Keith Weiss: How Generative AI Could Affect Jobs
As companies integrate generative AI into enterprise software, a wide variety of jobs that depend on requesting or distributing data could be automated.----- Transcript -----Welcome to Thoughts on the Market. I'm Keith Weiss, Head of Morgan Stanley's U.S. Software Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the significant potential impact from generative A.I on enterprises. It's Tuesday, October 10th, at 10 a.m. in New York. You may remember the generative A.I powered chat app that reached 1 million users in only five days after its launch late last year. While much of the early discussion on the use of generative A.I focused on the consumer opportunity, we see perhaps an even bigger opportunity in enterprise software. The advantages from traditional A.I to generative A.I are rapidly broadening the scope of the types of work and business processes that enterprise software can automate, and this could ultimately have an impact on industries across the entire economy. Of course, one of the biggest questions everyone seems to have is how will generative A.I impact jobs? We forecast 25% of labor could be impacted by generative A.I capabilities available today, likely rising to 44% of labor in three years. Further, by looking at the wages associated with those jobs, our analysis suggests generative and A.I technologies can impact the $2.1 trillion of labor costs attached to those jobs today, expanding to $4.1 trillion in three years in the U.S. alone. This drives an approximately $150 billion revenue opportunity for software companies in our view. An important caveat here, we believe it's too early to make any definitive claims on the number of jobs that will be replaced by generative A.I. So we used the term impact to denote the potential for either an augmentation or further automation of these jobs on a go forward basis. So what are the jobs we think are most likely to be impacted? Based on the current capabilities of generative A.I technologies like large language models, we believe the common characteristics are skills amongst the jobs most impacted are the need to retrieve or distribute information. For example, billing clerks, proofreaders, switchboard operators, general office workers and brokerage clerks. On the other side of the equation, jobs that are least impacted today are those that require some aspect of physical labor, including ophthalmologists, extraction workers, choreographers, firefighters and manufactured building and mobile home installers. Over the next three years, as this more generalized A.I. technology focuses in on more specific use cases, we believe the impact of generative A.I will shift into more specialized jobs, such as general and operations managers, as well as registered nurses, software developers, accountants and auditors, and customer service reps. Of these, the General and Operations Manager jobs could experience the highest potential cumulative wage impact. In fact, our analysis suggests a $83 billion impact amongst general and operations managers today. The magnitude of the enterprise impact marks only one side of the equation, as the timing of the realizable opportunity becomes increasingly important for investors to navigate this evolving technology cycle. To be clear, the rapid adoption of these consumer technologies are not going to be indicative of the pace of adoption we're likely to see amongst the enterprise. There are several notable frictions to enterprise adoption related to items such as finding a good return on investment, enabling good data protection, the skill sets necessary to run and operate these new technologies and legal and regulatory considerations, all which necessitate significantly longer adoption cycles for the enterprise. For this reason, we think generative A.I remains in the early stages of the opportunity. Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
10 Loka 20233min
Michelle Weaver: The Priorities of the U.S. Consumer
While U.S. consumer sentiment is on the decline, there are some categories that have remained stable as purse strings tighten.----- Transcript -----Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, today I'll give you an update on the U.S. consumer. It's Monday, October 9th at 10 a.m. in New York. As we get into the fall season and close out the third quarter of this year, investors are paying attention to the state of the U.S. consumer. Our recent survey work reveals that inflation continues to be a primary concern for consumers and that the U.S. political environment is the second most significant concern. Furthermore, consumers continue to worry about their payment obligations, and 30% of people we surveyed expressed concern over their potential inability to repay debts. Low income consumers are generally more worried about their inability to pay rent, while upper income consumers are concerned about their investments, U.S. politics and geopolitics. Overall, consumer confidence in the U.S. economy and household finances worsened modestly in September. More than half of U.S. consumers are expecting the economy to get worse in the next six months, while less than a quarter of consumers are expecting the economy to get better. This worsening sentiment is also consistent across different income cohorts. Additionally, savings