Bloomberg Wall Street Week: May 20th, 2022

Sam's l Sharmon and founder of Equity Group Investment. In Bloomberg wool Street Week with David Weston from Bloomberg Radio. It is a process of choosing political candidates for the fall, of strengthening the coalition, confronting Russia, but most of all of coming to terms with a tightening FED. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers of Harvard on what can get the job done? On inflation This is a feature not above

associated with the tightening of monetary policy. And Tom Tapira of g t I S Partners on risks to the housing market. As interest rates rise, the consumers stretch and that is certainly going to be an issue on a going forward basis. This week we did a lot of preparing recurring to add Sweden and Finland to NATO when the leaders of the two countries paid a visit to President Biden at the White House. Well, it's incredibly historic and this completely reshapes the post called war security alliance

in Europe. Finland and Sweden make NATO stronger. Preparing for midterm elections less than six months away, as five states held primaries, though in Pennsylvania, Republicans have some more work to do, as Senate candidate Dave McCormick explained, Now, we have tens of thousands of mail in balloasts that have not been counted. But we could see the hath a head, We could see Dandre ahead. But no one and I mean no one, is preparing harder than FED Chair J.

Powell preparing for the next round of rate hikes. Inflation is coming down. That's what we really need to see. Honestly, We'll just where we will go until we feel like we're at a place where we can where we can say yes, financial conditions are an inappropriate place. Equity markets this week, believe the Chair, and if that weren't enough, then chilling news out of retailers like Target and Walmart

reinforce the idea that harder times may lie ahead. With the SMP down for the seventh week in a row, the longest losing streaks since two thousand one, and though it flirted with the bear market, it came back late on Friday, ending just above thirty nine hundred, down three overall for the week, while the NAZAC, already in bear territory, was down another three point eight percent this week. But the bond market was a different story, with a tenure rallying for the second week in a row, ending up

with a yield below two point eight percent. Tell us sort it all out. We welcome to Bob Michael, he's ce IO of Global fixed Income, Currency and Commodities at JP Morgan Asset Management, and Sarah Maleck, chief investment officer at now Vene. So welcome both of you. It's great to have you here. Sarah'm gonna start with you because it was so much activity in equities this week. What happened? Daven There was three key drivers for the market this week.

First was the retail wreckage, which shocked investors on Wednesday because we saw demand destruction. Consumers are not willing to pay anything for goods anymore. And secondarily, we finally did see that shift in spending from goods to services, but it came with a healthy dose of inventory building up. On the good side, this is not good for retailer's business model. So Bob Sarah says, maybe the faith can take its foot off the gas on interest rate heights.

What do we see in the bond market, because we had seen that really dramatic ramp up in the yield of the tenure and then it sort of plateaued the last couple of weeks. Well, David, unlike the equity market, the bond market actually found solid footing this week. And it all started when FED expectations of rate hikes settled

at around two and three quarters percent a year. And I know that's two percent from where we are now, but earlier this month it was at three percent, and the concern was that it was headed north to three and a half or higher. Once FED rate hike expectations settled down, the treasury market settled down. You said we're at two eighty. Last week we were at three twenty, and again the concern was that we were headed to

three fifty. It feels as though the market is getting very comfortable with the narrative that the path to a three percent FED funds rate will be enough for now to slow down growth and inflationary pressures, or at least get the Fed to pause. Now. Look, I'll admit it wasn't a perfect bond market. Corporate credit still had a tough week, Thanks very much equity market and Sarah. It was the lousy earnings that Sarah talked about, and we had high yield yielding now eight percent. It started the

month at seven percent. Bob, Sarah raised, recession. How do you see the likeliest recession? I think most people I've talked to not over the next twelve months, But you go about twenty four months, it's different. I think when you look at the next twelve months in the US, you still have to get through this summer where there's a lot of pent up demand for travel and leisure, and unemployment is still very low, wages are going up.

I think when you start to get out eighteen to twenty four months, and then you're looking at a lot of things, you're looking at where rates will be. The cumulative impact of rate hikes, we think they'll be about three. You're looking at the bite that inflation will have taken out of the economy. You'll have another year year and a half of higher inflation than the consumer would like

to see. You'll have a strong dollar. It's still possible for the Fed to engineer a soft landing, but frankly, it looks very aspirational when you figure they have to battle the highest rate of inflation in forty years and drain away the greatest amount of liquidity we've seen in the history of Earth. So Sarah Bob's right, what does that say to equities? I think you know, for equities it definitely leads to more downside in a recession innary environment.

They have not priced in. And but that's also why we're looking for those companies that are less dependent on economic growth. That does lead us to growth stocks. They have some of the worst returns here to day. And then also fundamentally strong sectors. Energy as a sector we still like because of the fundamentals tight supply, demands remain reasonably strong, and producers are being very disciplined. And then finally,

dividend growers. If you look at history, companies that have strong balance sheets cash flow can continue to grow their dividends. They'll give you that portfolio protection within equities and should perform quite well while the friend raises heights and be defensive during a recession. Okay, Sarah, Bob, we're gonna be staying with us because we want to put some money to work here. We're gonna ask them for some investment advice given what we are seeing in this tumultuous market.

That's next on Wall Street we on This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This was the week when the stock market stage what it you sphemistically calls a correction, plunging below the one thousand

mark for the first time since mid November. Came amid growing investor concern over the state of a dollar at home and abroad domestically, how much it's going to cost in terms of escalating interest rates on the dollar and abroad, how much it's going to be worth in terms of other currencies whose relative value was on the rise. That, of course, is Lewis Rock has around Wall Street Week

nearly fifty years ago. Now remindings of the similarities and for them, mat of the differences as well between then and now. Sarah Maleck of Nouven and Bob Michael of JP Morgan have stayed with us. So Bob, will we come back to you. It is a different time, although there are some similarities. I'm not sure I there's a correction or we're actually seeing a downright to bear market right now. But let's talk about investment in fixed income.

Where are their opportunities from your point of view. By the way, I hope it's a correction, because if I'm right, I think it took about ten years for the doubt to get back up above a thousand from that taping. Look, when we look at the repricing in the bond market, it's been dramatic. For the first four or five months of the year. It's been the worst bond market in history by a lot of measures. We want to take advantage of that. We think it's gone too far. I

was in Kentucky visiting clients. There was a lot of discussion about municipal bonds and there are a lot of individual and institutional investors that are looking at muni bonds yielded one percent a year and they're now yielding over three percent on a taxable equivalent yield that's about five and municipal finances actually look pretty good. The other area that we're getting back into that looks pretty attractive to us.

I touched on earlier. It's high yield. You're at an eight percent yield, You're at seven percent at the start of the month, you are four and a half percent at the story of the year. A pretty dramatic repricing, and I think a lot of investors have just fled the market and forgotten that it's a cleaner market. Six percent of the market defaulted away in twenty You've got a lot of middle American industrial companies in there with great fundamentals. To me, that's where a lot of value exists.

I want to come back to high yields. But Sarah, what about munis, because I think you're interested in those as well. Right. Yeah, for fixed income in general, rising rates are going to be aheadman, But similar to Bob, we don't see rates rising to the degree that they have year today. So for fixed income, there are areas where you can lean in municipal bonds to do have

strong fundamentals at the front end of the curve. We're seeing high yields and in taxbill fixed income, we like corporate credit those companies and sectors with strong balance sheets, but also emerging markets. In hield, you're getting a good return now, much better than you did in the past. So both all of those are areas that we like

in taxible, fix and munis. So I'm really curious about the high yield because there's a lot of talk about possible the spreads, as they say, blowing out on high yields. So you don't want to be high yields when that happens. Are you confident that's not going to happen? And when you have rising range, don't you have to be worried about some defaults? Um you have to worry about defaults

right before recession. And our analysis shows that any backup in high yield credit spreads is a buying opportunity unless a recession is imminent. Expecting one two years out is an imminent because we know anything can happen. So for us, credit quality still looks great. The yield is there. There's a lot of money on the sidelines that needs to put yield into their portfolios. As long as things remain stable,

we think that money will come in and support the market. Sarah, you mentioned earlier some of the equities you're interested in. You mentioned energy for example, you mentioned Microsoft, maybe Costco. What makes you interested in those particular sorts of equities? So within energy, we love the fundamentals of the sector type supply, strong demand, produced discipline. Particularly refiners we think can benefit if benefit at this point in the cycle.

Within the fank socks, we don't think that they're dead. You just need to be selective. Look for ones with less competition, more of a unique business model. Not only Microsoft, but Amazon. They had a very tough quarter that they've really in a sense overinvested in their logistics. They have no so much control over their global distribution. It's going to be a positive for them and pay off in the long term. We don't look at Amazon as a post pandemic SOOFT that's just going to suffer from here.

So on the on the fixed income side, is there a corporate bond sort of tracking of what Sarah just said in the equity side, are those the corporate bonds you're most interested in? UM, I think it's just so broad based. Now everything got thrown away. I wish I could say there was a particular market or sector but everything cheapened up so dramatically. It's just a matter of going in, having the nerve to buy when everyone else is selling, and just hanging on for a little bit

and ride through the volatility. But what if, in fact there is more of a chance of recession than we're anticipating. How do you hedge against that? How do you protect yourself up? Well, I think there are a couple of things. One is you have to go up in credit quality, because if in fact we do go into recession, then you are going to see default rates go up. Then there's going to be a flight to quality. So not only do you want higher quality corporate bonds, you want

government bonds again, regardless of the yield. We've seen that you could be anything in the government bond market, and then you want to still stay in the dollars. So those are the kinds of things where you would go to a recession became really probable near term. So, Sarah, what about the dollar? I mean, we heard there Mr Rukheiser so fifty years ago talking about the dollar. Boy,

we've had a very strong dollar. This week we saw maybe a little bit of a backing off in the strength of the dollar, do you have a theory on the dollar and how does it affect your investment strategy. I hate to say anything different than lou Rukheiser, but are we are in the camp that the dollars should remain pretty strong in the US is a safe haven trade.

There's so many geopolitical risks out there, from the rush of Ukraine's situation to the lockdowns in China and the supply chain issues that they're having, and also can that monetary policy really have an impact? So we're very selective non US. We only like Latin America at this point in emerging markets, dollar remains strong as the US raises interest race you think that you know that's it's flat,

that likely remains pretty strong going. So Sara also wants to ask you the same question as Bob on the equity side. For example, if you thought there was a larger chance of recession than you've said so far, how would you headge against that? Well, first of all, I think market time ring is a loser's game. The market can turn on a dime. We've seen that happen consistently this week. So we don't recommend people trying to get

in and out of the market. This is where you need to be diversified, disciplined averaging into the market, and then you just need to look for those companies that are resilient in those sectors where they can continue to perform well because they have the profitability, they have pricing power to overcome inflation, strong free cash flow, strong balance Shee sets where we'd be positioning inequities, say out of you know, unprofitable technology companies where you know you might

have they might have a hard time surviving during a deep recession. And Bob sort of finally, Warren Buffe and others have said, you want to buy when others are selling in the reverse? Right right now, as you look at the marketplace, where are people selling that you'd like to buy, they're making a mistake. Well, I think we've talked about corporate bonds. I think that was a big mistake. I think there was a lot of selling of municipals.

I don't think that was a mistake. I think what that was the technicals because they had to rap cash to pay capital gains taxes at the start of the year. I think some of the emerging market debt sectors look pretty attractive to me. I'm glad you raised that because I was going to ask about outside the United States. You think emerging markets maybe attractive on the fixed incomes out, Yeah,

because they've gone through a rate adjustment. If you look at the US, we've done two rate hikes for seventy five basis points. If you look at the emerging market since the start of we've had something like a hundred and thirty rate hikes for accumulative eleven thousand basis points. There are high real yields there. They front run the inflation. They're in a good spot. This has been a great discussion. Thank you so much to Bob Michael of JP Morgan

and Sarah Manic a movine. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The housing housing a kind of climate and climate and climate housing. We all need it. There isn't enough of it, and prices are going up. Part of the problem is that we never really recovered from two eight. According to Jonathan Gray of Blackstone, the challenge on housing has been many years

in the making. If you step back and look at the supply picture, we have been building housing at half the rate we did prior to the financial crisis and the Fed's monetary support for mortgages has helped stimulate the market. It was very hard to understand why when we were in the midst of the biggest house price run up ever that the FED was by mortgage back securities on

us substantial scale. But now mortgage rates are pushing the other way, climbing back up over five driving the Housing Sentiment index down the most since the pandemic, which leads Wells Fargo CFO Mike Santa Masino to anticipate softening in the market. I think we've seen you know, if if it's not the largest increase in mortgage rates in a quarter ever, it's pretty close, um, and so I think that's definitely going to have an impact on the mortgage market.

And this week's mortgage applications seem to prove that point. Down eleven percent, people are not entering into contracts, are trying to buy homes anymore because it costume much and to take us through this housing market. Welcome now. Tom Shapiro, He's president and chief investment officer of G T I S Partners. They manage about four point three billion dollars in real estate assets. Tom, thanks so much for joining

us on Wall Street Week. First of all, I want to start with your take on where the housing market is right now. We've seen some slowing even this week with some new house in sales as well as existing housing sales. Sure that first, thank you so much for having me on the show. Why don't I just give you a little anecdotal evidence of what we're seeing in

the field right now. Our home sales are down about fifteen to but that's a headline number, and you know, I think it would be helpful to kind of dig a little bit deeper into that number. The reason, for the most part is down is because we can't deliver homes. We're still having tremendous supply chain issues. Also, we find that a lot of home builders are actually holding back on the number of homes they want to deliver, and

that is for a couple of reasons. One inflation because costs keep going up and they don't know what it's gonna actually cost to finish the house. And and too they want to ride up the home price appreciation. So I would say, for the most part right now, while we see a fifteen to slow down in sales, your over year, a lot of that is because of other extraneige issues. It's more of a delivery issue than is demand issue. With that said, we're definitely starting to see

a pullback. We're starting to have to go deeper into our wait lists. But every house at this point that we deliver in the markets were in, we are selling. But I think we have to be careful about what we see, you know, on a going forward basis, because definitely we're starting to see things slowing down. But that's a really helpful way of putting up because we're having those discussions about the overall economy. Is it supply, is it demand? Is I understand you've got a supply problem

because the supply change. People say that's going to go away? Is it going away? And how's it? Well, it's not. I mean, we definitely have issues. We have problems getting trusses and windows and appliances. Um, we're delivering homes with plywood windows at times. Um, it's we're having all sorts of issues. And of course you know the war in Ukraine and what's go on in China and the work

stoppage is there. Um, the deliveries and transportation is an issue, and jobs are an issue, and trades are an issue, so it's gotten marginally are but we still have tremendous supply chain issues. Uh. And look if you look at how many houses were delivering a year in total, this is all all forms, it's about one point two million housing units a year, which is sort of in equilibrium. So Tom, some of the issue can be on the

demand side. At some point. We've heard about mortgage rates going up to what five point five percent something like that, so that must affect it to some extent. Are you seeing some effects with that because we also have the FED is going to start selling off some of those mortgeback securities. Yeah, for sure. I mean, look, the consumer stretched, so why are they stretched a stretch because of inflation?

So we have all sorts of issues. We have gas prices are more expensive, and we have the costs of food is more expensive, and of course, as you point out, mortgage rates are our own issues. So the consumer is stretch and that is certainly going to be an issue on a going forward basis on housing. But we are seeing you know, people taking less options, they're going to slightly smaller unit types UM and their renting, So we aren't necessarily seeing a slowdown at this point because of

Morgan traits. But again, I think we have to be careful. I think, you know, the crystal ball says it's going to get a lot worse. We're not seeing it today, but I think in the future where I'm going to see a slowdown. Um And as I mentioned, so we're seeing your over your decline at this point isn't a demand issue. But I think we shouldn't kid ourselves that we are seeing it again. Our traffics down in a lot of our communities. It is starting to slow down.

So I think we're gonna start to see the slowdown common The next couple of quarders, Tom, thank you so much for joining us at Waalter Week today. That is Tom Shapiro of G T I S Partners. Coming up. We wrap up a week with our special contributor, Larry Summers of Harvard. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is Wall Street Week. I'm David western We are joined once again by our very special contributor in Wall Street Week. He is Larry

Summers of Harvard. So, Larry, this was quite a week in the market. You saw equity markets and really selling of rather substantially. It's got a lot of people nervous. Is that gonna help or hurt the Fed's effort to address inflation? I think it's part of the Fed's efforts to address inflation. The way monetary policy works is by raising the costs of capital and discouraging investment. The way it works is by reducing wealth, which reduces spending. This

is part of the process. This is a feature, not a bug, associated with uh the tightening of monetary policy that we've had, and the reason I've been reasonably confident that the economy will slow down but not so confident about just where interest rates will go is because of the uncertainty about what economists call the transmission mechanism, how large a decline in markets, how much of a discouragement of housing you get as rates go up. Well, it's

at that very point. What is the risk from where you see it right now, of the Fed essentially getting cold feet as we see the markets really come up substantially SMP now really in bear market territory. What's the risk that they'll let up too soon on the interest rate hikes. Look, there's two risks in a situation UH like this, that we overshoot the runway and that we land the plane too hard, and those are both very real risks in UH this situation. It's a very very

difficult landing that the FEDS attempted. Is I've said on your show before, David, there's never been a moment when we had unemployment below four an inflation above four when we avoided having a recession within the next two years, And that just goes to show the huge difficulty of the task UH that is before the FED. My own judgment is that it's distinctly more likely than not probably two and three or three and four, that we will have a recession that will start UH sometime within the

next two years. When we look at the markets right now, a lot of this reaction we think is a reaction to the possible of higher interest rates. Is it possibly it's actually bleeding over into the underlying economy itself. Because we also saw some retail sales numbers that concern people from Walmart and from Target this week. Maybe people aren't spending as much money. We also have seen some softening

housing numbers. There are various indications and by the way, a lot of the things that people are buying, their buying with increase credit card loans. So I think that the prospect of recession is looking much more real to markets right now than it was a few months ago. You see that in UH the way in which certain retail stocks have been hammered. You see that in the way some credit spreads have UH widened UM and it's just you see it in the behavior of the overall

UH market. So I think you still have UM more room to go. And as I say, I do think we're unlikely to get out of this with sustained expansion. There are some thoughts. There are other ways as well to address the inflation problem. One of the suggestions is increasing corporate taxes. That's something suggested by President Biden. Mr Bizos, Amazon came out against that. You had a little bit

of a disagreement on Twitter this week. I've been hardly consistently supportive of everything the White House has said on fiscal UH policy, and now I haven't been consistent with everything they've said on policy towards business UH either. And I've got great respect for Jeff Bezos as a business leader and as an observer of the economy, but I

didn't really see his point. It seemed to me that it was pretty natural to raise corporate taxes so as to reduce spending when you had an economy that was overheating. And it seemed to me pretty reasonable strategy to try to raise taxes to reduce spending in ways that would affect the most fortunate people in uh, the society. And it seems to me that that's what President Biden was is trying to do, and that's what he pointed up

in his remarks. So I didn't understand why, uh Jeff Bezos was suggesting that they were somehow an obfiscation or somehow an inappropriate uh kind of commentary. You can agree or disagree with the President's policy, but I found Bezos's comments, uh to be somewhat off base. Another way that President Body suggests we might address some of the inflation problem

is by more vigorous enforcement and trusts. We had the Assistant of Trade General for antitrust this week come out and say he thinks he's got some problems with private equity. What do you make of the efforts at the FTC and the Probate of Justice on a trust front. I'm very worried about whether they are in the right direction. I don't think there's any question that we need to

step up INTI trust enforcements in America. I don't think there's any question that there are areas where we have too much monopoly power that should be process that should be prosecuted prince ably, where individual firms are merging to get excessive market shares in particular industries, and the budgets of those agencies have been allowed to erode in ways

that are quite damaging. What I think is badly misguided and potentially dangerous to our economic future is the set of doctrines that people jokingly referred to as hipster uh antitrust or the new Brandisians after Justice brandis. That's a theory that says antitrust shouldn't be about maximizing benefits to consumers, but should be about some other different set of abstract objectives. And I think that tilts very easily into a kind

of dangerous populism. If the head of the antitrust Division thinks that there are mergers that are headed towards monopoly, he should try to block those mergers. If the head of the antitrust Division believes that there are companies that are engaged in inappropriate exclusionary business practices, he should prosecute

those companies. Okay, there are one quick one here. At the end, there was a big objection from the shareholders to Jamie Diamond's conversation was a fifty million dollar bonus that they were going to pay him that they really objected to. What did you say that? Look, I think taxes ought to be more progressive, and so Jamie Diamond, Jamie Diamond and everyone else who makes a lot of money ought to be uh paying more in taxes that ought to be much harder for them to pass large

fortunes to UH their kids. But God, if you look at what Jamie Diamond has contributed to the market value of the share owners of JP Morgan, I don't think there's anything unreasonable about his being paid and making as much money in a year as a really great pro golfer.

And uh, so I was surprised at those objections. I think the way to get at issues of inequity is to have more progressive taxation, more burdensome taxation on the states, get rid of a whole set of UH loopholes, but driving people out of leading public companies into the private sphere away from public companies. I don't think that's smart strategy for our country. Okay, thank you so much. Always great to have you this. That's Larry Summers of Harvard

are very special contributor here on Wall Street Week. Finally, one more thought, the unknown unknown. That's what Donald Rumsfeldt warned about when he was Defense secretary. There are things we know, things we know our issues but don't know the answer to, and then there are the things we don't even know. We don't know. Right now, investors face their fair share of known unknowns, like where inflation is heading.

You know it's not going to be good for a while, Whether we're facing a recession next year, every single American workers going backwards right at this minute, whether China's problems with COVID will continue, our supply chain problems. Clearly China's industrial might was slowed by the lockdowns. What the endgame is for Russia's war with Ukraine. I think the off

ramps have gotten slightly narrower. And of course, whether we're facing another wave of COVID cases, are organizing hospitalizations arising, But those are the known unknowns, Congress has now added an unknown unknown to the list we need to be worried about UFOs. The House Intelligence Committee's Subcommittee on Terrorism held hearings this week to get some answers on unidentified

flying objects. We have seen an increasing number of unauthorized and or unidentified aircraft or objects in military controlled training areas and training ranges and other designated airspace. And in case you wonder why our Congress was so much else on its plate, has decided to take up the question

of UFOs. Fear not, it's been on the case for over fifty years now, dating back to Gerald Ford, now when he was president, but when he was House Minority Leader and organized the hearing after complaining the testimony from an Air Force expert calling reported sightings swamp gas was flippant. So as you go through your portfolio and consider the upside and downside risks, you might want to include the

possibility of alien intervention. That, as Rod Serling put it, we've moved into a land of both shadow and substance, between light and shadow. It is an area which we call the twilight zone. I'll leave it to you decide whether that's a risk to the upside or a risk to the downside. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.