Wall Street Week 03/15/2024

Summary

This episode of Bloomberg Wall Street Week, hosted by David Westin, dives into a multitude of pressing economic and geopolitical discussions. Harvard economist Ken Rogoff critiques the economic policies of both Trump and Biden, especially their protectionist tendencies and the handling of the national debt. KKR's Henry McVey shares insights on India's evolving economic landscape, crediting significant reforms for its growth. The episode also explores challenges and opportunities in the Chinese economy, commercial real estate, and the divisive climate of U.S. politics juxtaposed with the robust stock market. The narrative concludes with a reflection on global unity against the backdrop of contentious issues like TikTok's ownership and the Oscars' best film winner highlighting the atom bomb's creation.

Takeaways

• 🔥 Stubborn inflation remains a significant concern, influencing economic policies and investment decisions.
• 💻 TikTok is scrutinized for its ties to China, reflecting broader tensions between the US and China over technology and national security.
• 🏆 The 2024 presidential election could feature a rematch between Biden and Trump, highlighting their economic policies and protectionist tendencies.
• 🛠 India's economic growth is noteworthy, driven by reforms and investments in infrastructure, highlighting its emerging market potential.
• 💰 The global macroeconomic landscape is affected by challenges such as inflation and the need for sustainable growth in leading economies like China and the US.
• 📈 The stock market's performance is disconnecting from political instability, with investors focusing on sectors like AI and technology for growth.
• 🛡️ The US and China face challenges in balancing economic growth with national security and geopolitical interests.
• 📖 Commercial real estate is evolving, with a focus on quality assets and adapting to post-pandemic work trends.
• 📉 Concerns over national debt and fiscal policy highlight the need for prudent economic management by future US administrations.
• 🚩 Bipartisan consensus exists on certain issues like TikTok, showcasing moments of unity in a generally polarized political landscape.

Q & A

What are the economic policies at issue in November's election according to Harvard economist Ken Rogoff?

The economic policies at issue include protectionism, with both Biden and Trump being described as the two most protectionist presidents in a long time.

What has changed in India since Henry McVey first visited for KKR?

India has made significant progress in infrastructure investment, particularly in roads and technology, and improvements in the rule of law and bankruptcy courts, attracting more foreign capital.

How does India's economic growth compare with China's, according to Eswar Prasad?

India's economic growth is driven by domestic consumption, unlike China which has yet to shift from saving to spending. India needs to bolster its manufacturing sector for higher-paying jobs to continue moving up the global economic ladder.

What challenges does India face in its growth trajectory as mentioned by Henry McVey?

India's challenges include managing inflation, improving its taxation system, and enhancing consumer confidence. Economic reforms and increased GDP per capita are essential for sustainable growth.

What did Elizabeth Economy note about China's approach to its economy during the 14th National People's Congress?

Elizabeth Economy highlighted China's focus on state-directed investment in military, R&D, and advanced manufacturing, indicating a departure from economic reform and opening, aiming for control over the economy and information space.

What are the implications of China's demographic challenges on its economy?

China's aging population and low birth rate necessitate increased investment in technology to boost productivity, as traditional sectors like real estate no longer drive growth.

How does Peter Borash view the current inflation situation in relation to commodity markets?

Peter Borash sees inflationary pressures in the commodity markets, with most commodities like cocoa, cotton, and crude oil showing uptrends, indicating ongoing inflation concerns.

What is the state of the commercial real estate business according to Michelle McCarthy of Cushman & Wakefield?

The commercial real estate business is in a state of gray zone with a bifurcation of assets, where high-quality assets perform well, some struggle due to financing and demand changes, and a recovery is anticipated with some distress expected in 2024.

What common economic policies do Biden and Trump share according to Ken Rogoff?

Biden and Trump share common economic policies that include a tendency towards protectionism, a reluctance to address the national debt and deficit, and potentially lax regulation on emerging technologies like AI.

What does the focus on unity at the end of the script imply about global and political challenges?

The focus on unity implies a need for global and political collaboration to address significant challenges, such as nuclear threats, indicating that cooperation is essential even amidst diverse and often divisive issues.

Outlines

00:00

🌏 Global Economic and Political Insights

This segment provides an in-depth analysis of global economic conditions, focusing on the implications of India surpassing China in population and becoming an attractive investment hub. It highlights India's progress in infrastructure, technological advancements, and legal reforms, attributing much of this success to Prime Minister Modi's policies. The discussion extends to India's economic growth, driven by domestic consumption and the need for high-paying manufacturing jobs to sustain this trajectory. The narrative also contrasts India's economic model with China's, emphasizing India's stronger focus on consumption and technological openness.

05:02

📈 Economic Challenges and Opportunities in India

This paragraph delves into India's economic strategies to increase its GDP per capita, crucial for maintaining low inflation and fostering real income growth. It examines the impact of the GST tax on improving efficiency in goods transportation across states, boosting consumer confidence, and enhancing financial services. The segment further explores India's investment prospects, spotlighted by KKR's engagement with Indian conglomerates and infrastructure developments. It addresses the challenges facing India, such as agricultural consolidation and inflation, while outlining the strategic local presence required for successful investment in the country.

10:05

🇨🇳 China's Economic Strategy and Global Positioning

This section discusses China's economic strategy post the 14th National People's Congress, emphasizing state-directed investments in military, R&D, and advanced manufacturing. It critiques China's diminishing focus on the private sector and foreign investment, raising concerns about growth sustainability amidst demographic challenges and a tech-driven economy. The narrative questions China's balance between state control and economic innovation, highlighting potential global implications and the tension between economic reformers and security-focused governance within China.

15:08

🔍 Navigating the Future of Commercial Real Estate

The dialogue shifts to the commercial real estate landscape, dissecting the sector's condition post-pandemic and amidst rising interest rates. It presents insights from Cushman Wakefield's CEO, discussing the 'trification' of assets and the nuanced recovery process across different market segments. The conversation also addresses the evolving nature of office spaces, the integration of data in real estate decision-making, and the anticipatory strategies for 2024, considering the potential for distressed assets to influence market dynamics significantly.

