Bloomberg Wall Street Week: Moynihan, Davis, Landmann

Johnson sec Chairman J Clayton. Bloomberg wool Street Week with David Weston from Bloomberg Radio. Don't bring me no bad news. Market shrug off, higher consumer prices and even a vaccination program put on hold as they see a glass more than half full. This is Bloomberg Wall Street Week. I'm David Weston. The markets took it all in stride, with the banks posting earnings no one could have dreamed of just a year ago, and the S and P and

Dow and NASDAC one all reaching new record highs. Even the US Treasury tenure barely blinked on the J and J news, with the yield ticking up only for a moment and then turning around and dropping the most since February. Heelp us understand the market reaction or maybe lack of reaction. We're going down by our Wall Street Week round table of Nancy Davis, chief investment officer at Quadratic Capital, and also Laird Landman. He is a portfolio manager for a

fixed income at TCW. So welcome both of you. Lead. Let me start with you. You are a fixed income guy. One of the big questions I think on investor's minds right now is inflation. Is it transitory? Is J? Powell tells us? Or it could have been more troubling than that. If as you look at the fixed income market, what do you look at to answer that question? Well, I think it's very hard to know what to look at.

In the sixties, people looked at the Philips curve. In the seventies, the theory of monet of inflation was that it was monetary in all places you looked at him and to growth. UM. In the in the nineties it was pce Star. There's been all different models and none of them have really worked. UM. Today we're in a we're clearly moved into a direction of uh. This this modern monetary One of my favorite charts you can pull up on your terminal. Is just just chart the budget

deficit versus the growth in the Fed balance sheet. It's a one for one sort of item. So if anyone thinks we're not in modern monetary policy world, take a hard look at that um and I think that given that it's it's going to be very difficult to know

whether inflation is going to be real or transitory. But as we increase the amount of government spending going on, and as we move from the government transferring money to individuals to actually spending the money themselves, I believe the price elasticities will become will change, and you'll actually see

more persistent inflation. So that's something we're focused on, is the idan that government spending does tend to be subject to more inflationary pressures, and they will also crowd out as they do infrastructure, they're going to crowd out traditional commodities like copper, lumber, steel. So Nancy, you actually try to hedge against inflation with your eyeball. Yeah, Uh, give us as what you look at an inflation because in additional one Lard said, for example, you cook money supply.

I mean, like M two I think is increased by more than year every year. I mean, if you if you look at the data and you look at what's happening in reality, between the FED having an average inflation target, between having fiscal spending, between having the FED not even thinking about thinking about raising rates UM and UH a blue wave right now, and relative to the rest of the world really exporting inflation now from emerging market companies

and countries. I don't know why people wouldn't have inflation in their portfolio. To me, it's sort of like why would you why would you take a risk and take a bet? To me, UM, inflation is actually a bigger risk to investors and a recession because if you think about what you know, not not healthy normal inflation, but if we had runaway inflation, that would decrease our purchasing power right UM, the cost of drugs, the cost of housing,

the cost of travel, especially if we have a weaker dollar. UM. To me, I don't see why people are thinking or overthinking it. I think you should just have a diversified portfolio. And just because we haven't had runaway inflation for many years doesn't mean we're not going to have it in the future, So learn pick up on what Nancy just said, What about the symmetry of the risk? I mean, we don't know what's going to happen, obviously, but what about

the symmetry. Do you think that's a greater risk of out of control they'd say, unmoored inflation, or of disinflation or even recession. Well, I was trying to be subtle in my first answer, so I'll be direct in this one and just say I don't think anybody has a good model of inflation, and I certainly don't think the FED has it. So the notion that the FED targets a variable that they don't really have a model to understand seems a little absurd on the surface. So I

do think it leads to a symmetry. And again, just look at that chart that I mentioned before, federal federal deficits versus the size of the balance sheets? Do it across countries? And we're clearly in a new monetary environment, um, And so I do think the risk is asymmetric at the end of the day, that this new type of economic approach may result in inflation that we previously wouldn't have understood from our models. And Nancy, one of the things that I wonder about is the length of time

over which we will not know the answer. We had an interview with Jim Bullard in the St. Louis FED this week, and he said, basically, we're not even gonna have numbers. We're gonna rely on inflation until the end of the year. As we get these cp A numbers and even PC numbers, CORPS PC numbers. We can't trust him right now because the base effects and all those sort of things. Does that actually increase the risk because we're running blind for some period of time, assuming maybe

contrary to what Larry says, we have a model at all. Well, I do think we have to keep in mind that all of these whether it's CPI or PC, these are all in disease right there. Their baskets of goods and services that you know, the FED officials of your labor statistics, they're trying to do the best they can with the

baskets that they've created. But it's almost like if you if you own the US equity market, but you have the Dala Jones Index and you just say, oh, I'm good, I've got it, but you don't have the NASTAC or you don't have the Russell. I think there are lots of different ways to measure inflation, and and David, that's one of the things you know, we tried to do with the IBOLL e t F is give another measure of inflation expectations. It's not linked to a government entity

creating an index for it. Thank you so much for our Wall Street Week roundtable. Lard Lamon from TCW and Nancy Davis from Quadratic Capital. Coming up dealing with high tech one problem with the United States and China have in common, and former IBM CEO Sam Paulmisano sees the differences and the similarities. That's next on Wall Street Week on Gloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Big Brother is going after jack

Mas Tech Empire. As part of a string of crackdowns. Beijing and post a record two point eight billion dollar fine on ali Baba for abusing its market dominance and ordered it to stop making merchants choose between Ali Baba and competing platforms. Here's company vice chair and co founder Joe Tsi with this uh a penalty decision. Uh we've uh you know, received a good guidance on some of

the specific issues under the anti monopoly law. China also ordered an overhaul of ANT Group, which has expanded into payments, banking, wealth management and insurance over the years. I didn't think the government wants this story to dominate through one and specifically they've been guiding media to report on how um they the government is pro what they called platform economy. There pro the innovation, that's Duncan Clark, chairman of b

DA China. The revamp leaves Aunt's main businesses in tact, but the new directive makes it harder for the firm to direct traffic from its payment service Alipay, which has a billion users, to other AUNT financial services, including wealth management, consumer lending, and even on demand neighborhood services and delivery. Here's Rabbi Menon from the Monetary Authority of Singapore and

our philosophy is simple. If you carry out similar activities, similar risks as a bank, then you subject to similar rules and similar requirements. This week, Chinese regulators also summoned thirty four of the country's largest tech companies, from ten Cent to TikTok owner Byte Dance, warning them to curb their excesses joining a global rush by governments to regulate

big tech once again Ali Baba's Joe Tsig. Globally, the trend is that regulators will be more keen to look at some of the areas where you could have unfair competition. Sam Paulmisano knows what it is to run a tech giant the government wants to regulate from his time as CEO of IBM, when the U. S Government and the European Commission we're both pursuing IBM. We asked him to evaluate the Chinese moves to restrict big tech and how

they compare with US efforts. If you go back, I'll start with China first and they'll get to the United States.

But if go back in the early stages of technology or in emerging economic opportunities, to view it broadly, government's always trying to provide in sentence or clear a path for companies, and that started really in fintech in China, and basically, you know, I was over there a lot when I was working, and it was clear from the central banking system that they wanted to be able to get more liquidly going to small businesses and the Stono state on enterprise banks are really focused on midsize to

large companies, so they gave a lot of flexibility in the regulations. So let these guys get going, and they did a phenomenal job. They get really big. Unless they get really big, the government decides that we need to bring them back into the banking system and therefore create the holding company and subject them to more regulation. At the time, that really struck me that after there was that record fine imposed against Ali Baba, Ali Baba thanked

the regulators for the fine. I don't remember IBM back in your day thanking the federal government for pursuing them. Well, you know, we we uh, as I used to say. And when I was the CEO, I'm elected every year by the shareholders. Uh So it's a different system, you know here versus there. Uh But I really mean, I

mean I could see that. Why if you are operated in China, you need to maintain a close relationship and partnership with the government because they can impact your business either positively negatively, in a very direct way, in a

very quick and direct way. Does that suggest that China may have an easier time, if you can call it easy, really getting their control over the big tech companies in China because of that different relationship than for example, Washington would have with the big tech here in the United States. When you think about it, you know, it's not it's not it's not a the split government of any way.

