Wall Street Week - Full Show 11/12/2021

Wall Street Week - Full Show 11/12/2021

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In a battle between a hot new electric vehicle company and hot new inflation numbers I'm afraid that inflation wins. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on you guessed it inflation. It turns out that Larry may just have been right. It's always important to avoid excessive certainty.

Tariq Header of Causeway Capital on that big announcement the three giants Jimmy Johnson and Johnson and Toshiba would all break themselves up and famed investor Jeremy Grantham on just how overheated he thinks this market has gotten. We've never seen anything like it. We started the week pretty sure of where we were going. Earnings were up at least basically equities were reaching up to new

highs bonds were tame and we had a new infrastructure package. All was right with the world. But then Wednesday hit and consumer inflation numbers came in high higher than anyone really expected an annualized increase of six point two percent. That's the highest in nearly 30 years. Austan Goolsbee of the Chicago Booth School said it's not going away anytime soon. Look it's big number. And whether your team permanent or team temporary everybody agrees it's it's gonna be months of this before you see any relief. And San Francisco Fed President Mary

Daley while saying it was too soon to change course admitted that the inflation numbers really did get her attention. Inflation is high higher. It's eye popping. This is a transitory period. That's what we believe. That's what I think when I look at the data. But it's directly related to Covid and is quicker we get through Covid the better off we're gonna be as an economy. But the week wasn't over yet as electric vehicle maker review and went to market and blew past the price set for the IPO. The results of what the review and CEO said was a true team effort spent years and years putting this together. Really. What's so exciting. You see such a diverse group of people with diverse backgrounds and and

interests really coming together to create these products. And standing there today looking out at the teams as we rang the bell was quite emotional. Seeing seeing somebody passionate faces is really powerful. And three corporate giants G.E. Johnson and Johnson and Toshiba all decided to break themselves up with G.E. CEO Larry Culp saying it was all about focus. These businesses will be more focused. They'll be higher greater level of accountability. We should have sharper capital allocation more strategic flexibility. And frankly these can be good for the team as well. I think we'll end up with investor bases focused on these pure plays investors that are probably under invested in G.E. today.

You put all that together. It's clear this is the best path for us to unlock and create value going forward. And when the dust settled from what is fairly called a wild week it left equities down for the first time since early October though not as much because of a Friday rally with the S&P 500 off about three tenths of a percent. The Nasdaq down seven tenths. But really much of the action was over the bond side with the 10 year yield up to well over one point five percent

and inflation concerns driving the 10 year tips up to over two point seven percent. Take us through the week and what it taught us. We welcome now Greg Peters co CIO PJM Fixed Income and Sarah Carter CEO of Causeway Capital Management. So let's start on the equity side. Welcome Sarah. Give us a sense of the equity because we started the week really at record levels and then the

inflation numbers hit but then they came back up at the end of the week. Yes they did. The inflation genie seems to be out of the bottle. And markets have to digest that. The technology stocks many of them seem to have such significant market shares or competitive positioning. The market is giving them credit for being able to price this inflation pass it on to consumers. But there many in both industries and sectors according to our team where they won't necessarily be the case. And that's really the

job of the fundamental research analyst is to determine whether or not a business say its consumer staples and food beverage. Can they pass on their increased costs of raw materials on into their final product. Because if they can't that means margin squeeze and that means earnings will. All other things being equal will decline which is not good for markets. So Greg when we see inflation numbers like this we automatically think about what it does to bonds and perhaps most important what it says to the Fed and how they might react. What did you make of this week.

Yeah I think that's the story. What it makes what it tells you about the Fed and central bank action ultimately. And so there's been this this response in the bond market really before the CPI print that inflation is picking up and more importantly that the Fed is going to be much more aggressive and central banks globally much more aggressive than initially anticipated. So I think that is the story in the marketplace. The two year yield and then equally I mean this is a volatile market in fixed income that has been largely isolated in fixed income. So what you're seeing is this disconnect in volatility in fixed income and equities. And yes it does make some sense for sure as the as the earnings coming out are quite strong margins all time high.

The the micro story is is quite supportive. But at some point the volatility that we're seeing in fixed income markets have just start to infiltrate other markets and risk markets if it doesn't settle down. At the same time how much is the Fed sort of putting a blanket on that volatility even given what we've seen. Because certainly they've made it pretty clear they're not in a rush to change course. You just heard Mary Daley say well we're not going to change course right away. Yeah but they changed their rhetoric quite substantially since the summer. And if you look at the bond market yield into two year and even inflation it it's been commensurate with the change in Fed tone. So I don't know. I I'm really worrying about

the Fed here moving too fast too soon particularly when you think about the construct of inflation that it's largely outside of the Fed control. So the Fed raising rates isn't going to help offset the supply chain issues. It's not going to have those kind of facts like it normally does. That's a really important point. No matter what the issues are it's not going to help the supply chain right now. So what about over on the equity side. If you're looking at equities are you more concerned about what the Fed might do in terms of interest rates or are you more concerned with what you were talking about which is really pressure on margins just because prices are going so high. Well we're concerned about both our team and we are looking at both

what could affect earnings and and also to what degree if the Fed does react prematurely is not going to be a depressant on markets overall. We just think about market sensitivity or based on which stocks have it which don't and how to be positioned in this kind of environment. But the cry we hear from companies are we interview hundreds of companies is that they don't have the labor they need. This seems to be this chronic labor shortage which is something we haven't seen. Normally we talk about slack

and that doesn't appear to be the case. And it's not like the labor isn't there somewhere. It doesn't seem to want to work in many of these jobs. And that ultimately may lead to a solution in automation or types of some labor replacement. But in the interim that means that the wage has to rise in order to attract the labor that's needed to make for example packaging. And and how high does it have to go. And then once it's there is it intractable or likely. I mean people don't very easily accept wage cuts. They want increases and it ratchets upward. That in our view is a wage price spiral. And the Fed should react to that is the concern that wages tend to be stickier than other sorts of prices. No question about it. At the same time if in

the short to medium term they have to raise wages it puts pressure on margins. Sara how do you differentiate who can raise their prices. You talked earlier about pricing power. Is that by categories or is that company by company depending on their brands. It's bold but thinking about let's let's stay within technology because it's been such a hot area of all markets and looking where there are few competitors an area that we like now are semiconductors particularly memory and the really only three Micron Samsung and High next. In the latter two in South Korea they have such significant scale advantages over all their competitors that they can. There's have to be a shortage of their product. But to

the degree they have price pressures themselves they should build a pass those on because there aren't alternatives. And where there aren't alternatives there is some flexibility. But that only goes so far. There's something called the substitution effect that happens when prices rise for and maybe not for the essential semiconductor but other other goods that are used in manufacturing. There may be substitution which could be quite damaging. So really the question is how long will this go on. Because that's the determinant what the outcome is for companies. So Greg Sarah says on the equity side maybe some

areas like semiconductors on the tech side might be a good investment. What about the bond side. You're investing bonds right now. How do you invest. It sounds like you configure the policy error of moving too fast in terms of raising rates rather than too slowly. So what does that say to you as a bond investor. Yes. So I was I think one of the worse areas to invest in the bond market right now is in the inflation market. I think what's being priced in in inflation and tips is just too much to be brutally frank. So that is one area that I would not look to

invest. We still see value in U.S. Treasuries actually. I know it's crazy to say but but we think the long term interest rate from where we are today is lower not higher. And there's a multitude of reasons for that in part because there's too much debt in the world and the inflation story and and growth story gets pulled down by that tremendous amount of debt. But within credit we still see value. So I still see value in the high yield market. It's clearly not what it used to be. That's for sure. But I still think that you're in this environment with strong M and a strong earnings that really benefits the high yield bond market. So those are just some ideas. But we still see value in fixed income and we still see value in credit. So it gives us a sense a duration whether it is treasuries or whether it is credit.

