Bloomberg Wall Street Week: October 7th, 2022

Sam's l Sharon and founder of Equity Group Investment. In Bloomberg wool Street Week with David Weston from Bloomberg Radio. As fall sets in a decided turn in the air for the new British government's designs for the economy, for Elon Musk's designs on Twitter, and most decidedly for Mr Plutin's designs on Ukraine. This is Bloomberg Wall Street Week.

I'm David Weston. We had our fair share of about faces this week with the Bank of England's quick intervention to save the guilt market, as explained by former MPC member Kristen Forbes of m I, T seems that they are worried that because of the big market moves, there could be some margin calls, um some pressures for for selling that could cause the guilt market to freeze up, and British Prime Minister Liz Trust giving up at least part of her economic program. It was becoming a destruction.

So that's why we immediately change that policy, and that's the kind of government we all. But as ugly as the situation was in UK markets, it was nothing compared with the setbacks for Russian forces in eastern and southern Ukraine, with President Putin's efforts to quote annex territory that his forces didn't even control, which Admiral John Kirby at the NSC looks at as an indication that Mr Putin just may be coming to understand how difficult his situation really is.

The annexation announcements, as well as his announcement of partial mobilization, certainly shows the degree to which Mr Putin knows how much he's struggling inside Ukraine, and OPEC plus weighed in with its own changes, cutting production caps by two million barrels a day, or about seven percent, putting even more pressure on Europe and the rest of a war world already worried about energy, while we were disappointed that OPEC

made this decision. As the President mentioned, I think it's unnecessary if you look at the global environment, where supply continues to be the predominant challenge. Then there's Elon Musk. He offered forty four billion dollars for Twitter back in April, then decided to reneg got sued, and on the eve of his deposition, returned to his original offer, even though it looks like he's going to be way overpaying in

many ways. This is almost the most expected outcome of all, which is settling on the eve of trial, just before deposition. Of the main players, Elon must himself he doesn't want to be deposed. He has, you know, probably some embarrassing text messages and conflicting statements and all of that would

make for a very unpleasant decision crowd. But after all the back and forth, this week, US jobs and members actually came in surprisingly on course, adding two and sixty three thousand new jobs, just slightly more than expected, with workers paid five percent more than they were last year, and a reduction the unemployment rate to three. Here to walk us through this week and what got us here are Aaron Brown, portfolio manager at PIMCO, and Chris Allman,

Chief Investment Officer, Ed Kelster. So, Chris, let me start with you. Boy, given what we're seeing right now, are we looking at a long, cold winter? Would you say? Unfortunately, David,

I think we are. Um. I think the Fed, you know, with these employment numbers, the Fed knows that they have to continue this pace of aggressive tightening and they're going to do so the next meeting and the next senning after that, and I think which the street is pricing in, but I think after that they're going to have to keep it up and that's going to be into the winter and it's going to be a tough time. So what do you say, Aaron, is it going to be a rough winter? I think it is going to be

a rough winter. I think that they're fans of uncertainty are quite wide. For next year, the Fed is tightening into an economic slowdown and we haven't even seen the

real impact of that slowdown yet. We're just starting to see signs of a gradual slowing, but like will continue to see that into next year, and we think that we're heading into a recession into early and at that same point, just given the level of inflation, the Federal Reserve is now really challenged to be able to arrest that inflation get it under control despite what happens to

the economy. So I think that really poses a challenge for the FED, and we'll likely see something that's fairly unprecedented, which is continued financial conditions tightening and FED tightening into an economic slowdown, even if it really leads to a harder landing than what the Fed's anticipating. And Aarin I pushed back a little bit. I actually think we're in a recession right now. It's not a very strong one, um,

and it doesn't hurt a lot. I would so an employment growing, you know, but we did have a negative GDP in the second quarter, third quarters mild to me, anything below one percent in the USA feels like a recession. But so what you're saying is you think it's going to be a really will actually have a good, traditional hard get overse session with rising unemployment, which is exactly what Powell has said. I mean that's his forecast. Yeah,

