Wall Street Week - Full Show 02/04/2022
Searching for direction in corporate earnings in Ukraine and in the economy. This is Bloomberg Wall Street week. I'm David Westin. This week's special contributor Larry Summers and Amy monetary policy at the moving target of the US economy. Markets have to be prepared for a rate hike at every meeting and related companies. Jeff Plough on the comeback in real estate in the face of rising inflation. New York is really I would say on a on a tremendous rebound postcode. Markets turn to earnings this week to find some relief from that bad January start. And it looked like tech might help us when
Alphabet shot the lights out in growing ad search revenue at Google. Something CFO Ruth Porat said was because of the strength of the overall economy and the shift to e-commerce. But then then Metta came out with its earnings sending its stock sharply downward over 26 percent on news of stalled Facebook user growth which Mark Zuckerberg blamed on stiffer competition. People have a lot of choices for how they want to spend their time. And apps like Ticktock are growing very quickly. And this
is why our focus on real is so important over the long term. And at the end of the week Amazon completed the tech whipsaw by posting strong cloud earnings and raising the price for Amazon Prime which sent its stock sharply higher. And we didn't get any real break in geopolitics either as President Biden and President Putin continue to talk past one another over the crisis in Ukraine. But with Russia's continuing his buildup of its forces around Ukraine we are ready no matter what happens when you might deny the legitimacy but which in the end we are analyzing written responses that U.S. and NATO received on January 26. But it's already clear. I informed Mr. Prime Minister about it that principle Russian concerns were ignored. And if earnings and geopolitics weren't enough to confuse us along came those U.S. jobs numbers on Friday. Stunning the markets and economists alike with Ford and sixty seven thousand
new jobs in January. We expect only one hundred twenty five thousand. And adding another 300000 revisions for December. Well how do markets respond to so much confusion. They get volatile with the S&P 500 moving up in the beginning of the week dropping on Thursday into Friday and then coming back to end the week up one point five percent. And the NASDAQ followed a similar
pattern. But a bit more dramatically shooting up only to plunge on Thursday and rising again on Friday to add two point four percent of the week. While in bonds the 10 year yield seemed relatively tame hovering around one point eight percent for most of the week but then shooting up to over one point nine when those jobs numbers came in at the end of the week. Tell us makes sense of a difficult week in the markets. Welcome now. So now Deci Franklin Templeton fixed income chief investment officer and Sharmeen most of our rock money. She's chief investment officer for Goldman Sachs Consumer Wealth Management. Let me start with you Sharmeen. You have your outlook for 2022 out. I have a picture of it right now the cover. You have an icebreaker
going through some really perilous waters here with a lot of icebergs. Tell us what you're concerned about for U.S. equities going into 2020 to. David the purpose of our cover is actually to make sure that our clients can just look at the cover and know what the key messages and the key messages. An ice breaker. It's a U.S. Coast Guard icebreaker that we've called USS Equities and it's going through all these icebergs. Hence the term piloting through. And our view is that U.S. equities are best positioned to pilot through all the risks and the icebergs are labeled according to
the risks we know are inevitable in a year like this. So the biggest iceberg out there is first inflation. Then the next iceberg is interest rate hikes and much further out. We have the prospect that maybe we're going to have a recession. But there are some icebergs we've passed through like micron and big energy prices. And so the recommendation to our clients is that stay invested and we're calling it USS Equities because we're emphasizing U.S. equities. But let's recognize all the risks out there that we think will introduce a lot of volatility. As you said but will not derail the economy or derail modestly positive returns in equities. We still recommend staying invested because we have about a 6 percent total return as our base case. So
certainly a lot of volatility certainly risks that we have to navigate but something that we think is manageable for 2022. So now to continue the analogy here for a moment it did feel this week sometimes in the markets like it was an ice breaker zigzagging around some of these icebergs. And to me as we heard from shore I mean we're rate hikes and inflation. Tell us about those jobs numbers that came out stunned a lot of people on Friday. Does that send a signal to the Fed. You've got to read
it raise your rates even faster and even more so. You know those jobs numbers we have to recognize that we have seasonal adjustment factors playing into these jobs numbers. So the jobs numbers the participation rate numbers actually it's not very clear what they're telling you. You know you talked a little bit about the revision data to December's numbers. There is also a
revision to November's numbers largest revisions on record. However if you look at the year as a whole some numbers were revised down its seasonal adjustments. You know what you actually take away from that is a little hard to see. What I'm taking away from the entire report really is that five point seven percent wage increase. No. And then if you look at non managerial you're looking at six point five. So you're looking at really strong wage growth. That's the number which I am
focused on. And if I look further and think about inflation next week I think that I would stop getting worried if you got that upside surprise to what is broadly expected to be a zero point or Rakesh style increase which will give you a headline with 7 percent. But I think that's where my concerns would be about the Fed speeding up that it would have to be in conjunction with that inflation number. Shery Ahn. I know you but when I hear wage increases I think two things. Number one it's nice for the people getting paid more money. That's really good. On the other hand you can do something to margins for corporations. Does it give you any pause at this point going into 2022 about earnings. When we think about earnings we believe that they have been the strongest driver of the returns since the global financial crisis and they will also be the primary driver of returns in 2022. So our base case is about 12 percent growth and earnings but we are as you point out assuming that we will see some
reduction in margins. U.S. margins have grown steadily since trying to join the WTO for a whole host of reasons. And the increase in margins has continued to surprise investors because everybody looks at them and say at some point they have to be coming down. But what has actually transpired is margins continue to increase. We think we're probably going to be closer to the peak and we're going to see some margin compression a little bit coming down because of exactly the point wages. And as to not mentioned the wage increases the pace will be a little bit stronger. And we're going to probably get a few inflation
numbers that are going to be a little bit strong. We think people are expecting them but it's always hard to know what the market reaction is when you actually see the prince of the higher numbers. But yes we are assuming some compression in margins but still a pretty good robust earnings growth. I mean do you think that the companies are going to be able to
pass through more of these price increases as we go forward. Because as you pointed out we also think that the underlying economy is going to be pretty strong because that's one of the things which I'm monitoring quite closely to see how much we see companies trying to protect their margins by passing along price increases to customers. Well as we thought we just briefly touched upon these things are a double edged sword. So on one hand price increases allows companies to increase their own prices and maintain good revenues. On the other hand you also have higher cost of inputs. When we look at the history of earnings generally companies do
absorb some of the increase in costs into their margins. So I think it would be unrealistic for us to assume that all the increases including energy prices are totally passed through. Our view is that they pass through some but not all and they do absorb some into margin. And that's why we do think you're going to see a bit of a decrease in margin levels. So Satya Nadella come back to you on fixed income. Okay. Maybe the margins of some of this cost increase wage increase. How much of a rate increase can the markets absorb. I mean you have to over one point nine people
are talking about something significant more that perhaps driven by the Fed who has to get told they have to get real rates up above zero in order to work on Sunday. Yeah they absolutely have to. And the reality is I mean I I have actually been quite critical of the Fed's droops. The Fed has taken on this. They've already established in December that inflation was. Inflation had surprised them. It was the type of inflation they wanted. We heard last we heard from the Fed just a week ago say it maybe did announce that yes the taper was going to end and they were going to clearly making very clear that we were going to have earlier rate hikes. But it's still expanding. The taper will end in March. But with the inflation prints we're seeing with the strength of the underlying economy we haven't actually stopped buying. So we are
still seeing an expansion the Fed. So I'd say that overall the Fed does need to do more really do more. And can the market absorb it. I think they have noted they want to be very measured. I'm not absolutely sure that the data is going to allow them to be as measured as they would like. This is a rubbish fed at the end and I don't think people have the ability to be as dumb issues they would like. So so now let me go over to rush hour. I mean on this question just some Chanel's part of the world actually potentially affect yours in this sense. As she said sooner or later they've got to stop actually pumping
money into the economy. And they said they can start taking it back out. How much are we seeing an effect of the withdrawal of liquidity at this point in the equity markets. David one of the interesting parts of our report is that there are a lot of myths out there that actually aren't quite accurate. So the argument that this incredible bull market is
all liquidity driven is actually not correct. Half of the increase that we have seen since the trust of the global financial crisis. So let's say returns around seven hundred sixty percent cumulatively is driven by earnings. We have about a quarter of that remaining being driven by dividends and the remaining quarter is driven by multiple expansion and lower rates. So one could say that there's been some impact from lower rates and liquidity but the biggest driver has actually been earnings. That's what's so incredible about this market rally. And this earnings has been broad based. It's also a myth that technology has driven all of it. It's actually very broad based earnings. Fascinating. Thank you so much. And I'll decide and I mean most of our money we'll be staying with us as we turn to geography and how the United States may may be diverging from much of the rest of the world. That's next on Wall Street on Bloomberg.
This is Wall Street week. I'm David Westin. It wasn't just the US markets it got some surprises this week. The European Central Bank didn't move. But Matt Miller guard sure made a turn in the direction of tightening. And the Bank of England moved up a full 50 basis points. So I mean most of our money of Goldman Sachs. And so now the PSI of Franklin Templeton remained with us to
talk about what geography has to do with it at least when it comes to investing these days. So so now let's start with you because as I say we saw more action on the central bank front in Bank of England and also ECB this week. It surprised I think some people at least. What did it do to the bond market. Well we finally saw a bunch go positive first time in three years. So we definitely had an impact. I would say that the Bank of England is the one which I find fascinating. Definitely the ECB moves large shield pools of money. When you see they see a major central bank shift on a dime between December and now December.
Probably no rate increases this year. Now pretty clear that we will have a couple of rate increases I'd say later on this year. It's a big change. You look at the Bank of England and that was a truly hawkish tone. Because not only are we thought yet in the US there's still open questions. And the market fully believes that when the Fed reduces the size of its balance sheet it won't actively be selling down the balance sheet which would be big big news for the U.S. The U.K. the Bank of England has made actually said that they might do that. That's very hawkish and very unexpected. And I
always look at the Bank of England because it's so interesting. They have the liberty to move because it's a smaller country on currency. And I often look at them as a leading indicator of the potentially other major central banks. But. So something to keep. Keep an eye on. Markets potentially have room to be majorly surprised and loads of volatility. Shery Ahn. Talk about
the equity side. U.S. versus Europe euros. Yes. For the rest of the world. How did you look. And 20 21 is going to look like that in 2022. We have been much more bullish on U.S. equities and have recommended that our clients actually overweight U.S. equities in their portfolios relative to market cap. Just to give you a sense of the magnitude of the difference in terms of U.S. and other parts of the world since the trough of the global
financial crisis U.S. equities have returned about seven hundred sixty percent. And we'd like to use cumulative numbers because we think it is just such a huge number. It has more impact when people hear the curative numbers. Developed equities outside the US returned around let's say two hundred and sixty percent. So roughly 500 percent lower returns. Emerging markets a little bit less than that in China just two hundred and twenty percent. So U.S. has far out earned and outpaced in terms of returns the rest of the world. And last year was just was an incredible example of that. So last year U.S. equities up just under 30
percent let's say. Twenty nine non U.S. developed equities around 20. Emerging markets flat in China down 21 percent. Well that kind of a difference can't persist forever. As they say trees do not grow to the skies. However we do think U.S. will continue to out or in other parts of the world other regions. And so even though they appear cheaper we think some of that cheap risk is just because of the sector exposure. U.S. has a lot more earnings for example from technology and faster growing sectors. They have less market cap weighted in areas like energy and financials that are cheaper
while emerging markets and non U.S. developed economies have more of that. So we still prefer our U.S. preeminence theme and recommend clients do that. And again that's why that Coast Guard icebreaker is called USS Equities. And so now what about on the bond side given what's going right now. Does it make any sense for example to be owning European bonds particularly sovereign bonds right now. Again you've got to pick and choose the one thing about Europe which is true is there are different countries in Europe different underlying fundamentals. And there's always going to
be there will always be parts of Europe which look attractive at different points in time. And I think that as you start seeing yields go up in Europe. Conversely one of the anchors which kept which people expected would keep U.S. 10 years from going up to high which is that as a differential with Europe with a Europe a eurozone kept increasing you would see inflows into into the U.S. and thus the long end would stay anchored. That starts that argument starts becoming a bit bit weaker as you get some kind of normalization and it's gonna be much lower. Let's let let's have that upfront. Normalization in Europe will be a lot slower
than the US. But on the other hand I think it again points towards differences amongst the different countries. I mean when you describe the really substantial difference between for example U.S. and Europe was equities I tend to think over the long term you can't have those kind of differentials. There's a sort of a lot of us most us in financial markets. Does that suggest maybe it is time to actually go into some of the markets such as Europe because they're undervalued.
