Bloomberg Wall Street Week: Sonders, Ketterer, Jacobs

most influential voices. Larry Summer is the former Treasury Secretary Bryan Whan, a backup America, Will Smart CEO Charlie Sharp, Bloomberg wool Street Week with David Weston from Bloomberg Radio, rethinking where we are on rates, on oil, on banker's pay, and on the Biden administration. This is Bloomberg Wall Street Week. I'm David Weston. It was a week for taking stock as President Biden tried to reset his agenda after a year in the job. But I'm not going to give

up and accept things as they are now. I call it a job not yet finished. And it did it that he wasn't going to get all of that build back better package, at least not all in one piece. I think we can break the package up, get as much as we can now and come back and fight for the rest of lator. All markets took stock of where they are to, sending the price of Brent crude up over eighty nine dollars a barrel at one point, with talk of it maybe going to one hundred dollars

of barrel. Here's amrita send from energy aspects. I think the fact that demand is so strong and refining margins in particular are still very, very robust despite the crewe

galley we've seen, is a very promising sign. But when it comes to taking a fresh look, equities led the way, suffering the worst week since the pandemic royal the market, with tech shares leading the way down, help by uneven earnings and the anticipation of higher rates, with the SMP down five points six percent for the week and the NASDAC down another seven percent, putting the index into correction territory.

For all the talk about rate hikes, the ten year bond yield actually went down to basis points to one point seven six while the dollar climbed nearly four tenths of a percent. Help sort out a very vulnerable week. We welcome now Sarah Ketder, she's CEO of Causeway Capital, and liz Ant Sanders, she's chief investment strategist at charl Schwab.

So as a strategist, we've got to turn to you first, Lisi, on what is going on here with the markets, is that the rates anticipation is that the earnings isn't something else. So there may be a little bit of a tie into earnings just in terms of the companies that haven't beaten expectations have gotten hit a little bit more. But

I think there are bigger picture issues here. It's the combination of the FED having moved from very loose policy to tighter monetary policy, whether or not that what they will start to do with rate hikes ending tapering and then potentially moving to QT is the elixir for what ails us in terms of the inflation problem, which in turn is putting downward pressure on growth. And I just think you have a rerating going on, and certainly a bit of a excuse the term puking of some of

the higher spec lower quality segments of the market. So, Sarah, a puking a technical term I hadn't heard before. But but but what are you saying as an investor, what are you seeing there? What are the opportunities? What are the real risks out there in the market place right now? Well, the market is certainly rewarding certain areas such as energy and financials, banks, insurance stocks, but it's and value indices are outperforming growth by wide margin. And this is just

three weeks into the year. But if you look beneath that that as lizanner, that, they're definitely pain associated with the extremely high valuation stocks, but not all the very low valuation stocks are doing well. Again, the market seem to rewarding those associated with rising commodities and the financials. Maybe the value of dias are pulling up some of

the financials. They have some I think serious headwinds, But the area that might have the greatest amount of upside as the market begins to discern the winners and losers in is as we moved towards post pandemic will be those who are most badly affected by COVID And there's a whole range of those stocks that have outperformed thus

far should continue to do so as the year progressed. Yeah, and David, I think what Sarah said is absolutely right with regard to sort of the push and poll of energy and financials, and then the relationship that that has with the value indexes. But what's also interesting, it's a lot of times when people talk about growth versus value and value doing well, they're thinking about it at the

index level. But even in a sector like technology over the past few months, those stocks within tech that screen well on value characteristics like free cash flow yield, dividend yield are the ones that are outperforming, whereas the stocks within tech that have negative earnings are the ones getting hammered. So even within call it growthier segments of the market, of the value oriented stocks are the ones that are doing better. Yeah, we even see this within semicon actors.

You can see an incredibly expensive semi vector stock like an Nvidio under form of maybe a less expensive stock in memory. So the distinction is happening right before us, and it's a it's a reason to be grounded portfolio wise in reasonably value, higher quality companies. Listen, as far as there's uncertain of market right now, are we going to get some help from the Fed? Next week? We're gonna get another FMC ruling, So it'll be an interesting meeting.

I don't expect anything um particularly formal in terms of what they're going to do. They're not going to start to raise interest rates. Maybe in the statement they give a little bit more color about tapering, but there's no question that during the press conference, I'm sure John Powell is going to be peppered with questions about the span of time between papering and QT, whether or not they're going to have to act with a faster pace, or

a lot of chatter today. Might they have to do fifty basis points in the early stages versus only twenty five. So I don't expect much of any of that to be in the statement. But given that every f o MC meeting has a press conference, those these days I think are even more interesting than when we first here at two o'clock Eastern. And what we can't it's so interesting that the said, nor can the Bank of England

or the European Central Bank. They can't ignore what's right in front of their face, which is inexorable wage increases that every company we talked to and companies we don't talk to, we just read transcripts, they are facing wage inflation, and wage inflation that gets more so wage rises get more wage rises, which is what makes inflation somewhat difficult to eradicate. So central banks may very well be behind

the ball here. Thank you so very much to liz An Sanders of Charles Schwab and Sarah Kettter of Causeway Capital Management. Coming up, Bank of America Chair and CEO on the future of digital banking. That's next on Wall Street Week on gloom Work. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The move into digital was a big part of the earnings announcements of the big banks this season, with projections of large investments

dampening profit expectations in the near term. Bank of America Chair and CEO Brian moynihan has made digital priority for years now and he's not backing off, seeing it as a major component of the bank's future and the broadest strokes. We are a high touch, high tech company, so digital is part of the strategy, but it has to be incorporated with our relationship manage of businesses think the private bank or MARYL, or the commercial bank or UH, the

trading businesses. So and also our branches three or four D thousand people coming to our branches, so it's a combined strategy. But why digital is so important, it's from the customer interface. It's from the how employees can work together, and then how the customers can receive the uh, the goods and services, how they by them, how they interact with So it makes us tremendously efficient and a great

client experience, which is a pretty good thing. There's a lot of talk right now, but particularly the big banks investing in digital. I know you've been investing for some time. I think your numbers around three point five billion dollars a year is as steady as you go. Do you expect that to continue into the future or ramp up? Well, it's always changing as to what we spend it on. It's a gross amount of money, which is a pretty

good sized amount of money. So when people talk about three and a half billion for us, that means literally incremental new products and services and new capabilities. So it's a lot of money to run the platforms another ten or twelve billion dollars. It just goes on every day. But what are we investing in greater capabilities? So Erica to our consumer clients, you know, is huge, but we

can keep increasing the functionality. So year every year, we had a fourfold increase in the fourth quarter of twenty one people using Erica, not because Erica it had a growth in customers, but really came from people using it more and more or Zel getting it more easily accessible through a widget it's called. Those are the types of things we're doing it in. On the institutional side, cash pro, which is the way companies move money, more engagements by customers.

They can see everything in a in a portal type app as opposed to a bunch of different systems. These are just core executions we drive through the platform. I believe you passed a road mark this actually quarter in Zell actually having more transactions than you're checking accounts? Do I believe? I read that? If true, give us a sense of overall in your business. Will that continue to progress?

I mean, at some point does digital eat the entire bank? Well, so what happened with Zell is we keep track of the checks written by our customers. So, uh, you're sitting down and writing a checkout and handing putting in the mail to pay a bill or to hand it to somebody that's down of the last couple of years, and Zel has been growing fifty percent a year, so the numbers of transactions by zel is actually exceed the number

checks written by our consumer customers. That was a milestone because it shows you what's really happening is that Zel is eating into those low balanced checks. And if you look at a dollar amount of checks right, not the

number of transactions. Dollar amounts actually up a little bit, so less checks of higher amounts to two thousand dollar checks versus twy dollar checks, and those low checks are being taken over by Zell, which is good because it's easier for the clients to move money to each other. It's easy instead of giving your your son or daughter

a check, David Ido, you just zelling the money. And and in the volume of Zell now exceeds Vemo overall in the industry, and I think we're basically equal to Venmo in terms of transactions a quarterly basis, So we're

driving that through. It's really convenient, but that is a big milestone to think that what you and I grew up with, David, is the way to get money out of the bank was to write a check and hand it to somebody and then they could negotiate that check has now gone to where you can just say giving your cell phone number and you pay them. That's pretty good. It's extraordinary development, certainly for somebody at my age. That's right, Brian.