I think that's right. I mean, my our view at PIMCO is that will likely see unemployment rise to about five percent by the end of and so right now we're sort of seeing some of those early signs, but we really haven't seen the full brunt of financial condition tightening yet. That's more to come. So we are going to continue to see as slow down, and I think that's really going to hit in the first quarter of next year and into the second quarter of Chris, given

where we are with inflation right now. Loo concerns about inflation if we are heading an inter session or even are already in one, no matter how long it is or how short it is, what are the tools the Fed has to use, Because typically you turn to the Fed and say, okay, start cutting interest rates. It doesn't look like they're going to do that. In the likelihood they're gonna raise interest rates. They only have one tool they have well, they have their mouth that can job

on the market, which is what they're doing. They have the dot plot, which is going to indicate or direct the market, but there really the only tool they have is short term ingistrates and the FED funds rate. Uh and that's what they're using aggressively. I mean, good Greek seventy basis points. Those are big balances. Do you know through history you've gotta go way back before you have that aggressive tightening of monetary policy and they have to

shrink the balance sheet. So as they moved through that, you know, he's already said he's going to hurt employment. Yet we have stronger numbers. I think the numbers there's something strange in the numbers this week, just like last month. But we'll see how that balances out. We're gonna have a tougher time, and you know, I think the question is going to be about corporate earnings. You've got cp I next week, and then you've got the bank starting

to roll out with their earnings. Okay, we're gonna pick up exactly that question, where do you hide in this environment? Chris Ailman and Aaron Brown will be staying with us. We're gonna ask for them them for some investment advice. We could use it, that's for sure. That's the next time Wall Street Week here on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The facts on unemployment seemed clear enough, or at least as

clear as that changing social definition ever can be. The situation is gained a little better, but not much. The government announced today that the overall unemployment rate last month was six pot nine. The official unemployment rate has been stuck within a tenth of seven percent for six months, and that scarcely represents the massive reduction of unemployment that at least some folks thought they heard Jimmy Carter promise

a year ago. That was Lewis Kaiser on Wall Street week back in October of ninety seven, when the unemployment rate was twice what it is today and we were trying to get it down rather than focusing on inflation whatever that ends up meaning for employment. And if that seems like a galaxy far far away, well maybe that's no accident. The top movie this week back in was Star Wars, and the top song on the charts was You Got It the Star Wars theme. Still with us

are Aaron Brown and Pimco and Chris Ailment of Calistro. So, Aaron, let me turn to you and pick up on where we were talking just now with Chris. But where you hide if you're really an asset here? You said cash is one alternative? Are there things though, that involve at least some risk that you go to? And how much it depends on what you think the recovery is gonna

look like whenever it comes. So I'm gonna flip that sort of question and answer the second question first, which is unlike prior recessions that we've seen in very recent history. So think of the global financial crisis or even the pandemic of I don't think this is going to be a V shaped recovery. I think this is going to be more of a pro monged you know, sort of stalling of the economy and more of an L shaped

recovery than what we've seen in the past. And the reason for that is because inflation is high and it's likely to persist at high levels, You're not going to come in and see the FED start cutting, you know, as the unemployment rises like we've seen in the past. Instead, because the the FED is you know, moved from a dual mandate FED to a single mandate FED, really just focus on getting the inflation right down, you'll likely see you won't see this sort of immediate relief that we've

seen in recent history. And so that does change a little bit the landscape of how you think about investing. You know, Historically, as we start to get closer to what we expect the bottom level of the SMP five hundred to be we start to you know, scale risk back up, start to move back into equity investments to catch that recovery to the upside. And this time around, I think you have to be a little bit more patient.

