Bloomberg Wall Street Week: September 23, 2022

a really different reaction to mark. It's more indications of just how hot the U S economy really is, through the eyes of the most influential voices, Larry Summers, the former tractor secretary, Katherine keening, CEO of the N Y Mollins Sam's L Sharman and founder of Equity Group investment in Bloomberg Wool Street Week with David Weston from Bloomberg radio, ratcheting up the rhetoric over Ukraine and interest rates all around the world. This is Bloomberg Wall Street Week. I'm

David Weston. This week contributors Larry Summers of Harvard on those rate hikes and whether we're starting to see some cracks. When you get as far behind the curve as the Fed did, then you really have to hit the brakes very, very hard, and Steve Rattner of willowed advisers on the problem with equities. Our equity exposures down to the lowest levels that's been are in twelve or thirteen years. Of Existence.

It was a week of coming to terms with a war in Ukraine that he is not going away as President Biden went to the United Nations to lay the blame squarely on President Putin. This wor. All should see these outrageous acts of what they are. Putin claims he had to act because Russia was threatened, but no one threatened Russia and no one other than Russia sought conference, and President Putin warned about just how far he is

willing to go. I would like to remind those who allow themselves to make sus statements about Russia that our country also has various means of destruction, which in some cases is even more modern than what NATO countries have, and when the territorial integrity over a country is written, we will certainly use all the means at our disposal to protect Russia and our people. This is not a bluff. This week we also had to come to terms again

with tightening monetary policies. Central banks around the world added a total of seven hundred basis points to their rates, with the Bank of England going up another fifty Swiss national bank up, putting it into positive territory for the first time in almost eight years, and the Federal Reserve adding another seventy five basis points, with no suggestion that

it is close to being done. We've just moved, I think, probably into the very, the very lowest level of what might be restrictive, and certainly in my view and the view of the committee, there's there's a ways to go, and part of the fallout from all that tightening is an ever strengthening dollar, with all that means for markets and for policymakers. In the end, it seems like the Ode currency that will sustainably win discounty will is the dollar.

But what was good for the dollar was bad for just about every other market, that is, with the SMP given another four point six percent on the week and at one point falling below it's June closing low before

ending just above it at thirty. The NASAC was off just over five percent, despite rally on Friday, and bonds basically melted in the heat of the Fed rate increase, with the yield on the ten year gaining nearly twenty five basis points for the week, while the two year was up over thirty basis points, ending at four point two percent. To put this rather extraordinary weekend context. Welcome now Christina Hooper, she's chief market strategies for INVESCO, and

Tracy Alloway, Co host of Bloomberg's odd lots podcast. So welcome to both of you. Great to have you here for about alter. Well, let's start with you, Christina. Is The Sky Falling? The Sky is not falling, but markets are adjusting to very changing circumstances, if I said that right, very changed circumstances. What we are doing is seeing an adjustment that is very, very significant, because what the Fed and other center banks are doing, as you mentioned in

the Intro, is very, very significant. This is the analogy I'd use. Um, if you're lactose intolerant, you have a half a cup of milk, it's a little painful. If you have a gallon of milk, it's extraordinarily painful for a few hours. And we just drank a gallon of milk and we're lactose intolerant. Well, to continue an analogy, a little bit crazy. We were told we were going to have to drink the gallon of milk. Why didn't

we believe it? This is what I don't get. So I think one of the reasons this week is so significant is because it really seems to me like investors have woken up to this pain messaging that Jerome POW and other fed members have been trying to transmit for many, many months now. I mean we even had the minneapolis fed president, Neil Cash Kari, come on and say pretty much explicitly I would like to see stocks lower. I was happy when stocks fell after Jackson Hole. Tighter monetary

policy works through financial conditions. They need financial conditions to get tighter, but for some reason the market has been reluctant to take on that messaging. I really think this week is sort of the moment that everyone woke up. Now, I'm a journalist and I'm not allowed to have official opinions, but I would say that anyone who still believes in the soft landing prospects, they need to be getting worried at this point. The Path to a soft landing seems

