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I mean may not have an overall recession. We're having a rolling recession. To Cone rowl looks pretty strongly. It is when it comes to jobs.
The financial stories that shape our world.
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Welcome down, Doctor Paul Krugman, Ryan moynihan, a 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.
Sometimes no news can be good news. No government shutdown, no new flare up in US China relations, and no news surge in inflation numbers. This is Bloomberg Wall Street Week. I'm David Weston, this week's special contributor to Larry Summers of Harvard on whether we're through the worst on inflation.
I'm not sure the inflation figures over the next two years are going to be quite as favorable as the market is expecting.
Tony James of Jefferson River capital on the past and future of private equity and credit.
Private equity really needs to be operational as well. You still need the transaction skills, You still need to be an investor, but now you need to be able to intervene in the company's fortunes.
And Dan Senor about the Israeli Hamas War and what it means for the Israeli economy.
They can get through the short term.
I think in the long run, Israel's tech economy will be stronger.
Global Wall Street had an exciting week, mainly because of what didn't happen. President Biden met with President g during the APEX summit, and they appeared to set a new more constructive tone to US China relations.
Our meetings have always been Canada straightforward. We haven't always agreed, but they've been straightforward and today build on the groundwork related Over the past several months of high level diplomacy between our teams, we've made some important progress.
I believe the US Congress got its act together and finally agreed not to shut the government down at least until after the new year. I have good news for the American people this Friday night, there will be no government shutdown but most exciting for global Wall Street this week were those CPI numbers that came in even better than expected, pointing to a continued sawing in the rate of inflation and maybe just maybe no need for the Fed to keep hiking rates.
It's a rather amazing number. This morning, CPI comes in flat. The estimate was one tenth that it had been zero point four back in September, and that leaves the year over year headline number at three point two percent, down from three point seven.
And then late on Friday, word came that the man who made chat GPT famous, Sam Altman, was stepping down immediately as CEO of open Ai after the board lost confidence in his candor, and Microsoft shares dropped on that news. The markets overall had a nice bump up during the week with the news about slowing inflation and a strong economy. The S and P five hundred was up two point two four percent, ending at four five one four. That's comfortably above the median number of our Bloomberg elves that
they're predicting for year end. The Nasdaq was up two point three seven percent, while the yield on the tenure dropped almost twenty two basis points to four point four. Here to tell us what it all means are Sarah Mallik Neuveen Asset Management CIO and Peter Borisch, Computer Trading CEO. So welcome back both of you. It's great to have you here. Sarah, let me start with you. Was it really all about the CPI numbers in the end for this week?
Well, the Santa.
Claus rally has come early this year for three reasons. One of those is inflation, which is coming in under expectations. Also the feedest signal the end of the rate pike cycle, and finally the economy, which is showing some signs of cooling but not enough to take us into a recession. All of this caused ten year treasury yields to drop by about fifty basis points and markets to rally. However, I caught twenty twenty four looks a little bit more complicated.
The question is going to move not from how high will interest rates go, but to how long will interest rates stay high? And given that futures markets, you're expecting four rate cuts in twenty twenty four. I think that's optimistic because inflation is still above target and we're not in a recession. So I don't see why the FED would be cutting rates so aggressively going into next year.
So, Peter, before we get to twenty twenty four, which we do want to get to, what are for the rest of this year? Can we put our pencils down? Our desks are in pretty good shape for the rest of this year.
Do you think you know?
In this business, a week can be a long time. Just look at the move from two Fridays ago to this Friday. So no, and you can never put your pencils down. And if you listen to some of the FED talk President Collins, they're kind of like, wait a second, financial conditions aren't really that tight. If you look at the equity markets, we may have to raise again.
So I agree with Sarah.
I mean, I'm in the camp that I don't even think the FED is going to cut at all next year, and that's going to make for a bumpy road. And depending on what the news conferences after the next FED meeting, this could sort of be an upside down. Remember in twenty eighteen you had the tremendous rally the last week of the year.
This could be the opposite of that.
Oh really, so the reverse of a Santa Claus rally, Well.
You have a you know, if you pick any low in the fourth quarter, by definition, you're going to have a rally off of it. So yeah, she said, we had an early Santa so Santa Claus rally, we had a low, we rallied, but then we could have a nice little correction going into the end of the year.
Sir, how much of it do you think is in the hands of the Fed. We all focus on the FED. It's understanding what we do, but it's not just the FED that determines things like yields. For example, We've got a lot of issuance coming out of the treasure these days. It looks like that's not going to stop anytime soon.
I think it is still very important. And what is the FED going to do next year?
Let's start with inflation at which Peter talked about, which will have to do with whether we get rape. Inflation is still about a percent above the FEDCE target when it comes to CPI, and that last mile of inflation could be the longest miile. Our view is that inflation likely doesn't hit target in twenty twenty four. That's going to prevent you from getting aggressive rate cuts. So that's going to be an issue for the FED. And also looking at the economy, the consumer and employment markets have
been driving the economy. Payrolls are still coming in close to two hundred thousand. Yes, we did see unemployment claims spiked to August levels this week, so employment is starting to slow. Consumers starting to show some cracks when it comes to delinquencies. But none of that means the recession is imminent until you get those two factors of inflation at or below target and a recession right in front of us.
I don't think the Fed's going to have the room to cut rates.
Well, what were the equity side, Sarah, Because we've had sort of a I can say a subdued earnings earning session here. What are we looking for in twenty twenty four?
Well, Q three marked the end of an earnings recession. Before Q three we had three quarters.
Of negative earnings, so it was good to see this growth in third quarter, and in twenty twenty four we expect about five percent earnings growth. That will be positive. It will be dependent on companies' ability to preserve margins as inflation continues to moderate, so that'll be the positive. I don't think we're going to see a lot of valuation expansion driving the markets in twenty twenty four because valuations are already out of premium.
So Peter, what about the consumer, Because the consumer really feeds directly into earnings because companies have to sell things. Where is the consumer right now? Are they running out of all that excess savings that they had?
Well, first of all, Saraen made a great point, but when I look at the consumer, I kind of try to watch, you know, Visa and MasterCard as a proxy for consumer and those stocks have continued to stay strong close to their all time highs. So I think it's a little premature given the fact that employment is still high right, Unemployment is low again another indication that financial conditions are not tight, and therefore I think the higher probability of rates going up. So the consumer's in pretty
good shape for now. But I look at the three c's, copper, corn, and crude, and they have been weak. So that's saying something about the aggregate demand in the economy. So that's the irony of markets. They have been weak. That drags down inflation. But is that bullish, Sarah?
As it brings up a good point David about the consumer. They continue to spend and consumer discretionary stocks have been very strong this year. But if you look behind under the hood at the consumer, auto and credit card delinquencies are increasing significantly. I think the consumer is starting to
show some cracks. And if the employment markets continue to slow and people do not feel secure in their jobs, I think that'll be the unwinding of the economy that does eventually get us into that recession.
But again, as I said, that is not right around the corner.
Sarah, you usually like to pick a stock or two for us. Do you have a stock or two to recommend?
We do, so we're looking at first of all, we think the dollar is going to be it's at peak levels. I'm going to weaken from here, so outside of the US countries where there could be demand, and also commodities which tend to.
Benefit from a week or dollar. Peter mentioned copper. That's an area that we like. Supply is type for copper.
Freeport Macmaran is a company specifically, they're finishing their last smelter in Indonesian in early twenty twenty four, so capex is declining and they are returning cash to shareholders. Demand for copper is strong. Not only has US production of copper declined significantly over the last half century, but also wind solar electric vehicles and increase need for US infrastructure as we onshore, all of that will increase demand for copper. Multi year tailwinds for that commodity.
Peter, so too soon to get back in the pool.
For real estate, well, there was a very interesting article on Bloomberg today about how so many homeowners actually don't have a mortgage. So this notion that well, the market's frozen because people don't want to sell because they have low mortgages.
That may not be true.
If that's the case, and people want to trade their stock, that may increase the housing supply and that could drive down some prices. Again, ironically, is that bullish or bearish for interest rates as housing demand gets met with increased supply.
So is it too soon? No, but it's going to be interesting in fascinating.
Well, Well, an area David within reads that looks really attractive is actually the public reads sector. It's trading at a discount to net asset value. Reads actually tend to underperform while rates are going up and in periods of rate pauses, and rate cuts, reads out perform, and I think that's what we're getting to. This elongated pause by the Fed should be positive for segments such as reads.
Well, so that's fascinating. Reads got clobbered, obviously. Do you think they've bottomed, they're going to come back up.
We've actually seen them bottom in the last couple of weeks as yields rolled over. And if you look at history, as the Fed pauses and we don't expect any more Fed rate hikes, that should be positive for reads. They're still cheap, they're trading at a discount to nav Many are worried about commercial real estate, but if you look at the main benchmarks, it is a very insignificant, low single digit percentage portion of their benchmarks, industrial rates, apartment reads,
all of those are actually doing very well. So it's not just a commercial real estate story. That's a very small piece of reds.
Sarah Malak and Peter Buscher are going to be staying with us, but first we're going to take a look back at another time we watch the Fed wait patiently for inflation to come down. Here's Frank Capiello on Wall Street Week with R. Lewis Rockeiser way back in nineteen eighty two. This is a whole new operation.
And I think what's happening is economic policies now are more important than the statistics, and the policies are less inflati. We've really got a FED a reserve that's fighting many recurrence of inflation, and we've got interest rates. It will eventually come down.
This is Wall Street Week on Bloomberg.
President G is desperate for American investment because he has made a series of economic decisions and political decisions are arresting people where capital is fleeing the coin of the realm. For the United States, we have allies, we have friends, and they want to be aligned with us.
That was US investor in Japan, Rama Manuel, talking at the APEX summit this week in San Francisco. Had efforts by Chinese President G to attract Western investment flows back into China. Sarah Malak of Nouvegne and Peter Borsh of Computer Trading have stayed with us. So Sarah, let me start with you. We had the meeting with President Biden President G. Not a lot came out except they did talk. They didn't fight with one another. I guess that's good.
But overall, do you think this affects the really the status of investments right now that in fact US and China may be at least not at Dagger's drawn.
I think there's two issues to think about from this week's meeting and over the long term. One is geo political issues, which I think did become reduced a bit this week. You saw that with CDs spreads narrowing a bit. But the main issue with China is exports. They've declined significantly in terms of what they export to the US over the last five years, and that I think until they can turn that around, that's going to be an issue.
And there's other countries that are benefiting from this, like Mexico with its near shoring, the increased need for infrastructure in the US, which is a segment of the market that we really like. Countries like Indonesia with the young populations, and Japan which is benefiting with their weaker yen.
So as Chima loses in these areas, these other.
Emerging and developed international countries are winning, and I don't see that trend reversing in the near term.
When it comes to China's exports.
To the US, who do you talked earlier about commodities. We often think about China when it comes to things like copper, for example, to one extent, is the demand for copy of the price of copper are going determined by what happens in China and whether they can really rebound in their economy.
Well, I think a lot of that, and you could see earlier this week they laid out the objective by doing a big soybean purchase, right, which reminds us of the early seventies when you had another crisis and they came in and bought a bunch of grain before President Nixon went to China. But I think the history lesson here is that emerging countries in their markets understand that if you partner with the US, you get rich. Now you've had growth and they got rich, and then they're like, Okay,
we don't need you anymore. This crisis in China has made them realize that if you want to stay rich, you need to partner and continue partnering with the US. So what Sarah said is critical, and yes, so they need our capital, as an ambassador Manual just said, but people aren't going to fly in there. They have to demonstrate that the capital is going to be safe, that the human capital in China is going to continue to be safe.
So it's going to be.
A little bit of a slower process, and that's going to be reflected not an immediate demand for commodities and copper, but a slow and steady demand.
As Sarah was saying earlier.
Sarah, just briefly here at the end. Does that mean for other opportunities? For example, in Japan, I think you've just gotten back from Japan iView not I was.
I was in Japan last week, and Japan's economy is growing very strongly for two reasons. One the increased focus on governance not only within the country but from non japan investors. Secondarily, Japanese government is very focused on getting individuals out of cash into more investable asset classes. And second is the Japanese economy is going very strong. The
yen has been weak. However, our view is with some moderate inflation that we're seeing in Japan and likely higher interest rates, I think the yen is likely to bottom and reverse from here, but that does not unwind the japan story that has been very strong this year and should continue.
And finally, Peter also Mexico's a lot more attractive than it.
Was, absolutely for the near sourcing for their innovation. And you know, again, climate change has a little impact on that because we were saying earlier that the Panama Canal is low, so Mexico's trying to build and increase their transportation infrastructure. I just want to add in ten seconds, China Japan that story that's bearish for US treasuries because they are both selling treasuries to focus on their domestic economies.
It's a globally integrated world, so you have to be careful what you wish for.
What about that? Just a word or two, Sarah, do you agree there's a problem here with foreign buyers and treasuries.
I think Peter makes a good point and that could be a headwind.
Okay, thank you so much both of you for reading back with us. It's Peter Borsh of Computer Trading and Sarah Malaka New Ven. This is Wall Street Week. I'm David Weston. Israel's war with Hamas continues with Israeli troops fighting Hamas in Gaza as the humanitarian toll mounts. SR was a foreign policy advisor to George W. Bush when he was President in his administration, and as well, to admit Romney, he is the author of a brand new book. It's called The Genius of Israel. So Dan, welcome, it's
good to have here. Congratulations in the book Congression of the fact that's on the New York Times bestseller leans. I should make you you actually wrote this book, completed it before what happened in last October seven, at the same time you were anticipating some difficulties with Israel. There have been demonstrations because of what happened with the part of Justice. So as we go forward, now, one of your themes is Israel is resilient. You've got then your
subtitle Resilient and comes together. What have you learned since October seven about Israel?
What we argued in the book because we wrote the book at the point at which Israel's in the depth of internal division, as you say, and we argued that as divided as Israel was, it was politically polarized. And we said, look, most Western affluent democracies are very politically polarized. Israel's not immune to political polarization. The difference between Israel and other Western countries is Israel has these societal shock absorbers built into it. This infrastructure that just as polarized
as it may get, the country doesn't spin apart. And that's why were we said that in a sense, is like a blueprint for the West to look at how they keep the country together even when it looks like it's.
About to go over the edge.
We look at the role of national military service, which is interesting because it not only as we wrote in our first book about the tech economy, the national military the compulsory service helps young people develop management skills, leadership skills, in some cases specific technology skills that help them in
the startup scene. But in this book we focus on the national Compulsory Service brings Israelis together from all walks of life, religious and secular, politically right wing, politically left wing people from the center of the country, like in booming cities like Tel Aviv, versus the struggling towns of
the periphery. It brings all these people together and has them in the hull of a tank or in the warehouse on a military base, and they are working together and living together, and it makes it harder for them to look at one another as the other. So that's another important national compulsory service, and then lastly on national compulsory service.
Is they focus on the we, not the me.
In other words, to be effective in national military service in Israel and in other parts formative parts of Israeli life, you have to focus on being part of a team, community, a group. And we go through this in the book and say, compare that experience to how Americans go through life trying to get into colleges, trying to get into elite colleges. It's all about your own individual performance, your
own individual excellence. There's a lot to learn from Israel in terms of these institutions that keep people together even though they see the world differently. And that's why we were hopeful that even if there were an October seventh event, an event, and we didn't anticipate in October seventh event, but even if there were one, it wouldn't surprise us if the country held together.
Obviously, the first priority is dealing with security of the Israeli state and it's people. At the same time, there is an economy, the thriving economy. Where does that stand right now and what longer term challenges might this war pose.
Look, there's no doubt in the near term. This is a setback.
You've called up three hundred The Israel's called up three hundred and sixty thousand people, three hundred and sixty thousand reserves. It's the largest call up I think in its modern history. It's the number of Israelies have been called up for reserves is larger than the standing armies of the UK and France combined.
Those are people who.
Work in the hospitality industry and the tourism industry. Now there's a lot of tourism right now and a lot of people who work in the tech economy. So I speak to venture capitalists in Israel quite regularly, and many of them tell me that they're top that they look at their portfolio companies about ten percent of their top executives have been called up in one form or another.
Does that mean these companies grind to a halt, these startups. No, but it does mean if they're in the middle trying to close a fundraising round, or in the middle of trying to complete an M and A deal or some sort of business development or sales deal, it slows things down.
That's the bad news.
I think this size, the scale of the reserve call up is going to shrink pretty soon. Particularly Israel's making much more progress I think anyone expected in Gaza. So I think they'll draw down on the reserves relatively soon.
I don't know exactly when.
And Two, if you look at how Israel the economy has dealt with major security like I go back to nineteen ninety one First Golf War, when the whole country was shut down, when Saddam Hussein was launching scud missiles into Israel and the whole country shut down. Most of the multinationals set up in Israel that had Israel R and D centers.
There are Israel teams.
Didn't miss a single deadline, didn't miss a single milestone.
So they've sort of.
Proven that even when they're these security shocks, they still can hold together. I think the same will be true here in the long term. The short term, it's going
to be pretty stressful. I do think the experience, so I hate to say what I'm about to say, but I do think the experience of these young people who run companies in Israel going having to go through this experience, developing interdisciplinary skills, having the sub in for someone who's been called up, having to juggle a bunch of balls. Just you know when you're in when you're in Gaza for three days and you come back to work for a week, and you go back to gazam for three days.
I do think there's a resilience factor that ultimately serves these companies in the long run, wealth they can get through the short term.
I think in the long run, Israel's tech economy will.
Be stronger Israel's had I think a disproportion of effect in the global economy, given its size, in its location, is that in any way in jeopardy the integration, certainly within the Middle East we were hoping for really a Repushwan with Saudi Arabia that certainly is not happening anytime soon, but even more broadly in Europe and as the rest of the world starts to be really uneasy with what's going on in Gaza.
So I think there are two Look, if the US stays strong it shoulder to shoulder with Israel during these next few months that are going to be difficult, I think the rest of the world will basically follow. I don't think Europe is going to go in a dramatically different direction. In the US, That's why it's very important to Israel that it stays locked arms with the United States. And so far that's pretty good. That all indicators are
that's pretty strong. The question, to your point, is the golf in the Arab world, that's where the most progress is being made. Now, if you go back in the book at why the Sunni golf, Bahrain, the Emiradis, the Saudis were in the works, as I call Israel's friends in Israel's future friends. Why all that was deepening and warming was not out of love for Israel. Those countries
were doing it because they believed in Israeli strength. They're depending on the strength of Israel's economy, it's tech sectors, we're just talking about. It's geopolitical positioning in the world which had been growing, and they believed in the idea that Israel's military and intelligence capabilities were a juggernaut and they wanted a piece of it. They want to be part of it because they shared a common enemy, specifically Iran and the Muslim brotherhood.
Dan, it's really great to have you back on Wall Street. Read that is Dan Senior. He is the author of the new book The Genius of Israel. This is Wall Street Week on Bloomberg Private equity. It's been around a while, but it hit the big time back in the eighties when the leverage out of R JR. Nabisco put Henry Cravis up on the big screen.
I'm talking about putting a mountain of money into everybody's pocket right now.
Since the go go days of lbo's, private equity and alternative investments more broadly have come a long way. The big guys like Cravis, KKR, Steve Schwarzman's Blackstone, David Rubinstein's Carlisle, and Jim Colter's TPG have gone from being the upstart pirates of finance to an entrenched and important part of the establishment, and along the way have been joined by a wide range of others, including the likes of Kim Kardashian.
I've often said that private equity is the highest calling of mankind.
Why did it take you so long to realize that?
And that to join the private equity world?
I finally got talked into it once I came to that realization. In the process, private equity has grown enormously, accounting today for some twelve trillion dollars in assets, with Blackstone now managing over one trillion dollars in assets all by itself, KKR about half that and Carlisle about a third, and they've taken somewhat different paths. With Blackstone's emphasis on its access to private data that may not be as readily available to public markets.
I believe AI will reinforce and further the advantage advantages of private market investing relative to public market investing. Why is that Well, I think the reason for that is it's actually pretty simple public market investing, which relies obviously on publicly available data. That sort of data will be
increasingly and further commoditized in an AI world. The value of that sort of information and data and ability to mind insights from that and have pattern recognition coming out of that, both longitudinally and across your business that will only be further enhanced.
To KKR's big move into Asia and stakeholder capitalism.
Our founders Henry Cravis and George Roberts say internally they pioneered the private equity business, and they said, if we were twenty two, we would go to Japan right now, because that's actually where you're seeing some of the real movement in creating some opportunities.
Look private equity is not perfect, capitalism's not perfect, but this is a superior way of operating a company in every respect. But those most involved say they've only just begun.
We have a very long term view on building the business. You know, we don't just want to be a very good asset management company. That's in addition to that. We want to build really one of the great companies in the world that is very enduring. That is Steve Schwarzman's vision and it permeates, you know, our culture and everything we do.
And to take us through where private equity and the world of alternative investment, where broadly is today web So who knows it terribly well? He is Tony James. He is the founder and chair of Jefferson River Capital and of course for years was president and COO of Blacksmith. Tony, thank you so much for being here, pleasure, David. So, this has grown rather dramatically over the time you've watched it and participated, and it's like a twelve trillion dollar
business today. It didn't start out that way in the eighties. So what gave rise to that? Why did it have such an advantage over other ways of investing?
Well, as you point out.
It started about fifty years ago, so there's something appropriate for now dealing with that. It started as a bit of a curiosity industry. It was primarily dominated by investment bankers. They perceived that the public markets.
Were not what they are today.
There were companies that were under managed, asset heavy, kind of sleepy, and an investment baker come in there, use the company's own assets to buy itself, spin off some assets, cut some costs, and then flip it out again and make some good returns. That pulled in more capital, of course, and after a while that became more competitive, so that the private equity industry then needed to actually not only have the transactional skills, but they needed to be investors too.
They need to perceive value and where are the company's going and will it be a good company and will I be able to exit it at a good value. And so that expanded a lot the opportunity set. But again, the success of that pulled in more capital. Today it's evolved to where private equity really needs to be operational as well. You still need the transaction skills, you still need to be an investor, but now you need to be able to intervene in the company's fortunes and create value.
So at Blackstone we've figured we could add by our own intervention, five to ten percent on average of a company's EBITDA, just by things like procurement, redesigning the healthcare plans, providing AI and data science, lean manufacturing, pricing, marketing, all
of those things. And we could have world leading experts in that because we can deploy them and frankly deploy their cost over two hundred or so portfolio companies, medium and small companies, which are the focus that private equity can't really afford to have world class experts in all.
These special areas.
So a private equity firm is very well positioned to.
Create the value.
And that's had some other implications.
In the early days, the.
Kind of buy a company that's ascid heavy, sell off some assets, you made all your money, like in the first year or so, you cut some costs, you so al those asses, and then you flipped it. Now we're trying to create great companies. We're trying to grow them, and transforming a company takes the number of years and you sow the seeds, but they don't blossom right away.
So private AQA.
Has come much much more of a long term holder and builder of companies.
And I would wouldn't be surprised.
If in the early days of the industry, privately actually cost jobs. But today there's absolutely no doubt about it that it's a job creator. And so I think the industry has evolved to a better place.
I kind of view.
I mean, the gains the private aquho are always going to pensioners, but now I view the private itself as a force for good in the economy to a much greater degree than it was way back.
When does that require more patience on the part of people who were giving them money to invest? I mean, if you're holding the company a lot longer time to get those operational benefits, and is there that patience? And by the way, what about the liquidity issue? One of the issues on private equity has always been I can't pull my money out.
When I want to, right right, It does definitely require more patients, But most investors now actually want longer holding periods because because you get richer, you get richer. Compounding something at twelve percent for twenty years, then you do compounding at twenty percent for five years. So the IRR that people talk about the compounding, that's only one aspect of it.
So a lot of investors they want.
That money out, they want that money working for them over a long period of time, and they're content with longer holding periods. We can get into different investor classes, but there are other ways you can get liquid if you really need it.
Well, I was going to answer about that secondary there's a secondary market now as I understand it. So actually you can get your money out through secondary market, as I understand explain that.
Sure, well, twelve trillion dollars, it's muff roomed out there. Inevitably a certain number of vestors want to get their money out, and not necessarily for.
Because assets not performing for them.
Private acuity has been the best performing asset class for most institutions, and just a sidelight. One of the ironies of that is if an institution has an asset allocation model, so twenty percent in private equity, forty percent in public ateke, forty percent in debt, let's just say, and private equly outperforms. What happens is that all of a sudden they have more than twenty percent in private equity, right, and so
now they need to sell down private equity. So it's got a kind of a counterintuitive the success means they need to be net sellers, which is kind of odd, but that's.
The way, that's the way it works.
So but but reallocating, rebalancing the portfolio strategy changes with corporate pension funds. When they've become fully funded, they then want to go out of risk assets of just essentially lock in the with double a credit stuff the liabilities, so defeats the liabilities. If in retail investor, you have life changes, you get divorced, you have the state planning, so all those reasons. There are sellers of LP interest and this business secondaries has ballooned as the primaries have.
It's still lagging. But to provide that liquidity.
Tony Yousers mentioned retail investors. I think if you go back ten years ago, I wouldn't have thought of retail investors in the same sentence with private equity. How has that changed to what extent are retail investors coming in and what is the profile of those retail investors in general?
Well, it started off as very high net worth investors. There are almost many institutions in a way, but now it's down to the mom and pop, and the industry has evolved to create products that are more and more appropriate for smaller investors. And retail investors have the same need for returns that institutions do. And you know, we've essentially had a forty year downtrend in interest rates, but that's pulled the returns all asset classes down, so the
need for added returns becomes more and more acute. At the same time, institutions realized particularly the first were the endowments of the universities. They are the most sophisticated David Swinson and so.
On and so forth.
Then there were the pensions, and then now to the high networth individuals. Endowments have about fifty percent of their endowments in private assets, pension funds about twenty five, retail investors less than five, so they still have ways to go. And what the institutions realized is, I don't need all that liquidity. I'm never going to need to raise to liquidate everything overnight. And I think increasingly high networth individuals
are realizing the same thing. If you have assets financially, if you own your home, and you say you're lucky enough to have a second home, and you have financial assets multiples of annual spending. Do you really need to be able to liquate everything tomorrow? Because it has a real cost. It has a real cost in lower return. And so it also has a cost because it's tempting because individuals tend to do the wrong thing. They get
worried when the markets are collapsing. That's probably the time they should buy, but they end up selling, and they get embulent when they see everyone making a lot of money and they throw them theirselves in the market.
That's probably the time they shouldn't do that.
So it's got a counterintuitive negative too. So yeah, it's the sort of the new frontier is retail investors, and the big new frontier is not their ULTRAI networth but the mass market, and.
That's growing very much. Yeah, okay, Tony, really great to have you with us on Walster. I really appreciate that's Tony James of Jefferson River Capital. Coming up, we wrap up the week with our special contributor Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. We're joined once again by our very special contributor here in Wall Street Week, he is Larry Summers of Harvard, So Larry, welcome back.
Great to have you here. Let's start with one of the major events of the week, and that was the President g and President Biden actually meeting around the APEC meetings out there in San Francisco. It's hard to know where this will go, but so far, so good. They seem to be trying to really pull themselves back from the precipice.
Look, it's important to have meetings like this. Churchill famously said,
much better jaw jaw than bang bang. On the other hand, I think we need to remember that there are very difficult fundamentals here, very different systems, very different views of the world, profound competition in the technological arena, concerns on the American side about China subversion of our our international our vision of the international system, compares concerns on the Chinese side that the United States is trying.
To hold them down.
So there are very profound geopolitical forces at play, and this struggle is going to be with us for a long, a very long time. So I'm glad to see the meeting, but I'm concerned and I'm particularly concerned in light of the gravity of the economic challenges that China is facing.
And my concern is that, as with the Soviet Union in the nineteen sixties, a sense of very serious economic challenges is going to drive a felt need for increasing assertiveness in the international arena, as we saw with Khrushchev's moves on Berlin, as we saw with the placement of
missiles in Cuba. And while I don't see anything concrete like that that's happening right now, I think the economic distress and the link to nationalism, given some of the very strong positions that g has taken, is something that is going to require the United States and the West to be on their guard going forward.
Global Wall Street has paid a lot of attention this week to those CPI numbers that came out for the United States. Some people are, if not declaring victory, close to declaring victory over inflation. Are they premature?
Look, those were good numbers. Those were better numbers than I would have expected, better numbers than I think most people would have expected. And I think inflation performance has been more favorable certainly that I have expected over the last year. I thought a lot about that. David and I think there are two or three factors to emphasize. The first is that policy has been much tighter than
was anticipated. In July of twenty twenty two, markets were assigning a probability of under ten percent to the level of tightness in policy that we have seen so far. So more tight policy has led to better outcomes on inflation. That doesn't mean inflation fears were unwarranted. It means that people took the fears seriously, which was good. I think
that's one important aspect. I do think that given how strong the economy has been, there's still a surprise in what's happened to inflation, and that I think has to do in part with transitory factors. Transitory factors that were pushing inflation up from bottleneck that are now mean reverting and are pushing inflation down. So I think there's been a little bit of prematurity in some of the declarations
of victory. And I'm not sure the inflation figures over the next two years are going to be quite as favorable as the market is expecting, especially in light of the geopolitical risks around oil and some other commodities. So we'll have to see whether we're really able to get down to two percent quite as easily as many people imagine.
And what is the risk right now of a recession in the first half of next year.
It's certainly under fifty to fifty David. I think it's probably on the order of twenty twenty five twenty five percent. That ultimately something will happen which will cause the nber to data recession is having begun in the first half of the year. In general, when recessions come, we don't even know that we're in them till they've been underway for several months, so I think you got to recognize
that as a real risk. On the other hand, with what we've been seeing in the employment reports, incomes are continuing to grow, so I don't think that is the preponderant scenario.
One thing that maybe at verse in store is actually, besides of the federal deficit, a lot of talk about that. This week. It appears we've avoided actually shutting down the government. People came to their senses, but it's only up to next January before they come to it again. And the main issue is not even what they did this week, but the larger issue about the weight that this may impose on the US economy.
