This is Bloomberg Wall Street Week.
I mean may not have an overall recession. We're having a rolling recession. ECONYE roll looks pretty strongly. It is when it comes to jobs.
The financial story is that shape our world.
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Through the eyes of the most influential voices.
Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, deebro Lair of the Paulson Institute, well Then Hubbard of the Columbia Business School.
Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Responding to adversity, a Maori town devastated by the worst wildfire in US history, a Chinese economy that can't catch a break, and a former US president facing a fourth indictment. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers of Harvard and Steve Rattner Willet Advisors, on why the yield and the tenure is headed higher.
You're looking at it four seventy five on the ten year, and it could end up being higher than that.
And Master's make of the softening Chinese economy.
I have been more optimistic about China in the past, and I will say that I have recalibrated my views.
And Greg Tason of Spotlight Advisors on the drop off in activist investing.
There's some dampening because of the m and A market.
It may be August, but it was a tough week for many on or near global Wall Street, starting with the victims of that wildfire that destroyed much of the town of Lahina, Maui, with over one hundred dead, many yet to be accounted for, and billions of dollars in damages.
Whole city destroyed, generations of native Hawaiian history turned into ruin.
President g Over in China had problems of his own, with reports of this week of continued weakness in his economy and stimulus moves that the market's pretty much shrugged off to someone said we'd like to say more policy action before we'd be getting a lot more comfortable moving into more chin a related exposure's Former President Trump confronted a different kind of problem this week when he faced off fourth indictment, this one from a state prosecution in
Georgia alleging he was part of a racketeering organization along with eighteen others trying to overturn the twenty twenty election.
This is an extremely serious indictment.
The allegations are serious, and if he's convicted, he's going to do time.
On the brighter side, US retail sales numbers came in surprisingly high, indicating the continued strength of the consumer and therefore of the economy.
The consumer is out there and able to spend at the moment.
But continuing strength of the US economy did little to reassure the markets this week, as the S and P five hundred lost over two percent to end the week at forty three sixty nine, bringing it back down toward the median number of where our Bloomberg ls predicted we
will end up the year, that's forty three hundred. The Nasdaq also had a rough week of it down two point six percent, at least a part because of those equity declines, No doubt came from the rise in the yields in bonds, with a ten year yield moving up nearly ten basis points, putting it well above four percent at four point twenty five percent to sort it all out. Welcome to Chris Aylman. He's the chief investment officer of
Couseros and Chanadasai. She is Franklin Templeton's CIO for fixed income. Welcome. Both of you took it back to Wall Street Week. You've both been on quite a few times now. Chris, let me start with you. Were you surprised anything that happened with the bond yields this week?
Well?
Yes, surprised that as Larry Summers said that bond yields are heading up and I think going to be heading higher. I mean, he's signed fifty basis points, so I'm I'm cautious, and I would be worried about trying to trade fixed income in here. I like it as a buy and hold, but I don't like it from a trading standpoint.
Yields are going to head.
Up four point seven to five. Chris, you agree with Larry on that.
Well, I'm not going to argue with Larry Summers. I'm not going to try and nail down that number. That's a big reach, Like I said, half a point from here, but I do think ingistrates are going to stay higher for longer We're not going to see rates go back down like a lot of the street is predicted.
Sona, you really focus on fixed income? What did you make of the bond market this week?
So honestly, I think this is the bond market finally coming around, coming to terms with certain facts. Here's the thing for a long time, even the sad when you look at the Fed funds rate, the long term Fed funds rate, they're looking at two point five percent if inflation are two percent. This is real yields of half a percent. If I look at not the anomaly of the post global financial crisis period, but I look at from the nineteen fifties all the way up to two
thousand and seven eight. Really we're looking at yields, real yields which were around two to two and a half percent.
So here's the.
Thing that you take.
Even if we get back to two percent inflation, real yields at two two and a half percent takes you to four and a half already. So and that's the short term, and then you have two on premium. If you're looking at ten year yields. Yeah, I actually think four point seventy five is not unreasonable.
Not at all Chris.
