Wall Street Week - Full Show 09/16/2022
A strike averted. The tide turns in the Ukraine war possibly and inflation while inflation. It just gets worse. This is Bloomberg Wall Street week. I'm David Westin.
This week special contributor Larry Summers of Harvard on just how much economic trouble we may be in. Headline inflation fluctuates substantially but we've got a significant underlying inflation problem. And Dan Chung of Alger Management on staying safe by taking some risk. There are patterns that you can invest in even in turbulent times.
The war in Ukraine took another unexpected turn this week as Ukrainian forces pushed the Russians out of territory that they had held for months raising hopes for people like former U.S. Army Europe Commanding General Ben Hodges. This will end I believe early next year. The Ukrainians are going to push the Russians back to the 23 February alone before the end of this year I believe. While former Defense Secretary Leon Panetta warned of possible Russian retaliation. The real issue is whether Putin now
strikes back. He already has struck back on the infrastructure whether he resorts to do more you know including the possibility of battlefield nuclear. And President Xi of China took the occasion to make his first trip out of the country since the pandemic. And whom do you visit. Well Russian President Putin in Pakistan he essentially hitched his wagon to Vladimir Putin.
It hasn't gone well. That has gone badly for for shape. Meanwhile in the United States we walked right up to a national rail strike that would do real damage to a fragile economy and then avoided it at the 11th hour through round the clock negotiations led by the Biden administration that reached agreement. And I think an agreement that really is beneficial to both sides. But the really big story for global Wall
Street were those CPI numbers on Tuesday coming in harder than expected. Cementing in most minds a path of continued aggressive rate hikes by the Fed and maybe just maybe for longer than we had thought. The Fed has a game plan. Their game plan is to make sure that the interest rate is higher than inflation. That's the way they believe the way to kill inflation. But President Biden insists he is not worried. The stock market doesn't necessarily
reflect the state of the economy. As you well know economy still strong. Unemployment's low. Jobs are up. Manufacturing is good. So I think you will be fine.
But the inflation number does not. Well if President Biden isn't worried about inflation the markets sure were this week reacting with a vengeance to that CPI news with the S&P 500 having its worst week since June down four point eight percent and the Nasdaq down almost five and a half percent while bond yields shot up. The 10 year Treasury adding 14 basis points ending up at three point four five percent. An even bigger story with the two year up 31 basis points pushing up to just under three point nine percent. Tell us understand what the markets are
trying to tell us this week. We welcome now Sonny Beschloss CEO of Rock Creek and Greg Peters co CIO of PJM. So Greg let's start with you. What are the markets trying to tell us. Markets are trying to tell you David that the Fed has a lot of work to do.
Inflation continues to be quite this persistent. What I think the inflation numbers showed us is that how broad based it was and the focus was on the ward number and the core number came in double what was expected and the markets were leaning the other way. So I think this is just a reaffirmation that inflation is entrenched in the system. The Fed has a lot of work ahead of itself as do other central banks. And the markets need to adjust. Yields need to adjust. And the economy as a consequence of this
higher rate environment needs to slow down. So Sunny it looked like the market started to just certainly this week at the same time how much work does the Fed have in front of it. Because we keep hearing about there's a lag in monetary policy at same time. It looks like they're behind. You're absolutely right. And what is happening is now I think the market has accepted that we're going to be closer to four four and a half maybe more in terms of terminal rates.
And that was what shook the markets this week. And as Greg said this is not just in the US. I think the ECB is behind the curve. The Bank of England is behind the curve.
So this is more of you than more than just a US phenomena. But no question that the medicine will be tough over the next six months. And our expectation here is that we would probably end up at probably four point two five by the end of the year. Well the most is tough. I'm sorry but is there any danger the doctor my prescribed too much of the medicine overreact because it takes a while for to kick in. You're so right. Also because policies take a while to work through the system. So we know in economics one to one that
that policies especially interest rate increases can choke off the housing market. For example they've started with 6 percent mortgage rates. You're going to see the housing market hugely impacted. But that takes not next month but a
couple of months to work through. So no question that we could overcorrect. But I think the Fed now feeling that they have fallen behind has that danger of over correcting. I think the good news there is that they can always bringing interest rates down a little bit in the early part of next year. But most likely they will be very careful before they do that because we have seen with Deb Volcker and others if you bring down interest rates down too soon you will also have problems greater since we are a pretty broad consensus that the Fed was late to get started both on rolling off the balance sheet as well as increasing interest rates at this point. How do they maintain or regain their credibility.
Because we're a long time. We basically believed in the Fed and that would take care whatever the problem was. Yeah I think that's the central part of the story in that the has to get inflation down. I think they realized that they were slow to react that inflation wasn't transitory. It's become much more entrenched. It's global in nature as we just talked
about. So the way that their success is measured is one way and one way only and that is bringing inflation down. And the unfortunate collateral damage in bringing inflation down is the economy. So while housing is slower to react I think what the Fed and other central banks are really focused on is bringing inflation down because credibility is based on that fact alone. If we think about the prosperity that
we've had at least from a market standpoint since inflation has been under control since central banks have built that credibility they need to get that back. And that's what they're desperately fighting for. I've seen as you know terribly well the Fed has two mandates its full employment as well as stable prices.
Right now it looks like they're focused on the second that we're out of employment. How does this work for wage earners as a practical matter. Because on the one hand you want wages to go up. And by the way real wages if any of the going down not up because of the inflation at the same time.
If you really have inflation rampant then what they're making is not worth very much. So the emphasis was on increasing employment. And that was the first part of the correction. And I think that was what actually led to the Fed being so late in in moving towards more equitable and more equitable economy. And that is what led to this inflation which is unacceptable obviously to everyone including wage it owners who are now in real terms getting less. But there is what we're seeing now for example with the port set on them this week with a number of unions getting formed existing unions successfully negotiating wages that we might end up in an economy. And I don't want to be over positive
about this but I think there is a really good scenario where where the DAX stops sometime next year. Wages in real terms might end up in a better place. And by that I mean higher. That is obviously going to be at the cost of of earnings going down which means that there will be a reallocation between different stakeholders. And a lot of stakeholders have been talking about labor and getting a bigger share of the economy.
And that can either be leading to an inflation spiral or something has to give. And if you could get into an economy where wage earners are buying more that leads to more consumer goods. It leads to a better growth rate. When we come out of this. So I wouldn't be so negative when I read the news about student loans being forgiven or wages going up at this point. So Greg for a long time it looked like we were solving the equation for the value of assets. We're getting asset values that we were
pretty successful in doing overall. If in fact we're going to take the move that Sandy suggests right now and say let's focus on wages and get more than assets what does that mean for asset. Do we have to have or worse. We're shifting away from asset those toward wages. Yeah. So I think our time is spot on with this
notion. The Fed basically telegraphed this when they talked about a part of their mandate is inequality and inequality is wages. I think what we've seen with this this widening of the wealth gap in inequality just growing wider each and every year is that this trickle down aspect where the Fed's zero asset prices go higher and you know the rest kind of benefit from that you're you really haven't seen that. So the fact that actually wages are going up is a real positive. I do think that has an impact though. Margins will come down there at all time highs.
So there is room for that. But I think we're moving into this new regime from you know less shareholder value into wages and worker value. And I think that is a story that's going to continue to be told here for some time to come. Well some time to come.
So I'm just curious if you agree with Greg. You said I was talking about over a year or five years. How long do you think this transition might be. I think it's really in front of us as we speak.
So I think this readjustments adjustments we talked a lot about the negative part of Covid. I think this is the positive could be the positive outcome. And what I think is you want more balance right. Do you want more balance between stakeholders for an economy to prosper if you have too much of the share of the economy going to one group or another group.
It's never balanced and it's never good for growth. So I think this could be sooner than later which makes me a little bit more positive that you know President Biden said may not be completely untrue. We might we might get into a better place sooner than people expect.
Well after a week like this I'll take some positive whoever I can find it. Thank you so much Greg Peters of a bachelor's degree staying with us as we get some advice on what we should be doing with our portfolios given all of the turmoil. Coming up next on Wall Street on Bloomberg. The outlook for oil is bleakest before we now use nine and a half gallons each day. By 1985 the average household is expected to be using 15 gallons of oil. Yet even at the present lower rate of
usage the reserve on hand would be wiped out in 10 more years. That was loose rock ISE are of course on Wall Street. Back in 1973 when he was worried about running out of oil altogether in the globe. After only 10 years. Little did we know that at the time. We were only seven minutes away and was
seven months away from an OPEC oil embargo which really played havoc with the markets. As we were watching the hit movie Poseidon Adventure and listening to the most popular song that was Roberta Flack's Killing Me Softly. Still with us our Greg Peters of Fiji and a sunny specialist of Rock Creek south of Sydney.
You've had a good party a career dealing with oil. We didn't run out of oil the way we thought we were. There are a lot of issues including geopolitical ones. But given what we just talked about that possible paradigm shift from asset value over into wages. If you're maintaining a portfolio if you're investing funds the way you do have Sunny what does that tell you.
What would you do. It doesn't sound very good for investors. If assets ISE are going down. They David even in this very difficult year for the economy and for renewables renewables were up about 9 percent. Now obviously this year they fell far behind. Oil and gas as we all know.
But if you look on a three year basis I have some numbers here. Clean energy was up about eight point nine percent versus oil and gas which was up three point three percent. If you look at the five years again renewables have been doing better. So the interesting thing also is that
from you ask about wages that there's now more people working in clean energy than in fossil fuels as we speak. So the economy is shifting and those jobs are actually pretty well paid because there is a shortage of people who have the experience. So in terms of investments there are a number of areas obviously in climate including food and AG.
We're seeing that more people are looking for for high quality foods. So there is a big big potential for investing in that area. And it's not just in the short term because fertilizer prices are high because of the Ukraine war or or supply chain problems.
It's a longer term issue. So energy clean energy and food and AG obviously have the wind on their backs. Specialty also because of the New Inflation Act that is also going to put resources in that area.
But even if we had not had the inflation act you would still have a lot of interest in those areas. The only other two things I was going to say on that front is also biotech and life sciences that also got killed over the last few years relative to the rest of the market. Very interesting. We look at it very actively. But but again those are areas where you see startups as well as established companies doing more and more. Last but not least I would love to know what Gregg also thinks. If we could be going back to a 60 40 or a 70 30 where people were getting bonds out of their portfolios.
But is this a good environment to start thinking bonds if our scenarios about the economy are right. So outside. So it's you know I'm thinking the bond markets and modern day Poseidon Adventure. When I heard that quote. So I do think the good news in the bond market is that we're largely past the pain. So it's been a really difficult environment to say the least. If you think about just the 10 year Treasury we're at 50 basis points now we're at 340 basis points.
So there's been a dramatic repricing. High yield yields are up from four and a half to nine a half percent. So I think we're getting closer to the end. And just six nine months ago investors were asking about the benefit of bonds in the portfolio 60 40 construct.
I do think that game has changed. It's still a little early because some volatility is on the horizon here. But we're in a much better place today than where we were back in 2021 and 2020. So I feel pretty constructive even though I do believe that there is volatility had. And just think about how we move from a Fed pricing perspective. Right. So this time last year there was basically zero Fed hikes priced into the market. And now we're pricing in you know close
to four and a half percent. So that's a dramatic move a real repricing. And no wonder why not only bonds were hit but equities have been hit in the process. So Greg let's pursue that 40 percent of it in the high end investment as our fixed income part of it. We have people on here who say high yield as you just said that's a good idea.
