Bloomberg Wall Street Week: Desai, Blau, Summers

most influential voices. Larry Summer is the former Treasury Secretary, Bryan wynhand back of America, Will smar Ceo, Charlie Sharp, Bloomberg wool Street Week with David Weston from Bloomberg Radio, searching for direction in corporate earnings in Ukraine and in the economy. This is Bloomberg Wall Street Week. I'm David Weston. Markets turned to earnings this week to find some relief from that bad January start, and it looked like tech

might help us. When Alphabet shot the lights out in growing ad search revenue at Google, something CFO Ruth Porrett said was because of the strength of the overall economy and the shift to e commerce. But then then Meta came out with its earnings, sending its stock and sharply downward over on news of solid Facebook and user growth,

which Mark Zuckerbert blamed on stiffer competition. People have a lot of choices for how they want to spend their time, and apps like TikTok are growing very quickly, and this is why our focus on real is so important over the long term. And at the end of the week, Amazon completed the tech whipsaw by posting strong cloud earnings and raising the price for Amazon Prime, which sent its

stock sharply higher. And we didn't get any real break and geopolitics either, as President Biden and President Putin continued to talk past one another over the crisis in Ukraine, but with Russia's continued his build up if its forces around Ukraine, we are ready no matter what happens when you might we are analyzing written response is that US and NATO received on January six, but it's already clear.

I inform Mr. Prime Minister about it that principal Russian concerns were ignored and if earnings and geopolitics weren't enough to confuse this. Along came those US jobs numbers on Friday, stunning the markets and economists alike with four and sixty seven thousand new jobs in January, we expect only one thousand and adding another three in a thousand or visions for December. Well, how do markets respond to so much confusion?

They get volatile, with the SMP five moving up in the beginning of the week, dropping on Thursday into Friday, and then coming back to end the week up one point five and the NASDAC followed a similar pattern, but a bit more dramatically, shooting up only to plunge on Thursday and rising again on Friday to add two point

four percent of the week. While in bonds, the ten uere yields seemed relatively tame, hovering around one point eight percent for most of the week, but then shooting up to over one point nine when those jobs numbers came in at the end of the week. Tell Us makes sense about lo called weekend the markets welcome now Sonal DCAI Franklin Templeton Fixed Income chief investment Officer, and Charmine most of our Rochmanny. She's chief investment officer for Goldman

Sex Consumer Wealth Management. So let me start with you. Charmine. You have your outlook for two out I've pictured right now the cover you have an icebreaker going through some really perilous waters here with a lot of icebergs. Tell us what you're concerned about for US equities going into the key messages an icebreaker, it's a U S Coast Guard icebreaker that we've called USS equities, and it's going

through all these icebergs. Hence the term piloting through. And our view is that US equities are best positioned to pilot through all the risks, and the icebergs are labeled according to the risks we know are inevitable in the year like this. So the biggest iceberg out there is first inflation, then the next iceberg is interest rate hikes, and much further out we have the prospect that maybe we're going to have a recession. But there's some icebergs

we've passed through, like Omicron and big energy prices. And so the recommendation to our clients is that stay invested. And we're calling it USS equities because we're emphasizing US equities. But let's recognize all the risks out there that we think will introduce a lot of volatility, as you said, but will not derail the economy or derail modestly positive returns and equities, we still recommend staying invested because we have about a six percent total return as our base case.

So certainly a lot of volatility, certainly risks that we have to navigate, but something that we think is manageable for two. So sent out to continue the analogy here for a moment. It did feel this week sometimes in the markets like it was an icebreaker, zig zagging around some of these icebergs, and two of them, as we heard from Charmine, were rate hikes and inflation. Tell us about those jobs numbers that came out stunned a lot of people on Friday. Does that send a signal to

the Fed? You got to raise your rates even faster and even more so? You know, those jobs numbers, we have to recognize that we have seasonal adjustment factors playing into these jobs numbers. So the jobs numbers, the participation rate numbers, actually it's not very clear what they're telling you. You know, you talked a little bit about the revision data December's numbers. There was also a revision to November's numbers, largest revisions on record. However, if you look at the

year as a whole, some numbers were revised down. It's seasonal adjustments. So you know, what you actually take away from that is a little hard to see. What I'm taking away from the entire report really is that five point seven wage increased number. And then if you look at non managerial you're looking at six point five, so you're looking at really strong wage growth. That's the number

which I am focused on. And if I look further and think about inflation next week, I think that I would start getting worried if you've got that upside surprise to what is rudely expected to be a zero point fourish style increase, which will give you a headline of all the seven cent But I'd say that's where my concerns would be about the FED speeding up, but it would have to be in conjunction with that inflation number. Sherman, I don't know about you, but when I hear wage increases,

I think two things. Number, When it's nice for the people getting paid more money, that's really good. On the other hand, it can do something to margins for corporations. Did it give you any pause at this point? Going two? About earnings. When we think about earnings, we believe that they have been the strongest driver of the returns since the global financial crisis, and they will also be the

primary driver of returns in twenty two. So our base case is about twelve percent growth and earnings, but we are assuming that we will see some reduction in margins. Last thank thank you so much, Sonaleci, and and most of our recommendy will be staying with us as we turn to geography and how the United States maybe diverging from much of the rest of the world. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall

Street Week with David Weston from Bloomberg Radio. It wasn't just the US markets that got some surprises this week. The European Central Bank didn't move, but Manamin Guarde sure made a turn in the direction of tightening, and the Bank of England moved up a full fifty basis points. Show mean, most of our Rochmani of Golden Saxon, Sonaldsai of Franklin Templeton remained with us to talk about what geography has to do with it, at least when it

comes to investing these days. So so so now let's talk to start with you, because as I say, we saw more action on the central back front in Bank of England and also ECB. This way, it's surprised, I think some people at least what did it do to the bond market. Well, we finally saw Blunden School positive cross samon three years right, so we it definitely had an impact. I would say that the Bank of England is the one which I find fascinating. Definitely. The ECB moves large

ship pools of money. When you see the see a major central bank shift on a dime between December and now December, probably no rate increases this year and now pretty clear that we'll have a couple of rate increases i'd say later on this year. It's it's a big

change if you look at the Bank of England. And that was a truly hawkish term because not only are we talk in the US, there's still open questions and the market fully believes that when the FED reduces the size of its balance sheet, it won't actively be selling down the balance sheet, which would be big, big news for the US the UK. The Bank of England has made actually said that they might do that. That's very hawkish and very unexpected. And I always look at the

Bank of England because it's so interesting. They have the liberty to move because it's a smaller country own currency, and I often look at them as a leading indicator of the potentially other major central banks would go. So something to keep keep an eye on. Markets potentially have room to be majorly surprised and loads of voluntility. I mean, talk about the equity side, US versus Europe. US, yes, first, the rest of the world. How did you look in

is it gonna look like that? We have been much more bullish on US equities and have recommended that our clients actually overweight US equities and their portfolios relative to market cap. And just to give you a sense of the magnitude of the difference in terms of US and other parts of the world, since the trough of the global financial crisis, US equities have returned about seven hundred sixty And we'd like to use culative numbers because we think it is just such a huge number. It has

more impact when people hear the culative numbers. Developed equities outside the US returned around let's say two hundred and sixty, so roughly five hundred percent lower returns. Emerging markets a little bit less than that. In China just two d so US has far out earned an outpaced in terms of returns the rest of the world, and last year

just was an incredible example of that. So last year US equities up just under thirty percent, let's say twenty nine, non US developed equities around twenty, emerging markets flat and China down. While that kind of a difference can't persist forever, as they say, trees do not grow to the skies, however, we do think US will continue to out earn other parts of the world, other regions, and so even though they appear cheaper, we think some of that cheapness is

just because of the sector exposure. US has a lot more earnings, for example, from technology and faster growing sectors. They have less market cap weight in areas like energy and financials that are cheaper, while emerging markets and non US developed economies have more of that. And so, now, what about on the bond side, given what's going right now, does it make any sense, for example, to be owning European bonds, particularly sovereign bonds right now? Again, you've got

to pick and choose. You The one thing about Europe which is true is there are different countries in Europe different underlying fundamentals, and there's always going to there will always be parks of Europe which look attractive at different points in time, and I think that as you start

seeing you wills go up in your roope. Conversely, one of the anchors which kept which people expected would keep US ten years from going up too high, which is that as the differential with Europe, with the Europe Eurozone kept increasing, you would see influence into into the US, and thus the long end would stay anchored. That starts that that argument starts becoming a bit a bit weaker as you get some kind of normalization, and it's gonna

be much lower Sherman. When you describe the really substantial difference between for example, US and Europe with equities, I tend to think over the long term, you can't have those kind of differentials are to serve a law of osmosis in financial markets? Does that suggest maybe it is time to actually go into so the markets such as Europe because they are undervalued. That is actually one of

the questions or clients ask us. So when you look at valuations across a series of metrics, US is trading at a much higher premium relative to again emerging markets and non US developed and clients are asking, isn't this time to go, given that it's much cheaper than even average levels, But first of all, we do adjust for sector weights and it doesn't look as cheap. And as we project forward, US trend growth is actually higher than that of let's say, the Eurozone or Japan, so you'd

expect better earnings growth. The other two really interesting facts are US labor is a much more productive labor force and US corporate management has much better UH management scores, so actually they get better earnings out of similar levels of growth. And so our view is that the earnings gap will continue, but the outperformance will not be as significant. So now we've had this whole discussion without once mentioned supply chains, which has been talked about an awful lot.

Talk about supply chains, and do you see a differential potential between the United States and Europe, or United States and Asia with respective relief of some of the clogging of the supply chains. I'm not so sure we're going to see differences on supply chains. I would actually say that one thing which has really kept me a little bit amused is that when I look at the inflation

expectations for most of this year. The second half of the year, you typically see a very sharp decline in expectations of where inflation will go, partly related to the idea that you know, you've got these effects which fallout, but then also with this idea that supply chains are going to clear up, and I don't. I really don't think supply chains follow the years, so I don't I

don't put much faith in that. The other thing I'd say is, we haven't talked about this much, but fortunately it is only China, but China is committed to a zero COVID policy. Now, zero COVID is interesting because you can have completely, very difficult to predict stocks and stocks to supply chains, and therefore I remain a little bit skeptical about an easy, smooth unclogging of all the supply chains.

That's one thing. That's another point I would say, which is different to me between the US and certainly Europe, would be that UH would be that in the U S you've got very very strong demand, no question, We've got no trouble with demand in the United States and to supply holding it back many thanks. Now that's anat of Franklin Temple and Charmine. Most of our rakimany of Golden Sachs coming up. If inflation is the question, can

real estate be at least part of the answer. We had to read on the state of the market from Jeff blah CEO of Related companies in our buildings were essentially full and rents, you know, even higher than pre COVID. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. FED chair j Pal made it official last week. Dealing with inflation has become job one. Inflation remains well above our

longer run goal of two. Supply and demand and balance is related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. But as the FED tries to get inflation under control, real estate maybe pushing the other way. All of us, from New York City mayor Adams on down want to get people back into the office. I need my companies back open and operated. You can't run a city like New York even as the prices are going up for tenants.

Our data has a rent increase of almost eighteen percent over the course of one But what may not be good for inflation or renters may work just fine for investors. Investors like John Gray of Backstone the real estate market, for instance, because the fundamentals are very strong, particularly the sectors were focused on. We're seeing pretty robust SAMs. And of course, if it's inflation you're worried about. Mark Kissel of PIMCO reminds us that real estate is the tried

and true hedge. We like apartment rates for a lot of reasons. It's not just the fact that they're real assets. The fact that they are an implicit inflation hedge for higher rents UH and higher wages as another reason. And when it comes to real estate, particularly real estate in the New York area, there is no one who knows it better than Jeff Blau Here's the CEO of Related Companies. So, Jeff, thanks so much for joining us. Let's start with New York.

Tell us what's going on with residential, what's going on with officers. We hear a lot of stories about dramatically increased prices. New York is really, i would say, on a tremendous rebound post COVID. You know, I would say everyone really thought we'd be fully back to the office, back to everything's fighting in New York right after New Year's within with the variant. I think that got delayed a little bit, but it seems to be blowing its

way through the city. And certainly I can tell you on the office side, our tenants are all planning for real return back to work UM whatever that new definition is UM, you know, sometime in the month of February. And I think that's very very positive. We've got double digit increases of occupancy UM, people actually showing up to the office UM week over week, and so I think

that's a very positive trend in terms of the city overall. UM. You've definitely seen people who had left during COVID come back. Apartment buildings that went down in terms of occupancy to roughly are now back to UM. In our buildings were essentially full UM at rents, you know, even higher than

pre COVID. So that's been a tremendous bounce back because we were down to that roughly number and concessions and so on, and so that's been a tremendous rebound on the for sale condominium side, New York City had its best for sale year since two thousand seven. UM, So I think again showing that resilience of the market. And

back to the city. UM, there's something like seventeen thousand apartments that traded hands last year, as they said, the biggest increase since UM, the biggest sales volume since two thousand seven. So I think the city is feeling pretty vibrant almost all parts of the city. Uh. If you try to go out to a restaurant. UM. While again there was a dip in January, it seems to me now things are busy again. The streets are busy, traffics back. UM,

it feels good. I'd say. The only areas that feel kind of quiet to me are are really true commercial districts in Midtown a little bit UM here at Hudson Yards, it's it's very vibrant if you're outside. UM feels great. And so all the things that we love about New York seemed to be kind of back in place. And I'm feeling good. On the commercial front. You say that

you are getting back into full occupancy. Are you repurposing some of that because we certainly read stories about, particularly in the retail area that there's not the same demand for space. Are you having to repurpose some of your

commercial space? We actually we're repurposing. As you said, UM retail has probably suffered the most of all the asset classes UM at Hudson Yards, I think, you know, we built a seven level retail center that was anchored by Neiman Marcus, and when Nieman's filed bankruptcy, instead of trying to retenant that for retail, we decided to repurpose that

to office. And so we now we we are in the process of converting UM and creating about four hundred thousand feet of new office space at Hudson Yards to deal with the increased demand that we're seeing from actually mostly a lot of it from tenants that are in

place today that are growing and expanding. And so while uh, the office occupancy might be kind of in the mid thirties or we I think we had UM day in and day out, today companies are a thinking forward beyond kind of that full return to the office and making the decision to take even more space. And so we're feeling pretty optimistic about the office side. And like you said, I think there will be some conversions UM where possible away from uses that are not quite as valuable anymore,

retail being the top one. There's been a lot of talk about, uh converting hotels into residential or offices into different uses. I think it's pretty hard to do those conversions. I don't think there'll be too many of them. Um. I think I think it's it's hard if you've got a building that's got tenants to vacate. UM. So I think what we did at Hudson Yards was pretty unusual, and you know, we took the opportunity to make that change, and uh, that space is mostly least already, so we

we we're pretty positive about the office sector here. Thank you so much to Jeff Blow He is the CEO of Related Companies. Coming up, we wrap up the week with special 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 Walter Week. I'm David west Today we're gonna wrap up this week

once again with our very special contributing Larry Summers of Harvard. So, Larry, one of the big surprises this week were those jobs numbers. The estimates were one came out of four sixty seven. Also, there were over three hundred thousand jobs added for last month in a revision. So what does that tell us? Why are we so surprised by this? A lot of

its special factors? They do a special year end revision of the seasonal factors, UH, David, I think the right takeaway from these numbers is that the economy is going UH strong, and I think the most significant number in it may have been the seven tenths of a percent almost nine annual rate UH increase in wages UH in the last month. It's hard to know exactly really what to UH make of make of that, but it sure looks like we've now got wage inflation in the United

States at really a rate that is very strong. And unfortunately, since labor is sev of all costs, that suggests that, apart from all the special factors used, cars, housing, and so forth, we're moving towards entrenching UH inflation at well above the target two percent rate. Does this surprise upside

and the jobs yield? This one more piece of evidence that the Fed is behind with the special monetary policy, and if so, is the message of Fed from this quite possibly, you've got to move faster and bigger than perhaps even you thought. There's no question, with the benefit of hindsight, that the FED is behind the curve. I think it's important to say, respecting the FED, that the errors of judgment they made last summer and last spring

were quite widely shared in the economic forecasting community. But they were errors, nonetheless, and I think the Fed's got to uh catch up now. And I rather doubt that bringing real interest rates up all the way to negative two, which is about what's factored in right now, well, let me just be specific with you. Over a month ago on this program, you said there should be five rate hikes.

Should it be even higher than that? Look, one of the very good things about J. Powell's last press conference was he he he didn't say he was doing it, but he in effect ditched a lot of misguided framework that the FED had talked about earlier when he talked about being humble and nimble. And that's the way we've all got to be before the data. So I don't think there's any need to judge right now whether you

need five or whether you need seven rate increases. Uh this year, my best guess is that they're in the end gonna need more than they now think, and UH that markets have to be prepared for a rate hike in every meeting, and they have to be prepared for the possibility that as the inflation process continues, we might need to have meetings with more than a single basis point UH rate hike. But the data are very uncertain, and we've all got to recognize and be humble about that.

So it's hard for me to know what will happen. But certainly anyone who's not prepared for a rate hike at every moment me eating as a real possibility, even with multiple rate hikes um on occasion, I think is underestimating the range of possibility. Larry, you would be the first one to say there's a risk in undertightening, also a risk in overtightening. Where is that balance in your mind right now? What is the bigger risk for US

overtightening or undertightening. I didn't get an economy with four percent and declining unemployment rate, with a record level of job vacancies, and with wage inflation now on more and more measures above six percent. I think the greater risk is that we undertighten and that we end up with UH an economy with underlying inflation above four percent, and then there's no alternative at some point to do the kind of thing that Paul Vulker had to do at

the end of the n East. Now we're not going to have double digit inflation, we're not going to have interest rates, we're not going to have a recession of that UH magnitude. But I think we are at risk of having something directionally UH the same. We've already put that into put that risk into play with the delays that we have UH made, And the more we are on the side of letting inflation go and letting expectations rise,

the more risk we take. Laurie, one of the developments of this week was the beginning of the Olympics, over invasing the Winter Olympics. And we see there a different system for ours, both politically and economically, being put on display for the world as we compete with China and other autocracies around the world. Where are we in that competition? Are we as strong in our alternative both on a political sense and economic term as we were in the past.

I think we're going to endure and be strong and I think there are important respects in which people are gonna look back at the way China is viewed right now, and it's going to remind them of the way Japan was viewed in it's going to remind them of the way Russia was viewed in nineteen sixty. That these things look like terrible threats, but ultimately our system endures, that's my best guests, And I'm not sure, but it does

depend on our preserving the basis of our system. And what's new and profoundly troubling is doubts about the presidential succession process. And not so much that there are people who want to subvert the process. That's always been true, but good mainstream people who don't have the courage to do what they know is right and work against and bring down those who would subvert the integrity of our election process. And that's gonna be a very important test

for our democracy. And I might say to all those who listen to this show who are involved in uh markets, that one of the reasons why the American stock market has been so strong is that people believe so strongly in the rules law in the United States, and that's why the multiples on a given stock are much higher

when it's an American company than when it's the Chinese company. Uh, frankly, And if our sense of the rule of law is called into question, that's gonna have, in addition to everything else, long term consequences for American asset values that we're not gonna We're not gonna like that's not the most important thing, but I think it's a significant thing and gives investors more interests than they may realize they have in these political debates. Something we don't hear often enough. It's not

just politics. Politics are important, but it's also the economy and our entire financial system as well. Thank you so much to Larry Summers are Harvard, our very special contributor here on Wall Street Week. Finally one more thought spreading the wealth even to the goat. It's that magical time of year on global Wall Street bonus time, with the reports of pools going up thirty, forty, even fifty percent levels three nare. John of Bloomberg reports, we haven't seen

in a good long time. Wall Street hasn't seen this level of excess in over ten years now, and it's hardly surprising. The banks did extremely well last year, and there's a lot of competition out there for that top talent. As Bank of America Chair and CEO Brian moynihan recognizes, you have to pay people. We don't want people want to work for less next year, as does Ubs CEO

Ralph Hamers. We pay competitively. We pay for performance. We have the talent to make our our plan and to the excent, we need to pay up, but we will do so as we have done so last year. But generally you don't have to pay up for the top talents once they've walked out the door. And that takes us to the greatest of all time. The quarterback who's won the most Super Bowls buy a lot, and, by the way, has the most touchdown passes, the most completed

passes in the most games. One, not to mention a few other records unlikely to be broken anytime soon, if ever. This week, Tom Brady made it official he's retiring from the NFL after twenty two incredible seasons, explaining to his eleven million Instagram followers that his teammates, coaches, fellow competitors and fans deserve of me, but right now it's best I leave the field. Of play to the next generation

of dedicated and committed athletes. His close friend and business partner in his fitness business TB twelve, Alex Guerrero, told ABC S G M A that it's not just his family that Brady will be spending more time on. I think he's excited about post football career. You know, he's

got amazing businesses that he's involved in. Certainly, you know, he has a passion for health and wellness and and sharing you know, the TB twelve method and what we've been able to to start there and share that with the masses, like he wants people to know how to be able to do what they love doing for longer, and how to be able to do it regardless of age. It didn't come as a big surprise. There had been

reports of its coming for days. By the end, the biggest question was why he was dragging it out, So why the weight speculation of the press focused on You guessed it his bonus. It turns out that his contract with the Tampa Bay Buccaneers specified this Friday is the day he would receive the remaining fifteen million dollars of his twenty million dollars signing bonus. Some sports were speculated that he might be waiting to make sure he got the cash, but at least this time it was not

the bonus talking or even keeping Brady from talking. Under the terms of his deal, he was owed that bonus no matter what, although it was for a four year deal that he will complete only half of. So now it's up to the lawyers to figure out whether he owes some of that money back. And trust me, they will get paid no matter what. But however the money sorts out, a lot of fans are going to miss him.

He gave us so much pleasure around here. Um all about women twenty years here for us six Super Bowl wins. You can't go wrong. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.