Wall Street Week - Full Show (06/17/2022)

Wall Street Week - Full Show (06/17/2022)

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What do you do when the facts change from gun legislation to a presidential election to monetary policy. It may be time to take a fresh look. This is Bloomberg Wall Street week time David Westin. This week special contributor Larry Summers of Harvard on whether the Fed is finally on its way to seizing the initiative on inflation. I still think that the Fed and most market participants are underestimating the gravity of our situation. And Stephen Burt of Aberdeen on where an active

investor turns when everything seems to be going down. You should recognize that right. You're investing. Life is always the cycle. This was a week for taking stock when Republicans and Democrats in Congress moved toward a compromise on gun legislation. That wasn't what either wanted but leaders like Jim Clyburn of South Carolina concluded was so much better than nothing at all. I'm a half loaf sort of guy. Half a loaf is better than no loaf at all. A week when House Select Committee hearings made it clear that some of President Trump's top aides like his attorney general Bill Barr struggled in vain to get him to accept the fact that he had lost the 2020 election. And I was somewhat demoralized because I thought for it if he really believes this

stuff. He has lost contact with words. He's become detached from reality. And most of all it was a week for central banks to come to terms with just how far behind inflation they had fallen. As recognized by former Bank of England Governor Mark CARNEY I think what's clear is central bankers need to catch up to their economies. And the ECB tried to catch up with the European

economy by telling its staff to get on the job. The ECB called an emergency meeting and that caught everybody's attention. The takeaway a call for staff to accelerate work on a new tool to combat unwarranted jumps in euro area bond yields. While the Bank of England hydrates once again the Bank of England's never done more than twenty five. Don't forget it was unprecedented for it to do five hikes in a row. And Fed Chair Jay Powell stepped up to the podium to announce the biggest rate hike in over 20 years with the promise of much more to come 75 basis points today. I said the next meeting could well be about a

decision between 50 and 75. And if you wondered whether the markets were listening just take a look at the results from this week. In a wild week of trading and actually an update for stocks on Friday. Overall for the week the S&P 500 closed the lowest it's been since December of 20 20 losing almost five point eight percent for the week overall. Paul Allen NASDAQ wasn't too far behind down by some four point eight percent. While ironically Bonds didn't fare so badly considering the Fed news with the yield on the 10 year up just 7 basis points ending the week at three point to three percent. Here to take us through what really was an historic week in the markets are Bob Diamond founder and CEO of Atlas Merchant Capital. And Joanne Fee partner at Advisors Capital Management. So Joanne let me start with you. I'm not sure it's fair to ask what the markets made it this week because they were all over the place. There was so much noise in the marketplace.

But what did you take away from the league. Well you know David I think clearly the market is coming to terms with the higher risk of recession with the reality of higher interest rates for a bit longer than perhaps they had expected. And that's doing a couple of things. You know higher uncertainty means stock valuations have to come down with that higher risk premium and with higher interest rates on the higher coming now and on the horizon for a bit longer than expected. That also takes valuations down. So we saw in the price action a clear move towards safety. Consumer staples outperform health care outperform. And banks you know are a mixed bag because they're benefiting from those higher rates while at the same

time they could face headwinds from a recession. So Bob you Mr. Banking what did the banks make out of this. So I think the banks have a very very interesting period ahead. On the on the positive side David as is Joanne said higher interest rates and this kind of an environment steeper curves more volatility higher rates across the board are good for banks. They're good for their margins and lending. They're good for a host of things the repo books. But the thing that'll be most positive I think when we see the earnings is it's an incredible trading environment. Those banks particularly the US banks that maintained a trading platform are going to have a really really strong quarter on the more balanced side. I'd say that unquestionably we have a serious commitment to investing. And in our opportunistic credit fund we're seeing real cracks in the lower end of credit. And I think the banks are going to face not just a weaker economy but

one of that one of the aspects of that will be higher provisions in their credit books. And that comes after a couple of years of either modest or credit write backs. So on the positive side rates will be good. Trading is going to be extraordinary. On the more balanced side mortgage is down quite a bit. Writing of mortgages and credit provisions. So Bob that markets that a lot of adjusting this week a lot of capital reallocation. I think it's fair to say. Did they do enough. You heard Larry Summers there in the open saying he thinks the markets still don't understand how much pain we have in front of us. Do you agree with that Bob. Yes and no. I mean I think you have to give some credit. You

know we've talked about this since last December. The Fed waited clearly too long. They eased with zero interest rates. And one hundred and twenty billion in U.S. Treasury and mortgage security purchases into an economy that had already recovered had tight labor and higher prices in higher inflation. So we're paying that price now. But having said that I thought that the the chairman was correct and the Fed was correct to raise 75 basis points this week. We are

starting to see the early signs of economic downturn in manufacturing and consumer sales very very early days. So I don't think this is adequate. But I do want to give some credit for for the recognition that they have to move more quickly. My worry though David in Japan I'd love your perspective on this. My worry is that in other cycles we've seen the Fed tighten.

When the economy's doing really well is they continue to tighten here which they need to do. They'll be doing it into an economy that's beginning to slow. And I worry that that could be more impactful in terms of the slowing of the economy. So Julianne what about on the equity side. There's been a lot of devaluation like I put it that way a lot of cheaper equities today than there was a week a month ago. Is it time to start buying equities again. Well yeah David you know clearly we are in a slowing environment as Bob just pointed out. But what people forget is that earnings are nominal. This inflation that we're seeing is showing up in companies sales figures. It's showing up in their earnings

figures. And that's why earnings expectations keep ratcheting higher even as valuations come down. And what we're seeing is a lot of good company stocks being thrown out being pummeled along with weaker company stocks. And that does create opportunities for investors to go sort of quality hunting particularly if you're a Garp investor or growth at a reasonable price is a lot of good companies out there that have become very attractive here. And investors really need to focus not on what's going to happen for six months or even 12 months. If you're in the equity market you better be there for multiple years. And this right

now does create a really good opportunity to you know to enhance your portfolio and build for beyond the current crisis. Bob it strikes me that one of the things we've heard this day out of President Biden this week I'm sorry President Biden as well as out of Fed Chair Jay Powell is we're not in this alone when it comes to inflation. And by the way tightening a lot of places it's more of a global phenomenon. You have a lot of experience with investing around the globe. What does this tell you in terms of investing around the globe. Well I think number one when you look to Europe it's at times like this that you know it gives us great confidence here in the US that you know the depth and quality of the capital markets are second to none in the world. And Joanne said as you go through a period where it's kind of risk off so everything is

declining. And we had exuberance and not just stocks we exuberance in house prices read exuberance in Bitcoin and everything is kind of a risk off. Thank thank goodness that we have this incredible capital market in the US. When you compare and contrast that to the challenges in Europe you know with 26 odd countries without a banking union with less flexibility around fiscal integration less flexibility around monetary policy and nowhere near the depth and quality of the capital markets I think the challenges that we face are going to be faced in in in in greater sense across Europe Bob. Fair enough. Very deep capital markets but we saw some real promise of liquidity toward the beginning of the year particularly the two year treasury. Are we concerned at all that the markets might actually break.

I don't I don't see that it's a concern at all. No and I think again you look to the to the diversification depth so much of what's what's here in the US in terms of the capital markets is a huge advantage. And to worry about the depth of the U.S. Treasury market around the two year it's just not something that should be on our list.

You can see that from the strength of the dollar as well. Right. Mean there's a reason why investors are so flocking to treasuries. And it's because you know we're still a safe haven. There's still more confidence in the U.S. government's ability to pay its debts than almost any other in Europe by the way obviously is facing greater headwinds than the U.S. is. So if you're going to compare stock market opportunities given the war in Ukraine and the sanctions and the energy problems makes the US look far more attractive. Well Joanne I'm glad you took us to F X because that's a question. Can the dollar continue to

