Wall Street Week - Full Show 03/03/2023
New beginnings for Britain's relations with Europe, for America's semiconductor industry and maybe for the Chinese economy. This is Bloomberg Wall Street week. I'm David Westin. This week, a special contributor, Larry Summers, on signs of a Chinese resurgence with a population deciding at half as many children have that revolution in six years. It says there's some very fundamental
concerns about the future in that society. Renee James of AM here on the bold new U.S. industrial policy for semiconductors. It's right, the importance of semiconductors in the semiconductor industry and into the public discourse.
And Professor Melissa Kahney of the University of Maryland on investing in the future workers of America. We have the tools and the resources to reduce child poverty in this country, which would remove major impediments to children's learning, cognitive development. That is a way to invest in our future.
Everywhere you look this way, global Wall Street seemed to be turning over a new leaf with the UK and the EU patching things up over Northern Ireland announced in the shadow of Windsor Castle by Prime Minister Rashid sooner. I'm confident that the Windsor framework that we announced yesterday resolves the issues that people have with the protocol. It restores balance to the Belfast Good Friday Agreement, and that's what was needed. And President Ursula von der Leyen, this new framework will allow us to begin a new chapter. It provides for long lasting solutions that both of us are confident will work for all people and businesses in Northern Ireland. Solutions that respond directly to the concerns they have raised while the United States moved forward with the first stage of its Chips and Science Act. Investing billions of dollars to bring
semiconductor manufacturing back to America's shores. Everybody knows this little chip that we have as part of everything that we do in our life, and most of them are manufactured overseas. So the idea here is to bring those manufacturing capabilities back home. Not to be outdone, China got into the act with PMI numbers way above expectations, indicating its economy may be roaring back faster than it was thought there was a rebound expected when the Chinese came out of their lunar new year. But this has been much stronger than people thought and paving the way for President Xi's coronation at the National People's Congress beginning this weekend.
This is really the last act of the transition for Xi Jinping into his third term. But from the time he was given the third term at the party Congress and now the costs of Xi Jinping and his policies have been piling up. And markets pretty much picked up on the upbeat mood of the week as the S&P 500 made up what it lost last week, adding one point nine percent while the Nasdaq was up almost two point six percent. Bond yields surged on Thursday with the 10 year well above 4, but then settle back down under a three point nine six for a gain of just over 4 basis points for the week overall. Here, for their interpretation of what the markets were trying to tell us this week are Amy Ruth Silverman.
She is head of derivative strategy at RBC Capital Markets. And David Bianco, CIO, Americas for D.W. s Group. So welcome, both of you. Great to have you here.
Let's start with you. What did you hear out of the markets this week? Confusion. It was an up week and I'm glad it's Friday and that the machines have been shut off. But it was a very volatile week. Market was lower. The market was up. I think the main issue for the week was the culmination of the realization that we don't know what's going to happen with inflation over the course of this year. So inflation is back. What's the Fed going to do about it? Is the big question.
Amy? Yeah. You know, look, I would say that derivatives market echo that to some degree, even though we ended the week up, what we saw was actually a lot of hedging during this whole week. So, you know, as the market kind of wrestles with concerns about inflation, what you're actually seeing is investors going out buying downside protection, kind of four to six months out wrestling with where this terminal wait is going to be. And the sentiment is still leaning pretty briskly. So what does it tell you when people are really buying those hedges four to six months out, as you say, what are they anticipating four to six months from now? So, you know, the derivatives market, it has to be very specific. So meaning if you don't get the timing right, it doesn't really matter if you get the direction right. And so, you know, they're essentially
saying four to six months from now there is going to be some sort of reckoning. We're either going to be on the right glide path to a soft landing or unfortunately, we may be wrestling with a terminal rate that is actually much higher than initially expected and that could cause downside to the market. Here's what this glide path to a soft landing. You talks about that. Are we on the right guy path or do we even know at this point? Because we thought that we thought inflation is coming down. We've had some data in recent weeks.
The NIKKEI maybe not so fast. Maybe the airport's moving around. It's one of those airports that, well, the lights for landing are still on. There's still a chance. But so much data has come in suggesting that inflation sticky, particularly at services to service demand is strong. Those jobs are still strong. And so really tight labor market. And I think you've got a labor market that's up that's not too pleased.
