Wall Street Week – Full Show 11/11/2022

We just don't know about the US
elections, about inflation. And goodness knows about crypto
currencies. This is Bloomberg Wall Street Week.
I'm David Westin this week, special contributor Larry Summers of Harvard on
the good, the bad and the ugly of U.S. elections.
I'm quite encouraged. The center is holding and Glenn Hubbard
of Columbia on a Republican plan for building an economy for sustainable
growth. An awful lot happened this week, but
it's not yet clear what it all meant. The U.S.
held those much anticipated midterm elections and instead of a big red way,
we got what amounted to little red ripple.
The red wave didn't happen. And instead we're going to have more
divided government with the full consequences.
Still up in the air. How do you get things done with a
Republican House and equally evenly divided Senate and by this president?
We also got consumer price numbers for the United States.
They were good coming in lower than expected on both the headline and the
core numbers.

But they left us wondering whether this
was the beginning of inflation's end or a false dawn.
A significant improvement in the data that wasn't expected by the markets.
And then we come to the wonderful land of crypto currencies.
The so-called emperor of crypto got dethroned.
Sam Bentham, freed, had to turn over the keys to his FTSE kingdom to his arch
rival, Zhao Ching Ping, only to have him promptly give them back.
And then as the week ended, the other shoe dropped.
SPF resigned as CEO as FTSE filed for Chapter 11 bankruptcy, leaving questions
about the broader crypto industry. One of the people that are kind of a
blogger, speakers in this industry had said that you were looking for contagion
in the industry. This is the contagion.
But if the rest of us had some DAX this week, then Marcus sure didn't share
those doubts. The markets took one look at those CPI
numbers and never looked back. With the S&P 500 up five point nine
percent in the week, its best week since June.
The Nasdaq up a whopping eight point one percent and bonds very much in demand
with the yield on the 10 year falling 35 basis points over the course of the
week.

Here to take us through what they saw in
this dramatic market turn are Laurie Covid.
She's head of US equity strategy for RBC Capital Markets.
And David Bianco, he's chief investment officer here.
So welcome back with you. Good to have you here.
David, let's start with you. What did you make this week?
It was such a dramatic turnaround on Thursday.
Should we believe it? I would not take it with a grain of
salt. What a week it was.
The midterm elections and the inflation report.
And let's not forget Veterans Day without our votes.
A big thanks to them. There wouldn't be peace.
The inflation report stole the limelight, though, for the week.
And unarguably, I don't think it should have.
It's just one data point and was very welcome that inflation's come down from
the highs.

It still seems broad based and
particularly broad based in services which suggest the labor market is still
extremely tight. I'd argue that we see narrow
disinflation goods, apparel, used cars and still broad based service inflation.
So I think inflation still still a risk. And I just remind people that in October
20 21, inflation was about 6 percent back then.
And so it's still about over 6 percent on a poor basis.
Now, that's a lot of inflation over the past two years.
It's a really good point.

And then we really focus on how much has
come down. It has come down some finally, but it's
still a very high level. And do we have any assurance it's going
to keep coming down at a fairly brisk level to get us down to 2 percent or
thereabout? Well, look, I think it's all about where
the numbers come in versus expectations. And if you look at street consensus,
they're already baking in pretty significant moderation.
You kind of heading back to 3 percent next year.
So I think it was not surprising to me to see such a fierce reaction in
markets. Maybe not.
I didn't expect quite as much as what we got.
But I can tell you, David, I've talked to a lot of investors the last few weeks
who have really, you know, kind of quietly arguing it was getting ready to
come down, building their models.

And you don't have gotten fooled by
this, you know, several times in the past when it didn't happen.
I think there was just tremendous relief that this kind of idea that inflation is
moderating, that we finally got the data to cooperate.
It's moderating for one data point. We've had the chair of the Fed say again
and again and again, I need more than one data.
I need quite a few data points before I'm really going to leave it.
So do we think there's actually going to change but fed behavior at this point?
Well, you know, unfortunately, I think that the Fed probably didn't like the
reaction that we saw on Thursday.

And I wouldn't be surprised to see the
rhetoric, you know, take another kind of hawkish tone to try to clamp down
enthusiasm. I think things are going to stay choppy
for quite some time. You know, let's enjoy the day while it
lasts. It was a nice week.
You know, we've been in need of a nice week in the equity market,
but I wouldn't necessarily expect this to go up in a straight line from here.
David, what are the markets basically baking in really getting back down, if
not the 2 percent to sort of two and a half, 3 percent?
Are they a little complacent? The bond markets?
I think the markets are complacent. It's interesting how the bond market
also yields fell upon the inflation report.
And maybe that's all that equities need to know.
But yes, investors expect inflation to come down.
But at this stage, we can't keep saying eventually.
It's important that the Fed or other factors get inflation down quickly
because we're looking on the verge of inflation vs.
inflation becoming a multi-year problem.

