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 cheap 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 voices Larry Summers, the
Speaker 1: former Treker Secretary, Katherine Keating, CEO of d n Y Mollins,
Speaker 1: Sam's l Sharmon and founder of Equatic Group Investment in
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio,
Speaker 1: Inflation easing, China reopening, and Africa waiting. But all anyone
Speaker 1: can talk about is Samuel Bankman Free. This is Bloomberg
Speaker 1: Wall Street Week. I'm David Weston, this week's special contributor
Speaker 1: to Larry Summers of Harvard on easy inflation and whether
Speaker 1: we're on our way to that soft landing. Chairman is
Speaker 1: in about the right place. I think we are in
Speaker 1: better shape than I thought we were. And Rick Reader
Speaker 1: of Black Rocket on the historic opportunity hec in fixed income.
Speaker 1: If I can lock in these yields through a little
Speaker 1: bit longer without having to go out to tens or
Speaker 1: thirties back to me is a sweet spot today. There
Speaker 1: was a lot of news this week for Global Wall Street,
Speaker 1: but we found ourselves spending just about all of our
Speaker 1: time focused on f t X and its former CEO,
Speaker 1: Samuel Bankman Freed as its curren CEO bluntly told Congress
Speaker 1: what had happened. This isn't a sophisticated whatsoever. This is
Speaker 1: just plain old embezzlement. And some members of Congress, like
Speaker 1: Brad Sherman of California, said we should just do away
Speaker 1: with cryptocurrencies altogether. What does cryptocurrency have over the US
Speaker 1: dollar or other major currencies. It's right there in the
Speaker 1: name hidden money. My goal is to say enough is enough.
Speaker 1: It's time to prohibit Americans from investing in cryminal. President
Speaker 1: Biden convened the summit in Washington to deal with Africa,
Speaker 1: with Secretary of State Anthony Blinkin emphasizing cooperation. Partnership is
Speaker 1: at the heart President biden strategy for Africa partnerships between
Speaker 1: the United States and African nations, with the private sector,
Speaker 1: and between our people. But Ian Bremer of Eurasia Group
Speaker 1: said that the United States has to work to catch
Speaker 1: up with China. When it comes to Africa, the Chinese
Speaker 1: invests a lot more, but the African governments want to
Speaker 1: see the money they need the baseline infrastructure. In so far,
Speaker 1: the Chinese have done a lot more on the ground
Speaker 1: to invest. Secretary Granholm announced that the Department of Energy
Speaker 1: had made a major breakthrough in nuclear fusion. This demonstrates
Speaker 1: it can be done. That threshold being crusted allows them
Speaker 1: to start working on the things that are necessary to
Speaker 1: allow it to be modularized and taken to commercial scale.
Speaker 1: And Elon Musk gave up his title as world's richest man,
Speaker 1: at least for now. He's no longer the richest man
Speaker 1: in the world if you look at Tesla stock, specifically
Speaker 1: their market value now falling below five billion dollars. But
Speaker 1: for all the drama, the big news really came from
Speaker 1: the central banks, starting with the Federal Reserve. On Tuesday,
Speaker 1: the Fed got the good news that inflation was slowing
Speaker 1: faster than we had thought. Investors didn't think inflation was
Speaker 1: going to come down as fast as economists were forecasting,
Speaker 1: and now it's coming down even faster. And on Wednesday,
Speaker 1: the Fed responded by saying, well, not so fast. It's good,
Speaker 1: but not good enough to declare victory. The MC raised
Speaker 1: our policy interest rate by a half percentage point. We
Speaker 1: continue to anticipate that ongoing increases will be appropriate. I
Speaker 1: wouldn't see us considering RAID cuts until the Committee is
Speaker 1: confident fit inflation is moving down to two in a
Speaker 1: sustained way. And then on Thursday, the Bank of England
Speaker 1: and the European Central Bank raised their own rates another
Speaker 1: fifty basis points each, with ECB pre Christine Legarde saying
Speaker 1: they won't be taking their foot off the break anytime soon.
