Wall Street Week: The Powell Pivot (Full Show)

If it's not one thing it's another as troubling news on Covid compete with news of tightening to fight inflation. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on the Fed response to inflation that he has been asking for. I was glad to see him advocate retiring the word transitory from the inflation

discussion and Deborah Lair of Edelman on the new paradigm for doing business in China. What you need to know as an investor. There is no question that it's going to be a bumpy road ahead for foreign investors. I don't know whether it's a wall but there was sure a lot of worry about this week as we came out of the weekend reeling from news of a new variant called Omicron that we weren't even sure at the beginning how to pronounce or how effective our vaccines would be in fighting it. But Dr. Anthony Fauci said the best defense no matter what is to get vaccinated and boosted. We know what we need to do to protect people get vaccinated. And Pfizer's CEO Albert Borel promised that if we need another vaccine it is just around the corner. If the virus escapes the protection is our vaccine after a booster dose which would be very difficult. But we need to take it. We have already tried to stop it. The pressures of developing a tailor made vaccine. But

look at me. We have a very high level of confidence that we will be trained within hundred days. But we have very high level of confidence that you can manufacture it by billions if needed. And if Omicron weren't enough we had Fed Chair Jay Powell admitting that they'd gotten it wrong that inflation is more persistent and broader than they had anticipated and that as a result that schedule for cutting back bond purchases just last month may need to move up. The economy is very strong and inflationary pressures are high. And it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases which we actually announced at the November meeting. Perhaps a few months sooner. And if all that weren't enough on

Friday Chinese regulation Didi hit tech hard giving the markets one more thing to contend with. So after a Monday rebound the S&P 500 had the worst two day slide in over a year leading index down for the week about 2 percent. While the Nasdaq hit in part by that Chinese problem fell over two point six percent. And when it comes to bonds the Treasury 10 year yield was off almost 12 basis points while the yield curve flattened as the two year moved up on anticipation of that Fed rate hike. Here to make sense of this volatile week Rebecca Patterson director of investor research at Bridgewater and Barbara Ann Bernard founder CEO and CIO of Wind Crest Capital. So welcome to both of you. Barbara Ann let me first start out with you as we try to set through sort through a really tumultuous week what really affected the markets and what was just a faint.

Well I think the combination of the virus and the Fed is sort of the perfect storm because on one hand you had Mark Gurman virus holding back certain parts of the market such as the reopening trade. And on the other hand you know the March 20 to play Covid playbook was completely crushed by the Fed because you think that that was a loss. The beneficiaries of cheap money such as your politicians are stay at home and no other manager really exemplifies that trade as well as Kathy would. And if you look at her fund ARC is down 16 percent since Thanksgiving Day when we learned of the virus. And typically you would have thought that would have been your go to play book. So what this means is you need a new playbook this time being the feds change of stance is very material. So Rebecca I'm curious what that change of stance from the Fed. Is it a change of stance in that we know

that they're going to taper and that they're ultimately going to hike. Or is it rather let's improve our options. I think it's the latter really. The Fed is trying to make sure it has optionality. It's still not sure if inflation is going to be where you know low quite a bit lower next year or quite a bit higher next year. But by speeding up the taper you can address inflation expectations. Make sure they don't anchor. Now you finish the taper and that's completely separate from tightening. And so if inflation stays high and we think the risk is that inflation could stay high. Housing supply is going to take a

long time to come back. Labor's going to take a while to come back. Energy commodities those supplies are going to take a while to come back so that inflation pressure is going to last. If that's true then the Fed can raise rates faster. And right now we only have two hikes priced in for the second half of next year. So there is room for more to get priced in and that can push yields back up just as fast as they came down this week. Exactly. Very powerful point Barbara. Let's talk about the deflation issue if in fact it stays up. Are you starting to see it sort out some of the stocks you get involved in individual stocks. Are there certain stocks you want to go to in a high inflation world.

Oh absolutely. I mean I'm very fond of green metals for example and they're a beneficiary of inflation and I think every portfolio is woefully under allocated to them. But I think you know with the market's showing you right now is that the Fed might be doing a deflationary lower growth policy mistake. The markets are expensive whether it's a stock or a market. David punching multiples hate lower growth and that's when people are afraid of is that we will have lower growth. And so you'll see multiple contractions. So the stocks that you absolutely want to stay away from are sort of what I would call those you know

speculative bubble ones where they have no earnings. They haven't. And that game is sort of over. So it's more right now. How do you protect yourself from things that have been beneficiaries of this environment. Well let's pick up on that just for a moment. Is one interesting thing. At the end of the week I saw from Charlie Munger actually Warren Buffett's partner is pointing out how many of the Nasdaq 100 stocks actually are below their 50 day to day low as opposed to above. And it's sort of a record numbers like five hundred eighty eight of thirty five hundred or something like that. Are we seeing something like a bursting of some of the tech bubble. Well we try to monitor for bubbles in the stock market. And based on our own

calculations there is only about 10 percent of the US stock market that we would consider frothy. But the bulk of it we think is fairly valued. And a lot of the stocks that we think are frothy are in that speculative camp. Right. We also know from the US that over the last decade or so we've gotten more U.S. stocks that are very sensitive to liquidity conditions. So picking up on what Barbara was saying to the degree the Fed is forced to tighten faster than is discounted to address inflation. You do have a section of U.S. stocks that are going to be more vulnerable to that than they would in past cycles. Same time I'm not seeing any evidence yet that growth is slowing. This is a fear tied to the Fed a fear tied to Omicron rather than a reality. And we think there's a good chance you're going to have a self reinforcing cycle next year with

inventories rebuilding CapEx spending wages going up helping the consumer. And if that's the case then there's going to be plenty of stocks that are going to benefit from that that probably aren't that overvalued right now. Bob Brown's pick up on that for a moment with the OMA crime because we started the week really pretty concerned about it. That concern seemed to wane

during the course of the week. But some who were saying we might end up with the worst of both worlds which is the one hand suppressed growth because of overcrowding if it really comes back strong at the same time increased inflation because it may affect for example supply chains. I think that's right and this is that I think this is where we need to be very clear. There is more than one source of inflation. It's not all monetary. Right. Supply chains are a source of inflation and the virus could exacerbate that due to lockdowns and travel restrictions. You'll get energy. We have an energy crisis in Europe and China. Last month the PPA in China was up 13 percent on the back of higher energy. The PPA becomes the CPI and if you think about the cost of energy that's nature's discount rate and it impacts every industry. So I think

energy is a real source of inflation. And you you'll get food prices. They're up 30 percent year on year in part because the price of ammonia has gone from one hundred dollars a tonne to a thousand dollars a tonne in a year. So and then you'll get shipping costs. We all know the price of the container was twenty five hundred freaking twenty five thousand today. And lastly near shoring. We've gone from just in time to just in case you know McKinsey put out this report and said 92 percent of their clients had invested in near shoring to to bolster the resiliency of their company. And you just have to look at

someone like Ford and GM who are doing deals with chip suppliers manufacturers domestically. That is inflationary. So if you think about one of the sources of deflation for the last 25 years has been China. And if they are no longer going to be a source of deflation this is this is a radically different beast. This is inflation due to structural issues and this is something the Fed can't fix. So I think inflation is here to stay for longer. And call me crazy but it might not be the worst thing in

the world because you can fight your way out of debt. And what Colbert did was it took our debt to GDP up 225 percent and it's never been higher than that. Now even during World War Two and one way to deliver is to inflate your way out of it. So I love that the Fed dropped the word transitory. I'm just waiting for them to say it's necessary. Well this is a favorite topic. I think that Bridgewater actually you deflate your way you inflate your way out of debt by deflating the value of the currency is really what does it. Right. Discuss the currency. Is that a good way out of this. Well if you have to choose between a

deflationary depression and modest inflation both of them have costs and benefits. But the cost of inflating your way out is going to be spread a lot more evenly across different cohorts than a deflationary depression. So if I had to pick one I would completely agree. Setting inflation at a higher level is probably going to be a much less painful way to deal with our debt. Let me ask you one last question here before we go to the break. And that is you mentioned liquidity. The cost of capital

for a lot of companies has been approaching zero for a long time. Has that really saved a lot of companies or promoted companies that otherwise would have to make some tough decisions. Yeah I think that look it's important. Remember tapering is not tightening. Right. So for tapering we're still adding liquidity to the system just at a slower rate. So liquidity conditions are starting to normalize but we're not tightening that quickly yet. That could change next year if

inflation stays high. And I'm sympathetic to the points Barbara was making. But I do think that what Covid did is it released this coordinated fiscal and monetary stimulus the biggest stimulus we've seen outside of wartime in modern history. And it's meant that balance sheets for companies and households are much much stronger. And so yes there is some risk as liquidity conditions tighten and cost of capital goes up. But the starting point for companies and households is extremely strong right now. So that could help prolong the cycle for longer. OK. I'm delighted say Barbara Ann Bernard of Winkler's capital and Rebecca Patterson of Bridgewater. We'll be staying with us as we turn our attention from what happened this week to the longer

view and what investors should be thinking about for the year and beyond. That's next on Wall Street week on Bloomberg. This is boomer Wall Street week. I'm David Westin a topsy turvy week like this one cries out for a longer term view for investors. And Rebecca Patterson Bridgewater and Barbara and Bernard Winkler's capital have remained with us to give us just that perspective. So let me start with you Rebecca because I do think of Bridgewater sort of longer term vision typically. What

are the longer term issues that investors should be thinking about beyond what just happened this week. Well how long term do we want to go. I'm going to go really long term for a minute because I think when we look at this year when we look at the last decade frankly it's paid to be in the US. Right. The U.S. equity market has been where you've wanted to be. And when we look ahead right now what we're seen is that the markets are extrapolating that that will continue for the next decade. So the U.S. is priced to outperform other markets for the next 10 years by a lot. And so you have to ask yourself how likely is that. And when you think about some of the tailwinds for the U.S. that we've had low and falling tax rates a

deregulatory environment very strong forces helping capital versus labor. Well all of those things are fading a little bit. And some of those tailwinds could become headwinds. So when we think about what's priced into markets and where the opportunities are I'm taking a long term view here. But I do think looking at your portfolio making sure you have geographic diversification given that what that already priced in view to the U.S. makes a lot of sense. And if you take a shorter term view the next year if we go from pandemic to endemic. Right. Barring Omicron or some other variant being truly horrible if we

can move into that endemic phase of this virus if we go from a world where we're fighting downside growth risk to fighting inflation that also could benefit some markets that are much more attractively valued today and have stocks in sectors that should benefit from that more. Japan would be a great example. While in Japan. There you go. Barbara Ann what about from your point of view as an investor in emerging markets. I couldn't agree with Rebecca more. I think the U.S. is very expensive. If you do like emerging markets but they are not as resilient in the face of a pandemic. You need to try that hard. If you look at the MSCI Europe 28 percent of stocks trade on an FBI on one P look as well. So I think the rest of the world has been dramatically over looked. I think Southeast Asia is very interesting now. A lot of money is fleeing China because it's become investable. And that and that coupled with the increase in GDP per capita in Southeast Asia is a very interesting

inflection point. I like India for the same reason it's attracted a lot of the money that has fled China. I also like green metals because this is the value investors way to play the energy transition. I can get the same growth as a Tesla for a commodity multiple because every battery needs the copper and nickel and with you. But I like investing in. I also really like some of the part stories like math works. Right. So just being really disappointed. Cash flow based an

asset backed base. I think these are the interesting ways to find value when markets are expensive. I'd also say I really like shorting and so there's always something to do. I mean we're short Rubin peloton statistics and so you can make it you can take advantage of speculative markets as probably you don't have to be crazy to them. And then the last one is I think and I think Rebecca would agree here. You just want things that are uncorrelated rate and

something that's really uncorrelated and very interesting to me is actually going long. The price of carbon. And you can find contracts such as the one in California which literally goes up by 5 percent a year plus inflation. So I joke at my firm we're getting into fixed income so uncorrelated and diversified. So these are very different alternatives which makes it fascinating I think. Rebecca but talk about growth because when

I think about Europe and I think about Southeast Asia India I think of two very different growth patterns and all likely over the next 3 5 10 years. Well Europe has actually had an amazing inflection point right now. So we're getting the new German government led by Orloff Schultz and the coalition government. I wouldn't say they're gonna be fiscally loose. That would be a bridge too far. But I think you're going to see more fiscal flexibility out of Germany than we've seen in decades. They're also reviewing the Growth and Stability Pact. And for people who don't follow this day to day it's really the austerity straitjacket that's limited European growth since the EMU started in 1999.

Depending on how those talks end up and with this new German government I actually think the odds are greater today than they've been in many many years that you see relatively more fiscal stimulus continuing in Europe and that plus a European central bank that stayed pretty dovish. They want to get inflation up to. Because it's been anchored so low for so long. So if you have a stimulative monetary policy less of a fiscal straitjacket this could be a moment 2022 could be a moment for Europe that that valuation priced in is proven wrong and resets higher. I think that's one. One region of the world I'm watching very closely. Europe and Japan go. Those are two different sort of calls. So Barbara let me ask you. So a different question and that's about leverage because if in fact we get into a pattern of raising rates we've got a lot more leverage on balance sheets of corporations in part because the rates have been so low. If they start moving up it could really put pressure on some companies. Absolutely. You don't want to go anywhere near the zombie companies. My favorite company is the beautiful LBO

target. I don't like leverage. It's at risk. You don't have to take. You want great balance sheets great businesses hire a reasonable alignment of interests. But with the management running them it's fascinating. So if you were advising the Fed right now how would you advise them to handle this to have a soft landing over the next 12 to 18 months. Well you just said the magic words 12 to 18 months. So what the Fed does today feeds through the economy with a one or one and a half year lag.

And so I have a lot of empathy for the Fed right now. They have to try to thread this needle keep inflation expectations anchored but reset inflation at their new framework level and make sure they don't undermine the economy. So they have to try to really get it. Goldilocks tightening enough but not too much that it undermines the recovery to one and a half two years down the road. I think we are going to see the faster tapering. I think Paul's been trying to signal that pretty clearly for the December 15th meeting. And from there it's going to depend on inflation. Again we think inflation is going to be higher than

what's still discounted in the market and that's going to lead the Fed to have to tighten more than what's discounted as well. So I think not knowing how much of each you get you want to make sure your portfolio has assets that will benefit from higher inflation commodities some of those companies that can pass on higher prices to end users and you want to be positioned for rising yields. I think if you have both of those trades on in your portfolio you're covered for whatever the Fed's going to bring us. We'll talk about diversification Barbara. And you've talked about green metals a couple of times now here. How do you sort out the wheat from the chaff. If I can put it that way because not all of those new speculative technologies are going to work. So I think you're trying too hard if you go the technologies. I really like the commodity producing companies and an even greater than that. I like the net carbon neutral producing

copper with the nickel mines and I own all three in my portfolio. The first ever copper carbon neutral carbon lithium and nickel mines. Two of them are in Canada. One of them is in Germany but for various reasons governments. Here's the other thing that governments need to raise revenue. I think carbon taxes are something that we're going to see a lot more of. And carbon taxes are quite interesting because they incentivize socially responsible behavior and they also incentivize companies to use their CapEx to decarbonise their businesses so that they don't ever have to pay that carbon liability tax. And so these are and to me are the really innovative thought and thought leaders in ESG. And they're the ones that are really

positioned to win on multiple fronts be it from a lower cost of capital from green bonds it from higher operating leverage and just you know really doing well in this energy transition which is a globally synchronized initiative. And these are the tidal waves that you want at your back in this kind of environment. It's been really great having you both here. Rebecca Patterson of Bridgewater and Barbara Ann Vernon of Wind Chris Capital taking a look at this week but also out a ways for the investor about how to invest prudently in this tumultuous world. 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. It's time now to take a look at the week ahead on global Wall Street starting

with Juliette Saly in Singapore. Thanks David. The new found stability and Chinese dollar bonds will be tested in the coming days after Kaisa Group Holdings failed to get bondholder support for a debt swap on 400 million dollars worth of notes maturing December 7. Kaiser is China's third largest borrow of dollar bonds among property firms with some eleven point six billion dollars outstanding. A default could spur contagion risk just as global investors return to offshore property bonds. We'll also get more of a pulse check on how China's economy is faring with November trade data and

inflation figures too. Plus a central bank decision from the RBI and the final read on Japan's third quarter GDP. Now over the Dani Burger in London Danny. Thanks Juliet. Well here in Europe the week kicks off with a euro group finance ministers meeting in Brussels. They meet amid rising energy costs as well as more Covid cases. And the new variant will also monitor whether or not more restrictions in Europe are put in place due to the Corona virus. We already have Greece mandating that those over 60 get vaccinated in Germany placing more restrictions on the unvaccinated. Speaking of Germany on Wednesday Olaf Schulz is set to be sworn in as the new chancellor replacing Angela Merkel the first new chancellor in 16 years. And then rounding out the

week Daimler's truck unit is set to start trading in Germany. Covid Romaine Bostick in New York. Thanks Danny. Market participants in the US are honing in on that next round of inflation data which is likely to show a seventh straight month where the consumer price index has risen five percent or more from the same month a year earlier. That data for November will show the fastest pace of inflation since 1982. Supply chain pain transportation bottlenecks and higher wages all playing a role in the persistence of that price growth. And it's prompting a notable change in tone from Fed Chairman Ron Paul who now says it's time to retire the word transitory. When speaking about inflation one other big event

next week to keep an eye on is President Joe Biden's summit for democracy. It's a gathering of about 100 government leaders to talk about the challenges faced by free society. One key element of the summit will be a new U.S. initiative to prevent the proliferation of technology that authoritarian nations use to surveil and control their citizens. David thanks to Juliette Danny and Romain. Coming up is China investable. Maybe we just need to understand that the whole paradigm has changed. And Deborah Lair of Edelman explains it to us. We look at this really. Is she 3.0. This is Wall Street week on Bloomberg.

Match one 10 cent didi bite. Dance Chinese tech giants hit with fines and regulations seemingly out of the blue. The biggest Chinese regulatory crackdown we've seen. That's according to Jonathan Garner of Morgan Stanley. We think it's going to reshape the landscape for China equities really quite profoundly all coming on the heels of Jack Ma admonishing the Chinese government last year about making sure it got its regulation right. Good innovation is not afraid of regulation but is afraid of being subjected to yesterday's way to regulate. We cannot use the way to manage a railway station to manage an airport with investors left to ask themselves whether China is investable right now. Questions raised by David Rubenstein of Carlyle and Scott minored of Guggenheim.

I think people have to worry about investing in China or doing business with China. That's an issue. And also what what are the ramifications if the relationship gets worse. China is an investor. But whether we like it or not China's approach to regulating business is not going away anytime soon. As a Chinese party

official made clear in reaffirming support for President Xi Jingping in the plenum last month the whole party will have an anchor. The entire Chinese people will have a backbone and a giant vessel of China's rejuvenation will have a steady hand on the tiller. So if Chinese economic regulation is not going to change anytime soon the question is what does that mean for businesses and investors in China. We turn now to somebody who has had been addressing that question for years now. She's Deborah Lair of Edelman. She was there at the USTR when they were negotiating Chinese accession into WTO. And then she assisted big companies like

Goldman Sachs and Merrill as they moved into the Chinese market. And so Deborah welcome. It's great to have you back with Wall Street work. Let me ask you the most basic question. If there is something of a new paradigm that businesses are facing investors are facing what is that paradigm and how does it change what they do in China. Well that really is a great question. And thank you so much for having me back again. I'm delighted to be with you. We

look at this really as she 3.0. We're looking at a whole new world in some ways for foreign companies doing business in China. One Xi Jinping is entering into a very political year as he attempts to be take on the presidency for the third time. Now as part of the party in general secretary there were no term limits. But for the first time he is well positioned after 10 years to really take control in a way that we haven't seen since Mao. And what I mean is over the last 10 years it's almost been like a chess game where he has been able to position many of his people into positions of leadership that now when he takes on this third term they will be his people with his vision to implement his policies. So what does this really mean for the

foreign business community. One the Chinese have been very clear that they want to continue to open to foreign firms but they're going to do it in their own way. It's not going to be across every sector but there still will be huge opportunity. But at the same time they're going to be looking at implementing a whole series of regulations in some ways almost to make China more professional. It's been a little bit of the Wild West and we've seen the growth of large firms like Alibaba and Tencent and May 1 and others. They're looking to break down that monopoly power in part because of concerns about clearly the threat to the party but also because over 95 percent of China's businesses are small and medium sized enterprises and they're responsible for 60 percent of China's growth. So in order to allow those companies to flourish they need to introduce some new policies. But a lot of the policies that we're starting to see whether

it's anti monopoly whether it's rules around data whether it's rules on tech are perhaps trending in the direction that countries in the West might be looking at but with a Communist Party spirit to them. So so for the investor for the U.S. business going over there is there a predictability to it. Because sometimes it feels like it just comes out of the blue particularly when the regulation we've seen in the big tech sector. So other places as well private tutoring or is it more predictable than we think. If you step back and look at the areas of Xi Jinping priorities one to eliminate financial risk to to address to poverty alleviation and three to focus on climate change in that big picture. Some of these steps are predictable just in the way that they've implemented has come as a surprise.

And so if we look at what they're doing in the context of whether it's Deedy and data data is actually a very good example one because of the national security implications that they have but also because they look. Data is actually a factor of supply and so as they're looking to transition the economy in part focusing on rising consumer demand but also they have considered in many sense that data was a free good. That now there has to be a price on and there has to be some control over. So they're implementing new rules. And it was interesting to see that it was actually the Internet

authority that was the first in to do the investigations around. It wasn't the financial authorities and the restrictions that have come out as a result of further IPO listings are coming from the Internet and the concerns over data and foreigners access to data in China. How much of this comes from President Xi himself as he came into office. I think that he sort of looked around looked at the past 10 years of Hu Jintao and said that he had to get the country under control that there had been limited reform that the style of collective leadership had actually made it very difficult for Hu Jintao to get much done during his time and that he also had many of the people from the previous administration so to speak from. From President Jiang Zemin around him. So he couldn't really implement his own vision. So what she has been doing as I was saying is one getting his people into place but two he realized that in order to govern the country he had to find a vehicle to do that and a vehicle that reached from the top all the way down to the smallest cities. And that was the party because even when he was sitting in office when he was coming out with new policies even to this day 10 years later he still has policy enforcement teams that he has to send out into the provinces to ensure that policy is being implemented and the way that he expects. So I think as we look ahead and we look into next year this

political year when he is going for the presidency one of the things to watch is going to be the size of his standing committee. And this is is you know the group of usually men who roll China. They are the most powerful. And the number various 5 7 9 4 Xi Jinping. It's in his interests to try and make that a smaller group so that he can have more control and less of this collective leadership. For others who still have control and many of them are previous politicians whose people are still in

place it's going to be there in their interests to push for a larger size. And I think that's one of the criteria that we should be watching to see how well he does and how well he's consolidating his power to implement policy going forward. There is you know well there are investors right now who are asking the serious question is China investable at this point given some of the things we've seen. When you think about investing you've always got market opportunity in China. No one would deny that. What about the political risk during your time there. Do you think it's going up right now or going down. The degree of political risk for investors. Well there's no question that it's going to

be a bumpy road ahead for foreign investors. And that as we said while there may be some clarity around the direction that the Chinese government wants to go when it comes to whether it's market opening or the new regulations that they're taking there isn't complete transparency on what the process is and the timing of any of the regulations take what we're seeing around the VIX these vehicles that are being used for many Chinese companies to actually get around the rules in China to establish overseas and then use that vehicle to invest. And that's that's the way that many foreigners are investing in the Ali Baba's and the other big companies in China. There was a rumor coming out of China that they were going to

cut off that vehicle which their regulatory authority has come out and said that's not true. But I am sure that what they're going to do is take a very serious look at what those entities look like and put some new rules around them because the whole intent of these VIX ISE was actually to get around the regulatory structure. So by their very nature they need to bring some transparency and clarity to that. And that's going to make it very difficult for

foreign investors to continue that route. And we're going to see more and more of these types of actions that while in the big picture understandable perhaps from a Chinese context for an investor they're going to be unpredictable. And finally Deborah maybe one of the big political risk questions and that is human rights issues because we saw this come up this week as Senator Mitt Romney really took on Ray D'Alessio saying how can you deny that there are real human rights violations for an investor. Put aside the morality of it just for a moment. For an investor or a company doing business in China how does one factor that in. Is it a significant factor in decisions about how to go into China how big to go into China. I think the U.S. government has taken an important stance in its own set of values when it comes to voicing its concerns about human rights for foreign investors.

Absolutely. This is going to continue to be an issue. The Biden administration has stated very clearly that its expectation is that American companies will represent American values when they're overseas. How that is factored in is very complicated because. While American companies may take a stance it's not necessary that all

of our competitors are gonna be taking the same stance. And I do think as part of this we need to focus on what's the best interests of the American economy and American firms and American economic security which is the basis really for our national security. It's a very complicated question to factor in but it's really a very critically important one. Thank you so very much for being with Wall Street Week this week. That's Deborah Lira. She's the CEO of Edelman Global Advisory.

Coming up we wrap up a busy week with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin and we conclude our week once again with our very special contributor here on Wall Street. He is Larry Summers of Harvard. So Larry. Welcome back. Let's start with the jobs numbers that came out at the very end of the week. I saw a person after person say they're just perplexing because it really missed on the headline number. But

there was some good numbers below that. The participation rate was up the unemployment rate was down. How do you as an economist interpret these numbers. No one can be sure. There are two surveys David. There's an establishment survey and there's this survey where they talk to people and they're very sharply divergent. This month the establishment survey looks weak. The people's survey looks super strong. If you take the average of them which I think is a reasonable procedure for one month you

get a overall pretty strong number. So I read this as strong. I think the single most important number in the thing is that the unemployment rate is way down on rising labor force participation. That is the unemployment rate is down. And job creation is even stronger than suggested by the unemployment rate. So I read this is consistent with the picture that we've got an economy moving towards overheating with the benefits that that means for disadvantaged workers. But with the risks that go with inflation. OK. So let's pick up on the overheating. We had a pretty important development this week as the chairman of the

power the chair of the Fed Jay Powell testified in Congress and basically said you know what. It's more pervasive. Inflation is and it's more widespread than I had thought. And therefore we're going to have to consider at least moving up the time the taper something you've been arguing for from listening to Jay Powell this week. Do you think he gets it. I was glad to see his testimony I was glad to see him advocate retiring the word transitory from the inflation discussion. I wish it wasn't

necessary but given reality I'm glad about what the chairman is say. Here's what I think he needs to recognize next. If you look at what is in many ways the simplest indicator of the posture of monetary policy where is the real interest rate over the next one year as inferred from market inflation expectations and market interest rates. That number is at its lowest ever. That number is now way below negative 3 percent closer to negative 4 percent. That is not a terrible place for enduring monetary policy to be. So. I'd like to see him signal that there is no reason at all for us to be engaged in continuing QE and mortgage backed securities that there's no reason why we shouldn't very rapidly end QE altogether that we need to start moving in the way we do when inflation is well above target. I'd be signaling for rate increases next year with two sided uncertainty depending on how the inflation figures work out. That will be a jolt but a jolt is what is required to restore credibility given

how fast MA how much monetary policy has lagged. Let us know what that jolt as he as you refer to it some months ago you said your concern about the Fed is that they waited too late. If they were too dovish on this they would have to take action that actually could tip us into a recession. Do we still have that danger. The danger is for interest rate hikes. Next week. Next month. I'm sorry. Next year likely to tip us into recession. I think for interest rate hikes next year or less likely to 2%

into recession that aid inflation then eight interest rate hikes the next the next year. And so I think we have got to get ahead of the curve rather than be behind the curve with respect to inflation risks. Look I'm not saying we should lock into for inflation risks. I said we should be signaling that is a very plausible possibility. You know if you look at every business

cycle since the 1950s the Fed funds rate has never peaked below two and a half percent. Now we're looking at a situation we didn't have in the vast majority of those business cycles where we're coming into it with one year inflation rates above 5. So if anything that two and a half percent figure is too low. And markets aren't pricing anything like that. So I still think we've got some substantial distance to go in terms of signaling the Fed's resolve. And I think the evidence is that when you signal more and your credibility is greater you in the end find it easier. Then when you sacrifice your credibility and have to do even more to regain credibility. That was the lesson of the mistakes of the

1960s and 1970s. Larry one big piece of news was obviously Jay Paul's testimony talking about expediting the tapering of the bond purchases. Another big development obviously that happened over this last week. Is Omicron something there's a lot we don't know about still. How does Omicron potentially fun factor into decisions about monetary policy at this point. David let me first say that I am very concerned. Here's the point that I think is not in the discussion but should be much

more active in the just in the discussion. I can't contribute anything to resolving the uncertainty about just how serious Omicron is. But what I can say is this Omicron was a vastly larger mutation than anyone expected. The fact that we got such a vastly larger mutation whether this one was benign or proves to be heavily malign tells us that this virus is much more mutable than we had previously expected. It also means that in the future we've got two different jumping

off points for mutation that are very different. The original virus that we had and this new very large mutation. And so the prospect for mutation going forward that is damaging is far greater than we thought about or could have imagined as likely three weeks ago. And for that reason I think we need all to just up our thinking around Omicron. It means that the global health effort needs to be very substantially stepped up. If we are going to address this in a satisfactory way it means that there needs to be much more capacity developed to not just provide vaccines to other countries but to get jabs into arms. None of us are safe anywhere until this

is under control everywhere and the global effort needs to be ramped up. And I'd have to make the judgment that those in financial markets need to be aware that the range of possible scenarios is going is going to go up with this news of increased mutation potential. There becomes a real possibility that this is not going to be a transient but that we are going to be dealing with this kind of world for a number of years to come. Yeah it's sad but I'm afraid all too true. Larry finally just briefly here at the end we like to end with the Outrage of the Week. What's your outrage. We've got a very

eventful week on my set. I mean my outrage is my discovery probably too late that the legislation that's working its way through the Congress in pursuit of green objectives has put in other objectives so strongly that if you buy an electric car with a union you get a far larger credit than if you buy one without a union. And that seems to me to be exactly the kind of special interest measure that will compromise our achieving vital environmental objectives. And so I was sorry to see it. Thank you so much to Larry Summers our

very special contributor here on Wall Street. He of course is at Harvard University. Coming up inflation inflation everywhere and especially in our sports. This is Wall Street week on Bloomberg. Finally one more thought. Inflation hits the big time. Well Fed Chair Jay Powell made it official this week. Even he is getting concerned now about inflation. The threat of persistently higher inflation has grown. The test that we've articulated I think clearly has been met now. Inflation is run well above 2 percent for long enough. The word transitory has different meanings to

different people. It's probably a good time to retire that that word and try to explain more clearly what we mean. You've seen our policy adapt and you'll see it continue to adapt. We will use our tools to make sure that higher inflation does not become entrenched. The economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to

consider wrapping up the taper of our asset purchases which we actually announced at the November meeting. Perhaps a few months sooner. And if Mr. Powell needed any confirmation that we are seeing our prices skyrocket he need look no further than American sports. We knew we were in for it when Stephen Cohen bought the New York Mets and pledged to do whatever it takes to win. We're going to strengthen our farm system keep our players healthy and use the best analytics. We're gonna build a process that produces great teams year in and year out.

You build champions you don't buy that. But this week Mr. Cohen was buying instead of building ponying up one hundred thirty million dollars over three years for the great pitcher Max Scherzer a great pitcher who just happens to be 37 years old. And others like Michael Reese of our capital agree with Steve Cohen that it's really like any other kind of investing. We see real upside in sports investing and we're taking the same DNA and applying it to a different industry. But if you think it's

only professional sports they're seeing this kind of runaway inflation. You should think again. Take the case of Notre Dame football coach Brian Kelly who said it would take a fairy godmother with a 250 million dollar check to get him to leave. But who left for a mere one hundred million dollars over 10 years offered by LSU instead of that fairy godmother or even better the Oklahoma head coach. Lincoln Riley who moved on to USC saying he did it because the support he felt there as a

football coach to have that support behind you from some of the most influential people in this university from your bosses from people they're going to make big decisions. It said it said everything that I needed to hear that kind of support that will pay. Coach Riley one hundred and ten million dollars give him a six million dollar house and get this unlimited use of a private jet for him and his family. Good luck to Jay Powell if he thinks he can tame that sort of inflation that does it for this episode

of Wall Street Week. I'm David Westin and this is Bloomberg. See you next week.

2021-12-06 04:14

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