New governments face old problems.
And this time it doesn't look like tech will give us the solutions.
This is Bloomberg Wall Street week. I'm David Westin.
This week, special contributor Larry Summers on the new GDP numbers and what
they lack. It confirmed what I think we knew that
despite two negative quarters, the economy was not in any real sense in
recession. And Sam Zell on why he has more
opportunities than ever for good investments.
Think about the impact of the doubling in interest rates in eight weeks. This week, global Wall Street saw three
new or sort of new governments installed with Rishi Snack officially taking over
as the new prime minister of Great Britain and promising to make nice with
the markets. I will place economic stability and
confidence at the heart of this government's agenda.
This will mean difficult decisions to come.
Not to be outdone, Italy also got a new prime minister and Giorgio Maloney
wasted no time in taking issue with the ECB raising rates.
It's considered by many to be a rash choice that could have repercussions on
bank lending to households and businesses.
And although China rebuffed President Xi for a third term, he made his own
changes to his senior team surrounding himself with people who see eye to eye
with him, which Cornell's wish for, Prasad says, is a fundamental shift of a
different sort. The message is quite clear that take no
for an answer on the way out. The loyalists are on their way in.
But as much as governments may change, the problems they face remain the same.
As the United States reported stronger GDP growth than expected, despite higher
interest rates. And the ECB hiked another 75 basis
points with personal regard, saying she continues to focus on inflation even
though the European economy is slowing. The risks to the inflation outlook are
primarily on the upside. The major risk in the short term is a
further rise in retail energy prices over the medium term.
Inflation may turn out to be higher than expected.
And if global Wall Street was hoping that tech might help us climb out of
these doldrums, it was in for a letdown this week as the earnings of several big
tech companies disappointed, particularly in their guidance about
what may come next. The big tech names, as they have
reported this week, look at Microsoft, look at Alphabet today.
They really have underperformed in a big way.
But in the end, equity markets shook it all off with the S&P 500 up for the
second week in a row. This time by almost 4 percent.
And even the Nasdaq rose above those disappointing earnings.
Overcoming a bad week for the things and for the Golden Dragon China Index and
turning what was a loss as a Thursday into a nice two point two percent gain
by the end of the week. While the yield on the 10 year settled
in just over 4 percent by the end of Friday, down from about 4.5 percent at
the beginning of the week. Here to sort out a fascinating back and
forth in markets are Peter Cross, chair and CEO of Aperture Investors and
Mortimer Hodgson. He is senior investment strategist at
Edward Jones, among only pick on you first.
What did the markets do this week and why did they do it?
Yeah. Thanks, David.
Look, this week was a bit of a tug of war.
On one side of that tug of war, we saw the big cap tech earnings.
They were, in a word, disappointing. In fact.
And you noted this upfront, it wasn't necessarily the 3Q results.
It was the guidance across the board between advertising revenue, between
cloud computing demand. We're seeing a softening there and that
really dragged down the NASDAQ. But on the other side of this tug of
war, we saw the Dow up nearly 6 percent this week.
Now, what was driving that? Well, we are certainly starting to hear
a little bit more optimism about a Federal Reserve that may be looking to
raise rates at a more moderate pace. Now, of course, next week's meeting, the
75 basis point, the point seven five percent rate hike almost baked into the
cake. It's probably going to happen, but
really all eyes will then focus on that December rate hike meeting.
Will they go 50 basis points or will they go 75?
And in fact, we heard a little bit more from some Fed governors that perhaps a
more moderate rate of rate hikes probably makes sense here, just given
giving them an opportunity to pause, assess the economy, see what's
happening. So interesting moves in the market this
week. We do think more broadly some of those
inflationary trends that we have been seeing from the forward looking
indicators are starting to show some signs of rolling over.
That gives the Fed a little bit more comfort in perhaps going at a more
moderate pace. We certainly saw that from the Bank of
Canada this week. This as well, who went 50 basis points
rather than the expected seventy five. Peter, what do we see?
We heard from ONA. We're hearing some optimism about the
Fed. Where are we hearing that from?
I don't remember the Fed giving us. I think the Fed isn't giving us any
optimism. I think that is an interesting case of
are you actually listening to the people who have the power to move the interest
rates if you're actually listening to the Fed?
I think it's pretty clear the Fed's moving to squash inflation and they're
not going to stop until inflation goes down.
Inflation's sticky and it's not going to move so quickly.
