Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. U S CPI nevers 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 Treator Secretary, Katherine Keating, CEO of the n Y Moms,
Speaker 1: Sam's l Sharmon and founder of Equity Group Investment. In
Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Radio.
Speaker 1: It is a process of choosing political candidates for the fall,
Speaker 1: of strengthening the coalition, confronting Russia, but most of all
Speaker 1: of coming to terms with a tightening FED. This is
Speaker 1: Bloomberg Wall Street Week. I'm David Weston. This week's special
Speaker 1: contributor Larry Summers of Harvard on what can get the
Speaker 1: job done? On inflation This is a feature not above
Speaker 1: associated with the tightening of monetary policy. And Tom Tapira
Speaker 1: of g t I S Partners on risks to the
Speaker 1: housing market. As interest rates rise, the consumers stretch and
Speaker 1: that is certainly going to be an issue on a
Speaker 1: going forward basis. This week we did a lot of
Speaker 1: preparing recurring to add Sweden and Finland to NATO when
Speaker 1: the leaders of the two countries paid a visit to
Speaker 1: President Biden at the White House. Well, it's incredibly historic
Speaker 1: and this completely reshapes the post called war security alliance
Speaker 1: in Europe. Finland and Sweden make NATO stronger. Preparing for
Speaker 1: midterm elections less than six months away, as five states
Speaker 1: held primaries, though in Pennsylvania, Republicans have some more work
Speaker 1: to do, as Senate candidate Dave McCormick explained, Now, we
Speaker 1: have tens of thousands of mail in balloasts that have
Speaker 1: not been counted. But we could see the hath a head,
Speaker 1: We could see Dandre ahead. But no one and I
Speaker 1: mean no one, is preparing harder than FED Chair J.
Speaker 1: Powell preparing for the next round of rate hikes. Inflation
Speaker 1: is coming down. That's what we really need to see. Honestly,
Speaker 1: We'll just where we will go until we feel like
Speaker 1: we're at a place where we can where we can
Speaker 1: say yes, financial conditions are an inappropriate place. Equity markets
Speaker 1: this week, believe the Chair, and if that weren't enough,
Speaker 1: then chilling news out of retailers like Target and Walmart
Speaker 1: reinforce the idea that harder times may lie ahead. With
Speaker 1: the SMP down for the seventh week in a row,
Speaker 1: the longest losing streaks since two thousand one, and though
Speaker 1: it flirted with the bear market, it came back late
Speaker 1: on Friday, ending just above thirty nine hundred, down three
Speaker 1: overall for the week, while the NAZAC, already in bear territory,
Speaker 1: was down another three point eight percent this week. But
Speaker 1: the bond market was a different story, with a tenure
Speaker 1: rallying for the second week in a row, ending up
Speaker 1: with a yield below two point eight percent. Tell us
Speaker 1: sort it all out. We welcome to Bob Michael, he's
Speaker 1: ce IO of Global fixed Income, Currency and Commodities at
Speaker 1: JP Morgan Asset Management, and Sarah Maleck, chief investment officer
Speaker 1: at now Vene. So welcome both of you. It's great
Speaker 1: to have you here. Sarah'm gonna start with you because
Speaker 1: it was so much activity in equities this week. What happened?
Speaker 1: Daven There was three key drivers for the market this week.
Speaker 1: First was the retail wreckage, which shocked investors on Wednesday
Speaker 1: because we saw demand destruction. Consumers are not willing to
Speaker 1: pay anything for goods anymore. And secondarily, we finally did
Speaker 1: see that shift in spending from goods to services, but
Speaker 1: it came with a healthy dose of inventory building up.
Speaker 1: On the good side, this is not good for retailer's
Speaker 1: business model. So Bob Sarah says, maybe the faith can
Speaker 1: take its foot off the gas on interest rate heights.
