Bloomberg Wall Street Week: November 4, 2022

eyes of the most influential voices. Larry Summers, the former Trickery Secretary, Katherine Keening, CEO of v n Y mallin Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Getting tired of higher interest rates, chasing stubborn inflation, of government's offering more of the same, and of a war with much more at stake than just money or politics.

This is Bloomberg Wall Street Week. I'm David Weston. This week our contributors Larry Summers on the Fed decision Day Wednesday, followed by the jobs numbers on Friday. Good news is economy looking robust? Uh? The bad news is not much evidence of inflay. Shouldn't restraint yet? In train? And Steve Rattner on what's at stake for investors as Americans go to the polls in the mid term elections. I think the elections are uguely consequential for investors because there's a

lot of stake here. This week, it sometimes felt like it was more of the same, starting with the next phase of Russia's war in Ukraine, which saw Russia targets civilian facilities. As explained by John Kirby of the National Security Council, we know that this has yet another way here air strikes, a lot of missiles fired at in particular to capital, fired at both power and water facilities.

Even as the First Lady of Ukraine, Orleana's Olenska, told the world just how hard it is really for the Ukrainians. Nobody can't imagine how Ukrainians z threat is not just Ukrainian U for Ukraine. For US, fatigue means that we

would perish. Meanwhile, the rest of the world continued to wrestle with the effects of the war, including higher energy prices, with President Biden promising to take action and blaming the problem, at least in part on the all companies record profits today are not because you're doing something new or innovative. Their profits are windfall of war In Brazil and In Israel, new elections yielded old results, with former president Lula da

Silva narrowly winning re election to the presidency. We've been covering the Brazil election, of course. It's a historic narrow victory of Lucy Nazio, Lula the Silva, the former president, and Benjamin Netanya, who heading to a fifth stint as Prime Minister of Israel. In Israel, the fifth election in four years appears ready to return Benjamin Netanya, who to power.

But the main events for Global Wall Street this week came from the central banks, first and foremost from the Federal Reserve, which on Wednesday did as expected and raised interest rates another seventy five basis points, with more to come. According to chair at J. Powell, we still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be

higher than previously expected. While the Bank of England came in with its biggest increase in more than three decades Thursday, and Governor Andrew Bailey warned about what could happen if they don't take steps now. If we do no time false free now, it will be us later on. And that's the full cost Way. I'm publishing today's shows. It

is a tough right ahead. And then we ended the week with US jobs numbers which came in higher than expected, adding another two in sixty one thou jobs with wages going up another four tenths of evercent over the month of September, which could have sent markets into a tizzy, but didn't as equities had already taken a hit from what chair Powe had to say back on Wednesday. For the week overall, the sp gave up three point the NAZAC was five point six, and the year of the

ten ure was about sixteen basis points. End in the week at four point one six. Take us through the week in the markets. Welcome now, Charmian, most of our Rockmani Goldman Sex, chief investment officer for Wealth Management, and Sarah Kettter, co founder and CEO of Causeway Capital. So welcome both of you back to Wall Street. We're good to have you here. Let me start you with you, Sarah, if I may, so, what's an investor to do with

what they saw this week? A lot of turmoil, no doubt about it, David, and strong payroll data makes the FED jump much more difficult. This um labor supply shortage

situation is quite concerning. So it looks as if the FED is going to have to continue raising rates, and this creates a tremendous headwind for the US market and for markets around the world where central banks have to move up, if not un lockstep with the FED, they too have to be tightening in order to quill inflation that is global Charman, I wonder did j Pal get

us ready for this to some extent. I'm assuming he didn't have any idea what the numbers are gonna look like, but he sort of warned this on Wednesday what they're gonna have to do. When we think of this number, though, I don't think we have as pessimistic of you and as pessimistic read. In fact, you could see what happened to the market today at the end of the day, and you could say, in fact, the market is probably saying it's not as bad a number from a tightening

in a recession perspective. So in fact, our view is that if you look at the non farm payroll numbers, at the beginning of the year, they were averaging over three months about six hundred. The last three months now are about two nine thousand, so that's nearly more more than half. So that's a significant slowdown in the economy that we're seeing. And then if you look at the average hourly earnings and you look at what the latest three numbers are about three point nine percent. The prior

three months it was five point two. So directionally between what the FED has been doing and JED really financial conditions in the United States. Things are slowing down and it's not insignificant. So the question is how much does the FED need to tighten to lower those numbers even further. And our view is that they do have more to go, but I'm not sure the idea that it's definitive they have to go to five percent or five and a quarter.

