Michael Kassner, Bloomberg Radio, FED discussed on Bloomberg Best


I'm Michael kassner This is Bloomberg best on Bloomberg radio This is a special edition of Bloomberg best from the Bloomberg year ahead summit Ahmed Baxter And unto these Pellegrini All right Denise so what about the year ahead and investing Oh that was the theme we heard about from David Rubenstein And rubinstein of course is the cofounder and co chairman of the Carlyle group And he tells Bloomberg sonali basic A market downturn is in the cards as the fed Titans Well I think we are due for a correction The markets have been very Ebola in for quite some time We've been basically having free money right So interest rates have been so low I think the fed has indicated it's going to increase interest rates three or four or maybe even 5 times at some point this year and perhaps next year So the market is anticipating that But until it actually happens I think the market won't really correct But the market is weaker already this year than we would have expected The economy is generally in good shape but I think the fed is likely to ratchet up interest rates and that will I think put asset prices down a bit And in the near term how is this inflationary story going to impact both investors and the companies that are grappling with these higher costs Inflation is something we really haven't had for quite some time when I worked in The White House We famously got inflation to 15% or something like that That was in the 70s Since then we've been averaging 2% per year or so for inflation relatively modest or even less than 2% Now we've just had a month over month each 7% And in fact the 7% the last number So year over year in fact 7% inflation annualized rate That's very high We're not used to that I think it will normalize out at probably something around three to 4% But that's still double what we've had So a lot of people are nervous about it And obviously people are now beginning to increase prices and they're beginning to wonder whether their customers will go away or their customers will go along with these prices So if you go and shop in a food market or something you go to restaurant you already see the prices are moving on As you mentioned that three to 4% is higher than in modern times So what does that mean for the new reality of the American economy Well inflation is probably going to be a cost that we're going to have to live with for a while It won't be quite as bad as it was in the 70s but it's not going to be 2% for a while And I think this is going to be with us as long as we have COVID and the supply chain problems because of the supply chain problems people are unable to get products that they want to the market So people who have the products are increasing prices Also it's hard to get labor And you have to get labored as you probably know It's very difficult to get labor work at some let's say lower income jobs and therefore people are paying more to get these people to work than they previously do And the result is prices are going off I think we're going to see this for quite some time This increase in labor prices We saw that with Goldman Sachs reporting compensation increased 33% Now if you compare that with other areas like private equity private assets I mean how do you put that into context the price increases we're seeing for talent on Wall Street Well the talent on Wall Street compensation levels are justified gravity So they're in a different league The average person probably isn't really affected by the Goldman Sachs bonuses or private equity kind of compensation The average person is really worried more about what it costs to buy some food or buy a car get gasoline And those prices are up a fair bit And people have a little sticker shock now when they go together gasoline or they go to the supermarket And I think that's going to be where the people for a while We have to get used to it And of course the problem with inflation is it generally is harmful most to people in the lower incomes because they can't afford as much So it's really going to hurt people who are blue collar workers more than probably white collar workers the white collar workers are experiencing it as well Well what does this mean for quality moving forward If we're seeing the labor increase so much in terms of price for some areas of the economy whereas inflation eats away at others as you mentioned Well income inequality is one of the great problems that capitalism has never solved And it's getting worse as a result of COVID people who don't have college education people who work with their hands people who are blue collar workers people don't have broadband people don't have child care at home They're often falling further and further behind They're falling behind so much so that I think it's been very difficult the next year or two for them to catch up So income inequality is getting worse not getting better And the social mobility is a big problem as well So I wish I could tell you things are going to be better than I think they're going to be They're going to be some challenges for a while Now I think Congress is not able to do anything about this The Congress is not likely to pass major legislation It's going to solve all these problems And of course if Congress would have passed major legislation a lot of it will be inflationary because at this point a lot of the legislation are considering is putting more money into the economy I don't think a lot of members of Congress want to do that right now So it's an interesting question going into the midterms as well What does all of this at the end of the day There's inequality These concerns about inflation What does that say about the ability of the Democratic Party to Garner more favor at a time where on one hand you had job growth but on the other hand you have people not able to pay their grocery Bill Well in midterm elections after a presidential election it's traditional that the president's party and the president's party will lose 20 to 30 seats in the House And that first midterm I think many people think that will happen now And if that were happened of course the house would go Republican It's also traditional that they party and power The White House might lose two or three seats in the Senate And I think if that were to happen the party in control of the Senate would be Republican With both houses in Republican control I think President Biden have a very difficult time getting anything passed along the lines of proposed before He may have to adjust what he wanted But I think it's going to reset expectations considerably if he isn't able to get Congress to do anything he wants And now with Democrats controlling both houses he still can't get exactly what he wants The cost of some of these spending bills I want to visit with you because for a while here we have very low interest rates But as interest rates start to go up how does that then start to impact the cost of how we pay for services in our country Well right now we have roughly $29 trillion of federal debt And so every budget we have to put in the interest charge is to pay off this 29 trillion or just pay the interest on it When interest rates are 1% for federal borrowing it's affordable You could say when interest rates go up by twice that or three times that it's going to be much more expensive to pay off the federal debt Therefore something else has to get squeezed out And it's not likely to be the.

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