Wall Street Week - Full Show 09/30/2022
Storm season from pipeline leaks in the North Sea to emergency repair of a broken gilt market in the UK to Hurricane Ian rampaging through Florida. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers and the Bank of England's abrupt move to shore up the British bond market. We're in very complex and uncharted territory with what's happening in the UK and New Veen CEO Jose Minaya on seeking refuge from the storm in the markets. It's not just about stocks and bonds now. It's about alternative. It was a week of stormy weather starting with unexplained leaks in the Nord Stream pipeline off the coast of Denmark something special climate envoy John Kerry says is a real risk for the environment.
This is a massive leak bubbling up under the water. Methane is 20 to 80 times more damaging than CO2. So it has a profound impact in adding the amount of methane in the air. A major storm hit the market for British government bonds this week triggered by the new government's proposed tax cuts which had unintended consequences for the big pension plans as gilt yields shot up recalling the Bank of England to step in as explained by former NPC member Kristen Forbes. We are now in that situation. Every central banker doesn't want to be
in where the fiscal side is going in a direction opposite with the monetary side. It is time to do it. U.S. banks weren't immune from the stormy weather either as major banks were hit with one point a billion dollars in fines for improperly allowing their employees. Even some executives to use social media outlets outside the record keeping requirements. Regulators reached settlements with a
dozen banks for failing to monitor employees communications on unauthorized messaging apps like WhatsApp. And then there was the big storm Hurricane Ian that came up through the Caribbean and slammed into Florida causing destruction. We're still getting our arms around the pictures that were coming out of Florida.
You know just getting cars up and down the street know pouring after pictures of the beautiful little homes. Man all you talk to the roofs. So the storm surge looked up to the Haidi Lun of. And the markets they reflected all that stormy weather with stocks closing down for the week down for the month and down for the quarter.
The S&P 500 lost two point nine percent for the week and closed the quarter at the lowest point in two years finishing under thirty six hundred while the Nasdaq gave up two point seven percent for the week down four point one percent for the quarter. Bonds sold off as well with the yield on the 10 year up 13 basis points since the week began ending up at three point eighty two. And here to take us through another tough week in the markets are David Bianco chief investment officer at D.W.
s America and Laura Covid a head of equity strategy at RBC Capital Markets. Welcome both of you to Wall Street. Good to have you back. So let me start with you David. The most basic question. How bad is it going to get. How bad is it going to get. Well thank goodness it's Friday. The weekend should be a reprieve. Tough day tough week tough year. The S&P 500 is down 25 26 percent from
its all time high. This is this is a bear market. I find myself thinking about the 1970s lately. And I think something to keep in mind is that the 1982 bear market when the Fed was fighting inflation aggressively back then the S&P fell 27 28 percent but in 1974 the S&P fell 48 percent. So I think a key question is is this the beginning of a high inflationary period. Where are we near the end of a high
inflationary period. If you think we're near the end of a high inflationary period the worst is largely behind and the market shouldn't go too much further down. But that's the key question Larry. I'm not feeling much better. What do you think. All right. I'm going to try to make you feel a little bit good. So look we think that the market is set
to stage a major major battle at the thirty five hundred level. And the reason for that is if you look back over the course of recessions into the 30s a median recessionary draw down is about 27 percent. And so we'll get there when we're around thirty five hundred on the S&P. And I still as I talk to investors I think many are still in the mild kind of quick or shallow camp. But I do think there's going to be a
sluggish growth backdrop. Afterwards I think people are not really looking for anything major like what we had in the financial crisis. So I think that at least we've got that at our back. I will tell you if you think about kind of where investors heads are at something else that makes me feel a little bit better is I'm not sensing a ton of panic definitely alarm. But the big question of the day is what do higher rates for longer mean for valuation multiples.
And that's a very constructive conversation. And we've done some work suggesting that we're probably getting pretty close. If he hit that 30 500 level on the S&P to the same kind of multiple contraction you saw back in the 70s over the course of the entire decade. I want to come back to earnings. But before that we just heard from Lori short and shallow. I think you said I think she's referring to a recession. Are you projecting recession.
And I guess my question really is. Normally if you have a recession we turn our heads and look at the Fed and say OK please cut rates. Do we have much room to really deal the recession. If and when it comes we're expecting a short and shallow recession but we're a bit concerned that the troughs might linger well into 2023.
