Bloomberg Wall Street Week: Ketterer and Sonders

Wolf Street Weet with David Weston from Bloomberg Radio. Rising recession concerns, a budget moved to the center, and the killing continues in Ukraine. This is Bloomberg Wall Street Week. I'm David Weston. This week's special contributor Larry Summers on what happens when you run the economy hut for the

sake of employment. We do not do anybody a favor by overheating the economy, because when we overheat the economy, the chickens do come home to rush and former IBM CEO Sam Pomisano the opportunity for the United States to form a new coalition to compete with China in tech. I caught the Super Bowl. Geopolitics, the US needs to

leverage the world. It was a week of anticipating what didn't happen, at least not yet, with encouraging reports on possible progress in talks between Ukraine and Russia giving way to skepticism and disappointment. We can say that the signals we hear from the talks are positive, but these signals can't silence the explosions of Russian shells. We'll see. I don't read anything into it until I see what their

actions are. Kremlin very much downplaying now the outcome of peace talks in Istanbul, a spokesman for the Kremlin saying that has been no breakthrough, even though Russia pledged to scale back some military operations in Ukraine. It was a week when the Biden administration gave us a proposed budget that anticipated in producing the deficit but not the debt. It's a laundry list, it's what we believe in. It's almost a campaign speech if you think of it that way.

Knowing the White House knows all too well that this will be uh twisted into a lot of different pretzel pieces before this ever becomes a long This budget has a plan to borrow a fourteen point four trillion dollars in deficits over the budget window, which is ten years. And it was a week when former New York Fed chair Bill Dudley warned about the danger of a recession.

Every time the unemployer rate goes up by more than a half a percentage point, the next stop is a full blown recession, and pros like Mike Schumacher of Wells Fargo kept an ego eye on a yield curve inversion these times. It's very for a nano secondary said yesterday, but we think the curve gets substantially inverted very quickly. And if you look at what the bond market is telling us and fowards something like minus thirty minus thirty

five at the end of the year. Those are day numbers Mike Schumacher was talking about in Nanasaka on Wednesday. But by Friday we got that inversion as yields on two year treasuries rose above that on tens after the ten years sold off in response to the jobs numbers coming out on Friday, which were pretty robust numbers that took the unemployment rate down to three point six percent. And this came on the heels of a quarter that ended on Thursday with the biggest drop and treasury bonds

in history. In the face of all this, bond action equities actually were prelatively well behaved, with the SMP five hundred, the NAZAC up a bit and the down down a bit, and the price of oil, which has been driven by the war in Ukraine, fell the most in two years after present Biden announced he'd be releasing a million barrels a day from the Strategic Patrolling Reserve to helps makes

sense of all of this. Welcome now, Sarah Kett, CEO of Causeway Capital, and liz Ana Saunders Charles Schwab, Chief Investment Strategies. Lizien, let me start with you to make sense of all this. It was a tumultuous quarter and a pretty eventful as well. What are we learning from

all this? Clearly, the the inversion of the Yeld curve, which couple of days ago it happened briefly in tra day and didn't close at that level, has I think garnered most of the attention, certainly a lot of the financial media attention, and and lots of confusion about what it actually says about the risk of recession. I think anytime you have an inversion, anytime you've got a FED moving from extremely easy policy to tighter policy, you need

to dust off the checklist for a recession. But to see the market behave somewhat resiliency is actually not out of the ordinary yield curb in versions of historically generally seen rising equity markets. It's really not until the point where recession seems like a higher likelihood do you run into trouble. But I think we're in a relief rally relative to the correction that preceded it. I wouldn't bank on it continuing uh with without another bit of a pullback. Sarah,

do you believe the really Foley? Is it here to stay? It all depends, David, on what real interest rates do. So it's very important to note that its inflation is rising. We're seeing and this particularly acutely an issue in Europe and in the US. Real interest rates are going more negative and that creates more fuel for equity buying. So that's one of reasons why we keep fully invested, because we want to make sure our clients get access to what the only place you can put money is in

