Wall Street Week - Full Show 02/10/2023
A Fed chair speaks. A president delivers his blueprint for the next two years, earnings roll in, but a tragedy in Turkey overshadowed them all. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers of Harvard on whether we're headed for a landing at all, soft or hard. I think the Fed understands that it doesn't understand Stephen Meyer, the man responsible for New York City pension funds on investing for the long term in this uncertain market. There's a lot of things to consider out there.
The risk of recession here and abroad. And Josh Bolton of the Business Roundtable on what the president's State of the Union message means for American business, won't find a single member of the Business Roundtable saying, please put me in a completely unregulated environment. There was a lot for global Wall Street to pay attention to this week, but the tragedy of the earthquakes in southeastern Turkey cast a shadow over it all as the death toll reached into the tens of thousands and the difficulties of reaching those in need seemed almost insurmountable. But even as the world came to terms with human disaster, we also focused on the economy and inflation. When Fed chair Jay Powell talked with Bloomberg's David Rubenstein about the latest jobs numbers and whether they changed his mind on further rate hikes, this process is likely to take quite a bit of time. It's not going to be, we don't think,
smooth. It's probably going to be bumpy. President Biden delivered his annual State of the Union address and called for bipartisanship even over the catcalls from Republicans on things like the border. Congress must restore the right and energy policy. I we're going to need oil for at least another decade and I'm going to exceed. Beyond the fallout from that Chinese spy
balloon continued with questions about whether if it was a Chinese test of U.S. defenses, the U.S. passed that test. They wanted a display of weakness. And I think to some extent they got that. I don't know why this wasn't shut down
prior to entering U.S. airspace. Earnings continued to pour in with Disney comprising the upside on earnings, the downside and subscribers and newly returned CEO Bob Iger announcing a major restructuring and the trimming of thousands of jobs. We will aggressively curate our general entertainment content. We will reassess all markets we've launched and also determine the right balance between global and local content. The markets reacted to all this by being all over the place. The S&P 500 started out lower on Monday, spiked up after Paul's talk on Tuesday, only to come back down to earth on Friday, ending the week down just over 1 percent. The NASDAQ had a tougher time of it.
It too shot up on Tuesday, but settled for the week, down two point four percent. While the yield on the 10 year rose more steadily through the week, starting out at three point five five percent and ending up just over three point seven percent. To help us sort it all out, we welcome now Christina Hooper. She's Invesco chief global market strategist and Joanne Feeney, partner in Advisors Capital Management. Welcome back to both of you. Great to have you here. Joanne, let me start with you, if I
could. Does the markets get a little bit more sober by the end of the week? They seemed a little euphoric after Tuesday. Yeah. David, I think that's exactly what we saw. You know, the Fed has had a hard time convincing the markets that there's a lot more work to be done to bring down inflation. And they need to understand the markets, understand that if rates are going to go higher and they're likely to stay higher through the year, we're almost there. In terms of the market's forecast, they do still expect one rate cut at the end of the year. But, you know, that is quite a different
position to be in relative to the beginning of last year where we saw many rate hikes. So there's certainly less of a headwind this year from further rate hikes, but we're also not likely to get that break that the market is hoping for anytime this year. Well, Christina, what about it? Is the market slowly giving up on that break? Gloria, later in the year, we had been told the market saying we're going to cut by the year.
It looks like they're not so sure of that anymore. Well, hopefully they get accustomed to that idea, because I don't think we're going to see a cut by the end of this year. The economy is in better shape than I think most anticipated. So there really isn't a reason for the Fed to cut rates later this year.
Something would have to go very wrong for the Fed to need to cut rates by the end of the year. It looks like it's going to be a soft landing. So, Joanna, what about the economy looking stronger? Can we talk about the economy? Because you talk about different parts of the economy, you get different results. I mean, look at housing. It doesn't look that strong at all. And some people this week we're talking about so-called rolling recession. I know that's something you take issue with. Well, you know, we're certainly seeing
some parts of the economy in contraction, housing, as you pointed out, certain parts of the technology sector where we've heard about lots of layoffs shrinking P.C. production significantly down year over year. So there's certainly parts of the economy that are suffering contraction, but there are also parts of the economy that continue to expand. And when you look at the aggregate, what consumers have to work with in terms of spending power.
We have seen real disposable income rise for the last six months. So consumers still have more to work with. And I think that's why we're continue to see relatively robust numbers in terms of spending. Joanne, this is important point you made to me. I want to make sure we unpack it, which is we have a tendency to take a look at wages and we say real wages have not gone up. They've even gone down. And that's for individuals. But if you look at the additional people
coming to the workforce, you can have the aggregate actually going up, which says something strong about the economy. Yes, that's exactly right. In fact, if you look more granular at the data, in fact, over the last few months, we're seeing an increase in real wages as well. So you combine that with more people in the workforce that gets a lot of support for consumer spending. Now, it doesn't mean that a recession may not be coming at some point the future. High interest rates are clearly an impediment to economic activity, whether it's firms investing or households borrowing for the next car or or to buy the next house. So we're by no means sanguine that the
recession threat is over. But we do see continued strength for now, at least from the consumer side. Consumers, as you know, Christine, is all what it's all about. What is some 70 percent of the economy is consumer. So what is this data consumer, as far as you can tell? Well, I think that consumers in fairly good shape. What we see, of course, is an incredibly tight labor market. That's a problem perhaps for the Fed in
terms of its concerns about inflation. But it's a wonderful thing to have when you have rates going up. Right. You have so many people employed. Yes.
They've come under some pressure in different areas because of the rate hikes. But in general, people can still afford to go out and shop. And so it's a very different environment than what we saw when when the Fed was was hiking rates and unemployment was higher. I mean, this is a very, very appealing labor market. That leads to a fundamentally sound
consumer in general. Fundamentally sound. Let's go back on that. Christine, if we could just roll that, because going into this, there was a lot of so-called dry powder in households. They had a lot of savings they could spend on their spending that down.
We're starting to see credit card balances go up at the same time rates are going up. At what point does that put some constraints on the consumer? Well, it's certainly going to put constraints on the consumer, but we have to look in the context of pre pandemic conditions. Savings are still higher than they were pre pandemic. But they may have gotten low enough that they have encouraged greater labor force participation.
Right. So. So we've certainly seen some positive news there. And and so in general, what I think is, is that this is an environment in which there are there are many consumers that have the ability to spend uncertainly. Inflation has been something of a headwind. But it's it's. And it hasn't certainly been cured yet. But the outlook on inflation is has improved.
Certainly the Michigan flash inflation expectations stay. The five year head remains at two point nine percent. So they're very well anchored. I think the consumers feeling good
sentiment has gone up and they're they're outspending. They many feel very secure in their jobs, especially lower income Americans. Joann, also, it depends, obviously, on what the Fed thinks. Now, what we think, what the Fed thinks. So what do you think the Fed is looking at? What will it look at as the tides decides whether to keep moving up and how far to keep moving up and how long to hold it up there? Well, you know, David, the Fed's made it pretty clear that they're really focused on a persistent source of inflation, which could be coming through wages. And so nominal wages are still rising. They look also at the ECI, the Employment Cost Compensation Index, which gives you a much more accurate view of what's really going on in terms of compensation. So they're concerned that that's
continuing to rise at a decent clip and that that could feed into inflation. They're seeing inflation still in their super core measure, that is services excluding housing. And so they're going to watch that really carefully. And that's why when they say they're data dependent, that's really what it means.
If they see that start to slow down, then I think everybody can breathe a bit of a sigh of relief right now. Right. We're still seeing a lot of demand for services that are keeping that inflation pretty robust. At the same time, we're seeing more labor flow into the services sector. So if you think to the fundamentals of inflation, it was all about shortages of supplies. Now we're starting to see supply rolling back through into services that could help the Fed solve this problem. But that's what they're going to be watching. Christine, there's a lot of talk about
plateauing or holding at some point, maybe not quite yet, but after maybe a couple more rate hikes. What if that's not enough? I mean, we know there's long and variable lags from us places, but what in fact, inflation is. Not come in how dangerous it is at the flat. If the Fed levels off and then resumes hiking because inflation comes back. Well, that's the concern, right? That's the ghost of Paul Volcker, is that if you don't extinguish every ember of inflation, it could come back and and fanned the flames of higher inflation. However, I think we can take a page from the Bank of Canada's playbook.
