Bloomberg Wall Street Week: July 2nd, 2022

In Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Cooperation with Europe, competition with China, and conflict with Russia. But it always comes back to inflation one way or another. This is Bloomberg Wall Street Week. I'm David Weston. This week special contributor Larry Summers of Harvard on how close we may be to a recession here in the United States. I think the risks of a two recession are significantly higher than I would have judged uh six or nine

weeks ago. And Deborah Lair of Edelman Global Advisory on just how much China has changed in the twenty five years since it took back Hong Kong. We've come a long way as they've built a world class legal system

and trade systems. Much of the week was consumed with global events, as President Biden traveled to Germany to try to persuade other leaders of the G seven, like French President Makron, that they should live at how much the world pays for Russian oil in Our ministers will continue following the initiative of the United States to work so that such a ceiling can exist by applying the broadest

possible alliance of buyers. And then moved on to Madrid to work with Turkey to admit Sweden and Finland into the NATO Alliance. It's been historic twenty four hours here in Madrid as Natal leaders gathered. Turkish President it Urduan has lifted his objections for Finland and Sweden to join the NATO Alliance. We looked to Europe even for the latest on the FED, where Chair j Powell appeared at CenTra with other central bankers and reaffirmed his commitment to

beat inflation no matter the risk. We're very strongly committed to using our tools to get inflation to come down. The way to do that is to slow down growth, ideally keep it positive. Is there a risk that we would go too far? Certainly there's a risk, but I wouldn't agree that it's the biggest risk to the economy.

And just as things wound down in Europe, they moved on to Hong Kong, where President g traveled outside mainland China for the first time at eight hundred ninety three days to celebrate the twenty anniversary of the handover from Britain. Fog Don hung Jin. Hong Kong enjoys a unique position, favorable conditions and broad space for development. The central authorities fully support Hong Kong and seizing the historic opportunities presented

by our country's development. But Washington wasn't left without its own fair share of drama this week, as a former aide to President Trump's chief of staff gave dramatic testimony about Mr Trump's reported willingness to let the mob gather on January six, even if they did have weapons, housing the dicinity of a conversation where I overheard the President say something to the effective you know, I don't even care that they have weapons. They're not here to hurt me.

But with all that was going on around the world. In the end, it came back to inflation and the economy and growing fears of recession. For the week, the equity markets were down, with the SMP off over two percent since Monday and the NASDACK down over four and that was after a rally on Friday while bonds were being bought, leaving the yield on the ten year under

two point nine, down five basis points. But the bigger story of the week ended on Thursday, the close of the first half, which ended up being the worst for the equity market since nineteen sixty two and the worst for ten year treasuries since Get this, they were first sold back in seven teen eight. Here they help us sort it all out. Our Jillian Tet, Financial Times editor at Large and US Editorial board chair, and Peter Krause,

chairman and CEO of Aperture Investors. Julian, let me start with you, actually and what we saw in the markets. What's driving the markets from your perspective right now, Well, the best way to make sense of the equity markets is to recognize that a month ago investors had a nasty shock when they realize that rates were going up. You know, the inflation numbers have beencoming much higher than expected,

and the fat has really accelerated. What we're seeing today, though, is an investor realizing the earnings are being hurt by the underlying economic slowdown, and that is really when they're starting to drag on people as they worry not just about inflation but sac inflation. The combination of price growth and slowing sorry, price increases and slowing growth. Then, frankly, we've not seen in the nineteen seventies. So, Peter, the question I really wants to know is how bad is

it going to get? How far are we into this decline? In your judgment, I think there's two answers to that. One is how far the markets down into their ultimate decline and how far are we, from an economic point of view, into slowing growth slash recession. I think on the former point, we're probably two thirds are a little bit more of the way to a bottom. In financial markets, it's likely there's another ten percent and equity markets find

markets perhaps a little closer to their natier. But we're going to continue to have that volatility until there is some clarity regarding how much the FED is going to raise rates, because that really is what investors as Jillian points out, are watching as it relates to the economy itself. I think it is a good argument that we're already either entering a recession or in a recession. Manufacturing activity

has dropped significantly. We've seen leading indicators also decline. We've seen consumption activity fall, and CEOs are beginning to predict that the second half of their economic activity to their companies is going to be a lot lower. So, Jillian, what about that We pick one of the things that Peter talked about it, and that is consumption numbers. We had personal consumption numbers are really softened in the United States this week, and also of course we have the

consumer confidence numbers which are softening as well. That is a big driver, as we all know of the U S economy. How big a risk is that at this point for the US economy, Well, there are two or three factors right now whichuld make it incredibly hard to work out what's going on. One is the fact that yes, you're seeing a real loss of consumer competence, really quite staggering decline and consumer confidence. And that kind of makes sense given the scale of price shock and inflation shock.

But something that we haven't really seen before in previous economic cycles. Is that a lot of consumers are sitting on fat cushions of savings compared to the thought past because of the fiscal stimulus. Jillian Ted and Peter Kraus will be staying with us as we get some investment advice in these turbulent times. That's gonna have the next watter releasing Hun Bloomberg. This is Bloomberg Wall Street Week

with David Weston from Bloomberg Radio. Let's take some time out to go traveling, not the camel route to Iraq, but the financial route to a buck. Not only does the dollar to buy less at the supermarket than it used to, it also buys less in terms of other currencies than it did ten years ago, a period that

has included two official devaluations of the dollar. That of course is Lewis Rohaiser on Wall Street Gate that was back in and once again that buck is buying less at the supermarket, but it sure isn't buying less in terms of foreign exchange. Peter Cress of Aperture Investors and Jillian Ted. If the financial times are still with us, so Peter, it's hard to know where the markets are going but the one thing I think we can say

is they are turbulent. In these turbulent times, where do you put your bucks at this point, where does it make sense? Well, look, you're not gonna be able to put your money anywhere that is going to be unaffected by the volatility. So if the objective is find someplace to invest where you don't have volatility, that's the zero

sum game. On the other hand, equities will go up over time and credit has gotten a lot cheaper, and so if you're looking for incremental places to invest, even large institutional investors, you have to be beginning to look at putting some money back into the equity markets they're down thirty plus percent, and some money into the fixed

income markets because spreads have moved out pretty dramatically. But you're not gonna be able to do that without volatility, and you're not gonna able to do that with probably without additional draw downs. So you need to be cautious about how much you've commit well, and Julie, I wonder if you're you're gonna be able to do without additional risk. I mean, Peter says that credit is cheaper now, it's a better buy. You can get better returns. There may

be a reason for that. What is the risk of defaults? We haven't had defaults in a while now, Well, we're going incredibly retro in all kinds of ways right now. Um. You haven't yet got the sideburns unfortunately, David. But I hope we hear that soon of your former host. Um. But you know, one of the things that investors have not had to worry about for a very long time our corporate defaults UM and risks in the high yield market. Um,

we're still not seeing that. The default rate right now is incredibly low, UM, in spite of all the falls from the equity market and concern about recession. But what you're seeing a number of bankers and lawyers and others talk about is a likelihood that as rates keep going up, UM, we're going to start to see more and more pressure

on risky companies. Now, it's hard to predict exactly when that is going to strike because most risky companies, most high yield companies, or leverage loans have been essentially refinancing themselves or locked in financing for quite a while. So it really only begin to bite when the refinancings come up. Um, and that's a sort of staggered timetail because each company

is different. But when you do see those refinancing occurs, you can because see the very nasty shock for investors, and you're he seeing the high yield bond market react to that. But in some ways that's the clearest part of the markets where you've actually seen a reaction to the tightening of the quid deconditions. So that is absolutely something that in bestor should be looking too in the next year or so as one of the big risks

that are waiting us all. Peter, I wonder if we're getting an accurate read full on the full market right now in this sense, I'm back, by the way, I was just starting law school. I did have sideburns. For the record, they were quite as well, but I did have them. But one different thing. It's actually I'll try to bring it back. I did be a lot whiter that now. But but Peter, I wonder one of the changes that we've seen since nineteen five is how much

the markets are private rather than public. We said, a big shift, and I wonder whether we really are getting an accurate read on all that private capital. No, we are not, By the way. I never had good sideburns. That's why I went with a beard. But with regards to the private markets, I think that that is a serious problem, meaning that we know for a fact the private markets flag public market valuations. But it's also a fact that the assets owned in private hands are also

being affected by this market change. You cannot have this change in the interest rate construct that I spoke about briefly before without affecting values. So private equity assets are going to decline in value. I've already gone down in value but haven't yet been adjusted. And those adjustments, when they occur, are going to cause stress for investors. In

some cases, they could cause liquidity issues. In some cases they may actually make raising additional capital much more challenging, and in some cases that could cause defaults and ultimate bankruptcies. So that that whole private credit and private equity sector is a place where we need to be focused on risk rising substantially and potential stress coming from a mark to market of those assets, Julian, these days we can't have a real conversation with investing without talking about China

in one way or another. Of course, we have the anniversary anniversary they hand over is China a place that's attractive potentially for investors because they're going the other direction from the United States and much of the West. We're tightening, they're actually loostening. Well. Absolutely, China is something of an enigma in many ways because yes, they are going in the opposite direction from most other markets right now in

terms of loosening. There is great pressure on President G to ensure that he tries to hit the GDP growth targets because he has the all important Party Congress later on this year. Um, and all the signs are that, because of the COVID lockdowns, are in danger of missing the growth targets. So President G has every incentive to try and stimulate the economy going forward in the coming months. Um.

The problem that really is two or threefold. Firstly, we don't know how China will respond if there are more COVID outbreaks. Peter, what about it. You've had a career now investing your money and other people's money is at a a place where we should be putting the money right now into China. Can't be sure China right now, just can't. Being long China is a challenge for sure, But being short,

I think is a is a very big risk. Look, I also think investors are somewhat circumspect about the motivations of the government with regards to the external investor. How will they treat the bond investors? How are they going to treat equity investors? Visa the regulation and changes to companies inside of China that were thought early to be leaders and real growers. Those those issues still remain. But

China is a huge market, very strong economy. When it starts to grow, it will come back, COVID will get resolved, and it's still it. China is still provides significant exports to the world and buys significant imports. What about Europe, Well, Europe as ever is a very mix. Um. You've got some places like the UK which look really pretty um soggy right now, to use a wonderful British phrase, You've

got other parts of you are doing better. Um. But the one thing everyone needs to realize is that Europe is very vulnerable to any retaliation or any more retaliation on the energy front as a result of Russish invasion of Ukraine. So Europe as ever is unlikely to go completely up the cliff, but it's unlikely to boom and so there's growing concern right now about the price preshous building um, and you know that isn't a very safe

haven either. I guess the real message from all of this is that right now we're not dealing with a beauty parade in terms of decisions about where to put your money. It's really more like an ugly parade, which is an ugly place, and probably the only best option out of all that is a classic investment advice of diversify, hold your breath. Thank you so much to Peter Crass of Aperture Investors and Julian Ted of The Financial Times. Coming up twenty five years after China took back Hong Kong,

what has changed? We had a Debora layer of Edelman Global Advisors. That's next Wall Street Week on Bloomberg. On a stormy night on July one, British rule over Hong Kong came to an end, replaced by the regime of one country, two systems, something they and the last British governor, Lord Patton, had high hopes for at the time. I hoped for the best. You couldn't leave thinking anything but that. I think it's just in the last ten years or so that the things have taken a turn for the worst,

as I think we have in China overall. Twenty five years later, Hong Kong is a very different place. Its economy has doubled, and it is ruled by a China that is more assertive in Hong Kong and in its relations with the rest of the world, with the Chinese Defense Minister warning of possible conflict over Taiwan. If anyone dares to succeed Taiwan from China, we will not hesitate to fight. We will fight at all costs, and we

will fight to the very end. This is the utterly choice for China, and today the United States is using economic weapons, such as trade restrictions to influence China's behavior. As explained by United States Trade Representative Katherine Tie, the China tariffs are, in my view, significant piece of leverage. We need to use our tools more effectively. We need

new tools. Even as President g warns against what he calls weaponizing the world economy, politicizing, instrumentalizing, and weaponizing the world economy, using a dominant position in the global financial system, to wantonly impose sanctions would only hurt others as well as one self. And to take us through China as it is today twenty five years after that handover in Hong Kong. We're welcome Deborah Lair, she's the CEO of Edelman Global Advisory. Debor, you really are a China expert.

Weill always love it when you're on. Give us a sense how China has changed in the laste years. And one way I can start actually is COVID. COVID has changed us all. What about President's Jane's reaction to COVID and zero COVID It's called well, really excellent question, and David, it's so nice to see you again. Thanks for having me on. China has changed unbelievably in the last twenty

five years. As I look back when I was doing trade negotiations at that time, one of the most fundamental um concessions that we got from the Chinese, just to give you an example and put this in context, is the fact that they would actually have to publish their trade laws and only once that we're published were enforceable.

