Bloomberg Wall Street Week: August 26, 2022

In Bloomberg Wall Street Week with David Weston from Bloomberg Radio, It's all about time, twenty years since we last saw euro dollar parody, six months of a ground war in Europe and counting down less than thirty days to the next FED decision. This is Bloomberg Wall Street Week. I'm

David Weston. This week contributers Larry Summers of Harvard on his reaction to Chair J. Pale's Jackson Hole remark, look, I think he did what he needed to do, and former IBM CEO Sam Paulmisano how to make the Chips and Science Act live up to its name. You need to get the bureaucracy out of the way. This is a week to mark anniversaries and look forward to deadlines, starting with Dr Anthony Fauci's decision to step away from his ni A I D responsibilities after serving seven presidents

over fifty four years. I tried, as you know, my very best to have the facts and the science guide us. A very different anniversary came with the euro falling below parody with US dollar for the first time in twenty years, driven in part by the looming energy crisis and prospects for the recession that it may cause something. Ian Shepherdson of Pantheon macro Economics thinks he's already here in reception now already. I mean, that's that's pretty obvious. Now we

see that last thing for a while. We also passed the six month anniversary of Russia's invasion of Ukraine, as Prutent's forces has struck a train station in the eastern part of the country. On the thirty first anniversary of Ukrainians independence from Russia, a Russia that is trying to take it back. That's an irony not lost on Amanda

Slope of the National Security Council. It's a sobering reminder that just as the Ukrainian people had to fight to defend themselves and get their independence of thirty one years ago. They are unfortunately in a similar position today. But it was also a week for celebration, at least for those saddled with student loan debt, with President Biden fulfilling his

promise to give them some relief. I made a commitment that we provide student debt relief, and I'm honoring that commitment today we will forgive ten thousand dollars in outstanding federal student loans. But for Global Wall Street, there was really only one story this week, despite all the commemoration, and it came from Jackson Hole, and it came from

Chair J. Powell. As markets eagerly sought answers to their questions about US monetary policy coming less than three weeks from when the f on MC meets again, and the Chair stepped up to the podium and basically said, we'd all have to wait. Our decision that September meeting will depend on the totality of the incoming data and the

evolving outlook. But as much as the Fed says it will pay attention to the data, the markets, the markets got the message that they shouldn't expect any relief from tightening anytime soon, as the SMP five hundred who was down just over four percent for the week, and over three of that came on Friday alone. In response to chair Pal, the Nazadac fared even worse, down four point four percent, and again almost four of that came on

Friday alone. The bond market was a bit more complicated, with the yield and the tenure up to just over three percent, barely up for the week, but the yield on the two year reacted much more to the Fed news, ending the week at three point four that's up sixteen basis points for the week. To help us understand what the markets are trying to tell us, we welcome to Peter Krauss, he's founder, chairman and CEO of Aperture Investors, and liz An Sanders, chief investment strategist for Charles Schwab.

So listen, give us your take on what happened here. The markets were expecting more the same, they, sir, sure didn't react that way. Well, I think you know the narrative around the basis for the rally that started in mid June. Some of it had to do with the peak and the tenures around three and a half percent. But this narrative that was created around the notion of

a FED pivot, we never bought into that narrative. I think a pause is something we should talk about at some point, as did Powell today, but a pivot to aggressive rate cuts as early as the beginning of next year, that the only reason the FED would have the green light to do that would be a significant deterioration the labor market from here and or a much more significant deterioration in the economy, and for now we haven't seen that.

