WEBVTT - Bloomberg Wall Street Week - August 18th, 2023 0:00:00.240 --> 0:00:02.440 This is Bloomberg Wall Street Week. 0:00:02.480 --> 0:00:04.400 I mean may not have an overall recession. We're having 0:00:04.400 --> 0:00:06.840 a rolling recession. ECONYE roll looks pretty strongly. It is 0:00:06.840 --> 0:00:07.680 when it comes to jobs. 0:00:07.720 --> 0:00:09.840 The financial story is that shape our world. 0:00:09.960 --> 0:00:13.640 Three major regional bank failures send shockwaves through the banking system. 0:00:13.680 --> 0:00:15.440 We're all trying to figure out what to make of 0:00:15.600 --> 0:00:17.000 generative AI. 0:00:16.920 --> 0:00:19.320 Through the eyes of the most influential voices. 0:00:19.440 --> 0:00:22.400 Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, 0:00:22.560 --> 0:00:25.279 deebro Lair of the Paulson Institute, well Then Hubbard of 0:00:25.280 --> 0:00:26.280 the Columbia Business School. 0:00:26.280 --> 0:00:30.400 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:30.280 --> 0:00:34.000 Responding to adversity, a Maori town devastated by the worst 0:00:34.040 --> 0:00:37.480 wildfire in US history, a Chinese economy that can't catch 0:00:37.520 --> 0:00:41.400 a break, and a former US president facing a fourth indictment. 0:00:41.840 --> 0:00:45.159 This is Bloomberg Wall Street Week. I'm David Weston. This 0:00:45.240 --> 0:00:48.280 week's special contributor Larry Summers of Harvard and Steve Rattner 0:00:48.440 --> 0:00:51.000 Willet Advisors, on why the yield and the tenure is 0:00:51.040 --> 0:00:51.879 headed higher. 0:00:52.200 --> 0:00:56.280 You're looking at it four seventy five on the ten year, 0:00:56.400 --> 0:00:58.760 and it could end up being higher than that. 0:00:59.360 --> 0:01:02.800 And Master's make of the softening Chinese economy. 0:01:03.120 --> 0:01:06.000 I have been more optimistic about China in the past, 0:01:06.160 --> 0:01:09.000 and I will say that I have recalibrated my views. 0:01:09.080 --> 0:01:12.119 And Greg Tason of Spotlight Advisors on the drop off 0:01:12.200 --> 0:01:14.240 in activist investing. 0:01:14.120 --> 0:01:24.759 There's some dampening because of the m and A market. 0:01:30.000 --> 0:01:32.360 It may be August, but it was a tough week 0:01:32.440 --> 0:01:36.039 for many on or near global Wall Street, starting with 0:01:36.080 --> 0:01:38.880 the victims of that wildfire that destroyed much of the 0:01:38.880 --> 0:01:42.640 town of Lahina, Maui, with over one hundred dead, many 0:01:42.760 --> 0:01:46.399 yet to be accounted for, and billions of dollars in damages. 0:01:47.000 --> 0:01:51.800 Whole city destroyed, generations of native Hawaiian history turned into ruin. 0:01:52.120 --> 0:01:54.760 President g Over in China had problems of his own, 0:01:54.960 --> 0:01:57.360 with reports of this week of continued weakness in his 0:01:57.440 --> 0:02:01.120 economy and stimulus moves that the market's pretty much shrugged 0:02:01.120 --> 0:02:03.800 off to someone said we'd like to say more policy 0:02:03.840 --> 0:02:07.760 action before we'd be getting a lot more comfortable moving 0:02:07.800 --> 0:02:11.840 into more chin a related exposure's Former President Trump confronted 0:02:11.919 --> 0:02:14.160 a different kind of problem this week when he faced 0:02:14.160 --> 0:02:17.600 off fourth indictment, this one from a state prosecution in 0:02:17.680 --> 0:02:21.120 Georgia alleging he was part of a racketeering organization along 0:02:21.160 --> 0:02:24.600 with eighteen others trying to overturn the twenty twenty election. 0:02:24.840 --> 0:02:27.120 This is an extremely serious indictment. 0:02:27.240 --> 0:02:30.440 The allegations are serious, and if he's convicted, he's going 0:02:30.480 --> 0:02:31.040 to do time. 0:02:31.440 --> 0:02:34.360 On the brighter side, US retail sales numbers came in 0:02:34.400 --> 0:02:38.240 surprisingly high, indicating the continued strength of the consumer and 0:02:38.280 --> 0:02:39.800 therefore of the economy. 