Wall Street Week 03/22/2024
The Fed decides not to decide, Reddit goes public, and former President Trump faces foreclosure. This is Bloomberg Wall Street Week. I'm David Westin. This week, Brian Deese on what's really going on with electric vehicles.
I think those headlines would make you more concerned than you should be. The demise of electric vehicles is greatly exaggerated. And Christine Roth, the clerk of Barclays, on a comeback for tech IPOs. Investor appetite is as strong as it's been in a very long time for IPOs. But we begin with our very special contributor, Larry Summers of Harvard. As we address what the Fed decided this week, what we heard from Jay Powell, and also maybe a little microeconomics before we're done.
So, Larry, thanks for being back with us. Let's start with the Fed, though. What we heard, I heard. More growth, less inflation, low unemployment. That sounds pretty good to me. Is it too good to be true? I don't know. Certainly, there's been some encouraging data flow during 2023, though.
The last two months haven't been quite so encouraging. It's great and right to hope for the best, but hoping isn't planning. And certainly from that scenario laid out in the DOT plots, I think there's more room for things to surprise on the bad side than to surprise on the better side. We may have the path that's described there materialize. It's certainly got to be recognized as a very real possibility.
My sense is still that the Fed has itchy fingers to start cutting rates, and I don't fully get it. We've got unemployment, if anything, below what they think is full capacity. We've got inflation clearly even in their forecast for the next two years above target.
We've got GDP growth rising, if anything, faster than potential. We have financial conditions. The holistic measure of monetary policy at a very loose level.
I don't know why we're in such a hurry to be talking about moving to moving towards the accelerator. So we heard from Chair Powell that, in fact, he thinks these conditions are restrictive right now. They are to stick even if we're not seeing a lot of restriction.
But that depends in part on where the neutral rate is, something we've talked about before. I still don't get a sense from the Fed that they've figured out where they think the neutral is and do they need to know that before they can decide where they're going? They need to take a view. Because if you don't know what's neutral, you don't know how expansionary or restrictive you're being. And I find their view that the ultimate neutral rate is 2.6
to be bizarre in current circumstances. Here's what we have relative to a few years ago when they said it was 2.5. We've got fiscal policy in a much, much more expansionary place with much higher deficits, much larger role of debt.
That puts pressure on credit markets. We've got a huge set of new private sector investments going on with respect to green investment in the IRA, going on with respect to resilience and reducing dependance on single sources. We've got a potential huge source of demand for chips and for electricity coming out of the AI revolution. And we've got a huge wealth effect as markets in for both housing and stocks have run way up for the last few years. So with all of those impulses to demand, I cannot understand why someone would form the view that the neutral rate was essentially the same as they were as they thought it was four years ago.
And I think the neutral rate is far more likely to have a four handle on it right now than it is to have a two handle on it. And from that perspective, I'm not at all sure how restrictive monetary policy really is. And the proof's really in the pudding. Monetary policy is by now had a very long time for the legs to work through the transmission variables, stock prices, interest rates, long term interest rates.
Credit spreads are flashing green and loose, and the economy keeps surprising on the high side. So either if you look at the fundamental determinants of neutral interest rates or you look at how far how fast the economy is growing, seems to me you've got to read a high neutral interest rate. And I just can't understand why the Fed is talking about 2.6 as a best guess.
I would be the first to recognize that this is a number that fluctuates, that we can't gauge it precisely, that economists don't have great models. So I'm not saying that I'm sure that they're wrong. I'm not.
But I think the challenge in policymaking is to try to make best estimates. Where you're equally likely to be wrong in both directions. Larry, it occurs to me that there are policies going beyond monetary policy that could well affect future inflation.
I'll mention a couple of them. Trade and tariffs, which tend to be inflationary. President Biden really didn't back off of what President Trump did very much. Now we have a candidate Trump, which saw going even further. And by the way, immigration, it seems like we're going to constrain immigration. And if you really constrain the growth of the workforce, as I understand it, that is inflationary.
What are the other factors that might be driving inflation? Part of the story of the great moderation of low inflation for 40 years has to have been the ways in which globalization held down prices. Flows of capital that promoted productivity enhancing investment. Flows of workers that enhanced labor supply, lower priced goods that provided competition. The best forms of competition we get in the US economy are often from imported goods.
