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David Westin (1:59)

This is Wall Street Week. I'm David Westin bringing you stories of capitalism. Gold keeps setting new records as the US Dollar weakens and China sees opportunity. What does it mean for investors and for those getting the gold out of the ground? Plus, the US had its China shock 20 years ago. Is Europe in store for its own version this time as China looks to find new markets for its exports? And investing in art can be fun. It can be satisfying, but like any investment, it can go down as well as up. We update our story on where those investments are today, but we start with the Federal Reserve. Facing new leadership in May and under continued scrutiny from the Trump administration. Our colleague Michael McKee sat down this week with outgoing Atlanta Fed President Raphael Bostick.

Michael McKee (2:49)

We're speaking with the Atlanta Fed president Raphael Bostic, who is retiring at the end of this month. So this is sort of your HR

Lisa Mateo (2:57)

exit exit interview Mike It's Always good to see you.

Michael McKee (3:02)

I want to ask you, as you travel around your district for the past year, what's the mood like among companies and consumers? We've seen the surveys show that people are getting very, very pessimistic.

Lisa Mateo (3:16)

Well, I'd say it runs in two ways. So first of all, what has been true throughout the last year is a tremendous amount of resilience on the part of both businesses and consumers. You know, when April 2, when the tariffs were announced at very high levels, that put everyone back on their heels and there was a lot of uncertainty. And what's happened through the year is people have figured out ways to deal with that uncertainty. So as for today, I think most businesses and most households are not thinking that the worst of the possible outcomes are going to happen. They're not sure they can get to the best ones.

Robin Brooks (3:50)

But.

Lisa Mateo (3:50)

But everyone's trying to find a steady state where they can get through. So I think the sentiment is one of cautious optimism, but I put emphasis on the cautious as opposed to the optimism. I think people are really trying to wait and see what happens.

Michael McKee (4:03)

Well, what do you think that means for the economy?

Lisa Mateo (4:05)

Well, I think it means that the things that we've seen for the second half of 2025 we will continue to see through 2026. And you know, I've talked to a lot of folks in the last six weeks or so and they said we think our experiences in October, November, December are likely to move on. And then there are some reasons why they think it might actually get stronger. You know, the tariffs, people have gotten used to those. And so those effects will have run through by the middle of the year. We see some of the stimulative aspects of the tax bill last summer. Those will be coming on board. And if consumers start to feel like there is more certainty, then I think businesses think there's some upside potential in the economy.

Michael McKee (4:45)

Well, this last week we've gotten a lot of bad news on the employment front with ADP and Challenger and the other numbers that have come out. Does any of that. You don't have another meeting to vote at, but does any of that give you pause about the Fed pausing at this point?

Lisa Mateo (5:00)

For me, no. You know, I think we've been in a situation where inflation has been too high for too long and by many readings, it's been kind of marking time, has been at a plateau well above our target for the better part of two years. That's not acceptable. And for me, I think we can't lose sight of the inflationary concerns. The labor market is very turbulent right now and some of it is because there are some big structural things that are happening in the economy. You talk, when I talk to businesses, they're reluctant to hire entry level people at the same rate ways that they did before because they think things like I can replace that and they can deploy resources for other things. And I'm hearing that kind of reticence. There's also the reality that during the pandemic a lot of companies ramped up because the demand ramped up and they've been slower to right size. We see a bunch of that right sizing happening as well. And then we have issues around the labor supply and whether the immigration shifts are going to be temporary or permanent. And if they're permanent, then we're going to have a lower steady state job creation. So for all those reasons, I think it's very hard to make a clear statement. And then of course, we don't have a jobs number today. Right. So we're not getting the data in a timely basis. My team tells me it'll be April or May before we start to be able to draw clear signals from the data to really understand what's going on.

Michael McKee (6:29)

Yeah, we wanted to wish you a happy non jobs day today. You started a long and varied career at the Fed in 1995. Since then, what have you learned about the economy and about inflation?

Lisa Mateo (6:43)

Well, I think for the economy, one thing that is true is that it is a very complex economy. It's very large and to understand it you really have to get out and see all parts of it. And one of the things that's been great in my role here is I've had a chance to do that. I think it's given me a deeper understanding of just how people engage and experience the economy and how they make decisions to move it forward in terms of inflation. You know, what I've learned is that we really don't want to have inflation. Once inflation gets entrenched in people's minds, it changes how the economy evolves. And it's one of the reasons why I think that we need to keep our policy in a restrictive posture so that we get inflation back to 2%. That's paramount. High prices and the prospect of rising prices really do have a lot of families on the edge. And I mean, you all have reported a lot about the K shaped economy. There are lots of families that are feeling very precarious right now and that's a source of concern.