And if high inflation is a multi-year
problem, that might change the entire inflation risk premium demanded by the
bond market. So I think we're very lucky that the
bond market is staying calm about inflation so far.
We shouldn't press our luck. So clearly, CPI drove the markets this
week. It drowned out any news about the
midterms. Was that right, David?
Do we pay enough attention, do you think, the markets to the midterms?
Laurie, no, we're talking seem like investors were trying to follow some
game plan they had in mind about how the market would rally post midterm
elections or Republican red wave didn't happen.
Hopefully the inflation report wasn't a surprise, negatively was positively.
But I think this has gone too far, too fast.
And I think they did put too much emphasis on the inflation report, trying
to ignore the midterm elections, which are still uncertain, still uncertain,
but looks pretty divided.

It's not clear that Congress is going to
do an awful lot. Is that good news for investors?
Bad news? I think it's good news from the
perspective of historically a divided government.
When you have a Democratic president split a Republican Congress, you're
getting 13 to 14 percent average type returns in the S&P 500.
So the history is very favorable. I think a lot of investors know that
history. And so if nothing else, it gives you a
little bit of confidence. I think the other issue is, you know, in
terms of gridlock being good, I think at the last the last thing investors want
right now is more stimulative policy. So I think there is good news in that.
And look, I think this was a win for the markets.
This was a win for democracy. This week, you know, we don't know the
results yet, but things did go pretty smoothly.
Lori is right about the historical data and we've talked about that.
But I think investors are putting just too much weight on that historical
observation.

And I'm not sure a divided government is
all that wonderful right this moment. There's likely to be fiscal fights
ahead. Let's see what happens during the lame
duck session. Even if Democrats hold onto the Senate,
they might want to use the lame duck session to push through some more
policies. And I just think the the the poor
showing amongst the Republican Party at a time of such high inflation is not
good for the supply side. And the weakness on the supply side is
just part of the structural problems we're seeing with inflation or everybody
right now wants to draw up parallels in history.
It depends on which history you pick, but I know you've done work specifically
about 2002, I believe.

Yeah, it's eerie, David.
I mean, we've actually seen there's about a seventy eight percent
correlation between how the S&P 500 is trading this year and how it traded back
in 2002. And there are some similarities.
That was another mid-term year. There was geopolitical angst in the
backdrop from 9/11 and the sort of build up into the Iraq war, similar to what
we've got in Russia, Ukraine these days. And it was also a period of messy
normalization after we'd had a big crisis, big drop in the market, initial
rebound. And, you know, it took basically a year
and a half for the market to get back on its feet, find a bottom.
And I think we're doing something similar right now, not only 2002.
2018 was a year where after the midterm election Fed policy and how taking a
pretty hawkish stance at the December meeting of 2018, saying several more
hikes are likely market fell almost 20 percent in December 2018.
That was a mid-term election year.

What about geopolitics?
Lori mentioned that briefly. And we still have a war going on in
Ukraine. We've got President Xi meeting with
President Biden next week. Unclear what's going to happen there in
Asia. There are geopolitical issues here.
How much is the market discounting? The market is aware of it, trying to
ignore it. There are certain industries where where
the tensions are growing, like in semiconductors.
But it does seem like an even with this election that tough on China and support
of Ukraine, too. I think that's, though, the policies and
sentiment that will continue to prevail. Welcome back to saying David talked
about, which is President Biden said democracy is on the ballot for Barack
Obama said that as well. It looks like whatever happens here.
Most Americans seem they sort of believe in the election process.
They showed up. They voted.
Not a lot of disputes yet, really about what happened.
How good is that for the markets? Because to some see, the markets depend
upon, you know, regularity of our processes.
I think stability is good.

I think, you know, the fact that the
democratic process worked pretty cleanly.
There weren't a lot of fights. It's kind of a boring midterm at the end
of the day, other than having your polling data kind of make a lot of
people disappointed in the end. And I think that's good ultimately for
the investor ability of the U.S. when you're thinking about global
investors and the premium they're going to give U.S.
assets, particularly in the equity market.
You need that political stability. I think a wildcard is the debt ceiling.
David, don't lift it. You're confident that they always have.
But sometimes they put us through some some headaches before it's done.
But it is important to acknowledge that with these interest rates, these
climbing real interest rates, a little bit of a reprieve, you know, this week,
Thursday, Friday. But there is risk, especially if that
inflation risk premium goes higher, that the debt and deficits will be more
burdensome.

