Ellen Zentner's Shift From Public to Private Sector

A boys club filled with middle aged white dudes who are uh the average economist of days gone by, and

Allen and I couldn't agree more. Argues that the more diversity of opinion and thought we have in various organizations, the less likely we are to have group think, the more likely we are to consider different perspectives, and that's enormously helpful when you have literally hundreds of billions of dollars at risk in the marketplace, and and being able to look at everything from that perspective is enormously helpful.

This was a fascinating conversation if you are at all interested in economics, Wall Street, how big firms operate, what it's like to travel around the world speaking to clients and have them ask you all sorts of really interesting questions. Then you're going to really enjoy this conversation. So, with no further ado, my conversation with Morgan Stanley's Ellen Sentner. My special guest today is Ellen Zentner. She is currently

the chief US economist for Morgan Stanley. UH. Previously, she had held senior economist positions with such August firms as Nomura and Bank of Tokyo Mitsubishi. Previous to joining Morgan Stanley, she was a senior economist with the Texas State Controller's Office. Ellen Setner, Welcome to Bloomberg. Thanks, Thanks Barry. So that's

a kind of interesting progression. How do you go from Texas State Controller and the office overseeing Texas is I guess government spending and we held the purse strings right to I guess it would be somewhat similar to a big brokerage firm like Morgan Stanley. Yeah, I don't know. Working private versus public UM is very different. It's a

different pace of life. Uh, it's a different focus of study. UM. I think starting out in government is a great way to cultivate the career of an economist because you can start out in a slower paced environment where you can really learn deeply and think those deep thoughts were supposed to have time to think, but often don't have time when you move into investment banking. Um. And for me it was a great first job out of graduate school. Uh. The no brainer was to go back to Austin, Texas,

where I'm from and work for the state government. We were just in Austin. It's such a fabulous city. It was a ten pound trip because the food there is so fanta. I imagine you got in a lot of barbecue. So so what years were you working in the controller's office? So I was there from ninety eight to two thousand three. So you missed the Great Financial Crisis, right. I had the uh lovely experience of being right in the thick

of it in New York by then. But Texas did miss uh miss it in large part because of having a rainy day fund, which I think after the financial crisis was a great example to other state governments that you know, in in in good times, when revenues were good in the State of Texas or are good, especially in energy, you siphon those off past a certain point and put them in a so called rainy day fund

to tap should you ever need it. Um and I think after the financial crisis it was the first time that Texas ever had to tap it's rainy day fund. But it's one reason why it's been able to keep its triple A rating. Financial planning one on one counter cyclical that precautionary savings that unfortunately America's households didn't have

after the financial crisis, but but Texas had. And there's a little known thing about Texas that I find fascinating that given the boom and bus cycle with energy long before the Great Financial Crisis, they used to I believe they have something I want to say. It's it's in the state constitution that you cannot use your home mortgage, your home equity for cash out financing. So Texas had a much lower rate of default and subsequent issues foreclosures

than the rest of the country. Yeah, I think that, And I could also draw a line between that to Japan. Of course, I was working for a Japanese firm at the time of the financial crisis, and one of the thing I things I witnessed at Bank of Tokyo Mitsubishi was I was there at the time that we UH. Not literally I did not walk a check over to Morgan Stanley, but a check was walked over to Morgan Stanley in theory and and a chunk of Morgan Stanley

was purchased UM. And now there's this amazing partnership between m uf G, It'subishi United Financial Group UH AND and Morgan Stanley. Because the Japanese were the ones that were cash rich at the time of the financial crisis, because they had already gone through their big financial crisis, they did not participate in the mortgage crisis. UH, they were not over leveraged in that area, and so they had a lot of cash to deploy UH and it was much needed by by many of the firms that were

bought up at that time. So so I'm gonna sort of jump ahead. But given this relationship that came out of the financial crisis, how has that impacted Morgan Stanley as an international company. Has that broadened their footprints around the globe? It absolutely has. UH and Morgan Stanley already had a strong presence in Asia, but by partnering with m uf G, opening access to to markets more fully and mind share across more of the global economy. I

think it's been a fantastic partnership. Was it a coincidence that this deal took place and then you end up at Morgan Stanley or did you just happen out of this relationship to meet people and one thing led to another. It was a coincidence. Um. I'm when I began at Morgan Stanley, back in my colleagues at Bank of Tokyo Mitsubishi, had felt like I had come full circle. I was

back in the family, so to speak. Um. And but I'll tell you, Uh, probably the most important reason of how I became connected at Morgan Stanley, UM, is that I'm a nice person. Berry, And I always say this, You've got to be a nice person. And when people think about who do you want to work with, who do you want to have on your team? Uh, the ones yes, write it down. Be a nice person. It's

very simple. But it's not something everyone can do. Um. And especially in finance, we've heard of yellers and screamers and exactly, but you will be rewarded. And so when people when we all reach out to each other when we're networking, saying hey, I've got an open spot on my team? Who have you worked within the past, Who do you really like? Who do you think I should reach out to? Uh, if you were a jerk and nobody liked working with you, you're not going to be

one of the names on that list. And then that's exactly how I came about to be recommended for position at Morgan Stanley was because I was good people and you started as a senior economist And how long have you been chief economist in Worrow? I became chief a conist Morgan Stanley in February. Oh, so you've been here for in the role for over two years. For over two years? Yeah to me, and judging from your reaction, it sounds like it's been a lengthy time. But let

me tell you. One of the things I love about Morgan Stanley is that people are shocked when they hear that I've only been there a total of four years, because you talked to anyone their lifers. The longevity is amazing and it and it uh says something about Morgan Stanley is a place to work. It really is a family um and it just makes me feel good that there's there's just not a lot of turnover. We were talking earlier about the transition from private sector to public sector.

