This is Bloomberg Well Street Week.
I mean may not have an overall recession, We're having a rolling recession. Economy roll looks pretty strongly 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, Zebra Lair of the Paulson Institute, Glen Hubbard of the Columbia Business School.
Bloomberg Well Street Week with David Weston from Bloomberg Radio.
A lot of talk about climate, about US China relations, about the big banks, but the action still is in Gaza is Israel presses ahead. This is Bloomberg Wall Street Week. I'm David Weston, this week's special contributor Larry Summers of Harvard about US jobs numbers and more.
I still think the market is a bit overpricing. How much easing the Fed's going to decide it can prudently undertake.
Howne you all.
CEO Vimill Kapoor on his latest at inquisition and how it fits into his overall business model.
So it fits right in the heart of our building automation business and prepares it for higher growth trade in the future.
And Bob Diamond of Atlas Merchant Capital on the Big Bank's big appearance on Capitol Hill. Gill wall Street watched this week as those eighty thousand delegates continued their Top twenty eight meetings in Dubai, with US Special Envoy John
Carey turning up the rhetorical heat. The best scientists in the world are saying what we face now is alarming, terrifying, while Chinese officials reacted badly to Commerce Secretary of Romando's saying it poses a risk to the United States, even as Trade Representative Catherine Tye talked in terms of balance, the.
Lessons that we've learned from the past seven years on trade mean that we can't ever ignore the domestic political consequences of what we're doing in trade.
There was a lot of talk in front of the Senate Banking Committee this week as CEOs made their case that ramping up reserve requirements would not be good for the economy.
The most likely result of increasing the costs of banks to offer a variety of products. Is that it would move more activity into the less regulated non bank sector, which carries its own risk for consumers and the stability of the financial system.
The place where there was much more than just talk was once again in Gaza, as Israeli forces renewed their offensives, spreading into southern areas and urging civilians to flee.
Again.
The real question is how do you, on the one hand, allow a sovereign nation like Israel to go after terrorist targets, while on the other hand, have them do so in a way that minimizes the harm to civilians.
And Israel was very much the subject on Capitol Hill when the presidents of Harvard, Penn and MIT were summoned to address the rise of anti Semitism.
I have sought to confront hate while preserving free expression. This is difficult work, and I know that I have not always gotten it right.
And then on Friday we got the US jobs numbers, showing once again that the labor market is stronger than people thought, as the US added another one hundred and ninety nine thousand jobs in November, taking an unemployment rate down to three point seven percent, while wage growth accelerated. And here to take us through these employment numbers for this week, we welcome our very special contributor, Larry Summers
of Harvard. SOI, Larry, more jobs were created than expected and unemployment was lower than expected.
How do you interpret.
Them, David? These were good numbers.
They showed an economy that, at least as of November, was still looking pretty robust. Some of the greatest fears that the economy was turning over certainly looked to have been false.
By this number. The fact that average.
Hourly earnings were running running at four tenths of a percent bit more than was expected reinforces my sense that people need to be careful about declaring the war against inflation as having been one. They need to be nervous about what could happen from supply shocks, from.
Other adverse developments.
But I read these as a pretty favorable.
Number.
They certainly make a soft landing look more in play, although I certainly think it would be a mistake to treat a soft landing as something we can take for granted or be confidence about.
What do they say to the Fed?
Do you think, Larry, Because on the one hand, you say, boy, this is a pretty robust labor economy. We don't need to cut too soon, and people were expecting some cuts. And as you say, on inflation, there are some indications inflation is ticking back up. We have a line of Fed that says that, and they have you miss consumer in a sentiment this week indicated that it really dropped the consumer expectations for inflation for one year out look.
I think the Fed's got to be very careful.
Progress has been made about against inflation, but they've got to make sure that it keeps being made, and they've got to make sure that once it's made, it's entrenched and locked in. And I think this will make it
easier for them to do that. They've got a very tricky problem at the FED because whenever people conclude that it's looking good that we're not going to need more rat increases, they long rates come way down, and the stock market has a tendency to go up, and that then undoes some of the tightening that they have already put in place.
