Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. U S CPI nevers reinforcing
Speaker 1: concerns about inflation. The financial stories that cheap are worth
Speaker 1: a really different reaction to mark. It's more indications of
Speaker 1: just how hot the U. S. Economy really is. Through
Speaker 1: the eyes of the most influential voices. Larry Summers, the
Speaker 1: former Rikor Secretary, Katherine Keating, CEO of the n Y
Speaker 1: Mallam Sam's l Sharmon and founder of Equatic Group Investment.
Speaker 1: In Bloomberg wool Street Week with David Weston from Bloomberg
Speaker 1: Radio One for the history books, the markets get the
Speaker 1: message about tightening. Finally, Ukraine stalls the mighty Russian military,
Speaker 1: and a black woman takes a big step for the
Speaker 1: seat on the bench of the highest court in the land.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston, this
Speaker 1: week's special contributor Larry Summers on being caught between the
Speaker 1: rock of inflation and the hard place of recession. And
Speaker 1: I share very much the Chairman's hope that a soft
Speaker 1: landing is possible, but I don't think it's something we
Speaker 1: count on. And Candice Browning of Bank of America on
Speaker 1: Corporate America coming to terms was zero emissions even in
Speaker 1: a time of war. This really is a movement. I mean,
Speaker 1: I was surprised. We saw a history being made this
Speaker 1: week when Judge Katangi brown Jackson took a giant step
Speaker 1: towards the Supreme Court. US Supreme Court nomine Quatangi brown
Speaker 1: Jackson is set for questioning by a Senate committee. She's
Speaker 1: told the panel she's an independent thinker who decides cases
Speaker 1: from a neutral posture. Now there may be some who claim,
Speaker 1: without a shred of evidence, that you will be a
Speaker 1: rubber stand for this President. I have four words. Look
Speaker 1: at the record. I interpret and apply the law to
Speaker 1: the facts of the case before me, without fear or favor,
Speaker 1: consistent with my judicial oaks. President Biden traveled to Europe
Speaker 1: and support of the Coalition or raid against Russia. President
Speaker 1: Biden fielding questions from the media. They're talking about saying
Speaker 1: united with Western leaders. Do you think that Russia needs
Speaker 1: to be removed from the G twenty On a latter point,
Speaker 1: my answer is yes. If that can't be done, then
Speaker 1: we should ask to have both Ukraine be able to
Speaker 1: attend the meetings as Russian forces stalled in Ukraine. Ukrainian
Speaker 1: forces have essentially stole the Russian advance at Moscow's awards
Speaker 1: on diplomacy are not really being matched by actions on
Speaker 1: the grounds. Ceasefire is not to way out as a
Speaker 1: way out is immediate withdrawal of those of Russian troops
Speaker 1: from Ukrainian territory, so it's not as a way out.
Speaker 1: Fetcher J. Pow finally got his message through to the markets.
Speaker 1: What would prevent you from doing a fifty basis point move?
Speaker 1: In my what would prevent us nothing? The story has
Speaker 1: changed in a big way in the first quarter a
Speaker 1: t This is not the year people were looking for
Speaker 1: just three months ago. If someone had told all of us,
Speaker 1: everyone that watches the market that the Fed would be
Speaker 1: aggressively hawkish, I think we'd all be surprised. And if
Speaker 1: you had any doubt at all that the bond markets
Speaker 1: got that message, just take a look at the ten
Speaker 1: year this week, having its worst week since two sixteen,
Speaker 1: winding up on Friday just at TAD under two point
Speaker 1: five pc. Not to be outdone, the two year was
Speaker 1: down more in a week than it had been since
Speaker 1: two thousand and eight. And adding to the risk on
Speaker 1: sentiment where the equities markets where the SMP five hundred
Speaker 1: in NASDAC were both up just under two percent, while
Speaker 1: that faithful safe haven currency in the Japanese yen, had
Speaker 1: its worst week and over two years. Welcome now our experts,
Speaker 1: Chris Alman, c i O of the California State Teachers
Speaker 1: Retirement System and the c i O of Nowvine, Sarah Malic. So, Sarah,
Speaker 1: first of all, congratulations, I've becoming c i O. I
Speaker 1: think it's the first time since you've been back on
Speaker 1: Wall Street. That's great to see. Let's talk about this
Speaker 1: relatively risk on week we saw this week. Uh, what
Speaker 1: do you make of it? Given the fact that we
Speaker 1: are at war, well the fence trying to create a
Speaker 1: Goldilock scenario by engineering a soft landing, The equity markets
Speaker 1: are buying in and the bond markets aren't. We're watching
Speaker 1: three key things to monitor whether we're going to get
Speaker 1: to that, and that is the FED movements, inflation, and
Speaker 1: geopolitical issues. Uh. The equity markets like what the Feds
Speaker 1: said in terms of becoming more hawkish because they're catching
Speaker 1: up to what's going on with inflation, getting more credibility
Speaker 1: around that battle. The equity markets like it because it
Speaker 1: means we won't have runaway inflation. Now, when it comes
Speaker 1: to inflation, the key question is can economic growth be
Speaker 1: strong enough to overcome inflation. We think it can. Geopolitical
Speaker 1: risks are here to stay with Russia, though we see
Speaker 1: overall impact on global growth as moderate, but areas that
Speaker 1: we're monitoring, our financial channels, commodities, and the impact on
Speaker 1: the European Union. All of that together still leaves us
Speaker 1: moderately bullish for the year. So Chris Sarah says the
Speaker 1: effect on the markets will be relatively moderate from the war.
