Wall Street Week - Full Show 12/23/2022
Inflation. Ukraine. Climate. China. You name it. And investors have faced it in twenty two. This is a special year end version of
Bloomberg Wall Street Week. I'm David Westin. Whatever else you might say about 2022. You cannot, cannot call it boring. We began the year with the first major ground war in Europe since World War 2. I would like to remind you of the words that United Kingdom already heard.
We will not give up. We will not lose. We will fight till the end. At sea, in the air, we will continue fighting for our land. Whatever the cost. We will fight in the forests, in the fields, on the shores, in the streets.
And inflation rising rapidly to test the resolve of central bankers all around the world. It's unconditional. Our commitment is really need to restore price stability, get inflation back down to 2 percent. Because without that, we're not going to be able to have a sustained period of maximum employment with even the Bank of Japan making moves that some took as tightening. Hence, though, Governor Kuroda denied it, the B.O., Jane, tends to aim for price stability by increasing the sustainability of this monetary easing. It's not the beginning of an exit strategy, and we are ending the year dealing with the aftermath of a crypto collapse triggered by one of the biggest financial scandals of all time. As FTSE X is in bankruptcy.
Billions of dollars have gone missing. Founder Samuel Beckman, freed faces multiple fraud and conspiracy charges, not sophisticated at all. Sophisticated perhaps in the way they were able to hide it from people. Frankly, right in front of their eyes. Then there were the risks left over from the year before. Like climate change, we're not in a good
track right now. The world is not serious enough about reducing our emissions fast enough. And we've had to deal with continuing effects of Covid. As China pursued a zero Covid policy
that hurt its economy. What is your Covid policy mean for recession and inflation? And unfortunately, it means stagflation. Not surprisingly, the markets reacted to all this risk with some trepidation, with the stock market moving into bear territory. The S&P 500 at one point was off some 20 percent for the year.
The Nasdaq down over 30 percent, while the yield on the 10 year climbed from under 2 percent at the start of the year to hover around three point five percent by year's end. Through the ups and downs of the year, Wall Street week invited the most experienced experts and investors to rise above the day to day and week to week and give us a broader perspective on where we are and where we're likely going. We begin this year interview with the smart investor.
That's the person we're trying to speak to and speak with. Every week, starting with one of the most distinctive and successful that there is Sam Zell of Equity Group Investments, who told us what a tighter money meant for deal flow, at least for those with the cash. We're seeing more deal flow. We're seeing more situations where companies are having difficulty figuring out what to do.
We're seeing situations where. Nine months ago, financing a transaction. X, Y, Z size was nothing. You know, as you said, money was free. What's changed dramatically?
I mean, think about the impact of the doubling of interest rates in eight weeks. W just eight weeks earlier, interest rates were two and a half to three and now they're five and a half to six. That's an enormous change and it's going to slow down everybody's activity.
It's going to for sure, impact getting deals done. But in our particular case, because frankly, I've oftentimes told the world that, you know, when I'm liquid, the stock market can't go down, it only goes down when I'm in liquid. And here I am sitting there with a level of liquidity I've never experienced in my life because my focus for the last three and a half years has been and nothing more important than liquidity. So you've got a significant deal flow if anything is bigger than it was before. What about the quality of the deals? Are they different from what they were? For example, preach a pandemic? I think they are because they think they're a little more realistic. I think the prepayment gimmick, when
money was free, there were transaction. I mean, the whole spec market was, you know, we did a spec and chose not to take it to the next level because when we did the spec, spec seemed like a very interesting way to, in fact, monetize opportunity. It very quickly became a highly speculative scenario, depended then preposterous valuations that ultimately led to the crash of the whole spec market. You know, world has changed a lot since
then and that and the change is basically modifying what you can do. On the other hand, there's always demand for capital. Sam Zell sees an advantage to his liquidity as rates go up.
Steve Ratner's Willett Advisors manages the personal and philanthropic funds from Michael Bloomberg. He is the man who founded and owns most of the shares in our parent company. Steve sees some of the same challenges in and rising rates, but also keeps an eye on the regulatory environment, with a Biden administration committed to more regulation, even if it hasn't quite gotten there yet. 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 FCC 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 like claim next, Section 8, interlocking directors, things like that. They think that there is 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 and 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. Steve Rattner manages a very large and very diversified portfolio of investments. Jeff Plow, CEO of Related Companies, focuses specifically on real estate running one of the largest firms in the United States. He came on Wall Street week to explain what is happening in commercial real estate in the aftermath of the pandemic.
What we've seen is, is a real dispersion in values between older buildings and and brand new buildings. And it's not just new, it's new with the right features, the right amenities that tenants are looking for today. So we're seeing more and more corporations thinking about how do they get people back to their office and thinking about using the physical space as the attraction to bring people back. But truthfully, people don't want to go back to old kind of quiet offices that are dark and have bad air circulation and long waits in the elevators and no amenities. So what corporations are doing is investing in their office space, not for occupancy, but for talent attraction and retention. And I think that's where you're really seeing the.
Buildings and the new buildings that are focused on this, that have the right amenities, that have the right HBC circulation, that have hospitality type services, that have great air and light and the right type of build out the build out in office space is changing tremendously where we used to see kind of the old Mad Max version of a build out with know private offices on the exterior wall and assistance offices or tubes inside. That's really not the way office is built today. We're seeing much more collaboration space teaming space, meeting space food service tables around food where people are using for gathering and working as opposed to private offices. So this type of office of the future, we think can be successful and is successful.
The data is there today for these new buildings. So we compared brand new buildings across markets in the United States, not just here in New York. And you look at new modern buildings with the right features, the right amenities, and the demand for those buildings is tremendous. That was Jeff Lough, CEO of Related Companies. Coming next in our year end review is the role that climate change and the response to it head on investors this year from upside. Beschloss in Rock Creek. Bob Michael Barr, J.P. Morgan.
And former EPA head Christine Todd Whitman. This is a special year end version of Wall Street week on Bloomberg. This is a special year end version of Wall Street week. I'm David Westin investors focused once again this year on climate. What can be done about it and how those efforts could affect investments? It is the E in environmental, social and governance that has loomed large for asset managers and for governments leading up to the COP 27 gathering in Sharm el Sheikh with much promise, but with some people coming away thinking governments had not truly delivered. We talk of a Sunny Beschloss, CEO of Rock Creek and Bob Michael, CIO and head of fixed income currencies and commodities for J.P. Morgan Asset Management about COP 27 and
the role of the private sector in driving much of what needs to be done in COP 26. They had the Jeep fans, which was not large number of large asset managers signing up to make pretty significant shifts in their carbon footprint. But most recently they started walking back from that or not wanting to sign quite on what they had agreed to in COP 26. So I think it's very, very important as we're having these meetings. Maybe they shouldn't be every year. Maybe they should be every other year or less often, but show some sort of progress. And the most important part of the discussion this time, David, has been the fact that developing countries, again, have felt that they are in some cases suffering, because if they're an island economy, they're going underwater.
If they are affected by by droughts and by floods. And a lot of it might be caused by those who did use a lot of carbon over the last 10, 20 years. And they're asking if they could get help. And that help is really not coming. And I think that is the really major summary of COP 27, which is that the expectations of investments into climate are probably less than what we expected going into the Cup. Why just picking up on that on the investments in it? Bob, I want to come back to you because I want things at least I'm taking away from COP 27. You could certainly hear. Listen to John Kerry, the president's
special envoy on this subject. We're not going to get it from public money alone. It's going to take a fair amount of private investment as a bond person. Are there bonds that are green bonds or in the climate or. That makes sense as a business matter?
There are I think for sure if you're going to finance something, which is what bond investors do, you want something that has something of a green agenda to it. And we're hearing that from our clients. There's more and more money coming into this space. I think I've Sonia. Help is on the way for the island.
Economies of the large scale investors want to commit capital to this space. The ultimate goal for most of those focused on climate change is to get to zero carbon emissions. And those who know say that we can't get there without some substantial reliance on nuclear power. Christine Todd Whitman served as governor of New Jersey and then EPA administrator. She's become an expert and an advocate
when it comes to the future of nuclear power. She joined us on Wall Street week to lay out the case for nuclear. Well, I think nuclear play a huge role, at least in the transition from fossil fuels to renewables. Renewables are not yet based energy. Their peak shaving and we're a 24/7 society, as is the rest of the world.
