Wall Street Week - Full Show (10/22/2021)
More action than direction from earnings from bonds and from Chinese real estate. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers on tapering of growth rates as well as monetary stimulus. We're going to have a difficult inflationary dynamic. Former HP CEO Carly Fiorina on reining in the tech giants. And Rick Reader of BlackRock I'm getting supply and demand back in
line. It was a week filled with more news than direction as earnings came in sometimes higher than expected as in the case of Netflix described by its CFO. We saw an acceleration in our growth which is what we had been hoping for and expecting but it was good to see as we got into the strength of our schedule and sometimes a bit light miss. Tesla managed to beat on profit but disappointed on revenue. It was a week when Chinese house prices fell for the first time in six years and more developers missed on their bond
payments raising for some like Scott Miner of Guggenheim. The question whether China at this point is really investable. China is investable. The Republic of China just is doing a bond issue this morning 30 years at two point six percent. I mean if you want to tie your money up with China for the next 30 years for two point six percent then I encourage you to get out there and do it. But for many the most exciting news of the week may have come in cryptocurrency with the launch of the first ever Bitcoin futures ETF traded on the New York Stock Exchange. Shooting up to one billion dollars in assets in just two days something may not have come as a surprise to early
Bitcoin investor Kathy Wood of ARC Investments. It was a six billion dollar cap and now it's over a trillion and as much back and forth as there was this week in the markets. In the end the direction for those markets was basically up as the S&P gained about one point six percent for the week with nice gains for the Dow and the Nasdaq as well. While the 10 year yield climbed to one point 6 3 although giving back just a little bit at the end of Friday. But the big news the week from the markets just may have been the break evens which spiked up on inflation expectations and then eased a bit on Friday when Chair Powell suggested he is on the case after all to take us through what we should take away from the markets action this week. We welcome now Rick Rieder BlackRock chief investment officer for global fixed income and head of the global asset allocation team there. And Christina Hooper Invesco chief global market strategist. So welcome to both of you. Christine let me
start with you. What we saw with the equities as it was basically a good week for equities. They've clawed back what they lost in September basically. What's driving it. About earnings right. We went into the third quarter with a lot of fears and they have not been realized that thus far. In fact what we've seen is better earnings positive earnings surprise
than the average that we've seen. And certainly it's been helped by some high profile earnings reports that have driven up the averages for the overall market. But this is certainly a good environment thus far. Now only 23 percent of companies in the S&P 500 reported thus far. But but it's been a good good season so far. So Rick what about it. I mean we have seen outperformance thus far at least about a quarter to weigh in on the earnings. Are there any clouds on the horizon. Let me ask what inflation specifically. Because when those break even spiked up around Thursday late Thursday into Friday the concern
took a hit. Should we be worried about what's going on with the inflation prospects. So I mean I think it's you know I think inflation is it is a tricky concept because it's you know people focus on one number. There are a number of crosscurrents in the labor dynamics are real. And it's the hottest job market I've ever seen in history. And it's not going away anytime soon. There are not enough people when you look at the amount of hiring going on from Amazon to Wall March from the biotech companies technology generally. So labor is going to continue to accelerate the cost of labor. It is going to continue to accelerate and then energy some of the commodity infrastructure. It's hard to get the CapEx ex to rebuild that in a short period of time. So some of those stresses are real and the markets are going to focus on it. And then how the Fed addresses that I
think is going to be important agenda in the year which you're Powell said and part of why you're seeing the yield curve do it. It's doing what it's doing and part of why inflation came off the break even came off a bit today is you've got a Fed and by the way not just the Fed of Bank of England and some of the emerging market central banks that are going to try to address it. So it's worth keeping an eye on. It's definitely one of the risks that are out there. I think a lot of it David is the fact that it's coming from supply more than anything else today which is a really big deal. It's inventory draw downs and the amount of supply not being ample enough for a lot of products. It's driving price pressures higher. So Christina what about that supply problem we hear about every single day and one industry or the other. Are we seeing it show up in their earnings at all at this point. Is it again a cloud on the horizon for the future earnings of some of these companies. Well it's certainly showing
