Bloomberg Wall Street Week - February 10, 2023

In Bloomberg Wall Street Week with David Weston from Bloomberg Radio, a FED chair speaks, President delivers his blueprint for the next two years. Earnings roll in, but a tragedy and Turkey overshadows them all. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers of Harvard on whether we're headed for a landing at all, soft or hard. I think to FED understands that it

doesn't understand. Stephen Meyer, the man responsible for New York City pension funds, on investing for the long term in this uncertain market. There's a lot of things to consider out there. The risk of recession here and abroad. And Josh Bolton of the Business Roundtable on what the President's State of the Union message means for American business. You won't find a single member of the Business round Table

saying please put me in a completely unregulated environment. There was a lot for Global Wall Street to pay attention to this week, but the tragedy of the earthquakes in southeastern Turkey cast a shadow over it all as the death toll reached into the tens of thousands and the difficulties of reaching those in need seemed almost insurmountable. But even as the world came to terms with human disaster,

we also focused on the economy and inflation. When fitzher J. Powell talked with Bloombergs David Rubinstein about the latest jobs numbers and whether they changed his mind on further rate hikes. This process is likely to take quite a bit of time. Uh, it's not going to be We don't think smooth. It's probably gonna be bumpy. President Biden delivered his annual State of the Union address and called for bipartisanship even over the cat calls from Republicans on things like the border.

Congress must restore the right and and energy policy. I said, we're gonna need oil for at least another decade, and I'm going to exceed and beyond that. The follow out from that Chinese by balloon continued with questions about whether if it was a Chinese test of US defenses in the US passed that test. They wanted to display weakness, and I think to some extent they got that. I don't know why this wasn't shut down prior to entering

US airspace. Earnings continued to pour in, with Disney surprising the upside on earnings, the downside on subscribers, and newly returned CEO Bob Iger announcing a major restructuring and the trimming of thousands of jobs. We will aggressively curate our general entertainment content. We will reassess all markets we have launched in and also determine the right balance between global and local content. The markets reacted to all of this

by being all over the place. The Spire started out lower on Monday, spiked up after Pile's talk on Tuesday, only to come back down to earth on Friday, ending the week down just over one. The NASDAG had a tougher time of it. It too, shot up on Tuesday, but settled for the week down two point four percent, while the yield on the tenure rose more steadily through the week, starting out at three point five and any

of just over three point seven percent. To help us sort it all out, we welcome to Christina Hooper, she's investco chief Global Market Strategists and Joanne Feeny, partner in Advisor's Capital Management. Welcome back to both of you. Great to have you here, Joe, and let me start you with with you if I could it. Uh, the markets get a little bit more sober by the end of the week. They seemed a little u fouric after Tuesday. Yeah, David,

I think that's exactly what we saw. You know, the Fed has had a hard time convincing the markets that there's a lot more work to be got to bring down inflation, you know, and they need to understand the market needs to understand that rates are going to go higher and they're likely to stay higher through the year.

We're almost there in terms of the markets forecast. They do still expect one rate cut at the end of the year, but you know that is quite a different position and being relative to the beginning of last year where we saw many rate hikes. So there's certainly less of a head wind this year from further rate hikes. But we're also not likely to get that break that the market is hoping for any time this year. Well, Christina, what is the market slowly giving up on that break? Glord?

Later in the year, we had been told the markets saying that we're gonna have a cut by the end of the year. It looks like they're not so sure of that anymore. Well, hopefully, um, they get accustomed to that idea, because I don't think we're going to see a cut by the end of this year. Um. The economy is in better shape than I think most anticipated. So there really isn't a reason for the Fed to cut rates later this year. Something would have to go very wrong. Um for the Fed to need to cut

rates by the end of the year. It looks like it's going to be a softish landing. So Joan, what about the economy looking stronger? Can we talk about the economy because you talk about different parts of the economy, you get different results. I mean, look at housing, it doesn't look that strong at all. And some people this week we're talking about a so called rolling recession. I

know that's something you take issue with. Well, yeah, we're certainly seeing some parts of the economy in contraction housing, as you pointed out, certain parts of the technology sector where we've heard about lots of layoffs, shrinking, PC production significantly down year a year. So there's certainly parts of the economy that are suffering contraction. But there are also

parts of the economy that continue to expand. And when you look at the aggregate of what consumers have to work with in terms of spending power, we have seen real disposable income rise for the last six months, so consumers still have more to work with, and I think that's why we're continue to see relatively robust numbers in terms of spending. Joanne, this is an important point you

made to me. I want to make sure we unpack it, which is we have a tendency to take a look at wages and we say real wages have not gone up, they've even gone down, and that's for individuals. But if you look at the additional people coming to the workforce, you can have the aggregate actually going up, which says something strong about the economy. Yeah, that's exactly right, and In fact, if you look more granulally at the data, In fact, over the last few months, we're seeing an

increase in real wages as well. So you combine that with more people in the workforce, that gets a lot of support for consumer spending. Now, it doesn't mean that a recession may not be coming at some point in the future. High entry straits are clearly an impediment to economic activity, whether it's firms investing or households squarrowing for the next car or or to buy the next house. So we're by no means sanguine that the recession threat is over, but we do see continued strength for now,

at least from the consumer side. Well, consumers as you know, or is all what it's all about. What is something like the economy as consumer? So what is the state of the consumer as far as you can tell, Well, I think that consumer is in fairly good shape what we see. Of course, it's an incredibly tight labor market. That's a problem perhaps for the Fed in terms of its concerns about inflation, but it's it's a wonderful thing to have. Um when you have rates going up, right,

you have so many people employed. Um, yes, they've come under some pressure in different areas because of the rate hikes, um, but in general people can still afford to go out and shop, and so it's a very different environment than what we saw when when the Fed was was hiking rates and unemployment was higher. I mean, this is a very very appealing labor market that leads to a fundamentally sound consumer in general. Joan als so much this depends

obviously on what the Fed things. Now, what we think, what the Fed thinks. So what do you think the Fed is looking at? What will look at? Is it ties eyes whether to keep moving up and how far to keep moving up and how long to hold it up there? Well, you know, David, the Vets made it pretty clear that they're really focused on a persistent source of inflation, which could be coming through wages, and so

nominal wages are still rising. They look also at the e c I, the Employment cost Compensation Index, which gives you are a much more accurate view of what's really going on in terms of compensation. So they're concerned that that's continuing to rise at a decent clip and that that could feed into inflation. They're seeing inflation still in their super core measure that is services excluding housing, and

so they're going to watch that really carefully. And that's why when they say their data dependent, that's really what it means. If they see that start to slow down, then I think everybody can breathe a bit of a sigh of relief. But right now, right we're still seeing a lot of demand for services that are keeping that inflation pretty robust. At the same time, we're seeing more labor flow into the services sector. So if you think to the fundamentals of inflation, it was all about shortages

of supply. Now we're starting to see supply rolling back through into services that could help the FED solve this problem. But that's what they're going to be watching. Christina. There's a lot of talk about plateau ng or holding at some point, maybe not quite yet, but having maybe a couple more rad hikes. What if that's not enough. I mean, you know, there's long and variable legs from mont withven

facts inflation does not come in. How dangerous it is if the FED levels off and then resumes hiking because inflation comes back. Well, that's the concern, right That's the ghost of Paul Vulker, is that if you don't extinguish every ember of inflation, it could come back and and fan the flames of higher inflation. However, I think we

can take a page from the Bank of Canada's playbook. Uh. They announced recently that they would have a conditional pause, so they're going to be very very data dependent, watching the economic data and inflation data like hawks. And I think that that could be a model for the FED. UM. That means that if anything is concerning, they can move right back into action, and markets know that that is hanging over them. Well, that's interesting. What do you think

of that, Joanna? That would that to get care of the problem for the market, so they wouldn't react to adversely if they had to hike some more. Oh, I think the market still would really like to see the head cut um. So you know, if they signal, if they say okay, we're done for now, and they'll always say their data dependent, I think the market might grow

a little bit too enthusiastic. And then if the FET does turn around some months later and say, oh sorry, we we still have to raise rates some more, they'll be one of these resets again. So I think we're in for a year of volatility, both because of what the FETE is doing and the larger risks that the world economy is still in the middle of, whether it's

the war, energy price and supply dynamics. I just think it's a it's a tough year heading heading through this because of this ongoing recession risk and the unknowns about rate increases. Thank you so much to Christina Hooper and jo and Feeny. They're staying with us as we turned to questions of asset allocation in this As Joanne just said, very uncertain market. That's gonna up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with

David Weston from Bloomberg Radio. Actually, it turned out to be a remarkably good week for the president. His approval ratings have never been higher, suggesting that if only two or three more scandals can break between now in Washington's birthday, he'll have every American behind him. His State of the Union address, which began with a plea for fiscal responsibility and continued with an extensive laundry list of brand new ways to extend governmental power and spending, seems to have

played beautifully in Peoria. Not to mention, but Keepsie in Palm Springs. That was Lewis Rockheiser with his firm and his tongue firmly in his cheek on Wall Street week back in j You may remember that was the week after the Monica Lewinsky scandal broke. That's what he's talking about with another presidential scandal. Titanic was the number one movie that week, and the number one song was Together Again by Janet Jackson. Still with us are joe Anfini

of Advisor's Capital Management and Christina Hooper fro Vesco. Christina, let me start with you, because we've just talked about what we think are going to the FED, what's going on the economy. How do you put together portfolio? How do you allocate your assets in this world? Well, first, David, I have to answer the question I keep getting asked, which is is the sixty portfolio still alive? And I

think to a certain extent it very much is. The concept of diversification is so important and I think we will see the benefits of it this year, and actually not just equities and fixed income, but some alts in there as well to provide um lower correlating assets. My view is, as with Joanne um I believe we're going to see a significant amount of volatility, especially in the first half of this year. There's just an awful lot of uncertainty. So we're going to want to have exposure

to fixed income and some dividend paying stocks. We need that income to stabilize as we move up and down UM. I also believe that that as we move further into the year, we're likely to see markets start to discount in economic recovery, and so that would be a time to start to perhaps increase sequity allocations, especially among the more cyclical parts of the stock market. But fixed income looks attractive, especially in investment grade communis UM. Those are

very attractive yields right now. I like to think of this as almost a golden age of fixed income UM. So, so that's an important component of portfolios right now. Joanna, what do you think? I mean, it sounds like a fairly diversified approach, but with an emphasis on getting some cash, whether from dividends or otherwise. Yeah, we offer a range of opportunities. It really depends on the client, on the investor,

and what their time horizon is. You know, at this point, there are certainly some opportunities in the market that if you're a long term investor, you can be all in

on equities. But you know, a lot of our clients are also looking for that ash flow, and so you know, we like to offer them choices a mixture of stocks that will appreciate versus stocks that will deliver that yield alongside a fixed income and let the client really decide, you know, how much they want to put into equities at this point, based on their time horizon and their risk.

But yeah, I mean, I agree, given the volatility that we've just talked about, this is an awfully good time for a balanced strategy to protect the principle in the portfolio. And hopefully if you can get enough of yield on the dividend side and also on the fixed income side, you can eat your cash flow to pay your expenses if you're in retirement, and that will save you from

having to sell stocks when the market does go down. Christina, what about you, is it can't be the case we're gonna have as many rate hikes this year as we did last year. I don't think at least, So what does that mean? Certainly has said something about bonds, but beyond that, what does it tell you as an investorment, I do think that it gives certainly UM some space to technology, right that the tech sector is likely to to start to see better performance, especially as as rates

come down UM. But I also believe that what it really does is clear the way for an economic recovery. Right that once we have a stabilization um of of rates UM, that is really when the economy can start to recover accelerate, and I think stocks are going to anticipate that, so so we're likely to see smaller caps perform well. I also think the dollar is going to be relatively weak this year. That's a trend that's going

to continue. So emerging markets equities, especially Asia e M. We haven't even talked about the China reopening, but that is gonna be really powerful for Asia e M. What about Joan briefly here at the end, it's strong bounce back. Do you think this year in the overall stock market? I think I think the jury is still out on that. Uh, you know, it looks pretty good from the consumer side.

Fuer rate increases is a good thing, but ultimately we do have a pretty substantial decline in certain sectors of this economy. We have to see if housing comes back. So I think it's it's an open our ship, and that's why we are counseling to really diversify and be prepared for volatility. Sounds wise. Thank you so much to Christina Hooper of Investco and Joanne Fini of Advisor's Capital Management. We welcome now a big time, serious long term investor,

and he is Stephen Meyer. He is the chief investment officer for the New York City Retirement System. Welcome, it's great to have you here. Thank you, David. It's a pleasure to be here. So you've got a big responsible to two d fifty billion dollars. Seven and fifty thousand people are depending on this. We've got fireman, policeman, teachers for their pensions. Tell us about the investment climate as you see it today, it's a bit different than it was just two or three years ago, given work over

with interest rates, inflation growth. Yeah, well, David, I think it's gonna be another challenging a year in three for the US economy and financial markets. As a long term investment, we tend to look less at the fluctuates, short term fluctuations and asset prices. We have diversified portfolios that actually are geared to weather all different markets. My hope and expectation is for the global economy to bob for growth to um bottom out this year UH, and inflation start

to decline more meaningfully. We have inflation coming down the States, UH, less so in Europe at this point. You know, there's a lot of things to consider out there. We look at UM the risk of a recession here and abroad. We're coming off of one of the most aggressive interest rate hike cycles that we've seen by the FED in forty years. UM. You know that monetary policy operates with a long and variable lag, so we really haven't seen the impact of those rate hikes yet. And those rate

hikes continue. The Fed hikes basis points earlier this month. They've hinted that they're probably gonna do another two and that's what fit from futures are pricing in UM. We also, as I said, inflation abroad is still sticky on the upside. I also think there's a heightened level of geopolitical risk to consider. The war the Russian invasion Ukraine is problematic. We worry about that escalating, and I do think from a longer term perspective, the dynamic between the US and

China and the relations ship. I think we'll have UH implications for growth, competition, asset allocation for years to come. So see when you have the luxury of a long term perspective. On the other hand, you have to have the money when the pensioners need the money. It's you have to generate returns. As you say, it was a rough year. We had stocks and bonds both down. What does that tell you as an asset allocator about stocks,

bonds and maybe the alternative to the above. So stock and bonds, you know, it's rare that they go down in tandem, but it's not unprecedented, And you were right, David, last year was a tough year. We had that traditional sixty forty equity fixed income bond split generated a negative return of that's painful for all manner of investor um. We do again look on a long term horizon. We want that balanced portfolio. But you're absolutely right we had

the offset, if you will, of private assets. We have about allocation into private assets, spanning private equity, private credit, it UH, infrastructure, core non core real estate, as well as hedge funds. So we do have those offsets that that that can help drive that performance irrespect of what happens in the public markets. You've had a cap of centers I understand it that's now been raised at by the governor, got the hocoll Do you expect to use

a lot of that increased cap. Well, it's a wonderful question. So you know, the new legislation was signed in the law by the Governor at the end of the year. Uh, and it definitely will give us an expand an opportunity set.

We'll be able to have a more optimal portfolio. My expectation is, you know what, We're going to start the process of reviewing our strategic asset allocations with the five Plan Trustees and their consultants UM hoping to wrap that work up by say October and then perhaps if there is a change in strategy that will be implemented in two thousand and twenty four beyond series. Really great to

have you ere in Walsh. Thank you so much for joining us that Stephen Meyer, he's the chief investment officer for the New York City Return from a System coming up. We wrap up 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. This is Wall Street Week, Clim David Weston, We're welcome back now our special contributor here at Wall

Street Week, he is Larry Summers of Harvard. So Larry. One of the big events of this week was j Pile, the Chair of the Federal Reserve, speaking with our very own David Rubinstein the Economic Club in Washington, and the markets came away from that saying, you know what, he didn't go as far as we thought he would. It's saying we've got a tighten more given those jobs numbers. Are we becoming complacent because there's talk on Wall Street now that there won't we any landing, whether it's soft

or hard. Basically, we'll just keep going. I didn't the FED understands that it doesn't understand because no one can know the future with confidence, and I think that the Fed is determined to do what's necessary. That's certainly what I hope is the case. In a substantially uncertain environment. I think the consensus has become uh substantially too complacent

about inflation. For a variety of reasons. First, let's be clear, even after the reductions we have seen, inflation today is at levels that would have been unimaginable for inflation two years ago. And so we haven't come all the way

down or got this fully under control. And in a way, I guess one way to put it in Super Bowl week here is that it's easier to move move the ball down the field at midfield than it is when you're in the red zone, and we're getting closer to the red zone with respect to inflation, and so I think the gains in terms of further reduction are going to come harder. Second, I think there are a variety

of bounce back uh factors that we're gonna have. Uh. You saw it in the market, wholesale use car prices which look like they're gonna be a positive contributor to inflation. You've seen some reversal on gasoline prices. More broadly, you've seen a variety of prices that blipped way up nine months or so ago, and now that's mean reverting. Now that's coming back to normal. Well, it's not always gonna

be going down. And when those become normal, that's gonna be an increment to the underlying UH inflation UH figure, and so that too, I think is a cause for concern. Third, if you look at the variables economists tend to think that you should look at to predict what's happening with inflation, we are an economy that's got relatively loose financial conditions. Now, given what's happened to markets, by some measures, financial conditions are looser than they were when all this tightening started.

That's probably misleading. But if we probably are back to somewhere where we were late last summer in terms of the degree of tightness in UH financial markets, and we've got that at a time when we still have a record level of vacancies relative to unemployment. So I think with that kind of picture, the prospect that we are not on a trajectory now where inflation is going to get to the target level, and therefore this tightening cycle is not just about one more, two more, three more

basis point increases, but something more fundamental. That's a substantial probability UH in UH this environment. So I don't think it's a moment for any kind of UH euphoria UM. And I think there is some complacency that's setting in in many places, Larry. We heard from Chair Powell on Tuesday. A few hours later, we heard from the President of States Joe Biden, as he gave his State of the

Union a rest to Congress. UH. He did talk about some economic things fair number in there, including something you and I have talked about, such as by America. What did you make of the economic part President Biden speech. Look, I think the most important thing to say about the President's State of the Union was that it was probably the clearest, strongest exposition of his economic philosophy that he

has delivered during his two years as president. I did worry that as I heard him talk and speak powerfully, and I thought persuasively about the junk fee issues and the extra money people are paying for airline baggage or paying for overdraft UH fees or a variety of those other junk fees. I like that because it was recognizing that people's incomes, people's spending power is what matters, and that depends on how much they earned, and it also

depends on the prices they pay. I hope the administration is being very careful about that comprehensively. My guests would be that the extra taxes people are gonna pay a because projects are going to cost more because of buy America, the extra prices people pay because of tariffs that we put on in the name of create or maintain in

the name of creating American jobs. My guess is that those higher prices from things that we're doing through policy probably add more to consumer burdens that all the junk fees that the presidents spoke about. So I think we need to look very very carefully at UH those UH policies. Who One thing that you and I have not talked about. I don't believe is Israel and that managment now is new government over in Israel. There are a lot of political and legal issues involved, but there are also some

economic issues. As you know, a number of U. S economists you I don't think we're involved, wrote a letter really expressing concern about some of the proposed changes in the judiciary what that could mean for the Israeli economy. I was a little surprised to see your name came up actually in the Times of Israel as having talked to the Prime Minister Benjamin Nille. What do you want

to tell us about what they're doing over there. So David, I don't I don't talk about my UH conversations with government officials, as you know, but I have been following this issue closely, and I think the temperature has to come down on both sides. I think there is a taste for strong case for judicial reform UH in Israel. It's unusual by international standards for judges to be chosen

by currently sitting judges. It's unusual for courts to be able to rule out legislation UH simply by judging that it's unreasonable without having a constitution UH to point to.

On the other hand, it's very clear from the context of the way this is being done that it is feeling to a large number of people and a large number of people with the capacity to move their money in and out of Israel, particularly in the entrepreneurial community, that an overly rapid not carefully done judicial reform could raise serious and profound questions about the rule of law, and that, it seems to me, could have quite serious

adverse effects on the Israeli economy. And finally, at the end of the week, we received word that Mr Kazua Huaida may well be appointed the next Governor of the Bank of Japan. He is an academic economist as I understand it. He has served in the past on the Bank of Japan Policy Board. Do you have thoughts about either Mr Uaida or where the Bank of Japan needs to go next? You know, I think we can think

of him has been UH Japan's Ben burn Anky. He studied at m I T at about the same time that Ben did, with the same thesis advisor that Ben burn Ank he had. He specialized in similar areas of monetary economics and has a soft spoken academic way about him, but is also capable of being UH decisive. And I think Japan has a very complicated issue ahead of it. I don't think it's going to be able to maintain yield control for an indefinite horizon, and he has big

shoes to fill. I've known UH Corona soon for more than thirty years. He's an extraordinarily UH capable analytical but also with a real measure of cunning UH central banker, and he he will be UH. He will be missed. But knowing Mr Huweita, I've got quite a bit of confidence in his ability to chart a course forward. Larry, thank you so very much as Larry Summers are Harvard a very special contributor here on Wall Street Week. Coming up on the road again to New York, to Virginia,

to Australia, but to Hong Kong. That's next down Wall Street Week on Bluebird. Finally, one more thought on the road again. The pandemic hit traveled like nobody's business. During the pandemic, people stayed at home, they didn't go to movies, they didn't leave their homes, they didn't travel. As the world's economy shut down, so did the airlines and hotels. I think we've never seen an economy coming out of a shop down like this at a moment like this, when the world is in the kind of unusual and

unique spot that it's in. But now things are coming back, with the airlines adding business as fast as they can. It's a billion pound ball perspective. With the to be achieved. Also the highest drainings ever in the last quarter in the company's history, and Airbnb reporting a big jump in demand. What we're seeing as hosts made record earnings this past summer. Given the upstick and tourism, it's no surprise that governments are back in the business of luring visitors. New York

urges visitors to come check out the slopes. There's something for everyone in New York State. Virginia urges us to come back to Williamsburg, and even Australia is getting in on the act with a campaign featuring Hollywood stars will our Nett and Rose Burn, or at least computer animated

versions of them. There's nothing like Australia. But perhaps the most remarkable of these campaigns is Hello Hong Kong, complete with offers of five hundred thousand free airline tickets steal in Hong Kong, which is badly needed given the reported plummet in tourist visas to Hong Kong for a pre pandemic high of fifty six million to report it one hundred thousand in two though putting prominent Hong Kong citizens on trial for national security violations isn't like to help

that situation much. One thing is for sure. The Secretary of State B. Lincoln won't be traveling to Hong Kong. He had to cancel his China trip because of that pesky spy balloon. We concluded that conditions were not conducive for a constructive visit at this time, and there is one legendary football player who will not be traveling to

Phoenix for the Super Bowl. Though, Tom Brady's decision to retire managed to drive up the price of beach front property, or at least the beach he was sitting on when he made his announcement from retiring for good, with reports that a jar of and from that beach was bit up to almost one hundred thousand dollars on eBay at one point. And even if Mr Brady doesn't make it back to the super Bowl, he can always head to Orlando that doesn't. For this episode of Wall Street Week,

I'm David Weston. This is Bloomberg. See you next week.