It's not so obvious to us, Okay. Charmie Ramani of Golden Sex and Sarah Ketter of Causeway Capital, we're staying with us as we focus on sell investments outside the United States and what we expect from China, emerging markets, and Europe. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

Wall Street really loves ambiguity because the truth is that while the midterm election results scarcely constituted a warm vote of confidence in President Reagan's economic program, they were far from the Democratic landslide that some pre election forecasters were predicting. Indeed, the actual result, Republicans holding the Senate and losing twenty six seats in the House, was remarkably closed to the

figures I gave on this program last week. That was Lewis, of course, on Wall Street week after another midterm election, two years into a new president. That president was President Reagan, and it was two when it didn't come out quite as badly as Republicans had feared. Sometimes the Democrats this year are hoping for the time. Movie back then was First Blood starting to Sylvester Salona as Vietnam Vet John Rambo. The number one song was Up Where We Belonged by

Joe Crocker and Jennifer Warren. Still with us are Sarah Header of Causeway Capital and Shermane most of our Rachamani of Goldman, Sachs So Sherman maybe some parallels with but one thing is very different is there wasn't a lot of US investment in China back flash forward today, where are you on China, and we just come through the

twenties National Congress. In general, we've had a very strong US pre eminence view, recommending clients have a significant overweight to US equities and in turn a significant underway to emerging markets, which includes China. If you actually go back and look at the returns from the trough of the global financial crisis to the present, you will see that US equities are up about sixteen on an annualized basis

and five percent in China on an annualized basis. But actually one needs to look at the impact of that compounding. Is this chart that you just put up, if you had had a hundred dollars and put it in US equities today, you would have seven hundred fifty dollars if you would put it in China hundred and eighty eight dollars, not even a quarter of those returns. Now that has prompted some people to say, well, that actually means China is very attractive. We actually think that is not attractive.

China's growth will be much slower than people that expect going forward. China has overinvested in property, in infrastructure. They have a major demographic problem. So when we actually look at it on a forward basis, we think the earnings will not be there to even support these valuations. There's so much truth in that about China. It's just so interesting to see though, that much of the big sell

off started in just one last year. China is currently thirty percent roughly of the Emerging Market benchmark, so it's really important, and it has both bullied up the benchmark and dragged it down. But there's China and Taiwan together or some forty five percent of the index. You sort of can't get away from China if you want to invest in emerging markets, and one way or another, their growth rates have tended, they've tended to be faster than the US in the past, and to your poor sharp,

to your point, Charmie, they are slowing. But the opportunities there, because it's just such an enormous market, are really hard to pass up. I think the property sector is horrible, and what place had the worst property wipe out we can think of in the late eighties. It was Japan, and yet there was still money to be made in that would ended up being rather a stagnating situation if stock selection was good. So we're never writing off China.

But what's irresistible about emerging markets, again with China as an anchor tenant, is that it's trading it just twenty year low in price to book value, and then on a price to earnings basis, it's also at this extraordinary bouncing along it's twenty year low versus the US market and the world index. So at some point in time you have to say the price is right for emerging markets led by China, There's no doubt about that, Sarah. But when we actually look at the price, we think

you need to think about the sector weights. So emerging markets in general all and that applies to China as well, have a very different mix in terms of the sector exposure relative to the US. So on the surface, when you're looking at the discount from to China or emerging markets or even developed markets relative to the U S,

it looks like it's very low. But on the other hand, if you adjust for the sector weights, meaning for example, technology is of the S and P five and less in China, less in emerging markets, and maybe even less

than half in developed markets. If you adjust the sector weights, then these countries and regions are not as cheap as it appears, in fact suddenly emerging markets instead of being for example, let's say a multiple of sixteen for the US versus tent for emerging markets, once you adjust the weights, it's more like fourteen and a half times forward earnings.

