This is Bloomberg Wall Street Week.
And we may not have an overall recession, we're having a rolling recession. To conge 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, 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.
The Jobs engine continues, Tesla falters and Bob Eiger gets his way at Disney. This is Bloomberg Wall Street Week.
I'm David Weston, but we start with investing legend Ray Daliu, who has been on Wall Street Week several times through the years, but perhaps never more memorably than back in nineteen eight in the wake of the Mexican sovereign debt default, when Ray both appear before Congress and on this program with Marty's Wag and Lewis Rukaser to take a pretty firm position on where things were headed.
Chairman, mister Mitchell, it's a great pleasure and a great honor to be able to appear before you in examination with what is going wrong.
With our economy.
The economy is now flat teetering on the brink of failure.
You were recently quoted in an article you said, I can say this with absolute certainty because I know how markets work.
I can say with absolute certainty that if you look at the liquidity base in the cooperations and the world as a whole, that there's such a reduced level of liquidity that you can't return to an arab stagflation.
And we welcome now Ray Dalio of Bridgewater back to Wallstreet. Big so, Ray, great to have you back on It's great to see you somewhat younger, back in nineteen eighty two. But take us back to nineteen eighty two, because you've talked about that since it's being a really transformative, a pivotal moment in your life. Tell us of what happened and what happened afterwards.
Like watch me, was I arrogant?
I look at myself, mout I couldn't have been more arrogant and I couldn't have been more wrong and painfully wrong. And so that's why it was a transitional moment for me, because.
I got.
So broke that my dad had to lend me four thousand dollars to pay for my family bills.
So that was my bottom, my big.
Bottom, and that painful experience made me think, how do I get all the upside without the downside of risk? Okay, so it's the big question that all investors have to deal with being knocked out and the bet that you can lose that can take you out is your risk. But how do you get the great upside? And so then I had to engineer it and I learned about diversification. I learned that if I can have fifteen uncorrelated bets, I can eliminate eighty percent of my risk without producing my return.
Looking at this says, look, but look at what Bridgewater ended up and the extraordinary success you just went through. So go back to nineteen eighty two. You said you should have been more diversified, and you should have had some other points of view. What is it you got wrong in nineteen eighty two? Exactly what was your mistake? And could there have been somebody come along to say, at that moment, we're a second rate. You should think about that. You haven't thought about that over there.
Yes, So.
I calculated that Mexico, that American banks had lent more money to foreign countries than they were going to be able to pay back, and that was going to be a debt default, which was true.
Which was true.
Mexico defaulted and all these countries afterwards defaulted. And I said that that debt crisis was going to cause a crisis all the way around the world because to banks and so on. And I didn't realize the mechanics of how the changing of a debt squeeze, having a debt squeeze in those countries so money would not go to those countries used to go to those countries and lending, and while they were having a squeeze, we could have a disinflationary boom, and it produced the eighties.
My point is that these.
Experiences in life, if you go back and you study history and you see how history repeats many things never happened in your lifetime before, and you.
Built up Bridgewater at the same time. Having studied history. Now I'm surmising you knew you got to think about succession at some point. You can't stay forever. Now tell us how that's worked and has it succeeded. Are you satisfied with that succession of Bridgewater?
It's been so great?
So I am so I did that and I had that track record with them bringing them in as you described, and Bob Prince, Greg Jensen, near other people. All of those people are all part of that mission. And there was also part of a culture of can we be radical truth and radically transparent?
Could we trust each other? Can we go through all of that?
And so that was all they are And then of course, you know you want to pass it along and so then I, with a lot of planning and with the comfort that these great people I've worked with and I know, and those great people working together can continue to pick up where I left off or we left off together and then go bring it to a higher level beyond me.
And so that's the success.
And so in about eighteen months they I turned it over to them.
They have their it's.
