August 15, 2025 • 48 mins
This week, the framework of the Federal Reserve Board of Governors meets signs of economic softness just ahead of the Fed's annual meeting in Jackson Hole, Wyoming. And, Apple wants to increase its AI presence, but its focus on manufacturing and the tariff environment might pose challenges. Plus, rule of law is more than a legal concept - why businesses need it to operate in the US. And, the American dream of home ownership now belongs to small investors who are seeing opportunity in market conditions that are pricing out potential home owners.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:19):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism. Apple earnings last week were better than expected,
but it is still falling behind its biggest rivals. Patrick McGee,
author of Apple in China, tells us why it has
a long way to go. Plus, lawyers worry about the
rule of law in the US. The head of the
(00:39):
American College of Trial Lawyers explains why Wall Street should
be just as concerned as members of the bar. And
everything old is new again. Small investors are back in
the game of buying homes to rent and ultimately flip.
Why that doesn't necessarily mean we're headed back into another
great financial crisis. But we start with the future of
(01:02):
monetary policy in the US as central bankers head back
to Jackson Hall, Wyoming with a new framework on the agenda.
Our special contributor Larry Summers takes us through what he'd
like to see.
Speaker 1 (01:15):
I'm not sure that it's the right time for a
big new framework when you have an outgoing chairman. I
would have thought that a new chairman should be providing
a new framework when the new chairman arrives. After the
new Chairman has consulted, so this seems rather odd timing
for a major new of framework announcement. It seems to
(01:38):
me that, if anything, the errors have been on the
side of excessive transparency, excessive forecasting, excessive what we used
to call when I was in government, eatrogenic volatility. Eatrogenic
illness is when you get sick from being in a hospital.
(02:00):
Eatrogenic volatility is when officials' comments end up adding instability
to markets. So I think at the moment we have
too many dot plots, too many forecasts, too much cacophony,
and some of the ideas for more information from the FED.
(02:23):
I think we'll end up pushing markets around without any
great benefit. My own view is that Paul Volker and
Alan Greenspan had this right. They saw the FED Chairman
as like the Delphi Oracles were thousands of years ago.
They were imperfect and couldn't really know the future, but
(02:47):
people thought they were omniscient and omnipotent, and it was
therefore better to keep any statements vague and oracular. Certainly,
the dominant theme the last time the FED had a
new Framework review was the difficulty of getting inflation up
(03:09):
to target. That's not our problem anymore. Our problem now
is making sure that high inflation expectations don't become embedded.
So corrections back towards symmetry with respect to inflation seemed
(03:29):
to me to be appropriate. And I think one should
learn from the fact that, with the best of intentions,
the framework adopted before, right ahead of the pandemic wasn't
really the right of framework as things turned out, and
that could happen again. So I think the FED would
(03:51):
do well to avoid being overly prescriptive at this juncture. Finally,
I think that the whole question of the management of
the maturity structure of the federal debt needs careful consideration.
(04:11):
What matters to markets is the debt that they have
to absorb and the spectacle. We've seen that a number
of times in recent junctures where the Treasury was trying
to push the maturity structure of the debt in one
direction and the FED was trying to push the maturity
structure of the debt in the other direction. Seems odd, Larry.
Speaker 2 (04:35):
This week we got CPI numbers in which basically I
took two messages away from one is we are persistently
above that two percent mark on inflation, and it seems
to be really stubbornly so, and yet the markets took
it as boy, it's sure the Fed's going to cut
in September. The likelihood went to almost one hundred percent.
Can you square those two things.
Speaker 1 (04:55):
I think that there's also evidence of we in the economy,
and it's that weakening that I think is behind the
market's view that the Fed will likely ease rates. I
think that wall inflation was elevated, it was not as
(05:16):
elevated as many feared that it would be, so I
wouldn't want to fight hard against the market's judgment with
respect to September. I think it's also probably worth remembering, David,
that what you described as a certainty of a twenty
(05:41):
five basis point cut in September is probably better understood
as a likelihood of a twenty five basis point cut,
with fifty basis points and zero being about equally likely.
So the whole thing averaged out to a twenty five
(06:02):
basis point cut. And there's more data to come in,
and so I think it would be a mistake to
be certain for anybody about what would happen. We could
get very very weak data that pushed towards a fifty
basis point cut, we could get information on inflation and
the strength of the economy that pushed towards delaying cuts
(06:26):
even further. So it's a mistake to be certain about
what's going to happen.
Speaker 2 (06:32):
One of the sources weighing on a fifty basis point
cut side has been the Second of Treasury, Scott Bessen,
who said that might make sense in September.
Speaker 3 (06:39):
We should probably be one hundred and fifty one hundred
and seventy five basis points lower. So I think the
committee needs to step back. I think probably one of
the most politicized governors just went off the board.
Speaker 1 (06:57):
I was surprised to see the Secretary, any secretary of
the Treasury, be that prescriptive. Usually that kind of judgment
is not made by administration officials, and I'm not sure
it's helpful for the administration to be publicly prescribed on
(07:22):
monetary policy. Beyond that, I don't think the statement is
in line with what I would say. I would have
said that any model of monetary policy has to be
based on a judgment about what the neutral interest rate is,
(07:44):
and has to be based on a judgment about inflation.
Speaker 4 (07:47):
Expectations.
Speaker 1 (07:49):
If one has the view that substantially elevated deficit spending
plus substantially elevated data center spending is greatly plus reduced
trade deficits in the United States plus higher asset prices
(08:10):
which reduce the flow of funds for saving, if one
has the view that all of that is raising the
net demand for funds, then I think one might think
that neutral interest rates have risen quite substantially, in which
case you wouldn't be prescribing one hundred and seventy five
(08:31):
basis point cutting rates unless we see a recession. I
think the possibility and the risk of inflation expectations starting
to pick up, given big budget deficits, given tariff pressures,
(08:51):
given political uncertainties surrounding the FED, is also a reason
why one wouldn't want to feel that we were committed
to major rate reduction going forward. So I'm not here
to tell you that that's not going to happen. I'm
(09:12):
not here to tell you that it shouldn't happen. I
can certainly imagine circumstances in which the economy could play
out in which those kinds of cuts would be appropriate,
But it seems to me to be confidently prescribing them
(09:33):
at this juncture is beyond what I would see as
a prudent judgment, all the more when the judgment is
being made by a senior official with responsibility for policy.
Speaker 2 (09:51):
We end the week with President Trump meeting with President
Putin in Alaska to talk about Ukraine, with Ukraine not
being present. I wonder what your thoughts are, what effects
that have economically, And let me ask you specifically about
those Russian assets that you've talked about on this program
more than once.
Speaker 5 (10:07):
David.
Speaker 1 (10:09):
President Trump, like him or not like him, support what
he does, or be more skeptical of some of the
things he does, is the most transactional of all presidents.
I would have fought and hoped that a president who
(10:30):
was so transactional, with the tremendous leverage over Russia that's
represented by the fact that we have currently frozen their reserves,
would use our claim on those reserves as leverage to
drive them to a just piece with Ukraine. I know
(10:54):
there's some reluctance about that in Europe. There's concern that
it might inhibit some country's ability to sell debt. President
Trump's errors in the past have not been over solicitude
for European views. So I have been surprised and a
(11:16):
bit disappointed that President Trump has not been prepared to
bring the reserves issue more into the foreground, because I
think it would be helpful to him in achieving his
objectives of putting the Russia Ukraine conflict in the rear
view mirror.
Speaker 2 (11:38):
Up next, the saga of the three trillion dollar company
falling behind in its race with other megatech firms what
Apple needs to do to get back on track. This
(11:58):
is a story about race a bear, where it's not
so much that you beat the bear as it is
that you beat the others in the race so that
you don't get eaten. Apple is worth more than three
trillion dollars, but it's no longer the world's most valuable company,
and it's not racing as fast as its largest competitors.
Patrick McGee, author of the best selling book Apple in China,
(12:20):
says there's plenty for Apple to be worried about.
Speaker 6 (12:24):
In twenty seventeen, the former head of software under Steve Jobs,
Avi Tavanium basically used the analogy that if you and
a friend are being chased by a bear, you don't
need to outrun the bear. You just need to outrun
your friend. He meant to say that in the world
of Tim Cook Samsung, the Google Android operating system wasn't
doing anything in particular in twenty eighteen. So while he
(12:46):
could acknowledge that Tim Cook's Apple had sort of stagnated
a little bit, it didn't matter in twenty seventeen. Well,
eight years later, I think it really does matter. And
that's why you have Nvideo being worth a trillion dollars more,
Microsoft being worth eight hundred dollars, eight hundred billion dollars more.
Companies that really didn't even exist at the time, anthropic perplexity,
open AI are really defining a new era of computing.
(13:08):
And it's you know, somewhere between embarrassing and tragic that Apple,
sort of the most iconic company, really isn't even in
that conversation, and something like the design position, you know,
chief design officer has been vacant since Johnny I have
left in twenty nineteen. I don't think there's any excuse
for that.
Speaker 2 (13:26):
What's slowing Apple down.
