This is Bloomberg Wall Street Week.
We may not have an overall recession, We're having a rolling recession. To KNYE, 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 Laiir of the Paulson Institute, Welen Hubbard of the Columbia Business School.
Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Are we going forward backward or just marching in place? This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers On renewing his campaign with Bono on behalf of the world's poorest nations.
This is a moment when show me the money.
Marty schav has a Six Street Partners on what AI could mean for the world of finance.
At some fundamental level, it's just math. This time it actually is different.
And former President of Brown Ruth Simmons, I'm making sure we're giving our future workforce what they need to succeed.
I believe firmly that corporations have to be along with the universities leading this struggle.
It was a week of movement, but not always in the same direction, and sometimes not in any particular direction at all. ECV took a modest step forward in its battle with inflation by raising another twenty five basis points.
The focus is probably going to move a bit more to the duration, but it is not to say, because we can't say that now that we are at peak.
ARM took a big step forward as it went to market with it. You can't really run AI without ARM. The auto industry took a big step backward as the UAW failed to come to terms of Detroit Big three automakers and moved to strike.
If we need to go all out, we will.
Everything is on the table.
From job security, we have jobs for all of our people as we make this transformation.
The US economy more or less continue to march in place. As CPI numbers came in just about as expected, with inflation higher than the FED once but lower than some ad feared.
The level of inflation that we're going to be forecasting for the year is well above what people forecast at the beginning.
And maybe the biggest step of all this week, at least for New York football and for a future Hall of Famer, was the one Aaron Rodgers took on Monday Night's game against the Bills when he tore his achilles tendon and ended his season only three plays into his New York Jets career were all.
His contract was about one hundred and twelve millions, so we even if you can't play like he's going to be.
Okay in the end. The equity Americans took a step back this week, with the S and P five hundred giving up just under two tenths of percent, ending the week at forty four fifty. That is still nicely above where our Bloomberg Elves predicted will end up the year. The Nasdaq had a bit rougher time, down nearly four
tenths of percent. For her views on what the market action told us about our investments, we welcome back now one of our Bloomberg Alves, Savina Supermania, and she's Blank of America's Securities, Head of US Equity and quantitative strategy. So Cee Vidiot, welcome. Great to have you here in the studio.
To be here, and I love the moniker, I love having you.
So give us your take on where we are right now. The actually was doing pretty well till Friday and then backed off some. But did we learn anything this week about exactly where we think we're headed?
I think this week was well.
This week was a week where we heard a lot of really negative headlines around put potentially sticky wage inflation, I mean, the the auto worker strike. We're seeing signs of, you know, kind of trends that we were expecting to mean revert very quickly remaining high. So our view is we're not necessarily out of the woods yet in terms of the FED controlling inflation, and we think that the the mistake to be made at this point is betting
that the FED will start cutting aggressively next year. We we don't necessarilyssarily see that as a slam dunk, and that's what a lot of investors that we speak to are expecting. So there's this this theme around resumption to what happened over the last ten years, and our view is that we're at a break point where we may never see these low rates of the last ten years ever again. And in fact, I think it's important to remember that what we saw over the last ten years
was an anomaly. Negative real rates are not the norm, they're the exception, and where we are now just feels a little bit more like firm footing.
What does that tell you at equity valuation?
So I feel like the SMP five hundred right now is kind of a tale of two cities, and there's you know, the benchmark isn't a broad market composite like it normally is. It's a top heavy benchmark where thirty percent of it roughly is made up of seven big companies that play this megacab tech growth theme, and that area of the market is relatively pricey. Perhaps that's where we will see the greatest growth over.
The long term.
But I think what has yet to happen as these companies need to recalibrate to an environment where the hurdle rate is no longer zero, it's a lot higher than zero. We just saw the FED move us from zero to five very quickly. I think that when you take the broader market index, you see a very different valuation story, a very different growth expectation story. And I feel really bullish about the equal weighted SMP five hundred because I think what a lot of companies are doing right now
is smart. They've done the right things over the last ten years. They haven't necessarily taken on a lot of floating rate risk, They've paid down debt in many industries, energy industrials, materials, a lot of these manufacturing exposed sectors have been starved of capital and have gotten leader and meaner and now look like they're focused on efficiency, which I think is the best bowl case for the next ten years.
And we can talk more about that.
Well, does that suggest, perhaps, Sevita, that there will be some separation of the companies who can really get their head around increasing productivity, being more efficient, as you say, cutting costs, and ones that may have a tougher time at that because some people do that better than others.
Yeah.
Absolutely, it's a story of the haves and the have nots, who gets it right and who doesn't. And I think that's where fundamental analysis, which hasn't really.
Mattered for a very long time.
It feels like all you wanted to do is buy the rip, focus on the index, and now I think it's the time to get in the weeds into the fundamentals, and that's where you can figure out which CEOs and CTOs are figured out, how to use technology to replace more expensive workers, how to make markets more efficient. We're seeing this already in a lot of industries, like, for example, restaurants.
Our analysts have been writing about how today's kitchen looks so different from the kitchen ten years ago in terms of automating and getting a lot more labor light, if you will.
So that's automation. What about labor? I mean, we did have that UAW strike yees specific plants. Yes, we don't know where that's going exactly, but it's against a backdrop of larger pattern of labor unrest and demands for workers. Could that cut into some of those margins that maybe productivity.
Would give you, Oh absolutely, I think that right now there is a tension between real inflation and financial asset inflation. And what we saw for the last you know, during post financial crisis, was this wonderful frictionless environment where there was barely any inflation to speak of. If something got expensive in the US, we could move it somewhere else, or we could import from anywhere we wanted to, and now we're in a very different setup. The disparity between the wealthy and and the.
Poor has just grown larger.
We all talk about this, but I think what we're seeing now is real evidence of closing that gap. So that's going to be bad for some corporations. And I think where it's going to get difficult is for companies that haven't been able to really think about how to navigate.
A higher interest rate environment.
And again, when I think about the indices within the market, the S and P five hundred is this top heavy benchmark, and then the Russell two thousand, which are smaller companies. A lot of the companies that are in the Russell today aren't necessarily these economically sensitive growth companies. It's a lot of these so called zombie companies that have you know, we're iPod in a much friendlier environment and are no longer able to handle this rising rate shock, if you will.
So, Vita, taking a look at all of that analysis, what is it indicate to you about where we're going next? Is we look toward twenty twenty four. I mean, as one of our l's you're at forty three hundred, which is by the way, right at the median number right now, Oh, that's proverty good, probably right, But what can you tell us what where you think we may be headed as we go into twenty twenty four.
Yeah, so, I mean I think that we're we're what we're facing right now is again a market that's likely to right size technology. I think that tech shrinks as a percentage of the S and P five hundred, and we see leadership broadened out to other old economy sectors that are actually using these new tools to.
Get more efficient.
Next year I think could be a good year for earnings. It could be a good year for nomenal growth. I think the trick is figuring out which companies are doing it right and which companies are are going to become you know, obsolete, and that's that's where the challenges remain. So it's really a stock pickers market. But I think that if you want to buy an index, the equal weighted SMP five hundred to me looks pretty interesting. These
are companies that are relatively cheap. The trading value is I think something like fifteen times earnings, which is, you know, a relatively average valuation, not expensive, not cheap. And my sense is that we've all gotten used to just one sector and one theme driving equities, but we could be in an environment where the themes broaden out and we see different stories for different sectors.
One last quick one, if I could, are we as divers about it as we think we are given going on in the INDIAXES.
So this is where it gets interesting.
I think that portfolio managers and active managers are in a tough spot because we've been in a market where seven stocks have been driving the index and they're almost forced to own these companies. We're now at a point where one out of ten active managers has more than forty percent of their portfolio in five companies, not diversified at all.
