Wall Street Week - Full Show 09/02/2022
Something for everyone in the August jobs report with the top line beating estimates. But the unemployment rate ticking higher and European inflation hits a record high. This is Wall Street week. This week Wall Street week contributor Larry Summers on the jobs report. People have a tendency to exaggerate how much favorable participation contributes to necessary disinflation. And Jessica CALDWELL of Edmunds on the future of the electric vehicle market finally feels like now we're kind of on the cusp of something big.
So I think the question here is our consumers ready to pony up to spend the money. Markets began the week jittery following Fed Chair Powells hawkish tilt from Friday but Minneapolis Fed President Neel Kashkari hammering the point home. I was actually happy to see how chair pals Jackson Hole speech was received. You know people now understand the seriousness of our commitment to getting inflation back down to 2 percent. Inflation in Europe rocketed to yet
another all time high reaching nine point one percent year over year as the bloc's central bank weighs whether to go with a jumbo rate hike of 75 basis points. But economists are also being swayed because of all these hawkish commentary we've had of the ECB. You've got six members of the Governing Council now saying that a move bigger than a half point needs to be at least considered. Plus natural gas prices in Europe continue to fall throughout the week even as Russia's Gazprom shut off the spigots to Germany's Nord Stream pipeline. Three days of maintenance I put quote marks around that because some people would doubt the motives behind fine.
I'm Caroline Hyde alongside Matt Miller. Let us shape up the week for you. The week that was on Wall Street. S&P 500 five days we're in the red to the tune of almost three and a half percent. This is the third straight week of losses.
This is the worst week we've had since mid-June to yield almost an a round trip. Look we're basically flat on the week but what a movement into week volatility that we had yields rise. We think that we have a hawkish fed on our hands. They pull back when we get a really rather Goldilocks scenario with the jobs data and map the VIX it creeps a little high but twenty five is above the annual average. I think the VIX doesn't really do much. So I'm not convinced that we're really headed down hard yet.
The market doesn't really believe that the Fed can go ahead with rate hike after rate hike after a rate hike. They're a little more convinced after Jackson Hole. But this jobs number you're talking about this earlier today we saw what looked like maybe a little stabilization in terms of average hourly earnings and we saw the participation rate climb. So you know that's putting in a couple more question marks over the Fed's commitment to raise rates soft landing. Can they do it.
Let's ask our guests. We're pleased to welcome to the show. And Ali director and fundamental portfolio manager for Causeway Capital Sonali Basak Chief Investment Officer Franklin Templeton Fixed Income. It is wonderful to have you both here as we look towards a long weekend long weekend where it felt that money managers took risk off the table and start first and foremost with us your interpretation of the jobs number and where that leaves the Federal Reserve. I think you know people are looking at a number of very carefully to see what the feds are doing is working to see this.
What actions have taken are loosening the labor market doesn't it. There's incremental signs but nothing for sure. And I think there is also some confusion in the market thinking that you know only from the unemployment numbers we will see a slowdown be more market. But in a high inflationary era it is common that labor market stays tight before the shoe really drops. So I know this is a number that the Fed is concerned about. Well we have way more to go before
unemployment is threatening where Fed has to reverse course that we had in the last trading day of the week. A big turnaround as Caroline points out. Of course a lot of asset managers are going to take risk off the table as they go into a Labor Day weekend. You don't want to be sitting on the beach worried about your portfolio. Sonali Basak.
You have a big portfolio to worry about. Is that what you guys have done it the other way. Do you see portfolio managers typically doing that. So you know that I'd actually take it back to what you started started discussing. The Fed lacks credibility. Markets don't believe that the Fed is
going to do what the Fed keeps saying it's going to do. That's a problem for the Fed. And it's also a problem for markets. So we in our portfolios have actually we started taking risk off sometime before this long weekend. We don't think that long weekend in and
of itself makes a major difference. I couldn't agree more with Ed. This is one data point. The bottom line is I'm going to be looking very carefully at the Fed's new S.C.
please to see if we get some more realistic PS after the March and June Jew projections which I didn't think were internally consistent at all. So I'm taking it from them. It's not because you're saying they lack credibility. You are a bond money manager first and foremost. Fix damn it felt as though the bond market some had interpreted the Federal Reserve along the right tracks prior to Jackson Hole. They didn't expect to pivot in quite the
same way that the equity market did. Why do you think that for credibility's been so hard to come about. So I'm not sure I fully agree with you because we were at 347. The type of volatility we've seen in the bond market on every single data point to me indicates that the bond market also fully anticipates that the Fed is going to do what it's done for the better part of a couple of decades now which is as soon as the market gets wobbly the Fed blinks and it reverses course. It happened in 2013. People keep anticipating that the foot the fence first and foremost view the first target.
The only target is unemployment and growth. And we've got inflation at eight and a half percent and we have employment significantly lower than current NAIRU. It seems remarkable because the Fed is beating one of its targets. It's knocking it out of the ballpark as far as unemployment is concerned. And it's completely blowing the target. And as you know by and by the way I wrote or neighbor A what is it not an accelerating inflation rate of unemployment.
So we've got Larry we got Larry Summers take on that which we're going to play out later. He says it's like five five and a half percentage rate. Totally agree. We're nowhere near that. But I want to go back to something that I think is really interesting. And you know Ellen with your work into consumers with your previous work in transportation and autos I see this real divergence or some of my favorite words. Now bifurcation dichotomy in terms of
the market doesn't seem to believe the Fed but consumers seem to for sure. Right. They're freaked out about getting low rates locked in on mortgages getting a lower rate before they go and buy a car as those continue to climb higher and higher. How do you see the consumer right now Allan. Well consumer I love that word by application because I feel like it's the word for 2022. You know after what's happened after
Covid you see consumers you know spending a lot on service is sort of a revenge spending. So they are really taking back spending on discretionary. And you know the goods side or consumer sentiment is really low. And you also see retailers already coming out saying they have loaded inventories. So consumers are waiting for deals. There is going to be negative earnings revisions on consumer discretionary stocks.
And we're just waiting for the shoe to drop. And again I agree with some now. The equity markets you know do the terror. It went on in July and August. It clearly indicated that they believe that Fed was going to blink.
And I think this is why Jerome Powell had to use that strong language in the recent meeting to say you know what 8 percent inflation is not acceptable now. And what's really fascinating. DAX Beach. Ellen that he gave it. Jackson Hole.
It's a speech he should have given six months ago right. I mean a year ago. Hot. Yeah. A year ago. If we had been crying for this for a
couple of years now because I really think that the delay is going to make this more painful. And in part it's because the Fed has to follow through. So I keep seeing everybody obsessed with. Okay. Today's jobs number. Does that mean 75. Doesn't mean 50 doesn't mean 70. We're all macro tourists now.
It doesn't even matter. Because the bottom line is I think what I really need to CNBC piece is internal and internal consistency potentially a higher peak Fed funds rate. Remind us what the SPDR Chanel projection for the Fed. Those are the prediction projections
that economic projections which the Fed does every quarter which will come out again in September. And this. These are forecasts median forecasts for the FOMC members including of GDP unemployment inflation and importantly also see the median Fed funds rate. Now the ones which we saw from March and June how the Fed funds peaking at three point eight I think already in June. But this went together with unemployment
which remained at around three point seventy three point eight. And markets basically said well isn't internally consistent. I think we actually are going to see we need to see Fed funds above 4. And we need to see the Fed reject a higher unemployment rate.
U.S. GDP growth and back somewhat sticky inflation to make this whole thing hang together. This doesn't make sense. Still maybe trying to highlight a soft landing or the wish that was. So I'll just very briefly you've got about a minute left. Let's.
On our first part of this conversation you said perhaps there's more pain to come. Look there has been evident pain in the market. You look at first and foremost. Matt's been shining a light on it all day. The ag index the global bond market is now back in bear market territory. We've seen as you mentioned the volatility in the bond market.
The move index has been at such elevated levels versus the VIX. How much more painful can this get in your part of the market. So I think that actually are going to continue to see volatility until markets internalize what different central banks are going to do. Look the exit from this quantity of QE and market distortion that we have seen over the last basically since the global financial crisis. So it's going to be coming up for 15 years.
Anybody who taught at the exit would be simple was dreaming. Really it's going to. It was always going to be a complicated thing. And I think it's going to be extremely complicated. And the fact that we've got these issues with oil and commodities and supply chain bottlenecks it's it just adds there's there's a global lag right there.
You can see it on your Bloomberg TV eye and go and it's down 20 percent. When we come back I want to ask about this really an historic move in bond markets. Certainly when compared with what's happened in equity markets are going to have much more rational deci. And Ellen Lee Allen's going to give us some individual company names to talk about after we take a break. This is Wall Street week on Bloomberg. But this week the conventional media began to catch up.
After all it was hard totally to ignore such additional developments as the slowest rate of manufacturing growth in 13 months. The first outright decline in construction spending in seven months. Falling prices for raw materials to the lowest level since September. The biggest monthly tumble in factory orders in almost a decade. A rising unemployment rate and the first monthly decline in private sector jobs in more than four years. You think maybe the economy really is a hair less vibrant these days. This is Bloomberg Wall Street week.
I'm Matt Miller alongside Caroline Hyde. That clip of Lewis Brookhiser from June 2nd 2001. Santana's Maria Maria was at the top of the charts and Mission Impossible 2 was the number one movie of the land. There were similarities between the economy then and now. The unemployment rate ticked up. But back then it was all the way to 4
percent compared to this month's three point seven percent. And people were starting to really think about what was going on in the economy rather than at the individual company level. Ellen Lee joins us right now. Should all decide they're back with us to continue this conversation. Ellen I wanted to touch on this because
it seems like the whole world's gone macro. Everybody wants to talk about the unemployment rate and the Fed inflation. How does that strike you as a fundamental research analyst. I can't ignore what's happening in the world obviously because it's the backdrop for the environment which companies operate on a causeway.
We're looking for a bottom up investment ideas. And there are a couple that I really like in this environment. You know Philips and Alstom both are restructuring stories trading at ten times I think in the current environment where interest rates are going up. I think that's a good tailwind for value stocks. But more importantly they have more have their fate their control of where the management can lead them out of the situation they're in. And of course macro environment being challenging we believe is all reflected in their valuation. Philips Alstom both being European
companies. And it's been over by using your toothbrush for example. It's not your your global perspective here. We look towards next week we look
towards the European Central Bank. Fed is not the only central bank having to fight inflation here. Certainly not. The PBS sees anyone who doesn't. Your perspective on whether Europe is in a place to be investing at the moment in a very long line. Sorry. Sorry.
One moment Alan. I just just us now for a second. Oh I'm sorry. I didn't I didn't hear that. So I was just going to say that Europe's a very different position. But relative to the US I would say that it's interesting that inflation is almost as you know it is very similarly high in Europe as it is in the US. Then it comes from completely different fundamental characteristics.
You get energy prices go up 6. I think energy prices in Europe. Gas prices for example went up 6 7 10 times more than they went up here in the US. So yes you've got inflation but it's very different. The drivers are different.
The demand side for Europe is significantly different than the demand side we had here in the US. This is why I think this is why I think Ellen's call for Philips Nelson is so interesting. I mean the Russians said late on Friday that they are not going to reopen the spigots in terms of Nord Stream one. Caroline was anchoring the clothes on Bloomberg and all of a sudden the markets turned around Bigley.
Ellen why would you want to industrials in Europe at a time when they can't even count on energy bills to stay as low as 10 times as high as what we pay in the US. Because you'd have to look at the price on the screen. These stocks are down more than 50 percent and they're reflecting this challenging operating environment. But mind you you know this gas crisis right now this winter it's going to be difficult.
Actually people are thinking about a more difficult winter the year after. But the reality is things are in motion where this is going to be resolved. And guess what. In the long term everybody's going off
Russian gas. I mean this is your sweet spot. We all know of course the Franklin Templeton's of this world for emerging market expertise but also global expertise and therefore an all there any emerging markets at this moment. Look in any way attractive when you've got the US dollar as it did this week hitting a new record high. So I think you've got to look at different elements whether you're looking at local currency whether you're looking at hot currency.
Certainly in our Emerging Market Debt Opportunities Fund we continue to find opportunities in the hot currency space in particular. I would note though that as these valuations get more attractive there is a tendency to throw everything out and there are many emerging markets which continue to have very solid policies. Number one. Number two when you have energy crises the way we currently have unsurprisingly still have a large number of emerging markets not just Russia any other emerging markets which actually stand to benefit from high energy prices.
And I would note that while commodity prices such as food prices have come down there's every expectation that these are going to go up and they're going to come down. And so there are emerging markets which benefit from a lot of these underlying features that say vibrational. Ellen makes an interesting point which I want to get your take on this winter is going to be hard. Next winter could be worse right. We've seen forecasts for inflation in the U.K.
for example of over 22 percent from reputable investment banks. I mean how quickly do the central banks want to get a handle on inflation. Because if they want to do it quickly they're going to have to come down hard like Paul Volcker hard on labour markets.
And that's going to cause widespread spread pain and maybe civil unrest as can be politically maybe untenable. So it's going to be really hard. There's no easy way to put this. I don't think those massive double digit inflation rates are necessarily going to happen in all of Europe.
And that's a different issue. The UK in many respects always seems to have some more tailwinds on inflation. And the list. But then the rest of Europe does. All of it is very high. The problem is that if you let that high inflation continue inevitably it stops getting built into expectations wage expectations and it just gets harder the longer you wait. It's not clear to me that central banks
have much of an option right. They don't have an easy way out. And yes it's going to be extremely painful. And I think that monetary policy was way too easy for way too long since I saw ISE Bailey pulls out a little bit of the U.K. and he started talking tough perhaps the whole before the market had anticipated. What about Christine Lagarde then. Alan what about next week.
What about 75 basis points. I think you know overall inflation is high. So the central banks need to do what they need to do. But again I would agree with the North.
The energy crisis is at the center of inflation. And because of that we see governments in Germany France and UK discussing and thinking about how they can manage power prices because they can change the structure of the market to ensure that this can be more contained. And I think there is more news to come. And I think this is why when the
pipelines shut down actually gas prices fell. Ellen we haven't really gotten to China yet. You cut your teeth in Hong Kong I believe a credit squeeze before working for Tiger Asia. What do you make of the lockdown. Chango mean. Twenty one million people almost as many people as live in Australia. Right in this one city. We've seen this in other mega cities and it's just leading to really slow growth.
What the forecast like three and a half three percent now way below where they need to do. How does that fit into your bottoms up research on these industrial companies. So it's like a broken record these lockdowns. Right. But what we're seeing is when I'm looking at companies bottom up there is this pattern of earnings that is going to really deviate from past history. So we could get seasonality based on lockdowns.
If I look at consumer discretionary stocks depending on when the lockdowns happen and when it opens up. There is a revenge expenditure that happens that we're really going to have to adjust for those lockdown scenarios and how it affects the earnings number. But so far at least on the consumer side things have been resilient. But I'm not so sure going forward ISE p.m. likes are dropping. And of course spending. And I actually just add very quickly to
what Ellen said the global implications of China's lockdowns the complete lockdowns which are not predictable by definition that has additional inflationary impact. Right. Because you can't predict when you're going to have additional supply chain bottlenecks. It just makes it very difficult not to raise rates and not to try and keep a lid on some of this. Love that one. One word answer for you so now is China
investable on a. Pass because it's it's there's no one word answer it depends on the company it depends on the sector it depends on what you're investing in. So it's truly it's two two two two words. It depends. Perfect. Alan Lee and I'll decide. Wonderful to have time with you. I want to thank you both for joining us on Wall Street week. And of course coming up we're going to
have so much more of a global perspective for you. It is global Wall Street. That's next on Wall Street. I'm.
This is Wall Street week on Bloomberg on Juliette Saly in Singapore. This week in Asia China likely to report slower export growth and softer consumer in factory gate prices. More signs of weakening demand. Meanwhile central banks in Australia and Malaysia are likely to hike rates again to quash rising inflation. Meanwhile in Japan gains in household spending will probably have accelerated due to busy summer travel and inflation. Data from Thailand and the Philippines will likely show steep increases in the cost of living. The main event in Europe in the upcoming week will be the ECB decision on Thursday.
The current market pricing is coalescing around 75 basis points after earlier last week seen record inflation for the eurozone coming in at nine point one percent for the month of August. Adding to that plenty of hawkish ECB members pushing ninety five basis points worth of hikes. Now any language around Kutty will also be watched.
That's accelerated following accelerated rate hikes. Of course complicating the matter is an expected recession in the region with the energy crisis gripping Europe on the heels of the payroll report. Both Federal Reserve Chairman Jay Powell and Treasury Secretary Janet Yellen are due to speak. Meanwhile regional Fed governors of the Chicago Minneapolis and Kansas City Fed will also make comments alongside Fed vice chair Lael Brainard. Congress starts to return from its summer recess as President Biden attends the groundbreaking of a new intel facility in Ohio. Chips and supply chain issues are likely to be in focus for Washington. In corporate news Apple is expected to
unveil the iPhone 14 lineup in its next slate of smart watches as the company faces a slowdown in consumer spending and looks to shift its supply chain on the earnings front. GameStop sees Sailor Dock Design and Kroger are all due to report quarterly results. I'm Priti Gupta. You're watching Wall Street Week. Welcome back to Wall Street Week on Bloomberg. I'm Matt Miller. California has taken a big step forward
in the electric car revolution banning the sale of internal combustion engine vehicles in the state by 2035. So what do investors need to know about how this will affect the industry. From oral it's going to Jessica CALDWELL. She is executive director for Insights
with Edmunds. Jessica thanks so much for joining us. Let's first talk about the state of the market. I mean we have been seeing so many tassels on the road certainly where you are for years and years. And everyone's talking about the new Ford Lightning as well as a number of other start up electric car companies like Lucent for example. But how much of the market really is
electric right now across the United States. It's not a big percentage if you look at battery sales this year. They're around 5 percent of pure E.D.. So not a big percentage. And this is the technology we've been talking about for over a decade.
We've seen these cars but it finally feels like now we're kind of on the cusp of something big. We don't know exactly what the effect of that is yet but it definitely feels like the products are finally coming. And I think the question here is our consumers ready to pony up to spend the money. We know the past few years have been quite difficult in that regard. And to kind of see if the infrastructure will support increased sales. But if we look at the market as it is
it's still a very small percentage of total new vehicle sales in terms of spending the money we've started to see price increases. Right. Ford is raising prices for the marquee. It's already raised prices for the lightning and not unsubstantial amounts.
We're talking about 3 4 7 8 thousand dollar price increases. These vehicles I think at least the smaller ones were affordable before. But the bigger ones like the trucks can get up to one hundred thousand dollars. Are they making any margin on those. Yes.
I mean I think that's what it's all about really. I mean there's been so much demand for these vehicles this year. I mean I don't even think you can get on a reservation list right now for a might. So if you really want one it's it's pretty hard out there. So I think they're probably responding to the demand that they see. I mean we've seen a lot of price
increases also for Tesla products over the course of the past year. And just the market in general I mean if we look at new vehicle prices they really have skyrocketed. I mean the average new vehicles about forty seven thousand dollars right now which feels much higher than it ever has been historically. And new even cars are over 60 thousand dollars. So it is not a cheap game to to buy a
new vehicle particularly newbie. Fortunately for now you get seven thousand five hundred dollars back from Uncle Sam. And a lot of local markets also give you some sort of tax rebate. How long is that going to last. I mean I've heard that starting next year you're going to have to buy cars that are made in America in order to get that and that you're going to have to buy cars that have battery components also made in America. Yes. Next year is where it starts to get really tricky because not only are there requirements for the vehicles themselves and their components like their boundary the boundary elements as well as where the vehicle is assembled.
There's also requirements on income levels. So if you're someone that is you know you're a married couple and you make over 300 thousand dollars which may seem like a lot of money but if you think about these vehicles are a hundred thousand dollars it really is. You're not going to be eligible for those rebates which is you know a bit difficult and the same thing for the used vehicles. So that's what's interesting and new. Is that what we're going to start seeing used rebates for these. I'm about four thousand dollars.
Again income requirements. So all of a sudden this this market which didn't really have too many rules in terms of the rebates is going to get really strict. And it's going to be pretty hard to figure out if your vehicle qualifies. There's going to have to be VIN Decoders to figure out if your vehicle has the battery the battery components and the vehicles. Automakers have a few years to ramp up to get these things set in place. Obviously this cannot change overnight but it's still going to be a tough challenge for them as well as consumers because as of right now none of the electric vehicles comply with the new regulations in terms of you know the raw materials coming from the U.S.
or the batteries being built in the US they're going to have to change that. Are they do you think those companies building car car electric cars in the US like GM like for like BMW. Are they going to have to revamp the way they source these materials. Yes a lot of the companies there's a lot of pressure on them to revamp the where they source these materials. I mean we know that there's a lot of factories being built as we speak.
Are back factories building factories very soon. So that's definitely something that's in play. But in terms of sourcing some of these minerals the mining that goes into it that's a little bit different. That's something that takes from what I understand a very. Period of time. You can't just change that overnight. I mean none of these things you can
really change overnight but that is even more sensitive to do time. So yes in terms of where they get these natural resources they're going to have to put a lot more effort into it which is tough. I mean it's not they don't have to be 100 percent next year. There is a time frame associated with it.
It's like 40 percent 60 percent 100 percent eventually. So they do have a bit of a time window but that seems like that is going to be quite challenging and not something that they would have absolute control over. I mean automakers their specialty is designing building vehicles not necessarily figuring out where these resources come from and sourcing them and doing everything that involves that. That's that's definitely been a
challenge to what is already a challenging scenario. Let's talk about Jessica the players here. I mean Tesla seems to have an advantage still in terms of the range.
I guess that's the battery plus the software. But how long do they hold on to that. It's going to be challenging for Tesla to hold on because they've kind of been this big fish in a small pond for a very long period time. They have the cool brand factor which you cannot underestimate. But as we know that doesn't last forever. And all of a sudden we have a lot of
competitors are finally getting serious and making cool cars. I mean even somebody like Hyundai with their iconic fight we see Tesla shoppers looking also at Hyundai. And what world did that seemed like that was going to happen in a few years ago. In terms of brand and we see that now. So I think that they're still going to be fine. They're still going to make a lot of cars sell a lot of cars.
But in terms of their market share of the market of course that's going to look tremendously over the course of the next decade. Who would have guessed 10 years ago that everybody would want a Kia tell you ride. But they're pretty awesome in terms of the incumbents. You know GM has the bull. Plus they've brought out the Hummer. Kind of a barbell strategy there. They're coming out in the middle with other offerings.
The Silverado Eevee is one I'm looking forward to. Ford of course has the mock E and they've got the lightning which is probably the most talked about electric car since a Tesla BMW has some exciting products. Dodge even announced a new I think Challenger that's going to be electric. Which one do you think is going to lead
the charge as this ramps up. I think initially because they've spoken the most about it. They have the platform the ultimate ultimate platform. I think GM is sitting in a good place. They're very upfront about the vehicles. We know that there's a blazer at Equinox that is supposedly coming out for thirty thousand dollars which can really change the market a lot. If they can get two volumes we know the Silverado is coming in the Cadillac lyric even the stylistic a bit expensive but it's going to create some excitement.
So I feel like I've talked the most about building high volume vehicles at lower price points which is what this market means. Some of the other automakers that have you know some really cool cars and cool concepts. But I feel like GM is probably hitting volume niches at this point a bit better than the others. What about the startups Jessica especially companies that seem to be struggling to produce the kind of the kind of quantities that are necessary to stay in this industry. Which ones do you think will survive.
That's a tough question. I think all of them are a bit tenuous to be honest just because we know that it's challenging for these automakers that have been around for decades if not over 100 years making cars to to operate in this environment to change especially in light of some of the new requirements on with Inflation Reduction Act that's going to be tough for these established automakers that have very deep supply chains relationships all those things needed to make this work successfully. So some of these new players. I think that it's hard for them to be in volume. I think that's going to be the struggle. Even someone like Ribbon who product is called CAC fault that left the vehicles but even competing against a GM and Ford what they can offer in terms of price points is going to be tough. So they're going to have to rely a lot on brand being new being fresh somebody like Vin Fast as well kind of having you know different spin to the market which will appeal to a certain sector. I just think it's hard to get into
volumes with those type of play. Right. They've got to actually deliver the product. And if you want lucid or if you want to Ballinger or a canoe you're going to have to wait a long time if not forever. The cyber truck is one. I know people have been waiting years for this to come out. Is it ever really going to come from Tesla. Who knows. I mean yes I feel like we've seen this
ages ago. It was like anything that happened. Pre pandemic feels like it was 100 years ago. And that was certainly in this category. I think eventually I mean it's probably
hard for Tesla to prioritize considering there is so much demand on the other product. I just don't know what why. Maybe you put the resources into that if you can barely kind of keep up with what you have. I think more importantly they probably have to work on refresh on some of the existing models like the Model 3 the model s pretty long and to at this point. But I do think the cyber truck will eventually come.
Not sure if it's going to be an exact model that we we saw you on drive around and try to crush the doors. But it feels like it will come. I just I mean honestly who knows when hopefully the orange windows fix. Jessica thanks so much for joining us. Jessica CALDWELL there from Edmonds talking to us about the race to win the electric car crown.
Coming up we wrap up the week with former U.S. Treasury secretary and Wall Street Week contributor Larry Summers. That's next on Wall Street week. This is Bloomberg. Welcome back to Wall Street week on Bloomberg ISE Matt Miller.
I'm Caroline Hyde and we are thrilled as always as we do each week to welcome on Wall Street. We special contributor Harvard's Larry Summers. Of course Larry your reaction first and foremost with the jobs number with actually a tick higher in participation a steadying perhaps in terms of wage inflation. What do you make of the numbers. I think these numbers were relatively close to what we expected. I doubt anyone's going to change their view radically on this. I think the increases in participation
are good news. But I think there's a tendency to exaggerate how much higher participation will reduce inflation because people think of it as extra labor supply but they forget that if the unemployment rate stays the same. And participation goes up more people are working earning and therefore spending.
And that in turn raises the demand for labor. So I think this is a positive development for the economy more people working more GDP but people have a tendency to exaggerate how much favorable participation contributes to necessary disinflation. Doesn't the Fed Larry have to push people out of jobs. I mean right now everyone is earning money and able to pay up as much as they need to for goods and services. But in order to bring inflation down they're going to need unemployment at four and a half five five and a half percent. I don't know what NAIRU is right now but maybe you have a view. Is that going to bring a political
backlash. Matt my guess is that things are much less good than the Fed has supposed. My estimate would be that the nay rule is now near 5 percent. I don't see how you can fail to think that the nay roo has risen substantially. When you look at how much there's been an increase in vacancies at a given unemployment rate what economists call the Beveridge curve when you look at the big increases in quit rates that we've seen when you look at wage behavior and I add all that up and I see a difficult situation where I think that to start bringing down inflation we're going to need to get wage.
We're going to need to get above the day roux. That's probably somewhere in the 5 percent range. And I think we do have to achieve some meaningful amount of disinflation. So I've said that I'd be surprised if we get to the 6 percent get to the 2 percent inflation target without an unemployment rate that approaches or exceeds 6 percent. And I've said it before. I think the Fed's most recent judgment that they're going to get back to Target with an unemployment rate that stays at four point one percent is certainly a possible outcome. But how that could be regarded as the most probable outcome. I can't really understand.
I think that's the quite optimistic case. Nothing like the most reasonable case that I think that the preponderant probability is that the combination of 4 percent unemployment and 2 percent inflation misery index 4 plus 2 of 6 that the Fed foresees will be a substantial underestimate of where we'll be one year and two years from now. And to that end therefore Larry when you look to the JOLTS data because it hasn't just been of course the non-farm payrolls there's been a sprinkling of other data whether we look at the new numbers coming from ADP of course whether it's the jobless claims that looked hot. You felt that really a soft landing was very hard to achieve at that point. The market now thinking potentially a soft landing is achievable. You still think. No not not necessarily.
I don't think we've seen a soft landing means disinflation with a stronger economy. Evidence that we're having a stronger economy without substantial disinflation doesn't really speak to the likelihood of a soft landing. So my view that a soft landing represents the triumph of hope over experience is not one that I'm changing yet. It certainly could happen. But I think that one has to think in terms of preponderant probabilities and that's not the preponderant probability. Larry I want to bring up the passing of Mikhail Gorbachev. You served on the Council of Economic Advisers and Ronald Reagan's White House when those two made history together and really changed their trajectory of globalization.
Right. The fall of the Berlin Wall the fall of the Soviet Union really brought the world closer to. Gather now Vladimir Putin is taking it in the other direction as Gorbachev dies. What are your thoughts on the situation with Russia as it stands and the legacy of Mikhail Gorbachev.
I think in a quite extraordinary way Mikhail Gorbachev will be remembered as a great historic figure for presiding over a great historic surrender and letting that process play out without massive loss of life. And I think that is in its way not the achievement he set out to achieve but is in its way a very substantial achievement. Look I think we're at a time when globalization is getting a bad name. If you ask what the era of globalization has meant in terms of the quality of life for people around the world terms of the halving of the share of children on our planet who die before the age of 5 the doubling of the fraction of kids who learn to read. The fact that for all our problems the
incidents of violent conflict on our planet is much lower than it was in the 1970s or 1980s. The extraordinary change in human potential represented by the fact that there are now more smartphones on earth than there are adults. And so the majority of the world's people can reach out to all of the world's other people. I think these are fantastic things. And yes this is under attack. It is under attack from Russia.
It is under attack in important respects from an axis of authoritarians connecting Russia and China and Iran. And it is going to be the great struggle of our time to maintain the rule of law to maintain openness to maintain and operate a world of opportunity for as many people as possible. But I think it's very much the wrong way to pursue a strategy of resisting international connection rather than a strategy of better managing international connection. I think there's nothing in history to
suggest that a world of nations that isolate themselves is going to be an Ultima Le peaceful or prosperous or very attractive world. Larry told to us that for you mentioned China. And of course you've got news this week the Communist Party will hold its 20th National Congress starting on October the 16th. China actually faced an economically rather different slate than the US. Suddenly the inflation not that first and foremost priority but a property crisis and a Covid crisis. How do you find out.
What is your outlook on China as an economic growth fueling the rest of the world at the moment. Look always a mistake to count China out after its remarkable performance over the last 40 years. They've shown themselves to be resilient and able to overcome problems but the problems look pretty deep profound and severe. This time I have learned over time to watch what happens to capital flows. And when a country's wealthy citizens are trying to take their money out that's a time to be nervous about the near-term economic prospects for a country. And that certainly is the case in terms
of what people are trying to do in China today. The date at which China will put Covid behind it seems to be a receding horizon. So I'd have to say that I view the situation in China with considerable anxiety.
All right Larry. Thanks so much for joining us. Wall Street week special contributor of course former treasury secretary and Harvard had Larry Summers there talking to us about the jobs report his outlook for central banks and the geopolitical problems roiling markets as well. This is Bloomberg. Welcome back to Wall Street Company that we're in for David Westin myself.
Caroline Hyde and Matt Miller finally one more. Of course we're about to experience Labor Day. What happens after Labor Day is that one goes back to laboring and in fact not going back to laboring perhaps in the office a little bit.
Yeah a lot of them. Goldman Sachs right. Morgan Stanley came out with notes memos to employees saying hey you know what. It's really time to come back and do worry about being vaccinated or taking a task. Just get back to the office which I completely understand because if you're one of these bank's clients you want them to be at work right. You don't want them taking Labor Day off and to say that people are not productive when they're working at home. I'm not saying that although I guess you could be doubtful if you're a client and you want to get your money's worth. You don't care as much if you're paying
for their services about their work life balance right. Yes. I feel like isn't it more the lawyers who had charging you for every five minutes 10 minutes you should be there for setting aside. Yeah. I mean about what did Shakespeare say. The first thing we do is kill all the
lawyers. I think that's quite a different story than the bankers. But I love you lawyers. I definitely understand why these banks want their people back. And it's also about culture. I don't.
Do you think that they can collaborate as well. Do you think that they can pass on knowledge from the senior bankers to the kids. Do you think they need that five days a week. Yes. So I think I mean I want to point out that what I think doesn't matter but that my opinion is my opinion. Jeffrey. I thought had a slightly more nuanced note. Clearly they felt I like the way that they sort of said it was in your lonely silos at home. I mean anyone who has kids like we do or
our dog or anything isn't it lonely as they'd like to be. I think. But there is that element of this and come back. But we're not clock watching you. We're not seeing when you're barging in or watching out. Just treat everyone like adults and decide to be in maybe three days a week on set and collaborator Jeffries. I mean they're pretty hardcore at
Geoffrey's. I think they might be Warner CEO on the phone. Did you really mean Mitch Handler. Are you really not clock watching. I mean he probably has people that do it for him. But I think it's about time for Wall
Street really to get back to business to get back to work the way they have been. It might not happen if all the happening but that's a very big costs are rising. You see Sonali Basak on this note earlier showing that emanate this year is a trillion dollars less than MDA at the same time last year.
We've seen a ton of deals break apart and many many more not even get done. So that's a very good. Yes. Well fund. Yeah exactly right itself. We saw you actually on the yogurt man has just put its IPO on ice. I feel you know good grass isn't going to buy big go. I mean there's a ton of deals that have fallen apart but more and more haven't gotten done to that night crypto. Then I'll go out to the office and they
seem to be better as well. Right. The West Coast they're not going back to the office because they work from home or because they're getting fired. Right. You're seeing big layoffs on the West Coast big layoffs in tech. And that's starting to spread across to industrial America with a 3M announcement. It's an optimistic way to leave. It is. Yes. We'll have a great weekend. Enjoy your Labor Day.
You've been watching. We want to do it together. Wall Street. This is Mark.