equity markets in our view. And also note I mean there's plenty of bad news, but oil price shocks historically in the seventies, early nineties, in uh in two thousand, they're not always followed by weak equity markets. That those two are not correlated. So there are reasons to be

optimistic in what looks like a very dark environment. So Luzienne, I wonder in the face of these negative real rates that we just heard about from Sarah, as well as oil shocks at the moment, there's a lot of talking about the seventies where we had over stimulus and then on top of that oil shocks. It really does raise the question about the inflation. Negative real rates indicate we still have our foot on the accelerator at the break. How far do we have to go to slow down

this economy to get inflation under control. Well, even even Powell has said he's willing to accept a recession as a as the end game associated with finally bringing down this inflation problem. I don't think we're really looking at the seventies type of environment. I think there's more differences between today in the nineties seventies than there are similarities.

Stagflation I think used with a lower casees. Generically maybe as appropriate given weaker growth and high inflation, but really what that represented in the seventies was a high and rising unemployment rate, which is clearly different than the current environment. And Saunders and Sarah Ketty will be staying with us as we come back and look around the corner to what's coming up, not just next week, next next quarter,

but down the road. This is Wall Street Week on bloomber This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. I think one of the nice things about this environment is that with all the carnage out there, with so many of the smaller companies and the less well capitalized companies and the less well managed companies are starting to really have difficulty in some cases going out

of business. And I think this environment is going to afford the bigger, well managed companies the ability to pick up market share and in many cases maintain their dominance. It was one favorite that you think still has a ways to go. I still like Microsoft, speaking of the behemoths and a o LL although I wouldn't have sort of considered that a technology company anymore. That was our very own Lizana Sanders appearing on Wall Street Week with Lewis R. Back in two thousan when A. O. L

was still a behemoth. By the way, Losan has remained with us along with Sarah Ketder a Causeway Capital. So we've had a conversation about what's happened this quarter, what's going to be coming up around the corner here. But let's look down the road, Sarah, let me start with you. Where is there cause for hope. We've got a lot of concerns about inflation, about the tightening we're expecting plans, and by the way, we still have a war going

on where people are dying every day over in Ukraine. Well, what are some of the possible upsides for investors down the road? Maybe perhaps not too far down the road. And I hinted that before the break are the pandemic recovery stocks. They were certainly hit very hard and had a false dawn in early one and then the omicron

variant UH gripped them again and dragged them lower. They rallied a bit, and they were doing very well from January of this year until February, particularly the ones in Europe, and then we had this as you note did this horrendous invasion, so that UH really hit these stocks hard. Some of the great airline companies, like one of the best discounters in the world, Ryanair, crushed. And these are opportunities for investors because we can't assume that invasions last forever.

And this pandemic is thankfully dissipating. So there are other ones in aerospace, travel and leisure. You can find airport companies, aircraft engine manufacturers have only one or two competitors, like it's a This is where active management gets very excited. As you can tell, they there are pandemic recovery stocks

out there. They're in food, catering, and retail. They just need they need the uh, the mass to be off, the people be out again and then UH and as we discussed before, not too great of an inflation head when cutting into their discretionary spent. So listen, In addition to possibly the pandemic recovery, you may agree with exactly what we just heard from Sarah, but there's one other

factor I wonder about. That's fiscal stimulus. Right now, we have essentially a d stimulus because we're coming off of so much fiscal stimus. And I say it's at the same time that horrendous war in Ukraine, the goodness knows we want to be over soon. At some point will be over and they'll have to be the need to invest a fair amount. Could that be a potential fiscal students,

at least in Europe. Yeah. I think the the investment story along your term not just driven by the terrible tragedy going on in Europe right now, although that clearly will stimulate some investment, whether it's energy infrastructure, UM, food infrastructure, not to mention the rebuilding of actual infrastructure in Ukraine, but even prior to that, I think what the pandemic brought about was the necessity of investments in certain areas, and there was so much low hanging fruit of inefficiency

