Bloomberg Wall Street Week: Diamond, Feeney, Tarullo

of the most influential voices. Larry Summer is the former Treasury Secretary Bryan Wynahan back of America, Will CEO of Charlie Sharp. Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Inflation record, COVID numbers and an unresolved standoff with Russia, leaving us with an uncertain start to the new year. This is Bloomberg Wall Street Week. I'm David western It wasn't just the winter cold snap that may have sent a shiver down your spine. This week Wednesday,

we heard what we had suspected. Inflation last year was the worst it has been in nearly four decades, up a whopping seven percent. Here's American Action Forum President Douglas

Holtz Eaken. They do have a real problem. There's real heat on these inflation numbers, and all that inflation certainly has the attention of the Federal Reserve, as Chair J. Powell testified at his Senate confirmation hearing, that the Fed has to turn its attention now from supporting the economy to making sure inflation doesn't become a long term problem. We will use our tools to support the economy and a strong labor market and to prevent higher inflation from

becoming entrenched. And if all that weren't enough, Russia came to the table with the United States and then with other NATO allies to talk about all those Russian troops massing on the Ukraine border, and the Party is basically agreed to disagree at least for now, leaving prospects of a further invasion still up in the air, which was part, but only part of what drove oil prices up this week.

Here's i h S Market Chair Dan Jurgen. There's geopolitical anxiety feeding into the market on top of a tightening market that's coming with the economic rebound. Three big banks reported their earnings at the end of the week was something of a mixed bag. JP Morgan reported record profits, but disappointed a bit on trading and is adding to

its cost. City also came up short on trading in the midst of a major restructuring there, and Wells Fargo said it's tepid loan growth in the fourth quarter should pick up this year. Going beyond the banks, the markets overall well. They had a volatile week, responding to the high inflation numbers, the low retail sales numbers on Friday, and the testimony of FED Chair J Powell that reducing

monetary policy support is now a certainty. Socks fell for the second week in a row, with the SPI and the NAZAC both off about three tenths of a percent, while yields on the ten year climbed a hundred and twenty five basis points and in the week at one point seven eight. That's the highest level since the pandemic hit.

To put this rather confusing week in perspective, we welcome to Bob Diamond these Atlas Merchant Capital founding partner in CEO and joe An Feenie Advisors, capital management partner and portfolio manager. So Joanne, let me start with you. Respect equities in particular, Typically when the interest rates are going up.

That's not necessarily something all equities like, the equities respond that way this week, yeah, you know, and they've responded that way since the late fall, when I think it became finally clear to investors that interest rates would have to go up given the level of inflation. We're seeing the tightness in the labor markets and the slowness with which supply is coming back on one and so yeah, we certainly saw evaluations come back and some come down,

in some places more than others. And you know that we just don't know for how long that's going to go on, which points that big question that investors always face. You try to time this market where you just hold on for the long haul. So, Bob, what about the Fed trying to time bringing it back down again? How risky is that? Because the track record on the so

called South Atlantics is not a great one. So, David, we talked about this um um, you know when we when we talked in December, um, the Fed needs to begin moving UM. As of today, they're still very very easy, ultra easy, I would call it. The balance sheet is still expanding. They're still um, you know, almost a hundred billion in in uh in um uh security purchases each month UM, and I think it's time that they get

on with it. So UM. I think the sooner they begin this process of kind of easing into an economy that has recovered and is growing and has a very very tight labor market, the better. At the same time, I've you've got omicron out there, you've got the COVID virus, and so you can't quite know where the economy is going. So how big a risk is it that so called policy mistake stopping on the great break too fast and leading into dare say, a recession? Listen, it is it

is everyone has said, who has been on already? This is tricky, It's not it's not five minute rice to time this. But I think the biggest mistake that the FED could make would be to delay too long beginning to get to neutral. And I think, you know, David, we've talked about this before, and Joanne and I have talked about this, but when the FED goes from ultra easy to neutral, it's usually fine for the markets. That's been the history. We're not even close to neutral yet.

So when I say begin the actions, what I'm talking about is getting closer to neutral. If you look at the futures markets, then they're expecting FED funds not this year, but at the end of two thousand and twenty three, FED funds will be one and a half to one and three quarters. Neutral is maybe two two and a half percent. And I would just bring up, you know, it kind of ages me and my experience on Wall Street.

