Wall Street Week - Full Show 09/09/2022
History was made this week with the death of Queen Elizabeth of Great Britain the longest serving monarch in British history overshadowing for a moment. Economics and currencies and central banks and yes even wars. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers and Rick Reader of BlackRock.
Queen Elizabeth of Great Britain passed away this week at the age of 96 leaving behind a 70 year reign and a new king. King Charles the third Queen Elizabeth was a life will lose a promise with destiny kept. And she is mourned most deeply in her passing. But even as the world took a moment to reflect on an era that has passed it continued to contend with the current one. We're at war in Ukraine has led to an energy crisis in Europe. As President Putin insisted that he is not using oil and gas as a weapon even as he shut down his Nord Stream pipeline indefinitely this year.
Look I didn't show Nord Stream one is that practically shut down. And everyone is saying Russia is using energy as a weapon. More nonsense. We deliver as much as our partners need. And the ECB reacted to the inflation triggered by the energy crisis by raising rates an historic 75 basis points. With more to come the Governing Council today decided to raise the three key ECB interest rates by 75 basis points. This major step from slowed the
transition from the prevailing highly accommodative level of policy rates towards levels that will ensure that timely return of inflation 22 percent medium term target. While in the United Kingdom just before news came the Queen's death. The Prime Minister she had installed only two days before announced caps on household energy costs and promised to pull her economy through. I have a bold plan to grow the economy through tax cuts and reform. I will cut taxes to reward hard work and boost business led growth and investment.
I will drive reform in my mission to get the United Kingdom working building and growing. United States markets waited for the next Fed decision. Now less than two weeks away with all indications that the FOMC will stay the course and keep raising rates until it's sure inflation is under control. We're in this for as long as it takes to get inflation down. So far we've expeditiously raised the policy rate to the peak of the previous cycle and the policy rate will need to rise further. And when all was said and done the
markets had a good week at least if you were along with the S&P 500 up three point six five percent in a shortened trading week with much of the gain coming on Friday while the Nasdaq tracked the S&P nicely up over 4 percent with a gain once again on Friday. And all this was despite a rise in bond yields with the yield on the 10 year ending that we've just over three point three percent up about 12 basis points. Here to explain all this equity appetite our Sara Malik chief investment officer at Naveen and Jim McDonald Northern Trust chief investment strategist. Welcome to both of you. Here to Wall Street. So let me start with you Jim.
What do we read into this market. Are happy days here again. I mean we did have a really nice gain this week. David I think you could spend a couple hours looking through all the fundamental data and not find anything that really supported a big increase in risk appetite this week. So you really have two attributed to the fact that we had a couple of weeks of softness preceding this and then sentiment is terrible and then technically the market is making higher lows. So technically it looks OK here. But if you think about what's going to drive the market over the next six to 12 18 months the growth outlook is deteriorating. Europe's likely in recession. China's is clearly in recession.
The US 50 50 we think over the next 12 months the Fed and ECB are raising rates. A resolute Lee and the inflation picture while improving is probably overly discounted in the markets. A one year break even on the tips is at 2 percent. So we think that the environment is probably not as robust as this week's market action might indicate. Well I'm sorry Sarah. When I hear 2 percent one year break even that sounds like maybe inflation is coming back down again. I think that that number is coming back down. Inflation is moderating.
We'll likely see a little bit more moderation when CPI comes out next week. But that slope is probably too aggressive. I think inflation will remain sticky. We have higher wages and higher shelter prices. Those likely stick around and that's
going to keep core inflation numbers probably much higher. I would would would be wouldn't be surprised to see that break even actually increase over time. The other thing we're watching for is the Fed. Before we decide if this rally is sustainable we'd want to see more signs of a Fed pivot and we're not seeing that. So we agree with Jim. This is probably not a sustainable recovery. Well what about the Fed. Is it dead effectively.
I mean it certainly sounds like Jay Powell recently has not been saying much to be concerned with the pivot. I don't think we're going to see a pivot in early 2023. But Jay Powell has been saying is that he's going to do what's necessary to fight inflation even if that comes somewhat at the expense of the economy and given that inflation likely has the sticky components to it. I think he continues to raise rates likely 75 basis points at the September meeting and then more moderate rate increases from there. If anything you'll see a pause in 2023
but you won't see rate cuts until we hit a recession and we see that demand destruction. You know David we've seen in the last month a reduction in the cuts that the market is priced in. They were pricing in 50 basis points of cuts and twenty three. It's now come down to just 25 basis points. And what I'm most interested in keeping an eye on is the labor markets.
I think the Fed can't stop raising rates because growth is hurt. They can't stop because the market is struggling. They need to see the unemployment rate increase to give them cover to be able to start slowing down the pace of increase.
So next week we have CPI numbers right where there's going to tell us. Jim what do you think about that headline and core. Well I think the key is going to be the pace of improvement. I think there is very little doubt we're going to see improvement in the overall rate. But as Sara mentioned earlier the
progress on housing and the progress on labor are really the two most key. And they're key because the supply issues on both of those are really considerable. And the only thing the Fed could do is hurt demand. They can't increase supply in either of those areas. So this doesn't sound that road rosy about the U.S. economy and where we are.
But if you compare it with Europe or you compare it with China for that matter we're in a lot better shape aren't we. What about that divergence among the economies. I think the U.S. is still the safe haven region of the world to be in the economies much more resilient. That's giving the Fed leeway to continue to raise interest rates. We're not seeing that resiliency in the
rest of the world. And that's also why the dollar is so strong. We expect it to remain strong because the U.S. stronger growth higher interest rates
the currency will be that safe haven trade. And that's an issue for earnings going forward. Another Jim mentioned employment. We're also worried about earnings. Consensus has been pretty positive this year on earnings growth. And our concern is that earnings and will eventually get hit because of the strong dollar margin compression because of inflationary costs.
This is an issue for companies that don't have pricing power. So that was one of the big stories that week right. January. The dollar is setting record after record after record. We had Bill Dudley the former New York Fed president on Bloomberg this week saying he thinks the Fed actually wants that strong dollar because it actually slows down the economy.
But what does it mean for investors. Well it's an issue for investors from the standpoint that it is positive that will slow growth but it does hurt earnings and it's a negative for the international investments where you're seeing the depreciation of those currencies. Foreign markets have actually done. Badly but when you translated back into dollars it's really been a much more difficult market. Does it say anything. What small casters is big gaps. Well it does. Small caps would tend to have a little
bit less exposure there. But conversely small caps are more exposed to higher interest costs and more difficulty in handling higher input costs. They tend to not have as much pricing power. So they went on one front they lose on the other. So Sara what are we all missing. And then you're at New VA and you see all this stuff. I know you've got some secret sauce there.
What are the markets missing. What are we missing. One of the key issues for the markets is valuation. This is what we're surprised to see is that valuations for stocks actually are not that cheap. And even with earnings at risk they could look even more expensive. If you look at history during periods of
high inflation where you tend to eventually hit a recession market returns can be quite strong after that. But if you look at valuations in those historical periods there are much lower when that happens. That's why we're more concerned about the markets and think that it's likely that valuations need to crack before we would get interested. That's usually so we've got further to go down. If you think at least. So what do you agree with that Jim. Or do you have something else you think the markets are missing.
So our experience is that while valuations clearly are important they're much more important to long term returns than they are to 12 month returns. There's a very little statistical relationship on a short term basis. So we don't look at valuations as a timing tool but they're very important for intermediate to long term returns. So what about the cause and effect of the U.S. dollar scrip strength etc.. Is that because our economies aren't much stronger.
Actually I talked to Larry Summers who said it's because we've got such a strong energy position particularly compared to for example Europe which is struggling so badly. It's a combination of many factors. I think it's correct. It's because of our strong energy position is because of our relatively strong our economy our pace of aggressive rate hikes all other things make the dollar stronger.
And another headwind for the economy and the markets going forward particularly earnings. So as you look forward Jim you think this is going to continue at this strength or even get stronger. It probably will continue at this level. I'm not sure how much stronger we'll get from here because we are going to get towards the end of the Fed's cycle sooner than we will. Other central banks. But an important part of our investment philosophy is you do not want to take a lot of risk in predicting where currencies are going to go because it's an incredibly difficult thing to do. Hedge your liabilities and use your risk budget on other investment ideas. Certainly sounds.
Sounds that you agree Sarah. I do. I think that's a great philosophy. Okay. Sarah Malik and Jim Macdonald we'll be staying with us as we get their thoughts on what the smart investor does with their portfolio. Given what we've just been talking about this is Wall Street week on Bloomberg. Well it wasn't pretty. There was unforgettable heroism among the victims and the rescuers. But the financial markets even after
what was supposed to have been a useful time out staged a historically panicky retreat. Mumbling legalistic rationalizations like fiduciary responsibility as an excuse for what rapidly descended into unchecked hysteria. That was Luis Brookhiser of course describing the immediate market reaction to the tragic events of 9/11. That was 21 years ago this coming weekend.
