Bloomberg Wall Street Week - March 3, 2023

David Weston from Bloomberg Radio. New beginnings for Britain's relations with Europe, for America's semiconductor industry, and maybe for the Chinese economy. This is Bloomberg Wall Street Week. I'm David Weston this week special contributor to Larry Summers on signs of a Chinese resurgence. When a populations deciding to have half as many children have that revolution in six years, it says there's some very fundamental concerns about the future in that society. Renee James of am Here on the

bold new US industrial policy for semiconductors. It's brought the importance of semi conductors in the semiconductor industry into the public discourse and Professor Melissa Carney of the University of Maryland on investing in the future workers of America. We have the tools and the resources to reduce child poverty in this country, which would remove major impediments to children's learning cognitive development. That is a way to invest in

our future. Everywhere you look. This week, Global Wall Street seemed to be turning over a new leaf, with the UK and the EU patching things up over Northern Ireland announced in the shadow of Windsor Castle prod. Prime Minister Rishi Sunac un confident the Windsor Framework that we announced resolves the issues that people have with a protocol. It restores balance to the Belfast Good Friday Agreement and that's what was needed. And President Ursula underlying this new framework

will allow us to begin a new chapter. It provides for long lasting solutions that both of us are confident will work for all people and businesses in Northern Ireland, Solutions that respond directly to the concerns they had raced. While the United States moved forward with the first stage of its Chips and Science Act, investing billions of dollars

to bring semiconductor manufacturing back to America's shores. Everybody knows that this little chip that we have as part of everything that we do in our life, and most of them are manufactured overseas. So the idea here is to bring those manufacturing capabilities back home. Not to be outdone, China got into the act with pm I numbers way above expectations, indicating its economy maybe roaring back faster than

was thought. There was a rebound expected when the Chinese came out of their lunar New Year, but this has been much stronger than people thought, and paving the way for President She's coronation at the National People's Congress at the beginning this weekend. This is really the last act of the transition poor She shanping into his third term, but from the time he was given the third term

at the Party Congress. So now the costs of She Shinping's policies have been piling up and markets pretty much picked up on the upbeat. Mood of the week is the SMP five hundred made up put at a loss last week, adding one point nine percent, while the Nasdaq was up almost two point six percent. Bon yields surged on Thursday, with the ten year well above four, but then settled back down under three point nine six for a gain of just over four basis points for the

week overall. Here for their interpretation of what the markets were trying to tell us this week are Amy wu Silverman, she is head of Derivative Strategy at RBC Capital Markets, and David Beyond Cio America's for DWS Group. So welcome both of you. Great to have you here day. We got to start with you. What did you hear out of the markets this week? Confusion? It was an up week, and I'm glad that the machines have been shut off, but it was a very volatile week. The market was lower,

the market was up. I think the main issue for the week was the culmination of the realization that we don't know what's going to happen with inflation over the course of this year, so inflations back. What's the Fed going to do about it is a big question? Amy, Yeah, you know, look, I would say the derivative market echoed

that to some degree. Even though we ended the week up, what we saw was actually a lot of hedging during this whole week, So you know, as the market kind of wrestles with concerns about inflation, what you're actually seeing as investors going out buying downside protection kind of four to six months out, wrestling with where this terminal weight is going to be, and the sentiment is still leaning pretty Barishley, So what does that tell you when people

are really buying those hedges four to six months out? As you say, what are they anticipating four to six months from now? So you know, the derivatives market, it has to be very specific, so meaning if you don't get the timing right, it doesn't really matter if you get the direction right. And so you know, they're essentially saying four to six months from now there is going

to be some sort of reckoning. We're either going to be on the right glide path to a soft landing or unfortunately, we may be wrestling with a terminal rate that is actually much higher than initially expected and that could cause downside to the market. Dude, I'm curious about this glide path to a soft landing. Are he talks about that? Are we on the right guide path or do we even know at this point? Because we thought

that we thought inflation is coming down. We've had some data in recent weeks in the game maybe not so fast you maybe the airport's moving around. It's one of those pop up airports in it. Well, the lights for landing are still on. There's still a chance. But so much data has come in suggesting that inflation sticky, particularly at services. Service demand is strong. Thus jobs are still strong and really tight labor market. And I think you've got a labor market that's not too pleased with the

pay they're getting. You still have prices rising faster than wages and wages rising faster than productivity. So the path to a soft landing is getting trickier. But I think there's still time and maybe just a little bit of time left for the FED to act aggressively and bring down inflation. For talk about the FED acting exactly, we're going to hear from Jpal next week two days a testament on Capitol Hill at a time when he was saying, don't worry so much about inflation. He said, if it comes,

we will have the tools to deal with it. Does it look like he does have the tools right now or if are those tools working? They have the tools, And he said if inflation comes and they've reiterated that they are data dependent, that they're not on a predestined course in terms of the terminal rate destination, how high will they go? And there's no certainty or pre planned amount of rate increases from here, So be data dependent and consider strongly consider a larger hike the March meeting.