The pay they're getting. You still have prices rising faster than wages and wages rising faster than productivity. So the path to a soft landing is getting trickier. But I think there's still time.
And maybe just a little bit of time left for the Fed to act aggressively and bring down inflation. We'll talk about the Fed acting. Exactly. We're going to hear from Jay Powell next week. Two days of testimony on Capitol Hill, one at a time when he was saying, don't worry so much on inflation. He said if it comes, we will have the tools to deal with it. Does it look like he does have the tools right now or are those tools working? They have the tools. And he said if inflation comes and
they've reiterated that they are data dependent, that they're not on a predestined course in terms of the terminal rate destination, how high will they go? And there's no certainty or preplanned amount of rate increases from here. So be data dependent and consider strongly consider a larger hike at the March meeting. So what you see that the market when it comes to things like the rates, because they're two, we're talking about five and a half more or less terminal.
Right. But now people start saying maybe six, maybe we'll have to keep going. Given the data we've had from the economics lately, what do you see in derivatives? So one thing about derivatives markets is they really think about what the tail is. So right now, I would say that 25 basis points of the next meeting is still kind of consensus, but that tail of 50 basis points has actually risen. And we are seeing investors play that either through rates options, through sell for options or through equity options. And you really see that, David, and the
market structure as well, because we've really taken the tenor of the average option down from something like a month to a week or a day because people are playing these data points. So specifically because they matter so much. Well, I want to talk about this a week or a day. What what does it do to have an option
that's for one day or less than a day? It seems to be a big upswing in that, I guess, to start with. Meme stocks, actually. It did. And it's you know, for someone like myself who's been watching the greatest market for 20 years, it's just unbelievably shocking because right now almost half of all volume in the entire S&P 500 is concentrated in options that are less than a day to expiration. That really tells you, one, how much the market structure has changed, especially on days like today, where it doesn't seem to fit the market narrative. But secondly, you know, it exacerbates this intra day volatility that you haven't seen in a way since prior to. Pandemic, it's really changed the market structure of the day to day. So this is what I would get about that,
David. I would think normally, given all the uncertainty out there, people would be saying, I don't want to take as much risk. But trading in options for less than a day sounds like a pretty risky venture. I guess some investors don't want to pay for the time value and maybe they think they've got the right trade for the day.
I would simply say that that's why I don't read into any one day's market activity. It's been volatile. I think that's the message in the equity market and the derivatives market. This week was especially volatile in the bond market, and that is the root of a lot of the uncertainty out there where yields heading both short term interest rates and longer 10 year Treasury bond yields and the 10 year yield poked its head up above 4 percent this week. And I think that's a reminder the bond
market only has so much patience. I think it's running out for inflation to come down faster. So to put you on the spot here, because I think it uses the derivative person, your derivatives, taking some of the value away from the signals we're getting in the equity markets because we can't quite tell it's all about options. You know what? Whenever folks need someone to blame, they usually come.
So say, you know, let's take one for the team there. But, you know, one thing we've spoken about with investors is people used to use the VIX as a signal. It's quite a common signal for a risk. The VIX is broken down. So the correlation between the market and the VIX used to be the VIX went up. The market should be going down and vice versa. They think going in the same direction
for a while. And part of it is the VIX isn't capturing what's happening intraday. It's essentially what's capital capturing what's happening kind of on a one month out basis. But all the action is really, really short dated. And so even some of our old standard indicators, if you will, for volatility are having to be reframed. Okay.
Thank you so much to David Vehicle and went Amy Ruth Silver. And they're both gonna stay with us. We're going to the question of how do we make some money out of all this uncertainty? And by the way, does any of that reside in China? That's coming up next on Wall Street week on Bloomberg. We are in a period where country companies are copying the capitalist system. They are privatizing government owned
businesses everywhere. They're privatizing pension systems. And it's just a fantastic time to be in the financial business and have the opportunity to participate in this global growth. That was then Citigroup CEO Sandy Weill. On Wall Street back in November of 2000, when the number one movie in the country was How the Grinch Stole Christmas, the number one song in the country was Come On Over Baby by the Backstreet Boys. And China was well on its way to joining the WTO, raising hopes its style of running the country might be coming on over toward the western way. Still with us, our Amy Wu Silverman of RTS and David Bianco of Deviate W..
So we talked with the markets the last segment. Amy, give us a sense of where the options and let me ask you specifically, do you think there are options in China given about to go to the NBC route to see President Xi react? I do. I think there are opportunities and options in China specifically because there an event and that's what options love the most. They love to play an event because anything that could potentially increase your volatility can increase the value of your options.
So for folks who have been looking at the China re-opening story, that may be a way to get back into HSA char effect site E.M. Calls, which we've seen before in the beginning of the year and maybe reloaded now. So, David, where do you see off? Do you like bonds? Well, we think if the Fed takes aggressive action that you can invest in long term bonds.
We also still think there's opportunity in China amongst those companies that benefited from the economic miracle that happened in China. The tech stocks there. But we'll be keeping an eye on seeing if Chinese capitalism is something that we recognize as Western investors.
But there are reports in the U.S. equity market where we see some opportunities like these interest rates keep going up. The jobs market keeps holding up. That's a good combination for banks and bank profitability. But the rest of the equity markets need to be careful. But what about that?
You talk to your clients a fair amount. What are they interest in right now? You know, the one thing that I think is really important to remember is if you look back five years, 10 years, the cost of tales. So essentially a three standard deviation drawdown in the market is actually trading kind of at its lowest percentile, which I think is very interesting because there's a lot of uncertainty around terminal rates.
We're kind of in a completely new rate regime. And that volatility, while it's picking up, hasn't really reflected that to the extreme that I think we may go to. Are people getting paid for taking risk? So, you know, it's volatility is quite high. So, of course, if you're selling volatility, you're collecting that premium. But I think it's dangerous because
essentially what's happening right now is you're actually realizing more than the options are pricing in for the future. About other sectors. David, I mean, you mentioned banks. What about big tech, for example, that had a hard year last year, whereas it this year it's off to a terrific start. The proper tech, the proper tech titans,
the ones that are in the technology sector have held up really well. I mean, I think part of that is that people are seeking the stability of those businesses, the strength and resilience of those businesses. And don't forget, those are strong balance sheets with a lot of cash earning more interest income than they did in years past. But we also try to look at the market as to where is their upside that's worth the risk. I see that in healthcare there's more risk, but good upside. And banks and tech, we're underweight.
Now we've moved more significantly underweight on it. We're sticking more things like communications, where we see more of a price discount and more upside worth of risk there. And we want you to buy health care. David mentioned it.
Yeah, it's interesting. We just went through an exercise essentially through our universe of covered companies within the RTS universe, and we essentially looked at their sharp ratios. We just said given that the risk free rate has gone so much higher, you know, where's your excess return? Attractive level of volatility and health care is actually one of the sectors that is ranking quite well. It's interesting. Healthcare, you think is a strong one. Yes, it had a tough start, as I think. Are there investors running to the
cyclicals or running to the defensives? Or if you're leaving the asset equity asset class to go into bonds, which is an alternative, powerful alternative at this stage. Healthcare got left behind, but I think that's the sector for the for the decade. What we're talking about equities, obviously, we're talking in part about earnings expectations. Where are we in earnings? So we bottomed out. No, they keep drifting down almost in the painful, steady, gradual drip of downward earnings estimates for especially the first half of this year. I think at the best, S&P earnings will
be flat at about two hundred and twenty two dollars, which is what earnings were in last year. So, Amy, as I understand Sharpe ratio, which is limited, it's a combination of volatility and return. What you really, really get when you look at that, where do you see the highest volatility, highest return? Yeah.
So. So essentially what the Sharpe ratio is saying to you is, you know, for the level hard at that level of risk that I'm taking, where are you getting your most return? So. So as I mentioned, healthcare was one of the options we looked at, which looks attractive.
And interestingly, the other is large cap technology. And the reason is actually not related to the excess return. It's actually because the volatility has come in on a 12 month basis in those stocks. Okay. Thank you so much. It's really great to have both you with
us today for this discussion. That's Amy Wu Silverman of RBC. Capital markets, by the way, a derivatives person, as you might have noticed. And David Bianco of D.W. s America's coming up, making a long term investment in the next generation of workers. We'll talk with Melissa Kahney,
professor of economics at the University of Maryland. That's coming up next on Wall Street, where you hear on Bloomberg. This is Wall Street. I'm David Westin one of the things we focus on here are the long term prospects for investors and necessarily those prospects depend upon our growth. And that is dependent upon the size and the quality of our workforce. And when we talk about that, we necessarily have to think about our children.
Melissa CARNEY, professor of economics and Uterus of Maryland, has been focusing on just this subject and she joins us once again on Wall Street. We welcome back. Melissa, it's great to have you here. So thanks for having me, David. So we tend to think about children in the future workforce in terms of education.
And goodness knows, we have a lot we can do in this country about this. But you point out that from the pandemic, we saw something about not just the education but the care for our children. That's exactly right. So everybody is behind the need for a skilled workforce and boosting educational attainment. And everyone's behind improving schools. But the truth of the matter is that kids
home life really dictates their ability to thrive and learn in schools. And we don't do nearly enough in this country to make sure that the material needs of our nation's children's are being taken care of. We've millions of children show up at school every day with the burdens of poverty or economic insecurity. They're too tired or hungry or stressed to learn to the fullest of their ability. What was amazing during the pandemic is that, somewhat surprisingly, we actually managed to reduce child poverty in this country by a half or a third. I mean, this was really a historic accomplishment.
And so how did we do that? Well, Congress extended the child tax credit, made it more generous, increase the full credit amount from two thousand to three thousand dollars. Thirty six hundred dollars for a child under the age of six. And it made the credit fully refundable, which meant that even parents who didn't work, who had no earnings, could get the full credit amount. And the upshot of that was a historic
reduction in child poverty. And I think that means looking for a bipartisan way forward to an enhanced child tax credit. So coming back to the investment question, I mean, we're not continuing that program the way it was, at least as not as of right now.
Objections have been cost too much money and it actually discourages work. That's right. So Congress, despite, you know, everybody, this celebrated reduction in child poverty. Congress did not make the expansion of the child tax credit permanent. And a few key there were few key hangups, political hangups, reasonable hangups. So one was the worry that if we permanently sent checks to out of work parents of three thousand or thirty six hundred dollars, that would actually induce too many parents to leave the workforce. That was a really big hang up with
congressional Republicans, as you mentioned. Another worry was that it was too expensive. It added, you know, over one hundred billion dollars to the cost of the existing child tax credit. We propose that parents who were out of work only get half of the full amount and then the full credit amount of three thousand or thirty six hundred, that could phase in steeply.
And so what does this do? This rewards work. This incentivizes parents to go to work and it still gets a lot of money, material resources to these very low income families. The phase in, as I say, that means if I make more money as somebody who has half of this style of CAC, I get some more of my full credit incrementally. Exactly. As you go to work for every hundred dollars you earn, you get 30 dollars until you hit the full credit amount. Right. So we're increasing the return to an
hour of work on the issue of the child tax credit during that 20 21 expansion being too expensive. Well, a lot of the additional income was actually not going towards fighting child poverty or bolstering the income of low income families. A lot of that was the full credit. Three thousand dollars. Thirty six hundred dollars was going very high income families. So there is a way to keep the costs
down. Target the resources on children and families for whom this money will make a real difference. It would really increase their ability to pay the rent, to buy nutritious food, to pay for high quality child care. Target the resources we are. We know there is a real large social return and do it in a way that doesn't discourage parental work. Again, there's an easy path forward here. It's obvious it's just playing with the
policy parameters and we can't afford not to do this as a country. Clearly, this is a major moral issue that you raise here that all of us feel deeply about. But talk about the economic issue and the investment. It will still your plan, if you were
adopted, would cost a fair amount of money. What's the investment return on that in terms of a higher quality workforce in the out years? David, we have so much evidence now that alleviating the material need of children from low income families has a positive social return. When we enhance the income going to low income families, we see those children have better health outcomes.
They have better educational outcomes when they're adults, they have higher completed levels of education and higher earnings. Bolstering the income of low income kids is a positive social investment. We have lots of evidence on that. Sending the full credit amount to higher
income families even, you know, above one hundred thousand dollars. That has a political appeal. But but put policy wise, there's a low social return on that money. Getting that money to families, making 10, 20, 30 thousand dollars a year, you are quite literally making an investment in children. That's how we build up a skilled workforce from the ground up. Investing in those children, making sure
that they can get to school. Ready to learn. Making sure that they have safe housing, adequate nutrition. That's how we should think about sending income assistance, full credit amount to low income families with children and families to talk about the alternative investment, for example, in child care. Just this week, we saw the power of
Congress come out with some rules and the Chips and Science Act. You have to have child care facilities. We know that's going for children. We don't necessarily know what the child tax credits going for do. Yeah. So this is a really important point. So people who advocate for investing in children, there's a lot of different ways we could do it. In my to my mind, the evidence is quite clear that giving income to low income families is really the best way to boost their children's health educational outcomes.
They're learning the truth of the matter is, not all families need child care. You know, families who can't pay the rent, who can't who can't put food on their table, a child care subsidy, a child care spot at some local organization doesn't really help them. And we do have evidence that, again, when we send income to low income families from a variety of contexts, you see that in general kids do better. That means that their parents are in
general allocating the money in ways that benefit the kids development. Now, the other issue about child care is it's actually quite complicated. The child care market has a lot of challenges.
And again, the surprising, amazing thing is during the pandemic, when the economy was weak, we managed to reduce child poverty in this country by a huge amount. And how we did that was we sent money to low income families with children. And so that's why I think that's a better, more effective way of addressing the material needs.
The immediate material needs of families with children then throwing that money instead into into child care subsidies. Professor, thank you so much for being back with us. That is Professor Melissa CARNEY of the University of Maryland. Coming up, just how much will the chips and science that transform the semiconductor industry in America? We talked with the former president of Intel, Renee James.
That's next on Wall Street week on Bloomberg. The Chips and Science Act. It was a long time coming. We want to get this done and we are negotiating as a House and Senate right now to pass the chips. And when it finally did come, President Biden touted the difference it would make chips and science acts, invest 52 billion dollars, supercharge our efforts to make semiconductors here in America stimulated an enormous response. Unlocking private sector investments across the country more than ever before.
This week we saw the beginning of the implementation. Secretary Raimondo of the Commerce Department laid out the basics. There are no social goals associated with this agenda.
This is a national security program. It was passed on a bipartisan basis to make investments to achieve national security goals like how companies can apply for the federal funds and what strings will be attached. Strings like committing not to invest in China for 10 years, not using any proceeds for stock buybacks and committing to build childcare facilities. As explained by the president's
infrastructure coordinator, Mitch Landrieu. Whoever gets this money, whoever creates a facility like this gives people access to child care. Same thing is true about the idea about stock buybacks and other iterations of what you need to do to be a partner with us so that we can partner with you and grow the economy from the bottom up. Whatever the conditions. The time has come for us all to find out
just how much of a transformation of the tech industry. This will be. And to give us some sense of just how profound this new act may be, we turn to a true expert, particularly in the area of semiconductors. She is Renee James. She is now the founder, the chairman and the CEO of AMP here Computing.
But for many years, she was with Intel where she wasn't, including other things president. So thank you, Renee, so much for being with us. Let me ask you, maybe the most basic question. We're told we need this new Chips and Science Act to get really semiconductor manufacturing back onto the shore in United States. If it's a good idea to make the
semiconductors. So why do we need the government to help us? Why didn't the markets take care of this problem on their own? That's a great question. In general, I think for semiconductor industry has had a history of being very productive and not needing assistance. However, in the case of manufacturing over the course the last decade, it's really drifted outside, not just the core wafer fabrication, but also the rest of supply chain is really drifted into other areas of the world geographically where there is bad lower cost of building operations, et cetera. We're told that it's because of competitiveness, the need to compete, but also national security concerns. From what you understand. Is it more of one than the other or is
it even. Well, I mean, I do think that it's a combination. I don't know if it's even. But the national security concern is a geopolitical concern. Certainly from a supply chain availability perspective, we learned through Covid that geographic distribution of supply can be helpful.
And we need that. We need more diversity of supply chains. So it's beyond, you know, any one concern. I think we had a we had a perfect storm during Covid of shortages and other things and we out of that. You know, the conversations that Chips
Act was born. I am excited about the opportunity to start really doing some work to move towards a more balanced ecosystem. What's the goal? You just a balanced ecosystem is the goal self-sufficiency, United States that we can produce everything we need? Is that even possible to do? What should our goal be? You know, our goal should be that we have more availability of the complete semiconductor supply chain, not just wait for fabrication, but also packaging and memories and other things all within, not just the United States.
You know, I'm not one for protectionism per say, but but in a broader distribution and and better access candidly for companies. So can the United States produce everything? Intel has done it for decades. There are other companies that are required in the ecosystem around wafer fabrication to actually build the whole thing. My firm, Empire Computing makes high
performance semiconductors that are power efficient for servers that run your cloud and your Internet. But this is what they look like. So just to give you an idea of what is semiconductor for your viewers, looks like a chip like this, which has 128 course, has about 55 billion transistors on it, things that you can't imagine how complex it is to build one of these. The supply chain around this is equally complex. So the wafer fabrication, the thing that we talk a lot about and the thing that we know Intel for and TSMC, Taiwan Semiconductor and others, this was made at Taiwan Semiconductor, but it was actually packaged by a U.S. company called.
And for that, it was packaged in Asia. And so we need to see more of that entire supply chain move to us. And a large portion of the first phase of the CHIPS Act is to do what we would call incentive, you know, investment into the United States Renay. Where are we, from your perspective,
sort of in the longer scope of history with which of semiconductors? Let me ask about supply and demand. Supply, demand, a different sort of sense supply. We all sort of know I've heard about Moore's Law right there that's going to have increasing density. Where are we in that path? Does it trail off at some point? On the other hand, on the demand side? How much computing power do we need? And how do those two match up? Well, demand.
I'm going to take that one first because it's very straightforward, it's unabated, really. And we're entering into a phase. It's interesting. I've worked in this industry for for about 30 years. And every time we think we're at the
end, you know, whatever the face was, whether it was the P.C. cycle or the or, you know, smart phones. We think this is it. What are people going to need more computing for? And it turns out there's always, you know, another frontier of discovery.
We can call it a lie. We can. You know, there's lots of other things in the field of A.I. that just require more compute. In addition to that, we're trying to do more with compute. Our cars are getting smarter. Our homes are getting smarter. You know, every aspect of our life, even in non-scientific just daily life. So demand of all sorts of some ISE.
So it's not just high performance like what I build, but it's also what we in the industry call lagging edge that the use older technologies and we saw a lot of shortages of that in automotive that that companies like Global Foundries, a U.S. company, built. So demand growing, multi segment demand growing. That's good news. Not every segment, some segments are flat.
Some segments will go into decline. But the overall semiconductor industry growing. So going back to the chips in science back here, how transformative will be 50 billion dollars? Sounds like a lot of money to many of us, as I understand it, given how expensive these plants are, maybe not so much. Maybe you will leverage up more private investment, but will it really change the semiconductor industry and indeed the tech industry in that state? Well, you know, what it will do is it will.
It's already done this. It's brought the importance of semiconductors in the semiconductor industry, an industry that was pioneered, founded in the United States. The R.A. continues to be led in the United States. It has brought it into the public discourse. I think that's important. It's a bipartisan issue. We all are very concerned about the long term competitiveness of an important fundamental industry that supports many, many other industries.
You know, I think that with the Chips and Sciences Act does is it raises the awareness, it creates the opportunity for companies that may not come to United States like timelines, semiconductor or Samsung or others who have made commitments in the United States. It's more expensive and candidly for them to build and to operate. So it gives us a level playing field in some areas.
It's the beginning. It's not the end. I think private money will need to assist 50 billion dollars, of which the first tranche is very focused on manufacturing, not latter. Trench on RFD is is a small, small amount of money in semiconductor world.
But it is an important signal that we're open for business and that we are moving forward and are sincere about getting better geographical distribution of supply and firing. A lot of people call this industrial policy, which I guess is what it basically is. Not everyone thinks that's a good idea. The United States has had a mixed track record. I think it's fair.
Senator, what do you from the semiconductor industry, how do you regard this as industrial policy and what is the difference between good industrial policy and maybe not so good? I'm not sure I'm qualified to give a give an overview of industrial policy. I'll give you my point of view, which is, yes, in some ways it can be considered industrial policy. I consider this positive industrial policy because it's in its incentive investment and it's incenting private investment alongside. And what we would think of is reverse foreign direct investment into the United States. It is you know, I don't think industrial policy, that's economic protectionism is particularly productive. This is not part of it.
I think it's important. This is a global business. It's a global industry. We know that if we tried to do something that's protectionist because we're not competitive or something like that, it tends to not end up being as productive as we'd want it to be. That's not what the Chips and Sciences Act is, in my opinion. In my opinion, this is a positive movement towards encouraging people to invest in a segment that's critical to the future, not only national security, but of, you know, scientific breakthroughs in what we do. And I thank you so very much for being. Wall Street is really terribly helpful.
That's Rene James. She is the founder, chairman and CEO of Empire Computing. Coming up, we wrap up the week with special contributor Larry Summers of Harvard.
That's next on Wall Street week on Bloomberg. This is Wall Street week, I'm David Westin, we're joined once again by our very special contributor, Larry Summers of Harvard. So, Larry, we spent a lot of the week trying to figure out is the Fed ahead of the behind where the market's relationship, whereas the Fed compared to where it thought it was going to be, what its plan is, the Fed is behind the curve. There've been six jolts to the Fed in the last six weeks. The seasonal adjustments to the CPI took the trend downwards in inflation during 2022 out of the data. The inflation figures for the last several months of 2022 were revised upwards. Further taking any sign of declining
inflation out, we got a CPI number that was very disappointing in terms of how high the level and the core was. And that was reinforced by the P.C. information when it came in. All the indicators for January read strong, suggesting that monetary policy has not yet gotten substantial traction in slowing the fullness of the aggregate economy down.
The wage inflation numbers, as they have been revised, no longer show the kind of reductions that we had been expecting or many had been expecting to see. And you've seen interest straight move to ratchet upwards with the 10 year crossing 4 and the 2 year reaching record levels. Put all that together. And I think a reasonable assessment of where the Fed is would say that they have not been this far behind the curve for a year or so.
Once again, the forces, the arguments made by team transitory have unfortunately looked more like wishful thinking. And you can see that in the evolution of rhetoric from we will have a soft landing towards, it's possible that we will have a soft landing. Of course, it is possible that we will have a soft landing. But maximizing that limited prospect depends upon realistically assessing the situation. Once they assess the situation, realistically, they're behind the curve.
How do they catch up? What do they do going forward? What does the policy look? They're not in the right place right now with respect to March. I saw an estimate suggesting that markets right now are assigning a 22 percent probability to a 50 basis point move in March. The Fed right now should have the door wide open to a 50 basis point move in March. No need to be committed to that till we see the next employment figures to one sees what happens in markets. But if markets are now saying 22
percent, that means the door isn't open to that possibility. And there's a very significant chance that that's going to be the right thing to do. The main reason to move slowly in monetary policy is because you want to preserve the option of moving less far. It's looking less and less likely that the right thing to do is to not raise rates by at least another 50 basis points. And if that is the right thing to do, it's best for credibility at its best for ultimate stability to make that move more quickly.
So I've been very disappointed to see some of the speeches coming out of the Fed that have seemed to leave the march off the table as a possible place for 50. And I hope the senior leadership of the Fed will guide to agnosticism on the possibility of a 50 basis point move in March, and we'll do that sometime very soon. Larry, all clinging to the notion that our central bank is independent from the political process in this country and seem to want to have Jay Powell up for testimony for two days before Congress next week. We also have a nomination to come, the new vice chair.
This politics necessarily get injected with already. People are talking about possible candidates for the vice chair position, whether they're a hawk or a dove was something where progressives in Congress saying, let's get a dove in there. I guess I'd say this. I'd say that the chairman has an important opportunity when he testifies to reset. Expectations. And to address the growing credibility problems that the Fed has. I progressives are making a serious mistake even by their own lights.
