Bloomberg Wall Street Week - March 22nd, 2024

This is Bloomberg Wall Street Week.

I mean may not have an overall recession, We're having a rolling recession. To kind of 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, Bryan 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.

The Fed decides not to decide, Reddit goes public and former President Trump faces foreclosure. This is Bloomberg Wall Street Week. I'm David Weston. This week, Brian dies on what's really going on with electric vehicles?

I think those headlines would make you more concerned than you should be. The demise of electric vehicles has greatly exaggerated.

And Kristin Roth, the Clark of Barclays, on a comeback for tech IPOs.

Investor appetite is as strong as it's been in a very long time for IPOs.

But we begin with our very special contribut Larry Summers of Harvard, as we address what the FED decided is a week, what we've heard from JPOM, and also maybe a little microeconomics before we're done. So Lari, thanks for being back with us. Let's start with the FED. Though what we heard, I heard more growth, less inflation, low unemployment. That sounds pretty good to me. Is it too good to be true?

I don't know.

Certainly there's been some encouraging data flow during twenty twenty three, though the last two months haven't been quite so encouraging. It's great and right to hope for the best, but hoping isn't planning, And certainly, from that scenario laid out in the dot plots, I think there's more room for things to surprise on the bad side than to surprise on the better side. We may have the path that's described there materialized. It's certainly got to be recognized as

So we heard from a chair pal that in fact he thinks these conditions are restrictive. Right now they are decidedly justking even if we're not seeing a lot of restriction. But that depends in part on where the neutral rate is, something we've talked about before.

I still don't get a sense.

From the FED that they figured out where they think the neutralit is, and do they need to know that before they can decide where they're going.

They need to take a view, because if you don't know what's neutral, you don't know how expansionary or restrictive your being. And I find their view that the ultimate neutral rate is two point six to be bizarre. In current circumstances. Here's what we have relative to a few years ago when they said it was two point five. We've got fiscal policy in a much much more expansionary place with much higher deficits, much larger role of debt

So either if you look at the fundamental.

Determinants of neutral interest rates or you look at how fast the economy is growing, seems to me you've got to read a high neutral interest rate. And I just can't understand why the FED is talking about two point six as a best guess.

I would be the first to.

Recognize that this is a number that fluctuates, that we can't gauge it precisely that economists don't have great models. So I'm not saying that I'm.

Sure that they're wrong.

I'm not, but I think the challenge in policy making is to try to make best estimates where you're equally likely to be wrong in both directions.

Larry accurs me, there are policies going beyond monetary policy that could well affect future inflation. Now I'll mention a couple of them, trade and tariffs. What are the other factors that might be driving inflation.

Part of the story of the great moderation of low inflation for forty years hash to have been the ways in which globalization held down prices, flows of capital that promoted productivity, enhancing investment flows of workers, that enhanced labor supply, lower priced goods that provided competition. The best forms of competition we get in the US economy are often from imported goods, and so if globalization held prices down, it follows the deglobalization will tend to push prices up, which

Larry, thank you so much for being with us. As always, that's our special contributor to Larry Summers of Harvard. Higher interest rates have taken momentum away from tech IPOs, but we've read it up this week and asked Sarah on Deck twenty twenty four may be the year of the comeback for tech companies going public to take us through it. We welcome back Kristin Roth to Clark Barclay's global head of Technology Investment Banking. So welcome. It's great to have

Investor appetite is as strong as it's been in a very long time for IPOs. Part of that is because there really is a dearth of growth technology assets in the public market that are at scale today. And if you look at all of the public tech companies over two billion dollar market cap, less than thirty have growth rates over thirty percent. So investors are looking for opportunities for growth in the IPO market.

So is there a.

Profile for the companies they're most likely be successful. Reddit's very different from Astera. Those are two very different companies right well.

Scale matters to investors.

We saw, you know, some of the carnage a little bit from the twenty twenty and twenty twenty one IPO classes where IPOs were priced at pretty significant premiums to where the you know multiples have been on a historical basis and then traded down significantly. The ones that had the you know, smaller market caps, smaller float were disproportionately impacted. And for that reason, you know, the scale really matters

Growth.

You get paid more for growth, but that's only if the unit economics work and there is a either a break even or a very strong near term path the profitability. You'll get paid more for growth. If the business is not growing you know, thirty percent or north of even twenty percent, then having very significant margins and visibility and durability of those margins.

Has the definition of significant growth change. I mean, given when you see some of like an Nvidia, some of these growth stocks in tech have just been really really strong.

Yeah, so I think for an IPO, I would say a growth stock is something north of twenty percent thirty percent plus is really very you know, differentiated growth rate.

But that's how I would.

Think about it today. What's your sense of the pipeline out there for perspective IPOs in the tech era, I will.

Tell you we're tracking over two hundred companies that we really think have a credible exit in the public market or entry into the public market. I guess over the next two years they could also be sold to strategics or to sponsors. But that's kind of the cohort of the private companies that were highly focused on for potential IPOs over the next two years.

Structure, we might be looking at two very different revenue models. If you have a consumer facing products such as Reddit, for example, what the consumer can do, what they can afford, how much they spend could really affect it. On the other hand, if you're over in the artificial intelligence if I can mentioned that term area that's more of a business of business and need for semiconductors and things, are there two different revenue models here?

Yeah, I'd say that the I mean investors right now are anything that's AI and anything that is security related are probably the two areas that have the strongest bid. The consumer facing stuff is a little bit more challenged in terms of a multiple. You're just not getting the same multiple as you get for an enterprise sale that has those two kind of end markets AI. We're just at the beginning of a decade long you know, shift and change to what we can do from a productivity standpoint.

Kristin, really great to have you on and particularly here in New York. Thank you for coming to New York. That is Kristin Roth to Clark of Barclay's. Coming up, we go through the week in the Markets with Chris Harvey of Wells Fargo. That's next on Wall Street Week on Bloomberg.

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

This is Wall Street Week. I'm David Weston. Market's found a lot to like and what the Fed did and said this week as the SMP five hundred was up another two point three percent to end at fifty two thirty four, saying well above the medium projection of the Bloomberg ls for a year and number of only fifty one hundred. The Nasdaq added two point sixty five percent, while the yield on the tenure was down sixteen basis points to end the week at four point four point

Oh, it was game on. So what they heard was, Hey, the macro backdrop is hotter than we expected on a growth and an inflation side, but we're going to keep the same accommodation we had before. So the only thing that's going to change are equity prices, and they're going to move higher. What that was is to a lot of investors, I need to put on I'm not going to be penalized for risks, so I'm going to put more risk on. I probably won't be penalized for leverage.

So one of the things that I find surprising is at the beginning of the year we expected something like six countries. We've gone from six to three. I feel there may be less than that, and yet the equity markets didn't really discount to that. And why is that?

So?

I agree with that, and that's something we've been talking about, but there's more than one equity market. So higher rates did affect smaller caps, it affected value, and it held those back. But when you look at the S and P five hundred, the S and P five hundred is really a growth index, and growth has just been lackluster. And the fact that you're actually pulling it back to an odd degree actually helps because you're not accelerating the economy. You're keeping the economy right where it.

Is, which is perfect for gross stocks.

And the last thing I would say is that you have this amazing secular growth story in AI that's not going anywhere fast.

Well, that's what exactly what I was going to ask about, because it's great we have AI, at least for the moment. We hope it's all going to improve out as brilliantly as people think it is. But is there a risk there in the narrowness of the market because it's so tied into high tech and AI.

There is a risk to it.

Right.

We don't like to see the market this narrow, but it does make sense. Right when we see a market that's a bit broader, typically see different things. We see an economy that's moving from contraction to expansion. We're pretty much in this what I would call economic malaise where things aren't great, but they're not terrible, and you should

So you like momentum, we do explain that to us. What do you like in this picture that really tells you momentum is a way to go.

So it's not what do we really like about it? Because the market's so narrow, because there's not a ton of opportunities, everyone's chasing the same names, and so what happens is you get stocks that do well continue to do well, and people say, well, Chris, that's kind of a silly way to invest, and it's kind of naive, and I understand that. But if you look at the fundamentals for the stocks that are doing very well, the fundamentals.

Are actually quite good.

And what we keep saying is people are very scared about momentum because momentum.

If you go back to.

Financial crisis, say March of nine, momentum or momentum factors turned on their head and people lost a lot of money playing momentum. Same thing with the pandemic. But what we're saying right here, right now, a lot of the macro factors that would cause a point of inflection just aren't there be a credit spreads, be the economy going from contraction to expansion, or the fact that the contrarian basket or a lot of broken stocks just don't have very good valuations and good fundamentals.

So momentum is good, tell me about valuation, at what point are they fully valued? And tie that back in if you would to earnings, what we're expecting out of earnings is that could take care of the valuation problem.

So, David, what I would say is that we don't have I talk a lot of about valuation, but our clients aren't talking about valuation all that much. And I understand why we're in a relative We're in a chart looks good relative growth type market, and so if growth is going higher, you're going to be rewarded by that. At some point valuation will matter. But because growth is moving so quickly for a select number of stocks, there's really just one game in town and that will continue.

For a while.

What I think, and what you have to worry about with the rotation or brought out in the market is will the economy accelerate faster than we expect and that could cause a rotation and we just don't see that right now.

One last one with another game in town coming out with in November. It's called an election. Do we take that into account at all as we take a look at investing in the stock market right now?

We do.

I don't know how to handicap the presidential election, and luckily I don't have to. The real game in town here is the Senate. Who wins the Senate, and it looks like the GOP has a better than a fifty to fifty chance at winning the Senate. Why is this important? This is important because this could chase is a regulatory environment.

So you think the antitrust enforcement policy of the BODOM is to have held back some M and A.

That's part of the reason we've seen is absolutely there's not a question. It has absolutely held back some m and.

A last one taxes because there's a question we're renewing the Trump's tax cuts. How important is that in the Senate.

It's important, but it's not something a lot of people are talking to us right now. So I think it's more of a twenty five to twenty six issue. It's not really a big issue in top of mind for many investors at this point in time.

Infascinating, but you don't want to handicap the election. You sure, we can still do that if you want. You can tell us who's going to win.

If you want, I'll just say we'll have we'll have a president.

We'll have just go and vote. I'm going to vote.

We go, I can handicap. Well, we'll have a president, which is good news. Thank you so much, Chris for being back with us. Chris Harvey of Wells Fargo. Electric vehicles are a policy priority in the United States, in Europe, and in China, even as automakers, at least the United

I'm happy to be here.

It brings up to speed on electric vehicles, says they were all the rage just a couple of years ago, and now when you're reading the press, maybe not quite so much. Maybe the consumers are not rushing to buy them. You see some US automakers cutting back on their goals. What's going on?

Well, I think those headlines would make you more concerned than you should be that the demise of electric vehicles has greatly exaggerated.

So let's start with the number.

So in twenty twenty three, there were about one point four million electric vehicles sold in the United States. That was almost ten percent of overall sales. That was up fifty percent from a year before, so really significant growth.

First couple of months of.

This year, EV sales are up about fifteen to twenty percent. So the rate of growth is slowing, but I think

Overall, the demand for EVS in the United States continues to go up, even if more slowly, but different makers are taking different approaches to stimulating that demand.

For example, cut prices significantly on the Mustang Marquee as a response to demand. All eyes will be on Tesla, of course, because Tesla is the market incumbent.

The pure playev name.

How it fares in the first court will be critically important. You know, there is something happening where the early adopters in America have been and gone in terms of the consumer, and there is still an assessment to be done on how impactful the incentives provided by the Inflation Reduction Act are going to be.

And it's not just the traditional Big three US automakers seeking to take advantage of those incentives, raising the spectra of the US being left behind by overseas producers the way we saw in the nineteen seventies.

I think there's a risk. I think you listen to what the leadership of Ford in GM INSTALLMENTUS as well are saying, they recognize there behind that this is fundamentally a technology play electric vehicles. It's a it's a fundamental shift in technology. It's not just an incremental shift in vehicle technology, and they were behind. Tesla Hanbakia are both ahead.

Going to have to stay ahead and it's a dynamic global marketing.

Is there a challenge in the price point, because certainly a GM for will started out with the more expensive vehicles made sense because they needed to cover the costs at the same time, Again, going back to my recollection of when Japan really made in rows, they start out pretty inexpensively. You have some less expensive models coming forwardseas. Yeah.

Look, there's different different approaches to this electric vehicle market that are really fascinating. Where I think the dominant approach is to start at the very high price point, try to capture that margin, and then drive prices down across the board. I would argue that actually, learning from history, there's a real opportunity to own the lower cost segment of this market, right, to be the electric vehicle provider for typical middle class folks across the country. We've seen

So I think it's possible.

And the other thing that's good news for consumers is, in addition to seeing this electric vehicle growth, prices are coming down very significantly. We've seen a twenty percent reduction in the cost the purchase price of electric vehicles just over the course of the.

Last several months.

That presents a constructive challenge to the auto companies, but it's good news for consumers that we're seeing more and more of these vehicles get into a price point which is really in many ways, you know, comparable, particularly when you take into account the overall cost of ownership.

Finally, it talks about the labor consequences of electric vehals. As I understand, it takes significantly fewer workers to produce an electric vehicle than an internal combustion engine car. What does this mean for the auto worker, which is very much on everyone's mind right now.

Well, look, I think what you need to look at is the entire value chain. And so the electric vehicle itself from an assembly perspective has fewer parts and therefore less labor. The building of the batteries and the whole upstream supply chain there creates new opportunity and new opportunity for workers and for labor. So that whole battery supply chain that I was just talking about, it's referred now often as the battery belt from Michigan down to Georgia.

I'm happy to say that Brian is going to be staying with us as we turn to what this false presidential election could mean for the US economy. That's next time, 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. Former National Economic Council Director Brian Deese has stayed with us to talk about the economy. So, Brian, we've got an election coming up. You may not have noticed it coming in November, and it looks like it's going to be Joe Biden versus Donald Trump. Once again, give us your sense, having been in the White House, what difference does it make? Because it occurs to me sometimes I think we put too much pressure on the president in the White House.

Well, Look, I don't know if this election is going to be decided on policy and policy differences but it should be because if you look at the difference between these two candidates, the differences are as stark as certainly any election in modern history.

We've got President Biden's.

Got a basic approach to the economy that he has laid out, and now you can see we're talking about significant investment in industrial renewal in the United States, a commitment to the idea that public investment and things like infrastructure, things like clean energy, build out of a semiconductor industry will help to expand productive capacity ultimately expand real wage growth.

And that's his strategy.

And then frankly, it's consistent with who he is and how he's approached the economy for some time. Candidate Trump, on the other hand, is dramatic, dramatic departure. And the thing that I think we're probably paying insufficient attention to is at a moment where prices are the top issue on Americans minds, and we've finally seen real progress and

So let's talk about a couple of those if we could. And they are immigration and they are protectionism as you put it. On trade, President Biden has not really dialed back substantially on the tariffs put in place under President Trump, as I recall, and certainly when it comes to China, it doesn't sound like they have a very different position.

Is there really a.

Difference when it comes to trade between these two men.

I think there is.

I think it's pretty stark. President Biden has had a sort of a basic two part approach when it comes to trade, which is, one, have a very targeted approach to protecting American interests, economic and national security when it's warranted, and two really committing to work with partners and allies to try to build more capability and effectiveness when that

The Biden administration came in.

President Biden came in and said, I am going to put a stop to that, but I'm going to work with my allies and partners to do so because otherwise it's fundamentally ineffective. You contrast that with the Trump approach, which it's still emerging, so we have to see what

United States, a cup of coffee.

That is a very extreme and new step. You talk about completely eliminating permanent, normal trade relationships to China. Candidate Trump has said at times, I want to literally eliminate all imports from China, period and stuff. The macroeconomic impact of those steps would be significant, potentially a couple of points off at GDP, and the practical impact on those for families would be quite significant too.

People would start to see.

It, and I think that general Trump approach is one of core isolationism, which is not only to wreck those barriers, but basically to alienate our alley in the process that creates, you know, potentially larger risks across the board. So I think that the top line, well, you know, there's not that much difference in them on trade is a complicated position when you unpack it.

And what about immigration. There was a time there seemed to be a very big difference between them. Former President Trump certainly would say there's a big difference, But it feels like President Biden has moved toward the position of President Trump. Is there a big difference to this point, isn't any president going to have to address that southern board no matter.

What, one hundred percent the border will need to be addressed, and don't need to be addressed in a appropriate and aggressive way. I think the big difference in what I worry about is with respect to the legal immigration system.

Where we need more. We need more workers in the United States.

Our legal immigration system has been an engine for growth for decades. For a long time, I think that there would be a big difference on that front, because I think you're right with respect to the southern border, it will need to be addressed. It will need to be addressed in a realistic but aggressive way.

What about fiscal policy, and as you said, present Biden is really pursued a policy of investment, which is a mounded to fiscal stimulus as a practicmaty, so's a paramoida. It's still to be expressed. It hasn't come through the system yet. Is there a big difference in addressing the deficit and the debt because a lot of people at least on Wall Street are concerned about at this point.

Yeah, well, and I think there's reason for concern.

The big different the biggest difference here is with respect to tax policy, and there the numbers are very large.

So if you look at.

There's a reason analysis of what would it look like for Trump policy to go into effect. If you're talking about both extending the Trump tax cuts that were put in place in twenty seventeen, many of which expire in twenty twenty five, and then you add on to that things that Trump has been talking about to include a reduction in the corporate tax rate to fifteen percent. All told, that would be about four point six trillion dollars in additional tax cuts over a decade.

It's almost two percentage points of GDP.

It would take our revenue down below fifteen percent of GDP.

Very different from what a President Biden is.

Talking about, where he's talking about actually trying to increase taxes, raise that corporate tax rate back up from twenty one closer to twenty eight percent, Increase taxes on the very wealthy by a significant amount. That could raise a couple of trillion dollars. That gap between the two is well over five trillion dollars. That will be a line of debate and a line of demarcation in twenty twenty five.

But given the fiscal backdraft we have, I think if.

The market actually internalizes the idea that we're not going to do anything about the Trump tax cut extension, and in fact we're going to come and we're going to layer on that with additional tax cuts, then I think that you'll start to see that in impact on long to borrowing costs, because it will send a signal that we don't really have any serious plan to address the revenue short falls we have in this country.

Rian, thank you so much for being on Wilsher. Really good to have you here. That is former National Economic Council Director Brian Deese Socrates said, my friend, care for your psyche, know thyself. For once we know ourselves, we may learn how to care for ourselves. And let's face it, just about all of us could take better care of ourselves, like getting enough sleep and reducing stress.

We see that these five daily behaviors of sleep, food, move, month, stress, and connection dramatically affect our health and our longevity.

People who've run big companies, like Indra Nui of PEPSI see a greater need than ever to care for the psyches of their employees.

I think post pandemic, we're seeing more and more people say I have to worry about me as a person. I have to worry about my family, worry about my well being, my mental health. So we've got to start encompassing people as holistic humans, as opposed to a tool of the trade.

Some of us turn to psychotherapists, as mob boss Tony Soprano.

Did any thoughts at all on WHYU planted out?

I don't know, stress maybe, But for some it's not enough to get more sleep, or have a more thoughtful boss, or have someone to talk to. Some of us turn to chemistry, like Elon Musk, who is talking about his use of ketamine. Again.

There are times when I have.

Sort of a.

I don't know, like a negative chemical state in my brain, like depression, I guess, you know, or like depression that's not linked to any negative views. And then keadomy is helpful for getting getting one outside out of a negative frame of mind.

And now there's a new game in town, or really an old game that some of us may remember, perhaps hazily, from the nineteen sixties. Yes, there's a return to magic mushrooms. Mike Tyson does it, even when he was partying in Saint Bart's with Jake Paul the Man He's due to fight this July.

Are you taking shrooms before the workout just because.

You like the space of thinking?

It comes up absolutely, of the focusedness of shrooms.

It can't. It compared nothing. Now, Chelsea Handler does it with her employees.

You took them camping and everyone took mushroom. I didn't provide the mushrooms just for legal reasons.

I want that to be stated very soon.

Where in the budget is that is that craft service.

People can pick mushrooms in the forest.

Bloomberg this week reported on so called magic mushrooms being touted by executive coaches, and the Wall Street Journal had a piece on these magic mushrooms being quote the working woman's newest life hack. Steve Cohen has doubled down on his investment in cybin That's a biopharmaceutical firm in clinical trials for a medicine to handle serious depression. A medicine that uses you guessed it. The active element found in magic mushrooms. Given all the buzz, maybe this really is

This is your brain, this is drugs, This is your brain on drug that does it.

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