This is Bloomberg Wall Street Week.
We turn our attention to the markets this week. USCPI Nembers reinforcing concerns about inflation, the financial stories that shape our work. A really different reaction to Mark. It's more indications of just how hot the US economy really is. Through the eyes of the most influential voices. Larry Summers, the former Treasurer Secretary, Katherine Keating, CEO of bny ME and Sam Zel Sharman and founder of Aquatic Group Investment. Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Mixed signals from the economy, from earnings, but not from President Biden. This is Bloomberg Wall Street Week. I'm David Weston. This week special contributor Larry Summers on whether we're headed for a recession after.
All the odds on that happening sometime in the next twelve months, I think are pretty good, perhaps seventy percent.
Former IBM Haad Sam Palmasano on next steps for generative AI.
Business leaders and companies can show the way they could establish the guard wear.
And Steve Rattner of Willett Advisors on how to invest in China.
On the plus side, I would say China's back.
The flip side of it is clearly they're a bit off balance. Global Wall Street spent the week pouring over a lot of data looking for a signal in all of that noise. Big tech earnings are surprised to the upside.
They have had such large gains in this sector, not even the sector as a whole, but these fang names.
But most of the talk was about artificial intelligence and what it could mean for the tech industry, and for that matter, for us.
All AI is bigger than any single company, or any single industry, or indeed any single country.
And after all those encouraging earnings last week from the big banks, we learned just how bad things had gotten for credit suitees before UBS came to the rescue.
In three to four years time.
I like to see the employees of the combined organization this country, our clients to be very proud to be associated with the UBS.
And then at the very end of the week, reports came that the FDIC will put First Republic Bancorp into receivership, saying the time had run out for a private solution. President Biden was unambiguous in telling us bed indeed, he would like another four years in the White House.
Let's finish this job.
There's nothing that.
We cannot do the thing together.
And economic numbers pointed in both directions, with home prices and sales up.
If housing comes back does not give the consumer.
Another boost, consumer confidence down.
The consumer confidence number really interesting for April, so overall it falls a touch, and.
GDP numbers out Thursday mixed as well, slowing in the first quarter, but not as much as some had feared. Then on Friday we got consumer spending numbers and the all important Employment Cost Index showing spending was flat, while the ECI moved up higher than expected one point two
percent for the first quarter. Markets took it all pretty much in stride, with the yield and the tenure down about thirteen basis points for the week, ending up at three four hundred three point four to three nine, while equities held up nicely. The Nasdaq was up almost one point four percent for the week, while the sp five hundred was up almost nine ten to percent, leaving it at forty one sixty nine, or about ninety four points above the median of where our l's projected will end
the year. One of the most prominent of the l's Mike Wilson of Morgan Stanley is one of our most parish He's projecting at a year end of about thirty nine hundred and this week he noted a shift. This is according to Mike, while macro news has taken a larger focus in recent weeks, the reporting season has the potential to refocus investors' attention on equity fundamentals. To take us through the week in the markets, we welcome now Greg Peters PGIM Cocio for fixed income and Monama Hodgen.
She is Edward Jones, Senior investment strategist. Welcome both you back to Wall Street weeks. So Moon, let me start with you. What about what Mike Wilson had to say? Are we looking at fundamentals now more than some of the macro factors we have been?
Yeah, you know, look, I think Mike got it right.
This week.
Certainly markets were driven by those earnings results, and really their earnings results from the megacap technology names, and as you noted, they surprised, and the surprised to the upside. And that wasn't only earnings beats. A lot of them are now showing that their business models are resilient even through economics swings, and also they are showing off a
little bit of their cash piles. We saw a couple of very big share buyback programs announced this week as well, and we saw at the end of the week really equity markets were bullish, they were positive for the week, and that came even despite softer than expected GDP data inflation data that might be a little bit stickier than
some might have hoped for. So generally for the last couple of weeks, it certainly has been the earning story driving markets and really driving those growth sectors in particular. But as we look towards the weeks ahead, especially next week, when the FED becomes more in focus again and as the economy and inflation continues to remain to the forefront, I think we'll see a swing from earnings and equity fundamentals to macro picture becoming more in focus in the
weeks ahead as well. So it's certainly right for this week.
Greg what's driving the fixed income markets.
It is inflation, the economy, and what is the FED going to do about it? So we're on knife's edge in fixed income, whether it's a recession or soft landing. There's talk of sagflation still, of course, and the data are so all over the place in this furse that you can basically draw a narrative or conclusion from you know, the data in any way you want.
Well, so I'm curious about that because the tenure yield, at least in my eye, has not been going much of anywhere anytime soon. Is that because people are happy with where it is, or it's because they can't just decide anyway they look, it could go either way, They just can't tell.
Yeah, and so that masks you know, what's underneath. And so what we're seeing though on an inter day basis in the week, the the moves are pretty extreme. So fixed income volatility remains really really high. So yes, the tenure is virtually unchanged this month of April, but the swings are pretty substantial and mona.
What about in the equity markets? What are we seeing in the fix is pretty subdued, is it not?
Yeah?
You know, it really is. One of the key stories that has emerged over the last few weeks, which is that volatility index some call it the Wall Street fear gauge, has been very subdued. In fact, down about twenty five percent year to date, which shows a bit of complacency from the markets and perhaps a little bit of investors hiding out. You know, keep in mind, cash and cash equivalents are offering attractive yield, so investors do want to
wait for better opportunities. They certainly had an alternative now that is a pretty attractive alternative. But generally speaking, you know, some of the catalysts that were supposed to emerge early on this year, including earnings, including the FED potentially next week, and including this economic downtry, really haven't yet surprised in any material way, and so I do think markets have yet to see a meaningful catalyst. Perhaps the FED pause that maybe on the horizon will be that one.
Well, well, Mona, what about the possibility of recession, because we still have a lot of economists saying that it's more likely than that, perhaps as highest seventy percent likelihood. I don't think I can see that very much in the equity markets. So does the equity markets know something the economists don't, or do the economists know something maybe the equity markets don't.
Yeah, you know, look, I think this recession that is on the horizon is probably one of the worst kept secrets that's out there among economists and investors. Everybody has been talking about it. The deceleration. We saw this this past week. In first quarter GDP has shown a slow down from three point two percent in Q three, two point six percent in Q four of last year this quarter one point one percent, So we're seeing this downward trajectory.
The consumer is still holding up, but if you look at forecasts for Q three and Q four of this year, we are in fact seeing negative and slightly negative annualized growth rates. So in our view, this idea that a mild recession is on the horizon is very likely still probably still a base case scenario, and markets won't be able to completely ignore that. But keep in mind, we did put in a lot of work to the downside over the last fifteen months or so. The SMP went down almost twenty five percent.
Peak to trough.
We don't see a repeat of that happening even if we have a mild recession ahead. So any period of volatility consolidation pullback, we think could provide some opportunities for investors as they look past this bear market and perhaps towards a recovery period ahead.
Greg what about the bond markets, because we got a lot of economic data this week and it showed sort of slow in growth, perhaps, but inflation is not going away. Maybe a head in the right direction is not going away. Are the bond markets prepared for the possibility to Fed hiking even past May No.
In fact, the market's pricing in the opposite, right, they're pricing in rate cuts in the back end of this year. And to me, that is, you know, the risk markets are ignoring that if the Fed cuts, that means we are into a recession or much weaker period. But the binding constraint continues to be inflation, and I think we're in a very different environment.
We've been so accustomed to the FED coming to.
The rescue and it's much easier to do that when they're operating below that two percent level. When they're above, and they're pretty meaningfully above, their degrees of freedom really really get much tighter. So I think the markets are miscalibrating what the Fed can do.
And the opposite is also.
True, David, where if the numbers continue to assert themselves on the inflation side, there's more work to do, And the markets have been consistently wrong on the level of inflation and what the Fed's response function.
Yeah, as has a FED quite often wrong, as best I can tell. Greg Peers of PGUM and Mona Mahagron of Edward Jones. We're going to be staying with us as we turn to what a failed First Republic could mean for the markets. That's next on Wall Street Week. We're on Bloomberg. This is Bloomberg Well Street Week with David Weston from Bloomberg Radio. This is Wall Street Week.
I'm David Weston. The saga of American banks continued this week with news that First Republic is headed apparently for receivership. To talk about what that could mean for the market, it's Monamahadgen of Edward Jones and Greg Peters and PGUM are still with us. So Greg, let me turn to you first. We don't know exactly what's going on with the First Public. Let's assume it does go into receivership, as reports right now say it will. What does that mean for the markets as a practical matter.
I think what it means is that the market will continue to search for the next weekest link and so First Republic has been very much in the market the past month or so, so it's not a complete and utter surprise, but the markets are really looking to suss out the week players to see whether it's systemic or not. But I think the real issue on the table is how broad is the pullback and lending on the regional and community bank side, and what influence does that have
on the market and the economy. And you know that contraction of credit is really meaningful because it goes to the small and medium sized businesses, which quite frankly are the lifeblood of the economy and the labor market.
