Bloomberg Wall Street Week: Ketterer, Effron, Summers

of the most influential voices. Larry Summer is the former Treasury Secretary, Bryan Wynahan Back of America, Will CEO of Charlie Sharp. Bloomberg wool Street Week with David Weston from Bloomberg Radio. Cross currents in the economic data, in the virus, and in the markets as we look for direction. This

is Bloomberg Wall Street Week. I'm David Weston. All in all, the markets didn't much like all those cross currents that they saw this week, with the SMP five having another down week and flirting with its fifty day moving average, while the yield on the ten year Treasury moved up above one point three five. All in all, sort of a risk off sort of week. To take us through what she's seeing in the markets. These days Welcome act Now. Sarah Kettter, CEO of Causeway Capital, is named the Waringstar

International Manager of the Year for two thousand seventeen. Sarah, thank you so much for being back with us. So give us your sense of these markets. What are they telling us? Markets are driven by liquidity, They always have been and they always will be. Liquidity is incredibly important for asset prices and we've had so much of it. We've had an extraordinary amount of quantitative ease and globally and out of necessity due to the pandemic. But tapering

is now in sight. We don't know precisely when, and we know it's coming, and the FED will engage in tapering, buying less bonds, and so likely will the European Central Bank. That's less money created, that's less rocket fuel for equities. And my I think the Causeway team we recognize that we've been through a very bulliant period and investor has

been willing to pay almost anything to get growth. But now sobriety is setting in and that's some of what we think is happening in markets, and we've seen this week. So does that mean Sarah, that a lot of equity is are overpriced in your judgment, given all that liquidity at equities are all, it's just a question where the alternative is. And with bond yields it at intestinally low

levels that makes equities very attractive. But as yields rise, and they likely will, we don't know about how much, but if any of the inflation signals we have become more persistent and or as the money supplies reined in, that's likely to put some upward pressure on bond yields, and that in turn makes the discount rate on stocks, which are just the present value of all the cash they can generate into perpetuity. It makes that that just got rate higher, and as a result, valuations tend to

come down. Stocks tend to d rate, and the more long duration the stock, the more of the cash flows that are promised far under the future, those stocks will d rate more. Just the absolute opposite of what we've seen in a tremendously exciting bull market. So sir, there's a lot of talk about tapering, so called tapering, both in the United States with the FED, but also over in Europe as well. Sooner or later they're going to have to take some of those to quit of the market.

I'm assuming right, trees don't go to the sky. Doesn't matter to investor when they do that, or is the more important thing that they will have to do it well. If we know precisely when, we could be market timers and get all kinds of accolades. But we don't know, and nobody knows. And for that reason, it's very important to be very diversified. We a causeway in our fundamental portfolios in international and global equity. We've taken risk off

this year. We've seen a huge rally in cyclicals. In fact, equity markets just about everywhere have been led by cyclical stocks financials, materials, industrials with just a few exceptions, and those stocks have done really well in anticipation of economic recovery. So it's it's time to bank some of that and

and go to more defensive areas. So so, one of the things I find fascinating is your idea that you want to invest in the least popular segments of equity and one of them, for example, let's pick on Chinese equities. Right now, there's a whole lot of reasons not to invest in Chinese equities. What makes you and tweagued at least have not attracted to Chinese equities. Now that's why we're read I am, I think it might help like

Chinese equities are. China has been under so much regulatory pressure Chinese companies in the private sector that they hadn't seen here before, and it's been happening all of it seems that one announcement follows another, and this has been very difficult for companies that had been lightly regulated. Some of this regulation, as we wrote to our clients and

put on our website, is very appropriate. We think it's more consistent to have have safeguards for consumers and for workers and so on in industries than what China had here before. It's just the capricious side and the unexpected

that unnerves investors. So assuming that China doesn't make the Chinese government doesn't make miscalculations have become inconsistent and how they levy regulation and they make it very transparent, this could I know this sounds a little bit controversial, but we think it could end up being quite good for the market because it lowers the risk, increases transparency, and you can see understand and then invest around what the what the constraints are for a business once the regulation

is very clear, But what about that capriciousness, because I mean you don't know, I mean I I don't know at least where they might wake up them tomorrow morning and decide where we want to go after that industry. Yes, and then, and that's quite unnerving. The one that makes us most concerned with what happened in education, in the for profit education sector. The government after many announcements, there was plenty of harbingers that indicated the government wasn't satisfied

with it, but they made them non for profit. That is that is severe and jarring, and we understand the investor response. But there are some great companies in China that have such extraordinary balance sheets that they can pay fines in the regulator, they can make acquisitions, they can ultimately return a lot of capital to shareholders. Companies like gd dot Com or buy Do in search as well as in AI and cloud that that you can just get through this period for investors, just don't don't look.

Just own these companies because they will be great in the future. It's just very hard when there's so much negativity, especially in the press, and that's part of what we do. We take a much longer time frame and how we invest. But that is one area of China. And another area that's really interesting you didn't ask me about was was what in the cyclicals hasn't hasn't rallied, and that is

memory semiconductors. Those stocks have been a real drag for our clients here today and yet they're phenomenal consolidate industry, high barriers entry. It's incredibly capital intensive industry and the amount of memory chips that are used in our very data intensive economy is skyrocketing. The demand is going to be higher than we've ever seen it. That's Sarah Headerer, CEO of Causeway Capital. Coming up, we hear from the DNA the Tuch School of Business, the number two b

school in the nation according to Bloomberg Business Week. That's next on Wall Street Week on bloomber This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Bloomberg Business Week released its annual ranking of the nation's business schools this week and number one once again with Stanford, followed closely by dartmous Tuck School of Business. Welcome Now, it's Dean Matthew slaughter. So Dean, thank you for coming in. Congratulations,

that's a pretty pretty good performance. There give us a sense of where the business schools in America are today and how have they changed over the last ten years. Thanks David. No. Total team effort for TUCK is always look the demand when we see talk the interest in business education remains quite high. You know. This past cycle or applications through up eleven percent. Last school year they were up almost ten percent, even amidst the tumin of

the pandemic. And I think what we hear from business organizations is they are seeking, as they have for quite some time, individuals who can harness information um to articulate and defend points of view and environments of disruptive ambiguity, and really motivate high performing teams to bring those visions to life. What's changed, I think, uh is actually I think both the organizations that hire students and the students themselves, they recognize the complexity of our world in the twenty

one century. Yes, you need analytical skills and functional expertise in finance and accountancy, and yet that probably was never sufficient, but it's definitely not sufficient in our complex world of the twenty one century. I think the interconnected issues around wealth and health and sustainability. Organizations and students alike are seeking developing those integrated skills that are going to allow them to navigate through what I think greatly is including

called uch not to sharehold of his stakeholder capitalism. So do so, I want to unpack a little bit what you do while they were in business school and then where they go afterwards. But before you get do that, just give me a little bit of the numbers where applications from business schools, and particularly for for the Touch School of Business. Where are you are they up? You're down? Where are you're compared to history? Yeah, so compared to history.

You know, a lot of business goes. There's always some cyclicality, so applications are slightly countercyclical with the strength of the labor market. Economists mayill say that because the opportunity costs varying through time of leading the labor market to earn a degree of any kind. Um, many schools go back

and for years saw it drop and demand. Actually that came a lot from international students that had a lot to do with rising supply side competition and the rest of the world is good business schools come online more and the rest of the world. But we had talked in the past two years, they've seen strong growth and applications. They were up again over eleven percent this past cycle ten almost ten percent the previous cycle. Part of what

we're also seeing as an increased breadth and interest. I think if you go back to an earlier period, the NBA degree was thought to be sort of a finishing degree for people who had already been in certain firms or certain occupations and capital markets and then consulting um.

But we see an increased breadth in recent years among the perspective applicants for what they were doing in their post college years before thinking about an m b A. So the class of our first year class and talk now is a little und three hundred students two d nine students. They came from two hundred and twenty seven distinct employers, and what they were doing before coming here

to the touch cool. So I think the recognition of the enduring value of an m b A, the communication skills, the analytical thinking, the self awareness that are the heart of management leadership in our world today. I think the

breadth of interest that we see continues to grow. So so I have reception which is not based on fact, just an impression now that that business schools changed over time, that I used to think the graduates, the best graduates went to mackenzy sort of consulting firm, or to a Goldman Sachs on Wall Street. Then that evolved towards silicon value value a bit more on the tech side. Has the pandemic change things at all? Because, for example, I've

talked to Albert Bowler, who's the CEO of Fightser. He said, boy, they just have so many people now wanting to go into into Fightser. Yeah. So I think this one thing that's terrific is the strength of demand for a graduates across a lot of industries. It is still the case if I look at the recent years at talk, we've had very strong labor market performance for our graduates in terms of compensation and other measures. Um consulting and finance

are still very strong industries. So go you know, recent years, I'd say about our graduates, their first step back into the labor market is consulting. As you said, the Mackenzie's, the bands, the BCGS, the E wise, a lot of great firms about going to capital markets. I think investment banking is still a foundational next step for a lot of people. Technology relative to ten twenty years ago has surged in terms of their demand for NBA graduates as well.

That's about tuck as well. I think the other trend that we see is whatever that first step is back into the labor market for a students post graduation, I think they are even more likely a few years beyond to think about a transition into some particular industry vertical that might be clean tech, that might be in health tech, or to take a step into entrepreneurship. So many of

our tuck A lums are very successful entrepreneurs. Some do that at first step right beyond graduation, but many, like Sarah Kenner's with You Before Sarah is a great member of the Touch Class of eight seven. We have entrepreneurs who step into that new role of founding or joining some new business venture after they've done something in a

post situation. One of the things that we've covered af a lot here at Bloomberg is some of the pressures being put on some of the younger bankers on Wall Street, and by the way, perhaps corresponding to that, the rapid increase in salary levels, we have to pay them more money. Are people more reluctant to go to banks or having getting paid much more money, are they more eager to go to banks? Uh, great question. I don't think they're more reluctant to go to banking. I think it's a

couple of things. One is graduates, whether their undergraduates going into those analyst programs are are NBA graduates they want to receive a fair kind of market compensation for the skills they're bringing to their organization. And again, the demand for those skills globally continues to rise quite sharply, so they care about compensation. I think one of the changes to echo on your earlier question, I think there's a bit more sense of our NBA graduate's definitely talking in

other industries. They're devoted to their careers, and yet they want to have work that helps them live their lives

as opposed to sort of living to work. And so I think individuals are more seeking a match with an organization that thinks about the stakeholders that the global organization connects with, and they see of leaders in those organizations articulating values and taking stands on issues that um are broad definitions of who are the stakeholders for these companies, and so I think that's a change compared to an

earlier time. Our students than what they want to learn in out of the classroom reflects that, and I think the organizations that are recruiting our students they need to present a value proposition for that. And I think that's really exciting. I think it's going to help our world, you know, better the world through business as we echo our mission statement and talk. So I have no doubt that you don't have any shortage of applicants to dart with talk and by the way, that they go on

to really successful careers. But is that equally true throughout the range of business schools? Is there increasingly sort of assorting of the top schools really doing extremely well and maybe in the middle range, maybe it's not such a good investment frankly to go to business school. Yeah, boy, great question. UM. Like a lot of other industries we see, I think there is a sense where some of the

more successful organizations they're seeing strong demand for us. Again, the demand is joined between the prospective students and the organizations that you're them, and I think some of the organization the past, we're quite good and yet and sort of a general growth market, which was business education in

the last part of the twenties century. In the first maybe decade of the century, they were able to build programs and have them scale, especially as the rest of the world was recognized in the value of an m B A. But you're definitely right that in recent years there's been more of a quality sorting, and every organization talk no difference, has had to be very clear about what is its particular value proposition to the market and

what what it thinks it's delivering on. So we speak of a personal and connected and therefore transformative experience here at talk UM making sure that we are delivering on that is why we wake up every day. I think NBA education, like a lot of other industries, there's been this competitive dynamic that you point to, So it keeps us UM waking up every day and listening even more intentionally to our students, to our great faculty, to the

organizations that are part of our ecosystem. That's Dean Matthew Slaughter of the Dartmouth Talk School of Business coming up. Blair Efron of Center View Partners on what the c suite thinks about the tax debate that's going on in Washington. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Build back Better. That's the promise presidential candidate Joe Biden made the voters over a year ago. It's time to

reverse the priorities in this country. When the federal government spends taxpayers money, we should use it to buy American products and support American jobs. And that's the plan President Joe Biden laid out to Congress starting last March. But from the beginning he insisted he would not just borrow to get it done, that we had to figure out

how to pay for it. The investments I'm proposed and would be fully paid for over the long term by having the largest corporations, including the corporations have paid zero of federal tax last year, and the super wealthy began to pay their fair share. And this week we got some specifics on just what it will take to pay

for what the president wants. It may not be as dramatic as the fashion statement made by Representative Alexandria Ocasio Cortez at the met Gala this week, but it still would be the most sweeping set of tax increases in nearly thirty years, including raising the top rate on personal taxes, increasing taxes on capital gains, and imposing a three percent surcharge on anyone making more than five million dollars a year.

And it's not just individuals who would get hit. The top corporate rate would go up to twenty six point five, there'd be new levies on overseas corporate income, and the carried interest breaks so beloved by private equity would get cut back further, applying only if you hold the asset for at least five years before you sell it. Not surprisingly, Democrats and Republicans see these proposals vary differently, with Brian D's president and chief economists claiming the corporate tax changes

would bring more investment on shore. So I think that the core values the presidents put forward is reverse the most negative impact of the Trump tax cuts and get this corporate tax reform right so that we are encouraging more incentives to invest here domestically. While Republicans warned these hikes would make American industry less competitive. Here's Kevin Brady, the ranking chair of the House Ways and Means Committee. They'll be crippling for main street businesses. Certainly they'll land

on working families. But as importantly, we're going to drive you as jobs overseas. Uh And and this is trying to find our way out of the pandemic. It is the biggest economic blunder I've ever seen a country make. Well, whatever the politicians think about tax hikes, what do the people who will have to pay them things? Will they affect the way they do business? Welcome now, someone who deals in the real world with real CEOs who make the decisions to drive the real economy. Blair efron is

co founder and partner of Center Fing Partners. But are great to have you back with us. You talk with CEOs all the time. You can understand why they might be nervous given what we just heard from President Biden saying we're gonna pay for this by making sure the largest corporations pay their fair share. Our CEO is concerned about this. So what I would say is this, I think there is enough telling an economy that we'll be able to do this comfortably. Let's have a little bit

of a historical perspective, uh. Donald Trump cut taxes two trillion dollars UH. If you look at the impact of that also neglative bold. In fact, you go back to the second term of President Obama, compare that to the Trump three and a half years before COVID. Fundamentally, UH under Obama the market was up nine more UH growth during both parioses around two and a half. The point is,

I just don't think it's going to have a meaningful impact. Also, let's keep in mind that during COVID UH tremendous wealth has been created. The top UH ten percent have created ten trillion dollars wealth. I think the idea of a tax UH increase, particularly where half of it is corporate and only as personal, is something we can handle. Now. Of course, the key, very importantly, the key is that

it is done for investment. And when we talked about infrastructure, be a physical or a human where the money gets applied, I think is going to really be the most important question we have. And to the extent um we really are focused on the physical side, water, airports, railroads, electric grid,

that's a good thing. On the human side, to the extent it really goes to caregivers who can get back to work to the extent it goes to education, therefore getting more skills for UH future employment also a good thing. And we have a lot of as I said, a lot of telement economy done right, this hopefully will keep that tail went on a much more sustainable trajectory. So

it was a lot. I don't want to be too cute here, but I noticed a couple of things you didn't mention in there, things like medicare for the elderly, for vision and dental help, things like I earned income tax credits and child tax credits. Because if you look at like the pen Morton budget model, they say those things don't improve productivity. Things you mentioned Blair do So

