Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: Her name I almost said Mandina Parwan. Her name is
Speaker 1: Ellen Zentner, and she is the chief US economist at
Speaker 1: Morgan Stanley. She has a fascinating career and is one
Speaker 1: of the highest ranked women in the world of finance today.
Speaker 1: She is very, very insightful, bringing a unique perspective to
Speaker 1: really what has been We talked about this during the podcast.
Speaker 1: A boys club filled with middle aged white dudes who
Speaker 1: are uh the average economist of days gone by, and
Speaker 1: Allen and I couldn't agree more. Argues that the more
Speaker 1: diversity of opinion and thought we have in various organizations,
Speaker 1: the less likely we are to have group think, the
Speaker 1: more likely we are to consider different perspectives, and that's
Speaker 1: enormously helpful when you have literally hundreds of billions of
Speaker 1: dollars at risk in the marketplace, and and being able
Speaker 1: to look at everything from that perspective is enormously helpful.
Speaker 1: This was a fascinating conversation if you are at all
Speaker 1: interested in economics, Wall Street, how big firms operate, what
Speaker 1: it's like to travel around the world speaking to clients
Speaker 1: and have them ask you all sorts of really interesting questions.
Speaker 1: Then you're going to really enjoy this conversation. So, with
Speaker 1: no further ado, my conversation with Morgan Stanley's Ellen Sentner.
Speaker 1: My special guest today is Ellen Zentner. She is currently
Speaker 1: the chief US economist for Morgan Stanley. UH. Previously, she
Speaker 1: had held senior economist positions with such August firms as
Speaker 1: Nomura and Bank of Tokyo Mitsubishi. Previous to joining Morgan Stanley,
Speaker 1: she was a senior economist with the Texas State Controller's Office.
Speaker 1: Ellen Setner, Welcome to Bloomberg. Thanks, Thanks Barry. So that's
Speaker 1: a kind of interesting progression. How do you go from
Speaker 1: Texas State Controller and the office overseeing Texas is I
Speaker 1: guess government spending and we held the purse strings right
Speaker 1: to I guess it would be somewhat similar to a
Speaker 1: big brokerage firm like Morgan Stanley. Yeah, I don't know.
Speaker 1: Working private versus public UM is very different. It's a
Speaker 1: different pace of life. Uh, it's a different focus of study. UM.
Speaker 1: I think starting out in government is a great way
Speaker 1: to cultivate the career of an economist because you can
Speaker 1: start out in a slower paced environment where you can
Speaker 1: really learn deeply and think those deep thoughts were supposed
Speaker 1: to have time to think, but often don't have time
Speaker 1: when you move into investment banking. Um. And for me
Speaker 1: it was a great first job out of graduate school. Uh.
Speaker 1: The no brainer was to go back to Austin, Texas,
Speaker 1: where I'm from and work for the state government. We
Speaker 1: were just in Austin. It's such a fabulous city. It
Speaker 1: was a ten pound trip because the food there is
Speaker 1: so fanta. I imagine you got in a lot of barbecue.
Speaker 1: So so what years were you working in the controller's office?
Speaker 1: So I was there from ninety eight to two thousand three.
Speaker 1: So you missed the Great Financial Crisis, right. I had
Speaker 1: the uh lovely experience of being right in the thick
Speaker 1: of it in New York by then. But Texas did
Speaker 1: miss uh miss it in large part because of having
Speaker 1: a rainy day fund, which I think after the financial
Speaker 1: crisis was a great example to other state governments that
Speaker 1: you know, in in in good times, when revenues were
Speaker 1: good in the State of Texas or are good, especially
Speaker 1: in energy, you siphon those off past a certain point
Speaker 1: and put them in a so called rainy day fund
Speaker 1: to tap should you ever need it. Um and I
Speaker 1: think after the financial crisis it was the first time
Speaker 1: that Texas ever had to tap it's rainy day fund.
Speaker 1: But it's one reason why it's been able to keep
Speaker 1: its triple A rating. Financial planning one on one counter
Speaker 1: cyclical that precautionary savings that unfortunately America's households didn't have
Speaker 1: after the financial crisis, but but Texas had. And there's
Speaker 1: a little known thing about Texas that I find fascinating
Speaker 1: that given the boom and bus cycle with energy long
Speaker 1: before the Great Financial Crisis, they used to I believe
Speaker 1: they have something I want to say. It's it's in
Speaker 1: the state constitution that you cannot use your home mortgage,
Speaker 1: your home equity for cash out financing. So Texas had
Speaker 1: a much lower rate of default and subsequent issues foreclosures
Speaker 1: than the rest of the country. Yeah, I think that,
Speaker 1: And I could also draw a line between that to Japan.
Speaker 1: Of course, I was working for a Japanese firm at
Speaker 1: the time of the financial crisis, and one of the
Speaker 1: thing I things I witnessed at Bank of Tokyo Mitsubishi
Speaker 1: was I was there at the time that we UH.
Speaker 1: Not literally I did not walk a check over to
Speaker 1: Morgan Stanley, but a check was walked over to Morgan
Speaker 1: Stanley in theory and and a chunk of Morgan Stanley
Speaker 1: was purchased UM. And now there's this amazing partnership between
Speaker 1: m uf G, It'subishi United Financial Group UH AND and
Speaker 1: Morgan Stanley. Because the Japanese were the ones that were
Speaker 1: cash rich at the time of the financial crisis, because
Speaker 1: they had already gone through their big financial crisis, they
Speaker 1: did not participate in the mortgage crisis. UH, they were
Speaker 1: not over leveraged in that area, and so they had
Speaker 1: a lot of cash to deploy UH and it was
Speaker 1: much needed by by many of the firms that were
Speaker 1: bought up at that time. So so I'm gonna sort
Speaker 1: of jump ahead. But given this relationship that came out
Speaker 1: of the financial crisis, how has that impacted Morgan Stanley
Speaker 1: as an international company. Has that broadened their footprints around
Speaker 1: the globe? It absolutely has. UH and Morgan Stanley already
Speaker 1: had a strong presence in Asia, but by partnering with
Speaker 1: m uf G, opening access to to markets more fully
Speaker 1: and mind share across more of the global economy. I
Speaker 1: think it's been a fantastic partnership. Was it a coincidence
Speaker 1: that this deal took place and then you end up
Speaker 1: at Morgan Stanley or did you just happen out of
Speaker 1: this relationship to meet people and one thing led to another.
Speaker 1: It was a coincidence. Um. I'm when I began at
Speaker 1: Morgan Stanley, back in my colleagues at Bank of Tokyo Mitsubishi,
Speaker 1: had felt like I had come full circle. I was
Speaker 1: back in the family, so to speak. Um. And but
Speaker 1: I'll tell you, Uh, probably the most important reason of
Speaker 1: how I became connected at Morgan Stanley, UM, is that
Speaker 1: I'm a nice person. Berry, And I always say this,
Speaker 1: You've got to be a nice person. And when people
Speaker 1: think about who do you want to work with, who
Speaker 1: do you want to have on your team? Uh, the
Speaker 1: ones yes, write it down. Be a nice person. It's
Speaker 1: very simple. But it's not something everyone can do. Um.
Speaker 1: And especially in finance, we've heard of yellers and screamers
Speaker 1: and exactly, but you will be rewarded. And so when
Speaker 1: people when we all reach out to each other when
Speaker 1: we're networking, saying hey, I've got an open spot on
Speaker 1: my team? Who have you worked within the past, Who
Speaker 1: do you really like? Who do you think I should
Speaker 1: reach out to? Uh, if you were a jerk and
Speaker 1: nobody liked working with you, you're not going to be
Speaker 1: one of the names on that list. And then that's
Speaker 1: exactly how I came about to be recommended for position
Speaker 1: at Morgan Stanley was because I was good people and
Speaker 1: you started as a senior economist And how long have
Speaker 1: you been chief economist in Worrow? I became chief a
Speaker 1: conist Morgan Stanley in February. Oh, so you've been here
Speaker 1: for in the role for over two years. For over
Speaker 1: two years? Yeah to me, and judging from your reaction,
Speaker 1: it sounds like it's been a lengthy time. But let
Speaker 1: me tell you. One of the things I love about
Speaker 1: Morgan Stanley is that people are shocked when they hear
Speaker 1: that I've only been there a total of four years,
Speaker 1: because you talked to anyone their lifers. The longevity is
Speaker 1: amazing and it and it uh says something about Morgan
Speaker 1: Stanley is a place to work. It really is a
Speaker 1: family um and it just makes me feel good that
Speaker 1: there's there's just not a lot of turnover. We were
Speaker 1: talking earlier about the transition from private sector to public sector.
Speaker 1: You had an interesting experience this past election. How did
Speaker 1: the politics that have gotten kind of crazy in America
Speaker 1: affect clients, investing and just generally interacting with Morgan Stanley customers.
Speaker 1: You know, I think this is this is definitely Uh,
Speaker 1: this has definitely been a unique election cycle. Uh. And
Speaker 1: I know that we've beat that word unique to death,
Speaker 1: it feels, but I can tell you that I don't
Speaker 1: believe I've ever experienced emotions being this high and uh
Speaker 1: it affecting sort of Let's say, the emotional data this much,
Speaker 1: the survey based data of how do you feel? And
Speaker 1: it has been swinging wildly. There are massive divergences between say, uh,
Speaker 1: your your Trump voter, that's middle income America where uh
Speaker 1: you can see that by voter preference. Consumer confidence is
Speaker 1: a record high for Republicans but at a record home
Speaker 1: low for Democrats. And we saw a similar similar split
Speaker 1: among clients and among my internal colleagues as well. Just
Speaker 1: trying to dissect which economists, generally, I believe are very
Speaker 1: good at staying objective and trying not to let emotion
Speaker 1: drive your work. That was my next question is how
Speaker 1: do you keep clients from allowing their own emotions, political biases,
Speaker 1: just reactions to the crazingens on TV, from impacting their
Speaker 1: investing in trading. What you have to do is be
Speaker 1: the is remained, the calm voice in the room, and
Speaker 1: just keep coming back to the fundamentals, the fundamentals, the fundamentals,
Speaker 1: and try to create a story with a very strong
Speaker 1: argument based in fundamentals so that you you just keep
Speaker 1: coming back to that and saying, let's keep emotions out
Speaker 1: of it, let's keep feelings out of it, and just
Speaker 1: stick to the basics. And that has been extraordinarily difficult,
Speaker 1: UH post election, where emotions have run high. What I
Speaker 1: like now, what makes me more confident in the US
Speaker 1: outlook going forward, is that I can see that investors
Speaker 1: have adjusted their expectations for fiscal policy over time, and
Speaker 1: you don't see companies UH providing forward guidance on what
Speaker 1: Congress might deliver, and you you hear households talking more
Speaker 1: UH realistically about what Congress might deliver. And so that
Speaker 1: makes me more confident that what we're seeing in the
Speaker 1: economic activity is being driven by a stronger global economy,
Speaker 1: stronger fundamental US economy, legitimately and not being driven anymore
Speaker 1: by expectations of what Congress made de lyrics. As we
Speaker 1: all know, campaigning is easy. Policy making is difficult, for sure,
Speaker 1: And so I think I think that makes me less
Speaker 1: worried about what happens in the event of complete fiscal failure.
Speaker 1: You mentioned campaigning. I think we were all kind of
Speaker 1: hoping that once the election came and went, everything would
Speaker 1: settle down. And here we are in the middle of
Speaker 1: the summer, where more than six months through the first
Speaker 1: year of the first term of President Trump, and you
Speaker 1: travel extensively, you meet with clients in the United States abroad.
Speaker 1: I know when I travel around, it's all anybody wants
Speaker 1: to talk about. Is President Trump. Are you finding similar
Speaker 1: things that it dominates at least in the beginning of
Speaker 1: the conversation, Republican, Democrat, conservative, liberal, It does matter. Everybody
Speaker 1: is transfixed by the world's greatest reality show. Yeah, you know, Actually,
Speaker 1: I'm glad that you brought up regional differences because, uh,
Speaker 1: here in the U s. It has petered out. Right,
Speaker 1: My conversations with clients have gone back to simply talking
Speaker 1: about the economy, talking about global central banks and liquidity
Speaker 1: and everything other than fiscal policy, almost like we've gone
Speaker 1: back to a I'll believe it when I see it,
Speaker 1: but when I do go abroad, it is a very
Speaker 1: different story, And the conversations do still start out with
Speaker 1: what's going on with politics with Congress UH United At
Speaker 1: first it was our investors outside of the U S
Speaker 1: trying to understand what is the political process? How do
Speaker 1: things move through Congress? How much power does the president
Speaker 1: have to do X, y and z unilaterally or how
Speaker 1: much does a president need Congress for? And working Sometimes
Speaker 1: it would take an entire client meeting just working through
Speaker 1: the process, which could at times open their eyes to oh, okay,
Speaker 1: policy making is difficult, is it? Are they perplexed by
Speaker 1: the show? Are they um curious? Because I have recently
Speaker 1: been in Germany, I've been in in various places in Europe.
Speaker 1: The response in different areas are it's almost detached amusement
Speaker 1: versus the UK is like, oh, we have the same
Speaker 1: thing here, we are we're on the same page, not
Speaker 1: exactly brexiting, and the most recent UM change candidates seemed
Speaker 1: to be very different. What what are you finding overseas?
Speaker 1: Is it a uniform situation or is it full on like, Wow,
Speaker 1: what's going on there? Well, I would say the amusement
Speaker 1: comes up in meetings, but it's very fleeting, sort of
Speaker 1: at the beginning, kind of chuckling over whatever has happened
Speaker 1: in the media, most recently in the US, and then
Speaker 1: we dive right into more serious issues because at the
Speaker 1: end of the day, I get around quite often around
Speaker 1: the global economy, but not so often that clients do
Speaker 1: want to UH. I'll use the word waste, waste an
Speaker 1: entire hour of of client time, you know, but it
Speaker 1: comes up being being bemused over US politics, but it
Speaker 1: will come up as just a sort of a quick
Speaker 1: quip or two at the beginning of the meeting, and
Speaker 1: then we move on to more serious things. So let
Speaker 1: me ask you a more serious question because you have
Speaker 1: said previously you love going out and talking with clients.
Speaker 1: Who are they and other than politics, what sort of
Speaker 1: stuff do they lean on you for? So again, going
Speaker 1: to UH folks outside of the US, UM. You know,
Speaker 1: it's different when I sit down in front of equities
Speaker 1: investors versus fixed income investors. Fixed income investors UM. They
Speaker 1: love the nuances of how every economist will interpret UH
Speaker 1: pars fed speak UH and the data differently UH. And
Speaker 1: the fact that you can have two economists that see
Speaker 1: the economy the same way but have two completely different
Speaker 1: calls on what the FED will do, and so really
Speaker 1: working through the nuances of how is it that I
Speaker 1: listened to the FED. How do I come to conclusions
Speaker 1: of what I think I've discerned from from FED speak
Speaker 1: and meetings with FED policymakers working through those details I
Speaker 1: think is most important for them. It's a very presentation
Speaker 1: light and conversation heavy meeting. When I sit down with
Speaker 1: equities investors, it's more talking talk me through the fundamental
Speaker 1: see me how companies, show me, how companies are positioned,
Speaker 1: where are they investing, How to consumers spend if they're
Speaker 1: given more tax dollars? UH? Will interest rate simply be
Speaker 1: higher or lower at this time next year? You know?
Speaker 1: And it's a much more presentation heavy, show me the
Speaker 1: client deck meeting. UH. And so that's why I think
Speaker 1: my trips around the globe can be very dynamic because
Speaker 1: as part of the economics team, we have a foot
Speaker 1: in fixed income, we have a foot in equities, and
Speaker 1: we basically of us all sides of the firm UH,
Speaker 1: And so it can be very dynamic meetings in one trip,
Speaker 1: and I think that keeps it very very interesting for me.
Speaker 1: Let's talk a little bit about, um, your time at
Speaker 1: Morgan Stanley. You've been there about four years. You have
Speaker 1: a very high profile job in a field that's dominated
Speaker 1: by men. How is that changing? Because I've noticed more
Speaker 1: and more women are starting to assume senior piece positions
Speaker 1: in big farms. Uh they are. Uh, it's still lagging tremendously.
Speaker 1: Of course, it's still lagging tremendously. And I can tell
Speaker 1: you that we spend an unbelievable amount of time at
Speaker 1: Morgan Stanley, uh, beating to death all the ways and
Speaker 1: have we uncovered every way possible to uh lower attrition
Speaker 1: rates uh for women in the firm, uh, and keep
Speaker 1: them moving forward, and be being sure that there's nothing
Speaker 1: on our end that we haven't done in order to
Speaker 1: remove barriers to the moving higher. Specifically in economics, we
Speaker 1: saw cher Yelling spend time on this giving speeches about
Speaker 1: women in economics. I can tell you that when I
Speaker 1: was in graduate school, Uh, there were four of us
Speaker 1: ladies in graduate school and economomics, uh about two hundred. Yeah,
Speaker 1: it was very tiny and and so but today right.
Speaker 1: I am not the only woman on the economics team
Speaker 1: in the U S. I'm not the only U chief
Speaker 1: economist at Morgan Stanley that is a woman. Elgabarsh, our
Speaker 1: chief European economist, has been there many many many years. Um,
Speaker 1: and that is unique that Morgan Stanley has more than
Speaker 1: one female chief economist in the firm. Um. I think
Speaker 1: overall finances finances doing a horrible job having women in
Speaker 1: high positions. But we are doing we are make leaps
Speaker 1: and bounds trying to overcome that. It seems that the industry,
Speaker 1: however slowly, the changes are taking place. It's really starting
Speaker 1: to move in the right direction, with miles still to go.
Speaker 1: Oh yes, well, And that's exactly how we would characterize
Speaker 1: it when I say finance overall is a sector is
Speaker 1: doing a horrible job. That is a feeling shared to
Speaker 1: the highest rank in Morgan Stanley. It's not some uh,
Speaker 1: you know, outlandish statement that I'm making. Uh, It's just
Speaker 1: understood that the industry still has a long way to go.
Speaker 1: It's a long process to groom people to take over exactly.
Speaker 1: And what we find at Morgan Stanley, and this is
Speaker 1: probably not unique to Morgan Stanley is that when you
Speaker 1: look at our analysts class of new analysts coming in. Uh,
Speaker 1: it's an extremely good balance between men and women. But
Speaker 1: the attrition rate is higher for women as they get
Speaker 1: higher up the chain. Why is that? Is it because
Speaker 1: they don't come back after leaving to have children. Uh,
Speaker 1: we don't know. We're scrubbing the data and working with
Speaker 1: every individual segment within the firm to be sure that
Speaker 1: the data aren't telling us that we're not creating the
Speaker 1: right environment for them to come back. We've got a
Speaker 1: very strong return to work program that's been very successful.
Speaker 1: And I can tell you what we do recognize, and
Speaker 1: what I recognize firsthand, is that you get much more
Speaker 1: diversity of thought on an economics team when when it's
Speaker 1: diverse between male and female and all walks of life.
Speaker 1: I'm not just talking about a gender um difference, but
Speaker 1: I can tell you I developed a love for studying
Speaker 1: US household behavior from very early on in my career.
Speaker 1: It was one of the first things I did at
Speaker 1: the State of Texas out of graduate school. UH. And
Speaker 1: I also feel, UH, and maybe this is a biased view,
Speaker 1: that that I bring a unique perspective to studying the
Speaker 1: US household because as a woman, I'm extremely connected to
Speaker 1: running the household UH, and so I feel also from
Speaker 1: being from Texas, I didn't grow up on this island
Speaker 1: of Manhattan, and so I am not so far removed
Speaker 1: that I don't remember what the average American experiences like
Speaker 1: in the US UH. And if I were not on
Speaker 1: the US economics team and it was all UH men
Speaker 1: run by your typical mid middle aged white male economist, right,
Speaker 1: they might miss that perspective. There are a number of
Speaker 1: FED governors and chiefs of the federal Reserve banks who
Speaker 1: are either currently held by a woman as president or
Speaker 1: have previously been held by a woman. What does that
Speaker 1: shift really over the past decade say to young women
Speaker 1: who may be considering a career in finance or economics,
Speaker 1: How important are those roles to driving the industry Greek
Speaker 1: towards a little more gender parity. I think it's hugely important.
Speaker 1: Right If if I'm a young woman coming out of
Speaker 1: UH school and I'm studying economics UM, and I'm thinking
Speaker 1: about where do I see myself going? Where do I
Speaker 1: see myself five years from now, ten years from out,
Speaker 1: fifteen years from now, I might not think, Oh, staff
Speaker 1: economists somewhere on some team, either on Wall Street or
Speaker 1: at a think tank or a nonprofit. I might I
Speaker 1: might actually think, which was the unthinkable just two decades ago.
Speaker 1: I might actually think that I could run the FED
Speaker 1: one day, or I could head one of the regional
Speaker 1: federal reserve banks. Let's talk a little bit about the
Speaker 1: intersection between economics and markets. So does the stock market
Speaker 1: drive the economy or does the economy drive the stock market?
Speaker 1: Or is it a little bit of each? Oh, Barry,
Speaker 1: I'm an economist. I'm gonna say a little bit of each.
Speaker 1: Because you opened that door. Um, it's the chicken and
Speaker 1: the egg. Uh. And you'll have a strategist sit in
Speaker 1: this chair and tell you that it's the markets. Uh.
Speaker 1: And then you have an economist that sits in its
Speaker 1: chair and says it's the economy. Isn't the markets reflecting
Speaker 1: what the economy is doing or at least discounting what
Speaker 1: the economy is about to do the discounting. So I
Speaker 1: will say that markets are forward looking, but there forward
Speaker 1: looking at their trying to anticipate when things have gotten
Speaker 1: as bad as they could possibly get or as good
Speaker 1: as they could possibly get. And typically liquidity and global
Speaker 1: flows drive the markets first before anyone can see what's
Speaker 1: going on. Uh, and so that that tends to sort
Speaker 1: of be the forward looking piece that confirms and then
Speaker 1: the economic data confirms that. So if you look at
Speaker 1: every business cycle, uh. And let's go back to the
Speaker 1: most recent downturn, the financial crisis. The stock market reached
Speaker 1: its bottom first in March, started turning up and then
Speaker 1: the ultimately the date that the NBRUH said the recession
Speaker 1: was over was June of two thousand nine, so it
Speaker 1: led the economy by a couple of months um and
Speaker 1: on the flip side in seven, I think the market
Speaker 1: peaked in October seven NBR December of oh seven. So yeah,
Speaker 1: and so a lot of that is that the wealth
Speaker 1: effect is huge earlier late in a cycle. So March,
Speaker 1: what happened that March, this stock market bottomed, it started
Speaker 1: uh racing higher. Uh. And in in a cycle, when
Speaker 1: consumers start spending again, guess who are the ones that
Speaker 1: spend first? The wealthy because financial assets are rising the wealthy.
Speaker 1: The top twenty of households in income in the US.
Speaker 1: Income holders in the US make up of all spending,
Speaker 1: so that again the top so the top income quintile.
Speaker 1: So the top of income group in the US makes
Speaker 1: up of all makes sure that makes a lot. They're
Speaker 1: buying big ticket it good. So when wealth starts to recover,
Speaker 1: as the cycle is taking off, the expansion is taking off,
Speaker 1: they're getting out there buying motor vehicles and recreational vehicles
Speaker 1: and motorcycles and purchasing trips abroad. And let me push
Speaker 1: back a little bit on this because a well, we'll
Speaker 1: have a fuller debate about the wealth effect during the
Speaker 1: podcast portion. But if you remember back in two thousand
Speaker 1: and nine, there was kind of a rising um since
Speaker 1: that people were a little intimidated about either conspicuous consumption
Speaker 1: or ostentatious spending, and even the wealthy, or at least
Speaker 1: this was in the papers at the time, we're a
Speaker 1: little circumspect at really big ticket items. And we saw
Speaker 1: people come out of their caves and start to spend.
Speaker 1: But it wasn't real mayhem until a year or two. La. Yeah,
Speaker 1: so I'll give you the exact so and so you're
Speaker 1: absolutely right right that that uh, it was a little
Speaker 1: too You didn't want to get out there and do
Speaker 1: a bunch of chess chest thumping when your neighbor was
Speaker 1: still out of a job. Uh. And because this was
Speaker 1: a very severe downturn. And in fact, if you look
Speaker 1: at consumer confidence overall, let's just look at it in
Speaker 1: the aggregate the first five years of the recovery. I
Speaker 1: simply call it the phase of reparation, because it took
Speaker 1: five years for consumer confidence to finally reach what was
Speaker 1: a normal level in expansion. So and that's about the
Speaker 1: time that we finished, uh, de leveraging the household balance
Speaker 1: sheet as well, that we actually finished licking our wounds
Speaker 1: and and paying down dead and defaulting on debt, etcetera.
Speaker 1: So I'll tell you when it did finally kick in
Speaker 1: for the wealthy. Uh and uh, because you can't hold
Speaker 1: the wealthy down for too long, verry. So in SMP
Speaker 1: five hundred was up about and uh. We we scrub
Speaker 1: three hundred different categories of consumer spending, and that's how
Speaker 1: we know who's spending, who's doing the spending. Um. During
Speaker 1: that year, you saw consumer confidence among the highest income
Speaker 1: groups track the SMP five one for one, and personal
Speaker 1: aircraft was the single strongest category of space, followed by
Speaker 1: pleasure boats. Wow, that's fascinating if you think about Also,
Speaker 1: was it March breaks out to a new all time high,
Speaker 1: got above the pre crisis levels, arguably kicking off a
Speaker 1: new secular bowl market. It would make sense they're the
Speaker 1: wealth effect. The wealthiest people who own most of the
Speaker 1: stock are going to go out and spend that money.
Speaker 1: But I never saw that data on pleasure boats and aircraft.
Speaker 1: That's fascinating. It's it's interesting. So it Uh. I love UM.
Speaker 1: I love showing charts that will really make clients think
Speaker 1: that I think are charts that they haven't seen from
Speaker 1: anyone else. And so one of those charts is the
Speaker 1: consumer confidence that I mentioned of the highest income group
Speaker 1: versus the SMP five hundred, where it just tracks it higher.
Speaker 1: And it always makes me think of that that's saying,
Speaker 1: and I'm sure I won't get exactly right, but it's
Speaker 1: something about, uh, money can't buy you happiness, but it
Speaker 1: sure makes the suffering easier. The version I remember is
Speaker 1: um David lee Roth said of Van Halen one said
Speaker 1: money can't buy you happiness, but it could pull you
Speaker 1: up in a yacht right next to it. Exactly gets
Speaker 1: you as close as you can. And so yeah, it
Speaker 1: took a while, but you can only hold the wealthy
Speaker 1: back for so long. And uh, and so they were
Speaker 1: really getting their feathers ruffled by the gains in financial
Speaker 1: market wealth that that we're just I mean, just incredible gains.
Speaker 1: And by we had already blown past the previous peak
Speaker 1: toward the end of for financial assets wealth. And and
Speaker 1: I tell you what is another total total total wealth
Speaker 1: in financial assets. Of course, real estate wealth was another matter.
Speaker 1: We've only just popped into positive territory there where we've
Speaker 1: got positive real estate wealth in the first quarter of
Speaker 1: this year, finally, finally relative to the financial christ crisis. Yes, yes, uh.
Speaker 1: And so I think it's interesting that that if I
Speaker 1: were to point to another chart, Uh, that surprises seems
Speaker 1: to surprise everyone is who do you think saves in
Speaker 1: the US? It's the wealthy. Other income groups don't say
Speaker 1: most of most of them live paycheck to paycheck. The
Speaker 1: savings rate is largely determined by the wealthiest income group
Speaker 1: in the US. So if here's another great chart, if
Speaker 1: you take financial assets and you map it against the
Speaker 1: personal savings rate in the US, it shows nearly a
Speaker 1: perfect inverse relationship. As financial assets rise, the savings rate
Speaker 1: falls because the wealthy get out there and spend more. So,
Speaker 1: what does it mean that general, uh, only the highest
Speaker 1: income UM group in the United States is saving and
Speaker 1: and the rest of the country isn't. What What does
Speaker 1: that say to us say about us as a society
Speaker 1: in terms of our propensity to either save or invest well.
Speaker 1: The savings rate overall UM has come down from where
Speaker 1: it peaked after the financial crisis, but it hasn't come
Speaker 1: down all the way. So it's still indicates there's a
Speaker 1: little more precautionary savings out there than there was before.
Speaker 1: But I don't think there's been any fundamental change and
Speaker 1: behavior here. I think the wealthier still mostly the ones
Speaker 1: who are the savers in the US. The difference for
Speaker 1: the middle and lower income households is that the debt
Speaker 1: burden is not as high. Uh, So the crimp that
Speaker 1: they feel, say, when interest rates are rising, the crimp
Speaker 1: they would feel on the interest expense on their out
Speaker 1: their outstanding debt UH is not gonna be as as
Speaker 1: as acutely felt as before. There is some cushion there,
Speaker 1: but I wouldn't say that there's been some fundamental change
Speaker 1: and how they approach precautionary savings. UH. What I think
Speaker 1: is interesting now So going back to to to wealth
Speaker 1: uh and going back to the chart of the highest
Speaker 1: income group confidence matching the climate SMP five hundred. If
Speaker 1: you look at the consumer confidence of the lower income groups,
Speaker 1: it's basically looked like a slow bleed upward upward tracking
Speaker 1: wage gains. So that very kind of slow bleed upward
Speaker 1: and wage gains has really translated into to whom the
Speaker 1: households that rely a lot on labor income. So who
Speaker 1: have I left out? I've noticeably not talked about wealth
Speaker 1: for the middle um, and that's where the housing equity
Speaker 1: comes into play, because housing equity fell sharply housing prices
Speaker 1: once they reached their nature, they flubbed along the bottom
Speaker 1: for a time, finally started turning up staying two thousand
Speaker 1: twelve and have had some nice year over your increases
Speaker 1: in home price appreciation. But we only just moved into
Speaker 1: again at the national level level, into positive territory for
Speaker 1: housing wealth overall in the first quarter of this year.
Speaker 1: So I think my focus as a as a someone
Speaker 1: who loves studying the US consumer, my focus is going
Speaker 1: to be the middle over the next couple of years,
Speaker 1: because I think we're finally seeing wealth effects come through
Speaker 1: for them. So let's let's talk about two things you reference,
Speaker 1: because they're both really interesting. One is you talked about
Speaker 1: general um de leveraging of the household in debt. But
Speaker 1: the story that I've been watching, and I'm not quite
Speaker 1: a believer that this is what's gonna be our undoing,
Speaker 1: is the student debt rise that that's clicked up through
Speaker 1: a few trillions. How significant is that to future household formation,
Speaker 1: home purchases, durable goods, etcetera. And then we can talk
Speaker 1: a little bit about where we are on the labor cycle. Great,
Speaker 1: So I'm glad that you brought up um student debt
Speaker 1: because leieve it or not, it actually does tie into
Speaker 1: this theme of housing equity as well. So, UH, student
Speaker 1: loan debt is a problem. Uh. The the enrollment rates
Speaker 1: have been on a very pronounced upward trend for quite
Speaker 1: some time. But each time there's a downturn, you'll see
Speaker 1: that that enrollment rate escalate, uh, and then we revert
Speaker 1: back to previous trend. Now, of course, with the the
Speaker 1: the depth of the downturn after the financial crisis and
Speaker 1: the length of it sent many many more UH back
Speaker 1: to school seeking higher education. UH. And and it's really
Speaker 1: default rates among those that saw higher education that have
Speaker 1: been the highest because they spent even more on school
Speaker 1: came out and still we're facing just as horrible labor
Speaker 1: market as when they went in. UH. And so we
Speaker 1: saw student debt UH ratchet higher and delinquencies on student
Speaker 1: debt wratchet higher, such that it became a hot button
Speaker 1: issue at least for Democrats during the presidential election. So
Speaker 1: that that the idea that we would do some mass
Speaker 1: forgiveness on on student loans. I can tell you that
Speaker 1: delinquent WHENCE rates have peaked as the labor market has improved.
Speaker 1: Enrollment rates have come off of of UH the UM,
Speaker 1: the previous UH the trend that was the upward trend
Speaker 1: that was already established right for decades going into the
Speaker 1: financial crisis that was escalated, and now we're coming back
Speaker 1: down to that previous trend. So it look like enrollment
Speaker 1: rates are softening, but they're not. They're really just coming
Speaker 1: back to that that pre crisis trend. Here's what I
Speaker 1: think is so important. At the same time that we
Speaker 1: were pushing an unprecedent amount of students to enroll in
Speaker 1: school and take on incredible amounts of student debt. Uh,
Speaker 1: we lost housing equity, which was a primary the primary
Speaker 1: way families were paying for that student's tuition. So most
Speaker 1: of them, because who in their right mind was going
Speaker 1: to give a student in this labor market and vironment
Speaker 1: a private loan for school, they were forced to government loans. Now,
Speaker 1: you can never default on a student loan that you
Speaker 1: got from the government, Barry, if you retire, there's no
Speaker 1: escaping that. If you retire at age sixty five and
Speaker 1: you still haven't paid off your student loans, they will
Speaker 1: garnish your social security How much? How much of an
Speaker 1: insult is that everybody else has to go through a
Speaker 1: legal process except Uncle Sam. You default on that, they
Speaker 1: find you wherever you are right, there's no getting out
Speaker 1: of it. Now. What do you think mom and dad
Speaker 1: do if you default on your soft promise to pay
Speaker 1: them back after funding your education by pulling equity out
Speaker 1: of their home. Nothing? Nothing exactly. And believe me, Mom
Speaker 1: and Dad, no, you're not paying them back when they
Speaker 1: give you that for your student loan. Uh. And So
Speaker 1: families weren't able to fund student loans in that way
Speaker 1: anymore because they weren't able to pull equity out of
Speaker 1: the home now we've as I mentioned, we've us popped
Speaker 1: back into positive equity in housing in the first quarter
Speaker 1: of this year with home price appreciation. That should continue,
Speaker 1: and we saw for the first time this year mortgage
Speaker 1: equity withdrawal pick up. So that means a future generation
Speaker 1: of students going into school now can go back to
Speaker 1: having college funded in the traditional way we used to
Speaker 1: fund college, which is going to alleviate the burden on
Speaker 1: them when they get out of college and start looking
Speaker 1: to buy a home. So while we've got sort of
Speaker 1: a lost generation right that went into college during the
Speaker 1: financial crisis, came out and tried to get a job
Speaker 1: during the after the financial crisis, and we'll have their
Speaker 1: home buying plans delayed for a long time, and just
Speaker 1: big durable goods purchase decisions are delayed for a long time.
Speaker 1: The most the best work on this has been done
Speaker 1: by the New York Fed that's looked into this very
Speaker 1: closely and how it delays household for household formation buying plans.
Speaker 1: Everything has a big anomic impact. But the generation of
Speaker 1: kids now going into school, by the time they graduate,
Speaker 1: they're not going to be saddled anywhere near with the
Speaker 1: student debt burden at least not the government issued student
Speaker 1: dead burton the previous generation had, and that is not
Speaker 1: going to weigh on their decisions, their home purchasing decisions
Speaker 1: in the same way as the unfortunate group, which is,
Speaker 1: you know, sometimes it's just the unfortunate timing of your birth,
Speaker 1: dumb right when you graduate college. Um, it's not going
Speaker 1: to be the same for them. We have been speaking
Speaker 1: with Ellen Zanner. She is the chief US economist for
Speaker 1: Morgan Stanley. We love your comments, feedback and suggestions right
Speaker 1: to us at m IB podcast at Bloomberg dot net.
Speaker 1: Check out my daily column on Bloomberg View dot com.
Speaker 1: Follow me on Twitter at Dholts. I'm Barry Reholts. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to
Speaker 1: the podcast. Thank you Allen so much for doing this.
Speaker 1: I've been looking forward to having this conversation for a
Speaker 1: long time. Glad to be here. So we um. I
Speaker 1: got easily distracted by many of your answers and didn't
Speaker 1: get to a number of questions that I definitely want
Speaker 1: to go back to. But we'll we'll have to start
Speaker 1: before before we have a debate on the wealth effect
Speaker 1: let's at least talk about wages um because you mentioned
Speaker 1: a few things that I think are fascinating. Where are
Speaker 1: we in the cycle, in the wage cycle, are we
Speaker 1: finally starting to see an uptick in compensation or is
Speaker 1: it gonna be you know, flat wages for as far
Speaker 1: as the eye can see. So as the unemployment rate
Speaker 1: has come down, uh, we have seen wages growth in
Speaker 1: wages increase, but it's been pretty amnemic. Right, It's not
Speaker 1: been nearly to the extent you would think you would
Speaker 1: get given how quickly the unemployment rate has fallen. But
Speaker 1: the truth of the matter is unemployment rate in this
Speaker 1: environment with such a huge swath of the population, UH,
Speaker 1: continuing to move further and further out into the age
Speaker 1: groups associated with very low participation rates in the labor force.
Speaker 1: There's gonna be, right, more older folks working and retiring,
Speaker 1: leaving the labor force. There's this this gravitational pull just
Speaker 1: from the demographic trend that that pulls that unemployment rate lower.
Speaker 1: That's not indicative of labor market that's getting tighter and tighter.
Speaker 1: So the point at which we reach a tight labor market,
Speaker 1: which would really start to push the wage growth up
Speaker 1: more quickly. It's just simply a lot lower where where
Speaker 1: where than where it has been in the past. UM.
Speaker 1: That said, the the growth in wages has been sort
Speaker 1: of on a pretty steady, slow bleed upward. What we
Speaker 1: do Bury and I find that a lot of our
Speaker 1: work on the U S Economics team at Morgan Stanley
Speaker 1: is now we slice and dice it to a degree
Speaker 1: that we never had to before. UH because after financial crisis,
Speaker 1: there are lots of things that are going under the on,
Speaker 1: under the hood where you just can't look at anything
Speaker 1: in the aggregate anymore, and wages are a great example
Speaker 1: of that. Wage pressures have been rising much more quickly
Speaker 1: in areas of the labor market where we have been
Speaker 1: creating a lot of jobs. So more than six percent
Speaker 1: of all new jobs that we've created since the recovery
Speaker 1: began have been in the very UH typically low wage
Speaker 1: paying service sector, low productivity enhancing areas of the economy
Speaker 1: like retail and leisure and hospitality UH and home healthcare
Speaker 1: workers and temporary workers and THO. Those are the areas
Speaker 1: where as the unemployment rate has fallen, wages have accelerated
Speaker 1: there because we're hiring a lot more workers there and
Speaker 1: labor markets are actually tighter. They're how significant are the
Speaker 1: raises in minimum wage to that cohortive of the workforce. Well,
Speaker 1: let me put it two different ways. Uh. From a
Speaker 1: socio economics perspective, it matters greatly for that worker making
Speaker 1: a minimum wage. From a market perspective, not much, because
Speaker 1: if you look at wage growth in the aggregate, what
Speaker 1: you're doing is raising wages for the most marginally paid worker,
Speaker 1: and their total wage bill just does not move the
Speaker 1: needle much in the aggregum. Very often there is in healthcare,
Speaker 1: it's just a modest increase. It's just a modest increase
Speaker 1: in salary from what is already very low salary. And
Speaker 1: remember when states raise their minimum wages, uh, you know,
Speaker 1: in or when let me back up, when we talk
Speaker 1: about if the federal government raises the minimum wage, uh,
Speaker 1: and all of the discussion that ensues on both sides
Speaker 1: of the argument of is it good, is it bad?
Speaker 1: Is it gonna lead to high unemployment? Or is it
Speaker 1: necessary for those workers to have a living wage and survive.
Speaker 1: Oftentimes what's lost in that argument is that most states
Speaker 1: already pay above the federal minimum, So you really have
Speaker 1: to look to see what states are doing. UH. And
Speaker 1: individually states have been many many states have been raising
Speaker 1: the minimum wage UM. But those are really some of
Speaker 1: the higher success You know, when we see California or
Speaker 1: Seattle or even I was gonna say Washington State or
Speaker 1: even the city of Seattle REGI minium wage, raise the
Speaker 1: minimum wage, that's really very specific to a part of
Speaker 1: the country that's just booming. But what does that mean
Speaker 1: for Oklahoma or Arkansas or Kentucky where you may not
Speaker 1: have the same in this case, the technology driven boom towns.
Speaker 1: What do their minimum wage increases mean relative to UH
Speaker 1: states that aren't doing as well? So typically, so you
Speaker 1: do have to differentiate state by state. I think it
Speaker 1: is very important, right because the cost of living in
Speaker 1: one state, which I think is what you're getting at,
Speaker 1: is very different than another state. So raising you can
Speaker 1: raise them inimum wage to fifteen dollars in Seattle, but
Speaker 1: you can't do it in Birmingham, Alabama. UH. And so
Speaker 1: this is from the company by company perspective. This is
Speaker 1: the argument that they'll make. And there actually has been
Speaker 1: a good body of academic work that has suggested that
Speaker 1: raising the minimum wage, particularly in states like Alabama. UH
Speaker 1: doesn't necessarily lead to immediate layoffs UH in certain service
Speaker 1: sector industries, but it certainly depresses hiring UH from there forward. UH.
Speaker 1: And so I think it is something that has to
Speaker 1: be looked at on the state by state basis. If
Speaker 1: you're going to do it at the federal level, I
Speaker 1: think something like the earned income tax credit, which we
Speaker 1: already have in place, which you can expand, is a
Speaker 1: much better way to do it than a federal minimum wage.
Speaker 1: So rather than putting the burden on businesses and telling
Speaker 1: where businesses have no choice but to adjust their practices
Speaker 1: because they're being forced to raise wages whether it's good
Speaker 1: for that particular business in that particular state, in that
Speaker 1: particular town, doing it through expanding the earned income tax
Speaker 1: credit is a way you hit the lowest paid workers
Speaker 1: in the US, and the government, meaning the taxpayer more broadly,
Speaker 1: is bearing the burden of that cost. See my beef
Speaker 1: about minimum wage outside of the high earning cities the
Speaker 1: East Coast, the West Coast has always been Do you
Speaker 1: remember the helpline that McDonald's had set up. They were
Speaker 1: hiring people, they were capping them at thirty hours, and
Speaker 1: then they were sending them to aid to dependent children
Speaker 1: and welfare and medicaid, effectively having the taxpayer subsidize the
Speaker 1: labor force of a profitable company as a taxpayer. I
Speaker 1: always was offended by that, and that's what first sent
Speaker 1: me looking at minimum wage. It's wait, why why are
Speaker 1: you subsidizing your workforce with tax David Dollar? If if,
Speaker 1: if I need to give you a minimum wage raise
Speaker 1: in order to have these people no longer qualify, you
Speaker 1: should pay for that, not me. And if it means
Speaker 1: the burger is going to cose fifty cents more, I
Speaker 1: don't care if burger shouldn't be taxpayer subsidized. And I
Speaker 1: think a lot of that sort of gets lost in
Speaker 1: the minimum wage debate. That's very specific to a handful
Speaker 1: of company market and it's a very sensitive topic. It's
Speaker 1: um with a with a lot of heated debate on
Speaker 1: both sides of the coin. I think one of the
Speaker 1: one of the most interesting um uh things I think
Speaker 1: I've studied in the past in terms of company behavior
Speaker 1: on the back of minimum wages. When uh we were
Speaker 1: facing UM I think starting in in fourteen or so,
Speaker 1: we were going to be facing a lot of states
Speaker 1: that were raising minimum wages, and so to get out
Speaker 1: ahead of that, Walmart raised the wages of its workers
Speaker 1: across the board UM and I thought that it was
Speaker 1: a brilliant marketing UM tool for them, because you're gonna
Speaker 1: be forced, um via a lot of your states to
Speaker 1: be raised anyway, why don't do it ahead of time
Speaker 1: and get the pad on the back for doing this
Speaker 1: public service first. And on top of that, uh, there
Speaker 1: has been a real, a credible study out there that
Speaker 1: many of Walmart's workers spend their paychecks in Walmart. So
Speaker 1: pay them more. It comes right back to you and
Speaker 1: increased purchasing in your stores. It's brilliant plause. Walmart had
Speaker 1: a big issue with once we came out of the
Speaker 1: financial crisis, they had a big employee turnover issue and
Speaker 1: a big not only retention but recruitment issue. And it's
Speaker 1: very expensive to find and hire people and then train
Speaker 1: them in a Walmart and then they leave after three months.
Speaker 1: And so the most recent I want to say it
Speaker 1: was last February, maybe it was a quarter before that,
Speaker 1: CEO Walmart came out and said our retention numbers are better?
Speaker 1: Are are? Employee turnover numbers have reduced and the pay
Speaker 1: increase effectively is paid for itself, which is really a
Speaker 1: shocking thing because the previous management was really pushing back
Speaker 1: against Uh. This, This was very much a seat change.
Speaker 1: And yeah, I think it's a great example of how
Speaker 1: a company can very creatively get around something that's a
Speaker 1: sticky issue, like like minimum wage increase, and it doesn't
Speaker 1: have to be the end of the world. We were
Speaker 1: talking a little earlier, or I was referencing the technology
Speaker 1: boom on the West Coast, But since we're talking about labor,
Speaker 1: how significant has been technology and automation and software to
Speaker 1: either the wage malaise or the quality of jobs that
Speaker 1: we are creative? So it's a huge topic productivity, automation,
Speaker 1: replacing jobs with robots. Um. And it's something that's very
Speaker 1: difficult to see in real time. UM. I think this
Speaker 1: is gonna be something very where we wake up twenty
Speaker 1: years from now and realize that we're living through Wally
Speaker 1: the movie right right now. Um. But I can tell
Speaker 1: you that, um uh. From an economic theory perspective, UH,
Speaker 1: it's easy for me to argue why putting in chaos
Speaker 1: at McDonald's is a good thing because it will raise
Speaker 1: the productivity of its workers. And ultimately, UH, wages follow productivity. UH,
Speaker 1: you know, raising productivity if a business is UH makes
Speaker 1: that capex, that capital expenditure to raise its productivity. Productivity
Speaker 1: drives profits. And so even as as as profits rise,
Speaker 1: you can pay your workers more, but your labor share
Speaker 1: of income, UH, your labor share of costs does not rise.
Speaker 1: Fewer people making more money theoretically right, but it lifts
Speaker 1: wages of everyone because those workers that have been displaced,
Speaker 1: right are business overall expands and you have to hire
Speaker 1: them in other ways. So for McDonald's, go back to
Speaker 1: that example, they put in more chios where you go
Speaker 1: in and order, so you no longer need the people
Speaker 1: at the front desk taking your money. You're ordering from
Speaker 1: the kiosk. But maybe they're able to service more uh
Speaker 1: folks faster at lunch time and produce a lot more
Speaker 1: lunches in one hour, and so they need more people
Speaker 1: working behind the counter. So they extend their existing workforce,
Speaker 1: and they're able to pay their existing workforce. Are plus,
Speaker 1: somebody's building those chiosks, someone's doing them, making the screens,
Speaker 1: writing the software there exactly, so we can also the
Speaker 1: theory is kind of easy to explain right, why higher
Speaker 1: productivity wages tend to track productivity higher, and so why
Speaker 1: you as a policy maker, Uh, whether your fiscal policy maker,
Speaker 1: a monetary policy maker, or economists, you all want productivity
Speaker 1: to be higher because it still is the best indicator
Speaker 1: of overall health and well being of your economy, of
Speaker 1: your labor force. Uh. The the difficult thing to deal
Speaker 1: with is that there's always a temporal effect. There's always
Speaker 1: a segment of the population where labor is displaced for
Speaker 1: a time. Uh. And either that labor is never absorbed
Speaker 1: back um or it takes time to absorb it into
Speaker 1: other industries that are expanding. Uh. And so UM, I
Speaker 1: think that's the difficult part to deal with, is the
Speaker 1: temporal effect. So let's let's get a little wonky. Since
Speaker 1: you mentioned productivity. We've seen really me yoker productivity gains
Speaker 1: not just for quarters or years, but this seems to
Speaker 1: be going on for decades. What's the old joke? The
Speaker 1: productivity effect is seen everywhere except in the statistics. Do
Speaker 1: we have a productivity issue or do we have a
Speaker 1: productivity measuring issue? Okay, so the measuring issues, since you
Speaker 1: brought it up, because that is a that is a
Speaker 1: it's a hot button issue. Measurement mismeasurement has always been there,
Speaker 1: and so as an economist, I would want to show
Speaker 1: that miss measurement is worse today than it has been
Speaker 1: in the past. And I'm not sure that I can
Speaker 1: show that because I certainly don't want to hang my
Speaker 1: hat on trying to say that, oh, well, productivity is
Speaker 1: not low like everyone thinks it is, it's just simply mismeasurement.
Speaker 1: I think that's too cute, too easy of an explanation,
Speaker 1: because I think miss measurement has always been been there.
Speaker 1: Doesn't exist today absolutely, um, but was it there in
Speaker 1: the past as well? Absolutely. I can remember the dot
Speaker 1: com boom or or the Y two K come and
Speaker 1: he's going out and buying all of this software that
Speaker 1: was going to help them kind of get over that
Speaker 1: hump of Y two k. Um it uh took the
Speaker 1: government about five years to fully reflect how all of
Speaker 1: that that purchasing of software and deploying across business platforms
Speaker 1: affected productivity. Um. So I do believe there's ever present
Speaker 1: and always mismeasurement. But if you look at trend productivity
Speaker 1: over time, it's been falling for decades over time, we've
Speaker 1: been moving from a production lead economy, or let's say,
Speaker 1: manufacturing led economy, to a service sector led economy. Manufacturing
Speaker 1: has much higher associated rates of productivity than service industries,
Speaker 1: and so over time trend productivity has slowed. Now, do
Speaker 1: I think that it's flat to up half a percent,
Speaker 1: which is where it's been over the past five or
Speaker 1: six years. No, I don't think that's trend rate of productivity.
Speaker 1: I think we can see after the financial crisis there
Speaker 1: was an extreme shortfall in capital expenditures UM where only
Speaker 1: just now I'm seeing the kind of data that shows
Speaker 1: me companies are convinced now that it's time to go
Speaker 1: ahead and start adding UH two capex and doing some
Speaker 1: capital deepening. And part of that is the the cyclical
Speaker 1: rebound we're finally seeing in this cycle from global stronger
Speaker 1: global growth, and just companies in the U S having underbuilt,
Speaker 1: underinvested for so long and labor costs rising to a
Speaker 1: point where now UH capital is being incentivized over labor. Okay,
Speaker 1: So I don't think productivity is going to be stuck
Speaker 1: flat on its back where it has been for five
Speaker 1: or six years. But I think around one percent productivity
Speaker 1: is probably the best we get to, because I think
Speaker 1: the run rate of UH investment in the US it's
Speaker 1: probably around three to five not seven to nine percent,
Speaker 1: which is where it's been in the past. And a
Speaker 1: lot of that is just the elongating that trend, continued
Speaker 1: trend that where is the economy growing. It's growing in
Speaker 1: the service side. So let me push back on that
Speaker 1: a little bit, or share with you the standard pushback.
Speaker 1: When we were manufacturing, you could count the number of
Speaker 1: widgets and how much they were sold for and what
Speaker 1: it cost to actually create these individual widgets, and our
Speaker 1: productivity gains were easy to see and measure. Today, given
Speaker 1: the rise of technology, it's so much more nuanced. Let's
Speaker 1: take this conversation just as an example thirty years ago.
Speaker 1: This is a radio broadcast that reaches whoever it reaches,
Speaker 1: and so the amount of time and energy we put
Speaker 1: into this is heard by X number of listeners. Today,
Speaker 1: this will get done, it'll get edited, it will get
Speaker 1: nicely polished up, and in two or three weeks it
Speaker 1: will go up on Apple, iTunes and SoundCloud and overcast
Speaker 1: and Bloomberg dot com. And not only will it be
Speaker 1: listened to by a whole plus, it will go on
Speaker 1: the radio, so you get the original audience times four,
Speaker 1: time six. But it persists forever in somebody two years
Speaker 1: from now, doesn't Ellen Zentner google search and said, oh,
Speaker 1: what's this podcast that is? That is terrifying. It will
Speaker 1: haunt me for the rest of my life. Essentially, we'll
Speaker 1: let it out all the cuss words. None will hear
Speaker 1: the terrible things you've said. So here's another wrinkle on productivity,
Speaker 1: which which um, I think presents an interesting, um, not dilemma,
Speaker 1: but but let's say food for thought for policymakers going forward. UM.
Speaker 1: We can see in the data that we track on
Speaker 1: R and D spending research and development, we can see
Speaker 1: that it has been soaring yet and and typically productivity
Speaker 1: would follow that. Yet productivity hasn't. So where where is
Speaker 1: all that R and D going? What is it going into?