So what are you seeing in the derivative market when it comes to things like the rates, Because there are people talking about five and a half more or less terminal rate, but now people are starting to say, may it'll be six, Maybe we'll have to keep going. Given the data we've had from the economics lately, what are you seeing in derivatives? So one thing about derivatives markets

is they really think about what the tail is. So right now I would say that twenty five basis points of the next meeting is still kind of consensus, but that tail of fifty basis points has actually risen, and we're seeing investors play that either through rates options, through

sofa options, or through equity options. And you really see that, David in the market structure as well, because we've really taken the tenor of the average option down from something like a month to a week or a day because people are playing these data points so specifically because they matter so much. Well, I want to talk about this a week or a day? What did it do to have an option it's for one day or less than a day. It seems to be a big upswing in that.

I guess I started with memestocks. Actually it did, and it's you know, for some one like myself who's been watching the rotis market for twenty years, it's just unbelievably shocking because right now almost half of all volume in the entire SMP five hundred isn't concentrated in options that are less than a data expiration. That really tells you one how much the market structure has changed, especially on days like today where it doesn't seem to fit the

market narrative. But secondly, you know, it exacerbates this intra day volatility that you haven't seen in a way since prior to the pandemic. It's really changed the market structure of the day to day. So this is why I would get about that, David. I would think normally, given all the uncertainty out there, people would be saying I don't want to take as much risk, but trading in options for less today sounds like a pretty risky venture.

I guess some investors don't want to pay for the time value, and maybe they think they've got the right trade for the day. I would simply say that that's why I don't read into any one day's market activity. It's been volatile. I think that's the message in the equity market and the derivatives market. This week was especially volatile and the bond market, and that is the root of a lot of the uncertainty out there. Where are yields heading both short term interest rates and longer ten

year treasury bond yields. And the ten year yield poked its head up above four percent this week, and I think that's a reminder the bond market only has so much patience, and I think it's running out for inflation to come down faster. So I put you in the spot here because I think you used the derivative person. Are your derivatives taking some of the value away from the signals we're getting at the equity markets because we

can't quite tell it's all about options. You know, whenever folks need someone to blame, they usually come back to the derivatives, So so you know, I'll just take one for the team there. But you know, one thing we've spoken about with investors is people used to use the VIX as a signal. It's quite a common signal for a risk. The VIX has broken down. So the correlation between the market and the VIX used to be if the VIX went up, the market should be going down,

and vice versa. They've been going in the same direction for a while. And part of it is the VIX isn't capturing what's happening in traday. It's essentially what's capturing it's happening kind of on a one month out basis, but all the action is really really short dated, and so even some of our old standard indicators, if you will, for volatility are are having to be reframed. Okay, thank you so much to David Bianco and when Amy wu Silverman,

they're both going to stay with us. We're gonna show you the question of how do we make some money out of all this uncertainty? And by the way, does any of it reside in China? That's going up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We are in a period where country companies are copying the capitalist system.

They're privatizing government owned businesses everywhere, They're privatizing pension systems, and it's just a fantastic time to be in the financial business and you have the opportunity to participate in this global growth. That was then City Group CEO Sandy Wild on Wall Street Week back in November of two thousand, when the number one movie in the country was How

the Grinch Stole Christmas? The number one sawing in the country was Come On Over, Baby by the Backstree Boys, and China was well on its way to join the WTO, raising hopes its style of running economy might be coming on over toward the Western Way. Still with us our Amy Wu Silverman of RBC and David Bianco of DBAWS, so we talked about the markets. In the last segment, Amy gives us a sense of where the opportunities and let me ask you specifically, do you think there are

opportunities in China? Given we're about to go into the NBC or C presidents g reupt, I do I think their opportunities and options in China specifically because there's an event, and that's what options love the most. They love to play an event because anything that could potentially increase your volatility can increase the value of your options. So for folks who have been looking at the China reopening story, that may be a way to get back in to ashr FXI em calls, which we've seen before in the

beginning of the year, and maybe reloaded. Now, what about other sectors, David, haven't you mentioned banks? What about big tech? For example? They had a hard year last year. Where's it this year? It's off to traffic. Start the proper tech, the proper tech titans, the ones that are in the technology sector have held up really well. And I think part of that is the people are seeking the stability of those businesses, the strength and resilience of those businesses.

