WEBVTT - Bloomberg Wall Street Week: September 23, 2022 0:00:00.520 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.840 --> 0:00:07.120 to the markets. This week U S CPI never's reinforcing 0:00:07.160 --> 0:00:10.639 concerns about inflation. The financial stories that chief are worth 0:00:10.720 --> 0:00:13.480 a really different reaction to mark. It's more indications of 0:00:13.640 --> 0:00:16.239 just how hot the U S economy really is, through 0:00:16.239 --> 0:00:19.520 the eyes of the most influential voices, Larry Summers, the 0:00:19.560 --> 0:00:22.479 former tractor secretary, Katherine keening, CEO of the N Y 0:00:22.600 --> 0:00:26.160 Mollins Sam's L Sharman and founder of Equity Group investment 0:00:26.200 --> 0:00:30.280 in Bloomberg Wool Street Week with David Weston from Bloomberg radio, 0:00:30.800 --> 0:00:35.080 ratcheting up the rhetoric over Ukraine and interest rates all 0:00:35.080 --> 0:00:38.400 around the world. This is Bloomberg Wall Street Week. I'm 0:00:38.440 --> 0:00:42.199 David Weston. This week contributors Larry Summers of Harvard on 0:00:42.240 --> 0:00:45.040 those rate hikes and whether we're starting to see some cracks. 0:00:45.520 --> 0:00:47.839 When you get as far behind the curve as the 0:00:47.920 --> 0:00:51.480 Fed did, then you really have to hit the brakes very, 0:00:51.560 --> 0:00:54.880 very hard, and Steve Rattner of willowed advisers on the 0:00:55.000 --> 0:00:58.960 problem with equities. Our equity exposures down to the lowest 0:00:59.040 --> 0:01:02.720 levels that's been are in twelve or thirteen years. Of Existence. 0:01:15.480 --> 0:01:17.760 It was a week of coming to terms with a 0:01:17.840 --> 0:01:20.320 war in Ukraine that he is not going away as 0:01:20.319 --> 0:01:22.880 President Biden went to the United Nations to lay the 0:01:22.959 --> 0:01:26.280 blame squarely on President Putin. This wor. All should see 0:01:26.319 --> 0:01:29.840 these outrageous acts of what they are. Putin claims he 0:01:29.959 --> 0:01:34.480 had to act because Russia was threatened, but no one 0:01:34.840 --> 0:01:41.000 threatened Russia and no one other than Russia sought conference, 0:01:41.319 --> 0:01:43.800 and President Putin warned about just how far he is 0:01:43.840 --> 0:01:46.800 willing to go. I would like to remind those who 0:01:46.800 --> 0:01:49.840 allow themselves to make sus statements about Russia that our 0:01:49.880 --> 0:01:54.000 country also has various means of destruction, which in some 0:01:54.040 --> 0:01:57.040 cases is even more modern than what NATO countries have, 0:01:57.680 --> 0:02:00.320 and when the territorial integrity over a country is written, 0:02:00.520 --> 0:02:03.600 we will certainly use all the means at our disposal 0:02:03.680 --> 0:02:07.160 to protect Russia and our people. This is not a bluff. 0:02:07.520 --> 0:02:09.880 This week we also had to come to terms again 0:02:10.240 --> 0:02:14.160 with tightening monetary policies. Central banks around the world added 0:02:14.200 --> 0:02:17.400 a total of seven hundred basis points to their rates, 0:02:17.639 --> 0:02:20.440 with the Bank of England going up another fifty Swiss 0:02:20.480 --> 0:02:23.519 national bank up, putting it into positive territory for the 0:02:23.560 --> 0:02:26.400 first time in almost eight years, and the Federal Reserve 0:02:26.480 --> 0:02:30.160 adding another seventy five basis points, with no suggestion that 0:02:30.240 --> 0:02:33.040 it is close to being done. We've just moved, I think, 0:02:33.080 --> 0:02:35.720 probably into the very, the very lowest level of what 0:02:35.880 --> 0:02:38.400 might be restrictive, and certainly in my view and the 0:02:38.480 --> 0:02:41.040 view of the committee, there's there's a ways to go, 0:02:41.520 --> 0:02:43.760 and part of the fallout from all that tightening is 0:02:43.760 --> 0:02:47.120 an ever strengthening dollar, with all that means for markets 0:02:47.160 --> 0:02:50.679 and for policymakers. In the end, it seems like the 0:02:50.800 --> 0:02:54.280 Ode currency that will sustainably win discounty will is the dollar. 