This is Bloomberg Wall Street Week.
We turn our attention to the markets this week. USCPI en neembors reinforcing concerns about inflation. The financial stories that shape are worth a really different reaction to market. Some more indications of just how hot the US economy really.
Is rude the eyes of the most influential voices.
Katherine Keating, CEO of B and Y Moan, Ryan Winnahan, a Bank of America, Sam zel Sharmon and founder of Equat Group Investments.
Bloomberg Wall Street Week with David Weston.
From Bloomberg Radio.
Drones hit Moscow, lower numbers hit China, and Washington works hard not to hit the debt ceiling. This is Bloomberg Wall Street Week. I'm David Weston. This week's secial CONTRIBA Larry Summers of Harvard on the stubbornly strong labor market and what it means for inflation.
There's something about the underlying strength of the economy that they're missing.
And former IBM CEO Sam Palmersano on just how big generative AI could get and what could stop it.
You need some kind of a cognition, a capability which it.
Does not have.
Global Wall Street started the week watching drone hits in Moscow, perhaps as a precursor to a counter offensive in Ukraine.
We're able to reach you right in the heart of Russia, and these attacks are really about sort of like sending that message.
So it's quite embarrassing for Russia that this is happening. We spent another week on the debt ceiliing in Washington, but this time it wasn't about getting a deal, but about getting it all behind us, at least for a couple of years. We're going to deal with the debt ceiling. I think things are going as planned.
Tonight we all made history because this is the biggest cut and savings this Congress has ever voted.
For, and as expected, not everyone was happy.
Now one would again should vote for this deal.
Not once China got some bad economic news, raising more questions about the speed of its recovery.
China's manufacturing activity contracted for a second straight month in May.
It's more evidence that the post COVID recovery has slowed in the world's second largest economy.
But here in the United States, the jobs, well, it just kept on going, adding three hundred and thirty nine thousand new jobs in the month of May that was way more than the one hundred and ninety five thousand that was estimated, while unemployment actually rose up from three point four percent to three point seven percent, which set the markets off to the races, with the S and P five hundred up one point eight three percent for
the week, almost all of it on Friday alone. The Nasdaq was up a bit more, adding two point oh four percent for the week, while the bond markets almost did a round trip, starting the week just under three point eight percent on the ten year yield, dipping well below three point six percent at one point, and then coming back to just under three point seven percent on Friday as people return to thinking about possible rate hikes to take us through the week in the market, is
welcome now, Barbara reinhardtch she's Voye Capital, head of asset Allocation, and Aaron Brown PIMCO Multi Assets Strategy portfolio Manager, So welcome back to both of you. Great to have you here. Barbara. Let me start with you, but what we're seeing in the markets. We saw some numbers on Friday and then you get the commer roll looks pretty strong. Ata when it comes to jobs. How are the markets reacting to all this information.
It was a strange employment report, right, so it didn't coincide with necessarily some of the other data that we're looking at, looking at such as and if I be hiring intentions the home based data, they would have told you that the labor market would have been a lot weaker than the number that we had printed today. But the good news is and that what the equity market held onto is the gentle decline in average hourly earnings. And that is good news on the inflation side, because
you've had very sticky inflation. It's been coming down, but coming down probably slower than what people expected. But to see the easing in the wage data is a very good positive development.
Barbara, we've heard an awful lot about this lag and the effects from monetary policy. How long a lag should we expect, because boy, it doesn't see you're showing up very profoundly so far.
So it tends to be about you know, when the Federal Reserve started hiking industrates, it was about twenty about fourteen months ago. There tends to be a lag of about twenty four months between when the Fed starts hiking and when you start to see a dramatic slowdown in inflation. That means we should have at least the rest of this year into the first quarter of twenty four before you start to see a significant slow down in inflation.
Look when you look at things like the sticky price CPI or the underlying inflation gauge, they were at, you know, between six and seven percent just six months ago. They're down now to about three and a half to four and a half percent, well above the Fed's target, but they're going in the right direction. In order to get down to the two percent on inflation, which is the fed's target, you likely need to see a little bit more time go by.
Think about this, David.