The world is 24/7 and nuclear is the only forward based power that releases no regulated pollutants or greenhouse gases, wireless producing power. And we have an incredible safety record here in this country on nuclear and actually with few obviously very huge exceptions being Chernobyl and what happened in Fukushima Daiichi. Overall, worldwide, it's been it's been safe and getting safer all the time. I mean, the U.S.
Nuclear Regulatory Commission is considered the gold standard on regulatory oversight of nuclear reactors. I don't think, given cost and time, that we're going to see any more large reactors built in this country. Certainly they are being built in China. They're being built around the world. And we can certainly play a part in
developing the parts for those reactors. But I see the future for nuclear right now being in the small modular reactors. Well, let's get to that and what we're at first of. Give us a sense of the scope of it already. One of the things I have learned is
nuclear is actually one of the few things that really don't have emissions that can be taken to scale. I think something like 20 percent of energy in United States are generated by 70 percent in France right then. You know, you saw an example of what happens when you take nuclear off line. When California took the San Onofre nuclear reactor off line. Their emissions went up and the cost of their energy went up. I mean, it was totally counter to everything that they were hoping to achieve in my mind. And so what I found over time is that
even if you have an opportunity to talk to people and answer their very real questions, I mean, it's it's normal to have questions about the safety and you should ask them, but the answers are really good and they're based on our history. You can prove that, in fact, these things work. And once you do that with people, they get much more comfortable with the idea of nuclear. It's just that for so long it's been used as, frankly, a fundraiser, allowing a lot of times for the environmental groups. And we need to get the public to understand, particularly with the new small modular reactors that are built in a contained facility, they can be placed on site. They're much safer technology. They're a much safer way to produce the nuclear energy.
So overall, there are really, I believe, have the potential to make a huge difference, particularly if you think about the rural parts of America where you're not on the grid or you're not close to the grid. You can take a small modular reactor and provide power for an entire town, for an entire business. So they have a lot of potential there. So let's pursue that question of safety, because that is a lot of people's minds, without a doubt. And as you've mentioned, we've had some
horrific instances. Is the issue of safety that people don't realize that actually the track road is quite good for nuclear? Or is it technological developments such as as you're referring to, a small module reactors? No, I think it's because people just don't know. They don't understand. I mean, I get a lot of questions. I used to in the past about, well, what about the spent rods? And first of all, I tell them from all that, when the time we had a hundred and two nuclear reactors in this country and you took all those spent rods and you put them in one place, you'd fill up one football field to the height of the goalpost. They might have gotten slightly above that now because this was data from several years ago. But the point being, it's not this
massive thing, this size of the state of Vermont that people kind of have in their minds. And the other thing is that what's in those spent rods is 90 eighty seven to 90 percent fissionable material, meaning unused energy. And in France and Japan, they've figured out how to reprocess that and get the energy out of those rods, rendering that what you have is that, quote unquote, bad stuff's too down to 15 percent.
That was Christine Todd Whitman, former administrator of the EPA. Coming up, we'll take a look at what 20 twenty three may have in store for global Wall Street. This is a special year end version of Wall Street week on Bloomberg.
This is a special year end edition of Wall Street Week. I'm David Westin. Let's face it. 22 has not been an easy one for investors. A Russian invasion of Ukraine. China's struggling with Covid and most of all, markets reacting to a dramatic increase in interest rates led by the Fed, with England and Europe not too far behind. What does 2023 hold in store? We asked Romaine Bostick, Dani Burger and Annabel rulers to take us through the prognostications for investors in Asia coming into 2023. The big watch point is going to be what
happens in China. That's after the government eliminated more than half of its Covid 0 policies in just a matter of weeks. The explosive start means the country is on track to be free of Corona virus restrictions by the end of March. But there are still uncertainties on the
horizon. First says the risk of a huge public health toll and the capacity for the local medical system to withstand that without reimposing some curbs on mobility. Plus says disruptions to production and consumption as a result. And that could, Dan, for a lot of enthusiasm, at least in the short term, for a big lift to growth next year. A test of that would be Beijing's stance on travel during the Lunar New Year holiday, which falls toward the end of January in 2023. It may be a potential super spreader event. Still, China's overall economic rebound
could help insulate other nations in Asia from the risks of a global slowdown. And we'll check how central banks manage that an early right decisions next year. Despite the persistent need to rein in inflation, rate cuts could be on the docket. And South Korea may be an early contender.
It's the first in the region to post a decision in early January. And the bank is already signaling its next hike may be the last. Australia's central bank followed suit on February 7, and the RBA is also indicating it may be near the end of its tightening cycle.
The central bank picture could become a lot more interesting in Japan, too. Toward the end of the first quarter, Governor Kuroda is preparing to step down in April. So we are watching for the appointment of his successor and whether that means a review of the Bio J's ultra easy monetary policy settings is on the cards.
Let's take a look at some of the key events we're gonna be watching out for in Europe to kick off 2023. Croatia starts us off in the new year. As a member of the European single currency, the Balkan nation becomes the 20th to use the euro and the first to join since Lithuania in 2015. Also on January 1st, Sweden takes over the EU Council's rotating presidency for the first six months of the year. In the UK, the government's increased windfall tax on the energy sector kicks in, targeting power companies as well as the oil and gas sector. And a small Swiss town called Davos plays host to the World Economic Forum's annual meeting.
That's over five days. Starting January 16th. February gets going with plenty focus on monetary policy decisions from the Fed, ECB and BBB always in the first two days of the month. Later, they're also being EU energy ministers meeting in Stockholm throughout the year. Energy will be a concern. Russia's war is certain to dominate the agenda. They meet just ahead of February 24th. That's an anniversary of Moscow's invasion of Ukraine. And finally, on a lighter note, key
players from the global telecoms industry will also be gathering in late February. That marks the start of the Mobile World Congress, which takes place in Barcelona. 2022 was about what the Fed will do. Twenty twenty three will be about the lagged effects of what the Fed has already done.
The downturn in U.S. housing, spurred by that perfect storm of rising mortgage rates and already high prices, is set to persist into 2023. That's according to the analysts over at Bloomberg Intelligence, who suggests double digit declines in both volume and price. The airline and travel sector, which had been a bright spot over the past year, is projected to see demand soften in the year ahead as household budgets are stretched thin and consumer spending on discretionary goods weaken in November and is projected to remain challenged in 2023. In fact, most Wall Street strategists
have pencilled in a recession for the world's largest economy. Even if there is disagreement about the depth and severity of any economic contraction. But to a certain degree, a recession has already arrived in earnings. The Morgan Stanley team, a strategist
led by Michael Wilson, says a more meaningful pullback in corporate profits and margins may end up being the big market event for 2023. In a recent Bloomberg News survey of one hundred and thirty four, fund managers showed they're most concerned about a stagflation scenario of slowing growth and high inflation. A Bank of America Fund Manager survey released in mid-December showed market participants expect equities to face a rough first half, followed by a rebound in the second half. But the net effect may be a round trip to nowhere.
The average forecasts of strategist tracked by Bloomberg calls for a decline in the S&P next year of about 1 percent. That's the first time the aggregate projection of Wall Street forecasters has been negative since at least 1999. Many thanks to Romaine Bostick, Dani Burger and Annabel Drillers. Coming up, whatever happens in 2023, China will be a big part of it. Deborah Lair of Edelman and the Paul Sweeney to help us understand what is going on in China and what it means for the rest of the world. That's next on this special year end edition of Wall Street Week on Bloomberg.
This is a special year end edition of Wall Street Week. I'm David Westin. China has loomed large once again this year in the thinking of investors as it is pursued a zero Covid policy, triggering public resistance to the shutdowns that followed.
It has seen its growth slow, raising questions for the global economy and in the middle of it all. President Xi sought and got an historic third term at the 20th Party Congress. Deborah Laird, vice chair of the Paulson Institute and CEO of Edelman Advisory, has been a pioneer in understanding Chinese economic policy since her days in the trade representative's office. Negotiating China's accession to the WTO. And she'll talk to Wall Street week at the time of the party Congress about the significance of it for us all. We are all focused on President Xi and
what's going on over in Beijing this week. Give us your sense about what we're learning. It strikes me that one of the biggest challenges he has is the economy and growing the economy. And yet, I'm not sure we're hearing much about his economic policy. I hear a lot of politics, a lot about security. And that's right. I mean, it's Xi Jinping gave his all important work report at the beginning of the millennium, and it gave off a few previews of how he's going to start to look at the economy. One of the things that he's emphasizing
is common prosperity. His slogan about how he brings greater equality. One of the things that he's looking at is also how the party can continue to play an important role in the economy.
And also, he did give reassurance to foreign companies that they will continue to push for a market opening in key areas. So will we get a sense from the person now that surround him of where it might be headed? Because as I understand it, eventually we will see him come out from behind the curtain. We assume everyone assumes that he will get his third term. But there's going to be a critical question of who is with him and who comes out. Absolutely. The important thing and we're all watching for this weekend when the new party lineup is going to be announced. There's a lot of rumors starting to fly
around, although not as many as there usually are. But it's a big guessing game because that will give us really our first clue into what the third term is going to look like. And I think there are three important things to watch. One is going to be what happens to leak a China that the current premier. Does he continue to stay on the standing committee? He's he's termed out of staying on as the premier. But could they make him the number two and head of the National People's Congress, two, who will be in the lineup to then take the premier position? And the two leading candidates appear to be one, John, who is viewed as being more open on the economic issues and one who Nene, who really isn't in dialogue.
And the third to watch is what happens to Leo OHA, who's currently the vice premier who's in charge of the economy and finance. Does he stay? He has good relations with many foreign firms or who really comes in to take his portfolio. They're one of the things that we watch in the West, and we may be right or wrong in watching. It is the extent to which the markets in
some way play a substantial role in economic policy over there. It strikes me that it's possible to interpret President Xi thus far as moving somewhat away from the markets. A lot of what you emphasis right now is ideology. And I think it's what he came out of
more than perhaps we've seen in the past. Absolutely. We're seeing much more emphasis on ideology under Xi Jinping. And if we look back under Jiang Zemin, Jiang Zemin was saying the party is big enough to include business. She takes it in a different way. He says the party is all encompassing
and it should be forced into business. And so ideology is playing a much bigger role. Also, we need to keep an eye on how she's favourite slogan, Common Prosperity is going to be implemented.
China, surprisingly, is actually much more unequal than the United States. And one of the things that he's trying to do through this common prosperity slogan is say there should be a cap on executive salaries. We should be looking at big companies, particularly the private sector, giving back to the community and how that's going to be implemented. At the same time, when he's trying to grow the economy, when he's trying to encourage entrepreneurship and create jobs. It's going to be a very tough thing for him to balance. Well, I was going to ask exactly about that, Deborah, because through history, a lot of people have said we should have more equality, less inequality, whether it's income or wealth. But a lot of attempts to get that done
actually do get in the way of growth overall. Absolutely. I mean, in China and we've talked about this before, the overwhelming majority of Chinese companies are small or medium sized enterprises. It's up into the 90s. They are responsible for about 60 percent of China's growth and about 60 percent of job creation. And so if you can't create the right atmosphere for them to grow, you're going to.
Have a significant impact on China's ability, and right now she's facing a lot of headwinds when it comes to the economy. He's got issues still to deal with with the real estate market. It's one of the only places the Chinese people can invest.
And obviously, housing prices are going down at the moment. The world is facing a global recession and she is still very dependent on exports to grow the economy. He needs to find a way to unlock consumer spending. And that's very hard to do when you don't have confidence in the path of the economy, and particularly when you don't have the kind of social safety nets in place, particularly around health, that make people feel comfortable enough and have confidence to spend their money.
If you put in the longer course of Chinese history, because you've been really very active in China for a good long time now we're seeing something of a turn back toward Mao and away from dung shipping. Well, certainly we're seeing a difference in the way that she is governing the economy. The Chinese Communist Party has about 93 million members. And to put that in context. That's 10 million more people than the whole population of Germany.
And he views this as the way to govern the economy. And so, therefore, the party is involved in every aspect. As we look at this new leadership coming in, watching the ideology versus the technocrats, it's going to be really important. And give us a sense of what the government appointees which will take place next March will look like and how they're going to approach the economy.
Is there going to be this emphasis on a more socialist economy? Or are they going to be more emphasis in what they call the socialist market economy? The fact that they didn't put out the GDP numbers this week on time, I think is very disconcerting for the world's second largest economy to place politics over just the standard transparency and publication of data is not an encouraging sign. Deborah, looking into your crystal ball there, what do you think this might mean for U.S. China relations? I mean, it strikes me at least that going back five or 10 years, a lot of it was about economics. It was about trade. Things like that increasingly from Beijing, but also from Washington. When they talk about one another, it's about geopolitics, it's about Taiwan, it's about Russia. It's about security in the Asia area. Well, national security definitely dominates the headlines and there are some very serious issues that we're dealing with.
I was just in the UK. They were telling me Taiwan didn't even used to really be on their agenda. And now they're spending about 75 percent of their time. These are the China experts focused on this. So those are absolutely definite, important issues to watch. But I think the real story here is going
to be what happens with the economic and trade relationship. Traditionally, it's been the foundation of the relationship and it's created the people to people ties and built some levels of trust without these exchanges with Western companies reconsidering both because of the politics, but also because of the state of the Chinese economy and the complications that have come with dealing with Covid 0. They're reconsidering their strategies and not being that level of trust. I think really is going to have an
impact and ensure that they're going to continue to be fraught relations between the United States and China. That was Deborah Lair of the Paulson Institute and Edelman Global Advisory. Coming up, we turn to the subject of inflation. And our special contributor to Wall Street Week. Larry Summers of Harvard, who got in
early and got it right. That's next on Wall Street week on Bloomberg. This is our year end edition of Wall Street Week. I'm David Westin special contributor Larry Summers of Harvard has been our Wall Street week muse throughout the year on a range of subjects. But just as 2022 will go down as the year inflation came to stay.
Larry will be remembered as one of the leading economists who saw it early and kept insisting something needed to be done. Here's Larry on Wall Street with way back in February. I don't understand why people keep being so surprised when there's evidence that inflation is entrenched. This confirms just how far behind the curve the Fed has gotten. And this, along with the fact that it now looks like build back better is in trouble, confirms what a serious error the excessive stimulus of last March was.
Here's what I think the Fed should do. I think the Fed should have a special meeting right now to end QE. It is nothing short of preposterous that in an economy with seven and a half percent inflation, in an economy with the tightest labor markets we've seen in more than two generations, that the central bank is still, as we speak, growing its balance sheet. I think the Fed could show that at last. It really gets it by having a special meeting for the purpose of simply ending QE. And by May, we started to see the results as the Fed move toward a series of 75 basis point rate hikes. And we asked Larry whether that was
enough. Do you think that they really have made a turn toward really regaining their credibility when it comes to inflation? This is certainly the most dramatic action they've taken, both the fact of a 75 basis point move and what was clearly a calling of it audible just before the play out at the meeting. I think that was welcome and appropriate. I still think that the Fed and most market participants are underestimating the gravity of our situation.
The Fed moved its forecast by an epic amount, both up on inflation and down on the economy. But their current view that they're going to get to two and a half percent inflation or below with unemployment just above 4 strikes me as optimistic tail outcome, not a central tendency in a forecast. I think a better judgment is that there's no reduction to normality without a significant increase in unemployment of perhaps two percentage points or more at some point down the road. And when Chair Powell suggested in July that maybe the Fed was already at the neutral rate, Larry did not mince words.
I think Jay Powell said things that, to be blunt, were analytically indefensible. He claimed twice in his press conference that the Fed was now at the neutral interest rate, calling it two and a half. It's elementary that the level of the neutral interest rate depends upon the inflation rate. We've got on the most quoted measure, a nine point one percent inflation measure. The extrapolated off core or something, it's four or five percent inflation. There is no conceivable way that a two and a half percent interest rate in an economy inflating like this is anywhere near neutral. And if you think it is neutral, you are
misjudging the posture of policy in a fundamental way. So I was very sorry to hear him say that and frankly surprised. He said back in 2018 that the neutral interest rate that the Fed was approaching, the neutral interest rate at a time when the inflation rate was one point nine percent. How he could be saying the same thing today when the inflation rate is where it is, is inexplicable.
But by year's end, with a series of rate hikes behind the Fed and the promise of more yet to come, Larry said that they were moving in the right direction. The chairman is in about the right place. He's recognizing that we can't forecast the economy with precision. He's recognizing that it would be a terrible error if we were to fail to stop inflation in this episode. He's rejecting the talk about this being a moment to change the inflation target and he's maintaining substantial flexibility with respect to the future. I think that is broadly the right place
for him to be. But I think we've got a very difficult challenge ahead of us, because I think the old adage about things taking longer to happen than you think they will. And then they happen faster than you thought they could is really operating with respect to the forecasted recession. It does look like it's pushed back a bit in time, but there are reasons to think and this is what makes the chairman's job so hard that the economy could have a kind of wily coyote moment, that recession induced slow earnings could pop into focus for stock market investors with adverse consequences for the market that consumers could deplete their hoard of post. Covid savings, as outspoken as Larry Summers was on Wall Street week throughout the year.
He didn't hesitate to say what he thought about other subject as well as inflation, such as the disastrous mini budget that the short lived Prime Minister Liz Truss put forward. And that nearly broke the market in Gilt. What do you make of what's going on in the UK? It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market, turning itself into a submerging market. There's nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches being taken. It would not surprise me if the pound eventually gets below a dollar. If the current policy path ie is
maintained, this is simply not a moment for the kind of naive wishful thinking. Supply side economics that is being pursued in Britain between Brexit. How far the Bank of England got behind the curve. And now these fiscal policies. I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time. And even the subject of artificial intelligence caught the eye of our special contributor, who thinks something truly profound may be afoot with chat GP to the great computer scientist Alan Turing 70 years ago said that it was going to be a threshold for humanity when a machine could sep, could, could imitate a human being's answers to questions in a way where another human being wouldn't be able to tell the difference. We're somewhere in the territory of that
right now, and that is a profound thing for humanity. It points to a profound change in the way we're all going to be working. We're all going to have a kind of caddy that or many of us are going to have a kind of caddy that is going to augment our creativity, augment our capacities to bring knowledge to bear on what we do, augment our accuracy.
But just as the printing press or electricity was a huge change because it was a general purpose technology. This could be the most important general for this technology since the wheel or fire. And that is something we are all going to be changed by. My hope is that the very transcendence of these kinds of events can bring a kind of unity, can bring a kind of unity because they are so large relative to the differences between Democrats and Republicans or even the difference between the West and China, that these opportunities and threats, because they are both whether it's microbes, whether it's artificial intelligence, whether it's climate change, that the very transcendence of these global events can become a source of cohesion and progress.
That was special contributor to Wall Street week, Larry Summers commenting throughout an eventful year for global Wall Street. Coming up, we look back to how Lewis run Kaiser wrapped up the year 2000 on his version of Wall Street week. This is Wall Street week on Bloomberg. Finally, one more thought. Well, it's actually the one more thought of Lewis Rock ISE from two decades ago, when at the end of a difficult year of 2000, he reflected back over the aftermath of a market downturn led by a collapse of tech, showing once again the wisdom of Mark Twain that history doesn't repeat itself, but it often rhymes. Much of the world of investors regards 2000 as a year of mourning for profits past for bubbles burst for bulls, the horned and for certainties crumbled.
And let's face it, it wasn't always fun. As Winston Churchill put it, I'm always ready to learn, although I do not always like to be taught. Virtually nobody except the non-stop pessimists who are still stone losers over the past decade foresaw the viciousness of this year's declines. Although the year was contradictory even there, for example. Is this a bear market? Well, yes and no, even from their highest heights in early 2000, the Dow Jones Industrial Average and the S&P 500 have declined far less than the 20 percent that traditionally has defined a bear market. But for the formerly high flying technology stocks personified by the Nasdaq.
This has not only been a bear, but the growling of all time. NASDAQ, which never does things moderately, fell nearly 40 percent this year and is off more than 51 percent from its March 10th high. That makes this not only the worst year ever for the 29 year old NASDAQ, but the biggest decline for any of the three major indexes since the S&P 500 lost 47 percent in 1931 during the Great Depression. So devastating was this latest and most severe tech wreck that any attempt to put it in perspective by pointing out, say that NASDAQ has been the bullish phenomenon of the past decade and that it gained more than 85 percent in 1999 alone is likely to seem like irrelevant ancient history to today's bleeding. Tech investors. Are they right?
Is this just a temporary reversal of a fantastically promising uptrend? Or is it truly the end of a booming era where the downward catalysts of 2000, a fierce Federal Reserve, a steeply weakening economy and a nation driven to embarrassing self-doubt by the election that would not die passing phenomena or barriers of enduring change will try to get to some meaningful answers tonight. And we will try and get you answers in the new year that does it for Wall Street week for this year. I'm David Westin. This is Bloomberg. See you next year.
2022-12-26 18:05
