Bloomberg Wall Street Week: Ketterer, Grantham, Peters

coming out of Congress. One of the big questions I think on investor's minds inflation through the eyes of the most influential voices, Larry Summers, the former Treasury Secretary, Bryan wynhand back of America, Will Smart, CEO of Charlie Sharp. Bloomberg wool Street Week with David Weston from Bloomberg Radio. In a battle between a hot new electric vehicle company and hot new inflation numbers. I'm afraid inflation numbers win.

This is Bloomberg Wall Street Week. I'm David Weston. We started the week pretty sure of where we were going. Earnings were up at least basically, equities were reaching up to new highs, bonds were tamed, and we had a new infrastructure package. All was right with the world. But then Wednesday hit and consumer inflation numbers came in high oiger than anyone really expected. An annualized increase of six

point two that's the highest in nearly thirty years. Austin Gouldsby of the Chicago Boost School said it's not going away anytime soon. Look, it's a big number. And whether you're team permanent or team temporary, everybody agrees it's it's gonna be months of this before you see any relief. And San Francico Fed president Mary Daily, while saying it was too soon to change course, admitted that the inflation numbers really did get her attention. Inflation is high, higher,

it's eye popping. This is a transitory period. That's what we believe. That's what I think when I look out at the data. But it's directly related to COVID, and a's quicker we get through COVID, the better off we're going to be as an economy. But the week wasn't over yet, as electric vehicle maker Ryvian went to market and blew past the price set for the I p O. The results of what the Rivian CEO said was a

true team effort. She spent years is putting this together, and really what's so exciting is seeing such a diverse group of people with diverse backgrounds and interest really coming together to create these products. And and you know, standing there looking out at the teams as we're hang the bell, it was quite emotional, you know, seeing seeing so many

passionate faces. It was it was really powerful. And three corporate giants GE Johnson and Johnson Antoshiba all decided to break themselves up, with g E CEO Larry Colpe saying it was all about focus. These businesses will be more focused, There'll be a higher, greater level of accountability, we should have sharper capital allocation, more strategic flexibility, and frankly, I think it's gonna be good for the team as well.

I think we'll end up with investor basis focused on these pure plays, investors that are probably under invested in g E today. You put all that together, it's clear this is the best path for us to unlock and

create value going forward. And when the dust settled from what is fairly called a wild week, it left equities down for the first time since early October, though not as much because of a Friday rally, with the SPI off about three tents of a percent in the NASAC down seven tenths, but really much of the action was over the bond side, with the ten year yield up to well over one and inflation concerns driving the ten

year tips up to over two point seven percent. To take us through the week and what it taught us, we welcome now Greg Peters co c I O of PJAM Fixed Income and Sarah Kett CEO of Causeway Capital Management. So let's start on the equity side. Welcome Sarah. Give us a sense of the equities, because we started the week really at record levels and then the inflation overs hit, but then they came back up at the end of

the week, Yes they did. The inflation genie seems to be out of the bottle and markets have to digest that. The technology stocks, many of them, seemed to have such significant market shares or competitive positioning, the market is giving them credit for being able to price this inflation pass it on to consumers. But there are many in both industries and sectors according to our team, where that won't

necessarily be the case. And that's really the job of the fundamental research analysts is to determine whether or not a business, say it's consumer staples and food beverage, can they pass on their increased costs of raw materials into their final product, because if they can't, that means margin squeeze, and that means earnings will all other things being equal, will decline, which is not good for markets so quick when we see inflation numbers like this, we automatically think

about what it does it bonds and perhaps most important, what it says to the FED and how they might react.

What did you make of this week? I think that's the story, what it makes, what it tells you about the Fed and central bank action ultimately, And so there's been this this response in the bond market really before the CPI print that inflation is picking up, and more importantly, that the FED is going to be much more aggressive and central as globally much more aggressive than initially anticipated.

So I think that is the story in the marketplace, the two year yield UH and then equally, I mean this is a volatile market in fixed income that has been largely isolated in fixed income. So what you're seeing is this disconnect and volatility in fixed income and equities.

And yes, it does make some sense for sure as the as the earnings coming out are quite strong, margins all time high, the micro story is quite supportive, but at some point the volatility that we're seeing in fixed income markets have to start to infiltrate other markets and risk markets. Um, if it doesn't settle down. Look at the same time, how much is the FED sort of putting a blanket on that volatil you even given what we've seen, Because certainly they've made it pretty clear they're

not in a rush to change course. You just heard very daily say well, we're not going to change course right away. Yeah, but they've changed their rhetoric quite substantially since the summer. And if you look at the bond market, yield into two year and even inflation, uh, it's been commensurate with the change in FED tone. So I don't know.

I I'm really worrying about the FED here moving too fast too soon, particularly when you think about the construct of inflation that it's largely outside of the FED control. So the Fed raising rates isn't going to help offset the supply chain issues. It's not going to have those kind of facts like it normally does. Okay, thank you so very much for being with us. That's Greg Peters.

He is close c IO of PIGAM. Sarah Cader Causeway Capital is gonna be sticking with us as we turn our attention to all those big corporate breakups this week. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. It was a week of breaking up, at least when it came to some very big corporations like Toshiba and Johnson and Johnson and General Electric and Gene Chairman and CEO Larry Kulp said in the end, it was a

clear choice of focus over synergy. The GE team has heard from me for the last three years that I will bet on the benefits of focus every day, far more than the often illusory benefits that come from synergies. Now, we certainly enjoy those synergies today in certain places, but more and more we've been running the company on a decentralized basis, not as one GE, not as even the four reporting segments, but the thirty p m l's that deal with customers that compete in the markets every single day.

So if there are synergies that we enjoy today, will work to continue those, of course, but the vast majority of the benefits here will come from focus. Sarah Keeder Causeway Capital Management is still with Sarah. I want to talk to you as an investor because you own g E. We talked to Larry Colp and he said, part of the benefits for investors so they can focus as well on which line today to be invested. As you look

at this breaking up of g how do you analyze it? Well, I just want to set the stage that we may be one of the few who are analyzing it. He's absolutely hated by investors because of the damage they've done. If you think about it, David to today to go back and so the last five years, the annualized performance of the SMPI has been twenty percent per annum on average,

the comparable number for Geez Mayet a disaster. So Larry Colp's arrival in October of eighteen, he had his work cut out for him, and he's very incentivized financially to get it done. But they're there're two great businesses. There were aviation and healthcare, and then power renewables and digital weren't quite as good, and the key was to set them free. There were some codependency because not only did power and renewables have some serious problems but then we

had COVID. So then what happens to the aviation business. You know, this is aircraft engines, avionics systems. It give grinds to a halt, so free cash flow collapses and therefore the health care business had to support the other two. So what makes this announcement so interesting is that it

may be signaling that is getting beyond its problems. It will actually coming back into blue skies where the long term care business that the company has that is supposed to pay people for nursing care and end of life assistance, that was it h G stopped writing those policies in two thousand and six, but it's been a huge financial burden for the company. Under reserving has been a chronic problem. So this breakup, as it may, as Larry Coulton noted,

allow these three areas to shine on their own. It may be signaling, according to our industrial analysts, that g E is not worried any longer about long term care because and that means we shouldn't. Does investors be worried? And that is a very good thing. Yeah, it's given the history there. But let's take those three lines of business because they're not bringing it all up at once. I thought that that was important. I mean, the first they spin off healthcare, what you said, that's the strongest

one anyway, that's ready to go on its own. They're going to take another year on power to sort of get that up and running. It may need a little more help. And then you have aviation at the end. Talk about those three lines of business in their futures. Well, the healthcare business is in very good shape and it intends to retain nineteen point nine percent of that business. Ultimately that may be sold, that will end up if if this process continues to its fruition in the aviation

business at stake. But the that that's so here we are this is a bit of a waiting time and that means the stock may be volatile or it could be down. Who knows. Investors hate waiting, but it takes some time to do these tax free spinoffs. And also g is determined and this was part of the announcement to set these three areas off on their own at much lower levels of financial leverage. And that's really where

the cash flow is so important. How much can the company generate to be to get invest great credit ratings for all three is going to be a real that's the serious effort ahead. So that's why they need time. There's three and then for power and renewables, so we are we await all that information. But but there's really positive signaling happening here. Otherwise, why would announce Why would they announce it now? They would just continue to work on it and not let us know. Larry kept emphasizing

three publican trade investment grade companies. He's very proud of that that they will be all the investment grade from his point of view. At least talk about power, which has also struggled, had a lot of problems, some residual problems with some maintenance contracts and things. What about keeping traditional power together with renewables evens in a different way they let renewables go off on its own, maybe a bigger growth thing. Do you think that makes sense as

an investor? Do you look at that and say, yeah, that's sensible. It is given the mix that g has. Renewables ault only, as we all assume, will be the business that sustains in the future, But it was never really are preferred of their businesses, and we're glad to see it set aside and spun off again. The aviation and the healthcare business of far superior to free cash flow generation. Aviation almost and generate almost none in the downturn, and now is coming back. We think there's a normalized

four billion dollars of free cash just that business. And if you wrap the whole all of it up together and you think about it today, there might be normalized seven to eight billion dollars of free cash flow coming from the sum of the three parts. That's something that no, I don't think he's delivered for a very very long time. And so I come back to you as an investor because I say, Larry kept emphasizing that allows an investor to side which, if any of these lines they want

to play in. Is it more valuable to be able to pick and choose among health and power and aviation than to have all umping together have to buy the whole package. Very definitely, We as investors prefer that, And then we think about them. You want the senior managements of each, and they're not. Larry's, according to our industrial allowance, is the best industrial CEO in the country. So there's a lot right there. Him running aviation without a distraction

is fantastic. And then there are two very skilled individuals will be the CEOs of the power and of healthcare business. But think about it, they and there and their team can be compensated on their own efforts without the distractions and or delution of any other parts of the business. They can really focus. They'll have each have their own individual boards of directors who can focus on that business. So, yes,

this is given. There weren't synergies. This makes perfect sense and we expect the stock price to ultimately reflect this and be a very significant return for our clients very quickly. With you and Sarah's this the end of conglomerates, You know, I hard to say that. I think they will continue. There are plenty of them in Japan, for example, and unless they're desperate like Toshiba, they don't. They don't break up.

But but we're not patient as investors, and this is true globally, and when we see a company who's who, for example, if it's multiple being suppressed, we want them to fix it. Yeah. And by the way, so she was a little nudge, as I recall from some activists. Thank you so much there. It's always great having you with us. That's Sarah Header, she's CEO of Causeway Capital Management coming up. It was nice while a lasted, but it is the longest bull market in history about to

come to an ugly end. We talked with famed investor Jeremy Grantham of g m O. When the decline comes, it will be yeah, perhaps bigger invested than anything previously in US history. This is Wall Street Week on Bloomberg. This is Bloomberg All Street Week with David Weston from Bloomberg Radio. Asset bubbles they're the one thing every investor wants to avoid, from the tulip frenzy of seventeenth century Netherlands to Wall Street in to the tech bubble of

two thousand. The problem is knowing when you're in a bubble and when it will end. FED Chair J. Pale has recognized since last spring that asset values are stretched. You look at asset valuations, um you can say that by some measures, some asset valuations are elevated compared to history. I think that's clear, while others like Cathy would of ARC say we're just getting started that. In fact, the

market has been broadening and getting healthier. There has been a rotation into value as a style as fears of inflation and interest rates increasing picked up, and therefore there's been a broadening out of this bull market. All right, we are in a very strong bull market. And then of Tesla, which some people say is a bubble in and of itself, skyrocketing to a market cap of over a trillion dollars or roughly twenty times what it was

just four years ago. Well, others see Tesla and not as a bubble, but as the exception that proves the rule, changing the entire face of the automobile industry. That's the view of Star quarterback Tom Brady as he talked about Hurt's decision to include Tesla's in its fleet. Had a Tesla for about four years, and again, I think it's uh, it's kind of the direction that the world is heading.

And I think for me, it was about being really conscious about the impact that we all have on on our planet, whether it is Tesla or tech or markets overall. No one has been more outspoken about the possibility of bubbles than Jeremy Grantham. He is co founder of GMO and really a student through the history of markets that are overheated, and we welcome him now to Wall Street Week. Mr Grantham, thank you so much for being with us.

Let's talk about bubbles. But let's come in if we can through Tesla, because you've talked self Tesla in the past. I mean the last time I checked, I think the market cap is something like forty times what it was four years ago. Is Tesla bubble? Yes, that's pretty easy. And having said that, I'm the proud owner of a Model three and I do think they're magnificent vehicles, and

I think Tesla has done extraordinarily well. But if you go back into the life cycle of the Fangs, Tesla is many multiples of the price to sales ratio that they were at this stage in their lives, and they have been brilliantly successful. So Tesla is a assuming it will be brilliantly successful, and be assuming it will be, in addition to that, multiples as successful as the other Fangs, and they are some of the great companies in the

history of capitalism. Yeah, I'm always reluctant to say it might be different this time, but let me ask that question, could it be different this time when it comes to Tesla because it is at their us here's of a fundable technological transformation to electric vehicles and a real fight for the climate globally an important part of that. So is it possible that is different. There's a major transformation going on here that's bigger than what we've seen before.

I think if you were defending the fangs, you would say in each case that they represented, like Amazon, a crucial fork in the road on retailing, if you were looking at Facebook and Netflix, all all of them represent these breakout, major changes, disruptive changes. And I'm very grateful for Tesla as a dedicated green that they have pioneered e vs. But now in phase two, every every great automobile company, all the Mercedes and and the BMW's and so on, and and the v ws are all gearing

up to go electric. And we that that owes a lot to Tesla, But now in phase two they're going to have to have some serious competition and and to live up to the expectations of the price will be impossible. So, speaking more broadly, you've said that we're in something. I think you're called it an epic bubble. Right now, I think you've been very carefusy. I'm not going to predict when it ends. I'm just gonna say that it does end.

What's going to bring it to an end. The thing about the Great Bubble Japan, no, no one knows after all these years, exactly why the bubble peaked. You can say with hindsight it peaked at the point, of course of maximum euphoria, so there was no hint of darkness at the end of the tunnel. Everything looked absolutely splendid as the market peaked, and of course, as long as

it looks absolutely splendid, everybody is happy. The thing about the great bubbles is how intensely to people buying to the idea that it can never break, that prices will never decline. The housing bubble of two thousand and five two thousand and six in America was a brilliant bubble. In that description, you had people going out and buying a second house to rent because house prices never decline. Indeed, Ben Banankee said, US house prices have never declined. Of course,

then they promptly did. But that is power for the course, for the Federal Reserve. Thank you so much. As Jeremy Grantham, he is co founder of GMO. Coming up, we wrap up the week as always 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. So, Larry, you had quite a week, if I can put it that way, because you've been warning on this program and otherwise again and again week after week of on inflation, and boy, this week we got at six point two on the headline number on CPI. Shocking and awful lot of people. I guess I start out with why did you get it right? And so many economists, including the Federal Reserve and for that man of the White House, why did they get it wrong? David?

You know I did. It seemed to me apply a fairly basic economic model to the magnitude of the demand stimulus, and it seemed to me had predicted that we get certainly a significant rise in inflation. And then there were some other things that came along on the supply side that I didn't foresee, that others didn't foresee that made it even worse. Uh than I had expected. I think there are a couple of lessons from this episode. One

is that it's always important to avoid excessive certainty. The policymakers and economics who go work go wrong the most are the ones who are most confident of a single model. You've always got to recognize that there are a wide range of possibilities. You know, on your show, I always said that I thought this was the risk and the most likely thing, but there was a one in three chance that this would all work out terrifically and that

I'd be entirely wrong. I think more recognition of all the range of possibilities is a good discipline for policy makers. I also think and and economists. I also think that we have a problem, and it's a pretty broad problem

with what I call motivated belief. People really wanted to engage for all sorts of reasons humanitarian, uh political, related to momentum at the beginning of an administration in a very very large stimulus program, and so they convinced them else that it wouldn't be inflationary because they really wanted it to uh not be inflationary. And I think that something we need to do is be much more attentive to the fact that the world is as it is,

not always as we prefer it to be. We can want very much to be out of Afghanistan and believe deeply that it's best to be out of Afghanistan without that making us confident that it can take place in a efficient and uh complete UH way. We can want very badly for it to be true that improving the UH climate change problem can be accomplished without raising UH carbon prices in ways that middle class people UH don't want. But that doesn't mean that it's necessarily true, UH that

that is the case. Yeah, we have a problem with inflation. I think everyone at this point agrees with you. We have a problem. But the question is how big a problem for how long? Because we had Paul Kirkman you've identified earlier as a friend of yours and a former classmate, I believe Hillary, and he came out this week in New York Times and said, you know, this is not like the seventies. It's like when people came back from

the war. There was a big uptaking demand. Supply had to catch up, and the worst thing we could do would be to tighten because back then they did tighten and led to a recession. What do you say to that analysis. Paul's examples have been have sort of been bouncing around a bit. I think the most obvious example continues to be uh the Vietnam War. The other obvious example is the nineteen seventies, where people were saying temporary due to specific factors all the time. I guess I

don't really uh hear uh the music on uh Paul's thing. Uh. We had price controls, major price controls, and we took them off. You'd expect when you took off a major price control, a big transitory increase as prices returned to their level no price controls. Uh. This time, we had a extraordinary demobilization of vast amounts of production of tanks and other things that were uh taken that we're taken off. Uh. That didn't happen either, you know. So far, the um

the lesson has been uh. That used to be uh that Neil Ferguson and others drew that fears that the economy would go into depression, We're wrong because those kinds of fears existed during the Second World War. I just think it was a different, uh, different time and UH the Phillips curve had not yet been invented. It says something about the psychology of that moment that if you looked in the first edition of the Samuelson textbook, it

didn't have a graph of the inflation rate. It had a graph of the price level because people fought off. Prices is going up and down rather than rates of inflation going UH up and down. Larry from monetary policy, it's a restructuring corporations. We've had a space this week have large corporations breaking themselves up, first General Electric going

into three parts. Then at the end of the week we have Johnson and Johnson bringing into two parts, and over UH in Asia we have Toshiba breaking into a couple of major component parts as well. Is there something more fundamental underlying this? What is driving this increasing emphasis on focus rather than synergy? David? I think this is a broadly positive thing. I think in most cases these splits probably have come later than UH would have been ideal.

And I think those who don't like markets and don't like activists should be given a little pause by this kind of UH development. I think it's two things UH. The first is that in an increasingly complicated world. It's the essence of strategy to compensate, to build on strength rather than to compensate for weakness. And all of us are better off specializing a bit on what our distinctive talent is or what it is that is our strength. I think that's true for companies as well. Second, investors,

through their investments, express beliefs. Some people believe in prescription drugs and biotech. Others believe that consumer products are going to be uh the best way forward. Some people believe that the aviation business is good. Other people believe the health care business is going to be good. Not many people believe in particular sandwiches that were put together decades ago.

And so by splitting companies up, people give investors an opportunity to express the kinds of beliefs that investors are likely to have, rather than to bat on somewhat oddly and historically constructed sandwiches. That's what I think this is about, and I think for the most part it's a good thing. Thank you so very much. That's our special Wall Street we contributor. It's Larry Summers of Harvard. Finally, one more thought.

The last of the conglomerates There was a time not so terribly long ago when conglomerates were all the rage. Think Harold Jannine of I. T. T. Goulf and Western Lytton industries, many of which grew up and then died away. But then there was Ge, the biggest of them all. It lasted the longest when we had Jack Welch take what was a light bulb company founded by Thomas Alva Edison in the nineteenth century and expanded, expanded into television

and motion pictures, and most of all, into finance. He took a company that had revenues about twenty six billion dollars a year to a hundred and thirty billion dollars a year. The market cap went up over four hundred and fifty billion dollars. It was the largest in the world at the time. But trees don't grow to the sky, and neither did Ge. Jack Walsh moved on. We had Jeff Emil take his place, and during his tenure we took what had been the gold standard for corporate America

and turned it into something of a turnaround. And in the end even Jeff M. L couldn't quite explain why that had happened. We had through multiple receptions. We had really generated record earnings and cash flow. We had good businesses, good people, good initiatives, but at the end of the day the stock price lagged. So three and a hap years ago, the g board turned to Larry Colp, the former CEO of Dan and Herd, to sort things out. Larry came in and pretty much throughout the playbook of

Jack Welch, he pruned. He focused on cash flow and debt reduction and just playing focused overall. It all came to a head this week when Larry Colp announced that he would break up the company to three parts, healthcare, power and aviation. These businesses will be more focused, they'll be a higher, greater level of accountability. We should have sharper capital allocation, more strategic flexibility, and frankly, I think he's gonna be good for the team as well. So

is this the end of conglomerates. Nicholas Hayman of William Blair echoed Larry Colp, who said, it really is more important to focus today rather than go for those synergies across different businesses. It's much more important to have uh really percent focus on one end market instead of customers because things are changing so structurally and so rapidly that you really can't be burdened by having to wait for

another part of the company to come around. Well, Jerry Davis of Michigan Ross School thinks that there may still be room for conglomerates when it comes to tech. Anybody think of Amazon. I think that there is a future for conglomerates, but it's in the I T sector. If you look at big tech companies like Alphabet, UH, like Facebook, they really are conglomerates in some sense. They are hearkening back to the conglomerate that g E was at its birth. But if you listen to Larry Culp himself, it's not

about the form. It's not whether it's a conglomerate or not a conglomerate. In the end, it's about getting the job done. It's ultimately about performance, right I've I've been in companies where we did a number of things under one roof, so I've seen it from a number of different angles. But ultimately it's all about looking forward and being in a position to perform. And I think for Ge today on three separate bottoms will be at our best. That does it. For this episode of Wall Street week,

I'm David Weston. This is Bloomberg. See you next week, m hm.