The real issue is that the FED hikes the seventy five basis points that they did over the course of three or four meetings last year. They happened in the third and fourth quarters of last year. You need at least twelve months for that to start to be felt by the economy and start to see the slowdown you're seeing in some of the data change indexes. You're starting
to see some slowing. Certainly not indicative of the labor market this morning on that report, but I would say that data can change and can change relatively quickly.
It's not just US investors who drive US market. We also pay attention to foreign investors in US securities. And Torsten Slock of Apollo is here with one of his charts to show where foreign investors are putting their money.
So before the pandemic, that was appetite among foreigners for buying in particular US government bonds and also US equities. Foreigners have also historically bought a lot of US credit, but broadly speaking, the trends were that foreigners had appetide for buying both US fixed income and buying US equities. So over the months ahead, we still have that the federal serve is doing quantitive tightening to the tune of roughly sixty billion dollars every single month.
At the same time, we.
Also have a budget deficit which is roughly around five percent of GDP, and that amounts to roughly in round numbers, about one hundred billion dollars in issuings of treasuries every
single month. Combining both QT and the budget deficit. With this new issue, and on the other side of this that Celing deal now potentially being quite substantial, it does raise questions about who is it that will be buying treasuries, in particular in an environment where the hedging costs for foreigners continue to be quite elevated.
Aaron Brown up PIMCO and Barbara Ryan Hart a boy are still with us. Er, let me start with you here. We've been following this after the death Sente got put behind this unfortunately did this way. There's the question we're replenishing the larder essentially in the US treasure to get their stock back up. It's going to be a lot of tea bills. Do we have the buyers for those T bills?
Yeah, it's Torsten mentioned. I mean the challenge is from a foreigner's perspective. If you're a Japanese investor and you're looking to buy ten year government bonds, after the FX hedging cost measured by this sort of three month you know, FX forward hedge, it will cost you negative two percent. Your yield that you're getting is about negative two point two percent on a ten year bond. You can buy
jgbs for about forty basis points. So from a foreigner's perspective, it's better to buy the local bonds than to take into account the FX hedging costs and buy a US treasury bond, even though US treasuries at least from a yield perspective in the US is yielding. More so, it's really unattractive right now just because of FX hedging costs
to buy US government bonds from a foreigner's perspective. You know, there's another prop a wrinkle that I'm going to throw into, you know, the challenge that we have with perspective supply. Not only do we need to refill the cofer of the t GA and we have to fund the physical deficit, but also keep in mind from an international perspective, you have you're going to start to have the TLG or ros also that are going to you know, start adding
to additional supply uh in in Europe as well. So you have a lot of government supply that's going to be you know, hitting the market in the second half of this year, which is going to you know, create a challenge certainly, you know, in terms of or raise the question in terms of who's going to be the incremental guy or for that the problem with the debt ceiling being passed, and I mean it's good from a political perspective and good from a stability perspective, but it
does mean that you now have have to refill those coffers. They're gonna be a significant amount of issuance over the next couple of months, and the Treasury is saying that they want to rebuild to about six hundred billion dollars that TGA, which is means a significant amount of issuance over the next three to four months.
So Barbro, i'mos gonna. I hadn't thought about the Teltro issue. But whatever it is, what's you going to do to liquid in the marketplace? And what could that mean as a fract many that money's got to come from some place.
It does, but a lot of times you're talking about cash buyers moving over to a different cash instrument. In the past twenty years, there have been four times that the Treasury General Account has had to raise significant amount of assets like it is this time. Each time it
was able to do it without an issue. We don't rule out that something could potentially be and miss this time and cause some indigestion, But the FED is very well versed in the plumbing of the treasury market, and we don't think that it's necessarily going to be a very big issue for the front end market. Plus also think about this, You're now getting interest rates that are almost in excess of headline inflation to be parked in tea bills. So it's just a very attractive investment for
many investors. And many of the bank depositors are looking at the table market thinking I can go over to money markets and get much better of interest. So I think there's going to be a lot of natural buyers.
