Bloomberg Wall Street Week: Keating, Feeney, Drexler

most influential voices. Larry Summer is the former Treasury Secretary Bryan Wynahan a backup America Will Saro CEO Charlie Sharp. Bloomberg wool Street Week with David Weston from Bloomberg Radio, Geopolitics to the forefront, even as the economy stays hot.

This is Bloomberg Wall Street Week. I'm David Weston. It was a week when we woke up every morning and looked to see whether Europe was still intact with concerns about a possible Russian invasion of Ukraine, despite President Putin's protests to the contrary, even as he said he was running out of patients and appearing with the German Chancellor Schultz suggesting bombing might be necessary to stop what he

called a genocide. We should allow me to add that in our assessments, what is happening now in the don

Bass constitutes genocide. But while we were all focused on Ukraine, we had more indications of just how hot the U s economy really is, with retail sales nombers for January surprisingly high retail sales, a strong advance in January, a big rebound from what we saw in the month of December, and corporate earnings continue to pour in with mixed results from paramount CEO Bob Bakish falling short of expectations because

of his streaming investments. We would have peak streaming losses UH in terms of investment in UH, and then they would improve from there, which would return the company to total earnings growth in twenty four and beyond. But in the end, the geopolitics and continued concern about the Fed one out over any positive news of the week, as the Spire was down for a second week in a row, this time by one point six putting it off by

nine said for the year. Today, the NAZAC fell by one point seven six percent on the week, while bonds fluctuated but ended up not far from where they started with the yield in the tenure continue to hover just over one and oil actually was down despite all the anxiety over Ukraine, ending up at about ninety three dollars of barrel for Brent. To put this all in perspective. We welcome now Katherine Keating, she's CEO of b N y Melon Wealth Management and Joanne Feeny Advisers Capital Management

portfolio Manager. Thank you both for being your welcome back to walstere Week. Joe, and let me start with you on this geopolitics. As you talked to your clients, how concerned are they about this? What do you tell them? Well, you know, in the last week, I've actually feeled a number of calls with clients and some of them ask, you know, why aren't more people talking a bit about

this on the investment front. So they're clearly concerned about the you know, tensions in Ukraine, what we seem to be escalating um in addition to the concerns we've been talking about for months like inflation and interest rates and slowing economic growth. So you know, they want to know if they need to do anything different in their portfolios. Do we need to change things for them um or are they well positioned, and the answer that comes down to, really,

you know, what's their time frame. We've seen the world confront pandemics, wars, recessions, the stock markets suffers for a while but eventually recovers. So the time horizon for the investor really matters here as well. There risk tolerance for suffering through the volatility. So there are solutions out there, and the solution really depends on the the individual investor. Yeah, I agree with that, Joanne. And in fact, when we think about geopolitical events, believe it or not, they tend

to have very short lived impact on the markets. What really matters is the larger ecosystem in which they're happening. So if we think about nine eleven terrible, terrible tragedy, markets closed for four days. When they reopened the following week, you had a very significant sell off, but within two months that had actually been recovered. What was more important was the was the ecosystem that that happened, and we were already in a bear market on the tech bubble bursting,

and that market continued for a couple of years. I think the other thing that is important when you're thinking about war is um you know, worst take time right, We've we've learned that as a country, they take time, they can really impact your fiscal budget for a very long time. Well. Part of the ecosystem, though, Catherine, order is just volatility. We already had volative because the uncertainty about the FED triggered by the inflation of the factors.

So putting more volatility into that more uncertainty, what does that do to you as an investor? How do you how do you deal with that kind of volatility going forward? Catherine, so Joanne said it right, time horizon matters, and for most investors, their time horizon is actually quite long. They're saving for their retirement or maybe even their children and grandchildren, and so you can withstand volatility if your time horizon

is long. The other thing I would say about volatility is, you know, when we come out of a recession at a bear market, as we did over the last two years, those early months and years, everything goes in the same direction, it goes up. You don't have the nor more volatility, and we haven't. But in fact, when you look at the s MP five hundred, the average intra year correction over time is and yet seventy percent of the time the market ends up by the end of the year.

