WEBVTT - Bloomberg Wall Street Week: August 19, 2022 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:07.120 to the markets this week. U S CPI nevers reinforcing 0:00:07.160 --> 0:00:10.639 concerns about inflation. The financial stories that chief are worth 0:00:10.720 --> 0:00:13.760 a really different reaction to markets. More indications of just 0:00:13.960 --> 0:00:16.360 how hot the U. S. Economy really is. Through the 0:00:16.400 --> 0:00:19.799 eyes of the most influential voices Larry Summers, the former 0:00:19.800 --> 0:00:22.800 Streatory Secretary, Katherine Keening, CEO of v n Y mom 0:00:22.960 --> 0:00:26.279 Sam's l Sharmon and founder of Equatic Group Investment. In 0:00:26.320 --> 0:00:30.280 Bloomberg Wall Street Week with David Weston from Bloomberg Radio, 0:00:30.760 --> 0:00:34.840 China slows, the Fed worries and former President Trump strikes back. 0:00:35.360 --> 0:00:39.040 This is Bloomberg Wall Street Week. I'm David Weston, this 0:00:39.080 --> 0:00:42.120 week's special contributor to Larry Summers of Harvard on where 0:00:42.159 --> 0:00:46.360 the housing market is headed. I do think we're looking 0:00:46.560 --> 0:00:52.760 towards softness in the future with respect to housing. And 0:00:52.920 --> 0:00:56.120 Sonya Gibbs of the Institute of International Finance on the 0:00:56.240 --> 0:01:00.920 risk and the opportunity of zombie companies. Money that's being 0:01:00.960 --> 0:01:04.839 spent to keep zombie companies afloat is money that could 0:01:04.880 --> 0:01:21.920 be more productively deployed elsewhere. It was a week of signals, 0:01:22.200 --> 0:01:26.679 some subtle and some not. China sent an unmistakable signal 0:01:26.720 --> 0:01:29.880 that its economy is slowing, something that a ten basis 0:01:29.880 --> 0:01:33.800 point rate cut doesn't seem likely to fix. President she 0:01:34.080 --> 0:01:37.119 is confronting a number of both, you know, short term 0:01:37.160 --> 0:01:40.720 and long term challenges right now, and probably the number 0:01:40.720 --> 0:01:43.920 one thing is the poor performance of the economy. While 0:01:44.000 --> 0:01:46.920 former President Trump kept up his attack on Republicans who 0:01:46.959 --> 0:01:50.600 supported his impeachment, so Congressman Liz Cheney of Wyalming said 0:01:50.640 --> 0:01:54.240 she wouldn't stop even after she was soundly beaten in 0:01:54.320 --> 0:01:58.600 her primary. I have said since January six that I 0:01:58.600 --> 0:02:01.600 will do whatever it takes to ensure Donald Trump is 0:02:01.680 --> 0:02:04.960 never again anywhere near the Oval Office, and I mean it. 0:02:06.040 --> 0:02:09.200 And there was nothing subtle about the inflation signal we 0:02:09.280 --> 0:02:11.840 got out of Great Britain, coming in over ten percent 0:02:12.280 --> 0:02:16.240 and apparently headed even higher. I'd go to the UK way. 0:02:16.240 --> 0:02:19.919 You're seeing an explosive move higher in UK guilt yields 0:02:20.120 --> 0:02:21.800 tom and I don't think I'm o a divnt us 0:02:21.840 --> 0:02:24.600 in that language. But the Fed, well, the FED was 0:02:24.639 --> 0:02:27.440 a little less clear in the minutes from its July meeting, 0:02:27.680 --> 0:02:30.519 with the nuance balancing of the concern over timing too 0:02:30.600 --> 0:02:36.280 much and concern over inflation expectations becoming entrenched. Reading the minutes, 0:02:36.360 --> 0:02:38.600 you have to feel that this is a sort of 0:02:38.600 --> 0:02:42.160 a dovish lead, and it supports Chairman J. Powell's tone 0:02:42.440 --> 0:02:46.680 at the news conference following the June meeting. Beneficials noted 0:02:46.760 --> 0:02:49.760 that some parts of the economy, notably housing, we're starting 0:02:49.760 --> 0:02:54.520 to slow as a result of higher interest rates. And 0:02:54.600 --> 0:02:56.720 if you wanted confirmation of just how I'm big, as 0:02:56.720 --> 0:02:58.720 those Fed minutes were, just take a look at the 0:02:58.760 --> 0:03:01.960 markets this week, with the some shooting up on Tuesday, 0:03:02.160 --> 0:03:05.200 when we'll fall back down to earth and beyond on Friday, 0:03:05.360 --> 0:03:08.720 ending the week down one point two eight