This is Bloomberg Wall Street Week.
I mean 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, 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.
Harvard President leaves a war in the Middle East, stays and Santa takes his rally with him on his sleigh. This is Bloomberg Wall Street Week. I'm David Weston, this week's secial contributor to Larry Summers and the US jobs numbers.
It's certainly increasingly possible that we'll have that much valleyhed soft landing as rare as those who have been historically.
And David Otter of MIT on what to expect from Generative AI.
Part of that on a game that's so called you know AI, give it in will actually be squandered on AI defense.
Global Wall Street got the new year underway this week with big changes at the top of Harvard.
The Harvard Crimson reporting that Claudine Gay will resign today. And keep in mind she was Harvard's first black president. She just took the post up in July, so this is the shortest tenure in Harvard's history, just six months and two days.
While things in the Middle East showed little signs of changing, at least for the better.
I think as events unfold, we're likely to see more escalation, stepped up attacks, and as a result, the market's going to sort of be dragged back to this Polish Middle East risk.
And Bob Ayer's challenges A Disney stretched into the new year as Nelson Pelts continued to challenge his leadership, even as another active Blackwells came to his defense.
This is going to be a really contentious fight I think between False and Disney.
He obviously does definitely want to put himself on the board.
He definitely wants to see Jay Rizzulu on the board.
The Federal Reserve released its minutes from the December meeting showing a cautious approach, with members talking about the possibility of holding for longer than expected, cutting or even raising rates.
I think we do have to pay a very careful attention to that tug of war between what markets are seeing in terms of FED easing and whatnot in what the macro data are suggesting.
And then on Friday, US jobs numbers came out stronger than expected, pointing to a surprising strength in the economy, only to be countered by ISM numbers ninety minutes later
suggesting some slowing. The markets took all this into account and decided that Santa had after all gone back to the North Pole and taken his rally with him, with the S and P five hundred down one and a half percent for the first week of the new year, ending at forty six to ninety seven, which is still nicely above the forty five hundred number of the bloomer
El's are predicting for the median. At the year end, the NASDAG gave up three and a quarter percent, while the yield on the tenure decided to peek its head back above four percent, ending the week up over eleven basing spoints at four point five to take us through the start of the year. Welcome back now, David Bianco, he's DWS Chief Investment Officer for the Americas. Welcome back, great to have you, happy news.
Happy new year. That's great to be here for the first Friday.
So Friday was a bit of a whiplash, at least for me, because we had those jobs numbers come out. The markets seemed to know what to do about that. They didn't like it very much, and then the sm numbers came out, turn right around. What did we take out of this?
Well, the week, first week of the year, and not a great start. Many investors are calling for us to pay attention to the January indicator the first several days, first five days of the year. Often investors say that's the way the rest of the year will go. Not a great start, but it's just a start to the year. We'll see how things play out.
The first data, as.
You said, key data, job market data for SUMBER and the manufacturing and the service ism. The way I see it is that the job market is absolutely solid. Another month of more than two hundred, tw hundred and sixteen thousand jobs created on the establishment survey, and we still see strong wage growth, more than four percent.
Sequentially and year on year.
And another interesting thing is that not only did the unemployment rate stay at three point seven percent, among the lowest in many many decades, we saw something interesting where it looks like nearly seven hundred thousand people who recently entered the labor market decided for whatever reason, to exit it. So the participation rate is sixty two point five percent, well above the lows during the pandemic, but still below the sixty three percent level before the pandemic. It's a
full employment economy. We're still creating jobs, mostly on the service side of the economy. Manufacturing is still weak, but it's definitely a full employment economy with no slack in my.
View, Does that give the FED permission to cut anytime soon? And we came out of last year with a lot of momentum, basically with anticipated cuts perhaps even early in the new year. Given those jobs numbers and the numbers we're getting right now, does it give the permission that have FED any permission to cut at this point?
