Wall Street WeekBloomberg Wall Street Week - November 10th, 2023
On this edition of Wall Street Week, Sonal Desai, Franklin Templeton Fixed Income CIO explains why the Moody's cut to its US outlook is not likely to be important to holders of US debt. Michael Spence, Nobel Laureate in Economics and Stanford Business School Dean Emeritus says that AI will be a powerful digital assistant. Afsaneh Beschloss, RockCreek CEO tells us why China is ahead of the west in climate investments, and Melissa Kearney, Aspen Economic Strategy Group director and University of Maryland Professor explains what it takes to build a resilient economy.
This is Bloomberg Wall Street Week.
I mean may not have an overall recesion. We're having a rolling recession. A kind of role 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, a Bank of America, Zebra Lair of the Paulson Institute, Glenn Hubbard of the Columbia Business School.
Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
A war intensifies, an election, hints at what lies ahead, a startup Darling goes bankrupt, and a king lays out his commitment to fight inflation. This is Bloomberg Wall Street Week. I'm David Weston. This week Nobel Laureate Michael Spence on the promise of generative AI.
Generative AI is mainly, not exclusively, but mainly going to turn out to be a powerful digital assistant.
Rock Creek Asny Bacheloss, explains how to make money investing in climate in China.
While a lot of countries in the West talked about it, the Chinese actually became more than eighty percent of solar.
And Melissa Karney is the Aspen Economic Strategy Group on building economic resilience by addressing the deficit.
It's important that people are now paying attention to this. I mean, we're really on an unsustainable path.
Global Wall Street spent another week watching Israel's war with Hamas unfold as Israeli forces surrounded Gaza City and the fighting intensify.
Ground oppressions by the israel Defense Forces and continued bombardments are hitting civilians. At the same time, Hamas and other militants use civilians as human shields and continue to launch rockets in these streme in its league towards Israel, and.
The United States joined much of the rest of the world in calling for a humanitarian pause.
I don't think you know Israel is interested in a cease fire at this point, but they are perhaps willing to have what we do call humanitarian pauses.
Off Your elections in Ohio, Kentucky, and Virginia tipped decidedly toward the Democrats.
What's fascinating about this series of elections and the ones we had in November of twenty twenty two for the midterm election is that they're saying the same.
Thing, suggesting maybe that abortion rights could play a role in the presidential election less than one year away.
If you look at from the midterms to last night, from California to Kansas, Ohio to Virginia, the voters said, look, the government should not be telling a woman what.
To do with her body.
In two short years, the real estate startup work went for a huge potential IPO to asspack to bankruptcy. I think billions in the process.
As a company, we need to accept this reality and also or need to learn the lesson from this for our future investment activity.
On Wednesday, the picket lines came down in Hollywood as the studios reached a tentative agreement with SAG after raising hopes that movies and TV shows would get back into production.
This and a very clear message that union's work, labor movements.
Work, and no less than the King of England weighed in on the need to fight for an economic soft landing.
My government will continue to take action to bring down inflation to ease the cost of living for families. And help businesses fund new jobs and investments.
And then after the equity markets closed on Friday, Movies cut the US credit outlook to negative as the country looks at yet another government funding deadline next Friday. Through the week, the bond market was on something of a roller coaster, with the yield on the ten year ranging as low as four point four to seven, and then it shot up again late Friday after the Moody's news to end the week at four point sixty five. Stocks were a bit more upbeat as the S and P five hundred added another one point three percent to come within thirty points of the year end median number of four four three five that our Bloomberg elves are projecting right now, while the NASDAD gained nearly two point four percent. To explain it all to us, we welcome back now to Sonatasai. She is Franklin Temple and chief investment officer for fixed income. So thank you so much for being back with us. So before we get to what happened over all in the week, what about there right at the end on Friday with the Moody's downgraded US credit, How material is that?
