Wall Street Week: August 12th, 2022

how hot the U. S. Economy really is. Through the eyes of the most influential voices Larry Summers, the former Treachery Secretary, Katherine Keating, CEO of v n Y, mom Sam's l Sharon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio. So much for the dog days of summer, to landmark pieces of legislation, a major river runs dry, inflation takes a holiday, and the FBI searches former President trump'st mar

Alago residents. Welcome to August. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers on not counting our chickens too soon, on inflation We've Sarah seen this movie before. And Melissa Carney of the University of Maryland on the risk of running out of workers. Our population is going to age and it's not going to grow. Eventually, we're going to have a shrinking working age population. Things are supposed to be quiet in August,

but the news God's haven't gone that message. The week started off dramatically as dozens of FBI agents executed a warrant to search former President Trump's mar Alago residents. Trump allies were quick to comment, it's unpresidented that you would go into a former president. Why wouldn't they just ask the president if they have something there that they want. But Attorney General Merrick Garland waited until the end of the week before weighing in. I personally approved the decision

to seek a search warrant in this matter. Second, the department does not take such a decision lightly. And then on Friday we got to see the warrant and what was taken. The FBI has again sees classified records, some that were marked as top secret from former President Donald Trump's marro Logo home. And this was a copy of the search warrant that was seen by Bloomberg. Congress moved forward on not one but two pieces of major legislation,

that Chips Act that's been pending forever. The United States must lead the world in the production of these advanced hips. This law will do exactly that. And a piece or two of the bill back better proposal that had been left for dead but came back like Lazarus at the eleventh hour and the fifty ninth minute, and the bill as amended is past. And those summer in the northern Hemisphere is supposed to be hot, not so hot that europe Rhine River drives up, posing yet another problem for

strained supply chains. It's also just getting extremely expensive. The same ball general I was speaking to you before, he said that he literally fell off his chat when he saw the coast they're shipping on the Rhine. But as hot as things were everywhere else. Inflation chose this week to cool down a bit, with headline CPI numbers flat month over month and core up less than expected. Though to be fair, we still are facing more inflation than

anyone would like. It is good news, so though I do think we have to be cautious as fixed that all along, there's no silver bullet here, and after the Producer price Index numbers reinforced the idea of the inflation

just might be softening a bit. The markets responded warmly, with the SMP posting its fourth weekly climb in a row, up three to six and the NASDAC back in bull territory up over three percent, while bonds were relatively calm, with the yield on the tenure ending the week not far from where it started at two point eight three percent. Here to help us sort it all out, or Joann Feeny, portfolio manager at Advisor's Capital Management, and Christina Hooper, chief

Global market strategist at Investco. So welcome to both of you. Christina, let me start with you on the reaction of the markets to this. As CPI and pp I numbers some encouragement, does it sort of suggest maybe we're heading in a better direction. David, We're definitely heading in a better direction. Um. It looks like we're past peak for inflation, but the

problem is inflation is still very very high. If we think about the FEDS inflation target of two, we're way far away from that and it's going to take us a significant amount of time to get there. Um. But this is the first step in that direction, and so it's progress. Joy. I think the market start of thought, maybe we can back off a little bit. Well, the market, I think might be a little bit too optimistic. About how much work the FEDS still has to do. Yes,

the numbers have been good. In fact, a core pc inflation looks like a peaked back in March, and we got that information and that's a positive. And we're starting to see some of those items that were really short supply now start to become more available and that's helping to take the price pressure off. So christ take us over the next month a half or so, because we got Jackson hole first, right, well, he or from FED speakers including j Pow, and then there's phare amount of data.

I think we get another CPI reading or two, we get jobs numbers reading things like that. Where do you think the FED will be come September. Well, I'm actually going to go out on a limb, David and say we're probably going to be in a place where the FED feels it should air on the side of a

little more caution. Right, We've gone at a pretty breakneck speed in terms of back to back seventy five basis point hikes, and the FED is, as Joanne said, very data dependent, So it's going to be looking at data and seeing that longer term inflation expectations are better anchored than they were um and they are going to see inflation moving in the right direction. Uh. Inflation growth is obviously still an issue, so they're going to be hiking rates,

but they don't have to be as aggressive. So perhaps they signal it in a Jackson Hoole speech. That might be too premature, but I think by the time we get to September October, we should see a FED that

pivots to a less hawkish tightening stance. You know, I think the critical data, in addition to what you just mentioned Christina, is going to be the employee cost index that e c I. But we know the labor market is very tight, and we're concerned right that wages are going to continue to rise and that's going to put a floor early under price inflation as those bleed through into prices from firms. We're seeing that a lot. We're seeing firms actually be pretty successful at raising prices in

the face of those higher costs. So, you know, if if job openings drop and some of the heat comes out of the labor market and we don't get as large increases in wages and overall employee costs, then I could see the FED, you know, becoming a little bit more at ease. Christina Hooper of Inbsco and joe Anfoni Advisor's Capital Mets. We'll be staying with us as we turn from the markets generally to what investors can do about them. That's next on Wall Street Week on Bloomberg.

This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Housing start reversed to four months decline and the overall economy grew in the spring at a modest two point three percent annual rate, but amid signs that inflation was again easing. That wasn't good news for everyone. This week the oil market stepped into a poodle, with the price taking its biggest one day hit in almost a year, and every currency in sight took a bite

out of the dollar. That was Lewis ruck I just take on the economy on Wall Street Week back now thirty five years later, we're still focused on housing and energy and growth, but from a very different vantage point to Anfini of Capital Management and Christina Hooper of Investor are still with So Joanne, let me start with you if I could. Let's know what housing, because a lot of talking about housing right now, whether we in fact

are in a bubble. Obviously, housing prices have gone up a lot, rent costs are really in record levels places. At the same time, the fits trying to come off with that sugar hunt. Yeah, it's clearly a reset going on in the housing market. Um, you know that those low interest rates clearly created a lot of demand, a lot of activity in the housing market. But people shouldn't forget that there's still an awful lot of younger folks out there who have delayed getting into their first, first home,

and and that latent demand is still out there. And I think what we're seeing now is a reevaluation of how much house can I afford, And so we have seen people walk away from contracts. We've seen the builders slow down a little bit. But given how high mortgage rates are, the existing homeowners don't want to get out of their old cheap mortgages. So that's going to push

demand to the new builds. So we're still pretty enthusiastic about some of the plays in the new uh you know, in in new building for housing like say Alinar for example, which tends to serve that lower end, the first home buyer or the one step up home buyer. So there are places to be in housing. You just have to be a little bit patient here as this reset place through and folks renegotiate contracts and then find slightly cheaper houses to buy. So Christian, you heard about Lenard there

maybe lower end of housing. About what are you seeing? There's a lot of volatility in the marketplace. Where does it create opportunities for investors at this point? Well, it creates opportunities really at times when we see um sell offs.

Of course we haven't seen much of a sell off in in recent weeks, but but when we do get those, that's an opportunity for investors to reshuffle portfolios right and and sometimes it's about exchanging lower quality um, less defensive for higher quality, more defensive, getting a little more yield in there. So I think the areas that I would focus on right now or are opportunities and healthcare like pharma,

as well as as technology. The secular growth place there joan one of the things that have been driving the US a country. Sometimes our consumers. Consumers had a pretty good time of it, They've had really good balance sheets, they've got a very fair amount of income coming in. At the same time, there's more pressure there Now, what does that say in terms of investing in stocks if

in fact there's more pressure on the consumer. Yeah, you know, it's become a very challenging time to invest in the consumer space, because what we have going on now is really a tale of two consumers. We have folks at the lower to middle end of the income distribution really being hurt by these high prices, this high inflation. For them,

it's making their budgets a lot tighter. And so we're seeing that in the results of say a Walmart and a Target, where they're finding their shoppers aren't spending less, but they're switching away from discretionary products towards the necessities which have lower margins, so it's hurting their profits. But then you look at the higher end of the income distribution, you see companies like Apple selling expensive iPhones, they're not

seeing a drop in demand. Or say Williams Sonoma, right, they sell higher end uh you know, kitchen gear and furnishing type stuff and they're not really seeing a drop. So it really depends what kind of a consumer products company you are and how much you can raise prices because you have a resilient uh supply of shoppers or how much you're having to really trim them back to

keep the shoppers walking in the door. And so it does make it a selection question, and to Christina's point, finding the higher quality companies that have the more resilient shoppers is really going to help your portfolio. David, I would just argue that in this environment, having seen gas prices come down significantly, UM will incomes aren't as pressured now that they were just a little while ago. So I think that that chasm between those two sets of

consumers might not be as wide. Um, there's a little alleviation of the pressure on lower and middle income American households right now, just because energy prices have come down. So it's certainly not a much better situation, but it is materially better, and we saw that born out in

the most recent consumer sentiment numbers. Talk about earnings, if you would, Christina from while we're just getting through the earning season here, if we're seeing a tale of two consumers, as we just heard from joining, are we seeing a tale of two sets of companies as well, but high quality versus less high quality? Well, certainly there are some companies that are far better able to pass on their costs than others. Um, there are those that are really

experiencing reduction in traffic. For example, if we're looking at some of the retailers, UM and and others that have have held up fairly well. So I think, you know, going forward, what we're going to have to make an assessment on is is which are those higher quality companies that can defend their margins, that can pass on crisis, that can weather this storm better, because let's face it, it's going to be you know, um there are gonna

be some significant headwinds in the next two quarters. I would argue Joanne as a portfolio manager, how are you feeling about tech these days? I know text covers an awful lot of sins, there are a lot of different things called tech. But how are you feeling other opportunities right now in tech? Oh? Yeah, I think there definitely are. You know, it could take some patients really for investors

to to reap the rewards of tech. But when we look at technology, what we look for our companies that are in the middle of a change in the way things are done. Demand coming from the market, whether it's demographics or taste. But you know, the cloud area companies shifting their active these away from internal service state of the cloud. This is still happening, and more traffic on the Internet is pushing data centers to have to expand

and build in faster, wider pipes. So if you look for the companies that supply the parts to enable that, you know they're going to be able to sell well no matter what happens in terms of the cyclical side of the economy. And generally if you if you pick and choose carefully, you can find ones that have deep moats around them that don't have a lot of competition.

You're not buying into companies that are selling commodities, so you know, whether it's a broad Calm or an Amazon which really enables the cloud out, or Microsoft which enables the software to make all this work, these are companies that are going to power through. It's gonna be a little bit cyclical, but they're going to hold up better than others will. Christina. Finally, let's go Overseas if we could, because we've talked about the FED. However faster they're going

to tighten their tightening, no question about it. Europe looks like they're tightening. There are some places like Japan and China that maybe going the other direction, Does that create an opportunity for investors? I think so, David. It's not just prints in terms of monetary policy. So we both we have China easing and we have Japan remaining very easy. Um. But it's also fiscal stimulus. We're seeing fiscal stimulus in both those countries, whereas in the US and other Western

developed countries they're pulling back on stimulus. And so that sets up an environment in which there are built in tail winds that we're just not seeing here. I think there's potential there now when we look specifically at China equities. There's a lot of pessimism right now around China, especially

given headlines around the property sector. But if you ring fence the property sector and look at the broader market, especially technology, there are a lot of opportunities in China equities and I think there's the potential for positive surprise. Thank you so much to Christina Hooper of Investco and joe Anfini of Advisors Capital Management. Coming up, we ask our special contributor Larry Summers whether those CPI members have him feeling any better about inflation. This is Wall Street

week on Bloomberg. Okay, this is Wall Street Week. I'm David Weston to take us through the high points of this week. We welcome back our very special continue to Larry Summers of Harvard. So, Larry, thank you so much for joining us from Aspen. Actually this week we'll talk a little later about what you're doing out there. But first, we got CPI numbers this week on Wednesday. They came in significantly better than a lot of people thought they would.

