Wall Street Week - Full Show 01/06/2023
Another year and another set of challenges for the markets. Hopes for the economy and just plain silliness in the Congress. This is Bloomberg Wall Street week. I'm David Westin.
This week, contributors Larry Summers of Harvard on what the jobs numbers tell us about the economy and inflation. These were good numbers. They showed a strong economy with slowing inflationary pressures. And Steve Rattner of Willett Advisors on what did investors to do when there are no sure things? It looks tough, but it look most years and look tough this year looks very tough, especially for equities. Global Wall Street started a new year this week that in many ways picked up just where were the old one left off. President Xi Jinping of China admitted how tough his country's battle has been with Covid with extraordinary efforts. China has prevailed over unprecedented difficulties and challenges.
That has not been an easy journey for anyone. We have now entered a new phase of Covid response, where tough challenges remain. Even as his government cut back on semiconductor subsidies because of its economic challenges, this is a drastic shift, especially when we've seen President Xi Jinping in the leadership really want that self-sufficiency. When it comes to that critical technology, especially around semiconductors, the December Fed minutes gave a sense of just how difficult it is to deal with inflation and loose financial conditions.
That's a really narrow needle to thread. Monetary policy is not precision engineering, even as the House of Representatives made a spectacle of itself by not electing a speaker after ballots that went on so long that in the end it almost didn't matter who won. The important thing was just to get it over with. You'd have a Congress that can't
function. Is this embarrassing for the greatest nation in the world? How can that be? And if all that weren't enough, the saga of Samuel Bank and Freed continue Sam Banks and Freed, the founder of the FTSE empire, appeared at the Southern District of New York in a Manhattan court in downtown New York City to plead not guilty to eight criminal counts that included wire fraud. Then on Friday, we got back to business in the new year with the U.S. jobs numbers coming in much stronger than expected.
Adding tuning in, 23000 new jobs for an already strong labor market and managing to do it while the pace of wage increases came down a bit to four point six percent year over year. And the markets responded to what they saw as the best of both worlds, with the S&P 500 up one point four, five percent over the shortened trading week and the Nasdaq up just under 1 percent. While Bonds, they didn't sell off one bit with the 10 year yield ending up at three point five, six down from almost three point nine percent at the end of last year. Here to sort it all out for us are Sara Carter, CEO of Causeway Capital, and Jim McDonald, Northern Trust Bank chief investment strategist. A welcome back, both of you. It's good to have you generally start with you.
The markets seem to read a lot into these jobs numbers that came out on Friday. Is the market right to read that much? I think it's a little premature to declare victory on either inflation or that we're going to achieve a soft landing. The numbers were unequivocally good. The ninth month in a row of beating expectations shows that this economy's got more resiliency.
The three month wage number it up four point one percent is edging down to that more acceptable range. But we've still got a lot of progress to be made. And I think the market's overpricing, the Fed moving now where they've now got 40 basis points of cuts priced in in 2023. Our base case is the Fed's going to raise to around five, five and a quarter and stick there for at least six to twelve months. So, Sara, what about it?
I guess the question isn't so much what is actually going to happen in the market as what the Fed is going to do about it. Are we overreading what the Fed might do in reaction to numbers like we had on Friday? Possibly. It appears at least our team feels that every piece of good news seems to be offset by some bad news. A recession indicators that are
traditional, for example, a steeply inverted yield curve certainly present not just in the U.S. and other countries as well. And then we have this falling commodity prices indicating slowing of demand and then the excess savings that have built up during Covid that has been spent down. And we have higher cost of housing in terms of mortgage rates. There are so many depressants on the U.S. economy, not to mention foreign
economies. It's really hard to see our way out of this without some type of significant slowing, probably a recession. I wonder to your point, Sara, where there's contradictory information.
I mean, we had JOLTS numbers out this week as well that indicated that the job market is really quite tight, despite the fact it doesn't look like wages are going up quite as high. How do you take all the data we're getting and putting together so that investor knows where to go? Well, this is this is quite difficult. So from a bottom up perspective, the best path is typically to be very diversified and then don't let any risks aggregate any one particular area because it's hard to call. Think about where we were a year ago when looked as if and leaving a wonderful value rally tailwind of everything going well, particularly for places like Europe that had been struggling to get through Covid.
