Bloomberg Wall Street Week: Kaplan, Keating, Tett

most influential voices. Larry Summer is the former Treasury Secretary Bryan wynhand a back of America, Will CEO of Charlie Sharp Bloomberg wool Street Week with David Weston from Bloomberg Radio. Suddenly we want more more goods as we saw in the strong retail sales numbers on Friday, and more workers as we saw in those disappointing jobs numbers last week. But the supply isn't there yet, as we saw this week in consumer prices, with core CPI coming in at

a whopping three, well above expectations. This time, the markets didn't take it all in stride the way they have in the past, with the stock market having its worst day since February after those consumer price numbers hit us on Wednesday, got to bounce back on Thursday well, ten year bond yields climbed up toward one point seven and five year break evens pointed toward more inflation yet to come.

The FIT has done a wonderful job. They've done a great job and supervising the banking system, which has performed beautifully during this two year period. And the sharp reductions and short term interest rates have done a terrific job of stimulating housing and autos. They may be done um, but we think they will wait a while before they raise short term interest rates again. I think they want

to make sure that the labor markets have stabilized. That was Abby Joseph Cohen on Wall Street Week back in two thousand two. In some ways, things haven't changed all that much. Then as now the Fed is keeping interest rates low to stimulate the housing market. Then, as now it's trying to strengthen the jobs market. But when do you know that it's time to ease off of that gas pedal. That's the question a lot of people are asking.

Dallas Fed President Rob Kaplan says that while it may be too early, the time is coming as we see demand kick in so This is a contrast to the Great Recession, where we had a very slow recovery because of sluggish demand. Households weren't spending. In the current situation, we've got substantial demand. Households are spending. But what we're seeing, UH from our contacts across the board is supply issues.

And my team, to their credit, had warned me for the two weeks leading up to this report that there was a meaningful chance it could be disappointed because we were seeing Our estimate is something like two million fifty five year old and above workers have have either retired on schedule or accelerated their retirement. Got a million and a half working mothers UH that are home with their kids. UH, lack of childcare, school reopening is an issue. And yet

we are hearing broadly UH. Employers are trying to hire, but they're struggling to compete with unemployment benefits. And then the last thing we're hearing from goods companies is they're cutting back production runs because they lack inputs. And they've even done some temporary laidoffs. They've been telling us, UH, and we saw all that because but they're they're gonna be temporary because they lack the ability to have full production runs. So we saw all that in this Job's report.

And to what extension you these specific issues in er region, in Texas and northern Louisiana and New Mexico. We we saw all these issues. I can tell you across the board, and you know, we do extensive outreach here and we've redoubled it since the pandemic, not only talking to businesses, but I took a lot to community leaders, heads of heads start across our district and they've been the ones warning us UH skill training pipelines have have been reduced.

They can't get people to take money to enter skills training. They're seeing many workers who are taking unemployment. They're reluctant to enter full time jobs. They may be doing day work as a replacement, which allows them to continue to collect unemployment. And again we're seeing elevated high school dropouts.

And you notice in this Job's report one group that had an increase in their employment with sixteen and nineteen year olds, and normally it's say that might be good, but a number of them were a little alarmed by our high school dropouts that I think they would be better off in the economy and the long run would be better off if they finished high school, got their g e d. At least so they could then eventually get into skills training. But we're seeing all these trends.

I suspect that any of these decisions whether to go back to work or not are influenced by several factors, not just one factor. But talk about their unemployment insurance is specifically there was a time go a year back, where we wanted people to stay home for safety concerns, for health concerns, we wanted to pay them to stay home. That time is passing. If it hasn't already passed, does the impetus for enhanced unemployment insurance really fade as it's

safer to get back. I think we want people to go back to work now, don't we. So I'll answer it this way because I'll stay out of the political aspects of this. What we're hearing from contacts. You know, if you go back six months or more obviously, or even three months, there were a number of sectors that hadn't yet reopened, and number of their workers didn't have

the option to come back. As sectors reopened. For example, dining were unusual in Texas we we are now exceeding pre pandemic levels, but still movie theaters are just starting to reopen. I know in other parts of the country. In New York, restaurants are just starting to fully reopen. Uh. You want to help people that have lost their jobs, but as we more fully reopened, and we want to incentivize people to come back either to the jobs they left or two other jobs. UH. Contacts are telling me

this is a real issue. One of the numbers that people paid attention to is actually the increase in wages, how much people were making. Given that need to get those people off the sidelines, are we looking at possible wage inflation just around the corner. We're hearing across the board for unskilled workers as well as skilled workers. But but,

but but notably unskilled workers. Businesses tell us they're either offering higher wages, but that's not doing it to get people back, and they're offering bonuses, you know, signing bonuses.

And even with that, I think, based on our our work, you would have seen much greater hiring in leisure and hospitality than we saw if if they were able to learn more works, in other words, to demand from these businesses to higher is greater than you saw in the growth and employment there thanks to Dallas Fed President Rob Kaplan. Coming up, cryptocurrencies take a hit from an unexpected source.

Advocate Elon Musk, our crypto experts Jillian Tet at The Financial Times and Peter Krause of Aperture Investors take us through the climate olenges of bitcoin. That's next on Wall Street Week on This is Bloomberg Wall Street Week with

David Weston from Bloomberg Radio. Elon Musk has done a lot to boost cryptocurrencies like bitcoin and dogecoin, but suddenly he's on the other side of the trade, joking about doge coin being a hustle on Saturday Night Live and then reversing his decision to accept bitcoin and payment for Tesla's We talked with Jillian Tech, chair of the editorial board and editor at large US for The Financial Times, and Peter Krauss, CEO of Aperture Investors about whether the

setbacks are just a blip or reflect something deeper in a nutshell, Well, duh, because we have warned at The Financial Times now for many months that cryptocurrency is filthy and there's really just two key stats you need to know to understand why. Firstly about clip currency has been mined using the computer algorithms in China, overwhelmingly using Chinese coal,

mostly in the west of the country. And secondly, the sector has grown so rapidly that it now has the carbon footprint people calculate around the size of say Sweden UM and that is worrying. I mean, there have been any number of activists, scientists, um investors pointing this out and pointing out the tremendous irony that that Tesla has been branded as e s G friendly, good for environmental, social and governance even while it's got this filthy footprint

in bitcoin. So, Peter, there's more than a little irony here, right, because at least we tend to think of people who tend to invest in crypto as being very environmentally conscious, and it turns out they may be polluting the environment,

warming up admitting a lot of greenhouse gases. Yeah. Look, I mean, we spend an enormous amount of time every week trying to think about e s G. Countists and vest We designed investment processes, We have information and data we look to enquire as to managements views on e s G and how they deal with those different conditions, and investors are demanding, in particular in Europe, but all over the world investment portfolios that are e s G friendly and in fact even e s G compliant with

some of the new regulations in Europe. So it is in fact a paradox for investors to be investing in bitcoin, which is exactly the opposite of that, not even close and more interesting to the Jilly point, if it continues to grow, If it continues to grow, the exponential effect on the use of poor use of energy coal, dirty

energy is palpable. And so I find it, you know, kind of almost humorous that people are investing in bitcoin, thinking that they're doing something that's citing, and at the same time they're acting in exactly the opposite way that they want the rest of the world to behave. So so Julian, that says one thing to people who want to buy or hold the cryptocurrencies. What does it say

for the big banks? Because the big banks are getting some pressure actually to manage some funds that actually would include some crypto and it we have JP Morgan for example, as we're coming out, so we're really gonna get to zero missions. Everyone wants to get to zero missions. If they really want to do that, does that mean they can't hold crypto? Well, what I argue the column the

Bananche times are three key points. Firstly, this shows that nobody can afford to ignore E s G risks, even if they have an E S G label on of an asset. And essentially what you're seeing is a very fast moving sector where there aren't many binary situations. It's not static. It's often a question of trade off and the only way from investors to code is to take

a holistic view and recognize they will need to adjust. Secondly, though, in coming out of that point in fact, there is now a scramble a foot in the crypto world to tackle these green issues or these dirty issues, and the Unitine Nations just teamed up with the Rocky Mountain Institute and a group of fintech leaders to explore ways to

try and deal with it. Two options. One, you change the computing process is to slash the amount of electricity they consume, and there's been a cryptocurrency this week called Cheer launched to do just that. Secondly, you can try and source it from clean energy sources, say Icelandic hydro electric power, and create a registry. There are efforts on that way, but the third point is that regulators clearly

need to start getting involved. I mean, the reason why someone like Elon Musk can have almost this Wizard of Ods like effect on the crypto market is because it's opaque and unregulated and probably highly concentrated in its holdings.

And there are efforts underway now amongst the regulators to exert more oversight, not just all over the questions of market manipulation, but also money laundering and frankly, every single big bank who's dealing with crypto or thinking about it, and farm managers, whether it's Ferdella to your Golden Facts, needs to throw that weight around it behind this process big time, and ironically, green issues might turn out to be the issue that causes everyone to runny together, even

the libertarians. I just want to jump on something to just inject another idea into the conversation. There are there are two uh issues around around cryptocurrencies. One is the mining issue, which creates the sort of scarcity value and the desire to actually earn something for producing a new bitcoin, and that you know, that's the speculative aspect of bitcoin.

And the speculative aspect of cryptocurrency. But the more interesting aspect of cryptocurrency is not the fact that it is a speculative value, but that it's a mechanism by which you can actually trade, settle, and effectively record transactions immediately or instantaneously. That's the much more valuable part of crypto. And you don't need mining exercises and energy um utilization

in order to go after that. So I think you have to start thinking about unbundling the sort of speculative aspect of crypto, which frankly has no value to it, and now we know it's dirty as it as it relates to the environment and the actual value crypto, which is a currency that settles immediately, instantaneously, records the transaction, and lowers the cost of transactions in the world, and

is the most valuable part. And so I think this might be, to Jillian's point again, the sort of start of unappealing the onion between the speculative aspects, which frankly are not that valuable, and what the true value of crypto could be over time. So so Jillian and Peter says, you can separate out the immediate settlement on the one hand from the speculu on the other, what about another aspect, which is the complete anonymity, which I think we saw

this week and the Colonial pipeline hack. Actually, as we look at all these ransomware attacks, there've been almost four hundred on infrastructure. Could we have those ransomware infantachs without crypto if you had to actually rate a check in your bank account, I'm not sure the ransomware would work. That's a great point, David, and I think the issue is not so much anonymity, but pseudent anonymity that basically

don't know who lies behind these accounts. You canteract the accounts, and notly enough, some law enforcement officials actually think that the benefit to having this because they can actually see once you get inside system, you know where accounts are coming from. But pseudonomity is absolutely part of the issue. And again going back to my point that actually green might provide a spark to actually get community support for

more accountability and transparency. If you started to create a register of green versus dirty cryptocurrencies, that's the kind of thing that could actually put this on a more with you're footing. That was Peter Krass of aperture Investors and Jillian Tett of The Financial Times coming up. Inflation was up this week and stacks and bounds were down. At least you're part of the week. What does that mean for investors? We ask Katherine Keating of b N y

Melon that's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. It was a tricky week for investors as the market has been on a tear. Even some warned of gathering storm clouds, and this week it felt like we just might be feeling some raindrops as well, with those CPI numbers coming on the heels of disappointing jobs numbers last week.

So investors have to be asking themselves whether they should be reaching for the umbrella or even running to shelter. We ask Katherine Keating, CEO of b N y Melon Wealth Management, whether investors are changing their strategy to hedge for inflation. Investors always have to be concerned about inflation because inflation is one of the things that can lead to the end of a business cycle, tightening rates, recession,

bear markets. We don't see that yet. We actually agree um with Chairman Pale that we should expect inflation, and we should expect it to be transitory. There are a lot of inflationary forces at work in the market. Were reopening right, we wouldn't have been here together last May, and yet here we are. We're reopening um and so we need to expect inflation, and we need to expect some surprises because the economy closed down in a very synchronized manner, but it's reopening in stages, and so we

need to expect some of these surprises. And I and I always think that Janet Yellen has a great way of making economics human, and she reminds us it's not just statistics, it's people's activity. And if I think of my own activity in April, I was representing the reopening of the economy and some of those sectors that really drove the CPI increase, I'm grateful to be fully vaccinated. I was traveling on my first business trip, renting a car, flying on a plane, going to restaurants. Those were some

of the sectors. As we address transitory against not transitory, which j Pallis talked about repeatedly, how informed should we be about how much money is sitting on the sidelines, particularly in households. There's a lot lot of money sitting out there that doesn't really have a weight quite yet to express itself. Well, that's right. If you look at households, households are in very good shape, right, three trillion dollars

in household household bank accounts, savings accounts. You look at stimulus this year, that's going to households, which will actually be twice as much as what went last year, you know, six hundred billion last year, a trillion two this year. So households are in very good shape, which again is a good sign for the economy because if we think about the two thousand and eight crisis, that's a crisis that really hit households in a different way because of

the housing component of it. Households today are actually in very good shape. To one extent of people run away from bonds in this environment because it seems like whatever happens, it doesn't seem like bonds will gain in value very much going out. Well, that's right. We are we have seen interest rates, you know, decline for most of our investing lives, and now we're seeing them begin to rise. And so there's always a role for bonds in the portfolio.

It's a smaller role going forward. It's a smaller role because, as you note, returns are going to be much lower, but there's always a role, and we're broadening portfolios portfolios to get exposure to other things to make up for what you used to get from your bond portfolio. We're seeing some of the tech stocks get particularly particularly hard now. They drove a lot of the market for a long time,

and they're still well up overall. But at the same time, what is the problem with tech when it comes to inflation? Is it just because there is They're so richly valued that when people get nervous they run away from it. Look, I think there are two things. I think the tech stocks really, um you know, lead the recovery because of the way we were spending our time last year, right, they really enabled us to keep the economy open to a certain extent. So you saw tech stocks, um you know,

get very high multiples because of that. And also because investors were willing to pay for growth in a sector that was growing when you had so many sectors not growing. Now what you see is with interest rates rising, it actually reduces the present value of the cash flows and earnings of tech stops and so that's what you're seeing a rotation, but it's a rotation into sectors that we should all be embracing. Mid cap, small cap value, non US stocks. We think all of these will play good

roles in the portfolio. So follow up on that. Who might benefit actually from inflation? For example, financials, So financials um will benefit from inflation and in particular difference between short term and long term right, um, so that's a sector that benefits. Energy often benefits from inflation. Um. So many sectors benefit from higher rates. How concerned are your investors right now when you talk to them? How worried are there because there's a lot of uncertain in the

marketplace right now. As you say, we've never seen this happen in our economy. Ever, shut it down and bring it back. That's how anxious are people out there. So if we talk to our clients, they really focus on three things. They focus on the economy because their business people, They focus on the markets because their investors, and they focus on taxes because their taxpayers and so um our

our clients. Our clients are sort of living the reopening of the economy as business people, they see this supply demand and balances as they're trying to hire and trying to get workers. Um, they've benefited obviously from the markets as markets have you know, tipped to all time highs in recent weeks and even now still up nicely year to date. And so what we're talking to them a lot about right now is taxes. They feel that that's

much more uncertain. They know that they know the proposals that have been um introduced by the Biden administration, but they're asking us will they pass. There are very narrow majorities. If they pass, when will they be effective? How will

it affect the market. So one of the questions about tech actually I have is about taxes because if you've made a lot of money, at least on paper by the appreciation of the tech stocks does indicate maybe you should sell those right now and take the lower capital gains if you think it's around the corner. So what we tell our clients we tell them two things. Number One, as an investor, time is your biggest advantage because markets

tend to grow over time. So we say planned don't panic do things that you would otherwise do for your portfolio. Tech stocks rose to be, you know, the five largest tech stocks rose to be something SMP five hundred. If you've got large concentrations outside positions, you might want to trim those. You might want to trim those for investment reasons, but also potentially for tax That was Katherine Keating of b n y Melon Wealth Management. Coming up, we wrap

up the week with our special contributor, Larry Summers. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. So the markets were royal this week by one thing, really, the prospect of inflation. And we're blessed to have with us the special Wall Street Week contributor from Harvard, Larry Summers, who was really the first to warn about this possibility way back when President Biden proposed his American rescue plan

back in late January. So Larry, welcome. Let me say, Jason Furman, an economist you know well you respect, was on Bloomberg this week saying that no credible economists ever doubted that this was too much stimulus. I don't remember all those economists agreeing with you at the time. I don't know. I didn't feel like I was echoing the conventional wisdom at UH at the time, and David, I nobody knows yet, and it's too early to know, and

the record of forecasters isn't UH great. But I have to say that whether you look at average hourly earnings, whether you look at producer prices, whether you look at consumer prices, whether you look at direct measures of UH labor shortage, whether you look at market expectations of UH inflation,

whether you look at survey expectations of inflation. I was on the worried side about inflation, and it's all moved much faster, much sooner than I had UH than I had predicted, And I think that has to make us nervous going forward. Yeah, no question about it. At the same time, we have a number of people who continue to say it's not that big a problem. They have various reasons for that. One thing I say is it's just specific sort of kinks in the supply eye chain

that isn't a larger phenomenon. What do you say to them? So, look, by definition, there are always going to be a few components of the cp I that grew rapidly in any given month. That's what the Carter Economists said all through the creation of UH, the Great UH inflation. I think there's some things that are striking. If you look at corese c p I this month, it grew faster than headline cp I. That's exactly the opposite of what that idea would tend to predict. If you look at the

pace of inflation, it seems to be accelerating. What I'm struck by is how selective people are. I mean, the thing that leaps out at me when I do micro economic analysis of the price in disease is that house prices by some measures are up eighteen percent over the last year, but the owner occupied housing components of the CPI is up like two and so that tells me that we're probably missing something large with respect to housing.

And I think if people are seeing their house prices go up at eighteen before too long, they're gonna be estimating that the amount they could rent their houses for is gonna be going up substantially. So the largest distortion I see in the numbers is UH with respect to housing. You know, so many people commented on use car prices and use car prices. Surely that's not a trend. That's going to continue, but it's only a couple percent if

that of the index. If you look at the monthly CPI, medical care was zero UM in the most recent reading. I don't leave for a moment that medical care prices are gonna stay at zero. And that's a much larger component of the CPI than UH used car prices, so it may be that it's going to change. The other thing to say is, let's be clear, the core cp I grew at nine tenths of a percent. That's an

that's an annual inflation rate above eleven. So there's plenty of room for there to be a lot of translatory factor in it and for us still to have what would be an extremely serious problem of UH inflation rising to the four percent range. So I don't think you can dismiss these figures. I also think that if you look at the hourly earnings figures, if you look at the producer price things, all the inputs which have to do with future price increases, those seem to be UH

accelerating as well. So Larry, what do you say to the Fed Frankly who keeps saying it's transitory and specifically the arguments I understand is, look at what we're seeing right now is the necessary reaction of economy coming back online. And once it gets back online, things will settle back down again. So this is just like a relatively short one off. Look, anything's anything's possible, and they could be right.

But I always believe in government that the right strategy, indeed in life, the right strategy is to hope for the best and plan for the worst. And the FED seems to be planning for a very benign scenario that we certainly can't uh count on. And I don't think anybody at the FED Vice Chairman Clara to acknowledge this in the last day or two thought that inflation would

be anything like the number we saw in April. I certainly didn't see the slightest hint of a suggestion in anything that came from the FED that we were gonna be seeing wage growth figures pointing to um wage growth relative well above five even for a single month. And look, David, you have to make a judgment. Do we think from here that supply factors are going to be bigger than demand factors or vice versa. On the demand side, we

have two trillion dollars of savings overhang. We have three trillion dollars of stimulus that's worked its way only part way through the system. We have the continuing consequence of eighteen percent UH housing price UH increases and all the money that that's going to free up UH for consumers. And we have the fact that when nominal interest rates stay the same and inflation accelerates, real interest rates to climb,

and that means people borrow and spend more. That's what we have on the demand side, and all of that is pointing towards more inflation. On the supply side, we have maybe people will go back to work more when unemployment insurance ends. I actually think that's a significant factor, but the administration denies that unemployment insurance is relevant to UH the decisions. People talk about all the kids going back to school and that will enable workers to go back.

But as Jason Furman's work is gonna show, you don't really see that when you calculated carefully, as being a very large effect, because the change in the labor first participation rate of people with kids and people without kids

aren't really very different. So I'm not sure what the huge supply effect that people are looking towards So what I see going forward is we're in a tight place now with current inflation at a reasonably high rate, and I seem more on the side of increased demand than I see on the side of increased supply, and so that makes it seem pretty unlikely to me that this is all gonna subside. Uh, it might happen, but I don't think it's gonna happen without policy action and policy

they are. The more determined, the more clear the evidence that inflation is rising and inflation expectations are rising, the more determined the FED is to say, we're nowhere near beginning the process of um tightening monetary policy, and I think potentially it's gonna do some real damage to their credibility, and that's going to have important impacts for inflation expectations.

And there you have Summer's Inflation Watch the first episode actually with Larry Summer is our special contributor at Wall Street Week and of course from Harvard. Finally, one more thought. The price is wrong. In one sense, this week was all about prices, the price of gas at the pump, producer prices, and of course those spiking consumer prices. But there's more than just the economics and fed reaction when it comes to prices. There's also, of course, the politics.

Pocketbook issues always loom large in any election, and even if we may not blame the candidate for what we're paying at the pump or in the checkout line, we at least want the sense that they know what real people in the real world are paying for things, which brings us to the political price gaff, perhaps originating with President George Herbert Walker Bush back in getting caught out in a presidential debate having no idea what a gallon

of milk costs, and then Rudy Giuliani running for president in two eight just hazarding a guest at the price of milk and getting it hopelessly wrong. History may have repeated itself sort of this week in the New York mayoral race. When leading candidates were asked how much an average house costs in Brooklyn. Former Wall Street banker Ray McGuire guests it was between eighty and ninety thousand dollars. Well, we could forgive him, because, after all, at City he

didn't handle mortgages. Sean Donovan is a different story. He ran housing for Marion, Mike Bloomberg and then hud for President Obama, and he guessed that a house in Brooklyn would go for about a hundred thousand dollars, although afterwards he did say that he just got confused because he

had too many numbers rolling around in his head. The right answer, well, that was nine hundred thousand dollars and leave it to Andrew Yang to nail it, though former New York Sanitation had Catherine Garcia was awfully close at eight hundred thousand dollars. But if it's any constellation that eight thousand dollars could buy something in Brooklyn, according to Zillo, it may not be a house or even an apartment. There is a parking place in Brooklyn going for eighty

thousand dollars. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.