Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Didn't
Speaker 1: Turn It. Joining us now, Mar Risk Advice to see day.
Speaker 1: Can we just start with a little bit of a
Speaker 1: clinic on the volatility term structure, what it is, and
Speaker 1: the story around the election that's been priced in and
Speaker 1: now being priced out. Right, So when we look at
Speaker 1: the volatility, we can look at it, can you guys
Speaker 1: hear me, Yeah, we can hear you d Sorry, um, yes,
Speaker 1: So when we look at volatility, we can look at
Speaker 1: it both across strike and then across time. So when
Speaker 1: we look at it across time, that's uh, John, as
Speaker 1: you say that this thing called the volatility term structure.
Speaker 1: So we can look at the VIX. We can look
Speaker 1: at VIX futures that expire in October, November, December, and
Speaker 1: because there's been this date certain event on the calendar,
Speaker 1: the election, uh, for months, the market has differentiated, sometimes strongly,
Speaker 1: between options UH and volatility futures that expire before or
Speaker 1: after the election, with the premise that the election would
Speaker 1: create two things. One a potentially significant move in the
Speaker 1: smp UM in and around the date itself, so the
Speaker 1: outcome would result in a lot of folatility in the
Speaker 1: smp UM. And then the second one is that the market,
Speaker 1: at least as of a couple of weeks ago, started
Speaker 1: to think that um this, this notion of a contested
Speaker 1: election would lead to volatility on an ongoing basis. So
Speaker 1: we started to see longer dated vic's futures, those that
Speaker 1: expire in December. In January also bid up quite a bit.
Speaker 1: It's been interesting. A clinic there in the vix Dean
Speaker 1: current with us and he will continue with us through
Speaker 1: this important hour on the game theory of volatility and
Speaker 1: out folds into futures up fifteen. Right now, we need
Speaker 1: to listen to a moment in Sweden today. Once a
Speaker 1: year in October we listen this year's price. It's about
Speaker 1: auctions Andrada, the Royal Swedish Academy of Sciences, has today
Speaker 1: decided to award the Svatia six Bank Price in Economic
Speaker 1: Sciences in memory of Alfred no Belle jointly to Paul R.
Speaker 1: Milgram and Robert B. Wilson for improvements to auction theory
Speaker 1: and invention of new auction formats, and the celebration today
Speaker 1: in Palo out of California, more than anywhere else at
Speaker 1: Stanford University, I think of a frequent guest, Michael Spence,
Speaker 1: on all of his leadership and academics at Stanford, and
Speaker 1: it devolves down to the leadership and intellect of Robert
Speaker 1: Wilson out of Nebraska, with his academics at Harvard and
Speaker 1: his held core since nineteen sixty eight on the theory
Speaker 1: of syndicates at Stanford University. Professor Wilson, for all of us,
Speaker 1: for Michael McKee, congratulations on this award. Were you surprised? Yes,
Speaker 1: I was surprised because it seemed like the time had
Speaker 1: long past. Most of the interests in auctions peaked, you know,
Speaker 1: ten years ago. Yeah, you know, I look Professor Wilson
Speaker 1: at this and we know from Stanford the monetary theory
Speaker 1: of John B. Taylor and the Hoover Institution in such
Speaker 1: describe what auction theory means for our organization, for our
Speaker 1: societal organization where Stanford has led for forty years, all
Speaker 1: we think of it more generally in terms of market design,
Speaker 1: that there are many ways and with the institutions, the
Speaker 1: procedural rules and so on, the ways in which we
Speaker 1: allocate resources can be improved. A lot of times. Uh,
Speaker 1: these interventions are really, let's say, minor changes on the margin.
Speaker 1: But in some cases there they create entirely new markets.
Speaker 1: So we saw that in the spectrum auctions. But uh,
Speaker 1: my colleague Elvin Ross, you know, he worked on a
Speaker 1: market for exchange of kidneys among donor donors and recipients.
Speaker 1: So there are many novel applications in which we create markets.
Speaker 1: People participate and they work and work efficiently and with
Speaker 1: good incentives. Well, you're modest there, then, Elvin Roth studied
Speaker 1: under you at Stanford a few years ago. I think,
Speaker 1: Robert Wilson of all this, and what I think of
Speaker 1: is my colleague John Farrell bidding for a piece of
Speaker 1: art at Christie's in London. Your work goes so far
Speaker 1: beyond the auctions that we understand the auctions of the
Speaker 1: art market, or maybe the auctions for a foreclosed house.
Speaker 1: What does our audience worldwide need to know about where
Speaker 1: the science of auctions is going in? What it means
Speaker 1: for US worldwide. Well, we could deal with very complex
Speaker 1: multi commodity kinds of situations. So there are many different
Speaker 1: spectrum licenses in electricity. We're talking about electricity at various times,
Speaker 1: at various places. So these are ones which were systems
Speaker 1: which were allocating a huge variety of resources continuously over time.
