Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. Us CPI never's reinforcing concerns
Speaker 1: about inflation. The financial stories that sheep are were a
Speaker 1: really different reaction to mark Its more indications of just
Speaker 1: how hot the U. S economy really is. Through the
Speaker 1: eyes of the most influential voices. Larry Summers, the former
Speaker 1: Treachery Secretary, Katherine Keening, CEO of v n Y, Mom
Speaker 1: Sam's l chairman and founder Equity Group Investment in Bloomberg
Speaker 1: Wolf Street Weet with David Weston from Bloomberg Radio. Rising
Speaker 1: recession concerns, a budget moved to the center, and the
Speaker 1: killing continues in Ukraine. This is Bloomberg Wall Street Week.
Speaker 1: I'm David Weston. This week's special contributor Larry Summers on
Speaker 1: what happens when you run the economy hut for the
Speaker 1: sake of employment. We do not do anybody a favor
Speaker 1: by overheating the economy, because when we overheat the economy,
Speaker 1: the chickens do come home to rush and former IBM
Speaker 1: CEO Sam Pomisano the opportunity for the United States to
Speaker 1: form a new coalition to compete with China in tech.
Speaker 1: I caught the Super Bowl. Geopolitics, the US needs to
Speaker 1: leverage the world. It was a week of anticipating what
Speaker 1: didn't happen, at least not yet, with encouraging reports on
Speaker 1: possible progress in talks between Ukraine and Russia giving way
Speaker 1: to skepticism and disappointment. We can say that the signals
Speaker 1: we hear from the talks are positive, but these signals
Speaker 1: can't silence the explosions of Russian shells. We'll see. I
Speaker 1: don't read anything into it until I see what their
Speaker 1: actions are. Kremlin very much downplaying now the outcome of
Speaker 1: peace talks in Istanbul, a spokesman for the Kremlin saying
Speaker 1: that has been no breakthrough, even though Russia pledged to
Speaker 1: scale back some military operations in Ukraine. It was a
Speaker 1: week when the Biden administration gave us a proposed budget
Speaker 1: that anticipated in producing the deficit but not the debt.
Speaker 1: It's a laundry list, it's what we believe in. It's
Speaker 1: almost a campaign speech if you think of it that way.
Speaker 1: Knowing the White House knows all too well that this
Speaker 1: will be uh twisted into a lot of different pretzel
Speaker 1: pieces before this ever becomes a long This budget has
Speaker 1: a plan to borrow a fourteen point four trillion dollars
Speaker 1: in deficits over the budget window, which is ten years.
Speaker 1: And it was a week when former New York Fed
Speaker 1: chair Bill Dudley warned about the danger of a recession.
Speaker 1: Every time the unemployer rate goes up by more than
Speaker 1: a half a percentage point, the next stop is a
Speaker 1: full blown recession, and pros like Mike Schumacher of Wells
Speaker 1: Fargo kept an ego eye on a yield curve inversion
Speaker 1: these times. It's very for a nano secondary said yesterday,
Speaker 1: but we think the curve gets substantially inverted very quickly.
Speaker 1: And if you look at what the bond market is
Speaker 1: telling us and fowards something like minus thirty minus thirty
Speaker 1: five at the end of the year. Those are day
Speaker 1: numbers Mike Schumacher was talking about in Nanasaka on Wednesday.
Speaker 1: But by Friday we got that inversion as yields on
Speaker 1: two year treasuries rose above that on tens after the
Speaker 1: ten years sold off in response to the jobs numbers
Speaker 1: coming out on Friday, which were pretty robust numbers that
Speaker 1: took the unemployment rate down to three point six percent.