Look what's already happened.
Housing is getting crowded out. People were getting a lot more demanding
on the valuations for innovative businesses and stocks were crowding out
innovation, were certainly crowding out housing.
I wonder, Laurie, a lot of talk about a possible recession next year at some
point, not clear how long, how deep, even whether it happens.
But love, I think it's quite possible. Do we have the optionality for a fiscal
point of view to deal with recession right now, given what's going on with
interest rates gets and how much we borrowed and given the deadlock in
Congress? I don't know that we have a lot that we
can do at this point in time. I think that you know, I think that's
one of the reasons why investors are so focused on the equity side and getting
the Fed to pull back while there is still time to push us into something
deeper. And I think that's one of the big
takeaways from this week, is that even if you sort of believe the last round of
hawkish Fed rhetoric did that CPI print, at least for now, put us on a path where
we can look for the Fed to take their foot off the pedal sometime early next
year and avoid having this be a late 2023 recession, more of just kind of an
early economic hit.

I think for me, that was one of the
biggest takeaways on the CPI. Lori Covid and David Bianco, we'll be
staying with us as we turn from what happened this week to invest around it.
Next week in the week after, for that matter.
That's next on Wall Street. Week on Bloomberg. In reality, a disillusioned American
electorate quite plainly, sternly reassess the empty promises of 1992 and
concluded unmistakably that the incumbent administration not only had
presented itself in false economic colors as something new, rather than an
all too familiar throwback to the 1960s, but had been seriously off base and way
out of touch with the changing times. Bill Clinton has been campaigning from
the start against the 1980s. This week, the 80s won.
That, of course, was Lewis Rock ISE on Wall Street back in 1994, when a
different president's first midterm election ended in a repudiation of his
economic program. And the number one movie in America was
Interview with the Vampire. While the number one song was I'll Make
Love to You by Boyz to Men. What a difference 38 years makes.
Some people expect a civil rejection of President Biden's Michael Barr economic
plans, but they didn't get it as the two parties fought to essentially a draw.
And the Democrats are on a path to losing fewer midterm seats than any
party in power in 20 years.

Still with us, our David Bianco of the
US and Laura Kelly's seat of RBC. So let me let me come back to you,
Laurie, for a second. Let's talk about how you invest around
what we're seeing right now, given what's going to the CPI, given all the
uncertainties about inflation and for that matter, geopolitics, how do you
make investment decisions in this climate?
So I think you still have to stick with the longer term trajectory.
You know, kind of where you see the most opportunities longer term.
I think that there is still a real case to be made for switching from the kind
of new economy back to the old economy areas like industrials, energy,
financials.

A lot of these areas still have very,
very good valuations. I think on the more growth side of the
market, I think you want to be more selective.
So we obviously saw things like communication services.
A lot of the tech companies really rally pretty fiercely over the last couple
days. I think you still want to be careful
there. So we'd like tech.
We like things like software, we'd like things like semi's, which looks pretty
washed out on earnings sentiment, but we'd be a little bit more cautious with
some of the Internet related names. But it's a draw football analogy.
That sounds like running off tackle three yards instead of throwing a long
ball that you're not really betting on a lot of big growth in the near term.
I think so. I think so.
And you know, what we see when we look at different economic forecasts is the
price we're likely to pay for a short, shallow recession is subpar economic
growth that follows. So think of something like half a
percent, 1 percent. That is an environment in which
valuation will matter.

So what do you think of that?
I mean, is this a time to really dial it back some?
What are you interested in is investment opportunity?
Well, to the latter part of this week, we've gotten more defensively
positioned. I do think that we have a smaller
recession next year and I do believe it hits profits.
Profits will be flat at best, probably down 5 percent.
I think Lori's down a little bit more than that in her estimates that the S&P
is at 18, 19 times forward earnings. And you know, even though it's just, in
our view, a short and shallow recession ahead, I think there's going to be more
frequent recessions than we've been accustomed to in the past 20, 30 years,
during the 20 20s. And also inflation a little bit more
stickier. I love these clips.
The ninety four after that midterm election, I mean, that's one when
Clinton pivoted and it's also when the Republicans had strong messaging and and
policy suggestions and a long period of economic growth and declining inflation
for that decade and 25 years after that.

So I'm just not sure we saw the signs of
that happening today. So what stocks do you like, dude?
What are we looking for? I focus on industries and then my
portfolio managers pick the stocks and various strategies.
I'm most overweight. Health care, both big biotech and
pharmaceuticals and and big banks. Then we're we're dabbling in a few other
areas like air space, defense and oil services, but are overweight.
We're also underweight. A lot of things that we think are going
to be weighed on by the goods and the manufacturing recession that we see
ahead.

Materials, much of industrials look
still cautious on semiconductors and all of everything, consumer and consumer
discretionary auto retailing knows of both brick and mortar and even Internet
retailing. How does it match up with you for
general semiconductors? You have a different view on
semiconductor. So I think what's semiconductors, what
we're seeing is that basically nobody's taking earnings revisions of earnings
estimates up right now. And historically, when nobody's taking
earnings revisions up, our earnings estimates up, it's usually pretty good
12 month forward signal in the market. Now, it doesn't mean they're going to
turn a day. We have seen some of the price action
improve there a bit lately, but it's really a longer term kind of contrarian
type call. I would say that I think Dave and I are
mostly on the same page on a lot of stuff.
You know, we like the banks. I think we both still like small caps at
this point in time. And, you know, I I'm probably, you know,
a little more cautious on the defensive areas of the market.
I think things like staples and utilities still very expensive.
You've had some room left in health care valuations, but that's starting to creep
up as well.

So I'm really not as enthusiastic about
health care as maybe David. Still overweight, but I'm getting a
little concerned about it. I mean, frankly, just because coming
into this reporting season, we were getting close to peak valuation on that
sector as well. And now we've knocked it down a peg or
two that there were some rough earnings with the sector.
But I think we have to tread cautiously on the defensive.
I like small caps. I like banks because they are typically
areas that do well coming out of a recession.
You've got really cheap valuations.

In the case of small caps, we've got a
bucket of work showing that they're pricing in a recession already in
financials. I think it's more of an earnings
resiliency thesis, more of a domestic play.
But I think it's probably time, in my estimation, to start looking for some of
those recovery trades. What extent have the projections of
earnings taking into account inflation? Because that really is a margin pressure
issue, isn't it? Well, so well, our modelling has shown
on inflation that if we you know, if you sort of think about how they play into
an earnings model, for example, I see see positive correlations with revenues.
So the inflationary backdrop has really been goosing revenues and S&P 500
companies.

We find that when inflation comes down,
it doesn't really help margins all that much.
But bringing inflation down is going to pull revenues down.
Wages are actually the more important factor within margin.
So one of the reasons why we've been so cautious on earnings next year as a
whole is because we are baking in that moderation inflation.
It's going to pull the revenues down. It's not going to help the margins as
much. But I do think a lot of people who cover
stocks don't understand the revenue dynamic and don't appreciate that the
impact on margins isn't going to be as big as they think.
Where are you on earnings going forward? What are you projecting?
My estimate for next year is 220 and I expect this year to finish up at about
223 to 24. Thanks to energy sooner down, but just
slightly the average recession we're expecting smaller than average causes a
15 to 20 percent decline in profits. But usually more than half of that
decline in profits is from financials and energy.
Energy is smaller than it's been in the past, although it's growing every day.
And we think banks will be fine because we're not expecting credit costs to
surge.

Our banks really benefited from
increased rates. They are they are simply and it's been
one of the bigger areas that we've seen in terms of upward revisions.
And so when you think about why the earnings estimates haven't collapsed as
much as we might have otherwise expected at the broader level, it's financials is
also energy. Until recently, you've actually seen
that positive revisions in energy. Are you concerned at all, David, about
possible cracks in the system overall? We've seen some shit.
We saw the UK debenture blends. Sure.
And there's some rumblings back against this.
Are you worried about that? Well, I can't say that I've been able to
point out a systemic risk that's really keeping me up at night.
Frankly, I'm more concerned about geopolitical issues of RTX than the
systemic risk.

I don't think so.
What do you make of that? I make a of just too much speculation.
And I don't think it's systemic. But I do think it is something that has
strong and will continue to sting many people involved with that.
Now's not a great time to be speculative.
And the dollar goes from, you know, four Americans of dollars doing just fine.
And I wouldn't be too enthusiastic about finding alternatives right now.
Would you be interested in cryptocurrency at all or.
I try to avoid it at all costs? Well, look, I think that, you know, I
think Dave and I both lived through a lot of these cycles.
And it just I sense I'll tell you what I sense this time around, very different
from the dot.com bubble.

But there was a lot of skepticism in our
community about crypto. You know, I find that, you know, you had
sort of certain pockets of the hedge fund community that were true believers.
But I think most of the people that I talked to have been pretty skeptical,
didn't really understand necessarily what the point of it was kind of solving
a problem that didn't exist. And I think, you know, I've always sort
of believed when you don't understand that you want to avoid it sounds like
Warren Buffett actually said in his article.
Thank you so much to Laurie Covid and David Bianco.
Coming up, we're going to take a look at next week on Wall Street.
Week on Bloomberg.

This is Wall Street week.
I'm David Westin. It's time now to look ahead to next week
on global Wall Street, starting with Juliette Saly in Singapore.
Thanks, David. India will kick off a busy week in Asia
with its October CPI report Monday. Bloomberg Economics expects inflation to
slow sharply, which should allow the RBI to reduce the size of its next rate
hike. Japan's third quarter GDP on Tuesday
will probably show an abrupt slowdown in growth on surging import costs.
China's October activity data, according to Bloomberg Economics, likely to
reflect damage to production and consumption from the Covid curbs to
contain a spate of outbreaks. And Australia's jobs report will
probably show an increase in the unemployment rate.
Global climate talks in Sharm el Sheikh continue into their second and final
week. But in the UK, the economy will very
much be in focus on Wednesday between Governor Andrew Bailey will deliver his
quarterly monetary policy report that comes ahead of the government's big
autumn statement on Thursday.