If there's a sense that progressive political conviction is guiding the next nomination and even more if that's successful in getting a person confirmed, I think there'll be very little impact on the next two or three appointments. It took two or three decisions because the Fed's going to want to show its independence. The incumbents are going to want to look like they have not been pushed around.
A new person is not going to have media impact. So you won't affect rates in the short run. But that sign of politicization will cause issues of medium term expectation and that will cause the back end of the curve to rise. So ironically, that kind of political pressure is likely to put more inflation premium into interest rates and likely to lead to higher long rates, which means higher mortgage rates for the very people. Progressives are trying to help. This is really a very misguided and
problematic strategy for progressives. Even if one had their judgment that what's most important is lower rates and to stimulate the economy. So I hope they'll back off this kind of public campaign. Larry, on Sunday begins the meetings of the National People's Congress over in China, everyone anticipating new projections for growth, as well as a new economic team for President Xi. What are you looking for?
You know, I think there are two things that people should keep in mind is they're thinking about China. One is the importance of predictability and stability. I think that the Chinese underestimate the extent to which the previously respected members of the financial community can disappear without that having collateral impact on confidence and on the flow of capital. And if there's a sense of the politicization of things, financial to a growing degree, I think that's something they've got to be very careful. There's a backdrop that's maybe an under
told story, which is that which is what's happening demographically. NIKKEI stat. Who is the leading watcher of all things? Demographic tells us in the Washington Post that China has half as many births last year as it did in 2016.
That is a sea change with extraordinary speed. It downwards trend had heavily started before Covid. And in addition to what that means for the labor force, the age structure of the population down the road when a population's deciding to have half as many children have that revolution in six years. It says there's some very fundamental concerns about the future in that society. Larry, thank you so very much.
That's our very special contributor here on Wall Street week. He's Larry Summers of Harvard. Coming up, if baseball can pick up the pace, why can't Congress? This is Wall Street week on Bloomberg. Finally, one more thought. Haste makes waste. So Erasmus supposedly said back in the 16th century. But whatever passed for a hasty five hundred years ago looks awfully slow today. What with apps giving us instantaneous
trading, investing should be as ubiquitous as shopping online. It should just be something that people do or those scratch off lottery tickets. We won't admit that we are all buying. I got you a cash multiplier ticket, so a
chance to multiply your winnings up to 100 times even as fast as most things are today. Some things could move a bit more quickly, like baseball games. Notorious for going long, though not as long as that 2018 World Series game that went 18 innings in over 7 hours. Those are big baseball game. I don't know someone how and what he was going to bring people back home are waking up right now to the end.
It's probably best, if not the best game I've ever been part of. Red Sox coach Korra might have enjoyed that long game, but Major League Baseball has a better idea. This week we saw the first games played under new rules that are supposed to pick up the pace, including a pitch clock to keep the game moving. I think that the clock has been really successful in the minor leagues with a minimum of disruption in terms of the play of the game. Early reviews indicated it was shortening games by an average of 30 minutes. A game, though, also causing a bit of
confusion when one of the first violations wasn't for the pitcher failing to deliver the ball to the plate on time, but for the batter not getting ready. Time code Connelly took too much time. He's out. He was it. He didn't have his eyes on the pitcher. Oh, the 8 second pitch mark on the pitch clock. It makes us wonder what else might
benefit from a pitch clock or its equivalent. An obvious target are those Oscar acceptance speeches which they've tried to keep shorter by turning up the music, leading some award winners to try a competition with the audible pitch clock. Who among us has the wish for a pitchfork to be put on those endless strategic planning meetings we all attend? But most of all, what we apparently need is a pitch clock on debt ceiling relief, one that would require Congress to get its act together before we're on the brink of default. Do it clean, do it without brinksmanship, do it without this risk of hostage taking where things could blow up. And while we're at it, maybe we could ban shifting in Congress the way they've done for the infield in baseball. But then again, where would that leave Joe Manchin? And so now we're back in the match analogy game.
Wonder whether there's one more any left to play that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
2023-03-06 09:05
