Bloomberg Wall Street Week - January 27, 2023

Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Inflation, a slowing economy, a climate on the brink, and a new world order in the making. But the great and the goods still find room for optimism as they gather in Switzerland. This is a special Davos edition of Wall Street Week. I'm David Weston. This week we talked with the leaders of Global Wall Street about the economy. Business is clear, evidence inflation has in fact PETE ten is

coming down. It's a funny thing when people say inflation has peaked. Inflation is just going to grow slower, And why the big issues like inequality and climate and geopolitics matter for both of those. We were trying to address the misconceptions a transition has to always be fair and justice. Well, it's got a number of major transitions that we're going through. Our focus is trying to move the noise out the way and actually roll up our leaves and get on

with the hard work. And we speak to our special contribual Larry Summers on the potential for default on the US debt. This is potential tragedy is far. It would be catastrophic and inconceivable for the United States to default.

Every winter pandemic permitting. Global Wall Street makes the trek to the Swiss Alps for the World Economic Forum, an organization started forty two years ago by Swiss engineer and economist Claus Schwab to gather leaders of business, government and academia to, as he put it, improved the state of the world. He spoke at the beginning of the conference about some of the thorniest issues today hot spots of sicio economically modeling high inflation, inflation, increasing interest lates and

going national debt. This is particularly hurting low income groups. It is ex somebodying societal fugmentation. As Klaus Schwab says, we have some global economic issues to deal with, starting with at least the possibility of a recession, something that City CEO Jane Fraser told us she anticipates, though it may not be a bad one. We do have we do what we all see as the ferent countries are a very different places, so you actually cannot speak in generalities.

We expect to see a rolling series of country recessions, but short of anything crazy happening geopolitically, and this time last year we wouldn't have predicted what happened in the Ukraine. Um, you've seen the tales come in, so you've seen the over optimism from some about soft landings and the economy is doing well, but he gree you've seen the down

the severe case downside also coming in. I think the general view in the States, certainly one we hold that city is we expect to see a mild recession UM, largely driven by the painfully persistent service inflation. UM. It's coming off, but it's still pretty high, and we do expect to see central banks continue tightening as a result. But the vulnerabilities that amplified previous recessions around the world are not present. No thanks are in very good shape.

Consumer balance sheets are in good shape, corporate balance sheets are in good shape, and I think that omens well for a mild recessions when they come, rather than ones that we have to be worried about. Jane Fraser sees a rolling recession around the world, but maybe, just maybe

it won't roll to Europe after all. After German Chancellor ol Of Schultz told our editor in chief John michaels Wade that he does not anticipate a recession in Germany this year, and Gary Cohne, he's now vice chair of IBM, agrees with him. I thought that the risk to Germany was really the energy situation going into the winter, to the extent that we had a very cold winter and they had to start rationing energy and they had to cut back industrial Germany to keep people warm. I felt

that that was a really tough situation. Potentially, we're now deep enough into the winter and we sort of know where we are, we know what's in reserve and storage. I think Germany is gonna get through the winter very fairly easily with energy, and I think they're going to continue to power through this. So I'm in agreement with the Chancellor, all of which led to a somewhat more positive outlook at the World Economic Forum than some had anticipated.

As observed by Mary Callahan Urdos, responsible for investing four point one trillion dollars at JP Morgan Asset and Wealth Management, I would say the tone here, having come here for the past decade, is less depressed than it than it often is, which is a good sign of hope of

what's happening out there in the world. Having come off of the most difficult year for a balanced portfolio sixty forty, whether you were in stocks or bonds or anything in between, it was pretty rough sledding, and so I think everyone's happy that that's behind us and looking forward. And the job of what all of us at JP Morgan do

is work on advising clients through the cycle. And so we're going to have lots of boom and bust cycles, and I think the most important thing is to stay focused on diversification opportunity, not getting wedded to any one thing that looks like it worked in the past that may not work in the future, and so we're spending we're spending a lot of time on that. I mean, one of the things that really manifested itself through COVID was the problem of home country bias, which creeps into

almost everybody's portfolios. Uh, and you have to be very aware and conscious of of diversifying out of it. So not only home country bias in terms of the stocks in the bond you buy, but also the currency. And I think it's now a really important time that people think about how to get all of that the opportunities that they may have missed in other parts of the world, especially parts of the world that are reopening and making it very interesting. Morgan Stanley is James Gorman agreed that

there is room for optimism, not least because of China. Well, you know, I've seen I've seen a lot of cycles in my career, and I've seen some really really dark periods.