Not yet. I think the disinflation that we've seen during twenty twenty three and it more needs to occur in twenty twenty four has opened the door to cuts beginning in twenty twenty four. We think the first one will be in June, and should be no earlier than June, and it would just be so odd. There's no historical precedent since nineteen sixty of the FED cutting when unemployments below four percent. The stock market is basically at all time highs.
There's no reason for them to rush it.
And the more the markets try to rush the FED to cut, the more I think the FED should make markets wait.
Numbers were getting indicate that the fourth quarter was probably stronger in growth than a lot of people were anticipated. As a product matter, what is driving this economy at this point, because it is stronger than most people anticipated, stronger than most of the rest of the world at this point.
Well, the fourth quarter, still yet to fully be reported, is slower than the third quarter, and we expect the first quarter of this year to be even slower. So there is a clear slowdown in the job creation on the services side. On the consumption side, there is a slowdown, but less slowly than anybody would have thought. Including nos,
consumption stay strong. Lifestyle is sticky. People have a powerful we talk about pent up savings, but the wealth effect that has come from the stock market, and maybe a little bit of confidence that by the spring the housing market starts to recover in terms of activity. People feel really good about their balance sheets and they have their jobs.
Let's talk about the nineties. Are we're embarking on a time like the nineties and ninety is pretty interesting?
Yeah.
At the start of twenty twenty four, I actually find myself thinking about the nineteen nineties quite a bit. Some are wondering if it's the end of nineteen nineties as it was twenty twenty three like nineteen ninety nine, and are we going to have a popping of a tech bubble. I don't think so, but there's a rest The equity
market has some tough years. I had given the gains of the past few years, and then if you go the way back to the early the start of the nineteen nineties, nineteen ninety there are some issues on the table where inflation not as bad as we had recently, but inflation was a problem Greenspan had to do something about it in ninety four. But also the deficit was a problem in the early nineties, and we have yet
to do anything about the deficit. And a lot of people talk about nineteen ninety five being a good analogy for this year because of the soft landing. That may be the case, but we have an election this year, we have a deficit to deal with, and we have plenty of geopolitical concerns that are much more adverse than the case in the nineties.
Call By in nineteen eighty five, we did have the Carter tax plan that was starting to address on those fiscal questions.
Clinton, Yeah, Clinton.
Yeah, Yeah, that's right. So Clinton, to his credit, and don't forget, this was a big election issue in nineteen ninety two.
The deficit, And in.
The middle of nineteen ninety three, Clinton with Congress passed tax hikes that took effect in ninety three and played off in nineteen ninety four fully and they put together a plan to reduce the deficit over the nineteen nineties, as they successfully did, and we went to surplus. And then in nineteen ninety four, with the midterm elections and the Republicans come into power, a lot more was done to improve the fiscal situation and improve spending.
So, David, let's talk about how you're going to make money the rest of this year. You've already said that you think the evaluations are robust and big tech we are there places you think that maybe they're not quite as robust, maybe we're missing some things.
Well, I do scour over the equity market all the time to find some the best opportunities. We store are bullish on big banks. We see the best value at the big banks in the US, and they're doing very well the past several weeks as the recession fear.
As dissipated.
But I also like big biotech and pharmaceuticals because there I see strong long term growth potential that is at a very un demanding valuation right now. So tech companies, they're great, but the valuations are so demanding that even if these companies do wonderful things, they might not live up to the expectations of investors, particularly over the short term. And I'm looking for companies where there is that big upside optionality that investors are not pricing.
We see that pharmaceuticals and biotech.
What about pharma schools. What's going on specifical with pharma schools? So and for example, Pfizer's had a bit of a struggle, Yeah.
Yeah, Pfiser's definitely had a bit of a struggle.
And then on the opposite end you've got names like Ela Lilly which are going gangbusters, and then everything in between and then the companies are going through We've known this a transition period from old on patent drugs to the new pipeline.
It takes time.