So do you find some relief from this? Are we over the worst of it when it comes to inflation? I don't think these were encouraging numbers. We we knew that the headline number was going to be coming substantially down because we could see what had happened with gasoline prices. The core number was better than most people, uh expected. Uh, that's certainly better than the alternative to that. On the other hand, it was heavily driven by volatile sectors like

used cars, like hotels, like air airs. We've Sarah seen this movie before. We had a terrific core number in March, but it was from those volatile sectors, and then it bounced back up in April, May and June so we'll have to see, uh what happens going forward. But this is certainly a better number than most people expected, and it will come as a bit of relief to the FED. But I certainly think it's nothing like we are out of the woods. It's nothing like a fundamental change in

uh the orientation. It's nothing that means that we can pivot away from the overwhelming paradigm being in need for restrictive policy to contain inflation. Well, that's what I want to ask you about some relief for the FED. You said, is there a risk in that? And you've warned before about backing off too quickly in the cooling of the economy. There a risk the FED past too much attention to numbers like these. We'll have to we'll have to see

what they do. If the FED regards this as a major game changer, they will be making another major mistake. I would be surprised if they regarded it that way, because I think when you look within it, you'll see that seasonally adjusted airfares coming out of two JULYES when air fares were highly distorted by COVID. How could you take that seriously as a huge harbinger of new UH trends, So I don't think they will make UH that kind of mistake. They certainly shouldn't make that kind of mistake.

But you know, you get out of woods and even deep woods, you get out of them one step at a time. So I don't wanna deny that this is that there's some encouragement UH in this number, but overreacting to that would be a grave mistake. I think your show, before, David, I've talked about how prudent people finish their regiment of antibiotics even as they're gratified four days in that they feel better, and I still think that's the right metaphor

for thinking about this situation. You and I have talked a lot about race. What about the balance sheet? Because I muna say, just about every week after we get done on this program, somebody emails me and says, what about the balance sheet? How effective is the balance sheet and helping to slow down the economy get our arms around inflation? And are they doing it the right way? Should they be coming off the balance sheet even faster than they are? I wonder if they should come off

faster than they are. I think the clearest statement about the balance sheet is that they should have stopped buying six or nine months earlier than they did. I think it's clear that we had something that history will look back on as a bit of a housing bubble, and I think they contributed to that by buying mortgage backed securities. Now I certainly think they're going in the right direction with QT rather than QUE. Could they do it faster?

Perhaps they could. Would it make a major difference, I'm not sure that it would. Would it add to financial risk, It might in terms of some kind of accident in markets in general, David, I think that yields are driven more by the fundamentals of what's happening in the economy and less by central bank policies like uh QT and QE that I think many in the markets thank know. I could be right about that, or I could be uh or I could be wrong. But I think people

often ascribe to the direct impact of these policies. What is in fact a signaling with respect to future monetary policies. And I don't think that now the this is an area of stability to FED has set an expectation, that expectation is underway. I wouldn't be recommending a major change in balance sheet policies at at this point, Okay, Larry Summers, I'm delted to say, everybody staying with us, because we're

gonna be joined by Melissa Carney. She's professor of economics in Maryland, and she has convened that Larry and some other esteemed economist and askment to address the very important question of after we come through whatever downturn we're going through, where will the growth come from. That's gonna have next on 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, our special man Truitton.

Larry Summers has stayed with us and we are joined now. But Melissa Carney, she's professor of economics at the University of Maryland, also director of the Aspen Economic Strategy Group, which she has convened and asked me this week with Larry and other esteemed economists to address a critical question really of where the United States could be facing seculation. So Melissa, welcome to Wall Street Week. Great to have

you here. Let's start with the question of where growth will come on the other side of whatever it is we're going through, because that's ultimately going to be the question here. I understand from economists like you it comes from one of two sources, either more workers or more productivity. Are we going to get more workers? We're looking at both fewer workers and lower productivity, as you know, So let me focus on the fewer workers aspect for a moment.

The real issue demographic issue facing the US is we have a plummeting birth rate, and so total fertility in the US is now below the level required to keep population growth constant. And so the issue here is that on average now a woman in the US is expected to have one point six five children over her lifetime. So women used to have three kids, then it fell to two. Women were having comfortably above two kids for

many decades. With a with a fertility rate below too, that means our population is going to age and it's not going to grow, and so eventually we're going to have a shrinking working age population unless Melissa, we have immigration. And that's why immigration, I think many of us at this conference feel, is so very very important. What's your sense of what economists would say the politics apart um

about the immigration policy. Economists love immigration. We think immigration is a is a potential answer to our demographic challenges as well as our activity innovation challenges. Since immigrants come in, they work, they're more likely than native born Americans to be entrepreneurs and innovators. Of course, as you know, Larry, immigration rates our way down. So we used to bring in as you know, we hit as many as a

million new people coming into the country every year. That number is now below two d and fifty thousand, and so the combination of a declining native born population and a decline in immigration per tens even worse demographic challenges than if we were just facing one versus the other. Let me see if I can do a little arithmetic based on what you said from one mate in two So that's about seven fifty thousand people a year. So that's about half a percent of our workforce, maybe a

little less, so half a percent slower labor force. Uh growth over time can accumulate to something uh that is very that is very large. And and if we go back to the birth rates, we have about five fewer babies being born a year than in the not distant past. Melissa, if you um, what would you say about about this um.

Most people are scared that immigrants come and they take jobs for Americans and that if they're more immigrants, then there aren't gonna be as many jobs for Americans, or if there are jobs, because there's more competition, uh, they're going to be paid less. And that's true whether the job people think is working at McDonald's or is UH working doing computer programming at Microsoft. What how do you

How should people feel? Shouldn't they have shouldn't they have this worry that they're gonna be poorer if we take all the immigrants, just like they get hurt if we take a lot of local a lot of trade from other countries where they have much lower wage. So so the reason economists are so bullish on immigration is because we have so much evidence that immigrants are good for the economy. They are good for most workers. But it is true that there are some groups in some places

that will feel wage pressures. And I think the way we the way we solve this issue is to make sure that we recognize the disparate impacts of certain groups. We recognize that low wage workers in certain sectors might not experience the benefits the overall benefits that immigrants bring to the economy and we take steps to help them. I mean, it's not it's not dissimilar to what we have to do with trade to you know, more imports is good for most people, but some people are harmed

by it. We're going to see this too with the shift to green a greener economy. Some people are going to lose their jobs even though it's better for everyone. And so I mean, I think acknowledging that some people feel and are harmed by this, but that's a small concentrated group, and taking steps to address that allows us to do things that make the economy grow and be more productive. I wanted to come back to fertility. Larry's pointed out a way in which economics, whether misperceived or not,

may affect our willingness to have immigration. What about fertility? Are there economic causes for the reduction and fertility? So the decline in US fertility and it's really being driven by a plummeting of birth rates since two thousand seven. Births fell after the Great Recession. They haven't recovered. Um, you can't point to any any policy or economic factor

that's changed since two thousand seven. So sometimes people will say things like childcare has become more expensive, and if we just made childcare less expensive, people would return to having more than two kids. I do not that is just not the case, right, There's nothing, uh, there's nothing

that easy that we could point to. And in fact, us women now are just having births in the same way that women and other high income try countries have reduced their birthrates long before, in the eighties and nineties. So I don't think this is going to be easy to turn around. Lots of other countries have taken direct steps to try and incentivize people to have more kids. There's a lot of countries that have experimented with baby

bonuses a few thousand dollars. Birthrates go up a little bit in the following year, but nothing like the increase in infertility we would need to get back to replacement level. Also, having an expert like you here, I can't resist stepping out of our mutual lane as economists to ask a

question I suspect is on many people's minds. Do you think that the recent Supreme Court decision and the steps that are going to be taken in a number of states, do you think that's going to materially affect the number of births in the United States. The we do have estimates on this based based on you know, lots of data we have about how abortion restrictions, you know, lead to more birthrates. I expect there will be about or

thousand more births a year. UM. So uh, yes, not this is this is not going to bring fertility rates back to where they were. This is going to mean that some women who wouldn't want to have a child now are going to UM. Since you raise the issue, I will say that this makes the imperative of doing more to support kids and low income women in this

country that much stronger. Which is, you know that that was something that Congress was talking about for a brief moment in the initial build back Better That stuff got jettisoned in the post Dogs decision paradigm. We are going to have some more births disproportionately born to low income women, and we need to talk about how we're going to make sure that those children are well taken care of. So, Larry, can we make up the loss of population and workers

with productivity. We have the Chips and Science Act, now we have the Inflation Production Act, both of which I understand our meant to increase productivity. Can we make it up and increase productivity? You know, Melissa organized a terrific session here on R and D and science leadership issues. I think there's a lot we can do, but it's both about spending money and it's about spending it well. Thank you so much. Has been a great discussion. I wish I were out there and ask with you. I

could learn a lot more. But thank you so much for our very special trader Larry Summers of Harvard and Lissa Carney, Professor of economics at the University of Maryland. Finally, one more thought. Heavy is the head that wears the crown, at least according to Shakespeare's Henry the Fourth. And it's not only heavy, it's hard to pass that crown under the next head, at least judging by how often it doesn't seem to work. We don't have to go all the way back to Lear to find leaders bungling their

succession plans. And they have dividance in three our kingdom, it's a houst intense to shake well cares in business from my age concerning them on the youngest we all

know how that worked out for King Leir. And there are plenty of more recent examples, though, particularly in the world of business, like Jack Welch annointing Jeff M. L to carry on his legend at GE, something that didn't work out so well, although Jeff seemed to be the last to know when he spoke to our John Nichols Wade in two seventeen, not long before he had his crown removed. We always have a group of successors, and I always think you've got to earn it every day.

So you've been doing it in a while, I feel great, and we'll see where it goes. Or Kevin Johnson, who had the bad fortune to be the second CEO to replace Starbucks chief Howard Schultz, only to be succeeded by you guessed it, Howard Schultz. Though when I spoke with Kevin and two nine, he admitted that it was tricky in a transition from founder lead to founder inspired. Those transitions oftentimes are the most difficult and the most critical

transition that any company will go through. And this week we got yet another example when the founders of the Carlisle Group announced that their handpicked air Tucson Lee would be leaving abruptly to re replaced at least temporarily by Bill Conway, one of those founders who picked him, says, definite that we've shaken the investment universe. Let's not be coy about it. Ten pm Eastern on a Sunday night. And remember, like I said, he's stepping down before the

contract is even up. But it wasn't only q Lee who stepped down this week. We also saw a legend prepared to move on when Serena Williams, arguably the greatest of all time in women's tennis, announced that she would be retiring after the U S opened this year, something she had just joked about earlier. Every tennis player thinks about the R word as soon as they hit five years. And when it comes to Serena, I'm not sure that

we're going to see any successor anytime soon. So given how much drama there is around the subject, it shouldn't be surprising that there is a hit TV drama series given over to the matter of succession. Because it's one thing to know the boss has to go, it's quite another to figure out who should be the new boss. A special if you're warring with family members, he's erratic, he's making bad decisions. If he's not careful, he's going to destroy the company. And what you're going to do something?

I think I'm the best option, all right, because you like playing boss. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.