Theirs and now I'm a mentor, and as a mentor, we have the enjoyment, the great pleasure of being able to brainstorm that way, But it's theirs and they owner, and so when they have I'm confident that they have the qualities and the terrific elements to be able to bring them up to have theirs that will be hopefully better than ours, Because Wow, I think we had an amazing success. And the success it's like raising your kids, you know, the joy that the ones who are older
feel about the next generation and seeing them succeed. That'll be my mark of my success. If they succeed, it's my success. If they don't succeed, it's my failure. But I couldn't have a better group of people and a greater simpatico in terms of that element of where we're going on the same basic approaches and the same basic culture.
You've written a recent post about a pivotal year on the brink twenty twenty four. Take us through your analysis there.
There are many things that surprised me in my life that wouldn't have surprised me if I had studied the history, because they didn't happen in my lifetime, but they happened many times before. So I created a need really to when certain things are coming along that I'm not used to seeing to then go back and there are five things that are now the big forces that interact together.
The way those five forces interact with each other through history has a pattern to it, and you know those interactions.
So when we look at.
That pattern of what's now happening, and we could look ahead with that in mind, we can see that twenty twenty four is we are on the brink of a number of things related to that. I can list those things, but we're on the brink. And it becomes also somewhat of a definitive year because of we're going to find out how we are with each other politically, and we're going to find out geopolitically a lot.
A definitive year, but not the only one. Neil Ferguson of the Hoover Institution, for example, says that twenty twenty four stands out compared with the last thirty or forty years, but not compared to some of what came before.
If you go back maybe to the nineteen nineties, Yeah, that period seemed pretty low risk. The Soviet Union had collapsed, and apart from trouble in the Balkans with the breakup of Yugoslavia and some other trouble spots like Somalia. The world, by the standards of the rest of the twentieth century was pretty peaceful.
But if you go back.
Fifty years, imagine we're back in nineteen seventy four. That was a much more dangerous time than we're living through now. And I speak with some insight as I'm in the midst of writing about that period, as I write the second volume of my biography of Henry Kissinger. We have a tendency to judge the present by comparison with the recent past. But the recent past was an inter war period,
the period between two Cold Wars. Cold War one ended with the Soviet collapse, and we didn't really notice Cold War two beginning. But I think it really began when Exhijinpin came to power in China.
Geopolitical risk is not the only factor that may make twenty twenty four pivotal. We also have elections around the world, and particularly in the United States, which raises uncertainty over economic policies, which Neil ferguson things markets are well equipped to handle.
I think we know that markets try to adjust for domestic political risk. We know this because there's been some great work done in recent years on the way that in an election year, investors have a tendency to make some allowance for policy uncertainty, and the bigger the difference between the candidates in the United States, the more uncertainty.
And we've certainly got a pretty big difference this year, but it's the same difference that we have back in twenty twenty between Donald Trump and Joe Biden.
But Ray Dalio is concerned that the election this year may go past the policy uncertainty investors have dealt with in the past, that given the disagreements, even violent disagreements, over the last election, we may face more fundamental uncertainties about the underlying political system. And you, in your writing so specifically, a focus on that second force is maybe the most dominant right now going to twenty three fourth,
the potential for internal conflict. I mean, you even write the possible this is I have a there's a fifty to fifty chance of civil war you talk about, Is that right? Fifty to fifty?
Well, so let me define a civil war that you have a situation where you have irreconcilable differences so that there becomes a failure to follow the rules. In other words, let's take January sixth incident. Okay, you could see a situation in which you don't accept losing, don't accept the results.
