Are here in bloomberg headquarters in new york. Carol stocks up, but us business is having a crisis of confidence and the result could be a recession. Jason the fourth democratic president ial debate but the first since the impeachment inquiry. We will break it down. Carol the online trading commissions are now a thing of the past, but big brokers have a plan to make up that money. Jason here is editor joel weber on what to look for in this double issue. Joel the cover story is all about teslas autopilot which may be you have heard about it because it is a advanced Cruise Control that might put tesla on a path towards having self driving vehicles. Carol big ethical questions about how to get there, because you will probably lose lives along the way. Joel thats right. Tesla has a rough draft of something it things will become the future. Its on the road right now. When you are driving next to a tesla, the driver could be an autopilot pilot in already. Because of that there has been death. The deaths dont look like normal deaths. But there is a bigger ethical question which maybe it is all worth it. Jason moving to china, in the headlines, who is selling what to whom, and you have a resurgent or emergent may be name competing with nike. Joel thats right. You maybe havent heard of it in the west. One person who has heard of it is clay thompson, with the golden state warriors, who signed two years ago a huge deal with this company. It is so interesting. We can talk about trade war and the nba being the most recent one. One of the things we were talking about is what is a different way we can talk about china and the trade war and the nba . Because hereame up is a company that is uniquely chinese, only been around since 1991. Cannot Business Scale i nternally within china and see it grow internationally . Carol now china really wants to present brands to the world. Joel thats right. This is a homespun brand and doesnt have the same history nike or adidas has. How can you create something from the ground up . Carol what about austin car . You keep sending him to cold places. Joel he is our arctic correspondent. [laughter] joel he found highspeed internet in alaska. Via the northwest passage. Not everything is as it seems. It turns out the real entrepreneur and driving force behind the project was good at forging signatures to the tune of 1 billion in contracts. Carol a lot of signatures forged. Jason yes, this is something that is moving ahead, a going concern even though the founder is in jail. Joel she is doing time, but turns out the idea was good and now people are able to get highspeed internet in a place they would not have had it. Carol lets get to d. C. For a breakdown of the president ial debate in ohio. Teague is back with is here to help us understand everything that is going on. Great to have you back. A big week for the democrats and notably the first of the democratic president ial debates where the i word took center stage. What did we hear . Ryan the first part of the debate was an inkind contribution to the impeachment effort. Everyone onstage agree donald trump should be impeached. It was interesting that they had slightly different takes. Some of them talk ukraine. Bernie sanders wrought up a mall emolument. They all have strong feelings. Tom steyer and elizabeth warren, people pushing for it the longest, should have benefited more but did not appear to. Carol they spent a lot of time talking about impeachment. I also feel it is a big shift from september. Everyone is going after elizabeth warren. Ryan if you did not think she was the front runner, according to the polls, you definitely thought she was in terms of how how many people how many people threw haymakers at her. They came out swinging against her proposals, questioned her directly. She got into a back and forth biden, andieg, others. There were people attacking biden and even defending biden. Cory booker saying his son had done nothing wrong. Jason so, ryan, what do we think happens next in terms of the winnowing of the field or at least clarity about what the front pack looks like . Ryan you know, this race will essentially be frozen for a little while, while the impeachment thing plays out. It is sucking all of the oxygen out of the room. It is hard for the candidates to unveil anything new or get new policy or whatever. That could benefit those of them who like going door to door and doing the grassroots stuff in states like iowa where that helps, but the National Conversation now is completely distracted. Jason coming up, it could be the worst thing the u. S. Economy have to fear is fear itself. Something we have heard about from the likes of the biggest bank ceos. Carol we will look at the risks of a recession that is like no other. And, if you thought the bank of japan pulled out all of the stops on stimulus, it is taking a stab at pushing up on business yields. Thats right. Jason this is Bloomberg Businessweek. Jason welcome back to Bloomberg Businessweek. I am jason kelly. Carol join us every day on the radio at 2 00 wall street time. You can catch up on our daily show by checking out our podcast and you can find us on bloomberg. Com. Jason you can find us online at businessweek. Com and the mobile app. Carol to the economics section, the question of recession. When will it arrive and how bad will it be . Jason there are signs this long expansion may be starting to lose steam. Economists are not seeing the fundamental indicators that predict the downturn. Carol instead, it seems to be all about sentiment. We spoke to our editor about what makes this different. Usually, from history, we know they are triggered by a spike in inflation, followed spike in Interest Rates as the fed intervenes, and that causes an unwinding of either economic successes or financial excesses. This time inflation is low, the fed is cutting, and we dont see any bubbles. Stock prices dont seem to be out of sync considering rates are still low. So what is going on . Why is there so much talk about recession . As we joked around this week, we said it is geopolitics, stupid. It is an external shock that is selfinduced because we started this trade war, but it is causing uncertainty that businesses are not investing, not spending on new capacity because they are afraid supply chains will start unwinding. Carol and, lower Interest Rates by the federal reserve. They are already low, but lowering them will not necessarily give businesses confidence. Christina it doesnt change the outlook. It weaken the dollar but it doesnt materially change what we call the fog of the trade war. Jason we talked so much about the strength of the consumer amid all of this. There is this notion that, at some point, businesses curtail spending, they curtail hiring. People start to get more worried about their jobs or promotions or bonuses or raises. But, we dont see any signs of that yet. How is the consumer looking . Christina the consumer is feeling good, because they were late to harvest the fruits of this tenure expansion. 