So in fact, if you adjust the sector weight, then we don't think these markets look at as cheap, and historically that discount has not always been in an indicator of good forward returns. But Sarah, you mentioned a very important point, which is stock selection. It doesn't mean that stock selection can't add value, but when we look at the countries in aggregate and broadly at sectors, we just

don't find them attractive at all. Yeah, it's a very good point about sectors, and and i'd argue this think about in terms of value versus growth. The growth part of the emerging market benchmark doesn't still look pricey. But if you strip out the stocks that are in that lower valuation group, they have they just they're at loaves that we haven't seen in a long time. They're very, very compelling, and they can find those across sectors, which

is pretty useful, but only for China. The catalyst will make China much more interesting it's just a recovery. And if it turns out, the head of our China office in Shanghai tells us, next March is likely the date at which the gradual reopen becomes less gradual. To the point was so obvious that they can't be denied by the party leaders. That will create an economic tail wind for China, even with a very tough property market, and it could interestingly coincide with what is still slowing in

the rest of the world, making China relatively attractive. So Sarah, I suspect we're all looking for bargains and trying to avoid falling knives, right, whether it's China or somewhere else. Talk about Europe. Are there bargains in Europe at this point? Where is that a falling knife? Will? It fell with the Russia invasion of Ukraine in February. Europe was just awful and it continued to be awful. And the cyclical part of Europe any type of manufacturing, any users of

natural gas were sold off heavily by markets. Materials within that chemicals, so many stocks trading at discounts to book value that indicated apocalypse. So yes, bargains in Europe and they're still there. Some of those stocks have improved, but to the degree there isn't a harsh winter and Europe doesn't consume all of its energy it's gas storage reserves, which we think it won't. It looks as if we're

can squeak through this winter and perhaps even next. Meanwhile, there's a feverish effort there to build LERG terminals and ensure that there's a regasification capability. This all takes time, but Europe is united around their concern. Thank you so much. SHO mean most of our ROCKMANI have Goldman Sax and also Sarah Header of Causeway Capital coming up. Control of the U s. Congress maybe up for grabs at the mid term elections on Tuesday, but what is its stake

for investors? We as Steve Rattner a Willow Advisers. That's next on Wall Street Week. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Tuesday's the day for Americans to decide who will be in charge up on Capitol Hill for the next two years. With expectations for the Republicans to retake control of the House. Republicans have a lot of optimism going into the election, and

the Senate pretty much a toss up. No one knows exactly what's going to happen with the Senate with race is just too close to call. But as much time and attention as we're paying to the mid terms, what real difference will the outcomes make for global? Wall Street Republicans like Kevin Brady claim they will make sure less money goes to the government, which will benefit business. You'll see a push for less government spending, less taxes, and

less regulation to drive up inflation. You'll see a push for more American made energy, while Democrats claim that it's all about fairness. They're gonna shut down the government by not providing the votes to pay our federal debt. This is irresponsible, but some who follow it closely, like Libby can Trail of PIMCO, question how much will really change one way or the other. Practical differences between Republicans taking back just the House and taking back both the House

and the Senate are really diminimous. And to give us some answers to what difference the midterm elections might make for real investors, we now welcome somebody who is putting real money to work. He's Steve Ratner. He is chairman and CEO of Will Advisors. They invest the personal and philanthropic assets help Michael or Bloomberg of course, the man who founded our company and still owns most of the shares. So welcomes. Great to have you back in Moll Street week.

So you've had experience in Washington as well as in New York on Wall Street. We spend a lot of time, people get paid a lot of money trying to analyze these elections about what they will mean for investors. What's your experience. I think the elections are ugely consequential for investors because there's a lot of stay there. Take for example, tax policy. If you want lower taxes for wealthy people in business, then obviously there's one team that you want

to vote for. If you want lower taxes for working people and people below, then it's another team you want to it for. There's all kinds of policy decisions. We've seen an enormous amount of legislative activity these last two years, particularly this year, and that's the kind of thing that happens after an election. So as you say, we've had a lot of legislation through Congress, is the last Congress, and particularly given the fact that it was really evenly

divided in Congress. So looking back before we look forward, do you think overall that was good for investors? Not so good. I'm not sure it was great for investors, but a lot of it was stuff that we really needed to do for the sake of our economy, particularly the climate change. I don't think we should kid ourselves. Addressing climate change is going to be expensive for companies and therefore for investors, but we have to do it.

Prescription drug costs we have to get under control. So I think from an investor's point of view, some of this may cost them some money, but I think there were things that had to be done for society as a whole. Looking forward to the midterms, we don't know what the results will be, obviously, but some people are projecting we could have a switch in the majority in either the House or the Center, even conceivably in both if you get a divided moment, which is what that

would be. Essentially, is that a potentially good for investors simply because they won't do very much at all, They can't get much done and there's some stability. Yes, I think you're right. If we have divided government, it's highly unlikely, particularly in the run up to another presidential that we're going to get much done. Look depends what you think

the alternative is. If you think the alternative was a Congress in a White House controlled by people who essentially wanted to make investors happy, then obviously that's not as good, and vice versa. I happen to personally believe we still have huge problems in this country that we need to address, long term structural problems like the debt and the deficit, for example, and having government frozen is not really the

way it's supposed to work. You're supposed to be a legislate every year, not just every year out of one year out of five four or something like that. You oversee the investment of a lot of money, and not necessarily investing yourself, but really overseeing people who do that. In the course of doing that, do you take an account which industries, which companies might do better under republican administration rather than the democratic one. Sure, you can easily see.

