Bloomberg Wall Street Week - January 13, 2023

worth 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 Keening, CEO of v n Y Moms, Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Inflation easing odds or European recession dropping and North America coming together? Maybe just a gleam of optimism

for the new year. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers on whether we're seeing light at the end of the inflation tunnel or a false dawn if you think about it. The good news was inflation running in the sixes. That's still inconceivably high. Former IBM CEO Sam paulmisano On CEO is facing a very different world. Do it's necessary to maintain strategic growth and dry productivity at the same time.

And economist Melissa Carney of the University of Maryland on what declining births in the United States could mean for economic growth. You have fewer people of working age. More worryingly, it could mean lower GDP per capita. Maybe it was just the promise of a new year, or maybe just maybe things really are starting to look a little bit better. As the leaders of the three nations of North America gathered in Mexico City this week and sought cooperation on

a host of issues. Above all, we both committed to pursuing a better future, one grounded on peace and prosperity for all of our people. We're one of those inflection points, or what we do in the next several years is going to dechairmine what the world looks like the next two, three, four decades. In Europe, odds of recession are dropping, at

least according to the Belgian Prime Minister. If you look at the economic indicators UM in needs, the fearful recession is diminishing UM and there are good reasons for that. And in the United States, inflation signals reinforced what we thought we saw at the end of last year, inflation may just may be truly coming back down a month over month CPI print negative. This number was bang on

the screws. When he finally got the job, Speaker Kevin McCarthy got up to a surprisingly bipartisan start, with the House almost unanimous in improving a new select committee to look at the threats posed by China. We know that China right now is what would be called our pacing threat. This is something not just from the military perspective, but also from an economic perspective that we've seen our vulnerability days,

particularly over the last couple of years. Both things weren't quite as smooth for all the other lawmakers as the new Republican member from Long Island, George Santos, faces a range of investigations and growing calls for him to step aside, including from Republicans on behalf of the Nissa County Republican Committee. I am calling for his immediate resignation. We must call

for the resignation of Congressman George Santos. Calling for George Santos to resign, Calling on George Santos to resign, demand the George Santos steps down, calling him to step aside. You should design. My office will have no interaction with

George Santos or his staff until he resigns. In the end, the markets this week saw the half full part of the glass, with the SMP gaining two point seven percent for the week and the NAZAC up four point eight percent, while bonds strengthened as well, with the yield on the ten year down six basis points, ending at just about three point five percent. Take us through the week in the numbers. Welcome to Sanny Bechela CEO of Rock Creek and David Bianco, DWS Group ce IO for the America.

So welcome back both of you. It's good to have you here. David, we start with you CPN Nembers encouraging inflation. Is that what's driving the markets right now? It is UM and we knew that going into the week that investors would be focused on the inflation report. There were whispers that the inflation report with surprise to the downside. It didn't a King Bengan on target UM, but it

confirms that inflation is continuing to come down. However, the battle is not over, and I think investors should and certainly the Fed will likely stay focused on the labor market, and we still see wages really running red hot, so the inflation fights not over. We probably have a few more hikes ahead of about basis points, So that's interesting. I'm signing a few more hikes ahead. The question for me is it may not be over, but how close

is it to being over? What do you think the FED is going to think when they meet at the beginning of February. I think the FED is still trying to remain relatively hawkish and um and as David said, pretty sure they will do that twenty five basis points in their next meeting. They are looking, as he said, um at the employment numbers really carefully and um and also of course at earning the reports that are coming out as we speak. So so I think those two

items will be important. Wage growth is starting to show a little bit of maybe softening. We're seeing people starting to talk about laying off in certain sectors like finance and technology. So I think all of that will factor into the next conversation about ray tips. So so, David, We're all focused on the FED, and we will be for some time to come, but I know you think that we also should be look at other parts of Washington. It may actually be affecting the investment quiteria right now.

And what should we be focusing on as we're going to well, well, there's a lot of things going on with inflation. I would argue that the near term focus really should be on the labor market. We do have disinflation on goods, and we've had some on commodities, but the disinflation on goods is because we are entering a goods consumption and goods production recession, and I think we'll

hear more about that during earning season. So in the near term, stay focused on the labor market for where inflation goes, what the FED needs to do about it. But longer term, yes, I agree that the longer term inflation outlook has a lot to do with policies both at home and worldwide, but policies that relate to how well we spend, what type of return on investment we get on things like energy, energy transition, um, even defense and so on and so forth. So I t when

we hear energy, we think of you. Necessarily, You've had a lot of your career tied up with energy. You studied it, as I recall at Oxford as well, tell us about the federal policies right now in energy how they may be affecting some investment decisions. The interesting thing is, obviously when we talk about about policymakers, we think about the Inflation Act. But just before we go there, I think what's interesting is the concentration of of the market

has been on what the Fed is doing. And what is interesting is President Biden and UM and his team have been equally focused on removing some of the supply chain problems. We saw what they did with for example, the trains unions, UM. We saw that, for example, the energy reserves that were released and UH and and where one of that was one of the reasons that gas

prices are where they are, among other reasons. Of course, so government has been much more proactive when it comes to different areas, but in terms of his policies, but particularly when it comes to energy and UM and I think it has quietly been quite effective in keeping energy prices down. We've seen, by the way, similar things in

Germany and UM. Then coming back to the IRA, of course that is huge because there's the direct impact of the IRA, which is uh, you know, over three billion, but there's also the leverage impact in the sense that we're seeing already a lot of private sector deals happening, whether you look at big private equity firms that are doing very large projects, people investing in in clean energy, but also in things like all energy terminals to for the for the short term, and then last but not least,

venture firms are looking at hydrogen projects because they're seeing again with the i RA that there is potential some of these investments that are longer term investments some day that when we talk about energy, we have two sides

of the house. One is the fossil fuel side. This question of that released from the SPR the strategicroll certainly effect that, but you also have investment decisions like ion ear now is something like a seven million dollar loan in the private energy tied to that investment Inflational Production Act. So as an investor, what should we be looking at.

As an investor, what you want to do is look at the prospects for return on capital, and we would expect that there will be a lot of investment spending through government programs like the Inflation Reduction Act, but the CHIPS Act investments spending that's done by the energy sector of the alternative energy sector, the electric vehicle sector, the utility space, UH semiconductors. But the question that investors have is what's the return on investment going to be? And

certain industries have a history of producing poor returns on investment. Energy, auto, UH and I and others have done better or at least are regulated like utilities. So we do expect a lot of investment spending to come in this space. We have yet to really figure out will this be good for investors and what time of the type of return

on investment we would get. Ask you the most basic question when it comes to the green energy area that now is going to get some subside in the US government, is that inflationary or deflationary depends on you know how if if it brings down total energy prices, that would

be obviously um, not inflationary, right. Um. In the meantime, if you say that it's creating by some accounts nine million new jobs over time, of course, over a long period of time, you could say that that could have an impact on people having a larger ability to to spend and consume. But I think that's much longer term. I think in the short run, if it starts bringing down the cost overall costs of energy. That is good

in terms of our words about inflation. David the Uncle of DWS Group, Thank you so much, David for being back with us. Coming up, fertility rates are declining in the United States and don't appear likely to come back. We're talking to Melissa Karney at the University of maryll about why this is and what could mean for investors. And this is Wall Street Week on Bloomberg, your first in depth look at global market and business new We have one big item of corporate news to tell you

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This is Wall Street Week. I'm David Weston. Every year, the Aspen Economic Strategy Group comes out with a monograph describing with the state of economy and most importantly, what are the big issues that we face. They've just come out with the most recent edition. We're welcome to the Director of that group. She is Melissa Carney. She's professor of economics at the University of Maryland. So Wellisa, thank you so much for being back on Wall Street week.

This is a fascinating report from beginning to end, but particularly images in part you authored, which has to do with fertility rates in the United States and what that could do for economic growth. First of all, give us US an where we are on utility fertility rates in the United States and whether this is a temporary thing

or it may take care of itself. Sure, So, the US fertility rate has plummeted for the past fifteen years, and so the problem here is that now we are at a level of fertility in this country that is below replacement level, meaning without immigration, the population will not

maintain our size. And so what's been happening is for fifteen years, annual birth rates have gone down, and now we're at a point where the average number of children born to a woman in the US is substantially below the sort of magic number of two point one that would keep us at replacement population level. It's now one point six seven. My look at the data suggests that it's unlikely to turn around anytime soon. So what we've really seen is that the decrease in births is very widespread.

It's coming from across demographic groups, it's coming across the country. It doesn't seem to be driven by any sort of

sharp policy or economic change in the past fifteen years. Rather, it seems to reflect more recent cohorts of young adults having fewer children or remaining childless more often than cohorts in the previous past um And so this suggests that there's been a general trend away from having children, from having multiple children, And if we look to other high income countries that have been dealing with this for decades, it's it's probably going to be stubbornly low. That's my

best guess. So Professor here on Walter, we speak to investors in particular, what are the possible consequences of that in terms of economic growth, because it really we have to depend upon future economic growth. What is that decline particularly likely to do to us? The decline in birth rates has meant a decline in population growth, and the most immediate effect of this is likely to be a

shrinking size of the working age population. So the working age population in the US has been stagnant for for over a decade now, and given the decrease in birth rates we've been experiencing for the past fifteen years, in the not too distant future again, absent and increase in immigration, we're simply going to have fewer people of working age. Now that that's consequential of both in a fiscal sense, meaning that it's going to put fiscal pressures on our

social social security system, funding for Medicare disability insurance. But it also it also poses economic headwinds in the sense that you have fewer people of working age, and that doesn't necessarily just mean fewer people to produce stuff, lower economic lower economic activity overall. More worryingly, it could mean lower GDP per capita or reduction in in productivity per person, reduction and living standards, which could have profound effect obviously

on investment in particularly United States. So what can we do about it? Can we get that fertility rate back up or do we have to find a work around? Yeah, So here's where I think we can draw lessons from other high income countries Japan, UK, Canada, other countries in Europe, including Scandinavian countries um that have been dealing with below

replacement level fertility for many decades. You know, the first thing I would note is that despite efforts to turn things around, fertility has remained below replacement level in those

countries for many decades. A lot of those places have implemented explicitly pro natalist policies, things like baby bonuses or child tax credits, expanded parental leave, expanded subsidies for childcare, all things that should make the cost of having children lower um or the ability to combine work in kids easier.

And yet the evidence from those kinds of incremental policies is that they might lead to some modest increase in birth rates in the short run, in particular, perhaps not persistently, but nothing of the size that we would need to really lead to a dramatic reversal of the decline in fertility or the stubbornly low fertility rates um anytime soon. So you know, that suggests that it would be hard

to turn things around. And again, because it looks like what we're seeing is really just a move away from having children, are having multiple children, as opposed to any sort of temporary response to some to some you know, discrete change. So just that it's going to be really hard to turn the fertility rate around. So where does that leave us, Well, the obvious thing is to think about increasing immigration now Easier said than done in this country.

Congress has been sort of derelict when it comes to immigration reform for far too long now. But given these demographic trends, the parative for immigration reform for allowing more people to legally enter or stay in the country becomes that much stronger. And and there's lots of sensible reforms for reform proposals out their ways. We could do this.

We could certainly have more of an employment driven immigration system where you know, like other countries do, including Canada, where we allow more people in who are reasonably likely to contribute right away to our economic productivity. Um. We could also increase per country caps on the number of family members who are allowed to immigrate to the country

or stay in the country. Beyond immigration, of course, um. Again, these demographic headwinds emphasize the need for policies and conditions that promote innovation and productivity growth. Easier said than done, though recent spending bills in Congress aimed at investments in infrastructure, increases in spending on scientific development, all of those are encouraging.

All of those are steps in the right direction. But getting innovation policy right is very hard, UH, and it's and it's about it will require a lot more than just spending UM. It requires having the conditions in place for competitive companies UM and innovators to flourish and thrive. This is something that we take up in our in

our report that you mentioned UM. And of course it will require a lot of investment in talent, not just important global talent through more immigration, but also really building the talent pool UM among our native born population here in the US. That report is from the Aspen Economic Strategy Group, and I really highly recommended. It's fascinating reading, it's really terribly important. Thank you so much for sharing it with us today. As Melissa carneyhis professor of economics

at the University of Maryland. And we're going to continue this discussion about changes fundamental changes will effect of the plight of ceo s. Particularly we're gonna talk to Sam Pomisan, the former chairman and CEO of IVM, about how the paradigm has shifted for the average American CEO. That's gonna have next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston. We're joining once again by our very special contribute Larry Summers of Harvard. So Larry,

great to have you back with us. And there's a lot of good news this week. I must say, reopening of China. We've got a warmer window than expected. In Europe, maybe not a recession over there. In the United States, inflation numbers are coming down. Are you rethinking someone what you said in the past about the likelihood of recession. I think it is uh good news and the evidence that there's been some wage restraint as part of uh the good part of the part of the good news.

But at the same time, I think one has to be careful of uh false dawns. And if you think about it, it it the good news was inflation running in the sixes, and that's still inconceivably high by the standards of two or three years ago. So I would stick with my view that a recession this year is more likely uh than not. But certainly, looking at some of these trends, one has to think that, uh, the Fed's job is much much closer to being done, feels much

much closer to being done. In terms of disinflation than it did a few months ago. And I think the more optimistic possibilities, while they still would not be my bet, look more plausible today, uh than they did several months ago. And that's got to be encouraged. And we'll have to be watching the data very very closely. And the most important day of this month, by far from a macroeconomic point of view, will be the last day of the month,

when the Employment cost Index H comes out. That's the gold standard measure of labor costs and waves pressure, and that's a number they'll be studying very very closely at the FED, and I suspect on Wall Street and I'll certainly be up early that morning to get that number. So right after that, actually early in February, we're going

to have the meeting of the Federal Reserve. Given where we are right now and it's always data dependent, should they at least be talking about a pause, if not in February coming after that, I think we're still not

quite at uh that point. Uh. I don't think a pause in February would be well advised, and I don't think we have to make a definite decision beyond beyond February for right now again, I think the most important thing is to make sure that the job of containing inflation UH gets done and that they preserve UH their credibility. So I think it's a little bit premature at this point to be thinking about pausing, But we're getting much

closer to that day, Larry. Another big story this week had to deal with air traffic in the United States, as we had to ground all the airplanes because of an apparent problem with the f A A system. This is something you've referred to in the past. Actually, some doubts about the system. This is raised larger questions about the systems we have in the government at the f A and perhaps other places as well, like the I R S and the need for investment. Look, I think

it refers to two things, David. I think it refers to the quantity of resources that we invest, and it refers to the competence with which we invest. Something is wrong when tens of millions of returns sit opened at the I R S. Something is wrong when the I R S opens the phone answers the phone less than a fifth of the time. Something is wrong when these kinds of fiasco's happen with our air traffic control system. Some of this is we just don't invest the resources

that we need. Look, I'm not enough of an expert to exactly be able to compare the information technology challenges that an institution like the I r S, receiving billions of forms each year has with the information technology faced by a large bank like JP Morgan. But it feels very wrong to me that the I R S is I T budget is only three and a half percent of that of JP Morgan. Larry, thank you so much for being back with us. That is our very special

contributor here at Wall Street Week. He's Larry Summers of Harvard. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. Say you next week. This is Wall three Week. I'm David Weston. We're joining once again by our very special contributor, Larry Summers of Harvard. So, Larry, great to have you back with us. And there's a lot of good news this week. I must say, reopening of China. We've got a warmer winner than expected. In Europe,

maybe not a recession over there. In the United States, inflation numbers are coming down are you rethinking someone what you said in the past about the likelihood of recession. I think it is uh good news and the evidence that there's been some wage restraint as part of UH the good part of the part of the good news. But at the same time, I think one has to

be careful of uh false dawns. And if you think about it, the good news was inflation running in the sixes and that's still inconceivably high by the standards of two or three years ago. So I would stick with my view that a recession this year is more likely UH than not. But certainly, looking at some of these trends, one has to think that, uh, the Fed's job is much much closer to being done, feels much much closer to being done in terms of disinflation than it did

a few months ago. And I think the more optimistic possibilities, while they still would not be my bet, look more plausible today UH than they did several months ago. And that's got to be encouraged. And we'll have to be watching the data very very closely. And the most important day of this month, by far from a macroeconomic point of view, will be the last day of the month.

When the Employment Cost Index UH comes out. That's the gold standard measure of labor costs and wave pressure, and that's a number they'll be studying very very closely at the FED, and I suspect on Wall Street, and I'll certainly be up early that morning UH to get that number. So right after that, actually early in February, we're going to have the meeting of the Federal Reserve. Given where we are right now and it's always data dependent, should they at least be talking about a pause, if not

in February coming after that. I think we're still not quite as UH that point. UH. I don't think a pause in February would be well advised, and I don't think we have to make a definite decision beyond that beyond February. For right now, again, I think the most important thing is to make sure that the job of containing inflation UH gets done and that they preserve UH their credibility. So I think it's a little bit premature at this point to be thinking about pausing, but we'll

get much closer to that day, Larry. Another big story this week had to deal with air traffic in the United States, as we had to ground all the airplanes because of an apparent problem with the f A A system. This is something you've referred to in the past. Actually, some doubts about the system. This is raised larger questions about the systems we have in the government, at the FA and perhaps other places as well, like the I R S and the need for investment. Look, I think

it refers to two things, David. I think it refers to the quantity of resources that we invest, and it refers to the competence with which we invest. Something is wrong when tens of millions of returns sit opened at the I R S. Something is wrong when the I r S opens the phone answers the phone less than a fifth of the time. Something is wrong when these kinds of fiasco's happen with our air traffic control system. Some of this is we just don't invest the resources

that we need. Look, I'm not enough of an expert to exactly be able to compare the information technology challenges that an institution like the I R S, receiving billions of forms each year has with the information technology faced by a large bank like JP Morgan. But it feels very wrong to me that the I R S is I t budget is only three and a half percent of that of JP Morgan. Larry, thank you so much for being back with us. That is our very special

contributor here at Wall Street Week. He's Larry Summers of Harvard. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. Say you next week.