Bloomberg Wall Street Week - April 12th, 2024

This is Bloomberg Wall Street Week.

We may not have an overall recession, We're having a rolling recession. To Cone, roll looks pretty strongly. It is when it comes to jobs.

The financial stories that shape our world.

Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI.

Through the eyes of the most influential voices.

Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, deebro Lair of the Paulson Institute, well then Hubbard of the Columbia Business School.

Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

A total eclipse of the sun, Connecticut repeats his men's basketball champion, and inflation pushes back. This is Bloomberg Wall Street Week. I'm David Weston. This week, Former Trade Representative and World Bank President Bob Zellick on what both parties are getting wrong on US trade policy.

If you add barriers to one type of product or another, people will move.

And Finucan of Rubicon Capital on whatever happened to ESG.

I don't think there's an argument about the science. I think most companies are committed, but some of the tools they thought they were going.

To have have been held back a little bit.

And former IBM had Sam Palmesano on the right way to regulate generative AI.

Well, we want the government to is regulate the users of the technology.

Well, we start with those US inflation numbers coming in higher than expected, something that caught many market participants by surprise, but that did not surprise our special contributor Larry Summers of Harvard.

I was not hugely surprised by the numbers. In an economy that's growing faster than potential, with an unemployment rate that has a three handle, in the presence of massive and growing budget deficits and epically easy financial conditions, the idea that inflation would remain robust or even accelerate should not be a surprise to anyone, and that's what this

Taking out housing.

This confirms the idea that the neutral rate is way above the two point six percent level that the FED has been using as a north star. In my view, puts back on the table. It is still not what I would expect, but you have to take seriously the possibility that the next rate move will be upwards rather than downwards.

As much as Larry Summers may have been warning about inflation staying higher than we'd like, the reaction to the markets did not look like they've been fully prepared. The S and P five hundred was off one point six percent for the way, wending at fifty one to twenty three, much closer to that year end median number of fifty one hundred set by our Bloomberg Elves. The NANZDAC gave up just under half a percent of the week, while the yield of the ten year was up eleven basis

It looks like it is all about inflation, and I would also say earnings. So let's just look at the price action that we've seen to start the second quarter. You have geopolitics, you also have earning season kicking off. You have also some seasonal elements to what we see in April. This week, you tend to see a lot of tax payment selling, both within the bond market, in the municipal bond market, as well as within the equity market.

We spend a lot of time we'ring with the labor market, So folcus say, on those jobs numbers are goading over a month, are they really a factor at this point?

So I think if you're going to say what matters more, is it the labor market or is inflation? In terms of the Fed's dual mandate and what they're going to pay attention to, the data that we have out of the labor market is very robust. The job creation that we've seen, if we look at it year over year, you could start to see some cracks in that. So, for example, you can look at jolts, and you can see the millions of jobs that we've actually come down

So christ you said, it's not just the infliction data, it's also earnings. What are we looking for earnings?

It is so within earnings, I think it is something about actually beating and then raising guidance and expectations, because the expectations right now I think are relatively reasonable. I think what are we going to see we raise our expectations for the full year. So we came into this year relatively conservative, thinking that we would see slower growth data. I think that when you look across the US equity market,

What about mainstream versus Wall Street? Because Russell two thousand is not had an easy time of it. It is not.

And if you look at like small business confidence measures, they're also not where they where we would want them to be. So I think this is another thing when people are talking about whether or not the Fed's going to cut and some of the measures that we're looking at, I think you have to say, why do we see

The very end here any investment advice, how do you invest in this in climate?

So a couple of things. I would say, stay diversified. So when you look at the price action today, there is value to having both fixed income within your portfolio as well as equities. The broadening out to make sure that again you're not going to unprofitable parts of the market are highly levered, but you're finding opportunities to take advantage of some of these themes, but at a reasonable valuation.

Unfortunately, we need some of those hedges on geopolitics, I'm afraid many thanks to Kristin Bitterley of City Group Global Markets. Artificial intelligence is on the march. Jamie diamond says it may be as powerful as the invention of the steam engine or the discovery of electricity. And the government has given AI chipmaker TSMC eleven point six billion dollars to build a plan in the United States, but some say that the government is behind I'm figuring out a safe

Oh yah, David, thank you. It's great to be back on the program, and it's always going to be with you.

Good evening to everyone you know.