rates continue to trend lower versus earlier this year. Consumers report having an average savings reserve of 4.2 months, the average over the past few months has been trending lower compared to earlier in the year. Of course, savings reserves vary significantly by income though, with upper income consumers having on average around 6 to 7 months worth of expenses in savings compared to about 3 months for low income cohorts. Positively fewer consumers reported missing or being late on a loan or bill payment, with 34% missing a payment last month versus 38% in August. Low income consumers are more likely to have missed or been late on payments versus middle and high income consumers. Consumer spending intentions across income cohorts for the next month are similar to last month, with 31% of consumers expecting to spend more next month and 19% expecting to spend less. Consumers continue to prioritize essential categories like groceries and household items, but plan to spend less on more discretionary products like electronics, leisure and entertainment, small appliances and food away from home. Interesting to note, cell phone bills continue to be a clear priority for consumers. Travel intentions have also remained relatively stable. Over half of consumers are planning to travel over the next six months, mostly to visit friends and family, which is slightly up from last year. Not surprisingly, travel spending is higher for high income consumers than for low and middle income ones. However, we have seen plans for international travel start to decline. Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
9 Loka 20232min
U.S Equities: Credit Continues to Outperform
As bond yields continue to rise, credit has been more of a passenger than the driver of recent market volatility.-----Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Morgan Stanley's Head of Corporate Credit Research. Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist. Andrew Sheets: And on the special episode of the podcast, we'll discuss Morgan Stanley's updated cross-asset and corporate credit views. It's Friday, October 6th at 3 p.m. in London. Serena Tang: And 10 a.m. in New York. Andrew Sheets: Before we get into our discussion, let me introduce Serena Tang as Morgan Stanley's new Global Cross-Asset Strategist. Serena has been working with me for the last 15 years and together we initiated our cross-asset effort nearly a decade ago. Serena was responsible for building the team's investment framework, specializing in multi asset allocation, portfolio optimization, and long run capital market assumptions. So I can confidently say that Morgan Stanley's cross-asset effort is in very capable hands. As for me, I'm now Morgan Stanley's Head of Corporate Credit Research, but I'll continue to host my colleagues as we look forward to bringing you key debates from across asset classes and regions. So, Serena, welcome and let's jump right into what's going on in markets. Over the last several weeks, as everybody in the U.S. has returned from summer, the debate among Morgan Stanley's economists and strategists is centered on two main issues, the outperformance of the U.S. economy and the underperformance of China's economy, as well as the spike of government bond yields, especially at the longer end of the curve. So where has this left our views across asset classes? Serena Tang: Yeah, yields and real yields have indeed moved a lot higher in a very short amount of time, you know, on that narrative that rates will stay higher for longer. And I would say that, you know, while the market has been going against our current call for government bond yields to fall over the next 6 to 9 months or so, we’re steadfast on our preference for high quality fixed income over risk assets like global equities, like high yield corporate bonds. And the reason really comes down to how higher real yields mean the discount rate for equities is also higher, leading to lower stock prices. And we've kind of seen this over the past few weeks or so. I think this is especially true in today's environment where the rise in yields and the rise in real yields isn't really driven by a rise in growth expectations, which you know traditionally have been great for equities thinking about future growth. But rather today's move in yields is really much a function of what the markets think the Fed would do over the coming few months. And all this largely explains the nearly 9% selloff we've seen in global equities since the start of August. But Andrew, you know, such dynamics must also be very similar in the credit world. In your view, how do rising government bond yields affect your outlook for global credit? Andrew Sheets: So I think credit finds itself in a pretty interesting place as bond yields have risen. You know, I would safely say that I think credit as a passenger in recent market volatility, it's not the driver. And, you know, if I think very simply about why bond yields have been selling off and there are a lot of different theories of why that's been happening, maybe a simple explanation would be that bond yields offer pretty poor so-called carry, a government bond, a ten year government bond yields less than just holding cash. They offer poor momentum, they're moving in the wrong direction and they have difficult technicals, i.e., there's a lot