So you know, material is they're talking about, does it have an important impact on people's desire or ability to hold US debt. It's not going to be so important, but as a signal of how dysfunctional the US policy making is right now, it's very important, I'd say. I mean, it's a reminder that we are looking at an extremely serious fiscal problem between the debt and the deficit, and the way we are operating right now is not very reasonable. So it's a good reminder that fiscal policy is an issue and markets should pay potentially more attention than they are to fiscal issues.
And it comes against the backdrop of a fair amount of volatility in your neck of the woods, that is fixed income. We saw again this week the ups and downs. They may not have been quite as big, the amplitude maybe a litle less than it has been, but it's still a fair amount of volatility because I'm not sure the markets know where it's going.
I think that.
Actually, if you look at what's happening that markets, what we saw last week really was once again, we've been to this show, David right, We've done this before many times over the last year and a half. You have a FED meeting, the market here's what it wants to hear from what the Fed is saying, and runs with it. So what I think that Japowell was trying to do, not this week, but the week before, was to give the market a gentle nudge in the direction of a slightly more dubvish message. The market took that slightly dubbsh message and simply ran with it. We had a close to forty basis points rally in the tenure on the back of the Fed, on the back of slightly different than anticipated a schedule from Treasury in terms of issuance, and a slightly softer job market report.
The three of them together do.
Not change enough of what's happening on the ground to justify the type of rally we saw. And indeed, this week we've seen a bit of a sell off that roller coaster you were talking about. I think the market's still really really focused on trying to figure out whether the Fed or the Treasury can swoop in and make it all okay again so that rates can rally and we can go back to the races.
Given that situation, So now, what's an investor to do? How do you try to protect yourself and actually make some money in this environment right now, cash is actually worth something. Now when your cash is worth something, but what do you do with your bond Portfoliot's talk about that specifically.
So actually, you know you're right.
Cash has been very good, good for people this year. You're getting a very good, very good, good return on cash. However, as we get towards the end of this year, I said that I've been saying for a while that the FED is likely to maintain higher rates for somewhat longer than the market is anticipating.
We're not getting ready.
We are certainly not forecasting a hundred basis points of rape cuts starting already from the middle of next year, as is being.
Now priced by the market.
Nonetheless, as we get towards the next several months, I think the time to start moving away from that very very short duration and cash in fixed income. It's coming because we are looking once you get ten years at RAM five, once you look at high quality investment, great credits and mortgages areas like this are yielding over six percent. These are actually pretty attractive for attractive yields. To start slowly averaging into a little bit of duration is how I would put it. I don't think we chase the yield because the type of volatility we've seen it's.
Not gone away.
I do think we're going to probably see five again, so there's time to.
Start factoring that in.
But averaging in a true fixed income portfolio, where you start adding a little bit of duration, it's a good idea to do it right now, around now, over the next three months, over the next six months, and I'm looking forward to fixed income actually playing that traditional role of delivering income rather than equity like returns.
Looking at next.
Year, I'm not looking for massive capital gains out of fixed income.
What about trend? Sorry? What about what side? The United States? Europe? Japan?
So that's a really interesting point.
So in Europe, we actually think that the underlying growth fundamentals make duration plays in Europe potentially more attractive even than the US. So that's one area because growth in the euro area is simply not as well supported as it continues to be in the US. We're slowing in the US, but we're starting from a very good place. Japan, to me is the really fascinating one because Japan and Japanese investors have actually been a major source of support for the long end of the US yield cup because rates have been so low, and Japan within the G three, the BOG is very much behind the FED and the ECB.
In terms of changing its Montrey policy stunts.
Thank you so much to snaw this. I always great to have you with us. She's from Franklin Templeton. Coming up, what generative AI will mean for our jobs and whether we get to decide the Nobel Laureate Michael Spence of Stanford.
You can influence the direction of technology and development, and I think you know within Santas and so on, and you should be influenced in.
The direction of collaboration and augmentation.