You had an interesting experience this past election. How did the politics that have gotten kind of crazy in America affect clients, investing and just generally interacting with Morgan Stanley customers. You know, I think this is this is definitely Uh,

this has definitely been a unique election cycle. Uh. And I know that we've beat that word unique to death, it feels, but I can tell you that I don't believe I've ever experienced emotions being this high and uh it affecting sort of Let's say, the emotional data this much, the survey based data of how do you feel? And it has been swinging wildly. There are massive divergences between say, uh, your your Trump voter, that's middle income America where uh

you can see that by voter preference. Consumer confidence is a record high for Republicans but at a record home low for Democrats. And we saw a similar similar split among clients and among my internal colleagues as well. Just trying to dissect which economists, generally, I believe are very good at staying objective and trying not to let emotion

drive your work. That was my next question is how do you keep clients from allowing their own emotions, political biases, just reactions to the crazingens on TV, from impacting their

investing in trading. What you have to do is be the is remained, the calm voice in the room, and just keep coming back to the fundamentals, the fundamentals, the fundamentals, and try to create a story with a very strong argument based in fundamentals so that you you just keep coming back to that and saying, let's keep emotions out of it, let's keep feelings out of it, and just stick to the basics. And that has been extraordinarily difficult,

UH post election, where emotions have run high. What I like now, what makes me more confident in the US outlook going forward, is that I can see that investors have adjusted their expectations for fiscal policy over time, and you don't see companies UH providing forward guidance on what Congress might deliver, and you you hear households talking more

UH realistically about what Congress might deliver. And so that makes me more confident that what we're seeing in the economic activity is being driven by a stronger global economy, stronger fundamental US economy, legitimately and not being driven anymore by expectations of what Congress made de lyrics. As we all know, campaigning is easy. Policy making is difficult, for sure, And so I think I think that makes me less worried about what happens in the event of complete fiscal failure.

You mentioned campaigning. I think we were all kind of hoping that once the election came and went, everything would settle down. And here we are in the middle of the summer, where more than six months through the first year of the first term of President Trump, and you travel extensively, you meet with clients in the United States abroad. I know when I travel around, it's all anybody wants

to talk about. Is President Trump. Are you finding similar things that it dominates at least in the beginning of the conversation, Republican, Democrat, conservative, liberal, It does matter. Everybody is transfixed by the world's greatest reality show. Yeah, you know, Actually, I'm glad that you brought up regional differences because, uh,

here in the U s. It has petered out. Right, My conversations with clients have gone back to simply talking about the economy, talking about global central banks and liquidity and everything other than fiscal policy, almost like we've gone back to a I'll believe it when I see it, but when I do go abroad, it is a very different story, And the conversations do still start out with what's going on with politics with Congress UH United At first it was our investors outside of the U S

trying to understand what is the political process? How do things move through Congress? How much power does the president have to do X, y and z unilaterally or how much does a president need Congress for? And working Sometimes it would take an entire client meeting just working through the process, which could at times open their eyes to oh, okay, policy making is difficult, is it? Are they perplexed by

the show? Are they um curious? Because I have recently been in Germany, I've been in in various places in Europe. The response in different areas are it's almost detached amusement versus the UK is like, oh, we have the same thing here, we are we're on the same page, not exactly brexiting, and the most recent UM change candidates seemed to be very different. What what are you finding overseas? Is it a uniform situation or is it full on like, Wow,

what's going on there? Well, I would say the amusement comes up in meetings, but it's very fleeting, sort of at the beginning, kind of chuckling over whatever has happened in the media, most recently in the US, and then we dive right into more serious issues because at the end of the day, I get around quite often around the global economy, but not so often that clients do

want to UH. I'll use the word waste, waste an entire hour of of client time, you know, but it comes up being being bemused over US politics, but it will come up as just a sort of a quick quip or two at the beginning of the meeting, and then we move on to more serious things. So let me ask you a more serious question because you have said previously you love going out and talking with clients. Who are they and other than politics, what sort of stuff do they lean on you for? So again, going

to UH folks outside of the US, UM. You know, it's different when I sit down in front of equities investors versus fixed income investors. Fixed income investors UM. They love the nuances of how every economist will interpret UH pars fed speak UH and the data differently UH. And the fact that you can have two economists that see the economy the same way but have two completely different calls on what the FED will do, and so really working through the nuances of how is it that I

listened to the FED. How do I come to conclusions of what I think I've discerned from from FED speak and meetings with FED policymakers working through those details I think is most important for them. It's a very presentation light and conversation heavy meeting. When I sit down with equities investors, it's more talking talk me through the fundamental see me how companies, show me, how companies are positioned, where are they investing, How to consumers spend if they're

given more tax dollars? UH? Will interest rate simply be higher or lower at this time next year? You know? And it's a much more presentation heavy, show me the

client deck meeting. UH. And so that's why I think my trips around the globe can be very dynamic because as part of the economics team, we have a foot in fixed income, we have a foot in equities, and we basically of us all sides of the firm UH, And so it can be very dynamic meetings in one trip, and I think that keeps it very very interesting for me. Let's talk a little bit about, um, your time at

Morgan Stanley. You've been there about four years. You have a very high profile job in a field that's dominated by men. How is that changing? Because I've noticed more and more women are starting to assume senior piece positions in big farms. Uh they are. Uh, it's still lagging tremendously.

Of course, it's still lagging tremendously. And I can tell you that we spend an unbelievable amount of time at Morgan Stanley, uh, beating to death all the ways and have we uncovered every way possible to uh lower attrition rates uh for women in the firm, uh, and keep them moving forward, and be being sure that there's nothing on our end that we haven't done in order to remove barriers to the moving higher. Specifically in economics, we saw cher Yelling spend time on this giving speeches about

women in economics. I can tell you that when I was in graduate school, Uh, there were four of us ladies in graduate school and economomics, uh about two hundred. Yeah, it was very tiny and and so but today right. I am not the only woman on the economics team in the U S. I'm not the only U chief economist at Morgan Stanley that is a woman. Elgabarsh, our chief European economist, has been there many many many years. Um, and that is unique that Morgan Stanley has more than

one female chief economist in the firm. Um. I think overall finances finances doing a horrible job having women in high positions. But we are doing we are make leaps and bounds trying to overcome that. It seems that the industry, however slowly, the changes are taking place. It's really starting to move in the right direction, with miles still to go. Oh yes, well, And that's exactly how we would characterize it when I say finance overall is a sector is

doing a horrible job. That is a feeling shared to the highest rank in Morgan Stanley. It's not some uh, you know, outlandish statement that I'm making. Uh, It's just understood that the industry still has a long way to go. It's a long process to groom people to take over exactly. And what we find at Morgan Stanley, and this is probably not unique to Morgan Stanley is that when you look at our analysts class of new analysts coming in. Uh,

it's an extremely good balance between men and women. But the attrition rate is higher for women as they get higher up the chain. Why is that? Is it because they don't come back after leaving to have children. Uh, we don't know. We're scrubbing the data and working with every individual segment within the firm to be sure that the data aren't telling us that we're not creating the right environment for them to come back. We've got a very strong return to work program that's been very successful.