So I think it's very hard to know what's going to happen.
I still think the market is a bit overpricing how much easing the Fed's going to decide it can prudently undertake. But those issues are very much at the margin, unlike the situation we had a couple of years ago where it seemed to me the FED was very far, very far off. So I think the Fed's in broadly the
right place of watchful waiting. But the moment they turn or announce they're going to turn, is going to be a seismic moment, and for that reason, they probably need to be very deliberative and careful about getting to that point and waiting until they see some overwhelming evidence of inflation being locked in low or see some real evidence of the economy churning over. And I don't think we have either of those at this point.
Let me just turn this something.
It's very much in the news once again this week, and you have spoken out about it, and that is the rise of antisemitism, at least on some college campuses. We had the three university presidents go down and appear in Congress from your own Harvard, as well as MIT and pen And if they meant to put an end to this, they certainly did not succeed. As of right now, it looks like if anything got to be more so,
but this is one of my questions. You ran Harvard, you're a president there, but you also were at very senior levels in the government. When things start to go off the rails, when you start to lose control of the narrative, how do you get it back. Because we have everybody now wanting to run universities for the college presidents, whether it's Congress is where the contributors or whatever, how do you regain control of the narrative.
I think this is as difficult a moment for elite higher education as any moment since the Vietnam War period, perhaps more difficult. I think everybody needs to take a bit of a deep breath. I've had considerable sympathy with some of the things that have been saying said by both people in the government and by some of the
billionaires some of the donors to these universities. But even when the concerns are warranted, it's very important for us to remember that if universities start being run by politicians or by small groups of large doors, that's going to be a very problematic thing over time for the American university system, which is a huge source of.
Strength for our country.
That said, David, we have to recognize that there's been a double standard in how incidents of racism have been regarded in the past, Incidents of what people call micro aggressions, incidents of things that make people feel hurt or sensitive have been regarded in the past, and the way things that are abhorrent to the sensibilities of so many of us have been regarded in the last several months. And that double standard, which in different ways has been and
present on many campuses, creates an extremely difficult situation. I do not side with those who believe that the answer is simply to ratchet up the protections and condemnations of speech which is offensive, to include Jewish students more fully in what has happened in the past.
Larry, really food for thought, Thank you so much.
That's our special contribuity here on Wall Street Week is Larry.
Summers of Harvard.
Coming up, we take a look at the weekend markets with Aaron Brown of Pimco. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from blue Berg Radio.
This is Wall Street Week. I'm David Weston.
Stocks had another good week, helped by those jobs numbers, so the SMB five hundred, up for the sixth straight week, and to get forty six oh four that is well above the median estimate of the Bloomberg elves for the end of this year and for that matter, for the end of next year as well. The NASAQ was up seven tenths percent, while bonds had an up and down week, but in the end, the yield and the tenure added a bit over three basis points to finish at four
point two to three. To interpret all these markets for US, we welcome back now Aaron Brown. She's PIMCO Multi Asset Strategies portfolio manager erin great to have you back with us. So I start with the jobs numbers, the other economic data we got this week.
How did the markets react to it?
So I think that the markets actually behaved pretty rationally. We had a significant rally into the end of November, both across equity markets as well as bond markets, and I think probably the bomb market got a little bit
ahead of itself going into today's number. You know, keep in mind that prior to today, the market was pricing in about one hundred and twenty seven basis points of interest rate cuts next year, which is a really aggressive interest rate cutting cycle that had been priced in, you know, particularly against the backdrop of still elevated inflation, wage growth
north of four percent, and a pretty healthy economy. And so what you saw today I think was just some of that optimism of rate cuts being priced out of the market. What's interesting is it didn't really hurt the equity markets. Equity still, you know, rallied into the end
of the day, did quite well. But the market really is pricing in a pretty soft landing across both equity and bond markets, and I think just some of that enthusiasm was priced out of the bond market, but still a very healthy environment of healthy macroblock backdrop for stocks.
