Bloomberg Wall Street Week: November 11, 2022

just how hot the U. S economy really is. Through the eyes of the most influential voices Larry Summers, the former Tritory Secretary, Katherine Keating, CEO of the n Y Mallam Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We just don't know about the U S elections about inflation, and goodness knows about cryptocurrencies. This is Bloomberg Wall Street Week.

I'm David Weston this week special contributor to Larry Summers of Harvard on the good, the bad, and the ugly of U S elections. I'm quite encouraged, Uh, the center is holy. And Glenn Hubbard of Columbia on a Republican plan for building an economy for sustainable growth. An awful lot happened this week, but it's not yet clear what it all meant. The US held those much anticipated midterm elections, and instead of a big red wave, we got what

amounted to a little red ripple. The red wave didn't happen. Instead, we're going to have more divided government, with the full consequences is still up in the air. How do you get things done with the Republican House and eagerly evenly divided Senate in bodless process. We also got consumer price

numbers for the United States. They were good, coming in lower than expected on both the headline and the core numbers, but they left us wondering whether this was the beginning of inflations end for a false dawn, a significant improvement in the data that wasn't expected by the markets. And then we come to the wonderful land of cryptocurrencies. The so called Emperor of Crypto got dethroned, Sam bankmun Fried had to turn over the keys to his f t X kingdom to his arch rival Jao ching Ping, only

to have him promptly give them back. And then as the weekended, the other shoe dropped. SPF resigned to CEO as f t X filed for Chapter eleven bankruptcy, leaving questions about the broader crypto industry. One of the people that are kind of a larger speakers in this industry had said that we were looking for contagion in the industry. This is the contagion. But if the rest of us had some doubts for this week, the markets sure didn't share those doubts. The markets took one look at those

CPI members and never looked back. With the SMP five up five point nine percent in the week, it's best week since June, the NASDAC a a whopping eight point one percent, and bonds very much in demand, with the yield on the tenure falling thirty five basis points over the course of the week. Here to take us through what they saw in this dramatic market turn are Lori Calvacina, she's head of US Equity Strata for OURBC Capital Markets. And David Bianco, he's chief investment officer at d SO.

Welcome back both you. Good to have you here, be able to start with you. What did you make it this week? It was such a dramatic turnaround on Thursday show we believe it. I would not. I would take it with a grain of salt. What a week it was. The midterm elections and the inflation report, and let's not forget Veterans Day. Without our vets a big thanks for them, there wouldn't be peace. Uh. The inflation reports stole the limelight though for the week, and in arguably I don't

think it should have. It's just one data point. And whilst very welcome that inflation has come down from the highs, it still seems broad based, and particularly broad based in services, which suggests the labor market is still extremely tight. I'd argue that we see narrow disinflation at goods, apparel, used cars, and still broad based uh, service inflation. So I I

think inflation is still still a risk. And I just remind people that in October inflation was about six percent back then and so it's still about over six percent on a core basis. Now, that's a lot of inflation over the past two years. It's a really good point. I mean, we we like to focus on how much has come down. It has come down some finally, but

it's still at a very high level. And do we have any insurance it's going to keep coming down at a fairly brisk level that goes down to two percent or they're about well, look, I think it's all about where the numbers come in versus expectations, and if you look at street consensus, they're already baking in pretty significant moderation, you know, kind of heading back to three percent next year.

So I think it was, you know, not surprising to me to see such a fierce reaction and markets maybe not. I didn't expect quite as much as what we got. But I can tell you, David, I've talked to a lot of investors the last few weeks who have really kind of quietly arguing it was getting ready to come down building their models. Um, and you know, had gotten fooled by this, you know, several times in the past

when it didn't happen. And I think there was just tremendous relief that this kind of idea that inflation is moderating, that we finally got the data to cooperate. It's monitoring for one data point, Laurie, but we've had the chair of the FED say again and again and again, I need more than one data point. I need quite a few data points before I'm really gonna believe it. So do we think there's actually gonna change FED behavior at

this point? Well, I, you know, unfortunately, I think that the FED probably didn't like the reaction that we saw on Thursday, and I wouldn't be surprised to see the rhetoric, you know, take another kind of hawkish tone to try to clamp down enthusiasm. Um, I think things are going to stay choppy for quite some time. You know, Let's enjoy the day while at last it was a nice week. You know, we we've been in need of a nice

week in the equity market. Um. But I wouldn't you know, necessarily expect this to go up in a straight line from here. Dude, I want to other markets basically baking and really getting back down, if not to two percent, to sort of two and a half three percent. Are they a little complacently bond markets? But I think the markets are complacent. It's it's interesting how the bond market also yields fell upon the inflation report, and maybe that's

all that equities need to know. But yes, investors expect inflation to come down. But at this stage we can't keep saying. Eventually, it's important that the FED or other factors get inflation down quickly because we're looking on the verge of inflation for inflation becoming a multi year problem, and if high inflation is a multi year problem, that might change the entire inflation risk premium demanded by the bond market. So I think we're very lucky that the

bond market is staying calm about inflation so far. We shouldn't press our luck. So clearly, the CPI drove the markets this week and they drowned out any news about the mid terms? Was that right, David? Did we pay enough attention to do you think the markets to the mid terms? Well, you know, Lori and I were talking. It seemed like investors were trying to follow some game plan they had in mind about how the market would

rally post midterm elections, and Republican red wave didn't happen. Hopefully, the inflation report wasn't a surprise negatively, it was positively. But I think this has gone too far, too fast, and I think they did put too much emphasis on the inflation report trying to ignore the midterm elections, which are still on certain Laura Cavacina and David Bianco will be staying with us as we turned from what happened this week to invest around it next week in the

week after for that matter. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with

David Weston from Bloomberg Radio. In reality, a disillusioned American electorate quite plainly, sternly reassessed the empty promises of and concluded unmistakably that the incumbent administration not only had presented itself in false economic colors as something new rather than an all too familiar throwback to the nineteen sixties, but had been seriously off base and way out of touch

with the changing times. Bill Clinton has been campaigning for the start against the nineteen eighties this week the eighties one that, of course, was Lewis Rockeys around Wall Street back in when a different president's first midterm election ended in the repudiation of his aconomic program, and the number one movie in America was interviewed with the Vampire, while the number one song was I'll Make Love to You by Boys Two Men. What a difference thirty eight years makes.

Some people expected a similar rejection of President Biden's economic plans, but they didn't get it, as the two parties fought to essentially a draw, and the Democrats are on a path to losing fewer mid term seats than any party in power in twenty years. Still with us our David Bianco of DWS and Lori Calasina of RBC. So let me let me come back to you, Laurie for a second.

Let's talk about how you invest around what we're seeing right now, given what's going on the CPI, given some of the uncertainties about inflation and for that matter, geopolis, how do you make investment decisions in this climate? So, I think you still have to stick with the longer term trajectory, you know, kind of where you see the most opportunities longer term. Um. I think that there is still a real case to be made for switching from the kind of new economy back to the old economy.

Areas like industrials, energy, financials. A lot of these areas still have very very good valuations. I think on the more growthy side of the market, I think you want to be more selective. So we obviously saw things like communications services, a lot of the tech companies really rallied pretty fiercely over the last couple of days. UM, I think you still want to be careful there. UM. So we like tech, we like things like software, we like

things like semis, which look pretty washed out on earning sentiment. Um, but we'd be a little bit more cautious with some of the internet related names. To draw a football analogy that sounds like running off tackle three yards instead of throwing a long ball. That you're not really betting on a lot of big growth in the near term. I think so, I think so. And you know what we see when we look at different economic forecast is the price we're likely to pay for a short, shallow recession

is subpar economic growth that follows. So think of something like half a percent one percent um. That is an environment in which valuation will matter. So, so, DA, what do you think of that? I mean, is this the time to really dial it back some? What are you interested in? Is investment opportunity? Well forward the latter parts of this week, we've gotten more defensively positioned. Um. I do think that we have a small recession next year, and I do believe it hits profits. Profits would be

flat at best, probably down five percent. I think Lori's down a little bit more than that. And har estimate so the SMPS at eighteen nineteen times forward earnings. And you know, even though it's just in our view a short and shallow recession ahead. I think there's gonna be more frequent recessions than we've been accustomed to in the past twenty thirty years during the ties, and also inflation a little bit more sticky. I love these clips after

that midterm election. I mean that's when when Clinton pivoted, and it's also one of the Republicans had strong messaging and policy suggestions and a long period of economic growth and decline in inflation for uh that decade and twenty five years after that. So I'm just not sure we saw the signs of that happening today. So what's SCS do you like, David? What what are we looking? Well? Were there there? I focus on industries and then my

portfolio managers picked the stocks and the various strategies. I'm most overweight healthcare, both big biotech and pharmaceuticals and and big banks. Uh. Then we're we're dabbling in a few other areas like in our space and defense and oil services. But we're overweight, but we're also underweight a lot of things that we think are going to be weighed on by the the goods and the manufacturing recession that we

see ahead. Materials, much of industrials. We're still cautious on semi conductors, UM and all of everything consumer, consumer discretionary, auto retailing, of of both brick and mortar, and even internet retailing. How does that match up with you, for example, semi conductors. Do you have a different view on some

of conductors. So, I think with semi conductors, what we're seeing is that basically nobody's taking earnings revisions earnings estimates up right now, and historically when nobody's taking earnings revisions up or earnings estimates up, it's usually pretty good twelve month forward signal in the market. Now, it doesn't mean they're going to turnaround to day. We have seen some of the you know, price action improved, they're a bit lately,

but it's really a longer term, kind of contrarian type call. Um. I would say, though, I think David and I are mostly on the same page on a lot of stuff. You know, we like the banks, um, I think we both still like small caps at this point in time, and you know, I'm probably you know, a little more cautious on the defensive areas of the market. I think things like staples and utilities still very expensive, you've had some room left and health care valuations, but that's starting

to creep up as well. UM, So I'm really by health cares. Maybe David is I'm still overweight, but I'm getting a little concerned about it. I mean, frankly, just because coming into this reporting season we were getting close to peak valuation on that sector as well, and now we've knocked it down a peggatu that there were some rough earnings um with this sector, but I think we have to tread cautiously on the defensives. I like small caps, I like banks because they are typically areas that do

well coming out of a recession. You've got really cheap valuations. In the case of small caps, we've got a bucket of work showing that they're pricing in a recession already. In financials, I think it's more of an ings resiliency thesis, more of a domestic play um. But I think it's probably time, in my estimation, to start looking for some of those recovery trades. What extent have the projections of earnings taken at account inflation, because that really is a

margin pressure issue, isn't it? Well? So well, our modeling is shown on inflation that if we you know, if you sort of think about how they play into an earnings model. For example, UM, I see see positive correlations with revenues. So the inflationary backdrop has really been goosing revenues in SMP companies. UM. We find that when inflation comes down, it doesn't really help margins all that much. But bringing inflation down is going to pull revenues down.

UM wages are actually you know, have a more important factor within margins. So one of the reasons why we've been so cautious on earnings next year as a whole is because we are baking in that moderation and inflation it's going to pull the revenues down is not going to help the margins as much. But I do think a lot of people who cover stocks don't understand the revenue dynamic and don't appreciate that the impact on margins isn't going to be as big as they think. Where

are you on earnings going forward? What are you rejecting? I estimate for next year's to twenty and I expect this year to finish up at about twenty three too, thanks to energy slightly UM the average recession, but we're expecting smaller than average causes a decline in profits, but usually more than half of that decline in profits is from financials and energy. Energy smaller than it's been in

the past, although it's growing every day. Uh, and we think banks will be fine because we're not expecting credit costs to surge. Thanks to Julie Sally, Danny Burger, and Romaine Bostick coming up with the United States is getting a new Congress. However, the votes ultimately add up with an opportunity to rethink of policy for sustainable growth. We're gonna talk with former chairman of the Council of Economic Adviudgers, Glenn Hubbard of Columbia about what a sensible Republican plan

might look like. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Stick from Bloomberg Radio. This is Wall Street Week. I'm David weston the u S midterm elections may not be fully resolved yet. The President Biden didn't wait to talk about whether they

point to a rethink of his policies. What in the next two years do you intend to do differently to change people's opinion of the direction of the country, particularly as you can to play a run for president in twy twenty four. Nothing, because they're just finding out what we're doing. The more they know about what we're doing, the more support through is to give us. His views of where economic policy might be headed. Welcome now, Glenn Hubbard.

He's dean emeritus at the Columbia Business School and he was the chair of President George W. Bush's Council of Economic Advisors. It's also author of The Wall and the Bridge, Fear and Opportunity in Disruptions wig So, Dean Hubbard, thank you so much for being back with us, my pleasure. I really wanted to talk to you because there is this question where do we go for here? I mean, we don't yet know exactly what happened in the interns. We've got a pretty good hunch, probably a narrow majority

for the Republicans of the House. Quite possibly Democrats will hold a sort of split in Senate. What should Republicans do if you're up on Capitol Hill? Is there a sustainable economic policy for growth they could pursue? I think there is, and in fact there's a pivot for the president to you know, listening to him just now reminds one of the aphorism of learning nothing and forgetting nothing. It's time for a pivot, and I think for Republicans

GOP is instructive growth, opportunity and participation. There's a way to develop bridges to take people, take communities, take more people to the economy that will be in the future. We've done this before in the country. We can do it again. And it doesn't have a partisan label. Anybody could grab it. But it's especially after the GOP. So let's talk about walls and bridges, which you wrote about in your book. It strikes me and maybe I'm not being careful enough. I'm listening to it. I hear a

lot more about walls and bridges. I think these days a lot more about protect against change, perhaps both of the Democrats and the Republicans. Then about how do we embrace change and get ready for it? You do, I mean, if you start with the growth part. Change is important. There is no model or theory of growth that doesn't involve change. So we need change. The question is how do you bring everybody along? And that's what we hadn't been doing so well in the past few decades. Populism

comes embraces that and we need to address it. And so to do that, you really have to help individuals with training and education. You have to help communities to bring people along. Can we afford to do it because we don't have zero interest rates anymore? Oh sure. In the book I outline everything from community college block grants, to aid to communities, to reform of the earned income tax credit to support work. All of that is probably

about a hundred billion dollars a year. That's real money, but compared to what we've been doing, compared to student loan relief alone, that was four hundred billion dollar allers the stroke of a pen. We can afford to do this. You mentioned earned income tax and a lot of people think that that's a good reform that could be pursued. What about the child tax credit, because that's something that democrats badly want, They wanted to put through publicans don't

like it so much. Is that a constructive thing to allow people to re enter the workforce in a positive way. I think it could be, and it's part of what could be a compromise package. You know, if you want to allow more people to come back to work, you have to loosen all constraints on work, and I think the child tax Credit could play a very powerful role there if it's accompanied by rewarding work, which is what

the earned income tax Credit could do very well. Well, what about that point the specifically is I understand it at least one of the issues for Republicans. If you're going to give these breaks, you should actually sort of require work. It should be conditioned upon getting to work rather than just giving people the money. Is that right?

It should be, But that's a feature, not a bug, in the sense that participation in the economy brings dignity, it brings honor, and it brings support for the economic system. So that ought to be one of our goals. The question is really supporting work and making work pay. The e I T C or an income tax credit among other things, can do that. So, as I understand from you economists, there are two ways to grow. One is more people working, in other is more productivity. Ideally you

get both of those. Talking about more people working, some of them are living in the United States right now. What about immigration? Is there a way to really address immigration, which is really divided the parties. It's a problem we have to address at some point in a way that would actually give us more people constructively in the workforce. It's super important. Immigration has always been one of America's great strengths. And the immigration story is really two parts

in policy. One is about very high skilled immigration, and then there should be no doubt we should want every scientist, doctor, businessperson, entrepreneur in the world wants to be here, should be here. The political debate over low skilled immigration is harder. But rather than saying no to low skilled immigration, how about yes to training support and helping more people come along. I think that would ease the political dilemma. Have we

ever done that training support well? And by the way, should it be private sector or a public sector or a combination of both. The truth is we have so if you think back to the nineteenth century, the whole land grant college movement, which I build on for community colleges is exactly that. The g I Bill with President Franklin Roosevelt after the Second World War. We have done this, and yes it should have heavy involvement of the private sector.

Throughout the country. We've got great partnerships of business people with community colleges, with communities because they know where the jobs are fascinating. Great to have you with us. Is wall and Bridge is a really powerful way of thinking about it. Many thanks to Glenn Hubbard of the Columbia Business School. Coming up, and we're gonna wrap up the week with our special Wall Street Week contributor to Larry Summers at Harvard. That's next on Wall Street Week. Here

on Bloomberg, this is Wall Street Week. I'm David Weston. We're delighted to have our very special contributor, Larry Summers are Harrid back with us now on Wall Street Week. So Larry, it was a big week on a lot of fronts. Let's start with the CPI numbers. They came out. They certainly got the markets attention. What did you make of those CPN numbers? Are they as encouraging as some people seem to think. I think they were good. They were.

They were good numbers, But one number is never decisive, and there were a lot of special factors in these numbers, some of which will be reversed. Particular. As always, Team Transitory only focuses on the things that are likely to come down in the future, not the things that are likely to go up in the future. I don't pick a power prices will keep going down so fast. I don't think we've really got structural disinflation in uh medical care. But this was a good number, and the market was

right to respond positively. Whether the agnitude of the reaction was right, I think that's very much in question. There was another number yesterday, which was the Atlanta Fed number on wages, and that was showing continued strong wage inflation. And I don't see away as long as inflation is running in the five six range that we're getting to target. So I think the people who declared victory on the

basis of this number yesterday were overreacting. But look, it certainly was an encouraging number, but we had similar encouraging numbers in March and similar encouraging numbers in July, and one swallow didn't make a spring uh then, And so I think we've got to do what j. Powell said he's gonna do, which is be vigilant and integrate all the data looking forward. And that was my question. Actually, we know how the market reacted, The question is how will the Fed react. We have a little time to

that December meeting. At the same time, given what you've seen so far, it can change. Do you think that the FED should be variance path one iota? Some people are now saying fifty, for example in December. Well, I think the market has been expecting fifty for some time is the most likely case, and I don't see a reason to change UH from UH that expectation. I don't think you can make judgments based on a single months

UH data. There was a very substantial adjustment in markets expectations of what the FED would do, and I wonder whether that change quite that large of more than one full UH move one full basis point move was warranted on the basis of UH justice number, but it may well prove to be appropriate given what we see UH

in the in the future, Laria. Much more difficult are the markets making the Fed's job because the financial conditions loosened dramatically in responsive CPO never the most sense march of anounced two trillion dollars in fistical simulants, you have to look at both the FED funds rate and at

the overall UH level of financial conditions. To some extent, UH, I don't I think these financial conditions inducas are misleading because when the stock market goes up, they call that an improvement in financial conditions, but it may just be

a change towards more optimism about the economy. So I'm not that taken with the financial conditions in disease like the ones that come out of Golden Sacks to give significant weight UH to the stock market or to credit spreads in the overall assessment, because I think in some sense they're not just reflecting what the Fed does, They're

reflecting changing views about the economy. Larry are arguably the other big news this week with the midterm elections, which by the way, aren't really fully fine finalized yet because we don't know the results, including who controls the House and the Senate. But at this point in the process, what do you make these mid terms? And one thing I learned was, once again, the people don't pay that much attention to pulsters or by the way, the media. David, look,

I'm I'm quite encouraged. UH. The center is holding. If you look at people on the extreme of either party, they actually underperformed quite badly. The there was more ticket sledding as people voted for one Democrat and one Republican, rejecting the radical more radical UH candidates. The swing towards UH. Democrats came from independence UM and came from more Republicans voting Democratic. I think the reaction to the radical Supreme Court decision was actually a substantial part of UH this

UH story. That's probably cautionary UM for Democrats because it's not always going to UH be that be that way. But look, we're not having people in the streets fighting over the results of elections. Candidates who lose, even very radical candidates who lose, are are conceding. I think this was an election that suggested some movement back towards the center of the country holding. What message you think the White House should take away from this, particularly aspect to

economic policy. Is this time for a mid course correction? Are there some lessons in here for the White House? And by the way, should they even take a look at who the who's on the economic team? Is the time to revamp that? I think they've got very good people. I don't think the people are are are the issue. It's a very experienced UH team. Invitably to over time,

administrations have turnover. Look, I think the country is governed best when it's governed from UH the center and governed with moderation nobody's going back to three and a half trillion dollar h new deals. That's not on the table, and I think it's appropriate given inflation, that nothing like that be on the table. I think there's a lot we can do to bring down the price of energy by promoting energy production of all kinds, renewable and non and uh non renewable. I think there's a lot uh

that the administration can do and will do. With respect to technology, particularly in the semiconductor area, it's a big challenge to actually the old infrastructure out well in a way that's going to contribute to reducing bottlenecks uh in our economy. I would like to see more partnership between business and government. And frankly, if we're gonna build out the necessary energy infrastructure, I don't around the world, I

don't think, uh, there's any alternative. So I think that the administration has a real opportunity now to move to an implementation UH phase Larry. One other big development globally at least this week, was the next climate Suner and co top Charmel shake. Are we making progress on the climate or not? It seems sometimes like they just get together and talk. Yeah, that's what. Yes, I I agree with that, But David, I think UH more is happening in UH the laboratory and less is happening in the

conference room. The good news is that tremendous progress is being made in all sorts of UH technologies that point towards UH renewable energy. There some really exciting developments with respect to batteries and storage that enables renewables. Because it's not always windy or sunny. So I think, ironically, even though there's less political progress than one would have hoped, I actually think we're in a better place with respect to the problem than one might have expected a decade

ago because of the progress and technology. Okay, Larry, that was very helpful. Once again, that is Larry Summers of Harvard are very special contributor here on Wall Street Week. Finally, one more thought, looking for opportunity wherever you can find it. In a time of market downturns, investors are looking at portfolio losses that remind them of two thousand and runaway inflation. What matters is the FED saying we've got to get inflation back down, and more than a little political uncertainty.

Of course, we'll have to see the final results of these mid terms. That's we were looking at razor than margins. Right now, all of us have to be even more resourceful and looking for new opportunities. Former Bank of England Governor Mark Karney wants us to find them in sustainable energy. A lot of the answer to energy security problems that have been exposed by Russia's illegal war have to do with sustainability. Citadel CEO Ken Griffin thinks he's found opportunities

in moving to Florida. I'm gonna say something, it's like, uh, you know, it's gonna be thrown out of here. Taxes were not part of our decision to come to Florida, because when you've got great schools, when you've had a great environment, when your streets are safe and clean, you've got a place where people want to live in call home. And not surprisingly, the CEO of Delta Airlines has found opportunities in travel. We're seeing an incredible amount of demand

that's continuing. It's it's been in place for most of this year. We're looking at the upcoming holiday period looks very, very strong. And then then there's the irrepressible Simon Cowell, record producer International television personality and creator of reality series like The X Factor In America's Got Talent, Kyle can take credit for discovering hit makers like Fifth Harmony and

One Direction. Kyle's latest discovery, well, it is the bond market, where he just raised one million dollars selling bonds backed by his gut talent TV shows. Right now, I feel like James Bowmen. But the all time winner of the Golden Opportunity Award goes at least this week to the holder of the single lottery tickets sold in California that earned for its lucky holder get this, two billion, forty million dollars. And it wasn't only the winner who got

some opportunity. The man who sold the ticket, Joe from Joe's Service Center, is walking away with a cool million dollars as well, with the family with whatever I had needed, what my kicks, My gosh, then I live grandchildren. Now that is what I call opportunity. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.