Wall Street Week - Full Show (06/10/2022)

Wall Street Week - Full Show (06/10/2022)

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Dealing with the aftermath of the tragic shootings in Texas of breaking the Covid restrictions and stimulating the economy too much. This is Bloomberg Wall Street week. I'm David Westin. This week our special bond trader Larry Summers of Harvard on just how bad inflation has gotten to the Fed's forecast for a march saying that inflation would be coming down to the twos by the end of the year was frankly delusional. And senior markets editor John Authors on the downturn in ESG investing and whether there is more yet to come. Until now you've been able to have your cake and eat it. It was another week of dealing with the unimaginable killing of 19 elementary school children in Texas. Whether you've all the native son Matthew McCartney at the White House calling for gun legislation. I'm here today in the hopes of applying what energy reason and passion that I have to try to turn this moment into a reality. And Congress taking up the question the U.S. House has

passed a package of gun legislation mostly symbolic action. I don't know what will come out of the negotiations in the Senate but I have confidence and those who are negotiating in good faith on both sides of the aisle and we are eager to see what that will be. At the same time Congress was dealing with guns. It was also looking into what led to the insurrection at the Capitol in January 6th of last year. You will hear that President Trump was yelling and quote really angry at advisors who told him he needed to be doing something more. January 6 was the culmination of an attempted coup in the United Kingdom.

Prime Minister Boris Johnson faced something of an insurrection himself as members of his own party called for a no confidence vote which he won but not by much. Were in a worse position than Theresa May was after that in 2018. Do you think this is a good result. I think it's an extremely good positive inclusive decisive result. When we weren't dealing with insurrection and the killing of innocent children we had the economy to reckon with. As Treasury Secretary Yellen told Congress that high inflation will continue but that getting it down is her job. One. I think that bringing inflation down should be our number one priority. And President Biden has indicated it is our top priority. And boy was she right at the end of the week the

consumer price numbers came in showing just how hot inflation is with the headline number up eight point six percent year over year. And the core excluding food and energy up 6 percent which sent the markets down the most in three weeks with the S&P 500 off two point nine percent on Friday alone for a total loss of 5 percent for the week. Overall making it nine and the last 10 weeks the market's down and tech was hit even harder as the Nasdaq lost five point six percent over the course of the week. Treasuries fared no better leaving the 10 year yield well above 3 percent. Report 1 5 5 2 size and even the 2 year was over 3 percent at the end of the week. Take us through this rocky week. We welcome now Chanel decide she's chief financial officer of fixed income at Franklin Templeton. And so the super median. She is head of US equity and

quantitative strategy at Bank of America. So welcome to both of you. Great to have you here supporting me during this difficult week. So let me start with you. Could Savita. What do you make of what the markets did this week. I mean inflation looks like it's here to stay. It appears right now it does. And I think the markets actually were fairly well behaved against the backdrop of rising interest rates rising nominal yields. I think you know this is a year where the discount rate for equities has demonstrably increased and we've seen that play through to stocks. The risk of equities right now and especially the S&P 500 and the NASDAQ are that these are very long duration benchmarks.

There's a lot of growth promised way out in the future for these benchmarks. And we think that that's going to be a continued challenge if we see those discount rates rise as we've seen so far this year. So Sonali Basak about challenges I should say fixed income has a few challenges of its own. It looks like the Fed is going to have to be breaking rate hiking for some time to come. What do you make of what's going on in the bond market. So you know I'd just say that we have gone up almost 40 basis points in about 10 days on U.S. 10 years. This is the deepest most liquid market in the world. And I'm just looking at this

and this level of volatility. It can't be anything that any central bank would welcome. I do think that unfortunately we are going to see more of the same. And it's not going to be a nice grind up. It's going to see volatility. But inevitably the Fed is actually going to need to do more. I think that in the last after the last Fed meeting what Fed Chair

