Speaker 1: Lots of talk about the FED, about the economy, about China,
Speaker 1: about European natural gas, but how much really changed. This
Speaker 1: is Bloomberg Wall Street Week. I'm David Weston this week's
Speaker 1: special contributer to Larry Summers of Harvard on the FED
Speaker 1: and getting the economy back on track. Guiding J. Powell
Speaker 1: said things that to be blunt were analytically indefensible. And
Speaker 1: Ken Jacobs of Lazard on how a changing Supreme Court
Speaker 1: could affect his business. You have an industry like insurance,
Speaker 1: which has fifty different regulators in fifty different states. It
Speaker 1: was an extravaganza of talk and data this week, with
Speaker 1: President Biden finally having that talk with China's President g
Speaker 1: President she actually emphasizing to President Biden that they should
Speaker 1: coordinate on macroeconomic policies. According to the Chinese Foreign Minister
Speaker 1: read out the EU Energy Commissioner laying out plans to
Speaker 1: deal with further natural gas cuts from Russia. We will
Speaker 1: start saving cast now, and that we had a blue
Speaker 1: print to act together in a coordinate debate if the
Speaker 1: situation doosn't. Congress moved that chips bill towards the President's
Speaker 1: desk and to top it off. Senator Schumer and Mansion
Speaker 1: tried to pull our rabbit out of the hat with
Speaker 1: a surprise deal on climate and deficit reduction. This bill
Speaker 1: is far from perfect. It's to compromise, but is that's
Speaker 1: often how progress is made. And of course the big one,
Speaker 1: the Fed setting a new funds rate and share pow,
Speaker 1: saying they'll keep tightening and we're strongly committed to returning
Speaker 1: inflation to our two percent objective. As the stance of
Speaker 1: monetary policy titans further, it likely will become appropriate to
Speaker 1: slow the pace of increases, but we shouldn't expect a
Speaker 1: lot more of that forward guidance. We think it's time
Speaker 1: to to just go to a meeting by meeting basis
Speaker 1: and not provide the kind of clear guidance that we
Speaker 1: had provided on the way to new and if the
Speaker 1: Fed thought he would have an easy time, but the
Speaker 1: numbers kept coming in this week, making it more complicated,
Speaker 1: with GDP down for a second straight quarter on Thursday,
Speaker 1: and then on Friday, personal consumption and employment cost index
Speaker 1: numbers coming in higher than expected, showing that inflation is
Speaker 1: not close to done with us yet. And the markets, well,
Speaker 1: they pretty much took it all in stride, with the
Speaker 1: SMP up almost four point three percent for the week,
Speaker 1: ending the month with its best performance since November, and
Speaker 1: the NASDAC posted even higher weekly gains, up some four
Speaker 1: point seven while bond yields remained subdued, with the ten
Speaker 1: year yield ending the week at two point six five,
Speaker 1: giving up nearly thirty five basis points. To help us
Speaker 1: sort through all of this, we welcome now Rebecca Patterson,
Speaker 1: Bridgewater Chief Investment Strategists and Sarah Ketder, CEO of Causeway Capital.
Speaker 1: So welcome both of you back to Wall Street again. Rebecca,
Speaker 1: let me start with you and what the FED has
Speaker 1: in front of it. What is it trying to do.
Speaker 1: The Fed is trying to get goldilocks, and that means
Speaker 1: it wants to get inflation back down as fast as
Speaker 1: it can towards its two percent target without engineering a recession,
Speaker 1: and the market is giving it the benefit of the doubt.
Speaker 1: If you look at what's discounted into markets today, it
Speaker 1: is basically two and a half percent inflation in just
Speaker 1: over a year and only a moderate slowdown in growth.
Speaker 1: And I think it's gonna be almost impossible for the
Speaker 1: FED to get everything it wants here. The porridge is
Speaker 1: gonna be too hot or too cold. Either inflation will
Speaker 1: end up running much higher than the Fed's target and
Speaker 1: they risk losing their credibility, or if they're serious about
Speaker 1: getting inflation down, especially from the current high levels, it's
Speaker 1: going to require more targ more tightening, which we think
Speaker 1: is going to engineer a deeper recession, and that's what
Speaker 1: we're focused on. We think that within six to nine
Speaker 1: months we're going to be looking at us GDP that's
Speaker 1: negative to negative three. So, Sarah, where aren't you on this?
