Wall Street Week - Full Show 06/03/2022
More guns for Ukraine. Talk about fewer guns the United States and pinning the tail on the donkey of inflation. This is Bloomberg Wall Street week. I'm David Westin. This week special contributors Larry Summers of Harvard and Steve Rattner of Willett Advisors take us through another volatile week. Caught between the rock of inflation and the hard place of economic downturn. My top priority addressing inflation. Another week the 13th of war in Ukraine with no end in sight but Europe tightening the screws on an embargo of Russian oil. We
decided then to have a ban now on de facto 90 percent of Russian oil imports to the European Union by the end of the year. And the United States is sending yet more weapons to aid the Ukrainians. Just this morning President Biden announced a significant new security assistance package to arm Ukraine with additional capabilities and advanced weaponry precisely what they need to defend themselves against the ongoing Russian aggression. It was another sad week of mourning those lost because of gun violence as legislators in Washington once again took up the question of gun safety. These families my colleagues
don't want thoughts and prayers. They want their elected leaders to respond to their suffering. But when it comes to the economy and the markets the week was consumed with concerns about inflation as President Biden met with Fed Chair Powell and Treasury Secretary Yellen making it clear that the Fed is in the lead. My plan is to address inflation starts with a simple proposition respect the Fed respect the Fed's independence even as Secretary Yellen fessed up to underestimating the issue. I
was wrong then about the path of inflation would take. On Friday we got the numbers we'd all been waiting for and the jobs numbers came in stronger than anticipating adding three hundred ninety thousand jobs in May keeping the unemployment rate at three point six percent and showing wages growing at a five point three percent annual rate which pointed to more Fed tightening and took some of the lift away from the markets. With the S&P and the Nasdaq losing on Friday what they had green during the rest of the shortened week and leaving the S&P 500 down one point two percent for the week and the Nasdaq down almost one full percent while the 10 year yield reached back toward 3 to end up about two point ninety three percent. To help us make some sense of it all we welcome now Chris Ailments CIO of the California State Teachers Retirement System and Sarah co-editor CEO and co-founder of Causeway Capital Management. So Sarah thanks so much for being with us. Let's start with you on the equity side here. What did we learn this week into these market. What markets turned during the week. There seems to be uplifts whenever there is some sense that the federal back off. But it's
very unlikely there is. There's so much need to crush inflation now. Given what a terrible tax it is particularly on low income people. And the other side of the bonsai. Chris what did you take out of the week for a two point nine and heading to three percent on that to your rate and the curve is going to be flat. I know it's going to go inverted already. Did that earlier. David so we've got the signal that a recession is somewhere way out there. But you know bonds are going to keep backing up. The Fed is tightening. Facts are the facts. The Fed will tighten throughout 2020. Well so we've been told by a chair Powell Chris that he has the tools necessary to deal with inflation. Does he. Not this time. Inflation mean his only tool is today's raising rates. And this
is the kind of inflation that that doesn't have a direct impact. It's a supply problem. It's crude oil. It's commodities eventually. But it does mean that his staff to raise them consistently and a whole bunch higher than I think people are anticipating. So rough road ahead. I'm very concerned. Yeah I would agree with
that. He has to. He has to lower demand in order to keep prices under control. And that's going to require I mean we've just started. Not to mention the shrinkage of the Fed balance sheet. Other central banks other than China are all doing this too. This is a global tightening. This is our area. When you say slow demand that means slow down the economy in the Dow Jones Don. Where do you hide. Yeah I did. Well I don't believe in raising cash because it's one thing to raise another to put it back into the markets at the right time. That's why market timing is so difficult and our institutional clients and our funds expect us
to be fully invested. So the key here is to be diversified and use a lot of risk metrics in order to know just how much volatility you're likely to anticipate and then attempt with the better companies to be defensive. We just outperform as markets swoon but these are cycles and then we'll cycle back up again. At that point time we need to be in stocks. It would be take advantage of the impending recovery. We just haven't gotten to the bottom yet. Chris to go back to Sara's point you've got to slow the economy hooking up with the jobs numbers you've got on Friday because that didn't look like the economy is slowing very much. How much does the economy need to slow. We heard from Bill Dudley the former Fed chair the president here in New York and he said that actually we've got to go way about 4 percent unemployment to get the inflation back down to 2 percent. Now you're on the point David Brad Stone. You got to realize the amount of stimulus that
the Fed and Congress kicked into the U.S. economy during the pandemic and we're still living off of that bus. I got to tell you that you know balance sheets of average consumers are still there. They're checking accounts in. Their bank accounts are still cash rich. They're not spending that money. They're saving some of it. But you know you've got a strong employment market. You've got five million people who think they're wealthy enough to not work. That's just amazing to me. They've got to come back in the market. That's probably going to mean higher wages to attract them back which is more inflation. So you're right. The Fed's got to raise rates. We've got a long way to go. That's why I don't think a recession is imminent. But we've got a lot of
problems that we have to deal with before we're in a recovery mode. And David housing is the most lagging of economic indicators. We should be looking at housing. We should be looking for example in housing employment lagging housing orders profit sort of in that order and net. And it's all coming. That's what's so interesting that these markets are degraded by valuation multiple. But the profit hit. Hasn't happened yet. That's the other shoe to drop. Well what about that. Because
you've talked about earnings expectations. Are they coming down the way they should. Given where we're headed. Sarah. Very likely. And again that gets to the point of the Christmas question where do you hide. You obviously want to be in the stocks that will incur the least earnings downgrades. And that's
typically those at this point that are more defensive less economically cyclical. But again it's critical to be prepared to invest in those that are cyclical when we are at some point at the at the bottom of economies. And we're not there yet. And that's why it's hard to know exactly where it will be. And the whole point of active management is to start you. We we use a ranking system so we know how stocks are from a risk adjusted return basis. And as the cyclical stocks look more and more attractive they'll start working their way into the portfolio and into the fund. So it's a it's a gradual process right now defensive. And then over time over the next several months probably well into 2023 much more cyclical.
Chris you said it's not imminent recession is not imminent. What do you mean in it. What do you think about 2023 2024. Yeah I've got to be careful when I use words that are vague on timing. Chair Powell did that on inflation and it really to resolve for a loop. So I just don't think we're going to see it in the second quarter or the third quarter during the summertime. But I am worried about the fourth quarter next fall because these cash in consumers accounts they're going to ease it up quick especially if these inflated prices that people are having to pay. So employment is strong. And as Sara said earnings are OK. But listen to what CEOs are saying in their earnings calls. They're very cautious. They can't push this inflation in their base prices on to consumers. They won't buy it. So at some point we're going to start to see weaker economic numbers and then
eventually earnings downturns surrounding Wall Street's pricing that end David. It's not paying attention to just the facts surrounding the market at this point in the economy. Yeah I would agree with that. There are more earnings downgrades ahead. But on this question of the cash balance sheet the households they do have a lot over two trillion dollars I saw reported yet again this week. Chris says it's not going to last that long. How long can that continue through. And do we wanted to continue through very long because the longer we keep up with inflation it doesn't mean the
harder the Fed's going to have to come down the market. Very likely yes. The more persistent it is the more psychological it becomes embedded in how people operate. And that's the vicious wage price spiral. Something we haven't seen for 40 plus years. And it's it's nobody wants to see this. So that's why the Fed has it aggressively. Just this is going to be quite different from the 70s because I'm sure we have consumers with some money. Maybe they will in turn carry higher savings
rates with so much uncertainty out there. That's it. Banks with just awash in reserves. And the problem with that is that means that they'll continue to lend. That's that velocity of money. Money just keeps circulating in the economy which is counter to what the Fed wants which in turn makes the Fed have to be even more aggressive. And Chris we've gone through this entire discussion without talking about Ukraine and what's going on with a war on the ground in Europe much less what's going on with China. You talk about uncertainties. It goes beyond inflation goes beyond the economy. You're going to keep me up at night again David. There's a long list of risks surrounding this market. It begins with the economy but geopolitics are huge. You know the whole issue with Ukraine that's the beginning of inflation. We had inflation from
the supply surplus the supply chain shocks but now it's continued on because of the oil shut down as you said with the lead in and now food problems because of lack of wheat coming out of Ukraine and Russia. You're going to have higher food costs across Europe and that's going to lead to inflation even in the USA. So there's a litany of problems surrounding this market. On the long term as well as in the short term it's not for the faint of heart at this point. OK. Sarah CAC Causeway Capital and Chris Aleman of Cultures we'll be staying with us as we ask them to take all that they've
just told us about and put it to work in the markets. That's next on Wall Street week on Bloomberg. Where else but on some dead planet. Lost in space could have come the evidence of inflation indiscernible on this planet that led the starry eyed Federal Reserve to raise interest rates for the third time since February and thereby throw another cosmic monkey wrench into the financial markets. The Fed's fascinating if wacky theory that the way to bring down long term rates is to keep on raising short term rates is ever more clearly not produced by any evidence this side of Neptune. That of course was loose rock ISE on Wall Street with way back in 1994 when inflation seemed like it came from a different planet and he could see no reason for raising rates. Well now almost 30 years later we're not on Neptune anymore and there's plenty of reason to raise rates. Which poses the question for
investors of what they're to do about it. Sarah CAC Causeway Capital and Chris Alien Cultures have stayed with us. So Chris let me start with you as the bond guy here. We saw the yields really shoot up. They've settled back down now so they're staying pretty under 3 so far as we can tell. Is this the time to be investing in bonds. David I love that clip. Thank you for showing that because I remember that show I made my wife delay our dinner out on Friday night just so we could watch Lou. My favorite coverage all the time. You know I'll call Howard Marks here. If you buy bonds and can hold them to maturity that's a good safe investment. And you can get high yield bonds north and 7
percent which is a good return. The problem for most of us is we have to mark those to market and the Fed is going to raise rates consistently because now unlike 1984 we do have inflation and the Fed is trying to find it. So bonds I think at this point I would be underweight fixed income and I would not try to hold a bond because I think yields are going to go higher and higher which is going to drop those prices lower and lower. This is a time where you need to find good long term but safe
and boring investments. So when I think of Sarah and always buying kind of stocks what kind of are out there. Oh I love being associated with boring. Well but he's asking you what kind of boring stocks are there out there Sarah. I couldn't find a forest. Oh of course I have a whole portfolio of them. But what it isn't boring is what's done so well this year. Energy. I
would have had all through fruit thrown at me two years ago if we talked about oil and gas stocks. And then you have all the other defensive utilities and the metals have done well and the consumer staples. And what has been a disaster this year to date has been the crier darling. The information technology sector is particularly bad outside the US and and terrible in the US. Second only to consumer discretionary. And they both have their multiples massively contracted. But in that rubble of I.T. the information technology sector there are some fantastically defensive companies. We call them value tech. And again get
beyond that companies like Pfizer which is one of the we think the best financial technology companies they provide and merchant acquiring bank processing software. They're critical for banks and credit unions to run their run their transactions. And that means the business is really sticky and the multiples on the stock is quite low. The managed is excellent. They made a big acquisition. They're paying off the debt associated with that. It just goes under the radar. But every one of those
transactions there's a fee. And so it's it it's one of these wonderful dull businesses. And it generates so much cash. And that's exactly what we're looking for now for clients are businesses that can just ride through whatever the economic environment is ahead and deliver. And that creates less volatility and some downside protection. So Chris this is how good deal of boring socks. Well it sounds good to me as steady cash flow and the kind of stock that Sara is describing I would describe also as infrastructure. We do those kinds of investments. So outside of
the equity market when you own a pipeline or better yet you own electricity line you own a toll road that steady consistent cash flow really pays off. And real estate in this kind of a market I wouldn't be a big buyer of real estate but if you've got it and you can hold it then you've got some steady cash flow. So those are the kind of things that help you through this type of the difficult market. All of those levels of uncertainty is not just the Ukraine war or the struggles with China. And I think it's a real challenge when you look around the world to find those kinds of investments. Sarah you invest in the
emerging markets. You know are there those kind of boring yield opportunities in E.M. countries. Not many. Because people tend not to go to high risk geographies to get boring. Usually they want growth and they're willing to take some risk to get it. But you mentioned China. Chris in China is fascinating because China in a way is ahead of the rest of the world in terms of earnings downgrades. We've had Covid arrive later and it created major lockdowns in Shanghai and Beijing. And you have like 50 million people were stuck in their homes. More than that. So all of that is credit a real
impediment to economic growth and hence the earnings downgrades and the stock market was absolutely horrible. So the Chinese companies trading in Hong Kong the ones trading in the US in 80 hours and the ones trading in shares in the Chinese mainland exchanges all of them terrible. And this is a rare opportunity in China being the largest component of any emerging market index. That just means that the indices have fallen. But there is the potential for significant recovery because the only central bank globally is engaged major central bank engaged in stimulus. Now not tightening that stimulus is China's. So one thing that certainly was not boring this week was ESG investing where we had some very senior executives lose their job over it. Lot of accusations of greenwashing whereas ESG investing. If I Chris would start with you. What do you think about ESG. Is it here to stay. Is it really having a tough time of it. Oh there's no question it's here to stay. But David let's
get away from the initials. And if I mentioned to you long term business risk everybody and every CEO would absolutely agree. Yes there's greenwashing. But the question is and you let him show with it on one hand you have us sending weapons to Ukraine but then the horrible school shootings. And as a as a fund that represents teachers which were offended by the lack of federal follow through on gun control or at least a better sustainable industry there ESG is absolutely a reality. Whether it's environmental social or governments and I've been saying for a long time doubted that climate change is real material and it's going to massively impact our lives in the next 10 years not in the next. What it will in the next 20 actually but definitely in the next 10. And people have to realize that. So you know I think people like Sarah really have to think about what I
consider sustainable questions for companies about how they operate today and are they going to be able operate into the future. Chris it's so much more than that. We've had to prove to our clients that these criteria. That again as you rightly know we've been using this. The active management is all about finding better managed businesses that treat the environment appropriately that. These are employees that are governed so that they they reward shareholders above all. But we can't have companies in the portfolio that don't perform. So using these ESG criteria to isolate those stocks are going to outperform their indices. That is the holy grail. That's what everyone's working on now. And that's why we've hired a number
of people to do that. We're focused on all of our research. But what's different now is it's one thing to investigate and use data and say all right these companies are doing a better job at another to push them this this active engagement. That's what's different now is leaning on the management teams and the boards of directors to clean up their act become law for example environmentally friendly amongst a whole variety of demands that we're making because because of our values even though they may be our values it's because it leads to performance improvement. Chris David I think you hit it on the head when you say greenwashing CEO words. Words are cheap. They really have to show by their actions. And I agree with Sarah that engagement
holding CEOs accountable making it part of their compensation thinking long term is absolute critical. And we learned this week. You get in trouble by fibbing. I think it's fair to say. Thank you so much to Chris Alma of Canisters and also Sara Carter of Causeway Capital. Coming up we're going to take a look at what's happening next week in 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 for a look at what's coming up next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. A barrage of data in the week ahead will probably give further indications that China's recovery will be a struggle. Bloomberg Economics expects a bounce in May. Credit
but softer consumer and factory gate inflation could leave the door open for further easing. Meanwhile Australia's central bank is set to raise rates as it tries to rein in inflation and will also be at Asia's biggest defence summit as the double ISE Shangri-La Dialogue kicks off here in Singapore. Now over to Dani Burger in London Danny. Thanks Juliette. In the coming week in Europe all eyes turn to the ECB on Thursday where they have a rate decision and more debate has surrounded whether or not this is a live one. Christine Lagarde has said that it's not until July that for start the rate hike cycle. But given that inflation is reaching record levels in the eurozone eight point one percent even in
Switzerland which of course has its own separate decision that is reaching its highest since 2008 as well. So what will the central bank do to combat high inflation as markets move to price and the continued inflationary and demand effects of the war in Ukraine. Now to Romaine Bostick in New York. Thanks Danny. The week kicks off with Apple's Worldwide Developers Conference. It's an annual gathering where the company outlines its software strategy for the coming year. Elsewhere Space X the Rocket Taxi Company controlled by EMI Musk is scheduled to launch its 25th commercial resupply mission to the International Space Station. And the parent company of Facebook and Instagram changes its stock trading ticker from F B to M E T A member
within seven months after Mark Zuckerberg said he was pivoting the company's name and mission into the metaverse. And the week will end with the release of the Consumer Price Index. For me the headline number is expected to show that year over year inflation held above 8 percent for a third straight month. It's a persistent elevation in the prices Americans pay. That has
gone from being a monetary policy quagmire to a political football reshaping the midterm election season. David. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up we go through the macro economics and the market implications of inflation and how to get it under control. We're special contributors. Larry Summers of Harvard and Steve Rattner of Willett Advisors. That's next on Wall Street week on Bloomberg. This is Wall Street. I'm David Westin. It was another volatile week in the markets. And those jobs numbers out on Friday did not help matters one bit. And JP Morgan CEO Jamie Diamond this week gave us little hope for good news anytime soon. It's a
hurricane. It's weak right now it's kind of sunny. Things are doing fine. Everyone thinks that the Fed can handle this. That hurricane is right out there down the road. Coming our way. We just don't know if it's a minor one or Superstorm Sandy or Sandy or or Andrew or something like that. And it's seeing you better brace yourself. Tell us put together the mosaic of the economy
on the one hand in the markets on the other we welcome now our special continues Larry Summers of Harvard and Steve Rattner Willett Advisors which invest the personal and philanthropic assets of Michael Bloomberg the founder and majority shareholder of our parent company. So welcome to both of you. Larry let's start with that Sunny today. Like on Friday the jobs numbers were pretty sunny a lot of jobs. At the same time the market's sort of saw a storm squall coming in because they didn't like it one bit. What are those jobs numbers tell about where we are on the economy and particularly managing inflation.
Look the economy is pretty strong right. Right now the question is inflation is way above any concept of target. My view has been that inflation's not going to come down to target levels or close to target levels without introducing some real slack into the economy which means a period of very high turbulence. Whether that slacks going to come because the Fed's going to have to push interest rates very high or whether that's slacks going to come because of internal forces in the economy inflation eroding people's incomes and so forth that's less clear to me. But I don't think there's a path to a low inflation
economy without a material period of economic slack. It could happen but it's not the dominant probability. What we saw today was a lot of strength and that suggests more need for interest rate hikes and that's what was discounted into the market. So Steve you're a smart investor so speak for the smart investors. Should smart investors be actually rooting for weaker jobs numbers than we saw this week. Well just to follow on Larry's point I think that I think his
point is completely correct. But I think if you take the probability of higher interest rates being required given today's job numbers and obviously that was the market reaction I think the market is way underpricing the likelihood of future interest rate hikes. Looking at something like seven more hikes and that's probably some fraction of what would be required in order to get inflation down by using higher interest rates. So I don't know what Jamie. Which which whether Jamie Diamond was referring more to the real economy or more to the markets. But. But I would be very worried about the markets and somewhat worried about there about the real economy for the reasons Larry said. Are we seeing any indications yet of a slowdown in the economy. That the obviously the Fed has to want. If they're going to get
their arms around inflation. We're seeing a little bit of indications that some firms are no longer reporting the kind of huge labor shortages that they were before. We're seeing some indications of inventory build ups. But I think overall the picture is still a very stretched economy. You know the statistic I like to focus on goes to the labor market and it's the ratio of vacancies to unemployment
typically for every 10 unemployed people. We have six or seven vacancies. Right now we have 20. The highest we've ever had before was 15. So even if there is some easing up we've got very very tight labor markets. And I don't think there's likely to be substantial disinflation while we have very tight labor markets. Steve you'll remember that Chair Powell earlier when we weren't seeing that inflation yet said if it comes we've got the tools to deal with it. I wonder when we do we talk to Larry Fink this
week actually and he has his own doubts. This is part of what Larry had to say. I don't believe the Federal Reserve has the policy or the tools to do much with it right now. And I'm personally not blaming the Federal Reserve for where they are where we are right now. But I believe most of the problems we're living with today are more policy generated and supply generated. Steve what he's talking about their uncertain policy generated are things like some of our trade policies so our policies on immigration we're not getting as many workers. Indeed energy
policy. You think that's bigger than just a single fiscal stimulus package. And so that's not something the Fed can deal with. Are we concerned they don't have the tools they need to get the job done. What would be a little concerned but for slightly different reasons. I think some of those policy issues are certainly legitimate but I don't think the question for example of immigration is really what's driving our inflationary situation at the moment or really would make that much of a material difference in any medium near or medium term scenario. I think
in fairness to those on the who are on team transitory there are some supply shocks going on in the world. If you look for example at the price of chicken and egg I just happen to see that they both are up by more than double digits this year. I don't think people are eating a lot more chicken and eggs or eggs. So I think you have to look for other reasons for some of this stuff. And obviously energy was tight. We can talk more about energy. But Ukraine certainly has exacerbated that. But on the other side of the ledger I just want to make one comment in relation to what I said. You know for those people who basically
look at people like Larry and me and say you guys keep talking about recession. What recession. There is still more than two trillion dollars of excess savings or cash on the sidelines. So Jason Furman has done these numbers. And by his math even with the lower savings rate that we've seen in the last couple of months it maybe has brought that two and a half trillion down by one hundred million or something like that. So there's still a huge amount of excess cash. If you saw first quarter bank
earnings reports that CEOs and CFO are all talking about how much cash people still have in their bank accounts. So so yes I do see trouble down the road but I don't think it's right in front of us at this moment. And then one very last point I'd make is that as we talk to companies we are there is the transmission mechanism from the Fed through the capital markets to companies going on where it is where companies especially growth companies are bracing themselves for it to be harder to raise capital. And you're starting to see them cut back on expansion plans on hiring plans on things like that. I don't
think you can find that in the numbers yet but it's some anecdotal evidence that we've started to see. Laura what about that point specifically. I've had some people from Wall Street say when it comes to really quantitative tightening which we're seeing for the first time this this week that actually really depends on where that money is coming out of. It's not clear
whether that will slow the economy down or not. I don't know that I think that we are seeing some beginnings of the evidence of monetary policy working. I don't really understand Larry Fink's views. It seems to me pretty clear that a substantial part of the inflation we have is related to the fact that we have driven demand to extremely high levels. In 2021 GDP in dollars grew at overall 11 percent. That's a reflection of what was happening with fiscal and monetary policy. We have growth at 11 percent in total spending. You're going to have high and rising inflation and that's what we got. So it is substantially related to what at least with the benefit of hindsight were policy errors in 20 21. I think it's also
important to understand that if your bathtub overflows there's going to be more flooding some places than there are going to be other places. That doesn't mean that the fundamental cause of the problem isn't an overflow. And we had a fundamental overflow and it manifested itself more in some parts of the economy in some sectors than in others. And we call those bottlenecks sectors. But in many of the bottlenecks sectors we were producing more at the end of 2021 than we were at the beginning of 2021 which is what shows you that it was kind of a demand shock. I don't think we have the tools to bring this down smoothly. The experience is as I've said on this show before that when unemployment's below 4 and inflation's above 4
recession comes within the next two years. And my best guess would be that's what we will see this time round. Yes we have had supply shocks. There's also this idea that if it's a supply shock we're not supposed to adjust policy. Well I would disagree with that. If the economy is going to be kept in balance and there's going to be inflation then if the capacity of the economy to produce has been reduced we've got to reduce the level of demand. And this is why I always go back to the labor market because the labor market isn't one specific sector. It's everything from child
psychiatrist to workers at McDonald's where we've allowed demand to exceed supply creating the wage inflation which is the basis for much of the inflation that we are us that we're seeing. So I think that we're in a quite difficult situation. I don't think we had to be in this situation. And I think the Fed's going to do its very best to navigate a path. But there may not be any path of monetary policy that enables inflation to come down to the 2 3 percent range and also keeps the economy growing rapidly. We can agree that that's what we all want but that doesn't make it something that's feasible. One thing we certainly learned I think this week is that Janet Yellen your successor as treasurer starting now admits that they kept that tap on to walk in the bath of the user analogy. We're gonna have much more with Larry
Summers of Harvard and Steve Rattner. Advisers we're talking about one of the things greenwashing very much in the news this week. This is Wall Street week on Bloomberg. I don't want to be the environmental police. I think it's wrong to ask the private sector to tell all of us the entire society. We have to move forward. And I don't I I have no problem in doing Scope 1 and 2 but we've always had Scoop 3 is forcing big companies banks and asset managers to be the environmental police.
That was Larry Figure BlackRock talking to us this week about the plight of ESG or at least the E part of ESG investing. After some senior executives lost their jobs or manage the hot area at least once high area of ESG investing. So with us our Larry Summers of Harvard and Steve Rattner will advisor. Steve let's start with you because we've talked about ESG investing for I've taken you say in principle short on the environmental part of it climate. Absolutely. But there aren't that many opportunities.
What are we seeing ESG investment now. Because it was very very hot and now there's a lot of questioning of it. I think it's still certainly very hot in certain circles anyway. I as you may remember from our conversations I've always been somewhat skeptical of it as an investment tool. If you want to look at ESG principles as a shareholder because you believe that's what's right for the country for your company for yourself or anybody you're a shareholder. You're an owner. It's capitalism. You have a right to say vote do whatever you think is right. But if you look at it as on the theory that somehow
you're going to produce superior investing returns by investing alongside of ESG guidelines for restrictions whatever you want to call them I've been deeply skeptical. I've seen little to no evidence to suggest that that's true. At best it's kind of a push. At worst it may be counterproductive. I can give you an anecdote which is a company like Unilever which was way out in front on ESG issues. Maybe they got distracted maybe they didn't but they way underperformed. They've got an activist on their board and so on. And so I I just think you have to separate ESG as something you want to do as a shareholder for something that you think is going to actually make the company more money. Larry where is the line between ESG or let's stick with environmental for the frozen foods because I think it's hard to quantify these for me and the S and the G part but environmental wears long between just ESG investing on the one hand on the other hand really being concerned about long term risk. There
certainly are long term risks for companies based on the environment climate. Look I think that people should make investments largely on the basis of what the ultimate prospects are. I think the problem comes when people who really have an environmental motivation try to attach an economic motivation and make economic arguments that aren't really very strong. I think there's been a whole movement in the central banking community
to start focusing on what they call climate risks as if those were central systemic financial risks. And I don't think the evidence has ever been produced that genuine concern about systemic financial risk of the kind we had in 2008 during the crisis of the kind that reared its head in the immediate aftermath of Covid that that is something that is likely to come from climate issues. Seems to me to be quite remote risk. And I think a lot of the enthusiasm came from people who couldn't legislate things about climate through the front door. And so they want to try to legislate them through the back door through central bank regulatory policies. And I'm not really very enthusiastic about all of that. And more generally I think some of what has what little evidence there is of positive returns to
environmental investing. I don't think reflects so much that it's a way of picking companies that are going to outperform. It's the fact that this was a growing movement. And so first companies that met certain green tests had a little bit of green investment and then a lot more green investment poured into them. So their stock prices went up but it was really driven by the pressure from the investors market price pressure from the investors not buy anything about the underlying fundamental realities of the company. Well there's also a danger. I think there's a danger in this which is that I think many in the business community or at least some in the business community celebrate these processes of their own making pronouncements of one kind or rather and encouraging various kinds of investments. And if that they think that if they make enough noise in that direction they can avoid strong public policies. My sense is that this is not going to be resolved without strong public policies. And a lot of this
business cheerleading has a bit of a subtle motive to suggest that the problem is being addressed without the need for strong public policies. So Steve just last word to you here. Larry raises the prospect. Is it possible that some of the rush to ESG investing as we saw a lot of CEOs saying they're outperforming ESG investing is outperforming the S&P 500 now it seems to reverse. Was it a rising tide that is now going out. Look I am as I said I have not seen a lot of evidence that he is she investing has ever outperformed or is outperforming other ways of investing I think. And I think as a matter of pure investing theory you could argue that if you constrain the kinds of investments you're willing to make based on a set of criteria that aren't necessarily directly related to profitability. All things being equal your returns should be lower. And again I'm
not advocating going out and investing in a lot of companies that are environmentally dangerous or polluting simply because you might be able to make more money. I'm simply saying that you that invest you have to be careful about how many different boxes you try to check in the course of investing. But I must say one last thing because I think Larry touched on a really important broad point. I think as a society we're looking to other institutions whether it's the Federal Reserve or central banks or whether it's corporations or what have you to solve problems that Washington is not willing to take on. And I think we need to push back in the other direction and say it's not the Fed's job to solve every problem. It's not companies jobs to
solve every problem. The executive branch the legislative branch have to step up and get some stuff done here. I suspect Larry you'd agree with that. Briefly. Yes absolutely I think that Steve is making exactly the point that I'm making I would add that I think some of the motivation for some of happy talk in the private sector may be to discourage public efforts which they don't want to see. That's why I was kind of glad to see Larry Fink signaling that he thought strong public policies were necessary. OK. Thank you so much to our special contributors Larry Summers and Steve Rattner. Coming up we're going to take a look at the war with China on the big
screen. That's coming up next on Wall Street week on Bloomberg. Finally one more thought. Does the facilities trap apply to movies. We have no shortage of conflict these days over whether that massive fiscal stimulus was really necessary. It is nothing short of preposterous that the central bank is still as we speak growing its balance sheet. The American rescue plan played a central role in driving strong growth throughout 2021. We have conflicts over politics which Ray D'Alessio says inflation makes only worse. We are going to have more conflict. We're going to
have more inflation. Inflation causes domestic political conflict and goodness knows conflicts over Ukraine. With Europe ramping up the pressure on Russia this week by curtailing oil imports we could see a reduction of Russian oil into the EU of 90 percent by the end of the year while Russia retaliates by cutting off natural gas supplies. But in the long run the biggest conflict of them all is likely to be the contest between the United States and China. As the former seeks to maintain its number one position in the world while the latter nips at its heels the trap that the Kennedy School's Graham Allison warns about in his book on the Two Cities Trap. The first proposition is to recognize that because of structural
conditions that the consequence of a rising China that is actually threatening to displace the ruling U.S. because of this lucidity and dynamic. The future will be extremely dangerous. These cities may have been a visionary. But when he was writing his Greek history over 2000 years ago even he could not have anticipated that the first skirmishes in the conflict might be fought on the big screen. But that's what we saw this week with the blockbuster opening of Top Gun. Maverick Tom Cruise best premier ever raking in some one hundred twenty four million dollars over the Memorial Day weekend which could have made some good money for China's 10th century. That is if it hadn't pulled its financing for the project. Concerned that the movie's
glowing portrayal of the U.S. military might just upset the government in Beijing. Until now studios didn't want to mess with China as it moves toward becoming the largest movie market in the world something Disney's former CEO Bob Iger talked about when his first Star Wars movie was premiering. It's the number two movie market in the world. It will become the number one movie market in the world in a few years. Six sooner than everybody anticipated. That's a huge opportunity that did not exist a few years ago. But things may just be changing. Could it be a coincidence that in the final cut of Top Gun there was what
appeared to be an edit that cannot make Beijing happy in the Top Gun sequel. Maverick is wearing a jacket with the Taiwan flag on the back. There was applause apparently in Taiwan when this was shown at the premiere but this movie will not be shown in China. Does this highlight growing tensions between China and Taiwan. This movie will certainly be an irritation in the mix of all of that. Irritation indeed. But as Tom Cruise says in the movie will deal with the consequences later. The end is inevitable. A
movie the kind is headed for extinction. Maybe so sir. Not today. 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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