So instead, what we're really looking at is fixed income investments that we think are going to be able to sort of stand at the test of time, be able to sort of hide out in a safe haven assets. So beyond just looking at cash, we're looking at high quality investment grade corporates. We're looking at municipalities, municipal bonds, you know, particularly for those who are can take advantage of the tax advantages. Tax advantage bonds UM we think offer good value there at a sort of after tax

yield of six and a half percent, you know. In addition, we also like UM some mortgage agency bonds and structured credit bonds as well. And then sort of high quality equities that are defensive equities, high free cash flow, dividend growth, strong balance sheets we also think to do well in

this environment. But you know, it is a sort of challenging time for investors where you have to skew more towards fixed income in order to have stability of return as opposed to looking for a quick snapback in equities. But you know, I posed a question to Chris because I know he also manages a diversified portfolio. Chris, where are you looking at? What type of sort of diversification that are you looking at in order to sort of

hide out over the next couple of quarters. Well, Aaron, you know, I've got the benefit of being able to go into private security. So I've got a good sized real estate portfolio. We have a large private equity portfolios. Sure it's gonna have right downs, but its value is a bit more stable than we see in the public markets. Um, we have a cash position, but the problem is for US cash is not outperforming inflation. So the old adage cash is trash is still true. Um. We do like

private credit. You were kind of hitting on that that, you know, variable rate debt, short term debt with high quality, and I think collateral is going to be key because, as you said, we're gonna have a long rough winter. Uh, so you don't want to be loaning money to everybody. You have to do care about covenance, but it is tough in this environment. I mean, you know, if the economy is slowing, and inflation is still strong. That's stag inflation. And you look back in the seventies. I gotta say,

I love that suit that that Lou had. I don't know where you get that back in the seventies, but I'm stunned by it. But you know, you look back in that time period, returns in seventies seven were terrible. We're hard places to It was just a very tough time to hide anywhere. Yeah, So I'm curious though exactly, But when you go into fixed income do you think the price is attractive now in some fixed income Chris Well,

I agree with Aaron. I'm gonna go short. I'm not gonna go long fixed income and take duration exposure short term credits. I mean, you've can hold a credit for two to three years and then it's money good. And as she said, you're gonna put it in a spread products. So you pick up a couple of basis points by being in the corporate You're okay. There's still a lot of money, David, international money that wants to come into this market, non us rather that wants to come into

the market. You saw it in the this week where it suddenly comes rushing in. So I would give the advice to the average investors, You've got to slowly average cost in. You're not gonna be able to call the bottom. As much as Aaron I think there's a support number, it may not hit that at all, and the market is going to just bounce along and and an Aaron's example of an L and L goes on forever and

it's just flat. I hope we don't have to live in a flat recession for years and years that I think this is going to be a tough market to find any kind of growth opportunities. Uh So, you want a protection and a return of your money rather than return on your money are in. One of the big development this week was OPEC plus and what they did it certainly seemed to stun the White House of the time. What it tells about geopolitical risk generally and specifically energy.

It looks like oil princes are going to stay up there for a while. I think that's one of the things that the market is really mispricing right now. If you look at the throw word curve for oil, the risk is really in the sort of very short term where the market expects that oil is going to be elevated for the short term, but it really hasn't extrapolated or extended that expectation out the next one to two years.

And I think that there's a real value in sort of the back end of the curve for oil because I think that these oil challenges are going to persist much longer than what the markets anticipating. One of the reasons for that is, you know, first we saw out of oil OPEC plus this week, our intention to keep prices elevated. But I think the other challenges is that we really haven't invested here in the US or on a global basis on energy infrastructure, so that capacity is

really constrained over the next couple of years. Even if we wanted to expand capacity, or oil producers wanted to expand capacity, they don't have the ability to do so in the immediate term, and that's going to keep oil

prices elevated. So the risk for oil, then the risk for the energy complex broadly isn't just this winter, but it's next winter as well, and next winter's challenges are going to be even more difficult, particularly on the shores of Europe um than what we're experiencing this winter, And so that's what I think the challenges and you know why, I think this is something that's going to persist much longer than what the market is currently priced in. Thank

you so much to Aaron Brown and Chris Alman. Coming up, we'll wrap up the week with our special contributor to Larry Summers are Harvard. That's really up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Every week we turned to Larry Summers of Harvard, are very special contributor here on Wall Street Week to help us some up the major events of the weekend. Once again, we welcome back

