Wall Street Week - Full Show 04/15/2022
Continued war in Ukraine senseless violence in a subway in Brooklyn. The tax man cometh. Inflation really is as bad as we feared. And oh yes. Elon Musk has decided he wants to buy all of Twitter. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on how bad inflation is going to get. We're probably peaking for the next several months whether we're peaking indefinitely. I'm not certain that that's going to happen. And Grover Norquist on whether there's a right way to get the taxes we need to fund the government that we want. There's a certain point at which you can't get any more
blood out of a turnip. We're probably about that right now. It was a shortened trading week in the United States because the Good Friday holiday which postponed the day of tax reckoning until April 18. But holidays and taxes did not slow down. Preparations for a showdown in eastern Ukraine that retired Brigadier General Mark Kimmitt says could be decisive. I see this third face concentrating their forces in the dawn boss potentially big game change. But I also think there's some opportunities for the Ukrainians in this space as well. And sadly there was no stopping a man from detonating smoke bombs and opening fire on a crowded subway train in Brooklyn shooting 10 people. A man who by Wednesday New York's police commissioner and mayor were confident they had in custody. We were able to
shrink his world quickly. There was nowhere left for him to run. So New Yorkers we got the much anticipated inflation numbers came in every bit as high as anticipated. In March the CPI went up one point two percent. That's what was forecast. It was up eight tenths of a percent. The month before and on a year over year basis we're up eight point five percent. Those some like Jim Paulsen the Blues Hold expressed hope that this might just be the peak. I still think though this is a is likely to roll over in the second half of this year. And we might be seeing this morning the peak and CPI
inflation rate. Five of the big banks reported their second quarter earnings this week. And with all but Wells Fargo exceeding expectations. Trading coming in particularly strong at Goldman Sachs and Morgan Stanley. But overall overall the markets were in a selling mood for much of the week. With stocks down the S&P by 2.5 percent and the NASDAQ by almost 4 percent driven once again by the rise in bond yields. And the 10 year Treasury added almost 13 basis points on Thursday to end the trading week just over two point eight percent. Take us through what we saw in
this shortened trading week. We welcome now Gillian Tett Financial Times chair of the editorial board and editor at large US and Peter Krauss Aperture Investors chairman and CEO. So Peter let me start with you. What were the markets trying to teach us this week and didn't have to go beyond bonds or was it really all about bonds in the end. I think the market is right now is all about what is the growth rate going forward and where is inflation going to peak. And that is what's driving the yield curve. And it's also driving what will ultimately be fed behavior in terms of interest rate
hikes. And in terms of the cessation of bond purchases and the reduction of the balance sheet those two things together increasing interest rates and stopping purchasing bonds. That's what's causing the interest rate curve actually steeping. And you saw consumer conditions come out today. University of Michigan current conditions Michigan expectations and expectations for inflation were actually more optimistic than what than what was expected. So I think we probably have and I'm a little bit of a of a contrarian here. We probably have not a recession. We probably have a slowdown in growth but a persistent expansion. But that has got to be accompanied by significant increases in interest rates and a reduction in QE.
And that is what we expect. So Gillian can you have that significant increase in rates and the reduction about it and not have a recession. Because a lot of people are concerned about that. Well I think there is certainly a very significant risk that we're heading towards stagflation which is something that frankly most investors don't actually know how to deal with because we've not seen it since the 1970s. And there aren't that many people around it actually traded actively who are still on trading desks. You know I slightly disagree Peter. I think the Fed has got way behind the curve. And I think that this is really the week when the markets began to wake up to that and really understand that there are is going to be a series of potentially quite dramatic interest rate rises this year. We cannot guarantee that that's
going to not put the economy into recession. We've had people like Jim Bullets come out and say this and this week that it would be a complete fantasy to think that you can actually take away this level inflation and bring it back down just by tinkering with a few interest rate rises from the Fed really is signaling some quite serious interest rate rises coming down the track. And I think the thing that's really alarming for people right now is it although it would be convenient to blame all of these price hikes on Vladimir Putin and the energy complex. If you talk to people in business today who are dealing with supply chains with warehouses with trying to hire people there is an absolutely universal message coming across that wages are going up conditions are tight and inflation is anything but transitory. To use that phrase it was tossed around last year. And you can't just blame that on the Russian invasion. Well Gillian's right. But the the controversy in the data that
actually Julian just had happily ran through is that if wages are going up and labor conditions are tight and unemployment is dropping that is not a condition for recession. A condition for the recession is wages are flat and going down. You're losing jobs. People are then therefore not going to spend. And that's what causes a recession. So we don't have a recession. We have growth now whether we have stagflation. It's an interesting question. We haven't seen stagflation thankfully since the 70s
and the 80s. And that was accompanied by a significant oil shock much much greater than we have today. So I'm a I'm a bit dubious about stagflation. I do think we're going to see a significant rise in interest rates. But let's just examine that for a second. If the two to 10 year was 100 basis points in difference which is actually not not not not abnormal but quite normal you would have a 10 year rate of three point four percent which would be. 60 basis points higher than where it is today a substantial rise. That wouldn't be unusual. So I think that what's happening is we're getting a normalization of interest rates and the market has certainly reacted that it hasn't seen it for a long time.
But I don't think that that's the cause for a disaster here. I think it's a cause for reallocating capital and determining what stocks are going to do well in that kind of environment. Bonds are absolutely going to get crushed from a duration point of view and spreads are going to increase. But people are still financing in the market and acquisitions are not happening. And you said they're going to buy Twitter. So this is not a recession. Well you know I would actually agree with you in some ways. I it was certainly not in a recession yet but I think the risks are
rising. I think the other thing that is very striking is that we've been living in the last year or two through a period of extraordinary liquidity. You know the Fed's balance sheet doubled doubled during the Covid-19 lockdowns. We've had the loosest financial conditions index and the Goldman Sachs series since records began. And we've been drowning in liquidity. And the problem is that in a sense we've been drowning liquidity for such a long time that I think many investors and asset managers have almost forgotten what it's like to have anything like tightening liquidity conditions. Now
to mind my one was interesting. Developments of the week was actually a survey by Merrill Lynch Bank of America Merrill Lynch looking at fund managers which they do on a monthly basis. And that produced the gloomiest economic outlook seen since the series began about a quarter century ago. And maybe you're right that doesn't necessarily equate to recession but it does equate to a lot of uncertainty nervousness and jitters that I think could certainly cause real strains on the market particularly when we actually get that tightening. And we've not actually seen the Fed tightening yet. But if we actually have it coming and hitting investors I do think his potential was very uneasy. Yeah no I agree actually. Julian you and I agree on higher percent on this point because what I think is going to happen in the market is when the Fed starts to tighten and industriously actually at the Fed is going to do and they actually continue to see numbers as we have been seeing drop in and unemployment continued increase in wages. And and they see actually earnings come out for the first quarter that are not a disaster. I think
then the market will actually find its legs. But until then we're seeing all this volatility. Markets decline substantially. It's resetting its valuations. All that makes total sense. Yeah but Peter and to pick up on your point about the wages are going up and unemployment's really low. As I understand there are a couple of things that can cause a recession. One is demand destruction and the prices get so high. People stopped buying things. Robert too is the Fed decides they really are behind. I
mean we had eight point five percent of the CPI. Now we don't think inflation is eight point five percent but it may well be well above the 2.5 percent neutral transvestite rate. And if you're really trying to get up to a positive real real rate you don't have to go a long way. Well I don't think frankly any of us know. Know and all the people that have been comedy about this don't actually know how much of that eight point five percent headline inflation rate is really induced by supply constraints. The war in in the Ukraine coming out of Covid. And we don't know how long that's going to last. For now the Fed
used the word transitory which looks pretty silly. And I by the way was not a fan of that of that word either because I didn't think transitory meant that eight and a half was coming back down to one and a half or two. But I do I do think that the long term inflation view is still 3 percent and you can still see it in the 10 year in the 10 year interest rate. So I guess what I'm saying David is that is that it's natural for for wages to go up. It's natural for us to have inflation even three three and a half percent. And that means if we had three three and a half percent to get a real rate of
interest which we haven't had in ten years you would have to have a 10 year rate that is north of that inflation rate north the inflation rate. And the point of that Gillian made you can't take 9 trillion dollars off the Fed's balance sheet and not expected to have some effect. And it's going to be financial tightening. Gillian I want to pick out one thing that Peter talked about which is supply chains. And forgive me if I start to hear supply chains a little bit like transitory. It's always supply chains is a great fix. And yet you turn around there's a war in Ukraine you turn around there's a shut down in Shanghai. There's always some of the supply chains. Is that going to correct itself. Well the reality is that we're not sitting on
the second ledge here. We're dealing with a fundamental structural issue in supply chains which is yes no pressure on supply chains goes up and down with demand. But you have to understand that for the last two three decades dominant paradigm Western business has been to outsource everything that you possibly could and to run everything on a kind of Justin time basis where you essentially only had just enough inventory of what you needed to keep yourself going. Anything more is seen as
being inefficient. And two for each company to essentially try and optimize their supply chains in terms of what made sense of them without looking at the system the ecosystem as a whole. Now what's happening right now is you're having a really radical rethinking of all of those elements both in terms of the idea of endlessly outsourcing everything that's going out of fashion. The idea of trying to do just in time is moving to just in case basically stockpiling inventory having a plan B and you're also seeing groups increasingly trying to look at the market as a whole not just in terms of individual companies. And all of that is putting pressure on supply chains is massive reconfiguration. And you know the CEOs are speaking to us saying that they don't
expect the supply chain disruptions. If you want to use a polite word to work their way out of the system for another two or three years two or three years. Now tell me that that weren't in some way affect what kind of wages workers against are asking for if they keep seeing these kind of inflation points coming up this high. And to my mind the other big question which really comes out what Peter said is that history shows that sometimes policymakers get lucky and deflate bubbles smoothly. We may have
seen something like that in the tech sector in the last few months where essentially a bubble has been deflating. But do we really believe that the bond market bubble on the scale that we've seen it after a decade of negative real rates is going to deflate smoothly. If they if policymakers pull that off fantastic they deserve in the history books. But I feel very doubtful. Okay. Peter Krauss and Juliette Saly and staying with us as we turn from markets this week to the effect of the war in Ukraine on investors next week and beyond. That's coming up next on Wall Street. I'm Bloomberg. The truth is that the American tradition despite our globally renowned fondness for firearms has profound strains of pacifism and isolationism at its core from our founding fathers outspoken commitment to no entangling alliances right through to the excesses of the America Fosters.
This has been a nation historically suspicious of international involvements and so reluctant to race into battle. But we were conspicuously late entrants into both world wars. That was a little sarcasm on Wall Street. We have way back in 1996 expressing his concern over a possible U.S. withdrawal from the world stage at a time that looked very different from now when
the United States is sending hundreds of millions of dollars was the armaments to Ukraine and leading a coalition of countries to impose severe economic sanctions on Russia for its invasion. Peter Cross of Aperture Investors and Gillian Tett of the Financial Times are still with us. Gillian let me turn first to you as I look at that look what's going on right now and look at what this means for investors. We do have a big war going on with a lot of tragedy and a lot of potential consequences for geopolitics which has seen potentially a change in the world economic order as well. You're
absolutely seeing a change the right economic order. You know that wonderful Francis Fukuyama phrase that we lived in the end of history at the beginning with the end of the 20th century and 21st century has been shown to be can be wrong because essentially history be going backwards. And we're seeing what we thought was a world that was globalizing as a whole essentially fragmenting into the you west China spheres of influence the so-called banded cotton to cite Hank Paulson and the increasing split between you know the Western bloc and the Slavic Russian bloc if you like the the new Cathy Arkadin. And so you're essentially saying two and a half potentially three different areas emerging. And that is really a very big shift that we haven't seen this kind of magnitude of upheaval for several decades. Peter we've had Larry Fink recently saying he thinks it's the end of globalization which I think a lot of people thought was overblown. That's way too soon to call that. But are we seeing as Jillian suggests perhaps at least a dividing up in part into some blocks around the world which is quite different from where we thought we were headed. Yeah look I I do think that this
Russian incursion into Ukraine that has created a geopolitical shift is going to reverberate through not only political affiliations but also economic affiliations. I think to say that globalization is dead is way overblown. I don't think that that's even in the cards. But I do think that there are gonna be numerous places in which companies are going to decide to actually accept a higher cost of manufacture and thinking they can pass that through to the to the consumer. And so you're going to have higher structural inflation as a result of that. Now will that structural inflation be offset by techno technological advances and innovations. It may well be but I think clearly we're going to see a change. The one interesting question to me about globalization is this trading block pointed to raise. China has attempted and still attempts to actually
establish a contrary trading block to the US and its allies. The U.S. and its allies are far far bigger. If the U.S. and its allies through this geopolitical change decide to actually operate in a more concerted fashion as happened after World War 2 that's going to create enormous issue for the Chinese and other people in that other block because they need to trade with this with this Western bloc and they need to trade significantly with it. So it's sort of up to the Western democracies and the Asian democracies about how they play this if it all back and ISE and people go their separate ways. That's probably not a good thing for the economics and for the markets. If there is some sense of cohesion and an attempt to create more free trade capability between that bloc. I think that's actually an increase in economic activity and good for markets. Gillian is it possible that we might give up in sort of convenient dealing with rather there were some countries will be
made up for other places. That is to say is it likely this would drive a closer union with for example Western Europe Japan South Korea even Taiwan. Well there is a optimistic scenario which is you know tossed around say the chip sector. There various parts of industry right now. Which is it. Okay so a Mark Gurman no longer count on China as being the factory of the world. It can alone count and having this labor supply side shock where suddenly wages are depressed because you can outsource everything to China. Let's bring it back into into North America. Maybe put more factories into Mexico. You'll create more jobs back in the US. And guess what. You'll be environmentally more green as well because you
got me moving things around so much. That's the kind of optimistic scenario of essentially this reshuffling of the geopolitical order. And the pessimistic scenario though is that of course many commodities and raw materials are not found within the allied trading block at the moment. And you can't suddenly create lithium mines overnight even though Elon Musk tweeted that he'd like to this week. Another promise it is not clear that America has a workforce for even and supporting some massive resourcing of its manufacturing industrial base. And yes maybe you can give it all to robots. But you know even robots
can't necessarily be the easy answer right now. So so Peter let me ask you this. Is Wall Street weak after all how we make some money here if in fact there is what Gillian just called a reshuffling of the world order. What does that tell me. I should put my money right now. Look you can't answer that question and say put your money here for the next two weeks three weeks a month whatever you have to look at this over a longer period of time. But look Europe has clearly made the statement that they're going to invest in their energy infrastructure which means alternative energy. They're
gonna invest in defense. And those two areas have enormous tentacles throughout their economies. And all kinds of companies will benefit from that. I do think there will be some attempt in the United States to actually build some semiconductor and chip capability that people are concerned about as having have been offshore. So you're going to see investments in that. You can see it in the intel announcements
and the attempt to build large plants in the south. So I don't think it takes a great deal of imagination to see where to put your money over the long term. I still think describe this geopolitical question that the children and I are sort of touching on is a big deal. And the longer term trends and the bigger opportunity to make money is trying to figure out where that is going to fall. Peter there was one other event that certainly shook those of us in New York and around Wall Street
this week. That was that shooting in the crowded Brooklyn subway. Somebody has spent so much time on Wall Street. Do you think that may have longer term effects particular. We try to bring workers back to work. It's shaken up a lot of people. It's a terrible tragedy and horrible for New York but New York survived 9/11. It survived many other things. And we will survive this and we will continue on. OK. Thank you so very much to Gillian Tett of the Financial Times and Peter Kraus of Aperture Investors. Coming up we take a look at what's in store next week. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin. Now we take a look at what's up for next week starting with Juliette Saly in
Singapore. Hi David. Investors in Asia will once again be searching for clues as to whether China can meet its aggressive five and a half percent growth target which is looking more and more challenging amid its Covid zero strategy. First quarter GDP in monthly activity data this week will set the scene and world watch but cuts to the loan prime rate and triple arm. Meanwhile expect all of the above to be a top. The agenda at the Bowl Forum the annual gathering of political and business leaders in Hainan. Now over to Dani Burger in London. Danny. Thanks Julia. Well the contours and tactics of Russia's war in Ukraine continue to change as we enter yet another week with the US warning of a more protracted war and a more violent one. Russia looks to be concentrating their operations in the east.
Meanwhile European and US nations look to supply Ukraine with more weapons. Now let's get over to Romaine Bostick in New York. Thanks Danny. Earnings season picks up next week with more than five dozen S&P 500 companies reporting notably Bank of America and American Express which should each provide insight on consumer borrowing. Quarterly updates from United and American Airlines will shed more light on travel trends. And there's going to be a lot of attention paid to J.B. Hunt. The shares
have tumbled into correction since the trucking companies last earnings report. This is industry wide data shows freight prices falling and capacity rising. Other earnings to watch include JNJ P G IBM Tesla Lockheed Martin and Netflix. The week will be relatively light on economic data. The most notable releases though will be housing starts and existing home sales as well as
the Fed's monthly Beige Book which compiles surveys taken of local businesses about economic conditions. David. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up it's tax time in the United States. And we turn to the man most identified with getting our taxes down. Grover Norquist president of Americans for Tax Reform. That's next on Wall
Street week on Bloomberg. This is Wall Street. I'm David Westin. April 15 is the time of year when most of those of the United States turn to taxes. Though this year the Good Friday holiday gives us an extra weekend to get them done. But whatever the time of year and wherever you are. Taxes loom large for all investors. What do tax rates mean for how much we invest. What do they mean for when we invest. And for that matter when we cash out. And how does the structure of the tax code affect where we invest.
Grover Norquist has devoted his career to addressing questions just like these. He is the founder and president of Americans for Tax Reform. That's an organization that President Ronald Reagan urged him to start back in 1985. So Grover thank you so much for joining us. Really appreciate it. You are the man on taxes. And let me ask you going all the way back to 1985 when I look at the percentage of federal revenues as a percentage of GDP through about that period time. It has not gone up even from the days of Ronald Reagan. Have you succeeded. Should you declare victory. Well yes in the sense that the goal is to have
the government take less of people's resources and allowed them to have more freedom and more liberty and to have businesses invest based on what's a good investment not what tax policies are. So I'm happy that we've stopped a lot. We've taken the rates down dramatically. Remember top rate was 70 percent when Reagan walked in the door. It got down as low as 28 percent. Unfortunately Bush let that back up. But there's more to be done at the national level. The reduction of the corporate income tax that the Republicans did in 2017 made us more competitive with China. The danger with the tax increase one of the tax increases that Biden is looking at taking the top rate to 28 corporate rate the corporate that would put it up higher than China higher than anyone we compete with in Europe. When we were at 21 we were much more competitive. We are at right now. But if we go
back up to 28 and you have to add. Most states have a state corporate income tax. We become very uncompetitive with China Japan Europe as you know better than I. It's not just the marginal rate that counts. It's the total tax burden. And if you look at oh you see these countries in fact they have V A T taxes other taxes they pay. And there's a Peterson Institute study
that actually says we're at the bottom of the pack when it comes to overseas countries to competitors. What do you say about those numbers. Well we have less spend less taxation as a percentage of our income as a percentage of our GDP assets which is good. That's why we've historically grown faster than Europe. That's why where the GDP is stronger in the United States per capita than that other places. The value added tax that they have in Europe is how they got
government bigger. There's a certain point at which you can't get anymore blood out of the turnip with individual tax rates both on companies and on individuals. We're probably above that point now but the Europeans have decided you can increase the size of the government with a value added tax which is in some cases twenty one twenty five percent. In Europe it's a sales tax
at all levels of production. And that's one of the ideas that some in America have. Why don't we have a carbon tax which would then become the VAT tax that would look like Europe. And I guess my argument is if you want to see innovation growth job creation you don't want to look like Europe is there. Right. No number for the percentage of GDP that should be tax. I mean there's something called houses law that I've read about that says basically no matter what the marginal rate is in the United States going back to 1945 we come out with some between 17 and 20 percent. Right now I think we're about
seventeen point nine percent. Is there a right number. I think you find that out by bringing it down and seeing it get you work growth. You certainly saw when Coolidge cut tax rates you saw strong economic growth until Hoover raised them. And then when John F. Kennedy cut marginal tax rates you had strong growth until Nixon raise taxes. And with Reagan you had this strong growth until Bush and then Clinton raised taxes. So it's we've been getting towards that point which may maximize rather. I'm not sure maximizing revenue is the key. I'd like to maximize growth and job creation and innovation. Certainly we learn a lot from the states. Are 50 states eight of them have no personal income tax at all. And they tend to be doing better than other
states. People move to Texas and Tennessee and Washington state and Florida. And now they're another and they're another eight states that have single rate taxes. So even Democrat or progressive states like Massachusetts and Illinois have lower income tax rates on individuals 5 percent in Massachusetts about 4 percent in Illinois because it's a flat rate tax. And that's
difficult for. To raise. Easier to reduce. But they're now eight states that have income taxes that are phasing those out. You just saw the vote in Georgia to begin phasing out the income tax to zero. Mississippi's done the same thing Louisiana did last year. Iowa top rate individual. Six to half down to a four percent under four percent flat rate with the goal of then taking it down to zero. Oklahoma is looking to do the same thing both in North Dakota and in West Virginia. One body has voted to face it up to zero and the other is looking to do it. So there is a movement to follow the success of the lower income tax
states nationally among the 50 states. And we've seen in the United States when we took our corporate rate with the Reagan tax cuts down to thirty five we had one of the lowest corporate rate taxes back in the 80s than all the other countries had. That's a great idea. And they all came in under a 35 percent rate. And so for quite some time we were very uncompetitive. We're down to 21 percent now which makes us fairly competitive but not ahead of everybody else just in the middle. Grover talk about that relationship between taxes on the one hand the rate of taxation on the one hand and economic growth on the other. Isn't that clear a relationship. Because as I recall as you mentioned there's a Clinton tax raise during the Clinton
administration and in fact growth went up did it not. Well you also at that point had a significant cut in the capital gains tax which the Republicans forced through in 94. As soon as they took control of the House and Senate growth under Clinton was weak for the first two years when he was threatening all sorts of tax increases. When the Republicans took the House and Senate met that wouldn't be a tax increase. In fact there was a cut in capital gains taxes. That's when you saw the dramatic growth that flowed through. So watch Congress more than the president when you want to see what people think will happen with taxes because Republican presidents can get forced by Democratic. Congress has to raise taxes. Democratic presidents can get
forced by a Republican Congress to cut them. Watch the Congress to see how it goes. But on the competition issue one of the most dangerous things that's being discussed is this global minimum tax which would end tax competition. So instead of competing with lower taxes and low cost of government we're going to compete with what lower wages. That's not what America wants to
compete on. We want to compete on a more competent government with lower tax rates and more innovation that flows from that not by trying to beggar thy neighbor with lower wages. So this PAC or cartel or getting all the countries together and saying we're going to trust China won't cheat which by having lower tax rates than you're supposed to have. One wonders. And so many of their companies are run by the government the awfully easy to manipulate that compared to the United States or European countries. I think the idea of a cartel where the governments get together and set a minimum. Tax which stop tax competition which has been very healthy and in the same category. The other danger that we're hearing about is price controls on pharmaceuticals not. It's sort of a tax or a confiscation of people's wealth. It also means less innovation less investment
into pharmaceuticals for the next time. There's another Covid that's particularly damaging and there's two thousand years of history of very bad results. Every time you fix price when the government fixes prices and wages and or price controls. Yeah I should note that I think that part of the motivation for the Goldman Sachs was to avoid what you were describing earlier which is putting U.S. companies at a disadvantage. But I really am curious grew over more generally. You've been on this quest for a long time now. You've been very consistent but it is what drives you fundamentally economics that is the need for more growth or is almost a matter of philosophy or even morality about really what's fair and what's right about how much the government gets how much individuals get. I think it's three things the Constitution's fairly clear about certain limits
particularly on the federal government on taxation. What's allowed to be taxed. The idea that Biden has of taxing assets or unrealized gain is clearly not constitutional. Courts have ruled on this in the past but you just have to read the constitution to see the very limited number of powers that the states were willing to give the central government when they agreed to the Constitution. They made it very clear which can can't do taxing assets taxing wealth taxing unrealized income meaning income.
You don't have the value of your house goes up and they want to tax the income you got because your house is worth ten thousand dollars more. That sort of thing. Bad policy but it's also not constitutional. I think step one is a constitutional. Step two is good for the economy. Why would you raise taxes at a point where it kills jobs and slows economic growth. And then third there is a preference. If you earn a dollar it's yours. And the government needs to have a very good reason to explain why it
has to take your dollar and spend it some other way. So I think that we ought to say you earned it it's yours. Now the government has to make the case why it's actually necessary and important and not counterproductive to take some or all of that. It's awfully hard to have a meaningful discussion on taxes without talking to Grover Norquist. Grover thank you so much for
your time today. Grover Norquist is president and founder of Americans for Tax Reform. Coming up we wrap up the shortened holiday week with Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin we are joined once again this week by our very special contributor Larry Summers of Harvard. So Larry we got those CPI numbers out. They came in just about as bad as ever and expected they would. Let me ask you what you think. Do you think we're peaking in the inflation NIKKEI. Some people think this is about the peak. I think we're
probably peaking for the next several months. There was a huge component from gasoline this month that I don't think will be repeated in the next several because of the base year effects. I think the number is going to come down whether we're peaking indefinitely. I'm not at all. I'm not certain that that's going to happen. It will depend on lock. And it will also depend on the decisions that the Federal Reserve makes. And one of the questions how sticky it's going to be. There's this trimmed mean way of calculating inflation which is now up at 6 percent. It's the longest in history since 1980. For what do you make of that. Look there's been an effort as there always is when you have inflation to dismiss it as due to
specific or temporary factors. That is much more wrong than right. You can see it when you take out all the extreme observations in both directions. Is that calculation does. You can see it as I've emphasized by looking at the wage wages which are the ultimate source of costs in the economy. We've got
a pretty fundamental inflation problem in our country. You know David I saw something recently that brought this home to me. People think of us as having had 13 14 percent inflation in the 1970s but that's only because of the way it was calculated. Then if you use the same way we calculate inflation now it got just above 10 percent in the 1970s. So getting to eight and a half we're actually closer to being back there than I think most people realize. So given that and that's a really interesting
fact I must say I did not know that. Given that what should the Fed's realistic goal be right now. I mean they cannot get it back to 2 percent by next month. Goodness knows. No. Look I think we need to go back to the old idea of price stability as being when people are thinking about inflation as part of regular economic calculations. And we need to move away from the detailed fixation with numerical targets which it seems to me has led us to unhealthy places. So I'd go back to a general
definition of price stability. But we are nowhere close to that right now. And I would worry about the clamor of voices that are saying that you know 4 percent inflation could be OK or even that inflation above 3 could be OK. I think we need to be very determined to come way down from where we are right now Larry. There was a Bank of America survey of fund managers out this week and the big headline was concerns about stagflation. It's higher than it's been since certainly 2008 or so.
How concerned should we be about stagflation. I think it's the most likely place we're going to be if stagflation means rising unemployment and still high inflation. I think that's the preponderant probability as to where we're going to get over the last couple of years since ISE over the next couple of years. As I've said before on your show David the painful fact that needs to inform our view is that we've never had a moment when unemployment was below 4. Inflation was above 4. And we avoided recession for the next two subsequent two years. And right now unemployment's well below 4 and inflation is well above 4.
Lots of people say look the job market is so strong why would anyone think we're going to have a recession. What the data show is that the lower unemployment is the more likely it is that that's going to turn down in subsequent months. So that was last week. Next week of course we had those meetings in Washington the IMF and the World Bank. In anticipation of
that it appears the secretary of Treasury Janet Yellen had a speech before the Atlantic Council this week in which she really said we've got to decide which side we're on apparently pointing her fingers sort of at China saying you need to decide where you're going to come out because of the conflict with Russia over Ukraine. What about the use of International Economic and Monetary Forum to really address things like national security. Look there's plenty we need to work out with respect to China. But let's start with the fact that. The United States has now committed no funds to international Covid relief efforts. Let's start with the fact that the United States is a massive laggard with respect to climate change commitments because we haven't been able to pass anything through Congress. Let's start with the fact that Russia is earning more export revenue than it was before the war. And the ruble was stronger than it was because
our European allies are continuing to import oil on a substantial scale. I think we need to start in those places before we go after China. I think Secretary Yellen has been enormously successful in her leadership on global tax issues including bringing China into that regime. But the U.S. Congress isn't there. And I think that's a hugely important thing. I think that we do need to address the Chinese in a strong way but we need to make a decision as to whether the US strategy is to use international financial institutions as a strategy and a route to cooperating with China in those spheres where cooperation remains possible or we need to conceptualize those institutions entirely as means of containing disciplining and limiting China. We haven't really given entirely clear signals on that. I think we should still be trying to take the former approach of using them as tools for engaging China. Finally I hope that
we're going to see in the next months a U.S. strategy that's clear and explicit towards the World Bank. It seems to me that as climate change has loomed larger and larger as a problem as there has been a major pandemic issue as the need for relief around the world has stepped up the bank has really not stepped up as a major player. And given that the U.S. is the largest shareholder and appoints the president. The U.S. has a responsibility at this point to energize the bank. Okay. Let's have a two issue really rapid round here if we could. Number one Iran must. Now he said he wants to do a hostile takeover. He announced it this week toward the end of the week of Twitter. What do you make of that. Twitter may be practicing what it preaches in terms of being a source of news volatility and drama. This is going to be quite a story and
quite a story indeed. And finally one issue in the news this week was you. And it's something that even us because there was this piece by John CASSIDY in The New Yorker which really takes you on with your inflation predictions some which were made on this program. In fact it quotes Wall Street week specifically. And one of the things it takes you to task on this program back in March of 2021. You said there's a one third one third one third chance one third of runaway inflation. One third wouldn't
happen because the Fed really at that clamped down hard and one third will muddle through. They think you were too vague. I'm not sure. We thought you were vague at the time. But what's your response. I don't know for someone who is vague. I sure made a lot of people in the administration mad with the force of my view. It's kind of remarkable that they're saying that I in that piece that I had the numbers wrong given that they're the people who are forecasting 2 percent inflation and they're the people who have the budget that said this year that the Treasury yields are not going to rise above 1 percent. Hey in the meantime think that the administration anonymously is quoted actually taking it to task saying you had overestimated the output. Look I think
what we need to do is look at is look at the numbers on inflation. And I sure hope that they're more optimistic forecasts will turn out to be right. And look you'll all have a huge stake in their success. So we all thank you so much Larry Summers our very special The Perimeter on Wall Street Week. Coming up everyone says they want tax reform but are we sure. Finally one more thought. Death and taxes. Benjamin Franklin famously wrote that they were the only things that were truly certain. Though it turns out he took that truism from an earlier writer back in 1769. But when it comes to taxes it's more than
just the need to pay them that certain. There's also the certainty of the debate about them usually between the need to cut them and they need to make sure everyone is paying their quote fair share. For too long we've lived with a tax system that is a blot a stain on the shining mantle of our democratic government. Wall Street didn't do this country. The middle class
built the country. I think you should be able to become a billionaire and a millionaire but pay your fair share. And just as certain is the pledge to reform how we pay our taxes not just get the overall level right. Leading us to a recurrent debate for example over deductions for state and local taxes that so-called salted deduction. The President Trump severely cut back and the Democrats particularly from the Northeast keep saying they will restore this all speaks to the challenge that Democrats have before them. You did hear a restatement from a number of Democrats saying that they would not support legislation that does not have the salt tax in it. And of course there's the recurrent claim over the capital gains treatment for so-called carried interest for private equity income. Maybe the one thing that President Trump and President Biden could
actually agree on. The president very specifically campaigned against carried interest for hedge funds and for that industry. That's really what he's focused on keeping this tax loophole which leads to folks who are doing very well paying lower rates than their secretaries is not in any musical way improving our economy. And now we have a new candidate for so-called tax reform. It's a billionaires tax that would make the very wealthy pay for appreciation in their assets every year whether or not they actually get the cash right now.
Billionaires pay an average rate of 8 percent on their total income. My budget contains a billionaire minimum tax because of that 20 percent minimum tax that applies only to the top one hundredth of 1 percent. One hundredth of 1 percent of Americans will pay this tax. And so this year as we pay those inevitable taxes we can rest easy that people will keep talking about some kind of reform that never comes. But then again the late great Art Buchwald warned that tax reform is taking the taxes off
things that have been taxed in the past and putting taxes on things that haven't been taxed before. So maybe we shouldn't be in too big a rush for tax reform. After all that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2022-04-18 10:28