Speaker 1: What do we see in the bond market, because we
Speaker 1: had seen that really dramatic ramp up in the yield
Speaker 1: of the tenure and then it sort of plateaued the
Speaker 1: last couple of weeks. Well, David, unlike the equity market,
Speaker 1: the bond market actually found solid footing this week. And
Speaker 1: it all started when FED expectations of rate hikes settled
Speaker 1: at around two and three quarters percent a year. And
Speaker 1: I know that's two percent from where we are now,
Speaker 1: but earlier this month it was at three percent, and
Speaker 1: the concern was that it was headed north to three
Speaker 1: and a half or higher. Once FED rate hike expectations
Speaker 1: settled down, the treasury market settled down. You said we're
Speaker 1: at two eighty. Last week we were at three twenty,
Speaker 1: and again the concern was that we were headed to
Speaker 1: three fifty. It feels as though the market is getting
Speaker 1: very comfortable with the narrative that the path to a
Speaker 1: three percent FED funds rate will be enough for now
Speaker 1: to slow down growth and inflationary pressures, or at least
Speaker 1: get the Fed to pause. Now. Look, I'll admit it
Speaker 1: wasn't a perfect bond market. Corporate credit still had a
Speaker 1: tough week, Thanks very much equity market and Sarah. It
Speaker 1: was the lousy earnings that Sarah talked about, and we
Speaker 1: had high yield yielding now eight percent. It started the
Speaker 1: month at seven percent. Bob, Sarah raised, recession. How do
Speaker 1: you see the likeliest recession? I think most people I've
Speaker 1: talked to not over the next twelve months, But you
Speaker 1: go about twenty four months, it's different. I think when
Speaker 1: you look at the next twelve months in the US,
Speaker 1: you still have to get through this summer where there's
Speaker 1: a lot of pent up demand for travel and leisure,
Speaker 1: and unemployment is still very low, wages are going up.
Speaker 1: I think when you start to get out eighteen to
Speaker 1: twenty four months, and then you're looking at a lot
Speaker 1: of things, you're looking at where rates will be. The
Speaker 1: cumulative impact of rate hikes, we think they'll be about three.
Speaker 1: You're looking at the bite that inflation will have taken
Speaker 1: out of the economy. You'll have another year year and
Speaker 1: a half of higher inflation than the consumer would like
Speaker 1: to see. You'll have a strong dollar. It's still possible
Speaker 1: for the Fed to engineer a soft landing, but frankly,
Speaker 1: it looks very aspirational when you figure they have to
Speaker 1: battle the highest rate of inflation in forty years and
Speaker 1: drain away the greatest amount of liquidity we've seen in
Speaker 1: the history of Earth. So Sarah Bob's right, what does
Speaker 1: that say to equities? I think you know, for equities
Speaker 1: it definitely leads to more downside in a recession innary environment.
Speaker 1: They have not priced in. And but that's also why
Speaker 1: we're looking for those companies that are less dependent on
Speaker 1: economic growth. That does lead us to growth stocks. They
Speaker 1: have some of the worst returns here to day. And
Speaker 1: then also fundamentally strong sectors. Energy as a sector we
Speaker 1: still like because of the fundamentals tight supply, demands remain
Speaker 1: reasonably strong, and producers are being very disciplined. And then finally,
Speaker 1: dividend growers. If you look at history, companies that have
Speaker 1: strong balance sheets cash flow can continue to grow their dividends.
Speaker 1: They'll give you that portfolio protection within equities and should
Speaker 1: perform quite well while the friend raises heights and be
Speaker 1: defensive during a recession. Okay, Sarah, Bob, we're gonna be
Speaker 1: staying with us because we want to put some money
Speaker 1: to work here. We're gonna ask them for some investment
Speaker 1: advice given what we are seeing in this tumultuous market.
Speaker 1: That's next on Wall Street we on This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. This
Speaker 1: was the week when the stock market stage what it
Speaker 1: you sphemistically calls a correction, plunging below the one thousand
Speaker 1: mark for the first time since mid November. Came amid
Speaker 1: growing investor concern over the state of a dollar at
Speaker 1: home and abroad domestically, how much it's going to cost
Speaker 1: in terms of escalating interest rates on the dollar and abroad,
Speaker 1: how much it's going to be worth in terms of
Speaker 1: other currencies whose relative value was on the rise. That,
Speaker 1: of course, is Lewis Rock has around Wall Street Week
Speaker 1: nearly fifty years ago. Now remindings of the similarities and
Speaker 1: for them, mat of the differences as well between then
Speaker 1: and now. Sarah Maleck of Nouven and Bob Michael of
Speaker 1: JP Morgan have stayed with us. So Bob, will we
Speaker 1: come back to you. It is a different time, although
Speaker 1: there are some similarities. I'm not sure I there's a
Speaker 1: correction or we're actually seeing a downright to bear market
Speaker 1: right now. But let's talk about investment in fixed income.