Speaker 1: And this came on the heels of a quarter that
Speaker 1: ended on Thursday with the biggest drop and treasury bonds
Speaker 1: in history. In the face of all this, bond action
Speaker 1: equities actually were prelatively well behaved, with the SMP five hundred,
Speaker 1: the NAZAC up a bit and the down down a bit,
Speaker 1: and the price of oil, which has been driven by
Speaker 1: the war in Ukraine, fell the most in two years
Speaker 1: after present Biden announced he'd be releasing a million barrels
Speaker 1: a day from the Strategic Patrolling Reserve to helps makes
Speaker 1: sense of all of this. Welcome now, Sarah Kett, CEO
Speaker 1: of Causeway Capital, and liz Ana Saunders Charles Schwab, Chief
Speaker 1: Investment Strategies. Lizien, let me start with you to make
Speaker 1: sense of all this. It was a tumultuous quarter and
Speaker 1: a pretty eventful as well. What are we learning from
Speaker 1: all this? Clearly, the the inversion of the Yeld curve,
Speaker 1: which couple of days ago it happened briefly in tra
Speaker 1: day and didn't close at that level, has I think
Speaker 1: garnered most of the attention, certainly a lot of the
Speaker 1: financial media attention, and and lots of confusion about what
Speaker 1: it actually says about the risk of recession. I think
Speaker 1: anytime you have an inversion, anytime you've got a FED
Speaker 1: moving from extremely easy policy to tighter policy, you need
Speaker 1: to dust off the checklist for a recession. But to
Speaker 1: see the market behave somewhat resiliency is actually not out
Speaker 1: of the ordinary yield curb in versions of historically generally
Speaker 1: seen rising equity markets. It's really not until the point
Speaker 1: where recession seems like a higher likelihood do you run
Speaker 1: into trouble. But I think we're in a relief rally
Speaker 1: relative to the correction that preceded it. I wouldn't bank
Speaker 1: on it continuing uh with without another bit of a pullback. Sarah,
Speaker 1: do you believe the really Foley? Is it here to stay?
Speaker 1: It all depends, David, on what real interest rates do.
Speaker 1: So it's very important to note that its inflation is rising.
Speaker 1: We're seeing and this particularly acutely an issue in Europe
Speaker 1: and in the US. Real interest rates are going more
Speaker 1: negative and that creates more fuel for equity buying. So
Speaker 1: that's one of reasons why we keep fully invested, because
Speaker 1: we want to make sure our clients get access to
Speaker 1: what the only place you can put money is in
Speaker 1: equity markets in our view. And also note I mean
Speaker 1: there's plenty of bad news, but oil price shocks historically
Speaker 1: in the seventies, early nineties, in uh in two thousand,
Speaker 1: they're not always followed by weak equity markets. That those
Speaker 1: two are not correlated. So there are reasons to be
Speaker 1: optimistic in what looks like a very dark environment. So Luzienne,
Speaker 1: I wonder in the face of these negative real rates
Speaker 1: that we just heard about from Sarah, as well as
Speaker 1: oil shocks at the moment, there's a lot of talking
Speaker 1: about the seventies where we had over stimulus and then
Speaker 1: on top of that oil shocks. It really does raise
Speaker 1: the question about the inflation. Negative real rates indicate we
Speaker 1: still have our foot on the accelerator at the break.
Speaker 1: How far do we have to go to slow down
Speaker 1: this economy to get inflation under control. Well, even even
Speaker 1: Powell has said he's willing to accept a recession as
Speaker 1: a as the end game associated with finally bringing down
Speaker 1: this inflation problem. I don't think we're really looking at
Speaker 1: the seventies type of environment. I think there's more differences
Speaker 1: between today in the nineties seventies than there are similarities.
Speaker 1: Stagflation I think used with a lower casees. Generically maybe
Speaker 1: as appropriate given weaker growth and high inflation, but really
Speaker 1: what that represented in the seventies was a high and
Speaker 1: rising unemployment rate, which is clearly different than the current environment.
Speaker 1: And Saunders and Sarah Ketty will be staying with us
Speaker 1: as we come back and look around the corner to
Speaker 1: what's coming up, not just next week, next next quarter,
Speaker 1: but down the road. This is Wall Street Week on
Speaker 1: bloomber This is Bloomberg Wall Street Week with David Weston
Speaker 1: from Bloomberg Radio. I think one of the nice things
Speaker 1: about this environment is that with all the carnage out there,
Speaker 1: with so many of the smaller companies and the less
Speaker 1: well capitalized companies and the less well managed companies are
Speaker 1: starting to really have difficulty in some cases going out
Speaker 1: of business. And I think this environment is going to
Speaker 1: afford the bigger, well managed companies the ability to pick
Speaker 1: up market share and in many cases maintain their dominance.