0:02:40.120 --> 0:02:43.160 The consumer is out there and able to spend at 0:02:43.200 --> 0:02:44.040 the moment. 0:02:45.760 --> 0:02:48.560 But continuing strength of the US economy did little to 0:02:48.600 --> 0:02:50.799 reassure the markets this week, as the S and P 0:02:50.919 --> 0:02:53.359 five hundred lost over two percent to end the week 0:02:53.360 --> 0:02:55.760 at forty three sixty nine, bringing it back down toward 0:02:55.840 --> 0:02:58.200 the median number of where our Bloomberg ls predicted we 0:02:58.200 --> 0:03:00.520 will end up the year, that's forty three hundred. The 0:03:00.680 --> 0:03:03.160 Nasdaq also had a rough week of it down two 0:03:03.200 --> 0:03:05.519 point six percent, at least a part because of those 0:03:05.520 --> 0:03:08.560 equity declines, No doubt came from the rise in the 0:03:08.639 --> 0:03:11.200 yields in bonds, with a ten year yield moving up 0:03:11.320 --> 0:03:14.959 nearly ten basis points, putting it well above four percent 0:03:15.040 --> 0:03:17.800 at four point twenty five percent to sort it all out. 0:03:17.880 --> 0:03:20.240 Welcome to Chris Aylman. He's the chief investment officer of 0:03:20.280 --> 0:03:24.639 Couseros and Chanadasai. She is Franklin Templeton's CIO for fixed income. Welcome. 0:03:24.960 --> 0:03:26.720 Both of you took it back to Wall Street Week. 0:03:26.760 --> 0:03:28.440 You've both been on quite a few times now. Chris, 0:03:28.480 --> 0:03:30.160 let me start with you. Were you surprised anything that 0:03:30.160 --> 0:03:31.640 happened with the bond yields this week? 0:03:31.840 --> 0:03:32.080 Well? 0:03:32.200 --> 0:03:36.880 Yes, surprised that as Larry Summers said that bond yields 0:03:36.880 --> 0:03:38.680 are heading up and I think going to be heading higher. 0:03:38.720 --> 0:03:43.360 I mean, he's signed fifty basis points, so I'm I'm cautious, 0:03:43.560 --> 0:03:46.200 and I would be worried about trying to trade fixed 0:03:46.200 --> 0:03:49.200 income in here. I like it as a buy and hold, 0:03:49.760 --> 0:03:52.200 but I don't like it from a trading standpoint. 0:03:52.280 --> 0:03:53.200 Yields are going to head. 0:03:53.160 --> 0:03:55.800 Up four point seven to five. Chris, you agree with 0:03:55.880 --> 0:03:56.320 Larry on that. 0:03:57.720 --> 0:04:00.160 Well, I'm not going to argue with Larry Summers. I'm 0:04:00.200 --> 0:04:03.000 not going to try and nail down that number. That's 0:04:03.040 --> 0:04:05.520 a big reach, Like I said, half a point from here, 0:04:05.960 --> 0:04:08.440 but I do think ingistrates are going to stay higher 0:04:08.440 --> 0:04:10.920 for longer We're not going to see rates go back 0:04:10.960 --> 0:04:12.840 down like a lot of the street is predicted. 0:04:13.280 --> 0:04:16.200 Sona, you really focus on fixed income? What did you 0:04:16.200 --> 0:04:17.320 make of the bond market this week? 0:04:17.960 --> 0:04:20.960 So honestly, I think this is the bond market finally 0:04:21.279 --> 0:04:25.960 coming around, coming to terms with certain facts. Here's the 0:04:26.000 --> 0:04:29.719 thing for a long time, even the sad when you 0:04:29.880 --> 0:04:33.080 look at the Fed funds rate, the long term Fed 0:04:33.120 --> 0:04:36.160 funds rate, they're looking at two point five percent if 0:04:36.240 --> 0:04:39.880 inflation are two percent. This is real yields of half 0:04:39.920 --> 0:04:44.599 a percent. If I look at not the anomaly of 0:04:44.680 --> 0:04:47.279 the post global financial crisis period, but I look at 0:04:47.520 --> 0:04:50.560 from the nineteen fifties all the way up to two 0:04:50.560 --> 0:04:55.080 thousand and seven eight. Really we're looking at yields, real 0:04:55.200 --> 0:04:58.480 yields which were around two to two and a half percent. 