Bloomberg Wall Street Week: September 2, 2022

a really different reaction to Mark. It's more indications of just how hot the U. S economy really is through the eyes of the most influential voices Larry Summers, the former Treachery Secretary, Katherine Keening, CEO of v N y mon Sam's l Sharmon and founder of Equatic Group Investment in Bloomberg wool Street Week with David Weston from Bloomberg Radio. Something for everyone in the August jobs report, with the top line beating estimates, but the unemployment rate ticking higher

and European inflation hits a record high. This is Wall Street Week. This week wool Street Week contribute to Larry Summers on the Job's report, people have a tendency to exaggerate how much favorable participation contributes to necessary disinflation and Jessica Coldwell of Edmund's on the future of the electric vehicle market. It finally feels like now we're kind of on the cost of something big, So I think the question here is our consumers ready to pony had to

spend the money. Markets began the week jittery, following FED chair pals hawk ish tilled from Friday, with Minneapolis Fed President Neil cash Cary hammering the point home. I was actually happy to see how the chair Pal's Jackson Whole speech was received. You know, people now understand the seriousness of our commitment to getting inflation back down to two.

Inflation in Europe rocketed to yet another all time high, reaching nine point one year over year, as the Block's Central Bank ways whether to go with a jump the rate hike of seventy five basis points. But economists are also being swayed because of all this hawkish commentary we've had out of the CB. We've had six members of the Governing Council now saying that a move bigger than a half point needs to be at least considered class.

Natural gas prices in Europe continue to fall throughout the week, even as Russia's gas proms shut off the spigots to Germany's Norde Dream pipeline three days of maintenance. I could quote marks around that because some people would doubt the motives. Fine back, I'm Caroline Hyde alongside Matt Miller. Let us shape up the week for you. The week that was on Wall Street s ANDP five hundred five days were in the red to the tune of almost or three

and a half percent. This is third straight week of losses. This is the worst week we've had since mid June two year yield almost in a round trip. Look, we're basically flat on the week, But what a movement intra weak volatility that we had. Yields rise. We think we have a hawk is fed on our hands. They pull back when we get a really rather gold Delocks scenario with the jobs data and Matt the vix, it creeps a little Hibbert. Look, twenty five is above the annual average.

I think the VIX doesn't really do much. So I'm that conveys that were really headed down hard. Yet the market doesn't really believe that the Fed can go ahead with rate hike after rate hike after rate hike. They're

a little more convinced after Jackson Hole. But this job number you were talking about this earlier today, Um, we saw what looked like maybe a little stabilization in terms of average hourly earnings, and we saw the participation rate climb, So you know that's putting in a couple more question marks over the Fed's commitment to raise rates soft landing.

Can they do it? Let's ask our guests were pleased to welcome to the show, and they Director and fundamental portfolio manager for Causeway Capital Sonalta, said chief investment officer Franklin Templeton Fixed Income. It is wonderful to have you both here as we look towards a long weekend, a long weekend where it felt that money managers took risk off the table. And then start first and foremost with us your interpretation of the job's number and where that

leaves the Federal reserve. You know, people are looking at the number very care way to see if what feds are doing is working, to see if this what actions have taken, are loosening the labor market. It doesn't. There's incremental signs, but nothing for sure. And I think there is also some confusion in the market thinking that you know, only from the unemployment numbers we will see uh slow down,

be more market. But in a high inflationary era, it is common that labor market stays tight before the shoe really drops. So I know this is a number that the BED is concerned about. But we have way more to go before unemployment is threatening, where FED has to be a birth course. We had, you know, in the last trading day of the week, a big turnaround. As Caroline points out, of course, a lot of asset managers are going to take risk off the table as they

go into a labor day weekend. You don't want to be sitting on the beach worried about your portfolio. Now decide you have a big portfolio to worry about. Is that what you guys have done at the end of the week. Do you see portfolio managers typically doing that at Actually take it back to what you started started discussing the FED lacks credibility. Markets don't believe that the FED is going to do what the FED keeps saying it's going to do. That's a problem for the FED

