Wall Street Week - Full Show (07/15/2022)
This week on Wall Street week raging inflation the president in international diplomacy and a surging U.S. dollar. There's a lot going on. You have a host of global issues energy crisis massive divergence in monetary policy. Special contributor Lawrence Summers on what the Fed can do from here. We are asking for our central banks to analyze the economy accurately. And Rockefeller Capital Management CEO Greg Fleming on what asset managers are looking for in this rough climate. This is Wall Street week. The June inflation report came in red hot fueling talk of yet another 75 basis point rate hike or even 100 basis points.
Certainly the inflation report suggests that there's no reason to say that a smaller rate increase someone did last time. I fully support another 75 basis point increase. However my base case for July depends on incoming data. If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting. As President Biden wraps up a trip to the Middle East in hopes of gaining assistance from Saudi Arabia in lowering gasoline prices we had a good discussion on ensuring global energy security and adequate oil supplies. And I'm doing all I can to increase supply for the United States of America which I expect to happen. And underscoring a summer of volatility the euro plunged below parity something that hasn't happened in two decades. Tweet of the morning from Sam wrote on euro dollar and on
Twitter Leaks a big win for travellers who are terrible at maths. Hang Seng. That's pretty Shery Ahn. How do you start our package there and end it with John Farrell. I don't know who made that decision but we say welcome to you. I'm Tom Keene alongside Lisa Abramowicz.
We are not David Westin but we've had so much fun here on a Friday to bring you Wall Street week on Friday and of course into the weekend. And Lisa we've got to start with the hallmark of a great show. Lawrence Summers was on fire when I spoke to him this morning. But to me Lisa the hallmark of the week is how many times do you and I look at our Bloomberg terminal and it didn't look normal. It was odd. It was a wow week. And it was a wild week away from stocks in currencies and commodities at the market really spoke to recession fears to recession risks. We saw that in commodities such as copper and oil and we saw that very much with the dollar. Tom that has been a big theme of the week. This is a much worse much listen show for you for the next hour. As I said Professor Summers was lit up on the Fed and frankly on some of the emerging market tensions we saw. Gregory
Fleming will join us. Really one of my heroes and what he did and what's interesting about Greg Fleming is the Miami Marlins is his fault. Just so you know it's his fault in the bank. Derek Jeter. But it's gonna be great with Greg Fleming. Well let's get a sense though of what actually happened in markets
because if you take a look at what the extreme moves were in the dollar in copper in oil you didn't see it in the S&P that basically ended the week flat basically flat. I mean it was down less than half a percent. But that's basically flat after the correction and the carnage of this year. But if you take a look at that dollar index that is where the drama stood the strongest dollar going back to 2000 to at one point we did retrace some of that but we saw that with the euro dollar parity which perhaps is why John Farrell took it extended weekend. Yeah exactly. And he was laughing about Twitter and then copper Dr. Copper the gauge on the economic outlook having its worst week in a year. How much is this pinned to China. How much is this pinned to a forecast for an economy facing a lot of hurt. It was important to run up the data check here. Cross equities bonds currencies commodities. It was amazing. Equities were removed from what we saw in the gyrations of the others and
took to the copper point. And we under we failed this week on Bloomberg Surveillance folks and we didn't talk enough about China flat on its back. We talked about China. Every time we did we said we're not doing this enough because that's not who I am because there was a feeling of crisis and it was underpinning this feeling of global recession. You know we'll get to the mark. The incredible week coming up here as well with the ECB meeting. Mr. Fleming will join us later along. Professor Summers. But right now it is a joy to go into the trenches on Wall Street. Week of strategists and thinkers on Wall Street adjusting in real time. Larry Covid is to the RBC Capital Markets.
She is exquisite. It's small caps in midcaps and also the gyrations of the market. Lot of good work there bouncing off the work and economics of time personally. David Bianco is an institution far too young for the years on Wall Street at Deutsche Bank and now a DWI ISE group. America is so valuable. I think they he walked out the door and they brought him back a
second time. Two of you. Thrilled to have you on what is absolutely an artist week in years. Laurie we're equities removed from the turmoil in the other asset classes. I think they were a little bit this week but frankly I think they deserved a bit of a break after the year that we've had in the past couple of months that we've had.