So it wasn't a surprise to see him really forcefully push back against the the idea of a pivot that once they get to whatever the sort of final hike is, they're going to stay there for a while. And I think the market had troubled digesting that, so, Peter, if you look at the markets, they haven't highly given up on that cut. Actually they backed off of its some after the power marks, but not were you surprised at the market reaction? Now? I was, and I was a

little surprised with August uh Games. I mean, it was really sort of a melt up and sort of persistently was a risk on type of market, and as Lisianne said, it really wasn't any reason to believe that PAL was going to somehow give some credence to the idea that the FED was about to reduce rates in the next

six months. So I think the market sort of just realized that it was rising in a at a level that was not sustainable given where interest rates are likely to go, and we haven't really seen enough economic weakness to signal that rates are going to modify. So the market reacted to that, and I suspect it may follow through with more of a reaction until we get into September and there's real volume and real players in the marketplace. And right now we're still in a very very thinly

traded market. Peter, if if the FED was trying to get out of the business and really affecting the market, it's not succeeding very much. I mean, obviously, the central banks around the world really got involved a lot starting with a great financial crisis, and some people thought they were trying to pull out of it, including with the balance sheet rundown. But right now, how much of this is just driven by the central banks themselves Peter, Well,

we have not seen a return to fundamental investing. We're still in markets that are captivated by headline risks and headline commentary. Whether it's the said, whether it's the Russia Ukraine War, or whether it's China's COVID policies. We're still being driven by headlines and not enough fundamental analysis. I suspect that we're going to come to a market where fundamental analysis will have much more of an impact on

what investors actually invest in. But we're gonna have to get to some level of the bottom here, and I don't think the markets fight there yet, but it's forming about. Okay, Listen and Saunders and Peter Kraft will be staying with us as we turn to how investors might make some sense at this uncertain time. That's going up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Call it the

next space race. The push for public funding for semiconductors starting with President GE's program described by former US Ambassador to China Max Baucus, their help in pursuing their China two thousand plan, where China will focus on technologies of the future to enhance their economy, and followed by Europe's own version, described by Margaret Astaire of the European Commission. I have been impressed with is that sort of the first important project of common European interests that we have

on semiconductors. Here about two billions of public supports crowded in six point five billion of private investment. Now the United States has its own version, the Chips and Science Act, just signed into law by President Biden. The United States must lead the world on the production of these advanced chips. This law will do exactly that, and, as in Europe, Commerce Secretary Gina Romando predicts, the public funds will prime the pump for much more to come from the private sector.

As big as fifty two billion is, it is a drop in the book, get a very big drop in the bucket towards what this economy needs. All of which leaves us to focus on how fast the money can get out the government door, whether it will let loose the private sector, and whether it all will be spent wisely.

Go looking for really talented, experienced people in a wide range of ages who understand these technologies and get them on board, either as employees or advisors, so to help guide the process of making these investments as high potential and productive as they can be, and to help us understand this world of global competition and technology, and particularly the role governments might play. And welcome to somebody who spent a good part of his career in the middle

of that competition. He's Sam Paulisano, the former IBM CEO and chairman. Now he's the chairman of the Center for Global Enterprise. So welcome back. Great to have you on Wall Street week, Sam, as I say, this is not the first time we've had governments involved in tech by any means. Going back to Media and Japan DARPA, Defense Department, what have we learned from that? What should we have learned from those experiences? Well, David, I think it's it's

a great analogy that you drawn. You seem to be his starting of our industry. I actually was living in Japan during the Memory Wars. I was living in Tokens that time, working in IBM Japan. Now today things have changed, I mean clearly because it's not Japan who was part of the worldwide economic and government systems. It's China and China, as you know, is fast growing economy, investing trillions of

dollars and technology. They want to lead the West. They want to be the worldwide leader in semiconductors and microelectronics, and the majority of our capacity in this Asia, and it's not exactly a stable part of the world, so it's quite different. So it's more than just government involvement and adding stimulus to get an investment in these key critical areas you have. They have the geopolitics at play, so it's very complicated, much more so than it was

in the past. But it doesn't always worked as it I mean, I think a lot of people think that the media experiment over in Japan actually ultimately was not successful. In Japan is not a dominant player in semi conductors today, that's correct. I mean, I would argue that the execution by government then was very poor. I was. I used to meet with media and they were stronger in electronics, and they still are stronger manufacturing electronics, but the fill

in what was required from the industry's perspective. You also had to have soltware capability, and they were weak. So many times I think the government doesn't understand what's required to actually uh, not just in this, but to lead and then the discipline that's required to execute these things