in UH quite a few segments of our economy, healthcare, education, and I think the necessity of sort of stepping up and becoming more efficient and investing in digital driven by the pandemic, I don't think kind of goes back under the rock. I think we have unleashed what is likely to be an era of of stepped up investment and probably along with it higher productivity. It doesn't prevent a

possible recession. In the near term. But that's where I think there is sort of a shining light when you think longer term about what may come out of the combination of both the pandemic and the war. It may even the medium term to the degree that that digital spend is so necessary that will take precedent even when other if there's some sort of curtailment of capital expenditures, companies have to make that transition, and they need to do so globally, So we think of that as somewhat

non cyclical part of the whole technology spend. Lissen, I don't think I know many people who are rooting for a recession, although as you suggest, a lot of people have to be prepared for the possibility of it. But is there a potentially if I can say that upside potential to some creative destruction. I think that's what you

were talking about. Whenever you have a lot of money slashing around, some bad decisions that made, if you take some of that liquidity away, then actually people have to make some tough decisions and maybe you sort of maybe the sheep from the goats. Yeah, I think there have been some maybe unintended concept onnes is of this massive amount of liquidity, whether it's a mispricing in various markets and asset bubbles. So I think there's a benefit that

will accrue there. And then, as we already touched on the unfortunate possible necessity of constraining aggregate demand in order to rein in the combination of the supply chain problems and and just the feeder effect it's having on on pricing and inflation, we may need a recession to calm all of those forces, and it may not have to be a particularly deep one. But I do think what we're looking at is a more kind of normal cycle. If we're heading into recession, what it looks like it

causes of it being tighter monetary policy. That's sort of traditional that the last cycle, the COVID recession, the aftermath of it, um there was no playbook for that. That was incredibly unique. I think this next cycle, both into the next recession and coming out will be a little more I don't want to say garden variety, but a little more in keeping with your typical recession recovery type cycle. So, Sarah, give us just a little taste of your secret sauce here.

As an investor, somebody who maintains the portfolio. As you take a look. You've talked about things like coming back

from pandemic. That's sort of a structural thing across the board as you try to figure out which companies really are being run well and efficiently, are making sensible decisions, what do you look at and what other companies giving an example or two, Well, just to take up what Lizzen just mentioned, to the degree we've got we're going to see a typical recovery or typical recession recovery, then let's find those stocks that tend to do well in

that environment. So what doesn't do well initially as you head into the bottom of the economy, and I'm speaking really for everything ex China, The rest of the world is lodging on the same monetary policy cycle meaning tightening. Other than China and UH banks, other financials, they tend to bottom somewhere as as we get into that significant amount of tightening and the recession takes hold, and then they rally very strongly. May remember they're really part of

two thousand nine unbelievable performance. So if if history is going to repeat itself, what Lizan says is correct, which I agree with this is a little more normal, a little more then then those will be good stocks to own. And the most bombed out ones are in that part of the world has really been hit hard, which is Europe, so European financials. And you could also go with the

energy transition. One of the silver linings of this horrendous energy disruption is the greater need to accelerate, then move to low and then zero carbon type renewable energy. And some of the European utilities are expert at this and they're trading more six percentivity fields. Thank you so much for Liziane Saunders and Sarah Header. Coming up, what does a post sanctions world mean for tech competition during China and the United States. Where we find out from former

IBM CEO Sam Palmisano. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Hundreds of thousands of people who are being cut off from help by Russian forces placed like Mary stop. It's like something out about science fri. President Biden described the death and destruction we're seeing from Russia's military invasion of Ukraine during his recent trip to Europe.