And look I think investors on the equity side were also gearing up for earnings and we were in a little bit of a holding pattern until we got to the end of the week. And financials I mean there was definitely interesting moves in financials today. Once we finally got through the kind of Sonali Basak age this morning David Bianco helped me there because in your research note you say the banks are of interest but the banks are all very which kind of bank is where investment should be today. The big banks the ones that have sticky deposit bases the ones that will benefit from the Fed hiking and the continued Fed hiking. So it's not comfortable to own banks if we're perhaps headed into a recession. But even if we do have a recession this is not going to be a
deflationary type of financial crisis. I think the credit costs will be well behaved and the banks will fine. How much our financials and idiosyncratic story versus a story of macro economic strength really. Because that really was the feeling when J.P. Morgan came out and over time it became something different. Well it's a good question. And I do think when you have it's heart financials are always a macro story. It's very difficult for financials not to be sensitive to the macro and purely idiosyncratic. However what's happening in the macro situation right now is is inflation and the Fed hiking. So who's the only beneficiary of interest rates going up its banks. Everybody else is worried about that not just in terms of
slowing economy and earnings and P pressure but banks benefit with least with higher earnings from higher interest rates. So given that backdrop Lori and given the fact that you said that really stocks were somewhat immune to the. Utility we were seeing in other asset classes what are we pricing in. Is there a disconnect right now between the asset classes with stocks
painting a much more sanguine picture. Look stocks are pricing in a recession at this point in time. I mean we've we've moved beyond kind of growth scare territory which is where we were for the first part of the year. And now we've been down around 25 percent from the peak or so in your typical recession. Draw down on a median basis is twenty seven. Your average draw down is thirty two. So we're kind of pricing and that's short shallow recession scenario. We're not type pricing in a typical
recession. We're not pricing in a severe one. We're not pricing in an extended one. But I think the good news if we do have that short shallow recession in the back half of the year the equity market got a lot of that damage out of the way early. It's asymmetric or large. Normal I should say actually. And it's so easy to get out of the market. David Bianco it's so tough to get back in. I want you to go back. Lou Rukeyser 1987. How afraid were we. In 1987 after the crash and getting in in November and December before that 88 boom in the market was brutal. David where do you find the courage to get into the market if you're afraid how to pick the bottoms. Not an easy thing. And the 87 crash of about 35 percent. That's the only time the market has
gone down more than it has now. Outside of a recession. It's not clear that there's an equivalency now with 1987. Well no 87 was far worse. This I'm going to make some headlines here. This is a tough market. Laura is right. I think the equity market is largely priced to recession. A small one but not entirely. However we have seen how things can get worse like 87 even when the economy was fairly OK. But you're right that there was a lot of uncertainty around interest rates. The dollar and
the global economy wasn't as important to the U.S. and the S&P back then. But the volatility we see in commodities currencies interest rates the fear of what might happen to credit costs I am not sure that we should try to pick a bottom and scoop up stocks in one fell swoop. But I do think investors should nibble while nibbling gives you confidence. Nibbling. Where do you like the banks for those of the brave heart. I think some safer areas are health care and utilities. Well Laurie I want to get to this idea of both baking in a recession but also the Fed and the possibility that as we see the Fed officials go into a blackout period we're not gonna hear from any of them next week and some people might cheer perhaps this guy. St. Louis Fed President Jim B Jim Bullard came out today and yesterday and really knocked down the idea of 100 basis point rate hike but did raise the specter of 4 percent Fed funds rates by the end of this year. Has that been priced into stocks. I think that largely the idea that the Fed is going to be very very aggressive in here. That's in the market. But I
think markets are still struggling a little bit with the extent of the economic damage and that's what's yet to be priced in. And you know I think that markets at the end of the day on the equity side they just want to know what the path is. They want to know what the exit strategy is. They want to know how far this is going to go. They want a bit of a timeline. We're seeing some investors talking about you know bad economic data points and saying well we're going to you know we've ups the possibility that we're going to get cuts early next year. And that's telling you. Equity investors are willing to look very far ahead. But we need to stop giving the equity market nasty surprises. Laurie do you understand the consumer. I think so. I am one. The American consumer supposedly a strong. Yeah. And yet we see that they're incredibly worried and we see that their
balance sheets are getting weaker. We're seeing their savings are getting depleted. How do you understand that. In terms of the path of this economic cycle. So I think there are two things. I think that you know at the end of the day I think we may look back at 20 22 and say that this was phase three of the pandemic with 2020 being the year that everything fell apart. Everything happened to the health crisis hit 20 21 being the year of the initial
recovery. And this year possibly ending up being the year of normalization. So I think we need to think about it in that context from the psychology perspective. And I think there's something powering consumers that we don't quite know how to model as forecasters. And I think you know we've been talking about how lousy the consumer confidence data has been since I think about this time last year. And it didn't derail spending. Why is that.
I think also you know if you think about the consumer we're starting this crisis from a point of strength stronger than we've gone into past recessions. Yes data is going to get worse but we need to keep that in mind as well. Well I joined a Friday evening and over the weekend as we get to continue with Lori Covid CEO and David Bianco is well again we've got so much to talk about here over the are. I can't say enough about the importance of speaking with Gregory Fleming as we will hear in a bit. And again Professor Summers was immensely Prussian today on some of the images back to 1998. He says maybe panic less and March. It'll be interesting. Yeah and that's certainly a theme as we try to chart a path. What did we say this week. That it's not necessarily the question of whether we get a recession but the path to get there and the path out of it to get back to that 2 percent inflation rate. We've got much more of that coming up after the break.
The good economic news today was that the US unemployment rate fell to its lowest level in nearly four years five point seven percent. And for anyone who still hasn't got the message that inflation is the big problem. The index of wholesale prices took its second straight seven tenths of a point. Monthly jump. The Great Loser is a filming Wall Street week in 1978 from a sticky showroom. His that was a great moment though. What Mr. Rukeyser did here it speaks to 1978 and Lisa Abramowicz not of Bob Seeger or the moment but it was I'm sure Lou would agree it was the dismal 70s. This is not the dismal 2020. But this week
we got a number that was close with a nine point one percent inflation shocking markets. And we cannot avoid the rhyming aspect of that even if it isn't the 1970s. One of the things under the radar this week folks so important is compare contrast of Jerome Powell with Paul Volcker. I've got some major heat from Wall Street pros. Maybe lose that tone and just start looking at where we are right now where we are as the Lord Covid seen it. And David Beyond Call with RBC Capital Markets. And GW
is thrilled they could start us out here on the state of where Wall Street is right now. Laura I'm gonna go to you because you are exquisite. It's something no one talks about anymore not the Red Sox middle relief but small cap stocks. And the answer is small cap stocks do nothing. And then about every nine years boom. Are we close
to the small cap boom and why small caps are in a holding pattern right now versus large cap. I think they're waiting for their moment. Like what seven years. Well they actually have had a terrible last year and a half. And actually they've been bad for quite some time. But I think really round 2014 was kind of the last moment in the sun that we had there. But look I think
small caps are telling you that this is a market that wants to start bottom fishing where people are starting to look for things that have been depressed. And when I talk to investors about areas of the market right then they risk small cap is the number one thing that looks like a small cap because they're zombie companies or because their managements do not merge into mid-cap size. What's the what's the pixie dust of why they underperform. There's a few different. There's a few different versions of it. There are the younger growth companies. They're still up and coming. There's some that have been older and fallen on harder times. And then there are others that are simply a little too much and haven't gotten scooped up yet. So there's a big variety in there. David a lot of this hinges on inflation getting back to 2 percent as so many people believe. And this is the distinction people are drawing from the terrible 70s saying this is different and it is less entrenched than some people fear. What is the risk that that's not the case or is it a screamingly
obvious argument that the Fed will get things back to where they want it. The Fed will do everything it can do but it may have a bitter medicine for it for the economy. So I do think it's instructive to look at the 1970s and try not to repeat those mistakes. It's early in the 20 20 years from 1975 to 1979 real GDP growth was 5 percent plus. So real growth is not going to be that strong in the United
States. It's really important that inflation does work its way back to the Fed's target of close to 2 percent. That's going to require the Fed doing its job. Fiscal discipline and most importantly a renaissance once again like in the early 1980s of the supply side Reaganomics combined with focus monetary medicine is what laid the seed for a very good 80s and 90s and thereafter. So we need to learn the lessons of the 70s and not repeat the mistakes. Meanwhile as people do bottom fish and Lori says there's evidence from the small caps. How much are bonds participating in this. Has the stability in longer duration bonds provided a template for that bottom fishing for that comfort that could even persist longer than people think. I think investors are better off for
now in short duration bonds treasury bills to three year treasuries. The bond market is not priced for the Fed getting to as high as 4 percent and neither is the equity market. That would be a risk. So I think investors should be careful with that. Bonds look for inflation protected bonds hold onto cash and then look for real assets whether it be stocks or real estate or utilities.
I do like I do like small caps and I do like banks for those who are willing to take the cyclical risk. I think small caps have been beaten up even more so than the large caps. And what's interesting about small caps. They were held back over the past decade or two from globalization other factors. They would benefit. At least we're going to primarily disagree with each other very well here. I think you're there right. By where I OK. That's why we're put on
the couch together. I do wonder though when you we're all talking about the United States. We have to zoom out. It is not about the United States right now. It is strong in the United States in Europe. It's another story with gas. And we are looking to the ECB next week. We are looking to the Nord Stream one pipeline whether it will come back online. We are looking to emerging markets. Tom has been talking about it all week and some of the crises percolating in pockets throughout the entire complex. At what point. Can the United States fall subject to what's happening outside in the rest of the world Laurie. Well look I think we had a template for this back in 2018. We spent most of
the year thinking the U.S. would be immune from the global recession that would emerge from the trade war. And then recession fears came home to roost and markets fell sharply. But we've already done that at this point in time. So I think we can go back to this idea of a relative game. Will Europe be worse off than the U.S. if the U.S. is better off. I think there's a
limit to the amount of cash that institutional investors in particular are willing to sit on. So a lot of that money is going to find its way into the U.S. and the small caps. David I want to go to the Heritage NWS and of course the relationship with Deutsche Bank and the giant David Focus and who on February 24th or 25th told me watch the dollar. This will need to be amended. We are now living a dollar surge. And I'd say this week folks D X Y the blended large large nation index was caught up with late in the week by the Bloomberg Dollar Index. More E. David how do our listeners how do they adapt to a incredibly
large strong dollar. It's a tough thing to adapt to. Don't forget the S&P 500 not banks but the rest is a very global set of businesses and they're facing foreign exchange rates and they're gonna be facing tougher competition in the areas of auto and machinery and tools from Japan credibly weak yen and Europe. And it's a slow but slower global economy anyhow. David Focus Lando from Deutsche Bank was one of them the first to warn of a recession coming not due to the US asset management business. Right. You believe there will be one late this year or early next. Laura Lincoln your work with Tom personally right now he's
truly expert on wage growth or the lack there of what is terrible real wage growth mean for our listeners. Well look it reduces consumer spending power at the end of the day. There's a weakness right to the undercurrent of spending that we're going to see in the coming weeks. I think that you have seen a few companies already allude to the idea that there have been some hits to demand. If you read some of the early reporters. So I think that's something we have to watch out for. I think the country's a little bit of a shell shock at the moment with all the recession talk. But I think
that's really you know this idea sort of this undercurrent this underbelly of weakness that is not captured in the headline data is something to watch out for with the data dependency of the central banks for the data dependency of traders looking at some of these wow statistics that we were just talking about this week. David what are you trained on to give you some guidance. Because we were talking about the University of Michigan contra versus controversial sentiment data and how much people are really trading off of that. What's your compass. My compass is actually not the consumer. I think the real concerns are on the supply side something we've taken for granted for 40 plus years. So I'm watching the global economy. I'm watching the conflict. I'm looking at policies both in the United States and Europe and seeing if they're more pro supply side than they have been in recent couple of years. So I'm trying to get a big picture idea because I want to step up and buy when we have a recession and equities get hurt perhaps a little bit more. But I want to be
more confident this is going to be a good decade. But I think we need some better policies. And if we look back and see the 20 20s turn out to be another great decade for stocks I think health care will be a big part of that. That's been a huge theme this week Tom. We've heard that from person after person health care. The place to be. Lori Covid
David Bianco thank you both so much for spending your Friday night with us here. And coming up we're going to take a look further at what to expect particularly with global Wall Street particularly with the dollar particularly with the ECB. That's coming up next on Wall Street week on Bloomberg. Let's take a look at the major events coming up around the world this week. I'm Haslinda Amin in Bali starting with the agenda in Asia. He'll be analyzing major headlines out of the G 20 meetings here in Indonesia. Central bankers and finance
ministers have gathered after getting their calls on inflation wrong. For the most part. Meanwhile U.S. Treasury Secretary Janet Yellen heads to Korea to meet with hold local counterparts on Tuesday. Rate decisions are also due from the Bank of Japan and Indonesia. We'll get plenty of earnings including from Macao casinos next
week in Europe. Its monetary policy meets the fiscal. There'll be an ECB decision on Thursday. But before that their decision will be complicated by volatile Italian politics that could see the coalition of Mario Draghi fall apart with opposition from Giuseppe Conti. If that does widen spreads it will make things more difficult for the ECB wants to tighten policy while keeping spreads in line. Of course a lot of quarterly results coming up
here in the US next week starting with Netflix and then Tesla. Netflix is really going to be an interesting one given that it announced more of an ad supported model to go along with its traditional subscription business. See how much revenue can be boosted by that. Tesla also one that we're following of course given the drama in the C suite and how much of Elon Musk's attention has been pulled away now that he's in a court battle of course down in Delaware with Twitter. So Tesla of course will
also be another big one that we're following on the economic front. There's going to be a lot of US housing data to also give us an idea of how the housing sector is holding up in the face of a lot of these Fed rate hikes. And as well on Friday some p.m. ISE of course an indication of where we are in this economic cycle given further calls for a recession. Much more on Wall Street coming up after this break. Su Keenan.
Welcome back to Wall Street Week on Bloomberg on Lisa Abramowicz alongside Tom Keene. And I got to say Tom this has been amazing to speak with behemoths in the field over the dozens and decades of Wall Street history as we try to get a sense of our place in current history and do it right now. And the chaos this week from the micro which is you look at the Bloomberg screen and see where euro is and you go a different normal or this statistic the carbon version that we saw this week and we did some of that narrowness to day would be on Kurumi Mori Covid seen. But now it's time to go broader and we need to get a historical perspective of where we are. And there is no one better to do that than Greg Fleming chief executive officer of Rockefeller
Capital Management who spent decades running Merrill running Morgan Stanley Wealth Management and Investment Management. You have perspective running the big wealth management shops of Wall Street throughout history. So what is the best analog from a historical perspective for the moment that we're in. You know this it's interesting. If you're looking at analog I'd pull back pieces from different times. So we're still in the time that we were in in the last 10 or 15 years. We're technologies driven
deflation and prices coming down and productivity improvement. So that's still here. At the same time we've got vestiges of the 70s and early 80s in terms of pressure on the energy side of the equation that we really haven't seen to that degree since then. And a real inflation numbers this week that came in hotter than we've seen literally in decades. So you have a combination of historical times coming together to create the unique time that is 20 20 to
this moment was a pivot point this week when we got that nine point one percent inflation print when we got some of the data out of banks showing that they were suspending share buybacks despite the fact that it might be mandated by the Federal Reserve. How much do you view the markets as perhaps being overly pessimistic rather than not appreciating the difference of now versus a decade ago. You know I think that markets there's a tug of war every time there's data out. I mean today people said retail sales were better than they expected in June. Michigan sentiment was better. So they start to you know markets go up and it's like wait wait a minute maybe we'll get through the recession risk and be able to bring inflation down. So this
tug of war on the data constantly. But the reality is the biggest player here and you all know this because we've seen this historically. The Fed is focused and needs to stay focused on inflation. And they will. They have got to change. The expectations are getting embedded
from an inflation standpoint. Greg in the time we've got left as Lisa mentioned we want to go bigger and broader with you. And I don't think you've ever gotten the credit for literally inventing modern wealth management. How does it feel like to see every single firm out there do a press release that says we want to be like Greg Fleming we need to go to Asia together. High net worth assets. Gorman's doing 28 percent growth at the shop. You invented it. Morgan Stanley every Credit Suisse has announced UBS of course leading the way. But Credit Suisse wants to be Greg Fleming.
What do you say about an industry where everybody wants to get in. Well first of all what that means is that the business is a good business to be in. And you know that time the characteristics of wealth management fee based advice counsel to clients recurring earnings. So it has characteristics financial characteristics that make a lot of people want to be in the
business. But I say and this is what we're doing at Rockefeller Capital Management is defined the way that we're going to operate with competitive advantage. And what we're trying to do for clients is provide them advice across the full range of their needs through private advisors that are experienced on the investment side open architecture an investment platform where you bring in the best of outside managers. We've put together and we marry that also with family office services. We'll take care of bills. We'll help you with taxes. If you take care of the full needs of clients you can offer something that not everybody rise in the marketplace offers. So we've tried to redefine what it means with high net worth and ultra high net worth clients. You and I have never seen a bond market like this. The Lehman Barclays the Bloomberg total return
aggregate negative 12 percent. Some of the corporate high grade stuff has negative 18 percent. How does quiet money manage with bond prices down 12 percent. Well you know the reality is there are a number of things including on the macro side and we'll come back to this. But on the macro side you have virtually full employment and everybody worried about recession. So there's things Tom that even we haven't seen. Back to Lisa's question. What are the historical analogues. There really aren't some 4 4. No. The things we're dealing with here in terms of the bond market to have the equity market off as much as it's been this
year and fixed income off to the degree that you describe. That's something we haven't seen in history as well. So the quiet money was very careful about fixed income when rates were virtually zero across the spectrum. How much have we fully appreciated the. Absence of Japanese investors the absence of certain Chinese money the absence of some of the international flows amid domestic crises throughout the world. Well I think that that's one of the things Lisa that's that's happening both on the financial flow side and even on the trade side which is you know the internationalization and the globalization retrenching for really the first time in my career and the 90s and in the first part of this century people were focused on following those financial flows across markets. From a trade standpoint from an investment standpoint all the major financial firms in the US we're trying to build major presence in those markets. And now you have a retrenchment back
to home markets on both a financial basis to some extent as well as on trade. This is inflationary and it is also perhaps a headwind to true growth which raises a question of how long it will take before 60 40 works again. Well you know for different clients it if you might be re rebalancing the 60 40 in a different direction.
But I think it's going to take a while for the Fed and for the current situation to work its way out. When you have the kind of inflation numbers that you have now people are talking about what we're gonna be back to 2 percent. The reason they're going to go after this very aggressively is it's going to take some time to get it back to 2 percent. They need to break the back of the expectation over the next six or 12 or 18 months in order to have a hope that a 60 40 portfolio in 24 or 25 might make sense for investors. And now folks it's time for the Wall Street. Question Lewis Rukeyser never would ask because this is a rude
question. I'm going to ask you because you're qualified. I want you to tell me in banking New York City banking London banking and such. The delicacy of chairman and CEO being held by one person at the same time. This is a debate that's out there. What is the efficacy of having a separate chairman and a separate chief executive officer. You know in theory the efficacy is is making sure that all the different alignment of interests are in place. What's your experience. My experience is it depends on the institution. And I bet you've got very you've got a number of examples of very strong institutions with
management you know doing the right things across the landscape and shareholder return being where you want it to be. And then you have situations where splitting the roles works. I think it really is it boils down to looking at individual cases. We've been astral lab one of those medieval clocks in the surveillance room where we meet every morning. And it's trying to gauge when Credit Suisse has taken out. And the basic idea there is American banking the siren call of going over across
the Atlantic and running into European banking headaches. Should the banks that you built and lived in. Should they be buying European Bank assets. I think Tom it's it's more going the other way to the point Lisa. We were talking about before. I think that major financial institutions but also again back to trade. I think regionalization it's coming back.
And it's the first time in 25 or 30 years that that's happened. Well to that point and just to clarify that that or it a Paul I am wondering whether the expansion into China and in China is John Michael Barr. It has the the different ball game of a choice on the backside of it. I'm wondering though do you expect to see as a retrenchment from financial firms Chinese arms in the face of some of the international fissures as well as the zero Covid policies. Yeah I know about a retrenchment but much more caution in terms of the level of capital investment the aggressiveness of the growth strategy. There's no question in
fact. So you can take it further. You know I think you're going to see critical industry start to come back and more of a regional basis. And it's an opportunity for the United States actually where manufacturing of precision products could take place increasingly here. And who would have thought we would have been talking five years ago about pulling
manufacturing out of semiconductors of you know clean energy and some of the. Yeah. But all of these things are inherently inflationary. These all are inherently inflation especially with the dollar where it is especially because it is cheaper to go overseas and to do it elsewhere. How do we take that in to our market costs. Well I
don't disagree with you. I think that a lot of these things are inflationary. And this is why I said the Fed is going to in rhetoric and reality stay right on top of this because they recognize now that they've got expectations out of whack that they have to pull back. They've got some macro like what you're talking about Lisa where regionalization could create more inflationary pressure that nobody would have conceived of five years ago. Greg Fleming one minute on a Friday evening. You executed this which was the birth of black rock. What a triumph for Mr. Think the way they have done the. The way they have executed not so much wealth management but almost wealth husbandry. Did you see that coming. Have you been stunned at the success of Black Rock. It was impossible time given the magnitude of success to see it coming.
We took it public by the way in nineteen ninety nine at fourteen dollars a share. We merged Merrill Lynch's asset manager business as you know in 2004 or five into BlackRock and took back a 49 percent ownership stake. I'm proud of the role that I played in that we played in helping create that firm but it would have been hard to conceive of a firm with eight nine 10 trillion dollars in assets under management and that doesn't even really reflect the dominance they've created in certain spaces. Greg Fleming thank you so much for spending under today. That with us. It's great to see you both here. Your insights. Thank you. Thank you. And Tom we have a conversation coming up. That is a really important one with U.S. Treasury Secretary Lawrence Summers to be medicated for this. Professor Summers was on fire today not only about the central bank but we started out on the shocks that we're seeing in Asia and particularly the hugely strange movement of the Japanese yen on a July Friday.
Please stay with us. That is next on Wall Street week. I'm Bloomberg. Welcome back to Wall Street. I'm Tom Keene and for David Westin this week and I'm joined now by someone familiar and deservedly familiar. Lawrence Summers is Wall Street Week contributor. He's a former secretary of treasury of the United States president of Harvard. But far more than that. A contributor to our economic discussion over any number of decades. Larry I'd like to turn it into a two hour conversation. But we can't do that on a Friday evening into the weekend. And I have to digress off the usual Fed discussion here and talk to you about a magazine cover of February 15th
1998 99. Greenspan Rubin and a younger Lawrence Summers in a time of Asian crisis with dollar strength and with anticipated Fed rate increases. Do we see an emerging market fragility which could lead to something related to the August of nineteen ninety eight that you lived. I doubt it. In the same way central to that crisis was fixed. Exchange rates were fixed exchange rates were very low levels of reserves in many emerging market countries and were debt that was predominantly or heavily are dollar denominated. I do think that the combination of high energy and food prices are rising dollar and increasing interest rates does pose risks to emerging markets. But I think they're not likely to be
systemic and across the board in middle income countries. I'm more concerned about countries with particularly unsound policies. Turkey would be an example or Argentina would be an example. Countries with particularly problematic food situations Egypt would be an example. But I don't think there's going to be the kind of massive across the board. Right. Financial distress that we saw earlier. Prof. Summers I saw a chart this week on to
Bloomberg. I have never never ever ever seen in my life which is the zombie nature of Japanese yen weakening. Again this is away from the United States. But when you see the lethargy of yen weakening given the experiment of yield curve control how would you suggest that will end for Japan. How will that how would you suggest that
will end for the markets. You know Tom the problem with pegging financial variables whether it's an exchange rate or a long term interest rate or a stock or a stock price is that it tends to be a much easier strategy to enter than it does to exit. And I think that's got to be an issue for Japan. Sooner or later they're going to have to leave the yield curve control strategy. And I'm not entirely sure what's going to happen when they do. I think in the meantime the pressures are likely to build. And as they provide more and more liquidity it could easily lead to an even weaker yen especially given that as inflation surprised. On my high side here market participants revised upwards their expectations of how high interest rates are going to have to go in the United States. Let's get back to the United States here in just as a general statement before we look at nine point one
percent inflation. Are we asking too much of our central bank. We had a massive fiscal expansion. I guess we're trying to do a fiscal unwind of this pandemic. Are we just asking too much of our central banks today as an institution. I don't think so. I think we are asking for our central banks to analyze the economy accurately.
We are asking our central banks to keep in mind their primary mandate of price stability. And frankly I think in 2021 our central bank lost its way. It was talking about the environment. He's talking about social justice in a range of things. It was confidently dismissing concerns about inflation as transitory and it made mistakes in. Core functioning of a central bank including leading into highly expansive fiscal policies rather than accommodating them as our central bank did. So I don't
think we were I don't think we were asking too much of our central bank. But I think in 2021 our central bank led us down quite badly. And as a consequence they find themselves in a very very difficult position not least because they don't have the credibility that they once enjoyed given their repeated poor forecasting record. And I have to say that it's not something
that's been fully fixed. Therefore most recent dot plot. Right. Just stating that unemployment would get to 4 percent get only to four point one percent even as inflation came completely down. Seemed to me to be slightly implausible. And the fact that the most pessimistic person of the nineteen member open market committee was saying four and a half percent seemed to me to suggest a degree of highly problematic groupthink. Larry you've taken a victory lap among all on economics here with how far out front you were on inflation. I want to go back to a modest textbook of 1948 by a guy named Samuelson. And two years later one year later after the 1948 miracle of his textbook there was sky high inflation like the nine point one percent inflation we have now not once but twice. We came down into the Korean War and to an
Eisenhower disinflation and outright deflation. Do you have an optimism. We can move from nine point one percent inflation down relatively rapidly. I think it's pretty clear that there are some factors like what's just happened with gasoline prices that are going to point towards disinflation. But I think that if you look at core measures of inflation if you look at so-called trimmed mean a range of different indicators what they tell you is that this is a pretty pervasive expansion in inflation. And my reading of the experience of the last 60 years is that those don't tend to be reduced completely without significant economic slack. And I think if you look at the level of vacancies in the economy the ratio of vacancies to unemployment or the level of quits you see that we have a currently overheated economy. So we have some distance to go just to go back to neutral. You wrote
an initial paper with a guy named Martin Feldstein. This is a few decades ago to say the least Larry. He codified NBER is our measure of recession. And your colleague Jeffrey Frankel has done great work on this actually. How do we choose to define a recession and the magnitude of recession. The parlor game right now of recession I've never seen the guessing of it the gaming of it. Give us some clarity on how you define recession and the magnitude that we could see. I think the classic the classic
definition of a recession is a broad gauged multi month decline in a range of economic indicators activity. And that's something that the NBER makes a judgment about. There's a kind of crude approximation that many economists use which is two negative quarters in a row. I think there's a quite reasonable chance probably close probably 50 percent or a bit above that. We will in the first and second quarters have negative growth in both quarters. I don't think that is itself sufficient to establish a recession because it's heavily being driven by demand that draws down inventories and demand that draws in imports. But I think there's a real risk that we'll see it
through this year an even greater risk that we'll see it next year. I would say the odds are certainly in the far above half probably above three quarters of seeing a recession within the next two years. And I don't think there's any reason why it needs to be a recession like we saw in 1982 or. We saw during the great financial crisis. But I think it's not going to be a
walk in the park either. I would suggest is a kind of rough model. What we saw after the bubble burst in 2000. Larry Summers we've got to leave it there. And again as I speak to you haven't spoken to you in a while. Congratulations. I'm truly one of the great calls in modern economic history here questioning transitory. Lawrence Summers. Thank you so much. We'll be back with Wall Street Week in a moment. This is Bloomberg. This is Wall Street week on Bloomberg and Lisa Abramowicz here with Tom Keene and Tom. Next week is going to be a tremendous week with the European Central Bank in the forefront. It is setting a rock and a hard place and hoping to find some peace. I
just want to say to everybody who's joined us here with Greg Fleming and Lawrence Summers and David Bianco and Larry Covid. Lisa and I were sitting together and it looked like marriage therapy. So we got to set the setting. You're different. It was slightly more casual. I'm still numb from this week. I will read it over the weekend. And we will go to what our
colleague John Farrell John Farrell. He says This is the mother of all ECB meetings in which it is for people in America where it's like the lady that was with the IMF. She comes out. She does a press conference in that. No. This time's different. The ECB meetings are a huge deal especially because of guest on surveillance. This week was talking about how this year this time around it's not emerging markets. This time it's potentially dragging down the rest of the world complex just simply because of the crisis they face with grab guys. Well with the crisis they faced with negative yields et cetera. Next week will be a real. There's no one more qualified in the world to know that. Christine. Christine Legarde to say that it is E.M.
together with Jerome Powell together with Christine Legarde together with Bailey of the Bank of England. I'm not sure I buy the Europe only analysis. Did we do OK today. I think so because we're still sitting here next to each other. I guess at the therapy somebody e-mailed and said how can triple hold a guy in triple leverage cash to Wall Street. I don't know. We've been in therapy the whole time. This is Bloomberg.
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