Larry Summer. So, Larry, I think we should start with the jobs numbers out on Friday in the United States. I mean, some say not too hot, not too cold. Some people say, isn't this good? At least it's not getting worse. I guess my real question you is, I may not be getting worse. Was there a danger just in the inflation where many where it is we have five percent year over year increasing wages. I think these numbers were about what we expected, and the sensible judgment

was that we've got an inflation problem. Core inflation figures look artificially good. They're better than media and inflation. And yet core inflation ran at a seven percent rate last month, and that was more than for the quarter, and the quarter was more than for the half year, and the half year was more than for the whole year. So we're not in a controlled place with respect to inflation. And there wasn't really anything in this report to suggest

that we were coming into UH a controlled place. UH. The monthly wage number was relatively favorable, but it was pretty clearly distorted by the fact that you had a lot more workers coming in and leisure and hospitality, and those are low wage workers. The workers where wages are most flexible are going up more rapidly. So I don't think this is a number that changed, UH the picture that we've got an economy that is too strong to be an economy where inflation is going down, but that

is maintaining its UH robustness. But I think we are headed for a collision of some kind or other, and we've just got to manage that collision carefully. And I think the sooner we start UH managing for a slope, managing for some slowdown, the better we're gonna do. I think Chairman Powell was way late to come to that recognition, but he now has that recognition and he should be supported in that. So what do you think Chai Powell and the Federal Reserve will make of these numbers? How

will it affect what they do in early November? I don't think these numbers are going to change what the Fed, uh does? You know, you never know what's going to happen, and certainly there's risk of some kind of financially traumatic event, but I think the chances of something that is large enough to divert the FED are really quite low. So I'd be expecting that uh, the market, which is anticipating basis points in November and is anticipating fifty more in December.

That would correspond to my best guess at this moment as well. And I think that kind of thing is going to be appropriate if we achieve disinflation. Larry, there's another strain of discussion I've seen certainly this week. In fact, there was even some FED staff work at the New York FED suggesting that we better be careful because in fact, the rate that we may need and already get down to two percent, maybe so high it will cause financial instability.

There is a really safety and sound as issue. What do you make of that? Is it possible the Fed will have to choose between financial stability in the one hand and getting inflation down on the other. First, I think that should be the occasion for some soul searching.

If we have an economy where we think there's going to be substantial financial breakage because the FED lifts the FED funds rate to four and a half percent, then we have an inadequately supervised financial system and insufficiently active financial regulator. And so if anyone believes that, along with whatever monetary policy implication they draw, they better tell us how we think how they think we ought to be

repairing the regulation of the financial system. David might sense is that you can never rule out these kinds of risks. But the Fed has more than one instrument. It has instruments for specific guaranteed lending. We've seen that used a number of times, and each time we're surprised by how much the economy retains its robustness. In retrospect, we cut interest rates too much and kept them too low when

we were supporting the financial system. After COVID. In retrospect, we kept interest rates too low and blew up a bubble when we were supporting the economy with low interest rates. After Asia and LTCF in retrospect, we were surprised, amazed by how rapidly the economy grew when the Fed uh did what was necessary after the seven stock market crash. So we need to regulate right to preserve financial stability. We need to have a very strong firefighting force in

order to respond if and when financial accidents happened. Larry's always so helpful to have you on each week, and Delia said, d larious, I was gonna be staying with us as we bring in Professor Brad DeLong, professor of economics from UC Berkeley on his new book Slouching Towards Utopia. That's an economic history of the toy a century. That's gonna up next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.