But this war goes beyond the military is being fought in the markets as well, with the US and its allies imposing severe sanctions on the Russian economy, something Ukrainian President Zelinsky says is the only thing likely to get through to Vladimir Putin. There's no other language than if efficient sanctions that Russian leadership can understand that Woolmarstian has to be cut off from the means of existence. And when it comes to the economic battle, it's not just

the United States versus Russia. China plays a crucial role that made it clear to him that makes sure he understood the consequences of him helping Russia. But I pointed out the number of American and foreign corporations left Russia as a consequence of their barbaric behavior, which poses a difficult question for President g who has pledged to support Mr. Putin but has to keep a careful eye on his country's role in the global economy, which Nobel Laureate Michael

Spence says he is surely doing. China understands something that President Putin doesn't seem to understand, and that is that any economy, even a big one like China or even the United States can't perform and anything like its full potential in isolation, and so I expect China to sort

of move carefully and and try to thread needle. But to avoid a scenario in which we start dividing the world up into blocks when it comes to international economics and particularly when involves technology, we turn to our very special controller. He is Sam Paul is not a former CEO of IVM. Thank you so much for being with us, Sam. So we're seeing a lot of changes in trade patterns, in economic dealings, in payment systems around the world because

of the war in Ukraine. Talk to us about what specifically that may mean in the area of technology, whether it's Russia or China, depending on which way China comes down. Well, David, it's actually an excellent point, and I think that the the sad controversy of the Ukraine is just accelerating transition

or changes that I believe will potentially occur. I mean, as you know, everybody's talking about Russia, but also the implications in the US China relationships, and there's no doubt about it, and there's a lot of speculation that China and the US will separate economically, Uh, I really don't think that will occur. The reason I say that is these economies are too large and too to are connected to the world. You mentioned payment systems, full of capital,

all those things these economies are dependent upon. So I don't think separation totally occurs. However, as I say that, there's no doubt I believe that when it comes to technology and future technologies, there's gonna be competition between the two countries. And that's more so I'll say China uls I mean, Russia really doesn't have the kinds of technologies

that we're talking about. But if you think about things like semiconductors, artificial intelligence, quando computing, cyber computing, clearly there's going to be competition, and therefore I think that'll be less collaboration between China and the United States. So if that happens, because it certainly looks right now like that's where it's heading. We're not heading to a one big globe where we're all the same, we all do with

each other, maybe more separation, particularly areas like tech. If that happens, how are we and for we for the moment, I'll say the United States situated because some people are concerned that China, for example, has really been investing a lot more in tech than we have been. There's no doubt about it. I mean, I think last year alone is one point five Trilly and Burnt estimates in range. So yes, China is out invest in the United States.

They're not out investing the West. And I'll comment on that a little bit, but I mean, as you think of it, it's on this US China focus. I mean, I call it the Super Bowl geopolitics. You know, it's the Titans. Uh if you look at it today. To use a sports analogy, the US is about a three point favorite in the game going into the game. However, China is spending a lot and they're catching up. Can big kick have a heck of a fourth quarter? So my point being in that analogy, David, is the fact

that the US needs to leverage the world. If they could come together and optimize their focus their investments, I think they clearly could continue to lead and out compete China. So saying I want to come back to if they can come together, because that could be a big f But let's assume that could happen. Who's on our team? So to speak to continue your Super Bowl analogy, who

are the major players in tech on our team? I think the major players if you go through it, I mean there's if you look at the take semiconductors as an example. I think it's a good example. Everybody's focused on manufacturing capacity called FABS. That's important because there's such a dependency on Taiwan and your concerns and risk over China to Taiwan Taiwanese relationship. Having said all that, there's

there's different elements to the ecosystem and and semiconductors. There's fabrics, there's the tools to fabricate, there's the design tools, there's the materials, there's packaging, and there's great expertise, especially in Europe. Europe has great research and great expertise in many of these areas. South Korea and Japan has great expertise and the manufacturing tools and manufacturing side of the house. So my point being is that if you look at the capabilities,

the US certainly leads today in design and packaging. There's no doubt about and the research capability. But you combine these capabilities between Europe, mostly Germany, Japan, UH and I say it's really South Korea and Singapore. But you know those countries, within those regions, you can see how this thing could align. Okay, Sam, thank you so very much, really appreciate and Dela say Sam. Paulmisana is a contributor to Wallstree Weekend. Of course, he's the former CEO of IBM.