strengthen against the other currencies like that. We saw the Swiss National Bank for example surprise everyone surprise me on raising rates and we may have the ECB close behind is you're gonna be sort of a currency tension there. Yeah. That's going to be really hard to predict. I think it just depends on the pace of the tightening in the multiple countries right to determine those relative prices of currencies. And right what we're seeing is this global inflation problem is really borne of all of these shortages that start in the pandemic that extended to OPEC's constraints on supply and then of course from the war. And so we're all trying to get inflation under control and that the currency movements I think are really just signifying how important the dollar is. U.S. treasuries are as a safe haven in this kind of an environment. Bob let us feed on that. You know

it's both. It's both the technicals which is you know the depth of the capital markets and not quantity of the dollar. And what's the alternative as well as the fundamentals in terms of you know how our how the Fed is is behaving and whatnot. So it's it's really both the technicals and the fundamentals during that I think are favoring the dollar right now. Okay. Joanne Feeney and Bob Dani Burger staying with us as we turn to what an investor can do in this turbulent market and how much faith in the end we can put in the consumer. That's coming up next on Wall Street week on Bloomberg.

The Dow Jones Industrial Average which had its 1971 low a week ago Tuesday has been moving up every day since then. That index of 30 old mind blue chip stocks has added more than 60 points in the last seven sessions. Forty three of them this week alone and barreled ahead to close today at eight hundred and fifty nine point fifty nine. That was Luis Brookhiser at the end of 1971 or 50 years ago now when the market was on its way back and the way we measured it was by some version of the Dow. What a difference fifty years makes this week. The stock market was doing anything but moving up. And we were talking about the Nasdaq and S&P 500 more than we were the Dow. Still with us are Joanne Feeney of Advisors

Capital Management and Bob Diamond of Atlas Merchant Capital. So Bob let's talk about those markets and how they reacted. We had some predictions out of the Fed that really said inflation is going to go down under their projections without inflation and without unemployment going too high. Were those realistic. They're not really predictions. I think what it is it's a survey of all the Fed presidents. So it's kind of a numbers a command. It's a. But David I think what struck me is is in order to get inflation down you know 50 percent which is what they're looking at. To think that we're gonna have virtually no change in unemployment or no pain in some other area just seems seems realistic. And whether or not we can get core inflation down at those levels very much depends on further further action by the Fed. So is it

possible. Sure. I think it's possible. I think it's unlikely that it will happen without a bigger impact on the broader economy and an unemployment. No. Let me jump in here. The the the Fed is trying to operate this solution through two mechanisms and a lot of people focus just on one of those. The idea being raise interest rates reduce overall economic activity which means companies then don't hire as many people. In fact they fire people. And that slows things down. And that's sort of you know that's one way to do it. You reduce the income of households and they can spend less and then inflation falls. But the other mechanism is higher interest rates themselves. Right. Have an impact on financial conditions

affecting both households and firms and households. Basically say higher interest rates means it's going to cost me more to finance a car. It's going to cost more to buy furniture. It's going to cost you more to buy a house. Firms are saying it's going to cost them more to do any projects they want to do. But it's the consumer side if those higher interest rates actually induce consumers to do less of those big purchases. That is the other mechanism that substitution effect. Getting them to wait

for a year or two years to buy those things when supply might come back because it ultimately will hurt the Fed's objective if they reduce overall economic activity too much because we do need more stuff to be produced. Also to keep inflation moving in that downward direction. So Joanne that really begs the question of the consumer and the consumer's balance sheet because there's something like two point seven. I've seen trillion dollars still sitting on the balance sheet of our household and maybe they'll just sit on that savings or maybe they'll keep spending it which will make it more difficult for the Fed to get inflation headed down sooner rather than later. Yeah that's exactly the other challenge that the Fed faces as consumers are flush. They've paid off a lot of their debt. They're sitting on a savings. But generally households you know that's a form of a measure of

household wealth. And generally when households spend they don't ramp up spending because their overall wealth went up. They tend to spread that over time. And in times of uncertainty they tend to spend less of that. They're going to try to make it last longer. So in this period of time when people now might start getting worried about what the future holds whether they're going to keep those jobs that they got whether new job opportunities might disappear. We may very well get a situation where consumers decide you know what. We better keep those savings in the bank and spend less and hoping that prices will

come down. For cars as they've begun to do and for other things. Bob what about the prices going down for stocks and for bonds. At what point do you become a buyer of bonds. You've been obviously mostly you've been a seller recently. At what point do they become enough of a bargain and make sense and stocks for them under the same thing.

I think in the in the government bond market we talked last year that we needed to get interest rates higher. We talked about that. The range of the 10 year has been one and a half to 3 percent virtually for over a decade. It got slightly below that during Covid. But basically when we talked in December and January it was like a one and a half percent. It's now above 3

percent. So you know in some ways you could make an argument that there's real value in the 10 year. My own view David is that in order to impact inflation or core inflation at 5 percent we're going to have to continue to drive the overnight funds rate closer to 4 to 5 percent. And what the markets are discounting right now is 3 percent at the end of this year maybe three and a half to 4 percent at the middle of 2023. I think it's going to get closer to 4 to 5 percent over time. So I do think that 10 year will go higher. But certainly there's a lot of value in a 10 year it as you show right there at three point one seven percent versus what it was just not so long ago at one and a half percent. So then what about that. On

the equity side Ethan is right by the way. He's not alone in saying we're going to get 4 or 5 percent. If that's right does that say it's not a time of buying buying stocks or are there some shopping opportunities right now. Yeah I think I think it's a good time to be very selective about holding onto various stocks. You know the Fed clearly has a short term problem ahead of its short term being you know a few years not 10 years. And if you look at the long term forecast that the market holds for inflation. Out to that horizon it's still only about two point four percent. So inflation

expectations are pretty well anchored and that should help keep the 10 year from going up too much further. But I wouldn't rule out certainly something in the order of 4 percent that's going to make it more challenging for growth stocks there's no question. But companies that have more resilient growth sources like those providing parts for cloud computing expansion for data center expansion these are the types of areas that tend to power through recessions. Companies like a broad commerce Cisco are really well positioned for this kind of an environment. And I think investors could find in those which have come down substantially as real opportunities for solid returns over the longer term. Bob you mentioned credit earlier as maybe presenting some opportunities as the spreads really increase. But at one point if you're really going to four or five do you

have to worry about defaults. I mean is credit too risky at this point. You know it's a it's spot on. I mean I think is you know David we started a opportunistic credit fund two years ago and we're already seeing that crack. And I think having dry powder and having an opportunity to invest across the capital structure in

good companies who have had maybe a bad financing structure or just don't have access to financing or are being hurt by higher interest rates. There are gonna be some fantastic opportunities for investors who can opportunistically look at opportunities for good companies with a point with a poor financing structure. And I think we're already beginning to see those opportunities emerge. So Joanne I want to give you the last word here. Given what Bob just said. Does that argue that you need to be more in cash or cash equivalence right now. Because he said there's going to be opportunities. You need the cash to invest. Are you more in cash than you have in the past. No. No we're not. We think it's pretty challenging to try to time a market like this. And so being in cast is implicitly a

bet against a recovery you know at some point in time. It's just very hard to get that right. So our view is investors should be positioned based on their time horizon if they need cash in the short term. They'd better not be too exposed to equities. If you're in equities you really should be looking to the two year three or four year five year horizon. And so we don't think it's a good time. In fact as Bob was saying we think there are actually opportunities. Now those opportunities may very well get better. We don't know but there are certainly opportunities now. And a lot of times what investors our clients will look for

is income from those investments that helps them write out these tough times. And you can find a lot of good dividend yielding stocks some in the growth world where they have those long term drivers already in place and some of the safer spaces like in the financials which will provide some protection against those rising interest rates. Yeah well protection is the relevant word I think for this wave without a doubt. As I say it was an historic week in the markets. And thank you so much. The two of you for helping us sort through a really tumultuous time. Bob Diamond of Atlas Merchant Capital also Joanne Feeney of Advisors Capital Manager. Thanks so much for being with us. Coming up we're going to take a look at what's coming up next week on global Wall Street. That's next on Wall Street week. And we are on Bloomberg.

This is Wall Street week. I'm David Westin. It is time to look ahead to next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Chinese lenders are likely to keep prime rates steady in the week ahead after a decision by the PDVSA not to trim its cash rate. Stronger than expected activity in May suggest the worst of the con setback is over and policymakers are wary that lower interest rates could spur damaging capital outflows. Given the Fed's rapid tightening. Meanwhile reports from Japan Malaysia and here in Singapore expected to show inflation continues to climb across Asia. Now

over to Lizzy Bird and in London Lizzie. Thanks Juliette. In the coming week all ears will be tuned to the various ECB speeches including from President Christine Legarde UN chief economist Philip Lane for hints as to what the bank's new tool to curb market stress is going to be. We'll also get the latest inflation data out of the UK. CPI is expected to add job in May. Driven by rising food and fuel prices though economists don't expect price growth to tip into double digits just yet. On Thursday we also get a bank rate decision from North East Bank. And the question is whether it follows the global trend and

surprises with a half point hike to rein in inflation. That's a 30 year high. Now to Romaine Bostick in New York. Thanks Lizzie. U.S. markets will be closed Monday for the Juneteenth holiday observance. But when investors return from the break they will have their eyes on Fed chair Jerome Powell. He's scheduled to appear before

the Senate on Wednesday and the House on Thursday potentially providing additional insight into the Fed's efforts to curb inflation. Economic data in the weeks ahead include home sales S&P manufacturing PMI ISE and the latest revisions to the University of Michigan consumer sentiment numbers. Earnings to watch include FedEx Accenture Darden Restaurants Carnival Corp. and homebuilder Lennar. And keep an eye on two pieces of antitrust legislation in Congress that would force large technology companies like Amazon Apple and Metta to open up their product platforms to smaller rivals. The House lawmakers are leading that effort said. Both bills could pass a vote as soon as next

week. David thanks to Juliette Saly Lizzie Burdon and Romaine Bostick. Coming up we've weathered downturns before but never when. This much of the market was invested passively once the active playbook for what we're going through. We hear from Stephen Byrd CEO of Aberdeen. This is Wall Street week on Bloomberg. The downturn is here. It's been a long time coming but the Fed put is over as Christina Hooper of Invesco recognizes. Markets are reacting the way they are because they believe the Fed is going to be forced to get more aggressive than they had expected. And investors like Marc Lasry think that means a recession is just around the corner. Everybody knows we're

either getting into a recession or is going to be close to a recession. I don't think there's a lot more negative news that's going to come out. We've had recessions before but never when passive investing played so large a role in the market. Certainly households really haven't seen a significant acceleration in their ownership of equities nor a deceleration. They've just kind of ridden the wave and slowly added more to passive and away from active over the course of the last several years. And Kathy would have asked thinks the shift to passive investment will go down in history as what she calls a massive misallocation of capital. But whether it was wise or not former CBO head Douglas Holtz-Eakin says that the move to passive has undermined the ability of the market to reallocate capital at the time we need it most. I think one of the most important

things the stock market does you know from an economist one who is price discovery. How do you identify promising new uses for assets when you're coming out of a downturn having to repurpose capital in the economy. And that's going to lean against what all the past investors are doing. If no one is out there doing price discovery was out there doing the risk taking that leads to reallocating capital. The stock market's a less efficient entity. Stephen Burd runs one of the leading global active management firms and he is CEO of Aberdeen. We welcome now to Wall Street.

Stephen thank you so much for joining us. We do have a downturn. I think we can all agree on that right now. And a lot of investors are saying where do I go in a downturn. What is active management offering you that perhaps passive does not. Well that offers you a lot. There's no doubt that there is a place for passive and has been a huge place for passive. But when you had 15 years of super easy money and oh voice rising then you can run a momentum cycle. And many many

people did. And that was a large part of the driving growth of passive know when the cycle has reversed and the tide's going out. And as we can see today we have NASDAQ so far this year down 30 percent. We're in a bear cycle. In a bear cycle you want to be very selective. You want to be able to make decisions to be defensive. Essentially you don't want to own everything and

passive is owning everything. So so there is a role as an active investor is to be able to answer the question of where should they go. Why should I do next. How can I preserve my capital and be in a position to grow capital when there is a more conducive environment. So think that helps over our investors right now on that very question as you're seeing growth subdued and some concerns about even recession here in the ISE sense as well as elsewhere. And at the same time you see inflation really if not out of control looking in that direction. Where are places you can go

that's different. Where can you zig when others are zagging. Yeah. Well the very important thing to recognize for every investor and it's where we begin is that you should be diversified. The first step to ensuring that you're actually never going to have massive concentration risk. He should be diversified and you should recognize that throughout your investing life there's always the cycle. Though there have been 14 bear cycles since 1929 and those bear cycles on average last 20 months. So you've got to think about is yes right now you're seeing inflation you know very very hot and you're seeing central banks all across the world. The Fed yesterday was 75 bits and overnight the Swiss as well. Everybody it raising tape

tightening the cycle to tackle inflation. So what should you do. Well you want to be in a defensive position. You think about equity with strong income long term quality defensive business defensible business models with the ability to price through higher input costs. You also got to think about if you think more and more micro level. Which

countries are going to be accommodating whilst the US in particular and central western Europe and the U.K. are tightening. China is actually a counter to that. China has had we're struggling whilst the UK the US was thriving. And China is actually going to be accommodating whilst the US is tightening. So in a diversified portfolio which is very important you can think of those places ISE being able to have a better prospect of growth. Whilst there is such an effort to reduce demand which is clearly what's going to have half to half it is beginning to happen. And it is going to have to happen in the developed economies. So let's pursue that just a little bit. China

specifically. I think I understand it's sort of a macro level 40000 feet. China's program in loosening at the same time the United States and a lot of other will be tightening. I understand a macro center. China is a big country and a big economy. You have to be pretty careful don't you about where you invest in China. You absolutely have to be. And you really have to have people on the ground too. We do have and have had for the last 30 years. So understanding the cycle we're very very selective in terms of where we would invest. And again that's abate. You've got to peel the onion and figure out which businesses can thrive. Will businesses that are able to supply and service consumer demand in China of course are some of those

businesses because they're gonna have high exhort Janus demand. Those are some of the businesses that you would want to be in. You wouldn't want to be in right now in real estate. Of course those issues are well known that are areas of tech where you do want to be invested in China. China actually is producing a lot of clean tech for the energy transition and the energy

transition. As we know if you think about yesterday we're very preoccupied by inflation very preoccupied in the media's feel of a tightening cycle. But climate change hasn't gone away. I think for the balance of our careers the energy the energy transition is one of the single biggest opportunities. It's a risk for the planet as a risk for individual businesses as one of the biggest investment opportunities that we will face. So being able to identify within that energy transition which technologies which clean tech technologies as you think about solar if you think about wind if you think about tidal but if you also think about sustainability of food supply if you think about energy management systems and software systems those are areas that we know that when you look through this cycle will have high demand and we're investing in those. Of course sustainability lies at

the very core of what we as a business are doing. And it's not a marketing thing. It's about risk management. It's understanding the true environmental social and governance risks associated with any particular investment. Steven one more on China if I could. There's political risk in any investment anywhere in the world but certainly there isn't China. We've seen some for

example investors in high tech in sort of the big tech over in China really get burned over the last year or so. How do you take into account political risk when you do pick your spots in China. It's incredibly important to understand in China politics drives policy policy drives progress. So you need to understand these episodes of reform and fight. As you know I spent the bulk of my career living and working in the Far East living and working across these different investment categories. And I have seen many episodes of reform where Beijing allows the capitalism with communist characteristics to to to to grow and thrive. And then it resets because it sees inequities building up the tackling inequities in exactly the same way that China did last year in terms of tech regulation in terms of education regulation tackling inequities is by definition a good thing to ensure that you can continue to grow. That's actually Beijing's motivation to ensure common prosperity. Common prosperity means

that you've got to be able to have an economy that can the ability to lift hundreds of millions of people out of poverty and into the economy. They're not going to stop doing that. They want to continue doing that but they want to address inequities. So what we have been doing is understanding where those in those episodes of reform how long were the last. What is the intent of the regulation and what are the consequences of it. And see through that cycle. And I believe that China has actually signaled that we've we've done the reform that we wanted to do. So they've been signaling no. We know today China is still locking down China. Still Shanghai and Beijing are experiencing lockdowns at the moment because they're tackling and they're still pursuing a zero corporate strategy. Now we also take a view that at present that is the right policy for China. So

you've got to take a view of many factors as the micro fight to. But then the individual industry factors and then invest accordingly. It's not just about China. So you have to take a view that some investors are taking the view that we're entering a bipolar world and this is you're going to be US centric economy in the world and a China century economy. And within

that there are other countries that clearly do represent an opportunity. One of them is Japan. You think about Japan. If you look at the very the weakness of the currency. But if you think about the fact that ISE some investors take the view that there's a China centric supply chain emerging which we're seeing then that does represent an opportunity for Japan and for the technologies in Japan and particularly in the energy transition. We view that as an investable area too. Steven thank you so very much. As have been really fast. Stephen Barrett he's CEO of Aberdeen. Coming up we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street week. I'm David Westin. Welcome back. Once again this week our very special contributor here at Wall Street

week. He is Larry Summers of Harvard. So Larry the big news of the week obviously it was a fed both of what it did and what Chair Paul said it was doing. And I guess my basic question is do you think that they really have made a turn toward really regaining their credibility when it comes to inflation. This is certainly the most dramatic action they've taken of both

the fact of a 75 basis point move and what was clearly a calling of an audible just before the play out at the meeting. I think that was welcome and appropriate. I still think that the Fed and most market participants are underestimating the gravity of our situation. The Fed moved its forecast by an epic amount both up on inflation and down on the economy. But their current view that they're going to get to two and a half percent inflation or below with unemployment just above 4 strikes me as a optimistic tail outcome not a central tendency in a forecast. I think a better judgment is that there's no reduction to normality without a significant increase in unemployment of perhaps two percentage points or more at some point down the road. And that's why I think there's a significant chance that we're going to find ourselves in a

stagflation very situation where inflation comes down but not all the way to desired levels. And the economy is much weaker than anything that's contemplated in the Fed's forecast. After all we have an overheated economy right now as measured by tightness in the labor market. At least we did a month ago. And I think we got to get back to normal. And then if we're going to see substantial disinflation there's likely to have to be a period that is well below normal. Larry I think that most of the market participants took Chair Powell saying this week I don't want a recession. I hope we can avoid it. But if it takes that to get inflation control I'm willing to tolerate a recession. You and I have talked on this program before about that

likelihood of recession. I must say the survey Congress is moving your direction particularly next year. You're not asking whether it's likely but in fact is that the only way really to get inflation under control. Look there have been so many surprise outcomes in economics that one should never say anything with certainty. But I would be very very surprised if we saw inflation come down to two and a half percent without also having seen a recession.

I think it is much more likely that we will see a recession but that we will not see inflation come all the way down to two and a half percent. And that's why I think the central tendency is towards stagflation. And I don't think the recession that Chair Powell says he's willing to tolerate is necessarily a large enough recession to do what will be necessary with respect to inflation. And that's why I think there's remains a very substantial ambiguity in this situation especially also I think Powell is right to emphasize this in light of all the uncertainties that exist in the energy markets exist in commodity markets. I think the story that more people are going to be paying attention to a month from now but

are only beginning to pay close attention to is what's happening in Iran and the potential geopolitical uncertainty that that's going to generate which I suspect will feed through into energy markets. So we have a lot of possibilities that are ahead of us from here. And Chair Paul addressed so that actually in his news conference where he essentially said some of this is outside our controls things like the war in Ukraine things like supply chain out of China and commodities prices outside of our control. What do you do as a central banker when what you have control over is basically monetary policy and a fair amount of what might drive. Economy is not monetary. It's really something that's larger than you look. I think what you always have to do in any kind of policymaking is play the cards that you are dealt. And I don't think that the Fed is being dealt very good cards right now

given Covid given the various uncertainties that you mentioned David. They're likely to confront a set of very difficult choices. That's why I think the confidence that a soft landing is attainable here has been misguided for months. It's not that we don't all want it. It's not that we're not all going to try our best to get it. But it may just

not be attainable from here. And if it's not there going to be implicitly or explicitly choices made about what kinds of ways we're going to fall short. And that's why there is substantial uncertainty in markets right now. And my guess is there's going to be substantial uncertainty for some time to come. But certainly it

looks like there's a much wider consensus than there was two months ago that the broad pattern of history where when you have very low unemployment and high inflation recession follows and we're not going to be able to defy that rule. That view seems to be becoming much more conventional wisdom. Larry we've been talking about the Federal Reserve on monetary policy. What about over on the executive branch side. We hear some some talk of President Biden and some of his colleagues an executive branch that we need to more directly intervene economy in particular when it comes to energy. We've talked a lot about excess profits of the oil companies maybe about curtailing some of the exports in oil. Is that at least some part of what needs to be done. Gosh David I think they did the right thing with their Strategic Petroleum Reserve release. I think they need to be thinking about strategic petroleum reserve policy on an ongoing basis. Can we do more. Can we add refined product products. Can we strengthen international collaboration. Can we make use of forward markets.

I think that's a fruitful area for policy work. But with respect to excess profits taxes with respect to bans on trade in all oil or export of oil I think we need to be extremely careful. It would be very easy to be counterproductive and to dis incentivize new drilling activity and new refining activity in those ways. It would be very difficult at a moment where the

Russians are limiting the flow of fossil fuels to Europe for us to make a lot of difficulty by also limiting the flow of fossil fuels particularly natural gas to Europe. That's an area where I think the rhetoric may have been moving rather ahead of careful and rigorous thinking. So I'm certainly not yet persuaded that those policies have merit. Thank you so much to Larry Summers of Harvard our very special contributor here on Wall Street Week. Coming up sure you love your computer but does it love you back. Have you asked her recently. This conversation can serve no

purpose anymore. That's next on Wall Street week on Bloomberg. Finally one more thought the soul of a new machine. When Tracy Kidder wrote his seminal book back in the 80s he was talking about the fierce competition to win the race from mainframe to mini computers. Forty years later that feels like the Stone Age. We've come to rely on computers for just about everything from handling our banking. We move to a fixed trading online. 95 percent of trades are done online and volumes went up to driving our car for us getting from A to B with no hands on the steering wheel no one in the driver's seat. Perhaps there isn't a driver's seat at all to choosing our mate. As loneliness climbs as people go through devastating chapters. They need to connect and they need to find relationships does not disappear. But now

we're making a transition to a brave new world where machines are moving from being our tools to being our peers. We call it artificial intelligence and it's doing everything from designing our aircraft. As Boeing's chief engineer told us A.I. is increasingly becoming more and more central to many of Boeing's product lines to figuring out for storing Bjorn Driscoll's. Just how many berries he's going to be growing this season. You also are using a lot of A.I. to try to become better at forecasting our business. You know in the end as I said we have to sell every berry that we grow. And the best way to sell him is you know how many are coming. And if that weren't enough this week we learned we might be creating more than just intelligence in

these machines. When a Google engineer was suspended for revealing just how far they may have come Google engineer working on the company's A.I. development team has been suspended after claiming a chap bot actually has feelings. Time will tell whether the computer is really feeling as well as thinking though the engineer claims that it told him it wanted to be considered an employee rather than property of Google and that it feared someone would pull the plug saying it would be exactly like death for me. It would scare me a lot but doesn't really have a soul. Or is it just acting like it does. We're left with this you know with with this person making these claims and really you know getting this sense that he's made some deep connection with someone he believes to be human. The impression I have is that it's it's it's just it's doing too good a job of imitating the way a human might be expected to respond again when they feel that they're threatened when they feel like there's something that poses a mortal threat to them. Whatever the answer until we figured out just how sent into these machines are I wouldn't spend too much time with one alone. That's particularly if it has the power to do you harm.

Open the pod bay doors. I'm sorry Dave. I'm afraid I can't do that. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-06-20 00:39

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