up but mostly it's about worrying about the fourth quarter and beyond and so already what little guidance we've gotten for the fourth quarter is relatively negative. And I think that's likely to continue. Supply chain disruptions should be expected to last for a while. I mean we've gone through an extraordinary economic disruption. This pandemic has caused all kinds of issues and they're not going to be worked out overnight. So we have to expect that this will persist for four months. So what about the
pandemic. I mean where we can't get around the pandemic it is a lot looming issue out there. But is it an upside risk or a downside risk for corporations and corporate earnings at this point in markets for that matter. So you know I would say first of all you know the anticipation is that we're largely on the back side in terms of the real stress around around Covid. You know hopefully that is the case. There is still you know in areas like transportation leisure hospitality there is still
some concerns about how quickly that people are willing to come back. But I would say generally that we are on the back side of it. You're seeing that you know the economy by the way that operated extremely well through it and that is flexible enough to adapt. So it is clearly one of the big risks. I think you said earlier in the show China's certainly a big risk. And so there are definitely some things to keep your eye on. That's one of them. But I think at the end of the day I think we're seeing an economy that's flexible adaptive enough with enough ingenuity and innovation that the economy generally will work through it today assuming it's not a significant outbreak. Christina Rick took us right to China which is something I did want to ask about because we were surprised delightfully surprised that everyone at least made that one dollar bond payment. They were
wondering about that at the same time. We did see housing prices and try to come off for the first time in six years. How big a risk is China or is there an upside surprise potentially there. I think there is upside potential. What we keep hearing over and over again this mantra that China is on investable says to me that there are some opportunities there that there is some mispricing going on and that if one has a long enough time horizon if one is willing to wait this out they could be very pleasantly surprised with China. Clearly there are a lot of reforms going on but I think we have a better handle on the
areas of focused by China right now and that that certainly helps. And clearly what China has done specifically with the property market has been somewhat calculating. When we think about Lehman and try to compare ever grant to Lehman I think it's it's incorrect because Lehman is a situation where regulators were asleep at the wheel. This time we had regulators focused on improving the situation in the property market and creating casualties like ever grant. So Rick I think it's fair to say you might well say you can't get around China if you're an investor today. You've got to deal with it one way or the other. Right now do you think the risks in China are greater today than they were a year ago. Less or about the same. So I'm
Atlas and I think the uncertainty is higher. I mean particularly you've got an economy that's decelerating pretty quickly. And you know our sense is that most of that is temporary through the third and maybe into the into the fourth quarter. So anything that is higher the regulatory dynamics that have played out you know the uncertainty around actually seen in gaming you've seen an education you know in some of those and the property sector some of the reaction function has been unpredictable. And so you know do is risk gone up. I think so. And I think listen I think general platitudes of I'm going to invest in or not invest in it or particularly not invest. I think as an extreme I think it's Christine Assad. You've got to think about Risks award how much
is how much and scale your positions appropriately and where do you have upside convexity. Some areas but it's just not worth taking the risk. And in China today. But I think I think you know having some patients where there's convexity upside listen I think that I think given the number the other 26 percent of the unicorns in the world you know real technology is developing in China to be able to tap into some of that you know with some patients and some staying power I think makes some sense even though we're at what is probably a riskier period of time for investing in China because they. One last one to you. So a risk
back in the United States and sell it. Regulatory risk or tax risk here at the end of the week it appears maybe they're being able to figure out how to pay for all those things. They want to wash it without increasing the corporate rate instead having something called a billionaire's tax. Not sure what that is. Other markets constrained by the threat of that tax. And therefore might there be upside if it goes away. I think there is the potential for upside. I think at least some of this has already been priced in. There has been an assumption that we're going to see taxes go up. And now we're being presented with such a level of congressional dysfunction that investors and corporations might be able to have their cake and eat it too. Rick do you agree.
Listen I mean I think there's a number of things you've got you've got to focus on today around around some of these dynamics taking place. And players say I think each one of the meets that needs to be taken independently because there's a lot of idiosyncratic dynamics there today. Krizner Let me ask one more maybe an unfair one. What about these facts. I mean we had a flurry of activity around for President Trump's spark. Is this really just market froth. Is there something deeper there. Well it's really interesting that you asked that because not only did we see sparks really have a very a week of wild popularity but we also saw the same for crypto currencies. So I think it's certainly emblematic of some froth out there. But I also think it's clear that investors are looking for returns and they're looking for risk assets. And that suggests to me that stocks have longer to run. OK. Thank you so much. Always great to have you with us as Christina Hooper of Invesco Rick Reeder
of BlackRock will stay with us as we turn to the question of fixing that supply problem we have particularly when it comes to workers. That's next on Wall Street week on Bloomberg. This is Bloomberg Wall Street Week Fund David Westin. Whether it's transitory or not there is no denying that we are seeing inflation and then it's caused at least in part by supply. They can't keep up with demand whether goods of services or of workers. The question is whether that imbalance is going away or will be with us for a while. Rick Reeder of BlackRock has taken a hard look at the numbers. So Rick we hear this. I was going up to a Halloween. You've talked about that the goblin of demand
destruction. Are we facing demand destruction. So in some places there is. I mean pricing companies have what is extraordinary pricing power today you know because the demand function economy is so strong. I mean we're looking at some numbers as you were saying you know you think about during during this two year period there had been almost two year period of Covid where consumers have actually underspent relative to what they have historically been Mark Gurman outside and underspent. I took that note. We took those numbers and looked at it relative to the 2 trillion stimulus that came in.
The demand is extraordinary. That's out there. But companies now have pricing power and you're seeing prices move significantly higher. You're seeing places like energy where there's a supply demand imbalance a significant proportion driving energy prices higher. So it will denigrate some of this demand you're seeing in housing very clearly that that market tends to slow down people who people stop buying houses just slow down for a period for a period of time. That is some demand destruction taking place some parts of consumer durables when you get significant price increase because supply chain shocks or energy or input cost shock. So there is some demand to get denigration. That being said you
know I think what happens over time is that some of this inflation starts to come down some of the supply chains reopen you'll get CapEx you're seeing rig counts go up. You're seeing productivity increases as an energy field bring down some of that inflationary impulse. Similar what the Fed has described. And I think the demand is incredible and will continue. But there is definitely some people describe as stagflation I think is is missile oriented. The demand is tremendous. But no doubt people will hold back in some areas because they anticipate prices coming down. And it's not just of course for goods and services also for workers. I mean because we know a lot of job openings are out there. It's come down a little bit. It's still up near record levels. What about that. What's going to correct that situation.
David I mean I think I've studied this back from World War 1. I've never seen I don't think we've ever have had a hotter jobs market. And I think you know you look at just the sheer same magnitude of the hiring the Amazons the Walmart's hundred thousand hundred and fifty thousand jobs for people they're looking for to fulfill these roles. And then you look at biotech and you look at technology I think reading through extraordinary thinking to see historic levels of low unemployment because it's just not enough people that are out there. And it's interesting. I watch what's happening in hospitality restaurants which is are
oftentimes the frictional job that's out there tends to be not the highest paying job. And I think it's hard to bring a lot of those workers back because there are so many jobs available in other areas. So I quite frankly I'm not watching the payroll data as closely as I am some of the job openings data that jolts data et cetera. And
it's going to be high for a period time. Either way you see more people retiring recently and that's taking a lot of people out of the workforce. So I think I think there's a supply of human capital that shortage that's going to be there for a for an extended period of time. It'll keep wages buoyant. And by the way not just direct wages but benefits and other other forms of accommodation to workers that are going to be I think historic. So is it work. You say you pay more attention this point to the open jobs than say unemployment. You're in good company because the San Francisco Fed is you know did a study on this and
basically said instead of looking at unemployment when you figure out if there's labor slack when you're at addressing the question of potential inflation you should be looking at the ratio of unemployment. Tell job open jobs if you look at that. That might indicate we may have some wage inflation coming. Totally agree. And by the way I also look at quits to layoffs. So you look at the number of people why are they why are quits the layoffs at historic highs. It's because mobility job mobility is at an extreme level because there are so many jobs available that paid higher wage or better benefits etc.. So I
think those metrics are much more important today. And so you know looking at the whole suite you know people say my God you know like last month that was a slower jobs number. The economy must be slow. It's just actually absolutely misplaced. It's the demand. It's high. It's trying to get that supply moving into the right place. I think you see more and more people coming a come out of retirement. B join the workforce. And by the way it's missing that the benefits that people received you know that expire largely expired. I mean an immense number that expired in August September. And so that'll cause some
re-entered in the labor force. But there's still not enough people available for them for the job. So I'm watching those openings and equates to layoffs and a series of those metrics to see where we're going. But there's no doubt in my mind wages will be we'll be we'll be strong for a period of time. And this all necessarily leads back into questions about rates as a practical matter. And you've said you expect nominal rates to go up at the same time. With inflation we're talking about real
yield is really staying surprisingly low. How concerned should we be about. Because I've read some macro economics that say if you have real deal really low it's hard to have the productivity gains. So listen I think looking at real yields exclusively as is is an archaic concept in a number of ways. And less real yields are moving real rates are moving to extremes. Like you go back to the 70s you had inflation you had to have real rates that came down significantly. Listen I think there's something that's really important. I look at the company's return on invested capital versus their weighted average cost of capital. That drives financial transmission that drives investment. And today
companies return on invested capital is extremely high. You're seeing companies for 15 20 25 percent. Our return on equity and they're weighted average across the capital is really low. The cost of equity because I know how the stock market is across equities cheap and the way they finance themselves the real rates that the Treasury market trades that it's not really relevant it's where they finance themselves. And today on the debt and the debt market and the equity market there's a historic bid for yield in the market that's not going away anytime soon. Somewhat because of demographic. It's not because
of what the Fed did. So as long as that weighted average cost the capital stays reasonable and we think it will. Rachel move up a bit from here. I still think front end short end interest rates are going to move up a bit. But boy as long as companies continue and the demand continues to be what it is in the economy I'm not that concerned about small moves in real rates. You know listen if inflation moves dramatically higher and the nominal interest rate moves significantly higher forcing up companies cross the borrow. That's significant. But I think we're far far from that. So Rick you invest an awful lot of money on behalf of a whole hell of a lot of people. Give us some investment advice here. I'm like gonna ask you specific stocks or bonds but tell us about what we should do with all you've said in terms of investment. Second because you're on both side
you swing both ways. You heard it here right. You handle both the fixed income and the equity side. What does all that tell us about for example the balance between fixed equity and I think fixed income sorry and equities. So first off I think you got to look at companies operating leverage and think about what this means or I want to be a lender. I want to buy their bonds or buy their stock. So what happens when when you get inflation higher and if companies have pricing power in their business and they can price it through many of their expenses are fixed. Do you think by design long term leases that's a fixed expenses not subject to inflation a number of their senses are fixed. What happens is that you get pricing power and some portion of your expense is fixed. And so all you're doing is your variable costs go up. You're actually
benefiting. So meaning what do you do with all that. Equities are a whole lot more attractive there. And you know given what we described around around real rates are historically low. They can move up a bit and inflation may push interest rates a bit and the Fed pulling back a bit. And I think to raise rates in 2022. And so you know your return on a lot of the fixed income is not that interesting. Some of the credit markets some of the real estate markets commercial mortgages residential mortgage financing asset backed financing. That's interesting. If you get enough spread and there are some places to do that today. But otherwise I think equities make a whole lot more sense. I think
the equity market is going higher and then you hold some cash. And then in fixed income where are you getting enough yield to me that makes sense relative to where where interest rates where the risk free rate is where the treasury rate is. And there there's still a number of places to do that. But I will tell you your returns will be driven from equity. Private equity venture capital. And that's where I think the real upside is over the next certainly over the next year or so. So I just want to come
back and hit one point here. As you said overall it doesn't look like fixed incomes that are attractive but there are sources. You said credit and it was a high yield. Where were the opportunities. You think the. A fixed income. Yeah I mean not to get too nuanced around where around specific areas but places like the European high yield rates have backed up significantly recently and credit spreads have backed up. So there's some opportunities there. I think the high yield market generally because rates have moved up and and in high yield assets have cheapened up somewhat less. I think there's some opportunities in high yield. The more interesting place for us today is actually to finance you know it's some of the less liquid assets
in residential real estate commercial real estate where you can actually if you're willing to take some risk and a bit of illiquidity that's been more attractive. Rick it's really great to talk with you always. Thank you so much sir. That is Rick Reeder of BlackRock who does invest an awful lot of money on behalf of an awful lot of people. Next year. Coming up we'll take a look at the week ahead on global Wall Street. This is Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin. It's time now to take a look at the week ahead on global Wall Street. Thanks David. The Bank of Japan's board meeting is the big event in Asia's week ahead.
