Wall Street Week - Full Show 05/13/2022
When it rains it pours. Inflation supply chains war and tightening financial conditions. We've got it all. This is Bloomberg Wall Street week. I'm David Westin. This week's special contributor Larry Summers on what it will take to get inflation back under control. The real determinants of inflation have to do with the total level of demand that's being stimulated by Paul's and Roger Altman of Evercore. On whether things really are as bad as they look and what can be
done about it certainly could get worse before it gets better. It wasn't a great week on global Wall Street. Consumer price numbers may have slowed down a bit but according to Sara House of Wells Fargo not nearly enough. You are seeing some deceleration there but you're going to need to see a lot more. The war in Ukraine continued as President Putin made it clear he's not about to stop any time soon. Does much. It's going to send the media to meet countries. Didn't want to listen to us. And in fact he would have opened up completely different plans. While in China doubts grow about the economic path forward. It's less a story about China stimulating
the global economy and more about whether or not they can even get its own economy on a base level. And you can forget about crypto as a place to hide from the storm as terrorists. USD stable coin lost its dollar peg. In short the entire model fell apart and was unable to withstand a black swan event or an adverse event. And Secretary Yellen warned of the potential risks for the financial system. Overall I think that simply illustrates that this is a rapidly growing product and there are risks to financial stability. And if all that weren't enough for you we ended the week on Friday the 13th. With Elon Musk tweeting that he's been for Twitter was temp on temporary hold sending the
stock down by as much as 25 percent at one point before he said another tweet saying he was still committed to the deal which helped a bit but still left the stock off about 10 percent. And as for the markets overall equities made a valiant effort on Friday to come back from a bad week. But the S&P 500 still finished down two point four percent for the week closing lower for the sixth week in a row while the Nasdaq was off two point eight percent. And the yield on the 10 year came down 20 basis
points ending the week at two point nine two. To help us make some sense out of this rather chaotic week. Welcome now. Kate Moore she's BlackRock Global Allocation team head of Somatic Strategy. And David Bianco CIO for D.W. S. America. So David it's not a very easy task but what sense was made out of this week. This week was volatile. At least it ended on a happy note.
Happy Friday. Happy Friday the 13th. And we appreciate that equities ended the week on a on a strong note. But let's face it the equity market and most asset classes have been under a lot of pressure year to date. The S&P is flirting with a bear market. It was down as much as
18 19 percent during the week. Now it's down 16 percent from its all time highs. Well what about that bear market Kate. Because some people these around Bloomberg later on Friday were saying what we really saw was a bounce off of that level of bear market sort of a bear market bounce as it were. Yeah. I mean the way I think about today's trading David was more that the sellers took off early for the weekend rather than buyers having a huge amount of conviction. You know I think sentiment is such an important thing to track right now. And we're seeing kind of all of the major segments of investors whether it's retail or
traditional mutual funds along only. And hedge funds have a pretty dower outlook for both the market and the economy. And you know it's my view that we're not going to see a meaningful and sustained rally something that takes us closer to say forty five hundred on the S&P until we can really firm sentiment and kind of allay some of the fears around the economy and inflation and policy mistakes in the war in Ukraine and Chinese growth. I mean the list goes on. You lay that out at the beginning of the show. Well it does make sense to keep saying I think we're in a range bound market for some time. Markets just need to figure out what the normal interest rates are. And until we have an understanding as to where interest rates stabilize
and especially not until the bond markets stop suffering losses the equity markets are at risk. I think the S&P is in a trading range that is not much lower from where we were this week but five thousand thousands likely out of reach for the next year or maybe two. So OK. When you look at the equity market relation to the bond market how much of this is discounting future earnings basically as a discount rate cut against future earnings. And how much was actually the
multiple. Yeah I mean look in the highest growth parts of the market the stuff that was commanding ridiculous multiples for a lot of 20 20 one you know that D rating really started in November and has continued through the course of 2022. Look I think it's fair to assume that rates are going to have to move higher even if the economy is slowing a bit. We still believe we're far away from a recession and we think the Fed is in the very early stages of normalizing policy both in terms of policy rates as well as of course quantitative tightening and reducing or partly changing the size of the balance sheet. So you know those two things together are going to I think exert a bit of pressure and I think to keep volatility high. We keep watching
the relationship between rates fall and equity fall and see if there's a change in the pattern. But right now I think they're going to stay elevated. That's exactly right. I mean we're watching interest rates. We're watching interest rate volatility. It's just representative of how much uncertainty there is on where interest rates are likely to go up. But where
