Bloomberg Wall Street Week: Summers, Kraus, Davis

Before too long, investors had their fair share to worry about this week, starting with a dramatic spike in natural gas prices in Europe, putting at risk heat in homes and power in China. Here's Jeff Curry Goldman Sachs, Global head of Commodity Research. This is just the first inning of a multi year, potentially decade long commodity supercycle, which only fed the concerns already out there about inflation. Here

is Republican Congressman French Hill of Arkansas. We have addiction to spending in this city, We've had since seventy nine, but it's on steroids right now, and it's creating inflationary expectations that I think concern every retired person and every low income person, because inflation is a thief. And when we talk inflation, concerns about the FED tapering its bond purchases cannot be far behind. Something Fed Chair j Pole

put in play last week. So long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate and did nothing to back off of during his testimony this week before the Senate Banking Committee. Mainly, what we've seen is that the the supply side restrictions that that are so much at the heart of the inflation and we're seeing have not only not gotten better, they've actually

in some cases gotten worse. But then again, Senator Warren said that if she had her way, it wouldn't be Mr Pyle making the decisions anyway. Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man. And if all that weren't enough to set markets off, this week, we had the continuing spector of the United States possibly defaulting on its debt as Republicans and Democrats continued to bicker over

the debt ceiling, with each side blaming the other. Here's Senators Pat Toomey and Shared Brown. The Democrats have chosen to ignore our warnings about this excess of spending, but they want us to vote to raise the debt ceiling

in order to permit the massive spending increases that they're planning. Senator, can I really speak between witnesses, but I wonder if sexually takes you up on the offer to go get a cocktail, if if you would pay, or you'd skip out on paying the bill and the expect sector yelling to pay, and the markets, well, it could have been worse. After taking a hit on Tuesday, equities gained some of it back, with the SMP closing the week down just

over two percent. Well, the NASDAC took the biggest hit, down over three percent for the week, while the tenure yield, after jumping up on Tuesday's, settled down a bit to end the week just under the one point five level, while Bitcoin put on a late week surge, closing over forty eight thousand. Tell Us make some sort of sense out of these markets this week. Welcome to Peter Krause, he's chairman and CEO of Aperture Investors. Welcome back. It's

great to have you back. On Wall Street Week, Peter, So it give us a sense of what you think happened this week. It was it all about the tenure yield. I think you're I think you're opening remarks were terrific, But I would say the following there's a lot of noise out there, so let's focus on the facts. The facts are. The FED has clearly said they're going to table. The facts that are the FED is that I'm not going to increase interest rates until well into twenty two

early twenties. Rate facts aren't we continue to have growth. Facts are we continue to have elevated inflation, not runaway inflation, So in that sense it's transitory, but certainly more inflation than we had at one point five to two percent.

So if you have growth, you have inflation, you have the FED seeing they're going to taper, you have the FED saying you're not going to increase interest rates, it seems pretty clear to me that long term rates have to start rising, and they have them, that the energy prices are reacting, and we have growth, We're not at the point of a recession. So I think if you

take away all the noise, it's actually reasonably clear. But reasonably clear as as a good market to invest in as a questionable market, because it seems like if you take this week and last we put together both weeks for different reasons, we had big sellouts and equis and they come back again, it seems to be very choppy. As they say, yeah, I think at the equity market as at the level that is at is clearly at a value that is getting a little bit high, and

I think the equity markets behaving that way. Now. I don't think we're going to see your recession, so I don't think we're going to see a significant pullback, but I've said for the last you know, six months to eight months, this equity market could certainly see a retrenchment of ten to fifteen perhaps even as it reprices itself. The FED activity over the last number of years has clearly driven interest rates to very low levels. We know wheel rates in the United States are negative, wheel rates

in Europe are negative. So what does that mean. That means that all the cash that might have been running after fixed income markets went in the equity markets. So clearly the capital allocation is not normal, and people have more invested in the equity markets than traditionally, and they've driven prices to high levels. So do we have volatility rates start to move? Absolutely, would you put cash in the equity market today? You probably wait to see for

the volatility to reside. So the question is if low rates really drive this so much? That does depend critically? Does it not? On J Pali statement, this is transitory, is not permanent. Even this week when he was giving testament over the Hill, he said, you know, it's worse than we thought it wasn't It's more durable. And every time he talks, there's another reason. It was used cars, you know, and now it's natural gas prices. There's always

something else. And those supply chain problems are gonna linger for a while, aren't they, Peter? I do think they will. I I don't like the word transitory because it suggests that the level of inflation it's currently there is going to recede to the level of inflation we had before rates or inflation became quote unquote higher. I don't think that's the case, and I actually don't think that's what