Aaron, Well, well, in December now it started to time to start thinking about twenty twenty four.
It's not too early.
What are you projecting for twenty twenty four? And as you talk about those rate cuts, it always strikes me the only reason they cut rates is if maybe things are not going so well the economy. So I'm not sure if we should wish for that.
Well, there's other reasons why the Fed would would price in rate cuts, and the reason for that is right now, rates are quite restrictive. You know, the rates are probably two hundred basis points over the neutral rate, and that was really necessary given the very elevated levels of inflation.
But we're starting to see inflation come down, and as we see inflation normalize, the FED may want to take out some of that restrictiveness even apps in a recession, so that we could still see rate cuts in a healthy macro environment long as long as inflation is lower than where it is today. What was a little bit concerning about the job's number is we saw wage growth increase again and it's you know, elevated above four percent.
The FED is probably going to have difficulty cutting rates with inflation wage inflation above three percent, so we need to see that mark that really move lower in order to be in the fence comfort level overall to start
cutting rates. I think next year we're going to continue to see a gradually slowing economic environment that could stagnate, but right now at least, I'm not pricing in a recession for next year, but I do expect a slow growth environment in the US with the potential for recession risk, particularly outside of the US, that could open the door for ray cuts towards the end of next year, but it's unlikely that we're going to see ray cuts in
the first quarter, particularly after tip today's payroll print.
Aaron, I know your job is really monitoring to that balance between equities on the one hand and bonds on the other. Now, bonds are giving you some real returns. I mean, you're getting some real money. What does that mean you at your investment portfolio as you go into twenty twenty four.
So I think bonds are in a really unique sweet spot right for investors. Typically, there's three things that you look for in bonds, and I call it the trifecta of bonds. The first is yield, and you want real yield from bonds. If you look at a core US bond portfolio today, it's yielding four point eight percent on a real basis, so absent inflation, if you subtract out inflation, that's a positive real return from your fixing come portfolio.
That's really elevated versus where we've seen during very slow growth environments, and certainly very elevated versus the yield that you were getting from any type of bond portfolio over
the last decade or so. The second is the potential for capital appreciation, and just given the really rapid sell off and the extent of the selloff that we saw both in twenty twenty two and twenty twenty three with across you know, fixing come portfolios, I think you could see the potential for real capital return as well next year as bond's rally as a continuation of what we saw over the last month. And then the third is diversification.
And we've seen you know, stock bond correlation go back to inversely correlated with one another, which means that when bonds sell off, stocks rally, and when stocks sell off, bonds rally. And that's really important from a diversification perspective for most investors' acid mix and their core acid allocation
across their portfolios. And so you're now getting all three benefits from bonds, whereas you know two years ago you're really only getting you know, potential for diversification which failed. So I think bonds are in a real sweet spot next year for investors.
The COVID nineteen pandemic has triggered some big changes in investment patterns and supply chains around the world. To take us through what his industrial company is doing, we welcome now. The CEO of Honeywell is Vimal Kapoor. So Vim Well, thank you so much for being with us.
Great to have you here.
Thanks for having me David, and it's a pleasure to be here.
A lot of talk about supply chains.
Give us a sense from Honeywell's perspective, what has changed, if anything, since the pandemic.
I heard a thing I would say, I mean, it's been a biggest diceuption in our business for the last two years. It started with the disruption in electronics, which we all well aware, and you don't get chips, you don't get parts, and that was really I would say about two years back. That's mostly healed for most part. What's still left behind for US. Aerospace is the largest segment for Honeywell, and then they're the healing is yet to happen completely. We are in a midway and the
constraint there is Tier three Tier four suppliers. They moved on with a lot of people during COVID and when the capacity came back. Rebuilding the capacity of the people has been a big challenge because these are certified skills, not too easy to hire people. And that's the state we are in. So electronics mostly healed on the mechanical side, products in aerospace more in the midway. But we're making progress every week, every month and continue.
To produce more.
Other thing I must bring in it changed is how we think about insourcing versus outsourcing. That was I would say we generally practice the strategy of local for local, so produce for North America, and North America for Europe and Asia for Asia. So for us live with not a lot of moves. But when should you outsource and when you should not outsource? Because one thing we learned was that when we control the supply chain, we healed quickly,
and when it was outsourced more, we healed slower. And that kind of also raising the question on how should we configure on the things we do outsource, specifically electronic side, and should that not be done by us to drive more control and more execution.
So what about geography.
There's been a lot of talk with other companies about friends sourcing and on shoring things like that. Has that been a shift for you? Is most of your supply chain within the United States, you have you taken it into other countries that we will call so called friends showing.
So we always had a strategy of local for local, and our North America supply chain always supported in US and Mexico, and Europe was in Europe, and Asia was prominently China. So for US what changes. Certainly Mexico has become more important. We always had a great presence there, so probably we are doing some insourcing type of work in Mexico, considering that to do moving forward. But we see a lot of our customers moving into friend shoring.
We see activity in Asian countries like in Vietnam, Malaysia, we see a lot of activity in Poland, we see activity in Turkey. Mexico is probably top of the charts there. So clearly people are making decisions to redo their businesses to align more with the friend shoring.
Well, thank you so much. That is Wikapoor. He is the Honeywell CEO.
Coming up the Big.
Bank statement of their case to the Senate Banking Committee on Wednesday. We'll go through with Bob Diamond to Atlas Capital Management. 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, the CEOs of the major banks appeared before the Senate Banking.
Committee this week, and most.
Of the discussion was about the proposed regulations increasing reserve requirements as part of that move to Basel three requirements. To give us an expert view on the merits of the complaints we heard this week, Welcome to Bob Diamond. He's founder and CEO of Atlas Merchant Capital. Bob, great to have you back on Wall Street week. So, as I say, listen to some of those CEOs. They're not too happy with this idea about these reserves, are they right?
Is it really gonna suppress lending? Is it really going to hurt the economy?
Well, listen, of course the bank CEOs are not going to be looking for higher capital levels. I think the banks are doing pretty well right now. You know, the mantra that I used in two thousand and eight, David, was how do we how do we keep banks safe and sound while also driving jobs.
And economic growth?
And it would be hard to say that we're not doing a pretty good job on both of those right now. I think the banks are safer and sounder than they've been since two thousand and eight. And I think, on the other hand, people are pretty pleased with economic growth, really pleased with job creation in the US. So I think one of the things they're saying is there's some of balance. Factually, if you raise those capital levels, they are going to have lower rowe and factually they'll be
less capital for lending. So I think what they said is correct. I think the balance you have to put it is one of safety and soundness.
Well, and safety and soundness hasn't gotten more important to make sure that these really big banks, they're really big money center banks, are safe Because there was a time we say we don't want to have too big to fail. I think we're past that point, at least with that handful of big banks. I'm not sure we can handle if they fail.
Well.
I think that's a very good point. And if you go back to two thousand and eight, both City and Bank of America, two of the biggest four banks in the US were pretty much and solvent without the TART program. So the Fed and the Treasury came up with a program to put equity in the banks, and they're doing
great today. But the truth is the big four banks JP, Morgan, ba A, Wells, Fargo City today versus two thousand and eight are bigger, more concentrated, closer to government, more like utilities or an.
Oligopoly at that level.
And so if there was a mistake, if there was a systemic failure, it would be a problem.
Well, talk about the banking system overall. Are we headed to our world where we really have a handful of megabanks and then presumably a lot of small community banks and local things, and we really are putting a lot of pressure on the middle the so called regional banks.
