Wall Street Week - Full Show 11/19/2021
It was a week with a little bit of everything summit and infrastructure bill a Covid bill and a whole lot of worry about inflation. This is Bloomberg Wall Street week. I'm David Westin this week especially the trader Larry Summers on that question inflation and what we might not be thinking about. I think that desire to maintain credibility when you've made a big mistake is the source of some of the biggest disasters we've had in the United States. And former IBM CEO Sam Palmisano on the continuing crisis over supply chains and what we could do about it at this point. It's very very important that the United States of America had the policy of investment into the basis to make a self-sufficient. As government and business leaders gathered for the Bloomberg new economy form in Singapore they had no shortage of things to talk about from concerns over China. We should be concerned. I don't think it's going to war overnight but this isn't a
situation where you can have a mishap or a miscalculation and be in a very delicate situation. Two concerns that the party may end even if they haven't taken that punchbowl away. When I step back and I think about my 40 year career there have been periods of time when greed has far outpaced fear. We were in one of those periods of time. And generally speaking my experience says that you know those periods are not long lived. Now something will rebalance it and bring a little bit more perspective. And
whatever the topic the spectre of Covid was never far away. It wasn't just talking that got done this week. There was also some doing as President Biden finally finally got to sign that infrastructure bill into law saying it was really a game changer. We're in an inflection point in American history. This law this law reached that point for most of the 20th century. We led the world by a significant margin because we invested in ourselves. But with all the doing and all the talking. The biggest topic of the week by far was simply inflation with some members. The board now saying it may be time to get a bit more hawkish like James Bullard from St. Louis. It behooves that committee to tack in a more harshly hawkish direction. We could move faster. We kept optionality on this that we could speed up the taper if it's appropriate. And when the
week ended it was that inflation story that drove the markets with a dollop of Covid concern as the yield curve flattened and the 10 year yield fell down towards one point five percent. Again helping out tech stocks and taking the Nasdaq up by one point to 4 percent while the S&P 500 held its own up just three tenths of a percent. But it was the Dow the Dow that took the hit down over 1 percent. Here to put it all in the investors perspective are John Graham CEO of CPB Investments managing over a half a trillion dollars for assets for Canada's largest pension fund. And Katherine Keating she's CEO of Ben Wyatt Mellon Wealth Management. Welcome to both you seconds. We'll start with you. Inflation I think was the big story of this
week. How did it affect investors views of the marketplace. So I think the new inflation news this week and in recent days has been that we see some signs that we may be seeing some peaking. We see it in inventories starting to build in certain sectors of the economy. We see it in some of the port logjams starting to ease a little bit and we see it in emerging markets starting to tighten which is a deflationary force that'll affect the global economy. But I think for markets and for investors the question
really is where do we see inflation a year from now. Markets always look ahead and a lot can happen in a year. Think about last November. Think about last Thanksgiving how different it was than what we're expecting this year with vaccinations and travel. And so a year from now what do we think we would use the word. Not transitory but transitioning transitioning from the higher inflation that we have right now 5 and 6 percent but also transitioning from the very low inflation we had in the decade after the global financial crisis which was less than 2 percent to something more in between 3 or 4. And what we need to
remember. To your question about markets is the markets have behaved very well with inflation in that that range for most of our careers as investors. Yeah no question they have performed well. So John do you agree with that analysis. We were transitioning not to 6 percent but to 3 or 4 percent. And if so what does it mean for your investors in particular. You need to worry about all those pensioners out there waiting to have their checks when they need them. I think we would have actually a very similar view. And I think probably every day this week we talked about inflation and the worry that kept coming up was transitory. And my question is always what does transitory mean. It's not that helpful a word
without a time horizon put on it. And I like the word transition. Six months ago we probably thought it was shorter. It would be a shorter horizon than it's turned out to be. We we didn't anticipate all these Covid related shocks to the supply chain but we still do believe longer term that. When I say longer term
I mean 12 18 months we're going to get back to an inflation that is more similar to where we'd been in the past. Really a belief that the supply chains will work through the issues and capitalism will find a way in for our our beneficiaries. We are really thinking about that from a 5 10 15 year time horizon. So cash when it comes to the question of inflation it's not just goods and dollars. It's also the Federal Reserve and how they think how long they think they can put up with it. We had as I
say toward the end of the week two members of the Fed came out. So you know what. We think you do speed it up a bit. If in fact they do need to speed up the tapering and maybe the increase in interest rates what does that do to investments. So it was. Depends. Right. And you know inflation can end the cycle if interest rates if the bond market responds inflation becomes a problem when the bond market responds. And we don't see that. Right now we don't see that right now. We see a very gently upward sloping yield curve which is what you want to see. It says we expect growth but we don't expect too much inflation which would be a steeper curve and we end. So we don't see that right now. And I think an interesting question in addition to
the Fed is how are people responding because consumers are two thirds of the economy and how are people responding. You know consumers know that they feel inflation every single day at the grocery store at the gas station. And if they want to travel or go to a restaurant we're all feeling it. But what are we doing. We're buying anyway. We're buying anyway. It's not stopping the consumer. And I think we have cranky consumers. Right. We're all cranky about it. And that's probably a political issue but it hasn't really become an economic issue. And consumers still have 2 trillion dollars in bank savings from that from the stimulus.
So it's not really changing consumer behavior. It's changing the consumer's mood. So John's a really important point I think. It's not just a question of how much things cost but are we growing overall. And as Catherine points out we also had retail sales numbers this week which were pretty darn encouraging let's say. Is that an important indicator for you of the growth pattern for the economy and therefore potentially the growth of investment. I would say we're still reasonably constructive on the economy and maybe building on the point longer term we continue to see probably some headwinds to inflation with demographics with globalization being forces that will actually keep inflation in check over over the longer term. We continue to see so to be constructive
on the economy but we're also a global investor. I think one of the things that's interesting is to see the divergence in the global economy and the divergence in the global economy based on how different economies have approach Covid. And we're seeing it right now in Asia in Europe and in North America. So John just to follow up on that if I may. Is there a better opportunity right now particularly to talk about valuations overseas that are in the United States. I don't necessarily mean Europe may well mean Asia. Maybe China but Asia in general is the valuation more attractive there. Because let's be honest the equity
markets United States are pretty fully valued are they not. Probably some segments of the equity markets are are pretty fully valued the way we would think about it is we're a global investor. We've built out the capabilities to do lots of different asset classes around the globe and capital should flow to the best opportunities around the globe. We're seeing a divergence how countries went into Covid how they're coming out to Covid and certain asset classes are certainly presenting opportunities around the globe. We see opportunities in Latin America. We see opportunities in Asia in India but also see lots of opportunities in the US. So kind of. Well back to you. The same question sort of where do you see full valuations. Where do
you see opportunities. Yes. So I'll go back to people. Right. And how are people responding to what they're seeing and inflation in markets and what you see people doing. They might be cranky consumers but they're actually very contented investors. Right. Because we've seen you know the S&P 500 the NASDAQ the Russell 2000 small cap index all hit highs during the
month of November. The Nasdaq hit another one today. And so we might be cranky about what we're finding in the grocery store and with our grocery receipts but we're very happy when we opened our forum on case statements and our statements from our financial advisors. And in fact what you see is that the individual investor is really all in in this equity rally. We have seen what looks to be probably a record year in equity fund flows a lot of which is driven by the retail investor. John I want to talk about one thing that happened this week as I mentioned which is the signing of an infrastructure bill. I mean you have the advantage I think of being a patient investor. As a practical matter does infrastructure offer an opportunity today
that it didn't. A year or two ago I would agree that signing of the infrastructure bill could be a game changer. Infrastructure for institutional investors around the globe is it's a great asset class. It's a great asset class that it offers stable returns. And what infrastructure investors want to see is a pipeline of
high quality assets. They want to see a pipeline of high quality assets where there's a stable regulatory regime. And with its infrastructure bill we could see a lot of capital moving in and looking to participate in some of these projects. And I think a real opportunity to have public private partnerships. We've been invested in the Transurban Chesapeake Chicago Skyway. Puget Energy. And we see this infrastructure bill as something that could be a game changer. And what about real estate commercial real estate. Back to the office. Are you invested in that as well. Yeah real estate some interesting asset class. And in our
portfolio and thanks to a few years ago we started to transition our portfolio into logistics into logistics. Looking at the potential for e-commerce we obviously never anticipated the pandemic and benefited tremendously from the kind of rise in e-commerce during the pandemic. We've been investing in logistics across the globe Japan Korea United States. On the artist side I think probably still trying to figure it out trying to figure out what the winners and losers are. And office is something that there is dispersion. But I'd say we're probably for high quality assets. We're still
