Global Wall Street gathers in Washington with a focus on higher rates, shaky banks, and whether the world's two largest economies can work together. This is Bloomberg Wall Street Week. I'm David Weston this week's special contributor. Larry Summers of Harvard on whether we're headed for a soft but slow landing after.
All, I don't see inflation as on a secure path down to the two percent of target unless the economy turns over a bit.
Glenn Hubbard of Columbia on whether we're headed for a credit crunch. And Sonya Gibbs of the IIF on the plight of zombie companies.
Higher rates are going to cause a lot of pain, and particularly for these zombie firms.
Washington hosted the annual meetings of the IMF and World Bank again this week, with a focus on threats to global growth. Treasury Secretary of Yellen insisted that things didn't look all that bad.
I said that the global economy was in a better place than many predicted last fall. That basic picture has remained largely unchanged.
Though IMF Chief Economist Garancha warned that questions about the banks could be a drag on the global economy.
The risk that banks are going to look at the outlook, they're going to look at the bottom line, and they are going to be a little bit more prudent in extending loans going forward, and that could weigh down further on economic growth.
And geopolitics, particularly the tensions between China and the United States, the world's two largest economies, could make the difference. As acknowledged by Treasury Under Secretary Jay Shambaugh.
We obviously need to be able to work together.
And the USCPI numbers came out showing that inflation is still with us, but it appears to be moderating. We know that prices are still too high for so many things across the economy, but certainly we are looking for
this downward momentum. The market took all of this, put it together with somewhat weaker retail sales numbers, and came out slightly higher, with the S and P five hundred adding eight tens of a percent and the NASDACK up almost three tens of percent, while the yield on the tenure was up thirteen basis points to end the week just over three point five one percent. For their thoughts
on what we learned this week. We welcome back now Christina Hooper Invesco chief investment market strategist, and Sarah Mallick. She is chief investment officer at Nouvene, So welcome to both of you. Great Davy back with us, Sara, let me start with you. What did we learn this week and specifically about where the economy is headed? Maybe more importantly,
what you think, what the Fed thinks? Is there evidence in fact and the CPI and on the numbers than in fact we're getting our arms around inflation.
We learned that progress is being made on the war against inflation, but economic damage is yet to be seen. We had two data points for the bulls and the bears this week. For the bulls, CPI and PPI both moderating. Great to see sticky areas like Shelter starting to become a tailwind. But for the bears, powkish Fed speak and
also negative retail sales for March. That's four out of five months there, and that concerns us that overall we still have economic downside ahead of us, perhaps lower earnings going forward and market evaluations with the s and P OFBO forty one hundred likely has a tough time going
forty two hundred to forty four hundred. If it gets to that level, I think we just stay in a trading range and then go back down from there until we clear the decks on what we think is likely coming up, which is a mild.
Recession and the FED twenty five basis once in May. What do you think, Sarah.
We think the Fed is one and done. One more twenty five basis point rate hike in May.
But what we haven't seen yet is now thirteen months ago was just the first FED rate hike, and we have not seen the effects of monetary tightening through the economy. We did just see it recently with the banking system. I think there's more to come in terms of how higher interest rates are going to impact, for example, of the consumer. Tighter credit conditions that's going to impact the economy, which is why we're expecting that slowdown going forward.
Christina, one and done.
No, I don't think the Fed is going to high rates again. I think the odds are increasing that they won't, and I think that is the right decision. The Fed has already done enough, and I do believe that they're going to be relatively comfortable with the pace of inflation, especially since we've seen progress made in services x housing, which is the component of inflation that the FED is laser focused on.
Are they not going to hike rates Christina, because in fact we're headed to a recession. They see that they're.
Not going to hike rates because inflation is coming down at an appropriate pace that they're comfortable with. And they're not going to hike rates because they know that there are lagged effects of monetary policy, so we haven't yet seen most of the damage that has been done by the aggressive tightening cycle. But no recession, you think, well, I think that there is a pathway. It has narrowed, but there is a pathway to a semisoft landing. If we get a recession. I think it's going to be.
Mild Sarah, recession, no recession.
We're in a mild recession camp.
And the reason that we think that FED has more work to do with raising interest rates is because they've been clear that their mandate is two percent inflation as a t target. I don't think they're going to take their foot off the gas until we get closer to that number, and we're just not near that yet. The other thing we're concerned about is earnings now coming into
first quarter? It was nice to see that earnings estimates actually were cut to a higher mount than usual, so Q one earnings may be come out all right.
In terms of revenue growth, margins will continue to be.
Compressed for this quarter and going forward, and I think that positive revenue growth we see this quarter may have difficulty holding up because revenues have been growing because of pricing power, and as inflation we continues to moderate, companies may lose their pricing power.
Sarah, What about credit? There's a lot of talk about a credit crunch, whatever that means. Certainly there's tightening credit appears. Is that more likely to slow on the economy? Sarah?
I think it is because the consumer and the employment market has been what is holding up the economy here, and with the mini banking crisis that we saw, we expect banks to tighten credit and that will make it tougher for the consumer.
And just thinking about banks more broadly, they're going.
To probably have issues going forward with tighter regulations, tighter capital requirements, and pressures on their net margins. Even though we saw today with JP Morgan an unusually positive men interest margin income for them, but I think that was unusual and will normalize to the downside going forward.
So I think that a lot of it depends on how much credit conditions tighten, and I think there's a big difference between what's happening with regional banks and what's
going to happen with the major national banks. What I hear from my contacts at the big banks is that we are not tightening credit conditions, but what we are doing is adhering more closely to our own lending standard, So a very mild tightening of credit conditions, whereas the regional banks some have been under pressure and conditions are going to tighten significantly.
So then the.
Question becomes what is the impact on the economy. I think that it's certainly going to be a negative source of negative pressure, but at the same time, I also believe it could be a positive in that the FED seas that some of its work is being done for it by those tightening credit conditions, and then of course decides not to high rates any further.
Exactly what about that, Sarah, Are the credit conditions actually doing the Fed's job for it? Does it make up less likely it will actually have to have one and done?
I think credit conditions did some of the fed's job in March. A couple of weeks before the March FED rate high markets were expecting fifty basis points and the banking crisis took twenty five basis points off of that,
and we just got twenty five more and forward. I agree with Christina regional banks are more at risk than larger banks, but these large deposit flows that we've seen come from regionals to large money center banks likely moderates from here and we probably even see some attrition from that going forward. And then the larger banks also have these capital markets businesses that are down significantly, which is
going to be an issue going forward. Then the larger bank category, we'd stick with diversified companies like Morgan Stanley because of their strong wealth management business or ing, but generally we're not positive on banks overall because of the structural issues they're going to have going forward, which started over a year.
Ago, and that is exactly where we're going to turn next, where we should be puaring our money given this uncertainty. Sarah Melick of Nouvigne and Christina Hooper will be staying with us as we get some investment advice from them in these uncertain markets. That's next on Wall Street Week, and we are on Bloomberg.
Inflation in America. It's a problem that has come and gone every time, but this one. Inflation previously was strictly a wartime phenomenon, starting with the period during and after the Revolution, and returning virulently, even more virulently than lately at the time of the Civil War and World War One. What was different was that periods of deflation always followed. Indeed, the compound annual rate of US inflation since seventeen ninety
works out to only one point two percent. What's different about inflation in the last forty years is not its height, but it's length.
That was Lewsier Grockett Rockeiser on Wall Street Week back in January of nineteen eighty one, another time when inflation was proving harder to get under control than markets would have liked. The top movie back then that week, at least was The Incredible Shrinking Woman starring Lily Tomlin and directed by Joel Schumacher. And the number one song Well that was starting over by John Lennon. So what is our Christina Hooper of Invesco and Sarah Mallick of Nouvene. So, Christina,
let's start with you. Given that what we're having in inflation, trying to get inunder control, what the FED is doing, What does that tell investors? What this should they be doing right now?
So, David, what I think is it's telling investors right now is that there is an awful lot of uncertainty out there. We don't know what the Fed's going to do. Sarah and I differed and what we expect, and I think that's very very true. Markets don't know what the FED is going to do. And in addition, what we have is this big unknown about the debt ceiling and will it be easily resolved or will it be a problem like it was in twenty eleven and could it
be even worse and what we saw in twenty eleven. So this is an environment that I think you want to be defensively positioned in tactically though, waiting for a change and what is that change going to be? Well, to make sure the banking crisis is behind us, and also of course making sure the FED hits the pause button and we are poised. That to me means we'll be poised for a different market environment, one that tends to be more risk on.
Christina. When you say defensively, I think cash money markets are we're turning some pretty nice returns And are you talking cash?
I am not talking cash. I'm talking about with inequities being more defensively positioned in terms of technology, healthcare, consumer staples, utilities, within fixed income, being more cautious, having investment grade credit, so within alternatives, overweighting gold, and underweighthing cyclical commodities, So that to me is being defensively positioned, but also recognizing that this market could market regime could turn soon if we get that pause and if we get more clear
signs that the banking crisis is behind us.
