This is Bloomberg Wall Street Week, and we may not have an overall recession, we're having a rolling recession.
Econy of roll looks pretty strongly. It is when it comes to jobs.
The financial stories that shape our world.
Three major regional bank failures send shockwaves through the banking system. We're all trying to figure out what to make of generative AI.
Through the eyes of the most influential voices.
Welcome down, Doctor Paul Krugman, Ryan Moynahan, a Bank of America, deebro Lair of the Paulson Institute, Glenn Hubbard of the Columbia Business School.
Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
This week's special contributor Larry Summers on what the jobs numbers told us about the state of the economy.
We've got something of an energizer bunny economy.
The economy keeps moving right along.
Glenn Hubbard of Columbia on whether the bond vigilantes are knocking at the door, and Ray Dalio Bridgewater on cash being trash no longer.
When you look at the expected returns for this moment, cash is a relatively attractive asset class at this moment.
There was a fair amount of turmoil on global Wall Street this week, starting with a turmoil in Washington over who is Speaker of the House, as Kevin McCarthy became the first speaker in history to be voted out, throwing the business of the Congress up in the air until they could sort things out.
The yeas are two sixteen, the nays are two ten.
The office of Speaker of the House of the United States House of Representatives is hereby declared vacant.
Samuel Bankman Free spent his week worried not about his job but about his freedom as his criminal fraud trial got underway in Lower Manhattan. Putting Crypto under a bright hot spotlights.
Kind of missed the moment, since that when FTX happened, you would have thought that that might bring people together in Congress and say, Okay, we really have to do something.
Things weren't much better when it came to labor disputes this week, as the autoworkers kept up the pressure with GM taking out a new credit line.
I know the workers want to see strong companies because they want to have jobs, but when the companies got in trouble in two thousand and eight and two thousand and nine those workers gain so that those companies would succeed and wouldn't go bankrupt.
And seventy five thousand healthcare employees of Kaiser Permanente joined the auto workers on strike, complaining of too much work and not enough pay.
Look at the wage pressure on things like the auto strike, and you know there's a lot of discussion. If they're successful, you'll start to see other unions striking. And sure enough, today you had the seventy five thousand employees at Kaiser Permanentite going out on strike looking for wage increases. Those are going to be very inflationary.
Whatever turmoil we saw throughout the week, it was dwarfed by the blowout jobs numbers that came on Friday, A full three hundred and thirty six thousand new jobs added in September, about double what we expected, which sent the markets reeling, but they quickly recovered. The S and P five hundred ended the week up almost percent half a percent to forty three ohaight, just under the forty four to thirty five median prediction of our Bloomberg elves for
the end of the year. The NANZDAC fared even better, up one point six percent, and once again this week, the big action was really in the bond market, with the ten year adding almost twenty two basis points, ending the week at four point seven nine. To take us through this week in the market, Welcome back now, Liz Anne Saunders, Charles Schwab, chief market strategist, and David Bianca, he is WDS America's Chief investment officer. Welcome both of you.
Thank you so much for being here. So listen, let me start with you about those jobs numbers. They did surprise I think pretty much all of us. What do they tell us about where we are with the economy and how did the markets react?
Well, you know, certainly on the surface, looking at the headline payroll numbers, it shows an ongoing amount of resilience in the labor market that is quite surprising. You could pick a little at the numbers if you wanted to by looking under the surface. Or continues to be a pretty wide gap between the establishment survey, which is a survey of companies that's what generates the payroll number, and the household survey, which is a survey of just out
of households. That's where you get the unemployment rate from and the household survey tends to be a bit more of the appropriate tell when you're at a possible inflection point in the economy, and that's been much weaker. And then the last thing I'd say is, yes, the wage number was better than expected than that it downticked a little bit, which is good news from the perspective of
the FED. But that may be a function of mixshift because so much of the job creation was in lower wage segments of the economy, which, of course, when you put more low wages in an average, you get a lower average. So I would say, under the surface, it was a little more mixed than the headline.
David, how would you take away from it? I mean, we did have a lot of jobs created, as resident centives said, the wages didn't go up as fast as we thought they might do, but maybe that's not such good news.
