Speaker 1: This is Bloomberg Wall Street Week. Market shruggle, higher consumer prizes.
Speaker 1: The economy is in the process of rebounding. Will the
Speaker 1: Federal Reserve have its own digital currency? The financial stories
Speaker 1: that cheap hard work. Many people think the eels are
Speaker 1: just going to keep marching up. We have more spending
Speaker 1: coming out of Congress. One of the big questions I
Speaker 1: think on investor's minds inflations through the eyes of the
Speaker 1: most influential voices. Larry Summer is the former Treasury Secretary
Speaker 1: Bryan wynhand a backup America, Will Smart, CEO of Charlie Sharp.
Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Radio.
Speaker 1: The new year picks up right where last year left
Speaker 1: off with COVID, the Fed and jobs. This is Bloomberg
Speaker 1: Wall Street Week. I'm David Weston. It was a whole
Speaker 1: new year this week, but in some ways it felt
Speaker 1: like an extension of one, with the explosion in omicron
Speaker 1: cases continuing to set new records in the United States
Speaker 1: and for that matter, around the world. COVID in the
Speaker 1: environment here and in the world is probably here to day,
Speaker 1: but COVID as we're dealing with it now is not
Speaker 1: here to state, but so far the cases appeared to
Speaker 1: be less severe, and the new mayor of New York,
Speaker 1: Eric Adams, spoke for many when he said, we just
Speaker 1: need to move forward and get our lives back. The
Speaker 1: city is going to function, going to be safe, and
Speaker 1: we're going to stay open. When it comes to the FED,
Speaker 1: we learned this week that it really means what it
Speaker 1: says about tightening monetary policy, releasing minutes from its December
Speaker 1: meeting saying that quote, it may become warranted to increase
Speaker 1: the federal funds rate sooner or at a faster pace,
Speaker 1: and even that reducing the balance sheet may come on
Speaker 1: the heels of any rates tightening, which Michael Cantopolis of
Speaker 1: Richard Bernstein said wasn't necessarily expected March a live meeting
Speaker 1: for hikes. I think the only surprise perhaps was sort
Speaker 1: of the view on the balance sheet runoff, and if
Speaker 1: we had any doubts remaining about the FED meeting being
Speaker 1: live in March, they may have been answered when the
Speaker 1: job's numbers came in on Friday, disappointing on the overall number,
Speaker 1: but showing robust growth in wages of four point seven
Speaker 1: percent year every year and an unemployment rate falling down
Speaker 1: to three point nine percent, way below what anyone expected
Speaker 1: at this point. The markets took this eventful week as
Speaker 1: a rerating of risk, with the SMP five hundred down
Speaker 1: almost two percent for the week, it's worse start to
Speaker 1: a year since two thousand sixteen, while the NAZAC was
Speaker 1: even worse, down over four and a half percent, and
Speaker 1: bonds sold off, with the ten year yield adding over
Speaker 1: twenty five basis points ending up over one point seven
Speaker 1: six percent. Here to explain this wild first week of
Speaker 1: the new year are Katie Coach Goldman Sachs Global co
Speaker 1: head of Fundamental Equity Funds and Greg Peters co c
Speaker 1: i O of PGIM Fixed Income. So welcome both of
Speaker 1: you to be back on Wall Street week. Greg'm gonna
Speaker 1: start with you, because to some exsect, fixed income bonds
Speaker 1: really drove a lot of the week. Explain what happened here,
Speaker 1: because we did have the Fed minutes, but but we
Speaker 1: were getting increased to rates even before we got to
Speaker 1: the minutes. Yea, So the markets were skinnish before the minutes,
Speaker 1: and then the minutes came Man, and as you mentioned,
Speaker 1: David it bits, they reaffirmed what they said before. The
Speaker 1: surprise was though the balance sheet runoff. I think that
Speaker 1: did take investors by surprise, But what you really experienced
Speaker 1: this week was just a rerating of the FED. Uh.
Speaker 1: And so you've seen FED hikes pulled forward more aggressive
Speaker 1: over the near term, and I think the markets didn't
Speaker 1: like that. Now. I think it's important to go back
Speaker 1: in time though, So March wasn't even on the table contemplated. Uh,
Speaker 1: you know, six months ago, three months ago, and now
Speaker 1: it's a live meeting, so it really representative of how
Speaker 1: quickly the FED has kind of shifted gears here. So
Speaker 1: it's okay. Over to you on the equity side. Equities
Speaker 1: might have reacted violent to this, I wouldn't say they did.