Speaker 1: In the case of electricity, uh, it's a complex uh
Speaker 1: so much more complex than a single piece of art
Speaker 1: being auctioned under a gavel and then the next one
Speaker 1: and then the next one. Instead, these are cases at
Speaker 1: which your people trying to buy or sell like packages
Speaker 1: of things or there. In a sense of electricity, you
Speaker 1: have to have the energy, the transmission lines, all of
Speaker 1: the connections that are necessary. So you're bitty for a
Speaker 1: complex commodity, and there are many of them. Professor, this
Speaker 1: is an incredibly relevant field of study in our digital
Speaker 1: era as well as an era of central bank intervention,
Speaker 1: where a lot of people are wondering whether efficient markets
Speaker 1: still exist among public equities and public debt. I know
Speaker 1: you focus on the less mainstream asset classes and how
Speaker 1: to auction them efficiently, but based on your intensive knowledge
Speaker 1: of efficient markets, how inefficient have public markets gotten with
Speaker 1: that Central Bank intervention. That's way beyond my expertise. I'm
Speaker 1: afraid I couldn't give a reliable answer. Sorry, all right. Well,
Speaker 1: in that in that case, are there other asset classes
Speaker 1: that you foresee moving to a sort of auction format
Speaker 1: in our digital era that perhaps haven't been thought of
Speaker 1: in that way? Well, a good one to think about
Speaker 1: is uh something like electricity, because we have all these
Speaker 1: UH needs now for solar powered energy from from solar
Speaker 1: power and from wind, and it's quite variable, so we
Speaker 1: need to create new kinds of markets for those kinds
Speaker 1: of variable resources, you know, to keep the supply provided
Speaker 1: to beat the demand. So that that's a new and
Speaker 1: different kind of application. Robert Wilson, I want to take
Speaker 1: you beyond the theory of syndicates and what seems like
Speaker 1: ancient auction theory to what we're dealing with every day,
Speaker 1: which is our new digital dominance, the auctions that take
Speaker 1: part obviously on eBay, but far more the auctions and
Speaker 1: the information flow led by Apple, led by Google and
Speaker 1: the rest as well. What would you presume to be
Speaker 1: the future for how we bid each day within technology? Well,
Speaker 1: I think if you take those kinds of auctions as examples.
Speaker 1: What you see is that mostly automated that these are.
Speaker 1: They're a minute by minute or second by second, and
Speaker 1: they're done with bidding bots. You know, robots are algorithmic methods.
Speaker 1: So there's a continuous reallocation of resources, and I think
Speaker 1: you're going to see a lot more of that in
Speaker 1: many fields. Robert Wilson, thank you so much for joining
Speaker 1: us the Nobel Prize winner with Professor Milgram, Paul Milgram
Speaker 1: as well Michael mckeeon, and I say thank you as
Speaker 1: this all of Bloomberg Economics. John just to call one
Speaker 1: point one million dollar prize this year, Tom an upgrade
Speaker 1: from the year before. So we see how you can
Speaker 1: put that money to work. With Dean Kern and the
Speaker 1: macro risk advice, how the professor get a trade? How
Speaker 1: the professor get a trade? Dean, we were talking about
Speaker 1: the volatility term structure just before turning to him. It's
Speaker 1: been faded volatility in the back half of this year
Speaker 1: over the last couple of weeks. How do you navigate
Speaker 1: these issues now? Dean, I think one of the things
Speaker 1: we should really step back and contemplate in terms of
Speaker 1: volatility is that, like any market, it's just a it's
Speaker 1: an outcome of supply and demand, meaning, you know, the
Speaker 1: price of alatility of the market just reflects where two
Speaker 1: people found a way to do a trade. And one
Speaker 1: of the dynamics that was occurring over the summer that
Speaker 1: started to ease off is this tech stock mania. So
Speaker 1: look at indices like the New York Fang Index or
Speaker 1: just picked Tesla or Amazon. The speed with which these
Speaker 1: stocks were going up and then the retail almost reflective
Speaker 1: participation in that led to a tremendous amount of call
Speaker 1: buying in the high flying tech stocks. And if you
Speaker 1: look almost to the day when the tech stocks peaked
Speaker 1: right around the first day of September. Since then, as
Speaker 1: things have been um you know, down a little bit,
Speaker 1: not tremendously, but certainly not that high performance to the upside,
Speaker 1: the volumes and tech stock options have declined, in some
Speaker 1: cases dramatically. And so what what's happened is, against thinking
Speaker 1: about it from a supply demand perspective, the demand for
Speaker 1: optionality in the market has started to recede because the
Speaker 1: payoff to being long upside calls has started to recede.