Speaker 6 (13:28):
Well, what made Apple so iconic in the early two
thousands was really product design and then Tim Cook's ability
to operate those products at enormous scale. They're still playing
the scale game. I mean, they build and sell two
hundred and thirty million iPhones a year, and probably double
that number of products if you were to include everything
from air tags and air pods to iPads and MacBooks.
(13:48):
So their operation game is is, you know, second to none.
They run the world's most sophisticated supply chain, but they're
no longer redesigning products in super interesting ways. The Macbinnie
is about as boring as you can get in terms
of a product. In terms of how it looks, it's
almost HARKing back to the nineteen nineties when computers were
all beaige. The iPhone really hasn't been redesigned in any
(14:08):
meaningful tangible way since twenty nineteen, and I don't think
the other products have been either, So they've sort of
lost their cool in a certain sense, right. Apple no
longer sort of defines how a computer or a smartphone
is going to look and feel, and I think, unfortunately,
sort of the most sexy smartphones in the world these
days are from a bunch of Chinese companies who largely
can't sell in America, like the Huawei mate Xt, which
(14:32):
in Apple terms is an iPhone and an iPad in one.
So really, the story of my book is that Apple
trained up its own competitors. They didn't just give birth
to a smartphone industry in terms of the supply chain.
The supply chain took those skills and they sort of
offered what Apple taught them to Huawei, Apo, Vivo, and
shall Me, and those are the Chinese companies that collectively
(14:54):
have a global market share in smartphones, the most iconic
device of the twenty first century, of more than five percent.
So I really think Apple risks being overtaken by Chinese
competition in the next three years within China. And the
only reason that's not a global story is because you
can't go to an AT and T store here a
little let alone down to the local mall and buy
(15:18):
Huawei phone. So there's all sorts of protections, you know,
basically the same sort of thing that Donald Trump complains
about overseas, right, non tariff protections we have in the
telecom industry ourselves, but in places like Russia and Indonesia.
I mean, the Chinese smartphone manufacturers have an eighty percent
market share, if not higher, and I suspect that's going
to be a real problem for Apple in the next
(15:39):
five to ten years.
Speaker 2 (15:40):
One route Apple is pursuing to avoid the trade conflicts
between the US and China is to manufacture in India,
which has its own tariff problems with President Trump. But
even putting that to one side, McGee says India may
not be the success story.
Speaker 6 (15:56):
It appears there's more hype than reality in terms of
manufacturing in India. Really, they haven't moved the depth and
breadth of the supply chain. What they've moved is assembly.
And because people largely don't know just how gargantuan Apples
operations in China are, their investments in India can look
like a big deal. So just a few months ago,
for instance, Apple's Taiwanese partner was investing into India and
(16:18):
they were making dormitories to house thirty thousand workers. Well,
to any American listener or reader, that sounds like a
huge investment until you remember that Tim Cook's own estimate
of how many Chinese people are in the supply chain
is three million, right, So what's thirty thousand out of
three million? That's one percent. The investments in India need
to be on a staggeringly different scale for the country
to really replicate the depth and breadth of the supply chain.
(16:41):
I would say on a superficial basis, India absolutely has
what it takes one point five billion people, obviously a
massive land mass and wages comparable to what you had
in China twenty twenty five years ago. Unfortunately, the differences
between China and India are more profound the more serious
you seriously you look at this issue. So you know,
the missing topography of Apple that my book really contributes
(17:03):
to is and understanding that Apple didn't move to China
because China offered competence. Apple moved there because Apple was
able to build the competence right by training millions of people,
by investing billions of dollars, by installing machinery on production
lines that otherwise wouldn't be able to afford to do it. Now,
Apple can do the same playbook in India. However, who's
(17:25):
going to build the eight lane highways from the factories
to the ports. Who's going to build the high speed rail?
That's not something Apple can do. So I think there's
great potential for India to be an enormous and successful
partner to Apple, but it's going to take a lot
from New Delhi or the governors of Tamil Nadu or Karnataka.
In order for that to make sense, Apple can't just
(17:47):
write a blank check. They need government support and negotiations
for this probably have to happen at the level of
New Delhi, Beijing, Washington, etc. Because you can't really expect
a company to make these moves and just risk the
backlash from Chinese consumers where Apple has this seventy billion
dollar business, and from Beijing. So you're going to have
to have everybody at a table striking some grand bargain
for China and sense to allow the manufacturing to leave
(18:09):
its country, because Beijing knows better than anybody else what
it means to have Apple as a partner in your
country building up major industrial clusters, and Beijing wants technology
transferred to be a one way gate the information comes
in it does not leave.
Speaker 2 (18:24):
Apple's ties to China have turned out to be both
a strength and a weakness, but it's not the only
challenge it faces. It's also fallen behind its competitors in
the race to artificial intelligence. Man Deep Singh is the
global head of Technology research at Bloomberg Intelligence.
Speaker 7 (18:41):
They have a history of creating new products. Obviously, iPhone
is the big cash cow and they have monetized it
extremely well in terms of the newer versions. But AI
is something that wasn't in their DNA in terms of
you know, investing upfront the hyperscalers like Microsoft, Google, Meta,
(19:04):
these companies were quite aggressive in terms of believing that
AI was a secular team that will change the products. Apple,
on the other hand, has always thought about, you know,
hardware design. That has been their strength and till date,
I don't think there is a competitor when it comes
(19:25):
to the quality of the hardware that Apple has versus
you know, anyone else. But what they really missed out
on is the profound impact AI may have in terms
of the functionality whether you are browsing on your phone
or how you interact with an assistant the app store.
(19:45):
So now they are really realizing, Okay, what is it
that we could do given everyone else has a two
to three year headstart and they haven't invested in infrastructure
or data centers. But now partnership MNA seems to be
the most viable option because they still control the distribution.
Speaker 2 (20:06):
How big a problem when it comes to does Apple
have and does Apple know it has a problem.
Speaker 7 (20:11):
I think the acknowledgment is coming more now than it
was six months back. And part of the reason is
how big AI has become. So Google right now is
processing nine hundred eighty trillion tokens a month. Now, that's
one hundred x in the past one year. So that
just goes to show what is the level of consumption
(20:33):
in AI now versus where it was twelve months back.
Open ai is close to one billion monthly active users
a day, and so with those kind of numbers, you
have to acknowledge that AI is getting more pervasive in
our lives and on our devices.
Speaker 1 (20:51):
Now.
Speaker 7 (20:51):
The question is it enough for Apple to just keep
offering AI through their app store or do they need
natively on the device. And the answer is what OpenAI
has showed us with GPT five is you can use
llms for scheduling your diary, you can use llms for
summarizing your emails, and you know, acting as an assistant,
(21:13):
which is what Siri was supposed to do. Apple talked
about revamping sery, but we know it has gotten delayed,
and so those are the type of things Apple has
to do something about it. Otherwise it can turn people off,
and once they move out of the Apple ecosystem, it's
very hard to bring people back. The catch I think
(21:35):
as long as you control the distribution, which is why.
You know, companies like Google, which has made a lot
of advancements in their lms, they controlled the browser, they
control the Android ecosystem, and for me, Apple is similar.
They have their Safari browser, they have the iOS operating system,
(21:56):
they control the devices, so they have a lock in
with their users. The only trouble they've had is developing
this LLLM functionality. And so to my mind and Opening
Eye or Nthropic also have to catch up. If they
want to compete with Apple and take share, they have
to come up with devices, you know, And so it's
(22:19):
not easy what Apple has done over the past twenty
years in terms of the ecosystem they've created. And that's
why unless there is a disruption to smartphone or you know, tablets,
and there is a new form factor altogether, which as
I mentioned, Apple has come up with Vision Pro. So
it's not as if Ivar is going to challenge Apple.
(22:39):
I just don't see any hardware disruption on the horizon
to make me feel Apple is at risk. That three
trillion market cap is at risk. But if I see
a new form factor where people just do their work
completely differently, it's a substitute for a phone, That's when
I'll get worried about Apple.
Speaker 6 (22:57):
I think Tim Cook has done a tremendous job in
terms of following in the footsteps of Steve Jobs. That's
something basically nobody thought was really possible. And Apple's market cap,
I believe, has gone from around three hundred billion in
twenty eleven when Steve Jobs died, to three trillion dollars.
That's a massive accomplishment on the part of Tim Cook.
But I think if you look at what's happening in
Apple since twenty twenty two, it's not a whole lot,
(23:20):
and there's not a whole lot to cheer for. That
was the year that they first hit three trillion dollars.
The share price has barely moved since then. I would
look at twenty twenty two Apple and say mission accomplished.
Tim Cook was brought in to scale and distribute at
scale the products that Steve Jobs had already created. At
this point, the pendulum has swung back to an area
where you need a product design leader, a product visionary,
(23:43):
someone who's adept in ai and whatever the qualities of
Tim Cook are, it's none of those three things.
Speaker 2 (23:50):
Coming up from a small town in South Georgia in
the time of Jim Crow Laws comes the story of
why the rule of law matters so much, not just
a lawyer's judges, but to business and markets and the
economy overall. This is a story about playing by the rules,
(24:16):
or really playing by one really big rule.
Speaker 1 (24:19):
The rule of law.
Speaker 5 (24:21):
I think some of what we're seeing are basically pushing
power and pushing authority in directions that we haven't gone before.
Speaker 8 (24:29):
We're at a moment now where we have a president
who feels unusually unconstrained.
Speaker 4 (24:36):
I think we have to be concerned because this administration
is pressing boundaries every.
Speaker 2 (24:41):
Day, and some of what President Trump has had to
say about the courts and their rulings has not always
been reassuring.
Speaker 1 (24:50):
Judges are trying to take away the power given to
the president to keep our country safe, and it's not
a good thing.
Speaker 2 (24:59):
As in important as we're told the rule of law is,
it can sometimes feel pretty abstract something yes, legalistic, but
for the rest of us, it's a matter of predictability
and fairness, something that runs silently in the background until
it really matters.
Speaker 8 (25:17):
My parents came from South Korea, and Korea was subjected
to a military dictatorship. And when I was in high school,
I went to Korea and there was an assassination attempt
on the president who had installed himself as a dictator.
Suddenly they declared martial law and I couldn't go home.
Speaker 2 (25:39):
Harold Coe went on to be dean of the a
Law School and the chief legal officer in the State Department.
But he got his first direct exposure to the importance
of following predictable rules when he was a young Korean
American visiting his extended family in the country of his
heritage in the early nineteen seventies.
Speaker 8 (25:57):
And I called my father and he told me, you
know what happened here in America. Richard Nixon just resigned
and Gerald Ford is the president. And there are no
tanks in the street, there are no guns. And I said,
what does this mean? And he said, this is the
difference between the rule of law and the rule of individuals.
He said, in America, if you're president, the troops obey you.
(26:20):
In Korea, if the troops obey you, they'll call you president.
Speaker 2 (26:25):
Protecting the foundations of our system historically is the job
of US judges and the lawyers who appear before them
in litigation. Lawyers like the fellows of the American College
of Trial Lawyers, currently led by its president, Rick Dean, and.
Speaker 5 (26:40):
So it's a invitation only group of trial lawyers. And
you actually have to be a trial lawyer in order
to be considered for induction. There's a fairly lengthy process
by which you are considered. You have to have been
a member of the trial bar for at least fifteen years.
Speaker 2 (26:58):
Is there a political tilt one way or the other,
left or right of the American College Trialers.
Speaker 5 (27:03):
We are an organization that across the political spectrum. You're
going to find fellows with all kinds of political ideas,
and that's not important to us. We are committed to
certain core concepts. One of those is to the advancement
of the rule of law, protecting judicial independence, and frankly
(27:24):
supporting the access to justice, the concept of access to justice.
So those are our key tenants and politics is not
one of those. We're talking about that set of sort
of governing principles that bring stability and predictability to our liberty.
It's a concept of ordered liberty, and these are the
(27:46):
guardrails the rules.
Speaker 2 (27:47):
Are you more active in supporting defending the rule of
law today than you have been in recent years?
Speaker 5 (27:54):
I think a fair response is yes, And in part
that's because I think we're coming to see things that
concern us. And when I say we, I mean the
College itself, but primarily operating through its executive committee and
its leadership. We're coming to see things that concern us.
As I've gone around and spoken to fellows in both
(28:17):
the US and candidate, they're expressing to me concerns that
they have as well.
Speaker 2 (28:23):
So yes, Professor co is even more emphatic about his
concerns over recent government actions.
Speaker 8 (28:29):
I think it's the worst crisis of my lifetime, and
I'm not a young man. I was sad to say
the ultimate Supreme Court test may be coming, but frankly,
this Supreme Court has given Trump way more rope than
he should have been given. There have been more than
seventy rulings at the district and circuit courts against Trump.
(28:52):
I speak as someone who is a birthright citizen. It's
protected by the express word of the fourteenth Amendment. It
has been held explicitly by US versus Wong Kim arc,
which is a Supreme Court decision from the eighteen thirties,
and it has been consistently sustained, and there's a statute
(29:13):
which states it as well. You'll find out a few
minutes after taking an oath in which the President said
he would obey the Constitution, he signed an executive order
violating the Constitution, namely saying that he would not respect
birthright citizenship.
Speaker 9 (29:29):
They are coming right.
Speaker 2 (29:31):
Often we talk about things like the rule of law
when we're concerned about personal liberties like birthright citizenship. But
for Dean, we need to make every bit is sure
that everyone plays by the rules when it comes to
markets and to business.
Speaker 5 (29:46):
The rule of law is important to personal liberty, but
it's also fundamentally important to our economic well being. That
it's the rule of law that provides predictability, that provides
stability such that we actively participants in our own economy.
Why would Steve Jobs want to develop the iPhone and
(30:07):
all of the technology and the intellectual capital that went
into that technology. It's not just for the glory of
having done it. He's intending to capitalize on his intellectual capital,
his intellectual property. It's the rule of law that allows
that predictability. It assures him that his intellectual capital, his
(30:29):
intellectual property, can't simply be stolen and compromised by somebody else,
that he will get the benefit of it. And that
brings about innovation, that brings about development of greater intellectual capital.
And I think that's very important to understanding what the
rule of law brings to our society.
Speaker 2 (30:50):
After practicing law in Washington at Wilmer, Cutler and Pickering,
he and I were partners there back in the nineteen eighties.
Doug Mellman went on to head the Anti Trust division
of the Justice Department and then to serve as general
counsel for Intel.
Speaker 4 (31:04):
Shortly after I got to Intel, we were having the
annual gathering of the Worldwide Corporate Affairs folks, and I
was going to do an interview with one of the
most senior officers in the company, and I said to him,
give me a couple of ideas of times where the
government of affarious people have saved your bacon, and maybe
a couple of things you like from them going forward
(31:26):
in the near future. And his answer to me was Look,
as far as I'm concerned, it's your job, meaning the
general counsel, It's your job to tell me what the
rules are, and it's my job to optimize within them.
They want to know what the rules are. They need predictability,
They need a sense of fairness that the rules are
going to be applied in a predictable way to everybody
(31:49):
and then they can carry on their business.
Speaker 2 (31:51):
How do we get to that level of sufficient predictability
through the rule of law?
Speaker 4 (31:56):
You have a rule of law. The absence of the
rule of law, it's a continuum, and no society, i imagine,
is going to have a flawless rule of law that
sort of checks all the boxes all the time. There's
only one alternative to the rule of law. And this
might makes right because either you have rules to constrain
the exercise of power by the powerful, or the powerful
(32:20):
are going to make the rules and they're going to
run society. So the first element is that has to
be a body of rules that constrain the powerful, including
the government as well as others. And that means that
the rules have to be applied equally fairly to everybody.
They have to be predictable and knowable, predictable, so that
(32:42):
entities can know what they need to do to comply
with the law. Knowable for reasons of transparency and trust
in the legal process. You can't make anti competitive mergers,
you can't engage in fraud and securities fraud and set
up a Ponzi scheme, and so forth. Contracts are to
be enforced, property rights be respected, and so on. But
I think your question really illuminates the importance of the
(33:05):
value of the rule of law for a business entity,
because all of us feel constrained sometimes and you wish
were the speed limit, but we all benefit from the
fact that everyone else is constrained too. It's not just
a guardian against corruption and personal misdeeds, it is also
a guardian of an environment of robust business and economic sector.
Speaker 2 (33:30):
As an expert in international law, one who served as
a legal advisor at the US State Department, Harold co
knows firsthand how important it is for the US to
play by the established rules so that others will.
Speaker 8 (33:43):
International law rules set default patterns of compliance. That doesn't
mean that you can't break away from those, but there's
a cost in doing so, and there are two costs
in particular. One is that most of the other countries
are all continuing to followed the default, and so if
you break away, suddenly your intention with them, and then
(34:05):
you have to negotiate the differences. And the second difference
is that if you break away from the rules of
international law, you cannot enforce them against others when they
also break away. So, for example, it turned out that
before the World Trade Organization appellate panels, the United States
was winning most of its cases. Trump, in the last
(34:29):
administration that he led, decided that the World Trade Organization's
appellate process was disadvantageous to the United States. He did
it clearly, with no understanding of the track record, and
he broke it off. And now why should China obey
the rules? The United States is not going to obey
the rules. Lawlessness breeds lawlessness, and lawfulness breeds lawfulness.
Speaker 2 (34:53):
None of us wants lawlessness when it comes to either
our liberties or our markets. But commitment to that abstract
rule of law, to order and fairness and equal treatment
is more than just business. It's personal.
Speaker 5 (35:09):
I had a very simple prodding to go into law,
and it was largely through my grandmother. I grew up
in a small town in South Georgia, primarily raised by
my grandmother. I didn't know a lawyer. I had never
met a lawyer, and so most of what I knew
and thought I knew about being a lawyer I learned
from watching television.
Speaker 2 (35:31):
What did your grandmother see in the law?
Speaker 5 (35:34):
And you you know, I marvel at that even now
quite a lot, because I talk about my grandmother often
when I have occasion to speak to groups in the light,
because I want to honor her and acknowledge her. And
this was in the fifties, in the throes of segregation
and Jim Crow and so forth. She told me that
(35:57):
there wasn't anything I couldn't do, and you know, because
she said it, I believed it because I adored her,
and I hung on every word that she said. And
so what I saw in my grandmother is that she
didn't have some grand notion about the rule of law.
What she had was a simple understanding that she needed
(36:17):
to be and wanted to be free and treated fairly.
And while her world wasn't allowing that, she was telling
me that she saw a time in which it would
allow it for me, and that she wanted me to
be prepared to meet that moment and then to take
advantage of it.
Speaker 2 (36:37):
Up next coming full circle and residential real estate investment,
this time we hope without the crash. This is a
story about the American dream and how you too can
(36:58):
own a piece of it. Home Ownership used to be
a natural next step for people in their late twenties
and early thirties, But as they stand in the sidelines,
a new kind of investor is stepping in, but not
the one you might think.
Speaker 10 (37:12):
We're able to be nimble like a small investor, but
not be with the red tape of bureaucracy of a
large reed or a larger like for example, of Blackstone.
Speaker 2 (37:23):
Ra John Bott is the co founder and president of
Strand Capital, a private equity firm, but he started out
as a physician.
Speaker 10 (37:31):
I've always been more entrepreneur, you know, going back two
decades or more, building a company with my wife, Spectrumdromatology,
which I then sold in twenty twenty one, and building
all our medical office and owning a real estate at
that point, also having multi family and then fast forwarding
and getting involved industrial land development, and obviously being in
a single family. You know, it has been in the
(37:52):
heart of me always for twenty years.
Speaker 2 (37:55):
Bot's fund specializes in renting at single family homes, a
trend that's been on the rise because buying the house
you live in has become increasingly difficult. About two thirds
of Americans own their own homes, up from the early
nineteen nineties, but well below the peak of over sixty
nine percent just before the Great Financial Crisis.
Speaker 10 (38:15):
In an environment today where the affordability index is constrained,
you have interest rates that are high, you have economic uncertaincy,
you have the average American can't afford housing at these
levels in today's environment.
Speaker 2 (38:30):
When there is a market imbalance, as there was in
two thousand and nine, investors typically step in to address it,
and back then it was the big institutions like Blackstone.
Speaker 11 (38:40):
You would expect capital to flow into these markets. But
if the cost is prohibitive, nobody is going to expose
capital to higher than normal costs. And so I think
right now everyone is waiting to see what happens.
Speaker 2 (38:57):
Nancy Wallace is a professor at the Berkeley High School
of Business and chairs the real estate group there.
Speaker 11 (39:03):
You have to remember the origins of the single family
rental by large corporation or large fund purchases those were
heavily subsidized by Fanny and Freddie mortgages that went to
help these corporations buy the homes, so they actually financed that.
(39:24):
That was a one time thing. It was very helpful
for their initial growth. And then it was taking advantage
of the outmigration from the coastal states, especially during COVID
into these markets that were heavily single family for rent markets,
especially in Georgia, Atlanta, Charlotte, Tampa, Florida. But right now,
(39:48):
unless things change in terms of tariffs and the constant construction,
I wouldn't expect to see huge growth in single family
for rent by very large players.
Speaker 2 (40:00):
The role of investors in home ownership is particularly pronounced
in the Sun Belt. In California, investors purchased nearly a
third of homes sold in Miami in the fourth quarter
of twenty twenty two, at about one quarter in Atlanta.
In California, investors own more than fifty percent of homes
in five counties.
Speaker 11 (40:19):
It has to do with demographics and what preferences are
for a home ownership, and it does appear that there
are some shifts in terms of yes, people are interested
in having a single family home, but with two homeowner
working couples, which is largely the segment of the economy
(40:43):
that's interested in these homes. They're not interested in home maintenance.
They're not interested in the other things that break down
that they would prefer to call someone to have them
come and fix it.
Speaker 2 (40:55):
Fifteen years ago, it was the big funds that stepped
in to buy single family houses and rent them out,
but recently they have pulled back as the smaller investors
step into that role. In the first half of this year,
small investors made up about twenty five percent of single
family home purchases. Large investors accounted for only about five percent.
Speaker 10 (41:17):
Builders are in constraint. They are constrained, the interest rates
are high. The builders are negotiating with small investors will
be five, ten, or twenty homes. They are offering insteads
on financing, they're offering deals on homes.
Speaker 2 (41:30):
The current investor owned housing trend began back during the
two thousand and seven housing.
Speaker 9 (41:35):
Bubble in the Great Recession.
Speaker 12 (41:38):
I had just came into office, right so, I had
graduated law school, been eight years.
Speaker 9 (41:43):
I couldn't even afford a home.
Speaker 2 (41:45):
Dina Neil is a state senator in Nevada who has
seen the housing market transform since the Great Financial Crisis.
Speaker 12 (41:53):
In the Great Recession, homes were about three hundred and
fifty thousand, and it was a nineteen sixty five home
with no renovation.
Speaker 9 (42:00):
Now you have a brand new home.
Speaker 12 (42:03):
That's about four hundred and fifty thousand dollars that no
one can afford. And you have older homes that are
selling for about the same amount three hundred and fifty thousand,
and they were built in the sixties. The average income
of a Nevaden is around fifty thousand. Fifty thousand dollars
is not enough to afford a house in this market,
(42:24):
and so typically the housing market has jumped, so you
can't even find anything for two hundred and fifty thousand.
I know specifically there, you know, I know pharmacists that
are making one hundred and seventy k and they can't
afford a home in this market.
Speaker 2 (42:42):
Nevada is one of the hotspots for investors. Institutional investors.
Market share in residential real estate is up eight percentage
points in three years. There In Senator Neil's constituency of
North Las Vegas, that number is even higher.
Speaker 12 (42:57):
They're twenty seven percent of the Vegas market. It's significant,
and it's grown. They are now purchasing entire streets, they're
building entire neighborhoods for rent. And so this is going
on in Henderson, this is going on in North Las Vegas,
it's across the valley. And I think it's significant because
(43:20):
it's not creating home ownership, it's creating renters, which is different.
Speaker 2 (43:26):
Senator Neil introduced legislation to cap the number of homes
owned by investors at one hundred, but the measure recently failed.
Speaker 12 (43:34):
Literally when I left session, it was the national story
where a corporate investor purchased one hundred and fifteen homes
in one day.
Speaker 9 (43:43):
And this was a question that came up to me
during the session.
Speaker 12 (43:46):
As families or as individuals, we're also trying to expand
our own wealth, right, So fifteen or twenty houses to
me is still a mom and pop Right. There's still
a smaller investor that is saying, you know what, I'm
trying to expand my own generational wealth, but it's not
to the greatest extent of one hundred homes. And there
(44:09):
was a conversation around are you trying to lock me
out of my own ability to operate as a small capitalist,
and I had to say no. But there's a fine
line in gaining wealth and greed.
Speaker 2 (44:26):
But Wallace thinks the size of investors in the housing
market is exactly what is different this time around. How
is this time different from what we saw in two
thousand and six, two thousand and seven, where we did
have some mom and pops coming in, I think often
to flip the homes rather than to hold them.
Speaker 4 (44:41):
And rent them.
Speaker 11 (44:42):
I think that's exactly what the difference is. Although there
are house processes are definitely rising in California, again, we're
not seeing the flipper, at least we think we're not.
But that is a hard phenomenon to measure. Fanny and
Freddie a as you know, are in twenty twenty three
(45:03):
change their policies in terms of qualifying for investor loans
and getting them and being eligible for Fanny and Freddie securitization,
so the kind of pricing that you'd get from a
Fanny and Freddie securitized loans, So now under their rules,
basically the loan to value ratios are identical. If you're
(45:25):
an investor or, you're buying it for ownership where you
will live in the property.
Speaker 2 (45:30):
As if the story of single family home investment wasn't
complicated enough, there's now a new potential threat on the horizon.
Reports are that the Trump administration hopes to spin off
government sponsored enterprises Fannie May and Freddie Mac, which have
been under government control since the Great Financial Crisis.
Speaker 11 (45:49):
So right now, if you buy a Fanny May mortgage
backed security or a Ginny May mortgage backed security, you
are guaranteed against a default risk. Who provides that guarantee?
The US government right now, through the conservatorship the protections
we have in place that Fanny, Freddy and Jenny cannot fail.
(46:12):
If we privatize Fanny and Freddie and make it semi private,
who is going to provide that guarantee? Where are we
going to find sufficient capital? We're talking about markets that
are fourteen trillion dollars large. Where are we going to
find the private capital to support those markets? Especially without
(46:34):
very careful analysis, and that has not happened by the
Federal Housing Finance Administration to try to figure out how
we're going to do this. So I think anything that's
poorly thought out happens very rapidly is a recipe for disaster.
On this very florny problem that we have struggled with
(46:57):
now for years and failed, and largely I think the
pressure on this is very active shareholders, especially Ackerman and Paulson,
two very large shareholders of Fanny and Freddie Paper, especially
Fanny Paper, that want to monetize this paper. And I
(47:20):
think making a decision to benefit two large shareholders is
ridiculous if it could bring down the US mortgage market.
Speaker 2 (47:29):
The US housing market has been through the ringer, from
the Great Financial Crisis to inflation driving up construction costs
to rising mortgage rates. Privatization of Fanny and Freddie could
upset the apple cart once again, and whoever stands to
gain or lose Investors tend not to like that kind
of uncertainty. That does it for us. Here at Wall
(47:53):
Street Week, I'm David Weston. See you next week for
more stories of capitalism.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:19):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism. Apple earnings last week were better than expected,
but it is still falling behind its biggest rivals. Patrick McGee,
author of Apple in China, tells us why it has
a long way to go. Plus, lawyers worry about the
rule of law in the US. The head of the
(00:39):
American College of Trial Lawyers explains why Wall Street should
be just as concerned as members of the bar. And
everything old is new again. Small investors are back in
the game of buying homes to rent and ultimately flip.
Why that doesn't necessarily mean we're headed back into another
great financial crisis. But we start with the future of
(01:02):
monetary policy in the US as central bankers head back
to Jackson Hall, Wyoming with a new framework on the agenda.
Our special contributor Larry Summers takes us through what he'd
like to see.
Speaker 1 (01:15):
I'm not sure that it's the right time for a
big new framework when you have an outgoing chairman. I
would have thought that a new chairman should be providing
a new framework when the new chairman arrives. After the
new Chairman has consulted, so this seems rather odd timing
for a major new of framework announcement. It seems to
(01:38):
me that, if anything, the errors have been on the
side of excessive transparency, excessive forecasting, excessive what we used
to call when I was in government, eatrogenic volatility. Eatrogenic
illness is when you get sick from being in a hospital.
(02:00):
Eatrogenic volatility is when officials' comments end up adding instability
to markets. So I think at the moment we have
too many dot plots, too many forecasts, too much cacophony,
and some of the ideas for more information from the FED.
(02:23):
I think we'll end up pushing markets around without any
great benefit. My own view is that Paul Volker and
Alan Greenspan had this right. They saw the FED Chairman
as like the Delphi Oracles were thousands of years ago.
They were imperfect and couldn't really know the future, but
(02:47):
people thought they were omniscient and omnipotent, and it was
therefore better to keep any statements vague and oracular. Certainly,
the dominant theme the last time the FED had a
new Framework review was the difficulty of getting inflation up
(03:09):
to target. That's not our problem anymore. Our problem now
is making sure that high inflation expectations don't become embedded.
So corrections back towards symmetry with respect to inflation seemed
(03:29):
to me to be appropriate. And I think one should
learn from the fact that, with the best of intentions,
the framework adopted before, right ahead of the pandemic wasn't
really the right of framework as things turned out, and
that could happen again. So I think the FED would
(03:51):
do well to avoid being overly prescriptive at this juncture. Finally,
I think that the whole question of the management of
the maturity structure of the federal debt needs careful consideration.
(04:11):
What matters to markets is the debt that they have
to absorb and the spectacle. We've seen that a number
of times in recent junctures where the Treasury was trying
to push the maturity structure of the debt in one
direction and the FED was trying to push the maturity
structure of the debt in the other direction. Seems odd, Larry.
Speaker 2 (04:35):
This week we got CPI numbers in which basically I
took two messages away from one is we are persistently
above that two percent mark on inflation, and it seems
to be really stubbornly so, and yet the markets took
it as boy, it's sure the Fed's going to cut
in September. The likelihood went to almost one hundred percent.
Can you square those two things.
Speaker 1 (04:55):
I think that there's also evidence of we in the economy,
and it's that weakening that I think is behind the
market's view that the Fed will likely ease rates. I
think that wall inflation was elevated, it was not as
(05:16):
elevated as many feared that it would be, so I
wouldn't want to fight hard against the market's judgment with
respect to September. I think it's also probably worth remembering, David,
that what you described as a certainty of a twenty
(05:41):
five basis point cut in September is probably better understood
as a likelihood of a twenty five basis point cut,
with fifty basis points and zero being about equally likely.
So the whole thing averaged out to a twenty five
(06:02):
basis point cut. And there's more data to come in,
and so I think it would be a mistake to
be certain for anybody about what would happen. We could
get very very weak data that pushed towards a fifty
basis point cut, we could get information on inflation and
the strength of the economy that pushed towards delaying cuts
(06:26):
even further. So it's a mistake to be certain about
what's going to happen.
Speaker 2 (06:32):
One of the sources weighing on a fifty basis point
cut side has been the Second of Treasury, Scott Bessen,
who said that might make sense in September.
Speaker 3 (06:39):
We should probably be one hundred and fifty one hundred
and seventy five basis points lower. So I think the
committee needs to step back. I think probably one of
the most politicized governors just went off the board.
Speaker 1 (06:57):
I was surprised to see the Secretary, any secretary of
the Treasury, be that prescriptive. Usually that kind of judgment
is not made by administration officials, and I'm not sure
it's helpful for the administration to be publicly prescribed on
(07:22):
monetary policy. Beyond that, I don't think the statement is
in line with what I would say. I would have
said that any model of monetary policy has to be
based on a judgment about what the neutral interest rate is,
(07:44):
and has to be based on a judgment about inflation.
Speaker 4 (07:47):
Expectations.
Speaker 1 (07:49):
If one has the view that substantially elevated deficit spending
plus substantially elevated data center spending is greatly plus reduced
trade deficits in the United States plus higher asset prices
(08:10):
which reduce the flow of funds for saving, if one
has the view that all of that is raising the
net demand for funds, then I think one might think
that neutral interest rates have risen quite substantially, in which
case you wouldn't be prescribing one hundred and seventy five
(08:31):
basis point cutting rates unless we see a recession. I
think the possibility and the risk of inflation expectations starting
to pick up, given big budget deficits, given tariff pressures,
(08:51):
given political uncertainties surrounding the FED, is also a reason
why one wouldn't want to feel that we were committed
to major rate reduction going forward. So I'm not here
to tell you that that's not going to happen. I'm
(09:12):
not here to tell you that it shouldn't happen. I
can certainly imagine circumstances in which the economy could play
out in which those kinds of cuts would be appropriate,
But it seems to me to be confidently prescribing them
(09:33):
at this juncture is beyond what I would see as
a prudent judgment, all the more when the judgment is
being made by a senior official with responsibility for policy.
Speaker 2 (09:51):
We end the week with President Trump meeting with President
Putin in Alaska to talk about Ukraine, with Ukraine not
being present. I wonder what your thoughts are, what effects
that have economically, And let me ask you specifically about
those Russian assets that you've talked about on this program
more than once.
Speaker 5 (10:07):
David.
Speaker 1 (10:09):
President Trump, like him or not like him, support what
he does, or be more skeptical of some of the
things he does, is the most transactional of all presidents.
I would have fought and hoped that a president who
(10:30):
was so transactional, with the tremendous leverage over Russia that's
represented by the fact that we have currently frozen their reserves,
would use our claim on those reserves as leverage to
drive them to a just piece with Ukraine. I know
(10:54):
there's some reluctance about that in Europe. There's concern that
it might inhibit some country's ability to sell debt. President
Trump's errors in the past have not been over solicitude
for European views. So I have been surprised and a
(11:16):
bit disappointed that President Trump has not been prepared to
bring the reserves issue more into the foreground, because I
think it would be helpful to him in achieving his
objectives of putting the Russia Ukraine conflict in the rear
view mirror.
Speaker 2 (11:38):
Up next, the saga of the three trillion dollar company
falling behind in its race with other megatech firms what
Apple needs to do to get back on track. This
(11:58):
is a story about race a bear, where it's not
so much that you beat the bear as it is
that you beat the others in the race so that
you don't get eaten. Apple is worth more than three
trillion dollars, but it's no longer the world's most valuable company,
and it's not racing as fast as its largest competitors.
Patrick McGee, author of the best selling book Apple in China,
(12:20):
says there's plenty for Apple to be worried about.
Speaker 6 (12:24):
In twenty seventeen, the former head of software under Steve Jobs,
Avi Tavanium basically used the analogy that if you and
a friend are being chased by a bear, you don't
need to outrun the bear. You just need to outrun
your friend. He meant to say that in the world
of Tim Cook Samsung, the Google Android operating system wasn't
doing anything in particular in twenty eighteen. So while he
(12:46):
could acknowledge that Tim Cook's Apple had sort of stagnated
a little bit, it didn't matter in twenty seventeen. Well,
eight years later, I think it really does matter. And
that's why you have Nvideo being worth a trillion dollars more,
Microsoft being worth eight hundred dollars, eight hundred billion dollars more.
Companies that really didn't even exist at the time, anthropic perplexity,
open AI are really defining a new era of computing.
(13:08):
And it's you know, somewhere between embarrassing and tragic that Apple,
sort of the most iconic company, really isn't even in
that conversation, and something like the design position, you know,
chief design officer has been vacant since Johnny I have
left in twenty nineteen. I don't think there's any excuse
for that.
Speaker 2 (13:26):
What's slowing Apple down.
Speaker 6 (13:28):
Well, what made Apple so iconic in the early two
thousands was really product design and then Tim Cook's ability
to operate those products at enormous scale. They're still playing
the scale game. I mean, they build and sell two
hundred and thirty million iPhones a year, and probably double
that number of products if you were to include everything
from air tags and air pods to iPads and MacBooks.
(13:48):
So their operation game is is, you know, second to none.
They run the world's most sophisticated supply chain, but they're
no longer redesigning products in super interesting ways. The Macbinnie
is about as boring as you can get in terms
of a product. In terms of how it looks, it's
almost HARKing back to the nineteen nineties when computers were
all beaige. The iPhone really hasn't been redesigned in any
(14:08):
meaningful tangible way since twenty nineteen, and I don't think
the other products have been either, So they've sort of
lost their cool in a certain sense, right. Apple no
longer sort of defines how a computer or a smartphone
is going to look and feel, and I think, unfortunately,
sort of the most sexy smartphones in the world these
days are from a bunch of Chinese companies who largely
can't sell in America, like the Huawei mate Xt, which
(14:32):
in Apple terms is an iPhone and an iPad in one.
So really, the story of my book is that Apple
trained up its own competitors. They didn't just give birth
to a smartphone industry in terms of the supply chain.
The supply chain took those skills and they sort of
offered what Apple taught them to Huawei, Apo, Vivo, and
shall Me, and those are the Chinese companies that collectively
(14:54):
have a global market share in smartphones, the most iconic
device of the twenty first century, of more than five percent.
So I really think Apple risks being overtaken by Chinese
competition in the next three years within China. And the
only reason that's not a global story is because you
can't go to an AT and T store here a
little let alone down to the local mall and buy
(15:18):
Huawei phone. So there's all sorts of protections, you know,
basically the same sort of thing that Donald Trump complains
about overseas, right, non tariff protections we have in the
telecom industry ourselves, but in places like Russia and Indonesia.
I mean, the Chinese smartphone manufacturers have an eighty percent
market share, if not higher, and I suspect that's going
to be a real problem for Apple in the next
(15:39):
five to ten years.
Speaker 2 (15:40):
One route Apple is pursuing to avoid the trade conflicts
between the US and China is to manufacture in India,
which has its own tariff problems with President Trump. But
even putting that to one side, McGee says India may
not be the success story.
Speaker 6 (15:56):
It appears there's more hype than reality in terms of
manufacturing in India. Really, they haven't moved the depth and
breadth of the supply chain. What they've moved is assembly.
And because people largely don't know just how gargantuan Apples
operations in China are, their investments in India can look
like a big deal. So just a few months ago,
for instance, Apple's Taiwanese partner was investing into India and
(16:18):
they were making dormitories to house thirty thousand workers. Well,
to any American listener or reader, that sounds like a
huge investment until you remember that Tim Cook's own estimate
of how many Chinese people are in the supply chain
is three million, right, So what's thirty thousand out of
three million? That's one percent. The investments in India need
to be on a staggeringly different scale for the country
to really replicate the depth and breadth of the supply chain.
(16:41):
I would say on a superficial basis, India absolutely has
what it takes one point five billion people, obviously a
massive land mass and wages comparable to what you had
in China twenty twenty five years ago. Unfortunately, the differences
between China and India are more profound the more serious
you seriously you look at this issue. So you know,
the missing topography of Apple that my book really contributes
(17:03):
to is and understanding that Apple didn't move to China
because China offered competence. Apple moved there because Apple was
able to build the competence right by training millions of people,
by investing billions of dollars, by installing machinery on production
lines that otherwise wouldn't be able to afford to do it. Now,
Apple can do the same playbook in India. However, who's
(17:25):
going to build the eight lane highways from the factories
to the ports. Who's going to build the high speed rail?
That's not something Apple can do. So I think there's
great potential for India to be an enormous and successful
partner to Apple, but it's going to take a lot
from New Delhi or the governors of Tamil Nadu or Karnataka.
In order for that to make sense, Apple can't just
(17:47):
write a blank check. They need government support and negotiations
for this probably have to happen at the level of
New Delhi, Beijing, Washington, etc. Because you can't really expect
a company to make these moves and just risk the
backlash from Chinese consumers where Apple has this seventy billion
dollar business, and from Beijing. So you're going to have
to have everybody at a table striking some grand bargain
for China and sense to allow the manufacturing to leave
(18:09):
its country, because Beijing knows better than anybody else what
it means to have Apple as a partner in your
country building up major industrial clusters, and Beijing wants technology
transferred to be a one way gate the information comes
in it does not leave.
Speaker 2 (18:24):
Apple's ties to China have turned out to be both
a strength and a weakness, but it's not the only
challenge it faces. It's also fallen behind its competitors in
the race to artificial intelligence. Man Deep Singh is the
global head of Technology research at Bloomberg Intelligence.
Speaker 7 (18:41):
They have a history of creating new products. Obviously, iPhone
is the big cash cow and they have monetized it
extremely well in terms of the newer versions. But AI
is something that wasn't in their DNA in terms of
you know, investing upfront the hyperscalers like Microsoft, Google, Meta,
(19:04):
these companies were quite aggressive in terms of believing that
AI was a secular team that will change the products. Apple,
on the other hand, has always thought about, you know,
hardware design. That has been their strength and till date,
I don't think there is a competitor when it comes
(19:25):
to the quality of the hardware that Apple has versus
you know, anyone else. But what they really missed out
on is the profound impact AI may have in terms
of the functionality whether you are browsing on your phone
or how you interact with an assistant the app store.
(19:45):
So now they are really realizing, Okay, what is it
that we could do given everyone else has a two
to three year headstart and they haven't invested in infrastructure
or data centers. But now partnership MNA seems to be
the most viable option because they still control the distribution.
Speaker 2 (20:06):
How big a problem when it comes to does Apple
have and does Apple know it has a problem.
Speaker 7 (20:11):
I think the acknowledgment is coming more now than it
was six months back. And part of the reason is
how big AI has become. So Google right now is
processing nine hundred eighty trillion tokens a month. Now, that's
one hundred x in the past one year. So that
just goes to show what is the level of consumption
(20:33):
in AI now versus where it was twelve months back.
Open ai is close to one billion monthly active users
a day, and so with those kind of numbers, you
have to acknowledge that AI is getting more pervasive in
our lives and on our devices.
Speaker 1 (20:51):
Now.
Speaker 7 (20:51):
The question is it enough for Apple to just keep
offering AI through their app store or do they need
natively on the device. And the answer is what OpenAI
has showed us with GPT five is you can use
llms for scheduling your diary, you can use llms for
summarizing your emails, and you know, acting as an assistant,
(21:13):
which is what Siri was supposed to do. Apple talked
about revamping sery, but we know it has gotten delayed,
and so those are the type of things Apple has
to do something about it. Otherwise it can turn people off,
and once they move out of the Apple ecosystem, it's
very hard to bring people back. The catch I think
(21:35):
as long as you control the distribution, which is why.
You know, companies like Google, which has made a lot
of advancements in their lms, they controlled the browser, they
control the Android ecosystem, and for me, Apple is similar.
They have their Safari browser, they have the iOS operating system,
(21:56):
they control the devices, so they have a lock in
with their users. The only trouble they've had is developing
this LLLM functionality. And so to my mind and Opening
Eye or Nthropic also have to catch up. If they
want to compete with Apple and take share, they have
to come up with devices, you know, And so it's
(22:19):
not easy what Apple has done over the past twenty
years in terms of the ecosystem they've created. And that's
why unless there is a disruption to smartphone or you know, tablets,
and there is a new form factor altogether, which as
I mentioned, Apple has come up with Vision Pro. So
it's not as if Ivar is going to challenge Apple.
(22:39):
I just don't see any hardware disruption on the horizon
to make me feel Apple is at risk. That three
trillion market cap is at risk. But if I see
a new form factor where people just do their work
completely differently, it's a substitute for a phone, That's when
I'll get worried about Apple.
Speaker 6 (22:57):
I think Tim Cook has done a tremendous job in
terms of following in the footsteps of Steve Jobs. That's
something basically nobody thought was really possible. And Apple's market cap,
I believe, has gone from around three hundred billion in
twenty eleven when Steve Jobs died, to three trillion dollars.
That's a massive accomplishment on the part of Tim Cook.
But I think if you look at what's happening in
Apple since twenty twenty two, it's not a whole lot,
(23:20):
and there's not a whole lot to cheer for. That
was the year that they first hit three trillion dollars.
The share price has barely moved since then. I would
look at twenty twenty two Apple and say mission accomplished.
Tim Cook was brought in to scale and distribute at
scale the products that Steve Jobs had already created. At
this point, the pendulum has swung back to an area
where you need a product design leader, a product visionary,
(23:43):
someone who's adept in ai and whatever the qualities of
Tim Cook are, it's none of those three things.
Speaker 2 (23:50):
Coming up from a small town in South Georgia in
the time of Jim Crow Laws comes the story of
why the rule of law matters so much, not just
a lawyer's judges, but to business and markets and the
economy overall. This is a story about playing by the rules,
(24:16):
or really playing by one really big rule.
Speaker 1 (24:19):
The rule of law.
Speaker 5 (24:21):
I think some of what we're seeing are basically pushing
power and pushing authority in directions that we haven't gone before.
Speaker 8 (24:29):
We're at a moment now where we have a president
who feels unusually unconstrained.
Speaker 4 (24:36):
I think we have to be concerned because this administration
is pressing boundaries every.
Speaker 2 (24:41):
Day, and some of what President Trump has had to
say about the courts and their rulings has not always
been reassuring.
Speaker 1 (24:50):
Judges are trying to take away the power given to
the president to keep our country safe, and it's not
a good thing.
Speaker 2 (24:59):
As in important as we're told the rule of law is,
it can sometimes feel pretty abstract something yes, legalistic, but
for the rest of us, it's a matter of predictability
and fairness, something that runs silently in the background until
it really matters.
Speaker 8 (25:17):
My parents came from South Korea, and Korea was subjected
to a military dictatorship. And when I was in high school,
I went to Korea and there was an assassination attempt
on the president who had installed himself as a dictator.
Suddenly they declared martial law and I couldn't go home.
Speaker 2 (25:39):
Harold Coe went on to be dean of the a
Law School and the chief legal officer in the State Department.
But he got his first direct exposure to the importance
of following predictable rules when he was a young Korean
American visiting his extended family in the country of his
heritage in the early nineteen seventies.
Speaker 8 (25:57):
And I called my father and he told me, you
know what happened here in America. Richard Nixon just resigned
and Gerald Ford is the president. And there are no
tanks in the street, there are no guns. And I said,
what does this mean? And he said, this is the
difference between the rule of law and the rule of individuals.
He said, in America, if you're president, the troops obey you.
(26:20):
In Korea, if the troops obey you, they'll call you president.
Speaker 2 (26:25):
Protecting the foundations of our system historically is the job
of US judges and the lawyers who appear before them
in litigation. Lawyers like the fellows of the American College
of Trial Lawyers, currently led by its president, Rick Dean, and.
Speaker 5 (26:40):
So it's a invitation only group of trial lawyers. And
you actually have to be a trial lawyer in order
to be considered for induction. There's a fairly lengthy process
by which you are considered. You have to have been
a member of the trial bar for at least fifteen years.
Speaker 2 (26:58):
Is there a political tilt one way or the other,
left or right of the American College Trialers.
Speaker 5 (27:03):
We are an organization that across the political spectrum. You're
going to find fellows with all kinds of political ideas,
and that's not important to us. We are committed to
certain core concepts. One of those is to the advancement
of the rule of law, protecting judicial independence, and frankly
(27:24):
supporting the access to justice, the concept of access to justice.
So those are our key tenants and politics is not
one of those. We're talking about that set of sort
of governing principles that bring stability and predictability to our liberty.
It's a concept of ordered liberty, and these are the
(27:46):
guardrails the rules.
Speaker 2 (27:47):
Are you more active in supporting defending the rule of
law today than you have been in recent years?
Speaker 5 (27:54):
I think a fair response is yes, And in part
that's because I think we're coming to see things that
concern us. And when I say we, I mean the
College itself, but primarily operating through its executive committee and
its leadership. We're coming to see things that concern us.
As I've gone around and spoken to fellows in both
(28:17):
the US and candidate, they're expressing to me concerns that
they have as well.
Speaker 2 (28:23):
So yes, Professor co is even more emphatic about his
concerns over recent government actions.
Speaker 8 (28:29):
I think it's the worst crisis of my lifetime, and
I'm not a young man. I was sad to say
the ultimate Supreme Court test may be coming, but frankly,
this Supreme Court has given Trump way more rope than
he should have been given. There have been more than
seventy rulings at the district and circuit courts against Trump.
(28:52):
I speak as someone who is a birthright citizen. It's
protected by the express word of the fourteenth Amendment. It
has been held explicitly by US versus Wong Kim arc,
which is a Supreme Court decision from the eighteen thirties,
and it has been consistently sustained, and there's a statute
(29:13):
which states it as well. You'll find out a few
minutes after taking an oath in which the President said
he would obey the Constitution, he signed an executive order
violating the Constitution, namely saying that he would not respect
birthright citizenship.
Speaker 9 (29:29):
They are coming right.
Speaker 2 (29:31):
Often we talk about things like the rule of law
when we're concerned about personal liberties like birthright citizenship. But
for Dean, we need to make every bit is sure
that everyone plays by the rules when it comes to
markets and to business.
Speaker 5 (29:46):
The rule of law is important to personal liberty, but
it's also fundamentally important to our economic well being. That
it's the rule of law that provides predictability, that provides
stability such that we actively participants in our own economy.
Why would Steve Jobs want to develop the iPhone and
(30:07):
all of the technology and the intellectual capital that went
into that technology. It's not just for the glory of
having done it. He's intending to capitalize on his intellectual capital,
his intellectual property. It's the rule of law that allows
that predictability. It assures him that his intellectual capital, his
(30:29):
intellectual property, can't simply be stolen and compromised by somebody else,
that he will get the benefit of it. And that
brings about innovation, that brings about development of greater intellectual capital.
And I think that's very important to understanding what the
rule of law brings to our society.
Speaker 2 (30:50):
After practicing law in Washington at Wilmer, Cutler and Pickering,
he and I were partners there back in the nineteen eighties.
Doug Mellman went on to head the Anti Trust division
of the Justice Department and then to serve as general
counsel for Intel.
Speaker 4 (31:04):
Shortly after I got to Intel, we were having the
annual gathering of the Worldwide Corporate Affairs folks, and I
was going to do an interview with one of the
most senior officers in the company, and I said to him,
give me a couple of ideas of times where the
government of affarious people have saved your bacon, and maybe
a couple of things you like from them going forward
(31:26):
in the near future. And his answer to me was Look,
as far as I'm concerned, it's your job, meaning the
general counsel, It's your job to tell me what the
rules are, and it's my job to optimize within them.
They want to know what the rules are. They need predictability,
They need a sense of fairness that the rules are
going to be applied in a predictable way to everybody
(31:49):
and then they can carry on their business.
Speaker 2 (31:51):
How do we get to that level of sufficient predictability
through the rule of law?
Speaker 4 (31:56):
You have a rule of law. The absence of the
rule of law, it's a continuum, and no society, i imagine,
is going to have a flawless rule of law that
sort of checks all the boxes all the time. There's
only one alternative to the rule of law. And this
might makes right because either you have rules to constrain
the exercise of power by the powerful, or the powerful
(32:20):
are going to make the rules and they're going to
run society. So the first element is that has to
be a body of rules that constrain the powerful, including
the government as well as others. And that means that
the rules have to be applied equally fairly to everybody.
They have to be predictable and knowable, predictable, so that
(32:42):
entities can know what they need to do to comply
with the law. Knowable for reasons of transparency and trust
in the legal process. You can't make anti competitive mergers,
you can't engage in fraud and securities fraud and set
up a Ponzi scheme, and so forth. Contracts are to
be enforced, property rights be respected, and so on. But
I think your question really illuminates the importance of the
(33:05):
value of the rule of law for a business entity,
because all of us feel constrained sometimes and you wish
were the speed limit, but we all benefit from the
fact that everyone else is constrained too. It's not just
a guardian against corruption and personal misdeeds, it is also
a guardian of an environment of robust business and economic sector.
Speaker 2 (33:30):
As an expert in international law, one who served as
a legal advisor at the US State Department, Harold co
knows firsthand how important it is for the US to
play by the established rules so that others will.
Speaker 8 (33:43):
International law rules set default patterns of compliance. That doesn't
mean that you can't break away from those, but there's
a cost in doing so, and there are two costs
in particular. One is that most of the other countries
are all continuing to followed the default, and so if
you break away, suddenly your intention with them, and then
(34:05):
you have to negotiate the differences. And the second difference
is that if you break away from the rules of
international law, you cannot enforce them against others when they
also break away. So, for example, it turned out that
before the World Trade Organization appellate panels, the United States
was winning most of its cases. Trump, in the last
(34:29):
administration that he led, decided that the World Trade Organization's
appellate process was disadvantageous to the United States. He did
it clearly, with no understanding of the track record, and
he broke it off. And now why should China obey
the rules? The United States is not going to obey
the rules. Lawlessness breeds lawlessness, and lawfulness breeds lawfulness.
Speaker 2 (34:53):
None of us wants lawlessness when it comes to either
our liberties or our markets. But commitment to that abstract
rule of law, to order and fairness and equal treatment
is more than just business. It's personal.
Speaker 5 (35:09):
I had a very simple prodding to go into law,
and it was largely through my grandmother. I grew up
in a small town in South Georgia, primarily raised by
my grandmother. I didn't know a lawyer. I had never
met a lawyer, and so most of what I knew
and thought I knew about being a lawyer I learned
from watching television.
Speaker 2 (35:31):
What did your grandmother see in the law?
Speaker 5 (35:34):
And you you know, I marvel at that even now
quite a lot, because I talk about my grandmother often
when I have occasion to speak to groups in the light,
because I want to honor her and acknowledge her. And
this was in the fifties, in the throes of segregation
and Jim Crow and so forth. She told me that
(35:57):
there wasn't anything I couldn't do, and you know, because
she said it, I believed it because I adored her,
and I hung on every word that she said. And
so what I saw in my grandmother is that she
didn't have some grand notion about the rule of law.
What she had was a simple understanding that she needed
(36:17):
to be and wanted to be free and treated fairly.
And while her world wasn't allowing that, she was telling
me that she saw a time in which it would
allow it for me, and that she wanted me to
be prepared to meet that moment and then to take
advantage of it.
Speaker 2 (36:37):
Up next coming full circle and residential real estate investment,
this time we hope without the crash. This is a
story about the American dream and how you too can
(36:58):
own a piece of it. Home Ownership used to be
a natural next step for people in their late twenties
and early thirties, But as they stand in the sidelines,
a new kind of investor is stepping in, but not
the one you might think.
Speaker 10 (37:12):
We're able to be nimble like a small investor, but
not be with the red tape of bureaucracy of a
large reed or a larger like for example, of Blackstone.
Speaker 2 (37:23):
Ra John Bott is the co founder and president of
Strand Capital, a private equity firm, but he started out
as a physician.
Speaker 10 (37:31):
I've always been more entrepreneur, you know, going back two
decades or more, building a company with my wife, Spectrumdromatology,
which I then sold in twenty twenty one, and building
all our medical office and owning a real estate at
that point, also having multi family and then fast forwarding
and getting involved industrial land development, and obviously being in
a single family. You know, it has been in the
(37:52):
heart of me always for twenty years.
Speaker 2 (37:55):
Bot's fund specializes in renting at single family homes, a
trend that's been on the rise because buying the house
you live in has become increasingly difficult. About two thirds
of Americans own their own homes, up from the early
nineteen nineties, but well below the peak of over sixty
nine percent just before the Great Financial Crisis.
Speaker 10 (38:15):
In an environment today where the affordability index is constrained,
you have interest rates that are high, you have economic uncertaincy,
you have the average American can't afford housing at these
levels in today's environment.
Speaker 2 (38:30):
When there is a market imbalance, as there was in
two thousand and nine, investors typically step in to address it,
and back then it was the big institutions like Blackstone.
Speaker 11 (38:40):
You would expect capital to flow into these markets. But
if the cost is prohibitive, nobody is going to expose
capital to higher than normal costs. And so I think
right now everyone is waiting to see what happens.
Speaker 2 (38:57):
Nancy Wallace is a professor at the Berkeley High School
of Business and chairs the real estate group there.
Speaker 11 (39:03):
You have to remember the origins of the single family
rental by large corporation or large fund purchases those were
heavily subsidized by Fanny and Freddie mortgages that went to
help these corporations buy the homes, so they actually financed that.
(39:24):
That was a one time thing. It was very helpful
for their initial growth. And then it was taking advantage
of the outmigration from the coastal states, especially during COVID
into these markets that were heavily single family for rent markets,
especially in Georgia, Atlanta, Charlotte, Tampa, Florida. But right now,
(39:48):
unless things change in terms of tariffs and the constant construction,
I wouldn't expect to see huge growth in single family
for rent by very large players.
Speaker 2 (40:00):
The role of investors in home ownership is particularly pronounced
in the Sun Belt. In California, investors purchased nearly a
third of homes sold in Miami in the fourth quarter
of twenty twenty two, at about one quarter in Atlanta.
In California, investors own more than fifty percent of homes
in five counties.
Speaker 11 (40:19):
It has to do with demographics and what preferences are
for a home ownership, and it does appear that there
are some shifts in terms of yes, people are interested
in having a single family home, but with two homeowner
working couples, which is largely the segment of the economy
(40:43):
that's interested in these homes. They're not interested in home maintenance.
They're not interested in the other things that break down
that they would prefer to call someone to have them
come and fix it.
Speaker 2 (40:55):
Fifteen years ago, it was the big funds that stepped
in to buy single family houses and rent them out,
but recently they have pulled back as the smaller investors
step into that role. In the first half of this year,
small investors made up about twenty five percent of single
family home purchases. Large investors accounted for only about five percent.
Speaker 10 (41:17):
Builders are in constraint. They are constrained, the interest rates
are high. The builders are negotiating with small investors will
be five, ten, or twenty homes. They are offering insteads
on financing, they're offering deals on homes.
Speaker 2 (41:30):
The current investor owned housing trend began back during the
two thousand and seven housing.
Speaker 9 (41:35):
Bubble in the Great Recession.
Speaker 12 (41:38):
I had just came into office, right so, I had
graduated law school, been eight years.
Speaker 9 (41:43):
I couldn't even afford a home.
Speaker 2 (41:45):
Dina Neil is a state senator in Nevada who has
seen the housing market transform since the Great Financial Crisis.
Speaker 12 (41:53):
In the Great Recession, homes were about three hundred and
fifty thousand, and it was a nineteen sixty five home
with no renovation.
Speaker 9 (42:00):
Now you have a brand new home.
Speaker 12 (42:03):
That's about four hundred and fifty thousand dollars that no
one can afford. And you have older homes that are
selling for about the same amount three hundred and fifty thousand,
and they were built in the sixties. The average income
of a Nevaden is around fifty thousand. Fifty thousand dollars
is not enough to afford a house in this market,
(42:24):
and so typically the housing market has jumped, so you
can't even find anything for two hundred and fifty thousand.
I know specifically there, you know, I know pharmacists that
are making one hundred and seventy k and they can't
afford a home in this market.
Speaker 2 (42:42):
Nevada is one of the hotspots for investors. Institutional investors.
Market share in residential real estate is up eight percentage
points in three years. There In Senator Neil's constituency of
North Las Vegas, that number is even higher.
Speaker 12 (42:57):
They're twenty seven percent of the Vegas market. It's significant,
and it's grown. They are now purchasing entire streets, they're
building entire neighborhoods for rent. And so this is going
on in Henderson, this is going on in North Las Vegas,
it's across the valley. And I think it's significant because
(43:20):
it's not creating home ownership, it's creating renters, which is different.
Speaker 2 (43:26):
Senator Neil introduced legislation to cap the number of homes
owned by investors at one hundred, but the measure recently failed.
Speaker 12 (43:34):
Literally when I left session, it was the national story
where a corporate investor purchased one hundred and fifteen homes
in one day.
Speaker 9 (43:43):
And this was a question that came up to me
during the session.
Speaker 12 (43:46):
As families or as individuals, we're also trying to expand
our own wealth, right, So fifteen or twenty houses to
me is still a mom and pop Right. There's still
a smaller investor that is saying, you know what, I'm
trying to expand my own generational wealth, but it's not
to the greatest extent of one hundred homes. And there
(44:09):
was a conversation around are you trying to lock me
out of my own ability to operate as a small capitalist,
and I had to say no. But there's a fine
line in gaining wealth and greed.
Speaker 2 (44:26):
But Wallace thinks the size of investors in the housing
market is exactly what is different this time around. How
is this time different from what we saw in two
thousand and six, two thousand and seven, where we did
have some mom and pops coming in, I think often
to flip the homes rather than to hold them.
Speaker 4 (44:41):
And rent them.
Speaker 11 (44:42):
I think that's exactly what the difference is. Although there
are house processes are definitely rising in California, again, we're
not seeing the flipper, at least we think we're not.
But that is a hard phenomenon to measure. Fanny and
Freddie a as you know, are in twenty twenty three
(45:03):
change their policies in terms of qualifying for investor loans
and getting them and being eligible for Fanny and Freddie securitization,
so the kind of pricing that you'd get from a
Fanny and Freddie securitized loans, So now under their rules,
basically the loan to value ratios are identical. If you're
(45:25):
an investor or, you're buying it for ownership where you
will live in the property.
Speaker 2 (45:30):
As if the story of single family home investment wasn't
complicated enough, there's now a new potential threat on the horizon.
Reports are that the Trump administration hopes to spin off
government sponsored enterprises Fannie May and Freddie Mac, which have
been under government control since the Great Financial Crisis.
Speaker 11 (45:49):
So right now, if you buy a Fanny May mortgage
backed security or a Ginny May mortgage backed security, you
are guaranteed against a default risk. Who provides that guarantee?
The US government right now, through the conservatorship the protections
we have in place that Fanny, Freddy and Jenny cannot fail.
(46:12):
If we privatize Fanny and Freddie and make it semi private,
who is going to provide that guarantee? Where are we
going to find sufficient capital? We're talking about markets that
are fourteen trillion dollars large. Where are we going to
find the private capital to support those markets? Especially without
(46:34):
very careful analysis, and that has not happened by the
Federal Housing Finance Administration to try to figure out how
we're going to do this. So I think anything that's
poorly thought out happens very rapidly is a recipe for disaster.
On this very florny problem that we have struggled with
(46:57):
now for years and failed, and largely I think the
pressure on this is very active shareholders, especially Ackerman and Paulson,
two very large shareholders of Fanny and Freddie Paper, especially
Fanny Paper, that want to monetize this paper. And I
(47:20):
think making a decision to benefit two large shareholders is
ridiculous if it could bring down the US mortgage market.
Speaker 2 (47:29):
The US housing market has been through the ringer, from
the Great Financial Crisis to inflation driving up construction costs
to rising mortgage rates. Privatization of Fanny and Freddie could
upset the apple cart once again, and whoever stands to
gain or lose Investors tend not to like that kind
of uncertainty. That does it for us. Here at Wall
(47:53):
Street Week, I'm David Weston. See you next week for
more stories of capitalism.
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