narrower and narrower, almost by fed design. And as a journalist you've talked to a lot of people are saying something just like that. You're you're being a good reporter there. But, Christina, what did you want to say? I was just gonna say in fairness. The Fed didn't think it was going where it's going. It has. It's its view of inflation has evolved dramatically. If we go back to the DOT plot from December, the median expected fed funds rate for the end of twenty two was point nine. Now we're

at four point four percent. So we've seen the Fed do an incredible Um Turnabou in terms of its views on inflation. So that's why I think we had the market reaction we did. Not everyone expected it, because we didn't exactly know what the Fed was thinking. The whole purpose of Tracy, obviously, is to get our arms around inflation, which we have not had. We lost control of that, a doubt. I think the Fed would admit that as well. What is that going to take? What is your reporting

tell you about it going to shake? And do we believe the Fed is up to the test because, as Christina just said, they've had to change their theory here. Well, I think you are starting to see some signs of deceleration and I hate to do the sort of line by line CP I analysis. Um, it's probably boring for everyone involved, but there are some technical changes coming up to health care, for instance, that are expected to take

some of the acceleration out of the inflation index. But I think the big issue here, going back to the Fed and what Christina was saying, is they've misjudged the lag between rate changes and the impact on the economy and they misjudged that going into the crisis or coming

out of the immediate pandemic. Um the worst of the pandemic in March of fast saying thank you so very much, tracy allowy and Christina Hooper were staying with as we look for some shelter from the market storm for our investment and it's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg radio. First, the US federal government, for the first time since Columbus set sail from Spain, had to pay a double digit interest rate to borrow money from its citizens. For six months and two days. After treasury bills added this new chorus of how high the moon the nation's banks began to limb their version, taking the prime rate charge to the nation's biggest corporations to an unheard of thirteen percent. Previously unheard of, that is now you've heard

it here. That, of course, was Lewis Rucker on Wall Street, way back in September of nineteen seventy nine. That was when inflation was running at just under twelve percent. The most popular movie was alien and the Doobie brothers topped the charts with what a fool belief is. One of my personal favorites still were the Sur Christi, you know, Hooper of INVESTCO, and Bloomberg's Tracy Alloway, I wanna pick on you from it here on the dead side, borrowing

money at double digit numbers. We're not there at this point now. Well, at the same time, what is this environment we just described going to do for the asset of Fixed Income? Yeah, you know, we were talking about financial conditions earlier, and I think one of the weird things about recent market moves and history has been how sing wine the credit markets have been about inflation and

higher interest rates. And I've seen various theories. Um, you know, today we actually finally saw leverage loans the benchmark Indus down to like nineties three dollars, but even then eight five is generally considered the distressed level. So what's going on? One theory I've seen, and you know, it's kind of

a sort of moral hazard argument. But there are people who say because the Fed came in last time with the corporate bond purchasing program maybe that's one reason we haven't seen the market panic, because they think if things get bad enough while the Fed will come in and it'll buy some bonds. Well, last time it didn't even have to buy bonds. It just announces that it's going to buy bonds and everything is fine. But I think people are looking for that pressure and you are starting

to see some signs of it around the edges. So, for instance, we saw triple C rated junk bonds to take a little bit of a hit, but not nearly what you would have assumed looking at stocks. So what's your reaction to that, Christina? is any for fixed income right now, sort of a haven in this very tumultuous time in the markets? Yeah, I mean, first I have to say it all depends on your time horizon. Um, but and so I believe very strongly that it's important

if you've got a long time horizon. You shouldn't panic in this environment. I mean, let's look at fixed income, floating rate, but there's a variety of areas Um investment grade credit looks good. Um, I think we just have to recognize that we're going through this adjustment period. We're going back to the old normal. I mean presumably if the Fed doesn't cut rates again right and and that was a time that was fairly good for for equities and fixed income. Um, I think it's important to have