0:04:59.080 --> 0:04:59.720 So here's the. 0:04:59.680 --> 0:05:01.719 Thing that you take. 0:05:02.279 --> 0:05:05.200 Even if we get back to two percent inflation, real 0:05:06.080 --> 0:05:08.320 yields at two two and a half percent takes you 0:05:08.360 --> 0:05:10.800 to four and a half already. So and that's the 0:05:10.839 --> 0:05:13.359 short term, and then you have two on premium. If 0:05:13.360 --> 0:05:15.640 you're looking at ten year yields. Yeah, I actually think 0:05:15.680 --> 0:05:19.760 four point seventy five is not unreasonable. 0:05:19.240 --> 0:05:20.200 Not at all Chris. 0:05:20.240 --> 0:05:22.159 When we talk about these bond yields, we talk about 0:05:22.160 --> 0:05:25.599 things like expectations of inflation, and we talk about what 0:05:25.600 --> 0:05:28.080 the Fed is likely to do. What about the demand 0:05:28.160 --> 0:05:30.600 or maybe the supply of treasuries, because it's clear the 0:05:30.680 --> 0:05:32.360 unice discover is gonna have to borrow a lot more 0:05:32.480 --> 0:05:34.600 at the same time, for example, Japan may not want 0:05:34.640 --> 0:05:35.000 as many. 0:05:35.120 --> 0:05:37.960 The bomb market and the Yokurby is nothing but supply 0:05:38.000 --> 0:05:40.520 and demand, and there is a ton of supply coming. 0:05:41.320 --> 0:05:45.480 The Treasure Department has just due to all those budget negotiations, 0:05:45.880 --> 0:05:49.080 a huge calendar in front of them, and we are 0:05:49.200 --> 0:05:52.520 seeing buyers being a little bit cautious. You just reported 0:05:52.560 --> 0:05:55.760 about China and it's weak economy. They've got to protect 0:05:55.760 --> 0:05:59.240 their currency, so they may not have as much capital. 0:06:00.000 --> 0:06:02.680 We've had a lot of focus on the tail on 0:06:02.839 --> 0:06:05.760 all of our bond auctions, in other words, how much 0:06:05.839 --> 0:06:09.960 demand and how clean those actions are. I always said, 0:06:10.120 --> 0:06:12.760 we're a debtor nation, and we better pay attention to that. 0:06:12.839 --> 0:06:15.039 We've got to borrow money, and it may be a 0:06:15.040 --> 0:06:16.200 bit tougher now. 0:06:16.200 --> 0:06:18.560 We borrow a lot of money for fiscal stimulus. We've 0:06:18.600 --> 0:06:20.680 had a lot going into the system. Are we done. 0:06:20.760 --> 0:06:23.760 Yet where are we right now on fiscal supporting this economy. 0:06:24.400 --> 0:06:28.520 Honestly, we are looking at an economy which is true 0:06:28.800 --> 0:06:32.720 almost every estimate of full employment, and we have massively 0:06:33.120 --> 0:06:37.280 expantorary fiscal policy. This is getting hidden and you know, yes, 0:06:37.320 --> 0:06:40.719 there's discussion about you know, terrible budget negotiations, all of that, 0:06:40.800 --> 0:06:45.239 but fundamentally the economy in terms of employment is doing well. 0:06:45.920 --> 0:06:49.479 And at the same time, we are seeing fiscal deficits 0:06:49.520 --> 0:06:52.120 which are close to records five and a half percent 0:06:52.279 --> 0:06:55.400 odd last year. This year it's at least as much, 0:06:55.520 --> 0:06:59.720 if not higher, and the CBO expects six percent is 0:07:00.760 --> 0:07:03.320 the school deficits for the next several years. This is 0:07:03.360 --> 0:07:07.600 a lot officients and definitely that's a supply dynamic that's important. 0:07:08.040 --> 0:07:11.360 At the same time, you mentioned Japan, and Japan's very 0:07:12.440 --> 0:07:16.560 important here because we always focus on China, but actually Japan, 0:07:16.640 --> 0:07:19.560 which is which is the largest holder of US treasuries 0:07:19.600 --> 0:07:23.640 outside the US, and over the next few months, at 0:07:23.680 --> 0:07:28.679 some point the Japan's Central Bank is going to tight 0:07:28.960 --> 0:07:32.920 begin tightening monetary policy, at which point we will see 0:07:32.960 --> 0:07:36.320 a reduction in the month for US treasuries. All of 0:07:36.360 --> 0:07:39.440 this is additional pressure on yields. 0:07:40.400 --> 0:07:42.520 At what point do we run out of the so 0:07:42.640 --> 0:07:43.960 called excess savings. 