Wall Street Week - Full Show (08/05/2022)

Wall Street Week - Full Show (08/05/2022)

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Speaker Pelosi goes to Taiwan. Open goes small in response to President Biden's plea for more oil and central banks. They go big in the struggle to tame inflation. This is Bloomberg Wall Street week. I'm David Westin. This week contributors Larry Summers of Harvard on a higher rate and lower employment. And Steve Rattner of Willett Advisors on

what the Inflation Reduction Act could mean for Wall Street. So I think this is good for investors and that it brings again some stability to fiscal policy and the. It was a week full of signaling as Speaker of the House Nancy Pelosi went to Taiwan to send a signal to China about US commitments. Today our delegation which I'm very proud came to Taiwan to make unequivocally clear we will not abandon our commitment to Taiwan and we are proud of our enduring friendship. While China sent back its own signal of displeasure

with the visit we will do what we say and let me say no to these measures will be firm strong and effective and open. Plus responded to President Biden's requests for more production by increasing its limits but by our very modest one hundred thousand barrels a day which almost Hoxton of the State Department said was nice but not enough. The importance that the president has is not discussing barrels with with any country. He has been very clear that he wants to see oil prices come down and he wants to see gasoline prices come down. But it wasn't just geopolitics this week. We also spent a fair amount of time

getting signals from our central banks whether it was the Bank of England on Thursday raising rates 50 basis point as they battle even higher inflation. CPI inflation is not expected to peak at just over 13 percent in Q4 of this year but to remain at very elevated levels throughout much of 2023 or various Fed members all week long trying to walk back. Chair Powers statement from last week that we were close to the neutral rate. We are a long way away from achieving an economy that is back at 2 percent inflation and that's where we need to get to. And then then came Friday and boy did we get a signal with jobs numbers

coming in twice what was expected of four five hundred twenty eight thousand people. And June was revised up as well with wages increasing at an annual pace of 5.2 percent. Not surprisingly this gave the bond market yet another abrupt turn. And the 10 year yield which had dropped near 2.5 percent earlier in the week. Shot up again to end the week at two point eighty three percent. And while equities were volatile they weren't as bad as bonds. With the S&P 500 ending the week up just over one third of a percent while the Nasdaq moved back

toward bull territory at least for a time ending the week up over 2 percent. Here to tell us sort through yet another challenging week for the economy and for the markets. Welcome Mona Mahajan. She is chief investment strategist at Edward Jones and senior markets editor for Bloomberg. John author. So welcome both of you to

Wall Street. Good to have you here. I'll start with you. And certainly those jobs numbers really got our attention on Friday. We're really dominant. What did they tell the markets. Yeah. Look David it's hard to really say that we're in a recessionary environment with jobs going increasing over five hundred thousand five hundred thousand this month. Now keep in mind the

U.S. economy has started here from a position of strength. So while we could see weakening in the jobs figures in economic and earnings data in the months ahead we certainly are nowhere near what we'd call an economic downturn or a recessionary environment now. Now over the market implications of this move well you touched on some of them. But one thing we saw right off the bat the expectations of a 75 basis point Fed rate hike really skyrocketed between yesterday and today. Yesterday's probability. Thirty five percent today. We have a sixty five percent probability of a 75 basis point rate hike again by the Federal Reserve in September. The second thing we saw was of course those yields. So Treasury yields both on the 10 year and the two year. Now keep in mind the two year tends to be a proxy of what the Fed may do in the

next couple of years or so. Both skyrocketed higher but we continue to have what we call an inverted yield curve. So historically this inverted yield curve does provide a leading indicator of recessionary environment. But there is some lag to it six to 18 months. So net net we saw a market that absorbed this higher jobs figure absorbed a potentially more aggressive

fed. But what we did see under the surface was that some of those growth parts the market longer duration tech speculative higher valuation parts the market did underperform again today. And that might be a theme we see going forward as well. So John others you follow central banks all around the world all the time including the Federal Reserve. Did the Friday numbers make the Fed's already difficult job harder or didn't make it easier. I think it made it easier. They are people I don't think myself that Powell try to be that dovish last week. I think he meant to

give the impression that he was still very much committed to a more hawkish series of rate hikes. He was open to the idea of the claim that he was just not credible for a while. The number of people who convinced that the Fed will have to turn turn around swiftly because the economy will be too weak has been strong. That's been why we've had this really remarkable full back down in yields. And with numbers like that it's very hard to criticize them for tightening rates. Obviously the the

employment picture could scarcely be stronger. There is really no good practical reason why they shouldn't be very aggressive in raising rates to cut inflation. So I think their job has been made simpler. I don't quite understand why the stock market is still very calm about this and still play lean in the middle of quite a strong bear market rally. That does surprise me. I thought to the numbers we got stay would have been an RTS way to shape the stock market far more than it did. Yeah I want to come back there. But first Mona let me ask you do you think it's possible for us to have this kind of job growth and still get inflation under control or do we have to see a change in the employment situation.

Yeah. You know clearly we have to differentiate between headline and core CPI here and inflation expectations. So of course the headline number will be driven by what we see in energy and commodity markets. And we've been seeing a nice move lower really since the beginning of July mid-June. We've seen oil but not only oil food grain industrial metals all roll over to some

extent probably driven by concerns about global demand rolling over as well on the poor side. You know where we're continuing to look at what we call a shelter and rent inflation but also services inflation. Both of those are stickier than we'd probably like to see. But the Fed has to continue to put pressure on the core part of the market. And keep in mind their preferred metric is core P C E in order for them to meet this mandate. Now what what else we're watching and the other good part of this story is that we are starting to see inflation expectations and break even inflation rates starting to come down from their highs as well. So inflation hasn't yet been anchored permanently higher at least in the minds of consumers

which is something the Fed does watch. So in our in our view we do think inflation will start to moderate certainly on the headline side. And also on the core side by year end. And we should start to see you know even things like shelter and rent be impacted lower by inflation sensitive parts of the market interest rate sensitive parts of the market like housing for example. But even ultimately like durable goods and services as well. Well that's the key question isn't it. Some of those more durable factors in inflation John what about that. We're doing a CPI numbers next week and you have things like owner rent equivalents of blimps like that. Yeah. I mean I wouldn't be surprised if we don't see some kind of a decline simply because in the year on year rates compared to last month because gas prices really have come down very sharply from an extreme level. So the chances that we that we see a decline in the headline rate are fairly high. That's

politically quite important. It doesn't really help the Fed that much at all. I think is completely right to distress the rental issue. The problem with rents is that because of the way it's calculated we don't need to go into you now. It tends to it tends to have a lag. And the likelihood is pretty strong that we've got quite a few more months of increases in rental inflation already baked in. And there is again this is this is one area where monetary policy will work. You make it more expensive to borrow to buy a house and demand the houses go down. You will see I think the Fed

feeling obliged to keep a key to control that inflation. The other important point is let's make those people get excited about whether the peak is in. Understandably what really matters is how quickly it comes down is a very big difference between core inflation. Being back down to 3 percent by the end of this year would still be alive even though both which represents a decline. It needs to come down pretty fast and if it doesn't come down very fast because of this concern

about creating new baked in inflation expectations the Fed is going to have to be more aggressive than people are currently pricing. Well what about that. How fast you expect it to come down if in fact it does come down and put one more thing in that there may be momentum behind and that is salaries. This Arizona 5.2 percent year over year in the numbers we got this week. At the same time it's thought that they're kind of sticking. There are a lot of people out there just waiting for the next raise and expect something pretty big. Yeah absolutely. Look I think the at the inflation rate we'll start to see an end to John's point the year on year comparisons. And you know based on those base effects alone we should see headline numbers start to move towards six and a half percent. But when we reached that 2

3 percent probably not till at least mid and 2023 but that could be driven by exactly to what John was talking about as well. That lag effect from you know a weakening housing market potentially a softening labour market and potentially you know just weaker demand globally. That should all put downward pressure on inflation and that core part of the inflation which does take some time and when we looked historically takes about two years from inflation for inflation when it's above 5 percent to go from peak to trough. So if we did peak last month we may not reach trough until another 12 to 24 months from now. But if the direction of travel is in the right way we could start to see the Fed at least take a pause at some point next year and assess the situation assess the economy as well. John what about wages. Because we got those very strong inflation numbers out. There was sort of a head fake. I thought some of the jolts numbers in the unemployment claims. What is going on. Are we

seeing real softening in the labor market. It's a very difficult one isn't it. My best guess. Exactly like everybody else was surprised by today's numbers. The JOLTS number I suspect has come down simply because companies are beginning to fill those vacancies. I'm not sure that it's because they are already drawing in their horns and

taking out job ads down without ever having filled them which was a popular explanation earlier in the week. But the bottom line plainly is that there's I suppose with the claims the notion there although it's not fully borne out by the establishment survey either is that more people are looking that more people are trying now to get back into the labor force and things are getting things back therefore showing up as more more people claiming unemployment insurance even even though the the overall numbers show a strong market wage inflation. You mentioned earlier on Andrew Bailey of the bank that he got into a lot of trouble for urging people not to ask for more for higher pay which he certainly would like it if people didn't get better pay raises. But it's utterly reasonable in times of high inflation to want that higher pay rise. It's a very difficult

issue. Yeah. Good luck with asking people to ask for a lower pay. I've never had much luck with that. Thank you so much. John Arthur to Bloomberg and Monroe margin of Edward Jones. They're going to stay with us as we take a look at what else may be driving the markets particularly geopolitics and where those markets may be headed. That's coming up next on Wall Street week

on Bloomberg. This week China did some saber rattling versus the US. Where does China fit in your thought process in the future. Are there any significant investment implications with what's going on in China. Well in my group I think China is the biggest potential

growth vehicle for Boeing. Two years ago Boeing delivered about 16 percent of their total aircraft output went to China. It slipped down a little bit the last two years. But we anticipate say as we get back to the turn of the century it could go 16 to 20 percent. That was Michael Holland and Peter Esser items on Wall Street way back in 1996. And once again this week China was in the news with Speaker Pelosi's controversial trip to Taiwan and China's

rather strong reaction which certainly caused a geopolitical stir. But did it have any effects on the markets or potential effects on the global economy. Here to help us answer those questions and more are Mona Mahajan of Edward Jones and Bloomberg's senior markets editor John author. So John you actually wrote a column earlier this week noting that the bond market reaction apparently in part to Nancy Pelosi's visit. But do you think it has longer term ramifications.

I fear it has very much greater and longer term ramifications. And I'm a little concerned both how quickly the bond market got worried. We had a brief period of not much more than 24 hours when there was really quite intense demand for treasuries all on you know the classic desire for a safe haven. And more or less as soon as Nancy Pelosi's plane landed in Taiwan without the Chinese trying to shoot it down. I'm only slightly exaggerating. The market rebounded as though everything was everything was OK. And certainly the degree of saber rattling we're seeing presence from China is quite concerning.

It's conceivable that the speaker's trip is in some way hold China's bluff. I'm not a military strategist but plenty of people are pointing out that Taiwan is an island 100 miles away from China. It will make Russia couldn't make a good job of invading Ukraine. China actively invading Taiwan is going to be orders of magnitude harder. So with arguably the risk of total breakdown return to conflict

is that is still quite slim. But that there's no question if this leads to is a serious worsening in the U.S. Chinese relations from where they are now or which must all hope not an outright conflict. That's very serious. That's any any way you look at it that's going to be bad. Martin what about your perspective and not just limited to China. We have an awful lot of geopolitics going on as John just referred to briefly in various respects. Do you think geopolitics is affecting the markets right now or do they have enough to worry

about whether it's inflation or whether it's supply chains or whether it's the Fed. Yeah you know David this year we we actually got an outsized amount of geopolitics impacting markets directly of course starting with that Russia Ukraine conflict which not only kind of exacerbated the inflationary problems but really put upward pressure on oil. Energy grain prices across the globe. And then of course we did shift some focus to China. But because of the lockdowns and the on and off lockdowns created tensions and supply chain created some demand reopening and then shutting down once again. And then of course with Nancy Pelosi's trip this week we started to think about maybe another tail risk emerging in geopolitics which is the China Taiwan situation which could potentially at least in an investor's mind could be a Russia Ukraine 2.0. And keep in mind the implications would be quite a bit more severe. Supply chains and inflationary pressures again could be exacerbated to to a more even more

extreme level. So for now in our view we think it's a tail risk. But certainly one that's worth monitoring and certainly one that we're watching could intensify in headlines if we see you know another similar type of trip negotiation discussion. But hopefully for now a tail risk that has a lower probability than certainly what we saw in Russia in Ukraine. So to transit due to investment advice if you would here does that mean if I'm an investor from my portfolio I should look at more defensive investments whether that's equities or debt. Stay with growth right now. Yeah. You know I think in the near term. So look we've had a great run rebound off the lows of mid-June across equity markets and even in fixed income. So in equities we've seen the S&P rally nearly 13 percent underneath the surface. The growth parts of the market technology et cetera are up nearly 20

percent. Similarly fixed income rebounded off lows as well. Now going forward if we start to see yields move higher. You know we've had a really nice move downward in yields. But keep in mind we still have the Fed in play. We still have quantitative tightening in play which could put upward pressure on yields if that occurs. We could probably once again see growth start to

underperform or lag again. So in our view as we get through the next few months as those earnings and economic data perhaps start to soften catch up with what we've seen in equity markets earlier this year we would advise of a more defensive tilt value oriented defensive sectors and equities and fixed income. But if and when we do get inflation kind of in earnest moving lower the Fed in earnest able to pause that's really when we see a pickup in risk assets but perhaps a shift towards growth once again.

And then that's when you'd start layering in and barbell and growth. But for now we'd say stay invested and stay perhaps somewhat defensive in the months ahead. But don't be surprised if earnings and economics bottom start to bottom. But equities look forward and start to move higher. So that's what we do expect to happen a u shaped recovery ahead. So so John just overly simplistic here briefly does that mean I should have more bonds than I thought I should. That's that is a very difficult one. I need to be somewhat bearish on bonds. I think there is a risk that if the 10 year

reach is yet and that you said that it means that you probably don't want to pile too much too heavily into its funds. My best guess because. All of us have to contend with the fact that we don't really know then that the lack of good precedents for what happened to the world in 2020 means that there is also a lack of good precedence for what we should be expecting now. My best guess is that rates probably have to rise higher to choke off inflation. The rule of thumb is that inflation doesn't go down. It doesn't peak until the interest rate exceeds the inflation rate. That implies that we're going to be going. I would say above 4 percent at least. And that would mean that you would want to be getting into more defensive kinds of stocks that actually benefit from higher rates. Just being a citizen basically value if you want seats in

terms of real risk. There's this Machiavellian possibility of getting into chip makers that are from Taiwan. If that happens there then there is something a lot more scarcity of chips. Yeah. There you go. There's an interesting investment option. Chip makers are not in Taiwan. Thank you so much. Homeowner Mahajan of Edward Jones and Bloomberg's own John Authors. Still ahead we're going to take a look at what's happening next week on global markets. That's coming up next right here on Wall Street week. And we are on the Louvre. This is Wall Street. I'm David Westin. It's time now to take a look at what's coming up next week starting with Juliette Saly

in Singapore. Thanks David. The monthly China data dump will be crucial for investors trying to navigate signs of a recovery. But there is plenty more to keep an eye on in the region. With Bank of Thailand poised for lift off GDP from the Philippines and Malaysia as well as an inflation print from India after the RBI last week brought rates back to pre pandemic levels and Japan's producer price inflation likely slowed to seven point seven per cent year on year in July. In the coming week we'll get the second quarter GDP data out of the UK which should provide some

clarity on the impact to Britain's cost of living crisis on economic growth. We'll also get the latest inflation readings and updates from Greece Lithuania and Latvia on Monday. Hungary on Tuesday. Denmark and Germany on Wednesday and France on Friday. Also on Friday we get an advance reading of Russian GDP for the second quarter. So we'll see just how much Western

sanctions are biting. Thank you Lizzie of course here in the US. A lot to look forward to next week coming off of the big jobs day report. How do we think about a CPI and a PPA print starting to come next Wednesday. A lot of economists with CPI as well looking for it to decline from peak of nine point one percent may be down to about eight point eight percent. But as we know still well ahead of a 2 percent level from the Federal Reserve's target. We want to pivot to earnings as well. When you think about a big one to watch Disney coming on Wednesday as well how do you think about subscribers for the classic Disney plus streaming service that they have all in the face of Netflix as well as some of the reported slowdowns over there and of course Coinbase with the big route in crypto. How does that crypto exchange and trading platform fare amidst all of this

volatility. Back to you David. Thanks to Juliette Saly Lizzie Borden and Taylor Riggs. Coming up Democrats like their new reconciliation package. They call it the Inflation Reduction Act. And some economists won't like it too. But what would it mean for investors. We ask Steve Rattner a blue adviser. That's next on Wall Street week on Bloomberg.

Well this is really very comprehensive and historic piece of legislation. Joe Manchin he made a terrible deal. Leave it to Congress to surprise us. Take two of our biggest problems inflation. We have a serious inflation challenge which is hitting economies around the globe and climate. As the climate crisis gets worse extreme weather will pose a rapidly growing danger to a rapidly growing number of communities. Put them together in one big package and give it the attractive name of

the Inflation Reduction Act. This bill will reduce inflationary pressures on the economy. In the end it all came down to getting West Virginia Senator Joe Manchin to sign on. This is fighting inflation. This is all about the absolute horrible position that people are in now because of the inflation cost in senator mansions. Republican colleagues like Pat Toomey of Pennsylvania can't believe he went along. It's a very significant corporate tax increase mostly focused on manufacturers which is a bad idea. It's combined with price controls on prescription drugs. I've been asking myself what is Joe Manchin. Get out of this. But thus far economists like Larry Summers think the Inflation Reduction Act may be just what the doctor ordered. I was glad to

see the bill. I think it's going to reduce the rate of inflation because it's going to reduce deficits and demand over time because it's going to use the federal government's power to negotiate lower prices for pharmaceuticals. And because it's going to increase supply of energy. So economists really like the Inflation Reduction Act. But what does it mean for investors to get an answer that we're going to turn to someone who invests a fair amount of capital. He is

Steven Rattner. He's chairman and CEO of Willett Advisors. They invest the personal and philanthropic assets of Michael R. Bloomberg who of course is our founder and majority shareholder. Steve. Thanks so much for being back on Wall Street. We of course love to be here. So you wrote a terrific op ed piece for New York Times this week in which you said these are pretty

strong words I must say. You think that this may be one of the best packages that you can remember Congress giving birth to. So you think it's a good idea for the country. What does it mean for investors. I think for investors it's basically positive. I think we're making progress on a number of our really important problems climate being first and foremost among them. That's

good for the country. It's ultimately good for investors. I think prescription drugs may not. Pricing may not be absolute great for every pharma company in America but for the average American it will eventually give them more spending power and therefore the ability to buy other things. And that helps the economy. The minimum corporate tax it's just something we needed to do. I think the Trump T.J. was so wildly unfair in terms of the amount of the business rollbacks that this brought back. I would note that after the mansion proposal was very surprisingly announced as you know nobody thought this was coming. But after

it was announced the stock market the next several days had several of its best days throughout this difficult period. So obviously investors were not put off by this thing. And indeed even encouraged by the idea of progress in Washington one of the things Republicans think done for example Pat Toomey from Pennsylvania is to say that corporate minimum tax effectively would take some of the benefits away from the expensing of capital investment will deter capital investment. Corporations

ultimately hurt us in terms of investment in terms of growth. Well the first part of that is right. We are taking some incentives away although we're doing it. We're not really directly taking them away. We didn't roll back the depreciation provision. We simply put a minimum tax on all the corporate profits. So that in fact leaves most of the investment incentive in place. But there are those those who felt that that was simply too much when it was passed the ECJ. Why give companies 100 percent write off upfront. Is that really going to change investment that much. Is it really the way you want to run tax

policy. And I don't think there's a lot of evidence that had much of an impact on investment. So I don't buy that. I think I think the problem of investment here is there are not enough profitable opportunities out there not that companies are worried about their tax rate or they don't have the cash or something like that. One of the aspects of this obviously is the inflation reduction because as I understand it reducing the deficit actually paying for it having more in revenue than the costs going out. What does that do to investors. Well first on the inflation thing the Republicans have created I think a false

dichotomy the way they have. They made the point or claim this wouldn't really reduce inflation. And that's not untrue. Its impact on inflation in the first few years is relatively small gets a bit larger in the out years. But the most important thing is that it is a reversal of policy from the last several packages we've passed that have been highly inflationary. So I

think this is good for investors and that it brings again some stability to fiscal policy in Washington. And for the first time in a long time a fiscal policy package that actually does at least lean against inflation even if the total impact isn't enormous. If this package and again we're assuming for the moment that it gets enacted if it in fact gets enacted is the benefit to investors mainly sort of the rising tide notion. I mean it's the macro that everything goes up until we're all

better off or are there specific sectors that actually would be more attractive to investors such as you mentioned client climate and energy. Yes the rising tide is certainly the overarching part of this. It's not a complicated package. It doesn't have that many provisions in it. So it's really it really is climate and prescription drugs and then obviously some of the tax stuff. So in climate I don't think anyone yet has really combed through all the little minutia in this bill. But

in the climate section you have to believe there will be an opportunity for investors and also warning signs for investors about where not to invest. As we go through this energy transition and then we'll have to get a better understanding on the pharmacy side of what the impact is on that sector. But that's a long phased in program over I think seven or eight years. And so again no immediate impact. You manage investments around the world not just in the United States. One of the key questions we always ask is what does this do to the competitiveness of the United States versus other regions whether it's China Europe wherever. Does this make the United States more competitive in success. Not sure the difference is

that great. I think that you know this is an important bill for the reasons that I wrote in my piece of the reasons I believe. But I'm not going to sit here and pretend it's going to transform everything. I think with respect to climate for example it simply gets us closer to meeting the Paris Accord. But we have to understand that addressing the climate problem costs us money. People who say well you know you couldn't kind of make this a profit center. It's not a profit center. It's a cost center. It's something it's an externality as economists would say. A

byproduct of our having been irresponsible for many years and now we're going to pay the price of cleaning it up. So I would not pretend it makes us more competitive. I would say that it gets us more in line with some of our partners particularly in Europe who've done more on climate than we have. And it's time for us to do our share. He's addressing the climate situation inherently inflationary. Inherently there's a cost to it. Look I believe and I'm sure some economists have studied this. But if you go back to the early 70s when we had a huge environmental problem and you and I are old enough to remember when the Cuyahoga River went on fire and that sort of galvanized people to do something. Part of I

think why our economy struggled in those years was because we were paying a huge cost to clean up environmental problems all over this country that were costs but not revenues. Costs but not profits cost but not really benefits beyond having a better environment. And I don't think this is as big a deal as that but this is in the same direction. There is a cost for addressing climate and we shouldn't pretend this otherwise is part of a larger pattern that we're addressing right now of inflation. And just while I have you let's talk about that issue as an investor because there's a back and forth. Is the Fed going to go too far. They don't go far enough. The markets are reacting perhaps overreacting to some of the hints we're seeing right now. How does the Fed raising rates affect you. I mean are you happy with them raising rates. You want them to do more or less what's best

for you as an investor a long term investor I should say. Sure. Well look first of all markets are not always right. And as we sit here today markets are assuming a path for the Fed and a path to the economy that many of us feel is completely unrealistic. And if anything that the markets have gotten more optimistic about how far the Fed will have to go when rates will come down. Over the last several weeks you've seen the 10 year come down you've seen the five year forwards. All the indicators are that the markets have become I think irrationally optimistic about what the Fed is going to have to do. High rates are the enemy the stock market. There is no getting around it. It is the alternative use of capital. It's the so-called risk premium. You know all that. And and so I have been fairly bearish on the market because rates have to go up and I would continue to take

that posture. I think rates are going to have to continue to go up very substantially. I think we have a kind of embedded core rate of inflation if you will of between 4 and 5 percent in this economy. So it's not nine but it's still so far above the Fed's 2 percent. They're going to have to do a lot of work to get it back there. Thank you so much Steven Rattner. He's the chairman

and CEO of Willett Advisors. My pleasure. Thank you. Coming up we wrap up the week once again with our special contributor Larry Summers of Harvard. This is Wall Street on Bloomberg. This is Wall Street week I'm David Westin. We end the week as we always do with our special contributor Larry Summers of Harvard. Larry thank you so much for joining us. Let's address that big number that came out on Friday. Five and 28000 new jobs. Also revision up in June. And by the way wages up at a rate of 5.2 percent year over year. President Biden came on said this shows that his economic policy is working. What did you make of those numbers.

I think it's more mixed. I celebrate all the extra jobs and that's surely a good thing to see. But my principal concern is you know David has been that we've got an overheated economy and that if you overheat the economy longer and longer you get more and more inflation and bigger and bigger problems down the road. And everything in this number says to me overheating. Not yet under control. Not our path to being under control. So I was actually not gratified by these numbers but my concern was actually magnified. So what message does this send to the Fed do you think.

Look I don't think the Fed has the thread right now. As I said on this show last week I think the idea that we're at the neutral rate we're near the neutral rate is not a defensible concept. And now when we're seeing wage inflation unambiguously after this no accelerating after this number after the ECI after the Atlanta Fed we have by every reasonable measure of core inflation inflation running somewhere plus or minus 5 percent. That is more than it was when Richard Nixon put price controls in place. That is not acceptable by any dimension. And if we don't act on it and act strongly on it and that means raising real interest rates significantly then we're just setting the stage for stagflation. Here's what I'm very worried about because we've seen the movie before. I'm worried and I was interested to see that Paul Krugman who's hardly agreed with me in general on these things expressed exactly this concern today. I'm worried that we're gonna see some good news on. Non core inflation on commodities. On what's happened in gasoline

for example. And we're going to see a bit of economic slowing and that's going to lead the Fed to think that things are under control. But in fact underlying inflation is going to be still completely unacceptable. Things are going to go up and down in terms of non core inflation. And if we've got a labor market that's red hot that's only going to mean constant or even accelerating inflation. And we're going to have a situation like we did in the 1970s where we perpetuated inflation by not doing enough to contain it. The doctor tells you to take all your medicine if you take only some of your medicine you're going to get the illness back. The bacteria are going to be resistant and it is going to be worse. And that is the risk that I believe we

are running in this situation. On the path that the Fed is predicting and on the path that the market is expecting. Another big piece of news this week came from that Inflation Reduction Act which you talked about last week on the program saying you were glad to see the bill. It's been adjusted in some ways to accommodate particularly Senator Cinema from Arizona. But as of right now it looks like it may well pass the Senate this weekend and maybe be enacted next week. So what do you make of the bill

as it looks now the package as much as we understand it. This is really positive news. This is good news on health care. This is good news on the environment and energy. This is good news on tax reform. This is going to make our economy better while at the same time reducing the budget deficit and contributing albeit in a small way to a reduction in inflation. But it is a beginning a very important beginning not an end. We still have huge international tax loopholes that are driving businesses abroad. We still shockingly and this is something that really disappointed me and I was sorry with the judgment that Senator Cinema came to. We still have carried interest loophole that is allowing many of the wealthiest Americans to

pay taxes at a much lower rate than the people who clean their floors by getting capital gains on what is really earned income. And it is just wrong. And it makes me worry about our politics that it has lasted as long as it has. But look that's for another day. For today it's to celebrate that this is a good and important bill that is moving the country forward. And I think it's a tribute to the perseverance of Manny the perseverance in negotiating and negotiating and negotiating of Senator Schumer of Senator Manchin who many people have raised questions about and who I don't agree about on everything but who has stuck with some basic views he had about the importance of not adding to inflation for a year. And contrary to what many people said was prepared to reach a deal if it was the right deal and stayed at the table. And above all I think it reflects the fact that President Biden laid out an agenda pointed to things that he thought were very important recognize that not everything he's started with was going to happen but the some things needed to happen. And for him for Secretary Yellen for chief of staff

claim for any C director Brian D who played a big role in all of this. I think this is a very substantial victory. And the fact that it took a long time coming shouldn't blind anybody to the fact that it's something very important. Larry addressed one specific issue that's come up in this scoring as it's called the Joint Committee on Taxation which is bipartisan came out and said that in fact fair one of the tax burden would fall. People make 400000 hours or less. I understand what that is. It's saying if the corporations are paying more tax some of that is going to go to the employees and the regular consumers. What do you make of that argument. Is it true. I don't think it's very good economics. I think that the

corporate share owners and other capitalists pay the vast majority of corporate taxes in general and I think that's even more true with respect to corporate subsidies and loopholes and its corporate subsidies and loopholes that we're going after as a consequence of this. I think the vast vast majority of Americans are happy to see the tax rate on companies like Amazon go up and they're not worried that that means an increase in their taxes. They'd much rather see us when we need tax revenue as we do now. Go after companies that year after year after year are reporting billions of dollars of profits to their shareholders and still not paying taxes at a rate of even 15 percent. And that is all that this bill goes after high profits to shareholders. No taxes. That's the right thing to do. So finally and briefly if we can Larry. Tell me does it change your view about whether Washington works. Because if you look at actually what this Congress has done good bipartisan some of it

not. It's got an awful lot done with a 50 50 Senate and a narrow majority in the House and a fair amount of it bipartisan like the infrastructure bill like the CHIPS Act. I think it does. David I've said it on your show before the great the great thing about America is its capacity its resilience its capacity for self denying prophecy. Everybody predicts that our system is going to collapse that nothing's going to work that

we're not going to be able to do anything that we're not going to meet our challenges. And that generates sufficient alarm that ultimately we do step up. Now we've got a long long way to go. But I feel better about the fiscal side of what our country is doing today than I did a week ago or a month ago or frankly a year ago. And I think that that's something that all of us should take some satisfaction from. I'm not sure everybody is though. Is there communications failure. Look I think when you have a process that's as messy as this one. When you have as much transparency as today's

news stories filed every two hours social media tweets it's just hard. You know great surgeons accomplish remarkable things. But if people had to see the surgery it would all feel pretty grim and awful. And it's a bit like that with legislation like this. So I'm not sure we are there and I'm not sure we will get there. But I think that ultimately it's going to be the results that matter. And we're going to have less climate change. We're going to have America more as a process. Millions of people who were worried about their bills for health care now have them assured and people are going to go to the drugstore and they're going to get lower prices. And I think ultimately it's results not process that matter. Larry thank you so very

much. As a special contributor here let Wall Street. Larry Summers of Harvard. Coming up there may be great actors or athletes but shouldn't we be getting investment advice from them. That's next. And it's on Wall Street week on Bloomberg. Finally one more thought. All that glitters is not gold but it might just be crypto. Remember those glory days of yesteryear or at least the year before last. When money was cheap the Fed was still cutting

rates today. The FOMC kept interest rates near zero and asset values had nowhere to go. But up were near record highs. The stock market's making grand new record highs. Equities can continue to move higher. One of the hottest asset classes of the last few years was crypto with Bitcoin peaking near seventy thousand dollars just after Mr Powell announced his decision to cut rates again making it just too good to resist. For investors like Michael Saylor we have to invest in something and we've chosen as a business strategy to focus focus on what we believe is the most exciting investment idea. Because it's a digital commodity that's absolutely scarce and only getting technically better every year. While Mike Novogratz told our own Erik Schatzker it was as good as gold. It's a weapon in people's portfolio. It is a version of gold. We call

it digital gold. And if retail investors needed any more reason to get on the crypto bandwagon they got a not so subtle nudge from some of the biggest celebrities around. People like greatest of all time quarterback Tom Brady. I'm getting into crypto with RTX Duran and Reese Witherspoon tweeting quote Crypto is here to stay. And Steph Curry telling us he's not an expert but that's not stopping him from trading crypto anyway. This is Steph Curry the world's leading expert on crypto currency. I'm not but that was then and this is now. Inflation is up. We really need to restore price stability get inflation back down to 2 percent. The Fed is on a tightening spree. Well the message is that they will be continuing rate increases

although I think starting in September meeting as he said it will be meeting by meeting. And crypto isn't looking like quite the sure thing it did to some. With Bitcoin down over 60 percent from its peak leading people like Eddie Lowe of May bank Singapore to lose faith. CAC was actually touted as the alternative goal of any west. Call us at sixty thousand but I think now at twenty thousand or below that it is no longer really that valid.

And that's even before we get to questions about what mining crypto is doing to our climate. Bitcoin community should see the biggest risk. The bitcoin is climate is getting worse. Shery Ahn news every day and bitcoin is contributing to that but never fear. Matt Damon is here and we know that the characters he plays in

the movies are nothing if not courageous. We can't stay here. It's not safe. But Damon also styles himself as brave at least according to this crypto dot.com ad for simple words that have been whispered by the Intrepid since the time of the Romans. Fortune favors the bridge. I suspect that there just may be some crypt owners out there

hoping that fortune catches up with Mr. Damon's bravery. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-08-11 01:13

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