Bloomberg Wall Street Week - September 8th, 2023

This is Bloomberg Wall Street Week.

And we may not have an overall recession, we're having a rolling recession. To Cone roll looks pretty strongly it is when it comes to jobs.

The financial stories that shape our world.

Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI.

Through the eyes of the most influential voices.

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.

Less oil that we thought it's more high end chips than we expected, and trying to get our hopes for the future just right given where we're headed. This is Bloomberg Wall Street Week. I'm David Weston. This week Larry coppege on his remarkable five years of turnaround for an American icon and what comes next.

You're far better off being strong rather than just big, you know.

Ferguson of the Hoover Institution on the promise and the perils of artificial intelligence, and what we can learn from the Cold War.

There were problems posed when nuclear fission club was developed. It had both the destructive use atomic bombs and a potentially very productive use as a source of energy.

And Pete Stavros of KKR, together with Kathy Vajos of Chartered Next Generation on giving employees a true seat at the corporate table.

We lay the foundation of a different type of culture, which is ownership.

We normalize the fact that management and labor don't get along. I want to flip the script on that.

Global Wall Street eased its way into fall this week with continued disappointing economic news out of China, but a discovery that Huawei may have found a way to make high end microchips despite the US restrictions.

It shows that China can do mostly with domestic manufacturing a lot of the advanced the chip making and development for a smallphone.

Something President g won't have to answer questions about it the G twenty meetings in India this weekend because he decided not to go.

It just sticks away from the Shijen Bing's absence steaks of the primacy in a way.

Saudi Arabia and then Russia announced extended restrictions on their oil production, catching markets by surprise and raising the specter of a return to higher oil prices.

The fact that was reached ninety dollars but barrel is significant and it means that the whole commodity index pushes higher.

In the United States, everyone was looking for any scrap of information to confirm the soft landing. Last week's jobs numbers suggested, with the ISM services number coming in hot, which made everyone fear more rate heights, while the Fed's Beige Book pointed to subdued jobs growth and modest economic activity.

I think the Fed would be very unwise to raise rates again just because of a short term spike and enthusiasm and service sector and.

U US open headed toward its finals is driven by new faces, the return of some real American contenders, and a media showdown in the way of some people getting to watch.

We just came out of this golden age of fifteen years of Roger Rafa Novak, and the baton has not only been passed.

If you think it's been thrown to Carlos Alcarez.

And the echoing markets this week certainly spend a lot of their time trying to get their expectations in line with reality, as the SNP five hundred lost one point three percent in part because of rising oil prices, to close it forty four to fifty seven, but that's still well above the median year end call of our Bloomberg

At the moment.

Well, David, I think this was really a story of bad news is good news, good news is bad news, and this week it was good economic data that raised fears that the Fed may have to continue hiking rates, and that's really all it was to it. But actually, if we go through the data, not everything was that positive.

Right.

Yes, everyone sees on the ism services, but actually the S and P services PMI wasn't as good. If we look at initial jobless claims, yes, they're lower, get you know, the lowest we've seen in a while, and it's been on a trend for a few weeks. But other readings suggest more tepid labor market, right what we saw from the JOLT survey last week. So I think markets have been concerned because of a few data points. But I've always stressed that not every data point is going to

Disinflation. Are we on our route to two percent? And if so, long is it going to take us to get there?

I do believe that, and I'm happy you asked that because the Chicago Fed economists just put out of paper arguing that we are actually on that path and that we will get to two percent inflation. Now, it will take some time to get there, but that's okay because again, typically we see significant period of time between when monetary policy is enacted and when it shows up in the economy.

What does this say to investors? What do you do in this sort of world of as you say, bumpy landing, there's going to be some uncertainty even if it's not going to go off a cliff. What does an.

Investor do well, Investors have to understand that there are going to be shifts in leadership because markets are uncertain right now.

Last week this week was.

A perfect example of that. We have a lot of fear right now. But once we get clarity that the FED really has ended its rate high cycle, that's when markets can look ahead and start to discount in economic recovery. So that would mean being positioned more in cyclicals, more

Briefly, oil or persons did go up this week.

Certainly that's a concern, but it takes time to filter into the rest of the economy to make it into core. So if this is a relatively short burst, I'm not that concerned about it.

Is the FED going to be concerned?

I don't think so, because the Fed's looking at a mosaic of data, and again this is about a very strong disinflationary trend that I think they can see, and that was supported by what we heard anecdotally in the Federal Reserve page book this week.

Christina's always such a treat to have you here, Thank

At this moment, we have to be optimistic and encouraging of the nation state. This is a moment when the state has to adapt and evolve, just as we all have to evolve to these new technologies. There's no way to put the genie back in the boggle. This really is happening. So there art is going to be around shaping it in the public interest and making sure that our democratic governments remain in control.

The historian Neil Ferguson has written not just about economics and money, but also about the politics of disaster in his book Doom. He is a senior fellow at the Hoover Institution as well as a Bloomberg opinion contributor. And we welcome now back to Wall Street Wig. So, Neil, thanks so much for being with us. I know you've read the book because you call it Dazzling, a column actually wrote for Bloomberg. Here give us your biggest takeaway

Well, Mustafa Silima knows what he's talking about. He was really present at the creation of the big AI breakthroughs in recent years, one of the founders of Deep Mind, which has been a key pioneer in the field, and so he comes to the subject with the really almost unrivaled expertise. He was there in the room when they built AIS that could beat world champions at chess and then go So I respect him as a true authority on the subject. Not everybody who writes about AIS nearly

Think we should all listen, because I don't find it plausible that just let it writ as some people would advocate, is prudent given the potentially very dangerous things that AI is capable of doing.

Yeah, as you're saying, you know, he really sets out wonderful things and dangerous things at the same time. You were an historian, of course, and one of the things that mister Silman talks about is the need for what he calls containment, and he admits that that sort of sounds like George Kennon's proposal for Jalla Soviet Union. As you look back in history, are there analogies. They're always rough,

Well, you see, the interesting thing about the book is that it has lots of interesting historical analogies. I mean, the wilder enthusiasm for AI will tell you that it's some combination of fire, the wheel, electrification, and nuclear weapons. What was staff zeros In on is the analogy with the Cold War, and I was tempted to suggests he might turn out to be the Robert Oppenheimer of AI, because he observes that there were problems posed when nuclear

Which we might proceed today.

For example, he suggests that there should be arms control talks on AI between the United States and China, which are the only two superpowers really developing AI on a massive scale.

Okay, thank you so much, Neil, really appreciate your insights to this. Neil Ferguson of the Hoover Institution. Coming up, Private Equity, Doing Well. By doing good, we talk with KKR Global co head of private Equity, Pete Stavros and Kathy Bojos, CEO of a company he has invested in to explore the world of employee ownership. That's coming up next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

This is Wall Street week. I'm David Weston. At the beginning of the summer, we brought you a story putting together two things we don't usually associate with one another, private equity buyouts on the one hand, and employee stock ownership on the other. But KKR has been putting them together for some time now and has found some real success. So we welcome back to the man behind the effort. He is Peter Stavros, KKR Global co head of Private Equity and someone who's been working with Pete to put

Great to be here.

Let's start with you, Pete. So we've talked about what you've been doing at KKR, sort of the principles of how it works, how specifically has applied in this specific instance.

So what we do each time, and what we've done in the case of charternext Gen is we lay the foundation of a different type of culture, which is ownership. So we made every employee at charternext Gen a stockholder in the company. It's important to note it was a free and incremental benefit, so we're not asking workers to invest out of pocket. We're not asking people to trade off wages for stock, so it doesn't come out of their page, has not come out of their paycheck. It's

Now that that's just the foundation.

Really, the purpose of it is to change the culture, to get people more engaged on the job, to get people to think like business owners, and over time get the quit rate down and the engagement scores up.

And in the.

Short time we've been working together with charternext Gen, the quit rates are down thirty three percent, the number of gauged employees up twenty three percent. Safety has improved, So even in the two years we've been at this, we're starting to make real progress.

So Kathy, take it from your side of it, turn our next Gennels. I understand it is a leading producer of film used in packaging. A lot of the things that we buy when we go to the zero market has some of your film around it. You were a successful company before Pete came along. It's not like you were struggling about to go belly up. What did you see in this opportunity otherwise you might not have seen from somebody else.

Well, first of all, this this is a dream for me to be able to offer equity ownership to every employee. I look at it. Every single employee is part of the success.

Of the company.

It's a team sport. So it doesn't make sense that you would only reward the top executives the top five percent with equity. So the opportunity to give equity to everyone alliance the incentives. So now everyone has the same incentive, which is to create value for the long term. You know, when you give an employee who's living on an hourly wage the opportunity to build that nest egg, that's life changing. And that's our goal here, is to really have an

You mentioned you have some encourage in return. So far, how far can the gets to go? I mean you must believe in it, because I think you've got a documentary in the process right that you're working on with GAT.

We've released two clips so far of the documentary film and no pressure, but this has to be a big win.

That is exactly no.

I'm fully committed. I am going to do my best, and I know our people will too. This has created such a spree to core in the company, and you know that what I think is really important as a leader is to take the people metrics as seriously as you take the business metrics. So much of the time we focus on profit, focus on sales, focus on things we can measure, but you know, for us, it's really

That's how many people quit. Forty to fifty.

Percent of employees quit their jobs every year. Think about if you can reduce that down to five percent, the value that you can unlock. So that's where we're focused now. We also want to give our employees a voice, so we've implemented things like employee directed capital. We give each plant a budget. You decide how this capital is going to be spent. You have to vote on it, you have to agree. But then imagine spending this money to

PET. One of the things that's happened since you and I last spoke actually as a fair amount of organized labor activity as we have a strike right now with the Writer's Guild and SAG after who knows what's going to have with UAW doesn't look real good right now, But as I listen to what Kathy's saying right now, that's how world away from talking about hundreds of work rules to say exactly who goes where what do these two things fit together. Does employee ownership fit with organized labor?

I think historically organized labor took a skeptical eye understandably to ownership, you know, because to union, the employees are their members, not your employee, not your employees, right, so when you start then aligning their members with your company, that can be a conflict.

I think that's changing.

I think there's a real openness to new models and aligning capital in labor. And as you note, we've gone from a period of time where yeah, you saw some strife in autos and manufacturing, but now you're seeing it everywhere, and people they want to be a part of something. They want shared gains, they want transparency around how we're going to manage through all of this change driven by technology AI, you know, in the case of the writer's strike,

Finally, to you, we don't know how this will end up. I guess we'll have to wait for the documentary to find out what ends up. And I know you can't predict what's happening, but how big a difference could this make in some of your employees' lives. You mentioned before you get a paycheck to pay the bills, but it's very hard to amass capital, to amass wealth. How good could this be for some of your employees? Do you think or hope life changing?

I mean, when you're living paycheck to paycheck, you know forty percent of Americans have less than four hundred dollars. They're one car repair bill, one medical emergency away from financial devastation. Think about building an estag of fifty thousand dollars one hundred thousand dollars. There are employees who have said this will end generational poverty in my family, and I mean that's inspiring to me that you know, Yes, I have been a private equity sponsored CEO for thirteen

That's it.

We normalize that, We normalize the fact that management and labor don't get along. I want to flip the script on that, and.

We're going to have to fix this.

So in manufacturing, we've now got six hundred thousand open jobs. National Association Manufacturer says we're going to be short two million workers by twenty thirty. When you talk to manufacturing CEOs and you say what's your biggest concern, it's not supply chain, it's not state of the economy, And my number one concern CEOs in manufacturing stays I can't attract and retain people.

So it's great.

At the company level, we're going to have to do this or something like this at the economy level if we're going to continue to be successful.

Many thanks to Kathy Ballhouse of Charter Next Generation and Pete Stavros of KKR coming up. There was a day when the very survival of General Electric was in question, but that day was five years ago and today things look very different. We sit down with the man who oversaw the remaking of an American corporate icon, Larry Colt, CEO of GE.

We couldn't be in a better position with respect to the post pandemic recovery and aerospace.

That's next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

General Electric It was founded in eighteen ninety two when Thomas Anderson put together his electric companies under the banner of GE with the help of John Pierpont Morgan. It grew to be one of the largest and most profitable companies in the world, with a market capitalization approaching six

What you do with personnel around bad behavior does more establish a culture and good behavior role model those behaviors with great rewards for those that have the right culture and public aatings for those that don't.

I was very fortunate to grow and be mentored by Jack Welch.

And you know, Jack was laser focused on metrics, appropriate metrics.

But then the Great Financial Crisis hit and the conglomerate mister Welch built was hit particularly hard, causing profits and revenues to plummet as problems mounted, causing the market cap to plummet to under seventy billion dollars by twenty eighteen.

We had good businesses, good people, good initiatives, but at the end of the day, the stock price lagged. There are some things that didn't work. We didn't get as much value out of g capital as we could have. We had tough in use markets. At the end of my tenure, I gave the board a lot of things to work on. So it's a complicated story, but I think the way it's been told has been incomplete.

Then GE turned to a new CEO, one who had led not at GE but at Danaher. Larry Culp took over a CEO in October of twenty eighteen and undertook a fundamental rethinking of the company, selling assets, paying down debt, and ultimately leading the move to break the company up into three independent companies focus on healthcare, power, and aerospace.

Well they'll have left of meaningful size is power, which is a problem.

In aerospace, which is a terrific business.

If they get healthcare, everything else is really small.

Now the parts of GE add up to more than the whole did before, with combined market capitalization of about one hundred and fifty billion dollars, giving business schools once again a case study in management and leadership, but this time more in focus and execution and not so much in a massing size. And to take us through that saga of GE, we turn to the man himself. He's Larry Kulp. He's the chairman and CEO of General Electric. So welcome Larry. Great to have you here on Wall

David?

Always good to be with you, and it's hard to believe that it's been five years.

Here come first of October.

I think it was really in many respects simple GE, an incredibly important company to our country into the world. G 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 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.

I'm subably that simple.

As I said, 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. You 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 emergency around the deleveraging.

When a number of us had joined the board.

Through the course of twenty eighteen, the plan a record was to actually spin our healthcare business.

Much as we did earlier this year.

But I think we found as we dug into it that while that was a good idea, we couldn't possibly pull it off given the leverage level and given the performance of the other businesses, which is why we made the quick pivot through the fall into early twenty nineteen to actually sell a small part of healthcare, our biopharma business, for twenty billion dollars, And that was really the first

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 us improve our profitability and our cash flows.

It was a daily battle, it was a.

Game of inches, but over the course of time we really were able to lay in our lean operating model so that today we're able to perform at much higher levels across General Electric in ways that I think are going to serve all three of our businesses very well going forward.

How did you bring your board along with you, because again, g is just such an iconic company in the United States. To break that up into three pieces is quite a move. Did you expect to do that from the beginning when you took the job? Did you think you'd break it up?

Well?

Again, a number of us that joined in twenty eighteen knew about.

The healthcare.

Idea that we would spend healthcare and created an independent company, and that made sense then, it made sense earlier this year when we did it, but we really didn't have the strategic degrees of freedom.

We didn't have the balance.

Sheet to do it so early on there when I became CEO, of course, that was something that had never happened in the company's history. We didn't necessarily do make that move from a position of strengths. The board fortunately, was focused on what we were focused on as a management team, the deleveraging and improving our daily operations. But that board then and now I think is one of the best, if not the best boards in the country. This is a group of people who really ran toward

They pitched in.

It wasn't about themselves, it wasn't about their reputations. They just wanted to make sure that we did the right thing for the business. But as time passed, we put over one hundred billion dollars a debt aside. We improved our operations so that we were serving customers better, we were generating a respectable amount of free cash flow. When the pandemic lifted or began to lift in the spring of twenty one, we could see that we had more

How did you manage ego, and I mean ego of the company, of the people who worked there of the board and even your own ego, because there are a lot of CEOs, a lot of leaders say I want to have the biggest company. G had been the biggest company, and this is a decision. We're not going to be the biggest company. We're never going to be the biggest company again. How did you manage the egos involved?

Well, I think I've long believed that you're far better off being strong rather than just big, and that was a little bit of the evolution of our conversation. We're not going to be an all singing, all dancing ge going forward, but that doesn't mean we can't lead the energy transition. That doesn't mean we can't be a leader in precision healthcare. That doesn't mean we can't define the future of flight. And that's what these three businesses can

Geez Larry Cup was staying with us as we turned to those three businesses and where they are going next. That's why I'm next on Wall Street Week on Boomberg. This is Wall Streaming Week. I'm David Weston and we are back now with Larry Kulp, the head of GE. So, Larry, we've talked about how you got to where you are, now, let's talk about where you're going next.

We couldn't be in a better position with respect to the post pandemic recovery in aerospace. You've seen the performance thus far this year. We're really on a record pace given both the return to flight really around the world now is people see places they haven't been to and at the same time they're looking to modernize and expand

For some time.

That would put us well north of forty billion dollars in but a few years, a lot of opportunity. We have I think an ambuable position in propulsion. But again, it's not about how big we get. It's about how strong we are and are we serving our customers? Are we taking care of our team? Are we doing well by way of our shareholders.

It's optimistic that we will.

What's on the table. As the point, you've spent your five years really redoing the balance sheet, really fixing the cash flow situation, retiring a lot of debt. Capital allocation maybe hasn't been so much of an issue because you're just trying to retire to that debt. Going forward, you may well have some capital to work with. So what are the possibilities both in terms of acquisition but also sail potentially well.

I think that we want to be why stewards of that capital, right. I've long believed that investors give you a license to reinvest in your business, and you need to be careful with that license lest gets pulled. But I think what we've tried to do is set up all three of the businesses to be in a position where they are well capitalized, investment grade, and we'll have the opportunities to think through not only their organic options be at M and a small mid size probably not

Well, Larry, thank you so much for being wilture, with really a pleasure to have you here. That's Larry Culp of General Electric. Finally, one more thought, look deep into nature, and then you will understand everything better, so wrote Albert Einstein after the death of his sister in nineteen fifty one. And these days there's plenty of nature demanding that we look into it deeply, though it's not as clear that we're understanding any better. It has been a summer of

What we're seeing now is just repeated examples of natural disasters climate extremes happening at scales we haven't seen before in places we haven't seen them.

Burning Man has never really build itself as an environmental movement. It's an annual event in the middle of the desert in northwest Nevada, celebrating art and self expression and self reliance. But this year, whatever its purpose, nature crashed the Burning Man party in a big way, putting to a test

Honestly think that this is the best burn ever.

Seriously like this has given us the opportunity to rise to radical self reliance and to support each other in the community, and I'm having the best time, all of.

Which brings home the need for us to look deeply into nature, as Einstein suggested, and to try to understand everything just a bit better. That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.