Speaker 1: We should expect to raise interest rates at a fifty
Speaker 1: basis points face for a period of time. And the
Speaker 1: markets well, as much as they were encouraged by those
Speaker 1: CPI numbers on Tuesday, they were just that disappointed by
Speaker 1: the fed chairs reaction, as stocks were down again for
Speaker 1: the week, with the SP losing just over two p
Speaker 1: the NASAC off two point seven percent, while the yield
Speaker 1: and the tenure was down just over nine basis points
Speaker 1: to end the week just under three. Take us through
Speaker 1: this combination of economic and market data. Welcome now. Joe
Speaker 1: and Feeney partnered in Advisor's capital management and Sonalda, said
Speaker 1: Franklin Templeton, CEO of Fixed Income. So, Joe, let me
Speaker 1: start with you. Did I detect just a wee tension
Speaker 1: this week between other one hand, the markets and the
Speaker 1: other the Federal Reserve? Yeah, just a little bit, David.
Speaker 1: You know, we've seen this play before. The market gets
Speaker 1: all excited to see a data point and they think,
Speaker 1: okay that that's finally going to ease off or signal
Speaker 1: that'll ease off, and and then we get that bucket
Speaker 1: of cold water. The fact of the matter is there's
Speaker 1: just a lot of work for the Fed to do
Speaker 1: to get back to that two percent targets. And uh,
Speaker 1: you know, they're going to keep rates elevated and continue
Speaker 1: to raise until they have a much clearer and broader signal.
Speaker 1: And one CPI print is not going to convince them
Speaker 1: that the hard work has has been done. There's just
Speaker 1: too much in terms of labor shortages right now driving
Speaker 1: wage growth for them to ease off on this efforts
Speaker 1: to constrain economic activity. So so now the FET has
Speaker 1: been fairly explicit, why doesn't the bond market believe it? So,
Speaker 1: you know, I think that it's a question of what
Speaker 1: your call credibility. Is it credibility, does the FED a
Speaker 1: credibility that's going to fight inflation? Or is it more
Speaker 1: that the market does not believe the FED has credibility
Speaker 1: to stick to the guns in terms of raising rates.
Speaker 1: They're not taking the FED very seriously. Right. We are
Speaker 1: looking at what markets are pricing, both in terms of
Speaker 1: the peak FED funds, right, which is not five certainly
Speaker 1: not between five and five point two five as the
Speaker 1: s EPs are describing. It's below didn't change after Chair
Speaker 1: Powell's uh Q and A. And furthermore, the market still
Speaker 1: pricing and rate cuts by the end of next year.
Speaker 1: We're looking at four thirty five fill FED funds at
Speaker 1: the end of next year. So I think FED is
Speaker 1: FED has a problem. It's got its work cut out
Speaker 1: for it. Markets have been conditioned to actually not believe
Speaker 1: the FED when it says it's going to be really tough.
Speaker 1: So joy and given this disagreement, if I can put
Speaker 1: it that way, what does an investor do? It does
Speaker 1: strike me the bonds are a lot more attractive at
Speaker 1: the end of the year than they were at the beginning.
Speaker 1: I think the year was something like one point eight
Speaker 1: at the beginning. Here and we're up around three point five. Now, yeah,
Speaker 1: there's no question that finally investors can look to bonds
Speaker 1: to really fill an important role in their portfolios. Not
Speaker 1: only are they getting decent incomes off the bonds um
Speaker 1: and that's allowing them to build more balanced portfolios so
Speaker 1: that they can stay in equities to some degree and
Speaker 1: hopefully get that long term appreciation that they need. But
Speaker 1: now they're getting some decent income on the on the
Speaker 1: fixed income style, which is a relief. Right now, real
Speaker 1: yields are negative because inflation is running ahead, but when
Speaker 1: you look to the longer term out you know, two
Speaker 1: three or four years, those real yields now look look
Speaker 1: positive and they're really going to help purchasing power for
Speaker 1: those investors going forward. So now there is a lot
Speaker 1: of volatility though on the bond markets or not there
Speaker 1: really is. There is a lot of volatility, and honestly,
Speaker 1: until we get to a stage where the market is
Speaker 1: market starts buying whatever it is the fat is selling,
Speaker 1: I think we're going to keep seeing these moves which
Speaker 1: are remarkable. If you look at tenure tenure yields, which
Speaker 1: which I think over the month of November went at
Speaker 1: one point from four five all the way down and
Speaker 1: then back copy. We've seen around seventy eight basis points
Speaker 1: of moves up to thirty basis points in literally days,
Speaker 1: twenty basis points in the last few You look at
Speaker 1: these this level of volatility, it's almost too much, far
Speaker 1: too much. And as I look into next year, I
Speaker 1: think it's probably going to be a few months at least,
Speaker 1: maybe a quart or two until we see the FED
Speaker 1: having raised before we see some reduction and volatility. Nonetheless,
Speaker 1: you know, echoing what Joanne said, when you're getting yields
Speaker 1: in areas such as high for example, you're getting as
Speaker 1: much as nine on low dollar price bonds. Certainly there
Speaker 1: are specific bonds, specific areas which look attractive, but I
Speaker 1: don't think I would go wholesale into adding risk. It's
Speaker 1: actually quite a nice time to be low and duration
Speaker 1: and high and quality in the bond market. Well, let
Speaker 1: me pursue that if I could for moments a now,
Speaker 1: and this is the end of the year, So we
Speaker 1: traditionally say, what's your conviction trade going in next year?