But if you look at the experience in the early eighties when Bulker had to really you know, put the brakes on, short rates got to fifteen. So if we talk about getting short rates overnight FED funds back to two percent or two and a half percent um, I think that's what we should be aiming for, you know. And and to that point, uh, you know, Bob, you put it really in good context, right, this not the eighties. Right, short rates heading to fiftcent is very unlikely for that

to be in our future. So we're really looking at short rates in the two ish bus percent range. And also, right, this is a very different economy from where we were back then in the seventies and eighties when we had to deal with those oil embargoes and the slowdown in production. This time, the FED at least has a tail and help it solve the inflation problem. And that more supply

is going to be coming back online this year. Just look at the semiconductor industry, which is bringing new factories up and running and we'll be putting out chips starting mid year, and that's going to help by bringing up supply. That will help close that gap between consumer demand, which is incredibly strong and the gap in supply that we've been suffering. That should also help to bring down inflation

even as those interest rates go off. Bob Diamond and Joy and Feeny will be staying with us as we turn to the specifics of the tech sector and especially fintech that's gonna happen. This is Wall Stree Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from

Bloomberg Radio. Joe An Feeni of Advisor's Capital Management and Bob Diamond of Atlas Merchant Capital are still with us as we turn from the markets overall to one segment that has been particularly riled by the talk of higher rates, and that is the tech sector and more specifically fintech. But let me start with you. You've got some experience now it's just with banks, but also with tech and specifically fintech with your major deal involving Circle. So give

me your sense. Typically it's thought that tech gets beaten up with higher rates. Is that true? Now? Is this the time not to invest in tech come back to higher rates? David, we're talking about just getting back to neutral. So we're talking about maybe a ten year in the higher end of one and a half to three and rather than the lower end, and we're talking about two percent at funds rates. So no, I don't think they'll

be a negative impact. UM. Our investments, our last three or four investments, an Atlas, Merchant Capital have all had a very very strong tech angle to them. UM. We're very very positive overall on the fintech sector. UM stable coins in particular, as you know, we we announced in Conquered Acquisition Corps of merger with Circle. UM and I think payments technology, stable coins UM. You know, the ability to to uh impact the costs of commercial services UH,

the opportunity to increase economic stability. All these things we think are very very positive. So UM, there will be winners and losers. UM. I think there are periods in the market where anything with a tech angle, whether it was fintech or outside of finance, you know, had a good bid UM and I think it's it's appropriate that there are you know a little bit more selective in

terms of the platforms that will be both successful. But within financial services the impact of technology and the impact of technology focused platforms UM is significant and we really like it is a is a an area to invest, you know, And I think that the news that of JP Morgan just you know, really confirms that they are spending because competition is up and they need to become

more efficient. And where are they going to get that technology? Well, some of it will be internal, but if you go beyond the big money center banks, think of all the regional banks, community banks, they also need to become more efficient.

And so a lot of the fintech names that are providing some of those capabilities, whether it's a smaller name like an Encino or a larger name, you know, they got thrown out too over the last several months with all those multiples coming down, So you know, it's like the babies got thrown out with the bath order over the last several months. And I think this year we're

going to see quality names really come back. So as Bob was saying, we're going to have to be really selective, but I think investors are gonna start looking more carefully at the companies to see if they actually have customers, a well defined market and customers that have money to spend. And and some of these companies have proved themselves already and they're multiple still got crushed. So I think there's

a real opportunity for tech investing right now. You know, you don't want to buy tech necessarily when it's really high. You want to buy it when the market is panicking and when the numbers have really come down as they have a little less months. And Joanne, I would also say, you and I have talked about this, but there are sectors like using stable coins again UM, where you know, we should really embrace and encourage clear regulation uh. And I think in the case of of Circle, we certainly

do uh embrace regulation. And I think that can also help separate UM platforms from those that are more investable than than others. And Joan, I wonder if that takes us to Another big story of the week actually was the nomination by President Biden is Sarah Bloom Raskin to be the vice chair of the FED for supervision because she worked when she was a Treasury she worked specifically on regulation crypto. I'm told she's one of the first people to say we need to regulate this and came

up with a paper on it. So does that mean that we're going to have that regulation sooner rather than later and maybe have it be informed. Yeah, I think that's right. I mean, she has to stellar reputation that she's pretty highly respected, and she certainly has the experience in her various areas of work over the past many years to be able to think and lead discussions pretty

pretty well on that. But you know, I think people again not separating which companies actually benefit from more concise, more thorough regulation and which once might lose. You had the whole area trade down on the fear of more regulation, but actually it should be viewed as a positive for the development of products in that set, and I think

people probably misread that. So once again, going forward, I think we're going to get some clarity on the direction which regulation is likely to go, and I think that could actually help some of the better companies. Joy and I couldn't agree more. I think there's a there's a perception that you know, regulation is negative, regulations not negative.