Give me a sense as you look at the digital strategy going forward, how much of this is basically doing a form of the business you've been doing, for example zel replacing checks as opposed to actually moving into new businesses potentially with new stomers. Well, I think if you if you look on the wealth management business, the financial advisory team we have at MARYL and the private bankers we have their cord of what we do for clients.

But if you think about what happened during the pandemic, the ability for us to get information to clients and blue our insights to clients through through Zoom and WebEx and other types of meetings allowed us to get out to clients in a very intimate setting, one to one, but through the through the screen many more times. So

you enabled your reach of those teammates. But behind the scenes, also just thinking the investment products like our our Life Events investment product has seven million users now who are loading in a financial plan, a life event plan for them and It keeps them on uh you know, on parting and moving forward on task, showing them what's happening. If they say this much, they want to say for this purpose, what are the priorities? You know, is that a new product not an advisor did that for years?

But is it enablement advisor to add more value to the insight knowledge they have as opposed to putting the stuff in a financial planning module or doing calculations is on spreadsheets? So you know, as you think about these, yes, some are very new products. L is a new way to move money. Others are digital embodiments of old products. But light have reach and access and capabilities far different.

And that's pretty fun and interesting. Are there customers that you will reach their digital that you would never have reached their back of America or is it basically that customer base that of course you're always trying to grow. Yeah, well, you know, we have basic things. We have more to do. We can do with every customer because we have the

best capabilities of anybody in the market. And if a customer simply does has a product with us and does something with somebody else, We're like, we're not serving them well because we're the best, therefore they should do it with us. That's our basic principle. But on the other hand,

we can gather customers. So if you think about it in the in the consumer side, especially as we've been going into new markets at Pittsburgh or Columbus, are Cleveland, Cincinnati, Salt Lake, or Denver, Minneapolis that we've opened up in with branches. When we go in there, we go in digital first, and we'll have ten twenty thousand checking accounts

going before we ever opened the first branch. So those stomers can do, you know, can work with this completely digitally and it works and so but we we firmly believe it's a high touch high tech. At some point most customers on the consumer size come to the branch. All the relationship managing customers the core interfaces through a person, a financial advisor, a commercial banker, but enablement helps and so you have to think about this as a combined

strategy of high touch high tech. So, yes, we get customers digitally only that happens all day long. But the end of day, what makes us special. We have the best digital capabilities, plus we have the physical capabilities with them. Brian, as you say, you've invested a lot of money, continue to invest a lot. You've made a lot of progress. At the same time, do you envision possibly a major acquisition in this area to really take you forward, because you said the sky is unlimited and how far you

can go with digital? So we've done major acquisition would be off the table probably in a lot of ways because it's just the does a business model work creature. But we have done an acquisition like an healthcare technology space. We did something to enable the payment side, surround payments. We bought back our joint venture on the merchant side a couple of years ago. That was a two billion dollar transaction and now we've put three hundred million dollars

into the new system to drive that. So we're always going to make acquisitions which complement our behaviors and also partner with companies or a couple of our capabilities and partner with companies. But the reality is, you know, we have two point seven billion digital interactions and our consumer business. Last quarter, we have a huge business. We have fifty four million digital customers UH that are credited and forty

one million were active. You know, we we we we need always be looking at what capabilities we need, and sometimes that's partnered with providers and ideas that come in. But the reality is acquiring more customers is not what we're after right now. Right What we're after right now is driving the usage in the capabilities and people understanding what they can get from Bank of America's digital capabilities across the whole platform. That was Brian Wynihan Chair and

CEO of Bank of America coming up. How big is the semiconductor shortage problem? How long will it last? And how can we fix it? We hear from the former head of Qualcom, Paul Jacobs. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Everybody's talking about it, the shortage of microchips, whether you make cars. Like Mary Barra of GM, we saw significant impact with the semiconductor shortage

last year. I would say every quarter it gets a little bit better, but we're not through it yet. There still is work to do. Or you make heating and air conditioning equipment. Like Dave Gitland of Carrier, we actually um don't have the kind of buying power with the chip O e ms that maybe some of some other folks in other industries do. But I can tell you that we have met directly with the CEOs of major chip manufacturers. We've done unique arrangements with them that we've

never done in the past. And it's not just the buyers of chips feeling the pressure. The producers like Kurt Sivers of n XP Semiconductors are feeling every bit as much pressure. The entire semiconductor supply. Chaine is on the pretty heavy stress these days. Even FED Chair J. Powell's job has gotten harder because of the chip shortage, which he says is partly what's leading to the inflation. We're seeing people want to buy cars. Car carmakers can't make

any more cars because there are no semi conductors. So that's that's never happening. So what's the solution. Congress is working on a Chips Act to get more investment in onshore production, which Congressman Hayley Stevens of Michigan says is critical for the auto industry in her district. Here in Automotive plan, one of the things that you cannot escape from our is the chip shortage. We have got to pass the Chips Act. But whatever the solution, just about

everyone agrees that it's going to take time. Whether you're in the market to buy, we still think it's going to linger into the first half of this year and we should be farther out it by the end of this year, or in the market to sell. This is going to get better through next year, but I don't think everything is going to be imbalanced from a supplied amount perspective through the end of next year. And we turned now to someone who really knows this chip industry well.

He's Paul Jacobs. He's now the chairman CEO of x CAM and he did for many years run qual Calm. So Paul, thanks so much for being with us. First of all, give us a sense of how big a problem this is. Is can you put your arms around how big a problem the shortage of semiconductors is right now. But as you know, everything is being digitized, and so semi conductors are in almost every product we use, from home appliances to cars and now even more so with

electric vehicles. They're in the cloud, they're in our smartphones, are in just so many things in our lives. And what's happened is that we had some shocks in the system, which became big because we had this notion of being very efficient just in time manufacturing, lean manufacturing, so you didn't hold a lot of inventory on hand, and when there were whips in the supply which happened because of COVID, these things spiraled out of control and became very very

big issues in in the in the supply chain. And so you're seeing for big companies, some of them are able to get their components still, but for smaller companies, uh, some of them are having a very hard time, long lead times, some sometimes up as much as a year of waiting to get a part that you need, people who have been raising prices. So all these things are affecting sort of that innovation economy that the world depends on. When you talk about just in time, did we under

invest globally? Did we underinvest in the capacity to design and manufacturer chips. I think that there's a lot of concentration in it, and there's only a few suppliers. Is there's not a lot of diversity in the the supply chain. But I think maybe to explain it a little bit simpler, if we think about it something close to home, like

toilet paper. When you think about there was supply of toilet paper and a pretty constant demand of toilet paper, maybe a little bit more because people were working from home. But you didn't buy a lot of toilet paper at your house because I figured you could go down to the store and get it. Now what happened. People got nervous whether they could actually go down to the store and get it, so they started putting more at home. They started buying more, and the system wasn't set up

for that. So there was this surgeon demand and that meant that there were shortages. And that is part of the problem with the chip business. The supply is there under normal constraints. But now with these things that have happened because of COVID, and very interesting things happened because at first the demand dropped, everybody thought the whole economy was slowing down to demand drop. Then the demand surge because all of this work from home and all the

other other things. So there was this ripple in the demand side. The supply side was basically there, but it's kind of like this toilet paper situation. Now people who are have the ability are trying to hold more inventory so that they don't get hit by these ups and

downs in the process. I would say though, that it is important to build more semiconductor uh fabs, and it's important not just for the making of the chips, but also the packaging of the chips, the testing of the chips, but even beyond that, it's all the little components that go around it aboards. I mean, we really, uh, you know, we have an issue where there were very few suppliers.