So, sir, you're a chief investment officer at Neuvene, where you're putting your money.
We're advising our clients.
Overall, our theme is quality, making sure you own companies that are resilient and can survive lower earnings and a recession. So starting with equities dividend growers, these companies tend to increase their dividend over time, so it gives clients income and also they tend to have strong balance sheets and strong free cash flow because they're able to grow their divinends.
You know. Surprisingly, we also like emerging markets.
That's an area that we don't think of as sort of low beta, but with China reopening and the dollar likely weakening as the economy slows in the US and valuations on their side, we like emerging markets for a little more bang for your buck. Then fixed income we're looking at high quality, high yield, again the quality theme, and also doub rated corporates where you can reach for yield and get a little stronger return. And then real assets are interesting.
Well.
Our biggest, our top pick coming into this year was infrastructure. The components of that are waste management and utilities. Given during a recession, we take our garbage and we still turn of our life, so that tends to be a recession resilient sector going forward.
Those are the areas that we like.
A process, so certain, just a pressure a little bit. Do you have any good examples of what you call dividend growers.
Sure, So it's across the board. It's not broke versus value.
A company like Lindo, which is an industrial gas company, they tend to have strong margin, strong pricing power, high quality company, a nice yield. These are the companies that we like going Morgan Stanley's another company we just talked about that within financials, but that's the company we like in a sector where we're not as positive all but
they have a nice dive and meal. All these companies that have a nice yield and also tend to increase their dividend going forward are companies that fall into the dividend grower category.
Okay, this has been a terrific discussion. Thank you so much for being back with us. That's Sarah Mallick, she's CIO of New ven and Christina Hooper of Invesco. As we enter banks earning the season, investors are paying close attention to evidence of continuing effects of the failure of Silicon Valley Bank and government intervention to protect the pots to take us through the likely effects. We welcome back now, Glenn Hubbard. He's Deanameritis and Professor of Finance and Economics
at Columbia Business School. Doctor Hubber, of course, served as chair of the Council of Economic Advisors under President George W.
Bush.
So, Glenn, thank you so much for being back with us. So we've paid a lot of attention to what's going with banks, particularly regional banks. What's happened here, What are the obvious effects and what have made some of the more subtle ones we may be missing?
Well, great question. An obvious effect is you're seeing deposits move from smaller and regional banks into money center banks. You're seeing a lot of questioning of the financial health of many regional banks, and a lot of concerns about where the line is drawn into posit and shots. We're sort of at the worst spot now where we don't know what they expanded a lot.
Is it going back to where it was?
But to me there's some less obvious but bigger issues having to do with a credit crunch. You know, a lot of commercial real estate lending, a lot of commercial and industrial loans, certainly the heartland of the country are made by small and regional banks, and so even if depositors are safe, the credit crunch may provide quite an impact on the economy and on the FEDS job.
What could the possible affects me on the real economy if I can call it that. I mean, we all care about banks, regional banks, we don't want to wish them ill, But could there be broader ramifications for the economy overall.
Well, of course, if banks are tightening lending because they really don't see good things to which lend, that's certainly fine. But if banks are very worried now about the loss of deposits and the one wants to be the next Silicon Valley bank or fears of needing more capital, and then constrict loans and real estate projects can't happen, Smaller mid sized businesses can't get loans. That becomes a quite
large effect on the economy. From the FEDS perspective, that's like thinking there's some extra rate hikes happening in addition to the ones that the FED is doing, and so the credit crunch may well crimp activity going forward, although it will help the FED bring down inflation.
So let's go back to your question about deposit insurance and where we are on that, because we have some people like Bob Diamond, for example, formerly Barkley, saying we should at least insure up to a million dollars of deposits, maybe have unlimited If you were back in your old job advising the President United States, what's the right answer for the banking system and therefore for the economy overall, What would you advise and what do we really need from our banks?
I would say let's start with what can't be right. The current law wasn't right. The limit was too small to deal with the modern economy, and the Treasury or the Fed would try to move the increase it whenever we get into trouble. So that's not good. Unlimited, I don't think is a very good idea that takes away any incentive for depositors, even a very large size to
monitor the bank. And where to draw the line is hard because what you would want in principle is the payrolls of small and mid sized businesses, individuals, transactions accounts to be okay, those could be large numbers. Here's the concern. The higher we take that limit, the more we push for more regulation of banks. It's not going to be the case the taxpayers ensure all the posits in the
country without changing what banks do. And going to our earlier conversations a moment ago, banks are very important in lending in some activities, so I think we need a more fundamental conversation about what do we want banks to do and how are small and mid sized businesses and real estate going to give credit.
So, Glenn, one of the things that maybe goes unsaid largely is sort of a desire to preserve regional and specialist banks across the country. We have something like forty five hundred I think right now banks across the country. Is that too many? Can I ask that blunt question?
Well, I think we've always had too many banks in the United States, certainly relative to any of our peers. That said, while I don't know that we have a policy objective of preserving particular community or region banks, we do want to preserve blending activities theories. So I don't think it's the case that if all deposits in the United States suddenly moved to the four largest banks, that we'd have the same mix of lending. That's what I
meant by we really need to step back. We thinking of the fat or even the Congress as to what we want banks to do, but on on an unhealthy path now playing with deposit insurance without thinking about the future.
Glenn, thank you so much. It's always a pleasure to have you with us at Glen Hubbard of Columbia Business Schools. Coming up, we wrap up the week once again with our very special contributor, Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Wall Street Week. I'm David Western. We're joined once again by our very special contributor here in Wall Street Week. He is Larry Summers of Harvard. Larry, great to have you with us again.
Tell us where you think the economy is right now. We got a raft of eco numbers in CPI and others this week that some people in term to indicate that maybe actually the Fed is having its way, that the economy is softening, inflation is coming back down.
I think it's very hard to read, David, but I think I see some growing evidence of stag but some real continuing concern about inflation as well, and that's a tough combination. On the stag side, it does look like defaults are rising, it does look like the flow of credit is coming down. Headline retail sales were not strong, although the internals are less are less clear, So I think you have some grounds for concern about what's happening
with real activivity on a forward looking basis. And while the CPI and the PPI numbers surprised a bit in a favorable direction. You saw one year inflation expectations from the University of Michigan pop up, and the Atlanta FED a wage tracker, which I actually think is a better indicator of what's happening in the labor market than the monthly average hourly earnings that popped up a bit last month as well. So I think we're still looking at
a very hard to read economy. I don't see inflation as on a secure path down to the two percent target unless the economy turns turns over a bit. So I think the FED has very difficult choices ahead of it.
So Larie, let me make it even more complex, perhaps, And that is where we are with credit right now. There's a lot of reports right now that credit standards are going up in the wake of those bank if I can call them tremors that we had, how do you factor that into it? That could that help the FED a bit really curtail some of the inflation.
Look, I don't think there's any question, David, but that some FED work is being done by tightening of credit. So there's definitely that effect. The question is how large is it. I thought, prior to the tremors in the banking system that there was a chance the FED funds rate would have to get up to six, and that it was certainly more likely than not that it would
have to get to five fifty. What's very hard to know is whether that action in credit which is reinforcing the FED, whether that's three moves worth of reinforcement, whether it's only one move worth of reinforcement, And that's the judgment the Fed's going to have to make on an
ongoing basis. I'm surprised still that markets are expecting as large a set of rate cuts over the next two years as is currently priced in, because it seems to me that we're not very likely to get six or eight rate cuts over the next two years unless the economy is headed towards recession, and certainly recession of a substantial sort is not what's priced into the stock market or for the most part, priced into high yield credit.
Lauria, let's talk about something we haven't talked about that much, which is oil. There was reporting by Bluebrook this week it really suggested there is something of a rift growing between the United States and Saudi Arabia, that, if anything, Saudi Arabia is getting closer to President Putin in Russia, and the is what does that do potentially for the price of oil and therefore at least headline inflation. How big a problem do you think this is potentially?
Look, I think what's happening in the Middle East, and it's the Saudi Russian thing that you just referred to. It's the Chinese broker restoration of diplomatic relations between Saudi Iran is a symbol of something that I think is a huge challenge for the United States. We are on the right side of history with our commitment to democracy, with our resistance to aggression in Russia. We are very much on the right side of history. But it's looking a bit lonely, Larry.
I know you've spent the week at those meetings IMF and the World Bank in Washington, d C. What did you see? What did you hear about that very subject that is the extent of which we may be breaking up to if I can call this, trading blocks where people trade with one another. But actually we're moving away from globalization. We're not necessarily all on the same page.