Speaker 1: The main story I thought from the week you correct
Speaker 1: me on equities was able to tech. Yeah, tech had
Speaker 1: a very disappointing week of performance. Let me let me
Speaker 1: just back up and say that we have had the
Speaker 1: worst start to equity market since two thousands and sixteen,
Speaker 1: and kind of big picture, we've had this twelve years
Speaker 1: um of a great environment of rates going down and
Speaker 1: markets going up, and we're all kind of getting used
Speaker 1: to a new normal um and so that's played out
Speaker 1: and the volatility that we've had, and we're now down
Speaker 1: more than one and a half percent year to date
Speaker 1: on equities. As you pointed out, the locus of a
Speaker 1: lot of that pressure has been in technology UM the
Speaker 1: reason for that, and people have varying levels of familiarity.
Speaker 1: So I'll just say is that UM, when you look
Speaker 1: at tech companies, most of the values far out at
Speaker 1: terminal values. So when the rate curve steepens, that part
Speaker 1: of the market sells off the most. It's really raising
Speaker 1: this question for everybody who's had a lot of capital
Speaker 1: allocated to tech UM is tech over UM? Is this
Speaker 1: the end of of tech out performance? We we don't
Speaker 1: think that's the case. We continue to have UM a
Speaker 1: lot of capital committed there. We appreciate there's gonna be
Speaker 1: some near term headwinds, but very long term, even medium
Speaker 1: to long term, we know that even the companies in
Speaker 1: the value part of the market that are leading the
Speaker 1: market market now. So take banks for example, one of
Speaker 1: the number one things that they're going to spend money
Speaker 1: on over the coming years is innovating themselves on AI, UH,
Speaker 1: cyber security, moving workloads to the cloud. And so we
Speaker 1: know that all companies, regardless of whether their value or growth,
Speaker 1: are going to be doing a lot of tech spending
Speaker 1: and that should actually included these companies over the medium
Speaker 1: to long term. So we would encourage people to look
Speaker 1: at these dislocations as as opportunities to pick up exposure selectively.
Speaker 1: So thank you mentioned the jobs numbers. Why don't you
Speaker 1: unpack that a little bit? What jumped out at you.
Speaker 1: One of the things that I noticed, obviously was the
Speaker 1: increase in wages. Absolutely, uh. That was a clear focus
Speaker 1: from a market perspective. The headline number was disappointing. Let's say,
Speaker 1: you know, a hundred ninety nine new ads, but I
Speaker 1: think you have to look at the four month average,
Speaker 1: which is substantially higher. It's about three sixty nine. So
Speaker 1: what the market really looked at closely was the acceleration
Speaker 1: uh in wages, and so I will say, we haven't
Speaker 1: seen those wages create of broader inflation pressures. But that's
Speaker 1: the worry. I think that's the classic economic worry, uh
Speaker 1: that the many have, and that's why you've you've seen
Speaker 1: the rhetoric really shift and get cemented around that March
Speaker 1: meeting be being in place. So it's really about wages.
Speaker 1: As UH investors and economists in particular are worried about
Speaker 1: wages really kind of infiltrating the entire system, thereby creating
Speaker 1: broad based inflation. But the wage issue, in my mind,
Speaker 1: is an important positive development, not a negative one, and
Speaker 1: I think it's been flipped around unnecessarily. Yeah, it's always
Speaker 1: easier to criticize when we're off with the bleachers. And
Speaker 1: that's on the arena, right, Thank you so much. Greg
Speaker 1: Peters and Katie Cash. They're both gonna stay with us
Speaker 1: as we turn from this week in the market's the
Speaker 1: longer term implications for investors. That's gonna up next on
Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week.
Speaker 1: If David Weston from Bloomberg Radio. Still with us are
Speaker 1: Greg Peters of PGM Fixed Income and Katie Cotch of
Speaker 1: Goldman Sachs. So, Katie, let's turn from this week to
Speaker 1: the longer term with respect to equities first, and we'll
Speaker 1: turn to Greg on fixed income as we go into two.
Speaker 1: You draw an interesting distinction between disruptors and disrupt dead.