10year expansion. Companies and investors felt it first. Wage growth has been picking up in the recent year. Hiring, even though there has been a little bit of wobble, it been a high, sustained pace. We dont see yet the consumer has lost their nerve. That is going to be one of the things people are looking at. Hiring and how companies because the feeling is that, at some point, the trade war may cause companies to start dialing back on hiring. Carol we have more on sizing up the recession risk. What are we seeing . The chart that shows us where we stand, looking at the Bloomberg Economics recession indicator. It shows the probability of a downturn in the next 12 months. Relative to last year, we are slightly elevated, but if we take it back and look at a historical basis, specifically the Great Recession of 2007, the odds are lower. What this tells us, risks may be higher, but at the end of the day, it is not time to fully panic. Jason it is stark when you look back at the previous recessions, the spike was more pronounced leading into it. Thank you so much. When you are worried about unconventional concession, you wonder if conventional Monetary Policy can do anything to stop it. Carol the bank of japan has tried everything to get their economy moving and they are not done tinkering. We hear from editor christina bad cristina lind blad. It is desperate innovation, because it is like by necessity they are leading the world into this new area and trying to basically nudge up growth. This is a country that brought us negative Interest Rates and qe, quantitative easing. Now they are doing something which could be a possible. Be impossible. Carol dont tell us that yet. Tell us how long japan has been and why they are the negative poster rate child. They have been doing this a long time. Cristina they tried sending rates negative. When they did not succeed, they did qe in 2001. Way ahead of everybody else. Jason remind us, also, because it is important, the economic backdrop for japan, because when we think back, you go back to the early 1990s, late 1980s, this was an economic behemoth americans were terrified of in many ways. The intervening couple decades have been ugly had been ugly economically. Cristina there was a big property bubble, asset bubble, and then deflation set in. They have been fighting deflation. Not just deflation, but the country is aging rapidly. Growth has downshifted in a permanent way. They have been trying to kind of sort of juice the economy by any means possible and they have succeeded. They used to be this pattern of falling into recession every other year. This latest attempt, basically, is designed to attack a problem that is basically twofold. One, it is confidence, confidence of consumer and business. The issue is yields, on longterm bonds, have fallen to a level where it basically the message that it gives to the markets, to consumers, is that, out of the longterm, we still dont see any inflation, we dont see much growth, so bank of japan wants to nudge up longterm yields also for another reason. There are 40 million pensioners in japan. That number is only going to keep growing. Those people are being utilized in their savings by the low yields. The question is, how can you nudge up yields on longterm maturities while, at the same time, telling the markets that you are in a stimulus position and want to keep shortterm rates low . So, it is carol it is an experiment. Cristina it is, but some people believe it cannot be done, because the thing is, the boj has said they are willing to even stop buying certain kinds of bonds with maturity of 20 years and over. The feeling as though, when they do that, other actors may step into the market to buy. Then, basically, they will be foiling their attempts to have prices go down and yields go up. Carol the concern is that by keeping longterm rates so low, the signal it sends to the world at large and the folks in their economy is that the outlook is not great, so they tend to be savers rather than spenders, which you cant jumpstart the economy then. Cristina if it is flat on its back for that long, you got to think is my retirement safe . I shouldnt be spending. Carol everybody is watching. This low rate or negative rates world in places they never thought would happen. U. S. Has quite not gotten there yet. But how do we come but we wonder how we come out of this ti negative r lorates and what is the outcome . We are all watching japan. Cristina we all used to be afraid of japan as a competitor. Now, we are afraid we will become japan. Jason coming up, trading commissions are dead, but etrad ers will live on. Carol diversity and investment banking, there is an algorithm for that. Jason this is Bloomberg Businessweek. Jason welcome back to Bloomberg Businessweek. I am jason kelly. Carol and im carol massar. You can listen to us on the radio, sirius xm channel 119 and a. M. 1130 in new york, 1061 in boston, washington, dc. Jason and in london, on dab digital, and the Bloomberg Business app. A big shakeup in the world of online stock trading. Commissions are at the largest brokerage houses, going to zero. Carol that is a big hit to revenue, but these companies have other ways to