Wall Street Week - Full Show 04/28/2023
Mixed signals from the economy, from earnings, but not from President Biden. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers on whether we're headed for a recession. After all the odds on that happening sometime in the next 12 months, I think are pretty good. Perhaps 70 percent. Former IBM head Sam Palmisano on next
steps for generative A.I. Business leaders and companies can show the way they could establish the guardrails. And Steve Rattner of Willett Advisors on how to invest in China. On the plus side, I would say China's back. The flip side of it is that clearly they're a bit off balance. Global Wall Street spent the week poring over a lot of data, looking for a signal in all of that noise, big tech earnings, a surprise to the upside.
They have had such large gains in the sector, not even the sector as a whole, but these fake names. But most of the talk was about artificial intelligence and what it could mean for the tech industry and for that matter, for us all. A.I. is is bigger than any single company or any single industry or indeed any single country. And after all those encouraging earnings
last week from the big banks, we learned just how bad things had gotten for Credit Suisse before UBS came to the rescue in three to four years time. I like to see the employees of the combined organization, this country, our clients, to be very proud to be associated with UBS. And then at the very end of the week, reports came that the FDIC will put First Republic Bancorp into receivership, saying the time had run out for a private solution. President Biden was unambiguous in telling us that indeed, he would like another four years in the White House. This finishes. And economic numbers pointed in both
directions with home prices and sales up. If housing comes back, does that give the consumer another boost, consumer confidence down that consumer confidence number really interesting for April. So overall, it falls a touch and GDP numbers out Thursday mixed as well. Slowing in the first quarter, but not as much as some had feared. Then on Friday, we got consumer spending numbers and the all important employment cost index showing spending was flat. While the ECI moved up higher than
expected, one point two percent for the first quarter. Markets took it all pretty much in stride with the yield on the 10 year down about 13 basis points for the week, ending up at three thousand four hundred three point four 3 9, while equities held up nicely. The Nasdaq was up almost one point four percent for the week, while the S&P 500 was up almost nine tenths of a percent, leaving it at forty one sixty nine or about ninety four points above the median of where is projected will end the year. One of those prominent yells, Mike
Wilson of Morgan Stanley is one of our most bearish. He's projecting in the year end of about thirty nine hundred. And this week he noted a shift. This is according to Mike.
While macro news has taken a larger focus in recent weeks. The reporting season has the potential to refocus investors attention on equity fundamentals to take us through the week in the markets. We welcome now Greg Peters, PJM Co CIO for Fixed Income, and Mona Mahajan. She is Edward Jones, senior investment strategist.
Welcome both you back to Wall Street. So let me start with you. What about what Mike Wilson had to say? Are we looking at fundamentals now more than some of the macro factors we have been? Yeah. You know, look, I think Mike got it right this week, certainly. Markets were driven by those earnings results and really the earnings results from the mega cap technology names.
And as you noted, they surprise and a surprise to the upside. And that wasn't only earnings beats. A lot of them are now showing that their business models are resilient, even through economic swings. And also, they are showing off a little bit of their cash piles.
We saw a couple of very big share buyback programs announced this week as well. And we saw at the end of the week, really equity markets were bullish. They were positive for the week. And that came even despite softer than expected GDP data inflation data that might be a little bit stickier than some might have hoped for. So generally for the last couple of weeks, it certainly has been the earnings story, driving markets and really driving those growth sectors in particular. But as we look towards the weeks ahead,
especially next week, when the Fed becomes more and focus again and as the economy and inflation continues to remain to the forefront, I think we'll see a swing from earnings and equity fundamentals to macro picture becoming more and focus in the weeks ahead as well. So it's only right for this week. Greg, what's driving the fixed income markets? It is inflation, the economy, and what is the Fed going to do about it? So we're on knife's edge in fixed income, whether it's a recession or a soft landing. There's talk of stagflation still cause and the data are so all over the place and disperse that you can basically draw a narrative or a conclusion from the data in any way you want. Well, so I'm curious about that, because the 10 year yield, at least to my eye, has not been going much of anywhere anytime soon. Is that because people are happy with where it is or is because they can't just decide anyway they look, it could go either way. They just can't tell.
