Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. Us CPI never's reinforcing concerns
Speaker 1: about inflation. The financial stories that chief are worth a
Speaker 1: really different reaction to Mark. It's more indications of just
Speaker 1: how hot the U. S economy really is. Through the
Speaker 1: eyes of the most influential voices Larry Summers, the former
Speaker 1: Treator Secretary, Katherine Keating, CEO of v n Y Moms,
Speaker 1: Sam's l Sharmon and founder of Equity Group Investment. In
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio
Speaker 1: Easy does it whether it's fed rate hikes or China
Speaker 1: letting up on code restrictions or steering clear of a
Speaker 1: rail strip. This is Bloomberg Wall Street Week. I'm David Weston,
Speaker 1: this week's special contributor to Larry Summers on the jobs
Speaker 1: numbers and Chair Poll's take on inflation. Mike Arroghetti of
Speaker 1: Aery's Management on the remarkable growth in private credit. Private
Speaker 1: credit has ended out perform when rates are going up.
Speaker 1: And Tom montag And and Finucan on their new Tea
Speaker 1: PG venture into the world of carbon credits. We saw
Speaker 1: an opportunity to improve the whole market. It was a
Speaker 1: week of searching for the happy medium, as China began
Speaker 1: the week in an uproar over COVID restrictions. Put in
Speaker 1: perspective by former US Ambassador to China, Gary Locke, this
Speaker 1: is clearly the worst sense genumen square. But things ended
Speaker 1: the week a bit more calm for China after authorities
Speaker 1: signaled some easing in the COVID policy, as urged by
Speaker 1: World Bank President David Melpass I think they could use
Speaker 1: a recalibration more targeting of their of their lockdowns. We
Speaker 1: started the week with a looming rail strike, but President
Speaker 1: Biden and Congress sought to calm things down by stepping
Speaker 1: in and imposing a deal on the parties. The US
Speaker 1: is passing the bill to avert the strike by those
Speaker 1: freight rail workers, and consumers seemed to be seeking their
Speaker 1: own happy medium as they started their holiday shopping. It
Speaker 1: was kind of muted Black Friday. You know. It was
Speaker 1: solid customer traffic overall, but not strong, all of which
Speaker 1: brought us to FED Chair Powell, who struck a balance,
Speaker 1: or at least tried to, between raising rates too much
Speaker 1: and not raising them enough. We need to raise interest
Speaker 1: rates to a level that is sufficiently restrictive to return
Speaker 1: inflation to two. There's considerable uncertainty about what rate will
Speaker 1: be sufficient. But then the US job numbers came in
Speaker 1: on Friday, and there was nothing modern about those two
Speaker 1: sixty three thousand jobs created November, and employers are paying
Speaker 1: more for every one of them, with average hourly wages
Speaker 1: up a whopping point three point six percent month over month,
Speaker 1: and that's five point up year over year. The markets
Speaker 1: took a look at all the and didn't like it
Speaker 1: one bit, that's at least at first, But by the
Speaker 1: end of the day on Friday had settled back down
Speaker 1: and overall the SP five gained over one for the
Speaker 1: week and the NAZAC was up over two percent, while
Speaker 1: the yield on the ten year fell to under three
Speaker 1: point five percent for the week after starting out at
Speaker 1: nearly three point seven. Here to help us sort through
Speaker 1: this all, welcome now, Greg Peters back to Wall Street
Speaker 1: week co ce io for fixed income at PIGIM, and
Speaker 1: Christina Hooper welcome back from Investco. She's chief marketing strategis there.
Speaker 1: So Christine, let me start with you. I think the
Speaker 1: J Paul was trying to calm things down, but I'm
Speaker 1: not sure he accomplished that. He did not accomplish that,
Speaker 1: but that's the market's fault, not his fault. I think
Speaker 1: he was very clear, uh in telling us what we
Speaker 1: already knew, which is that the FETE is likely to
Speaker 1: downshift a fifty basis points in December, but the terminal
Speaker 1: rate is very unclear and we have a ways to
Speaker 1: go in terms of taming inflation. Really the only positive
Speaker 1: was around housing and talking about the rolling over there.
