Wall Street Week - Full Show (05/12/2023)

All eyes on Washington, on the drama over the federal debt, on whether the

Fed can take a break from raising rates and on the two men who are running for

president again, this is Bloomberg Wall Street week.

I'm David Westin this week, Blair Ephron at Center View Partners on the appetite

for big deals. Despite all the uncertainty, we are in

uncharted, complicated waters. Former Fed vice chair Randall quarrels

on what went wrong with Silicon Valley Bank and former BBC and New York Times

head Mark Thompson on what's streaming. And a I mean, for the business of news,

the news is going through a revolution. That's what's going on.

This week, global Wall Street spent a lot of its time trying to look around

corners like the corner of the debt ceiling and whether it will keep the

government from paying the debts it has already run up.

Speaker McCarthy travelling to the White House for what may or may not be

negotiations. I was very clear with the president.

We have now just two weeks to go. And the issue followed Treasury

Secretary Yellen to the G-7 finance ministers meeting in Riga, Japan, at the

end of the week. If Congress fails to do that, it really

impairs our credit rating. We have to default on some application,

whether it's treasuries or payments to Social Security.

The president's reelection may still be 18 months away, but the two leading

candidates each had his own take on the debt ceiling issue, with President Biden

saying it wasn't just the United States that is in the crosshairs if we default

on our debt. The whole world is in trouble.

This is a manufactured crisis. But on the other hand, former President

Trump appeared on CNN and said maybe a default isn't that big a deal.

I say to the Republicans out there, congressman, senators, if they don't

give you massive cuts, you're going to have to do a default.

And in the meantime, consumer price index numbers came in this week.

As predicted, the month over month change for both the headline and the

core comes in exactly as forecast had to up four tenths of a percent.

Now, that's up on a headline basis over what we saw last month, which, like

Vince Reinhart, did doubt that they would do anything to change the Fed's

path. Was today's disqualifying actually

being, you know? The markets this week were relatively

calm, with the S&P 500 off just three tenths of a percent.

The Nasdaq up four tenths of a percent. And the yield on the 10 year up less

than 2 basis points lending. We ended the week at three point 4 6 0 6

to take us through what we saw this week.

We welcome now Liz Ann Sonders back to Wall Street Week.

She is chief investment strategist at Charles Schwab.

And Kristen Britt, really? She is head of North America Investments

at Citigroup Global Markets. So welcome to both of you.

Great to have you, Christine. Thank you for coming to Wall Street.

We've really good to have you here. It's great to be here.

Thank you. Let's start with you in the equity

markets. They seem to be relatively calm despite

their talk about maybe some kerfuffle down in Washington.

Yeah, this is really interesting. And I think it's one of the most

frequently asked questions that we're getting from our investors.

Why is volatility muted? Why are we not seeing any stresses

within the equity markets? And I think there's a couple of

explanations for this. So the first one is when you look at the

breadth of the equity market rally that we've seen, it's really only seven

stocks are driving 80 percent of the year to date gains.

So this is very concentrated. This is very idiosyncratic.

Another way to look at it is you have about 10 companies that are driving 25

percent of the free cash flow generation within the U.S.

market. So this is a story about the companies

that are really well-run as opposed to a breadth and depth of this rally.

So listen, what about that? Does that narrowness of the rally, if we

can call them the stock market, does that make you nervous?

Well, it doesn't suggest as healthy a market as if you had, you know, the

soldiers at the front line and not just the generals at the frontline.

I think there's a little bit of muscle memory and a knee jerk move that goes

back into names like this. When people think back to those that

group of stocks, many of the same ones represented almost a defensive place to

go during the worst part of the pandemic.

But of course, what it represented fundamentally at that time was those

represented the the only ecosystems in which we were living when everything was

shut down. I think this time it's a bit different.

Chris talked about the large size and liquidity and cash generation of these

companies. You can also see the dominance of their

outperformance really kick into high gear when we saw the failure of SBB Bank

and the ripple effects. So I think that really was the push.

There you can have an environment like that last a while and it doesn't

necessarily have to be calamitous. There are times where you can see some

catch down by the big dominant names while you're seeing improving breadth

and better participation on the way back up.

That's a bit of what was going on last fall when the market had its low.

But I think concentration risk in terms of what is the manifestation actually

for investors. I think we investors should be mindful

of not chasing that and ending up with too much concentration risk.

So of course, the equity markets can't get too far away from earnings and we're

well into earnings now towards the end of this season.

And we looked at CAC elves, you know that we have 24 elves, of which we have

one from City actually. And they're projecting overall, I think

two hundred and six dollars at the end of the year earnings per share, which is

down about 8 percent from last year. Were you on that projection?

We're very much aligned to that that we started this year about looking at about

a 10 percent earnings contraction. We're now in the ballpark of about 8 to

10 percent. And I think when we look at Q1 earnings,

they were certainly better than feared, which is why we could see some reduction

of that number. But I think what we have to keep in mind

is when we look at the U.S. equity market, we have seven out of

eleven sectors that are already in a profits recession.

When we look at what the Fed has done already, the 500 basis points of rate

hikes, the quantitative tightening, the stresses in the banking sector that are

all going to lead to a tightening of credit conditions.

This is something that has us very cautious.

It's more difficult for companies to be profitable in this environment.

It's more challenging on the consumer and the idea that this isn't going to

flow through to corporate earnings in a more material way.

It's something that we just don't believe.

So playing a little defense here and expecting some downside is what we're

advising are our investors. Listen, I must say, when I listen to

Chris, I remind you so that you said on this program before, which is we may not

have an overall recession. We're having a rolling recession, as we

talked about the seven of the 11. Is that still your position?

Are we ever going to have a real recession across the board or is it just

going to be one segment after the other? I think more likely than not, we'll have

an actually officially declared recession by the NBER.

Of course, that happens well down the road in terms of just the process of

making the announcement and then backdating to when it started.

I think what what had been a missing ingredient for a traditional recession

until the start of the banking crisis was the absence of a credit crunch.

We had had the asset crunch part of this, but we've not had a credit crunch.

It's certainly a lot harder to bank on that at this point.

We certainly have a credit contraction likely to turn into a credit crunch.

I think that ultimately takes down the segments of the economy.

Me that had a revival at a later point in time because of just the rolling

nature of the pandemic. The goods orientation on the demand side

initially even within inflation metrics. Many of those areas like housing,

housing related to factory sector went into recessions.

We've just had the offsetting strengths in services and that's a larger employer

and that's helped keep the labor market afloat.

But I think that is set to falter and it's unlikely that a recovery in those

areas that already have gone into recession will be sufficient enough to

offset that. So I think it's a it's a better shot

that this ultimately goes in the record book as a recession at some point.

Christine Berry and Liz Ann Sonders, we'll be staying with us as we turn to

the crisis. And I think at this point you can call a

crisis over the debt ceiling and how markets are reacting to it.

That's next on Wall Street week on Bloomberg.

This is Wall Street week. I'm David Westin.

We're either in or rapidly approaching a federal debt crisis as the so-called X

date when the government runs out of money is just over two weeks away now

with a default, something most everyone agrees would be a catastrophe.

And there are some indications in the Tea Bill and the CBS markets that at

least some investors are starting to get worried.

But you couldn't really tell that from the equity markets.

This is not the first time we have been here.

And we asked our colleague Michael McKee to compare what we're seeing now with

what we saw in 2011 when we had a similar close brush with disaster.

Investors David Westin rather hope that history doesn't repeat or rhyme for some

time we've been told that nothing's going to happen on the debt ceiling

until we get to the last minute or until Wall Street melts down.

And it does seem we're getting close on both counts.

Here's what J.P. Morgan Chase CEO Jamie Diamond told us

just a few days ago. Actual default.

That is potentially catastrophic. And you will go through a million ways.

But everyone anymore, Zaman knows that. Guys, Robert and I know this is gonna

happen because it gets catastrophic and the closer you get to it, you will have

panic. Marcus Good, volatile.

Maybe this doc Margot down the Treasury market will have their own problems.

It's amazing. You already have certain T bills

straight in 3 percent. And right next on five percent.

This is not good. We have seen this movie before, the debt

ceiling taken hostage for spending cuts a number of times over the past couple

of decades. 2011 is one time when investors don't

want history to rhyme. They went down to the wire as President

Obama fought the idea of giving in to extortion the debt ceiling.

Then markets collapsed. The S&P 500 went down about 20 percent

and stayed down for quite some time before starting to go back up again.

Liz Ann Sonders at Charles Schwab and Christine Britton, bitterly of city, are

still with us as they let me go to you on this.

Why are we seeing more reaction to equity markets than we have so far of

the debt ceiling? I hope it's not just complacency and a

correct assumption that although the can will probably never be kicked to the

eleventh hour, 59 minute. That's just the way things are done,

particularly on this subject. But so my guess is just complacency and

an assumption that something will get done.

I'd hate to think we have to go down the same path of 2011, which is also akin if

for different reasons of what happened in 2008 with ultimately the passage of

TARP, you needed that riot moment in markets.

I think I agree with Jamie Diamond. I think it would be cataclysmic.

I don't think anybody should be cavalier about letting it happen, whether it's

for, you know, political gain or whatever reason.

My concern with regard to 2011 macro conditions are very different.

We were on an upswing in the economy. You haven't come out of the global

financial crisis. We weren't dealing with an inflation

problem or having come out of the most aggressive tightening cycle in 40 years.

And then there's certainly more vitriol right now.

So I think we all should be worried about it.

But I think ultimately something will get done.

Chris, listen, quite correctly says the macro economic conditions are different.

Also, I wonder if the conditions of the markets are different that say we gave

up a lot in the S&P 500 last year, as I recall.

Exactly. So we actually saw the massive decline

in the S&P 500 last year. So a lot of the equity market risk was

priced in last year. I think the interesting thing in terms

of why are we not seeing volatility, why are we not seeing movement in the equity

markets? Is the fact that you have to look at how

investors are positioned? So what happened on the back of last

year? A lot of investors moved money into

money market funds, into t bills, into cash and cash equivalents.

So the under positioning that we're seeing in terms of being long risk

assets is also creating this muted volatility environment, which in our

opinion, if you are someone who has exposure, this idea that volatility is

relatively low. What it means is that you can actually

protect your portfolio. So in terms of portfolio hedging, this

creates a really unique opportunity to say if I think volatility is going to be

higher going forward, whether that's because of the Fed's trajectory, whether

it's because of the debt ceiling, whether it's because of the credit

crunch that we could see on the horizon, buy some protection to then be able to

stay invested over the next couple of months.

And what about that point? Would you be advising investors to

really take into account the possibility that failure or is it something you even

can take into account, given how unpredictable it is?

Well, yeah, I think Chris is right in terms of doing some volatility, hedging,

there might be certain things that are specific to your own portfolio in terms

of hedging, whatever outsized positions. One of the things we've been emphasizing

and it's not just tied to uncertainty with regard to the debt ceiling, it's

every other category of uncertainty right now is within the equity

portfolio. Avoid the concentration risk, which we

already talked about, but also stay way up and quality.

Take advantage of what's sort of lacking in the macro environment and look for

companies that have interests coverage, a strong balance sheet, high cash, low

debt. They've got positive earnings revisions,

positive earnings surprise, lower volatility, lower beta.

And that's, I think, the best way to navigate within the equity portion

versus going out the risk spectrum too much.

Okay. Thank you so very much, Liz Ann Sonders

of Charles Schwab for being back with us.

And Kristen, bitterly for coming to us from Citi.

Partisan fights over the debt ceiling are nothing new for Wall Street.

Blues Rock ISE are talked about it in March of 1996, when Congress ended up

with a short term stopgap spending bill to keep the U.S.

from defaulting. Back then, if you remember, the top

movie in the country was Mike Nichols The Birdcage.

So this was the week when the entire economic world seemed to be coming down

with a severe case of mad cow disease in Washington, that was, you might say,

utter confusion. Congress and the White House, whose most

conspicuous accomplishment this year than blaming each other for lack of

progress, failed once again to reach agreement on a budget for fiscal 1996, a

year that's already half over. So they approve.

Would you believe it? One more so-called stopgap spending bill

to keep the government going for another 26 days.

And that's no bull. This is Wall Street week on Bloomberg.

This is Wall Street. I'm David Westin.

The failure Silicon Valley Bank sent shockwaves through the banking system

and rattled the markets. The dust is really still settling, but

the forensics on what went wrong are well under way with the Fed vice chair

for bank supervision. Michael Barr issued a report calling for

stronger supervision and stronger regulation.

For his perspective on what went wrong and SBB, we welcome now Mr.

Barr's predecessor as Fed vice chair. He is Randall Quarrels, now executive

chair of the Sinister Group. So welcome.

It's great to have you. Mr.

Quarrels. So there's been a lot of back and forth

about what happened, what didn't happen. I must say, Mr.

Barnes thinks that this was a textbook example of bank mismanagement at Silicon

Valley Bank. I think everyone agrees with that every

year. Well, are there things that actually the

regulators or the supervisors could have done to make it better?

So it obviously was a textbook case of mismanagement.

But I think that explanations are usually most penetrating when they don't

assume that the people involved were either fools or crooks.

And so the question is, how could some of these decisions have been made both

by the bank management, by the Fed itself in supervising the bank?

And there I think you have to look at the behavior of the uninsured deposits

in Silicon Valley Bank and in the other banks that have failed over the course

of the last two months. Signature Bank, First Republic and the

uninsured deposits at these institutions moved away from the bank with speed and

at a volume that we had never seen before.

I mean, the the largest amounts that had ever run from a bank in the previously

largest bank failures in the country's history had been, I think, 18 billion

dollars over the course of almost a month.

And in Silicon Valley banks case. Forty two billion dollars left the bank

in a day. And the bank was getting ready to open

the next day with the expectation that another hundred billion dollars would

have left the bank and have one hundred and forty two billion dollars leaving

the bank in the course of 24 hours, which means that the liquidity

requirements facing banks are much different.

It was it was a mistake, but it was not a crazy mistake for both

the bank managements and for the Fed supervisors to look at a bank with the

liabilities of Silicon Valley Bank funded almost entirely by its core

business depositors and say we have an interest rate risk problem that's

building in this bank. But thank heavens that the bank is

funded by its core depositors because those people don't tend to run.

They certainly don't run quickly. And yet they did.

And so the task for really figuring out what ought to happen differently going

forward, what can the Fed do going forward?

What ought banks to do going forward is to determine why did those deposits

behave differently? And as I understand it, you know this

better than I do. But as I understand it, it's not like

the superrich didn't see there was something going on.

There were some notices given to bank managements saying you do have an issue

here. It appears that remedial efforts weren't

taken fast enough. They saw it coming because of the

mismatch on the duration. Is that at all because of a change in

the climate, in supervision, where people thought maybe we don't need to

pay quite as much attention to division as I understand when you came in.

You did set your first goal was to change the supervision advisory climate.

Yes. So, yes, the the what I think still

needs to happen, the supervision infects Silicon Valley Bank is a is an example

of the fact that I didn't have the effect that I would like to have had on

the supervisory culture is that supervisors it's not just at the Fed.

It's across all the bank examiners. And it's not just in the United States.

It's really around the world. There is a natural tendency for

supervision to become a very comprehensive compliance check the box

type of operation. And my message to the supervisor is it's

very similar to the message that my counterpart at the ECB, a man named

Andre Andrea, has repeated very recently in a speech that he gave in Frankfurt

was that we really need to be focused on the most important risk.

We need to prioritize the risks as opposed to give the banks a huge menu of

tasks that they have to undertake without prioritizing among them.

And then we really have to focus our attention on the banks attentions, on

the ones that are most important. And as I would often say, smite them hip

and thigh on the things that are most important.

And when you look at the bar report, it's the case that that just didn't

happen. At Silicon Valley Bank, there were 32

so-called matters requiring attention, matters requiring immediate attention at

the end of 2022. This was some time after I left the Fed.

There was clearly no inhibition on taking supervisory action against the

bank. You had 32 MRI is an MRI ISE, but they

were across a whole range of things that didn't matter for the bank and very few

of them focused on what was truly critical.

There was no prioritization among them. So.

So I do think that that has to happen going forward.

And it's it's it's unfinished business at the Fed.

Let me turn, if I could, to the question of the structure of the Fed and how it

handles monetary policy as well as bank supervision, because sometimes it feels

like there is a total of two separate functions.

On the one hand, you had for monetary policy for good and sufficient reason, a

rapid increase in rates. Do we know why that was?

Because of inflation. At the same time, it felt like it was

entirely separate from. If you're going to increase your rates

that fast that far, wouldn't it make sense that there really is going to be

interest rate risk and will do we really communicate one side with the other that

if we're gonna do that, we better take a hard look at interest rate risk at

places like. Yes, Silicon Valley Bank.

Yes. Well, I think interest rate risk and

also about the need to provide liquidity to institutions we know from history, I

when I first came to Washington, it was in the government response to the

savings and loan crisis of the 1980s, where again you had a inflationary

episode and a robust Fed response to that inflation

that created significant problems for institutions that had

interest rate sensitive assets and very mobile liabilities, in that case, the

savings and loans. So it was we have historical experience

as to exactly what to expect when the Fed is responding vigorously to a large

inflationary episode. And and one of the things that could

have happened here was for the Fed to provide liquidity, which is one of the

reasons for the existence of the Fed, as opposed to requiring Silicon Valley Bank

to sell its assets into the market and to crystallize the loss, which was the

proximate trigger of the run on on March the 9th and the closure on

March 10. But Silicon Valley Bank wasn't prepared

to borrow from the Fed. It hadn't it hadn't done sort of the

necessary legal work to provide collateral.

And that's because the Fed has lost the thread a little bit about its

fundamental core purpose, which is to provide liquidity to banks and to the

financial sector generally in episodes just like this when there's reason to

see that coming. They tell the banks you have to have all

of your own liquidity. You have to have enough liquid assets

that you don't need any liquidity from the Fed and there is no bank that can

survive. One hundred and forty two billion

dollars going out the door in in 24 hours.

You have to rely on the central liquid reserve at the Fed.

It's why it's called the Federal Reserve to provide that liquidity.

And the Fed should certainly now be and should have been leading up to this

episode, ensuring that all banks are prepared to be able to borrow from the

Fed should they need to Silicon Valley Bank been able to we would not be in

this position. They would have received liquidity from

the Fed in order to continue to pay out their depositors.

OK. This has been very helpful, very

informative. Really appreciate your perspective on

this question. As Randal Corals of the Center Shore

grew. He was the vice chair for supervision of

the Federal Reserve. Coming up, where you have all those

deals gone and are they coming back? We're gonna ask Blair Efron instead of

your partners, about whether it has to do with credit tightening or whether

there are bigger factors such as, for example, what's going on in Washington

on the debt ceiling. All of that is coming up next on Wall

Street. And we are on Bloomberg.

Credit, it's what makes the financial world go round and that world is

concerned. There may be less credit available.

One of the big questions will be to what extent does credit tighten on that?

And if that is material that will have a drag on the economy with CEOs mentions

of credit tightening spiking this earnings season, the series of regional

bank shocks made matters only worse as bankers struggling to stay afloat had

little appetite to take on the risk of extended credit.

A banking system which has government guarantees where people put their money

in a trust relationship if they suffer significant losses, that's what causes

concern. But as important as credit is, it's just

that hard sometimes to get a handle on it in real time.

The Fed's backward looking numbers on bank, commercial and industrial loans

fell sharply in January and February, but started to recover in March, only to

turn down again in April. And the forward looking senior loan

officer opinion survey or sluice numbers this week pointed to further tightening,

which Fed Chair Jay Powell got a peek at last week and told us in advance was in

line with what they expected mid-sized banks have.

Some of them have been tightening their lending standards.

Banking data will show that lending has continued to grow, but the pace has been

slowing really since the second half of last year.

And to take us through the world of credit and what it may or may not be

doing to the deal pace, we turn now to somebody who really knows that space

awfully well. He's Blair Ephron.

He is a partner and co-founder of Center of Your Partners.

So welcome back to Wall Street. David, good to see you.

OK. Let's start with credit, because it was

one thing that does affect the pace of deals.

Is it affecting it from your point of view right now?

Absolutely. It's getting better.

Still constrained. Fourth quarter of 22, you had nothing

today. You actually have the markets loosening

up the right deals. Missing data point, for example, largest

LBO in the past six, seven, eight months was a deal with Blackstone and Emerson

for the climate business. 14 billion dollar deal.

No bank debt was available. The private direct lending market

stepped in. Firms like Apollo, Blackstone, KKR Areas

did five and half billion of financing to see it through.

Half of that has been replaced in the past week by the banks.

So it really depends on the credit and it depends on what the deal is.

But there is absolutely credit available.

Obviously, the key is it's much more expensive.

You should assume for a private equity transaction, it's 500

basis points or so higher than it would have been a year and a half ago.

And for a corporate deal, 200, 250 basis points.

And that leads to the next issue, which is how you price an asset for sale.

And obviously, with multiple staying high and elevated and 18 times PE, it's

the same as it was last year, same as it wasn't 21.

But yet your returns in any transaction are more difficult.

So you have to think about how to get the buyer and the seller to

come to agreement. Not easy.

As I recall, some of you might have had something to do with the Everson deal.

We did. You can give us a plug.

OK, let's do that. So let's go to that question of buyers

and sellers and where they think the price is because some of those prices

are coming down. Valuations are affected by interest

rates and also some slowing of the economy in some places.

Have the sellers gotten their heads around the fact that their price may be

lower? They finally started to do that, which

is actually why I think there is more discussion.

You don't see it yet in terms of announcements, but you see companies

thinking more about MBNA as part of their thinking in 2003.

And I would venture to say that as we exit the year 23 and getting 24, you'll

see activity actually start to pick up quite a bit.

So you think it will come back? Do you think we'll reach the levels we

have before because we have some record levels?

Oh, boy, that was high. You think about a 5 trillion dollar peak

market. That probably unlikely.

But the idea that you'll have a stable global lemonade market of four trillion

dollars or so a year, I think. Absolutely.

And what you find out generally about emanate, David, now is it's less prone

to cyclicality. It's part of a company's core strategy.

Most companies are actually very good at it.

And when you're thinking about new average, new growth, new areas for your

business, you're thinking about the pace of disruption

and how you combat that. It becomes important for most companies

to want to want to consider when you've been on with us before.

You've emphasized, Blair, that uncertainty is one of the biggest

factors in determining whether companies want to do deals or not.

Where we we've uncertain because there seems to be a lot of uncertainty around

right now. We are in uncharted, complicated waters,

starting with the debt ceiling, which were to come back to the banking

environment more generally. And whether you think in a slowdown or

something more severe in the coming months.

I happen to be in a slowdown camp. I think there's a lot of resiliency that

we don't account for, a lot of tailwind that will beat stability.

But that uncertainty clearly is an issue when you think about doing a

transaction. Remember, you want to be able to think

of that transaction when there's a macro tailwind because it covers up

some of your assumptions that may not pan out.

It's just people do better in a growth environment.

Any company does so clearly an issue. And I think until the debt ceiling

situation resolves and that's a question mark, I hope

it'll be weighing pretty heavily. We've had this debt ceiling situation

before. 2011 was the time we had a downgrade

actually from it. And we have a lot of people, the

president states, as well as Mitch McConnell agreeing we can't have a

default. We actually have for president Trump

saying this week, well, maybe it wouldn't be that bad thing.

How does it figure in the minds of people doing deals, CEOs and others

think about deals. Are they taking that into account?

They take it seriously. So, everybody, second series, that's

going to be a market for a second. Let's talk about a company's

performance. I think the debt situation, the debt

situation already is having a big impact.

If you think about driving a car, your passenger and the

driver goes 90 miles an hour and then slows down, you're going to think twice

about getting back in the car. You have a ready.

Simply the specter of it is probably hit GDP growth 30 basis points is probably

had jobs, 250000 according to S.A., the Council of Economic Advisors.

And then you start to think about what? The impact is if you go over and have a

default. That is

measured in days and weeks. The fact of the matter is that's a half

a million jobs. That's a half a point of GDP growth.

And that's before you start to think of the

absolutely urgent consequences of something that's protracted.

You know, Wall Street backwards and forwards, but you also have some

experience in Washington. I talked research Josh Bolten for the

Business Roundtable. He said if you pull his CEOs, they all

say we're not going to default. But if you ask the second question, how

are we going to avoid it? Nobody has an idea.

Can you see a path forward? So, of course I can.

Obviously, I'm not license to practice politics in New York in banking,

but everything from a clean debt ceiling to a promise to negotiate to a kicking

the can down the road is hard, but it will tell you it is progress.

I do think that the markets will not embrace in any way some of the ideas

that are so say more creative. Everything from the 14th Amendment to

produce nation all difficult. And I think that the markets will be, at

a minimum choppy, but much more likely highly volatile in fact, right now.

That's the credit default swap spread is much higher than it was you read in 2011

were four times higher than it was in 2011.

That's one level of uncertainty. We also have regulatory uncertainty,

particularly in the antitrust area, both from the FTC and from the Justice

Department. Bloomberg actually had a piece this week

saying that that really is deterring or some of the CEOs from moving forward

because you're not sure whether he'll get approved.

But even more than that, how long it will take.

There's a lot of uncertainty surrounding it.

Are you dealing with that as you advise? Absolutely, David.

And it just it shows up in the numbers year to date.

We have, I think, 14 deals over 10 billion dollars versus last year with 24

deals. But you account for that and you're

thinking if it's going to take 18 months for a transaction to close.

You spent a lot of time thinking about how both the acquired business and the

acquiring company manage their own businesses, keep the base business

performing well, and try to minimize uncertainty for all the employees.

You can think about different structures.

If you use stock, for example, on a transaction, the

selling company has more of a vested interest of you, if you will,

more of a meeting of the minds in terms of what it

takes to do well. And I'd also say you you think about the

whole question of synergy in a different way.

I think that you need to be more conservative, certainly on cost, and you

need to be more aggressive and absolutely committed to

the idea that a transaction leads to better growth, which lead to job

creation, which leads to potentially better

outcomes for consumers. All this factors into that thinking.

I would also finally say that it's much more the administration using a

megaphone than actually litigating that the people are tended to.

But all that said, smart deals are still happening and they

will continue to happen. One last one.

Blair, we heard from Jamie Dimon of JP Morgan again this week, and he

reiterated something he had said before. I am far more concerned about

geopolitics. Ukraine, trade, you know, Russia, our

relations with China, et cetera. Does that affect your business?

Of course it does. Now, I would tell you that I don't know

CEO who is not an exquisitely attuned to the geopolitical environment everywhere.

They are experienced in operating globally in all kinds of areas.

And it absolutely goes into what kind of advice and what kind of discussion you

could have with the CEO, what kind of discussion you have at the board, where

should you put capital where five and 10 year period, not just over the next

year. What are the black swan risk or frankly,

what I call a grey rhino, something that's staring you in the face, but you

just don't pay attention to it. And then it actually hits you.

All of this makes being a senior leader in a company more difficult, more

uncertain and ever. And I applaud a lot of them for actually

steering the ship through this kind of complication.

But I also tell you that the companies are better than ever managing through

uncertainty. We've had a decade, a decade and a half

of uncertainty. Yet companies across the country, big

and small, performing better than ever. Just last quarter, 80 percent of our

companies surpassed estimates. Granted, estimates were revised but

surpassed estimates. And

companies are more nimble in how they make decisions.

We're nimble in terms of how they take that information and

figure out what the outcome potential outcomes could be.

