Bloomberg Wall Street Week: May 27th, 2022

eyes of the most influential voices. Larry Summers, the former Treker Secretary, Katherine Keating, CEO of v n y Moins, Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg wool Street Week with David Weston from Bloomberg Radio. A week of big moves in the market, a big gathering in Davos, and a big signal from the Fed. But in the end, it was a tragic shooting in a small town in Texas that cast the biggest shadow over it all. This is Bloomberg Wall Street Week. I'm

David Weston. This week's special contributor Larry Summers on whether bad news in the markets and the economy is good news for the Fed? Humility is the right posture with respect to uh monetary follows see and Blair Afron a centerview partners on whether things really are as bad as they sometimes seem I've never seen, as Murky Turide has written right now. Sometimes the biggest events don't move markets,

but they do overshadow everything else. And this week it was the killing of nineteen children in their elementary school classroom in South Texas, provoking anger from President Biden. Why are we willing to live with this carnage? Why don't we keep letting this happen? Time to turn this pain

and at you. But as much as the tragedy held our attention this week, there was a lot going on elsewhere, like in Davos, Switzerland, where the great and the good of business and finance gathered once in again, and we heard about everything from Madame Legarde on the odds of a recession. For the moment, we are not seeing a recession in the ur area, the Bank of America's Brian moynihan, and the strength of the consumer. In the first two weeks of May, the consumer spent tempercent more than they

did last May. And that's over top of the payments that went out to pay taxes. To Fidelity CEO and richards On the global food crisis caused by the war in Ukraine. One of the things that has been really constructive about the conversations this week is how the risk of a food crisis has gone right up the agenda, and George Soros on whether the war could end it all. The invasion may have been the beginning of the Third

World War and civilization may not survive it. And while all those bold faced names were talking in Davos, we got the minutes from the FEDS May meeting showing that by raising rates now they may have more flexibility later on. I'm not sure how much the Fed is really moving

this market anymore. This is a market, I think, kind of running on fumes and looking for a direction from anybody, and they're not getting there from the Fed, right And whether it was the hint of a let up from the Fed or just wishing our ways toward better times. The equity markets finally broke their downward trend, with equities across the board up for the first time in eight weeks.

Both the SMP and the NASDAC were up over six point five percent for the week, giving the SMP it's best rally since and that risk on sentiment carried over to bonds as yields on the tenure gave up four basis points end of the week under two point seven four to take us through what, if anything, we learned from the markets this week. Welcome now, Ben Inker. He's gm O co head of asset Allocation, and Liza Saunders Charles Schwab, chief investment Strategy. So listen. I'll start with

you are happy times here again? I think it's too soon to tell looking at a one week rally after seven weeks of pretty significant carnage, is is more indicative of a counter trend move the types of rallies you tend to see in bear markets. I think it's premature to look at this either from a technical or breath perspective and suggests that it marks the beginning of a new cyclical uptrend. Uh, this is just natural to see

this kind of pressure. I think you know, as someone ironically, it was the weaker economic data to a large degree that change the perspective or the narrative as it relates to FED policy to maybe they have some flexibility to pause after the next couple of rate hikes. But I think it's also premature to make that assessment. So Ben, I know that you're a longer term investor. You don't just look week to week. But did we learn anything about that issue, about whether it's a soft landing or

a hard landing from what we saw this week. I don't think we learned anything that's that determinative. We've seen some evidence that there are parts of the economy that are softening. I mean it's most clear in the housing market, and that's the place most heavily impacted by what goes on in rates. So uh, you know that shouldn't have been a surprise. I'd say from the consumer perspective, the consumer still seems to be pretty strong. Um, we haven't

seen strong evidence of the consumer pulling back. So I don't think we've seen anything that should really cause people to have said, Okay, great, we're gonna have a soft landing. We're not gonna have recession, We're not going to have continued inflation problems. But as lis Anne was saying, man, it has been a really long run of the market losing week after week. Uh. And markets almost never moved for long periods of time just in one direction. There's

always volatility. Lisenne, I wonder what it told us, if anything, about the possibility of recession. So clearly the Fed doesn't want to engineer or drive us into a recession that they do concede at maybe the the price in order to narrow the gap between demand and supply in a monetary policy can sometimes be a fairly blunt instrument, and really all they can control right now is the demand side.

