Wall Street Week - Full Show 02/18/2022
Geopolitics to the forefront even as the economy stays hot. This is Bloomberg Wall Street week. I'm David Westin this week special contributor Larry Summers of Harvard on the proposed gas tax holiday. I think we are plumbing the depths of new bad ideas and Mickey Drexler on the state of the retail industry and where it is headed right now. It's being done by single women. It was a week when we woke up every morning and looked to see whether Europe was still intact with concerns about a possible Russian invasion of Ukraine. Despite President Putin's protests to the contrary even as he said he was running out of patience
and appearing with the German chancellor Schultz suggesting bombing might be necessary to stop what he called a genocide. Allow me to add that in our assessment what is happening now in the Donbass constitutes genocide. But while we are all focused on Ukraine we had more indications of just how hot the US economy really is with retail sales numbers for January surprisingly high retail sales a strong advance in January a big rebound from what we saw in the month of December. And corporate earnings continue to pour in. With mixed results from Paramount CEO Bob Beckett falling short of expectations because of his streaming investments we would have peak streaming losses in terms of investment in 2023 and then they would improve from there which would return the company to total earnings growth in 24 and beyond to blow out earnings from the likes of Wal-Mart and Cisco both increasing share buybacks. But in the end the geopolitics and continued concern about the Fed won out over any positive news of the week as the S&P 500 was down for a second week in a row this time by one point six percent putting it off by 9 percent for the year to date. The Nasdaq fell by one point seventy six percent on the week while Bonds fluctuated but ended
up not far from where they started. With the yield on the 10 year continue to hover just over one point nine percent and oil actually was down. Despite all the anxiety over Ukraine ending up at about ninety three dollars a barrel for Brent. To put this all in perspective we welcome now Katherine Keating. She's CEO of Being Y Mellon Wealth Management. And Joanne Feeney Advisors Capital Management portfolio manager. Thank you both for being here. Welcome back to Wall Street. Joanne let me start with you
on this geopolitics as you talk to your clients. How concerned are they about this. What do you tell them. You know in the last week I've actually feel a number of calls with clients and some of them asking you know why aren't more people talking about this on the investment front. So they're clearly concerned about the tensions in Ukraine. What we seem to be escalating in addition to the concerns we've been talking about for months like inflation and interest rates and slowing economic growth. So you know they want to know if they need to do anything different in their portfolios. Do we need to change things for them or are they well positioned. And the answer that comes down to really you know what's their timeframe. We've seen
the world confront pandemics worse recessions. The stock market suffers for a while but eventually recovers. So the time horizon for the investor really matters here as well their risk tolerance for suffering through the volatility. So there are solutions out there. The solution really depends on the on the individual investor.
Yeah I agree with that Joanne and in fact when we think about geopolitical events believe it or not they tend to have very short lived impact on the markets. What really matters is the larger ecosystem in which they're happening. So if we think about 9/11 terrible terrible tragedy. Markets closed for four days. When they reopened the following week you had a very significant sell off. But within two months that had actually been recovered. What was more important was the was the ecosystem that that happened. And we were already in a bear market. From the tech bubble bursting and that market continued for a couple of years. I think the other thing that is important when you're thinking about war is wars take time. Right. We've learned that as a country they take time that they can really impact your fiscal budget for a very long time. Well part of the
ecosystem though Katherine is just volatility. We already had volatility because the uncertainty about the Fed triggered by inflation other factors. So putting more volatility into that more uncertainty what does that do to you as an investor. How do you how do you deal with that kind of volatility going forward. Catherine so Joanne said it right. Time horizon matters. And for most investors their time horizon is actually quite long. They're saving for their retirement or maybe even their children and grandchildren. And so you can withstand volatility if your time horizon is long. The other thing I would say about
volatility is you know when we come out of a recession and a bear market as we did over the last two years those early months and years. Everything goes in the same direction. It goes up. You don't have the normal volatility and we haven't. But in fact when you look at the S&P 500 the average intra year correction over time is 14 percent. And yet 70 percent of the time the market ends up by the end of the year. This is normal volatility. It just may not feel that way right now. Joanne actually Kazim just talked about a bear market. Is it possible we are entering into a bear market right now.