Speaker 1: What's your conviction trade given that volatil the bond market?
Speaker 1: Oh no, I think my conviction trade on fixed income
Speaker 1: overall is high. I think I like to stay, like
Speaker 1: I said, relatively short duration, high and quality. I do
Speaker 1: like investment grade, and I think fairly soon into the
Speaker 1: new year, we're going to start very attractive opportunities and
Speaker 1: within the first quatural quarter and a half are going
Speaker 1: to see some good opportunities and risking a segments like
Speaker 1: high yield as well. Emerging markets look very attractive to So, John,
Speaker 1: what about you do you take your incremental dollar and
Speaker 1: put into bonds right now rather than the stocks. Given
Speaker 1: where bonds are, they're much more attractive than they work.
Speaker 1: As you said, you know, we've already seen that happen
Speaker 1: a little bit. But right now, you know, it's not
Speaker 1: that the equity markets are particularly cheap. Volatility has been high.
Speaker 1: The bond yield is certainly more attractive, So we get
Speaker 1: a balanced strategy. You know, at seventy sixty can do
Speaker 1: a lot for for clients, and so that incremental dollar,
Speaker 1: it really depends on the client's horizon. Obviously, a shorter
Speaker 1: Verizon client had better be more in bonds at this point.
Speaker 1: Despite that bond volatility that we're seeing and likely to
Speaker 1: continue to see, and while the stock market isn't particularly
Speaker 1: cheap roughly eighteen times forward earnings, and those earnings likely
Speaker 1: to come down some more. There are still some very
Speaker 1: attractively priced stocks out there, conservative companies that pay a dividend,
Speaker 1: that offer dividends that go up year after year, and
Speaker 1: that's another way of creating income for for investors in
Speaker 1: the short term, even while equities remain a bit of volatile.
Speaker 1: So if you can wait it out, you can get
Speaker 1: both the dividend income perhaps well above the market average
Speaker 1: to ride this out, and then still the position to
Speaker 1: have a portfolio on the equity side that's going to
Speaker 1: really help the portfolio appreciate over the next three to
Speaker 1: five years. Okay, So, so one quick one to you.
Speaker 1: I know you're fixed income, but do you think the
Speaker 1: equity markets have really taken into account the decline and
Speaker 1: earnings is coming. So from my equity colleagues, I hear
Speaker 1: that essentially we're not looking. We haven't seen major earnings
Speaker 1: sound grades now. While I don't expect a major recession
Speaker 1: next year, some slowdown in the second top of next
Speaker 1: year is pretty much a given. So I not sure
Speaker 1: that that earning sound grades have been factored fully. Okay,
Speaker 1: Thank you so very much to Sinalte, Siah Franklin Temple,
Speaker 1: and Joanne Peony of Advisors Capital Management. Coming up, we're
Speaker 1: going to talk with you Rick Reader of black Rock
Speaker 1: about what has already been an eventful year for markets
Speaker 1: and why he sees an historic opportunity to fixed income.
Speaker 1: That's next on Wall Street Week on Bloomberg. This is
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: This is Wall Street Week. I'm David Weston. Two has
Speaker 1: been a year of change, change in the FED and
Speaker 1: other central banks, pulling back support for the economy of
Speaker 1: the markets, changing the stock markets as they adjust to
Speaker 1: the central banks, changing the rate of inflation and the
Speaker 1: underlying economic growth. Take us through what we have seen
Speaker 1: so far this year and to look forward to what
Speaker 1: may come next year. Welcome back, Rick Riager. He is
Speaker 1: black Rock ce IO of Global Fixed Income and head
Speaker 1: of Global Asset Allocation. Rick, welcome back. First of all,
Speaker 1: the big news on Global Wall Street this week was
Speaker 1: you got a promotion. You're on the Global Executive Community
Speaker 1: A black congratulations, sir. I appreciate that, Thank you very much.