It's a centralized government and complete control. So if she usually main decides he does he wants to stop the ipl of it. He just stops the I P O of a you know, right, they don't have to go through the process. There's not checks and balances and those sorts of things. So therefore the government does have a lot of control and in a lot of a lot of the early stage government companies, I should say governments are actually active shareholders in those companies UH and over

time they divest and sometimes they don't. An example be Lenovo what we did with UH selling the PC business and Lenovo, but at the early stage of that relationship, the Chinese government had about share of Lenovo. Now they've divested over time, but nonetheless that they come in and out of companies. At the same time, President has made it very clear he wants to compete in the world stage when it comes to tech. He's made that a

priority of his. Does he have to be somewhat concerned about going too far and really curtailing big tech in China because it will be as competitive with for example, the United States. The kicks needs innovation, right, and there's a lot of the areas that they don't have the same expertise and experience and take entrepreneurship. I mean, there are a lot of great entrepreneurs in China, but not

necessarily in tech in China. So therefore there's going to be a encouragement But I believe by the Chinese government for foreign investment in entrepreneurial endeavors, even though in other places they're trying to control foreign investment. UM. So you'll see this sort of almost like it's uh split perspective or split uh interactions. Some areas are gonna say they want to uh indigenous innovation, but they need foreign help, uh,

and that's how they'll pursue it. In my opinion, look at Hong Kong, for example, they're getting more controlled Hong Kong, but they're putting tax in set ups to attract hedge funds and wealthy people to Hong Kong. So you see this isn't that aren't they counter counter interests of each other? The communist system of socialism, or as attracting hedge funds and large wealthy people. Well, they're very pragmatic, you know,

and depending upon their goals they will adjust. Well, it seems thus partly perhaps we're working in Hong Kong because you see a lot of new money managers being created in Hong Kong and a lot of big banks, including US banks, increasing their personnel in Hong Kong despite all the civil unrest. There's a during sytums to do that.

And like you know, companies learn like we learn. You operate with any system that you operate within um you know, in some ways, and I know this sounds crazy, but there's more stability and essentially controls governments than there isn't our system because every four years you get a whole new set of priorities. So you could argue that once you adjust to their systems and you work within their systems, there's much more stability over time and from a business perspective,

give you more certainty of investment. If you go back in history, the federal government in the United States has tried to regulate technology. IBM certainly they went after they went after Microsoft. Do you think looking back and it did curtail innovation. You talked about China having to be careful. It didn't curtail innovation. There's no doubt about it. If

you look at all of us went through it. What happens is that as you're going through the process, as they're trying to split you up or any trust, you are so focused on those cases of the government involvement you spend you tend to miss shifts in the technology. And that happened to have you have the IPM, Microsoft, A T and T all of us. I mean you just want could hissue of these things and that could happen here that the more government involvement that there happens

to be, you will curtail innovation. Uh, and that's a tradeoff. I don't know that governments look at it that way, and I really don't think they worry about that because their view will be that, look, we created more competitives. So yes, your company is not as innovative as it was before. We look at all these other companies that we're created because we the baby bells in the A T example, you know alternatives that IBM, Microsoft in the