Are very special contributor at Larry Summers of Harvard has stayed with us because we're gonna bring in now professor of economics from it you see Berkeley, he's Brad DeLong, the author of a new book, Slouching toward Utopia and Economic History of the twentieth Century. So, professor, welcome for joining us. It's really good to have you here. I've read this fascinating and really sort of protein book. It's really quite a book. Let's set it up first, because

it's a history of the the twentieth century. But you don't necessarily define the twentieth century as from nineteen hundred to two thousand. You start in eighteen seventy, un end up in why Well, the big thing that happens happens in eighteen seventy. Right before eighteen seventy, the world's poor, and there's no prospect for the world being anything other than poor. After eighteen seventy, every single generation, humanity's technical competence doubles

and then doubles again in the following generation. And such an enormous pace of tech chnological events raises the possibility, for the first time, of a world in which we can bake a sufficiently large economic pie for everyone to have enough. And that was nothing that humanity had ever

seen before. One of the remarkable things, Brad, that you highlight is that it really wasn't very different to live in the United Kingdom in the nineteenth century than it had been to live in the ancient world two thousand years before. Say something about that acceleration of growth that you see is happening in the twentieth century, well, you know, I mean it was British economist John Stuart mill right.

He was writing in eighteen seventy one about how all the Industrial Revolution had done was it had created a somewhat larger middle class, and it had allowed manufacturers and the rich to earn greater fortunes, but that the overwhelming massive humanity was still confined to the same life of drudgery and imprisonment um than they had been before. That they had been in before um and before all the way back into deep time. It was very clear by

nineteen hundred that things had changed. You know. John Maynard Keynes, writing in nineteen nineteen, looks back and says, starting in eighteen seventy we entered economic El Dorado, and that now our chief task after World War One was figuring out why we tried to blow it up and try to get desperately back to what was good was going on after eighteen seventy. Fortunately, we eventually did, and so things rolled through up until our day. First of all, gives

a sense of what happened in eighteen seventy. They brought all us about. There were some three driving forces in your book. Well, you know, everyone has an idea about just what it is that's made us as a civilization so wealthy, that makes our economy so productive. And you know, different people have different things, and they all go back, some of them back even to say the year ten seventy, when it turns out that the law applies to a German emperor standing in the snow outside of the castle

that allaws and his tool. But instead it could be that the law proatlies to everybody. But you've got three things that fall into place in eighteen seventy that set technological progress into a much higher gear than ever before. And they are the industrial research lab so that you can rationalize and routinize the discovery and development of technology. And then the corporation as we know it um, which

rationalizes the development and deployment of technology. And combine that with the globalized economy, with the telegraph and the eye railroad and the ironholed ocean going steamship and all of a sudden, the incentives to deploy technology worldwide for production are so overwhelming, and people turn their minds to how to do this that everything explodes and way it never had before. Brad Um. Much of the academic discussion of your book has centered on this idea of a pivot

point in eighteen seventy. But I want to ask about a different judgment you make, which is that there was this major era and that the major era ended in UH twenty ten. I would have thought that the world was growing, it was becoming more integrated with technology. There were important political struggles. Um. That was the stuff of history through the twentieth century, much better in the second half of the century than in the first half of

the century. The and the Cold War was a very different war than World War One or World War Two. It was cold, but I would have thought that was a continuing process with substantial challenges. And yet you see us as now being in a quite different era. What's different about the era we're in than the era you wrote the history of other than more of the kind of progress and change that you saw as happening every generation. Um, Well, I'm pleased you disagree here and I'm very pleased you

disagree in our story. I had optimist here about our future, UM, because look, I've been had losing arguments in person with you for forty two years, even when I think I'm right afterwards, and here I'm genuinely uncertain, and I actually

very much hope you are really right this time. My thinking was, I've been listening to our friend John fern Old about how the underlying pace of technological progress has more or less have since two thousand and five compared to what we were used to beforehand saving those year is from nineteen seventy five to nineteen ninety, when technology was crawling toward a more energy efficient and environmentally friendly