investing. So Catherine one more asset class. If it were as it were energy has been awful. I talk about energy both because a cop 26 and a climate issue that also maybe so opportunities energy as we've seen for example almost a crisis in natural gas prices in Europe. What do you advise investors and we're interested in energy is adding a segment to get invested in. So energy has become an increasingly small segment of the of the indexes. Right. It's a it's a smaller segment than it was in the past. And what you know what we would say to our clients is you know again we have to look at what's driving the economy. Right. And what is driving the economy is consumer spending. It's business investment. And again you want to be invested in in
really a broad section of the economy right now because we're seeing it across you know small companies big companies tech companies. So you really want to have a diversified portfolio and it will include some energy for sure. You have the advantage of dealing with clients day in and day out. What's the number one question they're asking right now. Inflation. The number one question they ask us is inflation. Well they feel it right. We feel it when we shop and what we say to them. I'll echo what
John said. You know that the deflationary factors that were in place before the pandemic are still here. Right. Demographics all of the major economies in the world are aging. The U.S. Europe China Japan where the young man on the block but we're aging to the average age in this country is almost 40 now. So that's still in place. Technological disruption is still in place. But the new thing that we've picked up during Covid is productivity.
Productivity is a huge antidote to inflation. And we've recovered all of corporate America's earnings and then some all over the U.S. economy. And then some with 5 million fewer workers. That's productivity. And we see it across sectors. We see it in healthcare. We see it in retail. We see it in. Financial services my sector and we think that's going to
continue and we think that's going to help to contain inflation to that 2 to 4 percent range over time. John hasn't mentioned technological innovation and perhaps a lot of that productivity in some sectors is driven by technological innovation. How about tech as an investment. Has it run its course. It's been driving the market for so long now. Do you still see more opportunities in tech. Yeah we still do. We still see more opportunities in tech. We just participated in the McAfee take private. We're looking for is kind of the growth of cybersecurity on the consumer side. One area of tech we're actually really interested in is technology to help transition the economy to net zero. Technology that's
really focused on decarbonising the economy. There's a real opportunity there. So Kathryn what about this ESG issue. Is there an opportunity there. I mean because you're being hear about green mail things like that. You can you can make mistakes there. You can. But we know a lot more about ESG today than we did 20 years ago. It's not a brand new investing in strategy. Not not a brand new investment strategy. And what do we know. We know that it doesn't necessarily mean you will get lower
returns. We know that we're coming out of a global pandemic where everybody is focused on values and what's important to them and legacy. And so we see that there's a lot more interest in ESG. And we also know again the individual is 70 percent of the economy. The individual is also 70 percent of financial markets. Today if you include for one case that we control plus our personal savings and individuals are increasingly interested in this as they learn more about it especially. Also as you and I talked about the past some some volatility in the marketplace. With all those individuals they tend to be a little pro cyclical as a percentage on. It's definitely countercyclical. We want our investors to behave just like you John. Thanks so much for
appellate panel Catherine King of being Why Mellon Wealth Management and John Graham of CPB Investments. Coming up some highlights from the Bloomberg New Economy Forum over in Singapore. This is Wall Street week on Bloomberg.
This is Wall Street week. I'm David Westin. This week Bloomberg sponsored its fourth annual New Economy Forum in Singapore. And here are just some of the many high profile guests we heard from. China cannot develop isolation of the world to get deep and nor can the world develop without China. China needs to play by the rules. They need to respect our IP. They need to live up to their commitments. You know right now for example in the so-called Phase 1 deal where the Chinese committed to purchase a certain amount of aircraft and agricultural products they're not doing that. They're not living up to their commitments. We should be concerned. I don't think it's going to war overnight. But this isn't a
situation where you can have a mishap or miscalculation and be in a very delicate situation. Two Chinese leaders who had the maximum capability of their country dead as Americans and learned Japanese is to understand what we need to do to make sure that it is at least equivalent. And you know it is good news. I think the Americans are actually coming to the right type of policy posture towards China. None of that means that there there's not going to still be some pretty fierce action on both sides and ends. You know there are all sorts of risks and dangers with this relationship but it remains the key to 21st century stability. Everyone says well what should President Biden do more of to improve the U.S. China
relationship. That question should also be posed to President Xi Jinping. What should China do to improve that U.S. China relationship. The real risk is either an accident or a miscalculation. And the more there is engagement there's talk this discussion and there's hopefully a meeting of minds. I think that lowers the risk considerably. I think they need to both take a little more time to better understand each other. There's there's some
disconnect right now. I think Biden is trying to engage more but there's still some disconnects. Wholesale financial decoupling is impassable and partial decoupling is likely to make the United States China and the world more susceptible to financial crises. It is crucial that we have a mechanism for the world's first and second largest economies to coordinate because the only way to put out the next big fire will be with global coordination. The Chinese economy has been big as a manufacturer
of the world for many decades. It's also huge as a consumption market for the future. I don't think the world can decouple from one of the biggest manufacturing nations of the world. What will be one of the biggest consumption markets in the world. Also I really hope it doesn't decouple. Will there be differences. Differences in views on
technology differences in views on politics. Yes. But I think it's important that there is a level of connectivity between the world and Asia between the US and China. What's important is the US re-engage with the region shows leadership. We are a Pacific power and finds ways that work politically at home but also from an economic perspective to integrate with the region and to help build on for example the digital economy dynamics that are so critical. Today we don't provide most of our signed and services in China and I don't see that changing. But you know there are ways as I said in areas like EIA or sustainability I think there'll be opportunities for us to work together to cloud. We will support multi-national companies which have a presence everywhere. So maybe there are opportunities to work that way as well. One of the issues that is really underpinning some of the
dynamics between legislation preventing Chinese companies from remaining listed in the U.S. is about the PCAOB oversight and so making sure that they are subject to the same investor protections that all other companies in the US are and that that's the dynamic that we're working through and that our regulators and governments are looking at. I think most the regulation that we see around our space is well telegraphed. So the government wants insurers out of the bank space out of the shadow banking. They want them investing in long term and they want them well-run well capitalized. That aligns with our view of risk. I wouldn't say these direct pressure on us to change our long term plans to grow our business in China. Is it possible at some point in time something goes on geopolitically between the US and China because we're a U.S. company. There's
either pressure or directive for us to do certain things differently. Sure that's a possibility. But we think about this where the 10 20 30 year perspective not with the next couple of year perspective. And so we're long term committed to continuing to serve our clients by having the resources and the capabilities in China that allow our clients globally to participate markets. Coming up we take a look at the week ahead on Global. Wall Street. This is Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. Let's take a look at what's coming up next week on global Wall Street starting with Annabel Rulers in Hong Kong. Thanks David. Well this week in Asia we'll focus on the central
bank hawks. Korea may lead the region and kick off a tightening cycle. Meanwhile New Zealand could bump rates half a percentage point higher but that's seen as more of an outside chance by Bloomberg Economics. Over in China there are some key earnings due including from AVM Maker X Fung Yao Ming. Now this is the world's second biggest smartphone maker. That report as well. And finally we'll track efforts from the U.S. to bolster key alliances in Asia. Trade rep Catherine Tai meets her counterparts in India on Monday and Tuesday to lower rice. In London now. Thanks Annabel here in Europe. We're on standby for
news on Germany's new coalition. And also here the incoming Bundesbank president will be on Tuesday. PMI data will be released for the U.K. Germany France and the wider eurozone. On Wednesday the Ifo index serves as a barometer for economic expectations. Thursday it's the turn of Sweden's Rick's bank for a rate decision on the end of the week Friday. Yes it's Black Friday but the focus this year is on supply chain disruptions and whether retailers will pass on the high cost of raw materials to consumers remain. Thanks Laura. Financial markets in the U.S. face a shortened week because of the Thanksgiving Day holiday on Thursday and a truncated trading session the day after which is typically the second lowest volume session of the year second only to Christmas Eve. However the inflow of news does continue. Look for economic data out on consumer incomes.
Wholesale inventories new home sales and durable goods. As well as the latest revisions on the third quarter GDP numbers and the release of minutes from the FOMC is November 3rd meeting. Earnings season also continues with a report scheduled from chip maker Analog Devices software company Autodesk tractor maker Deere and retailers Best Buy Gap and Dollar Tree. In fact retail spending overall will be in focus as is traditional during Thanksgiving week with Black Friday marking the official start of the holiday shopping season. This year's Black Friday though arrives with supply chains still choked promotional discounts scarce and inflation eating away at the disposable incomes of many families. David. Thanks to Annabel Laura and Romain. Coming up the chip shortage continues. And the question is what
to do about it and how to make sure it doesn't happen again. We asked the former CEO of IBM Sam Palmisano. This is Wall Street. I'm Bloomberg. However you get your NIKKEI Bloomberg Daybreak billion Bloomberg Real come to DAYBREAK. Australia is Bloomberg Technology Scarlet Fu on TV radio and the web. This is Bloomberg. The supply chain. One of those things we took for granted before the pandemic but that now affects almost every corner of the economy and it's hit the auto industry particularly hard. As President Biden explains a factory in Malaysia shuts down due to
a Covid outbreak which they have. It causes a ripple effect that could slow down auto manufacturing in Detroit. Minneapolis Fed President Neel Kashkari says things are getting better. Malaysian chip factories are now coming back on line to try to supply auto companies. I also recently learned that all the major auto plants in America have restarted. I'm not suggesting
that we're out or out of the woods yet at all. But many of these sectors are working themselves out. But despite the improvements GM's Mary Barra says she's looking for a more permanent fix. We'll be in a much better shape in the second half of 2022. And we're also taking steps over the medium term to make sure we're never seen this kind of constraint. An important part of that longer term solution according to Michigan Congresswoman Healy Stevens will be legislation pending in Congress to support more chip manufacturing in the United States. We have got to pass the CHIPS Act. This is what I am working on every single day as a
member of Congress and certainly as a member of Congress coming from Michigan are automotive companies need that certainty. And yes our American people need relief from the everyday costs that are impacting our. And when it comes to supply chains particularly tech and especially chips no one knows it better than Sam Palmisano is a former CEO of IBM and he's now the chairman and CEO of Global Enterprise which deals with cybersecurity issues right across the country. Sam thank you so much for being back with us on Wall Street. Let's break this down. As you suggest we break down into right now the problem is supply chain specifically with chips and then what happens over the next six months or so and then strategic. What about right now. How bad is the situation.
Is it getting better. What. Where are we. Yeah. David thank you again. Thank you for having me. There are always such right now. I think you're a great quote in our lead in which was from the Fed president Neel Kashkari which is about Malaysia and how things are improving at least in automotive ships. And things are improving but it takes time to work through the supply and demand balance. That'll occur. But things are getting better. They're loosening up. Once we solve the chip problem. There'll be other problems called packaging. But that's more of the ISE segment versus the consumer segments like automotive or
appliances. But things are improving. But we have we have a ways to go. And companies need to do things differently as we as we got to the future. What can companies do to try to ameliorate the problem not fix it entirely over say the next six months. I think the thing that I think they are doing quite honestly they've started to do I think you've seen this in some of their products. They're working on design and supply. You have to do both. By that I mean you have to reduce the demand to get in balance with the supply that is available on the design side. You'll see them using fewer chips and maybe consolidating functions within a chip or a board as it's called so that you can use fewer chips to get the same functionality in the product at the same time. Companies will will make long term commitments to their suppliers form partnerships. I believe Ford announced one this morning with Global Foundries is a good example of that. What they're going to make long term supply commitments
and on both parties I mean clearly perhaps to cost them a little more. Having been in this business on both sides both a buyer and a supplier I guess costs could go up. But you much but you're much better off having quality products as you can ship your customers even if even if it has a small cost impact. So sell on the redesigned point. I think I mentioned to you actually I looked at a Ford maverick this new small pickup and they went way to say you know what we made the screen smaller. It's now a key ignition or where we used to have of those instead of push button. Yes. Specifically to reduce the semiconductor needs for the vehicle. How fast can a manufacturer really retool. Well it
depends. If it's a software change they can do it pretty quickly immediately like next year's models for example. Right. If it's a hardware change where cars bending metal you know for example then yeah it's a little more complicated because now you don't do manufacturing line. But quite honestly the changes that they've made like Shery Ahn by a smaller screen size and use a key versus a push button. That's that's mostly software. That's the same. You also mentioned strategic relationships such as Ford and Global Foundries has been announced. Now give us this sense a spectrum from let's do it in-house because there's been
talk some talk. We'll design the chips inside inside our own company even if you're an automotive company to change your relationship to actually just be a customer. How do you decide among those alternatives if you're new the chips. I say the way I was thinking about it I'd start with your product differentiation. You know how do you make yourself competitive
versus your competitors their offerings and and then therefore capital allocation. I in a fab itself. So I'll start with the fab itself. Even a small fab day a three to four billion dollars one that Intel will build is probably eight to nine billion IBM or five to six billion. So it's a huge capital allocation and therefore requires a lot of volume for that fab. That makes sense. So therefore if you're not in that industry you're probably not going to build your own fab. You can reserve capacity with a partner. You can pay for that amount. Allocation of manufacturing capacity is the term but I would not recommend
they go out and sell their own shops. It's really really technical to talk about 5 nanometer. It's basically it's like three atoms on a circuit and things like that. It's extremely hard to do now on the other side where you can get great differentiations around design and what could be done on design and you have to work with your partner because DAX becomes part of the of the of the data they rode into the chip. You know the algorithms for the how the chip works. But nonetheless as you partner with your your whomever your foundry is whether it's Global Foundries or Intel or Samsung there's multiple TSMC etc.. My point being is you can get terrific definite differentiation to design. If you look at AMD in their stock you know they do
have more to design shop than a fab and you can see the stock is up tremendously because there's success there. So we were talking about what the now here and now and then the near future. What about the longer future. What are the strategic solution here. And if I. And you'll tell me if this makes sense. So we divided into what's good for business and the economy and then turned to national security because I think they may be somewhat different considerations. Yeah. Yes. Yes they are. But they do converge for. That's it. That's an excellent observation on your part Dave because they eventually do converge. If you
think about it today which were seen for the first time that data and semiconductors are the lifeblood of the economy and also important to national security. But they are the lifeblood of the economy. It's like the oil of the 21st century of the past. But now apply to the 21st century. So having said all that you know we need to have strategic relationships too. I would say secure that capacity that that protects the U.S. economy. That means we have to relocate which gets us back to the national security issue. But we need to bring more the capacity back into the northern hemisphere. Or or maybe our allies around
the world we can just discuss whether they have capability or not. That's a long conversation. I wouldn't bore your audience with. But having said that over 75 percent of worldwide capacity today is in Asia Taiwan Singapore Korea. We needs to be coming back to the United States at least to solve the needs of the companies. And in that country quite honestly our society in the United States the reason why I say converges is because that movement back to the United States. That's why you hear about in
the bill that was the Schumer bill the s being worked through the House and the Senate. The 52 billion dollars requires government involvement because it's this significant investments to bring those fabs back into the United States. It's both the fab itself and the future R and D. So that's where it off connect because the those facilities that are going to be above
both doing commercial work as well as work for our court the protection of our company nationals country rather national security. I I believe that Bill is called the U.S. Innovation Competition Act originally version. It was called the CHIPS Act. It's a little bit mired right now passed to the Senate. The House is having troubles with it. But the 52 billion dollars you referred to. Is that enough to make a material difference. I've heard some of the chip producers say we can't do it without it.
Is it enough to get us to where we need to go. I think it's enough to do production. Now there's a whole nother element to this thing called research and design a research and development. Right. That's in the back. Build back better Bill which they're talking about 190 billion if I'm not mistaken. I'm not sure if that's a good number or a bad number but they need to do probably twice as much of production in research and design because the point is that the way these chips are used in the future it's very very advanced research. You have to have the money to fund it. You need the academic relationships with
the appropriate universities to help you work on these kinds of solutions. It's really a three way partnership between government academia and business. But that research bill is every bit as important as the production bill. Now it's clear that the focus today is on production because we don't have the supply to meet the demand but that will be solved. And then in the 50 volume I think will make us more secure and resilient. But we need to address the long term requirements to be competitive. It's a country that's both commercially and national security of the organs the government because the
Chinese are spending this dramatically. OK. Sam it's always such a treat to have you contribute to Walter Reed. Sam Palmisano. He is the former CEO of IBM. Coming up we wrap up the week as we do every week with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. We end our week every week with our very special contributor for Wall Street
Week. He is Larry Summers of Harvard. Welcome back Larry. You've been talking about inflation since really early last February on this program and elsewhere. And early on in that process you said as you look forward to the Biden economic agenda as they were putting it forward you saw three possibilities roughly one third possibility of runaway inflation one third of a recession because the Fed had to react to that inflation overreaction. And one third things would be fine. We actually went to Twitter and ask this week what they thought at this point. And basically we had as 50 percent of people saying they think runaway inflation 50 percent. And then the rest were divided roughly evenly between a recession and not much at all. I want to know from you given we have a lot more data now. Where are you on the probabilities. Unfortunately I think the probability it's all
going to work out well has come way down to perhaps 10 or 15 percent a probability that I don't know about runaway inflation but the probability that we're going to be have inflation for a while that's well above the 2 percent target I think is about 50 or 55 percent. I think the probability that we're going to try to control inflation is not going to work out and the economy's going to turn down more than we want 30 or 35 percent. So I think the odds have gotten a bit more tilted to the bad outcomes and a bit more tilted to inflation than I thought. I say that because the inflation rates are up. I say that because markets have become more vulnerable. And I say that because the Fed's further behind the curve than I thought it was 10 months ago. So
let's talk about the Fed being behind the curve because there was a piece on the Bloomberg this week that said wait a second we should track Volcker but not so much in raising rates to really get inflation control as reestablishing what was called credibility that one of the things that Paul Volcker did was really reestablish the ability the Fed to withstand political pressure and therefore maybe it should stay the course. But with the new framework that the Chair Powell put forward. What do you say to that. That if the Fed really did pivot significantly right now it would lose credibility. I think that the desire to maintain credibility when you've made a big mistake is the source of some of the biggest disasters we've had in the United States. That's what caused 55000 soldiers to die in Vietnam. That's what kept us in a 20 year war in Afghanistan. What's most important is the policy have credibility as competent and able to respond to changing events. And that's what we need now. When the Fed put forward that framework it had no contemplation that there would be Covid. It
had no contemplation that we'd have record labor shortages. It had no contemplation that we'd have annual inflation rates on the CPI running above 6 percent. And so it has to adjust in the face of that. There's another lesson to learn which is none of us know the future. And so confident statements about what's going to happen by public officials and confident statements about intention to act and what they're going to do rather than about objectives often turn out to be embarrassing. So picking up on that uncertainty as you say very wisely we don't we can't really tell the future. Part of what got us here was Covid in the pandemic and the uncertainty of that. That seems perhaps to be coming back. And we certainly seen in Europe right now with a lockdown being announced by Austria and certainly cases flattening out or even rising in parts of the United States. The Fed was concerned originally that deflation in part because of the pandemic. What about the
argument that we hear from the Fed frankly that we cannot tighten up too quickly because we may go back into deflation. So I think first of all monetary policy is about balancing risks. The risk that we will go into some kind of chronic deflation in the next year or two coming off six percent inflation with housing prices and the labor market on fire is much smaller than the risk that we will need to crack down hard and we economy will skid into recession. Second if we were to go back into deflation we sure want the Fed to have some room to cut rates. And as long as they stay at zero they're not going to have room to cut rates. And as long as they're still buying bonds they're not going to have much room to step up QE. And so if we want to
reload the cannon it's time for monetary policy to be acting more firmly. If we want to be gay guiding against the greater risk it's time to be time for monetary policy to be acting more strongly. Larry let's move to Capitol Hill and the so-called build back better package which did move through the House this week in part because they got that. The Congressional Budget Office scoring which areas it was so important. You said in the past the part of the reason it's unlikely to increase inflation
build back better is because it will pay for itself. It didn't end up paying for itself according to CBO scoring at the same time. You take some issue as I understand with one part of that scoring debate. If you look carefully the only real gap between the CBO and the administration's estimate that it does pay for itself that's quantitatively important is in the tax compliance area where the administration is proposing overdue initiatives to raise the investment in the IRS. The CBO discounts those initiatives almost completely. They say it's only going to raise one hundred and twenty billion dollars over a decade. And here's what I'd say. A nation that can do everything the United States has done can surely close 6 percent of the tax gap. Six percent of the taxes that are owed but not paid. That's all the administration is assuming. And it surely surely can do that at
a time when we have so decimated the IRS that it has fewer auditors than any time since the Second World War. And the audit rate has been allowed to come down by almost half since 2011. Look there's a competition between those who use information technology to hide money and those who use information technology to find money. And unfortunately those who've been hiding it have been waiting. It doesn't have to be that way. And that's what investing in the IRS is all about. This isn't just my view. This is the view of Charles Rosati the highly respected former Republican commissioner of the IRS and Fred Goldberg
estimate that the IRS that the right IRS program could raise one and a half trillion dollars more than three times what the administration is claiming. There is a list of academic studies that show that contrary to what CBO is saying common sense prevails. And if you audit more people not only do you get money from the audits but other people are more careful in filling out their taxes. If you provide better customer service people feel more committed to the whole process and there's less tax evasion. I think it's almost unpaid. I don't wanna say unpatriotic but it's. It can't be
right to think that over a decade we can't meaningfully improve tax compliance. Coming off a decimated agency. Let me close today by asking you. That's a new idea of yours actually. Outrage of the Week. What outraged you this week. Larry Summers David Bloomberg reported that we are only raising half as much money from the estate tax as we used to. Even as fortunes at the high end have soared even as inequality has gone way up even as more and more children of privilege are being able to live lives where they don't have to work because of what they inherit. I don't understand why progressives feel a need to move to exotic new schemes like wealth taxes when there's a lot of money to be raised and a lot of justice to be served by simply reforming the estate tax to make it work. And that's something where people who believe in incentives should believe in estate tax reform because I don't think any American should inherent money in a way where they've got no incentive at all to work there. It's
always so great to have you with. This is a privilege. Thank you so much. That's Larry Summers of Harvard a very special contributor to Wall Street Week. Coming up your patriotic duty to get back to work. This is Wall Street week on Bloomberg. Finally one more thought the Chinese import. We didn't necessarily expect. Four months ago right here on Wall Street
week we talked about a new Chinese phenomenon called lying flat at the time. We thought it was something of an oddity. Began five years ago by a twenty five year old factory worker named Lo was wrong. Lying flat is spreading through the use of China tired of the long hours. They've decided to take it easy giving up their jobs living modest lives off of their savings and sometimes off of their parents. But now U.S. workers seem to be taking a chapter out of the lying flat book from China. As U.S. companies just can't get the employees they need to come back to work. As we've heard last week on Wall Street week from Sarah Header of Causeway Capital the cry we hear from companies will be interview. Hundreds of companies is that they don't have the
labor they need. This seems to be this chronic labor shortage which is something we haven't seen. Normally we talk about slack and that doesn't appear to be the case. And it's not like the labor isn't there somewhere. It doesn't seem to want to work in many of these jobs. And that ultimately may lead to a solution in automation or types of some labor replacement. But in the interim that means that the wage has to rise and will be tracked in labor that's needed. People speculate about the reasons Liz Shuler of if they'll CIO says the jobs just don't pay enough. There is a shortage of good high paid jobs in this economy and
working people are re-evaluating coming out of this pandemic. Do I want to sacrifice my health for a low wage dead end job. Jason Furman of the Harvard Kennedy School says that it's a combination of having enough cash. They don't need to get back to work and being worried about Covid. There's a number of factors related to Covid. It's psychological fallout the extra
cash that families have and just some resorting that always happens when people lose jobs and need to gain them back. So I would put most of my money on 90 percent of these people are going to come back. Think you could take a year or two for them to come back. So a lot of pressures in the meantime. But I wouldn't write people off long term. And some like Marc Cohen of Columbia say it really is just a matter of time before those workers come back on the job. Wage rates have gone up benefits
have gone up. In some cases benefits have become unprecedented. Amazon is offering college tuition for folks who join them and who stick around. So we're gonna have to wait this out. It's the one thing we can probably count on is that the labor shortages the labor disruption will slowly abate because in fact most folks have to go back to work. But whatever the underlying reasons are leaders around the world are using their bully pulpit to try to get us all to come back to work. Whether it's the Chinese Communist Party talking about lying flat and calling it unjust and shameful or former U.S. Labor Secretary Elaine Chao saying we owe it to our country and to our economy. As the economy continues to recover we're going to need these workers
to do their patriotic duty to come back and help the economy to come back. So maybe we need to take a page or a poster out of U.S. history and make it really simple. This time. Uncle Sam not only wants you Uncle Sam needs you. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2021-11-21 14:52