The chances of a policy change and next to zero. But the focus will be on its latest outlook on growth and prices on the economic front. Is China's industrial profit data it likely picked up in September. On rising factory gate prices and a lower year earlier base South Korea reports third quarter GDP. It will likely show the South Korean economy managed to post solid growth despite a virus resurgence and strict social distancing measures. We'll also get inflation rates from Singapore and Australia. And earnings season continues with the likes of Samsung Sony Yum
China and Australian retail giant Woolworths updating the market. Well the week kicks off with more earnings. We have the big banks UBS as well as HSBC. Also later in the week we have the U.K. budget and an ECB meeting. Three big things that we're watching next week. First of all we want to talk about U.P.S. are going to be reporting earnings on Tuesday. Supply chains of course continue to be in focus. And of course the pricing power that these companies like U.P.S. like FedEx have and delays again during this holiday season in a shipping related costs that we all might be experiencing. Management though saying that despite rising labor costs they are on track to meet their 2023 financial targets. Speaking of earnings while
sitting look at big tech next week Facebook Google Microsoft and Twitter all reporting Google and Microsoft has been some of the big outperformance on the year. Twitter and Facebook have been underperformers all as we head into those earnings season and finally want to change it up and take a look at some of the economic data that we're looking at next week. The big one that I'm watching is the P C E deflator. That of course is the Fed's broad inflation measure looking like still inflation going to rise about three point seven percent in September year over year. Certainly a lot going on. David back to you. Thanks to Julia Danny and Taylor. Coming up the power and responsibility of huge social media companies like Facebook. How do we get the best of what they have to offer without the worst. We talked with former
Hewlett-Packard CEO Carly Fiorina. This is Wall Street week on Bloomberg. Two point nine billion. That's how many people use Facebook every month. Well over a third of the planet. And to hear Mark Zuckerberg tell it the social media company he started to keep track of friends in college is using its enormous power to do good for most of our existence. We focused on all the good that connecting people can bring. But as former HP CEO Carly Fiorina points out with great power comes great responsibility. What makes Facebook different is their dominant control over people's lives and in our economy. And a growing
number of people find Facebook falling short such as former Facebook product manager Francis Halligan turned whistleblower. They can't protect us from the harms that they know exist in their own system. It is pulling families apart in places like Ethiopia. It's literally fanning ethnic violence. It's not just about harmful content being spread. Former Goldman Sachs CEO Lloyd Blankfein flags another risk looking through it from a macro point of view. You don't want to let you pull these pounds of high concentration of economic power and influence get into play. So I'd always thought that the tech industry was kind
of in some ways like financial services on steroids all of which leads lawmakers both Republicans and Democrats to say there has to be more regulation. With Senator Elizabeth Warren of Massachusetts calling for Facebook to be broken up break them up break them up. When we've got lots of competitors in this market no one dominates in that same way. So how can we keep the best of what Facebook and other social media giants have to offer and leave behind the parts that don't make us stronger. They might even make us weaker by stifling competition. Carly Fiorina has devoted her career to getting the very best out of tech rise to become the CEO of Hewlett-Packard.
She is the founder and chairman of Carly Fiorina Enterprises and Unlocking Potential. And we walk her now to Wall Street week. Welcome Carlos. Great to have you with us tonight. Can we divided up between content regulation on the one hand and the economic power of the other. Does that make sense. Actually I think it does because if you think about content for a moment and content in particular that harms young people which was the subject of the whistleblower's testimony then we have actually a fair number of tools that we may not be using. Look Facebook isn't the only company that delivers content or wants to deliver content to young people. That's harmful. Think video games alcohol cigarettes junk food sugary drinks et cetera et cetera. And the way we've handled that in the past is either
by limiting the availability and the accessibility age limits for example or parental controls or we regulate information. Here's what this does to you. And I don't think we've used either one of those tools particularly aggressively or effectively with big tech. And I think we need to look at it. That's quite apart from breaking them up. But let's get some information out there and let's control availability accessibility which is of course why people want more transparency from Facebook because they don't understand how kids are accessing this or whether parental controls work. So
let's pursue that just for a moment because we can't get nervous about the First Amendment. But what you're suggesting is before you start saying what you can put in terms of substance on the site you're saying who gets access to it's a little bit like when you put brown paper wrappers around the dirty magazines in the back of the olden ISE and drugstores and that that doesn't raise the same First Amendment concerns. Well exactly. And I know it's not a perfect analogy but let's look at alcohol and cigarettes just for a moment. Harmful to kids. What did we do. We said you can't buy them if you're below a certain age. And anyone who tries to sell them is going to be liable.
We also said that there's lots of information that has to be provided about the product on the product to warn kids and parents. And we're not really doing that with Facebook or even you know this incredibly popular show Squid Game. Now there's all this information coming out that children under 16 shouldn't watch it. And check your parental controls somehow. We haven't done that with tech and we ought to. So that's the substance of the content side. What about the economic power issue and the notion that particularly when it comes to search it comes to advertising things like that there's enormous concentration among a handful of really small handful of the biggest social media companies. Yes that's absolutely right. I would note that when Microsoft
was the big boogey man of Silicon Valley and the big scary big tech company in the late 90s early 2000s and there was a lot of hand-wringing about regulation what ultimately worked better than anything was competition. And so I do understand the argument about breaking them up. However let me say this. One of the things that we have not done a good job of is force disclosure. That was an interesting second whistleblower that came out today or late last night. And this particular whistleblower went to the S.E.C. and said you know Facebook is not disclosing to shareholders the risks to the company of all the things they are doing. I actually think the board of Facebook and shareholders of Facebook need to be very focused on risk. I don't want to get into the weeds here but there was a late 90s case on Caremark
that established that boards are responsible for overseeing management around the risks in a company. There are clearly huge risks right now to show Facebook shareholders. The board is kind of meaa. The dual class shares mean that Mark Zuckerberg called enormous power but the S.E.C. is a regulatory agency that can demand fuller disclosure of risks of algorithms on behalf of shareholders. And I think ultimately someone may take a shot at the board of Facebook. Carly I wonder what you think about the structure of potential regulation because there are those who say we should have a whole new agency actually in Washington specifically devoted to this question. Right. It's sort of like a new FTSE
specifically for online. Some people even go so far. Tom Steiger goes so far as to say we should regulate the way we used to do airlines and still. Utilities we should set rates. Well I'm not willing to go that far that we ought to set rates. But I do think the notion that perhaps we need to rethink the regulatory framework for something like Facebook which didn't exist you know 15 years ago we didn't even imagine it 20 years ago. And now Facebook is talking about the metaverse. And virtual reality is clearly something that we don't really know how to regulate. So I'm prepared to say that's a reasonable
point. However I would say that we are not using the tools we have. What is the board's liability. Have they overseen management with regard to risk. I would argue they have not. This independent advisory board. Who are they. They were all appointed by Mark Zuckerberg. They're not independent. There is
no accountability. Why aren't the dual class shares being sunset it at this point. There's no purpose in protecting the business anymore with a dual class shareholder structure. So I think there are tools that we could be using far more aggressively than we are. Agencies that exist that could be more aggressive. So let's do that. While we are also trying to think about perhaps we need a new regulatory structure. The one thing I will say though and I've said this to you before David I really think Section 230 is kind of a red herring here. I know politicians get really exercised about it but I think there are far more
effective ways to get more transparency from Facebook more disclosure and to protect young people more effectively than we have. So Carly you say forcefully there are tools we have right now we have not used in using those tools. Are you sympathetic to the argument of Facebook and others that we have to be careful or use them because there is good being done. We don't want to as it were. Throw the baby out with the bathwater. Up to a point. But you know I think honestly I think Silicon Valley has used that argument for a very very long time and it does not obviate them from the responsibility to disclose to shareholders all of the risks that exist to be transparent about a product that clearly is enormously popular and powerful in the marketplace. It does not obviate them from the responsibility of thinking about does it still make sense to have a single guy own so much of the stock so that shareholders really don't have very much power over a massively publicly traded company. And is the board actually doing its job or are have a kind of checked out because Mark Zuckerberg and Sheryl Sandberg are in charge. So one quick final one Carly. They're very powerful consumers. They're also
very powerful in Washington. If you talk to Elizabeth Warren says they have a lot of lobbying chops up here. Of course force. Is anything ever actually going to happen. Well yeah I think things may happen. I hope that the regulatory agencies that exist that I've mentioned the FCC and the FTC RTS will get more aggressive. Look. Lobbying is fair game. Everybody
does it. Facebook is just doing what everybody else does. But the reason I think something may happen and I think tech needs to be very thoughtful here about what they're willing to give up like dual class like being more transparent. I think something is going to happen because there is bipartisan agreement now that something should happen. And politicians look for villains. Facebook is now a villain. They look for victims and they look to be heroes. And so yeah I think they're going to continue to mess around in this area and come up with something eventually that may or may not be helpful. In a word or two do you see anybody within the industry who might be a leader for change. Well I have argued for a long time that the industry needs to
collaborate with Washington. And so I don't see anyone stepping up to do that yet but I hope someone will because Washington doesn't always know what it's doing in this regard. Carly it's really great to have you on Wall Street. Thank you so much for joining us. That is Carly Fiorina founder and chairman of Carly Fiorina Enterprises and Electric Potential. Coming up we wrap up the week as we always do with our special Wall Street week contributor Larry Summers of Harvard. That's next on Wall Street week on Bloomberg.
This is Wall Street week. I'm David West. And we turn once again to our very special contributor on Wall Street. He is Larry Summers of Harvard. Larry we've talked every week really about inflation concerns. There's new data coming in particularly about focus on the market data. Some of the break evens. What is the new data telling you about where we are in inflation. Unfortunately it's corroborating concerns I've had for some time. You've seen so-called break evens the gap in yield between
nominal treasuries and real indexed treasuries. Take a break to the upside. At the five year frequency for example it's up more than 40 basis points which is a very unusual move for one month. And what it suggests is that people are getting more and more concerned about the possibility of rising inflation and inflation continuing longer. First it was one year then it was two years. Now it's starting to be five years. It's even spilling over in to the 10 year. And it's a reflection of growing concern that this is going to
feed through into wages that it's going to feed through into higher expectations which is going to create something of a spiral and that we're going to have a difficult inflationary dynamic. It's not made any easier by the sense that because of the inflation consumer sentiment is turning down as inflation erodes people's real wages. And that's going to make it that much more difficult to stop the inflation. So I'm afraid that the kinds of concerns I've had for quite some
time I think the basis for concern is steadily increasing. So you mentioned wage inflation the possibility of it. We have heard from the Fed in the past that they're not as worried because they're so-called slack in the marketplace because there are a lot of people millions of people unemployed who were employed before the pandemic. And yet there is a paper out of the San Francisco Fed that you pointed out on Twitter this week actions and says that's not the number you should be looking at. It should be. How many job openings are there compared to unemployment. Look I think the view that there's a lot of labor some labor market slack is looking preposterous right now. You see the level of job openings record high far higher than we've ever seen before.
You see the number of people quitting their jobs to look for new jobs record highs. Why is that going along with high unemployment high and high unemployment. First of all the unemployment is not that high by historical standards. Below 5 percent is lower than normal. You've got all the things that are causing the great resignation in terms of people changing their lives. You've got households with unprecedented levels of cash which makes them he makes it easier to be fuzzier about jobs. You have some continuing concerns for some people not a large fraction of the population. But even if it's only 2 percent of the population that's big relative to discussions of unemployment. You've got evidence of
early retirement on a substantial scale. You've got evidence of more people unfortunately who are depressed and anxious. So I think there's every reason to think that the so-called natural rate of unemployment or not accelerating inflation rate of unemployment should be higher for a while here. I think the evidence from past business cycles suggests that if you had to go with one or the other you'd be as likely to go with vacancies as you would with the rate of unemployment.
And so I think the idea that there is some substantial slack in the labor market is not the one that one should should bet on. I also think that real interest rates are an important part of determining monetary policy. And as inflation accelerates what that means is that real interest rates are going down. So you've got very loose financial conditions Larry. A lot of Washington's time this week was consumed with the build back better proposal of President Biden. And more specifically how are you going to pay for it with for example the Democratic senator from Arizona Chris in cinema saying she does not want to raise corporate tax rates no matter what happens. I must say I talked to Josh Bolten for the Business Roundtable. He was adamant corporate America cannot afford a tax rate. What do you say to them. It's a ridiculous proposition.
I'm not somebody who has been comfortable with all the fiscal policy this administration's pursued. I've worried about excess stimulus. I've worried about hurting competitiveness. I've worried about too much government all at once not working out well. We have never had such low costs of capital in the history of our country. You look at the level of real interest rates. You look at the level of the stock market. You look at the fact that capital investments can be written off in the year they're made. It is absurd to suggest that cuts in the corporate tax rate are necessary at this point. The business community didn't even ask for the 21 percent corporate tax rate they got. Yes. Not
every one of the Biden proposals in the international area is right. Yes. I can understand the concern to raise rates to 25 percent rather than to 28 percent. I think there's real validity there. But the proposition that we cannot afford to raise the corporate rate back to 25 percent is an economic absurdity. The other economic absurdity is the banks claim that somehow they
can't figure out how to do information reporting on large deposits in accounts and help the IRS enforce the tax law. I've really been disappointed in parts of the business community. They're right to be focused on what's important and their right to have concerns about a variety of the trends right now. But this idea that we can't have any corporate tax increase is dangerous and misguided Larry. The Fed was in the news this week for a somewhat different reason on Thursday. They came out with
a new set of rules restricting trading coming off of some of the incidents that we know so well with some of the regional Fed presidents. What do you make of this entire situation with respect to the Fed and how it is administering its rules about trading securities. Look I'm not a I'm not in a position to judge any individual but here's what actually troubles me. It's pretty clear that whatever was done by the regional presidents was legal under the rules that the Fed had set. And that should be a subject for some real soul searching at the Fed as to how that could have been the case. You know it's scary for public officials to think they have to be their own ethics officers. We should have ethics officers who write reasonable ethics rules.
And if you comply with the ethics rules then you've been ethical. And the Fed had ethics rules that were much too lax. Prior to this. And I think it has to ask how that happened and do some pretty systematic review of its ethics rules across the board. One more quick one Larry. A big piece of news this week was this new Bitcoin futures ETF started trading and went to the moon. And now we have some more coming online. What do you make of what's going on here. And I guess more specifically is this just a new bright and shiny object or is there something related potentially back into inflation here. Is bitcoin potentially cryptocurrency a potential hedge against inflation. Look I think what you saw this week was Bitcoin has had some emergence as
digital gold. The thing you want to hold if you're worried about inflation and it also became easier to hold because of these ETF. And so when there's more motive to hedge against inflation and it's easier to hedge against inflation you're likely to see that asset go up. I think that's what we saw this week. What will happen next. That is anybody's guess. But I think that the idea not that big not that Bitcoin is going to transform the world of finance but the idea that there's an element of digital gold here that's going to find a growing place in or in many portfolios. That idea got a boost this week. It could go either way and in the future. But I think that's the
way to understand what happened this week. OK. Thank you guys. When we went on today what happened this week we always turn to you. Larry Summers our very special picture at Wall Street. Thanks a lot Larry. Coming up one more thought if you don't like this universe. Maybe we'll build you a new one. That's next on Wall Street week on Bloomberg. Finally one more thought going down the rabbit tar hole in a week full of earnings and crypto and more trouble in Chinese real estate. You might be forgiven if you missed or at least didn't pay much attention to the exploration of a whole new universe or more accurately metaverse. That reportedly is a place where we can all go and hang out and do business and
pretty much live our lives or at least our avatars can live their lives. Facebook. Nikola Mendelsohn told us about her company's initiative that will start with massive hiring right here in our current universe in a little corner called Europe. These 10000 highly skilled jobs are really for us going to put Europeans at the heart of our plans for the company's future which you say is all about the manifest. And we're excited about the madness which we see as being the next computing platform.
It's not just Facebook that wants to explore this metaverse and it isn't all way in the future in Las Vegas. They are having a music festival this very weekend. It's called the Electric Daisy Carnival. And if you can't make it there physically well not to worry you can join it in the metaverse version. Not to be outdone Playboy has announced its own metaverse built around avatars that you might guess it are rabbits or what they called rabbit tars. Not everyone in the current social media world has entirely bought into this metaverse thing. When someone tweeted that the term metaverse after all came from a science fiction
novel and was about a dystopian world created by nasty corporations who oppressed and users they tweeted Could that author be right man. Jack Dorsey of Twitter. Well he tweeted simply he was. And I'm not sure how Elizabeth Warren would go about regulating this new metaverse. But if you thought this might just be a passing fad you might be able to ignore it. You better think again particularly if you have a brand to promote or to protect. According to an hand of Super League gaming Joel
Weber. Any brand out there. If you don't have a metaverse play happening you need to think about it. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2021-10-27 07:49
