Bloomberg Wall Street Week - October 28, 2022

In Bloomberg Wall Street Week with David Weston from Bloomberg Radio. New governments face old problems, and this time it doesn't look like tech will give us the solutions. This is Bloomberg Wall Street Week. I'm David Weston, this week's special contributor Larry Summers on the new GDP numbers and what they lack. It confirmed what I think we knew that despite two negative quarters, the economy was not in any real sense in recession. And Sam's l on why he

has more opportunities than ever for good investments. Think about the impact of the doubling and interest rates in eight weeks. This week, Global All Street saw three new or sort of new governments installed, with Rishie Sunak officially taking over as the new Prime Minister of Great Britain and promising to make nice with the markets. I will place economic stability and confidence at the heart of this government's agenda. This will mean difficult decisions to come. Not to be outdone.

Italy also got a new prime minister, and Georgia Maloney wasted no time in taking issue with the ECB raising rates. It's considered by many to be a rash choice that could have repercussions on bank lending to households and businesses. And although China a re up to President g for a third term, he made his own changes to his senior team, surrounding himself with people who see eye to eye with him, which cornels each Farsat says is a

fundamental shift of a different sort. The message is quite clear that technocrats are on their way out, the loyalists are on their way in. But as much as governments may change, the problems they face remain the same. As the United States reported stronger GDP growth than expected despite higher interest rates, and the ECB hyped another seventy five basis points with President Leguards, saying she continues to focus

on inflation even though the European economy is slowing. The risks to the inflation outlook are primarily on the upside. The major risk in the short term is a further rise in retail energy prices. Over the medium term, inflation

may turn up to be higher than expected. And if Global Wall Street was hoping that tech might help us climb out of these doldrums, it was in for a letdown this week as the earnings of several big tech companies disappointed, particularly in their guidance about what may come next. There's big tech names, as they have reported this week. You know, look at Microsoft, look at Alphabet today. They

really have underperformed in a big way. But in the end, equity markets shook it all off, with the SMP five up for the second week in a row, this time by almost four percent, and even the NASDAK rose above those disappointing earnings, overcoming a bad week for the Fangs and for the Golden Dragon China Index, and turning what was a loss as of Thursday into a nice two point two percent gained by the end of the week, while the yield and the ten years, settled in just

over four percent by the end of Friday, down from about four point to five percent at the beginning of the week. Here to sort out a fascinating back and forth in markets are Peter Krauts, chair and CEO of Aperture Investors, and Monamahagen, she has senior investment strategist at Edward Jones. So, Waning, let me pick on you first. What did the markets do this weekend? Why did they do it? Yeah? Thanks, David. Look, this week was a

bit of a tug of war. On one side of that tug of war, we saw the big cap tech earnings. They were um, in a word, disappointing in fact, and you noted this upfront. It wasn't necessarily the three Q results. It was the guidance across the board between advertising revenue, between cloud computing demand. We're seeing the soft thing there and that really dragged down the NASDAC. But on the other side of this tug of war, we saw the Dow up nearly six percent this week. Now what was

driving that? While we are certainly starting to hear a little bit more optimism about a federal reserve that maybe looking to raise rates at a more moderate pace. Now, of course, next week's meeting, UH, the seventy basis point the point seven five percent rate hike UM almost baked into the cake. It's probably going to happen. But really all eyes will then focus on that December rate hike meeting. Um will they go fifty basis points or will they

go seventy five? And in fact we heard a little bit more from some Fed governors that perhaps a more moderate rate of rate hikes probably makes sense here, just given UM giving them an opportunity to pause, assess the economy. See what's happening so interesting moves in the market this week. We do think, more broadly, some of those inflationary trends that we have been seeing, some of the four looking indicators are starting to show some signs of rolling over.

That gives the Fed a little bit more comfort and perhaps going at a more moderate pace. We certainly saw that from the Bank of Canada this week this as well, who went fifty basis points rather than the expected seventy theater what do we say, are we heard from Ona? We're hearing some optimism about the Fed? Where are we hearing that from? I don't remember the Fed giving us much optimism. I think the Fed is giving us any optimism.

I think that this is an interesting case of are you actually listening to the people who have the power to move the interest rates? If you're actually listening to the Fed, I think it's pretty clear the Feds moving to squash inflation, and they're not going to stop until inflation goes down. Inflation sticky, and it's not gonna move so quickly. And so the likelihood is that we see high rates or higher rates, and that those rates probably top out sometime in twenty three and they don't go

down until well into or perhaps twenty four. And I don't think the market is completely digested that, and they're looking for scintillas of hope that are floating around in the market that I would call sentiment but not fact. What do you make of it all? And at the FED I think wants some consistent data over time that shows that the inflation really coming down. You said there are a little bit of indications around the edges. Yeah,

you know. Look, Peter has a point there. They want clear and consistent evidence of inflation moderating, and in fact, they don't want to indicate anything too prematurely. They started to see that in June and we saw markets start to rally, you know, financial conditions start to ease rather than tighten, which is what they really want to see in markets in order to push inflationary pressures down. So we're gonna pick out exactly that when we come back.

Mono Hodgen and Peter Crust will stay with us as we turn to some investment advice. They carry us towards the end of the year. That's coming up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street

Week with David Weston from Bloomberg Radio. Tom Alone will tell whether Black Monday enters the history book as the day American confidence was so shaken that a premature recession resulted, or merely as the day of the computers went wild and through the wonders of so called program trading turned a normal correction into an early Halloween. That of course was the one and only Lewis Rocks on Wall Street Week, the friday before another Halloween like we're having when this

coming Monday. But that one was back in seven just after so called Black Monday, when the Dow Jones lost in a single day and people back then we're trying to figure out what went wrong. The number one movie in America that week was Fatal Attraction and the number one song, well, it was bad by Michael Jackson. We still have with us now, Peter Krause of Aperture Investors and Monamohydgen of Edward Jones. So, Peter, when I come to you, I mean, it's not a Black Monday. We

haven't seen that by any means, Thank goodness. And I remember that day, by the way, I do too. I was practicing law back in Washington. But but give us some investment advice here. You started in that direction with small caps and duration. If you're putting money to work right now, where does it make sense to do that given all the uncertainty? Well, I look, I think Mona said it as well. There's three places that are in distress.

One is long duration fixed income. So whether it's treasuries or high yield or long duration bonds that have been absolutely crushed this year, those securities are likely going to provide attractive yields going forward. They're not going to reduce their volatility. They're still going to have a fair bit

of price volatility to them. But you know this is a time when you can start to think about getting a little longer and moving out of the very short duration, which by the way, is also paying very well, and you can buy short duration investment grade bonds at five percent or even five and a percent, so that looks pretty attractive as well. But I think leaking out a little bit into duration makes sense. And the equity side, you know, I think you can't abandon the growth world.

I mean, the tech world today or the tech news in the last few days is obviously very negative. But there are companies that are not necessarily tech, but our growth companies. They're either consumer oriented where their industrial companies that have fast growth, and not paying attention to those is going to miss a trick that whether they're small cap or mid cap or even large cap, but most likely you're going to find them in the small cap space. So I look at aperture. Our view is small caps

are very interesting space. The beta is cheap, and it's a place where we're probably going to see the first move when this market recovers. Well, that's what you said earlier, the small caps come back first, Mona. Do you agree with that? And if they come back first, what comes back second? What comes back thirds, because that indicates where you want to be and where you don't want to be right now. Yeah, absolutely, you know, Peter's absolutely right.

When you look historically, coming out of any sort of downturn or recessionary period, the thing that tends to lead us out our small cap names. And interestingly, this time around, small caps do tend to also be more domestically oriented. And perhaps when you look across the globe, you're seeing a European economy more exposed to the geopolitical issues oil and energy crisis. You're seeing an Asian economy more exposed

to a Chinese economy that may be slowing. So in fact, the small cap universe is starting to look more and more interesting as well. We probably will have some months of volatility ahead as we stabilize get through a potential downturn, but I think that is a place to start thinking about. UM. Similarly, you know, across equities and fixed income, we talked about complementing equities, so you know, think about the stuff that

has been more quote unquote beaten up this year. UM, there is values starting to merge in a lot of that. And again when you look historically the twelve months after the FED the final FED rate hike, equities broadly are up on average, and this is back till since FED right tiking cycle since ninety on average up about sixteen percent after that peak FED funds rate. So if you think it's coming sometime in February March, maybe earlier UM,

there's certainly an interesting opportunity starting to form. And of course, with inequities, the other parts of the market, aside from small caps that tend to perform well coming out of a downturn, or the more cyclical and growth parts of the market, and when growth is slowing, you know, investors pen to gravitate towards finding growth in their portfolios. So everything that we've talked about and Peter and I have probably reiterated a couple of times now, but think about duration,

think about quality. Growth opportunities are certainly forming. Like I also think that don't misunderstand arising economy or a rising market that you might have in the next few months. For a market that is absent volatility, there's still plenty of shoes to drop, and credit and leverage lending is one of them. And we don't know how the market