When we talk about these bond yields, we talk about things like expectations of inflation, and we talk about what the Fed is likely to do. What about the demand or maybe the supply of treasuries, because it's clear the unice discover is gonna have to borrow a lot more at the same time, for example, Japan may not want as many.
The bomb market and the Yokurby is nothing but supply and demand, and there is a ton of supply coming. The Treasure Department has just due to all those budget negotiations, a huge calendar in front of them, and we are seeing buyers being a little bit cautious. You just reported about China and it's weak economy. They've got to protect their currency, so they may not have as much capital. We've had a lot of focus on the tail on all of our bond auctions, in other words, how much
demand and how clean those actions are. I always said, we're a debtor nation, and we better pay attention to that. We've got to borrow money, and it may be a bit tougher now.
We borrow a lot of money for fiscal stimulus. We've had a lot going into the system. Are we done. Yet where are we right now on fiscal supporting this economy.
Honestly, we are looking at an economy which is true almost every estimate of full employment, and we have massively expantorary fiscal policy. This is getting hidden and you know, yes, there's discussion about you know, terrible budget negotiations, all of that, but fundamentally the economy in terms of employment is doing well. And at the same time, we are seeing fiscal deficits which are close to records five and a half percent
odd last year. This year it's at least as much, if not higher, and the CBO expects six percent is the school deficits for the next several years. This is a lot officients and definitely that's a supply dynamic that's important.
At the same time, you mentioned Japan, and Japan's very important here because we always focus on China, but actually Japan, which is which is the largest holder of US treasuries outside the US, and over the next few months, at some point the Japan's Central Bank is going to tight begin tightening monetary policy, at which point we will see a reduction in the month for US treasuries. All of this is additional pressure on yields.
At what point do we run out of the so called excess savings.
Well, David, I think the San Francisco Fed put on an excellent paperless week predicting that we may be seeing the end of that. And you had a great intro where he said the US consumer is strong for now. So I'm starting to see little cracks, little signs of worry.
For me.
Art Desk uncovered the US credit card applications literally fell off the shelf. And that doesn't importend that people won't increase and start to borrow, But I'm worried the consumer is going to run our money. I think the San Francisco Fed really is spot on.
If the consumer slows.
Down, then we're going to see the impact of these higher interest rates twenty two year highs in mortgages and rates. That's got to hurt, and then we may actually finally see this recession that I've been predicting.
For over a year.
Chanea, as I say, your CEO for fixed income at Franklin Tembla. But you watch the equity market. What about the valuations right now? Because I looked at it today on the Bloomberg we're over twenty times earnings in the price for the SPA five hundred. Can we keep that up?
Okay, I'm going to I'm going to be very careful here because definitely I'm more fixing than on the equity side of things. But I do think on the fixed income side we have finally seen some acceptance that higher yields are coming. On the equity side, I think where at the beginning of this process. I think, again, in your intro, you mentioned that higher yields are going to have an impact on the equity market, and I do think those yields are higher, and more importantly, they're probably
higher for a while to stay. And you know something that Chris mentioned the strength of the US consumer said, I think actually the US consumer probably is going to start weakening from a very strong point. And while the consumer might be beginning to run out of pandemic era savings from a debt perspective, in real terms, the consumers actually in pretty good shape. In real terms, the US consumer can actually borrow a bit more and still look pretty healthy.
The last time on this, Chris, as we look at the GDP esmens, for example, Atlanta GPGP now is way up there at five point seven something like that, and a lot of people are taking their estimates is that there's the economy strong enough to keep going.
Well, David, the Elves pointed out they're expecting a lower market, and I think they're spot on. I think that's a great indicator for people that people look ahead and you hit it right on the nail. Price earnings ratio is really set for expectations in higher levels and I don't know those earnings. While we've done okay in this earnings period.
Everybody who's warning that the future earnings are too difficult and that may be a problem in that pe ratio, that the earnings falter and that means the price has to come down and the Elves will.
Be right okay, Well, that's always good for the Elves. Thank you very much for getting it started. As channel the SI of Franklin Templeton and Chris Aylman of Kelster's coming up to the yield of the tenure seem to settle in well above four percent. This week, we ask contributors Larry Sawers of Harvard and Steve Ratner Will Advisors, where the tenure wants to go and what that means for investors. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
This is Wall Street Week. I'm David Weston. The yield on the US tenure government bond this week broke solidly through four percent, something it had flirted with last October and then again briefly in early July. To consider what this might tell us about the state of the US
economy and what it means for investors. Welcome back now special contributor Larry Summers of Harvard, and we're joined as well by Steve Rattner, Chairman and CEO of Willed Advisors, which manages the philanthropic and personal funds of Michael Bloomberg. He is, of course our founder and majority shareholder. So Larry,
thank you so much for joining us. First of all, let's start with what the ten year may be telling us, or not tell us, about the economy overall, particularly where inflation is and where the economic growth is.
Look, David, I've been predicting that rates would eyes for quite some time. The ten years got three pieces. It depends upon expected inflation, It depends upon the real interest rate, and it depends upon the term premium of the amount that the ten year rate is more.
Than expected future short rates.
If I take those three pieces, inflation may come down. But I think most people would be quite surprised if it was as low steadily as two percent over the next decade. So let's assume that inflation averages two and a half percent.
I think that's conservative.
We don't know what's going to happen to the real interest straight, but we know that budget deficits look to be very large. Perhaps the budget deficit, according to CBO, will get to seven percent by the end of the decade. And I think on more realistic assumptions that assume that some of the Trump tax cuts are preserved, assume that we have to expand national security spending, and make realistic
assumptions about the servicing of the debt. The CBO thinks it's going to cost two point three percent for short term treasury bills. I think you put all of that together and you're looking at a real.
Interest rate of one and a half to two percent.
And then you look at the fact that the FED is selling down its portfolio. You look at the fact that the financial regulators trying to avoid SVB situations, are making it harder for banks and other financial institutions to buy long term bonds, and term premiums usually are seventy
five to one hundred basis points. So if you take two and a half and for inflation, you take one and a half, which isn't especially aggressive for real rates, and you take seventy five basis points, which is lower than history for term premiums, you're looking at for seventy five on the ten year, and it obviously could end up being higher than that. So nobody knows, but it seems to me we're in a very different era than the era we were in in the aftermath of the financial crisis.
So, stee, if does that make sense to you as an investor? And perhaps even more important, let's assume that's right. Let's assume you knew today it was going to be four point seventy five over the medium longer term. What does that do to your investments?
Well, first of all, I think everything Larry said made good sense to me, and I think he's probably right and certainly very clear and logically a logical think about it.
Look, from the standpoint of an.
Investor, it's always a question of what does the market think, and do you have a differentiated view of that? And if you have a different view than the market, then you can obviously proceed on that basis, and if you don't, you go where you're going to go. So what is the market saying right now? The market looks more at the Fed. So let's talk, if we could, about the
Fed fed funds rate. So the market basically at the moment is predicting one more hike in November and then a cut in rates next year down I think about four and a quarter percent on the This is on the short end of the curve.
And why does the market think we're going to get there?
Because the market thinks we're going to have a soft landing basically, and the market thinks that inflation is going to come down to this two two and a half percent range. The Fed is going to kind of say, okay, and we can now start to cut rates. And if you basically cut rates, if you basically assume inflation is going to be in this two and a half percent range and you take one or one and a half percent for real rates, then obviously the Fed fund's a rate could come down a good bit.
So that's how the market is about right now.
Now, it'd be interesting to hear what Larry has to say about that, because if you have a different view than that, then you could be a more pessimistic view, which I would have, and be interested in Larry's view that the Fed is not going to be able to cut rates that fast, inflation is not going to come down that fast. That I think we're in a little bit of a Goldilocks moment. Everybody's feeling great about things, but I think there's still a lot to worry about
on the inflation side. Then you'd have to be reasonably pessimistic about the market once it wakes up and realizes that we're not going to have.
A four and a quarter percent rate.
Now, there's one other way to get to that, which is even worse, which is if we have a recession and the FED starts to cut rates simply to deal with the recession, and there is.