and the 0:03:08.840 --> 0:03:12.560 NASDAC was even worse again, climbing nicely earlier in the week, 0:03:12.639 --> 0:03:15.440 only to plunge on Friday, ending up down two point 0:03:15.520 --> 0:03:18.840 six percent. Helped, no doubt, by concern about bonds, with 0:03:18.960 --> 0:03:22.080 the yield on the ten year rising fourteen basis points 0:03:22.120 --> 0:03:24.640 for the week and ending up just under three percent 0:03:24.919 --> 0:03:27.600 at two point nine seven. To help us understand what 0:03:27.639 --> 0:03:29.680 the markets may be trying to tell us, Welcome now, 0:03:29.720 --> 0:03:33.200 Bob Prince. He's co Chief Investment Officers for Bridgewater Associates 0:03:33.320 --> 0:03:35.440 and Ed Hyman, Chair of ever Cores I s I 0:03:35.600 --> 0:03:38.160 and Vice chair of ever Core Partners. So welcome both 0:03:38.200 --> 0:03:40.120 of you back to Walster. We gets really a pleasure 0:03:40.120 --> 0:03:41.800 to have you. And let me start with you. You 0:03:41.840 --> 0:03:43.920 follow the economy and what's going on with the economy. 0:03:44.040 --> 0:03:46.360 We've talked about the markets, We've talked about the FED. 0:03:46.800 --> 0:03:50.520 What's the economy telling us? Well, the economy has two 0:03:50.520 --> 0:03:54.080 parts to it. Obviously, one part is what real GDP 0:03:54.320 --> 0:03:58.000 is there auto sales. Then there's inflation, and inflation is 0:03:58.080 --> 0:04:01.200 by far the more important part right now. But on 0:04:01.240 --> 0:04:06.120 the first part, Uh, the economy is doing okay. As 0:04:06.160 --> 0:04:10.240 you know, we survey companies and our retail survey dropped 0:04:10.240 --> 0:04:13.880 sharply this week but still pretty elevated. Housing is really 0:04:13.920 --> 0:04:17.800 getting hit. But on balanced, economy is doing okay. I 0:04:17.800 --> 0:04:22.960 think it's probably growing two or three but headed to one. Uh. 0:04:23.240 --> 0:04:26.080 The recount, I'm sorry, bank bank loans came out this 0:04:26.160 --> 0:04:30.160 afternoon and they're up eleven percent now, Uh, and retail 0:04:30.200 --> 0:04:34.640 sales this week, we're you know, pretty decent on inflation, 0:04:34.680 --> 0:04:39.000 which is much more important. UM, I'm pretty convinced that 0:04:39.040 --> 0:04:43.600 inflation is slowing of oil prices came down. Gasoline prices 0:04:43.640 --> 0:04:49.159 came down, and in the weeds, used car prices dropped 0:04:49.160 --> 0:04:54.480 about three in the latest month. And we survey retailers 0:04:54.520 --> 0:04:58.120 pricing power that's now plunging. You've heard the stories about 0:04:58.160 --> 0:05:01.320 the inventories being high, and we have been tracking that 0:05:01.400 --> 0:05:05.080 for a long time. It's now really coming down. But 0:05:05.160 --> 0:05:07.520 the most important part, and we don't get much data 0:05:07.560 --> 0:05:10.920 on this, or wages, And obviously the labor markets are 0:05:11.000 --> 0:05:14.320 very tight, but they had from the conference board this 0:05:14.360 --> 0:05:19.479 week a measure of CEO confidence was almost a record low, 0:05:20.640 --> 0:05:27.640 and another survey UH that showed of workers were concerned 0:05:27.640 --> 0:05:33.400 about losing their job. Go figure that. Uh. But we 0:05:33.440 --> 0:05:37.160 serve as employment agencies every week UH and ask them, 0:05:37.440 --> 0:05:40.560 among other things, about wage pressure. And that's now pretty 0:05:40.560 --> 0:05:43.520 clearly hooked down. So I think you're beginning to see 0:05:44.000 --> 0:05:47.880 some moderation in wages on top of you know, prices 0:05:47.960 --> 0:05:51.960 now cooling and the economy is cooling. So Bob Ed's 0:05:51.960 --> 0:05:54.880 seas inflation started to come down. The question is how 0:05:54.920 --> 0:05:57.080 fast it's coming down but starting to come down, how 0:05:57.080 --> 0:05:59.000 do you see it? And is it coming down enough 0:05:59.040 --> 0:06:00.919 and fast enough so the FED will not have to 0:06:00.960 --> 0:06:05.520 go much further in rate hikes. It's definitely on the down. 0:06:06.160 --> 0:06:10.040 But the question is where as it settled out, and um, 0:06:10.080 --> 