Bloomberg Wall Street Week - November 25, 2022

just how hot the U. S. Economy really is. Through the eyes of the most influential voices Larry Summers, the former Treachery Secretary, Katherine Keating, CEO of v n Y Moms, Sam's l Sharmon and founder of a creating group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio, giving thanks for what we've been through, for downs as well as ups, and for the opportunities yet ahead of us. This is a special Thanksgiving edition of Bloomberg Wall Street Week.

I'm David Weston. This week, America celebrates that holiday known as Thanksgiving, when we gather with family and friends, remembering a time nearly four hundred years ago when British settlers feasted to celebrate their survival and to give thanks to the American Indians who made it possible. This year, most of us can be thankful that we haven't had to survive scenarios anything like those early Massachusetts colonists. Though we are mindful of all those who have lost loved ones

to the pandemic over the last three years. We all lost something, a collective suffrage, a collective sacrifice, a year filled with the loss of life, the loss of livy, and to Ukrainians who have spent most of the year valiantly fighting off Russian invaders at a great cost of blood and treasure. We will not give up, We will not lose. We will fight till the end, at sea, in the air. We will continue fighting for our land,

whatever the cost. But for the rest of us, it has been a year of great uncertainty as the economy has come back, but at the cost of mounting inflation. Inflation is extremely high. The levels were at we're unimaginable eighteen months ago, and so we have to get that under control and the beginning of belt tightening that has played havoc with the plans of so many, as reflected

in markets that have struggled week to week. One of the places on global Wall Street, particularly hard hit by the higher rates and greater uncertainty has been mergers and acquisitions, And we sat down with one of the consummate dealmakers. Sam Zell to talk about the climate and how it's affected his business. Let's talk about what investor does in this new environment of increased inflation and increased interest rates. First of all, tell me what's going on with your company.

Are you seeing less deal flow? Now just the opposite. We're seeing more deal flow. We're seeing more situations where companies are having difficulty figuring out what to do. Uh. We're seeing situations where nine months ago, financing a transaction of X y Z size was nothing. You know, it was you know, as you said, money was free. What's

changed dramatically? I mean, think about the impact of the doubling of interest rates in eight weeks double you know, it's just eight weeks earlier, interest rates were you know, two and a half to three, and now they're five and a half to six. That's an enormous change, and it's gonna slow down everybody's activity. It's gonna for sure impact getting deals done. But in our particular case, because I've oftentime told the world that when I'm liquid, the

stock market can't go down. It only goes down when I'm ill liquid. And here I am sitting there with a level of liquidity I've never experienced in my life because my focus for the last three and a half here has been nothing more important than loquality. So you've got a significant deal flow, if anything is bigger than it was before. What about the quality of deals? Are they different from what they were? For example, preach a prandemic. I think they are because they think they're a little

more realistic. I think in prepaymandemic, when money was free, we did as back and chose not to take it to the next level. Because when we did this back spac seemed like a very interesting way to in effect monetize opportunity. Uh. It very quickly became a highly speculative scenario dependent on preposterous valuations that ultimately led to the crash of the whole spack market. World has changed a lot since then, and and the change is basically modifying

what you can do. On the other hand, is always demand for capital, uh, And there's always that demand is always on the on the the shoulders of those that have preserved the couidity. So let's talk about some specific investment of serious energy. I mean, you know energy terribly well. You see opportunities of energy ight. Now, there's been a lot of tumult in the marketplace because of Russia and

Ukraine and all sorts of versions. Yeah. I I mean we continue to do something in the energy space, not as much as I would have thought when we when this period began. The volatility and the energy space has been so extreme. Uh. I mean you just think about it. Within a twelve month period, the price of oil. Uh you know, you know, vascillated between thirty and twenty. Uh. That's an incredible level of volatility. Makes making investments extraordinarily

difficult and challenging. Do you see a prospect of a little less volatil because you up on the one plus o pl plus trying to live with things. Now you've got the U. S. Government, which it was not trying to regulate the price of oil. It looks kind of like it is because it says when it's gonna selone's gonna buy. So it looks like it's got a bid and ass price. Yeah. But we also have a allegedly we also have an administration it's very anti oil and

and and too. In my judgment, that anti oil provision is only going to hurt the United States. I mean, we were producing eleven million barrels a day of oil. UH. I don't know what we're doing now, but I think it's down two or three million barrels a day. UH as we've cut back on uh, capital for the for for fracking, etcetera. Uh. Not a healthy set of circumstances. That was Sam's l founder and chairman of Equity Group Investments.

Coming up, we'll turn to energy and the quest to get more of it with less emissions with Christine Todd Whitman, former EPA administrator and former governor of New Jersey. That next on this special Thanksgiving edition of Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is a special Thanksgiving edition

of Wall Street Week. I'm David Weston. Energy has been much on the minds of Wall Street this year as Russia's war in Ukraine made the price of natural gas spike up. The President gets it. He's been working to get prices gas prices down, so as a result, they've been coming down for the last three weeks or so. But we understand that that's partially due to the war in New Train and we need to keep oil on

the market. And President Biden tried to keep the price of gasoline down by releases from the Strategic Petroleum Reserve additional fifteen million barrels four December out of the SPR. But the President was doing this even as he tried to continue his push for more investment in energy sources that didn't add to carbon emissions. We're proving a good climate pology is good economic policy. It's a strong foundation

for durable, resilient, inclusive economic growth. Much of Mr Biden's effort was focused on renewables like wind and solar, but many of those who take the zero emissions goals seriously agree that we can't get there ultimately without nuclear energy. One of those who has been consistently advocating for the role of nuclear energy is Christine Todd Whitman, former Governor of New Jersey and former administrator of the e p A and Governor. Whitman joined us on Wall Street Week

to explain how it could work. You've dealt with nuclear energy for years now, so give us your sense of the role of nuclear energy potentially in getting to net zero. Well. I think nuclear can play a huge role, at least in a transition from fossil fuels to renewables. Renewables are not yet base energy. They're peak shaving and we're seven society, as is the rest of the world the world, and nuclear is the only form of base power that releases

no regulated pollutants or greenhouse gases, wireless producing power. And we have an incredible safety record here in this country on nuclear and actually with a few obviously very huge exceptions being Chernobyl and what happened in Fukushima, Daishi, overall worldwide it's been it's been safe and getting safe for all the time. I mean, the US Nuclear Regulatory Commission is considered the gold standard on regulatory oversight of nuclear reactors.

I don't think, given costs and time, that we're going to see any more large reactors built in this country. Certainly they are being built in China, They're being built around the world, and we can certainly play a part in developing the parts for those reactors. But I see the future for nuclear right now being in the small modular reactors. Well, let's get to that, and we first of all give us a sense of the scope of it. Already.

One of the things that I have learned is nuclear is actually one of the few things that really don't have a mission that can be taken to scale. I think something like energy in the United States and generated but in France, right. And you know, you saw an example of what happens when you take nuclear offline when California took the Santino Frey nuclear reactor offline. Their missions went up and the cost of their energy went up.

I mean, it was totally counter to everything that they were hoping to achieve in my mind, and so what I found over time is that if you have an opportunity to talk to people and answer they're very real questions. I mean, it's it's normal to have questions about the safety and you should ask them. But the answers are

really good, and they're based on our history. You can prove that in fact, these things work, and once you do that with people, they get much more comfortable with the idea of nuclear It's just that for so long, um it's been used as frankly a fundraiser a lot of times for the environmental groups, and we need to get the public to understand. Particularly with the new small modular reactors that are built in a contained facility, they can be played east on site. They're much safer technology.

They are a much safer way to produce the nuclear energy. So overall, there are really I believe, have the potential to make a huge difference, particularly if you think about the rural parts of America where you're not on the grid or you're not close to the grid. You can take a small modular reactor and provide power for an entire talent or an entire business. So they have a

lot of potential there. So let's pursue that question of safety because that is on a lot of people's minds without a doubt, and as you've mentioned, we've had some horrific instances. Is the issue with safety that people don't realize that actually the tracker is quite good for nuclear or is it technological developments such as as you're referring to small module reactors now. I think it's because people

just don't know, they don't understand. I mean, I get a lot of questions I used to in the past about well what about the spent rods, And first of all, I tell them from all but when the time when we had a hundred and two nuclear reactors in this country and you took all those spent rods and you put them in one place, you'd fill up one football

field to the height of the goal posts. They may have gotten slightly above that now because this was data from several years ago, but the point being, it's not this massive thing the size of the state of Vermont that people kind of have in their minds. And the other thing is that what's in those spent rods is eight seven to ninety percent fishing noble material, meaning unused energy.

And in France and Japan they figured out how to reprocess that and to get the energy out of those rods, rendering that what you have is the quote unquote bad stuff too down to let's say, and it can't be used in a nuclear weapon, so it's much easier to store, much less to store. You have a lot of unused power just sitting there. And they spent rods um and we should be using that technology as well. And people

have to understand. And when you explain it to them, you take one of these rods from a nuclear reactor and put it in a missile, it's not the same technology.

It won't work that way. And the other thing that explained to them because one of the most immediate issues that we had in this country was three Mile Island, and when that went down, the operators in the utility itself, in the reactor itself, were never exposed to high levels of radiation and they've been tracked ever since, and there were no releases into the community, and even those who were right there in the reactor had no adverse reaction to what happened. And in fact, it was because they

overrode the system. Really that you had the partial meltdown fo Kushima Daishi. That wasn't because of the earthquake. It was because of the tsunami, and that was because they had their backup power, their generator located physically in the reactor building. After nine eleven, our Nuclear Regulatory Commission said to our nuclear industry, you've got to move those out that cannot be co located with the reactor itself, so

we that kind of thing can't happen here anymore. Just this week we saw an announcement of a deal to acquire Westinghouse Electric basically on the premise, in effect, we're going to have more nuclear energy. Do you anticipate at that in the United States? Well, I certainly hope we do.

But it was what not even ten years ago. I guess there were four proposed reactors to in Georgia and two in South Carolina, and we were very hopeful if those are going to come in on budget and on time, and they both ran over and the utilities decided in each case that it just wasn't worth going forward. So it is a question of cost and regulatory hurdles. But you want to have those regulations in place because that's what protects the community, to make sure that things are

safe and streamline how you approach them. That was Christine Todd Whitman, former governor of New Jersey and e P A administrator, coming up. Higher interest rates this year have really at the real estate market hard. We get the overview from Tom Shapiro of G T I S Partners. That's next on this special Thanksgiving edition of Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is a special Thanksgiving

edition of Wall Street Week. I'm David Weston. Real estate is never far from the mind of Global Wall Street. In the United States, construction accounts for three point nine percent of all g d P and one point three percent of the jobs so when you start the year with mortgage rates around three point three percent and they reach seven by the end of the year, it can make for a bit of a rough ride. One of

those feeling the ride most directly is Tom Shapiro. He's co founder and chief investment officer of GTS Partners, and he joined us on Wall Street Week to take us through some of the struggles but also some high points for real estate adjusting to higher interest rates. First of all, I want to start with your take on where the housing market is right now. We've seen some slowing even this week, with some new housing sales as well as existing housing sales. Sure that first, thank you so much

for having me on the show. Why don't I just give you a little anecdotal evidence of what we're seeing in the field right now. Our home sales are down about fifteen but that's a headline number, and you know, I think it would be helpful to kind of dig a little bit deeper into that number. The reason, for the most part it's down is because we can't deliver homes.

We're still having tremendous supply chain issues. Also, we find that a lot of home builders are actually holding back on the number of homes they want to deliver, and that is for a couple of reasons. One inflation because costs keep going up and they don't know what it's gonna actually cost to finish the house. And and too they want to ride up the home price appreciation. So I would say for the most part, right now, while we see a fifteen slow down in sales, you're over year.

A lot of that is because of other extraneis issue. It's more of a delivery issue than is a demand issue. With that said, we're definitely starting to see a pullback. We're starting to have to go deeper into our wait lists. But every house at this point that we deliver in the markets were in, we are selling. But I think we have to be careful about what we see, you know, on a going forward basis, because definitely we're starting to

see things slowing down. That's a really helpful way of putting up because we're having those discussions about the overall economy. Is it supply, is it demand? Is I understand you've got a supply problem because the supply change. People say that's going to go away? Is it going away? And how's it? Well, it's not I mean, we definitely have issues. We have problems getting trusses and windows and appliances. Um, we're delivering homes with plywood windows at times. Um, it's

it's we're having all sorts of issues. And of course you know the war in Ukraine and what's going on in China, and the work stoppage is there. Um, the deliveries and transportation is an issue, and jobs are an issue, and trades are an issue. So it's gotten marginally better, but we still have tremendous supply chain issues. Uh. And look if you look at how many houses were delivering a year in total, this is all all forms, it's about one point two million housing units a year, which

is sort of inequilibrium. So Tom, some of the issue can be on the demand side. At some point. We've heard about mortgage rates going up to what five point five percent something like that, so that must affect it to some extent. How are you seeing some effects with that because we also have the FED is going to start selling off some of those mortgeback securities. Yeah for sure. I mean, look, the consumer stretched, so why are they stretched a stretch because of inflation? So we have all

sorts of issues. We have gas prices are more expensive, and we have the costs of food is more expensive, and of course, as you point out, mortgage rates are our own issues. So the consumer is stretch and that is certainly going to be an issue on a going forward basis on housing. But we are seeing, you know, people taking less options, they're going to slightly smaller unit types um and their renting. So we aren't necessarily seeing a slow down at this point because of Morgan traits.