Pressure on earnings.
As you probably know, forecasts, fors and peer earnings for next year have been coming down. Market has not reacted to that in a major way. But that's the other thing, obviously that the market will be watching.
So Larry see's interested. So am I what your reaction is both on the question about the raid cuts next year, but also on the recession, because in the past you have said fifty or more chance of recession. A lot of a kinders have backed off of that. Bank of America has apparently the staff of the FED is back to other Now we're in you today in a recession.
So in general, Steve and I are in raging agreement. Look, there's no question that the economy has come in stronger than almost anybody would have expected over the last few months, and despite that, the inflation figures have been relatively favorable. And those are the realities, and the question is how one processes those realities. My guess is that the economy will stay strong for at least a little while from here. I'd be very surprised now if a recession started during
twenty twenty three. I'm not as confident looking out a longer distance as many other people are, in part because I think the Fed's going to feel pressure to continue to tighten, and I think there are a range of factors from gasoline prices to healthcare, from continuing labor shortages in many places to what's happening in the service sector where you're going to see continuing inflation pressures. So I still think there's a good chance of a recession in
twenty in twenty twenty four. If we don't get that recession, I think it's much more likely that the Fed's going to feel pressure to raise rates faster than is now priced in than it is that the FED is going to feel pressure to cut rates faster than is now priced in, and that will in general tend to push
rates up outside of the curve. I also think that while I don't think the budget deficit is the central factor for rates in the short run, I think increasingly projected deficits are going to come into focus and that is going to be a matter of concern for longer term rates.
And that's part of why I.
Don't particularly see the current level of longer term rates as any kind of peak.
Okay, Larry Summers and Steve Randner will be staying with us because next we're gonna turn to the other big story of the week for Global Wall Street. That's China's economic struggles. That's coming up next down Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Rado.
This is Wall three week. I'm David Weston. China had a rough week economically, reporting weaker retail sales and industrial production, and continued problems with its property market. Larry Summers and Steve Radner have remained with us for their read on what's going on in China. Learned me start with you. In the past, you have expressed at least some skepticism about those who said that this is just going to keep going. The juggernaut that is the Chinese economy. It
may have some problems. They are what we're seeing what you predicted, or is even worse than what you thought.
I try to avoid baking near term predictions, but I fought for a number of years that the Chinese juggernaut was going to slow. Juggernauts usually do in economics. Classic examples were Russia in nineteen sixty when it was seen as is going to surpass us in nineteen eighty, or Japan in nineteen ninety when people expected that it was
going to surpass us. So it's a pretty good rule that when American high school kids rushed to study a foreign language, that's about when the country's economy is peaking. So you've got that, then you have a variety of near term challenges the kind you just referred to. Financial strains in China coming from excessive reliance on real estate and the drying up of export markets. Then you've got
some fairly profound adverse fundamentals for China. The fact that Chinese parents had only half as many kids last year as they did six years ago. The fact that there's large amounts of people with money in China who are very, very eager to get it out, which is always a sign of impending difficulty in emerging markets. So I would not be confident at a wall that China will be a faster than average growing major economy over the next decade.
And that's obviously a big difference from the world we've been living with for the last forty years.
So just a personal notes, Steve, let the record reflect that Larry's right in his rule. Thlumb I studied Russian and high school in the nineteen sixties, So certainly here's one anecdote that's aborts you, Larry. So you've an investor in China, you spent a lot of time there where they're fairly recently, Actually, what do you make of what we're seeing right now.
Well, first of all, look, I have been more optimistic about China in the past, and I will say that I have recalibrated my views. I mean, it's definitely going through a tough period. I don't think I'm as pessimistic as Larry is. I would just mention, for example, that they may not make their five percent GDP growth number this year. Maybe it'll be four, maybe it'll be four and a half. It'll still be probably twice what ours is. So I don't think we can yet sort of wipe
China off the blackboard. But look, they have a lot of problems, and I would put them in a couple of buckets. One, it was clear on my trip there that the sanctions that we've imposed and the whole deglobalization phenomenon and the fact that business feels that they have to be more careful about their supply lines has taken a toll and it's definitely affected their exports and their general mentality and their business.
The second big problem they have is.
Gi who has reasserted its control over the economy, who many of our investors that we talk to their field doesn't even understand economics and you can buy their policy actions so far, I think you'd probably agree with that. And so you've got really bad government policy on top of a bunch of difficulties, whether it's the property sector, whether it's export exports.
Whether it's whatever.
But I would say I'm not completely going to write China off because I think you have to recognize that you do have a lot of tools. For example, everybody talks about their debt, nobody talks about their assets. The IMF just came out with a paper in the last few days that basically tried to look at the balance sheet assets and liabilities of the Chinese government, and while their net assets have been coming down, they're still substantially positive.
I think if he went through the same exercise for the US, you'd find a different result. Their central government debt to GDP is only about thirty percent. They have plenty of scope to do something on the fiscal side to both stimulate the economy as well as solve some of the problems that the provincial governments do have with debt, which are very meaningful.
So Larry typically on one thing that Steve said there, if President g is part of the problem, could he be part of the solution, And I guess that's a way of asking, are there things he could do? We saw some actions even this week where we try to put some more money into the economy, although it's not clear that the consumers have enough confidence to start spending it.
But are there things the prison g could do or what we're seeing larger structural factors that you suggested that are outside of his control.
I think it's a combination of both. I think, by the way, there are a.
Lot of questions about Chinese economic statistics. We talk about smooth earnings of US corporations, I would politely suggest that that is as nothing compared to a fair amount of what goes on in Chinese statistical reporting. I thought it was interesting this week when the Chinese authorities, who had been facing really very grave youth unemployment figures, announced that you though unemployment figures weren't going to be published anymore.
Going forward.
So I think there are a lot of questions about what the real growth rate is. Beyond that, there are obviously things that China could do that would substantially stimulate demand. But here's the core problem, or a core problem. There's a basic tension between the politics and the economics in Chinese political economy is ConTroll going to rest with one hundred million people who are members of the party or the one point two billion Chinese citizens who are not
members of the party. The expansionary fiscal policy consumption led growth agenda is basically an agenda of spreading money all over the place and shifting it from the control of the Communist Party to the control of regular people who aren't part of the Communist Party.
Steve Larry makes an important point that I've always wondered about as an investment in China, how do you trust the numbers? I mean, Larry points out that they've decided they're not going to report the use of their employment because it was over twenty percent. It's not a good number. So how do you have confidence in the numbers as an investor.
Well, remember there's a difference between not reporting a number and making up a number.
And I don't.
Disagree with Larry about the statistics that they may be managed, but I would just make that distinction. They were reporting, you thounemployment numbers. They were huge numbers, so they decided not to report them anymore.
But the macro.
Statistics are just a piece of what we think about when we invest there. We're investing in companies or in managers who are investing in companies, and the question is one of the prospects of the companies, and obviously the fundamentals of the country do relate to that, but that's not the only piece.
Of how we go about investing.
But I would say just a couple of things about Larry said, and I don't disagree again with well, we might disagree a little bit about this. Look, I think fundamentally the deal between the Chinese government and the people has always been we're going to make you rich and let us control. And you know, you're not going to have free speech, you're not going to have this, you're not going to have that, but you're going to get into the middle class and so forth.
Larry, if China continues to struggle economically the way they have, and Steve points out they're still growing more than we are, but still struggle compared to where they were, is that good for the United States and the rest of the world, or is it bad? Do we need a strong China economically or a weak one.
It's two edged.
It's good when your customer prospers, and it's bad when your competitor gets hyper efficient.
So it's a two edge thing.
I am concerned that we will become the object of China's frustration and that will tempt them to.
Lash out. I think we need to be very careful in our approach to.
China at a moment of this kind of difficult and we need to be more attentive than I think some of the policy advocates in Washington are to avoiding a situation where we terrify China with the potential economic damage that we're going to do to them.
Thank you so much to both of you for joining us on Wall Street Reef. That's Larry Summers of Harvard and Steve Radder of Willet Advisors colling up, bringing puppies into the fight against inflation. That's next on Wall Street Reef.
On Bloomble this is Bloomberg Well Street Week with David Weston from Bloomberg.
Radio Activist Investing. For years, it was all the rage for those trying to shake up companies and get some alpha.
As we see companies that we think were once great have lost their way, and that we have a plan for them to get back to greatness. We're not there to leverage up these companies. We're not there to split them up. We're not there to do all the terrible things that typically go along with the term activist.
But the dramatic rise in interest rates put a damper on mergers.
Fourth quarter of twenty two, you had nothing.
Today, you actually have the markets loosening out for the right deals.
And the cooling of the M and A market took its toll on activist investing as well as recognized by practitioners like Carson.
Block, last year was probably the worst year in terms of the alpha generated by activist shorts since the global financial crisis.
But that would surprise.
People because it's a year in which the S and P five hundred declined.
So activist investing maybe it's something of a crossroads, with some seeing it as becoming more mainstream activist short selling.
It has become very mainstream.
What I started in the industry for like twenty three years ago is quite unique, and right now, if you don't have an opinion on a stockey, you don't publish your opinion.
That's even more unique.
While others like Jennifer Grancio of Engine Number one see it as integral to affecting basic change. As in the approach to climate.
We think of ourselves as performance firm, and so the next leg of decarbonization includes how to energy companies change, how to auto companies change. Exon wasn't performing in a way it should have been performing. We took advantage of that.
Finally, one more thought, having your cake and eating it too, isn't that what we all really want out of life? None of us wants to choose between grace Kelly on the one hand, and facing our sworn duty to stand up to the bad guys on the other.
I mean, if you won't go with me now, I'll be on that train.
When it leaves here.
I've got to stay.
Or giving up a star and professional basketball player in order to pursue a championship team.
Yeah. The toughest thing of this in sports is, you know, we all love market smart, but the goal in Boston is to win championships, and to do that you have to put the best team out there you possibly can.
And for the last seventeen months, we've all been hoping we can avoid another Hobson's choice, that we can have our cake of a strong economy and eat into inflation at the same time. As of today, it looks like we just may pull it off, as inflation has come down, even if not yet as much as we would like.
Right now, inflation is coming down. We've made some progress, some good progress.
I feel good about that.
It's still too high.
And even though some continue to warn it may bounce back up again.
If you think that there is a risk that the FED is kind of patting itself on the back by the end of the year, only to watch inflation potentially turn back up, you know sometime next year.
This week marks one year since the Biden administration's efforts to help the FED in the inflation fight with something called the Inflation Reduction Act.
And the bill, as amended is pasted as in.
Biden now questions the choice of the name, but it wasn't simply cynical. Senator Joe Manchin insists that the Act would help keep inflation down because.
On top of that, we did THERA. Now, the IRA was done just through reconciliation, which is Democrats only. But I can assure you because I worked with everybody for the last five years. I've been working with my Republican friends and said, hey, Joe, we need more energy. I agree, we need to put more product in the market. We need to basically pay down our debt. I agree.
The jury is still out and the full effects of the IRA. As pimco's Libby Cantrell reminds us, there's more yet to come.
A lot of this was signed into to law last year.
Many ways, I think for folks this seems like it's.
In the rear view mirror, But just knowing how Washington works, actually there's a lot of fiscal in the pipeline.
But we learned this week that there may just be another way to fight higher prices. It comes to us from England, which, to be sure, is having its own battle with high costs, as the UK CPI was up this week another six point eight percent, but as much trouble as they are having over in England with prices overall. The UK site Pets for Homes reports that the prices of cute little puppies are almost flat, apparently because people don't need canine companionship quite as much as they did
during the pandemic. So if that Inflation Reduction Act doesn't work out quite as planned, maybe Congress could just consider legislating more puppies.
Sometimes helping others the sure ast way to help yourself.
We can never have enough puppies, right. That does it for this episode of WATT, I'm David Weston. This is Bloomberg. See you next week.