UM configuration rather than focusing on labor saving. You know, but after two thousand and after two thousand, we seem to have a substantial loss of social and economic knowledge about how to run things. Things about financial regulation that I thought were in trend, that were known in the bones UM turned out to have been completely forgotten in two thousand and eight. Things about the proper tools for macroeconomic policy that I thought were in where were ingrained

in the bone, were also forgotten. After two thousand and ten, and I remember you and I whimpering in two thousand and twelve that no for more expansionary fiscal policy was not then um a thing that ran any risks whatsoever. So as I say so, we're more couple. Book. It's slouching towards utopia and economic history of the twenty century. Thank you so much for bringing with it. We can only really touch upon it today. I urge you everybody to read it. It's really worth the effort. Thank you

so much. That's Professor Brad DeLong of UC Berkeley, and of course to our very special contributor Larry Summers of Harvard. Finally, one more thought, the fine line between being steady and being stubborn. We've all admired those leaders through the years who have stuck to their guns when times got tough. British leaders like Winston Churchill and the darkest days of World War Two which he'll fight in the hill, which

you'll never horrender. And Churchill's successor Margaret Thatcher, who was known for sticking to her guns no matter what he wanted, the Council of Ministers to be the Senate No No. And American leaders like President Reagan at the Brandenburg Gate, demanding that the Soviet and tear down the Burling Wall when it seemed that was the farthest thing from Mr Gorbatchaw's mind. Mr garbut Schaw open this gate, Mr Garbutchev, tear down this war. But those were the times when

the steadfast were ultimately proven right by history. What happens when bold proclamations don't hold up quite as well, such as George Herbert Walker Bush's insistence he would never ever raise taxes, and they'll push again, and I'll say to them, read my lips. And then there are those bold pronouncements that have yet to be proven out one way or

the other. Like President Je's insistence that his zero COVID policy is the right one for his country, but if you just look at the COVID zero protocols, it requires all people returning from abroad to have ten days of quarantine. Or President Putin insisting that he will ultimately still prevail in Ukraine. He thinks he's losing and may lose his his office and even life. Then he could become completely unpredictable. But this week, this week we saw something a bit different.

Big Bowl pronouncements being completely reversed not long after they were made. A big one was, of course, Elon Musk's change of mind again on whether he'd pony up forty four billion dollars for Twitter for now here in that Elon Musk and Twitter, of course, that resolution really said to be sticking on the contingency of getting that debt financing, and that is going to be the key clause that we're focused on going forward. But at least Mr Musk

took a few months for his change of heart. Over in Great Britain we saw a new government lay out a new budget that included big tax cuts, starting with the top tax bracket. We loved the tax cutting, but not to this time. This is just absolutely the wrong time to do this, bringing immediate and violent reaction in the markets. He's trying to get the markeys behind those two lass of factors probably significantly more difficult, and the

Bank of England stepping in for the rescue. So suddenly the Bank of England signed itself in the ECB situation. So Prime Minister trust is newly minted Chancellor of the Exchequer had to admit publicly that they had been wrong, clearly and dramatically wrong. At least on those top tax rates. And it came only days after he and Prime Minister Trust had gone so big and so bold. I think it was a destruction. Uh And I think and I think I think it was. It was the wrong thing

to do. One can hardly fall to government for listening to its people, even if the listening might have come better before the deciding. But whatever the right answer, the one thing for certain is that, at least in this respect, Mistrust is no Margaret Thatcher. To those waiting with bated breaths for that favorite media catchphrase, the U turn, I have only one thing to say, you turn if you want to the latest not for turning. That does it for this episode of Wall Street Week, I'm David Weston.

This is Bloomberg. See you next week. M hm.