Powell delivered was a dovish hike. I think what we're going to need to see next week is a hawkish hike. So a promise to follow that the Fed is going to do everything it needs to do without it being limited to a couple of more months a 50 basis point hike for example. This is an all I'm not going to ask you to guess at what the Fed will do next week and going forward. But if you were advising the Fed would you say it's a matter of when you raise rates or how much you raise. And that is to say is this matter. Let's get there faster. But the ultimate number we're going to is nothing much higher. Or do these numbers suggest

actually you're going to end up higher. So now I think you might need to get it higher but that's the reality because you know I did see some something which has baffled me about the Fed dot plot from March. And that's actually almost as interesting as the actual meeting next week is that the Fed essentially had inflation coming down almost by itself. There was in the sense that you had massively negative rates even as inflation was collapsing in those dot plots. I don't think that's realistic. Not in the least. Therefore I will be looking for some added layer of sober realism in what the Fed shows us next week. And to your question is it how much or is it when. I think it's actually boats. It's probably going to need to be higher rates and they need to be. We need to get there faster. It's smarter

to get there faster because let's put it this way. We've had a full year of inflation being above 7 percent. We've had two years of inflation being actually above 6 percent. So when do expectations start catching up with this. You know I think that that's a great point. And you know one of the things that we're seeing is that the multiple on the market

is still really out of whack with where inflation is right now. So when you think about the relationship between the P E ratio of the S&P and inflation rates usually when inflation rises P E ratios come down. Granted we've seen the multiple come down with the sell off in the market but we're still at a fairly high and elevated levels level of valuation for where we are on an inflationary basis. So I think you know when we look at the data there are some pockets that suggest we're seeing an alleviation in the pricing pressure. So for example. Well we look at our credit card data. Bank of America and we found that the shift in

spending has moved from big ticket items to services. So at some level one could argue that that may serve as some moderation in the inflation of raw materials that are used for goods like metals lumber cotton etc.. But I think the the the demand for energy and for oil from flying and hotels and and all of the activities that we have pent up demand for is going through the roof. And energy is going to continue to be a point of pain for for investors and consumers. So now what we see some peak inflation in some pockets. I do agree with Soviet though to some point and to some extent

I'd say that. Yeah we. We also see pockets where we've probably peaked. But I think we're also seeing a little bit of broadening out actually because to some extent we're seeing the impact of the fact that people still have reserves from two different sources. One is the savings which which came in the post Covid period. People do they have banked a certain amount of savings. Those savings will get used no doubt quicker now than we would have anticipated at the end of last year prior to the energy shock. But we still think that we've probably got enough by way of savings to take us through probably the better part of the first quarter of next year. But even above that even above the issue of just savings people are actually going out and using

those savings. And consumers are entering this phase of the cycle some of the healthiest balance sheets that we have seen consumers have. They are in a position to actually rack up credit card debt. And historically the U.S. consumer has done that. It might be a first in the post GFC period but I wouldn't be surprised if we started seeing that that track. So now is

anything good to stop this runaway inflation short of a recession. You know one thing I would note I don't think it's runaway inflation. So I should just note that I think that it's more like pretty high inflation and way too high to be comfortable for the Fed. And I don't know whether you're going to get an

outright recession but I think you are going to need a significant cooling off of the labor market. And the problem is timing. I don't think it's going to cool off quickly enough to prevent us from having quite a lot of inflation first. So. So no I'm just curious your views because you know I remember before the pandemic we were all talking about disruption and demographics and all these sources of disinflationary pressure that were long term secular forces in some of those are still in play. So you know I think that there could be some kind of natural suppressants. As you say maybe this isn't runaway inflation because we still have some kind of ceilings or pressures on on inflationary forces from just that. Those themes that have been in place for for you know the last decade or so. What do you suggest. So actually you know we've always talked about demographics as always being in one direction. And I think that's off the back of Japan. And every case is a special case