Speaker 1: Because it felt like a tension this week between the markets,
Speaker 1: the futures markets on the one hand saying exactly what
Speaker 1: Rebcca just said, and economists on the other hand saying,
Speaker 1: you know what, we've got to really jack up the
Speaker 1: rates a lot to get inflation on control. Which side
Speaker 1: are you on more skeptical? I don't think that's how
Speaker 1: we are as value managers always want to have it
Speaker 1: proven to us. But but note that we've had so
Speaker 1: much liquidity created four trillion dollars of of enlargement to
Speaker 1: the Fed's balance sheet since the beginning of the pandemic
Speaker 1: in early that's a lot of liquidity, and it's still there.
Speaker 1: The FED only just started to reduce go into it
Speaker 1: from a quantitative eavening to quantitative tightening starting to one
Speaker 1: of this year, and it's just beginning, and it'll go
Speaker 1: from thirty billion a month and then bump that up
Speaker 1: to to sixty billion a month. Uh and letting those
Speaker 1: bonds roll off that again starts to compress bank reserves.
Speaker 1: This will take It's quite be quite lagged in its effect.
Speaker 1: So financial conditions will just tighten due to that reason alone.
Speaker 1: And we don't think markets anticipate that at all. And
Speaker 1: I think, just building Sarah on your point, it's it's
Speaker 1: important to remember that the markets are really looking at
Speaker 1: um the rates. They're not thinking as much about quantitative
Speaker 1: tightening or do the roll off of the Fed's balance sheet,
Speaker 1: which is on autopilot, that's going to keep going. And
Speaker 1: so we don't have the Fed buying bonds, we don't
Speaker 1: have banks buying bonds anymore. And so we've seen bond
Speaker 1: yields come down in the last couple of weeks, But
Speaker 1: how much further can they come down without retail investors
Speaker 1: institutional investors moving out of equities into bonds. I think
Speaker 1: what we've seen historically is when stocks go down, bonds
Speaker 1: rally and you get that diversification. We've had that for
Speaker 1: the last few weeks. We didn't have it for the
Speaker 1: first half of the year. I don't think we can
Speaker 1: count on that. As we get QT continuing quantitative tightening, continuing,
Speaker 1: bond yields may come down, but it's going to be
Speaker 1: a lot harder for them to do that in this
Speaker 1: environment where the Fed's created a liquidity hole. It's taking
Speaker 1: liquidity out and it's not as clear today who's going
Speaker 1: to fill that, who's going to supply the demand to
Speaker 1: keep bond yields going further down. So let me pursue
Speaker 1: that liquidity issue a little bit, Sarah, because you mentioned
Speaker 1: the lack of liquidity that really makes the market DESI
Speaker 1: understand much more voluerable. So what does that do to
Speaker 1: an investor? How do you do you have a GPS
Speaker 1: at this point given where we are, The key is
Speaker 1: to have a low entry price because you've got to
Speaker 1: have that margin of safety. And what this will mean
Speaker 1: if if massive increases in liquidity, And again this wasn't
Speaker 1: just the FED, central banks globally, we're all at this
Speaker 1: The European Central Bank, the Bank in Japan, and as
Speaker 1: they take all in unison, take liquidity out of the system.
Speaker 1: What pushed up market multiples, what made valuations expand what
Speaker 1: made investors in different devaluations, it'll to be just the opposite.
Speaker 1: And we've already seen that start because some of the
Speaker 1: hardest hit stocks globally, including in the US market, and
Speaker 1: they had the most bloated valuations. Okay, Sarah Kader and
Speaker 1: Rebecca Patterson, we'll stay with us as we take a
Speaker 1: look at earnings. It was a big earnings week as
Speaker 1: well for Wall Street and that's coming up next on
Speaker 1: Wall Street Week on Bloomberg about today that could be
Speaker 1: little launched corporations reported their worst profit decline in twenty
Speaker 1: nine years. Revised Commerce Department figures for the first quarter
Speaker 1: showed that both the economy's downturn and the pressures of
Speaker 1: inflation were worse than previously reported, and international speculators began
Speaker 1: dumping dollars and acquiring gold with a fervor not seen
Speaker 1: for quite some time. That was the way things look.
Speaker 1: The Lewis ruck has around Wall Street week. Back in
Speaker 1: we were coming out of a recession. Today we may
Speaker 1: have inflation, but we haven't really seen a downturn in
Speaker 1: corporate profits at least yet, much less a week er dollar.
Speaker 1: We've seen just the reverse. In fact, Rebecca Patterson of
Speaker 1: Ridgewater and Sarah Kettter of Causeway Capital have stayed with us.
Speaker 1: So Sarah, let me go to you on the equities question.
Speaker 1: We had a lot of earnings that this week. They
Speaker 1: went both ways, but I think sort of overall, earnings
Speaker 1: came in pretty well so far they have, and I
Speaker 1: think both Rebecca and I've commented on what's happened in
Speaker 1: the past is initially reflective of this future. In other words,
Speaker 1: there are so many challenges ahead in a persistent inflationary
Speaker 1: environment for companies in terms of cost increases, not to
Speaker 1: mention a consumer that's deliberately being reined in that this
Speaker 1: just made me a really tough next several quarters of reporting.
Speaker 1: How tough, hard to say, but unlikely to be buoyant.
Speaker 1: And that's to the point that we've seen multiple de rating.
Speaker 1: Now we made variable see earnings fall two, and that's
Speaker 1: typically what happens in market pullbacks, both multiples and earnings fall,
Speaker 1: and that again is a phenomena that likely occur globally. So, Rebecca,
Speaker 1: you have a little bit of money at Bridgewater you
Speaker 1: have to put to work every once in a while.
Speaker 1: What about the question, particularly that versus equity you mentioned before,
Speaker 1: the question of when stocks are attractive. We had that
Speaker 1: Bank of America fund managers report coming in and saying,
Speaker 1: look at you're better off right now going into bonds.
Speaker 1: We don't see bonds as attractive at this point, um,
Speaker 1: in the US, but also in places like Europe. Um.
Speaker 1: You know, with the FED still tightening, with the Fed,
Speaker 1: demand for bonds now gone, it's going the other way.
Speaker 1: Banks were huge buyers of bonds last year. They're gone.
Speaker 1: We think there's gonna be a greater challenge for demand
Speaker 1: to meet supply there um. But there was a there
Speaker 1: was another great point just made when we were referencing there,
Speaker 1: which was this fall in the dollar and this move
Speaker 1: into gold and and it's so interesting to compare what
Speaker 1: was happening then versus now, uh and and back then
Speaker 1: we saw the dollar fall in part because people thought
Speaker 1: that inflation expectations were unanchored and high inflation was going
Speaker 1: to undermine the value of currency. And as you just said,
Speaker 1: it's the opposite right now. We've seen a strong dollar
Speaker 1: as the US has looked like the nicest house in
Speaker 1: a bad neighborhood. What what I would say, though, as
Speaker 1: we think about earnings and equities and bonds and people's portfolios,
Speaker 1: is that we're in a world that's so different from
Speaker 1: the last decade. When it comes to currency markets, volatility
Speaker 1: is picking up and as we have inflation surprises, monetary
Speaker 1: policy surprise is and a huge cone of uncertainty, we
Speaker 1: should expect that FX volatility to continue and it flows
Speaker 1: through to companies. I think two big ways. One just
Speaker 1: if the companies themselves are hedging that risk or not.
Speaker 1: So we are seeing multinationals underperforming more domestic companies by
Speaker 1: wide margins just year to date. We think that is
Speaker 1: likely to continue as these kind of relatively wild moves
Speaker 1: continuing currencies. And then more broadly, if you're thinking about
Speaker 1: your portfolio, what currency are you denominated and what currency
Speaker 1: risk are you taking, and it can make a very
Speaker 1: big difference to your performance. I mean, just year to date,
Speaker 1: if you think about if you hedged foreign currency equity
Speaker 1: or didn't hedge, it could be the difference in ten
Speaker 1: percentage points and performance for those stocks. And we think
Speaker 1: that's going to continue and possibly escalate. So I would
Speaker 1: just say as we think about equities, we think about
Speaker 1: bonds and earnings. UM. I would also make sure not
Speaker 1: to ignore currencies as part of that equation for your
Speaker 1: total return. So Sarah, take all that, put it together.
Speaker 1: I think somebody who's really look at a particular kind
Speaker 1: of value investor. You look for good value in terms
Speaker 1: of low valuations, buying at the bottom, moving up with it.
Speaker 1: What's attracted to you right now? The go where the
Speaker 1: currencies have been the weakest, where there's potential for a
Speaker 1: return to some sort of more normal currency valuation, and
Speaker 1: the euro might be a good place to start. The
Speaker 1: euros off about twelve versus the dollar year to date,
Speaker 1: and maybe fifteen over the last twelve months. So yes,
Speaker 1: it's on sale, and it has been painful having stocks
Speaker 1: denominated in the euro unless they were dollar earners. But
Speaker 1: this does present an opportunity because likely the Eurozone will
Speaker 1: go into some sort of pullback as energy becomes scarce,
Speaker 1: particularly this winter, natural gas in particular. But out of
Speaker 1: that is the recovery, especially given them on spending that
Speaker 1: the Eurozone has in mind in order to revitalize their economies,
Speaker 1: and you know, worked for the US, it's likely to
Speaker 1: work for the Eurozone. So there are stocks that companies
Speaker 1: now buying back large portions of their outstanding market cap.
Speaker 1: That's really interesting. You can if they're that confident in
Speaker 1: the future and they know a whole lot more about
Speaker 1: it than we do in terms of their own companies.
Speaker 1: There are a number of European banks. Unit Credit in
Speaker 1: Italy is one example. Not only they buying back four
Speaker 1: percent of their stock, they have a six percent dividend yield,
Speaker 1: that's like twenty payout yield. That's fantastic on on of
Speaker 1: tangible book value. You may think that sounds terrified. Who
Speaker 1: wants to be in Italy right now? There's political uncertainty,
Speaker 1: But that's exactly when you want to buy, because the
Speaker 1: next stage you get back to sixty or seventy percent
Speaker 1: of tangible book and you've doubled your money. And I
Speaker 1: guess I would contrast that you might be seeing great
Speaker 1: opportunities in in specific companies, but when we look at
Speaker 1: Europe overall from from our perspective, we are still bearished.
Speaker 1: Now there might be a timing element, Sarah, between what
Speaker 1: you're saying and I'm saying, but um, I agree that
Speaker 1: they're doing some fiscal stimulus. I think with the potential
Speaker 1: for them to lose more energy supply in the winter,
Speaker 1: it will be important to see if the governments take
Speaker 1: those losses off the companies and onto the government balance sheets,
Speaker 1: just like we saw the US do for some US
Speaker 1: companies during COVID, Will Europe do that as well? That
Speaker 1: would certainly be a positive for European equities if that
Speaker 1: move happens. In the absence of that, I do think
Speaker 1: you have to reckon with the e c V tightening
Speaker 1: and what is an incredibly challenging environment, so the European
Speaker 1: Central Bank slowing growth even worse than what we're seeing
Speaker 1: in the United States so far, and very high multidecade
Speaker 1: high inflation. So they're stuff between a rock and a
Speaker 1: hard place. And you mentioned Italy. You know, look, Italy
Speaker 1: tends to go through governments roughly every eighteen months going
Speaker 1: back to World War Two, so this is not that unusual. However,
Speaker 1: Italy right now desperately needs these fiscal transfers from the
Speaker 1: European Union. And if this this government, which isn't as
Speaker 1: cohesive today, is unable to pass reforms the fiscal tap
Speaker 1: gets turned off. And if the fiscal tap gets turned
Speaker 1: off while the ECB is tightening, I think European equities
Speaker 1: are really going to struggle. Thank you so very much.
Speaker 1: Rebecca Patterson of Bridgewater and Sarah Header of Causeway Capital.
Speaker 1: Coming up, we have a Supreme Court taking a different
Speaker 1: direction on a wide range of issues. But what could
Speaker 1: it mean for the markets and for that matter, deals,
Speaker 1: We asked Ken Jacobs of Lazard Prayer. That's next on
Speaker 1: Wall Street Week on Bloomberg. The Supreme Court is rocking
Speaker 1: the boat for us all. In an historic term, the
Speaker 1: Court managed to turn the heat up on just about
Speaker 1: everything it touched. From its overturning Row versus Wade, the
Speaker 1: health and life of women in this nation are now
Speaker 1: at risk. It will save the lives of millions of children,
Speaker 1: and it will give families hope. To its permitting concealed
Speaker 1: weapons unquestionably the biggest Second Amendment ruling in more than
Speaker 1: a dead kid from this court to it's telling the
Speaker 1: e p A to back off on regulating power plants.
Speaker 1: The U. S. Supreme Court has restricted the Environmental Protection
Speaker 1: Agencies authority to curb greenhouse gases from power plants. The
Speaker 1: debate continues on the wisdom of all these decisions, but
Speaker 1: taken together, they raised important questions for business and the markets,
Speaker 1: questions about how the rule of law that underpins our
Speaker 1: entire system will work under this new court, with some
Speaker 1: like Senator Deportment of Ohio saying, it's just an appropriate
Speaker 1: reminder that the power ultimately remains with the Congress, not
Speaker 1: the regulators, not to Supreme Court. Was was essentially saying,
Speaker 1: is that, wait a minute, We've got to be sure
Speaker 1: that the Congress, which is the representative of the people, uh,
Speaker 1: you know, has has the final say. Well, Critics like
Speaker 1: Larry Tribes say the Court has abandoned principle in favor
Speaker 1: of personality. Strikes me as profoundly unprincipled, because the Supreme
Speaker 1: Court has long said that decisions of durability should not
Speaker 1: be overruled in the absence of some extraordinary change other
Speaker 1: than the mere personnel of the Court. And to tell
Speaker 1: us whether there might really be a connection between what
Speaker 1: the Supreme Court is during the one hand, and the
Speaker 1: business world and the other, We're welcome a true leader
Speaker 1: in the business world. He is the chairman and CEO
Speaker 1: of Lazar For he is Ken Jacobs Ken great to
Speaker 1: have you back on. So we tend to think of
Speaker 1: things like abortion and social issues and the Supreme Court
Speaker 1: and even some of the regulary issues as more in
Speaker 1: the zone of politics or even political philosophy. Can they
Speaker 1: affect the business world as well? Yes. So when you
Speaker 1: step back and you think about the United States, US
Speaker 1: has a handful of really true competitive advantages. One is
Speaker 1: um rule of law, a second is demographics uh, and
Speaker 1: a third is UH one market and by one market,
Speaker 1: where we're market of three million people with essentially one
Speaker 1: set of rules. So when a company goes to do
Speaker 1: business in the United States, by and large, it's it's
Speaker 1: one set of rules for the whole country. And what
Speaker 1: the Supreme Court is doing is essentially saying, look, Uh,
Speaker 1: the administrative state has become unwieldy. Uh, it's taken on
Speaker 1: too much responsibility. Uh. Congress really should do a better
Speaker 1: job of writing laws more specifically, and we're gonna start
Speaker 1: to whittle back some of the things that the administrative
Speaker 1: is doing. Well. On paper, that sounds great, I mean,
Speaker 1: perhaps will be less regulation, maybe the laws will be clearer,
Speaker 1: better written, But the reality is Congress is rife with polarization,
Speaker 1: it's difficult to get anything done without a supermajority. So
Speaker 1: the reality is that there's a vacuum. And so we're
Speaker 1: going from a from from a place where we have
Speaker 1: a clear sense. We may not like all the regulation,
Speaker 1: but we have a clear sense of the rules to
Speaker 1: a place where the rules are uncertain, and increasingly the
Speaker 1: states are stepping in and making decisions on many of
Speaker 1: these rules. And what's ending up happening is is gonna
Speaker 1: end up with multiple rules with multiple states and candid league,
Speaker 1: probably written by by groups or people that aren't as
Speaker 1: competent as exists in Congress. And that's worrisome. Take us
Speaker 1: into your business specifically, you've got a very large advisory business.
Speaker 1: You've also got a big asset management business. How do
Speaker 1: those challenges was perhaps a very diffuse set of rules
Speaker 1: and regulations laws? How could it potentially affect your bot's
Speaker 1: take asset management as an example, that's probably the easier
Speaker 1: one of the two to see the impact. So you
Speaker 1: have a state that essentially says, look, we don't want
Speaker 1: to hire an asset manager that is worried about climate,
Speaker 1: and so they will restrict uh the ability of a
Speaker 1: state pension fund to invest in that manager. Another state
Speaker 1: may say, you know what, we will only invest in
Speaker 1: managers that take into account climate. Now, if it's a
Speaker 1: small state with very little population and very little um
Speaker 1: assets under management in there's a pension funds, maybe it
Speaker 1: doesn't matter that much. But when we start having big
Speaker 1: states dueling on this, it's a real problem. Well, we're
Speaker 1: starting to see its like Texas and Florida and California,
Speaker 1: New York just to pick four. I seem to have
Speaker 1: different added to destroy these things. Are you seeing infect
Speaker 1: your business so far? Is this more on the horizon?
Speaker 1: It's I would say it's on the horizon, but it's
Speaker 1: worrisome and you sort of think about it. You have
Speaker 1: an industry like insurance, which has fifty different regulators in
Speaker 1: fifty different states. That's a complex industry. But that's a
Speaker 1: real exception in the U. S economy. Most of the U.
Speaker 1: S economy is dominated by company or driven by companies
Speaker 1: that are able to operate in all fifty states without
Speaker 1: a concern, And this is something that I think really
Speaker 1: runs the risk of upsetting one of the true competitive
Speaker 1: advantages of the United States. Ken, Thank you so much
Speaker 1: for being here. Really appreciated. As Ken Jacobs, he is
Speaker 1: the chairman and CEO of Lazard for Air coming off,
Speaker 1: we wrap up a week with our special contributor Larry
Speaker 1: Summers of Harvard. That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Wall Street Week. I'm David Weston. We're welcome
Speaker 1: once again our very special contributor Larry Summers of Harvard. So, Larry,
Speaker 1: a lot happened this week, but let's start at the
Speaker 1: end of the week. Was what you told us last
Speaker 1: week was the most important indicator that we should be
Speaker 1: looking at the economy, and that is the Employment cost Index.
Speaker 1: It came in. It came in above survey. David, We
Speaker 1: we weren't sure what was gonna be happening with wage inflation.
Speaker 1: We hoped that the indications in some of the monthly
Speaker 1: surveys that earnings growth was slowing and that that might
Speaker 1: slow the whole inflation process would materialize. That didn't happen.
Speaker 1: Looks like inflation is running at a pretty stable rate.
Speaker 1: It's still two and a half points at least above
Speaker 1: where it was before this whole episode. Uh. Started. Uh
Speaker 1: depends on just how you look at the figures. But really,
Speaker 1: no evidence of a significant decline. If you look at
Speaker 1: the private sector and you take out benefits, then it's
Speaker 1: going up a bit. If you look at the twelve
Speaker 1: month figure, it's going up a bit. Those may be
Speaker 1: the wrong things to do, so it may be better
Speaker 1: to look at the overall figure. But I think it's
Speaker 1: showing what I've been saying for quite some time now,
Speaker 1: which is that we are in ingrained moderate to high
Speaker 1: inflation economy. Nothing like nine percent inflation is built in,
Speaker 1: but inflation above four looks to be pretty securely built in,
Speaker 1: and if productivity growth doesn't accelerate, it could be UH
Speaker 1: worse than that UH quite easily. So I'm pretty uncomfortable
Speaker 1: with UH the current UH situation, and I think it
Speaker 1: just points to the difficulties that the Fed UH is
Speaker 1: facing going forward and confirms the broad diagnosis that we
Speaker 1: have an overheated economy that's not going to fix itself,
Speaker 1: and therefore we're not likely to get out of this
Speaker 1: excess inflation situation without having a recession. So so there
Speaker 1: you have been steadfast on this program and elsewhere on
Speaker 1: your views about inflation, and yet there's something of a
Speaker 1: debate going on right now behind between on the one hand,
Speaker 1: the markets and then the other hand economists with the
Speaker 1: markets sort of saying, Okay, the Fed will hike for
Speaker 1: a while and then then I'll start backing off next
Speaker 1: year and actually we'll have some reductions. But the economists say, boy,
Speaker 1: the economy doesn't look that way. We're gonna have to
Speaker 1: keep going and keep it pretty high. What do you
Speaker 1: do when you have that kind of debate, You know,
Speaker 1: we'll see what judgment the Feds make makes. Uh. The
Speaker 1: challenge they're gonna have, and it's a agonizing challenge, and
Speaker 1: it's why it would be better if we weren't in
Speaker 1: the kind of configuration we were in, and it would
Speaker 1: be better if we had not overstimulated. Uh. The economy
Speaker 1: last year is that on the one hand, I think
Speaker 1: you are likely to see a significant slowed down in growth,
Speaker 1: you are likely to see recessionary forces developed over the
Speaker 1: next year. And on the other hand, it's going to
Speaker 1: take a lot to get the inflation out of the system.
Speaker 1: The danger, David, is that they don't persevere strongly enough
Speaker 1: in restrictive policy, and that's what gets you a stagflation
Speaker 1: situation where growth slows and you don't beat the inflation
Speaker 1: out of the system. It's like if you don't complete
Speaker 1: your course of antibiotics and then your illness comes back
Speaker 1: and the drugs are bacteria resistant. On the other hand,
Speaker 1: I don't think we can deny that if they do
Speaker 1: what's necessary to contain UH inflation, then it's not going
Speaker 1: to be a happy economic situation over UH some over
Speaker 1: some interval. Secretary Yellen said yesterday that she held out
Speaker 1: the prospect of getting out of this without unemployment UH
Speaker 1: going above UH five. I've got enormous respect for her
Speaker 1: as an economist, but I have to say that statement
Speaker 1: greatly surprised me. It didn't surprise me as much as
Speaker 1: the FED saying we were going to get out of
Speaker 1: this with four point one percent unemployment. But I don't
Speaker 1: see any basis for thinking that either of those statements
Speaker 1: is a reasonable UH prediction given what we know. What
Speaker 1: do you him is due when you put together these
Speaker 1: neutral rates. Look, I think J. Powell said things that
Speaker 1: to be blunts were analytically indefensible. He claimed twice in
Speaker 1: his press conference that the FED was now at the
Speaker 1: neutral interest rate, calling it two and a half. It's
Speaker 1: elementary that the level of the neutral interest rate depends
Speaker 1: upon the inflation rate. We've got on the most quoted measure,
Speaker 1: a nine point one percent inflation measure he extrapolated off
Speaker 1: core or something. It's four or five percent inflation. There
Speaker 1: is no conceivable way that a two and a half
Speaker 1: percent interest rate in an economy inflating like this is
Speaker 1: anywhere near neutral. And if you think it is neutral,
Speaker 1: you are misjudging the posture of policy in a fundament
Speaker 1: mental way. So I was very sorry uh to hear
Speaker 1: him uh say that, and frankly surprised. He said back
Speaker 1: in that the neutral interest rate that FED was approaching
Speaker 1: the neutral interest rate at a time when the inflation
Speaker 1: rate was one point nine percent. How he could be
Speaker 1: saying the same thing today when the inflation rate is
Speaker 1: where it is, is inexplicable, uh to me. And it's
Speaker 1: the same kind of to be blunt, wishful thinking that
Speaker 1: got us into the problems we have now, So Larry,
Speaker 1: in the meantime, we have some legislation coming out of
Speaker 1: Capitol Hill, something perhaps we didn't even expect. We had
Speaker 1: the Chips Act, but now we have this proposed Inflation
Speaker 1: Reduction Act. Last week on this program, and you sent
Speaker 1: a powerful message to people who were saying increasing tax
Speaker 1: is actually might be inflationary. He said, that's really not
Speaker 1: true at all. I suspect one of the people you
Speaker 1: were communicating with, maybe, but Joe mentioned through Wall Street Week.
Speaker 1: I don't want to ask you about what you've said
Speaker 1: specifically Joe mentioned, but give us your reaction to what
Speaker 1: the proposal is now that's come up with respect to
Speaker 1: increasing taxes he has paying for it, but also addressing
Speaker 1: climate I was glad to see the bill. I think
Speaker 1: it's going to reduce the rate of inflation because it's
Speaker 1: going to reduce deficits and demand over time, because it's
Speaker 1: going to use the federal government's power to negotiate lower
Speaker 1: prices for pharmaceuticals, and because it's gonna increase UH supply
Speaker 1: of energy, so demand, supply, pricing power all working to
Speaker 1: reduce inflation. I think it's going to help the environment
Speaker 1: because of the climate change measures. I think it's gonna
Speaker 1: help fairness in our country because of the expansions in
Speaker 1: healthcare available hility. I think it's going to help fairness
Speaker 1: in our country by closing UH some very important tax
Speaker 1: loopholes that allow very profitable companies to avoid paying uh
Speaker 1: any any taxes, Thank you so much. That's our special contributer,
Speaker 1: Larry Summers here on Wall Street week. Of course he's
Speaker 1: from Harvard University. Finally, one more thought, it's the economy, stupid,
Speaker 1: but which economy? There is no end of worrying and
Speaker 1: complaining about the U. S economy these days. From too
Speaker 1: much inflation we certainly see peak inflation coming sometime in
Speaker 1: the second half, to too higher risk of recession. I
Speaker 1: think there many reasons why we're gonna have a severe
Speaker 1: recession and a severe that in financial crisis, to supply
Speaker 1: change that just won't cooperate, fakes the supply chain. Uh.
Speaker 1: These are all things that will be beneficial to the
Speaker 1: country writ large. But through it all, the one thing
Speaker 1: the United States does not seem to lack is jobs.
Speaker 1: Just about twice as many jobs as we have people
Speaker 1: to fill them are still seeing John's added at pretty
Speaker 1: substantial fates, and that robust demand for labor may just
Speaker 1: be the one thing that keeps the wolf of recession
Speaker 1: from our collective door. You got some help, and you
Speaker 1: got some down. You got the job market very strong,
Speaker 1: and yet at the same time you've got GDP growth
Speaker 1: stalling out, and so the FEDS got to figure out
Speaker 1: how hard to step on the break. So as we
Speaker 1: all continue to worry and complain about the US economy,
Speaker 1: and as the markets continue to be buffeted by all
Speaker 1: that worrying and complaining, you've got so many different cross
Speaker 1: currents that are going on and so many different forces
Speaker 1: acting on the market that you have these little mini moments.
Speaker 1: Take a moment to consider the plight of China right now. Yes, China,
Speaker 1: that economic miracle now facing slowing growth and a deeply
Speaker 1: troubled property market. Unfortunately, the private sectors that's what's collapsing
Speaker 1: as far as the eye can see that China is
Speaker 1: going to take a wal to recover, and COVID shutdowns
Speaker 1: that have reaked havoc with companies like Phillips needing in
Speaker 1: puts for overseas markets. The second quarter was impacted by
Speaker 1: a lot of headwinds. You had China lookdown supply issues
Speaker 1: and rising inflation and Elon Musk's Tesla not getting what
Speaker 1: it needs for the China market. Two was a unique
Speaker 1: coute for Tesla to lunch setdown of our Stina factory.
Speaker 1: The past few years that have been quite a few
Speaker 1: of course measures, and it's been it's been kind of
Speaker 1: supply chain hell for several years. Now. You can add
Speaker 1: to China's woes and oversupply of young college graduates. It
Speaker 1: has ten times the number of college graduates that it
Speaker 1: had only ten years ago, and way too many of
Speaker 1: them cannot find jobs, with almost young people unemployed twice
Speaker 1: the rate in the United States. So as those of
Speaker 1: us in the United States complained about too few workers,
Speaker 1: are Chinese counterparts complained about too many. But in the end,
Speaker 1: whichever version of labor issues you have, it does come
Speaker 1: back to James Carville thirty years ago. It's the economy
Speaker 1: stupid that doesn't. For this episode of Wall Street Week,
Speaker 1: I'm David Weston. This is Bloomberg. See you next week.
Speaker 1: M