is going to react to defaults. We haven't seen a significant default cycle really since Frankly two thousand and three, two thousand and four oh eight was a liquidity crisis, and you know two thousand and twenty was very short, so you could have some defaults here in corporate uh and in you know, other types of securities, real estate UM. And I think that that's going to have some effect on the volatility, but investors have to have to live

through that volatility. They can't get knocked out of the market because if you do that, you're gonna miss the opportunity. We'll talk about the overall structure of the paradigm as it were, of investing. We are going. It looks like from a world low inflation, low rates, into higher inflation and perhaps significantly higher rates. At the same time, there was a good long period of time when it was basically there was no alternative, so people went into a

lot of alternates, a lot of riskier things. What happens in this new world, because it's not like the old world necessarily, Yeah, you know, that's that's spot on, and in fact, we all know the Tina acronym. There is no alternative that served us well, probably from the Great financial crisis through the pandemic um, we saw a lot of investors pushed out the risk curve um in order

to get that return that they were seeking. And of course, as raise rates rose pretty rapidly through two what we did see is a lot of more speculative parts of the market have started to see the air let out

of those tires as well. You know, think about this back market earlier this year, the Meme stock market, uh, even crypto to some extent, we've seen large you know, compression and valuations, large downturn in values overall in a lot of those more speculative bubbles, and in fact, that probably sets us up for a more interesting time in

the next ten years. You know. The one nice thing that's happened over this kind of downturn and markets this year is that valuation compression has come in beyond what we've typically seen historically. So the SMP PE multiple, for example, has come down over um this year already. So the valuation correction in our view has likely already happened, and

that sets us up nicely. But to your point, in an environment where it will probably not return to zero rates, but with growth at two percent inflation hopefully returning somewhere in that two to three percent UM yields may also be somewhere in that two to three percent range, and so in that scenario, you think about discounting your cash flows at a higher rate, and so really that does put more pressure to prove your business models, especially those

business models that expect cash flows in the out years UM. But the more steady parts of the market that have proven business models, that have proven cash flows, those valuations are starting to look attractive here, and I think that's really what investors will have to think about in this new environment. Thank you so much. It's really great to have you both with it as a Peter Crest of

Aftercure Investors and Hydgen of Edward Jones. Coming up, famed investor Sam's l He's a veteran of Wall Street Week and he's back now to give us his advice on investing in these difficult markets and why he is seeing more opportunities than ever. That's next out Wall Street Week on Bluebird. Okay, what a difference a few rate hikes make. Not that long ago, when interest rates were at record lows, the easy days where they not money on you and you don't have much inflation and you don't have much

time inness those are past. You almost couldn't avoid making a deal and setting new records for M and A. We are continuing to see a just tremendous momentum in U S, M and A. But things have changed. Money isn't free anymore. We have got to get inflation behind us. I wish there were a painless way to do that. There isn't and credit is cutting into that record deal flow. I'm looking now at credit spreads in the mid four hundreds and they just look too expensive to me. So

what does that mean for the dealmaker? And are there many deal that still makes sense in this new world? There's still more room for we think these spreads to tighten. Probably at this point, you know, best opportunities are in the non investment grade market. And now return to a dealmaker. Par Excellan Sophia Sam's l He is the chairman and founder of Equity Group Investment Sam. Welcome to Wall Street Week.

I know you've been on this program in the past. Okay, so let's talk about what investor does in this new environment of increased inflation and increased interest rates. First of all, tell me what's going on with your company? Are you seeing less deal flow now just the opposite. We're seeing more deal flow. We're seeing more situations where companies are having difficulty, uh figuring out what to do. Uh. We're seeing situations where nine months ago, financing a transaction of

X y Z size was nothing. You know, it was you know, as you said, money was free. Uh what's changed dramatically? I mean, think about the impact of the doubling of interest rates in eight weeks double you know, it's just eight weeks earlier. Uh, interest rates were you know, two and a half to three and now they're five and a half to six. That's enormous uh change, and it's gonna slow down everybody's activity. It's gonna for sure,

uh impact getting deals done. But in our particular case, because frankly, I've oftentime told the world that you know, when I'm liquid, the stock market can't go down. It only goes down when I'm ire liquid. And here I am sitting there with a level of liquidity I've never experienced in my life because my focus for the last three and a half years has been nothing more important men equality. So you've got a significant deal flow if anything is bigger than it was before. What about the