As a friend of mine, put this, we always dress for yesterday's weather. Especially true when it comes to regulation right. Governments tend to apply existing laws and frameworks to new phenomenon, which is a challenge. I'll use two example, do any trust and then subsidies are tariffs and going back to the eighties here, But funny how history repeats itself. To take the first suit, which is IBM, mostly by the Maintrain dominance. It lasted from the last day the Johnson

Advanced and they become used. I'll give you another.

Example, pairs and subsidies. Since you brought up a chips tack, it might be relevant here as well. In the eighties the issue was Japan. It wasn't necessarily what's happening from their concerns with China and their supply chains, but it was in semiconductors and mostly memory. Reagan slapped one hundred percent tariffs on chips from Japan on a year later Congress, plus five hundred million to subsidized American chip companies those days.

That was a lot of money.

I need was to say, both both efforts fell flat. So why Well, one thing that all the incentives around memory chips and the industry had moved. The microprocess are now called logic, and so we missed it again. And so my point is it's really really hard in tech to pick winners and losers because the space just moves so fast. And that's what we're seeing again today.

If you were to advise the government, as you do regularly on these issues, what's the right balance between on the one hand, running a risk of it getting out of control, going off on its own. Some people would say that happened with social media actually at this point, that we let it go too far too fast as a post on the other hand, regulating and actually suppressing some of the innovation that we need.

Well, actually, you make a great point, and the analogy of the Internet and social media is absolutely true. The first thing, a first comment I would make, it's not just a bide administration executive order, it's also what the EU is doing the eu AI. I think that's really really important because you need to have coordination on a global basis because all these companies and all these systems are going to operate on global scale.

So that's a positive thing.

But from a company's perspective, you need to understand because you got to play offense and defense. So in playing offense, you need to understand where you can apply the technology, how you can make good use of the technology, what you really want and if you're a CEO running these companies, you actually want basically guardrail. You want, you want rules

They're coming from the.

Perspective is that you don't really you don't want you to regulate the technology because that will limit innovation. What we want the government to is regulate the uses of the technology. What are those use cases and let's look at those use cases and I'll call it a continuum of risk. So if it's national security high risk, if it's call centers and those sorts of things low risk, it's almost as I take it back to the cyber days of Tom Donald and I were running the Obama

Though.

This is how I think if I was the government, I would suggest to the government they think about the use cases and how the technology is being applied, not just the technology itself. Because if you influence the usage and you have guard rails established, that you get to the standards. So it's going to be hard to have standards they want.

Sam, it's always such a Treatamyan walshrobg thank you so much. That's Sam Palmersano of the Center for Global Enterprise. Coming up, India heads into forty four days of national elections. We talked with Rashir Sharma of Rockefeller International about the boost Prime Minister Modi is likely to get from the Indian economy.

The fact that inflation has been relatively under control. Is I think one of those underappreciated factors.

That's next on Wall Street Week on Bloomberg.

This is Bloomberg Well Street Week with David Weston from Bloomberg Radio.

This is Wall STREETWEK I'm David Western. India's economic growth will play a large role in the national election starting later this month. Growth that has been the goal since Prime Minister Indira Gandhi visited President Reagan back in nineteen eighty two.

In India, our preoccupation is with building and development. Our problem is not to influence others, but to consolidate our political and economic independence. We believe in freedom with a passion that only those who have been denied it can understand. We believe in equality because many in our country were so long deprived of it. We believe in the worth of the human being, for that is the foundation of our democracy and our work for development.

And Prime Minister Moting emphasized that same economic growth when he visited President by forty one years later.

When I first visited the US at a primeister, India but the tenth largest economy.

In the world. Today, India is the fifth.

Largest economic India will be the far largest economy soon. We are not only growing bigger, but we are also growing faster.

To explain how much economic progress India has made and what it could mean for the upcoming elections, we welcome back now. We're Shir Sharma, Chairman of Rockefeller International and founder and CIO of Breakout Capital. We're sure great to have you back with us. We have elections coming up and the economy I think is according to your column, action the ft will play a large role in this. Give us your perspective on just how far India has come economically.

Right up until the nineteen eighties, India was a big laggard economy that its rankings in both per capita income terms in both its in terms of his GDP size kept on falling for the entire period. The turning point as far as India's economic progress was concerned, I think was really the nineteen nineties when you had the major burst of economic reforms that took place. When the Indian economy nearly went bankrupt, it had to go to the

Began before Prime Minister Moti It came to office. At the same time it has continued. How much is he getting credited day in India for that as he looks towards these elections.

