Wall Street Week - Full Show 04/01/2022

Wall Street Week - Full Show 04/01/2022

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Rising recession concerns a budget move to the center and the killing continues in Ukraine. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on what happens when you run the economy hot for the sake of employment. We do not do anybody a favor by overheating the economy because when we overheat the economy the chickens do come home to roost. And former IBM CEO Sam Palmisano on the opportunity for the United

States to form a new coalition to compete with China in tech called the Super Bowl geopolitics. The US needs to leverage the world's. It was a week of anticipating what didn't happen at least not yet with encouraging reports on possible progress in talks between Ukraine and Russia giving way to skepticism and disappointment. We can say that the signals we hear from the

talks are positive but these signals can't silence the explosions of Russian shells. We'll see. I don't read anything into into my see what their actions are. Kremlin very much downplaying now the outcome of peace talks in Istanbul. A spokesman for the Kremlin saying that there has been no breakthrough even though Russia pledged to scale back some military operations in Ukraine. It was a week when the Biden administration gave us a proposed budget that anticipated reducing the deficit but not the debt. It's a laundry list. It's what we believe in. It's almost a campaign speech if you think of it that way. Knowing the White House knows all too well that this will be

twisted into a lot of different pretzel pieces before this ever becomes a law. This budget has a plan to borrow a fourteen point four trillion dollars in deficits over the budget window which is 10 years. And it was a week when former New York Fed chair Bill Dudley warned about the danger of a recession. Every time the unemployment rate goes up by more than a half a percentage point the next stop is a full blown recession. And pros like Mike Schumacher of Wells Fargo kept an eagle eye on a yield

curve inversion whose times was inverted for a nanosecond yesterday. But we think before it gets substantially inverted very quickly. And if you look at one of the bond markets telling us forwards something like minus 30 minus 35 in the year. Those are staggering numbers. Mike Schumacher was Taiwan and NASDAQ on Wednesday but by Friday we got that inversion as yields on two year treasuries rose above that on tends after the 10 year sold off in response to the jobs numbers coming out on Friday which were pretty robust numbers that took the unemployment rate down to three point six percent. And this came on the heels of a quarter that ended on Thursday with the biggest drop in Treasury bonds in history in the face of all this bond action. Equities actually were proactively well behaved with the S&P 500 the NASDAQ up a bit

and the Dow down a bit. And the price of oil which has been driven by the war in Ukraine fell the most in two years after President Biden announced he'd be releasing a million barrels a day from the Strategic Petroleum Reserve. To help us make sense of all of this. Welcome now. Sarah CAC CEO Causeway Capital and Liz Ann Sonders Charles Schwab chief investment strategist. Liz Ann let me start with you to make sense of all this. It was a tumultuous quarter and a pretty eventful week as well. What are we learning from all this. Clearly the inversion of the yield curve which couple of days ago it happened briefly intraday and didn't close at that level has I think garnered most of the attention. Certainly a lot of the financial media attention and lots of confusion about what

it actually says about the risk of recession. I think anytime you have an inversion anytime you've got a Fed moving from extremely easy policy to tighter policy you need to dust off the checklist for a recession. But to see the market behave somewhat resiliency is actually not out of the ordinary yield curve in versions that historically generally seen rising equity markets.

It's really not until the point where recession seems like a higher likelihood do you run into trouble. But I think we're in a relief rally relative to the correction that preceded it. I wouldn't bank on it continuing with without another bit of a pullback. Sarah do you believe the relief finally is here to stay. It all depends David on what real interest rates do. So it's very important to note that as inflation is rising we are seeing and this particularly acutely an issue in Europe and in the US. Real interest rates are going more negative and that creates

more fuel for equity buying. So that's one reasons why we keep fully invested because we want to make sure our clients get access to what the only place you can put money is in equity markets. In our view and also note I mean there's plenty of bad news but oil price shocks historically in the 70s and early 90s in 2000. They are not always followed by weak equity markets.

Those two are not correlated. So there are reasons to be optimistic in what looks like a very dark environment. So it was then I wonder in the face of these negative real rates that we just heard about from Sarah as well as oil shocks at the moment. There's a lot talk about the 70s where we had over stimulus. And then on top of that the oil shocks. It really does raise the question about the inflation. Negative real rates indicate we still have our foot on the accelerator not the brake. How far do we have to go to slow down this economy to get inflation under control. Well you know even even Powell has said

he's willing to accept a recession as a as the end game associated with finally bringing down this inflation problem. I don't think we're really looking at a 70s type of environment. I think there's more differences between today and the 1970s than there are similarities. Stagflation I think used with a lower case s generically maybe as appropriate given weaker growth and

high inflation. But really what that represented in the 70s was a high and rising unemployment rate which is clearly different than the current environment. In addition we have much stronger productivity now. Demographics are different. Obviously unionization. So I think the type of inflation we're experiencing now is more of the countercyclical variety where

inflation went from being pro cyclicals. Strong demand last year helped bring on inflation and now inflation is to such a high level that it's starting to put downward pressure on demand and growth. So maybe it's just semantics of what we call this inflation but I don't quite think that this is the 1970s. But David what we do know is that central banks have to do something about it. And that's what makes us interesting because we are moving through a real economic cycle. And to what degree will some of this inflation self correct. What degree will supply chains come out of their difficulties and do so somewhat organically. I think that's very debatable. It's something we terms of

investment research. We're not giving credit for that. We just assume that some of these bottlenecks are going to remain for many quarters ahead in which case central banks have to cool demand. And that in turn is going to likely create some significant slowing of economies which are all the more shores up. The reasons to have great companies in your portfolio because there are some headwinds ahead. Yeah I think I think there has to be a focus on quality right now that the relief rally had a bit of a low quality bias to it but I wouldn't bet on that persisting. I think the focus for the stock pickers out there needs to have that quality wrapper around it at this point in the cycle. So listen explain quality to me a little bit. Is

that for example is that value versus growth. Is it large cap. Small cap. Well I think what you want to take we think you want to take a from a factor perspective a hybrid between volume growth. I'm not talking about the value and growth indexes that that really ultimately is. You're making a sector call. I'm talking about the fundamentals of value and growth and what tends to happen when you're in a slowing economy. You you tend to want to look for areas that are displaying what is lacking in the economy. So as growth slows companies that have the ability to grow their

earnings tend to do better in a rising interest rate environment that puts downward pressure on long duration more richly valued areas. So you want to have that value filter. We're now in an environment where there's more negative revisions to earnings than positive. So you want to look for areas and companies that have positive earnings revisions. Again rising interest rates low debt to equity ratios. I think this is an environment where you want to be more factor focused than style box focused or even sector focused. And in markets there such extraordinary discounting mechanisms. They

look ahead and anticipate. And that's why it might be a little late to be piling in more to energy and metals and mining than it had. Just incredible run. And we'd like to look where others aren't. And there are definitely segments where companies can't pass on some of this cost increase in some cases. All of it. And those are remarkable businesses to be in in an inflationary environment. And they're out there and often priced at lower valuations than the overall market. Listen are earnings going to bail us out. Well earnings should still be in positive territory but we've

been in a in a descending pattern since the second quarter of last year. That was inevitable yet almost a hundred percent S&P earnings growth in the second quarter of last year because of the base effect relative to the year prior. That descended to about 32 percent in the fourth quarter. But we're now down in the mid single digit range. Now we may find again that analysts have set the bar too low but we've been in a descending rate from a beat rate perspective and a lower percent by which companies are beating. And as I already mentioned you've got that trend of now more negative earnings revisions than

positive. So I think we're on the cusp of a more difficult period. I think we'll be more important in this reporting season. About to start is less about what was reported for the first quarter. But the combination of outlooks broadly but specifically around profit margins and the ability to maintain those profit margins in light of rising labor costs as well as rising input costs in other areas. Sarah what are you expecting for earnings. Well in terms of CAC market cap weighted you have to see if to look at some of the big constituents and it's somewhat of a mixed bag. Some of it depends especially for the Internet stocks on what happens to advertising. Stocks like Alphabet is interesting to us and obviously a giant in the U.S. market because they have some of their ads a good portion of them that

are related to travel and leisure. And we see that recovering. If you've been to any airports lately they're not logged. And look at the online ISE searches for travel both domestic and international. It's it's going crazy. So there's obviously a lot of pent up demand and it's somewhat debatable to what degree inflation will crimp that spending. And that ought to be good for some of they at some of the big caps like like alphabet. Not to mention their cloud business etc.. So it's it's yeah. I think it's somewhat hard to say. What we can say is this companies that we're achieving record profit

margins are likely to see and it's hard to make generalizations but they're going to have a little bit of a struggle that we might have seen the peak there for some time. It sounds Sara to your point about you know pent pent up demand on the services side one of the potential benefits to bringing inflation down is we're starting to see some pared down demand on the good side. And clearly at the core level of inflation much of that was driven by the good side of the economy. And we are starting to see some weaker numbers in large part because whether it's wage data consumption data retail sales you look at the difference in nominal and real. And unfortunately in instances like wage growth lofty numbers in nominal terms but still in negative territory from a real perspective. We saw that actually on Friday. I say with that was five point six percent up and in

wages year over year. But in fact I was about inflation. That's a loss of money in terms of purchasing power than Sanders. And Sarah Carter will be staying with us as we come back and look around the corner to what's coming up not just next week next quarter but down the road. This is Wall Street week on Bloomberg. I think one of the nice things about this environment is that with all the carnage out there with so many of the smaller companies and the less well capitalized companies and the less well managed companies are starting to really have difficulty in some cases going out of business. And I think this environment is going to afford the bigger well managed companies the ability to pick up market share and in many cases maintain their dominance. There was one favorite I think still has a ways to go. I still like Microsoft speaking of the behemoths and AOL and I wouldn't consider that a technology company anymore. That was our very own Liz Ann Sonders appearing on Wall Street week with Lewis Brookhiser back in 2001 when AOL was still a behemoth by the way. There's that has remained with us along with Sarah Carter because we capital. So we've had a conversation about

what's happened this quarter what's going to be coming up around the corner here. But let's look down the road. Sarah let me start with you. What was their cause for hope. We've got a lot of concerns about inflation about the tightening we're expecting in response. And by the way we still have a war going on where people are dying every day over in Ukraine. But what are some of the possible upsides for investors down the road. Make it perhaps not too far down the road and I hinted that

before the break the pandemic recovery stocks they were certainly hit very hard in 2020 and had a false dawn in early 2021. And then on the chrome variant grip them again and drag them lower. They rallied a bit and they were doing very well from January of this year until February. Twenty third particularly the ones in Europe. And then we had this as you noted this horrendous invasion so that it really hit these stocks hard. Some of the great airline companies like one of the best discounters in the world Ryanair crushed. And these are opportunities for investors because we can't assume that invasions last forever and this pandemic is thankfully dissipating. So there are other ones in aerospace

travel and leisure. You can find airport companies aircraft engine manufacturers have only one or two competitors like it. So this is where active management gets very excited as you can tell. There are pandemic recovery stocks out there there in food catering and retail. They just need they need the mass to be off to people be out again. And then. And this we discussed before not too great of a

inflation headwind cutting into their discretionary spend. So let's add in addition to possibly the pandemic Covid you may agree with exactly what we just heard from Sarah. But there's one other factor I wonder about. That's fiscal stimulus right now. We have essentially a D stimulus because we're coming off as so much fiscal stimulus as it's the same time that horrendous

war in Ukraine. That goodness knows we want to be over soon. At some point we'll be over and they'll have to see the need to invest a fair amount. Could that be a potential fiscal status at least in Europe. Yes. I think the the investment story longer term not just driven by the terrible tragedy going on in Europe right now although that clearly will stimulate some investment whether it's energy infrastructure food infrastructure not to mention the rebuilding of actual infrastructure in Ukraine. But even prior to that I think what the pandemic brought about was the necessity of investments in certain areas. And there was

so much low hanging fruit of inefficiency in quite a few segments of our economy health care education. And I think the necessity of sort of stepping up and becoming more efficient and investing in digital driven by the temp pandemic. I don't think kind of goes back under the rock. I think we have unleashed what is likely to be an era of stepped

up investment and probably along with it higher productivity. It doesn't prevent a possible recession in the near term but that's where I think there is sort of a shining light when you think longer term about what may come out of the combination of both the pandemic and the war. It may even be medium term to the degree that the digital spend is so necessary. That will take precedent even when other. If there's some sort of curtailment of capital expenditures.

