Wall Street Week - Full Show (11/25/22)
Giving thanks for what we've been through, four downs as well as ups and for the opportunities yet ahead of us. This is a special Thanksgiving edition of Bloomberg Wall Street Week. I'm David Westin. This week, America celebrates that holiday known as Thanksgiving, when we gather with family and friends, remembering a time in nearly 400 years ago when British settlers feasted to celebrate their survival and to give thanks to the American Indians, that made it possible.
This year, most of us can be thankful that we haven't had to survive scenarios, anything like those early Massachusetts colonists. Though we are mindful of all those who have lost loved ones to the pandemic over the last three years, we all lost something a collective suffering, a collective sacrifice. A year filled with the loss of life and the loss of Livy and to Ukrainians who have spent most of the year valiantly fighting off Russian invaders at a great cost in blood and treasure. We will not give up. We will not lose.
We will fight till the end at sea, in the air. We will continue fighting for our land. Whatever the cause. But for the rest of us, it has been a year of great uncertainty.
As the economy has come back. But at the cost of mounting inflation. Inflation is extremely high. The levels we're under were unimaginable 18 months ago. And so we have to get that under control. And the beginning of belt tightening that has played havoc with the plans of so many as reflected in markets that have struggled week to week. One of the places on global Wall Street, particularly hard hit by the higher rates and greater uncertainty, has been mergers and acquisitions. And we sat down with one of the
consummate dealmakers, Sam Zell, to talk about the climate and how it's affected his business. Let's talk about what an investor does in this new environment of increased inflation and increased interest rates. First of all, tell me what's going on with your company. Are you seeing less deal flow now? Just the opposite.
We're seeing more deal flow. We're seeing more situations where companies are having difficulty figuring out what to do. We're seeing situations where. Nine months ago, financing a
transaction. X, Y, Z size was nothing. It was no mas. You said money was free. What's changed dramatically? I mean, think about the impact of the doubling of interest rates in eight weeks.
W just eight weeks earlier, interest rates were two and a half to three and now they're five and a half to six. That's an enormous change and it's going to slow down everybody's activity. It's going to for sure, impact getting deals done. But in our particular case, because frankly, I've oftentimes told the world that, you know, when I'm liquid, the stock market can't go down, it only goes down when I'm illiquid.
And here I am sitting there with a level of liquidity I've never experienced in my life because my focus for the last three and a half years has been and nothing more important than liquidity. So you've got a significant deal flow if anything is bigger than it was before. What are the quality, the deals? Are they different from what they were, for example, preacher pandemic? I think they are because they think they're a little more realistic. I think the prepayment gimmick, when money was free, there were transaction. I mean, the whole spec market was a you
know, we did a spec and chose not to take it to the next level because when we did the spec, spec seemed like a very interesting way to, in effect, monetize opportunity. It very quickly became a highly speculative scenario, dependent then preposterous valuations that ultimately led to the crash of the whole spec market. You know, world has changed a lot since then. And the and the change is basically modifying what you can do.
On the other hand, there's always demand for capital and there's always that demand is always on the shoulders of those that have preserved the cord. So so what's a specific investment after its energy and, you know, energy terribly well as you see opportunities, energy. And there's been a lot of tumult in the marketplace because of Russia and Ukraine and all sorts of reasons.
Yeah. I mean, we continue to do something in the energy space, not as much as I would have thought when we win this period began. The volatility in the energy space has been so extreme. I mean, just think about it.
Within a 12 month period, the price of oil, you know, volume vacillated between 30 and 120. That's an incredible level of volatility, makes making investments extraordinarily difficult and challenging. Do you see a prospect of a little less volatility because you have on the one plus OpEx plus trying to limit things that you get the US government, which if it is not trying to regulate the price of oil, looks kind of like it is because it says it's going to sell. I going to buy. So it looks like it's got a bid and ask price. Yeah, but we also have a legend. We also have an administration, it's very anti oil and that and in my judgment that Earl provision is only going to hurt the United States.
I mean, we were producing 11 million barrels a day of oil. I don't know what we're doing now, but I think it's down to three million barrels a day as we've cut back on capital for the for for fracking, et cetera. Not a healthy set of circumstances. Now, the oil companies almost invariably say it's because in this nation, because of regulation and their move toward renewables, things like that. So they don't want to make the investments. The administration says, no, no. You could simply make the investments. The problem is that your investors want it returned to them.