0:06:12.520 and doesn't settle out at the level that the Fed 0:06:12.600 --> 0:06:15.359 expects it too, and that the markets are discounting. The 0:06:15.440 --> 0:06:18.719 markets are discounting two and a half and you know 0:06:18.760 --> 0:06:22.040 we're coming down from six so or higher on the 0:06:22.040 --> 0:06:27.200 core right so, but there are really two big imbalances 0:06:27.240 --> 0:06:30.520 in the economy right now that are need to be 0:06:30.560 --> 0:06:33.800 resolved through this tightening cycle. And we're still in this 0:06:33.960 --> 0:06:37.880 tightening cycle. Um, it's it's too early to really see 0:06:37.920 --> 0:06:40.839 the effects. It hasn't been that long to see the effects, 0:06:40.880 --> 0:06:43.040 and so chances are you're going to get more of 0:06:43.080 --> 0:06:45.960 that weakness as you as you go along. Bob Princeton 0:06:46.120 --> 0:06:48.320 Ed Kimon will be back with us for more Wall 0:06:48.320 --> 0:06:59.919 Street Week after the break. This is Bloomberg Wall Street 0:07:00.040 --> 0:07:10.960 Week with David Weston from Bloomberg Radio. New construction contracts faltered, 0:07:11.000 --> 0:07:15.440 and while unemployment actually went down, more significant was back 0:07:15.480 --> 0:07:20.400 to back monthly declines and paying jobs. The bottom line 0:07:20.440 --> 0:07:23.840 seemed to be that the economy was beginning to move forward, 0:07:24.360 --> 0:07:28.320 but with many a lagging part and overall at a 0:07:28.440 --> 0:07:33.240 pace that would embarrass a tortoise. That was Lewis Rockeys 0:07:33.280 --> 0:07:36.320 around Wall Street week Back in August, when the United 0:07:36.320 --> 0:07:38.680 States had just come off of a relatively mild and 0:07:38.680 --> 0:07:41.560 short recession. The number one song, if you remember, was 0:07:41.600 --> 0:07:44.000 Brian Adams Everything I Do, I Do It for You, 0:07:44.360 --> 0:07:47.800 and the top movie was Terminator to Judgment Day. Still 0:07:47.800 --> 0:07:50.520 with us are Bob Princeton, Bridgewater and Ed Hyman. Of ever, course, 0:07:50.560 --> 0:07:52.400 so it's a bit of a different world today. Bob, 0:07:52.480 --> 0:07:54.520 for example, on the job situation, we still have a 0:07:54.520 --> 0:07:58.600 pretty robust jobs economy. But from everything we discussed before 0:07:58.840 --> 0:08:01.080 about the uncertainty of we are on the tightening cycle, 0:08:01.160 --> 0:08:05.040 what comes next? What is that stage? To an investor, Well, 0:08:05.120 --> 0:08:08.040 right now, we're in an in between stage right now right, 0:08:08.240 --> 0:08:10.320 so you if you, if you go back, just not 0:08:10.360 --> 0:08:13.760 too many months ago, it became evident that we had 0:08:13.800 --> 0:08:16.280 a self sustaining inflation, that there was going to be 0:08:16.320 --> 0:08:19.520 a tightening monetary policy. The markets price that in yields 0:08:19.520 --> 0:08:23.480 went up. You got the tightening of policy. It's still happening. 0:08:24.040 --> 0:08:28.119 It's not over. Uh. Markets got a little bit excited 0:08:28.120 --> 0:08:30.240 about to dip in some of the inflation. They started 0:08:30.200 --> 0:08:34.120 to bite on that yield, but that we've already given 0:08:34.200 --> 0:08:37.200 up half of the yield rise that occurred, and that 0:08:37.240 --> 0:08:39.360 actually means if it needs to do more than if 0:08:39.360 --> 0:08:42.480 the yields had stayed up where they were right, including equity. 0:08:42.600 --> 0:08:46.960 So so we're still in this thing. We're still in 0:08:47.040 --> 0:08:50.640 this tightening cycle. And like I said, there are really 0:08:51.160 --> 0:08:53.000 there's going to be a mixture of three things, and 0:08:53.040 --> 0:08:55.280 you don't know what the mixes yet because it's too 0:08:55.280 --> 0:08:57.240 early to tell, but you're going to get some mixture 0:08:57.240 --> 0:09:01.320 of wheat growth, high inflation, and rising interest rates. The 0:09:01.400 --> 0:09:05.120 more the interest rates rise, the more it's the weak growth. 