right. Yeah. But if I look at China there's been some very decent academic work which actually has said that demographics could play in the opposite direction. In the case of China separately I would say that there are new trends which have come out almost as a result of Covid one of which is insourcing or local sourcing. I mean remember the reason people outsource in the first place was to reduce costs. You bring that back closer to shore. It's going to raise raise costs. And we haven't even started talking about issues like green flashing which I think is a real thing. No. Separate from. And so I think there are new secular forces of either which actually add to those original ones. So I am uncomfortable today with the entire idea that we

have you know some kind of a long term destiny to words low low rates and deflation. I just don't think it's that when we come back we're gonna have much more. So and I'll decide. And Savita Subramanian this is Wall Street week on Bloomberg. The stock market as is its want sniffed and gotten nervous. But just when it seemed that it had finally found the excuse to

begin its long awaited downward correction estimates mightiest rally in years. The market was confounded by more portents of better news ahead. Interest rates definitely seem to be heading down again. New York's First National City Bank the industry leader in this department moved its prime interest rate the one it charges the big corporations down to 7 percent the lowest in more than two years. That was Luis Rock ISE are on Wall Street way way back in 1975 when the world seems so much simpler. The US economy was coming out of recession at that point. Inflation was coming down from the stratosphere. Numbers of 17 percent to

the much tamer area of 4 percent. And oh yes the predecessor city was called National City Bank back then. So with us or so now the sigh of Franklin Templeton and savvy the separation of Bank of America. And I'll let me start with you here on fixed income. I guess my question is if in fact inflation is here to stay at least as far as we can see how does that change in

investors decision for example with fixed income. Was it make you attracted to. So right now I'd say what it makes me attracted to is staying short duration right. Is a short duration. You are extremely careful. As much as Savita said you look at individual sectors in the corporate debt space and you are very careful about selecting individual corporates. If that's where you're going in in the event that we have a period before a distinct slowdown

slowdown in the economy you can look at things like floating rate. But to me what I think about as you know though the delight of the end of the tunnel is actually that if we get through the next year the next to you year and a half of rates going up and fixed income looking rather unattractive at the long end. We do come out of the other side where it finally after maybe close to 14 15 years we will have what I would think about as a bog standard recession i.e. you would have long and rates high enough and short end rates high enough that the Fed could actually stimulate the economy using that old fashioned tool of cutting interest rates. And that actually is a positive environment for fixed income. It's just that we've got to get from point A to point B. And during that time especially right now we're going to see a lot of volatility. Same question of equities. So on equities I

think it's a similar answer. But you know it's the idea of short duration or medium duration equities and this would be dividend yield dividend growth companies that are giving you your cash upfront. And one of the things that we've noticed is that dividends lagged earnings growth. Last year we saw a lot of earnings growth 50 percent earnings growth last year but dividend growth was just a fraction of that. I think we're going to see catch up.

I also think we're moving into a total return world. And if you think about it since the beginning of the S&P 500 over a third of your total return has come from income in the last 10 years. We've had this heyday for first stocks and price returns. But I think we're moving back to an environment where total return and dividends are going to be a much bigger part of our our overall wealth creation. So we're blue. We tend to talk about sectors. A lot of the equities I saw that you said not so much sectors as it is factors. Well so it's interesting because you know everybody wants to know what consumer stocks are going to do during a you know a rising rate environment. And if you think about the consumer sector today versus 20 years ago two of the

biggest stocks in consumer discretionary are Amazon and Tesla. Twenty years ago it was Wal-Mart and GM. These are different types of companies that are going to behave differently in an environment of rising rates. So the way we like to slice and dice the market is by looking at factors. And what I mean are kind of themes or ways to pick stocks like free cash flow. Yield

is one of my favorite screening criteria because I think as I mentioned we're in an environment where the Fed is basically moving cash yields from zero to 3 or 4 in a very short period of time. So free cash flow yield at an equity level I think it's one of the most powerful ways to invest today on fixed income. At what point do we need to be concerned about credit risk. I mean what about default. Remember the old idea of default. Haven't had much of that lately. No we haven't had much of that lately. And I think that already the the issue of choosing with

