Bloomberg Wall Street Week: Booth, Effron, Summers

most influential voices. Larry Summer is the former Treasury Secretary Bryan Wynahan, a backup America Will Smart CEO Charlie Sharp. Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Caught in the middle, bank CEOs between Democrats and Republicans, Exxon management, between new activism and old finances, and investors between inflation and a Fed that will have none of it.

This is Bloomberg Wall Street Week. I'm David Weston. Each week on this program we take a look at the big events of the week that the smart investor wants to be paying attention to. But let's be honest, sometimes it is hard to separate at the signal from the noise. We are fortunate to have with us today a really smart investor. He is Mr David Booth. He is the chairman and co founder of Demential Fund Advisors. They have been in business for forty years with an extraordinary track

record over that period of time. Welcome to Wall Street. We're good to have you, David. Let's go without that forty year history. I mean, I'm not sure that every month or every quarter, maybe even ever year you were up, but over the long term you did very very well. Give us some advice in that forty years, What did you pay attention to? What did you leave behind and

not get distracted by? If you look at over the last forty years, what we've learned, I think kind of ties in with your first comment trying to separate the signal from the noise. You know what, I think good The set of ideas around which we've built the firm have shown that you can have a successful investment experience without having to forecast the market turns, without trying to outguess the market. So a lot of that is tuning

out the noise, focusing on on what really matters. You know, you can't control markets, but you can't control the amount of risk you take, for example, so that's largely what it's about is coming up a sensible long term strategy and emphasizing long term, because if you're going to invest in risky assets, you need to have a long term investment strategy. It's a strategy that that that you believe in enough that you can stick with it through the

ups and downs of markets. Markets are going to go up and down, that's what they do, and and so what investors need to do is figure out how to deal with that uncertainty and come up with a sensible solution for them that they can stick with. So isn't that one of the real challenges for an investor, David, Because if you didn't have uncertainty, if you didn't have risk, you wouldn't have gained. As a practical matter, the one comes with the other. The question is how much risk?

How much uncertainty? I mean, when does it leave off being an investment and turn into a gamble. Because let's be honest, some of what's going on the market sometimes looks to me an awful light like gambling. Well totally, I mean exily. Trying to time short term movements in the market is more akin to gambling than investing, and you know, we think, uh, if you're going to invest in the market, you have to have a long term focus. This last year, for example, it's been a your It

was a great example. Uh. Markets down first few months of the year, and a lot of people bailed out, but the market ended up for the year. So if you didn't stay invested, if you tried to time that market got out, you know, you you missed out on a big return. And missing out on those big up markets is frequently as costly as being invested and and losing money in the down market. So those, uh, those are the those are the ideas that are tough for people to grasp that you can have a good experience

without shifting things around all the time. David, you are, by all accounts a patient investor. Are the people who put their money with your pay and as well? I mean you manage over six billion dollars right now? Are they willing to stay with you through those downturns? What's your experience? Well, it's you know, throw any downturn, you're going to have people who get discouraged and lose confidence in what you're doing and bail out. That's the business

we've chosen to be in you know. I but our view is if you educate people well and I have them and they're transparent, can help them think through, uh, how to go about doing creating an investment portfolio that's uh gives them the best chance of winning. If you focus on those things, then uh, you know you can over the long haul do really quite well. So David, give us a little insight into your day. You're working day when you come into the office. What do you

look at? I mean I like to have a dashboard where I look at certain things indicators. I'll give you one specific example, the tenure yield. I heard Warren Buffett once say, if there's one thing you'd like to know five years out is what the yield on the ten year is going to be. Do you pay much attention to that? Because this week actually there's been a lot of talk about Yale. People thought it was gonna go up to two point Oh it's now in the one point six range. Do you pay attention to that? Uh?

We don't pay attention to the short term movements. I mean what you want to look at are all kinds of investment scenarios. You know, currently people are asking what about inflation that's a big topic to or where's the ten year going all those things are you obviously would be very interesting to know where things are gonna be five years from now, but we don't know. And it gets back to trying to tune out the noise. You

have to prepare yourself for whatever happens. Uh, you know, you know, plan for the worst and hope for the best. You know, that's that's as true and investing as it is in other parts of life. You know. So um, we we don't know exactly when the markets we're going to go up and down. We just know they're going to go up and down. And to your point earlier, it's that that uncertainty that creates the opportunity. You know,

people want to shrink away from uncertainty. But if there are no one, sir, then your your your your return would be something like a money market fund on the return on the money market fund. So it's it's balancing all of that, you know, dealing with the uncertainty in a way that doesn't you can provoke a lot of anxiety. In the meantime, some powerful advice from as I say, a very smart investor, David Booth of Dimensional Fund Advisors.

