The State of Our Securities Markets: Current Global Macroeconomic Trends Affects Our Capital Markets

The State of Our Securities Markets: Current Global Macroeconomic Trends Affects Our Capital Markets


Good morning. I am pleased to be here
today to join SP in welcoming you and to introduce our first panel, a fireside
chat on current global macroeconomic trends affecting our capital markets. From
my vantage point in regulating the asset management industry there are really few
topics as important as the one our distinguished panelists will be
discussing this morning. Global macroeconomic trends have resulted in
big changes in the asset management industry and more broadly in our capital markets.
Both market participants and regulators are operating within a new and evolving
landscape. One striking aspect of this landscape
is the level of global debt which now stands at approximately 250 trillion
dollars or 320 percent of the world’s GDP. In the United States alone outstanding non-financial corporate debt is nearly
10 trillion and almost 50 percent of the U.S. GDP. Now the increase in debt is
driven by various factors and I’m sure the panel will be delving into that.
For example monetary easing by central banks has resulted in interest rates at
historic lows. Further, global regulators have encouraged banks to hold highly
liquid assets and less corporate debt especially lower rated debt. The
combination of monetary policy and regulatory constraints on banks has
contributed to a migration of debt investments from banks to other holders
including funds. In addition direct household investments in debt have
declined with investments through funds accounting for some of that change. A
report from our Division of Economic and Risk Analysis summed this up with the
following observation. From 2009 to 2016, the percentage of corporate and foreign
bonds held by households decreased from 22 percent to 8.6 percent while the percentage of corporate and foreign bonds held by funds increased from 8.5 percent to 18.3 percent. This shift makes it more critical than ever that we understand
the connections between banks and non-banks and from my perspective banks
and funds. These connections include exposure of banks to funds through both
lines of credit and as counterparties in derivatives and other transactions, exposures of funds to banks through holdings of equity securities,
overlaps in portfolio holdings particularly holdings that are more
susceptible to liquidity shocks, and clearing banks’ supply of a balance sheet
capacity to permit client clearing. Interconnectedness, leverage, and
liquidity are all topics we have talked about for years, but the conversation
should not be static and should be done with the evolving market in mind. There
are a few other areas where the shifting landscape requires an adaptive
regulatory approach, for example, increased globalization has intertwined
domestic and foreign markets and policy considerations. This is why we at the SEC
spend a great deal of time working with our international counterparts including
through organizations such as the FSB and IOSCO. advances in technologies have
enabled efficiencies and innovations in recent years with that however comes
heightened cyber risks as well as new business models and products including
Robo advisors and digital assets the growth and evolution and asset
management management industry has increased opportunities for investors it
also has given rise to public debates about concentration risks common
ownership and the effects of index investing to name a few to be clear
observing the activities or risks have changed is not to offer an assessment on
whether these changes are good or bad thus said change does mean that market
participants and regulators need to re-evaluate risks continuously and make
the necessary shifts in risk management oversight recognizing change and
modernizing oversight to meet that change will enable us here at the SEC to
meet our mission to protect investors maintain fair orderly and efficient
markets and facilitate capital formation as regulators I believe that we have to
work harder and use all available tools more effectively in this changing
landscape we don’t operate in a vacuum of course so an important tool is
engagement with market participants in that regard events such as today’s
conference help keep us informed of market developments that impact our
mission let me now turn to our distinguished panelists for their take
on macroeconomic trends and how they affect the
markets our Chairman J Clayton will be joined by Gary Cohen former director of
the US National Economic Council and Gunn Hutchins co-founder of Silver Lake
partners the accomplishments of these individuals speak for themselves and I
will refer you to the program for their detailed BIOS that said I do want to
note that this group brings unique perspectives and experience as global
investors advisors to governments and leading companies crafters of public
policy initiatives and supporters of the study of markets I’m sure you’re gonna
appreciate their perspectives and with that please join me in welcoming our
first panel Talya thank you thank you very much and let me let me just extend
on behalf of my colleagues here at the SEC thanks to Gary and Glenn we’re gonna
talk about where the bar I was until Danny choice being here Gary how about
you I’m in assembly camp okay give it up so when the SEC calls used to come yes I
couldn’t I couldn’t think of two better people to give us an assessment of where
we are and where we’re going in terms of market function and the risks and
opportunities we face so just thank you both very much for being here so let’s
get right into it Glenn you found with Silverlake two decades ago and you had a
belief that the power of technology was underestimated that it was gonna
transform our economy how do you think technology is affecting our markets
today where is it gonna be ten years from now your thoughts I mean this is
this has been a driver of your investing philosophy for years sure so for people
who don’t know I’ve invested I was in the FinTech before FinTech was cool and
investing at the intersection of financial services technology for the
last 20 plus years I helped to build companies such as Ameritrade the nasdaq
stock market and now for two which is a high-frequency market maker and I think
the biggest thing that’s at the the the biggest thing that happened and in
financial services technology over that time period Aaron had a conversation
about this a couple years ago recall is the when I first addressed this markets
and 20 years ago the cost of trading was for a retail investor an 8 through
quarter plus a commission and you waited you made a phone call you waited a
couple hours to see if you got the trade and then he settled five days later
wasn’t it something like that yeah now at Virtua cross the markets we trade
securities in microseconds which is a millionth of a second the binding
constraint is literally how fast you can move electrons that’s the binding
constraint on how fast you can trade and at less pres it or less than a penny and
that means that the cost of creating has been reduced by 99% or more over the
course of that time period and the speed is increase in an infinite level and
therefore a whole bunch of other kind of reasons we’re moving it was we’ll talk
later on and there’s a new level of we have the same capacity make as big a
transformation next 10 years as we had in those last 10 to 20 years for reason
we’ll get to later on I think that’s the biggest change look Gary I through
policymaking and whatnot you’ve been able to identify where conventional
wisdom holds true and where conventional wisdom no longer holds true going
forward you know technology other areas as you see government policy where are
we going where maybe technology’s got to change conventional wisdom well look I
agree with everything Glenn just said on what technology has done to the markets
today as we know them as far as speed of execution ease of execution we still