quality of deals? Are they different from what they were for example, preach prandemic. I think they are because I think they're a little more realistic. I think in pre pandemic, when money was free, Um, there were transaction. I mean, the whole spack market was. You know, we did as back and chose not to take it to the next level because when we did this back spac seemed like

a very interesting way to in effect monetize opportunity. Uh. It very quickly became a highly speculative scenario dependent on preposterous valuations that ultimately led to the crash of the whole spack market. Uh. You know, world has changed a lot since then, and the change is basically modifying what you can do. On the other hand, there's always demand for capital. Uh, and there's always that demand is always on the on the the shoulders of those that have

preserved the coidity. So let's tell about some specific investment of serious energy. Yeah, I mean you even know energy terribly well, yes, you see opportunities of energy right now, There's been a lot of tumult in the marketplace because of Russia and Ukraine, and all sorts of reasons. Yeah, I mean we continue to do something in the energy space, not as much as I would have thought when we when this period began, the volatility and the energy space

has been so extreme. Uh. I mean you just think about it. Within a twelve month period, the price of oil. Uh, you know, vascillated between thirty and twenty Uh. That's an incredible level of volatility. Makes making an investments extraordinarily difficult and challenging. Do you see a prospect of a little less latil? Because you have on the one plus plus trying to live with things. Now you've got the U. S. Government, which it was now trying to regulate the price of oil.

It looks kind of like it is because it says when it's gonna, see's gonna to buy, So it looks like it's got a bit an ass price. Yeah, but we also have an alleged we also have an administration it's very anti oil and uh and and too in my judgment that the anti oil provision is only going to hurt the United States. I mean, we were producing eleven million barrels a day of oil. I don't know what we're doing now, but I think it's down two or three million barrels a day. Uh, as we've cut

back on capital for the for for fracking, etcetera. Uh. Not a healthy set of circumstances. Sam, it's great to have you back on wallst Thank you so much. As Sam's l he is a chairman and founder of Equity Group Investments. Come up. We wrap up the week with our special contributor Larry Summers at Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street

Week with David Weston from Bloomberg Radio. Okay, this is Wall Street Week on David Weston, and we are joined once again by our very special contribute to Wall Street Week. He is Larry Summers of Harvard. So, Larry, welcome back. Great to have you. Let's start with those US GDP numbers that came and showed we were back into growth, modest growth. What did you see in those numbers that would indicate where we are headed? I think it's hard

to know. It confirmed what I think we knew that despite two negative quarters, the economy was not in any real sense in recession at this point. But if you look through the numbers to private domestic demand, which is

probably the best indicator of economic strength. It really wasn't a strong well below one percent for the third quarter, and so I think what we've now had for nine months is essentially no GDP growth and inflation on core measures probably stronger than it was at the beginning of the nine months, suggesting that we've got real challenges ahead. There continue to be arguments that inflation rates are going to come down, but we haven't yet seen them, uh

come down. So I don't think the fundamental picture that a soft landing remains an enormous and unlikely challenge is very different than it was before we got these numbers. Well, we're getting some political blowback now, as you know, shared Brown, the Senator from a high royal letter to J. Powe is followed by Mr. Hickerl Looper, Senator from Colorado, saying, you know, we shouldn't give up these gains we've had, an employment and progress we've made in the name of

fighting inflation. We're gonna seem more and more of that political pressure, do you think so? I think the two points. The first is that the political pressure is a counterproductive strategy from the point of view of those who launch it. Frankly, the FED doesn't listen, and if anything, feels more pressure to prove its independence. So they don't influence short term rates and what the FED actually does, but they do raise questions in the mind of market participants, and they

raise long term rates. So political pressure is a fool's game and actually probably makes financial conditions tighter than they otherwise would be. And that's entirely apart from the merits of the argument uh being made. I yield to no one in how much I loathe unemployment and want unemployment to be as low as it possibly can be over time. The concern is that, as in the nineteen seventies, if we don't contain inflation, we set the stage for much

more financial instability and unemployment. And that is the argument that has to be made by those who are on the dovish side. They say that the FED is gonna be counterproductive and overdo it. A corollarrea of that view is that they should think either that the FED should abandoned its two percent target or that they're gonna push inflation below two And I think it would be helpful if every critic of the FED were asked exactly that question.

Are they really saying that two percent inflation should not be the goal, in which case they should describe what their attitude is towards inflation and how they expected to

work out over time. Or are they expressing the view that the FED is acting so strongly that it's going to produce so large a recession that inflation is going to fall below two learn it's like a bit of a longer view, as you did this week and some of your tweets actually, and we had to study out showing how much we lost in our children's education because of the pandemic, something like six months, and you translated that actually into what that really means for the economy.