0:02:56.040 --> 0:02:58.120 But what was good for the dollar was bad for 0:02:58.160 --> 0:03:00.959 just about every other market, that is, with the SMP 0:03:01.600 --> 0:03:04.560 given another four point six percent on the week and 0:03:04.600 --> 0:03:07.680 at one point falling below it's June closing low before 0:03:07.840 --> 0:03:11.480 ending just above it at thirty. The NASAC was off 0:03:11.520 --> 0:03:15.400 just over five percent, despite rally on Friday, and bonds 0:03:15.520 --> 0:03:18.239 basically melted in the heat of the Fed rate increase, 0:03:18.440 --> 0:03:20.600 with the yield on the ten year gaining nearly twenty 0:03:20.600 --> 0:03:23.679 five basis points for the week, while the two year 0:03:23.840 --> 0:03:26.440 was up over thirty basis points, ending at four point 0:03:26.520 --> 0:03:30.239 two percent. To put this rather extraordinary weekend context. Welcome 0:03:30.240 --> 0:03:33.239 now Christina Hooper, she's chief market strategies for INVESCO, and 0:03:33.320 --> 0:03:36.680 Tracy Alloway, Co host of Bloomberg's odd lots podcast. So 0:03:36.720 --> 0:03:38.040 welcome to both of you. Great to have you here 0:03:38.040 --> 0:03:41.240 for about alter. Well, let's start with you, Christina. Is 0:03:41.280 --> 0:03:46.520 The Sky Falling? The Sky is not falling, but markets 0:03:46.520 --> 0:03:51.600 are adjusting to very changing circumstances, if I said that right, 0:03:51.760 --> 0:03:55.480 very changed circumstances. What we are doing is seeing an 0:03:55.520 --> 0:03:59.360 adjustment that is very, very significant, because what the Fed 0:03:59.400 --> 0:04:01.680 and other center banks are doing, as you mentioned in 0:04:01.720 --> 0:04:04.960 the Intro, is very, very significant. This is the analogy 0:04:05.000 --> 0:04:08.320 I'd use. Um, if you're lactose intolerant, you have a 0:04:08.320 --> 0:04:11.880 half a cup of milk, it's a little painful. If 0:04:11.880 --> 0:04:14.720 you have a gallon of milk, it's extraordinarily painful for 0:04:14.760 --> 0:04:18.279 a few hours. And we just drank a gallon of 0:04:18.320 --> 0:04:21.480 milk and we're lactose intolerant. Well, to continue an analogy, 0:04:21.480 --> 0:04:23.600 a little bit crazy. We were told we were going 0:04:23.640 --> 0:04:25.400 to have to drink the gallon of milk. Why didn't 0:04:25.400 --> 0:04:27.400 we believe it? This is what I don't get. So 0:04:27.720 --> 0:04:29.720 I think one of the reasons this week is so 0:04:29.760 --> 0:04:32.400 significant is because it really seems to me like investors 0:04:32.400 --> 0:04:35.880 have woken up to this pain messaging that Jerome POW 0:04:36.000 --> 0:04:39.400 and other fed members have been trying to transmit for many, 0:04:39.440 --> 0:04:41.839 many months now. I mean we even had the minneapolis 0:04:41.839 --> 0:04:45.240 fed president, Neil Cash Kari, come on and say pretty 0:04:45.279 --> 0:04:48.640 much explicitly I would like to see stocks lower. I 0:04:48.720 --> 0:04:52.640 was happy when stocks fell after Jackson Hole. Tighter monetary 0:04:52.720 --> 0:04:56.560 policy works through financial conditions. They need financial conditions to 0:04:56.600 --> 0:04:59.800 get tighter, but for some reason the market has been 0:05:00.080 --> 0:05:03.120 reluctant to take on that messaging. I really think this 0:05:03.160 --> 0:05:06.000 week is sort of the moment that everyone woke up. Now, 0:05:06.120 --> 0:05:09.400 I'm a journalist and I'm not allowed to have official opinions, 0:05:09.440 --> 0:05:11.919 but I would say that anyone who still believes in 0:05:11.960 --> 0:05:15.120 the soft landing prospects, they need to be getting worried 0:05:15.160 --> 0:05:17.480 at this point. The Path to a soft landing seems 0:05:17.560 --> 0:05:21.280 narrower and narrower, almost by fed design. And as a 0:05:21.360 --> 0:05:22.960 journalist you've talked to a lot of people are saying 0:05:23.040 --> 0:05:25.800 something just like that. You're you're being a good reporter there. But, Christina, 0:05:25.880 --> 0:05:27.080 what did you want to say? I was just gonna 0:05:27.120 --> 0:05:30.680 say in fairness. The Fed didn't think it was going 0:05:30.720 --> 0:05:34.080 where it's