20:08

🎥 Perspectives on Stock Market Dynamics and Fiscal Policy

Ken Rogoff offers an analysis of the disconnection between a thriving stock market and the challenging political landscape, attributing it to potential non-regulation of emerging sectors like AI. He discusses the shared protectionist tendencies of Trump and Biden, alongside their lax approach to national debt, which could have significant fiscal implications. The segment also explores the possible consequences of Trump's proposed tariff policies and the long-term impacts of maintaining high debt levels, questioning the sustainability of such fiscal practices.

25:09

🌍 United Perspectives on Global Threats and Cooperation

This concluding segment highlights the universal consensus against threats like nuclear proliferation, exemplified by the collective recognition of a film about the atom bomb's invention. It reflects on the political and societal divisions, contrasting them with moments of unity against common global threats. The narrative subtly underscores the importance of solidarity in addressing overarching challenges, suggesting that shared concerns about existential threats could potentially bridge deeply entrenched divides.

Keywords

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the video script, inflation is mentioned as a stubborn issue impacting economies globally. Its persistence is a concern for economic policies, particularly in the context of the upcoming elections and central bank decisions. For example, the Federal Reserve's interest rate decisions are significantly influenced by inflation trends.

💡India's Economic Growth

India's economic growth is a key focus in the video, especially regarding its surpassing China in population and emerging as an attractive investment destination. The growth is attributed to substantial infrastructure investment, a rising middle class, and advancements in digital banking and technology. India's economic model is distinguished from China's, especially in its focus on domestic consumption and technology platforms.

💡Commercial Real Estate

Commercial real estate is discussed in the context of its current state post-pandemic. The script highlights challenges like high vacancy rates and the need for refinancing at higher rates due to Fed rate hikes. However, certain sectors like industrial and warehousing are thriving. This segment underscores the complexity and diversification within the commercial real estate market, reflecting broader economic trends.

💡China's Economy

The script delves into China's economy, particularly its 14th National People's Congress outcomes. It highlights a shift towards state-controlled investments in technology and advanced manufacturing, moving away from a heavy reliance on foreign investment and the private sector. This approach is seen as part of China's strategy to navigate demographic challenges, real estate issues, and increased productivity through technology investment.

💡U.S. Politics and Economy

U.S. politics and its impact on the economy is a recurring theme in the script. It discusses the implications of the upcoming Biden vs. Trump election on economic policies, highlighting their protectionist approaches and reluctance to address debt and deficits. The script suggests that political decisions significantly influence economic trends, including stock market performance and trade policies.

💡De-Risking

De-risking refers to measures taken to reduce risk exposure, especially in financial investments. In the video script, it's discussed in the context of U.S. and Western policies towards China, focusing on reducing dependencies and vulnerabilities in national security and supply chains, as seen during the COVID-19 pandemic. This term illustrates the strategic shift in global economic relations, especially in critical sectors like semiconductors.

💡Emerging Markets

Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. In the script, India is highlighted as a key emerging market, particularly attractive for its economic growth and investment opportunities. The narrative around emerging markets in the video emphasizes their potential for high returns and diversification in a global investment portfolio.

💡Protectionism

Protectionism is a policy of protecting domestic industries against foreign competition by imposing tariffs or quotas on imports. Both President Trump and Biden are described in the script as having protectionist tendencies, affecting global trade dynamics. This theme is crucial in understanding shifts in international trade policies and their impacts on global economic relations.

💡Federal Reserve

The Federal Reserve (Fed) is the central banking system of the United States. In the script, it is referenced in discussions about interest rate decisions, inflation control, and overall economic policy direction. The Fed's actions are pivotal in steering the U.S. economy and have significant ripple effects on global financial markets.

💡Stock Market

The stock market is a collection of markets where stocks (shares of ownership in businesses) are traded. In the script, the stock market's robust performance is contrasted with political challenges, reflecting a disconnect between political turmoil and financial market resilience. The stock market serves as a barometer of economic health and investor sentiment, influenced by government policies and macroeconomic factors.

Highlights

India surpasses China in population and emerges as an investment alternative.

KKR's Henry McVey highlights India's progress in infrastructure, data, and legal reforms.

India's economic growth driven by domestic consumption and middle class expansion.

The U.S. and China exhibit protectionist policies in trade and investment.

Concerns over U.S. commercial real estate market due to remote work and interest rate hikes.

China's National People's Congress focuses on state-directed investment, with little emphasis on private sector and foreign investment.

U.S. investment strategies shift towards domestic growth and reducing reliance on China.

Tensions between economic reformers and security apparatus in China.

Potential impact of Trump's proposed tariffs on global economy.

Risks associated with high U.S. debt levels and future fiscal policy constraints.

The importance of steady economic policies for growth.

The disconnect between robust stock market and political challenges.

Bipartisan consensus on scrutinizing TikTok's Chinese ownership.

Global unity on the significance of nuclear non-proliferation.

Economic growth potential through rational immigration policies and AI integration.

The role of fiscal discipline and investment in technology for sustainable economic growth.

Transcripts

Stubborn inflation.

Tick tock in the crosshairs and round two of Biden versus Trump.

This is Bloomberg Wall Street Week.

I'm David Westin.

This week, Harvard economist Ken Rogoff

on the economic policies at issue in November's election.

They're certainly the two most protectionist presidents in a long time.

Cushman Wakefield

CEO Michelle McCarthy on the state of the commercial real estate business.

I think that the struggle for all of us is that it's a gray zone out there.

And Elizabeth, economy of the Hoover Institution on what the 14th

National People's Congress told us about the Chinese economy.

It's about control. Control over the economy.

And I'd say control over the information space.

But we begin with the most populous country

in the world, India, which is now past China in people

and for some is an alternative to China for investment.

And McVey is head of global macro and asset allocation

for KKR and has just returned from the subcontinent so.

Henry, welcome back. Good to have you here.

Great to be here.

It's a fascinating note you write because you did this 12 years ago.

How has it changed India since you did the first time in-depth?

Yeah, when we first when I first joined KKR in 2011 12, we wrote a piece

and we said, this is what India needs to do to to hit its potential.

One of them was invest in infrastructure.

The second was reduce its deficits.

It had twin deficits and the third was stop

subsidizing everything and let the real economy do its thing.

And, you know, we I was just back and there recently and you can

see from our piece, I mean, they have done there's a lot of credit to Modi.