Pal means. What I think he means is that four percent five percent inflation is transitory, but not necessarily two or two and a half percent is transitory, and if we had two and two and a half percent inflation that was normal unstable, we would definitely have higher rates and capital allocation would take place, and I suspect the equity market would have to reprice that. Thank you so much,

Peter Krause. He's gonna be staying with us as we take a closer look at inflation and how investors might cope if in fact it's here to stay contrary to what j Pole claims. That's next. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week. I'm David Weston. There was more talk of inflation this week with fed share Powell admitting it's a bit worse and more persistent than he'd expected, but still not really something

to worry about. And natural gas prices really shot through the roof over in Europe because they have some problems with some supply chains. What if chair Pole is wrong and real inflation is here to stay after all, what should investor do? Still well, this is Peter Krause of Aperture Investments and now joining us as Nancy Davis of Quadratic Capital. She is the CEO and founder of that organization. So Nancy, let's start with you, because you've made something

a name for yourself. When I say that in the area of inflation, without regard to whether you think it really is persistent or not. If it were to be persistent, what should investor do? I think every investor needs to be concerned about inflation, especially retire ease, because you're not going to benefit from the wage inflation if you're not in the labor force anymore. So we do live in a in a real world, and inflation is a risk

to every investor portfolio because it reduces purchasing power. I think investors just shouldn't be taking a bet on whether it's transitory or not, and really should have as part of a diversified portfolio, should own some amount of inflation protection. Well, just to follow that, Nancy, what does inflation protection look like? Is that gold? Is that real estate? What is that? Well? I definitely have a different view about what inflation protection is.

I know a lot of investors look at commodities because that worked in the seventies in the last period of hyper inflation. But we just I think commodities are like the laptop. You know, I'm talking with you on tonight. It's deflationary. Technology has innovated in that space, So I just don't think commodities are the only way to think about how to capture inflation. I personally like using um the difference between short and long dated rates as another

measure of inflation expectations outside the consumer price index. I think that's the thing that investors have to keep in mind, is that's just one index. It's like if you were to buy equities, nobody would buy just the Dow Jones index and say, oh, I have all equities. I think investors have to be diversified. Peter, same question to you if you think I think Nancy makes a really good

point about that. First of all, in in the commodity inflation time period, we didn't have the same kind of technology boom that we see today, and we didn't have anywhere near these social um I shouldn't say social, but ecologically beneficial ways to actually produce energy. And Nancy's business has has really focused on a long term structural benefit that's out there of taking advantage of the difference between short and long term rates, and she's made it liquid.

And I think that if you want to buy inflation for detection. That's a piece that's a part of your portfolio that you could easily tailor own, and it would give you protection to do that. You can also own commodities, but you are you are susceptible to supply and demand changes, political changes, technology changes. So there's more going on in the commodity world than there is in the sort of

pure rate opportunity. So but let me just pick up with something you referred to, which is what's going on with climate change and some of the things that are being done by the bodymustriction and others. In response that, Julian Tether Financial Times this week wrote a column and which is she called greenflation because she said, as we make this transition, it's a massive transition away from greenhouse gases, it's got to drive some prices up. There's got to

be inflation issue, right. I think she's right. I I definitely think she's right, and I think it's a little bit difficult to calculate. So what I mean by that is we're all going to move towards a green world.

That's a good objective and we should go there. But what we don't know is how long is it going to take us us collectively as a global economy to actually get to the point where the green world is efficient, cost effective, and actually produces enough energy for us to operate our world in and that time period we don't know, And if we haven't invested enough in carbon fuels to actually have the supply to get us there, we're gonna see price fake spikes, and we're gonna see them actually

be very rapid and actually quite uh disconcerting, because you're not gonna be able to increase the supply fast enough to be able to deal with the shortfall. One of the things Nancy, clearly we have not invest enough in his supply chains all around the world, and would start with semi conductors, but it's gone well beyond that. Take a look at all the ships lined up outside of Los Angeles and even here in New York. What about that is an effect on inflation? Is that going away

anytime soon? Well, it's really a result of the supply shocks around the world. It hopefully will go away soon, But we're also having labor shocks at the same time, so goods and services are not being able to be shipped around the world. Factories are not working at full capacity, and it's a bit of a catch twenty two because you know something's got to give eventually, and eventually the

demand will be met. The question is whether we're going to have higher costs without the earnings per share growth that has been priced into corporate America. If you look at stocks and corporate credit, the markets are really expecting

a lot of growth. And when you listen to some of the companies as they report earnings this season, a lot of people are talking about the labor market and the delays and the higher costs that are not necessarily growthee costs there are more potentially a stagflationary costs, or we have higher costs but not the earnings for share growth. Peters. I listened to Nancy. A lot of what she describes is the direct result I suspect to the pandemic. We had to shut down the economy and bring it back up.

But is it really the cause of what we're seeing or did the pandemic reveal some underlying structural weaknesses we had, perhaps around the supply chain, having too much devoted to certain countries like, for example, China. Is it really revealing more structural issues for the economy that have to be addressed. Well, that's an interesting question. I think you could argue that there was nothing structurally wrong with the supply chain, although

it was clearly concentrated in certain areas. I mean, remember the nuclear disaster in Japan and UH automobile manufacturers realized that their supply constraints were disrupted dramatically because they were getting a lot of supplies at in Japan in a

specific place. It was near Fukushima. So national events do have an effect on supply chain, and COVID had the same effect, although in a global basis, and so you know, now we're trying to figure out how do we diversify the supply chain so that effect isn't doesn't happen as often. But we're always going to have some aggregation of supply because ultimately there's a benefit of suppliers being near each other.

They use the same kind of labor costs, use the same kind of energy costs, and if those costs are low and attractive, you're going to attract the number of people that produce goods that have an ecosystem around them. So I suspect that you're always going to have these kinds of shocks in the supply chain when you have natural events that are catastrophic. So in that sense, I

don't think that COVID exposed a weakness. It exposed kind of the persistent issue you have when you're when you've got a global supply uh, you know, structure and effectively there's a concentration in the system somewhere. Really interesting discussion about inflation and the labor market and commodities and the climate change. Can't get much more than that. Thank you so much to Peter Krausse of Aperture Investments, and also to Nancy Davis of Quadratic Capital, where she is CIO

and founder. Coming up, Bloomberg opinion columnist Frank Berry has a bad news for New Yorkers when it comes to elections. Boston is beating you. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Over the next six weeks, Boston voters will witness a hotly contested campaign to determine the city's next mayor, while in New York voters know that

November's mayoral election is all but over. We're joined now by Bloomberg opinion columnist Frank Berry, who writes admitted New Yorkers Boston is beating us. I took a look at the city from a different perspective, which is politics, and the contrast between Boston and New York could not be any different. Right now. Boston's in the middle of an extremely close, heated, closely followed mayoral election between two women,

and in New York it's the opposite. We've got an election that no one's particularly following because no one has any expectation that the outcome will be any different than what everyone believes it will be. And in part that is because we have Eric Adams, the former New York Police captain, who is the nominee of the Democratic Party, and New York City is overwhelmingly Democratic. New York City

is overwhelmingly Democrat. He won the Democratic Party primary. He's facing a Republican who has marginal support, has raised a little bit of money, not a lot. But it's a race that's really devoid of debate. It's not capturing anybody's attention. Uh. And I think that's in large part because everyone expects that Adams will win running away. In Boston, it's the exact opposite story. It's a very close race between two

Democrats who both have strong basis of support. One is running more from the left, one is running more from the center. And so it's very much a debate about Boston, but it has national repercussions or overtones, because it mirrors a debate that is playing out in Washington and art cities across the country between the progressive wing of the party and the more centrist wing. And you put your finger on the structural difference, which is you have two

Democrats running into each other. You don't. You don't have a Republican versus a Democrat the way you do in New York City. Correct. So in Boston they run an election process that is often called top two or nonpartisan, and everyone gets to compete on the same ballot in the first round of voting in the primary, and the top two finishers, no matter what party they belong to,

advanced to the November general election. So that way you're short of getting two candidates who are your too strongest candidates, no matter what party they belong to. In New York, we run party primaries, so each party gets a chance

to advance one candidate. The problem is the Republican Party has been weak for many decades, and they often go outside their party to find someone and often don't find a strong candidate, and so you end up often with a very highly competitive Democratic primary UH and UM a

Republican candidate who is very weak. And so in New York we had a very closely contested Democratic primary, Eric Adams one against a very strong field, including two women can unidates who were close on his heels, but that effectively ended the election, and the November contest that will take place is basically afford go one conclusion. Whereas in

Boston they're getting a chance. They also had a competitive primary, but because they didn't give a Republican a free pass to the general election, Republican had to compete in the primary same as everyone else. UH, they were able to advance to November two candidates who either one of them has a shot at winning this so it could be a coincidence, but you mentioned it's two women in Boston.