Speaker 1: There must be some change going on. And what we
Speaker 1: found when we look at where is that R and
Speaker 1: D going? Um, rather than old world technology, that that
Speaker 1: R and D is going into, say developing a robot
Speaker 1: arm to work in an auto manufacturing facility, a lot
Speaker 1: of that is going into the biotech space. So we're
Speaker 1: elongating the age of an eighty year old to ninety
Speaker 1: years And while that's extremely socially desirable, it's not a
Speaker 1: productivity enhancer. It's not going to help that that eighty
Speaker 1: year old work for ten more years at at Walmart
Speaker 1: is a greeter all right. I'm just saying it's not
Speaker 1: a traditional productory enhancer. Now here's another thing. Uh, And
Speaker 1: so does that mean we don't do it? We shouldn't
Speaker 1: do it because it doesn't raise it productivity in a
Speaker 1: in a GDP marketable way, right, And I would think
Speaker 1: the answer is no, we should absolutely do it, but
Speaker 1: it's not going to translate into productivity in the way
Speaker 1: we are used to. Here's another example. There's been a
Speaker 1: massive shift in R and D spending, uh, in the
Speaker 1: area of consumer discretionary. Now, what the heck does that mean?
Speaker 1: We had to dig into it. It's Amazon. It's Amazon
Speaker 1: creating the type of platform that allows me to order
Speaker 1: a makeup product that I've run out of when I'm
Speaker 1: walking down the hallway to the bathroom. Right within fifteen seconds,
Speaker 1: I've placed a one click order and ordered that makeup
Speaker 1: before I've even hit the bathroom stall. And now my
Speaker 1: productivity rises, or what's happening instead is all of these
Speaker 1: technological advancements are helping you enjoy your life better. They're
Speaker 1: giving me more hours of my day back to do
Speaker 1: other things. To it, you don't have to go to
Speaker 1: the mall to get whatever it is that you just
Speaker 1: ordered exactly. So is that worth nothing because it doesn't
Speaker 1: raise my productivity? It makes my life more enjoyable. Is
Speaker 1: there not an amenity value in that? Right? But it
Speaker 1: just doesn't raise my quality of life? Except that productivity
Speaker 1: is how we measure quality, and so so what's the
Speaker 1: old Drucker quote. Not everything that's measure that can be
Speaker 1: measured matters, and not everything that matters can be measured
Speaker 1: exactly exactly. So I think that is the conundrum for
Speaker 1: policymakers because they're constantly disappointed with low productivity. I and
Speaker 1: because that is economic theory tells you that's the single
Speaker 1: best indicator for standard of living in your economy of
Speaker 1: living has not gone up in five or some nothing
Speaker 1: but the fact that I don't have to go to
Speaker 1: the mall with my wife to get lipstick anymore or
Speaker 1: whatever lead in quality of life. I actually don't mind shopping.
Speaker 1: We go through the malls, we make I make fun
Speaker 1: of stuff it's entertainment. That's not shopping. Barry Berry is
Speaker 1: walking in, actually buying things and helping the economy, well,
Speaker 1: walking on and making fun. We call it economic research
Speaker 1: or economic stimulus. Absolutely, But I would given the choice
Speaker 1: between the half hour takes to drive and park and
Speaker 1: actually get into a store and then do our thing
Speaker 1: and then head out. Wait, I could just scroll through
Speaker 1: Amazon find what I want in fives and save myself
Speaker 1: ninety minutes of my weekend. Hence the death of the mall.
Speaker 1: But no doubt about it. Well, we all you know,
Speaker 1: the United States has this huge retail footprint. We're overbuilt
Speaker 1: on a per capita basis, at least compared to Europe,
Speaker 1: and that is certainly going through its secular changes. Um.
Speaker 1: I could talk about this stuff forever. It's fascinating, But
Speaker 1: what I want to do is get to specially since
Speaker 1: you brought up shopping. Yeah, oh, for sure, we can
Speaker 1: talk a ton about But let's instead jump into my
Speaker 1: favorite questions. Um. These are what I ask all my
Speaker 1: guests and and they're always kind of generate interesting responses.
Speaker 1: Let's start with what's the most important thing people don't
Speaker 1: know about your background? Oh? My gosh, I think if
Speaker 1: I if we keep it from a business perspective, any perspective,
Speaker 1: any perspective at all. Uh Like, I'm always surprised when
Speaker 1: someone says I climbed Mount Kilimanjaro. I'm like, what, But
Speaker 1: people have dropped that sort of Yeah, I'm sure I've
Speaker 1: done a lot of amazing things. Just there's so many
Speaker 1: of them. Nothing leaves the mind exactly, There's so many
Speaker 1: of them. Uh so keep it on the professional side.
Speaker 1: What what do people not know about you? I think
Speaker 1: if you were to start the conversation by saying, this
Speaker 1: is Ellen Sentner, she's US chief economist of Morgan Stanley,
Speaker 1: and then work backwards to how I started my career,
Speaker 1: or work backwards even further to how I even approached
Speaker 1: university and went through school, that whole process. You would
Speaker 1: you would never backtrack to where I started and draw
Speaker 1: a line to chief economy. What did you do at
Speaker 1: the beginning that didn't say economics in the future When
Speaker 1: I was in high school? Um, you go way back. Yeah,
Speaker 1: when I was in high school, there was no just
Speaker 1: because I compare it to what my niece and nephew,
Speaker 1: who are teenagers today are going through and how they
Speaker 1: prepare for college, and I think, oh my god, I
Speaker 1: wasn't even thinking about college at your age. I was
Speaker 1: thinking about having fun in high school every day. We
Speaker 1: did not have a high school counselor that helped me
Speaker 1: think about what schools I wanted to apply to. Uh.
Speaker 1: It was always understood in my family that I went
Speaker 1: to college. My both of my grandparents were professors at
Speaker 1: the University of Texas. Everybody went and got a degree. Um.
Speaker 1: But I graduated high school and I just wanted to
Speaker 1: work and have fun. So I worked and had fun.
Speaker 1: You're of the era Dazed and confused that movie with Yes.
Speaker 1: Top Notch, which is the burger joint in that movie
Speaker 1: is right in my neighborhood. And I still eat a
Speaker 1: top Notch every time I go back to Austin. So kids,
Speaker 1: I don't want to say kids today, these kids today,
Speaker 1: but my niece and nephews yours. So they've been thinking
Speaker 1: about college for ten years exactly. I didn't think I had.
Speaker 1: I Basically, everything came more organically for me once I
Speaker 1: got tired of working and having fun and thought to myself, well,
Speaker 1: I'm gonna am I gonna be a manager of a
Speaker 1: swimwear shop for the rest of my life. No, maybe
Speaker 1: I should go ahead and go to college. UH. And
Speaker 1: so I went off to college, and then I have
Speaker 1: the the you know, the kids that I mentor today
Speaker 1: asked me, well, how did you choose the school? You
Speaker 1: know how I chose school. My mother loved spending summers
Speaker 1: UH in Boulder, in the mountains, because my grandfather would
Speaker 1: teach summers at See You Boulder. He taught during the
Speaker 1: school year at U T Austin, UH. And because she
Speaker 1: said she loved the mountains, I decided I wanted to
Speaker 1: go to See You also, and I applied and went
Speaker 1: side Unseen and then I stayed there and to graduate
Speaker 1: school there. And then when I got to graduate school,
Speaker 1: I was like, well, what the heck do you do
Speaker 1: with a graduate degree in economics? I had specialized in
Speaker 1: econometric econometrics, I love statistics UM, and so I thought, well, heck,
Speaker 1: I'll just go back home to Austin. And at that time,
Speaker 1: if you're an economist, you worked for the state. I mean,
Speaker 1: so you can see where I'm getting at if you
Speaker 1: were to look at that. Ellen Ellen Beeson, I was
Speaker 1: at the time high school student in Austin Texas, and
Speaker 1: and think would this girl be chief US economist of
Speaker 1: Morgan's Ley decades from now? Uh No one would have
Speaker 1: drawn that line. And and Boulder and Denver and Colorado
Speaker 1: in general is now booming. Yeah. My sister lives in
Speaker 1: Denver now and it's unbelievable. The housing boom there is
Speaker 1: just just well, I don't know how much of it
Speaker 1: is attributable to decriminalization of marijuana and how much of
Speaker 1: it is organic. They have a burgeon no pun intended.
Speaker 1: They have a burgeoning tech community there as well, and
Speaker 1: they have when I lived there in the nineties, that
Speaker 1: tech community was really up and coming, the whole complex
Speaker 1: being built out for it in south South Denver um.
Speaker 1: And it's an incredible because I like areas of North
Speaker 1: Carolina and Texas, there are areas of Colorado that never
Speaker 1: had a housing boom, so they never never had a
Speaker 1: bust and now they're well above previous peak for home releasing.
Speaker 1: My sister is tickled, tickled pink that she's already a
Speaker 1: homeowner there at least, so she's gaining equity uh day
Speaker 1: by day. Uh yeah, So it's it's uh, it's on fire. Yeah,
Speaker 1: it's on fire. And Austin. I think I must be.
Speaker 1: I must be good luck for places that I've lived in.
Speaker 1: All right, let's talk about mentors. Who were some of
Speaker 1: your early mentors? Uh? So in my career the very
Speaker 1: first I think I was lucky right off the bat
Speaker 1: when I went back to the State of Texas, UH,
Speaker 1: to be assigned to be the right hand woman to
Speaker 1: Tamra Plout, who was the chief economist at the State
Speaker 1: of Texas at that time. UM. She and I had
Speaker 1: an amazing partnership. She took me under her wing. UM
Speaker 1: and having that kind of slow paced environment that government is. UH.