Speaker 1: And so that that's one part of the story is
Speaker 1: that because there's less demand, the price of volatility is
Speaker 1: going down. UM. So as we started trying to disentangle
Speaker 1: what's happening, some of it, I do think is Biden
Speaker 1: pulling away sufficiently such that this notion of a contested
Speaker 1: election may be less of an issue for the market. Um.
Speaker 1: But but again, some of it is just a fall
Speaker 1: off in demand and that's allowing volatility to clear the
Speaker 1: market at a lower level than it was doing, you know,
Speaker 1: in the peak several weeks ago. So Jana had this
Speaker 1: conversation with Muhammadalarian on Friday, and I do think it's
Speaker 1: important the price seems to be shaping narrative. It's not
Speaker 1: the narrative driving the price. Do you see some of
Speaker 1: that going on here as well? Oh, tremendous amount. I mean,
Speaker 1: the street is in some ways hopelessly addicted to backfilling
Speaker 1: the narrative. Um. There's a lot of confirmation bias in it. Um.
Speaker 1: You know, we stare at prices and we try to
Speaker 1: figure out what the market is telling us. I think
Speaker 1: that's a useful exercise. We're supposed to do it. But again,
Speaker 1: I think a framework that brings to just this notion
Speaker 1: of of supply and demand, especially as it comes to volve.
Speaker 1: It's been a really interesting year for volatility because we've
Speaker 1: had a couple of these dynamics. One, as I mentioned,
Speaker 1: this incredible demand from an unusual source, the retail source
Speaker 1: for for calls UH in tech stocks, and then the
Speaker 1: second one UM I'd point to two things on the
Speaker 1: supply side of volatility that are important. One, UH March
Speaker 1: was a year even worse than the worst part of
Speaker 1: two thousand and eight in terms of the explosion of
Speaker 1: alatility and what it did to short volatility strategies. There
Speaker 1: was a massive destruction of capital UH in the space,
Speaker 1: so all ell sequel, there's less supply of volatility. And
Speaker 1: then the second thing is just in and around the election,
Speaker 1: an incredibly political event for our country, polarizing, but even
Speaker 1: for the markets themselves. My senses and just talking to
Speaker 1: people that UM risk managers would would prefer not to
Speaker 1: lose money on the election. You know. It's it's one
Speaker 1: of these things that uh as, especially as time draws nearer,
Speaker 1: I think people's risk limits are going to be called
Speaker 1: into question, and the ability to provide capital hedging type
Speaker 1: capital into that event is going to be called into question.
Speaker 1: Now again, it may be a little bit less so
Speaker 1: if if the market becomes so convinced that a Biden
Speaker 1: uh win is is uh you know, baked in the cake,
Speaker 1: and the Senate win increasingly as well is baked in
Speaker 1: the cake. But I think that's just another thing to
Speaker 1: really watch is the streets ability to provide hedges over
Speaker 1: this period is compromised by just the unusual nature of
Speaker 1: the event and the reality that it's just not analyzable
Speaker 1: in the in the traditional sense that Wall Street likes
Speaker 1: to analyze things. Dean, given where positioning is now, and
Speaker 1: given the fact there does seem to be a complacency
Speaker 1: around a bowl a long call, how susceptible or markets
Speaker 1: right now to a violent move should there be a
Speaker 1: contested election or an outcome that people aren't expecting right well,
Speaker 1: I think price would tell you more so than a
Speaker 1: couple of weeks ago. As John pointed out, there there's
Speaker 1: been a fading of of things that measure volatility, whether
Speaker 1: it's option prices or vicked features. December, vicked features are
Speaker 1: down from thirty two to twenty eight over the last
Speaker 1: couple of weeks. That's actually quite quite a big move
Speaker 1: for that so I think more so than the peak
Speaker 1: a couple of weeks ago. There there is this complacency
Speaker 1: and a risk. I think one of the big risks
Speaker 1: is that the polls start to narrow, uh significantly. I
Speaker 1: think that's gonna, you know, uh enable Trump to potentially
Speaker 1: gen of controversy, and I think the market will be
Speaker 1: uh not well suited for that given current pricing. Jean Curnin,
Speaker 1: thank you so much. Macros Advisors. Betsy Stevenson enjoys now
Speaker 1: at Michigan, the Fourth School at Michigan, Professor of Public Policy. Betsy,
Speaker 1: what I want to do to start is go back
Speaker 1: to first principles, which you know is Carl Case so
Speaker 1: I'm sure you studied with at Wellesley a few years ago.
Speaker 1: The first principle is if you have debt, you need
Speaker 1: economic growth and a growth rate that is better than good.
