Wall Street Week - Full Show 08/26/2022
It's all about time 20 years since we last saw a euro dollar parity. Six months of a ground war in Europe and counting down less than 30 days to the next Fed decision. This is Bloomberg Wall Street week. I'm David Westin. This week considers Larry Summers of
Harvard on his reaction to Chair Jay Powers in Jackson Hole remarks. Look I think he did what he needed to do. And former IBM CEO Sam Palmisano how to make the Chips and Science Act live up to its name. You need to get the bureaucracy out of the way.
This is a week to mark anniversaries and look forward to deadlines starting with Dr. FTSE Fletcher's decision to step away from his NIAID responsibilities after serving seven presidents over 54 years. I tried as you know my very best to have the facts and the science guide us. A very different anniversary came with the euro falling below parity with the US dollar for the first time in 20 years driven in part by the looming energy crisis and prospects for the recession that it may cause something. Ian Shepherdson of Pantheon Macroeconomics thinks he's already here in recession now. Already.
I mean that's that's pretty obvious. Now we see that lasting for a while. We also passed the six month anniversary of Russia's invasion of Ukraine as Putin's forces struck a train station in the eastern part of the country on the thirty first anniversary of Ukrainians independence from Russia a Russia that is trying to take it back. That's an irony. Not lost on Amanda Slope of the National Security Council. It's a sobering reminder that just as the Ukrainian people had to fight to defend themselves and get their independence. Thirty one years ago they are unfortunately in a similar position today. But it was also a week for celebration
at least for those saddled with student loan debt. With President Biden fulfilling his promise to give them some relief I made a commitment that would provide student debt relief. And I'm honoring that commitment today. We will forgive ten thousand dollars in outstanding federal student loans but for global Wall Street.
There was really only one story this week. Despite all the commemoration and it came from Jackson Hole and it came from Chair Jay Powell as markets eagerly sought answers to their questions about U.S. monetary policy coming less than three weeks from when the FOMC meets again. And the chair stepped up to the podium
and basically said we don't have to wait. Our decision to September meeting will depend on the totality of the incoming data and the evolving outlook. But as much as the Fed says it will pay attention the data the markets the markets got the message that they shouldn't expect any relief from tightening anytime soon. As the S&P 500 was down just over 4 percent for the week and over three of that came on Friday alone. In response to chip out the Nasdaq fared
even worse down four point four percent. And again almost four of that came on Friday alone. The bond market was a bit more complicated with the yield on the 10 year up to just over 3 percent barely up for the week. But the yield on the two year reacted much more to the Fed news ending the week at three point four. That's up 16 basis points for the week. To help us understand what the markets
are trying to tell us. Welcome now. Peter Kraus is founder chairman and CEO of Aperture Investors. Liz Ann Sonders chief investment strategist for Charles Schwab. So listen give us your take on what happened here. If the markets were expecting more of the same they sir sure didn't react that way. Well I think the narrative around the
basis for the rally that started in mid-June some of it had to do with the the peak in the 10 year at around three and a half percent. But this narrative that was created around the notion of a Fed pivot we never bought into that narrative. I think a pause is something we should talk about at some point as did Powell today but a pivot to aggressive rate cuts as early as the beginning of next year that the only reason the Fed would have the green light to do that would be a significant deterioration in the labor market from here and or a much more significant deterioration in the economy. And for now we haven't seen that. So it wasn't a surprise to see him really forcefully push back against the idea of a pivot that once they get to whatever the final hike is they're going to stay there for a while. And I think the market had trouble digesting that. So Peter if you look at the markets they
haven't entirely given up on that next year. They backed off on that some after the remarks but not 100 percent. Were you surprised the mockery of. No I was in I was a little surprised with August's games. I mean it was really sort of a melt up. It's sort of persistently was a risk on type of market. And as was said it really wasn't any reason to believe that Powell was going to somehow give some credence to the idea that the Fed was about to reduce rates in the next six months. So I think the market sort of just
realized that it was rising in a at a level that is not sustainable given where interest rates are likely to go. And we haven't really seen enough economic weakness to signal that rates are going to modify. So the market reacted to that. And I suspect it may follow through with
more of a reaction until we get into September and there's real volume and real players in the marketplace. And right now we're still in a very very thinly traded market. Peter if the Fed was trying to get out of the business really affecting the market it's not succeeding very much. I mean obviously the central banks around the world really got involved a lot starting with the great financial crisis. And some people thought they were trying to pull out of it including with the balance sheet rundown. But right now how much of this is just driven by the central banks themselves. Peter.