with precision. So same as you suggest and mean, China really has changed the game, I think, in technology in all sorts of ways, and given its authoritarian aspect, which means it can do pretty much whatever it wants to do, as well as the massive amounts of money involved doesn't make it almost essential. The United States and for that matter of Europe also some way step up to the bar. I think it's key now. I know many of my colleagues and private sector will find that that strange for

somebody that ran IMBM to say those things. But this transition is very, very expensive, and I don't think it's you can. You could have a company, regardless of how successful they are, Intel, a M D, SML in Europe, etcetera, do this on their own. They're taking on a sovereign nation. And when you're when you're taking on a sovereign nation, it's not like competing in your industry space. So there is a role for government. Now the question is what

is the role for government? And I think we all know, we've all learned that government picking winners and looterers, losers. Even if you're an authoritarian government like Chanda gone at

quickly doesn't always work for lots of different reasons. But I think you need to have this partnership and not have the government pick and choose who the political winners or losers happen to be based upon votes per state and all the things that they consider beyond just what it takes to make this business successful and what it takes the lead in technology in the world. Sam, it's always a pleasure to have you with us on Walter. Thank you so much. As Sam PAULA Summer. He is

the chairman of the Center for Global Enterprise. Coming up, we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. Call it the Next Space Race. The push for public funding for semiconductors, starting with Presidents GE's program described by former US Ambassador of China Max Baucus, their help and pursuing their China two thousand five plan, where China will focus on technologies of the future to enhance their economy, and followed by Europe's own version, described by Margaret Astair of the European Commission. I have been impressed with is that sort of the first important project of

common European interests that we have on semiconductors. Here about two billions of public supports crowded in six point five billion of private investments. Now the United States has its own version, the Chips and Science Act, just signed into law by President Biden. The United States must lead the world on the production of these advanced chips. This law will do exactly that, and, as in Europe, Commerce Secretary Ginia Romando predicts, the public funds will prime the pump

for much more to come from the private sector. As big as fifty two billion is, it is a drop from the book, get a very big drop in the bucket towards what this economy needs. All of which leaves us to focus on how fast the money can get out the government door, whether it will let loose the private sector, and whether it all will be spent wisely.

Go looking for really talented, experienced people in a wide range of ages who understand these technologies, and get them on board either as employees or advisors, so to help guide the process of making these investments as high potential and productive as they can be, and to help us understand this world of global competition and technology, and particularly the role governments might plan. And welcome to somebody who spent a good part of his career in the middle

of that competition. He's Sam Paulusana, the former IBM CEO and chairman. Now he's a chairman of the Center for Global and a Price. So welcome back. Great to have you on Wall Street, wink Stamp. As I say, this is not the first time we've had governments involved in tech by any means. Going back to Media and Japan DARPA, Defense Department, What have we learned from that? What should we have learned from those experiences? Well, Dave, I think it's it's a great analogy that you're drawn. You seem

to be his starian of our industry. I actually was living in Japan during the Memory Wars. I was living in tokens of time working in IBM Japan. Now today things have changed, I mean clearly because it's not Japan who was part of the worldwide economic and government systems. It's China, and China, as you know, is fast growing economy investing trillions of dollars in technology. They want to

lead the West. They want to be the worldwide leader in semiconductors and microelectronics, and the majority of our capacity in this Asia, and it's not exactly a stable part of the world, so it's quite different. So it's more than just government involvement and adding stimulus to an get an investment in these key critical areas you have. They have the geopolitics at play, so it's very complicated, much more so than it was in the past. But it

doesn't always work, does it. I mean, I think a lot of people think that the media experiment over in Japan actually ultimately not successful. Japan is not a dominant player in semiconductors today, that's correct. I mean, I would argue that the execution by government then was very poor. I was. I used to meet with media and they were stronger in electronics and they still are stronger manufactured electronics, but the fill in what was required from the industry's perspective.