Then we had the Russian invasion Ukraine. So these setbacks occur and the key is then to be in companies with tremendous financial strength who can endure this. David, I agree. The importance of diversification can't be overstated. If you look back at 2020 to the importance of owning real assets in a portfolio was critical, really helped performance. If you look at 2023, it's hard to make big geographic calls. But we do think that underneath the surface of the markets, things like value should still perform well in 2023. They've got significant valuation
support still going through this period. Areas like high yield bonds are probably a good place to be in. Cash looks really attractive at a 5 percent yield over the next. Why are high yield bonds a good place to be right now? Well, we think that give you a pretty good protection in a more difficult economic environment.
You've got a yield to worst right now at about eight point seven percent. And what the market is doing is showing real confidence that through the cycle, defaults will be relatively well managed in high yield. We think that maybe we'll get to a three and a half percent default rate, but over 50 percent recovery. So that looks at less than a 2 percent loss rate and the yield the worst at eight point seven.
That gives you pretty attractive return. And high yield bonds tend to have only about a third of the downside risk that equities do. So Sarah, Jim obviously is cross asset. You focus more on equities. What about it in the equities area? We heard just briefly that I've open Steve Rattner saying he thinks give me a hard year for equities. Do you agree with him? Possibly for overall markets, after all? In particular, the U.S. market has delivered mass returns well
in excess of what is typical, a risk free rate, plus an equity risk premium. And the U.S. returns of last 10 years had been double digit percentage per annum. That's quite something. Let's just say we have more downward pressure on multiples. The key then, and I sort of coincide with Jim's remarks is CAC income and a number of great companies listed globally are paying. Today, and that's really if all power went out in the show was over.
I would just leave one message, which is get that income soon. Lower the duration of your holding because that's in an environment where there's a real cost of capital is a great strategy. So, Sarah, obviously US equities have been valued more richly than, for example, European equities. Do we do expect actually that will come
in likely and maybe not in part due to the continued multiple compression that we're experiencing in the US market that should continue as long as they are on a path of rising real interest rates. After all, everything is different now. That era free money is over and we don't have a fed put any longer, nor do we have other central banks there. They are reducing their balance sheets, are taking liquidity out and market and fiscal spending is very much constrained by inflation factor. Both monetary and fiscal are constrained by inflation. And as a result now it's just all we
have is earnings. The liquidity part of their day and propellant to markets is likely to be very muted for many years. David, I dare to the geographic commentary that people tend to think about the countries that they're investing in as opposed to the type of stocks that they're buying when they're buying, for example, European equities. If you want to value exposure or you want exposure to a reopening of the global economy, you want exposure to Europe over, say, the US. So that's one reason that we've taken off our underweight developed markets outside the US. Better value exposure plus the dollar's
probably had its wrong. Let me bring something in that may or may not be relevant. Joe, I'll start with you. What we're watching unfold in the Congress, not being able to pick a speaker of the House for so many ballots have gone on.
Is that relevant to an investor at this point at all, Jim? Well, it is. The situation before this was they were not going to pass much of those distortions. So that was not a market expectation. But now we've really put on the table the risk of the debt ceiling. If there was an individual member of the House that can call for a speaker vote anytime they want.
And if there is a tie to the debt ceiling in this agreement that's being made to potentially make Kevin McCarthy the speaker, that is going to significantly increase the risk around. The key will be could the Democrats get the Republicans from Democratic leaning districts to go along with them to pass the debt ceiling expansion, which is really what the American public wants? Sarah, we've all seen any number of times the debt ceiling has been at issue. One time it actually affected the credit, the United States government. And usually it's gone away. Does it factor into your investment decisions at this point at all the risk on the debt ceiling? Well, certainly because the risk free rate is critical when doing valuation work, because, after all, a stock is just a present value of all the cash it can generate into perpetuity discounted by this discount rate, where the risk free rate or the government bond yield is essential to that. So, yes, it's government bond yields rises that is going to cause us to have to pay and be much more stingy in terms of what we paid for stocks. So it's super important. But the U.S. is in good company and fortunately, so
many major countries globally had a significant amount of debt to GDP and or they had fiscal deficits that are sizable. So I think if it weren't like that, the U.S. would be penalized more. But unfortunately, we have brethren in this race did have a significant amount of debt. I'm not sure if that makes me feel better or worse.