PC into etcetera, etcetera. That was Wall Street. We contributed Sam paulms out out coming up how the economy looks from the top of one of America's with leading banks. We talked with Brian moynihan, a Bank of America. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The Federal Reserve can putting money into this system by increasing

the money supply. That if banks are unwilling to lend it to corporations because they are afraid of bad loans and rescue loans and write offs, then the private economy will suffer. That was Pimco's Bill Gross on Wall Street Week. Back in this week, bank lending was back in the news again as the banks posted eye popping numbers despite sluggish loan growth. As in the Federal Reserve has done its part in putting money into the system, but this

time it's not because the banks are reluctant to lend. No, this time is that the government has given a lot of money to households that have used it to pay off debt, leaving less reason to borrow. We talked with the head of one of the biggest lenders of the country. He's Brian moynihan, a backup America, and we asked him what this says about the economy going forward. Yeah, this is a healthcare crisis, and the very good news is

you're seeing the vaccine numbers go up. You're seeing the ability then to reopen without the risk that the governments can do in the states and cities and towns, and you're seeing people move around. So are spending levels for our Bank of American consumer customer base or record in the first quarter March is the biggest month ever. If you go back and compared to nineteen, they're up and so divide that by two, it's up ten percent a year, which is much faster than they were growing in fifteen

and sixteen seventeen. So there's a bigger number growing at a faster rate. And yet people still have a lot of the stimulus in their accounts and haven't spent it. So the world still has a group. We have a group of Americans and a group of people around the world who you know aren't back to work yet, and we need to get that done. Whose businesses can't open

yet because the nature of them. We've got to get those done, but a big part of the economy, and I think our predictions for economy across over the next couple of quarters to be bigger than it was before the pandemic is is open and operating, and the consumers are spending money, and that's a good news. And then when you translate the Bank of America, what you're seeing is our depositor way up because that money went into

people's accounts and it's sitting there. But our loans are not as you fell, because largely because people are paying us off because they have so much cash sitting around. So now the commercial side, we expect that to change. The economy growing at seven percent, which is what we predict, it would require companies to borrow to service at economy. It's just that company has had a lot of cash too. So we look for more long growth as year progresses.

But the good news is the customer consumers in good shape. There's an unemployment issue. We've got to get that the rest of the way down to where it should be. The business has got to get open. That couldn't be. But by and large, a big portion economy is up and operating very well. Back over here is a very special viewpoint into the America coutomy because you have such a consumer, such a retail presence, and also the middle market you really deal with small and medium sized enterprise

across the country. Are you see any pickup in the borrowing from your medium sized companies yet? If we've sent it bump along the bottom usage of our business banking segment, which is fifty million under revenue companies in our metal market which is to an half billion, we're seeing the line US it's really pretty flat. But the goodness is

a quick going down. We saw in the months during the quarter January fe Everry March, it got a little stronger origination activity meaning uh, you know, new clients and new deals done. Is still is strong. Bodes well for the for the year. But but we've got to see

it comes through um. And that goes back to those companies having a lot of cash and had to run very efficiently during the crisis because you didn't know what happened next and and and now they're gonna be you need to start spending money on supplies and things to redo their inventory. Now. The one thing I think we all have to be mindful is we've got to get

the trade. The trade is growing fast out you know, into the country, but the ports and things still need to get straightened out because of just the dynamics of the virus and the supply chains are still iron out. So I think one of the things I worry about from mid sized companies king that they get the supplies to do do what they do. So you've heard about lumber prices or residant things like that. I think it little straight out. We hope it will straight now. But

that's the next sort of channel outside the healthcare. The next challenge to get the supply chains really up in oil and greased and running through to serve that fast growing economy. So when you're talking about settling down, one thing that doesn't seem to be settling down yet the spacks, those special purpose acquisition companies. How much of your equity business, because you had a pretty robust quarter and equities, how

much of other SPACs? And do you expect that to continue? Yeah, whether it continues not going to do some of the dynamics, and we do we do selective ones were not as big in the business as other people and and that's fine, and in different times we're stronger and investment grade issuance and other people are stronger and and spacts, and that's fine with us, and we go forward. But you know, it seems to be holding on right now. Let's talk

about yields. The yields have been pushing up on fixed income despite the fact that this week actually we had a downturn that maybe a flip flip or not. But it's really important to Bank of America given the way your business works, what the ten year yield on this treasury is, and what the yield curve is, the spread between the twos and the tens. What are you projecting for the rest of the year. Many people think that