So we've come a long way as they've built a world class legal system and trade system now enforcements a whole other question, but it shows the significant changes that we've seen over time in the development of the economy. COVID is a whole other issue. She reiterated his position

on following a dynamic COVID policy. They have definite concerns about the impact that has had on the economy, but he had reiterated the fact that people were willing to sacrifice on the social and economic cost given the potential of deaths. And China had an article recently in Nature magazine where they estimated that if a macron were allowed to go free, essentially in China, it could result in

one point six million deaths. China is not going to stand for that, particularly in the lead up to the Party plenum, this likely this November. So for She, they now look at what has the impact on the economy. As he looks last year. Last year was a banner year for China. They were the largest source of direct foreign investments. Most foreign companies who were there reiterated they were going to stay. The majority of them were profitable,

They were positive about the prospects. She went into two in a very strong position and with a view that his policy around COVID was the best in the world.

Now hits Ukraine, Brush's invasion world potential recession and then the lockdown in Shanghai definitely was over zealous officials who were going after that, but that had both a psychological impact when it was a city is sophisticated and as crucial to China as Shanghai, but also to the rest of the world, and it's really causing ripples through the economy. We're likely to only see zero percent, well negative growth.

There's zero percent growth in the second quarter, and they definitely will not hit their targets of five point five that they had four this year. But I want to say one last thing too. When Si Jumping made his comments debbling down, and he was in Wuhan obviously where COVID first broke out, to make these comments, the most important thing that the Chinese did was actually put out a policy to try and govern and create guidelines for actions at local officials to take if there's a COVID

breakout in their city. And this is an attempt to address this issue of over zealous officials to limit the economic impact where possible when there are just a few breakouts. So Debora, that's interesting sort of a cabin as it were, some of the activities of local officials. At the same time, a lot of Western experts that we talked to here on Bloomberg say, you know, President's approach on zero Covia is just wrong. He's gonna have to change. You have

to go over to vaccinations. He's gonna have to change his economic approach overall. If you just look at that part, how well China has done compared to other countries. If I can't say whether she honestly believes it's the right policy or not, but there's no question they're not going to change. It has been so terribly helpful, as it always is. I must say thank you so much for being back on Wall Street Week. That's Deborah Lare She's

the CEO of Edelman Global Advisory. Coming up, we wrap up our week once again with special contributor Larry Suburbs of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We are joined thankfully once again by our very special contributor Larry Summers of Harvard. So Larry, thanks for being back with us. Let's start with some of the big news in the economy this week, which is

consumer spending in that states, It is softening clearly. Also consumer confidences down there are those who say that means maybe the Fed doesn't need to hike as much, maybe even they get the cuts sooner than we thought. What

do you think about consumer spending right now? Look, I think we're seeing that inflation which is eroded people's purchasing power, the end of the fiscal stimulus that gave people a lot of cash UH last year, higher interest rates that are discouraging housing and housing allied UH kinds of spending, generalized increases in uncertainty, and just a bit more feeling of insecurity. UH. All of that is taking a toll on spending. My guess is that that's gonna continue for

some time. And I think you have to say that whatever you thought about recession risks a month ago, the recession risks through the year two have to have gone up in a quate material way. I felt for a long time, as you know, David, that we're not gonna have inflation returned near target without a significant economic downturn.

But that downturn could happen either because interest rates UH set by the FED rise very very sharply, or it could happen because of a kind of self fulfilling process coming out of the high inflation and reductions some people's incomes. And the latter possibility is looking like is looking more

likely today uh than it was. And of course, if the economy did go into recession in the next six to nine months, uh, then you probably see a reduction in inflationary pressures and you'd see, uh the Fed probably feel that it had to push rates up less than it would if the economy was continuing to grow strongly and labor was and there was very very strong demand, uh,

pushing up wages and prices. So so I just want to be very precise here because you and I have talked quite a bit about the likelihood of recession this year and next, and you said next year, you think it's much more likely than that, But thus far you said this year maybe not so much. Are you saying, given the data coming in, perhaps a recession or as it gonna downturn, whether it's a technical recession on maybe

coming faster than you thought. Yeah, I think the risks of a two recession are significantly higher uh than I would have judged, uh, six or nine weeks ago. Look David, We've got the first quarter numbers in the bank. UH. They are negative for g d P. There are many forecasters who believe that the second quarter also had negative GDP growth. It's not really the formal definition of recession, but people often say it's a recession when you have two quarters of negative GDP growth in a row, and