Well in some areas of the stock market we're already in a bear market. Look at infotech. Look at other areas of growth some areas of consumer discretionary communication services. A lot of these stocks have come down you know well more than 10 percent and they're multiples have come down accordingly. And that started before really the Ukraine tensions really heated up. And it was primarily triggered by the Fed signaling that they were going to be raising rates and when rates actually rose. But you know back to Catherine's point on on the environment in which this higher risk has now arrived we are the U.S. economy and the global economy still in the midst of a recovery from the worst of the pandemic. So we have a backdrop of production increasing
whether it's in industrials consumer products housing market. And these are all trends that are likely to continue despite what is happening in the Ukraine because you know there is more and more production coming online. Cars for example have really been held back. And that should ease in the back half of the year. For example as semiconductor production a new factories come online. Starting in the middle of this year. So the economic environment is actually fairly positive. We worry though right about the Ukraine situation and how the sanctions that may end up being triggered if this really goes forward will affect particularly the European economy. We would agree with that and we remind ourselves about the
business cycle that we were in when this global pandemic hit we were actually in an expansionary cycle. It was the longest one on record. Companies were strong consumers were strong. We got interrupted with this terrible terrible health crisis. But coming out of it is Joanne says the global economy is growing. It may not be growing as fast this year as it was last year but it's going to still be nice growth. We may expect 4 percent or so in the US this year. Kessler I'm curious going back in
history sanctions we just heard Joanne refer to sanctions we had back and forth and up and down all week long. And at the very end of the week President Biden gave out said that he believes because based on intelligence that President Putin has actually decided to invade. Let's assume that's right. Let's assume the right and sanctions do come in the past. What is that done to an economy into businesses. How do you take the nuke out. So for the global financial system the impact of sanctions really depends on the size of the countries in their their size in the global economy. And in this case Russia and Ukraine are actually relatively small in the scale of the global economy. That doesn't mean however that sanctions on Russia wouldn't have a
couldn't have a very severe impact on Russia and its citizens and economy. And also right the impact even though Europe is voluntarily going to impose these sanctions. It's going to hurt the European economies. And I think that's probably the bigger risk. And you know that's why you maybe want to be a little bit careful about some European exposure at this point. Does it affect the length that you want to go. Do you want it to affect basically how long you want to invest for liquidity. Do you need to be pretty liquid. Joanne. Yeah. You know really depends on on the investor
if they need liquidity in the relatively short term then they probably want to be there already. Right. So you know what. I'm talking to a client who's in our balance strategy and they're 70 30 and they know they're going to have some expenses coming up. And they were just planning on selling stocks six months from now. They should probably be a little bit more conservative. And you know that fixed income even though we're not expecting a lot into the fixed income world. If you hand select bonds and preferreds you can protect against some of the risks from rising rates. Lock in some income and still be liquid. And you know so
if the time horizon dictates that you're going to need liquidity you ought to be positioned for that now. CASSIDY you have clients go into cash or cash equivalents. Not really. Not really. You know when you think about liquidity needs for people April 15th is the liquidity need right. So we see people planning for that need every single year and we see it now. But we don't see clients go into cash because if you're a long term investor you need to stay invested. These you know the market
the market path is just gently sloping upwards over time. Despite these despite these volatile periods in between. Yeah market time is always difficult when there's a war involved potentially. Thank you so much Kathryn Keating and Joanne Fisher. They're going to be staying with us as we turn to the question of what we should expect from the rest of the year. That's coming up next on Wall Street week on Bloomberg.