Which is getting lots of credit for that? And I think there are two or three reasons for it.

One is the fact that it's reached a sort of critical mass, which is that when India was rising in the nineteen nineties or in the.

Two thousands, the base was much smaller.

It's still in per capita income terms of relatively small base, but now that India has become the world's fifth largest economy, that just tends to have a much greater effect.

But in terms of his direct.

Credit, I think that the one thing which is possibly underestimated is that how non inflationary this growth has been over the last few years. That if you look at the previous growth spurts that India had, particularly in the preceding Congress government, one of the big problems was that it also led to a big surgeon inflation. This time, inflation has been relatively low, and that is a big plus because in politics around the world, economic growth mayo.

May not matter, but matters.

Nothing kills the prospects of incumbents as much as rising prices, and the fact that inflation has been relatively under control is I think one of those underappreciated factors because we as economic commentators or even political commentators, focus so much on just the headline GDP growth numbers. So the fact that you have very low inflation or relatively low inflation, I think.

Has been a big positive.

The other couple of things which are working in his favor is that this growth spurt has happened at a time when so many other emerging markets, including China, have been sputtering.

You point out in your Financial Times Calm. He also has managed his own press quite effectively. I mean, you have a quote in there that there's freedom of speech, not a freedom from speech. The consequence of that speech after speech, there's not so much freedom. So how does he managed that and is there a trade off there where they actually are giving up some of their civil rights in the interests of growth, which we've seen other places over time.

Now, there's no question about that.

If you look at the Indian media, there's a lot of self censorship which goes on a lot of news organizations that have spoken out against Modi or the DJP, they have been under investigation. The pattern is quite clear, which is that if you have been speaking out against Modi, you better watch out. I think that's been the clear message that has been sent out. The state machinery has been used quite extensively to silence critics and to silence the media.

One of the things you draw an analogy to is after World War Two, Taiwan and also South Korea particularly have had amazing growth with more authoritarian regimes, more than I think we'd say premister Modi has, but that that went away as they really moved into the middle income levels. So that is the question. At some point is that deal get changed? If that is the deal premister Motori has with the people of India, does that get changed to some point as it approaches middle income status? No.

I think that in India's case, it's a bit different because India is going the other way. That India gave its people political freedom first and did not give its people economic freedom, and so you didn't have much economic progress for the first forty audios of the new India which emerged after British rule. So now it seems to be reversing the order a bit so more than per capitain income levels. I think that there are two things. One that Modi has to keep delivering on the economic

It runs in the fiber of that country.

They seem to or at least a swing voter seems to have suspended that for now in return for what they perceive as economic progress. But it really seems to be because of Modi that he has got such personal appeal that he's been able to strike such a bargain with the swing voter. In the post Moodie world, I'm not sure that this works anymore because India is a

We're sure it's always such a treat to have you with us. Thank you so much. That's for shir Sharma, whose new book What Went Wrong with Capitalism is out this coming June. Japanese Prime Minister Kishita visited Washington this week in the midst of a difficult dispute over whether Nippon Steel could buy US steel, focusing American voters once again on the role of manufacturing jobs in the US economy.

The US came out of World War Two as the global manufacturing powerhouse. Factory jobs became a ticket to the middle class.

That's changed.

Factories and the jobs that were done there have disappeared all over America. Blame China, Blame globalization. The presidential candidates do, and they're doing a lot of talking about changing things back. The number of factory jobs has been falling for almost fifty years, and for a lot of people, the middle class paycheck has disappeared. Simply slapping tariffs on important factory goods or subsidizing the construction of new plants in the US might work in some isolated cases, but.

They can't bring back the past.

Manufacturing itself has changed, and it's not going to change back. As a share of GDP, it peaked in nineteen fifty three and has been falling ever since. In terms of output, though, industrial production is higher than ever. We're making more stuff, but we're doing it with far fewer workers and much more productive equipment. What we make has also changed, less steel, more semiconductors.

George W.

Bush, Donald Trump, and Joe Biden put or kept tariffs on important steel. The idea was to make important steel feel more expensive than domestically produced. What happened, American steel mills just raised their prices. Imports of steel dipped, but are now higher than ever. Wages for technology workers are higher than for those in old line manufacturing, but the rising even on the assembly line. As what we make

David to explain how US trade policy affects the labor market, we welcome now Bob Zelik, He's senior advisor to the Brunswick Group. Ambassador of Zelk served as President of the World Bank and is the United States Trade Representative under President George W. Bush. So, Ambassador, thanks so much for being Becka has appreciated. We just have had the visit from Prime Minister Kishita of Japan to Washington overhanging that was this dispute or possible dispute about the Nippon Steel

Well, clearly the politics are dominant, David.