And I can tell you what we do recognize, and what I recognize firsthand, is that you get much more diversity of thought on an economics team when when it's diverse between male and female and all walks of life. I'm not just talking about a gender um difference, but I can tell you I developed a love for studying US household behavior from very early on in my career. It was one of the first things I did at

the State of Texas out of graduate school. UH. And I also feel, UH, and maybe this is a biased view, that that I bring a unique perspective to studying the US household because as a woman, I'm extremely connected to running the household UH, and so I feel also from being from Texas, I didn't grow up on this island of Manhattan, and so I am not so far removed that I don't remember what the average American experiences like

in the US UH. And if I were not on the US economics team and it was all UH men run by your typical mid middle aged white male economist, right, they might miss that perspective. There are a number of FED governors and chiefs of the federal Reserve banks who are either currently held by a woman as president or

have previously been held by a woman. What does that shift really over the past decade say to young women who may be considering a career in finance or economics, How important are those roles to driving the industry Greek towards a little more gender parity. I think it's hugely important. Right If if I'm a young woman coming out of UH school and I'm studying economics UM, and I'm thinking

about where do I see myself going? Where do I see myself five years from now, ten years from out, fifteen years from now, I might not think, Oh, staff economists somewhere on some team, either on Wall Street or at a think tank or a nonprofit. I might I might actually think, which was the unthinkable just two decades ago. I might actually think that I could run the FED one day, or I could head one of the regional federal reserve banks. Let's talk a little bit about the

intersection between economics and markets. So does the stock market drive the economy or does the economy drive the stock market? Or is it a little bit of each? Oh, Barry, I'm an economist. I'm gonna say a little bit of each. Because you opened that door. Um, it's the chicken and the egg. Uh. And you'll have a strategist sit in this chair and tell you that it's the markets. Uh. And then you have an economist that sits in its

chair and says it's the economy. Isn't the markets reflecting what the economy is doing or at least discounting what the economy is about to do the discounting. So I will say that markets are forward looking, but there forward looking at their trying to anticipate when things have gotten as bad as they could possibly get or as good as they could possibly get. And typically liquidity and global flows drive the markets first before anyone can see what's

going on. Uh, and so that that tends to sort of be the forward looking piece that confirms and then the economic data confirms that. So if you look at every business cycle, uh. And let's go back to the

most recent downturn, the financial crisis. The stock market reached its bottom first in March, started turning up and then the ultimately the date that the NBRUH said the recession was over was June of two thousand nine, so it led the economy by a couple of months um and on the flip side in seven, I think the market peaked in October seven NBR December of oh seven. So yeah, and so a lot of that is that the wealth

effect is huge earlier late in a cycle. So March, what happened that March, this stock market bottomed, it started uh racing higher. Uh. And in in a cycle, when consumers start spending again, guess who are the ones that spend first? The wealthy because financial assets are rising the wealthy. The top twenty of households in income in the US. Income holders in the US make up of all spending, so that again the top so the top income quintile. So the top of income group in the US makes

up of all makes sure that makes a lot. They're buying big ticket it good. So when wealth starts to recover, as the cycle is taking off, the expansion is taking off, they're getting out there buying motor vehicles and recreational vehicles and motorcycles and purchasing trips abroad. And let me push back a little bit on this because a well, we'll have a fuller debate about the wealth effect during the

podcast portion. But if you remember back in two thousand and nine, there was kind of a rising um since that people were a little intimidated about either conspicuous consumption or ostentatious spending, and even the wealthy, or at least this was in the papers at the time, we're a little circumspect at really big ticket items. And we saw people come out of their caves and start to spend.

But it wasn't real mayhem until a year or two. La. Yeah, so I'll give you the exact so and so you're absolutely right right that that uh, it was a little too You didn't want to get out there and do a bunch of chess chest thumping when your neighbor was still out of a job. Uh. And because this was a very severe downturn. And in fact, if you look at consumer confidence overall, let's just look at it in

the aggregate the first five years of the recovery. I simply call it the phase of reparation, because it took five years for consumer confidence to finally reach what was a normal level in expansion. So and that's about the time that we finished, uh, de leveraging the household balance sheet as well, that we actually finished licking our wounds and and paying down dead and defaulting on debt, etcetera. So I'll tell you when it did finally kick in

for the wealthy. Uh and uh, because you can't hold the wealthy down for too long, verry. So in SMP five hundred was up about and uh. We we scrub three hundred different categories of consumer spending, and that's how we know who's spending, who's doing the spending. Um. During that year, you saw consumer confidence among the highest income groups track the SMP five one for one, and personal aircraft was the single strongest category of space, followed by

pleasure boats. Wow, that's fascinating if you think about Also, was it March breaks out to a new all time high, got above the pre crisis levels, arguably kicking off a new secular bowl market. It would make sense they're the wealth effect. The wealthiest people who own most of the stock are going to go out and spend that money. But I never saw that data on pleasure boats and aircraft. That's fascinating. It's it's interesting. So it Uh. I love UM.

I love showing charts that will really make clients think that I think are charts that they haven't seen from anyone else. And so one of those charts is the consumer confidence that I mentioned of the highest income group versus the SMP five hundred, where it just tracks it higher. And it always makes me think of that that's saying, and I'm sure I won't get exactly right, but it's something about, uh, money can't buy you happiness, but it

sure makes the suffering easier. The version I remember is um David lee Roth said of Van Halen one said money can't buy you happiness, but it could pull you up in a yacht right next to it. Exactly gets you as close as you can. And so yeah, it took a while, but you can only hold the wealthy back for so long. And uh, and so they were really getting their feathers ruffled by the gains in financial market wealth that that we're just I mean, just incredible gains.

