Bloomberg Wall Street Week: Mobius, Tett, Wheeler

SEC Chairman Jay Clayton. Bloomberg wool Street Week with David Weston from Bloomberg Radio. Big Brother is doing more than just watching. It's spending and regulating and providing liquidity, and it's not going away anytime soon. This is Bloomberg Wall Street Week. I'm David Weston, I'm from the government, and I'm here to help you. Well. That used to be a sort of sarcastic joke, but this week Global Wall Street got a taste of just how much the government

is intertwined with our markets and with our businesses. From Fed chair j Powell and Treasury Secretary Janet Yellen, reassuring markets they'll continue to be there for them. So at the FED, we will continue to provide the economy the support that it needs for as long as it takes. We should be clear eye that that's the whole we're

digging out of. Two big tech company CEO is being taken to the woodshed once again by Congress to state governments deciding day today how open their economies will be. So it's no surprise that the markets this week basically paid attention to the FED and prospects for more spending with or without taxes, and prospects for reopening. How does an investor make decisions in this world so dependent on

political risk? We asked our roundtable of Jillian Tet, chair of the editorial board and editor at large US at the Financial Times, Peter Krauss, chairman and founder of Aperture Investors. Well, David, that is a terrific question, because I think a lot of investors right now and ordinary people are desperately keen that when the pandemic ends, they'll go back to normality, and they assume that normality might mean an economic recovery

and some kind of political peace. We'll go back to the kind of analysis of the economy that everyone's tool about an NBA and things like that. But I think that assuming that political risk is going to disappear after the pandemic is probably a big mistake. Because we've seen the government intervene in the economy to an astonishing degree during the pandemic. The question of how it does or does not roll that back could prove to be very

politically divisive. So, Peter, what about as an investor? As I say, this may be oversimplifying it, but it was basically be in the market, you'll do fine because the government's going to bail you out. Now we're in a different world as we look into recovery. How does an investor take an account what the Fed may or may

not do. J Pale seems to saying, just let them play right now when it comes to the tenure yield and then we have more spending coming out of Congress, how does an investor take that on into account or

do they Well? I want to build on what Jillian said, because I think it's a very it's a very significant probability that the voter or the populace decides that the positive impact of government stimulus in the size and scale that it has taken over the last eighteen months is a positive and that trying to redistribute wealth into a broader base might actually be a good thing. The economy stronger, the markets up, interest rates haven't risen that much, Inflation

is not out of control. I like this, I want more of this, and I think Jillian's right on the money that that's going to continue. Now. The interesting thing about that is that we've been through thirty years of declining interest rates. Let me give you a couple of facts that I think is interesting. Over the last ten years, inflation is one point seven over that last ten years, the average US Treasury yield is two point two. That is a negative rate of interest real rate of interests

of fifty basis points. I see positive of fifty basis points. You subtract the yield two point two minus the one point seven. Okay, So today we have one point seven uh tenure at one point six tenure, and we have an inflation to trying to get the two. Well, that would give us a negative yield. Well, how long we're

going to have that negative yield? We can't have negative yields in a period of prosperity growth, Government stimulus, fiscal stimulus, and the things that Jillian is talking about so as an investor, the backdrop here is rising rates, rising rates secularly over time, and growth, but that will lead to periods of inflation, and those periods of inflation will hurt equities, they'll hurt bonds. So as an investor, fundamental investing is going to become more important. And the backdrop you have

to assume is growth, higher inflation, higher interest rates. So, Jilian, what does that do for overall GDP growth? Where the United States but global growth? As practical matter, are you looking at increasing GDP growth even without further fiscal stimulus? I think absolutely we are heading to a big rebound, call it the Roaring twenties if you want to call

it anything else. And the fact that we're having basically a rebound after the pandemic, coinciding with these extraordinarily large fiscal support programs and super loose monetary policy is a very striking combination. As Peter says, the fact that we have negative real rates right now at a time when people are forecasting six growth in the US economy is astonishing if you want to be charitable, or I would say completely nuts um, And I think that the fence

on the nuts point Julius. Well, I've been open about this many times. I think it's completely nuts. I think the biggest mistake that's BED made was to be give

the impression it was time dependent. I it was setting Fed policy according to a timeline rather than data dependent, i e. Reacting to the data and the fact that the Fed keeps indicating it's going to keep rates super low until I think it is setting itself up for a very nasty accident, because I would agree with Peter that there's a chance that the markets are going to start putting pressure on the BED to act sooner rather than later, and that would really wrong for investors. And

one quick thing to think about. Everyone's talking about the roaring twenties. You know, boom, boom, boom. Isn't that great? Remember what the rowing twenties of the pandemic then led to MATHI stock market bubble, It burst, huge political upheaval and tension, and it's not difficult to imagine that could be the kind of scenario that we're heading for again now. Thanks to Jillian Tett of the Financial Times and Peter Krauss of Aperture Investors, coming up, Turkey makes yet another

about face on monetary policy. We ask the Dean of Emerging Markets Investors, Mark Mobius, what it means for Turkey and for others. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Turkey's President of Urdawan shook markets again by replacing the head of his central bank again, this time after just four months on the job. Naji Abal was the third central bank chief ousted in less than two years.

Here's former British Ambassador of Turkey, Sir Peter Westmacott. President has headed in his head for a long time that high interest rates are a cause of inflation, and most orthodox economists think the opposite. Mr Abal's successor, Shahab kab Jolu, falls more in line with President Dans unorthodox thinking about

interest rates and inflation. Well, we were really expecting, given the heights that we've seen from the previous sample bank governor, that eventually inflation will started going down, and it would have if they had maintain policies um and their credibility. That's shamilaka On, director of Emerging Market Debt for Alliance Bernstein.

Cavolo's predecessor raised interest rates by eight hundred seventy five basis points in his short tenure, trying to slow Turkey's inflation, which runs at about fifteen percent a year, but putting a more devilish central bank chief in place. It didn't sit well with foreign exchange traders. The lyra plunged as much as fifteen percent on the announcement. Here's John Hardy,

head of FIC strategy at Saxo Bank. If you look at how that the behavior in the Leri has been versus the rest of emerging markets, it's it's pretty idiosyncratic. It's its own story. This isn't the first time that the lira has struggled. There was a currency crisis in two thousand and eighteen after President Trump double tariffs on steel and aluminum imports from Turkey, and it's stabilized only after the central bank took rates all the way up to two for almost a year. By two nine, rate

cuts started coming back. Markets didn't like that. Even though the new governor has not yet reversed the interest rate hike, which was implemented last Thursday, and he has said that there won't be a feather adjustment for another three weeks. That again was Sir Peter Westmacott, former British ambassador to Turkey. In a speech to his ruling party this week, President Urdwan tried to win back the trust of international investors,

assuring them that the recent volatility doesn't reflect Turkey's economy. Again, here's Alliance Burns Stein's Shamela Khan. It's going to be very hard to get credibility back. I think the best they can do is try to stabilize the situation. Um So, stability in the situation is probably the most optimistic scenario. The central bank game of musical chairs is holding Turkey

back during an emerging market's revival. Flows into the world developing economies have increased tent in the past five years, while Turkeys have fallen. It is going to be a very selective year for emerging markets, and it will be

for whisk asses as well. That's Bloomberg Opinion columnist Mohammad L. R N. To understand what happened in Turkey and what itould mean for investors, we turned to the man who pioneered investing in emerging markets, Mark Mobius, partner and co founder of Mobius Capital Partners, and he said, it all starts with the currency. In all these emerging markets, everybody's focused on the currency. I mean the first question I get whenever I talk about emerging markets, clients say, what

about the currency? Is there risking the currency? So, and of course the central banks are supposed to be responsible for a steady currency in the currency that's not volatile, and so whenever you see a central bank being a leader being replaced, that creates a panic. Despite the fact that if you notice the statement about the new central bank the governor in Turkey, his objective will be to have a stable lira, Turkish lira. So I think it's

probably the reaction was overdone. I think it was did not make sense to have that kind of reaction, but it was expected that whenever you have this kind of change, the and see will get weaker. But I don't think the leader will continue with this weakness. I think it would be steady going forward. How do you protect yourself

as an investor against currency co operations? What we do is we try to look at purchasing power parity is one measure and other measures of whether we think the currency will get stronger or weaker, and then we if we see that the currency is going to get weaker or isn't getting weaker. We then make a choice of stocks which will benefit from this weakness. So in some ways a weak currency can actually help us to perform better.

So for example, in Turkey, we have one investment in the software company that exports its products, so they're getting far an exchange coming in and of course their costs sound Turkish leader, which is getting weaker. So that's the kind of thing we take into a consideration. So we try to emphasize that currency can be your helper instead of your detractive mark. One of the big subjects in the United States, but I think it also applies to

emerging markets. Is the so called reflation trade? Uh, is it coming? Is it here? As it already had its time? For example, all prices actually start to come down over the last week or two, although they spiked up briefly with that Suez issue. What do you make the reflation trade as an e M investor? Is this the time to go in for the countries and the stocks that

will benefit from the reflation or not? Well, First of all, I believe that looking at what the FETE is doing, we're not going to see a big spike in the inflation indices that we measure cp I. As you know, I'm not a great believer in those, uh, those statistics, but anyway, you're not going to see a big spike in those numbers. And of course the emerging market countries, in fact, the world you're included, looks at the US

and concludes that paid inflation in America is not going anywhere. Therefore, we're not going to get hit with that same kind of situation. So the expectation is, first of all, inflation will as measured by the CPI will not raise its ugly head number one. Number two, the U S style will get weaker because of the big spending program that the Biden administration has, And of course we're already seen emerging market currency is getting stronger against the U style.

There's been recently a little spike in the U style index getting a little stronger, but basically the U style index is at a weak point and probably we'll get weaker going forward, which again is very good for emerging markets.

As you look at emerging markets as investments, uh, do you divide it up between the investments that are really tied to commodities as opposed to those tied to i T investment and communications, because typically people talk about North Asia, for example, as being much more oriented towards communications i T, but some other places like Mexico, like Brazil being more

tied to commodities. That's a very important question because we have investments in Brazil, in South Africa and so forth, but we haven't been in the in the commodity area at all for a number of reasons. One of course is the environmental problem. You know, you have these environment challenges. Nevertheless, commodity prices have moved up very dramatically and very nicely. But we decided that we're going to focus on technology

and not only the software but also the hardware. We're looking at things like computer I sees the software that goes into semiconductors, that sort of thing. The nuts and boats because this explosion and technology and the Internet is going to be with us for quite some time. Of course, it's been accelerated during the COVID crisis, but going forward, we're going to see a continuing demand for these goods and services. Thanks to Mark Movius and Mavius Capital Partners

coming up. Text c eos have a showdown on Capitol Hill. Former EBSC chairman Tom Wheeler on whether there is a regulation that can fix misinformation on social media. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The CEOs of Facebook, Twitter, and Alphabet faced another round of grilling from lawmakers on the subject of disinformation and social media. Former FCC chairman Tom Wheeler has seen tech from both

sides as a regulator and as an investor. We asked him whether there was any regulation that could fix misinformation on social media. It looks pretty clear that there will be something that will be done to deal with the issues of information going to children. UM. I was interested that um Mark Zuckerberg as he was questioned by Congressman Welsh Um seemed to endorse the idea of a new digital platform agency, which is something that a group and

I have been advocating for some time. As you know, UM, So, I think that Congress is actually trying to find what solutions might be and that for the first time we began to hear the ceo s saying that they might

be receptive. So I wondered, Tom, from your experience Uh, can you have a new agency, a digital platform agency, really involved in this setting standards, maybe enforcing standards, and not curtail innovation, because that's the argument you always hear is once you start doing that, you're gonna really squash a lot. Innovation. Might not hurt Facebook, but it might

hurt the next Facebook. That is a really good question, and one of the things that we specifically in our proposal spent a lot of time on is how do you not um slow down innovation or investment. And the key to that is that we need to have irregulatory structure that relates to the realities of today's digital markets, rather than being built around the assumptions of yesterday's what

worked for yesterday's industrial markets. And then when you stop and think about it, the regulation that you and I are used to is industrial era concepts, industrial era structures, and we're not suggesting that's where you go now that those are rigid, sclerotic and can have a negative impact. But what we were trying to propose was that there needs to be a more agile approach to regulation that perhaps has built around the kind of ideas that delivered

as the technology revolution in the first place. And that's standard setting process that you know, you go from three G T, four G T, five G and now six G that they're working on the standards for to keep up with things. That's not the way that regulation industrial style of regulation works, but if that can be the way that a digital era agile regulation works. Toma strikes me as you think about industrial era regulation. Basically we're

regulating people. I mean, they might have been trains, but there was somebody driving the train or setting the price for the train. I wonder if that's true here because the thing making decision often is an algorithm, is not a person. Is that an entirely different way to approach regulation. Yes, And what is that algorithm dealing with? It is dealing with data, with digital information. So the capital asset of

the twenty one century is data. How did the companies that were before the committee managed to get such a choke hold on economic activity was because they control the principal asset, and that's data. It's the data that drives the algorithms. So just like Rockefeller controlled oil, they can troll data and we gotta say, okay, how do we make sure that there's inter connection amongst those data? So

that there's not a series of choke points. At the same time, the thrust of the hearing was about, as I say, extremism and disinformation, really focusing on the terrible events of January six at the Capitol, as well as some of the vaccine issues via XX issues about COVID nineteen uh. And I wonder whether when it comes to that, whether what we're seeing, the things we're objected to, is

a bug or whether it's a feature. And by that I mean this is I understand the algorithms they basically designed to say, take the most engaging piece of information, which, unfortunately, because we're human, is often the most controversial or the most outrageous, and put it up to the top of the queue. Is that a basic feature? Can you ever fix that problem? Well? It's kind of like Dr Frankenstein,

isn't it um? You know, you you create these software algorithms that then go run off and you don't even know what they're doing. So one of the big issues you gotta deal with is how do we get insight into what the algorithms are doing? How do you understand how do you get transparency? You know? Mark Zuckerberg, to his credit, keeps saying, well, we've got all of these kind of interventions. Okay, that's nice, but we don't have

measurement for those interventions. We don't have oversight of those interventions. We don't know whether they're where you draw the line between a pr move and something that's really substantive and uh, and that's where we need to be going when we talk about an algorithm driven um economy. That was former FCC Chairman Tom Wheeler. Coming up. We hear from special contributor Larry Summers of Harvard about political risk and economic risk and how to tell the difference. That's next on

Wall Street read on Bloomberg. This is Bloomberg Wall Street

Week with David Weston from Bloomberg Radio. One of the most basic and immediate ways the government can affect the economy is through taxes, and this week talk about Texas was all the rage with reports to the White House is about to propose raising rates on corporations and on individuals making more than four dollars, with Secretary Janet yell And telling Congress that they needed to raise revenue to make long term investments such as infrastructure, and with Senator

Bernie Sanders interducing legislation to take the corporate tax rate right back up to Well, what could all this mean for our economy? When it comes to question like that, we turned to one place, and that is our special contrader, Larry Summers of Harvard for his perspective. So, Larry, give us a sense, as an econoist a macro economist, what is the right level of taxation? What is it too much? I don't think we're near the point where it's too much, David.

We're looking at huge planned investments, hugely important investments, but limits to the economy's capacity and risks of overheating, ultimate limits on how much borrowing is possible. So I think it would be better if we could pay for as much of that investment as possible. And I actually think the United States is now in a position where there are many ways we can raise tax revenue that will

actually make the economy function better. As I've said before on your show, we could raise over a trillion dollars in ways that we make the tax system fairer, in ways that would reduce evasion activity, simply by doing a good job of enforcing uh the tax law. There are plenty of shelters carried interests is just one example ten thirty one. Real estate exchanges that avoid capital games UH is another. Loopholes in the estate tax is a third.

There are plenty of examples of provisions that distort resources, that cause investments to go into less productive place is and at the same time cost the treasury revenue. I think there's a lot we can do in cooperation with other countries to prevent tax arbitrage across countries um eroding our tax collections. There's no reason why income should be

lost to cyberspace in the twenty one UH century. I think that there's no rational economic case for corporate rate reductions on the scale that President Trump UH legislative the Business Roundtable would have been thrilled to have achieved. UH corporate tax rate. There's no case for corporate tax rate.

So we can raise in the trillions of dollars before we do anything that even raises tradeoffs about adverse economic performance, and beyond that, even if there is some consequence for the economy, taxes enable us to invest Justice Holmes famously said taxes are what we pay for civilization. So I think phased in when the economy has started to overheat there's a compelling case for a much larger level of taxation,

and I hope the administration will work to achieve it. Lord, let's just pick up on one specific point you made, that tax arbitrage. Internationally, we heard from Janet Yelling, your successor as Secretary of Treasury, this week saying she favors a minimum corporate tax, but that should be done in coordination with other countries. Would you favor a corporate minimum tax if we don't have that corporation coordination, because as a practice the matter, is there any chance at all

we're gonna get it? I think we could. I think we should have some kind of corporate minimum tax. I think that if you report to your shareholders substantial profits, you should pay corporate taxes. And that should be a core principle of the way our tax system is designed. And that's something we can do, uh, purely domestically. Beyond that, I think there's very substantial will in most of the other industrial countries for cooperation to go after tax shelters,

and particularly to go after tax havens. This is something that I worked on, uh, frankly, back in the ninety nineties when I was Treasury Secretary and we were making real progress against tax havens and regulatory UH havens. The incoming George W. Bush administration thought that that was somehow morally wrong, and so they undid everything that we did. But I think that it's time to go after all

of that again. And I think that there's no question that if you look at the tech companies, the Europeans are right that there are substantial abuses in which they don't pay on a global basis, nearly the tax rate that they should on their income. And I think we should as a top priority, frankly, as a higher priority

than any new trade agreement. When we talk about an international integration globalization agenda, UH, tax cooperation ought to be at the very top of UH that list, along with regulatory enforcement to make sure that we don't have regulatory races to the bottom. Learn I want to let you go before we go back to a subject that you and I have talked about before, and that is a question of an inflation, because there's talk about whether this could be like what we saw in the sixties and seventies,

particularly during the Vietnam War. We have, for example, your fellow O'Connors, Paul Krookman saying it's entirely different because they had a long time for that to come, we could react to it. We have some banks now saying it really is quite different. Do you think that it is

that different? No. I think the main differences are that the fiscal expansion now is three or four times as large as l Vj's guns, and butter that the FED didn't dream of blowing up its balance sheet running rates at zero, saying that it didn't believe in acting in advance on inflation in UH that era, that we didn't have a flexible currency that UH could decline. So I think if there are any differences, the differences are such

as to make one more concerned UH now. And I think the assertion of commentators like Krugman that this took a really long time is just wrong. Inflation in some months UM had a one handle on it in nineteen sixty six, and three years later in nineteen sixty nine, and some certain months it had a sex handle. So the idea that it can't ratch it up quickly is just plain uh wrong. And so there are there are differences. We have had a different different history today than the

history we had before. Nineteen sixty six. But I actually think there is many differences suggesting this could be worse, as there are suggesting that UH, this UH could be UH could be better if you were looking to un

anchored inflation expectations. How having the FED Chair say that the FED is going to have a new regime and is no longer sure that overheating the economy leads to inflation, and having the administration say we're an entirely new progressive era where policy is gonna differ radically from what it has been for the last forty years, those would seem like the best things you could do if you were trying to un anchor um expectations. So it may all work out. It may be that a way will be

found to bring it under control. But as I look at three trillion dollars of stimulus, two trillion dollars of savings overhang, a major acceleration coming from COVID in the rear view mirror rates rates expected by the Federal Reserve to be at zero for three years even in a booming economy, record growth UH this year, major expansion of a FED balance, and much stimulus story. Thank you, thank you so much, Wall Street week Special Continual Larry Summers

at Harvard. Finally, one more thought. A bad day at the office. We all have them, those days when nothing seems to go right, when as hard as we try, it all goes wrong, and we get the blame, whether or not it's our fault. So on a week like this one, we can take some solace from the fact

that we're not alone. We could be. For example, the revered Chancellor of Germany who declared that she'd shut her entire country down, not even letting people go to the grocery store for five full days over the Easter weekend, only to admit she'd made a bad mistake just thirty three hours later. They're not find the idea of a so called easter lockdown was a mistake. It had its good reasons, but in such a short space of time

it wasn't possible to implement well enough. And then their Senator John Kennedy of Louisiana, who decided to take on Treasury Secretary yelling Or for the relatively obscure question of increasing special drawing rights for the I m F, only to get in a very public disagreement over how they work and managed to trigger just about the first public display of irritation maybe even anger from secretary yelling that just about anybody has ever seen it will have to

issue treasury bills or UM get to do it, but I'm sorry, I'm sorry. But it will also earn interest UM on any any amounts that it converts on behalf

of further countries. But when it comes to a bad day at the office, even if your office is on a bridge, the prize this week goes to the poor captain of the container ship ever given, who managed to get a ship carrying twenty thousand containers and it was as long as the Empire stapling is high, stuck sideways in a narrow part of the Suez Canal, blocking all other ships from using the canal. Sure there was this ndstorm, Sure there were severe winds, but I'm not sure. History

always grades on a curve. So whatever may have gone wrong for you this week at the office, and I hope there was nothing, though I bet there may have been something. You can take some comfort and being pretty sure you won't go down in history for it. That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week,