Speaker 1: A lot more stripes and epulots, so so talk to
Speaker 1: us about the change we've seen, because there has been
Speaker 1: a lot. If you look back to where we were
Speaker 1: January one of this year where we are now, it's
Speaker 1: really different, for example, from zero to three point seven
Speaker 1: five percent, even higher than that four point on the FED.
Speaker 1: Pretty incredible. Actually, when you go through I've been doing
Speaker 1: this almost thirty six years and you say, what were
Speaker 1: the years that were you had this sort of changed.
Speaker 1: Two thousand and eight maybe still the biggest, but this
Speaker 1: ranks right up in there at the top. And think
Speaker 1: about we came into the year in March the FED
Speaker 1: was still doing que and had the funds rated zero.
Speaker 1: Now we've priced the funds rate at about five as
Speaker 1: a terminal. I mean, that's pretty I mean, that's pretty extraordinary.
Speaker 1: And a year that you've never seen, nobody's ever seen,
Speaker 1: even in my long tenure in the industry, where the
Speaker 1: bondmark in the stock market all traded down, so your hedges,
Speaker 1: how you did portfolio allocation change, the leadership in the
Speaker 1: UK and all of the pension system dynamic that a
Speaker 1: war that you know, who thought that we'd go through
Speaker 1: a deglobalization process and the impact that has on inflation,
Speaker 1: impact on fuel cost, food costs. I mean, this is extraordinary,
Speaker 1: and I mean, by the way, did think about that
Speaker 1: and emergence from COVID, not emergence from COVID, Now do
Speaker 1: we start to grow? I mean, it's it's pretty extraordinary.
Speaker 1: It felt like five years wrapped into one. So the
Speaker 1: economy is absorbed a surprising amount. Actually, if you think
Speaker 1: about what's happened here, uh candidate absorbed what's going on
Speaker 1: right now? I mean, what are your prospects for as
Speaker 1: a so called soft landing at this point, Soda? But
Speaker 1: I think people underestimate how flexible, adaptive, innovative, particularly the
Speaker 1: U S economy is harder in emerging markets. You saw
Speaker 1: a year where a dollar appreciated. Emerging markets come under stress.
Speaker 1: But I think people underestimate how darn flexible, and you're
Speaker 1: seeing it play out in the US economy. Think about
Speaker 1: when we emerge from COVID. All of a sudden, people
Speaker 1: needed a TV, electronics, furniture, massive goods grow and you
Speaker 1: saw jobs moving into the good sector. Then people had
Speaker 1: had already gotten what they need to get. They didn't
Speaker 1: need another computer or TV. Now you shift to the
Speaker 1: service sector. Growth from the service sector and you're seeing jobs, leisure, restaurants, hospitality,
Speaker 1: healthcare that are now. It's pretty extraordinary. So can the
Speaker 1: economy with stand this? Listen, this is a historic move
Speaker 1: up and interest rates, tightening of liquidity through the balance
Speaker 1: sheet channel. But yes, I think that. I think you
Speaker 1: know what we've talked about in your show. I just
Speaker 1: don't know why. Soft landing is like landing the plane
Speaker 1: on a pin needle. It's you have an economy of
Speaker 1: a savings right, that's still that still in good shape.
Speaker 1: Leverage in the system. I've gone through two thousand two,
Speaker 1: two th eight, we had too much leverage in the
Speaker 1: financial system, consumers, corporates. Leverage is in pretty good shape.
Speaker 1: So the economy has some a series of buffers alongside
Speaker 1: of it. Listen to economy slowing. Could we have a
Speaker 1: shallow recession, for sure? But I think people will underestimated.
Speaker 1: Developed economy, particularly the US, has as much more reflective
Speaker 1: than people give credit to. Can say the economies were resilient.
Speaker 1: How resilient are the markets because you mentioned one of
Speaker 1: the issues that we've talked about before, which is liquidity.
Speaker 1: A lot of liquidity coming out of the markets and
Speaker 1: the markets held up. Are they prepared for what comes next.
Speaker 1: So I'd say the markets are less adaptive and flexible.
Speaker 1: And you know, I learned over my care there's a
Speaker 1: cultural dynamic around markets. People don't like to lose money,
Speaker 1: but not in of course, they don't like to lose money,
Speaker 1: but it's not symmetric to making money. I've always found
Speaker 1: this markets go down five times faster than they go up.
Speaker 1: People like to protect what they've made and don't like
Speaker 1: to lose money. And when people think the prospects they
Speaker 1: could lose more money, markets go down even faster. And
Speaker 1: it's pretty short to me why we witness that. And
Speaker 1: I've always found that people buy on up markets and
Speaker 1: sell on denmarks as they guess can't take the losing
Speaker 1: more money. Now we're at a place today that if
Speaker 1: the FED starts to come off the boil, which I
Speaker 1: think is the case, that now we're talking about rate
Speaker 1: volatility on the risk free rate on interest rates, that's
Speaker 1: going to come down a lot. That gives you know,
Speaker 1: when you there are two components, particularly fixed income at
Speaker 1: any assets, a risk free rate plus your risky rate.
Speaker 1: And we always think about whether it's debt equity, where's
Speaker 1: my wrist free rate, where's my risky rate? But if
Speaker 1: your wrisk free rate is moving all over the place
Speaker 1: and moving higher, you can't value any financial asset that
Speaker 1: If that stabilizes risk premia, term premier comes down, and
Speaker 1: I think it's a really big deals. But are we
Speaker 1: going to have some vall into next year? Yes, I
Speaker 1: just think less than twenty two if if the FED pauses,
Speaker 1: and by the way, the ECB starts to tone up
Speaker 1: a Bank of England, etcetera, well you can talk about
Speaker 1: the FED coming off the boil. Looks like at least
Speaker 1: a're gonna slow down the rate of increases. I'm not
Speaker 1: sure they're going to cut right away, but slow in
Speaker 1: the rate of increases. What do the economic numbers show
Speaker 1: us about that? Because we did get CPI numbers out
Speaker 1: this week that a lot of people reacted to very favorably,
Speaker 1: So it's really encouraging. By the way, we've had head
Speaker 1: fixed before, you know, we had it in the summer,
Speaker 1: would look like Okay, we're on the back side, and
Speaker 1: then all of a sudden it popped up again. I
Speaker 1: don't think it's over around around what is elevated rates
Speaker 1: of inflation? You see it through wage stresses in the system.
Speaker 1: That being said, when we break down the component parts
Speaker 1: of inflation, you think about shelter, you think about food costs,
Speaker 1: use cars, supply chain freight costs are all coming down,
Speaker 1: so you get you you take some comfort in that
Speaker 1: we're on the back side of the elevated inflation. You know,
Speaker 1: we've run some numbers that even if inflation and most
Speaker 1: products stays elevated four to five because of were energy
Speaker 1: is today, because of how much has come to worst
Speaker 1: but worse of where it was, because of house prices,
Speaker 1: shelter coming down, we still get in the high two
Speaker 1: is an inflation by the middle of the year. So
Speaker 1: you can live with that. And as part of why
Speaker 1: I think the FED, if the momentum is moving in
Speaker 1: that direction to a more normalized state, although elevated from history,
Speaker 1: FED can pause. But you've made a critical point. The
Speaker 1: markets a price in the FEDS gonna start easing in
Speaker 1: twenty three. I don't think that's right at all. I
Speaker 1: think the FED is gonna sit with us for a
Speaker 1: while and a restrictive policy. Maybe you'll start not maybe
Speaker 1: I think five you'll start normalizing rates back down again.
Speaker 1: But we're not going there. Yet, so what is generational
Speaker 1: inflection point? You know, I mean, I've said this for
Speaker 1: I'm I've never been more excited coming into a year.
Speaker 1: First of all, twenty two wasn't a lot of fun
Speaker 1: and a lot of the markets. But now when you
Speaker 1: put in perspective where we are. For the last ten years,
Speaker 1: the short end of the Yolker of the one to
Speaker 1: three year portion of the aggregate index, the benchmark for
Speaker 1: fixed income, the average average yield was one point one
Speaker 1: percent one point one eight percent. The last three years
Speaker 1: at one point one percent, we're talking about four and
Speaker 1: a half now. So you've got an opportunity where you
Speaker 1: can in fixed income, you can buy yielding assets and
Speaker 1: you don't have to stress around ill liquid, really deep
Speaker 1: down in leverage loans, really deep down in parts of
Speaker 1: emerging markets. You can build a portfolio investment grade credit,
Speaker 1: some of the triple A parts of credit card finance,
Speaker 1: UH student loan finance, etcetera, and you can create six
Speaker 1: to six and a half. That is we haven't seen that,
Speaker 1: Gosh has been I don't know, I don't got it
Speaker 1: since the eighties and nineties that you've seen those sort
Speaker 1: of yields by buying quality assets. David, that is a
Speaker 1: critical moment without taking a lot of interest rate risk,
Speaker 1: without taking a lot of beta risk, without taking a
Speaker 1: lot of convexity risk. And you think about what does
Speaker 1: that mean for equities? What does that mean for private equity?
Speaker 1: If you can get six ish in high quality assets,
Speaker 1: even a bit higher than that, it means boy, you've
Speaker 1: got to get higher numbers significantly, had to take a
Speaker 1: liquidity risk of volatility cetera. It's a really big deal.
Speaker 1: Money is gonna flow into fixed income as the result
Speaker 1: of it. I want to come back to equity and
Speaker 1: private equally before that duration is a particular duration you're
Speaker 1: looking at, it's more attractive. Yeah, I mean so, you know,
Speaker 1: obviously with the inversion of the yield curve it's been
Speaker 1: you can capture and this is part of the beauty
Speaker 1: of it. You don't have to take a lot of
Speaker 1: interest rate risking and so many times in my career
Speaker 1: you've got to hold go out to the ten year
Speaker 1: part of the thirty year part to get your yield.
Speaker 1: The curves inverted, you can stay in the front end
Speaker 1: if you believe, which I think is right, the FED
Speaker 1: is gonna pause. Um, you get to a place where gosh,
Speaker 1: I'm just gonna try and clip that yield. What we've
Speaker 1: been doing, and I think we've been on talking about
Speaker 1: the show that we've started, stayed short. We've run a
Speaker 1: lot of cash this year. Cash has been our best
Speaker 1: performing asset. Did a lot of you think about the
Speaker 1: financial markets? Now we can go a little bit longer.
Speaker 1: Can you go out to three years? Five years? Because
Speaker 1: the next evolution of the FED will be easy again.
Speaker 1: I don't think it's still twenty three until but if
Speaker 1: I can lock in these yields, go a little bit
Speaker 1: longer without having to go out to tens or thirties.
Speaker 1: Back to me as the sweet spot today, it's always
Speaker 1: such a treat you haven't Wall Street Week, thank you
Speaker 1: so much for being u's Rick reader of black Rock.
Speaker 1: Coming up, we'll go through the week with our special
Speaker 1: contributor Larry Summers of Harvard. That's next on Wall Street
Speaker 1: Week on Bloomberg. This is Bloomberg Wall Street Week with
Speaker 1: David Weston from Bloomberg Radio. Okay, this is Wall Street Week.
Speaker 1: I'm David Weston. I'm joined once again by our very
Speaker 1: special contribute to Wall Street Week. He is Mr Larry
Speaker 1: summers of Harvard. So Larry, welcome back. We have to
Speaker 1: talk about what happened this week before we get to China,
Speaker 1: because last week he told us we're going to get
Speaker 1: to China. But first, what happened this week? We got
Speaker 1: the numbers in the CPI. We've got retail sales numbers,
Speaker 1: and they tend to indicate that maybe inflation is not
Speaker 1: quite so bad. And then we heard from chair Powell,
Speaker 1: and he got up and said his mind doesn't change.
Speaker 1: Was your mind changed as you looked at these numbers?
Speaker 1: Do you think maybe we're a little better shape than
Speaker 1: thought we were. Yeah, look, I think we are in
Speaker 1: better shape than I thought we were. But I think
Speaker 1: Powell is the Chairman is in about the right place.
Speaker 1: He's recognizing that we can't forecast the economy with precision.
Speaker 1: He's recognizing that it would be a terrible error if
Speaker 1: we were to fail to stop inflation. In this episode,
Speaker 1: he's rejecting the talk about this being a moment to
Speaker 1: change the inflation target, and he's maintaining substantial flexibility with
Speaker 1: respect to the future. I think that is broadly, uh,
Speaker 1: the right place for him to be. But I think
Speaker 1: we've got a very difficult challenge ahead of us, because
Speaker 1: I think the old adage about things take longer to
Speaker 1: happen than you think they will, and then they happen
Speaker 1: faster than you thought they could is really operating. With
Speaker 1: respect to the forecasted UH recession. It does look like
Speaker 1: it's pushed back a bit in time, but there are
Speaker 1: reasons to think, and this is what makes the chairman's
Speaker 1: job so hard, that the economy could have a kind
Speaker 1: of widely coyote UH moment that recession induced slow earnings
Speaker 1: could pop into focus for stock market investors, with adverse
Speaker 1: consequences for the market, that consumers could deplete their horde
Speaker 1: of post COVID savings, That there's growing reason to think
Speaker 1: that many businesses are holding on to workers because in
Speaker 1: this labor short economy, they're afraid that if they were,
Speaker 1: if they fire them or they let them go, they
Speaker 1: won't be able to replace them. If that last thing
Speaker 1: is true, then it could all of a sudden change
Speaker 1: very dramatically, if labor markets starts to loosen. So I
Speaker 1: think the broad picture is where it was. I've been
Speaker 1: gratified to see the ways in which the FED has
Speaker 1: caught up, but they've got very challenging judgments UH to
Speaker 1: make going forward, and I think they're in broadly the
Speaker 1: right place. The last thing, though, I would say, is,
Speaker 1: you know, everybody is getting enormously excited about whether the
Speaker 1: dot plot is calling for two increases from here or
Speaker 1: three increases from here. The this is kind of the
Speaker 1: narcissism of small differences. Compared to a year ago or
Speaker 1: a year and a half ago, when the debate was
Speaker 1: three percentage points three hundred basis points off of where
Speaker 1: it where things have turned out to be. We're now
Speaker 1: in a much narrower consensus around UH judgments, and we
Speaker 1: need to appreciate UH that, and it will be great
Speaker 1: if the FED turns out to be highly skillful. Larry,
Speaker 1: you promised last week we would get to China this week,
Speaker 1: So let's talk about China. Last week, we saw the
Speaker 1: COVID zero policy sort of changing. This week we're starting
Speaker 1: to see, at least anecdotally, some of the consequence that
Speaker 1: the reports actually that a lot of China shutting down.
Speaker 1: Some people are saying Beijing is like a ghost town.
Speaker 1: So what potential effect does that have on the rest
Speaker 1: of us, on the U S economy, on the global economy.
Speaker 1: What should our response be. It's extraordinary the way mandatory
Speaker 1: lockdowns are now giving way to voluntary lockdowns, with people
Speaker 1: staying home more than UH they were a few weeks
Speaker 1: ago in China. I think it's gonna be a very
Speaker 1: challenging six weeks ahead of US in China, and it
Speaker 1: will be fascinating to see what that means for UH
Speaker 1: social stability, what kind of political ramifications UH that has,
Speaker 1: And it's likely to be a very painful period for China.
Speaker 1: Two things for US UH to remember in the United States. First,
Speaker 1: even if this works out very badly in China, at
Speaker 1: the end of the day, the Chinese fatality rate from
Speaker 1: COVID will have been half of what it was in
Speaker 1: the United States, and so we need to this any
Speaker 1: strong tendency to be to feeling highly superior UH here. Second, UH,
Speaker 1: precisely because this is burning so out of control, my
Speaker 1: guess is that it's likely, like the fastest burning fires,
Speaker 1: to burn out more quickly rather than more slowly, and
Speaker 1: so I think ironically a consequence of this is probably
Speaker 1: the lead to some upwards revision on Chinese economic forecasts
Speaker 1: beginning next spring, and that's a factor tilting a little
Speaker 1: bit towards higher commodity prices and a little bit more
Speaker 1: inflationary pressure globally. But that's a highly uncertain, uh judgment.
Speaker 1: And of course how all this plays in a broader
Speaker 1: social sense in China will be very very important. Larry,
Speaker 1: last week he brought a longer view with respects of
Speaker 1: chat GBT that artificial intelligence, I will call it phenomenon
Speaker 1: right now. But this week we have yet another development,
Speaker 1: and that is fusion. Where in that Lawrence Livermore lab
Speaker 1: out in northern California, they actually managed to have a
Speaker 1: fusion reaction, whereas I understand, they got more energy out
Speaker 1: than they put into it. So last week, when you're
Speaker 1: talking about AI, you said that had the potential to
Speaker 1: be as significant, perhaps as fire or the wheel. Where
Speaker 1: does this rank? I think not remotely comparable, uh, David,
Speaker 1: And of course I might well turn out to be wrong.
Speaker 1: Here's why, there's a fundamental difference between innovations to give
Speaker 1: mankind the capacity to do things they've never been able
Speaker 1: to do before. On the one hand, that's what AI is,
Speaker 1: and innovations that give mankind the ability to do what
Speaker 1: we've done before forever cheaper. That's what fusion potentially is,
Speaker 1: and the first, like fire and the wheel, are much
Speaker 1: more fundamental than the second, so I'm gratified by the second.