0:09:06.000 --> 0:09:08.040 The less the interest rate rise, the more it's the 0:09:08.120 --> 0:09:11.520 high inflation because and if the fit takes the foot 0:09:11.520 --> 0:09:14.640 off the brake, you're gonna that inflation improvement is going 0:09:14.679 --> 0:09:16.360 to go away, and they're gonna, you know, and they're 0:09:16.400 --> 0:09:19.880 gonna favor growth. So you don't know which, which which 0:09:20.000 --> 0:09:22.640 how they're going to play it quite yet. So what 0:09:22.720 --> 0:09:24.920 we try to do in this kind of environment is 0:09:26.000 --> 0:09:30.720 maintain some balance, right diversification obviously, don't not too heavily 0:09:30.760 --> 0:09:33.920 committed to any one direction, but also even within the 0:09:33.960 --> 0:09:38.200 equity market, um, you know, structuring equity portfolios that have 0:09:38.320 --> 0:09:42.760 a cash flow and balance sheet base under them, so 0:09:42.840 --> 0:09:46.400 that if you tightening is very aggressive, that there's a 0:09:46.440 --> 0:09:49.240 strong enough balance sheet to hold that up to to 0:09:49.280 --> 0:09:53.480 sustain their their their position in the markets, or uh, 0:09:53.679 --> 0:09:56.760 sustain a positive cash flow. UH. And I think that 0:09:56.800 --> 0:09:59.240 the companies that are you have a lot of debt 0:09:59.280 --> 0:10:03.319 in relation price value or vulnerable profit margins, that sort 0:10:03.360 --> 0:10:06.080 of thing, um, you know, are the are the type 0:10:06.120 --> 0:10:08.679 that are most vulnerable for that environment. So it sounds 0:10:08.679 --> 0:10:11.240 like an awful lot of hinges on the FED. Surprise surprise, 0:10:11.360 --> 0:10:14.640 Jackson Hole coming up next week. Okay, a lot of 0:10:14.679 --> 0:10:16.760 people are gonna pay attention to j pals to say, 0:10:16.760 --> 0:10:18.840 if we remember last year at this he was talking 0:10:18.840 --> 0:10:21.720 about transitory still that doesn't work so well this year. 0:10:22.080 --> 0:10:24.440 So how much guidance can the FED give us about 0:10:24.480 --> 0:10:26.280 exactly where they're heading on some of the questions that 0:10:26.320 --> 0:10:28.360 Bob just talked about, Well, it's hard to hard to know. 0:10:29.360 --> 0:10:32.240 I do think we're going to get a financial crisis 0:10:32.360 --> 0:10:36.440 some queer somewhere pretty soon. It's always been part of 0:10:36.440 --> 0:10:40.640 the of the tightening cycle. But like you point out, David, 0:10:41.000 --> 0:10:45.280 you know, last year it was really about transitory. He 0:10:45.400 --> 0:10:49.080 had five differ you which you went through five different 0:10:49.080 --> 0:10:53.000 things that would prove transitory. And I personally think the 0:10:53.040 --> 0:10:55.640 FED is now on the other side of the wrong foot. 0:10:56.280 --> 0:11:00.200 You know, now they're doing the entrenched and uh, you know, 0:11:00.240 --> 0:11:02.120 a year ago I thought Bonnio could go to five 0:11:02.120 --> 0:11:04.839 percent and FED funds go to five percent, and I'm 0:11:04.880 --> 0:11:07.120 not quite sure what's happened. But you know, money growth 0:11:07.160 --> 0:11:12.319 DIDs slow dramatically, and commity prices have come down dramatically, 0:11:12.880 --> 0:11:15.920 and now I'm saying pricing power coming down. And so 0:11:16.040 --> 0:11:18.439 I think we've made a lot more progress on inflation 0:11:18.679 --> 0:11:21.480 than I expected. And that's why the market was going 0:11:21.559 --> 0:11:26.480 up until today. But that's that's if inflation keeps coming down, uh, 0:11:26.679 --> 0:11:30.400 then the market is gonna appreciate that. So one thing 0:11:30.400 --> 0:11:33.360 I don't understand, Bob, we heard why ED thinks the 0:11:33.400 --> 0:11:35.800 FEDS job maybe it's gotten easier actually with some of 0:11:35.840 --> 0:11:38.640 the things that have happened, But financial conditions actually have 0:11:38.760 --> 0:11:41.920 not tightened. Actually, if anything, that in someone looser that 0:11:41.960 --> 0:11:45.360 makes the FEDS job harder. In recent weeks, yeah, I 0:11:45.360 --> 0:11:47.520 mean the first half, the first half of the year, 0:11:48.080 --> 0:11:50.720 literally the first quarter of the markets were doing the 0:11:50.760 --> 0:11:54.880 fed's job entirely, and then the FED joined