WEBVTT - Bloomberg Wall Street Week: October 7th, 2022 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:07.080 to the markets this week U S CPI nemers reinforcing 0:00:07.160 --> 0:00:10.639 concerns about inflation. The financial stories that chief are worth 0:00:10.720 --> 0:00:13.760 a really different reaction to markets. More indications of just 0:00:13.960 --> 0:00:16.319 how hot the U. S economy really is. Through the 0:00:16.400 --> 0:00:19.799 eyes of the most influential voices Larry Summers, the former 0:00:19.800 --> 0:00:22.880 Treachery Secretary, Katherine Keating, CEO of v n Y Moms, 0:00:22.960 --> 0:00:26.239 Sam's l Sharon and founder of Equity Group Investment. In 0:00:26.320 --> 0:00:30.280 Bloomberg wool Street Week with David Weston from Bloomberg Radio. 0:00:31.000 --> 0:00:33.840 As fall sets in a decided turn in the air 0:00:34.080 --> 0:00:36.760 for the new British government's designs for the economy, for 0:00:36.880 --> 0:00:40.440 Elon Musk's designs on Twitter, and most decidedly for Mr 0:00:40.479 --> 0:00:44.000 Plutin's designs on Ukraine. This is Bloomberg Wall Street Week. 0:00:44.080 --> 0:00:47.400 I'm David Weston. We had our fair share of about 0:00:47.520 --> 0:00:50.440 faces this week with the Bank of England's quick intervention 0:00:50.479 --> 0:00:53.240 to save the guilt market, as explained by former MPC 0:00:53.440 --> 0:00:56.360 member Kristen Forbes of m I, T seems that they 0:00:56.360 --> 0:00:59.560 are worried that because of the big market moves, there 0:00:59.560 --> 0:01:02.720 could be some margin calls, um some pressures for for 0:01:02.920 --> 0:01:05.560 selling that could cause the guilt market to freeze up, 0:01:05.800 --> 0:01:08.440 and British Prime Minister Liz Trust giving up at least 0:01:08.480 --> 0:01:12.039 part of her economic program. It was becoming a destruction. 0:01:12.319 --> 0:01:15.600 So that's why we immediately change that policy, and that's 0:01:15.600 --> 0:01:18.399 the kind of government we all. But as ugly as 0:01:18.400 --> 0:01:21.760 the situation was in UK markets, it was nothing compared 0:01:21.800 --> 0:01:25.120 with the setbacks for Russian forces in eastern and southern Ukraine, 0:01:25.400 --> 0:01:28.920 with President Putin's efforts to quote annex territory that his 0:01:29.040 --> 0:01:32.360 forces didn't even control, which Admiral John Kirby at the 0:01:32.440 --> 0:01:35.360 NSC looks at as an indication that Mr Putin just 0:01:35.480 --> 0:01:39.160 may be coming to understand how difficult his situation really is. 0:01:39.640 --> 0:01:44.480 The annexation announcements, as well as his announcement of partial mobilization, 0:01:44.640 --> 0:01:47.760 certainly shows the degree to which Mr Putin knows how 0:01:47.840 --> 0:01:51.360 much he's struggling inside Ukraine, and OPEC plus weighed in 0:01:51.400 --> 0:01:54.480 with its own changes, cutting production caps by two million 0:01:54.480 --> 0:01:57.840 barrels a day, or about seven percent, putting even more 0:01:57.880 --> 0:02:00.240 pressure on Europe and the rest of a war world 0:02:00.280 --> 0:02:05.240 already worried about energy, while we were disappointed that OPEC 0:02:05.760 --> 0:02:08.639 made this decision. As the President mentioned, I think it's 0:02:09.000 --> 0:02:13.200 unnecessary if you look at the global environment, where supply 0:02:13.400 --> 0:02:17.040 continues to be the predominant challenge. Then there's Elon Musk. 0:02:17.200 --> 0:02:20.400 He offered forty four billion dollars for Twitter back in April, 0:02:20.560 --> 0:02:23.679 then decided to reneg got sued, and on the eve 0:02:23.720 --> 0:02:27.080 of his deposition, returned to his original offer, even though 0:02:27.080 --> 0:02:30.120 it looks like he's going to be way overpaying in 0:02:30.160 --> 0:02:33.359 many ways. This is almost the most expected outcome of all, 0:02:33.360 --> 0:02:36.840 which is settling on the eve of trial, just before deposition. 