Coming up, we wrap up the week with 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. We're joined again this week by our special contributer Larry Summers of Harvard. So, Larry, we got jobs numbers out at the end of the week

on Friday. Strong job numbers once again. Also by the way, I should say strong increases in wages at the same time, that doesn't raise the question whether this economy maybe even more overheated than we thought. Look, I think the single most important statistic for judging overheating is the ratio of

vacancies to unemployment. And with these Jolts numbers and these unemployment numbers, that statistic is going to be plumbing new highs uh in the in when it's next calculated, and that suggests even more tightness in labor markets, and I think that points towards UH even more inflation. So I think near term we've got to, if anything, a bit greater inflation concerned UH than we had before we saw these numbers. Of course, it's good that the economy is

looking relatively strong. I think if you were in doubt as to whether the previous weakness was fundamental or was caused by omicron, this would tend to tilt you towards thinking that it was caused by O Macron. But look, labor market indicators are always contemporaneous. We're lagging, so we don't know what the future holds, and certainly there are worrisome signs in terms of what's happening with consumer sentiments.

But for now, I would say these are relatively inflationary numbers, and that's how markets look to be reading them, with significant movements towards you curve inversion. Larry. At the same time, you'd be the first to say these jobs ms are good for the people who are getting jobs, and particularly some of the people at the lower end of the spectrum,

which is something we should be concerned about. Is there no way that we can both take care of those people, make sure they're employed, that they are getting paid fairly, and not overheat the economy. David, Look, this is why the earned income tax credit is such a good idea. This is why I've supported increases in UH minimum wages. This is why we need stronger programs for people who

don't go to college of UH many kinds. But we do not do anybody a favor by overheating the economy, because when we overheat the economy, there the chickens do come home to roost at some point, as the inflation has to leave UH the system. And so I think that this idea that we simply cheer on more and more employment without thinking about the inflationary consequences is like a doctor who celebrates the results of the prescription of their pain killer without thinking about what's going to come

down the road. I think the FED, too late, has awakened to that and is moving towards the strategy that is much more oriented towards tightening. Larry, let's talk about those chickens maybe coming home to rus. There is talk about a possible recession here. You and I have talked about that. This at various times. I know you've focused on historically one of the issues about the four percent number, under four percent unemployment in the same to you have

over four percent inflation. We also had the yield curve, the twos tends yield curve invert a couple of times this week, including after the job's nevers came out. Do you pay much attention to yield curve at this point as a predictor of recession. I pay a little less attention to it than people in the markets. Uh do, And I think it's important to understand that it's not a causal relationship. If it exists, it's a canary in

the coal mine kind of relationship. So it's not that changing the changing the tenure interest rate, if you could do it in some way, will change the prospect of recession. Rather, it's that when people are forecasting that the fan is going to be cutting rates, they're also forecasting that that's going to happen because there's a recession. So it's a

correlation thing, not a causation thing. I think that what's happening with the yield curve adds to a sense of economic anxiety that in situations like this Historically we have not achieved soft landings, and we have seen recessions. Is it a certainty that will see a recession in the next two or three years. No, is it more likely than not that we will see a recession in the

next two years. I don't see how anybody can look at either the historical experience or what markets are predicting and not think that it's fifty fifty batter than fifty fifty that a recession will start sometime within the next two years. Larry, we also got the budget from the White House at the beginning of the week this week,

and everybody agrees it's aspirational. What is sent out as the budget from Whiteos does not actually become law, but it does reflect values, as person after person with the White House reminds us, what are the values that you saw in prison Biden's budget. So I was glad to see increases in the defense budget. I was glad to see a substantial indicative commitment towards doing something about COVID. I was glad to see uh an emphasis on mental