I think there's a growing acceptance of fragmentation, and maybe even more troubling, I think there's a growing sense that ours may not be the best fragment to be associated with. Somebody from a developing country said to me, what we get from China is an airport. What we get from the United States is a lecture. We like your values better than we like theirs, but we like airports more
than we like lectures. And so I think that what's at stake in some of these really technical discussions that they're always having here about debt relief or about the future of the World Bank is not just a bunch of stuff about lending money to promote different economic activities or to make development more sustainable, but what the broad
structure of the system is going to be. And if the Bretonwood system is not delivering strongly around the world, they're going to be serious challenges and proposed alternatives.
Larry, your name came up actually in connection with these meetings as people noted that the IMF is really having a different projection on long term interest rates, the neutral rate of the longer term saying it's going to come right back down to pre pandemic levels, whereas you have been saying that's not necessarily the case. Where are you on that issue?
Look, I was in a way that the IMF was resurrecting and talking about the secular stagnation theory that I pushed so hard between twenty thirteen and twenty nineteen, and certainly I recognized all the various arguments they were making, and it's certainly possible that they will turn out to
be right. My own sense is that given the huge volumes of government debt that have been run up, given the very large flow deficits that are in offing, and given the large amounts of private investment that are going to be devoted to the renewable energy transition and devoted to friendshoring and increasing resilience, my sense is that the balance and the supply and demand for fun is going to be more towards demand, and that's going to mean
higher real interest rates going forward than we had before the pandemic, and so I not expecting that we will see a huge return to the secular stagnation situation.
Larry, in your opinion, how does money supply figure into your analysis of the economy overall? There was a lot of talk this week by some economists actually saying that in fact, the fall in the money supply, particularly M two espect the United States really indicates that, in fact, we're going to go, if anything, into a recession, that we're not going to worry about inflation anymore.
David, I would describe myself as post monitorist. I think when we started paying interest on reserves, and so if a bank or somebody had an account at the FED, it was kind of just like a interest bearing account, and so money was no longer special by virtue of not paying interest. When we had that change in our economy, I think this whole concept of monetary aggregates as substantial predictors of what's going to happen lost a lot of
its force. And so I'd have to say that money stock he's pretty far down on my list of indicators to follow.
Thank you so much. I always great to have you with this our very special controuder Wall Street Week. He's Larry Summers of Harvard. This is Wall Street Week on Bloomberg. Finally, one more thought longing for the good old days. Change is hard. Just when we think we have things figured out, the world goes and changes on it. Take inflation. After Chairman Vulgar administered his harsh medicine of rate hikes.
A much tougher approach to inflation, which led to nearly twenty percent official interest rates hard to believe now, hard to remember. At a time when inflation was also in the high double digits.
We thought we'd left that problem behind us. We even fought to get some inflation back into the system.
It was a big thing to start this rate increases. I think the fact that they have them to four and three quarter to five percent now they'll be a little bit higher, probably before they go on pause. And I think if inflation is around three percent plus or minus, they'll be pretty pleased.
But that all changed last year when that stimulus finally kicked in and reminded us of the bad old days.
We are seeing inflation coming down, has come down by about forty five percent since the peak, but we still have more work to do.
But it's not just inflation that has shifted us. What about all those banks that thought there was nothing safer than long term treasuries as in investments.
The basic issue that they took all of these big deposits and invested them in long term treasuries and had a gigantic mismatch, where again it should never have occurred.
Now it turns out that what was a safe haven has turned into a lot of unrealized losses on balance sheets.
You have this bank that has deposits from very concentrated, highly volatile depositors, and you have a balance sheet where they've invested long in treasuries and when interest rates spike, they're underwater.
This week we were reminded that it's not just economics and banking where we have our expectations shaken to their core. Now we hear the Tupperware, that iconic plastic system for keeping food.
Fresh, plan to have or can the Tupperware party too.
Maybe going out of business.
Shares of Toperware falling fifty percent, the most since twenty twenty after the company said that it hired financial advisors to help improve its capital structure and its ability to even say in business.
The company dates back to nineteen forty six when Earl Tupper, Yes there was indeed a mister Tupper, developed it in Leminster, Massachusetts. Part of its claim to fame was the way it was sold in Tupperware parties, thrown at homes by women looking for a new way to make a living after men came back from the war and took all their jobs back. But however things work out for Tupperware. There are times when change is actually for the better. Take the iPhone, something that some of us have grown all
too attached to. So attached to we may have forgotten what came before. The BlackBerry, which we don't miss all that much, no matter how iconic and cool we tried to make it at the time.
We wear suits, we wear shiny shoes, wear BlackBerry.
That does it. For this episode of Wall Street Week, I'm David Weston.
This is Bloomberg.
See you next week.