Speaker 1: Tell us about some of the disruptions you're looking at
Speaker 1: coming up this year for equities or whenever we turned
Speaker 1: the page on the calendar for a new year. We
Speaker 1: do like to do some longer term thinking about where
Speaker 1: we've come from an equity markets and where we're going.
Speaker 1: And I just think it's really interesting to know we
Speaker 1: were looking at the top ten companies as at the
Speaker 1: beginning of two and if you go back twenty years,
Speaker 1: there's actually only one that's still a top ten company,
Speaker 1: which is Microsoft UM and it's five x over that period.
Speaker 1: The nine others on that list have actually detracted a
Speaker 1: total of two thirty five billion of market cap over
Speaker 1: that period, and I think that just underscores the importance
Speaker 1: of of being on the right side of the disruption
Speaker 1: um and picking the companies that you think are going
Speaker 1: to drive forward good fortunes in the future. We're really
Speaker 1: focused just to end on on three main themes going
Speaker 1: into this year, but I actually think they're going to
Speaker 1: be relevant for investors for most of the decade. And
Speaker 1: those themes are the future of healthcare, everything from genomics
Speaker 1: to robotic surgery. The future of the planet, So this
Speaker 1: idea of transitioning to a more sustainable planet. Yes it's
Speaker 1: about renewables, but also UM sustainable consumption, circular economy, were
Speaker 1: invested in a company, for example, that recycles genes. And
Speaker 1: then finally we're talking about tech earlier. We're big believers
Speaker 1: that we need to invest beyond the fangs, down the
Speaker 1: market cap and around the world because tech power is
Speaker 1: going to get diffused out of Silicon Valley um into
Speaker 1: the smaller cap part of the market. But also have
Speaker 1: many local winners around emerging markets. Take pack Sagora, for example,
Speaker 1: and a company listed in Brazil. It's a micro merchant
Speaker 1: expert and payments in Brazil. And so these are some
Speaker 1: of the themes that we think are gonna matter in
Speaker 1: two but well beyond. For long term oriented investors, those
Speaker 1: are some great macro things. That's keep an eye and
Speaker 1: Greg come over to you. I'm gonna make it simple.
Speaker 1: Perhaps it is. It looks at me for fixed income
Speaker 1: it's really all about the FED and frankly, whether there
Speaker 1: might be a policy error. I mean, because now we
Speaker 1: know we're gonna have some tapering of the buying, we're
Speaker 1: gonna have some rate increases, and now this week we
Speaker 1: found out we're gonna actually have some quanditive tape tightening.
Speaker 1: It looks like no, I completely agree. I think the
Speaker 1: fundamental risk for the markets this year, not just fixed
Speaker 1: income but broadly speaking UH is a central bank policy
Speaker 1: error and it looks like we're creaning towards that. And look,
Speaker 1: it is a very difficult environment to ascertain UH. You
Speaker 1: know that so much is clouded by COVID opening, reopening, closures,
Speaker 1: those types of things. But but for us, we're looking
Speaker 1: at the fixed income market in several ways. First from
Speaker 1: a yield perspective, with the tenure currently just called it,
Speaker 1: that's exactly where we hit in March of last year.
Speaker 1: That was the top. I think we're getting close to
Speaker 1: the top in yield once again, so it might overshoot.
Speaker 1: So the near term is always more difficult, of course,
Speaker 1: but I think you know, looking out over time at
Speaker 1: one seventy five ten year we actually see value there.
Speaker 1: And we see value because we think there's a gravitational
Speaker 1: pull towards disinflation. There's a demographic issue here in the
Speaker 1: U S and globally UH and UH in many resuspects.
Speaker 1: And let's not forget we put on a lot of
Speaker 1: debt to fight the virus and that acts as a
Speaker 1: draw and growth. So for that reason we're we're actually
Speaker 1: pretty constructive as yields kind of hit these levels here. Uh,
Speaker 1: and so we might be wrong over the near term,
Speaker 1: of course, as things have a tendency of overshooting. I
Speaker 1: think six months and twelve months from now, Uh, you'll
Speaker 1: be rewarded. So I'm gonna guess, Katie. But I'm gonna
Speaker 1: guess that if in fact Greg is right that we're
Speaker 1: talking one seventy five, it could overshoot for a time
Speaker 1: to come back down. You're gonna be fine with that.