And you know, this is really an example of first time we've had two presidents that are economically isolationist in their policies back to back, and they're sort of competing to try to figure out how we can add protections.

Now, in the case of.

The steel industry, Trump put on a twenty five percent tariff that Biden kept in place, and so you're already well if people ask about inflation, well, you know, that gives you a pretty good example of why steel prices were going to go up.

But this case is a little different.

This case is Nippon Steel, a Japanese company wanting to come in and buy US steel. Frankly, invest more capital, keep the jobs, add technology, add the competition, but the steel workers super President Biden wants to court, have resisted, along with one other US company that wanted to pay about half as much for US steel and have a monopoly position. So it gives you an example of the politics now that is sort of running the economic and great palls.

Bubb Block put one more complicate ef factor on that is national security. I mean, there was a time, as I understand, where the seal industry was critical to the US national security and we were very protective of that. I think that time has largely gone by as we've moved, frankly into semiconductors, which are so much more important to defense. How do you overlay national security concerns to maybe come out in a different place when it comes to trade policy than you otherwise would.

Well, the case that you started with is an excellent example. So we've just had the Japanese Prime minister come to town. He's a close ally. They're increasing their defense expenditures. We're trying to deepen the security relationship with Japan to deal with the dangers of China. Then we say that the Japanese can't produce steel in the United States. Remember this is steel produced in America.

They're not going to move the plants.

When if you're trying to think about security, you want to have a variety of sources, but certainly you want to work with your allied partners and countries. You don't want to tell the Japanese, oh, yeah, you're our security partner in military things, but we can't have you invest in America.

Well, thank you so very much for being a wilsary. We really appreciate that. Is investor Bob Zelich of the Brunswick Group coming up. ESG has gone from all the rage to hardly mentioned in some quarters. We go through what happened and why with Anthon Ucan, chair of Rubicon Capital.

The top companies are there.

That's next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

This is Wall Street Week. I'm David Weston. ESG. After becoming all the rage, the very term has suffered something of a decline as it became a political rallying cry. For some to bring us up to date on worthings san today. Welcome back now, Anne Fanuca. She's chair of Rubicon and Capital and former vice chair of Bank of America and always great to have you on. If you just read the front pages of the newspaper, you think ESG is almost dead because some people sort of running

I think there's some confusion around it. Let's just sort of go back here for a minute.

The real genesis of DSG was post.

Financial crisis and the Great Recession, when there was certainly ample reason for the world to wish that corporations were a little clear on their value proposition to their shareholders, to their communities, to their employees, to their customers, etc. So ESG is kind of a sort of next generation of corporate responsibility, and everybody had some version of corporate

That distinction and Finucan makes between ESG tied to how a particular company behaves and ESG simply reflecting how a company is affected by climate change regardless of what it does, is an important one that is often confused. According to professor Andy King of Boston University.

Most ESG funds are what I call light green funds, which they're using ESG scores to pick stocks and put them in their portfolio, and most of them are not very different from other comparable types of funds. If I think about what a manager might do with ESG funds.

That I think is very valuable.

And you can be looking at what you're doing in terms of the risks that you face, and you could be making good investments.

On how to change your firm.

At the public assets level, I think the effect is much more minor, and it's very difficult to have a higher return, and as we said, it's very difficult to have in any impact.

With that.

Point, the problem is not a lack of voluntary commitments on the part of companies trying to address climate change.

The top ten companies in the US, whether you're looking at revenue, market cap, net income, however you want to divine it, most of those companies have made commitments to decarbonizing their companies demonstrating the decarbonization. Most are committed to net zero. Their sort of end dates may be a little different, and their descriptions may be a little different.

But the top companies are there.

Even the fossil fuel companies, which I know is more controversial, are making commitments now. Their focus is more on carbon capture and sequestration storage and less about new forms of clean energy. But you know, I defy you to mention a company that hasn't put something forward in this effort.

And you know, twenty twenty three was the hottest year in history of recorded history.

