Bloomberg Wall Street Week: Malik, Ailman, Browning

In Bloomberg wool Street Week with David Weston from Bloomberg Radio One for the history books, the markets get the message about tightening. Finally, Ukraine stalls the mighty Russian military, and a black woman takes a big step for the seat on the bench of the highest court in the land. This is Bloomberg Wall Street Week. I'm David Weston, this week's special contributor Larry Summers on being caught between the

rock of inflation and the hard place of recession. And I share very much the Chairman's hope that a soft landing is possible, but I don't think it's something we count on. And Candice Browning of Bank of America on Corporate America coming to terms was zero emissions even in a time of war. This really is a movement. I mean, I was surprised. We saw a history being made this week when Judge Katangi brown Jackson took a giant step towards the Supreme Court. US Supreme Court nomine Quatangi brown

Jackson is set for questioning by a Senate committee. She's told the panel she's an independent thinker who decides cases from a neutral posture. Now there may be some who claim, without a shred of evidence, that you will be a rubber stand for this President. I have four words. Look at the record. I interpret and apply the law to the facts of the case before me, without fear or favor, consistent with my judicial oaks. President Biden traveled to Europe

and support of the Coalition or raid against Russia. President Biden fielding questions from the media. They're talking about saying united with Western leaders. Do you think that Russia needs to be removed from the G twenty On a latter point, my answer is yes. If that can't be done, then we should ask to have both Ukraine be able to

attend the meetings as Russian forces stalled in Ukraine. Ukrainian forces have essentially stole the Russian advance at Moscow's awards on diplomacy are not really being matched by actions on the grounds. Ceasefire is not to way out as a way out is immediate withdrawal of those of Russian troops from Ukrainian territory, so it's not as a way out. Fetcher J. Pow finally got his message through to the markets. What would prevent you from doing a fifty basis point move?

In my what would prevent us nothing? The story has changed in a big way in the first quarter a t This is not the year people were looking for just three months ago. If someone had told all of us, everyone that watches the market that the Fed would be

aggressively hawkish, I think we'd all be surprised. And if you had any doubt at all that the bond markets got that message, just take a look at the ten year this week, having its worst week since two sixteen, winding up on Friday just at TAD under two point five pc. Not to be outdone, the two year was down more in a week than it had been since

two thousand and eight. And adding to the risk on sentiment where the equities markets where the SMP five hundred in NASDAC were both up just under two percent, while that faithful safe haven currency in the Japanese yen, had its worst week and over two years. Welcome now our experts, Chris Alman, c i O of the California State Teachers

Retirement System and the c i O of Nowvine, Sarah Malic. So, Sarah, first of all, congratulations, I've becoming c i O. I think it's the first time since you've been back on Wall Street. That's great to see. Let's talk about this relatively risk on week we saw this week. Uh, what do you make of it? Given the fact that we are at war, well the fence trying to create a Goldilock scenario by engineering a soft landing, The equity markets

are buying in and the bond markets aren't. We're watching three key things to monitor whether we're going to get to that, and that is the FED movements, inflation, and geopolitical issues. Uh. The equity markets like what the Feds said in terms of becoming more hawkish because they're catching up to what's going on with inflation, getting more credibility around that battle. The equity markets like it because it

means we won't have runaway inflation. Now, when it comes to inflation, the key question is can economic growth be strong enough to overcome inflation. We think it can. Geopolitical risks are here to stay with Russia, though we see overall impact on global growth as moderate, but areas that we're monitoring, our financial channels, commodities, and the impact on the European Union. All of that together still leaves us

moderately bullish for the year. So Chris Sarah says the effect on the markets will be relatively moderate from the war. The war is not going the way we thought it would. We thought it would over quickly one way or the other. It isn't. Are you more concerned about long term consequences exactly, David Sarah, I would have to say, I think the markets actually have their heads stuck in the sand. The

