Surveillance: Recession Risk With Blanchflower

important research by the gentleman from Dartmouth. David blanche Flower joins us now his public service to his United Kingdom, to his Wales, frankly, to his car to football team as well, and we're thrilled at Danny bluch Flower could join us this morning. Daddy, I'm gonna die good to see. I'm gonna digress here. I know John wants to drive in dive into this research. We are seeing big tech now show that David cart and Alan Krueger got it right.

They nailed it on the minimum wage. Now we have big tech bidding up labor to seventeen eighteen dollars an hour across America. What is the effect of big tech and a minimum wage? Well, I I always living in Hannow, Hampshire. Tom My kids used to go and work at the local cinema and they'd work at ten bucks an hour, And obviously north of the northern part of the United States, the minimum wage didn't bind. But what we're seeing here is a labor market adjusting to a shock um and

and basically firms having to pay the going price. The question would you guys are all thinking about, is does that continue in the future. Just because there's a once off rise in wages doesn't necessarily mean something going forward for us. Start with, this week announced three bonus for all its staff, but that lifts prices this year and does nothing next year. So the question is, you know

we're we're emerging from a bottleneck. I don't see anything really actually suggests that prices in eighteen months will will continue to rise. This is a once off jump for an economy that's adjusting. Firms are having to pay for those shortages. But arise today doesn't mean arise tomorrow. Danny, I don't want to bury the lead here. You've got a recession call. A recession call when people are looking

at four percent growth next year, what's the recession call about? Well, if you have a new paper coming out on Monday, if you and Dave Wilson Twitt put out the chart yesterday if you look at what predicts all six of the last six recessions, it's actually consumer sentiment, consumer expectations, and that if you look at the paper I have coming out that turned in the US around April May this year, it looks almost identical to what happened in two thousand and seven. And people can pooh pooh it,

but these are the data. These data are precisely what explains six of the last six recession. Nothing else does, and there are no false calls. So the question is

what's going on? And I think the answer is that it's about the spread of COVID we've seen and at the it's particularly amongst women who said they're fearful of going back to work, with seeing people withdrawing, and in the last month we sort of huge drop in the female participation rate of eighteen to twenty five year olds and and and sorry to thirty five year olds and thirty five to forty four year olds. So I think

it's women being very fearful. Anxiety in the US has reason that suggests spending is going to pull back, and it would not be surprising consistent with that to see falls in retail trade. So I'm not saying this will happen, but all the other data is completely messed up. These data are the best you have, and it's rate, and it now is flashing rate. Danny. There's a lot here to pack to unpack. We've got the participation rate, We've got the labor market and the question over whether it's

tight or loose. And then there's the issue of the importance of consumer sentiments surveys, which has been called into question by some people. Others would argue that if you look at other consumer sentiment surveys, like the Langer one, it shows a different picture of the University of Michigan survey. The basic this isn't clean either. How would you respond, Well, you know they can make stuff up. But the question

is what does the data actually show. And so there's the set of econometrics, particularly show that these things predicted. So you you may not like it, but that's factually what it does. Particularly in these data we actually now have from the Center, from the Conference Board, we have data since two thousand and seven on the eight biggest states um and basically in the expectations induicries there predict behavior twelve months ahead, so people can pooh pooh, just

go and look at the data, run it yourself. It's not the case that they don't like it because they're just making it up. The data shows that you can predict with exactly these data. The question is whether this is the this is the seventh of seven, and is this the one that gets it wrong? Um. I think the concern is that most of the other data looks to be crazy. I mean, if you look at Tom always asked me about the wage code, Well, for every recession I've ever seen in the world, as the unblow

rate goes up, wage growth slows. Well, in this one, the opposite happens. The Phillips curve now slopes up, the wage curve slopes up. It's not clear that that's true. And most of the other day, I don't believe you asked me which day. I do believe it's these day too. So Danny, underlying this is the idea that you don't think that the labor market is as tight as other people think. That is sort of the presumption that seems

to be baked in. Can you explain why that is at a time when you do see all of these job openings and you do see the wage hikes that we are seeing right now to entice people back into the labor force. Well, the best analogy is that this is like a hurricane hitting a place hitt and say that, I don't know that the coast of Florida. So presumably what happens is when that occurs, is the price of roofers and plumbers and gardeners rise as an economy adjusts.

Just just go back to the fact that we had in April, the unemployment rate went from three and a half percent to when you calculated right to twenty and wage growth went from three to eight percent. Well, so unemployment rights like crazy. So what happened was the bottom part of the labor market drops out. There are certainly

adjustment costs coming. People are withdrawing from particular kinds of goods for particular kinds of work, and firms are having to pay pe because they don't want to go and work in a school, they don't want to work in consumer facing places. And that's the surveys from Grant Thornton and the conference boards saying people if they're forced to go back to work, they're going to look for another

job or quit. So we're seeing people retiring. So this is an adjustment of an economy that's been hit by this shock, and people are fearful, and all the evidences that fear rose dramatically around May of this year, and that it particularly is driven by women being fearful that they all got to work and bring something home to

their families. That's consistent with the data. I mean, whether whether whether this is whether this is predictive, we will see, but be mindful that the people who guess have no no mechanism by which they can predict the last six and these days to predicted six of the last six, and so it's mindful to them to come up with, well, how do you predict the session with what you have been talking about? And the answer is they can't. They're just making it up. Nobody has a crystal ball, Danny.

It's always going to catch up, sir, before you go. Before you go, an important note, we were all thinking of the late great Alan Krueger this week. I know you were too, sir. Your thoughts on that, buddy, Well, I'm so pleased that David Carden and Josh and Guido got this prize. But if you read, if you read the thing from the Nobel Prize. Most of this work was joined with Alan um Alan, our friend and colleague beyond Blumber for a really long time. So I was

really pleased at the price came. But it was a sad day too. It was a great day for the work that he did. The guy was a shoe in for a Nobel and if you read it, I mean he should have been there on the stage. His work is was brilliant and wonderful and we miss him hugely. We don't understand why, lovely Danny, well, we all miss him this week. And Danny just finally, you've been saying for a long time, thinking about the work of An and Crewe ground others, that the Nobild Prize needed to change.

We needed to get to award it to someone who's actually found something out that we can work with. I think that's right. And if you look the Economics Prize, a Young Prize, you award your awards stuff and methodology, um, and eventually you have to stop that and and actually it will start to award for people who found things.

In essence, there was a prize to ago to the flow on a Husband and that was great, but in essence it probably should have come first, the Card and Kruger, and in fact, if it had come and Alan would have been alive. But I think what we're actually going to see, and you could look back on the prize in economics and say, what do these people find? It is what they actually wrote true, and the vast majority

of the case we have no idea. So I think increasingly what we're hopefully going to see a prize is given to people who found stuff, And David Carter and Alan Kruger found stuff about the minimum wage. David worked on the Marial boatlift, and work on about immigration, and you know, the rate of return to schooling and all sorts of cool things. So I'm just really impressed with it.

But John and and Tom, I mean, this guy was a great guy, and we've missed him in America, and the academic communities worse off for the loss of a group. Hey here, Danny, Hey here, a great man, Danny Plans, Thank you, sir. We finished strong here in this last half hour this morning with Jennifer Lee, senior economist at DEMO. Were thrilled that she could join us this morning. Jennifer, the arch debate right now is a consumer where the glass is half full, or a consumer where the glass

is half empty. Which is it. I'm going to go with the glass is half full? Story Um, good morning everyone. I think if you heard a big five relief down to the studio is probably me when I when I saw the other headline numbers as Michael's just saying, you a very strong beat and strengths across the board. So weird results such as as you pointed up with the auto sector with stronger auto sales. But so I'll take it with a little bit of a grain of salt.

Maybe they're trying to get a little bit of relief. I think, just getting some more chips out there and into the cars of awful lots. I think the most telling or the most interesting point, this is the one I always look at, is like the dining out just um. I think that speaks volumes about you know, where the consumer is apt these days and if they're still confident enough it's still comfortable enough to go out there and you know, have lunch or have a glass of wine

on the patio. I think that's that's very positive news. Help us with the ambiguity of if rates go up, inflation and goes up, there's a better economy, etcetera. There's a group that says the ambiguity will tilt towards woe is me, do this do this worry and others saying this is every sign of a good economy, which is it? You know, obviously a lot of people if you're if you're a big borrower, you're not gonna want those higher rates.

But um, you know, we don't want to see the FED or any central bank for that matter, staying on the sigline, staying in this emergency accommodative mold forever. I mean, that's obviously not good news, and there's not a good sign for the for the for any economy. So the fact that they are finally um you know, talking about

not even talking about, they're actually gonna do it. Um, they're going to start tapering, you know, probably to make the announcement at the November meeting and probably kick it off before the end of the month or earlier or at the December meeting. You know. The fact that they're actually doing that, I think is speaks volumes for the economy and the fact that we are finally moving away from this emergency these emergency measures and trying to get