Chancellor Jeremy Hunt will set out his
tax and spending plans as the UK looks to fill its fiscal black hole.
And on Sunday, another eagerly awaited event, the pandemic delayed World Cup
kicks off literally in Qatar following last week's surprise moderation in
consumer prices. The week ahead includes producer price
data for October, where prices paid by companies remain above 8 percent, but
still well below the near 12 percent rate logged back in March.
Additional economic data include building permits, housing starts and
existing home sales, and the earnings season enters its final stretch with a
slew of reports from retailers including Home Depot, Walmart, Target, TJX and
Macy's.

And finally, the FCC deadline arrives
for money managers to disclose their stock positions from the third quarter.
The flurry of thirteen F filing should give some interesting insight into how
they were positioned heading into that mid summer rally and the sell off that
we had in September. David?
Thanks to Juliette Saly, Dani Burger and Romaine Bostick.
Coming up, the United States is getting a new Congress, however, the votes
ultimately add up with an opportunity to rethink a policy for sustainable growth.
We're going to talk with former chairman of the Council of Economic Advisers,
Glenn Hubbard of Columbia, about what a sensible Republican plan might look
like. That's next on Wall Street week on
Bloomberg. This is Wall Street week.
I'm David Westin. The US midterm elections may not be
fully resolved yet.

The President Biden didn't wait to talk
about whether they point to a rethink of his policies.
What in the next two years do you intend to do differently to change people's
opinion of the direction of the country, particularly as you come into play to
run for president in 2024? Nothing, because they're just finding
out what we're doing. The more they know about what we're
doing, the more support is due to give us his views of where economic policy
might be headed.

Welcome now.
Glenn Hubbard, he's dean emeritus of the Columbia Business School and he was the
chair of President George W. Bush's Council of Economic Advisors.
It's also author of The Wall in the Bridge Fear and Opportunity in
Disruptions Work. So, Dean Hubbard, thank you so much for
being back with us. My pleasure.
Really want to talk to you because there is this question.
Where do we go from here? I mean, we don't yet know exactly what
happens in the entrance. We got a pretty good hunch, probably a
narrow majority for the Republicans. The House, quite possibly the Democrats
will hold a 50 50 for a sort of split Senate.
What should Republicans do if you're up on Capitol Hill?
Is there a sustainable economic policy for growth they could pursue?
I think there is. And in fact, there's a pivot for the
president to, you know, listening to him just now reminds one of the aphorism of
learning nothing and forgetting nothing. It's time for a pivot.
I think for Republicans, GOP is instructive.
Growth, opportunity and participation.

There is a way to develop bridges, to
take people, take communities, take more people to the economy.
That will be in the future. We've done this before in the country.
We can do it again and it doesn't have a partisan label.
Anybody can grab it. But it's especially after the GOP.
So let's talk about walls and bridges, which you wrote about in your book.
It strikes me and maybe I'm not being careful of listening to it.
I hear a lot more about walls and bridges.
I think these days a lot more about protecting against change, perhaps both
on the Democrats and the Republicans than about how do we embrace change and
get ready for it.

You do.
I mean, if you start with the growth, part change is important.
There is no model or theory of growth that doesn't involve change.
So we need change. The question is, how do you bring
everybody along? And that's what we hadn't been doing so
well in the past few decades. Populism comes, embraces that.
And we need to address it. And so to do that, you really have to
help individuals with training and education.
You have to help communities to bring people along.
Can we afford to do it? Because, sure, we don't have zero
interest rates anymore. Oh, sure.
In the book, I outline everything from community college block grants to aid to
communities to reform of the earned income tax credit to support work.
All of that is probably about 100 billion dollars a year.
That's real money. But compared to what we've been doing
compared to student loan relief, a loan that was 400 billion dollars at the
stroke of a pen, we can afford to do this.
You mentioned earned income tax from a lot of you will think that that's a good
reform that could be pursued.

What about the child tax credit?
Because that's something the Democrats badly want.
They want to put through. Republicans don't like it so much.
Is that a constructive thing to allow people to re-enter the workforce in a
positive way? I think it could be.
And it's part of what could be a compromise package.
If you want to allow more people to come back to work, you have to loosen all
constraints on work. And I think the child tax credit could
play a very powerful role there if it's accompanied by rewarding work, which is
what the earned income tax credit could do very well.
Well, what about that point specifically?
As I understand it, at least one of the issues for Republicans is if you're
going to give these breaks, you should actually sort of require work.
It should be conditioned upon getting to work rather than just giving people the
money.