Speaker 1: Are we anyway as certain that we will have a
Speaker 1: growth rate to help us out of this huge amount
Speaker 1: of debt. Well, you know the thing is, we got
Speaker 1: to do the stimulus spending in order to get the
Speaker 1: growth rate that will help us out of the debt.
Speaker 1: I mean, it is absolutely the case that one of
Speaker 1: the best ways to deal with debt is just to
Speaker 1: grow so fast that the debt shrinks as a percent
Speaker 1: of GDP. But you know what, you were the idea
Speaker 1: that when the stimulus comes, that it needs to come fast.
Speaker 1: That the whole point there is that we need to
Speaker 1: restore potential GDP. We need to be able to get
Speaker 1: to potential and go back to growing if we put
Speaker 1: ourselves on a permanently lower level of GDP. So we're
Speaker 1: we're sort of never quite getting back to potential in
Speaker 1: a lower growth path, so we're never like quite back
Speaker 1: to where we were. Well, then that's a problem, and
Speaker 1: now there's lots of reasons we could end up doing
Speaker 1: a lot of permanent destructions. The more businesses that would
Speaker 1: have been viable that would be hard to to put
Speaker 1: back together again, that disappear um, that causes problems, Families
Speaker 1: that you know, go to bankruptcy that are just never
Speaker 1: quite able to get back on their feet again. These
Speaker 1: things happen, and that's why it's so important for government
Speaker 1: to respond in a timely way. But it's also important
Speaker 1: for government to respond in a timely way because it
Speaker 1: alleviates the suffering. So we can tell the economic story really,
Speaker 1: you know, get us back to where we were as
Speaker 1: quickly as possible get us on a strong past, but
Speaker 1: realized every day they delay, there's somebody's not put food
Speaker 1: on the table, who's at risking in their I don't
Speaker 1: need a single point estimate from you, because that's what
Speaker 1: we do in market economics, and you're clearly under the
Speaker 1: academic purview. But where is potential g d P. There's
Speaker 1: a belief in Mourning America that we go back nostalgically
Speaker 1: to a time of what we would call substantial GDP growth.
Speaker 1: Are those days gone? Well? I mean, you know, I
Speaker 1: you guys know the whole secular stagnation argument as well
Speaker 1: as as I do. Um. You know, estimates I've seen
Speaker 1: of where growth can be is that it's it's lower.
Speaker 1: You know, there's concern that we've run out of ideas
Speaker 1: in a way that's just gonna make it harder for
Speaker 1: us to to, you know, grow faster. But I have
Speaker 1: to tell you, you you know, I go to UH tech
Speaker 1: conferences every year sort of UH is artificial intelligence gonna
Speaker 1: take our job but make us rich, And I'm impressed
Speaker 1: every year by the amount of progress I've been seeing there.
Speaker 1: So I think there's actually you know a lot of
Speaker 1: room for us to do things better, faster, cheaper. That's
Speaker 1: where our growth comes from. And and I'm always an optimist,
Speaker 1: we can do it. I also think we have a
Speaker 1: lot of untapped potential in people, um and that's why
Speaker 1: investing in people is so important, because we can harness
Speaker 1: all that untapped potential. You know, that's what will fuel growth.
Speaker 1: And realize, if you know, if you go back to
Speaker 1: the nineteen seventies, nineteen eighties, you know, a large chunk
Speaker 1: of our growth just came from the rise of female
Speaker 1: labor force participation. If female labor force participation in twenty
Speaker 1: nineteen had been back where it was in the nineteen seventies,
Speaker 1: are in g d P would be about fifteen percent smaller.
Speaker 1: So just think about that and then realize that women's
Speaker 1: labor force participation right now is back where it was
Speaker 1: in the mid primate. Women's labor force participation is back
Speaker 1: where it was in the mid nineteen eighties. So if
Speaker 1: you want us to get back, we got to get
Speaker 1: all these people back in the labor force. So, Betsy,
Speaker 1: two really powerful concepts you've touched on in just minutes.
Speaker 1: Something that I've heard from other prominent economists as well.
Speaker 1: The longer we are below potential, the lower potential growth
Speaker 1: might be in the future. But when you talk about policy,
Speaker 1: you're talking about structural initiatives as well, not just throwing
Speaker 1: money at the issue. At the moment, Bessie can put
Speaker 1: those two concepts together, and the urgency to do something quickly, well,
Speaker 1: I think, you know, we need to do something quickly,
Speaker 1: and that's the idea that we need to get money
Speaker 1: out the door, and that's, you know, the same thing
Speaker 1: that they did with the CARES act. I think that's
Speaker 1: money to individuals, to families to make sure that they
Speaker 1: can keep spending so that we don't end up with
Speaker 1: demand driven problems. Um and we are seeing demand driven
Speaker 1: problems starting to pick up. We thought demand driven problems
Speaker 1: we're huge in the spring. So that's getting money to people.