back toward some semblance of normalcy. Jennifer, can you respond to Danny Blancheflower please, basically saying the consumer sentiment indications point to a very different story than some of these other indicators, and yet we are seeing ongoing strength. Can you sort of pair these differences as we wait for that ten am Eastern University of Michigan sentiment survey. So I think those the surveys are always interesting to look at, but you know, it's it depends on the timing of

this survey. You know, when you're catching I mean I had to see it, but you know, your your mood could change. I think, you know, from from from from day to day. But you know, I think it's uh, it's it's the overall trend. Like right now, for example, the University of Michigan, Uh, we're waiting for at ten o'clock. The numbers have actually been been fairly low, the confidence levels, but they are off the bottom, which is which is

a good sign. And so I sort of like I take it as a mix between what we're seeing for the Conference Board measure for example, and the University of Michigan. But overall, you know, if if think it all goes back to you know, the fundamentals. Uh, you know, whether or not there is a job out there for for

the for the average American. And we all know that the john market is extremely tight right now with still almost eleven million jobs available out there, So the job market is strong, wages are rising, Uh, the household net worth I still I believe is at an all time high as well. All those are really strong sources of support. So yes, we'll get swayed by the day to day um. You know, um stories about you know about the Delta Varian or we know with all these supply issues and

all that, um. But at the end of the day, just I think with the average consumer knowing that they have a city income, knowing that they have a strong network, I think speaks against six volumes. Jennifer, thank you for you want to get Steni Felida now a one hour conversation on Golden Sachs. Well, okay, we'll do it in

less than one hour. Christian Balloo joins us with a really really important look at Golden Sex Senior analyst and Autonomous Research this morning, Christian, I'm gonna go retail and you Lisa's got some other thoughts on Marcus, which you say is grossly underestimated. I want to talk to you about Clay Christiansen and the classic innovator's dilemma and all of the major banks scared stiff of neo banks. How Solomon and Goldman Sachs doing on challenging the innovator's dilemma

and doing neo bank right. It did a very good job. But I think they had very early insights in that you could essentially build a any type a bank essentially from scratchy don't have any legacy infrastructure, whether that be physical footprint or or a technology, and that allowed them to really create something interesting. It's not perfect. Um, they still don't have a robust check in feature or robust

robust payment features. But I think I think the point here is I think they've been they're a very good job, and I think it's been someone on the look to think when you think about the partnership that if if, if they've they've acquired where it's Apple, et cetera. It does speak to the technology prowess of the Marcus Marcus franchise. Will the old banks build their neo banks like Goldman, or will they acquire their neo banks. That's an interesting question.

I probably leave that one to my UM too much to my bank A. I think the issue acquisitions is, I mean these folks are expensive, right, UM, it would be probably pretty dilutive to go and require a decent sized new bank as so much suspicion is most of it will be done organically. Build up perspective, but again probably better for my band collects. Comment on that, Christian more broadly, why do you think the Goldman's access transformation

has been underappreciated by other analysts? It's it's a great question. I think part of it is we are in a very robust part of the capital market cycle, as you

just seen today. Um, they could put keep putting out blowout results of the blow out results, a lot of it driven by a traditional goldmen you know, strong m and a strong Equitti's trading things that were you know that people are traditionally who don't know goldmen traditionally four And I think it's it's really um if you like masked the broader transformation, particularly a Marcus and also very important on alternative UM, the alternative asset manager remember uh

at this by our analysis Goldman is probably the fastest growing skills alternative asset manager out there. That is not an easy feats giving um, you know, the competitive landscaping that business. So there's been a lot of really good stuff going underneath. But the reality is, you know, you know, results just dominated by absolutely awesome investment bank that's doing that is probably a tole cycle. Well that's that's where

I wanted to go with this. I mean, because if you actually look at asset management, there was a slight miss there, but really it's the investment banking, the trading that came in one and a half a billion dollars in revenue above what the expectation was. I mean, it was a blowout quarter. Is this the cycle peak or is this Goldman Sachs gaining share from others gaining share particularly from the European peers. A good question. It's always had to call it peak, so I'm not going to

exactly call the peak, but we are somewhere around. UM and when we're some way in the mountain top right, and you already begins is some businesses rule of us. So fixed income has always started to slow down, Equities still growing m and a still growing uh, but but clearly we are we are very strong here at twenty twenty and twenty one will be the best here's for investment banking since two thousand and nine, right, so you

know we know what happened after two nine. Um So, so I do think we are we are close to um something that feels h near a peak. That said, though, that's that's the Goldman. It's very important to remember that the game market share, so in fixed income share has almost doubled by our analysis, from seven percent in twenty seventeen,

it's about twelve thirteen percent today. In equities, they've been getting about a hundred based points of market share every year since twenty seventeen as well, So you have seen market share growth of Goldman UM. So it's a combination of strong markets and market share games. We compare Goldman, Sachs and Morgan Stanley frequently. Who's winning in your opinion? That's it's a it's a really good question. Look, I think when you think about strategic evolution, it's very clear

that Morgan Stanley is ahead, right. They they've been on a longer path and arguably kind of in a steady state now with a new business model right, it's basically a wealth and as a manager they had their growth rates are comparable to anybody in the industry, best in class organic growth rates of almost ten percent. That's comparable to again best in class, like a show up, So they really have you know, they're there. They figured out the strategy and there there. I think they're there. And

then Goldman is motivate process. We're still in the middle of the transition here. Uh, and so there's still an execution to go. So if you want to ask me in terms of a UM strategic transformation, timeline of Morgan Stanley is clearly ahead. Is there an urge to merge? I mean I mentioned scale earlier. Is there a frenzy where we are in the interest rate environment or maybe the death acquiring environment to do transactions, to do can

combinations to generate scale? I think so. I think Morgan Stanley has been a post a child of how to do this right. You know, you figure out a strategy and essentially take advantage of um UM you know, very accommodating markets to what an accelerate and strategy by M and A. But it's advanced a fast forward as a manager and the bot you trade to really posted the wealth management franchise and it's it's not one of us.

They've actually had multiple expansion on buying. Essentially, do companies that would do need to taxical book which you probably wouldn't have happened a couple of years ago. So so I certainly am one that believes that clever M and A UM in this environment where innovation is happening very quickly, UM and and and and financing is you know, very available and EM and it makes a lot of sense

to U to to to accelerate code. You gotta leave it there, Christian Bolder, thing for for the brief with autonomous research today on not Global Wall Street, but well they are global, but let's call it American Wall Street. As well as we spoke to Adam Posing and this allusion to the research of Olivier Blanchard. We now speak

with John Lipsky. He's a former first deputy Managing director and interimanaging director of a tumultuous I m F. And what is so important about John Lipsky's work now at Johns Hopkins is not his public service but the when of it. He was in the crucible of the financial crisis of oh seven, oh eight and oh nine with his service at the i m F. John, we have so little time and too many questions with the uproar now on data integrity. When you were at the i m F, did you always and in each instant see

data integrity? Absolutely, it's completely important and central to the I m F s being able to conduct it said, it's work in an authoritative and uh comprehensive way. It's absolutely critical. And you know the i m F over the years has made great efforts in conjunction working together with its member countries to improve the production of data,

to improve the quality, and that that goes on. I think in the current context, the i m F is going to redouble efforts to create confidence in their data. John Letsky, my memory serves me you gave a landmark speech in Hanoi a few years ago in Vietnam, and within that you said, Southeast Asia matters. Is the crisis at the I m F A time too? At the margin? Give more governance to the Pacific rim. Well, first of all, I think we need to take a look at the

idea that there's a crisis at the IMF. Certainly there's been a kafuffle of some consult okay, fair of importance. Yesterday, the Inner National Monitoring Financial Committee though that's the executive committee of the Board of Governors of the Fund, reaffirmed its confidence in the Managing Director and essentially said, let's

move forward from this from this problem. But for sure, it'sn't going to be important that the IMF membership comes to an agreement as it has said it would by December three to undergo to have a new review of quotas, and in that review, for sure the fastest growing economies are going to be rewarded with a larger voting share in the fund almost without question. One of the litmus tests will be will China become the number two, at least number two countries in the IMF in terms of

voting chair. How does that change John the tenor of the i m F, the actions that the i m F takes if China becomes the number two. Actually it's more I think a matter of image and pride than it is in terms of actual day to day working. The members of the i m S ex Ecutive Board, that's the decision making political level decision making body, and

the Fund understands who China is, who Japan is, etcetera, etcetera. So, in actual consideration of policies, UH, their weights are realistic, but in terms of voting shares and details and public image,

it's of importance in ensuring the credibility the institution. John, yesterday we had Muhammadalarian on and he said that right now he is very concerned about the diverging economic fates of the developed and the developing worlds, and he basically was saying that there are big potholes and vulnerabilities that are getting developed that potentially could come to a head

in the near future. Do you agree. Oh? Absolutely, And of course that was one of the principal themes of the I m F World Economic Outlook, that the recovery is showing divergence and looking forward that divergence is going to get bigger and many of the developing countries are struggling in many ways. That is going to continue into the coming years and act and is needed. John always great to catch up with. He sir a voice I've always respected. John Lipsky there the former first deputy Managing

Director at the IMAM. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg