Bloomberg Wall Street Week - January 19th, 2024

This is Bloomberg Wall Street Week.

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

The financial stories that shape our world.

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

Through the eyes of the most influential voices.

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

Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

Finding a way forward through the Red Sea at Davos, in the presidential campaigns, and once again in Congress.

This is Bloomberg Wall Street Week. I'm David Weston.

This week's special contributor Larry Summers of Harvard and the fiscal path ahead for the US government.

Our fiscal problems are much more serious than they were in nineteen ninety one or nineteen ninety three.

I'm Funny a Bacheloss of Rock Creek. I'm plotting a new course for ESG investing.

The economics of solar and wind have changed today.

They are very economic, and Blair Ephron of Centerview partners on getting mergers and acquisitions.

Back on track.

M and A feels like we're much more important than them in twenty four than it was in twenty twenty three.

Global Wall Street spent the week looking at some hard problems and searching for some solutions. As a tax from Huthi rebels on commercial shipping in the Red Sea worsened despite US and British military action. I don't think it was possible to go on allowing these attacks to continue in the Red Sea. In Davos, the Great and the Good gathered for their annual meetings, which this year focused on the newest bright and shiny objects generative AI.

It's not yet like replacing jobs in the way to the degree that people thought it was going to.

What we're doing is we're addressing some of the most profound social challenges with AI in ways they're transformative.

Even as Secretary of State, Blincoln had trouble getting out of town because his plane broke down, only adding to Boeing's problems in the frozen tundra of Iowa. Former President Trump found his way forward with the resounding victory and the caucusses there.

The important thing is for us to just take the victory tonight and send a message to the nation the world that the Republican Party is going to be supporting once again with Donald J. Trump for the presidency.

And back in Washington, Congress continued to struggle to come up with some set of compromises to avoid a government shutdown.

Congress has been able to keep the government open only by kind of kicking the can down the road.

Whatever the struggles the rest of US may have had this week, the markets certainly had no trouble finding their way, as the S and P five hundred closed at a record high for the first time in two years, up almost one point two percent on the shortened trading wheel that put it at forty eight thirty nine, which is only about one hundred points below the median number the Bloomberg Ls have for the SMP to close at the

Well, the week itself was a bit fascinating, just if you listen to your preview there. So everybody loves higher markets and this was incredible week, right, shortened week, holiday week. At the same time, you had global uncertainty which was just mentioned. Maybe there was optimism because of the fiscal deal, as your person just said, to kick the can down the road. But the fact that interest rates are higher faster than people expected is something that you need to watch.

So one of the things that you are so student is really understanding with the markets work, is that the thing that's driving right now is that anticipation of cuts from the fur Reserve, and are the markets getting a little ahead of themselves, even though they came off a little bit this week.

Yes, there's this expectation that the FED itself is trying to camper in the sense that all the public statements this week are, hey, we're not gonna cut as soon as you think the march futures markets have really cut the probability of a cut then in half. It's highly unlikely in an election year to see the Fed cut so many Historically that has just not happened.

Well, I was wondering about that historical Because you have that historical perspective, does a FED have to be a little concerned, particularly as we get into the year, that if they start cutting a lot, it looks like they've got their thumb on the scale of the election.

That's going to be a problem because every point that takes place then becomes a question of are you favoring one candidate over the other. So if they cut, Trump's going to say, oh, boy, you're just doing it to support Biden. If they don't do anything, then the Biden camp may say, well, you're doing this just to support Trump. It's a very no win situation. But you have to look at the economic data. Someone tell me why the FED needs to cut. Equity prices are record highs. That's

Peter's always great to have you with.

That's Peter Borsh of computer trading.

Well, I don't think the US has lost on migrancy. We're going to regain it in the second half of this decade. The second half of this decade, one of the overriding issues facing the economy and the political decision makers will be the infrastructure of the United States. To rehabilitate our educational facilities, to rehabilitate our roads, our communications, our environment.

I think the solution to the budget deficit problem is really twofold. Number one, create strong sustainable economic growth by, as you said, getting out of the way of the private sector, support entrepreneurship, investment incentives, and so forth. Number Two, we've got to restrain federal spending. And I think on this point there's a lot more work to be done.

That was Henry Kaufman on Wall Street We're Back in nineteen ninety one, and Larry Kudlow appearing with Lewis Rakiser in nineteen ninety three, taking decidedly different views on spending in the role of government for his thoughts on where we should be heading in twenty twenty four, welcome now our very special contributor, Larry Summers of Harvard.

So, Larry, welcome back. Great to have you here.

We've talked about some aspects of this before. I mean, I could say it's guns, butter and deficit, the question of defense spending, the question of investing in future productivity, question of deficit. If you were the architect once again of US fiscal policy over the longer term, where should we be heading?

Let's start with the recognition that our fiscal problems are much more serious than they were in nineteen ninety one or nineteen ninety three. Then we had budget budget debts relative to GDP and the thirty percent range, with outyear deficits perhaps in the five percent range on honest forecasts.

Today we have.

A debt to GDP ratio above one hundred percent, with out your debts in the ten percent of GDP range, So we've got a much more serious problem Number one.

Number two.

Then we were reaping a Cold War dividend from the end of the Cold War, and we could reasonably expect defense spending as a share of GDP to be falling today. Though it's not reflected in the CBO forecast, almost certainly we are going to have to substantially increase defense spending and spending on a broader range of what in a sense or international security activities, issues like global health, issues like resilience, most importantly climate change. So we've got a

So one of the questions people ask is did you increase taxes? Are you going to reduce productivity?

No, First of all, the last time we did it in nineteen ninety three, productivity sword afterwards, when we had much higher tax rates in the United States in the fifties, the sixties, and the early seventies, productivity growth was more rapid than it has been in recent years. The vast majority of the funds that flow into venture capital come from institutions like state pension funds, university endowments that are

Okay, Larry, thank you so much for being back with us again this week. That is Larry Summer's our very special contributor here on Wall Street Week.

Coming up, we go to Davos.

We're up Sunny Bechelists of Rock Creek will bring us up to speed on two central topics, China and the future of ESG investing.

Most people, including myself, you know, and people have been in the world of impact investing, do not necessarily like the word ESG.

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.

A good part of global Wall Street gathered for the World Economic Forum meetings in Davos this week, and a good part of the discussion returned to topics we discussed here before, China and climate of Sonny Bachelized, a founder and CEO of Rock Creek, joined us now fresh back from the Swiss Alps. So Sonny, welcome, It's good to have you back in this country. Tell us what came out of Davas and start with China from them, because we did have the Prime Minister go over, Prime Minister

David, number is five point two.

Obviously it looked a little better than what the estenates had been, but as you said, the numbers are less.

Credible these days.

I think the general sense that is coming up from China is very simple. Obviously you had the biggest delegation. I think maybe ever from China is certainly bigger than the US delegation this year.

But while the language was about.

We're open for business, in practice, as we know, markets were down twenty three percent outflows huge uploads last year. Markets are down ten percent already in China this year. And if you look at both the economic and the social problems that China is facing, things are only unfortunately getting worse. Because if we look for those of us who've been long term investors in China, if you look over twenty years, the first ten years of that twenty

But excludes college students.

Those numbers are showing that student aspirations and young people's aspirations right now in China, those between like sixteen to twenty four have diminished. China was a country where in the last twenty years, there was a lot of hope, so people thought they would do better than their parents.

They thought by getting.

A better education, etc. More job opportunities, they would do better. Those aspirations, unfortunately, are getting squashed for the younger population and then for the urban sort established mature population.

The value of the real estate has come down.

So if we look at the next ten years, while the delegations, whether it's this we or a lot of Chinese delegations are going all over the world right now trying to wile investors as we speak, it's hard to be a convincing. Of course, valuations are low, but what is the trigger to get them up?

Well, what about something you just referred to?

Because Pronsterly and others within the administration in China have been saying we're going to be pro business.

We're going to be pro business.

Do we have any sense of actually delivering on that promise, because, as you suggest, aside, they've got a big problem with foreign direct investment, which has gone negative.

For goodness sake, I think they are saying they're pro investments. At the same time, the actions over the last year especially were maybe less friendly just to investors in general, a lot of the money that went even into their own local markets was going to the soees versus their own private markets. The power of the central bank was

Jamie Jamon, the head of JP Morgan while Davos, says that basically the risk reward has changed dramatically for China.

Do you agree with that completely?

But also I just want to say, even though the risk reward was good the last ten years, China did really well. I'm not sure if investors made as much money. Venture investors made a ton of money early on, but you know, for the companies that are not sold, it's not clear that they would be able to get out

That's economic policy, which is something that the administration in China can do something about what about demographics, because we also got numbers off for demographics, which we're not encouraging exactly.

And I think think the population keeps on getting smaller. And if you have a population that is diminishing in terms of because of the previous policies in terms of children that they had, even though that policy has changed. The issue is that, together with the aspiration of young people and the fact that there is this youth unemployment really does not bote very well.

And the fact that a lot.

Of Chinese investments of households was in real estate and we know that that sector is hugely down and even policies are not going to fix that. And last, but at least, a lot of the young people have been getting trained to go into services jobs, jobs that are diminishing also. So all of that, the demographics but also the composition of the job market that is changing again is not very positive.

What was the discussion at Davos about what used to be called ESG. Esg's sort of got a bad name now, Larry Fink says, you don't want to say that anymore, but whatever you call about climate related investment, what was the discussion.

I think radly speaking.

You know, thin World Economic Forum has been doing a number of studies also over the.

Last year on the ESG topic, and.

Most people, including myself, you know, and people have been in the world of impact investing, do not necessarily like the word ESG. There is a political issue going on with ESG and d I putting that aside for a second. Basically, I don't think there's a lot of disagreement that there

So the decisions are economic.

I think the Chinese obviously are looking at their own climate related issues, the quality of air, the quality of water, the quality of food that is coming out and is sometimes hazardous, and they are investing a lot.

In those areas.

Plus, that is the one bright spot, I would say in China.

Well, and I'm sunny, as you know so well in life and in business, what you call something really matters and go away from ESG or even climate, talk about infrastructure. Last week we had this big deal announced with Blackrock and gp Bioevaglacia, you know, well, so as Lori Frank and talking to about the opportunity they see there and infrastructure. An awful lot of it seems to go back to climate and the investment we need to make to get to net zero exactly.

And I think while you will see that Larry may not be using those terms and politically very very careful on the terminology he's using, you can see what he's investing in, and I think that is a really positive sign in the sense that structure is getting built. G IP obviously is one of the biggest investors in this area. I think, you know as one of my colleagues, one of the ex World Bank presidents also is been there

Sney, thank you so much. Always great to have you on Wall Street Week. But as a Sonny Bachelist of Rock Creek. Coming up, what corporate leaders should be thinking about as we move toward the November elections in the United States. We'll ask Blair Ephron of Centerview Partners.

That think's important to either candidate that we rein in our deficit.

That's next on Wall Street Week on Bloomberg.

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

Corporate transactions have hit a dry spell after a blockbuster year in twenty twenty one. Mergers and acquisition stalled in twenty twenty three, though by the summer bankers like evercoorse Ralph Schlostein were hoping for more action in the second half of the year.

Announced and for the first six months of the year was down. The dollar volume was down forty percent. I don't expect it will be quite as bad in the second half of the year, but certainly the amount of dialogue among our clients is up quite dramatically, and our backlogs are up.

And there were some areas where things did pick up, like on international deals.

This year was very busy for US on cross border m and A. So we could we're seeing one companies listed outside the US just migrate to another new list thing here and turning it into their primary list thing, getting a multiple bump plump. But we could also just see a lot of US companies spending their cash overseas.

And as we get into twenty twenty four, there's reason to believe there's the appetite out there, whether it's from private credit.

If you look at the likely demand for private credit, if you take the two point four trillion dollars of dry powder and private equity funds and you assume five plus billion dollars of deals, is an enormous demand for private.

Credit or in tech where valuations may be making deals more compelling.

I do think investors have more confidence in the levels that we're at from a valuation standpoint, more broadly in technology, and are starting to see the competing tension in the public market of M and A from strategic you know, take privates for example, or or from take privates or from strategic activity leading into the end of this year.

But when you talk with the bank leading the league tables in M and A Golden Sachs, there remains a big difference between the interest and appetite and the deals making it over the finish line.

When you think about what really drives a future M and A, we think there's a lot of pent up demand.

The pipeline of.

Dialogue is as robust as we have seen.

What the challenge has been is just getting the fingers to meet on transactions.

And to take us through where we are emergence exhibitions right now. Blair fron cofound of Center of Your Partners, So Blair, this is really what you do for a living. We've talked a lot about the fact that the mergeranc existies were way up, came way down, and then we've talked about a pipeline You've talked about in this program, pipeline coming. It's been coming for a while. Now, when is it actually going to get here?

So a great question.

Obviously, if you're an investment banker, you're preternaturally optimistic.

So we always think that things will better.

I would tell you this, but we do see the shoots and actually it's already happening. In January, for example, you think about larger transactions, We've already had four transactions in the first two weeks over ten billion dollars. You compare that to last year's entire first quarter, there was five transactions over ten billion.

So it is happening. One. Two.

The fact is there's an optimism in the C suite that we have avoided sniffing the downturn and in fact that we'll have a tailwind and some growth. And that's always a good environment in which to do M and A and we're getting a sense of that strongly. Three does a pent up demand. We haven't had an important M and A in eighteen months. Last year's a three trillion dollar market. That compares to an average the five years before that four to four and a half trillion.

Up in the last year's.

Talk about the financing for a second. There are some people, particularly private equity, You're saying if in fact the Fed cuts cuts earlier rather than later, that will really really stimulate which an exquisition is that your experience? I mean, is it important whether they cut in March or they cut in July, and it is important how much they cut this year Hey.

I'm not in that camp.

I'm in the camp that wherever we end up at the end of the year in terms of the rates has been priced in. Whether it happens in March or happens in May, we'll have limited impact on my world. The trend will have a positive impact.

The fact is when.

Rates get cut from the first rate cut to the final rate cut, if you look at the past five times as this happened, markets have done very well.

Okay, so, and that's what we'll be priced in.

I think the bigger question is going to be evaluation number one. And after you've had such a run in the market, you have the obvious question am I buying it at the XYZ company at the right time or not? And the way you think through the and how long will the process take from assigning to a close that actually continues to be a big factor, as it should.

Twenty four than it was in twenty twenty three.

So in financial media, which doesn't necessarily make it sold, but in financial media's a lot to talk about private equity and having a lot of portfolio companies that need for private equity to actually get some money into the hands of some of the people who have given their money. Is that an imphatus right now to have more transactions done.

I think private equity will be a very strong driver in twenty twenty four. If you think about the years of preceding twenty twenty three, with basically forty percent of the market, there is such a large group of companies that are looking for the quid and coming from private equity that I do think it'll be a very active time. And again that goes directly to the financing markets as well.

You know, it's so.

Last year it was much easier for corporate to look at something and not think they had private ere competition. This year, when we see companies we're selling, the interest is both corporate We're already saying it corporate and private equity.

How much of your business emergion exisition is driven by essentially the need to reform parts of a sector. I mean, I'm thinking of one that I come out of media right now. There's a lot of pressure right now for some of the big media companies to really think about the cards they've gotten, how they deal with them, and how they get rid of them, how they pick them up. How much of em andy is really driven by these big companies saying, you know, we got a really restructure today.

I think it's most of it.

Progress transformation is happening so quickly and it's so disruptive that every company is saying, here's my portfolio today, but where's it going to be tomorrow? So you know, you talk about your world media. It used to be traditional media with three networks. Now it's traditional and not traditional players. Apple, Google, Amazon are as active as Disney, Comcast, Paramount Gaming. What is technology? It's all becomes one industry. If I go across any industry. That is what we say. I look

Buy then build.

So I would say that every business is being challenged in ways it never was before, and it's causing CEOs. It is causing boards, causing season leaders to constantly rethink their ideal portfolio, recognizing there is never an end state portfolio anymore.

It is always going to be evolving. And the good news is.

We have a as talented and experienced a group of leaders as ever.

So when a CEO undertakes M and A.

Today, chances are strong that he or she is going to end up doing a good job in the right thing for the company, both strategically and financially.

All of which supports your view.

The twenty twenty four looks like it'll be a lot strong at twenty thirty three Emergent Acquisitions. What does this say for a cent of your partners are you hiring and if they are, you are hiring what sorts of people you're hiring? Because it looks very different than it, certainly ten years ago, maybe five years ago, because of something innovation. I'm not to speaking for example generat Ai. Boy, that's a great question. First all, we are hiring, so

The skill set we look for is.

Probably different than you would think.

We want people who can think critically, who can analyze situations, who have judgment, have an ability to make difficult problems distilled into more simple problems, and it's less about whether you can make a great model.

That was Blair Efron of Center View Partners.

Coming up, we'll wrap up the week in Davis with Bloomberg Senior executive editor for Economics and Government, Stephanie Flanders.

That's next on Wall Street Week on Bloomberg