haven’t figured the clearing thing out yet Jay we’re still still clearing like
we move physical securities and horse and buggy but we’ll get to that later we
I don’t understand why we’re we’re not real time clearing there’s no
technological constraint there’s no technological constraint there’s a
there’s a there’s other constraints there’s really no other constraints we
just need to start going to real-time clearing it when you talk about safety
and soundness that’s a way to get safer and sounder but when you think about
where we are right now in look the United States has enjoyed an enviable
position being the dominant capital market the world both debt net
we’ve owned that position for a long period of time we are on the fringe and
the fringe is important we’re not in the middle and the fringe are potentially
losing that position and I say that because the capital markets around the
world are developing quite quickly in a much more digitized fashion than than
the US has developed the u.s. although we’ve gone to high frequency trading
we’ve gone to digitized trading we now see a lot of technology being used in
other parts of world whether it’s as simple as payments in China and look
it’s a lot easier to use payments in China digital payments because you have
a relatively unregulated banking system and I’m not espousing that we should go
to an unregulated banking system at all I think we have to do payments in a very
regulated fashion but we have to embrace that we are now seeing digitalization of
more and more assets in more and more securities I think that we have to
embrace this digitization we can’t say that everything’s gonna trade in the
traditional waves traded for the last 100 years and this is our sandbox and
we’re gonna stay in the sandbox so I think the fringes around the edges are
starting to get clawed away I still think that this is the dominant capital
markets in the world and it’s sort of in the hands of the regulators right now to
sort of lead not follow and I think you have an interesting opportunity to lead
so you’re telling me in a nice way Leyna recognize this is happening and
and make it happen in the right way what you said that I did but what I’m saying
is look we’ve been so dominant for so long we could always be the slowest
moving animal in the and survive I don’t believe we can be the slowest moving
animals survive the world’s too big the world’s to global there’s too much money
we need to get in the middle of the pack and right now I don’t believe we’re in
the middle of the pack in in technological evolution of our
marketplace so the if you think of it one way to think about this is we’ve
built out the internet over the course of my 25 years investing around this
stuff first we used it create messaging tcp/ip then we used to
create mail smtp then we used to get their websites HT p x it was something
called FTP in the middle which allowed you to attach files HC P TTP for
websites VoIP for voice now we’re building it out for video that’s what
all this streaming is all about and all the investment is happening there and
the next thing is going to be value and the question is how can we use the
Internet to move anything of value at the speed of light at no cost the way
we’ve done all those other things that we’ve done and and to do that we have to
have a regulatory framework gary suggesting that can keep up with that
rather than try to fit that new paradigm into an old regulatory paradigm but also
we need to recognize that we have to adopt the technological leap forward
because the reason why the Chinese in particular is investment some of these
Chinese payment modalities as well we’re able to do this is because they didn’t
have the payment their credit card system with which to contend it wasn’t
there so they could go right it’s like they skipped over landlines on the right
to cellular and a whole bunch of reasons why in so they now pays but even without
fundamental technological innovation to cost the payments in China’s about 30 to
40 percent of what it is the United States look the message of a message on
receiving from you is safety and soundness transparency investor
protection all very kyc AML audit trail all important but don’t give up on those
but those can all happen in the digital world except now it really exists much
reason to good use don’t use yesterday’s technology to achieve those goals
use tomorrow’s technology to achieve those yes another way another way I look
at this is you know you look at I mean Glenn gave you an actually unbelievable
tour of the Internet in 30 seconds I don’t know how he did that without notes
but if you look at sort of the the the the phone which is which is where the
world is right now you know we went from you know landline to what I would call
the the brick phone I mean I remember my first cellular phone you needed your own
briefcase to carry it around and you walk around with the BRIT that the brick
phone and then we went to the you know we went to the smaller phone so we went
to sort of the the flip phone and then we went to the smart phone and now we’re
gonna have to go to the secure phone so that’s the next part of it and when do
we get to the secure phone we’re gonna be able to use that secure phone for
everything we need financial and and we’re when I say we need to go to the
secure phone we’re virtually at the secure phone line right now and 5g and
we’re at the edge right now so about five do you later if you like yeah let’s
look message received on technology but we can keep hammering on it no no I
think I think it’s it’s it we can’t let it pass us by right we are already
behind in other words the payments modalities in Asia are much better than
the are in United States and this is not it’s not but it’s not primarily a
regular problem it’s primarily a legacy issue associated with the credit card
companies because the credit of the payments system in in in the United
States is the only place I’ve seen in my career as a technology investor where
the introduction of technology caused the price to go up usually you know
we’ve had these cost curves that drive prices down if you’d like we talked
about in securities trading but in payments they’ve gone up because you
Apple pay adds a quarter stripe adds a quarter of a point square adds the court
adds that maybe even a point more so payments go from 2 percent to two point
two and a quarter to two point seven five that’s actually ripping off the
consumer and making financial inclusion harder to accomplish rather than easier
and if you actually thought about the broader purpose of this kind of
organization like this we ought to actually be out there facilitating the
introduction of technologies to take these prices down to increase consumer
fairness and and and expand financial inclusion so I think about it that way
now I think and and to be clear I’ll give you I’ll give my usual disclaimer
that my views are my own and I’ll also say I’m not gonna pass views on any
particular company you guys are welcome to but I will say the one thing we are
devoted – here over our 85 years is that
transparency and pricing benefits the consumer absolutely and we
that is clear today extent technology enables us to provide transparency and
pricing it benefits investors and consumers all right so let’s shift from
technology well we’re not gonna shift it’s gonna keep coming back in every
hand just so you know I I’ve never ever been able to control Gary Cohn okay
monetary policy now I know you have you have a disclaimer right your your your
your board members we work fed and your views here are your own not not those so
a little little listen me either so don’t worry but we’ve had we’ve had a
run of accommodative monetary policy a lot probably the longest run in history
affects how we should look at that where do you think we’re going
I believe it’s driven some changes in the market but including as dolly
outlined and her introduction a shift to more debt and due to some other
regulatory events a shift in debt from debt being held by banks to being held
