Bloomberg Wall Street Week - Year End Edition

Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Inflation, Ukraine, Climate, China, you name it and investors have faced it. In two. This is a special year end version of Bloomberg Wall Street Week. I'm David Weston. Whatever else you might say about two, you cannot in that call it boring. We began the year with the first major ground war in Europe since World War Two. I would like to remind you of the words that United Kingdom already heard. We

will not give up, We will not lose. We will fight till the end at sea, in the air, we will continue fighting for our land, whatever the cost. We will fight in the forests, in the fields on the shores, in the streets, and inflation rising rapidly to test the resolve of central bankers all around the world. It's unconditional. Our commitment is we really need to restore price stability, get inflation back down to two because without that, we're not going to be able to have a sustained period

of maximum employment. With even the Bank of Japan making moves that some took as tightening hints, though Governor Coroda denied it, the b o J intends to aim for price stability by increasing the sustainability of this monetary easing.

It's not the beginning of an exit strategy. And we are in the year dealing with the aftermath of a crypto collapse triggered by one of the biggest financial scandals of all time, as ft X is in bankruptcy, billions of dollars have gone missing, and founder Samuel Bankman Freed faces multiple fraud and conspiracy charges. Not sophisticated at all, sophisticated perhaps in the way they were able to sort of hide it from people, frankly right in front of

their eyes. Then there were the risks left over from the year before, like climate change. We're not in a good track right now. The world. It's not serious enough about reducing our missions fast enough, and we've had to deal with continuing effects of COVID as China pursued a zero COVID policy that hurt its economy. What does euro COVID policy mean for recession and inflation? And unfortunately it

means stagflation. Not surprisingly, the markets reacted to all this risk with some trepidation, with the stock market moving into bear territory. The SMP five at one point was off some twenty percent for the year, The NAZAC down over, while the yield on the tenure climbed from under two percent at the start of the year to hover around

three point five percent by year's end. Through the ups and downs of the year, Wall Street Week invited the most experienced experts and investors to rise above the day to day and week to week and give us a broader perspective on where we are and where we're likely going.

We begin this year interview with the smart investor, and that's the person we're trying to speak to and speak with every week, starting with one of the most distinctive and successful that there is, Sam's ll of Equity Group Investments who told us what tighter money meant for deal flow, at least for those with the cash. We're seeing more deal flow. We're seeing more situations where companies are having

difficulty figuring out what to do. Uh. We're seeing situations where nine months ago, financing a transaction of X y Z size was nothing. You know, it was you know, as you said, money was free. Uh, what's changed dramatically? I mean, think about the impact of the doubling of interest rates in eight weeks double you know, it's just eight weeks earlier. Uh, interest rates were you know, two and a half to three, and now they're five and a half to six. That's an enormous uh change. And

and and it's gonna slow down everybody's activity. It's gonna for sure, uh impact getting deals done. But in our particular case, because frankly, I've I've oftentime told the world that you know, when I'm liquid, the stock market can't go down. It only goes down when I'm ire liquid. And here I am sitting there with a level of liquidity I've never experienced in my life. Because my focus for the last three and a half years has been

nothing more important than liquidity. So you've got a significant deal flow. If anything, it's bigger than it was before. What about the quality of deals? Are they different from what they were, for example, preach pandemic. I think they are because I think they're a little more realistic. I think in pre pandemic when money was free, Uh, they

were transaction. I mean, the whole spack market was. You know, we did its back and chose not to take it to the next level because when we did this back, spac seemed like a very interesting way to in effect monetize opportunity. Uh, it very quickly became a highly speculative scenario dependent on preposterous valuation shans that ultimately led to the crash of the whole spack market. Uh. You know, the world has changed a lot since then, and and

the change is basically modifying what you can do. On the other hand, is always demand for capital. Sam's el sees an advantage to his liquidity as rates go up. Steve Rattner's will It Advisors manages the personal and philanthropic funds from Michael Bloomberg. He's the man who founded and owns most of the shares in our parent company Steve sees some of the same challenges and rising rates, but

also keeps an eye on the regulatory environment. With a Biden administration committed to more regulation, even if it hasn't quite gotten there yet, you may see more activity by the regulators because they might feel like the clock is running out on their tournament office or whatever, and they might want to get stuff done. I've been a little surprised in that I would expect a very robust regulatory

environment out of this administration. They have appointed people too, many of the top regulatory positions who are very much pro regulation, and you can see it's starting to happen at the SEC in places like that. So I do think you're going to see a lot of regulatory activity over the next two years, regardless of what happens in the election. One of the things that this administration said they really want to go after, if I can put it that way, private equity, using things like Clayton next

Section eight and intellecting directors, things like that. They think that there's some and a trust things going on. There is there a chilling effect on private equity right now because they also have other things. There are headwinds for them well The biggest headwind for private equity at the moment is the fact that in an environment like this,

deals tend to slow down or even stop. And you can see if you look at the overall M and A volumes, how how much slower it is now than it was because the sellers all want yesterday's prices, the buyers want to pay today or tomorrow's prices. So you have a disconnect there. Um. I think I think the problem in in general with mergers over the last really twenty years or more has been a pretty benign anti

trust environment. And when I was in when I was in the M and A business, clients would come in and immediately they want to talk about which of their competitors they could buy, and that game I think in this environment is starting to wear out, and that and and so that relates a bit to private equity in terms of their portfolio companies. But I don't think private

equity in and of itself is an anitrust problem. Steve Rattner manages a very large and very diversified portfolio of investments, but Jeff Blause, CEO of Related Companies, focuses specifically on real estate, running one of the largest firms in the United States. He came on Wall Street Week to explain what is happening in commercial real estate in the aftermath of the pandemic. What we have seen is a real

dispersion in values between older buildings and brand new buildings. UM. And it's not just new, it's new with the right features, the right amenities that tenants are looking for today. UM. So we're seeing more and more corporations thinking about how do they get people back to their office and thinking about using the physical space as attraction to bring people back.

But truthfully, people don't want to go back to old kind of quiet offices that are dark and have bad air circulation and long weights and the elevators and no amenities. So what corporations are doing is investing in their office space not for occupancy, but for talent attraction and retention.

And I think that's where you're really seeing, uh, the A buildings and the new buildings that are focused on this, that have the right amenities, that have the right H, B A C circulation, that have hospitality type services, that have great air and light um and the right type of build out. The build out in office space is changing tremendously where we used to see kind of the old mad Max version of a build out with you know, private offices on the exterior wall and assistance offices or

cubes inside. That's really not the way office is built today. We're seeing much more collaboration space, teeming space, meeting space, food service tables around food where people are using for gathering and working as opposed to private offices. So this type of office of the future, UM, we think can be successful and is successful. The data is there today,

UM for these new buildings. So we compared brand new buildings across markets in the United States, UM, not just here in New York, and you look at new modern buildings with the right features, the right amenities, and the demand for those buildings is tremendous. That was Jeff blau CEO of Related Companies. Coming up, we'll take a look at what three may have in store for Global Wall Street. This is a special year end version of Wall Street Week on Bloomberg from New York. Another up day on

Wall Street. In fact, records to London, UK businesses are feeding the effects of part prices to home. The Hanks sang down about one point three right now twenty four seven Business and market news that expands your worldviewmail always nice to see you, French Finance Minister. I'm much more concerned about how things slow out of China. Bloomberg Radio, the Bloomberg Business App, and Bloomberg Radio dot Com. Bloomberg The world is listening. This is Bloomberg Wall Street Week

with David Weston from Bloomberg Radio. This is a special year in the edition of Wall Street Week. I'm David Weston. China has loomed large once again this year in the thinking of investors as it is pursued a zero COVID policy, triggering public resistance to the shutdowns that followed. It is seen its growth slow, raising questions for the global economy, and in the middle of it all, Presidents she sought and god an historic third term at the twentieth Party Congress.

Debra Layer, vice chair of the Pulse and Institute and CEO of Edelman Advisory, has been a pioneer in understanding Chinese economic policy since her days in the Trade Representatives Office negotiating China's accession to the w t O, and she talked to Wall Street Week at the time of the Party Congress about the significance of it for us all. We are all focused on President g and what's going on over in Beijing this week. Give us your sense

about what we're learning. It strikes me that one of the biggest challenges he has is the economy and growing the economy. And yet I'm not sure we're hearing much about his economic policy. I hear a lot about politics, a lot about security, that's right. I mean she Didn'ping gave his all important work report at the beginning of the planeum, and it gave up a few previews of how he's going to start to look at the economy. One of the things that he's emphasizing is common prosperity.

