Wall Street Week - Full Show 01/27/2023
Tanks at the Ukraine, justice goes after Google and the economy. Well, it just keeps coming along despite it all. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers on where the economy is headed. I think the economy's in a very uncertain state.
There are favorable numbers and there are rather less favorable numbers. Accenture CEO Julie Sweet on CEOs having to adapt fast to just about everything. The level of disruption has increased 200 percent over the prior five years. And Olivier Blanchard of the Peterson Institute on why we shouldn't be so worried about all that debt dynamics. Hope that when you have interest rates which are low and Indian interest rates which are lower than the growth rate are extremely favorable. This week had a little bit of everything.
The war in Ukraine took yet another turn as the United States and Germany stepped up big time in providing presence. OLINSKY With those tanks that he'd been asking for. The expectation on the part of Russia is we're going to break them. We're not going to stay united, but we are fully, thoroughly, totally united. Attorney General Merrick Garland announced that the Department of Justice was going after Google for monopolizing a good part of the digital ad market. Google has engaged in exclusionary conduct, just severely weakened, if not destroy competition in the ad tech industry. And tech earnings got off to something
of a rocky start. As Microsoft said, its cloud business was not likely to grow quite as fast as Wall Street had hoped. It's all about the cloud. I mean, there's no other story here.
It is the cloud. I think as we go deeper into the year, I think this concept of I.T. budgets are shrinking. Can Microsoft do more with less explaining why last week it announced it would be cutting 10000 employees, though it did find a few billion dollars to invest in the company that brought us check. GP It sounds like a lot of money, to be honest, but chat.
GP T was valued recently at 30 billion dollars. Now, whether or not that's the right valuation is for others to determine over time. But through it all. The US economy just kept going with the fourth quarter GDP surprisingly strong, better than expected two point nine percent. That's down from three point two percent in the third quarter, but that is still a very good number. Equity markets not only made news this week, on Tuesday, the New York Stock Exchange was the news.
Sources said someone left a backup system running all night long, the leading to wild swings at over 250 stocks at the open. And the exchange had to cancel the erroneous trade. This does not happen. I was talking to people. They said they haven't seen it. They couldn't count on one hand how many times an event like this has occurred. Despite that rocky start to the Tuesday session, equity markets overall had a really good week.
The S&P 500 was up nearly 2.5 percent, the NASDAQ up four point three percent, while the bond market remained relatively stable as the yield on the 10 year ended, the week just over forty three point five one percent. Having started at three point forty eight percent.
Here to unpack what we saw this week, our Show Me and most of our rock money, she is Goldman Sachs CIO for wealth management and Lori Covid senior. She's head of US Equity Strategy at RBC Capital Markets. Welcome to both of you for being back here on Wall Street.
Good to see you. Lori, start with you. I would say at least the market certainly liked this week. Why? So, look, I think that this earnings season has been quite scary when it's been far off in the distance. But now that things are here, what I keep hearing from investors is that they didn't believe the lofty sell side earnings expectations to begin with.
I think earnings were already depressed, much more in investors minds. I also think investors are seriously entertaining the idea that we may not have a recession after all. So I hear a lot of people in my meetings talk about the soft landing. Looks like it's probably going to happen. And then also, you know, I think people are starting to sniff out the and the Fed hikes and people are ready to turn a new chapter in this market. And so I think, on balance, I'm a big
sigh of relief. So so Shery Ahn, what about the Fed, which is tied into economic numbers? We've got a lot of economic numbers out. And I looked at him and saw positive over negative. I wasn't sure where they were pointing what the kind of economic numbers tell us from our perspective, for the whole next several months, we are going to get a mix of good numbers and then a mix of bad numbers. That's why in terms of our 2023 outlook, we have a range of 45 to 55 percent probability for recession. And we're making the point that there is
a lot of uncertainty out there. In fact, on the cover of our 20 23 outlook, we have an image and it's the outlook is called caution fog ahead. So the whole purpose is to say that outlook going forward is very foggy and we need to make sure that clients don't sway too much from one side to the other, don't become too optimistic and position yourself for a huge upside in equities, but don't become too pessimistic and position yourself for incredible downside. So it makes it hard to know exactly
where the Fed is heading next. How much of what Laurie is talking about with the earnings expectations are tied into where the Fed is going. Particularly the discount rate. So our view is the Fed's going to be
around five plus or minus. Generally, the Federal Reserve has actually not taken to the full extent that the market is anticipated. So there's a bit of realization of that when we're looking at the data. You get some data in terms of financial conditions tightening too much. And then next week you get different data with inflation or non-farm payroll numbers. And people worry about the Fed tightening too much. So we're going back and forth in that.
But the biggest factor, I think, in driving earnings, as you mentioned, was that people's expectations were so negative based on the data from financial conditions, based on bayside expectations. At one point, people were thinking we could have earnings down 25 percent and earnings have earnings expectations have come down. But the most amazing thing now is with the earnings we've gotten this quarter so far, when we get misses, when companies actually miss instead of, in fact, the market trading off, which it typically has based on work from our colleagues in global investment research, the market, the stocks go down two point two percent this time this cycle, they've actually gone up one and a half percent. That's a huge spread. So it's to Laurie's point that the kid was so negative, too pessimistic on earnings and on recession, two thirds of forecasters that we're going to have a recession. And that seems a lot less likely now. What do you think the percentages? We've said 45 to 55 percent, and that's the whole point of our theme for the outlook.
So, Laurie, it was expected as one of 23 earnings would be the big story as opposed to discount rate from your point of view. Has the market fully discounted or perhaps the short messages over discounted the take down the earnings rate? Well, I think one thing that's fascinating is that even those sell side numbers, so that the people, my colleagues and investment research try to cover stocks even though their numbers are still too high. This is the fastest pace of earnings downgrades that we've actually seen since the financial crisis. And so I don't think people really understand how much work the Southside community has been doing. They're still behind, but they've really just done a lot of work in getting those numbers down already. I mean, the other thing we see typically
also is that when you have earnings downgrades in any given year, they're typically done by March or April. I've been talking a lot to investors about that recently. And I think investors, you know, they're trying to game it a little bit. Right. They still think the numbers need to come down.
I think we should bottom in March. But if you think we're gonna bottom in March, we'll go ahead and get positioned for that now. So there's a little bit of gamesmanship going on here as well.
And where are you on the likely recession? The Shery Ahn was talking. So I have the luxury of not being our economists, and I don't have to make that call. But I agree with my colleague, Tom Ford. Charlie, when he says, you know, I don't know if we're actually going to call it a recession. In the end, it might be something similar to 2015, 2016, where parts of the economy are in recession, but we technically skate by. It's not going to feel fun. It's going to kind of smell like a
recession. Maybe it's not quite going to meet the technical definition, but either way, I think if that's what we get, we probably paid the price for that at the October low when we were down 25 percent from peak. So Shery Ahn, you said 45 to 55 percent chance of recession. How important is it where it comes in the year? It's very important because if we get it sooner, the basket would be discounting that at the end of 2023. The market will be looking to 2020 for earnings.
And so our base case is we're going to have actually reasonably attractive equity returns for the whole year. We've expected about 13 percent is our base case. So somewhere around 40 to 50 for the S&P 500. And so if we have an early recession, people won't care about it that much, especially if it's going to be a mild recession. The main issue would be if the Fed actually becomes a bit too aggressive because of a handful of inflation numbers, would we actually see it in a recession towards the end of the year? And that would not be good for equity. Mark Gurman means that 40 to 50 for the
end of year. If the S&P 500 where are you? So we're at forty one hundred. We're a little bit north of the consensus. We have said that some of our models are pointing us to around 40 546 hundred, and that's not our base case, but we can see how you can get there. One model, for example, looks at how much multiples might expand if we see the 10 year end up around three and a half and a couple cuts from the Fed at the end of the year. That gets us a little above forty five hundred.
And we also talk a lot about how sentiment was so depressed at the end of last year. You typically see a 15, 16 percent return on a 12 month forward basis off of those kinds of levels. So I can see how you can get to a number above my 40, 100.
Okay. Terrific decision. Really appreciate it. I'm glad to say. Laurie, Covid and Sherman, most of our money will stay with us as we hear what their clients are asking them about the market. That's coming up next on Wall Street on Bloomberg.
Meanwhile, up in Redmond, Washington. Bill Gates, give us. And Bill Gates, take us away. As Microsoft was cheered, the market with an upbeat talk a week ago turned around and depressed it with downbeat talk. A week later, people were so angry that they forgot the excellent possibility that the company would shares with Intel the distinction of appearing in all three major indexes and has been the single best performer in the Dow Jones Industrial Average.
This year might well have been wrong both times. That was Lewis right here on Wall Street back in July of 2001, when the number one movie in the country was Jurassic Park 3. The top song was Lady Marmalade by Christina Aguilar. Lil Kim. Maya and Pink and Microsoft.
Margaret. Market cap was about 300 billion dollars. You said at one point. A trillion dollars is today. But still, we were talking about Microsoft as we did this week. So what does our show mean? Much of our money of Goldman Sachs and Laurie Covid, CEO of RBC Capital Markets. So I'll start with you, Sharmeen. Tech has gone through something, a rollercoaster ride.
It was the leading force in the markets for quite some time now, not quite so much, whereas tech right now and its effect on the markets overall. It's actually a bit of a misconception that tech stocks were the driver of this entire bull market, inclined to ask us that question. What happens if we don't get the kind of earnings growth and we don't get the kind of price appreciation? So we did an exercise for our clients looking at an equal weighted index and a market cap weighted index. So, for example, if you're thinking about Apple and Microsoft as an example and you're looking at stocks where the market cap rate is about 6 percent, Microsoft a little bit less than that. And then you look at Exxon and Coca-Cola, where one is a little bit above one percent market cap. The other one a little bit less before. And you actually gave them equal weight
and looked at the returns. They're nearly identical for the last five years and last 10 years. So it's a bit of a myth that you need the technology sector to drive equity returns. So we're actually telling clients that at the margin, tech stocks are a little bit overvalued. It's not so overvalued that people want to take a reverse position and be sure that market. But we actually think it's a little bit right now five plus 10 percent overvalued, but not that significant. And we're not pricing the kind of
earnings growth that people had for the last five years, for example, especially because of the pandemic. So, Laurie, if tech isn't the buzzword that it once was, what is when you talk to your clients, what are they talking about today? If it's not tech? So I would say one of the more interesting discussions we have with people is sort of what's going to lead when we come out of this economic challenging period, whatever you want to call it. And there's a general agreement that the economy is going to be pretty sluggish and we're not going to be roaring in terms of growth again. And so you want growth stocks, but what are the growth stocks of the future? I think certain parts of techs, software, for example, cyber comes up a lot. I think that will give you some of those longer term secular growth tailwinds. But a lot of people are talking about industrials restoring near shoring automation and kind of everything is old is new again, you know, kind of that theme coming back.
Are we going to get those growth engines from kind of these older parts of the economy that are going to get reinvigorated? And so that's probably the most interesting debate is just kind of where do you want to be over the next three to five years in terms of some of those longer term sector drivers? So, sure, we want to hear about offshoring and near shoring. I think about geopolitics, obviously, that's driving some of that force. I think right now. What about the question of geopolitics for an investor these days? What are the questions our clients are asking us actually is given how much non U.S. economy's non U.S. markets have lagged the U.S., whether this is the time actually to go overweight Europe, to go overweight emerging markets, in fact, to go overweight China. And our response to that is, well, on
the surface, it looks like these markets are very cheap. So, for example, if you look look at price to forward earnings, it looks like China is trading at a 35 percent discount to the U.S.. So everybody's so interested given the zero Covid policy having been abandoned.
But once you actually adjust for a sector wait, it's nowhere near as cheap. It's maybe about 11 percent discount. That's not enough to take on all the geopolitical risks associated with China.
So when we go through the geopolitical risk for clients, we go through first Russia, Ukraine. And you talked about that earlier in the program and we say there's risk of escalation. We go through U.S. China relations, risk of worsening, less
likelihood of getting better. Then you go through North Korea and their ballistic missile. So we go through these. These are tail risks, but it doesn't mean you can position your portfolio for these Taylor Riggs. You can't be out of equities given our expected upside return or out of bonds. So we want clients to be aware of these risks, but we actually don't recommend shifting the portfolio significantly for that purpose. Laura, I'm aware that you are U.S. equity strategist for RBC Capital Markets, but what do you think about the U.S. versus non U.S.
question? Well, it's a great question. I got an earful about this in December. I was spending a lot of time outside of the U.S. meeting investors, and I found that European based investors were really high on Yvonne Man.
And really, you know, for reasons you mentioned where, you know, said the U.S. is expensive, it's the growth trade, we like value. And, you know, the U.S. were uncertain about the fundamentals of the US. And I kind of pushed back and I said,
well, I understand the valuation component. I said, but then it gets into, what do you really want to buy? Do you really want to buy European financials? Do you really want to buy European energy companies? And they kind of recoiled a little bit on that. But I you know, I think the issue for me as well is even though we do have a bit of uncertainty in the U.S., I do think the fundamental backdrop is still
stronger here when we look at what companies are saying about the China reopening. I think they think it's going to be a bit more complicated than investors have been assuming so far. So I've still been in the U.S. camp, but I certainly understand, you know, the valuation concerns people have shown me. I'm curious, do you see a certain chauvinism on the part of investors, whether they're in Europe or the United States? We tend to look close to home. Well, there's always a bit of a domestic bias. People know the companies very well.
They're more comfortable. But our view of U.S. preeminence is not actually driven by the fact that we are all based in New York. It's actually very international group. We have colleagues all over 23 different nationalities on the team. So there is thought that domestic chauvinistic bias. It's just that if you look across metrics and for people who are interested, we recommend looking at our outlook presentation, the reports, because we show 16 different charts where U.S. is so much more dominant and preeminent relative to other parts of the world.
Fascinating. Thank you so much to Laurie Covid of RBC Capital Markets. And Sharmeen, most of our rock money of Goldman Sachs. Coming up in to talk with former IMF chief economist Olivier Blanchard about his new book on fiscal policy under low rates. That's next on Wall Street. Word on Bloomberg. This is Wall Street week. I'm David Westin, we spent a lot of
time, Wall Street, we're talking about higher interest rates and are they here to stay? How do we adjust to that possibility? Some people suggest maybe that's not the right thing to be looking at, that the higher interest rates may be temporary. There were the longer term we will have lower rates. One of those who is asking that question and talking about the possible consequences is Dr Olivier Blanchard. He is the former chief economist for the IMF and he has written a book about this question, which is fiscal policy with low interest rates.
So, Dr. Walsh, thank you so much for being with us. Really appreciate it. Why is it that you think we may be on a long term cycle of low interest rates? We're continuing that cycle we've seen in the past. But you think it may continue into the future? Yes, I think what we're seeing is, is a blip due to the need to to fight inflation. So for the moment, we're all obsessed with high rates, but they're not incredibly high.
But the higher that they were. I think this will come to an it I think will basically win the fight against inflation probably within a year or two. And then we'll go back to something a bit like where we were before Covid, before the inflation and before the inflation when it happened for the best of thirty five years. Is that interest rates, what we call real interest rates corrected for inflation has steadily declined in the U.S., in Europe, in Japan and everywhere in the world.
And my sense is we're probably going to go back to something like this. I think the trend previous inflation episode was a very strong trend. I see no particular reason for it reversing. So I think we'll go back to something not unlike where we were in 2019, which means failure rates, real rates, probably close to zero real living growth rates. And if I'm right, Ben, this has
substantial implications for macroeconomic policy, general, but fiscal policy in particular, which is what my book is about. Well, let's talk about what those implications are for policymakers, because you spend a fair amount of time in the book talking about the relation with the rate of interest rate on the one hand and growth on the other. And when you're below zero, that is to say, the rates actually are lower than the growth rate, it poses particular challenges.
What are the risks in having that world particular when it comes to investment, public investment? Well, it's it's a goodwill to appear to be in because you can basically do a lot of things. An issue take on debt. The burden of the debt, which is debt service, is clearly much lower. So this is a world in which there's a lot of fiscal space to use that expression, which is quite popular these days when the interest rate is less than the wolf rate. You can actually run what we call primary deficits, which are deficits, not counting interest rates and still have debt to GDP, which is a ratio that everybody focuses on this table. So there's much more fiscal space and you can use deficits and by implication that deficits accumulating too debt for things that you need to do. So, for example, there's a Covid crisis.
We need to spend more on defense for Ukraine or so on then these days to do it. So you used the word challenge. I think it's more a favorable situation in which basically we have the room to do things and we should use it carefully. But we have the room. You speak at one point your book about
fiscal headroom being perhaps nearly infinite. That is to say, you can have a primary deficit that runs without getting the balance of between debt and GDP out of kilter. Is that right? Do we have not room? Because as you say right now, we're hearing a lot of people on Capitol Hill, but also at the other end of country, even at the Fed, talk about the risks of too much debt. No, no. We we don't have infinite will be absolutely explicit about this.
Look, there's such a thing as too much debt, but the dynamics are that when you have interest rates, which are low in and Indian interest rates, which are lower than the wolf rate, are extremely favorable. So you can sustain fairly high levels of debt and debt service is not a major burden. Now, this being said, you can do anything you can. You know, I think folks I spoke about
last year, pick one point nine trillion dollar plan was excessive. And if there was more of this in the future, then it would be an issue. So the point is there room to use that if needed, but it should be used. Right. And I don't think at this stage that the US is on the right trajectory. So rather from certainty.
But there seems to be a willingness to spend on things which are probably not absolutely essential. And this I disagree with. So let's go to an instance you referred to at the end of your book, actually, where the debt got to be too much and that has to be Greece. And what have the European crisis recently? What keeps us from being Greece? Well, basically, the belief, but investors that they hold the debt, they'll be repaid. Right. So, you know, when the. When you have debt at, say, a hundred percent of GDP and investors start having doubts about. But whether they're going to be paid are going to ask for a high interest rate, say maybe 5, 10 percent, right.
In which case you have to actually take 10 percent of GDP every year in order to satisfy them. Something you could absolutely not do for political and other reasons. So in this case, we have self-fulfilling doubts and lead to the debt crisis. And that's more or less what we saw in Greece. They just had too much debt. They just could not handle it. In the US, you do projections. They can be scary, but you know that the political process would eventually kind of adjust even in the US, even if it's broken.
And so I think we have room to have for levels that we have today. Again, if we were to keep doing this forever at some stage, I would worry. But I don't worry today. I'm an investor. I say, what is the probability that it will be repaid in, say, five years if they hold a five year bond? I think it's you know, it's one.
And so therefore, I am willing to basically lend to the US government that lower rates. So there are differences across countries which come from the political process, the level of debt, the uncertainty, the maturity of the debt and so on. I think for read for the moment, there's no reason to worry about debt. But that's not an excuse to have that irresponsible fiscal policy. Okay. Definitely.
Michael Barr, John, thank you so much for being with us once again. This is a terrific book. I really recommend it to everybody. Fiscal policy under low interest rates. That's Dr. Olivier Blanchard of the Peterson Institute for International Economics. Coming up, why investors need to look at CEO's ability to multitask.
We talk with Julie Sweet of Accenture about why companies need to be changing just about everything and all at once. That's next on Wall Street week on Bloomberg. The times they are a changing global Wall Street gathered last week in Davos. One message was loud and clear The world is going through dramatic changes that investors have to get ready for. Whether it was the economy, we expect to
see a mild recession largely driven by the painfully persistent service inflation. It's coming off, but it's still pretty high. Or China. Coming out of its Covid freeze, I think the opening up of China wallet will have its ups and downs. It will hopefully be a net exporter of deflation or the demographic challenges for the U.S. and having enough workers. I think we're getting a lesson right now
in the fact that America is this wonderful place for people to work and live and prosper. The problem is we need more people. We just need more capacity, more technology, taking us into a whole other world. We're in a process of transition because, of course, the building of the metaverse is not an overnight job. This is going to take years with the foothills of the foothills, a building that the massive US companies and their CEOs are having to deal with. A lot of change all at the same time, full of risk, but also a fair amount of opportunity. Having come off of the most difficult
year for a balanced portfolio, 60 40, whether you were in stocks or bonds or anything in between, it was pretty rough sledding. And so I think everyone's happy that that's behind us. And to take us through a lot of the changes we're seeing in the seas, we welcome now somebody who is on the front lines of that change is Julie Sweet, the CEO of Accenture. Julie, thank you so much for being on Wall Street. We really appreciate it. So change is something CEOs are used to having to deal with, but are we seeing a different level of change? And if so, is it a matter of degree or kind, David? It is both degree and kind. We just published our volatility index. And if you look at the last five years,
the level of disruption has increased 200 percent over the prior five years where that index showed disruption of only 5 percent. And in all cases, these are areas that are new. So you have CEOs, including myself, who have not governed and led through the kind of inflation and geopolitical disruption that we're experiencing today. So very different environment than the past. I also wonder if with the change and maybe less growth than we've seen before, geopolitics, as you say, but also, is it a bit more a less forgiving environment given the fact that interest rates now are on their way up rather than being near zero? Well, I think about this environment as both having challenges and opportunities, because certainly if you are a business, a capital intensive business used to low cost of capital, it's certainly challenging. And at the same time, what we're seeing CEOs do is really focus on how to get the right competitive advantage, whether that's cost structure.
Looking at more organic instead of inorganic strategies and using the opportunity to really reinvent how they do things, including in areas of the business that are more capital intensive, say capital projects, for example, and how to use technology better. Oh, as far as you can tell, I'm sure it's a complicated answer. What are the causes of this difference? A decree degree and in kind? Is it technological changes that driving it? Why is it that we're confronting more change than we have in the past? What I'd say is that, of course there's a huge geopolitical piece of this, and before that it was a health piece with the pandemic. And, you know, I think the big shift that you're seeing, post pandemic, is that technology itself used to be the disruptor.
That is what we talk about today. The power of technology has become the certainty. What you can count on, it's an enabler. And we talk we like to talk about all strategies lead to technology.
And you're seeing that with the most advanced companies who have embraced that, they need to reinvent all parts of the enterprise using technology, data and A.I. and most importantly, new ways of working to leverage those technologies in order to build greater resilience, to find new path for growth. So I'm really interested in the notion of having to change so many parts of the company at once, for example, with technology really permeating through the organization. I've certainly been in big companies where you need to focus on the finance, you need to focus on the legal, you need to focus on sales. But when you're changing everything at once, that's much more complex and much more fraught with peril, is it not? Well, David, actually, we've been seeing this trend toward what we call compressed transformation. It immediately happened post pandemic, because early in the pandemic, leaders saw an opportunity to double down on what they were doing around digital transformation. And those who were behind and you are
grappling with the new environment wanted to leapfrog the shift. Now is seeing that compressed transformation not being reactive, but to be embraced as the strategy, rewriting the business textbooks about what it takes to actually succeed in the next decade. And that is what we do call this idea of being a total enterprise, total enterprise reinvention and being reinvented.
And the point is that the greater risk is not embracing this as a new reality, as the new strategy and thinking that you're in some kind of an environment where you can transform a lot. And then you're done because you need to think very differently about basic capabilities of your leadership team, how you build a culture of change. There are fundamental changes that happen when you say I'm going to be a reinvent her as you do with so many large corporations all around the world as you look at that fundamental change. Does it extend to things like the metaverse, things like artificial intelligence, things that we hear about? I'm not sure I fully understand what they are. Certainly to understand the ramifications. But does it extend that far for the very
large successful corporation? Well, I probably separate between the megatrends that are happening today. And we would call those three big ones being tech knowledge in technology are the cloud. The move to the cloud, the use of A.I.. We all know that everyone's talking
about that these days with techy beauty and the metaverse. So those are three megatrends that are going to drive the success of companies if they embrace them. And in fact, the metaverse, we think, is being one of the big forces of change. And why is that? Is because it is so different in the way you work. I would say that it's important to understand those megatrends and then separately, which we can talk about more about, is the need at the top in terms of technology knowledge of leaders. It's fundamentally different than the days of old where was enough to have basic understanding and do a digital safari. And I'm talking to a lot of CEOs now
about how to close that gap, including with the work that we do with them. So do you have the advantage of both being the CEO of a very large successful company and also dealing with these CEOs as well as CFO CEOs all the time? We at Wall Street, we address to some extent the role of the investor. How does the investor know? How did it is certain which companies are up to this task that you're laying out and which ones are not? There's a few things that we're seeing in terms of trends is companies really talking about what their strategy is and the role that technology plays in it. I also think that a lot of investors certainly are as to talk to our leaders, you know, a lot and being able to see how proficient and how natural is it for leaders to talk about technology and how they're filling in gaps.
So, for example, we're working with a lot of companies around what we do in managed services so that we digitize faster. We provide talent. And the leading CEOs are now talking about that work they do with us as part of their own talent strategy, as a way that they're closing the gap in their technology, whether it's the fact that they haven't digitized fast enough or the fact that they need to access talent more quickly. And so really thinking about how do you articulate your technology strategy and more importantly, the way that you're changing the way you work. And I think that's a good way for investors to be asking those questions as they're talking to companies and to be looking for those explanations when they hear companies lay out their strategy. Julie, thank you so much for being back on Wall Street. It's always helpful to get your
perspective. That is Julie Sweet. She is the CEO of Accenture. Coming up, we wrap up the week with special contributor Larry Summers of Harvard. He is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin, we are joined once again by our very special contributor here on Wall Street.
He is Larry Summers of Harvard. So, Larry, thank you so much for being back with us. We had big numbers out this week on GDP. People got excited. It was a little higher than we thought.
But there were some other numbers that maybe you suggest it's softening the economy. I think that's right, David. The GDP number was looking pretty good. But if you looked at how much of it was inventories, you looked at the internals of it, it looked less strong.
And then we got a number this morning on personal spending that was softer than people were expecting. I think the economy's in a very uncertain state. There are favorable numbers and there are rather less favorable numbers. And that's certainly going to complicate the decision making and the signaling coming into the next Fed meeting.
Well, and that is, of course, as you know. Well, it's going to next Tuesday and Wednesday. We hear what they decide on Wednesday. So what do those uncertain numbers tell the Fed? What should it do next Wednesday? My advice to the Fed, which I think is consistent with the path they're on, is to maintain maximum flexibility in an economy where things could go either. Either way, I suspect they will do 25 basis points on Wednesday, and I hope they will not project confidence about what their future intentions are, because I think there's a lot of uncertainty about the way things are going. I if I were sitting at the Fed, Jay Powell has wisely observed that monetary policy works through financial conditions. And if you look at overall financial
conditions, they are actually looking like they have moved substantially towards easing in the last several months. So in a way, the monetary impulse that's coming into the economy is much less expansionary, much less contractionary than you would think. Just looking at federal funds and that is something that I think needs to concern the Fed as it sets policy. So I don't think this is a time to be taking possibilities of rate or rate hikes off the table. At the same time, I don't think it's a time to be committed to rate hikes, given the indications of softness that we have seen from a number of quarters. So this is going to be a very difficult period through the Fed. They're driving the vehicle on a very,
very foggy night. They've got to be doing it looking forward rather than looking out the side window or the back window. But when it's a very foggy night, you shouldn't drive too fast and you should be ready to hit either the brakes or the accelerator. Similarly, as a macro economist, you help us look broad.
You also help us look long and you put it in a larger perspective. There is something of a debate going on as I stand right now. Over the longer term about whether we are in or headed into a higher interest rate period overall or whether, in fact, we're going to come right back down where we were in that secular stagnation that you first identified for people maybe coming back. As you know, Olivier Blanchard, formerly chief economist, the IMF has a book out now warning about secular stagnation, saying that's the bigger risk right now. I think you may have a bit of a
difference with him. Look, everybody should read Olivier's book, which is terrific. And I think he recasts the debate about fiscal policy in some quite helpful ways, recognizing the potential importance of low interest rates. And I think he lays out an important and plausible scenario where we return to the kind of secular stagnation that he and I and others had emphasized as a feature of the pre Covid period. My own best guess is that neutral real rates are going to rise relative to the pre Covid period. That's going to happen for four reasons.
It's going to happen because of substantially larger government debts and deficits going forward in many parts of the world. It's going to happen because of substantial. Increases in investment, demand caused by energy transition investments and resilience investments in the private sector. It's going to happen because of the overhang of asset prices which are high and the contribution that that makes to spending which operates to reduce saving and raise real interest rates, something that may be particularly an ounce pronounced if, as Charles Goodhart has suggested, the elderly are dis saving and because there may be some greater tendency to rely on debt finance going forward. My sense is that those factors taken together may outweigh the continuation of the demographic factor and others.
But it's a very uncertain situation. But when I look at the Fed's current estimates of two and a half percent long run neutral rate, I see more room for inflation to settle in a bit above two and I see more room for real rates to steadily and about above point 5 than I do for the error to be I in the other direction. But Bond Charged is a hugely important book that deserves the attention. I'm confident it will get. We have been struggling with inflation versus growth here in the United States and in much the western economy. Latin America also is struggling with its own version of that. We had decisions with the Australian
Central Bank, the Colombian Central Bank this week, and then we had an announcement or a trial balloon or possibly a currency union between Brazil and Argentina. What do you make of that? If that was a trial balloon, it needs a needle to pop it. That seems to me to be a extraordinary and somewhat bizarre idea. I suspect there will be cynics who would say that Brazil and Argentina having a common currency has a little bit of the character of two drunks in a ditch hitch hugging themselves for warmth. I'd much rather see them work on liberalising trade between them, finding ways to make both our economies more fluid.
Larry, you and I were over in Davos last week and as we both saw, there was a lot of talk about Ukraine. Quite a few representatives from Ukraine, they're speaking out. And one of the things that you raised, others did as well, that you were particularly eloquent on the question of the need to really have substantial reinvestment in Ukraine to bring it back after this war, but also the need for that to be commensurate with so reform about how they handle their money. Now we see seven officials in Ukraine
having been dismissed by President Zelinsky. Are they on the right path? What do they need to do to have credibility as important as it is to win the war? It's important to win the peace. And that is a lot about the creation of prosperity for an opportunity for those who live in Ukraine. Let's be honest and recognize that even by the very low standards of the 15 republics of the former Soviet Union, Ukraine has performed very poorly economically since the Berlin Wall fell in 1989.
And that was true even before there was a Russian threat in 2014. So, yes, we need to provide very substantial support. Yes, I think a large part of Ukrainian economic success is going to come from coming together with the rest of Europe on many economic dimensions. But it's going to be very important that financing be provided for investments that take place in appropriate frameworks of integrity, of efficiency, in procurement, of targeting. And finally, Larry, we have this week the Treasury secretary, Janet Yellen, going to Africa.
And one of things that she's a girl dressing there is some of the debt overhang, if I could put it that way, in a number of sub-Saharan. African countries, it's something you have warned us about here on Wall Street week and elsewhere about this issue. What will it take to make real progress here? I think Secretary Yellen is building an important legacy around the developing world.
She has pushed for reform of the World Bank. She is going all the way to Africa to highlight the importance of these debt issues. A crucial issue is going to be finding a framework in which the United States and China can cooperate relative to where I worked on these issues and supported President Clinton in the largest state initiative to that point for the poorest countries.
The big difference now is that China and a range of Chinese institutions have emerged as major creditors, and we're going to have to work on finding a way that involves them. Okay, Larry, thank you so very much. As Larry Summers of Harvard, our very special contributor here on Wall Street week. Coming up, the biggest change in cars since the Model T. And why they may not be just cars at
all. That's next on Wall Street week on Bloomberg. Finally, one more thought. Is it a bird? Is it a plane? Is it a car? Or is it one more digital platform? Electric vehicles are all the rage these days with auto companies the world over rushing to catch up with Elon Musk's Tesla. It's a long term goal. By 2030, we want to be RTS 40 percent of the total market in India.
DAX have a long term one and the US government is giving its own push, with President Biden converting the entire fleet of government vehicles to electricity. The federal government also owns an enormous fleet of vehicles, which we're going to replace with clean electric vehicles made right here in America. But it's not just whether your next car will run on gas or on electricity. That may be at stake. James, Mary Barra has been saying for a while now that her new cars will be much more than just vehicles. They'll be platforms for your apps, just like your smartphone is today. We think we're going to not only have
affordable electric vehicles with know very well priced battery capability, power intensity, but then also the software business that we're going to unlock on top of it, because the vehicle, whether it's ICE or a V, is really a software platform. And now it turns out it isn't just the GM and the Fords and the photos who want to sell you your electric vehicle of the future. Sony has joined the party, too, as it went to the Consumer Electronics Show to unveil its a feeler Eevee with Honda. Earlier this month, boasting forty five, kind of forty five cameras and sensors with plenty of screens inside. Think PlayStation, meet your new accord. But maybe GM and Sony aren't thinking quite boldly enough. Maybe there's one more step to take on the road to merging transportation with the digital world. Ever since Facebook changed its name,
we've been hearing about its big, bold transition to the metaverse, which even met, as Nick Clegg admits will take some time and a whole lot of money thought of that future will materialize. But it'll take it'll take billions of dollars investment. It'll it'll take sort of some successes, some failures. But we're told it is coming. And this week, Apple laid out its plans to speed it up with a new headset developed with, you guessed it, Sony. That does matter one better for a mere three thousand dollars. Apple says that we will soon be able to
enter the metaverse and switch between applications simply by looking at them and touching our finger to our thumb. So if this metaverse thing really does take off, maybe even even EAS will be a thing of the past. We won't need cars or whatever they may become because we won't have to go places in the real world. We can just go there virtually.
And let's be honest, though. Three thousand dollars for a headset may sound steep. It's a lot cheaper than a car, electric or otherwise. That does it for this episode of Wall Street Week. I'm David Westin.
This is Bloomberg. See you next week.
2023-01-31 08:58