He's done an excellent job.

But when you look at it right now, massive investment and infrastructure,

particularly around roads, which is critical to that that economy.

Second is around data

and making sure that you can actually have the, you know, technology

do what it's supposed to do as it relates to the Internet.

And and then and then finally, I think about

all the stuff around the rule of law and making a better bankruptcy court.

You know,

that's something where people

foreign capital now wants to be in India and it's more it's more active.

And so it's a pretty good environment right now.

As you mentioned,

a lot of people are thinking, where can I get emerging markets growth?

And what you see is, is while I'm talking about this, this latest update,

India's you know, public equity markets have been outperforming

by about 700 basis points for the last ten years.

So this story, it's a growing one.

It's getting better, but it's not a new one.

So those reforms you talk about,

how do they manifest themselves in economic numbers, for example, growth?

By the way, we've always a concern about inflation in India.

Yeah. So there are a couple of things.

One is real GDP has gone up since, you know, the past couple of years.

There's more consumption in the economy.

I think you're seeing the rise of the middle class, particularly the middle two

to slightly higher class.

They're really starting to spend and they're enjoying the the benefits of that.

The second is everybody now has a digital bank account,

and so the government can be much more targeted in terms of doing

fiscal subsidies, making sure that money money's being transferred properly.

And then the final thing is, unlike China or the United States,

India has really created a technology platform that is agnostic.

So their version of Amazon

or the search engines is actually just to have something that's open to everybody.

Not having one private sector company control that.

And over time, that could be a differentiated model.

It's still early days, but but those would be a couple of big changes we're seeing.

India's economic growth is driven by domestic consumption,

something China has yet to achieve

as Chinese households continue to emphasize saving over spending.

But each our Prasad of Cornell says India will need to reinforce

that domestic consumption with higher paying manufacturing jobs

in order to continue its move up the global economic ladder.

India has a much higher rate of household consumption out of household income.

Now, this is true even though India's household saving rate is quite decent

and the overall

national savings rate, however, is not quite on par with China because

corporations and especially the government don't quite

save as much as those in China do.

But in India, household consumption has been a very important driver

of growth, and in particular with the rising middle class,

I think India has been counting on consumption to drive growth.

The one problem that held back India's growth story

is that the manufacturing sector for a long time was not doing very well,

and it's hard for an economy to graduate from being low income,

a lower middle income to middle or upper middle income status

without having a vibrant manufacturing sector that can generate high paying jobs.

India is beginning to get there.

So it's not only that the middle class is expanding, but high wage jobs are rising.

So overall, I think the consumption story is much better in India

than it is in China.

The good thing is

they don't have to start by increasing from exports to consumption.

The economy is almost 65 to 70% consumption.

To start off with.

So it's really about increasing GDP per capita.

That's why it's so important they keep inflation down

because you need to see real GDP per capita go up, which is is

tough in an economy that often has often has inflation.

The second thing is they've done things around taxation

to make sure there's something called the GST tax,

where it's made it more efficient.

So you actually have the ability to transport goods

across different regions within India.

In the past you've had waste and it's taken time and the toll on

actually getting the goods from one area to the other has been much worse.

So that's that that's improving.

And then the final thing we're just seeing

is there's more confidence in the consumer.

We have exposure to different types of financial services companies in India

and actually the loss rates are down.

So there's a confidence where people,

they want to invest in their businesses are actually paying off their debts

and the consumer is spending a little bit more.

Economic reforms put in place by Prime Minister Modi's government

have created the foundation for India's economic progress,

resulting in improved consumer confidence.

But there's a lot more to be done, particularly when it comes to growth

in per capita income that's going to be very difficult to grow.

Status opened up between India and even China

in terms of national GDP overall or per capita

income, that's going to be very difficult to bridge.

You know, a couple of decades ago, the two economies who had a very similar

status in terms of their per capita incomes and even in terms of size.

China wasn't that far ahead.

But right now, I think India is per capita

income is probably around 2000, $2,500,

which is well below that of China, about a quarter of that of China.

So that gap is going to be difficult to make up.

And India is on track, perhaps in the next few years

to become the third largest economy in the world.

But it's still going to be a much smaller economy than either China or the U.S.

GDP per capita goes up.

When you get urbanization,

people come into the cities, they can use their skill sets.

India has got a tremendous amount of skilled workers.

They need to learn how to incorporate AI into what they're doing.

They need to integrate into the global economy,

but they also need to make sure that their wages are protected

from the inflationary concerns.

I think I think the administration clearly knows that in India,

but they need to continually focus on that to make sure

that you're getting kind of a rising tide lifts all boats.

So give us a peek at your playbook, if you would, at KKR when you went over there

to look at it as an investment opportunity for investors watching this.

Where do you see the investment opportunities?

I think there continues to be.

India has a wonderful set of large conglomerates

that are going to grow both in India as well as in around the world.

Also, I think they've done a lot around technology, retail, telecommunications.

We've been partnering with some of the larger companies

in India to really bring foreign capital and some some expertise

around the industries.

That's been a great relationship for us.

So that's one big area.

You can play that through public markets or private markets.

That's through our private equity and KKR.

The other area that's really growing fast right now is around infrastructure.

And the government is looking to move 4 to

$5 billion out of the public into private hands per year.

Toll roads, transmission of energy data, all that area that is booming.

Henry, you've laid out some of the opportunities.

What are the challenges?

You mentioned consolidation in agriculture,

perhaps inflation and being something you have to really keep an eye on.

What do you see as the biggest challenges?

Look, I think as a global firm, we have a hugely local presence there.

We've got you know, we've had people in Gurgaon,

we've got people in Delhi, we've got people in Mumbai.

You've got to be local to play in India.

And that's that's kind of point number one.

Point number two, you talked about,

I think, the things they need to do around the agricultural sector.

Ultimately, though,

creating transparency around capital and just more reform, right?

You've got a billion for people you're trying to integrate into the economy.

Not everything is going to go perfectly.

So I think having fiscal discipline around how you grow and having a long term

focus, I mean, what they've done around the banking system, what they've done

around some of the things in technology to ultimately unlock

some of the productivity, that's a huge focus.

Henry, it's always great to have you on Wall Street.