Well, this is why we have been talking so much in Alys Smirntry Capital about the opportunities in regional community specialist banking. You know, we have over four thousand banks in this country. We're very very unique in that way, and I think the benefit that that as to our economy the diversification of lending, particularly the lending to specialist companies middle market companies. But we also have a very
diverse financial services industry outside of the banks. So you know, we own three middle market m and a advisory platforms or advisory platforms from middle market companies in the US. They serve small businesses and family owned businesses in a way that the large megabanks just can't afford to serve them in all of that benefits the financial services industry. So we're very positive on the regional banks and the community banks, and we think that there's clearly a spot for them.
The regional banks in twenty twenty three have come into a lot of stress starting with SVP. We had those failures. There was a lot of concern about them. They caught in between and they have a lot of the costs, particularly regulatory and other costs that the huge banks have, but they can't distribute it quite as broadly. Should we be promoting, encouraging, allowing more consolidation at that rank.
I think it's going to happen fairly naturally. And you know, to your point, David, they got hit with you know, a triple whammy with interest rates moving up quickly. The mark to market portfolio or the treasury portfolio that was not marked to market got hit for every bank. I think loans is a percentage of assets are higher in regional and community banks, and so there's been some concern there. And lastly, and I think it's not really a topic as much as it should be, is the higher regulatory
costs and post SVB, And first Republic. The impact of regulation and inspection on the smaller community banks is just much greater than it would be on the larger banks.
As you say above, there's increased regulatory costs and those get distributed. They don't ramp up or ramp down. They're not scalable. But what about tech costs as well. We're looking at we're on the edge of AI, generative AI, and how that's going to probably transform banking. Again, there's one thing for a city or a Bank of America or JP Morgan to afford it, it's another thing for some of these smaller banks.
To afford it.
I think it's going to be a huge advantage for them. I think, really, I think that technology of processing and back office and those are big, big challenges for the smaller banks, but I think their access to AI excuse me, will be a huge boost for them. So I think one of the things that we're pretty excited about going forward is that will be a pretty positive impact. But back to your point, David, four thousand banks today, some of the smaller ones are really really good banks, but
they're struggling to get their return on equity up. So we think some of the stronger ones are right for investment, and that investment can be to help increase capital levels, but it can also be to give them the capital to acquire some of the smaller banks.
One more point about those hearings.
We've heard a fair amount of concern, especially by the CEOs, that as you increase some of the regulatory requirements, you're driving money out of the regulated bank banking system. You're driving into private credit into some of the non bank banks. Is that a real issue? Is it a real problem? Should we be concerned about it?
Of course, you want to be concerned about everything in financial services. But I think one of the great attributes of the financial services industry in the US and its impact in the economy is the diversification. So the amount of private credit is actually quite a small percentage relative to all credit from the banking system. But it's venture funds, it's hedge funds, it's credit opportunity funds, it's regional banks, it's community banks, it's m and a advisory platforms for
middle market companies. No other country has is diverse and strong and diversified financial services industries we have. I think it's one of our great strengths. So does it need to be regulated, of course, But is it a real positive for our economy that not all of this activity is happening in four banks as it is in Canada in many of the European countries.
I think it's a real positive.
But taking the of the large banks just for a moment here, is there a risk of the small the private credit facilities cherry picking. It may not be big in the overall course things, but they may get the most lucrative.
It's competition.
I think it's fantastic. Of course, the private credit platforms are going to look for the best pieces of the lending sector, so I think that competition will be very good.
Is there systemic risk is the big issue from a regulator, and that's what we really care about, is the overall system. Is there systemic risk because we don't really know what's in a lot of the private credit.
Listen, one of the things that it's been hard for anyone to think about since two thousand and eight is that failure is okay, too big to fail? Is talking about systemic risk for the economy. So many of these private credit platforms have sovereign wealth funds investing in them, so the risk is well well diversified, and I think if the FED and the Treasury felt that there was systemic risk on the private capital platforms, they should take action.
But I don't see any evidence that failure in private credit right now is going to create systemic risk.
Historically, private credit was available to sort of the more wealthy, the more sophisticated investors of various sorts. But we've seen, certainly in private equity a move into retail, the ways to figure out retail to participate. Is that happening in private credit, and it's that pose a risk for just a mom and pop putting their money, their savings into this.