New York City in its history has never had a woman mayor, which is pretty extraordinary, never had a woman mayor, And we came as close as we ever have this year to UH to having a serious UH woman in the general election, and had New York been running Boston's system of elections where you advanced the top two, it's very likely, in fact, let's say it's most likely that one of those women, if not both, but certainly one

of them would have been in the November election. And we may very well be talking about the next woman mayor or the first woman mayor of New York. So let's talk about possible reform. What are the prospects of reform of the system in New York City? And we should have a little disclaimer here that you worked on Michael Bloomberg's campaigns for mayor, and he of course is the majority owner and founder of Bloomberg LPR parent company,

So not that out of the way. Where the projects of changing that and and UH and a Boston kit I might it's right, you've got another disclaimer. So we've got all kinds of disclaimers there. But it's it's always been an uphill battle in New York because the parties are strong, and UH, in general, neither the Democratic Party organizations nor the Republican Party organizations are eager to change the system because they have certain advantages that come with

the status quo um. I actually worked on a uh an effort to change the system that Mayor Bloomberg had supported back in the early days of his administration, but for a variety of reasons it failed, including running in a in a low turnout there's a referendum in a

low turnout primary campaign. But it's my hope that that voters will take a look at what's going on in New York and what's going on not just in Boston, but in places like Seattle, UH places like Atlanta, Cincinnati, Cleveland, other places that run their elections like Boston are also going to have very competitive elections in November, and places that run them like New York, which we're seeing in Pittsburgh and Buffalo, are having the opposite of that, having

the same scenario where the winner of the primary election is basically your rubber stamp poinner for the general. That's Bloomberg opinion columnist Frank Berry coming up. We wrap up the week as we always do with Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

We're return to Larry Summers of Harvard. Once again our special trailer on Wall Street Week to really take us through the week, Larry, First of all, let's start with inflation, something we've talked about, I think every single week, but we got really some news this week, in no small way because of what happened with the ten year yield and the treasury which really spiked up. It's still a

modest number overall, but it climbed really quickly. And you and I have talked about the question, if we really have an inflation problem, why isn't the tenure yield going up? Look at maybe that this is a recognition of some combination of the fact that we're going to have more inflation and that the FED is going to do more than people thought it was gonna need to do in order to contain inflation. You know, once these things start,

they sometimes have a tendency uh to trend. So I stand by my view that markets are substantially underestimate in what's likely to happen to interest rates before too long. You know, if you look at the so called tailor rules predictions of FED behavior, and you feed any kind of traditional tailor rule through with the way current economic data is running. It points you to a pretty substantial concern about inflation overheating. So I've got pretty real anxieties.

I think what's happening with oil makes the kind of Powell that I've drawn to the sixties and seventies look more real. We just seem to be having a lot of surprising bad shocks that are lasting longer than you think. And when you keep being surprised again and again, it suggests that there's a pattern and you're missing it. I

think that's a bit the case with inflation. And of course this week we saw some growing set that while Europe is not nearly as far along in this as we are, that even in Germany inflations right rising to uh surprising levels for them. At the same time, we have back and forth up on Capitol Hill about spending more money more potential fiscal stimulus. This week we had Joe Mansion, the Center from West Virginia come out and say, I don't like three point five trillion for this build

back better plan. I like it more like at one point five trillion. Now. I don't know exactly what's in Joe mentioned plan, but I remember last week on this program Wall Street Week you said what you thought they should do is do something less than three point five trillion and make it more targeted. Is Joe Mansion taking the Democrats in the right direction? Do you think? Look? I think if the if the bill shrink somewhat, even more important, if it's paid for, even more important, if

it's paid for without gimmicks. I worry about too many things being done where they're funded for three years and everybody assumes that will be funded after that, or it's announced right now that it will start being funded in uh seven years. Uh. It's crucial that there be some quality to the spending relative to the revenue, rather than

excessive reliance on timing gimmicks. If we can avoid timing gimmicks, if we can pay for it, and we can be disciplined and focusing on what will grow uh the economy, it is hugely important that we pass a bill. It is hugely important that we start doing more than we have done on climate change, uh for example. And I'm not sure that we need to do everything that center Mansion is calling for. UH. There, I think there's a lot that absolutely he needs to uh happen, even if

there is uh some short term dislocation. UH, so I'd like to see I think it's desperately important that we pass a bill. I hope that this process of of compromise uh will eventually UH get to an end, and I'm guardedly optimistic that at the end of a process that won't have been pretty to watch, we'll get something that may not correspond to some people's dreams, but will actually be a strong set of initiatives to invest in

the future of our country. That's more significant, Larry, I wonder if you see a possible connection between these two things, inflation on the one hand, and what we're doing with climate on the other that you just referred to. In this sense, we saw, for example, natural gas flat process really spike up in Europe. We've got problems now in China.

Is this something that is really going to stay with us on the flation front, because as we convert over to potentially zero greenhouse gases, there's got to be a cost. I think that's a risk. It's a complicated thing, David, because if you reduce the demand for fossil fuels, that will presumably reduce their price, not increase their price, and that aspect of it will be UH anti inflationary, but I think this is something we need to carefully monitor

and watch. I think the time frames are somewhat different. The inflation threats are of things becoming a bit unhinged in the next year or two. The climate plans are things that will play out over quite a long time period. But it's absolutely something that we need to pay very close attention to as we UH, as we set the policies going forward. Another I could just say, if I if I can I just add something on the subject of the tech of the tax debate UH that we're having.

I don't think it's going to happen. It would be fantastic, actually, if we were able to place some kind of UH tax on, some kind of fee on fossil fuels, not laid directly at consumers, but placed upstream on the businesses that produced them. I think that would be probably the best UH public policy. UH. There is the late George Schultz and I advocated UH several years ago. Beyond that, I do think that one thing Center Mansion has said is absolutely right, and that is that we should be

repealing much of the Trump tax cuts. There is no conceivable reason why we cannot have a corporate tax rate in uh, the United States without damaging competitiveness of US companies costs of capital or near zero. It is not cost of capital that is inhibiting investment. UH. Right now, this is something we surely should be doing. And on that, I am right with Center Mansion. I'm right with the administration.

I hope Senator Cinema. It's not clear exactly where she stands, and she studied all of this very very carefully, but I hope she will see her way clear to support a carefully measures tax program that raises revenue we surely need from people who surely can afford it um without doing damage to investment. Okay, Larry Sumers had thank you so very much for being back with us. Larry, of course,

is our special contributor here Wall Street Week. Finally, one more thought, taking a random walk on a hamster wheel. We spend a lot of our time try to understand the markets, explain the markets, even predict the markets. And we have no shortage of experts who can tell us what the markets are doing, at least in retrospect. The market is first of all rationalizing. We bond an equity joint set off this you know, growing anxiety. We're trying

to read the tea leaves. People are just closing their eyes and waiting for this all to be worked out. We basically entered a high voluntary regime. You've got to tend your yield at one and a half percent. This opening in the yield curve. The FIT has said that they're changing policy. They've telegraphed the tapering, of course, concerns all the pressure on ever grand in Chinese debt markets, you can volatility. Some days are going to be pretty uncomfortable.

Everybody's crying volatility ahead indeed, But now coming out of Germany, we have a useful reminder of just how modest we should be about how much we think we know about the markets. Meet Mr Cox. He is a hamster, and like most hamsters, spends his day running on a hamster wheel, going in and out of tubes in his cage. But his cage is a bit different. His owners set it

up so Mr Cox can trade cryptocurrencies. Which currency he wants to trade depends on where he stops on his wheel, and whether he's on the buy side of the cell side depends on which tube Mr Cox goes in or out of, and we can all watch Mr Cox make his investment decisions in real time because it is streamed on Twitch, and of course Mr Cox has his own Twitter account as well. And the results, well, let's put it this way, since June, Mr Cox's portfolio of cryptocurrencies

is up. If you're keeping score, that's better than Bitcoin, better than the SMP, It's even better than Warren Buffett's Berkshire Hathaway. But on the other hand, if you'll watch carefully that streaming video, you notice something of Mr Cox. He actually isn't so much a crypto trader as a crypto holder because most of the time Mr Cox is in his cage, not doing much of anything. He's not in a wheel, he's not going in and out of the tubes. So maybe, in one sense Mr Cox is

a long term investor. Does that remind you of anyone, like, for example, investing icon Warren Buffett. I'm buying stocks and I but I'm not buying because I think they're gonna go up next year. I'm buying him because I think they'll be worth quite a bit more money ten years or twenty years from now, and I don't know whether they're going to go off or down tomorrow or next week,

or next month or next year. I do know they're good businesses, so perhaps maybe the German hamster Mr Cox is one more follower of Ben Graham and Warren Buffett. That does it for Wall Street week. For this week, I'm David Weston. This is Bloomberg. See you next week.