Investment grade not so much. Is that where you are. You know these the high yield market is really different this time in this cycle. Aside I talk about energy. So about 20 percent of the U.S. high yield market is the energy space. That's a very different market going into this cycle than what we've seen in previous kind of economic downturns. It's a much higher quality segment than we've seen historically. All the risk has been pushed off into
the levered loan market investment grade corporate bonds. Also much longer duration lower quality. So somewhat perversely and interestingly the high yield bond market in the US looks pretty attractive relatively.
I just think it's a little early to get too excited as we enter or the possibility of entering into a recession as I have yet to see credit spreads stay stable and not widen heading into a recession. So that's kind of where we're at but it's definitely something to keep on the radar. And does change the dynamic at 60 40. Say another thing we hear from time to time is high yield might be the new form of equity. That's the place you want to take your risk assets in high yield. As you look at your portfolio does that
make sense to you. You know we're actually looking at maybe a donation of what you just said which is a lot of startups DAX got very large funding over the last few years. And as you know it was relatively easy for venture funds to raise money and for new companies to raise money that has come to an end and they don't go for the traditional high yield market obviously. But as they can get funding for you know the rest of their growth they're looking at new sources of ID within credit markets. And so we are looking at those markets specifically because we think that there might be a lot of really good value I think on the high yield market there.
It's always a Grexit. There's the energy component and the non energy component. Obviously the energy component has a lot of oil and gas in it. And so we have not been doing a lot in
that area. Sunny I'm curious about when you talk about renewables when you talk about some of the biotech a lot of those firms include the startups you're talking about. It's really based on the earnings in the out years. They're not making so much money now. Maybe not at all. They're going to make in the later years as interest rates go up.
That discount rate really hurts you doesn't it. So does that still make it a good investment. I think it's still and we still are going to do really well from innovation in our economy. So out of those companies. Well while a lot of them will need 10 12 years to grow some of them will not need as long as that. So you hope that your investments start bearing fruit. Some will bear fruit a little sooner. Some will barefoot a little later. That as a whole we still expect higher
returns relative to the markets. Let's not forget the kind of returns that we saw in equity markets over the last 10 years are unlikely in the next 10 years. And no question that private investments in new start ups will still do better in our view. One last quick one if I could Greg to you on fixed income. When you talk about again that 40 percent of the portfolio do you have a preference for short duration. Where are you on duration.
Also right now we're pretty defensive on the duration side we're we're pretty flat but if you believe that the economy is slowing then I think being long duration is the defense mechanism and that's really starting to assert itself. Just look at the shape of the yield curve. So the market's basically telling you that defensive nature being long duration has value. And so that's why it's inverted as the market the back end of the yield curve is not keeping up with the front end. So the way I'm thinking about it we're thinking about it at PJM is you want to actually be long duration heading into a recession. Sure is inverted no question. But that many thanks that Sunny
Beschloss of Rock Creek and Greg Peters of PJM. Coming up we're going to take a look at what's in store next week here on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. It's time to take a look at what we can expect next week on global Wall Street starting with Juliette Saly in Sydney. Thanks David.
Japan will be in the spotlight in the week ahead. Tuesday will bring inflation data that is likely to show the cool gauge climbing further above the Bank of Japan's 2 per cent target. But will it bring a Bank of Japan policy shift closer. Bloomberg Economics doubts a shift will be a busy week for rates in other parts of the region as well. China's loan prime rates likely to
remain steady consistent with the PBR C's decision to hold its one year key rate unchanged. The Philippine central bank is likely to raise its benchmark rate back above pre pandemic levels and bank Indonesia looks set to keep going with its gradual tightening. On Monday all eyes turn to London where the queen is lying in state. Already the crowds have been lining up for it. The day will start with a funeral for the queen at Westminster Abbey followed by a procession through London that will eventually end at Windsor Castle where there will be a ceremony for the family. So it will be a week of more ceremony
more pomp and importantly mourning for the country. All eyes on the Fed next week here in the US as policymakers are widely expected to lift benchmark interest rates by three quarters of a percentage point. Combine that with the 75 basis point hikes at both the June and the July meetings and we would have a cumulative increase of two point to five percentage points and the federal funds rate in just a three month span. That would be the most aggressive
tightening of monetary policy since the Paul Volcker era 40 plus years ago. The aggressiveness appears warranted following the most recent consumer price report that suggested bets on peak inflation may have been a bit premature. Now the Fed silent period has kicked in ahead of that meeting so don't expect to hear any commentary until Jay Power's press conference on Wednesday. There will be economic data to watch in the meantime including housing starts home sales and US purchasing managers data for the manufacturing and services sectors. And finally keep an eye on big bank stocks. Big bank CEOs including Jamie Diamond of
JP Morgan and Brian Moynihan of Bank of America are scheduled to testify before Congress at a hearing titled Holding Mega Banks Accountable. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up whether it's recession or not tougher times are coming. And with rates rising the bloom may be off the rose of those innovative growth stocks like tech and cutting edge health care. But Dan Chong of Alger Management thinks otherwise.
We'll find out why. That's next on Wall Street week on Bloomberg. There isn't much certainty out there for investors these days. Inflation may have peaked. I think there is consensus that we've
seen peak inflation. But the question is now why. Where it may not. The Nasdaq down close to 4 percent. The Russell 2000 down over 3 percent. Taylor. Inflation not peaking. We're headed for a soft landing. My hope is that we will achieve a soft landing.
But Americans know that it's essential to bring inflation down or we're not. There's a 75 percent chance of recession in the next two years. But the one thing we can all be certain of is that interest rates are going up. If there's any doubt at all about 75 they're definitely going 75. And nothing in those CPI numbers this week will make those hikes any less likely leaving an investor to think hard about what position makes the most sense in a turbulent time. And we turn now to someone who is
responsible for investing a lot of money over 30 billion dollars in a turbulent time. He's Dan Chung CEO and CIO of Alger Management. Dan thanks so much for being on Wall Street. First of all let's get your sense of how turbulent a time is. Are we headed to recession or not. We do think we're headed towards recession at this point.
Yes. How bad. How long. Well you know recessions are of course very feared events. One of the interesting things about the
stock market is it being a great predictor of recessions. And typically stocks peak eight to 10 months ahead of a recession. Stocks peaked at the end of December early January this year. So although Nyberg hasn't officially declared a recession the stock market is saying we're probably in recession now as we speak. So Dan one of the things that we've seen a lot of in the moving of funds as well as people talking about it is as we go into these turbulent times he was saying that's the time you want to go into value. You don't want to be in growth. And in fact if you look at some of the
big funds they've lost a fair amount. The growth funds have lost a fair amount. What does history tell us about when you go into recession where you want to be. Yes a really important point. I mean history there are patterns that you can invest in even in turbulent times even through recessions are very important.
Understand that because essentially it's about having a game plan you know during economic volatility and recession. And what the history tells us actually is that as we enter into recession growth stocks in other words companies with strong business models a low debt operating margins that are higher than average they tend to do better than say a highly leveraged companies companies with lots of operating leverage under a fixed cost structure. And of course companies that weren't growing particularly well before you know it only tend to grow with with economic growth. And so what we we have seen in the past historically is that as we enter into recessions value companies value stocks tend to have significant earnings compression. Also declines in earnings. Well growth stocks actually tend to hold up fairly well. Now the other part of history that's important to note is the first stage of a market correction is really valuation compression.
And we've seen that across the board. And it is also classically true that growth stocks compressed more than value stocks. But I think we would actually see a lot of signs that that part of this market cycle is already over. The next part is really about the economic recession and the decline in earnings that it will bring you know across the market. And that's where actually growth stocks start to shine. So that I think is important.
And what you said there it's not all the companies that are considered growth companies. You have a subset that you really focus on. Yeah I mean it's really interesting. You're Al just philosophy is focused on fundamentally the disruptors and the innovators across industries as well as a category called Lifecycle Change which is sort of companies that may have experienced tough times that we think are about to experience better times because of innovation or management and leadership. We have some interesting history from
top growers in particular. If you look at the top 75 companies across the largest 750 to the top 10 percent of growers. Their valuation actually is compressed so much that relative to the market now they're actually at multi decade lows. And that again gives us some confirmation that it's really probably time to start thinking about not so much the start of the recession which as I said probably has started already but what it looks like coming out of recession and into recession. And that's where again these kind of growth stock leaders the valuations have compressed the fundamentals are likely to hold up better than an average and certainly better than value cyclicals. And we think it's a good time for long
term investors to think about the opportunities there. So sit down. Let's go a little more specific because we want to try to help investors make some good investment decisions here. What specifically would you be looking at right now and those growth companies you describe. Sure. So I think when you look for is what are the strongest trends in business and in society in the world and one of them. And so and then of course the companies that are leading that write the disruptors the ones that are taking market share digital transformation of business is sort of where machine learning big data cloud computing all come together.
Right. This is all about making businesses more efficient efficient in their cost structure efficient in how they manage their employees you know getting more productivity and of course efficient in reaching and servicing their clients. And so when you think about the center of that that's really software. That's what's driving it. And then of course the powering of that is semiconductors and hardware. But think about company is we think like companies like VEBA which focuses on the healthcare industry and making everything from clinical trials to product recalls more efficient you know vast amounts of data to help improve clinical trials results to target medicine and also lots of data to make sure that if there is a recall you know you know exactly why there's a problem and how to recall it and who you know who has it on.
It's companies that are you know also for example of course transforming every business by moving to the cloud and helping them do that. So every business needs a lot of software companies like Data Dog. They do application performance monitoring on the cloud. That means you know if you have 100 applications running across your company that may be payroll that may be marketing that may be customer service. Then of course maybe you're manufacturing or court for service capabilities all those applications you need to monitor them for their performance. The downtime the accuracy and data of for example was a company that provides software that helps you do that basically manage your digital infrastructure.
So data transformation is incredibly important because particularly in a recession or in difficult times the most important thing businesses want to do is get more efficiency out of more you know more limited resources. Right. Maximize their efficiency. So darling when you talk about lifecycle changes it strikes me that one of the places we're seeing a huge change right now is in energy as we go towards renewables and we also try to get more efficient our fossil fuels. What sorts of opportunities do you see there if any. That's absolutely correct David. I mean we have like the renewable sectors solar or wind know battery technology is a grant power electric cars as well as backup power for a long time.
But given the Ukrainian Russian war the effect on oil natural gas and other prices on the traditional energy industry which had been in a bear market is now poised for a transformation what we call lifecycle change a growth renaissance. And the reasons are very clear. America is fortunately now a world leading energy producer across many fields not just renewables but the traditional oil and gas and liquid natural gas. For example we are a leading producer. Companies in the US are important not only producing natural gas but for example the processes and logistics to to ship natural gas leaking in the liquid form across the globe. So we're very excited about the opportunities in that area as well as the renewables area. One more that applies perhaps to all the growth companies in general. I think all of this is if you look at the lifecycle of their earnings more of them are out in the out years as interest rates go up.
That means there's a steeper discount back to present value. Does that warn you away from some growth companies because the interstates look like they're going to keep going up for a while. So that that's that's absolutely correct. It's what we've seen already. I think the valuation correction for the fastest grower because yes there there are the opportunity for growth stocks is what they do 3 5 10 years from now in terms of revenues earnings and cash flow. But as interest rates go up those cash flows the future opportunities get discounted.
Investors of course become very fearful and tend to focus on the near term. But by many measures in particular in large cap sector the valuation question is already gotten to the point where large capital stocks are actually relatively cheaper than they have been in decades. Against the market. So we think it's an opportunity to start you know picking picking the best of those those those growth stocks for of course the inevitable market recovery. So that's Dan showing with some really useful advice in these turbulent times for investors. Tension is the CEO and CIO of Alger Management.
Coming up we'll wrap up the week once again with special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. Wall Street Week David Westin. Welcome back to our very special interview Larry Summers O'Hara it's Larry.
I think maybe the biggest news for the markets certainly this week were the CPI numbers that really disappointed to the upside here particularly on the core. What did you make of those numbers. Look for me they were unwelcome but not wholly unexpected. I think the right reading of the data
all along has been that headline inflation fluctuates substantially. But we've got a significant underlying inflation problem. And that's what that core inflation rate where the month was faster than the quarter. The quarter was faster than the half year to half year was faster than the year and the year was faster than last year. That's what it showed.
And the month was that a close to 7 percent core rate. We've got a substantial underlying inflation problem. Another way to see that was the median inflation is higher than it's been any time since we started collecting the data. Another way to see that is that we're seeing substantial inflation in the housing components of the index which we know have very substantial persistence.
Yet another way to see that is in the data from the Atlanta Fed which I think is probably the best wage indicator on those who are switching jobs which show we are. The market really is unlike those who are staying on jobs which was running at 8 percent or or more. So we've got a substantial underlying inflation problem that doesn't come out without very substantial monetary policy adjustment. And the market is waking up to that fact and is now building in substantially more monetary policy adjustment than it was with the terminal. Fed funds rate are up now at 4.5. If you think back David it's been an extraordinary journey. It was only 15 months ago that the Fed
was saying that the rate was going to be zero in mid 2023. And now it's saying that that rate is going to approach four and a half. And so the idea that that would change financial conditions can hardly be a very surprising one. So Larry let's pick up on exactly that point. As far as you see it right now what
would you project the so-called terminal rate to be. We've got the head of economics at Bloomberg saying 5 percent Deutsche Bank that's 5 percent. Where do you think we end up. That wouldn't surprise me. That wouldn't surprise me certainly at 450. There's more realism in market pricing than there was several months ago. I think we're more likely to end up above four and a half than we are to end up below four and a half.
And it certainly wouldn't surprise me if that rate has to get above 5 if we are really going to in a determined way contain and control inflation. Whether the Fed is going to stay the course and do what's necessary to contain inflation you know we're going to have to see how that plays down down the road. Rick Michigan a former Fed governor had a very strong op ed this week making a point that I've made a number of times that even Paul Volcker had a kind of false start on inflation containment where he brought down rates in response to economic bad economic statistics in the spring of 1980 which then had to be reversed and forced us to have even higher rates than we otherwise would have had to have in the early 1980s. So I think it's not going to be easy to
do what's necessary. History records many many instances when policy adjustments to inflation were excessively delayed and there were very substantial costs that again and again through the 1960s and 70s for example I am aware of no major example in which the central bank reacted with excessive speed to. Nation and a large cost was paid. And so I think that lesson that in terms of minimizing the risk of a stagflation pre catastrophe the Fed has to be prepared to stay the course is the important one to internalize. Larry as you know so well have said
repeatedly on this program one of the major components of inflation are wages. We walked right up to the brink of the national rail strike this week and the United States avoided at least tentatively with a tentative agreement. Obviously that would not have been good for the economy if there had been a strike at the same time. What does this say about the hydraulic pressure from organized labor and otherwise on wages. David I think we have failed on labor rights in this country over the last generation. It has been far too easy to fire union
organizers. We have not done enough labor law reform to support the right to organize which I think is something fundamental to having an effectively functioning labor market and something that is essential to having a fair and just society. But I do think at a moment like this when inflation is a crucial issue the federal government needs to be very careful to keep a focus on all that advise at all that it sets a pattern for to pay attention to holding costs down rather than rewarding workers. And I think there are a variety of
provisions that try to maximize the wages of those who are involved in activity. The government is supported. And so I worry about provisions that seek to enshrine high wages for example in those who are producing goods related to the environment. And I think the federal government has to walk a very careful balance here between restoring appropriate labor rights which has been a real flaw and a huge problem for the last 30 years and doing things that will entrench inflation through wage pressure to the detriment of the overall economy including the economy of workers who work with their hands.
And finally let's turn to geopolitics for a minute. Obviously Ukraine had a rather good week I'd say with the advances it made in the northeast with Russian troops retreating or even an absolute right route. On the other hand President Putin had a rough week as he met with President Xi. And President Xi has some concerns about that war.
What do you make of what's going on there. I was heartened by the Ukrainian success but I think that from an economic point of view we're going to have to be very thoughtful about how we support Ukraine as hyper inflation becomes a greater risk in Ukraine. And I think more broadly there's enormous uncertainty in markets for natural gas in oil markets through those markets and markets for diesel fuel and for fertilizer. Add a great deal. We don't only say this but a great deal in the U.S.
inflation process is going to hinge on whether as markets tend to be pricing while prices stay moderate or even come down or whether as geopolitical experts warn we hit adverse developments and those prices spike up again. I don't have the wisdom to know which will happen but I do think it's going to be an enormous factor for the inflation process in the months ahead. OK Larry thank you once again this week. Very special material Wall Street. He's Larry Summers of Harvard. Coming up from lying flat to quiet quitting good backing off of work beat the latest bug that we're all catching from China. This is Wall Street week on Bloomberg.
Finally one more thought taking our lead from China again. Much has been made at least by a certain former president. It states of the fact that the Covid-19 virus comes from there. It comes from China. This way comes from China. But now it looks like it may be its work habits that are contagious.
Just over a year ago we first talked here on Wall Street week about the Chinese phenomenon of lying flat. Again five years ago by a twenty five year old factory worker named Lo. What's wrong. Lying flat is spreading through the use of China. Tired of the long hours they've decided to take it easy giving up their jobs living modest lives off of their savings and sometimes off of their parents. And as we all recover from the pandemic employers were concerned that some Americans might be lying flat by simply not coming back into the workforce.
A problem. Sarah Header of Causeway Capital described for us the cry we hear from companies of the interview hundreds of companies is that they don't have the labor they need. This seems to be this chronic labor shortage which is something we haven't seen. Normally we talk about slack and that doesn't appear to be the case. And it's not like the labor isn't there somewhere. It doesn't seem to want to work in many of these jobs. But now the problem has morphed into its
own American version. What some people call quiet quitting where employees show up but make sure that they do just what they are required and no more. I will say there's a growing sentiment among CEOs now. We are not we are not one good recession
away from employers having our again and employees being in second chair. There's a growing sentiment that this is more of a permanent shift. It's far from clear how widespread this quiet quitting is or even whether it's entirely new. After all let's be honest there have always been some co-workers who have been happy to coast a bit but it does raise questions for those of us who've been in the workforce for a while.
Whether the old norms still apply. And when you and I started out in the workforce and admittedly made a little bit later than you but I mean to get ahead you did everything that you could. You were the first and the last to leave. You put you volunteered to do every single extra job to get ahead. But whether it's big or small whether
it's new or it's old. This quiet quitting business does pose some challenges for those hard charging managers that some of us have had to deal with over the years. We're adding a little something to this month's sales contest. First prize Cadillac Eldorado. Second prize assisting. Third prize is you're fired. You get the picture. That does it for this episode of Wall
Street Week. I'm David Westin. This is Bloomberg. See you next week.
2022-09-23 03:18