But it's certainly important now. Sarah Carter and Jim McDonnell, we'll be staying with us as we turn to the New Year and what surprises may be in store for the markets and for investors. That's coming up next on Wall Street week on Bloomberg. On Wall Street, for example, when the market faltered on the opening day of the year, sophomoric so-called authorities raced to tell us that that meant an inevitable nosedive for the rest of the year. That would be profound. That didn't even last 24 hours when the market then went up every other day this week, establishing a couple of new post crash highs. In the process, a fresh set of geniuses
appeared to assure us that everything was suddenly beautiful and this best of all possible worlds. Well, maybe, though, the broader market was still well behind the blue chips. That, of course, is loose rock ISE are on Wall Street week at the end of the first trading week of nineteen eighty nine, that was 34 years ago when the number one movie in the United States was Rainman with Dustin Hoffman. And the most popular song in the country was Every Rose Has its Thorn Bipolar Poison and no to the producer. I'm not going to sing it even though you requested I do.
Still with us now, our Jim Macdonald of Northern Trust Bank and Sarah Carter of Causeway Capital. So, Sarah, obviously with that admiration from those rock ISE, which is which is wise, I mean, we're modest, but we have much to be modest about when it comes to predicting when I ask you to do it nonetheless. Well, who knows what 2023 holds and source. But as you look forward, what are some possible surprises that you're preparing for? Maybe the most impact will be nay effect on the Chinese economy and its reopening because it looks as if there's going to be a huge wave of consumption. We saw this in the investment world during lockdowns.
People couldn't spend. We were locked down to the degree they were in China. And they need desire to get out and spend to travel, to take purchase is huge.
And that's something that we may be underestimating this. It certainly will be a plus for markets, would be a plus for consumer discretionary. It'll be a plus for travel and transportation. So there are there parts of the global economy. It could do very well and some result in that. So let me pile on, Jim, because it's not just the reopening necessarily. But we also see, I think early on in the
year at least, President Xi changing some of the policies, whether it has to do with property, for example, whether it's do with big tech. Could we have an upside surprise head of China? We could, but I think it would be short lived. We're a little more cautious on the outlook for emerging markets and especially China, not only the Covid related issue, and there will be a short term bounce undoubtedly from reopening, but they really hurt themselves.
Intermediate and long term competitively with what they're doing from an intellectual property and a common prosperity standpoint. Dell announced this week that they're looking to move all of their semiconductor purchases out of China by 2024 and 50 percent of their production. So we worry about that. We worry about the continued concerns in
Ukraine with the Russia invasion and what that may mean for commodity prices. And then the final thing that we're worried about from a risk standpoint is just the risk of persistent labor strength, which leads to higher inflation and fed policy tighter than what the markets currently expect. So those are some downside surprises. Can you anticipate any possible upside surprise? Sure.
The upside surprise would be that if we actually do avoid a recession and that we see inflation come down, the labor market stays strong enough. But but wages are not as persistent and we actually get to a lower inflation rate. The break evens right now for a two year Treasury tips or a two point two percent.
If we actually achieve that, that will give the Fed some room to pause. And then if we don't go into an earnings recession, the stock market could be definitely better than people expect. The consensus is that it's not going to be a great year. So what about the flip side of that?
Because some people think the markets maybe underestimating the extent to which the Fed is going to have to raise and keep it at high levels. And we heard from some Fed governors actually this week saying we need to get to like five point four percent. Mr. Kashkari said. It's not just the Fed's actions and perhaps it's five point four. Could be could be higher, could be lower. It's the lag effect that matters. And that's something we take into consideration, is we have to anticipate as institutional investors where where monetary policy will be going and what the effect will be months, quarters, maybe years after it's implemented.
So this has been the one of the sharpest moves upward from zero to our current short rates. And we're going higher as we've discussed. So that might be 12, 18 months of continued tightening effect that follows along with that.