Thank you so much for being with us. Coming up, Big Tech, Big Media, and now a marriage of the two. We talk about what the dramatic increase in concentration in American business means for the economy with our contributors Stephanie Flanders of Bloomberg. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. Big media is getting only bigger, with Discovery and A. T and T. S Warner coming together last week in an unlikely combination of cooking shows and award winning draw Mammas. We're not just better together, but that that we're probably the best media company in the world. I can't and good conscience not allow these assets to develop their full potential. That's Discovery CEO David Zaslow and A T and T CEO John Stanky. This week, it

was Amazon's turn. The tech giant is buying Hollywood's iconic MGM for eight point four or five billion dollars, bringing James Bond and Rocky to the Everything Store, adding even more heat to the race to a mass and stream entertainment content triggered first by Netflix and then Disney. Here's the Zone chairman, Kevin Mayer. I think there's only a handful of truly global, you know, greater than a hundred million subscriber based type of services that can that can exist.

Amazon's latest expansion in media comes after it's moved into groceries and bricks and mortar with its thirteen point seven billion dollar acquisition of Whole Foods back in two thousand seventeen. And Amazon the mergers working on great for us. We're much better company today than we were Amazon. That's Whole Food CEO John Mackie. By expanding its entertainment and retail offerings, Amazon is adding more bang for the buck to its

one nine dollar a year Prime membership. Not to be outdone, Walmart launched a competing subscription service called Walmart Plus for ninety eight dollars a year, offering free shipping and delivery, but Walmart still trails Amazon's dominance in e commerce. Here's Alan Patrick off of Greycroft. You know, it's something I think we're all enjoying, you know, overnight deliveries at low prices.

But how long can that keep going on? To the two hundred million Prime members around the world, Amazon is a one stop shop, but regulators aren't convinced it's in the public interest. This week, the Washington d c. Attorney General brought in and a trust case against Amazon, alleging it is engaging in anti competitive practices that have raised prices for consumers. While Amazon claims that it does what

every retailer does to stay competitive. The monopoly power Amazon tells you what to set the price at and punishes you if you do not adhere to those rules. That is, an our view, an abuse of marketing power. That's Washington

D C. Attorney General Carl Racine. The consolidation of corporate power has reached an almost unimaginable scale since the profits of the world's fifty largest companies has gone from sixty eight billion dollars to seven eight eight billion dollars, now accounting for more than one percent of total global GDP. And at this point just four companies, Amazon, Facebook, Microsoft and Google together make as much money in one week as the entire country of Zimbabwe does in an entire year.

Here's Rhode Island Congressman David Cicillini. These platforms have enormous market dominance, they are have really monopoly power. They really don't have competitors in a serious way. And what that produced is is behaviors that monopolis engage in, you know,

favoring their own products and services. Stephanie Flanders is a senior executive editor for Economics at Bloomberg, and on a recent episode of her very important podcast called Stephanomics, she addressed the question of increased concentration in industries around the world. Welcoming now back to Wall Street Week. Thank you for being with a Stephanie. So I listened to this podcast, it was fascinating. First of all, you and your team economics team of Bloomberg actually took a look and has

it become more concentrated globally are our industries? And you had some pretty remarkable conclusions. Yeah, we were actually just taking stock of the biggest fifty companies in the world. Who are the biggest fifty companies now? And how does that compare in terms of the sectors there in the sheer size of them to And it was it was very striking just on the numbers that how much bigger

they are as a share of GDP. Certainly their market cap is worth nearly a third of global GDP or the equivalent of which is up from five percent in and their profits are also about three times higher relative to the global economy, so we could see there's to scale. But clearly we've also seen a big change in the in the makeup of who are those of those big companies, And it is no surprise it's tech firms much more evident than they were before twenty one of the top fifties.

So this is you know, there's there's lots of things to say about that research by the chief economist Tom Alick and his colleague Justin n Jimenizum, but that was the sheers scale of these companies and their dominance in their industries echoes what we've seen in studies of the US, for example, have found three quarters of US industries had

seen an increasing concentration in the past twenty years. And the role of tech that you refer to I find quite fascinating because it does raise questions about the consequences of the concentration. I mean, in industrial society, it was almost inevitable that prices would go up, in quality would go down, and you became monopolis. It's not clear that's happening with tech. In fact, if anything, that the prices

may go down as you get bigger and bigger. Yeah, and of course we're seeing in the numbers we're looking at that we've got to sort of dual effect of the rise of the tech giants, but also just globalization allowing companies. If you're very successful now, you get to be successful on a global scale in the way that you weren't able to twenty or thirty years ago. But you're right that there are structural features of these companies.

