Bloomberg Wall Street Week: November 24th 2023

A FED chair, a former Treasury secretary, a former White House Chief economist, two CEOs who turned around their companies, and two private equity competitors with different takes on their business. This is a special best of additional Bloomberg Wall Street Week. I'm David Weston. Each week we bring you interviews with some of the top minds in government, economics, business and finance, with the goal of taking a broader and deeper look

We certainly have a very resilient economy on our hands. We've got the economy growing strongly. If you think back a year, many forecasts called for the US economy to be in recession this year. Not only has that not happened, growth is now running for this year above its a longer run trend. So that's been a surprise, driven largely by consumer spending, driven by a very strong job market with people getting jobs with high first time nominal wages.

Less affected by interest rates.

It's hard to know precisely, but for example, companies, many companies, any company with bond market access will have termed out its debt right and therefore may not be feeling the effects of higher rates.

The same may be.

True of homeowners who have a long term, fixed rate, low rate mortgage, who then are therefore not because it's not an adjustable rate or a higher rate. They're not feeling that increase in rates, so the economy may be somewhat less susceptible to the effects of rate increases. On the other hand, if you look at look at interrat sensitive spending, these are very much the the the places where we see where we expect to see and do

As purchases of durable goods.

If you look at surveys, people will not say that it's a good time to buy a car or a house.

Quite the contrary.

So we see policy working through its usual channels. It may just be that rates haven't been high enough for long enough. And again it's all happening in a context of very strong demand.

We've heard other speculators maybe the terming out of debt, as you say, both corporate debt and hushole debt may diminish the effectiveness of rate hikes. Do you have a view on whether that's true, And if it is true, what does it say about mante posy. Does it mean you have to go farther in the rate hikes or do you just not have the power to affect it?

So no, I don't think that there's a fundamental shift in the way that interest rates affect the economy. There may be some differences in this cycle because of what I mentioned. As I mentioned, we are seeing those the effects where we expect to see them, which is intrasensitive spending and also asset prices to some extent, and the exchange rate, which you're also seeing a strong exchange rate, which is disinflationary. I don't think there's a fundamental change

And.

Inflation coming down.

These are the elements that we want to see that to achieve the outcome we want. It may take more time, but ultimately this is the kind of thing you would want to see along the path to getting through this without a big increase in unemployment.

How much effect thus far has the FED had we all have memorized how long and variable lags? How long and how variable and where are you in that process? Are you at the twenty five percent point, the fiferent in terms of seeing it in the effect in the real economy, there's no precision in.

Our understanding of how long legs are.

One thing that has changed in the modern era is that markets now, over the course of the last thirty years, central banks that have decided, instead of being secretive, to be very transparent. And what that has meant is that markets move actually well in anticipation, well before our policy moves. So the transmission from policy moves to financial conditions actually happens before the moves now, whereas that was not the case fifty years ago when Milton Friedman coined the phrase

In order to conduct monetary policy effectively, do you need at least hypothesis about how much has already hit the economy, because it's hard to know how much more you need to do if you don't know how far you've come.

So on lags, I think if you think back, it's been a year now since the last seventy five basis point hike we did. It was the November meeting in twenty twenty two. The first one was in June, so it's more than a year, so we should be seeing the effects. By the way, they don't all just arrive on one day. They arrive and then they're thought to

After we spoke with Chair Powell, our special Wall Street Week contributor and former treasure Secretary Larry Summers warned us about what he thought Powell had not given sufficient attention to that looming federal deficit and what it means for the economy and for monetary policy.

I didn't find anything to strongly disagree with in what Chairman Powell said, but there was a big newfoundland of a dog that wasn't barking as he was speaking. And that's everything about the federal fiscal situation. That matters two ways. If there's more debt and much bigger deficits, that means more demand in the economy, and that raises the neutral rate now and raises even more the prospective neutral rate in the future.

That's one important length.

The other important length is that when you're trying to sell huge amounts of long term debt because you have very big.

Deficits, its price goes down, and that.

Means longer, higher long term yields, a rising term premium.

And I think you've got.

Both of those phenomena going on, and realization that the neutral rates likely to be higher because of fiscal policy

So pick up on exactly what that means for the FED, because J. Paul didn't deny that, although he said there are a lot of factors, he thinks that's just one factor going into what's going on the twenty five year yield, for example, or thirty year yield. Right now, he said it's too complicate. He doesn't really know, but he said, we have to take that as it is. It doesn't change our policy if you are exactly right.

And I assume you are.

How does it change the Fed's policy monetary policy right now?

Well, I think there are two separate parts of it.

Insofar as the neutral rate is being pushed up by higher fiscal deficits, that's a thing that means the FED has to raise the actual rate in order to keep the same degree of balance between the accelerator and the brakes.

Insofar as the interest rate.

Is going up because of some kind of term premium, and that's important. That's restraint that's being applied to the economy. That's the break, and it might substitute for a break the FED would otherwise have to provide. So it's not enough for the FED to recognize that rates are going up. It has to implicitly be forming a view as to what the cause is. And I don't think that's analytically easy at this point. And it's sort of the first rule of mine fields to step gingerly.

That was special Wall Street Week contributor Larry Summers of Harvard.

Coming up.

We turned to another economist, doctor Cecilia Rouse about where the economy is headed as we head into an uncertain twenty twenty four. That's next don Wall Street Week on Bloomberg. This is a special additional Wall Street Week bringing you some of the most important interviews from twenty twenty three.

I'm David Weston.

Earlier this year, Cecilia Rouse stepped down as chair of President Biden's Council of Economic Advisors and agreed to take over as president of the Brookings Institution as of the first of the year.

We talked with her earlier this.

Month after US jobs numbers came in a bit lower than expected, and asked what they told us about where the economy is headed.

I think we are seeing the slowing of the labor market, which has been long anticipated. Some might say what took so long, But what we see is that employees growth remains healthy. Like if we were to talk pre pandemic. An average job growth if we look over the last three months, has been just over two hundred thousand jobs a month. This month it came in at one hundred

Well, no offense to the economists such as you, but and you've been off on some few things recently, and let me talk about that specifically, the relationship between the labor market on the one hand and inflation on the other. We thought we knew what that was, that it seemed to really the relationship went away, that Phillips currency knew really flat.

Where are we now?

Do we have a theory about what the labor market means for inflation?

So you know, the reality is that in economics there's not a fabulous theory and one theory of inflation. And I think that is part of the challenge. Another part of the challenge is what was the source. We know that we had unprecedented supply challenges due to the pandemic, both in terms of getting goods to people manufacturing goods because people have a part of that process and with

What we're seeing.

Now is monetary authorities stepped in, the federal government stepped in, They pulled back appropriately, and the economy is getting back to normal.

And as a labor economist, which you are, what about what I would call the cross tabs beyond just the overall numbers, the top line numbers. We had been having a pattern, I believe, of having some of the lower income people and people of color, some of the minorities benefit disproportionately. Is it a last in, first out sort of thing, where as you start to slow the labor market actually those are the people that get hurt the most.

Well, that is a bit to remain to be seen. You are absolutely right that traditionally strong labor markets benefit those who traditionally are not helped in labor markets. So we had narrowing of, for example, racial gaps in unemployment and employment. We saw women have benefited tremendously in this recovery. What we saw in today's job report suggested a bit of a tick up in unemployment for African Americans Hispanics, but we saw overall a tickup as well, So.

This remains to be seen.

There have been, and you know, there are some changes in our labor market. We still have very strong growth in employment, I think overall, especially given where we are, and we see labor having more of a voice traditionally, when we see unions being stronger, that helps those who are the lower wage workers as well. We've seen increases in the minimum wage, so I think it depends. We will have to see. One thing we do believe we've also seen for African Americans is that the wage increases

You mentioned the labor unions, and certainly that has been a development through the course of this. We've had the Writers Guild, We've had the actors, we had ups and now we had the UAW with the autoworkers. More yet

But it will come back down.

Again. Remains to be seen.

I think in a healthy economy we have both labor has voice and we have capital the owners and the managers also have agency, and that they work together and they negotiate, because fundamentally, we want a strong economy that benefits all, but we also don't want to leave workers behind. We understand shareholders and managers have to get their returns

That was doctor Cecilia Rouse, who takes over as president of the Brookings Institution on January first. This is a special best out of edition of Wall Street Week. I'm David Weston. When Brian moynihan took over as CEO of Bank of America in twenty ten, his company was still reeling from the acquisition of Merrill Lynch and countrywide.

Today, the second.

Largest bank in the country is making record profits. Brian sat down with us at the Aspen Economic Strategy Group meetings in August against the backdrop of beautiful Mountains, the failure of several regional banks in March, and recurrent uncertainties overfunding the federal government. But throughout the year, Brian came back to the overall strength of the US.

Economy because in the day, the consumption power of the United States drives economies around the world. Therefore, there's you know, US consumers spend dollars, so if you're selling stuff in dollars, you got to be exposed a dollar. And so I think the idea of some of this debate about reserve currency status, it's been tightening in the flight to quality, and the US tends to come. Now ten year bonds

These are not very big moves in a grand scheme of things.

It is tapping quickly, and people get excited about who trade bonds is living from the grand or impact in economy. Those moves are needed to get the ultimately yeld curve has to get back and sink or else we aren't taming the inflation or we're going to drive into a recession.

When you talk about the strengthen the US dollar.

Is it stronger today as a reserve currency globally than it was ten twenty years ago?

And if so, whid because I think the opportunities in

You had an oil and bark.

All that stuff happened in the early seventies and still a dec you know, fifty years later, we have twice as many people work in this country.

Since we talked last Brian, and we now have the proposed regulations on capital requirements from the Federal Bank regulators. We talked before, and you said one hundred basis points. As I recall, a difference in the capital requirements would amount to one hundred fifty billion dollars lest year long. Now we have the proposals. What would it mean for Bank of America and for our banking system.

Well, what it does is it's not to get too technical in the grand scheme of things, but it changes the calculation of risk.

Weighted assets RWA. And so the idea is that the.

Estimates by the FED is it's fifteen to twenty percent of RWA increase. When you do that, then ten percent of RWA at X and ten percent of URWA at one point one times X means you have to have more capital, and so the amount of capital goes up. That then constrains lening because you can't do anything with that capital. If you did, then you'd have more rw and you have to have more capital. But I think if you step back, this industry is well capitalized. It

That happens.

But since the financial crisis, more people under the tent because the issue of financial crisis, a lot of stuff wasn't a tent. The problem is if you get the capital regulations of banking system to tight, you push stuff back outside the tent.

And that's a concern.

So as I look at it, one, give a set of rules, we'll live with it too. It won't, you know, bank Americal adjustice business model to make it work. But what's been interesting about this is it's competitive position.

United States versus Europe and others.

This is making the bank industry, all banks less competitive to mid sized US companies than foreign banks are to mid sized US companies participating in the same global supply chains in those countries. That's more of a trade question and a balance of power question.

That's one.

And then second, I've surprised by the amount of descent that the governors of Federal Reserve. I've been working on Federal Reserve stuff for my whole career forty years now, and I was just surprised the amount of debate, which shows you that, you know, whether it's mortgage loans on one side, whether it's at tax benefits for and treatment for energy clean energy investments, or whether it's the basic

Is over the years. Brian, you said there's a role for regulation, and you'll live with the regulation as you say you will with capal parts. But what is the problem it's being addressed. That's what I don't quite understand about the crisis we had the back in March with the banks.

I'm not sure this addresses that well.

And that's been the debate, and that's go read the descents in the debate and the things.

So strong regulation is important.

Rapid growth in banks tends to come from things that turn out to be not so interesting after the fact, and so I think, you know that's the thing they need to sort of come to a common agreement on Basil three. Across the world we're just applying it with much more rigidity and requirements. And so if you look at the largest bank in France, UK and Germany, they have about half the capital requirements in the largest banks

Those companies aren't that size man.

That was Bank of America Chair and CEO Brian moynihan.

This is a special edition of Wall Street.

Week reprising some of the most important interviews we've had this year. Private equity and other forms of alternative investing has had a pretty rough time recently, going from a record year in twenty twenty one to almost freezing up in twenty twenty two and just getting going again this year. We talked to two leaders in the sector about there's somewhat different takes on a challenging business, starting with Blackstone CFO Michael cha who says the challenges may benefit his firm.

Our business model is really made for times like this. At its core, you know, we're all about long term, locked up committed capital through funds structures, and what that allows us to be is patient, and it allows us obviously to have capital and time when capital is short. And indeed we have nearly two hundred billion dollars of dry powder to invest opportutunistically in the coming time period. And our history has shown that those couple of years coming out of a cycle are some of the best

As you see that thaw, and if I can draw the analogy the green shoots coming up through the ice, more or less is the nature of the deals changing. We saw a piece in the Wall Street Journal this week. Actually Blackstone has mentioned it, the suggestive private equity is doing more smaller deals, maybe because of the uncertainty of the price of financing, even regulatory overhang. Are you Are you seeing smaller deals than you did before?

I think, well, we have our own particular perspective. We scale as one of our big advantages in our private allows us to do things others can't do in our private equity business. You know, we've successfully in the last couple of years been able to engineer a couple of really large deals of partnership with Emerson in the climate technologies area. Does the name the business recently a five

As you look at the.

Landscape out there where are the investment opportunities and how dependent on the assumptions that were done or close to done with the hiking of the rates.

Sure, well, it's a multifaceted answer, and we have a broad business and so we have sort of a balanced attack and aren't relying on one single strategy. But I think for sure on the on the credit side, lending money right now in this environment is a very compelling thing to do with very good risk reward, probably some of the best risk ard we've seen in a long

For a different approach to private equity, we talk with KKR CO head of Global Private Equity Pete Stavros about their use of shareholder capitalism to generate value well.

Stakeholder capitalism for me is finding a way to not only deliver great outcomes for shareholders, but doing right by workers and the climate. And I have to say, there's tons of brilliant people working on climate issues. Obviously it's critical, there's not enough people focused on labor and so that's really my passion.

A lot of it has to do with how I grew up.

My dad was a construction worker for forty years, earned an hourly wage and really taught my sister and I around the dinner table what it's like being an hourly worker. You know, you don't have a voice, nobody listens to you, there's no incentive alignment, and you have no stake in the outcomes. So that ignited a passion in me from a very early age to think about these labor issues.

So that sounds fine, but you'll forgive me if many of us who don't understand private equity the way you do, don't associate that approach with private equity. You tend to think you go and you buy the company, you strip out costs, you'll leverage it up, you sell it.

Yeah, well, but private equity is not perfect. Capitalism's not not perfect. But this is a superior way of operating a company in every respect. You can align incentives not just of the senior team, but of all of the employees, help them create wealth for themselves and create a better culture.

So that sounds great, also sounds fairly simple, is it when you actually do it? Because often the implementations were the tricky part.

Lot Ye, it's incredibly difficult.

So if this were easy, this would have been done fifty years ago, and there's many challenges starting with So let me just define the program.

The program that.

We've been working around around employee ownership is about much more than handing out stock. If it's just handing out stock, then we're in a compensation discussion, which is important, but that's not going to change cultures. As my friend Dove Seidman Alway says, you can triple people's compensation and not

You want me to double my profits.

You want the financials by the twelfth of the month, the metrics packaged by the fifteenth of the month. You want me to decarbonize, add diversity to the board, change the way I recruit so we add diversity deep into the organization. And now you want teach financial literacy, drive eplay engagement, make everyone an owner in the business. You know, come on, pete, what are the real priorities? And so CEOs are overwhelmed. The unlock is and this enables all

Does it also hurt their cost structure when you start talking about sharing and comp and things like that, does that actually add to their cost structure? Or do you offset in the compensation and the salary and benefits.

Well, one important thing to understand is this is never a trade for wages and benefits. So this is not about pushing risk onto workers. So we're not asking workers, here's some stock, can we take some compon benefits back. It's always incremental, it's always free. We're not asking workers to invest out of pocket. So to your question, it's not an incremental fixed cost. It's sharing in upsides, so

Let me give you an example.

So public company that we bought in twenty thirteen was called Gardner Denver. So we took it private in twenty thirteen, there were six thousand employees at the company. Out of six thousand people, eighty six people had ownership, which is what we see typically it's one to five percent. We've done an employee engagement survey, ever, massively high quit rates. When we started measuring engagement, twenty percent was that we

That was Pete Stavros of KKR. Coming up, we'll hear from GE CEO Larry Colt about the remarkable turnaround of a corporate icon and how it happened. That's next on Wall Street Week on Bloomberg. This is a special best of edition of Wall Street Week.

I'm David Weston.

G has gone through a remarkable transformation selling assets on the way to breaking up into three different publicly traded companies.

And increasing value all along the way.

But when Larry Culp took on the role of CEO five years ago, it didn't look like it was going to turn out this way. When we talked with him about how the turnaround came to be, we started with why he took the job in the first place.

GE an incredibly important company to our country, into the world. GE a company that I had long admired through the course of my career, and given what I had heard, given what I had learned as a director, clearly a challenge, perhaps the challenge of my generation. And it was really those three reasons that ultimately led me to say, yes, I'll put my uniform back on, and here we are.

So you put your uniform back on. What did you set up to do first? What were your priorities? Is you sat down the first day in that desk. So often, even if you're close to the job, until you've had the job, you haven't had it.

That's right. I don't remember sitting down much that first day.

Right.

There was a lot happening, but I knew relatively quickly that we had to do two things. One, we had to get our arms around the balance sheet issues. We had over one hundred and forty billion of debt outstanding. That was a crushing load in a host of different ways, and we needed to get to a better place in terms of the day to day operation of the business, and those turned out to be priorities that really took us through the first couple of years deleveraging and running the businesses better.

It was somebody that simple.

As I say, you were on the board for a short time before it took over, so some of the problems you knew about, but you couldn't anticipate Boeing seven thirty seven, Max, couldn't anticipate the pandemic, couldn't anticipate supply chain or in Ukraine. Did that change your plan?

Well, I think early on we knew that we needed the utmost sense of urgency around the deleveraging. When a number of us had joined the board through the course of twenty eighteen, the plan of record was to actually spend our healthcare business, much as we did earlier this year.

As you say, Larry, you had to deleverage. You really had to take a hard look at the balance sheet and really clean it up as quickly as you could. To draw a strained analogy, It's like give them a gin. You have to figure out which cards to hold and which ones to lay down. As you went through your operations in gluting, healthcare, but others as well, what was your criteria for saying this one we're going to hold, I think this one we can give up.

Well, I think we wanted. I looked at all three businesses. I was new to the business. I hadn't really been deep into aerospace or energy, had had some exposure to healthcare. I thought all three businesses were terrific leaders in their own right, solving significant global challenges, businesses that we could run better than we were at the moment, and we need we needed really everybody contributing, again, given the debt load.

You've mentioned a couple of times improving the operations, which sounds easy, but in my experience, it's really hard. So how could you, as something of an outsider, come in and understand where you needed to improve operations? And that, of course is not just what people do, but who's doing.

It well exactly right.

And for me, David, my approach has always been it's about the team first and foremost. Fortunately, we inherited I think a tremendous team at GE in each of the three businesses at Corporate up and down the org chart. So what we did is we set about making sure we knew where we were organizationally. We dove in deeply to make sure we understood how we were running the businesses, not just in the c suite, but all the way

Areas where we could do better.

We could do better for our customers, reduce cycle times, improve our delivery performance, all the while taking a lot of waste out of the system. Wasted often frankly, helped

I think I hear you saying you don't think it was the team that was at fault. The team was basically a solid team you could work with. So that makes you ask exactly what was wrong with the operation? And let me start with one thing that's terribly important as metrics. Was it a metrics issue? Did you bring in a new set of metrics? Where'd you get them from?

Well, the team that we have a GE as a team that I've just really been thrilled to be a part of.

Over these last five years.

We brought in a number of new people, we mixed it up, but by and large, the team that you see on the field today a GE is the team that was there five years ago. I give that team very high marks, David. With respect to metrics, one of the things that we worked hard to do was to make sure that we had a shared definition of winning. It's very easy in a large company for everybody to think that they're doing what has been asked of them.

So it was a shorter list.

It was a more compactless accessible to people throughout the organization, and then we just got focused on driving the critical few.

Well.

It was often is conducive to actually communicating because you have too many priorities.

It's hard for the organization really follow it.

But how do you once you have those make sure that everybody in the organization is getting it because too often people at the top they say things and it gets down a level, maybe two levels, It doesn't get down actually out of the shop floor.

Well, you communicate until you're tired of hearing yourself say the same things, and then you keep going. That's what I've learned over time. But we tried to be hands

But this is a resilient team. This is a talented team.

It's a team that loves the mission, loves the company, and we've just kept doing that type of work day in and day out, and I think that's where you see us today.

That was Larry Colp, Chairman and CEO of GE. Finally, one more thought, and it comes from economist Melissa Karney of the University of Maryland, whose new book The Two Parent Privilege addressed an economic challenge we have in the United States today, and that is the number of children growing up in single parent families.

I have been studying US in comminequality and poverty and social mobility for over twenty years, and I've been in countless at this point, policy conversations and academic conversations about these issues, and it has become abundantly clear to me that what's happened to families in the US, and in particular the rise and the share of kids living with one parent households. How this has primarily happened outside the college educated class. These trends are really important to what

That was Melissa Karney, professor of economics at the University of Maryland and author of The Two Parent Privilege. How Americans stopped getting married and started falling behind.

That does it?

For this episode of Wall Street Week, I'm David Weston, This is Bloomberg.

See you next week.