You never know which in the pipeline is going to be the hit and when. Like I said, the valuations are really on demanding. Now we're going into an election year and a lot of investors are shy to buy healthcare stocks during an election year. I might be a little bit cautious on some managed care prescription drug benefit managers, but the innovators in the space, the medicine makers, this is what we need, and I hope the policy makers allow these companies.
To reach for the stars.
Thank you so much. Great to have you with us always, as David Bianco of DWS. Coming up, we go over those jobs numbers out at the end of the week with our special contributor Larry Summers of Harvard. That's next on Wall three Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
This is Wall Street Week. I'm David Weston. We're now joined by our special betur Larry Summers of Harvard's. So, Larry, thank you so much for being with us. We got those jobs numbers at the end of the week on Friday. They were significally better than expecto. There were some down revisions for the prior month. At the same time, IM numbers came in a little softer. What do you make of these jobs numbers and particularly perhaps the wage numbers, David.
Look, I think we're in the same kind of pattern we've been in for us some time. As of right now, the economy looks pretty strong and inflation looks relatively under control, but there's a lot going on underneath the surface, and there are still substantial risks with my three scenarios paradigm, some risk of a downturn. We still keep not seeing
it at all in the employment numbers. In the data on GDP, there's this big gap between total income and total output that makes things hard to read, and there's some worrying developments some of the business surveys like that ism and in some of the credit data. So I think it's possible that the economy will go into recession in delayed response to monetary policy. That looks less likely to me that I might have fought some months ago.
It's certainly increasingly possible that we'll have that much valuehooed soft landing, as rare as those have been historically, and I think there's a risk that people are still underestimating given the very worrisome fiscal prospect of the country, given the recent easing, quite substantial in financial conditions, given still tight and the wage numbers again are not running right now, today's number not running at a rate that's consistent with
the two percent inflation target, given the uncertainties in geopolitics that could point the problems in supply chains. My gut is still that the market is underestimating the inflation risks in the current situation, and therefore probably overestimating the amount of FED cutting that is going to take place. But it's a fairly close call, and the FED is certainly doing the right thing by being entirely vigilant and signaling that it is very much going to be data dependent
going forward. Right here, I do read the continued strength of the economy in the face of what's happened to rates, as suggesting either that the neutral rate has risen substantially, or as suggesting that the economy is less sensitive to interest rates than we might have thought. Either one of those considerations will suggest a bit less urgency to rate cutting than many people suppose at the current moment.
Larry, we had a major development in something that you've talked about in this program more than once, and that is at Harvard, where you are a tenured professor, were president there, but more generally at college campuses that we saw the resignation of Cardinay from Harvard as president. I wonder what you make of it, now that we're getting, perhaps somewhat past the worst of the conflict, what are the larger lessons we should learn, what can be done in terms of reformation by the universities.
Otherwise, David, I think this is a time of testing for universities, certainly unlike any other, certainly since the Vietnam War period, and perhaps even going beyond that. Some of our leading universities are under investigation, both from Republicans in the House of Representatives and from the Education Department of the Biden demonstration. Biden administration. You're seeing a degree of divisiveness on campus I haven't seen since I first got
to the Harvard campus in nineteen seventy five. So I think there's going to be a very profound challenge of finding a vital center. Universities must stand up to some of the vitriolic forces on the populist right that seem to be in favor of everything up to book burning in support of enforcing some very particular risk vision on universities.
At the same time, I don't think there's any question that they have been threatened from within by stifling orthodoxies have led to the cancelation of speakers that have led to people being discomforted discomforted by discussing issues like crime, like education except in particular prescribed ways. And it's going to be the challenge of university leaders to find a way between those twin abhorrent polls. I have to say
that this goes way beyond any individual. I think universities have in many cases, including at Harvard, been failed by their trustees. At Harvard we call the group the corporation, and.
In many ways it is their job above all to maintain a healthy interface between the university and the broader society.