0:07:44.800 --> 0:07:47.600 Well, David, I think the San Francisco Fed put on 0:07:47.600 --> 0:07:51.320 an excellent paperless week predicting that we may be seeing 0:07:51.520 --> 0:07:54.480 the end of that. And you had a great intro 0:07:54.560 --> 0:07:57.960 where he said the US consumer is strong for now. 0:07:58.760 --> 0:08:03.120 So I'm starting to see little cracks, little signs of worry. 0:08:03.200 --> 0:08:03.480 For me. 0:08:04.720 --> 0:08:10.239 Art Desk uncovered the US credit card applications literally fell 0:08:10.280 --> 0:08:14.080 off the shelf. And that doesn't importend that people won't 0:08:14.360 --> 0:08:17.960 increase and start to borrow, But I'm worried the consumer 0:08:18.240 --> 0:08:19.920 is going to run our money. I think the San 0:08:19.920 --> 0:08:21.880 Francisco Fed really is spot on. 0:08:22.320 --> 0:08:24.320 If the consumer slows. 0:08:23.920 --> 0:08:26.600 Down, then we're going to see the impact of these 0:08:26.680 --> 0:08:30.920 higher interest rates twenty two year highs in mortgages and rates. 0:08:31.400 --> 0:08:34.400 That's got to hurt, and then we may actually finally 0:08:34.440 --> 0:08:37.600 see this recession that I've been predicting. 0:08:37.080 --> 0:08:38.040 For over a year. 0:08:38.360 --> 0:08:41.040 Chanea, as I say, your CEO for fixed income at 0:08:41.040 --> 0:08:43.640 Franklin Tembla. But you watch the equity market. What about 0:08:43.640 --> 0:08:45.720 the valuations right now? Because I looked at it today 0:08:45.720 --> 0:08:48.720 on the Bloomberg we're over twenty times earnings in the 0:08:48.760 --> 0:08:51.679 price for the SPA five hundred. Can we keep that up? 0:08:52.760 --> 0:08:55.160 Okay, I'm going to I'm going to be very careful 0:08:55.200 --> 0:08:59.319 here because definitely I'm more fixing than on the equity 0:08:59.360 --> 0:09:01.600 side of things. But I do think on the fixed 0:09:01.640 --> 0:09:05.920 income side we have finally seen some acceptance that higher 0:09:06.000 --> 0:09:08.480 yields are coming. On the equity side, I think where 0:09:08.480 --> 0:09:10.960 at the beginning of this process. I think, again, in 0:09:11.000 --> 0:09:13.640 your intro, you mentioned that higher yields are going to 0:09:13.640 --> 0:09:15.840 have an impact on the equity market, and I do 0:09:15.880 --> 0:09:19.000 think those yields are higher, and more importantly, they're probably 0:09:19.040 --> 0:09:22.360 higher for a while to stay. And you know something 0:09:22.400 --> 0:09:25.680 that Chris mentioned the strength of the US consumer said, 0:09:25.840 --> 0:09:28.600 I think actually the US consumer probably is going to 0:09:28.640 --> 0:09:33.600 start weakening from a very strong point. And while the 0:09:33.640 --> 0:09:37.160 consumer might be beginning to run out of pandemic era 0:09:37.280 --> 0:09:41.920 savings from a debt perspective, in real terms, the consumers 0:09:41.920 --> 0:09:46.040 actually in pretty good shape. In real terms, the US 0:09:46.080 --> 0:09:48.559 consumer can actually borrow a bit more and still look 0:09:48.600 --> 0:09:49.280 pretty healthy. 0:09:49.480 --> 0:09:51.240 The last time on this, Chris, as we look at 0:09:51.280 --> 0:09:54.839 the GDP esmens, for example, Atlanta GPGP now is way 0:09:54.920 --> 0:09:56.480 up there at five point seven something like that, and 0:09:56.480 --> 0:09:58.320 a lot of people are taking their estimates is that 0:09:58.720 --> 0:10:00.320 there's the economy strong enough to keep going. 0:10:01.640 --> 0:10:06.480 Well, David, the Elves pointed out they're expecting a lower market, 0:10:07.040 --> 0:10:09.200 and I think they're spot on. I think that's a 0:10:09.240 --> 0:10:13.080 great indicator for people that people look ahead and you 0:10:13.160 --> 0:10:17.200 hit it right on the nail. Price earnings ratio is 0:10:17.920 --> 0:10:22.280 really set for expectations in higher levels and I don't 0:10:22.320 --> 0:10:25.280 know those earnings. While we've done okay in this earnings period. 