That is really a market phenomenon. It's not the government. I'm sorry, I don't really I. I've heard that speech made by the government. I don't believe that in this in the least. I think, you know what? What we have is we have a eco friendly government that doesn't understand that even if there is a future of non fossil fuel future, the idea that it's going to happen in 15 years. I mean, talk about some cost. I mean, just it just doesn't make any sense.
And so we're in effect creating a shortage. By virtue of depleting oil depleting capital into the fossil fuel area that creates inflation, that it just doesn't make any sense. Sam, as I recall, you bought some distressed assets in oil back in 2019. They're about right. Did that turn out to be a good deal given how badly we need to L.A.? Probably 50 50 Anna Edwards. Again, it didn't do as well as we expected because the volatility in that commodity was just beyond belief and we know we'd ever seen that happen before. Your son nuclear.
I mean, a lot of people say we can't get to where we want to go without some nuclear. Yeah, I personally agree with that. It's like cryptocurrency. It's it's one of those areas where I don't understand it enough well enough to be able to invest in it. But given the difficulties with fiat currencies you identified, I understand you have bought some gold model. Yes. First time in my life over the last few years, I've bought gold securities and actually bought hard gold. Are you a buyer going forward?
I'm not sure. I bought it kind of as a as my own definition of a hedge. I have done well with it. I haven't lost it. But. But in a world where I think fiat currencies are being massacred or hurt, I think in that kind of a world, more focus on some hard currency is relevant. You're very much. I definitely love those bonds with real estate.
As I recall, you started that maybe when you were in law school, University of Michigan. I took an undergraduate undergraduate in Michigan. So it talked about real estate where we are right now. We've got some record high rent prices. We've got mortgage rates going up. Tell us your view on the real estate market right now. For all practical purposes, I haven't
bought anything in 10 years. And where are the opportunities created? I've sold a lot. I felt that the real estate market generally has been overpriced. Particularly in the private sector as
opposed to the public markets, have actually done a very good job of sensitizing people to what's going on in real estate on the private side. I mean, we took over a public reach seven years ago with badly with 13 billion dollars of assets. We bought nothing with that portfolio and sold one hundred and forty two out of a hundred and forty five properties. What's really incredible is we sold one hundred and forty two properties. And I don't have one sense of regret. Not one of those deals do I see. Keith, I wish we hadn't done that or waded into anything which shows sold it faster, earlier, quicker because it was you know it was because of free money. It created a price structure that
frankly was very decent that disadvantageous to the buyer. That was Sam Zell, founder and chairman of Equity Group Investments. Coming up, we'll turn to energy and the quest to get more of it.
With less emissions. With Christine Todd Whitman, former EPA administrator and former governor of New Jersey. That's next on this special Thanksgiving edition of Wall Street Week on Bloomberg.
This is a special Thanksgiving edition of Wall Street Week. I'm David Westin Energy has been much on the minds of Wall Street this year as Russia's war in Ukraine made the price of natural gas spike up. President gets it. He's been working to get price gas prices down. So as a result, they've been coming down for the last three weeks or so. But we understand that that's partially due to the war in Ukraine and we need to keep oil on the market.
And President Biden tried to keep the price of gasoline down by releases from the Strategic Petroleum Reserve, additional 15 million barrels for December out of the SPRO. What the president was doing this even as he tried to continue his push for more investment in energy sources that didn't add to carbon emissions. Proving a good climate policy is good. Economic policy is a strong foundation for durable, resilient, inclusive economic growth. Much of Mr. Biden's effort was focused on renewables like wind and solar. But many of those who take the zero emissions goals seriously agree that we can't get there ultimately without nuclear energy. One of those who's been consistently advocating for the role of nuclear energy is Christine Todd Whitman, former governor of New Jersey and former administrator of the EPA. And go to Whitman joined us on Wall
Street week to explain how it could work. You've dealt with nuclear energy for years now. So give us your sense of the role of nuclear energy potentially in getting to net zero. I think nuclear play a huge role, at
least in the transition from fossil fuels to renewables. Renewables are not yet based energy. Their peak shaving and we're a 24/7 society, as is the rest of the world. The world is 24/7 and nuclear is the only forward based power that releases no regulated pollutants or greenhouse gases, wireless producing power. And we have an incredible safety record here in this country on nuclear and actually with few obviously very huge exceptions being Chernobyl and what happened in Fukushima Daiichi.
Overall, worldwide, it's been it's been safe and getting safer all the time. I mean, the US Nuclear Regulatory Commission is considered the gold standard on regulatory oversight of nuclear reactors. I don't think, given cost and time, that we're going to see any more large reactors built in this country. Certainly they are being built in China. They're being built around the world. And we can certainly play a part in developing the parts for those reactors. But I see the future for nuclear right
now being in the small modular reactors. Well, let's get to that and what we would first hold. Give us a sense of the scope of it already. One of the things I have learned is nuclear is actually one of the few things that really don't have emissions that can be taken to scale. I think something like 20 percent of
energy, the United States is generated by 70 percent in France. Right. Then, you know, you saw an example of what happens when you take nuclear off line.
When California took the San Onofre nuclear reactor off line, their emissions went up and the cost of their energy went up. I mean, it was totally counter to everything that they were hoping to achieve in my mind. And so what I found over time is that even if you have an opportunity to talk to people and answer their very real questions, I mean, it's it's normal to have questions about the safety and you should ask them, but the answers are really good and they're based on our history. You can prove that, in fact, these things work. And once you do that with people, they get much more comfortable with the idea of nuclear. It's just that for so long it's been used as, frankly, a fundraiser.
A lot of times for the environmental groups. And we need to get the public to understand, particularly with the new small modular reactors that are built in a contained facility, they can be placed on site. They're much safer technology. They're a much safer way to produce the nuclear energy. So overall, there are really, I believe, have the potential to make a huge difference, particularly if you think about the rural parts of America where you're not on the grid or you're not close to the grid. You can take a small modular reactor and provide power for an entire town or an entire business. So they have a lot of potential there. So let's pursue that question of safety, because that is a lot of people's minds, without a doubt. And as you've mentioned, we've had some
horrific instances. Is the issue of safety that people don't realize that actually the track road is quite good for nuclear? Or is it technological developments such as as you're referring to, a small module reactors? No, I think it's because people just don't know. They don't understand. I mean, I get a lot of questions. I used to in the past about, well, what about the spent rods? And first of all, I tell them from all that time we had one hundred and two nuclear reactors in this country and you took all those spent rods and you put them in one place.
You'd fill up one football field to the height of the goalpost. They might have gotten slightly above that. Now, was this was data from several years ago. But the point being, it's not this massive thing, this size of the state of Vermont that people kind of have in their minds.
And the other thing is that what's in those spent rods is 90, 87 to 90 percent fissionable material, meaning unused energy. And in France and Japan, they've figured out how to reprocess that and to get the energy out of those rods, rendering that what you have is that, quote unquote, bad stuff, two down to 15 percent, let's say. And it can't be used in a nuclear weapon. So it's much easier to store, much less to store. You have a lot of unused power just sitting there and they spent rods.
And we should be using that technology as well. And people have to understand when you explain it, them, you can't take one of these rods from a nuclear reactor and put it in a missile. It's not the same technology. It won't work that way. And the other thing that we explain to them, because one of the most immediate issues that we had in this country was Three Mile Island.
And when that went down, the operators in the utility itself, in the reactor itself, were never exposed to high levels of radiation. And they've been tracked ever since. And there were no releases into the community. And even those who were right there in the reactor. Had no adverse reaction to what happened, and in fact, it was because they overrode the system really that you had the partial meltdown, Fukushima Daiichi. That wasn't because of the earthquake, it was because of the tsunami.
And that was because they had their backup power, their generator located physically in the reactor building. After 9/11, our Nuclear Regulatory Commission said to our nuclear industry, you've got to move those out. They cannot be co-located with the reactor itself. So with that kind of thing can't happen here anymore. Just this week, we saw an announcement of a deal to acquire Westinghouse Electric, basically on the premise that, in fact, we're going to have more nuclear energy. Do you anticipate that the United
States. Well, I certainly hope we do. But it was, what, not even 10 years ago, I guess there were two four proposed reactors, two in Georgia and two in South Carolina. And we were very hopeful that those were going to come in on budget on time. And they both ran over and the utilities decided in each case that it just wasn't worth going forward. So it is a question of cost and regulatory hurdles. But you want to have those regulations in place because that's what protects the community and make sure things are safe and streamlined, how you approach them so that you make them go through all the hoops they have to for safety, but to put it to the front of the line to get this power online. The big problem we have, though, when
you talk about all of this is the grid itself is old. It needs to be revamped. It can't handle a lot of new power coming in. And that's one of the big challenges. This seems to get so overlooked a lot when we're talking about these issues. Again, you go back to small modular reactors, which can actually function on their own. What about the grid? Are we investing in the grid? We have the bipartisan infrastructure bill. We also have the so-called Inflation
Reduction Act, which had money in there as well. Is there money in there for the grid? Is it enough? There is money in there for the grid, whether it's enough or not. I doubt it. Hopefully the money that's there will be
spent in a way that ensures that nothing is wasted. Because we need every penny of it. Certainly every penny that's in there is needed to get the grid updated to where it needs to be in order to accept the new power, whether it's from nuclear or renewables. I mean, they're going to depend on that as well.
That was Christine Todd Whitman, former governor of New Jersey and EPA administrator. Coming up, we take a look at what's in store for the rest of the year on Wall Street. On Bloomberg. This is a special Thanksgiving edition of Wall Street Week on Bloomberg.
We have a little more than a month to go on global Wall Street, and this is what's coming up, starting with Annabel Rulers in Hong Kong. Thanks, David. Well, looking toward the end of the year in Asia, we're going to be focusing on key meetings in China as the Central Economic Work Conference takes place around mid-December. And that's going to determine growth policies for 2023.
And we could also get more of a sense of the priorities for the incoming leadership. Hala Fung is the man tipped to be the next economy czar, and he's already emphasized development as the party's top task. The question is also when China will start to reap the benefits of that pivot away from its harshest Covid policies. The data due in the coming days, that's going to give us clues on that, including PMI ratings this week. And then we've got trade monthly activity numbers due later on, central banks wise.
Well, the spotlight's definitely going to be on Japan. No big policy change is expected as yet. Governor Kuroda, of course, still at the helm there. However, inflation is now at a four decade high in the country. So the policymakers definitely under
pressure to justify the decision to stick with easy settings. Australia's central bank also in focus, given the labor market there is looking fairly tight. But at Bloomberg intelligence team saying that's unlikely to sway officials from moving by more than 25 basis points. The 22nd to FIFA World Cup continues in Qatar with the group stage concluding on December 2nd and the knockouts coming to a climax. Exactly a week before Christmas. Oil producing nations, meanwhile, will gather for the final OPEC plus meeting of the year in Vienna. That's on December 4th.
And energy consumers across Europe will be keeping focus on the long range weather forecast with elevated gas and electricity prices. They'll be hoping a mild autumn continues into the winter, with earnings season pretty much done in the shape of the new Congress. Now known, the focus for investors is squarely on macro economic conditions and how Fed policy reacts. Fed chair Jerome Powell said after the FOMC meeting in November that interest rates would need to go higher than earlier projected, but the path may soon involve smaller hikes. That's the setup for the mid-December Fed decision. The last one of the year that meeting will be preceded in the days prior by the monthly payrolls report and another reading on the Consumer Price Index.
Spending trends will also remain in focus. We'll get two big reads on household incomes and purchases with one release at the start of December and the other toward the end of the month. Sandwiched in between will be a big retail sales report that will include the time period for Black Friday corporate spending. Also, it is being watched as more companies announce layoffs, hiring freezes, as well as other cost cutting measures.
As business growth slows. A report on orders for durable goods that drops two days before Christmas, which should provide a better read of industrial activity and potentially insights into the recent contraction in goods spending. David, thanks to animal drillers Dani Burger and Romaine Bostick. Coming up, higher interest rates this year have really hit the real estate market hard. We get the overview from Tom SHAPIRO of GPI as Partners. That's next on this special Thanksgiving
edition of Wall Street Week on Bloomberg. This is a special Thanksgiving edition of Wall Street Week. I'm David Westin real estate is never far from the mind of global Wall Street in the United States. Construction accounts for three point nine percent of all GDP and one point three percent of the jobs.
So when you start the year with mortgage rates around three point three percent and they reach 7 by the end of the year, it can make for a bit of a rough ride. One of those feeling the ride most directly is Tom SHAPIRO. He's co-founder and chief investment officer of GTD Partners. And he joined us on Wall Street week to take us through some of the struggles, but also some high points for real estate.