So what doesn't mean potentially for equities, but in fact we continue to contract on the credit side because the banks are under control, under stress, and they get more and more conservative as a practical matter.
Yeah, you know, it certainly has been interesting on equities. Of course, financials have had some difficulty this year and in fact still down here to date one of the worst performing sectors on the S and P five hundred, and part of that, of course is the banking turmoil we've seen over the last month and now at first
Republic coming back to the forefront. Really, the question, to Greg's point, is is there another shoe to drop after First republic and market uncertainty, of course, is never welcomed by investors. But what we would say is one the bank tightening of credit, and that actually had started even prior to the March turmoil. We started to see metrics like the Senior Loan Officers Survey starting to show meaningful tightening. So what that means is banks will make it harder
for consumers and corporations to get loans. Now that that's a double edged sword. On one side, yes, economic activity will cool and the economic growth prospects look worse, But on the other hand, the inflationary story we've been talking about could see a marginally less pressure on inflation, inflation moderating even further because banks are pulling back, and consumption and corporate spending may thus pull back as well. So really we're watching both edges of that story, of both
sides of that story. But more broadly, we'd say the volatility that we've seen in the financial sector we think probably has some room to run here. But one final point there, we don't yet see any systemic disruption or any scope for a systemic disruption to the US or global banking system. We do think large cap banks here in the US are still sound and much better.
Thank you so much, Tomana Mahadjen of Edward Jones and also Greg Peters of p JIM. In a week full of big tech earnings, all the talk was really about generative AI, it's potential and also some of the potential risks to take us through. Those who welcome now Sam Palmasano. He was the chairman and CEO of IBM. He now is chairman of the Center for Global Enterprise. So Sam, great to have you back with us on Wall Street week. Let me put you back as either CEO of IBM
or another huge corporation publicly traded. What would you be doing right now today to prepare for or to incorporate AI.
Well, David, it's an excellent question, and as I think about it, I would think about all the lessons I've learned in the past, either running an IBM or or if I was currently a CEO, what I've learned over the past ten or fifteen years, and that is that we face these challenges before, there's always been these disruptive technologies to come along. They represent from phenomenal promise, but also they can be disruptive.
There are a couple of different paths.
I mean, I'll make some suggestions, but you can dismiss it, you can wait and see.
But then you know, you learn we learned.
In the last time that you can be left behind if you do that and other leaders have urge in your peer group. Another way to do is let it just go like that would be the early days of the internet.
Just let it run.
And then the problem is then you have to clean it all up, you know, and that takes time, you lose some momentum, as it cost you some money, and those sorts of things. But I would start with creative management system that takes advantage of these technologies in your
strategy and implement that company wide. The benefit of starting there is you won't have the problems of the past with digitization in the Internet, and plus you can scale and integrate and learn a lot quicker once you get your footing and you know where you want to go to take your business. The other thing is that I'll add is these technologies are going to mature, and they will. I mean, there's a lot of innovation yet to come.
As exciting as this is a lot more to happen here, and it has to happen in other gaps that need to be filled. Having said that, it becomes ubiquitous, which means it touches everybody in your workforce. So you have to think about the jobs, the nature and work and how it changes how you develop skills. And it's not go out hire three data scientists. You're going to have to train and educate your people across the entire enterprise. And the last one, I would think ask them to
think about or I would think about culture. Culture are so so important you need to adopt ethical principles for AI. We see the issues today for companies that haven't done that. You need to be trusted in this space if you're an enterprise. But they're the things that a management system think about, learning of your employee base and the impact to them and your culture.
One of the issues I suspect is productivity. I mean AI, a generative AI has the potential at least to really increase the productivity of a company, something that we're always looking for. How do you make sure that you take advantage of that as a CEO without letting it go too far?
Well, that's exactly the point fundamentally, which you need to do is I would say you need to think about the technology as a compliment to what's going on today. So therefore your knowledge worker can become an expert not just an average knowledge worker. Or a teacher can become an expert teacher, not just a participant.
In teaching grammar or language, whatever happens to be.
So if you think about that way, you said, how do you compliment the technology with the actual the.
Work of the knowledge worker in your organization? I think if you.
Do that, you won't have all the chaos that occur historically. I mean, chaos is okay, we learned, I mean, so there's nothing wrong with learning, but let's take the learning into the past.
And try to avoid those as we get into the future.
Here, Sam, what is the role if any of the government all this. There's a lot of time about regulation. We already saw it. China come out with a draft or set of regulations basically saying whatever you do with this general of AI, it's got to be consistent with our values, which is all the censorship that comes with that. So when it comes to US government, Europe, India, what is the constructive role of government in really directing AI in constructive ways?
