1 00:00:00,560 --> 00:00:03,760 Speaker 1: This is Bloomberg Wall Street Week. We turn our attention 2 00:00:03,840 --> 00:00:07,600 Speaker 1: to the markets. This week. Us CPI numbers reinforcing concerns 3 00:00:07,600 --> 00:00:10,800 Speaker 1: about inflation. The financial stories that chief are worth a 4 00:00:10,840 --> 00:00:13,760 Speaker 1: really different reaction to mark its more indications of just 5 00:00:13,960 --> 00:00:16,360 Speaker 1: how hot the U. S economy really is. Through the 6 00:00:16,400 --> 00:00:19,759 Speaker 1: eyes of the most influential voices. Larry Summers, the former 7 00:00:19,800 --> 00:00:22,880 Speaker 1: Tripper Secretary, Katherine Keening, CEO of the n Y Mollins, 8 00:00:22,960 --> 00:00:26,239 Speaker 1: Sam's l Sharman and founder of Equitic Group Investments. In 9 00:00:26,320 --> 00:00:30,280 Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 10 00:00:31,240 --> 00:00:34,400 Speaker 1: Another year and another set of challenges for the markets, 11 00:00:34,600 --> 00:00:38,120 Speaker 1: hopes for the economy, and just playing silliness in the Congress. 12 00:00:38,440 --> 00:00:42,040 Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. This 13 00:00:42,080 --> 00:00:45,000 Speaker 1: week contributors Larry Summers of Harvard on what the jobs 14 00:00:45,040 --> 00:00:48,080 Speaker 1: numbers tell us about the economy and inflation. These were 15 00:00:48,120 --> 00:00:55,880 Speaker 1: good numbers. They showed a strong economy with slowly inflationary pressure. 16 00:00:56,120 --> 00:00:59,360 Speaker 1: And Steve Ratner of will It Advisors on what investors 17 00:00:59,400 --> 00:01:02,920 Speaker 1: to do when there are no sure things. It looks tough, 18 00:01:02,960 --> 00:01:04,920 Speaker 1: but it looks most years, it looks tough. This year 19 00:01:05,000 --> 00:01:20,959 Speaker 1: looks very tough, especially for equities. Global Wall Street started 20 00:01:20,959 --> 00:01:23,479 Speaker 1: a new year this week that in many ways picked 21 00:01:23,520 --> 00:01:25,760 Speaker 1: up just where were the old one left off. President 22 00:01:25,840 --> 00:01:29,199 Speaker 1: Jan Ping of China admitted how tough his country's battle 23 00:01:29,280 --> 00:01:34,080 Speaker 1: has been with COVID. With extraordinary efforts, China has prevailed 24 00:01:34,120 --> 00:01:38,280 Speaker 1: over unprecedented difficulties and challenges, and it has not been 25 00:01:38,280 --> 00:01:41,200 Speaker 1: an easy journey for anyone. We have now entered a 26 00:01:41,240 --> 00:01:45,199 Speaker 1: new phase of COVID response where tough challenges remained, even 27 00:01:45,240 --> 00:01:48,640 Speaker 1: as his government cut back on semiconductor subsidies because of 28 00:01:48,640 --> 00:01:52,680 Speaker 1: its economic challenges. And this is a drastic shift, especially 29 00:01:52,760 --> 00:01:55,640 Speaker 1: when we've seen presidential jam ping and the leadership really 30 00:01:55,680 --> 00:01:58,960 Speaker 1: want that self sufficiency when it comes to that critical technology, 31 00:01:59,040 --> 00:02:02,320 Speaker 1: especially around some conductor. The December Fed Minutes gave a 32 00:02:02,400 --> 00:02:04,560 Speaker 1: sense of just how difficult it is to deal with 33 00:02:04,560 --> 00:02:09,080 Speaker 1: inflation and loose financial conditions. It's a really uh narrow 34 00:02:09,120 --> 00:02:12,760 Speaker 1: needle to thread. Monetary policy is not precision engineering. Even 35 00:02:12,800 --> 00:02:15,840 Speaker 1: as the House of Representatives made a spectacle of itself 36 00:02:15,880 --> 00:02:18,480 Speaker 1: after ballots that went on so long that in the 37 00:02:18,600 --> 00:02:21,720 Speaker 1: end it almost didn't matter who won. The important thing 38 00:02:21,760 --> 00:02:25,079 Speaker 1: was just to get it over with. We have a Congress. 39 00:02:25,080 --> 00:02:29,480 Speaker 1: You can't function. It's just combarrassing. With the greatest nation 40 00:02:29,560 --> 00:02:31,800 Speaker 1: in the world, how can that be? And if all 41 00:02:31,919 --> 00:02:35,400 Speaker 1: that weren't enough, the saga of Samuel Bankman Freed continued. 42 00:02:36,120 --> 00:02:38,880 Speaker 1: Sam Bankman Freed, the founder of the f t X Empire, 43 00:02:39,040 --> 00:02:41,200 Speaker 1: appeared at the Southern District of New York and a 44 00:02:41,240 --> 00:02:45,000 Speaker 1: Manhattan Court in downtown New York City to plead not 45 00:02:45,320 --> 00:02:51,119 Speaker 1: guilty to eight criminal counts that included wire fraud. Then 46 00:02:51,200 --> 00:02:53,520 Speaker 1: on Friday, we got back to business in the new year, 47 00:02:53,600 --> 00:02:56,400 Speaker 1: with the US jobs members coming in much stronger than expected, 48 00:02:56,520 --> 00:02:59,680 Speaker 1: adding two twenty three thousand new jobs are already strong 49 00:02:59,800 --> 00:03:02,080 Speaker 1: late of market and managing to do it, while the 50 00:03:02,120 --> 00:03:04,639 Speaker 1: pace of wage increases came down a bit to four 51 00:03:04,680 --> 00:03:07,880 Speaker 1: point six percent year over year, and the markets responded 52 00:03:07,919 --> 00:03:10,359 Speaker 1: to what they saw as the best of both worlds, 53 00:03:10,560 --> 00:03:13,359 Speaker 1: with the SMP five hundred up one point four over 54 00:03:13,400 --> 00:03:16,320 Speaker 1: the shortened trading week and the NASDACK up just under 55 00:03:16,360 --> 00:03:19,200 Speaker 1: one percent, while bonds they didn't sell off one bit, 56 00:03:19,560 --> 00:03:22,080 Speaker 1: with the ten year yield ending up at three point 57 00:03:22,120 --> 00:03:25,360 Speaker 1: five six down from almost three point nine percent at 58 00:03:25,400 --> 00:03:27,679 Speaker 1: the end of last year. Here to stow it all out, 59 00:03:27,720 --> 00:03:30,800 Speaker 1: for us are Sarah Kettter, CEO of Causeway Capital and 60 00:03:30,880 --> 00:03:35,240 Speaker 1: Jim McDonald Northern Trust Bank, Chief Investment Strategy, So welcome back, 61 00:03:35,440 --> 00:03:37,160 Speaker 1: both of you. It's good to have your gymerally start 62 00:03:37,200 --> 00:03:39,160 Speaker 1: with you. The markets seemed to read a lot into 63 00:03:39,200 --> 00:03:41,360 Speaker 1: these jobs numbers that came out on Friday. There's the 64 00:03:41,400 --> 00:03:43,120 Speaker 1: market right to read that much into it. I think 65 00:03:43,120 --> 00:03:46,160 Speaker 1: it's a little premature to declare victory on either inflation 66 00:03:46,320 --> 00:03:48,320 Speaker 1: or that we're going to achieve a soft landing. The 67 00:03:48,400 --> 00:03:52,280 Speaker 1: numbers were unequivvaally good. The ninth month in a row 68 00:03:52,400 --> 00:03:55,839 Speaker 1: of beating expectations shows that this economy has got more resiliency. 