Bloomberg Wall Street Week - June 9th 2023

This is Bloomberg Wall Street Week.

I mean may not have an overall recession, We're having a rolling recession to kind of role looks pretty strongly it is when it comes to jobs.

The financial story is that shape our word.

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

The eyes of the most influential voices.

Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, deebro Lair of the Paulson Institute, well then Hubbard of the Columbia Business School.

Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

A whole lot of smoke and fires to match, some being started and some being put out. This is Bloomberg Wall Street Week. I'm David Weston. This week Bridgewater founder Ray Dalyio and economic historian Neil Ferguson on where China is headed.

There is not a winner or a loser.

I'm not saying there's any guarantee that the United States is assigned that winds Cold War two.

Pete Savros of KKR on a different approach to private equity.

This is a superior way of operating a company in every perspective.

And Bank of America CEO Brian moynihan, I'm saving money with ai Way.

I really think his near term helpful is a computer programming development.

Whatever the rest of Global Wall Street was doing this week, all of us in New York were looking skyward at the worst air quality in the entire world, all because of forest fires in Canada.

This is an unprecedented in our city.

In all New York should limit outdoor activity to the greatest extent possibly.

And while firefighters in Canada were trying to put out the fires there, things were heating up in the South China Sea as a Chinese Navy warship came close to colliding with the US destroyer in the Taiwan Strait, even as Secretary of State Blincoln planned that delayed trip to Beijing to try to take the temperature down a bit.

So since I think has A Russians could involve President changing because the United States looks to resume high level communication.

The PGA shocked everyone by trying to put out the fire in its relationship with Saudi Arabia's live Golf, leaving people like Mark Lazry wondering why.

Why did the PGA to do this? It's clear why I lived in it. A week ago, day ago, a year ago. That was the devil, and today they're your partner.

But while so many were trying to tamp the fires down, some were getting new fires started, like sec Shared, Gary Gensler going after crypto platforms Finance and coinbase and likening what's going on to the huge scandal with Sam bankman Fried's FTX.

There's parallels here to the FTX fraud manipulation that we saw.

And two new contestants edited the Republican side of the race for president in twenty twenty four trying to light some fires under their campaigns.

I know we can bring this country back, but it'll require new leadership in the White House and the Republican Party.

We have leaders who have shown us over and over again, but not only are they devoid of character, but they don't care.

And then late Thursday, the leader in the Republican field, Donald Trump, added his own fuel to the fire as he was indicted for holding onto classified documents after we left office in.

Selection interference at the highest level.

There's never been anything like what's happened. I'm an innocent man.

I'm an innocent person.

Despite all the heat and smoke from the week, markets came through it all relatively on scathed, with the S and P five hundred ending the week in a bull market by a mere five points at forty two ninety eight of four tenths of a percent. On the week, the Nansdaq was up just over one tenth of a percent, while the yield on the tenure went up five basis

Of Public Markets.

Please let me start with you about this so called bull market. Is it for real? Is it going to be sustained? I must say, we have our elves here that follow these things for Bloomberg, various securities analysts, and they think we're gonna end up the year around four thousand. We're now pushing forty three hundred.

Is it real?

Well, we're what we call a skeptical participant in the market, really with a neutral position on US equities and really the reason why is you've got a conflicting set of signals going on as far as what may happen with

Julie, We're going to hear from the Fed next week, and we talked about that tight monufterry buzz. Is that one of the things you could actually take this bullmarket back away.

From us again?

Look, I think, just out to Lisa's points, I think the technicals here are certainly being very supportive of this run. People came into the year very nervous, sort of concerned about the outlet for earnings earnings surprise to the upside, I think substantially in Q one, and people are sitting there along a lot of cash, and I think, you know, you're going to see risk assets continue to perform here because of the you know, the amount of amount of

Is there a lot of dry powder?

Jullian?

Right now we see over five trillion I think now in money market funds. It could come back to the equities market.

Yeah, there's about five point two trillion in US money markets alone, around six point five trillion on a global basis. It's interesting that, you know, the flow into those is still modestly positive, nowhere near the rate that we were seeing money coming into those money market funds around the events of SVB a few months ago, but it's still gradually trickling in. You know, an interesting phenomena there, there's a lot of stress in the money market complex ahead

Well, So a week or two ago, we were all concerned about the banks as we had that series of bank failure starting in March. There's a lot of concerned about liquidity, willingness to land. Are we through that at this point? Do we still have risks of a lack of liquidity, particularly as we have to issue all those T bills to make up for what we drew down because of that debt seiling problem.

We are still really carefully watching the liquidity To your point, David and The reason why is while we've had a fortunate reprieve in what's going on with financial sector stresses, certainly they are facing potential increased regulatory requirements as well as really just dealing with general economic slowdown, and so

I think this part of the rally we've seen in the last few weeks it's people getting increasingly comfortable that the banks this situation seems to have stabilized somewhat, and that's certainly been true in the near town. I think the short term liquidity issues have been somewhat put to bed, but I think we're not out of the woods yet. I think there's still going to be continued pressure on the banks on a whole variety of levels. I think

And Julian, you're just fresh back from Berlin, a big conference over there, and it was more private oriented. I think, what about private credit? Is it going to step in wherever we needed for the banks.

Look, I think a lot of questions around this topic everyone, you know, as I go around the world, not just in Berlin, but Middle East, Far East, there's a lot of interest in private credit. Of course here in the US, questions being asked about, you know, is that getting over inflated now? Is there too much excitement, too much money

Even apart from the private credit mark, Where do you see opportunities in fixed income right now particularly?

Well, we think there's actually a number of interesting opportunities in fixed income and while overall yields really are much higher than they were a year ago, if you look into specific sectors, there really are some very additional opportunities to pick up yields. So one area, for example, that we are advocating heavily with our clients is an area called reinsurance, where basically, as an investor you're really helping to pick up some of that insurance risk and in

Many thanks to Lisa Erickson of US Bank and also Julian Salisbury of Goldman Sachs. Coming up the all important and all two strained relationship between the world's two largest economies. We hear from Bridgewater founder Ray Dalio about the US relationship with China, and then we're going to hear from the economic historian Neil Ferguson.

We're going to hear what.

He has to say about Ray Dalio thinks about US China relations Oh that is coming up next on Wall Street Week, and we are on Bloomberg.

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

However you measure it. The economic relationship between the United States and China is the most important in the world. Bridgewater founder Ray Dalio has been an important observer of and participant in that relationship as China has emerged to become the global economic superpower that it is today with tensions rising. This week, we spent some time with Ray at Bloomberg at VEST and talked with him about where US China relations are today and where they are headed.

Right now.

There are irreconcilable differences on a number of topics Taiwan, Russia, revers Ifius, chips and so on. They're kind of at the edge and there's an inability to talk, so there's quite a bit of brinksmanship. And we are also heading into a political year here in which there's going to be more pressuring pressure. Both sides are very worried about this. So I think you're going to see restraint. I don't think it's going to lead to a terrible situation in

You produce it in wherever.

The cheapest place was mostly cost effective, and we became very intertwined with each other. Now in this global world, there's the worry about being cut off, cut off in all sorts of things, and so you're having that dynamic play, you know, a negative role in economics and inflation.

In thinking about the US relationship with China, which I think is probably the most important geopolitical economic relationship for the next generation, I would venture to say many people have made much of the fact that China is going to overtake the United States in the terms of the size of its economy, the strength of this economy. There

I think it's almost like splitting hairs.

There are two great powers.

And you know the.

Difference of overtake.

If you take purchasing power parody the size of GDP, they have slightly overtaken us if you take the other, who knows they're going to the main thing is they're comparable.

Powers in many ways, having strains in them.

They can do a lot of They have a lot of dependency with each other, and they can do a lot of harm. So the most important thing I think is how we take care of ourselves. Can we get strong? Can we raise productivity? Can we be politically and economically cohesive so that we can be effecient, effective and strong? Because you know, you can't rule out China. Since I started to go to China, you know, nineteen eighty four per capita income increased by twenty eight times. It's a

You're gonna have both winners, or you're gonna have both losers.

I mean, you founded Bridgewater, and for everything I've read about Bridgewater, I mean you put a great emphasis on the systems involved, the mechanics involved, the engine. It seems to me, without knowing about it, having done this for twenty five years or so, that AI might apply to that fairly easily. Is that your sense? Where are we going with artificiality?

Yeah?

I'm so excited because, as you say, for twenty five years, I would always write down my investment principles, all my principles, and then I would convert them to algorithms, which became decision rules, which became systems, and everything would run and they would like setting up a computer chess game.

It would play.

I would play next to it, and we would then reconcile differences and.

We would learn together.

Now what's happening with generative AI is that I can one can take all of that knowledge and have it there and then go beyond that to have it as a partner, a thought partner, because the intelligence has capacities that the human mind doesn't have. We don't, you know, the ability to process so much and everything at the same time. So I'm extremely excited. I think that this is the greatest revolution, bigger than the Internet revolution. But

Ray Dalio always puts his analysis of finance, markets and the economy into a broader historical perspective, and so we ask noted economic historian Neil Ferguson, Senior fellow at the Hoover Institution and Bloomberg Opinion colonists for his reaction to raise analysis.

There are certainly irreconcilable differences, and there's certainly not enough communication going on. Ray Dalio talks about their being restraints. I think that's pretty clear on the US side, right now, because there's been quite a diplomatic charm offensive by Jake Sullivan. Tony Blinkin is going to China after they had to reschedule his last trip because of the balloon over in Montana. But I'm not sure just how receptive or how restrained the Chinese side is being.

Neil, do you share ray Alio's view about the ultimate resolution of this conflict? Call it Corld War two as you have called it. He said, one side will not win and the other lose. Either both sides will win or both sides will lose. Do you share that view?

No, and I don't understand it to be perfectly honest. In Cold War one, I don't think there's any controversy that one side won the United States and its allies, and the other side lost the Soviet Union, which of course disintegrated in nineteen ninety one. And why shouldn't there be a similar outcome to a second Cold War? Now? I'm not saying there's any guarantee that the United States

That was Bloomberg Opinion commist Neil Ferguson of the Hoover Institutions coming up, improving your investment by sharing some of the upside. We'll talk with Pete Stabbers A Kkar about his approach to private equity with a decidedly different tilt.

You've got a better opportunity to deliver our value creation.

That's next down Watery Week. I'm Bloomberg.

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

Stakeholder capitalism. Milton Friedman famously wrote in The New York Times over fifty years ago that the social responsibility of a business is to increase its profits. I think we've had fifty years, let's say, of Milton Friedman, some good right in terms of competitiveness and innovation, some bad, and this became something of a gospel for many in the business community.

For years, all of us are Ohana that our local communities, plus our employees and our customers and our partners, all of them are key stakeholders, and that we're trying to practice stakeholder capitalism.

But recently there's been a new initiative dubbed stakeholder Capitalism, trying to make sure corporations are doing their best to serve all stakeholders, including shareholders, employees, customers, suppliers and communities. As set out in a Business Roundtable statement signed by two hundred of its CEOs in twenty nineteen, you.

Have to produce for your customers, your teammates and your shareholders, and you have to produce for society because if you don't have and if that's the core, I won't be sitting here.

And after that, mentions of purpose driven actions in S and P five hundred company earnings calls jumped, but recently it's been the subject of some debate, with as many as fifteen states taking the side against ESG investing.

The facts show that when you have a diverse workforce with inclusive leadership that listens to those employees, that takes into account their views, you actually add value.

To the company.

Whenever you think about stakeholder capitalism overall, it hasn't historically been associated with the rough and tumble business of private equity, the kind that made presidential candidate Mitt Romney's running bain capital an issue in twenty twelve. It's a very healthy and positive debate.

That doesn't mean the private equity world is going to enjoy it very much.

But all that may be changing. To take us through how stakeholder capitalism may be changing the face of private equity, we welcome noized Pete Stavros. He's KKR cohed of Global Private Equity.

So welcome to Pete.

Great to have you here, Thank you for having me. So let's start with the basics for you, because you're actually doing it rather than talking about it. What is stakeholder capitalism?

Well, stakeholder capitalism for me is finding a way to not only deliver great outcomes for shareholders, but doing right by workers and the climate. And I have to say there's tons of brilliant people working on climate issues. Obviously it's critical, there's not enough people focused on labor, and so that's really my passion. A lot of it has to do with how I grew up. My dad was a construction worker for forty years, earned an hourly wage, and really taught my sister and I around the dinner

So that sounds fine, but you'll forgive me if many of us who don't understand private equity the way you do, don't associate that approach with private equity. You tend to think you go and you buy the company, you strip out costs, you'll leverage it up.

You sell it. Yeah.

Well, look, private equity is not perfect, Capitalism's not not perfect, but this is a superior way of operating a company in every perspect You can align incentives not just of the senior team, but of all of the employees, help them create wealth for themselves and create a better culture.

So that sounds great, also sounds fairly simple, is it when you actually do it, because often the implementations were the tricky part.

Lot Ye, it's incredibly difficult. Let me just define the program. The program that we've been working around around employee ownership is about much more than handing out stock. If it's just handing out stock, then we're in a compensation discussion, which is important, but that's not going to change cultures. As my friend Dove Seideman always says, you can triple people's compensation and not get ownership behaviors, which I think

It's a great report.

Pete, thank you so much for joining us to bring it to Let's the in starbs of KKR. This is Wall Street Week. I'm David Weston. We talked with Brian moynihan, chair and CEO Back of America this week at Bloomberg Invests about a range of topics, but we started with the possible increases in capital requirements for the banks and how that might affect his ability to make loans.

It's a fairly straightforward. If our capital ratios go up by one hundred basis points, we basically, you know, simply put, you can't make about one hundred fifty million dollars loans. And because people say, well, you have more capital, make more loans. But if we took risk on that capital, we wouldn't have that capital ratio. So it has to be a riskless build. A capital can't be out there taking risks. See, the only thing you really do is leave it in cash or buy treasury securities. And that's

Is that a gating function of here right now? Over the last couple of weeks, you've been saying, in effect, some of your lending is slowing down anyway, just because the economy is slowing down. Is it a demand? Is there demand enough for the loans that you can't make.

That ebbs and flows all the time. So the loans, the loan demand is more product of customer activity. And so our team has a recession predicted beginning in the third quarter, fourth quarter or first quarter. Bank American Research team, which Candae Browning Plot leads, is tremendous and they have that has moved out a little bit as a consumer and activities stayed stronger even in light of the fastest FED rate increase in long time. But it's still the prediction.

Let's talk about something that's very much in the news these days. That's artificial intelligence, particularly generative artificial intelligence, large language model. You and I've talked in the past about Erica, which is a form of I think machine learning you've been using.

For some years now five years.

We've never really talked about what that is. So it take us through what Erica is for Bank of America right now, and then we can talk about where it's going.

So what Erica is is a product capability that's in the mobile banking app and other that you can go into and type either type in or say, you know, pay my landscape or pay my you know, school tuition, whatever it is, you know, and it will then say pay and I'll say the name of the of the provider and how much you want to pay, and then it'll go pay it. You'll just run through the bill paying systems, so instead of going the bill payment, going down the list and do all the stuff and do it.

They used to call us.

Now they don't have the routing numbers on the base of your check and routing number for all of you is the same, so it's not but people call because frankly, judging by the age of the people laughing. We were taught some point or how to write a check and how the numbers were and what was your account number. That's no longer in the system, so when somebody's doing

You know?

It thinks about it had So the first thing I had to do is we went to outside and got them to write a banking language program and things, and then we had to pair it with our data and our information. And so that's now five years old, and you know, twenty million people use it, and they use one hundred and fifty too, and million times. We're just right across a billion interactions with it. We'll get another billion and another twelve eighteen months. It's growing that fast.

That was Brian moynihan, Chair and CEO of Bank of America coming up. The perils are trying to do good and do well at the same time, all while you're trying to run a business. That's the next on Wall Street read on Bloomberg. Finally, one more thought, doing well by doing good. Corporate social responsibility is nothing new, but it's come a long way since the days of Google claiming its corporate code of conduct was simply don't be evil.

We've certainly incorporated ESG SO environmental social and governance, risk management and thinking into our analysis.

Or promoting diversity, equality and inclusion. You need workplaces that are truly inclusive and guess what, that makes all our businesses more profitable in the long run. But once you dip your corporate tow into the waters of social values,

Let's be honest, the Saudis aren't buying the PGA because they love golf. They're buying the PGA because they want to erase their dizzying campaign of political repression.

Or as the Walt Disney Company about the way out of its fight with the State of Florida after the largest entertainment company in the world took a stance on legislation restricting talk about same sex relationships and schools, rising the ire of Governor DeSantis.

You know, this idea of one corporation having its own government in Central Florida is something that is no longer in the best interest of the State of Florida.

It's all being grouped under the heading of woke. That's a term dating back to the nineteen forties when black Americans referred to being woken up to injustice, but that history has largely been lost on current day leaders, such as for example, our former president and I don't like the term woke because I hear woke, woke, woke.

You know, it's like just a term that use. Half the people can't even define it. They don't know what it is.

Josh Bolton of the Business round Table asks simply the companies be left alone to serve their customers and employees, whether or not that is woke.

Our message to policymakers is let business do business, and they, you know they they should get to decide how they treat their customers and their employees.

And some companies find they have no choice but to consider things like climate change if they're going to stay in business, for example, ensuring homes in the state of California. But never fear whether you personally like companies going so called woke or not. You can always vote with your own purse, as purchasing a bud Light apparently did recently when sales dipped after some marketing person sent a trans influencer beer cans with her face on them, and she then posted it on Instagram.

A Ken with my face on it.

But those customer boycounts may not be as easy as they sound, as Congressman Dan Crenshaw of Texas recently found out for himself.

So guess what we're gonna do with throughout every little bud light we've got in the fridge?

Alright, Well, I guess that was easy.

That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.