This is normal volatility. It just may not feel that way right now. Joanne entering Chasm just talked about a bear market. Is it possible we are entering into a bear market right now? Well, in some areas of the stock market, we're already in a bear market, alright. Look at info tech, look at other areas of growth, some areas of consumer discretionary communication services. A lot of these stocks have come down, you know, well more than ten

percent um and there multiples have come down accordingly. And that started before really the UK intentions really heated up, and it was primarily triggered by the FED signaling that they were going to be raising rates and when rates actually rose. But you know, back to Catherine's point on on the environment in which this higher risk has now arrived. We we are the U S economy and the global economy still in the midst of a recovery from the

worst of the pandemic. So we have a backdrop of production increasing, whether it's in industrials, consumer products, housing market, right, and these are all trends that are likely to continue despite what is happening in the Ukraine, because you know, there's more and more production coming online cars for example, it's really been held back and that should ease in the back half of the year, for example, as semiconductor production. A new factories come online starting in the middle of

this year. So the economic environment is actually fairly positive. We worry, though, right about the Ukraine situation and how the sanctions that may end up being triggered if this really goes forward, will affect particularly the European economy. Thank you so much, Katherine Keating and Joe A. Fini. They're gonna be staying with us as we turned to the question of what we should expect from the rest of the year. That's gonna be up next on Wall Street

Week on Bloomberg. This is Bloomberg Wall Street Week with David weston draw Bloomberg Radio. We are back with Joe and Feeni of Advisor's Capital Management and Katherine Keating of bny Melon Wealth Management. So Canton, when we come to you, we add this discussion, good discussion. I was going to ask you about the rest of the year where the sp forget that, what about inflation, because that's what everyone's talking about. Where do you see inflation now and where's

it going the rest of the year. Do you think it is the most important question? Actually, and it's the first one on everybody's minds. And I think to really understand that, we have to step back and reflect for a moment on what we've been through. As I said, we were in a healthy business cycle that got interrupted by a health recession, not a normal recession, a health recession. People were getting sick from this terrible virus that made the economy sick. And then we got an unusual kind

of medicine. Right, we got this six trillion dollars in fiscal stimulus in this country, which really changed some things in the recession. The first thing it changed is incomes didn't go down. That's very unusual. Incomes didn't go down, Spending didn't go down. That's very unusual. Normally in a pandemic, we tighten our belts. It happened was people kept spending, but they shifted their spending two goods. Right. We weren't buying services, we weren't going on vacation, but we were

buying goods. All the things we needed to work at home. The UM laptops and computers and monitors and all of those things. UM and and all the things we needed to do life everything in our lives at home, and we're we're I think we're starting to get past some of that. We see some of the um. You know, it's sort of economics one oh one, right, you have all of this demand for goods and you don't have the supply to get them. We see that starting to

correct a little bit. The fourth quarter was really a story about restocking inventories, and so I think the question about inflation is does the torrid pace of consumers buying goods start to come off of its peak and do we see more normal behavior which is shifting two services? Joe and aswer that question. Sure, that's exactly right. I'll

put on my economists at here for a second. But uh yeah, when you have this demand so high, it's apply not able to catch up, and interest rates not rising for various reasons, the only place the pressure valve can you know, can be turned is on the inflation front. And we should, towards the middle of this year start to lack some of the biggest price increases. So with fiscal spending less um than last year, uh, and with a shift back over to services spending, we're already seeing

that in the mobility data. More travel, more hotel bookings, more Airbnb bookings coming. That should take a lot of the pressure off inflation, uh is, particularly in the beginning of the year. Plus more supplies I mentioned before, more chips from the semiconductor companies mean more cars can be

produced and everything else. Um. You know, on the other hand, that we have to worry a little bit about the labor situation because the pandemic did trigger an awful lot of people to just leave the workforce, particularly the baby boomer generation, and they're not likely to come back. So we have a shortage of labor. We're going to have higher wages. That's going to continue to keep the upward