Speaker 1: But my read is that we've got a long long
Speaker 1: way to go before this is available at UH scale,
Speaker 1: and I that the reports UH yesterday, reports this week
Speaker 1: actually reminded me of all the stories you can read
Speaker 1: in the nineteen fifties when the first nuclear fission fission
Speaker 1: UH nuclear reactors were being built about how energy was
Speaker 1: going to no longer be metered because it was gonna
Speaker 1: be so cheap to produce, and it turned out that
Speaker 1: that didn't really work because there were capital costs that
Speaker 1: were transmission that we're all kinds reflege. My suspicion is
Speaker 1: that this is both less fundamental than something like AI
Speaker 1: or quantum computing, and that it is ultimately UH going
Speaker 1: to prove to be quite a long way off. But
Speaker 1: the only thing that's harder than forecasting inflation and unemployment
Speaker 1: is forecasting the long run of UH technology. So I
Speaker 1: sure hope it plays out to be even better than that.
Speaker 1: Kudos to the researchers involved, and it certainly does bear
Speaker 1: out something we've said on this show that if we
Speaker 1: ultimately succeed with respect to climate change. It's more likely
Speaker 1: to be because we find ways to produce clean energy
Speaker 1: cheap than it is because we uh make carbon exp
Speaker 1: really expensive. Thank you so much, Larry, especially Larry Summers.
Speaker 1: Still to come. Maybe we all could use a little
Speaker 1: more nuclear fusion in our lives, or at least someone
Speaker 1: to make sure the energy we're using is worth it.
Speaker 1: That's next on the Wall Street Week, I'm Gloomberg. Finally
Speaker 1: one more thought saving your energy. The world got some
Speaker 1: big news out of the Lawrence Liverwool Labs in northern
Speaker 1: California this week. For the first time ever, scientists have
Speaker 1: managed to create a nuclear fusion reaction that generated more
Speaker 1: energy than it consumed. A fusion reactor on the grid
Speaker 1: would be a complete game changer, and former e p
Speaker 1: A administrator Christine Todd Whitman says it may be a
Speaker 1: step towards saving the entire planet. This is a big
Speaker 1: step forward, and fusion can certainly offer a major major
Speaker 1: tool in the efforts that we need to make to
Speaker 1: address the issue of climate change. But as exciting as
Speaker 1: saving the planet would be, it's also pretty remarkable when
Speaker 1: we find anything at all that gives us more than
Speaker 1: we put into it. Take, for example, the case of
Speaker 1: Elon Musk, and I don't mean just the money and
Speaker 1: effort he's putting into Twitter and whether that will ultimately
Speaker 1: be proved worth it. Remember all the energy his team
Speaker 1: put into showing us that the window on the cyber
Speaker 1: truck just could not be broken. Maybe that was a
Speaker 1: little too hard. That sure didn't give him more than
Speaker 1: he put into it, Or for that matter, those midterm elections.
Speaker 1: Sure we managed to have a national election without an insurrection,
Speaker 1: which counts for something democracy one, because we had massive
Speaker 1: turnout across the country. But it costs billions of dollars
Speaker 1: to do it. Now, don't get me wrong. Free and
Speaker 1: fair elections are the life's blood of a democracy, but
Speaker 1: it is not always clear that they generate more energy
Speaker 1: than they soak up. And this week, the same week
Speaker 1: we made nuclear fusion work, we had one of the
Speaker 1: biggest examples around of something soaking up a whole lot
Speaker 1: of energy and money and not coming close to returning
Speaker 1: what's being put in. I'm telling you, of course, about
Speaker 1: Samuel Bankman frees f t X, backed by so many celebrities.
Speaker 1: Celebrities haven't been isolated or immune to the fallout. Details
Speaker 1: on the sports stars that have been entangled in the
Speaker 1: f t X mess and attracting billions of dollars. More
Speaker 1: than a million customers had funds tied up, and more
Speaker 1: than three billion dollars were owed to fifty creditors. But wait,
Speaker 1: there's more. Because mining for all that cryptocurrency not only
Speaker 1: uses time and money, it also is pretty much a
Speaker 1: black hole soaking up energy, making the entire planet worse off.
Speaker 1: Every transaction that you do takes more resources than the
Speaker 1: transaction you did before. It is fundamentally and intrinsically inefficient,
Speaker 1: and that is a huge energy ust. But maybe if
Speaker 1: we can get that fusion thing going, we can save
Speaker 1: the planet, though it probably comes too late to save
Speaker 1: Mr Bankman Freed. That does it. For this episode of
Speaker 1: Wall Street Week, I'm David Weston. This is Bloomberg. See
Speaker 1: you next week.