We are getting more and more, not only just in the election, but even in decision making as the state of Texas deals with the federal government on issues, or we had sanctuary city issues where there may not be the agreeing on that these irreconcilable differences. Irreconcilable differences for example, on children and sexuality and education, how should that be? These are not compromisable issues. That greater and greater extremism
is an issue. And so when we come to let's say this election period, how will we get through that and how will we work together in an effective way? Or will it be even so chaotic and that we keep that we start fighting with each other. So when I say we're on the brink, I think that it's to say we're accurate to say that some of these questions exist and we will find out in a year, Okay, how well we can be together, and that well, how well we be together not only the conflict, but how
effective can we be. We're going to find that out over the next year. What we need I think is a strong middle. We have to do this together with a strong middle and a bipartisan and my opinion almost the President of the United States should have a bipartisan cabinet, draw the best and bring it together so that there's a bipartisanship.
Where it's been such a pleasure having here. Thank you so much for doing this. Oh, thank you for having me. Many thanks to.
Ray Value of Bridgewater. Coming up, we go to Argentina and hear from President Milay about his economic plans. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Well Street Week with David Weston from Bloomberg Radio.
This is Walter Weegan.
I'm David Weston. After years of economic struggles, Argentina's new president, Javier Milay, is administering shock therapy that he promised when he campaigned.
For his job.
Bloomberg International Policy and Economics correspondent Michael McKee lays out the.
Issues for US.
Argentina has long been a symbol of economic mismanagement. A legacy of government overspending has led to recurring bouts of high inflation and debt defaults. Javier mile came to office in December promising a radical transformation. His plans include massively slashing government spending, privatizing state owned businesses, eliminating the central bank, and most controversially, replacing the Argentine peso with the US dollar.
The dollar would, he said, solve the inflation problem because the government couldn't spend more dollars than it has, but Argentina doesn't have enough dollars in its foreign exchange holdings to make it work right now. Adopting it would lead to a deep recession and tie Argentina's economy to the federal Reserve. While a recession may indeed be in the cards, Mela's plans aren't working out as he'd hoped. The opposition controlled Argentine legislature has blocked many of the changes he
wants to make. Inflation remains over twenty percent a month or almost three hundred percent a year, so while Melee cut the peso's value in half, dollarization.
Has been put on hold.
The Mela plan did convince the International Monetary Fund to offer four point seven billion dollars in loans to pay its foreign exchange debts, and the stock market is up twenty percent since he took office. Whether Melea's plans can succeed will depend on keeping that optimism going, getting the economy going, and bringing down inflation enough to build up
dollar reserves. He says he's not giving up on dollarization, but insists his program needs time until the money stops rolling out in all directions David.
This week, our editor in chief, John Micklethway traveled to Buenos Aires for an in depth interview with President Lay about what he hopes to accomplish.
So, first, you need to reform the financial system, which is what we are working on. And in that context, it's not just that the exchange rate is flexible, but also the money amount never varies, and as the economy recovers and grows and the money demand increases as the amount of business will order be a given endogenously will have a dollarization process relating to the monetization performed by individuals in the economy.
I know that you are doing this thing with the floating exchange rate, where you've been deprecating or depreciating the official rate by two percent each month, and the IMF and various people have said, you know you must speed up, you must go quicker. Will you proceed? I know you are doing these other things, but when you speed up, that's rate of appreciation.
No, because it makes no sense. It makes no sense to do that.
That was Argentine President Milay speaking with Bloomberg Editor in chief John Nikelthwaite. We're joined once again by our very special contributor here on Walsteretreek. He is Larry Summers of Harvard. So, Larry, welcome back. Great to have you here, particularly this week when we got those jobs numbers which surprised the ouside. What did you make of them?
This was a hot report jobs above three hundred thousand upwards, revision, strong, household survey hours up, payrolls up at nearly a ten percent to annualize rate.
This was a hot report that.
Suggested that, if anything, the economy is reaccelerating. This is very different from what lots of people, most people I think, were expecting, and fits the thesis that the neutral rate is much higher than people supposed and take money is much less potent than people supposed.
So let's talk about the neutral rate. You've said before that the FED should have at least some idea of the nutral right to know whether it's restrict or not. We heard from share Powell this week is making out of Stanford, where he said, yes, we are restricting of our policy, and yet he quite explicitly said he doesn't need to worry about where the neutral rate is for policy going forward.
