Wall Street Week - Full Show (10/28/2022)
New governments face old problems. And this time it doesn't look like tech will give us the solutions. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry
Summers on the new GDP numbers and what they lack. It confirmed what I think we knew that despite two negative quarters, the economy was not in any real sense in recession. And Sam Zell on why he has more opportunities than ever for good investments. Think about the impact of the doubling in interest rates in eight weeks. This week, global Wall Street saw three new or sort of new governments installed with Rishi Snack officially taking over as the new prime minister of Great Britain and promising to make nice with the markets.
I will place economic stability and confidence at the heart of this government's agenda. This will mean difficult decisions to come. Not to be outdone, Italy also got a new prime minister and Giorgio Maloney wasted no time in taking issue with the ECB raising rates. It's considered by many to be a rash choice that could have repercussions on bank lending to households and businesses. And although China rebuffed President Xi for a third term, he made his own changes to his senior team surrounding himself with people who see eye to eye with him, which Cornell's wish for, Prasad says, is a fundamental shift of a different sort. The message is quite clear that take no for an answer on the way out.
The loyalists are on their way in. But as much as governments may change, the problems they face remain the same. As the United States reported stronger GDP growth than expected, despite higher interest rates. And the ECB hiked another 75 basis points with personal regard, saying she continues to focus on inflation even though the European economy is slowing. The risks to the inflation outlook are primarily on the upside. The major risk in the short term is a further rise in retail energy prices over the medium term. Inflation may turn out to be higher than
expected. And if global Wall Street was hoping that tech might help us climb out of these doldrums, it was in for a letdown this week as the earnings of several big tech companies disappointed, particularly in their guidance about what may come next. The big tech names, as they have reported this week, look at Microsoft, look at Alphabet today. They really have underperformed in a big way. But in the end, equity markets shook it
all off with the S&P 500 up for the second week in a row. This time by almost 4 percent. And even the Nasdaq rose above those disappointing earnings. Overcoming a bad week for the things and
for the Golden Dragon China Index and turning what was a loss as a Thursday into a nice two point two percent gain by the end of the week. While the yield on the 10 year settled in just over 4 percent by the end of Friday, down from about 4.5 percent at the beginning of the week. Here to sort out a fascinating back and forth in markets are Peter Cross, chair and CEO of Aperture Investors and Mortimer Hodgson.
He is senior investment strategist at Edward Jones, among only pick on you first. What did the markets do this week and why did they do it? Yeah. Thanks, David. Look, this week was a bit of a tug of war. On one side of that tug of war, we saw the big cap tech earnings. They were, in a word, disappointing.
In fact. And you noted this upfront, it wasn't necessarily the 3Q results. It was the guidance across the board between advertising revenue, between cloud computing demand. We're seeing a softening there and that really dragged down the NASDAQ.
But on the other side of this tug of war, we saw the Dow up nearly 6 percent this week. Now, what was driving that? Well, we are certainly starting to hear a little bit more optimism about a Federal Reserve that may be looking to raise rates at a more moderate pace. Now, of course, next week's meeting, the 75 basis point, the point seven five percent rate hike almost baked into the cake.
It's probably going to happen, but really all eyes will then focus on that December rate hike meeting. Will they go 50 basis points or will they go 75? And in fact, we heard a little bit more from some Fed governors that perhaps a more moderate rate of rate hikes probably makes sense here, just given giving them an opportunity to pause, assess the economy, see what's happening. So interesting moves in the market this week.
We do think more broadly some of those inflationary trends that we have been seeing from the forward looking indicators are starting to show some signs of rolling over. That gives the Fed a little bit more comfort in perhaps going at a more moderate pace. We certainly saw that from the Bank of Canada this week. This as well, who went 50 basis points rather than the expected seventy five. Peter, what do we see? We heard from ONA. We're hearing some optimism about the Fed.
Where are we hearing that from? I don't remember the Fed giving us. I think the Fed isn't giving us any optimism. I think that is an interesting case of are you actually listening to the people who have the power to move the interest rates if you're actually listening to the Fed? I think it's pretty clear the Fed's moving to squash inflation and they're not going to stop until inflation goes down. Inflation's sticky and it's not going to move so quickly. And so the likelihood is, is that we see high rates or higher rates and that those rates probably top out sometime in twenty three and they don't go down until well into 20 feet or perhaps twenty four. And I don't think the market is completely digested that and they're looking for a scintilla of hope that are floating around in the market that I would call a sentiment, but not fact.
Mona, what do you make of it all at the Fed? I think wants some consistent data over time. This shows that the inflation really coming down. You said there a little bit indications around the edges. Yeah. Yeah. You know, look, Peter has a point there. They want clear and consistent evidence of inflation moderating. And in fact, they don't want to indicate
anything too prematurely. They started to see that in June and we saw markets start to rally. You know, financial conditions start to ease rather than tighten, which is what they really want to see in markets in order to push inflationary pressures down. But if you look at leading indicators, things like break even inflation rates, you know, I assume prices paid both services and manufacturing.
If you look at even broader commodity indices, we're starting to see some signs of cracks, notably the housing market. And that's the most probably interest rate sensitive part of the economy over the last couple of weeks. We've seen some real weakening there in terms of homebuilder sentiment. Housing starts, even price appreciation. That's really kind of move the lower and a more meaningful way. And so, you know, with mortgage rates over 7 percent at this point, we are starting to see some cracks there. Now, keep in mind, the shelter and rent
components of CPI are sticky and they may live. What we're seeing in the actual housing and even in the actual rental markets. But at some point, the Fed will have to acknowledge that we are starting to see some of some of these cracks appreciate. And in fact, we will probably need to
still get that clear and consistent, evident evidence of inflation rolling over. But markets won't wait for the Fed to announce that they're going to start thinking ahead of time, looking past just like they look past this week, some of these weaker earnings, potentially a weaker even rate of economic growth going forward. But markets tend to move about six months ahead of all of that as well. So probably an interesting time to start thinking about positioning, especially for the year ahead. I think I just to follow up on Mona's
point on the tug of war, you know, part of that tug of war was driven by nominal growth rates because inflation is very high, prices being reset, companies are increasing their prices and the revenues are going up, their revenues are actually going up faster than their unit growth. In fact, some of the unit costs are actually going down, but revenues are still going up. So that's producing growing earnings. And that was somewhat unexpected. And that strength was somewhat unexpected. You saw it mostly in the Dow companies and the financial entities and Dow companies benefited from a much higher rate environment and much higher net interest income. But that is going to slow because when the nominal growth rate slows and when the Fed finally gets to a slower economy, those numbers are going to shift. And then those companies that are now
benefiting from that, they're going to see some headwinds. So, Mona, does the Fed need that now growth to slow or even go down in order to get their arms or inflation? Can we get to where the Fed wants to go without that nominal growth suffering correction? Yeah. That's a pretty narrow path to get to what we call the soft landing and see inflation come down in a meaningful way. Now, you know, what the markets have probably already priced in is some sort of mild recession in the first half of 2023. And keep in mind, historically, if we do get that scenario, markets are down on average 25 to 35 percent. Every cycle is unique, but we have gotten down to 25 percent in the S&P over that in the NASDAQ already.
And so at this point, you know, if we continue to see softness, as we mentioned in the economics and even in the earnings figures, markets may start to look past that. Now, what's interesting here is, of course, to Peter's point, what's held up very well this year thus far, of course, has been value parts of the market, defensive parts of the market. You know, think about your health care, your staples, your utilities, all. Also kind of inflationary hedges. Their question is, as we get towards a
peak potentially in a Fed funds rate, as we look towards the 10 year Treasury yields stabilizing and potentially moving lower. Do we want to start complimenting some of that value defensive with maybe starting to pick up quality parts of growth? Similarly, in the bond market, we've seen huge kind of influx into the shorter end of the curve that that too year avoiding any sort of duration plays as the Fed is raising rates, and rightfully so. But now, as we're thinking about the end of that thing, about inflection points more than anything else, probably an interesting time to start thinking about complimenting your bond portfolio as well.
