Wall Street Week - Full Show (11/04/2022)
Getting tired of higher interest rates, chasing stubborn inflation. Governments offering more of the same. And if a war with much more at stake than just money or politics. This is Bloomberg Wall Street week. I'm David Westin. This week, our contributors Larry Summers on the Fed decision day Wednesday, followed by the jobs numbers on Friday. The good news is the economy looking
robust. The bad news is not much evidence of inflation restraint yet in trade. And Steve Rattner on what's at stake for investors as Americans go to the polls in the midterm elections. I think elections are hugely consequential for investors because there's a lot at stake here. This week, it sometimes felt like it was more of the same, starting with the next phase of Russia's war in Ukraine, which saw Russia target civilian facilities, as explained by John Kirby of the National Security Council. We know that this is yet another wave here, airstrikes, a lot of missiles fired at, in particular the capital, fired at both power and water facilities, even as the first lady of Ukraine, Elena Zelinsky, told the world just how hard it is really for the Ukrainians.
Nobody can imagine how tired Ukrainians are. The threat is not just Ukrainian for Ukraine and for us. Fatigue means that we will perish. Meanwhile, the rest of the world continue to wrestle with the effects of the war, including higher energy prices.
With President Biden promising to take action and blaming the problem, at least in part on the oil companies, record profits today are not because they're doing something new or intimate. Their profits are a windfall of war in Brazil and in Israel. New elections yielded old results, with former President Lula da Silva narrowly winning re-election to the presidency. We've been covering the Brazil election, of course.
It's a historic, narrow victory of Lucy Marcial, Lula da Silva, the former president, and Benjamin Netanyahu heading to a fifth stint as prime minister of Israel in Israel. The fifth election in four years appears ready to return Benjamin Netanyahu to power. But the main events for global Wall Street this week came from the central bank's first and foremost from the Federal Reserve, which on Wednesday did as expected and raised interest rates another 75 basis points. With more to come, according to Chair Jay Powell, we still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected. While the Bank of England came in with
its biggest increase in more than three decades Thursday and Governor Andrew Bailey warned about what could happen if they don't take steps now. If we do not act forcefully now, it will be worse later on. And that's a forecast issued today shows it is a tough road ahead. And then we ended the week with U.S. jobs numbers, which came in higher than expected. Adding another tune in.
Sixty one thousand jobs with wages going up another four tenths of a percent over the month of September, which could have sent markets into a tizzy but didn't. As equities had already taken a hit from what chair Paul had to say back on Wednesday for the week, overall, the S&P 500 gave up three point thirty five percent. The Nasdaq was off five point sixty five percent. And the yield on the 10 year was up
about 16 basis points, ending the week at four point one six percent. Take us through the week in the markets. Welcome now, Sharmeen, most of our money. Goldman Sachs, chief investment officer
for wealth management. And Sara Kidder, co-founder and CEO of Causeway Capital. So welcome, both of you. Back to Wall Street. Good to have you here. Let me start with you, sir, if I may. So what's an investor to do with what they saw this week? A lot of turmoil.
No doubt about it, David, and strong payroll data makes the Fed job much more difficult. This labor supply shortage situation is quite concerning. So it looks as if the Fed is going to have to continue raising rates. And this creates a tremendous headwind for the U.S. market and for markets around the world where central banks have to move up, if not in lockstep with the Fed.
They, too, have to be tightening in order to quell inflation that is global. I I wonder, did Jay Powell get us ready for this to some extent? I'm assuming he didn't have any idea what the numbers are going to look like, but he sort of warned this on Wednesday what they're going to have to do. When we think of this number, though, I don't think we have as pessimistic a view and as pessimistic or read. In fact, you could see what happened to the market today at the end of the day. And you could say, in fact, the market's probably saying it's not as bad a number from a tightening in a recession perspective. So, in fact, our view is that if you look at the non-farm payroll numbers at the beginning of the year, they were averaging over three months, about six hundred.
The last three months now are about two hundred ninety thousand. So that's nearly half of what, more than half. So that's a significant slowdown in the economy that we're seeing. And then if you look at the average hourly earnings and you look at what the latest three numbers are, about three point nine percent, the prior three months, it was 5.2. So directionally between what the Fed has been doing and generally financial conditions in the United States, things are slowing down and it's not insignificant.