That's next on 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. We know it's coming and we're told it's going to be big, But what generative AI will mean to our economy and our lives is yet to be determined, including what it will be doe to what jobs and productivity. For his analysis, we welcome now Michael Spence. He's Nobel Prize winner in economics. Diana Maritis of the Stanford Business School and co author with Gordon Brown and Muhammad al Area of Permacrisis, A Plan to fix a fractured world. So, doctor Spence, thank you so much for being with us. You've written an article, co author and article in Foreign Affairs, specifically the coming AI Economic Revolution. So you've thought through these things. First of I'll start with what the challenges are that we have in terms of the size of workforce and productivity that perhaps AI could help us on.
So we have a lot of what I what we call secular headwinds to growth. So we lived for three decades, David, in a world that produced massive amounts of incremental productive capacity made mainly in the emerging economies. As a result, we had a deflationary kind of you know pattern in the economy of inflation wasn't much of a problem.
And all that's that force is fading rapidly.
Then you've got aging in the global economy. More than seventy five percent of the global economy is in a serious pattern of aging, you know, declining workforces in some cases, you have big changes in labor market behavior. You have shortages in all the major employment sectors in the American economy, uh, the big ones. And then and then you know, you have geopolitical tensions and shocks coming from multiple sources like pandemics, climate, and a pattern of diversification initiated both by businesses, you know, in pursuit of kind of resilience and longer term you know, profitability, but also now by by economic policy and multiple jurisdictions. And when you combine all those forces and the declining productivity trend, which has been fairly dramatic in the last decade, you've got a world that switched relatively rapidly from you know, demand constraint to supply constraint growth patterns, and so we're looking for solutions to the supply side issues that are that are creating not only problems for growth, but you know, problems for the reappearance of inflation, you know, for higher interest rates, higher lower valuations, higher costs of capital and so on. And we're doing it in an environment where we have to make enormous investments and things like sustainability. So it's when I stand back and look at it, it's, you know, it's a big challenge. And so that led me and others to try to start looking for well what tools and technologies do we have to try to solve this problem.
We all live through something of digital revolution in the late nineties and the early oughts in the move to the Internet, and there was a real growth impetus from that. Is our call. In what ways does this new move to digital revolution through AI compared to that. Maybe it's similar to or maybe different from.
So we did get a productivity surge.
It came, you know, in the late nineteen nineties after everybody got access to the Internet and the Worldwide Web came in, you know, into its own and that lasted into the early two thousands, and some of that is ongoing, you know, the digitalization of supply chains and so on. That was pretty powerful and it had had noticeable effects. It produced decline in middle class jobs in the advanced economies like ours. It produced what David Otter calls job and income polarization. There was a lot of automation in it. You know, we automated things like you know, the keeping of the General Ledger. Most of the most of the information systems that a corporation runs on are now sort.
Of digital and fairly automated and so on.
So, you know, it was powerful but it feels to me at least very different from the current round.
One of the things you point out in your paper in Foreign Affairs is the effect that this new genera of AI could have on so called knowledge economy, which is different from the automation referred to from the Internet. That may well affect a different strata of jobs as I understand it.
Yeah, I mean, you know, the knowledge economy, when you think about it carefully, kind of runs through and across the entire economy. So even in what we think of as sectors that are sort of largely blue collar, you know, there's a fair amount of knowledge, you know that goes into these skills, knowledge and so on. I mean, take something like nursing. You know, nurses are pretty highly trained people. They have to respond in intelligent ways to the signals they get from you know, the equipment that patients are using and they're.
Looking after and so on.
But you know, but yes, I mean, the CEO of Google when asked you know, where is this going to have its immediate impact.
It's going to be in the knowledge economy.
But I think, you know, we tend to think of that as sort of white collar work, and there's an element of truth in that, but I think it actually does run right across the entire economy. Maybe not to the same depth in every sector, but nevertheless it's very broad based.
Do we have a sense and I understand this may not be determinate, I mean that is to say, it may differ as on what we do, but do we have a sense of the extent to which this general AI will displace jobs? They will go away as opposed to transform jobs.
Look, I mean we're in a period of intense expiration and experimentation. So you know, people often say, you know that it's important to acknowledge it. You know, real.