alts in there too. Um. But it is not the end of the world, as we talked about before, it's just we're going through a change. Well, we're talking about fixed income, whether it's loans or its bonds. We had one story this week's Citrix, where they basically were borrowing a lot of money and the banks went out and syndicated that that would be just fine. They ended up losing something like six hundred million dollars in the deal. They had to eat that money. What happened there? Is

that a one off, or does that say something broader? Well, to me this is sort of the tail end of that buyout boom and a lot of the credit market excesses that you've seen in recent years. And One reason why leverage loans in particular are getting so much focused right now is because if you look at which asset classes had the most Um, I'm going to say enthusiasm. Leverage loans would be one of them. You know, we had concerns about the quality of some of those loans

for a while. We had, at various points in time, US regulators trying to improve the quality of the market. And now, as interest rates get higher, a lot of that pressure lands on floating rate loans because the companies that took them out are going to have to start paying more to keep up with those benchmark interest rates. And that's why you have people who are well, at Morgan Stanley for instance, who are looking at the leverage loan market as the sort of Canary in the coal

mine of how the market is viewing recession risk. But again, we're not quite there. Eight five is usually the level of distress. We are at something like nine three now. So further to go. If you're really looking for a sign that the market is panicking. If that's a fixed income, what about equities? Doesn't make any sense to buy equities. Typically when the discount rate goes up, equities go down, and certainly we're seeing that right now in the equity markets.

Sure well, I do absolutely believe that unless you have a three or four month time horizon, you should be keeping your equity exposure and looking for opportunities to add to it. Um. Yes, there is that adjustment period when, when rates go up, Um, we do see equities tend to go down. But Um, we also tend to see

a recovery. It doesn't last forever. In fact, during a whole uh fed rate high cycle, usually by the end we come up with positive performance for equities, and leading the way is typically the higher valuation names that got hit hardest first. Um. So this is, you know, this is to be expected. It's not fun, but it is to be expected. Um, the kind of behavior was seeing, given the kind of dramatic increase in rates. But that is not, Um, the end for equities. So you might

actually add, at least selectively, to growth right now. Absolutely, as as coming out of it faster than the others, do you think? I do. I do believe that. For sure, evaluations are higher there. They tend to get hit hard, but Um, but they're also significant growth prospects, growth potential there at a time when the economy is clearly slowing down. So Tracy. What do you see in other asset classes? And let me name two at random cash and commodities. Cash,

I mean cash is looking okay right now. I guess you're only losing eight percent per year versus what like on some other stuff. But when we're talking about cash, I mean it's got to be in the dollar. That's the only thing that's really working at the moment. Cash. We used to say cash is king, now we say the dollar is king. And not only is the dollar king, it is a king with a wrecking ball going through

other asset classes. But from what you said, the very fact that the dollar goes up makes commodities don't go down in general over time, and so that means commodities aren't so attractive, you think, to investors right now. Well, that's exactly right, and I think that's one reason why the recent environment has been so painful for a lot of people, because I think back to the beginning of the year, commodities, we're seen as this inflation hedge Um,

a bit of a risk off hedge. You know, if you're worried about what's going on with Russia and the Ukraine, you can buy some wheat exposure, buy some oil exposure. You have a nice little offset to macro risk. That shows up in the sort of headline indussees. That's not working anymore and I think that's one reason why the environment has been so difficult for investors. The only good news that I kind of see here is, you know, people have been having to deal with these really binary

potential outcomes for most of the summer. You know, does inflation stay high, do we get the dreaded wage price spiral, or does the Fed come in, raise interest rates, bring down inflation and you get that knock on recession effect? I think the good news here is we're moving away from that really binary tail risky environment and we seem to be moving closer to that recession scenario. I know I'm scraping the bottom of the barrel by saying recession is good for investors at this point in time, but

at least you know where you're headed. Thank you so very much to blue ory's own Tracy Alloway, and to Christina Hooper INVESCO. Coming up the times, they are changing, and not necessarily in a good way when it comes to equities. We talked with Steve Ratner will it advisors about what the regime change in monetary policy means for equity investors. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg radio.