in. And 0:11:54.960 --> 0:11:57.240 once the FED joined in and the markets saw some 0:11:57.440 --> 0:12:00.640 you know, positive signs of inflation, you know, they actually 0:12:00.679 --> 0:12:04.120 pulled back, and so bond yields came back down, equity yields, 0:12:04.120 --> 0:12:08.800 you know, came back down. Um. And so you know that, 0:12:08.920 --> 0:12:11.840 as you said, about half of the tightening that the 0:12:11.880 --> 0:12:17.240 markets were applying has been retracted. If if yields had 0:12:17.240 --> 0:12:20.400 stayed where they were, uh, it would be that much 0:12:20.520 --> 0:12:22.520 less that the FED needs to do. But the fact 0:12:22.520 --> 0:12:25.120 that the yields have actually dropped some and kind of 0:12:25.160 --> 0:12:26.960 given back some of the work that they were doing, 0:12:27.000 --> 0:12:30.319 it's that much more that the FED needs to do. Um. 0:12:30.400 --> 0:12:33.840 And so I think you know it's into ed referred 0:12:33.840 --> 0:12:35.920 to the last you know you you you raised it, 0:12:35.960 --> 0:12:37.920 and then you know, we talked about last year's Jackson 0:12:37.960 --> 0:12:44.160 whole speech bit. Um. They were clearly wrong about transitory inflation. 0:12:44.720 --> 0:12:47.120 If you actually look at the indicators that they followed, 0:12:47.160 --> 0:12:51.040 they tend to be lagging indicators. UM. I haven't heard 0:12:51.120 --> 0:12:55.240 yet an explanation about how they think inflation, why they 0:12:55.280 --> 0:12:57.400 think there is an inflation, why they think that that 0:12:57.520 --> 0:13:01.480 was wrong. And I think that that cau caused you 0:13:01.520 --> 0:13:05.559 to question how well this this process is going to 0:13:05.640 --> 0:13:07.920 be managed, just gonna be very tricky. Well, and that's 0:13:07.920 --> 0:13:10.120 a really powerful point. I think. Does the Fed need 0:13:10.160 --> 0:13:12.000 to explain to us what went wrong and why they're 0:13:12.000 --> 0:13:14.000 not going to do a mistake again for us to 0:13:14.000 --> 0:13:16.640 really believe in this time it would be helpful. But 0:13:16.880 --> 0:13:19.720 you know, from my vantage point, as you can see, 0:13:20.760 --> 0:13:24.640 what they missed was that fiscal stimulus, quantitative easing led 0:13:24.679 --> 0:13:27.319 to increase in the money supply, and that did it. 0:13:28.040 --> 0:13:31.360 And if you look back at that Jackson hole, they 0:13:31.400 --> 0:13:35.839 completely missed that. Now money growth is plunging and my 0:13:36.000 --> 0:13:39.320 prices are coming down, all sorts of signs that early signs, 0:13:39.840 --> 0:13:42.679 and so the job not over by any means. Do 0:13:42.720 --> 0:13:45.240 you agree with Ed that in all likely we'll have 0:13:45.280 --> 0:13:47.840 some sort of financial crisis, that that's what happening happens 0:13:47.840 --> 0:13:54.120 in serious tightening cycles. Uh, odds are pretty good. Yeah, yeah, 0:13:54.160 --> 0:13:56.280 I mean we haven't had enough tightening get to really 0:13:56.320 --> 0:13:59.920 have that, But um, odds are good. Yeah. I mean 0:14:00.160 --> 0:14:02.319 we haven't had the downturn yet. If there's gonna be 0:14:02.320 --> 0:14:05.000 a downturn, it hasn't happened yet. It's gonna be hard 0:14:05.040 --> 0:14:08.320 to bring inflation down. How are you going to bring 0:14:08.360 --> 0:14:13.360 nominal spending down from ten percent to five without a 0:14:13.440 --> 0:14:17.160 significant contraction? And credit? You need to slow credit growth 0:14:17.200 --> 0:14:19.400 by about half. Money growth is slowed, but you need 0:14:19.440 --> 0:14:21.680 to slow credit growth in half. But it's still rising. 0:14:22.240 --> 0:14:24.400 You're gonna have to You're gonna have to hold interest 0:14:24.480 --> 0:14:26.960 rates up enough. And that's when things that's when bad 0:14:27.000 --> 0:14:28.720 things happen. I have to tell you this is not 0:14:28.760 --> 0:14:30.080 a bad thing. It's a real treat. They had the 0:14:30.080 --> 0:14:31.640 two of you here on Wall Street. We really thank 0:14:31.640 --> 0:14:34.080 you so much. That is Ed Hyman of Evercourt and 0:14:34.160 --> 0:14:37.960 Bob Prince of Bridgewater coming up. Do you know what 0:14:38.000 --> 0:14:40.800 Warren Buffett says about the tide going out? Well, some 0:14:40.960 --> 0:14:43.200 of those who may be caught are those so called 0:14:43.480 --> 0:14:46.560 zombie companies who've loaded up on debt when it was cheap. 