make money. Heres mike regan. Mike it has been trending towards zero. When you think back to the 70s it cost 200 to trade a stock. It is mindboggling today. Schwab came in there was regulation change in the 1970s which ended this fixed price commissions and allowed brokerages to set their own commissions. Schwab said i am going to cut mine. I will cut that she said i will cut mine to 70, and the discount brokerage era was born. Computers took over in the 90s, and it chiseled away at the fees. It was like 13 to trade on schwab in 2005. Less than five dollars recently. New startups were coming in. Robin hood allowed investors to trade for free. Some brokerages started allowing certain etfs to trade for free, so it was clear this pressure was building. To me, the interesting thing, if you are a customer of one of these firms, the important thing to ask is, how are they making money if they are not charging me a commission . That is what we get in to in the story. Carol we definitely saw stock prices go down, so we thought how are they making money . , they have other ways. Mike dont worry about them. The sort of line we use in the story, if you dont know how company is making money, chances are you are the product. It is what is true of facebook and google, Free Services but it is you, your eyeballs, and your personal data that is valuable to the companies. For schwab, for one of the most and for all of the discount brokerages one of the most important ways they make money is on the cash you currently do not have invested. Jason they make money with your money. Mike they make money with your spare money, the dry powder as they call it on wall street. Schwab has 3. 7 trillion in client assets on its platform. As of august, that is. 265 billion is cash. It is not invested in the markets. A small chunk of a huge pie that allows schwab to invest it out and make money off of that idle cash. Interestdo pay clients on that cash, but it is relatively low. As much as half of 1 . 5 on big balances and 0. 1 . Yields are low. You can make better return on your cash elsewhere in money market funds, Traditional Bank deposit accounts, but it is not convenient for a trader. People will keep some amount of cash in there in case they see a stocking want to buy. Schwab is happy to take it and reinvest it. And, there is other ways they make money. Carol they make loans to folks that want to do traits, too . Is that part of mike marginal lending. If you want to lever up, there is Services Like that. You want to short a stock, they will loan you the securities and charge you a percentage on that. One of the interesting ways these Companies Make money and it has been controversial in the industry, it is called payment for order flow. If you or i place orders to buy and sell certain stocks, there are Companies Like citadel, virtue financial, electronic Market Makers call them a few years ago, they would be referred to as highfrequency traders. They will buy up to order flow from these companies and match it internally. They dont even take it to the stock market. Say, jason, you want to buy a for 10, and carol is selling it for 9. 99, and they will internalize that and make a cent per share. If you do it enough, the pennies add up. Jason that is one example of the evolving relationship between technology and finance. Carol jason, there is another fascinating tech story this week. As bangs try to do better on dni, they are turning to ai. Erik schatzker joined us to explain. Erik it is about time someone brought Artificial Intelligence to the recruiting process, because this industry, for all of its efforts to become more diverse and inclusive, is still dominated by white men who are typically elite college educated. That is going to need to change. It needs to not just because of changing times, but because these firms, like so many other companies, recognize the bigger your talent pool, the better the quality of your recruiting, and, ultimately, the better your employees. We are talking of investment bankers, mergers and acquisitions, restructuring. Companies worldwide applies to the same logic, as i say, it applies to Companies Worldwide applies to wall street. The challenge is volume. It is difficult to fan out across hundreds of universities in the United States and open up the recruiting process to the degree that it can capture everybody, unless you put technology to work. Thats what this tool is designed to do. It is a screening process that surfaces candidates, regardless of skin color, background, or of skin color, background, or any other trait that might sway a campus recruiter. Carol tell us about the algorithm. You said it takes out any kind of color, ethnic background, sex. Erik unconscious bias is the word used in the recruiting industry, because, if you sit down with someone, you might find that person appealing for reasons other than qualifications. That person may sound like you. That person may enjoy some of the things you enjoy. That person may have played lacrosse. If you played lacrosse, you might be more inclined to want to hire that person, work with that person, but that person may not have all of the right attributes to become a topperforming banker. He or she might be appealing to you as a human being. And, that is not a good way to recruit. So, you bring Artificial Intelligence into the process by designing a model. The model is built using the characteristics of the topperforming employees at each firm, having candidates fill out comprehensive profiles, and then running the profiles against the models. That is the algorithm in action. Nd it spits out a score the higher the score, the better the fit the candidate is for that individual firm. The models vary by firm. Not every firm is looking for the same things or values the same things. And, not all bankers, at one firm, do the same things as bankers at another firm. You need to customize it to make it effective. Jason tesla is on the cover and it is all about whether regulators should be steering their effort to test Autonomous Cars. Carol plus, bringing highspeed internet to the arctic sounds like