And don't forget those are strong balance sheets with a lot of cash, earning more interest income than they did in the year's past. But we also try to look at the market as to where's their upside that's worth the risk. I see that in healthcare there's more risk, but good upside. And banks and tech were underweight now we've moved more significantly underweight. On it. We're sticking more things like communications where we see more of a price

discount and more upside worth the risk there. What do you think about healthcare? David mentioned it. Yeah, it's interesting. We just went through an exercise essentially through our universe of covered companies within the RBC universe, and we essentially looked at their sharp ratiows. We just said, given that the risk free rate has gone so much higher, you know,

where's your excess return attractive per level volatility? And healthcare is actually one of the sectors that is ranking quite well. It's interesting. Healthcare you think is a strong one. Yes, it had a tough start, as I think there are investors running to the circicles, or running to the defensives, or maybe leaving the equity asset class to go into bonds, which is an alternative, powerful alternative. At this stage, healthcare got left behind. But I think that's the sector for

the decade. Where we're talking about equities, obviously we're talking in part about earnings expectations. Where are we on earnings? So we bottomed out? No, they keep drifting down almost in the painful, steady gradual drip of downward earnings estimates. For especially the first half of this year. I think at the best SMP earnings will be flat at about two hundred and twenty two dollars, which is what hernings were last year. So, Amy, as I understand sharp ratio,

which is limited. It's a combination of volatility and return. But you're in really yet when you look at that, where do you see the highest volatil the highest return. Yeah, So essentially what the sharp ratio is saying to you is, you know, for the level of heartache, the level of

risk that I'm taking, where are you getting your most return. So, as I mentioned, healthcare was one of the sections we looked at which looks attractive and interestingly, the other is large cap technology, and the reason is actually not related to the excess return. It's actually because the volatilities come in on a twelve month basis in those stocks. Okay, thank you so much. It's really great to have both

of you with us today for this discussion. That's Amy wu Silverman of RBC Capital Markets, by the way, a derivative person as you might have noticed, and David Bianco of DWS America. And one of the things we focus on here are the long term prospects for investors, and necessarily those prospects depend upon our growth, and that is a dependent upon the size and the quality of our workforce. And when we talk about that, we necessarily have to

think about our children. Melissa Carney, Professor of Economic University Marian has been focusing on just this subject and she joins us once again on Walstert Week. Welcome back, Melissa. It's great to have you here, so thanks for having me, David. So, we tend to think about children and the future workforce in terms of education and goodness, does we have a

lot we can do in this country about this. But you point out that from the pandemic we saw something about not just the education but the care for our children. It's exactly right. So everybody is behind the need for a skilled workforce and boosting educational attainment, and everyone's behind

improving schools. But the truth of the matter is the kid's home life really dictates their ability to thrive and learn in schools, and we don't do nearly enough in this country to make sure that the material needs of our nation's children's are being taken care of. We have millions of children show up at school every day with the burdens of poverty or economic and security. They're too tired or hungry or stress to learn to the fullest

of their ability. What was amazing during the pandemic is that, somewhat surprisingly, we actually managed to reduce child poverty in this country by a half or a third. I mean, this was really a historic accomplishment. And so how did

we do that? Well, Congress extended the child tax credit, made it more generous, increase the full credit amount from two thousand to three thousand dollars thirty six hundred dollars for a child under the age of six, and it made the credit fully refundable, which meant that even parents who didn't work, who had no earnings, could get the full credit amount. And the upshot of that was a

historic reduction in child poverty. And I think that means looking for a bipartisan way forward to an enhanced child tax credit. So coming back to the investment question, I mean, we're not continuing that program the way it was, at least not as of right now. Objections have been cost too much money and it actually discourage his work. That's right. So, Congress,