Speaker 1: It was one favorite that you think still has a
Speaker 1: ways to go. I still like Microsoft, speaking of the
Speaker 1: behemoths and a o LL although I wouldn't have sort
Speaker 1: of considered that a technology company anymore. That was our
Speaker 1: very own Lizana Sanders appearing on Wall Street Week with
Speaker 1: Lewis R. Back in two thousan when A. O. L
Speaker 1: was still a behemoth. By the way, Losan has remained
Speaker 1: with us along with Sarah Ketder a Causeway Capital. So
Speaker 1: we've had a conversation about what's happened this quarter, what's
Speaker 1: going to be coming up around the corner here. But
Speaker 1: let's look down the road, Sarah, let me start with you.
Speaker 1: Where is there cause for hope. We've got a lot
Speaker 1: of concerns about inflation, about the tightening we're expecting plans,
Speaker 1: and by the way, we still have a war going
Speaker 1: on where people are dying every day over in Ukraine. Well,
Speaker 1: what are some of the possible upsides for investors down
Speaker 1: the road? Maybe perhaps not too far down the road.
Speaker 1: And I hinted that before the break are the pandemic
Speaker 1: recovery stocks. They were certainly hit very hard and had
Speaker 1: a false dawn in early one and then the omicron
Speaker 1: variant UH gripped them again and dragged them lower. They
Speaker 1: rallied a bit, and they were doing very well from
Speaker 1: January of this year until February, particularly the ones in Europe,
Speaker 1: and then we had this as you note did this
Speaker 1: horrendous invasion, so that UH really hit these stocks hard.
Speaker 1: Some of the great airline companies, like one of the
Speaker 1: best discounters in the world, Ryanair, crushed. And these are
Speaker 1: opportunities for investors because we can't assume that invasions last forever.
Speaker 1: And this pandemic is thankfully dissipating. So there are other
Speaker 1: ones in aerospace, travel and leisure. You can find airport companies,
Speaker 1: aircraft engine manufacturers have only one or two competitors, like
Speaker 1: it's a This is where active management gets very excited.
Speaker 1: As you can tell, they there are pandemic recovery stocks
Speaker 1: out there. They're in food, catering, and retail. They just
Speaker 1: need they need the uh, the mass to be off,
Speaker 1: the people be out again and then UH and as
Speaker 1: we discussed before, not too great of an inflation head
Speaker 1: when cutting into their discretionary spent. So listen, In addition
Speaker 1: to possibly the pandemic recovery, you may agree with exactly
Speaker 1: what we just heard from Sarah, but there's one other
Speaker 1: factor I wonder about. That's fiscal stimulus. Right now, we
Speaker 1: have essentially a d stimulus because we're coming off of
Speaker 1: so much fiscal stimus. And I say it's at the
Speaker 1: same time that horrendous war in Ukraine, the goodness knows
Speaker 1: we want to be over soon. At some point will
Speaker 1: be over and they'll have to be the need to
Speaker 1: invest a fair amount. Could that be a potential fiscal students,
Speaker 1: at least in Europe. Yeah. I think the the investment
Speaker 1: story along your term not just driven by the terrible
Speaker 1: tragedy going on in Europe right now, although that clearly
Speaker 1: will stimulate some investment, whether it's energy infrastructure, UM, food infrastructure,
Speaker 1: not to mention the rebuilding of actual infrastructure in Ukraine,
Speaker 1: but even prior to that, I think what the pandemic
Speaker 1: brought about was the necessity of investments in certain areas,
Speaker 1: and there was so much low hanging fruit of inefficiency
Speaker 1: in UH quite a few segments of our economy, healthcare, education,
Speaker 1: and I think the necessity of sort of stepping up
Speaker 1: and becoming more efficient and investing in digital driven by
Speaker 1: the pandemic, I don't think kind of goes back under
Speaker 1: the rock. I think we have unleashed what is likely
Speaker 1: to be an era of of stepped up investment and
Speaker 1: probably along with it higher productivity. It doesn't prevent a
Speaker 1: possible recession. In the near term. But that's where I
Speaker 1: think there is sort of a shining light when you
Speaker 1: think longer term about what may come out of the
Speaker 1: combination of both the pandemic and the war. It may
Speaker 1: even the medium term to the degree that that digital
Speaker 1: spend is so necessary that will take precedent even when
Speaker 1: other if there's some sort of curtailment of capital expenditures,
Speaker 1: companies have to make that transition, and they need to
Speaker 1: do so globally, So we think of that as somewhat
Speaker 1: non cyclical part of the whole technology spend. Lissen, I
Speaker 1: don't think I know many people who are rooting for
Speaker 1: a recession, although as you suggest, a lot of people
Speaker 1: have to be prepared for the possibility of it. But
Speaker 1: is there a potentially if I can say that upside
Speaker 1: potential to some creative destruction. I think that's what you
Speaker 1: were talking about. Whenever you have a lot of money
Speaker 1: slashing around, some bad decisions that made, if you take
Speaker 1: some of that liquidity away, then actually people have to
Speaker 1: make some tough decisions and maybe you sort of maybe
Speaker 1: the sheep from the goats. Yeah, I think there have
Speaker 1: been some maybe unintended concept onnes is of this massive
Speaker 1: amount of liquidity, whether it's a mispricing in various markets
Speaker 1: and asset bubbles. So I think there's a benefit that
Speaker 1: will accrue there. And then, as we already touched on
Speaker 1: the unfortunate possible necessity of constraining aggregate demand in order
Speaker 1: to rein in the combination of the supply chain problems
Speaker 1: and and just the feeder effect it's having on on
Speaker 1: pricing and inflation, we may need a recession to calm
Speaker 1: all of those forces, and it may not have to
Speaker 1: be a particularly deep one. But I do think what
Speaker 1: we're looking at is a more kind of normal cycle.