0:02:36.880 --> 0:02:40.040 Of the main players, Elon must himself he doesn't want 0:02:40.040 --> 0:02:43.120 to be deposed. He has, you know, probably some embarrassing 0:02:43.160 --> 0:02:46.600 text messages and conflicting statements and all of that would 0:02:46.600 --> 0:02:51.120 make for a very unpleasant decision crowd. But after all 0:02:51.160 --> 0:02:53.320 the back and forth, this week, US jobs and members 0:02:53.320 --> 0:02:56.320 actually came in surprisingly on course, adding two and sixty 0:02:56.400 --> 0:02:58.960 three thousand new jobs, just slightly more than expected, with 0:02:59.080 --> 0:03:01.679 workers paid five percent more than they were last year, 0:03:01.800 --> 0:03:04.800 and a reduction the unemployment rate to three. Here to 0:03:04.880 --> 0:03:07.280 walk us through this week and what got us here 0:03:07.400 --> 0:03:10.520 are Aaron Brown, portfolio manager at PIMCO, and Chris Allman, 0:03:10.600 --> 0:03:13.320 Chief Investment Officer, Ed Kelster. So, Chris, let me start 0:03:13.360 --> 0:03:16.480 with you. Boy, given what we're seeing right now, are 0:03:16.480 --> 0:03:20.360 we looking at a long, cold winter? Would you say? Unfortunately, David, 0:03:20.400 --> 0:03:23.080 I think we are. Um. I think the Fed, you know, 0:03:23.120 --> 0:03:25.800 with these employment numbers, the Fed knows that they have 0:03:25.880 --> 0:03:29.680 to continue this pace of aggressive tightening and they're going 0:03:29.720 --> 0:03:32.400 to do so the next meeting and the next senning 0:03:32.440 --> 0:03:35.120 after that, and I think which the street is pricing in, 0:03:35.560 --> 0:03:37.360 but I think after that they're going to have to 0:03:37.440 --> 0:03:39.120 keep it up and that's going to be into the 0:03:39.160 --> 0:03:41.040 winter and it's going to be a tough time. So 0:03:41.120 --> 0:03:43.280 what do you say, Aaron, is it going to be 0:03:43.280 --> 0:03:45.000 a rough winter? I think it is going to be 0:03:45.040 --> 0:03:47.480 a rough winter. I think that they're fans of uncertainty 0:03:47.480 --> 0:03:50.440 are quite wide. For next year, the Fed is tightening 0:03:50.760 --> 0:03:53.920 into an economic slowdown and we haven't even seen the 0:03:53.960 --> 0:03:56.880 real impact of that slowdown yet. We're just starting to 0:03:56.920 --> 0:04:00.880 see signs of a gradual slowing, but like will continue 0:04:00.920 --> 0:04:03.400 to see that into next year, and we think that 0:04:03.440 --> 0:04:07.640 we're heading into a recession into early and at that 0:04:07.760 --> 0:04:11.080 same point, just given the level of inflation, the Federal 0:04:11.160 --> 0:04:14.280 Reserve is now really challenged to be able to arrest 0:04:14.320 --> 0:04:17.640 that inflation get it under control despite what happens to 0:04:17.680 --> 0:04:20.160 the economy. So I think that really poses a challenge 0:04:20.200 --> 0:04:24.240 for the FED, and we'll likely see something that's fairly unprecedented, 0:04:24.279 --> 0:04:28.799 which is continued financial conditions tightening and FED tightening into 0:04:28.839 --> 0:04:32.960 an economic slowdown, even if it really leads to a 0:04:33.040 --> 0:04:36.760 harder landing than what the Fed's anticipating. And Aarin I 0:04:36.839 --> 0:04:39.000 pushed back a little bit. I actually think we're in 0:04:39.040 --> 0:04:42.800 a recession right now. It's not a very strong one, um, 0:04:42.839 --> 0:04:44.440 and it doesn't hurt a lot. I would so an 0:04:44.440 --> 0:04:47.279 employment growing, you know, but we did have a negative 0:04:47.320 --> 0:04:51.000 GDP in the second quarter, third quarters mild to me, 0:04:51.080 --> 0:04:54.120 anything below one percent in the USA feels like a recession. 