Yeah. So that mass, you know, what's underneath. And so what we're seeing, though, on an intra day basis in the week end, you know, the the the moves are pretty extreme to fixed income. Volatility remains really, really high. So, yes, the 10 year is virtually unchanged this month of April. But the swings are pretty substantial. Moon And what about in the equity markets? What are we seeing in the VIX is pretty subdued, is it not? Yeah, you know, it really is one of the key stories that has emerged over the last few weeks, which is that that volatility index, some call it the Wall Street fear gauge has been very subdued, in fact, down about 25 percent year to date, which shows a bit of complacency from the markets and perhaps a little bit of investors hiding out.
Keep in mind, cash and cash equivalents are offering attractive yield. So if investors do want to wait for better opportunities, they certainly have an alternative now. That is a pretty attractive alternative. But generally speaking, you know, some of the catalysts that were supposed to emerge early on this year, including earnings, including the Fed potentially next week and including this economic downturn, really haven't yet surprised in any material way. And so I do think markets have yet to see a meaningful catalyst. Perhaps the Fed pause that may be on the horizon will be that one. Well, what about the possibly recession? Because we still have a lot of economists saying that it's more likely than not, perhaps as high as 70 percent likely that I don't think I can see that very much in the equity markets. So the equity markets know something the
economists don't when it comes down saying maybe the equity markets don't. Yeah. You know, look, I think this recession that is on the horizon is probably one of the worst kept secrets that's out there among economists and investors. Everybody has been talking about it. The deceleration we saw this this past week in first quarter GDP has shown a slowdown from three point two percent in Q3, two point six percent in Q4 of last year. This this quarter, one point one percent. So we're seeing this downward trajectory. The consumer is still holding up.
But if you look at forecasts for Q3 and Q4 of this year. We are, in fact, seeing negative and slightly negative annualized growth rates. So in our view, this idea that a mild recession is on the horizon is very likely still probably still a base case scenario and markets won't be able to completely ignore that. But keep in mind, we did put in a lot of work to the downside over the last 15 months or so. The S&P went down almost 25 percent, peak to trough. We don't see a repeat of that happening
even if we have a mild recession ahead. So any period of volatility, consolidation, pullback, we think could provide some opportunities for investors as they look past this bear market and perhaps towards a recovery period ahead. Greg, what about the bond markets? Because because we got a lot of economic data this week and it showed sort of slowing growth, perhaps, but inflation is not going away. Maybe headed in the right direction is not going away. Are the bond markets prepared for the possibility of the Fed hiking even past May? No. In fact, the market's pricing in the
opposite, right? They're pricing in rate cuts in the back end of this year. And to me, that is, you know, the risk markets are ignoring that. If the Fed cuts, that means we are into a recession or a much weaker period. But the binding constraint continues to be inflation. And I think we're in a very different environment. We've been so accustomed to the Fed
coming to the rescue and it's much easier to do that when they're operating below that 2 percent level, when they're above and they're pretty meaningfully above their degrees of freedom really, really get much tighter. So I think the markets are mis calibrating what the Fed can do and the opposite is also true. DAVID WEBER If the numbers continue to assert themselves on the inflation side, there's more work to do and the markets have been consistently wrong on the level of inflation and what the Fed's response function as has the Fed quite wrong, as best I can tell. Greg Peterson, PJM and Mona Mahajan of Edward Jones. We're gonna be staying with us as we turn to what a failed first republic could mean for the markets. That's next on Wall Street.
We're on Bloomberg. This is Wall Street. I'm David Westin. The saga of American banks continued this week with news that First Republic is headed apparently for receivership. Well, what that could mean for the markets. Meanwhile, hundreds of Edward Jones and Greg Peters. Pete, you are still with us.
So, Greg, let me turn to you first. We don't know exactly what's going on. First of all, let's assume it does go into receivership as reports right now say it will. What does that mean for the markets as a practical matter? I think what it means is that the market will continue to search for the next weakest link. And so First Republic has been very much in the market in the past month or so. So it's not a complete and utter surprise.
But the markets are really looking to suss out the weak players to see whether it's systemic or not. But I think the real issue on the table is how broad is the pullback in lending on the regional community banks side and what influence does that have on the market and the economy? And that contraction of credit is really meaningful because it goes to the small and medium sized businesses, which quite frankly, are the lifeblood of the economy and the labor market. So what does it mean potentially for equities if in fact, we continue to contract on the credit side because the banks are under control, under undue stress and they get more and more conservative as a practical matter? Yeah. You know, certainly has been interesting on equities.
Of course, financials have had some difficulty this year and in fact, still down year to date, one of the worst performing sectors on the S&P 500. And part of that, of course, is the banking turmoil we've seen over the last month. And now with First Republic coming back to the forefront. Really the question to Greg's point is, is there another shoe to drop after first Republican? And market uncertainty, of course, is never welcomed by investors. But what we would say is, one, that bank tightening of credit and that actually it started even prior to the March turmoil, we started to see metrics like the senior loan officer survey starting to show a meaningful tightening.
So what that means is banks will make it harder for consumers and corporations to get loans. Now, that has a that's a double edged sword on one side. Yes, economic activity will cool and the economic growth prospects look worse. But on the other hand, get inflationary story we've been talking about could see, you know, a marginally less pressure on inflation, inflation moderating even further because banks are pulling back and consumption and corporate spending may thus pull back as well. So really we're watching both edges of that story on both sides of that story. But more broadly, we'd say the volatility that we've seen in the financial sector we think probably has some room to run here. But one final point there.
We don't yet see any systemic disruption or any scope for systemic disruption to the U.S. or global banking system. We do think large cap banks here in the U.S. are still sound and much better in much better shape than they were back in 2008, 2009. So that that provides a bit of comfort at this time around. Greg Monroe makes an interesting point here. To what extent might the disruption the banks, which we don't wish on anyone, goodness knows.
But could that actually do part of the Fed's work for it? There was a piece actually that Bloomberg this week that said that what we're seeing already on the credit side is a mining to one or even two rate hikes. No, absolutely. The inflation growth dynamic is reflexive. Right. And the Fed knows that. And so if you hit growth hard enough, if you just take it to extremists, if you really hit growth hard, inflation will follow lower. Right. So the stagflation fears, I think, are a little overblown. I mean, we do have a 50 percent
probability of it. But ultimately, if you really hurt the economy or the economy really starts rollover, inflation will likely follow thus far. Mona, I think the consumer is really carried us through here. What do you see in the consumer and can they keep doing it? Yeah, it's a great point.
And really, the resilience of the consumer has been remarkable through a few very tough quarters. And in fact, the GDP print we got this quarter for the first quarter of to 2023 showed the same trend. Yes, GDP growth was at one point one percent, but consumption and personal consumption three point seven percent. So still, you know, above trend levels, the consumer is spending. What we've been hearing throughout earnings season, though, is that towards the end of the quarter, perhaps we did start to see a little bit of pullback in consumption. And in fact, we're facing an environment where yields are continuing to move higher. We are seeing a bit of volatility in the
housing market. And, of course, the all important figure which will get next Friday as well, that jobs number, you know, unemployment in the US still at historically low levels, three and a half percent, multi decade lows. But we're what we're watching is some of the real time indicators of labor as well. We are seeing jobless claims, you know, weekly jobless claims tick higher, job openings tick lower, all kind of precursors to a little bit of softening in the labor market. We don't expect a dramatic softening,
but the Fed is hoping that the labor. Market cools to some extent so they can see that wage growth figure cool as well. So, you know, all in consumer resilient, but probably seeing incremental weakening in the weeks and months ahead. One last thought we couldn't finish discussion credit the time of commercial real estate. Greg, where are we in commercial real estate? Well, I think we're in the early stages still.
So, you know, the work that we have looked at and evaluated is that we're in we're calling the fourth inning or the third inning. So so this is a long tenured process. So I think we're very much in the first stages. You know, the the higher rate environment has pretty meaningful implications for commercial real estate. But actually, most most borrowers. So, you know, this story has yet to unfold. Yeah, third inning points to go.
That's a sort of the third or fourth. Okay. Thank you so much, Simona Mahajan of Edward Jones and also Greg Peters of PJM. Coming up, generative A.I. everybody is talking about at this point, what does it mean for all of us all around the world? But if you're a CEO, what do you do with General A.I.? We're going to ask former CEO of IBM, Sam Palmisano. He's been through a few of these technological changes and he has some advice for CEOs about how to handle general A.I. That is coming up next on Wall Street
week. And we are on Bloomberg. This is Wall Street. I'm David Westin a week full of big tech earnings, all the talk was really about genera of A.I., its potential and also some of the potential risks. Take us through those. We welcome now Sam Palmisano. He was the chairman and CEO of IBM. He now is chairman of the Center for Global Enterprise Assem.
Great to have you back with us on Wall Street week. Let me put you back as either CEO of IBM or another huge corporation publicly traded. What would you be doing right now today to prepare for two or to incorporate A.I.? Well, David, it's a it's an excellent question. And as I think about it, I would think about all the lessons I've learned in the past, either running IBM or or if I was currently a CEO.
What I've learned over the past 10 or 15 years, and that is that we face these challenges before. There's always been these disruptive technologies that come along. They represent trimmed from phenomenal promise, but also they can be disruptive for a couple of different paths. I mean, I'll make some suggestions, but you can dismiss it. You wait and see, but then you learn. We learned in the last time that you can be left behind if you do that and other leaders emerge in your peer group.
Another way to do is let it just go like that would be the early days of the Internet. Just let it run. And then the problem is that you have to clean it all up, you know, and that takes time. You lose some momentum, also cautious, some money and those sorts of things. I would start with create a management system that takes advantage of these technologies and your strategy and implement that company wide. The benefit of starting there is you won't have the problems of the past with digitization and the internet and plus you can scale and integrate and learn a lot quicker once you get your footing and you know where you want to go to take your business. The other thing is that I'll add as these these technologies are going to mature and they will.
I mean, there's a lot of innovation yet to come. As exciting as this is, there's a lot more to happen here. And that has to happen in their gaps and need to be filled. Having said that, it becomes ubiquitous, which means it touches everybody in your workforce. So you have to think about the jobs, the nature of work and how it changes, how you develop skills that go out, hire three data scientists. You're going to have to train and
educate your people across the entire enterprise. And the last one I would think s to think about it. I would think that's culture. Culture is so, so important. You need to adopt ethical principles for a. We see the issues today for companies that haven't done that.
You need to be trusted in this space if you're an enterprise. But there are the things that management system thinking about learning of your employee base and the impact to them and your culture. One of the issues, I suspect, is productivity. I mean, a guy, a general A.I. has the potential at least to really increase the productivity of a company, something that we're always looking for. How do you make sure that you take advantage of that as a CEO without letting it go too far? Well, that's exactly the point.
You know, it's fundamentally what you need to do is I would say you need to think about the technology as a complement to what's going on today. So therefore, your knowledge worker can become an expert, not just an average knowledge worker or a teacher can become an expert teacher, not just a participant in teaching grammar or language, whatever happens to be. So if you think about it that way, is that how do you complement the technology with the actual the the that the worker, the knowledge worker in your organization? I think if you do that, you won't have all the chaos that occurred historically.
I mean, chaos was OK. We learned I mean, so there's nothing wrong with learning. But let's take the learnings of the past and try to avoid those as we get into the future here. Sam, what is the role, if any, of the government all this? There's a lot of talk about regulation. We already saw China come out with a draft set of regulations, basically saying that whatever you do in the.
It's got to be consistent with our values, which is all the censorship that comes with that. So when it comes to U.S. government, Europe, India, what is the constructive role the government in in really directing A.I. in constructive ways? Well, I think government does have a role and we see what happens when governments like to get ahead of these kinds of issues. You see that today with the social media companies and the issues around data and data privacy. So there's clearly a role. But the challenges, as we know and we've learned these regulations and state standards have to be global. I mean, standards will emerge over time
that are global. That takes a long time. So in the interim, what does a regulator do? And that's you've laid out the problem. That's where it gets complicated because there's different systems. Of course, the Chinese control system is
the open system of the United States and let's say some of the best, but then Europe somewhere in between. So how do you get global regulation that's consistent? And to do this regionally just won't work. It won't work because fundamentally these platforms are global. By definition, they're open source software by definition. So I know regions think they can take control, but the technology moves so fast they will really struggle in doing so unless you completely shut the place down and you walled off one that has economic implications. So to me, the question is in the
interim, what do you do? And I think there's a role here for business leaders and companies. I think business leaders and companies can show the way they could establish the guardrails, the principles, ethical transparency and implement this themselves. And finally, Sam, this week we had some of the biggest tech companies reporting earnings. And almost all the discussion was really about A.I. and general A.I.
and its potential. And there are people in the street, you know this. Now, who are saying maybe this will give a new impetus to the tech sector generally. It had been such a growth sector for so long that was waning just a little bit in the growth. Now, this here was a whole new wave. Do you think they're right? Well, it's definitely going to be a huge growth in innovation opportunities. There's no doubt about it. The question of David is who emerges as the winner here? So I'll take you back a little bit in history.
You say 50 years in the tech industry. It's interesting. You see these patterns that who emerges as the winner take client server to cloud Jihye Lee. Microsoft was the winner with Intel, the technology provider and client server. Who's been the winner. There's no doubt Amazon is the winner. Let's go to the current world called hype of scholars and large data model companies, social media. We know who the winners have been. Obviously, the Facebook since the
Googles. It's the apples of the world have done very, very well in this environment. Who's going to emerge in the future? That's the question. I mean, because some of these things can be disruptive to the business models, especially to things like advertising and search. You could potentially be disruptive at the same time, a lot of these issues that still exist that need to be resolved. As far as the let's call it the
governance of the data, the transparency of the data, the issues around the fact that there's bias and that needs to be addressed. All that has to happen, the scale required to run these models, they use case for a large language model literally to get one use case is one hundred million dollars of infrastructure. I mean, that's not going to happen. It's almost like semiconductors.
And so this will all have to be addressed. There's tremendous opportunities. I think really the question for our colleagues, especially from the investor perspective, is who is going to win and where do you place your bets? Sam, thank you so much, as always, a treasure. Have you back on Wall Street, we've had a sample of some of the former chairman and CEO of IBM.
Coming up, we're going to go to China with Steve Rattner Rule Advisors, and we'll talk with him about the investor strategy in the Middle Kingdom. If you really try to create a balance sheet for China, you would find you'd be envious of that balance sheet relative to our balance sheet. That's next on Wall Street week on Bloomberg.
China and the United States. What was an afterthought when President Nixon went to China in 1972 has now been catapulted to be the most important economic relationship in the world. As the Chinese economy has grown more than six fold. Trailing behind, only the United States and the U.S. helped it get there, leading the move to admit China into the WTO. Bringing China into the WTO is a win win decision. It will protect our prosperity and it
will promote the right kind of change in China. And there's no doubt that U.S. trade with China has grown dramatically since the end of 2001, when China officially joined the WTO. But now the question is whether both sides truly did win from that deal with calls for restrictions on trade with China and investment in China. All these things are increasing tensions and it scares a lot of institutional investors that would be normally willing to put a lot of money into China.
And an outright ban on social media giant tick tock, potential security privacy, content manipulation concerns based on what? Tick tock. Really not unique to us. Even as Secretary Yellen says decoupling of the two largest economies in the world is not an option. The United States will assert ourselves when our vital interests are at stake. But we do not seek to decouple our
economy from China's full separation of our economies would be disastrous for both countries, leaving investors to question what to make of the Middle Kingdom as an investment opportunity as companies like Apple pull back for 7 percent of their iPhone production now coming from India. That's often 1 percent in 20 21. This is about diversifying away from China. And to give us an investors perspective on China, we turn to a significant investor in China. He is Steve Rattner, chairman and CEO of Wool Advisors. That, of course, is the opposition that invests the personal and philanthropic money of Michael R. Bloomberg, who owns and was the founder
of Bloomberg LP. So, Steve, welcome back. Great to have you here. You've just been over to China. I know that you have invested in China over the years. What did you learn from your trip? I think I learned two things, David. On the plus side, I would say China's back. Other than people wearing masks, you would have no idea that ever been Covid.
They're humming along the hard at work. We met up with a lot of startups and entrepreneurs and venture capital kind of people and they're very focused on building their businesses. The first quarter GDP numbers, four and a half percent and people say, OK, it's a slowdown for 7 percent, but it's a great number. I certainly compared to our one point one percent for our first quarter. And so they're humming along. The flip side of it is that clearly they're a bit off balance both by what the America America has done to them and the state of the relationship with the US. And also, frankly, it was she who came in with a economy that had really moved heavily toward market based activity, market reforms. And he dodged a lot of that back.
And now he's trying to walk it sort of back the other way a bit. But they don't. The Chinese don't really know where that's headed or what. There's not there's no transparency, what to expect. We tend to focus on the geopolitics of the relations with the United States and China.
But you make a really important point. If you're simply a businessman in China trying to make decisions in China, you don't have the certainty that maybe you thought you had before. And what does that do to their willingness to make investments, to take risks? Because you're not sure when the government may come crashing in, as, frankly, they did in the tech area. Exactly. And so the problem was that a couple of years ago, when she decided that the tech industry had gotten too big for its britches, he also got onto this sort of common prosperity theme, which is fine, you know, less income inequality.
But then he started randomly picking on sectors like online education, which he more or less shut down in a day. And so it was very interesting for me to watch this. And so then she gave some speeches and kind of outline what what he thinks China ought to be focusing on, things like renewable energy, new technology, stuff like that, hard tech, as we call it. And so as we talk to our investment managers, they suddenly pivoted and they're essentially listening to G.E. and say, well, if he wants us to invest in A, B and C, then we better go invest in A, B and C and not X, Y and Z. So there's a lot more follow up trying
to figure out what he wants and trying to follow it. As you talk to investment managers, are there some areas they think are safer, safer in the sense it's much less likely the government got involved in that? Yeah, I think certainly industrial. I visited a company that makes gears very high, precision gears. Their business is fine out there. They're a leading manufacturer. He doesn't care about who makes gears for electric vehicles and things like that.
So. Sure. And then there's a lot of activity in things like robotics and so on, where again, people feel very comfortable. This is where she wants him to go. Everything related to battery technology.
Anything to do with energy and climate. All great. Let's go. Let's go there. But more careful about the so-called sensitive sectors involving anything involving content. The media. Things like that. You talked about growth in China, which
is not what it was, but still, as you say, enviable for much of the world at this point. One of the things that we read about is that the nature of their growth has shifted from essentially an export driven growth to internal to build and evolve in their internal markets. Does it change the sorts of companies, the sort of investment you look at? It's a great question. Yes. This is something that people sort of suddenly started talking about, but it's been under way for a long time. China has been not just an export driven
economy, but an but an investment driven economy. Huge savings rate. And for a decade, everyone, including the Chinese government, has been trying to get consumers to consume more and create more of a domestic economy. And that is starting to happen. The implication of that is as investors, is that you 10 there's a lot more focus today on the domestic stock exchanges, the Shanghai Stock Exchange, the so-called eight shares where domestic companies that make things for local consumption tend to be listed, because that is what investors perceive to be China's future growth engine. And less emphasis on, for example, the New York Stock Exchange, where a lot of the Chinese tech companies are listed because people are worried about where they're headed.
There was a time a few years ago when there was wild fluctuation in the Shanghai exchange in the domestic issues, in part because, as I understand it, a lot more of the shareholders really are retail. It's not institutional. And so you could have retail investors really move quickly. Is that still the case or is it becoming more driven by institutional? It's somewhere in between. Everything you said is exactly right. That's the way it was.
Institutional money is now coming in. So the market is getting institutionalized. This is not a market in which I would recommend individuals go out and buy the index for a couple of reasons. First, the. You said. Secondly, there still a lot of state owned enterprises inside of that exchange, and although they've actually done well lately, better in fact than non-state owned companies in general, we don't perceive them to be the thought leaders of the or the great engines of growth, the future. So. So there's a market like Shanghai is one
where a good money, money, money manager can actually create a lot of so-called alpha outperform the index because there's so much volatility and junk inside that index. So as an investor in China, how concerned are you about leverage? We've heard a lot about really extreme leverage in the Chinese economy. Well, certainly a company by company, we would. We don't invest directly in companies very often, but our managers hopefully are looking at leverage. I think leverage across the Chinese economy is a little bit missing the point. In a sense, in that people are looking
at the liability side of the balance sheet, but there's also an asset side of the balance sheet, which is they own a lot of stuff, including over a trillion dollars of our treasuries. And so they also I think if you really try to create a balance sheet for China, you would find you'd be envious of that balance sheet relative to our balance sheet in terms of the level of the assets, because of all that saving that we talked about, the level of the asset accumulation that's occurred along with the leverage leverage on the other side. Steve, you mentioned the uncertainty, maybe some would call even anxiety about the U.S. China relations, two largest economies in the world. And there are a lot of hostile things being said on Capitol Hill about China at this point. How realistic is a not decoupling because Janet Yellen, churches are said, is not going to decouple, but a movement in that direction, what that could do to the Chinese economy, but to ours as well? Two things. First of all, I was really surprised for
the first time in my meetings with the Chinese, our investor managers, that in addition, answer our questions. They had questions for me. They wanted to know about the Chinese American relationship. They wanted to know what to expect from the Biden administration in terms of export controls. They are very off balance about the state of the relationship with the US. I think I think Janet Yellen speech was excellent. I read that whole speech.
That can never be a complete decoupling. We get all of our bicycle from China. We get all our toys from China. You're not going to you're not going to be able to resource those from other places. But, yes, it's like if you think of it as a spider web, the spider web is starting to disentangle a bit. The Chinese are very focused on the
possibility or the desirability of trying to make more of their stuff outside of China so that it's not core Chinese anymore and would come into the US more easily. So it's a bit of both. But we also have to recognize there's a cost for both economies associated with this decoupling. The coupling helped us have very little inflation over the last 10 years until recently because of lower costs. As you decouple by definition, you're sourcing stuff in a more expensive way. And obviously the Chinese are losing business. So it is really a lose lose. There's obviously good national security
reasons to try to reduce our dependence on them, but nobody should kid themselves. It is a lose lose. One last one. China has been known for restrictions on currency and capital flows outside the country less.