We have this perception that they invest less and certainly higher a fewer workers per per sort of billion of market cap than the big companies of previous series. And that's borne out by this. If you just take IBM was the world's largest company. It devoted at that point nine percent of its revenue to capex to investment spending every year. Have you take that. If you've come forward

to today, Apple has that crown. Now it's the biggest company of the world and it's investing in in capex a third of that amount three So you can see they're investing less and they certainly have a fewer workers um for the for their scale than the companies in the past, which affects their contribution to society. I also wonder, stephanitely,

if it affects our ability. Who actually regulate our kind of There was a time gone by that we thought, if we regulate the interest rates, we have the fair regular interests, it's really gonna affect how much how fast the economy is moving. If these companies don't need to borrow, they don't need to really care about what they're paying in interest, right, Yeah, I mean that was one of the fascinating things that came out of this. Right, So we we could also see in these numbers they're paying

less tax. They're paying about They were probably paying about thirty five percent of their profits in tax on the kind of average scale globally UM. Now that numbers more like seventeen, so it's sort of around half. But their profit margin has more or less traveled from about seven percent to twent And the result of that is they have loads of money. They have nearly two trillion dollars cash pier. We often talk about Apple's cash pier, but uh,

this is true of many other companies now. And if you have that kind of money, you cann't finance anything you want without paying any attention to what the Federal Reserve or any other central bank is is charging for full liquidity. So yeah, there is a sort of question

mark about that. The transmission mechanisms that we've got used to thinking about um for certainly for monetary policy maybe not working in the way we'd like with these kind of companies fasting, I do recommend the Stephans podcast use you're all go listen to it. Many thanks to Stephanie Flanders. She is the senior executive editor for Economics at Bloomberg. Coming up, speaking of concentration, what did the Biden administration mean for the mergen and acquisition business. We're gonna talk

with Blair Afron, co founder of center View Partners. That's coming up next. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Western from Bloomberg Radio. As we've seen the last two weeks in the to A world, mergers and acquisitions continue apace, despite what famed investor Carl Icon thinks about some of the prices.

Blair Afron, co founder of Centerview Partners, is in the middle of many of the most important deals getting done, and he does admit that there are concerns out there about the market getting overheated, but he also has his eye on the yet to be determined by the administration approach to merger review. Obviously a lot of tell into the economy. Uh, it's easy to imagine that this goes

well into twenty two and beyond. But someone like me, UH, frankly, you were always trying to figure out the ground corners and say, what are some of the clouds in the horizon. You just talked about inflation. We only have really a month where the data uh, the economy, the world's opening up. You should assume it's obviously mismatched in terms of materials allocation,

in terms of jobs, but that's a data point. Um. The markets generally, we obviously are being priced at a premium uh pe multiples on next twelve months earnings three points above the five year average. UH. You have pockets of the market where the particularly uh petty, whether it's crypto, whether it's facts, whether it's just retail investment volumes. So you ask yourself what were the antecedents back in Obviously the are balance sheets UH is on people's minds, and

then just the geo political situations. So I say that a ton of tail winds, but clearly a watch out for what might seep into the markets that we're not planning one today. So when you talk about possible clouds in their eyes and we're not looking for the half enter product glass, but we should be prepared for it at least. We do want to talk about the supply demand in balance, and you see it in various places.

You said, we just may be seeing it right now in housing where the prices of new houses really skyrocketing, but the purchases are going down, and that may be really a shortage of supply of lumber, of various inputs. We also see it perhaps in the labor market, where it looks like the demand right now for employees is outstripping the supply. The question, of course, is is it to use the T word transitory. That's what we're all trying to figure out. Again, it's one month worth of data.

The economy UH, and openings have been incredibly UH robust, rapid and broad, just like New York City in terms of restaurants opening, in terms of jobs going back, in terms of events, UH, massive squir Garden basketball game, teen thousand people. All of this has gotten a certain economy it's it's natural to expect that UH, jobs and people looking for jobs, UM will have a modest lag. Remember, only a month ago we had less than a third of the country UH vaccinated. So I think that it's

it's there. We see the surge, but I'm a believer that, uh, it is more transitory than not. We had a record downturn because we shut down the economy effectively as we needed to because of the pandemic. And now it seems like we're having a record rebound. But we gave it a lot of push on both monetary and fiscal policy. We pumped a lot of money in the economy and we're not done yet. Not all of the money from the American Rescue Plan has yet been expressed in the economy.

And as you refer to, we're having twenty billion dollars a month pumped in from the Fed. Do we need that monetary stimulus right now? Okay, So I think David, the word should be lesson focus on the word stimulus and more on the word investment. Right now, there's three and a half billion in two bills, as you know in Congress, UH, Human infrastructure and physical infrastructure. UH. And

that's over ten years. Okay, I think the extent we can invest back on a methodical basis, on a long term basis, and done so where you getting quote return on investment, I think it actually becomes a good tail. And just to put a perspective, every one point of growth on GDP, you do that for ten years, that's three killion dollars more UH in the economy. So it's it's less about steamless that thinking more about using the moment two um do what this country needs to do.

And you have that FED balance sheet. I mean one of the issues here also is that let's call it monetary support if you would right now coming out of the FED and for example, talk about the mortgage backed securities. I mean, given where mortgage rates are right now and given the housing market, do we need the FED to be supporting that. I think the FED has proven itself to be nimble in the past. Let's go back to December. The FED at that point saw a economy that they

assumed was rising. A signal of free rate cuts would happen next all months would happened. The economy didn't rise, started flatten out a reverse course UH. And in fact, over the next year, UH cut rates. I think what you're getting is a said that will be vigilant to facts on the ground. Bell Brainer just this morning, UH mentioned that, and I think the FED is also recognizing that the recovery in many ways is still prevent um. COVID obviously great progress in the US, not necessarily in

certain pockets outside the US. And in jobs. You have eight million people still out of work who were working for FORK. So there's a Uh, it's a complicated time that I believe that that will be nimble enough to figure out that the hast to tap on the brakes. We're not static comes in. That was Blair Afron, co founder of Center View Partners. Coming up, we wrap up the week with our special contributor Larry Summers of Harvard.

That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Wrap up the week, as we always do with our special contributor Larry Summers of Harvard. Let's start with the big event on Friday, which was the president's announcement of his budget six trillion dollars one point three trillion dollars in deficits in each of the next ten years, it

looks like, what's your reaction to that budget? Look, he's going to keep our country together by building back better. He's gonna fix a whole set of lagging public investments in everything from making the airport's work so it doesn't take half again as long to fly from Boston to Washington as it used to, to making the I r S be able to collect taxes, to having modern investments in science and technology. That's all right, and that's crucial. So is doing much more for children. So he's doing

much more for people who have been left behind. I'm all with that, and I think it's hugely important. But just because you care doesn't mean you don't also have to count. And I think we are as a country going to have to look at the total amount of spending we're calling forward and the total amount of taxing we're calling forward. And I am worried in both the

short and the medium term about overheating. It might be that the forces of what I used to call secular stagnation basically people not wanting to spend, are gonna be so strong that we need these kinds of uh, massive budget deficits and extraordinarily low interest rates to propel the

economy forward, and this will work out fine. That that could be the case, but I think the greater chance is that we're going to have some kind of collision between demand and UH supply, And from my money, what we need is more in the way of UH tax increases of the kind that the administration proposed, and even beyond,

we need to stretch out the spending. We need to take UH some of the spending that was in the first Act, the Rescue Act that really had no warrant, the huge grants to state and local governments that are doing just fine, for example, the support for medical institutions, some of which actually have from an economic point of view, come through this UH very well, and reprogram that to necessary public investments. So there are things we can do.

The broad impulse is UH right, but I am concerned, as you know I have been for some time, David. You know, if you look at the administration's economic forecast, they've done what all administrations do, and it's entirely legitimate. They several months ago froze a set of budget assumptions um to reflect in an entirely honest and accurate way what the census was then, but gosh, the consensus sure has changed. I don't think the idea of a one point two percent ten year eight for this year looks

particularly good right now. Uh. We've already had just about two percent inflation UM just in the months we've had of this year, So I think the year of the year inflation figure is gonna come in uh pretty high um. And I think that the magnitude of those surprises just speaks to the fact that we're gonna have to make uh some adjustments uh that go beyond what I think is the Washington three parts cycle on inflation. First you

deny that it's a problem. Then you say that it's just due to specific factors and specific transitory factors, and then you say, well, it's not really that big a problem after are all because wages are going to go up along with prices, and it's all gonna sort of be okay. And I guess I see us moving through that cycle a bit, and that worries me. And it worries me because I think it's so important to do the fundamental things that the president is trying uh to do,

but you do have to manage the macroeconomics right as well. Larry. One of the things you mentioned was the possibility of taking some of the money that's been appropriated for the state and local governments that may not need in reusing in other ways. It appears that the sentim Minority leader Mitchill kind of agrees with you on that. He quoted you on that and said, boy, Larry Summers has got it right, So you're enraging agreement appears with a Republican here. Well.

I wouldn't have necessarily expected to be on the same side as Mitch McConnell, but I think on that question he does have the right view, and I think I have a view that we would do well to follow.

But uh, the minority leader is selective when he quotes me because he doesn't tend to pick up on my view that the Trump tax cuts are looking increasingly grotesque in uh, the current environment of massive stock market zero cost of UH capital, all of that, and the kinds of steps that President Biden wants to take to restore some normality to internet, to corporate taxation, and to at long last do what we all ought to be able to agree on cracked down on the erosion of profits

because they're moved to the Cayman Islands and places like that through international cooperation. I have to say, I'm disappointed that that can't be an area of bipartisan American UH corporation cooperation. I would have thought that that was the kind of thing that Republicans would stand for on strengthening UM America grounds encouraging investment UH in America. So I think the UH minority leader is UM way too selective in his focus on what we should do about the deficit.

And deficits have to do with both revenues and spending, and I sure wish the minority leader would get behind revenues. I mean, really, how can anybody say that it's right to cut the I R S enforcement effort against millionaires by more than fifty percent when an extra day of auditing, an extra day one day, one auditor brings in thousands and thousands of dollars, and we're slashing UH that kind of investment, which is obviously in the interest of all

of us. Finally, let's sneak in a couple of short summer says here at the end, there's a big event in the corporate world this week when Exxon Mobile. The management lost a vote actually getting active as shareholders to put two at least two members on the board to really make it more of a climate friendly company. Is this the beginning of something to come in terms of shareholder activism, particularly in E s G. I think it

marks something. Uh you can like s G investment, you cannot like SG investment, but it is here to stay as a major phenomenon that's gonna be really important in many capital market aspects. And I just hope the steps that are taken are substantive rather than just optical. And I think we have to think very carefully. You know, if we're gonna have a charge away from fossil fuels and we're gonna move to renewables, which is the right thing to do. Is extra x ON play a larger role?

Or is x ON good at fossil fuels and they may not be the best at solar power and they're better off paying out their cash flows and letting the markets allocate those cash flows to the best places. I think there's some hard questions that we have to think about, But for sure E s G is a big deal for a long time to come. Last one, Larry and the real yield has been in negative territory. Well in negative territory. It's come up a little bit, but it's

still negative. When do you think we'll see a positive really yield between a THAD that's complacent about inflation rising UH inflation, UH tendency, and crucially UM a whole set of structural factors demography, cheap information, UH technology, demassification of the economy. I think it's gonna be a long time until we see a ten year tip UH that has a positive real yield. Not in the next three or four years, would be my guess. Thank you so much

for our special Larry Summers of Harvard. Finally, one more thought. It ain't easy being a CEO these days. Much of Wall Street watched this week as the princess of the realm, and finally, one princess in the form of Jane Fraser, testified to Congress about all the things they're doing to help people recover from the pandemic, although Senator Elizabeth Warren was having and none of it when it came to

Jamie Diamonds JP Morgan charging for overdrafts. You and your colleagues come in today to talk about how you stepped up and took care of customers during the pandemic, and it's a bunch of blowney. One of the issues that got the most attention was what the banks were doing

about climate change. But when it comes to climate, the real SmackDown this week was an Exceon Mobile's annual shareholders meeting were an upstar activist shareholder group holding only a miniscule portion of Exson chairs, took on management and to everyone's surprise, forced at least two of its candidates onto the Exxon board directors, who will advocate for remaking the company to address climate issues, and just in case any

CEOs didn't get the message. The same day, Chevron shareholders overruled its management to require the company to cut pollution from its customers, and a Dutch court told Shell it had to move faster to cut emissions. Now it isn't easy at the top. Sure, you get paid a small fortune, in some cases more than small, but you are reporting to an ever expanding group of people with a say in your business. Now it's not just the shareholders and

the employees and customers and Wall Street. Now now it includes social movements and perhaps just perhaps the weight of history itself that does it. For this episode of Wall Street Week, I'm David Weston, This is Bloom or see you next week. M hm.