0:10:26.160 --> 0:10:29.599 Everybody who's warning that the future earnings are too difficult 0:10:29.920 --> 0:10:32.400 and that may be a problem in that pe ratio, 0:10:32.880 --> 0:10:35.400 that the earnings falter and that means the price has 0:10:35.400 --> 0:10:37.040 to come down and the Elves will. 0:10:36.880 --> 0:10:39.400 Be right okay, Well, that's always good for the Elves. 0:10:39.440 --> 0:10:41.520 Thank you very much for getting it started. As channel 0:10:41.559 --> 0:10:44.559 the SI of Franklin Templeton and Chris Aylman of Kelster's 0:10:46.360 --> 0:10:48.640 coming up to the yield of the tenure seem to 0:10:48.679 --> 0:10:51.719 settle in well above four percent. This week, we ask 0:10:51.840 --> 0:10:55.120 contributors Larry Sawers of Harvard and Steve Ratner Will Advisors, 0:10:55.280 --> 0:10:58.400 where the tenure wants to go and what that means 0:10:58.400 --> 0:11:03.120 for investors. That's next on Wall Street Week on Bloomberg. 0:11:03.960 --> 0:11:08.200 This is Bloomberg Wall Street Week with David Weston from 0:11:08.320 --> 0:11:11.080 Bloomberg Radio. 0:11:16.160 --> 0:11:19.040 This is Wall Street Week. I'm David Weston. The yield 0:11:19.080 --> 0:11:22.160 on the US tenure government bond this week broke solidly 0:11:22.200 --> 0:11:25.040 through four percent, something it had flirted with last October 0:11:25.080 --> 0:11:27.840 and then again briefly in early July. To consider what 0:11:27.920 --> 0:11:29.920 this might tell us about the state of the US 0:11:29.920 --> 0:11:32.760 economy and what it means for investors. Welcome back now 0:11:32.840 --> 0:11:35.440 special contributor Larry Summers of Harvard, and we're joined as 0:11:35.440 --> 0:11:38.160 well by Steve Rattner, Chairman and CEO of Willed Advisors, 0:11:38.160 --> 0:11:41.679 which manages the philanthropic and personal funds of Michael Bloomberg. 0:11:41.760 --> 0:11:44.720 He is, of course our founder and majority shareholder. So Larry, 0:11:44.920 --> 0:11:47.240 thank you so much for joining us. First of all, 0:11:47.520 --> 0:11:49.800 let's start with what the ten year may be telling us, 0:11:49.840 --> 0:11:52.360 or not tell us, about the economy overall, particularly where 0:11:52.360 --> 0:11:54.960 inflation is and where the economic growth is. 0:11:56.080 --> 0:12:00.640 Look, David, I've been predicting that rates would eyes for 0:12:00.720 --> 0:12:04.960 quite some time. The ten years got three pieces. It 0:12:05.080 --> 0:12:10.640 depends upon expected inflation, It depends upon the real interest rate, 0:12:11.559 --> 0:12:15.200 and it depends upon the term premium of the amount 0:12:15.280 --> 0:12:17.520 that the ten year rate is more. 0:12:17.360 --> 0:12:19.560 Than expected future short rates. 0:12:20.280 --> 0:12:25.920 If I take those three pieces, inflation may come down. 0:12:26.120 --> 0:12:28.720 But I think most people would be quite surprised if 0:12:28.760 --> 0:12:33.520 it was as low steadily as two percent over the 0:12:33.559 --> 0:12:37.760 next decade. So let's assume that inflation averages two and 0:12:37.800 --> 0:12:38.600 a half percent. 0:12:39.280 --> 0:12:40.720 I think that's conservative. 0:12:41.600 --> 0:12:44.440 We don't know what's going to happen to the real 0:12:44.520 --> 0:12:48.240 interest straight, but we know that budget deficits look to 0:12:48.280 --> 0:12:54.280 be very large. Perhaps the budget deficit, according to CBO, 0:12:54.720 --> 0:12:57.839 will get to seven percent by the end of the decade. 