Well, but there's no doubt that there's a strong jobs reported surprise to the upside. We're always excited about the monthly jobs report on Friday at eight twenty nine am, but right afterward it's just another data point, and no one single data point makes a trend. But the data as a whole would suggest the labor market remains very, very resilient, still creating more jobs than the natural growth of the labor force in the United States, and it's
a full employment economy. I think that's the main message that even with all of this FED hiking so far, we're still at a full employment economy.
Well, let we follow up on that.
Can the FED get inflation under control with a full employment economy?
That's what's the big challenge here, And we can debate all day long about the need for watching more data the jobs market. The inflation report next week will be I'm sure scrutinized, but I think we're at the stage, given the turmoil in the bond market this week, the past couple of weeks, where the Fed should be thinking about what it can do to help calm and reduce risks for the bond market and bond investors to get The labor market so far seems to be taking care of itself just fine.
So listen on what about that? To what extent do you expect the Fed to take into account the turmoil in the bond market, because certainly we have had that this week.
Well, I think you're starting to hear you had Mary dally making comments about the spike in the tenuere to some degree doing some of the Fed's job for it.
You know.
The one unique aspect or maybe rubing this cycle as it relates to what should be happening with the kind of surge in yields in conjunction with what the FED has done on the short end, is the transmission mechanism through the economy, certainly the consumer side, the business side, and I don't want to say the economy is much less interest sensitive, but when you look at what many companies have done in terms of terming out debt, you look at things like the mortgage market, and the fact
that there's so much more of a bias towards the fixed rate side of things versus the variable rate side of things, like was the case and six when the FED was raising. I don't think it eliminates the impact. But when we all talk about, and quote Milton Friedman, with the long and variable lags, the lag component of it may have been added to by virtue of some
of those offsets. But this, you know, the spike to four to eight, it's the speed I think that we have to have some concern about in terms of you know something breaking breaking, as is often said.
David pick up on what la za Ane Sanders was talking about there, and that is the question of maybe the econ it's a little less sensitive to rate hikes. And if that's true because of some of the reasons you suggest, the terms of the debt, corporate and personal debt. If that's true, does that mean the Fed has to hike more, have to go further to get the attention to the economy.
We Zan's totally right that the lags are uncertain and the economy has been resilient in part because it's a service driven economy, but also it's only recently that we've gotten clearly to positive real interest rates. For a long time, inflation was still above where the Fed had the overnight rate, and if the economy hasn't slowed down enough, and of course inflation has come down more, but there's no guarantees
that it might not reaccelerate. And if you're a ten year bond investor, you want to be comfortable that inflation is not going to reaccelerate over a longer period of time owing to labor market conditions, supply conditions, and deficit conditions. And I think This is the thing. When the FED goes into their meeting at the end of the month
makes a decision November. First, I think they need to ask themselves what action helps to prevent the ten year treasury yield from going over five percent, because I think that would do more damage to the economy and perhaps cause a hard landing. So I think the FED needs to act in a way that calms the bond market and prevents ten year yields from going higher. And usually what makes bond investors bullish is when the FED is hawkish.
So, David, based on what you've seen so far, then you think actually the way to calm the bond market actually would be to raise rates.
It's tough call.
But with the turmoil we've seen in the bond market and the uncertainty that's going to be going on with the budgeting process, certainly through and into November, because the Continuing Resolution only being forty five days to November seventeenth, I think it's important that the bond market note that the Fed's got its back, while DC is not really taking too much concern with these deficits.
Lezan, same question to you, is the best way for the FED to calm the bond market if that were their priority, is it to raise rates at this point or not?
Well, either raise rates or at least maintain somewhat hawkish rhetoric and continue to emphasize the for longer part of higher for longer, which Powell has certainly been trying to do. The other issue here is that you know, we know the risks that come from such a speedy move up
in yields and the ripple effect through the economy. The concerns that, as David mentioned, are around the deficit and financing our debt given some supply demand imbalance, but there's also been so much lending done in the shadow banking system in private market, So that's that's one of those opaque areas where you wonder whether something could break in an area where it's hard for any of us as market watchers or even the Fed to have a sense of where those potential cracks are.
