Bloomberg Wall Street Week: Bianco, Moore, Altman

a really different reaction to Mark two. More indications of just how hot the U. S. Economy really is through the eyes of the most influential voices Larry Summers, the former Treachery Secretary, Katherine Keene, CEO of v n Y Moms, Sam's l Chairman and founder of Equity Group Investment in Bloomberg wool Street Week with David Weston from Bloomberg radew When it rains, it pours, inflation, supply chains, war and tightening financial conditions. We've got it all. This is Bloomberg

Wall Street Week. I'm David Weston this week special contributing Larry Summers on what it will take to get inflation back under control. The real determinants of inflation have to do with the total level of demand that's being stimulated by policies. And Roger Altman of Evercreps on whether of things really are as bad as they look and what can be done about it. It certainly could get worse before it gets better. It wasn't a great week on

Global Wall Street. Consumer price numbers may have slowed down how bad, but according to Sarah House of Wells Fargo, not nearly enough. You are seeing some deceleration pair, but you're going to need to see a lot more. The war in Ukraine continued as President Putin made it clear he's not about to stop any time soon. It was not just sum delier Neat countries didn't want to listen to us, and in fact what happened they had completely different plans. While in China doubts grow about the economic

path forward. It's less the story about John estimilating the global commy and more about whether or not it can even get its own economy on the base level. And you can forget about crypto as a place to hide from the storm. As Terris u s D stable coin lost its dollar peg. In short, the entire model fell apart and was unable to withstand a black spawn event or an adverse event, and Secretary Yelling warned of the

potential risks for the financial system overall. I think that simply illustrates that this is a rapidly growing a product and there are risks to financial stability. And if all that weren't enough for you, we ended the week on Friday the thirteenth with Elon Musk tweeting that he has been for Twitter was on temporary hold sending the stock down by as much as at one point before he sent another tweet saying he was still committed to the deal, which helped a bit but still left the stock off

about ten percent. And as for the markets, overall, equities made a valiant effort on Friday to come back from a bad week, but the SMP five hundred still finished down two point four percent for the week, closing Laura for the sixth week in a row, while the NASDAC was off two point eight percent and the yield on the tenure came down twenty basis points, ending the week at two point nine To to help us make some sense out of this rather chaotic week, we welcome now

Kate Moore, she's black Rock Global Allocation team head a thematic strategy and David Bianco c i O for DWS America. So, David, it's not a very easy task. But what sense was made out of this week? Oh? This week was volatile, at least ended on a happy note. UH and We appreciate that equities ended the week on on a strong note, but let's face at the equity market and most asset classes have been under a lot of pressure here to date.

The SMP it's flirting with a bear market. Who was down as much as during the week now it's down six from its all time hose And I think we're in a range bound market for some time. Markets just need to figure out what the normal interest rates are and until we have an understanding, has to wear interest rates stabilize, and especially not until the bond markets stop

suffering losses. The equity markets have risk. So so okay, when you look at the equity market relations to the bond market, how much of this is discounting future earnings basically it's a discount rate put against future earnings. And how much is actually the multiple in the highest growth parts of the market, the stuff that was commanding ridiculous

multiples for a lot of one. You know, that d rating is really started in November UM and has continued through the course of We still believe we're far away from a recession, and we think the FED is in the very early stages of normalizing policy, both in terms of policy rates, as well as of course quantitative tightening and reducing our partnering changing the size of the balance sheet. So you know, those two things together are going to I think, exert a bit of pressure and I think

gonna keep volatility high. We keep watching the relationship between you know, rates fall and equity ball and see if there's a change in the pattern. But right now, I think they're going to stay elevated. That's exactly right. I mean, we're watching interest rates, we're watching interest rate volatility. It's just representative of how much uncertainty there is on where interest rates are likely to go up, but where do they plateau. And yes, higher interest rates, particularly higher real

interest rates, is reducing the PE multiple. And then there's this uncertainty about how long this expansion might last. I've said that this expansion is two years old, perhaps going on seven or nine years old biologically, when it has a tenure expected lifespan. So they've not only used to hire discount rate to take in the PE, they've also

shortened their forecast horizons and not paying for future growth. Instead, they're valuing the more certain earnings and dividends that you see coming from certain companies now yea, and I have to say, you know, we look around and say, there are a lot of high quality companies that you want to own for the next three or five years that are trading it pretty attractive multiple right now. That said,

could the multiples overshoot to the downside? I mean, I think the answer is yes, there's a high probability that as the uncertainty rises around the macro environment and policy, that you end up seeing multiples get to kind of really silly cheap levels if you want to average in the great But it's this is a challenging environment. I think it's still a good environment for the long term investor. You have to find that person. That person needs to

really understand the volatility they may be facing. A twin pe is still reasonable given these interest rates, Uh, they're still much lower than history. Now the Fed has an inflation fight to fight, but it's unlikely that interest rates go anywhere near where they were historically. Kate wore a black rock and David Bianco DWS America's where we're staying with us as we take a look down the road and what it means for investors if this inflation is

here to stay. That's gonna have next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We've got some inflation built into the system, and price risers aren't going to go away overnight. But I think we begin seeing some hopeful signs that we're at a point here where we can

begin getting a grip on this situation. That, of course, was Paul Volker on Wall Street with way back in That was when he was the president of New York Fed, before he got to administer his medicine to the economy as head of the Federal Reserve. David Bianco of W DW S America said, Kate Moore of Black Rock are still with us? Okay, let me ask you a question that I'm hearing more and more. Some people are suggesting this may be here for a long time to come.

We had Jason Furman on from Harvard earlier this week on Bloomberg. He said he thinks it could be years we have really high inflation. If that's right, If that proves me true, what does that stay for two investors? Well, actually, you know, as much stress as we have around higher inflation rates, part really since most of us haven't had to deal with us for the majority of our lives. Um,

there's actually really interesting investment theme around higher inflation. It's really interesting to look at within industries, which companies have pricing power, which companies are doing a really good job of managing their costs and managing to their margins, and which are struggling. I mean, I also like this theme of looking at companies that have very high labor intensity

to sales. In other words, do they have to continue to hire and especially at a time where we know the total cost of an employee continues to rise, or do they have business models that are scalable they can continue to grow without adding to additional labor. I mean, we have to live in this environment and invest in this environment, and I think there's some pretty interesting opportunities,

even though inflation does pinch our wallets. Well, Okay, give me an example, what sorts of sectors at least you're talking about. Okay, an example might be like, if you're just thinking in the consumer sectors, for example, you know, some companies have done a really good job of you know, writing longer term contracts, of managing their input costs. Sometimes they've made great investments in software and systems and technology so that they've been able to reduce their dependence on labor.

All of these things help to sort of mitigate the margin pressure that an inflationary environment might otherwise scare us into. Right, and so there are some decent fundamental stories even in a higher inflationary environment. But you really got to get to know the company. And there are some beneficiaries of

the FED fighting inflation. Banks, insurance companies. They should benefit from higher interest rates with the utilities or a really good bond substitute with inflation protection, and probably delivering the energy of the future electrification. Uh. And we like healthcare, and healthcare has become the biggest part of consumer spending. It continues to be the fastest growing part. Productivity, medicines,

devices are needed. There these productivity providers, we think they're gonna be able to play an important role in capture profits. But I'd love about your clip in nine is that even the provoker recognized the challenge ahead. It's surprised even him, the big man, to the upside. Inflation can be a

very big problem when that genie is out of the bottle. Okay, that leads me exactly my question you, David, which is you studied that period, do we need this time the sort of medicine that Paul Wolker ended up administring that because it was pretty tough. It was brutal medicine, and I think people need to appreciate that it was a very high price to pay for allowing inflation to accelerate for so long. Folker hyped the overnight interest rate to

and inflation got to uh, it caused a recession. But one of the things that's important to recognize is that there was this combination of tightening monetary policy. While there's a lot of pro supply side policy. Who was a Reaganomics with Volkers monetary discipline that really helped seed a terrific nineteen eighties and longer expansion. So Kate helped me here because you're responsible for making these sorts of decisions.

And normal if you've got a lot of inflation, you don't want to have cash because it's dwindling as you hold onto it. On the other hand, we got a lot of uncertainty. So what's your approach. Yeah, you know, normally I would say holding cash in the bank and not investing it or putting it to work in the market in some way, you know, is a waste, and especially in real terms, you just think about that cash

kind of burning away. Of course, holding cash in this environment where we've had a really really challenging period for both bonds and stocks in terms of returns, has actually proven to be a really good portfolio diversifier. In fact, we're holding a fairly high level of cash both as an expression of our duration view, so we've had a

sort of shorter duration position in the fund. We also de risk part of our equity portfolio while still holding some of the higher growth, higher quality companies that I think they can compound over the next couple of years. I think you should have dry powder. I really recommend

people having some cash at this point. We're going to get some interesting bites at the Apple Um, you know, some other high quality companies, as I was mentioning before, may even get che birth in this as we know, have a very volatile period over the next couple one months of policy adjustment, and you know, recession fears, recession appears fading. David in a time of inflation, one thing people tend to go to his real assets, real estate,

and now guy's realized sistem. Does that make sense right now? It does, And there's a nice availability of real assets, and they're investable more than they were back in the past. It's easier to invest in commodities, it's easier to invest in real estate, it's easier to even buy inflation protected securities. These things, particularly the ease of which they're investable nowadays. I bet your investors wish they had those options in

the late seventies and early eighties. So there are ways to help manage through this period of uncertainty and the risks of inflation being high. Okay, so this is unfair. There's a curveball, Kade, I'll throw your way. Cash is not trash. What about crypto? I mean, we've had this whole discussion. There was something like two seventy billion dollars worth. The value came out of crypto and out of stable coins.

As we did that teach us anything in general. I talked to Larry Summers and he said mainly that greed drives the marketplace. Yeah, first of all, I'm stealing Dave's cash is not trash, and I might make a little tattoo of that on my shoulder. But this is what I'll say. I'm by far away not an expert or an authority in any on on crypto or digital assets.

I just would say that for people who are adding that into their portfolios as a diversifier, I think we've seen an incredibly higher correlation between all of these assets and actually between a lot of them and you know, more speculative parts of the technology sector. And you know,

you've got to really think about your portfolio construction. This is the very early stages of this, you know, um, digital finance revolution, if you will, and you have to be I think, pretty balanced in your portfolio if you're going to own some of those assets. I don't know where it goes from here, but I will say, um, you have to be cautious. Just quickly. That's such a great point Cages made. We talk about trying to avoid correlation.

I'm not sure I heard a lot of people talk about the corelation between big tech on the on hand in crypto on the other, but we surely certainly have seen it recently a lot of the same owners, so yes, they find themselves haven't been hurt and perhaps having to do risk. Um. The thing about one of the things to keep in mind the dollar has been getting stronger and if the Fed pulls this off, well the dollar will reign supreme again. What about that, Kate, What about

a strong dollar? What does it due to your investment? Yeah, we take some concurrency views into consideration. I gotta tell you though, over the course of my career, I don't have the best batting average and making cross currency. That's you know. What I will tell you though, is you know it does affect how we think about our internationally. I'm sure not currency traders. So thank you so much. Great to have you both of us as Kate Moore

black Rock and David Bianco of DWS Americans. Coming up, we take a look at what's coming up next week on the Wall Street. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Run up in stocks and then they subsequent set off in stocks on Wall Street is really working his way into the global narrative thing that sell off pattern in stocks and bonds really continue. But economic slowdown spurred another bout of risk aversion. Here's

that rainy day. It's been a long bowl run in the markets, in wealth accumulation and in the economy which came back fast even after being brought to a halt by a pandemic. The fact is Americans a lot to be proud of. We're experiencing the strongest economic recovery in the world. But now everything that looked so rosy gives cause for concern from inflation. To look at the numbers, the headline comes in up three tenths of eight per cent to the supply chain. Some of the supply chain

headaches that someone saying reaching an old time higher. To Ukraine, the Russians have been acting more like a bulldozer than than a tesla. To China, I think we're they're headed for growth recession. So yeah, I think the rest of the year is going to be very tough for China, leaving an investor to wonder how bad will it get?

And when you ask a question as basic as how big and it gets, you want a true veteran, even a legend of Wall Street and Washington, and that's what we have here in Roger Altman is the senior chairman, of course, the founder of ever Core. Roger, welcome back. It's great to have you, Thank you, great to see you. So it's been a week maybe a month of hearing all the bad things everywhere you turn, and it's inflation, and it's the FED, and it's Ukraine, it's China, it's

the plate China. How bad is it? Well, l as of right now is down more or less. And that's the definition of a true correction. And so I would say it's been pretty severe. Uh. I think the big question is how much worse can it get? Uh? And no one knows the answer to that, and I certainly don't, but it certainly could get worse before it gets better.

And you know, historically, when you see such a profound change of monetary policy, which as as worth having now or in the beginning stages of now, historically it's been at least over the short term after the change starts bad for equity values. It's really been the case very often. So it's not surprising that stocks are down now that the Fed has ended this relatively long period of almost free money uh and has headed up on a on

a substantial, substantial upward trajectory in terms of tightening. It's not surprising stocks are down, But I think, as you just said, it coincides with a lot of other negative news. Most basically inflation, but also some of the other points you make about Ukraine, uh and so forth, and so it could get worse. Do I think we're in the on the verge of a financial crisis. I don't. I don't.

I just think it's a sharp correction in equity values, which, when you step back and think about them, in so many cases, especially tech, were hard to hard to rationalize before this change. I mean, there was some astronomical values, as you well know, and it's not surprising that they're finally recked being rectified. So you're talking about the equity markets, We've talked with the bond markets as well, which is

really taken it on the chin. What's the relationship between those financial markets on one hand, and if I can put it this way, the rural world, because a lot of your work at ever Core is dealing with real companies who are buying and selling companies or pieces of companies. Does it directly translate into the value of those assets or is it somewhat removed. It does directly translate in two ways. Uh. The stock market is a uh pretty reliable predictor of the broad economy, albeit uh nine months

or so in advance. Of the real economy is changing. So um, right now there's a big debate as to whether we may have a recession, and uh, I think that's about myself. But uh, we're slowing down even right now, and and the market is in effect telling us that in terms of our own business, Oh yes, it has a big effect because when when the volatility is so high and people hesitate, they want to step back and wait for the smoke to clear in the environment to settle,

and so transactions slow down. There's no doubt about it. Um. And you can see that by the way and the valuations of all the investment banks which have come down a lot for a variety of reasons, but one of them is an anticipated slow down in transaction volume. But it's interesting people start to sit in their hands, if I can put it that where they're afraid to make a move, and that Trump's would otherwise might be an instinct is you know, there are some bargains now, so

prices are coming down. It's the price takes is lower. It might cause some cities to say now is the time to move well, And in fact, just before I just on my way over here, I was on the phone with some of my colleagues because we're having a call uh with a very very well known company that we work with closely. That's a technology company, a very big one and a lot of it. The smaller companies they've been interested in buying in recent years have just

been too expensive. Roger, thank you so very much. This is so helpful. How was the pleasure? David as Roger Allman. He is senior chairman and founder of ever Core. Coming up, we wrap up the week with our special Wall Street Week contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is Wall Spog Week time.

David Weston ats time once again this week to have Larry Summers at Harvard come to us and explain this really perplexing week. So Larry, thanks so much for being back with this. I could call this the week of inflation, as it were. With the CPI numbers, the PPI numbers something you've been warning about for some time now. Some people are saying that show sort of we've hit the peak, it's starting to come down. What did you read into those numbers? You know, once again, the numbers were worse

than people expected them to be. We may have hit a peak last month at eight point five, but we're not heading anywhere near to anytime soon, and that says that we've got very big challenges ahead of us in terms of managing UH this economy. And I think there's a lot of real risks out there. I see an overheated labor market as the core of the inflation process, driving service prices up. And I see a lot of risks geopolitically in terms of supply chains, geopolitically in terms

of UH commodity prices. And so I think this is gonna be a very difficult environment for quite some time to come. Well let's talk about that quite some time to come, because we're now starting to see some people, including Jason Furman on Bloomberger this week, say he thinks that we could have years of inflation even if you get a recession. We would because there are some structural

factors that could give us long, long inflation instead along COVID. Look, I think the two sets of issues that mean that that is a plausible view. One is, most inflations don't get stopped with a single slow down, there are multiple attempts to break inflation before there's ultimate success. That was certainly the case in the previous big inflation that we've had in the modern era, in the nineteen sixties and

nineteen seventies. And then there is the argument, I'm never sure how much weight to give it, that we're probably in a more labor short economy that we used to be, that the pressures of globalization that we used to feel are no longer there, that there's more capacity of firms to niche market than there used to be, and that all of that means there's gonna be a bit less ruthless deflationary pressure than we've seen in most of the century so far, and that that could operate in the

direction of higher inflation. I think I'd be very surprised at the average inflation rate during the ties wasn't materially higher than the average inflation rate UH during the decade of the teens, and it's reinforced via growing number of voices UH. I'm not yet prepared to join the chorus saying that we should set a target for inflation that

is higher than two percent. It could conceivably be ultimately right, but I think moving in that direction immediately would very much undermine what limited anti inflation credibility the FED has, So Larry the question that, obviously is what do we do about this inflation? Is there anything that can be done? Obviously the Federal Reserve has the frontline responsibility, but we also have the executive branch and now the legislature saying, well,

we can do some things. We have President Biden saying to the FEC, take a look at price gouging. And then we have the Speaker of the House, Nancy Pelosi saying she's going to bring legislation forward next week about price gouging at the pump? Is that going to help us? The price gouging at the pump? Uh? Stuff, the more general price gouging stuff is to economic science what President Trump's remarks about disinfectant in your veins was to medical science. Uh.

It is dangerous, nonsens Uh. There is no material prospect that in any enduring way gouging legislation can have any substantial effect on inflationary pressure. But it can cause and contrive all kinds of shortages. It can distort a complex network of flows between crude and refined product. It can inhibit the supply responses that are what's ultimately the best way to overcome UH inflation. UH. This gouging talk is a diversionary confusion. It's something that tends to happen when

we have inflations. But we only make progress once we move through that and we understand that the real determinants of inflation have to do with the total level of demand that's being stimulated by policies. If politicians outside the FED want to make a difference on inflation to the limited extent they can, they should be reducing tariffs. They

should be letting more immigrants into the country. They should be reducing regulatory burdens like the Jones Act that mandates that only US ships can take crude oil from Texas UH to UH the northeast. So let's wrap up this week with a couple of quick rips from the headlines. One of them is cryptocurrencies and stable coins. The prices of those certainly didn't go up this week, and in fact I saw it was something like two seventy billion

dollars where the market value taken away. Do we know anything at the end of the week about cryptocurrency stable coin that we didn't know at the beginning of the week. We've been reminded of something we should have known, which is that fear and greed drive financial markets. All financial markets and cryptos not immune from that, and bank run phenomena, whether it's banks, whether it's money market UH funds, whether

it's repo, or whether it's crypto. When you don't have backing and you lose confidence, you get a big mess. And finally, Larry at the very end of the week on Friday, Elon Musk tweeted on the one hand that he was having some second thoughts about Twitter, and then he came back and said, don't know, he's still committed to It's not clear. The stocks certainly went down, came back a little bit, but it certainly went down substantially. Does this say something larger about what's going with tech?

It right now? We saw that the value of so many big tech companies has come down. It's possible, well, this is actually having some buyer's remorse. Eon is I think you Musk is? I think in some ways the Andrew Carnegie of our time, a titanic, innovative, driving, extraordinarily wealthy UH figure who when he has leverage uses it, and with the changes of Twitter that have already taken place in the absence of other bidders, he has enormous leverage in this situation, and I suspect he's using it.

That's fascinating and Andrew Carnegie of our time. That will go down. But as the larger issue is techn not going to have as larger role in the markets going forward as it has in the past. I suspect that the share of total wealth, total stock market that's in tech maybe somewhat lower over the next few years than it has been over the last few years. But I think it's gonna can sinue to be the case that

the most valuable companies are tech companies. I think it's going to continue to be the case that as it always is, that UH technology and the transformations that it brings our driving history. My guess is that we're gonna see very profound changes coming out of artificial intelligence over the next decade, and I'm not sure where that's gonna go. Okay, Larry, it's always such a pleasure, a real treat to have you with us. As Larry Summers of Harvard a very

special contributor for Wall Street week. Finally, one more thought. There's no shortage of pessimism in the markets these days, with central bankers falling over one another to tell us

how determined they are to raise rates. We don't will out seventy five forever, right, I mean, what I'm gonna do is I think fifty the canes were going now seems about right to me, and those higher rates can mean only one thing, money coming out of the market and making all those financial assets less valuable than we thought they were. The trader actually told me that the consensus here is at the SPI will ultimately trade down

to a PE multiple of sixteen to eighteen. We're at about twenty to twenty one right now, so by that standard, we still have a lot more selling to go. When it comes to taking money off the table, we always start with the riskier, more speculative parts of our portfolio like bitcoin. Bitcoin of course extending losses even dropping below almost thirty thousand one point on Monday. This is the first time it goes as low since back in July.

And tech socks, including those in Cathy Wood's ARC fund, which this week gave back all of its gains against the smp F, and then some Cathy would strategy, for example, of picking stocks that have fallen victim to the tech meltdown, some of her favorites tumbling in an environment of rising interest rates and high inflation. There's a look at the arc innovation et F. But fear not, there are some assets that are holding up nicely, even setting new records, like,

for example, twentieth century American art. One not to the beginning I wanted to send me in one sentiment in one twenty. This week, Andy Warhol's portrait of Marilyn Monroe, it's called Shot Sage Blue Maryland, set a new record, going for one million dollars. That's almost double the previous record of one ten million dollars for a painting by Jean Michel Basquiette. We did sell the most expensive painting of the twentieth century. It's the highest price ever paid,

close to two hundred million dollars. Uh, let it sink in. It's quite something. So with all the talk about cryptocurrencies and n f t s is the value of the future, It's good to know that the safe haven investment may just be in the end good old fashioned art. Though I'm sure Mr Warhol would not appreciate being called old fashioned in any way that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.