I think the path to a soft landing would be the supply side easing up, not just supply chain disruptions but also the supply of labor, and that doesn't appear to be imminent, but I think that's probably the primary path to a soft landing. Otherwise, I think the conditions in place right now, the kind of early deterioration that we're seeing, have the needle pointing a little bit more

toward recession than soft landing. The last thirteen rate hike cycles, you've had their ten recessions and three soft landing, so simple history says that it's more likely this time. And with a forty year high in inflation and the simultaneously trying to shrink a nin trillion dollar balance sheet, it's hard to suggest at that points the needle more towards soft landing, but there is a path in that direction.

Liz Ana Sanders and Benanco where We're staying with us as we turn from what the markets did this week to what we should do with the markets going forward. That's next on Walter on Boomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The market end of the week in a sinking coma that made it clear that the worst economic shortage of all was

the shortage of buyers. On Wall Street, it was a week that we called the words of Otto H. Kom, a famous financier and art patron who once described finance as an old lady with shaken nerves. That was Lewis Orchiser, of course, on Wall Street Week back in nineteen seventy three. Lis An Sanders of Charles Schwab and Ben Inker of GMO have stayed with us. So Ben, I don't know about a nervous widow with uh daily With the markets this week, in fact, it was up, not down. At

the same time, the market has clearly been nervous. How do you approach this, and particularly I read with great interest you're talking about a so called growth trap. Yeah, I think you know. As a value manager, one of the things that happens to us all the time a client comes in, our prospective client comes in and says, oh, you buy value stocks, how you avoid value traps? Um And it's a perfectly reasonable question, because value traps are

a pain for value managers. But what people don't seem to focus on is those same kinds of stocks exist in the growth universe as well. Right, A trap is just a company that winds up not doing as well as investors were expecting, and those stocks actually turn out to be more painful if they were growth stocks, then if their value stocks for not such a weird reason. Right, If your value stock nobody expected all that much from you,

they're still disappointed if you do even worse. But if your growth stock, if people were expecting wonderful things out of you because you are Peloton and we're going to sell a bike to everyone on earth. When you fail to live up to that, there's two problems. One, your fundamentals are worse, but to your valuation drops right, that

growth premium you had you're no longer worthy of. And whether you're Peloton, whether you're a Netflix, uh, whether you're the whole series of growth stocks that have turned out to be traps in the past year. One of the interesting things that's gone on in the past months is this has actually been the worst year to be a disappointing growth stock relative to growth stock. So, right, it's

gonna allows a year for growth stocks. Fine, but the stocks that have done excessively badly relative to the rest of growth are those growth companies that are disappointed. Um. And we we think if you're gonna be hiring active managers, um, it's important to recognize they're not going to be right every tie. Uh. And one of the things that people are only relearning pretty recently is, yeah, it's really painful as a growth investor to turn out to have been

wrong on a stock. And we think that that pattern of growth traps doing particularly badly is set to an u for a while. So listen, what about that. Obviously, when you talk about grows stalks, there are a lot of things included on a wide range of different companies at the same time. In a world of rising rates, rising interest rates, all the things being equal, which they never are, growth is going to do worse because you're

dis kind of that future cash flow, aren't you. Well, and especially in an environment where some of these so called growth stocks are actually the nonprofitable stock, they don't have any earnings growth, they don't have any earnings. And I think when you combine that, which those types of stocks, whether it's nonprofitable tech, they were very narrative driven. They really represented one of the pockets of where speculative froth

was the primary driver. And in this part of the cycle, those types of companies, those longer duration you know, eternal duration stocks, as you wait for that earning stream in a rising inflation, rising interest rate environment, get absolutely hammered. The one thing I'd say, and I it's a little bit different a take on the idea or concepts of

growth and value. And I often describe it as lower case the and low work case G is investing based on the fundamentals or characteristics or factors of growth or value. In fact, you know, Bloomberg does amazing work on factors. And if you look over the last three months, over the last six months, sort of this era of tighter

monetary policy, high inflation, rising interest rates. What's interesting is even within segments of the market that are mostly housed in the growth indexes tech, consumer, discretionary, communication services, it's the value oriented factors that are working that are leading meeting stocks at that trade or stocks that screen well on those types of factors, whether it's strong free cash flow, yield,

strong balance sheet, lower volatility, they've been doing well. So I think sometimes investors have to take off the blinders when they think about growth and value, because you can look for value in areas that happen to live in the growth indexes. And there are times where and stocks that live in the value indexes don't offer a tremendous

amount of value. Utilities, which have been popular stocks because of the defensive nature, are now trading at a record or near record positive or or or a premium from a p perspective to the SMP five D. So, Ben, I'm curious about your reaction that I suspect you might not and tell you disagree because you talked about active investing.