0:12:58.160 --> 0:13:02.360 And I think on more realistic assumptions that assume that 0:13:02.400 --> 0:13:05.800 some of the Trump tax cuts are preserved, assume that 0:13:05.880 --> 0:13:10.200 we have to expand national security spending, and make realistic 0:13:10.280 --> 0:13:14.400 assumptions about the servicing of the debt. The CBO thinks 0:13:14.400 --> 0:13:17.440 it's going to cost two point three percent for short 0:13:17.559 --> 0:13:21.040 term treasury bills. I think you put all of that 0:13:22.360 --> 0:13:25.240 together and you're looking at a real. 0:13:25.080 --> 0:13:28.040 Interest rate of one and a half to two percent. 0:13:29.080 --> 0:13:31.800 And then you look at the fact that the FED 0:13:32.000 --> 0:13:37.080 is selling down its portfolio. You look at the fact 0:13:37.120 --> 0:13:42.679 that the financial regulators trying to avoid SVB situations, are 0:13:42.720 --> 0:13:47.440 making it harder for banks and other financial institutions to 0:13:47.600 --> 0:13:55.320 buy long term bonds, and term premiums usually are seventy 0:13:55.320 --> 0:13:58.720 five to one hundred basis points. So if you take 0:13:59.240 --> 0:14:04.680 two and a half and for inflation, you take one 0:14:04.720 --> 0:14:10.040 and a half, which isn't especially aggressive for real rates, 0:14:10.600 --> 0:14:14.000 and you take seventy five basis points, which is lower 0:14:14.000 --> 0:14:19.600 than history for term premiums, you're looking at for seventy 0:14:19.720 --> 0:14:24.960 five on the ten year, and it obviously could end 0:14:25.080 --> 0:14:29.880 up being higher than that. So nobody knows, but it 0:14:29.920 --> 0:14:34.760 seems to me we're in a very different era than 0:14:34.920 --> 0:14:39.600 the era we were in in the aftermath of the 0:14:39.640 --> 0:14:40.800 financial crisis. 0:14:41.440 --> 0:14:42.960 So, stee, if does that make sense to you as 0:14:42.960 --> 0:14:46.040 an investor? And perhaps even more important, let's assume that's right. 0:14:46.160 --> 0:14:48.120 Let's assume you knew today it was going to be 0:14:48.120 --> 0:14:50.760 four point seventy five over the medium longer term. What 0:14:50.840 --> 0:14:52.360 does that do to your investments? 0:14:52.760 --> 0:14:54.680 Well, first of all, I think everything Larry said made 0:14:54.720 --> 0:14:57.160 good sense to me, and I think he's probably right 0:14:57.280 --> 0:15:01.200 and certainly very clear and logically a logical think about it. 0:15:01.480 --> 0:15:02.760 Look, from the standpoint of an. 0:15:02.640 --> 0:15:06.040 Investor, it's always a question of what does the market think, 0:15:06.360 --> 0:15:08.840 and do you have a differentiated view of that? And 0:15:08.880 --> 0:15:10.560 if you have a different view than the market, then 0:15:10.600 --> 0:15:13.160 you can obviously proceed on that basis, and if you don't, 0:15:13.400 --> 0:15:14.920 you go where you're going to go. So what is 0:15:14.960 --> 0:15:16.920 the market saying right now? The market looks more at 0:15:16.920 --> 0:15:18.600 the Fed. So let's talk, if we could, about the 0:15:18.600 --> 0:15:21.440 Fed fed funds rate. So the market basically at the 0:15:21.440 --> 0:15:24.400 moment is predicting one more hike in November and then 0:15:24.440 --> 0:15:27.040 a cut in rates next year down I think about 0:15:27.040 --> 0:15:28.960 four and a quarter percent on the This is on 0:15:29.000 --> 0:15:31.040 the short end of the curve. 0:15:31.640 --> 0:15:34.160 And why does the market think we're going to get there? 0:15:34.200 --> 0:15:35.800 Because the market thinks we're going to have a soft 0:15:35.880 --> 0:15:38.680 landing basically, and the market thinks that inflation is going 0:15:38.760 --> 0:15:40.200 to come down to this two two and a half 0:15:40.240 --> 0:15:43.080 percent range. The Fed is going to kind of say, okay, 0:15:43.840 --> 0:15:46.280 and we can now start to cut rates. And if 0:15:46.280 --> 0:15:50.600 you basically cut rates, if you basically assume inflation is 0:15:50.600 --> 0:15:51.960 going to be in this two and a half percent 0:15:52.120 --> 0:15:54.520 range and you take one or one and a half 0:15:54.600 --> 0:15:57.120 percent for real rates, then obviously the Fed