Bloomberg Wall Street Week - November 15th, 2024

This is Wall Street Week. I'm David Weston bringing you stories of capitalism this week, the world of coffee and what global demand and a changing climate may mean for our daily habit and creativity from a machine, what jenn of Ai means for the world of art and entertainment.

In a world of stayd predictors of the stock market, Lane Garzawelli stands out after a series of orn target forecasts made her arguably the most widely followed Wall Street guru.

She was fired last year by Lehman Bros. Reportedly for a combination of being bullish indeed a bit too much so when the firm was being bearish way too much so, and for being too expensive.

Wall Street analyst Elaine Garzarelli became a superstar in the world of finance in nineteen eighty seven when she correctly predicted an imminent collapse of the US stock market, took her fund to cash, and was proven right just one week later. On Black Monday, when the Dow Jones Industrial Average dropped twenty two point six percent in a single trading session.

No question about it. She called it absolutely spot on. Her fund actually went up quite considerably in value on Black Monday because she put on all these puts as protection.

Bloomberg Senior editor for Markets and Opinion columnists John Authurs has been reporting on the markets and forecasters for four decades.

Did it work out that well? Not really, because the whole point of getting one really big call spectacularly right like that is the n equals one. If you get what I mean. There are only so many opportunities in a lifetime to get to call a freak event like Black Monday. Having done it once, there wasn't going to be another Black Monday.

In the decades since Black Monday, other investors and fund managers have made spectacular calls that have brought fame and yes often fortune, at least for a time. One investor stole the spotlight in twenty twenty thanks to the gold rush into big tech, once again showing the benefits of being in the right place at the right time. We have some funds, like for example, our investment Yes, which did extremely well for a period of time.

And made Kathy Wood, its manager, probably the most famous investor for a couple of years at least. Yes, I think one of the points that you begin to grasp more and more of the years covering finance is that if you really want to make it big, if you really want to make a big return, you have to take a big risk. That's basically an inescapable fact. If you want to be safe, you can be safe, but you're not going to be as rich as somebody else is who has taken a chance and it's come off.

In recent years, a broad market rally has been good news for most investors, but that can come at the cost of specific fund performance.

It looks like a rocket or trajectory that is zoomed up and zoomed back down again. If you stand back and think about whether you should treat somebody like Cathywood as an expert who can call the market liably every time. If you're going to have a return like that, it implies that you're very good at what you do, which in her case is tech investing. This is a person

Big contrarian calls can be very popular because of the attention they attract and because of the money they make for those who take the leap of faith. But betting against the markets also comes at a price, certainly when it comes to calls that, unlike those of a Lane Garzarelli and Kathy Wood, don't come true, but also in trading off drama for slow, more quiet progress.

The people who do best tend to be contrarians. They have to be, and most of the time, by definition, contrarians don't do that well, otherwise they wouldn't be contrarian. And I think that's another fact that people tend to forget that if you're really going to make a lot of money, you probably do need to partic a contrarian bet. But generally speaking, people aren't stupid, the market isn't wildly wrong most of the time. Being very contrarian will often lose you money.

It's not just individual market players who can gain enormous popularity relatively quickly. That popularity can also come to new ways of approaching investing overall, things like so called smart beta.

This was a great idea that got people very excited for a while and has generally now become It's a phrase I almost never hear anymore.

The term smart beta is said to have been coined by the consulting firm Willis Towers Watson in two thousand and six to describe funds that merge the benefits of active and passive management. Smart beta funds don't have a manager rebalancing holdings, but they have rules and factors that play the role of a manager.

Well.

Beta really just measures how much a strategy or a stock moves, and alpha is the performance of the stock relative to that sensitivity to market movements.

Rob Arnett is the founder of Research Affiliates, which launched its Fundamental Index in two thousand and four.

The inspiration for it was Fundamental Index, which was our idea back in two thousand and four, Fundamental Index simply says, why should we weight stocks according to how popular, beloved and expensive they are? Why not weight stocks according to how big they are in the economy. Now, what that does is several things. Firstly, if a stock is a growth stock priced at a premium multiple, it reweights it down. If it's a value stock priced at a deep discount,

Because they folks on value stocks, Smart beta funds may have missed the moment for the tech stocks known as the Magnificent Seven, which have been driving the S and P five hundred higher recently. Of the more than nine hundred smart Beta ETFs, about six hundred have no exposure to the Magnificent seven stocks. According to Bloomberg Intelligence.

Rules based strategies have had outflows. The genuinely smart forms of smart beta have been doing much better than that. It leans heavily towards cheap stocks, well cheap stocks have been out of favor for the last fifteen years. If you had a growth bias, you beat your value counterparts for the last fifteen years off and on. Not every year, of course, but over the fifteen years by a very

While some trading strategies or financial instruments might go in and out of fashion, sometimes what we think of as new products in the market really aren't new at all, like SPACs.

David in the early nineties, for those of us who are old enough to remember, the US had somewhat of the recession, and so there was a capital shortage, and two very smart lawyers who represented an industrial company that was short of capital and that needed to raise additional capital in the public markets came up with the device that we now know as the SPAC.

Betsy Cohen is a financial technology pioneer who founded Internet banking for Bank Corp. In nineteen ninety nine and now serves as chairman of the Cohen Circle, which she co founded in twenty fifteen to bring more than ten SPACs to market.

In a way, the SPAC format and structure has really always remained the same and is meeting the same needs, and those needs are a capital shortage within a particular area.

The number of SPACs coming to market peaked in twenty twenty one, with six hundred and thirteen just that year, and dropped to just thirty one in twenty twenty three. If we go back two years twenty twenty two, it seemed that there were an awful lot of SPACs. It was really almost dominating the market.

It seemed like a lot of fun.

It's come down a fair amount since then. Why has it come down?

I think there are several reasons. One of many of the SPACs did not find appropriate targets, and secondly, there was an excise tax that was imposed if you did close the spec, and so that was a financial liability that had not been thought of at the beginning of the process. So I think that there were enough cases of failure in the market that a company would come to market and then miss its first earnings projections that it became a much riskier vehicle to use.

Whether it's the latest star investor or hot strategy. What draws us to these overnight success stories is just that they make for a good story, one that the financial media wants to tell and one that the audience wants to hear.

We as journalists, you make a much better story when you really do tell tell it with a hero, with a person, with a with a with the beginning in the middle and an end. You want you want to be able to make it into a narrative. Then people will enjoy what you're showing them. Then people will understand the point you're making. But you might help people fall into a narrative fallacy we we the media maybe part of building up people only to then have to knock them down.

Today, ETFs have become popular on Wall Street right now. They seem to be everyone's answer to just about everything. But how long will the love affair last?

It would appear that they are in this country now. In many ways, the ETFs can be a superior product.

You could.

You know that they can be much more nimble, they can trade that much more rapidly, and therefore they can be of more different uses to people. But certainly my fear with exchange traded funds it's There's a line from one of David Bowe's albums begins with flees the size of rats, eats on rats, the size of cats, that that that ultimately they are Everybody is just taking a

In a world of growing and rapidly changing markets, it's no surprise that new people and new ways of investing show up regularly, or that we eagerly welcome the next bright, shiny object. But it's one thing to rush to them. It's another to stay with them too long, because in the long run, we are always reminded that that which varies greatly from the mean shall eventually return to it. Coming up, the big business of hot bruise, we taught coffee supply and demand. Next on Wall Street Week.

You're listening to Bloomberg Wall Straight Week with David Weston from Bloomberg Radio. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

This is a story about our habits, those rituals we follow every day and come to take for granted, even as we start sharing those rituals with hundreds of millions of other people.

This is a fine cup of coffee, Shannon Ravioli, not Roney.

If you want the thing you loved, you did it.

Congratulations, world's best cup of coffee.

We are taking around the three billion cups every day in coffee. These means around one hundred and seventy two million bags of sixty kilos each bag.

Venusian Naguera is executive director of the International Coffee Organization, a group created more more than a half a century ago to encourage trade between countries. She says, the trend in coffee consumption is moving in one direction.

The demand is growing around the world, mainly in Asia and also in what we call to the producing countries, the producing countries that use it to drink a lot of coffee. In the past, where only Ethiopia and Brazil, now you have many other producing countries taking a lot of coffee. And additionally to that we have now China, Philippines, Vietnam, Indonesia taking a lot of coffee together with South Korea, Japan and other countries in Asia.

Wock you All these habits being cultivated around the world add up to big business. According to the analysis from SMP Global. The annual revenue of the industry worldwide has soared from around two hundred billion dollars in twenty nineteen to know you four hundred and six billion dollars today. But as coffee demand continues to rise, production has been inconsistent.

Coffee as an industry really starts in the late nineteenth century. That's really when we see the start of trading, so the New York Coffee Exchange opens in the eighteen eighties.

Jonathan Morris is an expert in the field, dubbed the Coffee Historian. He's the author of Coffee, a Global History and a professor at the University of Hertfordshire.

Now we have a much more expanded global market, so coffee consumption has been rising. A lot of emulation in that rise so essentially that's what we're seeing, and the demand for coffee in that sense is ever growing.

A good part of their growth comes from the Starbucks of this world, a phenomenon that may have taken off in Seattle, Washington, but it is turned into an international trend.

So what's really changed coffee in the last sort of thirty forty years is obviously the growth of the if you like, the international coffee shop chains, that kind of format. And I say it's changed it not because it's accounted for a huge proportion of consumption, although it's certainly driven that up, but rather because of the amount of emulation that that's created across the market. So coffee as a beverage has become much more popular across the globe.

It's not just that more of us are spending more of our time in our favorite coffee shops. Increasingly, entire countries are getting into the game, quickly developing their own habits of turning to coffee instead of their traditional beverages.

So China as a market alone is now probably something like in the seventh or sixth in the world in terms of volume, and of course the growth across particularly Southeast Asia as a whole has really driven the big expansion of coffee in the last few years.

Steven Sutton's job is to meet that demand while strengthening the supply chain his New York coffee shops specializing getting beans to customers at breakneck speeds. It can take large chains up to a year to get coffee from farm to cup. Sutton's de Vosion sells beans that have been harvested less than a month before hitting shelves. To do that, he uses FedEx to overnight the beans straight from Bogata to Brooklyn, where he roasts around ten pounds of them

We actually opened doors in two thousand and six, and the whole idea was to do some different locally in Colombia for the farmers and finding absolutely the best coffees that were lost at that time because of the internal

Sun's direct relationship with farmers has been both good practice and good business. Better sourcing can mean better coffee, and that's been a staple of his success.

Actually getting the taste that they got at origin, and that until now it's pretty much unheard of. So we averaged let's call it around fifteen days old coffees before roasting.

So that sounds remarkable, but also sounds remark expensive. Potentially, what's the difference in the price of the fresh coffee, the freshly roasted and ground as opposed to things that take six months.

So there's there is a difference, but it's not a huge difference. I mean, you're probably going to be paying a dollar more for our coffee. If you take out a lot of the middle people and a lot of the normal process of coffee, you'll end up finding that number one, the money can actually go to the farmer.

Suton says that making sure everyone gets their fair share of the pie is one key piece of the puzzle, but another is protecting the supply chain. As the rising impact of climate change takes a toll on growing conditions.

The coffee market has been suffering with supply trucks, especially giving weather, because of weather problems we had in Brazil.

Carlos Costa is the chief commercial officer at Hedge Point Globe Markets and its spent years analyzing soft commodities like coffee, whose futures point to more confidence in the short term trade than in the long term investment.

Cost of production all days in Brazil it's around seven hundred has per bag, seven hundred and fifty for Arabica, and the price is trading at fourteen hundred fifteen hundred, so they are making a quite good amount of profits if you compare cost of production and price of selling. So farmers are making good money out of that in the supply chain. If you see other participants, traders, the margin of the trading is not you know, for commodity

Although production has rebounded this year, climate change means supply volatility isn't going away and demand will only continue to rise. For people like Steven Sutton, who see the whole process from start to finish, meeting that demand in the long term means investing in the next generation.

We are very active in doing things for the community and the farmer to protect our stakeholders and where we're getting our coffee from us we go to a local school in Ghaccetta and we are teaching these kits about how to do better coffee, how to get better economics. We give them tools from a young age not only to help them create a business, but also to help us, as pretty much all the stakeholders inside of the coffee process,

Up next, How artificial intelligence is changing the world of art and entertainment, the view from AI and artists themselves. Next on Wall Street Week.

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

This is a story about creativity, something we normally consider to be a quintessentially human trait, but something that machines increasingly seem to be encroaching on. You really think you can just walk away from all this? There's no other choice.

There's always a choice.

You just don't like the alternatives.

What would you have me do?

This video was made entirely by AI. It was generated by Runway, which builds AI tools from multimedia content. Crista Baal Bealezuela is the company's founder and CEE.

You can think of generated AI as a version of CGI. It's a better version of the things we've done in the past. Imagine a world where you have a system that can create imagery on a real time basis. It feels like a video game, feels like a movie, but you're generating things that you've never seen.

Before all over the world. Filmmakers, it's frightening on so many levels that so many people who will lose their jobs. Musicians, the way they are learning and the company is developing, it's going to be a threat visual artists.

Every single professional artist I know has been affected by this, and not a good way.

All worry about what generative AI could mean for their creative work, and it turns out that they have good reason to worry. A report from January twenty twenty three concludes that more than two hundred thousand people in the entertainment industry could be adversely affected by AI in twenty twenty six, nearly a third of the entire workforce. But for those who can use AI, it's already becoming a valuable tool in the industry.

Screenwriters are using Runway, there's a sort of BFx. Artist are using Runway, and so every part of the production cycle has avenues and spaces where you can augment and incorporate it and improve the process using AI.

Runway is growing fast, training its models to animate and alter already existing images in videos, and its adoption in the industry is little wonder given what generative AI can mean for a company's bottom line.

So this is your studio, Yes, this is our studio, and so today I'm going to show you a with creating video that involves no prompts, there's no text, and the idea there is that you can take the emotional, the expression, the performance of the actor and apply to your animated character or live action kind of like element. So to me, when I read a few lines, go for it.

No and you're scared.

Okay, discussed it so discussed like smells really bad.

So now now what we're going to do is we're going to take that performance that Jamie just did and we're going to map the un scanned kind of the face to translate that set of expressions and emotions you just perform for us into an animated character. And that happens almost in a roting basis. It's a couple thousand dollars for every second of a triple a movie or like a good movie. Right, there's a lot of money

To take advantage of that kind of cost savings, Entertainment companies are planning to ramp up their use of generative AI a lot. A recent survey showed companies plan to use AI extensively in the next three years on everything from sound design and cinematography to voice acting and writing, which may be good for the companies, but isn't so good for the creators.

You know what sucks is like I like these colors, and I like the idea, but I would never paint it like that. It's so boring. She has absolutely no emotion in her face.

Kelly mcckernin is a classically trained artist in Nashville who built a following with a distinctive style of illustration and watercolor portraits. But two years ago Kelly started finding images on the Internet that looked eerily familiar.

Summer twenty twenty two was when I first saw some images coming out of Dolly and mid Journey and a couple of other AI generators. It was very confusing because I wanted to know how they did that. At this point, there are more images online using my name as a prompt than there are actual artworks I've made. So because of this, between twenty twenty two and twenty twenty three,

McKernan has joined with other artists to sue several generitive AI firms, including Runway, for claims of copyright violation stemming from the company's use of images of their work taken from the Internet and used to train AI models entertainment. IP lawyer Jennifer Wallace believes McKernan and other creators have a strong case.

If the AI companies want to enter into licenses with the companies that own the copyrighted material, they absolutely can do that. But that's not what they're doing. And it's kind of the model of the tech industry where I'd ask for forgiveness, not permission.

What I was afraid of happening did happen where instead of a company reaching out to me, or perhaps a small publisher reaching out and wanting to commission me for book cover, for example, they could instead save a lot of money by just going into one of these programs and typing in the image they want and then saying in the style of Kelly mcckernan instead of hiring me,

So there's three ways that the industry is going about it. Right. There's federal legislation that creates a new IP right for

Valezuela contends that the copyright claim is based on a fundamental confusion about how his generative AI models work, a confusion indicated by the very word copy right, because he says generative AI is not copying, it's learning.

It's good to remember that these models don't copy data. They're not trying to replicate existing data. Like the goal for a good model is not to create a scene that already aciss there's no point in it. There's no database, so you're not pulling from existing scenes. What you're doing is you can think about it as a as a student.

I'm very skeptical. I could put the history of William Randolph Hirst into a large learning model and I wouldn't get Citizen.

Kain, whatever the legal issues involved. Jennathan Taplan says generative AI poses a real threat not to the top of the creative food chain, but to the vast majority of creative artists and writers who make up the core of the entertainment industry, people of whom we may never have heard.

It's not necessarily a real threat to Bob Dylan, but it's a real threat to the what I would call the working musician who may get one thousand dollars a month or a quarter from Spotify.

In the end, the issues surrounding generative AI and its effect on the entertainment industry likely do not come down to the law or even the financial consequences for individual artists. It's all about creativity and whether generative AI holds out the potential for increasing human creativity or drowning it under a seat of duplicative content we don't need.

We've always seen AI as a baseline for a new media format, a new way of storytelling, a new set of creative an artist. The gold is not technology. We don't build models for the sake of building models. But it's important to understand that technology serves a human need. And if you don't emphasize the human need, then there's no goal. And so we've always on emphasize that aspect of FAID, and our aspect is to create great storytelling tools more than anything else.

There's little doubt that AI will make storytelling faster, cheaper, less labor intensive. But that means it will also cut out the need for people to make thousands of small decisions like the color of the sky in a movie, or the balance between woodwinds and strings and a symphony, creative judgments made in nanoseconds by something that's learned from us, but that is not us. Will it be as good or better than what we humans would have done? Perhaps