Thanks for being.

That is Henry McVey of KKR.

Coming up,

China has ambitious growth plans, but how does it get there?

We ask Elizabeth Economy of the Hoover Institution.

Economic reform and opening is off the table for the foreseeable future.

That's next On a Wall Street

week on Bloomberg.

This is Wall Street Week.

I'm David West.

And China has just held

its 14th National People's Congress, setting out plans for its economy.

Here to take us through what we learned is Elizabeth economy.

Hoover Institution senior fellow. So welcome back.

Great to have you. Thanks so much, David.

What did we learn?

I mean, I think the big takeaway from this NPC was basically that economic

reform and opening is off the table for the foreseeable future.

The message coming out of the NPC was basically all about state

directed party state directed investment, you know, investment

in the military, investment in R&D, investment in advanced manufacturing.

You know, we even had a reference to a new leap forward,

which is a kind of unfortunate reference back to the Great Leap Forward, which

killed tens of millions of Chinese people.

But I think, again, there was very little about the private sector, very little,

you know, sort of about welcoming back foreign investment

and very little about the consumer.

So it's about control,

control over the economy and I'd say control over the information space.

What does that mean for growth?

Because President Xi must be a little concerned about growth.

He's got demographic issues.

He's got real estate issues, he's got debt issues.

He must be concerned about growth.

Is that state control, his theory

about how he's going to get this thing growing again?

Absolutely.

I think, again, it's about investing in technology and advanced manufacturing.

And so when Xi Jinping talks about, you know, marshaling

the new productive forces, he's very explicit.

It's about space commerce, it's about EVs, it's about A.I..

You know, there's a whole AI plus initiative, right?

They're going to integrate A.I.

to all the sectors of the economy.

It's moving away from the traditional investment

in the property sector, which, as everybody knows, has been quite weak

and sort of, you know, oversubscribed

into advanced manufacturing, into innovation.

So that's how he's going to grow.

The economy is relying on those coastal provinces where you do have

the innovation, you do have an incredible manufacturing ecosystem.

And leaving the rest of the country really to suffer through.

One challenge President Xi faces his demographic

as the Chinese population ages and the birth rate remains low,

which Eswar Prasad of Cornell sees as driving the move

to invest in technology in order to increase productivity.

They are looking to investment in the defense sector, partly

for national security reasons, but partly also as a technology play.

They are very keen to aggressively increase investment

in the new technology sectors, especially green energy, electric vehicles

and a variety of other technologies that are seen as technologies of the future.

So that's where the real emphasis

is going to lay, because ultimately, I think the Chinese government recognizes

that if it wants the economy to grow in a sustainable way,

it's going to have to generate much better productivity growth

because investment growth by itself is not going to do it, especially

in the property sector and other sectors, which traditionally used to drive growth.

And with weakening demographics, productivity is really

the one thing that can boost or at least hold up growth.

I was in China back in August and had the opportunity

to meet with a number of senior economic officials.

I went with Secretary Raimondo and you know, we heard consistently

all the way down from the premier down to the, you know, Minister of Commerce.

They welcome foreign investment.

They want U.S. business to be there.

And they're all holding meetings with, you know, international business,

telling them that we welcome you, but there are no steps,

there are no concrete steps being taken to demonstrate that welcome.

And so what you have is the security apparatus in China

taking all sorts of measures that, in fact, are signaling the opposite.

And so I think there's really a battle between the economic reformers,

the few that still remain and the security apparatus.

And it's really the security apparatus that Xi Jinping has empowered.

And so I think in that battle, it's clear that the security side of things

is winning.

What are the shape of the Chinese economy is the second largest in the world,

and it's very different, it strikes me, than when we were in the Soviet Union

back in the sixties and seventies.

We could sort of avoid that economically.

China. The West cannot avoid China dealing with China.

So what is the US and Western policy economically toward China right now?

I mean, I think, you know, there are

there are many debates within the United States alone,

but also among our European and Asian allies about

how do we strike the right balance.

And I think, you know, the code word, of course, is derisking.

Right. And what does that mean and how do we look at that?

And I think there are a number of ways in which,

you know, we in the United States are de-risking.

I think first there's the issue of de-risking around national security,

and that's the most important thing, right?

We want to make sure that

whatever it is that we're selling to China or any investing that we're doing there

or the investments that they're making here,

we are not doing anything that is helping them technologically with products

that are going to potentially undermine our own national security.

So I think that's number one.

Then there's de-risking around our supply chains.

And I think that's, you know, basically that happened because of COVID.

By COVID was our wakeup call when we couldn't get,

you know, personal protective equipment, the PPE that we needed.

Right.

Was all located in China,

all the manufacture of the gloves and the masks and and everything else.

But we realized that

we can't afford to have that kind of dependance on any one source.

And so, you know, now the big issue, of course, is semiconductors.

And that actually isn't even about China.

That's about Taiwan, Right.

Our reliance on Taiwan for advanced semiconductors.

So it's about talking

with our businesses about businesses themselves, understanding.

Right.

The risks of an overdependence on China or any other one,

you know, sort of one source for critical supply.

President Biden, what's your message to China today?

Geopolitics figures prominently in Chinese economic plans

as it's a traditional reliance on exports comes into question,

which will force it to look inward for the growth it needs.

I think what they articulated some years ago is their dual circulation

policy, you know, remaining engaged with the rest of the world,

but becoming internally self-reliant in terms of technology,

in terms of innovation, in terms of markets that I think

has probably become an even greater force

that is driving

the structure of economic policies right now, because it's not just the US,

but the West more broadly, including Europe and Japan,

which are very important export markets for China

that are very concerned right now that what has happened in the last two

or three years, the huge expansion in supply

and essentially manufacturing capacity in China, but with demand remaining weak

means that China is going to have to export a lot of its output.

And this is something that really unsettles

countries around the world that are China's big export markets.

So if you take EBS for instance, that is an area

where there is a very significant concern that the US and other countries

have about China beginning to dominate those markets

with its still relatively low cost and low rate structure.

So barriers are going to come up and I think China recognizes

that it's going to have to rely a lot more on domestic rather than external demand.

And just as China needs to look more

towards its own economy for growth, the United States is investing heavily

in some of the areas that until now China has taken the lead on.

