This is Bloomberg Wall Street Week.
And we may not have an overall recession, We're having a rolling recession to conge 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, 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.
Taking different paths. China slows down as the United States heads toward a soft landing after all, and Morgan Stanley fires on all cylinders while Goldman reboots. This is Bloomberg Wall Street Week. I'm David Weston. This week contributors Larry Summers of Harvard and Steve Rattner of will It Advisors on what generative AI could mean for the economy and for investors.
I have a suspicion that AI is coming for the cognitive clash.
History is probably still on the side that we will find our way through this in a positive way.
Oh And Thomas of Boston Properties on just how bad it could get in commercial real estate.
The sentiment is worse than the reality that we're experiencing.
And Dennis Arfa of Artist Group International about what Taylor Swift's billion dollar tour means for the business of music.
She's raised the bar, she said, a new bar.
Global.
Wall Street spent the week looking two different directions as China economic numbers once again pointed to a disappointing year.
The private sector is a big part of the Chinese economy. They're just not spending or investing like they used to, and.
Kris Delina Giorgieva of the IMF warned about what that could mean for the rest of the world.
In a slowing down, of course, affects Setia, affects the worlds.
But at the same time that the numbers seem to be getting worse in China, they continue to point towards strength in the United States, leading Treasury Secretary of Yellen to say a US recession may be off the table.
I don't expect a recession.
I think that we're on a good pass to bringing inslation downs that.
Stronger than we saw at US economy helped most of the big banks do better than we expected on their earnings, led by Morgan Stanley, with CEO James Gorman chalking the success up to three basic things.
The combination of really high conservative capital levels, pl vious.
Organic growth within a couple of cool businesses, and very high diven end yeok. But things weren't quite as rosy over at Gold and Sachs, with reduced profits in part because of challenges in the commercial real estate business.
They have about twenty eight billion dollars in loans in the commercial real estate space, so that's about fifteen percent of their total lown portfolio.
And CEO David Solomon admitted that the bank is going through something of a rebuilding period. We're making tough decisions
that are driving the strategic evolution of firm. Given both these factors, that should come as no surprise that we're going to a period of lower results through it all, The S and P five hundred continued, it's surprising march upward, adding another seven tens of an percent to end the week at forty five thirty six, way above where the Bloomberg elves had been, although in fairness, the Elves have been taking their median estimate up now indicating a forty
three hundred SMP by the end of the year. The NANTSAC didn't do quite well, giving up just under six tens percent, while the yield and the tenure was just about flat, hanging out at three point eight three, though it did dip as low as three point seven three on Wednesday and then flirted with three point eighty seven late on Thursday. To take us through the week in the markets and what investors should make of then we welcome back Sarah Malak, she's Nouvene chief Invents one officer,
and Christina Hooper and Vesco chief Global Market Strategy. So welcome to both of you. Thanks for being back with this. Let me start with you. As for Christina, what did you make of the week of the markets?
So I was happy to see a continued broadening in markets. So we didn't see tech do well, but that's okay because there was more participation from a variety of sectors. So I think in general this is a fairly healthy environment, but we should expect that it's not surprising if we get some kind of pullback we've had a strong rally this year, there should be or there should likely be, a digestion period over the coming months, So a.
Broadening in the market. Do you see that as well, Sarah, We actually at Bloomberg have a chart indicating the relationship between small caps and the S and P five hundred, suggesting is a bigger divergence that there been in twenty years. Are you seeing a broadening of the markets or not.
Well, there's three reasons why the bulls beat the bears again this week. One is broader participation in the indexes, Second is inflation, which is continuing to moderate, and third, of course is earning seas and so participation rate for everything outside of those top ten technology socks has been very strong since June. First, that's a healthy sign for the markets. Moderating inflation with CPI and PPI coming in
under expectations is another positive. But we are still concerned about wage inflation and core inflation, which remains above the FEDCE target.
So sure, we're still early on in the earning scenes so far, so we'll have to find out what actually happens. But where are you in the S and P five hundred by the end of the year.
We still think there's upside as long as employment markets remain strong and the consumers keep spending, and you tend to see that when people are comfortable with their jobs, they will keep spending money. I think the market still has upside if that's the case now. I do acknowledge sixteen months of monetary tightening, including what we think is one more rate hike next week until and then we're
done with rate hikes for a while. But all of that putting together, as long as we don't see a recession this year, which we doubt that we will, I think the markets keeps climbing higher. Technology. I wouldn't count that out either. It has a lot of tailwinds like lower inflation, heels that are moderating, and artificial intelligence. I think tech sucks also will continue to move higher once they can.
Solve what eight David.
I don't disagree with Sarah. I think after that digestion period that I talked about and the potential for a modest pullback, what we're likely to see is some improvement in the S and P five hundred by year end. And I would argue that that is being fueled by what I will call a bumpy landing. I don't think it's a soft landing, but I don't think we go into any kind of significant, broad based recession. We're also
going to see history help us. What we know is that when the FED stops hiking rates, typically in the one year period the two years after the end of rate hikes, that is when we tend to see good performance, strong returns, usually from the S and P five hundred.
I don't think this is going to be different this year, especially since this time around, this kind of downturn is a job full downturn, and so we see the consumer continuing to spend, as Sarah mentioned, because they have jobs and they can spend, and with inflation coming down that also helps helps with discretionary spend.
If it is summer, it is time to catch some live music, and this summer, the biggest live music that there is out there comes from Taylor Swift, whose Eras tour is expected to bring in a billion dollars. Welcome now, Dennis Arfa. He's head of Global Music at IAG. He has represented artists such as Billy Joel, Metallica, Rod Stewart, and many others. Thanks so much, Dennis for being with us appreciated. So we have a sense as fans, as
people who follow Tyror Swift that she's really big. But for the music business, how big is she?
Well, what she has accomplished with her tour is unprecedented. Never before have we ever seen an artist put multiple stadium shows on sale in the same city and blow them all out on the on sale, and that's never happened. And so she's raised the bar, she said, a new bar, because now that somebody can play whatever I believe it's fifty one stadium shows and sell it out on the on sale is incredible. It's what I'd call a beatlesque.
It's what we would.
Have expected the Beatles to do had they been touring in prime time as today they would kind of we would expect to have that same kind of result.
So we talked to investors. Here give us a sense of the economics of this. You refer to the Beatles. My understanding for reading about it is the economics were different back then, that a lot of the economics were driven by the records, the old LPs that we bought. Not so much anymore when we talk about perhaps a billion dollars in this tour, where does that money come from? How does it break down?
Well, it breaks down from ticket sales and then the additional moneies that come from ticket sales, platinum tickets, VIP tickets, merchandising as a big gradient sponsorship, you know, so those are kind of the things that bring up the dollar amounts. But it's ticket sales is the base.
We're just recorded music fit in anymore.
Well, you know, today you can have a record that's number one and be one hundred thousand or fifty thousand units. Twenty five years ago, you know, many artists were selling a million, million albums, million records, you know, on release or you know, it was it was more common. So the album sales are diluted and the record sales are
diluted in comparison to what it used to be. I mean, there's artists, whether it's the Eagles or Billy Joel and twenty four million, twenty seven million, Michael Jackson the Thriller, those numbers really don't exist, and if they do, they're really aberrations. The Adele success to Taylor Swift's success, those are our that really wasn't the case twenty five years ago. I have a lot of gold records and platinum records on my wall, and some of those artists you don't
even know who they are. And today you know, if you did twenty five thousand in the week, you could end up being in the top ten.
Okay, Dennis, thank you so much for being on Wall Street Week. That is Dennis Arfa. He's the founder of AGI. Coming up everywhere return we hear about problems with commercial real estate. We'll talk with the head of the largest public and traded developer of high end office space in the country, Owen Thomas of BXP.
Remote work is like a benefit, it's like compensation. You have to meet the market.
That's next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. This week brought another round of bad news and commercial real estate from Goldwyn Sacks sing a four hundred and eighty five million dollars it from the property market to news. Have yet another big mortgage default, this one for two hundred and twelve million dollars on an Atlanta office tower owned by Star would Capital. To put it all in a broader perspective,
the good and maybe even the not so good. Welcome back now, Owen Thomas. He's chairman and CEO of XP that is the largest publicly traded developer of high end office space in the country. Own always great to have you with us, as I say, and you know, there's so much bad news in commercial real estate. Put in a larger perspective exactly where we are at this way? What are you seeing in your business particular in terms of occupancy rates? Are people really coming to the office yet?
Yeah, Well, David's nice to be with you. I would say in summary that the sentiment is worse than the reality that we're experiencing. So let's talk a little bit about usage of buildings. There's a steady stream of corporate announcements going on right now. If companies returning to the office like Amazon did on May first, companies that were in the office three days a week moving to four days, even some companies saying we're going to evaluate all new
employees based on your office attendance that you're in. So you're seeing more and more of this. I think CEOs all want more in person work. They recognize that remote work is like a benefit, it's like compensation you have to meet the market, but it comes with a real cost of productivity and culture.
Are you seeing your buildings though, and actually people showing up because we have things like castle card reporting, it's still like fifty percent in Manhattan. Are you seeing it move up?
So the building we don't use castle systems and a lot of the landlords that we compete with don't, So I know the industry uses their data, So I'll tell you what we're experiencing. So in New York and Boston, Tuesday, Wednesday, Thursday is more or less at pre pandemic attendance. I think Monday's about sixty percent of that peak and Friday's
probably less than thirty percent of that peak. The West coast markets where we operate, Seattle, San Francisco, and LA they're probably fifty percent of all those known or so well behind.
What about repurposing some of these others buildings because we've heard a lot about that and whether we're residential or I think you've been big in life sciences? Actually haven't you at VXB?
Yes?
How's that going? Is there too much of a move into life sciences? Are you seeing a glut?
Yeah? Well, let me talk about the repurposing. We definitely have repurposed several office buildings successfully into life science, and we've done it very carefully in some of the premiere life science markets in the country. But on the residential conversions which you asked about, this is something that theoretically makes a tremendous amount of sense. We need more housing in our cities. We need less obsolescent office buildings, we need more real estate tax revenues, we need more activity
on the street. And when you repurpose an asset, the carbon footprint of doing that is much lower than demolishing and reconstructing. However, there are obstacles to doing all these things. Regulatory zoning requirements, residential zoning versus commercial zoning, physical requirements. Building has to be empty, the depth of the buildings. Residential needs more light and air than office, and many
office buildings have deep floor plates. And then financial you know, to do a successful conversion, the office building has to be contributed at something pretty close to land value. So there it makes a tremendous amount of sense. There are a lot of obstacles, but I would think about it this way, David. There are four hundred million square feet
of office space in New York. If one to two percent was converted, that's four to eight million square feet of new housing, and it's also probably you know, five to ten percent of the vacant office building, so not a lot, as a percent has to happen for it to be meaningful.
You raised the geography question because you particularly are obviously in Boston, but also New York, San Francisco. Some of the cities have been hit a little harder when it comes to residential I'm sorry, office space. Are you thinking about going to other places? We hear a lot about Austin, we hear about Miami, we hear about Florida. Are you thinking about expanding into the geographic areas well.
We're very happy with our footprint. We believe in having real estate where they are barriers to new supply and also knowledge clusters of workers, and we think our cities have those. There's clearly been some migration to the Sun Belt, and there's been strong growth in the Sun Belt markets,
but there's also been a lot of development. If you look at the vacancy rates in many of the Sun Belt cities, they've gone up very significantly over the last year to eighteen months, and in many cases are above the vacancy rates in the cities where we operate when.
You're in a particular position, which is a publicly traded company, the largest publicly traded company when it comes to high end office buildings, which means you have a lot of resources, access to a lot of resources, and you have to there's a marked to market every single day in a sense that's affected your stock like every else's. As you look at it right now, do you see opportunities? I mean, are there bargains out there, because in fact there are
problems getting financing, the prices are coming down. I think there are.
We So for example, we launched at the end of last year a billion and a half dollars of life science development in East Cambridge. We're building a six hundred plus thousand square foot lab building for AstraZeneca at attractive yields to our shareholders. We're also converting another significant office building in East Cambridge to life science for the Broad Institute, also at attractive yields. So those are the types of
things that we've been investing in. But I think as this market evolves and there's more pricing, discovery and a reset, I do think it will create great opportunities for a well capitalized player like BXP.
Thank you so much, Always a treat to have you with us. That's Owen Thomas of b XP. To everything there is a season, but sometimes that season can last pretty long. It's the summer of everything old being new again. We're a year away from the true start to the next presidential race, and a lot of the focus is already on the age of the two front runners, as former President Trump, a spry seventy seven year old, looks to reclaim the White House from the more senior President Biden,
clocking in at a mature eighty. But then again, Senate Minority Leader Mitch McConnell beats them both at eighty one, and some of those after mister Biden's job aren't too shy about showing off how useful and vigorous they are. From Robert Kennedy Junior doing bear chested pushups for the camera at age sixty nine, it's a good boy to the baby in the group. Forty five year old Miami mayor Francis Suarez demonstrating he can run all over town in a tight T shirt and shorts. I'm going to
run for present. It's not just Washington where the mature are showing their staying power. Bob Iger retired as CEO of Disney at age seventy after fifteen years running the company, only to come back for return performance with a contract that now will keep him in charge until he's at least seventy five. This isn't really a huge surprise, right that his contract has been renewed at this point. It's incredibly enticing, I think, and very tempting to keep him
on board. But Bob is just the right age to deal with. Some of the leading men driving the box office this summer. From Tom Cruise at sixty starring in yet another mission Impossible, I don't accept that. To Arnold Schwarzenegger at seventy five saving the world in Foo Bar I'm retired. To Harrison Ford returning as Indiana Jones at age eighty. I've been looking for this all my life. But wait, there's more. The star of what may well be the hit movie of the summer tops them all
at the age of eighty three. Yes, eighty three years old, and she is a leading lady. I'm talking, of course, about the one and only Barbie. You might say, no, Barbie is only nineteen. Well, that is the age she was when she first appeared.
My Barbie Dull is really.
But that was back in nineteen fifty nine. Since then, she's come back again and again, including for the Millennium, when she made a guest appearance on Wall Street Week with Lewis Rockeiser for Christmas back in two thousand.
Barbie is stating another of her periodic comebacks, Betell's Millennium Princess version as a hot seller this season at forty dollars.
And now Barbie is back bigger than ever in her own blockbuster movie as a thoroughly mature eighty three year old, something that even Barbie herself may not want to think too hard about. The best day ever. It is the best day ever.
So is yesterday, and so is tomorrow. In every daypnurship.
Forever, you don't ever think about nine.
Here's to eternal use coming up. We're told the generative AI will change all of our lives in ways we just can't imagine. We put together a special Wall Street Week roundtable of Larry Summers and Steve Radner to give us an early read and the possible effects of this revolution on macroeconomics and on investors.
Here's a substantial chance the AI is going to be much more of a threat to IQ than it is to EQ.
It is the cognitive classes, as you call them, who are most at risk.
This is Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Artificial intelligence. We may not yet know exactly what it is, even though the technology isn't all that new, but everyone agrees it's going to be huge.
We don't know yet all of the different applications that are going to come up.
Well, you're seeing that just.
Swipping the past six months is a revolution.
With Julie's Sweet of accenture saying just about all executives believe it will change their world.
In fact, ninety seven percent of executives and a recent survey that we did have said they believe that Jenna I will transform their industry and their company, leading.
Those funding startups to shift their investments. With Pitchbook reporting VC's last quarter spend less on crypto and digital assets than at any time since twenty twenty, while investing more in A than crypto even at its peak. Hopes are high the AI will make our lives better.
We'll also see AI coming more and more to the forefront, both to help folks say productive and from a security perspective.
But as with all powerful tools, there are also risks involved. With the head of Google's Deep Mind calling for more work on guardrails.
The number one thing that needs to be done right now is to put more investment into AI safety research and understanding what these systems can do and what God wills that we therefore should have.
And Elon Musk urging the government to step up to the challenge. I'm in favor of AI regulation because.
I think advanced AI is a risk to the public.
But chat GPT pioneer Sam Altman warns about the difficulties. Global regulation is hard.
You know, you don't want to overdo it for sure, but I think global regulation can help make.
It safe, leaving us all with some difficult questions about how to get the best of what artificial intelligence promises and yet manage the risks. To help us begin to explore some of the questions we have about AI, welcome now our special contributor Larry Summers of Harvard and Steve Ratner, Chairman and CEO of will It Advisors, which manages the personal and philanthropic assets of our founder and majority shareholder
Michael Bloomberg. So welcome to back to both of you. Steve, let me start with you, because you wrote a piece in The New York Times that a lot of us thought was quite thoughtful about this, making the point of part this is not a new thing. You like the seventeenth century their questions about looms give us your sense about AI the opportunity to offer us and some of the resistance to it.
As I wrote in the piece, I think that that economic growth and prosperity and better living standards for everybody in the world, no matter who they are, where they are, depends on increasing productivity efficiency at work, and in my mind AI it may be a quantum leap. We don't know that yet, but as part of a continuum going back to even the thirteenth century. I wrote about all that piece briefly of improvements and in productivity and getting those into the hands of the workers so that people
can have a higher standard of living. And as part of that you have what Trumpeter famously called creative destruction. You have some jobs that are lost and other jobs that are gained. We had four hundred and fifty thousand telephone operators in this country in the nineteen fifties. You tell me the last time you talked to a telephone operator, we had close to two million people. I assume most of them women classified as typists. That's not even a
job category anymore in the BLS. This is all things that have happened. And alternatively, we've developed millions of jobs in technology industries and finance and other sectors that have actually been helped by the development of technology.
So Steve, of course is an investor. Larry, you were a macroeconomist. As a macroeconomist, is Steve on the right trail about restoring the growth of productivity which has dropped off? As Steve pointed out his piece, it really has dropped off significantly.
Steve's right to be four technological progress and to recognize overall it's through change and evolution mediated through markeats that life has gotten so much better. And it's all right, just one thing. In the nineteen sixties, ninety six percent of American American men twenty five to fifty four were working, and only four percent were not. Today it's more like fourteen percent.
Are there things we should be doing right now that we fail to do with automation and with globalization, to think about those distributional effects potentially of AI to make sure that we bring more people along with the progress.
Absolutely, I don't think actually, Larry and I really disagree. I understand the problem he's talking about. It actually relates to automation a lot, and also to trade. And where I think, frankly, the economists Larry may jump down my throat for this part. I think the economists got it wrong on trade, which is similar in a lot of respects to automation or other technological improvements in terms of its impact. Is that trade had huge macroeconomic benefits for
the country. We missed the macroeconomic impacts those workers in Flint or Detroit or in Ohio. Some of their jobs were and I actually just read something the other day, you know rough Justice. Maybe half their jobs were lost to automation, the other half were lost to trade. And we had this little trade adjustment assistance program which basically did nothing. And we have not really done a great job as a society both in getting the benefits of
technology into the hands of everybody. There's been this lack of wage growth commensurate with the productivity growth over a fairly long period of time now, as well as individuals and finding them things to do where they can be more productive and happier.
Lurie, what about it? Did the economists, and yes, the policymaker in Washington, it sort of let us all down with respect to both automation and trade.
We should have done more to cushion the various changes associated with trade. I agree with that, I'm not sure I agree with Steve's quantification, and I think that a full calculus on trade has to recognize a large number of benefits in terms of jobs created and in terms of real wages enhanced. But that brings me to the other point I wanted to make about AI. And I don't know for sure about this, but if my suspicion
is right, it's very big. Most of the technological changes we've had before came for working people doing relatively routine things. They were automatic ways of picking cotton. It came from agricultural workers. They were things that replaced typists or telephone operators. As Steve mentioned, I have a suspicion that AI is
coming for the cognitive class. And part of the reason and you're seeing such hysteria now, is that it's the people who write articles and their friends, the people like the three of us, who are more at risk from AI competition than has been the case with most of the technological innovations in the past. I would say that there's a substantial chance the AI is going to be much more of a threat to IQ than it is to EQ.
It will be a very long time before AI will replace many of the kinds of direct physical work. Think of working in a garden, for example.
So I have a suspicion that the distributional consequences of AI for the bosses versus the boss may be very different than the distributional consequences of many of the other technological revolutions, and that affects how bosses are going to think about it in profound ways. They're going to be much more scared, and on the other side, may be more benign from the point of view of some of those who've been traditionally left behind.
So Larry, I agree. I agree with that.
I think it is the cognitive classes, as you call them, who are most at risk. I might make a dicis I'm not sure. I would think about it as bosses and boss and I'll use it but I will use this historical analogy to give us a little bit of hope. When I started on Wall Street as a young investment banker, I had nothing. I had an early HB twelve C calculator in my hand. We had no EXL we had no computers to speak of, we had know nothing. All of our spreadsheets were done by hand. They took a
really long time. They had to then be typed up. We'll put the type of societ and then if I wanted to make a change, I had to start all over again. And now that can all be done with the click of a mouse with an Excel program by anybody with a small personal computer. And yet the number of people doing what I did forty years ago when I started on Wall Street has multiplied since then, and so it became a productivity enhancing tool, not a job
destructing destructive tool. I'm perfectly prepared to believe that this may come out a different way. All I'm saying is I don't think we know yet, and I think history is probably still on the side that we will find our way through this in a positive way.
Many thanks to Larry Summers of Harvard and Steve Radner of Willet Advisors coming up, has the strong dollar run its course? We'll go through where we are and how we got here. That next down 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. The US dollar had been on something of a tear, recently hitting its peak last September, driven by all those rate hikes and expectations of more to come. But since then it's given up over five percent, with prospects that the Fed may be nearing the end of turning up the heat, and JP Morgan warned this week it may get worse from here, but it's still nothing compared to what Lewis
Rickhauser was looking at on Wall Street weeek. Back in nineteen ninety three.
The American dollar repeatedly dived to new postwar lows against the Japanese yen, fast approaching the once unthinkable level of one hundred yen to the dollar, and one Japanese financier confided to me that the next logical step would be to revalue, knocking off the last two zeros so that one yen would equal and perhaps even exceed one dollar.
Never mind that many amus seriously questioned the wisdom of a succession of our own governments whooping the yen higher and the dollar lower while beating on the Japanese to open their markets wider.
To take us through where we are today with the dollar and where we may be going, we welcome back Bloomberg International Economics and Policy correspondent Michael McKee.
Unfortunately for mister Ruchiser, the dollar continued its dive in nineteen ninety five, reaching the once unthinkable level of eighty yen. That was back in the days when American consumers seem
to be buying everything Japan could manufacture. The slide wasn't arrested until Robert Rubin, who became Treasury Secretary just as the dollar reached its NATI, was able to hammer home a new mantra that a strong dollar was in the best interests of the United States, and since then, as you've often heard, markets go up and markets go down. By nineteen ninety eight, the yen had weakened so much the US was willing to join with other G seven nations to strengthen it. Why well, for one thing, the
euphemisms strong and weak are quite misleading. There are advantages and disadvantages to both conditions. If the dollar appreciates, it means foreign goods are cheaper to buy. That helps hold down inflation, which means interest rates can stay lower than otherwise necessary. But it also means American exports cost more overseas. If the dollar is depreciating, those exports are cheaper and US companies can sell more. More foreign tourists can afford
to visit, and American assets become more attractive to foreign buyers. Now, some politicians worry about what they call a week dollar, and it has been depreciating. The dollar rows because the US economy has been much stronger than others, and the FEDS raised US interest rates higher than other central banks. With the Fed almost done, that's changing against many currencies. Currency strategists forecasts some dollar weakening, but no crash. It's
still historically strong. A drop may disrupt some carry trades and other strategies, but it's not necessarily a bad thing for the US. Just sounds bad.
David, thanks to Bloomberg's Michael McKee. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week,