pressure on prices. But with the FEDS actions, with more supply coming on, with the shift over to services spending, you know, it's likely that the torrid pace of inflation does ease a little bit through the course of this year, but it's going to take some time. Probably inflation gets worse as the housing price increases start to filter into the measured inflation numbers UM, as they've begun to do. It's probably gonna get a little bit worse before it

actually gets better. Yeah, we would agree with that. And you know, the thing about goods inflation is that it tends not to be very high. Right, there's so much competition, so many brands out there competing for consumer dollars. Uh. Sticky inflation is what we really worry about. So we worry about um, you know, rents and wages in particular.

And if you asked us about the one thing we're most focused on, it is that increase in labor costs because it's running at about four percent a year right now. And what we need is for the FED to do what it will do, which is raizor rates a bit. We need employers to do what they want to do, which is manage their costs and grow their prof fits um. And we need employees to come back to the workforce.

And there are things that we're missing, right. We didn't have the normal mobility and immigration over the last couple of years, which is which is very important. We didn't have mobility of people be able to move from one place to another to take a job. UM. I think the flexibility that a lot of businesses are adopting are going to invite will invite people back to the workforce. UM. And we need productivity, which actually we've been living a

productivity boom. That's how you recover corporate earnings and recover all the GDP that was lost without with fewer workers. We still have three million fewer workers. Joy. And you talk about pressure on prices, what about pressure on portfolio managers? Because in a world where you've got to or three present inflation, a five percent return every year on your portfolio looks pretty good. In a world of seven present inflation, it doesn't look so good. Do you have investors basically saying,

wait a second, how can I keep up with this inflation? Yeah? That's obviously more of a problem for those heavily exposed to fixed income, right, and that's where there's gonna be a real challenge in keeping up. But you know, when you think about inflation and stock prices, you recognize that the source of inflation is coming from companies raising prices. They raise prices, that means their revenue goes up, that means their earnings go up, and you know, commensurately, stock

prices tend to follow that. So there's a lot of protection in stock prices for inflation. Plus you can always direct your portfolio more towards the sort of companies that do better when inflation and instrates are higher. That could be banks, that could be real estate companies, that could be energy companies. So there are ways to build protection and we've been doing that for clients for for actually quite a while now. So which stocks do you like

right now? Well, it depends on the sort of clients. So for the sort of more conservative client, we're looking for stocks that will deliver some dividend yield, for example, but it also can appreciate. So in the tech world, a company like Qualcom or Cisco for a safer play of Philip Morris that has a very high dividend yield. Than in the energy world, we like Chevron, we like Kinder Morgan. You know, the energy demand is going to

continue to be strong because we do think the recovery continues. Plus, by the way, that adds a little bit of insurance against this uh, this Ukraine Russia situation. So Catherine, take a look at the rest of the year. As you look out, we can't know for sure what do you anticipate And for the rest of it's been a rough start to the year. I think it's fair to say I think I would say that we anticipated coming back to a new normal. And what do I mean by that.

I mean that we will still have economic growth, but it will be lower than it was right maybe four percent this year in the US, we continue to think that stocks can do well, but it will be lower than they were doing the last three years, actually when the SMP five almost doubled. Um. We think that we will have inflation, but we think we will transition to

a lower inflation rate. And in fact, the end point of inflation really matters because if you if you have inflation between three and four percent, you know over time markets can do very well. That's what That's what it's been for most of our careers. So the endpoint for an lation really matters. Thank you so very much to Katherine Keating of CEO of b n y Moan Wealth Management and Joanne Pheenie and she's portfolio manager at Adviser's Capital Management. Thank you so much for being with Wall

Street Week today. Coming up, retail sales are back up, but how long will it last? And what's the next new thing in retail? We ask retail guru Mickey Drexler. I think so is the enemy of any retail. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Everything seems like it's going up. I still worry about prices increasing, consumers spending. When it comes to the U. S. Economy, it's one of the main indicators of how we're doing.

So after retail sales trailed off at the end of last year, we breathed a collective sigh of relief when they bounced back strongly up three point five percent in January, although some of that was really from inflation an a phenomenal basis. I say that very deliberately, of course, because we saw also inflation spike in the month of January, so we're not used to seeing these inflation and additional

juiced sales in retail sales. And the rest of two maybe a challenging one for retailers as money from that child tax credit expires. We are concerned that the expiration of the child tax credit leaves millions of families without that added source of income that they really need to be able to support their families. Of course, it's not only about how much we shop, but also about how we shop with brick and mortar stores taking the biggest

hit in commercial real estate from the pandemic. And I think there will be some conversions UM where possible away from uses that are not slighted by one in more retail being the top one even as online sales grew dramatically. And when it comes to roots, OH, there's really only one person we want to talk to, and that is Mickey Drexler. He founded made Well an old Navy, He ran the Gap and J Crew and built them into behemus in the retail industry. And we're delighted to have

him on Wall Street Week now. Mickey, thank you so much for joining us. Let's start with this pandemic. How did it change the retail business? Well, I think it changed it pretty dramatically. I also think the changes were passed two way too many stores in America, which is no secret overstowed UH. Certainly healthy online business around UH. And I think it changed also, And I don't think it's the pandemic that there's so many companies now UH taking UH paying a lot of attention to statistics, I

think more than UH, more than merchandise. Lastly, I find it difficult UH that many companies in my industry, at least for them, are not going into an office every day when it's critically important to see and touch merchandise. But I think it's changed it that way. I think clearly changed the way people addressed for the last year or two, and this changes, dramatic change is always going on.

For a year, we've been up against what I called a snowstorm easy year one, up against really bad numbers, and I felt that starting this month February, that it would get tougher again because the numbers aren't easy. People all had pretty good years, actually surprisingly good, but they really weren't that surprising if you figure what they were up against. Uh the money stopped flowing from the government.

UH more difficult figures. And at the end of the day, for me and always has been, I think the merchandise matters the most. Business. What I hear, because you know, I'm a small part of it, what I hear is quite challenging and difficult. In February, and perhaps part of January supply chain issues. Price of cotton has gone up, I think about UH freight, so it's caused a lot of inflation in our out business, and I think obviously in the retail business, so it's not easier. I think

we're headed for much more difficult times. But by nature I'm always pessimistic. Making Let me pick up on one thing you've been talking about, and that is seeing and feeling the merchandise. I know you, I know the kind of retailer you are. You would walk around your stores and get a real sense of the merchandise and the interaction with people. How does that survive in an online AI world where artificial intelligence, they're big data things like that,

or is that a thing in the past. If it is the companies, I think, look, it's it's about product. It's the only thing I know. Our business is extremely song because you know we're small. But I sit with the merchants every day. I sit with design, not because I'm the one with all the answers, because I've been there and done it. I've seen the movie a lot, and I've made every mistake in the book. The very young people kind of think when I make a mistake,

they like to repeat that I made a mistake. I like. But in retail, predicting what's going to sell is a really important part of it. And the other thing is knowing what's kind of a day and day have. This is year to year, but I think, uh, you can't be there in my opinion, without being and watching the

goods and business spontaneity, a creativity that happens. I met a woman the other day who works in a company fifteen people, uh, no office at all, and I said, how can you run a retail business where you're not uh looking and communicating? It's not just merchandise. I think, I don't know the finances of your world, but I know in my world, Uh, the creativity flows regularly. You can get an idea anywhere, any place, at any time based on what excites you, simulates you, or gives you

a bigger imagination. It's really great to have you with this, Mickey, But as I say, the one man we always want to hear from on retail that is Mickey Drexler. Coming up, we wrap up the week with our 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 Wall Street Week. I'm David Weston, and we're joined once again by our very special contributor

Larry Summers of Harvard. Larry, one of the things we've talked about is inflation, but very specifically, are the supply chain problems we're all seeing are they a cause of the effect. A friend of Yours Mind and the Program, Steve Rattner had a column New York Times to Day basically saying supply chain is a symptom, it's not the disease. What did you make of it? I think Steve broadly

right in distilling what serious economists believe. First of all, the most of the goods where there's a bottleneck are having abnormally large quantity, not abnormally small quantity. So obviously if you have a big increase in demand, you're going

to encounter capacity limits. Second, what the supply chain people ignore is that if more money is being spent, for example, on used cars, yes, that's associated with higher used car prices, but it means less money is being spent on other things, and so it means less inflation in uh those sectors.

So while it's a widespread view, I think the interpretation of inflation largely around supply chains is mostly a confusion and mostly an evasion of what I predicted a year ago that if we overflowed the bathtub, we're gonna get an overflow as the economy overheated. Larry, one of the things that we're hearing out of the Capitol Hill this week is maybe it's not just all the FED that

can address the question of inflation. Maybe we should leave alleviate some of the pressure on consumers by having a hattus on the gas tax, the federal gas tax. What do you think about things like that of limiting the cost to consumers. I think we are plumbing the depths of new bad ideas UH with that one. First of all, guess prices are gonna fluctuate all over the place, so

nobody may see anything very substantial out of it. Second of all, lower prices for gasoline will tend to be offset by higher prices for other things as consumers have higher incomes that are able to shift spending UH to other spheres. Third, it runs exactly in the opposite direction of all the things we're trying to do in the environmental area. And fourth, you may get some if you did get some little bit of deflationary shock when you put the gas tax holiday into place, you're gonna get

some offsetting inflationary shock. When you move the gas tax, it goes in exactly the opposite direction of paying for more infrastructure, which everybody thinks, uh, we need. Look, I think there needs to be a lesson learned about gimmicks that pull well, they're like sugar highs. They make you feel good, but they really often don't redown to anybody's

anybody's substantial political benefit. What's remarkable is that all those much discussed tax credits, the two thousand dollar checks that we're getting mailed to everybody, did substantial economic damage and nobody remembers them, so they didn't even deliver the political benefit. So I hope we can step back and think about doing the right thing and move a bit away from trendy gimmicks. As you have pointed out more than once, we have a mismatch between supply and demand, not just

in goods but also in labor. Right now, you've just co authored a piece that I saw this week really analyzing what the cause of that work is. It's really again a supply problem or demand problem. What did you conclude? I think it's more of a demand problem. Look, David, we have by a wide margin the highest ratio of vacancies jobs that need to be filled too unemployed people that we've ever had. It can't be surprising in the face of that that we're seeing very large nominal wage increases.

And if you talk to businesses, they almost all feel that they can pass those wages on in the form of higher prices. And so that is the roots of our inflation UH problem. Many people say that it's not entrenched, there's no sign of a wage price spiral, not yet. I don't know what would be a sign of an incipient wage ace spiral. If an employment cost index approaching six and uh CPI inflation rate in excess of seven wasn't UH signs of a possible incipient waves price spiral.

So I think we've made a substantial problem of for ourselves. And I think if we don't recognize that it's at root a demand problem and we don't adjust UH monetary policy in a substantial way, it's only going to become a more serious problem. Letry going international here for a moment. We now are going to have the Olympics conclude the

Winter Olympics. Overvisioning this coming weekend. UH. You were on a panel I saw Institute of Politics up at Harvard talking about China and how China is positioned right now globally, suggesting maybe it's not quite as powerful as sometimes some

of us sometimes think. I think that's right. I think we in the United States need to remember how wrong we were in our active view of Russia in nineteen sixty and how wrong we were in our collective view of Japan in the early nineteen nineties, and consider the possibility that we may be underestimating uh China's challenges now, and we need to be particularly careful about being overly

uh provocative to them. Our provocations with respect to Russia after nineteen sixty contributed UH, many historians believe to the Cuban missile crisis, and so yes, we need to stand up for our interests visa the China. But I think we need to be quite careful, uh to avoid a kind of strategic narcissism and truculence in the approach that we take. Much of the news is we cause you know, Lawry was occupied with the crisis over Ukraine between Russia on the one hand, in the United States and NATO

Allis on the other. I noticed, for example, the President she appeared with President Putin at the beginning of the Olympics. What did you make of this geopolitical crisis and how it fits into the world more broadly, and how long lasting do you think the effects might be. Let me say, David Uh that I'm not an expert on everything geopolitical, but it seems to me that, as one who's been critical in a number of areas, this has been handled

extremely well UH by the US administration. That doesn't mean the ultimate outcome is going to be successful and then an invasion is going to be forestalled, but I think they've played the hand that they had in a very skillful in a in a very skillful way. I think this is a big deal. Not because Ukraine is economically powerful, it isn't not even because Russia is economically powerful, It's

not that powerful. But I think the question of whether there's some element of rule of international law and countries can't invade other countries with impunity is an issue that is very much here, and I think if this degrades, that will have costs for everybody, sends of certainty, which among other things, will affect the level of UH market valuations. Yeah, which Nixon go to China was specifically supposed to undo, is maybe undoing Henry Kissinger's work. Larry, thank you so

very much. That was very helpful. That's Larry Summers of Harvard, our very special contributor here on Wall Street Week. Finally, one more thought banking in the metaverse. Having troubles in the world as we know it, worried about higher rates or a possible recession, or tanks coming across the Ukraine border. Well, maybe tech has the answer for you, and for all of us for that matter. At this point, we've all

heard about the metaverse. That term taken from a sci fi book from thirty years ago and appropriated by none other than Mark Zuckerberg, who used it to rename Facebook Meta. And this is what he had to say about it when he made that announcement. It is time for us to adopt a new company brand to encompass everything that

we do. Our company is now meta. This week, Mr Zuckerberg took it a step further in a memo to his staff, updating the company's values and what he called its cultural operating system, summing it up as focused on meta, meta mates and me. So Facebookers are now meta mats, which reminds me, at least if when Disney bought ABC and the company started addressing people like Peter Jennings and

Ted Couple as castmates and employee emails. Well, let's hope that people at Meta embrace their new title with more enthusiasm than some of the folks at ABC News did back in the day. But it's not just met at a Facebook that's embracing the metaverse. When Disney CEO Bob Chapeck talked about his earnings just last week, he called the metaverse a quote third dimension of storytelling. I think it's a great opportunity for us. I think it's the next great horizon for Disney. I think it's the next

great horizon and entertainment. And don't forget toys in this metaverse. The CEO of Mattel certainly hasn't the metaverse n F the s and other digital opportunities. Digital experiences will give us an opportunity to engage with consumers and create another opportunity for us to commercialize our brands and franchises in other ways. To be sure, not everyone is sure what exactly the metaverse is or whether it truly will change the world. Here's Eileen Lee of Cowboy Ventures. I think

the metaverse is just like, what does that mean? Really? It's if you mean the metaverse, like, are we all going to be wearing the Arts headsets and staying in our houses all the time? I think that's, you know, if we're lucky enough to emerge from our caves after this pandemic. I think at least for the next three to five years, people are going to be more excited

to engage in real life than ever before. But if we needed final confirmation that this metaverse thing is going mainstream, it came this week from the Big Banks with JP Morgan leading the way. The way that is into Onyx that's its name for its metaverse lounge, complete of course, with a JPEG image of CEO Jamie Diamond, and accompanied by an eighteen page paper on why the metaverse is

a one trillion dollar Yes, I said, one trillion dollar opportunity. Now, if you want to get into the JP Morgan Meta Lounge, all you need to do is go to the Central Lands Meta Juku Mall, put that in your GPS and see what happens. That does it. For this episode of Wall Street Week, I'm David Weston and this is Bloomberg. See you next week.