So the question is, how much does the Fed need to tighten to lower those numbers even further? And our view is that they do have more to go. But I'm not sure the idea that it's definitive they have to go to 5 percent or 5 and a quarter. It's not so obvious to us. At the same time, are the markets fully describing Sharma using what the Fed is going to have to do? Because as you say, they're going have to do a lot more.
As Jay Powell said, he was put to the markets. Get that? Obviously, I think the markets if you look at the pricing on the tenure, if you look at what's happening in the short end of the curve, and if you look at the market volatility that we're seeing in the equity market, we do think the market, the markets do understand the uncertainty of that. We actually encourage our clients to think about the recession probabilities with a very open mind. We have two incredibly economists, great experience. One is Bill Dudley, former partner at Goldman Sachs, our chief economist, and he became head of the Federal Reserve Bank of New York and vice chair of the FOMC. He has a 70 percent probability of recession. And then you look at John Hatzius, our
current partner and chief economist, and he has 35 percent. So that tells you that we should think about recession as a 50/50 probability. We may have a recession. We may not. And our view is the market is priced priced to that, that the market is already saying the odds of a recession are very high. What about it, Sarah? Is the market discounting already a fair amount of a recession? I mean, actually, so the numbers suggest that if not all of it, a fair amount is already priced in.
That's very tough to say. David. What we do know is the laggard effects, as the Fed is pointing out in our economy wide. In fact, they're global. And more more companies we speak to, you are talking about. SALES are holding up. They have some serious cost pressures. And but they're just seeing this beginning of demand starting to turn down across industries. So it looks to us like it's early days
for what may be happening to earnings. And it's only an earnings bottom to markets begin to really anticipate the recovery if earnings continue to be revised downward. We're in for a pretty tough period. And the higher higher interest rates go clearly, the more pressure, downward pressure on earnings multiples, which again, is not nice. Is it not helpful from an investment perspective? Charming. What is your view actually on where we are compared to, for example, emerging markets or compared to China? Our market is our market already discounted more? Our view is that the equity market has actually discounted a lot. If you go back and look at past recessions on average the median and we look at the median because you don't want, for example, really extreme numbers to be pulling down the market. So if you look at the median on average,
it's down about 24 percent. Then you look at the average numbers, it's around 30 and high to low. The S&P 500 has actually been down about 25 percent. So to say it's not discounting a recession seems a little bit of a stretch to us. Our view is it has already discounted a bit of a recession.
And then the next question becomes, if we do have a recession, how much further could it go? Could it be down another 5 to 10 percent? Yes, but we do think a fair amount has already been discounted. The other thing to keep in mind is the equity market usually actually rallies before the trough and earnings usually about by about six plus months. So we don't actually have to see the big downdraft this year as a time to go back into bonds. I wouldn't we think rates are going to continue to rise, but we really equity specialists. And if it's interesting, interesting what Charmin has to say about markets in aggregate, but start to desegregate and there is a fascinating push and pull now globally in particular us between what's happening in the more defensive sectors. Let's take energy aside.
But those that are less economically sensitive versus those that are very economically sensitive, and we think one of the biggest decisions that investors want to need to make over the next 12 to 18 months is wind to make that shift and and feel one way to think about this is just start now and do it very gradually because we just don't know where. Mark, we could talk about it all day long, but we have no idea where markets will actually bottom but in out of recession or out of economic slowing. The best performers typically are the more cyclical stocks or those cyclical sectors. And it's getting from the defensives to the cyclicals. That is the critical journey in this market.
Sara, one of the things we have found is that when you've had a big downdraft in the market, for example, if equities are down 20 percent, usually the next 12 months on average, equities are up about 23 percent. And if you look forward, two years, equities are actually up over 30 percent. Now, this is the S&P broadly. And obviously when you look at the sector dispersion, that's been quite significant this year. As you point out, energy's up 70 percent. You look at sort of technology and other sectors down 20, 30 percent.
So clearly huge dispersion. But in aggregate, the equity market tends to rally after such a big downdraft. So does it make sense actually, for investors to start getting more aggressive with their portfolios? Well, this is really hard to say, not knowing investors risk tolerances, but they to my point earlier and just again, we can't know the bottom, it's true of us as equity analysts and portfolio managers, we never know where a stock is going to bottom and therefore we accumulate early. And then we also get quite a bit of
as much of the stocks we can, as low as we can in the average entry price is usually very attractive and that creates a lot of room to make money on the way up. And I think that same analogy applies to broad markets. So there are ways of working one's way to getting access to different markets around the world, especially emerging that are actually on their backs relative to developed. But they're all at multiples now that are beginning to look more attractive as long as earnings don't collapse. And that's the big if.
OK, Charmaine. So our fanny of Goldman Sachs and Sarah Carter of Causeway Capital was staying with us as we focus on some investments outside the United States and what we expect from China. Emerging markets in Europe. This is Wall Street week on Bloomberg. Wall Street really loves ambiguity because the truth is that while the mid-term election results scarcely constituted a one vote of confidence in President Reagan's economic program, they were far from the Democratic landslide that some pre-election forecasters were predicting. Indeed, the actual result Republicans holding the Senate and losing 26 seats in the House was remarkably close to the figures I gave on this program last week. That was Luis, organizer, of course, on Wall Street week after another midterm election, two years into a new president. That president was President Reagan and
it was 1982 when it didn't come out quite as badly as Republicans had feared, something the Democrats this year are hoping for. The top movie back then was First Blood, starring Sylvester Stallone as Vietnam vet John Rambo. The number one song was Up Where We Belong. By Joe Cocker and Jennifer Warnes.
Still with us, our Sarah Carter of Causeway Capital. And Charmaine, most of our money. Goldman Sachs sold Shery Ahn. Maybe some parallels with 1982, but one thing is very different.
There wasn't a lot of U.S. investment in China back in 1982. Flash forward to today. Where are you on China? We've just come through that 20 national Congress in general. We've had a very strong U.S.
preeminence view recommending clients have a significant overweight to U.S. equities and in turn, a significant underweight to emerging markets, which includes China. If you actually go back and look at the returns from the trough of the global financial crisis to the present, you will see that U.S. equities are up about 16 percent on an annualized basis and 5 percent in China on an annualized basis. But actually, one needs to look at the impact of that compounding as this chart that you just put up. If you had had one hundred dollars and put it in U.S. equities today, you'd have seven hundred
fifty dollars if you would put it in China. Hundred and eighty eight dollars, not even a quarter of those returns. Now that has prompted some people to say what that actually means.
China is very attractive. We actually think that China is not attractive. China's growth will be much slower than people expect going forward. China has overinvested in property, in infrastructure. They have a major demographic problem. So when we actually look at it on a forward basis, we think the earnings will not be there to even support these valuations. Oh, I have just have to jump in that day.
There is so much truth in that about China. It's just so interesting to see, though, that much of the big sell off started in just 20 21 last year. China's currently 30 percent roughly of the emerging market benchmark. So it's really important and it has both
buoyed up the benchmark and dragged it down. But there's China and Taiwan together. Some 45 percent of the index. You sort of can't get away from China if you want to invest in emerging markets. And one way or another, their growth rates have tended. They tend to be faster than the U.S. in the past.
And sure, Porsche, to your point, Sharmeen, they are slowing. But the opportunities there, because it's just such an enormous market are really hard to pass up. I think of the property sector is horrible. And what place had the worst property
wipeout we can think of in the late 80s? It was Japan. And yet there was still money to be made in that. What ended up being rather stagnating situation if stock selection was good. So we're never writing off China. But what's irresistible about emerging
markets, again, with China as the anchor tenant is that it's trading at just a 20 year low and price to book value. And then on a price to earnings basis, it's also at this extraordinary bouncing or long it's 20 year low versus the U.S. market and the world index. So at some point time, you have to say the price is right for emerging markets led by China. There's no doubt about that, Sarah. But when we actually look at the price,
we think you need to think about the sector waits. So emerging markets in general. And that applies to China as well. Have a very different mix in terms of the sector exposure relative to the U.S.. So on the surface, when you're looking at the discount from China or emerging markets or even developed markets relative to the U.S., it looks like it's very low.
But on the other hand, if you adjust for the sector weights, meaning, for example, technology is 25 percent of the S&P 500 and less in China, less in emerging markets, and maybe even less than half in developed markets. If you adjust the sector, weights in these countries and regions are not as cheap as it appears. In fact, suddenly emerging markets, instead of being, for example, let's say a multiple of 16 for the U.S.
versus 10 for emerging markets. Once you adjust the weights, it's more like 14 and a half times forward earnings. So, in fact, if you adjust the sector, wait, then we don't think these markets look at as cheap. And historically, that discount has not
always been an indicator of good forward returns. But, sir, you mentioned a very important point, which is stock selection. It doesn't mean that stock selection can't add value, but when we look at the countries in aggregate and broadly at sectors, we just don't find them attractive at all. That's a very good point about sectors.