And so the likelihood is, is that we see high rates or higher rates and that
those rates probably top out sometime in twenty three and they don't go down
until well into 20 feet or perhaps twenty four.
And I don't think the market is completely digested that and they're
looking for a scintilla of hope that are floating around in the market that I
would call a sentiment, but not fact. Mona, what do you make of it all at the
Fed? I think wants some consistent data over
time. This shows that the inflation really
coming down. You said there a little bit indications
around the edges. Yeah.
Yeah. You know, look, Peter has a point there.
They want clear and consistent evidence of inflation moderating.
And in fact, they don't want to indicate anything too prematurely.
They started to see that in June and we saw markets start to rally.
You know, financial conditions start to ease rather than tighten, which is what
they really want to see in markets in order to push inflationary pressures
down. But if you look at leading indicators,
things like break even inflation rates, you know, I assume prices paid both
services and manufacturing. If you look at even broader commodity
indices, we're starting to see some signs of cracks, notably the housing
market. And that's the most probably interest
rate sensitive part of the economy over the last couple of weeks.
We've seen some real weakening there in terms of homebuilder sentiment.
Housing starts, even price appreciation. That's really kind of move the lower and
a more meaningful way. And so, you know, with mortgage rates
over 7 percent at this point, we are starting to see some cracks there.
Now, keep in mind, the shelter and rent components of CPI are sticky and they
may live. What we're seeing in the actual housing
and even in the actual rental markets. But at some point, the Fed will have to
acknowledge that we are starting to see some of some of these cracks appreciate.
And in fact, we will probably need to still get that clear and consistent,
evident evidence of inflation rolling over.
But markets won't wait for the Fed to announce that they're going to start
thinking ahead of time, looking past just like they look past this week, some
of these weaker earnings, potentially a weaker even rate of economic growth
going forward. But markets tend to move about six
months ahead of all of that as well. So probably an interesting time to start
thinking about positioning, especially for the year ahead.
I think I just to follow up on Mona's point on the tug of war, you know, part
of that tug of war was driven by nominal growth rates because inflation is very
high, prices being reset, companies are increasing their prices and the revenues
are going up, their revenues are actually going up faster than their unit
growth. In fact, some of the unit costs are
actually going down, but revenues are still going up.
So that's producing growing earnings. And that was somewhat unexpected.
And that strength was somewhat unexpected.
You saw it mostly in the Dow companies and the financial entities and Dow
companies benefited from a much higher rate environment and much higher net
interest income. But that is going to slow because when
the nominal growth rate slows and when the Fed finally gets to a slower
economy, those numbers are going to shift.
And then those companies that are now benefiting from that, they're going to
see some headwinds. So, Mona, does the Fed need that now
growth to slow or even go down in order to get their arms or inflation?
Can we get to where the Fed wants to go without that nominal growth suffering
correction? Yeah.
That's a pretty narrow path to get to what we call the soft landing and see
inflation come down in a meaningful way. Now, you know, what the markets have
probably already priced in is some sort of mild recession in the first half of
2023. And keep in mind, historically, if we do
get that scenario, markets are down on average 25 to 35 percent.
Every cycle is unique, but we have gotten down to 25 percent in the S&P
over that in the NASDAQ already. And so at this point, you know, if we
continue to see softness, as we mentioned in the economics and even in
the earnings figures, markets may start to look past that.
Now, what's interesting here is, of course, to Peter's point, what's held up
very well this year thus far, of course, has been value parts of the market,
defensive parts of the market. You know, think about your health care,
your staples, your utilities, all. Also kind of inflationary hedges.
Their question is, as we get towards a peak potentially in a Fed funds rate, as
we look towards the 10 year Treasury yields stabilizing and potentially
moving lower. Do we want to start complimenting some
of that value defensive with maybe starting to pick up quality parts of
growth? Similarly, in the bond market, we've
seen huge kind of influx into the shorter end of the curve that that too
year avoiding any sort of duration plays as the Fed is raising rates, and
rightfully so. But now, as we're thinking about the end
of that thing, about inflection points more than anything else, probably an
interesting time to start thinking about complimenting your bond portfolio as
well. You can finally lock in 10 years close
to 4 percent. That's a pretty phenomenal non zero rate
that we've seen over last 10 years that investors can start thinking about more
seriously. People are looking at losses in the U.S.
Treasury market. If you own 10 year treasuries, they're
down 18 percent, total return to the lowest point.
People are probably afraid of duration right now, and that means it's probably
a good time to buy. If you look at the the equity markets,
let's look at the small cap market for a second.
Russell, 2000 probably bottomed in June and is probably looking towards, you
know, some kind of stability and growth into the first quarter of 2023.
That's the tug of war. We're talking about the cyclicals.
The larger cap companies benefit in this nominal growth rate, though, they're
still creating some value for, you know, for investors.
But the real opportunity going forward is not going to be in those stocks.
It's going to be in the small cap space, in the growth space.
You know, as they say, at the end of the day, you want to buy a company whose
earnings grow at 15 percent, not earnings growth 5 percent.
And that's still going to hold true going forward.
So we want to figure out exactly that when we come back.
Will Hodgman and Peter Cross will stay with us as we turn to some investment
advice that carry us toward the end of the year.
That's coming up next on Wall Street. I'm Bloomberg. Time alone will tell whether Black
Monday enters the history, Brooke, as the day American confidence was so
shaken that a premature recession resulted,
or merely as the day the computers went wild and through the wonders of
so-called program trading turned a normal correction into an early
Halloween. That, of course, was the one and only
Lewis truck has our on Wall Street week, though, Friday before another Halloween
like we're having one this coming Monday.
But that one was back in 1987 just after so-called Black Monday when the Dow
Jones lost. Twenty three percent in a single day.
And people back then, we're trying to figure out what went wrong.
The number one movie in America that week was Fatal Attraction and the number
one song, It Was Bad by Michael Jackson. We still have with us now Peter Krauss
of Aperture Investors and Monica Hodgson of Edward Jones.
So, Peter, I come to you. I mean, it's not a Black Monday.
We haven't seen that by any means. Thank goodness.
I remember that day, by the way. I do, too.
I was practicing law back in Washington. But but give us some investment advice.
You started in that direction with small caps and duration.
If you're putting money to work right now, where does it make sense to do
that, given all the uncertainty? Well, look, I think Mona said it as
well. There's three places that are in
distress. One is long duration fixed income.
So whether it's treasuries or high yield or long duration bonds that have been
absolutely crushed this year. Those securities are likely going to
provide attractive yields going forward. They're not going to reduce their
volatility. They're still going to have a fair bit
of price volatility to them. But, you know, this is a time when you
can start to think about getting a little longer and moving out of the very
short duration, which, by the way, is also paying very well.
And you can buy short duration corporate investment grade bonds at 5 percent or
even five and a half percent. So that looks pretty attractive as well.
But I think leaking out a little bit into duration makes sense in the equity
side. You know, I think you can't abandon the
growth world. I mean, the tech world today or the tech
news in the last few days is obviously very negative.
But there are companies that are not necessarily tech put our growth
companies through either consumer oriented where their industrial
companies that have fast growth and not paying attention to those is going to
miss a trick that whether they're small cap or mid-cap or even large cap.
But most likely you're going to find them in the small cap space.
So look at aperture. Our view is small caps, a very
interesting space. The data's cheap and it's a place where
we're probably going to see the first move when this market recovers.
Well, that's what you said earlier. The small caps come back first.
Mona, do you agree with that? And if they come back first, what comes
back second? What comes next Thursday?
Because that indicates where you want to be and where you don't want to be right
now. Yes, absolutely.
And you know, Peter is absolutely right. When you look at atomically coming out
of any sort of downturn or recessionary period, the thing that tends to lead us
out are small cap names. And interestingly, this time around,
small caps do tend to also be more domestically oriented.
And perhaps when you look across the globe, you're seeing a European economy
more exposed to the geopolitical issues that oil and energy crisis.
You're seeing an Asian economy more exposed to a Chinese economy that may be
slowing. So, in fact, the small cap universe is
starting to look more and more interesting as well.
We probably will have some months of volatility ahead as we stabilize get
through a potential downturn. But I think that is a place to start
thinking about. Similarly, you know, across equities and
fixed income, we talked about complimenting equities.
So, you know, think about the stuff that has been more, quote unquote, beaten up
this year. There is value is starting to emerge in
a lot of that. And again, when you look historically,
the 12 months after the Fed, the final Fed rate hike, equities broadly are up
on average. And this is back till since Fed rate
hiking cycle since 1940. On average, up about 16 percent after
that peak Fed funds rate. So if you think it's coming sometime in
February, March, maybe earlier, then there's certainly an interesting
opportunity starting to form. And of course, within equities, the
other parts of the market, aside from small caps that tend to perform well
coming out of a downturn, are the more cyclical and growth parts of the market.
