Wall Street Week - Full Show 07/01/2022

Wall Street Week - Full Show 07/01/2022

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Cooperation with Europe. Competition with China. And conflict with Russia. But it always comes back to inflation one way or another. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers of Harvard on how close we may be to a recession here in the United States. I think the risks of a 20 22 recession are significantly higher

than I would have judged six or nine weeks ago. And Deborah Lair of Edelman Global Advisory. And just how much China has changed in the twenty five years since it took back Hong Kong. We've come a long way as they built a world class legal system and trade system. Much of the week was consumed with global events. Vice President Biden traveled to Germany to try to persuade other leaders in the G7 like French President Macron that they should limit how much the world pays for Russian oil. East ministers will

continue following the initiative of the United States to work so that such a ceiling can exist by applying the broadest possible alliance of buyers and then moved on to Madrid to work with Turkey to admit Sweden and Finland into the NATO alliance. It's been historic 24 hours here in Madrid as NATO leaders gather. Turkish President Irvine has lifted his objections for Finland and Sweden to join the NATO alliance. We look to Europe even for the latest on the Fed chair. Jay Powell appeared at Cintra with other central bankers and reaffirmed his commitment to beat inflation. No matter the risk we're very strongly committed to using our tools to get inflation to come down. The way to do that is to

slow down growth ideally keep it positive. Is there a risk that we would go too far. Certainly there's a risk but I wouldn't agree that it's the biggest risk to the economy. And just as things wound down in Europe they moved on to Hong Kong where President Gee travelled outside mainland China for the first time at eight hundred ninety three days to celebrate the 25th anniversary of the handover from Britain. Five John Micklethwait in Hong Kong enjoys a unique position.

Favorable conditions and broad space for development. The central authorities fully support Hong Kong in seizing the historic opportunities presented by our country's development. But Washington wasn't left without its own fair share of drama this week. As a former aide to president Trump's chief of staff gave dramatic testimony about Mr Trump's reported willingness to let the mob gather on January 6. Even if they did have weapons in the vicinity of a conversation I ever heard the president say to. I don't think that they have weapons. They're not here to hurt me. But with all that was going on

around the world. In the end it came back to inflation and the economy and growing fears of recession for the week. The equity markets were down with the S&P 500 off over 2 percent since Monday and the Nasdaq down over 4 percent. And that was after a rally on Friday while bonds were being bought leaving the yield on the 10 year under two point nine percent down 25 basis points. But the bigger story of the week ended on Thursday the close of the first half which ended up being the worst for the equity market since 1962 and the worst for 10 year treasuries since. Get this they were first sold back in 1788. Here to help us sort it all out are Gillian Tett Financial Times editor at large and US editorial board chair and Peter Kraus chairman and CEO of Aperture Investors. Julie let me start with

you actually on what we saw in the markets. What's driving the markets from your perspective right now. Well the best way to make sense of the equity markets is to recognize that a month ago investors had a nasty shock when they realized that rates were going up. You know the inflation numbers have been coming much higher than expected. And the Fed has really accelerated what we're seeing today that is an investor realizing that earnings are being hurt by the underlying economic slowdown. Excuse me. And that is really starting to drag on people as they

worry not just about inflation but stagflation a combination of price growth and slowing price increases and slowing growth. Frankly we've not seen since the 1970s. So Peter the question I really wants to know is how bad is it going to get. How far are we into this decline in your judgment. I think there's two answers to that. One is how far are the markets down into their ultimate decline and how far are we from an economic point of view into slowing growth slash procession. Think on the former point we're probably two thirds a little bit more of the way to a bottom in financial markets. Like it's another 10 percent in equity markets bond markets perhaps a little closer to their nadir.

But we're gonna continue to have that volatility until there is some clarity regarding how much the Fed is going to raise rates because it really is what investors as Gillian points out are watching as it relates to the economy itself. I think it's a good argument that we're already either entering a recession or in a recession. Manufacturing activity has dropped significantly. We've seen leading indicators also decline. We've seen consumption activity fall. And CEOs are beginning to predict that the second half of their economic activity for their companies is going to be a lot lower. So Gillian what about that low pick one of the things that Peter talked about and that is consumption numbers. We had personal consumption numbers are really soft in the United States is we.

And also of course we have the consumer confidence numbers which are softening as well. That is a big driver as we all know of the U.S. economy. How big a risk is that at this point for the U.S. economy. Well there are two or three factors right now which make it incredibly hard to work out what's going on. One is the fact that yes you're seeing a real loss of consumer confidence really quite staggering decline in consumer confidence. And that kind of makes sense given the scale of price shock and inflation shock. But something that we haven't really seen before in previous

economic cycles is that a lot of consumers are sitting on fat cushions of savings compared to far past because of the fiscal stimulus. And ISE chatting with bank CEOs in the last few days were saying that as of yet they haven't really seen signs of increased defaults. They haven't yet seen signs that consumers are going bust or really in real problems. Partly of course with a lot of jobs out there. Now the bank CEOs are preparing for a lot more consumer pain further down the track not least because

one implication of rising interest rates is that mortgage costs get back to go up through the roof and they're beginning to see consumers dipping into their savings cushions to try and keep themselves afloat. But there's a real time lag effect and uncertainty playing out right now. The other one is about supply chains because so much of the price pressure right now is not driven by classic demand increases or not just by demand increases but by supply chain problems. And the honest answer is no one knows how long this supply chain disruption is going to last. I was listening to Pat Gallagher from Intel a couple days ago

saying it could be a year and a half before they really iron out the supply chain problems in computer chips. But no one quite knows how that's going to impact the wider economy partly because companies have been increasing their stocks in recent months and there's not a lot of visibility into how quickly they can run them down and how quickly they'll need to restock as a supply chain start to heal or not heal. So Peter what about the supply chain issue. I mean clearly whatever it was or wasn't transitory in the sense of short term. And I must say if you take a year a year and a half 18 months that seems to be a rolling 18 months. I feel like I've heard 18 months from sitting here for some time now. Why isn't the supply chain fixing itself. I mean theoretically in a market system prices adjust and those sorts of problems work themselves out.

Why haven't they. Well I think Jim points out the supply issues in the chips world. And that has been more persistent although it has gotten better. And you can hear that from the semi CEOs and other related entities in the more traditional supply constraint issues. Those have gotten better. So in the consumer goods there are not electronics. Those companies are seeing alleviation of supply constraints and they're able to actually satisfy demand. As you saw really in the first quarter. One of the things I thought was interesting was Target and Wal-Mart who dramatically adjusted

their inventory prices because they ended up with way too much inventory price too high and maybe even the wrong goods so high. And so we actually saw some price reductions. So I think we're a little bit past this. The acute phase of the supply constraint problem. And I think we're entering into a softer demand cycle. And joint points out she's right that there's a lot of savings.

But at the lower end of the income scale those savings are not so big. And there may also be at that part of the economy some job losses. So I'm not predicting a serious recession but ISE as I say I think we're further into this growth slowdown slash recession than it appears. Joel Weber the chances we're already are in a recession we just don't know it yet. Well we had one

quarter down there. Could be we have a second one. Well of course the bug with economic data is a data. It's always very backward looking and there's no two ways about it. So it's entirely possible we are slipping into one. There are some more current series of economic metrics like the Now series which tries to really amass different economic data to see what's happening in real time. And those suddenly do point to quite a sharp slowdown right now. But you know I've gone around talking to no different auditors recently at business people and policy analysis and analysts and ask them always to vote on what they think is happening. And the vast majority of people right now a brace for a mild recession

but not as a steep one. And I think that probably is what the market pricing in right now. Peter I pick up on one of the things that Jillian referred to and that's the housing market. We pay attention to consumers because they're so important. That kind of goodness knows the housing market could be as we saw in 2008 2009 it seems to be softening. What is the risk for the economy overall from the housing market right now given particular mortgage rate. Well mortgage rates are going to go up. Housing prices are going to stop increasing and in some cases go down that affect

consumer wealth. That will affect consumer consumption activities including their savings. In other words they may not spend their savings. We are not in a world where consumers lack for a lot of things. They have bought a number of tangible goods and durable goods over the last 18 months. Given all of the stimulus in Covid. So I think that housing prices are going to

be challenged here. That's going to have an effect on consumers and that's going to add to the slowdown slash recession. We've been talking about interest rates are not coming down in the short run. You heard Paul say we are going to take down inflation and that means interest rates are going to rise. And plus the fact I have to say interest rates have for the last

twelve years been at unusually low levels not sustainable levels. So the interest rate complex in total is going to rise above where it has been for 12 years. And that's going to have an impact on the housing market as well. It's gonna be a big shift no doubt about it. Gillian Ted and Peter Krauss will be staying with us as we get to investment advice in these turbulent times. That's coming up next on Wall Street. On Bloomberg. Let's take some time out to go travelin not the camel route to Iraq but the financial route to a buck. Not only does the dollar buy less at the supermarket than it used to. It also buys less in terms of other currencies than it did 10 years ago a period

that has included two official devaluations of the dollar. That of course is loose rock. ISE you're on Wall Street. That was back in 1975. And once again that buck is buying less at the supermarket but it sure isn't buying less in terms of foreign exchange. Peter Cress of Aperture Investors and Gillian Tett of the Financial Times are still with us. So Peter it's hard to know where the markets are going but the one thing I think we can say is they are turbulent in these troubled times. Where do

you put your bucks at this point. What does it make sense. Well look you're not gonna be able to put your money anywhere that is going to be unaffected by the volatility. So if the objective is find some place to invest where you don't have volatility that's the zero sum game. On the other hand equities will go up over time and credit has

gotten a lot cheaper. And so if you're looking for incremental places to invest even large institutional investors you have to be beginning to look at putting some money back into the equity markets. They're down 30 plus percent and somebody into the fixed income markets because spreads have moved out pretty dramatically. But you're not going to be able to do that without volatility and you're not going to do that with probably without additional drawdowns. So you need to be cautious about how much you commit. And Julia I wonder if you're going to be able to do that without additional risk. I mean Peter says that credit is cheaper now. It's a better buy. You can get a better return. There may be a reason for that. What is the risk of default. We

haven't had defaults a while now. Well we going incredibly retro in all kinds of ways right now. You haven't yet got the sideburns unfortunately David but I hope we hear that soon of your former host. But you know one of the things that investors have not had to worry about for a very long time are corporate defaults and risks in the high yield market. And we're still not seeing that the default rate right now is incredibly low.

In spite of all the falls in the equity markets and concern about recession. But what you'll seeing a number of bankers and lawyers and others talk about is the likelihood that as rates keep going up we're going to start to see more more pressure on risky companies. Now it's hard to predict exactly when that is going to strike because most risky companies miss high yield companies or leveraged loans have been essentially refinancing themselves or locked in financing for quite a while. So they really only begin to bite when the refinancings come up. And that's the sort of stock a timetable they because each company is different. But when you do see those refinancing occurs you could cause these very nasty shock for investors and you already seeing the high yield bond market react to that. But in some ways that's a clue as part of the markets where you've actually seen a reaction to the tightening of liquidity conditions. So that is

absolutely something the investors should be looking to in the next year or so as one of the big risks that are us all. Peter I wonder if we're getting an accurate read on the full market right now in this sense that they're back in 1985. By the way I was just starting law school. I did have sideburns. For the record there were quite as well. But I did have them. But one

different them by David. Exactly. I try to bring it back a lot wider that now. But. But Peter I wonder at one of the changes that we've seen since 1935 is how much the markets are private rather than public. We've seen a big shift. And I wonder whether we really are getting an accurate read on all that private capital. No we are not. By the way I never had good sideburns. Such went well with a beard. But with regards to the private markets I think that that is a serious problem meaning that we

we know for a fact that private markets lag public market valuations but is also a fact that the assets owned in private hands are also being affected by this market change. You cannot have this change in the interest rate construct that I spoke about briefly before without affecting values. So private equity assets are going to decline in value. I've already gone down in value but haven't yet been adjusted. And those adjustments when they occur are going to cause stress for investors. In some cases they could cause liquidity issues. In some cases they may actually make raising additional capital much more challenging. And in some cases it could cause defaults and ultimate bankruptcies. So that that whole private credit and private equity sector is a place where we need to be focused on risk rising substantially and potential stress coming from a mark to market of those assets. Julian these days we can't have a real conversation

investor without talking about China in one way or another. Of course we have the anniversary 25th anniversary the handover of Hong Kong right now going on with President Xi in Hong Kong. Is China a place that's attractive potential for investors because they are going the other direction from the United States in much of the West. We're tightening. They're actually loosening. Well absolutely. China is something of an enigma in many ways because yes they are going the opposite direction from

most other markets right now in terms of loosening. There is great pressure on President JI to ensure that he tries to hit the GDP growth targets because he has the all important party Congress later on this year. And all the signs are that because of the Covid lockdowns are in danger of missing the growth targets. So President Xi has every incentive to try and stimulate the economy going forward in the coming months. The problem there really is still three fold. Firstly we don't know how China will respond if there are more Covid outbreaks on the lockdowns in Shanghai have been very damaging but thus far there's no sign that the government is going to back away from those. If there are more Covid outbreaks. So that could certainly upset the economic figures.

And of course China is exposed to the wider global economy as well. So yes China could be providing some growth for the global economy going forward and offsetting some of the problems in Europe and the US. But the one thing that's clear we cannot expect China to do what it back did did back in 2008 which is to provide a real motive for global economic growth that drags the other countries out of a potential recession. Peter what about it. You've had a career now investing your way other people's money. Is that a place we should be putting money right now to

try to. Can't be sure short China right now. Just can't being long. China's a challenge for sure. But being short I think is a is a very big risk. Look I also think investors are somewhat circumspect about the motivations of the government with regards to the external investor. How will they treat the bond investors. How are they going to treat equity investors vs the regulation and changes to companies inside of China. We thought early to be leaders and real growers. Those those issues still remain. But China's a huge market very strong economy when it

starts to grow. It will come back. Covid will get resolved. And it's still in China still provides significant exports to the world and buys significant imports. So I think as an investor it's very very challenging to be short China and I wouldn't be. Let's give the last minute here to the European amongst us. Gillian what about Europe. What kind of shape in Europe. In Europe as ever is a varied mix of some places like the UK which look really pretty soggy right now to use the wonderful British phrase you got other parts of Europe that are doing better. But the one thing I want you to realize is that Europe is very vulnerable to any retaliation or any more retaliation on the energy front as a result of Russia's invasion of Ukraine. So

Europe as ever is unlikely to go completely off a cliff but is unlikely to boom. And so there's a growing concern right now about the price pressures building. And you know that isn't the base safe haven either. I guess the real message from all of this is that right now we're not dealing with a beauty parade in terms of decisions about where to put your money. It's really more like an orderly parade which is a pretty ugly place and probably the only best option out of all that is a classic investment advice of diversify. Hold your

breath and looked at the long term mainly hold your breath. Sounds right. Exactly. So thank you so much to Peter Cross of Aperture Investors and Gillian Tett of the Financial Times. Coming up next we're going to take a look at next week on global Wall Street. This is on Bloomberg Wall Street. This is Wall Street week. I'm David Westin. It's time now to take a look at what's coming up next week on global Wall Street

starting with Juliette Saly in Singapore. Thanks David. We'll be watching Australia's central bank for another potential 50 basis point hike as the RBA attempts to stamp down hard on the brakes amid surging gas and electricity prices. That would be the third rate hike in as many months. Meanwhile a raft of reports due or expected to show consumer price gains have accelerated in the likes of the Philippines Thailand and Pakistan. In Sri Lanka where inflation is running hotter than anywhere else in Asia the central bank's hands are tied. It's likely to hold borrowing costs steady because raising them would make the government's backbreaking debt even harder to manage. Now over at a Dani Burger in London Danny. Thanks Juliette. In Europe the cost of living crisis will continue to take center stage. Many strikes are expected in multiple countries in different

industries. There's issues at the airport. We've had Spanish workers for easyJet Ryanair and they've had strikes. Heathrow says that capacity needs to be reduced because at full passenger levels the airport won't be able to handle it. Charles de Gaulle they're facing a strike of firefighters saying that airlines there would have to reduce their capacity. At the same time

union workers for between one of the UK's largest telecom companies have voted for a strike as well. In France at the same time National Railways they're calling for a potential strike. Now over to Romaine Bostick in New York. Thanks Danny. A holiday shortened week ahead for Independence Day here in the U.S. when investors return. All eyes are going to be on the monthly employment figures. Non-farm payrolls growth is projected to have slowed for a second straight month in June though economists see the unemployment rate remaining where it's been for most of the year below 4 percent. Now a separate report

earlier in the week is projected to show job openings holding near record highs with more than 11 million available positions waiting to be filled elsewhere. Keep an eye on media companies and the moguls who run them. The annual invite only Sun Valley conference in Idaho returns next week sponsored by Allen and Company. The gathering has historically been a fertile ground for media deals. This year's guest list includes the usual titans of media and technology including Paramount chairman

Shery Ahn Redstone Meadow CEO Mark Zuckerberg Tesla's Elon Musk and Warren Buffett. David thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up. Twenty five years after China took back Hong Kong what has changed. We asked Deborah Lair of Edelman Global Advisors. That's next. On Wall Street week on Bloomberg. On a stormy night on July 1st 1997 British rule over Hong Kong came to an end replaced by the regime of one country two systems something the 28 and last British governor Lord Patten had high hopes for at the time. I hoped for the best. You couldn't leave thinking anything but that. I think it just in the last 10 years or so that things have taken a turn for the worse as I think

we're having China overall. Twenty five years later Hong Kong is a very different place. Its economy has doubled and it is ruled by a China that is more assertive in Hong Kong and in its relations with the rest of the world. With the Chinese defense minister warning of possible conflict over Taiwan if anyone dares to secede Taiwan from China. We will not hesitate to fight. We will fight at all costs and we will fight to the very end. This is the only choice for China. And today the United

States is using economic weapons such as trade restrictions to influence China's behavior as explained by United States Trade Representative Catherine Tai. China tariffs are in my view a significant piece of leverage. We need to use our tools more effectively. We need new tools. Even as President Xi warns against what he calls weaponized. The world economy politicizing instrumental izing and weapons rising. The world economy using a dominant position in the global financial system to wantonly impose sanctions would only hurt others as well as oneself. And to take us through China as it is today twenty five years

after that handover in Hong Kong we welcome Deborah Lair. She's the CEO of Edelman Global Advisory. Deborah you really are a China expert. We'd always love it when you're on. Give us a sense of how China has changed in the last 20 years. And one way I can start actually is Covid Covid has changed us all. What about President Xi's reaction to Covid and 0 Covid as it's called. Well really excellent question and David it's so nice to see you again.

Thanks for having me on. China has changed unbelievably in the last 25 years. As I look back when I was doing trade negotiations at that time one of the most fundamental concessions that we got from the Chinese just to give you an example and put this in context is the fact that they would actually have to publish their trade laws and only ones that were published were enforceable. So we've come a long way as a built a world class legal system and trade system. Now enforcement is a whole other question but it shows the significant changes that we've seen over time and the development of the economy. Covid is a whole other issue. She today reiterated his position on following a dynamic Covid

policy. They have definite concerns about the impact that it's had on the economy. But he had reiterated the fact that people were willing to sacrifice on the social and economic cost given the potential of deaths in China. Had an article recently in Nature magazine

where they estimated that if of Akron were allowed to go free essentially in China it could result in one point six million deaths. China is not going to stand for that particularly in the lead up to the party plenum. This likely this November. So for Xi they now look at what is the impact on the economy as he looks last year. Last year was a banner year for China. They were the largest source of direct foreign investments. Most foreign companies who were there reiterated they were going to stay. The majority of them were profitable. They were positive about the prospects.

She went into 2022 in a very strong position and with a view that his policy around Covid was the best in the world now hits Ukraine. Russia's invasion world potential recession and then the lockdown in China high definitely was overzealous officials who were going after that. But that had both psychological impact when it was a city as sophisticated and is crucial to China as Shanghai but also to the rest of the world. And it's really causing ripples through the economy. We're likely to only see zero percent well negative growth there zero percent growth in

the second quarter. And they definitely will not hit their targets of 5.5 percent that they had for this year. But I won't say one last thing to which Xi Jinping made his comments doubling down. And he was in one obviously where Covid first broke out to make these comments. The most important thing that the Chinese did was actually put out a policy to try and govern and create guidelines for actions that local officials should take. If there is a Covid breakout in their city and this is an attempt to address this issue of overzealous officials to limit the economic impact where possible when there are just a few breakouts. So that's interesting sort of cabin as it were. So the activities of local

officials at the same time a lot of Western experts that we talked to here on Bloomberg say you know President Xi is approaching zero Covid just wrong. He's going to have to change that to go into vaccinations. He's got to change his economic approach overall. Is that the way President Xi sees it. Because there are some indications. You pointed out a chart actually indicating that if you look at the objective norms of how many deaths per million by Covid and also the reduction in GDP China is not doing all that bad. Right. I mean looking at that Bloomberg chart it is pretty astonishing. What if you just look at that chart how well China has done compared to other countries. If I can. Can't say whether she honestly believes it's the right policy or not but there's no question they're not going to change it. They may fiddle around the edges. They now call it the dynamic Covid policy in the lead

up to the party plenum later this year. But if the goal is to to create economic growth they only have a number of limited options to do that. They have not double down on fiscal or monetary policy. They've kept it relatively stable. So the only other option that they have is they really need to find a way to generate growth in consumption. China did not see the kind of consumption bump that the United States and Western Europe saw. People were not taking their money and going out and buying during Covid buying goods when they couldn't buy services. Instead what's happened and this has been particularly exacerbated after Shanghai is people are hoarding their money because they're concerned if there is a Covid breakout in their city they're going to have to pay for it. So they're not spending money they're just keeping it. And that is having a

dampening effect on the economy. Definitely a dampening effect on consumption. So the only way that they can start to free up that money is if the Chinese people feel safe and in the short term they're not going to feel safe. If we if China opens the borders because that is absolutely going to result in additional cases of Covid. So they only have a few limited options. They have to start to vaccinate the population. And even though China has high vaccination rates amongst the elderly there it's very low. And if we look at Hong Kong and as an example the overwhelming majority over 90 percent of the deaths there were in the elderly in Hong Kong. So as an example extrapolating into China there's a lot of fear about that. You didn't refer much to

trade with the outside world. How important is it to President Xi and his regime to actually get back into a situation where you have more growth that's generated by international trade rather than domestically. Well they've certainly substituted export growth initially in the post-cold world to government investment. And so that was a critical part of economic growth as they started to open up again after their first shutdown with Covid. It is a very

important part but they know that they have to diversify even though they had record exports to the United States last year. They know that they have to diversify from the market because obviously with the politics different politicians are looking at ways to try and limit Chinese imports into the US. And there's a lot of concern about the growing trade deficit. The Europeans particularly as we've heard coming out of the G7 are also starting to reconsider their policies with China. And China anticipates that Europe could start shutting down their market. And so they've been very active in looking for new markets. And we have seen a regular and steady flow of leaders from the Middle East for example traveling to China and signing trade deals. You mentioned a couple of times this 20th party plenum toward the end of the year maybe around November time. I mean in a sense we have midterms in United States. They've got their own

elections of of sort for President Xi over there. How is that affecting decision making right now by President Xi and the people around him. Well I'm sure president she was hoping for stability going into this year and he certainly didn't get that on the economic front. And there's certainly a lot of concern even domestically with unrest for two reasons. One objections to these very stringent Covid policies with complete lockdowns. But two because we're seeing over 18 percent unemployment amongst Chinese youth. And when you look at the social contract that China had basically made to the Chinese government had baby with the middle class. Part of it was that they would be willing to

trade away some of their social liberties in exchange for continued economic growth. And when many of these families are highly dependent on one child to support the parents and two sets of grandparents it's critically important that these children can find jobs. But as we look ahead to the platform and ironically it might even be around the same time as the U.S. midterms one of the really interesting factors that she has in his favor when it comes to his own position of power is that there is going to be over 60 percent turnover at the central committee. And most of the new people who will be coming in due to China's age limits are going to be people who were born in the 1960s. They have a very different perspective. Many have

traveled widely overseas. They have been educated overseas. They are professionals in their fields. They are going to be the feeders to the Politburo core then feeders to the standing committee which are the top group that then rule China. And part of this collective leadership along with Xi Jinping there has been so terribly helpful as it always is I must say. Thank you so much for being back on Wall Street. Fifth Deborah Laird she is the CEO of Edelman Global Advisory.

Coming up we wrap up our week once again 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 are joined thankfully once again by our very special contributor Larry Summers of Harvard. So Larry thanks for being back with us. Let's start with some of the big news in the economy this week

which is consumer spending United States it is softening clearly. Also consumer confidence is down. There are those who say that means maybe the Fed doesn't need to hike as much maybe even they get the cuts sooner than we thought. What do you think about consumer spending right now. Look I think we're seeing that inflation which has eroded people's purchasing power. The end of fiscal stimulus that gave people a lot of cash last year. Higher interest rates that are discouraging housing and housing allied kinds of spending generalised increases in uncertainty and just a bit more feeling of insecurity. All of that is taking a toll on spending. My guess is that that's going to continue for some time. And I think you have to say that whatever you thought about recession risks a month ago

the recession risks through the year 2022 have to have gone up in a quite material way. I've felt for a long time as you know David that we're not going to have inflation return near Target without a significant economic downturn. But that downturn could happen either because interest rates set by the Fed rise very very sharply or it could happen because of a kind of self-fulfilling process coming out of the high inflation and reductions in people's incomes. And the

latter possibility is looking like it's looking more likely today than it was. And of course if the economy did go into recession in the next six to nine months I then you'd probably see a reduction in inflationary pressures and you'd see the Fed probably feel that it had to push rates up less than it would if the economy was continuing to grow strongly. And labor was and there was very very strong demand pushing up wages and prices. So it's a lot. I just want to be very precise here because you

and I have talked quite a bit about the likelihood of recession this year and next. And you said next year you think it's much more likely than that. But thus far you said this year maybe not so much. Are you saying given the data coming in perhaps a recession or a significant downturn whether it's a technical recession that may be coming faster than you thought. Yeah I think the risks of a 20 22 recession are significantly higher than I would have judged six or nine weeks ago. Look David we've got the first quarter numbers in the bank. They are negative for GDP. There are many

forecasters who believe that the second quarter which ended yesterday also had negative GDP growth. It's not really the formal definition of recession but people often say it's a recession when you have two quarters of negative GDP growth in a row. And there's I think it probably close to a 50/50 chance. Maybe it's a bit less than that that we've had two negative quarters in a row. So I think you have to say that the chance that a recession is ultimately dated is having begun during 2022 has gone up gone up significantly. We've got time yet structure.

The economy's changed. So I'm not at all confident about it. But I would say the nearer term risks have certainly gone up. You know you saw something in reports it used to be just target. Now there are reports coming out of other retailers reports coming out of semiconductors suggesting fairly drastic reductions in demand and fairly substantial buildups in excess inventories which will then lead to things on sale and will lead to reduced production demand. So those kinds of downturn dynamics are certainly things that are more in evidence than they were. Larry one of things that got us here is obviously inflation. And the question of supply chain problems. And you've been in fact that they are not so transitory whether transitory or not. Why are they lasting as long as they are. Why aren't we getting more employees in airports and more people flying airplanes and all

the things we're seeing around the country by the way in here in New York. We're having to shut some public pools because we can't find lifeguards. It's a combination of things. We've restricted immigration in various ways relative to where it was. That means fewer people here and here and working. We've got a variety of problems in terms of reliable production and transportation coming out of China. We have a non-trivial number of people with long Covid and unable to work. There are a larger number of people who want to do jobs where you can work at home. Employers are reluctant to pay what it takes to fill those vacancies quickly because

they think it's more profitable to ultimately have some vacancies and turn some people away than it is to raise we raise wages across the board. I think all of these things are contributing factors and I think with respect to airlines. While a lot of it is on the labor side there are also some very substantial infrastructure issues that the country is under invested in for a long time. And finally Larry we had NATO meetings many historic meetings and they really changed the strategy this week. And I wonder as we look at the war in Ukraine that Russia has perpetrated there. Do you think there may be long term really long term effects on the global economy. Certainly in the short term. What about longer term. Well historians will debate whether the Russia Ukraine war was a cause of big changes or was a consequence of tectonic forces that have been operating for some time. But I was very struck when you had a NATO meeting that for the first time invited a number of countries in Asia to participate in it and identified China as a security risk that had to be prepared for alongside Russia. It did very much have the feeling of a world that was forming blocs and choosing up teams not unlike or in some ways

not unlike the alignment that existed in the 50s and the 60s when Russia and China were allied. And there was a mobilization of Western countries along with some Asian countries against them. And that seemed to be a way in which things things were moving. And that's going to be a quite different world than the world we've had for the last 25 or 35 years. And just to follow

up on that you're a great macro economist. I am not. But I sort of had I thought was received wisdom that not having blocks was conducive to more growth more efficiency in the way economies work. And there's a big difference I think between the Soviet Union after World War 2 and China. Because Soviet Union was never that large a player. I don't think economic on the world stage. China's the number two economy trying to be number one. What does that world look like. Does that really interfere with growth overall. I think a world a world in which there are blocks a world in which countries are kind of forced to choose whose team they are on is likely to be a world that is both less prosperous. It's a world that's more inflationary because it's

going to be harder to find the cheapest products. And it's a world where there's going to be less cooperation on global challenges like climate change or pandemic. Okay. Thank you so very much Larry Summers of Harvard our very special contributor right here on Wall Street week. Coming up fireworks check hot dogs and hamburgers. Check sports. Absolutely. But do they have to come with a side of politics. That's next on Wall Street week on Bloomberg. Finally one more thought the potentially toxic mix of politics and sports. It's the long Fourth of July weekend in the United States that summertime holiday. Well we look forward to fireworks. A company in Boston by the famed Boston Pops concert

on the Charles River to politicians giving speeches. Today we celebrate America our freedom our liberty our independence to picnics and not least to sports whether it's baseball with both the Yankees and the Mets on top of their divisions or golf's John Deere Classic out in Illinois or the early rounds of Wimbledon. I think the last couple of points I was really suffering there. I fear retiring now. So with the country seemingly more divided than it's ever been defrauding the electoral count I believe we can fix along the way. With all of you let's do this together. It's a good time to put all that political strife behind this and just get caught up in the game. Right. All right. Well maybe not so fast because it turns out that even as you root for your favorite athlete or team the powers that be may be angling to use your sport to get their own edge an edge that goes way beyond the point spread. Take Wimbledon for example. This year competitors from Russia and Belarus will be

barred from competing as punishment for Russia's invading Ukraine. I feel good being at the tournament without having to see players from that country again. And China has just changed its sports law to authorize retaliation against anyone who shows the Middle Kingdom disrespect. Though what that means is anyone's guess. And even golf isn't immune from politics with a major feud between the PGA and the upstart Live Golf which is backed by the Saudi Wealth Fund. The PGA Tour an American institution can't compete with a foreign monarchy that is spending billions of dollars in an attempt to buy the game of golf. And it turns out none other than the former golfer in chief one Donald J.

Trump as he welcomes the tour to his home course in badminton New Jersey on July 29. But all that's almost a month away. In the meantime let's try and leave politics out of it and just enjoy the holiday. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-07-06 21:21

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