Okay, it's been really great having both you back with us, as David Bianco of DWS Group and Liz Anne Saunders of.
Charles Schwab coming up.
Washington lawmakers went to the match this week and Speaker of the House Kevin McCarthy ended up taking the hit. We go through the long term issues with contributor Glenn Hubbard of Columbia on what comes next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
The deficit, it's like the weather. Everybody talks about it, but nobody does anything about it. Last week on Capitol Hill there was more talking.
The third best option is the one we tried on Friday, which said we're going to reduce spending some but.
In the end not much doing, even though it is truly a bipartisan challenge.
So from my point of view, it's really the responsibility of Congress and administration to make sure that they're party keeping guinting us on a sustainable path and fiscal policy.
The US government has been running a deficit for over half a century now.
The US has run a budget deficit practically every year in the last fifty years, no matter if you've had a Republican or a Democrat precedent, or whoever has been in Congress. The attitude has come to be a policy makers that deficits don't matter.
And we're told the time is getting short to make some changes.
We're a rich country and we've got time to deal with it, but we need to do some things in the next few years to change that trajectory, and I think that's going to be very important.
Pretty much everyone knows that those changes are going to require addressing some thorny issues like entitlements.
This has been just a mystery to me as to why it is that the public doesn't want to hear more about what we're going to do to try and
solve the long term debt situation in this country. You know, it gets back to, ultimately the entitlement programs mixed with our demographics in this country, what you have is a system where the Medicare system is almost fifty percent underfunded, meaning that the taxes and the premiums that go in only cover about fifty sin of the program times ten thousand every day, and that just keeps digging your hole.
There are always good reasons not to get to the tough ones, the ones that in the end really matter.
But leaders of Global Wall Street like.
Jamie Diamond see the looming deficit as a real storm cloud on our economic horizon. The fiscal money being spent is so big, largest in peacetime, ever America and kind of around the world with already very high deficits. To explain what all the fighting is about and what's potentially at stake, we welcome back Glenn Hubbard of Columbia Business School, where he was dean after serving as chair of the Council of Economic Advisors under President George W.
Bush.
Professor Hubbard is author of The Wall and the Bridge, Fear and Opportunity in Disruptions Wake. So, Glenn, thank you so much for being back with this. We sure this is something you and I have talked about a bit in the past. But let's come back to what we saw. This huge Sherman drawing, if I can call that now that I'm Washington. Media loves to cover it, but did an did anything happen that really matters this week in Washington when it comes to the deficit?
Not really.
It was a farce, sermon drawings, probably even too much. I think the big story, or the big drama, really is the deficit and debt. We have high and rising debt to GDP ratios, and that was completely ignored in this drama, but really needs to become front and center.
Well, and that's a problem that Democrats and Republicans share.
That's by no absolutely if you ask yourself, bad math. The Democrat and Republican parties have no plan and the president has no leadership. What could go wrong a lot, particularly when you count in the need for higher defense spending, spending on opportunity, and particularly in the context of today's jobs reports, higher interest rates, and what they do to the budget.
So what about the math? You refer to the math? What's the math.
As opposed to the policy differences before we get to the policies.
Well, the math is the debt to GDP ratio is on an unsustainable path, meaning we just can't go there, and we can fight about how to address it. That's a reason for legitimate political de scores. But denying that it's a problem is not. And we can't say that we won't raise any tax or cut any spending.
There's no door.
Number three, When do we really start to feel the pain? Because part of the problem is we keep hearing about this drama and then it goes away and nothing quite happens, and so at some point it's sort of like the Boy that Cried Wolf, Right, We're going to.
Feel it very soon and it's easy to see why we need to spend much.
More on defense.
Interest rates have gone up and have really thrown the federal budget into a problem. In fact, if interest rates stay where they are now, premium over what the CBO forecast over the next decade all about a seven percentage point increase in the debt to GDP ratio, even over bad numbers, and about three trillion dollars more debt. We really can't go there.
So what's the solution?
Give us the answer to it again, apart from exactly what the policies are, but how do we start in a path that actually addresses the issue?
You know, it's a great question.
