Bloomberg Wall Street Week - February 2nd, 2024

This is Bloomberg Wall Street Week.

I mean may not have an overall recession. We're having a rolling recession. To kin of Rowl looks pretty strongly. It is when it comes to.

Jobs the financial stories that shape our word.

Three major regional bank failures sent 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 Moynahan, Bank of America, deebro Lair of the Paulson Institute, Glen Hubbard of the Columbia Business School.

Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

Up in the Air on whether Elon Musk moves to Texas, on the future of Boeing, on when tech we'll see that AI payoff, and on when the Fed we'll get.

A move on. This is Bloomberg Wall Street Week. I'm David Weston.

This week special contributor Larry Summers on US jobs numbers.

I was surprised, not shocked that the job numbers came in that way.

Shipwar author Chris Miller of Tufts on governments funding the tech.

Race, all of the world's governments, from the US to Japan, to Europe to China, are pouring tens of billions of dollars into their own ship industries.

And Nobel economist Paul Krugman of Cunei on what the election could mean for US trade policy.

Tariffs don't eliminate trade deficits unless they get so high as to basically make trade impossible.

Gold Wall Street looked at a lot of questions this week, but did not get many answers, as Elon Musk threatened to take his marbles along with his Tesla and go home to Texas after a Delaware court said he couldn't take home that fifty five billion dollar pay package his board had promised him.

If shareholders, upon the board's recommendation, decide to move to Nevada, they have a right to do that, but it's not a Musk decision.

Boweling's crisis over the seven thirty seven Max and nine aircraft is far from resolved, as the government limited future production. The companies said it would take a day off to reflect on what happened, and its chief executive admitted it was at fault. We carved the problems and we understand that, and we instituted additional quality controls and inspections at Going

The earnings that came out last night were excellent earnings by any measure, They just maybe didn't meet.

The gaftiest of lofty expectations, and the Fed surprised absolutely no one by not moving at all or giving much real sense.

Of when it will.

I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that, but that's to be seen.

Then.

On Friday, US jobs numbers underscored why the Fed may be reluctant to cut rates in the near future, as three hundred and fifty thousand new jobs were almost double what people had expected and the unemployment rates stayed at

Of the markets.

Welcome back, now, Sonal Desai. She's Franklin Templeton's fixed income CIO and Peter Krause, founder, chair and CEO of Aperture Investors. So, Sonawka, why don't you give us your take on what we saw in the markets this week up to the clothes on Friday.

Well, you know, the market has been so positioned, so positioned for and it's not entirely shield on the back of walk positioned for massive early FED rate cuts that wasn't going to happen. And in many ways, what Powell said during his press conference he left the door open for potentially cutting. I don't think he should and I don't think they will. But the immediate reaction to Powell's statement was still a bit of a rally before they started,

So Peter explained one thing.

We had a sort of unusual week where we had rates up in the form of the yield and equities up at the same time.

How do you explain those two things.

Well, first of all, you made an interesting point that rates are up today but actually up relative to the week. Secondly, normally, when rates move have that big a move, the markets do actually go down. That's been the recent consensus move. But as you saw today, there are two really big.

Stocks, Amazon and Meta that were up.

Dramatically during the day, and if you actually adjust for that, I'm not sure the market was up much at all. And the Russell of course was down forty basis points. So I actually think the markets are reacting somewhat negatively to Pal taking his foot off the gas of cutting rates, But I agree with so now, and I've said for a while I don't think the FED is going to cut rates early. I think they're going to wait for

So so now I think you too are agreeing that there are going to be cuts. The question is how big and how soon? What do you expect for this the rest of the year.

You know, I haven't changed my views now for quite a while, and I was in the fifty basis point cam in this in December and powers Folk it became pretty clear that the FED would like to do seventy five. I think maybe they'll do seventy five, but it's going to be in the second half of the year. I'm not changing any of that really, because it's not that I expect inplation to run away or pick up strongly, and I just don't think it's going to come down

I don't quite an experien in Sampeter.

When you've got this kind of growth, which is very robust, and this kind of employment what we're seeing right now, why.

Is there a need to cut rates?

Why do you need to stimulate the economies through monetary policy right now?

Yeah?

I think that's a good point. I do think that we're seeing a very strong and resilient economy up and down the income spectrum. And although there are some delinquencies that are rising in the consumer world, we still have people well employed with jobs.

That are paying even more than they paid last year.

So the FED is looking that inflation, and inflation has come down from eight percent or seven percent down to four, down to three, But is it really.

Going to fall much faster?

And so I think the FED is going to be very careful about taking short rates down. And I think it's quite possible that longer rates go up from here, not down from here.

So, given what you just said, Peter, why don't people feel better about it? Because everything we see and all the polls taken, people don't feel that great about the economy.

You describe an economy it's pretty good.

Yeah, I think that's the question that many people have asked, and I myself am a bit confused about it, but I think the answer really falls in how inflation affects people's spending capability. So, yes, wages are up, but remember wages are up following a very high period of inflation, which change the ability for consumers to actually spend money. It really changed their discretionary spending patterns, and it changed what they had left over to actually use for something else.

Remember, we don't have deflation.

Prices aren't coming down, they're just not going up faster. So it's going to take some time and people are not going to feel great about it for a while.

This is Wall Straight Week.

I'm David weston Son, I'll the side of Franklin Temple and Peter Krause of Aperture Investors have stayed with us We've talked on this program, Peter in the past about the growth of private credit and private equity. It seems sometimes like the trees are growing to the sky. I know you've just gotten back from Miami talking to MFA conference about a portfolio allegation. Is there a point at which maybe we start not rushing forward in private quite so fast?

Yeah, I think we are at that point.

I think that in the last fifteen years, we've had declining interest rates, benign credit environments and very low yields, and the place where you could get more yield was in the.

Private space, particularly in private credit.

And the place where you got more return inequity was in private equity, and a lot of that was in growth investing venture capital. I think at this point we have to be more cautious about those spaces, and the liquidity coming out of those areas that you invested in has slowed down dramatically.

We know that there's a lot less M and A. We know there's a lot less.

IPOs in the private equity space. There are continuation funds being talked about in credit, so maybe your credit comes back slower than you thought so, And I do think we said this in the earlier session is that yields in the liquid space have grown dramatically, and so if you're thinking about where you're going to allocate your next dollar, would it really be in that private space?

Where would it make more sense.

To actually be opportunistic in the liquid space and find a place to actually get reasonable yields with liquidity in that area.

So so now in here from the fixed income side, how does this play out in fixed income, private credits, syndicated loans, liquid credit?

How does it play out?

So basically it is it is exactly true. For the last fifteen years, illiquidity was almost sought after because liquid liquid acids yielded so little. What I would say is today with with liquid assets, I look at high yield for example, and even with the current of compression, you are getting all in returns of something like seven and a half percent. If you look at bank loans or floating rate you know, which is a little bit even you know it's very short duration, it's looking good at

I think there's some risk in marking to market assets at the end. Oh yeah, I fully get that I don't want to see my assets go up and down.

I fully get that it's nice to smooth them.

But at the end of the day, if you actually don't know what the values are, that's not exactly a good place to be. And I also think that we've had very few periods in the last fifteen years we've had extended period of time when asset values are hard to determine. We've had short reductions and very rapid increases.

But if you go for two years where.

Your assets are kind of difficult to value, that's a tough place for any fiduciar be.

Yeah, not knowing the value maybe part of the reason why they're not distributed cash back right.

And because they don't have the cash.

Exactly and when they sold them it might not be as much as they thought. Okay, many thanks now that Peter Krause of Aperture Investors and Sonal Desi of Franklin Templeton. Coming up the race for governments to subsidize chip production around the world, We talk with Chris Miller of Tufts University, author of Chip Wars. That's next on Wall Street Week on Bloomberg.

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

What a reversal today, when Japanese manufacturers have been so brilliantly successful at selling to and in many cases even taking over American markets that practically every politician in the US is scrambling to touch our nerves of xenophobia and to find a way of restricting and weakening these seemingly

That was Lewis Rocheiser on Wall Street Week back in nineteen eighty six, when the issue was computer chips coming from Japan. Today it's Chinese chips that has Washington concerned, something laid out by Chris Miller of Tufts University in his book Chip War. We asked him for an update given the billions of dollars in US subsidies about to be announced under the Chips and Science Act.

The boom and investment in artificial intelligence has impacted the chip industry too, and today there's actually a shortage of the types of chips that are used to train AI systems.

At the same time, there have been various actions taken by the US government and others to restrict China's access to some of the machinery, if I can put it that way, with the technology to develop these chips, how effective is that?

Do we know?

Well?

I think the honest answer is that it's still pretty early in the process. The restrictions went into place in late twenty twenty two, and the goal the restrictions was not really to stop China in its tracks, but rather to slow its progress over time. And so China's continuing

A lot of these hips actually put into other products that get important. Do we know where the chips are coming from?

Well, I think that's part of the challenge. You're right to say that the US and Europe and Japan is saying we don't actually import many chips from China directly. Most of the Chinese chips in our systems are actually first sent to Vietnam, then to the Philippines and to Malaysia and some countries. Some companies don't always know the origins of every single component inside of their system, and that's why a traditional anti dumping tariff might be less relevant in this case.

It's not just the United States and China, but also I've read now about Japan actually investing in at least the precursors to some of the chip manufacturing. What is the role of Japan potentially in subsidizing some of the more advanced chips.

Well, today, Japan doesn't produce any of the most advanced ships domestically, but it plays a major role in producing the machines and also the chemicals that are needed in cutting edge chip making. And there's some really unique expertise among a handful of Japanese firms, especially in the chemicals sphere, where Japan has very high levels of market share and limited competition because they've been investing in this sphere for

That was Chris Miller of Tufts.

Elections have consequences, including for business and the economy.

When President Trump was.

Elected in twenty sixteen, markets reacted violently and turned out to be violently wrong.

But you'll remember a lot of us kind of got this wrong on election night when it looked like Trump was going to win, and initially the market crash. Then people said, wait a minute, the markets sort up again, and it kind of took off from there, and.

Right now it looks like we may get a second look at mister Trump's approach to the economy as he appears to be headed to renomination as the Republican candidate, and if nominated, would be a serious contender to replace President Biden. Some say that the Biden record on economics stacks up favorably to former President Trump's.

For the first time in history, we have two candidates that had been president, So you have a track record of what to expect. In the case of President Biden, You've had so far three years of steadiness, good growth. Market said at all time home, I think it's underappreciated what has gone on with the economy.

Others see President Biden's policies insufficiently pro growth.

People are frustrated, and it's the economic policies the Biden administration that has brought us here. Is the president's policies of paying people not to work after the pandemic, massive multi trillion dollars spending bills that drove inflation. And the end result is if you speak to people here in Wisconsin, regular folks on the street, they're getting collaborated by Bidenomics, and they want to see Washington change course.

And then you have experts like Glenn Hubbard who worry that there isn't a big enough difference between the two.

What strikes me, in looking at least at President Biden and former President Trump's policies is less how different they are than how similar they are. So in terms of protectionism, in terms of a fondness for industrial pulse, in terms of intervention in financial markets, the two men are more similar than they are different.

But whoever gets the presidential nod this year, they're going to be faced with some big issues of the federal deficits and debt. The problem is that's led us two years and years of borrowing too much.

We now have a debt that's about to be at record levels.

I think we're in a terrible place because, unfortunately, once you get to legislating, there's a lot of talk, but the talk is always divided politically between the Republicans who refuse to raise taxes and the Democrats who.

Won't deal with titlements.

I do think when we eventually get to doing this, about sixty percent or something of the increase in the debt from thousand to twenty twenty two was because of the tax cuts.

For his thoughts on what difference the election out could could make for the economy were welcome, Dowt Doctor Paul Krugman, Nobel Laureate Economics and Distinguished Professor at the City University of New York Graduate Center. So, doctor Kruman, thank you so much for being back with this. Before we talk about what differences there may be in the leading candidates right now in November, give us your sense of the economy overall and what we're likely to need over the

Okay, so we are in an extraordinarily good immediate position. I've been arguing with people who say, you know, this is a Goldilock's.

Economy, and that's that's wrong.

Goldilocks found a partis that was neither too hot nor too cold. We've got an economy that's hot where you wanted to be hot, like in GDP growth, and cold where you wanted to be cold on inflation. So this is, you know right now, is this is a lotways the best short run economy we've had since since the nineteen nineties. So what we need for the next four years is to be thinking about the long run.

Do we need to at least start to think about the deficit and the debt that's accumulating because right now, as you look at Donald Trump and Joe Biden, the two leading candidates, neither one seems to be willing to address that. By the way, this week Congress did do something on taxation which was actually actually it was negative in terms of the deficit. So do we need to address that question?

And if so, when.

You know, I'm not a complete deficits never matter, guy, but I'm not.

It still doesn't look like a first rank issue.

Despite the you know, the enormous numbers but you know, everything about America is enormous, and particularly there is a lot of the sustainability of debt depends a lot on comparison between interest rates and the economy's growth rate. And right now what we have is interest rates seem to be coming down. Growth seems to you know, productivity growth is looking really good. There are high hopes for AI.

History we're told does not repeat itself, but it does rhyme sometimes. Is there a rhyme with nineteen ninety three, because if you go back to nineteenninety three you talked to Bob Rubin about what happened with President Clinton, It's thought that we got a lot of growth out of the nineties in part because we both increased some taxes and cut some spending. Is there a similar opportunity here for pro growth policies.

I'm a great admirer of Bob Rubin, but I don't believe that story for a minute. It's just not what you what looks like actually happened in the nineties. What actually happened in the nineties was that businesses finally figured out what to do with these computer things, and we got a decade of good productivity growth because we finally figured out how to make productive use of it. And I actually don't think that Clint administration policies made.

Much difference one way or the other.

So I just don't buy that it's just And we may be approaching another moment like that. Again, the recent productivity numbers are really quite good. AI. Maybe it's either going to destroy us or or possibly give us another decade of good productivity growth. So no, I just don't that whole responsible fiscal policy was responsible for the Roaring nineties. It's a lovely narrative. I don't think there's anything to support it.

President Trump, former President Trump, has said that he would favor a ten percent across the board, not just China, across the board tariff and Infortant and actually Joe Lightehyser is advisors section. Maybe we increase that to eliminate trade deficit.

What would that do to the growth of the American economy?

Okay, Now, dirty little secret of international trade economics is that moderate tariff rates do not, at least according to our models and as far as we can tell, in practice, don't have huge growth effects. They distort consumption.

And production choices.

They do some damage, but to get really big numbers you have to get well beyond ten percent. So of course, if the goal is to eliminate the trade deficit, lightheyder to have us a surprise, because tariffs don't eliminate trade deficits unless they get so high as to basically make trade impossible. So we would be talking about much much higher tariff rates potentially.

What worries me is not I.

Mean, I think there are a lot of really negative consequences if the US does a ten percent tariff, but they have they're sort of geopolitical more than anything else.

They would mean that the United.

States is basically saying, well, we're opting out of our role as a leader of the global economy.

It would have a lot of bad effects.

In terms of the economic impact. I mean, I'm hearing talk about, well, let's have sixty percent terroriffs on imports from China, and you know, tariff roughly speaking, the adverse effects of a tariff are proportionals something like the square of the tariff rates. So as sixty percent tariff is you know, thirty thirty six percent times as bad as a ten percent TERRAF. So if we start to get into those kinds of tariffs, yeah, then we are actually talking about significant negative impacts.

Doctor Carrey, thank you so very much for being Wall Street Week. I really appreciate that. Is Nobel laureate. Paul Krugman.

Coming up.

We wrap up the week with special contributor Larry Summers of Harvard.

I'm much less prepared to declare that it's all over then, I think, Paul is that's 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 western We are joined once again this week. We're our very special contributor Larry Summers of Harvard. Larry, thanks so much for being being this. We have to start with those wow, as some people are calling them jobs numbers. They came out way above expectation. What did you make of them?

Look, the economy has been surprising on the upside for a while, so I was surprised not that the job numbers came in that way. It was a pretty broadly strong report. Household Survey Business Survey wage numbers, especially given that the weather was pretty bad in January in many parts of the country, which probably held the numbers down

And we heard from the treasure six Ary Janet Yellen this week saying she's not sure that the introducers the longer term interest rates will come back down, they may remain elevated, in part because of how robust the economies.

We also heard the FED Chair J. Powell say his concern isn't.

So much about reacceleration of inflation, but it just won't come all the way down. On the other hand, despite the wage increases, productivity is at high levels right now.

I just checked it.

I think it's like three point two percent right now.

Might that save us?

The answer is yes, yes, and yes. I welcome Secretary Yellen's recognition that given prospective budget deficits, given perspective increases in investment demand, we really don't know where neutral interest rates are going to be. I'll be interested in seeing what's in the Administration forecast when it comes out. I think one would want to be guessing that Treasury bill rates will be averaging well above three percent through the rest of this decade.

Larry, We talked with your economist colleague Paul Krookman this week about inflation and what we should have expected, and he admitted that he actually underestimated the issue of inflation. He thought it would not be as big and glasses long, and he sort of called you up by name saying he thought you'd stayed too long on the old models, that you had topreciated that this was really a once in a lifetime experience with the pandemic and the shutdown

Look, I think we're having a softer landing than I would have expected so far. We'll see how inflation settles out, but we.

Are having that.

I think Paul tends to attribute it to a whole set of stuff on the supply side. I see the largest fiscal stimulus by far since World War Two. I see nominal GDP growth rising in double digits. I see an economy that gives evidence of booming and gave evidence of booming before the supply stuff was fixed. And so I think demand is a pretty big part of the story. But yes, the outcome has been more benign than those of us who drew the implications from standard models predicted.

What's your take on what really happened in the nineteen nineties and the relationship between that ninety three Act and the tax increases and spending cuts on the one hand, and growth on the other.

Look, there's no question that the economy hit good fortune from technology in the nineteen nineties, and that's an important part.

Of the story.

But you know, when you bring down capital costs, that's when people tend to take a longer view. That's when there's more investment in technology that produces growth. And I think what those of us who were in the Clinton administration always felt was that by cutting interest rates, you could turn a vicious cycle of high capital costs and low investment into a virtuous circle of lower capital costs, more investments, more growth. Lower deficits and the cycle goes

Larry, thank you so very much. SS. Larry Summer is our very special contributor here on Wall Street Week. He's from Harvard.

Finally, one more thought author Orn Woodward says, he who controls the fool's gold controls the fool. All of us are looking for some pot of gold at the end of our rainbow, whether it's intangible wealth or in something a bit less tangible. So we pay a lot of attention to those who do particularly well for themselves, like, for example, Elon Musk becoming the richest man in the world through his Tesla electric vehicles and SpaceX satellite launch.

Elon Muskus seeing his own network jump by more than anyone. So far this year, he and the world's five hundred visious people have gained more than eight hundred and fifty billion dollars wealth.

Or the late doctor Paul Farmer realizing a lifelong dream to change the world.

People shouldn't die of a readily treatable disease because they're poor.

But sometimes, and maybe too often, when it first appears to be a truly great deal, ends up too good to be true. That's certainly what Bernie Madoff's investors learned the hard way.

This is the real tragedy. This is where the human tragedy comes in. Those people organize their lives around the fact that they had real profits when in fact, there were never any, never, any assets at all beyond that which they put in.

As did investors in Enron, Developing a new technology to diagnose what ails us through a single drop of blood seemed a god send to patients and investors alike, until it turned out that Elizabeth Holmes Fharanos was all unallowed fraud.

So government prosecutes is. This was put plainly as a case about fraud. They said it was a story about a Silicon Valley founder and executive who had lied and cheated in order to raise money from investors and at the same time deceived customers and doctors about the capabilities of Pharnos's technology.

Even Elon Musk may in the end find out that his quest for X that's formally known as Twitter leaves him with more fools gold than real gold.

I'm wondering how much Elin Mask is regretting this impassive decision to buy tweeter.

This week, we got a particularly powerful reminder of the dangers in letting our ambition or our greed get the better of us when news came out of Minnesota about a Ruby slippers caper. It appears that mister Terry Martin of Grand Rapids, Minnesota, that's the hometown of Judy Garland, bought into a plan to steal an original pair of the ruby slippers worn by miss Garland when she played

After all, there's no place.

Like that, does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.