And by we had already blown past the previous peak toward the end of for financial assets wealth. And and I tell you what is another total total total wealth in financial assets. Of course, real estate wealth was another matter. We've only just popped into positive territory there where we've got positive real estate wealth in the first quarter of this year, finally, finally relative to the financial christ crisis. Yes, yes, uh.

And so I think it's interesting that that if I were to point to another chart, Uh, that surprises seems to surprise everyone is who do you think saves in the US? It's the wealthy. Other income groups don't say most of most of them live paycheck to paycheck. The savings rate is largely determined by the wealthiest income group in the US. So if here's another great chart, if you take financial assets and you map it against the personal savings rate in the US, it shows nearly a

perfect inverse relationship. As financial assets rise, the savings rate falls because the wealthy get out there and spend more. So, what does it mean that general, uh, only the highest income UM group in the United States is saving and and the rest of the country isn't. What What does that say to us say about us as a society in terms of our propensity to either save or invest well. The savings rate overall UM has come down from where it peaked after the financial crisis, but it hasn't come

down all the way. So it's still indicates there's a little more precautionary savings out there than there was before. But I don't think there's been any fundamental change and behavior here. I think the wealthier still mostly the ones who are the savers in the US. The difference for the middle and lower income households is that the debt

burden is not as high. Uh, So the crimp that they feel, say, when interest rates are rising, the crimp they would feel on the interest expense on their out their outstanding debt UH is not gonna be as as as acutely felt as before. There is some cushion there, but I wouldn't say that there's been some fundamental change and how they approach precautionary savings. UH. What I think is interesting now So going back to to to wealth uh and going back to the chart of the highest

income group confidence matching the climate SMP five hundred. If you look at the consumer confidence of the lower income groups, it's basically looked like a slow bleed upward upward tracking wage gains. So that very kind of slow bleed upward and wage gains has really translated into to whom the households that rely a lot on labor income. So who

have I left out? I've noticeably not talked about wealth for the middle um, and that's where the housing equity comes into play, because housing equity fell sharply housing prices once they reached their nature, they flubbed along the bottom for a time, finally started turning up staying two thousand twelve and have had some nice year over your increases

in home price appreciation. But we only just moved into again at the national level level, into positive territory for housing wealth overall in the first quarter of this year. So I think my focus as a as a someone who loves studying the US consumer, my focus is going to be the middle over the next couple of years, because I think we're finally seeing wealth effects come through for them. So let's let's talk about two things you reference,

because they're both really interesting. One is you talked about general um de leveraging of the household in debt. But the story that I've been watching, and I'm not quite a believer that this is what's gonna be our undoing, is the student debt rise that that's clicked up through a few trillions. How significant is that to future household formation, home purchases, durable goods, etcetera. And then we can talk

a little bit about where we are on the labor cycle. Great, So I'm glad that you brought up um student debt because leieve it or not, it actually does tie into this theme of housing equity as well. So, UH, student loan debt is a problem. Uh. The the enrollment rates have been on a very pronounced upward trend for quite some time. But each time there's a downturn, you'll see that that enrollment rate escalate, uh, and then we revert

back to previous trend. Now, of course, with the the the depth of the downturn after the financial crisis and the length of it sent many many more UH back to school seeking higher education. UH. And and it's really default rates among those that saw higher education that have been the highest because they spent even more on school came out and still we're facing just as horrible labor

market as when they went in. UH. And so we saw student debt UH ratchet higher and delinquencies on student debt wratchet higher, such that it became a hot button issue at least for Democrats during the presidential election. So that that the idea that we would do some mass forgiveness on on student loans. I can tell you that delinquent WHENCE rates have peaked as the labor market has improved.

Enrollment rates have come off of of UH the UM, the previous UH the trend that was the upward trend that was already established right for decades going into the financial crisis that was escalated, and now we're coming back down to that previous trend. So it look like enrollment rates are softening, but they're not. They're really just coming back to that that pre crisis trend. Here's what I

think is so important. At the same time that we were pushing an unprecedent amount of students to enroll in school and take on incredible amounts of student debt. Uh, we lost housing equity, which was a primary the primary way families were paying for that student's tuition. So most of them, because who in their right mind was going to give a student in this labor market and vironment

a private loan for school, they were forced to government loans. Now, you can never default on a student loan that you got from the government, Barry, if you retire, there's no escaping that. If you retire at age sixty five and you still haven't paid off your student loans, they will garnish your social security How much? How much of an insult is that everybody else has to go through a

legal process except Uncle Sam. You default on that, they find you wherever you are right, there's no getting out of it. Now. What do you think mom and dad do if you default on your soft promise to pay them back after funding your education by pulling equity out of their home. Nothing? Nothing exactly. And believe me, Mom and Dad, no, you're not paying them back when they

give you that for your student loan. Uh. And So families weren't able to fund student loans in that way anymore because they weren't able to pull equity out of the home now we've as I mentioned, we've us popped back into positive equity in housing in the first quarter of this year with home price appreciation. That should continue, and we saw for the first time this year mortgage

equity withdrawal pick up. So that means a future generation of students going into school now can go back to having college funded in the traditional way we used to fund college, which is going to alleviate the burden on them when they get out of college and start looking

to buy a home. So while we've got sort of a lost generation right that went into college during the financial crisis, came out and tried to get a job during the after the financial crisis, and we'll have their home buying plans delayed for a long time, and just big durable goods purchase decisions are delayed for a long time. The most the best work on this has been done by the New York Fed that's looked into this very closely and how it delays household for household formation buying plans.

Everything has a big anomic impact. But the generation of kids now going into school, by the time they graduate, they're not going to be saddled anywhere near with the student debt burden at least not the government issued student dead burton the previous generation had, and that is not going to weigh on their decisions, their home purchasing decisions in the same way as the unfortunate group, which is, you know, sometimes it's just the unfortunate timing of your birth,

dumb right when you graduate college. Um, it's not going to be the same for them. We have been speaking with Ellen Zanner. She is the chief US economist for Morgan Stanley. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg View dot com. Follow me on Twitter at Dholts. I'm Barry Reholts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Thank you Allen so much for doing this.

I've been looking forward to having this conversation for a long time. Glad to be here. So we um. I got easily distracted by many of your answers and didn't get to a number of questions that I definitely want to go back to. But we'll we'll have to start before before we have a debate on the wealth effect let's at least talk about wages um because you mentioned

a few things that I think are fascinating. Where are we in the cycle, in the wage cycle, are we finally starting to see an uptick in compensation or is it gonna be you know, flat wages for as far as the eye can see. So as the unemployment rate has come down, uh, we have seen wages growth in wages increase, but it's been pretty amnemic. Right, It's not been nearly to the extent you would think you would

get given how quickly the unemployment rate has fallen. But the truth of the matter is unemployment rate in this environment with such a huge swath of the population, UH, continuing to move further and further out into the age groups associated with very low participation rates in the labor force. There's gonna be, right, more older folks working and retiring,

leaving the labor force. There's this this gravitational pull just from the demographic trend that that pulls that unemployment rate lower. That's not indicative of labor market that's getting tighter and tighter. So the point at which we reach a tight labor market, which would really start to push the wage growth up more quickly. It's just simply a lot lower where where where than where it has been in the past. UM. That said, the the growth in wages has been sort

of on a pretty steady, slow bleed upward. What we do Bury and I find that a lot of our work on the U S Economics team at Morgan Stanley is now we slice and dice it to a degree that we never had to before. UH because after financial crisis, there are lots of things that are going under the on, under the hood where you just can't look at anything in the aggregate anymore, and wages are a great example

of that. Wage pressures have been rising much more quickly in areas of the labor market where we have been creating a lot of jobs. So more than six percent of all new jobs that we've created since the recovery began have been in the very UH typically low wage paying service sector, low productivity enhancing areas of the economy like retail and leisure and hospitality UH and home healthcare

workers and temporary workers and THO. Those are the areas where as the unemployment rate has fallen, wages have accelerated there because we're hiring a lot more workers there and labor markets are actually tighter. They're how significant are the raises in minimum wage to that cohortive of the workforce. Well, let me put it two different ways. Uh. From a socio economics perspective, it matters greatly for that worker making

a minimum wage. From a market perspective, not much, because if you look at wage growth in the aggregate, what you're doing is raising wages for the most marginally paid worker, and their total wage bill just does not move the needle much in the aggregum. Very often there is in healthcare, it's just a modest increase. It's just a modest increase

in salary from what is already very low salary. And remember when states raise their minimum wages, uh, you know, in or when let me back up, when we talk about if the federal government raises the minimum wage, uh, and all of the discussion that ensues on both sides of the argument of is it good, is it bad? Is it gonna lead to high unemployment? Or is it necessary for those workers to have a living wage and survive.

Oftentimes what's lost in that argument is that most states already pay above the federal minimum, So you really have to look to see what states are doing. UH. And individually states have been many many states have been raising the minimum wage UM. But those are really some of the higher success You know, when we see California or Seattle or even I was gonna say Washington State or even the city of Seattle REGI minium wage, raise the minimum wage, that's really very specific to a part of

the country that's just booming. But what does that mean for Oklahoma or Arkansas or Kentucky where you may not have the same in this case, the technology driven boom towns. What do their minimum wage increases mean relative to UH states that aren't doing as well? So typically, so you do have to differentiate state by state. I think it is very important, right because the cost of living in one state, which I think is what you're getting at,

is very different than another state. So raising you can raise them inimum wage to fifteen dollars in Seattle, but you can't do it in Birmingham, Alabama. UH. And so this is from the company by company perspective. This is the argument that they'll make. And there actually has been a good body of academic work that has suggested that raising the minimum wage, particularly in states like Alabama. UH doesn't necessarily lead to immediate layoffs UH in certain service

sector industries, but it certainly depresses hiring UH from there forward. UH. And so I think it is something that has to be looked at on the state by state basis. If you're going to do it at the federal level, I think something like the earned income tax credit, which we already have in place, which you can expand, is a much better way to do it than a federal minimum wage.

So rather than putting the burden on businesses and telling where businesses have no choice but to adjust their practices because they're being forced to raise wages whether it's good for that particular business in that particular state, in that particular town, doing it through expanding the earned income tax credit is a way you hit the lowest paid workers in the US, and the government, meaning the taxpayer more broadly,

is bearing the burden of that cost. See my beef about minimum wage outside of the high earning cities the East Coast, the West Coast has always been Do you remember the helpline that McDonald's had set up. They were hiring people, they were capping them at thirty hours, and then they were sending them to aid to dependent children and welfare and medicaid, effectively having the taxpayer subsidize the

labor force of a profitable company as a taxpayer. I always was offended by that, and that's what first sent me looking at minimum wage. It's wait, why why are you subsidizing your workforce with tax David Dollar? If if, if I need to give you a minimum wage raise in order to have these people no longer qualify, you should pay for that, not me. And if it means the burger is going to cose fifty cents more, I

don't care if burger shouldn't be taxpayer subsidized. And I think a lot of that sort of gets lost in the minimum wage debate. That's very specific to a handful of company market and it's a very sensitive topic. It's um with a with a lot of heated debate on both sides of the coin. I think one of the one of the most interesting um uh things I think I've studied in the past in terms of company behavior

on the back of minimum wages. When uh we were facing UM I think starting in in fourteen or so, we were going to be facing a lot of states that were raising minimum wages, and so to get out ahead of that, Walmart raised the wages of its workers across the board UM and I thought that it was a brilliant marketing UM tool for them, because you're gonna be forced, um via a lot of your states to be raised anyway, why don't do it ahead of time and get the pad on the back for doing this

public service first. And on top of that, uh, there has been a real, a credible study out there that many of Walmart's workers spend their paychecks in Walmart. So pay them more. It comes right back to you and increased purchasing in your stores. It's brilliant plause. Walmart had a big issue with once we came out of the financial crisis, they had a big employee turnover issue and

a big not only retention but recruitment issue. And it's very expensive to find and hire people and then train them in a Walmart and then they leave after three months. And so the most recent I want to say it was last February, maybe it was a quarter before that, CEO Walmart came out and said our retention numbers are better?