0:04:54.600 --> 0:04:56.640 But so what you're saying is you think it's going 0:04:56.680 --> 0:04:59.160 to be a really will actually have a good, traditional 0:04:59.240 --> 0:05:04.240 hard get overse session with rising unemployment, which is exactly 0:05:04.279 --> 0:05:07.920 what Powell has said. I mean that's his forecast. Yeah, 0:05:07.960 --> 0:05:10.600 I think that's right. I mean, my our view at 0:05:10.600 --> 0:05:13.760 PIMCO is that will likely see unemployment rise to about 0:05:13.800 --> 0:05:18.000 five percent by the end of and so right now 0:05:18.120 --> 0:05:20.800 we're sort of seeing some of those early signs, but 0:05:20.839 --> 0:05:23.679 we really haven't seen the full brunt of financial condition 0:05:23.760 --> 0:05:27.159 tightening yet. That's more to come. So we are going 0:05:27.200 --> 0:05:29.440 to continue to see as slow down, and I think 0:05:29.440 --> 0:05:31.680 that's really going to hit in the first quarter of 0:05:31.800 --> 0:05:35.400 next year and into the second quarter of Chris, given 0:05:35.440 --> 0:05:37.320 where we are with inflation right now. Loo concerns about 0:05:37.320 --> 0:05:39.560 inflation if we are heading an inter session or even 0:05:39.560 --> 0:05:41.960 are already in one, no matter how long it is 0:05:42.040 --> 0:05:44.040 or how short it is, what are the tools the 0:05:44.120 --> 0:05:46.039 Fed has to use, Because typically you turn to the 0:05:46.040 --> 0:05:48.080 Fed and say, okay, start cutting interest rates. It doesn't 0:05:48.080 --> 0:05:49.760 look like they're going to do that. In the likelihood 0:05:50.920 --> 0:05:53.359 they're gonna raise interest rates. They only have one tool 0:05:53.680 --> 0:05:56.559 they have well, they have their mouth that can job 0:05:56.680 --> 0:05:58.599 on the market, which is what they're doing. They have 0:05:58.640 --> 0:06:01.400 the dot plot, which is going to indicate or direct 0:06:01.440 --> 0:06:03.680 the market, but there really the only tool they have 0:06:03.720 --> 0:06:06.640 is short term ingistrates and the FED funds rate. Uh 0:06:06.680 --> 0:06:09.480 and that's what they're using aggressively. I mean, good Greek 0:06:09.560 --> 0:06:13.279 seventy basis points. Those are big balances. Do you know 0:06:13.400 --> 0:06:16.000 through history you've gotta go way back before you have 0:06:16.080 --> 0:06:19.560 that aggressive tightening of monetary policy and they have to 0:06:19.640 --> 0:06:23.560 shrink the balance sheet. So as they moved through that, 0:06:23.920 --> 0:06:26.560 you know, he's already said he's going to hurt employment. 0:06:27.279 --> 0:06:30.279 Yet we have stronger numbers. I think the numbers there's 0:06:30.320 --> 0:06:33.760 something strange in the numbers this week, just like last month. 0:06:33.839 --> 0:06:37.520 But we'll see how that balances out. We're gonna have 0:06:38.080 --> 0:06:41.440 a tougher time, and you know, I think the question 0:06:41.520 --> 0:06:43.600 is going to be about corporate earnings. You've got cp 0:06:43.640 --> 0:06:45.680 I next week, and then you've got the bank starting 0:06:45.720 --> 0:06:48.040 to roll out with their earnings. Okay, we're gonna pick 0:06:48.120 --> 0:06:50.640 up exactly that question, where do you hide in this environment? 0:06:51.040 --> 0:06:53.120 Chris Ailman and Aaron Brown will be staying with us. 0:06:53.240 --> 0:06:56.080 We're gonna ask for them them for some investment advice. 0:06:56.120 --> 0:06:57.760 We could use it, that's for sure. That's the next 0:06:57.800 --> 0:07:04.360 time Wall Street Week here on Bloomberg. This is Bloomberg 0:07:04.440 --> 0:07:09.440 Wall Street Week with David Weston from Bloomberg Radio. The 0:07:09.520 --> 0:07:12.640 facts on unemployment seemed clear enough, or at least as 0:07:12.680 --> 0:07:16.640 clear as that changing social definition ever can be. The 0:07:16.720 --> 0:07:20.320 situation is gained a little better, but not much. The 0:07:20.400 --> 0:07:23.680 government announced today that the overall unemployment rate last month 0:07:23.840 --> 0:07:27.200 was six pot nine. The official unemployment rate has been 0:07:27.240 --> 0:07:30.440 stuck within a tenth of seven percent for six months, 0:07:30.880 --> 0:07:35.120 and that scarcely represents the massive reduction of unemployment that 0:07:35.240 --> 0:07:37.640 at least some folks thought they heard Jimmy Carter promise 0:07:37.920 --> 0:07:41.600 a year ago. That was Lewis Kaiser on Wall Street 0:07:41.600 --> 0:07:44.960 week back in October of ninety seven, when the unemployment 0:07:45.080 --> 0:07:47.320 rate was twice what it is today and we were 0:07:47.360 --> 0:07:50.040 trying to get it down rather than focusing on inflation 0:07:50.120 --> 0:07:52.480 