Bloomberg Wall Street Week: June 24th, 2022

just how hot the U. S. Economy really is. Through the eyes of the most influential voices Larry Summers, the former Trickery Secretary, Katherine Keating, CEO of the n Y Moms, Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Hoping for better days, but not before we get through the fear of more gun violence, of keeping our democracy safe, and of a recession. This is Bloomberg Wall Street Week.

I'm David Weston. This week's special contributor Larry Summers on just how bad that recession could get and whether there could be something worse coming. I still do think we have a meaningful amount of inflation that we have to get out of the system. And Rick Reader of Black Rock on how we could use the expected down turn to make sure we come back stronger. It's a very challenging period to think through when you're trying to evaluate

risk versus reward. This week, there was a lot of talk about what could go wrong in Ukraine, as European leaders like Italy's Mario Draggy traveled to Kiev to say Ukraine should join the European Union. A Cristo propos to this purpose. I want to say today that the most important message of our visit is that Italy wants Ukraine

in the European Union. While in the United States, concerns over more gun violence led Republicans and Democrats finally to come together on gun legislation, driven as Republicans Senator Cornin explained, by constituents demanding action since shooting my officers received because I'm sure many other members of Congers have have received tens of thousands of calls and letters and emails with

a singular message. Do some Even as the Supreme Court came down with a landmark decision striking down as unconstitutional New York's license requirement for carrying concealed weapons and having a gun out in the open, these like it's incendiary.

It will only add to fear, it will only add to conflict and the potential for violence and when Congress wasn't doing something to address people's fears about guns, it was investigating a day when lawmakers fear for their own safety as rioters came within feet of Vice President Pence, approximately forty ft. That's all there was between the Vice president and the mob. But the fear most investors were

talking about it was the fear of recession. As FED Chair Powell traveled to Capitol Hill to say it was possible, but not inevitable. It's not our intended outcome at all, but it's certainly a possibility, And many investors said it was more than just possible, the essentially as inevitable. At some point, it's almost unavoidable. I got to think that the odds side, I think there's going to be a recession. Our economist, as you've noted this morning, had increased their

odds of the recession this year. This inflation is quite bad. It's it's intransigent, it's not transitory, and the consequence will

be the recession. And if all that weren't enough, on Friday, the Supreme Court came down with its monumental decision, overturning fifty years of president deciding the Constitution does not protect any right to abortion, something President Biden called a tragic mistake to day to Sutreme courts in the United States expressly took away the conscious right from the American people that it has already recognized. They didn't limit it, they

simply took it away. That's never been done to write so important to so many Americans, but they did it. It's a sad day for the court and for the country. While Republican House Minority of Leader Kevin McCarthy found the ultimate affirmation of American values, the voiceless finally a voice.

This great nation can now live up to its core principle that all are created equal, not for an EU created equal, and a good part of American business was quick to respond, with companies like Amazon, Apple, Disney, and JP Morgan pledging to do all that they could to support their employees getting abortions in states that still permit them. Here to sort through it all with us are Jim McDonald, Northern Trust chief investment strategist and Christina Hooper, chief Global

strategist at Investo. So welcome, Jim and Christina. Great to have your Christina, let me start with you on what happened with bond yields because they had been really ramping up. There's been a lot of all today they settled down a bit today this week. Is that because of a fear of recession. I do think that it is what we're seeing is concerns about at least a slowdown. I don't know if it's exactly a recession. I would argue that we'll still be able to avoid a recession in

the United States. And one could argue that that's what the bond market telling us. So, Jimmy, isn't that exactly what the Fed wants? Is a slowdown maybe short of recession. Absolutely, And so I think the softives and commodity prices in recent days has also contributed to the moderation and bond yields.

And the Fed is tightened financial conditions dramatically. And all you have to do is look at what's happened to mortgage rates and the impact and the housing market that that is starting to have to understand that the Fed's impact is already starting to make a difference. Well, I wonder if we got a University of Michigan consumer sentiment numbers out on Friday and they came off a little bit actually on the longer term five to ten year

expectation and inflation. Are we starting to see some effect of the FED, do you think? I do think we are. I mean, but we're also just starting to see a reflection of some commodity prices. Energy prices easing a bit in the last several weeks, so I think that is reflected in it. I mean. J Powell even said in in that FOMC press conference that there is a pretty strong correlation between energy prices headline CPI essentially, and inflation

expectations for consumers. Jim, how much they concerned about inflation actually comes right off of energy, just straight off energy. I think it's extremely high. I think if you look at the correlation between gas prices and the Michigan survey, it's really high. It's the most visible demonstration of what energy costs are to the consumer. And so I think it's going to be a critical point to inflation expectations and bond yields over the next year that we see

at least a flattening, if not some moderation in gasoline prices. Okay, Christina Hooper of Invesco and Jim McDonald of Northern Trust We'll stay with us as we take take a look at the market, at what they did to us last week as opposed to what they can do for us next week. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. Everyone's looking at housing and saying it's too high priced, and labor costs too much in the material, that too much on the land, is too much, and they all sit there and say it isn't that terrible? What are they gonna do about it? That was Pierre

Renfred of Rentfred Boston appearing on Wall Street. We way back in nineteen seventy six, and it looks like we're back to some version of that world again, with higher prices and higher input costs for housing, but a slowing economy and FED chair j Poale told us this week a slowing housing market as well. Still with us our Christina Hooper of Invesco and Jim McDonald of Northern Trust. Jim, this is exactly where you left us off on the housing market. We heard j Pale this week say, yes,

it is slowing. We could even have housing prices go down at least in some markets. How big a drag, potentially even a danger of the economy is the housing market. I think the danger is more from the volume standpoint than it is from the price standpoint. If you think of out housing today, it's about four and a half percent of the economy. It got to six and a half during the bubble, so we're nowhere closed to that

level of an impact. And what I think will provide some cushion to the downside on prices is an inventory is incredibly low, Vacancies are very low, So while the jump and mortgage rates really hurts affordability, there is just a mismatch between demand and supply that I think we'll put some downside underneath prices. And I think it's going to take a long time to work through that and get to the point where supply meets demand, especially given

all the supply chain issues were currently experiencing. It's just not an environment in which we're going to see a lot of homes built, especially first time home buyers homes. So Christina, give us a little investment advice here, right, that's what we really want. We're saying we're clearly going into a downturn. We don't know how bad it will be. At the same time, we know we'll come out of

at some point. As an investor, what do I do in the short intermediate term to make sure I'm protected, But as important, perhaps more important, what I do to position myself to come out of that downturn stronger than ever. Well.

I think it's a great question. I think it's great to look at it essentially in two phases, because what we're experiencing right now is this significant drop in the stock market and actually a significant stop drop for some fixed income um And what has driven that is expectations about uh an economic slowdown, whether or not it's an

actual recession a slowdown. We know that markets tend to signal economic events before they happen, So I think that before long, certainly before the end of the year, we'll start to see a start stock market recovery in anticipation of an economic recovery next year, and so I think we have to keep that in mind. Too often investors have gotten spooped. Look at the global financial crisis. How many people got out towards the bottom locked in losses.

I think it's critical to be forward looking and think of this time frame as actually a time to start um looking for opportunities to start dollar cost averaging. I think you want over the shorter term to have a pretty neutral stance when it comes to risk, but start to look and start to allocate for that recovery because the recovery I think is going to be longer lived than the downturn Jim. Right now, a lot of people

are talking about high yield because of their turns. You're getting on high yield right now over seven percent, maybe eight per cents on the event. Is that a place we want to be right now? I think it is. And if you want to be defensive in this environment, HW yield bonds provide about one third of the downside risk that equities do. And an important distinction is do you think of high yield is a fixed income alternative or a risk asseid alternative? And we think of it

as a risk asset alternative. So if we go into recession, hi yield bonds on average have declined just four and a half percent during the past six recessions, whereas US equities are down over twelve and you're getting a current yield to worse of roughly eight and a half percent. So would people say how can you buy how you old bonds for going into recession? The answer is if you're trading out of equities into them, it's a less

offensive position. But you don't want to trade out of investment grade bonds into how yield if you expect we're going to go into recession because investment grade bonds have historically done very well in that environment. What about that defensives in equities. Yeah. So the one nuance I would add to that is that we still like the natural resources sector and commodities oriented energy stocks for example, there are a nice hedge against our number one risk case,

which is sticky inflation. We don't know when these supply chain problems are going to get fixed. You keep hearing about more issues in the energy patch. For example, what's going on in the Ukraine and the big steel production facility in Mariuple that is probably shut down and so they're not able to provide the steel tubing that goes into well exploration. All of those things tell us we want to have some hedge in energy, and we do like technology. That's a recent upgrade for us for the

secular growth reasons. We expect technology to grow its share of GDP over the next decade by roughly double. Well, that's really interesting because there's sort of the bloom has been off the roads of a lot of technology recently after a really great run, sort to come off again. Who are you in technology, Christina? I'm very positive on technology now. I think we need to be selective. We want to stay away from what I would call spec tech, which was actually the first leg of technology to fall.

But there are a lot of great names in that space, some of which look like very good buys right now. Um, given where valuations are and given strong cash flow, just solid fundamentals in general, because whatever the longer term trends again, coming out of whatever downturn there is here, what do you think is promising? Are we talking about things like green energy? What are we talking about? So? I certainly think there are a lot of different themes that are

very exciting. Some are smaller than others. Green energy is certainly one of them. Cyber security is one of them. But I think I would take a step back and say the bigger picture is that we're returning to a more normal environment. And when I say more normal, more normal relative to longer term history, Jim, more normal certainly sounds pretty good to me right now. At the same time, how much of that depends upon the FED not overreacting because some people say the FITS hads a really big

say in the markets. Thus far, getting back to neutral, fine, little above neutral, fine, But we're really going well above that, to four or five percent. What is that going to do? So I would define overreacting a little differently. I would say that if they end up doing that, it's because inflation has proven to be more persistent, and so their action is actually justified, and that is not going to be a good circumstance for the market. If you think

about bearer markets, there really are three categories. An event driven one, which is the least damaging. Secondly, you can have one that is more cyclical oriented, and then you could have one that's driven by a financial crisis where credit creation is impaled. If FED hikes rates too much, we're definitely going to go from what's an event driven

to a cyclical type of recovery. But if you look at the FED stress test results over the last twenty four hours, and the banking systems in really good shape, so we are very unlikely to get into a structural bear market, which could be really damaged. Okay, that's pretty encouraging me. I'll take that to the bank, no question

about it. Really appreciate Jim McDonald, Northan Trust and Christina Hooper of Vesco being with us here today to really give us an insight into what the markets have done, but also what they're likely to do in the future coming up. We know things are rough and likely to get rougher. But what can investors and policymakers do to make sure we come back stronger than ever when things do turn around? We asked Rick Reader of black Rock. That's next on Wall Street Week on Bloomberg. This is

Bloomberg Wolves Street Week with David Weston from Bloomberg Radio. Okay, we can disagree about just how bad it will get. There's a chance that we are already in a recession. Is it severe? Is it drawn out? The shallow recession? Verst stay deep one recession? But no one can deny at this point that the economy will slow. Well, I expect the economy to slow. Oh, it's been growing at a very rapid rate. It's natural now that we expected transition to steady and stable growth and the markets could

continue to fall at least for a while. We've done a lot of price damage. Right, we want to be investing into the price damage, but we think it's premature if the recession is still increasing. But however bad it gets and however long it lasts, things will come back, raising the question what have we learned from the experience, Both in the policies we adapt by most important advice to the administrations, don't do anything to shock the economy,

and in the way we invest. I think we're going to see a lot more investors remain on the sidelines, remain cautiously positioned, and that actually may lead to some interesting opportunities for longer term investors. And to take us through where we are and more important, where we are headed, We're welcolled now Rick Reader. He is the c i O for Global Fixed Income and also ahead of the

Global Allocation team at black Rock. Rick, thanks so much for being here, haven't so before we start about how we come out of this stronger, let's talk about where we are and now where are we? Listen, I'm for markets and for the economy. We're one of the most uncertain periods we've been in a long time, and quite frankly in a generation. We have never had an experience where economy is tangibly slowing across almost every piece of data.

Economy is slowing. You're starting to see it work through in the claims data and unemployment data, and we think, go with the next couple of employment parts, you're gonna see an economy or hiring dynamic that's different. And you've got a central bank that's got as its singular focus today despite steel mandate, is full employment and price stability. That has got to bring down inflation. So it is a construct that the markets have a hard time dealing

with how much will I let the economy go? How much with inflation which we think will come down you're seeing you're certainly seeing indications that you're seeing in the markets pricing of it. So it's a very challenging period to think through when you're trying to evaluate risk versus reward. What are interest rates doing a portfolio? What are stocks

hi yiel bonds doing a portfolio? And I think the markets having reconciled the solution of that yet and how much of that is the markets and they are not economy And how much of his policy I know the black Rock has a terrific chart basically indicating it surprised me in recent years the volatility and monetary policy has driven the investments more than the investments at so day. But it's a it's a pretty incredible thing and part of what we're trying to illustrate on the support it

is you've you've been investing twenty years ago. Ten years ago, it was all about the central banks reaction function to the economy and how the central bank would react when inflation or employment moved too far away from normalcy. The last ten years and certainly anybody we've hired or work for us, it's been there ten years has been an environment where the central banks are functually all you have to focus on because they are driving the dynamic around

how prices are moving. Why is that the case? I mean, listen, you need aggressive monitoring policy when you go through a financial crisis or you go through a pandemic, you need aggressive policy. But there's been this process of tweaking to get back on the line that I would argue is creating more volatility to markets. You know, we, I would argue, including this central ban, including the FED, we need to get to neutral quickly, get to neutral. The system has

an ability to recalibrate itself, be flexible. I would say high prices are the cure for high prices. The U. S economy is incredibly adapted of and you're seeing it. It was a good article today about you know, you do look at gas prices. Higher consumption comes down, the system recalibrates. But we've become used to the Central Bank is kind of trying to put us back on a

line of two percent inflation and full employment. And I would argue it's actually creating more volatility at times than is warranted by how much the economy actually actually gyrates. We say, get back to neutral. We heard from a chair J. Pale, and he's testimony for Congress this week saying he still thinks neutrals are around two point five. But even he is saying, now we may need to go above that. You have other people saying we need to go way above it in order to really put

a stake through the heart of inflation. Is that wrong? I said, I don't think you have to go away above it. I think the chair is right, and I think what they're doing now is exactly the right policy. I know, you know, I and others have been critical about we waited too long to move, and I think the Fat has been clear on that being the case. But there's a question of what is the trade off from if you get to neutral and in a bit beyond, we shouldn't be at e the policy like we are today.

Get to neutral, do another seventy, get closer to neutral, maybe do a fifty on the back side of that, You know, you think about what you could do fiscal policy, solar battery, You've seen some developments recently, what you could do and precision act to help the food market. Multi family housing incentives to build more multi family housing affordabilities really hard, is really expensive today. Multi family is going to be people I can stay in rental. We need

more development of multi family. These are fiscal initiatives that need to come in and can be and by the way, have a real velocity to them, create multiplicative economic impacts. Just raised just keep raising rates and taking people out of work. It's a blunt tool and maybe it doesn't work, and maybe it doesn't bring the inflation down. I just don't agree. Okay, Rick, thank you so much that care

Black are always great to talk to. Rick. Coming up, we wrap up the week 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 Weston, and we welcome back once again our very special contribute Larry Summers of Harvard. So, Larry, a good part of

the week. This week was given over to talk about recession on the one hand and inflation on the other. We heard from Fed Chair J Powell for two straight days up on Capitol Hill. Let me ask you the most basic question, as you look forward to the economy, what do you think the biggest risk is right now we face Look, I think, David, that a recession is almost inevitable, probably a chance within the next two years, and there's certainly a real risk that it will come sooner.

That's gonna be a very difficult thing though, as I say, I think it may be inevitable given where we are, but I think it's going to be very important to make sure that, uh, if we're going to go through a period of pain, we do slay the inflation dragon. You know, there have been many failures, particularly the nineteen seventies of the classic example of where economic policymakers did the equivalent of stopping their antibiotic when they felt better,

but before the Tende dose UH was through. And so it's a very very difficult set of balances and challenges that the FED is going to have, and I very much hope that they make UH wise choices. So so I take your point that the only thing worse than having recession is having one without slaying the inflation dragon us to say, but let me ask you, at this point, some people are predicting this will be a fairly shortened, shallow one. Do we have reason to believe that? I

hope there. I hope they're right. Um. I think the question is gonna be how much recession do you how much recession is going to be part of eliminating inflation? And that goes back to the whole debate about team transitory. If most of inflation is transitory, then we're not going to have to live with very much pain to UH get the inflation out of the system. If more of it is more ingrained, then we're gonna have to live

with uh more difficulty. I was mildly encouraged by the number that came out today suggesting that long term inflation expectations as measured in Michigan had gone up a little less than people originally thought. But I still do think we have a meaningful amount of inflation that we have to get out of the system, and I don't think we're gonna do that in one or two uh quarters of economic uh slack. One of the things that share Pile testified about this week was neutral rate that he

still thinks it's about two point five percent. I wonder if you agree with that, and then going to say we may have to go someone over that. Some people think he has to go well over that word. You look, I think that talking about the neutral rate without talking about the rate of inflation is basically illogical. And so when he says the neutral rate is two and a half percent, he's assuming that the inflation rate will be two percent, which I don't think is to be assumed,

uh without the right kinds of policies. So my guess is we're gonna have to go well above two and a half percent on interest rates ultimately in the long run, when we get through this inflation uh episode. I think there's a substantial chance that we're going to return to the kind of secular stagnation situation we had before COVID, which could mean a neutral rate below U two and a half percent. So I think we're gonna have to be very careful and UH monitor to track UH to

track what's happening. But I wish Sharmon Powell would start framing the new control rate as a real interest rate concept that at any moment is dependent on the underlying rate of inflation and stop just using a nominal figure that assumes so much of what is an issue. Staying with chairpiles a testimony again. He also testified a fair amount on both days of the hearing is actually about the housing industry and the fact that necessarily the increased

rates are hurting the housing industry. Even suggested that at least in some place in the country we may have housing prices go down. How big a threat is that to the kind of because that is something we saw

back during the Great Financial Crisis. I think we're in a much less precarious situation in housing than we were during the Great Financial Crisis, but house prices have run way up, and I wouldn't be surprised given what's happened to UM more good traits, if at least in many parts of the country there was some UH backtrack of house price. My assessment is that that's not going to oppose the kind of systemic financial risk that it did

during the Great UH financial Crisis. But as is always true, when there's excess, the people who get in last UM find it expensive. Larry quite me on any testimony of my capital Hill. We also had two very dramatic opinions come down from the stream Corp of the United States. I know that you're not a constitutional lawyer, at least not that I'm aware of. At the same time, I wonder what you think about that decision with respect the Second A Moendment and guns, and also then at the

end of the week with respect to abortion. You have talked on this program before about your concerns about the institutions of democracy in this country. I'm worried about a Supreme Court that's so radically breaks with its own precedent, that is so fully in UH the life of the country, and I wonder if that doesn't raise questions more broadly about the predictability and continuity of UH policy. The extent to which they're very strong checks and balances UH in

our democracy. By my personal values, UH, both these uh decisions UH were appalling, but you know, everyone has their values, and there are other people who would have very different values. What I think is, in some ways the more fundamental issue is this question of reversing precedent and UH mandating UM things that have really not been UM acceptable for

UH many for many many years. I can't help but feel that the decision that it's illegal and unconstitutional to stop people from carrying UH concealed weapons that goes a long, long uh way UH for for me, and I think Roe v. Wade has been so much part of American life that UH to remove it completely and in the way they did with the divide completely divided course is a kind of UH fairly shocking act. And I say that as someone who believes very much in UH deference

UH to the Court. I was not one of those who attacked the Court for the Bush Fee Gore decision. Though it was not a decision I liked or supported. I was not one who was prepared to attack the Course for the decision they made in Citizens United, the case about corporate funding of politics, though that was a decision that I didn't like. Larry, Thank you so very much as our special contribute to Larry Summers. He is, of course from Harvard University and also an avid golfer. Finally,

one more thought, everything old is new again. We have had more than our fair share of historic moments these past few years. From a once in a century pandemic it is ten times more lethal than the seasonal flu, to an economy falling off a cliff and then bouncing right back again, the strongest economic recovery in the world, to a ground war in Europe the likes of which we have not seen since World War Two. This crisis directly affects every member of this Council and every country

in the world. And inflation higher than it's been in at least forty years. Inflation is shating people so hard they're coughing up bounds. If all that weren't enough, now we have the return of labor unions and even of strikes, as this week Great Britain saw unions shut down part of its rail system. Britain's biggest rail strike in thirty years starts today after unions rejected a last minute offer from train companies, bringing back more memories of the nineteen

eighties and British Prime Minister Thatcher's uncompromising stand. What we have seen in this country is the emergence of an organized revolutionary minority, how prepared to exploit industrial disputes, but whose real aim is the breakdown of law and order and the destruction of democratic parliamentary government. But now forty years later, the move back toward unions involves businesses that we didn't even conceive of in Lady Thatcher's day. Now it's our half calf no form lattes that could be

at the risk. As Starbucks were moved to organize. Starbucks has now lost several rounds of this legal fight at the labor board. And then there's the question of who's going to fix our iPhones if the people at the Apple Genius bar all joined the International Association of Machinists and Aerospace Workers, a trend that a former nlr B chairman says is far from over. I think it's likely that it will happen that many more stores. We don't know really how many uh it's likely to be, but

clearly something is happening. It may be no coincidence that what we're seeing today comes at a time when we have a president deeply committed to organized labor. I'm proud of it. You know, workers have a right to determine under what conditions were going to work or not work. But then again, back in the eighties, when things went too far, we managed to do without our air traffic controllers,

albeit with a very different president. If they do not report for work within forty eight hours, they have forfeited their jobs and will be terminated. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.