Peter, thank you so much for being a CEVIA super nion of Bank of America. Coming up, we're told artificial intelligen will take over the world. What can we be for finans? We talked on Martyschow as a Six Street partners.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
This is Wall Street Week. I'm David Weston. Generative AI may be here already, but we're told that we ain't seen nothing yet. That it will change much of our world, including potentially the world of finance. Here to give us a sneak peek of what that world might look like is Marty Schavez. He is a vice chairman of Six Street Partners. Marty, welcome back to Wall Street.
Great to have you here, pleasure to be here. Thank you, David.
And we're talking about changing the world. Start with the world of Six Street Partners. How is potentially AI changing your world?
The first thing I noticed about AI is that all of our limited partners, our investors, and all of our portfolio companies to first approximation, want to understand it, and they're also looking to us to have some thoughts that are differentiated, not just to understand it, but to understand what to do about it and what to do with it. So there's a lot of conversations going on.
So will help us a little bit as if we were one of your clients. Okay, give us a sense a little bit of understanding.
Here.
We hear a lot of things that are wonderful potentially about gender, some things that are pretty scary about it as well. What do you tell them about the upside potential?
So I tend to be rather calm about it, maybe in part because I've been working on AI in one form or another for a long time. My PhD from a million years ago nineteen ninety one was on AI and an early iteration of AI when we didn't really get that far, and the techniques that have now become really valuable were techniques that actually was pretty skeptical about
thirty years ago. But what happened is the computers got way faster, doubling about every eighteen months, and enough doubling between nineteen ninety one and now, and now you are seeing some amazing things. And so yet I would also say, at some fundamental level, it's just math. These neural networks are doing some really interesting math, but they're just doing some calculations. The calculations are letting us do pattern matching
statistical recognition in an unprecedented way, and that is really powerful. So, having seen so many ups and downs of AI, I believe, and I think many people share this belief that this time it actually is different and you can see it. You can go to bard or chat GPT and ask it some questions and get some pretty amazing things coming back. Now, it's also got problems. There's the hallucinations that are much talked about, and so what are we going to do
to ground those hallucinations? I think is one interesting topic. Another interesting topic is as the doubling continues, and I can tell you that every three months, I'm seeing something that's not more twice as interesting as what I saw three months before, but ten times more interesting. We are in some crazy exponential inflection point. So looking out into the future, we're starting to ask ourselves, when are these
computers going to be as smart as we are. We don't think they're going to be conscious in any way, but they might be intelligent. They might be as intelligent, they might be more intelligent. What kind of things will happen once we can tell the AIS? Go read every book ever written, especially all the textbooks. If that can
be done in a way that respects intellectual property. Go read all the textbooks and learn everything in them, and tell us everything that is implied by what's in them, and feed that back into the AI and train the next generation of yourself. As this sloop gets going, we
can see the prospects for some really interesting things. It wouldn't surprise me if in a few years we can tell the computers, please invent a commercially effective nuclear fusion reactor that's safe, and they might just go and do it. And you can imagine the computers doing the same thing. For climate change, we're already seeing and they can talk about a company I'm working with, Recursion Pharmaceuticals. We're already seeing what the computers can do for really hard problems
such as drug discovery. So there's no question in my mind that they're going to make a huge difference. There's also some concerns, and so delivering AI in a way that is bold and also responsible and safe and ethical is a huge area of concern.
Put those two things together, the AI and its potential for good and potentially some risks as well. With the financial world. I mean, when you talk about, for example, hallucinations, that doesn't sound very good to me if that's part of what's running the financial systems.
Right. So I started working on Wall Street in ninety three, and in ninety three, when people like me showed up on Wall Street, I often got asked, could you help me figure out how to print this document or turn my computer on and off? R What is this kind of quant math and software guy doing here? So it took a little while where we people like me, could find the problems that we could actually solve that would help us make better markets for our clients and manage
our risk more effectively. That's something we've been working on for a very long time, bringing math to Wall Street. And so I've had an opportunity to see many iterations of this movie, of this movie. So initially one of the things I might work on would be, we've got a complicated book of risk. How do we hedge it? We've got thirty seconds to make a phone call and construct the first order hedge of the book. All right,
so we do that lots of math and software. We want to do it reliably, don't want to make mistakes. We certainly don't want to hoose to me and get the wrong hedge and maybe make the risk position worse. And we got pretty good at that. But I remember thinking even then, Okay, so now we're calculating this hedge and the person next to me is calling the exchange and saying buy or sell that many futures. I remember thinking, even as a kid, well, we could do that part too,
But it took a long time. Eventually we got there, especially in equities markets that were exchange traded where there was a lot of data, and we could close that loop. You could do some analysis, and then you could say this is the trade we should do, and then you could have the computers just do that trade. And at the time that began, there was a lot of concerns, how could that go wrong? What if the computer puts
in the wrong trade? And then the whole loop got faster and faster, and computers were putting in orders with a latency of sub one millisecond, much faster than a trader could ever operate. And then we actually had some train wrecks. There was a company night Trading where the algos run amok and kept putting orders into the exchange that were at the wrong price, and so all the orders got taken out on the other side, and they eroded their capital in forty five minutes, and then they
were bankrupt. So some things have gone horribly wrong we learned from those episodes. I'm in the camp that sees AI as essentially wonderful, but still more of the same, So more math, more analysis, things going faster and faster, and yet I think there are some principles that are stable in time. So here's one. I remember a town hall years ago where I was talking and I said, there's really three strategies that I see when it comes to computers. Number one is, you could be a person
who tells the computers what to do. That's my strategy, and it's working pretty well for me, it's not for everybody. Number Two, you could collaborate effectively with the computers and the people who tell the computers what to do. And I recommend that to everybody. Everybody can embrace that strategy and use the computers to give yourself a force multiplier, leverage a superpower, and then go on and do more
interesting things that the computers can't do. And you always worry, well, maybe we won't be needed at all and the computers will take over. I've never seen that happen. The third strategy, which I have also seen, is stand in the way of progress. See if, in the name of your job security, you can stop the computers, and that is really dumb, and don't do that, and some people do do that.
I think that that advice applies today. I think everybody needs to be looking at computers and generative AI and thinking how can I use this to be more productive.
Mario, It's such a treat you have here on Wall Street. We thank you so much. As Marie Chavez of Six Street Partners coming up. Is a college degree still a ticket to a better life? And if so, what can we do to make sure everyone has a shot at that ticket? We asked Ruth Simmons, former president of Brown University.
I want those elite institutions to stop it, to stop saying we are so much better.
This is Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
A college diploma. The GI Bill sent soldiers returning from World War Two off to get their degrees, and ever since that higher education has been seen as the ticket to a better life in the United States, helping not just those getting the opportunity, but driving the economic force of the United States as well.
There's not an of college educated white men to drive the economy in the next thirty or forty years as demographics, so you need blacks to start businesses, you need Latinos and women to be part of the economy.
But over time, the cost of going to college has skyrocketed, putting increased pressure on the system to make sure young people can get there.
We've got to find a way to break the back of the education system and make it more accessible, cheaper, get more people into college, get higher graduation rates. That's I think a societal thing that we have to face them. It's going to be very critical in the next ten years.
And once in college that they can find the resources they need to stay there.
People that are going to college today still have to pay significant amount of tuition and they're going to need financing. So far is one of the companies that can provide that, But there's a number of companies in the ecosystem that haven't been able to withstand what's happened over the last three years, and they've dropped out in helping people pay for their college or refinance the.
College, creating what Ray MacGuire of Lizard calls a pipeline of talent, a pipeline as diverse as the nation it's being prepared to lead.
