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00:00It is a process of choosing political candidates for the fall of strengthening the coalition confronting Russia. But most of all of coming to terms with a tightening fed. This is Bloomberg Wall Street week. I'm David Westin. This week special contributor Larry Summers of Harvard on what can get the job done on inflation. This is a feature not a bug associated with the tightening of monetary policy. And Tom SHAPIRO of GPI has partners on risks to the housing market as interest rates rise that consumers stretch. And that is certainly going to be an issue on a going forward basis. This week we did a lot of preparing going to add Sweden and Finland to NATO. When the leaders of the two countries paid a visit to President Biden at the White House what's incredibly his story. This completely reshapes the post-Cold War security alliance in Europe. Finland and Sweden make NATO stronger preparing for midterm elections less than six months away. As five states held primaries go in Pennsylvania Republicans have some more work to do. As Senate candidate Dave McCormack explained we have tens of thousands of mail in ballots that have not been counted. But we could see the path ahead. We could see victory ahead. But no one and I mean no one is preparing harder than Fed Chair Jay Powell preparing for the next round of rate hikes. Inflation is coming down. That's what we really need to see. Honestly we'll just where we will go until we feel like we're at a place where we can where we can say yes to. Neutral conditions are in an appropriate place. Equity markets this week believe the chair. And if that weren't enough then chilling news out of retailers like Target and Wal-Mart reinforce the idea that harder times may lie ahead. With the S & P down for the seventh week in a row the longest losing streak since 2001 and though it flirted with a bear market it came back late on Friday ending just above thirty nine hundred down 3 percent overall for the week while the NASDAQ already in bear territory was down another three point eight percent this week. But the bond market was a different story with the 10 year rallying for the second week in a row ending up with a yield below 2.8 percent. To help us sort it all out. We welcome now Bob Michael. He's CIO of Global Fixed Income Currency and Commodities at JP Morgan Asset Management. And Sarah Malik chief investment officer at New VIX. So welcome both you. It's great to have you here. Sara let's start with you because it was so much activity in equities this week. What happened. Even there was three key drivers for the market this week. First was the retail wreckage which shocked investors on Wednesday because we saw demand destruction. Consumers are not willing to pay anything for goods anymore. And secondarily we finally did see that shift in spending from goods to services. But it came with a healthy dose of inventory building up on the good side. This is not good for retailers. Business model. Second is manufacturing data. After a great payroll number in April strong industrial production numbers yesterday the Philly Fed Manufacturing Index significantly misses numbers. There's cracks in the economy but it's not all doom and gloom. Investor sentiment is very negative. Markets are down almost into bear market territory. Valuations are starting to look attractive and down stock markets and some demand destruction. Could you give the Fed the ammunition it needs to finally take its foot off the gas and turn that surge of interest rate hikes. But we don't expect that till at least later this year after they see some more data. So Bob Harris says maybe the Fed can take its foot off the gas on interest rate hikes. What did we see in the bond market. Because we had seen that really dramatic ramp up in the yield on the 10 year and then it sort of plateaued the last couple of weeks. Well David unlike the equity market the bond market actually found solid footing this week. And it all started when Fed expectations of rate hikes settled at around two and three quarters percent at year end. I know that's 2 percent from where we are now but earlier this month it was at 3 percent and the concern was that it was headed north to three and a half or higher. Once Fed rate hike expectations settle down the treasury market settled down. You said we're at 280. Last week we were at 320. And again the concern was that we were headed to 350. It feels as though the market is getting very comfortable with the narrative that the path to a 3 percent Fed funds rate will be enough for now to slow down growth and inflationary pressures or at least get the Fed to pause. Now look I'll admit it wasn't a perfect bond market. Corporate credit still had a tough week. Thanks very much. Equity market and Sarah it was the lousy earnings that Sarah talked about and we had high yield yielding now 8 percent. It started the month at 7 percent. But overall good week for the bond market. If Fed rate hike expectations and the 10 year yield settle around where they are that will ultimately create support for corporate credit and that should spill over into other asset classes. Bob what are we seeing in the underlying economy as it were when you look at those retail sales numbers from Target and from Wal-Mart. Think some people are saying this is different from just a rate hike concern. This is concerned about the strength of the consumer. The basically they are not buying as much. They can't buy as much. Well we're looking at it from a credit perspective. And what we're seeing is exactly what companies said they would see this year that they were seeing higher input costs. They were going to pass some of that along. They were going to absorb some of that in their margins. We're seeing that the top line at a lot of these retailers was actually still very strong. It was up there. And I think the other thing that gets lost in all this is perhaps the consumer