Speaker 1: On the equity side, yeah, we should it. Equity markets
Speaker 1: should be able to digest them. Just to be very
Speaker 1: clear on our outlook. While we do expect volatility and
Speaker 1: as you mentioned at the outset, we haven't had a
Speaker 1: great start, we do actually think equity markets at golden
Speaker 1: success that management. We believe that they will out perform
Speaker 1: cash and bonds. So we do think it's the right
Speaker 1: asset class to be in. One might need to look
Speaker 1: further than the broad US equity market, which has been
Speaker 1: a great thing to own the last twelve years. That
Speaker 1: was the best thing to own in the markets. You
Speaker 1: may need to look further to that abroad to emerging
Speaker 1: markets for small cap but we do expect equity markets
Speaker 1: to outperform, and that field level should be should be
Speaker 1: fine for equity market. Well, let's just pick up on
Speaker 1: that emerging markets here and go back to Greg for
Speaker 1: a moment, because Greg, and You've thought a fair amount
Speaker 1: about what's going on with China, because China is off
Speaker 1: to a rather rocky start at the beginning of years
Speaker 1: as well in their property market, and so the debt
Speaker 1: over there, what do you make of emerging market debt,
Speaker 1: either China or otherwise. So China and emerging market probably
Speaker 1: have been a value trap, right, Uh, until one of
Speaker 1: the oddities of the recovery here that typically kind of
Speaker 1: emerging markets have a higher beta component versus developed markets,
Speaker 1: and you haven't seen that, and there's reasons behind it,
Speaker 1: of course. Uh. And so in fixed income uh e
Speaker 1: M has underperformed UM, and so I think it might
Speaker 1: be a tad early still. But you know, as I
Speaker 1: look at two thousand and twenty two, I'm looking at
Speaker 1: emerging markets as an area for real alpha opportunity. So UM,
Speaker 1: I think it's been a value trap for good reason.
Speaker 1: But I think it's changing and pricing is changing. Uh.
Speaker 1: And of course it's predicated on central bank policy there
Speaker 1: as well as UH you need to see inflation kind
Speaker 1: of come off the boil, but but see real opportunities
Speaker 1: and China is not what it used to be, and
Speaker 1: I think investors need to kind of get a grip
Speaker 1: around that new reality, which is China is slowing and
Speaker 1: will continue to slow UM and it's just a natural
Speaker 1: kind of maturation process right of the economy. So it
Speaker 1: has a very different UH input into the global economy
Speaker 1: as a result, and I think over time investors will
Speaker 1: continue to kind of understand what that really beats Kenny.
Speaker 1: One thing that we dealt with in we're still dealing
Speaker 1: with today is semiconductors, And I wonder about the semiconductor
Speaker 1: sector and how you see it developing because obviously we've
Speaker 1: had a real shortage, real supply chain problems there as
Speaker 1: a fairly concentrated supply. At the same time, there's a
Speaker 1: lot of talk about huge investment in production, including in
Speaker 1: the United States. Yeah, SEMy, when we look at twenty
Speaker 1: two is a year. Last year was recovery markets up.
Speaker 1: We're really focused on resilience across a lot of things
Speaker 1: as being a great investment opportunity in the supply chain
Speaker 1: is certainly one, and Sammy's is the most important part
Speaker 1: of it. Also very relevant to China, which Greg just
Speaker 1: spoke about so very big picture. Twelve percent of US
Speaker 1: GDP roughly runs through the factory floors of Taiwan because
Speaker 1: there is one company in Taiwan that has the ability
Speaker 1: to manufacture at the leading edge of logic, which is
Speaker 1: about five nimes. And I'm not going to go into
Speaker 1: too much detail, but the headline is in the US
Speaker 1: we really can only manufacture at ten nanometers and that's
Speaker 1: a problem because all of the technology we've spoken about
Speaker 1: on this segment that we're so excited about, whether it's
Speaker 1: the cloud, ai Fi, g et cetera, their chip dependent technologies,
Speaker 1: and we do not as a country, and actually the
Speaker 1: Chinese feel the same way, want to be dependent on
Speaker 1: one public company. From the perspective of the US and
Speaker 1: what many people would argue as a hot geopolitical zone
Speaker 1: for the manufacturing of our most important technologies and for
Speaker 1: a very significant portion of GDP. Thank you so much
Speaker 1: for great peters of Peach and fix income and to
Speaker 1: Katie Catch of Golden Sacks coming up, the threat to
Speaker 1: capitalism if we don't start building bridges to a dynamic
Speaker 1: and disruptive future instead of building walls to try to
Speaker 1: keep it away. We talked with Glenn Hubbard of the
Speaker 1: Columbia Business School about his new book, The Wall and
Speaker 1: the Bridge. We all often talk about the growth and
Speaker 1: dynamism side of capitalism. That's why we're in the game.