going. It has. It's its view of inflation 0:05:34.160 --> 0:05:36.640 has evolved dramatically. If we go back to the DOT 0:05:36.680 --> 0:05:41.680 plot from December, the median expected fed funds rate for 0:05:41.920 --> 0:05:45.080 the end of twenty two was point nine. Now we're 0:05:45.120 --> 0:05:48.039 at four point four percent. So we've seen the Fed 0:05:48.360 --> 0:05:51.559 do an incredible Um Turnabou in terms of its views 0:05:51.600 --> 0:05:54.720 on inflation. So that's why I think we had the 0:05:55.000 --> 0:05:57.920 market reaction we did. Not everyone expected it, because we 0:05:57.920 --> 0:06:00.479 didn't exactly know what the Fed was thinking. The whole 0:06:00.480 --> 0:06:03.120 purpose of Tracy, obviously, is to get our arms around inflation, 0:06:03.160 --> 0:06:05.240 which we have not had. We lost control of that, 0:06:05.360 --> 0:06:07.200 a doubt. I think the Fed would admit that as well. 0:06:07.560 --> 0:06:09.159 What is that going to take? What is your reporting 0:06:09.200 --> 0:06:11.000 tell you about it going to shake? And do we 0:06:11.040 --> 0:06:12.640 believe the Fed is up to the test because, as 0:06:12.680 --> 0:06:15.520 Christina just said, they've had to change their theory here. Well, 0:06:15.560 --> 0:06:18.120 I think you are starting to see some signs of 0:06:18.200 --> 0:06:20.800 deceleration and I hate to do the sort of line 0:06:20.800 --> 0:06:23.719 by line CP I analysis. Um, it's probably boring for 0:06:23.760 --> 0:06:26.920 everyone involved, but there are some technical changes coming up 0:06:26.960 --> 0:06:29.280 to health care, for instance, that are expected to take 0:06:29.680 --> 0:06:32.719 some of the acceleration out of the inflation index. But 0:06:32.800 --> 0:06:35.520 I think the big issue here, going back to the 0:06:35.560 --> 0:06:39.240 Fed and what Christina was saying, is they've misjudged the 0:06:39.320 --> 0:06:43.719 lag between rate changes and the impact on the economy 0:06:43.720 --> 0:06:47.919 and they misjudged that going into the crisis or coming 0:06:47.920 --> 0:06:50.400 out of the immediate pandemic. Um the worst of the 0:06:50.400 --> 0:06:53.720 pandemic in March of fast saying thank you so very much, 0:06:53.720 --> 0:06:56.520 tracy allowy and Christina Hooper were staying with as we 0:06:56.560 --> 0:06:59.360 look for some shelter from the market storm for our 0:06:59.440 --> 0:07:02.480 investment and it's next on Wall Street Week on Bloomberg. 0:07:04.120 --> 0:07:08.120 This is Bloomberg Wall Street Week with David Weston from 0:07:08.240 --> 0:07:18.120 Bloomberg radio. First, the US federal government, for the first 0:07:18.160 --> 0:07:21.400 time since Columbus set sail from Spain, had to pay 0:07:21.400 --> 0:07:24.800 a double digit interest rate to borrow money from its citizens. 0:07:24.800 --> 0:07:28.840 For six months and two days. After treasury bills added 0:07:28.880 --> 0:07:32.040 this new chorus of how high the moon the nation's 0:07:32.080 --> 0:07:35.560 banks began to limb their version, taking the prime rate 0:07:35.680 --> 0:07:38.880 charge to the nation's biggest corporations to an unheard of 0:07:39.040 --> 0:07:43.440 thirteen percent. Previously unheard of, that is now you've heard 0:07:43.440 --> 0:07:46.760 it here. That, of course, was Lewis Rucker on Wall Street, 0:07:47.000 --> 0:07:49.160 way back in September of nineteen seventy nine. That was 0:07:49.160 --> 0:07:52.160 when inflation was running at just under twelve percent. The 0:07:52.240 --> 0:07:55.760 most popular movie was alien and the Doobie brothers topped 0:07:55.760 --> 0:07:57.920 the charts with what a fool belief is. One of 0:07:57.920 --> 0:08:00.160 my personal favorites still were the Sur Christi, you know, 0:08:00.200 --> 0:08:03.440 Hooper of INVESTCO, and Bloomberg's Tracy Alloway, I wanna pick 0:08:03.440 --> 0:08:05.160 on you from it here on the dead side, borrowing 0:08:05.240 --> 0:08:07.880 money at double digit numbers. We're not there at this 0:08:07.920 --> 0:08:10.320 point now. Well, at the same time, what is this 0:08:10.440 --> 0:08:13.120 environment we just described going to