and it's also a problem for markets. So we in our portfolios have actually we started taking risk of sometime before this long weekend. We don't think that a long weekend in and of itself makes a major difference. I couldn't agree more with Eden. This is one day to point. The bottom line is I'm going to be looking very carefully at the Fed's new SEPs to see if we get some more realistic SEPs after the March and June number June projections, which I didn't think were internally consistent

at all. So I want to dig in that for a moments now, because you're saying they lack credibility. You are a bond money manager first and foremost fixing. It felt as though the bond market sort of had interpreted the Federal Reserve along the right tracks prior to Jackson Hall. They didn't expect to pivot and quite the same way that the equity market did. Why do you think, therefore credibility has been so hard to come about. I'm not sure I fully agree with you, because we were at

three forty seven. The type of volatility we've seen in the bond market on every single data point, to me, indicates that the bond market also fully anticipates that the Fed is going to do what it's done for the better part of a couple of decades now, which is, as soon as the market gets wappy, the Fed blinks and it reverses course. It happened in twenty eighteen. People keep anticipating that for the Feds first, and almost view the first target. The only target is unemployment and growth.

When we've got inflation at eight and a half percent and we have employment significantly lower than current NYROU, it seems remarkable. We're gonna have much more wish now to side and Ellen Lee. Ellen's going to give us some individual company names to talk about after we take a break. This is Wall three on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. But this

week the conventional media began to catch up. After all, it was hard totally to ignore such additional developments as the slowest rate of manufacturing growth in thirteen months, the first outright decline in construction spending in seven months, falling prices for raw materials to the lowest levels in September, the biggest monthly tumble in factory orders in almost a decade, arising unemployment rate, and the first monthly decline in private

sector jobs in more than four years. You think maybe the economy really is a hairless vibrant these days. This is Bloomberg Wall Free Week. I'm Matt Miller alongside Caroline Hide. That Cliff of Lewis Rookheiser from June two, two thousand, when Santana's Maria Maria was at the top of the charts and Mission Impossible Too was the number one movie of the land. There were similarities between the economy then

and now. The unemployment rate ticked up, but back then it was all the way to four percent compared to this month's three point seven percent, and people were starting to really think about what was going on in the economy rather than at the individual company level. Ellen Lee joins us right now, and I'll decide they're back with us to continue this conversation. Ellen, I wanted to touch on this because it seems like the whole world's gone macro.

Everybody wants to talk about the unemployment rate and the fed um inflation. How does that strike you as as a fundamental research annelist. I can't ignore what's happening in the world, obviously, because it's the backdrop for the environment in which companies operate. But at causeway, we're looking for bottom up, you know, investment ideas, and there a couple that I really like in this environment, you know, Phillips and also both are restructuring store raised trading at ten times.

I think in the current environment, were interest rates are going up, I think that's a good tail with were value stocks. But more importantly, they have more half their faith in their control, where the management can lead them out of the situation they're in, and of course macro environment being challenging. We believe it is all reflected in their valueation. Philips Alston both being European companies and Phillips you know, for you might use them for your teethbrush

for examples. Not you, You're a global perspective here. We looked towards next week, we looked towards the European Central Bank, it's said, is not the only central bank having to fight inflation here. It's certainly not. And really the p bocs here. Anyone who doesn't are your perspective of whether Europe isn't a place to be investing at the moment a very wild girl mind. Sorry, sorry one moment, and then I just just us allow for a second. I'm sorry,