They announced recently that they would have a conditional pass. So they're going to be very, very data dependent watching the economic data and inflation data like hawks. And I think that that could be a model for the Fed. That means that if anything is concerning, they can move right back into action and markets know that that is hanging over them. Well, that's interesting. What do you think of that, Joanne? Well, that's great.
The problem for the markets, so they wouldn't react too adversely if they had to hike some more. Oh, I think the market still would really like to see the Fed cut. You know, if they signal, if they say, OK, we're we're done for now and they'll always say they're data dependent. I think the market might grow a little bit too enthusiastic. And then if the Fed does turn around some months later and say, oh, sorry, we still have to raise rates tomorrow, they'll be one of these resets again.
So I think we're in for a year of volatility, both because of what the Fed is doing and the larger risks that the world economy is still on the middle of, whether it's the war, energy price and supply dynamics. I just think it's a it's a tough year heading heading through this because of this ongoing recession risk and the unknowns about rate increases. Thank you so much to Christina Hooper and Joanne Feeney. They're here to stay with us as we turn to questions of asset allocation in this, as Joanne just said, very uncertain market. That's coming up next on Wall Street week on Bloomberg.
Actually, it turned out to be a remarkably good week for the president. His approval ratings have never been higher, suggesting that if only two or three more scandals can break between now and Washington's birthday, he'll have every American behind him. His State of the Union address, which began with a plea for fiscal responsibility and continued with an extensive raunchy list of brand new ways to extend governmental power and spending, seems to have played beautifully in Peoria. Not to mention Poughkeepsie and Palm Springs. That was Lou's rock ISE with his firm and his tongue firmly as cheek on Wall Street. Back in January 1998, you may remember
that was the week after the Monica Lewinsky scandal broke. That's what he's talking about with another presidential scandal. Titanic was the number one movie that week, and the number one song was together again by Janet Jackson. Still with us are Joanne Feeney of
Advisors Capital Management and Christina Hooper Vasco. Christina, let me start with you, because we've just talked about what we think is going to fed what's going to the economy. How do you put together a portfolio? How do you allocate your assets in this world? Well, first day that I have to answer the question I keep getting asked, which is, is the 60 40 portfolio still alive? And I think to a certain extent, it very much is the concept of diversification is so important. And I think we will see the benefits of it this year and actually not just equities and fixed income, but some Alton there as well to provide lower correlating assets. My view is, as with Joanne, I believe we're going to see a significant amount of volatility, especially in the first half of this year.
There's just an awful lot of uncertainty. So we're going to want to have exposure to fixed income and some dividend paying stocks. We need that income to stabilize as we move up and down. I also believe that that as we move further into the year, we're likely to see markets start to discount an economic recovery. And so that would be a time to start to
perhaps increase equity allocations, especially among the more cyclical parts of the stock market. But fixed income looks attractive, especially investment grade Muniz. Those are very attractive yields right now. I'd like to think of this as almost a golden age of fixed income. So.
So that's an important component of portfolios right now. Joanna, what do you think? That sounds like a fairly diversified approach, but with an emphasis on getting some cash there from dividends or otherwise. Yeah, we offer a range of opportunities. It really depends on the client, on the investor and what their time horizon is. You know, at this point, there are certainly some opportunities in the market that if you're a long term investor, you can't be all in on equities. But, you know, a lot of our clients are also looking for that cash flow. And so, you know, we like to offer them choices, a mixture of stocks that will appreciate versus stocks that will deliver, that yield alongside a fixed income and let the client really decide how much they want to put into equities at this point based on their time horizon and their risk. But yeah, I mean, I agree.
Given the volatility that we've just talked about, this is an awfully good time for a balanced strategy to protect the the principle in the portfolio. And hopefully if you can get enough yield on the dividend side and also on the fixed income side, you can eat your cash flow to pay your expenses if you're in retirement. And that will save you from having to sell stocks when the market does go down, which inevitably it is likely to do along this very bumpy road to get beyond this inflation period.
Joanne, do you take a look at what got beaten up the worst last year and last year was a tough year for those stocks and bonds, right. But do you look at things like tech, for example, which really took it on the chin, in part because the discount rate. Right, because they were raising rates and say, you know what? I think they've had they've taken their hit. They might come back this year. You know, when you look at the tech space, two things happen, right? Certainly what you said, David, you know, the interest rates went up and they started going up in November of 21. And tech stocks started coming down. But the second thing that happened, you know, in retrospect, we can see this is there were some folks astute enough to recognize that growth of these big tech companies was going to be slower, at least for a short period of time.
And if you have enough short term investors, the hedge funds and what not, they're going to get out during this period. And that's what we saw. We do think that was a big headwind for a lot of these stocks this year. You have far fewer rate increases coming than we saw last year, less of a headwind for those tech stocks.
And we believe that towards the second half of the year and investors are going to start looking now, as we believe they did January. We should see those growth numbers start to turn around again and then particularly more so in 2024. So we do think it's a good opportunity to pick and choose among the tech stocks, find the good valuations relative to their growth opportunity. And if you're a long term investor, this is a good time to to put some of that in your portfolio.
Christine, what about you? As Joanna just said, it can't be the case. We're going to have as many rate hikes this year as we did last year. I don't think at least. So what does that mean? Certainly it says something about bonds. But beyond that, what does it tell you? But as an investor, I do think that it gives certainly some space to technology.
Right. That the tech sector is likely to start to see better performance, especially as as rates come down. But I also believe that what it really does is clear the way for. Economic recovery. Right. That once we have a stabilization of of rates, that is really when the economy can start to recover, accelerate, and I think stocks are going to anticipate that. So we're likely to see smaller caps
perform well. I also think the dollar's going to be relatively weak this year. That's a trend that's going to continue. So emerging markets, equities, especially Asia.
We have even talked about the China reopening, but that is going to be really powerful for Asia. All right, Joanne, briefly here at the end, strong bounce back. Do you think there's your. In the overall stock market, I think the jury is still out on that. You know, looks pretty good from the consumer side. Fewer rate increases is a good thing. But ultimately, we do have a pretty
substantial decline in certain sectors of this economy. We have to see if housing comes back. So I think it's it's an open question. That's why we are counseling to really diversify and and be prepared for volatility. Sounds wise. Thank you so much to Christina Hooper of Invesco and Joanne Feeney of Advisors Capital Management. Coming up, long term investing in
people's retirement is on the line. We talk with the man responsible for the New York City pension plans, Stephen Meyer. That's next on Wall Street on Bloomberg. This is Wall Street. I'm David Westin. We welcome now a big time, serious long term investor and Stephen Meyer.
He is the chief investment officer for the New York City Retirement System. Welcome. It's great to have you here. Thank you, Dave. It's a pleasure to be here. So you've got a big response where 20, 50 billion dollars, seven or fifty thousand people were depending on this. We've got firemen, policemen, teachers
for their pensions. Tell us about the investment climate as you see it today. It's a bit different than it was just two or three years ago, given where we are with interest rates, inflation growth. Yeah. Well, David, I think it's gonna be another challenging year in 2023 for the US economy and financial markets. As a long term investment, we tend to
look less at the fluctuate as short term fluctuations in asset prices. We have diversified portfolio. Is it actually or geared to weather all different markets? My hope and expectation is for the global economy to but you know, for growth to bottom out this year and inflation start to decline more meaningfully. We have inflation coming down the states less so in Europe at this point. You know, there's a lot of things to consider out there.
We look at the risk of recession here and abroad. We're coming off of one of the most aggressive interest rate hike cycles we've seen by the Fed in 40 years. You know that monetary policy operates with a long and variable lag. So we really haven't seen the impact of those rate hikes yet. Those rate hikes continue. The Fed hike 25 basis points really this month.
They've hinted that they're probably into another two and that's what fed from futures are pricing in. We also, as I said, inflation broad is still sticky on the upside. I also think there's a heightened level of geopolitical risk to consider the war, the Russian invasion, the Ukraine is problematic. We worry about that escalating.
And I do think from a longer term perspective, the dynamic between the US and China and the relationship I think will have implications for growth, competition, asset allocation for years to come. So, Stephen, you have the luxury of a long term perspective. On the other hand, you have to have the money when the pensioners need the money. Is it regular? You have to generate returns 24h who, as you say, was a rough year usually at stocks and bonds both down spectrometer. What does that tell you as an asset allocator about stocks, bonds and maybe the alternative to the above stocks and bonds? You know, it's rare that they go down in tandem, but it's not unprecedented. And you're right, David, last year was a tough year. We had that traditional 60 40 equity
fixed income bond split, generated a negative return of 16 percent. That's painful for all manner of investor. We do again, look at a long term horizon and we want that balanced portfolio. But you're absolutely right. We had the the offset, if you will, of private assets. We have about a 20, 22 percent allocation to private assets spanning private equity, private credit infrastructure, core non core real estate, as well as hedge funds.
So we do have those offsets that that can help drive that performance irrespective of what happens in the public markets. You said 20, 22 percent. You've had a cap of 25 percent, as I understand it, that's now been raised to 35 percent by the governor. Kathy Hochul, do you expect to use a lot of that increased cap? Well, it's a wonderful question. So, you know, the new legislation was signed into law by the governor at the end of the year, and it definitely will give us an expanded opportunity set. We'll be able to have a more optimal
portfolio. My expectation is what we're going to start the process of reviewing our strategic asset allocations with the five plan trustees and their consultants hoping to wrap that work up by, say, October, and then perhaps if there is a change in strategy that will be implemented in 2024 and beyond. Is the liquidity issue where the transparency issue because when you have marketable securities, you know what their value value is reasonably with a lot of the private assets, we're not so sure. I mean, do you mark to market, for example, your investments? We do more to market.
We rely on the general partners that we choose to work with to mark them. Martha positions the market. Those marks tend to be pretty conservative. So when equity markets are rallying,
say, in private equity, those marks aren't quite as high as the price as the public markets go. Similarly, on the downside, they're not less likely to decline as as much as public market. So we do do that. That's a great question. You do worry about transparency, the opaqueness.
It's also less regulated. Although I know that the S.E.C. and others are taking a closer look at it. We try to focus on picking those high performance, high condition managers that can perform over time. So given our size and our footprint in the market, we really have a wonderful opportunity to deal with.
The biggest and the best that are out there. Still is really great to have you here on Wall Street. We thank you so much for joining us. That's Steven Meyer is the chief investment officer for the New York City Retirement System. And coming up on Wall Street week, what did the State of the Union address mean for American business? We'll talk with Josh Bolten, the head of the Business Roundtable. That's coming up on Wall Street week on
Bloomberg. The State of the Union address, when the U.S. president stands before Congress and the world and lays out his hopes and dreams covering everything from foreign policy CAC China threatens our sovereignty. We will act to protect our country. And we did to public health crises. Two years ago, Covid had shut down our business or closed. Our schools were robbed of so much. Today, Covid no longer controls our
lives, but the business community and financial markets listen, particularly for what he'll say about economic policy. And this week's speech had a lot about the economy addressing the threat of inflation here at home. Inflation is coming down here at home. Gas prices down a dollar 50s from their peak. Food inflation is coming down not fast enough, but coming down. Proposing strong New Buy America requirements.
Past administrations, Democrat and Republican, have fought to get around it. Not anymore. Tonight, I'm announcing new standards require all construction materials used in federal ensure infrastructure projects to be made in America. Increasing the surtax on stock buybacks. Corporations ought to do the right
thing. That's why I propose we quadruple the tax on corporate stock buybacks and encourage long term. Demanding oil companies increase production. Have you noticed Big Oil just reported as record profits last year, they made two hundred billion dollars. In the midst of a global energy crisis, I think is outrageous and in the end, urging bipartisanship even as Republicans in the chamber were very vocal in their objections. Time and again, Democrats Republicans
came together, came together to find a stronger and safer Europe. It came together to pass once in a generation infrastructure law, building bridges, connecting our nation and our people. And now we turn to somebody who really literally everyday sits at that intersection of business on the one hand and government on the other, and he is Josh Bolten is the CEO of the Business Roundtable.
Josh, thank you so much for being back with us. We heard the State of the Union address. There was a lot covered in there, in particular saying things that are of import to the business community that you know so terribly well. But let me start with one that we talk about a lot of Bloomberg. You can tell whether we should and that's the debt ceiling. We had the president say we're not going
to follow our debt. That's reassuring. At the same time. You've been through a couple of these. Are we going get this thing resolved before we get to the edge of the precipice? Everybody's keeping their fingers crossed that it will be resolved. Unfortunately, there is a lot of brinksmanship involved here that's that's not constructive. But it would be a devastating blow to the economy for the first time in our history to allow the debt ceiling to be breached. The members of the Business Roundtable cared deeply about it because they know what a big blow it would be. They're not panicked about it because
everybody in Washington is telling them, don't worry, we'll work it out. The nervousness is that nobody at this point can quite define exactly what the path to working it out is likely to be. Josh, as you know, one of the things the president addressed and got a little bit of pushback from some people in the chamber was energy policy and worry on energy policy and getting the oil companies to produce more, saying that they're holding back. That's my word, not his. What's the response of business to that? What should be done right now recognizing, as the president said, we need some oil for a while here? Yeah. Well, the I mean, the business community is united.
We we need to be on the path to transitioning away from fossil fuels. But we need those fossil fuels not just for a decade, which is what the president referred to and elicited laughter from the Republican side, not just for a decade, but for decades to come. And we need those companies, many of whom are at the forefront of creating the technologies that will help us transition away from fossil fuel.
We need to have government policies that are not designed to strangle them as rapidly as possible, but rather to help give them the capital they need to make the transition. And that's where the disagreement from the business community is with a lot of Biden administration policy. We were strong supporters of many of the climate measures that were contained in the Inflation Reduction Act, but also strong supporters of the measures in there and other measures that can be done to make sure that we are taking advantage of our own resources here in the United States, which can be produced much more cleanly than almost anywhere else in the world, which we're going to need to do for not just 10 years, but several decades to come. One of things we did not hear about, at least I don't recall the Senate address, was any talk about the overall level of regulation, the extent to which there is regulation, something that prior administrations such as the trunk as efficient did to address from the business point of view. How do we get the right balance both in terms of how much regulation, where the regulation comes? As I suspect everyone agrees there has to be some regulation. Yeah. And there's a you won't find a single member of the Business Roundtable saying, please put me in a completely unregulated environment.
We do need to do. Government does have a critical role to play in protecting the health and safety of our population. And there is no resistance from the business community to that.
There is deep concern in many sectors of the U.S. business community about the tendency of Biden appointees to overreach. And I'm referring now to some of the what's called the case by independent agencies like the FCC and the FTC, both, in our view, likely overreaching not just their statutory mandates, but also what's sensible for the economy.
We we need an environment where health and safety are protected and competition is protected. But to pursue a lot of social goals through through the guise of that kind of regulation has really gone overboard in the Biden administration. And if anything, it may be the biggest point of friction between a lot of our business leaders and the executive branch. We have in power today we did hear in the state address talk about taxes, both the so-called millionaire's tax, but also a corporate minimum tax tax on stock buybacks and referring to those infamous 55 large corporations that pay no tax.
What's the reaction, the business roundtable that is there an issue here of the fairness, the tax cut? No. The short answer. I mean, they. First, with respect to the 55 companies that supposedly paid no tax.
Many of them didn't make profits or were or were able to use past losses to reduce their profits for the current year. But the main reason why a lot of companies ended up on that list is that they have been doing exactly what the tax code and what the government policy and I should say Biden policy expressly wants them to do, which is conduct R and D in the United States, invest in capital plant and equipment and in the United States. And so they were a they've been able to reduce their tax liability by taking advantage of the incentives in the tax code to invest in the United States. We want them to do that and then to
demonize them for for having done that while demanding that they that they stay competitive in the United States is is just a completely inconsistent and incoherent position. So, Josh, you've gone through a variety of possible differences of opinion. If I could put it that way between the business community and the Bush administration. And I guess my question is, is that a failure to communicate or is a true difference in policy? And I mean by that you've served in the executive branch. Are there people in the executive branch
who at least understand the arguments business is making? And I'll name a couple. Gina Raimondo has been in business. She did have our own venture company, capital. We now have Jeff Science going in who took a big company public. Do you have people in administration that whether they agree with you or disagree with you, they understand the arguments they've been there? Yeah, the administration has been short on on those people. But you just mentioned to with whom the business community can can have a really good hearing and a fair dialogue. The problem with the buy demonstration
has never been an unwillingness to listen. The dialogue has been civil. We've had sharp disagreements on some issues, profound agreements on other issues. I don't want to characterize the relationship, at least in my organization with the Biden administration as uniformly bad.
But we've been often disappointed that the people with whom we've had our communication with don't have the background, don't have the business experience to really appreciate what's likely to make business successful in the United States, which we all agree ought to be the goal. But I'm optimistic with with folks like the two you just mentioned, Secretary Raimondo and Jeff Science in positions of responsibility that we that we will have those good channels of communication open. OK. Josh, thank you so very much for joining us on Wall Street Rick. That's Josh Bolten.
He is the CEO of the Business Roundtable. Coming up, we wrap up the week with our special contributor, Larry Summers of Harvard. That's next on Wall Street week on Bloomberg. This is Wall Street. I'm David WESSEL. Welcome back. Now our special contributor here at Wall
Street. He is Larry Summers of Harvard. So, Larry, one of the big events of this week was Jay Powell, the chair of the Federal Reserve, speaking with our very own David Rubenstein at the Economic Club in Washington. And the markets came with it saying, you know what? He didn't go as far as we thought he would. It's saying we've really got to tighten more. Given those jobs numbers, are we becoming complacent because there's talk on Wall Street now that there won't be any landing, whether it's soft or hard. Basically, we'll just keep going.
I think the Fed understands that it doesn't understand because no one can know the future with confidence. And I think that the Fed is determined to do what's necessary. That's certainly what I hope is the case in a substantially uncertain environment. I think the consensus has become ISE substantially too complacent about inflation for a variety of reasons. First, let's be clear. Even after the reductions we have seen, inflation today is at levels that would have been unimaginable for inflation two years ago. And so we haven't come all the way down or got this fully under control.
And in a way, I guess one way to put it in Super Bowl week here is that it's easier to move move the ball down the field at midfield than it is when you're in the red zone and we're getting closer to the red zone with respect to inflation. And so I think the gains in terms of further reduction are going to come harder. Second, I think there are a variety of bounceback factors that we're going to have. You saw it in the market, wholesale used car prices, which look like they're going to be a positive contributor to inflation. You've seen some reversal on gasoline
prices more broadly. You've seen a variety of prices that blip way up nine months or so ago. And now that's mean reverting. Now that's coming back to normal. Well, it's not always going to be going down. And when those become normal, that's going to be an increment to the underlying inflation figure.
And so that, too, I think is a cause for concern. Third, if you look at the variables that economists tend to think that you should look at to predict what's happening with inflation. We are an economy that's got relatively loose financial conditions. Now, given what's happened to markets, by some measures, financial conditions are looser than they were when all this tightening started.
That's probably misleading, but we probably are back to somewhere where we were late last summer in terms of the degree of tightness in financial markets. And we've got that at a time when we still have a record level of vacancies relative to unemployment. So I think with that kind of picture, the prospect that we are not on a trajectory now where inflation is going to get to the target level and therefore this tightening cycle is not just about one more, two more, three more, 25 basis point increases, but something more fundamental. That's a substantial probability. In this environment. So I don't think that's a moment for any kind of euphoria. And I think there is some complacency that's setting in in many places. Larry, we've heard from share power on
Tuesday. A few hours later, we heard from the president states Joe Biden as he gave his State of the Union address to Congress. He did talk about some economic things, fair a number in there, including some you and I have talked about, such as Buy America. What did you make of the economic part of President Biden's speech? Look, I think the most important thing to say about the president's State of the Union was that it was probably the clearest, strongest exposition of his economic philosophy that he has delivered during his two years as president.
I did worry that as I heard him talk and speak powerfully and I thought persuasively about the junk. The issues and the extra money people are paying for airline baggage or paying for overdraft fees or a variety of those other junk fees. I like that because it was recognizing that people's incomes, people's spending power is what matters and that depends on how much they earn. And it also depends on the prices they pay. I hope the administration is being very careful about that comprehensively. My guess would be that the extra taxes people are going to pay because projects are going to cost more because of bio by America. The extra prices people pay because of
tariffs that we put on in the name of create or maintain in the name of creating American jobs. My guess is that those higher prices from things that we're doing through policy probably add more to consumer burdens than all the junk fees that the president spoke about. So I think we need to look very, very carefully at those policies. One thing that you and I have not talked about, I don't believe, is Israel and Benjamin Netanyahu's new government over in Israel. There are a lot of political and legal issues involved, but there are also some economic issues. As you know, a number of U.S. economists you don't think were involved wrote a letter really expressing concern about some of the proposed changes in the judiciary.
What that could mean for the Israeli economy. I was a little surprised to see your name came up, actually, in the times of Israel as having talked to the prime minister, Benjamin Netanyahu. What do I want to tell us about what they're doing over there? So, David, I don't I don't talk about my conversations with government officials. As you know, but I have been following this issue closely, and I think the temperature has to come down on both sides. I think there is a case for strong case for judicial reform in Israel. It's unusual by international standards
for judges to be chosen by currently sitting judges. It's unusual for courts to be able to rule out legislation simply by judging that it's unreasonable without having a constitution to point to. On the other hand, it's very clear from the context of the way this is being done that it is feeling to a large number of people and a large number of people with the capacity to move their money in and out of Israel, particularly in the entrepreneurial community, that an overly rapid, not carefully done judicial reform could raise serious and profound questions about the rule of law. And that, it seems to me, could have quite serious adverse effects on the Israeli economy.
And finally, at the end of the week, we received word that Mr. Cazorla Wadah may well be appointed the next governor of the Bank of Japan. He is an academic economist, as I understand it. He has served in the past on the Bank of Japan policy board. Do you have thoughts about either Mr. Wadah or where the Bank of Japan needs to go next? You know, I think we can think of him as being Japan's Ben Bernanke.
He studied at M.I.T. at about the same time that Ben did with the same thesis advisor that Ben Bernanke he had. He specialized in similar areas of monetary economics and has a soft spoken academic way about him, but is also capable of being decisive. And I think Japan has a very complicated issue ahead of it. I don't think it's going to be able to
maintain yield control for an indefinite horizon. And he has big shoes to fill. I've known Corona Sun for more than 30 years. He's an extraordinarily capable, analytical, but also with a real measure of cunning, central banker. And he will be he will be missed. But knowing Mr Hu away to, I've got quite a bit of confidence in his ability to chart a course forward. Larry, thank you so very much. As Larry Summers or Harvard, our very special contributor.
Here on Wall Street week. Coming up on the road again, to New York, to Virginia, to Australia, but to Hong Kong. That's next on Wall Street on Bloomberg.
Finally, one more thought on the road again. The pandemic hit travel like nobody's business during the pandemic. People stayed at home. They didn't go to movies. They didn't leave their homes. They didn't travel.
As the world's economy shut down, so did the airlines and hotels. I think we've never seen an economy coming out of a shutdown like this at a moment like this when the world is in the kind of unusual and unique spot that it's in. But now things are coming back with the airlines adding business as fast as they can. It's a billion pound bounce back. It would need to be achieved. Those with the highest earnings ever in the last quarter in the company's history and air B and B reporting a big jump in demand.
What we're seeing is hosts made record earnings this past summer. Given the uptick in tourism, it's no surprise that governments are back in the business of luring visitors. New York urges visitors to come check out the slopes. There's something for everyone in New York State. Virginia urges us to come back to Williamsburg. And even Australia is getting in on the act with a campaign featuring Hollywood stars.
Will our Net and Rose Byrne or at least computer animated versions of them? It's nothing like Australia, but perhaps the most remarkable of these campaigns is Hello Hong Kong, complete with offers of five hundred thousand free airline tickets. See you in Hong Kong, which is badly needed given the reported plummet in tourist visits to Hong Kong from a pre pandemic high of 56 million to reported 100000 in 2022. Though putting forty seven prominent Hong Kong citizens on trial for national security violations isn't likely to help that situation much.
One thing is for sure Secretary of State Blinken won't be travelling to Hong Kong. He had to cancel his China trip because of that pesky spy balloon. We concluded that conditions were not conducive for a constructive visit at this time.
And there is one legendary football player who will not be travelling to Phoenix for the Super Bowl. Though Tom Brady's decision to retire managed to drive up the price of beach front property for at least the beach, he was sitting on it when he made his announcement. I'm retiring for good with reports that a jar of sand from that beach was bid up to almost one hundred thousand dollars on eBay at one point. And even if Mr Brady doesn't make it back to the Super Bowl, he can always head to Orlando. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg.
See you next week.