Speaker 1: But other than that, I think he was a straight
Speaker 1: shooter about setting the table for what uncertainty there is
Speaker 1: in terms of where the terminal rate is and where
Speaker 1: the FED pauses. But Greg he also set the table
Speaker 1: for being really concerned about wage inflation because he talked
Speaker 1: about the really dislocation partaken on the Jolts numbers, and
Speaker 1: then those numbers came in on Friday and we're exactly
Speaker 1: what he was hoping would not happen. I think. Yeah,
Speaker 1: So the strong nonfarm pay will report and the recent
Speaker 1: economic data actually is a blunt reminder actually that the
Speaker 1: data are in charge. So it doesn't matter if you're
Speaker 1: abundant or fulil manager or even FED share Powell. It's
Speaker 1: all driven by the data. So for him or anyone
Speaker 1: to proclaim that, you know, rate rises are pausing or pivoting,
Speaker 1: it's just really kind of a fool's Errand because you're
Speaker 1: driven by the data, and the data is what's driving
Speaker 1: the FED uh and should drive the market absolutely if
Speaker 1: if you don't mind my adding back in June, the
Speaker 1: FED communicated that it was going to only hype by
Speaker 1: fifty basis points. Then two data points came out within
Speaker 1: days of the FED meeting. We got um CPI, we
Speaker 1: got Michigan inflation expectations, and they pivoted to seventy basis point.
Speaker 1: So Greg is absolutely right. The data is going to
Speaker 1: drive this and that really renders Powell speech pretty irrelevant.
Speaker 1: So so Greg, if the data are driving the Federal Reserve,
Speaker 1: what's driving investors? If you're an investor, what do you
Speaker 1: make of these data? And where do you go? You know?
Speaker 1: What is this circular reference problem that we have? It's
Speaker 1: it's it's clear to me at least that the markets
Speaker 1: are focusing less on the data and more on what
Speaker 1: the FED has to say. The challenge, I think is
Speaker 1: that the rhetoric coming out of the FED is quite
Speaker 1: disparate and not all over the place, So the message
Speaker 1: being what is quite mixed. But to me, it's really
Speaker 1: hard for me to swallow that. You know, rates have rallied,
Speaker 1: risk assets have also rallied um and we have an
Speaker 1: even senior recession yet and we haven't seen the peak
Speaker 1: in rates. And we've had one data print David of
Speaker 1: lower infl UH and lower inflation. So you're a fixed
Speaker 1: income guy, Greg, what do you do in fixed income
Speaker 1: given that circumstances? Yeah, so I think it's been this
Speaker 1: this this obviously very difficult market for fix income. If
Speaker 1: you think about where the tenure started this endeavor post COVID,
Speaker 1: it was fifty basis points right, So you know we're
Speaker 1: at three and a half now. I do think fields
Speaker 1: move higher here as we repriced more rate hikes. But
Speaker 1: I have to tell you, uh, you know we we've
Speaker 1: repriced is such a dramatic degree that I see a
Speaker 1: tremendous amount of value fixingcome yields higher all equal is
Speaker 1: a good thing. Spreads wider all of equal a good thing.
Speaker 1: So while we can't time it, I feel really bullish
Speaker 1: on the outlook for fixed income. Thank you so much,
Speaker 1: Investco Christina Hooper and p jims Greg Peters coming up.
Speaker 1: Bank of America veterans Tom Montag and and Finukein joined
Speaker 1: Wall Street Week for an exclusive explanation of their brand
Speaker 1: new carbon credit venture backed by TPG. 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. This is Wall
Speaker 1: Street Week. I'm David Weston. Global. Wall Street got some
Speaker 1: big news this week. It's two of its most prominent citizens,
Speaker 1: Tom Montag, the former CEO of Bank of America, and
Speaker 1: and For Nuken, the former vice chair of Bank America,
Speaker 1: got together and announced a big new venture fact in
Speaker 1: parted by TPG and involves carbon credits. Were delighted to
Speaker 1: say to welcome them now to Wall Street Week for
Speaker 1: an exclusive discussion about this new venture. So thank you
Speaker 1: very much, Ana and Tom for being here. And let
Speaker 1: me start with you. You're the chair of this new venture.
Speaker 1: Explain where it came from. How long you've been working
Speaker 1: on this? Thanks Steven, and good to be here. So, uh,
Speaker 1: this is an evolution actually of work that Tom and
Speaker 1: I did at Bank of America, Uh, for our own company.