I think that is a big part, frankly, of the Biden administration strategy.

All of the investment through the Chips in Science Act,

through the Inflation Reduction Act, through the bipartisan infrastructure law,

all of those things are about taking

some part of government capital to incentivize private capital to come in

to rethinking sort of the rules and regulations around these sectors

to incentivize more investment, because, yes, we don't want to be left behind.

We don't want to end up with areas that, you know, for whatever reason

our companies decided not to invest.

And one of the things I think that we really need to focus on

is our persistence.

I think back to 1979, you know, President Carter was putting solar panels

on the West Wing in 1979, Ronald Reagan, and he did a lot of great things, gutted,

you know, the renewable energy effort within the government.

And today, China, of course, which was nowhere, let's face

it, in the late 1970s when it comes to renewable energy or to solar

panels, is now the leading manufacturer and exporter of solar panels.

And I think in sector after sector, you see that

China is willing to invest for decades until it emerges as a global leader.

And we need to have some of that as well. Okay.

This was really great to have you with us always on Wall Street week.

That is Elizabeth Economy of the Hoover Institution.

Coming up, we go through

the week in the markets with Peter Borash of computer trading.

That's next.

On Wall Street week on Bloomberg.

This is Wall Street week.

I'm David West.

And the markets reacted to those stubborn

inflation numbers this week with the s&p 500 down for the second week in a row.

This time by just over 1/10 of a percent to end at 5117.

That is still comfortably above the median year end number of 5000

from our Bloomberg elves.

The Nasdaq gave up 7/10 of a percent and the yield on the ten year

climbed over 23 basis points to end the week at 4.3%.

Here to explain it all to us is Peter Boyer.

She's founder and CEO of Computer Trading Corp..

Peter, great to have you back with us.

So so what's going on? Is it all about this inflation numbers?

Well, I think it's a weight of the evidence, right?

If you're a macro analyst, you know, you put a balance sheet together, say,

okay, what's positive?

What's not so positive?

And I think Wall Street has a fatal attraction issue

with the Fed and interest rate cuts.

And the weight of the evidence continues to suggest that they're not going to cut.

I was here three months ago and they said, oh, yeah, let's forecast a three

cut in three months.

Three months later, guess what?

They have a meeting next week and they're going to suggest cutting in June.

I don't think that's going to happen.

The way to the evidence says it.

So they'll talk about the weight of the evidence.

And I must say, you point something out this fascinating,

and it's the story of Coco.

I'm not sure I would have looked at Coco, but if you look at the chart on Coco,

it's quite extraordinary.

It's totally extraordinary.

But it's one of the seven seas that I look at.

Cotton, coffee, cocoa,

copper, crude and corn

and those things together are way to the evidence in terms of inflation.

Six of those seven markets are in uptrends.

Only corn has been a little bit weak.

So that says that there's inflationary pressures out there.

That's where you have to look at.

Well, that's the question.

We put up a chart actually showing the price of cocoa versus

the price of video, which you wouldn't think would be particularly correlated

in any way, shape or form. Yet they seem to track.

Is that just a coincidence?

Well, I think when you get sort of into supply and demand

shortages, particularly in commodities, there's nothing that moves more quickly.

The point being that everybody thinks Nvidia is crazy,

but Cocoa is crazy and it can get more crazy.

And going back to Nvidia, if history is a guide, it may take overtake Apple.

In terms of the most second most cap stock.

I don't think it's going to take over Microsoft.

What that tells me is that we're in a particularly dangerous period

in the stock market because you don't have this margin of safety

when you buy after a long downtrend, you have a margin of safety, right?

The risk reward.

Buying NVIDIA here, it may go up 20, 30% from here.

But what's the margin of safety?

You talked about the Fed's meeting

coming up next week and we don't expect there to be any movement

next week, but they'll probably tell us something or signal what's going out.

There's a lot of concern, including some board members actually,

about the fact that we have very restrictive interest rates

right now, that basically it will slow the economy down too much.

And yet the economy doesn't see this slowing down.

The stock market doesn't seem to be slowing down.

So is it as restrictive as we think it is?

So on the surface, bitcoin's at all time high.

Gold's at all time high.

Equities are right off their all time highs.

Unemployment is that continues to track below 4%.

That doesn't seem very restrictive to me.

Atlanta GDP came out yesterday over 2%.

Michigan and I always have to go back to Michigan, of course, go by

their economic inflation

expectations came out today at 3% and that's been sticky there.

So 3%, 2% real GDP,

that's over 5% nominal interest rates.

The ten years only at 4.3.

If you add one real interest rate, you could start seeing them go towards

six. The two year today made new highs and yields for the year.

So the yield curve is getting more steep.

So there's definitely a little bit of uncertainty out there

which it goes back to my point on the equity markets.

So what's an investor to do?

How do you invest in that environment

to look for that margin of safety?

So in the case of the normal investor,

if every if the stock market today is above all your elves

objective for the end of the year,

getting a little bit defensive is okay,

take some money off the table.

Absolutely.

That's what you would say.

You would not be fully invested right now.

I'm never fully invested because you need to be diversified.

There's always some opportunity out there. You hope, right?

That's right.

Okay. Where are you looking for opportunities right now?

Well, I think, unfortunately,

the energy market seems to have a little bit of some legs behind it.

You're going into the summer driving season and gasoline

seems to be breaking out.

If I were going to buy something

with a bit of a margin of safety in case there's air,

that would be the agriculture markets, which I just said corn.

There you have it.

Thank you so much, Peter. Always great to have you with us.

That's Peter Busch of computer trading.

Coming up, is it time for commercial real estate to make a comeback?

And was it ever really gone?

We'll talk with Michelle Mackay of Cushman and Wakefield in 2024.

We'll have some distress claims through the system,

but that will just be helpful to getting us to the point of resolution.

That's next.

On Wall Street Week on Bloomberg.

Commercial Real Estate.

It's been hit from two sides.

First, when the pandemic drove people from their offices

and then when the Fed's rate hikes took values down.

Office commercial real estate in urban areas is suffering a lot of its

some of its interest rates some it's just that they're transition

to remote work and hybrid work is is reducing demand for office space

and creating high vacancy rates and stress for the landlords.

