Wall Street Week - Full Show (05/27/2022)
A week of big moves in the market a big gathering in Davos and a big signal from the Fed. But in the end it was a tragic shooting in a small town in Texas that catch the biggest shadow over it all. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on whether bad news in the markets and the economy is good news for the Fed. Humility is the right posture with respect to monetary policy and glare at front of center view partners on whether things really are as bad as they sometimes seem. I've never seen as murky a period as we're in right now. Sometimes the biggest events don't move markets but they do overshadow everything else. And this week it was the killing of
19 children in their elementary school classroom in south Texas provoking anger from President Biden. Why are we willing to live with this carnage. How do we keep letting this happen. Time to turn this pain into action. But as much as the tragedy held our attention this week there
was a lot going on elsewhere like in Davos Switzerland where the great and the good of business and finance gathered once again. And we heard about everything from Matt Miller guard and the odds of a recession for the moment. We are not seeing a recession in the euro. The Bank of America's Brian Moynihan on the strength of the consumer. In the first two
weeks of May the consumer spent 10 percent more than they did last May. That's over top of the debt payments that went out to pay taxes to Fidelity's CEO Ann Richards on the global food crisis caused by the war in Ukraine. One of the things that has been really constructive about the conversations this week is how the risk of a food crisis has gone right up the agenda. And George Soros on whether the war could end it all. The invasion may have been the beginning to war. And she did say she may not survive it. And while all those boldface names were talking in Davos we got the minutes from the Fed's main meeting showing that by raising rates now they may have more flexibility later on. Not sure how much the Fed is really moving this market
anymore. This is a market I think kind of running on fumes and looking for a direction from anybody. They're not getting that from the Fed. And whether it was the hint of a let up from the Fed or just wishing our ways toward better times the equity markets finally broke their downward trend with equities across the board up for the first time in eight weeks. Both the S&P 500 and the Nasdaq were up over six point five percent for the week giving the S&P
its best rally since 2020. And that risk on sentiment carried over to bonds as yields on the 10 year gave up 4 basis points ending the week under two point seventy four. Take us through what if anything we learn from the markets this week. Welcome now Ben. Anchor He's GMO co head of asset allocation. And Liz Ann Sonders Charles Schwab Chief Investment Strategies. So
listen I'll start with you. Are happy times here again. I think it's too soon to tell. Looking at a one week rally after seven weeks of pretty significant carnage is is more indicative of a counter trend move. The types of rallies you tend to see in bear markets I think it's premature to look at this either from a technical or breath perspective and suggests that it marks the beginning of a new cyclical uptrend. This is just natural to see this kind of pressure. I think you know somewhat ironically it was the weaker economic data to a large degree that changed the perspective or the narrative as it relates to Fed policy to maybe they have some flexibility to pause after the next couple of rate hikes. But I think it's also premature to make that
assessment. So Ben I know that you're a longer term investor. You don't just look week to week. But did we learn anything about that issue about whether it's a soft landing or a hard landing for what we saw this week. I don't think we learned anything. DAX that determinative. We've seen some evidence that there are parts of the economy that are softening. I mean it's most clear in the housing market and that's the place most heavily impacted by what goes on in rates. So you know that shouldn't have been a surprise. I'd say from the consumer perspective the consumer still seems to be pretty strong. We haven't seen strong evidence of the consumer pulling back. So I don't think we've seen anything that should really
cause people to have said oh OK great. We're going to have a soft landing. We're not going to have a recession. We're not going to have continued inflation problems. But as Liz Ann was saying man it's been a really long run of the market losing week after week. And markets almost never move for long periods of time just in one direction. There's always two way low volatility. LaSalle I wonder what it told us if anything about the
possibility of a recession. I mean obviously the Fed in part wants things to slow down and they're not going to get their arms around inflation without some slowdown someplace. And we certainly are seeing some weaker numbers and things like housing as you mentioned. So clearly the Fed doesn't want to engineer or drive us into a