of supply of government bonds forecast over the coming years. And across a lot of those metrics, I do think credit looks somewhat better. Credit yields are higher, that carry is better. Credit compensates you more for taking on a longer maturity corporate bond, which is the opposite of what you see in the government bond market. And as yields have risen, companies have looked at those higher yields and done, I think, a very understandable thing, they are borrowing less money because it's more expensive to borrow that money. So we've seen less supply of corporate bonds into the market, which means there's less supply that needs to be absorbed and bought by investors. So credit can't ignore what's going on in this environment and we're broadly forecasting this to be worse for weaker companies, as the effect of potentially slower growth and higher rates we think will weigh more heavily on the more levered type of capital structure. But overall, I think within this kind of challenging environment, I think credit has been an outperformer and I think it can remain an outperformer given it has some advantages on these key metrics. Serena Tang: So you touched on lower quality companies. One of the very interesting forecasts from your team is that we still think default rates can go higher over the next 12 months. Now, how do I square this with everything that you just said, but also our U.S. economics team’s continued forecast for a soft landing? Andrew Sheets: It's a great question. I'd say our default forecast, which is that US default rates rise to a little bit under 5% over the next 12 months, is quite divisive. I’d say there's a group of investors who say, well, it doesn't make a lot of sense that default rates would rise given that our base case does call for a soft landing of the US economy, no recession. And another group that says, well, that seems like too low of a default rate because interest rates have just risen at one of the fastest paces we've seen in 150 years. Of course, that's going to put stress on weaker companies. And I guess we see the markets splitting the difference a little bit between that. I think the fact that you are seeing a clearly outperforming US economy, I think that does really reduce the risk of an above average default rate. It would be very unusual to see an above average default rate with anything like what we're forecasting in our base case economically. And then at the same time, you do have, thanks to the low rates we're coming from, an unusually large share of borrowers who borrowed a lot relative to the amount of income that they generate because they could do that at lower interest rates, and now that's going to be a struggle at higher interest rates. So I think the combination of those two factors gets you something that's in the middle. I think you do have a more robust than expected US economy, but you do have this tail of more heavily indebted issuers that is just, I think, going to struggle with the math of how do you pay for that debt when the interest rate is effectively doubled from where it was just 18 months ago? Serena Tang: And you described just now our credit being in the middle, so to speak. And, you know, being in the middle is much better than what we're projecting for equity returns, and hence one of the reasons we like high quality credit and we like high quality bonds. But then my question to you is, what might the market be missing right now? But also importantly, what do you think we might be wrong? Andrew Sheets: So I think there are a couple of important things to follow. I think there has been over the last several years an advent of alternative forms of capital, some of this is kind of rolled up into the general classification of private credit. But, you know, there have been a lot of new entrants, new investors who are willing to lend to companies under nontraditional terms. And I think it's a big open question around, does that presence of additional investors actually make defaults a lot less likely because there's a new outlet for companies that need to raise funds from this new investor pool, or does that pool not have that effect? And if anything, maybe it is a source of some additional risk. It's a group of lending that's hard to observe by design, by its nature. I think another important thing to watch will be what do companies do? Part of our thinking on the research side is that companies will view current yields as expensive and they will react like any actor would act. When it's more expensive to borrow, they will borrow less. They will try to improve their balance sheet and maybe in the process they'll buy back less stock or do other types of things. That might be wrong. You know, we might see a different reaction from companies. Companies might view that debt cost as different. Maybe they view it as more reasonable than we think they will. So at the moment, we're thinking that companies will view that debt is expensive and respond accordingly and do more bondholder friendly things, so to speak. But we'll have to see. And we could be wrong about how corporate treasurers and management are thinking about those trade offs. Andrew Sheets: Serena, thanks for taking the time to talk. Serena Tang: As always, great. Speaking of you, Andrew. Andrew Sheets: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.
