Bloomberg Wall Street Week: August 5th, 2022

Sam's l Sharmon and founder of Equatic Group Investments. In Bloomberg Wall Street Week with David Weston from Bloomberg Radio, speaker Pelosi goes to Taiwan, Open goes small in response to President Biden's plea for more oil, and central banks big go big in the struggle to tame inflation. This

is Bloomberg Wall Street Week. I'm David Weston. This week contributors Larry Summers, Oh Harvard on a higher rate and lower employment and Steve Ratner of Will and Advisors on what the Inflation Reduction Act could mean for Wall Street. So I think this is good for investors and that it brings against some stability to fiscal policy. Affer it was a week full of signaling as Speaker of the House, Nancy Pelosi went to Taiwan to send a signal to

China about US commitments. Today, our delegation, bes Don very proud came to Taiwan to make unequippically clear we will not abandon our commitment to Taiwan, and we were proud of our enjoying friendships, while China sent back its own signal of displeasure with the visit. We will do what we say, and let me say that to these measures

will be firm, strong and effective and open. Plus responded to President Biden's requests for more production by increasing its limits, but by a very modest one thousand barrels a day, which Almas Hochstein of the State Department said was nice but not enough. The importance of the President has is not discussing barrels with with any country. He has been very clear that he wants to see all prices come down, and he wants to see gasoline prices come down. But

it wasn't just geopolitics this week. We also spent a fair amount of time getting signals from our central banks, whether it was the Bank of England on Thursday raising rates fifty basis point as they battled even higher inflation CPR.

Inflation is not expected to peak at just over and key four of this year and to remain at very elevated levels, stout much of three or various FED members all week long trying to walk back Chapal's statement for the last week that we were close to the neutral rate. We are a long way away from achieving an economy that is back at two percent inflation, and that's where

we need to get to. And then then came Friday, and boy did we get a signal with jobs numbers coming in twice what was expected for five DWY eight thousand people, and June was revised up as well, with wages increasing at an annual pace of five point two percent. Not surprisingly, this gave the bond market yet another abrupt turn, and the ten year yield, which had dropped to near two point five percent earlier in the week, shot up again to end the week at two point eight three.

And while equities were volable, they weren't as bad as bonds, with the spending the week up just over one third of a percent, while the NASDAC moved back toward bold territory, at least for a time. Ending the week up over two percent. Here to tell what's sort through yet another challenging week for the economy and for the markets, we welcome to Mahajen. She is chief investment strategist at Edward Jones and senior Markets editor for Bloomberg John Author. So

welcome both you to Walster. We're good to have you here. More start with you, and certainly those jobs numbers really got our attention on Friday. We're really dominant. What did they tell the markets? Yeah, look, David, it's hard to really say that we're in a recessionary environment with jobs going increasing over five hundred thousand, five hundred thousand this month. Now, keep in mind the U. S economy has started here

from the position of strength. So while we could see weakening in the jobs figures, in economic in earnings data in the months ahead, we certainly are nowhere near what we'd call an economic downtour or recessionary environment. Now, now, what were the market implications of this move? While you touched on some of them, but one thing we saw right off the bat, the expectations of a seventy five basis point FED rate hike really skyrocketed between yesterday and today,

yesterday's probability thirty. Today we have a sixty percent probability of a seventy bas point rate hike again by the Federal Reserve in September. The second thing we saw was, of course, those yields, so treasury yields both on the tenure and the two year. Now keep in mind the two year tends to be a proxy of what the Fed may do in the next couple of years or so both skyrocketed higher um, but we continue to have

what we call an inverted yield curve. So historically this inverted yield curve does provide a leading indicator of recessionary environment, but there is some lag to at six to eighteen months. So net net, we saw a market that absorbed this higher jobs figure, absorbed a potentially more aggressive FED. But what we did see under the surface was that some of those growth parts of the market, longer duration, tech, speculative, higher valuation parts the market did underperform again today, and

that might be a thing we see going forward as well. So, John, others, you follow central banks all around the world all the time, including the Federal Reserve. Did the Friday numbers make the Feds already difficult job harder or didn't make it easier. I think it made it easier. They are people. I don't think myself that Pwell tried to be that dubbish last week. I think he meant to give the impression that he was still very much committed to a more

hawkish series of rateykes. He was open to the the claim that he was just not credible for a while. The number of people who are convinced that the Fed will have to turn turn around swiftly because the economy will be two week it has been strong, that's been whin. We've had this really remarkable fall back down in yields, and with numbers like that, it's very hard to criticize them for tightening rates this Obviously, the the employment picture

could scarcely be stronger. Thank you so much for John Arthur's Bloomberg and Mono my hygen of Edward Jones. They're gonna be staying with us as we talk a look at what else may be driving the markets, particularly in geopolitics, and where those markets may be headed. That's coming up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This week, China did some saber rattling versus the US. Where does