69 00:03:56,280 --> 00:03:58,720 Speaker 1: The three month wage number at up four point one 70 00:03:58,760 --> 00:04:02,680 Speaker 1: percent is edging onto that more acceptable range. But we 71 00:04:02,760 --> 00:04:05,600 Speaker 1: still got a lot of progress to be made, and 72 00:04:05,640 --> 00:04:08,360 Speaker 1: I think the market's over pricing the Fed moving now 73 00:04:08,400 --> 00:04:11,600 Speaker 1: where they've now got forty basis points of cuts priced 74 00:04:11,600 --> 00:04:15,120 Speaker 1: in in three our base cases, the Fed's gonna raised 75 00:04:15,160 --> 00:04:18,040 Speaker 1: around five five and a quarter and stick there for 76 00:04:18,120 --> 00:04:20,640 Speaker 1: at least six to twelve months. We're over reading what 77 00:04:20,680 --> 00:04:22,640 Speaker 1: the Fed might do in reaction to numbers like we 78 00:04:22,680 --> 00:04:25,960 Speaker 1: had on Friday. Possibly it appears at least our team 79 00:04:26,000 --> 00:04:28,479 Speaker 1: feels at every piece of good news seems to be 80 00:04:28,520 --> 00:04:32,640 Speaker 1: offset by some bad news. The recession indicators that are traditional, 81 00:04:32,720 --> 00:04:35,840 Speaker 1: for example, as steeply inverted yield curve are certainly present, 82 00:04:35,880 --> 00:04:38,080 Speaker 1: not just in the U S and other countries as well. 83 00:04:38,720 --> 00:04:42,599 Speaker 1: And then we have this falling commodity prices indicating slowing 84 00:04:42,640 --> 00:04:45,479 Speaker 1: of demands. And then the excess savings that had built 85 00:04:45,560 --> 00:04:49,719 Speaker 1: up during COVID that has been spent down, and we 86 00:04:49,760 --> 00:04:52,719 Speaker 1: have a higher cost of housing in terms of mortgage rates. 87 00:04:52,720 --> 00:04:55,360 Speaker 1: There are so many depressants on the US economy, not 88 00:04:55,520 --> 00:04:58,560 Speaker 1: to mention foreign economies. It's really hard to see our 89 00:04:58,600 --> 00:05:01,360 Speaker 1: way out of this without some type of significant slowing, 90 00:05:01,480 --> 00:05:04,640 Speaker 1: probably a recession. I wonder to your point, Sarah, where 91 00:05:04,640 --> 00:05:06,920 Speaker 1: there's contradictory information. I mean, we had Jolts numbers out 92 00:05:06,960 --> 00:05:08,920 Speaker 1: this week as well that indicated that the gener mareket's 93 00:05:08,960 --> 00:05:11,240 Speaker 1: really quite tight, despite the fact it doesn't look like 94 00:05:11,279 --> 00:05:12,919 Speaker 1: wages are going up quite as high. How do you 95 00:05:12,960 --> 00:05:15,080 Speaker 1: take all the data we're getting and putting together so 96 00:05:15,160 --> 00:05:17,560 Speaker 1: the investor knows where to go? This is quite difficult. 97 00:05:17,640 --> 00:05:21,080 Speaker 1: So from a bottom up perspective, the best path is 98 00:05:21,120 --> 00:05:24,360 Speaker 1: typically to be very diversified and then don't let any 99 00:05:24,480 --> 00:05:27,280 Speaker 1: risks aggregate in any one particular area because it's hard 100 00:05:27,320 --> 00:05:29,280 Speaker 1: to call. Think about where we were a year ago 101 00:05:29,800 --> 00:05:32,000 Speaker 1: when it looked as if we were in a wonderful 102 00:05:32,279 --> 00:05:36,479 Speaker 1: value rally tail wind of everything going well, particularly for 103 00:05:36,520 --> 00:05:40,039 Speaker 1: places like Europe that had been struggling to get through COVID. 104 00:05:40,279 --> 00:05:43,240 Speaker 1: Then we had the Russian invasion of Ukraine. So these 105 00:05:43,240 --> 00:05:46,279 Speaker 1: setbacks occur, and the key is than to be in 106 00:05:46,360 --> 00:05:50,680 Speaker 1: companies with tremendous financial strength who can endure this. David 107 00:05:50,680 --> 00:05:53,600 Speaker 1: I agree. The importance of diversification can't be overstated. If 108 00:05:53,600 --> 00:05:57,039 Speaker 1: you look back at the importance of voting real assets 109 00:05:57,080 --> 00:06:00,560 Speaker 1: and the portfolio was critical really helped perform. If you 110 00:06:00,600 --> 00:06:04,240 Speaker 1: look at three, it's hard to make big geographic calls, 111 00:06:04,560 --> 00:06:08,039 Speaker 1: but we do think that underneath the surface of the markets, 112 00:06:08,080 --> 00:06:12,120 Speaker 1: things like value should still perform well in three. They've 113 00:06:12,160 --> 00:06:16,440 Speaker 1: got significant valuation support still going through this period. Areas 114 00:06:16,480 --> 00:06:19,039 Speaker 1: like high yield bonds are probably a good place to be, 115 00:06:19,440 --> 00:06:21,960 Speaker 1: and cash looks really attractive at a five percent yield 116 00:06:22,000 --> 00:06:23,800 Speaker 1: over the next High yield bonds a good place to 117 00:06:23,800 --> 00:06:25,600 Speaker 1: be right now. Well, we think they give you a 118 00:06:25,640 --> 00:06:29,000 Speaker 1: pretty good protection and a more difficult to economic environment. 119 00:06:29,080 --> 00:06:31,039 Speaker 1: You've got to yield to worst right now at about 120 00:06:31,040 --> 00:06:34,000 Speaker 1: eight point seven percent, and what the market is doing 121 00:06:34,080 --> 00:06:37,560 Speaker 1: is showing real confidence that through the cycle defaults will 122 00:06:37,560 --> 00:06:40,440 Speaker 1: be relatively well managed. In high yield, we think that 123 00:06:40,560 --> 00:06:42,440 Speaker 1: maybe we'll get to a three and a half percent 124 00:06:42,520 --> 00:06:46,160 Speaker 1: de fault rate, but over fifty recovery, so that looks 125 00:06:46,160 --> 00:06:48,440 Speaker 1: at less than a two percent loss rate, and the 126 00:06:48,520 --> 00:06:50,200 Speaker 1: yield to worst at eight point seven that gives you 127 00:06:50,200 --> 00:06:53,320 Speaker 1: a pretty attractive return. And how yield bonds tend to 128 00:06:53,320 --> 00:06:55,720 Speaker 1: have only about a third of the downside risk that 129 00:06:55,800 --> 00:06:59,080 Speaker 1: equities do. So, Sarah Jim, obviously it's cross ass head 130 00:06:59,160 --> 00:07:02,480 Speaker 1: you focus more equities. What about any equities area, possibly 131 00:07:02,520 --> 00:07:05,400 Speaker 1: for overall markets? After all, in particularly the US market 132 00:07:05,480 --> 00:07:09,080 Speaker 1: is delivered massive returns will in excess of what is 133 00:07:09,320 --> 00:07:13,800 Speaker 1: typical the the risk free rate plus an equity risk premium, 134 00:07:13,800 --> 00:07:16,640 Speaker 1: and the US returns of less ten years have been 135 00:07:16,680 --> 00:07:21,560 Speaker 1: double digit percentage per annum. That's quite something. Let's just 136 00:07:21,600 --> 00:07:25,440 Speaker 1: say we have more downward pressure on multiples. The key then, 137 00:07:25,640 --> 00:07:28,640 Speaker 1: and I'll sort of coincide with Jim's remarksis get income 138 00:07:29,000 --> 00:07:33,080 Speaker 1: and a number of great companies listed globally or paying 139 00:07:33,120 --> 00:07:36,600 Speaker 1: investors today. And that's really if all power went out 140 00:07:36,600 --> 00:07:38,640 Speaker 1: in the show was over, I would just leave one message, 141 00:07:38,640 --> 00:07:42,320 Speaker 1: which is get that income soon, lower the duration of 142 00:07:42,360 --> 00:07:45,400 Speaker 1: your holding, because that's in that environment where there's a 143 00:07:45,480 --> 00:07:49,280 Speaker 1: real cost of capital is a great strategy. So obviously 144 00:07:49,400 --> 00:07:52,240 Speaker 1: US equities have been valued more richly than for example, 145 00:07:52,240 --> 00:07:55,040 Speaker 1: European equities. Do we do you expect actually that will 146 00:07:55,080 --> 00:07:59,080 Speaker 1: come in likely and maybe not in part due to 147 00:07:59,120 --> 00:08:03,280 Speaker 1: the kneed multiple compression that we're experiencing in the US market. 