Last week on Wall Street week, Larry Summers said One of the reasons we don't need to worry about they are and be displacing the dollar and reserve currency is because nobody wants to put their capital in there if you can't get it out. As an investor, do you take into account, is that a problem for you? No, I don't think so we can get our capital out, and I am, yes. I mean, you can worry a little bit about what they could do. But I don't I don't think that's a significant worry. I but I would I thought, well, you can ask me and I would agree with Larry that the army can't become a reserve currency. You can't have a currency with that is
managed and with capital controls become the world's reserve currency and with a government that is so unpredictable. So the lack of I think probably the last thing I worry about is the idea that the RNC is going to displace the dollar. Steve, thank you so much. Always great to have you on Wall Street. That Steve Rattner of Willett Advisors. 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 week. I'm David WESSEL. We're joined once again by our very special contributor here on Wall Street. He is Larry Summers of Harvard. Larry, thank you so much for being with us. We had a lot of important economic data
this week. We get the first quarter GDP numbers about personal spending that ECI. What was most important for you, David? I've been pointing to the ECI number because I think the labor market is the key to the inflation process because it only comes quarterly because it's the best of the numbers for measuring wage inflation, because it includes benefits and adjusts for changes in the composition of the labor force.
And that number was pretty strong. That numbers running about four point eight percent now, both on an annual basis and a quarterly basis. There's not really evidence that it is decelerating. The revision for last quarter was a little bit upwards and four point eight percent. Labor cost inflation just does not go with 2 percent underlying inflation. So I think we've got a bit of a stagflation very problem developing where we have a base inflation that's well above target.
And as I've been saying for the last year and a half, I don't think that's going to get back to Target without a meaningful slowdown in the economy. That doesn't mean the Fed's objective should be to induce a slowdown. But if the Fed does what's necessary to contain inflation, I think a slowdown is likely to come along. And the odds on that happening sometime in the next 12 months, I think are pretty good, perhaps 70 percent. So I think we're not looking at an easy situation facing the Fed given these numbers. I think it's pretty clear that the Fed has to go ahead and move rates in May given the emerging credit problems.
I think June is very much an open question. So what I hope we'll see from the Fed is a move upwards by 25 basis points in May, followed by a commitment to monitoring both the activity and inflation figures on one hand and the credit flow issues which are leading of the economy on the other. So, Larry, there was a thought, not a hope, but a thought that perhaps some of the difficulties we had at Silicon Valley Bank and Signature Bank and now First Republic Bank might slow down the economy on its own. So the Fed wouldn't have to go as far. We thought maybe these were behind us. We'd now still have issues that looked up with First Republic. What do you make of the way that's being
handled as opposed the way Silicon Valley Bank was handled? I mean, let me just say first, David, that I am very connected to people all over the financial sector, but I have no specific relationship of any kind that I know of with First Republic Bank. I'm surprised and disappointed that this situation has continued to linger as long as it has with the bank stock down 95 percent and various other credit indicia of it in a problematic direction. Look, the big banks and the government both have a strong stake in this situation being contained and resolved. The big banks have deposits in First Republic Bank in significant quantity. They have a huge stake in the financial system staying stable. Larry, let's take a bit of a longer view here now about where we're headed globally with our economy head, Jake, solving the national security adviser give remarks at the Brookings Institution this week where he laid out what I took to be so a framework under the bottom Australian where he wants to go with economic policy. What did you make of that speech?
Jake is a very thoughtful leader, and it's probably the most carefully, intellectually developed exposition of the administration's philosophy that we have had to date. And certainly he's right that the world has changed. He's right that China represents a new kind of challenge. He's right to emphasize after what we've
seen in Europe with oil, other things, the importance of resilience. But I was disappointed that the speech did not emphasize the central importance of importing low priced goods. That is a substantial part of what determines the living standards of Americans. That is a substantial part of what determines the competitiveness of American producers. For example, we have 60 thousand people working in the steel industry and six million people working in industries that use steel. So when we raise the price of steel, we
are all hurting people. The Peterson Institute estimated some time ago that trade reduced costs for consumers by more than a trillion dollars. And if we had removed our tariffs on other measures against China, it would have added 2 percent to people's real incomes by reducing inflation pressure. I think that the administration is much too quick to move to industrial policy strategies on grounds of resilience.
Let me give you two examples. The Jones Act was the resilience policy of the nineteen twenties. Let's have all our shipping be U.S. carriers. That's made the price of heating oil considerably higher in New England all year. That screwed up our efforts to help Puerto Rico after the hurricane cause we didn't have adequate supplies. We had a major infant formula problem in this country that was related to buy American policies. That meant we couldn't turn quickly to
European supply chains. So, of course, we're all for resilience. We're all for strong U.S. corn producers and strong U.S. businesses. But what I find missing in the approach is helping consumers, which, after all, is the middle class and is central to how people feel they're doing. Recognizing the importance of
cooperation in producing a more prosperous general global economy that works to our benefit and the United States maintaining its commit. And to other countries, which we have not done, I. In the trade area for quite some time. Let's leave our audience on Wall Street here with a quick round of long, short or long or short.
Certain issues and certain people. Let's start with President Biden's relaunch of his new re-election campaign. It happened this week. Are you long or short on it? I've I'm long I think that the administration's got a lot that it can run on and frankly, its opposition is in very substantial disarray. What about the head of the Bank of Japan, Mr. Wade? He had his first meeting this week and surprised some people about sort of putting off ultimate decisions about yield curve control. Are you long or short on his premier?
I think he's a cagey and shrewd guy. Any kind of peg, whether it's an exchange rate or an interest rate, is a hotel that's much easier to check into than to check out. And I think by setting forth that study mechanism, he is beginning a process of orchestrating leaving a peg that probably has outlived its purpose. And finally, we talk about the Fed a lot. We don't talk about Fed security very
much. This week we had this remarkable incident where apparently some people who were apparently Russian purporting to be present, Selenski of Ukraine, and got Jay Powell, the chair of the Fed, on the phone and had a fairly detailed discussion with them. You're long or short on security at the Federal Reserve. Oh, I'm short looking backwards that I'm long looking forward, because I'm sure there's going to be a pretty thorough review of how that could have happened.
That's determined to make sure that doesn't happen again. That's kind of an embarrassing, embarrassing moment. If there's any institution in the United States, we want to be uncomfortable.
I would suggest that it's the Fed. But there are a lot of very dedicated people there, and I'm sure they'll get it fixed. Okay. Larry, thank you so very much. Always a pleasure. That's Larry Summers of Harvard, our very special contributor here on Wall Street.
Week. Coming up, the richest man in the world gives New York a brand new gift from Tiffany's. And he spared no expense. This is Wall Street week on Bloomberg.
Finally, one more thought. All that glitters may not be gold, but some of it sure is. This week marked not one, but two milestones for luxury and particularly for the largest luxury company in the world. LVMH. Or more correctly, LVMH Moet Hennessy, Louis Vuitton. This week, the market cap of LVMH touched the 500 billion dollar mark, making it the first European company to do that.
Run by the world's richest man. He's Bernard Arnault, who has added the names of some of the best known luxury brands to the name of his company as he's acquired them. But one iconic luxury brand name didn't make it into the company's name. That is Tiffany, whose flagship store at
Fifth Avenue 50 Seventh Street. Audrey Hepburn made iconic in Breakfast at Tiffany's, Just Loving One Tiffany's. And that brings us to the second milestone of the week when LVMH bought Tiffany's back in 20 21 for 16 billion dollars. A renovation of the 5th Avenue store was already underway, requiring them to move all those jewels to a safe location, hoping to avoid the sort of thing that happened in the Italian job. LVMH won't say how much at all cost. But it does include works by Basquiat. Damien Hirst and Rasheed Johnson, as well as a restaurant from Daniel Balloon.
So finally, you will be able to get indeed breakfast at Tiffany's. The transformation of what they now called the landmark Tiffany store has been overseen by one of Mr. Our Nose five children, ALEXANDRA, who, it turns out, is going through a process with his father and his siblings as Mr. Arnault has restructured his company to redistribute the power among the five with whom he has monthly power lunches, all in an effort to avoid that ugly succession process dramatized in the HBO series. We always tried to do the best playing my children because I love them. If you thought about the possibility that your children are actually scared of you cough, that does it for this episode of Wall Street Week.
I'm David Westin. This is Bloomberg. See you next week.
2023-04-30 15:38