Speaker 1: If we're heading into recession, what it looks like it
Speaker 1: causes of it being tighter monetary policy. That's sort of
Speaker 1: traditional that the last cycle, the COVID recession, the aftermath
Speaker 1: of it, um there was no playbook for that. That
Speaker 1: was incredibly unique. I think this next cycle, both into
Speaker 1: the next recession and coming out will be a little
Speaker 1: more I don't want to say garden variety, but a
Speaker 1: little more in keeping with your typical recession recovery type cycle. So, Sarah,
Speaker 1: give us just a little taste of your secret sauce here.
Speaker 1: As an investor, somebody who maintains the portfolio. As you
Speaker 1: take a look. You've talked about things like coming back
Speaker 1: from pandemic. That's sort of a structural thing across the
Speaker 1: board as you try to figure out which companies really
Speaker 1: are being run well and efficiently, are making sensible decisions,
Speaker 1: what do you look at and what other companies giving
Speaker 1: an example or two, Well, just to take up what
Speaker 1: Lizzen just mentioned, to the degree we've got we're going
Speaker 1: to see a typical recovery or typical recession recovery, then
Speaker 1: let's find those stocks that tend to do well in
Speaker 1: that environment. So what doesn't do well initially as you
Speaker 1: head into the bottom of the economy, and I'm speaking
Speaker 1: really for everything ex China, The rest of the world
Speaker 1: is lodging on the same monetary policy cycle meaning tightening.
Speaker 1: Other than China and UH banks, other financials, they tend
Speaker 1: to bottom somewhere as as we get into that significant
Speaker 1: amount of tightening and the recession takes hold, and then
Speaker 1: they rally very strongly. May remember they're really part of
Speaker 1: two thousand nine unbelievable performance. So if if history is
Speaker 1: going to repeat itself, what Lizan says is correct, which
Speaker 1: I agree with this is a little more normal, a
Speaker 1: little more then then those will be good stocks to own.
Speaker 1: And the most bombed out ones are in that part
Speaker 1: of the world has really been hit hard, which is Europe,
Speaker 1: so European financials. And you could also go with the
Speaker 1: energy transition. One of the silver linings of this horrendous
Speaker 1: energy disruption is the greater need to accelerate, then move
Speaker 1: to low and then zero carbon type renewable energy. And
Speaker 1: some of the European utilities are expert at this and
Speaker 1: they're trading more six percentivity fields. Thank you so much
Speaker 1: for Liziane Saunders and Sarah Header. Coming up, what does
Speaker 1: a post sanctions world mean for tech competition during China
Speaker 1: and the United States. Where we find out from former
Speaker 1: IBM CEO Sam Palmisano. That's next on Wall Street Week
Speaker 1: on Bloomberg. This is Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. Hundreds of thousands of people who
Speaker 1: are being cut off from help by Russian forces placed
Speaker 1: like Mary stop. It's like something out about science fri.
Speaker 1: President Biden described the death and destruction we're seeing from
Speaker 1: Russia's military invasion of Ukraine during his recent trip to Europe.
Speaker 1: But this war goes beyond the military is being fought
Speaker 1: in the markets as well, with the US and its
Speaker 1: allies imposing severe sanctions on the Russian economy, something Ukrainian
Speaker 1: President Zelinsky says is the only thing likely to get
Speaker 1: through to Vladimir Putin. There's no other language than if
Speaker 1: efficient sanctions that Russian leadership can understand that Woolmarstian has
Speaker 1: to be cut off from the means of existence. And
Speaker 1: when it comes to the economic battle, it's not just
Speaker 1: the United States versus Russia. China plays a crucial role
Speaker 1: that made it clear to him that makes sure he
Speaker 1: understood the consequences of him helping Russia. But I pointed
Speaker 1: out the number of American and foreign corporations left Russia
Speaker 1: as a consequence of their barbaric behavior, which poses a
Speaker 1: difficult question for President g who has pledged to support Mr.
Speaker 1: Putin but has to keep a careful eye on his
Speaker 1: country's role in the global economy, which Nobel Laureate Michael
Speaker 1: Spence says he is surely doing. China understands something that
Speaker 1: President Putin doesn't seem to understand, and that is that
Speaker 1: any economy, even a big one like China or even
Speaker 1: the United States can't perform and anything like its full
Speaker 1: potential in isolation, and so I expect China to sort
Speaker 1: of move carefully and and try to thread needle. But
Speaker 1: to avoid a scenario in which we start dividing the
Speaker 1: world up into blocks when it comes to international economics
Speaker 1: and particularly when involves technology, we turn to our very
Speaker 1: special controller. He is Sam Paul is not a former
Speaker 1: CEO of IVM. Thank you so much for being with us, Sam.
Speaker 1: So we're seeing a lot of changes in trade patterns,
Speaker 1: in economic dealings, in payment systems around the world because
Speaker 1: of the war in Ukraine. Talk to us about what
Speaker 1: specifically that may mean in the area of technology, whether
Speaker 1: it's Russia or China, depending on which way China comes down. Well, David,
Speaker 1: it's actually an excellent point, and I think that the
Speaker 1: the sad controversy of the Ukraine is just accelerating transition
Speaker 1: or changes that I believe will potentially occur. I mean,
Speaker 1: as you know, everybody's talking about Russia, but also the
Speaker 1: implications in the US China relationships, and there's no doubt
Speaker 1: about it, and there's a lot of speculation that China
Speaker 1: and the US will separate economically, Uh, I really don't
Speaker 1: think that will occur. The reason I say that is
Speaker 1: these economies are too large and too to are connected
Speaker 1: to the world. You mentioned payment systems, full of capital,
Speaker 1: all those things these economies are dependent upon. So I
Speaker 1: don't think separation totally occurs. However, as I say that,
Speaker 1: there's no doubt I believe that when it comes to
Speaker 1: technology and future technologies, there's gonna be competition between the
Speaker 1: two countries. And that's more so I'll say China uls
Speaker 1: I mean, Russia really doesn't have the kinds of technologies
Speaker 1: that we're talking about. But if you think about things
Speaker 1: like semiconductors, artificial intelligence, quando computing, cyber computing, clearly there's
Speaker 1: going to be competition, and therefore I think that'll be
Speaker 1: less collaboration between China and the United States. So if
Speaker 1: that happens, because it certainly looks right now like that's
Speaker 1: where it's heading. We're not heading to a one big
Speaker 1: globe where we're all the same, we all do with
Speaker 1: each other, maybe more separation, particularly areas like tech. If
Speaker 1: that happens, how are we and for we for the moment,
Speaker 1: I'll say the United States situated because some people are
Speaker 1: concerned that China, for example, has really been investing a
Speaker 1: lot more in tech than we have been. There's no
Speaker 1: doubt about it. I mean, I think last year alone
Speaker 1: is one point five Trilly and Burnt estimates in range.
Speaker 1: So yes, China is out invest in the United States.
Speaker 1: They're not out investing the West. And I'll comment on
Speaker 1: that a little bit, but I mean, as you think
Speaker 1: of it, it's on this US China focus. I mean,
Speaker 1: I call it the Super Bowl geopolitics. You know, it's
Speaker 1: the Titans. Uh if you look at it today. To
Speaker 1: use a sports analogy, the US is about a three
Speaker 1: point favorite in the game going into the game. However,
Speaker 1: China is spending a lot and they're catching up. Can
Speaker 1: big kick have a heck of a fourth quarter? So
Speaker 1: my point being in that analogy, David, is the fact
Speaker 1: that the US needs to leverage the world. If they
Speaker 1: could come together and optimize their focus their investments, I
Speaker 1: think they clearly could continue to lead and out compete China.
Speaker 1: So saying I want to come back to if they
Speaker 1: can come together, because that could be a big f
Speaker 1: But let's assume that could happen. Who's on our team?
Speaker 1: So to speak to continue your Super Bowl analogy, who
Speaker 1: are the major players in tech on our team? I
Speaker 1: think the major players if you go through it, I
Speaker 1: mean there's if you look at the take semiconductors as
Speaker 1: an example. I think it's a good example. Everybody's focused
Speaker 1: on manufacturing capacity called FABS. That's important because there's such
Speaker 1: a dependency on Taiwan and your concerns and risk over
Speaker 1: China to Taiwan Taiwanese relationship. Having said all that, there's
Speaker 1: there's different elements to the ecosystem and and semiconductors. There's fabrics,
Speaker 1: there's the tools to fabricate, there's the design tools, there's
Speaker 1: the materials, there's packaging, and there's great expertise, especially in Europe.
Speaker 1: Europe has great research and great expertise in many of
Speaker 1: these areas. South Korea and Japan has great expertise and
Speaker 1: the manufacturing tools and manufacturing side of the house. So
Speaker 1: my point being is that if you look at the capabilities,
Speaker 1: the US certainly leads today in design and packaging. There's
Speaker 1: no doubt about and the research capability. But you combine
Speaker 1: these capabilities between Europe, mostly Germany, Japan, UH and I
Speaker 1: say it's really South Korea and Singapore. But you know
Speaker 1: those countries, within those regions, you can see how this
Speaker 1: thing could align. Okay, Sam, thank you so very much,
Speaker 1: really appreciate and Dela say Sam. Paulmisana is a contributor
Speaker 1: to Wallstree Weekend. Of course, he's the former CEO of IBM.
Speaker 1: Coming up, we wrap up the week with special contributor
Speaker 1: Larry Summers of Harvard. That's next on Wall Street Week
Speaker 1: on Bloomberg. This is Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. We're joined again this week by
Speaker 1: our special contributer Larry Summers of Harvard. So, Larry, we
Speaker 1: got jobs numbers out at the end of the week
Speaker 1: on Friday. Strong job numbers once again. Also by the way,
Speaker 1: I should say strong increases in wages at the same time,
Speaker 1: that doesn't raise the question whether this economy maybe even
Speaker 1: more overheated than we thought. Look, I think the single
Speaker 1: most important statistic for judging overheating is the ratio of
Speaker 1: vacancies to unemployment. And with these Jolts numbers and these
Speaker 1: unemployment numbers, that statistic is going to be plumbing new
Speaker 1: highs uh in the in when it's next calculated, and
Speaker 1: that suggests even more tightness in labor markets, and I
Speaker 1: think that points towards UH even more inflation. So I
Speaker 1: think near term we've got to, if anything, a bit
Speaker 1: greater inflation concerned UH than we had before we saw
Speaker 1: these numbers. Of course, it's good that the economy is
Speaker 1: looking relatively strong. I think if you were in doubt
Speaker 1: as to whether the previous weakness was fundamental or was
Speaker 1: caused by omicron, this would tend to tilt you towards
Speaker 1: thinking that it was caused by O Macron. But look,
Speaker 1: labor market indicators are always contemporaneous. We're lagging, so we
Speaker 1: don't know what the future holds, and certainly there are
Speaker 1: worrisome signs in terms of what's happening with consumer sentiments.
Speaker 1: But for now, I would say these are relatively inflationary numbers,
Speaker 1: and that's how markets look to be reading them, with
Speaker 1: significant movements towards you curve inversion. Larry. At the same time,
Speaker 1: you'd be the first to say these jobs ms are
Speaker 1: good for the people who are getting jobs, and particularly
Speaker 1: some of the people at the lower end of the spectrum,
Speaker 1: which is something we should be concerned about. Is there
Speaker 1: no way that we can both take care of those people,
Speaker 1: make sure they're employed, that they are getting paid fairly,
Speaker 1: and not overheat the economy. David, Look, this is why
Speaker 1: the earned income tax credit is such a good idea.
Speaker 1: This is why I've supported increases in UH minimum wages.
