Join us now for a wide-ranging discussion on markets, economy, the Fed, AI and more, with Greg Fleming, president and CEO of Rockefeller Capital Management, former president of Morgan Stanley Wealth Management, ties to Merrill Lynch, goes way back, retail, institutional, M&A, all kinds of stuff. Good morning.
Long career, Joe. Great to see you.
Long career, but, you know, still young, still got a lot left to accomplish, I'm sure.
We hear again and again, and I'm just going to set the table for you. Again and again, given the state of corporate America and the type of earnings power that we're seeing, maybe it's not a surprise that all these exogenous factors have not hurt corporations. But we keep hearing it's a given that the US economy is just so strong and resilient. Can you tell me why? And is there something different now that explains this in the face of, you know, oil prices and geopolitical events and everything else? Is it AI? Is it deregulation? Is it the tax, the big beautiful bill? What is it?
Well, you know, you hit on a couple of them, and, you know, from a macro standpoint at this point, I think we've got major strengths, we've got major challenges, and you started listing some of those, and then we've got real uncertainty, given the scale of the technological revolution that's underway now. But on the major strengths, you ticked a couple of them, Joe. Obviously, AI and the power of the tools and the productivity that's already starting to drive across corporate America, public and private companies. Every company out there is trying to incorporate the tools as quickly as they can to drive productivity. So, that's a big driver.
Well, there's no payoff yet, though, Greg, on the productivity. Just the capital spending to build it out is the stimulus.
That has to be ongoing because you need the compute power. So, that whole side of the equation will continue. But it's not just that. I mean, you know, when you look at the ecosystem now, you have growth intact. Earnings, as you said, were terrific. Employment's hanging in. There are positives away from just AI, like deregulation and the whole, you know, American business ecosystem. We're on track this year for over 6 million new business applications. And that's up — it used to be three or four, last year it was five and change, it's up 17% year-to-date over last year. You can be a young person today and with the tools, you're 25 years old, you take the tools and you start to build something. So, it's really never been a better environment for people to start businesses and for entrepreneurs to, utilizing these new tools, go out with an idea and turn that into something quickly. So, I think the business innovation in the United States and the whole system, including the financing system, where if you come up with that idea in this country, you can get funding. And then you can follow that through all the way, you know, down the line ultimately to an IPO. So, there's a lot of positive. Now, there are issues. I mean, I can pause on the positive or we can talk about some of the issues. You highlighted some of them. Obviously, inflation is more of an issue now with the war and with oil. And even when things get settled, and hopefully they do soon, it's going to take a while to deal with all the tankers that are all over the world. Inventories have been run down, so, you know, you could see oil prices hanging here after the straits open and things finally calm down.
Is inflation already an issue because of 40 trillion in debt, or...
Well, that was going to be my second issue, Charles.
Are we built — have we, you know, the war's one thing, if it does go away, we still were at 3% even before the war on headline, right?
And look, that fiscal situation is probably the first thing I would raise on the major issues side of the equation because it's just ongoing. The debt just continues to come, 6, 7% of GDP every year. You know, it doesn't seem to be any political impetus to deal with it. And we've seen a backup in rates across the curve. And when you start to get to 10 years and out, that's not the war that's causing that because everybody knows that the war and oil prices will settle in a shorter time frame.
But you remember like I do what rates were our whole career. And they were seven, six, eight, nine, etc. Businesses did fine. I mean, we never thought we'd come down to these numbers. And even where they are now, all right, they've doubled or whatever from the lows, but are they prohibitively high at this point to business formation?
Well, what I'm worried about more there — they're not. They're not. They clearly aren't. 6 million new applications. But the bigger risk is that the debt continues to pile on. And then at some point, you have not only pressure on rates, you might have pressure on the currency. And you have pressure on the government to cut spending and to do things that they need to do. And that has a ripple effect across the economy.
Pay interest on the debt. Maybe there's a lot of things they don't need to do.
But when rates start to back up, you see the interest payments go up even more. And as wealthy as this economy is, you know, the debt trap is there for every country. We're not going to somehow not be an exception to that.
Less for us because of the dollar, obviously.
Yeah. But, you know, for the long-term health of the country, it would be much better if we took that on in a direct way instead of just trying to grow out of it.
Should Kevin Warsh lower interest rates? He has this idea that because AI is making people so much more productive, you will have the room to be able to cut rates despite what you just laid out in some of those issues.
I think, Becky, when he comes into office, first of all, he's got a divided Fed and he's one vote and he's going to try to pull that together. When he comes into office, I'll bet he's more cautious because of the near-term pressure from the oil. I don't see him going the other way, though. I don't see him raising rates. People are talking about higher rates. I think he'll be cautious on that as well. So, I think he'll move slowly when he comes in, but over time, assuming we solve things in the Middle East, and it would be nice if we had some movement on the fiscal side, but let's assume that doesn't happen. I do think he will look to lower rates and he might get the cover to do that, Becky, from the productivity increases that AI brings. So, that may be the cover to lower rates. But I think out of the gate, while his propensity is to look for lower rates and more growth, I think he's going to be cautious out of the gate given the situation in the Middle East.
The Middle East is going to dictate what he can do, don't you think?
Aren't they already starting to do that, Joe? That's part of the equation. He's got a divided group that he's now going to lead. You know, the votes have been split and he's got a bond market that's already levering him on the other side. Look, he's a very capable guy, so I think that, you know, right person for the situation, but he's got a lot of pressures on him, you know, in every direction.
