Bloomberg Wall Street Week: September 30, 2022

In Bloomberg Wall Street Week with David Weston from Bloomberg Ready storm season, from pipeline leaks in the North Sea to emergency repair of a broken guilt market in the UK to Hurricane Ian rampaging through Florida. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers and the Bank of England's abrupt move to

shore up the British bond market. We're in very complex and uncharted territory with what's happening in the UK and New Vine CEO jose meniah On seeking refuge from the dorm in the market. It's not just about stocks and bonds. Now it's about alternatives. It was a week of stormy weather, starting with unexplained leaks in the nord Stream pipeline off the coast of Denmark, something special Climate Envoy John Kerry says is a real risk for the environment. This is

a massively bubbling up under the water. Methane is twenty eight times more damaging than c O two, so it has a profound impact in adding the amount of methane in the air. A major storm hit the market for British government bonds this week, triggered by the new government's proposed tax cuts, which had unintended consequences for the big pension plans as guilt yields shot up, requiring the Bank

of England to step in. As explained by former MPC member Kristen Forbes, we are now in situation every central banker doesn't want to be in where the fiscal side is going in a direction opposite what the monetary side is trying to do. The US banks weren't immune from the stormy weather either, as major banks were hit with one point eight billion dollars in fines for improperly allowing their employees. Even some executives to use social media outlets

outside the record keeping requirements. Regulators reached settlements with a dozen banks for failing to monitor employees communications unauthorized messaging apps like WhatsApp. And then there was the big storm, Hurricane Ian that came up through the Caribbean and slammed

into Florida, causing destruction. We're still getting our arms around the pictures that were coming out of Florida where you know, there was just nifting cars up and floating down the street, you know, yet corn affter pictures of beautiful little homes and then all you could see if the tops of the roots. So the storm search looked up to the hype,

but a really diffut a day. And the markets they reflected all that stormy weather with stocks close and down for the week, down for the month, and down for the quarter. The SMP five hundred lost two point nine percent for the week and closed the quarter at the lowest point in two years, finishing under thirty six hundred, while the NASDA gave up two point seven percent for the week, down four point one percent for the quarter.

Bonds sold off as well, with the yield on the tenure up thirteen basis points since the week began, ending up at three point a two. And here to take us through another tough week in the markets are David Bianco, chief investment Officer at DWS America, and Lori Calvacina, head of equity strategy at RBC Capital Markets. Welcome both of you to Wall Street. Good to have you back. So let me start with you, David, and the most basic question, how bad is it going to get? How bad is

it gonna get? Well, thank goodness it's Friday. The weekend should be a reprieve. Uh. Tough day, tough week, tough year. The SMP five hundreds down from its all time high. This is uh, this is a bear market. I find myself thinking about the nineteen seventies lately, and I think something to keep in mind is that you bear market when the Fed was fighting inflation aggressively. Back then the SMP fell, But in the SMP fell, So I think a key question is is this the beginning of a

high inflationary period? Where we near the end of a high inflationary period. If you think we're near the end of a high inflationary period, the worst is largely behind and the market shouldn't go too much further down. But that's the key question, Laura, I'm not feeling much better. What do you think? All right, I'm going to try to make you feel a little bit better. Um. So, look, we think that the market is set to stage a major,

major battle at thirty five level. And the reason for that is if you look back over the course of recessions into the thirties, a median recessionary draw down is about twenty seven percent, and so we'll get there when we're around thirty on the smp UM. And I still, as I talked to investors, I think many are still in the mild, kind of quicker, shallow camp. But do think there's gonna be a sluggish growth backdrop afterwards. I think people are not really looking for an anything major

like what we had in the financial crisis. So I think that at least we've gotten that at our back I will tell you if you think about kind of where investors heads are at. Something else that makes me feel a little bit better is I'm not sensing a ton of panic. Definitely alarm um. But the big question of the day is what do higher rates for longer

mean for valuation multiples? And that's a very constructive conversation. UM, and we've done some work suggesting that we're probably getting pretty close if you hit that level on the SMP to the same kind of multiple contraction you saw back in the seventies over the course of the entire decade. I want to come back to earnings. But before that, we just heard from Laura shortened shallow. I think you said, I think he's referring to a recession. Are you rejecting recession?

And I guess my question really is, normally, if you have a recession, we turn our heads and look at the FED and say, okay, please cut rates. Do we have much room to really deal the recession if and when it comes. We're expecting a shortened shallow recession, but we're a bit concerned that the troughs might linger. Well. We're not expecting a V shaped recovery after the small rest US and I think it's gonna be slow real

growth afterward. The trouble here is that the FED can't rescue US because of the inflation problem, and they can't attempt to rescue the equity market or even the economy broadly until they're confident that the inflation battle has been one so I think what you people know, it's pretty clear at this stage the FED is committed to fighting inflation, and they've decided they're willing to risk a small moderate recession Tolery one to make sure that this inflation beast

is slain. What are you expecting on earnings? We're expecting earnings for two to be two. I think at this stage you should not expect any growth. It should be flat uree. But every day that goes by, with the shocks that we're experiencing, higher interest rates, a super strong daughter collapses and other currencies around the world. Even oil prices have come down a lot, and we are beginning to see a lot of companies come out and say

things are slowing. Okay, Lori Calvacina and David Bianco will be staying with us to you give us some investment advice next. That's coming up on Wall three Week here on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Frailty thy name is Woman, wrote William Shakespeare, thereby proving not only that he was arguably sexist, but that he indisputably had no knowledge of Wall Street.

For the most fickle female of poetic imagination would seem a symbol of romantic constancy next to the recent behavior of the stock market. Indeed, to paraphrase that other male chauvinist, Sigmund Freud, what does Wall Street want? One thing it wanted, we were told, was Paul Woker. It got him. That

was Lewis Ruckheiser, of course, calling Shakespeare a sexist. I understand it backage j when the stock market was on its upward climb after chair of Walker's interest rate shock therapy, and the bull market in bonds was just really getting started. By then, the CPI was climbing only two point five percent a year. The top movie with Star Wars for Return of the Jedi and the Police top the charts with every breath you take. Things I can remember actually

and were welcome back now, David Bianco and Lorie Calvacino. So, given what we just talked about, with what's going on in the markets, Larry, what's an investor to do? Where is their safe harbor from this storm? So look, I think it's a question of what your time horizon is, and if you're concerned about volatility and markets in the near term and want to add some more defense to the portfolio. I think the clear choice at this point

is healthcare. UM. If you look at other defensive sectors staples and utilities, you're basically at peak valuation relative to the broad market. UM. We also think they're significant earnings risk for consumer staples as the consumer weakens, pricing power wanes for some of these companies. And also staples have massive exposure to the dollar to international issues UM, and they're very, very sensitive to a stronger dollar. So I think health care you have less of that sensitivity, and

you have reasonable valuations. It's not a great story, UM, but I think it's the best one you can tell on the defensives. So what about that? And I think of defensive, I think about things like stables or utilities and things like that. Good right now, I think the consumer staples are not a great place to hide, especially if you believe that the market is a you know, an a bottoming process. Uh. They are going to suffer from the currency hit. They still have a stretch consumer

packaging costs. So we also prefer healthcare. UM. The thing about healthcare is that is not the second largest sector of the SMP five hundred, not financials, not industrials, certainly not energy or materials. So the SMP is global, the SMP is digital tech businesses, and the SMPS medical Now the global parts and the foreign currency exposure and helping

right now. And there's a little bit of valuation risks still at some of the big digital names, but the medical part has on demanding valuations, and we are quite excited about some of the innovation that we're seeing coming from the biotech and the and the and the and the pharmaceutical companies and medicine makers. You mentioned digital in tech, and there are some people, as you know, David, who say you want to go into tech right now because

it comes out of recession. First. It is a bit of an early circlical uh it's so or consumer discretionary stocks. But every cycle is different, and I think there are a few things that we have to be mindful of. I think this is going to be the consumer will be resilient, but a lot of consumer business models might not be able to expand the way they have been over the past ten twenty years of low inflation, low

interest rates. We're trying to find which businesses have that long term growth potential through innovation and through solving the problems that are causing us to have the weaken productivity. One thing is we expect jobs to hold up but a small recession. But if you're adding jobs and the economy is not growing much, that means productivity is really weak.

That's where we need companies to address that. That that that that problem, which Lauria I think takes us back to something David said earlier, which is it depends on what you think the comeback and sooner later there will be a rebound. What does it looks like? Is it a v or is it more gradual, because that will affect which one is a better place to be, right. I think if you're thinking about rebound place, I think you do want to look to some of these beaten

up growth areas. I think you want to be very selective. I think you want to stick with quality. I think you want to stick with bigger market caps. But technology is area that we think looks really really interesting with reasonable valuations. Areas like semiconductors look to me like they've bottomed out in terms of earning sentiment. Basically nobody is taking numbers up there right now, and that's usually a good contrarian buy signal for that part of the market.

But you know, going back to kind of what does this recovery look like. If you think it's going to be a hot economy, you want to buy value stocks, you want to buy cyclicals. But if you think it's going to be a cool economy, you do want to buy secular, growth oriented areas of the market. They typically outperform when GDP is below two per cent, and I think that is probably the kind of recovery we're headed for. How do you feel about them? Um, you're asking me

to talk about my first professional child. So I spent a long time covering this space, um, and I think people who have covered this space for quite some time realized that in the middle of recessions, in the middle of these very challenging periods economically, this is when you do want to buy them. And if you look at small caps, they've been in a trading range versus large

all year. There's some stability in the performance. They're mostly domestic, they're very cheap on valuation, basically at the bottom of their of their historical range, and small caps are already pricing in a collapse in manufacturing. Two typical troughs and a big spike and jobless claims from here. So I think the recession is largely baked in, and this is where you typically want to be on the rebound, and people want domestic us exposure right now. So what about

that issue domestic us exposure? Do you want to hide in America? You want to hide in America for now? Yeah? Um, And we are looking for businesses that, like Gloria said, the ones that we'll have a strong rebound. We want to be a little bit careful in small caps and some my conductors for a little longer, but those are ones that will likely have v shaped price recoveries once we get past this. Um. The cousin of technology is communications,

and that's been beaten up very badly this year. We think that's overdone, so banks and communications, entertainment companies, internet companies. We think that's an area where investors can start, um uh, stepping up and buying where the reward should be worth the risks. I know you've been going around the country talking to people. What are you hearing in terms of what they're interesting? What are they nervous about when it comes to investment. So it's funny I mean, nobody feels

particularly bullish right now. Um, but I think there is a general recognition that people have plenty of defense in their portfolio, plenty of safety trades, and so they are concerned about when does the market bottom, what do I need to own coming out on the other side, because I think there's a general recognition that when rebound, when the rebound finally does happen, they're under exposed to the

kinds of things that do well in those rebounds. Do you hear from people I don't want to be an equities no matter what they are, if this is not the time to be an equity, I don't hear that. I mean, to be honest, you know, as I talked to some of my more bearish kind of global multi caap multi asset investors, UM I can usually talk them into looking into small caps right now. UM So, I think kind of the desire to kind of put everything in cash, it's just not something that's in the DNA

of a lot of these people. But I do think even the most barish investors out there are trying to figure out what has been de risked and if there's an opportunity to put money to work in here and ultimately that is very healthy. What are the bonds? Is

it time to go back into bonds? Well, I think it's more of environment to go into bonds right now, you know, very short to rage and cash and trying to find the equities where the upside is worth taking the risks, in the pain and the volatility you'll like you to go through the next few months. I think this week frayed nerves though a lot of people were fairly calm up until this week, and and even today didn't end very well. Um, so we still want to

be a bit cautious. We are acting on this tip, we are buying it, but we're also keeping dry powder with cash, and it's probably best to just keep in mind that this will be a market that I think has a rally during the holidays on the idea that the FED is done hiking. They won't cut anytime soon, but they'll be done hiking probably at the end of the year. That probably gives us a rally. But I think we find ourselves at these levels once again early

next year in the spring. Okay, thank you so very much. It was great to have you both as Lori Calvacina and David Bianco. Coming up, we'll get some advice on where investors should hide out in these turbulent times from Moving CEO Jose Mania. That's coming up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. That rainy day is here.

Everywhere you look, economies and markets are struggling, with Jason Furman of the Kennedy School saying Europe maybe in the worst shape. I think Europe is one of the biggest risks for a recession. Even as the world was also focused this week in the United Kingdom and the British pound, something the British Opposition Party hammered home. What we've seen in the past few days has no precedent. The government has lost control of the British economy and for what

they've crushed the pound. But what happens in the UK and Europe doesn't necessarily stay there. As Atlanta FED President Raphael Bostick pointed out, what we've seen in terms of Markeury action is that the proposal has really increased uncertainty and really cause people the question about what the trajectory of the economy is going to be or might be moving forward. All of this leads Alvaro Pereira, the chief O E c D Economists, to take down growth estimates

overall worldwide. Our forecast certainly is a challenging one because we are forecasting a significant slowdown of the economy um to say, the United States growing zero points of episode next year, the Euro Area growing zero point globally, we're talking about significant slowdown right now. It looks like more than just a rainy day. We may be headed into a real storm. And if so, where are the ports

for the smart investor to head into? As we battened down the hatches, and we welcome now someone whose job it is to figure out how bad the storm is and where we should head as investors when it happens. He is Jose Mania. He's the CEO of Nuvin. Welcome back. Great to have you. Okay, thanks for having me the first on the storm as I'm calling it. How bad

is the storm? Do you think? Economically? Like? The storm is choppy, but it hasn't really changed much in our view, right I've been going into now the latter half of the year. We still see volatility ahead, but you know, the fundamentals are strong, and that you're seeing consumer household balance sheets are really good, the labor market, so we're not really forecasting a prolonged downturn or or recession. That being said, I think our view is the same it

was back in right. We we we've been telling our clients be prepared for lower returns in the previous decade, be prepared for more volatility and by the way, inflation while you haven't seen it for a long time and may show up, and here it is in our shores. Right, So for us, it's about staying invested, staying disciplined, maybe more defensive today, but always diversification. Right, it's not just

about stocks and bonds now, it's about alternatives. How do you get more outcomes and solutions because there's really nowhere to hide in a world where all correlations go to one. Well, let's talk about it. That exactly as we have a federal Reserve and other center banks raising rates, it looks like they're going to continue doing it for a while. It necessarily takes asset values down, whether it's stocks or its bonds, and we're seeing that, goodness knows, in the

market's overall. Right, Now, what do you do if you're an investor in that world, are there some assets that are better than other assets? Well, one I would say this is where active management I think comes back into the fold. Right, So there's going to be winners and losers. Clearly, in today's environment, we see buying opportunities. You have to be careful at value traps um as well. But then

you think about inflation rising rates. While you look at middle market bank loans, senior loans while they have floating rate paper, you think about getting more exposure to commodities, things that have a higher correlation to inflation as well, real estate um. These are all the different mixes. That's why when I talked about diversification, it's like there's active management, but there's also you can be more explicit and intentful to ride the wave with benefit from rising rates to

actually be highly correlated to inflation and inflation. Every environment in active advantage that you're going to have options to any rule, so you have to be careful. But as a rule is that it's time to stay away from equities because that discount rate is going up and that automatically just reduces the value of the equities. I would never say it's time to stay away from equities obviously,

when you know, we believe in staying invested. That being said, today, on the margins, we see more value in on the fixed and club side versus credit. We see more value actually in high yield. Right, you've got a high yield market almost topping eight percent in yields. You know, maybe again more active management, they're picking the better, better credits, stronger credits. So yeah, on average we see a tilte more towards fixed income, a tilted more towards private markets.