Speaker 1: The war is not going the way we thought it would.
Speaker 1: We thought it would over quickly one way or the other.
Speaker 1: It isn't. Are you more concerned about long term consequences exactly,
Speaker 1: David Sarah, I would have to say, I think the
Speaker 1: markets actually have their heads stuck in the sand. The
Speaker 1: bond market, they're awake and they're paying attention. I mean,
Speaker 1: if David, as you said, two's are back to eight, Uh,
Speaker 1: there's a thirty basis point spread between two's and thirties.
Speaker 1: That tells me the thirty year bond knows it's going
Speaker 1: to be a flight to quality because it's a safe
Speaker 1: haven in a war, which is the word you started
Speaker 1: with this equity markets shouldn't be rising. They go up
Speaker 1: at the beginning of inflation, and Sarah, I give you that,
Speaker 1: but I think long term, the bond markets got this
Speaker 1: right and the stock markets got this wrong. It should
Speaker 1: be more cautionary and it should be more worried about
Speaker 1: inflation long term. So Chris, as you imagine and manage
Speaker 1: that really substantial portfolio there at cal Stars, what do
Speaker 1: you look at in the yield curve? Anthing at all.
Speaker 1: We heard from j Powe this week and he said, look,
Speaker 1: oh sure, we pay attention to everything, which is really
Speaker 1: the very very early part of the curve which we
Speaker 1: focus on, not, for example, the two's tens. J can't
Speaker 1: control the twos tends. He can talk it up and
Speaker 1: he can job on it. You guys have a wonderful
Speaker 1: montage of a whole bunch of Fed governors who all
Speaker 1: talk about the next meeting that not only is fifty
Speaker 1: basis points not off the table. I think one of
Speaker 1: them at the end says, could be zero, it could
Speaker 1: be could be fifty, could be a point. I just
Speaker 1: think we have to recognize for an a rising rate environment.
Speaker 1: Sarah's right, it's the beginning. Bond stocks do quite well
Speaker 1: at the beginning of inflation period. But this is not
Speaker 1: going to go away. This isn't remember transitory, it's not transitory.
Speaker 1: Inflation is going to be around, and this war impact
Speaker 1: is going to be felt. Sarah Malic a movie and
Speaker 1: Chris element of Colchus will be staying with us as
Speaker 1: we turned from the economy and the Fed to what
Speaker 1: a portfolio manager is to do about them. That's gonna
Speaker 1: have next on Wall Street Week on Bloomberg. Still with
Speaker 1: us a Chris Ailment of Counselors and Sara Malic of Nowvines.