I didn't I didn't hear that. So I was just going to say that Europe in a very different position, yeah, the relative to the US. I would say that it's interesting that inflation is almost as you know, is very similarly high in EU Rope as it is in the US, when it comes from completely different fundamental characteristics. You had energy prices go up six that I think energy prices in Europe. Gas prices, for example, went up the six seven ten times more than they went up here in

the US. So yes, you've got inflation, but it's very different. The drivers are different. The demand side for your is significantly different than the demand side we had here in the US. This is why I think, this is why I think Ellen's call for Phillips Nelson is so interesting. I mean, um, the Russians said late on Friday that they are not gonna reopen. This figures in terms of nord dream one. Caroline was anchoring the clothes on Bloomberg

and all of a sudden the markets turned around bigly. Ellen, why would you want two industrials in Europe at the time when they can't even count on energy bills to stay as low as ten times as high as what we pay in the US. Because you have to look at the price on the screen. These stocks are downboard than and they're reflecting this challenging operating environment. But mind you, you know this gas crisis, right now this winter it's going to be difficult. Actually people are thinking about a

more difficult winter the year after. But the reality is things are in motion where this is going to be resolved. And guess what in the long term, everybody's going off Russian gas. I mean it. So now this is your sweet spot. We all know, of course the Franklin Templeton's of this world for emerging market expertise, but also global expertise, and therefore, are there any emerging markets at this moment?

They're looking any way attractive when you've got the US dollar, as it did this week, hitting a new record high. So I think that you've got to look at different elements, whether you're looking at local currency, where they're looking at hot currency. Certainly, of in our emerging market get opportunity is fund We continue to find opportunities in the hot

currency space in particular. I would note though that as these valuations get more attractive, there is a tendency to throw everything out, and there are many emerging markets which continue to have very solid policies number one. Number two. When you have energy crises the way we currently have, unsurprisingly still have a large number of emerging markets not NOTTRA structure, many other emerging markets which actually stand to

benefit from high energy prices valuation. Now, Allen makes an interesting point which I want to get your take on. This winner is gonna be hard, next winner could be worse. Right, We've seen forecasts for inflation in the UK, for example,

of over two from reputable investment banks. I mean, how quickly do the central banks want to get a handle on inflation, Because if they want to do it quickly, they're gonna have to come down hard, like Paul Vulker, hard on labor markets, and that's going to cause widespread spread pain and maybe civil unrest, and it's gonna be politically maybe untenable. So it's going to be really hard.

There's no easy way to put this. I don't think those massive double digit inflation rates are necessarily going to happen in all of Europe, and that's a different issue. The UK in many respects, always seems to have some more tail winds on inflation and the list than the rest of Europe does, though all of it is very high. The problem is that if you let that high inflation continue, inevitably it starts getting built into expectations wage expectations and

it just gets harder the longer you wait. So it's not clear to me that central banks have much of an option, right. They don't have an easy way out. And yes, it's going to be extremely painful. And I think that Monterrey policy was way too easy for way too long, and its full that a little bit of the UK and he started to looking tough, perhaps the whole before the market had antificated. What about Christine Lagard nfol Ellen? What about next week? What about seventy five

basis points? I mean, I think you know, overall inflation is high, so the central banks need to do what they need to do. But again I would agree with Soanal. The energy crisis is at the sort of center of inflation. And because of that we see governments in Germany, brants in UK discussing and thinking about how they can manage power prices because they can change the structure of the

market to ensure that this can be more contained. And I think there's more news to come, and I think this is why when the pipeline shut down actually a gas prices spell. And me, so now will decide wonderful to have time with you. I want to thank you both for joining us on Wall Street Week, and of course coming up we're gonna have so much more of a global perspective for you. It is global Wall Street.

That's next in Wall Street Week, I'll bring back this is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. Welcome back to Wall Street Week on Bloomberg. I'm Matt Miller. California has taken a big step forward in the electric car revolution, banning the sale of internal combustion engine vehicles in the state by twenty thirty five. So what do investors need to know about how this will affect the industry from World Let's go to Jessica Caldwell. She is

executive director for Insights with Edmonds. Jessica, thanks so much for joining us. Let's let's first talk about the state of the market. I mean, we have been seeing so many testas on the road, certainly where you are, for years and years, and everyone's talking about the new forward Lightning as well as a number of other startup electric car companies like Lucid, for example. But how much of the market really is a electric right now across the