6 Loka 20238min
Todd Castagno: Rising Growth in Convertibles Bonds
Here’s why convertible bonds, an often overlooked asset class, are becoming more attractive as an alternative to common stock.----- Transcript -----Welcome to Thoughts on the Market. I'm Todd Castagno, head of Morgan Stanley's Global Valuation Accounting Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll be discussing the increasing attractiveness of the convertible debt market. It's Thursday, October 5th at 10 a.m. in New York. Rising interest rates have increased borrowing costs for everybody, and that includes companies looking to raise or refinance debt. And that generates a renewed appetite for an oft overlooked asset class called convertible bonds. But what are convertible bonds? To start, convertible bonds are what we call a hybrid instrument, combining the features of a traditional corporate debt and common equity. Similar to corporate bonds, convertibles offer guaranteed income via interest of the initial investment. The reason they are called "convertible" is because they offer investors the option to convert that bond to common stock when a company's share price hits a certain threshold. These hybrid features provide investors with downside protection and upside equity appreciation. There are many reasons why companies choose to issue convertible debt. First, they offer a strategic financial flexibility for high growth in early stage companies, a quick time to market execution time. Second, convertible debt provides an alternative path for companies that would find it difficult to access straight debt in the market. Third, they offer a way to raise equity without issuing more stock directly through secondary offerings. And this is a big plus for corporates because investors often perceive a secondary offering as a negative signal. And finally, a lower cash coupon and lower interest expense is very attractive in a high-rate environment. Why is that? Convertible bonds have lost market share from traditional corporate debt over the last 15 years. The convertibles market size has remained largely unchanged, while the traditional corporate debt market in the U.S. has roughly doubled. Convertibles are relatively less attractive at lower interest rates and accommodating capital markets for traditional alternatives. As it stands, 2023 is on track to double last year's issuance, as likely to be the highest post global financial crisis issuance outside of COVID. Important to note, the nature of issuance this year is different from recent history. In the last decade or so, issuance has been led by smaller market cap and growth companies, who don't have established debt markets or ratings and thus don't have easy access to straight debt capital. However, this year, 65% of issuers have had a credit rating and thus have had easy access to the straight debt market. They're coming to the convertibles market, not as a necessity, but are instead actively choosing to issue converts because of the favorable economics, through interest expense savings, and a last wrinkle, new favorable accounting. Accounting rules recently changed that reduce complexity for both issuers and investors. While accounting typically does not drive economics, on the margin, the recent change improves transparency and reduces cost to issue. Utilities have been especially large convertible issuers this year in the market. 75% of convertible offerings in 2023 year-to-date have been refinancing, which are likely to be one of the areas primed for growth in the capital markets. Looking ahead, we believe the convertibles market is poised for growth. We will likely see more convertible issuances, given a higher interest rate environment, tighter capital markets and a wall maturities, that is coming due in the next 2 to 3 years. Convertibles are a particularly suitable instrument in this context as they offer defensive income enhanced alternative to investing in the underlying common stock. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
5 Loka 20233min
Vishy Tirupattur: Corporate Credit Divided by Quality
Fundamentals for investment-grade credit remain resilient and steady, while below-grade credit continues to deteriorate. ----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about our views on corporate credit markets. It's Wednesday, October 4th at 10 a.m. in New York. With the second quarter earnings now in the rearview mirror, we look at how credit fundamentals have evolved and what that means for credit investors. Quality based divergence in credit fundamental performance continues to bear out, reinforcing our preference for higher quality within the credit universe. Investment grade credit fundamentals remain resilient. Overall, issuers have held up reasonably well despite moving past the peak in the strength of balance sheet metrics. While certain metrics have started to deteriorate, most notably interest coverage as a result of higher interest rates, leverage ratios have stayed well-contained despite the uptick in debt levels. We are calling for wider spreads in investment grade credit, as the market might be overly discounting the odds of a recession, and we had already priced for a smooth soft landing. While current spread levels do not leave much room for further compression, current yield levels remain attractive at multi year highs. These levels present both a source of attractive income and potential price upside as growth and inflation cool, particularly heading into a Fed pause and potential rate cutting cycle, which our economists expect will start in March 2024. While one could argue that with spreads at tight levels, the yield demand could simply shift to treasuries. However, with very low dollar prices on most investment grade bonds and the macro optimism around a soft landing, we think investment grade credit will remain well placed for some