Adjusting to higher interest rates. First of all, I want to start with your take on where the housing market is right now. We've seen some slowing even this week with some new housing sales as well as existing housing sales. Sure, that first, thank you so much for having me on the show. Why don't I just give you a little anecdotal evidence of what we're seeing in the film right now.
Our home sales are down about 15 to 20 percent, but that's a headline number and I think it'd be helpful to kind of dig a little bit deeper into that number. The reason for the most part it's down is because we can't deliver homes. We're still having tremendous supply chain issues. Also, we find that a lot of homebuilders are actually holding back on the number of homes they want to deliver.
And that is for a couple reasons. One. Inflation because costs keep going up and they don't know what it's going to actually cost to finish the house and to they want to write up the home price appreciation. So I would say for the most part right now, while we see a 15 to 20 percent slowdown in sales year over year, a lot of that is because of other extraneous issues. It's more of a delivery issue that is a demand issue.
With that said, we're definitely starting to see a pullback. We're starting to have to go deeper into our wait list. But every house at this point that we deliver in the markets we're in. We are selling what I think we have to be careful about what what we see on a going forward basis, because definitely we're starting to see things slowing down. That's a really helpful way of putting out because we're having those discussions about the overall economy.
Is it supply? Is it demand? As I understand you've got a supply problem because supply change. People say that's going to go away. Is it going away in housing? Well, it's not. I mean, we definitely have issues. We have problems getting trusses and windows and appliances.
We're delivering homes with plywood windows at times. If we're having all sorts of issues and of course, you know, the war in Ukraine and what's going on in China and work stoppages there, the deliveries and transportation is an issue when jobs are an issue and trades are an issue. So it's gotten marginally better, but we still have tremendous supply chain issues.
And look, if you look at how many houses were delivering a year in total, this is all all forms. It's about one point two million housing units a year, which is sort of in equilibrium. So, Tom, some of the issue can be on the demand side at some point. We've heard about mortgage rates going up to, what, 5.5 percent, something like
that. So that must affect it to some extent. Are you seeing its effects with that? Because we also have the Fed is going to start selling off some of those mortgage backed securities. Yeah, for sure. I mean, look, the consumers stretch, so why they stretch a stretch because of inflation. So we have all sorts of issues we have. Gas prices are more expensive and we have costs. The food is more expensive.
And of course, as you point out, mortgage rates are an issue. So the consumers stretch. And that is certainly going to be an issue on a going forward basis on housing.
But we are seeing, you know, people taking less options. They're going to slightly smaller unit types and they're renting. So we aren't necessarily seeing a slowdown at this point because of mortgage rates. But again, I think we have to be careful. I think, you know, the crystal ball says
it's going to get a lot worse. We're not seeing it today, but I think in the future we're going to see a slowdown. And as I mentioned, the 15 to 20 percent or so we're seeing year over year decline at this point isn't a demand issue, but I think we shouldn't kid ourselves that we are seeing it again. The traffic's down in a lot of our communities. It is starting to slow down.
So I think where to start to see the slowdown come in the next couple of quarters. When you say things are going to get worse. A lot of us go back to 2008, the last time we really thought hard about a housing crisis in this country. And there are some anecdotal incidents where it sort of feels like 2006, 2007, where people are outbidding each other houses. They're going way above the asking price.
Are there parallels with what happened in 2008? It's at a May. It's really, really good question. So. So why don't we go back in history? Because I think, you know, we really have to analyze what where did we end up in 08 and why did we end up there? So if you if you look back to 2005, we produced two million housing units. So in general, we produce one point two million households a year. What's a household? Your kid graduates college and moves into an apartment. A couple moves out of their parents house and they and they take an apartment, there's a divorce, et cetera. And that creates a need for housing
units. So against a total need of one point two million units, we produce two. And then it did slow down. Remember, after 0 5, even before the GFC, we started to have a housing slowdown. We still produce one point five million
housing units. So we had a massive oversupply going into. Then a demand shock. So it was really the perfect storm. And that is why we end up with the global financial crisis. So in those days, we just had a massive oversupply and we had and then we had demand just fall through the roof to shoot me, fall to the floor. So that is that is why we ended up in the GFC and that's why we ended up with a massive oversupply of housing at that point. People thought there'd be 8 or 9 million
foreclosures. We actually didn't believe that number because fundamentally we don't believe that if your house goes below your mortgage value by 5 or 10 percent, the people are going to walk away from the house. So we actually at that point started to buy housing lots. Why do we buy housing? Lots. They have tremendous convexity at the home. Price goes down 10 percent.