All good things must come to an end, and if we still had any doubts, this week saw the Fed move even farther away from easy money, as the center bank raised rates again and signaled a good deal yet to come. What we think we need to do is to move our policy rate to a restrictive level that's restrictive enough to bring inflation down to two percent, and

the Bank of England followed suit. This is still the biggest box box hike since black Wednesday thirty years ago, while the Swedish Central Bank went even further, raising rates a full one basis points. That shift in the entire regime of monetary policy reverberates throughout investments, with rates on the ten year and the two year treasuries shooting up and the dollar continuing to strengthen. You've got two year treasuries at almost, you know, highest levels we've seen in forever.

And where does that leave equities? They're certainly well off from their highs. It's never a good sign when you get these big rallies and then followed by three straight weeks of declines and you just can't seem to hold onto some of these games. But does that make them a bargain? We have seen in the path that as we enter into recessions, value companies, value stocks, tend to have declines and earnings well, growth stocks actually tend to

hold up fairly well. Or have we yet to see the bottom when everyone's on the sort of race to the bottom of you know, who can get more Barish, who can have the more outlandished the forecast? I think I just told you where market psychology is right now. You sentiment different ways. To measure right it's a global financial crisis slows and to take us through whether it really makes sense to be investing in equities these days, we turned to somebody who's it is to invest a

substantial amount of money. He is Stephen Ratner, the chairman and CEO of Willed Advisors, which invests the personal and Philanthropic assets of Michael R Bloomberg. He is our founder and majority shareholders. So, Steve, thanks so much for being back on Wall Street Week. There's a lot of being talked about equities, particularly as interest rates rise. Give us a sense where you are on equities right now as an investment and you're not a trader. You do it

over the medium and longer term. We're not traders and I've always said to everybody that market timing is for fools. I think every smart investor, successful investor, has pretty much said that. But of course we do have opinions about the equity markets and at the margin we do make tactical tweaks and shifts to try to accommodate our view, and I would say that we have been very, very

cautious about equities for some months now. Our equity exposures down to the lowest levels that's been in our twelve or thirteen years of existence and we remain cautious, and interest rates are the biggest factor in that decision. So just to take us through exactly how higher interest rates, which we're having, not just the United States but almost globally at this point, how does it express itself in the value of the equities? Is that a matter of

the slowdown the economy overall, less demand for business? Is it a matter of evaluations? How does it feed through to equities? Certainly there are effects on the economy overall and one needs to think about it. But I my observation over I don't know, forty years or so of watching equity markets is that they are keenly attuned to interest rates as a more direct transmission mechanism to equity prices, simply because interest rates are a discount, our discount rate

on future cash flows. And it's not a coincidence that you've had the so called unprofitable tech with the longest state in cash flows suffering the worst than this down draft that is interest rate related, in my opinion, and some of the more near term cash flow producing companies suffering less. I think there's a very, very direct correlation between the investment opportunity and fixed income or an interest

rates versus inequities. That suggests perhaps the sell equities might make more sense than other equities, that is to say those that are generating real profits today. Cash today maybe a safer bed than those where it's really in the outyears. In terms of this factor, there's no question about it.