fund's a 0:15:57.200 --> 0:15:58.400 rate could come down a good bit. 0:15:58.480 --> 0:16:00.840 So that's how the market is about right now. 0:16:01.200 --> 0:16:03.200 Now, it'd be interesting to hear what Larry has to 0:16:03.200 --> 0:16:04.960 say about that, because if you have a different view 0:16:05.160 --> 0:16:08.640 than that, then you could be a more pessimistic view, 0:16:08.680 --> 0:16:11.120 which I would have, and be interested in Larry's view 0:16:11.600 --> 0:16:12.920 that the Fed is not going to be able to 0:16:12.920 --> 0:16:14.880 cut rates that fast, inflation is not going to come 0:16:14.920 --> 0:16:17.120 down that fast. That I think we're in a little 0:16:17.120 --> 0:16:21.160 bit of a Goldilocks moment. Everybody's feeling great about things, 0:16:21.160 --> 0:16:22.720 but I think there's still a lot to worry about 0:16:22.760 --> 0:16:25.440 on the inflation side. Then you'd have to be reasonably 0:16:25.520 --> 0:16:28.840 pessimistic about the market once it wakes up and realizes 0:16:28.840 --> 0:16:29.640 that we're not going to have. 0:16:29.600 --> 0:16:30.960 A four and a quarter percent rate. 0:16:31.160 --> 0:16:33.200 Now, there's one other way to get to that, which 0:16:33.240 --> 0:16:36.280 is even worse, which is if we have a recession 0:16:36.320 --> 0:16:38.400 and the FED starts to cut rates simply to deal 0:16:38.440 --> 0:16:40.040 with the recession, and there is. 0:16:40.000 --> 0:16:40.840 Pressure on earnings. 0:16:40.840 --> 0:16:43.560 As you probably know, forecasts, fors and peer earnings for 0:16:43.600 --> 0:16:46.520 next year have been coming down. Market has not reacted 0:16:46.560 --> 0:16:49.240 to that in a major way. But that's the other thing, 0:16:49.280 --> 0:16:50.880 obviously that the market will be watching. 0:16:51.640 --> 0:16:54.480 So Larry see's interested. So am I what your reaction 0:16:54.680 --> 0:16:57.160 is both on the question about the raid cuts next year, 0:16:57.200 --> 0:16:59.360 but also on the recession, because in the past you 0:16:59.400 --> 0:17:02.640 have said fifty or more chance of recession. A lot 0:17:02.680 --> 0:17:04.280 of a kinders have backed off of that. Bank of 0:17:04.320 --> 0:17:06.639 America has apparently the staff of the FED is back 0:17:06.680 --> 0:17:08.480 to other Now we're in you today in a recession. 0:17:09.760 --> 0:17:14.280 So in general, Steve and I are in raging agreement. Look, 0:17:14.359 --> 0:17:19.280 there's no question that the economy has come in stronger 0:17:19.320 --> 0:17:22.600 than almost anybody would have expected over the last few months, 0:17:23.600 --> 0:17:28.200 and despite that, the inflation figures have been relatively favorable. 0:17:28.880 --> 0:17:33.440 And those are the realities, and the question is how 0:17:33.480 --> 0:17:39.800 one processes those realities. My guess is that the economy 0:17:39.840 --> 0:17:44.120 will stay strong for at least a little while from here. 0:17:44.200 --> 0:17:49.240 I'd be very surprised now if a recession started during 0:17:49.760 --> 0:17:55.080 twenty twenty three. I'm not as confident looking out a 0:17:55.200 --> 0:18:00.000 longer distance as many other people are, in part because 0:18:00.080 --> 0:18:04.120 I think the Fed's going to feel pressure to continue 0:18:05.080 --> 0:18:08.040 to tighten, and I think there are a range of 0:18:08.160 --> 0:18:16.480 factors from gasoline prices to healthcare, from continuing labor shortages 0:18:17.040 --> 0:18:22.920 in many places to what's happening in the service sector 0:18:23.480 --> 0:18:29.760 where you're going to see continuing inflation pressures. So I 0:18:29.840 --> 0:18:34.399 still think there's a good chance of a recession in 0:18:35.480 --> 0:18:41.920 twenty in twenty twenty four. If we don't get that recession, 0:18:42.720 --> 0:18:46.879 I think it's much more likely that the Fed's going 0:18:46.960 --> 0:18:50.760 to feel pressure