Companies have to make that transition and they need to do so globally. So we think of that as somewhat non cyclical part of the whole technology. Spend less. And I don't think I know many people who are rooting for a recession although as you suggest a lot of people have to be prepared for the possibility of it. But is there a potential if I can say that upside potential to some creative destruction. I think that's what you were talking about. Whenever you have a lot of money sloshing around some bad decisions get made. If it takes some of that liquidity away then actually people have to make some tough decisions. And maybe you should sort out maybe the sheep from the goats. Yeah I think there have been some maybe unintended consequences of this

massive amount of liquidity whether it's mispricing in various markets and asset bubbles. So I think there's a benefit that will accrue there. And then as we already touched on the unfortunate possible necessity of constraining aggregate demand in order to rein in the combination of the supply chain problems and and just that feeder effect it's having on on pricing and inflation we may need a recession to calm all of those forces and it may not have to be a particularly deep one. But I do think what we're looking at is a more kind of normal cycle. If we're heading into recession what it looks like it causes of it

being tighter monetary policy that sort of traditional that the last cycle the Covid recession the aftermath of it there was no playbook for that. That was incredibly unique. I think this next cycle both into the next recession and coming out will be a little more I want to say garden variety a little more in keeping with your typical recession recovery type cycle. Sara give us just a little taste of your secret sauce here. As an investor as somebody who maintains a portfolio as you take a look. You've talked about things like coming back from pandemic. That's sort of a structural thing across the board as you try to figure out which companies really are being run well and efficiently are making centralization. What do you look at and what are what are those companies giving an example or is it. Well just to take up what Liz Ann just mentioned to the degree

we've got to look at to see a typical recovery or typical recession recovery then let's find those stocks that tend to do well in that environment. So what doesn't do. Well initially as you head into the bottom of the economy and I'm speaking really for everything ex China and the rest of the road is largely on the same monetary policy cycle meaning tightening other than China and banks other financials they tend to bottom somewhere as as we get into that significant bout of tightening and the recession takes hold. And then they rally very strongly. May remember the early part of 2009. Unbelievable performance. So if if history is going to repeat itself what Liz Ann says is correct which I agree with. This is a little more normal a little more than than those would be good stocks to own in the most bombed

out ones are in that part of the world that's really been hit hard which is Europe. So European financials and you could also go with the energy transition. One of the silver linings of this horrendous energy disruption is a greater need to accelerate then move to low and then zero carbon type renewable energy. And some of the European utilities are expert at this and they're trading it for a 6 percent dividend yield. Okay that's great to have a little bit of succor here at the end of a pretty rough

quarter. Thank you so much Liz Ann Sonders and Sarah Hutter. When we come back 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 look at the week ahead starting with Juliette Saly in Singapore. Thanks David. We'll be watching to see if the second phase of Shanghai's lockdown ends as planned. Tuesday Bloomberg

intelligence forecast the lockdown in the city of almost 26 million people will have even greater ramifications for China and the world than the already significant impact from Shenzhen lockdown. Morgan Stanley Friday cut China's 2020 to economic growth forecast of four point six per cent from 5.1. And Citi has warned of risks to the second quarter outlook as the nation sticks to a strict Covid zero approach. Now over to Dani Burger in London Danny. Thanks Juliette. In Europe in the coming weeks the main story will still be Russia's invasion into Ukraine which continues into a new month. A few key things to focus on.

One will be any talks between Russia and Ukraine and any efforts to alleviate the ongoing humanitarian crisis. Secondly any impact to European politics with both Hungarian elections and French elections coming on the horizon this week. And finally any continued impact to both energy and inflation dynamics in Europe. Now over Romaine Bostick in New York. Thanks Danny. A busy week ahead for economic data with monthly factory orders to be released on Monday. They are expected to show a contraction as rising input costs crimp some manufacturing activity. On Tuesday the Institute for Supply

Management releases its services PMI data which economists say likely rebounded in March after sliding a bit in February. On Wednesday the Federal Reserve releases minutes from its March policy meeting. Fed chair Jerome Powell has indicated that the minutes will include details on the discussion over plans to reduce the central bank's balance sheet. The week concludes with the release on Friday of the USDA World Agricultural Supply and Demand estimates that was the crops outlook. Next week follows a planting report that we saw this week that pointed to the biggest acreage ever devoted to soybeans. David. Coming up what does a post sanctions world mean for tech competition in China and the United States. We'll find out from

former IBM CEO Sam Palmisano. That's next on Wall Street week on Bloomberg. Hundreds of thousands of people were being cut off from help by Russian forces. The seeds places like Marius NIKKEI. Don't stop. It's like something out of a science fiction. President Biden described the death and destruction we're seeing from Russia's military invasion of Ukraine during his recent trip to Europe. But this war goes beyond. The military is being fought in the markets as well with the U.S. and its allies imposing severe sanctions on the Russian economy something Ukrainian President Zelinsky says is the only thing likely to get through to Vladimir Putin. There's no other language than efficient sanctions that Russian leadership can understand. That

war machine has to be cut off from the means of existence. And when it comes to the economic battle it's not just the United States versus Russia. China plays a crucial role. I made it clear to him that make sure he understood the consequences of him healthy in Russia. And I pointed out the number of American and foreign corporations left Russia as a consequence of their

barbaric behavior which poses a difficult question for President Xi who has pledged to support Mr. Putin but has to keep a careful eye on his country's role in the global economy. Which Nobel laureate Michael Spence says he is surely doing. China understands something that President Putin doesn't seem to understand and that is that any economy even a big one like China or even the United States can't perform at anything like its full potential in isolation. And so I expect China to sort of move carefully and and try to thread the needle but to avoid a scenario in which we start dividing the world up into blocks. When it comes to international economics and particularly when involves technology we turn to our very special controller. He

is Sam Paulson a former CEO of IBM. Thank you so much for being with us Sam. So we're seeing a lot of changes in trade patterns in economic dealings in payment systems around the world because of the war in Ukraine. Talk to us about what specifically that may mean in the area of technology whether it's Russia or China depending on which way China comes down. Well them it's actually an excellent point and I think that the sad controversy of the Ukraine is just accelerating transition or changes that I believe should occur. I mean as you know everybody's talking about Russia but also the implications in the U.S. China relationships. There's no doubt about it. And there's a lot of speculation that China and the U.S. will separate economically. I really don't think that'll occur. The reason I say that is these economies are too large or too interconnected to the

world. You mentioned payment systems flow of capital all those things. These economies are dependent upon. So I don't think separation totally occurs. However as I say that there's no doubt I believe that when it comes to technology and future technologies there's going to be competition between the two countries. And that's more so I'll say China U.S. I mean Russia really doesn't have the kinds of technologies that we're talking about. But if you think about things like semiconductors

artificial intelligence quantum computing cyber computing clearly there's going to be competition. And therefore I think there'll be less collaboration between China and the United States. So if that happens because it certainly looks right now like that's where it's heading we're not heading to a one big globe where we're all the same. We all deal with each other. Maybe more separation particularly areas like tech. If that happens how are we. And for we for the moment I'll say the

United States situated because I'm really concerned that China for example has really been investing a lot more in tech than we have been. There's no doubt about it. I mean I think last year alone was one point five trillion bird estimates in that range. So yes China is out investing United States. They're not investing in the West. So I'll comment on that a little bit. But as you think about it's on the U.S. China focus. I mean I call it the Super Bowl of geopolitics. You know it's the Titans. If you look at it today they use a sports analogy. The U.S. is about a three point favorite in the game going into the game. However China's spending a lot and they're catching up to configure CAC have a heck of a fourth quarter. So my point being in that analogy David is the fact that the US needs to leverage the world. It cannot go alone. And I believe there's great

capability would offer a sports analogy from an all star team. There was a great capability in Europe and Japan and Southeast Asia. So if the West could come together I because they've come together when it comes to the Ukraine. If they could come together and optimize their focus their investments I think they clearly could continue to lead and out compete China as a same one come back to if they can come together because that could be a big if. But let's assume that could happen. Who's on our team so to speak to continue your Super Bowl analogy. Who are the major players in tech on our team. I think the major players if

you go through it. I mean if you look at the semiconductors as an example I think it's a good example. Everybody focused on manufacturing capacity called fabs. That's important because of such a dependency on Taiwan and India's concerns and risk over China and Taiwan. Taiwanese relationship. Having said all that there's there's different elements of the ecosystem. In semiconductors there's fabric. There's the tools to fabricate. There's the design tools. There's the materials. There's packaging. And there's great expertise especially in Europe. Europe has great research and great expertise in many of these areas. South Korea and Japan has great expertise in the manufacturing tools and manufacturing side of the house. So my

point being is that if you look at the capabilities the U.S. certainly leads today in design and packaging there's no doubt about the research capability. But you combine these capabilities between Europe mostly Germany Japan and I say really South Korea and Singapore. But you know those countries within those regions you can see how this thing could align. And then there are nations that the US works quite well with as you well know. So Sam I noticed you didn't mention Taiwan and we hear a lot about Taiwan for manufacturing semiconductors the largest chip manufacturer in the world. Are they a strength or a

vulnerability given their situation with respect to China. My opinion and I've said this in the past couple of years even before the situation today with Russia is we need to lessen that tendency. The West needs to lessen the dependency on Taiwan. After observing what happened with Hong Kong it's hard to predict where Taiwan will end up long term. And it takes a long term. The bill does have to pass. You just can't do it in six to nine months. You're talking years to build this capacity up around the world and that's beginning today. There are two funding proposals. One of the United States is the 51 billion that you hear about the Innovation Act. That was the CHIPS Act. There's another 40 some billion euros are going through the

system in Europe. So that be combined is a significant amount of money to create this fabrication facilities around the world so that over time could lessen the dependency. But I think the West and I mean the West Western economies have to deal risk their exposure to Taiwan. Let's come back to that critical question of if we can get together on the same team here with some of the countries that you've mentioned. There are political aspects that United States domestically. There have been some resistance to that. So sort of just let's make it. Sure it's made in America. What are the prospects of those overcoming that. So we

really have an essential essentially a really integrated trade when it comes to tech. With Europe with South Korea with Japan. Well I mean I believe that I understand why it's important to create jobs in the United States. And this will occur. I mean it just it depends on what areas we're focused on versus our colleagues. What do I mean by that. Obviously when Intel makes the 20 billion dollars investment in Ohio that creates jobs in United States. That fabrication capability as we do advanced

research and design that creates jobs in the United States. There's nothing wrong with Germany creating jobs or South Korea creating jobs. My opinion in Japan creating jobs. If you think about this all these companies all these countries I should say based upon this is the future not the past. We'll be creating jobs and these are highly skilled jobs. So you're not going to outsourcing manufacturing workers. I mean if you look at a person that works in your average fabricator or the manufacturing capacity for a semiconductor they could be a masters in electrical engineering or Ph.D. in physics and things like that. The rest of places robots. So when we talk about these things they're capital intensive but they're really highly

highly skilled highly paid people. And I think the entire world will live as we invest in the best in those areas going into the future. Now it's different. I understand discrete manufacturing are called tops and bottoms and I can understand where politics are on both sides of the pond as we talk about that. But this isn't that high tech is not that at all. And they really should I think hopefully understand the difference between high tech and that's got standard process standard manufacturing. Sam one major economy. We've let the discussion so far. That's India. Where do they come out in technology. They more or less are

really working with Russia when it comes to oil and gas technology. India is very good in software and they have very good software capabilities. So in some of these areas I went through very quickly I didn't focus on artificial intelligence. They have pretty good capabilities around software. They do not have the expertise around the physics or the semiconductors or the electronics. And the reason why you need a combination of the

above even for artificial intelligence especially for quantum computing because if you think about what a semiconductor is in the software world of artificial intelligence it is the engine. It's the engine. It's the V12 if not a before for so V12 that's required to power these systems that are going to analyze massive amounts of data and apply it. But India is strong in software. There's been challenges you know historically with India more so than some of the other countries. But I do think they could participate but it might be a little more complicated than let's say South Korea or Singapore. In Asia that is or Japan. OK Sam thank you so very much. We appreciate it. And DeLys and Sam Palmisano is a contributor to Wall Street. And of course he's the former CEO of IBM. Coming up we wrap up the week with special contributor Larry

Summers of Harvard. That's next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. We're joined again this week by our special contributor Larry Summers of Harvard. So Larry we've got jobs numbers out at the end of the week on Friday. Strong job numbers once again. Also by the way I should say strong increases in wages at the same time. That does raise the question whether this economy maybe even more overheated

than we thought. Look I think the single most important statistic for judging overheating is the ratio of vacancies to unemployment. And with these JOLTS numbers and these unemployment numbers. That statistic is going to be plumbing new highs in the in when it's next calculated and that suggest even more tightness in labor markets. And I think that points towards even more inflation. So I think near-term we've got a if anything a bit greater inflation concern than we had before we saw these numbers. Of course it's good that the economy is looking relatively strong.

I think if you were in doubt as to whether the previous weakness was fundamental or was caused by all Micron this would tend to tilt you towards thinking that it was caused by Omicron. But look labor market indicators are always contemporaneous or lagging so we don't know what the future holds. And certainly there are worrisome signs in terms of what's happening with consumer sentiment. But for now I would say these are relatively inflationary numbers and that's how markets look to be reading them with significant movements towards yield curve inversion. Larry at the same time you'd be the first to say these jobs are good for the people who are getting jobs and particularly some of the people at the lower end of the spectrum which is something we should be concerned about. Is there no way that we can both take care of those people make sure they're employed

that they are getting paid fairly and not overheat the economy. David look this is why the earned income tax credit is such a good idea. This is why I've supported increases in minimum wages. This is why we need stronger programs for people who don't go to college of many kinds. But we do not do anybody a favor by overheating the economy because when we overheat the economy there. The chickens do come home to roost at some point as the inflation has to leave the system. And so I think that this idea that we simply cheer on more and more employment without thinking about the inflationary consequences is like a doctor who celebrates the results of the prescription of their painkiller without thinking about what's going to come down the road. I think the Fed too late has awakened to that and is moving towards a strategy that is much more oriented towards tightening. Laura let's time with those chickens maybe coming home to roost. There is talk about a possible recession here and

you and I have talked about that this at various times. I know you focused on historically when the issues about the 4 percent number under 4 percent unemployment in the sense you have over 4 percent inflation. We also had the yield curve the 2s Ten's yield curve invert a couple of times this week including after the jobs news came out. Do you pay much attention. The yield curve at this point is a predictor of recession. I look I look at it. I don't I pay a little less attention to it

than people in the markets do. And I think it's important to understand that it's not a causal relationship if it exists. It's a canary in the coal mine kind of relationship. So it's not that changing the changing the 10 year interest rate. If you could do it in some way will change the prospect of recession. Rather it's that when people are forecasting that the Fed is going to be cutting rates they're also forecasting that that's going to happen because there's a recession. So it's a

correlation thing not a causation thing. I think that the what's happening with the yield curve adds to a sense of economic anxiety that in situations like this historically we have not achieved soft landings and we have seen recessions. Is it a certainty that we'll see a recession in the next two or three years. No. Is it more likely than not that we will see a recession in the next two years. I don't see how anybody can look at either the historical experience or what markets are predicting and not think that it's 50 50 better than 50 50 that a recession will start sometime within the next two years. Larry

we also got the budget from the White House at the beginning of the week this week and everybody agrees it's aspirational. What is sent out is the budget from White ISE does not actually become law but it does reflect values as person after person of the White House reminds us. What are the values that you saw in President Biden's budget. So I was glad to see increases in the defense budget. I was glad to see a substantial indicative commitment towards doing something about Covid. I was glad to see an emphasis on mental health as a theme in the budget. I was glad to see open mindedness and open to complete negotiation on the remnants of build back better rather than re prescribing.

All of that expenditure. Those were all I thought positive steps. I would have liked to see more realism on the tax side. I think the billionaires tax is a bad idea whose time will never come. I think it's mislabeled to give it a kind of populist appeal relative to what's being proposed. I think the general idea of taxing capital gains when people don't have those capital gains that haven't sold the assets is not a realistic one. I think a much better strategy would have been to concentrate on a variety of loophole issues. Capital gains at death carried interest which the administration has still not

gotten done. Changing like kind exchanges for real estate. But the single most important thing of it if nothing else happens is that the historic bit of economic diplomacy that Janet Yellen concluded on corporate tax with other countries is enabled by the necessary U.S. legislative action. Larry if you read the fact sheet put out by the White House earlier this week they led with fiscal responsibility. The fact that they would be reducing

the deficit at the same time if you look at the projection over the 10 years that they do for budgets actually as a percentage of GDP the debt grows from something over one hundred and two percent to something over 1 and 6 percent. Is that sustainable for the United States. It's worse than that David. Because the interest rate forecasts in the president's budget look comical today in light of what's happened to interest rates. That's fair enough. They lock in those budget forecasts months in advance. But my guess is that if you used realistic forecasts you'd add another 5 percent to

the debt to GDP ratio ISIS spec. Given what's happening to interest rates that there's going to be a need for more fiscal adjustment then the administration imagines. I suspect the administration has underestimated the national security expenditures that will be necessary going forward. And I think we're moving towards a moment when we're gonna have to start thinking about fiscal policy as well as monetary policy as an anti inflationary tool. So I think this is a beginning for

budget discussions not an end of budget discussions. Well it does strike me Larry you spent so much time in Washington. I haven't heard. I don't think any politician draw that connection between taxes on the one hand and inflation on the other is against taxes and he's against inflation. But I haven't heard anybody getting us ready for the fact that if you really don't

like inflation you may have to put up with more taxes. You may need to put up with more taxes or you may have to put up with some some well-designed expenditure expenditure cuts. I don't think we're quite there at that point but I think if we start having difficulty containing inflation which I think is quite possible or we find unacceptable or the global economy finds unacceptable the magnitude of the interest rate increases that are necessary to contain inflation then I think the whole issue of fiscal restraint may get back on the on the play on on the playing field. I don't think that's an issue for the next several months. But I think if one's thinking about where we're looking down the road that's something we have to consider. You're absolute right there. I left out the possible cutting spending because it's just been so long since

I've really seen that happen in Washington. Thank you so much for our very special opportunity. Wall Street. Larry Summers of Harvard. Coming up it's no April Fool's joke when big banks screw up big time. That's next on Wall Street week on Bloomberg. Finally one more thought. Learning from our mistakes or maybe not all of us can make mistakes and sometimes when we go back over them we cannot believe what we were thinking or maybe what we were not thinking. And the big banks certainly are no

exception to this rule. There is the London big whale fiasco JP Morgan that led to the end of senior executive Ina Drew's 30 year career. I accepted responsibility for the events that happened on my watch in one of the portfolios in my division. And there's Deutsche Bank in 2018 mistakenly transferring thirty five billion dollars to your ex clearing which was more than the total net worth of the bank at the time. Germany's biggest lender has said about

thirty five billion dollars to an exchange as part of its dealings. They already have problems with risk management. This is not a headline. Love is a polite way of putting it. Thirty five billion dollars just sort of walked out the door to Citi in the height of the pandemic paying over five hundred million dollars to Revlon creditors despite a fight over the fund's money that it could not get back. Citigroup in unexpectedly lost its legal battle to recover half a billion dollars it mistakenly sent to Revlon lenders. It's the latest blow to the bank that's been forced to answer to regulators and tighten its internal controls. Mind you this all comes after Congress decided to make sure those banks were paying attention. You miss all the

protections of a law called Dodd Frank because of this law. The American people will never again be asked to foot the bill for Wall Street's mistakes. So it must have been particularly painful to Barclays this week when it found out that it had a teensy weensy clerical error in selling more and structured notes than the S.E.C. had given it permission to sell. You see it had asked for and received the OK to sell twenty point eight billion dollars worth of these securities. But apparently

someone wasn't paying attention and kept selling them way past the point they were supposed to stop like to the tune of thirty six billion dollars leaving Barclays with an estimated loss of five hundred ninety one million dollars. Just think it's just a simple filing error if they forgot to add an extension to the shelf full. And that's very embarrassing. They just declare the financial head as bad but fairly manageable. It's more of the reputational hit. It may be April Fool's but this one is no

joke. Certainly not for Barclays management. Let's see what we can learn from this one that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-04-04 10:55

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