Will growth eventually help in terms of not just dealing with the 40 trillion, but the amount that you brought up, 6 or 7%? Scott Bessent said he's got to get that down to like 3%, like it's been in the past.
When they took office, they said they were targeting 3% and it stopped there.
It started until we started doing all these things. Will any of this help cure the class struggle that we have, the populist — 'I don't like rich people, I hate billionaires, I'm a socialist because capitalism's not working.' Does any of that come home to roost? Because it's pervasive.
Well, let me first talk about the growth can help solve the debt problem. We absolutely need growth. And by the way, the higher inflation on a nominal basis, you're outgrowing even the 6 or 7%, if the inflation's high enough, but that's not a way you want to go about it. But, you know, I think one of the big issues now in society is AI and the impact on jobs. And I think that's going to be the focal point for the issue that you just raised. You know, the whole tension around wealth creation and who has it and who doesn't. It's going to focus on AI, and if AI ultimately starts to pull more jobs out than it creates, that's going to really pressure that issue. Now, I think it's not clear that that's going to happen yet. I mean, there are people on all sides of this. But, you know, as we talked about last time I was on here, every time in history there's been a technological innovation like this, it's created more jobs than it's destroyed.
Let me ask you a different question in terms of how you're using AI at your firm. And this debate that's even happened over the last week about this idea of token maxing. I don't know if you heard Dara Khosrowshahi at Uber, other companies, Microsoft saying, 'Look, the cost of using AI is actually not producing the kind of results that we think justify the cost to us to do all of this.' And as a result, even Uber was saying, 'Maybe we shouldn't be letting go of all these people. We should actually keep the people and maybe not have such high AI costs.' My question for you is, your firm's using AI now. Are you finding that whatever productivity you're getting out of your employees is justifying the cost? When you look at the KPIs and everything else, do you say, 'Wow, this is really working for us'?
This is a big topic that you've raised and it's early for everybody, us included. I mean, Uber may have been ahead of the curve with the amount of AI they were using across the company. But the cost of the power and the cost of the tokens, that's something that you're going to hear more and more about. In fact, you're going to hear it in public companies' earnings announcements. You know, 'we spent this much on compute power.' That is a big thing moving forward and there will be a balancing between utilizing the tools and what people are going to continue to do. So, that may ameliorate the desire or the effect of taking jobs out — the cost of the compute power, which is why, you know, when you look at what might happen on the jobs front, it's not clear yet what's going to happen on the jobs front. I mean, clearly employment is held in here so far. There are obviously going to be jobs that AI will do instead of the people that are doing them today, but the extent of that, the balancing of people versus the cost of the compute power, the new jobs that are created and how that offsets the jobs that are lost, all of that is to come here. It's everybody's guessing when they talk about this. And the time frame over which that's going to happen, based upon everything we've seen over the course of our careers, it probably plays out longer than some of the predictions that we heard, you know, in the last few months about, you know, a jobs apocalypse. This will take time to unfold.
I don't know if you want to weigh in or not, but given your history on Wall Street, what is your take on this sort of big number of IPOs, or at least big IPOs we're likely to see, whether it's SpaceX or OpenAI or Anthropic? Do you think there's enough appetite and enough liquidity in the marketplace to make those really pop and work?
Well, you know, I'll say two things about that. One, these are companies that are going public because they need the capital and it's hard to access capital at the valuations at the size of these companies on a private basis. You know that, so that's where you access the public markets. I'll tell you what we're doing with our clients: they want to be exposed to this sector, you know, these AI breakout companies and the whole new technology, but we're trying to make sure that we expose them to direct investments in companies that we've scrutinized carefully, to managers that are investing in a basket of these companies, because there will be winners and losers coming out of that whole space as well, right? Because there's tremendous competition here now. The Chinese are, you know, right there in a lot of the applications and a lot of the companies, and they're going to drive down the pricing on this. So, at the end of the day, when we look back on this, in terms of the suppliers of a lot of these capabilities, there will be winners and losers. Right. So, we're trying to work with our...
But do you want your clients getting access to these IPOs early? I mean, we've been having a big debate all morning about this whole idea that the NASDAQ is using its index effectively to put SpaceX, for example, into the index. That's going to create this sort of forced buying. I was making the argument that by default that can't be good for price discovery, just as a natural feature.
Although price discovery over time it'll be there, right? I mean, you're talking about near term, but, you know, over time. But look, you know, we're careful where we expose our clients to early-stage companies, but there is a tremendous desire on the part of high-net-worth and ultra-high-net-worth families to get access to these types of companies early.
And then the other question I was going to ask you about secondaries. So, to me, that statement by Anthropic a couple weeks ago that they were effectively going to invalidate any shares that had been sold in the secondary market that didn't exist directly on their cap table — meaning that the shares were not sold by them and their name appears attached to that share was not going to be a share that they were going to recognize as real. As someone who's in your business, what do you think of that?
Well, you know, what they're trying to do is control their cap table because there's so many people trying to get access to these shares that, you know, people bubble up all over the place saying, 'I can get some Anthropic shares and you can be in them.' I think that's going to be — we'll see how they enforce that. I mean, that's going to be interesting and that immediately brings in Joe's favorite profession: the lawyers.