Speaker 1: But So for our clients, whereas more and more companies
Speaker 1: are looking to become carbon neutral, which is the first
Speaker 1: step becoming at zero, they do an audit, they review
Speaker 1: what they can do, and there's a delta between everything
Speaker 1: they could do and what is carbon neutrality. And the
Speaker 1: sort of basic practice has been to fill in that
Speaker 1: delta for the short term with carbon credits. But they
Speaker 1: are not plentiful. They have had some controversy around them
Speaker 1: because looking back, UH they've not been well vetted and
Speaker 1: they may not be as as um as good as
Speaker 1: they could be. So we saw an opportunity to improve
Speaker 1: the whole market. Want to fill what clients need to
Speaker 1: put money into the developing world, in other words, cash
Speaker 1: into protecting forests for UH removal as well. So this
Speaker 1: is carbon reduction, carbon rem NOEL carb and removal. And
Speaker 1: in order to do that, we needed to set up
Speaker 1: a system that would be UH much more I think
Speaker 1: acceptable to not only companies but to the n g
Speaker 1: O world. So what I'm talking about is that these
Speaker 1: credits would be vetted through proprietary quality guard rails, they
Speaker 1: would have third party ratings, it would be a methodology,
Speaker 1: methodology that's transparent and so people could feel comfortable with
Speaker 1: this new product. So, so time you're giving the CEO
Speaker 1: of this, you've spent a career really in and around
Speaker 1: the markets, whether Goldman Sacks or a Bank of America.
Speaker 1: Are you making a market in these carbon credits? Is
Speaker 1: that the way it's going to you're putting together people
Speaker 1: who put them together with the people who need them.
Speaker 1: We're making a market in the sense David, that we're
Speaker 1: actually you know, we're offering a product that they can buy. Uh,
Speaker 1: it's not yet a tradeable product. At some point it maybe,
Speaker 1: but at this point, you know, we as and said
Speaker 1: were we just we have we've established rubicon carbon kind
Speaker 1: of solutions, Penny in the first product we have it.
Speaker 1: This is what we called rubicon carbon tons, and that
Speaker 1: is what we are offering to enterprises around the country.
Speaker 1: We'll tell us what's in that Rubicon carbon ton when
Speaker 1: it's available, what is in there. So what we've done
Speaker 1: is that you know our three words if you go
Speaker 1: to our website rubicon carbon dot com, our scale, confidence
Speaker 1: and innovation. And so we basically have already purchased a
Speaker 1: number of carbon credits and we sell them to you
Speaker 1: in a basically a portfolio and the port there's two
Speaker 1: different portfolios. There'll be a third, uh, and they'll probably
Speaker 1: be more over time. We have a nature based portfolio
Speaker 1: and an emissions based portfolio, and we will have a
Speaker 1: removals and each one of those underlying those rubicon carbon
Speaker 1: tons in nature has numerous projects that we've already purchased
Speaker 1: and we curate is constantly. So we we've hired Dr
Speaker 1: Jen Jenkins as our chief sustainability officer, and not only
Speaker 1: do we look at them when they come in, but
Speaker 1: we're always looking at and curating what's in there. So
Speaker 1: you would buy the right to retire carbon credits in
Speaker 1: the portfolio of your choice at any time that you
Speaker 1: wish so. And do you essentially certify the in fact
Speaker 1: these credits exist and that they're legitimate? And you and
Speaker 1: I have talked in the past about things like greenwashing.
Speaker 1: Does this address that problem to some extent? And do
Speaker 1: you need the government to certify it? Well, let's just
Speaker 1: go back here for a minute. I think the problem
Speaker 1: with carbon credits is more retrospective than it is current. Retrospectively,
Speaker 1: it was a nascent industry early on, small players and
Speaker 1: um standards were not set, so Yeah, in some question
Speaker 1: places they were questionable, but today we have much more transparency.
Speaker 1: We're working with NGOs, we are not only will work
Speaker 1: with those that certify and verify. Today we're essentially taking
Speaker 1: another step and we are doing our own project level diligence.
Speaker 1: So this is sort of an insurance on top of
Speaker 1: an insurance, and actually beyond that, we're going to be
Speaker 1: doing some work in terms of insurance itself and risk management.
Speaker 1: So if you are a client and you came to us,
Speaker 1: I think that you would have much more confidence. First
Speaker 1: of all, the projects themselves are forward looking, not retrospective.
Speaker 1: We recognize what the issues were in the years gone by.
Speaker 1: We're not buying renewable projects in O E c D countries,
Speaker 1: meaning we're not trying to UH make renewables in America,
Speaker 1: which are actually cheaper and easy to get to part
Speaker 1: of the credit basket. What we are doing is looking
Speaker 1: to the developing world to help, and I think everybody
Speaker 1: needs removables, So we'll be transparent, will be easy to use.
Speaker 1: The credits are verified, certified, and we're taking a second
Speaker 1: look at them through uh gent I CANS Group. I
Speaker 1: think that this is a sort of end to end process.
Speaker 1: We are working with developers, were working with bropers and
Speaker 1: we may actually source credits ourselves in the years to come.
Speaker 1: And let me come back to you and talk about
Speaker 1: the future of this business as as it were. How
Speaker 1: big is the bread box? Well, let's just talk about
Speaker 1: how big is the need? Uh? By any dimension, we
Speaker 1: are looking at a need a delta of three and
Speaker 1: a half to four trillion dollars a year needed to
Speaker 1: create and NED zero world by and UH, the scientists,
Speaker 1: the NGO's governments would like to see us get halfway
Speaker 1: there by so or at least they're just simply isn't
Speaker 1: enough money to do that in the current equation. Governments
Speaker 1: can't do it, philanthropy can't do it, and businesses are
Speaker 1: really not set up to do it. You will see
Speaker 1: more of that in the years to come. But we're
Speaker 1: talking about four trillion dollars a year that is needed
Speaker 1: to fill this delta. Meanwhile, through uh, some commitments that
Speaker 1: have been made, you know, about ninety percent of the
Speaker 1: world is committed to some form of net zero. But
Speaker 1: the Glasgow Financial Alliance for Net Zero, otherwise known as
Speaker 1: Chief FANS, is a collection of five financial firms who
Speaker 1: have committed to be net zero. For financial firms to
Speaker 1: be net zero, all of their clients have to be
Speaker 1: net zero. That means not just big corporates, but middle
Speaker 1: market companies, small businesses, and ultimately consumers. So imagine that
Speaker 1: kind of um task ahead of us to help clients
Speaker 1: and customers become first carbon neutral, ultimately net zero. Well,
Speaker 1: speaking for myself, I find it very exciting and we'll
Speaker 1: be really curious to see how it develops. Thank you
Speaker 1: so much for sharing with us. That's Tom montag and
Speaker 1: and for Nuken of Rubicon Carbon. Coming up, we're gonna
Speaker 1: explore the large and growing world of private credit with
Speaker 1: Mike Arrighetti of Aries Management. That's next on Walter Read
Speaker 1: on Bloomberg. This is Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. Okay, credit, it's what makes the
Speaker 1: business world go round, and years of fiscal and monetary
Speaker 1: stimulus have made sure there's plenty of credit to go around.
Speaker 1: But now the Fed and other central banks would like
Speaker 1: there to be just a little less lending so we
Speaker 1: can get inflation down. History cautions strongly against prematurely loosening policy.
Speaker 1: We will stay the course until the job is done,
Speaker 1: which is hitting deals, particularly when it comes to private equity.
Speaker 1: What effects deal making is uncertainty. Uncertainty is the enemy
Speaker 1: of deal making. But it turns out that as the
Speaker 1: government regulates lending from the banks more the world of
Speaker 1: private credit has exploded. And more you regulate parts of
Speaker 1: the financial system, the money tends to flow to the
Speaker 1: unregulated parts of the finance national system. Having all that
Speaker 1: credit going on outside of the regulated part of the
Speaker 1: economy is not ideal. But that leaves the question whether
Speaker 1: private credit will be able to step in as the
Speaker 1: banks pull back. Private credit is really important, but private
Speaker 1: credit has also pulled back a little bit, not because
Speaker 1: of uh, the availability of financing or because they're stuck
Speaker 1: with bad loans like some of the large banks are,
Speaker 1: but because of the enormous uncertainty. And to take us
Speaker 1: into this large and growing world of private credit, we
Speaker 1: welcome now one of the leaders in the area. He
Speaker 1: is Mike Arreghetti, CEO of Areas Management. So Mike, thank
Speaker 1: you so much. Welcome to Wall Street. Were great to
Speaker 1: have you here, Thank you very much. We hear so
Speaker 1: much about private credit these days and how big it is,
Speaker 1: how big it's gotten give us your sense of just
Speaker 1: how big it is right now and why it's gotten
Speaker 1: this big. So when we talk about private credit, let
Speaker 1: me just zoom out quickly. We're talking about lending that
Speaker 1: is happening outside of the banking system, and that could
Speaker 1: be in corporate, real estate, infrastructure, consumer. I think a
Speaker 1: lot of the recent dialogue that that folks are paying
Speaker 1: attention to is more along the opportunity and corporate lending.
Speaker 1: That's the most devolved and the most developed market built
Speaker 1: here in the US and globally. In terms of sizing,
Speaker 1: no one white knows just because a lot of this
Speaker 1: is in private hands. But order of magnetitude, the private
Speaker 1: credit market for corporate than the US is about one brillion.
Speaker 1: Juxtaposed that with CNI loans in the banking system, that
Speaker 1: that due to two and a half times that uh
Speaker 1: and almost at parity in terms of size. But the
Speaker 1: leverage loan and HIH yield market. So what effect is
Speaker 1: the increasing interest rates had the private credit business? Obviously
Speaker 1: it's affecting a lot of business right now. It's harder
Speaker 1: to get loans if you can get them at all,
Speaker 1: They're more expensive. Yeah, I think private credit has tended
Speaker 1: to outperform when rates are going up for two main reasons.
Speaker 1: Number one, the structure of the loans are short duration
Speaker 1: and floating rate, though they typically reprice every thirty to
Speaker 1: ninety days, so as rates are going up, the return
Speaker 1: is going up. Um that. Obviously, in an environment where
Speaker 1: we're seeing a lot of building the equity markets and
Speaker 1: valuations are challenged in the high grade markets, private credit
Speaker 1: is a place where people can actually go to benefit
Speaker 1: from from rising rates. The flip side of that, obviously
Speaker 1: is that as rates are going up, debt service becomes
Speaker 1: more challenging or leverage borrowers, and so part of the
Speaker 1: conversation today is as you're generating this bess return, at
Speaker 1: what point does the incremental interest rate challenge the companies?
Speaker 1: I would say, as we sit here today, uh, still
Speaker 1: really strong fundamental economic performance within the portfolios and not
Speaker 1: any signs of stress really making their way through as
Speaker 1: a result of the rate high might just pick up
Speaker 1: on a couple of things you said there, because I
Speaker 1: talked to one investor who said there's no such thing
Speaker 1: as truly bulletproof in business, but these are close to it.
Speaker 1: And I guess it's because of the two things you
Speaker 1: mentioned the short duration and also the fact you've got
Speaker 1: floating rates, so if interest rates go up, you're protected. Well,
Speaker 1: I hope that person he spoke to is an area's
Speaker 1: investor already, but if they're not, I hope to watch
Speaker 1: this show of bulletproof. Is always something that you don't
Speaker 1: want to talk about an investment, but I would agree
Speaker 1: at this point in the cycle, private credit is a
Speaker 1: good place to be floating rate. As we said, short duration,
Speaker 1: but also senior succored. So if you think about where
Speaker 1: these exposures sit in a company's balance sheet or relative
Speaker 1: to the value of an asset, today, most private credit
Speaker 1: loans are sitting in the top half of the capital structure,
Speaker 1: which means that there's institutional equity supporting those loans dollar
Speaker 1: for dollar. So there's a significant amount of equity valuation
Speaker 1: that would have to deterior rate before you begin to
Speaker 1: have a conversation about principle US on private credit. Mike,
Speaker 1: you mentioned areas investors, and I wonder whether you're having,
Speaker 1: if anything, an easier time in getting investors these days,
Speaker 1: because interest rates going up necessarily affect the value of
Speaker 1: equities just because of the discount rate. It makes it
Speaker 1: less attractive. Has private credit has become more attractive relative
Speaker 1: to equities as an alternative investment I think so. You
Speaker 1: know in areas managers posted three fifty billion dollars of
Speaker 1: assets globally, and we have funds that we offer across
Speaker 1: the alternative spectrum, including private equity. I would say, as
Speaker 1: a general observation investor, appetite for door play equity product
Speaker 1: is pretty muted right now, simply because, as you point out,
Speaker 1: valuations are challenged and if you think about the drivers
Speaker 1: a return in that market, earnings growth is going to
Speaker 1: be muted. Availability of leverage is difficult. Cost of capitals
Speaker 1: by Mike, thank you so much for joining us in
Speaker 1: Wall Street Week. As Mike Arri got it, he CEO
Speaker 1: of Arias Management, coming up. We wrap up the week
Speaker 1: with our special contributy to Larry Summers of Harvard. That's
Speaker 1: next on Wall Street Week on Bloomberg. This is Wall
Speaker 1: Street Week. I'm David Weston. We're joined now once again
Speaker 1: by a very special contributor to Wall Street Week. He
Speaker 1: is Larry Summers of Harvard. So, Larry, I have to say,
Speaker 1: until Friday, I thought the big story was going to
Speaker 1: be what j Powell had to say. And then those
Speaker 1: jobs nevers came in, And obviously the number of jobs
Speaker 1: is really impressive, but also the average hourly wage. Wow,
Speaker 1: look what we saw was a seven and a half
Speaker 1: percent annual rate wage increase for the month, a six
Speaker 1: percent wage increase for the last three months, at a
Speaker 1: five percent increase for the year. So it's high, and
Speaker 1: it's rising, and the labor market is strong, and we're
Speaker 1: still in unprecedented territory in terms of the gap between
Speaker 1: vacancies and jobs. And I think that what that's got
Speaker 1: to tell you is that we had a long way
Speaker 1: to go to get an inflation down where the FED
Speaker 1: has said that it wants it uh to be. We
Speaker 1: don't know where this is, how this is all going
Speaker 1: to play out, but for my money, the best single
Speaker 1: measure of core underlying inflation is to look at wages.
Speaker 1: It's interesting. That's what Paul Krugman acknowledged today when he
Speaker 1: said that he was shaken in his views by these numbers.
Speaker 1: And I think what this is telling us is that
Speaker 1: the Fed's got a long way to go, and so
Speaker 1: how is that going to happen? I mean, we heard
Speaker 1: J Powell talk about the Jolts numbers, for example, say
Speaker 1: we've got a big gap between the people trying to
Speaker 1: get people to work and the people actually working. As
Speaker 1: long as you have that, you've got this pressure. He said,
Speaker 1: we've got to get demand down so that in fact
Speaker 1: we are not seeking as many people in the workforce,
Speaker 1: But how do they get done. It's not getting done yet.
Speaker 1: It's not getting done yet. And what that says is
Speaker 1: we're probably gonna need increases in interest rates. I suspect
Speaker 1: they're going to need more increased as an interest rates,
Speaker 1: and the market is now judging or than they're now saying. Look,
Speaker 1: every every time they revise their forecast of inflation up,
Speaker 1: and they regard revised their forecast of ultimate unemployment up
Speaker 1: as well. And gosh, we've all been at the airport
Speaker 1: and they say it's leaving at seven thirty, and then
Speaker 1: they say it's leaving at eight thirty, and then they
Speaker 1: say it's leaving at nine thirty. And when I see
Speaker 1: that happen, I think it's leaving at eleven. And it's
Speaker 1: something like that with these economic uh forecasts. So I
Speaker 1: hope I'm wrong, but my sense is that inflation is
Speaker 1: going to be a little more sustained than what people
Speaker 1: are looking for. And my sense, uh also is that
Speaker 1: it's much harder than many people think to achieve a
Speaker 1: soft landing because there are all these mechanisms that kick in.
Speaker 1: At a certain point, consumers run out of their savings
Speaker 1: and then you have a wily coyote kind of moment
Speaker 1: where consumption falls off. At a certain point, people start
Speaker 1: putting their houses on the market, and then you see
Speaker 1: how house prices falling, and then other people rush to
Speaker 1: put them on the market. At a certain point, you
Speaker 1: see credit drying up. And when credit dries up, people
Speaker 1: can't pay back. Uh, they're old, they're old borrowing. So
Speaker 1: there is this proposition We've talked about it before on
Speaker 1: the show, David. It's called Psalm's rule that says that
Speaker 1: when the unemployment rate goes up by half a percent,
Speaker 1: it goes up by more than two percent. And that's
Speaker 1: because once you get into a negative situation, there's an
Speaker 1: avalanche aspect, and I think we have a real risk
Speaker 1: that that's going to happen at some point. So to
Speaker 1: continue your airport analogy, when is the plane going to leave?
Speaker 1: Because we heard j Powell this week say don't pay
Speaker 1: as much attention to how fast we're going, because every
Speaker 1: jumped in the fact he was pretty clearly seeking fifty basis.
Speaker 1: He said, pay attention to the terminal rate. I'm not
Speaker 1: sure the markets did that. So where do you think
Speaker 1: the term rate is now? Look, I've been saying that
Speaker 1: relative to the five, it's priced into the market a
Speaker 1: little below five. I think that's got to be low,
Speaker 1: or likely to be low, because I always try to
Speaker 1: look for possible errors, and four seems almost impossible, and
Speaker 1: six is certainly a scenario we can write. And that
Speaker 1: tells me that five is not a good best uh
Speaker 1: guess for where it's going to be. In terms of
Speaker 1: what will happen, I guess. I think there's an old
Speaker 1: saying that things happen faster than you think they will,
Speaker 1: don't happen as fast as you think they will, and
Speaker 1: then they happen faster than you thought they could. And
Speaker 1: I think that may be the way it is with
Speaker 1: the downturn. I don't know when it's going to come,
Speaker 1: but when it kicks in, I suspect it will be
Speaker 1: fairly forceful. I got an email, as you know, Larry,
Speaker 1: this week from a loyal viewer of Walter, particularly a
Speaker 1: loyal viewer of yours, saying, I really love hearing from
Speaker 1: Larious Summers, and he asked the question, he said, what's
Speaker 1: so magic about the two percent? I mean, why can't
Speaker 1: we live with three percent or four percent for that matter.
Speaker 1: First of all, I think it's important to understand that,
Speaker 1: having failed for a while to hit two percent, it's
Speaker 1: kind of problematic then to declare that it's no longer
Speaker 1: our goal, even if it was a somewhat arbitrary goal
Speaker 1: in the first place. Second, we've already backed away from
Speaker 1: the two percent in a sense, we've been for years
Speaker 1: well above two percent, and nobody's saying we should swing
Speaker 1: below two percent, so it all averages out to be two.
Speaker 1: So in some sense, we're already not really trying for
Speaker 1: a two percent average inflation target. We're trying for a
Speaker 1: two percent minimum inflation UH target, and that's different than
Speaker 1: what we originally set out to So we've already eased. Third.
Speaker 1: If we settle in for a three percent inflation target,
Speaker 1: then where do we think it's gonna go. Presumably there's
Speaker 1: gonna be a low point of inflation in this cycle, David,
Speaker 1: and from that low point it will rise. So saying
Speaker 1: three percent as a target for what we're disinflating too,
Speaker 1: isn't saying three percent as an average for UH the
Speaker 1: next cycle. So what I think we should do is
Speaker 1: stay with the two target, recognize in as I think
Speaker 1: is surely right UH that uh, that's gonna be a
Speaker 1: low point, not at average, But I think that's all right.
Speaker 1: There was news that went beyond these economy this weekend.
Speaker 1: It had to do with China. We had demonstrations at
Speaker 1: the beginning of the week. They seem to be settling
Speaker 1: down a little bit because there's easing off on the
Speaker 1: COVID restrictions, but it's pretty clear that the Chinese economy
Speaker 1: is struggling some in part because of those restrictions. Give
Speaker 1: us a sense of what the risks are there for
Speaker 1: the global economy because of what's going on to China
Speaker 1: right now. Look, it's possible that we're going to gain
Speaker 1: a little strength because it's white possible that they are
Speaker 1: going to open up a bit in response to these
Speaker 1: UH protests, and then the Chinese economy is going to
Speaker 1: go faster, and when it goes faster, that will be
Speaker 1: an impetus to commodity prices that will help parts of
Speaker 1: the global economy. I think the challenge for them is
Speaker 1: that they've only got one fifth as many intensive care
Speaker 1: units per person and a third as many nurses as
Speaker 1: we do per person, and they don't have much immunity,
Speaker 1: and so it could spread like wildfire, and they could
Speaker 1: have a very scary situation, and that's their tension. Really,
Speaker 1: they can save the economy or they can save their
Speaker 1: populations uh near perfect health. But I don't think they're
Speaker 1: gonna be able to do both well. And to your point,
Speaker 1: Larreas seems to be that we can sit here and
Speaker 1: say you should ease up some of your cover destrictions.