Well, I think government does have a role, and we see what happens when government's late to get ahead of these kinds of issues. You see that today with the social media companies and the issues around data and data privacy.
So there's clearly a role.
But the challenge is, as we know, and as we've learned, these regulations and standards have to be global. I mean, standards will emerge over time that are global. That takes a long time. So in the interim, what does a regulator do? And that's laid out the problem, David. That's where it's complicated because there's different systems. I'll call it the Chinese control system, there's the open system of the United States, and let's see some of the West.
But then you're somewhere in between.
So how do you get global regulation that's consistent And to do this regionally just won't work. It won't work because fundamentally, these platforms are global by definition. They're open source software by definition. So I know reagions think they can take control, but the technology moves so fast they will really struggle in doing so unless you completely shut the place down and you wall it off, but that has economic implications.
So to me, the question is in the interim, what do you do? And I think there's a role here for business leaders and companies.
I think business leaders and companies can show the way they could establish the guard wails, the principles ethical transparency and implement this themselves.
And finally, Sam, this week we had some of the biggest tech companies reporting earnings and almost all the discussion was really about AI and generative AI and its potential. And there are people in the street you know this right now who are saying, maybe this will give a new impetus to the tech sector generally. It has been such a growth sector for so long that it was waning just a little bit in the growth. Now they say, but it's a whole new wave. Do you think they're right?
Well, it's definitely going to be a huge growth in innovation opportunities, There's no doubt about it. The question of David is who emerges as the winner here. So I'll take you back a little bit in history. If I go back like fifty years of the tech industry, it's interesting you see these patterns of who emerge as the winner take client server to cloud.
Sam, thank you so much, as always a treasure to have you back on Wall Streetek. That Sam PALMASONO, the former chairman and CEO of IBM, coming up. We wrap up the week with our 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. So, Larry, thank you so much for being vick with us.
We had a lot of.
Important economic data this week. We got the first quarter of GDP numbers, We've got personal spending, we got ECI. What was most important.
For you, David.
I've been pointing to the ECI number because I think the labor market is the key to the inflation process, because it only comes quarterly, because it's the best of the numbers for measuring wage inflation, because it includes benefits and adjusts for changes in the composition of the labor force.
And that number was pretty strong.
That number is running about four point eight percent now, both on an annual basis and a quarterly basis. There's not really evidence that it is decelerating. The revision for last quarter was a little bit upwards and four point eight percent labor costs. Inflation just does not go with
two percent underlying inflation. So I think we've got a bit of a stagflationary problem developing, where we have a base inflation that's well above target, and as I've been saying for the last year and a half, I don't think that's going to get back to target without a
meaningful slowdown in the economy. That doesn't mean the FED subjectives should be to induce a slowdown, but if the FED does what's necessary to contain inflation, I think a slowdown is likely to come along, and the odds on that happening sometime in the next twelve months, I think are pretty good, perhaps seventy percent. So I think we're not looking at an easy situation facing the FED. Given these numbers, I think it's pretty clear that the FED has to go ahead and move rates in May given
the emerging credit problems. I think June is very much an open question. So what I hope we'll see from the FED is a move upwards by twenty five basis points in May, followed by commitment to monitoring both the activity and inflation figures on one hand, and the credit flow issues which are leading of the economy on the other So, Larry, there was.
A thought, not a hope, but a thought that perhaps some of the difficulties we had at Silicon Valley Bank and Signature Bank and now First Republic Bank might slow down the economy on its own, so the FED wouldn't have to go as far. We thought maybe these were behind us, We'd now still have issues that looked up with First Republic What do you make of the way that's being handled as opposed to the way Silicon Valley Bank was handled.
Let me let me just say first, David, that I am very connected to people all over the financial sector, but I have no specific relationship of any kind that I know of with First Republic Bank. I'm surprised and disappointed that this situation has continued to linger as long as it has, with the bank stock down ninety five percent and various other crediting dish of it in a problematic direction.
Look, the big banks and the.
Government both have a strong stake in this situation being contained and resolved. The big banks have deposits in First Republic Bank in significant quantity. They have a huge stake in the financial system staying stable.
Lariy, let's take a bit of a longer view here now about where we're headed globally with our economy. Had Jake Sulim, the National Security Advisor, give remarks at the Brookings' decision this week where he laid out what I took to be sort of framework under the Bide administration where he wants to go with economic policy. What did you make of that speech?
Jake is a very thoughtful leader, and it's probably the most carefully intellectually developed exposition of the administration's philosophy that we have had to date. And certainly he's right that the world has changed. He's right that China represents a new kind of challenge. He's right to emphasize, after what we've seen in Europe with oil other things, the importance of resilience. But I was disappointed that the speech did not emphasize the central importance of importing low priced goods.