You can finally lock in 10 years close to 4 percent. That's a pretty phenomenal non zero rate that we've seen over last 10 years that investors can start thinking about more seriously. People are looking at losses in the U.S. Treasury market. If you own 10 year treasuries, they're down 18 percent, total return to the lowest point. People are probably afraid of duration right now, and that means it's probably a good time to buy. If you look at the the equity markets, let's look at the small cap market for a second. Russell, 2000 probably bottomed in June
and is probably looking towards, you know, some kind of stability and growth into the first quarter of 2023. That's the tug of war. We're talking about the cyclicals. The larger cap companies benefit in this nominal growth rate, though, they're still creating some value for, you know, for investors. But the real opportunity going forward is not going to be in those stocks. It's going to be in the small cap space, in the growth space. You know, as they say, at the end of the day, you want to buy a company whose earnings grow at 15 percent, not earnings growth 5 percent. And that's still going to hold true
going forward. So we want to figure out exactly that when we come back. Will Hodgman and Peter Cross will stay with us as we turn to some investment advice that carry us toward the end of the year. That's coming up next on Wall Street. I'm Bloomberg.
Time alone will tell whether Black Monday enters the history, Brooke, as the day American confidence was so shaken that a premature recession resulted, or merely as the day the computers went wild and through the wonders of so-called program trading turned a normal correction into an early Halloween. That, of course, was the one and only Lewis truck has our on Wall Street week, though, Friday before another Halloween like we're having one this coming Monday. But that one was back in 1987 just after so-called Black Monday when the Dow Jones lost. Twenty three percent in a single day. And people back then, we're trying to figure out what went wrong. The number one movie in America that
week was Fatal Attraction and the number one song, It Was Bad by Michael Jackson. We still have with us now Peter Krauss of Aperture Investors and Monica Hodgson of Edward Jones. So, Peter, I come to you. I mean, it's not a Black Monday. We haven't seen that by any means.
Thank goodness. I remember that day, by the way. I do, too. I was practicing law back in Washington. But but give us some investment advice. You started in that direction with small caps and duration. If you're putting money to work right
now, where does it make sense to do that, given all the uncertainty? Well, look, I think Mona said it as well. There's three places that are in distress. One is long duration fixed income. So whether it's treasuries or high yield or long duration bonds that have been absolutely crushed this year.
Those securities are likely going to provide attractive yields going forward. They're not going to reduce their volatility. They're still going to have a fair bit of price volatility to them. But, you know, this is a time when you can start to think about getting a little longer and moving out of the very short duration, which, by the way, is also paying very well. And you can buy short duration corporate investment grade bonds at 5 percent or even five and a half percent.
So that looks pretty attractive as well. But I think leaking out a little bit into duration makes sense in the equity side. You know, I think you can't abandon the growth world. I mean, the tech world today or the tech news in the last few days is obviously very negative. But there are companies that are not
necessarily tech put our growth companies through either consumer oriented where their industrial companies that have fast growth and not paying attention to those is going to miss a trick that whether they're small cap or mid-cap or even large cap. But most likely you're going to find them in the small cap space. So look at aperture. Our view is small caps, a very interesting space. The data's cheap and it's a place where we're probably going to see the first move when this market recovers. Well, that's what you said earlier. The small caps come back first. Mona, do you agree with that?
And if they come back first, what comes back second? What comes next Thursday? Because that indicates where you want to be and where you don't want to be right now. Yes, absolutely. And you know, Peter is absolutely right. When you look at atomically coming out of any sort of downturn or recessionary period, the thing that tends to lead us out are small cap names. And interestingly, this time around, small caps do tend to also be more domestically oriented. And perhaps when you look across the
globe, you're seeing a European economy more exposed to the geopolitical issues that oil and energy crisis. You're seeing an Asian economy more exposed to a Chinese economy that may be slowing. So, in fact, the small cap universe is starting to look more and more interesting as well. We probably will have some months of
volatility ahead as we stabilize get through a potential downturn. But I think that is a place to start thinking about. Similarly, you know, across equities and fixed income, we talked about complimenting equities. So, you know, think about the stuff that
has been more, quote unquote, beaten up this year. There is value is starting to emerge in a lot of that. And again, when you look historically, the 12 months after the Fed, the final Fed rate hike, equities broadly are up on average. And this is back till since Fed rate hiking cycle since 1940. On average, up about 16 percent after that peak Fed funds rate. So if you think it's coming sometime in February, March, maybe earlier, then there's certainly an interesting opportunity starting to form.
And of course, within equities, the other parts of the market, aside from small caps that tend to perform well coming out of a downturn, are the more cyclical and growth parts of the market. And when growth is slowing. You know, investors tend to gravitate towards finding growth in their portfolios. So everything that we've talked about and Peter and I have probably reiterated a couple of times now. But think about duration. Think about quality. Growth opportunities are certainly forming.
Look, I also think that don't misunderstand a rising economy or rising market that you might have in the next few months for a market that is absent volatility, there's still plenty of shoes to drop and credit and leverage lending is one of them. And we don't know how the market's going to react to defaults. We haven't seen a significant default cycle really since, frankly, 2003, 2004, 0 8 was a liquidity crisis.
And, you know, 2020 was very short. So you could have some defaults here in corporate and in others types of securities, real estate. And I think that that's going to have some effect on the volatility.
But investors have to wall have to live through that volatility. They can't get knocked out of the market, because if you do that, you're going to miss the opportunity more to talk about the overall structure of. Paradigm, as it were, of investing, we are going it looks like a world low inflation, low rates into higher inflation and perhaps significantly higher rates at the same time. There was a good long period of time when it was basically there was no alternative. So people went into a lot of ultimates, a lot of riskier things. What happens in this new world? Because it's not like the old world necessarily. Yeah, you know, that's that's spot on.
And in fact, we all know the TINA acronym. There is no alternative. It served us well, probably from the great financial crisis through the pandemic, we saw a lot of investors pushed out the risk curve in order to get that return that they were seeking. And of course, as raise rates rose pretty rapidly through 2022.
Well, we did see is a lot of more speculative parts of the market have started to see the air let out of those tires as well. Know think about this back market earlier this year, the meme, stock market, even crypto to some extent. We've seen large compression in valuations, large downturn in values overall in a lot of those more speculative bubbles. And in fact, that probably sets us up for a more interesting time in the next 10 years. You know, the one nice thing that's happened over this kind of downturn in markets this year is that valuation compression has come in beyond what we've typically seen historically. So the S&P P E multiple, for example, has come down over 25 percent this year already.
So the valuation correction, in our view has likely already happened and that sets us up nicely. But to your point, in an environment where we'll probably not return to zero rates, but with growth at 2 percent inflation hopefully returning somewhere in that 2 to 3 percent yields may also be somewhere in that 2 to 3 percent range. And so in that scenario, you think about discounting your cash flows at a higher rate. And so really that does put more pressure to prove your business models, especially those business models that expect cash flows in the out years. But the more steady parts of the market that have proven business models, that have proven cash flows, those valuations are starting to look attractive here. And I think that's really what investors will have to think about in this new environment.
I'm a little bit more of a hawk. I think that inflation is going to be in the 2 to 3 percent range. I think you have to have a real rate of interest.
We have not had a real rate of interest since really 2008. So if you add another hundred basis points or so, you're talking about 3 4 percent, 4 percent, 5 percent Treasury. And I think that's normal. That's the real world. And in that world, why would people necessarily look for just private investments? Because in the public markets, then you can get paid 5 percent or 6 percent. So if you think about large pools of capital pension plans, insurance companies, large savings organizations that have large, large amounts of fixed income, they've been suffering for 10 years with almost no return.
So they're getting pushed to get the next 100 basis points, 150 basis points with private securities. Now that market's changing dramatically and the incremental dollar might not actually flow to where it had been historically. And just very briefly, as you know here, you may not know about that valuation compression that money talks about in the private markets for a while. You definitely won't.
That's always been a smoothing operation. But I think it's very important for investors and they look at their balance sheet at the end of this year and they think about rebalancing that they consider with the wheel values are in their private assets because the real values are probably lower than what's being reported. They could use a little mark to market maybe in their private asset. Thank you so much. It's really great to have you both with us. Peter Crest of Aperture Investors and Mona Mahajan of Edward Jones. Coming up, we're going to look ahead to
next week on global Wall Street right here on Bloomberg. Well, this week in Asia, it is the battle of the financial hubs, so Hong Kong is set to host the banking heavyweights of the world for an investment summit. We're gonna be seeing the heads of Goldman Sachs, Morgan Stanley, Citigroup, all of them are expected to attend with the focus among officials on proving that the city is still open for business. Now, recently slipped in the financial center rankings versus Singapore, which is also hosting a major fintech event. That one starts on Wednesday. Earnings wise, the spotlight shifts to Japan in the days ahead. We've got Toyota, Sony.