whatever that ends up meaning for employment. And if that 0:07:52.560 --> 0:07:55.160 seems like a galaxy far far away, well maybe that's 0:07:55.160 --> 0:07:59.000 no accident. The top movie this week back in was 0:07:59.080 --> 0:08:01.920 Star Wars, and the top song on the charts was 0:08:02.120 --> 0:08:04.800 You Got It the Star Wars theme. Still with us 0:08:04.800 --> 0:08:07.760 are Aaron Brown and Pimco and Chris Ailment of Calistro. So, Aaron, 0:08:07.800 --> 0:08:09.040 let me turn to you and pick up on where 0:08:09.040 --> 0:08:11.080 we were talking just now with Chris. But where you 0:08:11.200 --> 0:08:13.960 hide if you're really an asset here? You said cash 0:08:14.040 --> 0:08:17.040 is one alternative? Are there things though, that involve at 0:08:17.120 --> 0:08:19.280 least some risk that you go to? And how much 0:08:19.280 --> 0:08:21.320 it depends on what you think the recovery is gonna 0:08:21.320 --> 0:08:23.080 look like whenever it comes. So I'm gonna flip that 0:08:23.160 --> 0:08:26.440 sort of question and answer the second question first, which 0:08:26.480 --> 0:08:30.160 is unlike prior recessions that we've seen in very recent history. 0:08:30.240 --> 0:08:32.600 So think of the global financial crisis or even the 0:08:32.640 --> 0:08:35.920 pandemic of I don't think this is going to be 0:08:35.920 --> 0:08:38.160 a V shaped recovery. I think this is going to 0:08:38.240 --> 0:08:40.880 be more of a pro monged you know, sort of 0:08:41.000 --> 0:08:43.920 stalling of the economy and more of an L shaped 0:08:43.960 --> 0:08:46.560 recovery than what we've seen in the past. And the 0:08:46.640 --> 0:08:50.079 reason for that is because inflation is high and it's 0:08:50.160 --> 0:08:53.200 likely to persist at high levels, You're not going to 0:08:53.280 --> 0:08:55.960 come in and see the FED start cutting, you know, 0:08:56.080 --> 0:08:59.800 as the unemployment rises like we've seen in the past. Instead, 0:09:00.280 --> 0:09:02.960 because the the FED is you know, moved from a 0:09:03.040 --> 0:09:05.960 dual mandate FED to a single mandate FED, really just 0:09:06.040 --> 0:09:09.640 focus on getting the inflation right down, you'll likely see 0:09:10.400 --> 0:09:13.040 you won't see this sort of immediate relief that we've 0:09:13.040 --> 0:09:15.320 seen in recent history. And so that does change a 0:09:15.320 --> 0:09:17.760 little bit the landscape of how you think about investing. 0:09:18.000 --> 0:09:21.280 You know, Historically, as we start to get closer to 0:09:21.480 --> 0:09:23.839 what we expect the bottom level of the SMP five 0:09:23.920 --> 0:09:26.800 hundred to be we start to you know, scale risk 0:09:26.880 --> 0:09:29.720 back up, start to move back into equity investments to 0:09:29.760 --> 0:09:32.640 catch that recovery to the upside. And this time around, 0:09:32.679 --> 0:09:34.480 I think you have to be a little bit more patient. 0:09:34.960 --> 0:09:38.400 So instead, what we're really looking at is fixed income 0:09:38.440 --> 0:09:40.680 investments that we think are going to be able to 0:09:40.720 --> 0:09:44.240 sort of stand at the test of time, be able 0:09:44.280 --> 0:09:47.200 to sort of hide out in a safe haven assets. 0:09:47.480 --> 0:09:49.920 So beyond just looking at cash, we're looking at high 0:09:49.960 --> 0:09:54.640 quality investment grade corporates. We're looking at municipalities, municipal bonds, 0:09:54.840 --> 0:09:57.880 you know, particularly for those who are can take advantage 0:09:57.880 --> 0:10:01.000 of the tax advantages. Tax advantage bonds UM we think 0:10:01.040 --> 0:10:03.800 offer good value there at a sort of after tax 0:10:03.880 --> 0:10:06.800 yield of six and a half percent, you know. In addition, 0:10:06.880 --> 0:10:10.680 we also like UM some mortgage agency bonds and structured 0:10:10.679 --> 0:10:14.160 credit bonds as well. And then sort of high quality 0:10:14.200 --> 0:10:18.840 equities that are defensive equities, high free cash flow, dividend growth, 0:10:19.040 --> 0:10:22.200 strong balance sheets we also think to do well in 0:10:22.200 --> 0:10:24.760 this environment. But you know, it is a sort of 0:10:24.840 --> 0:10:28.520 challenging time for investors where you have to skew more 0:10:28.600 --> 0:10:32.240 towards fixed income in order to have stability of return 0:10:32.640 --> 0:10:35.559 as opposed to looking for a quick snapback in equities. 