United States. It's not a big percentage if you look at battery e V cells this year, they're around five of pure e vs, so not a big percentage. And this is a technology we've been talking about for over a decade. We've seen these cars, but it finally feels like now we're kind of on the cost of something big. We don't know exactly what the effect of that is yet, but it definitely feels like the products are finally coming. So I think the question here is our consumer is

ready to pony up to spend the money. You know, the past few years have been quite difficult in that regard and to kind of see if infrastructure will support increased sales. But if we look at the market as it is, it's still a very small percentage of total new vehicle sales. In terms of spending the money. We've started to see price increases right forward. Is raising prices for the Mackie. It's already raised prices for the Lightning

and not unsubstantial amount. We're talking about three, four, seven, eight thousand dollar price increases these vehicles. I think at least the small are ones were affordable before, but the bigger ones like the trucks, can get up to a hundred thousand dollars. Are they making any margin on those? Yes, I mean I think that's what it's all about. Really. I mean, there's been so much demand for these vehicles

this year. I mean, I don't even think you can get on a reservation list right now for lightning, So if you really want one, it's it's it's pretty hard out there. So I think they're probably responding to the demand that they see. I mean, we've seen a lot of price increases also for Tesla products of where the course of the past year, and just the market in general.

I mean, if we look at new vehicle crisis, they really have skyrocket and I mean the average new vehicles about forty seven thousand dollars right now, which feels much higher than it ever has been historically, and new evs are over sixty dollars. So it is not a cheap game to to buy a new vehicle, particularly an EV. Fortunately, for now, you get seven thousand, five hundred dollars back from Uncle Sam, and a lot of uh local markets also give you some sort of tax rebate. How long

is that gonna last? I mean I've heard that I'm starting next year, you're gonna have to buy cars that are made in America. In order to get that, and that you're going to have to buy cars that have

battery components also made in America. Yes, next year is where it starts to get really tricky, because not only are there requirements for the vehicles themselves and their components like their battery um the battery elements, as well as where the vehicle is assembled, there's also requirements on income levels.

So if you're someone that is you know, you're a married couple and you make over three hundred thousand dollars, which may seem like a lot of money, but if you think about these vehicles are a hundred thousand dollars, it's it really isn't you're not going to be eligible for those rebates, which is, you know, a bit difficult. And the same thing for the used vehicles. So that's what's interesting and new is that in UH we're going to start seeing used rebates for e vs about four

thousand dollars. Again, income requirements, So all of a sudden, this this market which didn't really have too many rules in terms of the rebates, it's gonna get really strict and it's gonna be pretty hard to figure out if a vehicle qualifies. Um, there's gonna have to be vindor Cooder is to figure out if your vehicle has the battery, the battery components, and the vehicle's automakers have a few years to ramp up to get these things set in place.

Obviously this cannot change overnight, but it's still going to be a tough challenge for them as well as consumers because as of right now, none of the electric vehicles comply with the new regulations. In terms of you know, the raw materials UM coming from the US or the batteries being built in the US. UM, they're gonna have to change that, are they? Do you think those companies building car car electric cars in the US, like GM, like four, like BMW, are they gonna have to revamp

the way they source these materials? Yes, a lot of the company is there's a lot of crussure on them to revamp the where where they source these materials. I mean, we know that there's a lot of factories being built as we speak, our back factory of building factories very soon, so that's definitely something that's in play. But in terms of sourcing some of these minerals UM the mining that

goes into it, that's a little bit different. That's something that takes, from what I understand, a very long period of time. You can't just change that overnight. I mean, none of these things you can really change overnight. But that is even more sensitive to time. So yes, in terms of where they get these natural resources, they're going to have to put a lot more effort into it, which is tough. I mean it's not they don't have to be a hundred percent next year. There is a

time frame associated with it. It's like six hundred percent eventually, so they do have a bit of a time window. Jessica, thanks so much for joining us, Jessica Caldwell. They're from Edmonds talking to us about the race to win UM the electric car crown. Coming up, we wrap up the week with former US Treasury Secretary and Wall Street Week contributor Larry Summers. That's next on Wall Street Week. This is Bloomberg. Welcome back to Wall Street Week on Bloomberg.

I'm Matt Miller, I'm Caroline Hyde, and we are thrilled as always as we do each week, to welcome our Wall Street Week special contributor, Hobbard's Larry summers. Of course, Larry, your reaction first and foremost with the job's number, with actually take higher in participation, a steadying perhaps in terms of wage inflation. What do you make of the numbers. I think these numbers were relatively close to what we expected. I doubt anyone's going to change their view UH radically

on this. I think the increases in participation are good news, but I think there's a tendency to exaggerate how much higher participation will reduce inflation because people think of it as extra labor supply. But they forget that if the unemployment rate ROT stays the same and participation goes up, more people are working, earning and therefore spending, and that in turn races the demand for labor. So I think this is a positive development for the economy, more people working,

more GDP. But people have a tendency to exaggerate how much favorable participation contributes to UH necessary disinflation. It doesn't the Fed, Larry have to push people out of jobs. I mean, right now everyone is earning money and able to pay up as much as they need to for goods and services. But um, in order to bring inflation down, they're gonna need unemployment at four and a half five five and a percent. I don't know what NEHRU is right now, but maybe you have a view. Is that

going to bring a political backlash? Uh? Matt, My guess is that things are much less good than the FED has UH supposed. My estimate would be that the nehru's

now near five. I don't see how you can fail to think that the AREU has risen substantially when you look at how much there's been an increase in vacancies at a given unemployment rate, what economists call the beverage curve, when you look at the big increases in quit rates UH that we've seen when you look at wage behavior, and I add all that up, and I see a difficult situation where I think that to start bringing down inflation,

we're gonna need to get weights. We're gonna need to get above then a RU that's probably somewhere in the five percent UH range. And I think we do have to achieve some meaningful amount of disinflation. So I've said that I'd be surprised if we get to the six percent, get to the two percent inflation target without an unemployment rate. UH. That approaches or exceeds uh six percent. And I've said

it before. I think the fed's most recent judgment that they're going to get back to target with an unemployment rate that stays at four point one per cent is certainly a possible outcome. But how that could be regarded as a most probable outcome, I can't really understand. I think that's the quite optimistic case, nothing like the most

reasonable case. And I think that the preponderant probability is that the combination of four percent unemployment and two percent inflation a misery index four plus two of six, that the FED four seas will be a substantial underestimate of where will be one year and two years from now.

And to that end, Therefore, Larry, when you look at the jolt stata, because it hasn't just been, of course the non farm payrolls, there's been a sprinkling another data, whether we look at the new numbers coming from a DP of course, whether it's the jobless claims that looked hot, you felt that really a soft lanning was very hard to achieve. To that point, the market now thinking potentially a soft landing is achievable, you still think no, not

not necessarily here. I don't think that we've seen a soft landing means disinflation with the strong economy. Evidence that we're having a strong economy without substantial disinflation doesn't really speak to the likelihood of a soft landing. So my view that soft landing represents the triumph of hope over experience is not one that I'm changing. Uh yet, it certainly could happen, But I think that one has to think in terms of preponderant probabilities, and uh, that's not

the preponderant probability. Larry, I want to bring up the passing of Mikhail gorbat Chaff you served on the Council of Economic Advisors and Ronald Reagan's White House. When when those two made history together and really change the trajectory of globalization, right, the fall of the Berlin Wall, the fall of the Soviet Union um really brought the world

closer together. Now Vladimir Putin is taking it in the other direction as Gorbachev dies, What are your thoughts on the situation with Russia as it stands and and the legacy of Mikhail Gorbachev. I think, in a quite extraordinary way, Mikhail Gorbachev will be remembered as a great historic figure for presiding over a great historic UH surrender and letting

that process play out without massive loss of life. And I think that is in its way not the achievement he set out to achieve, but is in its way a very substantial achievement. Look, I think we're at a