Housing lots go down 20 percent. There's some point where if you're gonna build a house across two hundred thousand dollars, that's worth one hundred eighty thousand dollars, lots of theoretically worthless, although of course they have some option value. Household formations also dropped through the floor. And that's because people doubled and tripled. Our people moved into their parents basements. There were such Mendel's unemployment.
So we started to see that at some point when the housing recovery happened and the economy started to recover, people would start to move out of those units and create households again. So that's why we did it. And we thought it was the best way to recover. That was Tom SHAPIRO, president and co-founder of VIX Partners. Coming up, the tight labor market has continued throughout the year, we talked about the causes, including some that may not be going away anytime soon with special Wall Street week contributor Larry Summers of Harvard and with economist Melissa CARNEY of the University of Maryland. That's next on this special Thanksgiving edition of Wall Street Week on Bloomberg. This is Wall Street. I'm David Westin.
Even as the markets and investors have struggled to come to grips with higher interest rates and less fiscal stimulus coming from the government. Even as inflation is cut into wages and profits, the labor market this year has continued to be robust. The labor market is still strong, but it requires a Fed that has a lot more skill and a lot more luck. Some of that may be, as they say, transitory. The continued aftermath of the pandemic and a dramatic snapback in the economy.
There are also more structural, longer forces at play. And we turn to our special moderator, Larry Summers of Harvard and his fellow economist from Maryland, Melissa CARNEY, to take us through some of those longer term labor market issues. They joined us from the Aspen Economic Strategy Groups meeting in Colorado. Let's start with the question of where growth will come. On the other side of whatever it is
we're going through, because that's ultimately going to be the question here. I understand for economists like you, it comes from one of two sources. Is there more workers or more productivity? Are we going to get more workers? We're looking at both fewer workers and lower productivity, as you know.
So let me focus on the fewer workers aspect for a moment. The real issue, demographic issue facing the US is we have a plummeting birthrate. And so total fertility in the US is now below the level required to keep population growth constant. And so the issue here is that on average now a woman in the US is expected to have one point sixty five children over her lifetime. So women used to have three kids. Then it fell to two women.
We're having comfortably above two kids for many decades with a roof with a fertility rate below 2. That means our population is going to age and it's not going to grow. And so eventually we're going to have a shrinking working age population. Unless, Melissa, we have immigration. That's right. And that's why immigration, I think many
of us at this conference feel is so very, very important. What's your sense of what economists would say, the politics apart about immigration policy? Economists love immigration. We think immigration is is the potential answer to our demographic challenges as well as our productivity innovation challenges. Since immigrants come in, they work. They're more likely than native born
Americans to be entrepreneurs and innovators. Of course, as you know, Larry, immigration rates are way down. So we used to bring in, you know, 2016. We had as many as a million new people coming into the country every year. That number is now below two hundred and
fifty thousand. And so the combination of a declining native born population and a decline in immigration portends even worse demographic challenges than if we were just facing one versus the other. Let me see if I can do a little arithmetic based on what you've said from 1 million, 250000. So that's about seven hundred and fifty
thousand people a year. So that's about half a percent of our workforce. Maybe a little less so half a percent slower labor force growth over time can accumulate to something that is very that is very large. And if we go back to the birth rates, we have about 500000 fewer babies being born a year than in the not distant past. Melissa, if you. What would you say about about this? Most people are scared that immigrants come and they take jobs for Americans and that if they're more immigrants than there aren't can be as many jobs for Americans or if there are jobs because there's more competition. They're going to be paid less.
And that's true whether the job people think is working at McDonald's or is working doing computer programming at Microsoft. What how do you how should people feel? Shouldn't they? Shouldn't they have this worry that they're going to be poorer if we take all the immigrants just like they get hurt? If we take a lot of look at a lot of trade from other countries where they have much lower wages. So so the reason economists are so bullish on immigration is because we have so much evidence that immigrants are good for the economy, they are good for most workers. But it is true that there are some groups in some places that will feel wage pressures. And I think the way we the way we solve this issue is to make sure that we recognize the disparate impacts of certain groups. We recognize that low wage workers in certain sectors might not experience the benefits, the overall benefits that immigrants bring to the economy. And we take steps to help them.