Uncertainty when you're in the early stages of this, and that's certainly characteristic of this. Having said that, James and I, our best guess is that generative AI is mainly, not exclusively, but mainly going to turn out to be, you know, a powerful digital assistant.
One of the points you make in the paper is that, as I say, this is not predestined to some extent. How this ends up depends upon us and what we decide to do about it. Explain to us, well, what you think needs to be done or should be done, so that we get the most good out of generative AI, and as a subpoint, how much of that can be trusted to the markets as opposed to governments.
So, you know, I think the markets in government and attitudes and what and biases you know, are all part of the mix. So I think the first order of business is to avoid what Eric Bridenelson calls that an influential paper that the touring trap. So Alan Turing proposed that we evaluate progress with digital machines by using.
The following tests. Can we build a machine that.
Interacts with the human and the human thinks that it's interacting with another human?
Is a fairly small step, and.
This is common in the AI world to evaluate progress in AI by determining how well machines do relative to human performance. So we do that in language recognition, we do it in the image recognition, which is a huge breakthrough in the you know, in the last six seven years. And we do it, you know, with the generative AI. Does the generative AI do better than the average human? On the l s at the law school have to do tests. That's okay, but there's a very small step from that to thinking that, you know, well, once the machine passes the human.
Why don't we get rid of the human And that leads you to.
What you might call the automation bias, and that I think we do have to resist. And that's not government, that's not business, that's got any particular sector, it's just the way we think about it.
So I think that's step one.
Step two is, you know, you can influence the direction of technology and development, and I think you know, with incentives and so on, and you should be influenced in the direction of collaboration and augmentation.
And then third, with the way James and.
I thought of it, we don't want to repeat that pattern of you know, sort of high adoption rates and very low adoption rates that we saw in earlier rounds of digital you know adoption.
Doctor Spence, thank you so much for being here on Wall Street Week, really appreciate That's not to Michael Spence of the Stanford Business School. Coming up, as we count down the months until next year's elections, our colleague Michael McKee takes us back through what happened to some other incumbent presidents when the economy was in flux. That's next on Wall Street Week.
On Bloomberg, this is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
China and climate investing two destinations that were once all the rage.
If I had to bet on one market or the other over the next several years, I would bet on China's.
If you're global investor, you've got to be watching and investing here in China.
ESG investing has gone from niche to mainstream.
We're integrating ESG environmental, social and governance into every aspect of our investment decisions and across our investment workfelows, but there recently have given up some of their momentum as foreign direct investment in China has dropped off.
The big question will be whether she jmping pivots and focus is more on market opening and creating the confidence and the conditions to continue to attract foreign business, which is necessary if he's going to continue to grow his economy, he can't do it without foreign business being present.
And green investing has gotten increasingly controversial.
Energy transition is very much misguided in my opinion. It's based on politics and emotion, it's not based on sciences. Back we're really all we're doing is we're substituting one form of mineral extraction for another.
But now there's reason to take a second look as technology may be taking the place of real estate in the Chinese economy.
Yes, there are excesses in parts of the Chinese economy in real estate, but their technological process is really strong. The entire clean energy economy cannot exist without Chinese components and Chinese raw materials.
And China races ahead of the West and extracting the minerals that drive the move away from carbon.
China has been developing this industry for twenty or thirty years, so they're really ahead of most Western democracies. It's now important for us to make sure we have diversified supply chains because no matter what the product, whether it's critical minerals or rares, having options.
Around where you get these things to be really important.
Leading Western investors to take a second look at parts of the Chinese economy that may be opportunities even as other parts slow down.
What I would say is, I think the story on what's growing in China's actually misunderstood.
Right One is that housing.
I think people know that it's not growing, and I think that's been well documented.
What they're ment missing though, is the growth drivers.
What you're seeing is a huge growth surge in the decarbonization or the energy transition.
And to give us her sense of investing in China and investing in greed at the same time. And welcome back a very special friend of Wall Street Week. She is a Sonny Bechalist of Rock Creek. Welcome back. Great to have you have, Sonny.
Thank you, David, It's great to be here.