in our capital markets but but your thoughts so I think the thing that most
concerns me as an investor in the space an investor in this moment is that these
very low nominal interest rates we can come back to what real interest rates
really are later but these real very low nominal and traits causing every layer
of the risk structure to search for yields so people who would normally have
bank deposits buy Treasuries people who burn or melea by travelpod buyer’s go to
high-yield high-yield buyers go to equity equity buyers go to ill liquids
the people who are normally in the illiquid space take on more debt and go
to late stage growth and the whole the whole layering of risk involves with
people reaching for yield and take a buck and taking risks that they’re not
accustomed to taking are not professional at managing and then when
that reverses itself it has a chance to it has the risk of reversing itself
rapidly in a way that’s easily predictable I think so that’s my
biggest concern about how the markets are operating right now we can get into
what that means in each of those segments so but actually let me tea this
up for Gary this way there are some people that we are believe we’re in a
lower for longer and then there are some people who believe that a snapback how
do we get to somewhere in the middle Jemmy one comment for you say that one
of my rules investing is widespread capitulations the first sign of the
bottom so as soon as people say we’re interface you’re going to stay lower for
a very long time period that’s when you ought to be prepared for this trying to
cope a couple yeah but I’ve been saying lower for Lara for five years if you
remember back five six seven years ago we were talking about interest rates in
the economy and we were using letters of the alphabet we’re talking about V shape
U shape J shaped and I said think of L shaped what okay so I’ve been saying it
for five plus years but look Jay I think you almost have to back up here it’s
almost difficult to answer this question without saying how did we get here and I
won’t drone on how he got here but you’ve got to go back to 2008 you’ve got
to go back to the financial crisis you have to understand that central banks
around the world in a coordinated effort basically decided and justifiably I’m
not saying they did anything wrong justifiably decided to flood the system
with as much possible liquidity as they could and threw every dollar yen
sterling euro anything they could at the system and they literally put it in the
system and they and they put it in and they they wanted to stimulate growth and
they wanted to make currency available as cheap as possible they also did that
simultaneously with the two big saving economies aging into that older
population where Germany and Japan they’re not gonna spend the money no
matter what it does but we’ve already proven you can put negative interest
rates out and they won’t they won’t take the money out of the bank and so this
idea that we can get savers to become spenders because we
set a negative influence by taking rates negative we’ve proven that if you’re a
saver you’re a saver if you’re a spender you’re a spender we could say the same
thing in the United States we could probably make in straights 10% people
wouldn’t save in Japan you can make rates negative and they won’t and they
and they won’t spend so we started with this whole issue of creating global
liquidity we’re now at the sort of ten years from the other side of that
pendulum where you know Oh eight oh nine flood the markets with liquidity lower
interest rate easy easy easy easy easy easy and now we’re trying to figure out
okay we really haven’t created growth out of that easing policy we have not
stimulated the way we wanted to stimulate how do we stimulate from here
negative interest rates and this is a personal opinion I guess all these are
personal opinions have this very negative unintended consequences
especially you have aging populations and they dissuade savings which is
exactly the wrong thing to dissuade and they make people on fixed incomes more
more financially insecure not more secure so now we’re in this part of the
equation we’re trying to say okay what should we do how should we do it how do
we get the economy grow we’ve proven that sort of throwing money at the
situation doesn’t just create growth in the world and a lot of this I believe
happens to simultaneously go with a lot of the regulation that happened after oh
eight and the fact that the world has become more and more globalized and so
one obvious example I’ll use since we’re at the SEC I’ll talk about a financial
service example you know you look at the financial services industry and oh eight
the regulation that was forced upon financial services industry was so
enormous that every financial service company basically in the asset man in
the large asset managers down to every bank was forced to add enormous amount
of regulatory cost of their system but they couldn’t afford that regulatory
cost so then all of a sudden figured out if we can export labor to cheaper
markets an arbitrage labor cost we can then afford to be in the system
so lo and behold you know Bangalore city where I couldn’t have found on a map 15
years ago now is the city with millions and millions of financial services jobs
where we can hire someone for $35,000 a year doing the same job that someone in
New York would do at a hundred and thirty-five thousand dollars a year so
we’ve created this labor arbitrage market that we all got very smart – in
the world and once Bangalore I got the $40,000
because we were hiring everyone we’ve found the Philippines or we found Poland
or we found all these other markets and because of necessity we’ve now created
this global labor market where you just keep finding cheaper and cheaper labor
and when you find cheaper and cheaper labor you don’t have wage inflation to
the extent you want wage inflation you don’t have any inflation in the system
so in a lot of a lot of reasons throwing money at the situation and regulating
the situation just force people to get a lot more creative on the situation so in
my opinion we almost have to figure out a way to start withdrawing the liquidity
from the system and it’s it look it’s gonna be a slow long slog and in many
respects the Fed tried to do that they tried to cut their balance sheet down
they tried to go through a very slow process of retiring their balance sheet
and these are the right steps to go back to what we would consider a normalized
environment yeah now Gary touched on some things I’m going to do a little bit
of a segue here but I know it’s an area you know a lot about the way that you
caught the macro economy operates today we touched on technology
Gary’s talking about availability of labor being a global issue we know
capital moves faster we know supply chains are real-time glam are we
measuring technology and the effects of technology in the right way when we when
we make policy this is a very good question so if you if we were sitting
here two years ago roughly and we started talking about Fed policy you
would have we would have all assumed that we were heading toward something
called normalization which was basically rates are gonna go up the balance sheets
are gonna go down and we’re to a place where there it looks and more
normal relative to historical experiences and there’s what’s called
policy rooms so then when the next recession comes you can drop rates you
can expand a balance sheet can do it all over noon and we sit here two years
later and the markets couldn’t digest that right the little bit of rate
increase had not just market effects but also real economic effects and and
recently as the balance sheet was being shrunk the repo markets or sending
signals that there’s not enough liquidity out in the system so what’s
wrong what what do we if you look at that you say what don’t we understand
and as Gary suggested earlier I think today you have to extrude every question
through this dimension of what is the impact of the transition we’re under the
fundamental historic transition we have from the industrial to the information
economy and what aren’t we understanding well so let’s think and one of the one
of the things people telling us is economists tell us is the reason we
haven’t got good growth economists tell us is demographics and low productivity
growth that’s the answer in the numbers I mean you talk about some of the
demographic trends earlier but the there it is it strikes me as unlikely that we
are experiencing low productivity growth during the information revolution in
fact it strikes me that we have enormous productivity growth which we’re not
measuring do an experiment one day if you have a few minutes take put two
columns on a piece of paper and put on what you should pay for everything on
this device and then the other column what you used to pay for all the things
you bought that this device now does for you and I stopped when I got a thousand
dollars on one side of the page and twenty thousand dollars on the other
this is the greatest deflationary tool I’ve ever experienced so if you think
about maybe we’re not measuring productivity correctly if we are
measuring productivity correctly perhaps that means that the economy is growing
more rapidly than we think and we’re not really measuring it well if that’s the
case the math means and deflationary times rather than
inflationary my modest inflationary times so let’s just take a number for X
Eve experiencing two percent deflation rather than 1.5 and 1.7 percent
inflation then real interest rates at about 1.7 percent 10 year are more like
370 basis points which is about the historical average for real interest
rates and so that and if you imagine that we’re at the real normal average
for real interest rates the economies were happy having almost exactly the way
you would expect it to as you try to increase increase interest rates in that
time period so it could well be that we just don’t we’re not measuring the
economy correctly as a consequence of which not understanding the effect of
the policies and that we’re applying Anna’s consequence which aren’t really
thinking about the right policy mix down right yeah no I I don’t disagree with
that it was just hypothesis I’m not saying
that’s the case in the US economy it’s different right it’s a different lens
and remember our economy in some respects gets harder and harder to
measure as we become a dominant dominant service economy and we’re 80 percent
service economy GDP and jobs in the United States so we’re not measuring our
economy on how many cars and how many machines and how many airplanes we put
out we’re measuring our economy based on how many people are going to get
Starbucks coffee and how many people are going to drycleaners and how many people
are going to the nail salon and how many people are going out to dinner I mean
that’s really our economy how many people are by banking services and the
counting services and the big poise is how many people are buying our
technology and technology products and are they actually paying for our
technology and technology products but maybe we’ll get in that or maybe we
won’t get in that later and if the price one of the things goes down that’s less
GDP it’s less GDP and so like airplane transferred to air air travel itself
right is one the very deflationary things like price of an airplane ticket
place of computing power Moore’s law all these things become very deflation Airy
and as higher end retail stores selling things have moved out of energy
these and more service businesses have moved in the marginal rate for rent
they’re willing to pay us less than someone selling goods so rents have come
down a little bit so so retail space is worth less today but you’re employing
more people at different wage levels so I a lot of a Glen is saying resonates
with me that we’re just met we’re trying to use
20 and 30 year old isolated domestic us measures in a globalized world older
more domestic than global yeah I need we need to look where we are today and and
I do want it before we ship its technology because I I want to get I
want to be shifting to technology the discussion we had about more credit
being in the capital markets versus in the banks how should we be thinking
about that let’s look this is one of these issues that sort of perks me
because getting out of the banks is probably the right place I mean the
answer crisis of 2008 was the banks balance sheets over levered with credit
when you get it into the capital markets or into the asset managers or into the
consumer all those asset managers and all those other places are basically the
consumer there’s this great idea that US citizens
don’t own credit and US citizens don’t own equities is really kind of
interesting because you know back in my good old days when we used to work for a
living you know and we sold stock and we sold bonds our biggest buyers were the
pension funds from the teachers unions and the police unions and all those
things I thought those were just normal people and they so they actually owned
those assets so we were disseminate disseminating those assets into what I
would call retail America the question to me is not who owns those assets I
mean it’s really not who owns those assets the question to me is how much
leverage is there behind those asses because that’s what ultimately comes
down to the whole financial crisis the whole stuff
and safety and soundness of the system is if they’re hedge funds owning those
assets or their asset managers owning those assets and they’re paid in full
there’s no issue there’s no problem the only problem is they can go down a value
but like there’s ways that that’s that’s what happens markets go up markets go
down to the extent that they’re leveraging them and they’re being
provided a lot of leverage to the banking system the banking system
ultimately owns the risk anyways because the banking system can you only you know
if the if the ultimate owner defaults or can’t repay them because they’re over
levered on their credit portfolio the banking system bears the brunt of it so
to me that’s the question Jay and I think based on where we are on the
regulation that we have today and this is one place where regulation works
we’re the banks our stress tests they go through their C car and they go through
all of their their testing with the Fed I don’t think the banks are over levered
and extending credit to people that own credit to things you guys might disagree
with this but I think first thing we want to do is I think understand history
correctly which was it was really the securities firms not the quote/unquote
banks that were the ones that failed and got into trouble
well thank thank you for saying that but that wasn’t self fulfilling just so you
know just so right it was Lehman Brothers and Bear Stearns and maybe some
thrifts oh I was necessary for effective yeah you were secure Sunday that has a
bank and and the solution was for you to become a bank so it wasn’t quote unquote
the banks had failed it was the securities firms that were
doing maturity transformation so if you had deposits you were in pretty good
shape agree it was the securities firms that were borrowing short and lending
long and accumulating in many cases bridging things before they could
securitize them I and it was also money funds doing a very similar thing as I
talked about earlier majority of reaching for yield that were kind of you
know supposed to have short term securities were buying slightly
longer-term securities in order to kind of get more yield and so what I would do
is I’ve really trying to understand kind of where the risks are in the system
it’s really where people are doing maturity transformation which is what
the Economist call borrowing short and lending long
and so I’d look for that through the system so you mentioned something we
were talking earlier about where the leverages in other words I’d be less
concerned about a a private equity for a credit private equity fund that’s got
commitments of capital for ten years with two one year extensions those
twelve year money they’re out buying high-yield debt in the markets and that
debt might go up might go down it might have to be marked a market they might
have some bad reports but there’s no capacity for the investor to say I want
my money back the big problem that happened in a financial crisis was there
was this massive capital call all across the economy everybody said I want my
money back I want to sell my securities in order to pick just cover my
obligations and that’s the place where I would look and make sure that there
wasn’t a problem so it would be leverage inside these companies short-term
leverage inside these companies that are lending long buy buying long-term credit
based assets that’s where I’d be concerned and enter subject to stress
yeah something exact that’s borrowing short where’s the lender did I write
about duration this mess we should always be racin dress the place to lose
we saw one of those this year but I think there is there’s something I do
worry about a little bit that is out there and it’s less this issue but it’s
more because the the the problem always comes from where the bubble is and the
bubble right now one of the bubbles in the world right now looks to me by this
massive movement of money toward end excellence mm-hmm
that’s been the biggest thing that’s happened post a crisis I know so I take
a very good look inside that and see what the ramifications were of that
reversing itself in some important way because that’s the biggest
transformation inflow of funds that’s happened other than what’s going on the
Chinese banking system which hold a whole different kind of thing that’s
happened since the financial crisis that’s the part that I look at and
wonder about what the implications of it are yeah let me let me give you a one
data point that I asked people and I think this
appropriate form to say that I asked people this about indexation I often say
to companies well it’s kind of a passive strategy how much would a company pay to
be in a very popular index I think the answer is a lot a lot a lot so tells you
something right well you look I can give you some relative values that you know
suit used to be and I’m dating myself now you know you you got announced that
you were added to the Dow you know I think that was like were seven to twelve
percent of the value of your stock you know back in the days when we used to do
big index add the index rebalances and you know the the movement on any day
when a stock would go in or out of a bigger index you know it would be
anywhere between two and twelve percent and you guys are investors you know this
better than I do but that means your cost of capital is actually actually
goes down mm-hmm no sure it’s got value look I’ve got a lot about nothing
happened the company pay a lot except more people had to own more people were
forced to own this case now the contrary happens when you come out of an index
look but the thing if you’re you’re you’re hanging toward kind of where’s
the risk and the system one should be worried about can I expand on that just
a little bit about that I think the two places that were paying insufficient
attention to the risk of the capital markets is climate change in cyber risk
and with respect to climate change mark carney the head of the Bank of England
has spoken I think very intelligently about in that there’s a potential risk
in the insurance markets in London which are a very important part of the
financial system in London to the cost of of the growing insurance claims for a
climate change-related kind of issues and so I would say that if I look from
your perspective I would say making sure that companies are adequately disclosing
their exposure to climate change and the risk in their businesses associated with
that is very important and on with respect to one cyber risk I think I
think the potential next financial crisis has more likely to come down that
dimension than the dimension of sort of maturity transformation
you know there’s a book I think everybody should read called the perfect
weapon I know you have it I think I gave it to you and what the end of it which
is about the last eight years of cyber competition among nations and the author
who’s a Pulitzer Prize winning New York Times reporter hypothesizes in the last
chapter what the next war could look like and it would start with our
adversary turning off our electrical grid in our financial system and then
telling us to surrender before they attack without firing a shot and the
vulnerability of our financial system to cyber almost everyone that’s an intruder
but if any if any company out there or bank tells you they have been intruded
upon they’re not telling you the truth all of them have been intruded upon all
of them are vulnerable and being able to kind of under put up those defenses and
understand their financial soundness implications is very important yeah I
think what I can say this is an ongoing conversation it’s a very important
conversation my view is the conversation has matured to some extent we’re now
talking about resiliency as opposed to defenses no one nothing happens how do
we recover I think that kind of conversation needs to go on I also think
let me just say the liquidity issues we talked about as history shows us there’s
usually a catalyst right it drives the no that’s good one and I can I could see
technology one being that kind of catalyst but I I hope that our investors
and consumers understand that we will have technology issues they will happen
yep question is how we deal with them know are we are we are we prepared do we
have the resiliency can we move forward but that’s a good shift crypto assets
what do we think about crypto assets you you have problem with your left hand
today do it for once there’s a left of me
so yeah that’s hard to get to the left of you crypto assets so so look III
think you gotta break this down because we conflate crypto and blockchain in
America we think that we think they’re synonyms there they’re not
all symptoms so I will be pretty quick on crypto I am not a real believer in
sort of the cryptocurrency world Glenn maybe Emily disagree with me on this but
I I am much more of someone that thinks in the United States we still believe in
safety and soundness we believe in kyc we believe in AML we believe in an audit
trail and some regulatory oversight and in in the crypto assets that are out
there are sort of the antithesis of that so to me they are gonna be tough assets
in the United States that said so that so take the currency side of it out the
technological side of it is unbelievably important and is going to be part of a
huge evolution that’s revolutionary in our business and you’re already starting
to see what the blockchain can do and how the blockchain can be used in all
industries but it is extraordinarily relevant in financial services in
consumer credit in areas where we as a financial service country we as a
capital market country if you use it we’ll use it day in and day out and I
think it will have enormous impact across the entire spectrum I think if
you’re not thinking about it really broadly when it comes to financial
services you’re missing enormous opportunities and there are enormous
amount of companies out there in each of these little silos trying to perfect and
figure out exactly how they make it work and it’s really kind of simple and Glenn
got on this topic and I’ll just elaborate on for a minute you know this
old idea that we created all these data warehouses and we kept all this
important information on individuals and on their cred
worthiness and on their financial information we kept it in data
warehouses well that was cutting-edge technology when it was built but the
people that the bad people out in the world they knew those warehouses existed
so if you wanted that information you might as well go to the place where all
that information is stored that’s why people rob the banks because that’s
where the money is if you’re looking to steal identities you go to the place
where all the identities are held in the blockchain world you can get rid of all
of those data warehouses you can create the identity real time instantaneously
have it created and then have it disappear and so think of the ability to
create things on a real-time basis as you need them use them and then have
them go away and you can get real-time information not the information that was
sent to the warehouse so there’s just enormous amount of applications for this
and whether it’s digitizing securities moving securities fragmenting securities
it just has enormous use so I am very very bullish on what its gonna do to the
industry and this goes back to where we started how you know the SEC the CFTC
the Fed they’re gonna have to understand that this is gonna happen with or
without you and it’s better off to happen with you okay a couple things all
that is accurate let me just give us different slightly slightly perspective
on what let’s talk first about digital currencies and let’s talk about crypto
stuff digital currencies today roughly 92 percent of all currencies of the
world is digitized you’re talking about fiat versus crypto coming just current
fine so break them up though what I totally believe in digital fiat yeah so
digital dollars digital and digital euros I don’t that’s digital fiat so I
just want everyone to understand yeah there were probably more agreement no
I’m just saying I’m just making I’m so dividing these two things apart just
like you just did so the first thing you have to understand is that moving to a
digital currency is a very straightforward thing to do people call
it feeble combs and the two things can interact of course some people call them
stable coins some people call them you know the Chinese are working on their
own taking that thing on paper and turning into a did
Tice thing is a very straightforward thing to do and it’s only and today the
vast majority of money in the world is already digital because it’s just
electronic entries and banks in central but yes so the notion that it’s some big
revolutionary thing only can take care of 8% by the way Ken Rogoff book the end
of cash says that you the eighty percent eighty to ninety percent of US
hundred-dollar bills or use an organized crime and tax evasion but so the thing
that’s most useful to the bad guys is cash that’s the ultimate sort of you
know anonymized security if anyway so that’s a straightforward easy thing to
do it should be done and kind of we just gotta get it there
agree that’s that’s that’s a mint now to talk about the old crypto kind of world
we I got I got to this from the kind of the payments thing because I’ve been
looking for a way in which we could take the cost of payments down by ninety nine
percent the way to take nominal cost of treating securities in the payments
world we use the term the we often times use the term of the payments real so
it’s a credit card rails as checking rails there’s a federal wire rails was
around so let’s take them to understand how I think to think about the
cryptocurrency world is there are three parts of it the blockchain the court the
the token and the protocol and the three of them operate together to create one
solution one integrated solution has the capacity to to revolutionize the way we
move things of value around the world I mean let me use a railroad analogy and
make the point the block the the the token is the equivalent of the boxcar
it’s the thing into which you embed something of digital value that needs to
be moved from one place to another from one part of a blocked into another the
blockchain is the cargo invoice is the invoice in the cargo manifest and the
rails is the protocol and you have to think about all three as one integrated
solution that enables you to accomplish the the purpose of moving anything of
value around the world at the speed of light at no cost the way we talk about
email today people who just talk about blockchain are talking about something
very interesting but it’s a piece of enterprise too
analogies as an advanced database and a private blockchain unconnected to the
global to the Bitcoin or another digital currency blockchain is the equivalent of
the intranet remember we had intranets to begin with where he was really cool
you could do internal communication with people in your own companies you know
but but it wasn’t really until those intranets were connected via the
internet protocol to other intranets to create the world wide web of intranets
called the internet that the world changed the world is going to change in
finance when we connect the private blockchains via the Bitcoin or aetherium
or other protocol to the other blockchain the world have a global
blockchain that’s the worldwide web of block chains that will fundamentally
change the way in which not only do we move value around the world speed of
life but also which we actually fundamentally change way which we
compute because it’s the fourth computing paradigm I’ve experienced in
my lifetime the decentralized computing paradigm that is the vision of where we
can really go with this that’s transformational now the first step will
be the intranets the block chains as those get deployed but that’s not the
endpoint that’s just a first step and going to all that stuff of greater
length to be like me too but that’s the beginning no I look at transformative I
want to go back to something we talked about around monetary policy which is if
this happens which I think it’s I say yes I think you’re saying when I get it
you don’t bit more to do with the F than we do I’m just kidding
no J my view is is it’s happening yeah what is the u.s. is wrong yeah well
that’s yeah I’m gonna I’m gonna go further because this is my right hand
yes yes because we’re both involved in companies that are doing it we’d like to
do it here but we’re gonna do it well let me let me ask this back to well
we’re talk about measuring things in our global economy
this also sounds incredibly deflationary because of the cost that will be driven
out of our system agree disagree I mean but if we’re going from we’re going from
paying a percent on a retail basis 2 percent 3 percent to move things around
to virtually nothing well let’s get maybe the denominator this is important
deflation is not necessarily a bad thing if my being able to buy you a mandate
that’s the problem mandate is about real interest rate yeah
but a the questions who pays all right there that’s your question you wanna
stay in the position where you’ve introduced this cost savings across the
globe you don’t want to be a taker you want to be somebody who leads in this
areas I think what you’re saying you know because we now do have a global
economy and these savings are our global that you want to be a leader look you
know leader in many things agree so look I the issue is in Glenn I haven’t talked
about this before it’s interesting we’re having our first conversation and us
both attacking soar the same problem the the friction in the payments system is
huge it’s not seen by the consuming public it takes away from their
purchasing power because they just pay the the the marked price but the seller
the retailer gets 97 96 or 98 cents on the dollar when they go turn in their
credit-card receipts or their payment receipts they’re just they just know
they’re getting less than par every time they sell you something in the store if
they if the if the retail seller could get par this is the interesting question
would the prices come down two or three percent we don’t know the answer but
someone eventually would probably figure that out with with the amount of
technology and digital sales and digital outlets and you know what will happen
you know and it takes one first mover the power of shopping is unbelievable
power suppose people can see prices and shop prices exactly right
the market has become pretty efficient pretty transparent and there there are a
bunch of companies out there that will basically take your grocery list today
and put it in the computer and tell you what grocery store in your neighborhood
to go to where your all-in grocery list will be the check of the cheapest and so
you’ll get more and more evolution on this space I just think that we ought to
come back to at the end consumer welfare because that’s kind of what we’re after
right and that’s not necessarily measured in prices it’s not necessarily
measured in productivity it’s not necessary measured in GDP growth or
inflation but the extent thing you were offering something to a consumer that’s
better faster and cheaper than what they had before that’s a good thing yeah and
the way we added up on economy and talk about it needs to be subsidiary to that
insight and policy needs to address the chain needs to be able to sleep we
talked about crypto just like we talked about now with Fed policy and needs to
address needs to change how it what tools it uses how a dress that dresses
that based upon how the economy changes in the pursuit of greater consumer
welfare rather than try to use old tools and old frames of reference to others
old lenses to understand the modern economy so look and that consumer policy
side I will add one thing I think is important you know Glenn’s talked about
a couple of the major problems in the world whether it be climate or things
like that there’s a there’s another issue on social side you we all talk
about banking the unbanked a big problem you know the the the payday lender
should not exist in American name it’s it’s it’s it’s one of those things that
when I Drive by him in New York City and see payday lenders it’s kind of shocking
to me in a digitized dollar stable token whatever you want to call it world we
would eliminate payday lending that has to be stimulant to the US economy if you
could basically get your paycheck into a digitized wallet or into a stable token
take that wallet to any ATM even if you pay the $2 50
ATM fee or pay the $4 8mp I don’t care what you know versus paying ten or
twelve or fifteen or eighteen percent to a payday lender to get your money into
your pocket or use your digital wallet at point-of-sale you’re adding a huge
amount of disposable income back into the system and to me that is one of the
huge potential opportunities of windfalls that comes out of this
technology and it has to be consistent with the SE C’s specific mandate and the
government’s broader mandate of consumer welfare social justice and Financial
Inclusion all right let me let me make sure you’re thinking
about it in that perspective is something we ought to go make sure it
gets done that as opposed to put impediments the way a beginning done
then one more quickly then you get to it with light and said about 100 our bills
if you literally could get to a cashless society you would basically have a
society where your income taxes would become digitized you basically would
almost push a button at the end of the year everything would go in the system
and you’d hit Cal or you can hit calc and see and you’re you could end up in a
real-time attack Society there’d be no fraud there’d be no anything in the
world you would have everything go through the system and then this whole
fraud and lack of collection tactics you know people say 30% of our taxes United
States don’t get collective that’s the problem
I don’t know if it’s true or not but we can fix it but the other thing is well
the best thing I would make point you guys understand is that you talk to law
enforcement people who have actually spent time trying to track whether why
do all the Bitcoin guys get caught because the public blockchain is a
permanent inaudible record availables law enforcement right so there’s
actually a whole law the one of the ways in which you get rid of fraud is that
the public blockchain is out there for everybody to see the and the community
is the one who validates every transaction so you can go find exactly
who did what when one of the things I’m very important public public service
announcement for my colleagues here at the SEC the women and men investor
education is so important to us the investor education becomes a lot easier
when you get rid of opacity and flexible yes people can see what they’re
paying they you know I often say in our economy there are people who pay eight
to 18 percent and there are people who collect eight to 80 percent you want to
transition from being the borrower at 8:18 and as close to eight not 18 as you
can to the person who’s getting those returns over the course of your lifetime
yes we are trying to help people understand that and the extent
technology helps people understand that it’s a wonderful thing see I want to do
something entirely different right which is I want to get rid of that other words
that’s just a cost and the system that you’re in deficiency that needs to go
away my great plan we can get rid of those eight to 18%
that’s just like the eighth or a quarter plus a commission it’s just like doesn’t
have to be there for the markets to operate anyway so go ahead by the way it
but the funny thing is at the time we had it you couldn’t imagine it ever
going away but we have to be we are now at a place where we can get rid of that
eight to eighteen percent and I can clear another nine that can I imagine I
can see it you need to set an economic construction which not that one person
gets it versus another prey and get it would it would which it’s irrelevant
I agree all right last topic what’s going on today brexit trade markets what
do we think about markets today anything any comments from either of you that was
your right hand place on the right was a right hand gesture not a left handed so
look that’s a that’s a how long is a piece of string questions so brexit look
brexit comes down to an election right I mean were on a very short timeframe here
if Boris wins which I guess is the polling now he’s got sort of ended
December to notify the you he’s leaving I assume he does that it’s a it look let
me give it more sophisticated answer you know looks like he’s polling at a high
enough margin to get a majority government but right on the edge he
would I assume he would notify the Union he’s leaving
he’s got a year basically to leave and he can extend a couple years so I think
that’s sort of where we end up so it’s a it’s a I guess people call that a quasi
hard brexit which to me I’ve said this before it’s probably the right answer
you know we just can’t keep living in the world of the unknown in Europe
probably the best thing that could happen we’d stop talking about what is
going to happen and what could happen in the future I think it will be fine you
know the whole thing is what do we do with trade agreements you know how do we
keep Merrifield ins taken off from from from the United States to Europe and
trade agreements and most likely what will happen is we’ll just take the
existing trade agreement will Reese I knit and keep extending it out for six
or twelve months at a time until we can renegotiate new trade agreement will
take years so yeah I think the UK election y know I know it will come and
go and there’ll be a winner and and if that happens if we end up with a
surprise on the other side we’ll just we’ll just live in this turmoil for like
we haven’t living for multiple multiple multiple years you know so you know
someone last night has an event they said you know the bid offer is parody on
the unsealing and 145 on the upside so we’re somewhere between parity and 145
you’ll be the u.s. to me we’re in and we’re in an interesting spot here in
many respects because the consumer continues to do what they’re really good
at in the United States they’re really good at spending money you know like I
said it doesn’t matter what interest rates in the United States the consumer
here knows how to spend the consumer has basically worth three percent wage
growth they’re taking the three percent wage growth and spending it they’re
taking their tax savings to the extent they got tax savings or they got
additional child care credit so they got additional credits in the taxes and
they’re saving it they’re taking their deflationary savings in in other areas
and spending it they’re taking their lower energy cost and they’re spending
it back in the economy you look at Friday’s Black Friday which was really
online sales and you take Monday’s cyber monday sales those were to record
days I mean monsters sales days if you look at the credit card data so the
consumer is doing what the consumer should do so that part of the economy
looks really pretty good the one concern I have in the US and I’ve had this now
for a year and a half his corporates are not spending money in
the United States and I totally get why they’re not spending money I I was a CEO
I probably would be spending money if I sat on a corporate board I wouldn’t be
doing big capex right now you first of all if you start down a big capex
project its property its property plant equipment its buildings and things like
that first thing you’re gonna buy a steel and aluminum why would you buy a
steel and aluminum at the world price plus huge tariffs you know so you look
at that the cost of the that is expensive on one side and then you look
at the other side of the equation with the geopolitical uncertainty in the
United States – what is it gonna be potentially if we get a change of
presidency what is healthcare gonna look like are you gonna be able to have
corporate profits are we gonna have sir taxes on corporate profits what are they
gonna do with corporate buybacks what are they gonna do with corporate
legislation it’s a really tough environment to say hey let’s take you
know ten or twenty billion dollars and invest it in the US economy right now
and look at it on a 30-year payback I think it prudent CEO or prudent board
would say let’s wait a couple years and we could probably make that investment
in the future or worse we can make that investment in another country and import
those products so unfortunately I understand why capex and corporate
spending is down in the United States which which is disappointing to me
because one of the big motivating facts behind the tax legislation wasn’t
incentivize companies to spend money in the United States that said again though
we still are at 3% wage growth where it’s sort of three and a half percent
unemployment we still have 7.2 million job openings in the United States so
from that side of the equation it looks pretty good so I you know I continue to
be cautiously optimistic in the United States good so okay so I’ve got three or
four things on my mind fit in that bucket one is a fundamental change in
the nature relationship between US and China that’s going to affect the world
economy for the next generation and it turns out that we misjudged XI and he
turns out to be a real hardliner and rather than the process that we had of
China moving toward a capitalist economy they are now very firmly adopting the
model of state control of very important parts of their economic sectors and the
state use of private actors for espionage and intelligence purposes
that’s not going to change anytime soon and so we’re going to have a very very
different way in which these the United States and China manage their
relationship with each other in the coming years that we have in the past
one very good example of that and now is largely an assumption among in the
technology community that we’re gonna have two internets on either side of a
great Chinese firewall that’s kind of one the second is that I was a public
critic of the tax cut because I doubted seriously that it would increase
economic growth and it hasn’t it didn’t and whatever economic growth it offered
was gonna be fleeting which it proved to be the case and that I thought at that
stage of recovery giving the level of federal taxes as a percentage of GDP
which was at well below historic averages that it was time to get our
fiscal house in order I’m very very concerned about the nature of the these
massive deficits the United States is running during a period of peacetime and
recovery and if you want to maintain United States centrality in the capital
markets one of the things need to do is be a capital provider not the world’s
largest borrower whose current whose sovereign credit risk is deteriorating
systematically that’s the second thing I worry about third thing I worry about is
even though the economy is strong and and not strong but an economy is growing
call it 2% trend and unemployment is at historically low levels you still have a
massive amount of economic insecurity in the American household the volatility in
people’s wages and the volatility and they’re spending their low level of
their savings without any cushion means that there’s even in a very strong
economy we still have this very profound sense of economic insecurity and very
important parts of our country and that’s reflected in a whole host of
political and social economic trends that we need to address that and the
strong economy hasn’t addressed it third thing fourth thing is I’m very
optimistic because I am on the board of a company that’s I think that I know as
America’s largest capital spender right now AT&T and is one of the largest
capital spenders in American history and we’re building out the 5g infrastructure
by the way my personal view is the reason why the companies that have good
commercial propositions and your group can grow in the technology economy are
actually investing and investing quite aggressively take Amazon for instance as
an example and we’re gonna build out a 5g network that’s gonna offer wireless
speeds at 5,200 times what you get today you’ll have a wireless experience as
good if not better than your wired experience just as 4G enabled the
creation of a whole host of companies on top of that platform that we didn’t
exist before everything from GrubHub to Airbnb to ooh BRR there will be a whole
host of new kind of economic constructs that’ll be able to be created on top of
the 5g infrastructure that are gonna be we’re gonna create a whole new layer of
economic growth it’s one thing that the United States will be competitive in
though China’s ahead of us for a bunch of reasons
we’ll be competitive in unlike the digital currency stuff where that might
migrate outside the base Teresa we talked about and so that’s a real life
reason to be optimistic it’s going to be a lot of fun to both invest in those
companies and then watch them deploy products and services well I’m gonna I’m
gonna close this out I’ll give you a chance to say any filings but let me
close it close it out with a few few words here
first of all it’s wonderful to work in this job in a country where you can have
this kind of discussion about how we look forward the risks we face in the
role of government have it in front of people out in the open
talk about risks talk about different perspectives it is a great privilege I
know you you’ve experienced it but it is a great privilege to be able to live in
a country where we can talk candidly learn from each other look forward and
try and do our job better and that’s what that’s what today is all about and
I just want to say I appreciate your sharing your views and sharing them in a
way that we can all digest them and be better for it so that’s can I say one
thing before we go which is I and I don’t want people to misinterpret what
Gary and I both said which is one of the reasons why we have the greatest capital
markets in the world is because they’re the ones we’re that are the most
effectively regulated and in which the all the rights and expectations that
investors have can be enforced yeah can be predicted in enforcement next dates
so please don’t interpret anything that we said that it is being critical this
organization because I see it as a centerpiece of kind of the financial
markets have a huge amount of respect and admiration for everybody does and I
want it here does and I just want to make sure everybody understands that
agree completely look we would not be in the position we’re in without the
regulatory system we have in the United States and I applaud it
sometimes I’m angry at it but I applaud it so thank you for to it we really
appreciate it yeah thank you please join me in thanking these wonderful guests

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