Finance

Legendary value investor Jeremy Grantham is betting on a special caliber of stocks with his firm’s first active ETF: the GMO U.S. Quality ETF.  
And he put GMO partner Tom Hancock in charge of it.

“There’s a lot more interest in active ETFs than there was even a few years ago,” Hancock told CNBC’s “ETF Edge” this week. “Coming from our clients, a lot of them are really excited about investing in ETFs. Of course, there are the tax advantages. But even amongst our institutional clients, just the ease of trading them is pretty material.”
Hancock says the new ETF is built around companies that can sustainably deploy capital and high rates of return, with a focus on technology, health care and consumer staples. 
According to GMO’s website, as of November 17th, the ETF’s top holdings include Microsoft, UnitedHealth and Johnson & Johnson.
“[These companies] can do things competitors can’t. Moats around their business. They have strong balance sheets,” he said. “These are battleship companies that are going to remain relevant and important going forward.”
Yet, the stocks’ performance is mixed so far this year. Microsoft is up almost 54% so far this year. Shares of UnitedHealth are virtually flat while Johnson & Johnson is down more than 15%.

‘Better chance at outperformance’

ETF Store President Nate Geraci sees active ETFs as natural evolution in the industry.
“If you think of an active manager attempting to generate after tax alpha, the ETF wrapper helps lower that hurdle. It offers a better chance at outperformance,” Geraci said.
He adds ETFs can give active managers a better chance at long-term success.
Since its Wednesday launch, the GMO U.S. Quality ETF is up less than a half a percent.

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Boston Federal Reserve President Susan Collins said Friday that more interest rate hikes could yet be needed to bring down inflation.
Inflation reports this week showed a slowing pace in both consumer and producer prices. However, Collins said recent data has been “noisy.”

Despite recent encouraging signs on inflation, Boston Federal Reserve President Susan Collins said Friday that more interest rate hikes could yet be needed.
“I understand the tendency to really enjoy good news, and there was some good news in some of the numbers — and I think that we need to appreciate that. But I don’t see additional firming off the table,” the central bank official told CNBC’s Steve Liesman during a “Squawk on the Street” interview. “I think the key point is we need to really stay the course.”

Other Fed officials have been saying much of the same, essentially that inflation is showing progress towards the Fed’s 2% 12-month target but still has a way to go. Policymakers are leery over repeating the mistakes of the past, where the Fed quit too early in efforts to bring down inflation and ended up paying for it.
Inflation reports this week showed a slowing pace in both consumer and producer prices. However, Collins said recent data has been “noisy.”
“We need to look holistically at the data,” she said. “So [there has been] promising news, which is great. But I remain focused on really looking at the kind of full complement of information that we’re getting and making assessments in real time about the right thing to do.”
Markets think there’s virtually no chance the Fed will hike any more during this cycle. The central bank’s benchmark borrowing rate is targeted in a range between 5.25%-5.5%, the highest in 22 years. Market pricing projects the Fed will start cutting in May and lop a full percentage off the fed funds rate by the end of 2024, according to the CME Group’s FedWatch gauge.
Collins noted the progress made in stabilizing the labor market and tightening financial conditions, but said it’s “important for us to be patient and recognize that [we’re] far from declaring victory.”

Collins will not be a voting member on the rate-setting Federal Open Market Committee until 2025.
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Cleveland Federal Reserve President Loretta Mester said that this week’s news showing lower levels of inflation isn’t enough to convince her that the central bank has won its battle against higher prices.
“Where I think we are right now is we’re basically in a very good spot for policy,” she told CNBC.

Cleveland Federal Reserve President Loretta Mester said Thursday that this week’s news showing lower levels of inflation isn’t enough to convince her that the central bank has won its battle against higher prices.
“We’re making progress on inflation, discernible progress. We need to see more of that,” Mester told CNBC’s Steve Liesman during an interview on “The Exchange.” “We’re going to have to see much more evidence that inflation is on that timely path back to 2%. But we do have really good evidence that it has made progress and now it’s just, is it continuing?”