Are are? Employee turnover numbers have reduced and the pay increase effectively is paid for itself, which is really a shocking thing because the previous management was really pushing back against Uh. This, This was very much a seat change. And yeah, I think it's a great example of how a company can very creatively get around something that's a sticky issue, like like minimum wage increase, and it doesn't

have to be the end of the world. We were talking a little earlier, or I was referencing the technology boom on the West Coast, But since we're talking about labor, how significant has been technology and automation and software to either the wage malaise or the quality of jobs that we are creative? So it's a huge topic productivity, automation, replacing jobs with robots. Um. And it's something that's very

difficult to see in real time. UM. I think this is gonna be something very where we wake up twenty years from now and realize that we're living through Wally the movie right right now. Um. But I can tell you that, um uh. From an economic theory perspective, UH, it's easy for me to argue why putting in chaos at McDonald's is a good thing because it will raise

the productivity of its workers. And ultimately, UH, wages follow productivity. UH, you know, raising productivity if a business is UH makes that capex, that capital expenditure to raise its productivity. Productivity drives profits. And so even as as as profits rise, you can pay your workers more, but your labor share of income, UH, your labor share of costs does not rise.

Fewer people making more money theoretically right, but it lifts wages of everyone because those workers that have been displaced, right are business overall expands and you have to hire them in other ways. So for McDonald's, go back to that example, they put in more chios where you go in and order, so you no longer need the people at the front desk taking your money. You're ordering from

the kiosk. But maybe they're able to service more uh folks faster at lunch time and produce a lot more lunches in one hour, and so they need more people working behind the counter. So they extend their existing workforce,

and they're able to pay their existing workforce. Are plus, somebody's building those chiosks, someone's doing them, making the screens, writing the software there exactly, so we can also the theory is kind of easy to explain right, why higher productivity wages tend to track productivity higher, and so why you as a policy maker, Uh, whether your fiscal policy maker, a monetary policy maker, or economists, you all want productivity to be higher because it still is the best indicator

of overall health and well being of your economy, of your labor force. Uh. The the difficult thing to deal with is that there's always a temporal effect. There's always a segment of the population where labor is displaced for a time. Uh. And either that labor is never absorbed back um or it takes time to absorb it into other industries that are expanding. Uh. And so UM, I think that's the difficult part to deal with, is the temporal effect. So let's let's get a little wonky. Since

you mentioned productivity. We've seen really me yoker productivity gains not just for quarters or years, but this seems to be going on for decades. What's the old joke? The productivity effect is seen everywhere except in the statistics. Do we have a productivity issue or do we have a productivity measuring issue? Okay, so the measuring issues, since you brought it up, because that is a that is a

it's a hot button issue. Measurement mismeasurement has always been there, and so as an economist, I would want to show that miss measurement is worse today than it has been in the past. And I'm not sure that I can show that because I certainly don't want to hang my hat on trying to say that, oh, well, productivity is not low like everyone thinks it is, it's just simply mismeasurement.

I think that's too cute, too easy of an explanation, because I think miss measurement has always been been there. Doesn't exist today absolutely, um, but was it there in

the past as well? Absolutely. I can remember the dot com boom or or the Y two K come and he's going out and buying all of this software that was going to help them kind of get over that hump of Y two k. Um it uh took the government about five years to fully reflect how all of that that purchasing of software and deploying across business platforms affected productivity. Um. So I do believe there's ever present

and always mismeasurement. But if you look at trend productivity over time, it's been falling for decades over time, we've been moving from a production lead economy, or let's say, manufacturing led economy, to a service sector led economy. Manufacturing has much higher associated rates of productivity than service industries, and so over time trend productivity has slowed. Now, do I think that it's flat to up half a percent, which is where it's been over the past five or

six years. No, I don't think that's trend rate of productivity. I think we can see after the financial crisis there was an extreme shortfall in capital expenditures UM where only just now I'm seeing the kind of data that shows me companies are convinced now that it's time to go ahead and start adding UH two capex and doing some

capital deepening. And part of that is the the cyclical rebound we're finally seeing in this cycle from global stronger global growth, and just companies in the U S having underbuilt, underinvested for so long and labor costs rising to a point where now UH capital is being incentivized over labor. Okay, So I don't think productivity is going to be stuck flat on its back where it has been for five

or six years. But I think around one percent productivity is probably the best we get to, because I think the run rate of UH investment in the US it's probably around three to five not seven to nine percent, which is where it's been in the past. And a lot of that is just the elongating that trend, continued trend that where is the economy growing. It's growing in the service side. So let me push back on that a little bit, or share with you the standard pushback.

When we were manufacturing, you could count the number of widgets and how much they were sold for and what it cost to actually create these individual widgets, and our productivity gains were easy to see and measure. Today, given the rise of technology, it's so much more nuanced. Let's take this conversation just as an example thirty years ago. This is a radio broadcast that reaches whoever it reaches, and so the amount of time and energy we put

into this is heard by X number of listeners. Today, this will get done, it'll get edited, it will get nicely polished up, and in two or three weeks it will go up on Apple, iTunes and SoundCloud and overcast and Bloomberg dot com. And not only will it be listened to by a whole plus, it will go on the radio, so you get the original audience times four, time six. But it persists forever in somebody two years from now, doesn't Ellen Zentner google search and said, oh,

what's this podcast that is? That is terrifying. It will haunt me for the rest of my life. Essentially, we'll let it out all the cuss words. None will hear the terrible things you've said. So here's another wrinkle on productivity, which which um, I think presents an interesting, um, not dilemma,

but but let's say food for thought for policymakers going forward. UM. We can see in the data that we track on R and D spending research and development, we can see that it has been soaring yet and and typically productivity would follow that. Yet productivity hasn't. So where where is all that R and D going? What is it going into? There must be some change going on. And what we found when we look at where is that R and

D going? Um, rather than old world technology, that that R and D is going into, say developing a robot arm to work in an auto manufacturing facility, a lot of that is going into the biotech space. So we're elongating the age of an eighty year old to ninety years And while that's extremely socially desirable, it's not a productivity enhancer. It's not going to help that that eighty year old work for ten more years at at Walmart is a greeter all right. I'm just saying it's not

a traditional productory enhancer. Now here's another thing. Uh, And so does that mean we don't do it? We shouldn't do it because it doesn't raise it productivity in a in a GDP marketable way, right, And I would think the answer is no, we should absolutely do it, but it's not going to translate into productivity in the way we are used to. Here's another example. There's been a massive shift in R and D spending, uh, in the area of consumer discretionary. Now, what the heck does that mean?

We had to dig into it. It's Amazon. It's Amazon creating the type of platform that allows me to order a makeup product that I've run out of when I'm walking down the hallway to the bathroom. Right within fifteen seconds, I've placed a one click order and ordered that makeup before I've even hit the bathroom stall. And now my productivity rises, or what's happening instead is all of these

technological advancements are helping you enjoy your life better. They're giving me more hours of my day back to do other things. To it, you don't have to go to the mall to get whatever it is that you just ordered exactly. So is that worth nothing because it doesn't raise my productivity? It makes my life more enjoyable. Is there not an amenity value in that? Right? But it just doesn't raise my quality of life? Except that productivity is how we measure quality, and so so what's the

old Drucker quote. Not everything that's measure that can be measured matters, and not everything that matters can be measured exactly exactly. So I think that is the conundrum for

policymakers because they're constantly disappointed with low productivity. I and because that is economic theory tells you that's the single best indicator for standard of living in your economy of living has not gone up in five or some nothing but the fact that I don't have to go to the mall with my wife to get lipstick anymore or whatever lead in quality of life. I actually don't mind shopping. We go through the malls, we make I make fun

of stuff it's entertainment. That's not shopping. Barry Berry is walking in, actually buying things and helping the economy, well, walking on and making fun. We call it economic research or economic stimulus. Absolutely, But I would given the choice between the half hour takes to drive and park and actually get into a store and then do our thing and then head out. Wait, I could just scroll through Amazon find what I want in fives and save myself

ninety minutes of my weekend. Hence the death of the mall. But no doubt about it. Well, we all you know, the United States has this huge retail footprint. We're overbuilt on a per capita basis, at least compared to Europe, and that is certainly going through its secular changes. Um. I could talk about this stuff forever. It's fascinating, But what I want to do is get to specially since you brought up shopping. Yeah, oh, for sure, we can talk a ton about But let's instead jump into my

favorite questions. Um. These are what I ask all my guests and and they're always kind of generate interesting responses. Let's start with what's the most important thing people don't know about your background? Oh? My gosh, I think if I if we keep it from a business perspective, any perspective, any perspective at all. Uh Like, I'm always surprised when someone says I climbed Mount Kilimanjaro. I'm like, what, But people have dropped that sort of Yeah, I'm sure I've

done a lot of amazing things. Just there's so many of them. Nothing leaves the mind exactly, There's so many of them. Uh so keep it on the professional side. What what do people not know about you? I think if you were to start the conversation by saying, this is Ellen Sentner, she's US chief economist of Morgan Stanley, and then work backwards to how I started my career, or work backwards even further to how I even approached

university and went through school, that whole process. You would you would never backtrack to where I started and draw a line to chief economy. What did you do at the beginning that didn't say economics in the future When I was in high school? Um, you go way back. Yeah, when I was in high school, there was no just because I compare it to what my niece and nephew, who are teenagers today are going through and how they prepare for college, and I think, oh my god, I

wasn't even thinking about college at your age. I was thinking about having fun in high school every day. We did not have a high school counselor that helped me think about what schools I wanted to apply to. Uh. It was always understood in my family that I went to college. My both of my grandparents were professors at the University of Texas. Everybody went and got a degree. Um. But I graduated high school and I just wanted to work and have fun. So I worked and had fun.

You're of the era Dazed and confused that movie with Yes. Top Notch, which is the burger joint in that movie is right in my neighborhood. And I still eat a top Notch every time I go back to Austin. So kids, I don't want to say kids today, these kids today, but my niece and nephews yours. So they've been thinking about college for ten years exactly. I didn't think I had.

I Basically, everything came more organically for me once I got tired of working and having fun and thought to myself, well, I'm gonna am I gonna be a manager of a swimwear shop for the rest of my life. No, maybe I should go ahead and go to college. UH. And so I went off to college, and then I have the the you know, the kids that I mentor today asked me, well, how did you choose the school? You

know how I chose school. My mother loved spending summers UH in Boulder, in the mountains, because my grandfather would teach summers at See You Boulder. He taught during the school year at U T Austin, UH. And because she said she loved the mountains, I decided I wanted to go to See You also, and I applied and went side Unseen and then I stayed there and to graduate school there. And then when I got to graduate school, I was like, well, what the heck do you do

with a graduate degree in economics? I had specialized in econometric econometrics, I love statistics UM, and so I thought, well, heck, I'll just go back home to Austin. And at that time, if you're an economist, you worked for the state. I mean, so you can see where I'm getting at if you were to look at that. Ellen Ellen Beeson, I was at the time high school student in Austin Texas, and and think would this girl be chief US economist of Morgan's Ley decades from now? Uh No one would have

drawn that line. And and Boulder and Denver and Colorado in general is now booming. Yeah. My sister lives in Denver now and it's unbelievable. The housing boom there is just just well, I don't know how much of it is attributable to decriminalization of marijuana and how much of it is organic. They have a burgeon no pun intended.

They have a burgeoning tech community there as well, and they have when I lived there in the nineties, that tech community was really up and coming, the whole complex being built out for it in south South Denver um. And it's an incredible because I like areas of North Carolina and Texas, there are areas of Colorado that never had a housing boom, so they never never had a bust and now they're well above previous peak for home releasing.