You were saying be careful about growth stocks. At the same time, there are these elements such as goal fashioned cash flow and balance sheet and and volatility, and like that within the growth sector, there may be still some goodbyes. Yeah, I mean, well, first of all, they're almost always are right. It is. It would be weird if an entire half of the market and growth and value tend to be defined by half if there was nothing worth owning. UM. So even a year ago, there were probably some growth

stocks that were worth owning. And I would say, we've got we have a strategy that we've been running for the last year and a half where explicitly long undervalued stocks in short overvalued stocks. And one of the things we've found in recent months is some of the stocks we were sure a year ago are showing up on the long side of our book, um, because the market has really fallen out of love with them. UM. And that's a natural you know, that is a natural process.

And and one of the things about growth and value and that people tend to forget they are always dynamic strategies. Right you buy, you buy a value portfolio. You come back in a year and some of those stocks aren't value anymore. Now, oftentimes those stocks that aren't value, it's a good thing because the market and say, oh, this is actually something pretty cool, and the valuation goes up

and they graduate to the growth universe. On the growth side, what you really want is for those growth companies that you owned at the beginning of the year to still look like growth companies at the end of the year, because if they doll, it's probably because something like bad has happened to though, And that's a piece people don't tend to recognize, especially when they're talking about a start duration difference between growth and value. I want to give

you the last word. I was sorry of curveball. Here's a curve ball is the real answer here. We should all lower our expectations for what they have been, what we should expect from our portfolio. Uh. You know, there's nobody that I know out there that does long term capital markets expectations that has a lofty number in keeping with say that that ten years leading up to the pandemic, or even the ten years up until the end of

last year. So I think just where we are in the cycle, the fact that household ownership of equities is as of UM the end of the year UM, even through the first quarter, was at a record high level. That that doesn't bode incredibly ill for subsequent tenure returns, but it does suggest curb your enthusiasm for access returns. Okay, many thanks with Luzian Sanders Chara and the Ben Inker of g About this is Bloomberg Wall Street Week with

David Weston from Bloomberg Radio. Okay, we knew it was coming, but somehow it's still surprised us. We had pumped record amounts of dollars and yen and pounds and euros into the global system, all to keep it going through a financial crisis and then a pandemic. As justified by then FED chair Janet Yelling at Crescent, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth

and employment. And then we added trillions of dollars of fiscal stimulus, including that American Rescue Plan. President Biden convinced us we just had to have for each dollar this tax cut cost, it returns eight dollars and benefits. Found the line, it's a gigantic helmet's an eight to one return. But now the time has come to cut down on all that stimulus. On both the fiscal side, we should not put more stimulus spending into the economy because that

is what generated so much of this. And on the monetary side, if you want to tighten policy, you have to raise interest rates by more than inflation went up, leaving us to debate just how bad it could get. Supply sharks, demand chalks altogether mix it in one. Of course, it is unclear at this moment in time when it comes to getting us that's what's really going on in the markets and in the business world. There's one person we really love to turn to. And then as Blair Fron,

he is the founder, co founder and partner in Centerview Partners. Blair, thanks so much for being with us. So we had a lot of stimulus go into the market, fiscal and monetary. We took it out and now people are really almost in a panic. Some people worry about where we're going. What is your sense of where we are if it? First of all, life for having me on. And obviously everything is a lot more murky than the last time

I was on. So what I would tell you is this one I've never seen as murky at period as we're intten right now, I think the answers across the spectrum, we're gonna a lot more than the next two months. Let's define first what we're looking for. Everybody talks about slowdown versus recession. Remember, recession, at least by our traditional definition, means two quarters of negative GDP growth. I don't think

that's going to happen. I do think there's would be three or so data points that we're all going to pay close attention to in the next two months that have to show decent results. Obviously, inflation. Let's assume that the Fed funds goal public goal of two to two and a half percent is going to look light, and it's somewhere between three to four percent before it's all done. To be at the better end of that, you're gonna hope to see inflation publishing with a seven by midsummer

and with a six later in the summer. Second, the energy prices, did they hang in where they are or did they go higher? That's howays going to be a big influence to give us the pump. I would note that the biggest companies, the biggest the oil majors, have not increased their production budgets, which kicks in our intermediate terms that they're telling you that uh. In some ways today the belief is it's big cycle. And finally, where is housing going to be? Mortgage rates two plus basic