Larry, if we cast our minds back to November of twenty sixteen, there were a lot of concerns about President Trump when it became clear that he had been elected, and in fact, you remember, the markets really went south, very dramatically initially, but then they rebounded. And if you look basically on the track record of the Trump presidency, just from the point of view of investors as well as the economy, it is not a terrible record. I
think it's fair to say. I mean, the markets did reasonably well, there was employment created, there was a GDP growth. So is it possible that we might overreact to the possibility of a Trump two point zero?
You know, there's an old saying, fool me once, shame on you. Fool me twice, shame on me. That's going to be the way the rest of the world is going to see it. The rest of the world, which has had so much faith in the United States for all their resentments, and so many have been so reliant for so long, were prepared to see a first TERMP term as an aberration. But after ninety one indictments, after the events of January sixth, that is not how they will see a second term that is not how they
will ever see America again. That will represent a loss of the moral authority that the United States has had since it won the Cold War, since it won the Second World War, and that will, I think, make for a much less stable world.
Okay, Larry, thank you very much for all those thoughts. As our special contribute here on Wall Street Week, he is Larry Summers of Harvard. Coming up, twenty twenty four may just be the year when we figure out how big generative AI could be. We'll talk with an economist who's done early important work on what it could mean for the labor market, David Otter of MIT. 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 new year will bring with it a presidential election in the United States with potentially very different approaches to the economy weighing in the balance. Here on Wall Street Week, we're going to cover the election by focusing specifically on what
it could mean for the economy and for investors. So we ask Bloomberg International Economics and Policy courspondent Michael McKee to start the conversation by laying out what we know at this point about the approaches of the two front runners, President Biden and former President Trump.
It's been thirty two years since political strategist James Carvel hammered home the idea that when it comes to presidential elections, it's the economy stupid. But in twenty twenty four, is it entering this election year Compared with election year's past. The economy is growing by around four percent, the most since two thousand and three, With one exception. Unemployment is the lowest it's been entering an election year since nineteen sixty eight, when a lot of men were employed by
the US Army in Vietnam. The exception was twenty twenty, when COVID doubled the jobless rate between January and election day in November. Inflation is higher than any year since two thousand and seven, but it's been cut in half over the last twelve months and should be close to the election year average by November by the carvill yardstick, it's somewhat surprising that President Joe Biden isn't far ahead in the polls. It may be that voters haven't shaken
off the COVID pandemic. Yet they're comparing the economy of the past three years to where it was under Trump in twenty nineteen, and they're not focused on what Trump is promising. Draconian changes. He wants across the board tariff increases, which would raise prices for just about everything, threatening inflation. Remember when the US raises tariff's, Americans, not foreigners pay the difference. Trump is talking about massive deportation of illegal aliens,
which would hit the labor market hard. On employment, particularly in lower wage service sectors, would rise. He would renew and expand tax cuts expiring in twenty twenty five, increasing the deficit. The good news for President Biden is the economic outlook remains bright. If inflation keeps falling, interest rates are expected to follow, and that would stimulate faster growth and higher stock prices. The Biden camp is betting people
will notice. The bad news is this year it may not be the economy stupid and Wall Street may not care. The S and P five hundre it rose twenty four percent under Biden last year, but it rose twenty nine percent under Trump in twenty nineteen, so this election may turn not on pocketbook issues, but personalities. Not that personalities are all bad. The nineteen ninety two election brought Larry Summers into government.
David, the generative Artificial intelligence was one of the hottest topics for investors in twenty twenty three and looks to be the same in twenty twenty four. There's much we don't know about what it could ultimately mean, including about the effect on productivity and growth in the labor market. David Otter, he is MIT Professor of Economics, has done some of the earliest seminal work on this subject, and we welcome now to Wall Street Week. So Professor, thanks
so much for being with us. As I say, it's really early going and we don't know a lot. But what do we think we might know about productivity and growth, because that's what investors seem to be most interested in.