I don't think the markets are anticipating that, certainly not in the U.S.. Sara, one of the biggest, I think, surprises of last year was geopolitical, particularly with Russia's invasion of Ukraine and the aftermath, the energy crisis that followed. As you look forward, how do you take into account the possible geopolitical surprise in 2023? And that, by the way, that could be the upside or the downside, a rapprochement with Russia maybe. Or it could be China invading Taiwan. There are plenty if you could. Again, it's like the economy and have the positive stories and the negative ones. Really, the only way to deal with this, because aside from just putting your money in the pillow, is to be well diversified. We use a quantitative model to do that.
But the whole idea is you can't anticipate when Russia invaded Ukraine, European stocks collapsed last year. They started to just fall in February and kept going. That was one of the best buys of 2022. So we can anticipate the problems, but we can react to them sensibly and take advantage of that. So, Jim, and anticipating where there's a problem or not. This last year, we saw a very, very
strong dollar that seems to be coming off a bit. What if, in fact, we do see a weakening of the dollar to 23? Well, if you were able to pair that with a strong, sustainable reopening of China, that would be a positive for emerging markets. It would be a bit of a headwind for commodities. But we look at commodities now for resource equities as one of the hedges against the geopolitical risk that you raise, which is pretty much on forecast of oil, as Sara mentioned. But then the other thing that I would
say is having an overweight to cash in this environment looks pretty attractive when you can probably get a couple hundred basis point premium in cash over investment grade bonds and you have that over where to cash is that in order to pounce when there are opportunities? It's both. It is because we don't see anything more attractive now. But then it also will give us that dry powder when the opportunity arises. Sarah, given your situation equities, I know you're fully invested, you remain fully invested, but that doesn't mean you're fully invested everywhere.
Where do you direct your investment toward and away and the highest return, lowest risk stocks trying all the capital. That's where we want to be. But I would argue it's not just institutional portfolios for individual investors to decide.
Timing markets is so appealing, it's so hard to do. That's why we we really do keep in equities and keep the cash levels very low, because if you raise cash, that's one thing, you may have avoided some sort of downturn, but then you have to go back in before the upturn follows. And that's very hard to do. I think it is. So I said I didn't have to say. But what about that?
What her broader point? It's hard to know when to get back in. There's no doubt that a tactical asset allocation is not for the amateurs. And so you do have to be ready to go back and you've got to have scenarios ahead of time. You've got to pay attention to valuation. And so it is something that does require a lot of resource to Sarah. Finally, I give you the last word here perhaps on actually having managed really active management of your portfolio in equities. What's the case for that for 2023?
And I'm going to repeat a little bit what I said earlier, which is we have no idea what the next crisis will come from and nor do passive indices. They are a passive index is a reflection of what has done well. I mean, think about the large cap stocks in the U.S.
that had a tough time last year. They were what had done well. So active really implies a team like we have a causeway looking for opportunities and often responding to whatever situation the market is is giving us. For example, last year, Russian invasion of the Ukraine are now with China reopening and its implications globally. So one minute on that. Jim ISE, it is 2043, not the year for index funds. I think that 2023 will be a year where active management will have a better opportunity than in the past.
The volatility is likely to remain very high. We think that the beginning of the year will be people worried about an economic downturn. The second half could be a time of greater optimism and a little better tone in the marketplace.
So I do think that active management should have a better time in 2020. It sounds like one thing everyone can agree on is volatility in 2023. Do you agree with that? Yes. As long as we're in an environment where then monetary noose is tightening and yes, we think it'll be volatile. OK, thank you so much to Sarah Keller of Causeway Capital and Jim McDonnell of Northern Trust Bank.
