Global Finance: View From the Top

there's a lot of risks out there I guess there are also a lot of opportunities for the financial sector um Larry let me start off with you what are your top three risks that would change your business and your industry oh I would say probably the biggest risk that's facing the financial services asset management business is the move from United States from multilateralism to unilateralism I've been traveling around the world a lot that's probably the number one issue I'm hearing from our clients worldwide today CEOs across the board and I do believe the outcome could and I want to underscore could not will could lead to a deep desire to create another payment system I've heard that sovereign wealth funds from CEOs and major large corporations large pension funds Europe Asia we build that foundation of multilateralism and we were the ultimate globalist and we are changing those that that design and we're trained in the design and forcibly on many organizations companies countries worldwide and the reason why this is a particularly real big potential issue is we are budgeting to have a trillion dollar deficit for the next number of years 40% of our deficits today our domestic are internationally financed and if there is a movement to another payment system as another alternative store of wealth it could lead to real real dollar crisis not the dollar crisis that we're seeing now for the emerging markets that would take 20 years 30 years no I I think that's conventional wisdom just like conventional wisdom about how fast technology changes they're always wrong if there's a will and the will is law it's less than 10 and it doesn't happen just like the financial crisis that was being discussed before we saw that the season 2 the financial crisis it happens incrementally until it can't sustain and there could be moments where you're seeing some organizations looking for other than dollar based assets and that could lead to much higher interest rates here which creates much greater issues worldwide if we had that that would be a big problem for Blackrock and other for organizations ot gentium do you worry about first of all trade tensions lasting for 20 years and again the impact actually being you know challenging I guess the US has a reserve currency yeah okay broadly agree with Larry I think but if you look at the financial system it's much more robust than when we went into the last crisis I mean balance sheets have been fixed knishes has been one of the last ones to fix its balance sheet and so what work is done the issue with multilateralism I I talk to a lot of clients and they say exactly the same thing is that nobody knows what the alternative is and I'm not gonna make a political statement but what we've seen in Britain with breaks it is that the vo Bergkamp has been unable to come up with an alternative plan to checkers and that's a bit what we see what is the alternative to an orderly multilateral world nobody knows and that that's an that uncertainty makes everybody feel quite uncomfortable and it's a paradox that the economy is so strong a four point two percent GDP go from the u.s. three point nine seven employments incredible and very hard to reconcile with the kind of nervousness but you can feel everywhere and it is really what political uncertainty that makes everybody uncomfortable and if I can add my honor is that a trigger event could make things move very quickly what's difficult to predict is what that event would be and when it that'd be it could be the midterms it could be elections in May 19 it could be a heartbreak city in option 19 but you can see where there's a series of events potentially but could disturb you - resistance David you start on Monday as chief executive Cossacks is trade gonna be one of your you know on your list to worry is it going to be number four number five or is it gonna be up top you know trade is trade would not be on my top you know one two or three things that you know that I'm worried about it's certainly certainly an issue that's affecting investors and affecting the way you know we're all thinking about what's going on in the world and my own view is it's something that's gonna play out over a period of time it's not gonna be a short-term thing what we're gonna get you know a clear packaged up with a bow solution in the near term so it's gonna be something we're gonna live within markets it will affect sentiment it'll affect market behavior and it will Evan flow as we go through the process you know this change in kind of a landscape affected by by some of the things that we've just been talking about you know I I spend a lot of time you know thinking about things that can that can really go wrong and so I have to start because I think and I heard from the back I heard Mary you know just just mentioned cyber you're the number one thing I think about what can go wrong and how can it cause derivative problems for our business is cyber and I just look at you know our own experience the focus the effort that we have around it yet all that's going on and all the pressures and the challenges and it's it's a it's a big issue that probably doesn't get as much attention as it deserves even though I'd say gets a lot of attention but I by getting as much attention as it deserves I don't think that that people are really internalizing you know what the first second and third derivative impact of something very seriously serious occurring you know from a cyber perspective but cyber how you know do you all have to work together do you need to share information to make sure that actually cyber attacks don't impact large financial institutions as a whole I think the bigger issues I think the financial institutions are probably institutions that have more yes I'm talking bra I was a broader I actually believe they're gonna be cyber attacks that's going to be probably organizations that have under spent on technology and my first candidates would be state governments you know and who possess Social Security numbers and so to me the the problem could be coming in in organizations that are not in focus the financial sector has been under you know obviously such scrutiny because of the financial crisis that I would say it's one of the sectors that is doing as much as it can I'm not trying to suggest it they're not there may not be a tack or and a real impact but the worry has to be in these other industries a lot of personal informations a lot of corporation does a cyberattack does it change the markets good I mean could it be a catalyst of a market correction markets one of the reasons one of the reasons markets are running and this is always correlated to markets both the positive and negative is confidence you know confidence had confidence and sentiment has a lot to do with markets and if you was just saying you know at the moment it is hard there's a lot going on in the world and at the moment markets don't