care is becoming increasingly important. Literally by the week and month. Having said that a lot of culprits are coming into this period in much better shape than they were previously. And I think again you know it's singing from the prayer book but you've just got to you've got to be active. You've got to make sure that you're thinking very carefully. I think going back to what either said of fixed income at the end of you know the silver lining is that I was

talking about is that in fact there will be some income coming from fixed income something which we haven't had now for a good 15 years. So I think that's another thing which is a positive. Over the medium term but maybe not right now. We will get there to getting to that point though could be much more painful for bonds very pain dogs. So I think the benefit of stocks is that earnings grow with inflation rather than just a fixed coupon. And I think that's where we see the opportunities within the equity market. I would just note though there are also questions about starting valuations. I'd be the last person to argue that bonds were particularly undervalued coming into this particular period. But I think there could be some debate as to where we

were starting. But definitely you know it's not a time to be long duration which does it tend to move you towards equities particularly since the slow down. I don't see that happening in the next quarter or two quarters in a meaningful way. So I think it's further out. It's a part of the reason that inflation will stay relatively strong I believe as we go forward in the next few quarters. The economy is not going to slow down enough quickly enough. Safina Snell said a lot of corporates go into this from a credit point of view in a strong position. Yeah a lot. Not all. Not all.

It makes me wonder about the so-called zombie corporations. They're more of them out there than we think there are. So I think when we talk about bathing trunks and the tide going out and things like that right now I think that we've been in an environment where hurdle rates were effectively zero capital was free and it funded almost any company that needed capital. And today we're starting to see the real companies the wheat separated from the chaff. And I think that's a good thing. I mean we're getting back to a more rational market environment.

We've we've come back to a point where real rates are positive where they were negative last year. So I think there are a lot of positive trends that we're seeing that will create more of a stock pickers market more of them you know a market where active managers can actually outperform the passive benchmark which is something we haven't seen in quite a while. You know I think we're past the point where all you need to do is buy an S&P index fund and you'll be fine. So now I'm curious besides factors in sectors you also have geography when it comes to fixed income. Are there some opportunities if you go geographic. So I think that probably are because the reality is I look at the U.S. and I look at Europe. Europe is facing what I would consider a more traditional supply shock. The price of gas has gone up three times. It's three

times more in Europe than it has in the U.S. because of a different situation in the US. Instead I think that I think you're going to see divergent monetary policies which is something which we haven't really seen again in a long time and that always offers up some opportunities in fixed income. Okay. It's fascinating. This has been a terrific discussion. Thank you very much both of you. A Sonali Basak and Savita Sumer media and talking about what happens if inflation is here to stay. Coming up on Wall Street week we're going to go across the country to the port of Los Angeles where difficult labor negotiators could pose a further danger for the supply chain. That's next on Wall Street week on Bloomberg. This is Wall Street. I'm David Westin. Well inflation is very much in the news this week with those CPI numbers. When we talk

about inflation we have to talk about the supply chain. There a lot of promises supply chain. But there may be another one developing with some labor relations problems out in the port of Los Angeles. And our colleague Ed Ludlow is in the port of Los Angeles to report on just that. David. The Port of Los Angeles experienced another record quarter in May in terms of the number of containers passing through the bottlenecks that we saw which included empty containers sitting idle or improving. But there is still concern that in the background you have negotiations between the longshoremen and warehouse workers union and the PMA the operators of the ports here on the West Coast. The concern as it relates to inflation is that if those contract talks do not proceed and there is a stalemate or an impasse between the two sides it could disrupt the work that is going on behind me. We could see more backlogs and lack of availability of containers

to move goods. And what does that mean. Likely higher container rates which could add to the inflation that we've seen in recent months. There's another concern which is that container rates are already too high. In his address President Biden said to the shipping companies that it is not acceptable although it's worth noting that shipping container rates have come down from that peak in September as those supply chain bottlenecks has started to unravel. He called on Secretary Walsh Labor Secretary Walsh and also Tramp Sports Secretary Bruce Edge to continue to work with the different parties the different tentacles of this supply chain to improve things. If there's one area that is still a bottleneck. It is on the rail. If you look behind me the

containers all being on offloaded from those ships they often find their way onto a truck and that truck carries them away to their final destination. But many are taken from the ship straight to the rail lines. That is an industry that did not invest during the pandemic that furloughed a number of employees. Now it is a bottleneck where there are not enough rail cars and all sides are telling me that they want to see improvement in the area of supply chains also to improve. There was some praise for the administration from port executives that I spoke to. They thank the White House for promising to get their checkbook out because there needs to be long term improvement in infrastructure. If we are to avoid these kinds of

supply chain crunches in the future. Back to you David. Many thanks to Bloomberg's Ed Ludlow reporting from the Port of Los Angeles. Coming up what goes up usually goes down and ESG investing is no exception. We talk with Bloomberg's John authors about the past and the future of investing based on the environment social and governance. This is Wall Street week on Bloomberg. Environmental social and governments ESG investing has become all the rage with everyone extolling its virtues from investors. Is she investing has gone from niece to mainstream to bank CEOs. Perhaps in the old days there was a bit of a tradeoff between

BSG and returns. Now I really think they go hand in hand. But some of that enthusiasm may be waning a bit as one prominent HSBC executive charged with ESG investing. Questioned whether it really makes sense Stewart Cut is the head of responsible investing for the bank's asset management unit. He criticized HSBC for paying too much attention to climate and other environmental and social issues. While the head of Deutsche Bank's asset manager lost his job after police raided

its offices apparently looking for ESG fraud Yvonne Man resignation comes just hours after Frankfurt police raided the headquarters of Deutsche Bank and VW. Prosecutors say the search was related to allegations that Dean W.S. was inflating the ISE credentials in the wake of all this. Larry Fink of BlackRock a strong supporter of ESG investing made it clear he thinks the government has to step up to police at all. I don't want to be in the environmental police. I think it's wrong that the private sector did to tell the entire society. We have to move forward. While former Treasury Secretary Larry Summers questions the very premise of getting better returns by going the ESG route 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 and to take us through the ups and the downs of ESG investing. Welcome now John Authors. He is the senior editor for markets here at Bloomberg John. Thank you so much for being on Wall Street week. It's a

pleasure. So let's talk about the downside. There was a robust growth in ESG investing. However what defines that for quite some time now. This year we're seeing a trail off. Why is that. I think there are a number of factors in that. One big part of it is simply that until now you've been able to have your cake and eat it because ESG investing is actually generally outperformed non ESG investing. That's because the oil price has been low and there's been great excitement in having putting

money into clean energy stocks. Once you have an oil price rocketing higher you begin to have to make some more painful decisions about whether you're really going to make whether you're really prepared to forsake money to do ESG. So that's one major parts of it. Then there is a broader sense of a reckoning with the attempts to make capitalism kinder. You know we had a decade or so of people blaming the Milton Friedman idea of shareholder value that the only legitimate reason the only legitimate purpose for company managers was to maximize shareholder returns. And that's seen as part of how we've had this very sluggish and hollowed out economy while the stock market is has risen. Now that ESG has got as big as it has. People are beginning to

ask is this working either. Is this actually slanting playing fields. And when we don't when say we don't want. Well another question we say is is it working. Is what it is. Is different. People define it very differently. Now people think it's just responsible investing. Yes it's developed over the years like 30 odd years ago it was ethical investing and it was generally particularly religious groups excluding things they really didn't like most obviously alcohol. And even 30 years ago carbon carbon fuels. Then it moved on to being S.R. ISE socially responsible

investing which made more of an attempt to positively find you know quote unquote good companies to invest in. And ESG is much more of an attempt to industrialize the whole process. What is it a way to make more money or a way to do more good or do a little of both. And in doing that do you do neither. Well I think Milton Friedman probably might accept ESG funds because it

has made a lot of money so far for the people offering the funds. There is there is research although it's interesting that it's always the same few pieces of research that get cited that shows that investing in companies that show up well on ESG indexes does actually pay. And that would be good reason for that. If you if you if you're socially responsible if you have good governance if you're ahead of the curve on the energy transition you probably will do a bit better in the long run. So there are ways in which.

It has made money over time. I think the question becomes if you ever have to choose between making money and doing something good. It's very hard to imagine that you could possibly you know there will always be money for example in tobacco and alcohol. And to some extent if you exclude investing in those you make it cheaper for everyone else. The one thing that seems to be working really well for ESG is as a marketing device as a label as it were. At the same time the more used for that the more it can be cynical and in fact you can get doing what you think

you're doing. How do we sought to separate out those who are just claiming it from those who are doing well. That's. That is one of the reasons we've got the degree of skepticism of a good degree of backlash at the moment. You've seen the head of D.W. s very big fund manager fall on his sword after you know there was a whistleblower pointing out that they were greenwashing i.e.

that they really weren't trying anything like this. Hard to ensure that the companies they were investing in were were doing green things as they as they said it. The FCC is looking into rules on on naming conventions and so on. This happens for the rest of the industry. There may be certain much more difficult barriers you need to cross before you can say this is ESG or environmental or ethical. So that is a big concern. I'm one of

the things that I find. Trudy's ridiculous actually about the ASCII concept is if you look at their different index in groups producing different ESG ratings and think it's a very big difficult exercise and they charge money for it. If you want to use it based on an index. But the correlation between the different ratings groups when it comes particularly to governance is almost literally zero. Like if somebody if one company gets a perfect score from MSCI that tells you nothing about how good a score it will get from S&P and so on. One of things I don't understand is if we do have the government be the environmental police the ESG police think is calling for it. Yes I think I can understand how they could. Police reporting on carbon. Yes that seems quantifiable. Yes. We want the government deciding what's socially responsible or what

is good in terms of governance by the way. Wouldn't it change from government to government depending on the right of the left. Yes it would. I do think that's a very good point. I think environmental it's a very complicated issue about how we manage the transition. If you try to put too much investing into clean energy before it's ready you get the issues of that that Europe is had in particular if suddenly becoming that much more reliance on natural gas. But yes it's the task of quantifying is much more straightforward when it comes to the E the S and the G me. I think they are very much more in the eye of the beholder and it's much harder to justify saying that any particular rating agency or any passive funds group can be in charge of them. One last one here. I have enjoyed covering business and economics in

news because I've always said money doesn't know right from left. Does this make money you don't make. Is this potentially a way for politics to creep its way into investment decisions because there's certain woke element. Is that overused word. Yes. Involved in ESG which is not to say it's not very serious. At the same time there is an element of that. There's a very big elements of it. What is what most worries me

is that the basic technology now exists for targeting something you don't like and punishing it in some way by the markets. You can. You have an index and then you exclude certain things from it on certain criteria and to complete that gain. One classic example which has bipartisan support but I think it could be the start of a dangerous principle is there's a government thrift pension plan which is under bipartisan pressure of Marco Rubio leading it. Maggie Hassan Democrat from New Hampshire saying that they mustn't invest in China because it's a national security threat and that can easily become habit forming. You see Japan pension funds started investing much more outside Japan to help weaken the yen when there was a desire for them to do that and so on. This could become now that it's been now that we understand how to do ESG investing at CAC could become weaponized and could become quite a dangerous elements in the unpicking of globalization. Johnson and Soto the whole thinking.

That's John Authors. He's the senior markets editor at Bloomberg. Coming up we wrap up the week with special contributor Larry Summers of Harvard. That's next on Wall Street week on Bloomberg.

This is Wall Street week I'm David Westin we're joined once again by our very special contributor Larry Summers of Harvard. So Larry CPI numbers this week I must say going back to March of last year you said that they've made have made the biggest fiscal blunder in 40 years and inflation would be the result. Boy we're having it but we're even using surprised by the low CPI numbers. I think today's numbers surprised most observers. I'm not sure it's short of. It's pretty clear that peak inflation theory transitory inflation theory is kind of wrong and it's wrong. You see it in the overall numbers and you also see it in the pervasiveness of the components. Almost everything

is up significantly. And my guess is that there's some major components that are actually going to accelerate in the months ahead. I think the shelter component is going to be rising at 8 percent a year by the end of the by the end of this year. If you look at all the private sector indices like Zillow they're going up much faster than that. If you look at the inflation numbers medical care is still looking low. I don't know what that number means. Every time I talk to anybody in medical care there's a desperate nursing shortage. There's a huge backlog of elective procedures. So I think that numbers are going to be going up. So

I think we've built ourselves a stagflation area kind of situation. And as I've been saying for months now I think a soft landing is not going to be easy. What about the core versus headline the cause below the headline. But the core this month which was supposed to be one of the good months was at an annual rate of close to seven and a half percent. So

that's nowhere near an acceptable level. And I think the Fed's forecast from March saying that inflation would be coming down to the 2s by the end of the year was frankly delusional when issued and looks even more ridiculous today. So let's talk about the Fed for a minute. President Biden has made it clear he thinks this job is first and foremost one for the Fed. Most would agree with him. What should the Fed do in response to these kinds of numbers. Let me be very direct with you.

Emergency fed rate hike should be on the table. An emergency rate hike a week before a meeting would look panicked. It is an unwise strategy. I think the deliberation has been between 25 and 50 basis point moves a couple months from now. I think a more fruitful deliberation would be between 50 and 75 basis points. I don't think anybody thinks that we're going to get out of this without interest rates being significantly higher than they are right now. Fed funds rate and I don't know what the advantage of delay in raising the Fed funds rate is. And I think given that monetary

policy acts on the economy with a significant lag there's some real disadvantages to delay. So I'd like to see the process be carried forward with a lot of energy and determination. The Fed is saying the right words but I think they don't appreciate the extent to which given the mistakes they made through last year and even into the early part of this year. I don't think they appreciate the extent to which those mistakes mean that they don't fundamentally have credibility. It's alert picking up on that. What would indicate to you that the Fed does. If I can put it in the vernacular get it. I mean should there be changes in personnel. Should there be a difference in

the overall approach. The Fed. Do we need to know what went wrong. I'd like to see much more effort at understanding the why their forecasts were so dramatically wrong and have been so repeatedly wrong. It's true as they will be quick to point out that often they have echoed the consensus of professional forecasters or whatever. But this is the fundamental responsibility of the Fed. I think the Faubus model which is at the center of their academic process their economic forecasting process that's the FRB U.S. model is not really fit for purpose in terms of inflation. I think they need a different approach. I think that successful organizations have substantial ranges of viewpoint that are debated in synthesized. What you have to be struck by

whenever you look at the dot plot is how much homogeneity there is across all the people at the Fed who are thinking about the economic outlook. I think you do have to ask why do why do these mistakes keep being made. Larry in addition to the CPI numbers this week we also got your recent Michigan consumer sentiment numbers at which were at a record low the lowest it's been fifty point eight was the index the lowest it's been since they started doing this back in 1978 which is basically when I was at law school frankly. So what's the significance of that potentially. And I want to tie it back if I can to stagflation because my understanding is economist tell us one of the issues of stagflation is when the expectations are there will be continued inflation and the driver primarily of that low you miss consumer sentiment was the expectation of inflation.