Speaker 1: This is why we need stronger programs for people who
Speaker 1: don't go to college of UH many kinds. But we
Speaker 1: do not do anybody a favor by overheating the economy,
Speaker 1: because when we overheat the economy, there the chickens do
Speaker 1: come home to roost at some point, as the inflation
Speaker 1: has to leave UH the system. And so I think
Speaker 1: that this idea that we simply cheer on more and
Speaker 1: more employment without thinking about the inflationary consequences is like
Speaker 1: a doctor who celebrates the results of the prescription of
Speaker 1: their pain killer without thinking about what's going to come
Speaker 1: down the road. I think the FED, too late, has
Speaker 1: awakened to that and is moving towards the strategy that
Speaker 1: is much more oriented towards tightening. Larry, let's talk about
Speaker 1: those chickens maybe coming home to rus. There is talk
Speaker 1: about a possible recession here. You and I have talked
Speaker 1: about that. This at various times. I know you've focused
Speaker 1: on historically one of the issues about the four percent number,
Speaker 1: under four percent unemployment in the same to you have
Speaker 1: over four percent inflation. We also had the yield curve,
Speaker 1: the twos tends yield curve invert a couple of times
Speaker 1: this week, including after the job's nevers came out. Do
Speaker 1: you pay much attention to yield curve at this point
Speaker 1: as a predictor of recession. I pay a little less
Speaker 1: attention to it than people in the markets. Uh do,
Speaker 1: And I think it's important to understand that it's not
Speaker 1: a causal relationship. If it exists, it's a canary in
Speaker 1: the coal mine kind of relationship. So it's not that
Speaker 1: changing the changing the tenure interest rate, if you could
Speaker 1: do it in some way, will change the prospect of recession. Rather,
Speaker 1: it's that when people are forecasting that the fan is
Speaker 1: going to be cutting rates, they're also forecasting that that's
Speaker 1: going to happen because there's a recession. So it's a
Speaker 1: correlation thing, not a causation thing. I think that what's
Speaker 1: happening with the yield curve adds to a sense of
Speaker 1: economic anxiety that in situations like this Historically we have
Speaker 1: not achieved soft landings, and we have seen recessions. Is
Speaker 1: it a certainty that will see a recession in the
Speaker 1: next two or three years. No, is it more likely
Speaker 1: than not that we will see a recession in the
Speaker 1: next two years. I don't see how anybody can look
Speaker 1: at either the historical experience or what markets are predicting
Speaker 1: and not think that it's fifty fifty batter than fifty
Speaker 1: fifty that a recession will start sometime within the next
Speaker 1: two years. Larry, we also got the budget from the
Speaker 1: White House at the beginning of the week this week,
Speaker 1: and everybody agrees it's aspirational. What is sent out as
Speaker 1: the budget from Whiteos does not actually become law, but
Speaker 1: it does reflect values, as person after person with the
Speaker 1: White House reminds us, what are the values that you
Speaker 1: saw in prison Biden's budget. So I was glad to
Speaker 1: see increases in the defense budget. I was glad to
Speaker 1: see a substantial indicative commitment towards doing something about COVID.
Speaker 1: I was glad to see uh an emphasis on mental
Speaker 1: health as a theme in the budget. I was glad
Speaker 1: to see open mindedness, um and open to complete negotiation
Speaker 1: on the remnants of build back better rather than represcribing
Speaker 1: uh all of uh that expenditures. Those were all I thought,
Speaker 1: UH positive steps. I would have liked to see more
Speaker 1: realism on the tax side. I think the billionaires tax
Speaker 1: is a bad idea whose time will never come. I
Speaker 1: think it's mislabeled to give it a kind of populist
Speaker 1: appeal relative to what's being proposed. I think the general
Speaker 1: idea of taxing capital gains when people don't have those
Speaker 1: capital gains and haven't sold the assets is not a
Speaker 1: realistic one. I think a much better strategy would have
Speaker 1: been to concentrate on a variety of loop whole issues
Speaker 1: capital gains at death carried interest, which the administration has
Speaker 1: still not gotten uh done changing like kind exchanges uh
Speaker 1: for uh real estate. But the single most important thing,
Speaker 1: even if nothing else happens, is that the historic bit
Speaker 1: of economic diplomacy that Jenny Yellen concluded on corporate tax
Speaker 1: with other countries is enabled by the necessary US legislative action, Larry.
Speaker 1: If you read the facts she put up by the
Speaker 1: White House earlier this week, they lead with fiscal responsibility,
Speaker 1: the fact that they would be reducing the deficit at
Speaker 1: the same time, you look at the projection over the
Speaker 1: ten years that they do for budgets, actually, as a
Speaker 1: percentage of GDP, the debt grows from something over to
Speaker 1: something over one. Is that sustainable for the United States?
Speaker 1: It's worse than that, David, because the intrast rate for
Speaker 1: hasks in the President's budget look comical today in light
Speaker 1: of what's happened to interest rates. That's fair enough they
Speaker 1: lock in those budget forecasts months in advance. But my
Speaker 1: guess is that if you used realistic forecasts, you'd add
Speaker 1: another five percent to the debt to GDP ratio. I suspect,
Speaker 1: given what's happening to interest rates, that there's going to
Speaker 1: be a need for more fiscal adjustment than the administration imagines.
Speaker 1: I suspect the administration has underestimated the national security expenditures
Speaker 1: that will be necessary going forward. And I think we're
Speaker 1: moving towards a moment when we're gonna have to start
Speaker 1: thinking about fiscal policy as well as monetary policy as
Speaker 1: an anti inflationary UH tool. Thank you so much for
Speaker 1: our very special matrinity to Wall Street, Ricky's Larry Summers
Speaker 1: of Harvard. Finally, one more thought, learning from our mistakes
Speaker 1: or not. All of us can make mistakes, and sometimes
Speaker 1: when we go back over them, we cannot believe what
Speaker 1: we were thinking, or maybe what we were not thinking.
Speaker 1: And the big banks certainly are no exception to this rule.
Speaker 1: There's the London Big Whale fiasco JP Morgan that led
Speaker 1: to the end of senior executive Aina Drew's thirty year career.
Speaker 1: I accepted responsibility for the events that happened on my
Speaker 1: watch in one of the portfolios in my division. And
Speaker 1: there's Deutsche Bank in two eighteen mistakenly transferring thirty five
Speaker 1: billion dollars to your ex clearing, which was more than
Speaker 1: the total net worth of the bank at the time.
Speaker 1: Germany's biggest lender has sent about thirty five billion dollars
Speaker 1: to an exchange as part of its dealings. They already
Speaker 1: have problems with risk management. This is not a headline.
Speaker 1: Flow is a polite way and put yet, thirty billion
Speaker 1: dollars just sort of walked out the door to City
Speaker 1: in the height of the pandemic, paying over five hundred
Speaker 1: million dollars to Revlon creditors, despite a fight over the
Speaker 1: funds money that it could not get back. City Group
Speaker 1: and unexpectedly lost its legal battle to recover half a
Speaker 1: billion dollars it mistakenly sent to Revlon Landers Is to
Speaker 1: lead us blow to the bank that's been forced answer
Speaker 1: to regulators and time its internal controls. Mind you, this
Speaker 1: all comes after Congress decided to make sure those banks
Speaker 1: were paying attention, giving us all the protections of a
Speaker 1: law called Dodd Frank. Because of this law, the American
Speaker 1: people will never again be asked to foot the bill
Speaker 1: for Wall Street's mistakes. So it must have been particularly
Speaker 1: painful to Barclays this week when it found out that
Speaker 1: it had a tenC weed see clerical error in selling
Speaker 1: more in structured notes than the sec had given it
Speaker 1: permission to sell. You see, it had asked for and
Speaker 1: received the okay to sell twenty point eight billion dollars
Speaker 1: worth of these securities, but apparently someone wasn't paying attention
Speaker 1: and kept selling the way past the point they were
Speaker 1: supposed to stop, like the tune of thirty six billion
Speaker 1: dollars dollars, leaving Barkley's with an estimated loss of five
Speaker 1: ninety one million dollars. I just think it's just a
Speaker 1: simple finding area, like they forgot to add an extension
Speaker 1: to the shelf full. And that's very embarrassing. Um, you know, logistic, Glara.
Speaker 1: The financial head is bad, but you know, fairly manageable.
Speaker 1: It's more of the reputational head. It may be April Fools,
Speaker 1: but this one is no joke. Certainly enough for Barkley's management.
Speaker 1: Let's see what we can learn from this one. That
Speaker 1: does it For this episode of Wall Street Week, I'm
Speaker 1: David Weston. This is Bloomberg. See you next week.