148 00:08:03,360 --> 00:08:06,160 Speaker 1: That should continue as long as there on a path 149 00:08:06,240 --> 00:08:09,960 Speaker 1: the rising real interest rates. After all, everything is different now. 150 00:08:10,400 --> 00:08:12,920 Speaker 1: The era of free money is over, and we don't 151 00:08:13,000 --> 00:08:16,840 Speaker 1: have a fit put any longer, nor do we have 152 00:08:16,880 --> 00:08:19,640 Speaker 1: other central banks. They are they are reducing their balance 153 00:08:19,640 --> 00:08:22,960 Speaker 1: she's are taking liquidity out of the market, and fiscal 154 00:08:23,000 --> 00:08:25,560 Speaker 1: spending is very much constrained by inflation. In fact, that 155 00:08:25,680 --> 00:08:28,360 Speaker 1: both monetary and fiscal or constrained by inflation. And as 156 00:08:28,400 --> 00:08:30,960 Speaker 1: a result, now it's just all we have is earnings. 157 00:08:31,000 --> 00:08:34,559 Speaker 1: The liquidity part of the the propellant to markets is 158 00:08:34,920 --> 00:08:39,080 Speaker 1: likely to be very muted for many years. And David, 159 00:08:39,120 --> 00:08:41,560 Speaker 1: I'd add to the geographic commentary that people tend to 160 00:08:41,600 --> 00:08:44,880 Speaker 1: think about the countries that they're investing in as opposed 161 00:08:44,920 --> 00:08:47,040 Speaker 1: to the type of stocks that they're buying. When they're buying, 162 00:08:47,120 --> 00:08:50,600 Speaker 1: for example, European equities, if you want to value exposure, 163 00:08:50,679 --> 00:08:53,400 Speaker 1: or you want exposure or reopening the global economy, you 164 00:08:53,440 --> 00:08:56,400 Speaker 1: want exposure to Europe over say the US. So that's 165 00:08:56,440 --> 00:08:59,959 Speaker 1: one reason that we've taken off our underweight to develop mark. 166 00:09:00,000 --> 00:09:03,400 Speaker 1: It's outside the US, better value exposure, plus the dollars 167 00:09:03,440 --> 00:09:05,960 Speaker 1: probably had it's wrong. Let me bring something that may 168 00:09:06,040 --> 00:09:07,960 Speaker 1: or may not be relevant at jail. I'll start with you. 169 00:09:08,160 --> 00:09:10,959 Speaker 1: But we're watching unfold into Congress. Is that relevant to 170 00:09:10,960 --> 00:09:13,360 Speaker 1: an investor at this point at all? Well, it is. 171 00:09:13,760 --> 00:09:16,360 Speaker 1: The situation before this was they were not going to 172 00:09:16,400 --> 00:09:19,439 Speaker 1: pass Muchel buzz installations, so that was not a market expectation. 173 00:09:19,760 --> 00:09:21,720 Speaker 1: But now we've really put on the table the risk 174 00:09:21,720 --> 00:09:24,400 Speaker 1: of the death ceiling that is going to significantly increase 175 00:09:24,640 --> 00:09:27,000 Speaker 1: the risk around that. The key will be, could the 176 00:09:27,040 --> 00:09:31,920 Speaker 1: Democrats get the Republicans from Democratic leading districts to go 177 00:09:32,000 --> 00:09:35,200 Speaker 1: along with them to pass the death ceiling expansion, which 178 00:09:35,200 --> 00:09:37,360 Speaker 1: is really what the American public wants. Sarah we've all 179 00:09:37,400 --> 00:09:39,560 Speaker 1: seen any number of times and the death ceiling has 180 00:09:39,600 --> 00:09:41,840 Speaker 1: been an issue. One time it actually affected the credit 181 00:09:41,840 --> 00:09:44,200 Speaker 1: of the United States government. It usually has gone away. 182 00:09:44,600 --> 00:09:46,839 Speaker 1: It does affect her into your investment decisions at this 183 00:09:46,880 --> 00:09:48,720 Speaker 1: point at all. The risk on the debt ceiling well, 184 00:09:48,800 --> 00:09:51,600 Speaker 1: certainly because the risk free rate is critical when doing 185 00:09:51,679 --> 00:09:54,560 Speaker 1: valuation work, because after all, the stock is just the 186 00:09:54,600 --> 00:09:57,040 Speaker 1: present value of all the cash you can generate into 187 00:09:57,080 --> 00:10:01,240 Speaker 1: perpetuity discounted by this discount rate, where the risk free 188 00:10:01,320 --> 00:10:04,640 Speaker 1: raider the government bond yield is essential to that. So yes, 189 00:10:04,679 --> 00:10:07,240 Speaker 1: this government bond yields rises that it's going to cause 190 00:10:07,320 --> 00:10:09,559 Speaker 1: us to have to pay be much more stingy in 191 00:10:09,679 --> 00:10:12,600 Speaker 1: terms of what we paid for stocks. So it's super important. 192 00:10:12,920 --> 00:10:16,080 Speaker 1: But the US is in good company. Unfortunately, so many 193 00:10:16,120 --> 00:10:18,920 Speaker 1: major countries globally have a significant amount of debt to 194 00:10:19,000 --> 00:10:23,520 Speaker 1: GDP and or they have fiscal deficits that are sizeable. 195 00:10:24,080 --> 00:10:26,000 Speaker 1: So I think if it weren't like that, the US 196 00:10:26,040 --> 00:10:29,040 Speaker 1: and be penalized more about Unfortunately, we have brethren in 197 00:10:29,080 --> 00:10:32,960 Speaker 1: this raceted have a significant amount of debt. Thank you 198 00:10:33,040 --> 00:10:35,679 Speaker 1: so much to Sarah Keller of Causeway Capital and Jim 199 00:10:35,760 --> 00:10:40,200 Speaker 1: McDonald of Northern Trust Bank coming up. It looks like 200 00:10:40,240 --> 00:10:42,960 Speaker 1: it could be a rough year ahead. We talked with 201 00:10:43,000 --> 00:10:46,360 Speaker 1: Steve Rattner Will Advisors about where a smart investor turns 202 00:10:46,520 --> 00:10:51,400 Speaker 1: when the answers are far from obvious. That's next on 203 00:10:51,480 --> 00:10:57,240 Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street 204 00:10:57,320 --> 00:11:02,600 Speaker 1: Week with David Weston from Bloomberg Radio. If you didn't 205 00:11:02,679 --> 00:11:07,599 Speaker 1: much like two, don't get your hopes up for Bloomberg 206 00:11:07,600 --> 00:11:10,800 Speaker 1: gathered almost five calls from Wall Street analysts for the 207 00:11:10,840 --> 00:11:14,480 Speaker 1: new year and couldn't find much optimism, with concerns over 208 00:11:14,559 --> 00:11:17,760 Speaker 1: everything from a recession as predicted by former New York 209 00:11:17,760 --> 00:11:21,520 Speaker 1: Fed President Bill Dudley. Recessions is pretty likely just because 210 00:11:21,520 --> 00:11:24,400 Speaker 1: of what the Fed has to do to equities. There's 211 00:11:24,400 --> 00:11:27,000 Speaker 1: still a lot of uncertainty on the growth picture globally. 