to raise rates faster than is now 0:18:50.880 --> 0:18:53.720 priced in than it is that the FED is going 0:18:53.760 --> 0:18:57.960 to feel pressure to cut rates faster than is now 0:18:58.680 --> 0:19:02.879 priced in, and that will in general tend to push 0:19:02.960 --> 0:19:08.679 rates up outside of the curve. I also think that 0:19:09.119 --> 0:19:11.960 while I don't think the budget deficit is the central 0:19:12.040 --> 0:19:16.480 factor for rates in the short run, I think increasingly 0:19:16.680 --> 0:19:20.919 projected deficits are going to come into focus and that 0:19:21.119 --> 0:19:26.119 is going to be a matter of concern for longer 0:19:26.240 --> 0:19:28.160 term rates. 0:19:28.480 --> 0:19:31.600 And that's part of why I. 0:19:31.560 --> 0:19:36.320 Don't particularly see the current level of longer term rates 0:19:36.920 --> 0:19:38.400 as any kind of peak. 0:19:39.160 --> 0:19:41.600 Okay, Larry Summers and Steve Randner will be staying with 0:19:41.720 --> 0:19:43.800 us because next we're gonna turn to the other big 0:19:43.840 --> 0:19:46.119 story of the week for Global Wall Street. That's China's 0:19:46.160 --> 0:19:48.680 economic struggles. That's coming up next down Wall Street Week 0:19:48.800 --> 0:19:49.440 on Bloomberg. 0:19:55.040 --> 0:19:59.280 This is Bloomberg Wall Street Week with David Weston from 0:19:59.359 --> 0:20:00.280 Bloomberg Rado. 0:20:07.600 --> 0:20:10.040 This is Wall three week. I'm David Weston. China had 0:20:10.040 --> 0:20:14.640 a rough week economically, reporting weaker retail sales and industrial production, 0:20:14.760 --> 0:20:17.920 and continued problems with its property market. Larry Summers and 0:20:17.960 --> 0:20:20.359 Steve Radner have remained with us for their read on 0:20:20.400 --> 0:20:22.199 what's going on in China. Learned me start with you. 0:20:22.520 --> 0:20:25.120 In the past, you have expressed at least some skepticism 0:20:25.160 --> 0:20:26.800 about those who said that this is just going to 0:20:27.040 --> 0:20:29.639 keep going. The juggernaut that is the Chinese economy. It 0:20:29.680 --> 0:20:32.080 may have some problems. They are what we're seeing what 0:20:32.240 --> 0:20:34.560 you predicted, or is even worse than what you thought. 0:20:36.080 --> 0:20:42.040 I try to avoid baking near term predictions, but I 0:20:42.080 --> 0:20:45.399 fought for a number of years that the Chinese juggernaut 0:20:45.640 --> 0:20:51.320 was going to slow. Juggernauts usually do in economics. Classic 0:20:51.440 --> 0:20:54.879 examples were Russia in nineteen sixty when it was seen 0:20:55.040 --> 0:20:58.840 as is going to surpass us in nineteen eighty, or 0:20:58.960 --> 0:21:04.560 Japan in nineteen ninety when people expected that it was 0:21:04.680 --> 0:21:10.119 going to surpass us. So it's a pretty good rule 0:21:10.200 --> 0:21:13.320 that when American high school kids rushed to study a 0:21:13.400 --> 0:21:19.240 foreign language, that's about when the country's economy is peaking. 0:21:19.760 --> 0:21:24.479 So you've got that, then you have a variety of 0:21:24.560 --> 0:21:29.360 near term challenges the kind you just referred to. Financial 0:21:30.160 --> 0:21:35.919 strains in China coming from excessive reliance on real estate 0:21:36.480 --> 0:21:42.240 and the drying up of export markets. Then you've got 0:21:42.400 --> 0:21:48.920 some fairly profound adverse fundamentals for China. The fact that 0:21:49.240 --> 0:21:52.880 Chinese parents had only half as many kids last year 0:21:52.920 --> 0:21:57.280 as they did six years ago. The fact that there's 0:21:57.680 --> 0:22:01.120 large amounts of people with money in China who are very, 0:22:01.200 --> 0:22:04.040 very eager to get it out, which is always a 0:22:04.080 --> 0:22:11.720 sign of impending difficulty in emerging markets. So I would 0:22:11.720 --> 0:22:15.280 not be confident at a wall that China will be 0:22:15.320 --> 0:22:22.960