points in just a few months. The last time we saw that cooled housing down about weed hasn't do better. To the extent this all happens. I believe that we will be in a period of slow down, certainly, but that there's enough tailwind in different parts of the economy to keep this from being uh going to a full blown recession. So we're certainly saying a slowdown, let's put it wildly. In the equity markets has been really a roller coaster, but down substantially this year. Is that translating

into your business? Our CEO is less eager to make deals now? Absolutely. I would say that the biggest factor in deal making is going to be confidence. And confidence comes from feeling certain in the decision making, certain in the outcomes of various moves you're gonna make. And right now we are an uncertain environment. CEOs can make judgments when there's a high growth environment, they can equally make judgments in a lower growth environment. Right now, it's certainly

difficult pory, but things are happening. I tell you, David that volumes remain okay, it's actually the value, the overall value transactions is down three and that tells you that CEOs are focusing still on doing moves that are more tactical than strategic, but doing them um, and they are getting things financed, I would say, particularly if it's of it.

The equity market's not so. But uh for investment grade, no issue, and for below investment grade a lot more expensive during the basis points are so higher than it would have been even a few months ago. But given what's going on a leverage loan market, which is her robust taking off a lot of the uh downward impact in the high yield market in terms of issuance volume,

things are actually still frankly getting done. From your experience, from your vantage point, is it possible we're all overreacting. That's not a word I would use. No. I think this is an environment where, if anything, you want to react aggressively, act aggressively, get ahead of it. I'm someone that's certainly thinks uh, and I have you and I've talked about for quite a while that getting to rate raiss had to happen, would have been uh, perhaps better

happened center the reasons for that. It didn't, but the rate had to happen, and you want to cure it to happen to deeply. So I believe getting ahead of it, particularly because we had an asset price and environment Okay, Blair, It's always such a treat to talk to you. Thank you so much for trying this Blair affront of Center View Partners, Get me Up. We wrap up the week with special contributor to Larry Summers up Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street

Week with David Weston from Bloomberg Radio. This is wall S three week clim David Weston. We want to wrap up the week once again with our very special contributing Larry Summers of Harvard. And Larry, we have a lot to talk about when it comes to the economy with respective markets, but I want to start with something very different, and that is what we saw on that tragic shooting down in South Texas and now elementary school. I'd like to say it's unimaginable, except it's happened too many times.

Do you have any thoughts about what we're seeing in this country? Horror, rage, frustration. We can do better, We can do better. We need to think through what the right solution is. UH. Some some limits on access to guns that don't threaten any real Second Amendment right, some red flags set of procedures that catch catch UH signs of trouble and people and UH take actions. We just can't accept this as the regular order of business in America.

And I think, David, it reflects something that may be broader, a kind of new callousness in our country. We're probably only in the fifth inning with respect to UH COVID. They're gonna be hundreds of people dying each day as far as the eye can see. And we are not as a country making the investments, whether it's vaccines you can take through your nose, whether it's new therapeutics, whether it's a war on long UH COVID and clinical trials

that we need. We've let the COVID controversy become a green eye shade thing about pay for wars and a culture thing about masks when they're the highest return investments available in our society, for here and for leadership around the world, and we just can't seem to get there. And I just don't understand why we can't all come together on the proposition and innocent Americans shouldn't be dying, and then it's government's first obligation in the name of

security to prevent that from happening. Yeah, it's hard to imagine what's going on. Larry. Let's come back now to the economy if we could, and particularly had f MC units coming out this week that the markets took as good news because they talked about having raising rates at fifty basis points for two or three times, and then that gives them flexibility as that already accomplished much of what it has to accomplish with a spectrum inflation. I

doubt it, but I'm not sure. I think the FEDS flexibility is a much better place for it to be. And all this emphasis on forward guidance that we were having for a long time, I think humility is the right posture in UH with respect to UH monetary policy, David, As you know, my view has been that inflation is not gonna come down without some meaningful downturn in our

economy that means an increase in unemployment. But I've been uncertain as to where interest rates will have to go to achieve that, particularly all that's happening that's been adverse for financial conditions in the stock market and in credit markets. Okay, let's talk about the Congression Budget Office, because I don't know how confident they are, but they came up with projections this week that that we was sure look like

a soft landing of me. They have inflation coming down at two point three four, they've got GDP growth at one point five percent, unemployment still under four percent, three and the tenure only goes up to three. That sounds a lot like a soft landing to me. Larry, I've always thought of the CBO as a bastion of credibility. I've watched the CBO projections for forty years. This is their least plausible one in the forty years that I've

been watching. To be fair, they have to lock that forecast up months ago, and a lot's happened that's been adverse in the last several months. But they are the last holdout on team Transitory on the conviction that somehow we can have the economy over stimulated and still have inflation come way down because the supply side is just gonna wonderfully materialize. That's a conceivable outcome. One of the velops this week was how the United Kingdom is addressing

some of the energy cost problems. They're imposing windfall profits tax on excess profits from oil and gas. We had Muhammad are and say, you know, what. He's not sure. It's a great idea, but it's better than the alternatives if they give that money to people who are having to pay more of that who don't tend not to be the people going to afford it. What do you think about windfall profits taxes on oil and gas. I don't know about the British context, but I think in

the American context they'd be a grave, grave error. Today's windfall profits tax is tomorrow is a return. Is a tax on the return people made on investments that are prepared for this contingency. A society that imposes windfall profits taxes is a society that discourages preparatory investments. It's a mistake.

If we need revenue, which we do in this country, we should get it by repealing the windfall profits giveaway that was represented in the Trump tax cuts to a substantial degree, and that would enable us also to join the world in the global tax cooperation. That was such a great success for Secretary Yalet. I've sometimes been critical in the Biden administration, but I applaud them for having resisted the easy political temptation to uh windfall profits taxes.

That was the courageous thing, and that was the right thing. Larry. Let's talk about how we're trying to get our arms inflation back here. We always talk about macroeconomics. You're renowned macroeconomists. What are some of the microeconomics things like? And a trust policy something we talked about last week on Wall Street Week. You tweeted about it to good effect this week.

Also for that matter, terroriffts. We continue to talk about tariffs, with even Secretary State B. Lincoln coming out giving a speeches week, doesn't sound like those China tarrifts are calling off anytime soon. I would say this, Those who say that vigorous competition is central to capitalism are absolutely right.

We should be pushing for vigorous competition. Probably the single most important instrument the government has for promoting competition in key industries is maintaining open markets in which foreign companies have access to US markets and can compete with US producers, and which in return for that, US producers get more access to UH foreign markets. Trade liberalization is central to having competition UH in the economy, and it should be

at the front of any kind of competition policy. If we had not had seventeen and a half percent tariffs on infant formula. We would be in a much better position with respect to that issue today. If governments had more sensible procurement policies with respect to infant formula at the state level, we would be in a better position with respect to uh infant formula today. Okay, Larry, thank you so very much for being back with us this week.

That's our very special contributor to Larry Summers of Harvard University. Finally, one more thought to air is human to forgive divine, so wrote Alexander Pope over three hundred years ago, and our leaders are giving us plenty of opportunities through the years to demonstrate just how divine we all can be. Consider, for example, President for during a presidential debate in nine telling an incredulous Max Frankel of The New York Times

that there really wasn't an Iron curtain. After all, there is no Soviet dominant nation of Eastern Europe and there never will be under Afford administration. I'm sorry, I could I just found did I understand you to say, sir, that the Russians are not using Eastern Europe as their own sphere of influence and occupying most of the countries there for a few years later, when President Reagan in four was getting ready to give a radio address and thinking that Mike in front of him wasn't on. I

have shined legislations. They will outlaw Russia forever we begin bombing. In five minutes. The Soviet Union condemned the remarks, and his opponent that year, Walter Mondale, tried to use it against him in the election. But we all know how that ended. Right. Presidential gaps are not merely relaxed of

the seventies and the eighties. This week we had two reminders that they're very much alive and well in the third decade of the twenty one century, as former President George W. Bush tried to condemn Russia for its invasion of Ukraine and scored something of an own goal, which

quickly was picked up on by Stephen Colbert. The decision of one man to launch a wholly unjustified and brutal invasion of Iraq, I mean of the Ukraine anyway, Jimminy Christmas the one phrase he definitely should never utter for the rest of his life. It's like he's thinking about it all the time, and it's just fucked out and then there's President Biden on his trip to Asia, when he was asked about the US springing to the defense

of Taiwan if it were invaded. Are you willing to get involved militarily to defend Taiwan if it comes to that, you are. That's a commitment we made, leading some at least to take issue, contending that he was committing to take up arms if necessary, rather than merely ensuring that Taiwan can defend itself. And this isn't the first time the President has appeared to go beyond stated policy on Taiwan. It's more like the fourth, reminding us once again of

that aphorism of Michael Kinsley in Washington. A gap is when someone tells the truth by mistake. That does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week.