WEBVTT - Surveillance: Pandemic Recovery With Stiglitz 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownwitz Jaily, we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:32.240 and of course, on the Bloomberg Terminal. Gary, Indiana, fanciest 0:00:32.280 --> 0:00:35.080 city in the world for economics, the home of Joe 0:00:35.080 --> 0:00:39.400 Stiglets and Paul Samuelson. Gary, Indiana went from a pandemic 0:00:39.600 --> 0:00:46.239 nine unemployment down to seven percent unemployment. That indicates the 0:00:46.360 --> 0:00:51.760 inequalities of a strange, strange economy. How great is the 0:00:51.840 --> 0:00:58.720 inequality in this two thousand twenty one Well, the the 0:00:58.800 --> 0:01:05.920 pandemic both exposed and exacerbated UH the inequalities. UH we 0:01:05.920 --> 0:01:10.480 were slated for a very K shaped recovery, with those 0:01:10.520 --> 0:01:13.680 at the top who had done well doing even better 0:01:13.760 --> 0:01:17.080 and those of the bottom doing more poorly. The kind 0:01:17.120 --> 0:01:21.560 of numbers that you cited suggests that that the kind 0:01:21.640 --> 0:01:28.839 of very strong economic Recovery Act that UH was passed 0:01:29.200 --> 0:01:32.040 at one point nine trillion dollars is beginning to have 0:01:32.200 --> 0:01:36.520 some effect and mitigating at least UH some of that 0:01:37.000 --> 0:01:40.920 fear of this very K shaped recovery. It's still there. 0:01:41.080 --> 0:01:45.080 It's still very clear that in terms of wealth, uh, 0:01:45.120 --> 0:01:48.440 those at the top have done very well and those 0:01:48.480 --> 0:01:54.320 of the bottom are more in debt as not only 0:01:54.360 --> 0:01:58.080 the visible debt, but the invisible debt that many of 0:01:58.080 --> 0:02:00.280 them have not been able to pay their rent for year. 0:02:00.480 --> 0:02:04.440 Professor Stiglets, I quote you often and the acclaimed Stiglets 0:02:04.520 --> 0:02:08.080 essays of long ago on the little G that what 0:02:08.200 --> 0:02:11.240 matters is the growth rate. You're acclaimed at this within 0:02:11.240 --> 0:02:15.440 your teaching in many different spheres. Great, can we grow 0:02:15.520 --> 0:02:18.200 our way out of these debts and deficits? Should we 0:02:18.240 --> 0:02:22.160 have confidence and rely on the Stiglets little g to 0:02:22.320 --> 0:02:26.280 help us get out of this fiscal mess? Yes, I 0:02:26.320 --> 0:02:28.600 mean one way of looking at it is just a 0:02:28.600 --> 0:02:31.480 little bit of history. At the end of World War Two, 0:02:31.880 --> 0:02:37.320 our debt GDP ratio and then there was a bipartisan 0:02:37.360 --> 0:02:41.760 consensus led by President Eisenhower Republican, that we ought to 0:02:42.639 --> 0:02:47.600 spend heavily on infrastructure, education, R and D and low 0:02:47.639 --> 0:02:51.639 and behold, in a couple of decades our debt GDP 0:02:51.840 --> 0:02:56.239 ratio was down to under fifty So, yes, you can 0:02:56.320 --> 0:03:00.840 grow out of the high uh levels of depth that 0:03:00.880 --> 0:03:04.440 we have, and you know right now we're expecting to 0:03:04.560 --> 0:03:08.919 have very strong growth for this year. We're actually uh 0:03:09.600 --> 0:03:12.560 most forecasts suggest that at the end of this year 0:03:12.960 --> 0:03:16.440 we will be better than we were projected to be 0:03:16.440 --> 0:03:19.240 before the pandemic. Yep, And Professor, we're talking about the U. 0:03:19.280 --> 0:03:21.480 S economy, of course, we're not talking about other parts 0:03:21.480 --> 0:03:25.120 of the world like India, like Brazil. You've advocated for 0:03:25.360 --> 0:03:28.520 the i P waiver that this administration is pushing through 0:03:28.880 --> 0:03:30.920 at the moment of at least trying to achieve with 0:03:30.960 --> 0:03:33.160 partners over the w t O. Why do you think 0:03:33.200 --> 0:03:38.880 that's the right approach? Oh, well, we this is a pandemic. 