I mean, it's not it's not just similar to what we have to do with trade to, you know, more imports is good for most people, but some people are harmed by it. We're gonna see this, too, with the shift to green a greener economy. Some people are going to lose their jobs even though it's better for everyone. And so, I mean, I think acknowledging
that some people feel and are harmed by this, but that's a small, concentrated group and taking steps to address that allows us to do things that make the economy grow and be more productive. So I wanted to come back to fertility. Larry's pointed out a way in which economics, whether misperceived or not, they affect our willingness to have immigration. What about fertility? Are there economic causes for the reduction in fertility, the decline in U.S.
fertility? And it's really being driven by a plummeting of birth rates since 2007. Births fell after the Great Recession. They haven't recovered. You can't point to any any policy or economic factor that's changed since 2007.
So sometimes people will say things like child care has become more expensive. And if we just made child care less expensive, people would return to having more than two kids. I know that is just not the case, right? There's nothing there's nothing that easy that we could point to. And in fact, U.S. women now are just having births in the same way that women and other high income countries have reduced their birth rates long before in the 80s and 90s. So I don't think this is going to be easy to turn around.
Lots of other countries have taken direct steps to try and incentivize people to have more kids. There's a lot of countries that have experimented with baby bonuses, a few thousand dollars. Birth rates go up a little bit in the following year, but nothing like the 20 percent increase in fertility. We would need to get back to replacement level. Also, having an expert like you here, I
can't resist stepping out of our mutual lane as economists to ask a question I suspect is on many people's minds. Do you think that the recent Supreme Court decision and the steps that are going to be taken in a number of states, do you think that's going to materially affect the number of births in the United States? The we do have estimates on this based based on lots of data we have about how abortion restrictions lead to more birth rates. I expect there will be about 100000 more births a year. This is not going to bring fertility
rates back to where they were. This is going to mean that some women who wouldn't want to have a child now are going to. Since you raise the issue, I will say that this makes the imperative of doing more to support kids and low income women in this country that much stronger. That was special Wall Street contributor Larry Summers and University of Maryland professor of Economics Melissa CARNEY.
Coming up, there's dust have yet to settle from the regime shift to higher interest rates. Specifically that surrounding the so-called zombie companies with Sonya Gibbs of the Institute of International Finance. That's next on this special edition of Wall Street Week on Bloomberg. This is a special Thanksgiving edition of Wall Street Week. I'm David Westin getting money for free or close to it can be nice.
It allows us to pursue hopes and dreams that we otherwise might not be able to afford, leading to investments that couldn't be made with higher hurdle rates. I outline everything from community college block grants to aid to communities to reform of the earned income tax credit to support work. All of that is probably about 100 billion dollars a year. That's real money. But what happens when the music stops or at least slows down a fair amount? As interest rates shoot up and the bankers and other lenders get out their sharp pencils. Then, as Warren Buffett famously said, we find out who's been swimming without their trunks. And at the front of the line of the so-called zombie companies, the ones who aren't throwing off enough cash to meet their interest payments, much less pay off their principal. Sonja Gibbs, managing director at the
Institute of International Finance, joins us on Wall Street week this year to take us through the problem and what it may mean for the rest of us. Let me start with those basic questions. What exactly is a zombie company and how many of them are there out there? First of all, to take a step back.
What you need to think about is that over the past 10 or 15 years, global debt levels have skyrocketed. We've had very low interest rates. And, for example, non-financial corporate debt around the world is now close to 100 percent of GDP, and that's more than double what it was a decade ago. So that's a very worrying backdrop. And so what we mean by zombie companies is a company that essentially has to borrow to keep going. They're highly leveraged. They're not growing very fast. Their revenues are not up to par.
And at the moment, they face a very difficult situation. You've got higher input costs. So you're commodity prices are higher. Wages are rising at the same time. You don't earn enough revenue to cover all of these higher costs and your debt service. So if you have a ratio of revenues to interest costs, that's one or less. If you can barely cover your debt service costs, we call you a zombie company and it's a very good name. It's very evocative.
And for how many Emmys is difficult to calculate. Right? Because for a lot of firms that, for example, aren't publicly listed. The information might be less available. They might be smaller non-public companies.