His slogan about how he brings greater equality. Uh. One of the things that he's looking at is also how the party can continue to play an important role in the economy. And also he did give reassurance to foreign companies that they will continue to push for market opening in key areas. So will we get a sense from the personnel that sur ound him of where it might be headed, Because as I understand it, eventually we will

see him come out from behind the curtain. And we assume everybody assumes that he will get his third term, but there's gonna be a critical question of who's with him and he comes out absolutely the important thing. And we're all watching for this weekend when the new party lineup is going to be announced. There's a lot of rumors starting to fly around, although not as many as there usually are, But it's a big guessing game because that will give us really our first clue into what

the third term is going to look like. And I think there are three important things to watch. One is going to be what happens to Lee Ka Chung, the current premiere. Does he continue to stay on the Standing Committee.

He's termed out of staying on as the premiere, but could they make him the number two and head of the National People's Congress to who will be in the lineup to then take the premiere position, And the two leading candidates appear to be Wang Yang, who's viewed as being more open on the economic issues, and Wang Hunning, who really isn't ideologue. And the third to watch is what happens to Leoja, who is currently the Vice Premier,

who's in charge of the economy and finance. Does he stay He has good relations with many foreign firms or who really comes in to take his portfolio. They were one of the things that we watch in the West, and we may be right or wrong, and watching it is the extent to which the markets in some way play a substantial role in economic policy over there. It strikes me that it's possible to interpret presidency thus far

is moving somewhat away from the markets. A lot of what do you emphasis right now is ideology, and I think it's what he came out of more than perhaps we've seen in the past. Absolutely, we're seeing much more emphasis on ideology um under Shi Jimping, and if we look back under John Zamin, Jack Zaman was saying the party is big enough to include business. She takes it in a different way. He says the party is all encompassing and it should be forced into business, and so

ideology is playing a much bigger role. Also, we need to keep an eye on how she's favorite slogan, common prosperity is going to be implemented. China surprisingly is actually much more unequal than the United States, and one of the things that he's trying to do through this common prosperity UH slogan is saying there should be a cap

on executive salaries. We should be looking at big companies, particularly the private sector, giving back to the community, and how that's going to be implemented at the same time when he's trying to grow the economy, when he's trying to encourage entrepreneurship and create jobs. Is going to be

a very tough thing for him to balance. Well, I was going to ask exactly about that debora, because through history, a lot of people have said we should have a more equality, less inequality, whether it's income or wealth, but a lot of attempts to get that done. Actually you

get in the way of growth overall. Absolutely. I mean in China, and we've talked about this before, the overwhelming majority of Chinese companies or small and medium sized enterprises, it's up into the nineties, they are responsible for about six of China's growth and about six of john creation. And so if you can't create the right atmosphere for them to grow, you're going to have a significant impact on China's ability. And right now she's facing a lot

of headwinds when it comes to the economy. He's got issues still to deal with with the real estate market. It's one of the only places that Chinese people can invest, and obviously housing prices are going down at the moment, the world is facing a global recession, and she is

still very dependent on exports to grow the economy. He needs to find a way to unlock consumer spending, and that's very hard to do when you don't have confidence in the path of the economy, and particularly when you don't have the kind of social safety nets in place, particularly around health, that make people feel comfortable enough and have confidence to spend their money. If you put in a longer course of Chinese history, because you've been really

very active in China for a good long time. Now, are we seeing something of a turn back toward male and away from Duncho Ping. Well, certainly we're seeing a difference in the way that she is governing the economy. You know, the Chinese Communist Party has about ninety three million members, and to put that in context, that's ten million more people than the whole population of Germany. And he'd used this as the way to govern the economy, and so therefore the party is involved in every aspect.

As we look at this new leadership coming in, watching the ideology versus the technocrats is going to be really important and give us a sense of what the government appointees which will take place next March, will look like and how they're going to approach the economy. Is there going to be this this on a more socialist economy or are they going to be more emphasis in what they call the socialist market economy. The fact that they didn't put out the GDP numbers on time, I think

is very disconcerting. For the world's second largest economy to place politics over just the standard transparency and publication of data is not an encouraging sign. Debra, looking into your crystal ball there, what do you think this might mean for US China relations? I mean, it strikes me at least that going back five or ten years, a lot of it was about economics, it was about trade, things

like that, increasingly from Beijing but also from Washington. When they talk about one another, it's about geopolitics, it's about Taiwan, it's about Russia, it's about security in the Asia area. We national security definitely dominates the headlines, and there are some very serious issues that we're dealing with. I was just in the UK and they were telling me Taiwan didn't even used to really be on their agen to

and now they're spending about se at their time. These are the China experts focused on this, So those are absolutely definite important issues to watch. But I think the real story here is going to be what happens with the economic and trade relationship. Traditionally it's been the foundation of the relationship and it's created the people, the people

ties and built some levels of trust. Without these exchanges, with the Western companies reconsidering both because of the politics, but also because of the state of the Chinese economy and the complications that have come with dealing with COVID zero, they're reconsidering their strategies and not having that level of trust I think really is going to have an impact and ensure that they're going to continue to be fraught

relations between the United States and China. That was Debora Lair of the Pulse and Institute and Edelman Global Advisory. Coming up, we turned to the subject of inflation and our special contribute to Law Street Week Larry Summers of Harvard who got it early and got it right. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is our year end edition of Wall Street Week. I'm

David Weston, special contributor to Larry Summers of Harvard. Has been our Wall Street Week mused throughout the year on a range of subjects, but just as two will go down as the year inflation came to stay, Larry will be remembered as one of the leading economists who saw it early and kept insisting something needed to be done. Here's Larry in Wall Street Week way back in February. I don't understand why people keep being so surprised when

there's evidence that inflation is entrenched. This confirms, Uh, just how far behind the curve the FED has gotten. And this along with the fact that it now looks like build back batter is in trouble. UH couldn't firms what a serious error the excessive stimulus of last March was. Here's what I think the FED should do. I think the FED should have a special meeting right now to

end quee. It is nothing short of preposterous that in an economy was seven and a half percent inflation in an economy with the tightest labor markets we've seen in more than two generations that the Central Bank is still as we speak, growing its bound sheet, and I think the FED could show that at last it really gets it by having a special meeting for the purpose of simply ending quee. And by May we started to see

the results. The FED moved towards a series of seventy basis point rate hikes, and we asked Laurie whether that was enough. Do you think that they really have made a turn towards really regaining their credibility when it comes to inflation. This is certainly the most dramatic action UH they've taken, UH, both the fact of a basis point move and what was clearly a calling of an audible just before the play at at the meeting, and I

think that was welcome and appropriate. I still think that the Fed and most market participants are underestimating the gravity of our situation. UH. The FED moved its forecast by an epic amount, both up on inflation and down on the economy. But their current view that they're going to get to two and a half percent UH inflation or below with unemployment just above four strikes me as an optimistic tail outcome, not a central tendency in a forecast.

I think a better judgment is that there's no reduction to UH normality without a significant increase in unemployment of perhaps two percentage points or more at some point UH down the road. And when Chair Pale suggested in July that maybe the Fed was already at the neutral rate, Larry did not mince words. I think J. Powell said

things that, to be blunts, were analytically indefensible. He claimed twice in his press conference that the Fed was now at the neutral UH interest rate, calling it two and a half. It's elementary that the level of the neutral interest rate depends upon the inflation rate. We've got on the most quoted measure, a nine point one percent inflation measure he extrapolated off core or something it's four or

five percent inflation. There is no conceivable way that a two and a half percent interest rate in an economy inflating like this is anywhere near neutral. And if you think it is neutral, you are misjudging the posture of policy in a fundamental way. So I was very sorry, UH to hear him UH say that, and frankly surprised. He said back in that the neutral interest rate that the Fed was approaching the neutral interest rate at a time when the inflation rate was one point nine percent.