despite everybody the celebrated reduction in child poverty. Congress did not make the expansion of the child tax credit permanent, and a few there were a few key hangoups, political hangoups, reasonable hangoups. So one was the worry that if we permanently sent checks to out of work parents of three thousand or thirty six hundred dollars, that would actually induce too many parents to leave the workforce. That was a really big hangoup with congressional Republicans, as you mentioned. Another

worry was that it was too expensive. It added, you know, over one hundred billion dollars to the cost of the existing child tax credit. We propose that parents who are out of work only get half of the full amount, and then the full credit amount of three thousand or thirty six hundred that could phase in steeply. And so what does this do? This rewards work, This incentivizes parents to go to work, and it still gets a lot of money material resources to these very low income families.

The phase and is I understand that means if I make more money as somebody who has half of the style, I get some more of my full credit incrementally exactly as you go to work. For every hundred dollars you earn, you get thirty dollars until you hit the full credit amount, right, So we're increasing the return to an hour of work.

On the issue of the child tax credit during the twenty twenty one expansion being too expensive, well, a lot of the additional income was actually not going towards fighting child poverty or bolstering the income of low income families. A lot of that was the full credit three thousand dollars thirty six hundred dollars was going very high income families. So there's a way to keep the cost down. Target the resources on children and families for whom this money

will make a real difference. It would really increase their ability to pay the rent, to buy nutritious food, to pay for high quality childcare. Target the resources were we know there's a real large social return, and do it in a way that doesn't discourage parental work. Again, there's an easy path forward here. It's obvious. It's just playing with the policy parameters, and we can't afford not to do this as a country. Professor, thank you so much

for being back with us. That is Professor Melissa Carney of the University of Maryland. Coming up, we wrap up the Week with 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 Weston. We're joined once again by our very special contributor, Larry Summers of Harvard. So, Larry, we spent a lot of the week trying to figure

out is the FED ahead of the behind? Where the markets and relationship? Where is the Fed compared to where it thought it was going to be, what its plan is? The Fed is behind the curve. There have been six jolts to the FED in the last six weeks. The seasonal adjustments of the CPI took the trend downwards in inflation during twenty twenty two out of the data. The inflation figures for the last several months of twenty twenty two were revised upwards, further taking any sign of declining

inflation out. We got a CPI number that was very disappointing in terms of how high the level and the core was, and that was reinforced by the pc information when it came in. All the indicators for January read strong suggesting that monetary policy has not yet gotten substantial traction in slowing the fullness of the aggregate economy dawn. The wage inflation numbers, as they have been revised, no longer show the kind of reductions that we had been expecting,

or many had been expecting to see. And you see interest rates move to ratchet upwards with the ten year crossing four and the two year reaching record levels. Put all that together, and I think a reasonable assessment of where the fat is would say that they have not been this far behind the curve for a year or so. Once again, the forces the arguments made by Team Transitory

have unfortunately looked more like wishful thinking. And you can see that in the evolution of rhetoric from we will have a soft landing towards it's possible that we will have a soft landing. Of course, it is possible that we will have a soft landing, but maximizing that limited prospect depends upon realistically assessing the situation. Okay, once they've assessed the situation realistically, if they're behind the curve, how do they catch up? What do they do going forward?

What is the policy? Look, they're not in the right place right now with respect to March. I saw an estimate suggesting that markets right now are assigning a twenty two percent probability to a fifty basis point move in March. The FED right now should have the door wide open to a fifty basis point move in March. No need to be committed to that till we see the next

employment figures, till one sees what happens in markets. But if markets are now saying twenty two percent, that means the door isn't open to that possibility, and there's a very significant chance that that's going to be the right thing to do. The main reason to move slowly in monetary policy is because you want to preserve the option of moving less far. It's looking less and less likely that the right thing to do is to not raise

rates by at least another fifty basis points. And if that is the right thing to do, it's best for credibility, at its best for ultimate stability to make that move more quickly. So I've been very disappointed to see some of the speeches coming out of the FED that have seemed to leave March off the table as a possible place for fifty and I hope the senior leadership of the FED will guide to agnosticism on the possibility of a fifty basis point move in March, and we'll do

that sometime very soon. Larry All cling to the notion that our central bank is independent from the political process in this country. The same time, we're gonna have j. Powell up protesting me for two days before Congress next week. We also have a nomination to come of a new

vice chair. Does politics necessarily get injected? Were already people are talking about possible candidates for the vice chair position, whether they're a hawk or a dove, with some of the more progressives in Congress saying let's get a dove in there, I guess i'd say this. I'd say that the chair Airman has an important opportunity when he testifies to reset expectations and to address the growing credibility problems that the FED has. I think progressives are making a

serious mistake, even by their own lights. If there's a sense that progressive political conviction is guiding the next nomination, and even more, if that's successful in getting a person confirmed, I think there'll be very little impact on the next two or three appointments. It took two or three decisions because the Fed's going to want to show its independence. The incumbents are going to want to look like they

have not been pushed around. New person's not going to have mediate impact, so you won't affect rates in the short run, but that sign of politicization will cause issues of medium term expectation, and that will close the back end of the curve to rise. So ironically, that kind of political pressure is likely to put more inflation premium into interest rates and likely to lead to higher long rates, which means higher mortgage rates for the very people progressives

are trying to help. This is really a very misguided and problematic strategy for progressives, even if one had their judgment that what's most important is lower rates and to stimulate the economy. So I hope they'll back off this kind of public campaign. Larry on Sunday begins the meetings of the National People's Congress over in China. Every reason to opening new projections for growth as well as a new economic team for President g What are you looking for?

You know? I think there are two things that people should keep in mind as they're thinking about China. One is the importance of predictability and stability. I think that the Chinese underestimate the extent to which previously respected members of the financial community can disappear without that having collateral impacts on confidence and on the flow of capital. And if there's a sense of the politicization of things financial to a growing degree, I think that's something they've got

to be very careful of. The backdrop that's maybe an undertold story, which is that which is what's happening demographically. Nick Eberstat, who is the leading watcher of all things demographic, tells us in The Washington Post that China has half as many births last year as it did in twenty sixteen.

That is a sea change with extraordinary speed. The downwards trend had heavily started before COVID, And in addition to what that means for the labor force and the age structure of the population down the road, when a population's deciding to have half as many children and have that revolution in six years, it says there's some very fundamental concerns about the future in that society. Larry, thank you

so very vich. That's our very special contributor here in Wall Street Week he's Larry Summers of Harvard coming up. If baseball can pick up the face, why can't Congress? This is Wall Street Week on Bloomberg. Finally, one more thought. Haste makes waste, so Erasmus supposedly said back in the sixteenth century. But whatever passed for hasty five hundred years ago looks awfully slow today, what with apps giving us instantaneous trading. Investing should be as ubiquitous as shopping online.

It should just be something that people do. Or those scratch off lottery tickets. We won't admit that we are all buying. I got you a cast multiplayer tickets, so gives a chance the multiplier winnings up to one hundred times. Even as fast as most things are today, some things could move a bit more quickly, like baseball games notorious for going along, though not as long as that twenty eighteen World Series game that went eighteen innings in over

seven hours. That was a Greig baseball game. I don't know seven hours, whatever it was. You know, probably people back home are waking up right now to the end. It's probably one of the best, if not the best game I've been part of. The Red Sox coach Cora might have enjoyed that long game, but Major League Baseball has a better idea. This week we saw the first games played under new rules that are supposed to pick up the pace, including a pitch clock to keep the

game moving. I think that the clock has been really successful in the minor leagues with a minimum of disruption in terms of the play of the game. Early reviews indicated it was shortening games by an average of thirty minutes a game, though also causing a bit of confusion when one of the first violations wasn't for the pitcher failing to deliver the ball to the plate on time, but for the batter not getting ready time called Conley

took too much time. He's out. He wasn't. He didn't have his eyes on the pitcher by the eight second pitch mark on the pitch clock. It makes us wonder what else might benefit from a pitch clock or its equivalent. An obvious target are those Oscar acceptance speeches, which they've tried to keep shorter by turning up the music, leading some award winners to try a competition with the audible

pitch clock. Who among us hasn't wished for a pitch clock to be put on those endless strategic planning meetings we all attend. But most of all, what we apparently need is a pitch clock on debt ceiling relief, one that would require Congress to get its act together before we're on the brink of default. Do it clean, do it without brinksmanship, do it without this risk of hostage taking where things could blow up. And while we're at it, maybe we could ban shifting in Congress the way they've

done for the infield in baseball. But then again, where would that leave Joe Mansion? And so now we're back in the Mansionology game, wondering whether there's one more ending left to play that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week. M