really care that doesn't mean they don't react at the margin but they've been less sensitive to some of the things that might have created sentiment shifts historically than they are today but I would argue right now despite the big run in the equity markets equities are cheaper today than they were in January earnings have been so powerful and it appeared to be even more powerful that we witness about a to multiple point decrease in Pease so the market is actually now despite the rally the market is actually pricing in a little more risk yes I agree but compared to one was tell people you're in q1 January but as opposed it's a minor II where I was going with it as opposed to just a view on whether the market is cheap or expensive now cyber is an example of something that can change people's sentiment and change behavior in a way that can have a sec third derivative effect on confidence and how people deploy capital and therefore how it affects markets and so it's only one example we come up with lots of other examples another example that certainly has to be on people's minds is that interest rates can go up higher here in the United States and everybody expects at the moment the moment people generally expect this continuation of the unwind and monetary policy is gonna go very slowly and very steadily history would tell you that's generally not what happens or at this kind of Goldilocks moment where it all feels pretty good from an inflation perspective kind of the trajectory on the economic trajectory but that could change and if rates started going up much faster than everyone expected that would change people's sentiment would change the thought process around markets and where they wanted to point capital and so I'm making the point that broadly speaking cyber is an example of how sentiment and my fear is that rates going up because it's our central bank rates are going up because there's a lack of demand and they can't control the riser that's that and that's a seven-inch of the data but is it time for rates to go up I mean we've been in this for ten years it's time to start yes what kind of yes but I agree with what they've said but my view is that we've been at the end of this very long cycle there is a lot of nervousness I agree with you that market is strong but this if you think sentiment the people people don't feel as good as they should prefer with a market at that level there is about nervousness and I'm worried but it's what I call trigger event whether it's a major inversion of a yield curve or the pace of raising rates that is faster than expected or any event of that nature a very bad result on May 19 but puts again value in play in Europe you know you have a number of scenarios but could surprise people change sentiment and I just think that's a very vulnerable point in the in the cycle was global markets are actually down it's just the US markets that are that are really up rightfully so that an end to if you look at the breadth of the equity markets it is not breadth is really weak so that's another reason why confidences not that strong where would you see a correction coming from would it come from China would it come from you know sell-off in emerging markets like we saw over the summer or would it be something else I would argue the market is self-correcting every day by having Pease modestly go down because earnings charge up and market to in most cases is down a little bit you're actually seeing a corrective mechanism despite higher rates because the power of our corporate earnings the things that I worry about are things are not being discussed momentarily I mean if China does its reforms and I have to pivot the China if China actually does the reforms that President Xi and his government talked about six years ago October 1st which they haven't that haven't done what reforms mean for me is consolidation of industries consolidation industries means for me less excess capacity LSX capacity means higher prices so the same time we're putting on tariffs if they actually do and that's gonna take years to do anyway but if they actually do these reforms that they talked about and what I think our government is pressuring them do they do the reforms you are going to see China becoming not an exporter of deflation which they have been they can become an exporter of inflation at the same time we have 3.9 unemployment we have beginnings of rising wages could we go from a benign environment of 2% or less inflation to one day waking up in 2020 you know this is not the next six months problem 2020 2021 a four or five percent inflation rate and that I don't think is in the market and nobody talks about it don't trade easy don't forget the economy is very flexible and very dynamic I was talking to a client recently who was manufacturing in the u.s. in the Philippines and he's importing so as a your tariff on his export from China well it's just not diverted to the Philippines which has the most favored nation status in the US and exposed to the u.s. dairy-free so what you're going to see is a lot of reorganization of trade flows but not a major final impact and that's why I don't worry so much about trade when I was in China like you recently when you ask people what's going on settlement is negative I saw 20 clients every one of them said settlement is negative but it's I said all the trade said no it's these are domestic reasons linked to the fact that the government and the state play a huge role in the decision-making in the economy and from number of factors of fight the anti-corruption Drive and also address meant in the salaries of civil servants things have been going more slowly and we're going for this adjustment process which has slowed down investment and decision making but there's nothing fundamentally wrong in the economy and they don't see trade in spite of all the noise around that they don't see trade as a huge fundamental issue for America butBut 2020 could be also crunch point for the US economy we're late cycle the tax cuts are nearing an end is 2020 the witching you know year if you're if you're talking purely about the US economy you know I'm a flowery you know I think that some of the things that we're talking about just for the pure US economy perspective the chances of something happening in the next 12 months to the next 20 you know 18 months low not zero whoa you know fifteen percent 20 percent as you get out to 24 months I think the chances go up materially you know I don't know what materials materially fifty to sixty percent it's definitely more so you know where are we in the cycle I'm not good at I'm not going to call it a cycle but you know we're running through a process and their variety of pressures which we build and you know at some point one of those pressures will pop up in some way and the cycle will feel different here in the US and you know how will banks and actually markets change in the environment when when you know hate hikes are made by central banks so when we have a normalization will it mean that actually we have good volatility it will easier to make money will you have to rearrange things around well fundamentally I mean we've been talking about this for years you know I've always been an advocate of normalization because I think that ultimately this is all about the price of risk and you know capitalist market economy the price of which basically move freely and found its own equilibrium so I've always been a nervous around the inflation of the balance sheets of the central banks and also variability to shrink those balance sheets in an orderly manner you know execution we know in everything we do is difficult but actually it's a huge task and you can see the ECB you can see struggling with with that and the risk of miscalculation there is quite material so net net yes it's good for banks if you normalize is the risk is that it will require close to perfect execution to have no unintended negative consequences but net net yes it's good it's gonna lead to more rational asset pricing you need more rational decision making because take Switzerland we run with negative interest rates so maybe to make everybody smile but in in Switzerland the Swiss have traditionally always paid back taxes early okay so now you get how can I say an incentive not to pay early because the local governments deposit proceeds in the bank were very tax negatively with a negative interest rate so they want you for the first time in the history of sweeten they're always wish to pay late not early for taxes you're functioning in a very kind of counterintuitive environment and the sooner we get out of that a bit does anybody worry about liquidity on the markets or is it was it a thing of the past I I think one of the places where we have where things will appear differently than they've looked sterli some people have a tendency to look through the rearview mirror there have been significant changes in market structure over the last 10 years and those are generally untested in real significant stress and so I think with those changes in market structure there is real risk that in a period of real stress people will be surprised by the lack of liquidity that exists in certain products or certain segments or certain you know certain market environments and I think that's always something that you have to you have to worry about you have to think about anger you know and I I look at you know the evolution of different products I look at the evolution of market structure more going through machines and you know I think about the fact that with real stress they're gonna be different outputs from that and you know one of the outputs might be people are surprised by where liquidity is and isn't at those points in time Larry I agree with David the one of the consequences of reform and regulation was restricting balance sheets of the intermediaries and the markets had to evolve over the last 10 years to having less balance sheet availability those balance sheets were buffers during times of stress and and we have witnessed periods of time in the last five years where you've seen no shifts up or down with the lack of market liquidity but I would say in the countered that as balance sheets have been reduced the reliance on capital market at capital market activities has benefited the world's corporations individuals they've had access to capital whether it's debt or equity and so the reliance on capital markets is greater than ever before that is a good thing but do we have the proper oversight today to making sure of it because the world is dependent on capital markets much more than they were 10 years ago as countries developed from a developing country to a developed country their reliance on the capital markets becomes even more apparent and that's what now China is trying to do and try to expand their capital markets and so yes we are we've changed the nature in which how financing is being done and it's in markets that doesn't have the foundation of I would say the the buffers and so we're gonna have more probably interred day or into you know volatility I don't know if that's bad but as investors you have to expect that means it's a very interesting observation for me what's happened in that world that they describe is when the penalty for a country for being poorly managed is much higher emerging economies have to be well managed people often ask me about emerging not emerging economies I know there's only two types of economies were well-managed ones and we're polling management's well-managed economies are safe if they happen to be emerging so be it but then poorly managed economies are unsafe and so be so you have to have a balanced budget can't run budget deficits you have to have a reasonable current account balance you have to have reasonable FX reserves and you have to have a reasonable debt to GDP ratio and that was from France or for Indonesia you know and the markets fan react based on what you look like and if you're vulnerable while you're attacked and if you're not attached so so I never really worried about emerging market crises the emerging markets that are well-managed are fine and that's that's all there is to it but overall I mean not least for that reason because actually you'll see even more and more countries in the well manage it so the biggest issue I think in fronting all of us today you know I write quite a bit about long-term ism yeah that's getting really hard because more and more governments are focusing on short term populism in every country is forcing more short term behaviors I mean I've had dozens of conversations with the heads of state this week and that is my number one message if you can't if you're entirely focused on the noise of the moment and you're responding to that how do you expect any long-term investor to invest in your it's just impossible and totally totally I mean it yes I don't want to talk about which countries but yeah that that is becoming the bigger and bigger issue and we're all living in a world now where social media not only is impacting companies and how we operate but it is certainly impacting governments and how they perform and I actually believe companies are despite you know these a lot of companies that haven't done a good job and that companies have proven to be more adept at navigating around social media despite there's been some great failures countries and governments are having a harder time adapting David how will tech change the financial industry so it's a I it's FinTech it's big data that's a big question we could spend an hour talking about really up to its you know look in two minutes you know our business is digitizing like so many others lots of processes and functions that were analog and we're a person-to-person have you know already digitized but the process you know will continue I look at our trading businesses I think of our trading businesses really flowing into two buckets they'll continue to be some bespoke analog risk intermediation big complicated things but a lot of our clients are coming to us and they want execution highest quality lowest cost and so those are processing platforms and those are platforms where you have the best product platform best system that's delivery that's a very different business than fundamentally you know what finance was you know twenty years ago I think that when you look at businesses that are more advisory in nature advice is always something that's going to be highly valuable but data and AI and learning creates different edge or different advantages in terms of how you connect real intellectual capital with information and you better have different delivery platforms to make sure that you're offering your clients something that's really differentiated over time you'll become commoditizing your margin your edge you know those businesses the value that you deliver will go down and you'll get paid less and so it it's it's a pressure but it's also an opportunity you know candidly and it's an opportunity to really deliver for our clients all of our clients in an evolving way but is it tech that will define the winners and losers this industry I'm a big believer that that in almost there very few businesses that we could talk about not just financial services but I think it's certainly true and financial services that don't in some ways define great intellectual capital and great technology to deliver for their customer their client their you know their end user and you know finance financial services certainly in that space technology's a means to an end it's not going to tell you what you want to do for your clients it's a tool but you have to use in an efficient and effective way for me finance II I'm an engineer I was in my younger is involving there's a big pharmaceutical company when abuse in Factory in Europe created ten jobs the factory was run by ten people so it's the whole part of a value chain finance that's going to go that way it's what you were saying automation at Canisius we have five hundred and sixty robots working and number increases every day and that's an inexorable but there's been the high-end kind of move I touch really interesting advisory but we'll never go in the asset management business I think technology is going to be the key transformational change and we're seeing huge impact already in one area is active management's under performance in some of the old fundamental ways of investing and and much of it has to do with it's harder to get unique information and now with computers on everybody's desk all information about all companies are all there for very inexpensive price more transparency commoditization of information has been incredible and so it's harder and harder and so you have to find different sources of unique information and that could be in big data analysis algorithms you know because you can all have the fundamental information about a company that's all public reg FD has changed everything because everything has to be on a constant plane and so you're not going to get any nuances anymore and more importantly myth 2 and the Cawood research so the investment side is changing dramatically and it has to be changed by technology client connectivity especially in the retail side has to be done through interfacing through technology financial literacy is abysmal in this country and in most countries and if we can't use financial technology to find some improvement especially with the Millennials on some mobile advice and other things and then the third area is you know because there's constant pressure on our business now because our clients businesses are in trouble and they're there they're their liabilities are still in many cases higher than their asset base and so they are struggling to find solutions and so they're looking for lower fees and so if you don't create technology to create more efficiencies to so at Blackrock we do over 30 million trades a day five years ago each trade cost us about two dollars and seventy five cents today it's under 20 cents going to zero and so the whole David talked about the whole trading process is all being digitized and it's all one private blockchain but will that will that lead to consolidation in the industry t-jon technology I think I think cross-border stuff I'm talking from a European perspective here I think cross-border stuff and unlikely I think domestic consolidation yes it's relatively easy to do cross-border is a it's tough and it's not for technological reasons is for political sociological regulatory reasons as opposed to as opposed to taking the question purely from does it create consolidation I'd say in our industry like others scale and global is gonna be a competitive I mean it's very peridot and so unless you're scaling at mobile you can't you're out camp you're out and so that has to overtime doesn't mean there can't be nichy players but it has to put a lot more pressure on people that aren't scale and global in any particular business they choose to be in for a long time finance was a business where you could get adequate returns if you were the seventh eighth ninth 10th 15th player in a particular segment that's changed and by the way that's what your businesses look like and you know go find any other industry with a number 14 player can get a reasonable return on capital but we're very unique industry where our size is capped because the concept of too big to fail has been pushed out there so we can't grow as early as big as we would like to and also exits are fewer than they should just based on the current mix because there's national pride patriotism matter so you still have a lot of excess capital around trading too little business because a normal macroeconomic adjustment where the winners of scale are more efficient and progressively eliminated losers doesn't really take place in okay can I ask each of you as a final question actually the way a concrete way in which technology will change what you do says it's actually something that in ten years will will be completely different Larry let me start with you I don't know we're on the path I don't know how it's going to change it I mean one of the got another statistic says it's happening every day mm-hmm in the last five years we doubled assets under management and we added 18% new employees so the efficiencies that we've created through technology we added more employees so it's not that we didn't have employees but we were you're creating these efficiencies as I said the biggest failure for my business if we don't create more financial literacy and help people navigate the cumbersome task of the navigation of their savings for retirement we're not doing our job you

Channel: Bloomberg Television

Views: 38,173

Keywords: Bloomberg

Id: ha8VqOCsMXI

Length: 29min 56sec (1796 seconds)

Published: Wed Sep 26 2018