Thank you so very much to Barbara Reinhardt, Avoye Capital and Aaron Brown of Pimpco. Now, this week we marked the one hundredth birthday of Henry Kissinger, the man who laid the foundation for the most important economic relationship in the world. That was, of course, the one between the
United States and China. So we went back and found an interview Doctor Kissinger did with Lewis Rockaiser back in nineteen ninety when Chinese GDP was a mere three hundred and sixty billion dollars compared to the eighteen trillion dollars that it is today.
Do you think we still have important economic opportunities in China?
I think we do, and I'm in favor of maintaining a working relationship with China. It is too important the country it had made good procreates in economic refem and I think we should not likely sacrifice the relationship with the country with the longest continuing history in Asia, with the cultural influence that it has.
This is Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Artificial intelligence it's been with us for longer than we think. Bank of America's Brian moynihan says they've been using it for at least five years.
We have this thing called Erica, which is a virtual artificial intelligence, virtual assistant, natural language processing predictive technology that we've been running for four or five.
Years, and people like JP Morgan's Jamie Diamond insist that it is transformational. AI is real. This is not no, that's not crypto ed. This is a technology which is staggering, with AI pioneer Samuel Altman telling Congress we think it can be a printing press moment. We have to work together to make it so. But now there are those who are warning about some of the downsides with tech. Veterans like Carly Fiorina, agreeing with Open AI. Samuel Altman that there needs to be regulation.
Big tech has to say we alone are not in charge, and we alone cannot control.
And a group of AI industry leaders this week wrote an open letter warning that what they are building could lead to a risk of extinction and to take us through some of the possible impediments to general of AI, as well as the risks involved. Welcome to Sam Palmasano. He is now the chairman of the Center for Global Enterprise, but of course for many years he was the chair and CEO of IBM. So Sam, welcome back to Wall Street.
We've really great to have you here. Let's start, first of all with exactly how big this generative AI could be. We've seen Nvidia this week really explode in its market capitalisation. Is it over hyped? Do you think? Is it as big as people say?
David?
But first of all, thank you for having me. Now, I think it's that big.
This is transformational technology, but it's always but I mean I always draw the analogy to the Internet because if you think back where it began exchanging technical documents around the world in the seventies to what has become today fifty years later, a lot happened in innovation and development and regulation and guidance, etc. All that has to happen with generative AI or large language models.
But it is that transformation transformational because.
Like the browser for the Internet made it kind of user friendly for people to actually get in there and look up information or search, this will do the same thing as far as AI is concerned, for people to use natural language to interface to it and get responses that are very much like human being responses.
So if it is transformational, as you say, what are we going to need to have it be that transformational? What are some of the key inputs. Let's start, for example, with microchips. That's what's driving in Vidiot or large degree and maybe some other chip manufacturers as well. What is the need there?
Well, basically this is going to be it requires massive infrastruction. Sure, and today you think about as hyperscalers as the term, or cloud computing service providers like Amazon, Google, Microsoft, etc. Having said that, this is huge demands on capacity and performance of that capacity. Therefore, the chips and the advantage that Nvidia has is these things graphical processing units that
are called GPUs. Those technologies themselves are much better performers than the classic Intel chip, which referred to as X eighty six technology. So fundamentally you need that level of performance to run this like these natural language models, because they are so large, the data setsor is so large and requires so many interconnections that you.
Need the performance to be acceptable to the end user.
One of the things we hear about is energy. Also, we didn't seem that long ago we're talking about crypto mining and how what a big drain that was for energy back China really cut back on some of the mining there in China. What is the demand potentially in this transformational gener of AI LM, what is the demand for energy?
Oh, it's the same as all these large cloud service data centers.
I mean it's massive. I mean you could model those as if they're nuclear reactors. That so much energy they consume.
Now, there's a lot that can be done, I mean, quite honestly, around the utilization of the infrastructure to cut the energy costs. There's ways you can use green energy to supplement the classical forms of electricity in those sorts of things. But there are lots of techniques associated with how to reduce that.
But energy is going.
To be significant there's no doubt about it already is I mean, it has been for years in these large whether they were supercomputers in the old days or now the cloud infrastructure providers, it's the same issue.
They require significant amounts of energy.
So, Sam, we've heard an awful lot about the wonderful things that generative AI could bring us, not least of which is increased productivity. They're remarkable of projections here of trillions of dollars of increased production because of a general AI. Then we had a letter that came out this week from a group of AIX first people who know about this warning about the risks and even saying there's a risk of extinction if we're not careful. Is that overblown?
Well, okay, let me tell you what the risk are. I don't know if it's extinction, but the risk are. Quite Honestly, this technology makes you feel like you're actually getting something that's correct, you know, right, But it's not.
It's not valid.
And what it's doing basically at the engineering design is connecting large scale words together, but there's no checking to the source of the words. There's no fact checking as the conclusions these words reach. In some cases it's a terrific essay that it's prepared. Maybe it's a great book
that it's written, or a wonderful poem. But at the end of the day, if you need accuracy, and you have to have accuracy, like in healthcare, if you were depending upon your diagnostics, you would not use chat GBT. I mean you want to have a doctor or some human of some kind that looked at the conclusion that it reached, even though it probably read all the medical journals like we did in Watson Health. You need some kind of a.
Cognition capability, which it does not have.
I think people get confused by what it does have because it's so easy to use.
I mean, it's very, very attractive, there's no doubt about it.
But it needs to be enhanced with some of these capabilities that will address the concerns that are in that article.
Today about worrying about it. It could be like nuclear warfare in the future. I mean, if you think.
About applications that could have a short term impact that you would like to have facts but don't have any facts. Take political propaganda as an example of that, our political campaigns. I mean, you'd like to have some facts and all that information but we all know they don't exist, and I'm not sure that proponents of all that information really want the facts out there anyway.
Sam, is that risk? Is that weakness about actually truth checking? Is that inherent in large language models? Is it inherent in general AI or is it something with new iterations? Actually it could take over yourself so it could actually check itself.
It needs to be done.
Is the self checking, like you said, that does not exist today. I make the argument that the inventors of this technology that are raising all these alarms knew about these alarms, and they could have written some of these checkers, these tracing of the information or transparency of the data into the actual technology itself. Now, however, you know, I understand that they raised the concerns. They are very very
valid concerns. However, if you are the inventor or the guys coming up with this technology, you knew this and you could have prepared for this.
But now it has to be done.
I mean, it's great technology, it's transformational, but now it has to be done, and it will be done, and there's going to be lots of small innovative companies that are going to take advantage of that gap.
And add that capability.
What's the government to do?
It depends, you know, right, this is a great dilemma. And I take you back to the early days of the Internet. I mean, in the early days of the Internet, the government decided to take a light hand of guidance to the Internet, and the reason being that they would like to see the innovation could grow and accelerate before they actually put the.
Say, the regulations in place.
And they're still trying to do that today as you look at data privacy and those kinds of issues, which are.
Very very valid issues.
And this is the same thing I think in the beginning, how do you regulate something that you don't know what it is?
And we really don't know.
We have concerns about what it could be, but that's not what it is today. So my suggestion to the people that are raising all these concerns is they work with that obviously, the technologists, the private sector, of the academic, university's government regulations and come up with guardrails. Guardrails, not regulations, because once you put this in law or code, it never gets reversed. And I don't think we know enough today to put that in a responsible way, put that
in place. I know some of the founders of the technology are calling for that. I understand that. I understand why they're raising those concerns. However, it's the actual details that matter in this case, and you're trading off innovation because you could solve massive societal problems with this technology.
Okay, Sam, it's always such a pleasure to have you here on Wall Street. We've got Sam Palma Sinho. He is now the chairman of the Center for Global Enterprise. Coming up, we wrap up the week with our special contributor, Larry Summers of Harvard. That's next time, Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. We're joined once again by a very special contributor. Here
he is Larry Summers of Harvard. So, Larry, we have to start with those jobs numbers that came out on Friday, a lot more than expected at three hundred and thirty nine thousand jobs. At the same time, we also had an increase in wages, and we had an increase in unemployment. What do you make of this surprise number? I think for most.
People, look, I think these are strong numbers. In Toto three hundred and thirty nine thousand jobs is a lot. There were upper revisions for the previous two months. We've always known that the monthly unemployment rate is a very noisy series. That's especially true in May when you got all the seasonal adjustments going on with respect to the kids who are leaving school and looking.
For summer jobs.
So I think you have to read this report as strong. I think the forecasting communities got to do a little soul searching. They've been low on this report for fourteen months.
In a row.
That has got to suggest that there's something about the underlying strength of the economy that they're missing, Or another way to put it is that they are exaggerating the impact and efficacy of monetary policy in slowing the economy down. So I read these as a strong report, and I think the general tendency of the data has been very much towards saying that the economy, at least for this while, has a fair amount of robustness in it.
Going beyond the jobs numbers out this week, the other big development of the economy, I dare say, is that package that did make it through actually the Congress, that took care of the debt sealing problem. I wonder what you make of that package, and maybe more specifically, what it means for the fiscal policy of the United States of America.
David, Before I say something about the debt limit issues, I want to just say that with that behind us, with these employment figures, with the general evidence of robustness in the economy, I think the lower risk strategy is for the FED to raise rates in June. It's a close call, and if they don't raise rates in June, I think they have to be open to the possibility that they may have to raise rates by fifty basis points in July if the economy continues to stay way
hot and if inflation figures are robust. I saw that some of the governors have been saying that maybe the FED can move to a mode of raising rates by twenty five basis points only every other meeting. It's certainly possible that that's a mode that they can move into, but for there to be any sense of commitment to that, given the risks, would I think be repeating the kind of mistakes that the FED has made repeatedly over the
last several years. I vacillated after the first run of serious banking issues, but seeing where we are now seeing the general picture in markets, I think we are again in a situation where the risks of overheating the economy are the primary risks that the FED needs to be mindful of. And of course that's just reinforced by the fact that we've put the debt limit and the potential loss of confidence from it very much behind us by
reaching this deal. Look, the thing I'm worried about coming out of this deal is.
Not what happens in the near term.
The irs provisions there, I think are really a serious error, and we're missing a chance to catch lots of people who have just cheated on their taxes, who are going.
To go undiscovered.
And because we're not investing enough, we're gonna probably have even more people playing the audit lottery. And that's a mistake, best serious mistake. But I think the really big issue that focus is going to need to turn to is
the long run fiscal picture of the country. CBO says that we're headed to a projected deficit more than twice as large as the one we had when we set off the Simpson Bowls process, more than seventy five percent larger than the one that was there when Bill Clinton came in as president, And there are all sorts of reasons to think that the CBO estimate is way optimistic. I don't believe for a moment that three month treasury bill rates are going to average two point three percent
over the next decade. I don't believe for a moment that defense spending as a share of GDP is going to fall by twenty percent over the next decade. If anybody believes that one hundred percent of the Trump tax cuts are going to be terminated when they come up for renewal in twenty twenty five, I'd be happy to make them a bet, or even happier to sell them
a bridge, because they're very gullible. So I think if you look at the numbers in the right serious way, you're looking at projected budget deficit that could approach or exceed ten percent of GDP.
Well that's fascinating there, because I don't want to say you're sounding a little bit like Kevin McCarthy, but you are concerned about the deficit and the debt. Let me talk to you about how we should look at that problem. You just talked about the ratio of the debt to the GDP. You wrote a paper with Jason Furman a few years back saying it really is the question of the size of the debt service against GDP. There's a
report in Bloomberg this week. He said, that's with Janet Yell in the treasure sectory's looking at and then if she looks at that regio, it's not that disturbing. Should we be looking at it through that lens?
Look when you look at it in terms of debt service, David, what that depends on, obviously, is what the level of the interest rate is. And if you believe CBO that the one month or three month treasury rate is going to stay below two and a half for ten years,
then you can be serene about debt service. But that's a kind of assume, a can opener approach, my guests, Given all the debt that we're accumulating, given what the Fed's going to have to do to contain inflation, is that rates are going to have to be substantially higher than that.
And if you take a.
More realistic approach, you are looking at debt service levels that, whether you use the nominal interest or the real interest rate, are getting very close to the levels that Furman, and I said would would be dangerous. So I think it's absolutely right to focus on debt service as the issue. But we have in part because of all the massive QE where the FED, which is after all an arm of the government, has brought up all the long term bonds.
We're now running the country's finances like a homeowner with a floating rate mortgage.
So Larry finally put this all together. If you would take the really robust jobs numbers that we've talked about, put it together with what you're admonishing the FED, they should be at least willing to put on the table fifty basis point rate hikes in order to get our arms around inflation. Given how strong the economy is. Where are you now on recession? Because people are talking about recession for a long time. You've been talking about I've been talking about a lot of people. Have we keep
putting out the time for it. Where are you on the likelier recession? When is it hit?
David? I still think that it is soft landings are very unlikely, that it's unlikely that inflation will come down to the two range without an economic downturn, And in a way, it's a policy choice when that downturn comes and we have put it, we have put it off. The worry is that when you delay taking your medication and then you only take part of your medication until you feel better, you don't really get cured and there
ends up being more pain down the road. It sure doesn't look to me like we're going near recession before the end of the summer. And if I had to guess right now, I think the FED will end up doing enough to restrain inflation and that's going to mean a quite soft economy sometime in twenty twenty four.
But the dynamics are very difficult to gauge.
Okay, Larry, it's always such a pleasure having with us. That's Larry Summers of Harvard, our special contributor here on Wall Street Week. Coming up, What do you do when you can't believe your own eyes or ears or even your own lawyer. That's next time, 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, Investigat It takes into account environmental, social and governance issues. Has been all the rage with Bloomberg estimating that ESG funds will reach over fifty trillion dollars worldwide by twenty twenty five. But the issue has become increasingly politicized in the United
States in sharp contrast with Europe and with Canada. To explain that gap and where it could take us, welcome dow Eileen O'Connor, Rockefeller Foundations, Senior vice president for Strategic Communications and Policies. So, Aileen, thank you so much for joining us. What are you hearing in terms of a divergence possible divergence between Europe and the United States.
Well, there's incredible frustration of US pension funds because they understand that this is actually bad for business and particularly bad for their investors. And we're already seeing that in some conservative states where there's proposed ANTIEESG legislation, some of those, even Republican pension fund managers are pushing back and saying that it's going to cost their pensioners billions of dollars, both in fees to convert and to pull out of investments,
but also in losses over the next few years. And the reason for this is that if the United States businesses don't start investing in the technologies that going to abate greenhouse gas emissions and also adapt to a warming climate.
We are going to be losing out as a country and as an economy because Europe and Asia and particularly China are investing in these technologies because they understand that climate change is very real, that human activity and fossil fuels are major causes, as well as some of the ways we grow our food and use other technologies, and so they are now already converting their energy systems. They are investing in battery storage, electric vehicles, electric stoves.
And other things.
And the United States business if there is a chilling effect by this ANTIESD legislation, it's business that's going to lose out and also consumers and the economy in general.
Before you even get to the investment, so you can talk to it and just about talking about it, because we're having difficulty sometimes getting people even to come on and talk about the issue because it's so politicized and there's actually partisan politics going on with people's houses. They're sending up picket lines and people's houses. Are you having a difficult time getting even be able to discuss it publicly?
Yes, I'm also was a corporate lawyer, and I've been speaking to some of my former partners who are representing companies and who are basically afraid to talk about the fact that these investments are good investments. I mean, over the years, investing in new technology says driven down the cost of solar and is driving down the cost of battery storage. These are very good investments and they will
actually lead to economic growth. The other thing is these businesses know that they have to also know they have to address climate change, because they have to address the risk of climate change.
We already know that even this year.
Alone, we've had seven billion dollar climate weather events, that's what Noah calls them. They actually caused over a billion dollars worth of loss and damage to businesses and to people in the United States. And those instances are rising tremendously over the last few years. And so that is another thing that.
Businesses want to do.
They want to make profit, but they want to avoid costs obviously, and so that's a risk that they are also looking at. And I would also say that you know, interestingly, Norway's sovereign Wealth fund is really taking that risk seriously. They're basically saying that they're not going to invest in companies that don't take mitigation of climate risk into account when they're making investments. They will actually deep disinvest from those companies, is what they're saying in a.
Statement, I think it's really great to talk to you. Thank you so much. That's Eileen O'Connor of the Rockefeller Foundation list that does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.