Bloomberg Wall Street Week - December 16th, 2022

just how hot the U. S. Economy really is. Through the eyes of the most influential voices Larry Summers, the former Treker Secretary, Katherine Keating, CEO of d n Y Mollins, Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio, Inflation easing, China reopening, and Africa waiting. But all anyone can talk about is Samuel Bankman Free. This is Bloomberg

Wall Street Week. I'm David Weston, this week's special contributor to Larry Summers of Harvard on easy inflation and whether we're on our way to that soft landing. Chairman is in about the right place. I think we are in better shape than I thought we were. And Rick Reader of Black Rocket on the historic opportunity hec in fixed income. If I can lock in these yields through a little bit longer without having to go out to tens or

thirties back to me is a sweet spot today. There was a lot of news this week for Global Wall Street, but we found ourselves spending just about all of our time focused on f t X and its former CEO, Samuel Bankman Freed as its curren CEO bluntly told Congress what had happened. This isn't a sophisticated whatsoever. This is just plain old embezzlement. And some members of Congress, like Brad Sherman of California, said we should just do away

with cryptocurrencies altogether. What does cryptocurrency have over the US dollar or other major currencies. It's right there in the name hidden money. My goal is to say enough is enough. It's time to prohibit Americans from investing in cryminal. President Biden convened the summit in Washington to deal with Africa,

with Secretary of State Anthony Blinkin emphasizing cooperation. Partnership is at the heart President biden strategy for Africa partnerships between the United States and African nations, with the private sector, and between our people. But Ian Bremer of Eurasia Group said that the United States has to work to catch up with China. When it comes to Africa, the Chinese invests a lot more, but the African governments want to

see the money they need the baseline infrastructure. In so far, the Chinese have done a lot more on the ground to invest. Secretary Granholm announced that the Department of Energy had made a major breakthrough in nuclear fusion. This demonstrates it can be done. That threshold being crusted allows them to start working on the things that are necessary to allow it to be modularized and taken to commercial scale. And Elon Musk gave up his title as world's richest man,

at least for now. He's no longer the richest man in the world if you look at Tesla stock, specifically their market value now falling below five billion dollars. But for all the drama, the big news really came from the central banks, starting with the Federal Reserve. On Tuesday, the Fed got the good news that inflation was slowing faster than we had thought. Investors didn't think inflation was going to come down as fast as economists were forecasting,

and now it's coming down even faster. And on Wednesday, the Fed responded by saying, well, not so fast. It's good, but not good enough to declare victory. The MC raised our policy interest rate by a half percentage point. We continue to anticipate that ongoing increases will be appropriate. I wouldn't see us considering RAID cuts until the Committee is confident fit inflation is moving down to two in a

sustained way. And then on Thursday, the Bank of England and the European Central Bank raised their own rates another fifty basis points each, with ECB pre Christine Legarde saying they won't be taking their foot off the break anytime soon. We should expect to raise interest rates at a fifty

basis points face for a period of time. And the markets well, as much as they were encouraged by those CPI numbers on Tuesday, they were just that disappointed by the fed chairs reaction, as stocks were down again for the week, with the SP losing just over two p the NASAC off two point seven percent, while the yield and the tenure was down just over nine basis points to end the week just under three. Take us through

this combination of economic and market data. Welcome now. Joe and Feeney partnered in Advisor's capital management and Sonalda, said Franklin Templeton, CEO of Fixed Income. So, Joe, let me start with you. Did I detect just a wee tension this week between other one hand, the markets and the other the Federal Reserve? Yeah, just a little bit, David.

You know, we've seen this play before. The market gets all excited to see a data point and they think, okay that that's finally going to ease off or signal that'll ease off, and and then we get that bucket of cold water. The fact of the matter is there's just a lot of work for the Fed to do to get back to that two percent targets. And uh, you know, they're going to keep rates elevated and continue to raise until they have a much clearer and broader signal.

And one CPI print is not going to convince them that the hard work has has been done. There's just too much in terms of labor shortages right now driving wage growth for them to ease off on this efforts to constrain economic activity. So so now the FET has been fairly explicit, why doesn't the bond market believe it? So, you know, I think that it's a question of what your call credibility. Is it credibility, does the FED a

credibility that's going to fight inflation? Or is it more that the market does not believe the FED has credibility to stick to the guns in terms of raising rates. They're not taking the FED very seriously. Right. We are looking at what markets are pricing, both in terms of the peak FED funds, right, which is not five certainly not between five and five point two five as the

s EPs are describing. It's below didn't change after Chair Powell's uh Q and A. And furthermore, the market still pricing and rate cuts by the end of next year. We're looking at four thirty five fill FED funds at the end of next year. So I think FED is FED has a problem. It's got its work cut out for it. Markets have been conditioned to actually not believe the FED when it says it's going to be really tough. So joy and given this disagreement, if I can put

it that way, what does an investor do? It does strike me the bonds are a lot more attractive at the end of the year than they were at the beginning. I think the year was something like one point eight at the beginning. Here and we're up around three point five. Now, yeah, there's no question that finally investors can look to bonds

to really fill an important role in their portfolios. Not only are they getting decent incomes off the bonds um and that's allowing them to build more balanced portfolios so that they can stay in equities to some degree and hopefully get that long term appreciation that they need. But now they're getting some decent income on the on the

fixed income style, which is a relief. Right now, real yields are negative because inflation is running ahead, but when you look to the longer term out you know, two three or four years, those real yields now look look positive and they're really going to help purchasing power for those investors going forward. So now there is a lot of volatility though on the bond markets or not there

really is. There is a lot of volatility, and honestly, until we get to a stage where the market is market starts buying whatever it is the fat is selling, I think we're going to keep seeing these moves which are remarkable. If you look at tenure tenure yields, which which I think over the month of November went at one point from four five all the way down and

then back copy. We've seen around seventy eight basis points of moves up to thirty basis points in literally days, twenty basis points in the last few You look at these this level of volatility, it's almost too much, far too much. And as I look into next year, I think it's probably going to be a few months at least, maybe a quart or two until we see the FED

having raised before we see some reduction and volatility. Nonetheless, you know, echoing what Joanne said, when you're getting yields in areas such as high for example, you're getting as much as nine on low dollar price bonds. Certainly there are specific bonds, specific areas which look attractive, but I don't think I would go wholesale into adding risk. It's actually quite a nice time to be low and duration

and high and quality in the bond market. Well, let me pursue that if I could for moments a now, and this is the end of the year, So we traditionally say, what's your conviction trade going in next year? What's your conviction trade given that volatil the bond market? Oh no, I think my conviction trade on fixed income overall is high. I think I like to stay, like

I said, relatively short duration, high and quality. I do like investment grade, and I think fairly soon into the new year, we're going to start very attractive opportunities and within the first quatural quarter and a half are going to see some good opportunities and risking a segments like high yield as well. Emerging markets look very attractive to So, John, what about you do you take your incremental dollar and

put into bonds right now rather than the stocks. Given where bonds are, they're much more attractive than they work. As you said, you know, we've already seen that happen a little bit. But right now, you know, it's not that the equity markets are particularly cheap. Volatility has been high. The bond yield is certainly more attractive, So we get a balanced strategy. You know, at seventy sixty can do a lot for for clients, and so that incremental dollar,

it really depends on the client's horizon. Obviously, a shorter Verizon client had better be more in bonds at this point. Despite that bond volatility that we're seeing and likely to continue to see, and while the stock market isn't particularly cheap roughly eighteen times forward earnings, and those earnings likely

to come down some more. There are still some very attractively priced stocks out there, conservative companies that pay a dividend, that offer dividends that go up year after year, and that's another way of creating income for for investors in the short term, even while equities remain a bit of volatile.

So if you can wait it out, you can get both the dividend income perhaps well above the market average to ride this out, and then still the position to have a portfolio on the equity side that's going to really help the portfolio appreciate over the next three to five years. Okay, So, so one quick one to you. I know you're fixed income, but do you think the equity markets have really taken into account the decline and earnings is coming. So from my equity colleagues, I hear

that essentially we're not looking. We haven't seen major earnings sound grades now. While I don't expect a major recession next year, some slowdown in the second top of next year is pretty much a given. So I not sure that that earning sound grades have been factored fully. Okay, Thank you so very much to Sinalte, Siah Franklin Temple,

and Joanne Peony of Advisors Capital Management. Coming up, we're going to talk with you Rick Reader of black Rock about what has already been an eventful year for markets and why he sees an historic opportunity to fixed income. That's 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. Two has been a year of change, change in the FED and other central banks, pulling back support for the economy of the markets, changing the stock markets as they adjust to the central banks, changing the rate of inflation and the underlying economic growth. Take us through what we have seen so far this year and to look forward to what may come next year. Welcome back, Rick Riager. He is black Rock ce IO of Global Fixed Income and head

of Global Asset Allocation. Rick, welcome back. First of all, the big news on Global Wall Street this week was you got a promotion. You're on the Global Executive Community A black congratulations, sir. I appreciate that, Thank you very much. A lot more stripes and epulots, so so talk to us about the change we've seen, because there has been

a lot. If you look back to where we were January one of this year where we are now, it's really different, for example, from zero to three point seven five percent, even higher than that four point on the FED. Pretty incredible. Actually, when you go through I've been doing this almost thirty six years and you say, what were the years that were you had this sort of changed. Two thousand and eight maybe still the biggest, but this

ranks right up in there at the top. And think about we came into the year in March the FED was still doing que and had the funds rated zero. Now we've priced the funds rate at about five as a terminal. I mean, that's pretty I mean, that's pretty extraordinary.

And a year that you've never seen, nobody's ever seen, even in my long tenure in the industry, where the bondmark in the stock market all traded down, so your hedges, how you did portfolio allocation change, the leadership in the UK and all of the pension system dynamic that a war that you know, who thought that we'd go through a deglobalization process and the impact that has on inflation,

impact on fuel cost, food costs. I mean, this is extraordinary, and I mean, by the way, did think about that and emergence from COVID, not emergence from COVID, Now do we start to grow? I mean, it's it's pretty extraordinary. It felt like five years wrapped into one. So the economy is absorbed a surprising amount. Actually, if you think about what's happened here, uh candidate absorbed what's going on right now? I mean, what are your prospects for as

a so called soft landing at this point, Soda? But I think people underestimate how flexible, adaptive, innovative, particularly the U S economy is harder in emerging markets. You saw a year where a dollar appreciated. Emerging markets come under stress. But I think people underestimate how darn flexible, and you're seeing it play out in the US economy. Think about when we emerge from COVID. All of a sudden, people needed a TV, electronics, furniture, massive goods grow and you

saw jobs moving into the good sector. Then people had had already gotten what they need to get. They didn't need another computer or TV. Now you shift to the service sector. Growth from the service sector and you're seeing jobs, leisure, restaurants, hospitality, healthcare that are now. It's pretty extraordinary. So can the economy with stand this? Listen, this is a historic move up and interest rates, tightening of liquidity through the balance sheet channel. But yes, I think that. I think you

know what we've talked about in your show. I just don't know why. Soft landing is like landing the plane on a pin needle. It's you have an economy of a savings right, that's still that still in good shape. Leverage in the system. I've gone through two thousand two, two th eight, we had too much leverage in the financial system, consumers, corporates. Leverage is in pretty good shape. So the economy has some a series of buffers alongside of it. Listen to economy slowing. Could we have a

shallow recession, for sure? But I think people will underestimated. Developed economy, particularly the US, has as much more reflective than people give credit to. Can say the economies were resilient. How resilient are the markets because you mentioned one of the issues that we've talked about before, which is liquidity. A lot of liquidity coming out of the markets and the markets held up. Are they prepared for what comes next. So I'd say the markets are less adaptive and flexible.

And you know, I learned over my care there's a cultural dynamic around markets. People don't like to lose money, but not in of course, they don't like to lose money, but it's not symmetric to making money. I've always found this markets go down five times faster than they go up. People like to protect what they've made and don't like to lose money. And when people think the prospects they could lose more money, markets go down even faster. And

it's pretty short to me why we witness that. And I've always found that people buy on up markets and sell on denmarks as they guess can't take the losing more money. Now we're at a place today that if the FED starts to come off the boil, which I think is the case, that now we're talking about rate volatility on the risk free rate on interest rates, that's

going to come down a lot. That gives you know, when you there are two components, particularly fixed income at any assets, a risk free rate plus your risky rate. And we always think about whether it's debt equity, where's my wrist free rate, where's my risky rate? But if your wrisk free rate is moving all over the place and moving higher, you can't value any financial asset that If that stabilizes risk premia, term premier comes down, and I think it's a really big deals. But are we

going to have some vall into next year? Yes, I just think less than twenty two if if the FED pauses, and by the way, the ECB starts to tone up a Bank of England, etcetera, well you can talk about the FED coming off the boil. Looks like at least a're gonna slow down the rate of increases. I'm not sure they're going to cut right away, but slow in the rate of increases. What do the economic numbers show

us about that? Because we did get CPI numbers out this week that a lot of people reacted to very favorably, So it's really encouraging. By the way, we've had head fixed before, you know, we had it in the summer, would look like Okay, we're on the back side, and then all of a sudden it popped up again. I don't think it's over around around what is elevated rates of inflation? You see it through wage stresses in the system.

That being said, when we break down the component parts of inflation, you think about shelter, you think about food costs, use cars, supply chain freight costs are all coming down, so you get you you take some comfort in that

we're on the back side of the elevated inflation. You know, we've run some numbers that even if inflation and most products stays elevated four to five because of were energy is today, because of how much has come to worst but worse of where it was, because of house prices, shelter coming down, we still get in the high two is an inflation by the middle of the year. So

you can live with that. And as part of why I think the FED, if the momentum is moving in that direction to a more normalized state, although elevated from history, FED can pause. But you've made a critical point. The markets a price in the FEDS gonna start easing in twenty three. I don't think that's right at all. I think the FED is gonna sit with us for a while and a restrictive policy. Maybe you'll start not maybe I think five you'll start normalizing rates back down again.

But we're not going there. Yet, so what is generational inflection point? You know, I mean, I've said this for I'm I've never been more excited coming into a year. First of all, twenty two wasn't a lot of fun and a lot of the markets. But now when you put in perspective where we are. For the last ten years, the short end of the Yolker of the one to three year portion of the aggregate index, the benchmark for fixed income, the average average yield was one point one

percent one point one eight percent. The last three years at one point one percent, we're talking about four and a half now. So you've got an opportunity where you can in fixed income, you can buy yielding assets and you don't have to stress around ill liquid, really deep down in leverage loans, really deep down in parts of

emerging markets. You can build a portfolio investment grade credit, some of the triple A parts of credit card finance, UH student loan finance, etcetera, and you can create six to six and a half. That is we haven't seen that, Gosh has been I don't know, I don't got it since the eighties and nineties that you've seen those sort of yields by buying quality assets. David, that is a critical moment without taking a lot of interest rate risk, without taking a lot of beta risk, without taking a

lot of convexity risk. And you think about what does that mean for equities? What does that mean for private equity? If you can get six ish in high quality assets, even a bit higher than that, it means boy, you've got to get higher numbers significantly, had to take a liquidity risk of volatility cetera. It's a really big deal. Money is gonna flow into fixed income as the result of it. I want to come back to equity and private equally before that duration is a particular duration you're

looking at, it's more attractive. Yeah, I mean so, you know, obviously with the inversion of the yield curve it's been you can capture and this is part of the beauty of it. You don't have to take a lot of interest rate risking and so many times in my career you've got to hold go out to the ten year part of the thirty year part to get your yield. The curves inverted, you can stay in the front end if you believe, which I think is right, the FED is gonna pause. Um, you get to a place where gosh,

I'm just gonna try and clip that yield. What we've been doing, and I think we've been on talking about the show that we've started, stayed short. We've run a lot of cash this year. Cash has been our best performing asset. Did a lot of you think about the financial markets? Now we can go a little bit longer. Can you go out to three years? Five years? Because the next evolution of the FED will be easy again.

I don't think it's still twenty three until but if I can lock in these yields, go a little bit longer without having to go out to tens or thirties. Back to me as the sweet spot today, it's always such a treat you haven't Wall Street Week, thank you so much for being u's Rick reader of black Rock. Coming up, we'll go through the week with our special contributor 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. Okay, this is Wall Street Week. I'm David Weston. I'm joined once again by our very special contribute to Wall Street Week. He is Mr Larry summers of Harvard. So Larry, welcome back. We have to talk about what happened this week before we get to China, because last week he told us we're going to get to China. But first, what happened this week? We got the numbers in the CPI. We've got retail sales numbers, and they tend to indicate that maybe inflation is not

quite so bad. And then we heard from chair Powell, and he got up and said his mind doesn't change. Was your mind changed as you looked at these numbers? Do you think maybe we're a little better shape than thought we were. Yeah, look, I think we are in better shape than I thought we were. But I think Powell is the Chairman is in about the right place. He's recognizing that we can't forecast the economy with precision. He's recognizing that it would be a terrible error if

we were to fail to stop inflation. In this episode, he's rejecting the talk about this being a moment to change the inflation target, and he's maintaining substantial flexibility with respect to the future. I think that is broadly, uh, the right place for him to be. But I think we've got a very difficult challenge ahead of us, because I think the old adage about things take longer to happen than you think they will, and then they happen

faster than you thought they could is really operating. With

respect to the forecasted UH recession. It does look like it's pushed back a bit in time, but there are reasons to think, and this is what makes the chairman's job so hard, that the economy could have a kind of widely coyote UH moment that recession induced slow earnings could pop into focus for stock market investors, with adverse consequences for the market, that consumers could deplete their horde of post COVID savings, That there's growing reason to think

that many businesses are holding on to workers because in this labor short economy, they're afraid that if they were, if they fire them or they let them go, they won't be able to replace them. If that last thing is true, then it could all of a sudden change very dramatically, if labor markets starts to loosen. So I

think the broad picture is where it was. I've been gratified to see the ways in which the FED has caught up, but they've got very challenging judgments UH to make going forward, and I think they're in broadly the right place. The last thing, though, I would say, is, you know, everybody is getting enormously excited about whether the dot plot is calling for two increases from here or three increases from here. The this is kind of the

narcissism of small differences. Compared to a year ago or a year and a half ago, when the debate was three percentage points three hundred basis points off of where it where things have turned out to be. We're now in a much narrower consensus around UH judgments, and we need to appreciate UH that, and it will be great if the FED turns out to be highly skillful. Larry, you promised last week we would get to China this week, So let's talk about China. Last week, we saw the

COVID zero policy sort of changing. This week we're starting to see, at least anecdotally, some of the consequence that the reports actually that a lot of China shutting down. Some people are saying Beijing is like a ghost town. So what potential effect does that have on the rest of us, on the U S economy, on the global economy.

What should our response be. It's extraordinary the way mandatory lockdowns are now giving way to voluntary lockdowns, with people staying home more than UH they were a few weeks ago in China. I think it's gonna be a very challenging six weeks ahead of US in China, and it will be fascinating to see what that means for UH social stability, what kind of political ramifications UH that has, And it's likely to be a very painful period for China.

Two things for US UH to remember in the United States. First, even if this works out very badly in China, at the end of the day, the Chinese fatality rate from COVID will have been half of what it was in the United States, and so we need to this any

strong tendency to be to feeling highly superior UH here. Second, UH, precisely because this is burning so out of control, my guess is that it's likely, like the fastest burning fires, to burn out more quickly rather than more slowly, and so I think ironically a consequence of this is probably the lead to some upwards revision on Chinese economic forecasts beginning next spring, and that's a factor tilting a little bit towards higher commodity prices and a little bit more

inflationary pressure globally. But that's a highly uncertain, uh judgment. And of course how all this plays in a broader social sense in China will be very very important. Larry, last week he brought a longer view with respects of chat GBT that artificial intelligence, I will call it phenomenon right now. But this week we have yet another development,

and that is fusion. Where in that Lawrence Livermore lab out in northern California, they actually managed to have a fusion reaction, whereas I understand, they got more energy out than they put into it. So last week, when you're talking about AI, you said that had the potential to be as significant, perhaps as fire or the wheel. Where does this rank? I think not remotely comparable, uh, David, And of course I might well turn out to be wrong.

Here's why, there's a fundamental difference between innovations to give mankind the capacity to do things they've never been able to do before. On the one hand, that's what AI is, and innovations that give mankind the ability to do what we've done before forever cheaper. That's what fusion potentially is, and the first, like fire and the wheel, are much more fundamental than the second, so I'm gratified by the second.

But my read is that we've got a long long way to go before this is available at UH scale, and I that the reports UH yesterday, reports this week actually reminded me of all the stories you can read in the nineteen fifties when the first nuclear fission fission UH nuclear reactors were being built about how energy was going to no longer be metered because it was gonna be so cheap to produce, and it turned out that that didn't really work because there were capital costs that

were transmission that we're all kinds reflege. My suspicion is that this is both less fundamental than something like AI or quantum computing, and that it is ultimately UH going to prove to be quite a long way off. But the only thing that's harder than forecasting inflation and unemployment is forecasting the long run of UH technology. So I sure hope it plays out to be even better than that.

Kudos to the researchers involved, and it certainly does bear out something we've said on this show that if we ultimately succeed with respect to climate change. It's more likely to be because we find ways to produce clean energy cheap than it is because we uh make carbon exp really expensive. Thank you so much, Larry, especially Larry Summers. Still to come. Maybe we all could use a little more nuclear fusion in our lives, or at least someone to make sure the energy we're using is worth it.

That's next on the Wall Street Week, I'm Gloomberg. Finally one more thought saving your energy. The world got some big news out of the Lawrence Liverwool Labs in northern California this week. For the first time ever, scientists have managed to create a nuclear fusion reaction that generated more energy than it consumed. A fusion reactor on the grid would be a complete game changer, and former e p A administrator Christine Todd Whitman says it may be a

step towards saving the entire planet. This is a big step forward, and fusion can certainly offer a major major tool in the efforts that we need to make to address the issue of climate change. But as exciting as saving the planet would be, it's also pretty remarkable when we find anything at all that gives us more than we put into it. Take, for example, the case of Elon Musk, and I don't mean just the money and effort he's putting into Twitter and whether that will ultimately

be proved worth it. Remember all the energy his team put into showing us that the window on the cyber truck just could not be broken. Maybe that was a little too hard. That sure didn't give him more than he put into it, Or for that matter, those midterm elections. Sure we managed to have a national election without an insurrection, which counts for something democracy one, because we had massive turnout across the country. But it costs billions of dollars

to do it. Now, don't get me wrong. Free and fair elections are the life's blood of a democracy, but it is not always clear that they generate more energy than they soak up. And this week, the same week we made nuclear fusion work, we had one of the biggest examples around of something soaking up a whole lot of energy and money and not coming close to returning what's being put in. I'm telling you, of course, about Samuel Bankman frees f t X, backed by so many celebrities.

Celebrities haven't been isolated or immune to the fallout. Details on the sports stars that have been entangled in the f t X mess and attracting billions of dollars. More than a million customers had funds tied up, and more than three billion dollars were owed to fifty creditors. But wait, there's more. Because mining for all that cryptocurrency not only uses time and money, it also is pretty much a black hole soaking up energy, making the entire planet worse off.

Every transaction that you do takes more resources than the transaction you did before. It is fundamentally and intrinsically inefficient, and that is a huge energy ust. But maybe if we can get that fusion thing going, we can save the planet, though it probably comes too late to save Mr Bankman Freed. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.