Thanks very much for inviting me. What you said is correct. We don't know very much about the pro TV consequences. It's easy to project enormous potential gains, but we would have made the same projection about the computer era of the last four years, and in fact growth has been
relatively disappointing, especially for the last fifteen years. So I think there's enormous upside potential, but sometimes that potential doesn't turn into reality, and you know, we will spend some of the productivity of AI dealing with the problems that AI creates, including hoscination, including vulnerabilities, cyber attacks, and so part of that gain that so called you know, AI dividend will actually be squandered on AI defense.
Talking about productivity and growth them is sort of talking about whether the pie gets bigger overall? What about how we divide up the pie that is distributionally, particularly in the labor market, because you've done some work there based on past history, but what we think might happen with jobs, who gets better jobs, who gets worse jobs.
So the period we're concluding now, the computer era, the traditional computer era, has been one of rising inequality, and we think that computing has had a lot to do with that because it's been very complementary to decision makers, you know, to lawyers and doctors and marketers and people who basically use information and analysis to make high stakes,
one off decisions. It's displaced a lot of workers from production work, from office work, and sort of pushed them down into less expert jobs in food service, cleaning, security, entertainment, recreation, and those are socially valuable work, but it's paid poorly because it doesn't require specialized expertise. And so computing, as we understand it has actually not been that great for growth and really created a lot of inquality. I think AI has the potential to work quite quite differently.
As you talk, it sounds to me there's another distributional potential effect here people, for example, receiving medical care, which is far from equally divided in this country, and goodness knows around the world. Is the potential that more people will have access to better healthcare in the United States and around the world.
It's a great question. So I do think there's a lot of super expensive services that or expenses specifically because they're provided by highly paid experts. So that would be in education, that would be in healthcare, that would be in architecture and design, that would be in software development,
and AI could make those things more accessible. I think that's going to have that has potentially enormous benefits both in rich industrialized countries like the United States and potentially even more so in the developing world, where that type of expertise is even more scarce. How we do that, of course, depends a lot on our institutions, right, So the good scenario is the price of medical care comes down, it becomes more broadly available that we allocate it more efficiently.
The bad scenario is basically, if you're wealthy, you see a highly paid doctor, and if you're not wealthy, you see a machine. So we shouldn't count on the technology to solve our problems for us. It opens possibilities, but how we use them is really a societal choice. And just to give you a very stark example of this, you know, in the nineteen forties scientists figure out how to harness controlled nuclear fission that has two really powerful uses.
One is for energy generation and the other is for a nuclear weapons. North Korea is a country that has lots and lots offensive nuclear weapons, but no nuclear power plants. Japan, the only country against which offensive nuclear weapons has ever been used, has no nuclear weapons and dozens of nuclear power plants. So AI is a bit like nuclear energy, but in some ways more powerful and certainly more applicable.
We can use it for really good things and for really destructive things, and already both of those are current.
And finally, Professor, let's come back to where we started. The uncertainty about AI right now, because one of the things I've learned from you and from others is this is not just a matter of degree, but perhaps of kind. That is to say, basically, with automation, people who are really expert in this know how it works. They know what the rules are that the computers are following AI generative AI, as I understand, we literally don't know how it works and never will know how it works. It
does know how it works itself. What does that say about our ability to predict where it's going and how to manage it?
So your point is nexcellent one. Just to slightly clarify, we understand, or you know, computer scientist understand mathematically what it's doing. But in any given instance, it's like a child. It's learned some lessons. What it will actually you know, it's read some things and encounters some things. What will actually do on any given occasion is extremely hard to predict. You'd have to know everything it's ever been exposed to.
So that makes it actually a lot like human experts in some ways, because we ourselves a unpredictable in the sense. But it means that when we interact with AI, we need to learn how to treat it not as authoritative but as a guide or support to decision making, and that's really critical a professor.
Does that necessarily lead to regulation, that is to say, the government telling us when we should and shouldn't use AI because we don't want to use it the wrong way?