I think the problem is we can't go to the Congressional Budget Office's long term outlook and start pulling out techmocratic proposals.
That's not going to work.
We first have to tell the American people what's going on, actual information. Here's the path, Here's how bad it is, Here's what it's going to do to programs you care about, the ability to defend the country, educate children, do basic research. And then we have to start articulating stories. You know, what kinds of policies make sense? Do we have a tax system that works. Do we want social Security and medicare to be as generous they are now for up
er income people. We have to have those discussions, and then finally we have to talk about gradual adjustment. No serious person thinks we're going to slam on the brakes today, but how do we like the Greenspan Commission decades ago outline something steadily that could make a difference.
Who's the We we live in a democracy and votes count political appeal accounts. I assume you're talking about some political leadership that has to really take the bull by the horns.
Yes, I mean, obviously the president should be lea.
He's not.
I would hope that in the presidential campaign we will see this. My desire would be to have a fiscal Commission begin after the election, the twenty twenty four election, to really tackle these issues, and whoever's president to take that very seriously unless you think it's naive. We have plenty of precedents for doing this, and frankly, anything that tries to move fast or just isn't politically vibe.
Tell us about the commission, as you say, it's been done before with respect to Social security, as I recall also base closings.
I think yes, those are the two issues.
So social Security had a cash flow problem. President Reagan appointed a commission. Alan Greenspan shared it, and that commission came up with a politically palatable idea of gradual changes that affected both taxes and spending. I think the same thing has to happen here. We have to ask ourselves, do we have the right tax system? Hint we don't, let's fix that. Do we have the right structure of the entitlements? Hint we don't? And how to can we gradually change those to bring the budget.
Back in the past.
When you use a commission, is it basically because both sides know where they need to get to They just need to have a way to do it without paying too much of a price. And do sides right now have that same understanding?
I think they do. I think nobody wants to admit it. Right now, we have a bipartisan consensus that taxes should not be raised except on the very rich, and no spending should be cut.
That fails, math.
Where are we social security?
Social Security is actually relatively straightforward to fix. We have to ask ourselves a fundamental question, what do we want it to do. If we want social Security to make sure no senior is in poverty, we should raise minimum benefits and then flatten them for everyone else. Raising the retirement age is something to consider, although one would want to make sure it doesn't bind on people who do a lot of physical labor as opposed to people who
do more office labor. But this one isn't hard economically, it's just politically difficult.
Is there only way to get to real deficit reform without dealing with Social Security and medicare?
No?
No.
In fact, if you say let's just fix this by raising taxes on the rich, if you did all of the tax increases on the rich.
That might be plausible.
You might be talking about a percentage point of GDP that's real money, but not compared to the size of the deficit that we're talking about. You really have to tackle the entitlement program.
Is there any way to deal with the deficit problem without doing both revenue and costs.
No. No.
I think revenue has to be part of their equation for two reasons. One is political, but the other's timing. If you believe that you need gradual adjustment in the spending side, on entitlements. You'll need more revenue upfront, so candidates I think would include, let's say, a carbon tax or a reform in the tax system that allows you to raise more revenue without killing jobs and growth. Both of those are possible.
Glenn. It's always such a treat to have you here. Thank you very much.
That is Glenn Hubbard of Columbia.
Coming up.
We wrap up the weekend as we always do with our special contributor, Larry Summers of Harvard. That's next time Wall Street Week on Bloomberg.
You're listening to Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
This is Wall Street Week. I'm David Weston.
We are joined once again by our very special contributor here on Wall Street Week.
He is Larry Summers of Harvard. So Larry, thanks so much. Boy.
The big question here came up on Friday. Are those jobs numbers? It really was so far away and above what was expected. What do you make of those numbers? Where are we in this economy? And how can it keep doing what it's doing.
Look, we've got something of an energizer bunny economy.
The economy keeps moving right along.