0:03:38.880 --> 0:03:42.000 The definition of a pandemic is that it's global, and 0:03:42.440 --> 0:03:49.880 this particular pandemic is a kind of uh uh danger 0:03:50.320 --> 0:03:55.160 because it keeps mutating and we don't want that those 0:03:55.200 --> 0:03:59.800 more a fertile few field for those mutations. Say in India, 0:04:00.360 --> 0:04:05.000 we want this disease to be put under control. We're 0:04:05.080 --> 0:04:08.920 not nowhere is going to be safe until everywhere is safe. 0:04:09.360 --> 0:04:12.760 And that's why, uh, it's really important to get the 0:04:12.840 --> 0:04:16.600 vaccine out there as quickly as possible. Now, a major 0:04:16.680 --> 0:04:21.160 impediment is access to the intellectual property. A whole variety 0:04:21.160 --> 0:04:28.200 of of UH access is needed. The principle has been 0:04:28.279 --> 0:04:32.479 long established. It was established almost two decades ago in 0:04:32.520 --> 0:04:36.840 the midst of the HIV AIDS epidemic. UH. The question 0:04:37.000 --> 0:04:40.400 is how to facilitate it. There's an urgency here and 0:04:40.520 --> 0:04:43.799 that's the waiver is about. It's not changing the basic framework. 0:04:44.040 --> 0:04:47.039 There was always the right to compose three licenses since 0:04:47.080 --> 0:04:50.039 that h A I v as. The question is how 0:04:50.040 --> 0:04:53.120 to happen make it happen quickly, and that's what the 0:04:53.800 --> 0:04:58.400 temporary IP waiver is all about. Doctor Fanci has doubts 0:04:58.400 --> 0:05:01.320 about that. He thinks that this could be an unwarranted, 0:05:01.360 --> 0:05:03.920 unwelcome distraction, that it could take until the end of 0:05:03.960 --> 0:05:06.800 twenty two early twenty three to transfer the technology, and 0:05:06.800 --> 0:05:09.039 then Professor, we'd have to talk about expertise as well. 0:05:09.320 --> 0:05:11.920 The starting position of this debate, everybody agrees with what 0:05:11.960 --> 0:05:14.440 you said. We need to help the rest of the world, 0:05:14.680 --> 0:05:16.839 and even the most selfish individual has to acknowledge there 0:05:16.880 --> 0:05:21.440 is positive externalities associated with that. So before we even 0:05:21.480 --> 0:05:23.719 have this debate, it's done. That's done. We need to 0:05:23.760 --> 0:05:25.920 help the rest of the world. But Professor it's how 0:05:25.960 --> 0:05:28.960 we help them more quickly. Do you acknowledge there are 0:05:29.000 --> 0:05:31.200 other issues that need to be tackled and that this 0:05:31.240 --> 0:05:35.240 could become an unwelcome distraction for the other nations that 0:05:35.279 --> 0:05:37.599 we could could be doing more to loosen up the 0:05:37.600 --> 0:05:41.719 strings our swear. Well, UH, there's something like the talking 0:05:41.760 --> 0:05:44.880 points from their drug companies. But the point is that 0:05:45.040 --> 0:05:49.080 the drug companies in the developing countries emerging markets do 0:05:49.200 --> 0:05:54.240 have a capacity. UH. A barrier to their expanding their 0:05:54.279 --> 0:05:58.800 comp capacity is the concern about intellectual property. You know, 0:05:59.320 --> 0:06:02.800 as several companies in South Africa and in India are 0:06:02.800 --> 0:06:07.440 already producing even the more advanced UH kinds of vaccines, 0:06:07.560 --> 0:06:11.080 let alone the simpler kinds of vaccines, And it is 0:06:11.160 --> 0:06:14.600 really intellectual property that is one of the barriers. Now, 0:06:14.760 --> 0:06:18.160 another barrier that is related to the UH w t 0:06:18.320 --> 0:06:23.440 A waiver is allowing it UH companies to more easily 0:06:23.600 --> 0:06:28.560 export UH their their products. Under the standard w t 0:06:28.760 --> 0:06:33.680 O framework, you can get a composory license that allows 0:06:33.680 --> 0:06:37.760 you to manufacture for domestic use, but it makes it 0:06:38.000 --> 0:06:43.120 more difficult to export. But in today's world of global 0:06:43.160 --> 0:06:47.440 supply chains, where even the ingredients in a vaccine may 0:06:47.440 --> 0:06:53.280 be made in several countries. The barriers to export are 0:06:53.320 --> 0:06:57.640 a major barrier to expand in the world's globe supply. 