China fit in your thought process in the future? Are there any significant investment implications with what's going on in China? Well, in my group, I think that China is the biggest potential growth vehicle for Boeing. UH. Two years ago, Boeing delivered about six of their total aircraft output went to China. It slipped down a little bit the last two years, but we anticipate, say, as we get back to the turn of the century, it could go sixteen. That was

Michael Holland and Peter s Oritis on Wall Street. We've back in and once again this week China was in the news with Speaker Pelosi's controversial trip to Taiwan and China's rather strong reaction which certainly caused a geopolitical stir but didn't have any effects on the markets or potential effects on the global ecount of me. Here to help us answer those questions and more are Monoma Hygen of

Edward Jones and Bloomberg's senior Markets editor John Author. So, John, you actually wrote a column earlier this week noting in the bond market reaction, apparently in part to Nancy Pelosi's visit. But do you think it has longer term ramifications. I I fear it has very much greater and longer term ramifications, and I'm a little concerned both how quickly the bond

market got worried. We had a brief period of not much more than twenty four hours when there was really quite intense demand for treasuries born on the classic desire for a safe haven. Uh. And more or less as soon as Nancy Pelosi's plane and landed in Taiwan without the Chinese trying to shoot it down, I'm only slightly exaggerating, the market rebounded as though everything was everything was okay. And certainly the degree of saber rattling we're seeing a

present from China is quite concerning. It's conceivable that this speaker's trippers in some way called China's bluff. I'm not a military strategist, but plenty of people are pointing out that um Taiwan is an island a hundred miles away from China. It will make um. Russia couldn't make a good job of invading Ukraine. China actively invading Taiwan is

going to be orders of magnitude hardaer um. So whether arguably the risk of a total breakdown and return to conflict is is still quite slim um, but that there's no question. If this leads to a serious worsening in the US Chinese relations from where they are now, or which we must all hope not outright conflict, that's very serious. That's any an when you look at it, that's going

to be bad. What about your perspective, And not just limited to China, We have an awful lot of geopolitics going on, as John just referred to briefly in various respects. Do you think geopolitics is affecting the markets right now or do they have enough to worry about, whether it's inflation,

or whether it's supply chains, or whether it's the Fed. Yeah, you know, David, this year we we actually got an outsized amount of geopolitics impacting markets directly, of course, starting with that Russia Ukraine conflict, which not only kind of exacerbated the inflationary problems, but I've really put upward pressure

on oil, energy, grain prices across the globe. And then of course we did shift some focus to China, but because of the lockdowns and the on and off lockdowns created tensions and supply chain created some demand, reopening and

then shutting down once again. And then of course, with Nancy Pelosi's trip this week, we started to think about maybe another tail risk emerging in geopolitics, which is uh, the China Taiwan situation, which could potentially, at least in an investor's mind, could be a Russia Ukraine two point oh, and keep in mind the implications would be quite a bit more severe. Supply chains and inflationary pressures again could

be exacerbated to more even more extreme level. So for now, in our view, we think it's a tail risk, but certainly one that's worth monitoring, and certainly one that we're watching. Could intensify in headlines if we see you know, another similar type of trip negotiation discussion UM, but hopefully for now, a tail risk that has a lower probability than UM

certainly what we saw in Russia and Ukraine. So, to translated into investment advice, if you would here, does that mean if I'm an investor, for my portfolio, I should look at more defensive investments, whether it's equities or dead Yeah,

you know, I think in the near term. So look, we've had a great run rebound off the lows of mid June across equity markets and even in fixed income so inequities, we've seen the SMP rally nearly underneath the surface, the growth parts of the market, technology, et cetera, up nearly twenty per set um. Similarly, fixed income rebounded offloads as well. Now going forward, if we start to see yields move higher, you know, we've had a really nice move downward and yields, but keep in mind we still

have the FED in play. We still have quantitative tightening and play which could put upward pressure and yields. If that occurs, we could probably once again see growth start to underperform or lag again. So in our view, as we get through the next few months, as those earnings and economic data perhaps start to soften catch up with what we've seen in equity markets earlier this year, we would advise a more defensive tilt, value oriented defensive sectors

and equities and fixed income UM. But if and when we do get inflation kind of in earnest moving lower um the FED in earnest able to pause, that's really when we see a pickup and risk assets, but perhaps a shift towards growth once again, and that's when you'd start layering in and barbelling growth. But for now, we'd say stay invested, stay perhaps somewhat defensive, and the months ahead.