It's not only that we got a very strong employment number this month, we had upwards revisions for the last two months. If anything that looks like job growth is accelerating for the moment, this is great news. We got an economy that looks very strong, and the wage inflation numbers looked very much under control for the medium term. Very complex picture that the FED has to read tight and substantially tightening labor markets combined with significant labor unrest,
combined with significant uncertainty about commodity prices. And even though it doesn't show up in the inflation statistics explicitly, people feel when interest rates are going up, when mortgage rates are approaching eight percent, like their cost of living is rising. So very challenging environment going forward. These are good numbers, and you've got to recognize that these are good numbers, but I can't say that they give anything like assurance
of soft landing. And I think the risks of hard landing are very much as real as they were, And perhaps the fact that the plane is flying even faster than we thought makes the hard landing at some point risk look a little greater.
So, Larry, why is the plane at this point flying this past fast I mean, an awful lot of people thought once you raise the rates as much as the Fed did, as quickly as it did, it would slow things down. Shouldn't look like that message is getting through, for example, the corporate leadership that's hiring as fast as they can.
David that economists will be studying that for a long time. One of the things I've talked about on your show is that interest rates may be less restrictive than they used to be. When people don't sell houses because they're locked in with low mortgages, house prices go up and that makes people feel wealthier. When the government's got as much debt as it does and interst rates go up, that's more money in people's pockets and they spend some of it.
When capital that people are.
Purchasing is a new AI system rather than building a new factory, it's all shorter duration and less intrasensitive. So we may be living in a world where the interst rate is less of a tool for guiding the economy that it used to be, and that means when things need to be cooled off, interest rates are going to have to be more volatile.
Than they have been in the past.
That's one important part of it, and the other important part of it is what's happening with the budget deficit and what's happening with the government's fiscal position. Even though we've got a booming economy, the deficit is a share of GDP. Once you take out special factors, well just about double this year will rise by more than three percent of GDP. That's been a big push forward to
the economy. And frankly, our financial authorities haven't done what has been done by corporate treasurers and by smart households over the last several years. When the private sector was turning out its debt, we did more turming in with QE and what the treasury has done then we've done terming out of the debt, and that means that we've got a wall of higher and higher debts, debts finance
that is ahead of us. I think it's a combination of the changing impact of interest rates and the fiscal expansion that explains where we are, and that's why I don't think interest rates are likely to come down quite as much, and haven't for a long time thought interest rates were going to come down as much as the market did. Markets revised its view substantially. I wouldn't be surprised if the market revises its view a little more.
Well, so, Larrie, let's go to where the market is right now, because we did see real turmoil in the bond markets. We saw yields really go up. You two or three weeks ago on this program talked about a four point seventy five percent on the ten year. At
the time, it seemed like an off high number. Now, if anything, maybe you were you were not fast enough and making a call given where we are this week, is epic as a supply and demand because of the deficit that you're talking about and how much the supply is exceeding the demand right now.
I think it's half underlying reality of the strong economy and what's going to be necessary to keep the economy in balance what fed watchers call our star, and everybody's just just I've been warning for quite some time now revising upwards their view of our star. I think that's half the story. And I think the other half of the story is people thinking that there's just a big issuance of debt ahead and there's less willingness to hold us long term debt given rising rates in Japan, that
source of demand may fall off. Who knows what's going to happen with China as a source of demand for US debt. The changes that all the banks are making to make sure that they're not the next SVB caught with a lot of long term bonds. That's reducing holdings of long term bonds. So if you've got more supply and less demand, that may.
Should be less.
More supply and less demand, that's gotta gotta have a big effect on price.
Okay, Larry, thanks so much for being with us. That's Larry Summers of Harvard. We talked with Bridgewater founder Gray Value at the Greenwich Economic Forum this week, and given his track record, we asked him the obvious, where should we put our money?