Speaker 1: Going back to the beginning of the podcast where I
Speaker 1: said it was just a a great time to cultivate
Speaker 1: deep thinking. I learned a lot from her. We remain
Speaker 1: extremely close today. UM. Also UH when I moved on,
Speaker 1: I had gone there the Bank of Tokyo Mitsubishi, and
Speaker 1: then when I went on from there to Nomeura Securities
Speaker 1: David Wrestler, who when he by the time he retired,
Speaker 1: he had been at Nomura for twenty six years, the
Speaker 1: longest practicing chief economist on Wall Street. UM. Dave was
Speaker 1: an amazing mentor to me from a market perspective. So
Speaker 1: taking me from sort of that academic thinking economist UM
Speaker 1: to how a market economist thinks and how to move
Speaker 1: into that fast paced world of working for an investment bank.
Speaker 1: He and I are both very good friends today. If
Speaker 1: I can ever catch him when he's off the golf course,
Speaker 1: he's living a very nice retirement right now. Uh. And
Speaker 1: so that those those were very important UM mentors UM
Speaker 1: in in the business world in Texas. I started off
Speaker 1: at a pretty young age UM in gymnastics competitive gymnastics UM.
Speaker 1: And the coaches there, uh, Jim and Cheryl and at
Speaker 1: Capital gymnast Sticks in Austin were were incredible. Let's talk
Speaker 1: about books. This is the question everybody always asks. Tell
Speaker 1: us about some of your favorite books, fiction, nonfiction, economics
Speaker 1: or markets related or not. I'm gonna talk about one book.
Speaker 1: I'm gonna talk about one book because it's the first
Speaker 1: one that always comes to mind anytime anyone asked me. Okay, So,
Speaker 1: because it's a lot of pressure for one book. Joe
Speaker 1: No Sarah wrote a book called A Piece of the Action,
Speaker 1: How the Middle Class Became the Money Class. UM. It
Speaker 1: goes all the way up through the late nineties. It
Speaker 1: covers the love of Americans, Americans love affair with credit cards?
Speaker 1: How did that all come about? How did this credit
Speaker 1: explosion and debt explosion the US affect the middle class?
Speaker 1: It was now I'm gonna say this from a very
Speaker 1: nerdy economist perspective, the book read like a novel. I
Speaker 1: could not put down. It was the best book. It
Speaker 1: goes right up there with best books fiction or nonfiction
Speaker 1: that I've read. I'm going to have to unbelievable. And
Speaker 1: I just tell myself if Joe ever reached out and
Speaker 1: wanted to do an update to the book, because I've
Speaker 1: covered the consumer and so much depth the US household
Speaker 1: and so much depth, and that book singularly has influenced
Speaker 1: so much of my study around the US household and
Speaker 1: slicing and dicing it by income group and studying the
Speaker 1: household experience. It is. It's huge. And I always told myself,
Speaker 1: if Joe calls me and says, help me update this book,
Speaker 1: I'll take you upstairs to me. I'm assuming you've met
Speaker 1: Joe over the years. I would love to, and I
Speaker 1: have never met him. He's on the he now writes
Speaker 1: for Bloomberg Views. I know that one floor I suppose
Speaker 1: that was my way of trying to get an invite.
Speaker 1: He's literally like if I could drill a hole through
Speaker 1: the ceiling. We're practically but I'm not kidding you. Every
Speaker 1: economist that comes on my team, if I want them
Speaker 1: to know the consume us, consume Mr inside and out,
Speaker 1: I just give them that book and I say you
Speaker 1: need to read this. So let's talk about a time
Speaker 1: you failed. Tell us about something that didn't go as
Speaker 1: you expected and what you learned from it. It's not
Speaker 1: that I never failed. I came up with an example,
Speaker 1: but it's it's not that I never failed. It's that
Speaker 1: I was raised in the South, in Texas, and there's
Speaker 1: this sense of perpetual optimism for some reason. I think
Speaker 1: when you grow up in his sunny climate and every
Speaker 1: failure is embraced and turned into something positive, so that
Speaker 1: when you look back on it's hard to see it
Speaker 1: as a failure because all I can think of is
Speaker 1: the positive thing that came out of it. Isn't that
Speaker 1: a characteristic of America in general? Coast, in Europe or elsewhere,
Speaker 1: when a business person fails, it's a black mark. And
Speaker 1: in the United States, I mean, how many companies did
Speaker 1: Ford have? How many times it did Edison fail before
Speaker 1: they hit their market? It seems, you know, there is
Speaker 1: a second act in American life. But I always found
Speaker 1: that entrepreneurship, that ability to just get up, put dust
Speaker 1: yourself off, and move on to the next is a
Speaker 1: uniquely American phenomenon the rest of the world, it is.
Speaker 1: And I think and I think embracing the failure um.
Speaker 1: And this is something that I that I think is
Speaker 1: great um and that the world of finance. I think
Speaker 1: we do well at Morgan Stanley, or at least promoting
Speaker 1: it Morgan Stanley, but I think the world of finance
Speaker 1: could do better about is uh embracing when you fall
Speaker 1: on your face publicly with a bad call and say
Speaker 1: that was a bad call. I thought I had sound
Speaker 1: research behind it. Turns out out was I was wrong.
Speaker 1: And then let's move on. People will trust you so
Speaker 1: much more when you make the next call. Then if
Speaker 1: you're one of these and I've met plenty that have
Speaker 1: tried to cover it over time, revisionist history. I always said, X, Y,
Speaker 1: and Z and and believe me, with things like these podcasts,
Speaker 1: you can't go back and have revision. It's a generational thing.
Speaker 1: People forget that the internet is forever and it's amazing.
Speaker 1: All right, we're I only have you for a few
Speaker 1: more minutes. I see your your handler jumping up and down.
Speaker 1: I have to ask my sound like a performing monkey. No,
Speaker 1: not at all, not at all. This is great stuff.
Speaker 1: So what sort of advice would you give to a
Speaker 1: millennial or recent graduate who's interested in going into economics
Speaker 1: as a profession. Uh. I would start more generally by saying,
Speaker 1: stop worrying about where you're going to be ten to
Speaker 1: twenty years from now. Worry about where you're going to
Speaker 1: be a year from now, and then as you get older,
Speaker 1: widen it out to where I'm I going to be
Speaker 1: three years from now, five years from now. Communicate and
Speaker 1: communicate face to face, no matter how much your generation
Speaker 1: hates it because it's not the way you were raised.
Speaker 1: Communicate face to face, because those of you who do
Speaker 1: will make it further than those of you who just text.
Speaker 1: You cannot get body language from a text. You just
Speaker 1: can't uh, And people will appreciate that. UH. For the
Speaker 1: economists specifically, it is half about showmanship and delivery uh,
Speaker 1: and half about the analytical work that you put into
Speaker 1: a steak and the sizzle. You have to have the
Speaker 1: sizzle and not a lot of economist sizzle because we
Speaker 1: tend to be nerds and attract nerds to our industry. UM.
Speaker 1: Embrace public speaking, Embrace being comfortable in front of people,
Speaker 1: and you will go much further than your counterpart. That's terrific.
Speaker 1: And then my final and favorite question, what is it
Speaker 1: that you know about econometrics investing markets today that you
Speaker 1: wish you knew twenty years ago? I wish that I
Speaker 1: was told, which you never would be told when you're
Speaker 1: learning economic theory that it doesn't always make sense because
Speaker 1: I think the peril that many of us ran into
Speaker 1: right after the financial crisis, there was all of these
Speaker 1: economic theories we learned in school made no sense anymore. UM.
Speaker 1: And uh only be just beginning with my generation did
Speaker 1: we start to really fully employ econometrics and statistical modeling
Speaker 1: and economics. UM. And it's those of us that were
Speaker 1: able to rely on that more so than trying to
Speaker 1: make everything fit into a theory that we're able to
Speaker 1: adapt better after the financial crisis. Fantastic stuff. Thank you
Speaker 1: Ellen for being so generous with your time. You didn't
Speaker 1: think we'd go the full ninety minutes, but we did. UH.
Speaker 1: We have been speaking to Ellen Zentner. She is the
Speaker 1: chief US economist for Morgan Stanley. UH. If you enjoy
Speaker 1: this conversation, be sure and look up an intro Down
Speaker 1: an Inch on Apple iTunes or SoundCloud, overcast Bloomberg dot
Speaker 1: com and you can see any of the other hundred
Speaker 1: and fifty three or so such conversations that we've had
Speaker 1: over the past three years. We love your comments, feedback
Speaker 1: and suggestions right to us at m IB podcast at
Speaker 1: Bloomberg dot net. I would be remiss if I did
Speaker 1: not thank the wonderful team I have who helps us
Speaker 1: put this podcast together and then send it out into
Speaker 1: the world via the technology we were talking about. Medina
Speaker 1: Parwana is my technical producer. Taylor Riggs is our booker
Speaker 1: slash producer. Michael Batnick is our head of research. I'm
Speaker 1: Barry Ridholts. You've been listening to Masters in Business on
Speaker 1: Bloomberg Radio.