Speaker 1: You get money to businesses to help businesses that can
Speaker 1: make it to the other side survive. We're gonna lose
Speaker 1: some of some businesses for sure, and that's why the
Speaker 1: next step for government is going to be thinking about
Speaker 1: how do we transition people, how do we provide the
Speaker 1: drop job training programs, how do we provide the liquidity
Speaker 1: in markets? For new businesses to be able to get started.
Speaker 1: How do we foster the creation of change? And there
Speaker 1: I think we need a government with as strong as
Speaker 1: set of plans on that as on the stimulus package.
Speaker 1: And so I think the second is what we're gonna
Speaker 1: have to wait and see after the election, just because
Speaker 1: I think, you know, nobody can take um that kind
Speaker 1: of strong initiative now. But now that would be where
Speaker 1: I would hope we see, you know, in the early
Speaker 1: spring of next year, you know, comprehensive plans around how
Speaker 1: we move the economy to the next stage, because there
Speaker 1: is going to be some permanent realignment, some permanent sectoral
Speaker 1: shifts to build on what John was talking about. With
Speaker 1: the timing of this plan on it maybe not the
Speaker 1: one next year that focuses more on these skills gap
Speaker 1: issues that you focus on is the question of fiscal
Speaker 1: austerity at a state level, the idea that states and
Speaker 1: local governments are saying to the federal government, we can't
Speaker 1: go into debt the way that you can, and we
Speaker 1: are running out of cash. We're going to have to
Speaker 1: lay people off and cut services. How different is the
Speaker 1: scarring that comes from an acceleration of fiscal austerity on
Speaker 1: the state level that you see as posing a risk
Speaker 1: to the economy if there isn't this near term fiscal
Speaker 1: support bill that's passed. So I think that the fiscal
Speaker 1: austerity the states go through UM in modern times has
Speaker 1: really caused recessions to drag on to deepen UM. And
Speaker 1: it's the case that the federal government should just prevent
Speaker 1: that from happening. But it's even worse right now because
Speaker 1: what happens if the states have to start letting off teachers,
Speaker 1: which they will. UM. We're already in the situation where
Speaker 1: there are a lot of parents who have cut hours
Speaker 1: or who have quit jobs because they've got kids at
Speaker 1: home from school. And we've got a lot of kids
Speaker 1: who are struggling from you know, this period of you know,
Speaker 1: eight ish months where their school hasn't been normal. They're
Speaker 1: gonna be going back to school in a world where
Speaker 1: they're you know, wearing the ones who are our in school,
Speaker 1: or in a in a world where they're wearing masks.
Speaker 1: They have to keep distance. How do we do that
Speaker 1: with fewer teachers in the classroom? Do parents feel comfortable
Speaker 1: but that's the place they can done their kids? UM?
Speaker 1: And what we're doing with these kids. You know, I
Speaker 1: just saw someone talk about future US productivity in future
Speaker 1: US growth and he was saying, you know, one of
Speaker 1: the big open questions is what are we doing with
Speaker 1: these kids? And is there some sort of permanent loss
Speaker 1: of human capital? So this could not be a worse
Speaker 1: recession for states to have to lay off UM, state
Speaker 1: and local workers and um, you know, is there is
Speaker 1: there permanent you know, problems there. It really depends on
Speaker 1: what they're choosing to do. Are they having rolling furloughs
Speaker 1: that will cause a lot of a lot of harm
Speaker 1: and hurt in in terms of state employees, households, um.
Speaker 1: But maybe we'll keep them attached to the job, or
Speaker 1: do we see you know, government workers decide that it's
Speaker 1: not worth that they're not going to stick it to
Speaker 1: these jobs, or do they do permanent layoffs um. In particular,
Speaker 1: One thing I don't hear anybody talking about is we've
Speaker 1: never seen such a decline in the labor force participation
Speaker 1: of people over the age of fifty five. And I
Speaker 1: think you're gonna see a lot of older workers deciding
Speaker 1: to retire a little bit early, and that's gonna put
Speaker 1: enormous strain on social security, on medicare um as well
Speaker 1: as again, you know, on the economy. As we take
Speaker 1: all these experienced people out early, that's going to give
Speaker 1: us a bumpy road over the next five years before
Speaker 1: sort of losing too many older workers at once. That's
Speaker 1: great to catch up on a really important policy conversation,
Speaker 1: Betty Stevenson, their professor of public policy and economics at
Speaker 1: the University of Michigan, Rat pob Donovan, get to it
Speaker 1: very quickly. You'll um us in a global chief economist
Speaker 1: in the Zitgeist this weekend, Parl. There's no question about it.