Speaker 1: So we've talked about the economy, We've talked about the FED,
Speaker 1: We've talked about inflation. Let's talk about what that means
Speaker 1: for a portfolio manager. Chris. Let's start with you, because
Speaker 1: I think of you particularly when we talk about inflation,
Speaker 1: because you've had a lot of pensions. Are you making
Speaker 1: enough money right now? Stocks are down this year, bonds
Speaker 1: are down this year. Are you making enough money to
Speaker 1: pay those pensions well? When you're looking at it on
Speaker 1: an average, not on a one year period, David, No,
Speaker 1: and markets behind us. So we're having a tough time,
Speaker 1: but we do invest in longer term assets. Real estate
Speaker 1: has held its value. Private equity has done really well,
Speaker 1: mostly because of the technology and the medical booms that
Speaker 1: we've seen this year. But then we also invest in
Speaker 1: inflation sensitive assets. We've got uh Timberland, we've had agriculture,
Speaker 1: we've got commodities which have been up over twenty nine
Speaker 1: so far this year. So the key is diversification. We
Speaker 1: don't put all our money in one basket. We don't
Speaker 1: put it all in domestic stocks. We spread it across
Speaker 1: in a number of different asset classes. That way that
Speaker 1: we can weather years like this and then also make
Speaker 1: money in the positive years. So, Sarah, how do you
Speaker 1: manage in this environment? Certain there's a lot of volatility
Speaker 1: out there, a lot of uncertainty. I've read a number
Speaker 1: of analysts who say, you know, you've got to get
Speaker 1: conservative right now. You know, a large cap you want
Speaker 1: to start wars and start small cap. You want to
Speaker 1: go value rather than growth. Now we also go public
Speaker 1: surprivates at New venes. So in an inflationary environment, we
Speaker 1: like equities, we like commodities and also real assets and
Speaker 1: within equities, and we're being selective, but you know, companies
Speaker 1: with pricing power. We are seeing that from energy, which
Speaker 1: has a very tight cycle and producer discipline, which is
Speaker 1: very important that the producers are not just pulling just
Speaker 1: focusing on volume growth, they're returning cash to shareholders. And
Speaker 1: then we like large caps largely have growth stocks really
Speaker 1: beaten down this year. Economically resilient. These are companies like
Speaker 1: you know, a bell Weather sooft like Microsoft, which has
Speaker 1: such strong growth characteristics going forward, exposure to we view
Speaker 1: as the next digital revolution, which is the metaverse um.
Speaker 1: And then also within fixed income, it is challenging that
Speaker 1: there's areas that you can look at where you can
Speaker 1: find quality or also higher yields like emerging market debt,
Speaker 1: floating rate loans, and we're definitely airring on the shorter
Speaker 1: duration side with fixed income given what's going on with
Speaker 1: infest rates. Sarah with a big grosstalk like Microsoft, are
Speaker 1: you not worried about it's fully valued? You know, the
Speaker 1: growth stocks are actually pretty beaten down this year. Considering
Speaker 1: their structural growth ways, we found them to be quite interesting.
Speaker 1: Another name that we like in technology is applied materials,
Speaker 1: where fans of the semi conductor cycle semis are getting
Speaker 1: larger and more complex, they require more equipment. Applied Materials
Speaker 1: is in the sweet spot of t SMC and Intel,
Speaker 1: two of the biggest foundries, a lot of demand for
Speaker 1: their products, and we think that's so very well position
Speaker 1: company going forward. Chris tell us about bonds in this
Speaker 1: environment with rates going up, why does it make sense
Speaker 1: to be in bonds at all? Good challenge, But I think,
Speaker 1: just like Sarah said, we're looking at the short end.
Speaker 1: We're looking at private credit, which is variable rates, so
Speaker 1: we have opportunities to invest there. There's still a few
Speaker 1: credit opportunities, but it's a challenge. We have the lowest
Speaker 1: waiting in fixed income that we've had in the history
Speaker 1: of cal Star's uh So it's a challenging environment. And
Speaker 1: if you're in a four oh win K investor, it's
Speaker 1: really hard because all you really have is stocks and bonds.
Speaker 1: You don't have a lot of chances. Maybe if you
Speaker 1: have a real asset option in your four oh one K,
Speaker 1: take advantage of that, but you've got to open your account,
Speaker 1: take a look at it and diversify across. As I
Speaker 1: said at the at the earlier segment, David, I think
Speaker 1: that you know, the Feds making it clear they're raising rates.
Speaker 1: Sarah said it herself seven more times already this year,
Speaker 1: and maybe more so that that to thirty uh two
Speaker 1: year is gonna go higher, and that's gonna work against you.
Speaker 1: I mean, so far you have a negative eleven percent
Speaker 1: return in bonds this year. That's a tough way to go.