And so if globalization held prices down, it follows that globalization will tend to push prices up, which will mean for some and travel higher rates of inflation. And I don't think the prospects of tariff increases of reductions in immigration, of war, restriction on foreign foreign investment, what that means for the dollar, I don't think that's reflected in consensus inflation views. And so I think that's another upside risk to inflation.
And frankly, it's one that would be substantially exacerbated if the Trump program, economic program, at least as it's been described in recent months, were to be implemented. So you mentioned a flow of capital and foreign investment. The United States. We have a specific instance right now in the instance of TikTok in the bill.
that’s passed the House, not passed the Senate. What do you make of that issue of trying to divest actually TikTok being divested by its Chinese partner and particularly compare and contrast to something we've talked about before, which is U.S. Steel and the Nippon Steel Investment into that. Look, without access to classified information, it's difficult to make a definitive judgment on either of those cases. I would just say this. It seems to me, albeit self-evident, that the threat to U.S.
security from our Chinese adversary are controlling the newsfeed. That is a primary news feed to more than 100 million Americans has to be vastly greater than any risk from our staunch ally, Japan. Having a private company own less than 15% of U.S. steel production. And so it seems to me there's just a very clear disproportion in the risks in those two cases. And I hope that will factor into our decision making going going forward.
Larry, thank you so much for being with us, as always. That's our special contributor, Larry Summers of Harvard. Coming up, a readiness to get tech IPO started again.
We talk with Barclays’ Kristin Roth DeClark about what comes next this year with the election kind of looming. Later, I could see 20 plus tech IPOs. That's next on Wall Street Week on Bloomberg. This is Wall Street Week.
I'm David Westin. The higher interest rates have taken momentum away from tech IPOs. But with Reddit up this week and Astera on deck 2024 may be the year of the comeback for tech companies going public. To take us through it, we welcome back Kristin Roth DeClark, Barclays Global head of technology investment banking.
So welcome. It's great to have you here in person instead of San Francisco. Yes, great to be here. So give us a sense we do have Reddit in this area, right, Right in front of us as we speak this week.
But are we seeing perhaps a break in the logjam in tech IPOs? Investor appetite is as strong as it's been in a very long time for IPOs. Part of that is because there really is a dearth of growth technology assets in the public market that are at scale today. And if you look at all of the public tech companies, over $2 billion market cap, less than 30 have growth rates over 30%.
So investors are looking for opportunities for growth in the IPO market. So is there a profile for the companies they're most likely to be successful? Reddit's very different from most era. Those are two very different companies, right? Well, scale matters to investors.
We saw, you know, some of the carnage a little bit from the 2020 and 2021 IPO classes where IPOs were priced at pretty significant premiums to where the, you know, multiples have been on a historical basis and then traded down significantly the ones that had the, you know, smaller market cap, smaller float were disproportionately impacted. And for that reason, you know, the scale really matters in terms of revenue scale. The second piece is, you know, growth rate and the interplay between growth rate and profitability.
So it's important to be to have kind of a balance that works growth. You get paid more for growth, but that's only if the unit economics work and there is a either a break even or a very strong near-term path to profitability, you'll get paid more for growth if the business is not growing, you know, 30% or north of even 20%, then having very significant margins and visibility and durability of those margins as the definition of significant growth change. I mean, given when you see some of that going in video, some of these growth stocks in tech have just been really, really strong.
Yeah. So I think for for an IPO, I would say a growth stock is something north of 20%. 30% plus is really very, you know, differentiated growth rate. But that's how I would think about it today. What's your sense of the pipeline out there for prospective IPOs in the tech area? I will tell you, we're tracking over 200 companies that we really think have a credible exit in the public market or entry into the public market.
I guess over the next two years, they could also be, you know, sold to strategics or to sponsors. But that's kind of the cohort of the private companies that were highly focused on for potential IPO is over the next two years structurally might be looking at two very different revenue models. If you have a consumer facing product such as Reddit, for example, what the consumer can do, what they can afford, how much they spend, could really affect it. On the other hand, if you're over in the artificial intelligence and like I mentioned, that term area, that's more of a business to business and need for semiconductors and things are there are two different revenue models here. Yeah, I'd say that the I mean investors right now are anything that's AI and anything that is security related are probably the two areas that have the strongest bid. The consumer facing stuff is a little bit more challenged in terms of a multiple.
You're just not getting the same multiple as you get for an enterprise sale that is that has those two and you know, kind of end market AI. We're just at the beginning of a decade long, you know, shift and change to what we can do from a productivity standpoint. And so we've seen a lot of the stocks that are being, you know, that are really being driven by the advancements in AI trade up significantly. And that will continue. I think there are going to be fits and starts and play times where investors think, okay, this has been a little bit overbought, take, you know, a little bit of profit taking. But I think by and large, this is a decade long plus shift.
What about regulation? Is there a prospect of regulation, particularly in the tech sector? We certainly hear about it from Washington. A fair amount is that's sort of a cloud out there on the horizon for investors. Well, I think I mean, companies and governments are talking about this a lot.
It's it's hugely topical, not dissimilar from what we faced with the explosion of social media. Right. But this is obviously more pronounced because it's impacting enterprises in a meaningful way.
So I think it's going to ultimately end up being a combination of self regulation from some of the enterprises without government oversight to some extent, but it still remains to be seen. It certainly is a question, but it's difficult for an investor to really discount that, is it not? Yeah, it is. And I think it's more about, you know, what are some of the what's the low hanging fruit And I some of the productivity tools for example, versus moving into you know what what the art of the possible could be in ten, 20, 30 years. It strikes me there's been something of a fallow period here with tech IPOs. It's not been as robust as before. Do you expect it to turn around and if so, when? Yeah, I do.
I think I mean, you're you're right. Last year there were five tech IPOs, a typical year there, you know, 40 tech IPOs. And this is just in the US. I could see this year with the election kind of looming later, you know, in the fall, I could see 20 plus tech IPOs.
And that's more about a readiness standpoint, like the companies are actually have everything ready to go to where they could hit the market in the spring, summer, you know, leading up to the election. And then we have very few windows kind of post-election with Thanksgiving and Christmas holiday and, you know, the winter holidays. So I could see a 2025 IPO type year for tech. I think in next year is where we could see kind of a return to the 40 plus, maybe even 50 tech IPOs. I wonder, I we've had a fair amount of uncertainty about interest rates. We know where the Fed is this week, but we don't know where it's going to be next month, for example.
How is that affecting IPOs and what do you project? Yeah, I think the the thing that affects the most are companies with leverage. So some of the companies coming out of private equity firms that may have been highly levered and then solving for what the right leverage profile is for the company on a public basis, how much primary capital do they have to raise to bring that leverage down to a level that doesn't scare investors because of refinancing risk, for example, in the in the high yield market? And so that's that's the one place where I think it's impacted a little bit and specifically, But I think we're coming out of that at a much more positive tone around leverage for investors because it feels like we're going to start, you know, taking interest rates the other way. But other than that, it's more macro, it's less about business specific and more about, you know, what does this do to them, to the market overall. Christine, really great to have you on and particularly here in New York. Thank you for coming to New York.
That is Christine Ross, the clerk of Barclays. Coming up, we go through the week in the markets with Chris Harvey of Wells Fargo. That's next. On Wall Street, Week on Bloomberg.
This is Wall Street Week. I'm David West. And markets found a lot to like and what the Fed did and said this week as the S&P 500 was up another 2.3% to end at 5234. Staying well above the median projection of the Bloomberg LS for year end number of only 5100.
While the yield on the ten year was down 16 basis points to end the week at 4.2%. Take us through where we are. We're welcome back. Now one of the Bloomberg elves himself, Chris Harvey, Wells Fargo Securities equity analyst. Great to have you back, Chris. It's good to be back. So so give us your sense of how the markets interpreted what they heard from Jay Powell this week. Oh, it was game on. So what they heard was, hey, the macro backdrop is hotter than we expected on a growth and inflation side, but we're going to keep the same accommodation we had before.
So the only thing that's going to change are equity prices and they're going to move higher. What that was is to a lot of investors I need to put on. I'm not going to be penalized for this. I'm going to put more risk on. I probably won't be penalized
for the leverage I'm going to put more leverage on. And things got we had a pretty healthy move. Let's just say that. So one of the things I find surprising is at the beginning of the year, we expected something like six or eight countries where we've gone from 6 to 3 people, maybe less than that. And yet the equity markets didn't really discount to that.
And why is that? So? I agree with that, and that's something we've been talking about. But there's more than one equity market. So higher rates did affect smaller caps, it affected value and it held those back. But when you look at the S&P 500, the S&P 500 is really a growth index. And growth has just been lackluster.
And the fact that you're actually pulling it back to an odd degree actually helps because you're not accelerating the economy. You're keeping the economy right where it is, which is perfect for growth stocks. And the last thing I would say is that you have this amazing secular growth story in AI that's not going anywhere fast.