There was a broad range of products out there that that and components that that people needed, and all this led to a lack of resiliency, you know, a lack of ability to adapt to these big shocks that might happen in the system. Paul, this has been very helpful. Thank you so very much. As Paul Jacobs, he's the chairman and CEO of x COOM. Coming up, we wrap up the week with special contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. This is Wall Street Week. I'm David Weston. We're gonna wrap up the week again this week with our very special contributer Larry Summers of Harvard. Larry, welcome back. Good to have you here. We've talked about the Fed. We've talked about inflation. The FED has said they're going to tighten because the inflation you've been warning about for some time. We actually get a decision next week. What do you

expect the FED to do? I think they're going to be signaling the tightening in March. I hope they'll be signaling as rapid as possible and end UH to qt UH. We got an economy that's looking like it's above the speed limit and it's gonna have to slow down. And the Fed's got a very delicate operation now in UH owing it down. The delicacy of that operation is underscored by the turbulent and asset markets since the beginning of the year. It's underscored by the softness in some kinds

of measures of consumer sentiment and UH consumer spending. But if we're going to have maximum employment and maximum growth over time, UH, we're gonna have to control the pace of the growth of UH total incomes so that more of it can go into more employment and more output and less of it into inflation. Larry, as you look at the various indicators do you can. Are you concerned at all that maybe we're too complacent about the offensibility

to do this. The market uses they have been turbulent, they're reacting at the same time you look at the five year five years there's still like a two point one two like that, And also the financial conditions have not really tightened much. Is that because we're just so confident that they can do this without really roiling people? Are we underestimating the size of the problem. I think

the gravity of our situation is still understated. While the term transitory has left the policy maker discourse, the idea of transitory inflation is still very fixed in their minds. There's still a belief that with very limited monetary actions that have not taken full effect, we will see inflation as slow to the two percent range by the end of the year. That certainly could happen, but it wouldn't

be my bet. Given the tremendous tightness of labor markets, given increasing signs to China is going to be a source of bottlenecks for quite some time to come, given increasing concerns about oil prices, given that there's a lot of housing inflation that's still has to feed through the system, and given how remarkably low real interest rates UH are, I don't think that it's the best bet that inflation is going to be coming down to the two into the two percent range or the two's by the end

of the year. And so I think complacency is UH not appropriate. So Larry and President Biden had a quite long, almost two year, two hour press conference this week, and in the course of that he basically said it is the FEDS responsibility to do with inflation. He talked about the economy. What did you make of what Prisident Biden

had to say about his leadership of the economy. Look, I think President Biden is right to take pride in the fact that more people are employed than anyone would have expected on the day he took office, despite very substantial uh desease threats. Frankly, I can't understand, for the life of me why the administration is so obsessed with meat packing. Meat Packing is a entire higherly trivial and

unimportant issue with respect to uh inflation. It is inconceivable that tossing a billion dollars as the Agriculture Department is in the general direction of creating an extra meeting meatpacking plant is a good use of taxpayers money or is going to happen. So I don't understand why the President of the the United States keeps talking about that. I'm glad to see him recognize and emphasize the independence of the