Speaker 1: So you've got a diverse fy away into other types
Speaker 1: of assets, Sarah, as you manage your portfolio. We just
Speaker 1: heard from of course and seven times. Actually a city
Speaker 1: came out on Friday of this week and said eight times,
Speaker 1: can don't even stand that. I guess the reason I
Speaker 1: asked that as a portfolio manager, do you have to
Speaker 1: be hedging against the possibility recession? Actually, well, if you
Speaker 1: look at the last couple of cycles, the Fed, the
Speaker 1: equity markets peaked in around nine to fourteen rate hikes,
Speaker 1: So I think you know, we can handle multiple rate hikes.
Speaker 1: One question for us, as though, it has to make
Speaker 1: a dent in inflation or we're going to have other problems.
Speaker 1: You know, we have to watch the hard economic data.
Speaker 1: I think the FED is doing the same thing. They've
Speaker 1: said their data dependent. Can the economic data hold up
Speaker 1: during all of these rate hikes. I think initially we're
Speaker 1: seeing signs that it can, because sag inflation is a
Speaker 1: period where we have low employment and lower economic growth,
Speaker 1: and we're just not really seeing that yet. We still
Speaker 1: have a very strong economy here, and so you know,
Speaker 1: we are not initially worried about these rate hikes. As
Speaker 1: I said earlier, we want to be careful about leaving
Speaker 1: to money on the table in the early cycles of
Speaker 1: rate hikes, and just because the yield curve is inverting
Speaker 1: in certain places, Sarah, you said, the word that keeps
Speaker 1: saying up at night stag inflation, because I worry about
Speaker 1: is that if if the inflation is coming from external
Speaker 1: sources like the war in Ukraine and the lack of fertilizer,
Speaker 1: the lack of we hire prices two wages because people
Speaker 1: are demanding it before they go back to work, that
Speaker 1: makes me worry that that economic growth is going to
Speaker 1: get squashed in this summer. The FED can't fight that
Speaker 1: kind of inflation with just higher rates, and we end up,
Speaker 1: as you said, in stag inflation. I know for my portfolio,
Speaker 1: that's the worst situation of all there. There's almost nothing
Speaker 1: we can find to invest in to make us money
Speaker 1: in a stagflation environment. If you actually look at the
Speaker 1: seventies during the period of stagflation, during the early period,
Speaker 1: it was a very challenging period invest but later on
Speaker 1: actually that was when equities and real assets actually performed
Speaker 1: pretty well. So you can't find period during that cycle.
Speaker 1: You can't actually have times where you can make good
Speaker 1: returns on your investments. Um. So, I mean, I agree
Speaker 1: it's a concern out there, but it's not something that
Speaker 1: we're worried about right now. Also, within inflation, I think
Speaker 1: the FED seeing the same thing where there's noise in
Speaker 1: those umbers from tier supply chains to the war that
Speaker 1: we're seeing these things that are not necessary, things that
Speaker 1: are going to remain permanently. So what is that true
Speaker 1: baseline inflation number one? We're through this, That's what you
Speaker 1: know we're not clear on. I don't think the fet
Speaker 1: is yet and they have the ability to pull back
Speaker 1: on rate increases. Um. Once we start to see what
Speaker 1: inflation really looks like, we're passing of these unusual currencies
Speaker 1: that are happening. True, Christal, wrap up this investment cycle.
Speaker 1: Let's talk about that you referred to earlier, and that
Speaker 1: is the energy transition. What effect, if any, will the
Speaker 1: war Ukraine have on that? Because we saw just this week,
Speaker 1: for example, the United States now commit to a huge
Speaker 1: new supply of l n G. Look with natural gas
Speaker 1: to Europe. What's going to happen in the energy transition
Speaker 1: in this world? David, it's fronduct to light that it's
Speaker 1: not going to be smooth, that it is going to
Speaker 1: be a difficult transition. I get a ton of pressure
Speaker 1: from teachers that want us to dump US oil companies,
Speaker 1: and now maybe they realize that, well, we don't want
Speaker 1: to be dependent on Russia and Saudi Arabia and Venezuela.
Speaker 1: It needs to be a transition where consumers change, utilities changed.
Speaker 1: You know, the number one thing is how we generate
Speaker 1: electricity first and foremost. So we've got to find ways
Speaker 1: to have a thoughtful transition. And we don't want to
Speaker 1: be geopolitically linked to one economy or one type of fuel.