recession but they do concede it may be that the price in order to narrow the gap between demand and supply and monetary policy can sometimes be a fairly blunt instrument. And really all they can control right now is the demand side. I think the path to a soft landing would be the supply side easing up not just supply chain disruptions but also the supply of labor. And that doesn't appear to be imminent. But I think that's probably the primary path to a soft landing. Otherwise I think the conditions in place right now the kind of early deterioration that we're seeing have the needle pointing a little bit more toward recession than soft landing the last 13 rate hike cycles. You've had 10 recessions and three soft landing. So simple history says
that it's more likely this time and with a 40 year high and inflation and that simultaneously trying to shrink a 9 trillion dollar balance sheet. It's hard to suggest that that points the needle more towards soft landing. But there is a path in that direction. Ben I'm not going to ask you necessarily make a prediction on a recession or even when it might happen but it's must be one thing you take into account as you decide your investment issues that are in front of you. Well how do you take into account a possible recession right now. You know there's two things we tend to focus on one of them we focus on almost all the time. Are there conditions that would make a recession if we get one a particularly dangerous one. We look for things going on in the financial markets evidence notes
excessive leverage either on the corporate side the household side of the financial system side or an economy that's just been growing in a way that just looks really unhealthy. We don't see any evidence for that now. So even if we get a recession now I don't think it's going to be that big a deal. And most recessions aren't that common. They go inflation goes up. I mean excuse me unemployment goes up. It's bad for people who lose their jobs. But you come back in a couple of years it's like oh
yeah right. There was a recession. I'd forgotten about that. The thing that I think makes it matter more this time is right now we obviously have more of an inflation problem in the US than we have had in 40 years. And one of the clear ways that that might go away is if we got a recession. So ordinarily we don't care that much. Is it going to be a soft landing. Is it going to be a recession. Because either way it's going to disappear within a couple of years. This time around I do think the question of whether inflation becomes entrenched and becomes very difficult to get rid of is incredibly impactful one not just for the bond market but for the stock market as well.
And so the evidence of the US heading into recession earlier than expected matters more than I'd say a recession normally does. And David I would agree with with Ben I think this is I don't want to be so cavalier is to say garden variety recession but not that kind of crisis driven recession not even as we see housing rolling over. This is not a systemic crisis. It's going to bring down the global financial system along with the then how it popping of the housing bubble. So it's a more natural into a business cycle which even if it's not imminent will happen at some point. And I think that the Fed gets that and they don't want to do anything artificial to try to prevent the
natural force of the business cycle especially if inflation doesn't become contained in the near term. Ben as Lasn says if the supply situation straightens itself out we're in pretty good shape. It'll take care of inflation. But if that doesn't happen where are we today. You're talking about a couple of supply shocks right now. Certainly energy. What's going on with Russia but do that actually. Energy prices are up even before the sanctions against Russia. And of course food. We're really
concerned about getting grain and other food out of Ukraine. Yeah I think I mean the food situation is a really important one for the world. And if you think about kind of the poorer countries in the world where food is a big part of the consumption basket that price rise is a extraordinary social problem. The nice thing about the US and the rest of the developed world is higher food prices for the vast majority of people are a nuisance and a pain but they're not a life or death problem with energy and the commodity price increases. It has been interesting right. This is a supply shock. We've seen prices go up that often leads to problems in the economy. But the other thing it often does is lead to excessive investment in the commodities space itself and kind of creates the seeds of destruction in terms of falling prices. And there's
where it's really been interesting this time around. We have not seen the burst of investment either on the energy side of things or you know because industrial metals prices have moved up hugely. We haven't seen the huge increase in investment there. And that's good. If you're going to be buying those companies because ordinarily the dangerous thing about buying those companies when prices are high is because they make bad decisions and destroy their return on capital but not necessarily so good. As we look forward for the global economy because we're not seeing the obvious places where more copper more oil more natural gas more iron and more lithium is really going to come from and and released that cost pressure coming from the supply side there. Listen Ben Rhodes is a really interesting point. Even beyond commodities what are we seeing in capital investment. We'd like to see capital investment productivity go up. So short term I think there is a risk that it continues to
weaken here. If you look at capital spending intentions if you look at the CEO survey of confidence it suggests that near term there's going to be a constraint. However if you want to find a bright spot medium to longer term in the U.S. economy I think that the capital investment side is going to be very strong. In fact I wouldn't be surprised to see if the consumer is a driver of GDP starts to move down slightly from its current 70 percent weight. And what ticks up some of
that decline is business investment capital investment and in conjunction with government investment. And I think that's a that's a healthy backdrop for an economy. And it may not be the near-term story but I think it's a much more powerful medium to longer term story. Liz Ann Sonders had been anchor. Will he stay with us as we turn from what the markets did this week to what we should do with the markets going forward. That's next on Wall Street week on
Bloomberg. The market ended the week in a sinking coma that made it clear that the worst economic shortage of all was the shortage of buyers on Wall Street. It was a week that recalled the words of Otto H. Calm the famous financier and art patron who once described finance as an old lady with shaken nerves. That was Lewis work ISE of course on Wall Street way back in 1973. Liz
Ann Sonders of Charles Schwab and then anchor of GMO. Stay was so Ben. I don't know about nervous. I would deal with markets this week. In fact it was up not down at same time. The market has clearly been nervous. How do you approach it. And particularly I read with great interest. You talk about
so-called growth trap. Yeah I think you know as a value manager one of the things that happens to us all the time a client comes in our prospective client comes in and says oh you buy value stocks how you avoid value threats. And it's a perfectly reasonable question because value traps are a pain for value managers but people don't seem to focus on is those same kinds of stocks exist in the growth universe as well. Right. A trap is just a company that winds up not doing as well as investors were expecting. And those stocks actually turn out to be more painful. If they were growth stocks then if their value stocks for not such a weird reason and right up your value stock nobody expected all that much from you. They're still disappointed if you do even worse. But if you're a growth stock. If people were expecting wonderful things out of
you because you were palatine and we're going to sell a bike to everyone on earth when you fail to live up to that there's two problems. One of your fundamentals are worse but to your valuation drops right. That growth premium you have you're no longer worthy. And whether you're Palatine whether you're Netflix whether you're in the whole series of growth stocks that have turned out to be traps in the past year. One of the interesting things that's gone on in the past months is this has
actually been the worst year to be a disappointing growth stock relative to growth stocks. So right. It's been a lousy year for growth stocks 5. But the stocks that have done excessively badly relative to the rest of grow are those growth companies that are disappointed. And we we think if you're going to be hiring active managers
it's important to recognize they're not going to be right every time. And one of the things that people are only really learning pretty recently is yeah it's really painful as a growth investor to turn out to have been wrong on a stock. And we think that that pattern of growth traps doing particularly badly is set to continue for a while. So listen what about that. Obviously we you tell our growth stocks there are a lot of things including a wide range of different companies at the same time. In a world of rising rates rising interest rates all the things being equal which they never are. Growth is going to do worse because you're describing that future cash flow issue. And especially in an environment where some of these so-called growth stocks are
actually the non profitable stock. They don't have any earnings growth. They don't have any earnings. And I think when you combine that which those types of stocks whether it's non profitable tech they were very narrative driven and they really represented one of the pockets of where speculative froth was the primary driver. And in this part of the cycle those types of companies those longer duration you know eternal duration stocks as you wait for that earnings stream in a rising inflation rising interest rate environment get absolutely hammered. The one thing I'd say and I it's a little bit different take on the idea or concepts of growth and value. And I often describe it as lower case. The and lower case G is investing based on the fundamentals or characteristics or factors of growth or value. In fact you know Bloomberg does amazing work on factors. And if
you look over the last three months over the last six months sort of this era of tighter monetary policy high inflation rising interest rates. What's interesting is even within segments of the market that are mostly housed in the growth indexes. Tech consumer discretionary communication services it's the value oriented sectors that are working that are leading meeting stocks said that trade stocks that screen well on those types of factors whether it's strong free cash flow yield strong balance sheet lower volatility they've been doing well. So I think sometimes investors have to take off the blinders when
they think about growth in value because you can look for value in the areas that happen to live in the growth indexes. And there are times where certain stocks that live in the value indexes don't offer a tremendous amount of value. Utilities which have been popular stocks because of the defensive nature are now trading at a record or near record positive or premium from a PE perspective to the S&P 500. That's not value in a traditional sense. That doesn't mean they've become gross stocks. They still live in the value indexes. So that's another way to think about the concept of of a value trap like Ben talked about. So Ben I'm curious about your reaction that I suspect you might not entirely disagree because you talked about
active investing. You were saying be careful about growth stocks. At the same time there are these elements such as gold fashioned cash flow and balance sheet and volatility. It's like that within the growth sector. There may be still some goodbyes. Yeah I mean. Well first of all they're almost always are right. It is. It would be weird if an entire half of the market and growth in value tend to be defined by halves if there was nothing worth owning. So even a year ago there were probably
some growth stocks that were worth owning. And I would say we've got we have a strategy that we've been running for the last year and a half where we're explicitly long undervalued stocks in short overvalued stocks. And one of the things we've found in recent months is some of the stocks we were sure a year ago are showing up on the long side of our book because the market has really fallen out of love with them. And that's a. You know that is a natural process. And one of the things about growth and value and that people tend to forget they are always dynamic strategies. Right. You buy a you buy a value portfolio. You come back in a year and some of those stocks aren't value
anymore. Now oftentimes those stocks that are in value it's a good thing because the market is a who. This is actually something pretty cool and the valuation goes up in a graduated growth universe. On the growth side what you really want is for those growth companies that you own at the beginning of the year to still look like growth companies at the end of the year. Because if they don't it's probably because something quite bad has happened to them. And that's a piece people don't tend to recognize especially when they're talking about a start duration difference between growth and value. It turns out that that dynamism that rebalancing of growth stocks to value add value to growth means I think people overestimate the duration difference between growth as a strategy and value as a strategy by a large amount. Listen I want to give you the last word. I was sorry a curveball here's a curveball is the real answer here. We should
all lower expectations for what they have been what we should expect from our portfolio. I you know there's nobody that I know out there that does long term capital markets expectations that has a lofty number in keeping with say that the 10 years leading up to the pandemic or even the 10 years up until the end of last year. So I think just where we are in the cycle the fact that household ownership of equities is as of the end of the year even through the first quarter was at a record high level that that doesn't bode incredibly ill for subsequent 10 year returns. But it does suggest Curb Your Enthusiasm for excess returns. OK. Many thanks. With Liz Ann Sonders of Charles Schwab and the Ben Incorrect GMO. Coming up we take a look at the week ahead on global Wall Street. That's next on Wall Street week on
Bloomberg. This is Wall Street. Time David Westin. It's time now for a look ahead at next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Investors will be looking to China PMI ISE this week for any hint that growth is bottoming out even as restrictions in major cities continue. This after Premier Li admitted that China's economy could be facing greater pressure than in 2020. A rare statement that
suggests policy implementation may be accelerated. And with the tech crackdown still dragging on sentiment. We'll speak with the CEO and founder of ISE. See China's answer to Netflix with over half a billion users. Now over to Laura Rice in London. Laura. Thanks Judy. EU leaders can be in Brussels on Monday. On Tuesday high on the agenda the war in Ukraine. Inflation energy and food security on the lots of the UK have publicly supported a proposal from Lithuania to restart grain exports through the Black Sea with a naval coalition of the willing. Next Thursday on Friday UK markets will be closed for Queen Elizabeth. Official Ninety sixth birthday and platinum jubilee celebrations remain.
Markets will be closed Monday for the U.S. Memorial Day observance. The big event when investors return will be the June 1st start of the Federal Reserve's decision to shrink the holdings of treasuries and mortgage securities on its balance sheet holdings. The more than doubled during the pandemic to nine trillion dollars as the Fed tried to stimulate the economy. Jay Powell has described this so-called quantitative tightening as important for returning financial conditions to quote more neutral calibration economic data. Next week include home prices consumer confidence readings and employment report for me which is expected to show a 17th straight month of gains for non-farm payrolls. And next Friday will mark the end of an era for
Amazon. The company's stock which is trading at more than two thousand dollars per share will be split for the first time since 1999. Amazon along with Alphabet are the last two of the five biggest U.S. tech companies to have four digit stock prices. An alphabet already made plans to split its stock in July. David thanks to Juliette Saly Laura Wright and Romaine Bostick. Coming up the Fed is taking the punchbowl away. How bad will the hangover be. We'll ask Blair Efron of Centre View Partners. That's next on Wall Street. I'm Bloomberg.
We knew it was coming but somehow it still surprised us. We pumped record amounts of dollars and yen and pounds and euros into the global system all to keep it going through a financial crisis and then a pandemic as justified by then. Fed Chair Janet Yellen at present a few. The balance of risks is still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment. And then we added trillions of dollars of fiscal stimulus including that American rescue plan. President Biden convinced us we just had to have for each dollar this tax cut cost. It returns eight dollars in benefits down the line. It's a gigantic helmeted 8 to 1 return. But now the time has come to cut down on all that stimulus on
both the fiscal side. We should not put more stimulus spending into the economy because that is what generated so much of this. And on the monetary side if you want to tighten policy you have to raise interest rates by more than inflation went up leading us to debate just how bad it could get. Supply shocks demand shocks all together mixed in one. Of course it is unclear at this moment in time. When it comes to getting a sense of what's really going on in
the markets and in the business world there is one person we really love to turn to and that is Blair Efron. He is the founder co-founder and partner in Center View Partners. Blair thanks so much for being with us. So we had a lot of stimulus going in the market fiscal and monetary. We took it out and now people are really almost in a panic. Some people worry about where we're going. What is your sense of where we are. David personal life I have me on and obviously everything is a lot more murky. The last Amazon. So what is this one. I've never seen as murky a period as we're in right now. I think the answer is across the spectrum. We're going to a lot more in the next two months. Let's define first what we're looking for. Everybody
talks about slowdown versus recession. Remember recession leased by our traditional definition means two quarters of negative GDP growth. I don't think that's going to happen. I do think there's to be three or so data points that we're all going to pay close attention to in the next two months that have to show decent results. Obviously inflation. Let's assume that the Fed funds goal public goal a two to two and a half percent is going to look like it's somewhere between 3 to 4 percent before it's all done. To be at the
better end of that you're going to hope to see inflation publishing with a 7 by midsummer and with a 6 late in the summer. Second the energy prices. Today hanging where they are. Or did they go higher. That's always going to be a big influence. They get into the pump. I would note that the biggest companies the big oil majors have not increased their production budgets which kicks in intermediate terms that they're telling you that in some ways today the belief is it's peak cycle. And finally whereas housing going to be mortgage rates 200 plus basis points and just a few months. The last time we saw that it cooled housing down about 15 percent. We need to do better to the extent this all happens.
