This is Bloomberg Wall Street Week.
I mean may not have an overall recession. We're having a rolling recession. To Kanye Roll looks pretty strongly when it comes to jobs.
The financial story is that shape our work.
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, Bank of America, deebro Lair of the Paulson Institute, Len Hubbard of the Columbia Business.
School, Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
The big rally in Wall Street this week? Who gets the credit? The Fed, banks or big Tech? This is Wall Street Week. I'm Romaine Bossic in for David Weston. This week, Catherine Judge of Columbia Law School and what steper capital requirements will mean for banks and their willingness to lend.
What we really want is more lending during periods of distress, and probably a little less lending when everything's going really well.
Rock Creek CEO Asani Beschloss on why the economies on mainland, China and Taiwan are moving in different direction.
One thing that President v has created which will be hard to undo is uncertainty.
And former CNN president John Klein on the disruptive effect of AI on the business of media.
AI can be a very useful tool. On the other hand, it can result in efficiencies for the studios.
The FED appeared to score one of its first victories in the fight against inflation core CPI, posting its smallest increase in June since twenty twenty one, but the FED may hike again.
In July, it was very clear that inflation was and still is at levels that are too high for their comfort. I do think that the narrative both for the FED and also for markets will now begin to change towards growth towards employment.
Meanwhile, China faces a different problem, delytionary concerns, prompting the Central Bank to step in MEANINGSHIDA.
Going forward, the People's Bank of China will continue to provide support for small, medium and private businesses.
Media executives gathering in Sun Valley, Idaho, and One Big Deal was all the buzz a US court rejecting the US government's challenge of that Microsoft did the buy Activision. The company is now moving forward with some additional measures to appease UK regulators and finally close out that deal.
On the one hand, everyone was talking about the Microsoft's activision deal, the efforts the FTC went to appeal the decision by US district courts.
But strikes did loom over the annual gathering, members of the sag AFTRA Actors Union joining writers who have been on strike since May, making it the first time that actors and writers have together walked out since nineteen sixty. Back then, Ronald Reagan was president of the Actors Guild and Marilyn Monroe was still gracing the screen.
You cannot change the business model as much as it has changed, and not expect the contract to change.
Two and earnings kick off with a bit of a sigh of relief on Wall Street. JP Worg and Wells Fargo and City Group leading the big bank Earnings on a high note, getting a big boost from the Fed's recent rate heights, But we hit.
A hard landing. It's going to be very difficult for the banks, including JP Morgan, but that doesn't appear to be the case at least today.
A goldilocks type of week for the economy, a bit of an everything rally for equities, the S and P five hundred jumping more than two percent on the week, the Nasdaq surging more than three and the Russell two thousand index of small cap stocks coming close to a four percent game. Discretionary stocks helping to lead the advance, so too did big tech, and so too did homebuilders Pulti Group and Toll Brothers, closing out the week at an all time high, Microsoft finishing a fraction of a
percent away from a fresh record itself. But the biggest moves cross asset wise, we're in treasuries, commodities, and dollar, the US currency weakening to a fifteen month low versus a global basket of its peers, and two year treasury yields swinging more than thirty basis points from peak to trough this week, a volatility in that space that is expected to say as long as the Fed remains in play.
The big catalyst for these market moves came in the form of two big economic reports this week to show US inflation reverting back to its lowest levels in at least two years. And that is where we start today. Mona Maha John joining us right now, senior investment strategists at Edward Jones and Dennis de Busher, chief market strategists over at twenty two V Research and Mona. I'll start
with you. You look at that inflation report, particularly when it comes to consumer prices, airfares down, used car prices down, eight prices, which we've all been obsessing over for the last couple of years, finally dropping back to sound down to something that's somewhat more reasonable.
Yeah, remain Look, it was a nice week in markets for the bulls and certainly for investors and consumers broadly. You know, I'll highlight three quick things, and one, of course, is that CPI report that you mentioned, and in fact, inflation broadly surprised to the downside in both the CPI
and PPI prints. But the good news was in CPI not only headline inflation, but we did see a bit of cooling in core inflation as well, driven by downward pressure in the housing market, and even that non housing services inflation that the FED is tracking carefully started to ease as well. Number two is the Fed itself. You know, I think markets are now looking for perhaps one more rate height coming out of the FED and maybe they can stept to the sidelines after that. That is welcome news.
After putting upward pressure on interest rates for the past sixteen months, raising borrowing costs for consumers and corporations, we are seeing a resilient consumer and an economy that's holding in. There, so we have a backdrop of lower inflation, perhaps a FED moving to the sideline, and an economy that's holding up. That's good news for markets broadly.
Well, Dennis, I want to get your thoughts here on those economic t leads. I mean, because these are kind of the two big components of this economic narrative, right, whether inflation is coming down to a reasonable enough level, but also whether the economy is still unstable enough condition following five percentage points of rate hikes out of the FED.
Yeah, you bring up a really important point.
And if we have to go back to why markets have done so well, we know that.
Inflation is coming down.
The inflation appears to be coming down for now at least, not the hardware.
You know, it can come down to the two ways.
An easy way which would be associated with the soft landing, but the hard way, which be assiliunting obviously for the recession, and so it is clear that it's coming down the East way. For now, it's achieved. And part of the reason we saw this big shift in the internals in the market, so small capital performing like you know at the top of the show, retail stocks out warming deeper, cipples balancing is because the housing data stable plods and
the housing data stabilize it. Because that is the tip of the sphere when it comes to interest rate policy.
We heard from three big banks, JP, Morgan, City Group, and Wells Fargo officially kicked off the earning season with better than expected results all around. Is this a harbinger of things to come for the rest of the banking sector and more importantly for the rest of corporate America overall. Mona Mahajan is still with us over at Edward Jones and Dennis to Busher over at twenty two V Research
and Dennis, I'll start with you. I think some of the estimates coming into this earning season certainly not bullish, but they certainly weren't as bearish as maybe what we saw in the previous quarters.
Definitely not as parish previous quarters.
Hope you're earnings revisions are still running around the twenty fifth percentile.
So you've seen a little bit of acceleration that earnings revisions coming into the quarter.
And typically when that happens, you beat five about two bucks relative to estimates, and I analize, right, they will get us somewhere in the two sixteen, two seventeen rings for the year, So you know, coming in a little bit low on the estimate side, that's not too out of bounds relative to history, but not as nearly as poor.
And I was just saying early sentiment wise, not nearly as poor as we've seen.
The last three or four earning season were really bad. En upcoming in.
We got the banker in these earlier this morning, Dennis, or at least three of the big banks here. There were some upside surprises there. I'm wondering, what are you expecting overall to hear out of not just the banks, but overall the companies overall, in terms of how their businesses are holding up.
Shopping lead well.
Relative to what we've heard and the fears over the last I guess yeah, basically here and particularly since the banking crisis, when people thought following up there was going to be a significant type of financial conditions that was going to lead to a sharp curation in the economy. I think you're going to hear from companies that things are holding up pretty well, consistent with slower growth than what we've seen the last two years, but expansionary like economy.
And we'll see what happens in the future with Ernie.
We'll see what happens in the future with the economy, but for now, it seem relatively okay.
Earnings consistent with an expansion mona.
We've already started to see a lot of equity strategists and analysts are to ratchet up their expectations not only for overall aggregate earnings for the S and P five hundred, but of course you're twelve month price targets as well.
Yeah, you know, look, I think the earnings recession that we went through, and really Q four and Q one came in negative year on year earnings growth for the S and P five hundred. Q Q two earnings, which we're getting right now, could also be the perhaps last quarter that we get a negative year on year number.
And then we start to see improvement in Q three and Q four and really into twenty twenty four as well, and so as we head towards the next six to twelve months, we also know markets are pretty forward looking right now, twenty twenty four estimates are calling for double digit earnings growth. Now we will have to assess the backdrop as we head into twenty twenty four, but if we are in an environment where yields are moving lower and the economy is improving from any sort of softening,
we could certainly see a rebound in earnings growth. So some of the momentum that we've seen in markets recently could be an expression of the direction of try level of earnings over the next six months as well, So we certainly see progress there. Of course, we've moved pretty far, pretty fast, as we noted, across equities now, and so
we think some bird of consolidation makes sense. Perhaps we'll get some earnings figures over the next few weeks that give us some reason to pause, but we do think broadly the opportunity will come as we head towards the back half.
Of this year.
Yeah, and it'll be interesting to see whether some of the moves that we see in equity market actually start to broaden out just a little bit. Our appreciation to both of you monamaje On over at Edward Jones, Dennis the Busher over at twenty two V Research.
Coming up. One China, But Two Economies. We talked with us Sonny Bechelist of Rock Creek about the disappointing performance of mainland China so far this year and how different it is from Taiwan.
Who knew in the beginning of the year, that's with ais becoming so important and the Taiwan news market would do so well.
That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
One China, but Two Economies. The United States continues to go out of its way to underscore its One China policy, as Secretary of State Blincoln did during his recent visit to Beijing. Our reiterated the long standing US One China policy. That policy has not changed. We do not support Taiwan independence. We were made opposed to any unilateral changes to the statis quo by either side, even as the United States seeks to compete with that one China without coming to blows.
I also believe that the United States in China should seek a relationship of healthy economic competition that is not winner take all, but with a fair set of rules, we benefit both our countries over time.
But recently the economies of mainland China and Taiwan have been headed in very different directions. As the mainland finds it's harder than expected to come back from the COVID lockdown.
I have been a.
Little surprised with the degree of how quickly it's moderated.
China is going to need to do more stimulus.
Leading Beijing this week to undertake new stimulus measures, particularly to help its struggling property market.
There's a lot of expectation that there will be more coming from Beijing to help the property sector, but the question is what can the government actually do when there is so much debt at the local government level.
While Taiwan continues to thrive economically with the move to AI spurring on chip manufacturer TSMC and lifting the entire market.
So why is Taiwan and this bull run and can it last?
One things?
For sure, stocks have been riding on this AI wave, but the head.
Of the Taiwan Stock Exchange says it's not just Ai that is driving market strength, as.
The pace of the US is His high stowing and also the Girlball economy remain the statues. I think mostly investors, we all pay attentions. Again, I'm Peter A. Bresse and the kesh In Frost. I expect it in the second half of this year.
All of which makes the geopolitics across the Taiwan Strait just that much more complicated. And to take us through the geopondse and the economics of mainland China and its environs, we welcome to somebody who knows it terribly well. She is a Sunny bachelist. She is the CEO of Rock Creek of Sanae. You come on regular. We really value you on Wall Street. We thank you for being here. As I say, you've spent a lot of your career
dealing with and around China. Start with what I would call mainland China right now, I think that if you go back to the first of the year, people expect it to really be a rebound year for China, given what had happened with COVID doesn't seem to be playing out that way.
You're so right. Stated in the beginning of the year markets went up twenty percent. People expected markets to be up another ten to twenty percent in mainland China with all the geopolitical issues going on. If anyone had guessed, you would think Taiwan would be down and the rest of Asia would be sort of so so, and Asian would be doing relatively well. And if you look actually today, it's a very very different story. Number one, what you saw is as China came out of COVID, it has
been taking much longer. Chinese consumers were supposed to be the big fource carrying us out of COVID and sort of creating this huge growth in the economy, and they have been really scared because they went through their savings during three years and they are trying to save more.
And the uncertainties that have been created both internally and by geopolitics is getting the Chinese consumer to save more and spend less now At the same time, I should say, what happened also is that in Taiwan, for example, where we did not necessarily expect this kind of rise of
like twenty two percent year to date. Who knew in the beginning of the year that with ai becoming so important, the micro chip that is made in Taiwan would become even more important and the Taiwanese a market would do so well. Last but not least. Of course, you've seen a lot of outflows from US and European and other
global investors going out of China. If anything, the flows seem to be increasing coming into July than getting reduced, and a lot of very interesting phenomena going on on that point.
So, Sonny, as a longtime investor, you're the first one to know that markets go up, markets go down. You can't overreact to short term developments. When you look at mainland again, i'll call it mainland China for the moment, how much of this is a short term thing, do you think? And how much are there larger underlying structural factors that may hold back mainland China from the remarkable growth we've seen or the last generation.
David, I think the fact that you have twenty percent youth unemployment is a very big factor. That's a long term issue and that is not going to get affected by short term monetary policy changes. So even though at the moment the monthly policy is trying to help push the economy forward, the job creation is much less, particularly because these jobs were in the tech sector, in services in areas that have got affected and have not been
expanding as much as you would expect. The other area I think to look at in China that has been affected is sort of the old age population and the demographics that also, if you look long term, is a big issue with the aging of the population in China. With Secretary Yellans visit, we saw we went from decoupling to the risking and what the term she used last
week while she was in China was diversifying. I think every country, having experienced the issues the supply chain issues that the experience, including the US during COVID, is diversifying its sources of input and trade, and we saw for example Mexico overtake China in terms of trade. Those I think are longer term issues as countries, including the US,
diversify trade sources. There is one big positive though, looking at China, which is that they have continued to invest in their green economy, not as much as they could or should. In fact, Secretary in fact mister carry will be will be going there shortly and I think that meeting will be quite important. But even looking at their domestic economy, the Chinese are putting in a lot of
resources and investments into ev into solar. As you know, they're still the biggest supplier to the world of solar facilities as well as now starting to become the largest producer.
Of ev asny. You mentioned the demographics issues in China. Perhaps a related issue is for some time China was something of a talent magnet. I remember going over there a few years ago, and they're attracting Chinese American scientists
back to mainland China to live with their families. Is there a risk of really not altogether turning around, but actually reducing the attraction of mainland China for talent from around the world because of some of the reforms as you would put it from presidency.
I think we have about three hundred thousand Chinese students in the US, and a lot of them would go back to China, and there's a question mark as to whether that flow will be back to China or back. Some stay here, some go in to other countries for exactly the reason you said. For example, Ai, which is a very exciting area for some of the scientists you are talking about, is heavily government controlled, right, So if you are working for the largest state owned enterprises and
under direct government supervision. You will be you will be benefiting from working on AI. But if you're working in the private sector, in some of the private sector companies or the ones that we're working with the venture industry in the US, that is something that is now think of the past, we've seen that a kind of cooperation between venture in the US and venture in China.
Duendo.
It's not gone, it's still there is still some going on, but at a very different level. So that will definitely impact the flow of the brain flow as it were into China. Asta.
It's always so good to have your walls. Rybick, thank you so much. As ny Rshalist, she is the CEO of Rock Creek.
Coming up.
Media at a crossroads as leaders meet in Sun Valley in the middle of a strike with more uncertainty than they've seen for a long time. We go through it with Streaming and Cable executive Jonathan Klein.
They know something is coming their way, they just don't.
Know what that's next. On Wall Street Week on Bloomberg, this is Wall Street Week. I'm David Weston This week, media moguls had their annual Allen and Company meeting out in Sun Valley with the fundamentals of their business more uncertain, perhaps than ever before, as people rush to a streaming world with uncertain profits, the basic cable model is melting out from under them, and strikes are starting to shut
down their businesses all together. To take us through where the business of media is heading, Welcome down, Jonathan Klin. He's a former PRESIDENCYNN now a media entrepreneur whose latest venture is Hanging Media, a sports streaming platform. John, Thank you so much for being with us. Thanks for having me so you know this business over a number of years from the point of view of cable as well
as now streaming. You understand it. Give us your sense of how fundamental the shift is as we, I guess, are moving away from cable pretty quickly into this streaming world.
It's all exploded right in front of our faces. There's more change hitting media today than ever in the course of either of our careers. It's all accelerated so much, and ultimately it comes down to consumers embracing the idea that they really do have total control in the media ecosystem.
One of the things that strikes me is I certainly watch streaming services, but if you asked me what service it was on. I'm sorry to say often I couldn't tell you I know what the program is, I don't necessarily know what the services. What's the role of brands. We used to know ESPN, we used to know CNN. I'm not sure if we know the brands and streaming as well.
The strongest brands today are the shows themselves and often the creators.
You know.
I was the media consultant for Succession on HBO.
Congratulations on them.
They were an incredible group. I mean Jesse Armstrong, who was the creator and show runner, a phenomenal guy and a wonderful manager for all of the managers who might be watching this, really understood how to empower a team
to yield amazing results. I mean, no ego there, but he is sitting pretty Because if you are a streaming service witnessing twenty four percent churn year over year, you need retention, and shows like Succession or White Lotus or d and or or pick them, they are retention magnets. That's what keeps users there. That said users are completely promiscuous.
I just saw a survey I think it was Publisher's Clearinghouse to the survey, and they found that only less than seven percent of viewers plan to keep the subscription service that they are currently subscribed to. So what that means is consumers completely understand their ability to float from service to service in search of the shows that they want.
But does that suggest, as we would call in the financial world, of maturity mismatch. On the one hand, you have to make long term commitments to creators, to the actors, the writers, the producers, tens of millions, hundreds of millions of dollars on these series. At the same time, on the revenue side, you don't have the assurance of the cable dollars coming in. And think about this.
Added to that, the most popular network on television today is YouTube. Everyone's smart TV. You power it up. You can watch not only traditional broadcasts, but you can watch internet chat. So YouTube has something like one hundred and sixty million regular viewers. Their viewership dwarfs Netflix, Disney plus Max combined.
Let me add a further complication of this, and that's artificial intelligence. Right now, we have the writers on strike, we've got issues about SAG after whether they go out, and as I understand, artificial intelligence and its role in the creative process is key to that element. What is artificial intelligence likely to do to all of this?
So AI and I ran an AI company that Apple acquired a couple of years ago and it's now Apple's Media Intelligence division. AI can be a very useful tool to creators, enabling them to make projects that look every bit as good as the most lavish, high end productions on any of the services, which is going to unleash another tide of creativity. On the other hand, it can result in efficiencies for the studios and the networks, so they can outsource some of the creative process that.
Jonathan Klein, he's the former head of CNN and now a serial media entrepreneur.
The problem is they have to sell off assets in order to keep their capital up. In the bank's shrink and is their asset based shrinks. They can't loan out money, and that's the real problem because banks are contracting and the marginal borrowers shut out, and that kills the economy.
To take us through the issues banks face. In twenty twenty three, we welcome now Catherine Judge. She's professor at Columbia Law School. So, Kate, thank you so much for being back here on Wall Street. We great to have you before we get to the question that Marty addressed about whether it's going to affect lending or not. First of all, tell us why did Michael Barr think he needed this at all? What's the issue that they're addressing.
So a couple of things.
One is, we still haven't fully implemented Basil three in the United States. So there's been a lot of conversation for a long time around Basil three end game and helping to bring the US into conformity with some of the international standards they degree to. But Michael Barr has gone further. Price sher Bar very shortly after taking office said he's going to engage in a broad, holistic review
of capital requirements. There's a whole host of requirement that we're put into place in Dodd Frank modified somewhat since then, and he wanted to take a more comprehensive look of how they work together, how well they were working, and the changes that needed to be made. So what the speech was the summary of what he sees as the problems and how he wants to proceeed. And it is going to mean more capital for all the large banks.
Let's go beyond the banks and the effects of this potentially and go back again to what Marty's Wige said, what Randy Quarrels is saying now. I talked to Mike Brian moynihand at Bank of America two free weeks ago, and he said, it's a very simple thing for Bank of America. For every one hundred basis points increase in the capital requirements, it means one hundred and fifty billion dollars less in loans. Does that sound right? And does that really have an effect on the real economy as it were?
Again, a bank CEO is going to know better than I'm exactly how those trade offs are happening. Everything with a little bit of grain of salt. There are meaningful trade offs, but two important qualifications. So first, when banks pull back up, so first it's hard to know how much acually going to pull back on lending.
When they do pull back on lending.
Another challenge that arises is not that that lending doesn't happen, that lending moves outside of the banking space to less regulated domains. So a lot of what we have to pay attention to is where these loans are being made. But the other core thing to note is not all lending is of equal social value, right, What we really want is more lending during periods of distress, and probably a little less lending when everything's going really well and
assets are potentially inflated. And so one of the things we know from history is that better capitalized banks tend to be more willing to make loans during periods of distress, which is when we most need that lending. So my guess is by share Bard's response would be, even if we have a little less blending during the good times, we're going to have more lending when we most need it during the bad times, in ways that are going to make us overall better off.
Kate, I'm not going to ask you to predict the future necessarily, but is this possibly a candidate for one of those times we're going to need a little more help. We're just going in a bank earning season now this week and next week, and there's a lot of anticipation about watching exactly default rates, delinquency rates, reserves being taken, particularly in the consumer areas. There are a lot of concern that we're going into one of those difficult periods.
What are you expecting? What are you looking for?
I think I'll be looking really closely at what we actually see in terms of the productions, right, So we want to know what the default rates are looking like, what is the rate at which they are accelerating. But a lot of what we want to see is what are the projections that the different banks are making regarding how much additional pain they see coming down the road. I think we're certainly going to see some challenges, and
the question really is going to be bad magnitude. You know, we're helped a little bit by some of the recent inflation data and hopefully some stabilization and the economy which would mean balancing out and a little more of the soft landing, but that can't be guaranteed, so there's still going to be a lot of noise in all the figures.
But part of what we're going to be trying to figure out is is there a possibility not just on the employment side, but the employment side as it interacts with the lending and the credit of the ability of getting through all this.
Okay, Kay, thank you so much. Always great to have you on Wall Street Week. Really appreciate that's Katherine Judge Supers, Professor at Law at Columbia university coming up. Trying so hard to get into the club that just doesn't want you. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Well Street Week with David Weston from Bloomberg Radio.
Finally, one more thought. I refuse to join any club that would have me as a member, so joked Groucho Marx. But these days some of those clubs are getting pretty picky. Take the Club of NATO for example. Sure, they moved this week to admit two new members in Sweden and Finland, even though if Turkey had some doubts right up to the end.
Under ratification of Sweden's membership does not mean the end.
Of cooperation with Turkeia, far from it.
And though they let two more into the club, they gave Ukraine something of a cold shoulder, saying they will consider it somewhere down the road without any indication of when, which didn't make President Zelenski or his foreign minister any too happy.
These decisions they make our path to NATO shorter, and they could have done it faster too if there was a clear indication when the invitation to Ukraine would be extended.
And then there's the Club of the Financial World, which recently voted long term member Crispin Oday off the island for allegations of some pretty odious conduct.
We're in the process of moving away from that.
Business and active as short sellers have never truly been embraced by the club of financial players, something felt powerfully by Andrew Left, who's under investigation by the Department of Justice and the SEC. People think there's just like underground network of short sellers who try to ruin companies or anything like that. It doesn't work like that. But whoever thought that the world of affordable housing would itself start
to act like an exclusive club. We all know we don't have enough existing houses for sale.
The new home.
Market is benefiting from a very severe shortage of existing homes for sale, and that makes it awfully difficult for ordinary people to afford a house.
The post single multi in house prices.
You know, I do think we have an affordability issue that needs to be resolved one way or the other, which could lead some as fire homeowners to take some risks they probably shouldn't a magnificent new home that they bought for a song who says they can't have it all, But that assumes they can get someone to sell in the house in the first place. This week comes news of the Nimbi that is not in my backyard phenomenon coming to none other than Levittown out on Long Island.
Levittown was a series of housing golls built by William Levitt after World War II for returning vets. The whole idea was affordable housing for eighty four thousand people, mass produced, government subsidized, and with the price of just seven nine hundred dollars a house. But time has moved on, and with it the price of houses in Levittown now averaging over five hundred and seventy five thousand dollars, helped by
local restrictions on multi family residences. While New Jersey allows about twenty five new apartment buildings per thousand people a year, San Francisco builds about sixteen. Out of Long Island, the number is just two point three multi family units per thousand per year. It turns out that all those residents have won it's affordable housing are pretty picky about their neighbors. Get off my lawn. That does it. For this episode of Wall Street Week, I'm David Weston This is Bloomberg.
See you next week,