time to come. In-place fundamentals remain strong and thus far are not flashing signs of alarm to argue for long-duration buyers of credit to shift into treasuries. On the other end of the grade spectrum, in the below investment grade segment, fundamentals have continued to deteriorate. Earnings growth turned negative, coverage metrics fell, cash to debt ratios declined, and leverage rose. The weakness was widespread across sectors, with materials and consumer discretionary sectors seeing the largest year-over-year increase in leverage. Within our high yield fundamental sample, median interest coverage dropped for a third consecutive quarter, now more than a turn below its peak in 2022. The trend was similar for loans as well, while surging interest costs were the primary driver, weaker earnings were also at play. The concentration of "tail" cohorts is rising. In high yield, the vulnerable cohort, that is companies with low coverage and low cash debt ratios, reached 5% in size, which is record high post global financial crisis. In loans, the coverage tail inflected higher for the first time in two years. Clearly, quality based divergence continues to play out in credit fundamentals, which aligns with our recommendation to be defensive and stay invested in the higher quality segments of the credit markets. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
4 Loka 20233min
U.S. Consumer: Opportunity in Online Grocery
With online grocery shopping growing in popularity, artificial intelligence can improve the customer experience while increasing efficiency.----- Transcript -----Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's U.S. Internet Analyst. Simeon Gutman: And I'm Simeon Gutman, Hard lines, Broad Lines and Food Retail Analyst. Brian Nowak: On this special episode of Thoughts on the Market, we'll discuss the significant opportunities in online grocery. It's Tuesday, October 3rd at 10 a.m. in New York. Brian Nowak: Simeon, our work suggests that online grocery is the largest remaining category of offline spend, which makes it the biggest opportunity in e-commerce. When we talk about online grocery, do you think of it as pure dot-com? Do you think of it as omnichannel? How do you define online grocery and how do you think about the growth outlook for the industry the next few years? Simeon Gutman: To settle that debate we think of it as omnichannel. The online market includes both delivery and pickup, which we actually think is a 50/50 mix. The market today, we think, is about 11.5% penetrated. That equates to roughly $190 billion of online and pickup sales. It's growing low double digits and we think over time it reaches about the high teens by 2027. Brian Nowak: So 11% adoption now heading to teens penetration a few years from now. That's quite a bit below a lot of other categories in the United States. So let me ask a sort of obvious question. What new types of technologies or innovations have you seen in online grocery that you think are going to really drive faster, more durable adoption going forward? Simeon Gutman: It's likely in the micro and macro fulfillment. I mean, online grocery is complicated. There's a lot of SKUs to pick. There's labor involved. We're seeing better ways that grocers are able picking and packing the groceries. I think still getting it to the end user remains a challenge and that's what we're going to see probably evolve over the next, call it, decade. Brian Nowak: That's helpful. What are some of the other key debates in the online grocery space and what aspects do you think the market is missing or underappreciated right now? Simeon Gutman: I think two key debates are the path to profitability, and if online grocery can reach that profitability threshold and two whether an online only player will encroach on the traditional share and disrupt the market. As for the path to profitability, we think eventually we'll see it. We don't have a lot of examples because we don't think we're there with scale today. But over time we think these models will show some level of profitability. It may not be a fully online model. It'll still be a holistic omni channel model. And then the second piece is we do think there is going to be an encroachment from e-tail or e-commerce only players. The market's big. It's one piece of the market that online only hasn't conquered, but it's such a big TAM, we think everyone has their attention on it. What are some of the most significant advertising opportunities when it comes to online grocery Brian?Brian Nowak: To your point on profitability within online grocery, we think advertising is likely to be a key lever to drive profitability across the space. Historically, we have seen traditional grocers and retailers benefit from trade spend, advertising dollars spent essentially for NCAP placements, shelf space and really in-store marketing. As consumer wallets move online with an online grocery, we expect those dollars to shift toward the online players. And given the high incremental margin of advertising dollars compared to traditional grocery spend. We think that the advertising business is likely to be an important lever in online grocers, both traditional players moving online as well as e-commerce first players growing their business and their ability to build profitable long term ecommerce businesses. Now Simeon online grocery, to your point earlier, is an industry where the unit economics are quite tight and margins are thin. With that as a backdrop, what in your mind are the keys to driving long term durable profitability beyond advertising? Simeon Gutman: Two things. First scale and then second capability. In terms of scale, the more densely populated or the more densely penetrated a grocer can be in a market, the more money we think they can make. And we think the same is true with online grocery. You have to have a high market