There's a saying in the markets, he who lives by the crystal balls, He who lives by crystal ball is destined to a ground glass. Okay. What I mean is what you don't know is very important relative to what you do now. And for that reason, understanding how to properly balance and diversify a portfolio, and that diversification should be out of country's currencies and assets, is something that's important for most investors to make tactical decisions is not
going to be the best thing they can do. They're going to they'll do that badly. And when you come to conferences like this, you will get different points of view. But unless you actually have a system and your mechanize and we put hundreds of millions of dollars lots of money, maybe a billion dollars, I don't know into doing a technology,
and so what to try to get an edge? So number one is respect what you don't know how to diverse by well, because diversifying allows you to reduce your risk by up to eighty percent without reducing your incut, without your reducing spectrum of jerk. If you know how to do that, well, okay, then I think then what you have to do is you have to look at the relative appeal of asset classes. So when I go through that calculation, the relative cash now as a relatively
attractive appeal. You know sort of people when I said cash is trash and that got a lot of attention, But that's when cash was nil. Okay, Now when you look at the expected returns for this moment, cash is a relatively attractive asset class at this moment, it's not just attractive because it has a relatively decent decent not great, but decent expected In other words, it has something like a one and a half percent real return Okay, not bad and not bad in comparison to the other things.
And it doesn't have price risk.
That was ray value of Bridgewater.
Coming up and changing the world by losing a few pounds. That's next on Wall Street Week on Bloomberg.
This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Finally, one more thought.
Mark Twain said that the only way to keep your health is to eat what you don't want, drink what you don't like, and do what you'd rather not. Judging from current results, an awful lot of Americans are eating and drinking pretty much whatever they want, regardless of their health. The Centers for Disease Control report that the number of obese Americans is now around forty percent, and the severely obese are reaching toward ten percent, which has some real
economic effects for us. All obesity itself is like just this gigantic economic force.
It's a business force.
The are businesses that thrive on how much people like to eat unhealthy foods.
They're huge cost to insure.
But things may be changing thanks to pharmaceutical companies coming up with a new category of drugs called GLP one, originally intended for diabetes, but the turnout to help us get around Mark Twain's dilemma. They help us not to want to eat the things we shouldn't. Demand for the new drugs is through the roof.
If you take our best setting medicine, Oceanpic for type two diabetes that grew the first six months by fifty nine percent, that's actually lower pricing, so underlying volume growth is much higher.
With immediate and dramatic effects for the drug companies involved, like Novo Nordisk for ozempic.
The newest thing that we really like is the weight loss drugs.
We say those area, that area is going to just explode, and even for whole economies with Denmark that's home of Novo Nordisk, the macro ozempic having to deal with an influx of dollars so large that it's driving up the kroner and requiring Denmark to cut interest rates so it doesn't get out of whack with the Eurozone. But the new chemical approach to weight loss goes way beyond the
sale of drugs themselves. In success, they point to whole new classes of winners and losers, like the airline companies, for example, big winners as people lose weight and require less jet fuel to get them up into the sky.
They saved an ounce on every passenger seat from taking out changing the feedstock of the paper that they used on their United Airlines magazine and saving eleven pounds for per flight. What yeah, and so we extrapolated that into ten pounds per passengers one hundred and seventy five people per plane. What happens to the fuel savings? They save twenty seven million.
While snack food makers may come up losers in a world where there's less demand for things like pringles.
You've got Canagra that just said that it's watching this.
Kelenova, the former Kellogg, said earlier this week that it's studying the impacts and WW which has worked for years to get you on that weight Watcher's diet, has decided not to beat the new drugs but to join them, cutting back on their diet meetings and expand into telehealth to get people the pharmaceuticals that may work better.
We wanted to enter the space and be able to extend our toolkit to not only behavior change and functional but also clinical interventions.
And wait, there's more. Just imagine if we started getting the GLP one wonder drugs to all of our troops, whose wasts we carefully measure every six months to make sure they're in fighting shape.
Surely it would slim them down.
Some and maybe take some of the heat out of the inner service war over just where our waist is measured from anyway.
But if the pharmaceutical.
Companies really want to help, maybe they could come up with something for our political leadership to take in Washington, something that interferes with their appetites not to eat what they shouldn't eat, but to spend what they shouldn't spend and that we can't afford. We saw that unhealthy appetite displayed again this week when the fight of the budget led to the House of Representatives for the first time in history, voting out a Speaker of the House.
Chaos is Speaker McCarthy.
Chaos is somebody who we cannot trust with their word.
I know we would all like our lawmakers to be Santa Claus, but unfortunately there is a price to be paid.
But it's growing on it. I mean forty five pounds a week.
That does it.
For this episode of Wall Street Week, I'm David Weston.
This is Bloomberg. See you next week.