Coming up, we're going to look ahead to next week on Wall Street, week on Bloomberg. This is Wall Street week. I'm David Westin. It's time now to look ahead to next week, a global Wall Street starting with Yvonne Man in Hong Kong. The big story we're watching out of Asia
this week, China reopens with the world. That has been a dramatic shift from Covid 0 and lockdowns to scrapping PCR tests and quarantines. But will it work? Can it save the economy? And how destructive will this transition be? With a growing list of nations like the US, Japan now requiring travelers from China to show a negative test before allowing them to enter the European Union is also considering masks and other pre-flight testing requirements. China watchers are cautiously optimistic, though. Hong Kong listed Chinese stocks have one of the best starts of the year since 2009. And some economists are expecting consumption to come back with a vengeance on the global central bank docket, of course. The Bank of Korea has its next rate
decision. The central bank widely expected to raise rates by another quarter point in what could be the last hike of the current tightening cycle there. And we'll get the latest polls from the India tech sector as well. Tata Consultancy reports earnings on Monday. Bloomberg Intelligence expects the
company may take a more measured tone when discussing growth prospects for the next 12 months. Europe, which accounts for a third of TCI, says revenue likely to see most of the slowdown. Well, we're heading into the second week of 2023 and the Atlantic Global Council Energy Forum will get underway in Abu Dhabi. From the 14th of January. This year's meeting will focus on the
challenge of managing energy security priorities and decarbonisation efforts in tandem. We'll also look at the impact of the crisis in Ukraine and on the energy transition. Two days later, business and politics leaders will be heading to Switzerland for the World Economic Forum's annual meeting in Davos. We'll bring you the full coverage from there. The economic data front, we're gonna be getting industrial production numbers from Germany on Monday, France on Tuesday from the U.K..
On Friday, the U.S. CPI report for December will be released on Thursday. Economists project headline consumer inflation moderated to less than 7 percent, marking six straight months of easing in year over year growth since peaking at nine point one percent back in June. Elsewhere, earnings season kicks off with for the five biggest U.S. banks reporting, including JP Morgan, Wells Fargo, Citigroup and Bank of America. Also want to focus Boeing and Airbus releasing their 2022 tallies for orders and deliveries while Airbus is certain to hold its position as the world's biggest maker of commercial airplanes. Analysts say Boeing likely saw Lee your
surge in deliveries for that cash cow 737. That would bolster bets investors have made on Boeing's turnaround story, a turnaround that has made Boeing the best performing stock in the S&P 500 since the third quarter. David? Thanks to a Yvonne Man, Dani Burger and Romaine Bostick. Coming up, it looks like it could be a rough year ahead. We talk with Steve Rattner of Wool Advisors about where a smart investor turns when the answers are far from obvious.
That's next on Wall Street week on Bloomberg. If you didn't much like 2022, don't get your hopes up for 2023. Bloomberg gathered almost 500 calls from Wall Street analysts for the New Year and couldn't find much optimism with concerns over everything from a recession, as predicted by former New York Fed President Bill Dudley. Recession is pretty likely just because of what the Fed has to do to equities. There's still a lot of uncertainty on the girl's picture globally.
So I think we're in the same spot where I think we see equities down in the near term, possibly recovering towards the end of the year. But I think that the key challenge is risk premium. Very low to bonds. I just don't know that yields are going to go down as far as people think. There's some calls for, you know, two and a half percent, two point eight percent by the end of this year and a 10 year. And I'm just wondering whether that
actually is, you know, matches with everything else to geopolitics. We are seeing around the world a significant number of super empowered individuals who aren't getting great inputs from experts who are able to act with impunity and are not getting what they want in various ways on the global stage. All of which poses some hard questions for investors looking to make good returns in a year set up for anything. But 2023 could end up being a kind of widow maker. In terms of a market and for the perspective of a big time, very sophisticated investor, return now to Steve Rattner, who is chairman and CEO of Willett Advisors. He is responsible for investing the personal and philanthropic funds of Michael Bloomberg.
He is, of course, the founder and majority shareholder of our company. Steve, thanks so much for being back with us on Wall Street week. When you listen to any of the Wall Street strategists this year, it sounds like 2023 looks pretty bleak for an investors point of view. Does it look as bad as what they're saying? It looks tough, but look, most years look tough.
This year looks very tough, especially for equities. I don't I can't tell you how much more downside I think there is to equities, but it's very hard to see a lot of upside. It does feel like the markets are pricing in a more benign set of moves by the Fed, and I think what many of us believe is actually going to happen. And that, of course, becomes very tough for equities.
And so we remain very cautious, very defensive in terms of our own positioning visa v equities, not by no means out of them, but as I've told you, I think in my last couple of times on your show. So it essentially as defensive position as we've ever been in in our 14 or so years of existence. Well, I want to talk about the defensive position and what that country is when it comes to equity. Specifically, Steve, you have said in the past, given the discount rate, if nothing else. Basically, when the rates are rising,
that's not good for equities. But does your position on equity for 2023 tell us something about where you think that the Fed will be throughout the year and for that matter, where inflation is going to be? Well, it tells you something about where we think they're going to be, because I have no idea and they have no idea. In fairness, there is no. As you know, there is no secret Fed plan that the media is trying to get hold of. It's all data dependent, data driven. Janet Yellen used to say. But the fact is that the credit markets from which the equity markets take their cue on Fed policy are looking for interest rates to peak somewhere in the early first half of next year and then begin to decline. And I don't believe that that is what the Fed is likely going to have to do or will be doing, because I don't believe inflation is going to come down enough for them to do that. And so if you believe not necessarily
that interest rates will go higher than the markets think. But at the very least, that they will persist at high levels for longer than the market thinks. Then you have to be nervous about equities. Equities, of course, not all created equal. Some are much more sensitive discount rate than others. Does that suggest that there might be
some defensive positions in equities, actually? Yes, that is absolutely true. The growth equities, the unprofitable tech, all that stuff is certainly more susceptible to high interest rates. But then you have a bunch of cyclical stocks, which also can be called sometimes value stocks that are sensitive to economic conditions. And the yin and the yang of all this is that we still are facing the probability of recession, maybe the back half of this year, 2023, maybe early in 2024. And that's not good for cyclical stocks. And so, sure, there are always some some places, some pieces and places that one can go.
But overall, it still looks like a pretty tough market. So what about fixed income? I hear only some people saying this may be the year of the bond with bombs are coming back. Yields will come down. Are you more comfortable in fixed income? Certain parts of it. And in the following sense, given our view about interest rates.
It is hard to be constructive about fixed rate fixed income, if you will. Bonds that have a fixed. Coupon on them because they are also going to be susceptible to rates staying higher for longer.
Where there is a very interesting opportunity at the moment, we believe is in what we call private credit. What's happening out there is the banks are very reticent to lend, especially for leverage transactions and things like that. They still have a lot of hung loans on their balance sheets. They see the same world that we all see. And so they're pretty pretty. I wouldn't say out of business, but
reticent to lend. The high yield market has been essentially closed now for the best part of a year. No real sign of that opening. So what's happening is that you have a number of firms, private firms or private credit oriented firms, I should say, that are finding places to put money to work at very attractive spreads above libel or so for whatever you want to call the current benchmark interest rate. And so you not only won't suffer if
rates go up, you actually benefit. If rates go up and you're looking at at this paper coming it at spreads at six hundred fifty seven hundred basis points even over the over the Treasury, the rate and for stuff that is really firstly secure top of the capital structure kinds of opportunities so you can make ten eleven twelve percent on that. And to us that seems like a very good trade relative to what's likely to happen to the equity markets at the moment.
Steve, as you look at 2023, what about geography? Are there places that you see that are relatively better suited to what you need to get done? Are there places like I'll name some India, Southeast Asia, Indonesia, places like that? Well, first, the U.S. always auctions. They always have. U.S. has for some time now. And it continues to be the best house in a bad neighborhood on a risk adjusted basis as you look around the world.
I'll get to some of those slightly more far flung places that you mentioned. But as you look around the world, Europe is certainly got a set of economic challenges, even with energy prices coming down. It's possible Europe could perform well simply because the markets are relatively cheap. But in terms of fundamentals of growth, it doesn't seem very attractive. China obviously is an opportunity, but
one that is filled with risks and alligators and crocodiles are on every corner. I was in India just before the Christmas holidays and India is actually finally looking like it may be more interesting. It's always been market waiting to excite and impress people and and often not doing that. It does feel at the moment like India really is starting to move forward for a whole variety of reasons, including China moving back. And so India is interesting on a number of levels. And then in Southeast Asia, you really have to go country by country. It's not our area of expertise.