Look it can't be. It can't be good. I'm not sure how well you can compare those numbers over time. It's sort of a surly your time and people are more disgruntled. And in general you know sentiment may be on maybe the lowest it's ever been. But that's not true. Certainly of spending behavior. But look it's a clear negative indicator and it goes with what I've been saying which is I think everybody's got to be anticipating that we're going to not have inflation come down extremely rapidly and we're going to enter into a period of substantially more sluggishness. That's what stagflation is poor growth and problematic inflation performance. And I fear that that's what's ahead of us given the supply shocks we have suffered. And given that we experience

those supply shocks after we had very substantially overheated the economy because of the policy errors of 2021 Larry let's face this week we have a couple of rapid fire one of which is Linda Kohn the chair of the FTSE. We've talked before about what you're described as hipster antitrust. We saw her interviewed by the Financial Times this week. She went after private equity very explicitly. And a lot of the criticisms were not so much about the economics as the conditions of workers in companies.

They're bought by private equity. What do you make of what she's saying. That's not her job. Her job is competition. Competition between companies and making sure that it's robust. It's not to pass judgment on who the owners of the companies are. I was very sorry to see that. Frankly a lot of her writings were quite problematic but many had assured us that her deeds were going to be reasonable and provide the new rejuvenation that anti-trust represented. That interview seemed to me to be back to academic populism of a quite unfortunate sort. And finally Larry you have

a long and very distinguished curriculum vitae and included in that of course as president of Harvard. Now we see Harvard is going to be looking for a new president by the way joining Columbia and M.I.T. and NYU. There are a lot of big institutions of higher learning looking for presence. It was never an easy job. How much harder is is today than it was say 20 years ago.

It was probably harder given all that has to be navigated all the various social revolutions we're having. But I think it's much more important because I think there's never been a moment when ideas and bringing forth new leaders has been more important. And I think the centerpiece seeking truth through open debate. Committed to the most excellent scholars pursuing the best ideas. I think all of that is frankly under challenge on our college campuses in a way that it has not been in many years. And so I hope the new generation of presidents is going to rise to that challenge of truth seeking and excellence at a moment when there's a lot of turbulence and a lot of forces at play. Larry thank you so very much for being with us once again. That is Larry Summers of Harvard our very special contributor here on Wall Street Week. Coming up Boris Johnson has a slip between the cup and the lip.

Will it cost him his job. That's next on Wall Street week on Bloomberg. Finally one more thought. What a difference a party makes. Prime Minister Boris Johnson survived a no confidence vote of his own party this week by a surprisingly narrow margin but a win nonetheless. I can announce that the parliamentary party does have confidence. UK Prime Minister Boris Johnson has won the Conservative Party vote on his leadership as many had anticipated. It all grows out of parties held at Number 10 Downing Street during lockdown when no one was supposed to be gathering at all much less to imbibe adult beverages in large quantities and much less at the Prime Minister's own residence. Party gate is far from the first time that prominent political leaders have been caught out for their

social activities. Think of Wilbur Mills the powerful head of the House Ways and Means Committee getting pulled over in the middle of the night only to have an Argentine stripper jump out of his car and plunge into the Tidal Basin. Now I've been embarrassed beyond words about this experience. I apologize again tonight for what happened or married presidential candidate from 1980s Gary Hart caught on a yacht travelling to Bimini photographed with a young blonde on his lap. I just didn't use good judgment. That's all. I used very poor judgment but many times have changed since the staid era of the 70s and the 80s. We're now living in a time when a presidential candidate bragged he could commit a crime in broad daylight and not lose support. They say I have the most loyal people. Did you ever see that where I

could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose any voters. OK. It's like incredible. And although President Trump didn't exactly do that he certainly committed some peccadilloes that didn't stop him from becoming president. Yes the Trump organization was responsible for initiating the idea of paying off Stormy Daniels and Karen McDougal to keep them quiet. So while pundits are quick to point out that Boris Johnson has less support than that enjoyed by Theresa May when she was forced out of her job I will shortly leave the job that it has been the honor of my life to hold. He may just be right that in this day and age he can just move forward. We have a conclusion to something. It's been dragging on for far too long and we have the ability not to indict deliver and get on with the people's priorities. And that is what we got to do. Maybe.

But he may just want to think twice before he throws another party at Number 10 Downing Street that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-06-12 20:20

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