So all those are very important things, but they're not things that affect the longer run potential output of the United States. So honestly, though, so the question of what will be the equilibrium interest rate, that the neutral interest rate going forward doesn't really matter for policy today.
Saying we don't need to know what the neutral rate is is like saying you should drive your car on fees without looking at the speedometer.
It is just a mistake. You cannot know.
And look, I don't know what the Chairman said in full context, and I want to be fair, but there's no way to judge what policy is without knowing what would be a neutral policy. My view is that the evidence is overwhelming that the neutral rate is far higher than the two and a half percent two point six percent that the FED talks about. That evidence comes from
four places. First, we have high interest rates, and we have an economy that is, if anything, growing faster than its long run potential, creating jobs as fast or faster than natural growth in the labor.
Force, even allowing for immigration.
Second, we have an economy with financial conditions that are extremely loose, that are actually looser than they were before the FED.
Started the whole tightening process.
If you look at credit spreads, you look at the stock market, suggesting that in the fullness of it, all financial conditions actually haven't been tightened in an appreciable way.
Third, if you look at the markets.
Estimate of the long run neutral rate as formed by looking at longer term of forward interest rates, that neutral rate is comfortably above four percent. Fourth, if you look at the fundamental determinants of the neutral rate, we have big surges in budget deficits that, if anything, look to get worse given the political process.
We have big changes in.
Resilience, investment in green investment in new investment in data centers,
along with deglobalization which may limit capital inflows into our country. So, whether you look at the fundamentals, you look at market estimates, you look at financial conditions, or you look at the current strength of the economy, seems to me the evidence is overwhelming that the neutral rate is far higher than the FED supposes, and so cutting rates and hitting the accelerator in an economy creating jobs at more at a pace of more than three million jobs a year, with
payrolls growing at rates consisting with inflation far above two percent, with a need to hoard ammunition, because we're not one hundred percent certain we're past every financial problem in the banking system, and with potential supply shocks coming down the road.
Things could change.
Things are always subject to rapid change. So I don't want to make a prescription for monetary policy in June, but on current facts and current trends, I think it would be a inappropriate act to cut rates in June. And it is deeply troubling to me that the Fed somehow thinks that fidelity to its previous forward guidance and doc it believes some time ago is a more important thing than trying to gauge the neutral rate on an ongoing basis.
There's a lot of talk right now about what we're seeing in the labor market. Here actually is an increase in immigration, and I'm not necessarily even talking about the people coming across the southern border illegally. I'm talking about legal immigration, which has increased rather significantly under the Biden administration, How is that affecting your model for economic growth in the United States.
Look, that has meant more labor force growth, which has meant more supply to the extent that those immigrants are earning and increasing the capacity of the economy and remitting the money back to their families where they came from. It's a supply increase without a concombatant demand increase, and therefore it's deflationary. But that's what's been baked in and
is going to happen and has been happening. And so the question for movements and inflation is is that trend going to accelerate or is it going to decelerate over time? As I look at the attitude, which I find ugly and unattractive of a potential Trump administration towards immigration, if I look at the political pressures on the Biden administration, seems to me much more likely that immigration flows are going to decrease going forward then that they're going to
increase going forward. And that's just one of the ways in which deglobalization may contribute to higher inflation.
What other things are worrying you that are out there right now?
David I'm nervous about oil prices is given what's happening in the Middle East, and given the increased possibility that Iran is going to be drawn into this conflict. Given that we've got the coming of summer combined with higher wholesale prices projected, I think there's a real shot that we will have gasoline prices back to having a forehandle.
And I think the last.
Thing is that if I'm right, I'm not convinced that duration mismatches in the banking system.
Have been fully addressed.
And the combination of duration mismatches plus hot money on the depositor side, plus problems in commercial real estate means that we could have some real financial distress at some point.