0:10:35.559 --> 0:10:37.720 But you know, I posed a question to Chris because 0:10:37.760 --> 0:10:41.719 I know he also manages a diversified portfolio. Chris, where 0:10:41.760 --> 0:10:44.600 are you looking at? What type of sort of diversification 0:10:45.000 --> 0:10:47.360 that are you looking at in order to sort of 0:10:47.440 --> 0:10:51.040 hide out over the next couple of quarters. Well, Aaron, 0:10:51.120 --> 0:10:52.920 you know, I've got the benefit of being able to 0:10:52.960 --> 0:10:56.040 go into private security. So I've got a good sized 0:10:56.080 --> 0:10:59.720 real estate portfolio. We have a large private equity portfolios. 0:10:59.760 --> 0:11:02.880 Sure it's gonna have right downs, but its value is 0:11:03.000 --> 0:11:06.400 a bit more stable than we see in the public markets. Um, 0:11:06.520 --> 0:11:08.719 we have a cash position, but the problem is for 0:11:08.880 --> 0:11:13.320 US cash is not outperforming inflation. So the old adage 0:11:13.360 --> 0:11:16.640 cash is trash is still true. Um. We do like 0:11:16.960 --> 0:11:19.079 private credit. You were kind of hitting on that that, 0:11:19.280 --> 0:11:23.920 you know, variable rate debt, short term debt with high quality, 0:11:24.000 --> 0:11:27.320 and I think collateral is going to be key because, 0:11:27.400 --> 0:11:30.439 as you said, we're gonna have a long rough winter. Uh, 0:11:30.480 --> 0:11:32.360 so you don't want to be loaning money to everybody. 0:11:32.400 --> 0:11:35.560 You have to do care about covenance, but it is 0:11:35.600 --> 0:11:38.560 tough in this environment. I mean, you know, if the 0:11:38.600 --> 0:11:42.760 economy is slowing, and inflation is still strong. That's stag inflation. 0:11:43.200 --> 0:11:46.080 And you look back in the seventies. I gotta say, 0:11:47.080 --> 0:11:49.360 I love that suit that that Lou had. I don't 0:11:49.360 --> 0:11:51.440 know where you get that back in the seventies, but 0:11:51.920 --> 0:11:54.880 I'm stunned by it. But you know, you look back 0:11:54.880 --> 0:11:57.800 in that time period, returns in seventies seven were terrible. 0:11:58.000 --> 0:12:01.120 We're hard places to It was just a very tough 0:12:01.160 --> 0:12:05.320 time to hide anywhere. Yeah, So I'm curious though exactly, 0:12:05.320 --> 0:12:07.240 But when you go into fixed income do you think 0:12:07.280 --> 0:12:11.720 the price is attractive now in some fixed income Chris Well, 0:12:11.800 --> 0:12:13.880 I agree with Aaron. I'm gonna go short. I'm not 0:12:13.880 --> 0:12:18.200 gonna go long fixed income and take duration exposure short 0:12:18.320 --> 0:12:20.320 term credits. I mean, you've can hold a credit for 0:12:20.320 --> 0:12:23.439 two to three years and then it's money good. And 0:12:23.559 --> 0:12:26.480 as she said, you're gonna put it in a spread products. 0:12:26.480 --> 0:12:29.439 So you pick up a couple of basis points by 0:12:29.480 --> 0:12:32.480 being in the corporate You're okay. There's still a lot 0:12:32.480 --> 0:12:35.160 of money, David, international money that wants to come into 0:12:35.240 --> 0:12:38.480 this market, non us rather that wants to come into 0:12:38.520 --> 0:12:40.880 the market. You saw it in the this week where 0:12:40.920 --> 0:12:43.760 it suddenly comes rushing in. So I would give the 0:12:43.800 --> 0:12:46.800 advice to the average investors, You've got to slowly average 0:12:46.840 --> 0:12:49.120 cost in. You're not gonna be able to call the bottom. 0:12:49.840 --> 0:12:52.200 As much as Aaron I think there's a support number, 0:12:52.600 --> 0:12:54.720 it may not hit that at all, and the market 0:12:54.760 --> 0:12:57.640 is going to just bounce along and and an Aaron's 0:12:57.720 --> 0:13:00.599 example of an L and L goes on forever and 0:13:00.559 --> 0:13:02.640 it's just flat. I hope we don't have to live 0:13:02.679 --> 0:13:05.640 in a flat recession for years and years that I 0:13:05.679 --> 0:13:07.280 think this is going to be a tough market to 0:13:07.280 --> 0:13:10.440 find any kind of growth opportunities. Uh So, you want 0:13:10.440 --> 0:13:12.920 a protection and a return of your money rather than 0:13:12.960 --> 0:13:14.760 return on your money are in. One of the big 0:13:14.800 --> 0:13:17.120 development this week was OPEC plus and what they did 0:13:17.520 --> 0:13:19.600 it certainly seemed to stun the White House of the time. 0:13:20.120 --> 0:13:23.600 What it tells about geopolitical risk generally and specifically energy. 0:13:23.880 --> 0:13:25.600 It looks like oil princes are going to stay up 0:13:25.640 --> 0:13:27.160 there for a while. I think that's one of the 0:13:27.200 --> 0:13:29.880 things that the market is really mispricing right now. If 0:13:29.920 --> 0:13:32.360 you look at the throw word curve for oil, the 0:13:32.520 --> 0:13:35.480 risk is really in the sort of very short term 0:13:35.559 --> 0:13:37.400 where the market expects that oil is going to be 0:13:37.440 --> 0:13:40.120 elevated for the short term, but it really hasn't extrapolated 0:13:40.200 --> 0:13:44.480 or extended that expectation out the next one to two years. 0:13:44.720 --> 0:13:46.720 And I think that there's a real value in sort 0:13:46.720 --> 0:13:48.920 of the back end of the curve for oil because 0:13:49.160 --> 0:13:51.720 I think that these oil challenges are going to persist 0:13:51.920 --> 0:13:55.200 much longer than what the markets anticipating. One of the 0:13:55.200 --> 0:13:57.319 reasons for that is, you know, first we saw out 0:13:57.320 --> 0:14:01.040 of oil OPEC plus this week, our intention to keep 0:14:01.080 --> 0:14:04.200 prices elevated. But I think the other challenges is that 0:14:04.240 --> 0:14:06.840 we really haven't invested here in the US or on 0:14:06.880 --> 0:14:10.360 a global basis on energy infrastructure, so that capacity is 0:14:10.400 --> 0:14:13.960 really constrained over the next couple of years. Even if 0:14:14.000 --> 0:14:17.200 we wanted to expand capacity, or oil producers wanted to 0:14:17.240 --> 0:14:20.200 expand capacity, they don't have the ability to do so 0:14:20.440 --> 0:14:23.320 in the immediate term, and that's going to keep oil 0:14:23.320 --> 0:14:26.880 prices elevated. So the risk for oil, then the risk 0:14:26.920 --> 0:14:30.320 for the energy complex broadly isn't just this winter, but 0:14:30.400 --> 0:14:33.680 it's next winter as well, and next winter's challenges are 0:14:33.680 --> 0:14:36.160 going to be even more difficult, particularly on the shores 0:14:36.200 --> 0:14:39.360 of Europe um than what we're experiencing this winter, And 0:14:39.400 --> 0:14:42.760 so that's what I think the challenges and you know why, 0:14:42.880 --> 0:14:45.400 I think this is something that's going to persist much 0:14:45.480 --> 0:14:48.000 longer than what the market is currently priced in. Thank 0:14:48.040 --> 0:14:52.200 you so much to Aaron Brown and Chris Alman. Coming up, 0:14:52.240 --> 0:14:54.320 we'll wrap up the week with our special contributor to 0:14:54.360 --> 0:14:56.880 Larry Summers are Harvard. That's really up next on Wall 0:14:56.880 --> 0:15:03.160 Street Week on Bloomberg. This is Bloomberg Wall Street Week 0:15:03.360 --> 0:15:07.320 with David Weston from Bloomberg Radio. Every week we turned 0:15:07.320 --> 0:15:09.760 to Larry Summers of Harvard, are very special contributor here 0:15:09.760 --> 0:15:11.640 on Wall Street Week to help us some up the 0:15:11.760 --> 0:15:14.040 major events of the weekend. Once again, we welcome back 0:15:14.160 --> 0:15:16.280 Larry Summer. So, Larry, I think we should start with 0:15:16.280 --> 0:15:19.080 the jobs numbers out on Friday in the United States. 0:15:19.200 --> 0:15:21.960 I mean, some say not too hot, not too cold. 0:15:22.560 --> 0:15:24.520 Some people say, isn't this good? At least it's not 0:15:24.560 --> 0:15:26.640 getting worse. I guess my real question you is, I 0:15:26.720 --> 0:15:29.120 may not be getting worse. Was there a danger just 0:15:29.240 --> 0:15:30.880 in the inflation where many where it is we have 0:15:31.040 --> 0:15:35.400 five percent year over year increasing wages. I think these 0:15:35.480 --> 0:15:40.200 numbers were about what we expected, and the sensible judgment 0:15:40.560 --> 0:15:45.200 was that we've got an inflation problem. Core inflation figures 0:15:45.320 --> 0:15:49.280 look artificially good. They're better than media and inflation. And 0:15:49.400 --> 0:15:52.880 yet core inflation ran at a seven percent rate last month, 0:15:53.360 --> 0:15:56.160 and that was more than for the quarter, and the 0:15:56.240 --> 0:15:58.160 quarter was more than for the half year, and the 0:15:58.200 --> 0:16:01.600 half year was more than for the whole year. So 0:16:01.960 --> 0:16:06.960 we're not in a controlled place with respect to inflation. 0:16:07.520 --> 0:16:11.080 And there wasn't really anything in this report to suggest 0:16:11.280 --> 0:16:15.960 that we were coming into UH a controlled place. UH. 0:16:16.040 --> 0:16:20.040 The monthly wage number was relatively favorable, but it was 0:16:20.040 --> 0:16:22.720 pretty clearly distorted by the fact that you had a 0:16:22.720 --> 0:16:26.720 lot more workers coming in and leisure and hospitality, and 0:16:26.840 --> 0:16:31.920 those are low wage workers. The workers where wages are 0:16:31.960 --> 0:16:36.640 most flexible are going up more rapidly. So I don't 0:16:36.640 --> 0:16:40.840 think this is a number that changed, UH the picture 0:16:41.000 --> 0:16:46.120 that we've got an economy that is too strong to 0:16:46.600 --> 0:16:50.680 be an economy where inflation is going down, but that 0:16:50.920 --> 0:16:56.040 is maintaining its UH robustness. But I think we are 0:16:56.120 --> 0:16:59.400 headed for a collision of some kind or other, and 0:16:59.480 --> 0:17:02.840 we've just got to manage that collision carefully. And I 0:17:02.840 --> 0:17:07.040 think the sooner we start UH managing for a slope, 0:17:07.080 --> 0:17:10.480 managing for some slowdown, the better we're gonna do. I 0:17:10.480 --> 0:17:13.920 think Chairman Powell was way late to come to that recognition, 0:17:14.400 --> 0:17:17.399 but he now has that recognition and he should be 0:17:17.440 --> 0:17:20.680 supported in that. So what do you think Chai Powell 0:17:20.760 --> 0:17:22.800 and the Federal Reserve will make of these numbers? How 0:17:22.840 --> 0:17:26.080 will it affect what they do in early November? I 0:17:26.080 --> 0:17:29.600 don't think these numbers are going to change what the Fed, 0:17:30.040 --> 0:17:33.919 uh does? You know, you never know what's going to happen, 0:17:34.000 --> 0:17:39.440 and certainly there's risk of some kind of financially traumatic event, 0:17:39.680 --> 0:17:43.000 but I think the chances of something that is large 0:17:43.119 --> 0:17:47.840 enough to divert the FED are really quite low. So 0:17:48.200 --> 0:17:52.880 I'd be expecting that uh, the market, which is anticipating 0:17:54.040 --> 0:17:59.959 basis points in November and is anticipating fifty more in December. 0:18:00.520 --> 0:18:05.800 That would correspond to my best guess at this moment 0:18:06.040 --> 0:18:09.439 as well. And I think that kind of thing is 0:18:10.000 --> 0:18:14.560 going to be appropriate if we achieve disinflation. Larry, there's 0:18:14.560 --> 0:18:17.960 another strain of discussion I've seen certainly this week. In fact, 0:18:18.000 --> 0:18:20.199 there was even some FED staff work at the New 0:18:20.240 --> 0:18:23.160 York FED suggesting that we better be careful because in fact, 0:18:23.480 --> 0:18:25.640 the rate that we may need and already get down 0:18:25.640 --> 0:18:29.080 to two percent, maybe so high it will cause financial instability. 0:18:29.119 --> 0:18:31.199 There is a really safety and sound as issue. What 0:18:31.280 --> 0:18:33.040 do you make of that? Is it possible the Fed 0:18:33.080 --> 0:18:35.280 will have to choose between financial stability in the one 0:18:35.280 --> 0:18:39.359 hand and getting inflation down on the other. First, I 0:18:39.400 --> 0:18:42.280 think that should be the occasion for some soul searching. 0:18:43.200 --> 0:18:46.760 If we have an economy where we think there's going 0:18:46.800 --> 0:18:52.240 to be substantial financial breakage because the FED lifts the 0:18:52.280 --> 0:18:55.960 FED funds rate to four and a half percent, then 0:18:56.000 --> 0:19:03.320 we have an inadequately supervised financial system and insufficiently active 0:19:03.880 --> 0:19:09.200 financial regulator. And so if anyone believes that, along with 0:19:09.280 --> 0:19:14.000 whatever monetary policy implication they draw, they better tell us 0:19:14.040 --> 0:19:16.479 how we think how they think we ought to be 0:19:16.520 --> 0:19:23.040 repairing the regulation of the financial system. David might sense 0:19:23.200 --> 0:19:29.560 is that you can never rule out these kinds of risks. 0:19:30.359 --> 0:19:34.000 But the Fed has more than one instrument. It has 0:19:34.080 --> 0:19:40.760 instruments for specific guaranteed lending. We've seen that used a 0:19:40.920 --> 0:19:47.440 number of times, and each time we're surprised by how 0:19:47.520 --> 0:19:52.359 much the economy retains its robustness. In retrospect, we cut 0:19:52.400 --> 0:19:55.960 interest rates too much and kept them too low when 0:19:56.000 --> 0:20:00.880 we were supporting the financial system. After COVID. In retrospect, 0:20:01.040 --> 0:20:04.960 we kept interest rates too low and blew up a 0:20:05.040 --> 0:20:09.000 bubble when we were supporting the economy with low interest rates. 0:20:09.520 --> 0:20:15.080 After Asia and LTCF in retrospect, we were surprised, amazed 0:20:15.640 --> 0:20:19.760 by how rapidly the economy grew when the Fed uh 0:20:19.960 --> 0:20:24.840 did what was necessary after the seven stock market crash. 0:20:25.440 --> 0:20:29.639 So we need to regulate right to preserve financial stability. 0:20:30.080 --> 0:20:35.040 We need to have a very strong firefighting force in 0:20:35.200 --> 0:20:41.760 order to respond if and when financial accidents happened. Larry's 0:20:41.840 --> 0:20:43.960 always so helpful to have you on each week, and 0:20:44.240 --> 0:20:45.960 Delia said, d larious, I was gonna be staying with 0:20:46.040 --> 0:20:49.200 us as we bring in Professor Brad DeLong, professor of 0:20:49.240 --> 0:20:53.480 economics from UC Berkeley on his new book Slouching Towards Utopia. 0:20:53.480 --> 0:20:55.440 That's an economic history of the toy a century. That's 0:20:55.440 --> 0:21:00.919 gonna up next on Wall Street Week on Bloomberg. This 0:21:01.400 --> 0:21:05.879 is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:21:06.200 --> 0:21:08.760 Are very special contributor at Larry Summers of Harvard has 0:21:08.800 --> 0:21:11.200 stayed with us because we're gonna bring in now professor 0:21:11.200 --> 0:21:13.840 of economics from it you see Berkeley, he's Brad DeLong, 0:21:14.119 --> 0:21:17.200 the author of a new book, Slouching toward Utopia and 0:21:17.280 --> 0:21:20.240 Economic History of the twentieth Century. So, professor, welcome for 0:21:20.320 --> 0:21:22.200 joining us. It's really good to have you here. I've 0:21:22.200 --> 0:21:24.840 read this fascinating and really sort of protein book. It's 0:21:24.840 --> 0:21:27.639 really quite a book. Let's set it up first, because 0:21:27.640 --> 0:21:29.640 it's a history of the the twentieth century. But you don't 0:21:29.640 --> 0:21:32.600 necessarily define the twentieth century as from nineteen hundred to 0:21:32.640 --> 0:21:35.560 two thousand. You start in eighteen seventy, un end up 0:21:35.600 --> 0:21:40.000 in why Well, the big thing that happens happens in 0:21:40.080 --> 0:21:44.800 eighteen seventy. Right before eighteen seventy, the world's poor, and 0:21:44.840 --> 0:21:48.479 there's no prospect for the world being anything other than poor. 0:21:49.040 --> 0:21:54.560 After eighteen seventy, every single generation, humanity's technical competence doubles 0:21:55.080 --> 0:21:58.520 and then doubles again in the following generation. And such 0:21:58.520 --> 0:22:02.440 an enormous pace of tech chnological events raises the possibility, 0:22:02.480 --> 0:22:05.040 for the first time, of a world in which we 0:22:05.080 --> 0:22:08.560