Tell us about that problem. If we talk on this show about financial capital, it is very important, but human capital is even more important. And what a generation of economic research has now shown is the human capital is the most important determinant of our economy's long term growth and most important determinant of the fairness and equity with

which incomes are distributed in our society. And so when we see six months or a year's loss in children's achievements, that's a five to ten decline in the value you of human capital. For tens of millions of children, and if you add up what that value is in terms of the lost earnings down the road, it's comfortably into the trillions of dollars, and not just a few trillions.

So we've gotten some really very very discouraging news and it points up the importance of our doing much more and much better on UH what we're doing in the whole education system. We can't fix what happened. We can't fix the non learning that took place when kids were at home UH during COVID. We can do everything we can to double down on learning going forward. And that's about how our schools are organized. That's about who's staffing

and teaching in our schools. That's about making sure they're out of resourced, and in my view, that's absolutely critically about accountability for everyone, Accountability for those teaching and administering UH in the system, and also accountability for UH the kids.

Whether it's the fact that close to of all the grades in the IVY League are a straight A not a minus, or whether it's social promotion in too many of our schools, or whether it's the move away from testing because we don't like the messages that tests said, relative to our social aspiration, we have got to get more serious about actual knowledge acquisition in our education system

at every level. Larry started the week with President she coming out and unveiling his senior management team, if I can put it that way, and we surprised something because there were no perceived as modern at all. They were really people who were very much aligned with him. He also had a fairly aggressive speech on his economic policy in China. What did you make of where China's head?

And certainly the markets didn't like it very much. I think anybody who thought that the posture of Chinese policy was politicized before the Party Congress but would be reformists after the Party Congress got absolutely nothing to make their views confirmed. They didn't get it with respect to COVID, they didn't get it with respect to personnel, they didn't get it with respect to rhetoric on the policy substance. So given what happened, I wasn't surprised to see UH

markets respond with disappointment. Now, Ultimately what happens is gonna depend not on what was said add and just which personnelity appointments took place at this Party Congress. Ultimately, is going to depend on how things in the Chinese economy play out, and it's gonna depend on the judgments the president she makes. Okay, Larry, thank you so very much. Always great to have you with us. That's our very

special contributor for Wall Street, Larry Summers of Harvard. Finally, one more thought, getting it right and getting it wrong. Nothing feels better than having plans work out even better than we'd hoped. Fiser betting big on m R n A and coming up with a COVID vaccine. There's no option of failing, and there's no way that we can do it because failure is not option. And if not Austin who or the Patriots going for the n draft

pick and coming up with Tom Brady. But what happens when it goes wrong when you take a big public position and get your head handed to you. Like President Putin deciding to advant Ukraine expecting a quick and glorious win. President is fa Link in Ukraine. This war is not going as planned or for that matter, Kanye West, now known as Yea, deciding not to be shy about his anti Semitic sentiments and losing his mega deal with Adidas

in the process. In recent weeks he has made controversial statements, including anti Semitic posts on social media that's turned his easy line of sneakers into a lightning world for criticism, which brings us to economic policy and getting cross wise of the markets. Liz Trust made her first big move as British Prime Minister be a new budget, which the markets promptly and emphatically rejected, leading it to her quick departure.

I am resigning as leader of the Conservative Party. So her successor, she Suna, started his tenure this week by saying he'd make it up to the markets. I will place economic stability and confidence at the heart of this government's agenda. But consider the very different case of President gy of China, who this got his way on having a third term, surrounded himself with only his closest allies, and forged ahead on his aggressive economic policy, which led

the markets to give another big thumbs down. As very lovely of the Peterson insit explained it, one of the big things that came out of this is that we're going to stay the course with she Anomics, and that means continued centralization of power. We're staying the course and the course doesn't look that great from the market's point of view. No one thinks President she is about to

pull a Liz Trust. So in the course of a week, the markets won one and lost one, and the time may be broken just over a week from now, when Americans go to the polls in the mid term elections with their opinion of President Biden's economic policies very much on the ballot, Jared Bernstein from the White House wants voters to focus on all the jobs that have been created. Our top line objective here's to maintain the economic gains

we've made for working Americans while significantly easing price pressures. Time, as they say, will tell, But from what we've seen so far, what James Carville said thirty years ago remains true in the United Kingdom, in the United States, and I guess we'll see about China. It's the economy stupid that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.