Central Bank. And as I said on your show last week, David, I very much hope that his new appointees to the Fed, when they have their confirmation hearings, will take the opportunity to underscore their recognition that the most basic responsibility that the Central Bank has is a stable currency and price UH stability and the avoidance of inflation. That's not something that's been in any of their writings UH prior to

this point. That doesn't mean they don't fully share the conviction, but I think it will be very important for them to articulate that and articulate how important they perceive that to have been in the nominating process, because ultimately, credibility is about deeds as much as it's about words, and the most important deeds the president has with respect to UH the Central Bank are what he are, what he does UH in terms of staffing the Central Bank, Larry,

we're talking at me packing, I naturally think about competition policy and a trust law. You have something of a dispute, perhaps going with Paul Krugman, your former classmate, your friend, over the role that a trust and we've heard from President Biden and others that really an trust enforcement is a key ingredient in fighting and inflation. How big a difference do you really have on this subject. I'm not sure, because I'm not sure what they really think. Should we

have substantially enhanced anti trust in the United States? Yes, we absolutely should. Is it harmless and normal politics to take advantage of concern about high prices to drive political energy behind that competition policy? Yes. Does it make sense to suggest that antitrust policy canning any important way reduce uh the inflation rate over the horizon of a couple of years. No, that is not supported by economic science. I'm also worried about the um and type trust doctrines

that some of the Biden appointees have put forward. Lena Kahn expressed a concern that perhaps when two firms merge and they're able to produce more efficiently with fewer people, that should not be counted as an efficiency. There's been a lot of talk about introducing considerations other than lower prices for consumers into antitrust protecting small business competitors. For example.

That kind of stuff is frankly promoting of higher prices and works in the wrong direction with respect to inflation. The most important things thing we can do with respect to competition policy is accept lower priced goods from abroad, and resistance to protection is UM active trade policy. Those aren't things we hear about from the administration. So yes, I am all for UH competition policy. Yes, I think ant i trust in our country has lagged, but it

needs to be based on lower consumer prices. Larry Lewis sneak in one more if I could hear please. A couple of weeks ago, we had an outrage of the week from you about the patterns of investment from our public officials, whether at the Federal Reserve Board or up in at on on Capitol Hill. We now have perhaps a development where the Speak of the House, Nancy Pelosi, apparently has backed off of her resistance to a broadband on that. What do you think should happen? I was

glad to see it. I think we need to scale scale any suggestion of impropriety by public officials. UM out of our system. That means not trading in individual stocks. That also means uh, not here in something and calling your broker to do anything, even selling mutual funds and the like. People should be able to adjust their financial positions, but only well in advance, so that there's a reassurance

that insider information is not coming into it. And there should be rigorous rules in both the executive branch, the Federal Reserve and uh the Congress. And I think it's an area where it's appropriate for a confidence uh to look at things so an outrage of the week that maybe a little bit less outrageous going forward, we hope. Thank you so much to Larry Summers, Will Harvard, our very special contributor on Wall Street Week. Thanks a lot. Finally,

one more thought. Lions and tigers and bears and even hamsters. Oh my, every one of us is dealing with COVID in one way or another, whether it's worrying about our hospitals or whether our kids can go to school, or figuring out when we should go back into the office. But that's all about us. What about the other creatures that share the planet with us? What about the tigers

and pumas, and minx, and yes, even the hamsters. Well, it turns out that a lot of them can get this virus too, and they don't even have the option of getting the vaccine, much less the booster. A year ago, it was a crisis over mink farming in Denmark which brought the Danish Prime Minister to tears when she ordered millions of the little furry creatures destroyed. Now we learned that lions and pumas in a South African zoo have

contracted COVID, apparently from the people who work there. Fortunately they were treated and they recovered, which is more than we can say for the poor hamsters. Over in Hong Kong, China is pursuing a vigorous, some might say ruthless policy of zero tolerance of COVID. So when a local pet shop worker, a customer, and eleven hamsters tested positive for the Delta variant, the Hong Kong government ordered all hamsters

imported since December euthanized. Despite the lack of really clear proof that humans can get COVID from hamsters, but there may be another way. Since the eighteenth century, in a small village west of Madrid, on the eve of San Anton's day, they purify animals from disease. Well, how do they do it. They take a group of horses and ride them through bonfires, which may or may not date back to the days of the plague. And if it seems a bit medieval, then again doesn't a lot of

our response to this pandemic. It sure does for those poor hamsters. That does it For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.