And as you point out, most of our money is invested through other managers who do actual stock picking and so forth. But we spend a lot of time meeting with them, as you would imagine, And yes, absolutely they think a lot about what might happen in Washington, how that would affect the investability to use a word that might not be a word of different sectors, different industries,

different companies. So sure, what goes on in Washington. I don't think any investor would tell you that what goes on in Washington isn't incredibly consequential for the economy, and therefore we all pay a lot of attention to it. This week, we had the FED Reserve come out raised interest rates another seventy five basis points. Uh. If you can compare and to trust FED decisions on where we are on the ten year yield, for example, versus who's

in charge of Congress, which is more consequential potentially for investors. Well, I personally think the FED is the biggest game in town in terms of affecting the economy. I'm not quite a Milton Freedman monitorist, but I believe enough in the power of monetary policy to believe that it's uh. It is the biggest thing that affects the economy, and by the way, it probably affects the stock market even more directly in a sense. What interest rates go up, it's

the enemy of stock prices. They tend to go down. And you've seen that happen this year, and vice versa. During two thousand one, when the FED poured all that liquidity into the market, the market went up. The old saying don't fight the Fed. So I watched the FED very closely, and I think it is It is far more of an influence on the economy than Congress. Steve, so great to have you back on Wall STI thank you so much. Let's Steve Brantner. He is chairman and

CEO of will It Advisors. Coming up, we'll wrap up the week with special contributor to Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. Okay, this is Wall Street Week. I'm David Western. Were joined once again by our very special contributor on Wall Street Week, he Larry Summers of Harvard. So Larry, welcome back. We had a lot of economic news this week. We had jobs numbers and we had FED results. Of course, let's start with the jobs numbers, because they came in I

think at least readily strong. How did you interpret them? I saw it the same way. Look, the population only grows by about fifty adults a month, so anytime you have two hifty uh jobs, you're growing at a rate that you're not going to be ultimately able to uh sustain. It shows that still the economy is uh looking quite strong, no recession. UH. Soon you saw wages UH tick up. So the good news is economy looking robust. UH. The bad news is not much evidence of inflation restraint yet

in train. Of course, when j Pal the Chairman of the Federal Reserve spoke earlier on Wednesday, he didn't know of those jobs nuber of me. I don't believe. At the same time what he said anticipated just what you just said is that inflation continues, they're gonna have to keep hiking. I assume you thought what they did made sense. Yeah.

I think there was a little bit of bouncing around immediately after the statement, But after Chairman Powell's press UH conference, I thought the necessary and right signal um has been sent that the Fed is determined to stay the course with respect to inflation, that a sensible judgment of where the terminal rate, how high FED funds will ultimately have to go, has gone up given the strong inflation numbers, the strong UH employment numbers UH that we've seen, and

that the FED is determined. So I thought those were very much the right kind of signals for the FED to send. I think it's appropriate. I think we are starting to get some little suggestion in the data we don't know yet, and we always have to remember about lags, that the effective interest rates on slowing the economy might in total be somewhat less than many people supposed. And if that's right, I think it's going to be pressure for interest rates to be pushed up further in order

to get done the necessary inflation UH restriction. So I'm moving upwards my view on the possibilities for UH the terminal rate. It's not what I would expect, but it would not surprise me if the terminal rate UH reached UH six or more. And I think the FED has to be noticing that there's been started to be some upwards moves in inflation expectations, albeit from low levels, and that's got to be a source of concern of for

them as well. Learning we're also beginning to get some suggestions, including even by some economists like Marks Andy, that in fact the real cause of the inflation is more a matter of supply rather than demand, and because of that, it's not going to be really effective to just try to coach HEIL demand to increase rates, and therefore by the beginning of next year, maybe they should start cutting back.

What do you make of that suggestion. I have to respectfully say that I can't really see a lot of logic in UH the views that Zany and those like him are expressing. Look, the basic fact is that the way you tell a supply shock from a demand shock, both of them raise prices, but when there's a supply shock, quantity falls. When there's a demand shock, output is strong, and output has been very strong. Employment has been very strong. The people who talk about supply shocks, it's really just

the last readoubt of team transitory. First it was a story about UH COVID UH ending quickly. Then it was a story about COVID ending UH slow, ending slowly. It keeps bouncing around what the story is. We've still got high core inflation and gasolene prices were mostly down for a period of UH more than more than three months,

So I don't hear the story. Very simple ways of looking at the data look at what's happening to uh nominal GDP total dollar volume of g g P. If that's going up rapidly, that tells you that demand is going up strongly. Learn another issue that it's rearing its head. You've seen this issue before, and that's the death ceiling up in Congress, because we're gonna be pushing up against it sometime in the new year, maybe not even too

far in the new year. We're now seeing some talking on Capitol Hill that perhaps particularly Republicans, if they come into power, will actually hold that hostage to get some other changes they want, particularly in things like entitlements. What's your experience with the death celling? What should we be doing?

There are a lot of bad ideas in American politics, but I think it's close to the worst idea in American politics that we should hold hostage the credit worthiness of the country threatening to default for the first time in two hundred and fifty years, and the ransom that people want is taking social Security benefits away from retiree not a single one of whom gets more than from Social Security. It is almost impossible to see a worse idea, either in terms of the hostage taking or the desired,

uh ransom. The right thing to do is for us to raise that debt ceiling for a long time so it won't be a political football. And I hope that as many responsible Americans as possible can say, look, yes, yes, I am four entitlement reform. I am four looking at the long run deficit picture. But hostage taking to cut

social Security is wrong. And I hope some of the business leaders who watched this show, whose packs are giving money to support the people who are advocating that, will convey that as responsible financial leaders, they know that their companies at all fellow citizens have a have a stake in the United States, uh, not playing games of chicken with our country's credit worthiness. Thank you so much. That's Larry Summers are very special contributor here in Wall Street Week.

He is, of course from Harvard University. Finally, one more thought, second acts. There what most of us hoped for, but f Scott Fitzgerald once thought Americans may not get. History is full of people who were counted out and came back, sometimes even stronger than ever, like Richard Nixon losing to jfk X and coming back to take the presidency, go to China and win re election by the second largest margin ever, though it did end rather badly with that

whole Watergate thing. I shall leave you this office with regret at not completing my turn, but with gratitude for the privilege of serving a sure president. And Steve Jobs driven from the company he founded, only to return when Apple was at death's door, because Apple needs to find where it is still incredibly relevant and focus on those areas Apple has neglected its core assets for a while and take it to greater things than anyone could have imagined,

revolutionizing the way we communicate and live our lives. These are not three separate devices. This is one device. Family are following it iPhone or Michael Jordan's who retired after winning three NBA championships, went to play baseball sort of, and then returned to the Bulls to three p yet again, there is a reason you call somebody the Michael Jordan's of He is the definition of somebody so good at what they do. But those, those are the second acts

that worked. There are others that didn't go so well, like Teddy Roosevelt, who wanted his second acts so badly that he turned on his own Republican Party when it refused to nominate him, created the ill fated Bull Moose Party and succeeded only in putting Democrat Woodrow Wilson in the White House or Tiger Woods, arguably the greatest golfer of all time, who crashed and burned figuratively and then literally and valiantly tried to come back and play through

the pain, which we all watched with sympathy and yes, a bit of regret. My body certainly can get better, um, but realistically not a whole lot that forty six. You don't quitte heil as well as you do twenty six. This week we got our fair share of new second acts to watch, with Louis and Nacio Lula da Silva becoming the once and future president of Brazil, narrowly beating

out the current president, JayR. Bosonaro. Prasilian President Jaya Bosonara has broken his silence on his election and lost, promising to respect the constitution, but still stopping short of formally conceding and talk about a comeback. Less than three years ago, Lula was in a Brazilian prison on money laundering charges, released only when a higher court ruled that the original sensing court didn't have jurisdiction to convict him in the

first place. And then there's the biggest comeback kid of them all, bb Net and Yahoo over in Israel, poised to come back for a fifth time as Prime Minister, ducking and weaving and moving ever further towards the religious right, but doing whatever it takes to survive former Israeli Prime Minister of Venue Maneta, who looks poised to return to

power after the fifth selection since two thousand nine. Time will tell whether the second acts of Messrs Lula Da Silva and Netanya, who looked more like Tiger Woods or like Steve Jobs. A lot of times people think they're crazy, but in that craziness we see genius that does it. For this episode of Wall Street Week, I'm David Weston. This is Bloomberg. See you next week. M