0:06:58.240 --> 0:07:01.799 So that's why it's imperative to have a temporary waiver 0:07:02.600 --> 0:07:05.440 all these Professor, There is a question though about the 0:07:05.440 --> 0:07:08.320 economic incentive for companies, and yes, there is this concern 0:07:08.360 --> 0:07:11.680 by pharmaceutical companies that this removes the economic incentive. However, 0:07:12.000 --> 0:07:14.000 there are some who argue this could pull them back 0:07:14.200 --> 0:07:17.520 from innovating, from working harder to come up with new 0:07:17.560 --> 0:07:21.680 drugs to combat whatever new disease comes our way. What's 0:07:21.680 --> 0:07:25.120 your response to this, that the economic incentive is that 0:07:25.200 --> 0:07:29.320 much lower for the pharmaceutical companies. That's absolutely nonsense. I mean, 0:07:29.320 --> 0:07:32.400 first of all, let's let's be clear the basic research 0:07:32.680 --> 0:07:37.560 on which UH these vaccines is based was financed by 0:07:37.560 --> 0:07:43.520 the governments around the world. Secondly, the expansion of the 0:07:43.600 --> 0:07:49.960 production and the development of these particular vaccines received enormous 0:07:50.520 --> 0:07:53.160 government support, not only from the United States but from 0:07:53.200 --> 0:07:57.040 other countries. The amounts of money that the drug companies 0:07:57.040 --> 0:07:59.560 are going to get on these vaccines are going to 0:07:59.600 --> 0:08:05.040 be you know, uh enormous returns uh well in excess 0:08:05.120 --> 0:08:09.000 of any normal return. What we're talking about here is 0:08:09.040 --> 0:08:13.840 whether they'll get say, percent return on their investments, uh 0:08:14.040 --> 0:08:17.640 or a thousand percent return. Uh. You know, a thousand 0:08:17.640 --> 0:08:21.400 percent return is enough incentive to make them undertook that research. 0:08:21.480 --> 0:08:24.080 I don't worry about that. Well, there's also a question 0:08:24.120 --> 0:08:27.280 that dovetails into the larger infrastructure spending that Joe Biden 0:08:27.320 --> 0:08:29.720 has proposed. And just quickly, here are you in the 0:08:29.760 --> 0:08:33.719 camp of Janet Yellen that taxes should be raised substantially 0:08:33.800 --> 0:08:37.040 on companies And if so, why is it not just 0:08:37.120 --> 0:08:39.520 sufficient to do deficit spending, which does not seem to 0:08:39.520 --> 0:08:43.679 have had a problem for this country. Well, I do 0:08:43.760 --> 0:08:50.760 agree that eventually we need to correct our distorted tax system, which, 0:08:51.520 --> 0:08:55.400 in terms of the percentage of GDP that is raised 0:08:55.400 --> 0:09:00.320 in taxes, is insufficient to finance uh a century economy 0:09:00.320 --> 0:09:04.200 where you need infrastructure, research, education, a whole host of 0:09:05.080 --> 0:09:09.920 public needs to make a well functioning economic society. Uh. 0:09:10.080 --> 0:09:12.839 We also have a distorted tax system which is less 0:09:12.840 --> 0:09:17.600 progressive than other countries, less progressive than than it should be, 0:09:17.640 --> 0:09:21.760 particularly given the enormous increase in equality over the last 0:09:21.760 --> 0:09:28.240 four decades. UM. So the question is really when of timing, uh, 0:09:28.320 --> 0:09:32.360 you know, basic uh law of economics is uh scarcity 0:09:32.360 --> 0:09:37.320 of resources. Uh and uh we've have we've not we've 0:09:37.480 --> 0:09:44.040 we've underutilized our resources. We have some capacity to expand production, 0:09:44.440 --> 0:09:49.920 but eventually we will reach capacity constraints and then we 0:09:50.000 --> 0:09:54.160 will have to decide how our resources get allocated. And 0:09:54.320 --> 0:09:58.000 that's when the issues of taxes becomes your Maine. I 0:09:58.040 --> 0:10:01.120 won't get about the efficient allocation of resources with a 0:10:01.160 --> 0:10:07.280 Nova laureate, so we'll leave it there, Professor, Columbia Business School, University. 0:10:07.280 --> 0:10:10.360 Professor used the arrogance in the past term, but I'm 0:10:10.360 --> 0:10:18.480 not gonna take it that far. This morning, Okay, we 0:10:18.679 --> 0:10:22.080 halt here on our economics financial investment and try to 0:10:22.160 --> 0:10:25.160 figure out what this vaccination program means. We've gone out 0:10:25.200 --> 0:10:28.240 and found a token grandfather who will actually see his 0:10:28.360 --> 0:10:31.800 grandchildren for the first time since time began. David Blanche 0:10:31.840 --> 0:10:35.920 Flower joins us grandfather hanover, New Hampshire. This morning, Danny, 0:10:35.960 --> 0:10:39.280 the kids show up here in the coming days, absolutely 0:10:39.360 --> 0:10:42.440 first time in fifteen months. There, My grandkids are coming today. 0:10:42.520 --> 0:10:45.560 So you know, things are starting to get back to normal. 0:10:45.679 --> 0:10:48.640 And that's the story we're hearing on the economy, of course, 0:10:48.679 --> 0:10:51.199 but it's you know, but it's slow progress. I mean, 0:10:51.200 --> 0:10:54.160 we've seen fast recovery, but never back to where we 0:10:54.160 --> 0:10:57.640 were before this awful pandemic. Hid I want to go 0:10:57.720 --> 0:11:00.120 back to the distinction of your book, The Wage of 0:11:00.120 --> 0:11:03.080 a Million years Ago, David blanche Flower very simply here 0:11:03.360 --> 0:11:06.800 there's a mystery here to what wage dynamics will do 0:11:07.240 --> 0:11:11.880 as we bring on millions of service sector lower wage employees. 0:11:12.240 --> 0:11:17.800 Are you worried about why rising wages and benefits? Um? No, 0:11:18.760 --> 0:11:21.480 I've been. I've been worried about the lack of rise 0:11:21.679 --> 0:11:25.120 of wages and benefits over the last fifteen years or so. 0:11:25.800 --> 0:11:28.520 And obviously the big puzzle in the data is that 0:11:29.000 --> 0:11:32.680 we've actually seen wage growth which is so strong it 0:11:32.800 --> 0:11:35.160 just makes no sense. So when we saw the unemployment 0:11:35.240 --> 0:11:38.400 rate in the US go from four to fifteen, we 0:11:38.440 --> 0:11:41.640 saw wage growth go from three to eight. And the 0:11:41.679 --> 0:11:44.840 reason for that has been obviously the dropout at the 0:11:44.880 --> 0:11:47.760 low end of the wage distribution. So folks like me 0:11:47.840 --> 0:11:51.880 trying to understand what's happening to wages, it's pretty complicated. 0:11:51.920 --> 0:11:53.720 I was looking at the same data for the UK 0:11:53.880 --> 0:11:56.240 today that the Bank having are going to look at, 0:11:56.360 --> 0:11:59.280 and it's just this confusing. There there's an election going 0:11:59.280 --> 0:12:01.720 on in Scottland. And if you look in Scotland today, 0:12:01.760 --> 0:12:05.280 the unemployer rates Scotland is lower than it was in March, 0:12:06.679 --> 0:12:08.760 and so that the data in the labor market are 0:12:08.800 --> 0:12:11.200 pretty puzzling, and a lot of it has to do 0:12:11.280 --> 0:12:15.760 with furloughed workers bottom of the wage distribution dropping out, 0:12:16.240 --> 0:12:19.600 and in a sense that certainly the argument that I'm 0:12:19.600 --> 0:12:24.400 gonna worry about wages really picking up seems most unlikely 0:12:24.480 --> 0:12:27.840 to me. People talk about shortages, but there's plenty of 0:12:27.920 --> 0:12:31.360 labor out there. There's many firms that haven't recovered and 0:12:31.480 --> 0:12:34.120 probably going to close. So I think adjustment is going 0:12:34.160 --> 0:12:36.400 to be complicated. But the last thing in the world 0:12:36.400 --> 0:12:39.480 I really care about is that wages are going to explode. 0:12:39.640 --> 0:12:42.440 They are not Danny for regulatory reasons. Let's avoid the 0:12:42.480 --> 0:12:45.320 domestic politics talk over in the UK and focus on 0:12:45.360 --> 0:12:47.280 the labor market here in the United States if we can. 0:12:47.600 --> 0:12:50.840 The world has come to you every single Payrolls Friday 0:12:51.080 --> 0:12:52.880 used to come on Bloomberg Radio with Tom and I 0:12:52.920 --> 0:12:55.400 and we talk about the labor market. And you were 0:12:55.400 --> 0:12:57.040 the class clown. You were the guy that came out 0:12:57.080 --> 0:12:59.560 and said, look, you're wrong, You're all wrong, and everyone said, Oh, 0:12:59.600 --> 0:13:02.520 here goes Danny. Danny going at it again. The labor 0:13:02.559 --> 0:13:05.000 market's not tight. Look at where unemployment is. The guy's 0:13:05.000 --> 0:13:07.599 an idiot, Danny. Everyone agrees with you. Now, So I 0:13:07.640 --> 0:13:09.600 want