Is that right?
It should be. But that's a feature, not a bug, in the
sense that participation in the economy brings dignity, it brings honor and it
brings support for the economic system. So that ought to be one of our goals.
The question is really supporting work and making work pay.
The ITC earned income tax credit, among other things, can do that.
So as I understand from you economists, there are two ways to grow.
One is more people working. The other is more true productivity.
Ideally, you get both of those taking up, more people working.
Some of them are living in the United States right now.
What about immigration? Is there a way to really address
immigration, which is really divided the parties?
It's a problem we have to address at some point in a way that would actually
give us more people constructively in the workforce.
It's super important.

Immigration has always been one of
America's great strengths. And the immigration story is really two
parts in policy. One is about very high skilled
immigration. There should be no doubt we should want
every scientist, doctor, business person, entrepreneur in the world who
wants to be here, should be here. The political debate over low skilled
immigration is harder. But rather than saying no to low skilled
immigration, how about yes to training, support and helping more people come
along? I think that would ease the political
dilemma. Have we ever done that training support?
Well, and by the way. Private sector or public sector or a
combination of both. The truth is we have.
So if you think back to the 19th century, the whole land grant college
movement, which I build on for community colleges, is exactly that.
The G.I.

Bill with President Franklin Roosevelt
after the Second World War. We have done this.
And yes, it should have heavy involvement of the private sector
throughout the country. We've got great partnerships of business
people with community colleges, with communities, because they know where the
jobs are. One size fits all from Washington.
Less efficient. So other issues like productivity, other
ways to address that. And by the way, go back to the Trump tax
cuts. Was that an effective way to deal toward
poverty by giving certain tax credits for investment?
Did it work? Well, I think it did.
Unfortunately, trade policy went the other way and created uncertainty and
diminished investment.

But yes, a pro investment tax policy is
a big deal, but it's not the only thing. For example, we need to be spending much
more on basic research in the country so that we keep our lead and our
competitive advantage in new science and new technologies.
And I think we could profitably put applied research centers around the
country again, drawing on the land grant college model to help local businesses
in local areas compete better. Did the CHIPS Act, which I think I
folded into in Flesh Reduction Act? I get confused on the name sometimes.
Was that a good step in that direction basically too?
Because I think it was a fair amount of money toward basic research, wasn't
there? The basic research parts?
Yes.

I worry that parts of the act look a
little more like corporate welfare. For me, what I would prefer to see is
much more on the front end for research and then allow businesses to figure it
out, which they will do. One of the fundamental walls, as it
were, to use your term from your book has been trade policy protectionism.
Some would say there was a time when I think sort of simply stated, Democrats
tend to be more protectionist. They want to protect workers, including
unionized workers.

Republicans were more free trade.
I'm not sure that's true anymore. It's not.
And it's a problem. Whether you're a Democrat or Republican.
Trade is very good for the economy. Globalization gets the political wrap,
in fact. Technological change has been far bigger
than globalization and disrupting the workforce.
But we need to address it. We need to help people cope with whether
it's the China shock or other trade disruptions in the economy.
Otherwise, we shouldn't be surprised when politicians say no to trade right
now. Most people I think they're observing
and thinking we're gonna have a status up on Capitol Hill.
It's going to be split. Nothing's going to get done.
If it was possible to do something, what would it be?
And then let's get let's let it put you in charge and say you come up with your
bill. One bill.
Did you think we'd make a real difference?
What would it be? Well, I think you have to ask yourself
what problem you're trying to solve.

So if the idea is to bring more people
along. Greater opportunity, greater
participation. I think it would be saying no to the
student loan forgiveness and starting over with something like a big block
grant for community colleges. Those are the foot soldiers of training
people for the economy. That will be whether it's younger people
or people who need retraining. I think massive support for work, again,
possibly combined with a child tax credit.
These are things that frankly, some years ago, both Paul Ryan, when he was
chairman of the Ways and Means Committee and Barack Obama when he's president
United States, both agreed it's progressive taxation, a wall or a
bridge, because, again, oversimplifying, I think Republicans tend to say let's
cut taxes, including and maybe especially for the more wealthy, they're
going to say let's raise taxes on the wealthier.
Doesn't make a difference.

Does that help address some of the
underlying causes of populism? Well, I think we will need some revenue,
given the nation's fiscal problems and progressivity is important to the tax
system. That said, if you want growth and
opportunity and participation, you do need a tax system that's consistent with
that. I think the failure to adapt to change
is what's led to populism and tax policy that has not been that welcome in the
business community.