212 00:11:27,280 --> 00:11:29,400 Speaker 1: So I think we're in the same spot where I 213 00:11:29,440 --> 00:11:33,480 Speaker 1: think we see equities um down in the near term, 214 00:11:33,640 --> 00:11:37,760 Speaker 1: possibly recovering towards the end of the year. But I 215 00:11:37,800 --> 00:11:41,000 Speaker 1: think that that the key challenges risk premia, very long 216 00:11:41,280 --> 00:11:44,200 Speaker 1: two bonds. I just don't know that yells are going 217 00:11:44,240 --> 00:11:45,800 Speaker 1: to go down as far as people think. There are 218 00:11:45,840 --> 00:11:47,960 Speaker 1: some calls for you know, two and a half percent 219 00:11:48,040 --> 00:11:50,160 Speaker 1: to point eight percent by the end of this year 220 00:11:50,200 --> 00:11:53,120 Speaker 1: on a tenure. And I'm just wondering whether that actually is, 221 00:11:53,720 --> 00:11:57,679 Speaker 1: you know, matches with everything else to geopolitics. We are 222 00:11:57,720 --> 00:12:02,560 Speaker 1: seeing around the world a significant number of super empowered 223 00:12:02,679 --> 00:12:07,400 Speaker 1: individuals who aren't getting great inputs from experts, who are 224 00:12:07,520 --> 00:12:11,079 Speaker 1: able to act with impunity, and are not getting what 225 00:12:11,160 --> 00:12:13,920 Speaker 1: they want in various ways on the global stage, all 226 00:12:13,960 --> 00:12:17,040 Speaker 1: of which poses some hard questions for investors looking to 227 00:12:17,120 --> 00:12:20,560 Speaker 1: make good returns in a year set up for anything 228 00:12:20,600 --> 00:12:23,760 Speaker 1: but could end up being a kind of window maker 229 00:12:23,880 --> 00:12:29,560 Speaker 1: in terms of the market and for the perspective of 230 00:12:29,600 --> 00:12:32,920 Speaker 1: a big time, very sophisticate investor. Returned out is Steve Rattner. 231 00:12:33,160 --> 00:12:35,440 Speaker 1: He's chairman and CEO of Will and Advisors. He is 232 00:12:35,440 --> 00:12:39,280 Speaker 1: responsible for investing the personal and philanthropic funds of Michael Bloomberg. 233 00:12:39,320 --> 00:12:41,440 Speaker 1: He is, of course, the founder and majority shareholder of 234 00:12:41,440 --> 00:12:43,400 Speaker 1: our company. Steve, thanks so much for being back with 235 00:12:43,520 --> 00:12:45,720 Speaker 1: us on Wall Street Week. When you listen to any 236 00:12:45,760 --> 00:12:47,880 Speaker 1: of the Wall Street strategists this year, it sounds like 237 00:12:47,880 --> 00:12:50,440 Speaker 1: two thousand twenty three looks pretty bleak for an investor's 238 00:12:50,480 --> 00:12:52,360 Speaker 1: point of view, doesn't look as bad as what they're saying. 239 00:12:52,760 --> 00:12:54,960 Speaker 1: It looks tough, but you look, most years look tough. 240 00:12:55,040 --> 00:12:59,280 Speaker 1: This year looks very tough, especially for equities. I don't 241 00:12:59,320 --> 00:13:01,679 Speaker 1: I can't tell how much more downside I think there 242 00:13:01,760 --> 00:13:04,079 Speaker 1: is equities, but it's very hard to see a lot 243 00:13:04,080 --> 00:13:08,800 Speaker 1: of upside. It does feel like the markets are pricing 244 00:13:08,800 --> 00:13:12,000 Speaker 1: in a more benign set of moves by the Fed 245 00:13:12,040 --> 00:13:14,520 Speaker 1: than I think what many of us believe is actually 246 00:13:14,520 --> 00:13:17,400 Speaker 1: going to happen. And that, of course becomes very tough 247 00:13:17,440 --> 00:13:22,359 Speaker 1: for equities. And so we remain very cautious, very defensive 248 00:13:22,400 --> 00:13:24,680 Speaker 1: in terms of our own position in visa the equities 249 00:13:24,920 --> 00:13:28,000 Speaker 1: by no means out of them. But but as as 250 00:13:28,080 --> 00:13:29,880 Speaker 1: I've told you, I think in my last couple of 251 00:13:29,880 --> 00:13:33,680 Speaker 1: times on your show, still it essentially as defensive a 252 00:13:33,679 --> 00:13:36,280 Speaker 1: position as we've ever been in in our fourteen or 253 00:13:36,320 --> 00:13:38,520 Speaker 1: so years of existence. Well, I want to talk about 254 00:13:38,520 --> 00:13:40,480 Speaker 1: the defensive position of what that concerts. But when it 255 00:13:40,520 --> 00:13:43,160 Speaker 1: comes to equity specifically, Steve, you have said in the past, 256 00:13:43,320 --> 00:13:45,800 Speaker 1: given the discount rate of nothing else, basically when the 257 00:13:45,880 --> 00:13:47,840 Speaker 1: rates are rise, and that's not good for equities. But 258 00:13:47,920 --> 00:13:50,719 Speaker 1: does your position on equities for three tell us something 259 00:13:50,720 --> 00:13:52,959 Speaker 1: about where you think that the FED will be throughout 260 00:13:52,960 --> 00:13:54,560 Speaker 1: the year, and for that matter, where inflation is going 261 00:13:54,600 --> 00:13:57,920 Speaker 1: to be, Well, it tells you something about where we 262 00:13:57,960 --> 00:13:59,880 Speaker 1: think they're going to be. Of course, I have no idea, 263 00:14:00,080 --> 00:14:03,000 Speaker 1: they have no idea. In fairness, uh, there is no 264 00:14:03,920 --> 00:14:05,960 Speaker 1: as you know, there is no secret FED plan that 265 00:14:06,320 --> 00:14:08,040 Speaker 1: the media is trying to get hold of. It's all 266 00:14:08,120 --> 00:14:11,400 Speaker 1: data dependent, data driven, as Janet Yellen used to say. 267 00:14:11,480 --> 00:14:14,200 Speaker 1: But the fact is that the credit markets from which 268 00:14:14,200 --> 00:14:17,959 Speaker 1: the equity markets take their queue on FED policy, are 269 00:14:18,040 --> 00:14:20,640 Speaker 1: looking for interest rates to peak somewhere in the early 270 00:14:20,800 --> 00:14:24,880 Speaker 1: first half of next year and then begin to decline. 271 00:14:25,400 --> 00:14:28,720 Speaker 1: And I don't believe that that is what the FED 272 00:14:28,880 --> 00:14:31,960 Speaker 1: is likely going to have to do or will be doing, 273 00:14:32,400 --> 00:14:34,600 Speaker 1: because I don't believe inflation is going to come down 274 00:14:34,680 --> 00:14:37,440 Speaker 1: enough for them to do that. And so if you believe, 275 00:14:37,880 --> 00:14:40,000 Speaker 1: not necessarily that interest rates will go higher than the 276 00:14:40,040 --> 00:14:42,280 Speaker 1: markets thing, but at the very least that they will 277 00:14:42,320 --> 00:14:45,440 Speaker 1: persist at high levels for longer than the market thinks, 278 00:14:45,880 --> 00:14:48,960 Speaker 1: then you have to be nervous about equities. Equities, of 279 00:14:48,960 --> 00:14:51,480 Speaker 1: course not all created equal. Some are much more sensitive. 280 00:14:51,480 --> 00:14:53,840 Speaker 1: There's kind rate than others. Does that suggest that there 281 00:14:53,920 --> 00:14:57,680 Speaker 1: might be some defensive positions in equities. Actually, yes, that 282 00:14:57,800 --> 00:15:01,280 Speaker 1: is absolutely true. The growth equities, the profitable tech, all 283 00:15:01,280 --> 00:15:04,800 Speaker 1: that stuff is certainly more susceptible to high interest rates. 284 00:15:04,880 --> 00:15:07,280 Speaker 1: But then you have a bunch of cyclical stocks, which 285 00:15:07,320 --> 00:15:11,280 Speaker 1: also can be called sometimes value stocks that are sensitive 286 00:15:11,320 --> 00:15:14,560 Speaker 1: to economic conditions. And the end and the ang of 287 00:15:14,560 --> 00:15:17,560 Speaker 1: all this is that we still are facing the probability 288 00:15:17,560 --> 00:15:22,560 Speaker 1: of recession, maybe the back half of this year, maybe early, 289 00:15:24,160 --> 00:15:27,200 Speaker 1: and that's not good for cyclical stocks. And so sure, 290 00:15:27,280 --> 00:15:31,200 Speaker 1: there are always some some places, some pieces and places 291 00:15:31,240 --> 00:15:34,720 Speaker 1: that one can go, but overall it still looks like 292 00:15:34,760 --> 00:15:38,920 Speaker 1: a pretty tough market. So what about fixed income? I 293 00:15:38,960 --> 00:15:40,960 Speaker 1: hear at least some people saying this maybe the year 294 00:15:40,960 --> 00:15:43,280 Speaker 1: of the bond. Maybe bombs are coming back, yields will 295 00:15:43,320 --> 00:15:46,960 Speaker 1: come down. Are you more comfortable with fixed income certain 296 00:15:47,000 --> 00:15:50,920 Speaker 1: parts of it? And in the following sense, given our 297 00:15:51,040 --> 00:15:54,359 Speaker 1: view about interest rates, it is hard to be constructive 298 00:15:54,440 --> 00:15:59,200 Speaker 1: about fixed rate fixed income if you will uh bonds 299 00:15:59,200 --> 00:16:01,720 Speaker 1: that have a fixed coupon on them, because they are 300 00:16:01,840 --> 00:16:05,600 Speaker 1: also going to be susceptible to rates staying higher for longer. 301 00:16:06,040 --> 00:16:08,800 Speaker 1: Where there is a very interesting opportunity at the moment 302 00:16:09,320 --> 00:16:12,520 Speaker 1: we believe is in what we call private credit. What's 303 00:16:12,520 --> 00:16:16,560 Speaker 1: happening out there is the banks are very reticent to lend, 304 00:16:16,720 --> 00:16:19,560 Speaker 1: especially for leverage transactions and things like that. They still 305 00:16:19,600 --> 00:16:22,000 Speaker 1: have a lot of hung loans on their balance sheets. 306 00:16:22,000 --> 00:16:25,040 Speaker 1: They see the same world that we all see, and 307 00:16:25,080 --> 00:16:27,600 Speaker 1: so they're pretty pretty I wouldn't say out of business, 308 00:16:27,640 --> 00:16:30,760 Speaker 1: but but reticent to lend. The high market has been 309 00:16:31,720 --> 00:16:34,280 Speaker 1: essentially closed now for the best part of a year, 310 00:16:34,760 --> 00:16:37,440 Speaker 1: no real sign of that opening. So what's happening is 311 00:16:37,480 --> 00:16:41,320 Speaker 1: that you have a number of firms, private firms or 312 00:16:41,360 --> 00:16:44,960 Speaker 1: private predit oriented firms, I should say, that are finding 313 00:16:44,960 --> 00:16:47,560 Speaker 1: places to put money to work at very attractive spreads 314 00:16:47,560 --> 00:16:50,840 Speaker 1: above libel or sofa whatever you want to call the 315 00:16:50,840 --> 00:16:54,200 Speaker 1: current benchmark interest rate. And so you you you not 316 00:16:54,280 --> 00:16:57,000 Speaker 1: only won't suffer if rates go up, you actually benefit 317 00:16:57,040 --> 00:16:59,880 Speaker 1: if rates go up. And you're looking at at this paper, 318 00:17:00,680 --> 00:17:05,240 Speaker 1: coming at at spreads in the sixty seven basis points 319 00:17:05,280 --> 00:17:08,520 Speaker 1: even over the over the treasury or the SOFA rate, 320 00:17:09,000 --> 00:17:13,440 Speaker 1: and for stuff that is really first lean secured, top 321 00:17:13,440 --> 00:17:16,520 Speaker 1: of the capital structure kinds of opportunities, so you can 322 00:17:16,560 --> 00:17:19,640 Speaker 1: make ten, eleven, twelve percent on that, and to us 323 00:17:19,720 --> 00:17:22,800 Speaker 1: that seems like a very good trade relative to what's 324 00:17:22,840 --> 00:17:25,520 Speaker 1: likely to happen to the equity markets at the moment, Steve, 325 00:17:25,560 --> 00:17:28,040 Speaker 1: As you look at three, what about geography? Are there 326 00:17:28,040 --> 00:17:32,080 Speaker 1: places that you see that are relatively better suited to 327 00:17:32,160 --> 00:17:34,080 Speaker 1: what you need to get done? Are there places like 328 00:17:34,119 --> 00:17:38,880 Speaker 1: I'll name some India, Southeast Asia, Indonesia, places like that. Well, first, 329 00:17:38,920 --> 00:17:42,320 Speaker 1: the US always shouldn't say always, The US has for 330 00:17:42,359 --> 00:17:45,040 Speaker 1: some time now, but it continues to be the best 331 00:17:45,080 --> 00:17:47,840 Speaker 1: house in a bad neighborhood on a risk adjusted basis. 332 00:17:47,880 --> 00:17:49,520 Speaker 1: As you look around the world, I'll get to some 333 00:17:49,560 --> 00:17:53,120 Speaker 1: of those um slightly more far flung places that you mentioned. 334 00:17:53,400 --> 00:17:56,520 Speaker 1: But as you look around the world, Europe has clearly 335 00:17:56,560 --> 00:18:00,439 Speaker 1: got a set of economic challenges. Even with energy crisis 336 00:18:00,520 --> 00:18:04,080 Speaker 1: coming down. It's possible you could perform well simply because 337 00:18:04,119 --> 00:18:06,880 Speaker 1: the markets are relatively cheap, But in terms of fundamentals 338 00:18:06,880 --> 00:18:09,399 Speaker 1: of growth, it doesn't seem very attract to us. China 339 00:18:09,480 --> 00:18:13,080 Speaker 1: obviously is an opportunity, but one that is filled with 340 00:18:13,200 --> 00:18:17,320 Speaker 1: risks and alligators and crocodiles are on every corner. I 341 00:18:17,359 --> 00:18:20,960 Speaker 1: was in India, uh just before the Christmas holidays, and 342 00:18:21,040 --> 00:18:25,280 Speaker 1: India is actually finally looking like it may be more interesting. 343 00:18:25,280 --> 00:18:29,000 Speaker 1: It's always been market waiting to excite and impress people 344 00:18:29,080 --> 00:18:32,040 Speaker 1: and and often not doing that. It does feel at 345 00:18:32,040 --> 00:18:35,919 Speaker 1: the moment like India really is starting to move forward 346 00:18:36,000 --> 00:18:38,879 Speaker 1: for a whole variety of reasons, including China moving back, 347 00:18:39,400 --> 00:18:42,120 Speaker 1: and so India is interesting on a number of levels. 348 00:18:42,520 --> 00:18:44,960 Speaker 1: And then Southeast Asia you really have to go country 349 00:18:44,960 --> 00:18:47,440 Speaker 1: by country. It's not our area of expertise. We don't 350 00:18:47,440 --> 00:18:51,600 Speaker 1: really do anything there. Um, Indonesia is potentially interesting, but 351 00:18:51,640 --> 00:18:53,439 Speaker 1: I have not spent time there, so I'm not an 352 00:18:53,480 --> 00:18:56,320 Speaker 1: expert on that. Steve, when you say you're as defensive 353 00:18:56,320 --> 00:18:58,480 Speaker 1: as you've been, maybe ever, but certainly in a good 354 00:18:58,520 --> 00:19:00,520 Speaker 1: long time, does that include making sure you have a 355 00:19:00,560 --> 00:19:02,399 Speaker 1: lot of liquidity. Does that mean you stay in cash 356 00:19:02,480 --> 00:19:04,760 Speaker 1: or cash equivalents because you think there may be opportunities 357 00:19:04,800 --> 00:19:08,800 Speaker 1: as the year unfold. Yes, First, we are as defensive 358 00:19:08,840 --> 00:19:11,440 Speaker 1: as we've been at any point in our fourteen or 359 00:19:11,480 --> 00:19:15,360 Speaker 1: fifteen years of history, and that does include a lot 360 00:19:15,359 --> 00:19:19,760 Speaker 1: of cash. And it's not that we necessarily wanna get 361 00:19:19,760 --> 00:19:22,639 Speaker 1: ready to pounce on something, although we does put us 362 00:19:22,640 --> 00:19:24,760 Speaker 1: in the position to be able to. But you really 363 00:19:24,800 --> 00:19:28,120 Speaker 1: can't lose money holding cash and especially with short rates 364 00:19:28,160 --> 00:19:30,199 Speaker 1: having moved up so much, you can actually make a 365 00:19:30,240 --> 00:19:33,359 Speaker 1: decent amount of money on relatively short rates. You can 366 00:19:33,400 --> 00:19:35,800 Speaker 1: buy two year treasury paper and make over four percent. 367 00:19:35,880 --> 00:19:39,639 Speaker 1: It's all. It's all a lot better than potentially risking 368 00:19:39,640 --> 00:19:42,200 Speaker 1: money in the equity markets at this moment. And then 369 00:19:42,240 --> 00:19:46,000 Speaker 1: we do other things involving hedges and UH and things 370 00:19:46,080 --> 00:19:49,480 Speaker 1: like that to make sure hedge funds hedges, to make 371 00:19:49,480 --> 00:19:52,280 Speaker 1: sure our equity exposure or exposure to the equity market, 372 00:19:52,320 --> 00:19:55,520 Speaker 1: I should put it that way, is down where we 373 00:19:55,560 --> 00:19:57,399 Speaker 1: wanted to be. Okay, Steve, thank you so much for 374 00:19:57,400 --> 00:19:59,480 Speaker 1: being back with this. As Steve Rattner, he's the chairman 375 00:19:59,480 --> 00:20:03,280 Speaker 1: and CEO of A Will and Advisors. Coming up, we're 376 00:20:03,280 --> 00:20:05,400 Speaker 1: gonna talk with our special co twitter Larry Summers about 377 00:20:05,400 --> 00:20:08,160 Speaker 1: those jobs numbers and what the Fed should do about them. 378 00:20:08,160 --> 00:20:12,800 Speaker 1: That's next on Wall Street Week on Bloomberg. This is 379 00:20:12,880 --> 00:20:17,280 Speaker 1: Bloomberg Will Street Week with David Weston from Bloomberg Radio. 380 00:20:17,760 --> 00:20:19,760 Speaker 1: This is Wall Street Week. I'm David western We turned 381 00:20:19,760 --> 00:20:22,479 Speaker 1: out to our very special contributor Larry Summers of Harvard 382 00:20:22,600 --> 00:20:24,720 Speaker 1: to take us through what we saw this week. So Larry, 383 00:20:24,920 --> 00:20:26,240 Speaker 1: first of all, right, at the end of the week, 384 00:20:26,240 --> 00:20:29,199 Speaker 1: we got the jobs numbers which actually were larger than 385 00:20:29,240 --> 00:20:32,520 Speaker 1: we thought that the markets actually were somewhat encouraged. What 386 00:20:32,600 --> 00:20:36,880 Speaker 1: did you make of these numbers? Look, these were good numbers. 387 00:20:37,400 --> 00:20:44,440 Speaker 1: They showed it a strong economy with slowing inflationary pressure. 388 00:20:45,119 --> 00:20:50,359 Speaker 1: Insofar as there's strong signal in them, it's got to 389 00:20:50,440 --> 00:20:57,240 Speaker 1: be encouraging. Uh. My instinct is not to make too 390 00:20:57,320 --> 00:21:03,520 Speaker 1: much of the month. The month fluctuates in the wage numbers, 391 00:21:03,560 --> 00:21:06,760 Speaker 1: which are I think the source of encouragement that people 392 00:21:06,800 --> 00:21:13,000 Speaker 1: are seeing. Of the various data on wages. I regard 393 00:21:13,080 --> 00:21:17,840 Speaker 1: the quarterly employment index as the gold standard, the Atlanta 394 00:21:17,920 --> 00:21:23,720 Speaker 1: Fed information as the silver, and the monthly information that 395 00:21:23,880 --> 00:21:28,280 Speaker 1: comes here as the bronze, simply because of all the 396 00:21:28,359 --> 00:21:33,440 Speaker 1: composition changes. If for example, more teenagers start working, then 397 00:21:33,480 --> 00:21:40,960 Speaker 1: that's gonna show up as slower growth in average hourly earnings. 398 00:21:41,000 --> 00:21:47,160 Speaker 1: But this is an encouraging, uh number. Did it encourage 399 00:21:47,160 --> 00:21:49,400 Speaker 1: you in the direction, perhaps, Larry, that perhaps we could 400 00:21:49,400 --> 00:21:52,760 Speaker 1: have as the so called soft landing without major unemployment, 401 00:21:52,800 --> 00:21:57,240 Speaker 1: because certainly we're certainly adding jobs at a fair clip. Still. Look, 402 00:21:58,080 --> 00:22:04,040 Speaker 1: my view contin in use uh to be that you 403 00:22:04,119 --> 00:22:09,719 Speaker 1: don't get inflation down to the two range without getting 404 00:22:09,760 --> 00:22:14,480 Speaker 1: wage inflation substantially down. And you don't get wage inflation 405 00:22:14,600 --> 00:22:20,840 Speaker 1: substantially down without meaningful UH slack in the labor market, 406 00:22:21,400 --> 00:22:26,359 Speaker 1: And we don't have slack in the labor market. And 407 00:22:26,400 --> 00:22:34,560 Speaker 1: there's nothing in this number that fundamentally changes UH that picture. 408 00:22:35,119 --> 00:22:40,679 Speaker 1: I certainly think that the prospects for recession in the 409 00:22:40,800 --> 00:22:46,080 Speaker 1: near term look lower. Of prospects of recession in the 410 00:22:46,119 --> 00:22:51,200 Speaker 1: winter or the spring of three are certainly lower right 411 00:22:51,240 --> 00:22:54,200 Speaker 1: now than I would have guessed they would be UH 412 00:22:54,400 --> 00:23:00,639 Speaker 1: six months ago. But I think the judgment that soft 413 00:23:00,720 --> 00:23:05,280 Speaker 1: landings or the triumph of hope over experience UH continues 414 00:23:05,400 --> 00:23:11,439 Speaker 1: to be the right best guess with respect to the economy. 415 00:23:11,560 --> 00:23:17,119 Speaker 1: And I'm not sure that continued strength points to a 416 00:23:17,240 --> 00:23:23,720 Speaker 1: softer landing rather than pointing UH to even a harder 417 00:23:23,840 --> 00:23:32,440 Speaker 1: landing when things re equilibrate. So the information UH here 418 00:23:32,880 --> 00:23:39,720 Speaker 1: is favorable. It certainly changes the schedule, it is raises 419 00:23:40,520 --> 00:23:49,320 Speaker 1: some hopeful prospect on on inflation UH coming down, but 420 00:23:49,400 --> 00:23:54,119 Speaker 1: I don't think it changes the fundamental picture. And I 421 00:23:54,160 --> 00:24:00,080 Speaker 1: think the fundamental fixture is that the FED is now 422 00:24:00,320 --> 00:24:05,639 Speaker 1: in the right ballpark, which was not true a year ago. 423 00:24:06,400 --> 00:24:11,240 Speaker 1: But the FED still, as I think Chairman Powell recognized, 424 00:24:11,400 --> 00:24:18,359 Speaker 1: as Neil cash Carry recognized his essay yesterday, as others 425 00:24:18,480 --> 00:24:26,080 Speaker 1: that the FED have recognized, still has UH work to do. 426 00:24:26,840 --> 00:24:33,439 Speaker 1: And UH the continuing lesson is that one needs to 427 00:24:33,520 --> 00:24:39,000 Speaker 1: be careful um to complete a full prescription of antibiotics, 428 00:24:40,040 --> 00:24:44,040 Speaker 1: rather than to stop too soon, because that raises the 429 00:24:44,160 --> 00:24:49,360 Speaker 1: risk of recurrence. And that's certainly true with respect to inflation. 430 00:24:49,560 --> 00:24:53,800 Speaker 1: And we saw that in the mid nineties seventies when inflation, 431 00:24:53,840 --> 00:24:58,199 Speaker 1: which had spiked in the early seventies, came way back down, 432 00:24:58,760 --> 00:25:02,000 Speaker 1: but then it started to go right back up with 433 00:25:02,960 --> 00:25:07,880 Speaker 1: FED easing, even before the oil shocks of the late 434 00:25:07,960 --> 00:25:11,000 Speaker 1: nineties seventies. So, Larry, as you suggest, we got some 435 00:25:11,080 --> 00:25:13,840 Speaker 1: glimpse into the thinking of the FED this week by 436 00:25:14,040 --> 00:25:15,840 Speaker 1: things like Mrs cash Car what he had to say. 437 00:25:15,880 --> 00:25:18,520 Speaker 1: We had other FED people saying we really should stay 438 00:25:18,600 --> 00:25:21,720 Speaker 1: up at five or above five even for some time. 439 00:25:21,840 --> 00:25:24,480 Speaker 1: We also got the minutes of the last meeting out. 440 00:25:24,720 --> 00:25:27,080 Speaker 1: Were you encouraged by the fact that at least apparently 441 00:25:27,119 --> 00:25:29,480 Speaker 1: some of the members of the former really really struggling 442 00:25:29,480 --> 00:25:32,399 Speaker 1: with the fact that the markets remained the conditions financial 443 00:25:32,359 --> 00:25:37,399 Speaker 1: conditions remained pretty loose despite everything the Fed's been telling us. Look, David, 444 00:25:37,440 --> 00:25:41,119 Speaker 1: I I've been speaking in a different way about the 445 00:25:41,160 --> 00:25:43,920 Speaker 1: FED in the last couple of months that I had 446 00:25:43,960 --> 00:25:50,199 Speaker 1: been before, and that's because, for whatever reason, they have 447 00:25:50,320 --> 00:25:54,040 Speaker 1: come around to views quite close to mine. They think 448 00:25:54,080 --> 00:25:59,480 Speaker 1: inflation is the primary concern. They explicitly recognize that there's 449 00:25:59,520 --> 00:26:04,840 Speaker 1: gonna need to be increases in unemployment to contain inflation. 450 00:26:05,320 --> 00:26:10,360 Speaker 1: They recognize the sayance of labor market developments as a 451 00:26:10,440 --> 00:26:15,960 Speaker 1: kind of super core measure of inflation. They're showing awareness 452 00:26:16,200 --> 00:26:19,320 Speaker 1: of the fact that the neutral interest rate is a 453 00:26:19,359 --> 00:26:28,359 Speaker 1: real interest rate concept rather than a nominal interst rate concept. 454 00:26:28,800 --> 00:26:34,280 Speaker 1: They're recognizing that the tradeoff is not between unemployment and inflation, 455 00:26:34,800 --> 00:26:40,119 Speaker 1: but between unemployment and the level of entrenched UH in 456 00:26:40,600 --> 00:26:45,520 Speaker 1: UH inflation. These are the kinds of points that I've 457 00:26:45,560 --> 00:26:50,760 Speaker 1: been stressing on your show for the past eighteen months, 458 00:26:51,440 --> 00:26:57,920 Speaker 1: and I think I'm gratified to see that they now 459 00:26:58,000 --> 00:27:05,439 Speaker 1: are increasingly representing orthodoxy. I think it's interesting, UH that 460 00:27:05,560 --> 00:27:12,320 Speaker 1: the FED is indicating a commitment to tighter policies more 461 00:27:12,480 --> 00:27:17,120 Speaker 1: focused on resisting inflation than the market is expecting they 462 00:27:17,119 --> 00:27:20,000 Speaker 1: will carry through on. I think I would be closer 463 00:27:20,000 --> 00:27:22,760 Speaker 1: to the FED at this point in terms of judging 464 00:27:22,800 --> 00:27:25,960 Speaker 1: what will happen than I would be to the market. 465 00:27:26,840 --> 00:27:30,520 Speaker 1: And finally, Larry, you brought chat GBT to walls three 466 00:27:30,560 --> 00:27:33,280 Speaker 1: week this year and then then the year two. Is 467 00:27:33,320 --> 00:27:34,840 Speaker 1: that going to be a major factor going forward? And 468 00:27:35,000 --> 00:27:37,440 Speaker 1: brought to that AI and by the way, quantum computing. 469 00:27:37,720 --> 00:27:45,880 Speaker 1: I think it's all uh going to uh really come. UH. 470 00:27:46,000 --> 00:27:51,280 Speaker 1: The thing about chat gpt is and the thing about 471 00:27:51,320 --> 00:27:57,960 Speaker 1: the current artificial intelligence is that we're no longer devising 472 00:27:58,119 --> 00:28:06,959 Speaker 1: artificial intelligence solutions to particular problems. We're developing generic UH 473 00:28:07,440 --> 00:28:11,880 Speaker 1: solutions where you don't have to explain the problem to it. 474 00:28:12,240 --> 00:28:15,199 Speaker 1: You just have to give it a few examples and 475 00:28:15,800 --> 00:28:19,800 Speaker 1: it goes from there in some ways sort of like 476 00:28:19,840 --> 00:28:25,240 Speaker 1: a child uh growing growing up. So I don't know 477 00:28:25,280 --> 00:28:33,040 Speaker 1: where all this is going to UH lead, But I 478 00:28:33,080 --> 00:28:35,840 Speaker 1: think that in the same way that we think of 479 00:28:35,880 --> 00:28:40,320 Speaker 1: a beginning of the atomic age or a beginning of 480 00:28:40,360 --> 00:28:46,960 Speaker 1: the era of electricity, that these years are going to 481 00:28:47,080 --> 00:28:54,719 Speaker 1: be remembers for the very different kinds of capacities that 482 00:28:55,440 --> 00:29:02,000 Speaker 1: mankind UH developed to supplement UH its own