This is Wall Street week I'm David Westin and we are back with Joanne Feeney of Advisors Capital Management and Katherine Keating of the NY Mellon Wealth Management Council. We come to you. We had this discussion good discussion good as to what the rest the year where the S&P 500 be. Forget that. What about inflation. Because that's whatever he's talking about. Where do you see inflation now and where's it go in the rest of the year do you think. It is the most important question actually and it's the first one on everybody's minds. And I think to really understand that we have to step back and reflect for a moment on what we've been through. As I said we were in a healthy business cycle that got interrupted by a health recession not a normal recession a health recession. People were getting sick from this terrible virus that made the
economy sick. And then we got an unusual kind of medicine right. We got this six trillion dollars in fiscal stimulus in this country which really changed some things in the recession. The first thing that changed is incomes didn't go down. That's very unusual. Incomes didn't go down. Spending didn't go down. That's very
unusual. Normally in a pandemic we tighten our belts. What happened was people kept spending but they shifted their spending to goods. Right. We weren't buying services. We weren't going on vacation but we were buying goods. All the things we needed to work at home the laptops and computers and monitors and all of those things and all the things we needed to do like everything in our lives at home. And where I think we're starting to get past some of that we see some of the you know
it's sort of economics one to one right. You have all of this demand for goods and you don't have the supply to get them. We see that starting to correct a little bit. The fourth quarter was really a story about restocking inventories. And so I think the question about inflation is does the torrid pace of consumers buying goods start to come off of its peak. And do we see more normal behavior which is shifting to services. Joanne you had a question. Tumor. That's exactly right. I'll put on my economists out here for a second. But yeah when you have
this demand so high and supply not able to catch up and interest rates not rising for various reasons. The only place the pressure valve can you know can be turned is is on the inflation front. And we should. Towards the middle of this year start to lap some of the biggest price increases. So with fiscal spending less than last year and with a shift back over to services spending we're already seeing that in the mobility data more travel or hotel bookings more air BNP bookings coming. That should take a lot of the pressure off inflation particularly in the beginning of the year plus more supply. As I mentioned before more chips from the semiconductor companies
mean more cars can be produced and everything else. You know on the other hand that we have to worry a little bit about the labor situation because the pandemic did trigger an awful lot of people to just leave the workforce particularly the baby boomer generation and they're not likely to come back. So we have a shortage of labor. We're going to have higher wages. That's going to continue to keep the upward pressure on prices. But with the Fed's actions with more supply coming on with the shift over to services spending you know it's likely that the torrid pace of inflation does ease a little bit through the course of this year but it's going to take some time. Probably inflation gets worse as the housing price increases start to filter into the measured inflation numbers as they've begun to do. It's probably going to get a little bit worse before it actually gets better. And we would agree with that. And you know the thing about goods
inflation is that it tends not to be very high. Right. There's so much competition so many brands out there competing for consumer dollars at sticky inflation is what we really worry about. So we worry about you know rents and wages in particular. And if you asked us about the one thing we're most focused on it is that increasing labor costs because it's running at about 4 percent a year right now. And what we need is for the Fed to do what it will do which is raise rates a bit. We need employers to do what they want to do which is manage their costs and grow their profits. And we need employees to come back to the
workforce. And there are things that we're missing right. We didn't have the normal mobility in immigration over the last couple of years which is which is very important. We didn't have mobility of people be able to move from one place to another to take a job. I think the flexibility that a lot of businesses are adopting are going to invite will invite people back to the workforce. I mean productivity which actually we've been living a productivity boom that's how you recover corporate earnings and recover all of the GDP that was lost without with fewer workers. We still have three million fewer workers. Joanne you
talk about pressure on prices would put pressure on portfolio managers because in a world where you've got two or three percent inflation a 5 percent return every year on your portfolio looks pretty good in a world of 7 percent inflation. It doesn't look so good. Do you have investors basically saying wait a second how can I keep up with this inflation. Yeah that's obviously more of a problem for those heavily exposed to fixed income. That's where there's going to be a real challenge in keeping up. But you know when you think about inflation and stock prices you recognize that the source of inflation is coming from companies raising prices. They raise prices. That means their revenue goes up. That means their earnings go up. And you know commensurately stock prices tend to follow that. So there's a lot of protection in stock prices for inflation. Plus
you can always direct your portfolio more towards that sort of companies that do better when inflation and interest rates are higher. That could be banks. That could be real estate companies that could be energy companies. So there are ways to build protection. And we've been doing that for clients for for actually quite a while now. So which stocks do you like right now. Well depends on the sort of client. So for that sort of more
conservative client we're looking for stocks that don't deliver some dividend yield for example but also can appreciate. So in the tech world a company like Qualcomm or Cisco offer a safer play. Philip Morris has a very high dividend yield in the energy world. We like Chevron. We like Kinder Morgan. You know the energy demand is going to continue to be strong because we do think the recovery continues. Plus by the way that has a little bit of insurance against this is Ukraine Russia situation. So Catherine take a look at the rest of the year as you look out. We can't know for sure. What do you anticipate for the rest of 2022. It's been a rough start to the year. Things first. I think I would say that we anticipate it coming back to a new normal.
And what do I mean by that. I mean that we will still have economic growth but it will be lower than it was right. Maybe 4 percent this year. In the US we continue to think that stocks can do well but it will be lower than they were doing the last three years actually when the S&P 500 almost doubled. We think that we will have inflation but we think we will transition to a lower inflation rate. And in fact the end point of inflation really matters because if you if you have inflation between 3 and 4 percent you know over time markets can do very well. That's what that's what it's been for most of our careers. So the end point for inflation really matters. Joanne we've seen maybe a little bloom go off the rose and
growth and go back into value do you anticipate for that for the rest of the year. Yeah. No. You know I think part of the reason why we've had this what we're calling the great reallocation right. Has been because of the elevated uncertainty the anticipation of higher rates. We saw folks get out of growth names into safer names into real estate banks et cetera energy. And the idea there was that hey economies are recovering and the rising tide lifts all boats. So why on risky things let's own some safe stuff. But as economic growth does slow down as is natural when you're coming
off a very large recovery it's going to peter out over time. I think investors are going to recognize that they can no longer get as much appreciation out of those traditional economic oriented companies. And if they want to build appreciation into their portfolios for the longer term they're going to have to go back to growth stocks. And if you look at some of the valuations they've really come down. If you look at the broader infotech sector for example the valuations have come down 16 to 18 percent just since the beginning of the year. And that reflects that reallocation. So we expect a reallocation back towards the
growth names as some of these uncertainties recede. And you don't know when that's going to happen. But we do see investors really needing to look for some sources of appreciation for the longer term. And we think that's a lot of the higher quality growth names. And so what we've done is to raise the quality a little bit in some of the growth names that we own. For example know we'll stay with a Palo Alto in the cybersecurity space which by the way is a nice defensive position in case of war because we do expect cyber attacks to coincide with this potential military event instead of say an octo which is in the same space but has some management questions along with it. So we do expect to move towards quality and a move towards growth
as we go through the year. So one last would you Catherine maybe an unfair one. Are you always like to be diversified. That's the way you hedge. Yeah. Is there any reason to be a bonds right now given rising rates. So the answer is yes. So year to date you know equity markets are down anywhere from seven to twelve percent. So if you had a fully equity portfolio you would be down someplace in that range. You know adding bonds to that portfolio probably took your return to you know down 7 percent
or so today. So you underweight but you don't eliminate bonds because they do have a role in the portfolio. And your investors are patient are they. They are patient whether they're investing for the long term. That's the kind of investor you want. Okay. Thank you so very much to Katherine Keating CEO of Being Y. Mellon Wealth Management and Joanne Feeney. She's portfolio manager at Advisors Capital Management. Thank you so much for being with Wall Street Week today.
Coming up we look at the week ahead on markets around the world. That's next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. It's time now to take a look at what's coming up in the days ahead on global Wall Street starting with Juliette Saly in Singapore. Thanks David. A busy week of central bank action in the region. The Reserve Bank of New Zealand is likely to hike rates further while the Bank of Korea is expected to hold fire after January's hike. And Chinese banks will probably quote loan prime rates on par with the levels at January's fixing. The data includes Thailand's fourth quarter GDP and inflation friends from Singapore and Malaysia. Elsewhere Hong Kong's financial
secretary delivers the annual budget this week with the financial hub in a perilous position as the government remains steadfast in its dynamic zero Covid strategy. Meanwhile Australia reopens its borders to vaccinated visa holders for the first time in two years. And on that note Qantas and Singapore Airlines among the companies delivering earnings this week along with mining giant Rio Tinto. Now over to Anna Edwards in London Anna. Thanks Juliette. The geopolitical situation around Ukraine continues to dominate the agenda for investors. We'll hear from European foreign ministers when they meet in Brussels on Monday after the Munich Security Conference wraps up. Elsewhere we get more earnings reports from major European corporates including Barclays and still answers and some important moments for monetary and fiscal policy. We'll hear testimony from the Bank of England Governor Andrew Bailey on Wednesday. And European
finance ministers meet in Paris on Friday. Now over to Romaine Bostick in New York. Thanks Anna. A shortened week ahead for financial markets in the U.S. because of the President's Day holiday on Monday when folks return Tuesday. They'll be watching for market manufacturing PMI ISE and the Conference Board's consumer confidence data for a read on economic momentum. Later in the week we'll get new home sales for January. Durable goods orders for the same month. And an update on the Fed's favorite measure of inflation. The Personal Consumption Expenditures Price Index which the Fed officially targets as it aims for that 2 percent average annual inflation. That index has jumped five percent year over year for
three consecutive months. And economists expect the latest data for January to show a 6 percent rise. It will likely add fuel to the debate on whether the Fed should be more aggressive in tightening monetary policy. There are earnings scheduled for the week including retailers Macy's TJX Home Depot and Lowe's as well as e-commerce platforms eBay and Etsy. Also look for earnings from Dish Coinbase Caesar's Madonna and Monster Beverage. David. Thanks to Juliette Saly Anna Edwards and Romaine Bostick. Coming up retail sales are back up but how long will it last.
And what's the next new thing in retail. We ask retail guru Mickey Drexler. I think Sale is the enemy of any retailer. This is Wall Street week on Bloomberg. Everything seems like it's going up. I still worry about prices increasing consumer spending. When it comes to the U.S. economy it's one of the main indicators of how we're doing. So after retail sales trailed off at the end of last year we breathed a
collective sigh of relief when they bounced back strongly up three point five percent in January. Although some of that was really from inflation on a nominal basis. I say that very deliberately of course because we saw also inflation spike in the month of January. So we're not used to seeing these inflation and additional juiced sales in retail sales and the
rest of 2022 may be a challenging one for retailers as money from that child tax credit expires. We are concerned that the expiration of the child tax credit leaves millions of families without that added source of income that they really need to be able to support their families. Of course it's not only about how much we shop but also about how we shop with brick and mortar stores taking the biggest hit and commercial real estate from the pandemic. I think there will be some versions where possible away from uses that are not by design or retail being the top one. Even as online sales grew dramatically. And when it comes to retail there's really only one person we want to talk to and that is Mickey Drexler. He founded made well an old navy. He ran the Gap and J. Crew and built them into behemoths in the retail industry. And we're delighted to have
him on Wall Street week now. Mickey thank you so much for joining us. Let's start with this pandemic. How did it change the retail business. Well I think it changed pretty dramatically. I also think the changes were passed to way too many stores in America which is no secret over story certainly helped the online business Shery Ahn. And I think it changed it also. And I don't think it's the pandemic that there's so many companies now taking a pay a lot of attention to statistics. I
think more than more than merchandise. Lastly I find it difficult that many companies in my industry at least for them are not going into an office every day when it's critically important just to see and touch merchandise. But I think it's changed it that way. I think clearly changed the way people dressed for the last year or two. And this changes dramatic changes always going on for a year. We've been up against what I called a snow storm easy year twenty one up against really bad numbers. And I felt that starting this month February that it would get tougher again because the numbers aren't easy. People had pretty good years actually surprisingly good but they really weren't. That's surprising if you figure what they were up against. The money stopped flowing through the government
more difficult figures. And at the end of the day for me and always has been I think the merchandise matters the most. This is what I hear because I'm a small part of it. What I hear is quite challenging and difficult in February and perhaps part in January. Supply chain issues price of cotton has gone up. I think about 50 percent freight. So it's caused a lot of inflation in our our business.
And I think obviously in the retail business. So it's not easier. I think we're headed for much more difficult times. But by nature I'm always pessimistic. So Mickey let me pick up on one thing you've been talking about and that is seeing and feeling the merchandise. I know you. I know the kind of retail you are. You would walk around your stores and get a real sense of the merchandise and the interaction with people. How does that survive in an online A.I. world where artificial intelligence they're big data things like that. Or is that a thing of the past. If it is the companies I think look it's it's about product. It's the only thing I know. Our business is extremely solemn
because we're small. But I stick with the merchants every day. I sit with design not because I'm the one with all the answers because I've been there and done it. I've seen the movie a lot and I've made every mistake in the fall. Very young people kind of think when I make a mistake they like to repeat that I made a mistake. I laugh. But in retail predicting what's going to sell is a really important part of it. The other thing is knowing what's kind of a day in day out. This is year to year but I
think you can't be there in my opinion without being and watching the goods. And there's a spontaneity of creativity that happens. I met a woman the other day who works in a company 50 people know office at all. And I said how could you run a retail business where you're not looking and communicating. It's not just merchandise. I think I don't know the finance business or your world but I know in my world that creativity flows regularly. You can get an idea anywhere anyplace any time based on what excites you stimulates you or gives you a bigger
imagination of what it's making. How do you fit that with the closing of so many brick and mortar stores. Research certainly around New York around the country. It's really fall off. Is that going to come back. Can you have that sort of feel that touch and feel without brick and mortar. You know it's a good question. I think you can. In the industry if in fact the merchandise you know if you order online know paper towels George anything that simple easy and consistent like the jacket I'm wearing we don't not sell it. We're going you know we relaunched the company which Alex started about
seven or eight years ago was doing well. But I thought Alex and I and a new designer who I worked for 50 years could do more. But we identified things like this that we don't intend to put on. Well first we never run a sale. I think sale is the enemy of any retailer. I learned that when Kush falls I think most of your viewers know what it is. On the same street in San Francisco where I lived for a while run and gap it was to one store a dollar store next door two dollars. And it told me never to shop in the store next door. And right now it's bingo. It's price bingo in America. When will it be on sale. And there's
this thing called online that helps all of us identify best prices. We made a decision early on that no sale takes away the integrity of pricing and it's a moving target. So with us it's never on sale. It probably cost us gross margin profit in the interim. But that's the way I think is fair. Right. And we do that. So you're not seeing yourself. Oh I missed it by a little. I miss friends and family. I miss the Thanksgiving Black Friday. We don't even sell on Black Friday. Maybe it's a mistake. Long
term will tell. But people are shopping for merchandise first. Especially in our guests where a fashion company we appeal to a relatively affluent clients which was there a strategy. But I thought we still good goods good value new goods. And I don't want the old goods but classics that you know personally is short. This is a date on it. So I know it's 14 years so I could replace it. But white jackets three years old and jeans of course like 20 year old it's very easy to get up. For me personally and this is not just me it's never for me personally. So what we see as America and as a business we want to be in fashion is very difficult. But they're always changing changing
styles changing. So Mickey I mean you are really part salons. The person who understands the product feels the product can anticipate the need. A lot of the people watching us on Wall Street week are investors. Give them some investment ISE given what you know about retail. Are there good investments in retail right now. And if so where are they. Do you think. Well I don't know much about that. I don't really pay attention. I was on the board of Ward B nine years and that was for me a business that was tiny and small. When I was fair initially that I felt had a great opportunity for me invest in companies that frankly in the fashion business. Once they hit the wall I've been there many times. I made many mistakes but when you get big enough to hit a
wall it's to me. Time to sell when you're in again. I don't invest on my own. I could say I usually do very well when I'm on the board of a company. I get a little lucky. Stood like Apple for Warby because the companies take care of themselves. I try to do the best I can do but if I were a retail investor
I always used to make mistakes early on. I invest in companies that I felt if there was a good CEO or if I could write myself for whatever then I like the company. But finding people who can run lead and have vision for company is not easy. Certainly in my industry I like small. I like different. I like new. I like unique to me. Small is the new big which is how I call us. We're
a small company. It's much easier to grow like Wal-Mart did it at some point two dollars. The first states buying us. It's much easier to grow small if you have the right goods the right management the right operations and the right creativity. It's really great to have you with us Mickey but as I say the one man we always want to hear from on retail that is Mickey Drexler. Coming up we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street week. I'm David Westin and we're joined once again by our very special contributor Larry Summers of Harvard.
Larry one of the things we've talked about is inflation but very specifically are the supply chain problems we're all seeing. Are they a cause of the effect. A friend of yours mine and the program Steve Rattner had a column New York Times. They basically saying supply chain is a symptom. It's not the disease. What did you make of it. I think Steve broadly right in distilling what serious economists believe first of all the most of the goods where there's a bottleneck are having abnormally large quantity not abnormally small quantity. So obviously if you have a big increase in demand you're going to encounter capacity limits. Second what the supply chain people ignore is that if more money is being spent for example on used cars. Yes
that's associated with higher used car prices but it means less money is being spent on other things. And so it means less inflation in those sectors. So while it's a widespread view I think the interpretation of inflation largely around supply chains is mostly a confusion and mostly an invasion of what I predicted a year ago that if we overflowed the bathtub we're going to get an overflow as the economy overheated as Hillary. One of the things that we're hearing on Capitol Hill this week is maybe it's not just all the Fed that can address the question of inflation. Maybe we should leave will alleviate some of the pressure on consumers by having a hand on the gas tax the federal gas tax. What do you think. Things like that of limiting the cost to consumers. I think we are plumbing the depths of new bad ideas with that one. First of all gas prices are going to
fluctuate all over the place. Nobody may see anything very substantial out of it. Second of all lower prices for gasoline will tend to be offset by higher prices for other things as consumers have higher incomes that are able to shift spending to other spheres. Third it runs exactly in the opposite direction of all the things we're trying to do in the environmental area. And fourth you may get some if you did get some little bit of deflationary shock when you put the gas tax holiday into place you're going to get some offsetting inflationary shock when you remove the gas tax. It goes in exactly the opposite direction of
paying for more infrastructure which everybody thinks we need. Look I think there needs to be a lesson learned about gimmicks that poll. Well. They're like sugar highs. They make you feel good but they really often don't redound to anybody's anybody's substantial political benefit. What's remarkable is that all those much discussed tax credits the two thousand dollar checks that we're getting mailed to everybody did substantial economic damage and nobody remembers them. So they didn't even deliver the political benefit. So I hope we can step back and think about doing the right thing and move a bit away from trendy
gimmicks plumb those deaths just more because one of the other proposals is let's limit the prices of things such as for example insulin. Are we in a place where the inflation is so bad. We may actually be talking about price controls. Price controls are a ridiculous idea. Price controls are a prescription for a shortage. They're a prescription for the non availability of goods. Richard Nixon tried that experiment. It was a disaster. It was a disaster then. And it would be an even
worse disaster now. Now look I think there is a strong case for the government which is the largest purchaser of pharmaceuticals in the world to use its purchasing power to get a better deal for taxpayers and to get a better deal for consumers. But using your purchasing power when you're a large purchaser is a very different thing than trying to make rules about what price every business in the country should charge. So yes I'm I'm actually for activism on pharmaceutical prices but I am not in and it has to be sensible activism that preserves incentives. But across the board. Price. Price controls. That's a grave error. As you have pointed out more than once we have a mismatch between supply and demand not just in goods but also in labor right now. You've just co-authored a piece that I saw this week really analyzing what the cause of that work is. It is really again a
supply problem or demand problem. What did you conclude. I think it's more of a demand problem. Look. David we have by a wide margin the highest ratio of vacancies. Jobs need to be filled to unemployed people that we've ever had. It can't be surprising in the face of that that we're seeing very large nominal wage increases. And if you talk to businesses they almost all feel that they can pass those wages on in the form of higher prices. And so that is the root of our inflation problem. Many people say that it's not entrenched. There's no sign of a wage price spiral. Not yet. I don't know what would be a sign of an
incipient wage price spiral if an employment cost index approaching 6 percent and CPI inflation rate in excess of 7 percent wasn't signs of a possible incipient wage price spiral. So I think we've made a substantial problem of for ourselves and I think if we don't recognize that it's at root a demand problem and we don't adjust monetary policy in a substantial way it's only going to become a more serious problem. Larry going international here for a moment and we now are going to have the Olympics conclude the Winter Olympics over Beijing this coming weekend. You were on a panel. I saw Institute of Politics up at Harvard talking about China and how China is positioned right now globally suggesting maybe it's not quite as powerful as some some of us sometimes think. I think that's right. I think we in the United States need to remember how wrong we were in our collective view of Russia in 1960 and how wrong we were in our collective view of Japan in the early 1990s and consider the possibility that we may be underestimating China's challenges now. And we need to be particularly careful about being overly provocative to them. Our provocations with respect to Russia after 1960 contributed.
Many historians believe to the Cuban Missile Crisis. And so yes we need to stand up for our interests Visa v China. What I think we need to be quite careful to avoid a kind of strategic narcissism and truculence. I in the approach that we take which in the news this week as you know there was occupied with the crisis over Ukraine between Russia on the one hand and the United States and NATO allies on the other. I noticed for example the president she appeared with President Putin to begin in the Olympics. What did you make of this geopolitical crisis and how it fits into the world more broadly. And how long lasting do you think the effects might be. Let me say David that I'm not an expert on everything geopolitical but it seems to me that as one who's been critical in a number of areas this has been handled extremely well by the U.S. administration. That doesn't mean the ultimate
outcome is going to be successful and that an invasion is going to be forestalled. But I think they've played the hand that they had in a very skillful in a very skillful way. I think this is a big deal not because Ukraine is economically powerful. It isn't. Not even because Russia is economically powerful. It's not that powerful. But I think the question of whether there's some element of rule of international law and countries can't invade other countries with impunity is an issue that is very much here. And I think if this degrades that will have costs for everybody sense of certainty which among other things will
affect the level of market valuations. Larry thank you so very much. That was very helpful. That's Larry Summers of Harvard our very special contributor here on Wall Street Week. Coming up from marble halls and teller windows to 80 MS to apps. So what's next for banking. Why the metaverse of course. That's next on Wall Street week on Bloomberg. Finally one more thought banking in the metaverse having troubles in the world as we know it worried about higher rates or a possible recession or tanks coming across the Ukraine border. Well maybe tech has the answer for you and for all of us for that matter. At this point we've all heard about the metaverse the metaverse the metaverse the metaverse that term. Take it from a sci fi book from 30 years ago and expropriated by none other than Mark Zuckerberg who used it to renamed Facebook Metta. And this is what he had to say about it when he made that
announcement. It is time for us to adopt a new company brand to encompass everything that we do. Our company is now met this week. Mr Zuckerberg took it a step further in a memo to his staff updating the company's values and what he called its cultural operating system summing it up as focused on meta meta mates and me.
So Facebook shares are now measurements which reminds me at least of when Disney bought ABC and the company started addressing people like Peter Jennings and Ted Koppel as cast mates in employee emails. Well let's hope that people at Metta embrace their new title with more enthusiasm than some of the folks at ABC News did back in the day. But it's not just met at Nay Facebook that's embracing the metaverse. When Disney CEO Bob Chappell talked about his earnings just last week he called the metaverse a quote third dimension of storytelling. I think it's a great opportunity for us. I think it's the next great horizon for Disney. I think it's the next great horizon in entertainment. And don't forget toys in this metaverse. The CEO
of Mattel certainly hasn't the metaverse. And if these and other digital opportunities digital experiences would give us an opportunity to engage with consumers and create another opportunity for us to commercialize our brands and franchises in other ways to be sure not everyone is sure what exactly the metaverse is or whether it truly will change the world. Here's Eileen Lee of Cowboy Ventures. I met verse. It's just like what does that mean really. It's if you mean the metaverse like are we all gonna be wearing the IBEX headsets and staying in our houses all the time.
I think that's you know if we're lucky enough to emerge from our teams after this pandemic I think at least for the next three to five years people are going to be more excited to engage in real life than ever before. But if we needed final confirmation that this metaverse thing is going mainstream it came this week from the big banks with JP Morgan leading the way the way that is into Onyx. That's its name for its Metaverse Lounge complete of course with a JPEG image of CEO Jamie Diamond and accompanied by an 18 page paper on why the metaverse is a 1 trillion dollar. Yes I said one trillion dollar opportunity. Now if you want to get into the JP Morgan Metal Lounge all you need to do is go to the central lands. Met a Jew cue mall. Put that in your G.P.S. and see what happens. That does it for this episode of Wall Street Week. I'm David
Westin and this is Bloomberg. See you next week.
2022-02-25 05:44