But the Federal Reserve estimates that between five and 10 percent of U.S. firms fall into this category. It's also important to remember that this is not a static world. It's not one size zombie, always a
zombie. Conditions change. And in fact, becoming a zombie company is a little bit cyclical in the sense that when times are good, maybe interest rates are low. Growth is high. Maybe you're not a zombie, but then you
know that things happen. Pandemics happen. Shocks happen. Interest rates go up. And a company that was formerly doing reasonably well might suddenly fall into the zombie category. So you mentioned the overall debt load, which is true certainly United States and not just in United States, in part because interest rates are so low. There are some very, very successful, healthy companies that loaded up on debt because it was so cheap.
But whenever we've talked about this risk in the last few years is that don't worry, as long as interest rates are low, we're fine. It looks like those days may be on their way out. We have higher interest rates. So what kind of pressures that put on
these zombie companies? Well, I think it's a good analogy, right? It's all fine until it's not. And so you've had a kind of a confluence of factors that have hit pretty much at the same time. You had a pandemic which hit growth. You had commodity price shock. You have rising inflation. You have higher interest rates. And you also have firms whose whose
business models, for example, have been entirely changed by the pandemic. I mean, amongst the list of zombie companies, you might find a company like we work, you know, a company that has been very successful. But at the same time, the pandemic has changed a lot of things for that for that company. Carnival Cruise Lines is another good
example of a type of company who is now in the zombie category or some of the meme stocks. You know, AMC or GameStop. So these are really household names. And I think that the difficulty is at a point in time when you've got wages rising, when you have higher input costs, these firms may not be able to borrow as much as they need to borrow to keep afloat. So you do tend to find zombie companies concentrated in certain sectors or in certain sized corporations.
So I think it's fair to say that the sectors that are worst off in terms of percentage of zombie firms are probably in manufacturing and in retail. And retail, of course, is an industry that's undergoing secular change over the long term as we move to sort of more online, no less brick and mortar. I think there are underlying structural issues there and in that sector in any case. But I think some of the companies that
are hardest hit tend to be smaller firms. And if you think about a small company, they're sort of inherently face greater credit risks than some of the larger, better established companies that have long standing histories and track records in borrowing. They're, you know, familiar to investors. Smaller companies have a harder time accessing funds, especially when when borrowing conditions are difficult. And with some of these companies having
fallen on hard times during the pandemic, you know, there are estimates that suggest that in some cases as much as 25, 30 percent of the small cap companies, especially if you include unlisted companies, could be falling into this sort of zombie trap. I wonder, say, with the larger effects on the economy. Obviously, we don't wish ill for any corporation, but there's gonna be a lot of stress put a lot of the companies you're describing right now insofar as that all gets sorted out to use a euphemism, perhaps. Is there some benefit for the economy in
redeploying the capital? They represented the things that might be more productive than their enterprises. I think we might want to think about this in a short term and a long term context. So in the short term, it is very helpful for the economy to keep these companies afloat. And you could think of the example of Japan here, which has spent over eight hundred billion U.S. dollars since the pandemic hit to support its companies. So you avoid bankruptcy, you keep people
employed, you keep these companies afloat. But there's a longer term costs to be paid for that, because when you think about it, money that's being spent to keep zombie companies afloat is money that could be more productively deployed elsewhere. You could put it in due to capital spending.
You could put it into infrastructure. You could put it into new industries, new technologies maybe in the ESG world or green technology that can really deliver a boost to productivity and growth. So it's kind of a foregone opportunity in that sense that the system, for the reasons you describe and the example of Japan is a good one.
It strikes me there are political consequences of letting zombie companies go belly up. Well, you know that the politics of these things are always difficult. Right. I mean, one of the conclusion is that you can come to is that if you have a high proportion of zombie companies, if you have companies that you're worried about keeping afloat, there's political pressure to keep that going. The more that borrowing costs rise, the more that interest rate rise, the harder time these companies will have keeping going. So if you're in a world where inflation is rising and you have central banks having to make a very difficult balance between controlling inflation and supporting growth, which can involve supporting some of these less profitable companies, you know, it's it's it's a rock and a hard place. You know, where do you where do you draw the line? That was Sonia Gibbs of the Institute of International Finance.
That does it for this special Thanksgiving edition of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.