We don't really do anything there. Indonesia is potentially interesting, but I have not spent time there, so I'm not an expert on that. Steve, when you say you're as defensive as you've been, maybe ever, but certainly in a good long time. Does that include making sure you have a
lot of liquidity? Does that mean you stay in cash or cash equivalents because you think there may be opportunities as the year unfolds? Yes. First, we are as defensive as we've been at any point in our 14 or 15 years of history. And that does include a lot of cash. And it's not that we necessarily want to get ready to pounce on something, although it does put us in a position to be able to. But you really can't lose money holding
cash. And especially with short rates having moved up so much, you can actually make a decent amount of money on relatively short rates. You can buy to year treasury paper and make over 4 percent. It's all it's all a lot better than
potentially risking money in the equity markets at this moment. And then we do other things involving hedges and and things like that to make sure hedge funds hedges to make sure our equity exposure, our exposure to the equity market, I should put it that way, is down where we want it to be. As I said, look, we're very still very exposed to equities. We have we have too big of a battleship to pivot that quickly, even if we wanted to. And I none of us can be sure we're
right. And so we do want to maintain a healthy exposure of the equity markets in the long run. We believe in equities and we're not. We try not to be short term traders and
market timers, but we do feel and so far, for better, for worse, it's been the right call that we want to be on the defensive side of the range of possible positions we might have. Okay. Steve, thank you so much for being back with us. Steve rather. He's the chairman and CEO of Willett Advisors. Coming up, we're on top with our special between Larry Summers on those jobs numbers and what the Fed should do about it. That's next on Wall Street week on Bloomberg.
This is Wall Street. I'm David Westin. We turn now to our very special contributor, Larry Summers of Harvard. Take us through what we saw this week. So, Larry.
First of all, right, at the end of the week, we got the jobs numbers, which actually were larger than we thought. But the markets actually were somewhat encouraged. What did you make of these numbers? Look, I. These were good numbers. They showed a strong economy with slowing inflationary pressure in so far as there's strong signal in them. It's gonna be encouraging. My instinct is not to make too much of the month to month fluctuations in the wage numbers, which are, I think, a source of encouragement that people are seeing of the various data on wages. I regard the quarterly employment index
as the gold standard. The Atlanta Fed information as the silver and the monthly information that comes here as the bronze simply because of all the composition changes. If, for example, more teenagers start working, then that's going to show up as slower growth in average hourly earnings. But A, this is an encouraging number. Did it encourage you in the direction, perhaps, Larry, that perhaps we could have as the so-called soft landing without major unemployment? Because certainly we're certainly adding jobs at a fair clip. Still, my view continues to be that you don't get inflation down to the 2 percent range without getting wage inflation substantially down.
And you don't get wage inflation substantially down without meaningful slack in the labor market and you don't have slack in the labor market. And there's nothing in this number that fundamentally changes that picture. I certainly think that the prospects for a recession in the near term look lower of prospects of recession in the winter and spring of 2023 are certainly lower right now than I would have guessed they would be six months ago. But I think the judgment that soft landing, sort of the triumph of hope over experience continues to be the right best guess with respect to the economy. And I'm not sure of that. Continued strength points to a softer landing rather than pointing to even a harder landing when things re equilibrium. So, Larry, as you suggest, we got some
glimpse into the thinking of the Fed this week, buying things like Mr. Kashkari when he had to say we had other Fed people saying we really should stay up at five or above five, even five point four percent for some time. We also got the minutes of the last meeting out.
Were you encouraged by the fact that at least apparently some of the members of the formerly really struggling with the fact the financial condition ran pretty loose despite everything the Fed's been telling us? I've been speaking in a different way about the Fed in the last couple of months than I had been before. And that's because for whatever reason, they have come around to use quite close to mine. They think inflation is the primary concern. They explicitly recognize that there's going to need to be increases in unemployment to contain inflation. They recognize the say in some labor market developments as a kind of super core measure of inflation.
They're showing awareness of the fact that the neutral interest rate is a real interest rate concept rather than a nominal interest rate concept. They're recognizing that the trade off is not between unemployment and inflation, but between unemployment and the level of entrenched in inflation. These are the kinds of points that I've been stressing on your show for the past 18 months. And I think I'm gratified to see that they now are increasingly representing orthodoxy. It's interesting that the Fed is indicating a commitment to tighter policies, more focus on resisting inflation than the market is expecting, they will carry through a lot.
I think I would be closer to the Fed at this point in terms of judging what will happen. Then I would be to the market. OK. Our special contributor, Larry Summers of Harvard is going to stay with us. He's going to have a special end to our
program this this week. It's going to be actually asking Larry to go forward a year and predict what would be the big stories on Wall Street throughout 2023. That's coming up next on Wall Street week on Bloomberg.
This is Wall Street. I'm David Westin, we're going to end this first week of the New Year with something special. We've asked Larry Summers, our very special contributor, to take a look forward to 2023 and give us a prediction about what the biggest stories of the year will be in the coming year. So, Larry, let me start with the markets. They had a pretty rough year in 2022.
Can we look forward to something a little smoother in 2023 or is there some tumult yet to come? I suspect tunnel, David, look. The 30 year story. It has been declining interest rates. The idea that we're moving into an era of low interest rates. That was certainly the thesis that I was pushing with the secular stagnation idea prior to Covid. That's been the basis for a large amount
of economic thinking. The idea that we're going to return to that is a kind of orthodoxy baked into markets. You see it when the Fed predicts a half a percent neutral real rate.
You see it in break evens on inflation in the low twos. You see it in a 10 year rate in the 3 7 range. And that might be how things play out. The forces of secular stagnation,
demography, inequality, lower priced capital goods, all of that are strong. But my guess is that just as those who during the Second World War predicted that when the war ended we would return to secular stagnation and a sluggish low interest rate economy turned out to be wrong. That that's going to be true this time round.
I think we're in a new era of much higher government debt ratios. We're in an era including because of national security spending of substantially larger budget deficits. We're in an era of much higher investment demand because of resilience. Investment in reassuring and because green energy transformations that are going to happen all over the world.
My guess is that this is going to be remembered as the year when we recognized that we were headed into a different kind of financial era with different kinds of interest rate patterns. Larry, you mentioned defense spending. Geopolitics figured large in 2020, too. We've had a real clash, whether with Russia over the war in Ukraine or in various ways with China as well. What role will that play? This fundamental struggle, if you will, between democracy and autocracy in 2023? I'm an optimist. We had a much more politically
productive year of legislation in 2022 than most people expected. We had much more, much easier and more reasonable set of political outcomes in the 2022 election with much less contest over elections than most people expected. So I think as America's so often has in the past, it's demonstrating its fundamental resilience as a society. And at the same time, I think that if you look at Iran, if you look at Russia, if you look at China, the magnitude of the challenges those societies are facing look much greater than they did a year ago. And my sense is that trend is going to continue. So I think that democracy is going to look a good deal better relative to autocracy a year from now than it does today.
One of the great questions of 2023 is going to be whether, as that happens with democracy looking better. China is modifying its policies in our kind of direction towards warmer relations with the United States, towards more support for market institutions, towards more global co-operative ness, or whether they're sticking with some of the wolf warrior approaches that have defined them over the last several years and are suffering as a consequence. I don't know which way that's going to go. My sense is that the tide of history is moving in our direction, and just as it was darkest before the dawn and the period of the Iran hostages in Jimmy Carter's malaise speech. It was darkest before
the dawn in the late 1960s with the assassinations of the president, nine states unable to go speak places other than military bases. I think people are going to look back at this as having been a period when the United States got it back together. And finally, Larry, you're right, Chad, G.B. tend to Wall Street like this and then a year 2022. Is that gonna be a major factor going forward? I'm proud of that. And by the way, quantum computing, the thing about Chad GP, too, is and the thing about the current artificial intelligence is that we're no longer devising artificial intelligence solutions to particular problems.
We're developing generic solutions where you don't have to explain the problem to it. You just have to give it a few examples and it goes on from there. In some ways, sort of like a child growing growing up. So I don't know where all this is going
to lead, but I think that in the same way that we think of the beginning of the atomic age or a beginning of the era of electricity, that these years are going to be remembered for the very different kinds of capacities that mankind developed to supplement its own efforts. Some of those lined up being benign. Some of those, I suspect, will end up being malign. But I think it is going to be an important part of the story of our times. And there you have it. Our special contributor, Larry Summers on Wall Street telling us what he thinks the major stories of 2023 will be.
And trust us. We will check back in on those stories throughout the course and here. Thank you so much, Larry. Great to have you with us. And that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2023-01-11 23:33