to ask you, when you look at the labor 0:13:09.640 --> 0:13:12.120 market and months and quarters to come, what's the data 0:13:12.160 --> 0:13:13.880 point you'll actually be looking at. If it's not the 0:13:13.960 --> 0:13:17.880 unemployment rate, what is it? Well? Yeah, well, I've certainly 0:13:17.920 --> 0:13:20.480 looked at other measures of labor market slack. So I 0:13:20.559 --> 0:13:24.800 like the employment rate, unlike the under employment rate, but 0:13:24.880 --> 0:13:27.880 particularly parts on for economic reasons. But I think the 0:13:27.960 --> 0:13:32.000 adjustment of wages are really the big story. I mean 0:13:33.080 --> 0:13:35.439 that Shocked just talked about the curd in the US. 0:13:35.840 --> 0:13:37.679 It's a it's a big puzzle. And I think if 0:13:37.679 --> 0:13:40.480 you look back, if you look back at what happened 0:13:40.480 --> 0:13:42.800 in the US between two thousand and fifteen and eighteen 0:13:42.800 --> 0:13:45.760 and what the Fed did in essence, they didn't listen 0:13:45.800 --> 0:13:48.599 to what I said. They said, oh we're going to 0:13:48.720 --> 0:13:51.719 raise rates, there's a full employment coming, wage growth is 0:13:51.760 --> 0:13:55.319 about to come. That didn't happen. J Power has sort 0:13:55.360 --> 0:13:57.560 of given them mere culprat. But I think what we 0:13:57.600 --> 0:14:00.520 have to watch is what happens to wage growth? What 0:14:00.679 --> 0:14:04.880 measures really are there suggesting that the labor market is 0:14:04.960 --> 0:14:06.800 very tight. And I think the story I've said to 0:14:06.800 --> 0:14:09.800 you many times or along period, which other people disagree with, 0:14:09.960 --> 0:14:13.880 was the unemployment can surprise on the low side, and 0:14:13.960 --> 0:14:17.320 basically we should sit and wait and I'll allow the 0:14:17.360 --> 0:14:20.000 economy to adjust. And I think that's where we go. 0:14:20.080 --> 0:14:22.120 So I'm going to really watch wage birth. I got 0:14:22.160 --> 0:14:24.680 to see how it progresses, but I'm gonna watch it 0:14:24.720 --> 0:14:27.480 come down as people come out of furlough, as they 0:14:27.480 --> 0:14:30.920 come out of lockdowns that they've been in, and and 0:14:31.000 --> 0:14:33.960 see and see what recovery comes. But but I think 0:14:33.960 --> 0:14:36.240 we just sit and wait and watch, and that's the 0:14:36.360 --> 0:14:38.400 right strategy of the FED. I listened to j Cal 0:14:38.680 --> 0:14:41.680 I thought he was fantastic, absolutely got it. But if 0:14:41.680 --> 0:14:44.080 you like he's just been saved what I've said over 0:14:44.080 --> 0:14:47.200 the last five years, which people disagree with but essentially 0:14:47.240 --> 0:14:49.480 turned out to be right. You need to understand what's 0:14:49.480 --> 0:14:52.880 happened in the labor market, and that's where the adjustment is. 0:14:52.880 --> 0:14:55.120 But you want to look at multiple indicate and remember 0:14:55.120 --> 0:14:58.480 that the employment rate never has got back to where 0:14:58.480 --> 0:15:01.920 it was in two thousand and eight never did, and 0:15:01.920 --> 0:15:04.160 I think that was a mistake. Most people made it. 0:15:04.320 --> 0:15:06.720 Lots of commentators on Bloomberg I spoke to him anytimes, 0:15:06.880 --> 0:15:09.480 just got it wrong. Well, Danny, There's also a question 0:15:09.520 --> 0:15:13.320 about what policies could materially increase wages going forward, and 0:15:13.360 --> 0:15:16.440 we hear this increasingly from the Biden administration with the 0:15:16.480 --> 0:15:19.480 taxes that he's proposed, as well as the support of unions. 0:15:19.600 --> 0:15:24.600 What policies traditionally in your economic research have effectively raised wages, 0:15:24.720 --> 0:15:30.440 increased productivity, made a fairer labor market goal a tough 0:15:30.560 --> 0:15:34.080 I mean, the first answer is you move towards full employment, 0:15:34.520 --> 0:15:38.160 but also you give incentives for firms to hire people. 0:15:38.480 --> 0:15:40.680 I mean, one of the stories about capital and labor 0:15:40.800 --> 0:15:44.080 is why firms invest in capital is because it's relative 0:15:44.200 --> 0:15:48.920 prices lower, so you try and make the labor price lower. Um. 0:15:49.040 --> 0:15:51.360 I mean the story about unions. I mean, unions are 0:15:51.360 --> 0:15:54.840 fine if you can generate raises in productivity. So I 0:15:54.920 --> 0:15:58.760 think helped to make workers more productive. Help share in 0:15:59.480 --> 0:16:01.840 profits are available, And I think one of the stories 0:16:01.880 --> 0:16:03.720 we have to think about is for a very long 0:16:03.800 --> 0:16:07.880 time firms were able to pay higher wages and chose 0:16:07.960 --> 0:16:10.840 not to and the question is why not they paid 0:16:10.880 --> 0:16:14.320 salaries to executives as on, so you can encourage firms 0:16:14.320 --> 0:16:17.240 to hire people. You've given tax incentives to people, and 0:16:17.360 --> 0:16:20.200 one of the big stories is you can give wage 0:16:20.240 --> 0:16:24.200 incentives to people, earned income tax credits, the kind of thing. 0:16:24.440 --> 0:16:27.800 But essentially you you start to say it's very important 0:16:27.800 --> 0:16:30.920 to have a ship from labor to capital. Perhaps because 0:16:30.960 --> 0:16:33.800 the balance moved to far in one direction, but I 0:16:33.840 --> 0:16:38.200 like the idea moved towards form point and perhaps the 0:16:38.200 --> 0:16:40.880 balance between labor and capital has to adjust. And I 0:16:41.000 --> 0:16:45.920 certainly think the levels of inequality you sound like administration 0:16:45.960 --> 0:16:48.440 is doing. With my friends Janet and CC. You sound 0:16:48.520 --> 0:16:51.240 like a professor from Dartmouth. Danny. Let's cut to the chase, 0:16:51.280 --> 0:16:53.280 and we don't have enough time to get into a 0:16:53.360 --> 0:16:55.720 lecture you want. I earn a classroom up in Hanover, 0:16:55.760 --> 0:16:59.640 New Hampshire, and we're talking about the unique politics of 0:16:59.680 --> 0:17:03.840 the Eiden Democratic Party. How alone is Joe Biden and 0:17:04.000 --> 0:17:07.719 wanting to get back to a labor vision from another time. 0:17:08.200 --> 0:17:10.840 Is it a one off that evaporates when he's gone, 0:17:11.359 --> 0:17:13.800 or is there a real new substance here for a 0:17:13.840 --> 0:17:17.680 new labor vision in Centrist America. Yeah, I mean, I mean, 0:17:18.119 --> 0:17:20.359 I think that's a really good question. I mean, I 0:17:20.400 --> 0:17:23.000 think in a sense that I always thought the last 0:17:23.080 --> 0:17:26.520 decade was the decade of the Central Banker. Maybe what 0:17:26.560 --> 0:17:29.280 we've seen now is a new decade coming of the 0:17:29.359 --> 0:17:32.680 labor commist. Well why do I mean that? Well, Janet 0:17:32.720 --> 0:17:37.720 Yellen labor economists at Central Banker. But basically in her 0:17:38.119 --> 0:17:41.119 in her acceptance speech, talked about the importance of, you know, 0:17:41.160 --> 0:17:44.879 improving the labor monk, improving wages, improving jobs. C. C 0:17:45.080 --> 0:17:49.320 rouse Um, chairman of the Council of Advised, another labor commist, 0:17:49.600 --> 0:17:54.520 members of the Council of Economic obviously labor colms. And 0:17:54.560 --> 0:17:57.919 the recognition is you've got to do something about the 0:17:58.040 --> 0:18:02.120 labor market, not least those people who have been essentially 0:18:02.200 --> 0:18:05.600 left behind. You've got to do something about real wages 0:18:05.640 --> 0:18:09.720 in America, and especially do things about people with high 0:18:09.720 --> 0:18:13.040 school education and high school proper, something about those folks. 0:18:13.080 --> 0:18:16.199 So I think there's a recognition politically, a recognition, but 0:18:16.240 --> 0:18:18.560 in terms of the labor market, we have to do 0:18:18.680 --> 0:18:21.679 something about those people who have not who have not 0:18:21.720 --> 0:18:24.520 benefited from the American dream. And I think the Biden 0:18:24.640 --> 0:18:28.200 administration has recognized that. Look at who they have appointed. 0:18:28.520 --> 0:18:31.080 So my I think Janet's talked a lot about that. 0:18:31.200 --> 0:18:33.760 So I think the new recognition has to be we 0:18:34.240 --> 0:18:37.119 really messed up what happened in the labor market. And 0:18:37.160 --> 0:18:40.040 I think Biden's right, and he's moving in that direction 0:18:40.680 --> 0:18:43.840 and looks like quite a lot of public support for it. Danny, 0:18:43.960 --> 0:18:46.080 the world came to you on the labor market. It's 0:18:46.119 --> 0:18:49.199 great to catch up, Danny Blanche flat downmouth professor of 0:18:49.280 --> 0:18:57.800 economic right now in the dynamics of the market, the 0:18:57.840 --> 0:19:02.280 correlations of the markets, Alanker joins us with Janice. Really 0:19:02.440 --> 0:19:04.879 just a perfect time to talk to him. As you 0:19:04.920 --> 0:19:08.439 know the mathematics of correlation, I would suggest the media 0:19:08.520 --> 0:19:14.080 is pretty naive about its complexities. Discussed the complexities of 0:19:14.160 --> 0:19:19.560 the odd correlation now between yield and equity. Yeah, um, 0:19:20.000 --> 0:19:23.040 that that is. I think you've summed it up in 0:19:23.400 --> 0:19:27.439 my opinion, that that correlation is the largest riff that 0:19:27.520 --> 0:19:30.760 we believe investors face. And why I say that is 0:19:31.320 --> 0:19:34.960 if you think about why these balanced portfolio, say these 0:19:34.960 --> 0:19:39.879 strategic fifty fifty portfolio, the strategic sixty portfolio has done 0:19:39.920 --> 0:19:44.320 so incredibly well over the last forty years. Has everything 0:19:44.320 --> 0:19:49.240 to do about correlation. Um. Every single time equities over 0:19:49.320 --> 0:19:53.200 the last thirty years has suffered a significant loss, bonds 0:19:53.200 --> 0:19:56.040 have stepped up to help offset that loss. So that 0:19:56.160 --> 0:19:59.040 correlation in recent times and thirty years is in a 0:19:59.080 --> 0:20:02.359 long period of dabt uh um. That correlation in recent 0:20:02.440 --> 0:20:06.960 times has been extremely negative. And the correlation I'm talking 0:20:06.960 --> 0:20:12.159 about is the downside correlation. Now is it an equilibrium 0:20:12.280 --> 0:20:15.080 or is it too good to be true for bonds 0:20:15.240 --> 0:20:20.160 a to always hedge or ensure against equity risk and 0:20:20.240 --> 0:20:24.000 be at the same time for bonds to yield tremendous 0:20:24.080 --> 0:20:26.960 positive carry. Most would say that's too good to be 0:20:27.000 --> 0:20:31.080 true because we all know insurance costs money. Insurance doesn't 0:20:31.119 --> 0:20:33.719 come for free. So the past thirty years was an 0:20:33.720 --> 0:20:38.119 abnomen Was it an anomaly? Um? If you look going 0:20:38.200 --> 0:20:41.440 all the way back to the eighteen fifties, eight six, 0:20:42.040 --> 0:20:47.520 that yeah, Unfortunately a lot of it, well unfortunately a 0:20:47.520 --> 0:20:49.399 lot of us. I mean, it's a good point. A 0:20:49.440 --> 0:20:52.560 lot of us don't remember periods of time where the 0:20:52.600 --> 0:20:56.680 correlation between bonds and equities was not negative, where bonds 0:20:56.800 --> 0:21:00.560 failed to diversify equities. But that was the norm, right, 0:21:00.720 --> 0:21:04.400 And this is having ishe, And I mean, it's so 0:21:04.560 --> 0:21:08.879 important to get away from the assumed exactly. And then 0:21:08.960 --> 0:21:12.359 that's that's the complexity when it comes to correlations. And 0:21:12.440 --> 0:21:16.040 just a quick empirical point which I think you might 0:21:16.080 --> 0:21:19.919 find fascinating a lot of listeners might find fascinating. Ignoring 0:21:20.480 --> 0:21:23.760 the period from night from the two thousand's to now, 0:21:24.760 --> 0:21:29.560 the average returned to fixed income when equity suffered a 0:21:29.680 --> 0:21:34.200 monthly return worse than three percent, So worse than minus 0:21:34.240 --> 0:21:38.840 three percent was actually minus one percent, so that tail 0:21:38.920 --> 0:21:43.600 correlation between bonds and equities was actually positive. Bonds did 0:21:43.680 --> 0:21:47.760 not diversify equity draw down risk. And that makes perfect 0:21:47.800 --> 0:21:51.960 sense if you're collecting yield and gaining risk premium by 0:21:52.040 --> 0:21:56.600 holding bonds. Bonds shouldn't act