They're among the highlights for us with investors. They're going to be looking to gauge the impact of a weak yen and on high alert for any adjustments to forecasts. It's a big week for the Bank of England. It's set to become one of the first major central banks to actively sell bonds held on its balance sheet after Kuti gets underway. The Beazley also has a rate decision to attend to with investors pricing in a 75 basis point hike at this Thursday's meeting in the Middle East out of CAC. One of the world's biggest oil and gas conferences kicks off. Bloomberg TV will be speaking to many of the top players in the industry.
And from fossil fuels to climate change. Last but not least, the COP 27 conference gets underway in Sharm el-Sheikh, Egypt, on Sunday. The focal point of the week will be the Fed's policy decision on Wednesday. Market pricing showing investors overwhelmingly expect the FOMC to boost interest rates by 75 basis points for a fourth straight meeting, though we should say that pricing beyond November suggests Jay Powell could signal a downshift 50 basis points for the following meeting in December. Economic data next week centers around Friday's release of the October payrolls report, which is expected to show U.S. employers having added the smallest
number of jobs since the pandemic disruptions in 2020. Elsewhere, earnings season continues, with more than 100 S&P companies reporting, including Pfizer, Uber, Roku, FC, Kellogg and Madonna. And finally, Netflix is lower priced advertising tier is set to officially launch in the US. It will cost just seven dollars a month. And remember, no more password sharing. David.
Coming up, famed investor Sam Zell. He's a veteran of Wall Street Week, and he's back now to give us his advice on investing in these difficult markets and why he is seeing more opportunities than ever. That's next on Wall Street week on Bloomberg. What a difference a few rate hikes make. Not that long ago, when interest rates were at record lows, the easy days where they got money on you and you don't have much inflation and you don't have much time in this. Those are past. You almost couldn't avoid making a deal
and setting new records for MDA. We are continuing to see just tremendous momentum in the U.S., but things have changed. Money isn't free anymore. We have got to get inflation behind us.
I wish there were a painless way to do that. There isn't. And credit is cutting into that record deal flow. I'm looking now at credit spreads in the mid for hundreds and they just look too expensive to me.
So what does that mean for the dealmaker? And are there many deals that still make sense in this new world? There's still more room for four. We think these spreads to tighten probably at this point. You know, best opportunities are in the non investment grade market. And now we turn to a deal maker, par excellence. He is Sam Zell. He is the chairman and founder of Equity Group Investment.
Sam. Welcome to Wall Street. I know you've been on this program in the past. Okay. So let's talk about what investor does
in this new environment of increased inflation and increased interest rates. First of all, tell me what's going on with your company. Are you seeing less deal flow now? Just the opposite.
We're seeing more deal flow. We're seeing more situations where companies are having difficulty figuring out what to do. We're seeing situations where. Nine months ago, financing a transaction. X, Y, Z size was nothing. It was no mas, you said. Money was free. What's changed dramatically? I mean, think about the impact of the doubling of interest rates in eight weeks.
Double, you know, just eight weeks earlier, interest rates were two and a half to three and now they're five and a half to six. That's an enormous change. And it's going to slow down everybody's activity. It's going to for sure, impact getting deals done. But in our particular case, because frankly, I've oftentimes told the world that, you know, when I'm liquid, the stock market can't go down. It only goes down when I'm illiquid. And here I am sitting there with a level of liquidity I've never experienced in my life because my focus for the last three and a half years has been and nothing more important than liquidity. So you've got a significant deal flow if
anything is bigger than it was before. What about the quality of the deals? Are they different from what they were, for example, preacher pandemic? I think they are because they think they're a little more realistic. I think the prepayment gimmick, when money was free, there were transaction. I mean, the whole spec market was a you know, we did a spec and chose not to take it to the next level because when we did the spec, spec seemed like a very interesting way to, in effect, monetize opportunity. It very quickly became a highly
speculative scenario, dependent then preposterous valuations that ultimately led to the crash of the whole spec market. You know, world has changed a lot since then and that and the change is basically modifying what you can do. On the other hand, there's always demand for capital and there's always that demand is always on the shoulders of those that have preserved the cord.
So so what's a specific investment after its energy? You know, energy terribly well, as you see opportunities, energy. And there's been a lot of tumult in the marketplace because of Russia and Ukraine and all sorts of reasons. Yeah. I mean, we continue to do something in the energy space. Not as much as I would have thought. When we win this period began.
The volatility in the energy space has been so extreme. I mean, just think about it. Within a 12 month period, the price of oil, you know, Vittorio vacillated between 30 and 120.
That's an incredible level of volatility, makes making investments extraordinarily difficult and challenging. Do you see a prospect of a little less volatility because you have on the one plus opaque plus trying to limit things. Now you get the US government, which if it is not trying to regulate the price of oil, looks kind of like it is because it says it's going to sell. It is going to buy. So it looks like it's got a bid. Ask price. Yeah, but we also have a legend, we also have an administration, it's very anti oil and that and in my judgment that anti-Israel Earl provision is only going to hurt the United States. I mean, we were producing 11 million
barrels a day of oil. I don't know what we're doing now, but I think it's down to three million barrels a day as we've cut back on capital for the for for fracking, et cetera. Not a healthy set of circumstances. Now, the oil companies almost invariably
say it's because the administration, because of regulation and their move toward renewables, things like that. So they don't want to make the investments. The administration says, no, no, no. You could simply make the investments. The problem is that your investors want it returned to them. That is really a market phenomenon. It's not the government. I'm sorry, I don't mean I. I've heard that speech made by the government, I don't believe that in this in the least. I think, you know what?
What we have is we have a eco friendly government that doesn't understand that even if there is a future of non fossil fuel future, the idea that it's going to happen in 15 years. I mean, talk about some cost. I mean, just it just doesn't make any sense. And so we're in effect creating a shortage. By virtue of depleting oil depleting capital into the fossil fuel area that creates inflation, that it just doesn't make any sense. Sam, as I recall, you bought some distressed assets in oil back into the nineteen there, correct? Did that turn out to be a good deal given how badly we need to know? Probably 50 50 Anna Edwards.
Again, it didn't do as well as we expected because the volatility in that commodity was just beyond belief. And we know that we'd ever seen that happen before. Your son nuclear. I mean, a lot of people say we can't get to where we want to go without some nuclear.
Yeah, I personally agree with that. It's like cryptocurrency. It's it's one of those areas where I don't understand it enough well enough to be able to invest in it. But given the difficulty with fiat currencies you identified, I understand you have bought some gold model.
Yes. First time in my life over the last few years, I've bought gold securities and actually bought hard gold. And are you a buyer going forward? I'm not sure. I bought it kind of as a hair, as my own definition of a hedge. I haven't done well with it. I haven't lost it.
But. But in a world where I think fiat currencies are being massacred or hurt, I think in that kind of a world, more focus on some hard currency is relevant. You're very much I defend a lot of those bonds with real estate. As I recall, you started that maybe when you were in law school at University of Michigan. I had an undergraduate undergraduate
here in Michigan. So I talked about real estate where we are right now. We've got some record high rent prices. We've got mortgage rates going up. Tell us your view on the real estate market right now. For all practical purposes, I haven't bought anything in 10 years. And where are the opportunities created?
I've sold a lot. I felt that the real estate market generally has been overpriced. Particularly in the private sector, as opposed to think the public markets have actually done a very good job of sensitizing people to what's going on in real estate on the private side. I mean, we took over a public reach seven years ago with that with 13 billion dollars of assets. We bought nothing with that portfolio and sold one hundred and forty two out of a hundred and forty five properties. What's really incredible is we sold one hundred forty two properties.
And I don't have one sense of regret. Not one of those deals do I see. Keith, I wish we hadn't done that or waiting. If anything which shows sold it faster earlier, quicker because it was you know, it was because of free money. It created a price structure that frankly was very decent that disadvantageous to the buyer. So it's great to have you back on Wall Street.
Thank you so much. That sends out. He is the chairman and founder of Equity Group Investments. Coming up, we wrap up the week with our special contributor, Larry Summers of Harvard. That's next on Wall Street week on Bloomberg.
Small three week ISE David Westin and we are joined once again by our very special contributor to Wall Street. He is Larry Summers of Harvard. So, Larry, welcome back. Great to have you. Let's start with those U.S. GDP numbers came in, showed we're back into growth, modest growth. What did you see in those numbers that would indicate where we are headed? I think it's hard to know. It confirmed what I think we knew that despite two negative quarters, the economy was not in any real sense in recession at this point.
But if you look through the numbers to private domestic demand, which is probably the best indicator of economic strength, it really wasn't very strong. Well below 1 percent for the third quarter. And so I think what we've now had for nine months is essentially no GDP growth and inflation on core measures, probably stronger than it was at the beginning of the nine months suggesting that we've got real challenges ahead. There continue to be arguments that inflation rates are going to come down, but we haven't yet seen them come down. So I don't think the fundamental picture that a soft landing remains an enormous and unlikely challenge is very different than it was before we got these numbers. Well, we're getting some political
blowback now. As you know, Sherrod Brown, the senator from Ohio, wrote a letter to Jay Powell, followed by Mr. Hickenlooper, senator from Colorado, saying, you know, we shouldn't give up these gains we've had in employment and progress we made in the name of fighting inflation. We're going to see more and more of that political pressure, do you think? So I think there are two points.
The first is that the political pressure is a counterproductive strategy from the point of view of those who launch it. Frankly, the Fed doesn't listen and if anything, feels more pressure to prove its independence so they don't influence short term rates and what the Fed actually does. But they do raise questions in the mind of market participants and they raise long term rates. So political pressure is a fool's game
and actually probably makes financial conditions tighter than they otherwise would be. And that's entirely apart from the merits of the argument being made. I yield to no one in how much I loathe unemployment and want unemployment to be as low as it possibly can be over time.
The concern is that as in the 1970s, if we don't contain inflation, we set the stage for much more financial instability and unemployment. And that is the argument that has to be made by those who were on the dovish side. They say that the Fed is going to be counterproductive and overdo it. A corollary of that view is that they should think either that the Fed should abandon its 2 percent target or that they're going to push inflation below 2. And I think it would be helpful if every critic of the Fed were asked exactly that question. Are they really saying that 2 percent inflation should not be the goal, in which case they should describe what their attitude is towards inflation and how they expect it to work out over time? Or are they expressing the view that the Fed is acting so strongly that it's going to produce so large a recession, that inflation is going to fall below to learn to take a bit of a longer view, as you did this week in some of your tweets, actually. And we had a study out showing how much
we lost in our children's education because of a pandemic, something like six months. And you translated that actually into what that really means for the economy. Tell us about that problem. Look, we talk on this show about financial capital, and it's very important, but human capital is even more important. And what a generation of economic research has now shown is the human capital is the most important determinant of our economy's long term growth. And most important determinant of the fairness and equity with which incomes are distributed in our society. And so when we see six months or a year's loss in children's achievement, that's a five to 10 percent decline in the value of human capital for tens of millions of children. And if you add up what that value is in
terms of the lost earnings down the road, it's comfortably into the trillions of dollars and not just a few trillion. So we've got. Really very, very discouraging news. And it points up the importance of our doing much more and much better on what we're doing in the whole education system.
We can't fix what happened. We can't fix the non learning that took place when kids were at home. During Covid, we can do everything we can to double down on learning going forward. And that's about how our schools are organized. That's about who's staffing and teaching in our schools.
That's about making sure they're adequately resourced. And in my view, that's absolutely critically about accountability for everyone. Accountability for those teaching and administering in the system and also accountability for the kids. Whether it's the fact that close to 50 percent of all the grades in the Ivy League are a straight-A, not a minus, or whether it's social promotion in too many of our schools or whether it's the move away from testing because we don't like the messages that test send relative to our social aspiration. We have got to get more serious about actual knowledge acquisition in our education system at every level. Larry started the week with President Xi
coming out and unveiling his senior management team, if I can put it that way. Surprise something because there were no perceived as moderates at all. They were really people who are very much allied with him. He also had a fairly aggressive speech
on his economic policy in China. What did you make of where China is headed? Certainly the markets didn't like it very much. I think anybody who thought that the posture of Chinese policy was politicized before the party Congress, but would be reformist after the party, Congress got absolutely nothing to make their views confirmed. It didn't get it.
With respect to Covid, they didn't get it. With respect to personnel in get it. With respect to rhetoric. On the policy substance. So given what happened, I wasn't surprised to see markets respond with disappointment. Now, ultimately, what happens is going to depend not on what was sad and just which personnel appointments took place at this party Congress.
Ultimately, it's going to depend on how things in the Chinese economy play out. And it's going to depend on the judgments that President Xi makes. I'm not optimistic for China's economy, for reasons we've discussed in either the short run or the long run. But we will have to we will have to say and I think what we can hope for at this point is not any kind of friendship or partnership, but a kind of cold detente in which the U.S. and China recognize that they have to manage their coexistence in their mutual interest. Whatever the depths of their hostile feelings or sense of antipathy.
And finally, let's end up on golf. Something that you are very devoted to. I dabble in a little bit. Augusta National here at Piers that the Department Justice now investigating along with the PGA.
I don't know that we know what the merits of the case. But what was your reaction? I've got no idea what the merits of any of it are. But I have to wonder, at a time when the Justice Department, the president, are claiming that we've got massive problems of monopoly and concentration in our economy, and when inevitably legal resources are finite, whether protecting millionaire multimillionaire PGA players from some kind of exploitation is a sensible allocation of resources and a sensible judicial priority, even on the worst view of what is happening. I see a lot of other abuses in our country that seem a lot more serious. And so I wonder about this choice and I wonder whether there isn't some headline seeking element in it. But again, I'm not aware of any details on the merits. OK.
Larry, thank you so very much. Always great to have you with us. That's our very special contributor for Wall Street. Larry Summers of Harvard. Coming up, they say the markets are always right. But do we always have to listen to them?
That's next on Wall Street week on Bloomberg. Finally, one more site. Getting it right and getting it wrong. Nothing feels better than having plans work out even better than we'd hoped.
Pfizer betting big on MRSA and coming up with a Covid vaccine. There's no option failing and there's no way that you can do it because failure is not an option. And if not, ask then who or the Patriots going for the one hundred and ninety ninth draft pick. And coming up with Tom Brady. But what happens when it goes wrong,
when you take a big public position and get your head handed to you, like President Putin deciding to advance Ukraine, expecting a quick and glorious win. President Putin is failing in Ukraine. This war is not going as planned or for that matter, Kenya West, now known as Yay! Deciding not to be shy about his anti-Semitic sentiments and losing his mega deal with Adidas in the process. In recent weeks, he has made controversial statements, including anti-Semitic posts on social media that said his easy line of sneakers into a lightning rod for criticism. Which brings us to economic policy and
getting crosswise of the markets. Liz Truss made her first big move as British prime minister be a new budget which the markets promptly and emphatically rejected. Leave it to her quick departure. I am resigning as leader of the Conservative Party. So her successor really soon ex started his tenure this week by saying he'd make it up to the markets. I will place economic stability and
confidence at the heart of this government's agenda. But consider the very different case that President Xi of China, who this week got his way on having a third term, surrounded himself with only his closest allies and forged ahead on his aggressive economic policy, which led the markets to give another big thumbs down. As Mary Lovely of the Peterson Institute explained it, one of the big things that came out of this is that we're going to stay the course with the Shia nomics, and that means continued centralization of power. We're staying the course and the course doesn't look that great.
From the market's point of view, no one thinks President Xi is about to pull a Liz Truss. So in the course of a week, the markets won one and lost one. And the time may be broken just over a week from now when Americans go to the polls in the mid-term elections with their opinion of President Biden's economic policies very much on the ballot. Jared Bernstein from the White House wants voters to focus on all the jobs that have been created.
Our top line objective here is to maintain the economic gains we've made for working Americans while significantly easing price pressures time as they say, we'll tell. But from what we've seen so far. What James Carville said 30 years ago remains true in the United Kingdom and United States. And I guess we'll see about China. It's the economy, stupid, that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg.
See you next week.