And I'd argue this think about it trims in value versus growth. The growth part of the emerging market benchmark doesn't still look pricey, but if you strip out the stocks that are in that lower valuation group, they have they're just they're at lows that we haven't seen in a long time. They're very, very compelling. And they you can find those across sectors, which is pretty useful, but only for China. The catalyst will make China much more interesting. It's just a recovery. And if it turns out the head of our
China office in Shanghai tells us next March is likely the date at which the the gradual reopening becomes less gradual to the point, it's so obvious that they can't be denied by the party leaders that will create an economic tailwind for China, even with a very tough property market. And it could, interestingly, coincide with what is still slowing in the rest of the world, making China look relatively attractive. Sara, I suspect we're all looking for bargains and trying to avoid falling knives. All right. Whether it's China or somewhere else, talk about Europe. Are there bargains in Europe at this point or is that a falling knife fill and with the Russia invasion of Ukraine in February? Europe was just awful and it continued to be awful. And the cyclical part of Europe, any type of manufacturing, any users of natural gas were sold off heavily by markets, materials within that chemicals. So many stocks trading at discounts to
book value that indicated apocalypse. So, yes, bargains in Europe and they're still there. Some of those stocks have improved. But to the degree there isn't a harsh winter and Europe doesn't consume all of its energy, it's gas storage reserves, which we think it won't.
It looks as if Europe can squeak through this winter. And perhaps even next. Meanwhile, there's a feverish effort there to build LNG terminals and ensure that there's a re gasification capability. This all takes time. But Europe is united around their concern of having been dependent on Russian energy, in particular natural gas and their determination, fierce determination to be independent from that. And that itself is turning out to be useful because we needed to see, especially within the eurozone, some type of fiscal unity.
And they're getting closer to that. So it's not your business to great place to be as a tourist, but it certainly looks from some perspective attractive. So Shery Ahn live issues as a chief investment officer, how do you discount geopolitical risk? Because obviously the war in Ukraine is awful. Looks like it's going to last forever, but it may not.
How do you discount the possibility if something happened, it went away tomorrow, it would change the valuation dramatically. Do you take that into account at all? We pay a lot of attention to geopolitical risk to try to figure out what has or hasn't been discounted. And obviously, it's very hard to know at any point in time what the market has discounted. But both in terms of China and in terms
of Russia, we think the geopolitical risks are significant and we cannot anticipate them. So do we know if there's further escalation? Would Russia use some kind of a dirty bomb? What else will they do? Will they attack infrastructure or will they increase cyber attacks? So definitely something to worry about. Investors don't like uncertainty. Thank you so much. The Shery Ahn most of our money.
Goldman Sachs, also Sarah Carter, Causeway Capital. Coming up, we'll take a look at what's coming up next week on Wall Street. Week on Bloomberg. This is Wall Street week. I'm David Westin. It's time now to take a look ahead at next week on global Wall Street, starting with Juliette Saly in Singapore.
Thanks, David. The week ahead will likely confirm a deepening slowdown in China. When the monthly activity data is released, there was a weeklong holiday in October, but still export growth is expected to weaken. And Bloomberg Economics expects factory prices to drop for the first time since late 2020. While consumer inflation is likely to soften further on the flip side, GDP ratings from Indonesia, Malaysia and the Philippines are likely to show South East Asia's growth is holding off. Climate change is very much in focus
this week as the Cop 27 conference gets fully underway in Sharm el Sheikh. With inflation and rising energy prices center stage, the summit in Egypt will seek to hold political leaders to their carbon reduction commitments. And after the previous week, when we got the Bank of England's latest rate hike, we're gonna get an update on UK GDP. On Friday, with a first reading for the third quarter and the fifth and final season of the Crown will be released by Netflix on Wednesday. This time, the company has added a disclaimer to its marketing for the series about the royal family, saying the show is a, quote, fictional dramatization inspired by real life events. With the Fed meeting out of the way, markets will focus on two key economic data points in the week ahead.