If somebody's got a basic problem of being overweight. It's good if a skip desserts. It's good if they check into a spa for a weekend. But what really matters is whether they change their habits and they change their lifestyle, And nothing in this agreement or anything in the discussions currently underway, is about changing the American habit or lifestyle
with respect to spending in taxes. I look at the world right now, and it is the most ominous world geopolitically that I have seen, certainly since the Berlin Wall fell in nineteen eighty nine. I look at projections for the federal budget that call for defense spending as a share of GDP to fall substantially. I don't think that should happen, and I don't think that will happen, almost
regardless of how domestic politics play out. And so I think, as I look at the budget picture, we got to recognize that we've got a big national defense liability ahead of us that we're not really budgeting for in the current projections. And much more generally, David is a very profound question of how long the world's greatest debtor will remain the world's greatest and most secure power. And so
I think that everybody talks about our resilience as a country. Well, part of resilience for a company, part of resilience for a household is containing your leverage and containing your borrowing. And I think that's something we need to think about as a nation.
Larry, just give us a little wisdom from the nineteen nineties. You serve in the Clinton administration back then when they got their arms around the budget, and my recollection to continue your analogy to dieting. If you're going to lose weight, you can't just exercise. You can't just cut back on what you You got to do both. And right now one might think we have one party who doesn't want to increase taxes and increase revenues, the other doesn't want
to cut spending. How did you manage in the nineteen nineties to get over that home.
Well, I'm happy to try to answer the question how Bill Clinton managed. I don't want to be the one taking credit for the nineteen ninety three budget deal. Look, I think he laid out the case. He brought people together, He was willing to do things that were painful. His for the people who were his.
Friends.
He was able to explain the case to the American people, and that's the kind of leadership.
We're going to need.
And he reaped a benefit that I think people need to recognize and that maybe hasn't come into focus quite Ye.
Okay, Larry, thank you so very much. Always great to have you with us, as Larry Summers of Harvard coming up. Second acts. Sometimes you win, sometimes you lose, and sometimes you end up with the cat. That's the next time Wall Street Week on Bloomberg. Finally, one more thought. F Scott Fitzgerald told us that in American lives, there are
no second acts. The annals of business and politics and sports are filled with stories of stars who had great first acts but fell short when they tried to come back. Think Michael Jordan's ill fated career as a professional baseball player after he had dominated the world of basketball. Or famed Hollywood agent Michael Ovitz, who left an indelible stamp on the entertainment industry with his creation of CAA, only to struggle with a transition to the corporate world under
Michael Eisner. But that doesn't keep people from trying and sometimes succeed all the way back to the early nineteenth century when President John Quincy Adams lost to his arch rival Andrew Jackson, only to come back as a congressman, and some have suggested he had more success in that role. Or Arnold Schwarzenegger, who went from action star of the big screen to become a successful governor of California.
I'll be back.
Just within the past two years, we've had two notable comebacks in the corporate world, as Howard Schultz returned for a second time to run Starbucks and he's seriously considered a second act that would go way past coffee.
I am seriously thinking of running for president.
Bob Eyer returned to CEO to Disney just under a year ago and was praised by competitors like Reid Hoffman.
Bob is I think one of the great CEOs of our time. Part of what you want CEOs to be doing, which is acting like owners and feeling that the important thing is the legacy of the company that they hand on to their successors, to employees, to society.
I think, Bob, And even as we speak, we have Donald Trump, the forty fifth president, trying to come back as the forty seventh vowing to make America great again again.
In order to make America great and glorious again, I am tonight announcing my candidacy for President of the United States.
But perhaps the oddest story of attempted second acts comes not from America, but from Great Britain. We all remember David Cameron, that young, charismatic British Prime Minister who was so confident his fellow Britons wanted to stay in the European Union that he decided to put it to a vote. He was wrong. They voted to leave, and mister Cameron had little choice but to leave as well.
The British people have made a very clear decision to take a different path, and as such, I think the country requires fresh leadership to take it in this direction.
Now, seven years later, another struggling Tory Prime Minister, Rishi Sunak, has decided to bring mister Cameron back, not as Prime Minister, to be sure, but as his Foreign secretary. Things are quite a bit different than they were when mister Cameron left Number ten. The world's been through a pandemic. The promises of economic prosperity made by the Brexiteers have proven largely hollow and the polls point to labor being back in power with the next general election.
The labor market data was also pretty positive.
Wage growth decelerated a little bit.
It's still incredibly high though, and so I would put all of this in a category of good news.
But David Cameron will have one friendly face to greet him when he pays visits Number ten Downing Street. That of Larry, the chief mouser at the Prime Minister's residence, a cat who shared the house with the Cameron's back when they were in charge. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.