Speaker 1: Can you believe China's recovery? Can you? Yes? I think
Speaker 1: China has had a genuine recovery. China's recovery was very
Speaker 1: different from what we saw in Europe and in the States,
Speaker 1: because in Europe and in the States, people acquired savings
Speaker 1: during lockdown and then as soon as they're released from lockdown,
Speaker 1: you know, you've just spent three months sat at home
Speaker 1: watching home makeover shows on Netflix. What are you gonna do?
Speaker 1: You're gonna go rush out and spend the money. And
Speaker 1: that's exactly what happened. And once you've spent the savings. Then,
Speaker 1: obviously the momentum slows, slowing fourth quarter momentum. It's hardly
Speaker 1: a surprise. Every economist was expecting this to happen. But
Speaker 1: China didn't have that model. Because China's lockdown, people weren't
Speaker 1: able to accumulate savings. They were having to live off
Speaker 1: their savings because there's a far less efficient social security net.
Speaker 1: So what's happened in China is that there was a
Speaker 1: pause before the domestic consumption started to kick in, and
Speaker 1: that coincided with the recovery and demand that we've been
Speaker 1: seeing in Europe and in the States. Can you bring
Speaker 1: that recovery and demand over to GDP in the US
Speaker 1: and in Europe? And by that I mean equity markets
Speaker 1: today dowwy THO one, sp X almost up to thirty
Speaker 1: five hundred, almost out in your record highs were a
Speaker 1: bit away from that. I don't want to oversell that,
Speaker 1: but Paul, can you look at the expectation of the
Speaker 1: equity markets and half out do you get that real
Speaker 1: GDP that goes with that? Well, we've got to remember,
Speaker 1: of course, that there is a there's a really important
Speaker 1: distinction that the equity markets are just a sub set
Speaker 1: of g d P and listed companies are not actually
Speaker 1: nearly as important as people think that they are. Um
Speaker 1: And so what we're looking at here is a GDP
Speaker 1: environment where a lot of the negatives on g d
Speaker 1: P are actually in sectors a million miles away from
Speaker 1: listed equities. So it's it's the small restaurants that are suffering.
Speaker 1: It's the small service sector businesses that are suffering. These
Speaker 1: are not listed companies. These are mom and pop stores.
Speaker 1: They're not they're not in a position to be quoted
Speaker 1: on equity markets. The listed market tends to be more
Speaker 1: biased towards the manufacturing sector. Manufacturing is doing better than services.
Speaker 1: It's got better access to capital, it's got better control
Speaker 1: of its costs. The listed sector is going to outperform
Speaker 1: g d P in this environment, and that, of course,
Speaker 1: is exactly what we're seeing happen. Paul. I'd love for
Speaker 1: you to compare and contrast what's happening in the United
Speaker 1: States and Europe, not just the US and Europe versus China.
Speaker 1: There's a trade that's become really popular in the bond
Speaker 1: market over the last ever a weeks. I'm sure you're familiar.
Speaker 1: Short treasuries get along Europe. Just the idea that this
Speaker 1: US recovery continues and it stalls in Europe. What you're
Speaker 1: seeing right now, just the trajectory of the respective recoveries,
Speaker 1: does it speak to that, Well, not really, I would say.
Speaker 1: So what we're seeing now is a shift. So as
Speaker 1: I said, you know, we've had this surge of consumer
Speaker 1: spending fueled by the savings accumulated in lockdown. That's pretty
Speaker 1: much universal in the developed world. And that's your third
Speaker 1: quarter story record third quarters. As we go through the
Speaker 1: fourth quarter and into next year, fiscal policy is going
Speaker 1: to start playing a larger role, and there we're going
Speaker 1: to have I think, um some issues now are depending
Speaker 1: on the election result. We might get a large fiscal
Speaker 1: stimulus in the States in January, but of course, you know,
Speaker 1: the the negotiations in Washington at the moment your rival
Speaker 1: briggsit for the the delays and the chaos and the
Speaker 1: internal tedium of of what's going on. So the failure
Speaker 1: to do fiscal stimulus now is actually doing real damage
Speaker 1: to the US economy. First, because if you're unfortunate enough
Speaker 1: to be unemployed, you are clearly on a far lower
Speaker 1: income than you were. And second and economically, this is
Speaker 1: very important if you are afraid that you might become unemployed,
Speaker 1: that fear of a loss of income in unemployment is
Speaker 1: likely to delay spending. And so what we're getting here
Speaker 1: is is two hits to the consumer through fiscal policy.
Speaker 1: Now that's not in evidence in Europe. In Europe we
Speaker 1: are seeing the number of people on furlough fall, but
Speaker 1: that's because they're being rehired, not because they're being made unemployed.
Speaker 1: And so I think that the fiscal policies on the
Speaker 1: two sides are creating slightly different stories. At the moment,
Speaker 1: the US will grow faster than Europe simply because of demographics.
Speaker 1: I mean, there's no surprise about that. We know that.
Speaker 1: But I think actually Europe's fiscal policy at the moment
Speaker 1: is is clearly support. In the US, we've got this
Speaker 1: cloud of uncertainty over the fiscal support. So this is
Speaker 1: slightly contrarian porn. I stress this is relative to expectations
Speaker 1: and anecdotally just the conversations we would have on a
Speaker 1: program like this. But you seem less constructive on the
Speaker 1: US recovery than say most Well, I'm still constructive. I mean,
Speaker 1: the recovery carries on in the fourth quarter. I think though,
Speaker 1: that we are seeing some damage to the recovery come
Speaker 1: through from the um the indecisiveness over fiscal policy in
Speaker 1: the United States. I mean, there are plenty of people
Speaker 1: who are relatively secure in their jobs. They will continue
Speaker 1: to spend, they'll spend down their savings. That's all great.
Speaker 1: If you look at the employment participation in the States,
Speaker 1: it's very interesting. The high skilled people, people who've got
Speaker 1: college degrees, they've got pretty much normal employment participation. Low
Speaker 1: skilled people, people who failed to graduate high school have
Speaker 1: also got almost normal employment participation. The area where employment
Speaker 1: has been weaker has been people who graduated high school
Speaker 1: but did not go to college, and that, of course
Speaker 1: is an area where you're likely to see quite a
Speaker 1: lot of service sector jobs. These are the jobs which
Speaker 1: are at risk in the Fourth Industrial Revolution. But that's
Speaker 1: the area of weakness, and I would argue that fiscal
Speaker 1: policy today is not doing much to help that particular
Speaker 1: cohort in a way that perhaps it is helping in Europe.
Speaker 1: On both sides of the Atlantic. However, in the US
Speaker 1: and the UK and the rest of Europe, you're seeing
Speaker 1: this bifurcation that you talked of earlier, you touched on
Speaker 1: of big companies doing better or having a better chance
Speaker 1: of surviving, while smaller businesses go out of business at
Speaker 1: the fastest pace in some cases on record. And there
Speaker 1: was a statistic in the Wall Street Journal over the
Speaker 1: weekend showing that smaller businesses account for an incredibly shrinking
Speaker 1: portion of overall employment in the US and around the world.
Speaker 1: How much does that hamper global growth going forward? Well, now,
Speaker 1: this I think is a really interesting issue because you're
Speaker 1: quite right, of course, with seeing a lot and lots
Speaker 1: of small businesses closed, but we're also seeing a phenomenal
Speaker 1: pace of small business creation at the moment. I mean
Speaker 1: it's it's absolutely staggering the rate of small business creation.
Speaker 1: And it's not just the States. This is the UK,
Speaker 1: this is France, this is Singapore, this is Japan. I mean,
Speaker 1: it's it's across the board, and we're talking sort of
Speaker 1: business creation rates of a hundred hundred and fifty percent growth.
Speaker 1: I mean, these are not small numbers. So what I
Speaker 1: think is going on here is we're seeing lots of
Speaker 1: people set up individual businesses. Your single proprietors are setting
Speaker 1: up businesses. You know, you've you've had some time to
Speaker 1: reflect at home over the last few months, and you've
Speaker 1: decided that you know, now is the time to start
Speaker 1: selling your hand knitted sweaters on eBay, or you know
Speaker 1: you're going to convert your TikTok account into merchandise sales
Speaker 1: or whatever it is now. Then I think raises a
Speaker 1: really interesting question about the future and about how we
Speaker 1: think about employment, because I think we end up having
Speaker 1: multiple in come streams become a lot more common. So
Speaker 1: you'll have somebody who maybe has a job, full time job,
Speaker 1: part time job, but then they've maybe got a sideline,
Speaker 1: be that Airbnb or selling over social media, whatever it is,
Speaker 1: and so you have these multiple income streams. So there
Speaker 1: are positive as well as negative signals in business creation
Speaker 1: at the moment. And I think that what we've got
Speaker 1: to try and do is understand how the structural changes
Speaker 1: of the economy which we're rapidly going through at the moment,
Speaker 1: might actually be changing our concept about what it is
Speaker 1: to actually be employed and how people actually get income
Speaker 1: in the months and years ahead. Paul, great to catch
Speaker 1: up that final topic that Lisa introduced really important. We
Speaker 1: could continue this conversation for a long time. Paul Donovan
Speaker 1: of Ubs. Paul, Thank you sir. This is a this
Speaker 1: is too short in interview with the announcement of the
Speaker 1: laureates today Mr Wilson and Mr milgn him, I simply
Speaker 1: sent one note, get me Michael Spence, and of course
Speaker 1: you know Mr Spence, Professor Spence, of course has spent
Speaker 1: some generous time with us over the years. What you
Speaker 1: may not know is arguably here reinvented graduate studies in
Speaker 1: America with his work over a decade at Stanford. At
Speaker 1: the time, it was absolutely historic. And rather than talk
Speaker 1: about auction theory today we will talk about the wonderful
Speaker 1: millia that is Palo Alto, California and what it did
Speaker 1: for Robert Wilson in his PhD student Paul Milgram as well,
Speaker 1: Michael Spence, thank you so much for joining us. A
Speaker 1: special day for Wilson and Millgram. What is in the
Speaker 1: air in Palo Alto. Yeah, well, it's a it's a
Speaker 1: wonderful intellectual environment. And you know, I think Bob Wilson
Speaker 1: deserves a lot of credit for that. You know, he
Speaker 1: he brought along a whole lot of students, uh is
Speaker 1: in allectual insight, in depth. It's extraordinary, just a very
Speaker 1: exciting environment. I mean, there are others in other parts
Speaker 1: of the country, but but that that this this is
Speaker 1: a wonderful recognition of both of their work. But also
Speaker 1: I think you're right, Tom, indirectly, it's a recognition of
Speaker 1: the fertility of that intellectual environment. The word that is
Speaker 1: so associated across degrees at Stanford is a strange word,
Speaker 1: organizational And I you know, you go back to theory
Speaker 1: of syndicates and Wilson seminal paper on all this, folks.