Again, I think it's odds off.
But it's a risk, and that's another reason why I think the FED should be hoarding its ammunition, not pumping up bubbles with easy money at a time of rapid growth and epically loose financial conditions.
Larry, thank you so much for being here, as Larry Summers of Harvard are very special contributor here on Wall Street Week. Coming up, we welcome back Sonal Desai of Franklin Templeton to take us through the week in the markets. 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. Equity market served on Friday after those strong jobs numbers. But for the week overall, the S and P five hundred was down by just under one percent, ending at fifty two oh four.
That is still though one.
Hundred points over the median estimate of our Bloomberg ols. The Nazak goes off eight tens of percent. Bond sold off throughout the week, with the yield on the tenure up twenty basis points ten to four point four percent. To take us through this week in the markets. Welcome back now, Sonaldosai Franklin, Templeton's CIO for fixed income. So so now great to have you back with us. So what should investor take away from this week in the markets?
Well, you know, it's a part of what investors need to take away is it's going to stay voldotile for a while longer. And that's really clear. I think bond markets have started absorbing the fact that the Fed doesn't need to rush in cutting rates. That's also quite clear. Having said all of this, next week we might get good inflation prints and you might get a fifteen basis point Raley. The problem, as I see it, is that
the Fed has been very clear. Jay Powell has been really clear that he would like to be able to cut, and I think if he had been in a position to cut already, he would have cut. The data has not cooperated and so essentially there is a little bit of whipsaw action happening right now in the bond market, certainly at the equity market. No comments, I have no comments as to what's going on there at all.
Just after the races. Well, as you say what you call it rip saw color volatility, there's a lot of risks out there that are hard to quantify. We spend a lot of the program actually talking about a variety of risks, not just economic, but also geopolitical and political. As an investor, when you put together a portfolio, how do you provide the sort of risks that we're seeing right now out there?
So you know, the reality is, I couldn't agree more with your earlier guests. We are you know any one of this series of risks China and Taiwan, Russia, Ukraine, the Middle East, and the American of course, and the other elections we're going to see around the world. Any one of these would have actually been somewhat significant. All of them together, of course, increases in terms of the uncertainty.
It increases, it increases the potential impact, no doubt. The problem is you can't actually manage your portfolio to one of these risks, because how do you actually handicap any one of these as being likely? Just if anything disastrous happened in the Middle East, forward, Russia or with China. Clearly what you'd want to be in is completely only
entirely safe. Maybe you'd want gold. I don't know. That's not how you manage your portfolio, right, So I think for us what we've done, you know, David, we were very short for a long time with juist treasuries. We've moved to a neutral position, and we are hesitant I'd say to go overly long, despite tenures being where they are right now, in part because the economy is pretty strong and I'm not sure that the Fed's going to be able to cut as quickly as they would like
to cut. So I would tend to agree entirely with Larry. I've been saying September now for a while as being the right time for the FED to start thinking about this. I also think that the overall number of cuts is not going to be quite as high as markets would like, leading us to that neutral rate of about four percent.
So what does it tell us about duration? I mean, you have cash on the one extreme, you have longer duration on the other. Where do you go? Are you moving toward more durations now?
So?
You know, what I'd say is what I would advise people to do. You know, cash has worked incredibly well. How can we deny it? You know it's paying really well. However, it is important to start thinking about increasing that duration. It's not to get massive returns in fixed income. That's not what I'm falling for. We are neutral. I'm talking about moving from overnight and cash towards ultra short and then slowly dipping into low duration and beginning to move
out on that duration spectrum. But FED wilcut. The one thing I would say, though, is this is not a series of cuts leading to a multi year rally in yields. I think we are in a different place if you look at where the fiscal deficit is. You look at the fact that inflation is stickier than any of us would like. Wages are pretty sticky. You've got to accept that Fixtinc. Is not going to give you equity like returns.
Yeah.