You know, good sound regulation will make it more clear who are the winners and who are the losers, and which you know can operate within a highly regulated financial services industry. My unders ending is that the FED white paper on stable coins is coming out very soon, and I think that will add to some clarity around that as well. So so Bob, you've mentioned stable coins a couple of times, and really focus, if you would, on the payment companies, because you do have experience, You've got

investments in the area. What will be the difference between the sheep and the goats, if I can put it that way, Because there are a lot of companies out there right now, which ones will survive and flourish and

which ones will follow the wayside. So there are there are stable coin companies or companies that are platforms that that expect to be that would prefer to be offshore, that would prefer to be outside of the regulatory perimeter, and I think I think those will be very challenged in terms of becoming um you know, really used is payments. And there are others like Circle, which has said they planned to m apply with the o C c UM

for a full reserve banking license. That's how that's how much they would um prefer to be within the regulatory perimeter of of the US financial system. So UM, I think I think we'll see it with more clarity David, going forward, but I think we can see it, and there's ore there's already a separation from those that had prefer to stay outside of the regulatory perimeter and those

that would prefer to operate inside. Joyn, I'm really curious again for you, as a portfolio manage, we hear increasingly people say, even the we're skeptical of cryptocurrency overall, that there is a role in your portfolio for some of it for various reasons. Do you feel that way? Do you look to balance to some extent have some role for cryptocurrency, whether stable coin or a different sort. Yeah, you know there can be a role for it. As Bob was saying, it's at this point a bit of

a wild west, right. Some are quality and they're really careful about adhering to what is likely to be regulatory frameworks that keep them safe, right and create transparency. Um, but you know, we do create opportunity for our clients to be involved in some of the cryptocurrencies. We like the ones that have a more grounded foundation in the

underlyingable wuting technology. UM. But you know, it's a bit hard right now to get too to evolved because again there's going to be a shakeout among those who are are more careful about keeping those transparency uh, you know, guard rails in place and keeping out some of the more de various activities that have been you know, used in those platforms and also you know, potential for hacking and other things. So one really has to be careful.

But you know, it's a clearly speculative um, you know, potentially a lot of upside, but also a riskier position, so one wants to limit exposure. I think that that realm at this point. Great having both of you with us. That's Bob Diamond of Atlas Merchant Capital and Joe an Fee of Advisor's Capital Management coming up. It looks like FED Chair j Pal is headed toward us second tour of duty. But what confronts him this time may be very different from what he's seen before. We ask former

FED Governor Dan Torulo of Harvard. They could dust off a lot of the tools from the eighties. You know the output gap analysis h Phillips curve. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio economic defender of last resort since the Great Financial Crisis of two thousand eight, it's been the Federal Reserve we've depended on to bail

out the economy when things got rough. The ongoing labor market slack and the subdued inflation outlook are key reasons for the Committee's decision to maintain the current high degree of monetary policy. Monetary policy will likely remain highly accommodative for quite some time, but now we face something we haven't seen for a while, a FED bent on tightening rather than loosening. With Chair J. Powell testifying his confirmation hearing this week, the quantitative easing has to come to

an end. Will be normalizing policy, meaning we're gonna end our asset purchase in March, that rate hikes are coming this year. If we have to raise interest rates more over time, we will, And that the Fed's balance sheet is just too big we're mindful of the balance sheet is nine trillion dollars. It's far above where it needs to be, in short, that the economy no longer needs the sort of monetary policy support the FED has been

providing for over a decade. The economy no longer needs, or once the very highly accommodative policies that we've had in place to deal with the pandemic in the aftermath. And so, as J. Piale is on the brink of being confirmed for a second term as Chair of the Federal Reserve, it's time to think about how different the next four years maybe from what came before, and to help us take a look at what the Federal Reserve has in store for it. Coming up, we welcome to

a former member of the Federal Reserve Board. He is Daniel Tarullo. Dan, thanks so much for being with us. It's been one thing to manage the Fed. It's not been easy, I'm not saying, and we were losing monetary policy supporting economy. How difficult will it be if and when J. Powell gets confirmed as the next chair to really have a very different regime. Well, David, it's true

for the first time really in about forty years. Inflation is the part of the dual mandate that's front and center, if not standing alone at least much more prominent than it has been. And essentially what they're confronting here is that had, of course a major supply side shock in the form of the virus of uncertain duration with literal variants that keep mucking up people's efforts to analyze when

the effects will pass through. At the same time, they've had an awful lot of fiscal stimulus over the last couple of years, and so when you have reduced supply and increased demand predictably, you've got inflation of the sort

that we haven't seen in some time now. The FED spent most of telling itself and us that they thought that inflation was going to be transitory because it was grounded in those supply side effects people not going to work, not being able to get things around the country, and the like. Obviously they're not holding to that line anymore. UH, And the the implicit policy implication of their view last year that they didn't really need to do much has

now obviously been abandoned. But they now need a new hypothesis as to uh, the trajectory of inflation and what will cause it to perhaps recede, what will cause it to embed itself. UH. And and that's really I think the first order of business on monetary policy for the FED this year. Do they have, as far as you can tell, a theory of the case at this point? What are they managing this for? As they say, we

have to get inflation down. We heard that from both FED Chair j Pal aswell as lair Brainer this week. They agree in the goal, but did they have a theory about how to come about with that goal? Well, they have. I wouldn't have expected that at confirmation hearings they would have put forth a more or less nuanced monetary policy view. Uh. So, I don't know what they're operating theory is now, but it's surely not just going

to be last year's I mean, there are several options, right. Uh. They tend to talk about expectations a lot that is uh well grounded inflation expectations in the public and markets keeping inflation down. Um, that's a that's a hard one to judge in real time, and nobody really quite understands why expectations change. They could dust off a lot of the tools from the eighties, you know, the output gap analysis, uh,

Phillips curve the relationship between inflation and unemployment, wage price cycles. Uh, and try to apply that right now? Are they could come up really with transitory version two, which would basically say, look, we think the medium term are longer term disinflationary forces in the economy. Globalization, demographics and the like are still at work, um, and so we we don't need to make major adjustments in monetary policy, but we do make need to make some. So those are at least three

possibilities or some combination of them. But I haven't seen anything yet, uh that would give us a hint as to which particular blend of those notions the feed is going to redoct What's important, David, though, is that they do articulate, as you put it, a theory of the case so that they can then judge incoming data against that theory, and that allows them to make policy adjustments as appropriate. Thank you so much to Daniel Tarullo of the Harvard Law School. Coming up, we wrap up the

week special contribute to 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 David Weston. We are delighted to welcome back once again our special between Larry Summers to Wall Street week. So, Larry, we had a lot of data flow this week, and i'd like your reaction to and let's lead off with the lead, which is the CPI numbers of seven percent. It's been a good long time

since we've seen that kind of number. It has David Richard Nixon imposed wage price controls when inflation was about two thirds as high as it's been last year. This is above any place that got during the Guns and Butter Vietnam inflation. I ate the data flow is saying what I thought for quite some time that yes, there are transitory elements in inflation, and very likely they will recede, but we are basically moving towards UH higher entrenched inflation.

It's there in expectations, it's there in wages, it's there in labor shortages, it's there in the pervasive pattern across many different UH prices, and people try to excuse it by picking this figure and that figure from UH month to month. But we've got an overheated economy and the Fed is going to have a very real challenge of cooling that economy off. UM and doing it in a controlled way that has not been done very successfully UH in UH the past. So it's gonna be a very

challenging year for macroeconomic policy. And I suspect that the approach depends on what the causes are of the underlying inflation, and we have various candidates put forward. For example, we talked with Briand's you know him well from the White Hosts week. He said, well, really, this is a supply side problem. Once we get the supply chain fixed, it'll be all fixed. Is he right? No, he's wrong. UH.

We have a massive overheated labor market. We have the highest ratio of vacancies to unemployment in the country's history by a large margin. We have shortages of labor in everything from psychotherapy UH to McDonald's, in everything from investment analysts to UH garters. That suggests a ay surfeit of purchasing power and demand relative to the capacity of the economy to UH produce. And unless we bring those things into balance, we're gonna have not just higher inflation, but

possibly even UH accelerating UH inflation. And we need to recognize that we have an overheated economy that we are going to need UH to cool off UM in UH the time to come, and until we do that, it is going to be much more difficult to address the problem. Yes, we need to do what we can to open up ports. Yes, if there was anything we could do to cause there to be more semiconductors, UH, that would be good. Yes, better childcare arrangements to enable more women to work UH

would be desirable. But fundamentally, this inflation is about UM and overheating economy, and that's the thing that UH we have to address. All which takes us back to your statement that it's pretty difficult for the FED to have a soft landing here. The tracker is not unblemished. I think it's fair to say with the three new nominees from President Biden, he will have basically put five people in place, renominating J Pal as Chair, promoting his proposals,

proposing LEO branded and then three new members. What do we know about these people? What does it say about the constitution the FED going forward? Assuming they get confirmed. Let me say that I strongly support UH the reconfirmation of J. Powell, and I strongly support Layo Brader's nomination to be UH Vice chair of the FED. The President has made clear his commitment to the independence of the FED.