That is actually one of the questions our clients ask us so when you look at valuations across a series of metrics U.S. is trading at a much higher premium relative to again emerging markets and non U.S. developed and clients are asking isn't this time to go. Given that it's much cheaper than even average levels. But first of all we do adjust for sector weights and it doesn't look as cheap. And as we project forward U.S. trend growth is actually higher than that of let's say the Eurozone or
Japan. So you'd expect better earnings growth. The other two really interesting facts are U.S. Labor is a much more productive labor force and U.S. corporate management has much better management scores. So actually they get better earnings out of similar levels of growth. And so our view is that the earnings gap will continue but the outperformance will not be as significant. So now we've had this whole discussion without once mentioning supply chains which has been talked about an awful lot. Talk about supply chains. And do you see a differential potential between the United States and Europe or United States and Asia with respect to relief of some of the clogging of the supply chains. I'm not so sure we're going to see differences on supply chains. I would actually say that one thing which is really get
me a little bit bemused is that when I look at the inflation expectations for most of this year the second half of the year you typically see a very sharp decline in expectations of where inflation will go partly related to the idea that you know you've got these effects which fall out. But then also with this idea that supply chains are going to clear up. And I didn't I really don't think supply chains all year. So I don't I don't put much faith in that. The other thing I'd say is we haven't talked about this much but fortunately it is only China. But China is committed to a zero Covid policy. Now zero Covid is interesting because you can have completely. Very difficult to predict stocks and stocks to supply chains. And therefore I remain a little bit skeptical about an easy smooth unclogging of all the supply chains. That's one thing. Another point I would see which is different to me between the
U.S. and suddenly Europe would be that would be that in the U.S. you've got very very strong demand. Right. You've got a five mile long queues of boots. So there's no question we've got no trouble with demand in the United States and to supply them holding us back. Many thanks. Now this analysis of Franklin Templeton and assure me and most of our money of Goldman Sachs. Coming up we look at the week ahead. And markets around the world. That's next on Wall Street week on Bloomberg.
This is Wall Street week. I'm David Westin. It is time now to take a look at what's coming up next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Well investors in Asia will be focusing on the reopening of markets in China after the weeklong Lunar New Year break. There's much to digest after a weak PMI data and the start of the Olympics. Plus we'll be looking for evidence of travel and spending over what is usually the biggest holiday of the year. Elsewhere a Japanese behemoth Softbank reports earnings and found a messy ISE son will face investor questions of a leadership. The future of and the ever present question of investment strategy amid a yearlong tech crackdown in China and other high profile blowups like the PCM IPO in India. This site also slated to release earnings. And we had interest rate decisions in the region from
India Thailand and Indonesia. Now over to Dani Burger in London. Daddy. Thanks Juliette. This coming week in Europe. It is another very very busy week for earnings. We have more lenders who are set to report results. They include Credit Agricole. We also have SOC Gen and BNP. The focus will be on rising costs as they pay up for talent as well as an inflationary environment means for them. And on the geopolitical front. On Monday German Chancellor Olaf Schultz will be in the White House. She has a meeting scheduled with President Biden where top of the agenda are rising tensions
between Russia and Ukraine. They'll also be discussing diplomatic efforts among other things like climate change and Covid as well. And then to round out the week on Friday we get UK GDP that data and high focus after the BMD rate decision last week. Now renewed Romaine Bostick in New York. Thanks Danny. The Securities and Exchange Commission next week is preparing to pitch a range of policy changes including the consideration of new rules on how long it takes to settle stock trades. FCC Chairman Gary Gensler said in an interview this week that he's aiming to quote take risk out of the plumbing of the stock market. Any new proposals would be the first major step taken by Gensler to make good on his promises to rein in how some brokerages operate.
Elsewhere investors will have their eye on the latest inflation report. Economists surveyed by Bloomberg expect the data to show consumer prices soared 7 percent in January from a year earlier. Finally more earnings on tap next week. About 80 S&P 500 companies are scheduled to report including Tyson Foods PepsiCo
Pfizer Kellogg Twitter Expedia and Disney. David. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up if inflation is the question can real estate be at least part of the answer. We'll get a read on the state of the market from Jeff Plow CEO of related companies in our building
where essentially all rents are even higher than people of. This is Wall Street week on Bloomberg. Fed Chair Jay Powell made it official last week dealing with inflation has become Job 1. Inflation remains well above our longer run goal of 2 percent. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. But as the Fed tries to get inflation under control real estate may be pushing the other way. All of us from New York City Mayor Adamson down. Want to
get people back into the office. I need my companies back open and operating. You can run a city like your own 30 percent even as the prices are going up for tenants. Our data has a rent increase of almost 18 percent over the course of 2021. But what may not be good for inflation or renters may work just fine for investors. Investors like John Gray of Blackstone the real
estate market for instance because the fundamentals are very strong particularly the sectors we're focused on. We're seeing pretty robust sales. And of course if it's inflation you're worried about. Mark Kissel of PIMCO reminds us that real estate is the tried and true hedge. We like apartment rates for a lot of reasons. It's not just the fact that they're real assets. The fact that they are an implicit inflation hedge for higher rents and higher wages is another reason. And when it comes to real estate particularly real estate in the New York area there is no one who knows it better than Jeff Glor. He is the CEO of Related Companies. So Jeff thanks so much for joining us. Let's start with New York. We go on beyond that
soon. But in New York City tell us what's going on with residential what's going on with offices. We hear a lot of stories about dramatically increase prices. Right. First thanks for having me David. Good to see you. New York is really I would say on a tremendous rebound post Covid. I would say everyone really thought we'd be fully back to the office back to everything exciting in New York right after New Year's with with the variant. I think that got delayed a little bit but it seems to be blowing its way through the city. And certainly I can tell you on the office side our tenants are
all planning for real return back to work whatever that new definition is. You know sometime in the month of February. And I think that's very very positive. We're double digit increases of occupancy. People actually showing up to the office week over week. And so I think that's a very positive trend in terms of the city overall. You definitely see people who had left during Covid comeback. Apartment buildings that went down in terms of occupancy to 80 percent roughly are now back to 98 99 percent in our buildings where essentially fall at rents even higher than pre Covid. So that's been a tremendous bounce back because we were down to that roughly 80 percent number and concessions and so on. And so that's been a tremendous rebound on the for sale condominium side. New York City had its
best for sale year since 2007. So I think again showing that resilience of the market and back to the city there's something like 17000 apartments that traded hands last year as I said the biggest increase since the biggest sales volume since 2007. So I think the city is feeling pretty vibrant almost all parts of the city. If you try to go out to a restaurant while again there was a dip in January it seems to me now things are busy again. The streets are busy. Traffic's back. It feels good. I'd say the only areas that feel kind of quiet to me are really true commercial districts in midtown a little bit
here at Hudson Yards. It's very vibrant if you're outside. Feels great. I went for a run in the park this morning. It was packed. And so all the things that we love about New York seem to be kind of back in place and I'm feeling good. Jeff on the commercial. You say that you are getting back into full occupancy. Are you repurposing some of that. Because we certainly read stories about particularly in the retail area that there's not the same demand for space. Are you having to repurpose some of your commercial space. Well actually we're repurposing as you said
retail is probably suffered the most of all the asset classes at Hudson Yards. I think you know we built a seven level retail center that was anchored by Neiman Marcus. And when Neiman filed bankruptcy instead of trying to retain it that for retail we decided to repurpose that to office. And so we now we we are in the process of converting and creating about four hundred thousand feet of new office space at Hudson Yards to deal with the increased demand that we're seeing from actually mostly a lot of it from tenants that are in place today that are growing and expanding. And so while the office occupancy might be kind of in the mid 30s or I think we hit 40 percent day in and day out today companies are thinking forward beyond kind of that full return to the office and making the decision to take even more space. And so we're feeling pretty optimistic about the office side. Like you said I think there will be some
conversions where possible away from uses that are not quite as valuable anymore. Retail being the top one. There's a lot of focus on real estate right now from the investor side right now because of inflation and efforts by the Fed. Now increasingly through 2022 it looks like try to fight that inflation. Where do you see the rates going in terms of rental rates whether it's commercial or private residential. Where are they going this year. And is it possible that by raising the rates by the Fed it'll make things work worse because it'll discourage new construction.
Right. So it is actually an interesting dynamic happening as people talk about inflation and real estate. You know normally what you would the typical response to inflation would be rents are going to rise along with inflation which I do think will happen. But then often you'll hear that the demanded rates of return would rise decreasing the value of the buildings. But actually what we're seeing is there is such a a flow of capital looking for stable cash flow returns into the real estate asset sector today that I actually think this is going to be one of those points in history where it might be counterintuitive. But I do think cap rates are going to go down as interest rates go up. And that that if you if you look in any real estate textbook that's probably not what you hear. But that's what I think is going to happen driven by all the cash
that's coming into the sector today looking for steady recurring cash flow returns. You have a very substantial presence in the New York area at the same time. We've seen a lot of people move away both businesses and individuals. You also have a presence in some other places. Are you shifting your business to some of the places that are hot right now as opposed to New York City. Well as you know I mean historically we've focused on the large urban centers in this country in New York Chicago L.A. just a Boston D.C. And you might historically have called those tier one markets and the cities that we might have called secondary or tier two. And they could be Charlotte Austin Nashville West Palm Beach.
Those cities are actually growing much greater and much faster rates than kind of the traditional urban core markets. And so we have shifted into those previously second tier cities which may quickly become first tier cities. And we are taking advantage of the growth in those markets and have opened offices and expanded. As you know we have a big presence in Florida in both Miami and West Palm Beach. We built new office buildings and we've seen tremendous demand a lot of it. I guess you could say unfortunately coming from New York. Fortunately we're on the other side. But I actually don't see many people closing up shop from New York and moving altogether to these other markets. What you're seeing is often a
second office an opportunity for people that want to live in Florida to operate to work out of their second office in that location. And so the offices are often smaller in West Palm Beach or Miami and they're a supplement to kind of their headquarters. We do think there's great opportunity in those markets. Jeff finally I want to talk about clean energy infrastructure because I know that's something it's really important to you and you're investing a lot in it related. Tell us about what that's going to do to real estate over the longer term. So we a couple of years ago set out we created a separate
company called Energy Rates a focus on renewable energy development generation. And just last at the end of last year we were awarded what will ultimately be the largest renewable energy project ever built in the US. And so we're going to build upstate New York. Twenty five utility scale wind and solar projects and build a 200 mile transmission line to bring that renewable energy into New York City and really clean up the grid in New York City. Because the problem that we have here is that the grid that provides the electricity to our buildings in New York City is driven today 80 percent by fossil fuels and only 20 percent by renewables. And the problem is you really can't build these renewables within the city center. And the traditional grid that would bring power here was too congested to carry. So that's why we're adding new infrastructure new transmission
lines. We'll build those renewables upstate. This is an 11 billion dollar project that will ultimately provide 16 percent of the energy for all New York City. And we know it's really all New York all renewable power and really change kind of the makeup of how power is provided to all of our buildings in New York City. So we're very excited about the opportunity. We brought on a great team to help us really grow that business and look to to replicate that in cities all across the United States. Pretty powerful change. I must say thank you so much to Jeff Flock. He is the CEO of Related Companies.
Coming up we wrap up the week with special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is water week I'm David Westin and we're going to wrap up this week once again with our very special contributor Larry Summers of Harvard. So Larry one of the big surprises this week where those jobs numbers the estimates were one in 25000 and for sixty 467. Also there were over 300000 jobs added for last month and a revision. So what does that tell us. Why are we so surprised by this. David I think the right takeaway from these numbers is that the economy is going strong. And I think the most significant number in it may have been the seven tenths of a percent almost 9 percent annual rate increase in wages in the last month. It's hard to know exactly what to make of make of that but it sure looks like we've now got wage inflation in the
United States at really a rate that is very strong. And unfortunately since labor is seventy five percent of all costs. That suggests that apart from all the special factors used cars housing and so forth we're moving towards entrenching inflation well above the target 2 percent rate. Does this surprise upside. And the jobs yield is one more piece of evidence that the Fed is behind with respect to monetary policy. And if so is the message the Fed from this. Quite possibly you've got to move faster and bigger than perhaps even you thought. There's no question with the benefit of hindsight that the Fed is behind the curve. I
think it's important to say respecting the Fed that the errors of judgment they made last summer and last spring were quite widely shared in the economic forecasting community. But they were errors nonetheless. And I think the Fed's got to catch up now. And I rather doubt that bringing real interest rates up all the way to negative 2 percent which is about what's factored in right now is going to be enough this year to make a meaningful dent a major dent in the inflation rate or even in inflation psychology. So I'd be quite concerned if I were sitting at the Fed about being behind the curve. Well let me just be specific with you. Over a month ago on this program you said there should be five rate hikes in 2022. Should it be even higher than that. Look look one of the very good
things about Jay Powells last press conference was he. He he didn't say he was doing it but he in effect ditched a lot of misguided framework that the Fed had talked about earlier when he talked about being humble and nimble. And that's the way we've all got to be before the data. So I don't think there's any need to judge right now whether you need five or whether you need seven rate increases this year. My best guess is that they're in the end going to need more than they now think and that markets have to be prepared for a rate hike at every meeting. And they have to be prepared for the possibility that as the inflation process continues we might need to have meetings with more than a single 25 basis point rate hike. But
the data are very uncertain and we've all got to recognize and be humble about that. So it's hard for me to know what will happen. But certainly anyone who's not prepared for a rate hike at every meeting as a real possibility even with multiple rate hikes on occasion I think is underestimating the range of possibility. Larry you would be the first one to say there's a risk in undertaking also a risk and over tightening whereas that balance in your mind right now what is the bigger risk for us over tightening or under tightening. I didn't get an economy with 4 percent and declining unemployment rate with a record level of job vacancies and with wage inflation now on more and more measures above 6 percent. I think the greater risk is that we undertake and we end up with an economy with underlying inflation above 4 percent. And then there's. Alternative at some point to do the kind of thing that
Paul Volcker had to do at the end of the 1970s. Now we're not going to have double digit inflation. We're not going to have 20 percent interest rates. We're not going to have a recession of that magnitude. But I think we are at risk of having something directionally the same. We've already put that into put that risk into play with the delays that we have made. And the more we are on the side of letting inflation go and letting expectations rise the more risk we take of that kind of scenario. So I think the greater risks are of that kind. You know in retrospect the Fed
made a mistake in 2018. They raised rates up to two and a half percent and then they brought them back down. That did not prove to be a consequential error in the grand scheme of things. But I think an error of allowing inflation to become entrenched would be a very real and grave error. You made the call of a concern on inflation and therefore the need for a Fed action. A year ago on this program and elsewhere and as you said earlier when the Fed was doing was doing there was a lot of consensus out there that they were probably right. Turns out that consensus was wrong. You wrote an op ed piece this week in The Washington Post about learning from mistakes. Where did the consensus go wrong. What can we learn from that. Consensus was too myopic in only looking at recent history where inflation had been stable and concluding that inflation was inherently stable. Rather than
studying the longer term interest longer term history and the consensus was a bit willful in wanting to believe that we could provide maximum economic stimulus without inflation risk. And it's very important to sort out what you want to be true from what is true in policy. And I think we lost sight of that principle a bit during 2021. Laurie one of the developers this week was the beginning of the Olympics over in Beijing the Winter Olympics. And we see
there a different system for ISE both politically and economically as we compete with China and other autocracies around the world. Where are we in that competition. Are we as strong in our alternative both in a plural sense and economic team as we were in the past. I think we're going to endure and be strong. I think there are important respects in which people are going to look back at the way China is viewed right now and it's going to remind them of the way Japan was viewed in 1990 and it's going to remind them of the way Russia was viewed in 1960 that these things look like terrible threats. But ultimately our system endures. That's my best guess and I'm not sure. But it does depend on our preserving the basis of our system. And what's new and profoundly troubling is doubts about the presidential succession process and not so much that there are people who want to subvert the process. That's always been true but good mainstream people who don't have the courage to do
what they know is right and work against and bring down those who would subvert the integrity of our election process. And that's going to be a very important test for our democracy. And I might say to all of those who listen to this show who are involved in markets that one of the reasons why the American stock market has been so strong is that people believe so strongly in the rule of law in the United States and they believe that shareholders will get what they're entitled to and that it won't be taken from them. And that's why the multiples on a given stock are much higher when it's an American company
than when it's a Chinese company frankly. And if our sense of the rules law is called into question that's going to have in addition to everything else long term consequences for American asset values that we're not going to that we're not going to like. That's not the most important thing. But I think it's a significant thing and gives investors more interest than they may realize they have in these political debates. And it is something we don't hear often enough. It's not just politics. Politics are important but it's also the economy and our entire financial system as well. Thank you so much to Larry Summers of Harvard our very special contributor here on Wall Street Week. Coming up think your top performers deserve a hefty bonus this year. What if you have a goat on your team.
This is Wall Street week on Bloomberg. Finally one more thought. Spreading the wealth even to the goat. It's that magical time of year on global Wall Street bonus time with reports of pools going up 30 40 even 50 percent levels. Three Natarajan of Bloomberg reports we haven't seen in a good long time. Wall Street hasn't seen this level of excess in over 10 years now and it's hardly surprising. The banks did extremely well last year and there's a lot of competition out there for
that top talent. As Bank of America chair and CEO Brian Moynihan recognizes you have to pay people. We don't want people want to work for less next year as does UBS CEO Ralph Hammers. We pay competitively. We pay for performance. We have the talent to make our our plan and to the extent we need to pay up. But we will do so as we have done so last year. But generally you don't have to pay up for the top talents once they've walked out the door.
And that takes us to the greatest of all time. The quarterback who's won the most Super Bowls by a lot and by the way has the most touchdown passes the most completed passes in the most games won not to mention a few other records unlikely to be broken anytime soon if ever. This week Tom Brady made it official. He's retiring from the NFL after twenty two incredible seasons explaining to his 11 million Instagram followers that his teammates coaches fellow competitors and fans deserve 100 percent of me. But right now it's best I leave the field to play to the next generation of dedicated and committed athletes. His close friend and business partner in his fitness business. TB Twelve Alex Guerrero told ABC CMA that it's not just his family that Brady will be spending more time on. I think he's excited about post football career. You know he's got amazing businesses that he's involved in. Certainly you know he has a
passion for health and wellness and and sharing you know the TB Twelve method and what we've been able to to start there and share that with the masses like he wants people to know how to be able to do what they love doing for longer and how to be able to do it regardless of age. It didn't come as a big surprise. There had been reports of its coming for days by the end. The biggest question was why he was dragging it out. So why the weight. Speculation in the press focused on you guessed it his bonus. It turns out that his contract with the Tampa Bay Buccaneers specified this Friday is the day he would receive the remaining 15 million dollars of his 20 million dollar signing bonus. Some sportswriters speculated that he might be waiting to make sure he got the cash but at least this time it was not the bonus talking or even keeping Brady from talking under the terms of his deal. He was owed that bonus no matter what. Although it was for a four year deal that he'll complete only half of. So now it's up to the lawyers to figure out whether he owes some of
that money back. And trust me they will get paid no matter what. But however the money sorts out a lot of fans are going to miss him. He gave us so much pleasure around here all about winning 20 years here for us. Six Super Bowl wins. You can't go wrong. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
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