share in a concentrated place, and that's happening slowly. And some companies are stronger in certain markets than others, but that needs to happen more broadly. Second is the capabilities. And as I mentioned earlier, we're starting to see the emergence of newer technologies, macro fulfillment methodologies, meaning automation in a large scale, micro fulfillment, automation at the local level. And these type of technologies remove the human element, the labor element, from picking a relatively large basket of items and can save a significant amount of money. And eventually the last mile needs to be figured out as well, whether the customer picks it up in store or who knows, one day a self-driving car brings it to someone's house. And of course, Brian, Online grocery will likely experience the impact of A.I., how do you see the role of A.I in this space? Brian Nowak: We think artificial intelligence has the potential to create a better consumer experience with an online grocery and drive higher efficiency in the backend for the delivery companies as well. On the consumer front the capability for large language models and artificial intelligence to analyze more consumer data and essentially create what we think will be A.I powered personal shoppers with better suggestion, recommendation engines, recipe recommendations, auto replenish, auto reorder, we think is going to remove some of the friction that historically has held back online grocery adoption. On the back end, the use of artificial intelligence and large language models can be important in creating more effective driver routes for all the online grocery delivery companies, as well as ways to better manage inventory and supply in their logistics and fulfillment centers in order to operate more efficiently. So we do think artificial intelligence is going to be important to driving online grocery adoption on the front end and efficiency and profitability on the back end. Simeon, thanks so much for taking the time to talk. Simeon Gutman: Great speaking with you, Brian. Brian Nowak: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.
3 Loka 20236min
Mike Wilson: Has the U.S. Government Hit a Fiscal Wall?
Although Congress agreed on a short-term deal to avoid a shutdown, the increase in the deficit and lack of fiscal discipline may concern investors in the long run.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 2nd at 11 a.m. in New York. So let's get after it. This past weekend, Congress agreed to a last minute deal to keep the government open for the next six weeks. On one hand, avoiding a government shutdown is a net positive for the equity markets. However, on the other hand, the government is showing very little fiscal discipline will likely weigh on bond markets, which could then reverberate through stocks. This past August, I wrote a note and recorded a podcast asking if the U.S government may have hit a fiscal wall. One of the biggest surprises this year for investors has been the monumental increase in the fiscal deficit. More specifically, over the past 12 months, the fiscal deficit has increased by $1.3 trillion. This has supported better economic growth and may have kept the U.S. economy from entering a recession that many thought was unavoidable earlier this year. But now the piper must be paid. With the U.S. Treasury expected to issue close to $2 trillion in new supply in the second half of the year, the bond market has taken notice. While front end interest rates have been generally stable over the past several months on the expectation the Fed is very close to ending its rate hikes, the longer end of the Treasury market continues to trade very poorly, with ten year yields reaching 4.7%. With inflation expectations relatively stable and economic growth showing signs of slowing, we think this move in ten year yields is directly related to an earlier question. Has the US government pushed a limit of its ability to spend without proper long term fiscal discipline and funding in place? I think it's a reasonable question to ask even though we all know the Fed will likely provide the money necessary for the government to meet its obligations, especially in the short term. But now there is some growing doubt on the sustainability of such programs. The bond term premium has been suppressed over the past decade through quantitative easing and insatiable demand from foreigners looking to store their savings in a reliable place. But with the Fed no longer doing QE and even shrinking its balance sheet, banks unable to step up and buy and foreigners starting to diversify away from the US dollar, it's unclear who will be the natural buyer of this significant new supply. Lack of funding is a risk that markets have not had to think about when budget deficits get a bit out of control. In fact, the last time this happened was 1994, when ten year Treasury yields increased to 8%. The result was one of the biggest belt tightening exercises enacted in a bipartisan manner. Congress really had no choice at that time but to acquiesce to the demands of the bond markets. Could we be looking at a similar response this time? Like many Americans and investors, I have my doubts any real fiscal discipline will be enacted proactively. This just means the bond market may have to push back even harder to get legislators attention. Of course, that would not be good for already elevated equity valuations. The alternative is that Congress gets ahead of it and cuts spending, raises taxes or both, which would arguably be bad for growth. Bottom line, this conflict between markets and policy is nothing new, but this time it's centered around fiscal rather than monetary policy. More importantly, both potential outcomes, higher rates or smaller budget deficits, are likely bad news for stocks in the short term. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.