I think it leads to a couple of types of regulation. One of them is safety regulation. But we're actually pretty good at that. You can't buy our toaster of and that doesn't meet energy standards and fire proofness standards. And so when we're using AI and specific applications like in aircraft or in medicine or in cars, the government should and I think will regulate that and so absolutely. But there's two other forms of regulation that I think we
are much harder. One is AI you know desperately, you know, chips away or let me say, but differently, AI really threatens the foundation of our intellectual property system or our copyright laws. They just weren't built in anticipation of machines that would absorb and then memorize and not exactly reproduce but pretty much replicate what's already there. So that's an issue, and I really think there's a real threat to you know, to newspapers to create, to illustrators, to artists, to actors.
That needs to be negotiated and set properly in law, in bargaining. And we've already seen the screenwriters skill do that, the actors skill do that. But that's only the very beginning.
Professor, Thank you so much for joining us on Wall Street.
MAK really appreciate.
That's David, author of MIT.
Coming up.
Why pay for the cow when you can get the milk for free? Just ask Michigan coach Jim Harbaugh. That's next down Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Finally, one more thought. They say you get what you pay for. According to Wikipedia, it's an expression of the so called common law of business balance, though no one seems to know exactly where it came from. One follower of this supposed rule of business balance is Warren Buffett, at least after his partner Charlie Munger persuaded him it was better to pay a fair price for a great
company than to pay a great price. For just a fair company, and his Messrs Buffett and Munger proved paying up for great assets and talent most of the time is the way to go, like for those who stepped up in twenty twenty three and paid full price for big tech stocks when others were insisting they were overvalued. As we know, in the end, the Magnificent seven proved to be worth every penny, at least in twenty twenty three.
I think a lot of these names have a lot of growth in.
Them over the long term.
However, in the short term profit taking happens, it's good to lock in some of those great returns that we saw in twenty twenty three.
And one of the big tech companies that certainly got what it paid for was Microsoft with its thirteen billion dollar investment in open Ai, which despite a bit of trouble along the way, is now valued at something like one hundred billion dollars. We continue to be committed to open Ai, and we continue to be committed to Sam and Greg and the team, or in respect your where
they are. Hollywood writers did their best last year to show us all that if we want their best creative output, the students will have to pay full value, and in the end they made their point.
This deal is the very best deal that could be negotiated at this time, even with the use of all the leverage that we generated from having a strike for one hundred and eighteen days.
And while we were in Hollywood, Warner Brothers didn't scrimp when it put together the Barbie Movie, as the budget ballooned to one hundred and forty five million dollars and it certainly got what it paid for and then some, with global box office receipts somewhere north of one point four billion dollars. Of course, paying top dollar doesn't always guarantee you'll make money on the deal. Just ask Elon Musk, who paid forty four billion dollars for Twitter, renamed it
X and now admits it's worth about half that. While others think he may be optimistic.
We've just seen a huge erasure of value from X since Elon took over.
And at this point it's far from certain whether Steve Cohen will get his money's worth from the Mets, what with a two point four billion dollar price to egg, the hundreds of millions he's committed to the largest payroll in Major League Baseball and his plan to put another eight billion dollars into developing fifty acres around City Field.
Now it's the Los Angeles Dodgers, and to hope their new star pitcher, Shohei Otani will be worth their record seven hundred million dollars, they've promised to pay him, Which takes us to the one place left, at least in sports, where you can have a multi billion dollar business and effectively not pay at all for those doing the real work.
College football, where players give their all throughout the fall every Saturday, risking life and limb for exactly zero pay, something that Michigan coach Jim Harbaugh says has to change.
What I don't understand is how the NCAA television networks, conferences, universities, and coaches can continue to pull in millions and in some cases billions of dollars in revenue off the efforts of college student athletes across the country without providing enough opportunity to share in the ever increase in revenues.
Now, let's see whether Hawballs players win that national champceanship on Monday, even without pay Go Blue. That does it. For this episode of Wall Street Week, I'm David Weston see you next week.