Bloomberg Wall Street Week: Koch, Minaya, Summers

of the most influential voices. Larry Summer is the former Treasury Secretary Bryan Wynahan back of America, Will Smart CEO Charlie Sharp Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The administration keeps its economic agenda alive, the inflation debate continues, and earnings Will they just keep shugging along?

This is Bloomberg Wall Street Week. I'm David Weston. We had another week consumed negotiations back and four over President Biden's economic agenda, all within the Democratic Party, with President Biden announcing a framework just as he got out of town for his trip to Europe for the G twenty and the copy summits. These plans are fiscally responsible, They're fully paid for, they don't add a single penny to the deficit, and whatever ultimately gets passed into law for

infrastructure and build back better. This week continued the debate over inflation, with two of those who should know best directly taking one another on when Treasury Secretary Janet yell And disagreed on CNN with what Larry Summers had said right here on Wall Street week about the problem of inflation. We are going through a period of inflation that's higher than Americans have seen in a long time, and it's something that's obviously a concern and worrying them. But we

haven't lost control. And Larry came right back at Janet yelling on Twitter, saying until the Fed and Treasury fully recognize the inflation reality, they are unlikely to deal with it successfully. But for all the talk of more fiscal stimulus and inflation, the week on global All Street was really given over to earnings, particularly those from big tech. Here's Apple's Tim Cook. We are optimistic about the future, especially as we see strong demand for our new products,

and also from the auto companies. Here's GM's Mary Bara.

We're selling every vehicle we can make, and I think that along with UH, you know the overall environment is what allowed us to have a beat for the quarter, and when it came to Equiti as those earnings were enough to pull out a win, with the SMP five up six point nine from the month, making this October the best for the index in six years, while the Nasdaq was up two point four for the week and the bond yield curve flattened somewhat with the short end

moving up and the ten year yield come down under one point six this week. To take us through what the markets had to teach us this week, welcome now Katie Cotch Goldman Sex Co had of Fundamental Equity Funds and Kate L. Hillo. She's Russell Investments Chief investment Officer. Kate, welcome to wall Stree Week. Congratulations on your promotion. By the way, give us a sense of what you saw on the market this week. As I say, the equities did really, really well despite the fact they had a

little headwind from a couple of big tech companies. Yeah, David, thanks so much for having me and you. Earning season about fifty percent of the way through and it has been it's been good, I mean not great like we saw in Q one. And Q two but of the company's beating so it's still above you know, kind of

the average. But I'd say the one big cave yet we would flag is around your company guidance and you know, a lot of that has been focused around a lot of supply team issues and other impacts that pricing power. Initially for the companies that can do it, should be able to work through um. But that is something to continue to look out for as we go into queue four. Uh. I think for companies that did miss, they have gotten

hit reasonably hard. And so what we've seen the market react overall well to earnings on average four percent down for companies that you aren't meeting expectations, and so from our point of view, you have healthy spread between winners and losers. Is a really good opportunity for active management and really started to dig into some of the differentiation

that we expect to see going forward. Is Okay, let's talk about a tech for a second, because we had so many big tech earnings out this week, a lot of them positive, but then we had the Amazon and Apple, which really a hiccup, one of which was really supply chain in the case of Apple. The other was really more labor In the case of Amazon, did it tell us anything in the longer term big tech driving this market,

which is done for so long. You know, they did disappoint but I just put take Apple for a second. People are disappointed, but they should remember iPhone stales were still up forty six percent year over year, so there's still is good growth there. But expectations, of course, we're

for fifty. I think what you've seen there is very specific to what you just said, and maybe we can unpack it later, which is supply chain issues and also labor UM and we don't think that that's going to that We think that's an issue that they can actually get over. UM. Other interesting trends that were focused on in tech earnings generally would be UM. I could maybe touch on payments as an example, and what's happening in

the finance space. I'm really interested in the third quarter UM of this year as being kind of the first quarter that we've seen the potential for how much disruption we think is coming at the financial sector. Just for context, UM there's sixteen trillion dollars of market capitalization and financials UH compared to for example, fourteen trillion dollars of market capitalization and the Internet, and we are on the precipice of seeing major disruption across that whole sector. We saw

some big losers get printed in the third quarter. So, UM, the merchant acquire sector, if you look at the earnings of those companies, they disappointed a lot because they're getting disintermediated by companies like Shopify or Toast for example, that

are offering those services better product, better pricing. And then on the winning side and all and my comments there, but in terms of winners in this space, UM, you would look at buy now pay leader UM, which, as my husband says to me, isn't that just the same thing as a credit card? What's what's buy now p later? But effectively what it's great product for the millennial and

Gen Z consumer. You basically pay on deferred payments. Um. There's no late fee and there's actually no interest charged either. And the reason it works is because they charge the merchants higher fee and those merchants tolerate that higher fee because they're getting a bigger addressable market and higher volume. Now, of course we need to go through a credit cycle to see if this is a durable business model, But they're taking tremendous market share from traditional banks. Okay, thank

you so much for being with us. As Kate L. Hillo, she is Russell Investments ce io Katie Catchy Goldman. Sacks will be staying with us as we focus specifically on supply chains and how prominently they have figured this week and those earnings were born. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. If earnings were the big story this week, supply chain difficulties were the constant narrative through

all of those reports. As we heard from the CEOs of Raytheon, GM and Carrier. We're not immune from the challenges of supply chain. In fact, we talked about this morning on our earnings called the fact is we'll probably see almost three hundred million dollars of lower revenues this year because we can't get material into our shops and

we can't get the labor that we need. It will linger into next year and we're right now are our feeling is will be in a much better shape in the second half of two and we're also taking steps over the medium term to make sure We're never seeing this kind of constraint, not only with chips, but with other you know, whether it's critical materials or just the overall supply chain, because we have an aggressive growth strategy in front of us and we're going to make sure

that we can execute it. So it's a very it's a near term problem that will work through. The supply demand is really out of whack. You see it in chips. Whenever you have to buy chips from on the brokerage market, it's always going to be painful and expensive. We see

it on raw materials copper price, steel, aluminum. So we're seeing a lot of pressures on raw materials and tier one, tier two pricing, but we're managing it through price increases and we're having to be very aggressive on things like g and A, having to be very creative on how we manage logistics. Katie catch A Golden Sacks has remained with us so we can talk about supply chains. So I heard about it all week long from see you have to CEO tell us about supply chains. Where are we?

So two main takeaways I think from this earning season. I've also been speaking to a lot of CEOs and the first is that it is very clear that unit growth has been constrained by supply chain issues. So we'll talk a lot about tech, but let me talk about something very different from tech. Let's talk about pools. We love pools, we've liked them for a while. They've been big pandemic beneficiaries. Are pool CEOs, the ones building the pools,

and the supply that's the one supplying the pools. Believe that unit growth could have been fifty percent higher without the supply chain issues they're they're facing, UM, the supply itself and of materials, and also the labor because we're facing a great resignation in this country and we're currently have the lowest labor force participation rate since World War Two, so that's a big problem. So that all goes under

unit growth is constrained UM. And then the second issue that the second thing that I would highlight UM is something that Mary said I think is really really important. What she said is that what I heard her say is that over the longer term, they're going to address this issue because they need to be positioned for growth.

And I think what she means by that is that they're going to have to reshure some of this capacity and focus on supply chain resilience, and it is it is my view that actually Wall Street has probably put too much pressure on companies to optimize their supply chain, and we're going to get a very much better balance going forward between that supply chain optimization and the resilience that become very obvious that we need. So there are a couple of issues there. I think, what is where

do you get the materials from? We relied upon some countries, perhaps too much. We have to diversify in that. The other is how much inventory we maintain just in time was very popular for a long time, very efficient for a lot of companies. Is this going to affect margins

going forward? If we make those adjustments to supply chains, it may cost more money, it will, and it will impact margins most likely, and we're going to have to kind of get used to that um But of course we need the top line to come through too, and if people want to sell product, they need to have inventory. So again it's going to come back to the balance of these two things. I do think there's an incredible

investment opportunity. In our team beliefs there's an incredible investment opportunity in investing in the companies that are going to help reshure um some of the manufacturing capacity of the United States of America. And so there I would point to you, Hurt, all those people are dependent on chips.

Chips fuel the world. They're fueling the technological advancement that we're seeing across all sectors, and so we can't be dependent on that just from another corner of the world where and have to take some of that manufacturing capacity here. So we love chip manufacturing equipment. So back when I was running a budget cap cities in a Disney, one of the questions I ask every quarter if we were down, is this a timing issue or we permanently lost this revenue?

For someone? Let me ask you that question about supply chains when you see it down, because the units, as you described, is that demand waiting for when the supply is there? Or could we lose some of the demand. Yeah, So in other words, are people still going to buy pools and iPhones exactly? And I believe they will um and they're just gonna have to wait a little bit longer. Now. Of course, that requires us to have a reasonable economic backdrop.

So that with that caveat, but they will. And in the iPhone space, if you had to wait longer, you're not going to switch to another provider. You will go out and buy that iPhone. So in some ways we know that that demand has been kicked into next year. But again, these companies still have to position themselves for the long term runway of growth and they will invest in the restoring of their supply chains. Katie. With just about every CEO I talked to, the supply chain discussion

came right up with cost increases YEA and inflation. It raises the question is this lasts well into two which seems clearly will some people say even to the late what possible effect might that have on inflation because a lot of the ceo as we've talked to you said we raised prices. Yeah, absolutely, and so of course you want to be with the companies that have the pricing power to pass that through. UM. I'd say three quick things. I am we are in the camp that these supply

chain issues last throughout. There's not there's not an easy fix for them UM. And there's an investment opportunity on the back of that, which we which we talked about. UM. The second thing I would say is that the inflation in the labor space is real. Um, we've talked you and I've talked a little bit about this before, but we have failed to pass minimum wage in this country for many decades. We've now actually jumped over minimum wage

because we've had to bid people back into the labor market. Now, the question that we have to really think about is has that been a one time reset in wages? Are we going to get upward continued upward pressure? And time will Time will tell on that. But both of those suggest a higher cost structure. And I wonder whether our wage increases actually allow pagging because if you look at the consumer price index, it is going up faster than the wages are. Wages are going up but not as fast.

Does that mean we're gonna have to catch up at some point we're gonna have even more wage increases. Well, that's how you get inflation, right, But it's very it's very determinant on on get that sticky upward pressure of wages going up, which we'll put you know how that cycle works going forward. But does that affect which companies you want to invest in the sense that some are more sensitive to that that wage inflation than others are. Yeah, so I would say right now we see a very

healthy consumer UM. They're benefiting from higher wages UM, and we're seeing that come out in the data. If you look at credit card data. Just to to show you the health of the consumer and why we like the consumer UM we have, American Express publishes spending trends. Spending is up thirty six percent versus two nineteen, so we've

had a big big jump in spending UM. The other thing I just want to say about consumer in terms of where we're focused, it's the millennial and Gen Z consumer that are driving a lot of that increase because they like experiences over things, and it's safe now to go out and have experiences, and they also have a higher risk tolerance around experiences than baby boomers. Baby boomers spending according to American Express date is actually down six

percent relative to two thousand nineteen. So we see health in the consumer that's repaired, their balance sheet has firepower, and we're very much leaning into those consumer companies that have pricing power and can benefit from a healthier consumer. Okay, thank you so much, Katie's always great to have you portunity in the studio. Now, that is Katie Coach in real life, in real life exactly, we're not in the metaverse right words, we're here together. That's Katie kaj from

Golden Sachs coming up the inflation head. You may not have thought much about the beauty of owning land, especially when it's farmland. With New Vine's CEO Jose Mania. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Inflation it's all the talk these days among investor because of

what it could do to your portfolio. As Nancy Davis of Quadratic Capital explains, inflation is a risk to every investor portfolio because it reduces purchasing power and Treasure Secretary Janet Yellen took the airways on CNN to disagree with our own Larry Summers about how long it will last. But while people are debating the size of the problem, investors are left to make sure they're protected against the downside,

looking for what Bob Prince calls inflation hedge assets. You want inflation hedge assets because it's very likely that the that the rise of interest rates will lag inflation and lag the economy. The FED doesn't really want to get ahead of it, ranging from things like gold to things like cryptocurrency. According to Larry Summers, bigcoin has had some emergence as digital gold. The thing you want to hold if you're worried about inflation. One asset that might get

overlooked his farmland. Historically, farmland returns have outpaced inflation in a variety of market environments, providing returns more than double the inflation rate for decades. And right now the farming sector is booming. Is a really robust story. Right net farm income is projected by the Department of Agriculture to be up to a level of a D thirteen million dollars, which is a level we haven't seen since so in aggregate on average across the country, that's a really good story.

We're welcome now to Wall Street Week. One of those who is focused on farm land investing is a sensible hedge against inflation. Jose and I is the CEO of Leuvene, which manages over one trillion dollars in assets. Welcome, Jose. It's great to have you here. Thank you for having me. David So so you really are introducing me to this whole idea about farm land is a hedge against inflation. Tell me how you came to it and how you think of it today. Yeah, we came through it through

our traditional portfolio construction process. Right, we were looking for assets brought attractive correlation benefits to our portfolio. We're looking to smooth out volatility. We're looking to kind of find a good hedge against inflation and also looking at total returns and more were more skewed towards income income returns, and we found that in farmland. But what made farmland really attracted to us. I always say is one of the best investment thesis I've come across because it's as

simple as people need to eat. Yet what we found was you have a any elastic demand supply it right, it's one that the populations are growing, middle classes, the middle classes growing. It takes ten pounds of grain to make one pound of protein, so as they're consuming more protein, that demand is continues to be pushed and it accelerates. You look at the supply side, it's also any elastic because they're not making any more land. If anything, production

is being trained by environmental factors. So when you combine that it made for a perfect place where we can fit in our portfolio construction. So give us a sense of the return from the sort of investment over the longer term, because I've seen some pretty staggering numbers. And you know, obviously, like many, like many different investments, there are different risk return profiles. But for us, typically we're

seeking called admit to high single digit returns. If it's say eight to ten eight to ten percent returns, half of that is coming from income, the other half is coming from from capital appreciation, and the lower return is because there's different risk profiles. Right, we we go to the areas that we're more protected against natural disaster issues or climate change. Water is a key factor in this asset class, and you can you can mitigate mitigate that risk by go to areas that have more a better

source of water. They're going to be more expensive, your cap rates or returns are going to be lower. But again, we're not investing in farmland or really alternatives in general for an outsized return. We're really looking for where can we find some of that stable, stable income with with good protection of our principle. Right when I think about farmland, we're buying land that is producing an essential need for society into perpetuity um, so that gives me really strong

intrinsic value. So it's almost like owning a triple A bond, yet I'm getting a four plus or so percent coupon on that particular asset that has really been stable through the years. From volatility perspective, was a compare and contrast a little bit this asset class from other alternatives on two different matrices. One of them is stability. You just said volatility, How is it compared in terms of volatility? And the other is we're all talking about inflation right

now and how we're gonna protect against inflation. How does farmland? Do you know? Well? Farmland again, how it compares to other asset classes today is that it's it's not as further along in terms of its access to capital markets. Right when you look at sharp ratios, for example, farmland really pops relative to another real asset like real estate. That a lot of that has to do with liquidity and access to capital. If you look at farm have you looked at real estate fifties sixty plus years ago?

It had around a similar profile in terms of who are the owners of those assets. Today you and I can go to talk to our an advice or broken and get exposure to real estate. You can't do that in farmland as much. So that again, that inefficiency kind of adds to the alpha in the excess returns that we can derive from from from that asset. And then

ultimately it's a commodity. So from an inflation perspective, that dynamic of any elastic demand, any elastic supply, right as that as that stretches and commodity prices typically go up and follow inflation, it's proved to be a very very strong, uh you know, hedge against inflation. Rosimania, thank you so very much. She's new being CEO here on Wall Street Week. Coming up, we wrap up the week once again with our special contributor Larry Summers of Harvard. That's next on

Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We're delighted to welcome once again our special contribute to Wall Street Week. He is Larry Summers of Harvard. Larry, thanks for being back with us. Let's start with what happened actually on Thursday, just as the President was leaving to go over to Europe, he announced what he called a framework for something on

his Buillback Better Plan. Not clear how that's going to develop, what's going to turn into law, but let's assume it was enacted just as it's proposed described by the White House. What would it do in macroeconomic terms? What would it do to growth? What would it do to inflation? I don't think the effects are likely to be large in the very short run, but I think over the medium term it will be a positive for growth because it will expand the capacity of the economy, and I think

there might be some benefit in terms of inflation. I don't think it's likely to be large. I think there are a number of important investments there, including in the bipartisan Infrastructure Bill, which will come along with it. I think there are some UH movements to promote clean energy, which ultimately I think can help UH our economy. I think it's a very positive thing that it's there's a significant increase in revenue that matches the increases in expenditure.

So I certainly hope that this bill UH will pass. It's UH far from perfect, but I think it's a real achievement and is in many ways one of the most significant pieces of economic legislation we've had. It might be the most significant between the two bills piece of

economic legislation we've had in the twenty one century so far. So, Larry, you mentioned how it's going to get paid for the proposals, at least on taxes, and you saw at the very end they backed off of the so called billionaires tax, which is actually a proposed tax on the on the appreciation of assets held by people rather than income. They now have service surcharge on multimillionaires as they call them,

as well as a minimum corporate tax. Is that, as a matter of tax policy, a more sensible way to go. I thought the billionaire's tax was not the right thing to do. I thought the mark to market capital gains aspect was impracticable, and I thought the general idea of targeting a few hundred people for a special tax was something that didn't fit with my sense of the right

uh values much better to have a broader base tax. Frankly, David, what I think is disturbing is that in the way this bill is likely to pass, it's not completely clear yet, depending on what happens to state and local taxation, there will be a large number of people with incomes of say eight or nine million dollars who are going to

see their taxes UH go down. And I'm not sure that this was a time when people in the top tenth of a percent of the income distribution, top hundredth of a percent of the income distribution should be getting UH tax cuts. And so I'm disappointed that in a build is passing only with democratic support. So let let's talk about the overall economy here. We got numbers out this week showing that growth was slowing as people expected, but it's a little bit more than we thought in

the third quarter in terms of GDP. At the same time, corepis and continues to move up. And we've talked about inflation paramount. You were certainly in the news this week because actually on Sunday, CNN played for Janet Yellen's Treasury secretary. One of the things you said on Wall Street we've right here. She disagreed with it, and then you disagreed with her on Twitter. Take us into that debate that

you're having right now with the Treasury secretary. Look, I have enormous respect for Secretary Yellen, and I hope her judgments about inflation prove to be correct. Um. I have the view that we've got substantial risks right now. It seems to me that almost everyone is experiencing a shortage of something, almost every employer is having trouble finding work or those seem to me to be uh, the conditions for inflation to take a rashet up from the two

level we've been used to. And I think that's gonna happen, and it's gonna happen with an indefinite horizon unless somebody does something pretty strong to stop it, or unless we have some kind of financial accident. That's the position, uh that I've been trying to make. I was glad to see uh, Secretary Yell and recognize that uh, certainly out

to the second half of next year. UM, so that's almost a year from now, nine months, Uh, we're we're in agreement and expecting inflation uh well above two percent. I was very glad to see that. We'll see what happens after that. Certainly a lot can happen, both in terms of policy and in terms of the economy until then.

But right now I see a variety of things suggesting that inflation may accelerate starting from uh, the tremendous shortage of labor that we're dealing with, which is I think what held the economy back in terms of the GDP growth figures. So let's talk about those two things, both how long it's gonna last into and the shortage of labor. Because we've had a lot of earnings out this week, and we hear from CEU after CEO about problems with

supply chain in particularly on labor. In fact, we saw Amazon actually disappoint the markets because they say they're gonna have to spend a lot of money to get the people they need to deliver things in Christmas. What is the importance of going into into the middle of twenty two, maybe even after that. How long does that affect the economy?

You know, we'll have to say, we'll have to see at what rate um labor supply comes back, and if labor supply comes back, when it comes back, if it does, we'll have to see how much that adds suspending power. You know, if more people start working, then more people are gonna be earning and more people are going to be spending. And so in terms of the supply demand balance, it may not get us ahead um by that large

a margin. So my own view is to be quite concerned that we're ratcheting up to a new kind of level of wage expectations. Larry. Finally, as you know, we've got a G twenty summit go ahead in Rome this weekend and then followed by the top in Glasgow. What do you hope what do you expect might come out of that? In concrete terms on two fronts. One is the climate, but the other one of the things they have to address is really vaccination and getting our arms

on the pandemic globally. I hope we're going to see commitments on funding for vaccines, commitments on some kind of governance structure so that it's better managed the next time, and so we're focused on preventing the next global pandemic, and I hope we're gonna see substantial commitments where there's

a meaningful prospect of enforcement on the climate front. I'm not optimistic right now that we're gonna see as much progress as I think future historians will think we needed on either global health or vaccines, But let's see what happens. A lot can always happen in the course of these meetings. It will we be very concrete for a moment when we talk about trying to keep it down to one

point five degrees centigrade. Do they need to come out of copy with specific commitments about a limiting the use of coal at some date in the future, It would certainly be very helpful. Or they need to come out with some set of commitments on what they're gonna get done in terms of being able to take carbon out of the atmosphere. We are currently on a credible trajectory

to anything like one point five. I think it would be a minor miracle if coming out of cop we were committed to such a trajectory and the sand is running through the hourglass. Okay, we'll have to watch that. Thank you so much to Larry. It's always great to have you with us, as Larry Summers of Harvard our very special contributor here on Wall Street Week. Finally, one more thought. A trillion dollars just ain't what it used to be. The Late Center from Illinois, Everett Dirkson famously

said a billion here, a billion. They're pretty sure you're talking about real money. Well, at least some people remember that he said it, and there's no real record that he did say that. But this week we were talking about a thousand times that billion as Democrats struggled to get their spending package down under two trillion dollars. You hear these numbers, three point five trillion, one point seven five trillion, we pay for it all. It doesn't in

eased to deficit one single cent. So let's get to work. And the key Senator Joe Manchin pointed out that all of World War Two and the Marshall Plan cost the United States only about four point seven trillion dollars in current dollars, and we've already blown way past that in the last year and a half before adding another one point five We saved the world in World War Two, we rebuilt your on today's dollars at four point seven, we've already spent five point four and we're about ready

to spend a heck of a lot more. But it wasn't just the government this week who was talking about trillions of dollars. Tesla blew past the trillion dollar market cap number, making Elon Musk a quarter trillionaire. It wasn't just a te word that connected Tesla with Congress this week when lawmakers want looking for some way to pay for some of those new programs they want to adopt, they quickly focused on the very wealthy people. Yes, you

guess it, just like Elon Musk. At first, they came up with something called the billionaires Tax, which actually is not a tax on income at all, but a tax the increased value of assets held by billionaires. That is something that made Republicans like Mitch McConnell apoplectic over the unfairness of it. All our Democratic colleagues and President Biden or behind closed doors dreaming up creative new ways to

grab literally historic amount of the American people's money. But then again, Democrats like Shared Brown of Ohio said it would only be fair. We've seen an executive compensation explode upward, We've seen profits go up, wages have been flat. In Congress has rarely been on the side of workers. This Congress, in these two bills, were clearly on the side of

workers into fixing that. Democrats may have backed off of that so called billionaires tax, but they replaced it with a multimillionaires surtax, because in the end, then that's goot shall get but you may have to give some of it back. That does it. For this episode of Wall Street Week, I'm David Weston, This is Loomberg. See you next week.