bond market, they're awake and they're paying attention. I mean, if David, as you said, two's are back to eight, Uh, there's a thirty basis point spread between two's and thirties. That tells me the thirty year bond knows it's going to be a flight to quality because it's a safe haven in a war, which is the word you started with this equity markets shouldn't be rising. They go up at the beginning of inflation, and Sarah, I give you that, but I think long term, the bond markets got this

right and the stock markets got this wrong. It should be more cautionary and it should be more worried about inflation long term. So Chris, as you imagine and manage that really substantial portfolio there at cal Stars, what do you look at in the yield curve? Anthing at all. We heard from j Powe this week and he said, look, oh sure, we pay attention to everything, which is really the very very early part of the curve which we focus on, not, for example, the two's tens. J can't

control the twos tends. He can talk it up and he can job on it. You guys have a wonderful montage of a whole bunch of Fed governors who all talk about the next meeting that not only is fifty basis points not off the table. I think one of them at the end says, could be zero, it could be could be fifty, could be a point. I just think we have to recognize for an a rising rate environment. Sarah's right, it's the beginning. Bond stocks do quite well

at the beginning of inflation period. But this is not going to go away. This isn't remember transitory, it's not transitory. Inflation is going to be around, and this war impact is going to be felt. Sarah Malic a movie and Chris element of Colchus will be staying with us as we turned from the economy and the Fed to what a portfolio manager is to do about them. That's gonna have next on Wall Street Week on Bloomberg. Still with us a Chris Ailment of Counselors and Sara Malic of Nowvines.

So we've talked about the economy, We've talked about the FED, We've talked about inflation. Let's talk about what that means for a portfolio manager. Chris. Let's start with you, because I think of you particularly when we talk about inflation, because you've had a lot of pensions. Are you making enough money right now? Stocks are down this year, bonds are down this year. Are you making enough money to

pay those pensions well? When you're looking at it on an average, not on a one year period, David, No, and markets behind us. So we're having a tough time, but we do invest in longer term assets. Real estate has held its value. Private equity has done really well, mostly because of the technology and the medical booms that we've seen this year. But then we also invest in

inflation sensitive assets. We've got uh Timberland, we've had agriculture, we've got commodities which have been up over twenty nine so far this year. So the key is diversification. We don't put all our money in one basket. We don't put it all in domestic stocks. We spread it across in a number of different asset classes. That way that we can weather years like this and then also make money in the positive years. So, Sarah, how do you

manage in this environment? Certain there's a lot of volatility out there, a lot of uncertainty. I've read a number of analysts who say, you know, you've got to get conservative right now. You know, a large cap you want to start wars and start small cap. You want to go value rather than growth. Now we also go public

surprivates at New venes. So in an inflationary environment, we like equities, we like commodities and also real assets and within equities, and we're being selective, but you know, companies with pricing power. We are seeing that from energy, which has a very tight cycle and producer discipline, which is very important that the producers are not just pulling just focusing on volume growth, they're returning cash to shareholders. And then we like large caps largely have growth stocks really

beaten down this year. Economically resilient. These are companies like you know, a bell Weather sooft like Microsoft, which has such strong growth characteristics going forward, exposure to we view as the next digital revolution, which is the metaverse um.

And then also within fixed income, it is challenging that there's areas that you can look at where you can find quality or also higher yields like emerging market debt, floating rate loans, and we're definitely airring on the shorter duration side with fixed income given what's going on with infest rates. Sarah with a big grosstalk like Microsoft, are you not worried about it's fully valued? You know, the

growth stocks are actually pretty beaten down this year. Considering their structural growth ways, we found them to be quite interesting. Another name that we like in technology is applied materials, where fans of the semi conductor cycle semis are getting larger and more complex, they require more equipment. Applied Materials is in the sweet spot of t SMC and Intel, two of the biggest foundries, a lot of demand for their products, and we think that's so very well position

company going forward. Chris tell us about bonds in this environment with rates going up, why does it make sense to be in bonds at all? Good challenge, But I think, just like Sarah said, we're looking at the short end. We're looking at private credit, which is variable rates, so we have opportunities to invest there. There's still a few credit opportunities, but it's a challenge. We have the lowest waiting in fixed income that we've had in the history

of cal Star's uh So it's a challenging environment. And if you're in a four oh win K investor, it's really hard because all you really have is stocks and bonds. You don't have a lot of chances. Maybe if you have a real asset option in your four oh one K, take advantage of that, but you've got to open your account, take a look at it and diversify across. As I said at the at the earlier segment, David, I think that you know, the Feds making it clear they're raising rates.

Sarah said it herself seven more times already this year, and maybe more so that that to thirty uh two year is gonna go higher, and that's gonna work against you. I mean, so far you have a negative eleven percent return in bonds this year. That's a tough way to go. So you've got a diverse fy away into other types of assets, Sarah, as you manage your portfolio. We just heard from of course and seven times. Actually a city came out on Friday of this week and said eight times,

can don't even stand that. I guess the reason I asked that as a portfolio manager, do you have to be hedging against the possibility recession? Actually, well, if you look at the last couple of cycles, the Fed, the equity markets peaked in around nine to fourteen rate hikes, So I think you know, we can handle multiple rate hikes. One question for us, as though, it has to make a dent in inflation or we're going to have other problems. You know, we have to watch the hard economic data.

I think the FED is doing the same thing. They've said their data dependent. Can the economic data hold up during all of these rate hikes. I think initially we're seeing signs that it can, because sag inflation is a period where we have low employment and lower economic growth, and we're just not really seeing that yet. We still have a very strong economy here, and so you know,

we are not initially worried about these rate hikes. As I said earlier, we want to be careful about leaving to money on the table in the early cycles of rate hikes, and just because the yield curve is inverting in certain places, Sarah, you said, the word that keeps saying up at night stag inflation, because I worry about is that if if the inflation is coming from external sources like the war in Ukraine and the lack of fertilizer, the lack of we hire prices two wages because people

are demanding it before they go back to work, that makes me worry that that economic growth is going to get squashed in this summer. The FED can't fight that kind of inflation with just higher rates, and we end up, as you said, in stag inflation. I know for my portfolio, that's the worst situation of all there. There's almost nothing we can find to invest in to make us money

in a stagflation environment. If you actually look at the seventies during the period of stagflation, during the early period, it was a very challenging period invest but later on actually that was when equities and real assets actually performed pretty well. So you can't find period during that cycle. You can't actually have times where you can make good returns on your investments. Um. So, I mean, I agree it's a concern out there, but it's not something that

we're worried about right now. Also, within inflation, I think the FED seeing the same thing where there's noise in those umbers from tier supply chains to the war that we're seeing these things that are not necessary, things that are going to remain permanently. So what is that true baseline inflation number one? We're through this, That's what you know we're not clear on. I don't think the fet is yet and they have the ability to pull back

on rate increases. Um. Once we start to see what inflation really looks like, we're passing of these unusual currencies that are happening. True, Christal, wrap up this investment cycle. Let's talk about that you referred to earlier, and that is the energy transition. What effect, if any, will the war Ukraine have on that? Because we saw just this week, for example, the United States now commit to a huge new supply of l n G. Look with natural gas

to Europe. What's going to happen in the energy transition in this world? David, it's fronduct to light that it's not going to be smooth, that it is going to be a difficult transition. I get a ton of pressure from teachers that want us to dump US oil companies, and now maybe they realize that, well, we don't want to be dependent on Russia and Saudi Arabia and Venezuela. It needs to be a transition where consumers change, utilities changed. You know, the number one thing is how we generate

electricity first and foremost. So we've got to find ways to have a thoughtful transition. And we don't want to be geopolitically linked to one economy or one type of fuel. We want to be diversified. And so you know, we've we've got time of twenty years, but it has to start now and it has to be meaningful. Thank you so very much for both of you. That's Sarah Malic of Nouvena and Chris Ellman of Calster. Is great to

have you both with us coming up. The SEC wants companies to disclose their greenhouse gas emissions, but what are they already doing to get to net zero? Bank of America has done the survey, and its head of research, Candice Browning, is here with the report. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Getting to zero, that's the goal that countries representing of greenhouse emissions and

g d P have set for themselves. Making progress all but inevitable. That's according to President Biden's Climate Envoy, John Kerry. No president in the future would walk into the White House and undo what is going on around the world. This is bigger than the United States. What is this response? People all around the world are retooling, and corporations are

quickly signing up to do their part. Like VP CEO Bernard Looney, we will reinvest two pounds more than that actually for every pound that we make, and the majority of that investment, the vast majority of it will go into helping Britain transition to a zero future. This week, the SEC gave corporations a nudge, proposing new requirements the public and traded companies disclose their greenhouse gas emissions. So

now it appears there's no turning back. Before we go forward into a zero emissions world, we have to know where we are right now, and particularly where companies are and really being committed to zero emissions. To find that out, Bank of America has done a compremis of survey of thirty four hundred different companies around the world, and here tell us about what she found out. Were welcome Candice Browning. She is head of Global Research for Bank of America.

So Candice, thanks so much for being here. What did you learn from your survey? Oh, David, we learned so many things. I mean, the first thing we learned is that this really is a movement. I mean I was surprised, you know, and nineteen about sixteen percent of the world's GDP, you know, by country had committed to some sort of net zero plan, and today, just three years later, that number is nine. And you know, this whole thing was

really led initially by policymakers, right. But now, what's happened is all these other groups have jumped in, whether it's active as shareholders, or whether it's consumers who want to buy, you know, goods that they think are not don't have a huge carbon footprint. Um, so it's all it's in its shareholders. They've all jumped in, and everybody wants to get on this wagon. So the first big takeaway was that you know, it's it's a movement and it's going

to happen. And I think actually that the events between Russia and Ukraine are actually going to further accelerate this because Europe you know, has to get off its dependency on hydro carbons. How difficult it's going to be. Because one of the things I really focused on in reading your survey was there are three different categories here of emissions, and one of them is your own companies. Another is that people supply you. But then there's a third category

that actually dwarfs the other two. Yeah, Basically, the first one is what you use to make your goods and services and products, and then the second one is the purchased energy, you know, the electricity that you buy. And then the third one is the really difficult one to to measure, and that is really the carbon footprint of all of your suppliers. And it's estimated that that third level David is three times as big as level one and level two. In doing your survey, did you get

a sense of timeline for these corporations? If they're committed to NED zero, how long is it going to take? So what we found is that of the thirty four hundred companies that eleven percent of them globally said they're going to get there by that's just eight years away. That number quadruples by the time of the company said that they would be there. And there are also some

real differences by region. So if you look at Europe, for example, they're twenty percent of companies say they're going to get there by twenty thirty, so they're far ahead of the rest of the world. In China, fully a third of companies don't even have a timeline, So there are big differences by region. We'll talk about that geographic dispersion. I can call it that. You talked about Europe, you

talked about China. Where's the United States? You know, the United States is just solidly right um right in the middle there. I think it's about I can't remember the exact number for but we're solidly in the middle and we've been accelerating our timeline. Okay, we have Wall Street. We appeal to investors, try to inform them what's this gonna cost, what's this gonna do to revenue on the top line on the one hand, what's also going to

do to the cost line. So what we found is that in general, companies analysts expected that revenues would decline about five Now that averaged from zero percent to as much as fourteen percent um depending on the sector. For example, energy companies you would imagine would have one of the

biggest hits. So we think that there'll be a revenue hit. Interestingly, we also think that there's going to be a real pick up in research costs, So about one point two trillion of R and D will be spent we think over the next five years, and capital expenditures we think will be about two point four trillion over the next five years. So put it together, you've got lower revenues, you've got higher costs. It means that you're going to have a hit to operating profits, which we think will

be down about five on average. So that sounds like a pretty grim picture, and you know, in the short term there definitely will be pain, but there are going to be companies that are going to be beneficiaries of this as well. Well. It's a fascinating study, is I say. I learned a lot from and I really thank you for sharing it with us here on Wall Street Week as Kenneth Browning, she's head of Global research for Bank of America. Coming up, we wrap up the week with

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, and welcome back now our special contributor here at Walster Equal Larry Summers. And Larry, you were at least perhaps a little bit in the

news this week for one specific reason. We heard from FED chair J Powell at the NAB meetings down in Washington, and he went out of his way to sort of correct the record on exactly how aggressive the FRED will be. Some people have said he was responding to some of your criticisms or what he said last week. We're clearly the bond markets didn't listen to him. You know, I don't I don't know whether I had anything to do

with it at all. I think he did signal more hawkishness, and I think that was very much warranted given the inflation threat. I do think there are a number of problems in FED thought where they're advocating and making arguments that I don't think really stand up to economic scrutiny. So let's take let's go through some of those arguments. One of the things I think I heard from the chair was, actually, inflation is going to get relieved because

there will be an expansion in the labor force. It will relieve some of the wage pressure that you've talked about. You know, an expansion in the labor force matters if it changes the supply demand balance in an important way. But if the people all work, then it translates into more demand, off setting the increase in supply. And the

FEDS not forecasting any increase in unemployment. So with no forecasting increase in unemployment, I don't know why one would think that an expanded labor force would somehow be a reason why inflation would come down. It would only exert restraint on wages if it translated into higher unemployment. Something the FED is it pains to predict will not take place.

That's the second thing that we heard from the chair today this week was in fact that they are willing to go up to the neutral end, up above the neutral rate and the FED funds in order to get inflation on control. Is that going to do it? I think we have to be careful with that. Uh. In a sense, I think the Fed is doing assumer can opener economics, after the old joke about the economists when asked how to how to get into a tuna fish

can UH says, assume we have a can opener. That reality is that the neutral interest rate is a real interest rate concept. It reflects the difference between the interest rate and inflation. What the FEDS doing is assuming their own success with respect to inflation that it comes down to about two, and then saying that their interest rate forecast will represent a positive real interest rate and will correspond to their neutral interest rate. But it all depends

on assuming their success. Markets are saying that real interest rates aren't getting anywhere near the FEDS estimate of the neutral real interest rate anytime in the next UH five years, and certainly that's what most professional forecasters are saying in terms of their views about inflation. So I don't think we're seeing the kind of increase in interest rates that's

usually necessary to go for UH inflation. I don't agree with Republican economist John Taylor on not many things, but his Taylor principle that to stop inflation you have to raise interest rates by more than inflation goes up, because otherwise the real interest rate is coming down. That's a valid principle, but not one that's yet been internalized in

the FEDS forecasts. The third thing that we heard from the chair this week was he admitted, I think that it it's going to be difficult to have a soft landed. He nonetheless, it's confident it can be done, in part because it's been done before. There are at least three other instances people are pointing to, right, I don't see how anybody can regard those as very relevant precedents. And none of them was the CPI at anything like eight

when the episodes started. In none of them was the unemployment rate or the vacancy to unemployment rate in historically tight labor market territory. And in all of them, the whole point by the FED was preemptive action to restraint, and that's what this FED ruled out in its operating framework. So, Larry, are you confident that we know what it will take to get inflation down at this point? Are no important? Does the FED now? Look? Nobody knows? I certainly don't.

I don't think the Fed knows. I do think that it's likely to require significantly greater interest rate hikes than the Fed or markets are now except expecting. And I do think that we need clear signals that we're prepared to accept some slowdown in economic activity if that's the price of reducing inflation. Otherwise we're going to be making the mistakes of the nineteen seventies that will ultimately create

a need for a really catastrophic procession. I think that can be avoided, but it can't be avoided if we're counting on some kind of immaculate reversion of inflation or immaculate disinflation. Larry, as we speak, that horrific war in Ukraine continues, and of course we're all fixated on the death and destruction, but they're also economic consequences. What do you see as potential longer range global economic consequence of

what we're seeing? I fear and it's too early to know, and we may will never get the data to do a really accurate measurement. But my fear is that there's going to be more death thousands of miles from Ukraine because of the food price hikes, food shortages and potential famines that are associated with UH, the loss of crop in Ukraine and Russia, that that will ultimately be the

cause of more death than what happens in Ukraine. That, of course, is not to minimize the tragedy in Ukraine, but it is to point up the need for the world community to be focusing even on it as it focuses on Ukraine, to be focusing on the needs of developing countries broadly, the need for financing, the need for debt relief, the need for UH food UH allocations. I think this is a critical issue, and it could become a more critical issue depending on developments in the next

few weeks. We've had some people this week predict perhaps we're seeing the end of globalization. Larry Think, for example, for black Rock, said that in the media, what do you think about that as a possibility. At this point, we're certainly seeing the evolution of hyperglobalization. We're going to see more rely more emphasis on justin todd cases rather than just in time. But I don't think we're gonna

see anything like the end of globalization. I think as long as there are smartphones, as long as there are video cameras, as long as there is zoom, we are going to see levels of interaction between countries that are great than anything that was taking place even twenty years ago. So I think discussions of the demise of globalization are overheated, and I think they're even a little bit dangerous because

they risk a self fulfilling prophecy. Finally, Larry, we lost a true pioneer this week in Malon Albright, a scholar, a diplomat, the first woman Secretary of State, and I believe when she was a point of that position was the most senior position ever served by a woman in the United States. I know you served with her. Give us your thoughts about Matton, all right, what she did, what her legacy is. Madeline was a special UH person. She was a role model for UH so many women.

She ascended to the highest levels of power while always maintaining the highest level of decency, humanity, collegiality, kindness. UH two others. She showed that you could be tough and generous at the same time. Larry, thank you very much for sharing that with us, as Larry Summers at Harvard are very special contributor here on Wall Street Week. Finally, one more thought. They say that war is politics by other means, but what happens when politics starts to look

like war? American politics has always had a bit of an edge to it, going all the way back to when a moderator in a primary debate New Hampshire wanted to turn off Ronald Reagan's mike and it got physical, and a news conference at bagged in into this an age when someone in the audience through a shoe at President George W. Bush, So what if they gat to

a shoe hit me? And of course there was the famous confrontation between candidate Joe Biden and the woman who was to become his vice president in the primary debate. Government must stem in that's rights and the civil rights. That's why we need to pass the Equality Act. That's why we need to pass the e r A. Because there are moments in history for states fail to preserve

the civil rights of our peoport. But we saw political confrontation taken to a whole new level in the debate between two Republican candidates trying to win the nomination for the Senate in Ohio, Josh Mandel and Mike Gibbons, when they came about as close to fisticus as you can get on a stage on live TV. Watch what happened?

Watch what happened. But then again, maybe they're following a more ancient tradition, one going all the way back to eighteen fifty six, when Congressman Preston Brooks of South Carolina went on the floor of the U. S. Senate and took his cane to Senator Charles Sumner of Massachusetts, nearly killing him right in the miliv of speech. Admittedly a

somewhat lurd speech against slavery. And although we may have come to exp BacT somewhat better of our senators these days, there's still always room in the government of Turkey or Mexico or Taiwan for a good old fashioned brawl. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.