Bloomberg Wall Street Week: Koch, Hubbard, Rubenstein

most influential voices. Larry Summer is the former Treasury Secretary Bryan wynhand a backup America, Will Smart, CEO of Charlie Sharp. Bloomberg wool Street Week with David Weston from Bloomberg Radio. The new year picks up right where last year left off with COVID, the Fed and jobs. This is Bloomberg

Wall Street Week. I'm David Weston. It was a whole new year this week, but in some ways it felt like an extension of one, with the explosion in omicron cases continuing to set new records in the United States

and for that matter, around the world. COVID in the environment here and in the world is probably here to day, but COVID as we're dealing with it now is not here to state, but so far the cases appeared to be less severe, and the new mayor of New York, Eric Adams, spoke for many when he said, we just need to move forward and get our lives back. The city is going to function, going to be safe, and

we're going to stay open. When it comes to the FED, we learned this week that it really means what it says about tightening monetary policy, releasing minutes from its December meeting saying that quote, it may become warranted to increase the federal funds rate sooner or at a faster pace, and even that reducing the balance sheet may come on the heels of any rates tightening, which Michael Cantopolis of Richard Bernstein said wasn't necessarily expected March a live meeting

for hikes. I think the only surprise perhaps was sort of the view on the balance sheet runoff, and if we had any doubts remaining about the FED meeting being live in March, they may have been answered when the job's numbers came in on Friday, disappointing on the overall number, but showing robust growth in wages of four point seven percent year every year and an unemployment rate falling down to three point nine percent, way below what anyone expected

at this point. The markets took this eventful week as a rerating of risk, with the SMP five hundred down almost two percent for the week, it's worse start to a year since two thousand sixteen, while the NAZAC was even worse, down over four and a half percent, and bonds sold off, with the ten year yield adding over twenty five basis points ending up over one point seven

six percent. Here to explain this wild first week of the new year are Katie Coach Goldman Sachs Global co head of Fundamental Equity Funds and Greg Peters co c i O of PGIM Fixed Income. So welcome both of you to be back on Wall Street week. Greg'm gonna start with you, because to some exsect, fixed income bonds really drove a lot of the week. Explain what happened here, because we did have the Fed minutes, but but we were getting increased to rates even before we got to

the minutes. Yea, So the markets were skinnish before the minutes, and then the minutes came Man, and as you mentioned, David it bits, they reaffirmed what they said before. The surprise was though the balance sheet runoff. I think that did take investors by surprise, But what you really experienced this week was just a rerating of the FED. Uh. And so you've seen FED hikes pulled forward more aggressive over the near term, and I think the markets didn't

like that. Now. I think it's important to go back in time though, So March wasn't even on the table contemplated. Uh, you know, six months ago, three months ago, and now it's a live meeting, so it really representative of how quickly the FED has kind of shifted gears here. So it's okay. Over to you on the equity side. Equities might have reacted violent to this, I wouldn't say they did. The main story I thought from the week you correct me on equities was able to tech. Yeah, tech had

a very disappointing week of performance. Let me let me just back up and say that we have had the worst start to equity market since two thousands and sixteen, and kind of big picture, we've had this twelve years um of a great environment of rates going down and markets going up, and we're all kind of getting used to a new normal um and so that's played out and the volatility that we've had, and we're now down more than one and a half percent year to date

on equities. As you pointed out, the locus of a lot of that pressure has been in technology UM the reason for that, and people have varying levels of familiarity. So I'll just say is that UM, when you look at tech companies, most of the values far out at terminal values. So when the rate curve steepens, that part of the market sells off the most. It's really raising this question for everybody who's had a lot of capital allocated to tech UM is tech over UM? Is this

the end of of tech out performance? We we don't think that's the case. We continue to have UM a lot of capital committed there. We appreciate there's gonna be some near term headwinds, but very long term, even medium to long term, we know that even the companies in the value part of the market that are leading the market market now. So take banks for example, one of the number one things that they're going to spend money on over the coming years is innovating themselves on AI, UH,

cyber security, moving workloads to the cloud. And so we know that all companies, regardless of whether their value or growth, are going to be doing a lot of tech spending and that should actually included these companies over the medium to long term. So we would encourage people to look at these dislocations as as opportunities to pick up exposure selectively. So thank you mentioned the jobs numbers. Why don't you unpack that a little bit? What jumped out at you.

One of the things that I noticed, obviously was the increase in wages. Absolutely, uh. That was a clear focus from a market perspective. The headline number was disappointing. Let's say, you know, a hundred ninety nine new ads, but I think you have to look at the four month average, which is substantially higher. It's about three sixty nine. So what the market really looked at closely was the acceleration uh in wages, and so I will say, we haven't

seen those wages create of broader inflation pressures. But that's the worry. I think that's the classic economic worry, uh that the many have, and that's why you've you've seen the rhetoric really shift and get cemented around that March meeting be being in place. So it's really about wages. As UH investors and economists in particular are worried about wages really kind of infiltrating the entire system, thereby creating

broad based inflation. But the wage issue, in my mind, is an important positive development, not a negative one, and I think it's been flipped around unnecessarily. Yeah, it's always easier to criticize when we're off with the bleachers. And that's on the arena, right, Thank you so much. Greg Peters and Katie Cash. They're both gonna stay with us as we turn from this week in the market's the longer term implications for investors. That's gonna up next on

Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week. If David Weston from Bloomberg Radio. Still with us are Greg Peters of PGM Fixed Income and Katie Cotch of Goldman Sachs. So, Katie, let's turn from this week to the longer term with respect to equities first, and we'll turn to Greg on fixed income as we go into two. You draw an interesting distinction between disruptors and disrupt dead.

Tell us about some of the disruptions you're looking at coming up this year for equities or whenever we turned the page on the calendar for a new year. We do like to do some longer term thinking about where we've come from an equity markets and where we're going.

And I just think it's really interesting to know we were looking at the top ten companies as at the beginning of two and if you go back twenty years, there's actually only one that's still a top ten company, which is Microsoft UM and it's five x over that period.

The nine others on that list have actually detracted a total of two thirty five billion of market cap over that period, and I think that just underscores the importance of of being on the right side of the disruption um and picking the companies that you think are going to drive forward good fortunes in the future. We're really focused just to end on on three main themes going into this year, but I actually think they're going to

be relevant for investors for most of the decade. And those themes are the future of healthcare, everything from genomics to robotic surgery. The future of the planet, So this idea of transitioning to a more sustainable planet. Yes it's about renewables, but also UM sustainable consumption, circular economy, were invested in a company, for example, that recycles genes. And

then finally we're talking about tech earlier. We're big believers that we need to invest beyond the fangs, down the market cap and around the world because tech power is going to get diffused out of Silicon Valley um into the smaller cap part of the market. But also have many local winners around emerging markets. Take pack Sagora, for example, and a company listed in Brazil. It's a micro merchant

expert and payments in Brazil. And so these are some of the themes that we think are gonna matter in two but well beyond. For long term oriented investors, those are some great macro things. That's keep an eye and Greg come over to you. I'm gonna make it simple. Perhaps it is. It looks at me for fixed income it's really all about the FED and frankly, whether there

might be a policy error. I mean, because now we know we're gonna have some tapering of the buying, we're gonna have some rate increases, and now this week we found out we're gonna actually have some quanditive tape tightening. It looks like no, I completely agree. I think the fundamental risk for the markets this year, not just fixed income but broadly speaking UH is a central bank policy error and it looks like we're creaning towards that. And look,

it is a very difficult environment to ascertain UH. You know that so much is clouded by COVID opening, reopening, closures, those types of things. But but for us, we're looking at the fixed income market in several ways. First from a yield perspective, with the tenure currently just called it, that's exactly where we hit in March of last year. That was the top. I think we're getting close to the top in yield once again, so it might overshoot.

So the near term is always more difficult, of course, but I think you know, looking out over time at one seventy five ten year we actually see value there. And we see value because we think there's a gravitational pull towards disinflation. There's a demographic issue here in the U S and globally UH and UH in many resuspects. And let's not forget we put on a lot of debt to fight the virus and that acts as a draw and growth. So for that reason we're we're actually

pretty constructive as yields kind of hit these levels here. Uh, and so we might be wrong over the near term, of course, as things have a tendency of overshooting. I think six months and twelve months from now, Uh, you'll be rewarded. So I'm gonna guess, Katie. But I'm gonna guess that if in fact Greg is right that we're talking one seventy five, it could overshoot for a time to come back down. You're gonna be fine with that. On the equity side, yeah, we should it. Equity markets

should be able to digest them. Just to be very clear on our outlook. While we do expect volatility and as you mentioned at the outset, we haven't had a great start, we do actually think equity markets at golden success that management. We believe that they will out perform cash and bonds. So we do think it's the right asset class to be in. One might need to look further than the broad US equity market, which has been a great thing to own the last twelve years. That

was the best thing to own in the markets. You may need to look further to that abroad to emerging markets for small cap but we do expect equity markets to outperform, and that field level should be should be

fine for equity market. Well, let's just pick up on that emerging markets here and go back to Greg for a moment, because Greg, and You've thought a fair amount about what's going on with China, because China is off to a rather rocky start at the beginning of years as well in their property market, and so the debt over there, what do you make of emerging market debt,

either China or otherwise. So China and emerging market probably have been a value trap, right, Uh, until one of the oddities of the recovery here that typically kind of emerging markets have a higher beta component versus developed markets, and you haven't seen that, and there's reasons behind it, of course. Uh. And so in fixed income uh e M has underperformed UM, and so I think it might be a tad early still. But you know, as I look at two thousand and twenty two, I'm looking at

emerging markets as an area for real alpha opportunity. So UM, I think it's been a value trap for good reason.

But I think it's changing and pricing is changing. Uh. And of course it's predicated on central bank policy there as well as UH you need to see inflation kind of come off the boil, but but see real opportunities and China is not what it used to be, and I think investors need to kind of get a grip around that new reality, which is China is slowing and will continue to slow UM and it's just a natural

kind of maturation process right of the economy. So it has a very different UH input into the global economy as a result, and I think over time investors will continue to kind of understand what that really beats Kenny. One thing that we dealt with in we're still dealing with today is semiconductors, And I wonder about the semiconductor sector and how you see it developing because obviously we've had a real shortage, real supply chain problems there as

a fairly concentrated supply. At the same time, there's a lot of talk about huge investment in production, including in the United States. Yeah, SEMy, when we look at twenty two is a year. Last year was recovery markets up. We're really focused on resilience across a lot of things as being a great investment opportunity in the supply chain is certainly one, and Sammy's is the most important part of it. Also very relevant to China, which Greg just

spoke about so very big picture. Twelve percent of US GDP roughly runs through the factory floors of Taiwan because there is one company in Taiwan that has the ability to manufacture at the leading edge of logic, which is

about five nimes. And I'm not going to go into too much detail, but the headline is in the US we really can only manufacture at ten nanometers and that's a problem because all of the technology we've spoken about on this segment that we're so excited about, whether it's the cloud, ai Fi, g et cetera, their chip dependent technologies, and we do not as a country, and actually the Chinese feel the same way, want to be dependent on

one public company. From the perspective of the US and what many people would argue as a hot geopolitical zone for the manufacturing of our most important technologies and for a very significant portion of GDP. Thank you so much for great peters of Peach and fix income and to Katie Catch of Golden Sacks coming up, the threat to capitalism if we don't start building bridges to a dynamic and disruptive future instead of building walls to try to

keep it away. We talked with Glenn Hubbard of the Columbia Business School about his new book, The Wall and the Bridge. We all often talk about the growth and dynamism side of capitalism. That's why we're in the game. It's hugely important. The web site of it's des This is Wall Street Week on Bloomberg. This is Bloomberg Wall

Street Week with David Weston from Bloomberg Radio. Walls, we spent much of the nineties tearing them down, whether the physical kind Mr garbuschov teared down this wall or the walls of tariffs and regulation. But then competition from foreign goods and from technologies started to hit people where it hurt in their jobs. Our jobs are going to Mexico, our jobs are going to other countries. China and others are making our product. We don't make it anymore, and

so some have started building walls again. But former Columbia Business School dean Glenn Hubbard says it's bridges to help workers a just change, rather than walls to protect workers

that we really need. In the Wall and the Bridge, Hubbard proposes a series of private and government programs to help workers build a bridge to the future, because in the end, even painful change is essential to capitalism, which, echoing Ken Langon, is the system that in the long run will do the most people the most good, which works better for everybody. There's no doubt in my mind capitalism. And we're delighted to be joined now by one of

our regular contributors here in Wall Street. He's Glenn Hubbard, former chairman of the coustal chanoccivisers, certainly of Columbia Business School, and most important for this purpose, the author of the new book, The Wall and the Bridge. Glenn, thank you so much for being back with this. It's a fascinating book,

an important book. In reading through it, I have the strong sense part of your motivation was you have some concerns for the future of capitalism because to some extent, inherent in capitalism is a dynamism and creativity that can lead to some destructive qualities. I think it's under present right data. You know, it's it's like a coin with two sides, economists, policymakers, business people. We often talk about the growth and dynamism side of capitalism. That's why we're

in the game. That's hugely important. The flip side of its disruption. Many of us, frankly, most of us win from a lot of the disruptions I talked about in the book, but not everybody. And I think we have to notice those who have been left behind and figure out how do we get everybody to be able to participate in our economy. Not a new idea, it was actually Adam Smith's idea. We need to put the liberal

back in neoliberalism, classical liberal, that is aut Smith. Let me ask you, as an economist, does dynamic capitalism and inherently lead to increasing inequality? I don't know about that, but it certainly needs to generate churn and disruption. You know, many jobs and industries that exist today didn't exist a hundred years ago. That's the good news. The flip side of that is that people's livelihoods, communities, firms, and industries can be at risk. That too, is not a bad

thing as long as we prepare people. You know, when Adam Smith talked about the wealth of nations, he talked about competition and openness, and those are good things. But I think if Smith were alive today, he would talk about the ability to compete in the world we have with technological change and globalization. Is everybody really at the

starting line. I think that's the inequality that would have worried Smith and should worry us glat In your book, there's a lot of talk about dynamism, creativity, innovation, and how important it is for a society for growth and for the individuals in it. At the same time, you have a distributive notion as well, called mass flourishing that you actually go back to Adam Smith and say Mas was consistent with Adam Smith talked to us about mass flourishing. Well,

mass flourishing is more than GDP. You know, when Smith wrote The Wealth of Nations, there was no GDP, although he did talk about maximizing the size of output. I also think of the Smith of the theory of moral sentiments, where he used an expression mutual sympathy that today we

might call empathy. I think the eyed economic ideas everybody in the book, everybody participating, everybody flourishing into the minds of the classical economists, flourishing men participating in the economy, the ability to have meaningful work, And I think that's really what the book is about how do you build

bridges to that kind of work. A bridge either takes you to somewhere or brings you back, and taking you two could be preparing you for the jobs of today and tomorrow, and taking you back is rethinking social insurance. We have a way to reconnect people who fall out of the boat to the boat. And what if you knew for a certainty that in order to have truly mass flourishing you had to give up some of the dynamism. Would you make that trade? I wouldn't, And that's the

point of the book. It's I think there are a number of people that I note in the book that Adam Smith would school if you were here today, to suggests that you can just sort of haircut dynamism. The real issue is compensating people who have been left behind. We we have old expressions in economics. The same professor who told you that on trade is good, or technological advances are good, he or she also told you that's

because the gainers can compensate the losers. And by compensation, what I talk about is not writing people of check or pinching them off, but investing in getting people connect, preparing people for work, and preparing people who got left behind. That's something we used to do in the country, the land grant colleges of the nineteenth century, the g I Bill of the twentieth century. I suggest ways we can bring those life to life today. Glenn Hubbard, thank you

so very much. He's the author of this terrific, fascinating and really important new book, The Wall in the Bridge. Of course, he's from Columbia Business School. Thank you, Glenn. Coming up, we wrap up the week, as we always do with special contributor Larry Summers of Harvard work irustrating um. The turning down the temperature in the economy. I think is uh going to be very challenging. From here. That's next on Wall Street Week on Bloomberg. This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. This is Wall Stree Week, clim David west Center, and we're delighted now to be joined once again for the first time in the new year by our special contributor, his Hilarry Summers, will Harvard. So happy new year, Larry. Great

to have you with us. Let's start with the big news of the week, perhaps came on Friday with those jobs numbers where people were a bit disappointing the overall number, but there were a lot of other numbers in there to suggest that we've got a pretty robust labor market. This is a strong report. After this report, the vacancies to unemployment ratio is going to be higher than it's

ever been. We saw wage growth rates, depending on which measure you used, seven to eight percent annualized rates in the last month, and if you look at the sequence of reports, uh, it's been accelerating. The job The establishment number was disappointing, but the previous months were substantially revised upwards, and I suspect this one will be as well. I don't think anybody can look at this labor market and this job's report and believe that we have a sustainable

degree of heat in the labor market. The level of heat that we have in the labor market is consistent not just with high inflation, but it's consistent with accelerating inflation. And there isn't going to be a path to less inflation without a cooler labor market. And I think that has to be uh sobering so learned last year, the FED seemed to be reassured at least for part of the year that there was some slack in the labor

market that which absorbs the inflation. Is there any doubt in your mind right now that we're in full employment because we not only had these numbers, we also had the Jolts numbers come out and where we're record numbers of quits. David, Uh, I've been doing this long enough that there's always doubt in my mind. Nothing is certain, but the probability that we are past a sustainable level of heat in the economy is higher than I can remember it at any point in the forty years that

I've been UH watching these things. I think that the FAT is recognizing that, and that's why they've executed in the last three months such a strong pivot from talk of transitory inflation and the need to ensure employment targets and the need to guard against inflation, which was their rhetoric just a few months ago, to a focus on inflation UH now to accelerating the tightening, to UH signaling the very real and even likely possibility of rate increases

in UH March. UH. We are well into the adjustment of monetary policy. My own view is that UH, the FED and the markets are still not recognizing what's likely to be necessary. The market judgment and the fed's judgment is that UH, you can somehow contain this inflation without rates ever rising above two and a half percent UH in terms of the FED funds rate. I don't think

that's very likely to turn out to be right. And if it does turn out to be right, it's only because the economy is extraordinarily vulnerable to rate increases, which will mean problems of its own. So I think we're headed into a very challenging period for the FED in terms of executing a soft landing. UM. It looks to me like we're gonna need some meaningful deceleration in nominal wage growth, not necessarily in real wage growth, but in

nominal UH wage growth. And if we don't have much experience of getting such decelerations in nominal wage growth without a substantial UM, well at least some slow down UH in UH the economy. So orchestrating UM, the turning down the temperature UH in the economy, I think is UH

going to be very challenge eaging from here. Well, let's pick up exactly on that point, orchestrating this cooling down, because we also had a piece of news out that the markets alely reacted to this week, which is the FED minutes from the December meeting, and which they said, not only we're going to talk about tapering, we might well have rate increases more and sooner than we thought.

And by the way, we might get the quantitative the cutting are actually we're gonna actually tighten the quantitative easing instead of just tapering. Is that enough? And by the way, can they do all that stuff in the time allotted, David, They can make the choices that they want to that they want to make. Certainly, there have been periods when the FED was raising rates uh basis points uh in a given at every meeting for periods of a year or or more. So it's certainly something that is uh

technically possible. I think the I think what we're going to find out is what the vulnerability of the economy is to rate increases. If that vulnerability is not greater than it has been historically, then it's really quite unrealistic to think that we're going to keep inflation under control with two percent rates. It may be, as some argue that because of greater levels of debt, because asset prices are substantially inflated. The economy is more vulnerable than usual

UH to rate increases or to UH quantitative tightening. So it's not an easy UH balance that they're going to have to strike. My guess is that we're headed into a difficult period because I don't think that inflation is likely to come down very quickly. And indeed it's almost baked in that the annualized inflation figures are going to be rising for UH the next several months because of the very UH flattering compares or very low compares in

January and February of UH last year. So my own sense is really of the difficulty UH of this, and the challenge for the FAT is that they're likely to see some amount of UH fluctuation in financial markets and concern about growth before they see the declines in inflation that are substantial, and then they're going to have a very difficult Then they have a very difficult set of decisions to make. Well said, thank you so much once again for being with us as our very special contributor

in Wall Street Week. He is Larry Summers of Harvard. Finally, one more thought, and this time it's not from me. It's from Carlisle co founder David Rubinstein about the events of a year ago when a mob stormed the Capitol building to stop one of the most important steps in the U s Constitutional process, the counting of the electro votes.

His reflections my lifetime, January six will be an important day because that is the day when we had an invasion the capital, the first time it's happened since eighteen fourteen when the British invaded our country, and nobody really thought this should happen, and so it's amazing to me that it didn't happen. But more amazing to me is that one year later, one year later, we are still

in the same situation. If if we didn't prevent another thing by having copsure military people there, today, I suspect you could have another invasion of the capital. There are a lot of people who really really are upset with the way the election went against Donald Trump, or the way that other things have happened, And so I do think there are a lot of people in this country

today who do believe the election was stolen. There are a lot of people in this country day who believe that those who stormed the capital were not insurrectionists, but just tourists and not doing anything that's inappropriate. And as a result, I think the country is bitterly divided. It's not as bit as a civil war, but which it's clearly a country is divided, and it's reflected in the Congress.

The Condress is bitterly divided. Nothing is really getting done of any consequence because the country is really bitterly divided. Into the capital knowing they are marketing, the business community, I think, is disappointed that the country hasn't moved on. What business people like is certainty, predictability, and right now there's a lot of uncertainty and a lot of predictability

about what the federal government is going to do. So I think that the business community by and large wishes we had moved forward and we were not in a situation we are today. But the business community is a realistic community and they recognize it. Right now, the country is fairly divided, the Congress is fairly divided. It's unlikely we're gonna get major legislation one way or the other the President Biden wants so, I the Business Committee would

like to not be involved in commenting on this. The Business Committee, which is this is behind us, but the Business Committee recognizes that for the foreseeable future, we're gonna be living with his division in the country and this bitter the division is going to be. How the increasing, not decreasing. Yeah, the rule of law did prevail. There were sixty five lawsuits that were filed by the people who thought the election was stolen, and sixty five times

the courts threw them out. So the rule of law did prevail. And the truth is that the rule of law does prevail in this country. And the truth is the military, now know, was not prepared to overtake the government, though there were some people in the administration I think who wanted that to happen, but the military state out of it, and the rule of law did prevail. Whether it will prevail in the future, I don't know, but right now I think the rule of law is going

to prevail the United States. And that is one thing that people around the rest of the world really admire us for, which is the rule of law does exist in this country. And despite the events of January six, rule of law did prevail. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week,