The article below is from our BRIEFINGS newsletter of 04 November 2021
At the Goldman Sachs Asset Management Forum, Steve Rattner, chairman and CEO of Willett Advisors, spoke with Goldman Sachs’ Katie Koch, co-head of the Fundamental Equity business, and Goldman Sachs' Nora Creedon, an investor in private real estate, about China, U.S. deficits and wage inflation. Rattner manages the personal and philanthropic investments of Michael Bloomberg and Bloomberg Philanthropies, and previously served as counselor to the secretary of the treasury in former President Barack Obama's administration and as lead auto adviser, where he led the successful restructuring of the auto industry during the 2008 financial crisis. Ahead, a few excerpts from their conversation.
Nora Creedon: Steve, you’re widely known as a China bull, having said in the past that China is one of the most exciting places to invest, despite the lack of transparency. What do you make of the government’s regulatory crackdown and recent concerns about the property sector? Has it affected your appetite to invest there?
Steve Rattner: I’ve been investing in China for a long time and have found it to be one of the most dynamic, driven and—ironically, given its Communist roots—capitalistic countries in the world. The reason Chinese equities have traded at a substantial discount to developed market equities is because of the unknown risks around its political system. That’s playing out now. Not only is the government responding to the growing power and wealth that’s been created in the technology sector and others, but there are rising tensions with the U.S. over trade, data security and the South China Sea. Meanwhile, President Xi Jinping is pivoting away from policies aimed at lifting people out of poverty to policies aimed at leveling the playing field for individuals. All of these changes are forcing us to rethink how and where we invest in China, although I fundamentally still believe that China will remain a market-based economy and an attractive place to invest.
Katie Koch: You’ve been vocal about the high level of deficits in the U.S. Even today, there are proposals that could add another $3 trillion in new spending to those deficits. Where do you come out on the absolute level of deficits and what do you see as some of the dangers?
Steve Rattner: I’ve long been a deficit hawk, but it’s worth noting that there are different types of hawks. Some people believe that markets will, at some point, back up and revolt against the level of debt, forcing the U.S. into a position where it will have trouble borrowing. I don’t believe that. In 2011, for example, when the U.S. was close to defaulting on its debt, investors piled into Treasuries as a safe haven. What I find sad today is that our country’s deficits represent an intergenerational transfer from our children to us. Sure, we’ll continue to roll over the U.S. debt from year to year, but we still have to pay interest. Interest rates are low right now, but eventually rates will rise and the interest payments on the larger deficits will create more pressure on the federal budget, reducing the available funds for other priorities.
Katie Koch: One of the government’s priorities, of course, is to speed up the transition to clean energy. It’s clear that capital is being catalyzed behind the solutions providers for a transition to net zero. Do you also think levying a carbon tax would be a good approach?
Steve Rattner: From a policy point of view, a simple solution would be to tax carbon at its real costs. There are huge externalities, as economists would say, of the damage that carbon causes the environment as well as the costs to clear up the damage. The people who use carbon should pay for it. Put a carbon tax on it and let the market sort it out.
Katie Koch: Let’s pivot a bit to discuss income inequality. We’ve seen a rapid level of wealth creation over the past year due to the rise in the capital markets, which has also left part of American society behind. We’ve also effectively seen an increase in the minimum wage through stimulus, which is resulting in higher wages. From our perspective, we believe we could be on the precipice of a redistribution cycle from capital to labor that could result in inflationary pressures. In fact, there are some people in this country who would argue that we have to run deficits to address income inequality, but—even as a deficit hawk—you’ve also said that the U.S. has a challenge to solve with income inequality. So what solutions would you propose to address that?
Steve Rattner: We absolutely should be implementing some of the spending proposals that are being considered. Recent studies show that the U.S. still ranks at the bottom of every developed country in terms of providing social benefits, such as paid sick leave or childcare. We need to address these issues, but we also need to be careful with how much we’re spending, how quickly and how responsibly. Of course, these proposals will have to be paid for with higher taxes, primarily on the wealthy, but I believe everyone should do their part. President Biden’s proposal to only raise taxes for households with incomes of more than $400,000 excludes 98% of the country. To your point on higher wages, we also expect that higher wages will create cost pressures, raising concerns for companies about their profit margins. At some point, however, the higher costs will translate into higher interest rates. And that’s what I worry about. The market is heavily driven by interest rates. Higher interest rates can hobble this market.
Nora Creedon: One of the industries that is benefiting from wealth accumulation is the housing sector. Do you get nervous with the current pace of home price appreciation or is this a sign that the middle class is accumulating more wealth?
Steve Rattner: What we’re seeing in housing today is almost the exactly the opposite of what we saw during the great financial crisis, when we were building too many houses. Since the GFC, we have underbuilt housing relative to the rate of household formation. Today, people have more money—incomes went up last year during the pandemic—and with interest rates at all-time lows, people want to buy houses. But even with interest rates at all-time lows, housing unaffordability is at a 10-year high. It’s the worst it’s been in 10 years. It’s a real problem.
Nora Creedon: And from an investment perspective, what’s your view on real estate and on real assets?
Steve Rattner: We like real assets and have been investing in real estate, especially in the last year and a half, particularly in hospitality, where through external managers, we’ve bought assets during the pandemic that we’ve already sold for two to three times what we paid for it. Real estate, done properly, is a reasonably stable returning asset class where you can get low- to mid-double-digit returns.
Nora Creedon: Steve, before you started your investment banking career, you worked as a journalist for The New York Times, mostly as an economic correspondent in New York, London and Washington. What do you make of the evolution of journalism where journalists can make significantly more money by publishing content that goes directly to consumers? What does that do the world of journalism?
Steve Rattner: We’re in the golden age of media where people have never had so much access to so many different kinds of content without gatekeepers—without three networks or one newspaper deciding what people can watch or read. From a societal point of view, the democratization of media—where anybody can write anything, from anywhere—is a wonderful thing. It has some implications for traditional media, but there is still a need and desire on the part of consumers for someone to collect content, organize and fact check the content. What’s being squeezed out, unfortunately, are the local, smaller papers in cities that don’t have the resources. We’re going to see a lot of cities in the U.S. without a daily, local newsletter—but that’s also part of capitalism.