2 Loka 20233min
U.S. Economy: What AI Means for People Doing Multiple Jobs
The number of U.S. workers with multiple income streams is increasing steadily, with earnings of $200 billion today poised to double by 2030. Generative AI could help these “multi-earners” hold down their many jobs.----- Transcript -----Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Ellen Zentner: And I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Ed Stanley: And on this special episode of Thoughts on the Market, we'll discuss the impact of A.I. on the multi earning trend we've been observing over the last year. It's Friday, September 29th at 3 p.m. in London. Ellen Zentner: And 10 a.m. in New York. Ed Stanley: You'll remember that the pandemic created the conditions for many people to start pursuing multiple income streams, and post-COVID this need has shifted to an opportunity. And little over a year ago, we first wrote about the rise of multi earners, a large and growing class of workers who, we argued, whose marginal hour was better spent multi-earning than staying in a low paying traditional corporate role, for example. And not surprisingly, Gen Z, a group our economist team have studied in detail, is leading this paradigm shift, and that is clearly underway in our latest survey. Ellen, before we get into some of the current specifics on the fast moving multi-earner and A.I. Trends, can you set the stage for us by giving us a sense of where the US labor market is right now and how things have evolved since the great resignation that we heard so much about during COVID? Ellen Zentner: Sure Ed. Participation in the workforce dropped like a rock around COVID and government subsidies helped folks take time away, and particularly those that work in high risk areas of services where face to face contact is a necessary work requirement. Now, at the same time, the percentage of employees that shifted to some amount of work from home arrangements soared from about 15% to over 50%, and it's remained pretty sticky even as COVID has moved further into the rearview mirror. So while prime age labor force participation has fully recovered and continues to climb, the share of workers with some amount of work from home has remained elevated, as well as those that the Bureau of Labor Statistics here in the US has identified as holding multiple part time jobs. So it turns out it skews toward younger workers. In other words, Generation Z, as you noted, which is a growing share of the prime age workforce. And for many workers, COVID was a wake up call, a call to action, if you will, that multi-earning might better balance a sense of freedom and flexibility while still earning a living wage. Ed Stanley: To expand our lens even more in order to understand the economic backdrop of multi-earning, can you give us a quick overview of the rise of the so-called worker economy over the last two decades? Ellen Zentner: So here's a brief history lesson. Wage growth, when adjusted for inflation, has been falling for decades in the U.S. and is a reflection of factors such as waning presence of unions, the rise of mega companies and the like that reduced worker bargaining power over time. Wage growth should have kept up with gains in productivity, and it just didn't. And as a result, the labor share of corporate profits has been falling. COVID created the labor scarcity needed to reverse that secular decline in labor income by raising bargaining power. In a sense, it galvanized the demand for higher wages that we think is durable. Now Ed, as you mentioned, you first started publishing on the Multi-Earner Trend a year ago, and this trend has been developing by leaps and bounds, it seems, especially when you overlay the fast and furious development of generative A.I. So can you tell us what you're observing and how your thesis is evolving? Ed Stanley: Yeah. So there are three ways that we keep track of to triangulate how this thesis is evolving. The first is official data, and you touched on this. The BLS shows a modest 1 in 20 multi-earners as a portion of the US population, for example, and growing pro-cyclically. So that is one data set we look at. The second is Google Trends. So it's a less well-captured metric in official data, but we can see less about how many people are doing it and more about the growth rate, which we can see is about 18% compound and actually growing counter cyclically. When life gets more challenging from a macro unemployment perspective, people seem to turn to these earnings streams, which inherently make sense. And then the third is to look at our Alphawise survey, the second of which we have that just came out, which shows multi-earning growing 8% year on year and as much as over 15% for Gen Z, which we talked about. So in essence, we don't rely on one dataset to estimate the size or growth of the market. The real addition this year is around