Bloomberg Wall Street Week: Pagliuca, Gelpern, Summers

most influential voices. Larry Summer is the former Treasury Secretary Bryan Wynhan a backup America, Will Smart, CEO of Charlie Sharp. Bloomberg wool Street Week with David Weston from Bloomberg Radio. Global investors search for direction with global economic recovery uneven, pandemic risk not going away, and geopolitical risk on the rise.

This is Bloomberg Wall Street Week. I'm David Weston. A lot of ups and downs this week, but no clear direction, with concerns over the pandemic shifting overseas to places like India. As the United States makes progress on vaccinations, with much more yet to do, we let up now and stop being vigilant. This virus will erase the progress we've already achieved, the sacrifices we've made, the lives that have been put on hold, the loved ones who've been taken from us,

the time we're never going to get back. There was a lot of talk about infrastructure, including what it means, and some groping toward a compromise, but prospects remained very unclear. And US corporate earnings have come in strong so far, but let's be honest, that was more or less expected,

wasn't it. And the markets by and large reflected the gifts and the takes, with equities hesitating in their reflation march upward and the tenuere yields staying just about one point five, neither surging toward two nor falling back down.

Bloomberg broke the news that President Biden maybe getting ready to follow through un Candidate Biden's commitment to eliminate preferential tax treatment for capital gains at least for those making over one million dollars a year, as part of an effort to pay for some of the other Grahams that the administration wants to take us through. What this could mean. We welcome now David Herzig. He is tax principal in the e y private client services tax practice. So, David,

thank you so much for being with us. As I say, this doesn't come as unnecessary shocked anybody because the President had it in his campaign website as a practical matter, But what would this mean for the taxpayer and that for that matter, for capital formation generally in the country, Because David, thanks for having me. Um. I mean, I think you hit the nail on the head with the first thing, right. This isn't a surprise that you know

present Finden proposes during the campaign. Um, we haven't seen the actual proposal, the American Family Plan yet, which which

will kind of give us some more guidance. But it is really interesting to see what might happen with these tax rates increasing, because you know, if you're in New York or California, even the marginal rate might even be higher than than the proposed rate because you have the state level tax too, So you're seeing tax salvation putting out that New York might have a mark general rate of fifty eight point two percent, California might have a

marginal rate of fifty six point seven. So these rates will really I think impact, you know, the way people look at us, a capital formation how they balance their portfoldio on what kind of goes on in kind of their overall tax plan. Yeah, so so, Um, the real question is for the people who are making more than a dog a year, they they can afford some really frust rate tax advice, the kind that you give them. Actually, So if people come to you and say, what do

I do in response to this? How do you change your investment behavior in response to something like eliminating the preferential treatment for capital tax game for capital gains? Well, I mean, I think that's all. I mean, it's a hard question, right because we don't I guess there's an initial matter. You don't know if really that will get to the thirty nine point six percent that President bidence proposing. Right, There's there's questions of how this might work through the

actual budget process. But let's assume for your argument, right, that will use the thirty nine points. That's that that's actually what gets past the Congress. The question is what do you do about that? And I think that's a challenging question for most taxpayers. Right when we talk to taxpayers about this, you know, the questions become, you know,

is this going to be retroactive? Should I sell now and then think about buying later and capturing the lower tax right now, should we wait and see kind of what happens and see if the rate actually goes not but maybe a thirty percent ort and kind of see what happens. There's a lot of questions and moving parts about what you might want to do depending on where the rate lands. I mean, there's just a lot of

uncertainty right now. I got a glimpse of one report that came out on what's happened in the past that suggested that if you do increase taxes on capital gains, that you may move more business into pass throughs and

away from separate entities. Does that make sense? Well, I mean I think generally, like what the way you have to look at this is there's this kind of the big elephant in the room that no one's really discussing analysis, this thing called the locked in effect, right, and so the locked in effect is basically this economic theory that says you you won't sell if the tax rates get too high. Right, So if if tax rates get too high, I'm just going to hold onto my stock and wait.

And so one of the things that Democrats are kind of proposing is saying one of the key drivers of the locked in effect is step up a basis at death. So what happens then is that when I die, I get an increased basis in my stock or whatever it is, and that kind of helps eliminate or mitigate against this capital gains rate increase. So when you look at this, you say to your point about like should we move from corporate to partnerships, or or how should I think

about my investment strategy. If you eliminate capital gains preferences at death, you're going to see some different kinds of drivers for taxpayers trying to figure out which is the most efficient kind of capital structure and and it you know, generally partnerships have lower overall rates than corporate structures, so you could definitely see a shift to kind of the move to more partnership type structure. Yeah, but it's very interesting.

I had not made the connection. I'm not a tax lawyer like you, but I had made the connection actually with the stepped up basis uh in inheritance. That's that's very interesting. Let me turn to a different subject, which is proposals to increase the funding for auditing by the I r S. You've seen that now to paper various things, maybe elimiting the salt limitation, but for whatever purpose, is it pretty clear that if we ramped up the spending on I R S assets, we would ramp up the

revenue we get. Yeah, I mean, I think what you see, like all the all the kind of studies that have been done and all the the research that's been done on the matter, is if you increase spending on audits, you increase tax revenues. David, thanks, that's David Herzig tax principle with Ian Wise Private client services tax practice coming up. It's bad enough to speculate on doge coin or non

fungible tokens, but European football. We talked with Steve Pluka of Bain Capital about what was behind that attempted cop who that was the Super Soccer league. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Investors are getting creative in a low rate, low return world. Spacks, for instance, used to be a last resort for companies struggling to go public, but they've become all the rage, at least

until the SEC warned this month about accounting errors. They raised nearly twenty six billion dollars of share sales in January alone, compared with less than fourteen billion dollars in all of two nineteen. Here's Scott Minored of Googgenheim. The upside is if the sponsor finds are really good in Loveland, uh, you know, you could still double or triple your money. It's a similar story with cryptocurrencies. Bitcoin broke out in two seventeen before plunging, and shot up to nearly sixty

five thousand dollars last week before tumbling once again. In addition to institutional interests, the Nasdaq listing of coin based last week lifted crypto's profile in mainstream markets. It's obvious is an asset people are investing in. Our clients are asking ascamely invest in assasset, and you put it on our accounts and look at it. That's Back of America chairman Brian moynihan. Smaller coins like doge Coin, which was created as a joke, soared along with Bitcoin and has

Elon Musk's backing. Here's Galaxy Digital's Mike Novograts. You know does was a main coin it doesn't really have a purpose. Let's put people in the safest, best stuff. Uh not, you know these joke coins. The crypto cras also fueled the rise of n f t s non fungible tokens unique irreplaceable identifiers created by algorithms, which gives value to digital art and other assets. There's money to be made with n f t s. In February, and animated image of a flying cat leaving a rainbow trail went for

almost six hundred thousand dollars realities. A collectibles market is somewhere between three or five hundred billion dollars US per total, and I think that the reality is this market could get just as large. That's Jonathan Bixby from n FT Investments. There was a time when the ultra wealthy might buy a sports team as a way to diversify their portfolio.

But this week a group of elite European football clubs decided to go further and create a whole new league, a super soccer league that would turn the richest and most popular sport in the world on its head. Twelve clubs from England, Spain and Italy signed on, backed by four point eight billion dollars in debt financing from JP Morgan, but it created a storm of protests from fans and from UK Prime Minister Boris Johnson. By the end of

the week, several teams were backing out. Here's European Commission Executive Vice President Margaret Vestaire. I myself just you know, kind of relief that now some of the clubs are dropping at as you have heard my colleague Marguerite Taskinas very very strong that this is not in the European

way when it comes to football. Turns out the Super Soccer League may not make it, but you have to wonder whether it made sound business sense or was just another example of too much money searching for too few opportunities. Before the league collapsed, we heard from someone who resides at the crossroads of high finance and sports ownership. Steve Paluka is co chairman of private equity giant Bayne Capital

and co owner of the Boston Celtics. So we spoke with him before the league collapse about what was up with the Super Soccer League. On paper, conceptually, moving to a more American style sports ownership situation will be great for those big clubs because right now in europe UM, there is no there are no cost controls, virtually no cost controls. You can own a major franchise and be

relegated UM. So that is a lot of uncertainty from a business standpoint, and uh, and so on paper, they've been talking about this, I think for close to twenty years now. But on paper it makes a lot of sense for those large clubs and as gonna cause a lot of disruption and and football is a way of life in England and countries of Europe, so I think

you'll see a battle of go on. But ultimately, uh, the large city owners that are supplying a lot of those revenues, I think want to capitalize on that and want a more stable structure. I think I may have a rough, very rough understanding of why they also rans if I can call them, that want to participate in this, because they'll get a bigger piece of the pies. I understand there'll be some caps on how much people can spend. Why do the rich clubs want this? Because don't they

rich get richer when it comes to European football? Well, I think part of the proposal is is to have a more partnership with players where there's A. I think they're talking about of the take goes goes to the players, and right now I think the players are taking eight percent of the take, and therefore even these big clubs are losing money, you know, given the transfer costs and

given the cost of players. So I think part and parcel with it is is a you can't be relegated, and then having some cost controls in to ensure and you can make modicum of profitability. This is a different world from what I think a lot of people have seen. With so much monetary and fiscal stimulus in the United States but also in Europe and Japan. How does that affect the investment decision? How do you avoid overpriced assets? How do you find bargains in that world? Well, there's

very few bargains in that world. Uh, we're kind of all time high multiples. As you know, the money supply increased over which one leads to inflation and uh and and the devastit is an all time might as well.

So so that's the that's the the situation that there's a lot of money chasing a few deals, and that's been great for private equity because what you have to do in private equity is a be patient b You have to have a thesis when you buy a company on how you're going to improve it, make it larger, make it global, have new products, because at the end of the day, fundamentally people will pay for burrowing companies.

So if you're gonna pay those high multiples, you have to have a plan that's going to justify that UM and UH and that's what we do at Bank Account But were formed, as you know, from a consulting firm, Well Banting and Company. And from day one we've been helping companies grow and and UH and prosper and as we have to keep doing. And we got perceived with caution not get carried away to pay be the last one to pay the hyble before the crash, but pay. You have to pay a fair multiple and then make

those companies grow. You mentioned the money supply and inflation. There's something a debate going on between. On the one hand, I put might put j Pal on one side saying, don't really worry about inflation that much, given for a long time it's been deflationary disinflationary rather inflationary, and Larry Summers perhaps on the other side saying, wait a second, pumping this much money need economy, you're going to get

more inflation than you think. Where do you come out on that, and how do you take that into account? If you do when you're looking at investments, Well, I'm with Larry Summers on that if you look at at all the data points in any country in the last hundred years, when the money supplies increased that level, you have gotten inflation percent at the time. Within a year or two after those kinds of massive and resist So

I think there will be inflation. And so what you have to do is factor that into your investment decisions and uh and and figure out what companies will will will be able to get through an inflationary period. So companies that companies that can withstand that kind of inflation,

you have to factor that in your models. In fact of that impression back, do you take into account the future strength or weakness of the dollar, because typically when you run record deficits trade deficit as well as budget deficity, you're gonna have a weaker currency. Do you anticipate that possibility? Do you take that into account in investing? I think you have to take that into account as well, especially

if you're if you're on both sides of it. If you're if the dollar appreciates and you're in a highly export driven business USA business and exports all over the world, that's gonna be beneficial with you. UM. If you have raw materials and you have things that you're important to manufacture, UM, that's going to be not the infestially used. So I would suspect we're gonna have an inflationary environment of those things will have to be factored in all all of

our investment decisions. Thanks to Steve Alucca of Bain Cap coming up investing in our Future. What would putting two point to five trillion dollars to work on infrastructure do for our economy and for US business? From Ralph Schlastein of Evercore. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. There was a lot more talking about infrastructure this week, including talk between the President and a bipartisan group of lawmakers about what's needed and about how to pay for it. Everyone seems to agree something needs to be done, but we don't always hear exactly what it would accomplish. So we asked someone who spent his career walking the halls of power in Washington, and then those of Wall Street Avercorp. Co Chairman and co CEO, Ralph Schlastein.

I think the economy is in very very uh good shape poise to make a quite rapid recovery. And I believe, if anything, the ECONO to me is going to surprise on the upside because there's so much uh pent up demand to consume, so much uh build up of net worth uh and savings on personal balance sheets UH that if we're gonna if we're going to get a surprise, I believe it's on the upside. And I think if we're going to get a surprise and unemployment, I think

it will be and how rapidly it declines. And I think if we get a surprise and earnings, it will also be on the upside. So I think one of the questions people have is people expect that sort of upswing. No question, is it going to be a sugar rish

sugar high that we come down off of quickly? Or what do you think about the longer term prospects, not just for going into and beyond the challenge here is to get back to potential uh as rapidly as possible, but not on a path that causes you to overshoot and cause uh, you know, longer term and more sustained inflation.

As you said in your opening remarks, Uh, the amount of fiscal and monetary stimulus that has been applied is absolutely unprecedented, and the rapidity with which it's been applied is also unprecedented. So we're a little bit in uncharted waders as to uh what happens after we get closer uh to uh, you know, potential growth. I will say that over the long term, we have to get more balance between revenues and expenditures in the government. Uh. You know.

The pace at which debt is expanding is tolerable in a period of economic decline like we're like we've been in for the last year or so, but it's not sustainable over the longer term. One of the advantages I think of your job is you get to talk to c e O s all the time. Are they concerned about overshooting I think was the term you used. Are they are worried about running economy too hot? At this point,

I'd say there's very little concern about that. Uh, CEOs are concerned about making sure they have uh sufficient uh trained and qualified workers. UH. They're concerned about their uh supply chains due to the rapidity of the recovery. But at this point, uh, you know, we're still so far away from uh you know capacity uh that that concern really doesn't exist today. And I will say also that the the logical concerned that one might have is that inflation UH is that's is sustained at a much higher

level than we would like. And I do believe that uh you know, technology, including some of the advances that we've made uh as a result of COVID, does serve as a longer term depressant on inflation. So one of the things we're seeing proposed now by President Biden is a massive I think that's not an overstatement of proposal for what he calls infrastructure two point two five trillion dollars.

We also now have Republican senators coming back and saying, well, we believe in infrastructure, but maybe institute of rather than two trillion. But whatever the number is, what is that likely to do the economy? It's going to provide uh longer term uh, not immediate uh stimulus, because as we all know. UH. The idea of quote unquote shovel ready projects for economic stimulus has been tried UH in many past recessions, UH and doesn't really work. Shove already never

seems to be shove already. I think the proposition that we need to make uh multi hundred billion, perhaps trillion ish dollar investments in UH roads, bridges, broadband, all things that enhance productivity over the intermediates a longer term, I think there's broad based agreement on that UH, and I

think there is still compromise or disagreement on the amount. UH. There's a there's certainly disagreement on what constitutes infrastructure, and there are certainly things in President Biden's proposal that uh, you know, expand the historical definition of infrastructure. And then of course there's the big question about how does this get financed? Thanks to Ralph last line ever Corps coming up.

It's the second largest economy in the world, and if we thought China might be throwing its economic weight around, now we have the evidence from special contributor Larry Summers of Harvard and Anna Gaelpern of Georgetown University. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. China the number two economy in the world, gaining on the United States, and it is coming to exercise its economic power around

the world, including through that One Belt one Road. Were's making a lot of sovereign loans all around the world. We don't know very much about them, but we now have a new insight into them, and that is because of professor Anna Gelpert. She is from Georgetown University and we welcome her now she's done a study and we're joined our special contributor Larry Summers, who really pointed out and to be so and it's a fascinating thing you did.

You actually got your hands on some of these contracts because most of us never see what they are, the terms on which China is lending to some sovereigns around the world. What did you learn? The project is very

much a collaboration. There are folks from AID Data William and Mary specialized in finding UM project documents about various bilateral deals with China and otherwise and UM they found a hundred pure accident, by the way, a hundred nice round number contracts between Chinese lenders primarily China x and Bank and China Development Bank and governments in developing countries, and it's both one belt, one road and you know large emerging markets in Latin America, Argentina, Ecuador among them.

UM And the question was so UM Brad Parks at AID Data, Scott Morris at Center for Global Development, and Christoph Trebish and Sebastian Hornet Heel and i UM tried to figure out whether these Chinese contracts were normal, whether they were um UH roughly in line with other bilateral official contracts, with other commercial contracts, or whether in fact the story that you see in the papers about China taking over Sri Lanka courts and electricitys and wows is

the right story. There's an enormous amount of kind of myth making and myth busting space, but not a whole lot of um facts. So what did you find? What was the myth? What was the reality? The myth was China lens against infrastructure. China takes over these facilities on the one hand, and the other myth is um. You know, China is a benevolent lender UM that helps development. Well, neither of those is really quite right, and these warring

myths are sort of beside. At the point where we found was terms that are more aggressive, more muscular than other bilateral official contracts UM, and more muscular than most commercial contracts. But the difference we found was really a difference of degree. So China is much more likely to use revenue accounts so to control cash for example UM in a bank account, as addtional security beyond sovereign credit than other lenders. China is much more likely to use.

Chinese lenders much more likely to use very expansive confidentiality clauses UM. Again, others use them, but not nearly as often. We see a lot more linkages between the loan contracts and other projects by the same Chinese lender or other Chinese lenders of Chinese enterprises in the borrowing country UM

so across default linkages UM. And then there's one clause that we found that is truly unique, and that is a promise not to restructure the debt in the Paris Club of government to government creditors or otherwise in these coordinated structuring. So Larry R. Goes to you actually, as former Treasury secretary, you know the Paris Club well, that's been historically sort of ad hoc way we work it out when people can't pay their debts. Did it come as a surprise to you that the exclude these debt

agreements from the Paris Club. I've learned not to be surprised too often. I think Anna has done hugely important research that moves us beyond ideology to some practicalities. And I think those practicalities are that it's wrong when people go on go into strong rhetoric about debt trapped diplomacy. But at the same time, China isn't completely play and fair vise a the other creditors and writing clauses into its contract that says that we won't participate in the

global multigatural rescheduling processes isn't really fair. And you can't have a system where people right go to people who are desperate for money and get them to agree to contracts that one particular category of debt can't ever be restructured. So I think we're gonna be in a much more fruitful position to have international dialogue on these matters because of uh the research that Anna and her many colleagues and her many colleagues have done. But look this is

a big deal. We've got more flow of credit across international borders than at almost any point in history. You look at the amount of debt that's carrying junk bond spreads, and that's telling you that people think that not always that debt's gonna get repaid, and sometimes it's gonna have to be restructured. And the right time to think about the restructuring of debt is not when we're an extremist, but in advance. And so I think it's gonna need to be a lot of soul searching in the international

community around these debt issues. And you know, I think that it's gonna take it's gonna take time. I think one of the important conclusions of Anna's research is that none of us have a monopoly on virtue, and that some of the practices that people thought of as problematic Chinese practices are also problematic European practices, and maybe even problematic in some cases American UH practices. And so we just need to work through a system that can work

for everybody. Oh and let's pick upbout what Larry just said. UH, And you are an expert on sovereign debt, not just Chinese, but in general sovereign debt. It doesn't make sense to ask the question, how many of these provisions muscular you call them provisions are to protect China as a lender as opposed to advance China China policies, or is it inherent in any sovereign debt and in fact the sovereign doing the lending is going to try to have their

will in things other than just getting repaid. So that's a fabulous question data because I think that we spend way much time haggling over these boundaries between official and commercial lending, whereas in fact, I think the assumption has got to be and what we see is it's all mixed motive and the motives shift over time. What we see in the contracts is the leverage that the lender has to pursue their goals. And we saw this in Russia Ukraine, mind you right where the Russian sovereign left

fund sued Ukraine for three billion dollars in London. Was that a commercial transaction or was that part of a broader strategy in some sense? Commercial official is is not a fruitful question to ask. The question is what are the objectives of the slender, what tools does the slender

have and what bargaining power does the borrower have. I mean, borrowers have agency, and I think that it's um important for us to make sure that a um countries know what they're getting into and that there is some sort of a set of norms and in particular surrounding disclosure. I musta say, the one thing that I learned from this project is I really want to see the contract.

There are set of special features about sovereign debt and policy and all that, but some of this comes back to something that in a way is even uh simpler. If I'm borrowing to buy a car, I want two things. I want as low and interest right as possible, and I also want, in the event that I don't pay the car back pay the debt back, it to be as hard for the lender to repossess the car as possible.

And there's some trade off between those two things. If it's gonna be really hard to repossess the car, the lender is gonna demand a higher rate, And so you have to think about it both at the beginning in terms of the desire to have lower rates, and part way through in the event that thing that things go wrong, and that's really the subtlety uh in this subject. Okay, thank you so very much the Professor Anna Gaelpern of Georgetown Law and of course Wall Street Weeks special contributed

Larry Summers of Harvard University. Finally, one more thought. Can zoom be hazardous to your health? Working from home? A year ago most of us didn't really think much about it. But thirteen months ago we all packed up our things and we left the office and we went off to work from our homes, never thinking that it might last for over a year. So now we've spent a year figuring it all out, the tech, the kids learning from home, finding someplace to do our work, and oh yes, learning

how to use Zoom or Skype or whatever. At first it was a rush how much we could get accomplished. But now it's starting to dawn on us that there's another side of this working from home business. Sure, it's convenient to walk down the hall around the corner, but it's equally convenient for everyone else to reach out and

get us any time of day or night. And that includes, goodness knows, on the weekends, which takes us to that health issue and the HSBC program manager working from home who on a Sunday afternoon felt tightness in his chest and some difficulty breathing. Yes, he was having a heart attack, and as Johnny Frostick laid out in a LinkedIn post that's been liked over two hundred thousand times, his first

thoughts weren't about himself or about his family. He told Bloomberg News he was worried about missing a meeting with his manager coming up the next day. In his words, this isn't convenient. Let's be clear, we all had the ability to work too much without the help of Zoom, and Mr Frostick is the first to admit he needs to lose a bit of weight. But as we go forward into this new world, maybe we should think about whether it may be a bit too easy to work

anytime and anywhere. When Mr Frostick listed his new priorities in his LinkedIn post, the first was I'm not spending all day on Zoom anymore. Sound like someone you know that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.