Michael McKee (7:36)

Do you think the economy is becoming more K shaped?

Lisa Mateo (7:40)

You know, I don't know more. I mean, it's been that way for a while. Just before the pandemic, I had been talking about this and we were trying to find some metrics to really detail how there's a split. I used to call it the barbell economy, where either you were at the high end or at the low end. The K shape is the same thing. What I know is that there are a lot of families that are precarious and are feeling very uncertain about their prospects for the future and the prospects for their children for that matter. And that concern, I think does underlie a bit of the lower on the low consumer confidence that we continue to see being reported. And what we'll need to do is really give people reasons to be optimistic, show them where the new jobs are coming from and show them how they get the skills to compete for it.

Michael McKee (8:25)

Well, this week Treasury Secretary Bessant said the Fed has lost the confidence of the American people. Do you think you have lost the confidence of the American people in your district? Do you hear people raising questions about that?

Lisa Mateo (8:38)

That's not been my experience. As I go around the 6th district, people tell me we're grateful for what you're doing. You have a very hard job and we want you to be as data dependent and as open to information so you can make the best judgment that you can. Look, the world is very complicated. It's actually more complicated today than has been my whole time here. So what? I think most people understand that and they know that we're doing the best job that we can under very difficult circumstances.

Michael McKee (9:05)

Well, the new chair designate, Kevin Warsh says the Fed needs regime change. What does that mean to you?

Lisa Mateo (9:11)

I have no idea. You're going to have to ask him what that means. Look, I think we definitely need to be data dependent. Our bank has really taken on board the notion that we need to go out and engage and talk to business leaders, find out how they're engaging with the business, how they're making decisions. And that combination we have found to give us the best perspective on how the economy is performing. I don't think that we should change from that. I think we might need to even lean in more to those non official data sources as the economy is changing so rapidly because those are all looking backwards and we need to be looking forward.

Michael McKee (9:48)

Well, he's been very critical of what he calls the Fed's mission. Creepy. Does he have a point?

Lisa Mateo (9:54)

I actually don't even see the mission creep argument. Like for me, on the banking side, for Example, our job is to make sure that every bank that's alive today is alive tomorrow. And so we need to make sure that banks are thinking about the risks that could cause them to need to deploy capital in ways other than in loans. And so having conversations about those things I think is fully appropriate and we should be doing that. We don't tell banks where to lend. I've never told a bank don't do a loan or don't do that sort of thing. And my examiners don't as well. I think we are asking prudent questions to make sure that financial sector business leaders are aware of trends that could be introducing risk.

Michael McKee (10:34)

What would you tell Donald Trump if you had the opportunity about Jay Powell and about the Fed?

Lisa Mateo (10:40)

I'd say Jay's trying to do the best that he can. He's a smart man. He understands markets. And if you want him to succeed, you should let him succeed.

Michael McKee (10:52)

The Fed itself, do you think it is under threat from this administration?

Lisa Mateo (10:56)

Threat? I don't know what I would say is my whole time here. And I think that most of the history of the Fed, there have been people who thought the Fed should do other things and talked about that and called them out. This is another one of those times. And we need to be mindful and we need to be solid and resolute to understand that that's part of that comes with the territory and with that territory, then requires our strength and our resoluteness to stay focused on what we've been asked to do.

David Westin (11:33)

Coming up, gold remains the hot commodity. We look at what's driving it and who stands to benefit.

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David Westin (12:54)

This is a story about money burning a hole in your pocket. And the more money there is, the hotter it can get. Last September, we showed you how Australia's gold miners were cashing in. And that was when gold was at $3,600 an ounce. It's jumped much higher since then. Our colleague Paul Allen saw firsthand how miners are now putting that cash to work

Tom Keene (13:18)

in the Australian outback. Scrub and red dust stretch as far as the eye can see. It's desolate out here and it's dry. But beneath the dust, there's a bounty that miners are willing to dig a long way for. How many ounces of gold would be in a typical truck? So there'd be around 500 grams of gold in the truck. So we've got a line of trucks slowly making their way out of the pit here. How long does it take to get from the bottom to the top? Yeah, it's well over an hour. The Kalgoorlie Super Pit in Western Australia is a sight to behold. More than 600 metres deep, it would cover even Manhattan's tallest skyscrapers. It's so vast, it'd swallow Central Park. This project's going to be an important one for our business and our shareholders. It's over half of it. Stuart Tonkin is CEO of Northern Star, Australia's biggest gold miner. Probably around 3 to $400 million per annum being spent moving material from the southern part of this pit, gaining access to over 6 million ounces of gold in the bottom of this southern part of this pit. The price of gold has been on a tear. Tonkin's company and many others around Kalgoorlie are cashing in. But the gold industry has been here before. There's probably more failure stories than success stories where people can point to in the gold sector. And so repairing a lot of that trust with investors as we go into another cycle has been really important for our company and I think for many Australian to get that investor trust. Two of the dominant players in Australian gold mining, Northern Star and Evolution, are reaping the rewards. Seeing the return on investment from projects planned years ago now surging. Laurie Conway is CEO of Evolution Mining. So, back in June 23, we made the decision to invest $250 million building this plant expansion and $75 million to open up a new mining centre into the north here to feed the plant, taking it from 2 million tonnes to 4.2 million tonnes. And in 23, it was pretty difficult. The market was hot, it was hard to get people, hard to get equipment. I think we were very fortunate when we did that. But, you know, gold price was only $2,400, $2,500 an ounce when the board approved this. And it had very good economics. I mean, bringing it in right now at 5,000, $5,200 an ounce is a perfect time to be commissioning it. In 2019, Evolution reported adjusted gross profit of about US$270 million, or about 410 million Australian dollars. That now jumped to about 1 billion. It's expected to grow even further to almost 2 billion. And how about on the costs front, what's that like at the moment? Because, you know, I imagine your diesel bill must be pretty high. Yeah, diesel is only about 4% of our cost. Power will go up because we're obviously doubling the processing and the processing uses power. 50% of our costs are labour. And investors are keeping a keen eye on costs this time around. When gold prices last jumped, Australia's gold miners underperformed, falling 16% in the three years from 2010, while the price of the metal itself rose 52%. Kate McCutcheon covers Australia's gold miners for Citi. So last cycle we definitely saw a

Christina Raffini (16:35)

lot of transformative M and A, which was very value destructive.

Tom Keene (16:39)

So that last cycle, from 2000 to

Stephanie Flanders (16:41)

2012, the 10 biggest gold stocks in

Christina Raffini (16:43)

our coverage universe cumulatively burnt $10 billion in free cash.

Tom Keene (16:48)

As an industry, we made those missteps because when the price did come off and that cycle changed, shareholders went, well, where's the cash? And all the industry said is, well, we reinvested it into projects or we went and bought assets and therefore we've reinvested that money for you. And the shareholders were like, well, we would have liked some of that. And we didn't see that. It hasn't changed too much. I mean, other than that, we're putting more cash in the bank, which is what our shareholders want to see it. So it's interesting you say you've got more cash in the bank. Has this changed your approach to reserve management and long term planning as well? You know, you've got to see it as sustained price at these levels before because you can't just change your mine plans overnight. So what it does mean we look at our reserve pricing, we look at what the costs have changed because you do see costs generally follow the gold price. And then we look at what projects become more economic in a higher price environment. And then we apply the normal discipline of when do you bring those on? Look, I think it's important that you look at a lot of these things in hindsight. Some things like hedging, you know, hedge book legacy at prices that people had never, never thought that they would see exposure to. You know, when people had a high equity price, they probably tried to use that currency by raising lots of money on the back of an elevated equity price and then potentially dropping money out of their balance sheet return capital to shareholders that then wasn't retained for its own sustainability inside the business. So there are very many different disciplines of what people do at different times. And do you feel lessons have been learned? Do you feel like the approach is different this time? I feel that the heat has come out of some of that. But I've found a foundation discipline of true capital management across a variety of things. So you know, dividend paying gold companies was never really heard of. There's a lot of good track record of gold companies paying dividends, doing share buybacks, compressing registers that they had raised equity on the back of. Those are the type of capital management measures that aren't typical to a gold company

David Westin (18:47)

even after its recent sell off. Gold is up more than 60% over the past year. A rise that has come in part because the US dollar has gone in the opposite direction. Robin Brooks is a senior fellow at the Brookings Institution and former chief currency strategist at Goldman Sachs. We talked with him before the most recent volatility.

Robin Brooks (19:08)

So this move in gold started after Jackson Hole on August 22 last year. Basically what's going on is there is this fear that fiscal policy, not just in the United States, but heavily in the United States, fiscal policy has been out of control for so long. We are running deficits in non crisis peaceful times of 5, 6% of GDP. We've never really done that before. And so there's a fear in markets that fiscal policy is just out of control. And the only way to get debt to sustainable levels is to print money and to inflate our way out of over indebtedness. And so my view is that this gold rally is one particular manifestation of really a debt sustainability fear and a fiscal crisis. That is why you're seeing long term yield all over the world rise. So debt is a global problem. And I think what the gold rally tells you is markets have kind of run out of patience. They're looking for safe havens.

David Westin (20:29)

So who's buying the gold? I mean, the price wouldn't go up this high unless you didn't have a lot of people eager to buy. Either more buyers, new buyers, or current buyers who are willing to pay more.

Robin Brooks (20:39)

So the most common thing I hear is that this is about central banks buying gold. And the story basically goes that the United States and a bunch of other countries put a lot of sanctions on Russia after the Ukraine invasion. And so countries don't want to hold US Dollars in their foreign exchange reserves. They're shifting into gold. And it's true that they are buying, but they're buying at a steady pace. The pace hasn't accelerated. So it definitely doesn't explain this crazy run up in precious metals that we've seen since August. So central banks I think are not the explanation. I think like in every historical bubble going back to the tulip mania, this is basically about animal spirits and the retail investor and people who are worried about their retirement savings getting eroded by inflation, so and so seeking safety in things that they think will preserve value.

David Westin (21:41)

If it dates back to Jackson Hole last summer, what happened to Jackson Hole that triggered that? I mean, we've had a debt problem in the United States for some time.

Robin Brooks (21:51)

Jackson Hole was pivotal because the event, the Fed meeting or the Fed event where Jay Powell, the chair of the Federal Reserve, gave a speech saying, okay, inflation is kind of high, but the labor market is weak, yes, those two things are in conflict, but we think the evidence steers us in favor of cutting interest rates. And so that was actually kind of a bold statement because it said we're going to cut. And in September, one month later, the Fed did indeed cut and it made 325 basis point cuts last year. And so it makes sense that that event would raise questions in investors minds about hey, how safe is my money in fiat currency? Should I be looking for, for alternative ways to protect my retirement savings? And so that is why I think Jackson Hole was such a pivotal moment. The other big Fed event that got gold prices and other precious metals to rally was the last cut that the fed made on December 10th. So Jackson Hole is just one of many Fed events that have caused people to say, hey, wait a minute, why are we easing when inflation is so high? This is steering us in a bad place.

David Westin (23:26)

You say inflation is so high, it still has a 2 in front of doesn't. It isn't 2.0, but it's come down a long way. And the 10 year yield, while it's a little higher right now as we talk, is around 4.2, something like that. If there really is a concern about our repaying our debts in the United States, why aren't the yields higher? Why isn't inflation higher?

Robin Brooks (23:50)

So this is a great question. And you know, let me say first of all, the debasement trade is totally new, right? We're learning about this in real time. But there are two big pushbacks to the debasement trade. The first is that, hey wait a minute, U.S. treasury yields aren't particularly high. If anything, they've kind of traded in a range or even fallen somewhat. So what are you doing talking about a fiscal crisis? And second, if people are worried about inflation as an erosion of retirement savings, then why is breakeven inflation still so low? That's pretty low too, as you know. And so I think there's good explanations for both things. First of all, as I mentioned at the outset, there are a lot of places that are in much worse fiscal shape than the United States. So in a relative sense, the US Looks relatively okay and that makes treasury yields relatively attractive.

David Westin (24:48)

So as we look at the political situation today, there don't doesn't seem to be a lot of prospect of really getting our fiscal house in order and getting the debt down anytime soon. And as far as I can tell, that's true with both parties, Democrat or Republican. So, so does that indicate, as far as you can see, and we can't predict, but as far as you can see, gold will continue to be elevated and may even go higher.

Robin Brooks (25:12)

Yeah, I really worry that we are at the very beginning of this debasement phenomenon. I mean, at the end of the day, this thing has been going on in earnest less than a year. Market phenomena can play out over decades. And I mean the point that you just made, treasury yields are still low. Well, there's a lot of reason to think that they can go higher. And of course we are in an environment where we have midterm elections later on this year. The current administration may do lots of things to stimulate activity, so we may actually get strong growth and we may get a pickup in inflation. All, all of these things I think would steer towards gold and other precious metals going higher. Gold prices also jumped on Liberation Day, April 2 last year when there was all this tariff uncertainty. So we need two things. We need governments to focus on getting their fiscal house in order and we need governments to get along across countries. We need geopolitical stability. Do I think either of those things are likely? No. So I think things have to get worse before they get better. Meaning gold goes higher

David Westin (26:35)

up. Next, the US had its China shock at the turn of the century. Is it Europe's turn next?

Tom Keene (26:48)

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David Westin (27:52)

This is a story about the second coming of China. The first China shock hit the United States after it joined the wto. This time there's concern about Europe and whether US Efforts to curtail Chinese imports might hit European producers. But it might not be that simple.

Christina Raffini (28:10)

Simple.

David Westin (28:13)

About two hours outside Frankfurt lies the town of Schweinfurt. Dating back to 791, it's one of the oldest towns in Bavaria. Today, Schweinfurt is part of an auto industry that's at the center of Germany's modern industrial might.

Martin Buchs (28:29)

The auto industry is really the backbone of Germany.

David Westin (28:34)

German carmakers are amongst the most famous in the world. Mercedes, BMW, Volkswagen. But supporting the iconic brands is a vast network of parts manufacturers. One of them is the JOP Group, based near Schweinfurt.

Martin Buchs (28:47)

So we are the main machining plant here of our headquarters.

David Westin (28:50)

Its CEO is Martin Buchs.

Martin Buchs (28:52)

We are an automotive supplier mainly for maybe 80% of our business. We are supplying directly to the OEMs, the vehicle manufacturers, and supplying to the tier one suppliers that supply to the vehicle manufacturers like Audi, Mercedes, Volkswagen, Porsche. So you can find our parts in all of these vehicles.

David Westin (29:15)

But the German auto industry is facing stiff headwinds. Germany employed over 800,000 auto workers in 2018, a number that fell to just over 720,000 last year. And it isn't just auto manufacturing that's down. The German manufacturing sector Overall employed around 5.5 million people at the end of September 2025. That's 2% less than a year earlier.

Martin Buchs (29:39)

China is really a challenge for the German automotive landscape at the moment. With the rise of the battery electric vehicle, which has gained now 17% market share here in Europe as well. Access to battery technology is much more difficult for German OEMs. Access to raw material is much more difficult. And the Chinese OEMs, there's been a lot of new OEMs actually coming up. I think it's about 100 in China. So competition in China is very tough actually. And the export of components and vehicles from Germany to China has decreased significantly. We are a family business. Yeah, we have long term relationship with our employees, but programs from our customers were postponed. We had volume drops. So we had to react not only last year, but for the last couple of years. We had to adjust. We had to close two plants, we had to do some restructurings and we had to lay off around about 500 people. So coming from 2000 now to 1500, but actually we had to do it.

David Westin (30:46)

If this sounds familiar, consider the United States at the turn of the century, Specifically the year 2001, China joins the world Trade Organization.

David Gura (30:54)

This is a very productive, fast, rapidly advancing country. And then barriers were removed. They became more competitive.

David Westin (31:01)

David Autor is a professor of economics at MIT and co director of the Labor Studies program at the National Bureau of Economic Research. He and his co authors popularized the term China shock in a 2016 paper on the impacts of the country's economic rise.

David Gura (31:17)

And it really, especially for the United States, it displaced a lot of U.S. production. And this really did great rapid damage to manufacturing intensive locations that were making, you know, commodity furniture. They were making textiles and fabrics, clothing, toys, games, assembly and so on and so on. The scale of US employment, it wasn't that large. On the scale of the places that were most affected, it was quite devastating.

David Westin (31:42)

China shock hit parts of the US hard. Autor and his co authors estimate that it accounted for nearly 60% of all US manufacturing job losses between 2001 and 2019.

David Gura (31:55)

I think that the US did two things wrong. First, we just let it rip. There was no gradualism about it. And with labor markets, you really don't want to just rip the band aid off because labor markets have a natural rate of adjustment of a couple percent per year because that's the rate at which people retire and new people enter and people make those transitions by choosing New occupations at entry or retiring from old ones. They don't. Generally you don't go mid career from being a lawyer to being a manufacturing worker or vice versa. And so you don't want things to change that fast. You can handle change, but at a gradual rate. We didn't do anything to buffer that shock. The other is we had no real social policies in place to help people, to help communities and to help people adjust.

David Westin (32:35)

The China shock dealt a blow to labor intensive manufacturing like automobiles and textiles. Something similar may be playing out across Europe now as Chinese exports to Europe surge and prices of some goods collapse. French President Emmanuel Macron calls the trade imbalance, quote, unbearable. And Ursula von der Leyen of the European Commission said that the bloc's relationship with China has reached, quote, an inflection point.

David Gura (33:00)

Europe has been one of those markets and Chinese exports to Europe are growing very rapidly and they threaten to displace a lot of European manufacturing that remains most visibly in the automotive sector and in Germany most of all. And this is going to, I think, you know, have similar risks for them in terms of hollowing out sectors really rapidly.

David Westin (33:24)

Europe's so called China shock seems to have been triggered in part by US tariffs on Chinese goods, leading China to look for new markets. But as Mark Twain said, history doesn't repeat itself. It often rhymes. And this time it may be different for Europe than it was for the

Stephanie Flanders (33:41)

US There was this sense of, oh well, all of the exports that were going to the US because there has been a big reduction in Chinese importance ports coming into the US There's a feeling that those goods are just being diverted to, to Europe and elsewhere and that we're not quite seeing that in the numbers.

David Westin (33:57)

Stephanie Flanders runs economics and government for Bloomberg News and thinks the story is more complicated than China flooding Europe's markets.

Stephanie Flanders (34:05)

We are seeing that China has successfully offset the impact of US tariffs by trading more with other countries. But actually, if anything seems to be different goods and it seems to have been done through, you know, cutting the price of some of those different goods that they're used to selling to Europe. So, you know, as ever with trade numbers, it's just a bit complicated. But it is certainly true that China on the face of it, has not been affected as much as you would have thought from the big reduction in exports going to the U.S. the U.S.

David Westin (34:33)

trade deficit has been falling since Liberation Day when President Trump announced sweeping tariffs on imports from many countries. But fewer Chinese exports to the US did not mean China's exports overall went down. To the contrary it now has a $1.2 trillion trade surplus as its exports have actually increased.

Stephanie Flanders (34:53)

So the increase has been quite widely spread, David, because obviously the rest of the world as a market is bigger than the US But I mean the headline numbers are you've seen about a 4, just over a 4 percentage point reduction in Chinese exports to the US but actually overall the exports last year increased by 3%. So they'd actually more than offset that swing in their exports to the US and that's been spread over. I think the place that's had the biggest increase is Africa, albeit from a small base. They've seen a lot more Chinese exports and Europe, other places have also seen more, but it's more on the order of sort of one, one and a half percent growth.

David Westin (35:33)

Another difference in this China shock is the kind of goods China is exporting all over the world.

David Gura (35:39)

If you're mostly just importing without exporting, you're just accumulating trade deficits. That means that it's not obvious where all those people are supposed to go. There's not a new set of activities opening up simultaneously. So I think it's quite a challenge. It was quite a challenge for the United States. We didn't manage it particularly well. And I think it's actually in many ways more, more challenging now than it was 20 years ago because China has moved so far up the value chain. When the China shock hit the United States in 2000, China was not exporting automobiles, but now they're a world class auto supplier and they're the best producer of electric vehicles in the world. There's a huge car industry in Europe, particularly in Germany, and they feel very threatened and understandably so. But it will not just be in automotive, but it'll also be in heavy industry like rail cars, shipping, but also be in lots of consumer goods. And so China is a formidable competitor and not just in low value added, labor intensive manufacturing the way it was 20 years ago, but in really all the high tech sectors and all the consumer products that are, you know, kind of central to, you know, both what consumers purchase, but also what a lot of advanced economy manufacturers purchase produce.

David Westin (36:50)

Martin Book sees that happening already. To adapt, his company is turning to an area that isn't affected by China's reach and manufacturing dominance. Defense.

Martin Buchs (36:59)

We do round about 80% of our revenue in automotive, but our part of our strategy is to diversify into other areas. We are already doing some supplying to semiconductors, some to medical, to the general industry, but we would like to do more in defense and Space actually that's part of our roadmap of a 10 year roadmap. And we are already supplying to the drone industry, which has become much more important now because of the Ukraine, Russian war. And we have some more plans for 26 that's going to be announced in the second half of this year. We have some plans to come forward with our core competence actually, which is mechanic and mechatronic products.

David Gura (37:43)

Defence spending is government spending, which means it has to be paid for through taxation or borrowing. So it's not. You can't run your economy just by making defense goods for yourself. But that will use some of European industrial capacity and perhaps give focus to some of what they're doing and also technological advance. They also will face the same supply chain constraints the United States as a lot of our military inputs come from China in including for example, rare earth metals.

Stephanie Flanders (38:08)

The German case has been quite dramatic in these sectors that had previously been absolutely the heart of Germany's kind of self identity as a manufacturing power machine tools and cars. I think the only thing that's kind of offsetting that, which is quite a big thing in terms of growth overall in Germany is of course they're the ones who've had, they're increasing dramatically their defense spending and they're getting a fiscal impulse from that which is not really present in the same way in other countries. So the country we are seeing a lot of structural change hitting Germany at the same time, partly as a result of Donald Trump's trade policies with respect to China and other places, but also as a result of being in a more scary world.

David Westin (38:56)

But where China makes life harder for some European manufacturers, it is lending a helping hand to central banks.

Stephanie Flanders (39:02)

Annoyingly, for those sitting in central banks, the numbers, it's hard to tease out the data because it always tends to be a bit behind the curve. But we are seeing not so much the volume changing, I mean the overall value of trade changing, but within that maybe more goods at a lower price. And actually the reduction in price may actually be helping to pull down inflation in some of these countries.

David Westin (39:25)

Does that relieve some pressure on the European Central Bank?

Stephanie Flanders (39:27)

Well, I think it's one of those things. We've heard some bank of England policymakers and European Central bank policymakers talk about it. You know, they're obviously a period. The European Central bank has been on hold for a long time. They've been adjusting their inflation forecast. A lot of people, including Bloomberg, Bloomberg's economists think that inflation is going to undershoot the Eurozone's target this year and that they should potentially be looking to to cut rates further.

David Westin (39:55)

If we are witnessing a sort of second coming for China, it's coming in some very different ways in the products it is making and in the regions it is exporting to with different economic effects. But as before, some particular sectors and geographic areas could be hit harder than others. Just ask Martin Buchs.

Martin Buchs (40:15)

We are a family business. I'm living in an area, of course it's not easy to lay off people in area where you live, where you meet people in shops every day. But at the end of the day it's about survival in the industry. And I think the case was quite clear that it was necessary to reduce our labor.

David Westin (40:36)

Coming up, the ups and downs of investing in your art passion.

Tom Keene (40:39)

170 million for the Warhol is selling here.

David Westin (40:44)

What's driving the market this time? This is a story about paying for our passions. A year ago we brought you the story of the business of art. We called it investing in your passions. But a year later, we're seeing some of the challenges and losses that can come with those passionate investments.

Michael McKee (41:10)

Remember these pieces of work, these assets, if you want to call them that, they don't produce an income. They don't have a coupon associated with them. The only income that you get is the appreciation.

David Westin (41:22)

Kraus is Chairman and CEO of Aperture Investors and has spent a career in finance, including as head of Alliance Bernstein with his wife. He has also become one of the most avid art collectors on Wall Street.

Michael McKee (41:35)

My wife and I have been collecting since we got married, which is 44 years. And the first thing we bought was really sort of a small print. And I said to the gallerist who's not alive any longer, I said, well, you know what I like and if you have any more, give me a call. And he looked at me and he said, here's what we're going to do. If you want to collect art, you will come in every Saturday and I will show you art. But if you think I'm going to call you on the phone and tell you there's something for you to come and see, that's not happening. And I took his admonition seriously and we went, we, my wife and I went in every Saturday and every Saturday he showed us work, most of which we couldn't afford. And we finally found a painting that we liked and we bought and it was $6,000 and we paid for it $500 a month until it was paid off.

David Westin (42:32)

Over the decades, Kraus and his wife Jill have added to that single work paid for in installments and assembled a very large collection. It's people like the Krauses who are at the center of a growing web of players, including auction houses, banks and advisors. They connect one of a kind assets to collectors of all levels, from the very experienced to those just starting out.

Christina Raffini (42:57)

Traditionally, when, when folks wanted to go to sale, they would kind of call a gallery or a dealer or call an auction house.

David Westin (43:05)

Anita Herio is Fine Art Group America's president.

Christina Raffini (43:08)

As the market's grown so substantially, it became necessary to have an independent firm that kind of serves as a fiduciary for the client.

David Westin (43:17)

According to a recent Deloitte report, ultra high net worth individuals grew their art and collectible wealth from $2 trillion in 2022 to more than $2.5 trillion in 2024. The trend shows no sign of stopping as the so called great wealth transfer gets underway.

Christina Raffini (43:36)

Just imagine this, Baby boomers bought more stuff than anyone in world history. Just think about that and what are they all doing right now? They're trying to figure out what to do with it. There's more material that will be hitting the market than ever before. And it's required to find appropriate places and strategies for sale for these objects. So that's number one, supply is going to increase with baby boomers. Number two, what did they buy? Right. Most young folks are not interested in 19th century paintings, Old Master paintings, regionalist artwork from the 19th century and the 20th century, like the Ashcan American school as an example. So there are lots of areas where taste will really be impacted by the younger generation acquiring these objects. There's no doubt about it. And because these are kind of passion assets that tend to sit in homes, think about how homes are now designed.

David Westin (44:44)

More art and more stuff also means a growing clientele for those in the art business. There were 121,000 ultra high net worth individuals in 2024, rising to over 163,000 by 2030. But that doesn't necessarily mean any time is a good time to be in art.

Christina Raffini (45:03)

It really depends on what's happening in the economy. So for instance, you know, in 2015, 2016, 2017, when people were buying art like crazy, right? There was just this huge appetite to acquire these assets. It was really great to have an opportunity to utilize your art for liquidity, which allowed you to get a loan against your artwork to buy more artwork, right? Many auction houses would have advances, right? So you could acquire an artwork and it would automatically you'd get an advance on it. So There was a desire to acquire more work. As the economy started to slow and there was inflation, there's interest, there were issues in the commercial real estate market. We started seeing more and more clients not thinking so much about, hey, I want to buy more art. But they were thinking like, hey, I need liquidity, right? Maybe I'm over leveraged in other areas of my portfolio, but I've got this big art collection. I can use this for liquidity to buy another business to pay for my commercial real estate. So the reasons for collateral really depend very much on what's happening to the economy and the necessity for quick money.

David Westin (46:19)

While each work of art is unique, there's a big business in bringing some clarity to the market and in bringing together the buyers and sellers. Enter Edward Doleman.

Tom Keene (46:29)

Well, basically, it's a sort of perfect form of the market. It's the ultimate sort of demand and supply where the two meet with an auctioneer in front of all our clients who have come along to bid for the works of art that we've offered for sale.

David Westin (46:44)

We spoke to Dolman when he was CEO of Philips, which specializes in contemporary art. Auction houses like Phillips, Sotheby's and Christie's provide a public forum for price discovery at events throughout the year, including big ones in the spring and the fall.

Tom Keene (47:01)

So the art business is essentially driven by this auction machine, but round it is a huge sort of ecosystem of galleries and collectors and museums and art institutions. We're a big community. But I do think the auctions are probably at the heart of it.

David Westin (47:20)

Over your time involved in the art auction business, how has it evolved?

Tom Keene (47:26)

Well, it's been transformed, actually, in the time that I've been in it, which is a long time now, it's 35 years. When I first started, the market was opaque, to say the least. The only people that had any pricing information were the auctioneers and the dealers who attended the auctions and wrote down all the prices in their catalogues. And I think the biggest transformative event in our world has been information and access to data. So really, the market we see now, what's so different about it is the access to information that everybody has who's in that room competing, whether they're in Asia or South America or Europe or America, they have access to the same information.

Stephanie Flanders (48:08)

Who would like to open the bidding

David Westin (48:09)

here, the price may be public and the seller may be protected by guarantees and irrevocable bids, but for the buyer, the question remains whether a work of art is worth the prices being bid and also how Those prices might be financed, which is where Fotini Zaidis and her colleagues at Citi come in.

Christina Raffini (48:28)

The art market can be still opaque. It has gained transparency in some ways, but in many ways it still remains not a transparent market. And a novice collector might need some guidance.

David Westin (48:44)

Fotini Zaidis is head of art finance at Citi, one of the major banks that have added art advisory and financing to their investment offerings. When needed, they lend against the investors collections to provide the liquidity needed to acquire new art.

Christina Raffini (48:58)

Some of the things we look at when evaluating art, be that for an acquisition, a sale as collateral for an art loan, for insurance purposes. We look at a range of factors. We look at an artist's market history. If it's a more established artist, we look at the longevity of that market and what's happening. We look at the individual artwork itself.

Michael McKee (49:23)

So.

Christina Raffini (49:23)

So the sale history of that work. Sometimes artworks might show up for sale several times at auction. So we have to be able to put a value on an object and understand what is the long term value for it. Is it financial preservation? Is it investment? So when I say quality, I can't help but think value as kind of the synonym for quality.

Martin Buchs (49:45)

14,900,000.

David Westin (49:48)

Today, the art market is larger and more transparent than in the past. And it's interwoven with interest rates and financing and expert advisors. But in the end, whether you're an art investor, a collector, or something of a mix of the two, the value of your purchase depends in part on whether it will resonate through time.

Michael McKee (50:07)

I literally think it's impossible. I think that if you were to ask yourself the question, if you went back to Renaissance times and were in Leonardo da Vinci's studio and he was painting the Mona Lisa, would you have known? Probably hard to tell.

David Westin (50:24)

But fortunately for a true collector like Peter Kress, it's not about predicting where the market will go.

Michael McKee (50:31)

As a collector, the key issue is trying to unlock the language that the artist is using to communicate their feelings or whatever they're putting into the art. And it's trying to figure out that language. That's the mystery to me. And where you figure out that language, then all of a sudden you see what the artist is doing. You may not like it, it may not speak to you, but if it does speak to you, if that language is something you read and it does excite you and it moves you, that's interesting and that's important. And then the question is, are you the only person moved by it? Or are many people moved by it as a collector.

David Westin (51:09)

Do you sell? Never for the true art collector as for the true artist, maybe it doesn't matter how many people are moved. One can be enough. But it's how many people are moved that will take a passion asset and make it an investment that does it for us. Here at Wall Street Week, I'm David Westin. See you next week for more stories of capitalism.

Tom Keene (51:36)

It.