My sister is tickled, tickled pink that she's already a homeowner there at least, so she's gaining equity uh day by day. Uh yeah, So it's it's uh, it's on fire. Yeah, it's on fire. And Austin. I think I must be. I must be good luck for places that I've lived in. All right, let's talk about mentors. Who were some of

your early mentors? Uh? So in my career the very first I think I was lucky right off the bat when I went back to the State of Texas, UH, to be assigned to be the right hand woman to Tamra Plout, who was the chief economist at the State of Texas at that time. UM. She and I had an amazing partnership. She took me under her wing. UM and having that kind of slow paced environment that government is. UH. Going back to the beginning of the podcast where I said it was just a a great time to cultivate

deep thinking. I learned a lot from her. We remain extremely close today. UM. Also UH when I moved on, I had gone there the Bank of Tokyo Mitsubishi, and then when I went on from there to Nomeura Securities David Wrestler, who when he by the time he retired, he had been at Nomura for twenty six years, the longest practicing chief economist on Wall Street. UM. Dave was

an amazing mentor to me from a market perspective. So taking me from sort of that academic thinking economist UM to how a market economist thinks and how to move into that fast paced world of working for an investment bank. He and I are both very good friends today. If I can ever catch him when he's off the golf course, he's living a very nice retirement right now. Uh. And so that those those were very important UM mentors UM

in in the business world in Texas. I started off at a pretty young age UM in gymnastics competitive gymnastics UM. And the coaches there, uh, Jim and Cheryl and at Capital gymnast Sticks in Austin were were incredible. Let's talk about books. This is the question everybody always asks. Tell us about some of your favorite books, fiction, nonfiction, economics or markets related or not. I'm gonna talk about one book. I'm gonna talk about one book because it's the first

one that always comes to mind anytime anyone asked me. Okay, So, because it's a lot of pressure for one book. Joe No Sarah wrote a book called A Piece of the Action, How the Middle Class Became the Money Class. UM. It goes all the way up through the late nineties. It covers the love of Americans, Americans love affair with credit cards? How did that all come about? How did this credit explosion and debt explosion the US affect the middle class? It was now I'm gonna say this from a very

nerdy economist perspective, the book read like a novel. I could not put down. It was the best book. It goes right up there with best books fiction or nonfiction

that I've read. I'm going to have to unbelievable. And I just tell myself if Joe ever reached out and wanted to do an update to the book, because I've covered the consumer and so much depth the US household and so much depth, and that book singularly has influenced so much of my study around the US household and slicing and dicing it by income group and studying the household experience. It is. It's huge. And I always told myself, if Joe calls me and says, help me update this book,

I'll take you upstairs to me. I'm assuming you've met Joe over the years. I would love to, and I have never met him. He's on the he now writes for Bloomberg Views. I know that one floor I suppose that was my way of trying to get an invite. He's literally like if I could drill a hole through the ceiling. We're practically but I'm not kidding you. Every economist that comes on my team, if I want them to know the consume us, consume Mr inside and out, I just give them that book and I say you

need to read this. So let's talk about a time you failed. Tell us about something that didn't go as you expected and what you learned from it. It's not that I never failed. I came up with an example, but it's it's not that I never failed. It's that I was raised in the South, in Texas, and there's

this sense of perpetual optimism for some reason. I think when you grow up in his sunny climate and every failure is embraced and turned into something positive, so that when you look back on it's hard to see it as a failure because all I can think of is the positive thing that came out of it. Isn't that a characteristic of America in general? Coast, in Europe or elsewhere, when a business person fails, it's a black mark. And in the United States, I mean, how many companies did

Ford have? How many times it did Edison fail before they hit their market? It seems, you know, there is a second act in American life. But I always found that entrepreneurship, that ability to just get up, put dust yourself off, and move on to the next is a uniquely American phenomenon the rest of the world, it is. And I think and I think embracing the failure um. And this is something that I that I think is

great um and that the world of finance. I think we do well at Morgan Stanley, or at least promoting it Morgan Stanley, but I think the world of finance could do better about is uh embracing when you fall on your face publicly with a bad call and say that was a bad call. I thought I had sound research behind it. Turns out out was I was wrong. And then let's move on. People will trust you so much more when you make the next call. Then if you're one of these and I've met plenty that have

tried to cover it over time, revisionist history. I always said, X, Y, and Z and and believe me, with things like these podcasts, you can't go back and have revision. It's a generational thing. People forget that the internet is forever and it's amazing. All right, we're I only have you for a few more minutes. I see your your handler jumping up and down. I have to ask my sound like a performing monkey. No, not at all, not at all. This is great stuff.

So what sort of advice would you give to a millennial or recent graduate who's interested in going into economics as a profession. Uh. I would start more generally by saying, stop worrying about where you're going to be ten to twenty years from now. Worry about where you're going to be a year from now, and then as you get older, widen it out to where I'm I going to be

three years from now, five years from now. Communicate and communicate face to face, no matter how much your generation hates it because it's not the way you were raised. Communicate face to face, because those of you who do will make it further than those of you who just text. You cannot get body language from a text. You just

can't uh, And people will appreciate that. UH. For the economists specifically, it is half about showmanship and delivery uh, and half about the analytical work that you put into a steak and the sizzle. You have to have the sizzle and not a lot of economist sizzle because we tend to be nerds and attract nerds to our industry. UM. Embrace public speaking, Embrace being comfortable in front of people, and you will go much further than your counterpart. That's terrific.

And then my final and favorite question, what is it that you know about econometrics investing markets today that you wish you knew twenty years ago? I wish that I was told, which you never would be told when you're learning economic theory that it doesn't always make sense because I think the peril that many of us ran into right after the financial crisis, there was all of these

economic theories we learned in school made no sense anymore. UM. And uh only be just beginning with my generation did we start to really fully employ econometrics and statistical modeling and economics. UM. And it's those of us that were able to rely on that more so than trying to make everything fit into a theory that we're able to adapt better after the financial crisis. Fantastic stuff. Thank you Ellen for being so generous with your time. You didn't

think we'd go the full ninety minutes, but we did. UH. We have been speaking to Ellen Zentner. She is the chief US economist for Morgan Stanley. UH. If you enjoy this conversation, be sure and look up an intro Down an Inch on Apple iTunes or SoundCloud, overcast Bloomberg dot com and you can see any of the other hundred and fifty three or so such conversations that we've had over the past three years. We love your comments, feedback and suggestions right to us at m IB podcast at

Bloomberg dot net. I would be remiss if I did not thank the wonderful team I have who helps us put this podcast together and then send it out into the world via the technology we were talking about. Medina Parwana is my technical producer. Taylor Riggs is our booker slash producer. Michael Batnick is our head of research. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio.