Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. U s CPI never's reinforcing
Speaker 1: concerns about inflation. The financial stories that chief are worth
Speaker 1: a really different reaction to Mark. It's more indications of
Speaker 1: just how hot the U. S. Economy really is. Through
Speaker 1: the eyes of the most influential voice of Larry Summers,
Speaker 1: the former Tractor Secretary, Katherine Keening, CEO of the n
Speaker 1: Y Mollins Sam's l Shairman and founder of Equitic Group Investments.
Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Rede
Speaker 1: call it the rescue week, with the President trying to
Speaker 1: rescue buyers at the gas bump, earnings trying to rescue
Speaker 1: troubled markets, and the British government just plane needing a
Speaker 1: rescue period. This is Bloomberg Wall Street Week. I'm David Weston.
Speaker 1: This week special contributor Larry Summers on having to make
Speaker 1: hard choices to get inflation down. If your deficit projection
Speaker 1: starts to get out of control and your real interest
Speaker 1: rates start to rise, you can get into who are
Speaker 1: kind of doom? Loup and Debrael Laire of the Paulson
Speaker 1: Institute on whether President Je's ideology can get China's economy
Speaker 1: growing again. She's facing a lot of headwinds when it
Speaker 1: comes to the economy. It was a tough time on
Speaker 1: Global Wall Street, but nowhere was a tougher than at
Speaker 1: Number ten Downing Street, where Liz trust Is on her
Speaker 1: way to becoming the shortest serving Prime Minister in British history,
Speaker 1: forced to resign after concluding she just couldn't get done
Speaker 1: what she'd set out to do. I cannot deliver the
Speaker 1: mandate on which I was elected by the Conservative Party.
Speaker 1: I have therefore spoken to His Majesty, the King to
Speaker 1: notify him that I am resigning as leader of the
Speaker 1: Conservative Party. It wasn't easy for President Biden either, as
Speaker 1: he continued to fight high gas prices, for which he
Speaker 1: largely blamed the oil companies encountered with yet another release
Speaker 1: from the Strategic Petroleum Reserve. The Department advantage, you release
Speaker 1: another fifteen million barrels from the Strategic Patrolling Reserve, extending
Speaker 1: our previously announced release through the month of December. The
Speaker 1: market spent the week looking for some form of rescue
Speaker 1: from earnings, and they did get a bit of it
Speaker 1: from companies like Netflix with read hastings giving thanks well,
Speaker 1: thank god, we're done with shrinking quarters, so the big
Speaker 1: feeling of we're back to the positivity. But Tesla didn't
Speaker 1: help much by disappointing on sales, though Elon Musk predicted
Speaker 1: it would make it up in the fourth quarter. As
Speaker 1: a factors ran, we're looking forward to a record breaking pupil,
Speaker 1: so it's literally no one would it looks it looks
Speaker 1: like we'll have an happy command of here. And although
Speaker 1: Goldman Sachs earnings were a pleasant surprise, Chief DJ Officer
Speaker 1: David Solomon said they have a fair amount of work
Speaker 1: to do. Importantly, talent is moving around tremendously at Goldman
Speaker 1: Sacks to a lie behind David Solomon's new new vision
Speaker 1: remix the Remix, And at the end of what was
Speaker 1: a wild week, the markets did find similarly finally, with
Speaker 1: the SMP five four point seven four percent for the week,
Speaker 1: while the NASTAC was up five point to two percent,
Speaker 1: and it was all pretty much driven by anticipation of
Speaker 1: where the Fed is heading, as the yield and the
Speaker 1: ten year climbed for much of the week, but after
Speaker 1: peaking over four point three midday and Friday it fell
Speaker 1: to four point two percent to end the week, while
Speaker 1: the two years, well, the two year fell thirteen basis
Speaker 1: points on Friday alone, after speculation grew that the center
Speaker 1: right might just slow its rate hikes after November. To
Speaker 1: take us through the week in the markets, we welcome
Speaker 1: now you're in Timor he's director of Global Macro for
Speaker 1: Fidelity Management, and Sonal Decide c I O for the
Speaker 1: Franklin Templeton Fixed Income Group. Welcome both of you back
Speaker 1: to Wall Street week. Good to have you here. So
Speaker 1: now let me start with you because so much after
Speaker 1: this week I think was driven off of fixed income,
Speaker 1: particularly those treasury rates. So what did we see this again?
Speaker 1: Why were there so many apparently violent moves up and down?
Speaker 1: It was a crazy week, but it's been several crazy weeks.
Speaker 1: I think until the market gets a sense of where
Speaker 1: the Fed is going to go and stop, we're going
Speaker 1: to keep getting these wild bouts of volatility. We've been
Speaker 1: expecting it for a while in a sense, you know,
Speaker 1: there was not that much of news in the Fed
Speaker 1: saying that they're close to being done. Well, of course
Speaker 1: they are. We already know that we're going to get
Speaker 1: up to five, maybe five point two five, maybe a
Speaker 1: bit more, but quite early in the new year, it's
Speaker 1: pretty clear that they will be getting close to an end.
Speaker 1: We get a seventy five, maybe we get another fifty,
Speaker 1: after which do we get another fifty, another twenty five?
Speaker 1: I think the more interesting thing is what happens after that,
Speaker 1: once the market feels that they know that the FED
Speaker 1: is not going to pivot on a dime. I think
Speaker 1: we might get to a point where we stop seeing
Speaker 1: these wild back and forths because these are these are
Speaker 1: truly massive moves in the treasury market. And uh I
Speaker 1: would just note that every single data point is going
Speaker 1: to carry with it this level of gravity in terms
Speaker 1: of the moves that we see until we get to
Speaker 1: the stage that the market buys what the FED is selling.
Speaker 1: And you're in, where are we headed? Where is the
Speaker 1: FED head? Because I look at my Bloomberg right now,
Speaker 1: the FED futures rate looks like it's about five point
Speaker 1: oh five. At one point this we goes up close
Speaker 1: to five point two in terms of a terminal rate. Yeah,
Speaker 1: so when you look at the SOFA curve, it peaks
Speaker 1: it around five percent um and you look at the
Speaker 1: you know, the implied terminal rate. You know, it's around
Speaker 1: the it's around the same. You know, the markets have
Speaker 1: been in a relentless mode of price discovery this year, right,
Speaker 1: and the glass has been half empty for the last
Speaker 1: nine months, where you know, every time we think maybe
Speaker 1: the markets are bottoming and the FED is going to
Speaker 1: be close to being done, that moving target starts to
Speaker 1: starts to move again in the wrong direction. But I
Speaker 1: do think we're we're getting to a more glass half
Speaker 1: full mode. And I think that's what the stock market
Speaker 1: is starting to signal here that you know, at this
Speaker 1: point the expectations for the FED are are so bad
Speaker 1: and meaning they're going to go so far that the
Speaker 1: possibility of a surprise may start to you know, go
Speaker 1: more in our favor. So maybe the fat doesn't have
Speaker 1: to go all the way to five. Maybe it only
Speaker 1: needs to go to four and a half. Uh. You know,
Speaker 1: financial conditions have tightened significantly, so maybe the FED is
Speaker 1: closer to being done than we think. But you know,
Speaker 1: I think the FED is pretty committed to getting inflation
Speaker 1: back towards its target of let's say two two and
Speaker 1: a half percent, and you know, we're a long ways
Speaker 1: from that, and so I think the risk is not
Speaker 1: so much that the FED overshoots or undershoots in the
Speaker 1: near term, but that it's going to take longer to
Speaker 1: get back to a neutral policy after it gets to
Speaker 1: that terminal point. So I'll design your intim we're gonna
Speaker 1: be staying with us as we turn to what investors
Speaker 1: should be doing in these uncertain times. That's going to
Speaker 1: go next on Wall Street Week Unhindered. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. There's
Speaker 1: Governor Reagan now conceived that it would be inflationary if
Speaker 1: we just cut federal taxes and didn't cut federal spending.
Speaker 1: I don't know whether he does or doesn't, but that's
Speaker 1: not his program. His program is in fact too, cut
Speaker 1: taxes significantly ten percent a year over the next three
Speaker 1: years each year, but also to restrain the growth in
Speaker 1: federal spending. That, of course is Lewis Rockaiser talking with
Speaker 1: a pre chairman, Alan Greenspan on Wall Street Week back
Speaker 1: on October eight, back when Alan was simply part of Townsend,
Speaker 1: Greenspan and Company. It was just before Governor Reagan was
Speaker 1: elected president, and the concern back then was about tax
Speaker 1: cuts without spending cuts, something that frankly, we're still talking
Speaker 1: about today. The top movie back then was Goldie Hans,
Speaker 1: Private Benjamin and Woman in Love. Do you remember it?
Speaker 1: By Barbara streisand top the Billboard Hot one chart for
Speaker 1: the week. So where's Arsenal Deci of Franklin Templeton and
Speaker 1: you're in Timber of Fidelity Management. You're gonna start with you.
Speaker 1: What's an investor to do in this environment where we
Speaker 1: do have inflation that seems to be broad maybe entrenched,
Speaker 1: we have a FED that's on the move. What does
Speaker 1: an investor do? What's overpriced? What's underpriced? Well, you know,
Speaker 1: the good news is um in a in a period
Speaker 1: where there isn't very much of it, is that both
Speaker 1: the forty and the sixty side of the sixty paradigm
Speaker 1: I think, are now, you know, really attractively valued. I mean,
Speaker 1: you can get a ten year yield at a ten
Speaker 1: year note at four point to a two year note
Speaker 1: at four and a half. You can buy the SMP
Speaker 1: five hundred at around fifteen sixteen times forward earnings. Now
Speaker 1: that pe is only as good as the forward earnings.
Speaker 1: So we will find out whether the earnings hold so
Speaker 1: far they have, so valuations have had a tremendous reset
Speaker 1: from the overvaluation days, you know, following the COVID lockdown,
Speaker 1: when the FED basically repressed interest rates down to much
Speaker 1: lower levels than they really deserve to be, and that
Speaker 1: raised asset price inflation in the stock market, because again,
Speaker 1: interest rates are an important factor in valuation. And so
Speaker 1: it's been a very painful nine months during which neither
Speaker 1: the forty nor the sixty has worked. That's a very
Speaker 1: unusual environment to be in. But I think, you know,
Speaker 1: the good news is that if the Fed does overshoot,
Speaker 1: I think the forty will really present a lot of
Speaker 1: value at four plus yields, and maybe the forty will
Speaker 1: start becoming negatively correlated again to the sixty. And if
Speaker 1: our recession is averted, then the sixty I think will
Speaker 1: do well because earnings then will likely hold up and
Speaker 1: valuations are now much more reasonable. So for me, the
Speaker 1: glass half full, you know view here is that at
Speaker 1: least one of those two engines is going to start working.
Speaker 1: I can't tell you which one it is, unfortunately, but
Speaker 1: I do think it's not going to be any longer
Speaker 1: this monolithic market where basically nothing works, So now when
Speaker 1: will the bond market be the engine that starts working.
Speaker 1: Our bonds getting cheap enough, now there's time to go
Speaker 1: back in. They're beginning to look interesting. Let's put it
Speaker 1: this way, because if I look at investment grade bonds,
Speaker 1: I look at short short paper. You know, uh, we
Speaker 1: already we just discussed her, and just discussed that. We
Speaker 1: were talking about four point four, four point five. I
Speaker 1: think we're getting getting to interesting levels. We're seeing something
Speaker 1: finally that we haven't seen four again, close to seventeen years.
Speaker 1: Fixed income delivering income what a concept. I think income
Speaker 1: becomes more and more important as we look forward. I
Speaker 1: do think that tenure yields are likely to still go up,
Speaker 1: but having said that, it does start becoming attractive. So
Speaker 1: over the coming weeks and sorry, coming weeks and months,
Speaker 1: I think the first step would be areas like investment grade,
Speaker 1: because you're getting paid healthily to hold good credit, and
Speaker 1: our baseline is not to have a steep recession. We'll
Speaker 1: have a recession, but I think we might be able
Speaker 1: to avoid a steep one, which means that fundamentals can
Speaker 1: still look good. And furthermore, if I look in areas
Speaker 1: like high yield and emerging markets. You we are now
Speaker 1: getting paid between eight and ten percent in these areas,
Speaker 1: which means that finally liquid fixed income starts becoming a
Speaker 1: very decent alternative to alternatives, which up till now have
Speaker 1: really been the only area in the last multiple years
Speaker 1: that could deliver those style of style of return. So
Speaker 1: I actually am also gloss half full at this point
Speaker 1: for the first time in quite a while. Ur in
Speaker 1: just coming back to you and just kind of cash
Speaker 1: for a way of looking at stock valuations as understanding
Speaker 1: in fact you've taught me in fact the FED has
Speaker 1: been buying bonds, but they've also in buying tips. Is
Speaker 1: that skewing that as a measurements? It's it's interesting you
Speaker 1: you you mentioned that because I'm trying to I'm trying
Speaker 1: to figure that out actually in my latest my latest research,
Speaker 1: because the FAT owns thirty three of the Bloomberg Tips index,
Speaker 1: so that may not be all of all tips, so
Speaker 1: the overall number will be less than that um and
Speaker 1: so it makes you wonder whether there's any price signal left.
Speaker 1: But you know, when I compare, for instance, the tips
Speaker 1: break even to the inflation swap market, which is you know,
Speaker 1: a direct swap. I don't really see a tremendous amount
Speaker 1: of price distortion from the FED owning so many tips,
Speaker 1: and of course the FAT owns a bunch of nominals
Speaker 1: as well, so maybe one cancels out the other. So
Speaker 1: I think that the jury is still out. But clearly
Speaker 1: the tips market is saying a different message than the
Speaker 1: headline inflation numbers are, because the tips break evens are
Speaker 1: around two and a half across the curve, and that
Speaker 1: that's that's totally different from an eight CPI's And now
Speaker 1: one more here. Maybe the Bank of Japan has tamed
Speaker 1: the bond market, it sure hasn't tamed the FX market.
Speaker 1: And then on Friday we got that news out of
Speaker 1: Nique at least that they are now intervened to support
Speaker 1: that yen, which a weekend so much we've got the
Speaker 1: b o J next week tell us about that. What
Speaker 1: does that mean? Is the yend broken? So you know,
Speaker 1: what we're seeing is something we haven't seen in a
Speaker 1: very long period of time. We have the EU, Japan,
Speaker 1: and the US all with dramatically different monetary policies, you know,
Speaker 1: So I think about this and when times were good
Speaker 1: to uh misculled Tolstoy. All good markets, functioning markets look
Speaker 1: the same, and all of these markets, as they're breaking,
Speaker 1: they're breaking in different ways. And I think that is
Speaker 1: that could just could. It's never been more apparent than
Speaker 1: what you see in Japan. The reality is the yen
Speaker 1: is moving in line with infrast rate differentials with the US.
Speaker 1: You look at US tenure yields and you look at
Speaker 1: where Japan's YenS and it continues to move. Can the
Speaker 1: Bank of Japan actually be actually can they control the end?
Speaker 1: I have my doubts. You know, they might take some
Speaker 1: of the air out of it, but ultimately this is
Speaker 1: a global system which is very interlinked, and the interest
Speaker 1: rate differential is simply too extreme right now to simply
Speaker 1: intervene to fix it. The other issue, of course, as
Speaker 1: Japan does not have the US, is inflation issue. And
Speaker 1: speaking to the size of the bond market that is
Speaker 1: held the U in the US, you're, depending on what
Speaker 1: the bonds you're looking at the FED ones between twenty
Speaker 1: five and thirty of the bond market, right So it's huge,
Speaker 1: it's a huge impact. It's a great discussion. I really
Speaker 1: owe it to both of you. Thank you so much
Speaker 1: as Sonal Desiah Franklin Templeton, and you're in timor of
Speaker 1: Fidelity Management. Coming up, le we take a look at
Speaker 1: next week on Wall Street Week on Bloomberg seen through
Speaker 1: the eyes of experts gives you a better view. So
Speaker 1: let's talk about the paint's right and that Bloomberg or
Speaker 1: market vision is twenty twenty. I am shocked by the
Speaker 1: moves that we're seeing in the rates market. Bloomberg Radio.
Speaker 1: The Bloomberg business happened, Bloomberg Radio dot com. This is
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: Ten years of remarkable growth. That's what President Jijin Ping
Speaker 1: of China focused on in his speech to the Party
Speaker 1: Congress last Saturday about the historical lives in China's economic constraint.
Speaker 1: In past decade, China's GDP has grown from fifty five
Speaker 1: trilling them to fourteen mmen and come to account for
Speaker 1: eighteen of the world economy. Not a bad track record
Speaker 1: during she's time in office. But if president she had
Speaker 1: been willing to go back to before he was president,
Speaker 1: the story is even more dramatic. Since Dung shaal Ping
Speaker 1: initiated the open door policy in China's economy has gone
Speaker 1: from under one fifty billion dollars to nearly eighteen trillion
Speaker 1: dollars last year. Now that growth is slowing down with
Speaker 1: possible repercussions for the rest of the world. According to
Speaker 1: the head of the w t O, if China's economy
Speaker 1: continues to slow the way we have seen, that will
Speaker 1: have a big impact on what happens to the world
Speaker 1: economy and u S officials like Deputy Treasury Secretary Wally
Speaker 1: Adamo say that the open door isn't as open as
Speaker 1: it used to be. In addition to add resilient supply chains,
Speaker 1: we want to make sure that American companies are competing
Speaker 1: on a level playing field with companies in China and
Speaker 1: around the world, and that's why we've taken actions like
Speaker 1: restraining the ability to shift some key components. But Bridgewater's
Speaker 1: Ray Dalio, who has been back and forth to China
Speaker 1: over the last thirty years, insists that despite all the problems,
Speaker 1: he wouldn't bet against Beijing over the long term. I
Speaker 1: think the longer term victory in China is still bright
Speaker 1: because I know the people and I know the culture,
Speaker 1: and I think it's good. But they have major issues
Speaker 1: now and when it comes to China. The person we
Speaker 1: turned to here at Wall Street Week is Deborah Lair.
Speaker 1: She is the CEO Edelman Global Advisory and executive director
Speaker 1: of the Pulse and Institute. Debor, welcome back, Good to
Speaker 1: have you. We are all focused on President g and
Speaker 1: what's going on over in Beijing this week. Give us
Speaker 1: your sense about what we're learning. It strikes me one
Speaker 1: of the biggest challenges he has is the economy and
Speaker 1: growing the economy. And yet I'm not sure we're hearing
Speaker 1: much about his economic policy. I hear a lot of politics,
Speaker 1: a lot about security. That's right, I mean she didn't.
Speaker 1: He gave his all important work report at the beginning
Speaker 1: of the plantum and it gave up a few previews
Speaker 1: of how he's going to start to look at the economy.
Speaker 1: One of the things that he's emphasizing is common prosperity,
Speaker 1: his slogan about how he brings greater equality. One of
Speaker 1: the things that he's looking at is also how the
Speaker 1: Party can continue to play an important role in the economy.
Speaker 1: And also he did give reassurance to foreign companies that
Speaker 1: they will continue to wish for market opening in Key
Speaker 1: areas well we get a sense from the personnel that
Speaker 1: surround him of where it might be headed, because as
Speaker 1: I understand it, eventually we will see him come out
Speaker 1: from behind the curtain, and we assume everybody assumes that
Speaker 1: he will get his third term, but there's gonna be
Speaker 1: a critical question of who's with him and he comes
Speaker 1: out absolutely the important thing, and we're all watching for
Speaker 1: this weekend when the new party lineup is going to
Speaker 1: be announced. There's a lot of rumors starting to fly around,
Speaker 1: although not as many as there usually are, but it's
Speaker 1: a big guessing game because that will give us really
Speaker 1: our first clue into what the third term is going
Speaker 1: to look like. And I think there's three important things
Speaker 1: to watch. One is going to be what happens to
Speaker 1: Lee Ka Chung, the current premiere. Does he continue to
Speaker 1: stay on the standing committee? He's termed out of staying
Speaker 1: on at the premiere, but could they make him the
Speaker 1: number two and head of the National People's Congress to
Speaker 1: who will be in the lineup too then take the
Speaker 1: premiere position. And the two leading candidates appeared to be
Speaker 1: Wang Yang whose viewed as being more open on the
Speaker 1: economic issues, and Wang Hu Ning, who really isn't ideologue.
Speaker 1: And the third to watch is what happens to Leoja
Speaker 1: who is currently the Vice premier, who's in charge of
Speaker 1: the economy and finance. Does he stay he has good
Speaker 1: relations with many foreign firms, or who really comes in
Speaker 1: to take his portfolio? They were one of the things
Speaker 1: that we watch in the West, and we may be
Speaker 1: right or wrong, and watching it is the extent to
Speaker 1: which the markets in some way play a substantial role
Speaker 1: in economic policy over there. It strikes me that it's
Speaker 1: possible to interpret presidenc Thus far is moving somewhat away
Speaker 1: from the markets. A lot of what do you emphasis
Speaker 1: right now is ideology and I think it's what he
Speaker 1: came out of more than perhaps we've seen in the past. Absolutely,
Speaker 1: we're seeing much more emphasis on ideology um under Shi Jimping,
Speaker 1: and if we look back under Jacksonman, jackson Men was
Speaker 1: saying the party is big enough to include business. She
Speaker 1: takes it in a different way. He says the party
Speaker 1: is all encompassing and it should be forced into business,
Speaker 1: and so ideology is playing a much bigger role. Also,
Speaker 1: we need to keep an eye on how She's favorite
Speaker 1: slogan common prosperity is going to be implemented. China surprisingly
Speaker 1: is actually much more unequal than the United States, and
Speaker 1: one of the things that he's trying to do through
Speaker 1: this common Prosperity uh slogan is say there should be
Speaker 1: a cap on executive salaries. We should be looking at
Speaker 1: big companies, particularly the private sector, giving back to the community.
Speaker 1: And how that's going to be implemented. At the same
Speaker 1: time when he's trying to grow the economy, when he's
Speaker 1: trying to encourage entrepreneurship and create jobs, is going to
Speaker 1: be a very tough thing for him to balance. Okay, Deborah,
Speaker 1: it's always such a pleasure to have you here. You
Speaker 1: are really are are China expert. That's Deborah Lair and
Speaker 1: she CEO of Edelman Global Advisor. Coming up, we'll wrap
Speaker 1: up the week with our special contributor Larry Summers of Harvard.
Speaker 1: This is Wall Street Week on Bloomberg. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. This
Speaker 1: is Wall Street Week. I'm David Weston. We're welcome once again.
Speaker 1: Our very special contributor in Wall Street Week is Professor
Speaker 1: Larry Summers, of course, former Treasury Secretary, So thank you
Speaker 1: so much for being with us, Larry. Once again. Much
Speaker 1: of the week was consumed with the drama over the
Speaker 1: United Kingdom, which is good and serious business for people
Speaker 1: who are living in Great Britain, but what lessons might
Speaker 1: it have for the rest of us. Look at one
Speaker 1: level Bretain. Britain is unique. They went through Brexit, They've
Speaker 1: had some unique political challenges that have taken place within
Speaker 1: their Tory Party. We've rarely seen the kind of extreme
Speaker 1: incompetence that was represented by the original trust proposals. But
Speaker 1: I think there are two lessons that policy makers around
Speaker 1: the world UH need to heed. The first is that
Speaker 1: things can change extraordinarily fast if you lose uh credibility.
Speaker 1: Just as it takes a long time to grow a forest,
Speaker 1: but you can burn it down very quickly. Something similar
Speaker 1: is true with respect to uh credibility and confidence. And
Speaker 1: I think at a time of rising government debts and
Speaker 1: rising interest rates, that's a lesson to be careful that
Speaker 1: policy makers in many different countries need to take account.
Speaker 1: I would say the second, more specific UH lesson just
Speaker 1: goes to the potential instability in government debt markets, and
Speaker 1: that's got both a macroeconomic aspect that if your deficit
Speaker 1: projection starts to get out of UH control and your
Speaker 1: real interest rates UH starts to rise UH rapidly, you
Speaker 1: can get into a kind of doom loop. And it
Speaker 1: also has to do with UH liquidity in the markets
Speaker 1: and the possibility that you'll get a situation where they'll
Speaker 1: be selling but there won't be buying, which will be
Speaker 1: get a kind of liquidation cycle. And I think given
Speaker 1: the magnitude of the increases and interest rates that you're
Speaker 1: seeing in other parts of UH the world, that's something
Speaker 1: that policymakers are going to have to be very careful of.
