Bloomberg Wall Street Week: Davis, Malik, Wolf

most influential voices. Larry Summer is the former Treasury Secretary, Bryan Wynahan back of America, Will sar Ceo, Charlie Sharp, Bloomberg wool Street Week with David Weston from Bloomberg Radio. The dawn days of Summer meet, a busy newsweek and the markets take it all in stride. This is Bloomberg Wall Street Week. I'm David Weston, take us through the week in the markets. Welcome down, Nancy Davis. She's chief investment officer and managing partner at Quadratic Capital Management. And

Sarah Mallick, chief investment officer for equities at Nouvene. So, Sara, let me start with you on the equity side. Despite all the news that came out and there was some up and down. The equity market just kept going up, although not quite as fast as it had. Equity markets and bond markets definitely became disconnected this week. This is around the great debate around economic data and also inflation.

We saw a cooler CPI data, hotter PPI data. Our view is that the cooler CPI data wins out because the factors driving that down are more permanent. Well, the PPI data is hotter, but that's around the one time reopening other data points we watched this week for the infrastructure package billion in new spending that's good for industrials. And then of course consumer sentiment coming in at the lowest level in a decade. If you look at consumer sentiment,

it's not always tied to consumer spending. We saw low numbers in the fourth quarter of while equity markets still produce positive returns, we're watching economic data like the Conference Board data, which remains over one standard deviation above its mean. Nancy, let's turn to you, because you've made something of a name for yourself in investing in and around inflation, really knowing how to take this into account as an investor, What do you make of those CPI and PPI numbers

which seem to go a bit in different directions this week. Well, I think if you look at the long term trend, if we start at say the first quarter of UE, you know, the ten year yield was one seventy five, and then we've had four CPI prints well above the two percent target from the Fed. We had four point to first, then five, then to five point four prints,

and you would kind of scratch your head. And if you had a crystal ball at the start of Q two and you knew the CPI prints were going to come in that much higher than two percent, what would most rational people do. You would sell bonds because you would think yields would be going higher. But it's opposite day in the markets, and yields have done nothing but

go lower um with all these higher CPI prints. So I think there's definitely something screwy going on in the markets where nobody believes inflation is actually going to be here, because why would you be walking up your capital To your point, David, that the ten years under one point three percent right now, that doesn't make any sense if you actually believe that inflation is coming. But Sarah, you're

an equities person, not a bond person. But how much of the support of the equities markets that we're seeing is exactly because what Nancy was talking about, because yields actually have been very tame. People were talking about to two point oh I'm talking about on the tenure. That's definitely very makes equities look more attractive from an equity portfolio point of view. We're definitely saying you need to

become more selective here. First of all, you need to look for those companies that have the pricing power to overcome these inflationary costs. We're also seeing profit margins at about decade highs for companies, so these companies also need to be able to raise prices in order to drive their margins higher. Areas that we think are attractive are actually small caps. They're now training at the largest discount to large caps that we've seen since September. They're back

at valuation levels of January. They tend to do well in periods of rising inflation and interest rates, and like industrials because as that infrastructure package kicks in, industrials will have that cyclical tail when behind them to help them grow their businesses and increase their profit margins well and

it's not just the infrastructure package. We now have the Democrats in the senat at least saying we want it would like another three point five percent incremental spending in that sort of second wave, the build back Better plan, as President Biden calls it. So So, Sarah, if in fact that comes to pass, and forget the three point five, so it's just two or two point five, What does

that mean potentially for investors? I mean for investors, I think it means we have more confidence in economic growth going forward. If you look at third year past, the recession market turns actually tend to be pretty strong. We see high single digit earnings growth next year. That's not recessionary levels. It's not where you would be for a bear market. We think that drives markets higher rather than evaluations, and that's supported by economic growth. Now, we do have

two headwinds next year. One is how are we going to pay for that infrastructure and all that spending. Probably higher taxes that's going to negatively impact that earnings growth none or And also we need to worry about taper timing. The FED has been taking baby steps the words taper timing. We think they're watching August payroll data. If that looks as high as July data, Um, we think the FED could announce tapering in September and start tapering in early two.