Where do you see the greater opportunities given your concerns about volatility in the bond market. Yeah. So I mean we always buy for Kate the rest of the duration and the spread rests separately. But but we're not scared of duration. Right. I think the back end of the curve in treasuries has some real value. And then quite frankly the front end in credit has a tremendous amount of value. It's its risk remote. We think it has really positive attributes. So we see kind of value across the curve. But our bottom line message PJM fixed income is we do not fear duration for sure. We think it's an important part of any asset allocation decision. Okay. Thank you so very much for being with us as Greg Peers. He is

CIO co CIO of PJM. Sarah CAC. Causeway Capital is going to be sticking with us as we turn our attention to all those big corporate break ups this week. That's next on Wall Street. Bloomberg. This is Bloomberg Wall Street. David Westin. It was a week of breaking up at least when it came to some very big corporations like Toshiba and Johnson and Johnson and General Electric and G.E. chairman and CEO Larry Culp said in the end it was a clear choice of focus over synergy. The G teams heard from me for the last three years that I will bet on the benefits of focus every day far more than the often illusory benefits that come from synergies that we certainly enjoy those synergies today in certain places. But more and more we've been running the company on a decentralized basis not as one gee not as even the four

reporting segments but the 30 panels that deal with customers that compete in the markets every single day. So if there are synergies that we enjoy today will work to continue those of course. But the vast majority of the benefits here will come from focus. Sarah CAC Causeway Capital Management is still with us. Sarah I want to talk to you as an investor because you own G.E. We talked to Larry Call and he said part of the benefit is for investors so they can focus as well on which line they take to be invested. As you look at this breaking up of G.E.. How do you analyze it.

Well I just want to set the stage that we may be one of the few who are analyzing it. Absolutely hated by investors because of the damage they've done. If you think about it David two to today go back. So the last five years the annualized performance of the S&P 500 has been 20 percent. That's 20 percent per annum on average. The comparable number for GS negative 13 percent. G.E. disaster. So Larry Cox arrival in October of 2018. He had his work cut out for him and he's very incentivized financially to get it done. But there are two great businesses. There were aviation and health care and then power renewables and digital weren't quite as good. And the key was to set them free.

There were some co-dependency because not only did power and renewables have some serious problems but then we had Covid. So then what happens to the aviation business here. This is aircraft engines avionics systems. It grinds to a halt. So free cash flow collapses and therefore the health care business had to support the other two. So what makes this announcement so

interesting is that it may be signaling that G is getting beyond its problems on actually coming back into blue skies where the long term care business that the company has that is supposed to pay people for nursing care and end of life assistance. That was it. This G stopped writing those policies in 2006 but it's been a huge financial burden for the company under reserving has been a chronic problem. So this breakup is it May. As Larry Cole noted in the video allow these three areas to shine on their own. It may be signaling according to our industrial analyst that G.E. is not worried any longer about long term care because that is we shouldn't as investors be worried. And that is a very good

thing. It sure has given the history there. But let's take those three lines of business because they're not bringing it all at once. I thought that that was important. I mean first they spin off health care. You said that's the strongest one anyway. That's ready to go on its own. They're going to take another year on power to sort of get that up and running. You may need a little more help. And then you have aviation at the end. Talk about those three lines of business and their futures. Well the health care business is in very good shape and it intends to retain nineteen point nine percent of that business. Ultimately that may be so that will end up if

this process continues to its fruition in the aviation business at stake. But that that's twenty twenty three. So here we are twenty twenty one. Keep this a bit of waiting time. And that means the stock may be volatile or it could be down. Who knows. Investors hate reading but it takes some time to do these tax free spin offs. And also GS determined that and this was part of the announcement to set these three areas off on their own at much lower levels of financial leverage. And that's really where the cash flow is so important. How much can the company generate to be to get investment grade credit ratings for all three is

going to be a real that's the serious effort ahead. So that's why they need time. There's twenty twenty three and then twenty twenty four for power renewables. So we are. We await all that information. But but there's some really positive signalling happening here. Otherwise why would announce. Why would they announce it now. They would just continue to work on it and not let us know. The alert kept emphasizing three publicly traded investment grade companies. He's very proud of that that they'll be all be investment grade from his point of view. Let's talk about power which is also struggled had a lot of problems some residual problems with some maintenance contracts and things. What about keeping traditional power together with renewables.

Siemens what a different way. They let renewables go off on its own maybe a bigger growth. Do you think that makes sense as an investor. Do you look at that and say yeah that's sensible. It is given the mix the G.E. has renewables ultimately as we all assume will be the business that sustains in the future. But it was never really our preferred of their businesses and we're glad to see it being set aside and spun off again. The aviation in the health care

business is far superior tourism's free cash flow generation. Aviation almost and generate almost none in the downturn and now is coming back. We think there is a normalized 4 billion dollars of free cash just not business. And if you wrap the whole all of it up together and you think about it today there might be normalized 7 to 8 billion dollars of free cash flow coming from that. The sum of the three parts. That's something that no I don't think GS delivered for a very very long time. And so come

back to you as an investor because as I say Larry kept emphasizing that allows an investor to say which if any of these lines they want to play in. Is it more valuable to be able to pick and choose among health and power and aviation than to have it all lumped together have to buy the whole package. Very definitely. We as investors prefer that and then we think about them. You want them senior managements of each and they're not Larry. According to our industrial ounces the best industrial CEO in the country. So there's a lot right there. Him running aviation without distractions. Fantastic. And then there

are two very skilled individuals will be the CEOs of the power of health care business. But think about it. They and their and their team can be compensated on their own efforts without the distractions and or dilution of any other parts of the business they can really focus. They'll have each had their own individual boards of directors who can focus on that business. So yes this is a given the weren't synergies. This makes perfect sense. And we expect the stock price to ultimately reflect this and be a very significant return for our clients very quickly. And Sara is this the end of conglomerates. You know I I. Hard to say. I think they'll continue. There are plenty of them

in Japan for example. And unless they're desperate like Toshiba they don't they don't break up. But but we're not patient as investors. And this is true globally. And when we see a company who's who. For example if it's multiple being suppressed we want them to fix it. By the way is to shoot a little nudge as I recall from some activists. Thank you so much. It's always great having you with us. That's Sarah Cutter. She's CEO of Causeway Capital Management. 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 is time now to take a look at the week ahead on global Wall Street. And we start with Juliette Saly in Singapore. Thanks David. Events in Singapore take center stage this week

with the fourth annual Bloomberg New Economy Forum here in the Lion City. We'll ask world leaders and key executives about the growing divide between Beijing and Washington China and focus on the economic front with monthly activity data due Monday. Japan will also post third quarter GDP numbers after producer prices jumped to their highest in 40 years. Turning to equities Ali Baba and JT dot com earnings will give us another pulse check on China's tech sector. Plus India opens its borders to foreigners

for the first time since the pandemic began. Now over to Dani Burger in London. Danny. Thanks Juliette. Well on Tuesday we get UK jobs numbers coming out followed by the next day CPI for the region as well. It'll be crucial for the BJP to really ascertain whether or not they will indeed raise rates after they did in their last meeting to the surprise of many in the week. We also have an ECB Financial Stability Review which they're set to publish. How much will sky high asset prices feature in that review to round out the week later. We also are going to be getting a Turkish central bank decision. All economists surveyed by Bloomberg expect that they will continue to ease monetary policy something which Irda one has called for. This of course

all despite the fact that means seen inflation readings as high as 20 percent and the lira continuing to tumble. Now over to Romaine Bostick in New York. Thanks Danny. Retail sales data and department store earnings are going to be in focus. A new round of insight into consumer spending. Economists project U.S. retail sales growth likely we accelerated in October from September. As consumer demand for a variety of goods remain resilient. That's the good part. The concern that that resiliency and consumption is putting even greater strain on global supply chains. Insight into how

retailers are navigating those supply chain distortions that will come in the latest earnings reports next week from Wal-Mart Home Depot Target TJX Macy's and Kohl's. Expect analysts to pepper executives on the conference call with a lot of questions about inventory shipping times labor costs and pricing power. And it's that pricing power and how it's passed on to consumers. That ties directly into the most recent CPI numbers which are now running at a faster pace than wage growth. We'll get a chance to hear from multiple Fed members about how monetary policy will address those recent price spikes. The presidents of

the regional Fed banks in Cleveland San Francisco Chicago and Atlanta are each scheduled to speak publicly in the weeks ahead. David thanks to Julia Danny and Romain. Coming up it was nice while it lasted but it is the longest bull market in history. About to come to an ugly end. We'll talk with

famed investor Jeremy Grantham of GMO. When the decline comes it will be perhaps bigger and faster than anything previously in U.S. history. This is Wall Street week on Bloomberg. Asset bubbles they're the one thing every investor wants to avoid. From the tulip frenzy of 17th century Netherlands to Wall

Street in 1929 to the tech bubble of 2000. The problem is knowing when you're in a bubble and when it will end. Fed chair Jay Powell has recognized since last spring that asset values are stretched. If you look at asset valuations you can say that by some measure some asset valuations are elevated compared to history. I think that's clear. While others like Kathy Wood of ARC say we're just getting started that in fact the market has been broadening and getting healthier. There has been a rotation into value as a style as fears of inflation and interest rates increasing picked up. And therefore there's

been a broadening out of this bull market. I think we're in a very strong bull market. And then you have Tesla which some people say is a bubble in and of itself skyrocketing to a market cap of over a trillion dollars or roughly 20 times what it was just four years ago. While others see Tesla not as a bubble but as the exception that proves the rule changing the entire face of the automobile industry. That's the view of star quarterback Tom Brady as he talked about Hurt's decision to include Tesla's

in its fleet of Tesla for about four years. And again I think it's it's kind of the direction the world is heading. And I think for me it was about being really cautious about the impact that we all have on our planet. Whether it is Tesla or tech or markets overall no one has been more outspoken about the possibility of bubbles than Jeremy Grantham. He is co-founder of GMO and really a student through the history of markets that are overheated. And we welcome him now to Wall Street Week. Mr. Grantham thank you so much for being with us. Let's talk about bubbles but let's come in if we can through Tesla because you've talked so about Tesla in the past. I mean last time I checked I think the market cap is

something like 40 times what it was four years ago. Is Tesla a bubble. Yes that's pretty easy. And having said that I'm the proud owner of Model 3. And I do think they're magnificent vehicles. And I think Tesla has done extraordinarily well. But if you go back into the life cycle of the fangs a Tesla is many multiples of the price to sales ratio that they were at this stage in their lives and they have been brilliantly successful. So Tesla is a assuming it will be brilliantly successful and B assuming it will be in addition to that multiples. As successful as the other fangs and they are some of the great companies in the history of capitalism. So this is a big ask. Yeah I'm always reluctant to say it might be different this time

but let me ask that question. Could it be different this time when it comes to Tesla. Because it is at the crosshairs of a fundable technological transformation to electric vehicles and a real fight for the climate globally apart an important part of that. So is it possible that is different. There's a major transformation going on here that that's bigger than what we've seen before. I think if you were defending the fangs you would say in each case that they represented like Amazon a a crucial fork in the road on retailing. If you were looking at Facebook and Netflix all all of them represent these breakout major changes disruptive changes. And I'm very grateful for Tesla as a dedicated green that they have pioneered Evie's. But now in

phase two. Every great automobile company all the Mercedes and the BMW is and so on. And the VW are all gearing up to go electric. And we know that that owes a lot to Tesla. But now in phase two they're going to have to have some serious competition. And to live up to the expectations of the prize will be impossible. It's interesting you mentioned the other auto companies because in looking at Tesla I wonder how much of the valuation has been put in the stock right now is really dependent upon it being almost by itself. That is to say a very large moat around the company. And how defensible that and also the question is what about disruption of Tesla. I think you're involved actually in a company quantum scope that is success on

the battery side could actually disrupt Tesla itself. Absolutely. Are new technologies come along all the time particularly in solid state lithium and many many things can go wrong with Tesla. I think they're very fast moving company and they'll handle that kind of problem and they'll be worth a lot of money. The question only is has has a discounted 50 years into the future rather than 5 or 10. And I think it probably is. Speaking more broadly. You've said that were in something I

think you call that an epic bubble right now. I think you've been very careful. I'm not going to predict when it ends. I'm just saying that it does end. What's going to bring it to an end. The thing about the great bubbles 1929 Japan. No. No one knows after all these years exactly why the bubble peaked. You can say with hindsight it peaked at the point of course of maximum euphoria. So there was no hint of of darkness at the end of the tunnel. Everything looked absolutely splendid as the market peaked. And of course as long as it looks absolutely splendid everybody is happy. The thing about the great bubbles is. How intensely do people buy into the idea that it can never

break. The prices will never decline. The housing bubble of 2000 and 5 2006 in America was a brilliant bubble in that description. You had people going out and buying a second house to rent because house prices never declined. Indeed Ben Bernanke said U.S. house prices have never declined at cost and they promptly did. But that is par for the course for the Federal Reserve. In 1929 there was a terrific buy in and you could read articles in the Ladies Home journal saying all you had to do to get rich was to buy stocks and hold onto them. And the same thing occurred in 2000. In the tech bubble the same thing occurred in the biggest bubble of all which was Japan in 1989 when the

Japanese market went to sixty five times earnings. But in U.S. history I would say there is a bigger buy in this time to the idea that prices never decline and that all you have to do is buy them. Then that has ever been. Which suggests that when the decline comes it will be.

Perhaps bigger and better than anything previously in U.S. history. You've talked about the tech bubble in 2000 that you famously really did anticipate that you paid a price for getting out of the market that place because other people continue to make money. People who were were a value investors switched over. You stuck with it at the same time. The longer that bubble goes the bigger gets. Does that represent the possibility for you to make more money when it does burst. If you can handle

going short getting out of the way. Yes you can make a lot of money. This bubble in part if it is in bubble as you describe it must in part because of the amazing liquidity pumped into the world market frankly. But certainly the Fed participate in that fully. We now just this week have some pretty staggering numbers on consumer prices of over 6 percent annualized right now in the

United States. To what extent will the pricking this bubble come if the Fed needs to respond and really step on the on the brake and maybe do it even a little abruptly. Markets peak when inflation is low and profit margins are high. It's not about growth. They like GDP to be very stable. They hate it. Bouncing around it makes portfolio managers nervous. And our model that goes back to 1925 explains almost all the ebbing and flowing of market bull markets and bear markets and until until June of last year. Starting in June of last year is the first time that inflation

the number one predictor since 1925 is ignored. If you want to explain today's market level yes you have handsome profit margins. Every bull market has a wonderful economy. Every bull market has a plentiful supply of liquidity. But every bull market before this one had low inflation. In order to explain today's market you have to assume 100 percent. Ignoring of the rising inflation which is quite remarkable. We've never seen anything like this. We've just hit 6 percent today that would have been enough in any market since 1925. And for all I know long before that it would have been enough to

have crashed the market. But this time the faith in the Fed is so complete that when they say it's temporary we believe it. The Fed in my opinion hasn't done a thing right. Since Paul Volcker who was brilliant. All of the others have encouraged a chain series of really dangerous asset bubbles. They rattle the economy. They're incredibly disruptive. The decline in two thousand eighty two percent in the NASDAQ was a decline from 2000. The decline of the housing

market all the way back to trend and below dragging the world with it and all of the problems from bad mortgages and a 50 percent decline in the S&P. These have a terrible wealth effect. They make people feel poor and they make people spend less. It's the last thing you want. And yet they have not learned they overstimulated to get to 2000. They overstimulated in the housing market. They got 3 or 4 percent more people to own houses in 2000 and 7 than had ever owned houses before. And the consequent consequences were dire. And I have they learned absolutely not. So in this time they step in to Covid. And of course you needed to stimulate. But did you need to throw this much money all over the world so that it flows into the stock market and creates creates these meme stocks. This craziness that had Avis triple in one day

and in the last week. And why did it triple. Because in response to Tesla and Hertz and Tom Brady et cetera Avis said hey dudes we're going to buy some electric cars to wham it triples. You know this is more extreme in scale and size of market cap than anything that occurred in 1929 and even adjusted for the size of the economy. Thank you so much Jeremy Grantham. He is co-founder of GM of. Coming up we wrap up the week as always with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This really ISE David Westin. We're joined once again by our very special contributor Larry Summers of Harvard. So Larry you

had quite a week. If I can put it that way because you've been warning on this program and otherwise again and again we got to week about inflation. And boy this week we got at six point two percent and the headline number on CPI shocking. An awful lot of people. I guess I start out with why did you get it right. And so many economists including the Federal Reserve and for that matter the White House. Why did they get it wrong. David. You know I did. It seemed to me apply a fairly basic economic model

to the magnitude of the demand stimulus. And it seemed to me it predicted that we'd get certainly a significant rise in inflation. And then there were some other things that came along on the supply side that I didn't foresee that others didn't foresee that made it even worse than I had expected. I think there are a couple of lessons from this episode. One is that it's always important to avoid excessive certainty. The policymakers in economics who go were go wrong the most are the

ones who are most confident of a single model. You've always got to recognize that there are a wide range of possibilities. You know on your show I always said that I thought this was the risk and the most likely thing but there was a one in three chance that this would all work out terrifically and that I'd be entirely wrong. I think more recognition of all the range of possibilities is a good discipline for policymakers and economists. I also think that we have a problem and it's a pretty broad problem with what I call motivated belief. People really wanted to engage for all sorts of reasons humanitarian political related to momentum at the beginning of an administration in a very very large stimulus program. And so they convinced themselves that it wouldn't be inflationary because they really wanted it to not be inflationary. Now we

have a problem of inflation. I think everyone at this point agrees with you. We have a problem. But the question is how big a problem and for how long. Because we had Paul Krugman you've identified earlier as a friend of yours and a former classmate I believe Hillary. And he came out this week in New York Times and said you know this is not like the 1970s. It's like 1946 to 1948 when people came back from the war there was a big uptick in demand. Supply had to catch up. And the worst thing we could do would be to tighten because back then they did tighten and led to a recession. What do you say to that. Analysis of Paul's examples have been have sort of been bouncing around a bit. I think the most obvious example continues to be the Vietnam War.

The other obvious example is the 1970s where people were saying temporary due to specific factors all the time. I guess I don't really hear the music on Paul's thing. My own sense continues to be that if you look at ongoing developments in the labor market if you look at what is feeding through in housing if you look at the evidence on the range of commodities being quite up in inflation rising if you look at the available data on expectations then I think it is hard to not have considerable concern that an inflation is entrenching that is not going to go away without some significant other development. I've not said I've been very careful all along to say what I believe. David Which is that yes there is transitory inflation but to say that there is some inflation that is transitory is not to say that we're still going to be a two percent inflation country. I like to look at the month to month figures better than the one year figures. And as you know the month to month figure for the CPI

last month was above 11 percent. I've got no doubt that that contains a substantial amount a very substantial amount of transitory inflation. But that doesn't mean we're back to Target. How can it be that when you have an interest rate that's running at negative 2 or 3 percent you have the biggest labor shortages and highest vacancy rate since they collected statistics. That that's an environment for natural deflation. I don't I just don't hear that argument which is why it seems to me we need to be recognizing what the American people very broadly are recognizing. But we still quite have haven't quite heard the Fed

say which is the major economic concern of the United States today is overheating. Larry from monetary policy to restructuring corporations we've had a spate this week of large corporations breaking sales up. First General Electric going into three parts. Then at the end of the week have Johnson and Johnson bringing into two parts. And over in Asia we have Toshiba breaking into a couple of major component parts as well. Is there something more fundamental underlying this. What is driving this increasing emphasis on focus rather than synergy. David I I think this is a broadly positive thing. I think in most cases these splits probably have come later than would have been ideal. And I think those who don't like markets and don't

like activists should be given a little pause by this kind of development. I think it's two things. The first is that in an increasingly complicated world it's the essence of strategy to compensate to build on strength rather than to compensate for weakness. And all of us are better off specializing a bit on what our distinctive talent is or what it is that is our strength. And I think that's true for companies as well. Second investors through their investments expressed beliefs. Some people believe in prescription drugs and biotech. Others believe that consumer products are going to be the best way forward. Some people believe that the aviation business is good. Other people believe the health care business is going to be good. Not

many people believe in particular sandwiches that were put together decades ago. And so by splitting companies up people give investors an opportunity to express the kinds of beliefs that investors are likely to have rather than to bat on somewhat oddly and historically constructed sandwiches. That's what I think this is about. And I think for the most part it's a good thing. Thank you so very much. There's our special Wall Street contributor. That's Larry Summers of Harvard. Coming up one more side are conglomerates going the way of the dodo bird.

This is Wall Street week on Bloomberg. Finally one more thought. The last of the conglomerates. There was a time not so terribly long ago when conglomerates were all the rage. Think Harold Janine and ITV Golf and Western Litton Industries many of which grew up and then died away. But then there was G the biggest of them all. It lasted the longest when we had Jack Welch take what was a light bulb company founded by Thomas Alva Edison in the 19th century and expanded expanded it to television and motion pictures and most of all into finance. He took a company that had revenues about twenty six billion dollars a year to one hundred and thirty billion dollars a year.

The market cap went up over four hundred and fifty billion dollars. It was the largest in the world at the time. But trees don't grow to the sky and neither did G. Jack Welch moved on. We had Jeff Immelt take his place and during his tenure we took what had been the gold standard for corporate America and turned it into something of a turnaround. And in the end even Jeff

Immelt couldn't quite explain why that had happened. We had through multiple recessions we had really generated record earnings and cash flow. We had good businesses good people good initiatives. But at the end of the day the stock price lagged. So three half years ago the G.E. board turned to Larry Culp the former CEO of Danaher to sort things out. Larry came in and pretty much throughout the playbook of Jack Welch he pruned. He focused on cash flow and debt reduction and just plain focused.

Overall it all came to a head this week when Larry Corp announced that he would break up the company into three parts health care power and aviation. These businesses will be more focused. They'll be higher hire greater level of accountability. We should have sharper capital allocation more strategic flexibility. And frankly these can be good for the team as well. So is this the end of conglomerates. Nicholas Heymann of William Blair echoed Larry Cole who said it really is more important to

focus today rather than go for those synergies across different businesses. It's much more important to have really 110 percent focus on one end market instead of customers because things are changing so structurally and so rapidly that you really can't be burdened by having to wait for another part of the company to come around. While Jerry Davis of Michigan Ross School thinks that there may still be room for conglomerates when it comes to tech many many think of Amazon. There is a future for conglomerates but it's in the I.T. sector. If you look at big tech companies like Alphabet like Facebook they really are conglomerates in some sense. They are harkening back to the conglomerate that she was at its birth. But if you

listen to Larry Culp himself it's not about the form. It's not whether it's a conglomerate or not a conglomerate. In the end it's about getting the job done. It's ultimately about performance. Right. I've been in companies where we did a number of things under one roof. So I've seen it from a number of different angles. But ultimately it's all about looking forward and being in a position to perform. And I think for G.E. today on three separate bottoms we'll be at our best. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2021-11-15 05:51

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