Speaker 1: I thought Secretary Yellen was right to warn about issues
Speaker 1: around illiquidity in the US treasury markets. I think we're
Speaker 1: gonna need to be watching our own fiscal projections in
Speaker 1: the United States very carefully because I think they're gonna
Speaker 1: look different with current market UH interest rates. If you
Speaker 1: factor in the recession it's likely to come, that's going
Speaker 1: to have some significant effects. If you factor in all
Speaker 1: the different steps that are being taken, whether it's the
Speaker 1: student loan debt relief, for the emergency funding that's going
Speaker 1: to take place because of the hurricane in Florida, or
Speaker 1: the increases in national security expenditures that I think are
Speaker 1: almost inevitable given what's happening in other parts of UH
Speaker 1: the world. I suspect that the fiscal issue is going
Speaker 1: to need sooner or later to be back on the
Speaker 1: table in UH the United States. So I think that
Speaker 1: we can be amused those of us who don't live
Speaker 1: there by some of the things that are happening UH
Speaker 1: in Britain. But if we think of it is an
Speaker 1: experience that's entirely outside of any kinds of concerns that
Speaker 1: other countries could have, that would be a real mistake. Well,
Speaker 1: and Larry, as you say, we have to perhaps pay
Speaker 1: much more attention on the fiscal side, be a bit
Speaker 1: more responsible. That's at the same time that many people
Speaker 1: and you included our warning that we may will be
Speaker 1: heading to our session here in the past several years,
Speaker 1: it's thought that if there's a session, we can just
Speaker 1: write some fiscal checks for it. If we don't have
Speaker 1: the ability that a way it turns out, Liz Trust
Speaker 1: did not have over in the United Kingdom. What does
Speaker 1: that mean of our ability to pull out of it,
Speaker 1: and what is the prospect that when we've had so
Speaker 1: many years of feast, we may be handed for some
Speaker 1: famine on higher interest rates, lower growth, and lower productivity increase. Look, David,
Speaker 1: there's always a tendency UH at the beginning or in
Speaker 1: the early stages of very problematic periods to assume that
Speaker 1: everything is going to be resolved much more quickly than
Speaker 1: actually proves to be the case. Think about COVID. I
Speaker 1: was early on your program and was very worried about COVID,
Speaker 1: but I certainly didn't envision that it would be something
Speaker 1: that would still be on people's minds going into the
Speaker 1: winter of U three. And I think it's a mistake
Speaker 1: to think that all of our economic challenges are going
Speaker 1: to be met quickly, particularly if we heed what I
Speaker 1: think would be the dangerous advice that are coming from
Speaker 1: the erstwhile members of Team Transitory that the FED can
Speaker 1: back off UM already and not carry through on the
Speaker 1: increases that the market is now expecting. I think for
Speaker 1: that to happen would be to almost guarantee a portray
Speaker 1: active period of stagflation, as we had both we lacked
Speaker 1: both price stability UH and UH confidence. I think we
Speaker 1: need to remember that apart from anything we do with
Speaker 1: discretionary policy. We have a whole set of natural stabilizers
Speaker 1: to kick in in our economy. As UH the economy
Speaker 1: goes down, tax collections go down, as unemployment crosses certain thresholds,
Speaker 1: there are increases in unemployment insurance UH payments. But unfortunately,
Speaker 1: I think we fired the fiscal cannon so strongly that
Speaker 1: there's going to be limited room for discretionary fiscal policy
Speaker 1: if we have another recession. Finally, Larry, one of the
Speaker 1: other events of the week was the release of further
Speaker 1: release from the Strategic Patrolling Reserve by President Biden, who
Speaker 1: swears this is not a political issue, but could you
Speaker 1: give us the economic potential effects of that those sorts
Speaker 1: of releases, David, I think the the initial spro release
Speaker 1: was a powerful thing that over the last months has
Speaker 1: done a lot to contain oil prices, and I think
Speaker 1: the Biden administration was exactly right to do it strongly,
Speaker 1: do it for a long time, do it in coordination
Speaker 1: UH with others. I think it's much less clear how
Speaker 1: much scope there is for that policy to work going forward.