yields are just going to keep marching up. We're all projecting that, and so we're up over the ten year, got up to one seventy plus. And the reality is if the economic activities picking up and and prices are picking up what you've seen unemployments going down, you know, the yield curve will start to normalize. And you saw that start to happen as we came in out of last year fourth quarter in the first quarter. That helps us because as a curve gets higher, that we can

make more money from the loans and other things we do. Now, what's really important to us, honestly is short rates and the questions when the Fed raises rates. The market has it pretty well deferred, and they've been clear that they want to see the inflation levels. They've share pals talked about they want to see the unemployment numbers, and they've

been clear about that. The question is whether it will happen faster than they they have in their projections as that even they have projections at six percent plus for GDP growth this year, and so we'll see when those rates. But that's the that's the quicker route to success for us because we have all we have all these no interest bearing deposits that instantaneously you're worth more that we don't have to do any more work. Thanks the Bank

of America Chairman and CEO, Brian moynihan. Coming up, we wrap up the week with special Wall Street Week contributed Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. As we do every week, we're gonna wrap up the week with our special contributor. Here's Larry Summers, Oh Harvard, Larry, welcome back. Great to have you here. Let's talk about inflation. And we've talked about

on this program. You've talked about elsewhere quite a few times. But this week. This week we had the Council Economic Advisors put out a blog post, a fairly long essay that I'm not sure, but I think it might have been responding to you. They think we don't have a long term problem. What do you say. I read the CEA analysis pretty carefully. I can't say put my mind at ease. Here are some things that didn't talk about. Didn't talk about the housing market on fire more than

any time since the statistics were being created. Didn't talk about all the employers who reported that they were having difficulty finding UH labor, or the fact that the vacancy rate is already back to UH normal levels. Didn't talk about the purchasing manager surveys would show things UH to be an unprecedented territory. Didn't talk about the largest one quarter movement upwards in ten year bond yields in UH decades.

It didn't talk about the consequences for inflation psychology of a change in the policy regime, away from preempting inflation towards UH pre empting the idea of doing something about UH inflation. It argued that there was gonna be a variety of transient factors that would lead to high inflation. Now it's right about that, but that's a little bit like arguing that we're about to have a blizzard, but doesn't mean anybody should worry about how bad the winter

is going to be. So there are no certainties, and god knows, economists aren't very good at forecasting UH inflation. But if you look at the overheating economy theory of inflation, looks like we're headed towards an overheating economy. If you look at the monitorius theory of inflation, money aggregates are growing at unprecedented rates. If you look at the fiscal theory of inflation, we're in an unprecedented UH fiscal experiment. So it certainly didn't convince me that one should be

relaxed about inflation. And David, I have to say that the frequency with which people return to this argument and debate suggests to me that there is a certain amount of discomfort and UH concern out there. But we'll see what happens, and I don't think we'll know, uh for eighteen months or so, uh what the consequences of the experiment we're engaged in are. But so far, nothing's happened that has given me any reassurance. And if anything, the flow of the numbers has been more rapid than I

would have expected and more cause for concern. Let's talk about growth. Uh. We've long heard about how delightful it is to have global synchronized growth. Right now, it doesn't look like we're headed there. We have asynchronous growth. We certainly have China doing quite well. The United States apparently has headed at least for a year or so, into pretty robust growth. On the other hand, Europe seems to be lagging behind. And then don't even get me started

about some of the emerging markets. They seem to be really suffering quite a bit. What are the risks in that kind of asymmetry in the global economy, you know, to paraph paraphrase dickens, we may be headed for a tale of two worlds, between the US and China on the one hand, and large parts of the developing world

on the other. I heard a debate the other day, and it's the most depressing debate I've heard in a long time about whether when you look at Latin America and Africa and even parts of India, you're gonna be looking at a lost decade or you're gonna be looking at a lost generation. We just have not seen remotely the kind of boldness and imagination that we've seen in responding to this with monetary and fiscal policy for the

rich countries like the United States. In some of the poorest countries said to have that kind of effort requires the international system to step up, and so far it's really stepped up in a rather inadequate way. I think this is gonna have huge political consequences for our security, not to mention the tragic consequences for millions, if not

ten millions of people. At the same time. I can hear in my head some people up on Capitol Hill, I will say, they tend to be Republicans, maybe not exclusively, who say, why is that our problem? You heard that in some of the exchanges with Janet yell In, the Secretary of Treasury actually over the SDR of the Special Drawing Rights contest about the a m F, which basically, why are we helping out the rest of the world. I'll tell you why, because there's one human gene pool.