We're not expecting a V shaped recovery after the small recession. We think it can be slow real growth afterward. The trouble here is that the Fed can't rescue us because of the inflation problem and they can't attempt to rescue the equity market or even the economy broadly until they're confident that the inflation battle's been won. So I think what you people know it's pretty clear at this stage the Fed is committed to fighting inflation and they've decided they're willing to risk a small moderate recession tolerate one to make sure that this inflation boost is slowing. So if we're talking about equities just
for a moment you've got at least two things going on. One is valuations. And what we're expecting in the higher discount rate affects that also. Earnings. What are you expecting on earnings at this stage.
We're expecting earnings for 2022 to be two hundred twenty five dollars. I think at this stage you should not expect any growth. It should be flat in 2023. But every day that goes by with the shocks that we're experiencing higher interest rates the super strong daughter collapses and other currencies around the world even oil prices have come down a lot. And we are beginning to see a lot of companies come out and say things are slowing.
So the earnings risk is mounting. What about earnings. I mean we saw FedEx we Apple we've seen a lot of earnings warnings out now. So we're actually pretty far below consensus where it to 18 for this year versus to eleven last last year. And then we're actually at 212 for next year on S&P earnings. So we think this is going to be pretty similar to 2015 2016 where earnings basically go nowhere for a couple of years. And I do think companies are much more resilient in terms of managing their business models than they have been in the past. There's a lot more flexibility a lot
more ways to suck out costs a lot of more ways to manage through supply chains are improving. But one thing we've been telling investors is as inflation moderates. That takes a bite out of earnings because it takes a bite out of revenues. So that's a big headwind. We've got next year. So Lori can companies maybe resilient consumers how resilient are they. And particularly tie that into unemployment. Because if we do go this direction what
kind of unemployment are we facing. So look I think consumers are headed into some headwinds here. And we're starting to see trade down impact you're seeing a lot of those references on their earnings calls. We're also starting to see a lot of impacts among lower end consumers higher and has been holding them much better. But we do think the consumer is going to take some knocks. One of the things that gives me comfort
is when I talked to my bank analyst for example they told me the starting points on various credit metrics are looking much better than they have heading into past recessions. So we think a lot of the consumer trends are going to head in the wrong direction but they're not going to necessarily be hit as bad as they have in past downturns. Just because balance sheets have been cleaned up pretty strongly over the past few years and we're thinking similarly that the consumer is having a tough time. They got hit by this high inflation.
They see the high interest rates affecting the housing market. But this small recession should be marked by still an inflationary environment not deflation. And we think the labor market will be relatively OK. They will suffer some knocks.
But what we don't think unemployment goes up any more than 1 percent. We're usually goes up 3 4 or 5 percent during a recession. So if it's still inflation not deflation and the labor market holds in there largely because supply is tight then credit conditions credit costs they should be benign. That should help the banks get through
this very well and that should help investors and investing credit. Twenty twenty three should be a better year for fixed income investing. So relatively benign. What we saw in the United Kingdom this week was not benign. There was a real break in the market
dislocation. Do we have to anticipate something similar that the United States. The short answer is no. However what's happening in the U.K. is a shot across our bough one that I hope our policymakers take very seriously.
And that comes down to when you're fighting inflation and your economy is suffering supply side shocks and other pressures it is difficult to support the economy with monetary policy. They're hiking rates. The BSE is difficult to support the economy with fiscal policy. They also have deficits. So the United States needs to be a lot more mindful about its deficits whether it's tax cuts or spending.
These deficits need to be watched in this time of rising interest rates. So Larry one more attempt to put this our broader perspective on a great financial crisis what we're all afraid of. Right now we're in better shape going in to this whatever this is than we were that time right. I think we are. I mean we again go back to our banks analysts who spend time scrutinizing the balance sheets of the big major banks. And we think the plumbing is in much much better shape. I mean the way I put it is the stress
tests do appear to have worked. That's one of the reasons why banks haven't really been able to grow in recent years. But it is also one thing that I think is going to really be an asset to the financial markets in coming years. And we're overweight the banks we've been adding this week. But on the banks specifically that's
great. And the banks which is up to all the right regulation. What about the part that's not subject to. Sure.
What about the the shadow banks. What about the private credit issues. We don't necessarily know what's going on there. Well there's some debt in the system because that was so cheap and readily available for the past 10 20 years. But the banks just as Laurie said were confident that their balance sheets are strong. Higher interest rates they should make higher net interest margins provided their credit costs don't surge. But a resilient labor market. Home prices may come down a little bit. But as long as they don't collapse
people keep paying their mortgages particularly they're locked into low rates from before. OK. Laurie Covid and David Bianco we'll be staying with us. He gave us some investment advice next. That's coming up on Wall Street week here on Bloomberg.
Frailty thy name is Woman wrote William Shakespeare thereby proving not only that he was arguably sexist but that he indisputably had no knowledge of Wall Street. For the most fickle female of poetic imagination would seem a symbol of romantic constancy next to the recent behavior of the stock market. Indeed to paraphrase that other male chauvinist Sigmund Freud. What does Wall Street want. One thing it wanted we were told was Paul Volcker it got him. That was Louis Rukeyser. Of course calling Shakespeare a sexist
as I understand it back in July of 1983 when the stock market was on its upward climb after shareholders interest rates shock therapy and the bull market in bonds was just really getting started. By then the CPI was climbing only 2.5 percent a year. The top movie was Star Wars for Return of the Jedi. And the police topped the charts with every breath breath you take. Things that I can remember actually were. Welcome back now.
David Bianco and Lori Covid CEO. So given what we just talked about with what's going on in the markets Larry what's an investor to do. Where's their safe harbor from this storm. So look I think it's a question of what your time horizon is.
And if you're concerned about volatility in markets in the near term and want to add some more defense to the portfolio. I think the clear choice at this point is health care. If you look at other defensive sectors staples and utilities are basically at peak valuation relative to the broad market. And we also think there are significant earnings risk for consumer staples as the consumer weakens pricing power wanes for some of these companies. And also staples have massive exposure
to the dollar to international issues and they're very very sensitive to a stronger dollar. So I think health care you have less of that sensitivity and you have reasonable valuations. It's not a great story but I think it's the best one you can tell on the defensive. So what about that. I think it's defensive. I think about things like consumer staples or utilities and things like that. It's good buys right now. I think the consumer staples are not a
great place to hide especially if you believe the market is in a you know in a bottoming process. They they are good to suffer from the currency hit. They still have a stretch consumer packaging costs. So we also prefer health care. The thing about health care is that is not the second largest sector of the S&P 500 not financials not industrials certainly not energy or materials. So the S&P is global the S&P is digital tech businesses and the S&P is medical. Now the global parts and the foreign currency exposure aren't helping right now. And there's a little bit of valuation
risk still some the big digital names but the medical part has undemanding valuations. And we're quite excited about some of the innovation that we're seeing coming from the biotech and the pharmaceutical companies the medicine maker. You mentioned digital and tech. And there are some people as you know David who say you want to go into tech right now because it comes out of a recession first. Mm hmm. Yeah. It is a bit of an early cyclical. So are consumer discretionary stocks.
But every cycle is different. And I think there are a few things that we have to be mindful of. I think this is going to be the consumer will be resilient but a lot of consumer business models might not be able to expand the way they have been over the past 10 20 years of low inflation low interest rates. We're trying to find which businesses have the long term growth potential through innovation and through solving the problems that are causing us to have weak productivity. One thing is we expect jobs to hold up but a small recession. But if you're adding jobs and the economy is not growing much I mean productivity is really weak. That's what we need companies to address
that problem which Laura I think takes us back to something David said earlier which is it depends on what you think the comeback is. Sooner or later there'll be a rebound. What is it looks like. Is it a V or is it more gradual. Because that will affect which one is a better place to be right. I think if you're thinking about rebound
plays I think you do want to look to some of these beaten up growth areas. I think you want to be very selective. I think you want to stick with quality. I think you want to stick with bigger market caps.
But technology is an area that we think looks really really interesting with reasonable valuations. Areas like semiconductors looked to me like they bottomed out in terms of earnings sentiment. Basically nobody is taking numbers up there right now and that's usually a good contrarian buy signal for that part of the market. But you know going back to kind of what does this recovery look like.
If you think it's gonna be a hot economy you want to buy value stocks want to buy cyclicals. But if you think it's going to be a cool economy you do want to buy secular growth oriented areas of the market. They typically outperform when GDP is below 2 percent.
And I think that is probably the kind of recovery we're headed for small caps. How do you feel about them. A You're asking me to talk about my first professional child. So I spent a long time covering this
space. And I think people who have covered this space for quite some time realize that in the middle of recessions in the middle of these very challenging periods economically this is when you do want to buy them. And if you look at small caps they've been in a trading range versus large all year.
There's some stability in the performance. They're mostly domestic. They're very cheap on valuation basically at the bottom of their of their historical range. And small caps are already pricing in a collapse in ISE and manufacturing to typical troughs and a big spike in jobless claims from here.
So I think the recession is largely baked in. And this is where you typically want to be on the rebound and people want domestic U.S. exposure right now. So what about that issue. Domestic U.S. exposure. Do you want to hide in America. You want to hide in America for now. Yeah.
And we're looking for businesses that think Lori said the ones that will have a strong rebound. We want to be a little bit careful in small caps and some conductors for a little longer. But those are ones that will likely a V shaped price recoveries once we get past this. The cousin of technology is communications and that's been beaten up.
Very badly this year. We think that's overdone. So banks and communications entertainment companies Internet companies. We think that's an area where investors can start stepping up and buying where the reward should be worth the risks. I know you've been going around the country talking to people. What are you hearing in terms of what they're interested in. What are they nervous about when it comes to investment.
So it's funny. I mean nobody feels particularly bullish right now. But I think there is a general recognition that people have plenty of defense in their portfolio plenty of safety trades. And so they are concerned about when does the market bottom. What do I need to cut own coming out on the other side. Because I think there is a general
recognition that when rebound when the rebound finally does happen they're underexposed to the kinds of things that do well and those rebound. Do you hear from you. I don't want to be in equities. No matter what they are. This is not the time to be in equities. I don't hear that. I mean to be honest you know as I've
talked to some of my more bearish kind of global multi cap multi asset investors I can usually talk them into looking into small caps right now. So I think kind of the desire to kind of put everything in cash it's just not something that's in the DNA of a lot of these people. But I do think even the most bearish investors out there are trying to figure out what has been depressed and if there's an opportunity to put money to work in here. And ultimately that is very healthy. There are a lot of bonds. Is it time to go back into bonds.
Well I think it's more of a 2023 environment to go into bonds right now. You know very short duration cash and trying to find the equities where the upside is worth taking the risks and the pain and the volatility you're likely to go through the next few months. I think this week frayed nerves though a lot of people were fairly calm up until this week and then even today didn't end very well. So we still want to be a bit cautious. We are acting on this dip. We are buying it but we're also keeping
dry powder with cash. And it's probably best to just keep in mind that this will be a market that I think has a rally during the holidays on the idea that the Fed is done hiking. They won't cut anytime soon but they'll be done hiking probably at the end of the year. That probably gives us a rally. But I think we find ourselves at these levels once again early next year in the spring.
Boy we've talked about the strength of the dollar which has been a real phenomenon. Right. How does an investor take that into account. What does it tell me in my portfolio. It's a tricky issue because typically
when the dollar is strengthening it's a bad environment for equities. You tend to see the market go down. But at the same time we do usually see U.S. equities outperform non U.S.
equities. So I think you can still look to the U.S. as a safe haven. And I think frankly it's just all about the positioning.
So you want to be more wary of areas like industrials materials consumer staples which have that big dollar exposure and look at areas like financials which have less of it frankly. David Arnold we're going to cash or cash equivalents. Yeah. And that's sensible.
Well it would be good if you've done it weeks and months ago begin to deploy some of it. But keeping some cushion that where you keep your confidence should things get worse and more turbulent. Cash is not trash. But if you hold onto it for too long it begins to rot. So we are deploying some of it but we
are still braced for what should we think will be turbulent times. What do you do with cash Laurie. Well I'm an equity strategist so I've always enjoyed all the time I did. I think there are as opportunities and things to do if you have a longer term time horizon. So you know when we look through the Russell 2000 for example we can find about 18 different industry groups out of 60 some odd. That looks like they're washed out in terms of earnings sentiment.
We can find about a dozen in the big cap space. So I think there are things to do. But I do think you have to have a strong stomach. And I am mindful of the fact that when
these bottoms happen they tend to be very quick. No one ever pegs the bottom. So I think kind of moving and slowly and buying things that makes sense longer term is what I'd be doing here as opposed to having cash. One last one.
David what about liquidity. You want to be liquid right now. Do you want whatever investment you make. Whatever it is make sure you can get out of it pretty quickly. Well there's nothing more liquid than cash and treasuries or of course the world's most liquid security. That's part of the reason why you see the dollar so strong right now. For a lot of reasons.
Things are more difficult elsewhere. The Fed's raising interest rates and it's the world's most liquid security. So yes I think what you what you're seeing is that people want to have that cushion and liquidity but they'll be looking for opportunities to deploy it in the coming months.
Thank you so very much. It's great to have you both as Laurie CAC and David Bianco. Coming up we're going to look ahead at what's happening next week and go Wall Street here on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin.
It's time now to look ahead to next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Central bank decisions will take center stage this week in Asia with the RBA and RBA NZ set to extend their tightening sprints to beat down inflation. In contrast Bloomberg Economics expects Sri Lanka's central bank will probably wager that it's done enough already. Elsewhere the Bank of Japan's Tom Keene survey is likely to show slightly stronger business conditions as the end of Shanghai's locked down and smooth supplies of chips probably helped manufacturers while Indonesia's headline inflation likely jumped in September propelled higher by the government's fuel price hike. This coming week in Europe it's another potentially volatile one for the UK with the fallout from quasi Cortines mini budgets still being felt for having a Conservative Party conference as well. At a time when their approval ratings
are at historic lows with the most recent polls will the government do a U-turn on their plans. Liz Truss has also reportedly met with the OBE. Are there any outcomes from that. And what impact will policy continue to have on a UK market that sells off forcing the baby to intervene. A slew of economic data on tap for US markets in the week ahead including construction spending factory orders mortgage applications and I assume manufacturing and services numbers. Now investors also will get a fresh look at two key labor market reports. The Job Openings and Labor Turnover Survey which was released on Tuesday the so-called JOLTS data. It's an important one as Fed Chair Jay
Powell has cited the report's insightful ness for gauging tightness in the labor market. There are now about two jobs available for every unemployed person in the country. The biggest ratio since that data began being tracked in the year 2000. The other big release will come on Friday with the September payrolls report which is projected to show another month of robust job creation and the unemployment rate well below 4 percent near the lowest levels in the postwar era. Now under most circumstances this would
be lauded but the labor market tightness has become a cause celeb with the Fed making clear its success in fighting inflation depends in part on softening labour market conditions. David thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up we'll get some advice on where investors should hide out in these turbulent times from New Vision CEO Jose Minaya. That's coming up next on Wall Street week on Bloomberg. That rainy day is here. Everywhere you look. Economies and markets are struggling. Jason Furman of the Kennedy School
saying Europe may be in the worst shape. I think Europe is one of the biggest risks for a recession even as the world was also focused this week and the United Kingdom and the British pound something the British opposition party hammered home. What we've seen in the past few days has no precedent. The government has lost control of the British economy and for what. They've crushed the pound. But what happens in the UK and Europe doesn't necessarily stay there as Atlanta Fed President Raphael Bostic pointed out. What we've seen in terms of market reaction is that the proposal has really increased uncertainty and really caused people to question about what the trajectory of the economy is going to be or might be moving forward.
All of this leads Alvaro Pereira the chief OCD economist to take down growth estimates overall worldwide. Our forecasts certainly is a challenging one because we are forecasting a significant slowdown of the economy to save the United States going to zero point five percent next year. The euro area growing zero point three percent globally.
We're talking about a significant slowdown. Right now it looks like more than just a rainy day. We may be headed into a real storm. And if so where are the ports for the smart investor to head into as we batten down the hatches.
And we welcome now someone whose job it is to figure out how bad the storm is and where we should head as investors when it happens. He is Hosie Minaya. He is the CEO of Newfield. Welcome back. Great to have you here. Thanks for having me David. First on the storm as I'm calling it. How bad is the storm do you think economically. The storm is choppy but it hasn't really changed much in our view.
Right. I've been going into now the latter half of the year. We still see volatility ahead. But you know the fundamentals are strong in that you're seeing consumer household balance sheets are really good. The labor market. So we're not really forecasting a prolonged downturn or recession. That being said I think our view is the same. It was back in 2019. All right.
We we've been telling our clients be prepared for lower returns in the previous decade. Be prepared for more volatility. And by the way inflation while you haven't seen it for a long time it may show up in here. It is in our shores. Right. Well for us it's about staying invested
staying disciplined maybe more defensive today but always diversification. Right. It's not just about stocks and bonds now. It's about alternatives. How do you get more outcomes and solutions. Because there's really nowhere to hide in a world where all correlations go to one. Well let's talk about it. That exactly as we have a Federal Reserve and other central banks raising rates it looks like they're going to continue doing it for well it necessarily takes asset values down whether it's stocks or its bonds.
And we're seeing that goodness knows in the markets overall right now. What do you do if you're an investor in that world. Are there some assets that are better than other assets. Well one I would say this is where active management I think comes back into the fold. Right. So there's going to be winners and losers.
Clearly in today's environment we see buying opportunities. You have to be careful in value traps as well. But you think about inflation rising rates.
Well you look at middle market bank loans senior loans. Well they had floating rate paper. You think about getting more exposure to commodities things that have a higher correlation to inflation as well real estate. These are all the different mixes. That's why when I talk about diversification it's like there's active management. But there's also you can be more explicit and intent full to ride the wave with you know benefit from rising rates to actually be highly correlated to inflation in an inflationary environment. In fact advantage if you're going to
have exceptions to any rule you have to be careful. But as a rule is it time to stay away from equities because that discount rate is going up and that automatically just reduces the value of the equities. I would never say it's time to stay away from equities obviously when you know we believe in staying invested. That being said today I'm on the
margins. We see more value in the fixed income side versus credit. We see more value actually in high yield. Right. You've got the high yield market almost topping 8 percent in yields. Know maybe again more active management. They're picking the better better credit
stronger credits. So yeah on average we see a tilt more towards fixed income. I tilt more towards private markets but I would never say completely stay away from equities.
So talk about high yield because I've heard others suggest that sort of almost a subsidy for equities in a way. And obviously we're getting some bigger returns now but we're getting big returns for a reason as we're worried about a recession. A downturn. You're worried that some of these companies not being able to pay back the money. And by the way we acknowledge it actually spreads can continue to widen from here. That being said when you look at a risk return perspective you look at some of the most attractive pricing we've seen you know in quite a long time. These are still the areas where again active management picking the right credits maybe still being more defensive picking the stronger credits.
But the yield versus the risk that we're taking in the pricing you're seeing in equities versus the high yield in the fixed income market today we see more opportunities there. But look this is you know we're in year three of this kind of quote unquote interesting and challenging year. Guess what. I think 2023 is going to be more of the same or that you're going to have volatility. Now is it time to again stick to your discipline you know stick to to a diversified portfolio. But then again actively you can find these pockets where you can do well in a diversified portfolio.
You think it's time to take another look at municipal bonds. Oh I do. I mean munis if you think about it. Right they've had a pretty rough year in terms of redemptions out there yet from a credit profile. They're stronger than they were last year. They're better from your perspective.
I think that's a market that's kind of looking at Fed policy and where rates are going to settle. But today munis are looking very attractive. And I think you're going to see a lot more flows going into the muni market even with Muni. So do you have to be have some discretion sort of active management which means you're buying. Absolutely.
We've shown that over the years where there is decisions to be in Puerto Rico not Puerto Rico not all municipalities are created like. And again that goes back to in an environment like this again active management is going to be a a bigger trend than it's been in the last decade. You mentioned alternatives particularly real estate. What are you looking at right now on real estate. Well the markets that are extremely strong and real estate for us today would be the industrial industrial market. Things like warehousing logistics multifamily housing is very strong retail. Amazingly it's come back significantly.
We've seen more openings and closings here in the U.S.. Office market is again still a little bit lagging there but again there's an example of we focus around diversifying our own real estate portfolio and you can you're able to pivot quicker into these different themes. Last time you were on Wall Street week we were talking about agricultural real estate. As that picture changed since we last
talked we imagine this rate it's just become so much more attractive. When we look at an asset class like farmland and there's others that we look at it that way we talked about an 8 percent return. You're clipping a 4 percent coupon. It's pretty boring or in this environment. And by the way a hedge you highly correlated to inflation. These are the asset classes where I
think historically people understood it academically. But hey you know what. The S&P is going up 15 20 percent. It's kind of a hard tradeoff today. I think these are the asset classes that make a lot of sense whether it's the real estate side asset classes I talk about whether it's timber whether it's renewable infrastructure.
Now that Alpha is real because you're smoothing out your returns and you're having a higher yield component and one that's highly correlated to inflation. Put all this discussion over against demographics. We're a national Hispanic Heritage Month.
I'm very mindful of that. How does this work differently perhaps for some Hispanics. Well it works very differently in a lot of it is about inclusion. What's amazing to me as you look at the Hispanic population is the largest minority population in the U.S. It is the fastest growing population in the U.S.. If you think about the GDP that it generates.
If it was a standalone country it would be the seventh largest GDP in the world. So one tremendous buying power by this population. Right. So I think there's a business opportunity here. But what's amazing within that demographic less than a third of the Hispanic population has access to retirement services or advice. And again in times like this I think
that approach that community even more. So again I think we have to kind of reach out from an inclusive city perspective. But I also I often tell my peers in my own firm is it's also a massive opportunity. Again a lot of buying power highly under
penetrated and advice and in retirement products. I think it's just a huge opportunity. So what lies behind that great disparity about access to retirement advice investment advice. Is it the nature of the jobs you will have. So they're working in positions that they don't naturally come to it. Is it because we don't have the financial institutions in their areas in their communities. There is these two things.
One is financial literacy right. And then just kind of really kind of engaging that community and driving higher financial literacy. The other one is just pure diversity and inclusion. And I I remember starting up my career looking at marketing materials that were all driven in Spanish because there was more clients and customers that just spoke Spanish. And I read it. I'm like well this translates really well but my mom would be pretty insulted by this. And you're like how does that happen at a large company with they probably paid a lot of money to an agency.
Well there's no one in there. Sure there were people in the room that can translate to Spanish but there was no one in the room that really kind of understood that journey understood that culture. And I think to me that's also what's missing as we get more inclusion in diversity. We're able to better access these markets. And that's why I've always said this is a bottom line issue at the end of the day. There's a lot of money front. Firms are leaving at the table by not
engaging that community better than it's helps to have somebody at the table who understands that community. Exactly. OK. Thank you so much. Has a really appreciate. This was a man. He is the CEO of New The. Coming up we'll wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg.
This is Wall Street. I'm David Westin and we're delighted to welcome back once again our very special contributor here on Wall Street. He is Larry Summers of Harvard. So Larry maybe not the most consequential thing but certainly the most noteworthy thing in the markets this week was the Bank of England saying they're going to buy an unlimited number of long term gilt bonds to try to stabilize the market. I know there is a specific problem there but does that indicate something broader about the markets. David we're in very complex and uncharted territory with what's happening in the U.K.
It wouldn't amaze me if we had situations like that in more places. Look the U.K. has fundamentals that are out of whack in which the market does not believe that they have a sustainable path of macro economic policy that over time no matter what interventions you do spells very difficult times for their long term bonds for their currency for their rate of inflation and ultimately for their economy. They pursued yesterday what's called the in this little field. A market maker of last resort option at a moment when there were huge margin calls. And so there was great selling pressure
but no buying pressure on long term bonds. They committed to step in and buy for the next two weeks. And that for a time stabilize things. But it's not going to stay stable forever on the basis of two weeks by. And it's probably not even going to stay stable for two weeks unless there is a sense that this is a bridge to the fundamentals being fixed. And that's not what we are seeing from the indications we're getting this morning.
That's why I encouraged the IMF to make clear that it was monitoring this situation. And the IMF made clear that it was concerned even adding some editorialized Asian on the rigorous city of the tax policy of the tax code which I'm not sure is their usual role. But there's got to be real concern. So so Larry it's clear the Bank of England stepped forward and saying we are willing to be as you say the market maker of last resort or some other central banks are going to have to potentially step up or at least be willing to step and be a market maker of last resort.
What about Bank of Japan. What about for that matter the Fed Reserve. I don't think there's any sign that I see yet of other markets being disorderly. But we know that when you have extreme volatility that's when these situations are more likely to arise when you have extreme volatility coupled with substantial leverage coupled with substantial uncertainty about what's going to happen in policy layered on top of the kind of uneasiness that you have with high rates of inflation underlying. And with the kind of geopolitical and
commodity uncertainty that's coming out of what's happening in Ukraine and China. This is certainly not a time when very many firefighters should be taking vacations. And so I've got nothing to print to predict. But I do certainly think we're living through a period of elevated risk and that earthquakes do not be gear.
Earthquakes don't come all of a sudden. There are tremors first and most of the time when are tremors then just tremors. And it goes away but not 100 percent of the time. When there are tremors does it just go away. And so in the same way that.
People became anxious in August of 2007. This is a moment when there should be increased anxiety. So Larry a couple more reasonably quick ones. Number one should the Federal Reserve be particularly nimble at this point. You said it's incredibly complex. Some people think they've built in so much momentum on the rate hikes that they should actually consider how they can adjust to the data. Look I think after a long time.
Hayden when he was still captaining Team Transitory I think Chairman Powell is now in the right place. I think chairman Chairman Powell is saying that he sees this and travesty of inflation as the concern. He's also say which is just the right thing to say that while it's their plan to move vigorously to the point where monetary conditions are restrictive and the 3 percent interest rate they have right now is not restrictive. Their plan is to move to a restrictive place and that's appropriate. He's also making clear that they're
going to maintain their peripheral vision on what's happening to the real economy and certainly to the emergence of financial strains. So I think that he is broadly appropriate. You know I certainly have written the sentence many times about long and variable lags and that is a real feature of the difficulty of doing monetary policy. Now David I think it's worth remembering that when you're in a regime of signaled policy I suspect the lags may be a bit smaller than they otherwise would be in the sense that the response to for example the hike that will come in December is probably already happening because it's been factored in to prices has fed through into medium term rates. It's a really it's important Larry. One last one.
You really tweeted a fair amount of the Jones Act this week. Finally there was a suspension of it effect of Puerto Rico. So they get some of that fuel on. Explain to us why you're so wrought up about the Jones Act. So look the Jones Act was Woodrow Wilson's by America by America industrial policy. They had the idea that we'd require that stuff being carried between the United.
Between the United States between Houston and Boston to Puerto Rico to Hawaii would have to be carried on U.S. ships because that would make us not dependent on foreigners and not make us and make us more secure. Whatever the logic of that idea when they had it in 1920 it makes no sense today. It means we can't get natural gas from
Texas in New England today because there are no U.S. registered natural gas tankers. It means that vitally needed fuel was sitting off Puerto Rico for days because it happened to be on a far and ship. It means there's an incentive to send stuff to Europe and to import stuff from Europe. Close the shipping costs are lower even though the distance is longer because we can use foreign flag carriers. So it makes our economy work less well it makes us be less environmental because the stuff goes on trains or on cars rather than over the water.
It reduces competitiveness because inputs of anything you have to ship costs more. And the reason this is important is it's important to the health and well-being of a couple of million people who've just been through a hurricane on Puerto Rico. And eventually eventually the Biden administration got that fixed with the exemption. But the deeper point is that this
demonstrates the danger of buy America industrial policy to preserve 4000 jobs. This is not the stuff of a great nation. It's the stuff of parochial politics. We should be trying to do less of it not build on its example. And that's why I'm apprehensive about where this will go unless it's very very carefully managed. Larry thank you so very much for being
back with us. That's Larry Summers of Harvard our very special contributor here on Wall Street Week. Coming up trying to repeat economic history or at least to make it rhyme.
This is Wall Street week on Bloomberg. Finally one more thought. Mark Twain famously said that history does not repeat itself but it does sometimes rhyme and we have certainly seen that recently and everything from the echoes of Roger Maris with his record setting. Sixty first home run that came actually 61 years ago and that is now echoed by one Aaron judge also of the New York Yankees. One of baseball's greats be enshrined with him forever as those words can describe it to Russia going to war confident of a big quick win as it did with Japan back at the very beginning of the 20th century only to lose ignominiously something that certainly hasn't done in Ukraine. Well at least not yet.
But boy as it gone less well than Vladimir Putin ever imagined it would to have Ukraine conducting a strong offensive that's working is incredibly important to putting real pressure on both Putin and the Russians. And this week we saw the leader of the political party descended from Benito Mussolini rising to lead Italy 79 years after El Do Che fell to Dow Jones accomplished a threefold of success political success. So her party clearly emerges from these elections says a clear winner of these elections. So now we're hoping for a very different sort of historical rhyme. As the current Fed chair Jay Powell is
hoping to replicate some version of what his predecessor Paul Volcker pulled off 43 years ago with a series of dramatic interest rate hikes that brought runaway inflation in the United States to heel something Mr. Powell is not subtle about saying he'd like to repeat one way or the other right here right now. The successful Volcker disinflation of the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. And as we hope that Jay Powell does get his way on inflation might we look for something similar on the strong dollar. For soon after Chairman Volcker got his arms around inflation United States the British pound back then started to collapse something Treasury Secretary James Baker wanted to fix to help his his friend Margaret Thatcher.
But on that one. Secretary Baker took the league by coordinating with other finance ministers while the chairman Chairman Volcker went along. If somewhat reluctantly. So if history rhymes on the strong U.S. dollar Britain may need to wait for inflation to come down before it gets any U.S.
help for its pound. That does it for this episode. Wall Street week. I'm David Westin. This is Bloomberg. See you next week.
2022-10-05 19:28