That's what exactly I was going to ask about because it's great. We have, at least for the moment, we hope it's all going to prove out as brilliantly as people think it is. But is there a risk there in the narrowness of the market because it's so tight, tight and high tech? And and I there is a risk to it, right? We don't like to see the market this narrow, but it does make sense, right. When we see a market that's a bit broader, typically see different things.
We see an economy that's moving from contraction to expansion. We're pretty much in this what I would call economic malaise where things aren't great, but they're not terrible. And you should expect a pretty narrow market. And again, the real story here and I don't want to be too repetitive with it, is it's a secular growth story that's in play. And the fact that the Fed is adding a significant amount of accommodation to a period or a situation that really doesn't need it. So you like momentum.
We do need to explain that to us. What do you like in this picture that really tells you momentum is the way to go? So it's not What do we really like about it because the market's so narrow, because there's not a ton of opportunities. Everyone's chasing the same names. And so what happens is you get stocks that that do well, continue to do well and people say, well, Chris, that's kind of a silly way to invest and it's kind of naive and I understand that. But if you look at the fundamentals for the stocks that are doing very well, the fundamentals are actually quite good.
And what we keep saying is people are very scared about momentum because momentum, if you go back to post financial crisis in March of oh nine, momentum or momentum factors turned on their head and people lost a lot of money playing momentum. Same thing with the pandemic. But what we're saying right here, right now, a lot of the macro factors that would cause a point of inflection just aren't there be a credit spreads, be the economy going from contraction to expansion or the fact that the contrarian basket where a lot of broken stocks just don't have very good valuations and good fundamentals, So momentum is good. Tell me about valuation. At what point are they fully valued and tie that back in, if you would, to earnings. What we're expecting out of earnings is that could take care of the valuation problem.
So, David, what I would say is that we don't have I talk a lot about valuation, but our clients aren't talking about valuation all that much. And I understand why we're in a relative, we're in a chart looks good relative growth type market. And so if growth is going higher, you're going to be rewarded by that at some point, valuation will matter. But because growth is moving so quickly for a select number of stocks, there's really just one game in town and that will continue for a while. What I think and what you have to worry about with the rotation or broadening out in the market is will the economy accelerate faster than we expect? And that could cause a rotation and we just don't see that right now. One last one.
We have another game in town coming up in November. It's called an election. Do we take that into account at all as we take a look at investing in the stock market right now? We do. I don't know how to handicap the the presidential election and luckily I don't have to.
The real game in town here is the Senate who wins the Senate and it looks like the GOP has a better than a 5050 chance at winning the Senate. Why is this important? This is important because this could change the regulatory environment. The M&A market is improving. And if the GOP does take the Senate, we would expect an acceleration of the M&A market later on in the year because of the potential change with regulation. So you think the antitrust enforcement policies have held back some M&A? That's part of the reason we've seen as Absolutely.
There's not a question. It has absolutely held back some M&A last one, taxes, because there's a question we're renewing the Trump tax cuts. How important is that in the Senate? It's important, but it's not something a lot of people are talking to us right now. So I think it's more of a 25, 26 issue. It's not really a big issue. And top of mind for many investors at this point in time thing.
But you don't want to handicap the election. You sure we can still do that? If you want. You can tell us who's going to win if you want. I'll just say we'll have we'll have a president, We'll have this go and vote. I'm going to vote. Yeah, we got I can handicap, but we'll have a president, which is good news.
Thank you so much, Chris, for being back With us is Chris Harvey of Wells Fargo. Coming up, is the push for EVs losing its momentum? We talk with the man who constructed the Biden administration policies, Brian Deese of MIT. That's next. On Wall Street Week on Bloomberg. This is Wall Street Week.
I'm David Westin. Electric vehicles are a policy priority in the United States, in Europe and in China. Even as automakers, at least the United States trim back their ambitious goals. Brian Deese has been at the center of auto policy in the United States. First, as a member of the Obama administration team that rescued the industry during the great financial crisis, and then more recently as director of President Biden's National Economic Council. And we welcome him now to Wall Street Week. Brian.
Welcome. It's good to have you here. I'm happy to be here. Bring us up to speed on electric vehicles as they were all the rage just a couple of years ago. And now when you read in the press, maybe not quite so much, maybe the consumers are not rushing to buy them. You see some U.S. automakers cutting back on their goals. What's going on? Well, I think those headlines would make you more concerned that you should be that the demise of electric vehicles is greatly exaggerated. So let's start with the numbers.
So in 2023, there were about 1.4 million electric vehicles sold in the United States. That was almost 10% of overall sales. That was up 50% from a year before. So really significant growth. First couple of months of this year, EV sales are up about 20%, 15 to 20%.
So the rate of growth is slowing. But I think that that's actually reasonably what you would expect. This is a market that as it matures and as it becomes a larger share of overall vehicle sales expecting year on year, 50% growth rates was never realistic.
And so I think the question is where will this growth trajectory lead out and also when will the appetite for this electric feels but up against consumer concerns and consumer adoption? I don't think we're there yet. And so, you know, a rate of growth that's 20% year over year would be pretty good for a lot of industries. But we're certainly seeing a slowing compared to the rate of pickup in 2022 and 2023, which was really quite extraordinary. Overall, the demand for EVs, the United States continues to go up even if more slowly, but different makers are taking different approaches to stimulating that demand. Ford, for example, cut prices significantly on the Mustang Mach-e as a response to demand. All eyes will be on Tesla, of course, because Tesla is the marketing company.
Pure play ev name how it says in the first quarter will be critically important. You know, there is something happening where the early adopters in America have been and gone in terms of the consumer and there is still an assessment to be done on how impactful the incentives provided by the inflation reduction Act are going to be. And it's not just the traditional Big Three US automakers seeking to take advantage of those incentives, raising the specter of the US being left behind by overseas producers the way we saw in the 1970s. Well, I think there's a risk.
I think you listen to what the leadership of Ford and GM instill into it as well are saying. They recognize they're behind that. This is fundamentally a technology play. Electric vehicles, it's a it's a fundamental shift in technology. It's not just an incremental shift in vehicle technology.
And they were behind Tesla on they are both ahead. That said, I think you're seeing as certainly GM and Ford both invest a lot in saying we need to we need to catch up and we need to catch up quickly, I would say. Ford's CEO, Jim Farley, has been very blunt about this in saying we're going to need to remake this company. We're going to need to do things differently in terms of how we organize ourselves to drive innovation, to actually catch up and catch up quickly in a growing global market as well. So I am hopeful that what we'll see is that that kind of commitment actually manifests in the marketplace.
And we've certainly seen some we're seeing those companies increase their sales sequentially as well. But I think that that's always a risk. Right? We have to we we're going to have to stay ahead. And it's a dynamic global market.
Is there a challenge in the price point? Because certainly a GM, for example, started out with a more expensive vehicles made sense because they needed to cover the costs. At the same time, again, going back to my recollection of when Japan really made inroads. They started out pretty inexpensively.
You have some less expensive models coming from overseas. Yeah, look, there's different different approaches to this electric vehicle market that are really fascinating where I think the the dominant approach is to start at the very high price point, try to capture that margin and then drive drive prices down across the board. I would argue that actually learning from history, there's a real opportunity to own the lower cost segment of this market, right, to be the electric vehicle provider for typical middle class folks across the country. We've seen some innovation on that front. GM introduced the Chevy Bolt and for a part of last year, it was the fastest growing electric vehicle in the country.
And so I think it's it's possible. And the other thing that's good news for consumers is in addition to seeing this electric vehicle growth, prices are coming down very significantly. We've seen a 20% reduction in the cost of the purchase price of electric vehicles just over the course of the last several months. That presents a constructive challenge to the auto companies, But it's good news for consumers that we're seeing more and more of these vehicles get into a price point, which is really in many ways, you know, comparable, particularly when you take into account the overall cost of ownership. The Biden administration has made no secret of its desire to urge the auto industry ahead in the transformation to EVs as it seeks to put its foot on the accelerator of electric and step on the brake for internal combustion engines. And then we kind of have the carrot and the stick approach where the carrot is, the incentives provided for by the Inflation Reduction Act.
But just this week, the Biden administration came in with the stick more stringent tailpipe emissions by 2032, particularly aimed at the likes of GM and Ford to accelerate their transition to selling more battery electric vehicles because their combustion engine cars will be bound by these new, stricter rules. You have to remember that GM and Ford are using the kind of highly profitable combustion engine pickup focused business to fund their transition to EV. The problem is, is that there is kind of some softness in both of those, and particularly more softness in heavy demand than they perhaps expected. And one thing that's sorely needed if we're to get to an electric vehicle future, is a way to charge those vehicles across the country. The single most important thing the government needs to do is to backstop the build out of an electric vehicle charging infrastructure.
It's interesting, if you look at the cost effectiveness of a public investment to actually reduce emissions across time, there's probably no higher bang for buck investment than a public investment in infrastructure. And if you think about it, it makes sense, right? Who's going to build out the backbone of chargers across the country to help address range anxiety and give people a sense that this will be as easy as owning an internal combustion vehicle. The good news is the government is doing that and backing that in a significant way. That was part of the infrastructure of the bipartisan infrastructure bill that we passed in 2021. And that money is now hitting the streets and we're starting to see significant build out of that infrastructure. We're going to need to make sure that that stays on track and that the experience, the charging experience, is not just that there are chargers there, but the experience itself is easy and straightforward so that consumers feel as if this is something that they can get comfortable with the way things have developed.
We can't talk about electric vehicles without talking about China and BYD. It's becoming a real factor globally. We just had the former President Trump talk about the possibility of manufacturing in Mexico, hundred percent tariffs that come across the border.
How big a factor is China and how should the government handle that challenge? Because the BYD automobiles are at a much lower price point, I believe. They're they're lower price. I also think they're not they're not particularly well positioned for the U.S. market in the U.S. consumer.
Look, I think we need to step back. The the challenge that we have with China right now is quite significant. And we need to have a strategy to address that. And part of what is happening is China's got very significant imbalances in its own economy, and it has to make some difficult decisions about whether it's going to double down on a strategy that is over subsidizes and often in in inappropriate or illegal ways subsidize its manufacturing base at the expense of more balanced domestic growth in its own economy and at the expense of other economies worldwide.
And that overcapacity issue is an issue for the U.S. economy, but it's also an issue for the European economy. It's an issue for other economies as well as interesting.
Just this week, we saw Brazil actually raised the prospect of anti-dumping duties against China because they're facing these pressures as well. I do think that the that Chinese model of just pushing manufacturing above all else, including above its own balanced domestic growth, is not a tenable long term model. We in the United States that we need a strategy to succeed on our own. And part of that is making a commitment to invest in our own industrial capacity.
One of the things I would note is that in the last year, the single category of manufacturing investment that has grown the fastest in the U.S. is in the upstream electric vehicle battery supply chain. It's a $42 billion in manufacturing investment going into everything from upstream processing of critical minerals to battery assembly and then ultimately electric vehicle assembly as well. There's a lot of investment in the United States to build that capacity. And as that happens, hopefully, as we were talking about, prices will come down.
Finally talking about the labor consequences of electric vehicles, as I understand it, takes significantly fewer workers to produce an electric vehicle than an internal combustion engine car. What does this mean for the auto worker, which is very much on everyone's mind right now? Well, look, I think what you need to look at is the entire value chain. And so the electric vehicle itself, from an assembly perspective, has fewer parts and therefore less labor. The building of the batteries and the whole upstream supply chain there creates new opportunity and new opportunity for workers and for labor. So that whole battery supply chain that I was just talking about, it's referred now often as the battery belt. You know, from Michigan down to Georgia, we're seeing this investment in the manufacturing and the processing and these upstream components as well.
Taken together, that creates real new opportunities for American workers and American labor. I think it's one of the reasons why these things aren't easy. But you've seen even the UAW come around and recognize that this is the future of the industry, and the opportunity is to effectively organize that whole value chain. And they're seeing more opportunity than threat from that is a fair amount of risk filling required in order to do that. Yes or no, in the sense that the the the best positioned workers to actually do that work in the future are the existing workers who have been trained and worked in a lot of auto plants or in the suppliers Tier one and Tier two suppliers.
Those workers are the best positioned and they should be in a position to actually have a shot, a fair shot at jobs in the battery supply chain. At the same time, we're talking about really cutting edge, innovative technology. And so whether that's the chemistry involved or storage more generally and I mean, this is exciting.
We're talking about batteries for electric vehicles, but the storage technology itself is also going to help solve a lot of our energy needs, create a grid that is more dynamic and less susceptible to risk, help feed the need for energy that's going to come from data centers that is powering so the underlying technology of how we store energy, whether that's in a vehicle or in a much larger battery, is one of these. There is a cutting edge innovation where reskilling and frankly, we need new we need new innovation as well. I'm happy to say that Variety is going to be staying with us as we turn to what this fall's presidential election could mean for the U.S. economy. That's next. On Wall Street. Week on Bloomberg.