And then

they have to refinance about it or they got to have a tree

and is financing this year again to refinance at higher rates

which puts pressure on the regional banks that had financed the deals

in the first place.

I believe it's manageable, although there may be

some institutions that are quite stressed by this problem.

It wouldn't stun me if, you know, a bank or two ended up wrong footed.

But some, like San Francisco Fed President Mary Daly, say

the problem is pretty much limited to office space in some urban areas.

Commercial real estate is a big name for a lot of different segments.

So if you're an industrial and warehousing space,

you're feeling very good about things.

Right now, if you're in retail space or even multifamily

housing out in suburban areas, then you're feeling really good.

And Daly believes that even

the troubled parts of commercial real estate may be ready for a rebound.

I see private equity money,

venture money sitting on the sidelines, ready to come in when the price is right.

So there'll be some repricing, there'll be some loss of valuations for sure.

But it doesn't seem today to be the kind of disorderly adjustment

that you would worry about.

And here to take us through the world, of course, the real estate is a true expert.

She's Michelle McKay, CEO of Cushman Wakefield.

So welcome. Good to have you here, Michelle.

Thanks for having me.

So we've heard an awful lot about commercial real estate in recent months.

Not all of it. Good.

Give us your perspective from Cushman Wakefield,

because you have a particular way of looking at it.

Yeah, I do.

And I think that there's been a lot of dialog around the idea

that there's a buyer ification of assets out there,

higher quality and lower quality.

I like to think of it as a tri ification of the assets.

So we have some super high quality assets out there in the office,

industrial and retail sector in particular who are untouchable.

Right? You saw them get through COVID.

They demand higher rents. Everything is great.

Then on the other bookend of this, you have assets

that were struggling before COVID even started,

and those assets continue to struggle and may never make it back.

The media, the conversations around the middle of those markets

and the assets

that reside in the middle of those markets and how they're performing.

And I think that the struggle for all of us is that it's a gray

zone out there.

We want to say it's good, it's bad, it's bottomed, is recovered.

We want to make a big statement about it.

But it's nuanced.

We think about some of them

having financing that's coming due next year at substantially higher rates.

We think about some of them that are owned purely in cash.

Some markets could be compelling, like Baltimore, that you and I

don't sit around and think about or San Francisco in contrast to New York.

So I think that what's going on out there is a discovery process

whereby people are trying to figure out which assets they want to get involved in.

What has value.

And at the end of the day, I do believe in 2024

will have some distress playing through the system,

but that will just be helpful to getting us to the point of resolution.

So it's a it's a large and complicated asset class,

but we in the media like to make things really simple.

And the question people are asking and address right now is have we bottomed

and are were coming back up.

We had John Gray from Blackstone just this week say

he thinks we have been we had Mary Daly from San Francisco, Fred,

saying she thinks there's money about to come in.

What's your perspective?

Yeah, I think that

if you want to say bottomed or not bottomed, you lean to we bottomed

because if you're going to make a macro statement about it, I would say

somewhere around 80% of the assets are in really good shape

and 20% still have some issues to work through.

We know that the Fed is most likely going to come out with some kind of rate cut.

Powell is comments last week were dovish regardless

of what's going on with inflation and kind of how sticky it's been,

That gives everybody a point of view to think that there's recovery coming

when there's recovery coming and optimism in the real estate sector,

people will start to make decisions.

That's what takes you out of the bottom when it comes to offices.

Talk about the geography.

You mentioned some of the geographical areas,

but we hear, for example, San Francisco's

very different from Chicago, very New York.

And don't get me started about things like Dallas or Austin or Florida.

Miami, What are you seeing?

I mean, we're seeing certain markets that are doing really well.

I think that that kind of top line headline is accurate

and you're seeing other markets that are really struggling.

I think that when you take a step out of the United States, it's really compelling.

I was just in India, in New Delhi.

Those markets are doing really well in Asia.

A lot of occupancy in the office market, a lot of occupancy here.

And in New York City, we're doing pretty well here, too.

How is real estate overall changed in the last ten, 15 years?

Yeah, I love this question.

We talk about the flow of dollars into the commercial real estate sector.

Over the last 20 years.

I've been in real estate a little over 30 years, and when I started

it was one of the only alternatives.

You were never considered in the vein of equities or bonds and debt.

I think today it's a core part of every money

manager out there, which means there's just more capital behind it.

And so in that way it's changed.

But let's talk about the human

equation, also post-COVID, the way that we talk about real estate.

Yes, the office conversation has dominated the work

from home, the return to office.

But when you think about the ecosystem of real estate and certainly

what we manage, we're involved in hospitals, were involved in R&D,

we're involved in protecting national art collections.

We clean universities.

You know, I mentioned Harvard to you in our conversation this morning.

Real estate is really about what is built and what is out there

in the built environment.

It's also about how it's used.

Are you seeing changes in the way real estate is being configured

in the wake of the pandemic and all the difficulties you've had?

Yeah, people are really reconsidering what has value.

And it used to be that you could walk on to maybe

any traditional office space and it would almost look like a trading floor, right?

A pod, A pod, a pod, a pod.

And people were lined up almost like soldiers in that space.

Now what you're seeing is more common area and what you're seeing in terms

of services.

Companies like ourselves are groups that specialize in workplace solutions

and how you enter your space.

How do you feel when you come into the space?

How are you the most productive when you come into it?

These are the questions our clients are starting to ask us,

not just can you find me 100,000 square feet?

So we have to have the specialists for that.

The other way that has changed is that data is really important

in decision making today.

So if you and I were to walk down the street

and you said, well, I'd like to be in this building,

people don't make decisions like that anymore.

They want to know how does the employee get here?

How long is the commute?

Does that employee have the skills that I want?

Where do they live? Right.

How can I make them come to the office or incentivize to get them here?

It's been a difficult period for commercial real estate.

I think everyone to agree to that.

Yeah, Cushman Wakefield is not immune to that.

Yes. As you look forward

now coming out of this, what's your growth plan for Cushman Wakefield?

So we went through a full PAC strategy plan a couple of months ago.

I came in in July,

as you know, and seeing growth was a really important component of that.

We love our services businesses.

We're going to see it organically.

We have been a company that really grew mostly through

small tuck in M&A after we went public.

I really like the idea of feeding into our services businesses

to grow them directly.

We have very talented people in there.

We're also going to love our capital markets group and really expand

that area in terms of growth and talent there as well.

I also like some of these megatrends that are playing through the system.

We talk about population growth, we talk about data centers,

we talk about geopolitical risk, we talk about climate.

How do these play through?

Well, we've done a whole pack of analysis for ourselves, proprietary,

so that we understand where we want to see growth.

Take us forward. Michel, it's really a treat to have you on.

I hope you come back. Thank you.

That's Michelle Makai of Cushman Wakefield.

Coming up, how can the stock market be doing so

well when our politics seem to be doing so badly?

We ask Harvard economist Ken Rogoff.

Neither of them are going to regulate air

and air is behind a lot of the boom in the stock market.

That's next.

On Wall Street Week on Bloomberg.

This is Wall Street Week.

I'm David Westin with the presidential candidates pretty much determined now.

We've been asking a range of economists and other experts

what differences the choice could make for global Wall Street.

For his views, we welcome now Ken Rogoff.

He's professor of economics at Harvard and former IMF chief economist.

So, Ken, welcome back. Always great to have you on.

You've written a piece for Project Syndicate

in which you talk about the disconnect between a really robust

stock market, the one hand, and some real challenges politically.

Why is there this disconnect?

The stock market's doing so well.

Politics, maybe not so much.

Well, I. I have trouble reconciling it.

The only thing I can just think

about in the article is that neither of them are going to regulate.

I and I behind a lot of the boom in the stock market

and they figure, well, it's going to be like social media.

It's going to be like big tech.

It's going to be like Bitcoin in the end of the day,

they're going to do nothing and the stock market rolls along.

Well, talking about things that they might share in common

in terms of policy, they also perhaps, as you suggest in the piece, they share

sort of sort of a tendency

toward protectionism, if I can call it that sort of populist approach on tariffs,

as well as a reluctance to deal with the debt and the deficit.

Well, absolutely.

So obviously, Trump put in his tariffs

and Biden essentially doubled down on it.

Legal immigration is still really hard

under Biden, you know, became much harder under Trump.

I won't speak of the open border policies, but they both you know,

in that respect, we're trying to shut out the outside world.

And Trump's talking about expanding his tariffs

and Biden so Inflation Reduction

Act kind of misnamed is a very protectionist.

I mean, the Europeans are livid about it.

He does things that where you have to buy American in many ways.

So they're certainly the two most protectionist presidents in a long time.

How much?

Oh, I'm sorry. You asked about the debt.

He and yes, I mean, Washington in general

has a very relaxed attitude

towards debt that I think they're going to be sorry about.

Biden's speech suggested blowing up the debt.

And of course, we have really no idea

what Donald Trump will do, but that's what he did last time.

He was surprised at the great gas. He will do it again.

And as you know, David,

you can't count on real interest rates being ultra low anymore.

I think they're probably not going to be.

And the idea that it's a free lunch, I think, is the past thinking.

Yeah, I want to come back to the real interest.

But before that, let's let's talk about tariffs

for just for a second,

because President Trump has said

he wants 10% tariffs across the board for all countries worldwide.

And by the way, he might increase them if anybody reciprocated

with tariffs coming back and against China.

He's talking about 50 or even 60% tariff.

What likely effect could that have on the economy?

I must say we did have Paul Krugman on who said 10%

tariffs don't make that much of a difference.

I mean, 10% tariffs would, I think, push up

inflation.

They'd push up interest rates.

That certainly back when Trump

put in his tariffs in 2019, the Fed had to do an about face

on its interest rate policy because of the the uncertainty and stress that caused.

So, you know, it's one thing to talk about over a 50 year horizon.

Does it matter that much if you put in tariffs, if you do it

out of the blue, it's very dislocating to the economy.

I think it would be very tend to be very recessionary inflationary.

And, you know, obviously other countries would retaliate.

Let's come back to that question

you raised about the long term real interest rates,

because there is something of a disagreement.

Appears we had Mary Daly on from the San Francisco Fed recently who said

she still thinks that it's around 2.5 to 3%, sort of a long term neutral rate,

which is composed of various components, as you know so well.

I mean, Larry Summers has come out and said it's much higher than that.

You in the past have said you think it is higher.

No, I well, I've studied the most the tenure rate

really long term data on tenure rates.

And, you know, it's not

it's probably more in the range of one and a half to 2%

than in the 0% that it was from 2012 to 2021.

The short term rate, I don't you know, it's possible that term premiums change.

But, you know, look at the economy.

It doesn't feel like we have really tight monetary policy.

If if we were really 3% above a neutral rate right now,

you would think that something would have hit faster and harder.

And I would agree with my colleague Larry Summers that, you know, we're

probably more like a percent

or percent and a half above what would currently be a neutral rate.

So if you're aiming for 2.5,

I think you're going to end up stopping a long time before you got there.

So bring this back to the question of whether it is a President

Biden or President Trump come next year.

Either one of them is going to have to deal

with the consequences that take us through, which some of the

possible consequences are, because the assumptions

put into the budget, for example,

are much more modest when it comes to interest rates.

So there are two ways that can go.

It could end up in inflation, which happened

in the last time, which would eventually ratchet up interest rates.

I think one of the reasons inflation is a little stuck in a high level

is partly because if you've just experienced this

inflation burst, things tend to calm down right away.

But so one possibility is there's inflation

and then we ratchet up to higher and higher interest rates.

But I think if the Fed were to stick to its guns and not a lot of that,

then you're really not seeing interest rates come down.

I think we're in an environment where there are so many demands

on the government, even if the neither candidate

quite realizes that defense spending is going to have to go up.

I think we're quite a bit down in Biden's

budget proposal and Trump presumably retreating out of narrow plans the same?

I don't think so.

Green transition is going to cost something.

Populism and global that's really high.

There are a lot of upward pressures.

And this environment where you can just jack up the U.S.

debt and assume the effect of would be

no effect to even see the interest rates drop.

I think that was a post financial crisis thing

and it's not a post-pandemic thing.

What does that mean for fiscal policy going forward?

Whatever President Trump or President Trump wants to do going in,

what constraints may they have on fiscal policy, given what you just said?

Well, you take bigger and bigger risks as you blow up the debt.

I mean, you can just keep borrowing all the money

you need to pay the interest and keep expanding the debt.

The CBO estimates bounce all over the place,

but most recently, they projected the debt GDP ratio getting to

170% in the year 2053.

But, you know, that really leaves a lot room for accident.

So, yeah, I mean, we don't know what an upper limit is.

There is no upper limit.

But as you get higher and higher, it puts political pressures on the Fed,

it puts volatility, know inflation and interest rates.

We will feel events that create pressures that it's just not the free lunch.

Ken, how do you assess the prospect?

We don't know.

But the prospect, at least the productivity and growth will save us.

I mean, we have seen

something of a productivity upsurge just in recent months here.

We don't know exactly what is perhaps more immigration, actually,

whether it's lawful or otherwise, and also some other sorts of productivity.

Could we grow ourselves out of this problem?

I mean, first of all, on the immigration.

Immigration is good, but a rational immigration problem.

Yeah, a rational immigration policy would be better.

I mean, if you tell me, let's spend $10

trillion, you can probably get some growth out of that.

The U.S.

has room to have immigration.

You will get some at least, you know, temporary boost perhaps out of that.

But it's much less than it could be.

You're giving up an asset by not having a rational immigration policy.

And I I'm a big believer in A.I., but the question is,

you know, it's what we're seeing in the stock market,

a belief that firms are going to get a bigger share

because they're going to be laying people off

and it'll be, you know, globalization squared.

There's certainly a lot of studies and reports showing that.

Is it really going to be just much higher growth in the economy?

And it's sort of hard.

So are firms getting a bigger piece of the pie or is the pie growing faster?

And I think the firms getting a bigger piece of the pie

is a very big part of what's going on.

As you look back through history,

how much can economic growth be helped just by a steady hand at the wheel?

I mean, we tend to go back and forth right now.

It seems like every four years we're veering between what on their face

look like very different sorts of policies.

To what extent can you get some growth

just by staying in this given direction, whatever direction that is?

Well, I think one of the ways the US has worked

so well, for better or for worse, I mean we have a lot of problems

is they haven't done that much over the last 20 or 25 years.

I mean, they make big policy announcements.

We obviously had a lot of pandemic stimulus, but precisely

because the country is so divided and there are very few periods

where the president, House and Senate are all of the same party.

There's a sense in which the steady hands been yielded by voters.

I'm not giving anyone too much power.

But the trouble with that is, as stuff changes,

we ought to be regulating and I think this is just a historic mistake.

It was terrible not to regulate social media, mental health,

political problems, air, social media, times, town and times 100th.

And so I think it's very, very worrisome

that they don't seem to be moving on that.

But yeah, of course, a steady hand is worth a lot.

The fact that inflation's low

and constant's been incredibly helpful to productivity.

Having predictable tax policy is helpful.

So of course it's quite helpful.

But if if there are big majorities going back and forth, it's

not just the president changing out of the House, changing hands,

but you really see these more wholesale shifts in power

than policy is going to be very erratic.

We have such extremes in economic policy at the moment.

I and the views and it's such a treat to have you on is really helpful.

That has Ken Rogoff of Harvard

coming up.

Why can't we all just get along?

Well, maybe we can, at least when it comes to blowing up the world.

That's next.

On Wall Street Week on Bloomberg.

Finally, one more thought.

T.H. White wrote in the Once and Future King

that the destiny of man is to unite, not to divide.

If you keep on dividing, you end up as a collection of monkeys

throwing nuts at each other out of separate trees.

Sometimes it seems as though we're closer to those monkeys throwing nuts at one

another than we are to a destiny of being united.

Certainly it seems that way in politics, as we saw in the State of the Union

address last week, when half the Congress cheered President Biden on.

We will not bow down

and the other half heckled him.

Even the historic unity between the United States and Israel

is under increasing strain as President Biden presses for restraint

and Israel must do its part.

Israel must allow more aid

in the God to ensure humanitarian workers aren't caught in the crossfire.

And Prime Minister Netanyahu will have none of it.

You cannot say you supported Israel's

right to to exist and to defend itself

and then oppose Israel when it exercises that right.

You cannot say you support Israel's goal of destroying Hamas and then oppose Israel

when it takes the actions necessary to achieve that goal.

And activist investor

Peltz is throwing his share of nuts at Disney CEO Bob Iger as Peltz tries

to break up the unity that Bob has long enjoyed with his shareholders.

Nelson Peltz is out with a manifesto for change over at Disney.

Here it is. It's a 133 page

white paper entitled Restore the Magic at the Walt Disney Company.

So in the midst of so much dissension that we see every day in the news, it's

nice to know that there are some things we can all agree on.

Like, for example,

how much the United States regards the Chinese government with a distrust

that sometimes borders on outright hostility.

There's a tremendous loss of confidence, investment.

Foreign investment has collapsed.

Domestic confidence has collapsed.

It feels pretty bad.

And in particular, how Republicans and Democrats seem to be able to get together

on trying to do something to tick tock, like make it get a non-Chinese owner.

The main thing, though, is we want to talk to exist.

We're not there to ban it.

I've said we want to make it tic tac toe.

We want to make it

something that is

not a fearful social media platform, but one that is very positive.

And in order to do that,

we have to see the divesting of it from the Chinese government.

Last week, we saw yet another example of people coming together,

but this time it was people all dressed up and gathered in Hollywood

to celebrate a range of motion pictures, everything from one about a dolls

to the best day ever.

It is the best day ever. So was yesterday.

And so is tomorrow.

And every day from now, forever

to a young woman in Victorian England brought back to life

by a brain transplant. She's an experiment.

Good evening.

Her brain and body are not quite synchronized,

but she is progressing at an accelerated pace

and in the end

they united in agreeing that the best film of the year was one that portrayed

the invention of the atom bomb, which led to the end of World War Two.

Why? Why?

How about Because this is the most important thing

that ever happened in the history of the world.

Let's hope it doesn't take the threat of nuclear destruction

to help us find unity on other controversial subjects.

That does it for this episode of Wall Street Week.

I'm David West and this is Bloomberg. See you next week.