do for the asset 0:08:13.400 --> 0:08:15.720 of Fixed Income? Yeah, you know, we were talking about 0:08:15.760 --> 0:08:18.320 financial conditions earlier, and I think one of the weird 0:08:18.440 --> 0:08:23.200 things about recent market moves and history has been how 0:08:23.560 --> 0:08:26.800 sing wine the credit markets have been about inflation and 0:08:26.880 --> 0:08:30.400 higher interest rates. And I've seen various theories. Um, you know, 0:08:30.440 --> 0:08:33.959 today we actually finally saw leverage loans the benchmark Indus 0:08:34.080 --> 0:08:37.920 down to like nineties three dollars, but even then eight 0:08:38.080 --> 0:08:42.440 five is generally considered the distressed level. So what's going on? 0:08:42.440 --> 0:08:45.240 One theory I've seen, and you know, it's kind of 0:08:45.280 --> 0:08:48.720 a sort of moral hazard argument. But there are people 0:08:48.760 --> 0:08:51.320 who say because the Fed came in last time with 0:08:51.400 --> 0:08:54.920 the corporate bond purchasing program maybe that's one reason we 0:08:54.960 --> 0:08:57.200 haven't seen the market panic, because they think if things 0:08:57.200 --> 0:08:59.240 get bad enough while the Fed will come in and 0:08:59.280 --> 0:09:01.760 it'll buy some bonds. Well, last time it didn't even 0:09:01.800 --> 0:09:04.200 have to buy bonds. It just announces that it's going 0:09:04.280 --> 0:09:06.920 to buy bonds and everything is fine. But I think 0:09:06.960 --> 0:09:10.280 people are looking for that pressure and you are starting 0:09:10.280 --> 0:09:12.679 to see some signs of it around the edges. So, 0:09:12.760 --> 0:09:16.240 for instance, we saw triple C rated junk bonds to 0:09:16.240 --> 0:09:18.679 take a little bit of a hit, but not nearly 0:09:18.800 --> 0:09:22.120 what you would have assumed looking at stocks. So what's 0:09:22.160 --> 0:09:25.360 your reaction to that, Christina? is any for fixed income 0:09:25.440 --> 0:09:28.079 right now, sort of a haven in this very tumultuous 0:09:28.120 --> 0:09:31.160 time in the markets? Yeah, I mean, first I have 0:09:31.240 --> 0:09:33.640 to say it all depends on your time horizon. Um, 0:09:33.679 --> 0:09:37.160 but and so I believe very strongly that it's important 0:09:37.160 --> 0:09:39.480 if you've got a long time horizon. You shouldn't panic 0:09:39.520 --> 0:09:42.000 in this environment. I mean, let's look at fixed income, 0:09:42.080 --> 0:09:45.480 floating rate, but there's a variety of areas Um investment 0:09:45.480 --> 0:09:47.840 grade credit looks good. Um, I think we just have 0:09:47.920 --> 0:09:51.000 to recognize that we're going through this adjustment period. We're 0:09:51.040 --> 0:09:53.760 going back to the old normal. I mean presumably if 0:09:53.760 --> 0:09:56.000 the Fed doesn't cut rates again right and and that 0:09:56.120 --> 0:09:59.679 was a time that was fairly good for for equities 0:09:59.720 --> 0:10:02.120 and fixed income. Um, I think it's important to have 0:10:02.200 --> 0:10:05.240 alts in there too. Um. But it is not the 0:10:05.360 --> 0:10:07.680 end of the world, as we talked about before, it's 0:10:07.760 --> 0:10:10.080 just we're going through a change. Well, we're talking about 0:10:10.120 --> 0:10:13.120 fixed income, whether it's loans or its bonds. We had 0:10:13.440 --> 0:10:17.200 one story this week's Citrix, where they basically were borrowing 0:10:17.240 --> 0:10:19.320 a lot of money and the banks went out and 0:10:19.320 --> 0:10:21.560 syndicated that that would be just fine. They ended up 0:10:21.600 --> 0:10:23.439 losing something like six hundred million dollars in the deal. 0:10:23.480 --> 0:10:25.520 They had to eat that money. What happened there? Is 0:10:25.559 --> 0:10:28.160 that a one off, or does that say something broader? Well, 0:10:28.240 --> 0:10:30.560 to me this is sort of the tail end of 0:10:30.600 --> 0:10:33.320 that buyout boom and a lot of the credit market 0:10:33.400 --> 0:10:36.800 excesses that you've seen in recent years. And One reason 0:10:36.920 --> 0:10:40.120 why leverage loans in particular are getting so much focused 0:10:40.240 --> 0:10:43.360 right now is because if you look at which asset 0:10:43.440 --> 0:10:46.960 classes had the most Um, I'm going to say enthusiasm. 