as a hedge against equities 0:21:56.600 --> 0:21:59.960 each and every time, um and and so going forward, 0:22:00.000 --> 0:22:04.720 the resiliency of these balanced portfolios, of these strategic portfolios 0:22:04.760 --> 0:22:07.760 has to be questioned, um which brings us to to 0:22:07.840 --> 0:22:11.439 a very difficult period of time for acid owners. What 0:22:11.520 --> 0:22:15.080 do you do, all right? Ask, so, now that the 0:22:15.119 --> 0:22:17.400 winter skiing season is coming to an end, your portfolio 0:22:17.400 --> 0:22:19.959 managers are actually coming back to the office, is what 0:22:20.000 --> 0:22:23.240 are you telling them to do right here and now. 0:22:23.280 --> 0:22:26.680 As we look at markets that are rich by many measures, 0:22:26.840 --> 0:22:29.000 that have had a great run off the bottom, what 0:22:29.080 --> 0:22:33.280 are you suggesting they think about in their portfolios? Great question. 0:22:33.359 --> 0:22:35.840 So what we believe is the biggest risk out there 0:22:36.440 --> 0:22:39.240 is what may unfold in the sixt income markets. UM. 0:22:39.240 --> 0:22:42.959 We're big fans of using forecasted risk implied by option 0:22:43.080 --> 0:22:46.800 prices to give us a picture into what may unfold. UM. 0:22:46.800 --> 0:22:50.160 We use the option market estimates of both future upside 0:22:50.200 --> 0:22:54.640 volatility and downside volatility as our crystal ball. UM said 0:22:54.640 --> 0:22:57.800 crystal ball based on the collective wisdom of the markets, 0:22:57.840 --> 0:23:00.639 and what this crystal ball is telling us, UM, and 0:23:00.680 --> 0:23:03.640 it's the most single, most interesting observation that we see 0:23:03.680 --> 0:23:09.320 today that there's great inflationary pressures, that there's great pressures 0:23:09.400 --> 0:23:13.679 to increases and interest rates going forward. UM. Given that 0:23:14.720 --> 0:23:19.080 we are telling clients and potential clients asset owners, you 0:23:19.160 --> 0:23:22.359 really need to rethink the role that bonds play in 0:23:22.440 --> 0:23:28.000 your portfolios. Bonds may no longer a hedge equity risks, 0:23:28.040 --> 0:23:32.280 so you lose that diversification and be bonds given the 0:23:32.400 --> 0:23:35.960 environment of low yields, given the environment that the central 0:23:36.000 --> 0:23:39.399 banks have sucked out risk premium from bonds. Given the 0:23:39.520 --> 0:23:43.520 richness you see in bonds, to carry on bonds maybe 0:23:43.520 --> 0:23:48.080 non existent. UM. So one obvious way and direct way 0:23:48.119 --> 0:23:53.560 to hedge that risk is to lighten up your bond exposure. UM. 0:23:53.680 --> 0:23:56.520 There's ways you can lighten up your bond exposure but 0:23:56.560 --> 0:24:00.640 at the same time keep the risk of your portfolio 0:24:00.760 --> 0:24:05.920 more at moderate levels. Our research shows one great substitute 0:24:05.960 --> 0:24:09.800 for holding bonds UM and say a fifty fifty portfolio 0:24:10.240 --> 0:24:14.199 is simply to hold the portfolio, which is equities. So 0:24:14.240 --> 0:24:17.000 you're earning and you're exposed to an asset which is 0:24:17.040 --> 0:24:20.840 delivering positive risk premium, which is compensating you for the 0:24:20.920 --> 0:24:25.639 risk that you're bearing. But by equity put options to 0:24:25.760 --> 0:24:29.560 reduce that downside risk to a level more consistent with 0:24:29.720 --> 0:24:32.480 say a fifty fifty portfolio, and in many ways you 0:24:32.520 --> 0:24:35.639 then get get the best of both worlds. You're holding 0:24:35.680 --> 0:24:39.159 assets where the risk premium exists, i e. Equities, and 0:24:39.200 --> 0:24:42.160 you're buying protection to limit those losses so that downside 0:24:42.240 --> 0:24:45.199 risk is more in line would say a sixty UM 0:24:45.359 --> 0:24:48.840 A great alternative. Today where rates are low, bond risk 0:24:48.880 --> 0:24:51.840 premium has disappeared, and in many ways the enemy of 0:24:51.880 --> 0:24:56.119 inflations at the gates. So the enemy of bonds dividend growth, 0:24:56.240 --> 0:24:58.840 I mean, is what we're talking about here is you know, 0:24:59.080 --> 0:25:01.760