But again, I think we have to be careful. I think, you know, the crystal ball says it's going to get a lot worse. We're not seeing it today, but I think in the future where I'm going to see a slow down. When you say things are going to get worse, a lot of us go back to two thousand and eight, the last time we really thought hard about housing crisis in this country. And there are some anecdotal incidents where it sort of feels like two thousands six or seven

where people are outbidding each other houses. They're going away but above the asking price. Are there parallels with what happened in two doesn't eight? It's an amazing it's really really good questions. So so why don't we go back in history because I think, you know, we really have to analyze where did we end up in a eight and why did we end up there? So if you if you look back to two thousand and five, we produced two million housing units, So in general, we produce

one point two million households or what's a household? Your kid graduates college and moves into an apartment. Uh, A couple moves out of their parents house and they and they've taken apartment, there's a divorce, etcetera. And that creates

a need for housing units. So against a total need of one point two million units, we produced to and then it did slow down because remember after five even before the GFC we started to have a housing slow down, we still produced one point five million housing units, so we had a massive oversupply going into then a demand shock. So it was really the perfect storm and that is why we end up with the global financial crisis. That was Tom Shapiro, president and co founder of G T

I S Partners, coming up. The tight labor market has continued throughout the year. We talked about the causes, including some that may not be going away anytime soon with special Wall Street we contributed larryus Summers of Harvard and with economist Melissa Carney of the University of Maryland. That's next on this special Thanksgiving addition of Wall Street Reek on Bloomberg. This is Bloomberg Will Street Week with David Weston from Bloomberg Radio. This is water Rag. I'm David Weston.

Even as the markets and investors have struggled to come to grips with higher interest rates and less fiscal stimulus coming from the government, even as inflation is cut into wages and profits, the labor market this year has continued to be robust. The labor market is still strong, but it requires a fed that has a lot more skill and a lot more luck. Some of that maybe, as they say, transitory, they continued, aftermath of the pandemic and

a dramatic snap back in the economy. There are also more structural, longer forces at play, and we turn to our special comtinuter Larry Summers of Harvard and his fellow economists from Maryland Melissa Carney, to take us through some of those longer term labor market issues. They joined us

from the Aspen Economic Strategy Groups meeting in Colorado. Let's start with the question of where growth will come on the other side of whatever it is we're going through, because that's ultimately going to be the question here, I understand from what conness like you, it comes from one of two sources, either more workers or more productivity. Are

we going to get more workers. We're looking to at both fewer workers and lower productivity, as you know, So let me focus on the fewer workers aspect for a moment. The real issue demographic issue facing the US is we have a plummeting birth rate, and so total fertility in the US is now below the level required to keep population growth constant. And so the issue here is that on average now a woman in the US is expected to have one point six five children over her lifetime.

So women used to have three kids, then it fell to two. Women were having comfortably above two kids for many decades. With a with a fertility rate below too, that means our population is going to age and it's not going to grow, and so eventually we're going to have a shrink working age population unless Melissa, we have immigration. And that's why immigration, I think many of us at

this conference feel is so very very important. What's your sense of what economists would say the politics apart um about the immigration policy. Economists love immigration. We think immigration is a is a potential answer to our demographic challenges as well as our productivity innovation challenges. Since immigrants come in, they work, they're more likely than native born Americans to be entrepreneurs and innovators. Of course, as you know Larry,

immigration rates our way down. So we used to bring in as you know, sixteen we hit as many as a million new people coming into the country every year. That number is now below two d and fifty thousand, and so the combination of a declining native war in population and a decline in immigration portends even worse demographic challenges than if we were just facing one versus the other.

Let me see if I can do a little arithmetic based on what you said, from one million, so that's about seven fifty thousand people a year, so that's about half a percent of our workforce, maybe a little less, So half a percent slower labor force UH growth over time can accumulate to something UH that is very that is very large. And and if we go back to the birth rates, we have about five dred thousand fewer babies being born a year than in the not distant past. Melissa,

if you um, what would you say about about this? Um? Most people are scared that immigrants come and they take jobs for Americans, and that if they're more immigrants, then there aren't gonna be as many jobs for Americans, or if there are jobs, because there's more compet titian, Uh, they're going to be paid less. And that's true whether the job people think is working at McDonald's or is working doing computer programming at Microsoft. What how do you

how should people feel? Shouldn't they have shouldn't they have this worry that they're going to be poorer if we take all the immigrants, just like they get hurt if we take a lot of local a lot of trade from other countries where they have much lower wages. So so, the reason economists are so bolish on immigration is because we have so much evidence that immigrants are good for the economy. They are good for most workers. But it is true that there are some groups in some places

that will feel wage pressures. And I think the way we the way we solve this issue is to make sure that we recognize the disparate impacts of certain groups. We recognize that low wage workers in certain sectors might not experience the benefits. The were all benefits that immigrants bring to the economy, and we take steps to help them. I mean, it's not it's not dissimilar to what we have to do with trade to you know, more imports is good for most people, but some people are harmed

by it. We're going to see this too with the shift of green a greener economy. Some people are going to lose their jobs even though it's better for everyone. And so I mean, I think acknowledging that some people feel and are harmed by this, but that's a small concentrated group, and taking steps to address that allows us to do things that make the economy grow and be more productive. I wanted to come back to fertility. Larry's pointed out a way in which economics, whether misperceived or not,

may affect our willingness to have immigration. What about fertility? Are there economic causes for the reduction and fertility? So the decline in US fertility and it's really being driven by a plummeting of birth rates Since two thousand seven, births fell after the Great Recession, they haven't recovered. Um, you ken a point to any any policy or economic

factor that's changed since two thousand seven. So sometimes people will say things like childcare has become more expensive, and if we just made childcare less expensive, people would return to having more than two kids. None. That is just not the case, right, There's nothing, uh, there's nothing that easy that we could point to. And in fact, us women now are just having births in the same way that women in other high income countries have reduced their

birth rates long before, in the eighties and nineties. So I don't think this is going to be easy to turn around. Lots of other countries have taken direct steps to try and incentivize people to have more kids. There's a lot of countries that have experimented with baby bonuses a few thousand dollars. Birth rates go up a little bit in the following year, but nothing like the increase

in infertility we would need to get back to replacement level. Also, having an expert like you here, I can't is this h stepping out of our mutual lane as economists to ask a question I suspect is on many people's minds. Do you think that the recent Supreme Court decision and the steps that are going to be taken in a number of states. Do you think that's going to materially

affect the number of births in the United States? The We do have estimates on this based based on you know, lots of data we have about how abortion restrictions you know, lead to more birth rates. I expect there will be about a hundred thousand more births a year. This is not going to bring fertility rates back to where they were. This is going to mean that some women who wouldn't want to have a child now are going to um.

Since you raise the issue, I will say that this makes the imperative of doing more to support kids and low income women in this country that much stronger. That was Special Wall Street. We contributed Larry Summers and University of Maryland Professor of Economics Melissa Karney. Getting money for free or close to it can be nice. It allows us to pursue hopes and dreams that we otherwise might not be able to afford, leading to investments that couldn't

be made with higher hurdle rates. I outline everything from community college block grants to aid to communities, to reform of the earned income tax credit to support work All of that is probably about a hundred billion dollars a year. That's real money. But what happens when the music stops or at leak slows down a fair amount, as interest rates shoot up and the bankers and other lenders get

out their sharp pencils. Then, as Warren Buffett famously said, we find out who's been swimming without their trunks, and at the front of the line of the so called zombie companies, the ones who aren't throwing off enough cash to meet their interest payments, much less pay off their principle. Sonya Gibbs, Managing director at the Institute of International Finance, joined us on Wall Street Week this year to take us through the problem and what it may mean for

the rest of us. Let me start with those basic of questions, what exactly is a zombie company and how many of them are they're out there? First of all, to take a step back, what you need to think about is that over the past ten or fifteen years, global debt levels have skyrocketed. We've had very low interest rates, and for example, non financial corporate debt around the world is now close to a cent of g d P and that's more than double what it was a decade ago,

So that's a very worrying backdrop. And so what we mean by zombie companies is a company that essentially has to borrow to keep going. They're highly leveraged, they're not growing very fast, their revenues are not up to power, and at the moment they face a very difficult situation. You've got higher input costs, so your commodity prices are higher, wages are rising. At the same time, you don't earn enough revenue to cover all of these higher costs and

your debt service. So if you have a ratio of revenues to interest costs that's one or less. If you can barely cover your debt service costs, we call you a zombie company. And it's a very good name. It's very evocative. And for how many I mean, it's difficult to calculate, right because for a lot of firms that, for example, aren't publicly listed, the information might be less available.

They might be smaller non public companies. But the Federal Reserve estimates that between five and ten percent of US firms fall into this category. And it's also important to remember that this is not a static world. It's not once a zombie, always a zombie. Conditions change, and in fact, becoming a zombie company is a little bit cyclical in the sense that when times are good, maybe interest rates are low, growth is high, maybe you're not a zombie.

But then you know, bad things happen. Pandemics happen, shocks happen, interest rates go up, and a company that was formally doing reasonably oh might suddenly fall into the zombie category. That was Sonya Gibbs of the Institute of International Finance, that does it. For this special Thanksgiving edition of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.