But as long as the yield curve doesn't flatten, we think that markets can remain with positive returns even through tapering and higher interest rates. So, Nancy, I don't want to misquote you, but I think you said the market a little bit screwy, I think was the word you given what the CPI numbers have been being and what the year over year inflation is despite the fact people

don't think it's gonna come. How much of that do you think, maybe because of the delta variant, that people are really subdued, And we had really stunning numbers at the end of the week on the consumer confidence out of the University of Michigan and lowest I think in eleven years. How much of that is really constraining? So what we otherwise might have with consumer spending, well, I think to Sarah's point, um, the yield curve is the

most important measure to be watching. It's very forward looking, and since the feds June FM Cement meeting, we've had the largest flattening in the forward yield curve since a financial crisis, and that should be ringing, you know, ringing the alert for equity and credit investors because corporates are priced to perfection. Right, everybody is expecting growth, everybody is expecting earnings per share. But what if we actually have higher labor costs or shortages of goods and services, or

shipping delays, all those things. Um, the guild curve is expecting. UH has had a massive flattening. And um, that's also because the market has priced in the FED hiking rates. Okay, thank you so much to both of you that Sara Manic of New Vine and Nancy Davis of Quodai Capital Management. Great to have you with us on Wall Street Week. Coming up, the enigma that is the labor market. Is it possible that we are seeing a shift in power back towards the labor side of the ledger? We ask

Steve Rattner of will It Advisors. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The pandemic disrupted employment around the world, and as the economy recovers, we can't assume that we'll go back to working the way we did before. We've added millions of jobs since the low point, but the unemployment rate in the US is still above five and taken as a proportion of the population, employment

is actually close to a four decade low. Here's Bloomberg Opinion columnist Bill Dudley. One hand, the labor supply seems tight. On the other hand, when you chip judged by the number of jobs were short from where we were in February, the rate still seems like a bit of slack in US labor marketing. It's a trend that's affecting companies from

services to Wall Street. A range of firms are raising salaries and paying bonuses, while others are offering perks like a free Peloton bike or an all expenses paid vacation. We're definitely trying to do the bad job to attract the widest array of talent possible. Competition is important, and we've always, i think, been a leader in that area. That's Blackstones John Gray. Inflation and the labor market go

hand in hand. Higher prices lead workers to ask for raises, and as we get back toward full employment, employers may have no choice but to pay them here's Larry Summers. I think we're not far from full employment. We're within nine months or a year, certainly maybe less than that of getting uh to full employment. And now the pandemic has added a new dimension to the traditional back and forth over pay and hours. Now there's the option of

working from home as well. Bloomberg's John author says it wouldn't be the first time that a pandemic strengthened the hand of labor at the expense of capital. One of the reasonable lessons from history about pandemics, not that we've had too many pandemics that exactly like this one, was that it does tends to strengthen the hands of labor

compared to capital. That's Bloomberg's John authors. A University of Chicago study suggests that if employers try to make employees work from home five days a week, more than a third of their workforce may just quit. Here's Barkley's Just Staley. You know that physical presence I think is important for people, but also the pandemic has taught us that we can be quite flexible. Steve Brodner has spent his professional career

looking at the balance between labor and capital. First as a successful banker on Wall Street, then as leading the efforts to renegotiate and restructure the auto industry under President Obama, and now as chairman and CEO of Will and Advisors, which invests the personal and philanthropic assets of Michael Bloomberg, the founder and principal shareholder of our parent company. Steve, thank you so much for being back on Wall Street week. So let me ask you how we can have what

we have right now in the labor industry. We have more than four million new jobs we've created the last six months. We have at the same time a record were job openings, and yet we have the lowest percentage of people actually employed in the of the old war population in something like forty years. David, As you said, I have been watching this for forty years actually as it happens myself, and we've never seen I've never seen

anything quite like it. I think this will be an enormous amount of grisp for the mill of economists to study in the years going forward. But essentially, yes, there's strong demand for labor. The country at least so far has been reopening, in large part thanks to the federal government and all the stimulus and yet a large number of Americans are reluctant to go back to work for a variety of reasons. There's a lot of polling down

on this. Some of it is our health concerns. Some of it is the fact that they've decided simply to leave the labor force and retire. Some of it has expanded unemployment benefits that actually pay some people more for not working than they were getting working. And a lot of it, though, is the fact that people's balance sheets, the household balance sheets, are in extraordinarily good shape. You had an enormous amount of financial support from the federal

government last year. Total income earned by Americans, including federal transfer payments, was actually a trillion dollars above what would normally have occurred last year, and households spent about a trillion dollars less than they would normally spend last year. And so people don't have to go back to work because in many case, and I obviously I'm giving you

broad generalizations. There are plenty of exceptions in both directions, but on an aggregate basis, households are in extraordinarily good shape, and many people don't have to go back to work, and they're choosing not to before this pandemic. I think some people might have said, it's sort of a buyer's market. If we make the employer the buyer, that basically they can largely dictate the term. The bargaining position was really

stronger for the employer. Is it possible that's shifted because the pandemic, Well, as I think it's shifted for the moment, I'm not sure it's shifted forever. It shifted for the moment for the reasons that I just described that people. I think in general, again broad generalizations, people have the wherewithal to not go back to work, and so they are able, to a greater degree than they have in the past, as you suggest, dictate the terms under which

they're going to go back to work. That should be a somewhat transitory effect. People can't can't spend their savings forever. At some point, most Americans need to go back to work,

and they will have to go back to work. But in the short run, what's going on, as you well know and everybody knows, is that employers are raising pay, especially for people at the bottom, which is in many ways welcome news to try to get them to come back to work, And as you also said, we have created a lot of your jobs so slowly but surely they are coming back, and I would expect that trend to continue over time. It's early going, and you know, the danger is better than I have trying to make

long term projections off of single data points. At the same time, what do you think about the work from home phenomenon? Has it injected into the negotiation between labor and management a new element Where it used to be mainly about pay and hours, now we have where we're gonna be working from We see a lot of people saying, you know what, I'm going to go back, but only if I can work from home. There's no question. Again,

the polling data brings a lot of this out. There's no question that the work from home and just a lot of things that relate to the pandemic, this extraordinary, once in a century event have changed the way people think about many of these things. And yes, there's no question from the data that people are putting a greater value on the ability to work from home. And if they're for many of them, if they're choosing between two jobs, one of which they're allowed to work from home, one

of which they're not. They're more likely to choose the one in which they can work from home. But that's okay for employers too. For many of these people, you can work from home. But as I said, I do think in the fullness of time, the luxury that people have today, which I'm fine with and thrilled by being able to make these kinds of choices, will diminish, and people are going to be in a position where they're going to need to work, and the jobs will be

what the jobs are. Some of them can be done remotely, but many of them can. Steve, let's inject one other element into this that you know well, and that's organized labor. Certainly you dealt with that when you restructure the auto industry. President Biden and his administration have made a priority of really advancing the cause for organized labor, which had happened would reverse something that's been going on for some time. We're done to just over ten I think of the

private workforce that's organized right now under a union. Is it possible for the by administration to turn that around? I think they can make some difference. There's no question that the balance of power has had shifted over the last forty years away from organized labor and two employers, labor share of of of profits and the economy had dropped to a relatively low level. Corporate profits have been incredibly strong a real way just had not done particularly well.

And so yes, it is it is both necessary and possible to begin to shift that around that. Steve Rutner from will It Advisers. Coming up, Disney comes roaring back from COVID. But was it old fashioned theme parks or was it the high tech streaming? We talked with media executive and entrepreneur Michael Wolfe of Activating That's coming up next on Wall Street Week on Bloomberg. This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. Streaming giants like Netflix and Disney were among the few winners during the pandemic as lockdowns forced people to stay home. But Netflix earnings last month raised some questions, some initial questions at least about whether it was just a blip or a long term trend. This week, Disney show that it could keep the momentum going with better than expected

subscriber growth for its Disney Plus streaming service. Michael Wolfe has served as president of and CEO of MTV, on the board of Yahoo, and is the co founder and CEO of Activate, which advises tech and media companies. Michael, great to have you, the guru of media and tech. So first of all, it's start with Disney and a basic question at this point as an investor, do you invest in Disney as a tech sack or a media sack because, as you and I both know, the multiples

quite different. Yeah. I mean when when you think about when investors are cited about they're starting to look at, yes, the hundred and sixteen million in total subscribers globally, which compares to Netflix at two millions, So they're getting they're getting up there. If you look historically Disney with trading in the same neighborhood as Netflix and and Amazon really

in the fifties. Um. Going forward, Um, it looks like they're trading and around thirty seven if UM, and and someone that just has questions about their ability to execute with Bob jay Pick in place, who Bob is incredibly exquisited execution. Um, there's a lot of upside in the stock if they were to hit the same kind of multiples as Netflix and Amazon. You're talking between thirty the fifty pers and increase in shareholder value for this company.

But Michael reason my question mind the question of there's a lot to the Disney beyond streaming. They have the theme parks, they have the cruise ships, they have a television network. After all, they said that is that ballast at the sort of rights the ship if it might go off, or does it limit their upside because when you talk about Netflix, for example, they have pretty much

all their eggs in one basket, which is the tech basket. Right, Disney has a great deal more to play with and and and a great deal more to underwrite their risk from streaming. The fact is that the parks are back delta, no doubt delta. We should see a stunning recovery from in the parks, a lot of other places, and their

business are doing well. But let's remember, compared to Netflix, they have licensing and merchandizing this, they have the theme parks, they can create other shows, they can create other networks, so they're fundamentally in a better position than Netflix in a lot of ways. You're similar to Amazon, which is streaming is the only part of the picture, and and the revenue mix. So we've been talking about Netflix and

Amazon and Disney. There so other players out there, right, We have people like a Comcast for example, we have BA CBS. We had other players discovering Goodness Notes, which is going through a big transaction. So what is the future of the business overall? What sort of consolidation wanted me to see? After all, I think Disney got there in park Is Baby really bellied up to the bar and bought all those assets from Fox. Well, he bought the assets from Fox, but he also barred Lucasfilm with

Star Wars. He bought Marvel with um the entire Marvel cinematic universe. And so you see what we're gonna see as it continued in consolidation frenzy among the major media companies. If you look over time, what what's happened is every new wave of technology has driven um changes in the composition of this industry, but it's actually increased revenue in the industry. So, um, you some of the things that are driving it is the growth of streaming, but it's

also some others. One is the decline in in cable, and cable has been the driver of revenue growth and profitability, and all these companies, increased rise of connected TV. Within a couple of years, practically every American home will have a connected TV, whether it's a Roku or it's a video and UM. But also it's this need to compete against Amazon and Google and Facebook and Apple, and so we're gonna see a lot more consolidation. Each of these companies one way the other is going to have their

own streaming services. I'm very upbeat about what does Warner Discovery will be able to do. I believe that between Discovery Plus and HBO Max they will also get to two million UM subscribers will worldwide. So so, Michael, much are all the consolidation thus far, I would say is within sort of the media space. What about even outside of that space? People say maybe Apple should buy CBS or by Comcast or something. Do you expect it to go beyond just the four corners of the media world

as they consolidate in the streaming world? Um. Yes, the first of all week the Amazon's eight billion dollar acquisition of MGM, and once approved, it is Apple practice to a massive library historically of shows and also the ability to produce going forward. But I expect that every one of the technology companies will one way or the other find themselves into production, either television or films. And the results of that is they're not going to be able

to build these services just on a new production. They're going to build a lot of it on on libraries. Uh. And if you also look at the amount of money that each of these companies are spending, Apple TV Plus is costing billions of dollars a year um. It isn't It is really a part of the entire Apple ecosystem and support so many of the things. So we will see mergers between these companies. Thank you so much. It's great to have you with us. As Michael Well of Activist.

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 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. As we come to the end of the week, we've turned to our special contributor, to Larry Summers, to really bring out some of the most important things of the week. Larry, Welcome, it's great

to have you back. I'm gonna actually start with last week if I may, because when you are on Wall Street Week you said something of the FED that a lot of people reacted to. They ask questions why that is? You said, in their bond buying program, there are, perversely, i think was the word you use, actually shifting us towards shorter term funding structure when we should be going to longer term funding structure. Could you connect those two things up for us? First idea, the FED is a

creature of the Treasury. The Treasury owns UH. The FED like the subsidiary of a company in a financial sense. What does the FED do? And it does quantitative easy. It puts out money which carries a short term floating interest rate as bank reserves, and it buys up long term bonds and so in effect, the government now has a floating rate short term liability outstanding rather than a

long term UH fixed interest rate UH liability. Since the FED is owned by the Treasury, at a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems UH bizarre. And that's just one of the reasons why I think as as quickly as we prudinently can without destabilizing things, we should be bringing HUE to an end.

At the same time, this week we found out that the government, at least part of the government, would like to borrow more money as we had that three point five trillion dollar budget resolution passed the Senate now headed over to the House. As Congress looks at this, because it's there's a lot of steps to take before it actually gets made into law, what should they be thinking about?

What's your Congress we concerned about? In terms of macroeconomic policy. Look, the broad message of bionomics of build back better, that investment deficits are just as serious or more serious than financial deficits and we have to address them, is right.

But as we do it, we need to one pay for all the investments that we make with genuine revenue increases, to be very careful about locking in future liabilities that we don't pay for by, for example, funding very popular tax credits for just a few years, And three making sure that what we call investments really are investments that

augment the supply capacity of the economy. If we do those three things, this can be a contributor to non inflationary growth and rising standards of living for years to come. But if we don't. There's a real risk that it's going to fuel and inflationary psychology and actually bring forward UH the date of the next bout of financial instability or recession. So you have talked to me about inflation

of fair amount. The Bidom instation reportedly took some steps maybe to keep down at least the price of gas at the pump this week. Ironically, when they're trying to cut back in the greenhouse gas emissions, they ask OPEC plus to increase to increase its production. What did you make of that as a matter of policy. Look, I don't really hear the malady quite right on some of this, with buy American, with raising UH tariffs, with various regulatory policies,

the with so called worker based trade policies. The goal of the Biden administration sometimes seems like it's to aise the price to consumers of most things, to help workers and to help businesses, and then to reduce the price of gasoline. Since we've seen this week that energy consumption is the most toxic form of consumption that households engage in, I think it's highly problematic to be trying to bring its price down while trying to bring every other price up.

I think there's no more important price to increase in the American economy than the price of carbon based UH fuels, and so this is a perverse UH kind of UH step of from my point of view, I'd much rather see us do it in other ways than by helping uh OPEQ. But in general, the right direction for guest prices is up, and the right direction for most other prices is down. At a time of inflation, and policy seems to me in important respects to be pushing in

the opposite direction. You mentioned vaccines. Let's go there. Because you're part of a very important group, the Aspen Economic Strategy Group. They came up with a statement this week really calling on the US to take a leadership position on vaccination. Tell us about that, David. We're spending or proposing to spend three and a half trillion dollars on

investing in the country's future. I cannot understand why we would not spend one percent of that at least on protecting the country's future with a forward defense investment in vaccinating the world. It protects against evolution that could be very damaging to US as we get variants beyond the delta virus. It would be a huge source of American prestige and influence. Let's face at, our vaccines work much better than the Chinese vaccines. We're constantly talking about shoring

up our alliances and concrete ways. There's no way more concrete for more countries UH than this, And it showcases what has been a huge success of American private sector public sector UH collaboration. So on the model of when we sent a man to the Moon, on the model of the Marshal Plan, on the model of and I wasn't usually a supporter of his the Bush Administration's UH pepfar initiative that people in Africa are still so grateful for fifteen years later because of what it meant for

the worldwide fight against AIDS. This is an area where we need to be leading from the front. So Larry, I'm really curious because you've really led at very high levels in the US government, including his Treasury secretary. You have seen the intersection in politics on the inside and policy on there, and there's a themes from what you said today. I think, for example, in the pressure for lower gasoline prices at the pump, that's a political matter.

I suspect fundamentally at the same time leading around the world on vaccines that doesn't rest necessarily so well at home. How do you try to broker that deal between politics on one hand, you can't ignore in Washington and good policy. Look, I think there's no one, with all his years as chairman of the Senate Foreign Relations Committee as Vice President who's got more experience in striking those balances UH than

H Joe Biden. And I was always mindful when I served in UH government and if I was anything, and I was, I perhaps had some expertise. I certainly wasn't a politician or someone who anyone had ever elected to office. So I think one needs to respect the fact that in a democrat see, policies should UH follow the will of the people. And so I think it's right that these decisions are made UH politically. And I'm always offended when people somehow suggests that authoritarian governments will do it

better because they can follow the advice of technocrats. But I think sometimes and this is something that constitution very much UH recognized, you need to lead UH the people rather than UH follow the people. And that's what we did with UH the Martial Plan. And we're gonna need uh some of that. I believe with respect to what I think are the most important global security challenges, climate

change and uh pandemic uh disease. And my reading of American history is that the American people respond to leadership when it comes. It's so terribly helpful. Thank you. Larry Summer is our special contributor here at Wall Street weeken of course of Harvard University. Thank you. Finally, one more thought, cryptocurrency,

meet Hay Street. The Gospel of Matthew warns that there's risk when you try to pour new wine into old bottles, and this week in Washington, we saw once again why the new wine, this time came in the form of cryptocurrency, that new fangled thing. We aren't quite sure what it is. Is it a form of money, Is that a commodity? Is an investment or is it just a way to speculate? Well, whatever it is, a lot of people. Are you gonna get it and trade it? And yes, you better believe

make money off of it. And if you make money, you have to pay taxes, right, And that's where the old part comes in. When the Senate needed to find a way to pay for some of that Infrastructure Bill. It sees on requiring brokers to report transactions and cryptocurrencies so the I r S can make sure people pay the taxes that they owe. But the cryptocurrency industry said they were going way too far, and so they did what industries have done since the middle of the nineteenth century.

They allobbied that time arnored tradition named for the lobby of the Willard Hotel on Pennsylvania Avenue, where all the real work got done way back in the Grant administration, and through their efforts, they got a bipartisan group of senators to come up with new language that the buying administration could support. Problem solved right, Well, not so fast.

It turns out that they are cane. Rules of the Senate give any single senator the right to stop the proposed changes, and Republican Senator Richard Shelby did just that, and he did it repeatedly, leaving the tougher language in the bill that actually passed. But don't just spare these blockchain upstar It's are a pretty resourceful bunch, and maybe you can teach new dogs old tricks. Heck, maybe all it takes is for them to figure out how to

get all those political packs to take bitcoin. That does it. For this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week.