I'm not as close to some of the private equity firms, but I would expect they're looking more and more at retail as well. So again it's the diversification, and it's the question of is their systemic risk.
So to make the banking system even stronger than it is today, you said it's pretty good shape.
What would you do?
Well, listen, I think what Michael Barr is looking at as the vice chair in terms of the capital levels is appropriate given that the banks are larger, more concentrated, and carry a larger and larger percentage of the deposits. So at some point, you know, you and I have talked about this is Is it four large banks at
the expense of a couple thousand banks. I'd like to see at the capital levels a little bit less onerous at the smaller community banks, and the regulatory costs a little bit less onerous there and give them a chance to continue to grow and get their row up.
Bob, it's always such a treaty, have you of Wall Street.
We thank you so much for coming in.
That is Bob Diamond of Atlas Merchant Capital, coming up enough with the fountain of youth. Get ready for a fountain of age, brought to you compliments of your friendly generative AI. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Finally, one more thought.
Mark Twain taught us that age is an issue of mind over matter. If you don't mind, it doesn't matter, it must be Frank, we do mind, and yes it does matter. After all, didn't ponste leone spend years back in the sixteenth century looking for that lost fountain of youth? In these days, it sometimes seems as though we're surrounded by people who could use a drink from that found
of youth, starting with many of our politicians. People do believe that our elected leaders are just too old, and those same.
Elected leaders are really reluctant to give up that.
Power, which makes it all the harder for the young to wait for their turn in the big leagues. But it turns out there are at least some places where that weight is getting shorter rather than getting longer, like tech, for example, where Mark Zuckerberg became a billionaire at twenty three. This guy's probably smiling big day, yes.
Big small in his face.
His wealth went up by one point six billion dollars just in one.
Day yesterday, and Evan Spiegel made it by twenty five. Sam Bankman Freed was a billionaire briefly when he was twenty nine, But I'm not sure that that one still counts.
The players like Sam Bankman Freed might be new.
Just kind of fraud, kind of corruption is as old as.
Time or In sports, we have young baseball players racing their way through the miners like never before. According to sports site Defector, like Jackson Holliday moved up by the Orioles to triple a ball only a year out of high school, aided by high tech applied to his training. Though Detroit Tigers fans like me might recall that our al kline first played in the Major's A eighteen, long before we used all those new fangled computers, which takes
us to artificial intelligence. Nobel Prize winner Michael Spence told us that the best use of AI may well be to augment what we do, rather than replace it.
Our best guess is that generative AI is mainly, not exclusively, but mainly going to turn out to be a powerful digital assistant.
And some professions are already using this new digital assistant to advance the careers of their junior talent faster than ever before.
This week, Bloomberg.
Reported that new graduates hired at KPMG are using artificial intelligence tools to do tax works that used to require at least three or four years of experience, and law firm McFarland's has junior lawyers working with AI to interpret complex legal documents that the partners wouldn't let us go near back when I was starting out. All of which may mean those accountants and those lawyers will get their
coveted partnerships much earlier than we used to. So it turns out that four hundred and fifty years after constantly owned trapes around Florida looking for that fountain of youth, we have found the opposite, artificial intelligence that lets us grow old earlier. Call it maybe the fountain of age. Now the question is whether this will spread from lawyers to doctors. Stanford Medical School Dean Lloyd Miners says they're already well into integrating AI into medicine.
There will be less emphasis on memorization, more emphasis, I think on truly understanding and in particular understanding what these models are doing and how they can be responsibly deployed and trained.
So we may be just around the corner from bringing to the world what thirty years ago TV only imagined in Doogie Houser, who graduated from med school at fourteen and was practicing medicine at sixteen.
Today's sixteenth birthday getting his license would just be the most perfect present.
You want to go to jail, No, you'll be going to deal for criminal negligence.
Who is a character that's.
My sin with the doctor that does it.
For this episode of Wall Street Week, I'm David Weston, This is Bloomberg.
See you next week.