You also have to have soltware capability, and they were weak. So many times, I think the government doesn't understand what's required to actually uh not just invest, but to lead and then the discipline that's required to execute these things

with precision. So same as you suggest, I mean, China really has changed the game I think in technology in all sorts of ways, and given its authoritarian aspect, which means they can do pretty much whatever wants to do, as well as the massive amounts of money involved doesn't make it almost essential. The United States and for that matter of Europe also some way step up to the bar. I think it's key now. I know many of my colleagues and private sector will find that that's strange for

somebody that ran IMBM to say those things. But this transition is very, very expensive, and I don't think it's you can. You could have a company, regardless of how successful they are, Intel, A M D, s mL in Europe, etcetera, do this on their own. They're taking on a sovereign nation. And when you're when you're taking on a sovereign nation, it's not like competing in your industry space. So there is a role for government. Now the question is what

is the role for government? And I think we all know we've all learned that government picking winners and looterers losers, Even if you're an authoritarian government like Chinda gone A

quickly doesn't always work for lots of different reasons. But I think you need to have this partnership and not have the government pick and choose who the political winners your losers happen to be based upon votes per state and all the things that they consider beyond just what it takes to make this business successful and what it takes the lead in technology in the world. Sam, it's always a pleasure to have you with us on Walster. Thank you so much. As Sam PAULA. Summer. He is

the chairman of the Center for Global Enterprise. Coming up, we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. This is Wall Street Week. I'm and Western were joined once again by our special contributor here in Wall Street Week. He is Dr Larry Summers of Harvard. So, Larry, we heard from j. Powell. We've heard from the last

three years in Jackson Hall. You weren't too pleased when he had his framework a couple of years ago. We weren't too pleased about his transitory talk, did you feel a little better this year? Look? I think he did what he needed to do. It was clear that inflation is the overwhelming priority. It was clear, despite some earlier confused talk about neutral, that he was under no illusion that monetary policy was in an appropriate place right now.

It was clear that whatever the academic arguments about demand shocks versus supply shocks said, the FED couldn't accept UH continuing high inflation and had to act until it was clear that that was going away. The remarks were very concise. There wasn't a lot of uh more academic UH discussion, but there was a statement of being resolute UH. So I think that's just right. So I think the Fed is positioned UH as well as it can be given the credibility losses and mistakes that there have been UH.

With these remarks to manage things going forward. The chair never used the word recession at the same time. You did talk about below trend growth for an extended period time, also in elevated interest race for a good time to come? Is he really pointing to recessions between the lines saying get ready for it? I think he also had a reference to the fact that there was going to be pain.

He wasn't predicting recession, and after all, even someone who's quite pessimistic about the situation like me, is saying that there's a seventy chance of recession in the next two years. But he was clearly showing an awareness of the possibility, uh, indeed, possibly even the likelihood of recession. And I think that was very important because saying you're against inflation when there's no price to have to resisting inflation or bringing down

inflation isn't a consequential statement. Today, he prioritized inflation, making clear that he recognized that that prioritization would have short term adverse consequences that wouldn't be easy, but that by bringing down inflation, ultimately there were going to be more jobs with higher real wages for more people, and after all,

what economic policy is all about. It was a big change from the J. Powell of a couple of years ago, who was speaking about the importance of maximizing employment without an awareness of the issues of sustainability, um and long run economic performance. So I was quite pleased with uh these remarks. So let let's go over to Europe for a moment, because they have their own problems over there.

The e CP is indicating further titan perhaps at the same time, they're in for what looks like a substantial energy supply shock, particularly as we get into the winner. Are we properly appraising what is going on in Europe and how bad it could be. Christine Lagarde's got a much harder job right now than UH J. Powell does. She's got the dilemmas of inflation, but she's got a truly massive supply shock with what's happened there with natural

gas and electricity prices. She has the set of challenges of monetary union, problematic politics in is in Italy, very high debts in UH the European UH periphery, so they've got a very very difficult set of balances, and they also have the challenge of a credible currency as the euro moves UH to and through parity with the dollar. So I think it's going to be a very difficult