Well we have not seen a return to fundamental investing we're still in markets that are captivated by airline risks and headline commentary whether it's the Fed whether it's the Russia Ukraine war or whether it's China's Covid policies. We're still being driven by headlines and not enough fundamental analysis. I suspect that we're going to come to a market where fundamental analysis will have much more of an impact on what investors actually invest in. But we're going to have to get to some level of the bottom here. And I don't think the market's quite
there yet but it's forming a bottom. So listen one of things that Peter just mentioned actually is liquidity. To what extent is that paint playing a significant role right now. We're seeing in the markets. Well there's the short term impact simply of just light volumes by virtue of it being August. And I think Peter's right about that. But you know we've recently done a 180 in the liquidity environment with the Fed having gone in the past year from zero percent interest rate policy blending the balance sheet to nine trillion dollars and now starting that process in reverse. Not to mention the fact that so much liquidity has moved away from the traditionally liquid markets into less liquid markets and at a point in time possibly where there is that need for more ample liquidity. I think that has the potential to be a
future strain. I also think that that Peter's absolutely right. This has been more macro driven not fundamentally driven. Certainly not the unbelievably low
quality bias to where some of the speculative juices were were running most Todd in this rally from mid-June to mid August. But we're also dealing with a you know I like David Tench channel. The old days on Wall Street week and my first 13 years in the business starting in the mid 80s was working for the late great Marty Zweig who coined the fake phrase Don't fight the Fed. And I think Howell's underlying message today was hey don't fight us. That's really why you're an important part of that Wall Street we've got to say back in the day. But listen let's pick up on one thing and that's credit because we really haven't seen credit spreads brought law yet.
Should we expect that coming. So we did see a maybe not a blowout. Just depends on how you define that term. But we did see a pretty significant move up in spreads and then they retreated a bit in conjunction with the rally in the equity market.
But that contributed to a loosening in financial conditions which maybe not as explicitly focused on today by Powell. That was another thing I think they needed to and are starting to push back on is this loosening of financial conditions. And we had our conversation earlier today and Peter has thoughts that I think we're not out of the woods certainly from a from a credit environment. There's a lot of low quality zombie companies out there that probably are going to face some some growing pressure. Yeah. I mean it's those it points out where we have interest rates that are two times what they were six months ago.
Well there may not be a maturity wall that we're facing because many companies have been able to refinance in the last 18 months. That's not entirely true for the commercial real estate market. Number one. And it's not true for every company. So as we continue to see a slower economy and less revenues and more pressure on cash flow I suspect that we will see some credit widening and we will see some stress in the credit markets. And that hasn't really happened yet. And one other issue on liquidity we talk about liquidity as it relates to the Fed.
We also talk about liquidity as relates to the actual trading markets that credit lives in. The trading markets that credit lives in have been very thin very illiquid and create significant gap risk. And that is going to continue. I don't see that changing in any short period time. Listen I wonder does the rise of private credit contribute to some of the lack of liquidity the thinness in the market some of the opacity. I think absolutely.
I think we've taken for granted for much of the past 15 years or so in the aftermath of the global financial crisis with the Fed going to zero interest rates and starting met multiple rounds of QE. And I think we've been in this environment where liquidity was so ample that we didn't worry about that. I think we're now entering a part of the cycle where we're we're going to find that we probably should have had a bit more of a cushion. Okay. Liz Ann Sonders and Peter Kraus will be staying with us as we turn to how investors might make some sense of this uncertain time.
That's coming up next on Wall Street week on Bloomberg. It was a week when investor concerns tilted back to the possibility that the economy was not slowing fast enough to head off an increase this fall in inflation and interest rates. As a result bond yields retreated to near their 1996 highs set in early July and stocks took their first tumble in six weeks. The conventions couldn't seem to cheer anybody up for long. That was loser guys out on Wall Street. Back in August of 1996 it was a presidential election year when the inflation he was concerned about was at 3 percent and a gallon gas costs a dollar. Sixty three.
And that by the way is in constant dollars. The number one song was the Macarena which gave rise to a rise or dance craze. And while the biggest movie was Tin Cup the Kevin Costner star in it playing a washed up golf pro still with us hard Liz Ann Sonders of Charles Schwab and Peter Krauss an amateur investor. So Peter I won't ask you to reminisce about 1996 but you persist in the earlier that I thought was interesting that we might be getting to a point where maybe there's a return at some point to fundamentals in investing.
Where do you see that happening when you see that happening. And what will that mean for investors. Well I do think that I said earlier that the market's trying to figure out a bottom bottoming process is not precise. It takes time. Investors have to sort of feel their way if you will in the dark at the bottom of the trough. But I think we're I think we're in that that kind of mode. And once that really happens then investors will start to think about OK what does the world look like going forward. And you know the argument is is that
growth is probably not going to be robust broadly speaking. But investors will start to look for companies that have sustainable cash flow growth sustainable business models and opportunities for earnings to grow with some degree of confidence. And that's where they're going to start to invest. And that's when you're going to start to see the headlines recede. And the fundamental investing come to the fore when that is it's hard. That's a hard call. But the catalyst for that will be when the market starts to find a bottle and that's when I think investors will move to the fundamental point of view.
So it doesn't help me with that. What does it mean to turn to the fundamentals. Does that mean sort of slow and steady wins the race when you don't have a lot of growth coming your way. So I think in a growth constrained environment you do want to look for the types of factors that highlight if you have either that sustainable growth or in a declining earnings revisions environment like we're in right now for the broader market the companies that are bucking that trend and have positive earnings revisions. I'd echo what Peter said about strong
free cash flow yield in a rising rate environment which we're clearly in right now healthy balance sheets with lower debt higher cash. There's going to be times though when you get to the point where there's a more definitive bottoming in economic activity. And I think in this cycle that's probably only going to come when we start to see stability in housing. And I don't think we're there yet. I think we're still in the deterioration phase.
Then there's an opportunity to go a little bit more cyclical and develop that leverage to a turn up in the economy. But in the near term I'd stay focused on those kind of hybrid growth and value characteristics kind of quality wrapper around them. That's been our mantra for much of this year. Peter we heard from Jay Powell the Fed chair this week that he really was intent on getting inflation down but it looks things are going to take a while to get that done. Are we looking at a higher inflation environment for the foreseeable future. If so what does that say about your
investments. Yeah absolutely. I mean I've been of the opinion and I'm not dead. Right in terms of timing. But we've had 30 years of declining interest rates since Volcker and since the last time we had very high inflation by the way. If you recall in those time periods
there's inflation rates while they were high. We're also pretty sticky. They didn't come down that fast. So the chance that we are going to go back to sort of a very benign inflation environment or even a declining inflation environment where rates continue to bump along the bottom and are not really much of an issue I think is not in the frame. I think we're going to have inflation. I don't think it's going to be 5 6 percent or even 4 percent.
I think it could easily be in the 3s. I think there's going to be dispersion between regional growth rates between Europe the United States China emerging markets. That's going to make central bank activity less where needed more dispersion between currencies. And I think that's a marketplace where investors will actually thrive where active investors will actually thrive. And you know some investors won't do well. But I think those smart investors who can be flexible in the in the kinds of factor rotations if Lazard is talking about I think will actually do well here.
But I David Westin. So go ahead Peter. Yeah it's just going hard. But I think it's wrong to conclude that we're in a an environment where the Fed is going to go back to being the Fed put it. The Fed is not going to do the Fed but the Fed is going to increase interest rates and they're not going to create the kind of liquidity they had for the last 14 years.
And David I think there's a characteristic associated with what Peter is talking about to the extent he's right. I believe in this too that we're we're now in the beginning of a more secular environment that has a higher kind of landing point for inflation. If you go back to that basically the 60s 70s and 80s it was an environment of a negative correlation between bond yields and stock prices because typically when yields were rising especially sharply in that environment it was because of an inflation problem or more of a toxic environment for the equity market there of the Great Moderation. You flipped that on its head and you had a positive correlation because the yield pops during that era of great moderation that 20 or so years preceding the pandemic was because growth was picking up without that concern about inflation. That's a great backdrop for the equity market. So I think the tell we'll be if we're in a more sustainable period of that negative correlation between bond yields and stock prices. And I absolutely agree that taking more
of an active approach not just on the equity side but on the fixed income side is is a way to navigate a very different environment than what most people are used to at least. Looking at the past 20 years. Let's then pick up on Peter's point about dispersion in currencies and nations. We've seen that sort of geopolitical risk right now. So the other practice goodness knows Europe is in a very different position. That stage is in a very different position with China. What does that say when you're investing. How do you take advantage or at least
not get burned by that dispersion. So I do think that we're in the beginning of a more volatile era. And I would say that not just in terms of asset markets but more geopolitical volatility more economic volatility and shorter cycles in terms of both the length of expansions but the frequency of recessions. And one way to navigate that for investors is first of all go back to your disciplines around diversification and rebalancing and want greater volatility affords you the opportunity to do is use volatility based rebalancing or portfolio based rebalancing. Let your portfolio tell you when it's time to trim into strength add into weakness. There is an opportunity these days to be much more diverse in terms of asset classes that even individual investors can have in their portfolio and have low cost very easy way versus the standard old fashion.
Our options are stocks bonds and cash. So I think there's a way that individual investors can take advantage of just a broader swath of offerings out there in order to boost that diversification. So Peter help me with this. Just what Liz Ann just said in that world where it's not just stocks and bonds cash what are you looking alternatives are looking at real estate.
Are you looking at going longer in duration. Where do you go that the other people are not. But the is going to be expensive for investors for the next couple of years. At some point duration will will give you value at least it would give you a coupon. But I think you need to look at your portfolio and assume that there is a 3 to 4 percent inflation rate over the time period. You're going to hold an asset and you
have to decide that that asset will actually do well in that inflationary environment where let's put it this way in a more inflationary environment than kind of the benign world that we are living in that could in fact be in real estate. But real estate today is a very challenged asset class because Covid has had a huge behavioral impact on office properties and on how people use offices. So the the adoption of the office market to the Covid behavioral shifts and less than five day working and working from home and the flexibility that's come with that that hasn't hit the bottom yet. We haven't seen that stress work its way out. So you know real estate's going to be a tricky asset for the foreseeable future.
And that's something that I think will be interesting too to take advantage of. So listen briefly wrap this up for us. Gives a little hope for growth. Where would it come from. So I think we may be shifting into an environment eventually not in the near very near term of a more investment driven economy and less a discretionary consumption driven economy.
And if that's correct I think that's a that that's a more optimistic outlook longer term for the economy than just we went back to that consumption model purely. Who knows. Maybe Congress is leading the way. They're doing a lot of investing these days as far as I can tell. Very active Congress right now. Thank you so much to Peter Kraus of Aperture Investors Alisan Sonders of Charles Schwab. And coming up we're going to take a look around the world and consider what is coming up next week on global Wall Street as we go to three different locations all the way around the world for a preview. That's coming up next on Wall Street week on Bloomberg.
This is Wall Street week. I'm David Westin. It's time now to take a look at next week on global Wall Street starting with Juliette Saly and Singapore. Thanks David. Falling PMI ISE in the week ahead are likely to show China's recovery being hit from all sides. Bloomberg Economics expects slower
industrial profit may add to warning signs that have prompted new stimulus pledges from the government in recent days. In Japan employment data will likely show a mixed picture with summer travel boosting hiring in services while slower export demand hits workers in the manufacturing sector and skyrocketing inflation is likely to keep climbing. In Pakistan and Sri Lanka now over to Tom Mackenzie in London.
Tom here in Europe with energy prices hitting new highs. The focus switches back to Nord Stream one. That's the pipeline of course that transports gas from Russia to the European markets. It is looking like there will be an unscheduled stoppage of that pipeline on Wednesday. The last time it was closed down it reopened with reduced capacity.
The is this time is it may not reopen at all. And of course those record energy prices are tying into the inflation picture. Wouldn't it be getting CPI prints out from some of the biggest eurozone economies next week. So we'll get an indication of just to what extent those gas prices are playing into already red hot inflation across the euro zone. And here in the UK we're counting down to the end of voting the end of the ballots within the Conservative Party to choose. The next British prime minister will be the foreign secretary Liz Truss or the former chancellor really soon.
Whoever it is will have to navigate and lead the country through what is shaping up to be increasingly a Windsor it seems of discontent. Fresh off the heels of Jackson Hole we've got even more Fed speak coming up stateside. The presence of the Cleveland and Atlanta Fed are all due to speak on what comes next for the central bank. But the main event is payrolls Friday. The jobs report is in the spotlight. How much unemployment is too much in the face of extremely high inflation and doesn't even matter as economists call for an inevitable job fall recession and a return to the fundamentals at least in theory. We'll get earnings reports from Best Buy Chuey and Lululemon to name a few.
How did these companies fare in the spending slowdown and inventory buildup that's plaguing retailers. And it doesn't stop their business investments. Also in the limelight with results from Broadcom and Kraft strike. Thanks to Juliette Saly Tom Mackenzie
and critic Gupta. Coming up Congress has enacted a raft of legislation for investing in America from infrastructure to semiconductors to green energy. What are the chances it will work. We asked contributor Sam Palmisano former IBM CEO. This is Wall Street week on Bloomberg. Call it the next space race. The push for public funding for
semiconductors starting with President G's program described by former U.S. Ambassador to China Max Baucus their help and pursuing their China 2025 plan where China will focus on technologies of the future to enhance their economy and followed by Europe's own version described by Margaret Astaire of the European Commission. What I have been impressed with is that sort of the first important project of common European interests that we have on semiconductors here about 2 billion of public supports crowded in six point five billion off private investment. Now the United States has its own version the Chips and Science Act just signed into law by President Biden. The United States must lead the world in the production of these advanced chips. This law would do exactly that. And as in Europe Commerce Secretary
General Mundo predicts the public funds will prime the pump for much more to come from the private sector. As big as 52 million is. It is a drop in the bucket a very big drop in the bucket twice what this economy needs. All of which leaves us to focus on how fast the money can get out the government door whether it will let loose the private sector and whether it all will be spent wisely. Go looking for really talented experienced people in a wide range of ages to understand these technologies and get them on board either as employees or advisers to help guide the process of making these investments as high potential and productive as they can be. And to help us understand this world of global competition and technology particularly the role governments might play in it. Welcome. Now somebody who spent a good part of
his career in the middle of that competition is Sam Palmisano the former IBM CEO and chairman. Now he's the chairman of the Center for Global Enterprise. Welcome back. Great to have you on Wall Street week Sam. As I say this is not the first time we've had governments involved in tech by any means. Going back to media in Japan. DARPA Defense Department. What have we learned from that.
What should we have learned from those experiences. Well I think it's that's a great analogy that you draw and you seem to be historian of our industry. I actually was living in Japan or the memory wars. I was living in Tokyo at the time working in IBM Japan. Now today things have changed.
I mean clearly because it's not Japan who was part of the worldwide economic and governance systems it's China. And China as you know is fast growing economy investing trillions of dollars in technology. They want to lead the West. They want to be the worldwide leader in
semiconductors and microelectronics and the majority of our capacity in East Asia. And it's not exactly a stable part of the world. So it's quite different. So it's more than just government involvement and adding stimulus to and getting investment in these key critical areas. You have. They have the geopolitics at play. So it's very complicated much more so than it was in the past. But it doesn't always work does it. I mean I think a lot of people think
that the media experiment over Japan actually ultimate was not successful. Japan is not a dominant player in semiconductors today. That's correct. I mean I would argue that the execution
by government then was very poor. I was based to meet with me and they were stronger in electronics and they still are strong in manufacturing electronics. But the fill in what was required from the industry's perspective we also had to have software capability and they were weak so many times. I think the government doesn't understand what's required to actually not just invest but to lead and then the discipline that's required to execute these things with precision. So Sam as you suggest I'm a China really has changed the game I think in technology and all sorts of ways. And given its authoritarian aspect which means it can do pretty much whatever it wants to do as well as the massive amounts of money involved. Does it make it almost essential that
the United States and for that matter in Europe also some way step up to the bar. I think it's key and I know many my colleagues the private sector will find that that's strange for somebody that ran IBM to say those things. But this transition is very very expensive. And I don't think you can do you could have a company regardless of how successful they are. Intel AMD DSM out in Europe etc. Do this on their own. They're taking on a sovereign nation. And when you're taking on a sovereign nation it's not like competing in your industry space. So there is a role for government.
Now the question is what is the role for government. And I think we all know we've all learned that government picking winners and losers losers even if you're an authoritarian government like China can act quickly doesn't always work for lots of different reasons. But I think you need to have this partnership and not have the government pick and choose who the political winners or losers happen to be based upon votes per state and all the things that they consider beyond just what it takes to make this business successful and what it takes to lead in technology in the world. So the lead in implementing this the United States is going to be general one of the second half of commerce. Give her a little advice. I mean we've talked to her and she said she wants to get that 53 billion dollars out the door as soon as possible.
What would you tell her to make sure that it goes to the right places at the right time. Well that's an excellent question. I'd start with the fact that I haven't been involved in these types of programs in the past. The application process to get approval to proceed is extremely Ellen. It's very complicated. And many times people just give up a lot of this one on the electoral modernization digitization of the grids. When I was working in the government
processes are so cumbersome people just said it's not worth it to heck with it. You know those kinds of things. In this case it's permitting that's required in a location that's required. Now the good news in this quite honestly is the states are heavily involved like Ohio and the states are much better at getting these things done in my opinion than the federal government is. So that's just based on my experience. So that's the positive side of this
thing. But Chief you need to get the bureaucracy out of the way. You know it's same thing they did with the vaccines. You got to get the bureaucracy out of
the way so you can move very very quickly. Now the other piece of this quite honestly I advise her on as you have to look beyond just production capacity. I know that's the bill. That's where the money is. But the issue is more complex than just the look at locating the fabricators. If you look back in history the US
government does not have an unblemished record when it comes to waste. When you're putting a lot of money out in the marketplace and yes even fraud how do you get the bureaucracy out of the way of at the same time make sure the money is going to the right places and the right people and not being wasted or for that matter fraud isn't being conducted. Well I quite honestly they would start by getting competent people involved. And what I mean by that. There are people in this industry that know how to do these things. I mean I'm not volunteering for work. Don't misunderstand me. I'm really not.
However there are people engaged the people who know how to get these things done. Government for whatever sense of reason this goes on there. Oh and that is a problem because in these very complicated areas you need people who have done this before who had the expertise and you need to engage them.
They turn it over completely to the government agencies without a partnership of some kind with April capable people. I think we'll be a mistake. I've argued this for years. When the Obama commission when it came to cybersecurity and the government network infrastructure you need to get people involved that know how this stuff works. However having said that my experience as a government in the US clearly in the United States is very hesitant to do that. I cannot explain why.
I just know they're hesitant to use the private sector expertise. Finally stand and take a step back here Robert. We talked about China. We talked about some of the geopolitics involved in semiconductors. There are a lot of larger set of issues
down geopolitics around the world. You don't need me to tell you whether it's Russia and Ukraine whether it's Taiwan and China whether it's Iran. Everywhere you look as a former CEO of a very large global company how does it change how you make your investment decisions. What you're seeing geopolitically right now.
Well I mean quite honestly it makes it much more complex. If you think about it there was a system before the world globally integrated called the Hub and spoke. And by that I mean you maintain manufacturing you are ending IP and your domiciled headquarters locations and you sold things into other countries today. As you look at where your facilities are. Would you make an asset.
It's a multi-billion dollar investment in an asset manufacturing facility or data center whatever that would happen to be in parts of the world are unstable. Of course not. Would you do that. There's not a predictable government. Of course not. I mean basically.
So that's what has to change. The the question is where do you go. And then you need stable environments where you have trusted governments that you know they'll be reliable and predictable that you can make these long term investments. Now there's a lot of those locations in the world bubble way. But fundamentally that's what you need to do. From a government's perspective. I don't really think it's practical to say everything returns to your domicile. Whoever you are us Germany doesn't matter.
France. That's not practical because the capabilities you need in technology in the world no one geography has total total end and capability to lead. They need to cooperate. They need to partner together to actually get this done.
Sam it's always a pleasure to have you with us on Paul Sweeney. Thank you so much. A sample of Osama. He is the chairman of the Center for Global Enterprise. Coming up we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin. We're joined once again by our special contributor here on Wall Street with his is Dr. Larry Summers of Harvard.
So Larry we heard from Jay Powell. We've heard from the last three years in Jackson Hole. You weren't too pleased when he had his framework a couple of years ago. We weren't too pleased about this
transitory talk. Did you feel a little better this year. Look I think he did what he needed to do. It was clear that inflation is the overwhelming priority.
It was clear despite some earlier confused talk about neutral that he was under no illusion that monetary policy was in an appropriate place right now. It was clear that whatever the academic arguments about demand shocks versus supply shocks said the Fed couldn't accept continuing high inflation and had to act until it was clear that that was going the way. The remarks were very concise. There wasn't a lot of more academic
discussion but there was a statement of being resolute us. So I think that's just right. So I think the Fed is positioned as well as it can be given the credibility losses and mistakes that there have been. With these remarks to manage things going forward the chair never use the word recession. At the same time he did talk about below trend growth for an extended period of time. Also in elevated interest rates were a
good time to come. Is he really pointing to recessions. Between the line thing get ready for it. I think he also had a reference to the fact that there was going to be pain. He wasn't predicting recession. And after all even someone who's quite pessimistic about the situation like me is saying that there's a 75 percent chance of recession in the next two years. But he was clearly showing an awareness of the possibility indeed possibly even the likelihood of recession. And I think that was very important because saying you're against inflation when there's no price to have to resisting inflation or bringing down inflation isn't a consequential statement today.
He prioritized inflation making clear that he recognized that that prioritization would have short term adverse consequences. That wouldn't be easy but that by bringing down inflation ultimately that we're going to be more jobs with higher real wages for more people. And that's after all what economic policy is all about. It was a big change from the Jay Powell of a couple of years ago who was speaking about the importance of maximizing employment without an awareness of the issues of sustainability and long run economic performance. So I was quite pleased with these remarks. So let's go over in Europe for a moment because they have their own problems over there.
The ECB is indicating further tightening perhaps at the same time they're in for what looks like a substantial energy supply shock Tom Keene as we get into the winter. Are we properly appraising what is going on in Europe and how bad it could be. Christine Lagarde got a much harder job right now than Jay Powell does. She's got the dilemmas of inflation but she's got a truly massive supply shock with what's happened there with natural gas and electricity prices. She has a set of challenges of monetary union. Problematic politics is in Italy very high debts in the European periphery. So they've got a very very difficult set
of balances. And they also have the challenge of a credible currency as the euro moves to an through parity with the dollar. So I think it's going to be a very difficult road for them to walk in Europe. My suspicion would be that they're going to have to raise rates more than is currently priced in but that that's going to come at a time when there's very substantial. Recessionary forces in Europe and I'm concerned about what that's going to mean for intra European politics. And I'm also concerned ultimately and I
think it's probably most important is how it affects Europe's fortitude in this very difficult world we have with a revanchist Russia and an aggressive China back in their states. One big development this week was President Biden announcing his plan for relief at least partial relief from student debt loads. We heard Jason Furman somebody you know well respect. I respect him as well. He had some tweets that were hurt. I think among other things said this is pouring gasoline on an inflation fire. What did you make of that policy changed
by the administration. I did not support large scale student debt relief because I thought it was using federal resources to make transfers hundreds of billions of dollars. And I would have liked those resources put to better use helping people who were poorer who were more in need and who would use the money to invest more in the future of the economy. I think that it does add to demand which does increase inflationary pressures but that's something that the Fed should be able to offset. But it will mean more need
for the Fed to move rates. And I think it needs to be recognized that this is something that's meaningful relative to all the other things that are that are that are going on. It's not the policy I would have preferred but if this is our biggest mistake we will be doing very well. And you know this is several hundred billion dollars over 10 years.
What we did in 2021 was several trillion dollars over one year. So we just need to keep perspective on the scale with this. Larry you have helped set economic policy both at Treasury and at the White House. Was this the economist talking or is it the politicians talking. And some people as you know are starting to say serious economist are not having enough of a say in this White House. Look I'm somebody who always believes that you can't go wrong listening more to more to economics.
I think in response to many of the frustrations going back to the financial crisis there has been some movement away from relying on economists advice. I think over time that will tend to lead to mistakes because you'll focus on the direct consequences of things and fail to recognize the indirect consequences. For example you'll miss the inflationary consequences of protectionism. You'll tend to focus on what's good about spending and not focus on the things that are crowded are crowded out. So yeah I would like to see more
influence but I also think that the economics profession has got to do better do better in recognizing the kinds of concerns that led to the terrible populism that we've seen in many parts of the country. And we need ISE economists to be understanding rather than just dismissing those problems. Finally briefly at the end I was talking about golf. You're a serious golfer. I try to golf some. In the meantime we have the Department
of Justice reportedly investigating the possible antitrust suit against the PGA Tour I guess because of live golf. What you make of that. I don't know anything about the merits but it's just hard to believe that there isn't a higher priority for the use of taxpayers money in the antitrust area than protecting Bryson D shambo from exploitation. I just find it hard to see why of all the issues that they could work on. That would be the one they would choose. Again I have no knowledge of the merits
and certainly civil suits back and forth are part of what happens in situations like this. I did wonder why this was something the Justice Department was taking on. Rice And but. Looks like you can take care of himself. I must say thank you so much Larry for being with us once again. That's our special contributor on Wall Street. That's Larry Summers of Harvard. Coming up the first thing we do is we kill all the lawyers that according to Shakespeare's Henry the Fourth. But what if all the lawyers have gone on
strike. That's next on Wall Street week on Bloomberg. Finally one more thought. Workers of the world unite. That was the rallying cry of Karl Marx and Friedrich Engels in their Communist Manifesto of 1848 and their followers took a pretty good run at it. But with the Soviet Union at all at the same time organized labor grew in Europe and in Britain and in the United States even as late as 1979. The noble quest of organized labor was celebrated in an Academy Award for Sally Field leading a sit down as Norma Rae.
But that was then and now is different. As Cornell's Alexander COLVIN explains with labor unions losing a fair amount of clout in the United States we had over 20 percent of workers represented in America by unions. Today it's a little 7 percent and down to around 6 percent of the private sector. So it is a much weaker.
The question is whether the tide may be turning once again as job markets have tightened and big employers like Amazon are facing new organizing attempts. Although CEOs like Andy Jassi insist unions are not the answer we happen to think they're better off without a union for a number of reasons including the fact that you know it's much harder when you have a union to have a direct relationship with your manager and to get things done quickly. With the growing push by unions and high inflation and economic uncertainty comes the prospect of course of strikes whether it's in West Coast ports.
The United States is obviously anytime you have a negotiation like the ports whether it's on the western east coast but in this case on the West Coast we want to keep a close eye because we know the impacts that that if it doesn't go well what will happen or if Felixstowe Britain's largest port which went on strike just this week. This is a significant moment in the UK summer strike. We're on day two. It's about two thousand workers who are disputing that pay miss because already had to reread three vessels. But it's one thing for stevedores or warehouse workers to stand up to management.
You know things are getting truly rough when it's the lawyers who decide to strike as British barristers did just this week. It is what we for. What we did unhappy with the way their fees are lagging behind runaway inflation putting at risk a classic source of Western entertainment. This sort of thing depicted in witness
for the prosecution question this trial. Were you lying then. Are you lying now. You will not in fact a chronic and habitual liar. Then again even as a lawyer I have to ask myself if all the lawyers decide not to work. Is that an economic headwind or is it a tailwind that does it for this episode of Wall Street Week. I'm David Westin. See you next week.
2022-08-28 17:59
