Bloomberg Wall Street Week - February 3, 2023

Through the eyes of the most influential voices Larry Summers, the former Tretory Secretary, Katherine Keening, CEO of the n Y Mollins Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio, do we know which way we're headed? Markets don't believe the Fed, the U S isn't sure about paying all those bills that it's wracked up, and earnings, well, earnings are just all over the place. This is Bloomberg

Wall Street Week. I'm David west this week's special contributor Larry Summers of Harvard on a FED sending mixed signals. I think the FEDS doing a good job of portraying substantial uncertainty in the account. To me and Musher Sharma of Rockefeller International on whether India is finally coming into its own for investors. This is a country that has

consistently disappointing the optimist and defaceims. It was a week of contradictions the Federal Reserve height rates and other twenty five basis points, and warned that more is coming and continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to two over time. Whatever Chair Pile said, the markets apparently heard only that things

may be getting better. I think there are opportunities for this rally to go longer and higher, while the European Central Bank and the Bank of England continue to play catch up, with both raising rates the expected fifty basis points. We know we have ground to cover. We know that we are not don't. President Biden met with Speaker McCarthy at the White House and afterward they agreed only on continuing to talk with no resolution in sight of the

debt ceiling dilemma. My role right now is to make sure we have a sensible, responsible ability to raise the debt ceiling, but not continue this runaway spin. Earnings were all over the place, with snaps selling off while metas surprise to the upside. It is a good sign that both daily active users and monthly active users for platform like Facebook that is you know, quite quite old in social network terms, is still gaining. Caterpillar miss on profits

while GM scored big. Where we see consumer demand for our vehicles at our price points is really strong. We just need to make sure we get production up to be able to meet that demand. But over in India, the Adane conglomerate had bigger problems than just earnings as it tried to stabilize with a stock offer after being hit hard by a short seller, only to have to cancel the offering as the company lost over one hundred

billion dollars in market value. Hey, it's all about good having a company and its associates heavily and bad and

that's what hits away. And then came Friday with US jobs numbers coming in far above what anyone had predicted, adding five seventeen thousand new jobs to an already type market, dropping the unemployment rate to three point four percent, which drove bond yields up, with the yield on the tenure adding thirteen basis points on Friday alone, but remaining nearly flat for the week overall, ending up at three point five to while the SMB five hundred climbed one point

six percent over the week and the NASDAC gained a robust three point three percent today through a very busy week in the markets, we welcome now Bob Michael He's JP Morgan Asset Management, Head of Global fixed Income, Currency and Commodities, and Aaron Brown, Pimco portfolio manager for multi asset Strategies. Welcome both of you for being back with us. Aaron, I'll start with you. This is a very busy week and the markets were not always clear about what they thought.

What did you make of what happened over the course of the week, in particularly jobs numbers. I think that the jobs numbers came well above consensus expectations and certainly underpinned the fact that the economy is not in a recession right now. The job growth still remains quite strong, and the labor market is still quite tight. And it probably also underscores the fact that the Fed has more work to do with respect to, you know, keeping rates

in restrictive territory. The FED has already indicated that they're likely hike and at least an additional time one time in March, and then after that, I think, you know, certainly there's scope for the Fed to potentially hike an additional one time or pause there, but in either case, the Fed will likely not cut rates for an extended period, continue to remain restrictive for quite some time time, and then really observe and see how the data unfolds from there.

And so while the market has been romancing this idea of the Federal Reserve starting to cut at the tail end of three, the Federal Reserve, at least for now, is likely to continue to keep rates on hold for an extended period of time and not meet the market's expectations for rate hikes as soon as the market is expecting. Bob, Yeah, David, I wasn't confused at all. Actually, for the first time, I think the Federal Reserve and the labor data confirmed

what the average investor, the average consumer is seeing. The Federal Reserve could have walked in and said, inflation is nowhere near our target. We've got to raise rates indefinitely and push FED rates expectations much higher, maybe the terminal rate to five and have even five and three quarters percent. Instead, they came in and said, what I see, which is inflation is moderating. We can see an end two rate hikes.

They confirm that. You look at the jobs data, and yes it was a very big number, but how many times have we been here and we've said everywhere we go in the services economy there's a shortage of worker. You look at airports, you look at restaurants, they're complaining

about not being able to hire enough workers. And this confirm that this labor for this labor report confirmed that the economy has shifted consumption from work from home sort of expenditures to things that are more services, travel and leisures. And what about that, because that's one of the things that struck everybody that you added so many jobs got tighter and tighter, and labor market at the same time, actually the wages came down a little bit. Where is

the wage pressure and is it coming and when? Well, I think part of it is a mix shift issue, and we know that average hourly earnings does have some distortions with respect to the mix shift, and so looking at e c I Atlantic wage data is probably more

appropriate indicators. You know that said, I do think that there is continued pressure, particularly on some of the services UM side, and particularly some of the areas that Bob mentioned with respect to leisure, travel transportation, which saw some of the you know, significant job gains this last month. UM that said, you know, we are starting to see

peak inflation. On the wage side. We are starting to see measures of inflation start to move lower with respect to wage growth, and I think that that's likely to continue as we move through you know, the course of three will still see wage gains, but at a slower pace. And I think that's what they've FED is really keyed in on in terms of you know, setting and determining

their policy. If they continue to see wage growth move lower UM, which we're starting to see, that will allow the FED to eventually back off and and really pause. And so I think that's what the key thing to watches is the pace of wage gage which is slowing from here so soon I pick up on that very point because I think most people agree. Certainly j Pal said, we're starting to see some disinflationary forces. We're starting to

see seven inflation come off. But there's a question about whether that's going to continue as you suggested, or whether you're really gonna be able to get down to anything like two without a lot more increases on the FED. So I don't think the FED is likely to hike rates, you know, significantly higher than here. I think one additional basis point hiker potentially two is probably the most that's in the cards for the FED at this time. And

then they're going to sit and wait. And you know, we all know that Federal reserve policy, you know, moves with variable and lagged effects, and so I still think that the FED thinks that that the effects of the tightening last year will still continue to make their way through the economy uh this year, and therefore, you know, there may not be future rate hikes that are necessary. But you know, I think that they're willing to to wait and see whether or not future rate hikes are

are necessary after another one or two hikes. And so, you know, I do think that the FED right now, you know, does expect that they're at least not there's not significantly more hikes that are necessary, and as a result of that, they're you know, willing to take a little bit of a weight and see approach. You know that said, um, you know, we have seen some disinflation will likely see more, but to expect that we're going to move, you know, close to two percent by year end.

I don't think you know, many are expecting that. And you know, I think that at this point the FED will think of anything less than three percent. Uh, you know, in terms of core PC inflation is a win. So I think that's the number to be looking for. Not to percent is really sub three percent? Well, last one, last one two on this subject, and that is what do you expect the Fed to do? And number two, what are the bond markets anticipating? Those could be two

different things. Well, we expected two different things. So I agree with Aaron. The FED is setting us up to do one or two more rate hikes, and as she said, they pause, they wait for the cumulative and lagged effects to hit. Our analysis shows that from the last rate hike until recession, it's roughly a year, so you're gonna have to wait out several quarters to see are you going to have that mythical soft landing? Are you headed into recession? The market is starting to front run that.

We've all done the work. We know at the time of the Fed's last rate hike, that's the peak in yields and things rally like crazy, particularly the front end of the yield curve. That's what we're seeing in bond markets absent today. We think that's what we're going to see going forward. Okay, thank you so much, Aaron Brown PIMCO and Bob Michael JP Morgan. They're gonna be staying with us as we turn to some of the other big issues out there for the market. That's gonna be

up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The market has disappointed the bulls. It is disappointed the bears. It has been, if anything, a cat on a hot

ten economy. Those who believe, against all the evidence that the market is always efficient, sophisticated and prescient may have a little trouble explaining the last two weeks when the market first sword in its best day in ten months and then two sessions later panicked for its worst day in five months. That, of course, is luifer has around Wall Street Week back in February when the number one movie was on Golden Pond and the top song was

Centerfold by the j Giles. But I have to say people to remind me what that song was, but I remember it now. Aaron Brown of PIMCO and Bob Michael from JP Morgan are still with the soul. Let me start with you, Bob. We've talked about the central banks, We've talked about jobs. I don't know if we have a market on a hot tin economy is that we've

just learned from. But apart from the center bank and central bank, and apart from the jobs, one of the things that you're looking at that there and now they could have fixed investors. Well. I think that's a very good clip to go to because that's a reminder of the era when the Fed declared victory on inflation too soon and then had to go back and raise rates again. And for us, that's the biggest risk that that happens again.

We're looking at a number of things. I think the one most recently that's occurred is China is reopening and suddenly you're going to have a billion for consumers out there consuming that's twice the size of the US and Europe put together. That could create a lot of pressure on the price of goods and services. The other thing out there that we're very mindful of is that the US and Europe got away with a very mild winter and that kept energy prices low, as did releasing the

strategic petroleum Reserve. So Aaron, what about those are two very interesting risks, one of those that inflation is not going away, that federill actually have to keep raising or after pausing, after raise again maybe because of China. How big a risk is China in terms of inflation. I think that China, with respect to global inflation and particularly developed market inflation, is actually going to be quite small.

The way that we think about it. From a growth perspective, it probably has about a point to percentage point increase to US growth and maybe point three increase to European growth just because of the trade effects, and pretty similar impact to inflation, albeit potentially even a little bit smaller than those impacts. And that's because you know, typically in an environment where you see China growth really rebounding, those tend to be the typical effects to growth and inflation

to global Developed market GDP and inflation. This time around, it could be even a little bit smaller, given the fact that the reflation story and the and the growth story in China is going to be really centered in domestic growth drivers and more service reopening drivers rather than what you typically see, which tends to be more investment

in infrastructure. Lad So this time it's going to be really focused on travel, getting back to work, getting back to you know, typical service oriented economy, which is very domestic, China focused. It probably has a bigger impact into the region than the region and sort of the country's closest to China rather than to the US and into Europe,

into more developed market economies in the Western world. And so I think that the effects are going to be good for for China, good for maybe Korea, for Thailand, to Singapore, to Hong Kong, but but not as strong as a driver for growth and inflation, you know, in the US or in Europe. Well, although we did see the price of copper shoot up pretty smartly once China started to reopen, so they're out there competing for the

same resources that the Western world is. Now that's inflationary pressure. Well, what about broke broadly to want to think you taking into account of emerging markets in your decisions about bond investing. We're gonna have sure, Shama. On a few minutes, you're talking about India is that a factor is making investment decisions, Bob, It's an enormous factor. As we look across bond markets,

we've been very impressed with the emerging markets. We like to track the cumulative number of rate hikes since the start of the development markets have done close to four thousand basis points. The emerging markets have done over twenty two thousand basis points of rate hikes. They got in front of this, they raised rates. Real yields are high, they slay slowed growth and inflationary pressures. We can go into those markets, get high real yields and you know what,

we do. Think the dollar has topped, it will come down over the balance of the year. That's a pretty nice tail went to local emerging market debt, and I think I cut you off. No, what I was gonna say was the biggest driver for inflation, particularly in the US from a commodity perspective, tends to be energy. And we've seen even since the China reopening which started in early in early October, we've seen energy prices come down, you know, fairly significantly, and gas prices also fall pretty

precipitously as well. So while typically you would think that if it was going to have a significant commodity impact from China reopening, you would see that occurrent in energy costs. We've actually seen the opposite occur, which is why I don't think, you know, just looking at the data and looking what's transpired and looking at how China is reopening and the sectors is going to be impacted. It's why I don't think you're going to see a huge, you know,

sort of impact to inflation from China real winning. I hope that's right. I hope the Fed engineers a soft landing, but China is going to be out there consuming and spending. And we also have to look at Europe. Europe did not go through the pain that we all feared over the last several months. That's put them in a much better position to consume as well. Fascinating. Thank you so very much. It's great to have both of you back with us. It's always a treat, that is Bob Michael

of JP Morgan and also Aaron Brown of Pimco. Well, this week was hedge fund Week down in Miami, and our very own Shinelle Boss went down to report on this really important event for hedge funds. Were welcoming now to Wall Street. We great to have your Chanelle. I'm glad you were down there for it. So talk to the smart long term investor who's looking at their portfolio. Why do why do I need hedge fund in my portfolio? I mean, it looks like some make money, some lose money.

And as a whole, the industry has lost more than two hundred billion dollars last year. So it's not like the hedge funds at large are doing so well. But there are select few that I've had some of their best years in history. Take Citadel for example, which not only had sixteen billion dollars in profit last year, they surpassed on Paulson with the greatest trades ever. And so single trades as well as larger funds have had amazing years. But what strategy, I think is what you're asking here,

What what is a hedge fund? I wanna take a listen here really quickly to seem to lead the black Swan author who was famous for navigating these types of events, because even in universe of the fund that he advises didn't have a favorable year. But this is what's ahead, is what he has to say. We have more debt than we ever did in history. We have the weirdest valuations in history, and we have a lot more connectivity

than we did before. So these things up and realized that, hey, you know what, disney Land is over, the children go back to school and then make sure you're so now we're gonna go back to the war. It's a humbling time.

But listen, I spoke to both to lead as well as Jim Chainos, for example, who expects that over time corporate profits could drop another fifty And so whether you're going short in the market like Jim Chainos is known for, or whether you're buying options likeness seems teleb or whether you're cliff fastness and believe that trend following will get you there. There are a lot of strategies that are coming back to the surface now and at a humbling time,

as you call it. We have a new leader at the top of the largest head fund, a new co c i O for Bridgewater. Tell us about her. Yeah, remember Ray Dalio just stepped down from this post about four months ago and he was co c i O. But as he transitions, remember their two new CEOs as well at Bridgewater that started early last year and this is their new leadership team. This is a big change. It comes at a tough time, David, because remember I

was talking about Citadel. You have Citadel surpassing Bridgewater as the highest grossing hedge fund firm of all time according to l c H Investments. So Karen Carneal Tambor will take them into this new generation. She's only thirty seven years old, but started her career there being recruited there by Greg Jensen. Thank you so much to Shay Bask who reports on all things Wall Street right here for Wall Street Week 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. I'm David Western. We are joined once again by our very special contributor here on Wall Street Week. He is Larry Summers of Harvard. So, Larry, I gotta start with those jobs and never was out on Friday when they crossed. I actually thought maybe they were wrong.

It is extraordinary FID jobs were adding given where we are already. It's a huge miss relative to the consensus, it's way out of line with what you'd expected with a DP. The labor mark, it's running very differently then lots of other indicators in the economy where you see some signs, particularly in manufacturing, of real slowing. So it's

a pretty confused uh picture. UH. One idea would be that people are still worried about how much work they're going to get out of their workforces, given people UH working at home, given increased steps and teasm, given a variety of UH post COVID changes, and so they just feel that whenever they can get workers, they should take the opportunity. But it sure does seem like we have a lot of workers relative to the amount of demand we have or amount of production we have in UH

the economy. And the question is, is all this gonna be income that's gonna be spent that's gonna lift the economy up a bunch? Is it going to turn out that at some point people realize they've got too much inventory and labor and we're gonna see a fairly sudden stop. I think it's as difficult to an economy to read as I can remember a year ago. At this time, I was pretty confident about what the principal imbalances were and how things we're gonna play out. I don't have

that kind of confidence right now. Can we have this sort of addition to the job market and not have wages go up more than we thought? They went up four point four percent as a year over year now on the monthly, which was a tenth of a percent more than expected, but it wasn't that dramatic. Are we going to have wage inflation kick in here that will really give us problems once again on Terrey policy? David,

that's a basic question. I went back and looked at forecasting model emphasizing vacancies that I had used a year ago to predict that we were headed for significant wage inflation problems, and what I found was quite interesting to me. What I found was that that model is predicting wage inflation right now, just about right, but it's substantially under predicted wage inflation in the latter part of two. So we saw an acceleration beyond what models would have predicted

that in two. We saw that, I now realized with respect to wages, just as we saw that with respect to prices. And the central question is we had some easy come and now it's come off very quickly inflation. And the question now is whether that inflation is going to continue to decline rapidly, continuing the trend of the last few months, or whether the inflation that was never

really predicted by models wasn't a sense ultimately transitory. But now we're left with an underlying inflation that's gonna be much more difficult to have get out of the economy. And the difficult you described, Larry sit right on the desk of J. Powell, the Chair of the FED, from whom we heard, of course this week, in connection with their decision. Last week, before we heard from him, you were on this program saying it's what the FED has.

It's sort of like a car on a foggy night, and basically you got to keep the foot close to the accelerated and close to break. And this is actually what your friend and colleague Paul Krugman had to say reacting to what you had to say. It This really disturbs me to say this, but I think I agree with Larry. Yeah, we could. You know, we will get it wrong one way or the other. There's a reasonable chance in either direction. So there are you disturbed your

friend Paul Groom because he actually agreed with you. But at the same time, do you think Paul did exactly what you were describing, didn't keep his foot sort of close to both the brick and he started without going too far either direction. I think of FEDS doing a good job of portraying substantial uncertainty UH in the economy, recognizing that it's going to be very hard and one's going to have to try to interpret the data month by month, and that there are a lot of uh surprises.

I think they're having a difficult time uh convincing markets on their determination and with respect to the path towards the end of the the year, I probably will think, uh the risks that the two part theory I just laid out is true and that the inflation reductions will be transitory. I think that risk is greater than I

think the FED thinks it is. I do still think there is the risk that I've talked about earlier on the show of a kind of wildly coyote moment where firms realize they've got too much inventory and uh too many, too many people, and that you see a more economy wide turned to adjustment of the kind you've seen in the relatively limited in terms of employment technology sector. But

that's not that's certainly anything but a confident predict. Let's turn from the Central Bank actually the executive branch in the White House, where there's a big change going on in the staff there. Ron Claim, the chief of the staff, has left also Brian DEAs with whom you I know you've worked personally very closely. What do you think about their tenure and as important, what is present by now need going forward? I think Ron Claim as chief of Staff and Brian Deese as head of the any city,

have very proud legacies. They can look back on. This administration with a very small set of margins in the Senate and in the end in the House, probably passed more economic legislation in its first two years than any administration in more than two generations. There are, to be sure, real and serious issues with inflation. But I don't think anybody would have predicted an economy quite as strong as is the one in the labor market at least uh that we are seeing, uh that we're that we're seeing

right now. So they've got an enormous amount to be uh proud of, as does Treasury Secretary UH Janet Yellen, who UH will fortunately be continuing UH in her position and will provide I think some hugely important stability for the for the economy. But Ron Klane and Brian Deese should be and are leaving with their heads held very high. And of course one has to give enormous UH credit to the President who relied on them to really push forward a set of very bold policies. And finally, Larry,

give us a minute on anti trust. We've talked in the past about Lynda Kahn, the chair of the FTC, and her new approach and interest. She tried it out in court trying to stop actually Meta from making an accussion of a small virtuality startup and was rebuffed by the court. What do you make of that. I'm worried

about overambition in antitrust policy. This isn't the first or the second or the third time that our anti trust authorities have lost in court for overstepping I've heard stories that they are trying to ask so many questions about mergers even when they don't think they're going to have a strong legal argument. The deadlines are past, and the

mergers don't happen. Okay, Thank you so very much to Larry Summers here a very special contributor here on Wall Street Week coming up, it's the country with the large just population in the world and the fifth largest economy. We talked with the ser Shama of Rockefeller International about whether investors should be taking a fresh look at India.

That's next on Wall Street Week on Bloomberg. India the fifth largest economy in the world, with more people than China, and as the head of the State Bank of India told Us and Davos, it's growing faster. We are quite hopeful that this year will witness a growth of about seven and going forward even next year also on the higher base, we expect the growth to be about six person.

India is benefiting from supply chain concerns with China. For too long, countries around the world have been overly dependent on risky countries for a single source for critical inputs, over corrected economic integration, trusted trading partners like India, and it's moving fast on everything from electric vehicles from companies

like Tata. I think the transition in India is coming through very strong and very fast, much much faster than what people are expecting it to be to the expansion of five g O objective is by master twining four to cover the entire country on five, all of which is leading investors like Steve Ratner of Will and Advisers

to take another look at opportunities in India. It does feel at the moment like India really is starting to move forward for a whole variety of reasons, including China moving back, and so India is interesting on a number of levels. And to bring us up to speed on where India is today and where it maybe going for investors, Welcome to Stony who knows the country terribly well. He is Russia Sharma. He is the chairman of Rockefeller International,

also founder of Breakout Capital. Sure, great to have you back on Wall Street Week. I mean, I hear a lot of talk about maybe India is the next China in terms of investment here, the next great opportunity. How what's your reaction to that thought? Well, David, I guess this is a legacy of the fact that I've covered India now for nearly three decades. Uh and my consistent observation about India has been that this is a country

that has consistently disappointed the optimists and the pessimists. So this is not the first time that I've heard India being the next China. India will be India, which is that it's a complicated story. There are many nuances out here, and there will possibly never be next China. Just because what China achieved over its UH four decade long economic expansion, where it grew at a pace of nearly ten percent, I think it's something which we've never seen in history

and we're unlikely to see ever again. Because an extraordinary set of circumstances and leaders brought China to the position it is. And as you know that China has been reversing many of its policies over the last few years. Sosa. As India's concerned, I think that it UH offers many great prospects. But to project China on it is a story I've seen in the past, and unfortunately, I feel that people who think that are likely to be a bit disappointed. Sure, as you so wisely suggest, you really

can't compare any two countries at the same time. Is there one parallel part of the reason for the amazing economic privrecs of China is they started from a very low base, and you actually cause me to go back and look at per capita GDP for India and it's something like a year as opposed to China was just like five times that much. Does that offer actual an opportunity because there's a lot of headroom there, you can

grow in awful lot. Yes. So I think that India in terms of because of its low base, will remain one of the fastest growing economies on the in the world. It's been so over the last three or four decades. Just said, its success has been overshadowed by what China has been able to achieve. But if you look at India's grow it is consistently grown at a pace of about two and a half to three percentage points faster

than the global economy. UH. That's been the link. China's growth street UH during the similar income levels was far greater than the average of the global economy. India's average has been about two and a half to three percentage points faster than the global economy has consistently been there and there's nothing to suggest that that's about to change. So if you expect the global economy to grow at about two two and a half percent, which is what

I expected to for the foreseeable future. Then I think that India's growth strate is likely to be five five and a half percenter. So anything more than that to expect out of India is far too ambitious and something we have never seen UH in its UH post reform history which began. Thank you so much, for sure, it's always great to have you with us on Wall Street Week, that's for sure, Sherman. He is chairman of Rockefeller International. That does it for this episode of Wall Street Week.

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