Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets. This week U S CPI never's reinforcing
Speaker 1: concerns about inflation. The financial stories that chief are worth
Speaker 1: a really different reaction to mark. It's more indications of
Speaker 1: just how hot the U S economy really is, through
Speaker 1: the eyes of the most influential voices, Larry Summers, the
Speaker 1: former tractor secretary, Katherine keening, CEO of the N Y
Speaker 1: Mollins Sam's L Sharman and founder of Equity Group investment
Speaker 1: in Bloomberg Wool Street Week with David Weston from Bloomberg radio,
Speaker 1: ratcheting up the rhetoric over Ukraine and interest rates all
Speaker 1: around the world. This is Bloomberg Wall Street Week. I'm
Speaker 1: David Weston. This week contributors Larry Summers of Harvard on
Speaker 1: those rate hikes and whether we're starting to see some cracks.
Speaker 1: When you get as far behind the curve as the
Speaker 1: Fed did, then you really have to hit the brakes very,
Speaker 1: very hard, and Steve Rattner of willowed advisers on the
Speaker 1: problem with equities. Our equity exposures down to the lowest
Speaker 1: levels that's been are in twelve or thirteen years. Of Existence.
Speaker 1: It was a week of coming to terms with a
Speaker 1: war in Ukraine that he is not going away as
Speaker 1: President Biden went to the United Nations to lay the
Speaker 1: blame squarely on President Putin. This wor. All should see
Speaker 1: these outrageous acts of what they are. Putin claims he
Speaker 1: had to act because Russia was threatened, but no one
Speaker 1: threatened Russia and no one other than Russia sought conference,
Speaker 1: and President Putin warned about just how far he is
Speaker 1: willing to go. I would like to remind those who
Speaker 1: allow themselves to make sus statements about Russia that our
Speaker 1: country also has various means of destruction, which in some
Speaker 1: cases is even more modern than what NATO countries have,
Speaker 1: and when the territorial integrity over a country is written,
Speaker 1: we will certainly use all the means at our disposal
Speaker 1: to protect Russia and our people. This is not a bluff.
Speaker 1: This week we also had to come to terms again
Speaker 1: with tightening monetary policies. Central banks around the world added
Speaker 1: a total of seven hundred basis points to their rates,
Speaker 1: with the Bank of England going up another fifty Swiss
Speaker 1: national bank up, putting it into positive territory for the
Speaker 1: first time in almost eight years, and the Federal Reserve
Speaker 1: adding another seventy five basis points, with no suggestion that
Speaker 1: it is close to being done. We've just moved, I think,
Speaker 1: probably into the very, the very lowest level of what
Speaker 1: might be restrictive, and certainly in my view and the
Speaker 1: view of the committee, there's there's a ways to go,
Speaker 1: and part of the fallout from all that tightening is
Speaker 1: an ever strengthening dollar, with all that means for markets
Speaker 1: and for policymakers. In the end, it seems like the
Speaker 1: Ode currency that will sustainably win discounty will is the dollar.
Speaker 1: But what was good for the dollar was bad for
Speaker 1: just about every other market, that is, with the SMP
Speaker 1: given another four point six percent on the week and
Speaker 1: at one point falling below it's June closing low before
Speaker 1: ending just above it at thirty. The NASAC was off
Speaker 1: just over five percent, despite rally on Friday, and bonds
Speaker 1: basically melted in the heat of the Fed rate increase,
Speaker 1: with the yield on the ten year gaining nearly twenty
Speaker 1: five basis points for the week, while the two year
Speaker 1: was up over thirty basis points, ending at four point
Speaker 1: two percent. To put this rather extraordinary weekend context. Welcome
Speaker 1: now Christina Hooper, she's chief market strategies for INVESCO, and
Speaker 1: Tracy Alloway, Co host of Bloomberg's odd lots podcast. So
Speaker 1: welcome to both of you. Great to have you here
Speaker 1: for about alter. Well, let's start with you, Christina. Is
Speaker 1: The Sky Falling? The Sky is not falling, but markets
Speaker 1: are adjusting to very changing circumstances, if I said that right,