So now it's so great always to have you with this.
Thank you.
Listen now the sigh of Franklin Templeton. Rules are mostly made to be broken and are too often for the lazy to hide behind. So said General Douglas MacArthur during the Korean War when he was disobeying a direct order from President Truman. He broke the rules, and the president promptly sacked him. There are times when all of us have to make tough decisions about following the rules. I got crosswise of a rial judge very early in my career when I deliberately ignored his instruction not to move
a controversial document into evidence. It was the only way to make a record for appeal, and so I did it anyway. I remember Judge Barnes his name, was leaning over the bench, raising his voice and reaming me out for what seemed like forever on the way out of the courtroom. A senior litigation partner for another law firm put his arm around my shoulders and said, you don't win cases by making friends of judges, and I certainly didn't.
The business world is full examples of people either breaking the rules or coming so close that there's nowhere for them to hide. Elon must notoriously kept tweeting about Tesla, which got him in trouble with the SEC.
All of these allegations are very pointed. They're very direct in alleging that he committed, you know, actions at least the SEC feels were against against regulations and potentially against the law.
Apple has been a choose to breaking the rules against anti competitive behavior any number of times, most recently by the Attorney General of the United States.
We alleged that Apple has employed a strategy that relies on exclusionary anti competitive conduct that hurts both consumers and developers. For consumers, that has meant fewer choices, higher prices and fees, lower quality smartphones, apps and accessories, and less innovation from Apple and its competitors.
And there are some so called rules that we observe in the breach and may be happy doing it, like that tailor rule that pointed to much higher interest rates than any of us wanted.
The tailor rule. For example, a guideline that central banks around the world have used to guide interstrate policy would have suggested, at the outset of this you needed short term registrates of nine or ten percent.
We didn't get there.
Sometimes it seems like General MacArthur had so our political leaders in mind when you talked about breaking rules from a certain short term congressman from Queens who simply made up as qualifications for the job.
It's always, frankly, very sad when a public official that has that is responsible for properly stewarding the public trust portrays that trust. It is absolutely imperative that George Santos resigned from his seat. It is extremely important for the integrity of this body.
To a longtime New Jersey senator who stands accused of taking bribes.
The senator and his wife accepted hundreds of thousands of dollars of bribes in exchange for Senator Menendez using his power and influence to protect and to enrich those businessmen and to benefit the government of Egypt.
And then there's the arcane world of sports rules. We couldn't play these games if we didn't have rules to follow, But does the NFL really need a rule that ties performance payments at the end of the year to where a player was picked in the draft.
San Francisco forty.
Nine Ers quarterback brock Perty probably doesn't think so. This week we learned that he came out twenty fourth on the bonus list because, as we all know, he was picked dead last his year, which meant that he already made about fifty million dollars less last year than his
counterpart in the Super Bowl, Patrick Mahomes. In the world of basketball, we certainly need rules about where we put that three point line, which somehow got lost in the Portland, Oregon Arena where several of the NCAA women's basketball.
Games were played.
Just before game time between Texas and North Carolina State, the coaches learned that the three point line was closer to the basket at one end of the court than at the other. Faced with either playing the game with the wrong lines or postponing the game, the coaches decided to play on, with NC State winning.
To go on to the Final Four.
It was a real embarrassment for the NCAA, but nothing like what it confronted three years ago when a player went on social media showing how pathetic the weight room provided to women athletes in the tournament was compared to their male counterparts, where the men got an extensive facility with weight machines, squat wrecks, and bench which is the women were given just a single stand of dumbbells, causing a public outrage, an NCAA apology, and promises a future
parody for men and women. This year, women's basketball got a different sort of parody when Iowah Hawkeye guard Kaitlyn Clark passed the men's all time scoring record.
Maybe this time the.
NCAA will learn its lesson about paying attention to the women's side of the tournament. Or then again, it might just need another rule about that. That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg.
See you next week.