road for them to UH walk in Europe. My suspicion would be that they're gonna have to raise rates more than is currently priced in, but that that's gonna come at a time when there's very substantial recessionary forces UH in Europe, and I'm concerned about what that's gonna mean for intra European politics. And I'm also concerned ultimately, and what I think it's probably most important is how it affects Europe's UH fortitude in this very difficult world we

have with a ravanchist Russia and an aggressive China. Back in the States, one big development this week was President Biden announcing his plan for relief, at least partial relief from student debt loads. We heard Jason Furman, somebody you know well respect I respect him as well. He had some tweets that were, I think, among other things, said this is pouring gasoline on inflation fire. What did you

make of that policy changed by the administration. I did not support large scale UH student UH debt relief because I thought it was using federal resources to make transfers hundreds of billions of dollars, and I would have liked those resources put to better use helping people who were poorer, who were more in need, and who would use the money to invest more in the future of the economy.

I think that it does add to demand, which does increase inflationary pressures, but that's something that the FED should uh be able to offset UH, but it will mean more need uh for the Fed to move UH rates. And I think it needs to be recognized that this is something that's meaningful relative to all the other things uh that are uh that are that are going on. It's it's not the policy I would have preferred. But if this is our biggest mistake, UH, we will be

doing uh very well. And you know, this is several hundred billion dollars over ten years. What we did in one was several trillion dollars over one year. So we just need to keep perspective on the scale of thish. Larry, you have helped set economic policy both of the Treasury and at the White House. Was this the economists talking or was it the politicians talking? And some people, as you know, are starting to say, UH, serious economis are

not having enough of us say in this White House. Look, I'm somebody who always UH believes that uh you can't go wrong UH listening uh more to more to UH economics. I think in response to many of the frustrations going back to the UH financial crisis, there has been some movement away from relying on economy lists advice. I think over time that will tend to lead to mistakes. Thank you so much, Larry for being with us once again. That's our special contributor on Wall Street. That's Larry Summers

of Harvard. Finally, one more thought, Workers of the world unite. That was the rallying cry of Karl Marx and Friedrich Engels in their Communist Manifesto of eight and their followers took a pretty good run at it. But with the Soviet Union and all and at the same time, organized labor grew in Europe and in Britain and in the United States. Even as late as nineteen seventy nine, the noble quest of organized labor was celebrated in an Academy award for Sally Field leading a sit down as norma Ray.

But that was then and now is different, as Cornell's Alexander Colvin explains, with labor unions losing a fair amount of cloud. In the United States, we had workers representative in America by unions. Today it's it's a little leven percent and down to round six percent of the private sector, so unise a much weaker. The question is whether the tide may be turning once again, as job markets have tightened and big employers like Amazon are facing new organizing attempts.

Although CEO is like Andy Jasey, insists unions are not the answer. We happen to think they're better off without a union for a number of reasons, including the fact that you know it's it's much harder when you have a union to have a direct relationship with your manager and to get things done quickly. With the growing push by unions and high inflation and economic uncertainty, it comes

the prospect of course of strikes. Whether it's in West coast ports in the United States is obviously anytime you have a negotiations like the ports, whether it's on the West and East coast, but in this case on the West Coast, we want to keep a close eye because we know the impact. Said that if if it doesn't go well, what what will happen? Or it's Felix, So, Britain's largest port, which went on strike just this week. This is a significant moment in the UK summer of strike.

We're on day two. It's about two thousand workers who are disputing their pape. Mirsk has already had two rereute three wrestles, but it's one thing for stevadors or warehouse workers to stand up to management. You know things are getting truly rough when it's the lawyers who decided to strike, as British barristers did just this week. Kite is what we trained for, it is what we do, unhappy with the way their fees are lagging behind runaway inflation, putting

at risk a classic source of Western entertainment. The sort of thing depicted in witness for the prosecution question is fro out home? Were you lying then? Are you lying now? Are you not in fact a chronic and habitual liar? Then again, even as a lawyer, I have to ask myself, if all the lawyers decide not to work, is that an economic headwind or is the detail wind that does it? For this episode of Wall Street Week, I'm good Western, See you next week. M