Speaker 1: It's hugely important. The web site of it's des This
Speaker 1: is Wall Street Week on Bloomberg. This is Bloomberg Wall
Speaker 1: Street Week with David Weston from Bloomberg Radio. Walls, we
Speaker 1: spent much of the nineties tearing them down, whether the
Speaker 1: physical kind Mr garbuschov teared down this wall or the
Speaker 1: walls of tariffs and regulation. But then competition from foreign
Speaker 1: goods and from technologies started to hit people where it
Speaker 1: hurt in their jobs. Our jobs are going to Mexico,
Speaker 1: our jobs are going to other countries. China and others
Speaker 1: are making our product. We don't make it anymore, and
Speaker 1: so some have started building walls again. But former Columbia
Speaker 1: Business School dean Glenn Hubbard says it's bridges to help
Speaker 1: workers a just change, rather than walls to protect workers
Speaker 1: that we really need. In the Wall and the Bridge,
Speaker 1: Hubbard proposes a series of private and government programs to
Speaker 1: help workers build a bridge to the future, because in
Speaker 1: the end, even painful change is essential to capitalism, which,
Speaker 1: echoing Ken Langon, is the system that in the long
Speaker 1: run will do the most people the most good, which
Speaker 1: works better for everybody. There's no doubt in my mind capitalism.
Speaker 1: And we're delighted to be joined now by one of
Speaker 1: our regular contributors here in Wall Street. He's Glenn Hubbard,
Speaker 1: former chairman of the coustal chanoccivisers, certainly of Columbia Business School,
Speaker 1: and most important for this purpose, the author of the
Speaker 1: new book, The Wall and the Bridge. Glenn, thank you
Speaker 1: so much for being back with this. It's a fascinating book,
Speaker 1: an important book. In reading through it, I have the
Speaker 1: strong sense part of your motivation was you have some
Speaker 1: concerns for the future of capitalism because to some extent,
Speaker 1: inherent in capitalism is a dynamism and creativity that can
Speaker 1: lead to some destructive qualities. I think it's under present
Speaker 1: right data. You know, it's it's like a coin with
Speaker 1: two sides, economists, policymakers, business people. We often talk about
Speaker 1: the growth and dynamism side of capitalism. That's why we're
Speaker 1: in the game. That's hugely important. The flip side of
Speaker 1: its disruption. Many of us, frankly, most of us win
Speaker 1: from a lot of the disruptions I talked about in
Speaker 1: the book, but not everybody. And I think we have
Speaker 1: to notice those who have been left behind and figure
Speaker 1: out how do we get everybody to be able to
Speaker 1: participate in our economy. Not a new idea, it was
Speaker 1: actually Adam Smith's idea. We need to put the liberal
Speaker 1: back in neoliberalism, classical liberal, that is aut Smith. Let
Speaker 1: me ask you, as an economist, does dynamic capitalism and
Speaker 1: inherently lead to increasing inequality? I don't know about that,
Speaker 1: but it certainly needs to generate churn and disruption. You know,
Speaker 1: many jobs and industries that exist today didn't exist a
Speaker 1: hundred years ago. That's the good news. The flip side
Speaker 1: of that is that people's livelihoods, communities, firms, and industries
Speaker 1: can be at risk. That too, is not a bad
Speaker 1: thing as long as we prepare people. You know, when
Speaker 1: Adam Smith talked about the wealth of nations, he talked
Speaker 1: about competition and openness, and those are good things. But
Speaker 1: I think if Smith were alive today, he would talk
Speaker 1: about the ability to compete in the world we have
Speaker 1: with technological change and globalization. Is everybody really at the
Speaker 1: starting line. I think that's the inequality that would have
Speaker 1: worried Smith and should worry us glat In your book,
Speaker 1: there's a lot of talk about dynamism, creativity, innovation, and
Speaker 1: how important it is for a society for growth and
Speaker 1: for the individuals in it. At the same time, you
Speaker 1: have a distributive notion as well, called mass flourishing that
Speaker 1: you actually go back to Adam Smith and say Mas
Speaker 1: was consistent with Adam Smith talked to us about mass flourishing. Well,
Speaker 1: mass flourishing is more than GDP. You know, when Smith
Speaker 1: wrote The Wealth of Nations, there was no GDP, although
Speaker 1: he did talk about maximizing the size of output. I
Speaker 1: also think of the Smith of the theory of moral sentiments,
Speaker 1: where he used an expression mutual sympathy that today we
Speaker 1: might call empathy. I think the eyed economic ideas everybody
Speaker 1: in the book, everybody participating, everybody flourishing into the minds
Speaker 1: of the classical economists, flourishing men participating in the economy,
Speaker 1: the ability to have meaningful work, And I think that's
Speaker 1: really what the book is about how do you build
Speaker 1: bridges to that kind of work. A bridge either takes
Speaker 1: you to somewhere or brings you back, and taking you
Speaker 1: two could be preparing you for the jobs of today
Speaker 1: and tomorrow, and taking you back is rethinking social insurance.
Speaker 1: We have a way to reconnect people who fall out
Speaker 1: of the boat to the boat. And what if you
Speaker 1: knew for a certainty that in order to have truly
Speaker 1: mass flourishing you had to give up some of the dynamism.
Speaker 1: Would you make that trade? I wouldn't, And that's the
Speaker 1: point of the book. It's I think there are a
Speaker 1: number of people that I note in the book that
Speaker 1: Adam Smith would school if you were here today, to
Speaker 1: suggests that you can just sort of haircut dynamism. The
Speaker 1: real issue is compensating people who have been left behind.
Speaker 1: We we have old expressions in economics. The same professor
Speaker 1: who told you that on trade is good, or technological
Speaker 1: advances are good, he or she also told you that's
Speaker 1: because the gainers can compensate the losers. And by compensation,
Speaker 1: what I talk about is not writing people of check
Speaker 1: or pinching them off, but investing in getting people connect,
Speaker 1: preparing people for work, and preparing people who got left behind.
Speaker 1: That's something we used to do in the country, the
Speaker 1: land grant colleges of the nineteenth century, the g I
Speaker 1: Bill of the twentieth century. I suggest ways we can
Speaker 1: bring those life to life today. Glenn Hubbard, thank you
Speaker 1: so very much. He's the author of this terrific, fascinating
Speaker 1: and really important new book, The Wall in the Bridge.
Speaker 1: Of course, he's from Columbia Business School. Thank you, Glenn.
Speaker 1: Coming up, we wrap up the week, as we always
Speaker 1: do with special contributor Larry Summers of Harvard work irustrating um.
Speaker 1: The turning down the temperature in the economy. I think
Speaker 1: is uh going to be very challenging. From here. That's
Speaker 1: next on Wall Street Week on Bloomberg. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. This
Speaker 1: is Wall Stree Week, clim David west Center, and we're
Speaker 1: delighted now to be joined once again for the first
Speaker 1: time in the new year by our special contributor, his
Speaker 1: Hilarry Summers, will Harvard. So happy new year, Larry. Great
Speaker 1: to have you with us. Let's start with the big
Speaker 1: news of the week, perhaps came on Friday with those
Speaker 1: jobs numbers where people were a bit disappointing the overall number,
Speaker 1: but there were a lot of other numbers in there
Speaker 1: to suggest that we've got a pretty robust labor market.
Speaker 1: This is a strong report. After this report, the vacancies
Speaker 1: to unemployment ratio is going to be higher than it's
Speaker 1: ever been. We saw wage growth rates, depending on which
Speaker 1: measure you used, seven to eight percent annualized rates in
Speaker 1: the last month, and if you look at the sequence
Speaker 1: of reports, uh, it's been accelerating. The job The establishment
Speaker 1: number was disappointing, but the previous months were substantially revised upwards,
Speaker 1: and I suspect this one will be as well. I
Speaker 1: don't think anybody can look at this labor market and
Speaker 1: this job's report and believe that we have a sustainable
Speaker 1: degree of heat in the labor market. The level of
Speaker 1: heat that we have in the labor market is consistent
Speaker 1: not just with high inflation, but it's consistent with accelerating inflation.
Speaker 1: And there isn't going to be a path to less
Speaker 1: inflation without a cooler labor market. And I think that
Speaker 1: has to be uh sobering so learned last year, the
Speaker 1: FED seemed to be reassured at least for part of
Speaker 1: the year that there was some slack in the labor
Speaker 1: market that which absorbs the inflation. Is there any doubt
Speaker 1: in your mind right now that we're in full employment
Speaker 1: because we not only had these numbers, we also had
Speaker 1: the Jolts numbers come out and where we're record numbers
Speaker 1: of quits. David, Uh, I've been doing this long enough
Speaker 1: that there's always doubt in my mind. Nothing is certain,
Speaker 1: but the probability that we are past a sustainable level
Speaker 1: of heat in the economy is higher than I can
Speaker 1: remember it at any point in the forty years that
Speaker 1: I've been UH watching these things. I think that the
Speaker 1: FAT is recognizing that, and that's why they've executed in
Speaker 1: the last three months such a strong pivot from talk
Speaker 1: of transitory inflation and the need to ensure employment targets
Speaker 1: and the need to guard against inflation, which was their
Speaker 1: rhetoric just a few months ago, to a focus on
Speaker 1: inflation UH now to accelerating the tightening, to UH signaling
Speaker 1: the very real and even likely possibility of rate increases
Speaker 1: in UH March. UH. We are well into the adjustment
Speaker 1: of monetary policy. My own view is that UH, the
Speaker 1: FED and the markets are still not recognizing what's likely
Speaker 1: to be necessary. The market judgment and the fed's judgment
Speaker 1: is that UH, you can somehow contain this inflation without
Speaker 1: rates ever rising above two and a half percent UH
Speaker 1: in terms of the FED funds rate. I don't think
Speaker 1: that's very likely to turn out to be right. And
Speaker 1: if it does turn out to be right, it's only
Speaker 1: because the economy is extraordinarily vulnerable to rate increases, which
Speaker 1: will mean problems of its own. So I think we're
Speaker 1: headed into a very challenging period for the FED in
Speaker 1: terms of executing a soft landing. UM. It looks to
Speaker 1: me like we're gonna need some meaningful deceleration in nominal
Speaker 1: wage growth, not necessarily in real wage growth, but in
Speaker 1: nominal UH wage growth. And if we don't have much
Speaker 1: experience of getting such decelerations in nominal wage growth without
Speaker 1: a substantial UM, well at least some slow down UH
Speaker 1: in UH the economy. So orchestrating UM, the turning down
Speaker 1: the temperature UH in the economy, I think is UH
Speaker 1: going to be very challenge eaging from here. Well, let's
Speaker 1: pick up exactly on that point, orchestrating this cooling down,
Speaker 1: because we also had a piece of news out that
Speaker 1: the markets alely reacted to this week, which is the
Speaker 1: FED minutes from the December meeting, and which they said,
Speaker 1: not only we're going to talk about tapering, we might
Speaker 1: well have rate increases more and sooner than we thought.
Speaker 1: And by the way, we might get the quantitative the
Speaker 1: cutting are actually we're gonna actually tighten the quantitative easing
Speaker 1: instead of just tapering. Is that enough? And by the way,
Speaker 1: can they do all that stuff in the time allotted, David,
Speaker 1: They can make the choices that they want to that
Speaker 1: they want to make. Certainly, there have been periods when
Speaker 1: the FED was raising rates uh basis points uh in
Speaker 1: a given at every meeting for periods of a year
Speaker 1: or or more. So it's certainly something that is uh
Speaker 1: technically possible. I think the I think what we're going
Speaker 1: to find out is what the vulnerability of the economy
Speaker 1: is to rate increases. If that vulnerability is not greater
Speaker 1: than it has been historically, then it's really quite unrealistic
Speaker 1: to think that we're going to keep inflation under control
Speaker 1: with two percent rates. It may be, as some argue
Speaker 1: that because of greater levels of debt, because asset prices
Speaker 1: are substantially inflated. The economy is more vulnerable than usual
Speaker 1: UH to rate increases or to UH quantitative tightening. So
Speaker 1: it's not an easy UH balance that they're going to
Speaker 1: have to strike. My guess is that we're headed into
Speaker 1: a difficult period because I don't think that inflation is
Speaker 1: likely to come down very quickly. And indeed it's almost
Speaker 1: baked in that the annualized inflation figures are going to
Speaker 1: be rising for UH the next several months because of
Speaker 1: the very UH flattering compares or very low compares in
Speaker 1: January and February of UH last year. So my own
Speaker 1: sense is really of the difficulty UH of this, and
Speaker 1: the challenge for the FAT is that they're likely to
Speaker 1: see some amount of UH fluctuation in financial markets and
Speaker 1: concern about growth before they see the declines in inflation
Speaker 1: that are substantial, and then they're going to have a
Speaker 1: very difficult Then they have a very difficult set of
Speaker 1: decisions to make. Well said, thank you so much once
Speaker 1: again for being with us as our very special contributor
Speaker 1: in Wall Street Week. He is Larry Summers of Harvard. Finally,
Speaker 1: one more thought, and this time it's not from me.