You have to make sure that we have a robust pipeline. That pipeline needs to have sponsorship, That pipeline needs to be trained, it needs to be encouraged, and it also needs to have visible examples of people who look like the pipeline, so that it gives a pipeline some confidence that they too can get there.
All of which feeds the American dream of enlisting all the talent we have for the benefit of us.
All I benefited from living in a country that believed in my potential, and even though I was a poor kid living in a rural community, America cheered me on. This country wanted me to win and succeed, and that manifest in the ways in which all of this made it possible for me to get on the mobility escalator and write it as far as I could, and my talent would bring.
Me and here to take us through the state of higher education. Today, we welcome to somebody who really knows it backwards and forwards. She's Ruth Set. She has served as president of Smith, She's served as president of Brown University and then as president of Prairie A and M. Thank you so much for being with thous welcome roofs. Thank you for having me a lot of debate right now about the value of college education. There was a time that was indispensable to really move forward and move
up in this country. Is it as important today as it was a generation ago.
It's far more important today than it was when I started out. When you think about the complexity of the world, when you think about the mirriad things that people have to absorb from an intellectual standpoint, when you think about the difficulty of making a happy, fulfilling life, Oh my goodness, do we ever need a higher education?
So it raises in my mind is the question, how do we make sure that the people who can benefit from that, the talent that we have in this country, get the education because it's gotten harder, it's gotten more expensive and more difficult, particularly for people who are not from privileged backgrounds.
My own view, and I've espoused this for many, many years, is that we've become too segmented in higher education in this country. And that is to say, there are eleit institutions that pull themselves up as being so much better, so much more privileged than other institutions. There are the haves and have nots. And furthermore, we've pulled apart significantly because the rich have gotten extraordinarily richer and the poorer
have stayed poor or gotten much worse. But here's the thing, and I so want in my book for people to understand this, and that is I had the education that I could get. I grew up at segnated country. I grew up when we didn't have access as African Americans to the quality of education that whites had. And I went to a black college that was still a wonderful experience for me and beneficial for me. And I was able to take that and go to Harvard to graduate
school and then make my way in the world. So what I advocate is that people use every avenue for education, and community colleges are a good place to start. So are state colleges that have a teaching mission. You don't have to go to a research university. You may want to do that, but it isn't necessary at all. But more than anything, I want those elite institutions to stop it,
to stop saying we are so much better. And if you don't come to Brown and if you don't come to Harvard, well, og, you're not going to be successful in life.
It's just not true.
You grew up in a segregated environment. Yes, a very different environment, I hope, than what we really have today. Your book, you write, I believe about actually being with white students for the first time in Mexico. He went to Mexico to study Spanish.
Yes, isn't that odd?
You mentioned the exactly what a story, But you mentioned the importance of teachers. What about your classmates? Does it make a difference in your experience now to have a diverse group of students around you, not just teachers who believe in you.
Of course it does, and it doesn't know where you are.
You can be in a tribal college.
Or a minority serving institution or an HBCU. You need to have experiences with people of all backgrounds. So let me tell you this story. If I May, I was did an exchange program with Wellesley when I was a junior, and I was taking an ancient philosophy class. And in the middle of this class, the question turned to apartheid, which was still going on in South Africa, and so we started a conversation, and of course everybody in the
classroom decried the situation in South Africa. But there was one girl who raised her hand and who spoke up to say that she wanted to defend apartheid. She was South African and she talked about her life as a white South African. Of course, she didn't convince me that apartheid was a just system. But when I heard her.
Speak, I have never forgotten this girl.
I wish I could find her, because I cannot remember a single other student in that class. But I remember her and I remember the lesson she taught me, which is, whenever you have an opportunity to hear different points of.
View, even if you don't agree with them, you.
Learn something from it. And I think she set me on a course in my studies that I never would have had without that encounter.
So finally, this is Bloomberg, this is Wall Street. We speak to people in places of leadership in the financial world and incorporations. What can those leaders in the financial and business world do to make sure that we have all the talent that we need that we can develop wherever they come from, whatever their origin, really on the team, as it were, helping move our economy forward.