I believe that we will be in a period of slowdown certainly but that there's enough tailwind in different parts of the economy to keep this from being going to a full blown recession. So we certainly seeing a slowdown that's put it mildly in the equity markets. It's been really a roller coaster but down substantially this year. Is that translating into your business. Are CEOs less eager to make deals right now. Absolutely. I would say that the biggest factor
in deal making is going to be competence. And confidence comes from feeling certain in the decision making certain in the outcomes of various moves you're going to make. And right now we are an uncertain environment. CEOs can make judgments when there is a high growth environment. They can easily make judgments in a lower growth environment. Right now it's certainly a difficult
period but things are happening. I tell you David that volumes remain OK. It's actually the value the overall value of transactions is down 35 40 percent. And that tells you that CEOs are focusing still on doing moves that are more tactical and strategic but doing them and they are getting things financed. I would say particularly
if it's out in the equity markets not so but for investment grade no issue and for below investment grade a lot more expensive 30 basis points or so higher than it would have been a few months ago. But given what's going on a limited loan market which is very robust taking off a lot of the downward impact in the high yield market in terms issuance volume things are actually still frankly getting done. From your experience from your vantage point is it possible we're all overreacting. That's not a word I would use. No I think this is an environment where anything you want to react aggressively act aggressively get ahead of it. I'm someone that certainly thinks and I have
you and I've talked about for quite awhile that getting to rate raises had to happen would have been perhaps better happened sooner. The reasons for that it didn't. But the rate had to happen and you want the curve to happen. So I believe getting ahead of it particularly because we had an asset price and thought environment that was just too robust. And it is no surprise that when that happens you will get corrections in certain areas of the market filing corrections to overcompensate. I do not think in any way it is an overreaction. I rather suspect strongly so that we can figure out how to guide the economy down but still keep it in a growth mode. And again you have a lot of tailwind in different areas to suggest that that is entirely possible. So as you say you don't see a
recession as of right now. You don't see it in the traditional sense. Some people say part of that's because we're going into this situation of some sort of downturn with much stronger household balance sheets. People have a lot more money in their bank account so to speak. And by the way the banks are much better capitalized than they've been in some prior area. Does that is that possibly a drawback for the Fed which would require them to go further on the rate hikes because in fact we have more momentum going into it. So personally I believe the Fed will do what it needs to do. Jay
Powell tells you look back to Paul Volcker as a personal hero. I took that as a pretty interesting signal. What I would tell you is we're starting obviously correct and strong recession. The last time the last four big upticks in rates went up 30 basis points. They started at a 3 percent Fed funds rate. Here we started at zero. That gives us I believe more cushion than not.
I also think that consumer is stronger. Balance sheets are stronger. Obviously Wal-Mart Target last week talked about a cost issue of price realization issue and it really talked about a consumer. We can only talk about a consumer changing preference still staying strong. And then of course David we have employment levels really historic lows and we still have 10 million jobs waiting to be filled. I think all of this gives us protection. I don't
think that said the Fed will. I think they'll be nimble. I think they will act to facts on the ground. And the most important thing which they've said and I fully support is getting inflation back under control. Remember we still don't know how much of the 8 plus percent is structural versus transient. And the goal at some point the question is going to be is 2 percent the right level end up long term or just something different. Time will tell when we look at what the markets have done thus far. Our eye is naturally drawn to tech techs really gotten hit particularly hard here. As you look at potential deals for the CEOs that you represent the CFO
as you work with are they particularly reluctant the tech area. Has the boom truly gone off the rose and MDA and tech. No it has. It's certainly hard to price things and evaluate things the environment. But tech obviously is a huge and growing sector of our economy of the global economy. And as an enabler frankly companies across the spectrum to do better. So when I think of tech I think if every company beat that company not just what you might define as traditional tech I do think that said that we've had a return tradition to a traditional valuation metrics. Companies ought to earn return. They ought to have cash flow and they ought to be valued as such. There was a period of time when that became less
important. And I think the market therefore is having that correction now. So while it may be hard to do a tech deal as we speak right now I have high confidence as we get through this period of uncertainty that it will continue to be at the forefront the economy and frankly the forefront of my world. When the markets were on their way up and we had a lot of various forms of stimulus coming in. A lot of the talk is about environmental social and governance ESG investing of various
sorts. I know it's something you've been active in. Has that been put in advance for the time being. Is that put off the science and we get. Not at all. That's a great question. But not at all. Most companies across the spectrum including energy companies I think are more committed than ever. And in all three aspects of E s energy and you see commitments being made. I think that that is seen as responsible responsible corporate citizenship. Stakeholders demand it. And frankly the best companies figure out how to give
a great return to their shareholders and also a great return on ESG. If you think about what it needs for recruiting if you think about what it needs for customer satisfaction we know airlines can talk to its customers about the kind of greed through those biofuels is unique. Using it makes a big difference. So by no means has it been on the back burner. When I see that there are cutbacks in certain discretionary spends. It's not in that area. It might be an advertising. Get a promotion for example where I do see some or a cutback. It might be modest in tech. I already do see cut back but it's not going to be in the best area. Okay. Blair it's always such a treat to talk to you. Thank you so much for your
time. Blair Front of Center View Partners. Coming up we wrap up the week with special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street week. My David Westin will wrap up the week once again with our very special contributor Larry Summers of Harvard. And Larry we have a lot to talk about when it comes to the economy with respect to markets. But I want to start with something very different and that is what we saw on that tragic shooting down in South Texas elementary school. I'd like to say it's unimaginable except it's happened too many times. Do you have any thoughts about what we're seeing in this country. Horror rage frustration. We can do better. We can do better. We
need to think through what the right solution is. Some some limits on access to guns that don't threaten any real Second Amendment right. Some red flags set of procedures. They catch catch signs of trouble and people and take actions. We just can't accept this as the regular order of business in America. And I think David it reflects something that maybe broader a kind of new callousness in our country. We're probably only in the fifth inning with respect to Covid. There are gonna
be hundreds of people dying each day as far as the eye can see. And we are not as a country making the investments whether it's vaccines you can take through your nose whether it's new therapeutics whether it's a war on long Covid and clinical trials that we need. We've let the Covid controversy become a green eyeshade thing about pay for wars and a culture thing about masks when they're the highest return investments available in our society for here and for leadership around the world. And we just can't seem to get there. And I just don't understand why we can't all come together on the proposition that innocent Americans shouldn't be dying and that it's government's first obligation in the name of security to prevent that from happening. Yeah it's hard to imagine what's going on. Larry let's come back now to the economy if we could. And particular we had FOMC minutes coming out this week that the markets took as good news because they talked about having raising rates at 50 basis points for two or three times. And then that gives them flexibility as the Fed already accomplished much of what it has to accomplish with respect to inflation. I doubt it but I'm not sure.
I think the Fed's flexibility is a much better place for it to be than all this emphasis on forward guidance that we were having for a long time. I think humility is the right posture in with respect to monetary policy. David as you know my view has been that inflation's not going to come down without some meaningful downturn in our economy. That means an increase in unemployment. But I've been uncertain as to where interest rates will have to go to achieve that particularly all that's happening that's been adverse for financial conditions in the stock market and in credit markets. But I thought the Fed's posture at last was broadly appropriate and now the question's going to involve carrying Karin through. But I do continue to believe that a soft landing is an unlikely outcome and that those who are confident that it will happen. I don't think I
have a basis for their confidence. OK well let's talk about the Congressional Budget Office because I don't know how confident they are but they came out with projections this week that would sure look like a soft landing. They have inflation coming at a two point three percent by 2024. They've got GDP growth at one point five percent. Unemployment still under 4 percent three point eight percent. And the 10 year only goes up to three point one percent. That sounds a lot like a soft landing to me Larry. I've always thought of the CBO as a bastion of credibility. I've watched the CBO projections for 40 years.
This is their least plausible one in the 40 years that I've been watching. To be fair they have to lock that forecast up months ago and a lot's happened that's been adverse in the last several months. But they are the last holdout on team transitory on the conviction that somehow we can have the economy overstimulated and still have inflation come way down because the supply side is just going to wonderfully materialize. That's a conceivable outcome to possible outcome. How they could regard that as the most likely outcome is not something that I can understand. You know David a good discipline for would have been a good discipline for them. Good
discipline that I try to use. I would commend your listeners is whenever you have a forecast imagine that it's way off on the upside and imagine that it's way off on the downside and see if those two things are equally plausible. And I for one don't think that 4 percent inflation is. I think it's much much more plausible than 0 percent inflation two years from now. And that tells me that 2 percent inflation isn't really a best guess. One of the valleys this week was how the United Kingdom is
addressing some of the energy cost problems. They're imposing a 25 percent windfall profits tax on excess profits from oil and gas. We had Mohamed El-Erian say you know what. He's not sure it's a great idea but it's better the alternatives if they give that money that people were having to pay more. They don't tend not to be the people can afford it. What do you think about windfall profits taxes on oil and gas. I don't know about the British context but I think in the American context they'd be a grave grave error. Today's windfall profits tax is tomorrow is a return is a tax on the return people made on investments that prepared for this contingency. A society that imposes windfall profits taxes is a society that
discourages preparatory investments. It's a mistake. If we need revenue which we do in this country we should get it by repealing the windfall profits giveaway that was represented in the Trump tax cuts to a substantial degree. And that would enable us also to join the world in the global tax cooperation that was such a great success for ISE Secretary Ya'alon. I've sometimes been critical of the by the administration but I applaud them for having resisted the easy political temptation to windfall profits taxes. That was the courageous thing and that was the right thing Larry. Let's talk about how we're trying to get our ISE inflation back here. We all have to talk about macroeconomics your renowned macro economist. What I saw on the micro economics. Things like antitrust policy is
something we talked about last week on Wall Street. You tweeted about it to good effect this week. Also for that matter tariffs. We continue to talk about tariffs with even secretary say Blinken coming out giving a speech this week. Doesn't sound like those China tariffs are calling off anytime soon. I would say this. Those who say that vigorous competition is central to capitalism are absolutely right. We should be pushing for vigorous competition. Probably the single most important instrument the government has for
promoting competition in key industries is maintaining open markets in which foreign companies have access to U.S. markets and can compete with U.S. producers and which in return for that U.S. producers get more access to foreign markets. Trade liberalisation is central to having competition in the economy and it should be at the front of any kind of competition policy. If we had not had 17 and a half percent tariffs on infant formula. We would be in a much better position with respect to that issue today. If governments had more sensible procurement policies with respect to infant formula at the state level we would be in a better position with respect to infant formula today. So yes I applaud the administration's emphasis on
competition policy. But that means we've got to respect all competitors who can help American households. Okay Larry thank you so very much for being back with us this week. That's our very special contributor Larry Summers of Harvard University. Coming up telling the truth by accident of Iraq. Coming up in Ukraine what Freud might say about President Biden's trip to Asia. This is Wall Street week on Bloomberg. Finally one more thought to air is human to forgive divine. So wrote Alexander Pope over 300 years ago and our leaders are
giving us plenty of opportunities through the years to demonstrate just how divine we all can be. Consider for example President Ford during a presidential debate in 1976 telling an incredulous Max Frankel of The New York Times that there really wasn't an Iron Curtain. After all there is no Soviet domination of Eastern Europe and there never will be under a Ford administration. I'm sorry could I just. Ford did I understand you to say sir that the Russians are not. Using Eastern Europe as their own sphere of influence and occupying most of the countries there are a few years later when President Reagan in 1984 was getting ready to give a radio address and thinking them Mike in front of him wasn't on signed legislation that will outlaw Russia forever. We begin bombing in five minutes. The Soviet Union condemned the remarks and his opponent that year Walter Mondale tried to use it against him in the election. But we all know how that ended right. Presidential gaffes are not merely relics of the 70s and the 80s. This week we had two reminders that they're very much alive and well in
the third decade of the 21st century. As former President George W. Bush tried to condemn Russia for its invasion of Ukraine and scored something of an own goal which quickly was picked up on by Steven Kull there the decision of one man to launch a wholly unjustified and brutal invasion of Iraq. I mean over Ukraine. Director Anyway Jiminy Christmas the one phrase he definitely should never utter for the rest of his life. It's like he's thinking about it all the time and it just popped out. And then there's President Biden on his trip to Asia. When he was asked about the U.S. spring to the defense of Taiwan if it were invaded are you willing to get involved militarily to
defend Taiwan if it comes to that. Yes you are. That's a commitment we made leading some at least to take issue contending that he was committing to take up arms if necessary rather than merely ensuring that Taiwan can defend itself. And this isn't the first time the president has appeared to go beyond stated policy on Taiwan. It's more like the fourth
reminding us once again if that aphorism of Michael Kinsley in Washington a gaffe is when someone tells the truth by mistake that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
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