I won't necessarily ask you to name
names, but there are other people who have this vision who are active in
politics that you mentioned. For example, Paul Ryan, he's not in the
game anymore. Are there people that are sort of
listening to you and people like you? I think there are many governors and
senators who have ideas like this and have long had ideas like this.
After all, everything that I'm talking about once was in the center of both the
Democratic Party and the Republican Party.
Ronald Reagan, when he reassembled a coalition, a coalition effectively did
that on growth and opportunity and participation.
Fascinating. Great to have you with us as well.
Bridge is a really powerful way of think about it.
Many thanks to Glenn Hubbard of the Columbia Business School.
Coming up, we're to wrap up the week with our special Wall Street Week
contributor, Larry Summers of Harvard.

That's next on Wall Street week here on
Bloomberg. This is Wall Street week.
I'm David Westin, we're delighted to have our very special contributor, Larry
Summers or Harvard back with us now on Wall Street.
So, Larry, it was a big week on a lot of fronts.
Let's start with the CPI numbers that came out.
They certainly got the market's attention.
What did you make of those CPI numbers? Are they as encouraging as some people
seem to think? I think they were good.
They were they were good numbers, but one number is never decisive.
And there were a lot of special factors in these numbers, some of which will be
reversed.

Particular, as always, team transitory
only focuses on the things that are likely to come down in the future, not
the things that are likely to go up in the future.
I don't think apparel prices will keep going down so fast.
I don't think we've really got structural disinflation in medical care.
But this was a good number and the market was right to respond positively
whether the magnitude of the reaction was right.
I think that's very much in question. There was another number yesterday,
which was the Atlanta Fed number on wages, and that was showing continued
strong wage inflation. And I don't see a way as long as
inflation is running in the 5 6 range that we're getting to target.
So I think that people who declared victory on the basis of this number
yesterday were overreacting.

But look, it certainly was an
encouraging number, but we had similar encouraging numbers in March and similar
encouraging numbers in July. And one swallow didn't make a spring
then. And so I think we've got to do what Jay
Powell said he's going to do, which is be vigilant and integrate all the data
looking forward. And that was my question, actually.
We know how the markets reacted. The question is, how will the Fed react?
We have a little time to let December meeting at the same time, given what
you've seen so far. It can change.
Do you think that the Fed should be varying its path in one iota?
Some people are now saying is that 75 should be 50, for example, in December.
Well, I think the market's been expecting 50 for some time is the most
likely case. I don't see a reason to change from that
expectation. I don't think you can make judgments
based on a single month's data.

There was a very substantial adjustment
in markets expectations of what the Fed would do.
And I wonder whether that a change quite that large of more than one full
move, one full 25 basis point move was warranted on the basis of just this
number. But it may well prove to be appropriate
given what we see in the in the future.
Larry, how much more difficult are the markets making the Fed's job because the
financial conditions loosened dramatically in response to the CPI.
That was the most since March of 20 21.

And that's two trillion dollars in
fiscal stimulus. You have to look at both the Fed funds
rate and at the overall level of financial conditions to some extent.
I don't I think these financial conditions indices are misleading
because when the stock market goes up, they call that an improvement in
financial conditions. But it may just be a change towards more
optimism about the economy. So I'm not that taken with the financial
conditions, indices like the ones that come out of Goldman Sachs, they give
significant weight to the stock market.
Or to credit spreads in the overall assessment, because I think in some
sense, they're not just reflecting what the Fed does.
They're reflecting changing views about the economy, Larry, are arguably the
other big news this week with the mid-term elections, which, by the way,
aren't really fully finished finalized yet because we don't know the results,
including who controls the House and the Senate.
But at this point in the process, what do you make of these midterms?
One thing I learned was once again, that people don't pay that much attention to
pollsters or, by the way, the media.

David, look, I'm I'm quite encouraged
the center is holding. If you look at people on the extreme of
either party, they actually underperformed quite badly.
The there was more ticket sledding as people voted for one Democrat and one
Republican rejecting the radical, more radical candidates.
The swing towards Democrats came from independents and came from more
Republicans voting Democratic. I think the reaction to the radical
Supreme Court decision was actually a substantial part of this story.
That's probably cautionary for Democrats because it's not always going to be that
be that way. But look, we're not having people in the
streets fighting over the results of elections.
Candidates who lose, even very radical candidates who lose are can are
conceding. I think this was an election that
suggested some movement back towards the center of the country holding what
message you think the White House should take away from this particular aspect of
economic policy.

Is this time for a midcourse correction?
Are there some lessons in here for the White House?
And by the way. Should they even take a look at who who
is on the economic team? Is it time to revamp that?
I think they've got very good people. I don't think the people are.
Ah! Ah.
The issue. It's a very experienced team.
Inevitably, the over time administrations have turnover.
Look, I think the country is governed best when it's governed from the center
and governed with moderation. Nobody's going back to three and a half
trillion dollar new deals, ads not on the table.
And I think it's appropriate, given inflation that nothing like that be on
the table. I think there's a lot we can do to bring
down the price of energy by promoting energy production of all kinds renewable
and non and non-renewable. I think there's a lot that the
administration can do and will do with respect to technology, particularly in
the semiconductor area.