0:10:47.720 --> 0:10:49.440 Leverage loans would be one of them. You know, we 0:10:49.520 --> 0:10:51.880 had concerns about the quality of some of those loans 0:10:51.880 --> 0:10:54.080 for a while. We had, at various points in time, 0:10:54.160 --> 0:10:57.160 US regulators trying to improve the quality of the market. 0:10:57.559 --> 0:11:00.280 And now, as interest rates get higher, a lot of 0:11:00.280 --> 0:11:03.120 that pressure lands on floating rate loans because the companies 0:11:03.160 --> 0:11:04.760 that took them out are going to have to start 0:11:04.760 --> 0:11:08.120 paying more to keep up with those benchmark interest rates. 0:11:08.200 --> 0:11:10.559 And that's why you have people who are well, at 0:11:10.559 --> 0:11:12.840 Morgan Stanley for instance, who are looking at the leverage 0:11:12.920 --> 0:11:15.840 loan market as the sort of Canary in the coal 0:11:15.920 --> 0:11:19.559 mine of how the market is viewing recession risk. But again, 0:11:19.679 --> 0:11:22.720 we're not quite there. Eight five is usually the level 0:11:22.840 --> 0:11:25.880 of distress. We are at something like nine three now. 0:11:26.040 --> 0:11:28.720 So further to go. If you're really looking for a 0:11:28.720 --> 0:11:32.120 sign that the market is panicking. If that's a fixed income, 0:11:32.440 --> 0:11:34.679 what about equities? Doesn't make any sense to buy equities. 0:11:34.720 --> 0:11:38.160 Typically when the discount rate goes up, equities go down, 0:11:38.240 --> 0:11:40.599 and certainly we're seeing that right now in the equity markets. 0:11:40.679 --> 0:11:43.720 Sure well, I do absolutely believe that unless you have 0:11:43.760 --> 0:11:46.319 a three or four month time horizon, you should be 0:11:46.880 --> 0:11:49.760 keeping your equity exposure and looking for opportunities to add 0:11:49.800 --> 0:11:53.080 to it. Um. Yes, there is that adjustment period when, 0:11:53.160 --> 0:11:57.040 when rates go up, Um, we do see equities tend 0:11:57.080 --> 0:12:00.320 to go down. But Um, we also tend to see 0:12:00.320 --> 0:12:03.720 a recovery. It doesn't last forever. In fact, during a 0:12:03.800 --> 0:12:07.319 whole uh fed rate high cycle, usually by the end 0:12:07.640 --> 0:12:11.240 we come up with positive performance for equities, and leading 0:12:11.280 --> 0:12:14.320 the way is typically the higher valuation names that got 0:12:14.440 --> 0:12:18.560 hit hardest first. Um. So this is, you know, this 0:12:18.640 --> 0:12:21.040 is to be expected. It's not fun, but it is 0:12:21.080 --> 0:12:23.960 to be expected. Um, the kind of behavior was seeing, 0:12:24.000 --> 0:12:26.520 given the kind of dramatic increase in rates. But that 0:12:26.679 --> 0:12:29.480 is not, Um, the end for equities. So you might 0:12:29.520 --> 0:12:33.040 actually add, at least selectively, to growth right now. Absolutely, 0:12:33.480 --> 0:12:35.640 as as coming out of it faster than the others, 0:12:35.640 --> 0:12:38.079 do you think? I do. I do believe that. For sure, 0:12:38.960 --> 0:12:43.360 evaluations are higher there. They tend to get hit hard, 0:12:43.600 --> 0:12:48.600 but Um, but they're also significant growth prospects, growth potential 0:12:48.640 --> 0:12:51.680 there at a time when the economy is clearly slowing down. 0:12:52.600 --> 0:12:56.120 So Tracy. What do you see in other asset classes? 0:12:56.160 --> 0:13:00.960 And let me name two at random cash and commodities. Cash, 0:13:01.120 --> 0:13:04.120 I mean cash is looking okay right now. I guess 0:13:04.200 --> 0:13:07.840 you're only losing eight percent per year versus what like 0:13:08.720 --> 0:13:11.360 on some other stuff. But when we're talking about cash, 0:13:11.400 --> 0:13:14.480 I mean it's got to be in the dollar. That's 0:13:14.600 --> 0:13:17.720 the only thing that's really working at the moment. Cash. 0:13:17.880 --> 0:13:19.720 We used to say cash is king, now we say 0:13:19.840 --> 0:13:22.120 the dollar is king. And not only is the dollar king, 0:13:22.200 --> 0:13:24.800 it is a king with a wrecking ball going through 0:13:24.840 --> 0:13:27.440 other asset classes. But from what you said, the very 0:13:27.480 --> 0:13:30.280 fact that the dollar goes up makes commodities don't go 0:13:30.360 --> 0:13:33.439 down in general over time, and so that means commodities 0:13:33.480 --> 0:13:35.680 aren't so attractive, you think, to investors right now. Well, 0:13:35.679 --> 0:13:38.040 that's exactly right, and I think that's one reason why 0:13:38.080 --> 0:13:41.240 the recent environment has been so painful for a lot 0:13:41.280 --> 0:13:43.480 of people, because I think back to the beginning of 0:13:43.480 --> 0:13:47.000 the year, commodities, we're seen as this inflation hedge Um, 0:13:47.040 --> 0:13:48.679 a bit of a risk off hedge. You know, if 0:13:48.679 --> 0:13:51.120 you're worried about what's going on with Russia and the Ukraine, 0:13:51.160 --> 0:13:54.040 you can buy some wheat exposure, buy some oil exposure. 0:13:54.280 --> 0:13:57.200 You have a nice little offset to macro risk. That 0:13:57.240 --> 0:14:00.200 shows up in the sort of headline indussees. That's not 0:14:00.280 --> 0:14:03.680 working anymore and I think that's one reason why the 0:14:03.800 --> 0:14:06.920 environment has been so difficult for investors. The only good 0:14:06.960 --> 0:14:09.240 news that I kind of see here is, you know, 0:14:09.280 --> 0:14:12.440 people have been having to deal with these really binary 0:14:12.480 --> 0:14:15.719 potential outcomes for most of the summer. You know, does 0:14:15.760 --> 0:14:19.640 inflation stay high, do we get the dreaded wage price spiral, 0:14:20.120 --> 0:14:23.040 or does the Fed come in, raise interest rates, bring 0:14:23.080 --> 0:14:26.160 down inflation and you get that knock on recession effect? 0:14:26.840 --> 0:14:29.360 I think the good news here is we're moving away 0:14:29.440 --> 0:14:32.680 from that really binary tail risky environment and we seem 0:14:32.760 --> 0:14:36.720 to be moving closer to that recession scenario. I know 0:14:36.800 --> 0:14:39.560 I'm scraping the bottom of the barrel by saying recession 0:14:39.600 --> 0:14:41.560 is good for investors at this point in time, but 0:14:41.640 --> 0:14:43.680 at least you know where you're headed. Thank you so 0:14:43.840 --> 0:14:46.600 very much to blue ory's own Tracy Alloway, and to 0:14:46.720 --> 0:14:52.120 Christina Hooper INVESCO. Coming up the times, they are changing, 0:14:52.200 --> 0:14:54.560 and not necessarily in a good way when it comes 0:14:54.560 --> 0:14:57.360 to equities. We talked with Steve Ratner will it advisors 0:14:57.400 --> 0:15:00.400 about what the regime change in monetary policy means for 0:15:00.640 --> 0:15:07.320 equity investors. This is Wall Street Week on Bloomberg. This 0:15:07.640 --> 0:15:12.120 is Bloomberg Wall Street Week with David Weston from Bloomberg radio. 0:15:20.480 --> 0:15:23.040 All good things must come to an end, and if 0:15:23.080 --> 0:15:25.440 we still had any doubts, this week saw the Fed 0:15:25.520 --> 0:15:28.720 move even farther away from easy money, as the center 0:15:28.760 --> 0:15:31.960 bank raised rates again and signaled a good deal yet 0:15:32.120 --> 0:15:34.200 to come. What we think we need to do is 0:15:34.240 --> 0:15:36.680 to move our policy rate to a restrictive level that's 0:15:36.680 --> 0:15:40.600 restrictive enough to bring inflation down to two percent, and 0:15:40.600 --> 0:15:42.880 the Bank of England followed suit. This is still the 0:15:42.880 --> 0:15:46.240 biggest box box hike since black Wednesday thirty years ago, 0:15:46.600 --> 0:15:49.880 while the Swedish Central Bank went even further, raising rates 0:15:49.880 --> 0:15:53.080 a full one basis points. That shift in the entire 0:15:53.160 --> 0:15:57.400 regime of monetary policy reverberates throughout investments, with rates on 0:15:57.480 --> 0:16:00.000 the ten year and the two year treasuries shooting up 0:16:00.400 --> 0:16:04.280 and the dollar continuing to strengthen. You've got two year 0:16:04.320 --> 0:16:08.840 treasuries at almost, you know, highest levels we've seen in forever. 0:16:09.200 --> 0:16:12.520 And where does that leave equities? They're certainly well off 0:16:12.560 --> 0:16:15.160 from their highs. It's never a good sign when you 0:16:15.200 --> 0:16:18.040 get these big rallies and then followed by three straight 0:16:18.080 --> 0:16:20.840 weeks of declines and you just can't seem to hold 0:16:20.840 --> 0:16:23.080 onto some of these games. But does that make them 0:16:23.120 --> 0:16:25.600 a bargain? We have seen in the path that as 0:16:25.600 --> 0:16:30.440 we enter into recessions, value companies, value stocks, tend to 0:16:30.760 --> 0:16:33.960 have declines and earnings well, growth stocks actually tend to 0:16:33.960 --> 0:16:36.800 hold up fairly well. Or have we yet to see 0:16:36.880 --> 0:16:39.120 the bottom when everyone's on the sort of race to 0:16:39.160 --> 0:16:41.240 the bottom of you know, who can get more Barish, 0:16:41.280 --> 0:16:43.680 who can have the more outlandished the forecast? I think 0:16:43.720 --> 0:16:46.040 I just told you where market psychology is right now. 0:16:46.520 --> 0:16:49.320 You sentiment different ways. To measure right it's a global 0:16:49.360 --> 0:16:56.440 financial crisis slows and to take us through whether it 0:16:56.440 --> 0:16:58.760 really makes sense to be investing in equities these days, 0:16:58.920 --> 0:17:01.280 we turned to somebody who's it is to invest a 0:17:01.320 --> 0:17:04.359 substantial amount of money. He is Stephen Ratner, the chairman 0:17:04.400 --> 0:17:07.800 and CEO of Willed Advisors, which invests the personal and 0:17:07.840 --> 0:17:10.880 Philanthropic assets of Michael R Bloomberg. He is our founder 0:17:11.080 --> 0:17:13.800 and majority shareholders. So, Steve, thanks so much for being 0:17:13.800 --> 0:17:16.760 back on Wall Street Week. There's a lot of being 0:17:16.760 --> 0:17:20.520 talked about equities, particularly as interest rates rise. Give us 0:17:20.520 --> 0:17:22.879 a sense where you are on equities right now as 0:17:22.920 --> 0:17:24.520 an investment and you're not a trader. You do it 0:17:24.520 --> 0:17:27.240 over the medium and longer term. We're not traders and 0:17:27.280 --> 0:17:30.200 I've always said to everybody that market timing is for fools. 0:17:30.240 --> 0:17:33.240 I think every smart investor, successful investor, has pretty much 0:17:33.240 --> 0:17:36.000 said that. But of course we do have opinions about 0:17:36.000 --> 0:17:38.240 the equity markets and at the margin we do make 0:17:38.320 --> 0:17:42.080 tactical tweaks and shifts to try to accommodate our view, 0:17:42.560 --> 0:17:44.800 and I would say that we have been very, very 0:17:44.800 --> 0:17:48.080 cautious about equities for some months now. Our equity exposures 0:17:48.160 --> 0:17:50.639 down to the lowest levels that's been in our twelve 0:17:50.680 --> 0:17:54.520 or thirteen years of existence and we remain cautious, and 0:17:54.640 --> 0:17:58.399 interest rates are the biggest factor in that decision. So 0:17:58.600 --> 0:18:00.879 just to take us through exactly how higher interest rates, 0:18:00.920 --> 0:18:02.800 which we're having, not just the United States but almost 0:18:02.840 --> 0:18:05.760 globally at this point, how does it express itself in 0:18:05.800 --> 0:18:07.600 the value of the equities? Is that a matter of 0:18:07.600 --> 0:18:10.600 the slowdown the economy overall, less demand for business? Is 0:18:10.600 --> 0:18:13.040 it a matter of evaluations? How does it feed through 0:18:13.080 --> 0:18:16.320 to equities? Certainly there are effects on the economy overall 0:18:16.440 --> 0:18:18.639 and one needs to think about it. But I my 0:18:18.720 --> 0:18:20.879 observation over I don't know, forty years or so of 0:18:20.880 --> 0:18:23.600 watching equity markets is that they are keenly attuned to 0:18:23.680 --> 0:18:27.719 interest rates as a more direct transmission mechanism to equity prices, 0:18:27.720 --> 0:18:31.680 simply because interest rates are a discount, our discount rate 0:18:32.000 --> 0:18:35.360 on future cash flows. And it's not a coincidence that 0:18:35.400 --> 0:18:37.840 you've had the so called unprofitable tech with the longest 0:18:37.840 --> 0:18:40.760 state in cash flows suffering the worst than this down 0:18:40.840 --> 0:18:43.760 draft that is interest rate related, in my opinion, and 0:18:43.800 --> 0:18:46.600 some of the more near term cash flow producing companies 0:18:46.960 --> 0:18:49.520 suffering less. I think there's a very, very direct correlation 0:18:50.080 --> 0:18:52.800 between the investment opportunity and fixed income or an interest 0:18:52.920 --> 0:18:58.280 rates versus inequities. That suggests perhaps the sell equities might 0:18:58.280 --> 0:19:00.000 make more sense than other equities, that is to say 0:19:00.040 --> 0:19:03.960 those that are generating real profits today. Cash today maybe 0:19:04.119 --> 0:19:06.680 a safer bed than those where it's really in the outyears. 0:19:07.080 --> 0:19:09.479 In terms of this factor, there's no question about it. 0:19:09.720 --> 0:19:11.600 And again you can see it in the numbers over 0:19:11.640 --> 0:19:14.199 the last nine months or so since the equity markets 0:19:14.200 --> 0:19:17.840 really started rollover, which is which is the fact that 0:19:17.920 --> 0:19:22.119 longer dated cash flows, the further out you get, biotech startups, 0:19:22.240 --> 0:19:25.200 growth companies have been hit the worst. The Nasdaq is 0:19:25.240 --> 0:19:28.120 down a lot more than the SMP. Not a coincidence, 0:19:28.560 --> 0:19:30.520 but you say have been hit the worst. There are 0:19:30.520 --> 0:19:34.320 those who really are fans of growth stocks who say, 0:19:34.359 --> 0:19:36.320 you know what, they've already taken a hit. That what 0:19:36.359 --> 0:19:38.800 happens actually when you go into a slowdown recession. They 0:19:38.800 --> 0:19:40.760 take the hit up front, but then they come out 0:19:40.800 --> 0:19:42.800 of it faster and better. Well, I'd like to see 0:19:42.800 --> 0:19:45.400 their evidence and support of that. And again, if you're 0:19:45.400 --> 0:19:48.040 talking about an economic slowdown, we could have that conversation. 0:19:48.119 --> 0:19:50.080 That may come out at a different place. If you're 0:19:50.080 --> 0:19:52.600 talking about a situation which there's no evidence at all 0:19:52.960 --> 0:19:55.160 that we're at the end of an interest rate cycle, 0:19:55.560 --> 0:19:58.080 then I would push back. And in fact, if you 0:19:58.119 --> 0:19:59.960 look at the market as a whole, I believe it's 0:20:00.040 --> 0:20:03.200 true that the market has never really turned upward until 0:20:03.560 --> 0:20:06.080 the Fed has been done tightening. And again, there's no 0:20:06.119 --> 0:20:08.880 evidence the Fed has nearly done tightening. So the Fed 0:20:08.960 --> 0:20:11.680 has been pretty explicit they're going to keep tightening for 0:20:11.760 --> 0:20:14.639 quite a while. Do you have any projections as you 0:20:14.680 --> 0:20:17.480 think about your investments? Do you try to have any 0:20:17.480 --> 0:20:20.120 sense of how long that might be and frankly, even 0:20:20.119 --> 0:20:22.560 with the terminal, right might be. Well, we think about 0:20:22.600 --> 0:20:25.000 it more in terms of over under. If you look 0:20:25.000 --> 0:20:28.160 at the market, the credit markets have been wildly behind 0:20:28.160 --> 0:20:30.879 the curve in predicting. The fedsman behind the curve and 0:20:30.880 --> 0:20:33.520 the credit markets behind the Fed in terms of their 0:20:33.520 --> 0:20:38.560 interest rate expectations and and so if you basically say, okay, well, 0:20:38.600 --> 0:20:41.040 the equity markets are taking their queue from the credit markets, 0:20:41.280 --> 0:20:42.840 you can see why we had this sort of mini 0:20:42.920 --> 0:20:44.399 bull run, if you want to even call it that, 0:20:44.520 --> 0:20:47.159 this summer when it looked like maybe interest rates for 0:20:47.200 --> 0:20:49.520 starting the plateau or something like that. Steve, thank you 0:20:49.600 --> 0:20:51.560 so much. Really great to have you the Stephen Ranner. 0:20:51.680 --> 0:20:56.919 He's the chairman and CEO of Willet Advisors. Coming up, 0:20:56.960 --> 0:20:58.800 we wrap up the week, as we always do, with 0:20:58.800 --> 0:21:01.840