And when growth is slowing. You know, investors tend to gravitate
towards finding growth in their portfolios.
So everything that we've talked about and Peter and I have probably reiterated
a couple of times now. But think about duration.
Think about quality. Growth opportunities are certainly
forming. Look, I also think that don't
misunderstand a rising economy or rising market that you might have in the next
few months for a market that is absent volatility, there's still plenty of
shoes to drop and credit and leverage lending is one of them.
And we don't know how the market's going to react to defaults.
We haven't seen a significant default cycle really since, frankly, 2003, 2004,
0 8 was a liquidity crisis. And, you know, 2020 was very short.
So you could have some defaults here in corporate and in others types of
securities, real estate. And I think that that's going to have
some effect on the volatility. But investors have to wall have to live
through that volatility. They can't get knocked out of the
market, because if you do that, you're going to miss the opportunity more to
talk about the overall structure of. Paradigm, as it were, of investing, we
are going it looks like a world low inflation, low rates into higher
inflation and perhaps significantly higher rates at the same time.
There was a good long period of time when it was basically there was no
alternative. So people went into a lot of ultimates,
a lot of riskier things. What happens in this new world?
Because it's not like the old world necessarily.
Yeah, you know, that's that's spot on. And in fact, we all know the TINA
acronym. There is no alternative.
It served us well, probably from the great financial crisis through the
pandemic, we saw a lot of investors pushed out the risk curve in order to
get that return that they were seeking. And of course, as raise rates rose
pretty rapidly through 2022. Well, we did see is a lot of more
speculative parts of the market have started to see the air let out of those
tires as well. Know think about this back market
earlier this year, the meme, stock market, even crypto to some extent.
We've seen large compression in valuations, large downturn in values
overall in a lot of those more speculative bubbles.
And in fact, that probably sets us up for a more interesting time in the next
10 years. You know, the one nice thing that's
happened over this kind of downturn in markets this year is that valuation
compression has come in beyond what we've typically seen historically.
So the S&P P E multiple, for example, has come down over 25 percent this year
already. So the valuation correction, in our view
has likely already happened and that sets us up nicely.
But to your point, in an environment where we'll probably not return to zero
rates, but with growth at 2 percent inflation hopefully returning somewhere
in that 2 to 3 percent yields may also be somewhere in that 2 to 3 percent
range. And so in that scenario, you think about
discounting your cash flows at a higher rate.
And so really that does put more pressure to prove your business models,
especially those business models that expect cash flows in the out years.
But the more steady parts of the market that have proven business models, that
have proven cash flows, those valuations are starting to look attractive here.
And I think that's really what investors will have to think about in this new
environment. I'm a little bit more of a hawk.
I think that inflation is going to be in the 2 to 3
percent range. I think you have to have a real rate of
interest. We have not had a real rate of interest
since really 2008. So if you add another hundred basis
points or so, you're talking about 3 4 percent, 4 percent, 5 percent Treasury.
And I think that's normal. That's the real world.
And in that world, why would people necessarily look for just private
investments? Because in the public markets, then you
can get paid 5 percent or 6 percent. So if you think about large pools of
capital pension plans, insurance companies, large savings organizations
that have large, large amounts of fixed income, they've been suffering for 10
years with almost no return. So they're getting pushed to get the
next 100 basis points, 150 basis points with private securities.
Now that market's changing dramatically and the incremental dollar might not
actually flow to where it had been historically.
And just very briefly, as you know here, you may not know about that valuation
compression that money talks about in the private markets for a while.
You definitely won't. That's always been a smoothing
operation. But I think it's very important for
investors and they look at their balance sheet at the end of this year and they
think about rebalancing that they consider with the wheel values are in
their private assets because the real values are probably lower than what's
being reported. They could use a little mark to market
maybe in their private asset. Thank you so much.
It's really great to have you both with us.
Peter Crest of Aperture Investors and Mona Mahajan of Edward Jones.
Coming up, we're going to look ahead to next week on global Wall Street right
here on Bloomberg. Well, this week in Asia, it is the
battle of the financial hubs, so Hong Kong is set to host the banking
heavyweights of the world for an investment summit.