The longer this is out there, the more it evolves. The more it evolves, the greater the risk that our vaccines won't keep us immune and the Americans will start dying in large quantity again, that we'll have to lock up and closed down again. This is not a charitable endeavor. This is forward defense of our global interests. And look, I'm I'm as worried as anybody about China. I'm as

worried about anybody as Russia. But frankly, over the next decade, I think we've got more to fear from microbes than we do from shijin ping. So let's wrap up this week with a lightning around here. If Summer says number one, let me ask you, do you think that we'll have a ten year yield at three percent before we get down to four percent on the unemployment number. It's a race, my guesses will get to the four percent unemployment rate first,

because we'll get to it this year. Uh. And secondly, there's a lot of talking about in income, inequality, income and wealth and equality this country. It's been great and growing for some time. A lot of people say we have to fix it, including J. Powell at the Federal Reserve. If you're going to really address that issue, can you do it through fiscal policy or other means, or do you need labor law reform such as President Biden is

trying to implement. I hesitate ever to use the word need, but I'll say this, we sure could use UH labor law reform UH in UH this country. I think it's something where we Democrats have not been aggressive enough UH for a long time. The impunity with which employers can break up union organizing efforts and fire union organizers with only a slap on the wrist is a national embarrassment and it is something that should be changed very quickly.

Beyond that, we we we need to think about our approaches to UH labor bargaining because there's certainly some excesses in the other direction, and we need to find some new models. But I think we're not going to change this fundamentally enough unless we change what's happening in workplaces as well as changing national fiscal policies. And finally, there are you, of course, word Secretary Treasury age or at

the end of the week. On Thursday, we heard the United States government they're gonna impose new sanctions on Russia for that solar wind hack, as well as for inference in the election, And part of the sanctions were really specifically on Russian sovereign debt. From your experience, is that a gesture or could it actually change Russian behavior? How effective is that sort of sanction? I think it has

I think it has some impact. But it's easier to be critical of sanctions than it is to identify an alternative. When countries do things that are sufficiently wrong from our viewpoint, and we don't and we want to do more than talk, and God knows we don't want to do anything violent, there's a tendency for policy to go to sanctions, and it's probably the best of bad alternatives. Okay, thank you so very much to our Wall Street Weeks special contrainer

Larry Summers of Harvard University. Finally, one more thought, Bernie made off. This week Wall Street lost one of its most infamous villains. We all know the story of the man who spent decades building an investment fund that didn't invest, who told his investors they were worth sixty five billion dollars. That wasn't there who took advantage of the rich and the famous, and the not so rich and the not so famous, his close friends, and even the endowment of

the Orthodox University whose board he chaired. This week, Bernie Madoff died in prison like Charles Ponzi did seventy years ago. The man who gave his name to the scheme made off, copied, and then took to a scale no one could have imagined. When something as big and as bad as Bernie made us crime happens, we all look for some larger meaning. Does it show us that we're all gullible, that we're all greedy, that we are all too willing to wish ourselves to success even when it's too good to be true.

Does it tell us that no matter how much we may regulate, we can never regulate our way to integrity? Or maybe, just maybe it's an important reminder that there are some people who are out there who and there is no other word for it, at evil in their heart. But they're rare, and the willingness of the rest of us to trust despite knowing they are out there is what makes it all work in the end, isn't it that does it. For this episode of Wall Street Week,

I'm David Weston. This is Bloomberg. See you next week.