Well, I certainly believe that universities have a special role to play, but I believe firmly that corporations have to be along with universities, leading this struggle to make sure that we're tapping into the talent and ability of all segments of the US population.
Imagine that we have.
A country so rich in diversity and so rich in talent in all these areas, and we're not availing ourselves of that. That doesn't make any sense. It's illogical. So you know, as you may know, I've been on a number of corporate boards and in the in the boardroom, I'm often advocating for inclusion of executives from different perspectives, including women, because it adds immeasurably to the corporation's understanding of their customers, understanding what the opportunities will be for
them as a business going forward. So no CEOs need to be playing a very visible role in this, and I've been very fortunate in the last few years to see many CEOs step into this space and say no, I'm going to lead in this space because it's important for the country.
Doctor Simmons, thank you so much for spending time with us. As Ruth Simmons, she's the author of Uphome, a Girl's Journey coming up. They did it once? Can they repeat their performance? Likely duo of YouTube's Bono and Larry Summers take on relief for the world's poorest countries once again.
We need to take a flow of capital to the global South.
That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Here to put in perspective what a major auto strike can mean is Bloomberg's International Economics and Policy correspondent Michael McKee.
For the automakers and their employees, this may be as existential a labor conflict as we've seen since the days of Roger Smith. Gm Ford and Stilantis have made big profits in recent years, and union members now want a piece of those, given the concessions they made in two thousand and eight to keep the automakers alive. Both sides also want to set the work rules for the new World electronic vehicles. That's why an lists say this could
be a long strike. We don't know who will win the faceof but we can make a pretty educated guess as to who loses equity investors. History shows auto strikes don't have a big impact on the macroeconomy. This walkout could effect up to one hundred forty six thousand workers, which would represent only about one percent of manufacturing employment. Go back to nineteen ninety eight when the numbers were similar.
Twelve seven hundred workers are picketing today, then it was nine thousand, two hundred at two plants in Flint, Michigan. Their walkout shut down GM production nationwide, putting two hundred thousand in total out of work for fifty four days. You can see the dramatic impact on the auto industry production numbers and employment in the third quarter of nineteen ninety eight, but you can't see it in the GDP numbers.
The losses were made up in the ensuing months, but there can be a big ripple effect in the markets. The nineteen ninety eight stri I cost GM two point three billion dollars in profits, and of course the stock plunged. Shares of parts makers like paid producer H. B. Fuller also fell, as did steelmakers, but the impact was felt far beyond the rust belt. The New York Times saw revenue fall as auto advertising dried up. A lot of the impact today will, of course depend on how many
end up off the job and for how long. Given this strike is for the first time against all of the Big Three. At the same time, there is reason for investors to be concerned.
David finally, one more thought, getting the band back together. That's what you two lead singer Bonow has proposed with our special contributor Larry Summers. It turns out that they worked together back when Larry was President Clinton's Secretary of the Treasury, and Bonou got a meeting with him to talk about relieving the debt of the poorest countries around the world.
Bono is an unlikely but very close friend. I will confess it. I'd never heard of him before war. We had our meeting.
And so we turned to Larry Summers this week for our one more thought.
Twenty three years ago, at the time of the Millennium, Bno and I got together because at that time Africa's economic prospects and poorest countries outside of Africa looked very dim because of the debt burdens.
Today, the problems are much graver than they were.
Then.
The great news is that we have.
Staggering capacities with technology to address these problems of a kind we could not have imagined a decade ago.
We couldn't have imagined that a vaccine could be created in a year against a new disease. We could not imagine that in many parts of the country's electricity was going to be cheaper in the world solar electricity was going to be cheaper than coal electricity. But if these technologies are going to find application, we.
Need to take the flow of capital to the global South, to developing countries up by a dimensional factor, not just in an incremental way.
But this is a moment when show me the money, when we need to move