And factoring that in so more difficult is a macro.

But we have an industry and a private sector that's up to the challenge.

Blair, it's great to have you back on. We thank you for having me, David.

That's Blair Efron, Centre of New Partners.

Coming up, generative A.I. just the latest challenge to the news

business model. We talk with the man who led the BBC and

then The New York Times, Mark Thompson, about whether there is a way to make a

serious business out of serious news. That's next on Wall Street week on

Bloomberg.

This is Wall Street week. I'm David Westin.

We're all trying to figure out what to make of genera of a AI and what it will

do to all of our lives. For those engaged in the business of

gathering reporting news, it's just the latest in a series of innovations that

have also posed challenges. Things like streaming video and social

media and even the Internet itself. Mark Thompson is someone who has spent

his career addressing these changes and figuring out how to make them tools

instead of threats. He was director general of the BBC and

then president CEO of The New York Times.

He's now chairman of Ancestry, that is the largest for profit genealogy company

in the world. And we walk home now back to Bloomberg.

Mark, great to have you here. Good to see that.

So this week we were struck by the fact at the same time we have BuzzFeed going

out of business. We have your old shop, New York Times,

signing a really big deal with Google for cash.

What is going on? Well, news is going through a revolution

that was going on and the revolution is full of surprises.

When I got to New York Times in 2012, so just over 10 years ago, everyone told me

that BuzzFeed was going to become The New York Times or The Huffington Post

was going to become The New York Times. A decade on the Games really changed.

It's changed both in that the legacy players, some of the legacy players, at

least The Times, Wall Street Journal, The Washington Post might be examples of

that kind of got their act together and began to think hard about digital.

And I think in the early 20 20s look pretty secure, whereas the the

insurgents, the new guys who had no legacy hang ups, they had no

print or broadcast TV to worry about. They've kind of gone into trouble.

It's turned out to be much, much harder than they thought, to build a brand, to

keep your audience and above all, to figure out ways of turning big audiences

billions of clicks into dollars. That's proven very hard for them.

What does that say about incumbency when it comes to.

I'm talking about real news now. There are things that call themselves

news that's brought I get real reporting.

What does it say? Because, in fact, there are all of those

things that you've mentioned and more that really sprang up.

We thought they were going to the bright new thing and they've gone now.

And yet we do have New York Times where I'll say Financial Times and Wall Street

Journal, who seem to be doing quite well.

Thank you. That's right.

Well, I think it's a few things. I mean, what one question is, when was

the last time in the free world we saw the creation of

a global news brand or truly global news brand, not a specialist business led

news brand. Bloomberg is a really good example of

that, but a kind of global general news brand.

It's CNN. In the early 80s.

So it's really, really hard to do. And in a great continental country like

the United States even to become a national news brand.

So legacy in terms of brand and trust and name recognition is fantastically

valuable. But it's not enough.

It's like, you know, it's it's necessary but not sufficient, it seems, because

you also have to work out the economics of very different media environment.

And what's interesting is I would say that the big TV brands in this country.

TV news brands to include CNN have yet to figure that out and that their

business, their legacy business, still very profitable, is dying.

It's dying. And it's not yet clear that they've got

credible plans yet for the for the new ship that's going to take over when the

old ship thinks so. Talking about video news for a moment,

which I know more about, we had obviously the broadcast networks than

they were licensed by the government. There was a motor on your business

because you needed a license that gave rise to cable.

And people were terribly afraid of cable.

Would have that gave rise to CNN, actually.

And then we went on beyond that. Now we have streaming video.

Yeah. So there's more out of it available out

there. What a streaming video potentially mean

for news. Is that a risk and opportunity?

Both. Well, I think if we're just talkers as

kind of as news people, some stories are best consumed as video.

And actually, even newspapers like The New York Times realize that you'll see a

lot of video on The New York Times, obviously short form video, which is

kind of specially designed for smartphones and it's very snack Apple

has taken over the world. I think for the for the big the big

players, if you're CNN, for example, for Bloomberg, the question of whether you

want to offer users snack, apple, little pieces, 45 seconds a minute, Matt Miller

and a half, or whether you want to try and somehow port the longer the show, 10

or 15 minutes, the anchor, the conversation, whether that has a

streaming role is unproven. And now on top of all that, we have

generative A.I.. Yeah, and that means you saw Barry

Diller remarks recently saying he thinks it could really pose a substantial

threat to news. What do you make of general or is it

just too early to know it? I think I mean, I think it's too early

to know. It is extraordinary, though.

I was at a board meeting branches yesterday and what our engineers had

used CBT for, to hack the beginnings of a of a version of the RTS product where

you can ask it questions, you can say tell story of my grandfather and it will

create either a thousand words of prose or it'll create a slideshow with achieve

funny, astonishingly convincing captions like that in seconds to every seconds.