In separate reports, the Labor Department said that consumer prices were unchanged in October from the previous month, while wholesale prices actually fell 0.5%.
While the producer price index fell below the Fed’s 2% 12-month inflation goal, the consumer price index was still at 3.2%, and even higher when excluding food and energy, at 4%.
Following the reports, market pricing in the futures market completely eliminated the possibility that the Fed would be approving any additional interest rate hikes. Moreover, the market is now pricing in the equivalent of four quarter percentage point rate cuts next year, according to a CME Group gauge.
But Mester said she’s reserving judgment on where policymakers go from here.
“I haven’t assessed that yet. Where I think we are right now is we’re basically in a very good spot for policy,” she said.

Comparing the Fed’s position to navigating a ship, Mester said, “We’re at the crow’s nest. What does the crow’s nest let you do? It lets you look out on the horizon and see where the data is coming in, where the economy is evolving. And then we’ll have to see: Is it moving in the way that we forecasted?”
The Federal Open Market Committee next meets on Dec. 12-13.
Mester, who gets a vote on the committee in 2024 but will retire in midyear having met the Fed’s limit for time served, said she hasn’t made up her mind about where she thinks rates should go.
“My feeling is that it’s really not about cutting rates. It’s really about how long do we stay in a restrictive stance and perhaps have to go higher given what happens in the economy,” she said. More

Berkshire Hathaway Vice Chairman Charlie Munger pushed back against a report that alleged his partner Warren Buffett at times traded stocks in his personal account before the conglomerate made moves in the same securities.
Munger, 99, told CNBC’s Becky Quick in an interview that the idea that Buffett was front-running Berkshire’s own trades doesn’t make sense, pointing toward his charitable giving and the fact that most of his wealth is tied up in Berkshire stock.

“I don’t think there’s the slightest chance that Warren Buffett is doing something that is deeply evil to make money for himself. He cares more about what happens to Berkshire than he cares what happens to his own money. He gave all his own money away. He doesn’t even have it anymore,” Munger said.
In a Nov. 9 article, ProPublica reported that Buffett on at least three occasions made personal trades in a stock shortly before or in the same quarter that Berkshire did. ProPublica cited leaked IRS data as the source of the information. CNBC has not independently confirmed the timing of these trades.
The ProPublica report said Buffett made at least $466 million in personal stock sales between 2000 and 2019. That would account for a very small percentage of Buffett’s overall net worth. A securities filing from August showed Buffett owns more than 200,000 Berkshire Hathaway A shares, a position worth more than $100 billion.
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Chinese President Xi Jinping told U.S. business executives Wednesday the two countries have to choose between being adversaries or partners.
Xi was speaking at a dinner in San Francisco following his meeting with U.S. President Joe Biden a few hours earlier, on the sidelines of the Asia-Pacific Economic Cooperation conference.
He also said China would send its giant pandas to the San Diego Zoo.

U.S. President Joe Biden waves as he walks with Chinese President Xi Jinping at Filoli estate on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit, in Woodside, California, U.S., November 15, 2023. REUTERS/Kevin Lamarque
Kevin Lamarque | Reuters

BEIJING — The U.S. and China have to choose between being adversaries or partners, Chinese President Xi Jinping told American business executives late Wednesday in San Francisco.
His remarks contrast with the Biden administration’s approach of pursuing strategic competition with Beijing — restricting exports of advanced U.S. tech to China, while looking for areas of cooperation.

Xi was speaking at a dinner in San Francisco following his meeting with U.S. President Joe Biden a few hours earlier, on the sidelines of the Asia-Pacific Economic Cooperation conference.
“I have always had one question on my mind: How to steer the giant ship of China-U.S. relations clear of hidden rocks and shoals, navigate it through storms and waves without getting disoriented, losing speed or even having a collision?” Xi said, according to an English-language readout of his Mandarin-language speech.

China is ready to be a partner and friend of the United States.

Xi Jinping
President of China

“In this respect, the number one question for us is: are we adversaries, or partners? This is the fundamental and overarching issue,” he said.
“The logic is quite simple. If one sees the other side as a primary competitor, the most consequential geopolitical challenge and a pacing threat, it will only lead to misinformed policy making, misguided actions, and unwanted results,” Xi said.
“China is ready to be a partner and friend of the United States,” he said. “The fundamental principles that we follow in handling China-U.S. relations are mutual respect, peaceful coexistence and win-win cooperation.”

Nearly 400 business leaders — including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon — government officials, U.S. citizens and academics attended the dinner, hosted by the U.S.-China Business Council and the National Committee on U.S.-China Relations.
U.S Secretary of Commerce Gina Raimondo delivered remarks ahead of Xi’s address.
In a roughly 30-minute speech, Xi said China-led international initiatives such as the Belt and Road are open to U.S. participation, while Beijing is ready to join U.S.-proposed multilateral cooperation initiatives.
“No matter how the global landscape evolves, the historical trend of peaceful coexistence between China and the United States will not change,” Xi said.

Pandas returning to the U.S.

Regarding earlier conversations with Biden, Xi said “we agreed to make the cooperation list longer and the pie of cooperation bigger.”
Xi said China is ready to invite 50,000 young Americans to study in the Asian country over the next five years.
He also said China would send its giant pandas to the San Diego Zoo. He did not specify a time.
Last week, the remaining three pandas in the U.S. on loan from Beijing returned to China due to an expiring contract. China has lent pandas to countries around the world as a diplomatic tool.

China never bets against the United States, and never interferes in its internal affairs.

Xi Jinping
President of China

Xi’s speech was titled “Galvanizing Our Peoples into a Strong Force For the Cause of China-U.S. Friendship.”
“It is wrong to view China, which is committed to peaceful development, as a threat and thus play a zero-sum game against it,” Xi said. “China never bets against the United States, and never interferes in its internal affairs.”
“China has no intention to challenge the United States or to unseat it. Instead, we will be glad to see a confident, open, ever-growing and prosperous United States,” he said. “Likewise, the United States should not bet against China, or interfere in China’s internal affairs. It should instead welcome a peaceful, stable and prosperous China.”
— CNBC’s Christina Wilkie and Eamon Javers contributed to this report.
Correction: The summary and key points have been updated to accurately reflect that Xi’s dinner with U.S. business executives took place on Wednesday night in San Francisco. More

U.S. regulators on Tuesday defended their plans for a sweeping set of proposed changes to banks’ capital requirements, speaking in front of the U.S. Senate Banking Committee.
These proposed changes in the U.S. seek to incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
Regulators say the changes in the proposals are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements.

James Gorman, chairman and chief executive of Morgan Stanley, speaks during the Global Financial Leader’s Investment Summit in Hong Kong, China, on Tuesday, Nov. 7, 2023. The de-facto central bank of the Chinese territory is this week holding its global finance summit for a second year in a row. Photographer: Lam Yik/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images

SINGAPORE — Morgan Stanley Chairman and CEO James Gorman said his firm will be able to cope with “any form” that new banking regulations end up taking, but added he expects some watering down before the final rules are confirmed.
U.S. regulators on Tuesday defended their plans for a sweeping set of proposed changes to banks’ capital requirements, speaking in front of the U.S. Senate Banking Committee. They are aimed at tightening regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders.

These proposed changes in the U.S. seek to incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
Regulators say the changes in the proposals are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements — which is a measure of an institution’s presumed financial strength and is seen as a buffer against recessions or trading blowups.
“I think it will come out differently from the way it’s been proposed,” Gorman told CNBC Thursday in an exclusive interview on the sidelines of Morgan Stanley’s annual Asia-Pacific conference in Singapore.
“It’s important to point out it’s a proposal. It’s not a rule, and it’s not done.”
“I think [the U.S. banking regulators] are listening,” Gorman added. “I’ve spent many years with the Federal Reserve. I was on the Fed board in New York for six years and I just think they are trying to find the right answer.”

“I’m not sure the banks need more capital,” Morgan Stanley’s outgoing CEO said. “In fact, the Fed’s own stress test says they don’t. So there’s that … sort of purity of purpose and in pursuit of perfection that can be the enemy of good.”
Whatever the outcome though, Gorman said his New York-based bank will be able to manage.
“We have been conservative with our capital. We run a CET1 ratio, which is among the highest in the world, significantly in excess of our requirements, so we’re ready for any outcome. But I don’t think it will be as dire as most of the investment committee believes it will be,” Gorman said.
The bank said in its latest earnings report that its standardized CET1 ratio was 15.5%, approximately 260 basis points above the requirement.

Wealth management and inflation

In late October, Morgan Stanley announced that Ted Pick will succeed James Gorman as chief executive at the start of 2024, though Gorman will stay as executive chairman for an undisclosed period.
Led by Gorman since 2010, Morgan Stanley has managed to avoid the turbulence afflicting some of its competitors.
While Goldman Sachs was forced to pivot after a foray into retail banking, the main question at Morgan Stanley is about an orderly CEO succession.
There will likely be some continuity with the bank’s focus on building out its wealth management business in Asia.
“We think there’s going to be tremendous growth,” Gorman said Thursday.
“So we would like to do more. We have. If I was staying several years, we would very aggressively be pushing our wealth management in this region. And I’m sure my successor would do the same.”
On the issue of inflation, Gorman said central bankers have brought surging inflation under control.
“Give the central banks credit. They moved aggressively with rates,” Gorman said. “I think they were late —that’s my personal view — but it doesn’t matter. When they got there, they really got going. Took rates from zero to five and a half percent. The Fed did five, five and a half percent in almost record time, fastest rate increase in 40 years. And it’s had the impact.”
U.S. Federal Reserve Chairperson Jerome Powell said last Thursday that he and his fellow policymakers are encouraged by the slowing pace of inflation, but more work could be ahead in the battle against high prices as the central bank seeks to bring inflation down closer to its stated 2% target.
The U.S. consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% in October from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday. 
“Are we done? We’re not done,” Gorman said.
“Is 2% absolutely necessary? My personal view is no, but directionally to be heading in that to around 2, 3% — I think is a very acceptable outcome given the cards that they were dealt with.”
— CNBC’s Hugh Son and Jeff Cox contributed to this story. More

Around a decade ago Carl Benedikt Frey and Michael Osborne, two economists, published a paper that went viral. It argued that 47% of American jobs were at risk of automation. A deluge of research followed, which suggested the poorest and least-educated workers were most vulnerable to the coming revolution. Such fears have intensified as artificial-intelligence (ai) capabilities have leapt ahead. On November 2nd, speaking after Britain’s ai summit, Elon Musk predicted: “There will come a point where no job is needed.”image: The EconomistYet at the same time, economists have become more optimistic. Recent studies have found that fewer workers are exposed to automation than Messrs Frey and Osborne supposed (see chart 1). In 2019 Michael Webb, then of Stanford University, showed that ai patents are more targeted at skilled jobs than those for software and robots. New ai seems better at coding and creativity than anything in the physical world, suggesting low-skilled jobs may be insulated. In March Shakked Noy and Whitney Zhang, both of the Massachusetts Institute of Technology (mit), published an experiment showing that Chatgpt boosted the productivity when writing of lower-ability workers more than that of higher-ability workers.Although ai is still in its infancy, some industries have been eager adopters. A close look at three of these—translation, customer service and sales—is broadly supportive of the optimistic shift among economists, though not without complications. In translation, perhaps the first industry to be heavily affected by language modelling, workers have become copy editors, tidying a first draft undertaken by ai, which eases the path of newbies into the industry. In customer service, ai has helped raise the performance of stragglers. But in sales, top performers use the tech to find leads and take notes, pulling away from their peers. Will ai boost the incomes of superstars more than those of stragglers, much as the internet revolution did? Or will it be a “great equaliser”, raising the incomes of the worst off but not those of high flyers? The answer may depend on the type of employment in question.Roll the diceRoland Hall has been translating board games and marketing material from French to English for 27 years. He recalls that even in the 1990s software was used to render specific words from one language to another. Today the tools are more advanced, meaning the types of job available have split in two. One type includes texts where fluency is less important. An example might be a several-thousand-page manual for an aircraft, says Mr Hall, where readers simply need to know “what part to look for” and “do you turn it left or right”. The other type includes literary translations, where the finest details matter.The first type has been most affected by ai. Many workers now edit translations that have gone through a machine similar to that underlying Google’s translation service. They are paid at a steep discount per word, but more work is available. Lucia Ratikova, a Slovakian who specialises in construction and legal translations, reckons that such work now makes up more than half of listings on job sites, up from a tenth a few years ago. A larger pool of businesses, many eager to expand into global markets, are taking advantage of the drop in price.image: The EconomistIf machines are able to do what humans do more cheaply, employers will turn to computers. But as prices fall, overall demand for a service may rise, and possibly by enough to offset the increased use of machines. There is no law to determine which effect will dominate. So far in America the number of translators has grown, yet their real wages have fallen slightly (see chart 2)—probably because the profession now requires rather less skill.Customer service offers more difficult terrain for ai. Firms have been trying to automate it for years. Thus far they have mostly just annoyed customers. Who doesn’t try to game the chatbot in order to speak to an actual human? The American Customer Satisfaction Index has been falling since 2018, and workers also appear fed up. Turnover in American “contact centres” hit a record high of 38% last year.But there may be consolation: the workforce is becoming more welcoming to the low-skilled. Erik Brynjolfsson of Stanford, as well as Danielle Li and Lindsey Raymond of mit, studied the roll-out of an ai assistant to more than 5,000 customer-support agents earlier this year. The assistant offered real-time suggestions to workers. This lifted the productivity of the least-skilled agents by 35%, while the most-skilled ones saw little change.It would be reasonable to assume that the impact on salespeople would be fairly similar to the one on customer-service workers. But that is not the case. Marc Bernstein of Balto, a firm that creates ai software for both sales teams and call centres, notes that “style points” (ie, charisma and the ability to develop a relationship) matter much more in sales than in customer service, where the important thing is getting the right answer quickly.ai might even create sales superstars. Skylar Werneth has been in the industry for eight years and is now at Nooks, a startup that automates sales. Software analyses his calls, identifying which tactics work best. It also helps him call many people at once. Most customers do not pick up; dialling in parallel ensures Mr Werneth is talking more and listening to dial-tones less. He reckons the tools Nooks offers makes him three times more productive, earning him a solid amount more than before.What does this mean for labour markets? Sales representatives are given bonuses based on the number of clients they bring in over a threshold. When productivity grows across a firm, bosses tend to raise the threshold. Because not everyone is able to meet it, low performers are pushed out of the workforce, since demand for products does not grow in parallel with sales performance, as would be necessary to justify retaining them. The result is a shrinking set of highly productive salespeople. At least, given high turnover in the industry, the shift to this state of affairs might mean hiring fewer people, not mass firings.AI carambaIf ai eventually becomes superhuman, as many attendees