generative A.I., where we showed, for those people using A.I. to enhance their multi earning, they are earning as much as 21% more than those who are not using generative A.I. tools. Ellen Zentner: Okay. So let's get into some of the key debates. You've had some investor feedback to this thesis. So what do you think are some of the key debates on multi earning in the era of generative A.I. that investors should pay attention to? Ed Stanley: I think there are two that remain the most unanswered, so to speak. The first one, I think the biggest issue is it can't be proven or disproven in terms of what happens during a recession. And given that the gig-working multi-earning economy is a relatively new phenomenon, the only recession we have data for was, as you say, distorted by stimulus checks, furlough schemes and other things which forced or allowed people to take much more risk than they otherwise would have. So a proper hard landing recession would certainly challenge this multi-earning thesis, and that remains to be seen. On the second point, I think it's actually a more positive one, the goalposts keep changing as it relates to these models. The speed and capability of new generative A.I. models, and particularly multimodal ones where you can deal with text and images, for example, all in one place is moving at pace still. And that is going to make content creation, e-commerce, gaming, web hosting much easier to scale and monetize for the individual. So if anything, we think we're underestimating the impact of A.I. will have on the multi earning economy over the long run. But those are the two debates that have captivated most investors. Ellen Zentner: So clearly there are unknowns around these key debates, but you have an estimate of the current market size of the income generated by individuals through multi earning platforms. Can you give us an idea of that? And given the speed at which A.I. is developing, what's your outlook for the next 3 to 5 years? Ed Stanley: So our base case currently is about $200 billion and that increases to $400 billion in 2030, of which we expect a 20% uplift from generative A.I.'s productivity gains. So about $83 billion of that $400 billion number. And that figure came from our survey, which I've already mentioned in terms of earning uplift with those using it versus those that aren't. And just to put that figure in context, that is only 4% of the wider gig economy market values, so really quite modest, actually, in view of the uncertainties that we have. And we actually expect these figures to get beaten in time, but it's always better to be more conservative early on. Ellen Zentner: Okay so, you know, last one from me, we haven't talked about regionally what's happening. So do you think there are any notable regional differences when you look at the intersection of multi-earning and A.I.? Ed Stanley: Yes, there are certainly that come out of our Alphawise survey. The highest earnings in dollar terms are in the US, the highest growth is in Europe but from a lower base. And then the one that jumped out at us and several of the investors we've spoken to is the higher than expected level of multi earning in India, which is new to our survey and particularly in the invest-to-earn category. And this is skewed by the fact that it was largely a survey for urban India, but it's also mirrored by a survey we did earlier in the year for Saudi Arabia, which showed much higher multi-earning engagement than we had expected. So that emerging market element has certainly taken us and some of our investors by surprise. But Ellen, turning back to you and to the US, what portion of the total US workforce are multi-earners and how do you see that evolving over time? Ellen Zentner: Multiple job holders has always been a feature of the labor market, but it's also always skewed towards younger workers and we have an incredibly young workforce today. So Gens Y and Z are moving through their prime working years in their greatest numbers as we speak, and the official data show that about 5% of the population hold multiple jobs. But, you've mentioned our surveys, our survey suggests that's an undercount and point to something closer to 8 to 10% of the workforce that are multi-earning. Our surveys also capture the skew toward younger workers where the labor force is growing more rapidly. So overall we find that multi-earning is growing by about 8% per year and that jumps to 15% per year if you isolate it to low earners. And the bottom line for me is that the stars align for this secular trend. Our demographic work has shown that the U.S. is an increasingly younger demographic and it really sets the U.S. apart on the global stage. Ed Stanley: Well, Ellen, thanks for taking the time to talk. Ellen Zentner: Great speaking with you, Ed. Ed Stanley: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.
29 Syys 20239min