You know, the financial crisis have to September eleven, even though you know the early recessions in the US and the market bust and seven year I go back up a lot, you I go back a long way, and you know, I think what we've been through if you stack up the negative stuff that happened first lame we're in European seventy years, first global pandemic in a century and highest rate increase because of inflation in forty years. That's a lot to throw up people. And where are

we now so bad? The debate is will it be a recession? Will it be shortened? Show nobody's saying we go into depression right, everybody's saying, we can kind of deal with this. And two things I think have changed in the last month which has caused this echo chamber we live in here and dove us where everybody's basically repeating back to each other what they've heard from the last person. Let's be honest. I'm not hopefully, but most

people are. Is two things have changed. Number one, the inflation numbers are definitely there's clear evidence inflation has in fact peaked and is coming down right how quickly? Whether the Fed will get us to two percent and when remains the debate, but is clearly the slope of the

line as positive is um to everybody's favorite. And the second is not just the opening up of China, but China has embraced the rest of the world more aggressively in the last few weeks, witnessed by the Vice Premier meeting with Treasury Secretary yelling Um in a way that we haven't seen for some time. So the big question coming out of the Party Congress and President she um uh you know, being real reelected by the Congress, was

way does China go from here? Back of America Chief Brian moynihan agreed with others about the likelihood of recession, but at the same time and not being too severe be based on the strength of the consumer and also the strong labor market in the US. Our research team, which is the best in the business, has a mild recession predicted sort of mid this year. In the next year, they pushed that out, and so why they keep pushing

out it's the strength of the US consumer. They have the FED getting over five five five and a quarter. Just this week they moved at the three basis point rate rises a phoe the fifty, meaning again the Fed can slow down a little bit because you see inflation go over um and so that's what you have. And so this year ends up being positive, next ye ends up being positive, but you have a little trough in

the middle. Employment is still strong, people are working, they're getting paid more, but they've got to get to inflation. So they have to keep the rate structure up here for a fair amount of time until they get the services side inflation down and the market maybe mis reading how fast that will take. But on the other hand, we're a heck of a lot better shaped than all these other economies that I talked about it, that's for sure.

So pushed out the possible recession your research team did, is it also looking shallower because the economy is more resilient than we thought it was. Well, the consumer is very resilient, and you look new claims from unemployment, we're down in the one nine thousand. Before the two thousands seven eight UH recession, Great recession, Financial crisis, they ran

three D thirty thousand each posting. So to think about that difference in the workforce about bigger, These are down to numbers consistent where they were in you know, fifty years ago when the workforce was half as big. So the employment still strong. Now. Are all being more careful about higher we're all trimming our head count by attrition or we're all flatting out in some industries are actually taking head count down. So that may change. That hasn't

changed yet. The money in our counts is still there from and it's come down a little bit they're starting to spend it. But on the other hand, it's multiples where it was pre pandemic. They have lots lots of barring capacity. Now what's going quickly stopping. Obviously mortgage has got expensive, in house purchases stop. But the dollar value

of housing that went shot up after the recovery. Yes, it's come down, but still way above where it was in nineteen and so people have to think about this in the perspective long term growth rates that that fell and then shot up with all the stimulus, and now we're settling in and the ft has to bring inflation down because inflation will eat away purchasing power and that's really not good for especially media income household going up. We moved from the economy to another big topic for

global Wall Street, geopolitics. That's next on this special edition of Bloomberg wall Stree Week from the World Economic Forum. This is a special edition of Wall Street Week from the World Economic Forum in Switzerland. I'm David Weston. Leaders gathered here this week against the backdrop of the largest ground war in Europe since World War Two, sanctions opposed on Russia for his invasion of Greek Crane prevented any Russians from actually attending, and China was represented by its

Vice Premier to her, not its president. As a year's passed, but China nevertheless was very much a topic of conversation at the World Economic Forum. Ast Her actually left Davis to go over to Zurich to meet with Janet Jill and the U. S. Treasury Secretary, raising the prospect of maybe better relations between the United States and China. We asked US Trade Representative Catherine tie about her take on what was accomplished by that meeting with respect to trade.

I think that expectations for everyone, UM, workers, families, businesses, in America, in China, around the world UM should be that President Biden is committed to bringing a thoughtful, deliberate, strategic, and ultimately effective approach to the challenges that we have as well as the opportunities that we have in this profoundly consequential trade relationship. W t O director and Gozi on koja O Wala is encouraged by possible thawing between

the United States and China. There's quite a bit of optimism that has been attached to the opening up of China, and I think the meeting of Vielen and Luther is a good sign, but I think we should also keep it in check. Mary Callahan Urdos of JP Morgan says she's seeing some hopeful signs out of China already, having come back from Hong Kong just a few weeks ago. You can just see the pent up demand of what's there. People wanting to go in country, people wanting to come

out of country to travel around the world. I think the opening up of China, while while we'll have that's ups and downs, uh, it will hopefully be a net exporter of deflation, which would be good for the world, getting all of those kinks out of the system, uh and really bringing back growth in a in a positive way.

So I'm looking forward to that. I just say for us at JP Morgan, getting to see our people who are on the ground in China and have been working so hard throughout these many years um of us not being able to travel in We're really excited about that. We're looking forward um to lots of good reunions, UM and the like. But people are really excited, and I

think it means a lot of things. The tone that you're hearing from many that are that are either going in already and or just listening to some of the conversations here today are really positive about what could be happening. And of course there's all sorts of um negotiations that have to happen to make sure that people do things in the right way, that people work forward to cooperation

on a fair and even playing field. And I think that those are the important conversations that had to be that have to be head But now that we can do them in person, it's going to be a hell of a lot more fruitful to be able to do it that way than to try and do these things on some kind of a flat screen where you're not you're not able to have those personal connections that are

so important when you're going through through these negotiations. For years, environmental, social and governance investing was all the rage, but it's become something of a political hot potato recently, with eighteen states now either enacting or proposing legislation to bar state governments from dealing with any financial institutions that take e s G into account in their investing. We asked Jane Fraser, CEO of City, whether her bank has lost any money because of E S g and she had a very

simple direct answer, no, um. But but I think that's not really where we're focused. So when we look at it, the world's got a number of major transitions that we're going through, and to your point, these aren't These aren't easy ones. So where we're focused on is helping let's take climate, we're trying to make sure that there is both the realization of energy security for the world, which

is critically important for economic growth. At the same time is that there is the investment and the innovation required in sustainable, green sources of energy and cleaner sources of energy, and we've got to solve both of them together. They're

not mutually exclusive, um. So our focus is trying to move the noise out the way and actually roll up our sleeves and get on with the hard work of how do we um help support our clients who are investing in the innovations, get them to scale that we'll get those cleaner technologies that we need up and running at the same time as supporting clients who are also critical sources of energy for the world right now and helping them with that transition. But recognizing this takes time.

Black Ruck, CEO Larry Think went even further to say that at least in Europe, if you do not have a lens towards a de carbonization, you're not gonna win one one year old business. You know, we are one of the largest hydrocarbon if not the largest hydrocarbon investor in the world, because we're the largest index er and we we work with all these different companies. At the same time, we're one of the fastest growing companies related

to de carbonization. And let's be clear, the IRA in the United States is a game changer too, whether banks are losing money or making money from e s g. The one thing everything can agree and we need to know what it is and by the way, how to measure it. Something that Brian moynihan, the head of Bank of America, has been working on in his capacity as chair of the International Business Council for the World Economic Forum.

We started many years ago thinking about how the private sector had to make the changes to drive the economies. And then, you know, with all going on in the public sector, with all going on in debt levels and all that stuff, and so we sat there and said, Okay, what do you need to do that, and what you need to do that was defining a set of standards that we believe of the right standards, and then we've

got to stop from having a proliferation standards. So there's at one point there was gonna be six hundred uh in two thousand scheduled be I think in North America, like six hundred uh seminars on metrics. Yes, you know, and we've got stuffed to So we've come up with straightforward metrics that match the STGs and these other things that people talk about, their straightforward metrics that say, you know,

are we good for our our customers, yes? Are we good for our teammatess, are we good for our shareholders yes? And are we good for society? Yes? Yeah. That that's how we drive a company. And and so we're saying if you disclose those metrics, then people can see what you're doing. It is not just investors and financial firms that are concerned with climate and what can be done about it. Tech is also moving into the area. As we talked to Gary Cohen, he's now vice chair of IBM.

So environment is really important and as a technology company, we think about how we can help our clients and we look at the We look at climate no different than any other sort of business operation. First of all, it's a data problem. It's a big data problem. So you have to collect the data and you have to get it into a usable format. That's something that IBM really thrives on is we help people collect data, we

help getting into usable format. Once you have the data, you need the technology, you need the software, you need the analytor the tools to start evaluating the data. So you've not got a baseline. You're evaluating your data. You

know how much carbon you're admitting. Now, once you know how much carbon you're admitting, you can go through policies and procedures to change the way you're running your business, how you're running your business, and you can measure success so you operationalize it and you become much more efficient at running your business. Once you have the technology and once you have the data in a in a way that's useful to you as a company. As Global, Wall

Street talked about climate and Davos. One of the main topics of conversation where those electric vehicle tax credits in the Inflation Reduction Act, which the United States is is a big step toward clean energy, but Europe is very concerned that it's actually protectionist because the favoral treatment it gives for US manufactured batteries. Democratics. Senator Joe Mansion of West Virginia came to Davos to talk about energy and why he thinks the US approach makes really good sense.

They've been coming to me for years saying, you've got to have a carbon tax, You've got to have a carbon fee. And I said, we don't have any any other choices except to use fossil right now, because we don't have the horse power to run our economy in our country. But you want to penallyze people thinking it'll make them do it quicker. I never used I never thought that would work. I thought incentives work better. And guess what, the Europeans have used the carbon tax and

carbon fees forever. We come along all of a sudden and do something, and we says we're gonna incentivize you. We're gonna help be your partner and take some of the risk out, but you're gonna have to invest. We're not send you a check. You've got to have either production tax credits or investment investment. Tell me which way

you're going we're gonna work with you. You're gonna have a tenure runway, but that ten uere runway where the I ra A and I know the administration has been telling this as an environmental bill, environmental bill, This is truly an energy security bill, and we need everything, but we need a horse power from fossil for ten years win I mean not win, but as far as in cold gas and all, but do it cleaner than anywhere.

That's climate, that's helping the climate. Coming up, we turned to what we learned to Davos about inclusive growth and what Global Wall Street can do for developing countries falling behind. This is a special edition of Wall Street Week from the World Economic Forum. I'm David weston Global wall Street wasn't just focused on the developed world when it came to Davos. The developing world also got a fair amount of attention, starting with Sub Saharan Africa, which cities Jane

Fraser says is very much on her client's mind. A lot of the discussions we're having, particularly interestingly with a lot of our mid least and clients is what are they doing about Africa? And I think Africa is one that we've all got to keep our mind on because that is where the net growth in the world force is going to come over the next few decades. UM.

If we get it right, it's a wonderful opportunity. If we don't, it's going to cause a lot of problems, both in Africa as well as in Europe as well as other parts of the world. And so looking at how do we build out transmission networks, greenness, supply chains there and the Biden administration echoes what city is hearing from its clients. As the United States Trade Representive Catherine tied laid out plans to support and engage Africa and

described the great opportunities for the world economy there. President Biden hosted the African leaders at a summit in December in Washington, d c. And um, I think it came at just the right time. The message that we wanted to send across the board, across the administration was that America is ready to partner with Africa, to work for Africa with Africa on trade. We've got our baseline trade program. It's a preference program. It's called the African Growth and

Opportunity Act. It is um set to be um reauthorized in now is exactly the right time to be reviewing what performance has been, like how effective has this been in UM stimulating and fostering development, economic development and investment UH in our partner economies, and then also to start thinking how do we make this better and more effective.

It is very clear from all of the engagements that we had last December in Washington, d C. Including um my trip to Nairobi for President Ruto's inauguration in September UM the future really is Africa. The resources in Africa, whether they are in the ground or that they are the human beings, the people of Africa. The potential is tremendous.

If we can find the way through trade, economics, investment, finance to un lock the potential of Africa and its people, Africa could be the engine that drives economic growth and prosperity for the next phase of globalization. But it is going to require us to think big and to be creative because the tools that we have so far UM haven't done what we know we need to do in this next phase. President but also just recently traveled to Mexico City for a North American Summit meeting with the

head of Canada Mexico as well as President. But there are trade issues pending under the UMCS, U S m C and other places involving energy. Where did those stand? Are they being resolved? What's the timetable? So? UM, there is an energy consultation that we are engaged in right now. Both the United States and Canada have requested consultations with UM with Mexico, those consultations are ongoing. UM. We UH have certainly gotten Mexico's attention. They know we cared deep

about this. Our economies are and have been inextricably linked for many decades now, and we are the claim of partners. We are neighbors. Geography is never going to change. We're going to be neighbors forever. So these are really important conversations. They're about energy policy, they're about um our vision for

a competitive North American future. UH. We are still in consultations UM, and we're committed to finding a solution here using whatever tools are available, including the ones under the U s n C. A. The pandemic drove home so the great disparities between the developing and the developed world.

FISER Chairman and CEO Albert Borla explained how the mRNA vaccine that his company developed with Beyond Tech was made available for free, and how that has led to a much broader initiative the vaccines port, the Gero vaccine, those all convers in the world where offered completely free through a brave move that the government made. The US government, they bought one billion dollars from much at costs and

they offered it for free to the world. Unfortunately, they were not able to observe it because there's no demand for those vacans in unfortunately the poorest of the countries. But nevertheless that gave us the whole story with with COVID sensities even more so. Nine months ago here in Davos, we launched an accord where we said that Fighter will offer all the pattern protecting products, which makes the products

that generic manufacturers cannot make chip copies at cost. And they say, of course these manufacturer and send no regulatory, no compliance, no legal, no administrative, no research. We announced not all our pattern protected, but all our products. This moves at least from twenty three products to over five hundred. Wow, so it's not just always pan pan protected, it everything.

Of course we're hearing when we're we're giving for example, would give them maybe the most prescribe rist canster medicine in the world, high technology, but they would say, we have also needs for antibiotics, you have needs for anti parasitics, you have needs for anesthetics or basic chemotherapy, and we help them and then we do everything. I would say that sounds wonderful. Absolutely, it is wonderful. Why did you do it because you ow to do it? I don't

think it is. There is no reason why the poorest cantus in the world right now, who won't have access to the same medicines that kids in America or in France are heavy. One of the reasons I think FISER has been a successful it has been because there's been investment in science. Basically, what about larger for the US government and other governments. Are we investing enough in basic R and D? Could that help you? I think we'd help. And I think there is a lot of work happening,

particularly in the US. And this is why in the US has attracted all the research investments of the private sector. If you see what's going on, even uh companies that there are European companies are doing most of their research in the US because this is where things are and I think it is the crown zoo of the US industry with their life sciences. You know, healthcare so terribly well.

Dr Borling, let me ask you what you think the biggest challenge is actually having the drugs, the pharmaceuticals to administer or is it actually the infrastructure Taken a dollar you mentioned earlier that you actually couldn't get some of the COVID vaccines some countries that needed it. There's no doubt in Africa. It is not the availability of the products. Of course, you need to have them, and you need

to have them in prices that you can pay. But once you resolve up which with US deep, you're going to have very big problems with infrastructure. You don't have the right healthcare professionals to ad minister to make the diagnosis. This is where we should help. This is where it

should help us included. One of the ways those in the developing world are addressing the needs that they have is by migrating, something that has created a crisis the United States along the southern border, but back of America CEO Brian moynihan says that the biggest challenge ahead for the U s economy is not keeping people out, but getting more workers in of the country. I think we're getting a lesson right now in the fact that America is this wonderful place for people to work and live

and prosper. And you know the problem is we need more people. We just need more capacity. And the point I always say, when people say this anything, it says, well, it takes eighteen year year eighteen years to get an

eighteen year old. That is science, and nobody can refute. Okay, So if we're gonna have enough workers to do all this, all this near shore and all this on shoring to put up the wind you know, the windmill is all over Texas and alcohol in places that are being built that put up the solar fields, to build the pipelines. We've got to get some people in this country, and so we have to forgot a way to do what

it works. Surprisingly given the tight job market, particularly United States, it's the challenge of making sure workers at the bottom are making a living wage is not going away. Neila Richardson, she's chief economists a DP, came to Switzerland to address this very issue. There's a big gap between market wages. Minimum wage to is that are instituted by governments and what it takes to actually survive in this world in terms of housing, basic necessities, food, clothing, shelter, and then

the context of high inflation. Even as it moderates, it doesn't mean that those prices are going down. They've already gone up. They're just going to grow more slowly. So for the typical worker, their wages haven't kept up with inflation, and even before the pandemic, their wages weren't keeping up for the lower end of the of the paid workers with just basic necessity. So this is a global issue and it deserves the world's attention. Okay, so let's assume

the world actually pays attention. I hope it does. What does it do about it? Well, there's actually benefits to paying people fairly, believe it or not. It when companies and there have been companies that have been very prominent on this issue. A deco was on our panel. The CEO Unilever made comments on living wages when on his panel on the cost of living crisis. And what they've

identified is there's actually benefits to paying people fairly. It leads to more engagement, it leads to more retention, and at least to something that the world should really want right now, social stability when workers are secure. Coming up, We're here from special contribute to Larry Summers of Harvard on the big issues facing global Wall Street and why he may just maybe a little bit more optimistic than

he's been. This is Wall Street Week on Bloomberg. This is a special Davos edition of Wall Street Week, and I'm David West and Larry Summers, our regular contributor here in Wall Street. We came with us to Davos to talk about some of the big issues on the agenda, and we started with him about that debt ceiling crisis back in the United States that is getting so much attention right here at the World Economic Forum. This is potential tragedy. Is farce. Uh, it would be catastrophic and

inconceivable for the United States to default. It's not what anybody serious does. We have problems that our family or discussions about how my kids spend money. Maybe my kids will pay off visa, maybe I will pay off visa. But the idea that the family should stiff visa because we can't agree is absurd. Similarly, UH, the debt limit I've been through a lot of these. I think at the end of the day, we will meet our obligations

and not cause substantial disruption. But God, I wish we could move past this UH, like Senator McConnell showed real leadership in doing UH some time ago, because it would be catastrophic for the United States and for our sense is a serious country if we were to actually default.

Another big story here in Dallas, but more globally actually is now to her the vice primary premiere of China meeting with Jennie Ellen just over in Zurich, not far from here, in part because let who was here, as I understand it, in Davos to at least start a discussion. What do you make of that? I think it's encouraging. I had a chance to speak with him UH here in uh Davos. Look, I think it's always better to

be talking, whether you're agreeing, whether you're disagreeing. You get to better places with mutual understanding, and so I welcomed UH that. I think the right approach is small victories. We're not gonna have a broad rappers small or transformation of the relationship. But if we have small victories, we identify areas of progress, we have specific accomplishments. I'd like to see that with respect to the debt problems and debt resolution of some of the poorest countries in the world.

I'd like to see that with respect to climate finance UH in UH the developing world. I think we can make progress if we set our expectations and aspirations right towards small victories. You're a macro economist, You're not a politician as far as I know. At the same time,

you know politics in Washington. Can we make even those small steps of progress on either side with maintaining the support from President g and Janet Young maintains sport the Unit States because there's a lot, as you know, political sentiment against China. I think if we're making concessions to China, probably not. If we're working with China to work out an African debt problem or to support and energy transition,

then I think we can. I think we need to get out of the zero sum UH mindset, and by focusing on the issues in third countries, I think we've got a much better chance of doing that. I think it will be much harder on the direct commercial issues between our two countries. You've been warning about the possibily recession for some time, even saying it's more likely than not. At the same time, things have been getting a little better on some of the eco numbers. Where are you

right now. I'm still cautious, David, but with a little bit more hope than I had before soft landing. So the triumph of hope over experience. But sometimes hope does triumph over experience. And we have seen some slowing of inflation indicators at the same time we've seen continued strength, and that's got to be what we all UH want to see. I still think it's gonna be hard because we need a substantial amount of disinflation that goes beyond

volatile components UH receding. But you have to recognize that the figures are better than somebody like me would have expected UH three months ago. So it's still a very very difficult job for the Fed, but the situation does look a bit better. That was special Wall Street Week contributor to Larry Summers of Harvard. That concludes this special edition of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.