The Geopolitics of Markets

so why don't we just start and ignore the subject for the moment and just one or two opening questions so the u.s. elections are pretty much decided it appears that the house is going to go to the Democrats by 30-some seats or so Senate will maybe be a little bit more Republican than before so your former boss what do you think he's going to say about this which one you said you want that fun all right well which once they have that Donald Trump I think Donald will take full credit for the pick up of seats in the Senate looks like the Senate could go fifty two three four somewhere in that area to mainstream Democrats incumbents losing in a minimum and I think Donald will point out that he campaigned in those states and campaigned in those states heart he will say it is a complete ratification of his policies and his policies are working okay and if you were there would you advise him to say that well I I would say my personal opinion is look you've got a election that gave you dual results right you've got a Senate that's going one direction you've got a house that's going a different direction and the makeup of the house right now is getting more and more interesting much more diverse many many more women women voters came out and voted and they voted for women which is it which is a very good thing the suburban population came out in voted so I I think you've got a little bit more of a mixed message in there but it does look to me in some respects that the economic issue did play into the election in the end the fact that the US economy is strong did play in the election okay Larry and the markets open in in New York tomorrow morning what's gonna be the impact markets up or down you need a coin yeah I don't think I don't think the outcome is a big surprise I think the market obviously we've had a pretty big setback the market is reassessing itself last few day the market is trying to restabilized I think we'll still be part of that restabilizing process just to carry on what Gary said though I think the big narrative will be women women voted for women we have a much more diverse house I believe it's not just women voting more Millennials voting and I do believe that is going to shape the elections in the next two years again and in many years before even in the elections where Republicans won it was much by you know even like Ted Cruz it was very narrow and I do believe you're starting to see he demographics playing into it but I think the underlying thing that really shaped the election was the power of the economy and generally when the economy is doing is this this well with 3.7 percent unemployment I think it played out pretty well except demographics are starting to play in and the power of women and Millennials is gonna shape u.s. politics now you talk to the federal bank the central bank United States the Federal Reserve a lot people there do you think that the president's comments about the central bank's positions on interest rates is influencing them or not no no I think they're on a path of raising rates in December if anything they have to prove independence and so I think it I think the president's narrative makes it more difficult and I believe they're on a path of raising rates on the other hand I do believe because of changes in our economy changes of mortgage deduction and interest deduction with caps on on deductibility I do believe higher interest rates are going to have a more immediate impact on the economy so I don't agree on the forward rate where it rate where people believe where the Federal Reserve will be in a year from now because I think they're going to have to slowing down their pace okay now are the Canadians happy with the current administration united states and how do you think do you think your prime minister can get a better relationship with the president or you think there's no way that can happen anytime soon well I'm not gonna speak on behalf of government but and you know we're in this wonderful position as a pension fund of being totally arm's length from government but I've said sorry I mean that said it's the most important economy that Canada engages with and from our own point of view is where we have most of our money investors so it's incredibly important but Canada has to diversify its trading relationships away it's made great efforts on doing that with Europe it would be fantastic to see more progress on in Asia on its Asia trading relationships okay so we no longer have well NAFTA hasn't yet been approved by the Congress it may or may not be but let's assume it is at some point how is the new US MCA as it's called gonna be better for Canada than the existing NAFTA agreement if at all yeah I mean I think as a it's marginally beneficial the most important thing is it takes away uncertainty because uncertainty is held people back from investing it's held companies back from investing it's meant you know it's put a dampener on GDP growth in Canada and it's made people unsure about where to put the dollars if you're building a new plant or something so that with that removed then it will create more momentum in the corporate sector so I think I think it's beneficial for Canada overall just from that point of view and I should have asked people may not be familiar at the Canadian pension plan Investment Board which you're CEO of how much money do you manage on behalf of Canadian taxpayers not 360 billion dollars so we're the National Fund for everybody in Canada or outside of Quebec but we're purely an investment organization we invest all over the world the United States has a pay-as-you-go system more or less called social security why don't you have something as good as that well we did we sort of did when the system you know this is not the forum to start the history of pension and there's a book about it but we started when the system was set up in at my sixties it was basically pay-as-you-go and fully funded we see them birth rates dropped people kept living longer it won't were amazing statistic on demographics because this is one of the things it was a long term inverse as one of the things one of the things we follow every year the 1920s Canadians have been living three months longer and you know and that hasn't unlike in the US it hasn't sort of tail laughs it's kept going so basically the system didn't work by the nineties they had a crisis they had the crisis of the nineties they restructured it and they created a system that is sustainable in the long term and it's worked really well so when Canadians retired they actually will get their pension they will get they will get their pension yeah okay in England right now what about brexit what is gonna happen there we're tired of waiting can you finally resolve what you're doing hard brexit soft brexit it's just something tell us what you're doing well again I can't speak for the government resident observer I would say the problem is that the UK isn't negotiating with Europe it's negotiating with itself and the proposal may get through the cabinet but I think the big question mark is will the Prime Minister be able to get it through Parliament and that's not so clear so to say that a lot of men in the parliament want her job but they want her to get the get beat up have a woman get beat up for pushing this through and then the men will come and try to take her job you think there's any truth of that you know I think it's my old boss Christine Lagarde used to say when things get really tough they usually call in the women to clean up the mess and if there were a vote if there were a vote today another vote and why doesn't the Prime Minister say let's have another vote but if the primary cells want to say if there were another book would it be the same 52-48 same way the polling is very close still there is a little bit of evidence that as the the nature of the deal has emerged to be quite unattractive that some people have shifted but I don't think it's clear what a second vote would look like having said that if she can't get it through Parliament she has two options you either call in another election or you have a second referendum and that's going to be the crunch point Hey so Gary you were in wall street for a long time and sometimes people say there a lot of big egos they but some people say a lot of big egos in Washington how would you compare the egos in Wall Street where are they bigger yeah you know David this is second interview I thought when you've asked me the same question twice well it's a good question sure I'm consistent with my answer but other people haven't heard your answer oh okay no comparison which way Washington oh really yeah well I mean Washington wins bye-bye by all means and extents there there's much more of a system in Wall Street of having one's Bluff called and at the end of the day you're either right or you're wrong and you're PL your profit and loss reflects it your market view reflects it you get a transaction done and you don't get a transaction done and you're held to that level of accountability in Washington if you get nothing done you're running way above average okay so the biggest so what was the biggest surprise to you was that it when you left government you when you left Goldman you were president Goldman a lot of power you're a very powerful firm when you went to Washington what was the biggest surprise in serving in the US government I think in many respects it was what I just said you you would assume that the organization of the US government would come in every day first of all they don't come in most days on the days that they come in you would assume that they come in trying to move legislation forward to proactively help the country get itself to a better place and unfortunately I think we keep moving farther and farther from that and you see that even in today's election we are a country that is very very divergent on opinions of what is the right direction and how to get to the right direction which leads to a place of no activity and no activity being the right outcome now the tax cut bill that you largely engineer has produced that Larry picked on it's done as has maybe been responsible for the US economic growth being so strong but it said that the deficit will increase and debt will increase as a result are you comfortable that the increase in debt and deficit is worth the price that we're paying for this so look this actually deserves a really long answer I won't give you one because that would be unfair to the other like to hear your answer Larry you've heard it you just use not to listen alright so so the answer is something like this like in the United States prior to this administration we had a corporate tax rate of thirty five percent and we taxed on a worldwide basis our competition meaning all the countries we competed against had a tax rate in the low 20s twenty one twenty two and many of the countries we competed against had abilities to get into single-digit tax rates you start at a huge competitive disadvantage in the United States as a business person business creator business formation and the ability to hire people and he started a huge competitive disadvantage didn't make sense what our view was is we have to make the US corporate tax rate competitive with the rest of the world to attract business back to the United States attract earnings back the United States and attract jobs back to the United States that was the basic core premise of what we had to do the the the the reason we did that was to drive the economy to drive wages to drive growth the numbers behind that and everything in the United States miraculously has done on a ten-year budgeting cycle if you can drive GDP by one percent from whatever the baseline would have been and this is a great government argument right now we're three and a half the projections before we got there where we were stuck in a muddle two percent we were running right one seven one eight one nine so we're proven that we can drive more than one percent if you drive GDP by one percent you create three trillion dollars of deficit reduction over the ten years you create twelve million jobs and you create ten billion dollars ten trillion dollars of extra revenue so the answer is over a ten-year period if you do that you do pay for the tax cuts so Bismarck famous and that was a Bismark famously said that people don't want to see two things being made one was sausage and the other was legislation so you were in the middle of the tax legislation how would you think that process would look at publicly exposed was it too complicated give and take and harder than getting a deal done people shouldn't watch it okay you know it's it's right you know the important lesson to learn in Washington as well is never let perfection get in the way of a piece of legislation so to get a piece of legislation done in the United States you make many compromises along the way you if you were to hold out for the right bill the perfect bill the bill that made the most sense you would never get a piece of legislation vote Larry you've built with the help of others the single largest private sector money management firm in the world you're managing now seven circuits were gunned down all right between six and seven trillion dollars which is a lot of money and the firm is how many years old thirty thirty so if somebody was watching and they wanted to build another six to seven trillion dollar firm and they wanted to follow your model what is the secret what are the one or two things you did that enable you to come from nowhere to six or seven trillion in 30 years in a few powers having good partners having a principals that you stand by for the entire length of your organization's life and working for companies and clients not against them and there are all simple principles but we've been standing by those and I think it's paid off and and it continues to pay off today all right so today we've had a growth period in the United States of about ten years the second longest since I think World War two people keep saying there's going to be a recession at some point because inevitably there is one that always arises do you see any recession in the near term next year year and a half two years what what if anything worries you about first out I went what Gary said to be true I mean I and I and that that it becomes a reality that we do have and or 1% growth over the next 10 years because if we don't have that we are going into a recession and that is I would say that's the debate that's going on now in the economy are we you know we've had a ten-year bull market we've you know bull markets generally don't last ten years and so we're at this point now and we are also seeing growth shortages in other parts of the world now and the real star in the world remains to be the United States on the back of it of a tax cuts our government has already announced that 2019 s deficits are gonna be 1.3 trillion so already they're saying that math is not working out and I believe the biggest crisis could be and I don't want it to be the outcome the outcome I want is that we have extended three percent growth but if that outcome is not the case and and I do believe the 1.3 trillion dollar deficit is still based on a 3% economy so if the economy does slip because the world slipping or because there's trade imbalances or trade problems and we see less growth I mean the problem is we are living with a deficit that is very large we are fighting with our creditors right now worldwide generally when you fight with your banker it's not a good out outcome you generally I wouldn't recommend you fight with your ear lenders about you and we're fighting with our our lenders 40% of the u.s. deficit is funded by external factors no other country has that and I do believe now with you know with the deficits of 1.3 trillion dollars we are going to probably see and this is where I somewhat disagree with the president attacking the Fed because I do believe it's more of a supply problem that we are going to have more and more debt and because of deficits and because of the deficits we're you know the the investor is going to demand a bigger premium and we have greater risk for higher rates that will not allow the equity markets to flourish and that could be the real issue related to everything where we have interest rates becoming too high to sustain the economy with its growth rates when I was in the government we got inflation till about eighteen or nineteen percent which is a way to solving your debt problem would you recommend that we inflate a little bit more I don't think that's gonna work now and I don't think our creditors at that time we didn't have that much dependency and foreign creditors do so III think this is going to be the big issue and this is going to be the real issue going forward with government I mean one of the big projects that the Trump administration talked about that we haven't accomplished yet is our is our infrastructure problem two trillion dollars a deferred mate and it's building up worse and worse and worse and so we there are some great needs in society right now and you know if indeed we do have that 1.3 trillion dollar deficit and if the economy isn't growing at 3% we're gonna have a far bigger crisis than in the coming years and then the fear about the the ending of this big bull market is probably gonna be a reality and you would agree with it right mark you have you said 330 billion dollars to more or less investing more or less yep so where what kind of rate of return are you looking for on that 330 billion overall what kind of rate of return as high as possible so that there's the glib answer and you know maybe a balance to some of the comments here as well all right so on Monday the genius of the way this was set up was two thing one it was put at arm's length from government so it is entirely arm's length and it was it's an independent board and management team that decide how to how to run the money and he was given a really simple mandate which is maximize returns without undue risk of loss so we're trying to maximize returns of what we think as a as a board independent board and a management team is the appropriate level to run this and we're measured over 75 years so the chief actually comes in every three years measures are we sustainable over 75 years and when you look at that you know things like the election result doesn't really matter that much you're looking at really long term trends on what's gonna what's really going to influence returns of a long term so it's things like you technology disruption it's things like the demographic shifts around the world is things like the movements of economic activities to emerging markets its climate change as well those four things and then I'd say things that could really disrupt things even in the shorter term here and exacerbate the next downturn is the rise of populism was Peter Thiel right you know several years ago when he called Peak globalization be in 2007 and this is gonna be a secular trend and it's not gonna reverse we're gonna see more and more rise of populism which will inflame all the problems in the downturn next time around and then the one that you know Hank Paulson was talked about this morning though probably my number one warrior which is the tension the China china-us tension which has the potential to really rise to a very dangerous level the money you have now the 330 billion what percentage is investing United States in Asia emerging markets Europe Canada so today our biggest market is the US because it is the biggest economy and the biggest market and biggest available opportunity so about 40% is in in the u.s. in Asia we're about 25 percent and rising as economic momentum and markets availability rises here and we know we're able to access a lot of investment in China because we can invest onshore we invest in lots in different ways in China we don't need to hug an international index and wait for you know MSCI oversea to increase the proportions of China China is a big market for us so if somebody said I'm watching you now and I'd like a good investment idea somebody in the audience said give me a good investment idea that they could employ investing using the intelligence you have and all the information we have what would you recommend as a good investment idea for somebody plastics plastics are you come up with that one very good so you know what I think one of the things we're doing as long as my last two war is not I'm not don't come true is we we continue to push into and rebalance into emerging markets so we send a big sell-off in emerging markets long term we have said by 2025 by 2025 we will have up to a third of our fund in emerging markets and we're not going to do a little small market we focused on principally three May markets China India Brazil and if you look out 2025 you know current projections say forty-seven percent of global GDP will be emerging markets will go over fifty percent time sometime before 2030 so now we don't hunt GDP but again that probably the direction we're going if you look at all the dislocation that's happening right now all the you know that people are very concerned about emerging markets and what the tensions are that are going on there so I you know it's it's you can find a lot about arresting all the doubt they're the best thing to do is put your money in private equity right of course okay I'm public market right yeah let me ask you a question a very serious question about that you've you you were the deputy of the Central Bank of England and there aren't that many women in European finance who rise up to that level and the United States we've had Janet Yellen serve as chairman of the Federal Reserve Board and the head of the IMF who's here Christine Lagarde it's risen to that position but do you find that in rising up in in the Central Bank in other places that you found a lot of discrimination because you're a woman and you still feel discrimination you know I think discrimination diminishes massively when you have power and so the more senior you get the less you experience I think most women would say that when it's hardest is when you were young and junior and have very little power so I think the answer is to get more women into power okay all right all right all right so central bank in England now it's run by Canadian so how can it be the case that the people in England say we should have a Canadian one our central bank is well why are they I mean Americans wouldn't want to have a somebody from another country probably one their central bank why is that not a problem I think it's a little bit of a legacy of the UK's history that it had people a very good job I just say same Queen I think actually actually I funnily enough say that when Mark Carney was pointed he the queen is the queen of Canada and he had to be removed from his position and approved by the Queen and and then she had to approve his appointment to the Bank of England so as far as she was concerned it was just an internal transfer really Prime Minister gets to meet Prime Minister gets to meet once a week with the Queen the set of the central bank does he ever get to meet with the Queen after being approved I think he has a regular appointment but I think he might encounter her on occasion it events and is it a problem that it used to be the Sterling was the the reserve currency of the world and now it's let's say not the Sterling have any view of do you have any view that sterling can never come back and be a reserve currency or that those days are over you know I think I think well you know I think those days are over I think becoming a reserve currency takes a very long time and I think it's highly relevant in the current debate about what's happening to the dollar what's happening with the RMB there's quite a nice piece of historian has looked at how long it took the dollar to displace sterling and it took about a hundred years for the dollar to rise to preeminence and the key factor was institutions do you does your country have institutions that international investors will perceive as credible in the long term and I think that's the biggest question today of which currency will dominate the global market and the people in England ever say if they'd managed the Revolutionary War differently that they could have the United States they never think about that anymore right yeah I think about to his father Gary Gary many economists say that a budget deficit is a problem but not that many economists say a trade deficit is that big a problem yet the president United States seems very intent on fixing trade deficits as he sees them can you give us any insights and why he's so concerned about trade deficits No right he found one economist on Amazon do things straight down he listens to okay let me go to all right well let me go to the next question then in terms of the economics I had I had hair when I started a job can you explain the people the economic decision-making process in the US government I mean how does it really work is it done by memos is it done by oral briefing last person in what would happen to this what's it a process by which the process is made you your predecessor Bob Rubin started the process of the Economic Council in the White House and you know it's involved since then but now that you you ran it how does it work is it mostly memos is it oral briefings is it caches catch-can or a lot of things I just was gonna let you keep asking okay so I want to ask you the third what's your basic right that sometimes somebody wants to make it to sit get the president to do something what's the best ways that the write a short memo is a repro best way is to call the president Palme directly yeah just call the president is it hard to get them on the phone or not that no hard at all really okay and right now the trade skirmishes that we have with China do you think that there is a resolution in the offing and after the election that something will get resolved the I don't think there's a instant cure for the trade issue I really don't they wish that I could sit here and say after the midterm elections the White House the administration understand they've got to solve trade issues I think China would like to solve the trade issue it really comes down to two I would say there's two main topics topic number one for some reason is the side of the trade deficit the actual trade deficit with China is about 300 billion net and in the president seems to think that number is way too large I tend to differ with that I tend to say that's 300 billion dollars worth of goods that we're buying cheaper than we could produce ourselves because if we could produce some cheaper we would be doing that so there's that issue and then there is a more interesting issue that I think is more pertinent which is the open access to Chinese markets and the enforcement of intellectual property force technology transfer where the Chinese have historically not allowed US companies into China and have not paid for much of the technology they've taken from the US I think that is the bigger issue I think the Chinese would solve the first issue and buy a lot more natural LNG natural gas from us and more agricultural products and bring down the trade deficit but it doesn't really solve the core issue which is paying for intellectual property and respecting copyrights infringement Larry you talk with central bankers every day what is the main concern that central bankers you're talking to have about the global economy now I think they're they're worried about a trade explosion of create impact between the US and China they are seeing evidence of slowdowns and parts of the economy they were worried about Italy right now and in terms of you know what what Italy can do we relate it to Europe but look at the reality is I think central bankers are playing a smaller role in what we do the reality is what we are spending more time on focusing on more of the political issues populism how that's playing out I do believe like the issues we had to deal with related to Saudi Arabia where public companies had to make a decision before governments and so I actually believe investors are much more focused and things away from central banks than ever before I do believe the role of Millennials as we as investors are playing a bigger role and I do believe the whole issue about ESG and how we are how we are performing as companies whether companies have purpose or not you know they're showing that purpose every day is really what I believe is gonna be the transformational change and whether central banks are tightening or easing or central banks have these issues I think so secondary to the narrative today would the world be better off that we had more than one reserve currency do you think I think we're gonna move there over time and you know many people believe some type of cryptocurrency is going to be that I tend to say that's not going to be the answer but but I do believe the answer will be over time that there is going to be another reserve currency it it appears at this moment the RMB is going to play a larger role it's certainly playing a larger role in south-eastern trade a southeastern asia trade playing a bigger role i have heard from many europeans who were now caught in this whole problem related to US sanctions related to Iran's almost to a CEO they're all the moaning that they have to follow the u.s. because the role of US banks and we are the the store of wealth and and i do believe there's greater desire and this is probably the big thing for me there's more desire by more leaders of more companies and countries to find a longer-term solution beyond the dollar that still may be a 20-year outcome but i heard from some business leaders and and that they would like that outcome to be resolved in five years i don't think it will happen in five years but the notion that I heard and I heard it uniformly that people are looking for a different reserve currency is quite alarming and I don't think that is understood enough today thanks mark people who haven't been to Canada don't know it as well as obviously you do what would you like people to know about Canada and its economy what's the most interesting sitting on this panel you can generally see a trend as it's coming towards you but this one that keeps going in directions so alright but I mean trend on Canada I mean you know I I think you know I say you know Canada's a beacon of common sense in the world and yeah and it's I think you know it's a well-run I think you know from my perspective you know very sustainable system in many different ways but you were Goldman for many years he lives in Asia for quite some time yeah I've only been accounted a two and a half years okay so give you the whole history alright so any regrets about leaving the private sector and going into working for a government pension fund yeah well it's you know I say we were funny we're a funny thing in that we're sort of arm's length from government so I don't report to government I report to an independent board but I think you know one of the things I want to do and I started out in doing medicine actually I was a doctor originally and then I went into Goldman out of curiosity I went into finance and then I went to Asia out of curiosity and I ended up building most of my career I spent 22 23 years in Asia and Hong Kong and China so this was another twist and somebody well I you know I always wanted to do something that combined together the knowledge I got from finance with you know it's something to do something worthwhile in the world and you're a medical - wait well in this way you know you doing something worthwhile for 20 million people sorry okay you're a medical doctor I'm a medical doctor originally yeah okay so the best way to stay healthy is your line used to be do private equity all right go miles well on people probably dusters okay so a final question our time is up final question is England going to have a brexit eventually and what do you think the impact is going to be on England and Europe in one paragraph or so I think the most likely near term outcome is delay that not much will feel like it has changed there may be something that is signed they may not be there might be a longer transition but I think on the ground very little will change in the near term and then after that who who knows okay so I think you know in the well if I may I think one longer-term scenario is that eventually Europe will have to probably develop a model of concentric circles the eurozone countries will have to eventually resolve the incomplete parts of the institutional structure of the euro zone in terms of fiscal transfers having some mechanisms for dealing with shocks and that will mean that many countries that are in the next rim the Scandinavians and others who might not want to join the euro will be in a another concentric circle and you could imagine a scenario in which the UK became part of one of those concentric circles because the economic logic of being closely integrated with your largest market is so compelling right so you've all flown a long way to get here you all agree that it was worth coming yes of course Davis yes yes yes and it's just the best conference you've ever been to yes the best panel you've been on right how long never okay we're done thank you [Applause]

Channel: David Rubenstein

Views: 38,106

Rating: 4.768889 out of 5

Keywords: Bloomberg

Id: NyxhihpELkg

Length: 36min 22sec (2182 seconds)

Published: Tue Nov 06 2018