Speaker 1: In part that's because it's a little bit like q
Speaker 1: e UH for the FED. Whatever you put out there,
Speaker 1: you're gonna have to get back in at some point
Speaker 1: and that's going to have the opposite uh impact on
Speaker 1: oil prices. Okay, Larry, thank you so much once again
Speaker 1: for joining us on Wall Street week. That's Larry Summers
Speaker 1: of Harvard. Finally one more side, and this week it
Speaker 1: comes from Bloombrook Senior Executive Or for Economics and Government,
Speaker 1: and it's about her native land. Here is Stephanie Flanders.
Speaker 1: I think Liz Trust started off with the right idea,
Speaker 1: which is the UK has been held back by slow
Speaker 1: growth since the global financial crisis of Actually, in the
Speaker 1: in the two decades before two thousand and eight, we'd
Speaker 1: averaged around two and a half percent growth, which was
Speaker 1: higher than many of our trading partners. We sort of
Speaker 1: caught up a bit with Germany, we caught up a
Speaker 1: bit with us during that period, but since then growth
Speaker 1: has been less than half that and certainly much slower
Speaker 1: than other countries. So it did make sense to focus
Speaker 1: on growth, and it made sense to also to be
Speaker 1: spending some money in her initial mini budget on supporting
Speaker 1: households through a massive energy squeeze as we approached the winter.
Speaker 1: I think the problem for financial markets, is that the
Speaker 1: government showed no willingness to engage with the difficult trade
Speaker 1: offs that all governments are facing in this environment where
Speaker 1: they want to stimulate growth, they want to help households
Speaker 1: face rising energy bills, but they don't want to make
Speaker 1: it harder for the central bank to bring down inflation,
Speaker 1: and they don't want to be building up a lot
Speaker 1: of debt just at the time when we know the
Speaker 1: cost of money, the cost of borrowing all around the
Speaker 1: world is going up. So it was not what she did,
Speaker 1: but the way she did it and the kind of
Speaker 1: gay abandoned with which the government was proposing tax cuts
Speaker 1: that were not funded by any form of spending constraint
Speaker 1: and not targeted to the people who in this particular
Speaker 1: environment needed help the most. I think what we also
Speaker 1: saw in the UK there had been this nervousness and
Speaker 1: financial markets that maybe dates back to the Brexit referendum,
Speaker 1: that some of the constraints, the institutional constraints on policymakers
Speaker 1: in the UK that had prevented, you know, silly politicians
Speaker 1: from doing silly things, that those have been worn away
Speaker 1: in the years in the tunnult since since per Exit,
Speaker 1: and I think what happened when you saw the new
Speaker 1: chancellor installed, the seventh since sixteen. You saw potentially those
Speaker 1: institutional constraints come back that the Treasury, the Bank of
Speaker 1: England is still in charge. That's the message to markets,
Speaker 1: even if politicians are still messing around at the edges.
Speaker 1: There's a lot of schadenfreuder potentially, and certainly there but
Speaker 1: for the grace of God go i. Central bankers and
Speaker 1: treasury officials around the world. They are looking at the
Speaker 1: UK and wondering what's happened to this previously great nation.
Speaker 1: But they should also be looking at potential pitfalls that
Speaker 1: they too will face as we go into this environment
Speaker 1: in which interest rates are going to be higher, the
Speaker 1: cost of government borrowing is going to be higher, and
Speaker 1: potentially strains are going to be put on financial markets.
Speaker 1: We saw a particular investment strategy, the liability driven investment
Speaker 1: in the UK, which were which are particular to the
Speaker 1: UK mess up the pension market forced the Bank of
Speaker 1: England to intervene. But we know we saw similar fragility
Speaker 1: in the US treasury market back in March of and
Speaker 1: there may be other things out there that we should
Speaker 1: be nervous about as we see this very significant shift
Speaker 1: to a higher interest rate environment. That does it. For
Speaker 1: this episode of Wall Street Week, I'm David Weston. This
Speaker 1: is Bloomberg. See you next week.