Wall Street Week - Full Show 12/16/2022
Inflation easing. China reopening and Africa waiting, but all anyone can talk about is Samuel Bank then free. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers of Harvard on easing inflation and whether we're on our way to that soft landing chairman is in about the right place. I think we are in better shape than I thought we were. And Rick Reeder of BlackRock on the historic opportunity he sees in fixed income.
If I can lock in these yields, go a little bit longer without having to go out to tens or 30s. That to me is the sweet spot today. There was a lot of news this week for global Wall Street, but we found ourselves spending just about all of our time focused on FTSE X and its former CEO, Samuel Beckman, freed as its current CEO, bluntly told Congress what had happened. This isn't a sophisticated whatsoever. This is just plain old embezzlement. And some members of Congress, like Brad Sherman of California, said we should just do away with crypto currencies altogether. What is crypto currency here over the US dollar or other major currencies? It's right there in the name of no hidden money. My goal is to say enough is enough.
It's time to prohibit Americans from investing in crypto. President Biden convened a summit in Washington to deal with Africa, with Secretary of State Anthony Blinken, emphasizing cooperation. Partnership is at the heart. President by the strategy for Africa. Partnerships between the United States and African nations with the private sector and between our people. But Ian Bremmer of Eurasia Group said
that the United States has to work to catch up with China when it comes to Africa. The Chinese invest a lot more. But the African governments want to see the money. They need the baseline infrastructure. And so far, the Chinese have done a lot
more on the ground to invest. Secretary Granholm announced that the Department of Energy had made a major breakthrough in nuclear fusion. This demonstrates it can be done. That threshold being crossed allows them to start working on the things that are necessary to allow it to be marginalized and taken to commercial scale. And Elon Musk gave up his title as
world's richest man, at least for now. He's no longer the richest man in the world. If you look at Tesla stock, specifically, their market value now falling below five hundred billion dollars. But for all the drama, the big news
really came from the central banks, starting with the Federal Reserve. On Tuesday, the Fed got the good news that inflation was slowing faster than we had thought. Investors didn't think inflation was going to come down as fast as economists were forecasting. And now it's coming down even faster. And on Wednesday, the Fed responded by saying, well, not so fast. It's good, but not good enough to declare victory. The FOMC raised our policy interest rate
by a half percentage point. We continue to anticipate that ongoing increases will be appropriate. I wouldn't see us considering rate cuts until the committee is confident that inflation is moving down to 2 percent in a sustained way. And then on Thursday, the Bank of England and the European Central Bank raised their own rates, another 50 basis points each, with ECB President Christine Lagarde saying they won't be taking their foot off the brake anytime soon. We should expect to raise interest rates at a 50 basis point pace for a period of time. And the markets, well, as much as they
were encouraged by those CPI numbers on Tuesday, they were just that disappointed by the Fed chair's reaction. Stocks were down again for the week, with the S&P 500 losing just over 2 percent. The Nasdaq off two point seven percent, while the yield on the 10 year was down just over 9 basis points to end the week just under three point five percent. Take us through this combination of economic and market data. Welcome now.
Joanne Feeney, partner in Advisors Capital Management. And so now the site, Franklin Templeton, CIO of Fixed Income. So, Joanne, let me start with you. Did I detect just a wee tension this week between, on the one hand, the markets on the other, the Federal Reserve had just a little bit.
David, you know, we've seen this play before. The market gets all excited to see a data point and you think, OK, the Fed's finally going to ease off or signal that'll ease off and and then we get that bucket of cold water. The fact of the matter is, there's just a lot of work for the Fed to do to get back to that 2 percent target.
And they're going to keep rates elevated and continue to raise until they have a much clearer and broader signal. And when CPI print is not going to convince them that hard work has been done. There's just too much in terms of labor shortages right now driving wage growth for them to ease off on this effort to constrain economic activity. So so now the Fed has been fairly explicit. Why doesn't the bond market believe it? So, you know, I think that it's a question of what you call credibility. Is it credibility?
Does the Fed have credibility that's going to fight inflation or is it more that the market does not believe the Fed has credibility to stick to its guns in terms of raising rates? They're not taking the Fed very seriously, right. We are looking at what markets are pricing, both in terms of the peak Fed funds rate, which is not five, suddenly not between five and five point two five as the S&P is describing, it's below didn't change after Chair Powells, Q and A. And furthermore, the market's still pricing in rate cuts by the end of next year. We're looking at 45 for Fed funds at the end of next year. So, yes, the Fed has a problem. It's got its work cut out for it. Markets have been conditioned to
actually not believe the Fed when it says it's going to be really tough. So, Joanne, given this disagreement, if I can put it that way. What does an investor do? It does strike me that bonds are a lot more attractive at the end of the year than they were at the beginning. I think that you also make one point eight at the beginning year and we're up around three point five now. Yeah, there's no question that finally
investors can look to bonds to really fill an important role in their portfolios. Not only are they getting decent incomes off the bonds and that's allowing them to build more balanced portfolios so that they can both stay in equities to some degree and hopefully get that long term appreciation that they need. But now they're getting some decent income on on the fixed income side, which is a relief right now.
Real yields are negative because inflation is running ahead. But when you look to the longer term out, you know, two, three, four years, those real yields now look look positive and they're really going to help purchasing power for those investors going forward. So now there is a lot of volatility, though, in the bond market here.
There really is. There is a lot of volatility. And honestly, until we get to a stage where the market is. Market starts buying whatever it is the Fed is selling. I think we're going to keep seeing these rules, which are remarkable. If you look at 10 year tenure yields, which which I think over the month of November went at one point from 425 all the way down and then back up.
We've seen around 70, 80 basis points of moves, up to 30 basis points in literally days, 20 basis points in the last few. You look at these this level of volatility, it's almost too much. Far too much. And as I look in to next year, I think it's probably going to be a few months, at least maybe a quarter or two until we see the Fed having raised before we see some reduction in volatility. Nonetheless, you know, echoing what Joanne said when you were getting yields in areas such as high yield, for example, you're getting as much as 9 to 10 percent on low dollar price bonds. Certainly there are specific bonds, specific areas which look attractive, but I don't think I would go wholesale into adding risk. It's actually quite a nice time to be
low in duration and high quality in the bond market. Well, let me pursue that, if I could, for what it's about. And this is the end of the year. So we traditionally say what your
conviction trade going into next year. What's your conviction? Trade, given that volatility, the bond market? Oh, no. I think my conviction trade on fixed income overall is high. I think I like to stay.
Like I said, relatively short duration. High quality. I do like investment grade. And I think fairly soon into the new year, they're going to start seeing very attractive opportunities.
And within the first quarter, quarter and a half are going to see some good opportunities in riskier segments like high yield as well. Emerging markets look very attractive, too. So what about you? Do you take your incremental dollar put into bonds right now rather than the stocks given where bonds are? They're much more attractive than they were, as you said.
You know, we've already seen that happen a little bit. But right now, you know, it's not that the equity markets are particularly cheap. Volatility has been high. The bond yield is certainly more attractive. So we'll get a balance strategy at 70, 30, 60, 40 can do a lot for four clients. And so that incremental dollar really depends on the clients horizon. Obviously, a shorter horizon client had better be more in bonds at this point, despite that bond volatility that we're seeing and likely to continue to see while the stock market is in particular cheap at roughly 18 times forward earnings and those earnings likely to come down some more. There are still some very attractively
priced stocks out there, conservative companies that pay dividend, that offer dividends, that go up year after year. And that's another way of creating income for investors in the short term, even while equities remain a bit volatile. So if you can wait it out, you can get both the dividend income, perhaps well above the market average to ride this out and then still be position to have a portfolio on the equity side that's going to really help the portfolio appreciate over the next three to five years. Okay. So I said one quick one to you. I know your fixed income. But do you think the equity markets have really taken into account the decline in earnings, this coming? Yes.
So from my equity colleagues, I hear that essentially we're not look, we haven't seen major earnings downgrades. Now what I don't expect a major recession next year, some slowdown in the second half of next year is pretty much a given. So not true that that earnings downgrades happen factored fully. Okay.
Thank you so very much. Just another the. Franklin Temple and Joanne Feeney of Advisors Capital Management. Coming up, we're going to talk with Rick Reeder of BlackRock about what has already been an eventful year for markets and why he sees an historic opportunity, a fixed income. That's next on Wall Street week on Bloomberg. This is Wall Street. I'm David Westin 20, 22 has been a year
of change, change, and the Fed and other central banks pulling back support for the economy in the markets, change in the stock markets as they adjust to the central banks, changing the rate of inflation and the underlying economic growth. Take us through what we have seen so far this year and to look forward to what may come next year. Welcome back. Rick Rieger, he is BlackRock CIO of Global Fixed Income and head of Global Asset Allocation. Rick. Welcome back.
Well, the big news on global Wall Street this week was you got a promotion. You're on the global executive committee, BlackRock. Congratulations, sir. Thank you very much.
Lot more stripes and epaulets. So it's a talk to us about the change we've seen because there has been a lot. If you look back to where we were January 1 of this year, where we are now, it's really different, for example, from zero to three point seventy five percent, even higher than that, 4.5
percent on the Fed. Pretty incredible actually to go through having done this almost 36 years. And you say what were the years that were you had this sort of change, 2008, maybe still the biggest, but this ranks right up there. The top thing about you. We came into the year in March. The Fed was still doing QE and had the funds rate at zero. Now we've priced the funds rate at about 5 as a terminal. I mean, that's pretty I mean, that's
very extraordinary. And a year that you've never seen, nobody's ever seen, even in my long tenure in the industry where the bond market and the stock market all traded down. So your hedges, how you did portfolio allocation, change of leadership in the U.K. and all of the pension system dynamic
that a war that, you know, who thought that we'd go through a D globalization process and the impact that has on inflation, impact on fuel costs, food costs. I mean, this is extraordinary. And then this to. And the way I mean, think about that and the emergence from Covid, not emergence from Covid. Now do we or we start to grow? I mean, it's it is pretty extraordinary.
It felt like five years wrapped into one. So the economy has absorbed a surprising amount, actually, if you think about what's happened here. It can absorb what's going on right now. I mean, what are your prospects for the so-called soft landing at this point today? I think people underestimate how flexible, adaptive, innovative, particularly the U.S. economy is harder in emerging markets. You saw a year where the dollar appreciated emerging markets come under stress.
But I think people underestimate how darn flexible and you're seeing it play out in the U.S. economy. Think about when we emerged from Covid. All of a sudden people needed a TV, electronics, furniture, massive goods growing, saw jobs moving in the goods sector. Then people had already gotten what they
need to go. They didn't need another computer or TV. Now you shift to the service sector, growth in the service sector and you're seeing jobs, leisure, restaurants, hospitality, healthcare that are now. So it's pretty extraordinary. So can the economy withstand this?
Listen, this is a historic move up in interest rates, tightening of liquidity through the balance sheet channel. But yes, I think that I think, you know, that we've talked about in your show. I just don't know why soft landing is like landing the plane on a pin needles. It's you have an economy.
You have a savings rate that's still that's not good cheap leverage in the system. I've gone through 2000 to 2008. We had too much leverage in the financial system. Consumers, corporates, leverage is in pretty good shape.
So the economy has some a series of buffers alongside of it lets US economy slowing. Could we have a shallow recession for sure. But I think people underestimated developed economy, particularly the U.S. has this much more reflexive than people give credit to reconsider. The economy's resilient. How resilient are the markets? Because you mentioned one of the issues that we've talked about before, which is liquidity.
A lot of liquidity coming out of the markets, of the markets held up. Are they prepared for what comes next? So I'd say the markets are less adaptive and flexible. You know, I learned over my fear. There's a cultural dynamic around markets.
People don't like to lose money, but not in. Of course, they don't like to lose money, but it's not symmetric to making money. I've always found this. Markets go down five times faster than they go up. People like to protect what they've made and don't like to lose money. And when people think the prospects are they could lose more money, markets go down even faster. And it's pretty short. We witnessed that. And I always found that people buy on up
markets and sell on Democrats, that kids can't take that losing more money. Now, we're at a place today that if the Fed starts to come off the boil, which I think is the case, that now we're talking about rate volatility on the risk free rate on interest rates, that's going to come down a lot. That gives, you know, when you were there, two components, particular fixed income at any assets, a risk free rate, plus your risky rate. And we always think about whether it's debt equity. Where's my risk free rate? Where's my risky rate? But if you're risk free rate is moving all over the place and moving higher. You can't value any financial asset that if that stabilizes risk, premium term premia comes down. And I think that's a really big deal.
Are we going to have some fall into next year? Yes, I just think less than 22. If if the Fed policies and by the way, the ECB starts to tone it, the Bank of England, et cetera. Well, you talk about the Fed coming off the boil. It looks like at least are going to slow down the rate of increases. I'm not sure they're going to cut right away. Slowing the rate of increases. What are the economic numbers show us
about that. Because we did get CPI numbers out this week that a lot of people reacted very favorably. So it's really encouraging. By the way, we've had head fakes before. You know, we had it in the summer. We'd look like, OK, we're on the back side of and then all of a sudden it popped up again.
I don't think it's over, around, around what has elevated rates of inflation. You see it through wage stresses in the system. That being said, when we break down the component parts of inflation, you think about shelter, you think about food costs, use cars, supply chain, freight costs are all coming down. So you get you you take some comfort in that. We're on the backside of the elevated
inflation. You know, we've run some numbers that even if inflation in most products stays elevated 4 to 5 percent because of where energy is today, because of how much has come to worship, but worse to where it was because of house prices, shelter coming down. We still get in the high 2s and inflation by the middle of the year.
So you can live with that. And it's part of why I think the Fed, if the momentum is moving in that direction to a more normalized state, although elevated from history, Fed can pause. But you made a critical point. The markets are pricing the Fed to start easing in 2003. I don't think that's right at all. I think the Fed's going to sit with us
for a while and a restrictive policy may be in 24 25. You'll start not maybe I think 24, 25, you'll start normalizing rates back down again. But we're not going there yet. Recruiter BlackRock is going to stay with us, because when I talk about something he calls a generational inflection point on fixed income. That's next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin and we are back now
with Rick Reeder, BlackRock, and we talk about what Rick is calling potentially a generational inflection point for fixed income. So what is that generational inflection point? You know, I've been over this for. I've never been more excited coming into a year. Twenty three. First of all, 22 wasn't a lot of fun in a lot of the markets. But now when you put in perspective where we are for the last 10 years, the short end of the yield curve, the one to three year portion of the aggregate index, the benchmark for fixed income, the average average yield was one point 1 0 percent, 1 4 1 8 percent last three years of one point 1 0 percent. We're talking a four and a half now. So you've got an opportunity where you
can in fixed income, you can buy yielding assets and you don't have to tip stress around illiquid really deep down in leverage loans, really deep down in parts of emerging markets. You can build a portfolio investment grade credit. Some of the triple-A parts of credit card finance, student loan finance, et cetera. And you can create six to six and a half. That is we haven't seen that cash. It's been, I don't know, gotten since an 80s, 90s that you've seen those sort of yields by buying quality assets.
David, that is a critical moment. Without taking a lot of interest rate risk, without taking a lot of beta risk or I think a lot of convexity risk. And you think about what does that mean for equities was I mean, for private equity, if you can get 6 ish in high quality assets, even a bit higher than that. It means more. You've got to get higher numbers significantly or to take a liquidity risk, volatility, etcetera. It's a really big deal. Money is going to flow into fixed income as a result of it.
I want to come back to equity and private equity before that duration is their particular duration you're looking at that's more attractive. Yeah. So, you know, obviously with the inversion of the yield curve, it's been you can capture and this is part of the beauty of it. You don't have to take a lot of interest rate risk human so many times in my career. You've got to hold. Go out to the 10 year part of the 30
year part to get your yield curves inverted. You can stay in the front end if you believe, which I think is right. The Fed is going to pause. You get to a place where, gosh, I'm just
gonna try and clip that yield. What we've been doing and I've been on term other show that we've started states short. We've got a lot of cash this year. Cash has been our best performing
assets. A lot of you think about the financial markets. Now we can go a little bit longer. Can you go out to three years? Five years because the next evolution of the Fed will be easing again. I don't think it's still 23, 20. It's still 24, 25. But if I can lock in, these yields go a little bit longer without having to go out to tens or 30s.
That to me is the sweet spot today. Rick, you mentioned corporate investment grade. You mentioned possibly high grade credit card. What about sovereigns? So, you know, we've added a little bit of emerging markets recently. I think one of the big things that we didn't touch on last year was the dollar, massive appreciation dollar. Feds moving met, feds moving
aggressively, moneys flowing in the dollar, and not just not just in fund flows, but in terms of corporate spending, et cetera. I think the dollar is going to be more stable. I'm not I'm not ready to say the dollar is going to weaken significantly. But I think we're on the back side of real volatility. So parts of the emerging markets, Mexico, Brazil, Indonesia, you're getting some nice yield. And so I think you need to diversify a
bit more than historically because there's been stresses and it's still we're not out of the woods in a slowing economy. So you hold some emerging market sovereign debt. I think you can more so today. But, gosh, I sleep really well at night, knowing if I could buy 6 percent yielding assets that are high quality investment grade, triple a securitized. You know, how much GM do I really need? So we've been buying some, but not not not aggressively to follow on that. How much equity do you need? How much private equity, really? Because you were referring to that earlier.
When you get those kinds of yields out of fixed income, it makes it awful hard to justify equity. So, I mean, you know, I always value equities based off of obviously what the earnings growth is going to be. But I also need to know what my alternative assets suite is and companies borrow. And if they can't borrow at an
attractive rate, it's hard to do em in a cap ex buy back their stock. And today it's really hard. I mean, we're borrowing rates are so as an investor, it's symmetric. I'd rather just own that yield.
Listen, if I have a long term in anybody's portfolio, you're gonna have equities, you know, not looking at things for the next three months, six months, nine months. You need to have equities longer term. But if you said to me, the marginal dollar, you know, people talk about 60 40. The marginal dollar shouldn't be 60 40. The marginal dollar in this environment should be much more heavily weighted.
Let's get that yield in. And then the hurdle rate that I pay for illiquidity, if I got to lock up an asset for 10 years and if I could just clip 6 six and a half in a stable way. Boy, you've got to lift that hurdle rate to the mid teens to really want to take that risk. And so I think that's working its way through the system. Today's rates also put pressure on equities and also private and two other ways, don't they? No one discount rate applied to equities, which makes it less valuable. All things being equal and private
equity as they go out and they're trying to borrow money to make deals, it gets a lot more expensive than it has been in the past. So people. Estimate. That is a really, really big deal. It's your role over financing that is hugely and so many assets go into private equity, they get geared effectively. Think about the most acute form of that. Is anything attached to real estate, commercial real estate being the most acute form thereof? But Ramsay residential as well.
That's where you. It's built on gearing. And this is one of the things that I've always argued. The Fed has to be very careful about how aggressively you move it up, because that gearing that doesn't sit in the banking system the way it used to sits in the broad economy. And when you ratchet up, you've seen it last couple weeks, some of that stuff starting to break a bit.
And that's why the Fed has to be sensitive to what is outside the banking system. You may not even know what it is because you're not necessarily marking a market the same way you do in a public market. That's right. Until you've been to the rollover, your financing and then roll over your financing and or put if you're in a project, how much more cap X and I'm going to put in our project, how much more refurbishing of the building am I going to do if I'm not fully leased stuff? Those things are starting to make make it. You know, when when the economy was doing extremely well, rates were low. You know that lease rates were going to
expand. But now when you're going the other way, really, really tough. It's always such a treat you have on Wall Street. We thank you so much for being a trick reader of BlackRock. Coming up, we'll go through the week with our special contributor, Larry Summers of Harvard.
That's next on Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin, I'm joined once again by our very special contributor, Wall Street. He is Mr. Larry Summers of Harvard. And Larry, welcome back. We have to talk about what happened this week. Before we get to China, because last
week it was we were going to get to China. But first, what happened this week? We got the numbers in the CPI. We've got retail sales numbers and they tend to indicate that maybe inflation is not quite so bad. And then we heard from Chair Powell and he got up and said his mind doesn't changed. Was your mind changed as you looked at these numbers? Do you think maybe we're a little better shape than we thought we were? Yeah. Look, I think we are in better shape than I thought we were. But I think Powell is the chairman is in
about the right place. He's recognizing that we can't forecast the economy with precision. He's recognizing that it would be a terrible error if we were to fail to stop inflation in this episode. He's rejecting the talk about this being a moment to change the inflation target and he's maintaining substantial flexibility with respect to the future. I think that is broadly the right place for him to be. But I think we've got a very difficult challenge ahead of us, because I think the old adage about things taking longer to happen than you think they will.
And then they happen faster than you thought they could is really operating with respect to the forecasted recession. It does look like it's pushed back a bit in time, but there are reasons to think and this is what makes the chairman's job so hard that the economy could have a kind of wily coyote moment, that recession induced slower earnings could pop into focus for stock market investors with adverse consequences for the market, that consumers could deplete their hoard of post Covid savings. That there's growing reason to think that many businesses are holding on to workers, because in this labor short economy, they're afraid that if they were if they fire them or they let them go, they won't be able to replace them.
If that last thing is true, then it could all of a sudden change very dramatically if labor markets start to loosen. So I think the broad picture is where was I? I've been gratified to see the ways in which the Fed has caught up, but they've got very challenging judgments to make going forward. And I think they're in broadly the right place. The last thing, though, I would say is, you know, everybody is getting enormously excited about whether the dot plot is calling for two increases from here or three increases from here. This is kind of the narcissism of small differences compared to a year ago or a year and a half ago when the debate was three percentage points, 300 basis points off of where it where things have turned out to be. We're now in a much narrower consensus around judgments and we need to appreciate that. And it will be great if the Fed turns
out to be highly skillful. But frankly, with everything going on in the world, this is a case where, as Lincoln said, we really want lock in our generals and lock in our leaders because this could go a lot of different ways. Larry, you promised last week we would get to China this week. So let's talk about China. Last week we saw the Covid zero policy sort of changing. This week, we're starting to see, at least anecdotally, some of the concerns that the reports actually that a lot of China is shutting down. Some people are saying Beijing is like a
ghost town. So what potential effect does that have on the rest of us on the U.S. economy and the global economy? What should our response be? It's extraordinary the way mandatory lockdowns are now giving way to voluntary lockdowns with people staying home more than they were a few weeks ago.
I in China. I think it's going to be a very challenging six weeks ahead of us. I in China and it will be fascinating to see what that means for social stability. What kind of political ramifications that has. And it's likely to be a very painful
period for China. Two things for us to remember in the United States. First. Even if this works out very badly in China. At the end of the day, the Chinese fatality rate from Covid will be half of what it was in the United States. And so we need to resist any strong tendency to be feeling highly superior here.
Second, I. Precisely because this is burning so out of control. My guess is that it's likely like the fastest burning fires to burn out more quickly rather than more slowly. And so I think ironically, a consequence of this is probably to lead to some upwards revision on Chinese economic forecasts beginning next spring. And that's a factor tilting a little bit towards higher commodity prices and a little bit more inflationary pressure globally. But that's a highly uncertain judgment. And, of course, how all this plays in a
broader social sense in China will be very, very important. Last week, he brought a longer view with respect to Chad. Jean Beatty, that artificial intelligence, I will call it phenomenon right now. But this week, we have yet another development and that is fusion. We're in that Lawrence Livermore lab out in northern California. They actually managed to have a fusion reaction, whereas I understand they got more energy out and they put into it.
So last week, when you're trying it out, you said that had the potential to be as significant perhaps as fire or the wheel. Where does this rank? I think not remotely comparable. David and of course, I might well turn out to be wrong. Here's why. There's a fundamental difference between innovations that give mankind the capacity to do things they've never been able to do before. On the one hand, that's what A.I.
is. And innovations that give mankind the ability to do what we've done before forever cheaper. That's what fusion potentially is. And the first like fire and the wheel
are much more fundamental than the second. So I'm gratified by the second. But my read is that we've got a long, long way to go before this is available at scale. And I that the reports yesterday, reports this week actually reminded me of all the stories you can read in the 1950s when the first nuclear physicist vision nuclear reactors were being built about how energy was going to no longer be metered because it was going to be so cheap to produce. And it turned out that that didn't really work because there were capital costs that were transmission. There were all kinds of plague. My suspicion is that this is both less fundamental than something like a I or quantum computing and that it is ultimately going to prove to be quite a long way off.
But the only thing that's harder than forecasting inflation and unemployment is forecasting the long run of technology. So I sure hope it plays out to be even better than that. Kudos to the researchers involved. And it certainly does bear out something we've said on this show that if we ultimately succeed with respect to climate change, it's more likely to be because we find ways to produce clean energy cheap than it is because we make carbon extremely expensive. Thank you so much, Larry. Our special coverage, Larry Summers
always staying with us because we will be joined by Paul Tucker, the former deputy governor of the Bank of England, about his new book, Global Discord. That's coming up next on Wall Street week on Bloomberg. This is Wall Street week time David Westin. It has been a year when history has been made from Russia's invasion of Ukraine to the rise of inflation in much of the world to the withdrawal of massive fiscal and monetary support. Former Bank of England Deputy Governor Paul Tucker takes us through these issues against the backdrop of history and political philosophy, as well as economic theory. In his new book, Global Discord, Values and Power in a Fractured World Order.
And my friend and colleague Larry Summers joins us now in welcoming Mr. Tucker to Wall Street week. So thanks for coming, Paul. It's a fascinating book. I recommend it to everyone.
We can't go through it all, unfortunately, because there's an awful lot in there. But you really do set out a rubric, a framework for looking at issues, international global issues of economics, as well as foreign policy and certain ways of discerning what is going on. Let me ask a specific question. Maybe put it through that rubric and that is us China.
We have what, something called the subsidies trap right now where the second largest economy is overtaking the first. What does your approach tell us about what is going on there and what should go on? It's it's certainly a challenge of a rising state. But it's more than that. It's more than Second German Reich vs. Britain at the turn of the 20th century.
This China is a state which has a completely different ideology of governments and foreign policy. Something that most people missed in 2013 was a was the leaked infamous document nine, which contains seven modes. And actually it was a creed against against liberal democracy and everything that we stand for. Where this takes me as this is going to be a long, drawn out contest, a long, drawn out struggle. I think it will be a century or more more like Britain and France over the long 18th century. It will be everywhere and it will be in everything. If if China has a bad few years at some
point, because the fragility is in its economy, it has critical mass and everything, it will be back. I can quite imagine that the people in the West will be kind of thinking it's all over in a few years time, but in fact, that won't be the case. What it means for policymakers is that we can no longer live in a world, a world that both Larry and I inhabited in different ways, where policy can be can be approached in silos. A concrete example of that would be at
the moment in the United States. There's a debate within the belt, within the beltway about the debt ceiling. This is a foreign policy issue. Were were the US somehow to find itself in technical default? This would be a blow not only to its international prestige, but a blow, perhaps a small blow, but a blow nevertheless, to attitudes around the world, to the dollar. And yet the dollar is actually integral to the capacity of the United States to provide a security umbrella. For my part of the world in Europe and for East Asia, let me start by just congratulating you on your book. Keynes famously said that policymakers
are distilling the frenzy of past academic scribblers. You are the rare policymaker who goes on to become an extraordinary academic scribbler. Say something, if you would, about as you think about the in this philosophical way you lay out in your book. Give us a lesson from something. You think that if policymakers had understood all that you say, they might have acted differently in the past and after you do that. We'll get to a warning for the future.
OK. Thanks, Larry. That's very generous of you. An example would be the terms of China's entry into the WTO, the World Trade Organization. Given the design of the WTO. So the point I'm going to make marries two principles why is we should avoid wishful thinking? And the other is that we shouldn't just think it's a matter of state survival.
This is a matter of survival of our way of life and therefore of our values. So. The case about Chinese state owned enterprise subsidies to exports a decade ago now was explosive. Between Beijing and Washington because Beijing was providing subsidies to exports via state owned enterprises. But the appellate body of the WTO decided that actually they were public policy bodies and therefore it wasn't against WTO rules and therefore the US couldn't raise tariffs in response. The problem with this, deep down, was that what one would expect ordinarily is that in those circumstances, the case is decided. It's bad news for the US.
Some respects it's bad news for Europe. But Washington and Beijing then go to the bargaining table, perhaps with Europe, perhaps with Japan and others there, and they reach a kind of accommodation where they both give a bit and that becomes the new norm that is reflected in forward looking policy from the WTO. But that's impossible because every single member of the WTO has a veto. So the problem with the WTO is that its its basic design assumes that the people that drew it up were drawing up the perfect contract and that the the judicial body of the WTO would interpret it in an essentially classical liberal way forever. And that didn't happen. And the failure of U.S. policy, as I see it in this area, is that that possibility wasn't contemplated when the terms of of Chinese entry, when negotiated, because it was assumed effectively that economic liberalisation introduced by dunk trapping would lead to political liberalisation.
And that wasn't a crazy thought. But it was not sensible. It was wishful thinking to put all one's chips summit. So, Paul, let me pick up on that, because in reading your book and I agree with her, it's a fascinating book, really commanding book in this area.
What could we do better and different next time? Because one of things you're talking about is the legitimacy of some of these international arrangements. And if you get too far over your skis and away from where your basic values are and where your people are, you're in trouble. Many people and I think think that the WTO move with China did not work out. We thought they were going to come to us in who they were. They didn't. So going forward, if they're going to remain very different in their fundamental values, in a way they're in the system than us, how do we deal with them? I think one has to be imaginative about downside scenarios as well as upside scenarios.
It means in the trades there that probably for the near future, by which I mean in the next 10 to 15 years, the action is going to be in regional preferential trade agreements. It means it was a tragedy, by the way, that President Trump didn't go into the Trans-Pacific Trade Partnership. It also means if I go back to my old world, the world of monetary policy on financial stability, the West cannot afford another financial crisis, that when people are lobbying Congress to relax, this will relax that. And it concerns the resilience of the financial system.
Don't do it. You make an important point about the WTO, but a tragic sensibility needs to infuse these things. And the option for the United States of excluding China entirely from the WTO, leaning zero concessions from China on anything. And nonetheless, being bound by the commitment that it had de facto made to provide all the benefits of WTO accession to China through MF fan would also have been a highly problematic step in 1999 when that decision was made. And so I think your argument will require a credible alternative path rather than I just making the argument that there have been some adverse consequences that have followed on the particular agreement that was reached.
I think, you know, one tiny thing and one shouldn't get we shouldn't get too detail would have been to be tougher in the agreement about the respective treatment one day of Chinese economy as a market economy and the ability of even more importantly, the ability of China to self classify as a developing economy. There isn't an objective test for that. Essentially, economies can self elect, will self identify as developing. And you know, what we've learned both with Covid and I think with China is although the word exponential is one of the most frequently used words of our generation. Very few people actually realized exponential growth is is very, very rapid growth indeed.
And it was sensible to leave China with the option of self identifying as a developing economy, given the prospect of exponential growth. Unfortunately, we have to leave it there. But thank you so very much, Paul Tucker, former deputy governor of the bank, for coming to us with your really fascinating book that I think everyone has to take a serious look at. And that is global disorder. And of course, thanks to our very special contributor here at Walter Reed. Mr. Larry Summers of Harvard.
Still to come, maybe we all could use a little more nuclear fusion, our lives, or at least someone to make sure the energy we're using is worth it. That's next on Wall Street. I'm Bloomberg. Finally, one more thought, saving your energy.
The world got some big news out of the Lawrence Livermore labs in Northern California this week. For the first time ever. Scientists have managed to create a nuclear fusion reaction that generated more energy than it consumed. A fusion reactor on the grid would be a complete game changer. And former EPA administrator Christine Todd Whitman says it may be a step toward saving the entire planet. This is a big step forward and Fusion can certainly offer a major, major tool in the effort that we need to make to address the issue of climate change.
But as exciting as saving the planet would be, it's also pretty remarkable when we find anything at all that gives us more than we put into it. Take, for example, the case of Elon Musk. And I don't mean just the money and effort he's putting into Twitter and whether that will ultimately be proved worth it.
Remember all the energy his team put into showing us that the window on the cyber truck just could not be broken? Maybe that was a little too hard. That sure didn't give him more than he put into it or for that matter, those midterm elections. Sure, we managed to have a national election without insurrection, which counts for something. Democracy won because we had massive turnout across the country. But it costs billions of dollars to do it now.
Don't get me wrong. Free and fair elections are the lifeblood of a democracy. But it is not always clear that they generate more energy than they soak up. And this week, the same week we made nuclear fusion work, we had one of the biggest examples around of something soaking up a whole lot of energy and money and not coming close to returning what's being put in. I'm talking, of course, about Samuel Bank, Glenn Freed's FTSE ex, backed by so many celebrities.
Celebrities haven't been isolated or immune to the fallout. Details on the sports stars that have been entangled in the FTSE X mess and attracting billions of dollars. More than a million customers had funds tied up and more than three billion dollars were owed to 50 creditors. But wait, there's more, because mining for all that cryptocurrency not only uses time and money, it also is pretty much a black hole.
Soaking up energy, making the entire planet worse off. Every transaction that you do takes more resources than the transaction you did before. It is fundamentally an intrinsically an efficient. And that is a huge energy cost.
But maybe if we can get that fusion thing going, we can save the planet, though it probably comes too late to save Mr. Bank when freed. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2022-12-23 06:10