How he could be saying the same thing today when the inflation rate is where it is is inexplicable. But by year's end, with a series of rate hikes behind the Fed and the promise of more yet to come, Larry said that they were moving in the right direction. The Chairman is in about the right place. He's recognizing that we can't forecast the economy with precision. He's recognizing that it would be a terrible error if we were

to fail to stop inflation. In this episode, he's rejecting the talk about this being a moment to change the placition target, and he's maintaining substantial flexibility with respect to the future. I think that is broadly, UH, the right place for him to be. UH. But I think we've got a very difficult challenge ahead of us, because I think the old adage about things taking longer to happen than you think they will, and then they happen faster

than you thought they could is really operating. With respect to the forecasted UH recession. It does look like it's pushed back a bit in time, but there are reasons to think and this is what makes the chairman's job so hard. That the economy could have a kind of widely coyote UH moment, that recession induced slow earnings could pop into focus for stock market investors, with verse consequences for the market, that consumers could deplete their hoard of

post COVID savings. As outspoken as Larry Summers was on Wall Street weeks throughout the year, he didn't hesitate to say what he thought about other subjects as well as inflation, such as the disastrous Many budget that the short lived Prime Minister Liz Trust put forward and that nearly broke the market in guilt. When do you make of what's going on in the UK. It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging

UH market. There's nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches UH being taken. It would not surprise me if the pound eventually gets below a dollar if the current policy path is maintained. This is simply not a moment for the kind of naive uh, wishful thinking supply side economics uh. That is being pursued

in Britain. And even the subject of artificial intelligence caught the eye of our special contributor, who thinks something truly profound maybe afoot with chat GPT. The great computer scientist Alan Turing seven years ago said that it was going to be a threshold for humanity when a machine could SEPT, could it could imitate human beings answers to questions in a way where another human being wouldn't be to tell the difference. We're somewhere in the territory of that right now,

and that is a profound thing for humanity. It points to a profound change in the way we're all going to be working. We're all gonna have a kind of caddy that or many of us are going to have a kind of caddy that is going to augment our creativity, augment our capacities, to bring knowledge to bear on what

we do, augment our accuracy. That was special contributor to Wall Street Week Larry Summer's commenting throughout an eventful year for global Wall Street coming up, we looked back to how Lewis ruckheiserre wrapped up the year two thousand on his version of Wall Street Week. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with

David Weston from Bloomberg Radio. Finally, one more thought, Well, it's actually the one more thought of Lewis Ruckheiser from two decades ago, when, at the end of a difficult year of two thousand, he reflected back over the aftermath of a market downturn led by a collapse of tech, showing once again the wisdom of Mark Twain that history doesn't repeat itself, but it often rhymes. Much of the world of investors regards two thousand as a year of mourning.

For profits past, the bubbles burst, for bulls de horned, and for certainties crumbled. And let's face it, it wasn't always fun. As Winston Churchill put it, I'm always ready to learn, although I do not always like to be taught. Virtually nobody except the NonStop pessimists who are still stone losers over the past decade foresaw the viciousness of this year's declines, although the year was country victory even there.

For example, is this a bear market? Well, yes and no, even from their highest heights in early two thousand, the Dow Jones Industrial Average and the SMP five hundred have declined far less than the twenty percent that traditionally has defined a bear market. But for the formerly high flying technology stocks personified by the NASDAC, this has not only

been a bear but the growley of all time. NAZDAK, which never does things moderately, fell nearly forty percent this year and is off more than fifty one from its March tenth high. That makes this not only the worst year ever for the twenty nine year old NASDAK, but the biggest decline for any of the three major indexes since the SMP five hundred lost forty seven percent in

nineteen thirty one during the Great Depression. So devastating was this latest and most severe tech wreck that any attempt to put it in perspective by pointing out say that NASDAC has been the bullish phenomenon in the past decade and that it gained more than eighty five in nine alone, is likely to seem like irrelevant ancient history to today's bleeding tech investors. Are they right? Is this just a temporary reversal of a fantastically promising uptrend or Is it

truly the end of a booming era? Were the downward catalysts of two thousand a fierce federal reserve, a steeply weakening economy, and a nation driven to embarrassing self doubt by the election that would not die passing phenomena or orderies of enduring change. We'll try to get you some meaningful answers tonight, and we will try and get you answers in the new year. That does it for Wall Street Week for this year. I'm David Weston. This is Bloomberg. See you next year. M