So. I think it is an immense opportunity to

solve some problems for us. You know, at Ancestry, trying to to

bring these family trees to life into human stories with pictures and sounds

and where a machine is doing it, you know, in a fairly safe environment.

You know, it's all fully fairly formulaic.

That's very exciting. Clearly, there are threats, though.

And I would say one real hope for us is that A.I., both generative and other

forms of AI machine learning and other forms they are will really

help us solve that problem. If I'm a consumer of how do I find the

media I want? It's Friday evening.

I want. I want to be entertaining.

You know, I wanted P.G. 13 and little too much violence.

What did you got? What did you got?

And actually, even the very best films in the world don't do a good job of

telling me. In my view, I now need to bring friends

and go through reviews and I should work out.

I think that business of whether it's finding a new story on a smartphone or

what you want to watch in the evening, I can really help us with that.

But a threat. Imagine the algorithm which could every

morning at 7 ingest all of the news in the world.

And then turn it into. We could use your voice.

David Westin. And you, the consumer could ask your

smartphone in the kitchen to ask David. What's happened today,

David, is not quoting The New York Times or The Washington Post or CNN or MSNBC.

David is ingesting it all, paraphrasing it all, and he's ready to interact with

you. What's happening in Ukraine?

What are they? Did the Russians retreated back mode?

So what happened? Why?

What does that mean? And David can answer all those

questions. And like, they'll pay you a good pay you

good faith. Well, I was worried.

But like every powerful tool, it can be used for good or for ill and will be

used for both. Yeah.

I mean, I think when people talk about slowing it down, we must you know, we

must have a debate. Right.

How does that work? I mean, there are national security

implications here about I mean, this is the technology, which is I think almost

certainly going to and probably has to be developed and explored.

It will happen. It's happening now.

Very quickly, I want to say, as a species, we're very

adaptable to people who predicted the end of all jobs

and the end of everything with previous, you know, the industrial revolution and

everything since have always been proven wrong because human beings adapt.

And generally economic history suggests you get more jobs, you get more wealth

as a result of these things. So.

Although I can certainly think of very dark nightmares for me.

Like everyone else, I want to remain basically optimistic about A.I.

and news A.I. and media more generally.

So I'll buy that. Optimism is always good.

Thank you so much to Mark Thompson of Ancestry.

Coming up, putting a good part of America's future up for auction, all in

a bid to compete with China. That's next on Wall Street week on

Bloomberg.

Finally, one more thought sold to the highest bidder.

The sound of the gavel coming down. The thrill of victory over all those who

couldn't or wouldn't bid up the price one last time.

There's just about nothing quite as dramatic as competition measured in

money. And that's why auctions are so exciting.

No matter what's being sold, be at fine art.

Ladies and gentlemen, it gives me great pleasure to present.

Two hundred and thirty one, or Premier League football clubs like Manchester

United and Manchester United soars amid reports that the countries are bidding

for the world famous football club or failing banks like First Republic.

We had to go look before we bought it. And now the Inflation Reduction Act has

introduced a whole new level of auctions with not just billions, but hundreds of

billions of dollars in federal money at stake for those investing in green

energy or in semiconductors. The whole point of this is to increase

innovation, research and development in the industry, not, you know, we're not

giving you taxpayer money to fluff your pillow and increase your profit and give

it away to your shareholders. And the bidders in these auctions aren't

wealthy individuals or a large corporations, their states and even

countries offering concessions to get companies to invest in manufacturing

with them rather than with their rivals. As candidates stepped up to historic

incentives to get Volkswagen to build its battery plant in Ottawa rather than

across the border. Yes, the ISE is something that we've had

to step up to to make sure we're competitive.

But we're going to be a lot more strategic about how we pick and choose

the right investments. We can't just do a blanket like the US

can. Not to be outdone, this week, over 50

states and territories on this side of the border gathered together in

Washington at the Select USA event. That's all to bid against one another

for the foreign investors who are trying to get their share.

Of the three and sixty nine billion dollars in green subsidies and the 76

billion dollars in grants and tax credits for semiconductor manufacturing.

But maybe, just maybe, this is not the end of it.

But instead only the preliminary round in what could become the biggest bidding

war in history. The United States against China for the

grand prize of global technological leadership.

And we see competition, not conflict. But I will make no apologies that we're

investing to make America stronger. Invest in American innovation and

industries will define the future that China intends to be dominated.

Whatever happened to all that criticism of China putting its heavy thumb on the

economic scales? Well, maybe you can't beat him.

You just join him. That does it for this episode of Wall

Street Week. I'm David Westin.

This is Bloomberg. See you next week.