Speaker 1: Where are their opportunities from your point of view. By
Speaker 1: the way, I hope it's a correction, because if I'm right,
Speaker 1: I think it took about ten years for the doubt
Speaker 1: to get back up above a thousand from that taping. Look,
Speaker 1: when we look at the repricing in the bond market,
Speaker 1: it's been dramatic. For the first four or five months
Speaker 1: of the year. It's been the worst bond market in
Speaker 1: history by a lot of measures. We want to take
Speaker 1: advantage of that. We think it's gone too far. I
Speaker 1: was in Kentucky visiting clients. There was a lot of
Speaker 1: discussion about municipal bonds and there are a lot of
Speaker 1: individual and institutional investors that are looking at muni bonds
Speaker 1: yielded one percent a year and they're now yielding over
Speaker 1: three percent on a taxable equivalent yield that's about five
Speaker 1: and municipal finances actually look pretty good. The other area
Speaker 1: that we're getting back into that looks pretty attractive to us.
Speaker 1: I touched on earlier. It's high yield. You're at an
Speaker 1: eight percent yield, You're at seven percent at the start
Speaker 1: of the month, you are four and a half percent
Speaker 1: at the story of the year. A pretty dramatic repricing,
Speaker 1: and I think a lot of investors have just fled
Speaker 1: the market and forgotten that it's a cleaner market. Six
Speaker 1: percent of the market defaulted away in twenty You've got
Speaker 1: a lot of middle American industrial companies in there with
Speaker 1: great fundamentals. To me, that's where a lot of value exists.
Speaker 1: I want to come back to high yields. But Sarah,
Speaker 1: what about munis, because I think you're interested in those
Speaker 1: as well. Right. Yeah, for fixed income in general, rising
Speaker 1: rates are going to be aheadman, But similar to Bob,
Speaker 1: we don't see rates rising to the degree that they
Speaker 1: have year today. So for fixed income, there are areas
Speaker 1: where you can lean in municipal bonds to do have
Speaker 1: strong fundamentals at the front end of the curve. We're
Speaker 1: seeing high yields and in taxbill fixed income, we like
Speaker 1: corporate credit those companies and sectors with strong balance sheets,
Speaker 1: but also emerging markets. In hield, you're getting a good
Speaker 1: return now, much better than you did in the past.
Speaker 1: So both all of those are areas that we like
Speaker 1: in taxible, fix and munis. So I'm really curious about
Speaker 1: the high yield because there's a lot of talk about
Speaker 1: possible the spreads, as they say, blowing out on high yields.
Speaker 1: So you don't want to be high yields when that happens.
Speaker 1: Are you confident that's not going to happen? And when
Speaker 1: you have rising range, don't you have to be worried
Speaker 1: about some defaults? Um you have to worry about defaults
Speaker 1: right before recession. And our analysis shows that any backup
Speaker 1: in high yield credit spreads is a buying opportunity unless
Speaker 1: a recession is imminent. Expecting one two years out is
Speaker 1: an imminent because we know anything can happen. So for us,
Speaker 1: credit quality still looks great. The yield is there. There's
Speaker 1: a lot of money on the sidelines that needs to
Speaker 1: put yield into their portfolios. As long as things remain stable,
Speaker 1: we think that money will come in and support the market. Sarah,
Speaker 1: you mentioned earlier some of the equities you're interested in.
Speaker 1: You mentioned energy for example, you mentioned Microsoft, maybe Costco.
Speaker 1: What makes you interested in those particular sorts of equities?
Speaker 1: So within energy, we love the fundamentals of the sector
Speaker 1: type supply, strong demand, produced discipline. Particularly refiners we think
Speaker 1: can benefit if benefit at this point in the cycle.
Speaker 1: Within the fank socks, we don't think that they're dead.
Speaker 1: You just need to be selective. Look for ones with
Speaker 1: less competition, more of a unique business model. Not only Microsoft,
Speaker 1: but Amazon. They had a very tough quarter that they've
Speaker 1: really in a sense overinvested in their logistics. They have
Speaker 1: no so much control over their global distribution. It's going
Speaker 1: to be a positive for them and pay off in
Speaker 1: the long term. We don't look at Amazon as a
Speaker 1: post pandemic SOOFT that's just going to suffer from here.
Speaker 1: So on the on the fixed income side, is there
Speaker 1: a corporate bond sort of tracking of what Sarah just
Speaker 1: said in the equity side, are those the corporate bonds
Speaker 1: you're most interested in? UM, I think it's just so
Speaker 1: broad based. Now everything got thrown away. I wish I
Speaker 1: could say there was a particular market or sector but
Speaker 1: everything cheapened up so dramatically. It's just a matter of
Speaker 1: going in, having the nerve to buy when everyone else
Speaker 1: is selling, and just hanging on for a little bit
Speaker 1: and ride through the volatility. But what if, in fact
Speaker 1: there is more of a chance of recession than we're anticipating.
Speaker 1: How do you hedge against that? How do you protect
Speaker 1: yourself up? Well, I think there are a couple of things.
Speaker 1: One is you have to go up in credit quality,
Speaker 1: because if in fact we do go into recession, then
Speaker 1: you are going to see default rates go up. Then
Speaker 1: there's going to be a flight to quality. So not
Speaker 1: only do you want higher quality corporate bonds, you want
Speaker 1: government bonds again, regardless of the yield. We've seen that
Speaker 1: you could be anything in the government bond market, and
Speaker 1: then you want to still stay in the dollars. So
Speaker 1: those are the kinds of things where you would go
Speaker 1: to a recession became really probable near term. So, Sarah,
Speaker 1: what about the dollar? I mean, we heard there Mr
Speaker 1: Rukheiser so fifty years ago talking about the dollar. Boy,
Speaker 1: we've had a very strong dollar. This week we saw
Speaker 1: maybe a little bit of a backing off in the
Speaker 1: strength of the dollar, do you have a theory on
Speaker 1: the dollar and how does it affect your investment strategy.
Speaker 1: I hate to say anything different than lou Rukheiser, but
Speaker 1: are we are in the camp that the dollars should
Speaker 1: remain pretty strong in the US is a safe haven trade.
Speaker 1: There's so many geopolitical risks out there, from the rush
Speaker 1: of Ukraine's situation to the lockdowns in China and the
Speaker 1: supply chain issues that they're having, and also can that
Speaker 1: monetary policy really have an impact? So we're very selective
Speaker 1: non US. We only like Latin America at this point
Speaker 1: in emerging markets, dollar remains strong as the US raises
Speaker 1: interest race you think that you know that's it's flat,
Speaker 1: that likely remains pretty strong going. So Sara also wants
Speaker 1: to ask you the same question as Bob on the
Speaker 1: equity side. For example, if you thought there was a
Speaker 1: larger chance of recession than you've said so far, how
Speaker 1: would you headge against that? Well, first of all, I
Speaker 1: think market time ring is a loser's game. The market
Speaker 1: can turn on a dime. We've seen that happen consistently
Speaker 1: this week. So we don't recommend people trying to get
Speaker 1: in and out of the market. This is where you
Speaker 1: need to be diversified, disciplined averaging into the market, and
Speaker 1: then you just need to look for those companies that
Speaker 1: are resilient in those sectors where they can continue to
Speaker 1: perform well because they have the profitability, they have pricing
Speaker 1: power to overcome inflation, strong free cash flow, strong balance
Speaker 1: Shee sets where we'd be positioning inequities, say out of
Speaker 1: you know, unprofitable technology companies where you know you might
Speaker 1: have they might have a hard time surviving during a
Speaker 1: deep recession. And Bob sort of finally, Warren Buffe and
Speaker 1: others have said, you want to buy when others are
Speaker 1: selling in the reverse? Right right now, as you look
Speaker 1: at the marketplace, where are people selling that you'd like
Speaker 1: to buy, they're making a mistake. Well, I think we've
Speaker 1: talked about corporate bonds. I think that was a big mistake.
Speaker 1: I think there was a lot of selling of municipals.
Speaker 1: I don't think that was a mistake. I think what
Speaker 1: that was the technicals because they had to rap cash
Speaker 1: to pay capital gains taxes at the start of the year.
Speaker 1: I think some of the emerging market debt sectors look
Speaker 1: pretty attractive to me. I'm glad you raised that because
Speaker 1: I was going to ask about outside the United States.
Speaker 1: You think emerging markets maybe attractive on the fixed incomes out, Yeah,
Speaker 1: because they've gone through a rate adjustment. If you look
Speaker 1: at the US, we've done two rate hikes for seventy
Speaker 1: five basis points. If you look at the emerging market
Speaker 1: since the start of we've had something like a hundred
Speaker 1: and thirty rate hikes for accumulative eleven thousand basis points.
Speaker 1: There are high real yields there. They front run the inflation.
Speaker 1: They're in a good spot. This has been a great discussion.
Speaker 1: Thank you so much to Bob Michael of JP Morgan
Speaker 1: and Sarah Manic a movine. This is Bloomberg Wall Street
Speaker 1: Week with David Weston from Bloomberg Radio. The housing housing
Speaker 1: a kind of climate and climate and climate housing. We
Speaker 1: all need it. There isn't enough of it, and prices
Speaker 1: are going up. Part of the problem is that we
Speaker 1: never really recovered from two eight. According to Jonathan Gray
Speaker 1: of Blackstone, the challenge on housing has been many years
Speaker 1: in the making. If you step back and look at
Speaker 1: the supply picture, we have been building housing at half
Speaker 1: the rate we did prior to the financial crisis and
Speaker 1: the Fed's monetary support for mortgages has helped stimulate the market.
Speaker 1: It was very hard to understand why when we were
Speaker 1: in the midst of the biggest house price run up
Speaker 1: ever that the FED was by mortgage back securities on
Speaker 1: us substantial scale. But now mortgage rates are pushing the
Speaker 1: other way, climbing back up over five driving the Housing
Speaker 1: Sentiment index down the most since the pandemic, which leads
Speaker 1: Wells Fargo CFO Mike Santa Masino to anticipate softening in
Speaker 1: the market. I think we've seen you know, if if
Speaker 1: it's not the largest increase in mortgage rates in a
Speaker 1: quarter ever, it's pretty close, um, and so I think
Speaker 1: that's definitely going to have an impact on the mortgage market.
Speaker 1: And this week's mortgage applications seem to prove that point.
Speaker 1: Down eleven percent, people are not entering into contracts, are
Speaker 1: trying to buy homes anymore because it costume much and
Speaker 1: to take us through this housing market. Welcome now. Tom Shapiro,
Speaker 1: He's president and chief investment officer of G T I
Speaker 1: S Partners. They manage about four point three billion dollars
Speaker 1: in real estate assets. Tom, thanks so much for joining
Speaker 1: us on Wall Street Week. First of all, I want
Speaker 1: to start with your take on where the housing market
Speaker 1: is right now. We've seen some slowing even this week
Speaker 1: with some new house in sales as well as existing
Speaker 1: housing sales. Sure that first, thank you so much for
Speaker 1: having me on the show. Why don't I just give
Speaker 1: you a little anecdotal evidence of what we're seeing in
Speaker 1: the field right now. Our home sales are down about
Speaker 1: fifteen to but that's a headline number, and you know,
Speaker 1: I think it would be helpful to kind of dig
Speaker 1: a little bit deeper into that number. The reason, for
Speaker 1: the most part is down is because we can't deliver homes.
Speaker 1: We're still having tremendous supply chain issues. Also, we find
Speaker 1: that a lot of home builders are actually holding back
Speaker 1: on the number of homes they want to deliver, and
Speaker 1: that is for a couple of reasons. One inflation because
Speaker 1: costs keep going up and they don't know what it's
Speaker 1: gonna actually cost to finish the house. And and too
Speaker 1: they want to ride up the home price appreciation. So
Speaker 1: I would say, for the most part right now, while
Speaker 1: we see a fifteen to slow down in sales, your
Speaker 1: over year, a lot of that is because of other
Speaker 1: extraneige issues. It's more of a delivery issue than is
Speaker 1: demand issue. With that said, we're definitely starting to see
Speaker 1: a pullback. We're starting to have to go deeper into
Speaker 1: our wait lists. But every house at this point that
Speaker 1: we deliver in the markets were in, we are selling.
Speaker 1: But I think we have to be careful about what
Speaker 1: we see, you know, on a going forward basis, because
Speaker 1: definitely we're starting to see things slowing down. But that's
Speaker 1: a really helpful way of putting up because we're having
Speaker 1: those discussions about the overall economy. Is it supply, is
Speaker 1: it demand? Is I understand you've got a supply problem
Speaker 1: because the supply change. People say that's going to go away?
Speaker 1: Is it going away? And how's it? Well, it's not.
Speaker 1: I mean, we definitely have issues. We have problems getting
Speaker 1: trusses and windows and appliances. Um, we're delivering homes with
Speaker 1: plywood windows at times. Um, it's we're having all sorts
Speaker 1: of issues. And of course you know the war in
Speaker 1: Ukraine and what's go on in China and the work
Speaker 1: stoppage is there. Um, the deliveries and transportation is an issue,
Speaker 1: and jobs are an issue, and trades are an issue,
Speaker 1: so it's gotten marginally are but we still have tremendous
Speaker 1: supply chain issues. Uh. And look if you look at
Speaker 1: how many houses were delivering a year in total, this
Speaker 1: is all all forms, it's about one point two million
Speaker 1: housing units a year, which is sort of in equilibrium.
Speaker 1: So Tom, some of the issue can be on the
Speaker 1: demand side. At some point. We've heard about mortgage rates
Speaker 1: going up to what five point five percent something like that,
Speaker 1: so that must affect it to some extent. Are you
Speaker 1: seeing some effects with that because we also have the
Speaker 1: FED is going to start selling off some of those
Speaker 1: mortgeback securities. Yeah, for sure. I mean, look, the consumer stretched,
Speaker 1: so why are they stretched a stretch because of inflation?
Speaker 1: So we have all sorts of issues. We have gas
Speaker 1: prices are more expensive, and we have the costs of
Speaker 1: food is more expensive, and of course, as you point out,
Speaker 1: mortgage rates are our own issues. So the consumer is
Speaker 1: stretch and that is certainly going to be an issue
Speaker 1: on a going forward basis on housing. But we are
Speaker 1: seeing you know, people taking less options, they're going to
Speaker 1: slightly smaller unit types UM and their renting, So we
Speaker 1: aren't necessarily seeing a slowdown at this point because of
Speaker 1: Morgan traits. But again, I think we have to be careful.
Speaker 1: I think, you know, the crystal ball says it's going
Speaker 1: to get a lot worse. We're not seeing it today,
Speaker 1: but I think in the future where I'm going to
Speaker 1: see a slowdown. Um And as I mentioned, so we're
Speaker 1: seeing your over your decline at this point isn't a
Speaker 1: demand issue. But I think we shouldn't kid ourselves that
Speaker 1: we are seeing it again. Our traffics down in a
Speaker 1: lot of our communities. It is starting to slow down.
Speaker 1: So I think we're gonna start to see the slowdown
Speaker 1: common The next couple of quarders, Tom, thank you so
Speaker 1: much for joining us at Waalter Week today. That is
Speaker 1: Tom Shapiro of G T I S Partners. Coming up.
Speaker 1: We wrap up a week with our special contributor, Larry
Speaker 1: Summers of Harvard. This is Bloomberg Wall Street Week with
Speaker 1: David Weston from Bloomberg Radio. This is Wall Street Week.
Speaker 1: I'm David western We are joined once again by our
Speaker 1: very special contributor in Wall Street Week. He is Larry
Speaker 1: Summers of Harvard. So, Larry, this was quite a week
Speaker 1: in the market. You saw equity markets and really selling
Speaker 1: of rather substantially. It's got a lot of people nervous.
Speaker 1: Is that gonna help or hurt the Fed's effort to
Speaker 1: address inflation? I think it's part of the Fed's efforts
Speaker 1: to address inflation. The way monetary policy works is by
Speaker 1: raising the costs of capital and discouraging investment. The way
Speaker 1: it works is by reducing wealth, which reduces spending. This
Speaker 1: is part of the process. This is a feature, not
Speaker 1: a bug, associated with uh the tightening of monetary policy
Speaker 1: that we've had, and the reason I've been reasonably confident
Speaker 1: that the economy will slow down but not so confident
Speaker 1: about just where interest rates will go is because of
Speaker 1: the uncertainty about what economists call the transmission mechanism, how
Speaker 1: large a decline in markets, how much of a discouragement
Speaker 1: of housing you get as rates go up. Well, it's
Speaker 1: at that very point. What is the risk from where
Speaker 1: you see it right now, of the Fed essentially getting
Speaker 1: cold feet as we see the markets really come up
Speaker 1: substantially SMP now really in bear market territory. What's the
Speaker 1: risk that they'll let up too soon on the interest
Speaker 1: rate hikes. Look, there's two risks in a situation UH
Speaker 1: like this, that we overshoot the runway and that we
Speaker 1: land the plane too hard, and those are both very
Speaker 1: real risks in UH this situation. It's a very very
Speaker 1: difficult landing that the FEDS attempted. Is I've said on
Speaker 1: your show before, David, there's never been a moment when
Speaker 1: we had unemployment below four an inflation above four when
Speaker 1: we avoided having a recession within the next two years,
Speaker 1: And that just goes to show the huge difficulty of
Speaker 1: the task UH that is before the FED. My own
Speaker 1: judgment is that it's distinctly more likely than not probably
Speaker 1: two and three or three and four, that we will
Speaker 1: have a recession that will start UH sometime within the
Speaker 1: next two years. When we look at the markets right now,
Speaker 1: a lot of this reaction we think is a reaction
Speaker 1: to the possible of higher interest rates. Is it possibly
Speaker 1: it's actually bleeding over into the underlying economy itself. Because
Speaker 1: we also saw some retail sales numbers that concern people
Speaker 1: from Walmart and from Target this week. Maybe people aren't
Speaker 1: spending as much money. We also have seen some softening
Speaker 1: housing numbers. There are various indications and by the way,
Speaker 1: a lot of the things that people are buying, their
Speaker 1: buying with increase credit card loans. So I think that
Speaker 1: the prospect of recession is looking much more real to
Speaker 1: markets right now than it was a few months ago.
Speaker 1: You see that in UH the way in which certain
Speaker 1: retail stocks have been hammered. You see that in the
Speaker 1: way some credit spreads have UH widened UM and it's
Speaker 1: just you see it in the behavior of the overall
Speaker 1: UH market. So I think you still have UM more
Speaker 1: room to go. And as I say, I do think
Speaker 1: we're unlikely to get out of this with sustained expansion.
Speaker 1: There are some thoughts. There are other ways as well
Speaker 1: to address the inflation problem. One of the suggestions is
Speaker 1: increasing corporate taxes. That's something suggested by President Biden. Mr Bizos,
Speaker 1: Amazon came out against that. You had a little bit
Speaker 1: of a disagreement on Twitter this week. I've been hardly
Speaker 1: consistently supportive of everything the White House has said on
Speaker 1: fiscal UH policy, and now I haven't been consistent with
Speaker 1: everything they've said on policy towards business UH either. And
Speaker 1: I've got great respect for Jeff Bezos as a business
Speaker 1: leader and as an observer of the economy, but I
Speaker 1: didn't really see his point. It seemed to me that
Speaker 1: it was pretty natural to raise corporate taxes so as
Speaker 1: to reduce spending when you had an economy that was overheating.
Speaker 1: And it seemed to me pretty reasonable strategy to try
Speaker 1: to raise taxes to reduce spending in ways that would
Speaker 1: affect the most fortunate people in uh, the society. And
Speaker 1: it seems to me that that's what President Biden was
Speaker 1: is trying to do, and that's what he pointed up
Speaker 1: in his remarks. So I didn't understand why, uh Jeff
Speaker 1: Bezos was suggesting that they were somehow an obfiscation or
Speaker 1: somehow an inappropriate uh kind of commentary. You can agree
Speaker 1: or disagree with the President's policy, but I found Bezos's comments,
Speaker 1: uh to be somewhat off base. Another way that President
Speaker 1: Body suggests we might address some of the inflation problem
Speaker 1: is by more vigorous enforcement and trusts. We had the
Speaker 1: Assistant of Trade General for antitrust this week come out
Speaker 1: and say he thinks he's got some problems with private equity.
Speaker 1: What do you make of the efforts at the FTC
Speaker 1: and the Probate of Justice on a trust front. I'm
Speaker 1: very worried about whether they are in the right direction.
Speaker 1: I don't think there's any question that we need to
Speaker 1: step up INTI trust enforcements in America. I don't think
Speaker 1: there's any question that there are areas where we have
Speaker 1: too much monopoly power that should be process that should
Speaker 1: be prosecuted prince ably, where individual firms are merging to
Speaker 1: get excessive market shares in particular industries, and the budgets
Speaker 1: of those agencies have been allowed to erode in ways
Speaker 1: that are quite damaging. What I think is badly misguided
Speaker 1: and potentially dangerous to our economic future is the set
Speaker 1: of doctrines that people jokingly referred to as hipster uh
Speaker 1: antitrust or the new Brandisians after Justice brandis. That's a
Speaker 1: theory that says antitrust shouldn't be about maximizing benefits to consumers,
Speaker 1: but should be about some other different set of abstract objectives.
Speaker 1: And I think that tilts very easily into a kind
Speaker 1: of dangerous populism. If the head of the antitrust Division
Speaker 1: thinks that there are mergers that are headed towards monopoly,
Speaker 1: he should try to block those mergers. If the head
Speaker 1: of the antitrust Division believes that there are companies that
Speaker 1: are engaged in inappropriate exclusionary business practices, he should prosecute
Speaker 1: those companies. Okay, there are one quick one here. At
Speaker 1: the end, there was a big objection from the shareholders
Speaker 1: to Jamie Diamond's conversation was a fifty million dollar bonus
Speaker 1: that they were going to pay him that they really
Speaker 1: objected to. What did you say that? Look, I think
Speaker 1: taxes ought to be more progressive, and so Jamie Diamond,
Speaker 1: Jamie Diamond and everyone else who makes a lot of
Speaker 1: money ought to be uh paying more in taxes that
Speaker 1: ought to be much harder for them to pass large
Speaker 1: fortunes to UH their kids. But God, if you look
Speaker 1: at what Jamie Diamond has contributed to the market value
Speaker 1: of the share owners of JP Morgan, I don't think
Speaker 1: there's anything unreasonable about his being paid and making as
Speaker 1: much money in a year as a really great pro golfer.
Speaker 1: And uh, so I was surprised at those objections. I
Speaker 1: think the way to get at issues of inequity is
Speaker 1: to have more progressive taxation, more burdensome taxation on the states,
Speaker 1: get rid of a whole set of UH loopholes, but
Speaker 1: driving people out of leading public companies into the private
Speaker 1: sphere away from public companies. I don't think that's smart
Speaker 1: strategy for our country. Okay, thank you so much. Always
Speaker 1: great to have you this. That's Larry Summers of Harvard
Speaker 1: are very special contributor here on Wall Street Week. Finally,
Speaker 1: one more thought, the unknown unknown. That's what Donald Rumsfeldt
Speaker 1: warned about when he was Defense secretary. There are things
Speaker 1: we know, things we know our issues but don't know
Speaker 1: the answer to, and then there are the things we
Speaker 1: don't even know. We don't know. Right now, investors face
Speaker 1: their fair share of known unknowns, like where inflation is heading.
Speaker 1: You know it's not going to be good for a while,
Speaker 1: Whether we're facing a recession next year, every single American
Speaker 1: workers going backwards right at this minute, whether China's problems
Speaker 1: with COVID will continue, our supply chain problems. Clearly China's
Speaker 1: industrial might was slowed by the lockdowns. What the endgame
Speaker 1: is for Russia's war with Ukraine. I think the off
Speaker 1: ramps have gotten slightly narrower. And of course, whether we're
Speaker 1: facing another wave of COVID cases, are organizing hospitalizations arising,
Speaker 1: But those are the known unknowns, Congress has now added
Speaker 1: an unknown unknown to the list we need to be
Speaker 1: worried about UFOs. The House Intelligence Committee's Subcommittee on Terrorism
Speaker 1: held hearings this week to get some answers on unidentified
Speaker 1: flying objects. We have seen an increasing number of unauthorized
Speaker 1: and or unidentified aircraft or objects in military controlled training
Speaker 1: areas and training ranges and other designated airspace. And in
Speaker 1: case you wonder why our Congress was so much else
Speaker 1: on its plate, has decided to take up the question
Speaker 1: of UFOs. Fear not, it's been on the case for
Speaker 1: over fifty years now, dating back to Gerald Ford, now
Speaker 1: when he was president, but when he was House Minority
Speaker 1: Leader and organized the hearing after complaining the testimony from
Speaker 1: an Air Force expert calling reported sightings swamp gas was flippant.
Speaker 1: So as you go through your portfolio and consider the
Speaker 1: upside and downside risks, you might want to include the
Speaker 1: possibility of alien intervention. That, as Rod Serling put it,
Speaker 1: we've moved into a land of both shadow and substance,
Speaker 1: between light and shadow. It is an area which we
Speaker 1: call the twilight zone. I'll leave it to you decide
Speaker 1: whether that's a risk to the upside or a risk
Speaker 1: to the downside. That does it. For this episode of
Speaker 1: Wall Street Week, I'm David Weston. This is Bloomberg. See
Speaker 1: you next week.