So so, John just overly simplistic here briefly, Does that mean I actually have more bonds than I thought I should? That is a very difficult one. I tend to be somewhat bearish on bonds. I think that there is a risk that the peak for the tenure rate isn't in yet. Uh, And that is a that is a means that you probably don't want to pile too much, too heavily into

into bonds. My best guess, because all of us have to contend with the fact that that we don't really know that the lack of good precedents for what happens to the world in twenty means that there is also a lack of good precedents for what we should be expecting now. My best guess is that rates probably have to rise higher to choke off inflation. The rule of thumb is that inflation doesn't go down doesn't peak until

the interest rate exceeds the inflation rate. That implies that we're going to be going I would say above for cents at least. Uh. That would mean that you would want to be getting into more defensive kinds of stocks that actually benefit from higher rates. Just Mona said, is basically value if you want it. In terms of hel risks, there's this machiavellian possibility of getting into chipmakers that aren't from Taiwan. If that happens there, then there you know,

there is something a lot more scarce Steve Chips. Yeah, there, there you go. There's an interesting investment of chipmakers are not in Taiwan. Thank you so much, Tomonomo, Hydgen of Edward Jones and Bloomberg's own John Author's coming up. Democrats like their new reconciliation package. They call it the Inflation Reduction Act, and some economists won't. They like it too, But what would it mean for investors? We asked Steve Ratner of Will Advisors. That's next on Wall Street Week

on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Well, this is really a very comprehensive and historic piece of legislation. Joe Manchin, he made a terrible deal. Leave it to Congress to surprise us take two of our biggest problems. Inflation. We have a serious inflation challenge which is hitting economies around the click globe and climate. As the climate crisis gets worse, extreme weather will pose a rapidly growing danger to a rapidly

growing number of communities. Put them together in one big package and give it the attractive name of the Inflation Reduction Act. This bill will reduce inflationary pressures on economy. In the end, it all came down to getting West Virginia Senator Joe Mansion to sign on. This is fighting inflation. This is all about the the absolute horrible position that people are in now because of the inflation cost and senator mentions. Republican colleagues like Pat Toomey of Pennsylvania can't

believe he went along. It's a very significant corporate tax increase, mostly focused on manufacturers, which is a bad idea. It's combined with price controls on prescription drugs. I've been asking myself what does Joe Mantion get out of this? But thus far, economists like Larry Summers think the Inflation Reduction Act maybe just what the doctor ordered. I was glad

to see the bill. I think it's going to reduce the rate of inflation, because it's going to reduce deficits and demand over time, because it's going to use the federal government's power to negotiate lower prices for pharmaceuticals, and because it's going to increase uh supply of energy. So economists really like the Inflation Reduction Act. But what does it mean for investors? To get an answer to that, we're gonna turn to someone who invests a fair amount

of capital. He is Stephen Ratner. He's chairman and CEO of Willard Advisors. They invest the personal and philanthropic assets of Michael R. Bloomberg, who, of course is our founder and majority of Sheherrelder See. Thanks so much for being back on Wall Street. League, of course, love to be here. So you wrote a terrific not ed piece for The New York Times this week and which you said, these are pretty strong words. I must say. Do you think that this may be one of the best packages that

you can remember Congress giving birth to? So you think it's a good idea for the country. What does it mean for investors? I think for investors it's it's basically positive. I think we're making progress on a number of our really important problems, climate being first and foremost among them. That's good for the country. It's ultimately good for investors.

I think prescription drugs may not pricing may not be absolutely great for every farmer company in America, but for the average in America, and it will eventually give them more spending power and the afford the ability to buy other things, and that helps the economy. The minimum corporate tax, it's just something we needed to do. I think the Trump t c j A was so widely unfair in

terms of the amount of the business rollbacks. At this broad back, I would note that after the mansion proposal was very surprisingly announced, as you know, nobody thought this was coming. But after it was announced, the stock market in the next several days had several of its best days throughout the difficult period. So obviously investors were not put off by this thing, and indeed even encouraged by

the idea of progress in Washington. One of the things Republicans I think done, for example Pat too Many from Pennsylvania, is to say that corporate minium attacks effectively would take some of the benefits away from the expensing of capital investment, will deter capital investment corporations ultimately hurt us in terms of investment in terms of growth. Well, the first part of that is right. We are taking some of the centers away. Although we're doing it, we're not really directly

taking them away. We didn't roll back the depreciation provision. We simply put a minimum tax on all the corporate profits, so that in fact leaves most of the investment in sentiment place. But there are those those who felt that that was simply too much when it was as the t c J. Why I give companies right off upfront? Is that really going to change the investment that much? Is it really the way you want to run tax policy?

And I don't think there's a lot of evidence that had much of an impact on investment, so I don't buy that. I think I think the problem of investment here is there are not enough profitable opportunities out there, not that companies are worried about their tax rate or

they don't have the cash or something like that. One of the aspects of this, obviously is the inflation reduction, because, as I understand, of reducing the deficit, actually paying for it having more in revenue than the costs going out. What does that due to investors? Well, first, on the inflation thing, the Republicans have created I think a false psychotomy away they have made. They made the point or claimed this wouldn't really reduce inflation, and that's not untrue.

It's impact on inflation in the first few years is relatively small. It gets a bit larger in the out years. But the most important thing is that it is a reversaile policy from the last several packages we've passed that

have been highly inflationary. So I think this is good for investors and that it brings against some ability to fiscal policy in Washington for the first time in a long time, a fiscal policy package that actually does at least lean against inflation, even if the total impact isn't enormous. If this package, and again we're assuming for the moment that it gets enacted, if it in fact gets enacted, is the benefit to investors mainly sort of the rising

tide notion. I mean, it's the macro that everything goes up until we're all better off, or are the specific sectors that actually would be more attractive to investors such as you mentioned climate and energy. Probably yes, the rising tide is certainly the overarching part of this. It's not a complicated package that doesn't have that many provisions in it, so it's really it really is climate and prescription drugs

and then obviously some of the tax stuff. So in climate and I don't think anyone yet has really been a comb through all the little minutia. Thank you so much so Stephen Radder, he's the chairman and CEO of will It Advisors. My pleasure. Thank you. Coming up, we wrap up the week once again with our special contributor Larry Summers of Harvard. 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 western We end the week as we always do with our special contributor Larry Summers of Harvard. So, Larry, thank you so much for joining us. Let's address that big number that came out on Friday. Five thousand new jobs also were vision up in June, and by the way, wages up at a rate of five point two percent year a year. President Biden came out and said this shows that his economic policy is working. What did you

make of those numbers? I think it's more mixed. I celebrate all the extra jobs, and that's surely a good thing to see. But my principal concern, as you know, David, has been that we've got an overheated economy, and then if you overheat the economy longer and longer, you get more and more inflation and bigger and bigger problems down the road. And everything in this number says to me, overheating, not yet under control, not our path to being under control.

So I was actually not gratified by these numbers, but my concern was actually magnified. So what message does this send to the Fed? Do you think? Look, I don't think the Fed has the thread right now. As I said on this show last week, I think the idea that we're at the neutral rate, we're near the neutral rate,

is not a defensible concept. And now when we're seeing wage inflation unambiguously after this number accelerating, after this number, after the e c I, after the Atlanta Fed, we have, by every reasonable measure of core inflation um inflation running somewhere plus or minus uh five. That is more than it was when Richard Nixon UH put price controls in

place that is not acceptable by any dimension. And if we don't act on it, and act strongly on it, and that means raising real interest rates UH significantly, then we're just setting the stage for stagflation. Here's what I'm very worried about. Because we've seen the movie before. I'm worried, and I was interested to see that Paul Krogman, who has hardly agreed with me in general on these things,

expressed exactly this concern UH. Today. I'm worried that we're gonna see some good news on non core inflation, on commodities, on what's happened in gasolene, for example, and we're gonna see a bit of economic slowing, and that's gonna lead the FED to think that things are under control, but in fact, underlying inflation, it's gonna be still completely unacceptable. Things are gonna go up and down in terms of

the non core inflation. And if we've got a labor market that's red hot, that's only gonna mean constant or even accelerating inflation, and we're gonna have a situation like we did in the nineties seventies where we perpetuated inflation by not doing enough to contain it. The doctor tells you to take all your medicine. If you take only some of your medicine, you're gonna get the illness back. The bacteria are going to be resistant, and it is

going to be worse. And that is the risk that I believe we are running in this situation on the path that the FETE is predicting and on the path that the market is expecting. Another big piece of news this week I came from that Inflation Reduction Act what you talked about last week on the program, saying you were glad to see the bill. It's been adjusted in some ways to a company, particularly Center Cinema from Arizona.

But as of right now, it looks like it may well pass the Senate this weekend and maybe be enacted next week. So what do you make of the bill as it looks now? The package, as much as we understand it, this is really positive news. This is good news on healthcare, This is good news on the environment and energy. This is uh good news on tax reform. This is going to make our economy better while at the same time reducing the budget deficit and contributing, albeit

in a small way, to a reduction in inflation. But it is a beginning, a very important beginning, not an end. We still have huge international tax loopholes that are driving businesses abroad. We still shockingly and this is something that really disappointed me, and I was sorry with the judgment

that uh Senator Cinema came to. We still have the carried interests loophoul that is allowing many of the wealthiest Americans to pay taxes at a much lower rate than the people who clean uh their floors by getting capital gains on what is really earned uh income. And it is uh just wrong, and it makes me worry about our politics that it has lasted as long as it has. But look, that's for another day. For today, it's to celebrate that this is a good and important bill that

is moving the country uh forward. And I think it's a tribute to the perseverance of many the perseverance in negotiating and negotiating and negotiating of Senator Schumer, of Senator may Mention, who many people have raised questions about, and who I don't agree about on everything, but who has stuck with some basic views he had about the importance of not adding to inflation for a year, and contrary to what many people said, was prepared to reach a deal if it was the right deal and stayed at

the table at above all, I think it reflects the fact that President Biden laid out an agenda. Larry addressed one specific issue that's come up in the scoring. As it's called. The Joint Committee of Taxation, which is bipartisan, came out and said that in fact, a fair amount of the tax birden would fall and people will make

four dollars and less. I understand what that is. It's saying, if the corporations are paying more tax, some of that is going to go to the employees and the regular consumers. What do you make of that argument? Is it true? I don't think it's very good economics. I think that the core for share owners and other capitalists pay the vast majority of corporate taxes in general, and I think that's even more true with respect to corporate subsidies and loopholes.

And it's corporate subsidies and loopholes that we're going after as a consequence of UH this UH. I think the vast, vast majority of Americans are happy to see the tax rate on companies like Amazon go up, and they're not worried that that means an increase in their taxes. They'd much rather see us when we need tax revenue, as we do now, go after companies that year after year after year or reporting billions of dollars of profits to their shareholders and still not paying taxes at a rate

of even fient. And that is all that. This bill goes after high profits to shareholders, no taxes. That's the right thing to do. Larry, thank you, Silvery's special contributor here Walster Larry Summers of Harvard. Finally, one more thought. All the glitters is not gold, but it might just be crypto. Remember those glory days of yesteryear, or at least the year before last, when money was cheap the

Fed was still cutting rates. Today the FMC kept interest rates near zero, and asset values had nowhere to go but up. We're here record highs, the stock markets making grand new record highs. Equities can continue to move higher.

One of the hottest asset classes of the last few years was crypto, with Bitcoin peaking near seventy thousand dollars just after Mr Powell announced his decision to cut rates again, making it just too good to resist For investors like Michael Sailor, we have to invest in something, and we've chosen as a business strategy to FoST focus on what we believe is the most exciting investment idea, because it's a digital commodity that's absolutely scarce and only getting technically

better every year. Well, Mike NOVERGTS told our own Eric Shasker, it was as good as gold. It's a weapon in people's portfolio. It is a version of gold. We call it digital gold. And if retail investors needed any more reason to get on the crypto bandwagon, they got a not so subtle nudge from some of the biggest celebrities around, people like greatest of all time quarterback Tom Brady, I'm getting into cryptox and Reese Witherspoon tweeting quote crypto is

here to stay. And Steph Curry telling us he's not an expert, but that's not stopping him from trading crypto anyway. This is Steph Curry, the world's leading expert on cryptocurrency. I'm not, but that was then and this is now. Inflation is up. We really need to restore price stability, get inflation back down to two. The FED is on

a tightening spree. Well, the message is that there will be continuing rate increases, although I think starting at September meeting, as he said, it will be meeting by meeting, and crypto isn't looking like quite the sure thing it did to some, with bitcoin down over from its peak, leading people like Eddie Low of May Bank Singapore to lose faith.

Crypto was actually touted as the alternative goal when he was when bitcoin was at sixty thou but I think now at twenty thousand or below that it is no longer really that valid. And that's even before we get two questions about what mining crypto is doing to our climate. Bitcoin community should see the biggest risk of bitcoin is climate is getting worse used every day and bitcoin is contributing to that. But never fear. Matt Damon is here, and we know that the characters he plays in the

movies are nothing if not courageous. We can't stay there, not say, but Damon also styles himself as brave, at least according to this Crypto dot com. Add four simple words that have been whispered by the intrepid since the time of the Romans. Fortune favors the Brave. I suspect that there just maybe some crypto owners out there hoping that fortune catches up with Mr Damon's bravery. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.