at Britain’s recent summit believed possible, all bets are off. Even if ai advances in a less epochal fashion, labour markets will see profound change. A study by Xiang Hui and Oren Reshef of Washington University in St Louis and Luofeng Zhou of New York University, published in August, found that earnings for writing, proofreading and copy-editing on Upwork, a freelancing platform, fell by 5% after Chatgpt was launched last November, compared with roles less affected by ai. A survey of 400 call-centre managers by Balto found that the share using at least some ai grew from 59% in April to 90% by October. Mr Bernstein thinks that although “today ai is not capable of replacing a human [in call centres]…in ten years, quite possibly five, it will be there.”The flipside of ai disruption is new jobs elsewhere. Modelling in 2019 by Daron Acemoglu of mit and Pascual Restrepo of Boston University suggests that the impact of automation is worst for workers when productivity gains are small. Such “so-so” automation creates little surplus wealth to increase the demand for workers in other parts of the economy. Our investigation of industries at the front line of ai change suggests that the new tech has a shot at leading to much greater efficiency. The picture on inequality remains murkier. Better to be a superstar than a straggler, then, even if only to be safe. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The tome opens with Ray Dalio laying into an employee he apparently knew to be pregnant. He calls her an “idiot” over and over, until she runs from the room sobbing. The founder of Bridgewater Associates, the world’s largest hedge fund, was supposedly “delighted”. His “probing” of this woman was evidence of his commitment to “truth-seeking” at any cost. The meltdown, which had been recorded, was uploaded to a library of firm meetings. He had it edited into a clip to be shown to future employees.This is just the first of many damaging titbits in “The Fund”, a new book about Mr Dalio by Rob Copeland, a reporter at the New York Times. The book’s narrative builds to two points. One is that Mr Dalio’s “principles”, a philosophy he described as being centred on “radical transparency”, are really little more than time-wasting tools which he uses to bully employees. The system requires meetings to be recorded, for employees to rank one another and for them to upload complaints onto a platform. This is supposed to foster an “ideas meritocracy” but instead leads, at best, to petty gripes about how the peas in the cafeteria are too “wrinkled” and, at worst, to a culture of fear. Mr Dalio is supposed to have manipulated this system so that his opinion always mattered most.The second is that there is “no secret” to Bridgewater’s success. Mr Dalio’s hundreds of research staff write reports he does not even read. Mr Copeland claims Mr Dalio made all the investing decisions himself, or with some input from lieutenants. Far from having a codified set of rules, as he tells clients, he uses hunches and simple “if then” statements such as: if interest rates fall in a country then you should sell its currency. These worked, the story goes, for a while, but the rise of high-frequency traders and quantitative funds, which often follow market “momentum”, eroded his edge. Returns for Bridgewater’s flagship “Pure Alpha” fund have been pretty paltry for the past 10 or 15 years.The conclusions of the two intertwine: the cult of Bridgewater is pointless. Bridgewater’s employees have time to waste on nonsense because the investing process is simple, really. Mr Dalio might have been a gifted investor—since 1991 he has earned $58bn for those who have bought into his funds—but his efforts to codify investment rules and culture were a waste of time. His legacy will fade.Mr Copeland’s deep reporting unearthed damning tales, but they seem to have been told so as to place Mr Dalio in the worst possible light. Take, for example, a passage where Mr Dalio invites Niall Ferguson, a celebrated historian, to Bridgewater. Mr Dalio supplied Mr Ferguson with a copy of his book, which offers a sweeping theory of economic history and a model of “the economic machine”—only for Mr Ferguson to tell the assembled staff that there was no way of modelling history since models could not account for the “caprices of decision-makers”. Mr Dalio began shouting at Mr Ferguson, who soon left. Mr Copeland writes that Mr Dalio then sent round a poll asking who won the debate (Mr Dalio triumphed).It is one of many anecdotes that are supposed to reveal that Mr Dalio is unprincipled. Far from listening to unfiltered criticism he uses his power to silence others. But apparently Mr Dalio later solicited advice asking whether he had behaved inappropriately. His employees implored him not to invite people to Bridgewater just to shout at them—advice to which he is said to have listened. Mr Dalio’s radical transparency might be strange and misguided, but perhaps he is not a hypocrite.The book’s arguments about Mr Dalio’s investment process are harder still to swallow. Macro funds that follow trends are a dime a dozen, and few come close to touching Bridgewater’s record. As for the erosion of his edge, the earliest momentum funds were established in the 1980s, before Bridgewater set up its first funds. They grew in the 1990s and 2000s, when his edge was as sharp as ever. How Mr Dalio achieved what he did is something of a mystery. Perhaps some of the magic could have been codified or captured. It was worth trying, anyway.Mr Dalio dismisses Mr Copeland’s book out of hand. He has written that it is “another one of those sensational and inaccurate tabloid books written to sell books to people who like gossip”. The hagiography of Mr Dalio already exists: he penned his own tale in 2017. Mr Copeland seems to have written its foil, which can find only the ill in Bridgewater’s founder. The book is worth a read—but only with that in mind.■Read more from Buttonwood, our columnist on financial markets: Forget the S&P 500. Pay attention to the S&P 493 (Nov 8th)What a third world war would mean for investors (Oct 30th)Investors are returning to hedge funds. That may be unwise (Oct 26th)Also: How the Buttonwood column got its name More