efforts. Some 483 00:29:02,120 --> 00:29:05,240 Speaker 1: of those lined up being benign. Some of those I 484 00:29:05,360 --> 00:29:09,640 Speaker 1: suspect will end up being maligned, but I think it 485 00:29:10,000 --> 00:29:12,760 Speaker 1: is going to be an important part of the story 486 00:29:12,800 --> 00:29:16,640 Speaker 1: of our times. Okay, our special contributor Larry Summers Harvey 487 00:29:16,680 --> 00:29:18,120 Speaker 1: is gonna stay with us. There's going to have a 488 00:29:18,160 --> 00:29:21,040 Speaker 1: special end to our program this this week. It's going 489 00:29:21,080 --> 00:29:23,560 Speaker 1: to be actually asking Larry to go forward a year 490 00:29:23,640 --> 00:29:25,800 Speaker 1: and predict what will be the big stories on Wall 491 00:29:25,840 --> 00:29:29,080 Speaker 1: Street Week throughout two three. That's coming up next on 492 00:29:29,120 --> 00:29:37,600 Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street 493 00:29:37,640 --> 00:29:41,680 Speaker 1: Week with David Weston from Bloomberg Radio. This is Wall 494 00:29:41,680 --> 00:29:44,000 Speaker 1: Street Week. I'm David Western We're gonna end this first 495 00:29:44,040 --> 00:29:46,600 Speaker 1: week of new year with something special. We've asked Larry 496 00:29:46,600 --> 00:29:49,160 Speaker 1: Summers are very special contributor today we look forward to 497 00:29:50,120 --> 00:29:52,400 Speaker 1: and give us a prediction about what the biggest stories 498 00:29:52,440 --> 00:29:54,960 Speaker 1: of the year will be in the coming year. So Larry, 499 00:29:55,000 --> 00:29:56,600 Speaker 1: let me start with the markets. They had a pretty 500 00:29:56,680 --> 00:29:59,200 Speaker 1: rough year in two. Can we look forward to something 501 00:29:59,200 --> 00:30:02,000 Speaker 1: a little smooth y twenty three or there is there 502 00:30:02,040 --> 00:30:06,760 Speaker 1: some tumult yet to come? I suspect, Tunuel, David, look 503 00:30:06,840 --> 00:30:12,040 Speaker 1: the thirty year story. It has been declining interest rates, 504 00:30:12,480 --> 00:30:15,880 Speaker 1: the idea that we're moving into an era of low 505 00:30:15,920 --> 00:30:19,240 Speaker 1: interest rates. That was certainly the thesis that I was 506 00:30:19,360 --> 00:30:27,760 Speaker 1: pushing with the secular stagnation idea prior to UH COVID. 507 00:30:28,280 --> 00:30:32,800 Speaker 1: That's been the basis for a large amount of UH 508 00:30:33,360 --> 00:30:38,440 Speaker 1: economic thinking. The idea that we're going to return to 509 00:30:38,560 --> 00:30:44,280 Speaker 1: that is a kind of orthodoxy baked into markets. You 510 00:30:44,400 --> 00:30:47,880 Speaker 1: see it when the Fed predicts a half a percent 511 00:30:48,480 --> 00:30:52,920 Speaker 1: neutral real rate. You see it in break evens on 512 00:30:53,040 --> 00:30:58,840 Speaker 1: inflation in UH the low two's. You see it in 513 00:30:58,920 --> 00:31:05,000 Speaker 1: a ten year eight UH in the three seven range. 514 00:31:05,760 --> 00:31:10,480 Speaker 1: And that might be how things UH play out. The 515 00:31:10,600 --> 00:31:17,840 Speaker 1: forces of secular stagnation, demography, inequality, lower priced capital goods, 516 00:31:18,280 --> 00:31:22,959 Speaker 1: all of that are strong. You mentioned defense spending. Geopolitics 517 00:31:23,000 --> 00:31:26,280 Speaker 1: figured large in two. We've had a real clash, whether 518 00:31:26,920 --> 00:31:29,440 Speaker 1: with Russia over the war in Ukraine or in various 519 00:31:29,440 --> 00:31:33,280 Speaker 1: ways with China as well. What role will that play 520 00:31:33,280 --> 00:31:38,240 Speaker 1: this fundamental struggle, if I you will, between democracy and autocracy. 521 00:31:38,320 --> 00:31:42,600 Speaker 1: I'm an optimist. UH. We had a much more politically 522 00:31:42,640 --> 00:31:48,000 Speaker 1: productive year of legislation in two than most people expected. 523 00:31:48,640 --> 00:31:54,760 Speaker 1: We had much more, much easier, and more reasonable set 524 00:31:54,840 --> 00:32:01,000 Speaker 1: of political outcomes in the election with much less contest 525 00:32:01,120 --> 00:32:09,200 Speaker 1: over elections UH than UH most people expected. So I think, 526 00:32:09,280 --> 00:32:14,440 Speaker 1: as America so often has UH in the past, it's 527 00:32:14,520 --> 00:32:20,240 Speaker 1: demonstrating it's fundamental resilience as a society. And at the 528 00:32:20,280 --> 00:32:25,280 Speaker 1: same time, I think that if you look at Iran, 529 00:32:25,760 --> 00:32:29,080 Speaker 1: if you look at Russia, if you look at China, 530 00:32:29,720 --> 00:32:34,640 Speaker 1: the magnitude of the challenges those societies are facing look 531 00:32:35,240 --> 00:32:41,040 Speaker 1: much greater than they did a year ago. And my 532 00:32:41,240 --> 00:32:48,160 Speaker 1: sense is that trend is UH going to UH continue, 533 00:32:48,320 --> 00:32:52,400 Speaker 1: And so I think that democracy is gonna look a 534 00:32:52,480 --> 00:32:57,720 Speaker 1: good deal better relative to autocracy a year from now 535 00:32:57,760 --> 00:33:01,600 Speaker 1: than it does today. One of the great questions of 536 00:33:02,600 --> 00:33:06,800 Speaker 1: three is going to be whether, as that happens, with 537 00:33:06,920 --> 00:33:15,000 Speaker 1: democracy looking better, China is modifying its policies in our 538 00:33:15,240 --> 00:33:19,560 Speaker 1: kind of direction, towards warmer relations with the United States, 539 00:33:19,680 --> 00:33:28,480 Speaker 1: towards more support for market UH institutions, towards more global cooperativeness, 540 00:33:29,360 --> 00:33:34,600 Speaker 1: or whether they're sticking with some of the wolf warrior 541 00:33:35,080 --> 00:33:38,840 Speaker 1: approaches that have defined them over the last several years 542 00:33:39,640 --> 00:33:44,000 Speaker 1: and UH suffering as a consequence. I don't know which 543 00:33:44,000 --> 00:33:49,560 Speaker 1: way that's going to go, but my sense is that 544 00:33:50,720 --> 00:33:57,120 Speaker 1: the tide of history is moving in uh our direction. 545 00:33:57,440 --> 00:33:59,520 Speaker 1: And there you have it, our special contributor to Larry 546 00:33:59,560 --> 00:34:01,640 Speaker 1: Summer still Wall Street Week, telling us what he thinks 547 00:34:01,720 --> 00:34:04,640 Speaker 1: the major stories of three will be. And trust us, 548 00:34:04,760 --> 00:34:06,840 Speaker 1: we will check back in on those stories throughout the 549 00:34:06,840 --> 00:34:08,879 Speaker 1: course of the year. Thank you so much, Laurie. Great 550 00:34:08,920 --> 00:34:10,359 Speaker 1: to have you with us. And that does it for 551 00:34:10,400 --> 00:34:12,759 Speaker 1: this episode of Wall Street Week. I'm David Weston. This 552 00:34:12,920 --> 00:34:16,799 Speaker 1: is Bloomberg. See you next week.