is shifting its spending patterns. It's shifting away from the retail and it's doing more in travel and leisure. I agree with Bob on the bond market. I think it is leading the way when it and equities are starting to catch up. Today we did close in much better territory right where we were. We could see a bear market rally and we did see short covering this week. But with the retailers I'm less constructive because that inventory build and it goes on their balance sheet is going to be an issue. I think consumers are saying we're not going to pay anything for it for for goods going forward. There's any winners and losers in the retail sector. For example Costco. This is a winner though going forward. They have a more resilient business model lower price points and they have that subscription business which gives them stability. They can raise prices there to overcome inflation. And raising prices is going to be key for companies in order to preserve their margins going forward. Look I think for sure Sara that higher energy prices higher gas at the pump higher food prices are eating into consumer budgets. But we still have to look at very low unemployment. We've got wage gains going up at the fastest rate in decades. It feels after a little consolidation in here that perhaps the consumer will return to spending more broadly. What good does that cut the other way to some extent above. Because if it's really going up that fast the Fed may need to go further in rate hikes. Well I think certainly that was the narrative last month that there was no high that the Fed could reach. That would be high enough. It feels like we're seeing some pause in the housing. There's enough evidence that things might slow down with higher rates and perhaps the liquidity withdrawal. That 3 percent is a good target for now. So one of the concerns of an evaluation is when it comes to equities there's been some would say fully valued I guess that's the polite way to put it. Is that out of the market now. Not completely out of the market. Equities are mostly pricing in a soft landing and somewhat pricing in a mild recession. And if we were to hit a deeper recession hard landing we've not priced that in yet. We could see equities go down another 10 percent. In that scenario that is not our base case. Now valuations are about between the five and 10 year average at this point. So this is where you need to start looking for quality companies with strong balance sheets that are trading on sale. Another area we like actually are growth stocks which are very unpopular right now but they're significantly declined. There's a lot of great companies in there for example even in the famed sector Microsoft. They have a 1 percent dividend yield. Dividend growers tend to outperform in higher rate environments. Huge total addressable market. Strong enterprise can demand strong cloud. The man we're looking for opportunities in companies such as those given the declines year to date. Bob Sara recent recession. How do you see the likely recession. I think most people I've talked to over the next twelve months. But you go out 24 months. It's different. I think when you look at the next 12 months in the U.S. you still have to get through the summer where there's a lot of pent up demand for travel and leisure. And unemployment is still very low and wages are going up. I think when you start to get out 18 to 24 months then you're looking a lot of things. You're looking at where rates will be the cumulative impact of rate hikes. We think they'll be about 3 percent. You're looking at the bite that inflation will have taken out of the economy. You'll have another year year and a half of higher inflation than the consumer would like to see. You'll have a strong dollar. You're you're also going to see the liquidity withdrawal from the Fed. So two years out our probability of recession goes up to fifty five percent. It's still possible for the Fed to engineer a soft landing. But frankly it looks very aspirational when you figure they have to battle the highest rate of inflation in 40 years and drain away the greatest amount of liquidity we've seen in the history of Earth. We're still more optimistic Bob we're between a soft landing and perhaps at worst a mild recession. The demand destruction that we're already seeing cracks in the housing market. Those to get it plus that 20 percent or so decline in the stock market. Do you think that that could be one of the reasons in a few months from now the Fed has said they're data dependent. They could start to lower that the number of rate hikes that they're doing and help us avoid that worst case scenario of a recession. So David there you have it. Two years out a lot of people are saying it's a coin toss. Someone in the equity side sees the optimism. Bond guy sees the pessimism. Yeah but my question basically Bob is if in fact the Fed decides it's really getting troublesome. So I have to back off on the rate hikes. Where are we the inflation. I mean is there a danger here of getting off the antibiotics a little too early. We don't have the infection gone. Well I think we don't want to acknowledge that Chair Powell already told us that if it comes down to growth or inflation their battle is against inflation even if it means avoiding a recession is unavoidable. So Sara if Bob's right what does that say. The equities. I think you know for equities it definitely leads to more downside in a recession environment they've not priced it in but that's also why we're looking for those companies that are less dependent on economic growth. That does lead us to growth stocks. They have some of the worst returns year to date. And then also fundamentally strong sectors. Energy is a sector we still like because of the fundamentals. Tight supply demand should remain reasonably strong and producers are being very disciplined. And then finally dividend growers if you look at history companies that have strong balance sheets cash flow can continue to grow their dividends. They'll give you that portfolio protection within equities and should perform quite well while the Fed raises hikes and be defensive during a recession. OK. Sarah Barbara Lee stay with us because we want to put some money to work here. We're gonna ask them for some investment advice given what we are seeing in this tumultuous market. That's next on Wall Street week on Bloomberg. This was the week when the stock market staged what it euphemistically calls a correction. Plunging below the 1000 mark for the first time since mid November came amid growing investor concern over the state of the dollar at home and abroad. Domestically how much it's going to cost in terms of escalating interest rates on the dollar and abroad how much it's going to be worth in terms of other currencies whose relative value was on the rise. That of course is Luis Brookhiser on Wall Street week nearly 50 years ago. Now remind us of the similarities and for that matter the differences as well between then and now. Sarah Malik of Naveen and Bob Michael of J.P. Morgan has stayed with us. So Bob let me come back to you. It is a different time although there are some similarities I'm not sure but there's a correction. What we're actually seeing a downright bear market right now. But let's talk about investment in fixed income. Where are there opportunities from your point of view. By the way I hope it's a correction because if I'm right I think it took about 10 years for the Dow to get back up above 1000 from that taping. Look at when we look at the repricing in the bond market it's been dramatic for the first four or five months of the year. It's been the worst bond market in history by a lot of measures. We want to take advantage of that. We think it's gone too far. I was in Kentucky visiting clients actually yesterday. There was a lot of discussion about municipal bonds and there are a lot of individual and institutional investors that are looking at muni bonds yielded 1 percent at year end. They're now yielding over 3 percent on a taxable equivalent yield. That's about 5 percent. And municipal finances actually look pretty good. The other area that we're getting back into that looks pretty attractive to us. I touched on earlier it's high yield. You're at an 8 percent yield. You're at 7 percent at the start of the month. You were four and a half percent at the start of the year. A pretty dramatic repricing. And I think a lot of investors have just fled the market and forgotten that it's a cleaner market. Six percent of the market defaulted away in 2020. You've got a lot of middle America industrial companies in there with great fundamentals. To me that's where a lot of value exists. All right. Come back to high yields. But Sarah what about Munis. Because I think you're interested in those as well right. Now for fixed income in general rising rates are going to be a headwind but similar to Bob we don't see rates rising to the degree that they have. Year to date. So for fixed income there are areas where you can lean on new municipal bonds to do a strong fundamentals at the front end of the curve. We're seeing high yields and in taxable fixed income. We like corporate credit. Those companies and sectors are strong balance sheets but also emerging markets in high yield. You're getting a good return now much better than you did in the past. And both with all of those are areas we like and taxable fixed and munis. So I'm really curious about the high yield because there's a lot of talk about possible the spreads as they say blowing out and high yields. So you do want to be high yields when that happens. Are you confident that's not going to happen. And when you have rising rates don't you have to worry about some defaults. You have to worry about defaults right before recession. And our analysis shows that any back up in high yield credit spreads is a buying opportunity. Unless a recession is imminent expecting one two years out isn't imminent because we know anything can happen. So for us credit quality still looks great. The yield is there. There's a lot of money on the sidelines that needs to put yield into their portfolios. As long as things remain stable we think that money will come in and support the market. Sara you mentioned earlier some of the equities you're interested in. You mentioned energy. For example you mentioned Microsoft maybe Costco. What makes you interested in those particular sorts of equities. So within energy we love the fundamentals of the sector. Tight supply strong demand produce discipline. Particularly refiners we think can benefit if benefit at this point in the cycle. Within the fang stocks. We don't think that they're dead. You just need to be selective. Look for ones with less competition more of a unique business model. Not only Microsoft but Amazon. They had a very tough quarter but they've really in a sense overinvested in their logistics. They had not so much control over their global distribution. It's going to be a positive for them and pay off in the long term. We don't look at Amazon as a post pandemic stock. Just going to suffer from your other areas of equities. Consumer staples is an area where people tend to hide during periods such as this. They are very low growth rates though valuations are high. That's not a place that we'd be looking. If you want protection look for those companies with strong dividends where they have the balance sheet strength to continue to increase those dividends. It's about on the fixed income side. Is there a corporate bond sort of tracking of what Sarah just said on the equity side. Are those the Covid bonds you're most interested in. I think it's just so broad base now. Everything got thrown away. I wish I could say there was a particular market or sector but everything cheapened up so dramatically. It's just a matter of going in having the nerve to buy when everyone else is selling and just hanging on for a little bit and ride through the volatility. But what if in fact there is more of a chance of recession than we're anticipating. How do you hedge against that. How do you protect yourself Bob. Well I think there are a couple of things. One is you have to go up and credit quality because if in fact we do go into recession then you are going to see default rates go up. Then there's going to be a flight to quality. So not only do you want higher quality corporate bonds you want government bonds again regardless of the yield. We've seen that you'll could be anything in the government bond market and then you want to still stay in the dollar. So those are the kinds of things where you would go to if recession became really profitable near term. So Sara what about the dollar. I mean we heard there Mr. Rukeyser 50 years ago. Tell you about the dollar. Boy we've had a very strong dollar this week. We saw maybe a little bit of a backing off in the strength of the dollar. Would you have a theory on the dollar and how does it affect your investment strategy. I hate to say anything different than Louis Rukeyser. We're in the camp that the dollar should remain pretty strong. The US is the safe haven trade. There's so many geopolitical risks out there from the Russia Ukraine situation to the lockdowns in China and the supply chain issues that they're having. And also can that monetary policy really have an impact. So we're very selective non U.S. We only like Latin America at this point in emerging markets. Dollar remains strong as the US raises interest rates. Do you think that you at best it's flat. It likely remains pretty strong going. So I also want to ask you the same question as Bob on the equity side. For example if you thought there was a larger chance of recession than you've said so far how would your hedge against that. Well first of all I think market time is a loser's game. The market can turn on a dime. We've seen that happen consistently this week so we don't recommend people trying to get in and out of the market. This is where you need to be diversified disciplined averaging into the market and then you just need to look for those companies that are resilient in those sectors where they can continue to perform well because they have the profitability they have pricing power to overcome inflation strong free cash flow strong balance sheets. That's where we'd be positioning in equities say out of your unprofitable technology companies where you know you might have they might have a hard time surviving during a deep recession. And Bob sort of finally Warren Buffet and others have said you want to buy when others are selling in the reverse. Right. Right. Now as you look at the marketplace where people selling that you'd like to buy they're making a mistake. Well I think we talked about corporate bonds. I think that was a big mistake. I think there was a lot of selling of municipals. I don't think that was a mistake. I think that was the technicals because they had to raise cash to pay capital gains taxes at the start of the year. I think some of the emerging market debt sectors look pretty attractive to me. I'm glad you raised that because I was going to ask about outside the United States. You think emerging markets may be attractive on the fixed income side. Yeah. Because they've gone through a rate adjustment. If you look at the U.S. we've done two rate hikes for 75 basis points. If you look at the emerging markets since the start of 2021 we've had something like a hundred and thirty rate hikes for a cumulative 11000 basis points. There are high real yields there. They front run the inflation. They're in a good spot. So Sara same question you whether it's debt or equity in emerging markets do you find attractive. Some people say this is a time to give into them. Others say they've got a lot of external debt. I mean I agree Bob. And see emerging markets debt over emerging markets equity. I think you're getting more for your yield there. Emerging market equities are tough because of what's happening in China. The impact of Russia and Ukraine on European equities were very selective there. India looks somewhat fully valued to us. So we're finding most value in Latin America which is out of the frame. It is a challenge for equities in emerging markets at this point. Let's take one last one and quickly Bob what about China. At the very end of the week they really cut their rates in particular market mortgages. Is that good news for the world. No it's bad news. And I think you have to look at it and think that the probability of stagnation of stagflation goes up a lot because they're struggling with vaccinations. They're struggling with the spread of Covid and mortality rates. They're going to lockdowns pretty systematically. So the supply pressures are going to continue and consumption will decline. This been a great discussion. Thank you so much to Bob Michael of J.P. Morgan and Sara Malik of Movie. When we come back we'll take a look at what's happening around the world next week. Global Wall Street. That's next on Wall Street week. I'm Bloomberg. This is Wall Street. I'm David Westin. It's time now to take a look at what's coming up next week on global Wall Street starting with Juliette Saly in Singapore. Thanks David. Investors here in Asia will be focused on geopolitics this week with President Biden expected to visit Japan for a summit with Prime Minister Casita on Monday. That is scheduled to be followed by a quiet meeting between the U.S. Japan Australia and India on Tuesday. China has continued to eye America's alliance building in Asia with alarm as relations between the world's two biggest economies strained further over Russia's invasion of Ukraine. Now over to Dani Burger in London Danny. Thanks Julia. One of the focuses in Europe this coming week will be the continuing story of Sweden and Finland's attempt to join NATO. They had hoped to fast track it and hoped to join the bloc last week. However Turkey had blocked their application. So questions will linger. Can they get back on track. Present. Biden last week voiced his support for the two Nordic countries to join NATO. This of course in the face of Russia's invasion and ongoing invasion of Ukraine. Now over to Romaine Bostick in New York. Thanks Danny. Coming off another rough week in U.S. financial markets. Investors are focused intently on macro conditions. Economic data next week include the U.S. Manufacturing and Services PMI data which are expected to show further softening. We'll also get a peek at durable goods orders which economists expect to have slipped to a growth rate of zero point six percent for April from one point one percent a month earlier. Two separate reports for home sales. Also on tap as our personal spending numbers. Remember in March inflation adjusted spending unexpectedly increased a signal that Americans weren't afraid to dig into savings to keep making discretionary purchases. But a lot has changed in the months since. And that number for the month of April is projected to have reverted back to the year to date lows. So onto that pile. One of the Fed's preferred measures of inflation. The PCC price index and the minutes from the May 4th FOMC meeting. And investors are going to have a lot to digest in the week ahead. Thanks to Juliette Saly Dani Burger and Romaine Bostick. Coming up a housing market caught between shortages of supply and rising mortgage rates. We talk with Tom SHAPIRO of GPI as Partners. That's next on Wall Street week here on Bloomberg. The housing. Housing a kind of climate and climate and climate housing. We all need it. There isn't enough of it. And prices are going up. Part of the problem is that we never really recovered from 2008 according to Jonathan Gray of Blackstone. The challenge on housing has been many years in the making. If you step back and look at the supply picture we have been building housing at half the rate we did prior to the financial crisis and the Fed's monetary support for mortgages has helped stimulate the market. It was very hard to understand why when we were in the midst of biggest house price run up ever that the Fed was buying mortgage backed securities on a substantial scale. But now mortgage rates are pushing the other way climbing back up over 5 percent. Driving the housing sentiment index down the most since the pandemic. Which leads. Wells Fargo CFO Mike Stanton Casino Two anticipates softening in the market. I think we've seen you know if if it's not the largest increase in mortgage rates in a quarter ever it's pretty close. And so I think that's definitely going to have an impact on the mortgage market. And this week's mortgage applications seem to prove that point down 11 percent. People are not entering into contracts or trying to buy homes and in part because it cost him. And to take us through this housing market. Welcome now. Tom SHAPIRO he's president and chief investment officer of GCI as partners. They manage about four point three billion dollars in real estate assets. Tom thanks so much for joining us on Wall Street. First of all I want to start with your take on where the housing market is right now. We've seen some slowing even this week with some new housing sales as well as existing housing sales. Sure that first thank you so much for having me on the show. Why don't I just give you a little anecdotal evidence of what we're seeing in the field right now. Our home sales are down about 15 to 20 percent but that's a headline number and I think it'd be helpful to kind of dig a little bit deeper into that number. The reason for the most part it's down is because we can't deliver homes. We're still having tremendous supply chain issues. Also we find that a lot of homebuilders are actually holding back on the number of homes they want to deliver. And that is for a couple reasons. One. Inflation because costs keep going up and they don't know what it's going to actually cost to finish the house and to they want to write up the home price appreciation. So I would say for the most part right now while we see a 15 to 20 percent slowdown in sales year over year a lot of that is because of other extraneous issues. It's more of a delivery issue that is a demand issue. With that said we're definitely starting to see a pullback. We're starting to have to go deeper into our wait lists. But every house at this point that we deliver in the markets we're in. We are selling. I think we have to be careful about what what we see on a going forward basis because definitely we're starting to see things slowing down. That's a really helpful way of putting out because we're having those discussions about the overall economy. Is it supply. Is it demand. As I understand you've got a supply problem because of supply chains. People say that's going to go away. Is it going away in housing. Well it's not. I mean we definitely have issues. We have problems getting trusses and windows and appliances. We're delivering homes with plywood windows at times. If we're having all sorts of issues and of course you know the war in Ukraine and what's gone on in China and work stoppages there the deliveries and transportation is an issue and jobs are an issue and trades are an issue. So it's gotten marginally better but we still have tremendous supply chain issues. And look if you look at how many houses were delivering a year in total this is all all forms. It's about one point two million housing units a year which is sort of in equilibrium. So Tom some of the issue can be on the demand side at some point. We've heard about mortgage rates going up to what 5.5 percent something like that. So that must affect it to some extent. Are you seeing some effects with that. Because we also have the Fed is going to start selling off some of those mortgage backed securities. Yeah for sure. I mean look the consumers stretch so why they stretch a stretch because of inflation. So we have all sorts of issues we have. Gas prices are more expensive and we have costs. The food is more expensive. And of course as you point out mortgage rates are an issue. So the consumers stretch. And that is certainly going to be an issue on a going forward basis on housing. But we are seeing you know people taking less options. They're going to slightly smaller unit types and they're renting. So we aren't necessarily seeing a slowdown at this point because of mortgage rates. But again I think we have to be careful. I think you know the crystal ball says it's going to get a lot worse. We're not seeing it today but I think in the future we're going to see a slowdown. And as I mentioned the 15 to 20 percent or so we're seeing year over year decline at this point isn't a demand issue but I think we shouldn't kid ourselves that we are seeing it again. The traffic's down and a lot of our communities it is starting to slow down. So I think where to start to see the slowdown come in the next couple of quarters. When you say things are going to get worse. A lot of us go back to 2008 the last time we really thought hard about a housing crisis in this country. And there are some anecdotal incidents where it sort of feels like 2006 2007 where people are outbidding each other houses. They're going way above the asking price. Are there parallels with what happened in 2008. It's at a May. It's really really good question. So. So why don't we go back in history. Because I think you know we really have to analyze what where did we end up in a way and why did we end up there. So if you if you look back to 2005 we produced two million housing units. So in general we produce one point two million households a year. What's a household. Your kid graduates college and moves into an apartment. A couple moves out of their parents house and they and they take an apartment there's a divorce et cetera. And that creates a need for housing units. So against a total need of one point two million units we produce two. And then it did slow down. Remember after 0 5 even before the GFC we started to have a housing slowdown. We still produce one point five million housing units. So we had a massive oversupply going into. Then a demand shock. So it was really the perfect storm. And that is why we end up with the global financial crisis. So in those days we just had a massive oversupply and we had and then we had demand just fall through the roof to shoot me fall through the floor. So that is that is why we ended up in the GFC and that's why we ended up with a massive oversupply of housing at that point. People thought there'd be 8 or 9 million foreclosures. We actually didn't believe that number because fundamentally we don't believe that if your house goes below your mortgage value by 5 or 10 percent the people are going to walk away from the house. So we actually at that point started to buy housing lots. Why do we buy housing. Lots. They have tremendous convexity at the home. Price goes down 10 percent. Housing lots go down 20 percent. There's some point where if you're gonna build a house across two hundred thousand dollars that's worth one hundred eighty thousand dollars. Lots of theoretically worthless although of course have some option value. Household formations also drop through the floor. And that's because people doubled and tripled. People moved into their parents basements. There were such Mendel's unemployment. So we started to see that at some point when the housing recovery happened and the economy started to recover. People would start to move out of those units and create households again. So that's why we did it. And we thought it was the best way for recovery. So fast forward to today. Today we have four. Last time mortgage rates were at this level. We had a million more housing units. We have a lot of markets one to two months of supply. So right now supply is not an issue. We have very very little supply in this market. But of course you know we're looking at the demand side now. And as you point out mortgage rates are up. As I said the consumers stretch. So there's no question that there's going to be a demand shock but there isn't a supply issue that we had in a way which is why we feel pretty confident that we're not going to see a GFC type situation in housing as we did before. Now look we have a lot to worry about. We're clearly heading for its recession potential recession with stagflation. So you know there is a lot in the economy we're starting to see. It's the summer's pullback. We're starting to see corporate earnings come off. They're starting to hear about potential layoffs. We're starting to hear about about jobs doc you know jobs being increased. And as well as wages going down which is all problematic. So Tom Keene on water we'd like to get some free investment advice if we could. So given all that you just said worthy investment opportunities I know recently you said I believe you want to sell old and build new. Is that still true. Yeah for sure. I mean we think I mean I say a couple of things that we're looking at right now. We are very concerned about older housing stock particularly in multi-family foreign style apartments. We think that people don't necessarily want to live in those type of units today. People people clearly in a post pandemic world are going to have some level of work from home. And given that they're going to work from home they need a different type of unit. So we're doing a lot of what we call build to rent and actually single family homes and a whole community where they are all for rent. They could be two three hundred units of single family homes. That could be one better. Generally the one bedrooms are for joint but they have a little backyard choosing three bedrooms for the really nice amenity package including a shared workspace where if the couple is in is in the house and one needs to be on Zoom and the other one needs to be doing work they can actually go into a shared work environment. So we are we are definitely looking into that. We like that a lot. And that also I'll throw off their rents. So look as things get more expensive for buying we think and rents have gone up as well. But we do see really strong demand on the rental side. Again we're starting. We still see very good household formations and people will make a lifestyle decision first and a financial decision second. So they'll decide I want to be in a house I want to have an apartment I want to be in a mobile home. So they make that decision first and they say I'm going to buy or am I going to rent that. So we're seeing more and more demand on the rental side. So a lot of what we've been shifting to we still do a lot of homebuilding and we still really like that sector a lot. But we're also looking at built to rent communities as well because we think that more and more especially as mortgage rates go up we're gonna see more people renting. And we are in a sort of Uber Bambi generation where people like to rent things and honestly own things as well. So we're not seeing the same desires of homeownership as we did in the past. Tom thank you so much for joining us on Wall Street today. That is Tom SHAPIRO of VIX Partners. Coming up we wrap up the week with our special contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street week I'm David Westin we are joined once again by our very special contributor on Wall Street week. He is Larry Summers of Harvard. So Larry this was quite a week in the market. You saw equity markets really selling off rather substantially. It's got a lot of people nervous. Is that going to help or hurt the Fed's effort to address inflation. It's part of the Fed's efforts to address inflation the way monetary policy works is by raising the costs of capital and discouraging investment. The way it works is by reducing wealth which reduces spending. This is part of the process. This is a feature not a bug associated with the tightening of monetary policy that we've had. And the reason I've been reasonably confident that the economy will slow down but not so confident about just where interest rates will go is because of the uncertainty about what economists call the transmission mechanism how large a decline in markets how much of a discouragement of housing you get as rates go up. Well to that very point what is the risk from where you see it right now of the Fed essentially getting cold feet as we see the markets really go off substantially. S & P now it really in bear market territory. What's the risk that they'll let up too soon on the interest rate hikes. Look there's two risks in a situation like this that we overshoot the runway and that we land the plane too hard and those are both very real risks in this situation. It's a very very difficult landing that the Feds attempt at. As I've said on your show before David. There's never been a moment when we had unemployment below 4 and inflation above 4 when we avoided having a recession within the next two years. And that just goes to show the huge difficulty of the task that is before the Fed. My own judgment is that it's distinctly more likely than not probably two in three or three and four that we will have a recession that will start sometime within the next two years. When we look at the markets right now a lot of this reaction we think is a reaction to the possibly of higher interest rates. Is it possible it's actually bleeding over into the underlying economy itself. Because we also saw some retail sales numbers that concern people from Wal-Mart and from Target this week. Maybe people aren't spending as much money. We also have seen some softening housing numbers. There are various indications that by the way a lot of the things that people are buying they're buying with increased credit card loans. So I think that the prospect of recession is looking much more real to markets right now than it was a few months ago. You see that in the way in which certain retail stocks have been hammered. You see that in the way some credit spreads have widened. And it's just you see it in the behavior of the overall market. So I think you still have more room to go in. As I say I do think we're unlikely to get out of this with sustained expansion. There are some thoughts. There are other ways as well to address the inflation problem. One of the suggestions is increasing corporate taxes. That's something suggested by President Biden for Mr. Business. Amazon came out against that. You had a little bit of a disagreement on Twitter this week. Yeah look I I've been hardly consistently supportive of everything the White House has said on fiscal policy and now I haven't been consistent with everything they've said on policy towards business either. And I've got great respect for Jeff Bezos as a business leader and as an observer of the economy. But I didn't really see his point. It seemed to me that it was pretty natural to raise corporate taxes so as to reduce spending when you had an economy that was overheating. And it seemed to me pretty reasonable strategy to try to raise taxes to reduce spending in ways that would affect the most fortunate people in the society. And it seems to me that that's what President Biden was is trying to do and that's what he pointed up in his remarks. So I didn't understand why Jeff Bezos was suggesting that they were somehow an obfuscation or somehow an inappropriate kind of commentary. Agree or disagree with the president's policy. But I found Bezos his comments to be somewhat off base. Another way the President Biden is suggesting we might address some of the inflation problem is by more vigorous enforcement and trust lies. We had the system of trade general for antitrust this week come out and say he thinks he's got some problems with private equity. What do you make of the efforts at the FTC and the private justice on antitrust front. I'm very worried about whether they are in the right direction. I don't think there's any question that we need to step up and take trust enforcements in America. I don't think any question that there are areas where we have too much monopoly power that should be price that should be prosecuted principally where individual firms are merging to get excessive market shares in particular industries. And the budgets of those agencies have been allowed to erode in ways that are quite damaging. What I think is badly misguided and potentially dangerous to our economic future is the set of doctrines that people jokingly refer to as hipster anti-trust or the new Brandeis science after Justice Brandeis. That's a theory that says antitrust shouldn't be about maximizing benefits to consumers but should be about some other different set of abstract objectives. And I think that tilts very easily into a kind of dangerous populism. If the head of the antitrust division thinks that there are mergers that are headed towards Monopoly he should try to block those mergers. If the head of the antitrust division believes that there are companies that are engaged in inappropriate exclusionary business practices he should prosecute those companies. But I don't understand what his argument is that whether a firm is owned by public shareholders or private equity shareholders should be dispositive. If he's saying that all the private equity firms are colluding on particular deals I understand that argument. And if he can prove that argument it would obviously be a serious problem. But it frankly sounded rather like some of the populist rhetoric that the FTC commissioner Lena Kohn has engaged in. And I think it's very important that we have antitrust policy based on facts based on economic science based on consumers not on a kind of generalized feeling of hostility and outrage towards business. And I'm frankly worried about that. Okay. One quick one here. At the end there was a big objection from the shareholders to Jamie Dimon as compensation as a 50 million dollar bonus that they were going to pay him that they really objected to. What did you think of that. Look I think taxes ought to be more progressive. And so Jamie Diamond what Jamie Diamond and everyone else who makes a lot of money ought to be paying more in taxes. There ought to be much harder for them to pass large fortunes to their kids. But God if you look at what Jamie Diamond has contributed to the market value of the share owners of JP Morgan I don't think there's anything unreasonable about his being paid making as much money in a year as a really great pro golfer. And so I was surprised at those objections. I think the way to get at issues of inequity is to have more progressive taxation more burdensome taxation on estates. Get rid of a whole set of loopholes. But driving people out of leading public companies into the private sphere away from public companies I don't think that's smart strategy for our country. OK. Thank you so much. Always great to have you with us. That's Larry Summers of Harvard. Our very special contributor here on Wall Street Week. Coming up you already know about the long list of risks you're facing right now. But is there one you might be missing one that is literally out of this world. This is Wall Street week on Bloomberg. Finally one more thought. The unknown unknown. That's what Donald Rumsfeld warned about when he was defense secretary. There are things we know things we know are issues but don't know the answer to. And then there are the things we don't even know. We don't know right now. Investors face their fair share of known unknowns like where inflation is heading. You know it's not going to be good for a while. Whether we're facing a recession next year every single American worker is going backwards right this minute. Whether China's problems with Covid we'll continue our supply chain problems. Clearly China's industrial might was slowed by the lockdowns. What the end game is for Russia's war with Ukraine. I think the off ramps have gotten slightly narrower. And of course whether we're facing another wave of Covid cases are rising hospitalizations are rising. But those are the known unknowns. Congress has now added an unknown unknown to the list. We need to be worried about UFOs. The House Intelligence Committee's subcommittee on terrorism held hearings this week to get some answers on unidentified flying objects. We have seen an increasing number of unauthorized and or unidentified aircraft or objects in military controlled training areas and training ranges and other designated airspace. And in case you wonder why our Congress with so much else on its plate has decided to take up the question if you oppose fear not. It's been on the case for over 50 years now dating back to Gerald Ford now when he was president but when he was House minority leader and organized a hearing after complaining the testimony from an Air Force expert calling reported sightings swamp gas was flippant. So as you go through your portfolio and consider the upside and downside risks you might want to include the possibility of alien intervention that as Rod Serling put it we've moved into a land of both shadow and substance between light and shadow. It is an area which we call the Twilight Zone. I'll leave it to you to decide whether that's a risk to the upside or risk to the downside 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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Wall Street Week - Full Show (05/20/2022)

On this edition of Wall Street Week, Saira Malik, Nuveen CIO & Bob Michele, JPMorgan Asset Management CIO & Global Head of Fixed Income wrap up a turbulent week in the markets. Tom Shapiro, GTIS Partners President & CIO talks about the health of the US housing market. Plus, Former U.S. Treasury Secretary Lawrence H. Summers weighs in on the possibility of a recession and more. (Source: Bloomberg)

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