time when globalization is getting a bad name. If you ask what the era of globalization has meant in terms of the quality of life for people around the world, In terms of the having of the share of children on our planet who die before the age of five, the doubling of the fraction of kids who learned to read, the fact that, for all our problems, the incidents of violent conflict on our planet is much lower than it

was in the nineteen seventies or eighties. The extraordinary change and human potential represented by the fact that they're now more smartphones on Earth than there are adults, and so the majority of the world's people can reach out to all of the world's other people. I think these are fantastic things. And yes, this is under attack. It is

under attack from uh Russia. It is under attack in important respects from an access of authoritarians connecting Russia and China and Iran, and it is going to be the great struggle of our time to maintain the rule of law, to maintain openness, to maintain an opportunity world of opportunity for as many people as possible. But I think it's very much the wrong way to pursue a strategy of resisting UH international connection rather than a strategy of better

managing UH international connection. I think there's nothing in history to suggest that a world of nations that isolate themselves is going to be an all to thatly peaceful, or prosperous or very attractive world. Larry, thanks so much for joining us Wall Street Week special contributor. Of course, former Treasury secretary and Harvard had Larry Summers. They're talking to us. Finally one more fault. Of course, we're about to experience labor Day. What happens after labor Day is everyone goes

back to laboring. And in fact, Matt, they're going back to laboring, perhaps in the office a little bit, Yeah,

a lot of them, Goldman Sachs right, Morgan stand. They came out with notes memos to employees saying, hey, you know what, it's really time to come back and don't worry about being vaccinated or taking a task, just get back to the office, which I completely understand, because if you're one of these banks clients, you want them to be at work right You don't want them taking labor day off to say that people are not productive when they're working at home. I'm not saying that, although, um,

I guess you could be doubtful. If you're a ilion and you want to get your money's worth, you don't care as much if you're paying for their services about their work life balance Right now, lawyer, is that done? I feel like, isn't it more the lawyers who are charging you for every five minutes ten minutes who should be therefore seeing that sea? What did Shakespeare say, Um, the first thing we do is kill all the lawyers. I think that's quite a different story than the bankers,

but lawyers. I definitely understand why these banks want their people back, and it's also about the culture. I don't do you think that they can collaborate as well? Do you think that they can pass on knowledge from the senior bankers to the kids. Do you think they need that five days a week? Yes? So I think I mean I want to point out that what I think doesn't matter, but that is my opinion. That is my opinion. I quite Jeffrey, as I thought, had a slightly more

nuanced note. Clearly they felt. I like the way that they sort of said it was in your lonely silos at home. I mean, anyone who has kids like we do, or a dog or anything isn't as lonely as they'd like to be. I think. But there is that element of their saying, come back, but we're not clock watching you. We're not seeing when you're badging and badging out. Just treat everyone like catulets and decide to be in maybe three days a week on certain collaborative from Jeffries. I mean,

they're pretty hardcore at Jeffries. I think they might be watched CEO on the phone. Did Chandler? Are you really not clock watching? I mean, he probably has people that do it for him. But I think it's about time for Wall Street really to get back to business, to get back to work the way they have been. It might not happen. Isn't happening because rising do you see Schnelli bast send this note earlier showing that M and A this year is a trillion dollars less than M

and A at the same time last year. We've seen a ton of deals break apart and many many more not even get done. So that's as well. Front that exactly hid itself. We sold Bonnie, the Yugat makers just put its I p O on Ice I Feel and Nova Grass isn't gonna buy bit Go. I mean, there's a ton of deals that have fallen apart, but more and more haven't gotten done. To that note Crypto, then I'll go out to the fist And Mayson seemed to

me about as well. Right the West Coast, they're not going back to the office because they work from home or because they're getting fired. Right, you're seeing big layoffs on the West Coast, big layoffs in tech, and that's started to spread across to industrial America. With a three am announcement, it's not mistic way to leave it, isn't it. Yes, We'll have a great weekend. Enjoy your Labor day. You've been watching We want to do it together Wall Street. This is blomk