Speaker 1: They have to be data dependent in their own way.
Speaker 1: It depends on how many infections they get, how many
Speaker 1: intensive care units have used. They may have to adjust
Speaker 1: their approach. They're surely going to have to adjust. They're
Speaker 1: surely going to have to tight trate uh their approach
Speaker 1: over time, and I don't think it's gonna be easy.
Speaker 1: I do think sooner or later they're going to have
Speaker 1: to do this, and they're not gaining a lot by
Speaker 1: postponing it. So I think a managed exit from zero
Speaker 1: COVID is probably the right thing for them to do,
Speaker 1: and I think the protesters have probably pushed them in
Speaker 1: that direction, and that's probably a good thing for them
Speaker 1: and for the global economy. But it's going to be
Speaker 1: a very rough patch. It's so great to have you
Speaker 1: here and have you here in New York as the
Speaker 1: wonder world to be with you. Thank you so much.
Speaker 1: That is our very special contributor, Larry Summers of Harvard. Finally,
Speaker 1: one more thought, the power of no. All of us
Speaker 1: like to hear people agree with us, so we're none
Speaker 1: too happy when people go the other way, when they
Speaker 1: tell us that we are just playing wrong, like former
Speaker 1: Vice President Mike Pence recently did to Senator Elizabeth Warren
Speaker 1: on the subject of abortion counseling Senator Warren, you couldn't
Speaker 1: be more wrong. But sometimes being told no is exactly
Speaker 1: what we need, whether we want it or not. Take
Speaker 1: for example, as an amputent and his ill fated decision
Speaker 1: to invade Ukraine, something that hasn't gone particularly well for him.
Speaker 1: A bunch of countries are watching him make mistake after
Speaker 1: mistake and not wanting to associate themselves with, as Donald
Speaker 1: Trump would say, a loser, and people at least those
Speaker 1: outside of Russia suspect Prutent's problems are the result of
Speaker 1: his being surrounded by yes men. I don't think there's
Speaker 1: any question that Russian intelligence got this wrong. Or consider
Speaker 1: the plight of President Z of China as he enters
Speaker 1: his historic third term as president. A month ago, he
Speaker 1: emerged triumphant at the end of his twentieth Party Congress
Speaker 1: with his hand picked team. As described by Very Lovely
Speaker 1: of the Peterson Institute, we now have what we might
Speaker 1: think of as all the King's men. But this week
Speaker 1: President g was confronted with demonstrations protesting his zero COVID policy.
Speaker 1: This is a big deal, these political protests, because they're
Speaker 1: happening across the country at the same time in multiple occasions.
Speaker 1: You just have to wonder whether that hand and picked
Speaker 1: team is exactly what President ge needs right now. And
Speaker 1: when it comes to the power of no maybe that
Speaker 1: is exactly what former President Donald Trump could use down
Speaker 1: at marral Lago about now, as he managed to hold
Speaker 1: a dinner party that included yea who has been accused
Speaker 1: of being anti Semitic, and let him bring along with
Speaker 1: him a friend who everyone agrees is anti Semitic. Nick
Speaker 1: flentis avowed Nazi sympathizers, white nationalist, anti semi I mean,
Speaker 1: let we go through the list, and it long lasts.
Speaker 1: It looks like Mr Trump maybe getting a taste of
Speaker 1: no from leaders in his own party. From Senate Minority
Speaker 1: Leader Mitch McConnell, there is no room in the Republican
Speaker 1: Party for anti semitism or white supremacy. To the likely
Speaker 1: next Speaker of the House, Kevin McCarthy, I don't think
Speaker 1: anybody should be spending any time with Nick Flinch as
Speaker 1: he has no place in this Republican Party. To Mr
Speaker 1: Trump's former Vice president himself, Mike Pence, I think the
Speaker 1: President demonstrated profoundly poor judgment uh in in giving those
Speaker 1: individuals a seat at the table. It may not be
Speaker 1: what we want to hear, but sometimes no is the
Speaker 1: best answer. That is, if we are listening, that does it.
Speaker 1: For this episode of Wall Street Week, I'm David Weston.
Speaker 1: This is Bloomberg. See you next week.