Speaker 1: very changed circumstances. What we are doing is seeing an
Speaker 1: adjustment that is very, very significant, because what the Fed
Speaker 1: and other center banks are doing, as you mentioned in
Speaker 1: the Intro, is very, very significant. This is the analogy
Speaker 1: I'd use. Um, if you're lactose intolerant, you have a
Speaker 1: half a cup of milk, it's a little painful. If
Speaker 1: you have a gallon of milk, it's extraordinarily painful for
Speaker 1: a few hours. And we just drank a gallon of
Speaker 1: milk and we're lactose intolerant. Well, to continue an analogy,
Speaker 1: a little bit crazy. We were told we were going
Speaker 1: to have to drink the gallon of milk. Why didn't
Speaker 1: we believe it? This is what I don't get. So
Speaker 1: I think one of the reasons this week is so
Speaker 1: significant is because it really seems to me like investors
Speaker 1: have woken up to this pain messaging that Jerome POW
Speaker 1: and other fed members have been trying to transmit for many,
Speaker 1: many months now. I mean we even had the minneapolis
Speaker 1: fed president, Neil Cash Kari, come on and say pretty
Speaker 1: much explicitly I would like to see stocks lower. I
Speaker 1: was happy when stocks fell after Jackson Hole. Tighter monetary
Speaker 1: policy works through financial conditions. They need financial conditions to
Speaker 1: get tighter, but for some reason the market has been
Speaker 1: reluctant to take on that messaging. I really think this
Speaker 1: week is sort of the moment that everyone woke up. Now,
Speaker 1: I'm a journalist and I'm not allowed to have official opinions,
Speaker 1: but I would say that anyone who still believes in
Speaker 1: the soft landing prospects, they need to be getting worried
Speaker 1: at this point. The Path to a soft landing seems
Speaker 1: narrower and narrower, almost by fed design. And as a
Speaker 1: journalist you've talked to a lot of people are saying
Speaker 1: something just like that. You're you're being a good reporter there. But, Christina,
Speaker 1: what did you want to say? I was just gonna
Speaker 1: say in fairness. The Fed didn't think it was going
Speaker 1: where it's going. It has. It's its view of inflation
Speaker 1: has evolved dramatically. If we go back to the DOT
Speaker 1: plot from December, the median expected fed funds rate for
Speaker 1: the end of twenty two was point nine. Now we're
Speaker 1: at four point four percent. So we've seen the Fed
Speaker 1: do an incredible Um Turnabou in terms of its views
Speaker 1: on inflation. So that's why I think we had the
Speaker 1: market reaction we did. Not everyone expected it, because we
Speaker 1: didn't exactly know what the Fed was thinking. The whole
Speaker 1: purpose of Tracy, obviously, is to get our arms around inflation,
Speaker 1: which we have not had. We lost control of that,
Speaker 1: a doubt. I think the Fed would admit that as well.
Speaker 1: What is that going to take? What is your reporting
Speaker 1: tell you about it going to shake? And do we
Speaker 1: believe the Fed is up to the test because, as
Speaker 1: Christina just said, they've had to change their theory here. Well,
Speaker 1: I think you are starting to see some signs of
Speaker 1: deceleration and I hate to do the sort of line
Speaker 1: by line CP I analysis. Um, it's probably boring for
Speaker 1: everyone involved, but there are some technical changes coming up
Speaker 1: to health care, for instance, that are expected to take
Speaker 1: some of the acceleration out of the inflation index. But
Speaker 1: I think the big issue here, going back to the
Speaker 1: Fed and what Christina was saying, is they've misjudged the
Speaker 1: lag between rate changes and the impact on the economy
Speaker 1: and they misjudged that going into the crisis or coming
Speaker 1: out of the immediate pandemic. Um the worst of the
Speaker 1: pandemic in March of fast saying thank you so very much,
Speaker 1: tracy allowy and Christina Hooper were staying with as we
Speaker 1: look for some shelter from the market storm for our
Speaker 1: investment and it's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg radio. First, the US federal government, for the first
Speaker 1: time since Columbus set sail from Spain, had to pay
Speaker 1: a double digit interest rate to borrow money from its citizens.
Speaker 1: For six months and two days. After treasury bills added
Speaker 1: this new chorus of how high the moon the nation's
Speaker 1: banks began to limb their version, taking the prime rate
Speaker 1: charge to the nation's biggest corporations to an unheard of
Speaker 1: thirteen percent. Previously unheard of, that is now you've heard
Speaker 1: it here. That, of course, was Lewis Rucker on Wall Street,
Speaker 1: way back in September of nineteen seventy nine. That was
Speaker 1: when inflation was running at just under twelve percent. The
Speaker 1: most popular movie was alien and the Doobie brothers topped
Speaker 1: the charts with what a fool belief is. One of
Speaker 1: my personal favorites still were the Sur Christi, you know,
Speaker 1: Hooper of INVESTCO, and Bloomberg's Tracy Alloway, I wanna pick
Speaker 1: on you from it here on the dead side, borrowing
Speaker 1: money at double digit numbers. We're not there at this
Speaker 1: point now. Well, at the same time, what is this
Speaker 1: environment we just described going to do for the asset
Speaker 1: of Fixed Income? Yeah, you know, we were talking about
Speaker 1: financial conditions earlier, and I think one of the weird
Speaker 1: things about recent market moves and history has been how
Speaker 1: sing wine the credit markets have been about inflation and
Speaker 1: higher interest rates. And I've seen various theories. Um, you know,
Speaker 1: today we actually finally saw leverage loans the benchmark Indus
Speaker 1: down to like nineties three dollars, but even then eight
Speaker 1: five is generally considered the distressed level. So what's going on?
Speaker 1: One theory I've seen, and you know, it's kind of
Speaker 1: a sort of moral hazard argument. But there are people
Speaker 1: who say because the Fed came in last time with
Speaker 1: the corporate bond purchasing program maybe that's one reason we
Speaker 1: haven't seen the market panic, because they think if things
Speaker 1: get bad enough while the Fed will come in and
Speaker 1: it'll buy some bonds. Well, last time it didn't even
Speaker 1: have to buy bonds. It just announces that it's going
Speaker 1: to buy bonds and everything is fine. But I think
Speaker 1: people are looking for that pressure and you are starting
Speaker 1: to see some signs of it around the edges. So,
Speaker 1: for instance, we saw triple C rated junk bonds to
Speaker 1: take a little bit of a hit, but not nearly
Speaker 1: what you would have assumed looking at stocks. So what's
Speaker 1: your reaction to that, Christina? is any for fixed income
Speaker 1: right now, sort of a haven in this very tumultuous
Speaker 1: time in the markets? Yeah, I mean, first I have
Speaker 1: to say it all depends on your time horizon. Um,
Speaker 1: but and so I believe very strongly that it's important
Speaker 1: if you've got a long time horizon. You shouldn't panic
Speaker 1: in this environment. I mean, let's look at fixed income,
Speaker 1: floating rate, but there's a variety of areas Um investment
Speaker 1: grade credit looks good. Um, I think we just have
Speaker 1: to recognize that we're going through this adjustment period. We're
Speaker 1: going back to the old normal. I mean presumably if
Speaker 1: the Fed doesn't cut rates again right and and that
Speaker 1: was a time that was fairly good for for equities
Speaker 1: and fixed income. Um, I think it's important to have
Speaker 1: alts in there too. Um. But it is not the
Speaker 1: end of the world, as we talked about before, it's
Speaker 1: just we're going through a change. Well, we're talking about
Speaker 1: fixed income, whether it's loans or its bonds. We had
Speaker 1: one story this week's Citrix, where they basically were borrowing
Speaker 1: a lot of money and the banks went out and
Speaker 1: syndicated that that would be just fine. They ended up
Speaker 1: losing something like six hundred million dollars in the deal.
Speaker 1: They had to eat that money. What happened there? Is
Speaker 1: that a one off, or does that say something broader? Well,
Speaker 1: to me this is sort of the tail end of
Speaker 1: that buyout boom and a lot of the credit market
Speaker 1: excesses that you've seen in recent years. And One reason
Speaker 1: why leverage loans in particular are getting so much focused
Speaker 1: right now is because if you look at which asset
Speaker 1: classes had the most Um, I'm going to say enthusiasm.
Speaker 1: Leverage loans would be one of them. You know, we
Speaker 1: had concerns about the quality of some of those loans
Speaker 1: for a while. We had, at various points in time,
Speaker 1: US regulators trying to improve the quality of the market.
Speaker 1: And now, as interest rates get higher, a lot of
Speaker 1: that pressure lands on floating rate loans because the companies
Speaker 1: that took them out are going to have to start
Speaker 1: paying more to keep up with those benchmark interest rates.
Speaker 1: And that's why you have people who are well, at
Speaker 1: Morgan Stanley for instance, who are looking at the leverage
Speaker 1: loan market as the sort of Canary in the coal
Speaker 1: mine of how the market is viewing recession risk. But again,
Speaker 1: we're not quite there. Eight five is usually the level
Speaker 1: of distress. We are at something like nine three now.
Speaker 1: So further to go. If you're really looking for a
Speaker 1: sign that the market is panicking. If that's a fixed income,
Speaker 1: what about equities? Doesn't make any sense to buy equities.
Speaker 1: Typically when the discount rate goes up, equities go down,
Speaker 1: and certainly we're seeing that right now in the equity markets.
Speaker 1: Sure well, I do absolutely believe that unless you have
Speaker 1: a three or four month time horizon, you should be
Speaker 1: keeping your equity exposure and looking for opportunities to add
Speaker 1: to it. Um. Yes, there is that adjustment period when,
Speaker 1: when rates go up, Um, we do see equities tend
Speaker 1: to go down. But Um, we also tend to see
Speaker 1: a recovery. It doesn't last forever. In fact, during a
Speaker 1: whole uh fed rate high cycle, usually by the end
Speaker 1: we come up with positive performance for equities, and leading
Speaker 1: the way is typically the higher valuation names that got
Speaker 1: hit hardest first. Um. So this is, you know, this
Speaker 1: is to be expected. It's not fun, but it is
Speaker 1: to be expected. Um, the kind of behavior was seeing,
Speaker 1: given the kind of dramatic increase in rates. But that
Speaker 1: is not, Um, the end for equities. So you might
Speaker 1: actually add, at least selectively, to growth right now. Absolutely,
Speaker 1: as as coming out of it faster than the others,
Speaker 1: do you think? I do. I do believe that. For sure,
Speaker 1: evaluations are higher there. They tend to get hit hard,
Speaker 1: but Um, but they're also significant growth prospects, growth potential
Speaker 1: there at a time when the economy is clearly slowing down.
Speaker 1: So Tracy. What do you see in other asset classes?
Speaker 1: And let me name two at random cash and commodities. Cash,
Speaker 1: I mean cash is looking okay right now. I guess
Speaker 1: you're only losing eight percent per year versus what like
Speaker 1: on some other stuff. But when we're talking about cash,
Speaker 1: I mean it's got to be in the dollar. That's
Speaker 1: the only thing that's really working at the moment. Cash.
Speaker 1: We used to say cash is king, now we say
Speaker 1: the dollar is king. And not only is the dollar king,
Speaker 1: it is a king with a wrecking ball going through
Speaker 1: other asset classes. But from what you said, the very
Speaker 1: fact that the dollar goes up makes commodities don't go
Speaker 1: down in general over time, and so that means commodities
Speaker 1: aren't so attractive, you think, to investors right now. Well,
Speaker 1: that's exactly right, and I think that's one reason why
Speaker 1: the recent environment has been so painful for a lot
Speaker 1: of people, because I think back to the beginning of
Speaker 1: the year, commodities, we're seen as this inflation hedge Um,
Speaker 1: a bit of a risk off hedge. You know, if
Speaker 1: you're worried about what's going on with Russia and the Ukraine,
Speaker 1: you can buy some wheat exposure, buy some oil exposure.
Speaker 1: You have a nice little offset to macro risk. That
Speaker 1: shows up in the sort of headline indussees. That's not
Speaker 1: working anymore and I think that's one reason why the
Speaker 1: environment has been so difficult for investors. The only good
Speaker 1: news that I kind of see here is, you know,
Speaker 1: people have been having to deal with these really binary
Speaker 1: potential outcomes for most of the summer. You know, does
Speaker 1: inflation stay high, do we get the dreaded wage price spiral,
Speaker 1: or does the Fed come in, raise interest rates, bring
Speaker 1: down inflation and you get that knock on recession effect?
Speaker 1: I think the good news here is we're moving away
Speaker 1: from that really binary tail risky environment and we seem
Speaker 1: to be moving closer to that recession scenario. I know
Speaker 1: I'm scraping the bottom of the barrel by saying recession
Speaker 1: is good for investors at this point in time, but
Speaker 1: at least you know where you're headed. Thank you so
Speaker 1: very much to blue ory's own Tracy Alloway, and to
Speaker 1: Christina Hooper INVESCO. Coming up the times, they are changing,
Speaker 1: and not necessarily in a good way when it comes
Speaker 1: to equities. We talked with Steve Ratner will it advisors
Speaker 1: about what the regime change in monetary policy means for
Speaker 1: equity investors. This is Wall Street Week on Bloomberg. This
Speaker 1: is Bloomberg Wall Street Week with David Weston from Bloomberg radio.
Speaker 1: All good things must come to an end, and if
Speaker 1: we still had any doubts, this week saw the Fed
Speaker 1: move even farther away from easy money, as the center
Speaker 1: bank raised rates again and signaled a good deal yet
Speaker 1: to come. What we think we need to do is
Speaker 1: to move our policy rate to a restrictive level that's
Speaker 1: restrictive enough to bring inflation down to two percent, and
Speaker 1: the Bank of England followed suit. This is still the
Speaker 1: biggest box box hike since black Wednesday thirty years ago,
Speaker 1: while the Swedish Central Bank went even further, raising rates
Speaker 1: a full one basis points. That shift in the entire
Speaker 1: regime of monetary policy reverberates throughout investments, with rates on
Speaker 1: the ten year and the two year treasuries shooting up
Speaker 1: and the dollar continuing to strengthen. You've got two year
Speaker 1: treasuries at almost, you know, highest levels we've seen in forever.
Speaker 1: And where does that leave equities? They're certainly well off
Speaker 1: from their highs. It's never a good sign when you
Speaker 1: get these big rallies and then followed by three straight
Speaker 1: weeks of declines and you just can't seem to hold
Speaker 1: onto some of these games. But does that make them
Speaker 1: a bargain? We have seen in the path that as
Speaker 1: we enter into recessions, value companies, value stocks, tend to
Speaker 1: have declines and earnings well, growth stocks actually tend to
Speaker 1: hold up fairly well. Or have we yet to see
Speaker 1: the bottom when everyone's on the sort of race to
Speaker 1: the bottom of you know, who can get more Barish,
Speaker 1: who can have the more outlandished the forecast? I think
Speaker 1: I just told you where market psychology is right now.
Speaker 1: You sentiment different ways. To measure right it's a global
Speaker 1: financial crisis slows and to take us through whether it
Speaker 1: really makes sense to be investing in equities these days,
Speaker 1: we turned to somebody who's it is to invest a
Speaker 1: substantial amount of money. He is Stephen Ratner, the chairman
Speaker 1: and CEO of Willed Advisors, which invests the personal and
Speaker 1: Philanthropic assets of Michael R Bloomberg. He is our founder
Speaker 1: and majority shareholders. So, Steve, thanks so much for being
Speaker 1: back on Wall Street Week. There's a lot of being
Speaker 1: talked about equities, particularly as interest rates rise. Give us
Speaker 1: a sense where you are on equities right now as
Speaker 1: an investment and you're not a trader. You do it
Speaker 1: over the medium and longer term. We're not traders and
Speaker 1: I've always said to everybody that market timing is for fools.
Speaker 1: I think every smart investor, successful investor, has pretty much
Speaker 1: said that. But of course we do have opinions about
Speaker 1: the equity markets and at the margin we do make
Speaker 1: tactical tweaks and shifts to try to accommodate our view,
Speaker 1: and I would say that we have been very, very
Speaker 1: cautious about equities for some months now. Our equity exposures
Speaker 1: down to the lowest levels that's been in our twelve
Speaker 1: or thirteen years of existence and we remain cautious, and
Speaker 1: interest rates are the biggest factor in that decision. So
Speaker 1: just to take us through exactly how higher interest rates,
Speaker 1: which we're having, not just the United States but almost
Speaker 1: globally at this point, how does it express itself in
Speaker 1: the value of the equities? Is that a matter of
Speaker 1: the slowdown the economy overall, less demand for business? Is
Speaker 1: it a matter of evaluations? How does it feed through
Speaker 1: to equities? Certainly there are effects on the economy overall
Speaker 1: and one needs to think about it. But I my
Speaker 1: observation over I don't know, forty years or so of
Speaker 1: watching equity markets is that they are keenly attuned to
Speaker 1: interest rates as a more direct transmission mechanism to equity prices,
Speaker 1: simply because interest rates are a discount, our discount rate
Speaker 1: on future cash flows. And it's not a coincidence that
Speaker 1: you've had the so called unprofitable tech with the longest
Speaker 1: state in cash flows suffering the worst than this down
Speaker 1: draft that is interest rate related, in my opinion, and
Speaker 1: some of the more near term cash flow producing companies
Speaker 1: suffering less. I think there's a very, very direct correlation
Speaker 1: between the investment opportunity and fixed income or an interest
Speaker 1: rates versus inequities. That suggests perhaps the sell equities might
Speaker 1: make more sense than other equities, that is to say
Speaker 1: those that are generating real profits today. Cash today maybe
Speaker 1: a safer bed than those where it's really in the outyears.
Speaker 1: In terms of this factor, there's no question about it.
Speaker 1: And again you can see it in the numbers over
Speaker 1: the last nine months or so since the equity markets
Speaker 1: really started rollover, which is which is the fact that
Speaker 1: longer dated cash flows, the further out you get, biotech startups,
Speaker 1: growth companies have been hit the worst. The Nasdaq is
Speaker 1: down a lot more than the SMP. Not a coincidence,
Speaker 1: but you say have been hit the worst. There are
Speaker 1: those who really are fans of growth stocks who say,
Speaker 1: you know what, they've already taken a hit. That what
Speaker 1: happens actually when you go into a slowdown recession. They
Speaker 1: take the hit up front, but then they come out
Speaker 1: of it faster and better. Well, I'd like to see
Speaker 1: their evidence and support of that. And again, if you're
Speaker 1: talking about an economic slowdown, we could have that conversation.
Speaker 1: That may come out at a different place. If you're
Speaker 1: talking about a situation which there's no evidence at all
Speaker 1: that we're at the end of an interest rate cycle,
Speaker 1: then I would push back. And in fact, if you
Speaker 1: look at the market as a whole, I believe it's
Speaker 1: true that the market has never really turned upward until
Speaker 1: the Fed has been done tightening. And again, there's no
Speaker 1: evidence the Fed has nearly done tightening. So the Fed
Speaker 1: has been pretty explicit they're going to keep tightening for
Speaker 1: quite a while. Do you have any projections as you
Speaker 1: think about your investments? Do you try to have any
Speaker 1: sense of how long that might be and frankly, even
Speaker 1: with the terminal, right might be. Well, we think about
Speaker 1: it more in terms of over under. If you look
Speaker 1: at the market, the credit markets have been wildly behind
Speaker 1: the curve in predicting. The fedsman behind the curve and
Speaker 1: the credit markets behind the Fed in terms of their
Speaker 1: interest rate expectations and and so if you basically say, okay, well,
Speaker 1: the equity markets are taking their queue from the credit markets,
Speaker 1: you can see why we had this sort of mini
Speaker 1: bull run, if you want to even call it that,
Speaker 1: this summer when it looked like maybe interest rates for
Speaker 1: starting the plateau or something like that. Steve, thank you
Speaker 1: so much. Really great to have you the Stephen Ranner.
Speaker 1: He's the chairman and CEO of Willet Advisors. Coming up,
Speaker 1: we wrap up the week, as we always do, with
Speaker 1: our special contribuity Larry Summers of Harvard at next on
Speaker 1: Wall Street Week on Bloomberg. This is Wall Street Week.
Speaker 1: I'm David Weston and were welcome back once again our
Speaker 1: special contributor, Larry Summers of Harvard. So, Larry, obviously very
Speaker 1: big news this week from the FAD. What was your
Speaker 1: reaction to what you saw in what they did but
Speaker 1: also heard from them. Look, I think they're moving in
Speaker 1: uh necessary, painful uh direction. It's clear that they're manifesting
Speaker 1: determination on inflation, that they're recognizing that you don't stop
Speaker 1: cars that's going much too fast in a completely comfortable
Speaker 1: uh way. I think that is all welcome. I still
Speaker 1: think they're too optimistic about how easy it's uh going
Speaker 1: to be. Their forecasts that unemployment will be four and
Speaker 1: a half percent, even as unemployment comes down, even as
Speaker 1: inflation comes down to two I think is a very
Speaker 1: optimistic view. It was also very optimistic when it was
Speaker 1: echoed by Secretary Yelling. It's the right thing to hope for,
Speaker 1: but we're not gonna beat the level of inflation that
Speaker 1: we have now out of the system without some quite
Speaker 1: substantial dislocations. No one should take any satisfaction in those
Speaker 1: dislocations or want uh those uh dislocations or want to
Speaker 1: see anyone unemployed. But the necessary medicine from where we
Speaker 1: are is likely to involve a recession, as Sherman Powell
Speaker 1: is being increasingly clear UH in recognizing. So I'm glad
Speaker 1: to see the Fed adjusting in the direction of seeing
Speaker 1: the need for more tightening and recognizing that unfortunately, that
Speaker 1: tightening will have consequences that we've been talking about on
Speaker 1: this show uh for a year. I still think there
Speaker 1: may be a bit of underestimation of what's going to
Speaker 1: be necessary in terms of tightening, but policy is now
Speaker 1: much closer, uh, certainly with current market expectations uh, to
Speaker 1: the appropriate place. The markets now expecting that fed funds
Speaker 1: will be four and three quarters per cent next uh May.
Speaker 1: Little wasn't much more than a year ago that they
Speaker 1: were forecasting that it would be zero or very close
Speaker 1: to that uh next May. That's a age or change.
Speaker 1: But when you get as far behind the curve as
Speaker 1: the Fed did, then you really have to hit the
Speaker 1: brakes very, very hard, as you know well. There it's
Speaker 1: not just the United States, it's also, for example, Great Britain,
Speaker 1: and it strikes me there's a big contrast there. Certainly,
Speaker 1: Bank of England says we've got a tightening that went
Speaker 1: up fifty basis points this week, but in the meantime
Speaker 1: you've got a new government over there that's going for
Speaker 1: a fiscal stimulus, tax cutting, and whereas at least the
Speaker 1: bode administration is getting out of the way of the Fed.
Speaker 1: What do you make of what's going on in the
Speaker 1: UK makes me very sorry to say, but I think
Speaker 1: the UK is behaving a bit like an emerging market
Speaker 1: turning itself into a submerging uh market. There's nothing in
Speaker 1: the pattern of market response in the UK that suggests
Speaker 1: anything but fear rather than confidence in the policy approaches
Speaker 1: h being taken. It would not surprise me if the
Speaker 1: pound eventually gets below a dollar if the current policy
Speaker 1: path is maintained. This is simply not a moment for
Speaker 1: the kind of naive, uh wishful thinking supply side economics
Speaker 1: uh that is being pursued in Britain. Between Brexit, how
Speaker 1: far the Bank of England got behind the curve, uh
Speaker 1: and now these uh fiscal policies, I think Britain will
Speaker 1: be remembered for having pursued the worst macro economic policies
Speaker 1: of any major uh country in a long time. I
Speaker 1: hope that at some point this policy pack goods will
Speaker 1: be reversed or that somehow I am misjudging uh the situation,
Speaker 1: but I am very fearful for Britain on the path
Speaker 1: that it is traveling. Well, let's even go beyond the
Speaker 1: United States. In the UK, this week center banks around
Speaker 1: the world at its seven D basis points to interest rate.
Speaker 1: So it's a global phenomenous point. The one thing that
Speaker 1: comes out of all of it is a newly strengthened dollar.
Speaker 1: I mean it sets record after record after record. What
Speaker 1: does that mean for the global economy? Look, a strong
Speaker 1: dollar is causing inflation in the United States to be
Speaker 1: lower than an otherwise would be because it reduces import prices,
Speaker 1: but it's pushing inflation up everywhere else. And because the
Speaker 1: dollars the currency of international trade, it's taking lubrication out
Speaker 1: of the system and it's putting x or burdens on
Speaker 1: countries that have borrowed, because when they've borrowed in for
Speaker 1: a foreign currency, it's usually been in the dollar. So
Speaker 1: this is going to complicate uh macroeconomic management in uh
Speaker 1: many countries. There's going to be continuing, I fear, uh distress.
Speaker 1: Countries are attempting to counteract this with intervention, as the
Speaker 1: Japanese UH did. I think we've mostly learned that when
Speaker 1: you're intervening against the trend, when you're intervening against the
Speaker 1: direction of monetary policy, which is certainly the case in Japan,
Speaker 1: your intervention is as likely to create opportunities for speculators
Speaker 1: as it is to really be effective in changing the
Speaker 1: path of UH currencies. So I think this is going
Speaker 1: to be an issue that is going to be with
Speaker 1: us uh for uh some time. But I suspect for
Speaker 1: the period ahead countries are going to have to be
Speaker 1: adjusting to a very strong US dollar. This week we
Speaker 1: learned the Tom Brady is his own form of maybe
Speaker 1: quiet quitting. He's just gonna work four days a week
Speaker 1: from now and he's gonna take Wednesday's off. Is there
Speaker 1: are a larger issue here, to think in the United
Speaker 1: States economy of people not being willing to work so hard?
Speaker 1: I'm seeing some evidence of that, at least anecdotally. People
Speaker 1: may work a bit shorter hours when they're working at home.
Speaker 1: People maybe just a little more prone, uh in an
Speaker 1: economy that is so red hot and where you can
Speaker 1: get a new job easily, to tell their bosses where
Speaker 1: to take it. We've had this phenomenon for the last
Speaker 1: half year or so of terrible, terrible productivity performance. Some
Speaker 1: of that's probably just an offset to the strong performance
Speaker 1: we had earlier, but it may be that people are
Speaker 1: just working a little less hard. You know, if everybody
Speaker 1: worked a seven hour and forty five minute day rather
Speaker 1: than an eight hour day. Practically, that would be the
Speaker 1: equivalent of a three percent uh wage increase or, equivalently,
Speaker 1: three decline in UH productivity. Okay, Larry, thank you so much.
Speaker 1: Always great to have you with us as our special
Speaker 1: contributor in Wall Street Week. He's Larry Summers of Harvard. Finally,
Speaker 1: one more thought. Investments are going down the drain. The
Speaker 1: era of cheap money brought with it some pretty loft evaluations,
Speaker 1: particularly when it comes to tech firms, with evaluations so
Speaker 1: rich that they were expressed as price to sales rather
Speaker 1: than price to earnings, with Google peaking at a price
Speaker 1: eight point nine times as sales, Netflix reaching over fourteen
Speaker 1: time sales at one point, and facebook making it up
Speaker 1: to just under fifteen time sales. Well, those wells of
Speaker 1: easy money are drying up and with them some of
Speaker 1: the astronomical valuations. All because the Federal Reserve, like just
Speaker 1: about every other central bank in the developed world, is
Speaker 1: committed to raising rates to get inflation backed down towards
Speaker 1: that two PC target. We're not at that level. Clearly
Speaker 1: today we're, you know, we're just uh, we've just moved,
Speaker 1: I think, probably into the very, the very lowest level
Speaker 1: of what might be restrictive. But never fear. There is
Speaker 1: one place where evaluations are as high as a tidal
Speaker 1: wave or even higher. But it's not in tech, it's in,
Speaker 1: wait for it, sewers. Yes, sewers, home to teenage mutant
Speaker 1: in to charitles, legends of alligators and, of course, tons
Speaker 1: and tons of waste and water treatment. In a Bloomberg column,
Speaker 1: Le And dunning takes us through a deal announced for
Speaker 1: the renewables company next era energy to buy the sewer
Speaker 1: and water system of Towa Mensin. That's a small township
Speaker 1: thirty miles north of Philadelphia. And the price. The price
Speaker 1: was a hundred and fifteen million dollars. Now that's not
Speaker 1: a big deal for a hundred and seventy billion dollar company,
Speaker 1: but take a look at the valuation, a whopping at
Speaker 1: twenty one times revenue, way more than apple or Microsoft
Speaker 1: or facebook ever dreamed of. Next era executive promised the
Speaker 1: town council that not all of that purchase price would
Speaker 1: be reflected in higher rates. We offered a hundred and
Speaker 1: fifty million dollar purchase price and, as I think it's
Speaker 1: very important to express that we do not intend to
Speaker 1: recover that full purchase price from the customers. But whether
Speaker 1: customers foot the whole bill or not, next era looks
Speaker 1: to make money on this deal. Rates for water expe
Speaker 1: to ramp up substantially in coming years. And if you're
Speaker 1: a resident of tower, means and there are definitely some
Speaker 1: remaining questions. Why are we selling this stick? This is
Speaker 1: a gold mine. Why are you doing this? That does
Speaker 1: it for this episode of Wall Street Week. I'm David Weston.
Speaker 1: This is Bloomberg. See you next week.