Speaker 1: We want to be diversified. And so you know, we've
Speaker 1: we've got time of twenty years, but it has to
Speaker 1: start now and it has to be meaningful. Thank you
Speaker 1: so very much for both of you. That's Sarah Malic
Speaker 1: of Nouvena and Chris Ellman of Calster. Is great to
Speaker 1: have you both with us coming up. The SEC wants
Speaker 1: companies to disclose their greenhouse gas emissions, but what are
Speaker 1: they already doing to get to net zero? Bank of
Speaker 1: America has done the survey, and its head of research,
Speaker 1: Candice Browning, is here with the report. That's next on
Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street
Speaker 1: Week with David Weston from Bloomberg Radio. Getting to zero,
Speaker 1: that's the goal that countries representing of greenhouse emissions and
Speaker 1: g d P have set for themselves. Making progress all
Speaker 1: but inevitable. That's according to President Biden's Climate Envoy, John Kerry.
Speaker 1: No president in the future would walk into the White
Speaker 1: House and undo what is going on around the world.
Speaker 1: This is bigger than the United States. What is this response?
Speaker 1: People all around the world are retooling, and corporations are
Speaker 1: quickly signing up to do their part. Like VP CEO
Speaker 1: Bernard Looney, we will reinvest two pounds more than that
Speaker 1: actually for every pound that we make, and the majority
Speaker 1: of that investment, the vast majority of it will go
Speaker 1: into helping Britain transition to a zero future. This week,
Speaker 1: the SEC gave corporations a nudge, proposing new requirements the
Speaker 1: public and traded companies disclose their greenhouse gas emissions. So
Speaker 1: now it appears there's no turning back. Before we go
Speaker 1: forward into a zero emissions world, we have to know
Speaker 1: where we are right now, and particularly where companies are
Speaker 1: and really being committed to zero emissions. To find that out,
Speaker 1: Bank of America has done a compremis of survey of
Speaker 1: thirty four hundred different companies around the world, and here
Speaker 1: tell us about what she found out. Were welcome Candice Browning.
Speaker 1: She is head of Global Research for Bank of America.
Speaker 1: So Candice, thanks so much for being here. What did
Speaker 1: you learn from your survey? Oh, David, we learned so
Speaker 1: many things. I mean, the first thing we learned is
Speaker 1: that this really is a movement. I mean I was surprised,
Speaker 1: you know, and nineteen about sixteen percent of the world's GDP,
Speaker 1: you know, by country had committed to some sort of
Speaker 1: net zero plan, and today, just three years later, that
Speaker 1: number is nine. And you know, this whole thing was
Speaker 1: really led initially by policymakers, right. But now, what's happened
Speaker 1: is all these other groups have jumped in, whether it's
Speaker 1: active as shareholders, or whether it's consumers who want to buy,
Speaker 1: you know, goods that they think are not don't have
Speaker 1: a huge carbon footprint. Um, so it's all it's in
Speaker 1: its shareholders. They've all jumped in, and everybody wants to
Speaker 1: get on this wagon. So the first big takeaway was
Speaker 1: that you know, it's it's a movement and it's going
Speaker 1: to happen. And I think actually that the events between
Speaker 1: Russia and Ukraine are actually going to further accelerate this
Speaker 1: because Europe you know, has to get off its dependency
Speaker 1: on hydro carbons. How difficult it's going to be. Because
Speaker 1: one of the things I really focused on in reading
Speaker 1: your survey was there are three different categories here of emissions,
Speaker 1: and one of them is your own companies. Another is
Speaker 1: that people supply you. But then there's a third category
Speaker 1: that actually dwarfs the other two. Yeah, Basically, the first
Speaker 1: one is what you use to make your goods and
Speaker 1: services and products, and then the second one is the
Speaker 1: purchased energy, you know, the electricity that you buy. And
Speaker 1: then the third one is the really difficult one to
Speaker 1: to measure, and that is really the carbon footprint of
Speaker 1: all of your suppliers. And it's estimated that that third
Speaker 1: level David is three times as big as level one
Speaker 1: and level two. In doing your survey, did you get
Speaker 1: a sense of timeline for these corporations? If they're committed
Speaker 1: to NED zero, how long is it going to take?
Speaker 1: So what we found is that of the thirty four
Speaker 1: hundred companies that eleven percent of them globally said they're
Speaker 1: going to get there by that's just eight years away.
Speaker 1: That number quadruples by the time of the company said
Speaker 1: that they would be there. And there are also some
Speaker 1: real differences by region. So if you look at Europe,
Speaker 1: for example, they're twenty percent of companies say they're going
Speaker 1: to get there by twenty thirty, so they're far ahead
Speaker 1: of the rest of the world. In China, fully a
Speaker 1: third of companies don't even have a timeline, So there
Speaker 1: are big differences by region. We'll talk about that geographic dispersion.
Speaker 1: I can call it that. You talked about Europe, you
Speaker 1: talked about China. Where's the United States? You know, the
Speaker 1: United States is just solidly right um right in the
Speaker 1: middle there. I think it's about I can't remember the
Speaker 1: exact number for but we're solidly in the middle and
Speaker 1: we've been accelerating our timeline. Okay, we have Wall Street.
Speaker 1: We appeal to investors, try to inform them what's this
Speaker 1: gonna cost, what's this gonna do to revenue on the
Speaker 1: top line on the one hand, what's also going to
Speaker 1: do to the cost line. So what we found is
Speaker 1: that in general, companies analysts expected that revenues would decline
Speaker 1: about five Now that averaged from zero percent to as
Speaker 1: much as fourteen percent um depending on the sector. For example,
Speaker 1: energy companies you would imagine would have one of the
Speaker 1: biggest hits. So we think that there'll be a revenue hit. Interestingly,
Speaker 1: we also think that there's going to be a real
Speaker 1: pick up in research costs, So about one point two
Speaker 1: trillion of R and D will be spent we think
Speaker 1: over the next five years, and capital expenditures we think
Speaker 1: will be about two point four trillion over the next
Speaker 1: five years. So put it together, you've got lower revenues,
Speaker 1: you've got higher costs. It means that you're going to
Speaker 1: have a hit to operating profits, which we think will
Speaker 1: be down about five on average. So that sounds like
Speaker 1: a pretty grim picture, and you know, in the short
Speaker 1: term there definitely will be pain, but there are going
Speaker 1: to be companies that are going to be beneficiaries of
Speaker 1: this as well. Well. It's a fascinating study, is I say.
Speaker 1: I learned a lot from and I really thank you
Speaker 1: for sharing it with us here on Wall Street Week
Speaker 1: as Kenneth Browning, she's head of Global research for Bank
Speaker 1: of America. Coming up, we wrap up the week with
Speaker 1: special contributor Larry Summers of Harvard. This is Wall Street
Speaker 1: Week on Bloomberg. This is Bloomberg Wall Street Week with
Speaker 1: David Weston from Bloomberg Radio, and welcome back now our
Speaker 1: special contributor here at Walster Equal Larry Summers. And Larry,
Speaker 1: you were at least perhaps a little bit in the
Speaker 1: news this week for one specific reason. We heard from
Speaker 1: FED chair J Powell at the NAB meetings down in Washington,
Speaker 1: and he went out of his way to sort of
Speaker 1: correct the record on exactly how aggressive the FRED will be.
Speaker 1: Some people have said he was responding to some of
Speaker 1: your criticisms or what he said last week. We're clearly
Speaker 1: the bond markets didn't listen to him. You know, I
Speaker 1: don't I don't know whether I had anything to do
Speaker 1: with it at all. I think he did signal more hawkishness,
Speaker 1: and I think that was very much warranted given the
Speaker 1: inflation threat. I do think there are a number of
Speaker 1: problems in FED thought where they're advocating and making arguments
Speaker 1: that I don't think really stand up to economic scrutiny.
Speaker 1: So let's take let's go through some of those arguments.
Speaker 1: One of the things I think I heard from the
Speaker 1: chair was, actually, inflation is going to get relieved because
Speaker 1: there will be an expansion in the labor force. It
Speaker 1: will relieve some of the wage pressure that you've talked about.
Speaker 1: You know, an expansion in the labor force matters if
Speaker 1: it changes the supply demand balance in an important way.
Speaker 1: But if the people all work, then it translates into
Speaker 1: more demand, off setting the increase in supply. And the
Speaker 1: FEDS not forecasting any increase in unemployment. So with no
Speaker 1: forecasting increase in unemployment, I don't know why one would
Speaker 1: think that an expanded labor force would somehow be a
Speaker 1: reason why inflation would come down. It would only exert
Speaker 1: restraint on wages if it translated into higher unemployment. Something
Speaker 1: the FED is it pains to predict will not take place.
Speaker 1: That's the second thing that we heard from the chair
Speaker 1: today this week was in fact that they are willing
Speaker 1: to go up to the neutral end, up above the
Speaker 1: neutral rate and the FED funds in order to get
Speaker 1: inflation on control. Is that going to do it? I
Speaker 1: think we have to be careful with that. Uh. In
Speaker 1: a sense, I think the Fed is doing assumer can
Speaker 1: opener economics, after the old joke about the economists when
Speaker 1: asked how to how to get into a tuna fish
Speaker 1: can UH says, assume we have a can opener. That
Speaker 1: reality is that the neutral interest rate is a real
Speaker 1: interest rate concept. It reflects the difference between the interest
Speaker 1: rate and inflation. What the FEDS doing is assuming their
Speaker 1: own success with respect to inflation that it comes down
Speaker 1: to about two, and then saying that their interest rate
Speaker 1: forecast will represent a positive real interest rate and will
Speaker 1: correspond to their neutral interest rate. But it all depends
Speaker 1: on assuming their success. Markets are saying that real interest
Speaker 1: rates aren't getting anywhere near the FEDS estimate of the
Speaker 1: neutral real interest rate anytime in the next UH five years,
Speaker 1: and certainly that's what most professional forecasters are saying in
Speaker 1: terms of their views about inflation. So I don't think
Speaker 1: we're seeing the kind of increase in interest rates that's
Speaker 1: usually necessary to go for UH inflation. I don't agree
Speaker 1: with Republican economist John Taylor on not many things, but
Speaker 1: his Taylor principle that to stop inflation you have to
Speaker 1: raise interest rates by more than inflation goes up, because
Speaker 1: otherwise the real interest rate is coming down. That's a
Speaker 1: valid principle, but not one that's yet been internalized in
Speaker 1: the FEDS forecasts. The third thing that we heard from
Speaker 1: the chair this week was he admitted, I think that
Speaker 1: it it's going to be difficult to have a soft landed.
Speaker 1: He nonetheless, it's confident it can be done, in part
Speaker 1: because it's been done before. There are at least three
Speaker 1: other instances people are pointing to, right, I don't see
Speaker 1: how anybody can regard those as very relevant precedents. And
Speaker 1: none of them was the CPI at anything like eight
Speaker 1: when the episodes started. In none of them was the
Speaker 1: unemployment rate or the vacancy to unemployment rate in historically
Speaker 1: tight labor market territory. And in all of them, the
Speaker 1: whole point by the FED was preemptive action to restraint,
Speaker 1: and that's what this FED ruled out in its operating framework. So, Larry,
Speaker 1: are you confident that we know what it will take
Speaker 1: to get inflation down at this point? Are no important?
Speaker 1: Does the FED now? Look? Nobody knows? I certainly don't.
Speaker 1: I don't think the Fed knows. I do think that
Speaker 1: it's likely to require significantly greater interest rate hikes than
Speaker 1: the Fed or markets are now except expecting. And I
Speaker 1: do think that we need clear signals that we're prepared
Speaker 1: to accept some slowdown in economic activity if that's the
Speaker 1: price of reducing inflation. Otherwise we're going to be making
Speaker 1: the mistakes of the nineteen seventies that will ultimately create
Speaker 1: a need for a really catastrophic procession. I think that
Speaker 1: can be avoided, but it can't be avoided if we're
Speaker 1: counting on some kind of immaculate reversion of inflation or
Speaker 1: immaculate disinflation. Larry, as we speak, that horrific war in
Speaker 1: Ukraine continues, and of course we're all fixated on the
Speaker 1: death and destruction, but they're also economic consequences. What do
Speaker 1: you see as potential longer range global economic consequence of
Speaker 1: what we're seeing? I fear and it's too early to know,
Speaker 1: and we may will never get the data to do
Speaker 1: a really accurate measurement. But my fear is that there's
Speaker 1: going to be more death thousands of miles from Ukraine
Speaker 1: because of the food price hikes, food shortages and potential
Speaker 1: famines that are associated with UH, the loss of crop
Speaker 1: in Ukraine and Russia, that that will ultimately be the
Speaker 1: cause of more death than what happens in Ukraine. That,
Speaker 1: of course, is not to minimize the tragedy in Ukraine,
Speaker 1: but it is to point up the need for the
Speaker 1: world community to be focusing even on it as it
Speaker 1: focuses on Ukraine, to be focusing on the needs of
Speaker 1: developing countries broadly, the need for financing, the need for
Speaker 1: debt relief, the need for UH food UH allocations. I
Speaker 1: think this is a critical issue, and it could become
Speaker 1: a more critical issue depending on developments in the next
Speaker 1: few weeks. We've had some people this week predict perhaps
Speaker 1: we're seeing the end of globalization. Larry Think, for example,
Speaker 1: for black Rock, said that in the media, what do
Speaker 1: you think about that as a possibility. At this point,
Speaker 1: we're certainly seeing the evolution of hyperglobalization. We're going to
Speaker 1: see more rely more emphasis on justin todd cases rather
Speaker 1: than just in time. But I don't think we're gonna
Speaker 1: see anything like the end of globalization. I think as
Speaker 1: long as there are smartphones, as long as there are
Speaker 1: video cameras, as long as there is zoom, we are
Speaker 1: going to see levels of interaction between countries that are
Speaker 1: great than anything that was taking place even twenty years ago.
Speaker 1: So I think discussions of the demise of globalization are overheated,
Speaker 1: and I think they're even a little bit dangerous because
Speaker 1: they risk a self fulfilling prophecy. Finally, Larry, we lost
Speaker 1: a true pioneer this week in Malon Albright, a scholar,
Speaker 1: a diplomat, the first woman Secretary of State, and I
Speaker 1: believe when she was a point of that position was
Speaker 1: the most senior position ever served by a woman in
Speaker 1: the United States. I know you served with her. Give
Speaker 1: us your thoughts about Matton, all right, what she did,
Speaker 1: what her legacy is. Madeline was a special UH person.
Speaker 1: She was a role model for UH so many women.
Speaker 1: She ascended to the highest levels of power while always
Speaker 1: maintaining the highest level of decency, humanity, collegiality, kindness. UH
Speaker 1: two others. She showed that you could be tough and
Speaker 1: generous at the same time. Larry, thank you very much
Speaker 1: for sharing that with us, as Larry Summers at Harvard
Speaker 1: are very special contributor here on Wall Street Week. Finally,
Speaker 1: one more thought. They say that war is politics by
Speaker 1: other means, but what happens when politics starts to look
Speaker 1: like war? American politics has always had a bit of
Speaker 1: an edge to it, going all the way back to
Speaker 1: when a moderator in a primary debate New Hampshire wanted
Speaker 1: to turn off Ronald Reagan's mike and it got physical,
Speaker 1: and a news conference at bagged in into this an
Speaker 1: age when someone in the audience through a shoe at
Speaker 1: President George W. Bush, So what if they gat to
Speaker 1: a shoe hit me? And of course there was the
Speaker 1: famous confrontation between candidate Joe Biden and the woman who
Speaker 1: was to become his vice president in the primary debate.
Speaker 1: Government must stem in that's rights and the civil rights.
Speaker 1: That's why we need to pass the Equality Act. That's
Speaker 1: why we need to pass the e r A. Because
Speaker 1: there are moments in history for states fail to preserve
Speaker 1: the civil rights of our peoport. But we saw political
Speaker 1: confrontation taken to a whole new level in the debate
Speaker 1: between two Republican candidates trying to win the nomination for
Speaker 1: the Senate in Ohio, Josh Mandel and Mike Gibbons, when
Speaker 1: they came about as close to fisticus as you can
Speaker 1: get on a stage on live TV. Watch what happened?
Speaker 1: Watch what happened. But then again, maybe they're following a
Speaker 1: more ancient tradition, one going all the way back to
Speaker 1: eighteen fifty six, when Congressman Preston Brooks of South Carolina
Speaker 1: went on the floor of the U. S. Senate and
Speaker 1: took his cane to Senator Charles Sumner of Massachusetts, nearly
Speaker 1: killing him right in the miliv of speech. Admittedly a
Speaker 1: somewhat lurd speech against slavery. And although we may have
Speaker 1: come to exp BacT somewhat better of our senators these days,
Speaker 1: there's still always room in the government of Turkey or
Speaker 1: Mexico or Taiwan for a good old fashioned brawl. 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.