do you draw a distinction. Do CEOs draw distinction between investment in something that's going to increase I think distinction, David, very fair question. We all draw distinction. I think out of four trillion that we're talking about, you can and again that number will change and we both know that. UM let's assume that at least what I've seen two

thirds of it actually is investment oriented. UH, if you look at the almost six trillion already spent, clearly, when you get six percent growth last quarter, you can assume directly because the tail and that's created. And I also again do think that given how well so many have done, uh, the idea share prosperity makes sense because really the goal here is to keep our economy growing. That's Blair Affront

of Center View Partners. Coming up, we wrap up. Coming up, we wrap up the week as we always do with our special contributor Larry Summers of Harvard. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We're gonna conclude our week as we do every week with Larry Summers of Harvard, our special contributor here on Wall Street Week. So Larry, let's start with all of the back and forth on Capitol Hill about the budget about taxes.

This week, we had a group of Nobel laureates in economics write a letter saying they think it makes good sense to invest in in fact, it won't be inflationary. What did you make of that letter? I agree that we absolutely need a bill that contains substantial public investment, and I was glad to see the latter. I think the letter could have said more. He could have warned about inflation expectations becoming unanchored unless we pay for the

investments we make with revenue increases. It could have stressed the importance of designing those investments so that they're maximally effective, with benefits exceeding UH costs. It could have very usefully warned against UH budget gimmicks where you only pay for investments for a limited UH period of time. Yes, we should, and have and need to pass a major investment in the future of our country bill, but especially after the indiscriminate spending early this year, we need to do it

in a rational, disciplined way. So that you mentioned inflation, particularly, something we've talked about pretty much every week. Now. We've got CPI numbers and states in this week, and they came in a little lower than people expected. Some people breathe the sort of collective sigh of relief. Are we out of the woods yet? Or is that premature? I think it's way premature. The labor market still looks extraordinarily tight.

The most interesting number of the week to me was the New York Fed survey that really shows pretty clear evidence that both one year inflation expectations and three year at inflation expectations maybe becoming unanchored. If you did the things that the inflation doves have done month after month, and you looked at median inflation, or you took out the outliers, the figures this week actually looked more ominous

relative to history. So we're not gonna know yet, but the data flow, whether it's housing, whether it's more and more anecdotes and more and more places of supply chains, whether it's direct measures of expectations, looks increasingly concerning to me, So, Larry, it seemed to be a week for letters. We not only had the Nobel Lawyer's writing in about the budget, we also had Leona Panetta, former Secretary of Defense, and

other former national security officials writing. It's a letter saying we've got to be careful about applying or expanding and trust when it comes to our tech companies because China's taking a very different course. China's embracing their big tech. That's what they call national champions. What is the challenge for the United States and both being competitive globally in tech but also making sure that our big tech doesn't

get out of control? You know, this is gonna be a big process challenge for the Biden administration, for Brian Deese, the director of the National Economic Council for Attorney General Merrick Garland for National Security Advisor Jake uh Saw, and uh, we've got to figure out that on the one hand, there's much to worry about coming from our tech companies on privacy, on market concentration, on what they're doing to uh, the nature of our public dialogue, and we need public

policy there. But they're also our national champions in important respects in key areas of competition around the globe, what Secretary Panetta was stressing, and we've got to make a

policy that integrates those realities. And frankly, our national security establishment isn't used to thinking about the first set of realities, and our economic and antitrust policy makers aren't used to thinking about the second set of realities, and so the government's gonna need to find a way of bringing them together so that we can craft uh the right uh

new HUNST policy. I think it's a hugely important area, and I think so far we've probably had too much in the way of sloganeering about some of the risks on both sides, and we really need a very thoughtful and serious policy process that brings together different parts of the government that aren't usually in dialogue with each other. Larry, you, of course co chaired the G twenty panel to address how to really avoid the next pandemic. You have a

piece out in the Washington Post this week. We have the United Nations General Assembly coming up next week. Give us a sense of where you are in that process. You were compared to sort of Bretton Woods, a new version of Bretton Woods. US leadership really got Bretton Woods done? Do we have that kind of U S leadership this time? I'm encouraged by what President Biden has said and by

the meeting he's convening. Um, We've got this set of meetings this week and next week, and then we have a G twenty meeting that will take place at the end of October. So I think the potential is there. But look, I want to take a big picture of you on this Uh, David. We've been celebrating the twentieth anniversary of nine eleven, but something very important has happened.

We haven't had a major terrorist attack again. That Look, that's a great victory relative to what people expected on September twelve or October twelfth of two thousand and one, and we should give credit for that. But at the same time, I think with the twenty year Afghanistan War, with the Iraq War, with various changes that have taken place in the United States, people see many elements of

overreaction and excess. I am worried that twenty years from now, a hundred million people will have died in pandemics, and the world's climate will have been radically altered, and the concern will not be overreaction but under reaction and to what I think are an immense set of security challenges. And so I think there's no danger we're gonna overreact to the pandemic threat or the climate threat, and there's enormous reason to fear that until we start seeing these

as top national security challenges, that we're gonna fall away short. Finally, Larry, I'd like get one quick thought from you on something I know you've dealt with before, and that's the dead ceiling. We now are back up against that in Washington. It's not clear exactly when we'll run a crowl of it. Sometime late October maybe November. First. We had Janet Yellow, the Secretary of Treasury, this week, calling up Mitch McConnell and earlier saying you've got to do something with this.

He said, basically, it's up to you. What do you make of this debt? Saying why do we have the dead? Something doesn't make sense. Are we dealing this in a in a sensible rational way? No. Um. As an investor, I would hold treasuries because you're gonna see a lot of stupid posturing and games games of Chicken and Washington. But I have every confidence that this will be worked out in the United States will honor its uh debts.

As a former Treasury secretary, I empathize with Secretary Yellen, who's gonna probably have a sleepless night UM or two along the way, and it is going to be involved in all sorts of uh posturing that's uh necessary as she explains what he is and uh what he isn't uh possible. Uh. This is an area where I think everybody just needs to uh grow up. No one's really in doubt that when we borrowed money, the United States

is going to pay it back. And so this whole ritual of pretending that we're gonna block paying it back, I think is a fairly sorry spectacle for our country. It diverts enormous amounts of political energy that could go to solving real problems rather than artificial and contrived ones like the dead silly. Okay, Larry Summers Harvard, thank you so very much for being back with us, Larry, of course,

as our special contributor here at Wall Street Week. Finally, one more thought, what could you buy for three hundred million dollars? That's how much California spent this last week on its recall. And that's before you count the seventy million dollars the governor at Gavin Newsom spent to keep his job. But in the end it turned out it wasn't even close. Here's a way are enjoying overwhelmingly has no voting tonight here in the state of California. And

it's not like it hasn't happened before. We all remember back in two thousand three when Governor Gray Davis lost his job only ten months into his second term. But he had a lot of challenges. Let's be frank, They'd had the collapse of the dot com bubble, which did really hit California, and even back then they had a lot of wildfires. Everyone running for office in California is well aware that the people in California have the first and last word. If you don't like that, well, don't

run for August in California. Run someplace else. So you can't have mon and grown as his part of life in California. And oh yes, Gray Davis was up against a formidable opponent in the Terminator. But then again, Gavin Newsom in some senses, was running against a different kind of celebrity in the form of our most recent president. You either keep Gavin Newsom as your governor or no, get Donald Trump. California has made something a tradition of

trying to recall its governors. In the roughly one years they've had the statute for the recall, they've had no fewer than fifty five attempts to recall the governor. Yes, if you're doing the math, that's roughly one every other year, But in all that time only two have actually made it to a formal election. Gray Davis that we talked about who lost, and now Gavin Newstone one. So if you're keeping score, it's roughly one and one at this point.

Gavin Newsom, the current governor, has some ideas of what to do with that three million dollars. If you look at his most recent budget for the state, he proposes, for example, doing the way of the entire backlog of unemployment insurance claims and also maybe forgiving all of the traffic tickets issued to all low income residents of the state for the last six years. And the price tag for either one of those, well, it just happens to be yes, you guessed it, three hundred million dollars, So

you make the call that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.