Bloomberg Wall Street Week: October 14, 2022

In Bloomberg wool Street Week with David Weston from Bloomberg Radio, Searching in Vain, for solid ground in an escalating Russian war, in Ukraine in a troubled global economy, and goodness knows in the British authorities economic management. This is Bloomberg Wall Street Week. I'm David Weston. This week special contributor Larry Summers of Harvard on the potential next shoe to drop economically. I doubt we've seen the last mine UH go off.

Some of them may be in the private sector. I think more of them may be a national and former New Jersey governor and EPA administrator Christine Todd Whitman on a path forward on nuclear energy. Nuclear and play a huge role at least in the transition from fossil fuels to renewables. Global Wall Street It's spent the week trying to get its footing after things only got worse in Ukraine as Russian missiles rained down across the country and NATO chief Yen Stollenberg had to reassure us the things

weren't about to go nuclear. Russian knows that the nuclear war channep won I must never be fall. The I m F, for at least its economic projections and its chief economists were warned that a global recession just maybe looming. What we see is about a third of global economy is going to be experiencing the contraction this year on next. And if that weren't enough, President Biden told CNN recession may come specifically to the United States. I don't think

there will be a recession. If it is, it will be a very slight recession. And then then the CPI numbers came in hotter than expected, with the headline numbers still up at eight point and core accelerating the six point six percent year over year. It is not a good picture here. Those who were thinking that inflation might drop off fairly quickly are going to be disappointed by

the numbers here. In the meantime, over in Great Britain, we had a week of financial turmoil, with a very public battle between the Bank of England and Prime Minister Trust's government, which ended up with a new Chancellor of the Exchequer and her giving up on more of her controversial budget. I want to be honest, this is difficult, but we will get through this storm and we will deliver the strong and sustained grace that can transform the

prosperity of our country for generations to come. But the surprises weren't all bad this week, at least not for former FED chair Ben Bernanke, who was awakened to learn that he shares with two others the Nobel Prize for

Economics this year. It was completely unexpected. My wife and I shut off our cell phones when we went to bed last night, not thinking about this issue um and it was our daughter in Chicago who was finally contacted and called us on the landline to inform us that this this had happened, And the markets had just as hard a time as the rest of us finding its footing, with the SMP swinging five points between big losses and

big gains. On Thursday alone, after the CPI numbers came out for the week, the SMP was down one, the NASDAG down over a three percent, and yield on the tenure was up over thirteen basis points to close the week just above four teples. Sort out a wild week in the markets. We welcome now Joe and Phoene, partner in Advisor's Capital Management, and Lizanne Sanders, chief investment strategist at charl Schwab. So welcome back both of you to Wall Street. Let me start with you, Luzenne, what happened

this week? I feel like we hit by a mack truck. So I think it was probably mostly technical the reversal that we saw yesterday. On an inter day basis, in the first part of the day, you did see the swoon. Take the SMP two below seventeen. And I'm not a technician, but that level was important because it was the retracement of the post pandemic move higher, and and that probably kicked in a combination of buying head just being taken off, some short covering, and that fed on itself through the

end of the day. Maybe you could point to the move down and yields yesterday, the move down in the dollar, but that could also help to explain today's weakness too, because you saw reversals there. So Joanna fairmoun A noise. I think it's fair to say in the equity markets there but on Friday, actually they gave up pretty much

every they got back on Thursday. So when you net net, when you get through it all, what did we learn this week that should affect the markets over the longer term, You know, Dave, But I think what we learned is that there's still a lot of risks out there facing the future of the global economy, not just here in the US. And those two price reports we got, the p p I and the c p I reinforce the view that inflation is going to be a really hard

challenge for the Fed to solve. But it also seems to have removed any wiggle room that people think the Fed has. They're they're really gonna have to be adamant about raising rates, try to constrain liquidity, try to discourage consumer demand in order for inflation to get under control. There's not a lot of room for them to do anything but raizor rates now for the next at least couple of meetings. The market finally perhaps is digesting that.

There's a lot of talk about me sorry, go ahead please. Yeah.

I think joins absolutely right. And I think there have been these moments where it seems like, whether it's in reaction to things going on in the UK, that the markets almost cheering for are looking for some sort of financial system accident because of the messaging from the FED, from Powell that they're not going to step in because of financial market weakness across any of the asset markets, or just volatility, but financial system and stability maybe what

could bring the fedback in. But even in a situation like that, what they may do is use the tool of their balance sheet or repo facilities versus doing a pivot anytime soon on rates. And I'm not sure that's been fully digested by the market yet. Yeah, there could be certainly more digested to come, particularly because the risks

that are out there are really unusual. You know, it's not just the inflation problem, right, The US has a labor shortage born of the pandemic, born of early retirees, born of a lack of legal migration immigration into the US. Joan Peony and Lisia and Saunders will be staying with us as we're trying to figure out what to do with our money in these turbulent times. It's gonna have

backs on Wall stere week on Bloomberg. Well, this was the week when Wall Street got much of what it had been asking for and then decided, quite characteristically, that it didn't like it. The economy is simmering down as requested. Industrial production took its worst fall in more than a year, business inventories are rising ominously, and the Housing Industries Trade Association said its members were virtually out of business. That,

of course, was Lewis Rocks around Wall Street. Wee back or not forty one years ago now, when all the markets wanted was a slowing economy and the lower interest rates that they thought would come with that. The big movie that week was a romantic comedy you may not remember it with Burt Reynolds named Paternity, and the number one song was Arthur's theme from that Dudley Moore film

named Arthur. Now the problems are very different, as interest rates are on the way up, not down, and the economy is still very robust by most measures, still with us or joe An Feeny of Advisor's Capital Management and Liz Anne Saunders of Charles Swab, So, Joeann, let me come to you. The question is what do we do with our money in this world? Where does it make

sense to invest with this much Volati's much uncertainty. It's really been challenging time for investors, and it really depends what sort of time frame you have as an investor. You know, if if you're in retirement, what you probably need is some assurance that you're going to going to be able to get the cash flow you need off of your portfolio. And so one of the things we've done for for our clients in that kind of a situation is to create portfolios with above average dividendields on

the one side. And now as bond yields are rising and we've kept our duration relatively short, we've been able

to let bonds mature and then re up at higher yields. So, you know, one area to go to is some relatively stable companies, whether it's a General Mills or an ab V or you know, some of the others in consumer staples and in energy that have you know, dividendnields in the four or five six percent range, and that way they can still get that income and they can ride out the volatility and the stock prices and wait this out. And then that gives our clients a fair bit of comfort.

But you know, it hasn't been easy really for anybody, but that's one way to deal with the volatility. Luzanne, what are you recommending these days? Well, first of all, I absolutely agree with Joanne that there's no there's no

cookie cutter answer to a question like that. It really does depend on who the investor is, their risk tolerance or past experience, their time horizon, whether they're financial risk tolerance, and their emotional risk tolerance, whether there's a narrow gap between the two or a wide gap between the two. But I think we're in a part of the market cycle right now where you want to actually focus on fundamentals.

And I know that sounds trite and sounds what we're always supposed to do, but gone are the days where you could look at segments of the market, components of say big tech, and look at it monolithically make an assumption that they're all going to go up simultaneously. There's much more differentiation in the market right now, and I'd say look for where things our dear from a macro perspective.