But I would never say completely stay away from equities. So talk about HW yields because I've heard others suggest that's sort of almost a substitute for equities in a way. And obviously we're getting some bigger returns now, but we're getting bigger returns for a reason. As we're worried about a recession of downturn. You're worried about some of those companies not being able to pay back the money. And by the way we we acknowledge it, actually spreads can

continue to widen from here. That being said, when you look at a risk return perspective, you look at some of the most attractive pricing we've seen you know, in quite a long time. These are still the areas where again active management picking the right credits, maybe still being more defensive picking the stronger credits. But the yield versus the risk that we're taking and the pricing you're saying in equities versus the high yield and the fixing cole

market today we see more opportunities there. But look, this is you know, we're in year three of this kind of quote unquote interesting and challenging year. Guess what I think is gonna be more the same of that You're gonna have volatility. Now is the time to again stick to your discipline, you know, stick to uh to diversified portfolio. But then again actively you can find these pockets where you can do well. Okay, thank you so much, as

I really appreciate this. Jose and I he is the CEO of New Ven helling up, we'll wrap up the week with our special contributor Larry Summers are Harvard. This is Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Weston, and we're delighted to welcome back once again our very special contributor here on Wall Street Week.

Here is Larry Summers of Harvard So, Larry, maybe not the most consequential thing, but certainly the most noteworthy thing in the markets this week was the Bank of England saying they're going to buy an unlimited number of long term guild bonds to try to stabilize the market. I know there was a specific problem there, but does that

indicate something broader about the markets? David? We're in very complex and uncharted territory with uh what's happening in the UK, and wouldn't amaze me if we had situations like that

in uh more places. Uh. Look, the UK has fundamentals that are out of whack, in which the market does not believe that they have a sustainable path of macroeconomic policy that over time, no matter what interventions you do, spells very difficult times for their long term bonds, for their currency, for their rate of inflation, and ultimately for their economy. They pursued yesterday what's called in this little

field um a market maker of last resort option. At a moment when there were huge margin calls and so there was great selling pressure but no buying pressure on long term bonds, they committed to step in and buy for the next two weeks, and that for a time stabilized things. But it's not gonna stay stable uh forever on the basis of two weeks buying. And it's probably not even gonna stay stable for two weeks unless there is a sense that this is a bridge to the

fundamentals being fixed. And that's not what we are seeing from the indications we're getting uh this morning. That's UH why I encouraged the i m F to make clear that it was monitoring, uh this situation, and the i m F made clear that it was concerned, even adding some editorialization on the regressivity of the tax policy of the tax UH code, which I'm not sure is their usual uh role, but there's uh gotta be real concerned.

So so Larry, it's clear the bank aving then step forward and saying we are willing to be, as you say, the market maker of last resort. Are some other central banks are going to have to potentially step up at least be willing stuff and be a market maker of last resort? What about Bank of Japan? What about for that matter, the feder Reserve. I don't think there's any sign that I see yet of other markets being disorderly. But we know that when you have extreme volatility, that's

when these situations are more likely to arise. When you have extreme volatility coupled with substantial UH leverage, coupled with UH substantial uncertainty about what's going to happen in policy, layered on top of the kind of uneasiness that you have with high rates of inflation underlying, and with the kind of geopolitical and commodity uncertainty that's coming out of

what's happening in Ukraine and UH China. This is certainly not a time when very many firefighters should be taking vacations UM and so I've got nothing to UH to predict, but I do certainly think we're living through a period of elevated UH risk and that earthquakes do not be get Earthquakes don't come all of a sudden. There are tremors first, and most of the time when they're tremors, they're just tremors, and it goes away. But not of the time when there are tremors does it just go away.