So in general, you hear people are less enthusiastic these days about investing in China, but what about investing in climate in China.
So you're absolutely right, David, investing in China. You put it very nicely. But I think a lot of people are taking out their money from China. We've seen now from FDI going down, to equity flows going out, to companies repatriating their profits in China, and a lot of people are actually not even making overt noises that there are because they want to build the next factory somewhere else before they say they're taking it out. So I think, if anything, what we've seen is the beginning of a process of reducing outside money going into China. And of course the biggest problems. We've talked about this before is the demographics, the big loans that the banks have, and also the fact that people are still saving so much and not consuming and that has not changed even yesterday's numbers, So there's deflation in the consumer area. So coming to the whole area of green energy, Interestingly, while a lot of countries in the West talked about it, the Chinese actually became more than eighty percent of solar production solar power production. When people talked about EV they're now fifty percent of EV exports into the world, apart from also buying EV's in China. So there is this contradiction in the broader economy in China. And I think while we are still discussing whether whether there is you know, ESG, or whether whether whether we should have renewable energy or not, they're not really looking at ESG. They're just looking at economics. They're looking at the fact that the uh these evs and and solar energy is cheaper. They are big, they have huge reliance themselves on imported.
Oil and coal.
So from their own point in terms of geopolitically, they have made a better plus when they went to all the cop meetings they heard loud and clear that the West is talking about this. The interesting thing is they did more than the West in terms of investments in.
This area on this program before you said it's the second largest economy in the world. You can't talk about just ignoring China. You have to deal with China. So if you're going to have to deal with China as an investor, some of the issues you identify are directly or in directly titan the government, even consumer purchasing in parties because of a loss of confidence. It appears certainly in the tech sector because of what the Chinese cars are. But given what you just said about climate, is that a relatively safer sector because the Chinese government is so committed to the area.
So Chinese gun is committed. It's still continuing to invest a lot in this area. But at the same time, as Janet Dellen said in her piece yesterday, they're also subsidizing a lot the energy sector. So what they have done with news sectors, as China has entered any new sector, whether it was originally tech, whether it was infrastructure, whether it is now clean energy, huge subsidies going into it. So if you can find companies that are well run that are profitable. I think it's a great area just because they are very good. But you have to be very careful to invest in companies that are really riding the low wage, the subsidized wage and subsidized subsidized loans from the government.
And given what's gone on with the stock market over there, do you want to look at private companies rather than publicly traded companies.
So I think maybe a few years ago, yes, But I think in private investments the biggest issue is the rule of law and certainty of whether you can take your money out in If you invested today in a private investment, you would assume you're taking your money out maybe ten years maybe later. So I think what the environment that President g has created unfortunately makes people much less comfortable making private investments. If anything, Chinese very successful private investors and tech and venture investors are starting to invest much more in Chinese companies that are investing outside of China or in Japan because they are concerned themselves that if they become too successful, the fate of Jackman and others may faund them. But also if they're not super successful, then what's the point. So the entrepreneurial spirit, which has been super important really in the last twenty years in China, particularly the last ten years. I think that is waning, and it is I think something to really watch for any kind of investment in China.
Talk about more globally, we have COP twenty eight coming up at the end of this month now, and there are discussions going on even as we speak. This week, there were discussions between US and China to try to come to terms on some basic issues, including funding for some of the lower income countries. Thrilled to deal with it. If in fact, and it's a big if, if the United States and China could come to terms, if COP twenty eight could come up with some meaningful global really agreements, would that be an investment opportunity potentially because it could really jump start a lot of the green economy.
I think it would be really really helpful if there was agreement. And I think starting with next week's meetings, the EPECH meetings here with a lot of Asian leaders in the US, that will be sort of the start of those conversations, and I think we should watch those to see what kind of agreements or lack of agreements there are next week in terms in terms of climate, because that is military and a climate are the two areas that people are looking for different kinds of agreements next week. So if that happens, I think we can be hopeful that when we get to cop there'll be more positive, more positive environment for some sort of agreement. My sense though is that there is the economics of renewable energy has changed a lot. So if you look at it, for example, on any given day in Texas versus California, one is ahead of the other in terms of solar production of power. So that is all based on economics, not politics of E.
S G.
Or all the other words that we hear. So if we're taking that line, if we're going to a lot of other countries, you're seeing that people want to want to move to eb cars just because they're cheaper at the moment in terms of running them. So if you look at that, it will be the consumers. It will be the private sector that I think will be bigger leaders in this public sector leaders have not really been while lots of you know, speeches have been made have been less uh less helpful in terms.
Of executing of signing always wonderful to have you on Wall Street? Thank you so much. That's a Sonny Bachelist of Rock Creek coming up, building a more resilient economy. We talk with Aspen Economic Strategy Group Director of Melissa Carney about the subject at this year's meetings.
These reforms really need to have bipartisan buy in so they're lasting.
That's next on Wall Street Week on Bloomberg.
This is Bloomberg Street Week with David Weston from Bloomberg Radio.
Finally, one more thought. Children cannot rest till they get rid of their money, or as we say it, burns in their pockets. According to the Oxford English Dictionary, that's the first reference to money burning holes in pockets, and it dates back to seventeen sixty eight. These days, it seems that there are quite a few children with burning pockets. Starting with we Work only two short years ago, investors including the legendary Maseoshi Son couldn't wait to get money into the pockets that the real estate startup and JP Morgan couldn't wait to get tens of millions of dollars into the pockets of founder Adam Newman to buy luxury homes.
They have a long standing relationship with Adam Newman himself. So JP Morgan has been leading something akin to a margin loan where he's been taking out loans based on his private staff.
But then questions were raised about the wee Work business plan and a massive IPO turned into a much more or modest spack.
It had to undergo a major restructuring. Well, that restructuring has just been complete. It did go publicly aspack in October of twenty twenty one. Sandy Mathroni took over and he did try to write the shift.
Now even that's gone by the wayside as we Work made it official and declared bankruptcy this week, leaving Masseosha, son of SoftBank, about eleven point five billion dollars later in his pockets.
We Work at his p twenty nineteen, here's a company that gets valued in private markets of what forty seven billion? And here we are four years later when the company's filing for bankruptcy. And in the meantime we know, based on reports that Adam Newman, the founder of the company, has managed to take in hundreds and hundreds of millions of dollars.
Twenty years ago. Donald Trump, long before it was president, was eager to get money in his own pockets to buy the Durrel Golf Club in Florida, as well as a hotel and skyscraper in Chicago, and Deutsche Bank seemed eager to give him his wish, loaning him a total of two hundred and thirty two million dollars, backed by his telling them he had assets worth four point three billion dollars. A New York State judge ruled that his assets were actually worth far less, and this week mister Trump appeared before a New York City court deciding how much he owes in damages, which may leave a bit less money in the former president's pockets, despite his spending much of his time on the witness stand, badgering counsul and even the judge himself. But in the end it may all have been worth it, as Bloomberg reported this week that mister Trump's net worth has actually gone up half a billion dollars since he left office, and that brings us to what may be the biggest pockets of all. We learned this week that the most famous investor of them all, Warren Buffett of Berkshire Hathaway, as a master record one hundred and fifty seven billion dollars in cash, an amount that would burn a hole in just about anyone's pockets. It appears that mister Buffett can't find any deals that make sense at the price is on offer, leading us to wonder how long he can wait before deploying some of that huge pile of dry powder.
I am curious about that cash pile.
When do you think, Gregory, it will be the right time to really try to deploy a big chunk of one hundred and fifty seven billion dollars.
But if we've learned anything at all about Warren Buffett, it's that he never feels the burn of money in his big pocket. He'd rather keep it where it is than invest in things like we works or loans to real estate developers with uneven records.
All of a sausage muffin with Egan Jays three scuteen, is a bacon egg, and Jee's biscuit.
The market's down this morning, so I can go pass up to three seventeen ag over the two twenty five.
That's why he's Warren Buffett and the rest of us are not. That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week,