do they plateau. And yes higher interest rates particularly higher real interest rates is reducing the P E multiple. And then there's this uncertainty about how long this expansion might last. I've said that this expansion is two years old but perhaps going on seven or nine years old biologically when it has a 10 year expected lifespan. So these days not only used a higher discount rate to take in the PE they've also shortened their forecast horizons. It's not paying for future growth stood their value in the more certain earnings and dividends that you see coming from certain companies now. Yeah and I have to say you know we look around and say there are a lot of high quality companies that you want to own for the next three or five years that are trading at pretty attractive multiples right now. That said could the multiples overshoot to
the downside. I mean I think the answer is yes. There's a high probability that as the uncertainty rises around the macro environment and policy that you end up seeing multiples get to you kind of really silly cheap levels. You want to average em then. Great. But this is a challenging environment. I think it's still a good environment for the long term investor. You have to
find that person. That person needs to really understand the volatility they may be facing. The S&P is trading at seventeen and a half to 18 times this year's earnings. A 20 P is still reasonable given these interest rates they're still much lower than history. Now the Fed has an inflation fight to fight but it's unlikely that interest rates go anywhere near where they
were historically. So OK we've really focused quickly on inflation which is only appropriate given the CPI numbers. We had this this week and the interest rates. But there are other risks out there as well. We have a war pending in Ukraine for example and their possible effects on the supply chain that could affect certainly the cost the companies going forward and their margins. Yeah I think it is one of our big focuses right now. Look you know when you look back a couple of years ago during the trade war and some of the changes in terms of tariffs for example not a lot of companies come out and say hey we're going to re jigger our supply chain and we're going to rethink where we're producing relative to where we're selling. They said that there wasn't a lot of follow through when it came to capital expenditure and investment in order to onshore or we saw some production. I think this experience of the last two years of the pandemic and certainly the supply shock shock that we've
seen in part because of dependence on China is going to incite like a new round of capital expenditure actually a real one in terms of supply chains. But that's expensive David and it's going to cost companies a large amount of money and take time. So we've got to watch margins. It's a challenging global economy. The partnerships that we've had in Asia and the challenges that Europe is now facing for their security for their energy and even a refugee crisis it's it's there are many threats out there to the health of this expansion and the pandemic. And some of the monetary and fiscal responses to it have caused demand to cause a bit more inflation than any of us are comfortable with in the past 40 years. But I'm also taking more concern with secular challenges structural challenges facing the global economy because things that drive productivity trade global trade global investment demographics cooperation on a global scale. These are things that were not seen as much of
that we saw in past decades. And we even have more resource constraints. So inflation should come down but it may not come down as fast or as low as the Fed wants it to come down. We certainly have a risk on interest rates although I think we're pretty clear that they're going to go up. It's a question of how far they go and how fast not where they're going go up. But if I had to make it choose between the biggest risk in terms of uncertainty and between on the one hand interest rates for an investor and the war in Ukraine and then sort of that which would you pick.
Oh David that's a tough question. I don't think that interest rates are that uncertain. In fact I gave Jay Powell and the Fed broadly it a plus in terms of how they've been communicating more recently. I think it's very very very clear to see that we'll continue to raise policy rates through the balance of this year. And that will be a steady progression. We'd have to have a massive shock I think in terms of you know an economic shock or an expansion of the conflict that's currently in the Ukraine. I am worried about the shifting of political alliances. I am worried about what this does to overall energy relationships. I am worried about the feed through to European growth of this ongoing conflict in Ukraine though somewhat similar most similar thoughts were more concerned about the war the conflict in Europe. It speaks about the dare I say d globalization that just
a lesser cooperation that's been in the world interest rates the Fed is doing what they need to do. This looks like it will be a typical Fed hiking cycle of about 300 basis points and 3 percent of total Fed hikes over a one and a half year period. A pretty normal Fed hiking cycle even though inflation has jumped higher than we've seen it in so many decades. But the Fed may be facing challenges greater than normal. Oh and to these global threats that we see out there. Kate where BlackRock and David VIX w ISE America's will be. Stay with us as we take a look down the road and what it means for investors. If this inflation is here to stay. That's coming up next on Wall Street week on Bloomberg.
We've got some inflation built into the system and the price rises are going to go away overnight. But I think we begin seeing some hopeful signs that we're at a point here where we can begin getting a grip on the situation. That of course is Paul Volcker on Wall Street with way back in 1975. That was when he was the president the New York Fed before he got to administer his medicine to the economy as head of the Federal Reserve. David Bianco of W D.W. S. Americas and Kate Moore of BlackRock are still with us. OK. Let me ask you a question that I'm hearing more and more. Some people are suggesting this may be here for a long time to come. We had Jason Furman on from Harvard earlier this week on Bloomberg. He said he thinks it
could be years. We have really high inflation. If that's right. If that proves to be true what does that say to investors. Well actually you know as much stress as we have around higher inflation rates particularly since most of us haven't had to deal with this for the majority of our lives. There is actually really interesting investment theme around higher inflation. It's really interesting to look at within industries which companies have pricing power which companies are doing a really good job of managing their costs and managing their margins and which are struggling.
I mean I also like this theme of looking at companies that have very high labor intensity to sales. In other words do they have to continue to hire and especially at a time where we know the total cost of an employee continues to rise or do they have business models that are scalable they can continue to grow without adding to additional labor. I mean we have to live in this environment and invest in this environment. And I think there are some pretty interesting opportunities. Even though inflation does pinch our wallets. Well OK give an example. What sorts of sectors these two you're talking about. OK. An example might be like if you're just thinking in the consumer sectors for example you know some companies have done a really good job of you know writing longer term contracts of managing their input costs. Sometimes they've made great investments in
software and systems and technology so that they've been able to reduce their dependence on labor. All of these things help to sort of mitigate the margin pressure that an inflationary environment might otherwise scare us into. Right. And so there are some decent fundamental stories even in a higher inflationary environment. But you really got to get to know the company. And there are some beneficiaries of the Fed fighting inflation banks insurance companies. They should
benefit from higher interest rates. We think utilities are really good bonds substitute with inflation protection and probably delivering the energy at least to future electrification. And we like health care. And health care has become the biggest part of consumer spending. It continues to be the fastest growing part. Productivity medicines devices are needed there. These productivity providers we think they're going to be have to play an important role and capture profits. What I love about your clip in 1975 is that even though Paul Volcker recognized the challenge ahead it surprised even him the big man to the upside. Inflation can be a very big problem when that genie is out of
the bottle. OK. That leaves me exactly my question to you David which is you've studied that period. Do we need this time the sort of medicine that Paul Volcker ended up administering. NASDAQ was pretty tough. It was brutal medicine. And I think people need to appreciate that it was a very high price to pay for allowing inflation to accelerate for so long. Volcker hiked
the overnight interest rate to 19 percent and inflation got to 15 percent. It caused a recession. But one of the things that's important to recognize is that there was this combination of tightening monetary policy while there's a lot of pro supply side policy whose Reaganomics with Volcker's monetary discipline that really helped seed a terrific 1980s and longer expansion. So we have to just realize that recessions are risky. That could end up becoming nasty. And if things don't go well on the supply side there could be a recession with inflation still uncomfortably high. So OK. Help me here because you're responsible for making these sorts of decisions. And normally if you've got a lot of
inflation you don't want to have cash because it's dwindling even as you hold on to it. On the other hand we've got a lot of uncertainty. So what's your approach. Yeah. You know normally I would say holding cash in the bank and not investing it or putting it to work in the market in some way you know is a waste. And especially in real terms you just think about that cash kind of burning away. Of course holding cash in this environment.
Well we've had some really really challenging period for both bonds and stocks in terms of returns has actually proven to be a really good portfolio diversify. In fact we're holding a fairly high level of cash both as an expression of our duration view. So we've had us our shorter duration position in the fund. We also do risk part of our equity portfolio while still holding some of the higher growth higher quality companies. I think they can compound over the next couple of years.
I think you should have dry powder. I really recommend people having some cash at this point. We're gonna get some interesting bites at the apple. You know some other high quality companies as I was mentioning before may even get cheaper than this as we have a very volatile period over the next couple one months a policy adjustment and recession fears recession fears fading. David at a time of inflation one thing people tend to go to is real assets real estate. Guys really this. Does that make sense
right now. It does. And there's less availability of real assets and their investable more than they were back in the past. It's easier to invest in commodities. It's easier to invest in real estate. It's easier to even buy inflation protected securities. These things particularly the ease of which they're investable nowadays. I bet you investors wish they had those options in the
late 70s and early 80s. So there are ways to help manage through this period of uncertainty and the risks of inflation being high. David Ingles the R word recession. Does an investor need to be taking that to account. And if he or she does. How do they do that. Look at these theories of fear in the market. Everyone likes to jump on to like a really scary narrative and right now everyone's talking about an imminent recession. That is definitely not our base case at this moment. We think growth is going to decelerate but we don't see the type of shocks either
to the consumer or to the corporate sector or a meaningful pullback in terms of overall fiscal activity that would like launch us into a recession. But I do think we have to think about you know where are the areas that we can still see solid growth. Last earnings variability in a slower growth environment. And that's where you have to really not just look at history but look to the future. What are the business models that are very strong. Where is consumption going to continue to be strong and where companies spending on each other. An example I might give you is around cloud computing. This is a place that
you know despite weaknesses in other parts of technology we continue to see aggressive spend. Recession risks are a little higher than they normally are at this point in the cycle. So we're on guard against that. But there are worse things that can happen to investors. So to long term investors than in a recession. That's when you get these lost decades and 1973 to 1982. It's one of the very few periods 10 year periods. The equity market have negative real returns but it did beat bonds over the full 10 year period. So stay the long term course keep the equities and other real assets in the portfolio. And cash is not trash at a time of uncertainty like this. But if you hold onto it for too long it does wrong. Okay. So this is unfair.
There's a curve ball. Kate I'll throw it your way. Cash is not trash. What about crypto. I mean we've had this whole discussion. There was something to the 70 billion dollars worth. The value came out of crypto and stable coins as we did that teach us anything in general. I talked to Larry Summers and said merely that greed drives the marketplace. Yeah first of all I'm stealing. Dave's cash is not trash. And I might make like a little tattoo of that the shoulder but I wouldn't want. This is
what I'll say. I'm by far away not an expert or an authority in any crypto or digital assets. I just would say that for people who are adding that into their portfolios as a diversified I think we've seen an incredibly higher correlation between all of these assets and actually between a lot of them and you know more speculative parts of the technology sector. And you know we got to really think about your portfolio construction. This is the very early stages of this you know digital finance revolution if you will. And you have to be I think pretty balanced in your portfolio if you're going to own some of those
assets. Such a I don't know where it goes from here but I will say you have to be cautious. Just quickly this is a great point Kate has made. We talk about trying to avoid correlation certain to be a hedge. I'm not sure I heard local talk with the correlation between big tech on the one hand and crypto on the other. But we certainly saw you've seen it recently. A lot of the same owners. So yes they find themselves having been hurt and perhaps having to do risk. The thing about one of the things to keep in mind the dollar's been getting stronger and it's the said pulls this off. Well the dollar will reign supreme again. What about that. Kate what about a strong dollar or is it due to
your investment. Yeah. We take some concurrency views into consideration. I got to tell you though and over the course of my career I don't have that the best batting average and on making cross currency bets. You know what I will tell you though is that you know it does affect how we think about our international and I'm sure no currency traders. Thank you so much. Great to have you both. This is Kate Moore BlackRock and David Bianco of D.W. US
Americans. Coming up we take a look at what's coming up next week on Wall Street. This is Wall Street week. I'm David Westin. It's time now to look at what's coming up next week starting with Juliette Saly in Singapore. Thanks David. China will likely report the weakest monthly economic indicators since the outbreak of the pandemic two years ago when April's monthly data dump is released Monday. That is
likely to put further pressure on the central bank to boost stimulus to support growth. But economists are still divided as to whether the PPACA will move as early as Monday by cutting the interest rate on one year policy loans. China's jobless rate which is forecast to climb again to a two year high that will also be in focus after top leaders made an urgent pledge recently to stabilize employment in the face of plunging business confidence. Now over to lower rush in London. Laura. Thanks Juliette. EU Commission forecasts released on Monday. It's interesting because the last readings were before the war
in Ukraine. The expectation this time around is that a percent will be knocked off GDP while 2 percent will be added to CPI for 2022. Obviously this raises the question of stagflation. Both economists and market participants will be listening carefully for any indications of a recession within one of the EU member states. Geopolitics in focus over the weekend with NATO foreign ministers meeting taking place in Berlin. We will wait to see whether a decision has come from Sweden about joining NATO.
Taylor Thank you Laura. Of course a lot of big economic news coming up next week as well. We're going to be getting a lot of retail sales data on Tuesday really looking at the health of the consumer in the face of again really strong inflation. Then we're also going to get some home market information as well. When you think about rising mortgage rates again the highest going back since 2009 up an additional five point three percent here on some of those long and mortgage rate. So a lot of economic data here that we're watching in the US. David back to you. Thanks to Juliette Saly Laura Wright and Taylor Riggs. Coming up the future may look bleak right now but is it really
as bad as some of us make it out to be. And what can we do about it. We talked to a veteran of Wall Street and Washington Roger Altman of Evercore. That's next on Wall Street week on Bloomberg. Run up in stocks and then the subsequent sell off these stocks on Wall Street is really what these waves in the global market sell off pattern in stocks and bonds really continue. An economic slowdown spurred another bout of risk aversion. Here's that rainy day. It's been a long bull run in the markets in wealth accumulation and in the economy which came back fast even
after being brought to a halt by a pandemic. The fact is Americans have a lot to be proud of. We're experiencing the strongest economic recovery in the world. But now everything that looks so rosy gives cause for concern from inflation. Look at the numbers. The headline comes in up three tenths of a percent to the supply chain. Some of the supply chain headaches that some are saying reaching an all time high to Ukraine. The Russians have been acting more like a bulldozer than a Tesla to China. I think where they're headed for a growth recession. So yeah I think the rest of the year is going to be very tough for China. Leaving an investor to wonder how bad will it get. And when you ask a question as basic as how bad can it get you
want a true veteran even a legend of Wall Street and Washington. And that's what we have here. And Roger Altman is the senior chairman of course the founder of Evercore Roger. Welcome back. It's great to have you here. Great to see you. So it's been a week maybe a month of hearing all the bad things. Everywhere you turn and it's inflation and it's the Fed and it's Ukraine. It's China. It's a play on. How bad is it. Well the S&P 500 as of right now is down more or less 20 percent. And that's the definition of a true correction. And so I would say it's been pretty severe.
I think the big question is how much worse can it get. And no one knows the answer to that. And I certainly don't. But it certainly could get worse before it gets better. And you know historically when you see such a profound change in monetary policy which as we're having now are in the beginning stages of now historically it's been at least over the short term. After the change starts bad for equity values it's really been the case very often. So it's not surprising that
stocks are down now that the Fed has ended this relatively long period of almost free money and is headed up on a substantial substantial upward trajectory in terms of tightening. It's not surprising stocks are down. But I think as you just said it coincides with a lot of other negative news. Most basically inflation but also some of the other points you make about Ukraine and so forth. And so it could get worse. Do I think we're on the verge of a financial crisis. I don't. I don't. I just think it's a sharp correction in equity buyers which when you step back and think about them in so many cases especially tech were hard to hard to rationalize before this change. I mean there were some astronomical values as you well know and it's not surprising
that they're finally record being rectified. So you're talking about the equity markets. We talk with the bond markets as well which is really taken it on the chin. What the relations between those financial markets on one hand. And if I can put it this way the real world because a lot of your work at Evercore is dealing with real companies who are buying and selling companies or pieces of companies. Does it directly translate into the value of those assets or is it somewhat removed. It does directly translate in two ways. The stock market is a.
Pretty reliable predictor of the broad economy albeit nine months or so in advance of the real economy is changing. So right now there's that big debate as to whether we may have a recession in 2023 and. I think that's about 50/50 myself but we're we're slowing down even right now. And and the market is in effect telling us that in terms of our own business. So yes it has a big effect because when when the volatility is so high and the VIX this morning was thirty two and a half I think before the day started.
People hesitate. They want to step back and wait for the smoke to clear in the environment to settle and so transactions slow down. There's no doubt about it. And you can see that by the way in the valuations of all the investment banks which have come down a lot for a variety of reasons but one of them is an anticipated slowdown in transaction volume. But it's interesting. People start to see in their hands if I put that where they're afraid to make a move and that trumps what otherwise might be an instinct. You know there are some bargains out. So prices are coming down. The price takes is lower. It might cause some CEOs to say now's the time to move. Well and in fact just before just on my way over
here I was on the phone with some of my colleagues. We were having a call tonight with a very very well-known company that we work with closely. That's a technology company a very big one. And a lot of the smaller companies they've been interested in buying in recent years have just been too expensive. These are tiny companies but they're smaller than this guy. And we were just observing to ourselves that the valuations have changed so much in the past few weeks that some of these companies they've long studied are now possibly at a level they could buy. So you're right this environment does create opportunities but people tend to want to see the smoke to clear or the or there are stability to return before they act. Does it
also change the nature of some companies. People would be interested acquire in this sense. You refer to the tech sector before. A lot of people say what's going on in tech is basically people who aren't betting on the come as it were its future earnings. And now it's not they're not as sure. And also as the discount rate goes up they're not worth quite as much. Does it make more of a premium on companies that are more sort of steady as you go throw off real cash. Year in year out. Does the temperament change. I think the answer is yes. And to give you a little metric maybe to support that
in so many areas of technology the relevant multiple over the last three or four years has been the multiple of revenue and so many companies trading at very very high multiples of revenue. I met with a company this morning. Which is private but its main comparable is public and the comparable had been trading I think twelve or 14 times revenue until very recently. It was a pretty crazy multiples. Yes there are examples of transformational technology where occasionally something like that is justified. But that was pretty widespread and it's changing now. And it was a piece in
The New York Times this morning about how unicorns have come down to earth. And there are so many of that so many cases of that. But the answer is yes. You said that the stock market is a pretty reliable indicator of potential slowdown in the economy overall. For the other way around when the market begins to rise
before the economy does it can go either way. Right now the market is projecting a slowdown. But we've also seen plenty of examples where the economy's in bad shape. The market goes up and the market is telling you that nine months or twelve months from now the economy is going to be better and the Federal Reserve might well applaud something. Slow down. I mean they've got to get inflation while they're seeking said that's their priority and they're seeking it. And they're they're trying to
avoid the so-called hard landing which is a recession. But they're certainly seeking a slowdown in the economy because most recent inflation number eight and a half percent that's. Pretty high. And so that released the question about the source forces hard landing slowdowns one thing recessions another. As you look out what are your expectations about a possible recession or maybe as important as you talk to CEOs you talk to companies do they. Can that possibly in mind as they think about possible acquisitions or not. Well very first of all. Very few that I would be talking to are yet experiencing a serious slowdown in their own businesses. This is all a question of where will we be in six months or so or later.
And I think the big debate in the market is mostly about 2023. Will we see a recession next year. What would cause a recession. It be a combination of consumers pulling back because right now every single American worker including you and me are seeing our real incomes fall because inflation is running well above the rate of increase in wages although the rate of increase in wages by a circle standards is pretty good. It's running at about 5 percent but inflation is running at 8 to 9 percent. So every single American worker is going backwards right this minute. You do that long enough. A few months for example and people start to get conservative and they start to pull back. That would be one factor. And add a second factor would be just the impact of higher interest rates. So mortgage rates as you
know are up by 250 basis points from their level of full five months ago. That's a lot. And that's going to impact the mortgage market and the housing markets. I don't think it's enough to bring them to a halt. But we've all seen it where we've been seeing a very hot housing market in this country both starts and secondary sales. And I think that level of increase in mortgage rates is probably more to come on that is going to slow down that market. So combination of interest rates what I call consumer psychology is a place into consumer spending and maybe business. Also just in a lot of the volatility pulling back a little bit on investment those three factors are the what could cause a recession. Finally Roger you've been a leader not
just on Wall Street but also in Washington. Is there anything that President Biden can do about this at this point. Well you notice that the last couple of days really he's changed his tone on this issue. Two days ago he said this is now my top domestic priority which is a change of tone. And then yesterday notice on his trip he was standing in front of a big background which said.
Prices down. Inflation control. So they've changed their their priorities or at least the way they state them. Actually I think that's quite good. And it's not trivial because you want the American public to think that you wake up in the morning with inflation on your mind and you go to sleep with it on your mind and every single thing you can do. You're going to do it. Roger thank you so very much. This is so helpful. Always a pleasure David. That's Roger Altman. He is senior chairman and founder of Evercore. Coming up we wrap up the week with our special Wall Street Week
contributor. Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin it's time once again this week to have Larry Summers of Harvard come to us and explain this really perplexing weeks. Larry thanks so much for being back with us. I could call this the week of inflation as it were with the CPI numbers. The PPA numbers something you've been warning about for some time now. Some people are saying that shows sort of we've hit the peak. It's starting to come down.
What did you read into those numbers. You know once again the numbers were worse than people expected them to be. We may have hit a peak last month at eight point five but we're not headed anywhere near to anytime soon. And that says that we've got very big challenges ahead of us in terms of managing this economy. And I think there's a lot of
real risks out there. I see an overheated labor market as the core of the inflation process driving service prices up. And I see lots of risks geopolitically in terms of supply chains geopolitically in terms of commodity prices. And so I think this is going to be a very difficult environment for quite some time to come. Well let's talk about that quite some time to come because we're now starting to see some people including Jason Furman on Bloomberg this week say he thinks that we could have years of inflation even get a recession. We would because there are some structural factors that could give us long long inflations that a long Covid. I think the two sets of issues that mean that is a plausible view. One is most inflations don't get stopped with a single slowdown. There are multiple attempts to break inflation before
there's ultimate success. That was certainly the case in the previous big inflation that we've had in the modern era. In the 1960s and 1970s. And then there's the argument. I never sure how much weight to give it that we're probably in a more labor short economy that we used to be that the pressures of globalization that we used to feel are no longer there that there's more capacity of firms to niche market than there used to be. And that all of that means there's going to be a bit less ruthless
deflationary pressure than we've seen in most of this century so far and that that could operate in the direction of higher inflation. I think I'd be very surprised if the average inflation rate during the twenty twenties wasn't materially higher than the average inflation rate during the decade of the teens. And it's reinforced by a growing number of voices. I'm not yet prepared to join the chorus saying that we should set a target for inflation that is higher than 2 percent. Could
conceivably be ultimately right. But I think moving in that direction immediately would very much undermine what limited anti inflation credibility the Fed has said Larry. The question that obviously is what do we do about this inflation. Is there anything that can be done. Obviously the Federal Reserve has the frontline responsibility but we also have the executive branch and now the legislature saying well we can do some things. We have President Biden saying the FTSE take a look at price gouging. And then we have the speaker of the House Nancy Pelosi saying she's going to bring legislation forward next week about
price gouging at the pump. It's not going to help us. The price gouging at the pump. Stuff. The more general price gouging stuff is to economic science. What President Trump's remarks about disinfectant in your veins was to medical science. It is dangerous nonsense. There is no material prospect that in any enduring way gouging legislation can have any substantial effect on inflationary pressure. But it can cause and contrive all kinds of shortages. It can distort a complex network of flows between crude and refined product. It can inhibit the supply responses that are what's ultimately the best way to overcome inflation. This gouging talk is a diversionary confusion. It's
something that tends to happen when we have inflations but we only make progress once we move through that. And we understand that the real determinants of inflation have to do with the total level of demand that's being stimulated by policies. If politicians outside the Fed want to make a difference on inflation to the limited extent they can they should be reducing tariffs. They should be letting more immigrants into the country. They should be reducing regulatory burdens like the Jones Act that mandates that only U.S. ships can take crude oil from Texas to the northeast. They should be limiting them
limiting demand by asking borrowers at a moment when they have better financial condition than any time in a very long time to pay back their student debts rather than maintaining the moratorium. Those are the things that you can usefully do to influence the inflation rate. And all this gouging talk is a pandering diversion from all of that. So let's wrap up this week with a couple of quick ripped from the headlines. One of them is cryptocurrency is in stable coins. The prices of those certainly didn't go up this week. In fact I saw others like something like turning 70 billion dollars with a market value taken away. Do we
know anything at the end of the week about cryptocurrency stable coin that we didn't know at the beginning of the week. We've been reminded of something we should have known which is that fear and greed drive financial markets all financial markets and cryptos not immune from that and bank run phenomena whether it's banks whether it's money market funds whether it's repo or whether it's crypto. When you don't have backing and you lose confidence you get a big mess. And finally Larry at the very end of the week on Friday Elon Musk tweeted on the one hand that he was having some second thoughts about Twitter. And then
he came back and said no no he's still committed to it's not clear. The stock certainly went down came back a little bit but it certainly went down substantially. Does this say something larger about what's going on with tech right now. We saw that the value of so many big tech companies has come down. It's possible this is actually having some buyer's remorse. Iran is I think Iran Musk is I think in some ways the Andrew Carnegie of our time a titanic innovative driving extraordinarily wealthy figure who when he has leverage uses it. And with the changes at
Twitter that have already taken place in the absence of other bidders he has enormous leverage in this situation. And I suspect he's using it. That's fascinating. And Andrew Carnegie of our time that will go down. So but the larger issue is tech not going to have as large a role in the markets going forward as it has in the past. I suspect that the share of total wealth total stock market that's in tech may be somewhat lower over the next few years than it has been over the last few years. But I think it's going to continue to be the case that the most valuable companies are tech companies. I think it's going to
continue to be a case that as it always is that technology and the transformations that it brings are driving history. My guess is that we're going to see very profound changes coming out of artificial intelligence over the next decade. And I'm not sure where that's going to go. OK. Larry it's always such a pleasure a real treat to have you with us as Larry Summers of Harvard a very special contributor for Wall Street Week. Coming up in a week when everything seemed to be on sale at a discount price there was one big premium paid for a Hollywood icon or at least for a version of her. That's next on Wall Street week on Bloomberg. Finally one more thought. Amid all the gloom in the markets a candle in the wind. There is no shortage of pessimism in the
markets these days with central bankers falling over one another to tell us how determined they are to raise rates. We don't rule out seventy five forever right. I mean what I'm going to do is I think 50 caves we're going now seems about right to me. And those higher rates can mean only one thing money coming out of the market and making all those financial assets less valuable than we thought they were. Trader actually told me that the consensus here is that the S&P 500 will ultimately trade down to a P E multiple of 16 to 18. We're at about 20 to 21 right now. So by that standard we still have a lot more selling yet when it comes to taking money off the table. We always start with the riskier more speculative parts of our portfolio like bitcoin. Bitcoin of course extending losses even dropping. Hello. Oh my study thousand one point ten on Monday. This is the first time
it goes this low since I can. July 20 21. And tech stocks including those in Kathy Woods Ark Fund which this week gave back all of its gains against the S&P 500 and then some. Kathy Woods strategy for example of picking stocks that have fallen victim to the tech meltdown. Some of her favorites tumbling in an environment of rising interest rates and high inflation. There's a look at the ARC Innovation ETF. But fear not. There are some assets that are holding up nicely even setting new
records like for example 20th century American art 100 million one of them. Why not send me than 120. This week Andy Warhol portrait of Marilyn Monroe. It's called Shot Sage Blue. Marilyn set a new record going for one hundred ninety five million dollars. That's almost double the previous record of 110 million dollars for a painting by John Michel Basquiat. We did sell the most expensive painting of the 20th century. It's the highest price ever paid. Close to two hundred million dollars. Let it
sink in. It's quite something. So with all the talk about crypto currencies and NAFTA is the value of the future. It's good to know that the safe haven investment may just be in the end good old fashioned art. Though I'm sure Mr. Warhol would not appreciate being called old fashioned in any way that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
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