We're gonna be seeing the heads of Goldman Sachs, Morgan Stanley,
Citigroup, all of them are expected to attend with the focus among officials on
proving that the city is still open for business.
Now, recently slipped in the financial center rankings versus Singapore, which
is also hosting a major fintech event. That one starts on Wednesday.
Earnings wise, the spotlight shifts to Japan in the days ahead.
We've got Toyota, Sony. They're among the highlights for us with
investors. They're going to be looking to gauge the
impact of a weak yen and on high alert for any adjustments to forecasts.
It's a big week for the Bank of England. It's set to become one of the first
major central banks to actively sell bonds held on its balance sheet after
Kuti gets underway. The Beazley also has a rate decision to
attend to with investors pricing in a 75 basis point hike at this Thursday's
meeting in the Middle East out of CAC. One of the world's biggest oil and gas
conferences kicks off. Bloomberg TV will be speaking to many of
the top players in the industry. And from fossil fuels to climate change.
Last but not least, the COP 27 conference gets underway in Sharm
el-Sheikh, Egypt, on Sunday. The focal point of the week will be the
Fed's policy decision on Wednesday. Market pricing showing investors
overwhelmingly expect the FOMC to boost interest rates by 75 basis points for a
fourth straight meeting, though we should say that pricing beyond November
suggests Jay Powell could signal a downshift 50 basis points for the
following meeting in December. Economic data next week centers around
Friday's release of the October payrolls report, which is expected to show U.S.
employers having added the smallest number of jobs since the pandemic
disruptions in 2020. Elsewhere, earnings season continues,
with more than 100 S&P companies reporting, including Pfizer, Uber, Roku,
FC, Kellogg and Madonna. And finally, Netflix is lower priced
advertising tier is set to officially launch in the US.
It will cost just seven dollars a month. And remember, no more password sharing.
David. Coming up, famed investor Sam Zell.
He's a veteran of Wall Street Week, and he's back now to give us his advice on
investing in these difficult markets and why he is seeing more opportunities than
ever. That's next on Wall Street week on
Bloomberg. What a difference a few rate hikes make.
Not that long ago, when interest rates were at record lows, the easy days where
they got money on you and you don't have much inflation and you don't have much
time in this. Those are past.
You almost couldn't avoid making a deal and setting new records for MDA.
We are continuing to see just tremendous momentum in the U.S., but things have
changed. Money isn't free anymore.
We have got to get inflation behind us. I wish there were a painless way to do
that. There isn't.
And credit is cutting into that record deal flow.
I'm looking now at credit spreads in the mid for hundreds and they just look too
expensive to me. So what does that mean for the
dealmaker? And are there many deals that still make
sense in this new world? There's still more room for four.
We think these spreads to tighten probably at this point.
You know, best opportunities are in the non investment grade market.
And now we turn to a deal maker, par excellence.
He is Sam Zell. He is the chairman and founder of Equity
Group Investment. Sam.
Welcome to Wall Street. I know you've been on this program in
the past. Okay.
So let's talk about what investor does in this new environment of increased
inflation and increased interest rates. First of all, tell me what's going on
with your company. Are you seeing less deal flow now?
Just the opposite. We're seeing more deal flow.
We're seeing more situations where companies are having difficulty figuring
out what to do. We're seeing situations where.
Nine months ago, financing a transaction.
X, Y, Z size was nothing. It was no mas, you said.
Money was free. What's changed dramatically?
I mean, think about the impact of the doubling of interest rates in eight
weeks. Double, you know, just eight weeks
earlier, interest rates were two and a half to
three and now they're five and a half to six.
That's an enormous change.
And it's going to slow down everybody's activity.
It's going to for sure, impact getting deals done.
But in our particular case, because frankly, I've oftentimes told the world
that, you know, when I'm liquid, the stock market can't go down.
It only goes down when I'm illiquid. And here I am sitting there with a level
of liquidity I've never experienced in my life because my focus for the last
three and a half years has been and nothing more important than liquidity.
So you've got a significant deal flow if anything is bigger than it was before.
What about the quality of the deals? Are they different from what they were,
for example, preacher pandemic? I think they are because they think
they're a little more realistic. I think the prepayment gimmick, when
money was free, there were transaction.
I mean, the whole spec market was a you know, we did a spec and chose not to
take it to the next level because when we did the spec, spec seemed like a very
interesting way to, in effect, monetize opportunity.
It very quickly became a highly speculative scenario, dependent then
preposterous valuations that ultimately led to the crash of the whole spec
market. You know, world has changed a lot since
then and that and the change is basically modifying what you can do.
On the other hand, there's always demand for capital
and there's always that demand is always on the shoulders of those that have
preserved the cord. So so what's a specific investment after
its energy? You know, energy terribly well, as you
see opportunities, energy. And there's been a lot of tumult in the
marketplace because of Russia and Ukraine and all sorts of reasons.
Yeah. I mean, we continue to do something in
the energy space. Not as much as I would have thought.
When we win this period began. The volatility in the energy space has
been so extreme. I mean, just think about it.
Within a 12 month period, the price of oil, you know, Vittorio vacillated
between 30 and 120. That's an incredible level of
volatility, makes making investments extraordinarily difficult and
challenging. Do you see a prospect of a little less
volatility because you have on the one plus opaque plus trying to limit things.
Now you get the US government, which if it is not trying to regulate the price
of oil, looks kind of like it is because it says it's going to sell.
It is going to buy. So it looks like it's got a bid.
Ask price. Yeah, but we also have a legend, we also
have an administration, it's very anti oil and that and in my judgment that
anti-Israel Earl provision is only going to hurt the United States.
I mean, we were producing 11 million barrels a day of oil.
I don't know what we're doing now, but I think it's down to three million barrels
a day as we've cut back on capital for the for
for fracking, et cetera. Not a healthy set of circumstances.
Now, the oil companies almost invariably say it's because the administration,
because of regulation and their move toward renewables, things like that.
So they don't want to make the investments.
The administration says, no, no, no. You could simply make the investments.
The problem is that your investors want it returned to them.
That is really a market phenomenon. It's not the government.
I'm sorry, I don't mean I. I've heard that speech made by the
government, I don't believe that in this in the least.
I think, you know what? What we have is we have a eco friendly
government that doesn't understand that even if there is a future of non fossil
fuel future, the idea that it's going to happen in 15 years.
I mean, talk about some cost. I mean, just it just doesn't make any
sense. And so we're in effect creating a
shortage. By virtue of depleting oil depleting
capital into the fossil fuel area that creates inflation, that it just doesn't
make any sense. Sam, as I recall, you bought some
distressed assets in oil back into the nineteen there, correct?
Did that turn out to be a good deal given how badly we need to know?
Probably 50 50 Anna Edwards. Again, it didn't do as well as we
expected because the volatility in that commodity was just
beyond belief. And we know that we'd ever seen that
happen before. Your son nuclear.
I mean, a lot of people say we can't get to where we want to go without some
nuclear. Yeah, I personally agree with that.
It's like cryptocurrency. It's it's one of those areas where I
don't understand it enough well enough to be able to invest in it.
But given the difficulty with fiat currencies you identified, I understand
you have bought some gold model. Yes.
First time in my life over the last few years, I've bought gold securities and
actually bought hard gold. And are you a buyer going forward?
I'm not sure. I bought it kind of as a hair, as my own
definition of a hedge. I haven't done well with it.
I haven't lost it. But.
But in a world where I think fiat currencies are being massacred
or hurt, I think in that kind of a world, more focus on some hard currency
is relevant. You're very much I defend a lot of those
bonds with real estate. As I recall, you started that maybe when
you were in law school at University of Michigan.
I had an undergraduate undergraduate here in Michigan.
So I talked about real estate where we are right now.
We've got some record high rent prices. We've got mortgage rates going up.
Tell us your view on the real estate market right now.
For all practical purposes, I haven't bought anything in 10 years.
And where are the opportunities created? I've sold a lot.
I felt that the real estate market generally has been overpriced.
Particularly in the private sector, as opposed to think the public markets have
actually done a very good job of sensitizing people to what's going on in
real estate on the private side. I mean, we took over a public reach
seven years ago with that with 13 billion dollars of assets.
We bought nothing with that portfolio and sold one hundred and forty two out
of a hundred and forty five properties. What's really incredible is we sold one
hundred forty two properties. And I don't have one sense of regret.
Not one of those deals do I see. Keith, I wish we hadn't done that or
waiting. If anything which shows sold it faster
earlier, quicker because it was you know, it was because of free money.
It created a price structure that frankly was very decent that
disadvantageous to the buyer. So it's great to have you back on Wall
Street. Thank you so much.
That sends out. He is the chairman and founder of Equity
Group Investments. Coming up, we wrap up the week with our
special contributor, Larry Summers of Harvard.
That's next on Wall Street week on Bloomberg. Small three week ISE David Westin and we
are joined once again by our very special contributor to Wall Street.
He is Larry Summers of Harvard. So, Larry, welcome back.
Great to have you. Let's start with those U.S.
GDP numbers came in, showed we're back into growth, modest growth.
What did you see in those numbers that would indicate where we are headed?
I think it's hard to know. It confirmed what I think we knew that
despite two negative quarters, the economy was not in any real sense in
recession at this point. But if you look through the numbers to
private domestic demand, which is probably the best indicator of economic
strength, it really wasn't very strong. Well below 1 percent for the third
quarter. And so I think what we've now had for
nine months is essentially no GDP growth and inflation on core measures, probably
stronger than it was at the beginning of the nine months suggesting that we've
got real challenges ahead. There continue to be arguments that
inflation rates are going to come down, but we haven't yet seen them come down.
So I don't think the fundamental picture that a soft landing remains an enormous
and unlikely challenge is very different than it was before we got these numbers.
Well, we're getting some political blowback now.
As you know, Sherrod Brown, the senator from Ohio, wrote a letter to Jay Powell,
followed by Mr. Hickenlooper, senator from Colorado,
saying, you know, we shouldn't give up these gains we've had in employment and
progress we made in the name of fighting inflation.
We're going to see more and more of that political pressure, do you think?
So I think there are two points. The first is that the political pressure
is a counterproductive strategy from the point of view of those who launch it.
Frankly, the Fed doesn't listen and if anything, feels more pressure to prove
its independence so they don't influence short term rates and what the Fed
actually does. But they do raise questions in the mind
of market participants and they raise long term rates.
So political pressure is a fool's game and actually probably makes financial
conditions tighter than they otherwise would be.
And that's entirely apart from the merits of the argument being made.
I yield to no one in how much I loathe unemployment and want unemployment to be
as low as it possibly can be over time. The concern is that as in the 1970s, if
we don't contain inflation, we set the stage for much more financial
instability and unemployment. And that is the argument that has to be
made by those who were on the dovish side.
They say that the Fed is going to be counterproductive and overdo it.
A corollary of that view is that they should think either that the Fed should
abandon its 2 percent target or that they're going to push inflation below 2.
And I think it would be helpful if every critic of the Fed were asked exactly
that question. Are they really saying that 2 percent
inflation should not be the goal, in which case they should describe what
their attitude is towards inflation and how they expect it to work out over
time? Or are they expressing the view that the
Fed is acting so strongly that it's going to produce so large a recession,
that inflation is going to fall below to learn to take a bit of a longer view, as
you did this week in some of your tweets, actually.
And we had a study out showing how much we lost in our children's education
because of a pandemic, something like six months.
And you translated that actually into what that really means for the economy.
Tell us about that problem. Look, we talk on this show about
financial capital, and it's very important, but human capital is even
more important. And what a generation of economic
research has now shown is the human capital is the most important
determinant of our economy's long term growth.
And most important determinant of the fairness and equity with which incomes
are distributed in our society. And so when we see six months or a
year's loss in children's achievement, that's a five to 10 percent decline in
the value of human capital for tens of millions of children.
And if you add up what that value is in terms of the lost earnings down the
road, it's comfortably into the trillions of dollars and not just a few
trillion. So we've got.
Really very, very discouraging news. And it points up the importance of our
doing much more and much better on what we're doing in the whole education
system. We can't fix what happened.
We can't fix the non learning that took place when kids were at home.
During Covid, we can do everything we can to double down on learning going
forward. And that's about how our schools are
organized. That's about who's staffing and teaching
in our schools. That's about making sure they're
adequately resourced. And in my view, that's absolutely
critically about accountability for everyone.
Accountability for those teaching and administering in the system and also
accountability for the kids. Whether it's the fact that close to 50
percent of all the grades in the Ivy League are a straight-A, not a minus, or
whether it's social promotion in too many of our schools or whether it's the
move away from testing because we don't like the messages that test send
relative to our social aspiration. We have got to get more serious about
actual knowledge acquisition in our education system at every level.
Larry started the week with President Xi coming out and unveiling his senior
management team, if I can put it that way.
Surprise something because there were no perceived as moderates at all.
They were really people who are very much allied with him.
He also had a fairly aggressive speech on his economic policy in China.
What did you make of where China is headed?
Certainly the markets didn't like it very much.
I think anybody who thought that the posture of Chinese policy was
politicized before the party Congress, but would be reformist after the party,
Congress got absolutely nothing to make their views confirmed.
It didn't get it. With respect to Covid, they didn't get
it. With respect to personnel in get it.
With respect to rhetoric. On the policy substance.
So given what happened, I wasn't surprised to see markets respond with
disappointment. Now, ultimately, what happens is going
to depend not on what was sad and just which personnel appointments took place
at this party Congress. Ultimately, it's going to depend on how
things in the Chinese economy play out. And it's going to depend on the
judgments that President Xi makes.
I'm not optimistic for China's economy, for reasons we've discussed in either
the short run or the long run. But we will have to we will have to say
and I think what we can hope for at this point is not any kind of friendship or
partnership, but a kind of cold detente in which the U.S.
and China recognize that they have to manage their coexistence in their mutual
interest. Whatever the depths of their hostile
feelings or sense of antipathy. And finally, let's end up on golf.
Something that you are very devoted to. I dabble in a little bit.
Augusta National here at Piers that the Department Justice now investigating
along with the PGA. I don't know that we know what the
merits of the case. But what was your reaction?
I've got no idea what the merits of any of it are.
But I have to wonder, at a time when the Justice Department, the president, are
claiming that we've got massive problems of monopoly and concentration in our
economy, and when inevitably legal resources are finite, whether protecting
millionaire multimillionaire PGA players from some kind of exploitation is a
sensible allocation of resources and a sensible judicial priority, even on the
worst view of what is happening. I see a lot of other abuses in our
country that seem a lot more serious. And so I wonder about this choice and I
wonder whether there isn't some headline seeking element in it.
But again, I'm not aware of any details on the merits.
OK. Larry, thank you so very much.
Always great to have you with us. That's our very special contributor for
Wall Street. Larry Summers of Harvard.
Coming up, they say the markets are always right.
But do we always have to listen to them? That's next on Wall Street week on
Bloomberg. Finally, one more site.
Getting it right and getting it wrong. Nothing feels better than having plans
work out even better than we'd hoped. Pfizer betting big on MRSA and coming up
with a Covid vaccine. There's no option failing and there's no
way that you can do it because failure is not an option.
And if not, ask then who or the Patriots going for the one hundred and ninety
ninth draft pick. And coming up with Tom Brady.
But what happens when it goes wrong, when you take a big public position and
get your head handed to you, like President Putin deciding to advance
Ukraine, expecting a quick and glorious win.
President Putin is failing in Ukraine. This war is not going as planned or for
that matter, Kenya West, now known as Yay!
Deciding not to be shy about his anti-Semitic sentiments and losing his
mega deal with Adidas in the process. In recent weeks, he has made
controversial statements, including anti-Semitic posts on social media that
said his easy line of sneakers into a lightning rod for criticism.
Which brings us to economic policy and getting crosswise of the markets.
Liz Truss made her first big move as British prime minister be a new budget
which the markets promptly and emphatically rejected.
Leave it to her quick departure. I am resigning as leader of the
Conservative Party. So her successor really soon ex started
his tenure this week by saying he'd make it up to the markets.
I will place economic stability and confidence at the heart of this
government's agenda. But consider the very different case
that President Xi of China, who this week got his way on having a third term,
surrounded himself with only his closest allies and forged ahead on his
aggressive economic policy, which led the markets to give another big thumbs
down. As Mary Lovely of the Peterson Institute
explained it, one of the big things that came out of this is that we're going to
stay the course with the Shia nomics, and that means continued centralization
of power. We're staying the course and the course
doesn't look that great. From the market's point of view, no one
thinks President Xi is about to pull a Liz Truss.
So in the course of a week, the markets won one and lost one.
And the time may be broken just over a week from now when Americans go to the
polls in the mid-term elections with their opinion of President Biden's
economic policies very much on the ballot.
Jared Bernstein from the White House wants voters to focus on all the jobs
that have been created. Our top line objective here is to
maintain the economic gains we've made for working Americans while
significantly easing price pressures time as they say, we'll tell.
But from what we've seen so far. What James Carville said 30 years ago
remains true in the United Kingdom and United States.
And I guess we'll see about China. It's the economy, stupid, that does it
for this episode of Wall Street Week. I'm David Westin.
This is Bloomberg. See you next week.