So we have declining earnings revisions in the aggregate, so look for the factor around positive earning to revisions positive earning surprise. We know we're in a rising interest rate environment, so companies with strong balance sheets, low debt, high cash flow, strong free cash flow, um low lower volatility. It's just kind of a quality wrapper and I think that's the

best type of approach in this environment. And then the last thing we've suggested for those investors who can do it, If you were a re balancer based on the calendar, maybe instead of doing it once a year, once a quarter, let your portfolio and the volatility associated with dictate the timing of of taking advantage of the volatility by you know, adding into weakness, trimming into strength relative to your overall strategic asset allocation. Joan, What about the possibility of fixed

income at this point. I mean, for a long time and you didn't want to be in bonds given what we're going to bonds, but those yields have really come up. They're yielding something now and they do generate cash. It's sort of like dividends, right, yeah, absolutely right. You know we're getting in the order of six plus percent in in yields in our all investment grade UH fixed income solution.

And when you pair that within a balanced strategy with the equity front, you know, you can generate a pretty nice cash flow for clients. Um. And so if you keep duration short and you're really careful about selecting credit quality because credit spreads have widened here, so you want to be careful that you're not adding risk to the side of your portfolio that it's supposed to be sort of the suspenders on the pants, right to provide more stability.

And so that's one thing we've done and it's helped our clients feel a lot more comfortable in this kind of environment. Listen, are you do the point yet where you'd consider duration that is going longer duration from EIX income? So, my my colleague Cathy Jones has a regular guest on on Bloomberg. She's our fixed incomes strategists, and in the sort of four ish per set range we have suggested

you can't that are lengthening duration. But I agree with everything that Joanne said too, I think there are finally opportunity and we've gone from a from a TINA environment. There is no alternative to TIA. There is an alternative, and there's income and fixed income again, and there's strategies, a bit more active strategies that you can employ to take advantage of this move up in yields. Even well

down the duration spectrum, you're actually generating a yield. If inflation ever came down, Um, we might actually have positive really yields. We're not quite there yet, but I think we'll get there. Well, you know, Lisiyne, I want to pick up. That was exactly the point I was going to make is the challenges that inflation is so high that even if you're getting those appealing yields on fixed income,

you're still losing purchasing power. And so that's why we, you know, continue to counsel if if the client has appropriate risk tolerances and the time horizon, the equity side can help you offset the cost of inflation. You know, for example, one of the stocks in one of these

portfolios is McDonald's. Now, what you want is to find a company like that that has good cash so that can continue to pay its dividend, but more importantly, even can raise its dividend year after year, and they just announced this week a tem percent increase in their dividend. So you're being compensated more than compensated for that cost of inflation. It wrote in the persame power of your money, and that's something that you're more likely to get on the equity side than you are on the on the

fixed income side. What are earnings? We are in earning season now, we had the first four banks come out this week of their earnings. Is there possibly that could help the investor right now to the up side. It's possible.

I think The rub though, is that even if we end reporting season with um some sort of positive beat rate, we have to recognize that estimates have been coming down since the April May period of time, both for the second half of two and the first half of three, so it has been a lowered bar and much like the second quarter, we're still early, but expectations are that

energy pretty much as all the earnings growth. So consensus right now, once the quarter is all said and done a month from an hour or so, you'll have three percent over alls and p earnings growth be exclude energy that goes down to minus three percent, and that's if that's the case, that would be worse than the second quarter. And I think the path of least resistance for estimates is still down. I'd also say really important to watch and listen in earning season, not just for did you

beat your numbers or your profit margins. What's your profit margin outlook if you're a multinational company, the impact of the incredibly strong dollar, whether you're hedging it or not. The impact of inflation, whether you have a lot of fixed costs or variable costs, what your labor costs are. So I think it's a lot of the details under the surface that a matter as much as just the top line reading. Thank you so much to joe Anfini and listen. Siders. Great to have you with us. Coming up.

If we're really serious about getting to zero emissions, experts say expanded nuclear power has to be part of the plan. We'll talk about the challenges and the opportunities with Christine Todd Whitman, former administrator of the Environmental Protection Agency. This is Wall Street Week on Bloomberg Net. Zero emissions. It's a lofty goal, but times a wasting just ask John Kerry,

President Biden's Special Climate Envoy. Many companies are making promises to be net zero by but the reality is unless you do enough between now and you can't hit zero. And if we're really going to get there, Bill Gates says, the math makes a pretty compelling case for nuclear power. You get a million times much energy peraction. I should do burning hydrocarbons, and so it's very advantaged if you

do the design right. Nuclear physicist and former Energy Secretary Ernest Monies says it won't get done without a public private partnership. I think what we need to see is governments moving together with the fine ancial sector and with the equipment providers to get new power plants over the

finish line. But partnership, we're not convincing the public about safety may remain an issue given high profile accidents like Fukushima, Japan in two thousand eleven, when an earthquake led to a disaster at the plant, causing tens of thousands of evacuations. All the nuclear power plants in this country, they operate really on this precipice of normal routine operation on one side and catastrophic accident on the other, and that's it's it's unclear exactly when kind of you'll fall to one

side or the other, but it's certainly possible. So the question is what will it take, how safe it can be, and how soon can we get there? Even for some who initially opposed the idea but now embrace it. Given this challenge we face today and given the progress for fourth generation nuclear, go for it. And again of some answers these very important questions, we turned out to Christine

Todd Whitman. She is president of Whitman Strategies. She is, of course, the former governor of the state of New Jersey and the former administrator of the e p A. So welcome to Wall Street Week. It's really good to have you with this governor. You've dealt with nuclear energy for years now, So give us your sense of the role of nuclear energy potentially in getting to net zero. Well, I think nuclear and play a huge role at least in the transition from fossil fuels to renewables. Renewables are

not yet base energy. Their peak shaving and we're seven society, as is the rest of the world. The world is, and nuclear is the only form of base power that releases no regulated pollutants or greenhouse gases, wireless producing power. And we have an an incredible safety record here in this country on nuclear and actually with a few obviously very huge exceptions being Chernobyl and what happened in Fukushima Daishi, overall worldwide it's been it's been safe and getting safe

for all the time. Mean, the US Nuclear Regulatory Commission is considered the gold standard on regulatory oversight of nuclear reactors. I don't think, given costs and time, that we're going to see any more large reactors built in this country. Certainly they are being built in China, They're being built around the world, and we can certainly play a part in developing the parts for those reactors. But I see the future for nuclear right now being in the small

modular reactors. Nuclear is actually one of the few things that really don't have emissions that can be taken to scale. I think something like energy United States and generated by in France, right And you know, you saw an example of what happens when you take nuclear offline when California took the Santino Frey nuclear reactor offline, their emissions went up and the cost of their energy went up. I mean, it was totally counter to everything that they were hoping

to achieve in my mind. And so what I found over time is that you if you have an opportunity to talk to people and answer they're in real questions. I mean, it's it's normal to have questions about the safety and you should ask them. But the answers are

really good, and they're based on our history. You can prove that in fact, these things work, and once you do that with people, they get much more comfortable with the idea of nuclear It's just that for so long, um it's been used as frankly a fundraiser a lot and a lot of times for the environmental groups, and

we need to get the public to understand. Particularly with the new small modular reactors that are built in a contained facility, they can be placed on site, they're much safer technology, they are much safer way to produce the nuclear energy. So overall they are really I believe, have the potential to make a huge difference, particularly if you think about the rural parts of America where you're not on the grid or you're not close to the grid.

You can take a small modular reactor and provide power for an entire town or an entire bi business. So they have a lot of potential there. So let's pursue that question of safety because that is on a lot of people's minds without a doubt. And as you've mentioned, we've had some horrific instances. Is the issue with safety that people don't realize that actually the tracker is quite good for nuclear or is it technological developments such as

as you're referring to small module reactors. Now. I think it's because people just don't know, they don't understand. I mean, I get a lot of questions I used to in the past about well, what about the spent rods? And first of all, I tell them from all that when the time when we had a hundred and two nuclear reactors in this country, and you took all those spent rods and you put them in one place, you'd fill up one foot fall field to the height of the

goal posts. They might have gotten slightly above that now because this was data from several years ago, but the point being, it's not this massive thing the size of the state of Vermont. Okay. Governor, thank you so very much for being with us. Really appreciate this. Former Governor Christine Todd Women. Now with Whitman's strategy coming up, we wrap up the week with our special contributor to Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg.

This is Wall Street Week. I'm David Weston. Welcome once again our very special contributor to Wall Street Week. He is Larry Summers of Harvard. So, Larry, we got the CPI numbers in that we've waited for this week, and boy, they came in hot and expected. It's been doing this repeatedly. Now, what do you read in these numbers? Not so much hotter than I expected. Inflation has got a lot of momentum. The best single measures to look at for inflation is

a kind of super core measure, which is wages. Or you couldn't look at the median component of inflation. They've just been running strong for a long time and not decelerating. So I think Team Transitory is engaged in a lot of uh, wishful thinking. And I must say that I'm struck by the hypocrisy of some friends of mine like Paul Krugman, who are very quick now to focus on housing and the fact that the private indusserise lead the

public induserise when the private industries are looking soft. But we're entirely unwilling to credit that argument or to pay attention to the private indusseries some months ago, when the private industries were obviously pointing to an acceleration of inflation. So I think we've gotta be uh, very very careful uh here if we want to be credible about containing inflation, how much momentum is built in inflation? And how can

you tell? What are you looking at right now? They're telling you what happens in the fourth quarter and as we go into next year. I'm looking at core measures. I'm looking at super core measures that take housing out, take use cars out, in addition to taking food and energy out. I'm looking at the so called median inflation component, whatever product it is that's right in the middle. I'm looking at the so called trimmed mean that looks at

the middle half of the distribution of product prices. And very crucially for me, I'm looking at wages um, which is a kind of super core measure because labor goes into everything, and all of those are saying that inflation is not really coming down very fast. If it's coming down at all, and that it's way above the two

percent target or any acceptable level. Besides the CPI numbers, Larry a very big story throughout the week has been and continues to be great Britain, where you had the Bank of England come in with their emergency buying of long term guilts that is due to expire on Friday end of this At the same time we now have Liz Trust coming out and making some changes. Give us your take on what's going on in the British economy

and more importantly the management of the British economy. Look, I think this is probably gonna be a textbook case of crisis creation followed by crisis UH mismanagement. UM. I'd be surprised if we were in the seventh inning of this particular set of challenges. UM. I have said before that people now, I think understand very clearly that when you do a military intervention, you should never give a sunset date when you're gonna leave, because it just emboldens

the opposition. And I think something similar is true of last resort UH finance, where the kind of deadline in the Bank of England gave I think is asking for trouble uh down down the road. So I think we're gonna see more tremors, more aftershocks, more problems. Well exactly, Larry, I guess I'm asking the same as that we have global slowed on. I m F this week came out and said, we're looking at the global slow now at the same time we have central banks in development countries

really all raising rates at the same time. What is the likelihood we're gonna see similar won't be the same, but similar sorts of problems elsewhere, particularly when it comes to very highly leveraged places and places that are more difficult to see. Some of the private credit, some of the non bank banks, I doubt we've seen the last mind uh go off. Some of them may be in the private sector. I think more of them may be international.

You know, something that disappointed me at the I m F World Bank meetings this week was the number of countries who were reporting that they're having substantial difficulty in

getting market access. And I must say, I'm sort of disappointed by a official sector people, people from the ministries of finance and the central banks who are talking about how we're gonna work with the private sector to catalyze trillions of dollars of finance for green transitions and all these countries, but don't seem to be doing anything about the fact that many of these countries can't even issue

a bond UH today. So I think there's a whole set of very important challenges with respect to developing countries and emerging markets, and I'd have to say that I don't feel those challenges were really met UH this week. UH there's some fires burning and fire department is still mostly in the station. So as we speak to you, you are in Washington for those I m F World

Bank meetings and the i f as. As a practical matter, you were very outspoken in the Project Syndicate piece, also actually speaking with David Malpass, the head of the World Bank, about the role of the World Bank right now on things like sustainability. What is going on there? Is the World Bank playing the role it should be playing and what should it be doing? No, I think it is um playing its usual roles in its usual UH way.

And I think generally the economic crisis of the moment demands major changes in approach, just as the security crisis in Ukraine demanded major changes in approach and we're not really quite seeing it UH yet. The World Bank needs to be much more aggressive in the use of its balance sheet, and it also needs to get much more capital. And instead of having a fight about which of those two things is more important, we need to do both

of them. Because the one mistake we're certain not to make is overinvesting in the green transition, and so we need to make sure we're doing everything we can UH to support that transition. So if there's a lack there, Larry, often that lack comes for a lack of leadership. Do we not have the leadership we need either from the United States Treasury, the White House or for them and at the World Bank? I mean, would you ever consider

taking over that role? I think that we do need leadership that points towards UH larger changes in business as usual. Then we're seeing UH in the financial area, and I think there's some mistakes being made right now, at a very very difficult moment in Africa, at a very very difficult moment in UH, Latin America, at a very very difficult moment in parts of Asia. Larry, one piece of news which was actually really hit the markets, but has not gotten too much attention is what the United States

did expect to semiconductors and China. The chips market really went down substantially. It took a lot of the tech with it at a time of so much difficulty globally. What are the possible effects of those sorts of trade actions, you know, the kind of large stale cut off on

cooperation and semiconductors that the Biden administration announced. I don't think it's possible to pass an overall judgment on that without understanding the security risks that they saw, which depend on classified information which those of us on the outside don't have. Okay, thank you so much to Larry Summers are very special. Contribute here at Wall Street Week. Finally, one more thought. When money is no object, watch out,

they say, the one with the most toys wins. And let's face it, toys usually cost money, and the bigger the toy, the more money it costs. Take for example, Jeff Beza's new yacht, the largest sailing yacht in the world at four hundred seventeen feet and costing upwards of five hundred million dollars, or Elon musk Agreen to plunk down forty four billion in dollars for the prize of owning Twitter, something most people think is worth a lot less than the price tag, that is, if he ends

up paying it. So there's two options here. One, uh, you know, the deal falls apart and the stock that has been sort of artificially inflated is going to crash. Or if if things go the way Twitter want, then they get the guy in charge who you know, for the last three months has been saying that Twitter has been lying about its user bait. But what happens when you spare no expense, go all in, put all your chips on the table, and don't win your dream prize.

Consider the case of Hillary Clinton's campaign spending one point four billion dollars on the two sixteen presidential race, substantially more than Donald Trump's sixty million dollars and coming up short. This is not exactly the speech at the Capitol I hoped to be giving after the election. More Poor Columbia pictures which Inn decided to make ishtar figuring anything with

Dustin Hoffman and Warren Beatty just couldn't fail. But for some reason, a movie about two lounge singers involved in a coup in the made up country of Ish Tower didn't quite land with the audiences. Columbia lost around forty million dollars on the deal, almost a hundred million dollars adjusted for inflation today, and the dud established Ishtar as the synonym for box office flop. Is the oasis? Does

this look like an oasis? Yeah? Look at the parts fell those vultures, And now we can add Steve Cohen to the list of those who went big and lost. The hugely successful hedge fund manager paid a round two point five billion dollars to buy the New York Mats and this year took it to number one at least in players salaries. But sad to say for fans of the Amazings, number one in payroll doesn't mean number one

on the diamond. The team lost the third game of the wild Card playoff by a score of six to nothing. Was executing pitches and the wheels fell off. I don't know why. We just couldn't out a way to get

some runs them off. That's going leaving Mr Cohen to spend the winter going back to first base and thinking hard about whether that two d and seventy eight million dollars in players sataries just maybe wasn't enough, they're going to get to this great point and they have all this momentum behind them, and then then they blow it. That's the Mets, that's Mets met singing. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.