Speaker 1: It was like Dylan at Newport, it was all original
Speaker 1: when he did this in n What does organizational mean,
Speaker 1: Professor Spence within the Stanford architecture, Well, I think you
Speaker 1: know that the what what's the really special about the
Speaker 1: work that's gone on there. You know, it's you know,
Speaker 1: Paul and Bob Wilson, Dave krabt Uh, John Roberts who
Speaker 1: was a co author with ru Paul Milgram. You know,
Speaker 1: they brought theory to things that were talked about in
Speaker 1: a kind of fuzzy way, theory and rigor uh the
Speaker 1: things that we're talked about in UH in more general terms,
Speaker 1: as I guess the way I would put it, Tom,
Speaker 1: and it just had an enormous on on a wide
Speaker 1: range of disciplines, especially economic on this special day, an
Speaker 1: offspring of the Stanford experiment. Lisa Bramwoods, Lisa, you grew
Speaker 1: up with this foolishness, right, Yes, my father got his
Speaker 1: PhD at Stanford, and I will say theory ruled the
Speaker 1: dining room table, and if you couldn't pass muster it
Speaker 1: was well, it explains a lot. I will say, Uh,
Speaker 1: you know, there is this question, uh though at this
Speaker 1: at this point when we take a look at the
Speaker 1: concept of auction theory, Paul, can you come in and
Speaker 1: talk about why it's important. Some people might look at
Speaker 1: this and say, isn't this somewhat peripheral. It's not, it's central.
Speaker 1: Why Well, I mean, I think it's central because there's
Speaker 1: because it's used to allocate some of the most important
Speaker 1: resources that we have. I mean, there are private auctions,
Speaker 1: you know, their auction housesn't all that. But I don't
Speaker 1: think that's the reason it attracts the attention. That does.
Speaker 1: The reason it attracts the attention is because we allocate
Speaker 1: you know, the electromagnetic spectant doing this um in much
Speaker 1: much more effective ways. So I think that's where you know,
Speaker 1: enormous impact has come and what they've been recognized for
Speaker 1: is having brought first theory and then real innovation how
Speaker 1: these auctions are conducted. Professor Spence, one final question, you're
Speaker 1: busy day. I know that that your phone is ringing
Speaker 1: off the hook. To most of us, an auction is
Speaker 1: in a James Bond movie where there's some piece of
Speaker 1: artist Christie's or something he's being sold and all that.
Speaker 1: But we live auctions each and every day. Are our
Speaker 1: auctions changing because of the speed and depth of technology?
Speaker 1: Oh absolutely, I mean I put up more generating tom
Speaker 1: um markets, you know, including auction markets are changing because
Speaker 1: of the vast quantity of information that's available at you know,
Speaker 1: negligible costs that wasn't there before. And because of you
Speaker 1: know what's now called artificial intelligence, that is the ability
Speaker 1: to process that information. That's that's changing the informational structure
Speaker 1: and a lot of the innovation in auction theory, tom
Speaker 1: and Lisay has been you know, recognizing very particular characteristics
Speaker 1: informational structural characteristics of different kinds of auction situations and
Speaker 1: that and and digital technology is transforming that. Michael Spencer,
Speaker 1: Philip Knight professor and Dean Emeritus, Stanford University from Align
Speaker 1: Italy Today on Wilson and Michael Spence, thank you so
Speaker 1: much for joining us here on short notice. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keene before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio