Wall Street Week - Full Show 09/23/2022

Wall Street Week - Full Show 09/23/2022

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Ratcheting up the rhetoric over Ukraine and interest rates all around the world. This is Bloomberg Wall Street week. I'm David Westin this week contributors Larry Summers of Harvard on those rate hikes and whether we're starting to see some cracks when you get as far behind the curve as the Fed did. Did you really have to hit the brakes very very hard.

And Steve Rattner of Willett Advisors on the problem with equities our equity exposure is down to the lowest level it's been in our 12 to 13 years of existence. It was a week of coming to terms with a war in Ukraine that is not going away. As President Biden went to the United Nations to lay the blame squarely on President Putin all should see these outrageous acts what they are. Putin claims he had to act because Russia was threatened but no one threatened Russia and no one other than Russia sought conflict. And President Putin warned about just how far he is willing to go.

I would like to remind those who allow themselves to make such statements about Russia that our country also has various means of destruction which in some cases is even more modern than what NATO countries have. And when the territorial integrity over a country is threatened we will certainly use all the means at our disposal to protect Russia and our people. This is not a bluff. This week we also had to come to terms again with tightening monetary policy. Central banks around the world added a total of seven hundred basis points to their rates with the Bank of England going up another 50 Swiss National Bank up seventy five putting it into positive territory for the first time in almost eight years. And the Federal Reserve adding another 75 basis points with no suggestion that it is close to being done.

We've just move I think probably into the very very lowest level of what might be restrictive. And then certainly in my view in the view of the committee there is there's a ways to go. And part of the fallout from all that tightening is an ever strengthening dollar with all that means for markets and for policymakers. In the end it seems like the only currency that will sustainably win this currency war is the dollar. But what was good for the dollar was bad for just about every other market that there is with the S&P 500.

Give it another four point six percent on the week at one point falling below its June closing low before ending just above it at thirty six ninety three. The Nasdaq was off just over 5 percent despite a rally on Friday. And bonds basically melted in the heat of the Fed rate increase with the yield on the 10 year gaining nearly 25 basis points for the week while the two year was up over 30 basis points ending at four point two percent. To put this rather extraordinary week in context. Welcome now Christina Hooper. She is chief market strategist for

Invesco at Tracy Alloway cohost of Bloomberg's Odd Lots podcast. So welcome to both of you. Great to have you here about Wall Street. Let's start with you Christine. Is the sky falling. The sky is not falling. But markets are adjusting to very changing circumstances. If I said that right. Very changed circumstances.

What we are doing is seeing an adjustment that is very very significant because of what the Fed and other central banks are doing. As you mentioned in the intro is very very significant. This is the analogy I'd use if you're lactose intolerant. You have a half a cup of milk. It's a little painful if you have a gallon milk. It's extraordinarily painful for a few hours. And we just drank a gallon of milk and

we're lactose intolerant. Well to continue that analogy a little bit crazy we were told we're going to have to drink the gallon of milk. Why didn't we believe it. This is what I don't get.

So I think one of the reasons this week is so significant is because it really seems to me like investors have woken up to this pain messaging that Jerome Powell and other Fed members have been trying to transmit for many many months now. I mean we even had the Minneapolis Fed president Neel Kashkari come on and say pretty much explicitly I would like to see stocks lower. I was happy when stocks fell after Jackson Hole. Tighter monetary policy works through

financial conditions. They need financial conditions to get tighter. But for some reason the market has been reluctant to take on that messaging. I really think this week is sort of the

moment that everyone woke up. Now I'm a journalist and I'm not allowed to have official opinions. But I would say that anyone who still believes in the soft landing prospects they need to be getting worried. At this point the path to a soft landing seems narrower and narrower almost by Fed design. And as a journalist you've talked to a lot of you are saying something just like that. You're being a good reporter there. But Christina what did you want to say.

I was just going to say in fairness the Fed didn't think it was going where it's going. It has it's its view of inflation has evolved dramatically. If we go back to the dot plot from December of 2021 the median expected Fed funds rate for the end of twenty two was point nine percent. Now we're at four point four percent. So we've seen the Fed do an incredible turnabout in terms of its feels on inflation. So that's why I think we had the market reaction. We did not everyone expected it because

we didn't exactly know what the Fed was thinking. The whole purpose of Tracy Alloway is to get our arms around inflation which we have not had. We lost control of without a doubt. I think the Fed would admit as well. What is that going to take.

What is your reporting tell you about going to take. And do we believe the Fed is up to the task. Because as Chrystia just said they've had to change their. Theory here. Well I think you are starting to see

some signs of deceleration and I hate to do the sort of line by line CPI analysis. It's probably boring for everyone involved but there are some technical changes coming up to health care for instance that are expected to take some of the acceleration out of the inflation index. But I think the big issue here. Going back to the Fed and what Christina was saying is they've misjudged the lag between rate changes and the impact on the economy and they misjudged that going into the crisis or coming out of the immediate pandemic. The worst of the pandemic in March of 20 20.

I mean if you look at early 2021 CPI was still at one point seven percent. You can kind of see why they were a little bit sanguine about what was happening. Now they're raising rates and they seem very emphatic about doing it as quickly as possible. Which begs the question of whether or not they're going to misjudge the lag this time around as well. So the trick presented the story in the ISE is a dramatic enough but we're not in a vacuum.

We see some forms I think having pretty much around the world maybe the exception of Japan and China and China. But let's talk about what other places are doing. The UK had extraordinary involvement. We make up their interest rate at the same time then new government come in and say let's stimulate with cutting a lot of taxes. Well that is certainly adding to the complexity of the situation. And monetary policy is a blunt instrument. The best we can do is try to calibrate it but it becomes that much harder when you have other impulses. And so it's a difficult situation.

Now I will say that this kind of environment that we're in is rather unique. The World Bank came out last week with a big warning about how this is the most synchronised tightening among central banks that we've seen in five decades. And that was of course a stark warning about what could happen. And we're seeing it play out certainly in markets. I'm not sure if the bond markets get a vote but if they got to go back to the UK they voted pretty firmly on Friday.

What happened with the guilty was pretty extraordinary. It was absolutely extraordinary. And I think the biggest impact we've ever seen to a mini budget proposal like this and what is really extraordinary is to see the UK government basically unveiling the most regressive of tax cuts in an effort to boost growth at a time when the Bank of England is clearly worried about inflation. And the really worrying thing about today's price action was when we saw the currency fall while bond yields are spiking. That is a classic hallmark of emerging market crises. And we saw a bunch of analysts and investors make exactly that point. It's kind of crazy that we're treating a

developed market economy with a very very important financial centre like an emerging market. And the big concern now is it passes the buck or passes the baton onto the Bank of England to try to handle this. And then you start getting worries about fiscal dominance which again is a very E.M. thing to be saying about one of the world's most advanced economies. So Christine is the one winner. I'm not sure it's winning is the dollar. I mean the dollar is just on a tear and it just keeps going. Japan tried to intervene a bit maybe

help a little bit at the moment. Not sure a long term. Well. What is the strength of the dollar mean for the economy in United States and elsewhere. Well it's a good thing for consumers in terms of purchasing goods from outside the U.S. It's great for for tourism of U.S.

citizens abroad but it can be very very problematic for multi-national companies. The U.S. companies that derive at least part of their revenues outside the U.S. So we've got a lot out there. There's a lot at stake with a very strong dollar. And of course there are implications for all the other economies as well. So it's it's it's it's a difficult time

but not surprising given the kind of dynamics we're seeing and the kind of factors that have driven the U.S. dollar higher treasury. Any impetus to try to get it under control. I mean this was the thirty seventh anniversary on Thursday of this week of the Plaza Accord. Yeah I know.

She I try that again. It's a little bit different this time around. I think the dollar going into the Plaza Accord had appreciated by something like 40 percent. It's 10 percent now. Slightly different conditions. But that said I really think the dollar is kind of driving everything at the moment. And you know the market has taken on this mantra of the Fed is going to hike until something breaks.

We should probably caveat that by saying until something American breaks because we're already seeing things shatter around the world. Right. Japan coming in to intervene in its currency for the first time since 1998. What happened to U.K.

in sterling today. Euro going further under parity with the dollar. These are signs of the dollar coming in like a wrecking ball. The dollar is the weapon of higher interest rates in the US. And it's problematic at a time when much of the world is experiencing for instance an energy crisis and a lot of those commodities are invoiced and. Dollars. It's difficult but ironically it dampens inflation United States.

The stronger dollar. It's. Yeah. You know it's a privileged position to be in the US and to have the world's global currency but it is difficult for investors. I mean again to this point of the dollar kind of ruling everything. If you think back to inflation hedges

earlier this year it was mostly commodities and the strong dollar has taken a lot of the air out of commodities now and it's making it difficult for investors to hedge. Fascinating. Thank you so very much Tracy Alloway. Christina Hooper will be staying with us as we look for some shelter from the market storm for our investments. That's next on Wall Street week on Bloomberg. First the US federal government for the first time since Columbus set sail from Spain had to pay a double digit interest rate to borrow money from its citizens for six months and two days after Treasury Bills added this new chorus of how high the moon. The nation's banks began to lend their version taking the prime rate charged to the nation's biggest corporations to an unheard of 13 percent previously unheard of.

That is now you've heard it here. That of course was Lewis Brookhiser on Wall Street way back in September of 1979. That was when inflation was running at just under 12 percent. The most popular movie was Alien and the Doobie Brothers topped the charts with What a Fool Believes. One of my personal favorites still with

us our Christina Hooper of Invesco and Bloomberg's Tracy Alloway. Interesting way to pick on you from here on the debt side. Borrowing money at double digit numbers. We're not there at this point now but at the same time what is this environment we just described going to do for the asset of fixed income. Yeah. You know we're talking about financial conditions earlier.

And I think one of the weird things about recent market moves in history has been how sanguine the credit markets have been about inflation and higher interest rates. And I've seen various theories. You know today we actually finally saw leverage loans. The benchmark index down to like ninety three dollars. But even then eighty five is generally considered the distressed level. So what's going on. One theory I've seen and you know it's

kind of a sort of moral hazard argument but there are people who say because the Fed came in last time with the corporate bond purchasing program maybe that's one reason we haven't seen the market panic because they think if things get bad enough while the Fed will come in and it'll buy some bonds. Well last time it didn't even have to buy bonds. It just announces that it's going to buy bonds and everything is fine.

But I think people are looking for that pressure and you are starting to see some signs of it around the edges. So for instance we saw triple C rated junk bonds today. Take a little bit of a hit but not nearly what you would have assumed. Looking at stocks.

So what's your reaction to that Christine. Is any form of fixed income right now sort of a haven in this very tumultuous time of the markets. Yeah I mean first I have to say it all depends on your time horizon but. And so I believe very strongly that it's important if you've got a long time horizon you shouldn't panic in this environment. I mean let's look at fixed income floating rate but there's a variety of areas.

Investment grade credit looks good. I think we just have to recognize that we're going through this adjustment period. We're going back to the old normal. Presumably if the Fed doesn't cut rates again. Right. And that was a time that was fairly good for for equities and fixed income.

I think it's important to have Alton there too but it is not the end of the world as we talked about before. It's just we're going through a change when we're talking about fixed income whether it's loans or bonds. We had one story this week Citrix where they basically were borrowing a lot of money and the banks went out and syndicated that that would be just fine. They ended up losing something like 600 million dollars in the deal.

They had to eat that money. What happened there. Is that a one off or does that say something broader. Well to me this is sort of the tail end of that buyout boom and a lot of the credit market excesses that you've seen in recent years. And one reason why leverage loans in particular are getting so much focus right now is because if you look at which asset classes had the most going to say enthusiasm leverage loans would be one of them. You know we had concerns about the quality of some of those loans for a while. We had at various points in time U.S. regulators trying to improve the quality of the market.

And now as interest rates get higher a lot of that pressure lands on floating rate loans because the companies that took them out are going to have to start paying more to keep up with those benchmark interest rates. And that's why you have people who are well at Morgan Stanley for instance who are looking at the leveraged loan market as the sort of canary in the coal mine of how the market is viewing recession risk. But again we're not quite there. Eighty five is usually the level of distress. We are at something like 93 now. So further to go if you're really looking for a sign that the market is panicking Christine if that's fixed income what about equities. Does it make any sense to buy equities. Typically when the discount rate goes up

equities go down. And certainly we're seeing that right now in the equity markets. Sure. Well I do absolutely believe that unless you have a three or four month time horizon you should be keeping your equity exposure and looking for opportunities to add to it. Yes there is that adjustment period when when rates go up we do see equities tend to go down. But we also tend to see a recovery. It doesn't last forever. In fact during a whole Fed rate hike cycle usually by the end we come up with positive performance for equities at and leading the way is typically the higher valuation names that got. It hardest first.

So this is you know this is to be expected it's not fun but it is to be expected. The kind of behavior we're seeing given kind of dramatic increase in rates but that is not the end for equities. You might actually add at least selectively to growth right now. Absolutely. Is it coming out a bit faster than the others you think. I do. I do believe that for sure. Evaluations are higher there.

They tend to get hit hard. But but they're also significant growth prospects growth potential there at a time when the economy is clearly slowing down. So Tracy what do you see in other asset classes. And let me name two random cash and commodity cash. I mean cash is looking okay. Right now I guess you're only losing 8

percent per year versus what 20 percent on some other stuff. But when we're talking about cash I mean it's got to be in the dollar. That's the only thing that's really working at the moment.

Cash. We used to say cash is king. Now we say the dollar is king. And not only is the dollar king it is a king with a wrecking ball going through other asset classes. Before you said the very fact that the dollar goes up makes commodities go down in general and over time. And so that means commodities aren't so attractive to investors right now. Well that's exactly right.

And I think that's one reason why the recent environment has been so painful for a lot of people because think back to the beginning of the year. Commodities were seen as this inflation hedge a bit of a risk off hedge. You know if you're worried about what's going on with Russia and the Ukraine you can buy some wheat exposure by some oil exposure. You have a nice little offset to macro risk that shows up in the sort of headline indices that's not working anymore.

And I think that's one reason why the environment's been so difficult for investors. The only good news that I kind of see here is you know people have been having to deal with these really binary potential outcomes for most of this summer. You know does inflation stay high. Do we get the dreaded wage price spiral or does the Fed come in and raise interest rates bring down inflation and you get that knock on recession effect. I think the good news here is we're moving away from that really binary tale risky environment and we seem to be moving closer to that recession scenario.

I know I'm scraping the bottom of the barrel by saying recession is good for investors at this point in time but at least you know where you're headed. Well that's all we're looking for though is where my investments go north actually in this difficult time Christine. What we haven't covered is always alternative investments real estate things like that. We need to have exposure there. We advocate something akin to a 50 30 20 allocation and that would include in that 20 percent plus bucket a nice healthy exposure to real estate real estate income. You know clearly the more conservative real estate makes more sense in this environment.

I think there's a lot of concern that there's so much structural change going on that that office space for example you can't trust can't rely on in this environment. But there are a lot of areas that are not part of the economic cycle that haven't been hurt by the changes we've seen in terms of hybrid working self-storage student housing. They're all kinds of areas that are very attractive right now. Real estate sectors. I'm sorry. Go ahead. I was going to say I think offices might be a good hedge at the moment because if you think about you know the emanate boom kind of dying all the emanate bankers now get called back into the office because Goldman says business is slowing down or Barclay's says business is slowing down. You all have to come back.

Rents go up. I'm joking. Of course we're trying to be creative with the portfolio hedges. Last thought from your podcast you cover an awful lot of aspects of financial ISE. What's the most controversial suggestion you've heard made about investments.

What's the one that's just out there. I'm trying to think I'd hurt. I don't think this is the most out there but it's sort of a contrarian position that's on my mind. And it's the idea that everyone's looking for the war between Russia and Ukraine to come to some sort of end.

What if it doesn't. What if we just get a sort of Stacy scenario where Russia occupies some parts of Ukraine and that's the end of it. And the market seems to be looking for a sort of finite ending and I'm not sure we're gonna get it. Yeah. This week it's hard to see how it's going to end anytime soon. I fear.

OK. Thank you so very much to Bloomberg's own Tracy Alloway and Christina Hooper Invesco. Coming up we're going to take a look ahead to next week on Wall Street. Week on Bloomberg. This is Wall Street week. I'm David Westin.

It is time now to take a look at what's coming up next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Another pulse check on the Chinese economy in the coming week as September p.m. ISE a release likely to show the recovery continuing to struggle. This is the likes of Goldman Sachs and Nomura COP that 2023 GDP forecasts for the economy citing the ongoing Covid zero policy.

Meanwhile in Japan industrial production growth will probably slow dented by weaker demand from Europe. And Bloomberg Economics expects rate hikes in Thailand and India as central banks continue to fight the inflation battle. This week we see a Russia that presses ahead with its effort to annex parts of occupied Ukraine and will hold votes up through Tuesday votes which world leaders have called a sham. This as Russia further mobilizes troops into Ukraine. And what is the seventh month marker of the war coming off a third consecutive 75 basis point rate hike. FOMC policymakers will be out in force next week potentially providing more insight into the pace and length of monetary policy tightening. Speakers include Boston Fed President

Susan Collins Atlanta Fed President Rafael Bostic Fed Vice Chair Lael Brainard as well as the heads of the Cleveland Chicago San Francisco and New York Fed banks. Economic data next week include new home sales durable goods wholesale inventories and consumer confidence indicators. Earnings reports are due from Santos Micron Nike and Beijing. Elsewhere the Justice Department's

antitrust trial that seeks to block that joint venture between American Airlines and JetBlue starts on Tuesday. Meanwhile Tesla hosting a day that Elon Musk has said may include the unveiling of the company's humanoid robot called Optimus. And finally NASA once again will attempt that art in this one launch. The unscrewed mission has captivated the public attention as it will be the first major step in a plan to send U.S. astronauts back to the moon in 2025. Thanks to Juliette Saly Dani Burger and

Romaine Bostick. Coming up the times they are changing and not necessarily in a good way when it comes to equity. We talk with Steve Rattner of Willett Advisors about what the regime change in monetary policy means for equity investors. This is Wall Street week on Bloomberg. All good things must come to an end. And if we still had any doubts this week saw the Fed move even farther away from easy money as the central bank raised rates again and signaled a good deal yet to come.

What we think we need to do is to move our policy rate to a restrictive level that's restrictive enough to bring inflation down to 2 percent and the Bank of England followed suit. This is still the biggest box block hike since Black Wednesday 30 years ago while the Swedish central bank went even further raising rates a full 100 basis points. That shift in the entire regime of monetary policy reverberates throughout investments with rates on the 10 year and the two year treasuries shooting up and the dollar continuing to strengthen. You've got two year treasuries at almost you know highest levels we've seen in forever.

And where does that leave equities. They're certainly well off from their highs. It's never a good sign when you get these big rallies and then followed by three straight weeks of declines and you just can't seem to hold on to some of these gains. But does that make them a bargain. We have seen in the past that as we enter into recession value companies value stocks tend to have declines in earnings while growth stocks actually tend to hold up fairly well. Or have we yet to see the bottom when

everyone's on a race to the bottom. You know who can get more bearish. You can have more outlandish forecasts. I think I just told you what market psychology is right now. All right. Sentiment different ways to measure it. It's a global financial crisis slows.

And to take us through whether it really makes sense to be investing in equities these days we turn to somebody whose job it is to invest a substantial amount of money. He is Steven Rattner the chairman and CEO of Willett Advisors which invest the personal and philanthropic assets of Michael Bloomberg. He is our founder and majority shareholder. Steve thanks so much for being back on Wall Street week. There's a lot of being talked about equities particularly as interest rates rise. Give us a sense of where you are on equities right now as an investment and you're not a trader. You do it over the medium and longer

term. We're not traders. And I've always said to everybody that market timing is for fools. I think every smart investor successful investor has pretty much said that.

But of course we do have opinions about the equity markets and at the margin we do make tactical tweaks and shifts to try to accommodate our view. And I would say that we have been very very cautious about equities for some months now. Our equity exposure is down to the lowest level it's been in our 12 or 13 years of existence and we remain cautious and interest rates are the biggest factor in that decision.

So just take us through exactly how higher interest rates which we're having not just the United States but almost globally at this point. How does express itself in the value of the equities. Is that amount of the slowdown the economy overall less demand for business. Is it a matter of valuations.

How does it feed through to equities. Certainly there are effects on the economy overall. And one needs to think about it. But I I my observation over I don't know 40 years or so of watching equity markets is that they are keenly attuned to interest rates as a more direct transmission mechanism to equity prices simply because interest rates are at discount our discount rate on future cash flows. And it's not a coincidence that you've had these so-called unprofitable tech with the longest stating cash flows suffering the worst than this downdraft that is interest rate related in my opinion and some of the more near-term cash flow producing companies suffering loss. I think there's a very very direct correlation between the investment opportunity in fixed income and interest rates versus in equities. That suggests perhaps to some equities might make more sense than other equities. That is to say those that are generating

real profits today cash today may be a safer bet than those where it's really in the out years. In terms of this factor there's no question about it. And again you can see it in the numbers over the last nine months or so since the equity markets really started roll over which is which is the fact that longer dated cash flows the further out you get biotech startups growth companies have been hit the worse.

The Nasdaq is down a lot more than the S&P. Not a coincidence but you say have been hit the worst. There are those who really are fans of growth stocks who say you know what. They've already taken a hit. That what happens actually when you go into a slowdown a recession they take the hit upfront but then they come out of it faster and better. Well I'd like to see their evidence in support of that. And think again if you're talking about

an economic slowdown we could have that conversation that may come out of a different place. If you're talking about a situation in which there's no evidence at all that we're at the end of an interest rate cycle then I would push back. And in fact if you look at the market as a whole I believe it's true that the market has never really turned upward until the Fed has been done tightening. And again there's no evidence the Fed

has nearly done tightening. So the Fed has been pretty explicit there. They're going to keep tightening for quite a while. Do you have any projections as you think about your investments. Do you try to have any sense of how long that might be and frankly even with the terminal right.

Might be. Well we think about it more in terms of over under. If you look at the market the credit markets have been wildly behind the curve in predicting the Fed's behind the curve in the credit markets and behind the Fed in terms of their interest rate expectations. And and so if you basically say OK well the equity markets are taking their cue from the credit markets you can see why we had this sort of mini bull run. If you won't even call it that this summer when it looked like maybe interest rates were starting to plateau or something like that. But but we don't believe the credit markets are right. We think the credit markets are and have

been wrong about this. And therefore we think the equity markets therefore are mispriced relative to what is likely to occur even assuming the Fed follows through on what they say they're going to do. Let alone if they end up having to do more. That all suggests that equity is probably not the place to be right at the moment. At the same time people have money they want to invest. You have money you're responsible for

investing if not equities. Where does that mean you go into fixed income. Not while certainly not long duration fixed income. If you if you agree with what I'm saying which is that we're on the bear side in terms of the interest rate cycle then long dated fixed income even starting at the 10 year or the five year is not where you want to be. You want to be in something.

It looks more like cash. And as the Fed raises interest rates obviously you can earn more on cash. People say to me yes but I can't earn the rate of inflation while I get that. You know I'd like to earn that too but I'd rather not earn the rate of inflation than actually lose money. And that's sort of your alternative things that look more like cash.

What about things that look more like equities. Some people think that some of the high yield critically shorter duration look they perform more like equities. Is that more attractive. And that causes some of these yields are pretty high. Some of those yields are pretty high but again you have to say to yourself where could they go from here either because the tightening cycle proves worse than we thought or because the market is mispricing them relative to what actually is going to happen. I think so.

I don't think you can simply I think what you're driving out with some of these questions as well. Just because something's gone down X percent doesn't that make it cheap. And the answer is no. That doesn't make it cheap. It makes it less expensive than it was before that happened. That doesn't mean it's cheap.

I think I think we remain we remain constructive bullish whatever you want to call it on things in the commodity sector the energy sector we think that there still a fair amount of demand pressure there. There is demand destruction going on but there's still also a lot of pent up demand that is being expressed. But but beyond that I think our view would be to be cautious. As I said we are at our lowest equity or risk exposure that we've been in twelve or thirteen years. So let me come back to energy. I suspect you know the answer to this

question but the traditional energy has been doing rather well recently. Obviously there's a lot of demand for it. A lot of crises geopolitical crises a symptom. There are alternatives like renewables. Now those might be attractive.

There's a lot of money being put by the US government others into renewables. But do you hesitate on things like that because the discount factor you referred to earlier with the increased interest rate. That's a great question. First in the public market we haven't seen much and we don't invest directly in stocks as you know typically through managers but we haven't also seen our managers do with that much in public market renewables. We have become much more active and private market renewables because we are there we are starting to bend.

That cost curve is starting to bend and they are becoming more economic than they were a couple of years ago. The government programs help a lot. It's interesting to see investments that we've said no to before they pass the bill coming back after the bill with a different set of tax regime around it. And that makes these things work. And so actually for the first time we are really seeing on the private side renewable investments that actually pencil out and make sense as an investment not just as a policy tool. Also that is interesting. In the past you've not been there and

I've not been there. That's a that's a different place. It is. Yes it is. The curves are starting to cross. The government is helping and you are starting to see and of course as energy price conventional energy prices go up which is not something that the advocates of of climate change always appreciate. It actually makes the renewables more attractive and more investable. So you mentioned the government.

There are a couple of times. You know the government terribly well. If you spent a fair amount of time in Washington we've got midterms coming out. We've had a presidential election. Do you take that into account in any way shape or form the political risk issue about what that could mean for investors.

No honestly not really. Because first of all I'm not smart enough to know what's going to happen in November. And that's not that's. Then you're putting bets on top of bets on top of bets. And your probability of actually doing something smart is wrong. I would say that right before two thousand and 20 we did make some tactical shifts because of a view we had about how the election might come out. But that's a rare event for us.

It's just not that that's too many degrees of separation for it to really work. I think as an investment tool. So as you look at the portfolio that you manage and the managers that you manage for their portfolio what's the biggest risk upside and downside you look at right now. Well the biggest risk is I think I've made clear is is in my mind as interest rates obviously as you implied in your opening question that does have a feedback effect on the real economy which. And as you've also noted earnings expectations are coming down. They've been being ratcheted down regularly. And I think the analysts were way ahead

of themselves in terms of likely earnings. I still believe we're going to have a recession. How much of that is priced in. I don't know but it's something we are

well aware of. And so when you put it all together it's very hard to have in my mind a constructive and positive view on equities at this moment. I don't want to make it sound like I'm a promo bear. I don't want to sound like I think the world is ending. But I think and I'm an optimist and I'd love to have hope. And I have hope but I don't have I don't

have solid evidence to back up hope. Maybe you're an optimistic holder of cash. There's nothing wrong holding cash. Exactly. Nothing at all. Okay. Thank you so much. Really great to have you. Steven Rattner is the chairman and CEO

of Willett Advisors. Coming up we wrap up the week as we always do with our special contributor Larry Summers of Harvard. That's next on Wall Street week on Bloomberg. This is Wall Street week David Westin and we welcome back once again our special contributor Larry Summers of Harvard. So Larry obviously a very big news this week from the Fed.

What was your reaction to what you saw and what they did. But I also heard from them. Look I think they're moving in a necessary painful direction. It's clear that they're manifesting determination on inflation that they're recognizing that you don't stop a car that's going much too fast and completely comfortable that way.

I think that is all welcome. I still think they're too optimistic about how easy it's going to be. They are forecast that peak unemployment will be four and a half percent even as unemployment comes down even as inflation comes down to 2 percent I think is a very optimistic view. It was also very optimistic when it was echoed by Secretary Yellen. It's the right thing to hope for but we're not going to beat the level of inflation that we have now out of the system without some quite substantial dislocations. No one should take any satisfaction in

those dislocations or want those dislocations or want to see anyone unemployed. But the necessary medicine from where we are is likely to involve a recession. As Chairman Powell is being increasingly clear in recognizing. So I'm glad to see the Fed adjusting in the direction of seeing the need for more tightening and recognizing that unfortunately that tightening will have consequences that we've been talking about on this show for a year. I still think there may be a bit of underestimation of what's going to be necessary in terms of tightening but policy is now much closer certainly with current market expectations to the appropriate place. The markets now expecting that Fed funds will be four and three quarters percent next May.

Little wasn't much more than a year ago that they were forecasting that it would be zero or very close to that next May. That's a major change. But when you get as far behind the curve as the Fed did then you really have to hit the brakes very very hard. As you know Weller it's not just the United States. It's also for example Great Britain. And it strikes me there's a big contrast there. Certainly Bank of England says we've got a tightening that went up 50 basis points this week. In the meantime you've got a new government over there that's going for fiscal stimulus tax cutting.

And whereas at least the bottom station is getting out of the way of the Fed. What do you make of what's going on in the U.K.. It makes me very sorry to say but I think the U.K. is behaving a bit like an emerging market turning itself into a sub emerging market. There's nothing in the pattern of market response in the U.K. that suggests anything but fear rather

than confidence in the policy approaches being taken. It would not surprise me if the pound eventually gets below a dollar if the current policy path is maintained. This is simply not a moment for the kind of naive wishful thinking. Supply side economics that is being pursued in Britain between Brexit. How far the Bank of England got behind the curve. And now these fiscal policies.

I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time. I hope that at some point this policy package will be reversed or that somehow I am misjudging the situation. But I am very fearful for. And on the path that it is traveling. Well let's even go beyond the United States and the UK this week. Central banks around the world added 700

basis points to interest rates. So it's a global phenomenon. That's. The one thing that comes out of all of that is a newly strengthened dollar. I mean it sets record after record after record. What does that mean for the global economy. Look a a strong dollar is causing

inflation in the United States to be lower than it otherwise would be because it reduces import prices but it's pushing inflation off everywhere else. And because the dollar is the currency of international trade it's taking lubrication out of the system and it's putting extra burdens on countries that have borrowed. Because when they borrowed and for a foreign currency it's usually been in the dollar. So this is going to complicate macro economic management in many countries. There's going to be continuing a fear distress. Countries are attempting to counteract this with intervention as the Japanese did. I think we've mostly learned that when

you're intervening against the trend when you're intervening against the direction of monetary policy which is certainly the case in Japan your intervention is likely to create opportunities for speculators as it is to really be effective in changing the path of currencies. So I think this is going to be an issue that is going to be with us for some time. But I suspect for the period ahead countries are going to have to be adjusting to a very strong U.S. dollar. Finally we'd like to talk sports with you. Normally it's golf because you're such a

golfer at center. Let's talk about some professional football here particularly at the Tampa Bay Buccaneers. Tom Brady the legendary quarterback. This week we learned that Tom Brady is his own form of maybe quiet quitting. He's just gone to work four days a week.

From now on he's going take Wednesdays off. Is there a larger issue here in the United States economy of people not being willing to work hard. I'm seeing some evidence of that at least anecdotally. People may work a bit shorter hours when

they're working at home. People may be just a little more prone. In a economy that is so red hot and where you can get a new job I easily to tell their bosses where to take it. We've had this phenomenon for the last half year or so of terrible terrible productivity performance. Some of that's probably just an offset to the strong performance we had earlier. But it may be that people are just

working a little less hard. You know if everybody worked a seven hour and 45 minute day rather than an eight hour day practically that would be the equivalent of a 3 percent wage increase or equivalently a 3 percent decline in productivity. So I'm going to be watching what's happening to unit labor costs wages relative to productivity very carefully. But my suspicion is that this is an additional contributor to the inflation factor that hasn't fully been recognized. And I think some of it goes back to Covid and the long term consequences of the pandemic.

Some of this may be a byproduct of the very tight labor markets that we've had where workers have big increases in their leverage. Okay Larry thank you so much. Always great to have you with us as our special contributor on Wall Street. Larry Summers of Harvard. Coming up looking for high valuations in a tightening market. You may want to look underground. That's next on Wall Street week on Bloomberg.

Finally one more thought. Investments are going down the drain. The era of cheap money brought with it some pretty lofty valuations particularly when it comes to tech firms with valuations so rich that they were expressed as price to sales rather than price to earnings. With Google peaking at a price eight point nine times its sales.

Netflix reaching over 14 times sales at one point and Facebook making it up to just under 15 times sales. Well those wells of easy money are drying up. And with them some of the astronomical valuations all because the Federal Reserve like just about every other central bank in the developed world is committed to raising rates to get inflation back down toward that 2 percent target. We're not at that level clearly today. We're you know we're just we've just moved I think probably into the very very lowest level of what might be restrictive. But never fear.

There is one place where valuations are as high as a tidal wave or even higher. But it's not in tech. It's in wait for it. Sewers. Yes sewers home to Teenage Mutant Ninja Turtles legends of alligators and of course tons and tons of waste and water treatment. In a Bloomberg column Liam Denning takes us through a deal announced for the renewables company Next Era Energy to buy the sewer and water system of telemedicine. That's a small township 30 miles north of Philadelphia.

And the price on the price was one hundred and fifteen million dollars. Now that's not a big deal for one hundred and seventy billion dollar company. But take a look at the valuation. A whopping twenty one times revenue weigh more than Apple or Microsoft or Facebook ever dreamed of a next era executive promise. The town council that not all of that purchase price would be reflected in higher rates. We offered one hundred and fifteen million dollar purchase price and as I think it's very important to express that we do not intend to recover that full purchase price from the customers. But whether customers foot the whole bill or not.

Next era looks to make money on this deal. Rates for water are expected to ramp up substantially in coming years. And if you're a resident of two elements and there are definitely some remaining questions why are we selling this thing. This is a gold mine.

Why are you doing this. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.

2022-09-28 07:14

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