I don't think there's much argument that we're looking at extreme weather, water shortages, food shortages arise in sort of climate related diseases like asthma. So I don't think there's an argument about the science. I think most companies are committed.

But some of the tools they thought they were going to have have been held back a little bit.

And what I mean by that is everyone talked about blended finance, so that meant that companies and governments and multilateral development banks would work together. So that would mean multilateral development banks would actually have to change considerably.

Those changes are slow coming.

Companies thought that they would have carbon credits or carbon offsets, and you know, I'm focused.

On that in my own work.

Well, those have been slow to come because the NGO community has really resisted them, and really is sort of problematic because there's plenty of proof that it's those companies that are doing the most and just using carbon credits as a delta to close the gap that are that are making the most progress. So some of the tools companies thought they would have are no longer either not there or they're slow coming.

One of the tools Professor King says could help companies meet their climate commitments would be something adopted by the European Union two years ago.

A carbon tax would help the great thing about things like that is that then the information is carried in the price and so people able to make much better decisions.

Or carbon tradable permits or something like that would be wonderful as.

Well, absent governmental actions such as a carbon tax. He worries that unstructured and unregulated voluntary commitments to limit emissions may mask the need for more fundamental change.

That is a big fear of mine, and we've seen that before in other areas. After the famous Bopaul accident which killed so many people in India, the chemical industry tried to self regulate and it didn't really work. I have to say, as an academic, the research suggesting that the ESG is substituting for political activity is not very strong.

But it is my experience that says I think that could be happening.

I'm looking out the window at the Charles River and it is clean because of the Clean Water Act that was passed in the seventies, actually under a Republican president, and it's a marvelous thing. I'm breathing better air because we had a tradeable permit system for a sulfur from coal burning, and that's a marvelous thing. And if we had a carbon tax, people would be moving away from a carbon intensive kind of fuels and things that they're doing.

So all three work. Well, you've got to do one.

So have we made progress? Let's take the e in the environment. Have we seen extra results in terms of carbon emissions coming, because I've seen conflicting reports about that exactly how it's worked thus far. It's been mainly voluntary, if I'm not mistaken. Have we made progress in the real world?

Yeah, we have made progress.

Well, it's voluntary in the US, it's not voluntary in Europe, and it is sort of double sided in China. So let's just go out to end farthest out. China is making enormous progress in green technologies, batteries, rare minerals, winds, solar, et cetera. I mean, they own the market in terms of solar paneling, but they also erect co plants at

Of the world is really making real progress. The United States has made real progress since.

Two thousand and five, two thousand and seven, and by twenty and thirty they hoped to be about half of what they were in their early two thousands, and we seem to be on pace for that.

This is a journey.

We're talking about the end of this century. We're talking about net zero by twenty fifty.

Could we miss that?

By both temperatures this one point five degrees cap I think so.

Could we be post twenty fifty? Maybe?

Okay?

And it's a real treat to have you back with this, Thank you so very much. That's an nukin of rubicon capital. I think the printing press, the steam engine, electricity, computing, and the Internet. That's what JP Morgan's Jamie Diamond compared artificial intelligence to in his shareholder letter this week, and our own Wall Street Week contributor Larry Summers has gone even farther.

This could be the most important general purpose technology since the wheel or fire.

There's no question but that the AI transformation is big and getting bigger and doing it fast. As computing power increases geometrically and machines take over some of the thinking for us humans. It's going to be widely available to hundreds of millions of people. In fact, we're starting to wonder whether a good number of us may be out of our jobs altogether.

Where's this going to have its immediate impact.

It's going to be in the knowledge economy.

We've seen versions of this before, as automation over the years, as eliminated entire categories of jobs.

We had four hundred and fifty thousand telephone operators in this country in the nineteen fifties. You tell me the last time you're talking to a telephone operator. We had close to two million people. I assume most of them women classified as typists. That's not even a job category anymore in the BLS.

I saw it in my law firm back in the late nineteen seventies. When I went to work as a summer associate at Wilmer, Cutler and Pickering in the summer of nineteen seventy six, I was introduced to the wonders of the Steno pool. The firm kept a teuen of typists and yes, as I recall, they were all women on duty twenty four hours a day, seven days a week.

Of the week.

We do believe in flexibility. We want people to be able to mix their lives and that work properly. Steve Cohen has said that the four day work week, whether from home or from the office, may be next up. But then again, don't be too sure that this will mean less work for us. Those word processors that eliminated our stenopool didn't cut back on the amount of work