there's I think it's probably close to a chance. Maybe it's a bit less than that that we've had two negative quarters in a row. So I think you have to say that the chance that a recession is ultimately dated as having begun UH during UH has UH gone up, going up significantly. We've got time yet the structure of the economy has changed, so I'm not at all UH confident about it, but I would say the nearer term risks have UH certainly gone up. You know, you saw

something in reports. Used to be just target. Now there are reports coming out of other retailers, reports coming out of semiconductors suggesting fairly drastic reductions in demand and fairly substantial build ups in excess inventories, which will then lead UH to things on sale and will lead to reduced production. Larry, one of the things that God US. Here is obviously inflation and the question of supply chain problems, and you've

been emphatic that they are not so transitory. Whether transitory or not, Why are they lasting as long as they are? Why are we getting more employees in airports and more people flying airplanes and all the things we're seeing around the country. By the way, in here in in New York, we're having to shut some public pools because we can't find lifeguards. It's a combination of things. We've restricted immigration in various ways relative to where it was. That means

fewer people here and working. We've got a variety of problems in terms of reliable production and transportation. Uh. Coming out of uh China, we have uh you know, a non trivial number of people with UH long COVID and unable to work. There are a larger number of people who want to do jobs where uh you can uh

work at home. Employers are reluctant to pay what it aches to fill those vacancies quickly because they think it's more profitable to ultimately have some vacancies and turn some people away than it is to raise raise wagses across the board. I think all of these UH things are contributing factors, and I think with respect to airlines UH. While a lot of it is on the labor side, there are also some very substantial infrastructure issues that the country is under invested in UH for a long time.

And finally, Hilarry, we had NATO meetings, maybe historic meetings. They really changed their strategy this week. And I wonder as we look at the war in Ukraine that Russia has perpetrated there, do you think there may be long term really long term effects on the global economies. Certainly have been the short term. What about longer term? Well, historians will debate whether the Russia Ukraine war as a cause of big changes or was a consequence of tectonic

forces that has been operating for some time. But I was very struck when you had a NATO meeting that for the first time invited a number of countries in Asia to participate in it and identified UH China as a security risk that had to be UH prepared for alongside Russia. It did very much have the feeling of a world that was forming blocks and choosing up teams,

not unlike or in some ways not unlike UH. The alignment that existed uh in the fifties and UH the six to East when Russia and China were allied and there was a mobilization of Western countries along with some Asian countries against them, and that seemed to be away in which things, uh, things were moving. And that's gonna be a quite different world than the world we've had for the last twenty five or thirty five years. Okay,

thank you so very much. The Larry Summers at Harvard are very special contributor right here on Wall Street week Finally, one more thought the potentially toxic mix of politics and sports. It's the long Fourth of July weekend in the United States, that summertime holiday when we look forward to fireworks a company in Boston, by the famed Boston Pops concert on

the Charles River, two politicians giving speeches. Today we celebrate America, our freedom, our liberty, our independence, to picnics, and not least to sports, whether it's baseball with both the Yankees and the Mets on top of their divisions, or golf John Dear Classic out in Illinois, or the early rounds of Wimbledon. I think the last couple of points that was really suffering there tirant now. So, with the country seemingly more divided than it's ever been, defriding the electoral account,

I believe we can fix it on the way. I'm with all of you. Let's do this together. It's a good time to put all that political strike behind this and just get caught up in the game. Right. Well, maybe not so fast, because it turns out that even as you root for your favorite athlete or team, the powers that be maybe angling to use your sports to get their own edge, an edge that goes way beyond

the points. Read take Wimbledon for example, this year, competitors from Russia and Belarus will be barred from competing as punishment for Russia's invading Ukraine. That I feel good being at the tournament without having to see players from that country segain and China has just changed its sports law to authorize retaliation against anyone who shows the Middle Kingdom disrespect,

though what that means is anyone's guess. And even golf isn't immune from politics, with a major feud between the p g A and the upstart Live Golf, which is back by the Saudi Well Fund. The PGA tour in American institution can't compete with a foreign monarchy that is spending billions of dollars an attempt to buy the game of golf. And it turns out none other than the former golfer in chief, One Donald J. Trump, as he welcomes the tour to his home course in Bedminster, New Jersey,

hun July twenty nine. But all that's almost a month away. In the meantime, let's try and leave politics out of it and just enjoy the holiday that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week. M