0:14:47.240 --> 0:14:50.400 You talked about the risks and possible opportunities with selling 0:14:50.440 --> 0:14:54.680 your gifts of the Institute for International Finance. That's next 0:14:54.680 --> 0:14:59.560 on Wall Street Week on Bloomberg. This is Bloomberg Wall 0:14:59.640 --> 0:15:11.600 Street Week with David Weston from Bloomberg Radio. It was 0:15:11.720 --> 0:15:14.880 nice while it lasted, all that support from the Fed 0:15:15.240 --> 0:15:18.160 from zero interest rates. We continue to expect it will 0:15:18.160 --> 0:15:21.240 be appropriate to maintain the current zero to one percent 0:15:21.360 --> 0:15:24.080 target range for the Feller Funds rate. To pumping money 0:15:24.160 --> 0:15:28.120 into the economy. More directly, we are deploying these lending 0:15:28.160 --> 0:15:31.960 powers to an unprecedented extent, enabled in large part by 0:15:32.120 --> 0:15:35.040 the financial backing from the Congress and the Treasury. We 0:15:35.080 --> 0:15:38.840 will continue to use these powers forcefully, proactively, and aggressively 0:15:39.120 --> 0:15:41.360 until we're confident that we are solidly on the road 0:15:41.400 --> 0:15:44.240 to recovery. All of which allowed companies to borrow as 0:15:44.360 --> 0:15:47.440 much as they wanted, which was worrying to Russ Kastrick 0:15:47.760 --> 0:15:50.640 of Black Rock as much as four years ago. The 0:15:50.800 --> 0:15:52.960 eight pound guerrilla, which eventually we're all going to have 0:15:53.000 --> 0:15:55.520 to question, is whether or not that's built up in 0:15:55.560 --> 0:15:57.880 corporate leverage which we've seen over the past three or 0:15:57.920 --> 0:16:02.240 four years, is that sustainable. Now those happy days are over, 0:16:02.680 --> 0:16:05.400 as the Fed has reversed course and says it will 0:16:05.480 --> 0:16:09.680 keep raising rates until the inflation dragon is slain. The 0:16:09.720 --> 0:16:13.000 idea that we're going to start cutting rates early next 0:16:13.080 --> 0:16:15.840 year when inflation is very likely going to be well 0:16:15.960 --> 0:16:18.520 well well in excess of our target. I just think 0:16:18.520 --> 0:16:21.120 it's not realistic. Where does that leave all those companies 0:16:21.120 --> 0:16:23.760 who have borrowed so much, Well, at least some of 0:16:23.760 --> 0:16:31.120 them are so called zombies. No, not those zombies, companies 0:16:31.120 --> 0:16:34.200 that don't generate enough cash to pay their debt. And 0:16:34.280 --> 0:16:37.640 that leads economists like Neural Robini to say, we're going 0:16:37.720 --> 0:16:40.800 to see some of them fail, which may just be 0:16:40.960 --> 0:16:43.640 what we needed to get to the other side. There 0:16:43.640 --> 0:16:46.680 are tons of firms that were highly leverage, you didn't 0:16:46.680 --> 0:16:49.880 have much profits, that were zombie that would have gone fast. 0:16:50.000 --> 0:16:53.800 But during COVID we bailed out. Everybody's zero rate, negative rates, 0:16:53.880 --> 0:16:56.280 wants toy easy, credit easy, not that they we have 0:16:56.320 --> 0:17:00.240 to tighten as inflation is higher. The zombe is not 0:17:00.240 --> 0:17:05.960 going too And to thank us to the strange and 0:17:05.960 --> 0:17:09.159 exotic world of zombie companies, we welcome now Sonya Gibbs. 0:17:09.280 --> 0:17:12.919 She's managing director and headed Sustainable Finance at the Institute 0:17:12.960 --> 0:17:15.359 of International Finance. So Sonia, thank you so much for 0:17:15.440 --> 0:17:17.320 joining us on Wall Street Week. Let me start with 0:17:17.359 --> 0:17:20.679 those basic of questions, what exactly is the zombie company 0:17:20.720 --> 0:17:23.800 and how many of them are they're out there? First 0:17:23.800 --> 0:17:25.719 of all, to take a step back, what you need 0:17:25.760 --> 0:17:28.200 to think about is that over the past ten or 0:17:28.280 --> 0:17:33.000 fifteen years, global debt levels have skyrocketed. We've had very 0:17:33.000 --> 0:17:36.920 low interest rates, and for example, non financial corporate debt 0:17:36.960 --> 0:17:40.040 around the world is now close to a of g 0:17:40.160 --> 0:17:43.480 d P and that's more than double what it was 0:17:43.520 --> 0:17:47.320 a decade ago. So that's a very worrying backdrop. And 0:17:47.359 --> 0:17:50.119 so what we mean by zombie companies is a company 0:17:50.200 --> 0:17:55.200 that essentially has to borrow to keep going. They're highly leveraged, 0:17:55.600 --> 0:17:58.239 they're not growing very fast, their revenues are not up 0:17:58.280 --> 0:18:01.320 to power, and at the want they face a very 0:18:01.359 --> 0:18:05.720 difficult situation. You've got higher input costs, so your commodity 0:18:05.840 --> 0:18:09.679 prices are higher, wages are rising. At the same time, 0:18:10.359 --> 0:18:13.480 you don't earn enough revenue to cover all of these 0:18:13.560 --> 0:18:17.360 higher costs and your debt service. So if you have 0:18:17.560 --> 0:18:22.320 a ratio of revenues to interest costs that's one or less. 0:18:22.400 --> 0:18:25.040 If you can barely cover your debt service costs, we 0:18:25.119 --> 0:18:28.080 call you a zombie company. And it's a very good name. 0:18:28.160 --> 0:18:31.520 It's very evocative. And for how many I mean, it's 0:18:31.520 --> 0:18:34.919 difficult to calculate, right, because for a lot of firms that, 0:18:34.960 --> 0:18:38.800 for example, aren't publicly listed, the information might be less available. 0:18:39.080 --> 0:18:43.080 They might be smaller non public companies, but the Federal 0:18:43.119 --> 0:18:47.560 Reserve estimates that between five and ten percent of US 0:18:47.640 --> 0:18:51.440 firms fall into this category. It's also important to remember 0:18:51.720 --> 0:18:55.160 that this is not a static world. It's not once 0:18:55.200 --> 0:18:59.639 a zombie, always a zombie. Conditions change, and in fact, 0:19:00.000 --> 0:19:02.959 coming a zombie company is a little bit cyclical in 0:19:03.000 --> 0:19:06.000 the sense that when times are good, maybe interest rates 0:19:06.000 --> 0:19:09.120 are low, growth is high, maybe you're not a zombie, 0:19:09.800 --> 0:19:13.879 but then you know, bad things happen, pandemics happen, shocks happen, 0:19:14.280 --> 0:19:17.480 interest rates go up, and a company that was formally 0:19:17.880 --> 0:19:22.879 doing reasonably well might suddenly fall into the zombie category. 0:19:23.880 --> 0:19:26.560 So so you mentioned the overall debt load is true 0:19:26.560 --> 0:19:27.840 st in the United States and not just in the 0:19:27.920 --> 0:19:30.479 United States, in part because interest rates are so low. 0:19:30.520 --> 0:19:33.239 There's a very, very successful, healthy companies that loaded up 0:19:33.240 --> 0:19:36.360 on debt because it was so cheap. But whenever we've 0:19:36.359 --> 0:19:38.800 talked about this risk in the last few years, they said, 0:19:38.840 --> 0:19:41.159 don't worry. As long as interest rates are low, we're fine. 0:19:41.480 --> 0:19:43.600 It looks like those days maybe on their way out, 0:19:43.600 --> 0:19:45.520 we're gonna have higher interest rates. So what kind of 0:19:45.560 --> 0:19:48.320 pressures that put on these zombie companies. Well, I think 0:19:48.320 --> 0:19:51.640 it's a good analogy. Right. It's all fine until it's not. 0:19:51.920 --> 0:19:54.320 And so you've had a kind of a confluence of 0:19:54.400 --> 0:19:57.359 factors that have hit pretty much at the same time. 0:19:57.720 --> 0:20:00.960 You had a pandemic which hit growth, had a commodity 0:20:01.000 --> 0:20:04.720 price shock, you have rising inflation, you have higher interest rates, 0:20:05.320 --> 0:20:08.760 and you also have firms whose whose business models, for example, 0:20:08.840 --> 0:20:13.400 have been entirely changed by the pandemic. I mean, amongst 0:20:13.400 --> 0:20:16.000 the list of zombie companies, you might find a company 0:20:16.040 --> 0:20:18.280 like we Work, you know, a company that has been 0:20:18.400 --> 0:20:21.440 very successful, but at the same time the pandemic has 0:20:21.520 --> 0:20:23.760 changed a lot of things for that for that company. 0:20:23.800 --> 0:20:26.680 Carnival Cruise Lines is another good example of a type 0:20:26.680 --> 0:20:29.840 of company who's now in the zombie category. Or some 0:20:29.960 --> 0:20:32.959 of the meme stocks, you know, a mc R game stop. 0:20:33.119 --> 0:20:36.240 So these are really household names. Sonia, thank you so 0:20:36.359 --> 0:20:38.760 much for that tour of the exotic world of zombie 0:20:38.760 --> 0:20:41.520 companies that Sonya gives. She is from the Institute of 0:20:41.640 --> 0:20:45.960 International Finance, plans you to be here. Coming up, we 0:20:46.040 --> 0:20:49.080 wrap up our week with special contributor Larry Summers of Harvard. 0:20:50.840 --> 0:21:00.720 This is Wall Street Week on Bloomberg. This is Walter. 0:21:01.000 --> 0:21:03.000 I'm David Weston. We're gonna wrap up the week once 0:21:03.040 --> 0:21:06.080 again with our special contributer Larry Summers of Harvard. Larry, 0:21:06.119 --> 0:21:08.080 thanks so much for being back with us. So let's 0:21:08.080 --> 0:21:11.119 start with those Fed minutes that everybody was waiting for eagerly, 0:21:11.960 --> 0:21:14.480 and they came out. The markets didn't know quite what 0:21:14.600 --> 0:21:16.240 to do with them. What did you make out of 0:21:16.240 --> 0:21:21.359 those minutes? They confirmed what I suspected, which was that 0:21:21.520 --> 0:21:25.959 the FED doesn't know where it is, that the world 0:21:26.080 --> 0:21:31.359 is very ambiguous at this point, and minutes of a 0:21:31.480 --> 0:21:39.399 meeting are a very poor way to convey a collective message. Look, 0:21:39.440 --> 0:21:44.639 the FED has a fundamental problem about which it is 0:21:45.160 --> 0:21:49.200 not yet willing to be realistic, and that is that 0:21:49.280 --> 0:21:53.600 it is exceedingly unlikely that inflation can be brought down 0:21:53.640 --> 0:21:58.800 to target levels without a substantial increase in unemployment. They 0:21:59.400 --> 0:22:06.399 launt to be very concerned about unemployment and about inflation, 0:22:06.640 --> 0:22:10.359 and the reality is that it's probably not so realistic 0:22:10.440 --> 0:22:13.480 to think that they're going to get inflation all the 0:22:13.520 --> 0:22:19.520 way down without getting unemployment up, and they don't want 0:22:19.560 --> 0:22:25.600 to acknowledge that, and that forces a certain confusion uh 0:22:25.640 --> 0:22:30.879 into all of their UH statements. I can sympathize and 0:22:31.000 --> 0:22:37.080 understand why they don't want to acknowledge that part of 0:22:37.080 --> 0:22:42.040 the problem is they've taken on an excessive obligation UH 0:22:42.080 --> 0:22:46.560 to UH communicate. So I think they're in a very 0:22:46.640 --> 0:22:50.760 very difficult situation. I don't know to what extent they're 0:22:50.760 --> 0:22:54.000 going to choose to take the pain that is ahead 0:22:54.600 --> 0:22:57.639 on the stag side, and to what extent they're going 0:22:57.680 --> 0:23:02.120 to choose to take it on inflation UH side. That 0:23:02.800 --> 0:23:07.679 remains to be seen. I suspect in some ultimate sense 0:23:08.119 --> 0:23:12.880 they don't really know either which way it's going to go. 0:23:13.880 --> 0:23:19.960 It's got to worry them that UH financial conditions are 0:23:20.040 --> 0:23:25.200 now materially looser than they were when the FED last met, 0:23:26.040 --> 0:23:30.080 and when in the middle of a tightening cycle, financial 0:23:30.119 --> 0:23:35.840 conditions are substantially loosening. That has to make a central 0:23:35.880 --> 0:23:40.399 bank UH nervous. David, There's one other aspect of the 0:23:40.480 --> 0:23:45.879 situation that I think is very important and underrecognized, and 0:23:45.960 --> 0:23:50.720 that is because everybody focuses, and focuses rightly on the geopolitics, 0:23:50.800 --> 0:23:54.440 what's happening with Russia and Ukraine, what's happening with droughts, 0:23:54.600 --> 0:23:59.000 all of it. They don't really fully internalized that oil 0:23:59.040 --> 0:24:03.679 prices and wheat prices have both come down substantially and 0:24:03.760 --> 0:24:07.480