And again you can see it in the numbers over the last nine months or so since the equity markets really started rollover, which is which is the fact that longer dated cash flows, the further out you get, biotech startups, growth companies have been hit the worst. The Nasdaq is down a lot more than the SMP. Not a coincidence, but you say have been hit the worst. There are those who really are fans of growth stocks who say, you know what, they've already taken a hit. That what

happens actually when you go into a slowdown recession. They take the hit up front, but then they come out of it faster and better. Well, I'd like to see their evidence and support of that. And again, if you're talking about an economic slowdown, we could have that conversation. That may come out at a different place. If you're talking about a situation which there's no evidence at all that we're at the end of an interest rate cycle,

then I would push back. And in fact, if you look at the market as a whole, I believe it's true that the market has never really turned upward until the Fed has been done tightening. And again, there's no evidence the Fed has nearly done tightening. So the Fed has been pretty explicit they're going to keep tightening for quite a while. Do you have any projections as you think about your investments? Do you try to have any sense of how long that might be and frankly, even

with the terminal, right might be. Well, we think about it more in terms of over under. If you look at the market, the credit markets have been wildly behind

the curve in predicting. The fedsman behind the curve and the credit markets behind the Fed in terms of their interest rate expectations and and so if you basically say, okay, well, the equity markets are taking their queue from the credit markets, you can see why we had this sort of mini bull run, if you want to even call it that, this summer when it looked like maybe interest rates for starting the plateau or something like that. Steve, thank you

so much. Really great to have you the Stephen Ranner. He's the chairman and CEO of Willet Advisors. Coming up, we wrap up the week, as we always do, with our special contribuity Larry Summers of Harvard at next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston and were welcome back once again our special contributor, Larry Summers of Harvard. So, Larry, obviously very big news this week from the FAD. What was your reaction to what you saw in what they did but

also heard from them. Look, I think they're moving in uh necessary, painful uh direction. It's clear that they're manifesting determination on inflation, that they're recognizing that you don't stop cars that's going much too fast in a completely comfortable uh way. I think that is all welcome. I still think they're too optimistic about how easy it's uh going

to be. Their forecasts that unemployment will be four and a half percent, even as unemployment comes down, even as inflation comes down to two I think is a very optimistic view. It was also very optimistic when it was echoed by Secretary Yelling. It's the right thing to hope for, but we're not gonna beat the level of inflation that we have now out of the system without some quite

substantial dislocations. No one should take any satisfaction in those dislocations or want uh those uh dislocations or want to see anyone unemployed. But the necessary medicine from where we are is likely to involve a recession, as Sherman Powell is being increasingly clear UH in recognizing. So I'm glad to see the Fed adjusting in the direction of seeing the need for more tightening and recognizing that unfortunately, that tightening will have consequences that we've been talking about on

this show uh for a year. I still think there may be a bit of underestimation of what's going to be necessary in terms of tightening, but policy is now much closer, uh, certainly with current market expectations uh, to the appropriate place. The markets now expecting that fed funds will be four and three quarters per cent next uh May. Little wasn't much more than a year ago that they were forecasting that it would be zero or very close to that uh next May. That's a age or change.

But when you get as far behind the curve as the Fed did, then you really have to hit the brakes very, very hard, as you know well. There it's not just the United States, it's also, for example, Great Britain,

and it strikes me there's a big contrast there. Certainly, Bank of England says we've got a tightening that went up fifty basis points this week, but in the meantime you've got a new government over there that's going for a fiscal stimulus, tax cutting, and whereas at least the bode administration is getting out of the way of the Fed. What do you make of what's going on in the UK makes me very sorry to say, but I think the UK is behaving a bit like an emerging market

turning itself into a submerging uh market. There's nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches h being taken. It would not surprise me if the pound eventually gets below a dollar if the current policy path is maintained. This is simply not a moment for the kind of naive, uh wishful thinking supply side economics

uh that is being pursued in Britain. Between Brexit, how far the Bank of England got behind the curve, uh and now these uh fiscal policies, I think Britain will be remembered for having pursued the worst macro economic policies of any major uh country in a long time. I hope that at some point this policy pack goods will be reversed or that somehow I am misjudging uh the situation, but I am very fearful for Britain on the path that it is traveling. Well, let's even go beyond the

United States. In the UK, this week center banks around the world at its seven D basis points to interest rate. So it's a global phenomenous point. The one thing that comes out of all of it is a newly strengthened dollar. I mean it sets record after record after record. What does that mean for the global economy? Look, a strong dollar is causing inflation in the United States to be lower than an otherwise would be because it reduces import prices,

but it's pushing inflation up everywhere else. And because the dollars the currency of international trade, it's taking lubrication out of the system and it's putting x or burdens on countries that have borrowed, because when they've borrowed in for a foreign currency, it's usually been in the dollar. So this is going to complicate uh macroeconomic management in uh many countries. There's going to be continuing, I fear, uh distress.

Countries are attempting to counteract this with intervention, as the Japanese UH did. I think we've mostly learned that when you're intervening against the trend, when you're intervening against the direction of monetary policy, which is certainly the case in Japan, your intervention is as likely to create opportunities for speculators as it is to really be effective in changing the path of UH currencies. So I think this is going to be an issue that is going to be with

us uh for uh some time. But I suspect for the period ahead countries are going to have to be adjusting to a very strong US dollar. This week we learned the Tom Brady is his own form of maybe quiet quitting. He's just gonna work four days a week from now and he's gonna take Wednesday's off. Is there are a larger issue here, to think in the United States economy of people not being willing to work so hard?

I'm seeing some evidence of that, at least anecdotally. People may work a bit shorter hours when they're working at home. People maybe just a little more prone, uh in an economy that is so red hot and where you can get a new job easily, to tell their bosses where to take it. We've had this phenomenon for the last half year or so of terrible, terrible productivity performance. Some of that's probably just an offset to the strong performance we had earlier, but it may be that people are

just working a little less hard. You know, if everybody worked a seven hour and forty five minute day rather than an eight hour day. Practically, that would be the equivalent of a three percent uh wage increase or, equivalently, three decline in UH productivity. Okay, Larry, thank you so much. Always great to have you with us as our special contributor in Wall Street Week. He's Larry Summers of Harvard. Finally,

one more thought. Investments are going down the drain. The era of cheap money brought with it some pretty loft evaluations, particularly when it comes to tech firms, with evaluations so rich that they were expressed as price to sales rather than price to earnings, with Google peaking at a price eight point nine times as sales, Netflix reaching over fourteen time sales at one point, and facebook making it up

to just under fifteen time sales. Well, those wells of easy money are drying up and with them some of the astronomical valuations. All because the Federal Reserve, like just about every other central bank in the developed world, is committed to raising rates to get inflation backed down towards that two PC target. We're not at that level. Clearly today we're, you know, we're just uh, we've just moved, I think, probably into the very, the very lowest level

of what might be restrictive. But never fear. There is one place where evaluations are as high as a tidal wave or even higher. But it's not in tech, it's in, wait for it, sewers. Yes, sewers, home to teenage mutant in to charitles, legends of alligators and, of course, tons and tons of waste and water treatment. In a Bloomberg column, Le And dunning takes us through a deal announced for the renewables company next era energy to buy the sewer

and water system of Towa Mensin. That's a small township thirty miles north of Philadelphia. And the price. The price was a hundred and fifteen million dollars. Now that's not a big deal for a hundred and seventy billion dollar company, but take a look at the valuation, a whopping at twenty one times revenue, way more than apple or Microsoft or facebook ever dreamed of. Next era executive promised the town council that not all of that purchase price would

be reflected in higher rates. We offered a hundred and fifty million dollar purchase price and, as I think it's very important to express that we do not intend to recover that full purchase price from the customers. But whether customers foot the whole bill or not, next era looks to make money on this deal. Rates for water expe to ramp up substantially in coming years. And if you're a resident of tower, means and there are definitely some

remaining questions. Why are we selling this stick? This is a gold mine. Why are you doing this? That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.