health as a theme in the budget. I was glad to see open mindedness, um and open to complete negotiation on the remnants of build back better rather than represcribing uh all of uh that expenditures. Those were all I thought, UH positive steps. I would have liked to see more realism on the tax side. I think the billionaires tax is a bad idea whose time will never come. I think it's mislabeled to give it a kind of populist

appeal relative to what's being proposed. I think the general idea of taxing capital gains when people don't have those capital gains and haven't sold the assets is not a realistic one. I think a much better strategy would have been to concentrate on a variety of loop whole issues capital gains at death carried interest, which the administration has still not gotten uh done changing like kind exchanges uh

for uh real estate. But the single most important thing, even if nothing else happens, is that the historic bit of economic diplomacy that Jenny Yellen concluded on corporate tax with other countries is enabled by the necessary US legislative action, Larry.

If you read the facts she put up by the White House earlier this week, they lead with fiscal responsibility, the fact that they would be reducing the deficit at the same time, you look at the projection over the ten years that they do for budgets, actually, as a percentage of GDP, the debt grows from something over to something over one. Is that sustainable for the United States? It's worse than that, David, because the intrast rate for hasks in the President's budget look comical today in light

of what's happened to interest rates. That's fair enough they lock in those budget forecasts months in advance. But my guess is that if you used realistic forecasts, you'd add another five percent to the debt to GDP ratio. I suspect, given what's happening to interest rates, that there's going to be a need for more fiscal adjustment than the administration imagines. I suspect the administration has underestimated the national security expenditures

that will be necessary going forward. And I think we're moving towards a moment when we're gonna have to start thinking about fiscal policy as well as monetary policy as an anti inflationary UH tool. Thank you so much for our very special matrinity to Wall Street, Ricky's Larry Summers of Harvard. Finally, one more thought, learning from our mistakes

or not. All of us can make mistakes, and sometimes when we go back over them, we cannot believe what we were thinking, or maybe what we were not thinking. And the big banks certainly are no exception to this rule. There's the London Big Whale fiasco JP Morgan that led to the end of senior executive Aina Drew's thirty year career. I accepted responsibility for the events that happened on my

watch in one of the portfolios in my division. And there's Deutsche Bank in two eighteen mistakenly transferring thirty five billion dollars to your ex clearing, which was more than the total net worth of the bank at the time. Germany's biggest lender has sent about thirty five billion dollars to an exchange as part of its dealings. They already have problems with risk management. This is not a headline.

Flow is a polite way and put yet, thirty billion dollars just sort of walked out the door to City in the height of the pandemic, paying over five hundred million dollars to Revlon creditors, despite a fight over the funds money that it could not get back. City Group and unexpectedly lost its legal battle to recover half a billion dollars it mistakenly sent to Revlon Landers Is to lead us blow to the bank that's been forced answer

to regulators and time its internal controls. Mind you, this all comes after Congress decided to make sure those banks were paying attention, giving us all the protections of a law called Dodd Frank. Because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes. So it must have been particularly painful to Barclays this week when it found out that it had a tenC weed see clerical error in selling more in structured notes than the sec had given it

permission to sell. You see, it had asked for and received the okay to sell twenty point eight billion dollars worth of these securities, but apparently someone wasn't paying attention and kept selling the way past the point they were supposed to stop, like the tune of thirty six billion dollars dollars, leaving Barkley's with an estimated loss of five ninety one million dollars. I just think it's just a simple finding area, like they forgot to add an extension

to the shelf full. And that's very embarrassing. Um, you know, logistic, Glara. The financial head is bad, but you know, fairly manageable. It's more of the reputational head. It may be April Fools, but this one is no joke. Certainly enough for Barkley's management. Let's see what we can learn from this one. That does it For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.