Wall Street Week - Full Show (11/18/2022)

Wall Street Week - Full Show (11/18/2022)

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A week of hope about inflation and interest rates, about China's relations with United States, about Britain getting serious about its budget. And of course, former President Trump's hope that he can do it all again. This is Bloomberg Wall Street week. I'm David Westin this week, special

contributor Larry Summers on what came out of the G 20 meetings in Bali. And former Fed vice chair Rich clarity on the liquidity problem in the Treasury's market. And what can be done about it? It was a week of hoping, hoping that things just might start to move in a better direction. In U.S.

China relations, after President Biden's meeting in Bali with President Jean, I'm absolutely believers need not be a new Cold War. I do not think there is any imminent attempt on the part of China to invade Taiwan. And I made it clear that our policy in Taiwan has not changed at all. Hoping that inflation may just be easing a bit in the United States with Fed vice chair Lael Brainard telling Bloomberg, we might see a bit of moderation in rate hikes. I think it will probably be appropriate to move to a slower pace of increases.

But I think what's really important to emphasize, we've done a lot. But we have additional work to do both on raising rates and sustaining restraint to bring inflation down, hoping that the new British government has gotten the message as it put forth a new budget designed to reassure the markets. So today we deliver a plan to tackle the cost of living crisis and rebuild our economy. Our priorities are stability, growth and public services. And then, of course, there's that special kind of hope that former President Trump brings to everything he does.

Deciding that despite what happened in the midterms to his handpicked candidates, this was the right time to announce he's running again for president in order to make America great and glorious again. I am tonight announcing my candidacy for president of. Even as prominent investor and Republican supporter Ken Griffin of Citadel couldn't find much to hope for in Mr. Trump's candidacy, he lost in 2020. We lost Georgia because of his behavior in a Senate race in 2020. That's a second loss. And then this year, the Republicans lost the Senate because the Trump backed candidate and Senate races were rejected by American voters.

That's a three time loser. I'd like to think that the Republican Party is ready to move on from somebody who's been for this party. A three time loser. But whatever we were all hoping for this week, we didn't really get that much out of the markets which traded without real conviction, with the S&P 500 off just seven tenths of a percent for the week and the Nasdaq down one point five, seven percent.

And the yield on the 10 year up about 7 basis points, ending the week at three point a to to help us sort it all out. We welcome now a Sunny Beschloss, CEO of Rock Creek and Bob Michael, he's chief investment officer and head of the Global Fixed Income Unit at J.P. Morgan Asset Management. So welcome both you. Great to have you back. Bob, let me start with you. I mean, I watched the eco numbers.

I listened to the Fed speak. I sort of feel like I was going both ways at the same time. What did you see? Well, for a bond investor, all of us who have been battered this year. This is one of the weeks that made sense to us. We had a nice tailwind coming in from the inflation data. It was great all the way through core. When you look at shelter, everything,

yes, the markets went a little crazy. They went wild. And the central bankers did what they're supposed to do. They came in one by one and reminded us, don't declare victory yet.

These are only a couple prints. There are more hikes to come. But maybe there is some optimism. And the markets settled down. So I look at this week and I thought this is the first great week in a long time. So, Sunny, is that the way you saw it as well? And there's still some more rate hikes to come? How many? I think at least another three to start with, 50 basis points next time in December, followed by at least two or three 25 basis points next year, and then we'll see from there. And I think what Bob said is very true. At the same time as we were listening to at least three fat people come and speak. I wrote that. I think they all had very different quotes.

And you had some of that when Labor not talked, but you also had the president of St. Louis Fed say something slightly different, as if, you know, we would start until we would continue with rate increases for a while longer than she had implied. And then, of course, we had Susan Collins come in today. I would even, you know, sort of potential 75 basis points.

So we are hearing numbers that a little bit all over the place and trying to make sense of it. So, Bob, are the markets making it harder for the Fed as a practical matter? They were at the start of the week. I think not so much now. I think we're all in the same spot. We've all got realistic expectations. The Fed is headed to four and a half, five percent. They'll get there sometime in the first quarter. We'll see where inflation is. If it's below the Fed funds rate, then

that gives them some scope to pause on the tightening we can re-evaluate at that point. But right now, bond yields have gone up a long way in a very short period of time. It's time for a breath. Bob, does that get us to a soft landing? Unfortunately, it does not. And I think that's the one consistent

message from the Fed. Susan Collins aside, which is there is going to be pain for businesses and households when you have this magnitude of rate hikes in such a short period. And you're also withdrawing liquidity through quantitative tightening. It's going to bite.

And we're already seeing it's biting the economy hard. Thankfully, it's also now starting to bite inflation. So I want to pick up on that liquidity just for a moment, if I could have it. How big a problem do we have in the Treasury market now is liquidity. I hear conflicting things, but some who are very concerned about.

Big problems. I think Bob leaves it much more than I do. But as as you know, there are very, very big problems with the trading volumes. And and for big traders or even small traders, getting bids is becoming much harder.

And you're working in a much less liquid liquid environment. And I know between Treasury and the banks, there have been a lot of meetings, but I'm not so sure if we have a solution yet. Well, Bob, could the Fed make it easier with some regulatory changes? It could. But I think the moaning that we hear in the bond market about liquidity, it's always there. We always complain. We don't get the price we want.

The reality is for the last couple of weeks, you could have moved your portfolio in any direction you wanted, up and down, duration up and down, credit risk without any kind of penalty. So I'm not that big a believer in the lack of liquidity. I'm saying we talk about a soft landing. It brings me back to oil because oil did move this week and it moved down in the price of oil. And most of people I talked to, some suggest it was in part because of a concern about global recession really backing off or at least a softening in the markets. You came out of that business. You really know energy backwards and

forwards. What are we seeing in oil? So as you said, oil prices did the future numbers went down below 80, which was a big shift from a little while ago. But my view is still that we might just avoid a recession in the U.S. if we're fortunate, but we may not be able to avoid it in Europe and the rest of the world. And a lot of the, I think, softness, but these numbers that we saw today and in recent days is because of the expectations in China.

Now, China is starting to open up a little bit maybe and loosen its Covid rules. But that's going to take a while. And I think that's softening is is softening the oil markets and we'll probably continue to do that. Is it opening up? I mean, I'm not exactly sure exactly what's happening, because on the one hand, we hear them saying things that sound a little softer on 0 Covid. On the other hand, we hear about a lot of cases. So it is kind of interesting. We had a team out in Asia as this week

and they came back with interesting news that there is actually some physical opening up. But now you have people who are afraid to go out because they've been told so long that if they go out, they'll get Covid. And so you're seeing a very different phenomena, which is actual, you know, individuals not wanting to go out of their houses versus the government, which has been very strict about your getting out of your house. I was I was at the G 20, of course, meeting over in Bali. And some people thought there would be no single statement coming out of it. They did come to some agreement, in part

driven by some of the developing countries. Should that be encouraging to investors? Actually, they were getting back perhaps a little toward multilateral cooperation. A much more positive news came out of the G 20 than we all expected.

And as you said, there was also a lot of big stress on reform of the multilateral lending, because the big news out of that meeting was that there's huge needs when it comes particularly to emerging markets, climate related investments. And there's no way with the existing finances of the multilateral is that that could be met. So that was why there was a lot of emphasis on the reform of the multilateral sector, but also getting the multilateral to work much better with the private sector to generate more resources. And you saw that very particular case of Indonesia, which was discussed a lot and written off a lot with about 20 billion going into it to replace coal in Indonesia with cleaner fuels.

About another important go of this week in sort of a rolling bowl was the outcomes of the Malta of the midterm elections. We found out that the Democrats will hold onto the Senate. The Republicans will get a narrow majority in the House. What does that communicate, if anything, to investors? Is that sort of a steady as you go away because we have a split government? Not much is going to happen either way. So it for sure is.

I will tell you, going back to the G 20, we're actually hearing from clients, large institutional clients, that they're more confident but confident about allocating to markets when the G 20 countries are talking to one another again and working with one another again. So that's a huge positive. I don't remember that in, gosh, over a decade. When you when you go back to the gridlock in Washington, I hate to say it, but the markets kind of like it.

It's when their dramatic policy changes, you have to reprice everything in the markets. It becomes destabilizing. They're always going to be some winners. There are going to be some losers this time. If we know we're going to have gridlock,

we can focus on bringing inflation down and trying to avoid a recession and have a soft landing. I think a lot of people on the street think that it's sort of a Hippocratic oath. First, do no harm. You know, if you're not doing it, then you're not messing things up. Bob Michael Barr, J.P. Morgan. I'm sorry.

Beschloss, a rocket. We'll be staying with us as we look at what this week meant for our investment decisions. That's next on Wall Street week on Bloomberg. We think it will create some of the most valuable companies the markets ever seen, and I think it's certainly driven companies like Cisco giving them the life that they've had. It's obviously also spectacularly volatile. But the market has pulled back in this sector since it came public, since it began in 1995.

It's pulled back 30 to 50 percent, at least seven or eight times. That was Henry Blodget talking about the Internet and tech on Wall Street. Way back in June of 2000, when the number one movie in the country was Mission Impossible 2 and the most popular song in the country was Maria Maria by Santana, Bob Michael Barr, J.P. Morgan and Sonny Beschloss of Rock Creek are still with us. So Sunny is certainly Mr.

Blodget was right that we gave us some awfully big and successful companies, no question about it. Some people thought that would happen as well in the crypto space. This week, we're not quite as sure after FTSE X. What do we make of that is that it does have broader significance in the markets or is it just a one off? Hopefully it is more limited. I think there's no question that without regulation and we've all been talking about having this sector regulated, it would help. It's the market itself, but also the

investors going in, having this particular come at, you know, X, which is an extension for crypto IP based in the Bahamas with not just no regulation, but also with a few people who had very limited experience in finance or in anything really run it. I think the shocking part of it, David, was that very, very sophisticated venture firms from Sequoia and others were invested. It was not just retail getting involved in that market. So it was a surprise, but hopefully it

will get limited. And I think it has put a lot of pressure on increasing regulations sooner here, and that will be a good thing for the market. Now, let's not forget that the whole market is less than, you know, at 900 billion. I'm not saying that that's tiny, but it's still not significant enough to create any kind of stress in the market unless we're missing something that we don't know at this point. I think what's important, David, when

you watch that clip and that was the absolute peak in in the dot.com bubble. Yes, there was a massive shake out. There was a massive consolidation. But I would argue the Internet and tech evolved far beyond what any of us ever thought it would be in 2000. I wonder if we're going through the same thing with crypto and then FTSE that it got a great start. There is going to be a shakeout of Sony's right. There's probably going to be a lot of regulation.

But when I talked to the young people on our desk and our platform, there's still a big believer. And if the millennials are a believer, twenty two years from now, they're going to be looking at this clip. And I hope we got it right. That's fascinating. There is no question it's a generational issue here. Let's come back to the current generation and people who are as old as I am. I'm older than you are, but as old, I'm bonds right now. Do you invest in bonds for the first

time in a decade? Absolutely. And I will tell you that we're seeing interest from everywhere now. Every wealth management platform in JP Morgan, every institutional client, they're coming to us. They're putting money in bonds. They're looking to commit more. And they haven't done so for four years. If I look at where we got to at the start of the year, a general bond fund that the Bloomberg AG yielded one point seven percent. Now we're up at four point seven percent.

We have three percent higher yields. And that's going to track investment. And as I said, I think the Fed is close to the end. I don't know if they get to 5 percent. We're kind of in the four and a half

foreign, three quarters percent. That's going to bring a lot of stability to the market at these levels. Bonds are back. So I'm saying you manage a fair amount of money. What about for you? Are bonds attractive at this point or are you just equities? I think, as Bob said, what is very interesting right now is even in any foundation or endowment or the assets that we manage. You're finding that exactly the same phenomena where people had moved away from bonds and cash and equities and private investments moving back into holding bonds.

And as we've sort of reaching that 4 5 percent that Bob talked about, much more interest in bonds in a more balanced kind of portfolio. And of course, people are looking at cash with 4 percent at with Treasury bills at the level that is much higher than cash is in a very long time. But I think the bigger thing that is happening in the portfolio is we're looking at is obviously a lot of investors, institutional investors have been also investing in venture private equity, real estate in private forum. And I think that is playing to some sort of transformation, too. Well, let's let's take a Segway, if we could, from that sort of investment into COP 27 as we're speaking right now. So go ahead.

It's going to end on Saturday. Right now, I've seen a you know, far better than I do. It looks like it's going to be difficult for them to get to the objectives that they had. You're absolutely right. So far as we know tonight, the latest news was not too positive. Things could change tomorrow morning,

but they didn't really have anything major to announce. Again, as you remember, in the cop 26, they had the Jeep fans, which was six, a large number of large asset managers signing up to make pretty significant shifts in their carbon footprint. But most recently, they started walking back from that or not wanting to sign quite on what they had agreed to in COP 26. So I think it's very, very important as

we're having these meetings. Maybe they shouldn't be every year. Maybe they should be every other year or less often, but show some sort of progress. And the most important part of the discussion this time, David, has been the fact that developing countries, again, have felt that they are in some cases suffering, because if they're an island economy, they're going underwater. If they are affected by by droughts and by floods. And a lot of it might be caused by those who did use a lot of carbon over the last 10, 20 years. And they're asking if they could get

help. And that help is really not coming. And I think that is really a major summary of COP 27, which is that the expectations of investments into climate are probably less than what we expected going into the Cup. Why just picking up on that on the investments in it? Bob, I want to come back to you because I want to things at least I'm taking away from COP 27. You would certainly hear. Listen to John Kerry, the president's special envoy on this subject. We're not going to get it from public

money alone. It's going to take a fair amount of private investment as a bond person. Are there bonds that are green bonds or in the climate or. That makes sense as a business matter? There are I think for sure if you're going to finance something, which is what bond investors do, you want something that has something of a green agenda to it. And we're hearing that from our clients. There's more and more money coming into this space. I think, Sonia, help is on the way for the island.

Economies of the large scale investors want to commit capital to this space where the Inflation Reduction Act, as it's called, local object. That title put a lot of money into the game here on the private side of something. Is it making a difference in the projects that are getting financed? No question.

I think I think DAX is a very powerful act and it's the largest amount of money going in. And I think that will really help us in the US to invest a lot more in climate related food and ag, in battery storage, in residential and in community related solar and wind. So that will be a major, major push. And we're seeing, as Bob mentioned, a

lot of movement. I agree with him. I think it's just that in COP where you expect that public money to go in, there was sort of disappointment with that. But the private sector is doing a lot. The young generation is doing a lot. We just need the public sector to jump

in when it comes to it outside of the ISE, of course. Bob, last word. Are you seeing a difference in your part of the business, in the government tax policy when it comes to green bonds? We are, yeah, absolutely. It's making a real difference here. It is from our perspective. So, yeah, everything we see that and we didn't touch on the regulation. There's going to be more regulation

poking through. What qualifies as a green bond? And also to prevent any green washing either in specific bonds or in bond funds. So watch this space. Yeah. OK.

Eventually pleaded with the new. Congress coming in. Thank you so much. Really great to have both you with us this ISE Beschloss of Rock Creek and Bob Michael of J.P. Morgan. Coming up, we are going to take a look at next week on Wall Street all around the world. That's here on Bloomberg.

This is Wall Street. I'm David Westin. It's time to look at what's up next week on global Wall Street, starting with Annabel Drillers in Hong Kong. Well, thanks, David. This week in Asia, we're going to be taking a close look at two big elections now in Malaysia. Voting took place this Saturday, just over a month after parliament was dissolved for a snap poll. And then meanwhile, Taiwan, that holds midterms this coming weekend.

So that's going to be a pulse check on the popularity of the ruling Democratic Progressive Party. As, of course, we say, political tensions continue to rise in the region eco wise. The highlight is on central bank meetings in Korea and New Zealand.

We're gonna be live from Seoul for the bay, OK, with expectations there for a half point hike, plus the obvious, NZ predicted to deliver its sixth straight, a 50 basis point move. The 2022 World Cup kicks off on Sunday in Qatar. The tournament is being held in the winter for the first time due to the blistering summer temperatures in the region. Thursday sees rate decision by Sweden's Rick's bank economists forecasts a 75 basis point hike.

But surging food prices could tip the bank to raise by even more. Well, also on the same day, give an account of the ECB as most recent policy meeting. And last but certainly not least, EU energy ministers will be meeting to discuss policy outlook as Europe heads into the winter, a holiday shortened week for the observance of Thanksgiving Day. The main focal point for the week.

It will centre around the release of the FOMC minutes from that November meeting, a meeting that saw the Fed raise interest rates by 75 basis points for a fourth straight time. Fed chair Jerome Powell said then that U.S. interest rates would go higher than earlier projected. But several Fed members since have indicated that they may be ready to downshift a handful of earnings next week to watch, including Zune Video, Dear Analog Devices, Best Buy and Nordstrom. Keep an eye on those last two for a read on the strength of the consumer as the traditional kickoff to the holiday shopping season in the U.S. begins on Friday. The main theme to watch there will be the flight to discounted items by cash strapped consumers that seem willing to spend, but maybe not have the same capacity as they did a year ago. David?

Thanks to animal drillers Dani Burger and Romaine Bostick. Coming up, we saw it happen in the gilt market. Could a crisis come to the markets for U.S. Treasuries? And would it come from a lack of liquidity? We're going to ask former vice chair of the Fed, Richard Clarity of PIMCO. That's next on Wall Street week on

Bloomberg. This is Wall Street week. I'm David Westin, and we spent a good deal of this week trying to figure out where the Fed is heading on rate increases. And part of what we were watching was the Fed's vice chair, Lael Brainard, who gave us at least some hope that we might be getting closer to slowing down. I think it will probably be appropriate soon to move to a slower pace of increases.

But I think what's really important to emphasize, we've done a lot, but we have additional work to do both on raising rates and sustaining restraint to bring inflation down. We welcome now Ms. Brainerd s predecessor as vice chair of Richard. Now global economic advisor to PIMCO. Sir Richard, thank you so much for being back with us. Good to have you back with us. So do you agree with your successor there? Do you think we're at least approaching a point where we might slow down the pace of increases? David, I do.

You know, the Fed has done a lot this year. In fact, it'll be the fastest pace of rate hikes since the early nineteen eighties. I do anticipate that at the December meeting, they'll know they'll slow the pace from 75 to 50 basis points. And I think as we move into 2023, I think they think and I agree that that they're close at least to a pause, probably in the first half of next year. They said in the November statement. They've done a lot and they want to see

how the rate hikes are impacting the economy. So, Richard, you have the advantage of having been in the room and having been in the room relatively recently. Give us a sense of what they're looking at their dashboard, because I must say, the economic numbers sometimes point in different directions. On the one hand, we do have some indications like the CPI numbers that may be slowing down a little bit, inflation there. And the overall inflation is still pretty high. It is. And you know, the challenge the Fed faces and other central banks in the world is that the economy is running hot and in particular, wages in the economy are growing much faster than consistent with the 2 percent longer run goal. And so I think that the Fed will be

looking at the labor market data and also be looking at inflation expectations. We have downshift in demand growth. You know, there's an imbalance between demand and supply. And this year, demand growth has already downshift. So that's an important thing to note. We're certainly along the way to where

we need to be. But the Fed has more to do and we need to get inflation back down towards the 2 percent objective. So everyone seems to agree there's more for the Fed to be done.

We just heard Lael Brainard say exactly that. The question is how much more? And part of the question is what's the terminal rate? I mean, how far up do we go? We had some somewhat conflicting indications this week, actually. And the banks basically reject these things are coming with very different sorts of answers. What determines that turn rate? And let me ask you, perhaps more pointedly, some people think that there was a little slow getting off the market, getting going.

Does the slowness of getting started mean the turmoil rate would have to be higher necessarily? David, I don't think so. I think what, what, what? Launching the rate hikes in March did me and I think share power recognized this pretty early on, was that it made sense to get to the destination pretty quickly and that's why we've had the four successive 75 basis point hikes. My sense right now is the committee believes and I share the view, that my baseline view is that I want to get the funds rate around 5 percent if the inflation data comes in on the soft side, maybe for three quarters. If it comes in on the hot side, maybe five and a quarter or perhaps as President Bollard indicated, maybe north of that.

But I think around 5 percent in the spring will be at a level where they've done a lot. They realize that inflation responds to policy with a lag. And I think that that will be a good place to to take stock. So I think that I wouldn't call that necessarily the turnaround. I hope it is. If the inflation data doesn't improve, then they may have to do more. But I think they will pause at around 5 percent.

So, Richard, I think you just put the figure on the thing that at least perplexes me, which is it to place function? I mean, you've got what the rates are. You also have what inflation is and how restrictive that is. Depends on how far and how fast inflation comes down. So going into the spring, if you're at 5 percent, how far down do you get need to get inflation before you say, OK. That's restrictive enough. It's an excellent point because typically monetary policy does operate with a lag.

So the Fed wants to look ahead and indeed, for example, Governor Waller and others have made reference to comparing the policy rate to where professional forecasters think inflation will be towards the end of the year. And I appreciate that point. My own research actually indicates that's a simple thing to do. I think the challenge they face, David,

is that, quite frankly, the Fed's record at forecasting inflation has not been very good, including when I was there last year. And so I think it's going to be a balance between adjusting policy according to both the forecast and the incoming data. Richard, it's not just the rates that are going on.

We also have so-called quantitative tightening as you try to run down the balance sheet, which have gone so far up. Give us your sense of what that is doing right now to financial conditions in the United States. Well, David, is tightening conditions again, quantitative tightening, as is reversing quantitative easing. So the Fed's balance sheet is shrinking now. It's been very well telegraphed. And so markets certainly understand the

pace and the modalities of tightening that it is serving to tighten financial conditions. And that's consistent with what the Fed wants to do in terms of raising rates. So, Richard, that takes us to a subject that I know you've heard a lot about. We read about all the time, which is perhaps a problem with liquidity in the Treasury market. There's more volatility in Treasury market, as I understand it, but that's inherent in raising rates. The question is, is there additional volatility because there's not as much liquidity.

We hear, at least anecdotally, that some people are having difficulty buying and selling large lots of treasuries. Yeah, well, it's true. I went back and looked I had the privilege of 20 years ago of serving as assistant treasury secretary in 0 1 or No. 2. And in those year debt outstanding was about three trillion dollars, about 30 percent of GDP. This year, it's 23 trillion dollars or 100 percent of GDP. So quite simply, the amount of debt outstanding and the amount of treasury issuance is vastly larger than it was 10 or 15 years ago.

And the plumbing of the intermediation system for treasuries has not really expanded concomitantly with that. And so as a result, there is evidence on occasion of illiquidity in the markets, certainly in extreme cases, as we observed in March in 2020 or September of 2019. It becomes even more evident. And so I think policymakers at the Fed and the Treasury and other agencies are looking at ways in which treasury market functioning can be improved. I think it's certainly something that should be studied and improved. And what are possible options if they do conclude there's an issue there? One of the best ways would be reversing and going back to quantitative easing. That's one way to do it.

Another might be actually to ameliorating at least some of the restrictions and regulations imposed after the 2008 grant. Great financial crisis, which really assigned us to took a lot of the big banks limited their participation in the market. Well, it's right. And so I think that one of the things, David, that we did in in the spring of 2020 is that we did relax something called the supplementary leverage ratio in the sense that we would not count on bank reserves or treasury holdings against that leverage ratio.

The idea is we wanted to encourage banks to lend in the pandemic shut down. And and the Fed indicated when it left those exemptions lapsed that it would begin it would review whether or not it made sense to include treasuries and reserves in that leverage calculation. I'm sure that analysis is ongoing, but I think that's certainly something worth serious study. What is the rationale actually for the SLR? I don't. Not sure I understand it because I would think the treasuries are as close to risk free as possible.

You know, the history of this is before the GFC, David, we had risk based standards for banks. And so treasuries are not risky. Other bonds are more risky. There was a sense broadly in the global community, not just in the US, but through the Basel process and Europe and Asia Central Bank and policymakers agreed that it made sense to have a supplementary leverage ratio that typically would not be binding. Most of the time, but it could prevent, if you will, financial institutions from gaming an entirely risk based system. However, you know, we discovered in March of 2020 the banks were in great shape. The banks were part of the solution, not part of the problem. And there can be perverse consequences

of having a supplementary leverage ratio, especially when the central banks are doing large amounts of of QE is they're creating reserves, which the system has to absorb. So I think it's certainly something the Fed could address. And I think it could make a lot of sense. Rich, thank you so much. Real. Well, sure. We're going to come back often. It's really good to have you. Richard Clarett of PIMCO. Coming up, we're going to wrap up the

week with our special contributor, Larry Summers of Harvard. That's next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. Welcome back now our special contributor, Larry Summers of Harvard to wrap up the week for us. Larry, thank you so much for being back with us. A lot of us spent a lot of the week actually trying to figure out where the Fed is headed, chicken with a terminal rate. And we had conflicting, I think at least

somewhat conflicting answers out of the Fed, including with Mr. Bullard, the Fed president saying, well, five, five and a quarter and then put up a chart using the Taylor rule that suggested seven. Where are we? Look, no one knows. I think it's a mistake to be slavish about Taylor rules. The market thinks the number is going to be about five. I look at things and my sense is there's more room for that to be too low than there is for that to be too high. But it's pretty clear that we've had the

big moves on this cycle and now we're going to be finishing that process are off. My view is that there's more risk from stopping prematurely and not really curing inflation and setting the stage up for a recent celebration of inflation. After it comes down, I see that as a bigger risk than going too far, because going too far would mean bringing inflation down below 2 percent. And that still seems to me like an awfully remote risk starting from where we are. But I think that the Fed has this in the right place when it says that they're going to move up somewhat more and they're going to take stock of the situation and see what the inflation data is saying and seeing what the inflation forecasts are saying when we get to next get to the spring of next fall. Spring, winter or rather spring of next year.

I have to say that if they hadn't made as many mistakes as they did of excessive optimism about inflation, they'd probably have a little more room than they do to rely on forecasts that hadn't yet proved out that inflation was going to come down. Larry, you and I talk a lot about monetary policy and fiscal stimulus and things, but geopolitics also factor increasingly and some of the issues having to do with the economy. This week we had what is potentially we don't know if it is an important development in the meeting of President G of China and President Biden. What do you make of those discussions and even ongoing discussions? Because now we have the USTR amount of time actually meeting with their counterpart. What do you make of the situation with China right now? The United States? Look, as Churchill famously said, chill out, John is a lot better than bang, bang. And so the fact that they had a meaningful conversation that lasted more than three hours.

The fact that they both came out of the conversation with a sense that there had been satisfying dialogue, the sense that there are some follow on steps. I think that's all to the good. What it's really going to mean, what really is going to happen is they're going to be constructive movement out of those dialogues. I think that's something we're going to have to wait and see. But I'm encouraged by but I won't buy

what I saw. And I think it means that President Biden's whole trip has to be regarded as a success. The United States back in the game with respect to climate in Sharm el Sheikh, the meeting with Jay. I don't think this G. 20 will be long remembered, but at a very vexing moment, there could have been some kind of breakdown and there certainly was not that. Why as a minimal thing. I've read some places people say at

least there is a G 20. And they came out with a joint communique and it was fairly tough on Russia. I think it's fair to say and the reporting behind the scenes are, is that some of the developing countries like Indonesia and India helped drive that process, which might might want to overread.

It suggests that maybe we're taking a half step back toward multilateralism. I think things I think I think we are. I think that what Russia has done has really shocked the conscience of the world and has affected very, very many countries. We'll have to see how this plays out. I think we need to remain aware that in the original vote in the U.N. General Assembly, there were countries with more than half of the world's population who abstained on to Russia's side, who declined to join in condemning Russia. So I think we've got a lot of work to

do. And we in the United States tend to be a bit overoptimistic about the extent to which all others see us as in a benign way that we see ourselves. It's such an important point and it takes me back at least to China, because it seems to me that sometimes we've been overly optimistic. I mean, for example, going back to the time we admitted to the WTO, we thought China was going to become more like us. And then we go over the other extreme of being perhaps overly pessimistic about China. I guess my question for you is former treasury secretary, among other things. How do we play both sides of that?

We don't know how we'll end up. How do we keep open the real estate? Possibly we can really work closely with China, but also protect ourselves against the possibility of confrontation. We in the United States probably need to be careful about our evangelizing influence. I don't think it's really for us to tell China how they should organize their entire society. It's for us to stand up for some of our fundamental interests in security and fair economic competition. But to leave it at that point, I think we're going to need to be very careful with respect to our diplomacy on the issue of Taiwan. I think we need to be very careful about

Trump, about giving China the sense that we are trying to change the traditional One China policy, because I think that could risk disastrous conflict. So I think the operative words for us need to be respect for them, respect for the positions and the fundamental interests that they have and at same time, absolute insistence on our own. And I would say one other thing, David. I think ultimately we will prevail in this broad contest with China. But I think if and when we prevail, it is going to be more than anything else. On the strength of our example. And that's why domestic renewal at home, whether the issue is scientific innovation or infrastructure, whether the issue is doing something about opiate opiate deaths or whether the issue is strengthening our education system, whether the issue is building on the greatness of our universities or the greatness of our national parks.

Ultimately, it's going to be our ability to remain the country that's the envy of the world, the country to which people want to come. That is going to determine our success. And if we change our focus from building ourselves up to tearing China down, I think we will be making a very risky and very unfortunate choice. Laura, I want to make a very large turn

here. I've had the benefit of talking to you about the Masters, about basketball, as was the one it talked about Taylor Swift, and she's a rather popular pop music star. And Ticketmaster, because we now know the Department Justice is investigating possible antitrust problems there because of Ticketmaster, which does, after all, have like a 70 percent market share that's been under investigation for some time. I don't know if you know much about Taylor Swift, although I am concerned about you getting tickets, which apparently seems to be difficult. But but more broadly, what does it say perhaps about some of the problems with over concentration in the economy? You know, I want to say two things about that, David. The first is that if the government made a Web site.

That functioned as badly as ticket masters has here. Everybody would be laughing and scorning the government. And so the next time the private sector says that, you know, the public sector can't do anything right. This was a private sector building a Web site sort of like that to build a Web site for Obamacare, sort of like to have to build Web sites at the IRS or like they have to build off a build Web sites first student loan debt relief and the private sector utterly failed. And that's something that we just have to remember. The next time somebody wants to say everything about government is hopeless.

Yeah, we are. We are lovable. He has a trust. Yeah. Larry, we're going to have to leave it there. I'm so sorry. We're humble. We have much to be humble about. Larry, thank you so very much. As Larry Summers, our very special contributor here on Wall Street, we're coming up. A lot of people get hurt when there's a

collapse like that of FTSE. But who stands to benefit? That's next on Wall Street week on Bloomberg. Finally, one more thought if Tom Brady's for it. It's got to be good, right? I'm getting into crypto with RTX Shery Ahn despite that endorsement from the greatest quarterback of all time. The collapse of Sam Banks and Freed's

FTSE ex has brought heartbreak to a lot of people, wiping out in one fell swoop. What was estimated to be a thirty two billion dollar empire, leaving what its lawyers now say could be as many as a million creditors holding the bag. And, by the way, triggering a class action lawsuit against Tom Brady and others paid to tout FTSE to the world. The ripple effects of the collapse of FTSE and the rest of Sandbank Winfrey's empire now beginning here as we wait for bankruptcy proceedings, all of which has shaken the confidence of many investors. That's according to Citadels. Ken Griffin RTX is one of these absolute travesties in the history of financial markets.

People are going to lose billions of dollars. And that undermines trust in all financial markets. But as bad as the FTSE collapse may be, it's only the latest in a series of major meltdowns we've seen in recent years. Just think back to 2001, when that mythical energy giant Enron hit the skids. Its former CEO, Jeff Skilling, reflected back on the loss in his later testimony before Congress.

I am devastated by an apologetic about what Enron has come to represent. No words can make things right. Too many people have been hurt too much. Or WorldCom and the telecommunications fiend of the late 90s that followed Enron into bankruptcy in 2002, wiping out a market cap of one hundred eighty six billion dollars and sending its former CEO, Bernie Ebbers to prison despite his trying to seek protection behind the Fifth Amendment.

I've been instructed by my counsel not to testify based on my Fifth Amendment constitutional rights or that emblem of the first Internet bubble pets dot.com with that cute sock puppet mascot, which was an instant market hit when it went public. And just as quickly went flop. What goes up must come down. All of these notorious failures shared a bold vision, a confident leader and a belief that they'd come up with a better mousetrap, just like Mr. Banks and free and have FTSE follows the pattern. It we'll share one other thing with colossal failures. Through the years, a lot of lawyers

making a lot of money. Despite all the carnage when Enron went into bankruptcy, it had assets of over sixty five billion dollars in the ultimate resolution. Shareholders were wiped out at a loss of 74 billion dollars. But the lawyers, they walked away with over one billion dollars, along with the accountants. WorldCom was three times as big, losing investors, an estimated one hundred seventy five billion dollars, while the lawyers were making over 10 million dollars a month in a proceeding that lasted well over a year.

Lehman was forced into bankruptcy amid one of the most turbulent periods in our economic history, which culminated in a catastrophic crisis of confidence and a run on the bank. But those were all small potatoes compared with Lehman bankruptcy that wiped out between forty six billion and 63 billion dollars, according to the New York Fed, and netted the lawyers and other consultants a cool. Get this, 6 billion dollars. So we'll see how much the FTSE creditors end up writing off. Much less the token holders. As much pain as they're feeling, though, you can be sure that there's one group that will come out OK. It's always the lawyers that does it for this episode of Wall Street Week.

I'm David Westin. This is Bloomberg. See you next week.

2022-11-27 15:57

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