Consumer credit and consumer inflation. Credit card balances are projected to have jumped by 33 billion dollars in September. That would be about triple the average monthly advance over the past decade. Later in the week, we get the Consumer Price Index report, which has posted a headline reading of 8 percent or more for seven straight months through September. Finally, Tuesday is Election Day, a pivotal midterm vote that will determine control of the House and the Senate.
A shift in a political power with major implications for tax, fiscal and economic policies. David thanks to Juliette Saly, Dani Burger and Romaine Bostick. Coming up, control of the U.S. Congress may be up for grabs at the midterm elections on Tuesday. But what is at stake for investors?
We have Steve Rattner of Willett Advisors. That's next on Wall Street week. Tuesday is the day for Americans to decide who will be in charge. Up on Capitol Hill for the next two years, with expectations for the Republicans to retake control, the House Republicans have a lot of optimism going into the election and the Senate pretty much a toss up.
No one knows exactly what's going to happen with the Senate, with races just too close to call. But as much time and attention as we're paying to the midterms, what real difference will the outcomes make for global Wall Street? Republicans like Kevin Brady claim they will make sure less money goes to the government, which will benefit business. You'll see a push for less government spending, less taxes and less regulation that drive up inflation. You'll see a push for more American made energy. While Democrats claim that it's all
about fairness, they're going to shut down the government by not providing the votes to pay our federal debt. This is irresponsible, but some who follow it closely, like Libby Cantrell of PIMCO. Question How much will really change one way or the other? Is the practical differences between Republicans taking back just the House and taking back both the House and the Senate are really de minimis. And to give us some answers to what difference the midterm elections might make for real investors, we now welcome somebody who is putting real money to work. You, Steve Rattner. He is chairman and CEO of Willett Advisors. They invest the personal and philanthropic assets of Michael Bloomberg. Of course, the man who founded our
company and still owns most of the shares. So welcome, Suze. Great to have you back on Wall Street. So you've had experience in Washington as well as in New York, on Wall Street. We spent a lot of time. People get paid a lot of money trying to analyze these elections about what they will mean for investors. What's your experience? I think elections are hugely consequential for investors because there's a lot at stake here.
Take, for example, tax policy. If you are lower taxes for wealthy people in business, then obviously there's one team that you want to vote for. If you want lower taxes for working people and people below, then it's another team you want to vote for. There's all kinds of policy decisions. We've seen an enormous amount of
legislative activity. These last two years, quickly this year. And that's the kind of thing that happens after an election. So as you say, we've had a lot of legislation through Congress as the last Congress, and particularly given the fact that it was really evenly divided in Congress. So looking back, before we look forward, do you think overall that was good for investors? Not so good. I'm not sure it was great for investors, but a lot of it was stuff that we really needed to do for the sake of our economy, particularly the climate change.
And I think we should kid ourselves. Addressing climate change is going to be expensive for companies and therefore for investors. But we have to do it. Prescription drug costs, we have to get under control. So I think from an investor's point of view, some of this may cost them some money.
But I think there were things that had to be done for society as a whole looking forward to the midterms. We don't know what the results will be, obviously, but some people are projecting we could have a switch in the majority in either the House or the Senate or even conceivably in both. If you get a divided government, which is what that would be essentially, is that potentially good for investors simply because they won't do very much at all. They can't get much done and there's some stability. Yes, I think you're right. If we have divided government, it's highly unlikely, particularly in the run up to another presidential, that we're going to get much done. Look, it depends what you think the alternative is.
If you think the alternative was a Congress in the White House controlled by people who essentially wanted to make investors happy, then obviously that's not as good and vice versa. I happen to personally believe we still have huge problems in this country that we need to address long term structural problems like the debt, the deficit, for example. And having government frozen is not really the way it's supposed to work. You're supposed to bill legislate every year and not just every year when you're out of 5, 4 or something like that. You oversee the investment of a lot of money and not necessarily investing yourself and really overseeing people who do that in the course of doing that. Do you take an account in which industries, which companies might do better under a Republican administration rather than a Democratic one? Sure, you can easily see that.
As you point out, most of our money is invested through other managers who do actual stock picking and so forth. But we spend a lot of time meeting with them, as you would imagine. And yes, absolutely, they think a lot about what might happen in Washington, how that would affect the investor ability to use a word that might not be a word of different sectors, different industries, different companies. So, sure, what goes on in Washington?
I don't think any investor would tell you that what goes on in Washington isn't incredibly consequential for the economy and therefore, we all pay a lot of attention to it. This week we had the Fed Reserve come out, raise interest rates, another 75 basis points if you can, comparing contrast Fed decisions on where we are on the 10 year yield, for example, versus who is in charge of Congress, which is more consequential potentially for investors. Well, I personally think the Fed is the biggest game in town in terms of affecting the economy. I'm not quite a Milton Friedman monetarists, but I believe enough in the power of monetary policy to believe that it's it is the biggest thing that affects the economy. And by the way, it probably affects the stock market even more directly. In a sense, when interest rates go up, it's the enemy of stock prices. They tend to go down.
You've seen that happen this year and vice versa during two thousand twenty twenty one, when the Fed put all that liquidity into the market, the market went up. The old saying, don't fight the Fed. So I watched the Fed very closely. And I think it is it is far more of an influence on the economy than Congress. So higher interest rates are the enemies, you say, of the stock market in the short term. But doesn't inflation have something to do with the value of investments as well, if in fact it particularly when you talk about bonds, but other investments as well, if you've got inflation that really isn't under control. Doesn't that affect your investments? It might. But, you know, inflation is actually
good for some investments. It's good for what we call real assets, things like real estate, commodities and things like that. It really depends, I think, a lot on what accompanies that inflation. If you happen to still be in a high growth or reasonably growing economy and you've got some inflation that can actually be a positive if you get stagflation or you get high inflation and a recession like what we had in the late, late 70s, early 80s, then obviously that's bad for investors. So nobody likes inflation. It's destabilising the businesses, he said. Destabilizing to American families by.
And therefore, it's not something investors want. But it's not necessarily the end of the world for investors. You talk about tax policy and you also talked about the Fed and what happens with interest rates. What regulatory policy? Well, I could almost argue the opposite in a way that you may see more activity by the regulators because they might feel like the clock is running out on their term in office or whatever, and they might want to get stuff done. I've been a little surprised in that I would expect a very robust regulatory environment out of this administration. They've appointed people to many of the
top regulatory positions who are very much pro regulation. And you can see it's starting to happen at the S.E.C. and places like that. So I do think you're going to see a lot of regulatory activity over the next two years, regardless of what happens in the election. One of the things that this
administration said they really want to go after, if I can put it that way, private equity using things I claim next, Section 8, interlocking directors, things like that. They think that there's some and I trust things going on there. Is there a chilling effect on private equity right now? Because they also have other things that there are headwinds for them? Well, the biggest headwind for private equity at the moment is the fact that in an environment like this, deals tend to slow down or even stop. And you can see if you look at the
overall MSA volumes, how much slower it is now than it was because the sellers all want yesterday's prices, the buyers want to pay today or tomorrow's prices. So you have a disconnect there. I think I think the problem in general with mergers over the last really 20 years or more has been a pretty benign antitrust environment. And when I was in it, when I was in the MFA business, you know, clients would come in and the media, they want to talk about which of their competitors they could buy and that game. I think in this environment, it's starting to wear out and that and so that relates a bit to private equity in terms of their portfolio companies. But I don't think private equity in and of itself is an antitrust problem.
It's not as easy to raise money these days. It's more expensive. You can find it. Some people have trouble finding it, period.
Does that mean that private credit is stepping up to that is more and more of the funding coming for private credit? You're going to see that, first of all. There's just less credit and there's going to be less credit, fewer deals, fewer acquisitions, less credit. But yes, the banks have, I wouldn't say, gone out of business, but the banks have come very leery about lending. The high yield debt market has effectively closed. And so, in fact, you are exactly seeing that private credit stepping into the breach, which is attractive for investors, because it often you can get low double digit kinds of yields or returns on that. Obviously not as attractive for the borrower who was paying, you know, a few hundred basis points not that long ago. Is it attractive for financial
stability? Because coming out of the 2008 crisis, we had a lot of regulation of the banks. We sort of know, I think, what's going on there. By and large, a lot of money went to private credit. I'm not sure that it's transparent to regulators. No. And that's that's a broader problem that we've had really since two thousand eight or nine, which is that the more you regulate parts of the financial system, the money tends to flow to the unregulated parts of the financial system. Having all that credit going on outside
of the regulated part of the economy is not ideal. One last question. This is asking you to be a soothsayer, which is tricky. We saw what happened with the UK pension funds when the mini budget came out. It was not good, but one wouldn't have thought the pension fund funds were leveraged highly. And yet it turns out through some derivatives they were.
Do you see any indications, other parts in the marketplace where you might not expect leverage at all? But as the interest rate go up, it really puts pressure on some investors. That's a great question. The U.K. is my understanding that whole pension thing was a very unusual policy move that they did.
I don't know that it's replicated here. And obviously the point is that the U.K. didn't know it was a problem until it became a problem. And so I don't think you know about these problems until they really appear. So I don't I don't have anything off the top of my head in terms of things that I worry about. But a lack of liquidity, rising interest rates does put strain on the financial system and then something will pop loose. Steve, so great to have you back on Wall Street. Thank you so much.
Steve Rattner, he is chairman and CEO of Willett Advisors. Coming up, we'll 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 WESSEL.
We're joined once again by our very special contributor on Wall Street. He is Larry Summers of Harvard Alert. Welcome back. We had a lot of economic news this week. We had jobs numbers and we had fed
results, of course. Let's start with the jobs numbers, because they came in, I think, at least relatively strong. How did you interpret them? I saw it the same way. Look, the population only grows by about thousand adults a month. So any time you have 250000 jobs, you're growing at a rate that you're not going to be ultimately able to sustain. It shows that still the economy is looking quite strong.
No recession soon. You saw wages tick up. So the good news is the economy looking robust. The bad news is not much evidence of inflation restraint yet in train.
Of course, when Jay Powell, the chairman of the Federal Reserve, spoke earlier on Wednesday, he didn't know those jobs numbers are. I don't believe Simpson what he said, anticipate. Just what you just said is that inflation continues. They're going to have to keep hiking. I assume you thought what they did made sense. Yeah, I think there was a little bit of bouncing around immediately after the statement, but after Chairman Powells press conference, I thought the necessary and right signal has been sent that the Fed is determined to stay the course with respect to inflation. That a sensible judgment of where the
terminal rate, how high fed funds will ultimately have to go has gone up. Given the strong inflation numbers, the strong employment numbers that we've seen and that the Fed is determined. So I thought those were very much the right kind of signals for the Fed to send. And I think it's appropriate. I think we are starting to get some little suggestion in the data. We don't know yet. And we always have to remember about lags that the effect of interest rates on slowing the economy might in toto be somewhat less than many people supposed.
And if that's right, I think it's going to be pressure for interest rates to be pushed up further in order to get done the necessary inflation restriction. So I'm moving upwards my view on the possibilities for the terminal rate. It's not what I would expect, but it would not surprise me if the terminal rate reached 6 or more. And I think the Fed has to be noticing
that there's been started to be some upwards moves in inflation expectations, albeit from low levels. And that's got to be a source of concern of for them as well. Larry, we're also beginning to get some suggestions, including by some economists like Mark Zandi, that, in fact, that the real cause of the inflation is more a matter of supply rather than demand. And because of that, it's not going to be really effective to just try to curtail demand through increased rates. And therefore, by the beginning of next year, maybe they should start cutting back. What do you make of that suggestion?
I have to respectfully say that I can't really see a lot of logic in the views that Zandi and those like him are expressing. Look, the basic fact is that the way you tell a supply shock from a demand shock, both of them raise prices. But when there's a supply shock, quantity falls. When there's a demand shock, output is strong and output has been very strong. Employment has been very strong. The people who talk about supply shocks, it's really just the last read out of teen transitory. First, it was a story about Covid ending
quickly and it was a story about Covid ending a slow ending. Slowly, it keeps bouncing around what the story is. We've still got high core inflation and gasoline prices were mostly down for a period of more than more than three months.
So I don't hear the story. Very simple ways of looking at the data. Look at what's happening to nominal GDP, total dollar volume of GDP if that's going up rapidly. That tells you that demand is going up strongly. Learn another issue that is rearing its head. You've seen this issue before and that's the debt ceiling up in Congress because we're really pushing up against it sometime in the new year or maybe not even too far in the new year. We're now seeing some talk on Capitol Hill that perhaps particularly Republicans, if they come into power, will actually hold that hostage to get some other changes they want, particularly in things like entitlements. What's your experience with debts and
then what should we be doing? There are a lot of bad ideas in American politics, but I think it's close to the worst idea in American politics that we should hold hostage the credit worthiness of the country, threatening to default for the first time in two hundred and fifty years. And the ransom that people want is taking Social Security benefits away from retirees, not a single one of whom gets more than forty thousand dollars from Social Security. It is almost impossible to see a worse idea either in terms of the hostage taking or the desired ransom. The right thing to do is for us to raise that debt ceiling for a long time so it won't be a political football. And I hope
that as many responsible Americans as possible can say, look, yes, yes, I am for entitlement reform. I am for looking at the long run a deficit picture. But hostage taking to cut Social Security is wrong. And I hope some of the business leaders who watch this show, whose PACs are giving money to support the people who are advocating that will convey that as responsible financial leaders. They know that their companies and or
our fellow citizens have a have a stake in the United States not playing games of chicken with our country's credit worthiness. One more here. Is important arguments Supreme Court this week on affirmative action. You dealt with that not just in the comments, but also as president of Harvard. What is the role of affirmative action, United States within the economy? Look, I was pleased to sign the brief that was provided on the basis of many universities. The last time affirmative action was in
the Supreme Court and fortunately at that time, affirmative action was upheld. Who knows what will happen this time. But I'll tell you, David, I think what's most profoundly important for fairness in our country is not the admissions policies of a few dozen elite institutions. What's most important is the achievement and the achievement of our minority citizens and the educational achievement statistics that have come in from Covid are catastrophic. They represent a 25 year fallback in progress. We had been making at a time when math
smart, analytic, smart workforce has never been more important to compete with China. And this ought to be our national preoccupation to make sure that every kid learns everything that they can. And, you know, more people are talking about the latest poll than our talking about these test results that are really showing. Millions of kids are being left badly behind in an age that's all about knowledge. So terribly important. Thank you so much. That's Larry Summers, our very special
contributor here on Wall Street, where he is, of course, from Harvard University. Coming up, if at first you don't succeed. We'll take a look at two world leaders trying again this week. That's next on Wall Street week on Bloomberg.
Finally, one more thought, second act. There what most of us hope for. But F. Scott Fitzgerald once thought Americans may not get history is full of people who were counted out and came back, sometimes even stronger than ever, like Richard Nixon losing to JFK in 1960 and coming back to take the presidency, go to China and win re-election by the second largest margin ever. Though he did and rather badly with that
whole Watergate thing, I shall leave this office with regret it not completing my term, but with gratitude for the privilege of serving. Sure, President and Steve Jobs, driven from the company he founded only to return when Apple was at death's door. Apple needs to find where it is still incredibly relevant and focus on those areas.
Apple hasn't neglected its core assets for a while and take it to greater things than anyone could have imagined, revolutionizing the way we communicate and live our lives. These are not three separate devices. This is one device. And we are calling it iPhone, or Michael Jordan, who retired after winning three NBA championships, went to play baseball sort of, and then returned to the Bulls to three peat yet again, there is a reason you call somebody the Michael Jordan of he is the definition.
Of somebody so good at what they do. But those those are the second acts that worked. There are others that didn't go so well, like Teddy Roosevelt, who won his second DAX so badly that he turned on his own Republican Party when it refused to nominate him.
Created the ill fated Bull Moose Party and succeeded only in putting Democrat Woodrow Wilson in the White House or Tiger Woods, arguably the greatest golfer of all time, who crashed and burned figuratively and then literally and valiantly tried to come back and play through the pain which we all watched with sympathy. And yes, a bit of regret. My buddy certainly can get better. But realistically, not a whole lot. At 46, don't quite heal as well as you do at 26. This week, we got our fair share of new second acts to watch with Lewis Ignacio Lula de Silva becoming the once and future president of Brazil, narrowly beating out the current president, say Air Force. A narrow Brazilian president, Jacob ISE NRA has broken his silence on his election loss, promising to respect the Constitution, but still stopping short of formally conceding and talk about a comeback.
Less than three years ago, Lula was in a Brazilian prison on money laundering charges released only when a higher court ruled that the original sentencing court didn't have jurisdiction to convict him in the first place. And then there's the biggest comeback kid of them all. Bebe Netanyahu over in Israel poised to come back for a fifth time as prime minister, ducking and weaving and moving ever further toward the religious right, but doing whatever it takes to survive. Former Israeli Prime Minister Benjamin Netanyahu looks poised to return to power after the fifth election since 2019. Time will tell whether the second acts of Messrs. Lula da Silva and Netanyahu look more like Tiger Woods or like Steve Jobs. A lot of times people think they're
crazy. But in that craziness, we see genius that does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.