Part of that commitment is allowing and encouraging the FED to be focused on its fundamental jobs of maintaining a non inflationary economy with as strong employment as is possible

on a sustained basis. If a sense develops that there's a desire to politicize the FED by focusing it towards other issues beyond the crucial issues of financial stability, I think that could be problematic for the Fed's credibility, and so it will be very important UH tow for the nominees who have distinguished track records in different UH areas in the past to present their views UH to UH Congress and for Congress to very seriously consider those views.

Curious about where you think we are and dealing with pandemic and more pointedly in the past on this program, you question, particularly during the Trump administration, the competence of the government. What they did demonstrating competence in the way they handled it. At this point is the Biden administration

demonstrating competence in the way it's handling the pandemic. It is so much easier to be on the outside and criticize and carp and judge things in retrospect that I'm reluctant to pass judgment on UH what the Biden administration has done. Certainly, UH we now need to be focused on much more than vaccination, on rapid dissemination of treatment, particularly on the availability of tests. I wish those things

had happened faster. I wish the CDC and the f d A had broken more out of their conventional rhythms to reflect the extraordinary situation UH that we're dealing with.

But I would underscore one thing, David, and that is that COVID anywhere is a risk of mutation that could lead to catastrophe everywhere, and that we are under investing as a global system on a massive scale in the global effort to contain UH covid, and in addition to its moral significance around the world, we are making it more likely that the next UH vaccine, the next COVID strain, will have O macrons transmissibility and some other strained UH lethality.

And that is a grave risk to H the global system, and one that I think is not getting enough attention. Okay, well said, thank you so much. It's always a polite to have you. That is Larry Summers, of course of Harvard University. Thank you. Finally, one more thought playing by the rules of vaccine mandates. Everyone is talking about them, from banks saying that if you don't get the JAB you can't keep your job, to the Supreme Court ruling that it's up to Congress, not the President, to make

them universal. In early while millions stayed at home, millions of healthcare workers heroically state that they're at worked. These same workers are enough for us to tune between losing their jobs and complying with the government's vaccine mandate. It's one thing to try to tell your employee is what

they need to do to come to work. It's quite another when it's an independent contractor who makes tens of millions of dollars a year, has a vocal global fan base, and oh, by the way, is arguably the greatest of all time. That's what Australia has on its hands in Novak Djokovic looking to break his tie with failed Nadal and Roger Federer for the most Grand Slam wins ever by a man, and oh, by the way, he's an

outspoken skeptic of vaccinations. Mr Djokovic has been shall we say, a bit kg about his vaccination status, invoking instead he has claimed that he caught the virus, recovered and is therefore immune, all of which got him into the country, only to have the government say it wasn't enough and you'd have to leave and say goodbye to that twenty one Grand Slam title, which put the issue in the lap of the courts, the courts of law and the courts of public opinion. As tensions continued in advance of

the start of the Australian Open next week. Rules rules and there are not special cases. But it's not only tennis stars playing a bit fast and loose with vaccine mandates these days. We have the infamous case of NFL quarterback Aaron Rodgers, who was forced to sit out when it turned out he really hadn't been vaccinated, after he led everyone to believe that he had the choice that was in my best interest. You might respect it, you

might hate it. And of course, not far from Wall Street, superstar guard Kyrie Irving of the Brooklyn Nets hasn't been able to play at home all season long, although his team needs him so badly. It is now starting to let him play on the road where local authorities permit understood their their choice to to say, if you're not gonna be vaccinated, fully vaccinated, then you know you can't be a full participant. And um, I knew the consequences.

I wasn't prepared for them by no stretch of imagination. But all that may pale in comparison to what China has in front of it, trying to keep to its zero COVID policy with hundreds of athletes through an entire Winter Olympics, with one city close of about eleven million people, and now cases of oh macron found in Chianjin, which is just you know, around the corner from Beijing, and an Olympics coming up in less than a month. Um,

all eyes on China right now. So if you think you're struggling with your version of a vaccine mandate, to just think about the for Australians or the Chinese, or for that matter, the NBA that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.