This is Wall Street Week. I'm David Westin, former National Economic Council director. Brian Deese has stayed with us to talk about the economy. So, Brian, we've got an election coming up. You may not have noticed it coming November, and it looks like it's going to be Joe Biden versus Donald Trump once again. Give us your sense, having been in the White House, what difference does it make? Because it occurs to me sometimes I think we put too much pressure on the president and the White House.
They can't control everything. Economy. How much of a difference does it really make? Well, look, I don't know if this election is going to be decided on policy and policy differences, but it should be, because if you look at the difference between these two candidates, the differences are as stark as any certainly any election in modern history. We've got President Biden's got a basic approach to the economy that he has laid out.
And now you can see we're talking about significant investment in industrial renewal in the United States, a commitment to the idea that public investment in things like infrastructure, things like clean energy, a build out of the semiconductor industry, will help to expand productive capacity, ultimately expand real wage growth. And that's his strategy. And then, frankly, it's consistent with who he is and how he's approached the economy for some time. Candidate Trump, on the other hand, is a dramatic, dramatic departure.
And the thing that I think we're probably paying insufficient attention to is at a moment where prices are the top issue on Americans minds. And we've finally seen real progress in bringing inflation down and bringing prices down. The basic Trump approach of protectionism across the board, indiscriminate tariffs, shutting down immigration and raising costs like health care costs by getting rid of pharmaceutical regulations.
Getting rid of the Affordable Care Act is a recipe for significant inflationary pressures in the economy and price increases for typical families. So I think that that's a real short term effect and a real difference between these two candidates. Let's take a couple of those, if we could. They are immigration and they are for protectionism, as you put it, on trade. President Biden has not really dialed back substantially on the tariffs put in place under President Trump, as I recall.
And certainly when it comes to China, it doesn't sound like they have a very different position. Is there really a difference when it comes to trade between these two men? I think there is. I think it's pretty stark. If President Biden has had a sort of a basic two part approach when it comes to trade, which is, one, have a very targeted approach to protecting American interests, economic and national security when it's warranted, and to really committing to work with partners and allies to try to build more capability and effectiveness when that is the case.
So if you look at something like semiconductors, the Trump administration really didn't take any action when we were looking at sensitive dual use technologies that were potentially getting in the hands of the Chinese or other adversaries. The Biden administration came in, President Biden came in and said, I am going to put a stop to that. But I'm going to work with my allies and partners to do so, because otherwise it's fundamentally ineffective.
You contrast that with the Trump approach, which is still emerging. So we'll have to see what happens on the campaign. But if it does turn out that what we're talking about is a 10% across the board tariff on all products coming into the United States from Allied countries, from from countries or from products where we don't produce anything here in the United States. A cup of coffee that is a very extreme and new step.
You talk about completely eliminating permanent normal trade relationships with China. Candidate Trump has said at times, I want to literally eliminate all imports from China, period, and stop. The macro economic impact of those steps would be significant. You know, potentially a couple of points off a GDP and a practical impact on those four families would be quite significant to people would start to see it. And I think that a general Trump approach is one of core isolationism, which is not only to break those barriers, but basically to alienate our allies in the process that creates, you know, potentially larger across the board.
So I think that the the top line well, you know, there's not that much difference in the mind. Trade is is a is is a complicated position when you when you unpack it. And what about immigration? There was a time there seemed to be a very big difference with them. President former President Trump certainly would say there's a big difference, but it feels like President Biden has moved toward the position of President Trump.
Is there a big difference this point? Isn't any president going to have to address that southern border no matter what 100% The border will need to be addressed. There need to be addressed in a appropriate and aggressive way. I think the big difference and what I what I worry about is with respect to the legal immigration system. So one of the significant things we've seen over the past couple of years, the reason why we've seen significant increases in labor supply and labor force participation, it's legal immigration has come back after COVID and after the Trump administration, as well as more women coming into the workforce. That process of legal immigration that is now normalized. And the Biden administration prioritize, for example, working down visa backlogs and trying to get to a more normal system.
I think under a Trump administration, you could expect that to revert. And I think in addition to that being bad for innovation and bad for for broader economic growth, it could also be quite inflationary in the short term because what you're doing is constricting labor supply at a moment where we need more we need more workers in the United States. Our legal immigration system has been an engine for growth for decades, for a long time.
I think that there would be a big difference on that front, because I think you're right. With respect to the southern border, it will need to be addressed. It will need to be addressed in a realistic but aggressive way. What about fiscal policy? And as you said, President Biden has really pursued a policy of investment which is amounted to fiscal stimulus.
There's a fair amount of it's still to be expressed. It hasn't come through the system yet. Is there a big difference in addressing the deficit and the debt? Because a lot of people, at least on Wall Street, are pretty concerned about it at this point? Yeah, Well, I think there's there's there's reason for concern. The big difference the biggest difference here is with respect to tax policy. And they're the numbers are very large. So if you look at there's a recent analysis of what would it look like from for Trump policy to go into effect.
If you're talking about both extending the Trump tax cuts that were put place in 2017, many of which expire in 2025. And then you add on to that, it's things that Trump has been talking about to include a reduction in the corporate tax rate to 15%. All told, that would be about $4.6 trillion in additional tax cuts over a decade. That's almost two percentage points of GDP would take our revenue down below 15% of GDP. Very different from what a President Biden is talking about, where he's talking about actually trying to increase taxes, raise that corporate tax rate back up from 21 closer to 28%, increase taxes on the very wealthy by a significant amount.
That could raise a couple of trillion dollars. So that gap between the two is well over $5 trillion. That will be a line of debate and a line of demarcation in 2025. But given the fiscal backdrop we have, I think if the market actually internalizes the idea that we're not going to do anything about the Trump tax cut extension and in fact, we're going to come in, we're going to layer on that with additional tax cuts, then I think that you'll start to see that in in impact on line to borrowing costs, because it will send a signal that we don't really have serious plan to address the revenue shortfall that we have in this country.
Ryan, thank you so much for being on Wall Street. Really good to have you here. That is former National Economic Council director Brian Deese. Coming up, the magical world of mushrooms comes to global Wall Street. That's next. On Wall Street Week on Bloomberg.
Finally, one more thought. Socrates said, my friend, care for your psyche, Know thyself for once we know ourselves. We may learn how to care for ourselves.
And let's face it, just about all of us could take better care of ourselves by getting enough sleep and reducing stress. We see that these five daily behaviors of sleep, food, movement, stress and connection dramatically affect our health and our longevity. People who run big companies like Indra Nooyi of Pepsi see a greater need than ever to care for the psyches of their employees. I think post-pandemic we are seeing more and more people say, I have to worry about me as a person. I have to worry about my family. I want to worry about my well-being, my mental health.
So we've got to start encompassing people as holistic humans as opposed to a tool of the train. Some of us turn to psychotherapists mob boss Tony Soprano did. Any thoughts at all on why you blacked out? I don't know. Stress, maybe.
But for some, it's not enough to get more sleep or have a more thoughtful boss or have someone to talk to. Some of us turn to chemistry, like Elon Musk, who is talking about his use of ketamine again. There are times when I have sort of a, I don't know, like a negative chemical state in my in my brain.
Like depression, I guess, you know, or like depression. That's not linked to any negative lives. And then ketamine is helpful for getting anyone else out of a negative frame of mind.
And now there's a new game in town or really an old game that some of us may remember, perhaps hazily from the 1960s. Yes, there's a return to magic mushrooms. Mike Tyson does it. Even when he was partying in St Barts with Jake Paul, the man he's due to fight this July.
Are you taking shrooms before the workout? Just because, like, the the space of thinking? Oh, absolutely. The focus and this of shrooms. It can't compare to nothing.
Okay. Chelsea Handler does it with her employees. You took them camping and everyone took mushrooms.
I didn't provide the mushrooms just for legal reasons. I want that to be stated very clear. Where in the budget is that? Is that craft service? Yeah. People can pick mushrooms in the forest.
Bloomberg this week reported on so-called magic mushrooms being touted by executive coaches and Wall Street Journal had a piece on these magic mushrooms being, quote, the working woman's newest life hack. Steve Cohen has doubled down on his investment in Sabin. That's a bio pharmaceutical firm. In clinical trials for a medicine to handle serious depression, a medicine that uses, you guessed it, the active element found in magic mushrooms. Given all the buzz, maybe this really is the way to go.
But as my wife could tell you, I'm pretty conservative. And back in the nineties when I was general counsel of Capsids ABC, we had a big commitment to the Partnership for a Drug Free America. That's a charity founded by Jay and Jay CEO Jim Burke, who just happened to be the brother of my boss, Dan Burke, And the essays we ran on ABC had a decidedly different approach to psychedelics. This is your brain, This is drugs.
This is your brain on drugs. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2024-03-31 20:40