It's a big challenge to actually build
infrastructure out well in a way that's going to contribute to reducing
bottlenecks in our economy. I would like to see more partnership
between business and government. And frankly, if we're going to build out
the necessary energy infrastructure, I don't around the world.
I don't think there's any alternative. So I think that the administration has a
real opportunity now to move to an implementation phase.
Larry, one other big development globally, at least this week was the
next climate summit in Congo. Cop 27 over at Sharm el Sheikh.
Are we making progress on the climate or not?
It seems sometimes like they just get together and talk.
Yeah. That's why.
Yes, I agree with that. But, David, I think more is happening in
the laboratory and less is happening in the conference room.
The good news is that tremendous progress is being made in all sorts of
technologies that point towards renewable energy.
There are some really exciting developments with respect to batteries
and storage that enables renewables because it's not always windy or sunny.
So I think ironically, even though there's less political progress than one
would have hoped.

I actually think we're in a better place
with respect to the problem than one might have expected a decade ago because
of the progress in technology. And finally, we can't leave this week
without talking about Sam Bank and Freed and FTSE X and that meltdown in the
crypto exchange. Apart from the details of what exactly
happened, what does it tell us about the need for regulation and why do we have
regulation? We've been talking about it forever.
Democrats and Republicans, how pressing is that need?
How can we get it done? You know, David, a lot of people have
compared this to Lehman. I would compare it to Enron, the
smartest guys in the room, not just financial error, but certainly from the
reports, whiffs of fraud. Stadium naming is very early in a
company's history. Vast explosion of wealth that nobody
quite understands where it comes from. I think the regulatory community ought
to draw two lessons from this. One, if we had a few fewer economists
and quants and a few more forensic accountants running around, I think it
would help us detect what was going on in countries and in companies.
The more I watch, the more that field of forensic accounting seems to me
important.

And the other is, I think we ought to
have a rule in everything that touches. Dance that everyone who has anything to
do with it in a position of responsibility has to be entirely away
from the office, away from their phone, away from the any device and connection
to the system for a week or two continuously each year.
And I suspect that that would be very helpful in causing some of these
problems to come to light sooner. But absolutely.
But I think this is probably less about the complexities of the nuances of the
rules of crypto regulation and more about some very basic financial
principles that go back to financial scandals that took place in ancient
Rome.

OK.
Larry, that was very helpful once again. That is Larry Summers of Harvard, our
very special contributor here on Wall Street week.
Coming up, what does the bond market. Green energy and lottery tickets have in
common? That's next on Wall Street on Bloomberg. Finally, one more site looking for
opportunity wherever you can find it in a time of market downturns.
Investors are looking at portfolio losses that remind them of 2008 and
runaway inflation.

What matters is the Fed saying we've got
to get inflation back down. And more than a little political
uncertainty, of course, we'll have to see the final results of these mid-term
opposites. We were looking at razor thin margins
right now. All of us have to be even more
resourceful in looking for new opportunities.
Former Bank of England Governor Mark CARNEY wants us to find them in
sustainable energy. A lot of the answer to energy security
problems that have been exposed by Russia's illegal war have to do with
sustainability. Citadel CEO Ken Griffin thinks he's
found opportunities in moving to Florida.
I'm going to see some looks like, you know, that's going to start out here.
Taxes were not part of our decision to come to Florida, because when you've got
great schools and you've had a great environment and your streets are safe
and clean, you've got a place where people want to live and call home.
And not surprisingly, the CEO of Delta Airlines has found opportunities in
travel.

We're seeing an incredible amount of
demand that's continuing. It's been in place for most of this
year. We're looking at the upcoming holiday
period. Looks very, very strong.
And then then there's the irrepressible Simon Cowell.
Record producer, international television personality and creator of
reality series like The X Factor and America's Got Talent.
Carl can take credit for discovering hit makers like Fifth Harmony and One
Direction CAC latest discovery. Well, it is the bond market where he
just raised one hundred twenty five million dollars selling bonds backed by
his Got Talent TV shows. Right now, I feel like James Bond.
But the all time winner of the Golden Opportunity Award goes at least this
week, to the holder of the single lottery tickets sold in California that
earned for its lucky holder.

Get this, 2 billion.
Forty million dollars. And it wasn't only the winner who got
some opportunity. The man who sold the ticket.
Joe from Joe's Service Center is walking away with a cool million dollars as
well. All of a sudden, it's what the family
would need it with. My kids, my grandchildren looking good
now. That is what I call opportunity.
That does it for this episode of Wall Street Week.
I'm David Westin. This is Bloomberg.
See you next week..

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