A reaction delayed by the closing at the time of the New York Stock Exchange and heroic efforts to get it back up and running after just six days. So with us are Sara Malik of Newsweek and Jim McDowell of Northern Trust. I'm happy to say we do not have anything like the tragedy of 9/11 that we're confronting right now. At the same time there's a fair amount of pressure on the market to the fair say in this environment. How does one construct a portfolio. Well it's not all doom and gloom when we
think about portfolio construction. There are ways to build portfolios that are resilient to inflationary environments across asset classes that the typical 60 40 equities fixed income portfolio has struggled this year. But within equities there's companies that are more resilient like dividend growers. These are companies like that continue to grow their dividends over time. Broadcom is a great example of that. In fixed income an area that people may not be thinking about before approaching a recession is high yield. You can get returns of over 8 percent in high yield fixed income. So you're paid to wait until spreads
tighten and the companies are higher quality than they used to be. And then finally outside of public equities and fixed income look at real assets. Farmland is an area which has built in inflation escalators often in their contract so they can benefit as CPI increases. Also private real estate even the real
estate market has issue on the private side. Similarly leases with built in inflation protection. Those are key for markets where inflation is going to be increasing. So that's a lot to chew on. Let's start with one of them which is credit and high yield. Where are you on that. So we're very constructive in high yield.
It's our largest tactical overweight with a yield the worst of eight and a half percent or so downside risk of about a third of the equity markets in the high yield markets. You need to think about high yield as a risk asset. So this is not something we're taking investment grade bonds and putting it into high yields. It's much more of an equities substitute.
In this environment. But that kind of return looks really attractive here. Another aspect I would mention is geographic exposure within equities. So we have a slight overweight to the US and underweight ex U.S. and an emerging market equities really
reflecting the significant growth issues and inflation problems that are being realized overseas. That's another way to give clients some confidence that we're positioning for what we think is going to unfold over the next 12 months. And lastly I would say the real asset side we also very much support having some inflation exposure whether it's in global listed infrastructure which has that pricing power or on a long term basis commodities where we think you can get in a basket of listed commodity producers a yield near 6 percent which is really attractive in this environment. So we're actually more concerned about commodities excluding energy because we think that commodities are very exposed to demand destruction. But energy is a different story where
supply remains tight demand should remain strong. And what we love about energy producers is that there be very disciplined this cycle. They're returning cash to shareholders rather than just working to just increase volume.
Good for those companies and to keep oil prices but beneficial to them. Let's put together if you will the slight overweight to us. Not much more than slight that Jim talked about and what you just said about energy because given this energy situation one might say it's more than a slight overweight to us. Where are you. We are probably more constructive on the U.S. and the rest of the world. We think the U.S. will continue to be that the safe haven trade because of the resilience of the economy versus the rest of the world. Europe could run into stagflation airy
issues with their aggressive increases in interest rates while the economy suffers and emerging markets are challenged because of the continued lockdowns in China and some of the other areas that are having issues. So I think non U.S. is going to be a struggle especially with the strong dollar in it. So I would add to that from a U.S. exposure standpoint we also like the energy sector and the other one that we like our technology stocks they have really struggled this year improve the valuations clearly a long term growth leader globally. And so it's a bit of a balanced approach within the U.S.
equity portfolio like both energy and technology stocks. Interesting. Technology stocks tend to struggle though when interest rates are increasing because they're considered long duration stocks an area for example semiconductors which have even underperformed the technology benchmark. But I think you can find value in some
of these areas. This goes back to dividend. Growers at Broadcom is the company that within the semiconductor space tends to be kind of offensive and defensive more resilient business with their enterprise demand and also with their software mix and a nice dividend that's growing over time. So so as you're putting together your portfolio do you take into account the possibility or even some say likelihood of recession or not. Because for example when you say high
yield high yields a good thing. I get a little nervous if we're going into anything. It's a real recession right Jim. So you have to have a view on what the recession will be if it unfolds. We're at a 50 50 probability in the US but we think it will be shallow. The banking system is in dramatically better situation than it was through the global financial crisis. So credit creation won't really be hurt. Household balance sheets are not in bad shape so it's much more likely to be a shallow cyclical recession in high yield with a starting yield.
The worst of 8 and 1/2 percent gives you a very nice cushion in the environment. I agree with that. I mean we're looking for areas. When the environment there where are you getting the best bang for your buck. And so even though we do predict a recession you're getting paid to wait.
In high yield with that kind of return you can have that resilient income producing portfolio in equities with dividend growers and then look for those asset classes that actually can benefit from inflation like within real assets. How important is liquidity in all this. When you start talking about real estate for example farmland things like that. That sounds like I'm giving up something on duration right. You're giving up something. You're giving up some liquidity. You're also dampening your volatility.
That's why we recommend a balanced portfolio. You want to make sure that you have your publics and your privates within your portfolio so that you do have areas where you can get liquidity if you need it. But also the resilience and less volatile pieces of the private asset classes can be beneficial especially in this year which is unique for the 60 40 typical equity and fixed income portfolios if will have had been highly correlated. All fixed income obviously is not created equal. Where are you in investment grade. So we're significantly underweight
investment grade. We just don't think that the nominal yield or the real yield opportunity looks particularly attractive. In our number one risk case around sticky inflation. Investment grade bonds are not going to do well in that environment. So that's an underweight in our tactical portfolios. Do you agree sir. Generally we would prefer high yield
over investment grade for the same thing. You're getting greater returns more bang for your buck from high yield. And where are you on tack Jim. Teddies at tech might be a good idea although as you said if the interest rates are going up typically that hurts tech. Yeah I mean generally bigger picture. The macro environment is not good for long duration technology stocks. That's why you need to be selective in where we're looking for.
What we said kind of offensive and defensive tech together the companies that either or more resilient because they have healthy growing dividends or they have pricing power so they can survive the environment the trade of pre pandemic. We're all technology stocks of all did well. I think that's over. I would just say that the market knows that interest rates are going up and have gone up and that has killed valuations within the technology sector. So we think that's what's set up the opportunity today.
Tech stocks have discounted a great amount of the higher rates. But it's interesting if you look at 2023 markets are actually less hawk less hawkish than the Fed. So there's a mismatch there. And 20 22 markets now caught up to the Fed. Same level of hawkishness for twenty twenty three markets are saying you know what we expect less rate hikes. And the Fed expects and we'll see if
that happens probably depends on if we hit that recession and inflation finally dropped significantly. We've had this discussion terrific discussion. But we have not mentioned health care or biotech at all which strikes me given what we've been through with the pandemic everything else. What do you think about health care. Just big regulatory risk. So the biotech stocks have been crushed.
Now maybe that will present an opportunity when we've got better clarity from a regulatory standpoint. But I think that's been the biggest headwind for health care. That's an issue for health care. But also when people are looking for growth stocks in the tech stocks are out of favor. They tend to go more defensively in terms of growth. But health care does fit that area. So when you get into these risk off environments for growth health care can actually outperform. What about I mean you mentioned dividend
growers but what about balance sheets. What about the old classic issues. Are you paying a lot of attention that at this point where we are because in an inflationary environment where costs are going up and costs of debt are increasing I think this is where balance sheets and high quality companies become very important. Jim mentioned that small caps less interesting. You know they can be more risk in periods such as this if their balance sheets aren't as strong and they are smaller companies.
So we think that is a key factor as well as pricing power. Who's got the pricing power to overcome inflation. So we're a big believer in quality within the equity portfolios.
We want to do it on a sector constrained basis because you can find yourself way mismatched against the overall market. But quality of capital deployment quality of balance sheet condition all good things for long term stock performance. I say the biggest one for last and we do have my ranch time. China.
Should we be concerned about China the lack of growth in China. Jim absolutely. So we think that the growth initiatives that have been taken have been anti growth. We think that the 0 Covid policy is going to be a problem for at least the next 12 18 months until they get their own world class vaccine.
And we just don't see that on the horizon yet. Where are you in China. Is there anything I think there's just going to be macro issues there that are difficult to analyze and that makes it tough to invest in. At the same time they could change their
course. Right. And then leading to the party Congress and the president she needs to get the economy going. Seems a little late to be doing that. I think he would have done that earlier refusing to do something really big.
And they have talked about that a lot but we haven't really seen the execution. That's what we'd be waiting for. Okay. This is really as I say a really terrific discussion. Thank you so very much that Sarah Malik of New Naveen as well as Jim McDonald of Northern Trust.
Coming up we're going to take a look at what's in store next week on global Wall Street. That's coming up right here on Wall Street week. And we are on Bloomberg. This is Wall Street week. I'm David Westin it's time to take a look at next week on global Wall Street starting with Juliette Saly. Over in Singapore. Thanks David.
Well this could be another telling week for the Chinese economy. Just weeks out from the all important party Congress Friday sees the monthly data dump for August which is likely to show the recovery stalling more stimulus perhaps needed. But Bloomberg Economics thinks the PBR essay will probably stand pat on a key lending rate this month because it's loath to do anything that could hasten the yuan's depreciation.
Elsewhere Sri Lanka's second quarter growth report will likely confirm a deepening recession. New Zealand's growth probably bounced back from a contraction. And in Japan producer prices may edge up as yen weakness inflates the build for oil and other imports. U.S. markets next week will be focused on
Tuesday's release of inflation data for the month of August. Consumer prices decelerated in July. And while that trend is expected to have continued in August. Headline CPI it's still projected to be above 8 percent for a sixth straight month.
And core CPI which excludes food and fuel is seen accelerating to back above a 6 percent growth rate. In addition to inflation data the government will also release data on industrial production small business sentiment and monthly retail sales. Year over year retail sales are expected to be flat for a second straight month as consumers wrestle with elevated prices. Those reports will be the last batch of
major economic data before the Fed's next policy meeting which begins September 21st. And finally keep an eye on Twitter next week. Shareholders on Tuesday will finally get their formal say on whether the social media companies should force Eli Musk to follow through on his proposed 44 billion dollar acquisition of the social media company a deal that Musk has sought to cancel.
Coming up it's an uncertain time for investors full of risk without a lot of certain return. But recruiter BlackRock thinks that there's the potential for the patient investment to really do quite well. That's coming up next on Wall Street week on Bloomberg. They say it's always darkest before the dawn. And there's plenty of dark out there for investors right now with the stock market off overall positioning has still been pretty depressed and sentiment reflects that inflation is still raging. Inflation sickness is not going away anytime soon. And the Fed intent on continuing to hike
rates was fairly obvious coming in year that were taken. But there may also be some early rays of light with commodity prices coming back down. The Fed continues to tighten. We believe the dollar will turn back up and these commodities will continue to fall. So the question is whether this is a
false dawn or whether it's actually a good time for the patient investor to position for a rosier future and to tell us tell us which of those it is. Welcome back. Now Rick Rieder BlackRock CIO for Global Fixed Income and also head of the Global Allocation Investment Team which includes the BlackRock Strategic Income Opportunities Fund rated Five Stars and Gold by Morningstar. I'm sure you don't want to brag about that but I think we should pray for you Rick. They're so very kind. Rick give us your sense of this market from your point of view. I mean you're putting money to work all the time both on fixed income and also in equities. What do you make in this market right now. So I mean David I mean you think about
we came in the beginning of this week and so you've got energy caps you've got the turning off of Nord Stream you've got China growth China Covid China Taiwan. You've got a series of issues that are that are hard to get your arms around. By the way the goods sector the U.S. economy is softening. So there's a lot of challenges out there in the world. That being said you know if you take a step back and you think about as an investor you know with the Fed moving rates higher all of a sudden you could buy short end interest rates at it at levels we haven't seen a really long time. I was thinking about a year or two ago you know you had to pay less than 1 percent to fund companies 50 basis points.
So Amazon did you know 25 basis points in three years. All of a sudden you could buy you could buy short end assets at four four and a half five percent put some money to work get some carry. And then tactically look at areas that are that are where there's opportunity and listen. I mean you can get really really concerned about where the world is when you step back and think about U.S.
economy we think is going to have nominal GDP this year 5 percent of GDP of 5. You know you've got a service sector that's doing well in the health care sector that's doing well. You've got parts of the economy. So there's things to do.
I mean you know while it is one of the most challenging uncertain times that we've seen in markets in a long time with central banks tightening there's some things to do in the markets and there's some there's some reason to look at some of some opportunities out there. So just as my math works from a quarter of a percent to 5 percent a pretty big difference. That sounds pretty good to get. They got a return the same time. It depends on what's going inflation right. We got CPI numbers go into next week. If we've got a headline inflation around
a theme we've got core around 5 or 6. That 5 percent doesn't look quite so good does it. It actually doesn't look good at all. If you assume that we're going to be running at those sort of levels for a period of time. But you look at where the inflation markets are where the real capital including ourselves are transacting. And today we were we were walking in inflation in two years at under two point two percent for two years five years five years around two and a half percent ten years around two point four. So if you say gosh I can buy one and two year high quality assets at four and a half to five I'm projecting my inflation risk in the low 2s or I'm locking in real rates. I'm financing company either way not
just companies commercial mortgages I'm financing companies with a real rate that's pretty attractive. And you can actually be we can talk about the stickiness of inflation which is real shelter inflation high wages are high. Boy you can do some things in the market that can that can certainly hedge your your inflation risk.
And then Ben Bernanke carry quite well in the market today. So yes inflation risk is not what some people fear it is is actually coming down. Why is that. Is that because the Fed is tightening and tightening the money or is it actually is there something that those in the supply chain is loosening up some. So I think it's two parts.
One. I think the Fed deserves an awful lot of credit. And so I was there was enough criticism to go around myself included that last year there were 2 to long QE.
I think that's been well chronicled this year. They cannot be any more clear. They cannot be more more strident in inflation as it is what they're doing. And they're not going to back off that. And you know I think they're going to get the funds rate to four or three and three quarters for probably four. And then I think they in a light long and variable lags monetary policy do their thing. So they're pretty clear.
So I think there's a credibility from the Fed that I think you've got to you've got to applaud in terms of what they're doing today. Second is as you said supply chain. You see real real improvement in supply chains. You see it in some of the PPA numbers. You see freight costs coming down. You see commodity costs coming down.
So there are some reasons to see you to see that the cash some of this inflation you know by the way you also seen inventory levels look at retailers or inventory levels are up quite a bit. In fact there's not there's not places to put some things that I see. You'll see some price discounts there. And by the way in semiconductors it's not it's a perfectly solid around supply chains. But look at some of semiconductor shut stocks these days. People are concerned about oversupply.
That's not something we've talked about for a long time. So it's better and there's some reason for optimism. But I think you have to start with a central bank that is there is no ambiguity. And they're quite clear in how they're communicating that tie with a divergence of the economies around the world because we're sure our series how the ECB raised 75 basis points this week and they say it's going to get worse before it gets better. They've got an energy crisis in Europe. I think it's fair to call it that. China is slowing down. Its challenges to Japan has its own
challenges. Are there opportunities or challenges in that divergence among the economies. So I mean where there's such a multifaceted question David you think about it. Why is the dollar doing what it's doing. Financial assets are being purchased in the U.S. because it is a safer haven.
It is hard to say gosh Europe the CBI towards. We never know what the weather is going to look like over the next couple of months let alone whether Nord Stream comes back on or not. So that is tricky. China as you talked about earlier in your show. Around around the Covid dynamics around
the US the trade dynamics China Taiwan etc.. Those are hard. So you know us it has to be your your your source of best opportunity and the point where the place where you sleep better at night. But the parts of the European you know we've been investing in some of the European credit markets particularly some of the shorter duration. You get comfortable that you know you're not going to have rapid or significant defaults particularly of big companies that have revenues ISE sales outside of the region. So we've been doing some things in credit.
In Europe again you know in moderate form because we're more comfortable in the US. And then tactically in other parts of Asia we've made we've we've talked about some opportunities. But you know it's no mystery as to why the dollar is well supported.
Financial flows corporate flows are certainly heading into a region. That certainly seems to be well-supported by the service sector and other parts of the economy. And Rick how much of that U.S. position right now is strictly energy because we're an energy exporter at a time that a lot of the rest of the world needs energy desperately. And that's a macro factor that's not likely to go away right away.
You know it's a really really big deal. David I mean it's not just something about crude or not gas. You know the fact that I mean where the U.S. shifted a number of years ago to being a
net exporter of fuel. Boy you change the paradigm around your self-sufficiency your independence and you think about Europe. And I was in that. I was in London this week.
I was in Europe the week before. And by the way inflation is seen to be that bad if you're using dollars when you're traveling to those those locales ahead. You know you look at Germany. And the thing about how vibrant how strong how do you leverage that economy is. But then all of a sudden you have a nat gas reliance that really questions whether do you have to shut industry for a period of time. That becomes tricky. Italy becomes extremely tricky. And the UK is in a bad boy. I witnessed it firsthand. When you talk about fuel costs that we
talk about your electric bills going up three four five times let alone you've gathered that central banks to raise rates. You've got floating rate mortgages that are more benign or tough really tough dynamics. And I think the world is going to realize and by the way not just fuel supply chains how you think about your supply chain how you think about vertical integration of your company. I think a lot of this is part of why inflation probably sets of its stickier over a period of time is companies need to be more thoughtful about what are their points of vulnerability and how do you how do you mitigate those going forward. Rick help us make some money here where we really should be investing if we think about for the medium long term. It sounds to me like short term credit. You've mentioned that more than once in
Europe and here the United States. What's going on. What beyond short term credit. Short. Yeah like the credit markets generally I think they think you can take some risk in high yield or you can you can pick up assets at 8 to 9 percent that are reasonable credit quality I think. I think the high yield market think generally the credit market by the way I think it's cheaper than equities.
You think about what's what's your return paradigm in equities when you've got margin pressures uncertainty of top line revenue where you're going to create 10 to 15 percent return. What. Gosh if I get it in debt and I can get that 8 to 9 percent DAX I think that's intriguing. The short end of the curve to me and that the ability to just take not a lot of interest rate risk and not not a lot of credit risk that. But I also think it's interesting. Listen I I I still think you need to be in the equity market. And I think there's some opportunities in equities. I just think you gotta think about the quality companies that have durable cash flow across industries health care parts attack.
You know we called garbage companies that are that are good cash flowing you know that have some pricing power. And I still think you're got to be in the equity market again. I'd rather you know for the first time in a long time but I'd rather be in more fixed income than equities because of where rates are today. And you could be up the stock in a more uncertain time. But this ISE selling equities are OK. I wrote for the long term certainly. OK.
But it sounds like a.. Right. On equities you spent a lot of time looking at balance sheets and things like cash flow and even die and all those old fashioned things. Leverage. Yeah well I. There's no better time to do that in the end. You know we've lived in a kind of kind of a crazy world the last couple of years where all that stuff when you're in QE it's almost get as much bait in the portfolio ride the wave as much as you can. And now and I think you're going through an era where gosh is that coming.
We see the volatility on a second. By the way the liquidity of these markets is not great. So if you if you have a bad piece of news stocks depreciate pretty darn quickly. So you know we're spending much more time on the intensity of gearing and cash flow. Time to get sharp pencil. Thank you so much. Always great to have you with us.
It's Rick Raider of BlackRock. Coming up we're going to wrap up the week with our special two hour Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street week ISE David Westin we're joined once again by our very special consumer Larry Summers of Harvard.
Larry welcome back. One of the big events of this week besides the queen passing was actually what's going on with currencies with the US dollar setting record after record. At the same time the euro is really falling on that. Boy look at the yen.
What is going on with the economies. Look the United States has a huge advantage. We've recognized it for a long time in terms of our lack of dependence on egregiously expensive foreign energy. And that is benefiting the relative strength of our economy. At the same time we've mounted a stronger response macro economically to the pandemic. Our central bank is moving faster to do necessary tightening with respect to the respect to monetary policy given inflation and all those various factors are making us safe haven a mecca for capital and that's causing resources to flow into the dollar.
It's remarkable that people were saying that the dollar's day was passed not very long ago. Given its current strength and my guess is that there's room for this to continue. You know the euro was in the low 80s against the dollar 20 some years ago. And in some ways the relative
fundamentals of the United States compared to Europe are even stronger now than they were that. So Larry there's talk actually about the possibility of intervention in Japan to try to support the yen given what you just said that it's a larger macroeconomic factors. Is it possible for Japan actually intervene and actually shore up the yen. I tend to be skeptical that intervention can have sustained impacts. The capital markets are just so big even relative to the resources that the authorities have. That I would be surprised. In today's world if interventions could have large sustained impacts on maintaining the value of the yen I think the more fundamental questions for the yen involve the level of Japanese interest rates both in the short and over the longer term and the extent to which the Japanese will at some point feel comfortable raising those interest rates which is not a simple proposition given the magnitude of debts in Japan. So we're seeing a different sort of
intervention over in Europe both through with respect to the United Kingdom where the new prime minister is trust now isn't trying to impose a cap on the cost to households. We also have the possibility of a price cap being agreed upon in Europe. Is that a reasonable thing for an intervention. Is it likely to be effective at dealing with a runaway energy costs particularly in Europe. Look. It's an extraordinarily difficult situation and it's a mistake to be to judge mental from too far away.
But when I saw the emerging plan it reminded me of standard Latin American populist approaches fix the price and commit to unlimited subsidy. And those policies often have not worked out well at all. For those who implemented them. And so it seems a very dangerous course. Now I think we ought to give the British authorities an opportunity to explain the rationale for their policy to explain the financing mechanisms behind their policies but a policy of tax cutting avoiding taxation of windfall profits subsidizing consumers for low priced energy in the face of a nearly unlimited potential liability.
I seems to me to at least raise very serious and severe arithmetic questions. And I think people who are thinking about the pound are thinking about that. Perhaps the story that overshadowed the entire week not a story in economics or finance but overall was the passing of Queen Elizabeth the second at the age of 96. And I wonder if that gives us an occasion to reflect on what has happened to the British economy since 1952 when she became queen to the present time. It's been through an awful lot. It's grown a fair amount the same time. And what we think is likely in store for
King Charles the third in today's world. There are very few leaders who command nearly universal respect. And there are very few leaders who are able through decades in the public eye to maintain that dignity and to maintain respected. Queen Elizabeth did that and did it as recently as this year at the age of 96. And it's a quite extraordinary thing that I think history will long remember. She stood for taking the long view. She stood for rising above passions of
the moment. I think those are useful lessons for all of us involved in political economy. Useful lessons when the urge to point scoring or cheap partisan advantage looms large in politics and useful lessons in with respect to economics and economic policy as well.
And one has to take a longer view. And so Queen Elizabeth was always acting not with a view to the newspaper headlines but with a view to the history books. And my counsel to those who will lead Britain politically at this very difficult moment is to do the same thing. And I think that's something we can all usefully keep in mind in every country. So Larry let's convene the Larry Summers Book Club here. How do you reading these days. I understand you have a book you like a lot.
Brad DeLong my former student now colleague at the Treasury Department now a professor at Berkeley has written the one economic history book that I think everybody should take a very serious look at. Slouching Towards Utopia is the title. It chronicles the world from the moment. Growth really took off in 1870 pretty much up to the present. And the only thing we really can learn from for thinking about the future economy is history. And Brad tells it in a dramatic and
strongly thematic way. And finally Larry you were part of history this week and the unveiling of the portrait of former President Obama and First Lady Michelle Obama. You were there. Describe for us what it was like. What were your reflections on that
revisit of yours to the White House. It was joyous to see the former president again and to see so many of the colleagues I worked with in the administration. Thanks for letting us invite a few friends to the White House. We will try not to tear up the place.
At a difficult moment hearing somebody talk about hope and change and remember the moments of hope and change was inspiring. President Obama spoke of how he always thought of the presidency as a relay race. It was his task for eight years to carry the time. And I think that's a useful idea for us all to keep in mind. It goes back to what we said about Queen Elizabeth. Let's think about what future history books are going to say rather than what two hours from now tweets are going to say. If we could all do that.
I think we'll be better off. Wise words indeed. Thank you so much. I really appreciate you being back with us. This Larry Summers of Harvard our very special contributor here on Wall Street with. Coming up when something's too good to be true does it have to be even if it's baseball. That's next on Wall Street week on
Bloomberg. Finally one more thought. Everything that goes up must come down. Or to put it in financial terms reverts to the mean. We've seen it recently in things like Bitcoin coming back down toward earth. The way that we've seen on Bitcoin and the crypto space at large downward momentum from a longer term perspective is very bearish right now in meme stocks shooting up and shooting right back down again.
So-called meme stocks like GameStop down 8 percent. AMC Entertainment will stay down. And in those NF TS that we're going to take us all into the bold new world of the metaverse. The team market has crashed but the closest come off of that particular world and now we're seeing it in the world of specs. Those special purpose acquisition companies that held out the promise of all the benefits of going public without all those pesky S.E.C.
requirements this black market in particular not doing well. This back craze is over. I think that investor sentiment has soured on the product. This week we saw the latest stumble of us back when the company former President Trump chose to help him take his truth. Social media company public ran into trouble with shareholders who refused to let it extend the time to close the deal as the app itself continues to have issues including a ban from the Google Play store. Truth social content moderation peace and making sure that they can kind of abide by the standards that Google expect seems to be the breaking point at the moment.
Which brings us to baseball and to the New York Yankees the best team in baseball at least through the month of June winning almost 75 percent of their games during that time period only to revert to that mean with a record well below 500 since then. But in a world of things coming back down to earth there is one part of the Yankees that hasn't. He's named Aaron Judge who has already hit well over 50 home runs this season and is on a pace that with a little luck and a bit of his skill could approach or even pass Roger Maris his record of 61. Young is blessed to be in this position to be with those guys and they are looking forward to send more record to those guys and hopefully eventually get the ring of the new year as big a deal as that is for the sport of baseball. It may be even a bigger deal for judges bank account. He was offered two hundred thirteen
point five million dollars and a contract extension at the beginning of the year only to turn it down and bet on himself and decide he was going gonna have a new contract in a year. Well that that it looks like is likely to pay off. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2022-09-15 16:37