And so in the same way that people became anxious in August of two thousand and seven, this is a moment when there should be UH increased anxiety. So so larry a couple more reasonably quick ones. Number one, should the federal Reserve be particularly nimble at this point you said, it's incredibly complex. Some people think they've built in so much momentum on the rate hikes that they should actually

consider how they can adjust to the data. Look, I think after a long time, when UH he was still captain in team transitory, I think Chairman Powell is now in the right place. I think Chairman UH. Chairman Powell is UH saying UH that he sees the centrality of

inflation as the concern. He's also say which is just the right thing to say that while it's their plan to move vigorously to the point where monetary conditions are restrictive, and the three percent interest rate they have right now is not restrictive, their plan is to move to a restrictive place, and that's appropriate. He's also making clear that they're may going to maintain their peripheral vision on what's happening to the real economy and certainly to the emergence

of UH financial strains. So I think that is UH broadly appropriate. You know, I certainly have written the sentence many times about long and variable lags, and that is sort of real feature of the difficulty of doing monetary policy.

UH Now, David, I think it's worth remembering that when you're inner regime of signaled policy, I suspect the lags maybe a bit smaller than they otherwise would be, in the sense that the response to, for example, the hike that will come in December is probably already happening because it's been factored into prices, has fed through into medium term UH rates. As a really interesting point one last one, you really tweeted a fair amount of the Jones Act

this week. Finally there was a suspension of it with respect to Puerto Rico, so they get some of that fuel and explained to us why you're so wrought up about the Jones Act. So look, the Jones Act was

Woodrow Wilson's by America Industrial Policy. They had the idea that we'd require that stuff being carried between the United between the United States, between Houston and h Boston to Puerto Rico to Hawaii would have to be carried on US ships because that would make us not dependent on foreigners and not make us and make us UH more secure. Whenever the logic of that idea when they had it at nineteen twenty, it makes no sense today. Larry, thank

you so very much for back with us. That's Larry Summers of Harvard, a very special contributor here on Wall Street Week. Finally, one more thought. Mark Twain famously said that history does not repeat itself, but it does sometimes rhyme, and we have certainly seen that recently, and everything from the echoes of Roger Merris with his record setting sixty first home run that came actually sixty one years ago, and that is now echoed by one Eron Judge also

of the New York Yankees, one of baseball's graades. Um you know, be enshrined with him forever, as you know. It's words. Can't describe it to Russia going to war confident of a big, quick win, as it did with Japan back at the very beginning of the twentieth century, only to lose ignominiously, something that certainly hasn't done in Ukraine, well at least not yet. But boy, as it gone

less well than Vladimir Putin ever imagined it would. To have Ukraine conducting a strong offensive that's working is incredibly important to putting real pressure on both Putin and the Russians. And this week we saw the leader of the political party descended from Benito Mussolini rising to lead Italy seventy nine years after El Duce fell. Malony accomplished a threefolded success political success. So her party clearly emerges from these elections,

says the clear winger of these elections. So now we're hoping for a very different sort of historical rhyme, as the current FED chair J. Pale is hoping to replicate some version of what his predecessor, to Paul Woker, pulled off forty three years ago with a series of dramatic interest rate hikes that brought runaway inflation in the United States to heal something Mr Powell is not subtle about saying he'd like to repeat one way or the other

right here, right now. The successful Volker disinflation of the early nineteen eighties followed multiple failed attempts to lower inflation over the previous fifteen years. And as we hope that J. Powell does get his way on inflation, might we look for something similar on the strong dollar? For soon after Chairman Volker got his arms around inflation in the United States.

The British pound back then started to collapse, something Treasury Secretary James Baker wanted to fix to help his boss's friend, Margaret Thatcher. But on that one, Secretary Baker took the league by coordinating with other finance ministers, while the chairman Chairman Volker went along, if somewhat reluctantly. So if history rhymes on the strong U. S. Dollar, Britain may need to wait for inflam Asian to come down before he

gets any US help for its pound. That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week