Speaker 1: It's from Carlisle co founder David Rubinstein about the events
Speaker 1: of a year ago when a mob stormed the Capitol
Speaker 1: building to stop one of the most important steps in
Speaker 1: the U s Constitutional process, the counting of the electro votes.
Speaker 1: His reflections my lifetime, January six will be an important
Speaker 1: day because that is the day when we had an
Speaker 1: invasion the capital, the first time it's happened since eighteen
Speaker 1: fourteen when the British invaded our country, and nobody really
Speaker 1: thought this should happen, and so it's amazing to me
Speaker 1: that it didn't happen. But more amazing to me is
Speaker 1: that one year later, one year later, we are still
Speaker 1: in the same situation. If if we didn't prevent another
Speaker 1: thing by having copsure military people there, today, I suspect
Speaker 1: you could have another invasion of the capital. There are
Speaker 1: a lot of people who really really are upset with
Speaker 1: the way the election went against Donald Trump, or the
Speaker 1: way that other things have happened, And so I do
Speaker 1: think there are a lot of people in this country
Speaker 1: today who do believe the election was stolen. There are
Speaker 1: a lot of people in this country day who believe
Speaker 1: that those who stormed the capital were not insurrectionists, but
Speaker 1: just tourists and not doing anything that's inappropriate. And as
Speaker 1: a result, I think the country is bitterly divided. It's
Speaker 1: not as bit as a civil war, but which it's
Speaker 1: clearly a country is divided, and it's reflected in the Congress.
Speaker 1: The Condress is bitterly divided. Nothing is really getting done
Speaker 1: of any consequence because the country is really bitterly divided.
Speaker 1: Into the capital knowing they are marketing, the business community,
Speaker 1: I think, is disappointed that the country hasn't moved on.
Speaker 1: What business people like is certainty, predictability, and right now
Speaker 1: there's a lot of uncertainty and a lot of predictability
Speaker 1: about what the federal government is going to do. So
Speaker 1: I think that the business community by and large wishes
Speaker 1: we had moved forward and we were not in a
Speaker 1: situation we are today. But the business community is a
Speaker 1: realistic community and they recognize it. Right now, the country
Speaker 1: is fairly divided, the Congress is fairly divided. It's unlikely
Speaker 1: we're gonna get major legislation one way or the other
Speaker 1: the President Biden wants so, I the Business Committee would
Speaker 1: like to not be involved in commenting on this. The
Speaker 1: Business Committee, which is this is behind us, but the
Speaker 1: Business Committee recognizes that for the foreseeable future, we're gonna
Speaker 1: be living with his division in the country and this
Speaker 1: bitter the division is going to be. How the increasing,
Speaker 1: not decreasing. Yeah, the rule of law did prevail. There
Speaker 1: were sixty five lawsuits that were filed by the people
Speaker 1: who thought the election was stolen, and sixty five times
Speaker 1: the courts threw them out. So the rule of law
Speaker 1: did prevail. And the truth is that the rule of
Speaker 1: law does prevail in this country. And the truth is
Speaker 1: the military, now know, was not prepared to overtake the government,
Speaker 1: though there were some people in the administration I think
Speaker 1: who wanted that to happen, but the military state out
Speaker 1: of it, and the rule of law did prevail. Whether
Speaker 1: it will prevail in the future, I don't know, but
Speaker 1: right now I think the rule of law is going
Speaker 1: to prevail the United States. And that is one thing
Speaker 1: that people around the rest of the world really admire
Speaker 1: us for, which is the rule of law does exist
Speaker 1: in this country. And despite the events of January six,
Speaker 1: rule of law did prevail. That does it. For this
Speaker 1: episode of Wall Street Week, I'm David Weston. This is Bloomberg.
Speaker 1: See you next week,