Wall Street Week - Full Show (12/02/2022)

Wall Street Week - Full Show (12/02/2022)

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Easy does it. Whether it's Fed rate hikes or China letting up on Covid restrictions or steering clear of a rail strike. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers on the jobs numbers and chair Paul's take on inflation. Mike Eric Getty of Areas Management on the remarkable growth in private credit, private credit has tended to outperform when rates are going up. And Tom Montag and Ann Finucane on their

new TV venture into the world of carbon credits. We saw an opportunity to improve the whole market. It was a week of searching for the happy medium. As China began the week in an uproar over Covid restrictions put in perspective by former U.S. Ambassador to China, Gary Locke. This is clearly the worst since Tiananmen Square.

But things ended the week a bit more calm for China after authorities signaled some easing in the Covid policy, as urged by World Bank President David Malpass. They think they could use a recalibration, more targeting of their of their lockdowns. We started the week with a looming rail strike, but President Biden and Congress sought to calm things down by stepping in and imposing a deal on the parties. The US House is passing the bill to avert the strike by this freight rail. Workers and consumers seem to be seeking their own happy medium as they started their holiday shopping. It was a kind of muted Black Friday.

It was a solid customer traffic overall, but not strong. All of which brought us to Fed Chair Powell, who struck a balance, or at least tried to between raising rates too much and not raising them enough. We need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent. There is considerable uncertainty about what rate will be sufficient. But then the U.S. job numbers came in on Friday and there wasn't nothing moderate about those two hundred sixty three thousand jobs created November. And employers are paying more for every one of them with average hourly wages up a whopping point three percent, one point six percent month over month.

And that's five point one percent up year over year. The markets took a look at all this and didn't like it one bit, at least at first. But by the end of the day on Friday had settled back down. And overall, the S&P 500 gained over 1

percent for the week. The Nasdaq was up over 2 percent, while the yield on the 10 year fell to under three point five percent for the week after starting out at nearly three point seven. Here to help us sort through this all, we welcome now Greg Peters. Back to Wall Street week wholesale for fixed income at PJM and Christina Hooper. Welcome back from Invesco.

She's chief market strategist. So, Christine, let me start with you. I think Jay Powell was trying to calm things down, but I'm not sure he accomplished that. He did not accomplish that. But that's the market's fault, not his fault. I think he was very clear in telling us what we already knew, which is that the Fed is likely to downshift to 50 basis points in December. But the terminal rate is very unclear and we have a ways to go in terms of taming inflation. The only positive was around housing and talking about the rolling over there. But other than that, I think he was a

straight shooter about setting the table for what uncertainty there is in terms of of where the terminal rate is and where the Fed pauses. But Greg, he also set the table for being really concerned about wage inflation because he talked about the really dislocation, particularly jolts numbers. And then those numbers came in on Friday and were exactly what he was hoping would not happen.

I think. Yes. So the strong non-farm payroll report and the recent economic data actually is a blunt reminder actually that the data are in charge, so it doesn't matter if you're a pundit, portfolio manager or even Fed chair. Powell. It's all driven by the data. So for him or anyone to proclaim that no rate rises or pausing or pivoting is just really kind of a fool's errand because you're driven by the data. And the data is what's driving the Fed and should drive the markets.

Absolutely. If you don't mind my adding back in June, the Fed communicated that it was going to only hike by 50 basis points. Then two data points came out within days of the Fed meeting. We got CPI, we got Michigan inflation expectations and they pivoted to 75 basis point. So Gregg is absolutely right. The data is going to drive this and that really renders pal speech pretty irrelevant. So, Greg, if the data are driving the

Federal Reserve, what's driving investors? If you're an investor, what do you make of these data and where do you go? You know, it is this circular reference problem that we have. It's it's it's clear to me at least that the markets are focusing less on the data and more on what the Fed has to say. The challenge, I think, is that the rhetoric coming out of the Fed is quite disparate, not all over the place. So the message is quite mixed.

But to me, it's really hard for me to swallow that, you know, rates have rallied risk assets have also rallied. And we haven't even seen a recession yet and we haven't seen the peak in rates. And we have one day to print day that of lower input and lower inflation. So you're a fixed income guy.

Greg, what do you do in fixed income given that circumstance? Yeah. So I think it's been this this is obviously very difficult market for fixed income. If you think about where the 10 year started this endeavor post Covid, it was 50 basis points. Right.

So they know we're at three and a half now. I do think yields move higher here as we reprice more rate hikes. But I have to tell you, you know, we we've repriced is such a dramatic degree that I see a tremendous amount of value. Fixed income yields higher.

All as well is a good thing, spreads wider, all else equal, a good thing. So while we can't time it, I feel really bullish on the outlook for fixed income. Christine, how are you? What do you see for investors right now? Where should they be going? Well, I think investors should remain relatively defensive, but recognize that we are likely to see improvement and a more risk on environment when we get more clarity.

Certainly when we when markets can tell that there is an imminent said pause before then there'll be volatility, though. So being defensive investment grade credit looks attractive, more defensive equities, but then also waiting for that, that pivot investment grade credit should actually hold investors through as but as they take on more risk in other asset classes. So. So this isn't a time to be well diversified, but more defensive. What does that mean in order to be able to pivot, you want to be pretty liquid so you can jump back in when you're on a moment's notice? Well, you certainly want to have some level of liquidity, but at the same time, humans are notoriously bad at market timing.

So I'm thinking about building positions for the longer term, starting to dollar cost average and sooner rather than later. Greg, in the fixed income area, what are the things we hear a lot about these days is private credit? We're going to have Mike, we're getting a little bit later in this program and some people are saying, well, given the fact that the interest rates are going up, that means equities are somewhat less attractive because the discount rate that private credit is really attractive because you can get some very high yields in the fixed income space. Well, you can, but you can get higher yields and public fixed income. I think if you look at what's been happening over the past decade or so, there's just been this tsunami of investment and private credit.

So if you look at when the excesses of the zero negative interest rate policy, I think private credit is front and center. So we have a lot more concerns around the private credit market. There's a lot more leverage in that market. It's a non mark to market market as well. And so it's the don't ask, don't tell type of policy there.

So to me, the relative value that we see is clearly in public fixed income. And it's also important to reiterate that there is a lot more leverage in the private credit market than there is the public. At the same time, it's shorter term, isn't it? Is it a shorter duration so you can get any. Yeah. And also so is floating rate, I think. Right. Greg.

Yeah, a lot of his floating rate. But it's also a highly dependent upon the investor and the sponsor putting money in. Right. Because these are such levered capital structure. If in fact we do have this recession that everyone's forecasting for 2023, you know, that requires a lot more flexibility, a lot more collateral. Cash falls into the company. So it's really incumbent upon the sponsors who hold all the cards, whether that company can survive. And that's not necessarily a great place

set. So, Christine, most of us retail investors are not going to participate in the huge private credit. If I'm a retail investor, what makes sense for me and I had the flexibility that you want, but at the same time be somewhat defensive.

So I think being very well diversified have some also exposure. And there are actually even ways to have access to things like private credit. I think what's what we learned from 2022 is that it is very important to have a broad array of of investments in an equities, fixed income adult, particularly attractive right now, as I said, as investment grade credit. Also, I favor dividend paying stocks in this kind of environment, but we're going to have to recognize that in the near term there should be significant volatility. So some of. Correlating asset classes within the old space could make a difference. You have to have a possible recession in the back of your mind, Christine.

So I think we'll be able to avoid a recession if we do have a recession. It should be relatively modest and brief so we could see an environment in which an economic recovery begins to unfold. By the end of 2023. Do you agree with that? Greg, briefly. I have a slightly more negative view, but nonetheless, even if it's a soft landing, a shallow recession or a deep recession, the contours are very different. So just the kind of bliley widely and blindly kind of add on risk I don't think is the right way to play it.

I think which you'll see, David, is a tremendous amount of differentiation and dispersion as some segments of the economy. Some sectors are hit harder than others. I think that's important. Thank you so much for Vestas, Christina Hooper and James Greg Peters. Coming up, Bank of America veterans Tom Montag, an infant who can join Wall Street for an exclusive explanation of their brand new carbon credit venture backed by TV. That's next on Wall Street week on

Bloomberg. This is Wall Street. I David Westin global Wall Street, get some big news this week has two of its most prominent citizens. Tom Montag, the former CEO of Bank of America, and Anne Finucane, the former vice chair of Bank of America, got together and announced a big new venture backed in part by CPG and involves carbon credits. We're delighted to say to welcome them. Now to Wall Street week for an exclusive

discussion about this new venture. So thank you very much. And and Tom, for being here. And let me start with you. You're the chair of this new venture. Explain where it came from. How long you been working on this? Thanks, David, and good to be here. So this is an evolution actually of work that Tom and I did at Bank of America for our own company, but also for our clients, where as more and more companies are looking to become carbon neutral, which is the first step to becoming net zero, they do an audit. They review what they can do. And there's a delta between everything they could do and what is carbon neutrality. And the sort of basic practice has been

to fill in that delta for the short term with carbon credits. But they are not plentiful. They have had some controversy around them because looking back, they've not been well vetted and they may not be as as. As good as they could be.

So we saw an opportunity to improve the whole market. Once, Phil, what clients need to put money into the developing world, another risk? Cash in to protecting forests for removal as well. So this is carbon reduction, carbon room, no carbon removal. And in order to do that, we needed to set up a system that would be much more, I think, acceptable to not only companies, but to the NGO world.

So what I'm talking about is that these credits would be vetted through proprietary quality guardrails. They would have third party ratings. It would be a methodology, a methodology that's transparent. And so people could feel comfortable with this new product. So it's a time here for me to see all this. You've spent a career really in and around the markets, whether Goldman Sachs or Bank of America. Are you making a market in these carbon

credits? Is that the way it's going to putting together people who put them together with people who need them? We're making a market in the sense, David, that we're. You know, we're offering our product that they can buy. It's not yet a tradable product. At some point it may be. But at this point, you know, we as Adam said, we just we have we we've established Rubicon Carbon Solutions Company, and the first product we haven't used will be called Rubicon Carbon Tons. And that is what we are offering to enterprises around the country.

Well, tell us what's in that Rubicon. A carbon ton when it's available, what is in there? So what we've done is there are three words. If you go to our Web site, Rubicon, carbon dot com, our scale, confidence and innovation. And so we basically have already purchased a number of carbon credits.

And when we sell them to you in a difficult portfolio and the port, there's two different portfolios. They'll be a third. And they'll probably be more over time. We have a nature based portfolio on an emissions based portfolio, and we'll we'll have to remove removals. Not each one of those underlying those Rubicon Carbon Tons in nature has numerous projects that we've already purchased and we curate this constantly. So we we've hired Dr.

John Jenkins as our chief sustainability officer. And not only do we look at them when they come in, but we're always looking at and curating what's in there. So you would buy the right to retire carbon credits in the portfolio of your choice at any time that you wish.

So and do you essentially certify that, in fact, these credits exist and that they're legitimate? You and I've talked in the past about things like greenwashing. Does this address that problem to some extent? And do you need the government to certify it? Well, let's just go back here for a minute. I think the problem with carbon credits is more retrospective than it is current retrospectively.

It was a nascent industry early on. Small players and standards were not set. So yeah, in some the places they were questionable. But today we have much more transparency. We're working within geos.

We not only will work with those that certify and verify today, we're essentially taking another step and we are doing our own project level diligence. So this is sort of an insurance on top of an insurance. And actually to beyond that, we're going to be doing some work in terms of insurance itself and risk management. So if you're a client and you came to us, I think that you would have much more confidence. First of all, the projects themselves

are forward looking, not retrospective. We recognized what the issues were in the years gone by. We're not buying renewable projects and we see these countries meaning we're not trying to make renewables in America, which are actually cheaper and easy to get to.

Part of the credit basket, what we are doing is looking to the developing world to help. And I think everybody needs removals. So we'll be transparent, will be easy to use. The credits are verified, certified, and we're taking a second look at them through. Jen Jenkins group. I think that this is a sort of end to end process. We are we're working with developers, we're working with brokers, and we may actually source credits ourselves in the years to come. OK. Tom Montag and Anthony will be staying

with us as we turn to what comes next and how far we've gone. Carbon could take us all. That's next on Wall Street on Bloomberg. This is Wall Street week. I'm David Westin we are talking with and for Newton and Tom Montag about their new venture, Rubicon Carbon.

So. And let me come back to you and talk about the future of this business, as it as it were. How big is the breadbox? Well, let's just talk about how big is the need by any dimension. We are looking at a need, a delta of three and a half to four trillion dollars a year needed to create a net zero world by 2050.

And the scientists, the NGO, those governments would like to see us get halfway there by 2030. So or at least forty five percent, there just simply isn't enough money to do that. In the current equation, governments can't do it. Philanthropy can't do it. And businesses are really not set up to do it. You will see more of that in the years to come. But we're talking about four trillion

dollars a year that is needed to fill this delta. Meanwhile, through some commitments that have been made, but 90 percent of the world is committed to some form of net zero. But the Classical Financial Alliance for Net Zero, otherwise known as Cheap Fans, is a collection of 500 financial firms. We have committed to being net zero for financial firms to be net zero. All of their clients have to be net zero. That means not just big corporates, but middle market companies, small businesses and ultimately consumers.

So imagine that kind of task ahead of us to help clients and customers become first carbon neutral. Ultimately net zero. Tom, that's exactly what I wanted to ask you about. Because you and and worked on green financing when you're a Bank of America.

If a Rubicon carbon had existed when you were doing that, how would you make your life different and how will it really interact in general? Thanks. I saw, by the way, Bank of America, I think is an investor. That's right. They're an investor. I think it was what we were and was just saying is that we think this product allows people us allows people to get at scale financing more frequently. And so we're hoping through room on carbon capital that we'll be able to bring as much money as it's necessary to help solve the problem. And David, the other thing is when you

look at Rubicon carbon tons of reminded me of. The more liquid and the more people are able to invest in a simple manner, the more money comes into a product. I always looked at it as I looked at the derivative market. Back then, the derivative when I was in the beginning, the derivative market was a very bilateral, not tradable market.

And its growth largely came from the fact that people got together and had standard agreements and masters and did all the kinds of things to make the market more liquid, which brought more money into that that market. We hoped by doing what we're doing now. We bring more money and help solve some of the problems. And how do you make money? Has Rubicon Covid make money in success? Justin, this all worked perfectly. Where do you get your money from? Well, there's a margin, if you will, on what we package for our clients. So that's how you make the money.

And it is certainly less expensive for them than keeping an entire staff on on call within their own operations. And it's completely unrealistic if you draw down the food chain to middle small market and as small businesses and consumers. So we'll make a fee for for our services. I think that relative to what it would cost somebody to set something up, it will be de minimus. And this is really out of the work that I want to sort of make a point about two different worlds that are coming together unexpectedly in the NGO space out of COP 27, it was clear to the NGO community that we need to be able to find sources of funding that doesn't currently exist. And if the carbon credit market can be more transparent, the products clearer, more forward thinking that people involved with, on the one hand, good financial background, but also understanding what the issues that the NGO world has. And that's for them a very good thing.

And I think we will supply that on the on the other side. We have Jim Coulter, Hank Paulson, Mark C and others who pull together, rise climate and raise seven and a half billion dollars for new investment in new technologies for this very same issue. So you have investing community. That's interesting.

Interesting. You have an NGO community that's interested and you have a client base that needs the help. And Tom, you said earlier this is not a true exchange where you're not really trading in these carbon credits. Do you envision a world where you do create an exchange? How far away from that world? That's a great question, David. I do believe at some point, given the volume that has to be done, that there will be an exchange of some of some sort where we can buy and sell a standardized product. Again, remember, these are retired. Kind of like a maturity, I guess, of a

swap or a bond. And so there will be trading, I think, at some point. I don't think we're really that close to that. But can I see that the next three or five years? Yeah, I can see that happening. I think we're all hoping that we can establish a price for carbon, but it's in these kinds of activities that we'll be able to do it because it needs to scale and it needs to be something that is more understandable to the financial markets. Tom, you've dealt with exchanges a lot

as a trader and otherwise. Are there things you've learned that you would apply here? You could do it better. I think certainly my experiences are gonna help help us establish something that people will will want to work on and work with us on, and so hopefully together as an industry, we can get something together that people want to standardize and they don't want to trade in a liquid fashion. And that liquidity always brings in more money, which is the scale part of this. We'll speak for myself. I find it very exciting and we'll be

really curious to see how it develops. Thank you so much for sharing with us. That's Tom Montag, an infinite kind of Rubicon carbon. Coming up, we're going explore the large and growing world of private credit with Mike Eric Getty of Areas Management. That's next on Wall Street on Bloomberg.

Credit, it's what makes the business world go round. And years of fiscal and monetary stimulus have made sure there's plenty of credit to go around. But now the Fed and other central banks would like there to be just a little less lending so we can get inflation down. History cautions strongly against prematurely loosening policy. We will stay the course until the job is

done. Which is hitting deals, particularly when it comes to private equity. What affects dealmaking is uncertainty. Uncertainty is the enemy of deal making. But it turns out that as the government regulates lending from the banks more, the world of private credit has exploded. The more you regulate parts of the financial system, the money tends to flow to the unregulated parts of the financial system. Having all that credit going on outside of the regulated part of the economy is not ideal.

But that leaves the question whether private credit will be able to step in as the banks pull back. Private credit is really important. But private credit has also pulled back a little bit, not because of the availability of financing or because they are stuck with bad loans like some of the large banks are. But because of the enormous uncertainty and take us into this large and growing world of private credit. We welcome now one of the leaders in the area.

He is Mike Eric Getty, CEO of Areas Management. So, Mike, thank you so much. Welcome to Wall Street. Great to have you here. Thank you very much. We hear so much about private credit these days and how big it is, how big it's gotten. Give us your sense of just how big it is right now and why it's gotten this big. So when we talk about private credit,

let me just zoom out quickly. We're talking about lending that is happening outside of the banking system and that could be in corporate real estate, infrastructure or consumer. I think a lot of the recent dialogue that that folks are paying attention to is more along the opportunity in corporate lending. That's the most evolved and the most

developed market up here in the U.S. and globally. In terms of sizing, no one quite knows is because a lot of this is in private hands, but order of magnitude. The private credit market for corporate in the U.S. is about 1 billion. Juxtapose that with CNI loans in the banking system that grew to two and a half times that and almost at parity in terms of size, but the leverage run in high yield market. So what effect is the increase in interest rates had on the private credit business? Obviously, it's affecting a lot of business right now. It's harder to get loans if you can get them at all.

They're more expensive. I think private credit has to outperform when rates are going up. Two main reasons. Number one, the structure of the loans are short duration and floating rate.

We reprice every 30 to 90 days. So as rates are going up, the return is going up. That obviously in an environment where we're seeing a lot of volatility in the equity markets and valuations are challenged in the high grade markets, private credit is a place where people can actually go to benefit from from rising rates. But the flip side of that, obviously, is that as rates are going up, that service becomes more challenging or leveraged borrowers. And so part of the conversation today is as you're generating this best return.

At what point does the incremental interest rate challenged companies? I would say as we sit here today, still really strong fundamental economic performance within the portfolios and not any signs of stress really making their way through as a result of the rate hike. Might just pick up on a couple of things you said there, because I talked to one investor who said there's no such thing as truly bullet proof in business. But these are close to it. And I guess it's because of the two things you mentioned, the short duration and also the fact you've got floating rate. So if interest rates go up, you're protected. Well, I hope that person you spoke to is

an areas investor already. But if they're not sure what the shot. Bullet proof is always something that you don't want to talk about in investing. But I would agree at this point in the cycle, private credit is is a good place to be floating rate. As we said, short duration, but also senior secured. Which do you think about where these exposures sit in a company's balance sheet or relative to the value of an asset? Today, most private credit loans are sitting in the top half of the capital structure, which means that there is institutional equity supporting those loans. Dollar for dollar, there is a significant amount of equity valuation that would have to deteriorate before you begin to have a conversation about principal loss on private credit.

Mike, you mentioned areas investors and I wonder whether you're having, if anything, an easier time in getting investors these days because interest rates going up necessarily affect the value of equities just because of the discount rate. It makes it less attractive. It has private credit has become more attractive relative to equities as an alternative investment. I think so. You know, in areas managers post to three hundred and fifty billion dollars of assets globally and we have funds that we offer across the alternative spectrum, including private equity, I would say as a general observation, investor appetite or door play equity product is pretty muted right now simply because, as you point out, valuations are challenged. And if you think about the drivers of return in that market, earnings growth is going to be muted. Availability of leverage is difficult. Cost of capitals ISE. So private credit does offer some pretty attractive relative value. And I think going into this part of the

cycle, a lot of institutional and retail investors were under allocated private credit. And so when they're grappling with the denominator effect from valuation deterioration in the public equity market, in the high grade market, private equity is probably where you're feeling at the most. I think the private credit markets, people are still under allocated, though, even though their alternative allocation may be lower, they're able to continue allocate, prevent.

I've read also, Mike, that the size of the loans is going up. You can handle much larger loans than you did, say, 5, 10 years ago at. Absolutely right. I mean, one of the biggest drivers of

growth in private credit in the US and now globally was just bank consolidation and the increase in size in the public market. Viewed through that lens, as banks have consolidated it more difficult for them to service smaller borrowers. And as the public debt and public equity markets have grown and moved towards larger borrowers as well. There's just a much brighter white space for private credit and private equity for that matter. I mean with larger capital solutions.

So as that opportunity set has grown and as folks like us have scaled capital, the average investment size has absolutely increased. To put that in perspective, when we started this business 20 plus years ago, a good sized borrower in this market was probably twenty five million dollars would be better cash flow. And today, average cash flow in our portfolios is pushing one hundred million. How much of the growth of private credit has been because the banks have been more regulated, they have had to move back out of that space. And I guess the follow on to that is do you see a prospect of more regulation coming from Washington as private credit's gotten so big? Yeah, I think that a little bit of it. I don't wanna say a false narrative, but a misunderstanding of what's been driving the growth of these market.

So bank consolidation is really the primary factor. So if you look at the evolution of private equity and private predator over the last 20 to 25 years, it really started with the consolidation of the middle market. Bank landscape in the big money center bank. So if you look today, there are 50 percent of the number of banks in the US than there were 20 years ago. As a result of that, what one may have expected, which was that all of this capacity would have stayed in the system. The larger banks are now focused on larger borrowers and more liquid part business. The regulatory overlay is less about

regulation of the banks and really more about regulatory capital framework and the profitability of this business on bank balance sheet. One thing that I think is misunderstood by most is that the banks are still very active participants in and around private equity and private credit landscape. They're just acting for the business in a different way, lending money to folks like areas supporting the buyout business through the syndication of loan.

So they're still very, very active. I just think that they've moved away from being primary holders of middle market credit, which I actually think makes them feel like where does the next leg of growth come? For areas and for private credit more generally, is it taking more market share away from banks? Is it moving into new areas? I know areas in the United States also to some extent in Europe, not in Asia. Yeah, we're seeing what I would call horizontal and vertical growth. So geographically we've been expanding into Europe over the last 10 years and now have a meaningful private credit business across the eurozone.

We are now meaningfully growing our business across the Asia-Pacific region. So there will be geographic expansion as these markets continue to evolve along a similar trajectory with a lot of the same trends that we saw in the US. There are also new markets that are opening is as institutional investors are being more attracted to private credit and the private market ecosystem is growing. We're seeing opportunities in places

like infrastructure lending, real estate credit, alternative credit. I think we're still in the early stages of the development of these markets and my expectation would be if we can continue to demonstrate durable performance through cycles. The appetite for the asset class overall continue to grow quite good. Mike, thank you so much for joining us on Wall Street. As Mike I get it. He's CEO of Areas Management. Coming up, we 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. I'm David Westin. We're joined now once again by our very special contributor to Wall Street. He is Larry Summers of Harvard. So, Larry, I have to say, until Friday,

I thought the big story was going to be what Jay Powell had to say and then those jobs numbers came in. And obviously, the number of jobs is really impressive, but also the average hourly wage. Wow. Look, what we saw was a seven and a half percent annual rate wage increase for the month, a six percent wage increase for the last three months and a 5 percent increase for the year.

So it's high and it's rising and the labor market is strong. And we're still in unprecedented territory in terms of the gap between vacancies and jobs. And I think that what that's gonna tell you is that we have a long way to go to get an inflation down where the Fed has said that it wants it to be. We don't know where this is, how this is all going to play out. But for my money, the best single measure of core underlying inflation is to look at wages. It's interesting. That's what Paul Krugman acknowledged

today when he said that he was shaken in his views by these numbers. And I think what this is telling us is that the Fed's got a long way to go. So how is that going to happen? I mean, we heard Jay Powell talk about the JOLTS numbers, for example. So we've got a big gap between the

people trying to get people to work and the people actually working. So long as you have that, you've got this pressure. You said we've got to get demand down so that, in fact, we are not seeking as many people in the workforce. But I think it done. It's not getting done yet. It's not getting done yet.

What that says is we're probably going to need increases in interest rates. I suspect they're going to need more increases in interest rates than the market is now judging or than they are now. Say, look, every every time they revise their forecast of inflation up and they regard revise their forecast of ultimate unemployment up as well.

And gosh, we've all been at the airport and they say it's leaving at seven thirty and then they say it's leaving at eight thirty and then they say it's leaving at nine thirty. And when I see that happen, I think it's leaving at 11:00. And it's something like that with these economic forecasts. So I hope I'm wrong, but my sense is that inflation is going to be a little more sustained than what people are looking for. And my sense also is that it's much harder than many people think to achieve a soft landing because there are all these mechanisms that kick in at a certain point, consumers run out of their savings. And then you have a wily coyote kind of moment where consumption falls off. At a certain point, people start putting

their houses on the market and then you see house house prices falling and then other people rush to put them on the market at a certain point. You see credit drying up and when credit dries up, people can't pay back their old bought their old borrowing. So there is this proposition we've talked about before on this show, David. It's called Psalms Rule that says that when the unemployment rate goes up by half a percent, it goes up by more than 2 percent. And that's because once you get into a

negative situation, there's an avalanche aspect. And I think we have a real risk that that's going to happen at some point. So to continue your airport analogy, when is the plane going to leave? Because we heard Jay Powell this week say don't pay as much attention to how fast we're going up, because every jump to the fact he was pretty cruising 50 basis points, that's only five. He said pay attention, the terminal rate. I'm not sure the markets did that. So where do you think the turnaround is now? Look, I've been saying that relative to the five. It's priced into the market a little below five.

I think that's got to be low are likely to be low. Because I always try to look for possible errors and for seems almost impossible. And sex is certainly a scenario we can write. And that tells me that five is not a

good best guess for where it's going to be in terms of what will happen. I guess I think there's an old saying that things happen faster than you think they will. So I don't happen as fast as you think they will. And then they happen faster than you thought they could. And I think that may be the way it is

with the downturn. I don't know when it's going to come, but when it kicks in, I suspect it will be fairly forceful. I got e-mails, you know, Larry, this week from a loyal viewer of Wall Street, in particular, a loyal viewer of yours saying, I really love hearing Larry Summers. And he asked the question. He said, what's so magic about the 2 percent? I mean, why can't we live with 3 percent or 4 percent for that matter? First of all, I think it's important to understand that having failed for a while to hit 2 percent, it's kind of problematic then to declare that it's no longer our goal, even if it was a somewhat arbitrary goal in the first place. Second, we've already backed away from the 2 percent. In a sense, we've been four years, well above 2 percent and nobody's saying we should swing below 2 percent.

So it all averages out to be 2. So in some sense we're already not really trying for a 2 percent average inflation target. We're trying for a 2 percent minimum inflation target and that's different than what we originally set out to. So we've already ease. Third, if we settle in for a 3 percent inflation target, then where do we think it's going to go? Presumably there's going to be a low point of inflation in this cycle, David. And from that low point, it will rise. So saying 3 percent as a target for what we're disinflation, too, isn't saying 3 percent is an average for the next cycle. So what I think we should do is stay with the 2 percent target, recognize in as I think is surely right, that that's going to be a low point, not an average. But I think that's all right.

There was news that went beyond the US economy this week and it had to do with China. We had demonstrations that began in the week. They seem to be settling down a little bit because they're easing off on the Covid restrictions. But it's pretty clear that the Chinese economy is struggling, some in part because of those restrictions. Give us a sense of what the risks are there for the global economy because of what's going on in China right now.

Look, it's possible that we're going to gain a little strength because it's quite possible that they are going to open up a bit in response to these protests. And then the Chinese economy is going to go faster. And when it goes faster, that will be an impetus to commodity prices that will help parts of the global economy.

I think the challenge for them is that they've only got one fifth as many intensive care units per person and a third as many nurses as we do per person, and they don't have much immunity. And so it could spread like wildfire and they could have a very scary situation. And that's their tension, really. They can save the economy or they can save their populations near perfect health. But I don't think they're going to be able to do both.

And to your point, Larry, it seems to me that we can sit here and say you should ease up some of your Covid restrictions. They have to be data dependent in their own way. It depends on how many infections they get. How many intensive care units are being used in Japan. They may have to adjust.

Their approach are surely going to have to adjust. They're surely going to have to tie straight their approach over time. And I don't think it's going to be easy. I do think sooner or later they're going to have to do this and they're not gaining a lot by postponing it.

So I think a managed exit from 0 Covid is probably the right thing for them to do. And I think the protesters have probably pushed them in that direction. And that's probably a good thing for them and for the global economy. But it's going to be a very rough patch.

Finally, Larry, what is this potentially mean for the rest, the economy, the global economy? Because we had David Malpass on this week and he said he thinks there's going to be recessions and a lot of countries around the world. I think that's fair. I think that is fairly likely, not so much because of what's happening in China. But you've got big challenges in China. We've got a good chance of going into recession. Europe's more difficult than we are. Those are the three big poles of the global economy. And if they all slow, others are going to slow along with them. And of course, this is going to be a

relatively high interest rate recession, not like the low interest rate recessions we've seen in the past. And that's also going to be problematic for emerging markets. What does that say to the Bush administration? I mean, they've got a new Congress coming in. They're not going to a majority in the House. If you were there, now you're back in

one of your old jobs in the White House. What is the best economic policy you could pursue given all the uncertainties and the risks? Look, they've got to execute what they've got in place. It's huge on infrastructure. It's huge on science and technology. They've got to implement that as effectively as they can. And they've got to lead the world in a strong response to all these various global challenges. But they've got their work cut out for

them. Can they invest in global health issues? Because you've always been very concerned about that. Look, they get the biggest opportunity today is to put money into pandemic prevention. Another pandemic is likely to threat is likely to come within 15 years. And unless we do more, we're not going to be more ready next time than we were last time. It's so great to have you here and have you here in New York.

It's wonderful to be with you. Thank you so much. Our very special contributor, Larry Summers of Harvard. Coming up, the one word we never want to hear, but we need to hear every so often, and that is the power of no. That's coming up next on Wall Street week on Bloomberg. Finally, one more thought, the power of no.

All of us like to hear people agree with us, so we're none too happy when people go the other way, when they tell us that we are just plain wrong. Like former Vice President Mike Pence recently did to Senator Elizabeth Warren on the subject of abortion counseling. Senator Warren, you couldn't be more wrong, but sometimes being told no is exactly what we need, whether we want it or not. Take, for example, President Putin and his ill fated decision to invade Ukraine, something that hasn't gone particularly well for him. A bunch of countries are watching him make mistake after mistake and not wanting to associate themselves with, as Donald Trump would say, a loser. And people, at least those outside of

Russia, suspect Putin's problems are the result of his being surrounded by. Yes, men. I don't think there's any question that Russian intelligence scrapped this wrong or considered the plight of President Xi of China. As he enters his historic third term as

president a month ago, he emerged triumphant at the end of his 20th party Congress with his hand-picked team, as described by Mary Lovely of the Peterson Institute. We now have what we might think of as all the king's men. But this week, President Xi was confronted with demonstrations protesting his 0 Covid policy. This is a big deal. These political protests, because they're happening across the country at the same time in multiple locations. You just have to wonder whether that hand-picked team is exactly what President Xi needs right now. And when it comes to the power of no.

Maybe that is exactly what former President Donald Trump could use down at Mar a Lago about now as he managed to hold a dinner party that included Yay! Who has been accused of being anti-Semitic and let him bring along with him a friend who everyone agrees is anti-Semitic. NIKKEI, avowed Nazi sympathizers, white nationalist, anti-Semite. I mean, like we go through the list. And at long last, it looks like Mr. Trump may be getting a taste of no from leaders in his own party, from Senate Minority Leader Mitch McConnell. There is no room in the Republican Party for anti Semitism or white supremacy to the likely next speaker of the House, Kevin McCarthy. I don't think anybody should be spending any time with NIKKEI as he has no place in this Republican Party to Mr.

Trump's former vice president himself, Mike Pence. I think the president demonstrated profoundly poor judgment in giving those individuals a seat at the table. It may not be what we want to hear, but sometimes know is the best answer. That is, if we are listening, that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-12-06 02:54

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