That is a substantial part of what determines the living standards of Americans, is a substantial part of what determines the competitiveness of American producers. For example, we have sixty thousand people working in the steel industry and six million people working in industries that use steel, So when we
raise the price of steel, we are hurting people. The Peterson Institute estimated some time ago that trade reduced costs for consumers by more than a trillion dollars, and if we had removed our tariffs on other measures against China, it would have added two percent to people's reel incomes by reducing inflation pressure. I think that the administration is much too quick to move to to industrial policy strategies on grounds of resilience.
Let me give you two examples.
The Jones Act was the resilience policy of the nineteen twenties. Let's have all our shipping be US carriers. That's made the price of heating oil considerably.
Higher in New England all year.
That screwed up our efforts to help Puerto Rico after the hurricane because we didn't have adequate supplies. We had a major infant formula problem in this country that was related to by American policies. That meant we couldn't turn quickly to European supply chains.
So of course, we're all for resilience.
We're all for strong US producers and strong US businesses.
But what I find missing in the approach is helping consumers, which, after all, is the middle class and is central to how people feel they're doing.
Let's leave our audience on Wall Street here with a quick round of long short, Whether you're long or short certain issues and certain people. Let's start with President Biden's the launch of his new re election campaign. It happened this week. Are you long or short on us?
I'm long.
I think that the administration's got a lot that it can run on, and frankly, its opposition is in very substantial disarray.
What about the head of the Bank of Japan this or way that he had his first meeting this week and surprise some people about sort of putting off ultimate decisions about you curve control? Are you long or short on his premiere?
I think he's a cagy and shrewd guy. Any kind of peg.
Whether it's an exchange rate or an interest rate, is a hotel that's much easier to check.
Into than to check out of.
And I think by setting forth that study mechanism, he is beginning a process of orchestrating leaving a peg that probably has outlived its purpose.
And finally, we talked about the FED A lot we don't talk about FED security very much. This week we had this remarkable incident where apparently some people who were apparently Russian, purported to be President Zelenski of Ukrainian got J. Powell the share of the FED on the phone and had a fairly detailed discussion with him. You're long and short on security at the Federal Reserve.
Oh, I'm short looking backwards. That I'm long looking forward because I'm sure there's going to be a pretty thorough review of how that could have happened, that's determined to make.
That doesn't happen again.
That's kind of an embarrassing, embarrassing moment. If there's any institution in the United States we want to be unconunable, I would suggest that it's the FED. But there are a lot of very dedicated people there, and I'm sure they'll get it fixed.
Okay, Larry, thank you so very much. Always a pleasure. That's Larry Summers of Harvard, our very special contributor here on Wall Street Week. Coming up, The richest man in the World gives New York a brand new gifts from Tiffany's and he spares no expense. This is Wall Street Week on Bloomberg. Finally, one more thought. All the goods may not be gold, but some of it sure is. This week mark not one, but two milestones for luxury and particularly for the largest luxury company in the world, LVMH,
or more correctly LVMH moet Hennessy Louis Viton. This week, the market cap of LVMH touched the five hundred billion dollar mark, making it the first European company to do that. Run by the world's richest man, he's Bernard Arnault, who has added the names of some of the best known luxury brands to the name of his company as he's acquired them. But one iconic luxury brand name didn't make it into the company's name. That is tiffany whose flagship
store at Fifth Avenue fifty seventh Street. Audrey Hepburn made iconic in Breakfast at Tiffany's Don't You.
Just Love It?
Larbor Tiffany's, and that brings us to the second milestone
of the week. When LVMH bought Tiffany's back in twenty twenty one for sixteen billion dollars, a renovation of the Fifth Avenue store was already underway, requiring them to move all those jewels to a safe location, hoping to avoid the sort of thing that happened in the Italian job truck LVMH won't say how much much at All costs, but it does include works by Basquat, Damien Hurst, and Rashid Johnson, as well as a restaurant from Daniel Balloon. So finally you will be able to get indeed breakfast
at Tiffany's. The transformation of what they now called the landmark Tiffany's Store has been overseen by one of mister Arnault's five children, Alexandra, who it turns out, is going through a process with his father and his siblings, as mister Arnault has restructured his company to redistribute the power among the five with whom he has monthly power lunches, all in an effort to avoid that ugly succession process dramatized in the HBO.
Series Always Tried.
Could do the best by my children because I love them.
Maybe you thought about the possibility that your children are actually scared of you?
Fuck off?
That does it for this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.