20 Episode results for "Goldman Sachs"
Whats It Really Like to Be a Goldman Sachs Intern?
"This is exchanges. Goldman Sachs where we discussed developments curly shaping markets industries in the Global Economy Jake siewert global head of corporate communications at the firm today. We're talking about what it's like to be Goldman Sachs in turn and how employers are trying to keep up with what younger generations want from a work environment to do that. We're talking to college. Seniors who Internet Goldman Sachs's Sachs's past summer and we'll be returning fulltime analysts next year as well as owner very own head of human capital management Dane Homes Catherine Rebecca Ending deign welcome to the program so much so this is for everyone briefly introduce yourselves where you from. Where do you go to school or did you go to school Tom. In what part of the bank will you interning in this past summer dangerous. Give us a quick. Take on your role here at Goldman. Sachs so my name is Catherine Doar VIZSLA. I'm from about an hour north of the city in Putnam County. I'm a student at Brew College here in the city and I had the opportunity to intern in the Securities Division this summer rotating on a few different teams within prime services. My name is Rebecca Scheiner. I am a super senior issuing university which is here New York City where I'm double majoring in accounting and finance but I am from Chicago and this past summer I was interning on the Jess Bank Alyce team and the Control Division here at the firm. I'm dain homes as was mentioned a head of HR. I guess in the small world connections I was born in Chicago. I went to University of Columbia Columbia New York so I don't know we're all all connected one way or another and I'm responsible for over activities around people at the firm leadership development okay just to set some context. We collect a lot of insights from our interns when they're here of the summer. Why do we do that. And what did we get out of that experience of listening to our interns over the course of the summer when they're here yeah so obviously we use the old adage that you don't know what you don't know and I think in a people driven business. It's very normal to fall into the trap of saying Oh. I know what it was like. I was an intern. You might have been a long time ago. When you're using an abacus. It is really true that you don't. I don't know what you don't know so part of it is getting the information and what's Great. I think about the generation that we're seeing today and a lot of the people that were recruiting to the French the firm open and honest and very frank about how they're feeling about things and how they're looking at the world so it's all about being informed unfortunately if they're happy to share it with us the intern class it's the summer was the most diverse to date talk a little bit about how that classes a reflection of what we're thinking and how we're thinking around diversity inclusion here at the firm we think about diversity inclusion through a bunch of lenses one is just if you think about it from a pure where business had serves clients and whatever problem issue usually solving some problem for one of our clients dance with our we want we want a diverse set of us in the room as we try and tackle whatever that problem is and so some of that is a reflection of frankly just wanting to provide the best solutions to our clients. Another part is is that in our surveys with our interns we hear that they want a diverse population around them so part of it is reflecting the desire of what the most talented people out during the marketplace that type of environment that they wanna work in and then frankly we have a core principle that we think about which is mirrored crecy and it's hard to argue that you fully sled meritocracy talk rec- if you don't have diversity in the group of people that you're bringing in because we've obviously proven time and time again talent knows no boundary whether be gender race ethnicity sexual orientation tation so having a diverse class of me makes me feel very confident that meritocracy is alive and well one of the things we did learn from the surveys that eighty two percent of our entrance that it was important and to develop managers that foster that kind of inclusive work environment so how are we thinking about the forward strategy for diversity inclusion particularly comes to training managers. All of this starts with one caring about developing our people which means investing in them investing your time. You're knowledgeable energy. Were looking for our managers to do that. The other part is understanding understanding them and so we started this question with why do we survey. It's a little bit to understand what drives them what they're looking for and in a lot of ways that's prepare managers to deliver that to them as well so managers play play a critical role in developing people in attaching them to the firm and making them effective and the diverse population would you need to do you need to make sure that you understand all the diverse perspectives that the people have in where they come in and you frankly have to care care about what matters to them care about what they're looking to achieve and addressing that and so you know it's resulted in a lot of education. We've put a lot of investment into our learning activities to make sure people understand the different perspectives that are out there but we give people the base knowledge and then we got to make sure that they care and engage H. and invest in our people Catherine when you came here to work over the summer. Does it feel more less diverse than your schools. And what do you expect for managers in terms of how they can do a better job of making people like yourselves comfortable. Baru at least for me is a very diverse school but I would say that the difference here wasn't huge Goldman's. There's definitely making big strides in that direction and I think something interesting just to think about in terms of managers kind of enforcing or implementing more of that diversity within their team team kind of what Dana mentioned a little bit about different perspectives kind of coming in from those diverse experiences. I think is important to think about so when I think about diversity. I don't just think of race ethnicity the city religion. Maybe I'm thinking more about kind of what have those experiences taught a person. What skill sets have they brought from. There and I think that's an interesting thing to think about in the workplace given that different experiences will transfer into different skills in different ways that a person can add value at team so my experience with diversity at the firm is that the firm is much more diverse than my my school or university but that said I think that within the firm managers can best encourage and foster diversity and inclusion by using it as an invitation to conversation because I've always thought of diversity as something so much larger than simply checking off boxes like Catherine said I think you have something to learn from everybody around you and while may be easier or more natural to start that conversation with someone who seems more similar to you at the outset. I think it's equally if not more important to start those same conversations nations with the people who seemed different than you are because in my experience the more you speak to the people who seem to be different than you the more you realize that you have a lot in common and I find that you come away having learned something and I think there's something really really valuable not so both of US studying finance as you're thinking about how to choose the next step of your career after school over the things that led you to Goldman and what were the attributes you looking for in a future employer. I think for me it was really the people that was the first thing and then I was looking at so I had a wonderful experience with all of my interviewers and that was kind of the initial stop that made me realize that golden was going to be a fantastic place to work and I actually had the unique opportunity many of turning here for two summers in a row and that's exactly what I've experienced. The people are incredible overwhelmingly supportive and helpful. I've always found that there's something you can learn from from everyone sitting on either side of you and I think there's definitely something to be said about. Never being the smartest person in the room. There's always something you can learn from every single person Golden Sachs for sure in addition to studying finance. I'm also studying accounting so last summer interns in a public accounting firm and it just wasn't for me so coming into this past summer. I want want to try something a little new which is what led me to controllers actually long story how. I ended up here but I guess in some. I'm really here due to the alumni I from my school who really stopped off and became interest me and guided me this way and I'm so thankful to them but how I ended up Goldman Sachs I mean I think the name really speaks. Thanks for itself because it truly is synonymous with excellence and that was my experience over the summer. When ever I was asked come experience was going. I would explain that I felt challenged. Challenge all around challenge that I was applying the things that I learned in school to my work on a daily basis which is rewarding in and of itself challenged and that I was furthering during the things that I learned and realized how much more I had to learn and challenge because I was surrounded by the most impressive people and as incredible as has my team is at what they do they were equally as incredible as a welcoming me as part of the team and of teaching me about my role and what I needed to do in order to succeed and they really thought to it that I was successful and to me that meant a huge amount so dean when we talk about work life balance means different things to different people and this is one of the questions questions we asked the interns is interesting sixty two percent of the entrance associated with spending time with friends and family only seventeen percent associate with disconnecting at the end of the day when I was that age that's what I was connected so it's different. It's unique for each person can meet flexibility can time always helpful to understand it. What does it mean to you so I'm not surprised. Now I found the pure synergy between me and most interns for me. It's family and friends allowed to but what's interesting stain. I think for me when I think about flexibility around life. It's having the space to live your life intentionally around the things that matter to you and I know there's this this whole debate. Oh can you have an odd habit. All say to people who have a problem with saying oh you can have it on like what you're just not creative enough because there's a lot of things in the word all a- and so to me you know work like balance starts with my family. I'm a obviously a husband and father and my wife. I guess semi chose me my kids. It didn't so I have an obligation on. Yes unfair to them a burden. I have to live up to and I care a lot around my community particular ticket around African American boys. I also care a lot about a lot of the friends that I've had growing up and you know people go through challenges in your life so being able to be there when that matters an an investment. Those things is really really important and the part. That's been interesting for me. It'd been at the firm I've been able to intertwine some of that together where some of those investments with with my family or whether it being so my charitable activities have been amplified as a result of being the farm and so that's actually created a unique synergy we sometimes it can these things is one or the other but a lot of times. There's a little inter twining of the Tube but for me if I can look at architecture and design books. That's that was my made in college. I I can spend time with my kids teasing them as much as possible. Make my wife think I'm a major intelligent brilliant funny good looking delete that one takes the most work of all then then. I'm pretty good so how about for you what is work life balance mean when you think about entering the workforce full-time and and what could employers be doing better to support healthy lifestyles. I think for me I'm one of that seventeen percents I would definitely put a focus on being able to disconnect from worked just because I don't think it can be fully present with friends and family and kind of pursuing your different passions. If your mind is always at work and in order to make sure you're not burning out and you can kind of come into work the next day really add value to your team every single day. It's important to find that time to disconnect at the end of the day in order to kind of foster that sort of environment making sure that there is a work life balance important important for managers to kind of just be on the lookout for is there somebody who's constantly working really late hours or coming in on weekends working from home every day and kind of identifying that before there might it'd be a case of burnout for example just to make sure that every person on the team really does have that time to themselves to disconnect and to pursue their passions and what's important to the employees say go home doc get out of here. I've been known to do that. I similarly in part of that seventeen in percent that answered that work life balance means to be able to disconnect at the end of the day because I've you work life balance as being able to maintain your priorities but not neglecting yourself in the process one of the things I like to do for pleasure and I won't let myself do that unless I finished reading my text books for the day so being able to read for pleasure at the end of the day says to me like you did it right but besides that you know artistic so I like to draw I like to Crochet. I also cook and I love having friends over and my friends all know that and they take advantage so you know weekend's classes in my room has already been rebranded into hotel to you see but those are all things that are important to me so when I approach my day I try to make sure to weave. Those both ends so that again I'm maintaining my priorities without neglecting myself in the process and I think that managers should encourage that among their teams as well. Everyone has the things that they're passionate. What about so I explain what those are in my case for other people might be you know playing on a sports team for example. Anything manager should encourage people to pursue those things that are important to them. Katherine said that you don't find yourself with a case of burnout because when you feel the best I think you perform the bat with a funny thing. Is this conversation so now I feel like them so maybe I'm like seventeen percent or that is director of sixty two but one thing that I found in it's one of the amazing things which you all reference about a lot of the people who work here Goldman Sachs when I think of disconnect I think of non movement and my guess is you crochet like a world class crocheter and a and when you cook you cook a mean meal and when you're with your family your with your family intensely and so that's the one thing that I found is people definitely have passions and things away from the office so in that sense. I really agree with disconnecting. Certainly I do but what I've found which has been one of the interesting things in connecting with a lot of people especially some of the younger generation to from when I ask them. What are they doing when the wave from their officer doing something else passionately they're not sitting back and hanging out there kind of doers which is inspired? It makes me feel like I need to do more. We all do more one of the interesting things in the service entrance a brand loyalty much more important than product loyalty okay so the very conscious of brands and impact brands have in the world. How does that change. That kind of evolution of consumer behavior changed the way we think about recruiting people ed how we approach campuses differently. If I were to use different language in it from a recruiting perspective I would say product loyalties like role responsibility. You come into this job right. That's like the product and brand is I'm hiring you to this firm and part of the importance is what does that brand stand for that brand. Iran mean and certainly for us. There's a lot around what our purpose at our impact in society is as one of the questions that we've done that so when we think about how a recruiting today were much more trying to help people see where their alignment of their skill set is to potential jobs within the firm and were often presenting it as there's not just one there can be multiple so you're joining a firm. You're not just joining a role and we spend a lot of time talking to them about what the impact is that the firm has in the broader society society as a hey. I want to attach myself to that brand and what that brand means and the impact and the positive results drives in the world and I think that's fundamentally different from where retreating was before which was some version of. Let me tell you what position I'm hiring for and let me tell you what you're GonNa do in the first six months and the second six months which is very kind of product. It certainly has changed how we approach it. Is that a fair characterization of the way you think about the choices that you're making definitely agree. I know that if something were to happen and my team let's disappears in the next year. I know that I still WanNa work at Goldman Sachs. I wasn't here specifically for the one team. Although I do love my team and very excited and let the record reflect there's definitely something to be said about kind of the strength of the name. Goldman Sachs and the people and kind of just the quality quality of working in a place like Goldman Sachs. I think kind of going back to that brand versus product loyalty. I can definitely say that. I'm one of those people who focus is a little bit more on the brand loyalty and I think it's important to kind of know who you're working with know who you're dealing with Rebecca as it relates to you know my habits is a consumer. I can't say that I identify with product loyalty guilty or brand loyalty and it's so interesting because I'm taking a marketing class this semester and the first topic that we've actually started discussing is the economics of brand loyalty but the more I thought about it the more I realized that for me it comes down to price and quality more than it comes down to a specific brands or specific product because I could think of examples in my life where I lean toward brands. I can think of examples in my life where lean toward a product and I can think of examples in my life where I lean toward one. It's not intentional at all when you have three kids like myself. If you lean towards whatever it's GonNa make them think you're cool. That's all that's all. Your definition is called yeah. I know a new day is coming to so one of the things our interns spotlight they thought. Ai Artificial intelligence is going to have the most profound global impact of any trends. We're seeing over the next ten years. It's interesting because a lot of times that's sort of seen as a display of some work in case but how's it shaping the future of our business in how we think about it. If you take a step back and think about as being a tool just like the internet was a tool or cars were or television and by the fax machine which you guys don't remember the Little Waxy Raleigh paper I I when you think about it a tool and whenever you have any tool you know whether it was the auto and the first horseplay there's always disruption and there's always some pain with that disruption but if you take a step back it's a tool and usually the tool takes precedent over the pre existing tool because it's better and it allows you to have a bigger impact as a result introducing. The car didn't didn't get rid of transportation it just make transportation more efficient quicker faster more effective and so I think over time we'll see the same way it will make certain aspects of the business and they'll be disruption in that but it will also create a whole new series of other jobs and opportunities for us to do because we now have a better tool when I think about this just narrowly in the space of people. I think it would be better to have a better tool to think about how we recruit. I think it's great and you know we do this now where somebody says these are the things that I'm interested in and we say hey. These are the jobs you should look at. That's good as opposed to running randomly the chance that you happen to be in the room interviewing with someone who has a great understanding of your skill set and how those apply to maybe a job so Rebecca Kathleen your digital natives your lives have been intertwined with the latest and greatest technology. How do you think about the role technology plays in your work life or just your life more generally or do you think about it all just take it for granted. I would definitely say we take it for granted ended. We did grow up with technology so we never kind of had an experience of Oh. We can't get on the Internet. We can't do something that technology really helps us with on a day to day basis but I really do think about it more in an academic capacity. I think it was introduced to me at the high school level of kind of how can we use technology to be more efficient a lot of different tools about whether it was submitting an assignment working on assignment all kind of focus on that efficiency making sure that we're able to kind of get what we need to get done quickly and efficiently man. That's kind of continued throughout college yeah. Dan I think your take on. Ai As something that's going to enhance what we currently have is quite comforting because that means that my job is not going to be replaced but to answer your question Jake as much as they really. We have grown up with technology. I have also grown up watching technology change. I totally remember the old stuff yes. I know what a fax machine is so I think that now it's really a matter for me at least a recognizing that there's a time and a place for technology because it is an incredible tool for connecting us. I mean I cannot imagine doing a research paper without Google. I do not know what our parents did but it's also a really powerful tool for enhancing my relationships chips keeping me connected to my friends but also keeping me connected to everything going on with school. I think you really do you have to recognize that. There's a time and a place when I'm studying and my phone is on silent. If I really really need to get things done phone is off when I go to sleep. My phone is often in another room because I recognize that it is an incredibly powerful tool when used correctly crackly but it's also an incredibly distracting tool when you don't use it correctly. I think a lot of people sometimes think millennials and Gen Z. Expect to spend a lot of different time with a a lot of different employers but the survey said at least maybe it's just the Goldman Sachs entrance ninety two percent of the interns expect to work for five or fewer employers in in their lifetime so dean does that square with what we're seeing in the workplace yeah you know it's an interesting comment because I do think this is the danger of whenever you have generalizations generalizations around us certain group and say this is what they want this particular one about moving around. I really think of it from a different. Lens which is frankly we just just have a group of people entering the workforce who have power more power than previous generations and so that's led a time for people to move around because they have the ability. They know where the jobs are. There's people actively recruiting them and they can. They have that option versus earlier generations who you know most people when I came out of college or just like literally the goal was to get a job when somebody said where do you WanNa work. That was weird question. It was like what city do. I want to work in a company. You know so when I look at this. I also think this is a generation that saw people in their family go through the financial crisis and the recession and so there's a desire desire to have stability there. That's embedded him in most cases. It's been interesting the things that I view the new generation. Wanting are frankly things that I think most people wanted. They just weren't empowered actually get it and now they're a little bit more empowered to get it and they warn the passing so they're executing but I don't think it's fundamentally in that sense fundamentally different any thoughts on that topic but I think kind of going back to our earlier about brand loyalty versus product Lindsey. I think I kind of look at this topic in the same way. In which I'm I'm a little bit more focused on the broader organization that I'm working for him reputable of that organization kind of knowing the people that I'm going to be sitting next to every day I'm definitely part of that pool that would like like to work for five or less companies in my lifetime thinking back to that brand loyalty Rebecca. I think there's a lot of room to pivot careers transition within the firm and that goes back to what you you said about brand loyalty not terribly surprised by that results. I also answered that I would like to work for. Five employers are fewer. I am very happy to have a job. I like job security yeah. I think those are all very good so Dane just finish summer vacation. You're big reader. What are you read so I'm just actually finishing a book the road to character but David Brooks which I find fascinating about what you know really drives character in people what creates these traits and how often the pathway a tremendous character is tremendous flaws and failures in advance so it's been really could read and I'm also reading homo. Diaz has the fallen domain sapiens. We'll see if I still feel good about that. Path as well how `bout you. You're a big reader yeah. Do you like to read. I just finished a novel. Call the time in between by Maria joining us and now I am reading a book called the ones we choose by Julie Clark. I read a lot of historical fiction. My favorite is the book thief by Marcus. I recommends Highly Catherine any book recommendations so I don't know yet fall recommended but I have lean in the next one on my list actually have a long flight ahead of me this weekend. So that will be what I'll be cracking open so senior year what class you most looking forward to so. I actually have the unique opportunity community to study abroad this fall. I'm going to be leaving Berlin this weekend and I'm going to be taking an international economics course out there so I think that's going to be a really interesting exposure in kind of Lens through through which to study economics class you looking forward to. I'm actually graduating in January but until then I'm really looking forward to my business law class. This is my third time taking a cost given by hi this professor. I think he's really really excellent gives a really good job of tying in what he teaches to our lives and showing us how it becomes applicable because is everything he's users really is so practical. I guess also my dad is an attorney so I grew up listening to all this stuff out our families dinner table so there's something about being in class asked is really reminiscent of being families dinner table and I love that a lot of optimism and energy in the room. What are you most optimistic bottomless hopeful four in the future despite all the discussions that go on all the problems in the world when I go thirty thousand feet up. I think people have more information that they ever ever had people feel more connected than they ever had. People's goals and aspirations are more aligned than they've ever been not to sound like I'm on the set of the Matrix tricks but I feel like the singularity is common in a way that you know hopefully over time people will move towards the state of being where we focus on the ninety percent at binds I ten percent that separates us like I just think understanding what's going on in the world and shared humanity of it is what I'm kind of Mussa optimistic about Rebecca something that I'm passionate about is people believing themselves and actualising their true potential because I think that everybody has what to give and you know you mentioned that you're about to re- lean in by Sheryl Sandberg. I actually read the book just before starting my internship my professors recommendation. I do think that her book is an incredibly important work in the way that she empowers women to do just that you believe in themselves into actualize full potential and I look around me and I see where I landed professionally and I see where my friends landed professionally and there are a lot of really impressive firms on that listen. I think what's even more impressive is that none of us thought twice that this is where there were supposed to be because at this point that's given to us. We can do whatever we want and it's crazy to think that you know even a generation ago. Oh that wasn't necessarily the case so I am optimistic that going forward people will just empower themselves not just women men and women really anybody and we live in a world where technology he is such a powerful tool in the way that it connects us and you think the impact that people building each other up is greater than anything that we can even imagine excellent yeah so. I actually want to bring it back to our conversation about AI and technology I think for me that's what I'm most optimistic about it and excited to see what's going to change in the years to come. I think it's really interesting thing to kind of be at the forefront of these different disruptions and technology and having grown up with technology we kind of are seeing the entire life cycle almost of it and I think coming into Goldman Sachs next year is a fulltime analyst might be a really interesting kind of environment in which to see some of these changes slowly kind of starting to come in all right well. Thank you all for joining so so much Katharine Rebecca Good luck finishing your school. We'll look forward to seeing you next year Dane. I'll see you around the office. Sir that concludes this episode of Exchanges Goldman Sachs thanks for listening and few enjoyed the show we hope you subscribe an apple podcasts and leave a rating and comment in for more from Goldman Sachs experts as well as influential policy makers academics investors on market moving topics be sure to check out our new podcast top of mind. Goldman Sachs hosted by also Nathan a senior strategist in the firm's research division thanking This podcast was recorded on September third two thousand nineteen. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast is not financial research nor product of Goldman Sachs Global Investment research neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed claimed the views expressed in this podcast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice or recommendations in this podcast in addition. The receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Goldman Sachs CFO Stephen Scherr Recaps the Firms First-Ever Investor Day
"This is exchanges Goldman Sachs were discussed developments. Kelvin's currently shaping markets industries in the global economy. I'm Jake siewert global head of corporate communications here at the firm today. We'll be talking to Stephen Shir. CFO of Goldman Sachs. Stephen played a big role in our first ever investor day the first one hundred and fifty years which took place here at New York headquarters just this week. We're going to be talking about the day Stevens. Tom Goldman Sachs and where the firm goes from here. But before that we're here with Jen Roth of our global markets division for a quick markets update on the five number. She's watching right now John. Welcome to the program. Thanks much good morning. Everyone as Jake said. My Name's Jan Roth. I manage the global currencies in emerging markets business in the Securities Division and. I'm ready to talk about these five numbers. What's the biggest number? You've been looking at thirty three billion as the number that I've been closely watching. That is the number of inflows we've seen into emerging market funds in two thousand and one thousand nine hundred and I'm closely watching to see if we're able to replicate that in twenty twenty thus far we've had eight billion inflows so clearly a very strong year but given that you're not going to have the support from core rates that you had last year we want to see if that can be replicated in in this year. Okay so what's the number of the skating a lot of attention attention but doesn't really tell us exactly what we need to know for the past couple of minds the number that everyone is focused on his global. PM is pretty much. There's a huge focus was on growth. After last year's monetary policy easing from both developed market and emerging market central banks on average the. PM is have been above fifty shows where an expansionary territory where I number below. Oh fifty shows wearing contractionary territory but a yo in my mind. These are more of a gauge of expectations as opposed to hard data and we should be focusing more on expert data and see is as opposed posted global. PM is the current activity in this sense. Right okay so what's a number that has moved a lot or hasn't moved at all that's caught your eye for me. One year. Your overall is really what is super surprising to me at all time lows in Eurodollar volatility ball. We actually hit below five. which as I said has all time lows and you look at that? And that's the same phenomenon. Cross currency pairs given all of the uncertainties in the market whether it's the US elections whether it's a newfound concerns around corona virus and the fact the stretch levels across risk risk assets. I think there should be more ball premium in this curve. So what's your theory on. Why vaults remain so low whether a couple of reasons the main two reasons is really the perception option that developed markets? Central banks are not going to play this year and we've had continue systematic selling evolve which is really depressed. The ball curves okay so a number. You're thinking about for the future. I would say that number would be three and those are the number of days into the Iowa caucuses as we know the races incredibly tight between the four leading Democratic candidates. Whoever wins Iowa will most likely Egli get five to ten point boost into New Hampshire? Currently Senator Sanders is doing quite well in both Iowa New Hampshire and really allowed the other Super Tuesday states so if he wins the first to the momentum could carry them to the nomination. The market is pricing very little risk involved markets around the potential of him being the nominee with dollar-yen pricing only thirty basis points of gap. Brisker Iowa. which is only three days away at this point all right and how about another number in the news? That's caught your eye so something I've been watching very closely. It's the number of confirmed corona virus cases in the US as of now on the market is pretty much been paralyzed with uncertainty around broad-based implications of this particular virus on growth and. Obviously there are significant health concerns so I'm closely watching to see this number. It's larger and has bigger implications for growth within the US as well as as well as outside in all right. Thanks JEN now. Over to our next segment segment with our Goldman Sachs. CFO Stephen Shirt Stephen. Welcome to the program. Thank you very much. So we're coming off a landmark event Goldman's first investor day and one hundred fifty years. I congratulations are getting through that. Thank you very much. You're still alive. Tell us a little bit of the day and in what do you think the investors and others in the audience picked adop- about Goldman that they didn't already know. Yeah so the day was an interesting one. I mean when when we said we opened the firm we literally opened the firm and so the front doors were open and four or five hundred people came marching in and and I think I think they came away with a view that the firm was quite genuine in its intent to be more transparent and engaging with them and we were that was our intention and I think they came away with a better understanding understanding not just of targets in facts and figures but I equally think they came away with a more general sense or a better sense of who we. We are depth of talent. WHO's running the firm in in a broader sense equally? I think they came away with view about our technology given what we had on on display and so I think I think the firm showed well In the context of opening its doors and letting people in for the first time and giving them a sense of what what the firms about where it's going so I was the idea was to You know to sort of explain the firm to an external audience but talk about the internal dynamic what went into preparing it. And what did we learn. Learn by going through the process of setting these targets and putting out the goals there. Yeah I I would have to say that I think the investor relations team led by Heather Minor. Did an extraordinary jar At putting this together what went into this at the beginning was a view that David John and I had which was we wanted to run the firm in no more transparent way meaning. The firm needed to open itself up and explain to people why it was worthy of engaging with the firm either has an investor or frankly speaking to you engage us you know in business and I also say that I think for many of the forty thousand people who work at the firm. This was an exercise equally at exposing firm to them in ways we hadn't before the foundation to all of this was a three or model that we started to develop which frankly hadn't had for one hundred and fifty years either and so we started to plan and and that's not to say that you can predict what the markets look like a year two years three years from now but you need to start to plan and set up a medium or long-term plan given the investments that we're making and so that was the foundation of it was a three year business plan for the firm and off of that. We looked at targets that we could articulate need at the enterprise level and some at certain businesses as to what people should expect and hold us accountable for Stephen. You spent time yesterday with investors investors after the session and and beyond that. What was the most interesting piece of feedback you got and and and you know what really what really broke through for you? Yeah so I did spend quite a bit of time after the event With our investors. And you know people were fielding range of different questions but but someone came up to me and in giving me feedback gave in a very succinct way. Would I thought was the most profound that I had heard. which is he felt that? The firm rendered itself more investable table on the back of the investor day meaning. We gave the community. The investor community quite a bit to digest and to think about in terms terms of what the forward proposition was for the firm. And I think in looking back putting aside the bill of particulars on the targets. I think what people saw was quite impressive. I mean I think they just go through the segments for a moment they saw firm that has an investment bank that is beyond formidable in terms of its position. Listen but still strives to achieve evermore. Notwithstanding its commanding position competitively it saw global markets division that recognizes recognizes where it sits at an inflection point in the market not particular to Goldman but to the market and I think rendered a very candid and clear eyed assessment of what their challenges are equally the direction they're going to meet them including building platforms staying Edgy Acknowledging Shing where they fell short and having a very clear view about where they're going and I think that you know is a is quite a formidable sort of picture to be drawn they saw on asset management business. That is bigger broader deeper more durable than they had imagined. And I think you know opening that lenses you and I talked talked about. I think it was a very big deal in the context of the investor day. I'd I'd audio is the most successful at accumulating new long-term fear no correct of the asset. Mirages correct I mean we knew it and assumed others in new it as well but in point of fact they didn't and I think opening that window onto that business gave investors ever more to chew on about the fourth proposition of the firm. I think we show them a consumer and Wealth Management Division. You know that on one hand historically owned a very enviable business in terms of its ultra high net worth but I think showed considerable promise at being what we want. which is an edgy aggressive growing forward-looking digital consumer bank that spans a range of different well strata and I think that was a very forward forward and positive view on the firm and then I think as a general matter you know? We showed ourselves to carry kind of Ford Engineering Prowess to put at the business us which is now organized and very clear eyed about where it's going and being led by a group of people who come with considerable history Dan Pedigree and so. The person said to me that you know you showed Goldman to be a more investable proposition. I think was reflecting on all elements that I went through businesses. Mrs that are edgy. Commanding market share very self aware of where they are or opening up a window onto a profile of the business. Not known all of that. I oh I think is even more significant than putting out specific targets themselves because again people are now going to look at us in a different light and think about the Ford of the firm which I think colds old enormous promise and importantly I think they do as well so one of the targets the put out there is a minimum thirteen percent. Are we in the in the medium-term which we discuss defined as three years for those who weren't necessarily absorbing everything that went on that day or didn't know or weren't there what's going to drive. Those higher returns. Well I think the drivers of those returns are GonNa be several things one just in our base core incumbent businesses businesses that have defined Goldman in sacks for the better part of our history. Those businesses have room to grow and areas in which they can expand and so they will whether that's investment banking or the securities business or investment spend management or. Like all of them have opportunity for growth in will harvest that growth in the context of building some momentum around increasing our we I think the second piece are the the newer businesses were in so think of Marcus and the consumer business or apple cart or transaction banking where over three year period. They will start to reach a level of maturity you know where they will start to throw off incremental revenue and do that on a higher marginal margin now the interesting bit about that component of it is a three year window for those businesses doesn't in my mind really reflect the true potential of what those businesses can produce both to the returns of the firm arm over the longer term. So call it five years or more. Because these are businesses that will still be on the upward slope to get to their maturity level. All and we will still be investing heavily in them and so the returns from those businesses within a three year period is more muted than I think what. They will demonstrate over the longer term arm which is why we equally said in addition to setting greater than thirteen percent. Are we or fourteen percent or not is that we would hit at least mid teens As you look at the longer term horizon for the firm itself one of the peculiarities of starting a new lending businesses. You have to build reserves For those who are super immersed I in Bank accounting explain what that means and why. That's doesn't give you a trip full picture of of the the firm's underlying profit sure so whenever you extend credit whether it's a consumer or otherwise you take reserve. There are accounting rules that determine how much that reserve needs to be in the reserve is this reserve is a reserve against the possibility or potential loss that you will Incur as it relates to that loan or a portfolio alone. So you set aside some amount of money that you hold out for the potential for loss so it is not economic loss in and of itself but it's reflecting your books that lost track it hits the bottom line of the firm so the challenge in that the burden that it puts upon the firm particularly as you grow business. So let's take the apple cart business you start from uh-huh zero and as you grow out that portfolio You are building a reserve in the context of the size and magnitude of the portfolio your building that burdens. It's the business during the growth phase. Because when you hit a point of maturity easiest way to think about it is you've taken a reserve loans. Leave Loans Command when you're substituting a two one for the next. It doesn't change reserve when you hit a fairly steady state. The impact of that reserve is rather muted. But when you're in a growth phase this is a it's a punishing proposition. And so we're feeling that and we were quite open with people you know yesterday during the investor day but equally. I've done it on calls where we're quite clear that this we'll have a fairly significant impact. And it's the cost of growing from starting a benefactor to something correct so one critique that we've heard from I'm from analysts and others is that the thirteen percent. Roi Is is not exactly aspirational relative to some of our peers. How do you think about competitive position relative to the other banks in that in that thirteen percent target? Well we all have slightly different business models so you know what one bank can return. Earn will be different than another. Some banks have a bigger much bigger consumer business other banks have less so and so. The comparison sometimes can be reflected in the different business models. That exist I I heard the same view. In fact going into the day my assumption was we would be criticised to the extent that people felt. Maybe we were a bit soft and not as aggressive or ambitious in the returns. This is the first time we put targets out and I think if we meet them I and I'm confident we will And it will take the organization to deliver on them will be quite content as will the investors in terms of you know what we will have achieved but there's some element of conservative bias in them. You know we for the first time did a three year model for the first time put out targets and we didn't leave ourselves sort of right up to the lion in the context of what we can deliver but I think they are ambitious enough in and Kennedy is. I pointed out to investors yesterday. These are not defining of what our ambition is. Our ambition mission is to exceed the targets that we have set for ourselves and I think as David said in response to a question that was asked of him. We're not asking people to go to sleep now for three years. There's and three years wake up and we'll tell them if we hit or not. This'll be a progression. And if if and to the extent we start to do better than you know there's always the possibility ability of upping the ante and you know and recalibrating where where our objective set so a lot of our Goldman economists have been on the show talking about the prospects for growth and they're pretty optimistic there a little bit above consensus both global growth and for US growth this year. But what if what if they're wrong and and how do you think about recession risk as it relates to the goals in terms of our business plan. Sure so Up Can I answer that question as one is a relates to what we set out what we set out by way of our targets and our performance. We did in a way that almost every other bank does. which is we do not try to forecast a meaningful upside or as is embedded in your question? A meaningful downside meaning so long as the market and the economy behaves within a fairly narrow range of where we are. These are the results that we think we can produce other banks do it exactly the same way. If there is a material fall off so we hit a recession or some other circumstances you know impacts the economy and therefore impacts our performance. I think investors understand that the achievement of our targets. You know will be different right than what we have. Otherwise is articulated the other way to answer the question which is less about our targets and more about the firm. Is the firm operates with you know in a sense a recession playbook meaning. We're not hoping that nothing happens. We are risk managers and therefore need to anticipate what might happen and in the context of what might happen where there are. Economists are forecasting it or not. You know we have plans for how we will manage the firm and what we will do about risk and overall exposure in the context of an economy that you know then shifts. Just one last point on this. I think an important point to make is I said in my remarks in my presentation. We are not beholden to lending targets convening delicious take our consumer business it's not a startup outside Goldman Sachs is a startup inside Goldman Sachs. It's not playing for. Its you know round on be around see funding. It's not looking to achieve lofty objectives. If those objectives are inconsistent with where the market is. And so we don't play to a lending in target. We have a budget. We know where we will be but it is based on an assumption about the underlying economy and if that changes Calabro will we correct so for one hundred and one hundred fifty years for roughly one hundred forty those years it was an investment banker pure investment bank and trading houses some level. So who recently. Obviously the firm became a bank in the wake of the financial crisis in recent ten years ago. Now so you have a phrase in your slide embracing the bankrupt model and so two questions. Why did it take so long for Goldman to kind of embrace? Its own bank NASA soon as it were and and does that mean Goldman's going to evolve to look a lot more like a J. P. Morgan or a city over time. Yeah I don't think we have in mind a model title that were evolving to other than the one we care to set for ourselves as bank so we will be a bank. We are a bank but but we're going to embrace the bank model on on our own terms meaning. We're not racing to become J. P. Morgan or or another back. Why did it take so long? I I think for a long time. We quite liked the businesses. This is that we were in and didn't feel particular need to sort of play to what comes of being a back meaning capital markets activities trading activities in the like where where where we were living and I think what we were late to is recognizing the value of funding that comes where the benefits of funding that may come through the embraced the bank. And I think for us most meaningfully and and at the early stages of this embrace it. A Bank model is a lot about embracing a more diversified less credit sensitive funding plan for the firm and as I also said in my remarks in the embrace of the bank and looking to lower our cost of funds because because we are a bank. We're not looking to depart from what we know to be our core strength which is a lot of what you described. We remain a formidable double investment bank. We remain a formidable trading house and intermediary of capital. I just want to do that using lower cost of funding as an input but being a bank helps us do that. And so that's what we're embracing in the first instance and I think we came to the later realization of that perhaps then we should've live but you know here we are and I read a moment now where we can do this on a different platform where competitive banks are. We're not going to build branches. We're GONNA they do this on a digital basis and I think both on the asset and liability side there's opportunity for us to grow and grow the firm so what I think I think caught a lot of people's I I was the story. Iran asset management and people newer investment. Bankers will know we have a big global markets business. What I don't think people appreciate appreciate was the size scale in sort of performance of that asset managers business in my short tenure here? It's grown from nine hundred million up to over two trillion dollars asset management. Talk a little bit about how that that part of the firm fits into the broader story rat for investors. Well I heard the same comment you where have you been in. Why haven't you been talking about this? And I think there's some validity to that. I mean I think one of the benefits of this push toward transparency in kind kind of all of its forms is that we will awaken people to sue strengths in our business. Frankly in an outside the firm that nobody had a full appreciation for and I think think asset management is probably not alone but it may be the most significant of it which is I don't think people have had a sense of just the breadth and scope scope and diversity of the offering that we had and in the absence of that information drew their own conclusions about perhaps a certain competitive inferiority to the business business that that in fact is very different than the reality but I think you know Julian and Tim did a great job yesterday at really opening the aperture sure on that Lens and showing people what we have an equally where our ambition lies in terms of taking that business along different alternative path and you know bringing in third party money and the fee income that has the potential to be derived from it so I think it was a very good day in that in that regard. One of the reasons that people can see that now is about a month gone. This is Super Wonky so bear with us here but we changed the way we report. We did business segments. We have busy January. We had a busy year. So you you said one of the one of the ideas around the whole re segmentation or changing the way report was to give more transparency in the business. You help people understand. How do you think that's played out? How's the market reactive? How to investors about that new Matia so I think the re- segmenting Actually played to the high site higher than my own expectations just in terms of market arket reaction to it. You know you always come at these things and you think and as I know you think you know you try to look for. Where's the cynical reaction GonNa comment? Truth was there was very little cynicism expressed about what we did in early January in terms of the new segments in part because I think it lays out the business of the firm in kind of very straightforward terms and it doesn't cause people to have to think and guess what sits where it is a very good blueprint for the forward a direction that this firm is taking I think it was a very sort of clear manifestation of what David John and I had been talking about for the better part of a year. which is we WANNA grow? Investment banking we want global markets to take lift we look at asset management in the broad spectrum of our offering and we look at consumer and wealth management as as a dedicated set of businesses toward the individual as a client of the firm. I think that resonated with people the notion that we took I n. l. and disassembled. It took those businesses and put lending and other activities in the businesses and in the segments that bear responsibility for it was a very good good sort of you know formal step to do it and I think equally the orchestration of all of this and the the choreography of it played really well. Meaning we came back out out of the New Year and I about a week to ten days ahead of earnings gave people the new segments. The description of them gave people time to digest it then we did earnings earnings and then two weeks later did the investor day all on the basis of the new segments and the kind of new window into the firm beyond beyond investor. Day Stephen Even David's announced a lot of new initiatives. Become you see always has a big target. Seven hundred fifty billion dollars on the Sustainability Front and financing announced last week at Davos an initiative around diversity in the board room and does a lot of changes some cultural ones changing the dress code or at least formalizing maligning a more informal dress code. How's the firm adapting wearing a tie to me? Neither so how do you. How do you think of firms forms of dealing with all those changes? Oh I think the firms dealing with quite well I mean you know it it. Bear it bears understanding that the firm had a very big change. Come upon it you know a year and a half ago which is David came in as the new CEO and by the way it's not typical that the entire C.. Sweet changes but it did with both you know John and I- joining David and so that brings about change and change can sometimes be quite refreshing inside aside and organization it gives lift to a new energy in a new direction. And I think some of what David is doing is putting his own imprint on the organization. But I would say. Ah You know. Notwithstanding the initiatives you mentioned different drafts etcetera etcetera. I think that David is equally quite attuned to the core elements and principles principles that have driven this Organization for one hundred fifty years. So I don't think we should lose sight of the fact that there are some deep foundational elements to this firm including focus on clients and customers. That's not leaving the house. Notwithstanding the fact that you know we may have different elements and sort of cultural winds that are blowing along through. I think the firm is still quarter the principles that has you know. It's made it successful for as long as it's been you've been here. Twenty seven years yes now. Cfo Your August twenty almost homeless stories of how did you get here and how did you end up a CFO. We'll both were little random. How did I get here? So I practiced law for about a year and a half before coming to Goldman in nineteen ninety-three not as a lawyer though as a lawyer yeah. I didn't come to Goldman as a lawyer. I mean yeah crack and so I I got bored as a lawyer Lasted longer than I did. Because that was and actually applied applied first to Goldman and got rejected as he was to be a common theme seems to be a common theme then had to let go in a different way and and came in and was as a first year associate in fig And then my career is taken pretty winding path from investment banking into the securities business into capital capital markets into our financing group through strategy and consumer and then finding myself in the seat of the. Cfo I suspect that I come to this this latest position as the CFO being the beneficiary though it wasn't a Cillian tended that way of having seen a lot of this firm from different perspectives. And not just one and and it helps in the context of thinking about you know how to partner with David and John in running the organization and all that comes with being the CFO the firm and so it came through a wandering path. And I think it's been a fun twenty six years and the twenty seventh years proving to be busy ever more interesting exactly so being. CFO foments a little different than other banks and you run in addition as soon as the classic core CFO functional Goldman Calls the federation. Yes how do you spend your time. between the CFO job in. What is a pretty big administrative job? So there's always I mean there's inevitably one week. Every quarter are which has earnings intensity to it. And so I need this needs to say spend quite a bit of time on that. There are a number of functions engagement around liquidity the and capital and sort of conventional. CFO stuff that I spend probably a third to a half of my time on and then I spent a good deal of time in in partnership with our technology area with our compliance people with legal in a variety of issues needs to say with Treasury and services and so forth. And so there's a wide should've ray of of of parts of the organization that I spend a good deal of time with and I think it all feeds into the the way in which we manage the firm. which is this a certain partnership you know a collection and a village that it takes to sort of run and manage the firm? I think it's part of the genius instead the place and it's probably reflected most in the seat of the CFO just in terms of the scope and range of engagements that I have over the course of a day or a week. So you mentioned earlier that it's not typical for the entire C. Suite to turn over all at once but it did happen in your case David taking over the chairman. CEO Job Waldron taking over the president and COO job and you take it out on the job now. You've known each other for a long time but what surprised you about how that come together. And how have you managed to allocate eight your time so we have known each other. We've known each other. Probably for the better part of twenty years going all the way back to our investment banking days. In fact I remember interviewing John Waldron Waldron when he came in as a lateral you and I were in the same. MD Class and the same partner class. And so here's some pictures floating around that age us all I would say there's been very little surprise honestly in the way the three of us have engaged in work I mean. I think it's playing in much the way the three of us thought it. Would you know we we have a lot to do. We started off John and I kind of double teaming more than we probably needed to but came to the fast realization. That wasn't necessary and I think we now have kind of an informal division of labor and I think it's working well and we speak to each other frequently and engage with each other and so I think it's working as we had hoped it would so we spend a lot of time talking about What's next for Goldman Sachs now with investor day behind you? What's next for Stephen Charlotte and we're GonNa go to the playground is just gift to do? Now maybe the bar maybe the bar. Well look I think you know in some sense so this is always the adage you know the kind of the work begins now. I mean we can have a day and sort of celebrate the fact that we undertook something that was a very very big and momentous event for the firm but the this sort of afterglow of that is GONNA burn out pretty quickly and now we need to deliver. We've set targets for ourselves and psoriasis. I've set the target or David John but the firm has said objectives for itself and goals and now we need to collectively live up to him and it means that had you know the organization is going to have to march to the rhythm rhythm of a of a revenue budget. That is sad. It's going to have to mind. It's manners on cost we're going to have to be as agile is Stuart of capital as we laid claim to be yesterday and so I think the work begins but the work. The work is the work of the firm. I think forty thousand of us now. Now hold the obligation to deliver on what we said we would and I have every confidence that we can and we will but I think the work begins now. All right. We'll see even but no beach today. Thanks for joining us today. Thanks a lot that concludes this episode of exchanges. Goldman Sachs for listening. If you enjoy the show. We hope you subscribe at Apple. podcast Saliba rating or a comment and for more from Goldman Sachs experts as well as influential policy makers academics and investors on market-moving topics. Be sure to check out our other. PODCASTS top Monica hosted by Alison. Nathan is senior strategist in the firm's research division. Thanks for listening All price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced. In whole or in part the information contained in this podcast does not constitute research or recommendation nation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any any information contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice vice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman woodmen sacks to that listener nor constitute such person a client of any Goldman Sachs entity.
Why Does Goldman Sachs President and COO John Waldron View Himself as COO First and President Second?
"This is exchanges goldman-sachs where we discussed developments currently shaping markets industries in the global economy. I'm Jay seward global head of corporate communications here at the firm. Our guest today is John Waldron Goldman Saks president and chief operating officer. John joined Goldman back in two thousand and prior to his current role. He was CO head of Investment Banking Division on this episode will be diving having into what it's really like to be president and CEO of Goldman Sachs some of the key strategic initiatives John's focused on some advice young people and much much more John Welcome to the program. Thank you thank you for having me so talk a little bit about your background fascinating career. What was the path to this job. So I started my career at bear stearns which in the early nineties this was a very entrepreneurial firm and got a lot of experience at a young age probably well before I deserved in a firm like that that was not as deep or or as well established the firm like Goldman Sachs and I ran through a bunch of different jobs in investment banking but a lot of them were in the capital markets part of the business mostly in the high yield business in the business so I had a background in leverage credit deep there there was deep. There bear had a real expertise. They're one of the things I learned particularly in my early years. Working in leveraged finance is the ability to analyze companies really looking at income statements balance sheets cash flow statements and understanding how the financial statements work and how companies make money what the issues are what the competitive threats are and really that analytical background background on company performance very well. I worked there until two thousand and then I came a Goldman Sachs in two thousand actually David Solomon who I now were foreseeable with a firm came to the firm a year earlier and said to me. I think you'd like coming here. I think you'd like the firm I think it'd be a firm you really enjoy and learn a lot professional and executive in coming here and so. I ultimately made the switch and I came over and I would say my background at bear was quite helpful because I was pretty entrepreneurial. I was pretty skilled at understanding markets and had spent a lot of time. I'm looking at companies. Now is pretty able to analyze companies and I had a reasonably good experience dealing with clients at an early age. I was given responsibility to interact with clients to own client. Hi relationships and to be in a position right had to be the interface between the firm and a client at a relatively young age and so I had that experience just in the back office crunching numbers a little little doing more in the front office before I probably deserved to be in the front office but again at bear stearns. You'd have more people in that scope so it was good background. When I came to Goldman Sachs I learned a lot first of all about covering big companies bear stearns really would have focused more on smaller companies and I learned a lot about working teams. I would say bear stearns had more of a sole proprietorship kind of model. Where if you were the banker you kinda brought in the business? You prosecuted the business. You did a lot of it yourself. It wasn't a particularly fulsome team team approach and Goldman is all about covering companies on a team basis and that really was key learning for me and I learned a lot about how to swarm company with broad swath of of opportunities and capabilities over for sex demystify for us the role of president and COO. It's a very lofty signing title. What does it mean on a day-to-day basis. Let's talk a little bit what your typical week might look like so. I've been in this job about a year the way I think about it. I actually think those two titles are somewhat different and I think about the the job as chief operating officer I and president second what I mean by. That is my role right now. Really is to first learn the firm and understand the inner workings of the firm across the different complexities of all the businesses that were in and the new initiative that we're embarking upon and be valuable than trying to lead the firm and making sure that we execute suit against the existing businesses and the new priorities and so that's a really operationally intensive job bus the chief operating officer component. The president job really comes into play play more on an external basis where you're out with clients with governments with regulators and other external constituencies where that title has real resonance in your position on the firm. I'm is important to that constituency and they liked the title President and that bestows on you and notion of being at the top of the firm inside the firm people don't really care about the title president they care about the title Chief Operating Officer if you're actually doing the job that way and so I tend to try to really lean in to the divisions and to the new initiatives and see if I can be of value you and help to making things happen that otherwise wouldn't happen because of the role that I play because of my knowledge of what's happening around the firm so when you talk about the coo job you talk about X. Skidding making sure things are happening. How do you do that which is not inconsequential in a firm the size and scope and make sure that we're executing on those larger strategic took objectives to which involve a fair amount of change in change management one of the things that we've started doing is actually getting together the key leaders and the different divisions together gather on a regular basis biweekly and really parsing the execution priorities between existing businesses and new initiatives and actually being very purpose. I fall about delineating the two were not taking our eye off the existing businesses because those franchises are strong. They're important and they need to be managed and cared for in in a very important way versus the new initiatives which earlier longer range kind of j-curve investment opportunities where you can have a long term horizon and you can start to really think about things over three eighty five ten year period that meeting is really run in a bifurcated fashion where we think about existing business new opportunities whether synergies between the two and I really spend probably half my time on the existing businesses and half Mike Tomlin the new initiatives and we try to go through in a pretty systematic fashion where we are making progress and where we have problems Zain deficits and where I've got to spend more time weekly biweekly or monthly basis one thing you've talked a lot about is breaking down silos inside the firm which doesn't sound like the most glamorous it's work but explain why that's important to you and how you going about doing well on the first day in our job. David Stephen and I put out a memo that talked about one Goldman Sachs and really focusing on clients and trysofi clients at the core of everything that we do and serving our clients as one firm which again sounds pretty simple and basic and you would think we'd be doing that for one hundred and fifty years and there's an ethos in the firm to do that but we observed was that the organizational structure of the firm was getting in the way of the ethos the firm in terms of prosecuting that in the right way so we think de silencing the firm really is about bringing everybody together to solve clients problems or our own problems uh-huh for that matter whether it's an technology platform context or any other context and bringing the best of what we have to offer together across all the different disciplines of the firm to get to the last answer and that seems again quite simple but there's a lot of organizational calcification if you will that we've got to cut through to do that you're right. It's unglamorous but I think what we we have a real strength that the core is we have a culture and ethos where people want to behave that way having better bear stearns. I've only been at one of the firm of my life. Bear stearns would never been able to achieve this. I think a lot of affirms in our industry wouldn't be able to achieve this. If we're really successful in doing this. We are going to be differentiated because I think we have a cultural basis to want to work together to respect each other to work in the notion ocean of getting the best answer for our clients and to be one firm. I think that is our cultural underpinning but we've got US throwing leash that capability and break down the silos and doing that yeah well anyone. I want to spend time with clients knows. The client doesn't care how we're organized. They just WANNA. That's right solution to that problem so you and David leadership team of set out certain goals. How are you measuring during progress against those goals. And how do you yourself see progress. One of the things we're really trying to do is think long term in the context of the goals that were setting out because it's very easy in a public company where you've got quarter quarter earnings pressure to be falling into short termism in terms of thinking about what kind of progress we making house the stock trading what were earnings last quarter. What are they going to be this quarter and of course we have to live with some of those pressures. You can't avoid them but I would say answer your question. We're really setting a three year running kind of three year path as we think about our progress so our business planning is now done on a three year basis that used to be on a one year basis so all the business units now think about their business opportunity eighty their investment spend their returns their margins their sales growth etc all in a three year basis and every one of those initiatives that I talked about that. We're focused on and has at least a three year plan in some cases. It's a five year plan or even longer plan. Our credit card. Joint Venture with apple is a much longer than three year plan because he takes a long time to build a business like that from scratch our transaction banking platform that we're building and will launch in the first quarter of next year. We'll have a much longer than three year horizon so you can measure investment banking on a three year plan. Dan and say okay. We have an existing book of business an existing franchise. How are we making it better over the next three years on a new venture it may be five or ten year build and so we're setting out metrics were very focused including KPI's and metrics and making sure that we've got real mathematical grounding where we can hold people accountable Barossa trying to give people the space to make adjustments be creative creative make some mistakes fail readjust and go forward and I think that's an important thing that balance is an important thing that we're constantly tinkering with the trying to make sure we get right talk a little a bit about working with David. You've worked together for a long time both at bear and Goldman for last nineteen years how's that working relationship evolved over time. I mean inside the firm. Irma externally presented a united front but behind the scenes. I know you have different views from time to time and you're not afraid to express those. Has that changed with these new jobs David's. It's an extraordinary professional. I worked with them for most of my career. I've learned a lot from him. He's been a mentor to me and so I really have great respect for what he brings to the table. We are different front. Were pretty complimentary. In the way we operate. I think we see things similarly in many respects but we have different talents and skills we bring to the table so we do complement each other and so you're right we we will usually present united front but that doesn't mean we always started from a position of unity but one of the things he and I feel quite strongly about as if you're leading an organization whether it's a group of people well a business affirmed and the case now leading means creating a real pathway people want to follow which means when you ultimately get to a place where you agree on where the path is you should the united there shouldn't be a lot of gray matter you can disagree you can kick and scream and fight behind closed doors but when you come out you set a direction people wanna see and feel that there's conviction and unanimity committee in the leadership behind that direction so we're pretty good at having our our disagreements behind closed doors and there's not tons of disagreements we generally have a similar worldview and we generally want to get got to the same place and we generally have the same ethos about how we're going to get there but we may have different perspectives on how to get there who the right people are to get us there in some cases and so we generally handle those those things more behind closed doors when we come out and we agree one side of the other is going to prevail and then we get behind whatever side prevails and we go you spend a lot of time obviously as coo hello running the business data. You also managed to travel light. You still see a lot of clients what international markets you most focus on right. Now I remember when I used to talk to Hank Paulson a lot about how he spent his time all the way back to when he was running banking and before he ran the firm and one of the things that he said to me that still sticks with me that I try to keep keeping my mind as I think about my travel schedule today. Is You have to look at where the big markets are where we can have a real impact because that's still the eighty twenty in the equation Asian of where you can really move the needle and that's still obviously the United States across the whole of the United States. It's clearly the UK it's clearly Germany France and the group of countries trees on the continent and the the major economies in Europe and increasingly it's China and Japan if I had to categorize where I'm spending the vast Madrid time it's the g seven and China at an essence. Most of my time is really spent trying to make sure our operations in the key countries are working. Well and our clients are feeling our presence and then I'm meeting eating the right people and I've got relationships with the key people that matter externally whether it's in the government or with corporations or private equity firms are large institutions and then the case of a country like China. It's really trying to figure out where we're going to go. And how are we going to build a business. And how are we GONNA get ourselves to be more important more relevant in that marketplace inside the country and then obviously connected to our clients globally connecting them back into China so you spent a lot of time at China both as someone running the Investment Bank but also as Presencio. What is is it that most business people and most Americans have a casual acquaintance of China miss when they're not spending enough time there. I think it's a multilayered country and I feel like you walk out of a meeting and they're real meeting happens after you leave when you walk into the meeting with a group of Chinese executives or government leaders and it's translated meeting and then you leave even then go have another meeting and that's the meaning you're not in and so you want to know about and so I think the key is to figure out how to know about what happened in that meeting which there's no substitute with for going there a lot and getting a sense for the nuance and building relationships where you can actually get some sense for what's happening when you're not in the room. What I experienced when I go to China is it's translated translated. It's very formal. There's not a lot of nuance to the meeting. It's a pretty staged environment and there's another set of discussions. That really is where the rubber rubber meets the road and so I think if you go there a few times you feel like oh I had a good meeting. Every meeting is a good meeting. You're not going to have a bad meeting in China because the Chinese don't like having bad meetings but there's plenty of things that happened in a meeting. That wouldn't be to your benefit if you didn't know about what was going to happen next and so I think the key is to get to a sense where a place where you've got enough of a relationship with somebody where they I can give you the nuance behind the scenes in the room. You're not in what major geopolitical issues you most focused on now. Obviously there's a lot going on in the world. It's very busy right now. But what do you think will have the biggest impact on Goldman over the longer term. If you think about the next five to ten years if you call that the longer term the U. S. China China relationship in the trade discussion but also more broadly just the broader relationship you know how it unfolds particularly given the trump administration's policy which is obviously a departure departure from prior. US policy towards China. I think that far and away has the most global implications for for Michael Sachs's implications for our business in China obviously but has implications for how multinational companies and governments react to that relationship if I had to pick one that would be it. The second is brexit which on the surface is not as big can issue but it has ramifications for the whole of the European Union where we have significant operations. We've obviously got six thousand or so people in the UK at a big presence on the continent. I think brexit is the beginning of a reset of the relationship. Rally in the European Union were thirty five percent of our business by most measures resides so that is very important to Goldman Sachs and I think to our clients I would say that'll be the second big geopolitical event that we're watching carefully so John and of course year banking career you became a counselor to some of the most successful CEOS really in the world do you misgivings kind of advisory is still get an opportunity to do it and does that background. Help help you in this current job. If I look back on my career the most fun that I've had is really sitting with CEOS and boards and chewing through difficult problems whether it's an emanate problem problem or a capital markets problem or in some cases personnel or other problem that doesn't relate to a transaction counseling clients really one of the great joys of this business and so yes. I don't get to do it as often as I used to. Do it and I do miss that aspect of it but one of the great benefits of this job by virtue of my position I actually get to interact with more CEOS and more presidents and more executives actives and important positions even I did in my prior job and so I still get to spend time counseling and now the counseling is a little bit different. It's not as much on transactions or deals roles. It's more on macro issues and things that the CEO or the executive is wrestling with it so I actually find some of those relations become even more intimate than they would have been when when I was more of an adviser on a transaction so that's been quite beneficial and sometimes I turn the tables now and I ask questions really picking their brains on how they run on their businesses so I've had numerous conversations with executives about how they run their human capital organization how they run their technology organization how they think about Silo Ization and their firms firms either think about brand how they think about technology disruption content etcetera. I found that the counseling I was doing is actually serve as a pretty good baseline flying for me too. Sometimes turn the tables and ask the questions that I know I was being asked my prior life is a banker people talk a lot about the culture of Goldman Sachs. It's hard to understand it less. You've worked here here but you've been outside the firm. Nabet inside the firm for a long time almost two decades. What are the things you're most proud of inside the culture. Where some places is that you think we need to change what I love about. Our culture is it's fundamentally grounded in respect lots of communication and a collaborative perspective people come to work here because they want to be surrounded by very very talented people that are desirous of doing important things in the world and they want to collaborate with those people to get better outcomes. We take that for granted because that's just the way Goldman Sachs's Ben for a lot of years. Most other firms have a hard time assimilating assembling that kind of culture so we've got tremendous advantages bandages. I think back to your question on silos ation and bringing the firm together one of the things that we've suffered from in the last ten twelve fifteen years. Maybe the crisis really accentuated this the notion that we had to play defense coming out of the crisis as we have gotten more balkanized we do operate in more individual units. The the firm has gotten bigger. It's more complex and more businesses. It's hard to bring people together. It's hard to tap into the vein of that collaborative ethos and actually pull it together there and go do the thing that I think everybody wants to do so. I think we have work to do there but we've got a lot of raw material to work with it. I think is great advantage. You Running Investment Bank for a while. You've made the transition now. What's been the biggest surprise going from the business investment banking division to the executive office investment banking things a great business and it's done very very well for a long period of time but the firm has a lot more complex in investment banking and so for me? The hardest part of this transition has undoubtedly Ben getting my arms around the complexity of the firm just the raw breadth of businesses that we're in of people that I have to get to know that I have to learn to both trust and have of them. Trust me you know it's just a very very broad complex firm and I'm getting my arms around it slowly but surely but it takes awhile I think you can't rush it and you have to just experience it that and you have to go through the paces and so I'm almost a year into that but I think in year two and three outfit even more comfortable than I feel today. That's far away the the toughest part of the transition. Yeah I think the thing that I've really been heartened by is I've yet to find a part of the firm where I don't see really high quality people and a really high quality organization. We've got balkanisation. We've got challenges. We've talked about in this discussion but we start with a base of extraordinary people you go all over the world you see people in every nook and cranny or any of the firm. It's a young energetic ambitious mobile group of people that want to work together to collaborate WanNa win and WanNa make Goldman Sachs as good as it can be and I want to be important in the world and relevant in the world and that again is a great advantage and we take it for granted but I think it's a great advantage when we talked about your career earlier. We started after College College but you've got a liberal arts education at one of the Great Liberal Arts Colleges in America talk about how the Liberal Arts education basically can be applied. I do a career and finances you have this feels like a plant that question because I'm a huge proponent of liberal arts education although I did say once air that if I could come back and what about an engineer that was authorized to say about that more spoke to my insecurity of not understanding all the platform that we're doing and not knowing the engineering walls I wish I did my view is you can and learn the technical stuff when you're in a job and you need to learn it. If you're smart you've got a good brain or willing to read and listen in and absorb. You can learn lots of technical nickel details harder things to learn how to solve problems how to communicate how to engage how to be well. Read how to understand what's going on in the world. You know how gotTa have a perspective on a point of view. That's a hard thing to learn and so I think that would a liberal arts. Education does view is it gives you that broad aperture to Wanna learn what's going around the world and to have a lot of breadth and then trying to figure out how to assimilate all that information and distill it down into something. That's communicable to somebody. Else is a really important skill in this world. I mean I find and more and more I'm in settings where I have to take a briefing memo and then go speak for three minutes on something that was seven pages and distill it down into something that can be understood by another party and that really calls them. My liberal arts background. There's no engineering in that that's just kind of learning how to read analyze assimilate thinking about the problem and then communicated an intelligent fashion and so. I think the education of a liberal arts student is a big advantage lots of things but particularly finding ways to communicate effectively so I went to Middlebury College where I spent four wonderful years was an English major. I was just up there recently and had a wonderful day in Middlebury prepared me exceptionally well for Wall Street. What advice would you have other than Steadier Liberal Arts College. Would you have for young people are just starting out their careers. Goldman or elsewhere find good mentors. All organizations like Goldman Saks will have a formal mentoring program and there's no harm in participating in those programs but a lot of the mentoring that I think you gain in career as informal. It's somebody who takes an interest in your career. Somebody that you work with a run into and form some relationship and you take mutual interest and then when you find a mentor or a couple mentors you have to invest in that relationship. I think it's easy to say oh. I have a mentor but if you talk to once a year you're not really getting much out of that relationship. I always felt like if I had somebody was taking an interest in me and I felt like they really could help me. I needed to invest back and actually help them understand what I'm dealing with. What my ambitions are what my insecurities are what I'm trying to improve upon and then I got more out of the relationship that far away to me is the most important thing I would say. The second thing I would say is ask a Lotta questions. It's very easy when you come in as a young person from from a prestigious college and university. Thank you have a lot of answers. In your well educated you understand things and that you're expected to know right the expectation. Goldman Sachs tax from McKinsey or any other prestigious firm as you come from a great school you're expected to know and in the early part of your particular you need to ask those so-called dumb questions agents to get them out of the way to make sure you really have grounding because once you get to be more senior you are expected to know but as a young person you're not expected to know so that's an important thing and then over time. I mean my job. I asked tons of questions. There's lots of people think I know that I don't know and I think one of the things that I'm pretty good at is asking. I'm unafraid. If somebody's saying well he's president or Chief Operating Officer of the firm. How does does he not know that I better ask the question the first six months because in your three everyone is GonNa assume he's got his arms around that and so I figure a little late. I don't think you can ever ever stop learning. The people that I most respect in the world are constantly asking questions and constantly learning and constantly growing and I think that's a great skill to have so at the young age you WanNa do it because you need that grounding and as you get more senior you to keep evolving and keep learning in the world is dynamic. I mean there's a lot more technology disruption today than there ever has been before. That wasn't the case ten years ago. When I was running investment banking five or six years ago it seemed to lie to us than it is today so you have to constantly evolve and be top of the Trans all right well. If you want to ask questions you'd be podcast podcast host so maybe maybe this job doesn't work but most most of our shareholders and our employees are hoping it does work out. You don't have a lot of time outside the office. You have to allocate it very effectively. How do you think about work life balance so important. Some of our employees not just start young employees but certainly some of our most senior professionals to you. How do you think about that issue. And how do you handle it yourself. I think it's a really important issue not just for the young generation as you rightly point out but for any of us that want want to have long-term career and I still consider myself one of those people that wants to have still a long term career. This is a marathon. It's not a sprint and I think first of all you need to take care of yourself and you to have a balanced life otherwise you're gonNa make it as long as you think you're gonNa make it because in the early days it feels like you can go forever and so I think it's important to have balance in your life for that perspective. I also think you're more interesting to people clients your own employees and anybody else you come into contact with your life is richer and fuller than just Goldman Sachs or just whatever your employer is and so so I've worked hard to make sure first of all that my life is more enjoyable and more balance and more full and I also think that suits me in my career in terms of being better arrested more able to kind of come to work charged up feeling really good about what's going on my home life and therefore feeling less distracted or stressed out about that when I come to work and I think hopefully being more interesting talk to and I talked to people inside or outside the firm because I have six children. I can talk about my kids and the time I spend with my kids. I travel a lot. I read a lot I have lots outside interests and it's important to be able to talk about those outside interests otherwise you really just defaulting to macroeconomic policy and Goldman Sachs which goes as far as it goes but you know in the third fourth north and Fifth Interaction Clients Kinda WanNa go into the next more interesting levels of human interaction the way I deal with balancing my life is I actually scheduled time with my kids which on the one hand sounds depressing but you have to actually schedule it on the other hand. If I don't do it doesn't happen so I have dinner with my kids many nights. I've six kids and total four kids under the age of ten Dan and the four hundred ten I can actually get home at six o'clock and have dinner with them from six to seven or seven thirty and put some of them to bed and then I can go on to a client in or another dinner enter outside later and so I do dinners a little bit of peanut butter and Jelly and then I'll have a steak tartare later on and I find that that time first of all it's good for my relationship with my kids. It's really good for me. I actually reset I unwind a little bit. I get a little bit of perspective and then I go back out and I go back into Goldman. Sachs mode and that balanced says a Microcosm Qasem is important to me and on the weekends. I'm really kind of an Uber driver driving my kids around to different sporting events or other cultural or social events that they're involved in and I find that's really great time with my kids. I can watch them on the sports field. Sometimes I coached them. Sometimes I'm just an observer one of my daughters acting and other things in the arts and I love watching her do that and watching her go through the stresses of learning how to get up on the stage and you know it's really valuable time and it resets me for the week ahead. Oh we better let you get home to those kids. Thanks I appreciate it that concludes this episode of Exchanges Goldman Sachs. Thanks for listening and a few joined the show we hope you subscribe apple podcasts and leave a rating or comment in and for more from Goldman Sachs experts walls influential policymakers academics investors be sure to check out our new podcast top of mind Goldman Sachs hosted by Alison Nathan a senior in your strategist in the firm's research vision this this podcast was recorded on September nine two thousand nineteen. This podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast is not financial research nor product of Goldman Sachs Global Investment Research Neither goldman-sachs Saks nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast. I am any liability. Therefore including in respect of direct indirect or consequential lahser damage is expressly disclaimed the views expressed in this podcast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax tax advice or recommendations in this podcast in addition. The receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice spy Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Whats on David Solomons Mind as He Enters Year Two as CEO?
"This is exchanges. Goldman and Saxwood discussed developments currently shaping markets industries in the Global Economy Jake siewert global head of corporate communications here at the firm today we're sitting down with our CEO David Salomon October October first marks one year since David has been leading Goldman Sachs though he's been at the firm for twenty years and we'll talk about that boss took about what he's been up to over the past year and his top priorities for your you're to a CEO and we'll ask him about would does outside the offices well so you can look forward to that. David Welcome to the program. Thanks a lot jake happy to be here again. You've been CEO for just about a ear now. Bring us back to October. One of last year your first official day. What was it like waking up that morning then go into work. I think the exciting thing about waking up that morning as I woke up a beautiful sunny southern California I spent my first day as CEO at the fortune most powerful women summit which was really a great way to start my tenure. Can you be allowed me to put an emphasis on something. That's really important to me which is diversity inclusion Goldman Sachs and so. That's an event that the firm has been affiliated with for a long time. Lloyd would attend on an annual basis. It's a real privilege to attend. They're very few men. The common have the opportunity to talk to this group of women leaders from all over the country all over the world actually in fact and it was just a great way to start so it wasn't walking into the building like the first day when it was still work but it was it was still work but I started with something that was just very uplifting uplifting very exciting and often running and I think one of the things that you just so interesting about it. is you kind of ebbed into it and I guess they're different transitions for different people. I think there were stages of my transition. The first stage was when Loyd pulled me aside in March of that year and said you're going to be the next. CEO and I'M GONNA make a statement about that but there was no timing in place the next eboni process was when loyd publicly announced that I would be the CEO on October first which I think came in July that was at that point the water runs downhill and it starts very quickly so by the time we got to October first we were into it. We were moving and it was exciting because there was a lot to do but it didn't feel like a different day. It was a little bit more gradual transition and Lloyd. There's a lot of credit for the way he managed that he allowed would me to have some time to kind of think about some things that we wanted to do and it didn't feel you know one day on one day off. It felt like we kind of transitioned into it and started very smoothly well. I know he didn't have the same luxury but those were different circumstances when he took the job. They were different circumstances. Maybe that's why he did it that way. Because they were different circumstances. I remember his his transition when heck basically called him on Sunday Memorial Day weekend in two thousand and six and said he was going to be the treasury secretary and by a Tuesday buoyed was in charge hank was gone and we had a partner meeting that week in Chicago and we were often running and so this was definitely a more fought for transition to my benefit and I think candidly the farms benefit so what was the transition like what was the biggest surprise the first thing that I had taken a lot of advice on his really thinking about what I thought was important for me to do for me to say as I was moving into this job and I thought about some themes. There's some things things that I just think our quarter Goldman Sachs and Goldman Sachs's very very rooted in the work we do for clients. It's rooted in the people that we have at Goldman Sachs support our activities you you know with clients and so I thought it was important to try to talk about or create some initiatives that set a tone for where I wanted the firm head and in particular her I've been very very focused on making sure that our client focus is at the center of everything we do and that we really work with our clients as one firm you. We're a divisional firm. We've always been a divisional firm but I think there's a great opportunity to make sure for our clients. Were delivering the whole firm and so very early we created. If you remember on that same first day October first we put out a memo on a cross divisional client initiative pilot which really sent a message out that we wanted to for biggest most important in clients really think about because these are people that are using all the different divisions of the firm how we face them how we make sure we're thinking about their experience with Goldman. Sachs through there is instead of through the structure we've set up and so one of my key messages was the client centrisly of the firm and I wanted to be very focused on that second. We have great great businesses great businesses that have been core to the firm for a long time and investment banking sales and trading and asset management as an investor. We have a fabulous I alter high net worth wealth management business those businesses a terrific opportunities and all those businesses but it was very clear to me that given the change over the last decade from a structural and regulatory perspective and our industry we had to broaden and diversify our business and and so it was very important to get working on a strategy and a plan to add businesses and add areas of focus and we immediately started to look at it through the Lens of of our clients and so you've heard US talk about this we have really three principal groups of clients governments incorporations institutions and individuals and we wanted to think about the strategy going forward and how we could add products and services that were differentiated for those different client groups and so for corporates though is the opportunity to do other things things that banks have traditionally done that we haven't been in but for individuals there was a very very open field because we've had very very little of consumer focus but we've been starting to build that and so we've been really focused in this first year on figuring out where we want to take the farm and the medium-term to really solidify the firm's competitive position as a large global financial institution. I feel good about the progress. We're making an excited about the fact that we're gonNA talk more about it in the coming months as we move forward. Do you WANNA preview view any of this strategy now or what's ahead. Is you think about strategy. You've been focused for year. You promised investors and update early next year what's ahead. I think people are getting a taste where we're going. We're talking about adding more durable recurring fee based revenue to the mix you've seen US consolidate are investing businesses onto one broad platform which should over time allow us to increase the amount of money we manage for clients on a global basis across a very very diverse tentatives investing platform platform. We continue to be focused on growing wealth management businesses. I said we've always had an excellent ultra high net worth private wealth business but we have the asset management infrastructure to support a much broader platform and through. Ako and the first acquisition we've made united capital were expanding. Ako is a channel Channel News Corp.'s the platform to attract wealth management clients and we're very excited about that and the opportunity there and we're starting to do through our digital platforms in the digital applications where you see the credit card and Marcus were starting to find ways to bring in everyday Americans were starting here in the US onto our wealth management platform. That's a pretty good list. readies is talking about strategy. You talk about diversity talking about clients interesting. What are some of the other priorities you and your first year. And what do you think you've accomplished so far. One of the things that I think is very important. When you're you're running a business of this size and scale. You have to have a plan and that's kind of new for this organization. This organization has always been very adaptive. It's always been very flexible voice about being nimble. We've always thought about being nimble but given the way the world evolved. If you really go back I can think about this. When I joined the firm. The firm was just going. Public is just becoming a public company twenty years ago and it was really quite small. It was a small private partnership and over a very short period of time in the overall scheme of things it's become a fortune fifty company and in the context of that as you look forward with a much bigger her capital base and a much larger business in order to grow the business and continue to drive returns for our shareholders we have to make investments and we have to you have a plan with respect to how we can add to the business and this is new for the organization so one of the things I really wanted to do. I wanted to build that plan and I wanted to start to get the broad odd leadership of the partnership to embrace the direction. We're going and candidly to really sign up to be a part of driving this plan which we're gonNA take a lot of work work over the next three to five years and so there's a natural process you do that of really figuring out is the broad leadership in place is the brought leadership with the organization and really saying to people. Hey this is where we're going. This is what we're GONNA do want you to be a part of it to be energized by it and sign up the aboard but hey this is a commitment. This isn't going to happen and twelve months. This is a multi year commitment and so that's been a process to a new process for people perform because we haven't traditionally really done that that process has inevitably led to some leadership changes that were flurry when you started and there's been a flurry and more recently as you hit your one the press not to beat up Ottoman. I love them all but inevitably over-interpret some of those misinterprets we could say how do you think about the leadership changes that are underway well. There are a couple of things that are going on. I first this process of saying. Here's what we're doing for the next five years. Let's be a part of it. Naturally has shaken out some people that are like you know. I've been at this for a long time. I don't think I want to sign up for another five years and that's a natural part of a process like this during transition we've also as a leadership team been very focused on trying and create opportunities for younger partners or up and coming leaders in the partnership to step up to have bigger roles you know to move forward and we're trying to unlock some of that talent that I think is deeply embedded in the partnership and try to pull some people up in the organization and so that's created a little bit of change in addition. I think one of the things that very healthy for an organization his Asia to move people around to different places so we're trying to move some people around to give some people that we think have the potential to be brought. Leaders across the organization were experiences and candidly one of the first thing I did. I took Beth Hammock Outta Securities and I made her treasurer. The firm we took Stephanie Out of investment banking we made her the chief strategy officer and we've continued to take people from around on the organization and put them to other jobs where they can broaden their skill set seymour understand the organization more broadly and therefore have the potential for bigger leadership jobs over time so all that's going on with all that going on again to your point that the story is always the story and it's not necessarily the facts. The facts are that we run a partnership that runs in two year cycles and there's nothing about the attrition and the Partnership Up to this point in the cycle as you know we're we're nine. I want to do a two month cycle but it looks absolutely the same or running on track towards looks like another cycles and so despite the fact that I understand why because there are a handful of more senior people who have opted out or a couple of senior changes that creates that buzzing the press but the reality of it is we're going through the normal normal transition that we've gone through for the last five or six partner cycles and so it's not surprising that we're going at approximately the same pace now at the same time we'd like to try to tighten up the partnership and really make sure we've got his tighter partnership as we can because we think that's the best thing to keep an aspirational national and really key into something that really drives the organization and so you saw US last time a smaller class and you'll probably see that going forward doc but they're still going to be four hundred plus partners Goldman Sachs. It's all at the margin. It's all proactive management at the margin to try to get the best result for the farm and therefore for our shareholders. That's the leadership of the firm. There's also thirty eight thousand people work at the firm and now they're looking to you everyday and sort of wondering what you're doing what you're saying how do you manage that. How do you engage with a broader cross section of the employs all around the world the whole leadership team spending a a lot of time and I've spent a bunch of my first year getting around the world and talking to people and one of the interesting things about the job is pick any city that you travel to you can see clients dance and you can see people from Goldman Sachs in almost any city almost any place you go in the world and so in the context of that there have been opportunities to see Goldman Sachs people one on one there have been opportunities opportunities for town halls. There've been opportunities for Small Roundtable meetings but I'm a big believer that investing the time to talk to people communicate with people to give people an opportunity interact with you all good for the firm all good for the messages and the direction we're trying to you know to go in to permeate through the organization and so I've spent a lot of time in the first year doing that so as John so is Steven so as other management committee leaders across the farm and my expectation is will spend a bunch more in the next year doing the same thing yeah. You've you've also opened up. This may be obscured people outside the firm but the earnings presentation used to be just a managing directors now available to everyone in the firm. How'd you think about that. I'm a big believer and we've talked about this a lot of a big believer in transparency and we're trying to make more transparent trying to make the firmware transparent inside the firm and we're trying to make for more transparent outside the firm and we serve our shareholders we serve our stakeholders but for sure we serve our shareholders earnings is a very important thing that occurs. I four times a year and I thought it was important to give all our people access to that information directly realtime. There's no reason why they shouldn't here would stephen in stands up and goes through the financial what he's saying what heather stands up and talks about how investors are thinking about the firm. What is she saying. I usually speak with those earnings. Calls halls meetings and you know I wonder if people hear directly from me and there's no reason to filter it. I'd like to be out there so we decided that was an easy way to open up communications and as an organization be more transparent this year we celebrate one hundred fiftieth anniversary celebrating the history the culture. How do you think about a culture. That's made the firm so unique of the last one hundred fifty years and how do you think about it going forward. It's humbling candidly to reflect upon the hundred fiftieth birthday of the firm one hundred fiftieth anniversary versus the farm. There aren't a lot of companies that make it a hundred and fifty years under any circumstances. It's a very special thing so I think it's good to kind of think think about what is it. That's allowed this company unlike so many others to not just survive but thrive for such a long period of time and how do we we strengthen the things that have allowed that and add new things that gives us a better chance of perpetuating a position of strike going forward and so I'm I'm a big believer that no company can stay the same. Everyone has to evolve. Everyone has to change the world is very very dynamic and we have some real cultural pillars that support our organization are focused on clients are focused on our people. The quality of our people will a real focus on excellence in everything. We do collaboration work as a team. These are foundational for the firm but in addition I think we you have to be open and flexible and willing to change in a world that was coming at us in all different directions and so I think the key is to keep the cultural foundation really really solid but be open to doing things differently so that you can keep the firm moving forward. You've been CEO for a year. You've been in senior management longer than I've been at the firm. Goldman went for twenty years and yet you still sometimes referred to maybe not to your face but as a lateral higher because he happened to work somewhere else. has you experience it other places inform your your views of Goldman in its own culture. Everybody's on a journey. I'll start by saying I'm still my face called the lateral sometimes around these halls but my career's journey the thirty six years into it and I've learned along the way and I think I'm better I've been better throughout my career Goldman Sachs because of experiences I had other places. There were some experiences excellent. There was some experiences that weren't as good but one thing for sure is having worked other places when I came goldman-sachs twenty years ago I really look at this organization and I could appreciate the things about this organization that made it special because I've been on other organizations organizations. The candidly warrant a special. You know we talk about diversity talk about diversity of ideas diversity of perspectives if only worked at one place in your life you don't have the same -versity of ideas and perspectives if you worked at a handful of places. I'd feel fortunate that I've worked at a handful of places and you know look twenty years a long time to work any place so you can call me a lateral role but I think I'm pretty much waiting Goldman Sachs. At this point. We talk with our clients about how technologies disrupting their industries their companies. How do you think about Goldman in terms of its evolution as it responds to technological disruption in the financial industry how do business with our clients. Oh you know we're we're making making significant investments in technology both upgrading our platforms and the technology we have existing business but also building new platforms and new applications that allow us to be more effective active with clients. I'd point to the credit card which is the first credit card platform to be built on a long time. I talk about marquee which is getting more visibility but it's a very very the interesting thing because people talk about technology companies and they attach that moniker for certain kinds of businesses and I would just say what business today exists what scale Ale that doesn't use technology to better deliver its products and services to better connect with its clients or customers to empower enable. Its employees needs to be more effective is just quart every business right. Now we have at the firm you know more than twenty five percent of the people who work here engineers. There's a lot that's going on on from a technology perspective. When I think about the firm at a high level we have people we have technology. We have capital and capital's a commodity but our ability to use our people marry really great people in great thought with fantastic technology will make us more effective for our clients and so it's a big big focus now putting that aside which I think is core to what we're trying to do when you look at the world you look at our world. Our businesses are changing because technology. Oh Gee you look at our sales and trading businesses there is much more that is done on platforms or through machines or where our data science is used then twenty years ago. It was a much more over the counter bespoke person to person business and now that still exists I think one one of the things that as an organization we still excel at is bespoke risk intermediation and I think we've got excellent risk-management culture capital committing capabilities across across this organization globally that I think second to none at the same point a lot more that business is being done through machines through platforms and it's our responsibility what if we want to be a leader in that business to have the best platforms that offer the most flexibility to our clients and the best tools for our clients clients can be more effective and so. We're very focused on that. We're taping this year in the middle of Climate Week and you recently signed onto an effort with Mayor Bloomberg around that to bring more business people together in the effort you also inside the firm pulled together a new group that will have the firm look at sustainability in a more business like way what led to that decision. What do you hope to accomplish there. I think these are really important issues and the important issues not just because they're the right thing for us to focus on the important issues because they affect our business and so when I think about at the medium and long term performance of our business if we don't get it right on a whole variety of topics that are sustainability effort is focused on it will be the detriment excrement Goldman Sachs and ultimately to the detriment of our shareholders so the environment is just one part of that focused but the sustainability of our free market system and the system them that we really believe in that's really brought people along here and around the world we need to participate in making sure we're investing in things that make the system work work that make the environment work for all people and if you do that it takes cost and friction out of our business and so it's super important that we think about these things but we do it because as we think it's right for our business and we also do because we think it's right but it starts with our focus. On what do we need to make our business as competitive and as well positioned as possible the medium and long-term. How do you think about working with other companies and other stakeholders on those issues. How do you go about that. There are lots of opportunities to partner with people and there are a number of examples examples where we're partnering with some of our clients. This is a topic that our clients are really engaged and you know it's different as you move around the world. I mean for example in Europe. There's an enormous mismanagement around the environment right now. An enormous amount our clients want to partner with us. Our clients are looking for opportunities for us to create interesting capital sources that in some way shape or form allow them to move toward being more carbon-neutral over time. It's a focus of companies all of the world and so there's a real opportunity for us to innovate around financial tools and support our clients and I'd say our clients are really engaged on this topic. They're looking for new and creative ideas and we've got a few that we've been working on a few that we the marketplace what are things attention. This summer was the launch of the partnership between Goldman Sachs and apple on credit card. How did that come about. How does that tie into how you're thinking about. Serving more mainstream customers well at the most base level it came about because apple decided they wanted to be in the credit card business. They wanted US their platform for other products and services and they decided they wanted to be in financial services to some degree. They started with credit card something they wanted to do. They did not want to jump inside inside the financial regulatory moat reason for understandable reasons and so they basically said we're going to go out and do a credit card use our platform to build the credit card we think a variety reasons why it's good for for us and so they went out and they talked to a number banks and we were one of the banks that they talked to so it started with the fact they went out and talked to everybody. We had some interesting advantages pitches in that process the first of which was we had a very nascent consumer business that was really digitally oriented but we had no legacy business and so they had some very very specific things that they wanted to build in terms of the application and the user ability in the phone and the ability to make things easier for consumers broadly and we had greater flexibility ability. He's we weren't married to an existing platform or existing tools or historical perspective on how these work together and so I think that proved to be an advantage adage that we could take out a white piece of paper and say okay. You want to design it this way yeah. We think we can design it this way. I think the second thing is apple has been a really important relationship here at the the firm for twenty five plus years and in the context of that the organizations knew each other well. There was a lot of trust that trust I think was important when you enter into a partnership like this they're going to be bumps and things aren't gonna go perfectly but the history that we had is two organizations trust that was their enabled us to kind of embark work on this project and the early launch in the early read is it's. We're off to a good start so we're living through interesting times. Geopolitics are back in the forefront of investors esters. Minds markets have been both fixed income and equity markets and a little jumpy recently controversies coming to you and asking for our view the macro picture how you describing that the clients and stays well. There's a lot going on in the world at the moment economically the US economy is doing fine and I'd actually say on a relative basis the US economy. He's doing better than the relative. Is you get around the world I think in particular there's been a real slowdown in Europe particularly industrial economy and even here. There's a slowdown slowdown in the industrial economy. There's a slowdown in capital spending and capital investment given some of the uncertainty that exists around the world but the consumer in the US is still in pretty good shape consumers a big part of the economy here and I think the economic picture here is okay but it's fragile the trade situation and more broadly our relationship with China which is evolving is fragile and that is affecting confidence when you look at what's going on politically in places around Europe. If you look for example what's going on in Germany. That's raising questions as they're clearly going through a transition there and so there's no question that there's there's a little bit of uncertainty around the world right now and that weighs on investors that said you know in the US. Things are going okay but there's a bunch to watch to think about got to worry about. I'm very concerned about monetary policy and how it's evolved over the last decade I think negative interest rates is a failed experiment and they're gonNA be real real consequences and repercussions of that for everyone in the world but in particular for those places where negative interest rates have existed. I think it's inflated aided asset prices around the world. I think that's something that should be of concern at some point in time and so we've had a nice run. I think there's reason to be cautious but at the moment if you look at the facts and we'll call the short term the economy is chugging along okay here in the US. You're just down in Washington. You had a chance to talk about some of these issues with policy makers there here and there were a lot of other business leaders in town. You also saw the Australian prime minister what was on people's minds there. What's the mood like people are very very focused on China China trade and the relationship between the US and China and people are in this dialogue about. Is it going to be a deal. Is it going to be big deals. It can be a small deal and I'm not smart enough to now if there's going to be a deal but I think there's a fundamental change in the U. S. China relationship and I think the evolution of that change and getting to the the end of the road is not something that's going to happen with a simple trade deal. I think this is a big change in the way the US China position in the world and we're navigating some very very big complicated issues and I think this is going to be a process over a period of time and I think people feel uncertainty about that and they're looking for answers and I think this is one of those things where there's not obvious obvious answers. This will be a process over a period of time and it's complicated and I I'm concerned about the fact that it seems like because of the way this process is unfolded. Were developing kind of two sphere. World is the US aligned economic world of the China Line Economic World and I think that's GonNa create issues of friction global growth over time depending on how it progresses so that was a big topic lot of discussion around monetary policy around negative rates concerned about growing government debt around the world concerned about deficits which is something to watch carefully lot of discussion about the role of companies versus government around complex difficult issues. That's tricky topic that a lot of tension. I think companies are going to continue to invest in their people their communities in things that matter some of the things things we were talking about before but to make progress on some of these difficult issues we need the legislator we. Democrats and Republicans to come together and legislate. We need both to make progress. That's a lot the hope for the election next year so we'll see and by the way the election next year was a big topic everyone. Everybody wants to talk about the election. They knew it was going to happen. What's your top focus for next next year for you. For Year to Goldman Sachs the big thing that we as a leadership team and I'm very very personally focused on is the rollout of our broader strategy and further execution on a bunch of the initiatives that we've communicated in some way that we will communicate as we move forward. We've done a few big things that have to be executed on. We announced we're building a transaction services platform and we're now on that transaction services platform for ourselves and we're GONNA roll out to clients in the first quarter of two thousand twenty we bought United Capital and we're integrated. We need to integrate it and see the benefits of that acquisition and make progress on that in twenty twenty. We launched a credit card which has been out there for a few months but now we actually need to build grow it make it work and we need to execute on that in the twenty twenty and we announced the point together of our investment platforms around the firm to have a more centralized merchant banking division and to start a broader plan plan across equity of private equity and growth equity across credit across real estate across infrastructure to grow our platforms and work more with our clients in a more strategic basis and so we need to execute on that too. That's a lot of execution that we're going to be really focused on during twenty twenty. It's GonNa be a busy year. It's always a busy. It's always busy. Let's close with a couple of quick questions. well known that you do some. Dj on the side probably had to scale back a bit with all your day job obligations but talk briefly about what having outside interests like that means to you and why it's important first of all. I really Oy enjoy it. I love music. I've really been lucky enough to find kind of passion or a hobby. That really takes me away from what I'm doing twenty four seven most of the the time when I'm in the music studio. I'm actually the handful of times a year that I do it publicly in a club and I'm actually really Jane. You're just you're lost in what you're doing. I'm and I'm a guy who's running running running running with a lot going on in my head related to Goldman Sachs every single day and when I go do this just Kinda clears my head a little it gets me away from it and I think it's healthy charges me and so I enjoy it as a hobby at work on the weekends. You know takes away a little bit and to some degree. I like to exercise. I like to road bike like to go to the gym etc that clears my head in a different way but when I'm doing those things a lot of the time I'm thinking about work. I'm thinking about Goldman Sachs and so this is a a different kind of escape so to speak which I just gives me more energy. Keep going. I really enjoyed. I'M GONNA keep doing it so every year. We hire lots of lots of young people won't they're starting out their careers. What advice do you give to young people when they come to you are lucky enough to get an audience and say hey. How should I be thinking about my career. Whether Goldman Sachs Zack's or somewhere else the thing that I try to encourage people to do a little bit more than I think I see. Young people doing today is to just be in the moment it and live and learn and do and not be so worried about what's next. I have a lot of people come to me while I'm doing this. What should I do next do this next. I do this next and you know. I tend to ask some basic questions like what you're doing. Are you learning. Do you like the people you're working with. Do you like the people you're working for. If those things are kind of clicking and working keep going and don't worry so much about what's next I always found in my career opportunities kept popping up over time and actually the more were I stayed in one place and did a little bit more got a little bit more invested in what I was doing the more the quality of the opportunities that popped up kind of accelerated and so I'm a big believer that it's a long road and we look we said earlier. I've been at thirty five thirty six years. I've still got a lot to do got a lot the energy so it's it's a long road and you just you don't have to have the answer. You don't have to know the destination you just have to be making progress and progresses learning meeting people aw enjoying what you're doing have a good experience. You don't have to know what's next. You don't have to have the final destination all right well David. That's great advice. Thanks for joining us today. Thanks Jake so that concludes this episode of Exchanges Goldman Sachs thanks for listening and if you enjoyed the show we hope you subscribe at Apple podcast rating or a comment and for more from Goldman Goldman Sachs experts as well as influential policymakers academics and investors on market-moving topics be sure to check out our new podcast top of mine at Goldman Sachs Husky Allison Nathan who's a senior strategist in our firms research mission This podcast was recorded on September twenty third two thousand nineteen. This podcast should not be copied distributed. Have you did published or reproduced in whole or in part. The information contained in this podcast is not financial research nor product of Goldman Sachs Global Investment German research neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information formation contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic omic legal accounting or tax advice or recommendations in this podcast in addition. The receipt of this podcast by any listener is not to be taken. Ask constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
The State of Goldman Sachs Small-Business Lending
"This is exchanged. Goldman Sachs for discussed developments currently shipping markets industries in the global economy. I'm Jake siewert global head of corporate communications at the firm today. We're going to get an update on the state of small business in the United States for Margaret Nada who leads our firms. Urban Investment Group Margaret was on the program last month. And we're delighted to have her back. We'll talk a lot about the P. p. p. program including how strategies played out to get money in the hands of small businesses and what. Margaret and her team have been doing to create partnerships to deploy that capital some trends. That have emerged when it comes to lending support and road ahead Margaret. Welcome back to the program Jay. Thanks for having me. So it's now been seven weeks or so since the cares act was on into law and the paycheck protection program or P P P program was created as listeners may know the PPI initiative was one of the key federal relief efforts and it provides emergency loans to small businesses but that relief did not come right away. Tell us about how you and your team approach. Small business lending when the crisis first emerged before there was federal legislation. Sure so back in March when this became a US crisis we were in touch with many of the business owners that we've known for years through our ten thousand small businesses initiative and we knew they needed chapel immediately and were concerned about their ability to survive so knowing that federally might take some time we start pushing forward with local of our ships to get capital to businesses from the start renew this price will require strong partnerships of course financial tab was needed but also a capital human apple in the real social capital relationships before the cures act was passed. We said about emergency small business. Loan Fund for New Yorkers directly in partnership with local government through the city's small business agency and a mission during lender that we'd actually worked with previously in times of crisis before to provide loans for impacted. Small businesses and goal was to get zero percent interest on capital. Two is many businesses as possible early fossil within a week of the New York facility. We work to set up a similar program in Chicago. So these emergency long bonds help bridge some of the gaps. These local businesses were feeling in the weeks leading up to the launch of peaky. Once the cares act was passed in p program was launched what came next for the strategy. How did it evolve sure? So knowing how rapidly the crisis was expanding we knew we needed to supplement the conversations. We were having in a totally wrong here. With more data we knew that concrete data would help ensure that our efforts would actually reach the businesses most in need so our. Pb strategy was getting off the ground we send our second pulse rate thousands of small businesses owners throughout the US and we learned a lot from this group. You Know I. We heard there was incredible. Interest in optimism about the program more than ninety percent of respondents had tried to apply in the first few weeks and for those who were approved nearly eighty percents that they were confident or business would survive importantly they believe that they would ultimately be able to retain the majority of that workforce and this was despite all of the disruption caused by four soldiers and for many very heart wrenching. Layoff decisions in the interim so for business owners who were aware of the program who understood its nuances and had a bank to turn to roll out. It's a hugely beneficial. Unfortunately this wasn't the reality for most if that stage one glaring wave data from our survey was the plight of black owned businesses if you compare those businesses to all small businesses double digit disparities in. Pcp application rain and the approval rate. There were twelve percent less likely to be able to apply in out of those who ply twelve percent less likely actually get direct shoe and get the ruble was coupled with with Britney that we saw as well the twenty six percent of the black business owners that we survey should should've been less than one month of cash reserves on hand and as you can imagine we deeply trouble his theory we all need. It's you better and we need to do so. Only a two hundred fifty million in lending capital for small businesses and eventually double that to five hundred millions. Make EP loans. We decided to do so solely through community development national institutions called. Cdfi's another mission driven lenders and we work with CDFI's for over a decade. All around. You Ask as part of our business program. We know these organizations we know they reach underserved areas. You know how they reached some of your infrastructure and with all that we know that their best position to reach the most vulnerable businesses were being left out. Ultimately we provide lending facility is to six organizations for homer minority lead including to most active. Black leads defies in the country. And sensing that the enormous demand for P. Lawns with strain. These community lenders aren't as with any institution needing to move at this pace executed brand program. We also provide a twenty five Brands as lenders and others to build additional operating passed as soon as possible this them to make immediate higher so there was additional support for small businesses and some were able to make real time technology updates to help process We think this targeted philanthropic commitment has played no meaningful role in helping the CDFI's Roy Moore capital more quickly in his epic for some small businesses getting might quickly really the difference between being able to pay bills and continued operated. I reduced capacity or going business entirely so Margaret. Has It going now tells more about the small businesses you've been able to reach with that approach. And what trends. Uc emerge as you deployed this capital. I are capitalist reached very small businesses just as we hoped it what across the eight thousand loans to date around the country. The meeting employee count is just three. These are businesses like the two women clothing design shopped. Who after receiving alone to creating based masks when there was a shortage in her community in Louisiana or the florist in Chicago never before needed along for her business which you know she'd been operated successfully for over two decades when every single one her upcoming event was cancelled due to stay home orders or a Solo Hairdresser in Detroit. His business dried up overnight and to serve these much. Smaller businesses are community. Lennon partners made much smaller laws. The average loan size to date has been about sixty one thousand which is less than half of the size of the average EP. Low nationwide in places. Like our William on Ohio are lender. Made loans the smallest. I've hundred dollars. So our partners are reaching the exact same businesses that initially struggled process because they didn't pay relationships or needed assistance in pulling together the paperwork and many simply never taken out a loan before and the second in it's noteworthy today. The David we've seen is beyond the small size of the businesses in the loans where these businesses are a third of the capital to date has gone to businesses operating in low income communities and roughly half of our learning capitals deployed in minority important rate. Is We need to ensure that the same communities and business owners and workforce it'll be disproportionately impacted by disastrous negative. Health outcomes don't have to suffer even further because they don't get the economic relief they need and so for example in a place like New Orleans where Hogan cases have been incredibly high per capita and the desperate for blacks is simply staggering nor really proud that our community lender. They're Obama arise has been very active in breaching undisturbed businesses with sixty percent of the lending capital they are going to businesses in neighborhoods and also eighty percent of the capital reaching black communities will to hoax approaching the city because we know that nearly half of black households are on country are on banged or underrated. So were encouraged that even with the large fortune mark capital reached those minority neighborhoods. The only take all these figures together. We believe these trends validate the importance of supporting these communing lenders who are successfully reaching some of the hardest hit businesses in some of the hardest hit places during during this really tough time and actually a lot of what's promised a lot of lenders. It doesn't count through in the transfer of the numbers and we've received countless notes on businesses. Were surprised in some cases emotionally overwhelmed but these lenders would spend real time with them to understand the program application and be there as a resource throughout the process so in the midst of crisis. Like this there's a lot of focus on the big macro stats and the numbers are so unprecedented. They're hard to fathom but a lot of the stories that get lost. Talk about some of the different business owners you breach in some of the partnerships you've been able to create so we don't under- using many different approaches to get to businesses. One of ample is our partnership with the Brooklyn. Nadya are this is a not for profit landlord you know. They host many innovative industrial businesses. Right here in New York City and we worked with them in our local department pursuit. Get loans to over sixty businesses that operate there so from light manufacturing businesses to not for profits to the restaurants that serve the workers air businesses. Like these which will be so critical to reopening but yet also face such frustration in getting a PB Baloney something else. That jumped out to us. what we've done so far. Common were capitalist Barbers nail salons in hundreds either businesses. That may have been successful without ever meeting. Allow a relationship with the bank and yet without a deep law in this crisis many would permanently closed left empty storefronts on main streets all over the country and actually one of my favorite approaches over the last few weeks nose out of our partner hope which churches in their communities in the south so the goal was to make sure as many churches as possible receive loans. Not only to support their own finance as an employee Prices but also because of the important role these in churches would play in raising awareness about keeping belongs for all of the businesses and sole proprietorship and independent contractors within their unity's but also in the recovery eat faith based institutions are going to need to be as strong as ever it helps healing of these communities. No one of these laws actually went to a small church in Birmingham Alabama and when sent over the articles have been rations to complete the loan application. It was handwritten from eighteen nineties. You know so look. There's a lot more work to do in neighborhoods or entry excited that today. Our lenders are still working there. Reaching businesses as we speak in support as many offices off the law capitals available so I mean everyone knows that small businesses will be critical to restarting economy and and the broader recovery efforts. What ARE SMALL BUSINESSES? Going to need beyond lending capital. There needs to be heard so people actually provide a great example of how what's needed for. Small businesses needs to be driven and designed by small businesses themselves. They know their challenges best and they know what's needed to overcome them so now more than ever. We see an opportunity to help. Elevate the voice of small businesses where the process of organizing virtual flying to Capitol Hill next month to allow this community small business owners to engage with their representatives Washington in what's expected to be the largest virtual lion today were were super excited about this. We believe will be an excellent opportunity to allow small business to you. In reheard allow them to share their views directly and give their perspective on. What's working and know equally important. Ill also via platform to not work to allow lawmakers to hear their concerns with relief efforts and reopening plans and to discuss ideas for changes in future legislation. That would even better help them. You know survive in the near term and hopefully get back to thrive in the A- I stack in providing a platform for small businesses to disturb US alongside the virtual flying. We're launching A LONG-TERM INITIATIVE called ten thousand small business voices now allowed the interests of small businesses to be better heard at the federal state and local level. Not just his moment in crisis. Release we as we thought as we move over so your team is focused on. The Urban Investment Group is focused on revitalization of underserved communities. Those communities have been particularly hard hit in this crisis and well beyond the small business lending. You've done how you thinking about. What's what's top of mind for that group and the road ahead and what the challenges are I mean? We remain really focused on the places where we've been in for years. These are the under served. Muslim majority minority neighborhoods off the country. South Baltimore or Tremaine New Orleans Ena parts of Queens right here in New York and I don't think that there is a piece of data or were stabbed it's more quickly unfathomable and shocking than the data that he might instead last week so this is on the point that if you look at households where incomes are forty thousand year below forty percent of the households lost a job in March alone Kick versa forty percent of lower income. Households in this country have suffered a job loss. So that is it's it's it's very focusing right. You know we know about the the needs of these communities beforehand but if you're talking about unemployment that concentrated in these communities we need to double down on many of the same thing is communities needed prior endemic even more that's quality affordable housing. That's enough jobs especially those athletes for career advancement in real shot at the middle class and better access to healthcare and equality education. All of this inside together and even you know things that you know. These communities have been lactating talk about broadband access in rural areas in some of the the lower income part of cities known saw that literally play out as people not only trying to access P P loans but tried to figure out how to educate their kids at home. So we know this will be very difficult with the budget cuts slated to come as a result of all the unanticipated spending on on Koga Force and we know there will be really tough choices facing local leaders across the country but despite being only these challenges I am not optimistic that the public sector and private sector can come together. We've done in the past to create innovative solutions. If there's any even tiny silver lining atoll this. These issues are Forefront we know which communities hurrying we see the data and nor can we all also know that it's not about. I'm how you prepare in the crisis that the infrastructure that that they are before until we need to double down really triple down on what we do to really rebuild. The infrastructure needs communities plan social and to do that mindful to ensure our efforts. And this is your efforts or all businesses in all communities are inclusive and particularly focused on areas and groups that are impacted the most and if we can learn from the lessons of past crises. Recovery's at all too often exasperated any non hopeful that through this recovery real it we can create stronger and more resilient neighborhoods another better position to weather. Season Future Margaret of a sobering. Take but I but I appreciate your optimism. Thanks for joining us again today. Margaret thanks for having me gave back concludes this episode of Exchanges Goldman Sachs. Thanks for listening. And if you join this we hope you subscribe on Apple podcasts. And leave a rating a comet in tune in for a weekly market update Friday morning where leaders around the firm provide a quick take on the latest in markets. This podcast was recorded on Monday. May Eighteenth Two thousand twenty. Thank you all price. References and market forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Whats Next for the Airline Industry?
"This is exchanges Goldman Sachs disgusts gusts developments currently shaping markets industries in the global economy. I'm Jake siewert global head of corporate communications here at the firm today will be talking all about the airline industry with Katie. O'Brien Goldman Sachs Research. But before that we're going to get a quick markets update from Scott rubbing her of Goldman Sachs Securities Division watching five key numbers in markets. Right now thanks Jake. The big number that I'm looking at this week is six hundred. Seventy one billion dollars. This is the amount of money market inflows since January two thousand thousand nineteen. We've seen equity positioning very defensive. Following the risk off during the Christmas Eve of twenty eighteen the wedges something that we look at on our or desk. It's the amount of money that was allocated to money. Markets and fixed income relative to equities last year the wedge expanded by one point five trillion dollars I would shows defensive positioning despite the rally in risk assets in fact in two thousand nine hundred ninety nine. This was two point five times larger than two thousand eight which was the previous just record the number that has been getting a lot of tension in markets but doesn't really tell us what we need to know is thirty two percent over the past twenty five years thirty. Two two percent of the full year's asset allocation takes place in January the so-called January effect. We are entering a very strong period of January where the majority of portfolio rebalancing takes place every year going back over the last thirty years the first two weeks of January see forty percent of monthly if purchases and the second two weeks of January C. Sixty percent of monthly purchases that's into 401k plans. Five twenty nine plans and year end bonuses so for performance going back to nineteen eighty five. The average S. and P. Five hundred return between January first and January fifteenth is forty basis points the average return for the SNP rendre between January sixteenth and January. Thirty first is eighty basis points so basically double the last two weeks so so far this year we've not seen yearly equity inflows come back into the market given geopolitical tensions potentially exacerbating the buying pressure for the last two weeks wchs the number that has moved a lot that has caught. My eye is three hundred and fifty basis points post the MSI inclusion of a-shares into MCI emerging markets global mutual funds have the largest underweight of China exposure on record at three hundred fifty basis points. This is on a USO of two point two trillion dollars which gets to be about underweight of seventy seven billion dollars. Twenty nine thousand nine was the year of repeatriation back into the US from abroad and twenty. Twenty twenty maybe the X. Patriation back in international equity specifically emerging markets emerging market. Financial conditions are at six year lows. At at the same time that are China current activity indicators rebounding. The number that I'm looking at in the future is two hundred. Twenty five billion dollars or buy back desk estimates. That corporates will start the year with two hundred and twenty five billion dollars worth of dry powder that was authorized in twenty one thousand nine hundred but not executed in two thousand nineteen eighteen currently ninety percent of S. and P. Five hundred corporates are in the earnings blackout window right now are blackout window. Ends January thirty first just as the January January effect flows start to Feign are buyback desk estimates that full year executions will be seven hundred and fifty billion dollars or the third best year on record the a number that I'm thinking about when I'm not in the office three. I have three young boys their favourite show to watch his Ryan's tour review on Youtube. Ryan is a seven year old host of the show uh-huh and the highest earner on Youtube last year. Boys asked why they couldn't also review toys on Youtube. So my wife and I said why not so. You may see me making slime. We're building legos. In the not so distant future. Thank Scott now onto the airline industry here with Katie O'Brien of Goldman Sachs research has been covering this space for the past decade Katie. Welcome to the program. Grim thinks jake. Thanks for having me so before we dive in. Just give us a quick intro about who you are and what you focus on here share so I joined Goldman in July I twenty eighteen prior to that was another bank also covering the airlines and aircraft leasing companies when I moved over to Goldman took over the lead analyst spot here covering the US airlines and US US listed aircraft leasing companies. And how did you start covering the industry. So a little bit. By luck I would say was graduating. College had a position to start as an equity research analyst that another bank the airline analyst there happened have an open position he sold me on. It told me that everyone loves travel. Everyone wants to talk to you with a good airline story and and it's just an industry that face touches a lot of different parts of the economy fuel business confidence all that good call. So what's the top question getting from clients you talk to a lot of clients about what's ahead for the airline industry in two thousand twenty so it might cheat and give you two so the first one being will airlines be able to offset the cost inflation. They're seeing across many parts it to the business so whether that's airports maintenance or labor expense it's of particular interest this year because of the number of open labor contracts and the number of airport projects we're seeing across the US right now so just to give you some numbers around that right now about forty percent of the US airline Labor forces an open contract negotiations. This is a highly unionized list labor force and so could be material as they work through that and then on the airport space. I'm sure you've seen Laguardia Construction here in New York Laguardia Lax L. E. X.. Seattle to name a few quite a bit of expenses on top of mind for investors right now and second question. I'm sure you will not be surprised to hear but what happens. One if the Boeing seven thirty-seven Max's recertified. Yeah we can't talk about airlines without talking about Boeing obviously the grounding of the Boeing seven thirty-seven. Max is had a big impact you publish research late last year about that. What's been the impact so far on the airlines sure so talking to the financial impact of the UCLA industry the system supply supply or capacity growth in the US last year would have been about two percentage points higher than the three percent growth? We actually saw and that lower supply is all a function of reduced growth. Both the three impacted carriers who owned the Max so that South West who had about ten percent of their fleet grounded at year end twenty nineteen and then united and American. Both had about four percent percents their fleet grounded and so these impacted cares seem. Prophets negatively impacted sense grounding airlines have made a lot of improvements in terms of reducing the overall percentage of fixed fix cost. They have in this business but they're still relatively high fixed cost industry and so as flights were cancelled. Many of those costs were still incurred on the positive side. Though we actually believe that at that lower supply we talked about actually boosted revenue trends south an unmitigated positive for carriers that don't own them acts like Jetblue Delta so really to your first question Russian. The question probably most most on investors minds is what will happen to revenue trends one and if the Max returns to service so as you think about forecasting revenues in the top line you teams come up with the composite index to track. US airlines unit revenue or RSM. Raza Raza even better briefly. Explain that to us. What what it tells us and what it tells you? Investors space sure so we worked with the data works team here Goldman to create a proprietary unit revenue or resum tracker so we started the thirty three macroeconomic or other industry data series and came up with a Raza M. tracking index that is highly correlated to resume growth in the industry as we back test cycle goal also tracked right along Industry Raza translator last recession in the reason that actual the genesis of this was management teams have been reducing the frequency of revenue updates dates we get and so we want to track revenue trends are more real time basis and so what kind of inputs are most determinative so we came up with two data point index which includes hotel occupancy rates and oil So any interesting. Take Steve Come up by looking at it in more real time way. Okay yeah sure so I think probably the most interesting takes that came out of this process. Was We think we've actually been able to demonstrate with data that the Max is indeed boosting Revenue Trans this year if we look back at the second quarter of twenty nine thousand nine thousand first bowl quarter without the maximum service and we saw the largest gap between our tracker and Industry razzing trends an industry rise and growth has actually been several hundred basis points higher than what our tracker would've predicted since the grounding of the Max. Okay so obviously this is an industry. That's highly consolidated solitude half the frequent flyer numbers. I used to have don't work anymore so that that's driven some better profitability in the industry. Better bottom line how. How the dynamics tied and what's what's been and driving that consolidation sure so I would say consolidation definitely the biggest driver of the profitability improvement? We've seen all of their. It's not the only driver so the airline join industry still very competitive one. Historically when it was much more fragmented. The industry regularly went through periods of widespread bankruptcies this is of course disrupted airline investors busters but also airline employees who had to live through this boom bust cycle with much less job security and often had to agree to concessionary wages trying to build a company out and then for the US consumer this period was also negative. In terms of the industry's ability to reinvest in the product. So I think as we move through time. Management teams wanted to dig himself out of this boom bust cycle realize thirty synergies so these mergers and so today where we stand the top four players in the US industry actually have over eighty percent market share in the domestic. You US compares to going back to the nineties. It was between sixty and seventy percent share held by the top four players. What's the industry view? Is there room for more consolidation or regulators. WHO's GONNA put a stop to it? So I think the investors view there's potentially room for more consolidation maybe not at the at the major carrier like an American or Delta level. Right now but we've actually seen for the first time in a couple of years a couple of new lower cost airlines spring up in the US. And how `bout internationally is the picture a little different. They're definitely so over the past. Probably ten or fifteen years we've seen the emergence of what's called an antitrust immunize joint joint-venture for instance if you're a Delta Flyer. They have an antitrust immunize joint venture with Virgin Atlantic Air France. KLM and now allows them to schedule in price price on route across the transatlantic so in effect almost a trans-border merger so related to improving margins. There's been a sort of de commoditisation education of the airline product. Talk about that and what might be next. Yeah sure so. I think it really comes back to the improve profitability and cash flow in the industry the last ten years. The airlines are now actually reinvest into the hard and soft products and so we think historically basically had two options coach business class and the person who booked the furthest out to the lowest price and the best seat on the plane now network cares are moving to at least five product options so that's basic economy that the definition Shawna soft product same. Cu Gavin economy. But maybe you can't pick the scene in bands and maybe you don't get quite as many frequent flyer miles next regular economy than extra legroom economy me and then we've got premium international connie cabin and then business and so has that lead to better consumer satisfaction in the industry or yes so that allows consumers to pay for only what they value and has also expanded the different levels of service and what we've seen as consumers are really willing to pay up for some of these products for instance instance the premium international economy mentioned. Consumers are willing to pay so far. It's been rolled out about two times the price of regular economy seat for those seats in light of the improvement in the industry in the tailwinds that it's facing no pun intended. There's a debate about whether it's really different. I mean as you said earlier. This is an industry that's lost investors money's over the years and so what makes us think that this cycle might be a little different than the airlines might be healthier than they have been in the past. Sure so I am for better or worse a believer that the industry is different this time and and I should. Caveat doesn't mean I no longer believe it's a cyclical industry because the most certainly is given how economically sensitive travel is especially business travel. Jake take United CEO. One of the first things they do in a downturn is cut the travel budget and so I do think it's different I think consolidation as we spoke about played a really big role. Also we've seen kind of mentioned it a bit earlier but we've seen increase in the amount of variable costs in the total cost structure at through things like employee profit sharing programs increase use of aircraft across leasing increased ability to partner with regional airlines. Outsource a little bit of that flying. So I think the combination of consolidation that more variable cost structure and then even the product differentiation. We just spoke about. That's going to allow companies to better weather any future downturns or external shocks and probably shouldn't feel to mention. Most of the industry has used the last last ten years or so of economic expansion to meaningfully deliver their balance sheets and are therefore better positioned when if we next downturn so Katie. I'm sure a lot of our listeners. Owners are frequent flyer members. Track their miles. What's going on on that industry around frequent flyer miles we've seen some evolution and how it's worked overtime and some devaluation of some of the currencies agencies but but how does it look like from the airlines perspective? Sure so that's actually a big revenue driver and profit driver at the airlines right now so for instance Delta just re. He cut their deal with American Express and they're expected to do about four billion dollars in Japan from Amex in twenty nineteen and that's going to grow to seven billion by twenty twenty three and so these programs are definitely meaningful for the airlines. And while yes I think we've seen some devaluation especially maybe on the credit card. Sign these programs. We've also seen the expansion China what you're able to redeem for. So for instance many of the airlines now you have the ability to use your points for an upgrade or club pass or maybe even a soda on the plane and so I think consumers while yes maybe a little bit point valuation. They're also seeing added ways to use those miles into increasing the value of it to them as well. What were some trends that you're watching in the industry that might transform the industry more of the next five to ten years so I think it's going to be the use of data both from an operational standpoint in terms of predictive maintenance off airplanes if you can probably one of the most costly things have to cancel flight last minute drives costs in terms of rebuilding maybe a voucher voucher and then also on the maintenance side An unscheduled trip to the to the maintenance shop is is more costly than a regular scheduled trip so I think data coming off the airplane. I'm just going to be big so Katya. There's some trends that you're looking at over the near-term that could transform the industry even more sheriff so I I think that's going to be their ability to interpret big data whether that's taking operational information off of the airplane to avoid unscheduled maintenance all the knock on impacts that has the cost structure or to even further refined some of the pricing capabilities. They have on the plane and have just more price points for mortar. From customers or more soft products customers are willing to pay for that. They just don't have available right now. What was less flight? You're on that was my last. Who is an American flight from Nashville? Back home to New York. My last business of the year on a Friday evening so would have been great to extend and into a personal trip but didn't think of it and advance in twenty twenty and any tips for the frequent traveler. Let's see we're a favourite airlines snack. The line snack as a tough one to say it depends a little bit on time of day but probably a toss up between biscuits cookies couple airline serve and then of course always a fan of the blue blue chips on jetblue all right. Well thanks for joining us today. Katie thank you jake rowing me. That concludes this episode of Exchanges goldman-sachs. Thanks for listening and if you enjoyed the show we hope you subscribe. Grab on Apple podcasts. And leave a rating comment and for more from Goldman Sachs experts as well as influential policy makers academics investors on market. Moving topics be be sure to check out our other podcasts top medical mistakes hosted by Alison Nathan of senior strategist in the firm's research. Division thank you All price references and market forecasts correspond to the date. Eight of this recording. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast does not constitute a to research or a recommendation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness weakness of the statements or any information contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss sort damage is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal full accounting or tax advice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Why Are Savings Rates Back in Focus in the UK?
"This is exchange of Goldman Sachs discussed developments currently shaping markets industries in the global economy. I'm Jake Siewert global head of corporate communications here at the firm today. We're in London, and we're talking about savings and the consumer finance business will talk a little bit about cultural differences and savings habits in the UK and other regions of the world and differences. Amongst generations, millennials jen's, ease baby boomers, and how they view the shift to mobile banking and much much more. Joining us his designate, imagine director goldman-sachs consumer finance division. Who's overseeing the launch of Marcus Goldman Sachs in the UK? Does welcome to the program. Thanks, jake. So let's start with some broad context around the savings market in the UK as typically been a region of savers, and how has people's view of savings changed since the financial crisis. The UK's definitely nation of savers before we launched Marcus. We interview three thousand different consumers to ask how they saved what they thought about savings, and we found that eighty five percent of people put some money aside every month just to save it for rainy day for holiday for purchase that nature of savings been good. But what we also found is that people aren't very good at saving. So they're trying to save twenty five hundred people didn't have savings account. All they just either left the money in the current count. Right. She lots of people just left at home lying around little pockets refined. Even one of the people actually literally left under the mattress. So is quite scary that at decade of low interest rates posts, a financial crisis had just seen that people try to save. But they're just not good at it yet while the wasn't much reward for saving in the wake of the financial crisis. One thing that's obvious when we launched Marcus here in the UK versus US. There's a much more active debate around getting a fair rate of return on your deposits. Why do you think the debate so much more robust? Here than it is elsewhere ten years of low interest rates savings was almost like forgotten category within banking knows of consumers, and what we saw was that banks in someway has lost interesting savings and savers. They weren't talking about it. It was like when was the last time. You saw a savings for advertised and customers lost interest in savings that apathy about what they get is not worth their while switching why not leave my money with my current account and account paying not no interest at all that apathy really kicked in after ten long years of low interest. So what we saw when we came in. And when the reason Marcus was excessive we put savings back Lanier gender Amal starting point was I see we wanted to put the interest back into savings, and that wasn't just about pain. Great customers with actually put savings back on the agenda. Does you talked a little bit about the awareness of the savings issues in the rates savers are paid our policy makers weighing in the space because there's not a big debate in the United States around the rates savers or paid for? Deposits. So there's been a lot of debate and changes in the UK market from the government and regulators to try to help people to save. So if I think some of the changes that we made in the last few years, the personal savings allowance was introduced which at he made all savings tax free for the first thousand pounds for normal rate taxpayers and five hundred pounds higher tax taxpayers that was used to incentivize people. They've also introduced individual savings accounts and schemes to help people get on the housing advice able for deposits. I definitely an incentive within the governments to put savings back on the genuine as realize Asian that low interest rates haven't helped savings so trying to do anything from government view, which drives savings behavior who put savings back. Bacne general gets people onto savings habits has definitely worked. Whether that's really driven behavior is yet to be seen in some ways. Because in some ways, that's added more complexity to them. Market people don't necessarily understand should have this tax free savings account that tax savings account. So I think there's a dry full simplicity of policy has been in the good way. There's still more that can be done. Monetary policy, obviously, very different in different countries in the wake of the financial crisis. There emerging from zero interest rates at different paces. What role does monetary policy play in the differences in savings habits in different countries? Fi look at the u k I very much quantitative easing ring-fencing the retail banks of a wash with liquidity. So they don't need savings. If you take out, and you up is very similar being low interest rates for a long time. So again, people need to save, but the returns incentives that banks give to them is much lower in that part to it. That's front are into all over the world post on crisis. So the banks didn't really want anymore at posits. They weren't willing to pay for more deposits are there other cultural psychological factors play in some of the differences around savings. If you look around the world is difficulty, cultural, psychological factors in itself. All people save as spenders at the younger person. I respect me spend my needs for more. And as older I became a saver. I start. Thinks that you'd long term. It's a moving natural insti-, you cume late more wealth. But I'm not sure there's a cultural difference, I know in Germany fascinating country because eight percent of their GDP at he saved every year that need to save is definitely grain into that culture. I don't think necessarily near Anglo-Saxon world so in different cultures. You see that as much it fills removing individual thing. And I think what your education what you're what up. What you need are one thing that's new about Goldman and Marcus is that we actually now have customer service real live people who answer the phone. What have we learned about customer service as an institution and has a different here in the UK when we were launching Marcus in the case, we spent quite a lot time thinking about what do we want the Marcus experienced be an although in online Bank what we found with people still need to phone up. Sometimes people still have questions people still have concerns, and that's a moment of truth for us when a customer phones, so something that we thought were. Very very important one was that we wouldn't hide telephone number on our website. I do so many companies where I try to frame them. And I spend the next hour twenty five their phone numbers in Iran cleanup. Mommy telephone companies about point. We also wouldn't have an Ivy. Are we didn't want customers to goes through press? One press two press three unit have a whole new set of options underneath it. We just want to be able to if someone's the furnace they can talk to us quickly screen vested. A lot of time in it. He recruiting agents who were used to dealing with customer service. They came from retailers. They were people who had a really good customer attitude, and we spend an inordinate time to training them spending weeks at she working up to make sure that the service. They gave was great. We now have something like fifty agents. He look off to our customers. And we tip you twenty phone within seconds people after wait to held onto the phone with us. And I'll call center initially was decided in London. It will stay in London. But we're also payment Yukos and to be Milton Keynes. That sent will have up to two hundred and fifty agents Thomas require the business out, and we really excited because some opportunity not just via digital, but we were direct Bank when customers choose to furnace. They can actually do with us on the telephone as well as online, and that gives people a choice when you look across the rest of the continent of Europe. Where did you see commercial opportunities for digital Bank? That's offering higher interest rates. The world is moving more did still time people use their phones all the time. Tracks your freight disrespecting this growing, generally, Germany for us is a phenomenal nextstep opportunity because of the size of the market the nature of the German saver who want stretchy grow and the level of competition that they're so it's probably the largest single market for us. But also paid France Italy Spain the all of these frost over time. But for us, our increased around the scale of the opportunity the appetite for those customers too low rate seven often the level competition, and we think we Germany's on next logical step. You mentioned that savings habits of all as you get older age. We all age, what do you think might help incentivize better savings among younger demographics like jen's E or maybe not so young anymore? But the millennials what we see is that if you look at how millennials consume information, I'm the use OSHA media. They use it vises use trusted circle to tell them more. So where we found out from maybe our parents from advertising from TV ads millennials you social media threatened form than when we see that twice as many of followers of millennials on social pages that if you look our advertising in that space. So they want advice they won easy to do. But what I would say as millennials also want instant gratification. They used to technology. They're much more able to get things done quite way. You know, they go in the phone. They fight there from across the phone, and it happens they used to that instant gratification. And that's I think what we need to do. We need to Floyd technology for them. We need to make it easy for them. Many to explain it in a way that exists. What fancs it on historically is? They've created FOX and silos that helped the banks of the money. But now we need to turn into a customer Centric operation was that talks about what customers needs and whatever filling so no when she has a savings account to save money. They save for goal. They say for purpose. We need to change the language a little bit from lineal. So that you understand what they're aiming for. And if we can do that, I think we can help them manage their money earlier than maybe we did in our ages and progress further in life. What are some of the barriers you mentioned a couple looted to a couple of ways traditional banks gathered savings or gathered deposits? What are some of the biggest barriers that consumers face today to save more in how is the industry trying to innovate to break down some of those barriers and reduce some of that friction? One of the hardest things in terms of various is habit. You have to get into the habit of saving. I'm having easy access in these way to move money. So what we find is that an awful. Knowledge is riddled with catches and conditions about why you have to do something we have folks in the UK where you know, like so excited a little bit, but you can put your money in and then you can any money on the third Wednesday of a month. They've it, sir. Full moon, and those types of conditions just complicate things. People have trade in order to get great returns. They have to make sacrifices and come from is it all the time. And I don't know why is an industry. Sometimes we think this is a good thing that we always have a tease great rate and all these conditions behind it, we shut she just put people off. So we just need simpler products nothing. That's the coal thing that we need say simple straightforward products that give customers value and transparent are the things that he what Marcus stands for in its heart is accustomed Sanchez. Simple transparent offered gives value to our customers. And if we do that industry, I'll consumers we better off they'll save more though, manage their money better an L light Bank small as well. Well, one group that's out to get the banks the fintech startups, those startups trying to disrupt the way that businesses done in this space, and in the way, they have a lot of other industries with a lot of great success. What are the new entrance in the fintech space? What are they understand about the consumers that the incumbents the bigger banks haven't understood, and processed the fintech have great advances coming into this market? They have no legacy. So they're not let the old banks more with their all systems profit polls becoming with fresh sea of paper the challenges that violence, she all the capital scales to really penetrate, but some of them are creating new flop noise around customer experience, and what to have tapped into is a certain knowledge about how to make things easy for customers. How to present information in such a way and how to rise you pick one problem and solve it really? Well, says lots of things that we can learn from the intakes, and if you look at the user experience how he grown some have had no marketing tool. In terms. It's been word of mouth and Africa. See they really tapped into the millennium the early adopter so segment maybe use that social media to grow their business. But what they already do Selva customer problem. And that's what banks can learn if they solve customer problems. And they make the first goal a successful come behind them the challenge for the fintech Texas, whether they have enough balance sheet will scale to really so more than one customer problem. A lot of incumbents in large banks have tried to acquire that fintech sensibility inside their firm and built out their own fintech arms. Goldman has done this with Marcus, brother. Banks have done something similar talk a bit about the dynamic of operating startup within a large financial institution. What are the trade offs? If I think the positives. First of all, you have all the fun of starts out with the backing of in our case one hundred fifty year old company behind you. So you have enough law security have investment behind you and yours have love governance behind you, see the rigor and. Challenge and the risk control. That makes you is that little bit safer and a little bit more rounded in terms of how you off right? The negative. Sometimes is that can slay down a little bit in a smaller fintech startup. He can be more nimble unique Volta more parts to it. You don't necessarily have as many people in the conversations that has positive size in times. You'll speed not Messier Rico some of those conversations. I almost have the best of both wells and toes. However, I I run a affect we a startup business, which is lots of energy, great culture. Great people. But I've got the backing of this huge firm behind me. So I've got like a big brother will begun Cole who has almost roundly. They won't me to succeed. I may put an awful lot of time and effort behind the company, so we're in a great position, given the trans you've describe what is the future of consumer banking. Look like will we be doing everything in the future on our phones in some countries? They moved further ahead on that than others. Notably China or will the still be some. The things that we grew up with certainly retail banks with actual stores street or checkbooks alike. Or is this going to be completely mobile experience? I think it's very hard to predict the future with any accuracy. You know, what I would say is the industry has changed massively over overtime. And it feels too they like the mobile phone, we everything. So I looked today. Anna, maybe ten years Tomo look back and think why would anyone look at their mobile phone minutes different world, but way, do see is that people want things to be foster people want things to be easy. It's not necessarily about the technology per se is about the experience that they have. And if we can deliver things quicker, I always think about Amazon and the uniqueness of Amazon says today, they're opening branches on high streets threat, she get things so given to you and where shops on radio really, well his district and for ex foster to people, so I don't think is necessarily about are we going to be on mobile. I think it's just about that will consume products faster. And whether that's in mobile, whether it's in false away to get to the high straight. It doesn't matter. But what I do know is that it was a whole generation of people who don't use Mobile's uncomfortable online that still needs to be certified branches that generation will reduce overtime by making easier and easier a mobile becomes more of your life Moby done over that. And China's will be a great example if you look at the we chats of the weld who are doing everything on the phone. There's a pot for that. But I don't think the branch is dead yet talk a little bit about the security risks for consumer banking in this digital age doesn't like Goldman thinking about the risks to mobile banking and how governments responding as a Bank. We have an inherent responsibility to look after our customers money. They information that data I met doesn't change with your physical branch with digital. It's the same. Inheritance, sponsor -bility the technology that people can use to break into online things. It's just the landscape, but it hasn't changed. Problem in terms of where we are. So we're in a constant fight. Right. He take security and to keep ahead of protecting that customers data and money, we invest no for law of time and effort to make sure we're ahead of that curve. But something that I think will never stop for us in terms of there will always be people who don't want to do good things. I'll jobs such protect monies and Bank started hundreds of years ago. Thousands of years goes looking after people's money. That's what we do. Now, we just do it in a different landscape. You haven't been around since the beginning of banking, but you've been in the industry feels like it. See your long tenure in the space tickets quick tour through your career, how you ended up here at Goldman leading the charge on Marcus I fell into banking. Really, it wasn't necessarily my embassy life to become Vancouver to Kasama Jove in a Matt restaurant in the mid eighties, and I never left. I start off imprint his I moved into the head office is I went on a management program, which gave me good general management training, and then I moved into private banking. So I went for Cousteau for awhile and then moved into banking. So I helped launch giant he'd right in the UK which was one of the early startup direct banks spent ten years, they're vowing Meinie marketing, and I think the coal role. I probably liked the most with marketing and pull it communicates with our customers. Developing products developing services that customers really wanted and understanding what their needs was delivering that. And I've been fortunate to run a number format sickle savings loans business banking across a few banks. Th now, but I've mainly been UK banking sector in the area. So we think back to that early job at NatWest in the summer. And then what you were doing that. And how you're interacting with the customer today. What's changed the most? I think back I think it really grounded me in terms of what we do is. We look off the customers when we look at the cusp is money and the allies we help them strive. And that's what we stayed with me in terms of that core. Grounding in terms of what we do. What's changed in some ways temps of how we deliver that everything is fast an hour. When I first thought in banking. It was a much more personal service. We knew the people it with local banking. It was on a high straight. You knew the customers you came in if he week there was definitely conversations and relationships merits much more impersonal, but you're still doing the same thing for people. So you transact with much more people much faster is sufficiently narrow than than the actual personal service. But I still think if you think back to what they're trying to achieve in. You think there's a custom at the end of it is not about ten. Sounds moving. It some was wages at someone's paying for something. If you always think about what they need for their money and what they're doing with it. You'll be in a better pace going again back to that early days. What surprised you the most in terms of how the landscape has changed? I think just the speed of change the number crunchers of disappeared. ATM's arrived telephone banking arrived mobile apps arrived contactless payments ride every couple years as new innovation in the world. We see constant change, and I think banks being fantastic adapting and at the same time. If at that very slowly to that to it. So a lot of things they've done. Really really, well, but the coal thing is looking after customers, you mentioned you started branch of NatWest back then talk a little bit about your family were they savers? How did you learn to save added? You get interested in banking in the first place, I'm Richie Irish heritage. So my family would be nervous immigrants who came over in the fifties. And literally buy look at my mother who is probably. Fantastic savers. She saves all life. She always told me when she came to his country. She always have enough money saved for emergency. If she needed to home that was her main starting point, but they say they will house they thrive education and background was very much around working hard managing money. Looking after money. I mean, growing and developing I think like many immigrant families. It was at starting a life, and then building out from there and Creighton a platform for future I have to some now, and actually what my values always terms of how come I give them the best start in life. Will does. Thank you very much for joining us today. Thank you very much, Jake. That concludes this episode of exchanges, Goldman Sachs. Thanks for listening. And we hope you join us again next time. This podcast was recorded on March fifth two thousand nineteen. This podcast should not be copied distributed published or reproduced in whole or in part, the views expressed in this podcast are not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting, or tax advice or recommendations in this podcast. The information contained in this podcast was prepared. For general information purposes, only does not constitute research advice or a recommendation from any Goldman Sachs entity to the listener and is not a substitute for personalized financial advice. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in podcast, Goldman Sachs and it's affiliates. Expressly disclaimed any liability including any direct indirect or consequential loss or damage for this podcast and its content.
Goldman Sachs and the 1MDB Scandal
"This is a story about one of the biggest financial heists in history four and a half billion dollars stolen and allegedly used I for yachts and jewelry and high-end art work apartment. Prosecutors say the money was stolen out of a fund in Malaysia known as one one. MD Be and one of the most elite investment banks in America helped raise. Most of the money that was in the fund that bank AH Goldman Sachs investigators in the US have been looking at Goldman Sachs's involvement in the alleged fraud and now a a punishment for the bank could be imminent today on the show. The role of Goldman Sachs in one of the biggest financial scandals history. Welcome to the Journal. Our show about money business empower. I'm Kate Limbaugh and I'm Ryan Carlson. It's Monday January. Six to understand how Golden Sachs got involved with the scandal. You have to go back to twenty twelve a couple of years after the financial crisis Goldman survived but just just barely. Our colleague Hoffman covers finance. I mean they've got bailed out by the federal government you know along with the rest of Wall Street. They're kind of limping the. US economy is very a week survey went abroad with business slow in the. US Goldman put together a plan to try and make more money overseas in places. Like Latin America in the Middle East based in a big area of focus was Asia Goldman Sachs realized that Asia was a huge opportunity they identified about twelve trillion dollars of assets held by institutions solutions in the area and only had tiny chunk of that business. I mean it was wide open territory. There these are things like pension funds and sovereign wealth funds. There's a lot of money in Asia and a lot of that money. Just sits in government coffers and they don't need to do something with it and Goldman wasn't plugged into them the way they want it to be so Goldman started courting clients all across Asia. One of the bankers heading up this push was a man named Tim Listener. Tim Laser is a German national. And he's sort of. This is flashy smooth-talking guy. He's a he's married to a Komo Orally Simmons the American Fashion designer he became a partner which is as his highest gets a Goldman. There's only about four hundred and fifty of them and it's this very sacred ritual on the bank. Every two years like inducts new members into its partnership and he rose rose the ranks in investment banking. Goldman eventually was their most senior investment banker in Southeast Asia. As one of Goldman's top bankers in the region lies ner was responsible counsel for finding new business for the bank and in two thousand twelve he brought in an opportunity for a potentially very big deal it was with a fund from Malaysia called all the one Malaysia Development Berhad but everyone knows it as one. MD Fund set by the government of Malaysia and it was basically there to fund things that the country you know in needed things like infrastructure power plants in toll roads and airports and all kinds of economic development that needed to he spurred therefore and the mandate was go. Raise some money and then go spend it on projects that will help build the Malaysian economy to help build a Malaysian Economy Konami one MD wanted to raise billions of dollars from outside investors into raise that much money. The people who ran the fund needed help financially sophisticated dictated and so for a firm like Goldman. It is the perfect client. They need to do a lot of things and they don't know how to do it. Leisner wanted Goldman to help one. MD MM DB raised the money it needed so one of the first things he did was offer to help the fund with a bond sale. They would raise a big chunk of money about one point seven five billion dollars there's and the bond sale would earn Goldman millions of dollars in fees before they could do that deal lice needed to get approval internally from people Goldman Sachs who vet new business basically. The bank needed to do some due diligence I. There's this meeting in Hong Kong has a bunch of senior bankers from around the region And their job job is to poke and prod at this deal to see whether it's something Goldman should be doing whether it should be committing. Its money to it whether they want to put their name on it. What's the risk? What's the reward? Why are we doing this? How should we think about it as a client as a transaction? Were there any red flags that suggested that they might not want to proceed. There were what were were they. So this committee produces a memo which we've seen that sort of details and potential risks around the transaction. I was the size of the fee. Goldman would make make for selling the bonds much larger than is typical in a transaction. What Goldman has said as they went back to them? Bunch of Times said look we charge you this and do it this way. We could charge if you've listened to it this way and that one. MD chose the highest fee. And who is Goldman to say. We won't take your money. Certainly in retrospect and given the documents we've looked at the time everyone knew that the feature is a little out of whack which is a pretty obvious red flag because if one MD is willing to pay AH above the going rate you have to ask yourself why so. Why was one of be willing to pay such a higher fee? So what we found in no reporting is that one. Md Be told Goldman that they wanted the money quickly and quietly. There was some discussion about all. It'd be bad if anyone found out about this. They talk about sort. The the risks of media scrutiny. The concerns went beyond that one meeting in Hong Kong separately. Other people at Goldman had reservations provision about someone closely associated with the fund. A man known as Jolo so joe is a Malaysia. National of Chinese descent. He'd worked his way in very early elite. The new administration and Malaysia Governor close to the Prime Minister who setting up this fund. But he's in his twenties at this point he has no real experience. International International Finance previously when low had applied for a bank account Goldman. The bank rejected him. Because compliance officers couldn't figure out the source of his apparent. Welf off low has said his wealth as legitimate. His presence had also been flagged by golden compliance officers on other deals but despite all these concerns the the bank decided to move forward. Anyway this is a chance to get a really big fee and it's also an opportunity to get a real foothold in a region where Goldman and a lot of other banks. Think there's there's GonNa be a lot of business over the next few years and it did lead to a lot of business. Goldman was able to sell those initial bonds and over the next few years would sell even more eventually raising six and a half billion dollars for the fund but not all of that money went where it was supposed to go instead of spending billions ends on power plants bridges and other major investments in Malaysia. Prosecutors say the money was stolen where the money went and what it could could mean for Goldman. That's after the break Welcome welcome back as Goldman in one. MGB were working together. It turned out those high fees. Golden was charging. We're just for the first year. The fees stayed high. All in Golden. Would you three deals for one. MD be they would raise six point five billion dollars and they made about six hundred million dollars in fees about ten percent ten percent. And how much does a bank normally make an deal like this one to two percent okay. So it was massively larger massively larger so these steals started to get noticed noticed in the markets by other investors and traders. They started to get noticed by the press because the question was how did Goldman makes so much money with this is fun that no one had ever heard of and so people across the world various places start looking into this. Malaysia starts looking into this. They're wondering what did we pay. This fee for Malaysian authorities started asking questions about what was happening to the billions of dollars. Goldman had helped one. MD Berets because despite raising so much money there wasn't much to show for it and then in two thousand fifteen one. MDP's offices in Malaysia raided by the police and they walk out with all kinds of documents. Achievements this is sort of where the first pillar of this whole scheme starts to collapse before long. US authorities are investigating eating also the attorney general at the time. Loretta Lynch laid out the scope of the fraud. Investigators were saying they'd found as my colleagues explained in further detail. The co-conspirators laundered their stolen funds through a complex web of opaque transactions and fraudulent shell companies with bank accounts in countries around the the world including Switzerland Singapore and the United States. What they find is that one? MD just got looted. The money just flew blew out of this fund all the money stolen something like four and a half billion dollars four and a half billion dollars. Investigators the gators now say was stolen from the fund. It's one of the biggest heists in history prosecutors say it mostly went to three places one is allegedly to the prime administer of Malaysia and his family who is running for reelection at the time prosecutors say that hundreds of millions of dollars from one. MD got diverted into a political slush fund for him to kind of handout favors and shore up his popularity. A lot of it went to allegedly to his family to his wife received A lot of jewelry and art work can they allegedly really funded like a very expensive lifestyle that he would not otherwise have been able to afford on a government salary the prime minister's alleged involvement with one. MGB You turned into a major political crisis in Malaysia. He lost a bid for reelection in twenty eighteen and is now on trial facing charges of money laundering abuse of power our and criminal breach of trust. He's pleaded not guilty. The second place prosecutors say a lot of the money went was to Jolo. He's the guy who'd been close to the prime minister. Mr And who'd already been on Goldens radar years earlier as a potential red flag. Jolo allegedly you know. He bought a huge yacht. callback when Emini Through fantastic parties in Vegas gambler. He bought A lot of Newark real estate. He helped finance a movie production company which made the wolf off of Wall Street Leonardo DiCaprio great movie. Movie out the irony. There is pretty incredible in October. Low came to an agreement with authorities to give up more than seven hundred million dollars in assets the surrendered assets included real estate a luxury yacht and a a private jet in a statement at the time. Low said the agreement did not constitute an emission of guilt liability or any form of wrongdoing low has said he had no official role at the fund and that he did nothing wrong. Jolo's whereabouts are unknown. He's wanted in the US where he faces. Criminal charges charges. Finally the third place prosecutors. I say the money when was to to golden bankers one of them was Tim Leissner. Certain listener has pleaded guilty to stealing about two hundred million dollars from one. MD for his own personal accounts. He siphoned a lot of it off through Shell. Companies and dummy corporations and he's pleaded guilty to that into arranging bribes for government officials in Malaysia and Abu Dhabi and what prosecutors say is that Tim Leissner arranged for tens of millions of dollars to go to the Prime Minister of Malaysia Asia and his family and effectively that those were bribes to ensure that one. MD kept hiring Goldman to do it steals and so he's going to be sentenced and he's likely facing prison time. The second Goldman banker implicated in the scandal as Roger Aung a former managing director at the bank reported to Tim. Listener is facing criminal charges in the US and has pleaded not guilty. Goldman has always said that these two bankers were bad apples. They were rogue actors and they were just out to commit crimes and steal money any and they went out of their way to make sure that no one at the firm found out about it. Usually what you hear from banks when there's rogue traders rogue actors. They were usually pretty junior and they were trying to make some money. Money on the side but listener wasn't a junior employee. He was a partner at the bank and prosecutors are investigating those two employees. They're also going going after Goldman itself. They WANNA know why Goldman didn't spot all that suspicious activity at one. MVP and do something to stop it because banks are supposed to Have Systems in place to stop these sorts of things so if you walk into a grocery store it's not the grocery stores job to know if you're a criminal if you walk into a bank branch approach and you have financial crimes in your pastor. You go on to commit financial crimes. And they don't find it they're going to be in a lot of trouble. SA- banks are unusual in that way and that they've kind of been deputized guitarist by law enforcement to sort of be the first warning sign for financial crimes and if they overlook red flags or sort of knowingly Ignore warning signs. Big An a lot of trouble for it. Liz has reported that Goldman may get in trouble for missing the warning signs about suspicious activity at one. MD her sources say the bank maybe close to accepting a punishment from the government. So they've been in negotiations with a bunch of US regulators for many months now and they're getting close to resolving it. And how are they going to resolve it so people we've talked to say that they're discussing a deal with the government right now that would involve them paying a fine of about two billion dollars. A subsidiary subsidiary of Goldman would plead guilty to a felony and the bank would agree to install an outside monitor basically a watchdog to take a look at their compliance procedures. And make sure that something like this could never happen again. That's pretty unusual. So what would monitor do exactly. So Monitor is basically a baby senator. it's someone appointed by the government from the outside to come in and look at how you do business and make changes so that this kind of thing doesn't happen again again. And some banks had monitors after the mortgage crisis Banks have gotten monitors for running afoul of US sanctions laws over the years it can be pretty pretty invasive depending on how it's done and so that's why it would be pretty significant if Goldman accepts a monitor. It would be an acknowledgment that they kind of fell down on the job that it wasn't just two bad apples but the the way the system is set up to find these crimes before they happen failed and then potentially I would imagine and it could change the types of deals that Goldman is willing to do. I mean even deals that were perfectly legal but they might say. It's too much hassle to deal with this monitor monitor Goldman has always made its money being a little edgier a little more willing to take risk in the little smarter than every other bank on Wall Street. It serves wall. But it's also having get into situations like this but if they do have a monitor and if that monitored does for some changes you could see a situation where there there's some changes to how they do business and what kind of business they ended up doing and it can sound kind of in the weeds to you and me but the way that a bank decides sides yes this is a client we want to have and this is a few we wanNA take. I mean you start saying no to stuff hits the bottom line pretty quickly what has the bank Goldman Sachs been saying if if anything about its overall involvement in the scheme I would say over the many years that I've been following this. They have gone on from staunchly defensive to while maybe we did something wrong but let us explain to you why it look different at the time and now there's a realization realization there that they got involved in something that they should not have gotten involved with and it's going to be expensive to settle it have. They said anything publicly not much. They've said they're working on it and I should insane all of this. There is a regime. Change Goldman so the CEO at the time isn't there anymore and a new CEO came in and he's very eager to move on and get this resolved and so they they told shareholders they've been talking to the government. They're trying to get it done sensibly. Lots of moving parts there's a bunch of regulators they would like to to settle L.. Listen Milan in December Goldman president. John Waldron said in an interview on. CNBC that quote. We don't control the outcome. Obviously we're one party. He he also said the bank was working hard to get the matter resolved sensibly the US penalties maybe just one part of the repercussions percussions for Goldman. Malaysia is stuck paying off one. MVP's dead and is also seeking billions of dollars in fines but in the US if a settlement settlement is reached it could send a message about how US companies should conduct themselves abroad. You mentioned the settlement. Looks like it might be around two billion dollars ars Goldman last year at a profit of ten billions of Iran's so is this a real deterrent. It's always the debate with this kind of enforcement. Look look the issue especially with banks is that you want to. The government wants to punish them but doesn't want to put them out of business but they do want to send a message Government takes foreign bribery Very seriously and even though all the sort of bad axe here happened in Malaysia. Goldman space right here in New York City they report to the Fed and the SEC and the DOJ DOJ and the government has the authority to extract pound of flesh. And they're going to do it. That's all for today Monday. January six the journal is a co production of Gimblett and the Wall Street Journal. If you like the show follow us on spotify or wherever you get your podcasts us route every weekday afternoon. Thanks for listening. See You tomorrow.
With Brexit Uncertainty and Sluggish Growth, Where Are European Investors Seeking Value?
"This is exchanges. Goldman Sachs discussed developments currently shaping markets. Industries in the global economy objects global head of corporate communications here at the firm today were at the London office of Goldman Sachs talking about Europe's investing environment from how investors preparing for possible. Brexit scenarios to drivers of economic slowdown in Europe town monetary policies expected to respond and much much more or guess today's Andrew Wilson. Ceo of Goldman Sachs asset management for Europe, the Middle East Africa and co head of global fixed income and liquidity solutions business. Andrew welcome to the program. Thank you very much when we think about investing environment in Europe, there's a lot of uncertainty, political uncertainty and uncertainty. But what's the top question? You're getting from clients today. The number one issue that clients in Europe effacing is had we get returns. So just remember European central banks has rates his negative. If you look across. Think like the German government bond curve to your bombs negative fifty basis points or thereabouts so much clients had we generate positive returns. And I know it sounds like another very ambitious task. But really live now with a long period of negative returns from the and the prospects. Now, the next one or two years do not look very good. So I think this two thrids to that one is a macro thread the slowdown. We're seeing across the globe is happening in Europe as well. And importantly, the has got no justification to raise interest rates. So inflation rates core inflation Europe's around one percent that's about percent below their target. If the he's not going to rose rates, then had these investors generate returns. So the worried about the macro slowdown and the word about the geopolitics. So Brexit plays a part of that. Frankly, when you talk to continental European clients, it's not the top of their list. They worry about Italy and the political concerns there, they worry about trade tensions between the US. And. Europe in particular, Costa, the auto sector, very important for Europe. You know, how does that impact that? So it's a slow down that has driven either by geopolitics, or by other factors that mean that ECB keeps rates on hold which means bond yield certainly remained very low. Ecuador turns remain very low so head. Are they generate returns? It's a number one question. So let's up a little bit more about Brexit since we're sitting here in London and Brexit day is approaching currently scheduled for March twenty nine power institutional investors, preparing for some deal. No deal. Soft hard Brexit scenarios. It's certainly the number one topic of discussion he ever now office round pubs wherever you are people talking about Brexit. And of course, it's now just a few weeks away. And yet still it remains incredibly uncertain from invest appoint of view, I think those who have linked through to Europe thinking just about the practical things who am I trading with. What is the entity I'm dealing with will I be after deal with a UK entity. Do I need to have a European into d? Relationship. So some of these are just practical, but the importance of repairing of is does in those kind of things take time. So that's on the practical side seconds. Then have we take advantage of any market moves that may take place around that we've seen sterling bounce quite a lot in the last few weeks because of optimism over a softer breaks at rather than heartbreaks. So certainly opportunities in the currency markets fixed income as much more difficult to know exactly which way that plays because on the one hand a hard. Brexit would lead to a slowdown in the UK economy. That sounds like a good reason to cut interest rates of your the Bank of England on the other side of that weaker sterling definitely results in inflationary pressures. So the banks going to be balancing, how do we make sure inflation doesn't get out of control or have we worry about a shop slowdown in the UK? So there's opportunities and investors look at that as head are they position themselves the equity markets, an unusual ones. Certainly if you look at the. Not one hundred those big companies have really global companies aren't really UK companies. So eighty percent of the earnings for the footsie one hundred come from outside of the UK. So of course, a weaker sterling means that the earnings go up so paradoxically a week. Sterling is actually really good for the UK equity markets heartbreaks that people might be terrible. Well, stilling falls. We actually could see the stock market door. Right. So it's much more indeterminate the clear thing that people are playing is the currency is probably the best barometer of how well these negotiations are going if indeed the does leave the EU, how would you expect inflows and outflows to look in the short term and more intermediate term. Yeah. I think in the short term with different get an inflow you've sort of seen some of the numbers most recently being very soft the British retail consortium looks at consumer sales that was down last month. If you look at the chamber of commerce here, again, the PM I- readings below fifty. So there's definitely a slowdown in manufacturing. In this caution around consumption. So I think if we get a resolution you see some short term pop and bounce investment. The housing market here has been very weak. So I think there's no doubt about it still goes up. We have some implodes some resumption of activity. The whole thing is frankly this agreement if we get May's agreement past that remains a pretty big if frankly, but if we do the details around the trading relationship between the UK and Europe not contained in that agreement. So we have a transition period that goes through to December twenty twenty over that eighteen month or timeframe is when those details get worked out, so depending on tariff rates excess to market those kind of things will determine the long-term decision by investors to invest in the UK. So we think we're still going to be a little bit on hold right immediate bounce two or three months of sort of euphoria. And then people come back and say, okay. So now what the details. So I think what still have a period as we go through that negoti. Chichan before you see any meaningful investment taking place in the UK. So let's talk about the continent. Traditionally investors have been a little wary about parts of the continent. Certainly. Although there have been times when they're great value plays there. What would Brexit mean nervousness now amongst institutional investors when they look at continental Europe as a place to do business or to invest. Yeah. I think there is a degree of nervousness around your one is just looking at the slowdown that's taking place, and again sort of happening globally, but European growth running around one percent thin a slowdown. There really does make a difference. We saw growth week last year in Europe by three tenths of a percent. As result of Brexit and slow down in the UK. And so again, there's the potential if we have a heart breaks for that to play into softer European growth equally. If you look at the auto tariffs and the risk of the US and Europe getting into some trae conflict estimates that we have put a twenty five percent tariff on European car exports. That takes three or four tenths of European growth. Now again, it doesn't sound that much. But if you're incurring around one percent, you don't have imagine for era Italy, technically in recession we had to negative quarters of growth in q three in Q four. So I think the reserve snus around the growth prospects in Europe. And where do you get that growth from very limited room to expand fiscally or they fiscal policy will be a little bit additive to growth this year. There's not a lot more. They can do we need to get unemployment down still further than where it is. It's come down a long way. But we need to see where that growth is coming from. So I think the nervousness is again, both macro and political and the politics with its Brexit or Italy change of leadership in Germany. What does that mean? All of those things I think it means it's hard to be really comfortable with as growth come from in order to drive investment. So midst that sluggish backdrop economically and the political uncertainty where our investors finding value in the continent, but sounds running. But actually, if you look at the market in your we do think there are some opportunities in the in the European corporate market European financials have been really hard when saying there at righteously cheap. But just think there's room for pretends to be generated out of those European financials if we got some stability, some pickup. Growth. They would be the big beneficaries. Frankly, we'd still think US credits bid a value than European comes back to the growth story. So again, we're more optimistic even though use Connie's slowing the absolute growth live on this quite a lot stronger. So we'd be a bit more positive around use credit and emerging markets again for European investors have relatively large imaging market exposures. And we would say again, that's where the growth is coming from this weather as value across Latin America across parts of eastern Europe. So we'd be positive on EM. We think that's we generate returns some European credits. But really as European investor, you're probably more focused. You're more outward-looking. You're more diversifying away from Europe. What are the main drivers of the slowdown you tribute portion of it a small portion of it to Brexit in the uncertainty around tariffs. But what are the deeper drivers of the sort of slowdown that we're seeing some of the slowdown is just because the rest of the world. Of course, China the slowdown. We've seen in China that has an impact some of it is the. Auto sector in particular. Again, I mentioned it before. But it's a very big part of European growth. What I sectors very significant concerns around mission changes the move away. From diesel engines, that's European manufacturers. Slowed in car sales in China. That's had a begin packed. But there was some of the just is a little bit of the price that slow down just as much as it has. So I think some of it is around the general concern around the world of these trade issues, and that is a big thing overhanging, whether it's US China with Europe US, those trade concerns, I think everywhere just slowing growth down and Europe is probably being disproportionately hit frankly, another factor that gets talked about a bunch of demographics in Europe, your a difficult demographic outlook, low birth rates and aging workforce. A lotta times people compare that to Japan, which has been in sort of perpetual demographic challenges is that a fair comparison. If you look at the demographics Japan around the world is definitely the worst. They've got the faster aging population. But Europe is not that far behind it. So we have a lot of sympathy for that notion that demographics is playing a big part in this. And I think it's probably under appreciated the impact that has having across Europe. If you look at birth rates in countries, like Italy, again, we're back to where we were forty or fifty years ago. So we just aren't getting the population growth. Now, the big difference is that there is still immigration both across Europe that Helms areas with isn't good jobs grows, southern Europe. They can move to northern Europe. Also, the borders themselves have been opened now that's heads and political consequences as we know for England Ercole, but we have a lot of north African immigrants coming in. So countries are a little more open immigration than perhaps we see in Japan. But we have lost sympathy that that we don't expect to see really vibrant growth, nor a lot of inflationary pressures coming across Europe. Now, of course, Japan had a decade of deflation, we certainly see deflation taking place in Europe. But we could certainly imagine a world where. You had really subdued growth really subdued inflation for that one to two years and against those comparisons. I think with Japan actually resonate with us. So you mentioned earlier trade tension between the US and China, which is an isolated has some spillover impact. What has been the impact of that trade tension over the past year? So on the portfolios, you manage impacts the broad or merging market complex, right? And you see that that if you see a slowdown in China than all of the emerging market countries. Slow down a good number of Asia because they depend Norma Slee on Chinese growth. So it has real economic consequences. More broadly across the EM complex and equally plays a big part and sentiment. That's what's caused a lot of the concern around EM sentiment against emerging markets and had these trait Harris head of these trade wars play in terms of slowing down growth. More broadly and the emerging market economies tend to benefit the most from strong growing economy. So anything that? Causes a slowdown as generally bad news for the EM world. We'd like to think and certainly the latest discussions between the US and China feel more constructive long way to go. And we know these things can change pretty quickly. If we do get some resolution of that, we think that's actually pretty positive not just for US China, but actually for the emerging market complex, more broadly. And that's where we're sort of skewing apple folios in terms of generating returns and finding opportunities. It's very much in the emerging market world talk about the uncertain backdrop and hasn't leads to monetary policy and inflation as we tape this on March fifth ECB set to meet in a couple of days, and there's talk of need for new stimulus these been trying to normalize. But it's proven more difficult maybe than it should bid. What are your clients looking for out of the central Bank and monetary policy? Well, I'm not sure the consulate before. But I know what we're looking for and that is some sort of guidance extended guidance around keeping rights low. I think the market itself is expecting some. Extension of the financing, these tell trolls these long term refinancing operations commencement of that as a way to stimulate and get growth into the economy for us. The big question is what is the basis on which the is going to raise interest rates? We know they would like to but with Adam flation being generated are they going to be able to do that. So I think any guidance they give as to how much longer they see the sort of very accommodative policy. They have in place. I think we'll be critical. The whole story is somewhat compounded, of course, by the change of ECB governor. And so Mary drag term expires at the end of October. It's not clear that he will want to lock success into a policy action. So we suspect the announcement will actually be pretty broad. And so that they continue to support the economy in magin conditions remain, very accommodative and he's a bit wordsmith. And I am for sure. But I think they're going to be giving some guidance to. Awards that air own view is it's going to be pretty hard for the to find justification to raise interest rates certainly to do it before Draghi hands over. I think will be quite tricky certainly right about inflation. It's going to be running as I said before about a percent below their own target. So what we're looking for is the guidance on that policy bearing in mind that drug is going to have to Bob in we've a little bit given the change of happening later in the year as I said, he doesn't wanna commit his success to a policy action Europe has dealt with sluggish growth before and deal with it again. But a recession might be a different matter. How are investors thinking about the possibility of a recession and are they willing to take on risk given that prospect or playing it very safe? You look it's an interesting question. Because of course, as a lot of discussion in the US about the recession and talk about how long the cycle is going for surprisingly this relatively little talk about recession in Europe does seem to us that risk is being underplayed a little bit as I was talking about before growth. Nemec? It doesn't take much of a slowdown for us to stop to flirt with recession. So I think we would still say that's a pretty low probability, frankly, we would say it's a low probability in the US as well. We would see growth in Europe more going towards trained. That's only around one one and a quarter percent. So it's not a very vibrant growth rate. But we think growth is lowing trained some of the headwinds that we've seen across the auto sector. We think are kind of lifting over the course of the next twelve months. We personally are not particularly concerned about recession. I don't think investors bracingly so focused on Europe. But if you saw any signs of more significant slowdown, the US, it's not much of a leap to look across to Europe and say, well, holding them US slowing surely dinners, implications Europe with such low growth rate, the risk of the recession. But interestingly, it's not a big topic of discussion. It's really focused on the US. Let's move away little bit from markets. Talk about some of the roles you play here at the firm beyond your day job year. Sponsored the disability interest forum in Mia and member of the. Inclusive diversity committed here. What drew you to those roles, and what are you trying to accomplish a fan believer in diversity? Maybe if I start with a disability interest forum said in the lead of my mother's life. She had Parkinson's. She is south was pretty disabled. And I saw that happen from sort of being able to physical disabled and then ended up being difficulty in for her to speak. So I guess when we thought about disability with something that resonated me because I'd seen it and dealt with it personally, amazingly department of were companions of studies in nineteen percent of the UK workforce is disabled in some way or other sometimes it's physical sometimes that's some mental disability. So they're not always obvious disabilities. I guess I was very passionate about how we treat that part of the community and making sure consistent with our diversity aims that we recruiting the best people wherever they may happen to be in a wheelchair. Doesn't mean. We don't want recruit from. So the focus for me around the disability. Interesting was a personal one. I think more broadly inclusive than diversity committee again enjoy being part of that. We've got a lot of work to do we making progress? But frankly, there's a lot more work to do. And we want to attract the best talent from around the world. We want to track that talent. So that those people come here and feel able to be themselves can give the most and not be uncomfortable in the environment, not creating environment. That is uncomfortable for any part with the Ritz because your gender your religious, beliefs sexual orientation. None of those things should have impact on how you're able to operate in a work environment. And to help us do a better job with all of their clients. That's the aim of the diversity committee. And that's the focus that can you think it's important work, and we need to make more progress less seriously. I've heard you ride a motorbike to work every day most days that is true. You have never grown up as the truth. Well, that's good for your carbon footprint little lower than the car. Maybe a little less than the tube. What else do you like did you outside the office physical? Stuff to be honest. I find sitting at a desk, actually, hard work. So I like to be active so Jim play tennis casually. Go motorbike stuff that is active. The get your mind thinking about other things other than work things. Well, hopefully, you're mindful traffic. I'm sure I should go slow. But yes, I'm all right? Andrew. Thanks very much for your time today. Thank you. My pleasure. That concludes this episode exchanges. Goldman Sachs, thanks for listening. And we hope you join a skin next time. This podcast was recorded on March fifth two thousand nineteen. The views and opinions expressed here in should not be construed as an offer to buy or sell any securities and such views and opinions may differ from those of Goldman Sachs global investment research or other departments or divisions of Goldman Sachs, and it's fillets. This information may not be current. And Goldman Sachs says no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed. Goldman Sachs is not providing any financial economic legal accounting or tax advice in the spot cast. In addition, the receipt of this podcast by any listener is not to be taken as closer to ding. The giving of investment advice by any Goldman Sachs entity or individual to that listener nor to constitute such person applying. Of any Goldman Sachs entity. No part of this podcast may without g SAM's prior written consent, be reproduced redistributed published copied or duplicated in any form by any means.
Markets Update: Latin America
"Welcome to our exchanges and Goldman Sachs markets update for Friday. May Each Week. We check him with leaders across the firm to get there quick. Take what they're watching it. Markets Jake Global Head of corporate communications here. Goldman and my guest. Today is Jan Rot. Who's the head of emerging markets international sales and foreign exchange sales teams? Your New York less agenda on the program back in January. Welcome back thanks Jake. It's great to be back. You know I was just thinking. It's amazing that last time we sat down to one of was the end of January. And you ask me the one number. I was looking at it and at the time. It was a number of confirmed Kobe cases in the US we had five confirm Cova cases and no person to person transmission. It's amazing how much has changed since then it is indeed. What's the top story in markets? But you're watching this week tune in my background in emerging market specifically in Latin America. I've been closely watching a spread cove in nineteen across Latin America given. They're still a few weeks away from the peak in each country's response to the health crisis has been quite different and Argentina the government enacted a strict lockdown early on which is lifted the president's popularity despite the lockdown slamming the brakes already struggling economy in Mexico on the other hand sanitary protection measures in suspension of non essential activities. Came later in the game and asked capacity is already low to begin with but perhaps the most worrisome is in Brazil given the viruses most widespread there but also because it seems to be further polarizing the society. Just this past weekend alone. There was an anti lock down protests organized by the pro government supporters and. Our bowls have been resignations. Key figures from within the government okay. Jen would've key themes you heard from clients around how are about these dynamics. You describe your overall clients have a pretty negative outlook on Latin American is. They don't really think. Markets are pricing the impact of the crisis or lower commodity prices in asset markets in countries seem to be using more develop market playbook to deal with the crisis by cutting rates dramatically letting their currencies depreciate. We've seen clients very active betting on further ethics appreciation and lower rates in countries. Where they're still room to cut. And what are some of those countries that have adopted more developed markets approaches? Really all of them this Wednesday along. Brazil cut rates to a record level of three percent. We've also seen inter-meeting cuts from places like Mexico Chile Colombia since the crisis began. Jen Looking ahead. What what piece of economic news data is on your radar screen so most closely keeping an eye on places where lockdowns are easing more potential per second wave of the virus right now. The market seems to be pricing more v-shape recovering many assets and investors are discounting the current economic data. Which is we all know if we see a pickup in cases our so we have to go back to another lockdown scenario. The market pricing V-shaped recovery using their shout. You've been working remotely for Awhile now. What's what's one of the top things you've learned about doing your sales and trading jobs remotely interesting. What am I last flying trips at the end of February I had a client asked me how effective I thought would be. You WanNa work from home scenario. I told him dictate to fifty five percent of this. I'd say I've been very pleasantly surprised. That was doing other technologies. We actually have probably been around. Eighty five eighty five to ninety percents effective as if we are working from two hundred West we really being more deliberate about connecting with our teams and I find that in some ways. I'm actually speaking with more people than I do. Being in the office JEN. Thanks for joining us again. A hope to see you in person again soon. Thanks Jake such time as always. I appreciate the time. That's all for this week's markets updated on exchanges. Goldman SACHS IN CASE YOU MISSED. It checked out or other episode this week and how retailers will reopen. And how they're dealing with the crisis with Brian. Dodge President of the Retail Industry Leaders Association and folks from Goldman Sachs Research. Thanks for listening and hope everyone is staying healthy and safe. This time. Castro's recorded on Thursday may seven two thousand twenty all price. References and market forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
How is Tech Reshaping the City Skyline?
"This is exchange. The Goldman Sachs what we discussed developments currently shipping. Markets industries in the global economy. I'm Jake Siewert global head of corporate communications here at the firm today. We're talking about real estate investing in Europe. And specifically how text changing the way cities look physically from retail stores to office buildings to student housing and much much more were at the London office of Goldman Sachs, and I'm joined today by Jim Garmon, who is global co head of the merchant Bank division real estate group and head of MED rela state in Europe. So runs real estate investing for the merchant Bank in Europe and globally. Jim. Welcome to the pro. Thank you. Thank very music. You look at real estate not the way some of us do, but you look at it from an investor point of yo, and how do you see pockets value in Europe today, and what is the environment? Look like in the wake of the financial crisis two years ago in business. We invite. I across both the US and in Europe and in Europe, it's lower growth. More fragmented more dislocated market higher. Barrister entry to build new product that environment continues to serve quite interesting. Investing Virginia's for us. If I think about the Davis is out of the financial crisis came out of the financial crisis in Europe, an awful lot of real estate assets and up in the hands of people for whom those as non-core, do you think of banks who had a lot of non-performing loans? The funds were at the end of the investment period. So these assets now had to be liquidated and even governments particularly in Ireland and Spain had to form organizations to resolve some of these problem masses back then the investing opportunity was really to provide capital to those types of organizations, so they could release those assets people like us and others would take them on Tron reposition them improve the operations sometimes makes him strategic and vengeance to improve the assets and sell them onto more natural long-term owners of those properties that situation still. Pacific. Even now ten years after the crisis. There are still plenty of opportunities to invest in those types of impediments, but the big shift was seen in the past say three to four years is that in many of the major cities in Europe, one of the impacts of the financial crisis. Was that credit was less available for developers to build new product. And as a result we've seen in many cities in Europe, an undersupply of appropriate modern gluco, accommodation that companies and people want to office in all living. And so now, we see an opportunity for investors to team up with those types of development crate that new products that we've moved from a post crisis value investing opportunity to more of a growth on did option d. Jim on Brexit. The big delta will probably be here in the UK. But how do you think about what the impact will be on the continent, particularly in some of the other potential financial centers? Yes. So I would say right after the Brexit referendum was a lot of ho- connective cities like Frankfurt Paris Amsterdam Balint trying to try companies from London who would need to move as a result of Brexit. Some of that is happening. There are companies who will need to move our own fumble, moose and jobs. I think the beneficiaries of that really Frankfurt Paris. And I also should mention Dublin. But I think the amount of people that are gonna move perhaps less than was originally thought. And so although it's help for those markets dentists going to be a major impact in terms of changing, the nature of their stay Marcus e mentioned this briefly, but let's focus on how tech is reshaping cities in real estate as technology reshapes really every industry, what kinds of buildings are needed. And. When you really start to observe the connection between the tech revolution its impact on real estate, the three broad impacts one is how people use buildings so how people for example, use office buildings. The fact that people working office buildings that they're much more mobile and agile today, you need a smartphone or tablet or laptop good wifi access if it of power and access to the cloud, and you can really work anyways may the workforce who in the services in much more mobile nuts. Changing the way people using the space. The second thing is what type of properties needed and the big out of this in the retail versus logistics theme where because of the invite of online shopping, there's less demand for bricks and mortar high street shops and much greater demand. For gist excessive has been a shift there. And then I think the third thing which is really just beginning as the way that property assets are into mediated and transacted with seeing the development of online marketplaces for real estate. We've seen. It into the residential space companies like Zillow in the US or bright movables. Oop. Learn the UK, and I think we'll see more of that in commercial property over time. And then I think we'll see disruption to the way that properties. Get transacted. You transacting properties. Today's still quite a laborious time, consuming and expensive process, and as technologies evolved things, like smart contracts, and so on that will make transacting property quicker, more, accurate and cheaper. And I think is just inevitable. As changes will come with back and talk a little bit more about retail cities. Typically, still have lots of storefronts in lots of shopping areas has tech changing the need for stores or distorts look a little different tuck a little bit about the impact. What's been called the death of high street? Yeah, it's a timely conversation. If you look at online shopping in the UK this year, it reached almost twenty percent of all online sales as the highest in the world. In europe. It's a bit less. So in France and Germany Moines ten to eleven percent Spain and Italy a little bit lower sort of high single digits, but growing everywhere even in the UK it's about twenty percent day five years ago only ten percents we've seen as massive rapid change in the way people shop that's having real impact on retailers because what's happening overseas. Less people going to the physical stores footfall on the high street in UK's down about ten percent. And so it's impacting the revenues that the traditional retailers can generate in the UK. There's a particular issue that the fixed cost of these retailers the leases. They have to sign for their retail properties. Retailers would say the rent's too high the business taxes the called business rates rita's have to pay the recharge would argue those too high. And so it's making the traditional retailing model profitable. The have been whole series of quite high profile administrations of retailers nuke over the past ten years. I think about thirty four thirty five. Five major names in the retail space in UK who've gone into ministration that is meant about thirteen thousand stores of closed. It's meant about one hundred eighty thousand job losses and one the most agreeing parts of that analysis is that of those thirty or so administrations about ten happened right after the financial crisis, the UK was in recession, but about ten happened in two thousand eighteen when the UK's men to be doing reasonably, well, you can really see the impact of the technology on that what's timely about this is only last week UK parliament put out a report talking about how they see the highstreet of twenty thirty ten years now, and they made the comment they really feel like the the UK retail high students at a tipping point where if nothing's done we really are going to get into a place where many highstreet death is probably strong, but could become not great places to be around. What kind of demand does the ecommerce business need you mentioned briefly? But what are that logistics demand? Look like an how's that? Popping up in the market. It's almost a mirror image of what we're seeing in retail space logistics, and this is true in North America and all around Europe. But again, I use the UK's example, we've seen the demand for good quality logistics properties for the past four years as not about thirty percent of what it was previously. What that is doing is making logistics companies compete more for logistics properties being built the not enough logistics facilities around the UK. The vacancy rate in logistics is now about five percent, which is quite low and as a result as he's different companies compete for that space seeing rent start to go up what that has meant as logistics has become very in favor resit classroom vest as because if they can see cashflows that they think are going to grow than they like that were as retail has become very out of favor as it costs a moment. What are those Scillies look like? And where are they as high street experience as a slow death, whereas happening this the complex possible? This traditionally. You would say that a big modern logistics facility in UK again as an example would sit in what we call the golden triangle, which is the area between the m one and the six in the middle of the country were distributing around the country's easiest one of the trends. We're seeing now in a buzzword real estate's loss Malla gist, and I think what's happening because of the success affirms like Amazon consumer expectations around delivery going up up all the time. So a few years ago if you wanted to order book or a pair of running shoes Amazon you'd be satisfied if it came three or four days later nowadays people wanted the same day all the flame our same hour. An so physically logistics hub, the sit on the big transportation as not close enough to deliver with that same day type delivery. And so what was seeing a trend in is in urban areas, logistics facilities being created there. The conversions of existing acids on you assets and the difficult part of this for investors is changing so quickly in the way, which consumed demands of changing the way in which the. The speed. And and sort of technology around delivery is evolving. It's very hard today. I think to look at eight logistics Saudi and be sure that that is the right type of ability that a logistics operable one five or ten years from now, I think you have to be very careful to make sure your recipes future-proof and can be adjusted as the needs change, you talk a little bit about stores members about offices ballistic a little bit more about the office building trans there, how has technology in the ability of employees to work remotely change the way people think about their offices and think about offices, particularly inexpensive center cities, like London offices, still exist. People still want to work in corporate communities corporate cultures very important. So I think the idea that everybody's gonna work from her. I'm not a bar of that kind of idea. I think companies will still want office space and something's not change companies. Still want office space is well acquainted kated good transportation hubs of their staff can get the building they wanted in a vibrant part of the city. They're inside the surrounding. Amenities a good for that. Always they won't buildings that energy efficient unsustainable. That's not renew. That's been going for some time. What is new is the way that people can operate within these buildings again because the access to technology is meant people can use high speed wifi, laptops, and the cloud. They don't need all the paraphernalia that used to go with being in an office. A one change. I think is happening is the need for physical infrastructure in an office. For somebody's workstation is diminishing. You don't need a big desk with a big desktop, computer. And a big phone and big store space, ROY befalls, that's all going people using smaller workstations is much more mobility within offices people move around what that means is that companies can dedicate more of their office space and more community areas were people can get together talk about I did about problem solving. So it's much more collaborative more mobile type office environment that we've previously had. So when we talk about real estate investing. We often focus on the big. Cities in Paris, New York, what about smaller unless expensive cities are those becoming hubs for some companies. How about the markets some of the second tier cities. That's a big thing. We've seen it in the US. And we see in Europe as well. You know, the traditional big gateway sit is becoming more congested and more expensive with seeing corporations and enterprises moved to other cities, which are smaller have a lower cost base in some cases, easy to live in. And so in the US if you look at the growth in cities like Austin or Denver or Nashville Schultz and other one they're big major corporations moving to there is because they have certain features. They have for universities. So the very large young well educated workforce, the cost of housing is lower the cost of office faces lower and because this mollis it is they have more walkability as they like to call it easy to get around. And it's nice place to be and was saying Cima Patton Europe if you take. Berlin, take Amsterdam you take Milan. Take boss Alona Lisbon Porto. These are all places where companies moving to because they have these types of features begin -versities good ploy rose rosewood, lower cost, and even in the UK, Manchester Birmingham Leeds Glasgow. They're all have these similar traits. Ye talked about the importance of university and good education Ozzy students need places to live student housing's bene- theme for some investors. How student housing changing how the demands changing there, and what are the demographics behind that? The overall demand for university education is going up. So the penetration rate the number of young people going to university is going up in the UK. It's gone up from thirty percent to forty percent and lost ten years. Some more younger people going to university, the total aggregate number of students going to university is an all time high. Another big trend is the number of students. Choose into good university outside of the country origin going up. So for example. Chinese or Indian students go into the UK all to the US for education. That's an all time highs. You've got this very big Domon driver of students going to these high quality universities and not being able to live at home the live at home traditional forms of accommodation. If you take the UK traditionally it would be either the university's own holes residence, or it will be students gang together and renting up a house together. Those still are important sources of accommodation students, but there isn't enough. And so what we see the emergence of in in many markets, including UK's what we call PBS AO purpose built student accommodation and these buildings which are anywhere from let's say fifty to five hundred units for students that designed specifically for the student population. So they have different types of units. They have smaller on sweet unit some students want a bigger unit some students want to live together. What we call a cost of flat, which is where they'll be five or six rooms or clustering around a kitchen and living area. So the combination itself. Has designed students the amenities are designed for students. There is study space social space, fitness and sports areas. And so on these are safe secure their located near the universities, and they're an affordable price points that type of accommodation has become a more attractive opportunity all place to live for many of these students. What was seeing the emergence of is what was fifteen years ago, a thirty fragmented industry has really become a very high-quality institutionally lead. Marketplace weather some big companies running these student housing perations really efficient and really well pretty customer focus thousand good time to be a student. I should go back to abuse another trend you mentioned on the his laws were on demographics is aging population. Obviously true all over developed economies Japan, the US, but certainly are how is the fact that we just have more people retiring more people living longer changing real estate markets in cities and how investors thinking. About that. It's similar to the student thing and not enough housing that is appropriate for the aging population. And what I mean by that is going to take London example, the demand for that time of combinations going up. I think one million people have of retirement age in London at the moment, the focus show that's going to double in the next. I think twenty years, but a lot of people as they they're retard getting older they stay living in there. What was the family home the children of now left? And so the now and in a home that may be too big it may not be fit for purpose given their needs as they age. And so what people want is a facility that is easier to get around if they have mobility issues. It has good amenities goods hospital services and good care services. Particularly they have medical issues, those things don't really exist. Only one or two of years ago in London. It's a new industry that is developing their number of groups operators and developers are starting to build this time facility. But the recent draft London plan, which is reorganizing the planning regime. Plenty ideas for London has prescribed the need to be about four thousand of these units built every year from extend years when Noah near that. So this chronic undersupply of this type of civility and is not true in London. It's true in all the major cities around the world people who've grown up in this is they want to stay in the cities. But there isn't the appropriate accommodation for them. And the other problem you which had more social problem is that you get logjam where people because they have an appropriate facility. Go to stay living in their large townhouse, which may not be appropriate for them, and the people who wanna live there cat live there because they're they're out of there. And I saw some numbers recently that said that if all people above sixty five moved into more private combination would release a hundred seventy five thousand family homes in London and huge amount of wealth. And at the moment. People can't move. It's not because they don't want to move. But it's because the appropriate accommodations not available. So I think this is of growing sector. It's been growing market like strata New Zealand is growing in US, it's growing Japan. And I think it will grow here. So I see there's been a big turnaround property prices in a couple places in Europe, pre dramatic bounce back in Spain Ireland, and what's been driving that again, if you go back to the financial crisis Spain on and were probably two of the most dramatically hit Marcus in terms of the collapse in real estate prices in Ireland property prices down about fifty percent in the is fine crisis. Spain was down. I think about forty percent though, other markets to Portugal, Italy, the UK, oh, you most markets had problems. But those markets will probably the most acute, and then we saw a phase from sort of two thousand ten to two thousand twelve thirteen fourteen whether commies starter recover, your member that many of these markets had support. From the European Union. A lot of the banks were reconstituted and resolved the various political actions to make these economies more competitive, make them labor market more productive and freer and so gradually over time. These Connie's started to reset themselves and started Grogan and real estate always lags GDP growth. Once he start to get positive GD pre girthy start to get a real estate recovery. Particularly if as I talked has been an undersupply of new product, so we've seen a dramatic recovering Arslan prices having fallen fifty percent backed within sort of ten to fifteen percent of their previous peak in the same in Spain recovering quite well back. Then I remember one of the big questions was could countries like on Spain who part of the European Union and part of the euro and therefore in fixed currency regime. Unlike the UK, they couldn't devalue the currency so they had to restructure with a fixed currency regime, which is very difficult to do. And I think looking back, I think most. Who've been pretty amazed at how they've been able to do that without being able to deflate there on currency one trend that gets attention in the US. They have a big presence. Here is the new entrance into the real estate market. Like, we were another's talk a little bit about what's driving that trend. And how you see that playing out in Europe. It's similar to what we just talked about within the way people use office buildings because people don't need the physical infrastructure used to needed an office building much more mobile with the technology sewn. That's fostered this whole idea of co working were small companies or growing companies or even individuals can go and work in a building that is operated by co working opportu like a we work whether an environment. You get really good quality space, they get interact with other people who doing some things and most important. It's very flexible arrangements. One of the problems with estate generally for growing companies is you have to sign a lease and commit to ability. If you keep it. Depending on which market in at least convy anywhere from one year to ten or twenty years, but we were allows in this whole co working. Dear allows communism does have a lot of flexibility they could breathe in out depending on the size of the company. It's also useful for bigger enterprises. Who might want some flexible space if particularly companies who are very project based if they're working on a project in particular market. They may not want to sign a lease on new building for a couple years because they're gonna be six months, but they can take space in. We work type of operation is just a much more flexible way of working we were what they've done is. Incredible. The now, I think the biggest occupier New York one of the biggest in London. So you travel to a lot of cities you're investing for the long term as you look ahead. The next ten years. What city the spend some time. And do you think will change the most we'll see whether it's still in Europe? But I think London is undergoing the most dramatic transformation at the moment the been a number of major infrastructure events, which transformed anew. We had the Olympics here in two thousand twelve which really regenerated large parts of east London. We've had the crossroad product which is building a new west east rail line, which is a major infrastructure for those are changing the nature of the city a known as been a massive building. Boom, all along the south of the river Bank of the Thames all the way from the west London through east London. And so skyline down the river. Which twenty is go was built on the north side. Not so build up on the south side is becoming really build up on the south side. Now a lot of those project is still underway nor all of the apartments office buildings being used yet. But eventually when they're all up at night is going to be a totally different panorama from west east down the Thames. What's your favorite city? Visit and Europe. I'd says Berlin, I think Bowen is an incredible place. I've done business. There have been net on holiday, and it is an incredibly vibrant city. It's gone through an incredible transformation. Obviously given its postwar period. Whereas divided city. A single city that split into and two very different political regimes with the wall coming down and nine hundred eighty nine thirty years ago, it's gone through a couple of boom and bust cycles, try to recover, but now being the capital city it's finally converging with the rest of Germany and becoming an established proper capital city. It's developing an industry, it's got a big tech industry. They're Bhagat seen big social scene, and has got some very interesting modern history behind wish to sort of dictates culture, also little less densely populated than some of the Pierre's, it's not a big deal. The Nate nature there. It's not a big city. It's easy to get around. But everywhere you go you see the relics of the past. But you see the optimism the future. So Jim you've obviously spent a lot of time thinking about these issues when did you first get interested in real estate, what piqued your interest from young age? My dad was an architect. So I grew up in a house. Where Brill estate was talked about. I started a degree. Land Konomi cames university, which is a real estate or enter degree. And when I left I joined a charters Vang firm. It's off to join sacks of nervous since the chance to give something back. Yeah. I do. Actually, I was up Cambridge last week. And I do something every year, which are joy, which is going to a guest lecture for the land economy as she called the real estate finance department. Now, we talk about a lot of the things we've been talking about today. And then I spend a day with the Cambridge rowing crew. The ROY myself this year's the thirtieth anniversary one of my years raced in the Cambridge. But rose, and I was watching this year's croup for that. And it's always great time. They will to hear from the older generations what it was like. And I tell them as hard back then as his day, so great, Jim. Thanks so much for your time today. Thank you. That concludes this episode of exchanges goldman-sachs, thanks for listening. And we hope join us next time. This podcast was recorded on March. Sixth two thousand nineteen this podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener, the views and opinions expressed here in should not be construed as an offer to buy or sell any securities and such views and opinions may differ from those of Goldman Sachs global investment research or other departments or divisions of Goldman Sachs, and it's Phillies, it's neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting or tax. Vice or recommendations in this podcast. In addition. The receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
How Can Cities Adapt to Climate Change?
"This is exchanges. Goldman Sachs where we discussed developments currently shaping markets industries in the global economy. I'm Jake siewert global head of corporate communications here at the firm today. We're talking about this question. How considers considers become resilient to climate change. We're joined in the studio by man to him and Sandra Lawson authors of a new report from Goldman Sachs Global Markets Institute titled Old Taking the heat making cities resilient to climate change. Amanda and Sandra Welcome back to the program Sandra. Let's start with what gave rise to this this report you focused on the need to adapt to the effects of climate change and become more resilient. Why did you choose that angle rather than say lowering carbon emissions. We did a lot of research on the topic of climate change and we were really stuck by how much attention goes to reducing carbon emissions and how little attention goes to this question of station while reducing carbon is incredibly credibly important and those efforts need continue and they actually need to accelerate. It doesn't seem like they'll be enough for the world to withstand what's coming because the scientists and to say that the world has already warned by about one degree Celsius over the past century and a bit and the world is going to continue to warm and that's a couple of reasons one miss that there's just so much carbon already cumulated in the air in the oceans and that's GonNa continue this warming process that can't be turned off quickly and secondly because despite some progress on reducing emissions the trajectory is not where it needs to be so the world is going to continue to warm and that means that the world is going to need to adapt apt the changes that are coming heat storms flooding all of these are likely to occur more frequently in the next few years right and then you get into the question of how you allocate resources to because resources are not infinite Amanda. Why did you hone in on cities in particular and not more rural or suburban communities. It's a good question we struggled with a little bit because we know that climate change and the need to adapt to climate change is not a local problem. It's a global problem but part the reason why we really tried to concentrate on cities was twofold. One of them is that cities today are already home to more than half of the global population and that's a shared. It's only expected to grow over time and the other reason is that cities produced roughly eighty percent of global. GDP and so the combination in of population density and economic activity makes it likely when you think about this from an investment perspective that cities would be on the front lines of beginning to to experiment and go down the path of really truly adapting to climate change notice Andrew's point. I think cities are already doing really interesting things. As it relates to reducing greenhouse gas emissions we see more bike lanes more parks or alternative sources of energy being used but cities are much less far along in thinking about how to adapt and again there are a lot of people who live in cities and there's a lot of economic activity concentrated there and so again again. Adaptation is likely to occur outside of cities as well but it's a reasonable starting points to think about cities. There's also this question of global versus local so climate change is certainly only a global problem but when you're asking people to solve a global problem sometimes the results are not obvious to them and it's hard to motivate them. If you say your city is at risk of flooding and you need to pay taxes to protect your city your home your business from flooding. That's easier to motivate people politically yeah certainly spent a lot of time in the wake of Sandy thinking that here in downtown one of the things you talk about in the report this issue of fairness and that as my mother used to say life is not always fair wine want to what do you mean by that in this context when you think about cities not all said he's have the same benefits or advantages and some cities are more economically prosperous and have large dense populations and may also have a prior track record of raising financing to undergo infrastructure for structure projects of the sort that we discussed in this paper and those cities are likely to have a natural advantage and continuing down the path of thinking through becoming more resilient into climate change. There are other cities that may have less dense populations or less robust economic activity or may be geographical geographic locations that are simply not beneficial to them and that make technically adapting more difficult or unfeasible and that may simply lack the resources to you make adaptation work for them so there are going to be questions of fairness across cities not every city is going to have the same resources in the same benefits now even and within cities even the most prosperous ones because to the exact point jake you raised at the outset financial resources are not unlimited those cities these are still going to have to make choices about where to allocate funds and what makes the most sense and again that may also raised questions of fairness even within cities that are relatively prosperous as he said at the beginning Sandra that there's near universal scientific consensus around that human behaviors contributing mm to climate change. What are the consequences that scientists are pointing to or focused on well as a preface. We're not scientists. Have we are not trying to make scientific argument. We know that there's a lot of still uncertainty about the magnitude the timing scope but we're looking at the consensus which is in fact that the earth his warming and is likely to continue to warm and so the consensus is also that there's a pretty wide range of negative outcomes that come from this so these include hotter temperatures. There's more heat waves longer. Heatwaves hotter heat waves rising sea levels that are going to flood coastal cities. You know it's worth noting that about forty percent of the world's the population lives within one hundred kilometers sixty miles of the coast and obviously you have huge cities producing a tremendous amount of economic activity on the coast of New York obviously Veasley Tokyo Mumbai. Those are all at risk from flooding. We are probably also gonNA be more destructive weather events. No one needs to be reminded of those are already underway okay so storms wind flooding fire wild brooms think of the West Coast and also storms and places where people don't expect them which we also seen and then it addition to that you're likely to see threats to human health because they may be diseases moving out of places where they are now into places where people don't have immunity a and a lot of pressure on food and livestock and drinking water which is already a problem in large parts of the world especially drinking water so there a lot of others but I think that's enough. That's enough out when you think about the ocean acidifying and warming their affects to ecosystems and we don't even know what all of the knock on consequences of that will be but again the general scientific consensus would point to things like coral briefs potentially being extinct within this century because their fix they can't relocate to cooler waters or less acidic waters for those of you who would like to you see a coral reef in your lifetime. You May WanNa do that now for people who want to move away from eating meat towards fish. That's at risk as well. Let's talk a little bit about infrastructure. What are the implications for cities as they think about renewing their infrastructure base or adding new infrastructure. It's a really broad question that we tackle in the paper and we'll take you through some of the high level ideas but when you think about infrastructure more broadly there obviously cities that are developed today. Hey that are looking at infrastructure replacement cycles and there are cities that are rapidly urbanizing that are building infrastructure for the first time some of the rapidly urbanizing using cities may actually find themselves better or worse place depending on their economic strength to think about climate change in resilience to climate change as they build new infrastructure some of the cities that are already developed. You're looking at bridges roads rail infrastructure that is quite old. Many many of those structures will need to be upgraded. It can't be upgraded necessarily with reference to historical stresses because the issue going forward is we don't know I know how big the tail risk events associated with climate change could be when I think about a city I think about all the things that you do on a daily basis that affect your life whether it's the building that you live in and the building codes associated with that whereas the electron equipment housed will should it be in the basement if you're in a flood zone or you're are at risk of storm surges probably not dear windows literally need to be stronger to withstand higher winds probably and those codes will need to adapt adapt adjust over time you think about coastal locations and again. Sandra mentioned how many cities are near coastlines and how many people live near coastlines. There's much that could be done to protect coastlines with seawalls and levees and other elements like that and Jake you referenced Sandy New York. That's something that's very real but then think about boat transportation systems our roads in the right places in terms of where weather may actually affect them or flood them are rail systems in the right locations nations to withstand changes weather patterns over time and even the Inter connection points for transportation strong enough so that if he it becomes extreme or cold becomes extreme depending on the location people are able to withstand transfer points in between locations and then think about things things like the power grid the US power grid is over a hundred years old and if you look at some distance from the Department of Energy they'll tell you that the vast majority of power outages in the US are due to extreme weather events that great in of itself needs to be hard and it sounds like a simple thing to just say will power lines actually need to go below ground but that's a massive infrastructure build out so when we talk about how it is that cities need to become more resilient overtime. There's an incredibly broad swath of things that actually need to occur for that to unfold at one more which is this question of soft infrastructure that requires. There's a lot of urban planning in addition to all of the hard infrastructure that Amanda talked about you need other things like better health systems and probably more public health programs programs and you need better education and you need cooling centers to be opened up during these longer hotter heat waves. You need places where people can go and they. I know they can take refuge from storms or hurricanes. It's less capital intensive than the infrastructure but all of it is really important and it requires a lot of coordination within a city among all the different departments and a lot of leadership to getting back to capital intensive all the things that Amanda outlined cost a lot of money as well how you thinking about infrastructure investment and financing challenge that all of this entails we're thinking about it as an all of the above approach even the most prosperous cities are not going to be able to fund the stuff alone. They have their local tax. Revenues in cities that are developing quickly may be able to benefit from taxes on land development element. Some cities will turn municipal bonds with those aren't available in most of the world but even where they are. That's not going to be enough so cities are going to have to look to their national governments commits funding and then they're going to have to reach out to the private sector and think about public private partnerships for these huge infrastructure projects like bridges and roads and and potentially power systems. There's a role for institutional investors particularly ones with a long-term outlook like sovereign wealth funds or pension funds that are willing to make these very long term commitments in investing in developing countries you also have international institutions like the World Bank and the regional development banks and they're already playing a really important role and that will continue insurance matters to in lots of ways but mostly there needs to be a mechanism for pricing risk like flood risk and fire risk more realistically weekly so that people don't build and keep rebuilding again and again in flood-prone or fire prone areas Amanda when should cities start to adapt. I mean New York did a lot of work. In the wake of Sandy. You know that was a shock to the system and forced the city to think about its own resilience and what type of cities need to move the quickest. If you think about the question from a traditional investment perspective the answer is usually pretty straightforward. You have a pool of capital you invest it you think about what their returns are on that that capital over time and you decide to invest today or later depending on which is. GonNa earn you a higher return. This is far more complicated because what you're talking about as as the climate changes are extreme tail events and the risk of those events and what's so uncertain about the change in climate is what events will occur win. What path will they take what other knock on consequences could occur so you hear people talking about melting a glacier ice caps and things like that when irreversible bulla vents begin to unfold the entire chain of risk changes. Our perspective is doesn't actually benefit you to wait to learn more information formation the way it would a normal risk reward situation where you're thinking about investment because these terrorist events that aren't going to become more predictable the closer after you get to them in fact waiting me make it so that it's too late and you already lost your ability to get ahead of. Some of the challenges still makes this a difficult difficult question to answer for investors so our general recommendation is start now starting out particularly if you have areas of exposure that you're aware of of and where you can begin to think about investing and try to do it in ways that enable you overtime to adopt those investments as things change and so that you can benefit from input costs and economies of scale that come from new technologies that emerge that make some of these problems problems easier to adapt to and to address in more economically feasible ways over time. You spend a lot of time on this. What surprised you most when you dug get into these issues. What were the most surprising findings in the report. I would say for both of us and actually for the whole team that worked on the report. It was how little attention goes this this question of adaptation despite all the focus on climate change. That's the point where we started the resources the attention the money are going to reducing carbon and of course that's critical but we were really surprised by how few people are focusing on adaptation in and action oriented way. Amanda anything that stood out for you that was one hundred percent my takeaways well which is just how little capital is actually going towards this question. The one caveat I would say is even as we we're conducting the research and thinking through these particular questions we started to see people begin to talk about these issues a little bit more than they had in the past so it feels a little bit like maybe that is on the precipice of changing but only time will tell for us. I think really the lack of focus on resilience was the most interesting interesting takeaway so given that and given that you've dug in a little bit. What do you want to find out next. What's on the docket for your next report so we're going to let her client demand lead us says we always do but there are so many interesting things going on in the broader climate sphere and in the ES Jeez fear as well and our our clients are starting to look at more innovative ways of reasoning financing of looking at climate bonds and all other sort of interesting projects and so for us. We WanNa see this continue to take off and be a topic of focus but we're likely to explore others and we may continue to talk about adaptation. We may do it relative to food for example agriculture but if the client demand changes will explore other areas as well well. Thank you very much for joining US Amanda and Sandra. Thanks Nick that concludes this episode of Exchanges Goldman Sachs thanks for listening and if you enjoyed the show we hope you subscribe apple podcast and leave a rating or a comment for more from Goldman Sachs experts was influential policymakers academics and investors on market moving topics be sure to check out our new podcast top of mind at Goldman Sachs hosted by Alison Nathan a senior strategist in the firm's research division This podcast was recorded on September twentieth. Two thousand nineteen all price references and market forecasts correspond onto the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast does not not constitute research or a recommendation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy completeness of the statements or any information contained in this podcast and any liability therefore including respect of direct indirect or consequential show loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic MC legal accounting or tax advice or recommendations in this podcast in addition. The receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Tech in Europe: Innovating Amidst Constraints
"This is exchange. The Goldman Sachs where we discussed developments currently she'd be markets industries in the global economy. I'm Jay seared global head of corporate communications here at the firm. Today's episode is all about technology in Europe, the industry's shown enormous growth in the region. But also continues to face pressure from political uncertainty and regulation to talk through the pace of technology disruption in Europe, bright spots challenges and much much more were joined by Johann Aford, head of Goldman Sachs technology division for Mia and global head of quality assurance engineering. Joe welcome to the program and key. So let's are big big picture from your see what is tech disruption in Europe. Look like compared to what's happening in Asia. The US way to categorize technology in Europe is really think we should separate it between the political environment and the impact that may or may not have the technology sector. And then it just talk about the technology. You could make a case that London is the capital of artificial intelligence in the world, and that's a couple of reasons in the kings cross area. Which is a very interesting story in itself. Historically, it's been an area that's experienced quite a lot of social deprivation. And in recent years has undergone a complete transformation in one area. You have the cookies to shoot which on the foremost cancer research institutions in the world next to the sharing institute of air research, next to Google deep mind and near the new headquarters for Facebook, and many people recognize the physical proximity brings and the type of people that are associated in their area would that could really main for the technology industry. And so you'll beginning to say a movement of the technology sector way from some of his historic premises into that particular area and you'll see in companies are very interesting who beginning to use a are in areas that you. Wouldn't normally anticipate it education legal. I mean financial services. It's very difficult to disrupt financial services from externally as the idea that you could disrupt medicine using is fascinating. But one of the trends that you see I think not just in Europe globally is this idea that if you get a group of people that don't historically mix, and they begin to share ideas, really interesting things happen. And you're certainly beginning to see that in that area. And there's other cities it's not just London other citizen. You're arguably have the same experience. I just spent some time in Lisbon, there's a huge sector in Lisbon. I spent time in southern Spain in Malaga, they are heavily investing in technology, and technology education, and you feel in your the physical distance doesn't really stop people being able to really kind of come together and communicate and I still think that even in a post Brexit environment that won't change people still talk and work together. Either. One of the trends, you see into -nology of courses, the idea that technology does bring together these collaboration tools, whether it's slack or Instagram or Snapchat. They argued about bringing people together and transcending geographical boundaries retailers. Been a lot of attention on the pressure that European regulators politicians are putting on big tech, specifically US Patek how companies innovating in response to some of the constraints that are being put on technology in Europe. One of the biggest challenges when we think about big tank from the European perspective is data protection Europe has a history of protecting civil rights and its connection through data. So in recent years, we've had GDP are. But what you're seeing in the US is privacy and data protection laws becoming into effect. And it makes some very difficult questions when you think about collaboration so going back to subject. I the data set that you use for. Why is very sensitive to the signals that you produce in terms of the results. And so before of a sudden it say as a consumer technology. There's a piece of data which helps put up recommendations if I suddenly as a consumer say, I want you to remove my data the impact of that has on that over survey are makes it very difficult, but data protection when I think about Europe Europe is leading the way in terms of being able to protect data protection rights for consumers, and for all individuals suppose, there's an argument that you're better off having the protections and knowing what's coming in the wild west, which is really journal the place in the world. So Brexit, big unknown hard to predict the sitting here today technology often doesn't respect boundaries. What could be the impact of some of the different outcomes on the tech sector in UK and the Europe more broadly, we've been planning as a firm for multiple scenarios that could happen for Brexit and those areas vary from the most extreme which is. You have to see that in order to deal with them. E u n t you have to be within the the least extreme is that we can carry on his we've historically done. Let's go to fold up between those two spectrums for technology has limited impact I would say for one reason, I think you can assume that in a post Brexit world the UK have to abide by the current regulations that they are by two today. And so the equivalence that we have to maintain will mean that we still have to have the same data protection. If you think about the recent financial regulations onto Murphy to that would have to continue. I don't really see that's making a huge difference in how companies deal together. I think the biggest thing technology has to be that we continue to be able to find talented engineers, and what you don't want us to not be able to have free movement of free employment of people who can foster the kind of technology startup area in London. It's well recognized that London really is the capital. For technology investment in Europe. And for that to continue we really need to be able to continue to employ an access to nickel talent from across Europe. And I think that would be the biggest issue that we face in being able to kind of keep the cone accelerated growth that you see moving beyond the UK. What countries do you see there? A little bit ahead of the game in terms of adapting technology, both and businesses and maybe in the consumer space, and are there any particular parts of Europe that are lagging? I won't say lagging I think the areas that really when you go there, you gotta fill the idea that you could have investment. I mean, certainly Berlin when you think about areas, which you're kind of attracted to and you see the most Hallam from then certainly could have Berlin from a kind of a fintech startup seeing one of the things about Europe, which, but he makes it stand out is it has a long history of technical education. So for the firm, we've been investing in a site in Walsall, and one of the things that attracted us to Poland was Poland has a long track record of technical education. There is a significant number of that population in Poland that take I agrees and second degrees, and they have well established technical institutions which have a history, and that's something that is pretty much across Europe. There's many technical colleges. There's a high number of engineering graduates and metal engineering on predominantly but computer science, but. If you think about on the other end of the kind of stem education, even concept modeling, France has a world of history in terms of producing the most amazing mathematicians and quantitative models, which we actively take advantage of when we think about trading strategies, and so education and the impact of free movement of this wealth of technical talent that we have in Europe at a post Brexit scenario is going to be vital for fostering, the industry. So you mentioned the financial industries the hardest for technology, disrupt. And yet digital banking release seems to be taking off in recent years both in the US and in Europe. What's driving the trend in Europe, one of the issues that many of the retail banks face is that they have significant legacy technology be able to pivot woods a richer. Consumer interface is actually quite difficult for them. We've managed to do this because we don't really have a history. Of consumer facing up occasions. And so we've been able to leverage some of our core technologies payments processing, for example, and be able to apply that to consumer space and we've done that remarkably quickly, but the way we've done that it's really been quest downing, and we basically built Marcus in the UK within a year, which if you think about starting your own company and been able to produce an online Bank. It would take you a bit more than a year. And we've done that not by creating a separate organization. We've done that. With our existing engineers. We've asked them to kind of work bit different 'love awesome to work in a very agile way. And we've done that in a way that allows us to take the best of our existing technology news irt, but also invest heavily in buying software that allows us to grow very quickly from the European perspective. Many banks eight we how did you do that? So quickly Joe, how did you manage to develop that infrastructure? And have a consumer facing application in the time period. You did and one of the things I think is very important to our culture as you do your existing engineers predominantly. So John what what's next when you look across your what's next for technology. I think disruption in medicine, we'll continue we've lost engineers to go into medical research. Her basically used up occasions that we have for market risk credit. Was there applying to cancer treatment? And so I think you'll continue to say the trend in being able to have more customized treatment programs through the use of technology. The second trend would definitely be with an education. I mean, you're seeing it more in the US hasn't quite reached Europe. But in the US because of just, you know, the size of the US you see more and more universities moving to online education. And if you think about as earlier, the desire to actually have more engineers and create more talent, if you are less wealthy country, and you have less access to education online education. So that you can actually be online and seeing lecture that's based in the US, and you could take grease. Let's say that you're in a refugee camp, you give you access to education that count is inaccessible to you. I think that's a fascinating era in terms of the impact could have on the world. There's companies in the US which are really far ahead in terms of being able to automate education in that way. Not just learning but also provide universities to run more efficiently. That's yet to really extend beyond the US. I think when it comes to your belt being credibly import. Especially in a post Brexit environment. You've talked a little bit already about how different types of companies, not just tech companies are leveraging technology mentioned medical industry. Of course, we do you see a lot of the blurring of lines between traditional sectors traditional industries, and technology and give us a couple examples. I am fascinated by cloud, cloudy, something that's a new term for most people. They understand the concept of a cloud, but the transformative qualities of the cloud. I think yet to be fully realized so give you an example. I'm always fascinated by how Netflix, which is the predominant video streaming technology their entire infrastructure runs on AWS, an Amazon is really one of their predominant competitors. That would have been unthinkable once that you'd be able to be using infrastructure and commodity infrastructure in a way that actually kind of transcend those types of boundaries. Think about the cloud in the context of academia, again, it's very difficult academics to collect large quantities of data. You have to base by the hardware will if you think about the cloud, what stops organization's been able to share large consumer data seamlessly. If they're on the same cloud platform. There's a lot of apprehension around data security when you think about it in the context of cloud. But I think that the way that the world will go is actually create more options to share information more easily, but huge quantities of data. And so this idea that you can actually mine information large quantities of information and be able to share information that way, I think it'd be very transformative. And I think it will create association between different types of organizations. You haven't seen before you talked a little bit about how London's become a center for you've also discussed in the past two different types of AI one based on robotics and the other based on the philosophic. Term called untolerable without getting to one. Give us a quick overview, both these types and the use cases for both of them and how they may be adopted. It's not without controversy. But my personal opinion of this is that they are tearful development as you mentioned. There's the one that we're most used to which is based upon collective in biological systems might people really associate that with robotics. Most of the robotics that we see is really driven by the artifice industry to the fact that it's so sensitive our movement and been able to think about how we use our limbs people could have think about that in terms of AI. But the I which is worse prolifically used in our society is on tala g or semantic definition. The best example of this is really the internet. If you think about your internet browser underneath that is very rich semantic layer that allows you to do words urging and that's ultimately been the biggest breakthrough in that. We've had and the most life changing, I mean, can you imagine living your life without the internet? I mean, how many times to use the internet every day to find things or find information? I remember as a child if you want to look something up you had to go to an encyclopedia on thinkable. Now. Isn't it? Go to shelf and pull out a book. And so at prevention, I think in the public about some of these new things happening internal Aji. But really my point is we've only benefited from it safe or a society, which is really the internet when I was young. And I started at my career thirty years ago, much of the technology was constrained by the size of the computers. So for example, what's now on my smartphone? Used to take an hunt tire room with the idea that you could actually have a car that was computerized you'd have to have a trailer behind it with a computer the size of your car like it wasn't practical. But now computers are so small you can put them in things that make them realistic and put them in your car. They can drive your call. You can put them in your vacuum cleaner. You can mow your lawn with them we've automated most of our house now, and I have in my fridge at home base automated milk buying. We have actually calibrated this so correctly because I have lots of milk. Too much travel. Travel, but the idea that this crossover between technology and everyday lives. Although it's enriching it's kind of disconcerting little people. I largely think it's great. But you think about the last five years. I mean, do you have an Alexa home? Indeed. Although my children like a little too much. You can actually do you can actually it turns out lights on women come home that's on thinkable five years ago that you would have technology crossing into your everyday lives in that way. It be interesting to see over time where we draw the boundaries of where we stop that. You're well-staffed leader in the tech field in the region. What are your thoughts on gender diversity on tech in Europe? And around the world for that matter. I mean, obviously gets a fair amount of well-deserved attention. Why are there? So few women senior roles in technology. And what could we all be doing to change that? I wish I had a clear answer to you. I've only done technology my computer, science degree in computer science. And although there were very few women doing it that were women doing it. Now, I've reached thirty is into my Curiel around. And I think we're have those women gone. It'll amazing career. It's very creative. I love programming now as much to thirty years ago and much of the programming languages the I use thirty years ago museums now, but it's been such an amazing career. And I think this impracticality is not all schools teach computer science access to computer science. Teachers is limited. I o say think once it one of the things that's happened in my career thirty years ago, I was encouraged to go into computing, he was actually considered thirty years ago to be a really great job for woman like a really great career. And somehow over the last fifteen years in particular, something has happened to make most of putting two women. There's a kind of dynamic in the vocabulary that you say where it's become even more about the kind of career America do as opposed to a woman, and that negativity that's not something that I experience when I was younger, and I quite know whether it's come from I have some series, but the reality is it is a great career form. And you can basically be a programmer from whatever location. You want allows you flexibility is a technical skill allows you balance in the UK. There's more women going into mathematics and chemistry and physics, and they're all computer science. Say some of the things that we're doing a firm to kind of help that is we are training teachers in schools to teach computer science, we are creating programs or sponsoring programs that allow goes to actually realise three role models what it's like to be a program to educate them. I mean, we feel for example that one of the most successful programs. We have in terms of encouraging women into the firm to do computer. Science somber intern program, and we have fifty percent gender diversity on that program. I'm one of the things that we see is that women who give us a chance for ten weeks just to try it. And at the end of those ten weeks all of their bias is about what it would be like to be a programmer have been completely reset and often. Oh, Said's me. I didn't really realize what a great career. This would be. It wasn't what I thought about a tour. I wasn't sitting on my own programming. I was working as part of a team we working very different problem sets of a fascinating problem set is highly creative. And like word that perception get created that it wouldn't be like that when I was younger. That's how it was described to me. I think a lot of those biases we have to continue to research educate people, but itself fulfiling, the more women do this. The more women will be encouraged. We know that role models are really important, not necessarily female role model but role models that people can relate to and so as a firm where doing programs like this. Thank you for your charity today to like just demonstrate that you can have a long successful happy career as a computer programmer, and it's really not that hard. So it sounds hard to me. You mentioned you're encouraged to get into the field. How did you end up in programming? Well, I went to an old girl school. They had a very strong history of science education physics chemistry. Maths my master is about five years away from retirement and she decided that she should start teaching computer science. So she taught herself computer science and started running and asked if goes wanted to attend a ni- subscribe to Ecorse, and I loved every minute Checchi quite a funny stories yet she said to her class. Why don't you go home instead of buying your mother flowers for mother's day automate her finances, the very first program, I wrote was to take all of the paternity bills in our house. And I produced a program that would basically automate them for my mom, but I look back at that. She was a bit could be welded. What was going on? Actually, she really appreciate the ending the same time. So how did that your early years your program or how do you end up Goldman tax? Well, I actually wanted to be an academic, and I did an internship in another financial institution kind of funny story, but I wanted to buy my sister is wedding present and say basically decided I was going to kind of work for the summer, and that's how I really got into financial services, and I was working for couple of years. And at that time, I mean, this is a long time ago now equalled looked around and I could have saw no women that were successful. It was a tough environment as a woman back then in the city of London. And I wanted to work in organizational, I felt was really America Crecy. So I decided to come to Goldman Sachs. I'd actually heard through the grapevine that Goldman Sachs with investing in technology. I mean, this is twenty three years ago and the head of research in London time, basically wanted to hire a program to automate research, and I. Worked directly for him. That's how joined the firm as a financial analyst in research, but automating research products. It's a testament to this firm that we're so far thinking like to do that back then to actually hire a programmer and be nontechnical to automate a put in that way with just unheard of an I thought he was kind of crazy, but I liked him and wanted to join Goldman Sachs I wanted to join Goldman Sachs because I had heard that there was a very strong culture of diversity here. I wanted to work in a firm to look at my gender or didn't look at the British just would just value my work, and when I look back. It was one of the best decisions I've ever made. Because exactly my experience of working here. Mike spirit working here is being they've been judged on my work, not myself as a woman or the fact that I'm from the east end of London or the fact that I'm this type of person on the fat this character is I've been judged on my output. And that's all you want from a company. That's what most people want from a company govern recently added a woman with a very interesting background in technology board retired Rear Admiral tie, and she has a background in cryptography and cybersecurity talk a little about your own interests in those topics and what it means to have someone like her on the board. I can't even imagine. How exceptional she must be to reach and vice Admiral as a critic affir-. I mean, she must be exceptional. But there is a history of women as talk Affi, if you think about in the history of the U K, and if you've watched that imitation game, you'll know that the history of Bletchley park was predominantly female mathematicians who were crypto prefers who are basically looking at the code every day trying to decipher it, unfortunately, much of that history can't be discussed because of the official secrets acts because often it is associated with the military. But there is a long history of women as talk. And particularly in the military and the history is amazing. With will publicize the second World War would have lasted a lot longer if it hadn't been for the efforts of those female cryptographer, and they were working with early stage digital machines. I'm an algorithm, I use of computers, and so it's incredibly insightful for GS to actually have someone of her standing on the board that will understand not just modern day cryptography, but be able to advise on cyber. And so I bet security increase in the modern day crime is happening on the internet's related on. Cyber you've taken a personal interest in Bletchley park a little bit about that. I have I amazed by the history. I mean, there's actually park the site itself, which is no fear in the UK. I would advise people to visit. But I think that this history of famous talk is the tune myself. A my fellow partners have actually created a game with Bletchley park called tra-, and we sponsor eight. Teacher to take an Nick machine, which is very much use in the second World War into schools and underprivileged areas and teach children to decode that program to be running just over three years, and we've trained ten thousand students in the UK the reason it so success with obviously the history is kind of cool to have an egg machine. But more importantly, you're teaching them an actual scenario. They actually reenact a day in the life of the enigma machine in the second World War, which basically involved the macoute changed every day. They were meant to change every day. But fortunately for the allies, they didn't change everyday. So every day you had basically start again, and these children are taught to do that they code and decode using this machine. And then they solve problems using it. Hopefully from that program, we're going to be encouraging children to think about this is a career. So what technology excited about today? I still very much. I'm rooted within programming. We didn't talk about programming as much, but we have at Goldman Sachs t point five billion lines of code and in my job in terms of quality assurance arm, responsible. As a custodian for two point six billion lines of code and my day start with me doing a code review of ring up Judea developer anywhere in the world. And sometimes you have to call the US, and I will do coat of you with them. And we'll talk about why they felt that piece of code was suitable to solve a problem in some of the things they could do better some of the advances. We see in coding, is modern languages are easier for people to learn one of the languages that is very straightforward to learn python. We partners of charity in the UK cooed code I and they. Aim to train twenty thousand women young women to learn python and movie and as part of our partnership with them, we've offered female analysts in our London office. The ability to have free training on python and the courses that we offered were completely over subscribed within the first thirty seconds of us, ending the Email young people want to learn how to program. I'll get you to do it Jake. Yeah. Mardi tempted me once but I backed down. So you've had a fascinating career super interesting. What's the best advice you've gotten over the course of that career keep going I think that to have a career you've got to want to have a career people say to me. Well, you had this exceptional courage, your partner, Goldman Sachs. I say, well, yes, or no I've had a career like I've worked. This is my thirty year working I've been junior programmer senior programmer, I've just had a normal career, and which I've really enjoyed and I'm lucky to for company which has allowed me to have that career. So you're based in London in New York for a couple of days. What do you like about visiting New York? And what miss I've done normally say this. I love Americans and in particular, like New York, it's a bit. Right now, it's particularly like the old, but I have lived in New York, but I love America's optimism about Americans, and like their work ethic that I really appreciate when you talk about it enough, but you can see America so successful the idea that you can work hard and basic cesspool and change your life. That optimism there's an intrinsic optimism. I actually read a book about Mrs Thatcher. And she felt the same way when she was here. But what I particularly like about coming here. I don't like the weather, but I do like the fact that I get to see a lot of the friends I've worked with for a long time, and it's very collaborative like if you think about the last two days that we've had. I always leave these business trips with a set of ideas in a way to do things differently than when I arrived, one of the examples in the technology division is weeping really focusing on our option of cloud. I'm going to go home. And I'm going to think about some of the major cloud providers and a little bit differently about how we using them in Europe. And what do you miss about London? When you're away. Well, one of the things I think it's really special about London is the fact that London is truly a multinational city, like I'm in New York is to a certain extent one and more. So I think London moso, and I do think about this with Brexit. I get up in the mornings, and I have a Lithuanian Chapin makes my coffee, and I was to same coffee place, and then I get my lunch from a polish shop, it's just very multicultural. And I really hope that that doesn't change on that note. Thanks for joining us. Joe pleasure. That concludes this episode of exchanges of Goldman Sachs. Thanks for listening. And we hope you join us again next time. This podcast was recorded on February. First two thousand nineteen this podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast is not financial research nor product of Goldman Sachs global investment research, neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast are not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting, or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of. Investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
What's Keeping Insurers Up at Night?
"This is exchanged Goldman Sachs were discussed developments currently shipping. Markets industries in the global economy. Jake Siewert global head of corporate communications here at the firm today were out to answer. This question. What's keeping insurers up at night? Tapas find out we're joined by Mike Segal, global head of insurance asset management business within Goldman Sachs asset management or g Sam Mike. Welcome to the program. Thank you, Jake. It's good to have you back. So before we dive in give us some numbers. What are the top three numbers? Our listeners need to know by the time they finish this episode thirteen eighty four into thirteen trillion that's amount of assets that the companies that responded to the survey are currently managing. It's over fifty percent of the global industries asset base eighty four percent. That's the percentage of companies that responded that think we're gonna see a recession within the next three years. But only two percent think that we're gonna see it this year. So they see recession coming and that's influencing a lot of their investment decisions. They just don't see at this year. Okay. So this survey that you do every year in the insurance industry, you publish it? Very recently. What are you trying to learn when you do the survey of this industry and the asset manager well investing is a core part of the industry, it's half of their business. One half is writing insurance policies. The other half is taking the premium in investing those policies. So they need to have views to where the economy's going. They need to have view of markets of risks. And it's very important to develop those views, and quite frankly companies are looking at other companies are doing because they're indirect competition. Okay. So why do you care in particular about what insurance think about the market conditions because a lot of people have used on market conditions. Why do insurance matter and what can we? Learn from their perspective that's different from some of the other big clients here at the firm, hedge funds, mutual funds, etc. Well, the companies when they policies they take in cash, so whether they're writing a auto policy homeowner's policy and apartment policy whether the writing policy to protect against this building the cash comes in. They simply can't sit. They must invest becomes a question where to invest these companies though, have a different perspective than most of the other investors in the world longer cycle. They have to put the money to work, and indeed they have to put it to work on a longer term basis. A hedge fund could sit on their hands. Individuals could decide to sit in cash or money market funds. These companies need to get a return in order to make their claims payments. And so they have to have used where the economy is how our markets valued we are risks. Where should they be putting their capital to work? Okay. Let's talk a little bit about what they think will do insure. I think we are in the credit cycle. And where we are in the macro economic picture will they definitely think that we are late cycle in that the risks are increasing to investing at the same time all the markets that we're looking at in terms of equities or all-time highs read that as expensive interest rates in most of the world are low read that as bond yields or bond returns or low having said that they need to put the capital to work. They are increasingly of the view that were late stage in the economic cycle. Be the USB Europe be at China. We're late stage in the credit cycle. So they are looking to go into higher quality assets. So in terms of fixed income, they're moving into higher grade corporate bonds, they're also moving into private markets where the terms and conditions on private credit are better having said that though they are not backing away from the markets, the industry's extremely welcome. Capitalized in needs to put that capital to work. Okay. So less fall looks like we'd have continually rising interest rates. But I was the feds backed off some how do they think about a rising rate environment, and the prospects inflation oddly enough, the companies would prefer rates to rise and rates to rise slowly because they're constantly have cash to put to work as I referenced before the insurance premiums. Plus they have money's coming off of bonds. They have dividend payments. So if they could put that to work at higher and higher interest rates that's better for the business for them. That's a benign environment of slow rise in rates is a benign environment. But that's not what they see this year. They think that rates are going to be stable, and as a result, they are starting to lengthen their bond portfolio durations, right? And so what most of these folks think the fed will do in the near term and medium-term we surveyed exactly that question. They think that we're good for one more rate rise by the federal. Serve in. That's it. One more this year. One more this year, you mentioned China and Europe to how do they think about growth globally in? Are they concerned about slowdowns in China in Europe? Right now, we ask what are the greatest? Macro economic concerns that you have the top three slowdown in the US slowdown in Europe slowdown in China and the slowdown in these markets would have implications about credit quality and equity values. One topic that we've spent some time on here, we talked Richard Manley from Goldman Sachs research about ESPN vesting. What does the insurance sector think about ESPN vesting they moving in that direction slowly moderate pace is it catching hold their or is it just not something that's on their radar? It's absolutely catching hold, and it's picking up pace we've been serving on that question and each year more and more companies around the world indicate that it's becoming an important factor in their investing. Now, there's a number of reasons for this. I would say boils down simply the companies their employees and their clients think it's good stewardship. And it's something they should be doing and slow. It is becoming embedded in the way the companies think the way they operate, and it's being embedded in the way, they invest they looking for funds or they just trying to take a portion of their portfolio and put it in sort of impact or sustainable investing. Or is it just more of a mixed bag while I would say, I it starts with policy. Oftentimes, if you take a look at the annual reports of the public companies, you'll have a statement by the CEO, the talks about the importance of sustainability about ES Chee about social matters governance matters. So that's the first thing they announced to the marketplace to their clients to their employees. This is important us then after translates down into policy becomes a question of how to implement some of this is how do I measure these things, and we and members of the industry are coming up with metrics to measure environ. Mental social governance issues after that it's starting to publish those metrics, and then Jake you mentioned actually making implementations in the investment portfolio to make sure that these investments take ESPN consideration. If not going one step further and investing specifically ES g funds, and then may be going one step further and looking at impact investing. Okay. Any other results from the survey that you'd wanna highlight ame- novice, you do the survey every year, and you pick up different kinds of feedback from year to year what stood as being most similar or different from other years? It was the dramatic amount of shift that we had going from a benign investing environmental late stage. There was a dramatic shift in lower inflation concerns, which are now translating into stability and rates in there for a longer term investing. But the other thing that continue to catch your eye is the dramatic move towards private equity and. Private credit and part of the reason is of you that these markets still have more room to run also view that the industry has a lot of liquidity. And they're able to put it to work in less liquid longer dated assets. And it's one of the few advantages they have an investing over all of the market participants. Are you seeing that shift in allocations, or is that just sentiment at the moment will sentiment, but it translates into allocations? Yeah. For sure personally for you. What was the most surprising result? In the survey. I'd have to say the dramatic shift that we are in the final stage of the credit cycle. Usually these shifts that we see edge out and change lowly over time that was one of the bigger surprises. The other surprise was the dramatic interest in fintech and insure attack in this is a couple of different reasons. One is are these good investment opportunities for companies to put their capital? And also is it a way to learn about what's going on the Ma? Markets, but also it's a competitive requirement now that they need to be leading edge in terms of the deployment of technology. Otherwise, they're the ones that are going to get disrupted, and this is a sector that has not really been disrupted today. But is there a lot of interest in some of the upstarts? Well, I might disagree. It may not be upstarts new to the industry of which there are few. But many of the companies in the industry are using technology as a tool to improve the efficiency of their operations lower their premiums and therefore create a competitive advantage against other firms in the industry. Okay. So you follow the industry for a long time been doing the survey for a while. Obviously a lot of sectors have been disrupted by technology. You mentioned there's more interest now in ensure TEK how does the insurance industry think about disruption in its own industry will take part of its offensive part of its defensive offensive. How can they utilize technology? In their own business to improve their underwriting to improve their operations the risk management to improve their access to clients. So that's the offensive part in their companies that are definitely both startups and major players in the industry that are putting technology to work to improve their operations reduce their costs, reduce the premiums. They're charging and take market share. That's the offense of side clearly for others in the industry. They need to be concerned about that. But there's another aspect to that. Which is their investment portfolio? How is disruption affecting the investment portfolio? They need to have an understanding of which industries are subject to disruption, and then within those industries, which companies are subject to disruption, as we mentioned earlier, these companies tend to be long term investors, a one year windows, not that important, but they're putting money out out to thirty years and beyond they need to have you is to will those industries in those companies still be around in thirty years. So my joined Goldman Sachs back in nineteen. Eighty six and then rejoined in the year two thousand and been here ever since explain your career trajectory to us, and how did you end up leading insurance GM? Well, Jake, I don't think we have enough time on the podcast for me star from nineteen eighty six. But let's say I was here starting nineteen Eighty-six went through a number different markets island left in nineteen Ninety-six to go to work for a reinsurance company. I was there for four years and was fortunate enough to come back and been in a number of different areas of the firm back in two thousand eleven eight years ago. Now, I was asked to take the knowledge of the insurance industry, plus all my market knowledge and head our insurance asset management business watching this survey year after year, you get a sense of how predictive it is about the future. Does this help you determine where insurers are going to be putting money to work? Or is it more reflection of what's already happened? There's a couple of different aspects to the predictive nature one. We. Ask their views on markets. And generally they've been right directionally. They've had of you for the last several years now that equity markets are going to continue to rise. And indeed that's been the case. They have had of you that long term interest rates are going to rise. Modestly immodestly is the right answer to that in terms of predictive as far as asset allocations concern. Yeah. Indeed. It's a very timely survey. And they're looking at the snapshot of today and they're going to do for the next year. And generally the direction of what they're looking to invest in has played itself out for the last several years. Now, it's been a movement from public asset classes to private asset classes, it's been a movement from public equity to private equity, and indeed we've seen those actual flows taking place so tight end the episode by recapping one question in one minute or less what's keeping insures up at night, given their views to where we are in the cycle and given their views that the market levels are high equities and yields are low where they safe. Fli deploy their capital in order to get a decent return. All right. Well, thanks for joining me today. Thanks, jake. That concludes this episode of exchanges goldman-sachs, thanks for listening. And we hope you join us again next time. This podcast was recorded on April twenty six two thousand nineteen. Using opinions expressed here in should not be construed as an offer to buy or sell any securities and such views and opinions may differ from those of Goldman Sachs global investment research or other departments or divisions of Goldman Sachs and it's affiliates. This information may not be current. And Goldman Sachs says no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed. Goldman Sachs is not providing any financial economic legal accounting or tax advice in the spot cast. In addition, the receipt of this podcast by any listener is not to be taken as close attuning the giving of investment advice by any Goldman Sachs entity or individual to that listener nor to constitute such person appliance of. Goldman Sachs entity. No part of this podcast may without g SAM's prior written consent, be reproduced redistributed published copied or duplicated in any form by any means.
How are Carbonomics Reshaping the Energy Industry?
"This is exchanges Goldman Sachs where we discussed gust developments currently shaping markets industries in the global economy. I'm Jake seward global head of corporate communications here at the firm today. We'll be talking about carbon NOMEX and the future Dr Energy with Michaela delvina of Goldman Sachs research but before that we're going to get a quick markets update from Oscar Ostlund of the Goldman Sachs Global Markets Division Division. WHO's watching five key numbers in markets? Right now welcome Oscar. Hi thanks for having me so before we start on the numbers. Just tell me a little bit about your focus area. We're here at Goldman. Some the head of content and data analysis on marquee which is our institutional investor platform. So what's a big number that you've been looking at as we start the new year. Three three hundred and three percent that is the ratio of China's total debt to GDP essentially over the last decade. Chinese policymakers have favored growth over de Leveraging and what that pilot Ohio can grow for a very long time. It can't grow faster than your economy forever so while I think there are plenty of bright spots in the Chinese economy this is a risk factor that I always always keep an eye on and with global growth being so highly dependent Chinese growth. This is very relevant to global markets investors. How about a number that you feel has been getting a lot of attention Jin but doesn't tell us all that we need to know hundred and forty five thousand? That's the headline number. In the latest nonfarm payroll report often called the jobs report representing the number of of private jobs the US economy added in December. We've continuously seen strong numbers in the jobs report. Get inflation is still below the feds. Two percent target in fact we have now two hundred and eleven consecutive positive monthly jobs numbers and year ten year stretch. And that's the long straight on record way past the previous four year record much much more. Relevant number is inflation and more precisely inflation expectations in a nutshell. Financial markets are time machines long people to extend units of work today again units so worked in the future and transparent and efficient way hence for anyone making a final decision. Inflation is a key input. As it alters the balance between savers and borrowers so Oscar have the number. That's moved a lot or maybe hasn't moved much. That's caught your eye one point twelve. That's the euro dollar exchange rate and it spent about a quarter of last last year at that level usually exchange rates. Move much more than that. The one year realized volatility our measure of fluctuation in prices if you want currently sits us four four point three percent this is the lowest since the late seventy s when currencies were pegged against each other and it was basically zero and history usually tells us when volatility is slow it becomes unsustainable and I would not be surprised to see resurgence in volatility in the coming year. So having a number that you're thinking about for the future one percent that's the forecast. GDP growth for the eurozone in twenty twenty. This number is important. Because the euro-zone economy has been finding very strong secular forces. That have prevented it from reaching escape. Velocity in the the last decade Colluding de Leveraging in southern Europe constitutionally mandated fiscal austerity and Germany brexit uncertainty. And with the lot of that uncertainty being about to be resolved no significant election in twenty twenty conditions in global markets. Relatively benign. This is as close to as good as it gets for Europe up. And therefore it'd be very worrisome for the European integration project if we don't see a stronger number here and what what's interesting is that in our latest Marquee Quick Ball survey the largest institutional investor serving the street within a notable shift from US equities to European equities investors do see more upbeat than economists here and having how about a number you're thinking about when you're not at the office hundred forty. That's the number of days until the next Champions League final and being Perry Math Fan. I'm convinced it will get there. And obviously when we'll say thanks Oscar now onto the Carbonaro segment of the episode here with Michaela Delvina. Michaela is the Commodity Equity Business Unit leader in a MEA for Goldman Sachs research based in our London office. Welcome Maekelae thank you jake start with Michaela you put out. A recent report called carbon. nomex explain in what you mean by Carbonaro mix what it means for the future of energy I think as climate change becomes top of mind. It's very important that we find a solution for decarbonisation that make sense financially with the lowest impact on the disposable income for the consumer the broadest oldest technology colleen ovation and the most efficient financing. That's why becomes particularly important to look at decarbonisation from an economics perspective. Your research talks about the cost curve of decarbonisation. Explain that and why that's important. What what does that cost curve? Look like so we have looked at almost one hundred different. Etymology is across the spectrum of economy from mobile to power generation buildings agriculture industry. To try to find out what are the key technologies technologies that can help us reach net zero carbon emissions over the coming decades and what we discover is there. There are some amazing low cost cost opportunities which will drive investment in the coming years but that they may not be now to get a to net zero carbon and that was particularly important we continue to foster technological innovation or some the other side we look a new technologies that can allow us to get back the co two from the atmosphere you're through co two segmentation. So let's talk a little bit more about that. What is the cost of show some of the best opportunities in the future of energy so when we look at energy it's too took areas where we believe technology starts to be in the money? There is plenty of opportunity in power generation through wind solar energy storage and there are some really attractive opportunities coming up in morbidity but she could only in city centres for buses for passenger vehicles. End For for shaping and we believe this will be at the core of what could be a one to two trillion dollar investment opportunity per annum over the coming decades if we want to reach net zero carbon so will these opportunities do enough to mitigate the effects of climate change. What else may be needed? We we believe about fifty percent. decarbonisation is achievable within reasonable carbon costs but then the cost curve becomes very very steep deep which means that we would need either of two things either. A real technology breakthrough particularly in things like battery and energy storage judge or we will need to the station and one of the fascinating thing we have seen over the past few years is how little has been invested in. Co Two sequestration prescription either through nature based solution like reforestation off technologies like carbon capture user than storage that can take back the C you two from the atmosphere and either create materials with it or a story to underground carbon capture and storage. The technology's been around and there has been some investment investment. Not as much as as there there might should have been what. What is the early research shown? And some of the early technological deployment show in about its feasibility. What what will it take for that innovation to accelerate? I think we know the technology's there. We know it works but we know it needs to be developed in scale to read improves meets economics. I think capturing storage is like where solar was in the ninety s underinvested we tremendous potential but without without the ability to deliver yet because them scale and yet the following twenty years showed that prices could go down eighty ninety percent on the back off off scaled investment and I think we will see the same in cc us including the opportunity which really would resolve a lot of the problems of decarbonisation of cracking technology and economics for direct yeah. Carbon capture a lot of these technologies have been around for a little while but Davos you say that investment hasn't hasn't really really followed the scale that's needed what role of capital markets taking in financing the energy transition today competitive markets have become very involved in climate change and we actually think they are currently being one of the key drivers of change it clause Global Corporation corperation if we look for instance at the climate change hold the resolution. Since two thousand twelve they doubled and the support of shareholders has tripled over the time period and this is forcing corporates to really incorporate climate change into their risk management into their investment out locating to how they think about their business developing in the future it also completely changing the way that financing works in the energy industry with new. Are you attracted avenues to find low carbon solution and on the other side very severe titan of financial conditions on traditional hydrocarbon assets. So what does that mix mean for the price of energy in the near medium term. We'll look at the financing of hydrocarbon acids we believe need the financial conditions have titan so much there were actually now into period of structure under investment in oil and gas which would mean that the way the decarbonisation process would work. But she could the next thing to twenty years is likely to happen through. Higher Commodity prices not not lower commodity prices and this is actually a perfectly rational thing to happen because it achieves too key aims the first one to continue to incentivize the consumer to find the low carbon alternative to the energy use and the second one it avoids the build up of stranded financial acids that could be destabilizing to the global economy. The long-term this energy industry has always been about scale. But you're seeing even more more consolidation today a lot of barriers to entry. What's driving that right now? Absolutely Jake as we look through the oil and gas industry. The tightening financial conditions is creating higher barriers to entry and is incentivizing consultation to the point that we believe. We're seeing the resurgence of will because they knew seven sisters seven large oil and gas companies set like in the fifties and sixties dominate. All Large scale new hydrocarbon debenham. And this we believe is creating a better industry structure for energy and creating higher returns for those companies so so this consolidation in the industry as I said it's always been intrigued. That's favor big scale can sometimes lead to less innovation and a little bit less investment. What is the market structure going forward for this industry mean for innovation and for new investment? I think absolutely right. It will mean an less innovation less investment and overall less production in oil and gas which would drive higher oil and gas prices but on the other side. I think these corporations will put more investment and more innovation and more top management focus on on the local solutions and this mix of more focus on low-carbon but on the other side higher oiling gas prices on the back of the underinvestment. Is What what I think will help to accelerate the decarbonisation process for the global economy sector like our own. That's heavily regulated. How would you you characterize? It's hard to sum it up in very quick terms. But how would you summarize the kind of regulation that we're seeing around the world and where's here's the directional flow of that regulation at the moment every government every country tend to have different incentives for low carbon technologies and some of these have been very successful particularly in areas like wind solar and batteries. But it's been consistent. I believe that it would be much better to have a broad technology agnostic. Co Two pricing. That would actually help. ACHIEVE A better technological education in the coming years and is there any prospect of of pricing like that that would be transparent kind of global in nature. Difficult to say I think Europe is very keen to achieve it and under the new European Commission will certainly push it's global peers to think doc about broadening end increasing the carbon price to accelerate the decarbonisation process. So what's the top question. You're getting from. Investors Investors as we enter a twenty twenty. One of the top questions from investors is the role that the energy industry but she could be goals. We'll have indication Asian. Are they drivers of change or not. We have dealt into this issue in our reimagining. Big Oil's report where we really think about. How how that business can transform to enable lower carbon emissions in the future and we believe they can and that their balance sheet and bear reese manage capabilities? ELITISTS can have a key role in enabling broader uptake of low carbon solutions particularly in power generation in mobility and we also have a key hugh rolling funding some of the key emerging sequestrated technologies now investors in the energy sector sometimes just looking for return of capital and those some of those US energy giants have been great return of capital through buybacks and dividends. Doing the kind of investment you're talking about will require redeploying. Some of that capital Outta investors I feel about that can hit an attractive balance. Where on one side they continue to enhance the cash return to shareholders and on the other side they substitute substitute in underinvested amount of money into traditional oil and gas with new attractive opportunities in renewables insecure station and ending low-carbon solution? And in that way we actually believe they can lower the carbon intensity of their energy sales by ten to twenty eighty percent over the next decade while enhancing corporately terms. So what what was the most surprising finding from your carbon research for you. Personally I will say for me. The the most surprising factor has been how underinvested the Celtics creation technologies have been if we take carbon capture use and in storage which will be an absolutely key technology if WE WANNA get to zero carbon. They only received less than one percent told. Investment than sort of wind than the reason is that there hasn't been enough broad and high carbon pricing to incentivize acknowledges. I would almost call the last decade the lost decade for Co two sequestration. And I think that needs to change in the next ten years fascinating fascinating thank you for joining us. McCain Take Jake that concludes this episode of Exchanges Goldman Sachs. Thanks for listening if you enjoyed the show. We hope you subscribe on Apple podcasts. Saliva rating or a comment in for more from Goldman Sachs experts as well as influential policymakers economics investors market-moving topics. Be sure to check out our other. PODCASTS gas top of mind Goldman Sachs hosted by also Nathan a senior strategist in the firm's research division All price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced. In whole or in part the information contained in this podcast does not constitute research or recommendation from from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information mation contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed and the views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs access to that listener nor to constitute such person a client of any Goldman Sachs entity.
Commodities Outlook: Return of the New Oil Order
"This is exchange of Goldman Sachs where we discussed developments currently shaping markets industries in the global economy. I'm Jake Seward global head of corporate communications here at the firm. Today's episode is all about commodities from what's been driving. Recent volatility to the role of shale in two thousand eighteen to the impact of geopolitical risks around trade and OPEC and much much more to talk through all of this. We're joined by our very own Jeff curry global, head of commodities research in Goldman Sachs investment research. Jeff welcome to the program. Great. Thanks, a pleasure to be here. So let's start with the big sell off that closed out the year eighteen and the rebound. We've seen sense. What's driving these big swings in commodity prices? And do you expect that to continue in two thousand nineteen? Well, let's talk about what was fundamental, and then what was sentiment, and if we begin with the fundamental shifts with energy, you had US foreign policy that disappointed many of the oil. Juicers in terms of providing sanctions around rainy and exports. So I would say that was the actual trigger. You look at the picture you have much more supply out of Iran than what most people nationally thought that created the initial sell off, but it involved many more assets than oil within about two to three weeks later, you had the equity markets the credit markets all of them beginning to participate in a large sell off that I would chalk up. Two more sentiment than fundamentals. Yes. We saw a weakening in the underlying macro data to that time period. But nothing to justify the magnitude of that sell off that we saw the way I'm interpreting. What happen really is that the market got too excited over the term global synchronous growth back in late two thousand seventeen in really two thousand eighteen this created a substantial rally in risk assets. But now that we look at the. Hard data, and we look back at two thousand eighteen it was really kinda mid cycle. So we use the term late cycle. We're going to have sickle. Upswing that's consistent with late cycle economic activity. That's going to drive commodity prices substantially higher. The reality is it was much more mid cycle. And if you actually just look at the survey data, relative to the hard data towards the end of two thousand eighteen what we see is a survey data just came back in line with our data. So the way I like to think about what happened in December wasn't that we had an absolute claps in expectations and economic activity, but rather the exuberance that we priced into the market in late seventeen eighteen was really taken out of the market to make this point. Let's just look at oil prices today there about sixty dollars a barrel. Where were they in late two thousand seventeen before global synchronous growth was the buzz? They were at sixty. Dollars a barrel. Copper was at six thousand at six thousand now equity market valuation. The average over the post crisis era, fourteen and a half where did it trae down to fourteen and a half? Let's goes on and on we essentially unwound all that exuberance over that time here. So one of the interesting turns last year was this highest what you call the new oil order, which is the area of low cost shale and relatively easy supply. The US being a big swing producer is shield back in the driver's seat. This year's you see it. Let's first define what we mean. By the new oil order, the shale technology, which is fast cycle flattened out. The oil supply curve, we go back to the nineteen nineties in the two thousands when you'd have explosive oil prices or even the seventies. It was because the supply curve had a hockey stick formation. It was very very steep out on the end part of that steepness was because it would take years to bring on supply. Meaning that if I did. A big deep water offshore platform. It require tens twenties of billions of dollars, and it would take five plus years to bring online in contrast shale requires a couple million dollars in some cases can be brought on line in fourteen days. So what does it flattens out that supply curve? So when we came up with the idea, the new oil order, we realized that if you don't have that steepness in that supply curve, it changes the behavior of OPEC think about if you're OPEC if you know that the non-opec players take five years bring on supply, you can cut supply yourself. Let price go up and not worry about losing market share. But when shale is active if they let prices go too, high, they lose market share. So what happened in late seventeen for us to call hiatus to the new oil order. It was several factors. One was that we had pipeline capacity constraints coming out of the Permian basin in the middle of the United States. So you. Couldn't grow that shale is quickly as you could before the second factor was that we had problems getting on some of the non-opec ex US production. And then the third factor was demand was much stronger than we thought it started Palmos out towards that hockey stick. So now, I'm OPEC I'm looking at it. You got the green light to start cutting back production without the potential losing market share. I'm not gonna say they weren't completely losing market share. They did lose a lot of market share last year. But not to the same extreme if you just had completely debottlenecking shale production. So we're calling the new oil order back online again in the reason why we see that is that the investment that we've seen in pipelines in two thousand eighteen and we're beginning to see an early two thousand nineteen will be sufficient to debottlenecking the Permian such that you can start to see that rapid growth in shale. Again, the question then becomes what does this do to prices in two thousand nineteen? We'll you downgraded prices recently. This the. Reason why -absolutely well, actually, there's two reasons I'm not going to completely discount. All that noise. We saw in December. We did see a sharp ramp up in production in intimidation of the Iranian sanctions going into play in November. When that didn't happen. You had all that excess supply leftover that created an inventory build and put downward pressure on prices part of our forecast revision in which we took two thousand and nineteen prices to sixty two dollars and fifty cents from seventy dollars per barrel. That downward vision had two components one was that excess inventory created by the Iranian sanctions not going into the same effectivenes. She thought the second has to do with debottlenecking of shale because when you debottlenecking the shale you lower the cost structure, you move yourself back to the new oil order. So those are the two real core reasons why we lowered our price forecast on the demand side. You've said were in base. A new kind of oil cycle that we're unlikely to see the demand pick up in the same extent that has in late business cycles in the past talk a little bit about the dynamics that are played there. I like to say we got hoodwinked by sentiment in two thousand eighteen and one of the reasons why we thought we were gonna get that late cycle uptick was because the survey data was so strong towards the two thousand seventeen again going back to that buzz global synchronous growth, and when you get eight late cycle uptick, usually substantially increases, the demand for oil income is, you know, give you an example why you get that big upswing. Let's say you have a bulldozer, and you're doing construction once that construction really begins to pick up late cycle your turn on a lot of bulldozers. And so the cyclical upswing and diesel demand is massive as you become late cycle. What happened was we didn't get that late cycle uptick in. It was embedded in core. Reason why we were very bullish on commodities going into this time period. So if you look at you know, our numbers give you an idea we had forecast oil demand growth of one point eight million barrels per day year ago, it turned out to be one point five. Now, we think about one point five million barrels per day. What do you think the average is in the post crisis era won't point five by goes back to my point everything is really kind of boring right now, this has been a long drawn out cycle with not much variation around. However, when we look at what happened in two thousand eighteen there was another dynamic, and we called it. The terrible trio. The terrible trio are rising rates stronger dollar in higher oil prices, you put those three together it's very punishing to emerging markets places like Brazil, we saw truck strike in Brazil in two thousand eighteen places. Like India, historically, when you look at the terrible trio, and when they occur. It's usually a signal. Of two things a mid cycle. Pause or an outright recession. We should have heeded that observation more seriously last year. Why didn't we because we thought the dollar would weaken take off the pressure? Oil prices continue to go back up without doing too much damage to demand. So now, we look at the current environment. It's relatively average underlying GDP growth going forward. But we look at the economic our macro backdrop, it's actually very supportive to oil and commodities why we can comfortably say the fed is on pause were unlikely in a recession. That's classic mid cycle. Pause amid cycle. Pause is a buy signal for oil and commodity. So that's point number one point number two. The strong dollar backdrop is turned into a weak dollar backdrop. We started the year with substantial weakening in the dollar again that creates a tailwind higher commodity prices Maryland correllated to the expectations around the fed. There's two factors when you think about the X. Dictate channels really important there. But there's another one when you just think about places like Brazil year when you had a very strong dollar, and you look at oil prices eighty five dollars a barrel to the rest of the world. Even the UK they were higher to the rest of the world, and they were in two thousand eight when we were at one hundred forty seven dollars a barrel. So it creates a lot of economic hardship for many parts of the world that are not dollar based. In fact, I like to say there's always a super cycle in commodities going on in the world, just pick your currency. And so we think about what happened in two thousand eight the US was the one that needed to slow down its consumption of oil. So the price of oil exploded in dollars, but because the dollar was so weak the rest of the world didn't feel the pain last year when we went to eighty five dollars a barrel. The dollar was so strong places like Brazil had equivalent of three hundred dollars a barrel of very very punishing are key reasons, why you've gotta tailwinds one rates. Fed is on hold dollar is weaker. The other big one is position in these markets is very light. You've lost a lot of the key investors in these markets in that sell off that occurred in December. So that you think about the current environment. The market's not that long which means as the market gets long likely, go hire another key reason, why we think you want to be bullish in two thousand in nineteen has to do with OPEC OPEC brought a lot of supply on intensification of Iran. But again, like I said before a lot of that has been unwound, and you've likely see OPEC, and we see the evidence already they're going to cut production to take out that excess inventory that was built up. Final reason on wanting to be bullish on oil commodities really has to do with China. That's always very critical to the outlook for oil commodities that China's growth has been running a little bit below six percent. They hit their policy targets at the end of twenty twenty means they gotta have six percent. Growth. They can't sustain too long of a period below six percent. They're running in that low fives right now. So we think policies likely to stimulate as we go into two thousand nineteen so it's a very robust backdrop for oil demand. But I do wanna go into your question about the cyclicality of commodities and cyclicality of the business cycle. We know enough to know, it's very different. And there's two key factors that we like to point out there one is if we look at the durability of commodity consumption or the consumption of durables in the economy, particularly places like the US stopped sharply. We don't consume as many whitegoods recreational quick houses and things of that nature that's important because big ticket items create the cyclicality, but it's not only in big ticket items. I like to look at my apple watch here. You'll days I would buy a watch that. It'd be only one I would buy for ten plus years. Now, you're updating them every two years. So we don't have that same duration to consumption. We like we have before which means you take out some of that cyclicality so say in the developed markets the amplitude of the cycle has been reduced. The second factor has to do with what's going on in the emerging markets, particularly China they liked to micromanage financial in fundamental imbalances in this is important because they'll do it counter-cyclically to the US. So if the US is really strong in their consuming a lot of the exports out of China. What is China? Do they deliver their debt? So they slow down the stimulus to the system when the US is weak. That's when they typically stimulate. So it gets countercyclical stabilizing factor to what's going on into the US. And so what we're left with with higher frequency in the cycles in places like China. So you put two together more likely the cycles are faster. With less amplitude. But it feels like they're longer and flatter. But with still look very much the same. So how do you think about geopolitical risk as we enter the new year, particularly around trade? There's been a lot of noise and OPEC you can divide the geopolitical risk into three categories trade foreign policy and the government shutdown. That's currently underway. Let's start with trade as we go into the year. I think both parties are in a position where they cut a come up with some type of deal, I know at this point consensus view, this thing's gonna go on and on. But you're starting to see a substantial hit two overall global trade. Global trade has dropped from running around six percent growth to somewhere around three percent. So it's starting to have a material impact. And I don't think either party wants to see this get much worse in the current virement. So we'll see two thousand and nineteen brings a deal there. Clearly, I think that the consensus views has gone away that this is going to go on forever. Or to a higher probability that you get a deal. I obviously a deal would be very beneficial to emerging market assets as well as to commodities. Let's go to the second one which is foreign policy for us in commodity. This has a huge impact. Whether it was the sanctions on Roussel and the impact that has had on aluminum, but even much larger the impacts that the macro space where the Iranian sanctions, what find kind of interesting. These are all beneficial to the old economy, whether it's Lumina m- steel where you see the tariffs in. And then the case in oil, it is Iran that ended up being a very uncertain environment particularly back in October November because most market participants viewed that there was a very high probability that the United States was going to take Iran down to zero exports. That's why you had people building precautionary inventories around this. You had the OPEC countries beginning to ramp up. Reduction, but the foreign policy in the US was very surprising because they actually issued a high number of sanctions that were unexpected. So you have much more rainy and oil supply as we sit here. It's early January and the government is currently shutdown. It will Strates these broader policy risks that are societas with the government. I think it just illustrate the economic Impala see uncertainty that is rampant in these markets recently. And you think about what does that impact it impacts long cycle investment, which really brings us back to the commodity story. We're not getting the investment that we need when we start to think on a much longer term basis last year on the podcast. You talked a bit about crypto currencies. And you explain that one angle out there in public was developed cryptos a commodity Ozzy. Lots transpired since then in the crypto market had its own issues in volatility. How do they today's option stack up against other stores value like gold, the big? Takeaway from price action and cryptocurrency last year was the high level of volatility both to the upside into the downside the advantage that gold has is it doesn't have that. Same type of all totally. So if you wanna store a value, you want something that, hey, if I buy it, and I put it in storage and pull it out six months later. It's going to have a value. Your hope a little bit higher than what it was. When you put it in stories of problem with those cryptocurrencies, you have no idea the follow Tilleke is hundreds of percents. Collapsing by fifty percent. We look at gold. It went up five ten percent. And some of those periods that's much more reasonable store about. And I I'm gonna go back to the point that I made a year ago when we think about what is the economic problem that a crypto currency solves. I let's ask what its physical characteristics. Are. It's the very first time, we could take lecture onic. Or digital money off the grid. We've had Lek traffic money for decades. But what was different as you take it off the grid and put it in your pocket and one of those little key-fobs in walkaway. Now, what are the economic reasons you'd wanna do that two fold one to conceal that money from the government or somebody else hide it or to because you have no banking grid in which you could use. So one is for illegal reasons or gray market, like say, the second one is because you don't have a banking system. What regions in the world have banking systems some of the emerging market. So there is a real legitimate reason, but it's relatively small then we look at gold gold is a well established has institutional arrangements has custodial capabilities. We put it all together. Look at gold. It is still an excellent store value. So they said a year ago, we still like gold, you know, like to point out. Then was that last year? Crypto currencies had about five years of trading. His. History to them. Now, they have six gold has three thousand years of trading history. So I'm gonna stick with my gold. Okay. So commodities, and when we talk about commodities oil gets a lot of the attention. But there's obviously some other really important ones. Let's take through some of them. What's your outlook for not gas the line? I liked to use for natural gas is long term surpluses create near-term shortages, why is that very much like the new oil order and the oil story we have excess natural gas due to the shale revolution. There's excess sir. Plus puts down where pressure on long-term prices. We have a long-term surplus out there that just cannot be resolved. You've built a lot of pipelines out of the Marcellus, which is the big producing basin in the northeast these pipes start to come online this year. It's more than adequate to me all of the Ellen g demand the power demand the demand. So we got more than enough gas than we possibly. Need? However, those pipelines are not there yet. So that's why argue long-term surpluses create the near term shortage because prices get too low you create too much demand from like power generation. And then you get caught short like we did in November of last year in prices begin to explode on the front end. But they never moved on the back end in that long-term surplus as we go onto two thousand nineteen more and more of those pipes come online that surplus starts to become reality. And so right now prices are trading around three dollars an M BTU that long-term surplus number is two dollars and seventy five cents. So by the end of this year, we think we'll have arrived at those term surpluses. And that's why our forecast is two dollars and seventy five cents. How about some of the metals copper and aluminum you mentioned, but without like on those I like listeners know that Jake does have a commodity background. Boy. That's right. That's right. Yeah. In terms of aluminum. Mm and copper the story in the metal space is really what we call a value proposition. Prices have dug down to the cost curves across these different markets. Why they were severely impacted by the trade war in terms of thinking about the manufacturing sector in China consumes on the copper side fifty percent of the world's copper. So if you slow down that manufacturing sector, you're going to have a significant impact on copper that. So that pushed prices back down to the cost structure, and we've been bouncing around those levels, and it's July of last year. We're bullish in two thousand and nineteen not because we think you're going to get a resolution to the trade war, but more so from the macro backdrop, we talked about it before you've got a lot of tailwinds to these markets. Let's start with China because it's the largest consumer economic growth is sub six percent. They need to hit those targets at six percent by twenty twenty more likely than not they're gonna. Stimulate which really begins to help the demand from China. So that's one reason. The other reason is you got the fed on pause that creates a weaker dollar environment and for metals dollars really important because then it goes that negative correlation that you referring to very dominant in the medal space. So you get a weaker dollar stronger. China that's where we see. The upside are targets on copper are seven thousand dollars a tonne currently trading around six thousand dollars. So it's one of our stronger views what's something in Mayes market. That's not getting enough attention that you think deserves a little bit more focus. I would argue it's this idea that spot prices solve surpluses forward. Prices solve shortages. We had a commodity Bouma decade ago. We still have a lot of commodity supply out there. Whether it is in places like China shales, we talk about with the new oil order now. Let's go over why you. Need a spot price to solve these problems? When you have a shortage, you need to attract capital to the markets to make investments was the best way to do that lock in the returns. Because then you don't have uncertainty about prices, crushing you, and you're not getting return on in many cases, multibillion dollar investments. So if you need to solve a shortage you turn to forward long-term prices. And what we're seeing in these markets is that more of the activities moving to the spot price, which is consistent with the idea that we have a surplus go back to the idea spot prices solve surpluses long-term contracts are for prices solve shortages, and I wanna talk about it, even in the context of the economic and political uncertainty that you were referring to recently, we can see it in the survey data when you look at the survey data what is declining in the survey day or new orders. What is telling you people are unwilling to commit to forward volumes in so. When you have a lot of uncertainty too much excess supply while happens is you see more and more of the market gravitate to the front end or to spot basis. Now right now, what that does is it creates a very liquid front in physical market, but it starts to discourage the investment and used the term before and four is we have inadequate long cycle investment because so much uncertainty. This is the real story with copper and to a lesser extent. Oil like the big deep water offshore platforms were not getting adequate amount of investment there. Am I really bullish this year? No really bullish next year. Maybe by twenty twenty one it starts to become a much more serious problem since we look out by twenty twenty three or twenty twenty-five you start to create a big hole because of that lack of investment in long-term prices because people have no confidence in the future to make those type of investments, nor are they trading out that far on. Curve in right now. Everything's on bases. So Jeff you've been in and around this industry deep in the industry for decades. Now, what's the thing that you'd say about the commodity market? That's most misunderstood the size of the investor community and commodities. It's always substantially overestimate. When I started these markets, probably when you were back in the aluminum industry, Riveria few investors, in fact, to say there was no hedge funds that traded commodities. Why started in the nineteen nineties? They started to grow in size in the two thousands. When you had a trendy market, even so I'm going to put some numbers around the size of the investor community in these markets when you look at the total open interest of the oil market. Obviously fifty percent of it is on the producer's side, meaning real people who produce oil copper aluminum selling forward commodities, and that's why they were invented actually look at the ridge futures markets. They were the culture markets invented for farmers to hedge front. Yeah. Exactly. So they're fifty percent of the market. The other thirty five percent of the market are going to be consumers consumers like airlines in for metals. And then you're leftover with about fifteen percent of the market that are investors. They're always on the long side mostly on the long. I make that point as to why. When we think about oil, you have these big large entities that can sell oil. But you, and I are the consumers oil at the pump. We're not can hedge. Which is why you have a mismatch. You have a lot more big concentrated producers that can sell but a unconsummated group of consumers. So there you need the investors to fill that gap. They represent about fifteen percent of the market of that fifteen ten of it are what we call passive investors that trade these commodity indices, that's like our pension funds. Heggie? Now, our gasoline price risk and then five percent of the market or the hedge funds. Let's call him active investors, the rest of that group is strategic or passive so only five percent of it. But the point out that five percent represents around seventy five percent of the trading. So they pack a big punch, which is why we focus on them, but they are relatively small. And so if you ask me, a what's the common misperception is that if you read the newspapers, you'd think that the entire commodity market was driven by a bunch of speculators. That's just not the case last question. We just got into the new year. What's one of your New Year's resolutions? Well, I look back. What was the biggest mistake? We made last year. We got hoodwinked by to Optimus -tic sentiment. My resolution in two thousand nineteen is not to get hoodwinked. Again, this time by not negative sentiment. All right. Well, Jeff, thanks for joining the program. Great to have you on. Excellent. Thanks for having me. That concludes this episode of exchanges, Goldman Sachs. Thanks for listening. And we hope you. Join us again next time. Despite cast was recorded on January tenth two thousand nineteen. All price references and market. Forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener, neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting, or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
China's 'Bumpy Deceleration'
"This is exchange. The Goldman Sachs where we discussed developments currently shaping markets industries in the global economy. I'm Jay sewer global head of corporate communications here at the firm. China's economy's been in the news lately as GDP growth in two thousand eighteen was the slowest since nineteen ninety to talk through the drivers of what we might. Call bumpy deceleration is some of the Alice of called it policy tools. Available to cushion the impact trade tensions and much much. More were joined by Andrew Tilton. Goldman Sachs chief Asia contests. Andrew welcome to the program. Thank you. Nice to be here in November of last year. Twenty teen team published an outlook on China, which you predict what you call bumpy deceleration of the economy of China, certainly panning out in light of recent reductions in the growth projections there. What's the magnitude of the slowdown? What's basically driving it? Why think it's confusing to a lot of people because if you look at GDP there hasn't been much of a slowdown GDP. Growth was six point six percent last year. And in the latest data point fourth quarter GDP was six point four year of year. So looking at those numbers, it doesn't seem like there's much of a slowdown. But GP is unusually smooth in China. And so we as have some other analysts have tried to create our own metrics for what's going on in the economy. We use something we call the current activity indicator which rolls up a lot of different monthly economic data to try to get an high frequency estimate for how the economy is doing. If we look at that measure, it's slowed from the first half of last year to our latest reading December. What's driving the slowdown in what sectors in particular are where we seeing deceleration? We're seeing it pretty broadly. And that's a difference. From the last time we had a slowdown in two thousand fifteen we saw cobble slowdown are almost as big of a slowdown. But it was very concentrated in heavy industry. This time we're seeing some effects in investment. We're seeing weaker consumer spending in the last Cup. Month's weaker exports as well. I think there are couple causes for that on the export side. Of course, the trade wars gotten a lot of attention, but global growth is also slowing. So that's been an important reason. Why exports have softened on the internal side? Chinese policymakers spent a lot of two thousand seventeen in early two thousand eighteen trying to address some of the systemic risks in their economy, including heightening policies in a number of areas such as shadow banking trying to constrain of banking and really shrink the so-called shadow banking sector and writing up credit tightening up credit. I mean, they were almost too successful in doing that. And that resulted in tighter credit availability to houses and businesses who are now partly because of that spending less. Amidst all the slowdown where we poised to continue see pretty strong growth in China is still some healthy numbers growth. What's still driving the growth one area where we think will see better growth is infrastructure spending. That's something that's driven by government decis. Reasons, and that's a tool the government uses to try to support the economy, and I wouldn't overstate the weakness in consumer spending. It has slowed, but is still growing at a healthy clip. You still have reasonable household income growth and relatively high levels of household saving. So some of the weakness we're seeing spending is resulting from the tightening in credit availability and the fading out of incentives for things like auto purchases that had been in place in two thousand seventeen so insofar as that slowdown spending driven by government policies tightening. I think it's less worrisome than something that was occurring on its own. The Chinese economy has been growing pretty fast for a long time. Now that's starting to slow. When might we see it? Bottom out. We think we can see it bottom out late first quarter second quarter. I think we still have a few more months of pretty weak activity because we haven't seen a turnaround again going back to the previous framework on the extra aside. Global? Growth hasn't turned around. And we don't have it resolution on the trade tensions yet and domestically. Policymakers of talked about doing a lot of easing. But we haven't actually seen that much yet. We think we'll see easier fiscal policy monetary policy. But as yet the shift has been much smaller than we have seen in past downturns. So you mentioned boosting infrastructure spending. As a tool to get the economy going faster. Again, what other tools might the government deployed to cushion, the low we've been hearing a lot about tax cuts. So that's not been a tool of the government in past downturns to the government tries to spend the money at self. So this in some ways, a more American style, consumer recovery. Yeah. I mean, the advantage of a tax cut is it works fast. If you cut taxes people know that the tax cut is coming for sure they may change their spending behavior fairly quickly the disadvantages. You can't be guaranteed that people will spend it. If they're worried about the outlook. They may just save the money. So you've got a little bit of a trade off between time and potentially effectiveness or as a communist call the multiplier effect of that tax cut. We're likely to see a tax cut. But we don't know exactly when and how big and on the infrastructure side that has been the favored tool in the past. And we think we will see some of that again this time so increased government spending on infrastructure possibly tax cut with more consumer spending. What does that mean for inflation? Inflation inflation has been coming a bit lower, particularly on the producer price side of things. The consumer inflation is moderate right now. And I don't think is a constraint on what policymakers are likely to do at this point in time with growth slowing. And demand pressures. Weakening were not particularly concerned about inflation as being constraint. If anything I think policymakers are probably worried about producer price inflation falling too much that caused a lot of problems back in two thousand fifteen and sixteen because some of the more indebted companies were having trouble servicing their debts. I don't think we're in the same situation today. But that's probably a concern should inflation fall further as the slowdown affected investor appetite for China assets. What asset classes are attracting the most interest? What are people shying away from investor appetite has been muted in the public equity? Markets are all well, I would say foreign investors have been a little bit cautious. Domestic investors have been extremely bearish throughout much of two thousand eighteen in fact, in recent years two thousand eighteen stands out as a situation where domestic investors were significantly more worried about the Chinese outlook than foreigners. It's often been the reverse. And the domestic investors are not to be right in their worries insofar as growth slowed significantly you have seen some signs of a better equity market performance recently. The theme that has been more consistent over the past year has been lower rates. So the bond market has rallied on easier monetary policy and glory global rates as well. Goldman Sachs research hosted a big macro conference in Hong Kong last month. Given all the trends were discussing what was on the minds of the clients there at our conference in Hong Kong clients were pretty conservative in their expectations for equity returns this year, mid high single digit returns, generally thinking Asia would do better than other regions of the world. Most investors had taken on board the idea that the fed would do relatively little maybe one or two rate hikes this year, pretty sanguine about trade. So we asked clients whether they thought the trae ward escalate. Pause or maybe actually there'd be a formal deal a relatively small fraction less than twenty percent of clients felt that there would be further escalated in a trade war. So I think that's an area where things were even more mystic than I expected. So as the president I'd states never ceases to remind US China has very large trade surplus with the United States, which is its largest trading partner. Still. We talk a lot here about the impact in the United States. What's the economic impact of that surplus within China? Well, interesting thing is China has a big surplus with the US as you said and natural his attract a lot of tension from President Trump and others, but it actually doesn't have big surplus overall in fact in recent quarters, it hasn't had a surplus at all. So you've seen a big change from the China of the global financial crisis period import nation, you had a huge surplus to one that's come down in recent years been two to three percent of GDP. But in the early part of two thousand. Eighteen was actually marginally negative. When oil prices were higher, China's an oil importer. So from that perspective, the weakening current account surplus is benefactor that other things equal tend to push the currency in weaker direction. The pattern of trade is such that China runs deficits with a number of other places imports a lot of materials and components from other places that then are assembled in exported. Elsewhere, that's oversimplifying, of course. But in particular, a lot of deficit that the US has with China's really a deficit with other parts of Asia with just being the past China's the pastor not to be clear, the majority of the deficit with China is with China, but a substantial fraction something like third reflects value added from other parts of Asia than combined into a final good in China that goes to the US. Yeah. So obviously, the president to get China's attention and try to resolve this issue. Put tariffs in place as the tariffs affected the con. Emme China would have people expect for the year ahead. The terrorists themselves have been only a part of the reason for the economic slowdown that we've seen last year as I mentioned, we have a lot of tightening domestic policies that drove that. So our estimates of the impact of tariffs on exports, and that effect on GP is really only a few tenths of a percentage point. We don't think that's very large. If anything the effects on uncertainty and suppressing perhaps business investment is businesses. Wait to see what's going to happen. Those might ultimately be bigger than the impact on exports the effect. So far are pretty manageable in the sense that China's currency depreciated about five percents a trade way to basis a bit more versus the dollar last year. If you think about that that almost offsets the ten percent tariff bracket that the US put on two hundred billion of Chinese imports to the US. It's only twenty five percent tariff that went on fifty billion of Chinese goods. That's really not been offset thus far. So I think it's manageable. But there's a lot of concern about what would happen should those tariffs. Ascoli does the pressure on China beyond trade or some of the key risks or opportunities that conference attendees were focused on regarding China? I think there's a huge attention on Chinese policy. How much stimulus is going to come and win our take that at the moment. The risk is that perhaps stimulus is a little smaller and later than it has been in the past or the markets expect. So that's a risk in terms of growth on the downside. I think markets are sniffing out the possibility that we do get stimulus, and if we get a more comprehensive resolution on the trade tensions than that's a potential upside risk not so much for the first or second quarter in terms of the economy, but maybe for later in the year. Stepping back a bit from the economy at this point in time. Chinese policy makers have been very focused over the past real decade, or so at least shifting the composition of their Konomi to something that might be more sustainable in the long term and moving away from big capital spending on infrastructure projects in the like, two more consumer driven economy like you see in Europe and the United States give us a well they've done and what remains to be accomplished. I think there's a lot still ahead on making that transition. I think it's fair to say that many analysts were hoping for a faster transition in. This regard on the one hand, we do see some signs of change policy makers of talked about not wanting to over stimulate the economy with infrastructure spending and borrowing, but on the other hand in the current downturn looks like they're resort to at least a little bit of that the easy poll. It's an easy lever to pull and another key goal of the leadership is. China's advance technologically. They want to see strong and sustainable growth, and they want to achieve technological parody or leadership, relative the United States in a number of different sectors. And that probably is going to require more private sector involvement more innovation, but at the same time, the thirties still want to maintain a strong state sector that still seems to be something that's important to them that in more sensitive areas of the economy. They want strong state on enterprises and enterprises that many cases can compete abroad. So I think in some cases there tensions between those different goals and tensions that haven't been fully resolved. Let's talk about one specific area where there's been a lot of coverage here in the United States presume. Elsewhere. There's a lot of talk about the race on artificial intelligence in the United States that's primarily private sector initiative with lots of companies investing in in China. It has a private sector component. But the state is very. Focused on leadership there any rate those two models today, especially the space people talk about the vantage is the Chinese system is maybe it's more than the system. It's just a large population. First of all. So there's more data a lot of bigger data bigger data, and the government is willing to provide that data to companies that can use in process, for example, for a nationwide facial recognition system for use by law enforcement state security. There are many more faces to analyze and those are available to public and private companies who want to do work in that area. So from that perspective bigger data sets, maybe fewer privacy related restrictions. It's a place where you have more to work with and that's one potential vantage operating, China, another is that the state does provide support and funding in different ways for enterprises in that space. It's a goal of top leadership and therefore for companies that need or want to acquire sensitive technology or. Search those are things to the government tries to support one key component for sustainable growth, and long-term more vibrant, capital markets and China's a lot to modernize its capital markets and a lot of attention on the connections in the equity markets. But there's recently been some changes in terms of fixed income markets, which are typically bigger, but get less. Attention talk a little bit about the volition of the fixed income markets in China. Well, we had a seminal event this week, which is that China's included in the Bloomberg aggregate index the largest global bond market indices with well, an excess of trillion in close to two trillion of assets under management following that broader index. So that index will now include China at gradually increasing weight over the next twenty months starting April that is a major event for global bond markets here, you have one of the largest bond markets in the world in China that wasn't formally included in these global indices that is not as correlated or historic. Weekly with them that will be huge destination for global capital companies investors willing to learn more about the Chinese bond market, you'll see capital inflows into China, which is important for policymakers at a time when the current accounts are pluses roading capital inflows from bonds will help support the currency and limit the depreciation pressure. So I think this is a major event and you'll probably see moves by the other bond indices and the relatively near future to include China, we expect we're taping this right around the Chinese New Year, and what happens after the new year of years, the Chinese government officials get together and sort of set policy for the your head. What should we be looking for out of policymakers in China as we head into March? I think this'll be a particularly interesting so called two sessions meetings. This is so named because they're the National People's Congress and the Chinese People's Political consultation committee. I think I got that right that occur each March important political meetings where leader. Meet in Beijing and often make announcements with respect to policy. They announced the policy targets, for example, the GDP growth target for the year and also lay out more detail in terms of policies in specific sectors. And so given that we're looking for more economic stimulus this year, the form and size of that stimulus will probably become clear, then if it doesn't before then so I think this meetings this year will be particularly important. So we talked quite a bit about the economy in China and its impact in the United States. But the Chinese economy is a massive factor for other economies in Asia. So the trade tension between the US and China has it play out for the rest of Asia. And what are the things we ought to be looking at them thinking about I think they're big swings in intact band. Other parts of Asia, depending on how trade tensions play out one thing to say for starters that Chinese growth itself is important for the rest of Asia. We find that. Depending on the economy. A one percentage point slowdown in China could mean somewhere between a zero point one zero point three percent slowdown. Elsewhere. So there's meaningful sensitivity to China around the region, particularly for the smaller open economies that have more exposure to global trade. But then how the US and China resolve their trade tangible, be important say China agrees to buy significantly more US agricultural and energy, and perhaps manufactured goods, maybe even semiconductors. Well, there's some important semiconductor manufacturers in Asia. So to the extent that that demand shifts to the US that displaces potential demand for elsewhere in the region. So cozy memory would be Correa microprocessors could be Taiwan. So those would be places that would be affected energy could potentially affect places like Malaysia, you must Rilya. So there could be spillover effects from China. Agreeing to buy a lot more US exports because China doesn't need more than it's buying now. So if it agrees to buy substantially more of that it has to come from somewhere, we had your colleague Tim O on podcast last year. He also lives in Hong Kong westmis- favorite thing about New York. So we have to ask you this. Well, what are you most look forward to when you're here in New York getting to do? Well, I worked on a US economics team for nine years. So I lived here for nine years. So for me it seeing friends that I haven't seen for a while going back to my old neighborhood in Brooklyn and eating good food. Awesome. Thanks for joining us today. Andrew, thank you. That concludes this episode of exchanges, Goldman Sachs. Thanks for listening. And we hope you can join us again next. This podcast was recorded on February first two thousand nineteen. All price references and market. Forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener, neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting, or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
How Automated Robots are Supporting the Surge in E-commerce
"Mrs Exchanges, Goldman Sachs I e Stereo Goldman Sachs Research, welcome to another episode of our Venture Capital Horizon Series where we use the lens of venture capital to identify emerging technologies, business, models and entrepreneurs and our last episode we looked at clean energy and the advances in sustainable nuclear power and this episode. We're going to die into the future of ECOMMERCE and the adoption of robotics in everything from manufacturing to packaging delivered. It's no surprise given the current challenges, Krona virus people are buying online more than our growth of e-commerce has skyrocketed from eighteen percent in February, two ninety three percent in May, looking ahead as social distancing and safety concerns remain in place. We may be approaching A. A holiday season where crowded malls and fitting rooms are at thing of the past while Amazon with roughly forty percent share, any is dominating space. It's clear their capacity has been stretched beyond its limits. Over the past few months we saw Amazon holding back shipments non essential items of trying to hire them without under thousand new workers, something made even more difficult by the need to socially distance in warehouses, but new generations of affordable advanced commercial robots are helping to solve for that according to market research firm API research more than fifty thousand warehouses worldwide will include commercial robotics by twenty twenty five something that's only going to be accelerated by the environment with that backdrop. We spoke Democrat. venture capital firm insight partners who has invested in numerous the commerce companies, as well as some of the most successful Internet and software on peace in the world, including Alibaba and twitter is someone who's obviously been very close to the category invested deeply ended over the over the years. How would you describe the state of E-commerce I'll speak from my personal experience order from Amazon in the middle of March was not a good experience. I had lots of things. Things took two weeks three weeks four weeks. Your show up where you could actually go walmart or target or other places, and yet that product, a lot faster unprecedented situation and unprecedented time. So you know certainly Amazon dot a pass. My point is that I think it's a situation where many of the offline companies are going to really have become better competitors over this period of time. How do you think about the enablement side of ecommerce whether it's the? The software marketplace component of that, or maybe more importantly when it comes to process complexity, the logistics warehousing, the robotics investments that are being made especially you know thinking about all of the needs for labor and warehouses, and how those are changing in a coed environment. Suddenly robotics may be gets even more interesting. How does that enablement piece sort of factor into the way that you're thinking about opportunities in commerce I can tell you that every scale e commerce. Commerce company is looking at robotics is going to have to look a robotics. Well, it's not just robotics automation right so robotic system that pick and pack, and in some cases that's actually it's fine for Amazon Amazon scale, but for lots of companies like it's not economic use robotics for picking pack like you're actually easier to use humans for picking back in certain categories depending on the size of company, although that may be changing, but what whereas about eight? Be Covert is. Forcing right meeting that it's actually hard to have high density in a warehouse right now and might be for you. Know might be the foreseeable future to hear how covert is accelerating the adoption of robotics and hoping Saul. Some of Lebron's shortages across fulfillment. We spoke to Melanie. Wise the CEO of fetch robotics of venture backed private company building robots used to automate ECOMMERCE warehouses like Amazon's or Walmart's if he look at the logistics industry before the. The pandemic there was a large labor shortage. There were about six hundred thousand jobs available in the logistics manufacturing industry, and they were being filled now today with the pandemic. We have some artificial creation of that because you can only have so many people on shift at a time slur still suffering from labor shortage, because they can't put more people in the building, social distancing and other factors that limit their capacity has people in the building. And so the way we looked at solving that problem, pre pandemic, and how we solve it today with the pandemic is by supplementing that Labor with more efficiency tools like a tom small robots until we help move things from point a to point b within a facility, so person doesn't have to so melanie. We've obviously seen the last few months of this pandemic this incredible. Incredible explosion in demand for ECOMMERCE and delivery at home, and obviously it's coming in. Even you know with all kinds of challenges. Were companies trying to do film? How have you seen that impact your business here in the the immediate are I. Guess maybe longer term you know. How's it impacting the way that you're thinking strategically about the future for four fetch or seeing? Seeing a lot of big business from segments have been stimulated by the pandemic and specifically work from home. So that's in anything that's related to work from home pet care shopping at home work from home supplies, like like tra-, Knicks, laptops, things, and then a lot of the more staples for things like a pandemic medical suppliers, since that they're also growing and fetches being gauged. Gauged with those but one of the new things that it's definitely shifted some of our focuses. We tried a lot of inbound around disinfection, and we've been working with a lot of partners in the last three months to get disinfection products of the ground, and so we've been developing some new features in our software to help support. The pandemic law liked contact tracing social. Social distancing tools for you know looking at where the robots can do short runs, things like that new in easier ways to make the system more flexible for the day to day changes that have to happen due to staffing changes new cleaning schedules how we introduce cleaning. Robots are disinfection robots tear existing customer sites to make them effective, so a lot of it is around. Around that obviously whenever you talk about robotics conjures up a lot of different images in people's mind. What does that really mean for fetch? Yes, so if you look at our customer base their predominantly in two verticals fulfillment on shell film e Commerce fulfillment in manufacturing so today fetch makes three autonomous mobile robots are a marsh. They can move goods from anything from hundred. Hundred kilograms to five hundred kilograms to fifteen hundred kilograms, so that's like a tube of toothpaste to apologize toothpaste. And when you look at what happens in most of these facilities, they're moving goods to be operated on. That could be in the case of fulfillment that's picking it off the shelf and putting it into a box in the case of manufacturing. That's a raw. Raw good like not a revolt or an engine block or parts dishwasher in bringing that to an assembly line to then be assembled, and sometimes we ended up moving the whole finish, good like a dishwasher across a facility, and so we use the robots to do that. And before the pandemic we were predominantly. Doing very long runs so several hundred feet that took people. To go walk those distances, so they could focus on doing assembly tasks or boxing, or some kind of quality inspection today with the pandemic shifted a little bit. Now we take over most of the movement, even movement between short movements between stations, so people don't have to interact with each other, so that's something that we saw very quickly after the shelter in place, orders happened a lot of our customers change with the robots were doing to reflect some of the new policies that had to be put in place and so autonomous mobile robots have am ours have been at work in factories and warehouses for a long time including yours Amazon alone. Alone reportedly has over two hundred thousand in their fulfillment centers. When you look at the cutting edge of where the technology is where it's going the advancements that you're making, how would you describe it? Yeah, so I guess one thing I. Going to put out. There is is so the types of robots that Amazon actually uses. They're not marsh. They're ag, vs so they follow guidance on the floor, so ATV stands for automated guided vehicles, so it has something on the floor or in the environment that it's guided by. They have little stickers on the ground, and yet they do have two or three hundred thousand of those vehicles doing delivery. And so if you look at it, age DVD's came into the scene in the nineteen eighties, and those vehicles were predominantly guided by things in the environment. You saw them in car. Manufacturing plants. You see the mini commercial filming, if become pretty prevalent, one of the challenges with that technology does it wasn't as flexible and so, but one of the limitations before two thousand, two thousand five was. We didn't have the complication power to do a lot of the things that we wanted to do with the tournaments, mobile robots, and around two thousand, ten, thousand fifteen. Fifteen you started seeing more and more companies being able to produce these autonomous moral, so am Mars have been around since around two thousand twelve I, know it still is a long time, but it's a little bit different than nineteen eighty and I. Think the thing is that if you look at it, robotics, it takes decades to have an overnight success in the robotics technology and I think that that's that's. It's kind of hard for people to understand how long it takes for the technology to evolve. We're still running on the machines that we have today. That were basically thought up in the early two thousands in the late nineteen ninety s so the technology moves very slowly, but the technology is evolving. It's definitely driving progress, but I would say that the biggest thing that I think has helped with Thomas Mobile robots in general is the ability to create a cloud platform. So that's one of the things that fetch does is we use the cloud to basically deploy so the coordination and the fleet management? Aspects of the robots are done in the cloud. The robots are still autonomous units, but there's this partnership between the cloud in the robot. So you know people talk about the fog where there's edge, computing will robots or basically the edge. In some and so but I would say that it's getting there, but I don't think you'll hit like a certain ubiquitous nece in the technology that we're deploying today. Probably for five to ten years for just takes out long for the technology ramp to happen in our space. We also asked Melanie about the technology rap, or one of the most highly anticipated use cases robotics in the ECOMMERCE speights autonomous delivered. There's a lot of applications for robotics outside of the warehouse You know one of those that we've seen. A lot of effort made is around solving the last mile model whether it's through autonomous delivery, drones or on the. The ground robots that are working within ECOMMERCE entries sort of how you see robotics as a solution for that problem, it's difficult. Outside is pretty hard I think that when you look in the robotic space, we talk about going from structured environments which are easy to completely unstructured environments, which are very very very hard, so structured environments would be a large empty space with nothing moving typically your standard research lab semi structured environments are things like warehouses where they have a lot of fixed infrastructure, the people in those facilities are trained and they have a specific job. They're going to do now less structured environments like grocery stores retail. That's. That's when you start blending into unstructured. The facilities look the same. The infrastructure is there, but the participants are less trained. They have different agendas. They have different social norms like if you look at some of the roads have been deployed in grocery stores, children run up to the robots in hugged him. That's actually pretty difficult situation for the robot. Now as you get further and further away from buildings and into the outdoors, it gets far far more unstructured, and those are very very very difficult problems to solve you. Look at it, you. Have you know lots of participants? You have lots of different things moving at lots of different. Different speeds especially for on the sidewalk delivery vehicles. They may have to cross the street where cars are. They're very low to the ground the her to see people like to play with them. People like take pictures with them. I would say that ground-based vehicles have a lot of challenges unless they use the roadways because the roadways create some norms, and that's why I think. Some of the more promising delivery vehicles are ones that are smaller versions of cars that only deliver groceries inside of them because they're using the infrastructure that was built for road transport men. They're not taking over a public sidewalk, but we'll see one of. Of the companies building autonomous delivery vehicles for last mile delivery is neuro dot AI. We spoke today Ferguson. Company's Chief Operating Officer Tech Interact Conference earlier this year. Hear more about the opportunity for autonomous delivered. Where are you now in terms of being able to deliver autonomously? You've got this partnership that you recently announced with Walmart. How far away are we from seeing something like that? You know really out live in the wild today. The US retail market, the consumer retail market is around six trillion dollars only eleven. percent of that is e commerce right so as big as Amazon is and as impressive as a company is Amazon is. Is We're still only talking about eleven percent of retail congress in the wrist. The other eighty nine percent is still performed locally in person and in the US that typically means you get in the car. You drive to your local shops. You buy stuff and you come back what we're trying to do it. Neuro is to replace all of those trips by delivering things to people on demand and making it both bad her. In terms of time, also safety efficiency, the effort required in terms of the technology on this software solving many of the same problems as general passenger transportation I think where we see there being a significant advantage. Advantage for transporting goods instead of people is I like to use the example of detecting a brick in the middle of the road to explain it, so the reason why solving self-driving full passenger transportation is so hard is that your system basically has to be perfect? You have to detect that break every single time because you can't afford to run into a brick in the middle of the road for us. We want to be the safest vehicle out on the roads because we should be able to. We don't have people inside, and frankly we don't care nearly as much about the eggs that are inside the vehicle as we do. Do about the kids playing in the road, so we want to be more conservative. We want our vehicle to effectively self sacrifice, so that it can favor the safety of what's outside the vehicle rather than what's inside interested, and so from a technical perspective. We leverage all of that as we're designing our system, we still have to take traffic lights. We still have to detect other vehicles, so the feature said is very similar to General self-driving, but we're able to really really bias towards safety, so that we can produce both a much safer overall system, and we can solve the entire tech challenge as a whole much much faster. We're focused on goods transportation because we see it as a trillion dollar opportunity that we can really go scale and capture. However I think there's actually a pretty strong argument to be made that by doing, so we're going to end up having a much larger fleet vehicles that's out there, actually profitably operating in the world and with that fleet. We then get an. An order of magnitude more data, and that enables us to solve the entire passenger self-driving problem as well. That's not sort of a core goal of ours but I. DO think that we're gonNA. See An acceleration in in terms of solving the general problem by the more vehicles that we get out there being capable so while growing number retailers and shipping companies. Companies are adding robotic technologies to increase productivity during these challenging times, Melanie says the future of robotics in everything from warehouses to delivery, and even in the home will be dependent on the ability to bring down the overall technology, so it is someone who has spent her career in robotics. Where do you see the field going? You've seen nearly twenty years of. Of Progress what are the next twenty years looked like yeah I would say. The next twenty years is really around the expansion of practical applications of this technology. You know I would say that. Until two thousand ten, it was pretty hard to deploy robotics technology outside of very rigid industrial applications right now we're entering the next phase of collaborative robots and it. It took us about sixty years to get through the industrial robot phase now in the collaborative robot phase so I really think that the next twenty thirty years is going to be really the expansion of the collaborative robot phase. I think near the middle of that, so the next ten to fifteen years we might might see the beginnings of some home robot. Robot applications beyond vacuum cleaning robots robots that have the ability to manipulate the environment, but it's hard because the components sensors that we need to make the technology work are pretty expensive. Hard make I mean. If someone suddenly came up tomorrow with the reality censor robotics would have a very different time line in execution model, but until we have this magical sensor. Sensor that can measure all of reality. It's very expensive to build robots and to make technology at the price point that people are looking for. You know it's important to remember that a cell phone cost. Two thousand dollars and the cell phone doesn't have any actuation in other than a vibrating motor, and the problem is is that there's a big disconnect because. Because if you go and you say to someone, I'll give you a robot that a clean your house and folder laundry and you ask them how much they think it should cost. They're gonNA say thousand dollars, but today. If you WANNA lift a gallon of milk cost about thirty thousand dollars, and so there's gotTa. We've got a pretty. Long Bridge to cross. To do that all costs, maybe a challenge. Dave Ferguson believes that transformation is imminent. If you look back in the last thirty years at how life has changed. Say That from the digital. Perspective we've seen unbelievable transformation. Right smartphones the Internet. And everything that has enabled, but if you look if you think about the physical world with mobility, being a piece of that. Things haven't really changed that much the chairs. You're sitting on the table that just sitting behind. Might be slightly different, but fundamentally not much has changed in the physical world in the last thirty years. If you fast forward from today, another twenty to thirty years, I think. We're GONNA see. Dick Drastic change that concludes this latest episode of Exchanges I WanNa, thank Devon Correct Melanie wise. Day Ferguson for joining us. Be sure to tune in at the end of this week for exchanges, market update or Goldman Sachs experts share their perspective on the weeks developments. We hope you enjoyed today's podcast, and if you did please subscribe on spotify or apple, bats and rate us on Apple, podcast I'll join you next month with another episode of couple -rises until then I'm sorry. Thanks for listening to. All price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part, the information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener neither Goldman, Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements, or any information contained in this podcast and any liability, therefore including in respect. Respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting tax, advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman. Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.
What's Next For Emerging Markets?
"This is exchange. Goldman Sachs where we discussed developments currently shaping markets industries in the global economy of Jake Siewert global head of corporate communications here at the firm today were in the London office of Goldman Sachs, and we're joined by Kevin daily who's the co head of central and eastern Europe Middle East and Africa or Samir, I'm going to call it economics within global macro research. And that's our focus today. Samir from what's been driving, the weakness in these emerging markets when conditions will likely to bottom out, and what's next for growth and inflation. Kevin welcome to the program. Thank you very much. So Kevin we'll get to this Amir region specifically a bit later on. But let's start with the big picture on merging markets last year. Twenty team was pretty tough year for emerging market economies for the markets as well. Why do you think that was the case for us? There's four fighters that drove the slowdown in the economies last year. The first. I was the slowdown in growth in developed economies monitors crucially for external demand free answer EM's export a lot of goods and services to developed economy. So in developed economies slow than has a negative impact on the m not certainly happened last year. The second is that there was a big titan. Global and EM financial conditions driven by a reappraisal of US rate prospects. So when people expect higher US rates and higher developed economy rates general that tends to set the funding availability for EM economies. So that tightening US conditioned in particular had an important negative drag through the course of two thousand eighteen on the m economies. The third factories oil prices, you saw big rise in prices through the course of two thousand eighteen at least by thirty percent to the period talk Tober that has a big impact on consumer -bility suspended in particular. Household finances and lost the tiresome the risk of a trade this cloud that. Hung over EM growth increasingly through the air and still hangs over growth to some degree. Now. Those were the key for factors shaping performance PM economies last year. How do you see things developing right now the picture shifted so much? Yeah. I think it has much as you think of those folks in particular on the tightening and financial conditions that's gone into reverse pretty much. There's been a big reappraisal of US rate prospects that has led to easier monetary policy prospects, globally and on the back of that stronger equity prices. So there's been res enough can put it that way and lower financial conditions. Secondly, oil prices have fallen from that mid-october peak fire around twenty five percent. Even though there is a little bit recently. They're still twenty five percent lower. So with the reversal of at least two of the factors that drove the slowdown last year. We think there's going to be a stabilization in global neom growth this year and subsequently a recovery. Although they'll be like. Via gradual Korean view, given that Wendy you think emerging market financial conditions will bottom out for have. They bottomed out this almost like a ripple effect from the US of these things you've seen the fetish change direction in terms of its project tightening US yields of full in the now, you're seeing other central banks around the world respond to them the tone of the easy. Be for instance, in Europe has turned easier. But you're seeing it from other EM central banks now as well as that's contributed to knees infant, I'm Barry mind, is that we've had the best year in beginning of global equities start this year that in any year since nineteen Ninety-one so that is contributing to Unongo, easy and both global unemployment conditions. What's the evidence of stabilization in emerging markets as you look across the broad set of data. I suppose good thing is not just our forecasting tools. That are telling us we expect to see some stabilization than recovery him growth. You're actually now already seen it in the data less folk. Could I on outside of China? So EM excluding China you've seen from around September October onwards, roughly one percent annualized increase in growth rates measured by our current activity indicator. So the has been already beginnings of recovery from the lows posted in September Tober last year in China is more tentative coming through. But we are seeing the beginnings of that as well. So there is some evidence in the m Dato of recovery you mentioned that the emerging market fixed income markets and been benefiting from a more dovish tone out of the US fed also low inflation somewhat softer global growth backdrop will those conditions continue. And what can we expect from imbalance? We think that will there's two elements to that one is weather mantra policy in the US and other developed economies provides an easy back. Satisfy compare that way four EM economies. And I think that is more the case now than it wasn't two thousand eighteen but. Second and more fundamentally is how does inflation these economies perform nonce where we think inflation will be pretty low in these economies. Why? Because as unlike a lot of DM economies, you have a lot of spare capacity. So there's still a lot of unused resources, and that will tend to depress inflationary pressures going forward and second you've had this fall in oil price will contribute to lower headline placement. Bear in in the m economies they tend to consume a lot of petrol and oil within their output. So actually that has a commensurate bigger affect in their inflation rates than it does in developed economies. Let's get back to China specifically excluded before talk about the role of China. And all this. We were recently on this podcast talking about China's bumpy deceleration factors that are driving the slowdown there. And just recently, it was announced that China's A-Shares we're gonna increase as share of the global index which should be a positive force for that market. What does that all mean for investors that are focused on EM and China, particularly? Until very recently. The news has been more negative and China Andrew Tilton and his team focused. Lot of not as you've seen activity in China fall below six percent annualized on our CIA. That's really very weak level context of Chinese growth and has been a level which historically had prompted quite a significant response from the authorities there in terms of easier monetary and fiscal policy initially that response appeared to be delayed. Their more circumspect about easing in that way today than they were in the past. But more recently, you have had evidence of them easing and financial markets have responded to that very positively. What's more is that you are also seeing now the first signs of recovery and Chinese data where that recovery really began to be seen in September October of last year for most hymns, it is only really begun to be seen the last month or two China. When you look ahead were some of the key upcoming events for investors in this space in emerging markets. Within the Samir spaces quite a lot of political events. In the coming months. We have elections in South Africa in may, which will represent a key point where the relatively new rung, foes regime, if they succeed as we expecting getting through those elections will be free or perhaps to implement reforms, and they have been up until now we have elections coming up in Israel. I she earlier than that at the beginning of eight bull, which still very uncertain. We have also elections in Turkey local elections, which are key focus for that market. And also the European elections in central eastern Europe, which are seen as being a key barometer of the performance of populism in these means, let's get to Samir your especially focused on that's base once again, central and eastern Europe Middle Eastern Africa. That's that's experienced slower growth against backdrop of slow growth in the continent. More broadly. But also some shocks in Turkey where we now in. The growth trajectory of that region. You're absolutely right. Jake. In addition to the global headwinds that we talked about these four factors of slower DM growth, tighter, financial conditions, higher oil, prices and Thompson, the risk of a trade war within Samir. There were additional shocks for Turkey specifically because you know, it had a very fragile balance of payments situation reflecting many years of overheating economy. Those imbalances really in this tougher environment were exposed, and so you had the Turkish lira fell twenty five to thirty percent at one point two in the course of the air on our four cuss. We expect the recovery and Turkey to be very slow. This is a balance sheet recession which will be unwound in our minds relatively slowly. But nevertheless, we do seem to be passed. The worst point of Turkish Grosso looking out the outlook for Samir's a whole thing that will contribute positively going forward when we look around the world post financial crisis. We really just haven't seen much inflation in. Economy's or in most emerging economy. What's driving week inflation emerging economies in the longer span of time? I one of the big changes taking place in the wind bastards are looking at it so much more than in the past there really grown us markets relative to ten and twenty years ago is you've seen this big increase in inflation targeting credibility over time. A lot of the reforms that you saw into valid economies took place in the early nineties into the two thousands have with the light begun to be introduced the economy's. Well, you have more independent central banks more credible fiscal policy and without over time. You have seen a convergence in inflation rates in the m economies down to DM levels. And this process of convergence has been underway for period now of twenty thirty years. It was very long term process overlain that process on or more short term cyclical basis. You'll have a lot of spare capacity in these colonies, which is helping on. A cyclical short-term basis drive inflation lower at the moment. And that's why we believe that inflation in some of these high yielders Africa Russia and also Turkey, we think inflation will for quite sharply this year. Let's talk about other policy levers what fiscal and monetary policy. Levers government's pulling to try to get growth back up. It's important the constraints in that area on monetary policy. We think that actually amongst all each of the high yield that I mentioned Samir. So we do expect easier monetary policy over time and in South Africa in Russia in Turkey, but in Turkey, not really until the second off this year, onwards. So we'd expect easier monetary policy in these colonies in terms of fiscal policy. I think the biggest change is we expect to take place in Russia in recent years, a lot of the policy initiatives have been to try and protect insulate the economy from the volatility of oil prices and financial market conditions that delivering process now peers to be compl. Fleet and fiscal policy look likely to play a more important role in driving growth, positively in the future getting back to Turkey. Obviously the economy there suffered use sketched that some of the scenarios, do you believe the sharpest part of the downturns already occurred in our central scenario. We do you seen inflation has begun to fold the exchange rate stabilized actually recovered a bit from the lows in Q three of last year. Inflation rates are falling quite sharply. However Turkey is still in the midst of a very painful adjustment process. The worst part of the downturn took place in our minds in Q three in Q four of last year. But it's going to be a pretty slow, and sluggish recovery going forward the reason being is that they're still a lot of accumulated balance-sheet adjustments in the banking sector Turkey in particular that need to be worked out over time. Even in a positive scenario that is likely to act as a drag on growth for a prolonged period. But there are more negative. Outcomes as well. If for instance, we had tighter financial conditions and barn, which is our expectations global going forward. But if that were to happen in the future, then actually that balance sheet adjustment could become more painful again for Turkey. So we see a slow recovery with still the risk of worse outcomes in that as well looking beyond the short-term, the current cyclical weakness in these comedies. What's your medium term view for the region for growth and inflation in countries pretty positive on the whole these economies last few years of how to deal with some issues that we talked about last year as well that have negatively affected growth on a cyclical basin. And for our mind, I think too many unless out there and investors have inferred the long-term performance from the recent underperformance, whereas in our mind, this still a lot of productivity convergence that these economies can exhibit. And in most cases, demographic situation looks significantly more positive than DM economies. So for us. These still convergence stories which hold the prospect of much strong growth on average than DM economies. And also, then the recent past so we're posed for the long-term another country like to discuss specifically Poland Goldman's, obviously been a big believer in the market we've invested there. And now the big office Moore saw what is the polish economy? Look like in this environment that we've discussed polish economy has been a great success story in recent years, the economies of central eastern European economies. It has been a fantastic convergence story that is really benefited from me you membership. You've seen significant inward investment into these economies include him from Goldman Sachs as well that has helped to raise productivity levels quite significantly within Poland. And in the near term prospects. Are are quite good is quite a big fiscal easings of budgets raising in the last couple of years. More Tacoma's we head into the elections this year as well on households. Spending his benefiting and Poland from them. And what's interesting about it is that despite the evidence of weak growth in the euro area recently, polish communists, continued form bring well, Kevin you join the firm in two thousand one he researches always gone, I'll have attention and praise over decade ago. You were to interesting piece about a topic. Still get a lot of interest today if not more so those paper called gender inequality growth in global aging talk about that paper what you wrote about then. And compared to today's environment, particularly gender the paper. Did it contained three main innovations? One was it derived a simple yet? Hopefully in shoot of means of estimating. What is the impact of gender inequality on economic output? We showed specifically that closing the gap between male and female employment rates would boost US GDP by around ten percent euro area TDP by as much as thirteen percent and Japanese DP by sixteen percents. Really quantifying. Not only does inequality of crucially important social fakes Bernie big economic affects which we could quantify second. We showed that contrary to the popular perception, increasing female employment rates tend to increase rather than decrease fertilizer C rates, not so counter intuitive conclusion, but the launch with it and certain clear in the data. But the intuition is in countries where women are sensually forced to choose between either having children or working they tend to do less of both. So it tends to hurt. Both for Tila ty- rates and employment rates in those economies. And actually if you do things like improve access to childcare in change tax incentives and so forth to encourage him at work, then you seem both rise in female employment and rise for Tilleke. So that it addresses not only the problems of gender inequality, but also dresses, the issues of long-term demographics and. Pension sustainability as well. The last innovational of the piece was that we used age Pacific employment rates to forecast how these issues of gender inequality were like to evolve over time. The insight being that observe of big wage got a big gender employment gaps in older age cohorts, they may not necessarily be as big in younger age cohorts. And if we look forward and project as that aging process takes place, we can have a view of how that gender gap is likely to evolve and it looked especially positive for Europe. And we have actually seen quite a big rise in female employment in Europe over the last ten years. How about the rest of economy of you done a deep dive in these topics? Yeah. Not something I need to revisit in detail soon. But what we tend to find is that actually Europe has made a lot of progress where there's still a huge amount of progresses now in the congress. That amount covers that EM economies tend to be poorly lacking relative to developed colonies in. On issues of gender inequalities. They have a lot of progress to be made there, but also with the potential for significant economic benefits from that progress. All right, Kevin. I look forward to reading the second addition. Thanks so much for joining us today. Thank you. That concludes this episode of exchanges, Goldman Sachs. Thanks for listening. And we hope you join us again next time. This podcast was recorded on March. Sixth two thousand nineteen all price references and market. Forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener, neither Goldman Sachs, nor any of its Phillies makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability therefore, including in respect of direct indirect or consequential loss or damage is expressly disclaimed the views expressed in this podcast or not necessarily those of Goldman Sachs. And Goldman Sachs is not providing any financial economic legal accounting, or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.
Markets Update: Investors Assess U.S.-China Risks
"Welcome to our exchange Goldman Sachs Markets Update from Friday may twenty nine between we check in with the leader across the firm to get their take on what watch in markets jade suitable head of corporate communications here affirm and today's guest is micro salve. Uncle will markets division. We might go back on February and things have certainly changed a little bit since then back to the program. Michael thanks to have me. So what's he talk show in markets? You're watching this week the escalation in. Us China tensions a front and Center for clients at trading this a one go through the headlines here but this clue even tensions in in US pension. Allocations in recent weeks has been in exchange listing. Is there's been concerns over China feeling? This is one trade deal and this is obviously escalate to the point. Where you know today the last couple of days the. Us State Department no longer considers Hong Kong have enough autonomy under Chinese rule. And that's just as China pastas. The national security will which is going to have some clear with the Hong Kong so tying it into markets. This pockets awakeness around. But we've seen Klein's generally compartmentalize the the US China Trade Astronomers SIPHO. There's still a glass half full approach to generic risk asset pricing. I would say that this week. We've seen a step change in focus from clients on the US. China issue a lot of concern that this issue could unravel that performance. She had a so. We have a lot of clients looking at cross asset hedges either to protect themselves or to adults in terms of mock. It's a modest amount of risk premium pressed into China. But I think it's not a nationality to work. What was saying this week in general over the past couple of weeks but I think the popular resistance from here is clearly further escalation so we think more risk premium can be built into Chinese assets for example the Chinese one forward markets are only pricing about one percent of weakness of the next six months. So we think that's quite. Aloha for example is entirely Selva. Currency outright was seeing clients put on cheap limited las structures them benefit from a controlled. Cnn weakness and protect our clients. But it's in line of view. Pbc over People's Bank of China will not allow a rapid evaluation just a strategic rates on the Taiwan front with saying plenty of shorts in the Taiwan. Dullah these popular fidgets domestic reasons and US. China reasons the market that surprising the Taiwan Dole to strengthen over the next six months despite the current issues. And it's had a lot of sensitivity to China in the pause and And finally we're just seeing a lot of interest in in other proxies like for example shorting models selling the villages to just to protect themselves against these issues so Michael beyond us. China would have some other factors that clients and focused on right now shaw outside the US. Yukos's been a major theme for the past month like not only has the US Flooded with Negative rights in the front end. But we saying pressuring I longer yields to just breaking it down in the in the front end we're having discussions of clients on how this is going to be different to other cycles of the. Fed's going to be more confident. This sock woods keeping the front end of the rights ca pin through various types of forward guidance and generally is not lifting off until inflation in a close that targets especially Previous cycles fed leadership now publicly discussing Yuka control as well which could further pin yields in the FRONTON and just strategically speaking. We think it's just going to be tough for them to take negative yields off the table. I think you've got to bear in mind that took the Fed seven years the hack after that loss in two thousand eight so if we have some confidence that high probabilities a very low. The next two three four years. It's not a wild stretch to see negative rights cross materializing the next year or two we run into issues and then just moving out. You'll have a little bit that the low of Longa front-end actually feeds into a steep. A yoga feather out so the the Fed keeps short that it yields lower lower than they usually would impress. This helps generate inflation and eventually the normalized writes at a at a faster pace down. The track city combined Miss Setup with a massive step up in net supply of treasury bonds. You've got very compressed. Inflation expectations feather out the crib. And you've got conditions that are along yields to rise mole than short end yields over the medium term and another point within this that break even on mock imply. Inflation is actually extremely low. Amendments helping clients navigate that opportunity that so for decade people observing the markets in the wake of the financial crisis. Talked about how everything's correlated. Have some of those correlations broken down in the wake of Kobe yet? Definitely so one of the big ones in February march for the breakdown in relations with Gold Fixed Income dollar yen which is extremely painful. Some back client base. What about clients shoes? For example fixed income has hedges and fixed income or bond prices actually sold off on some of the biggest risk off days and obviously had many of our clients so these breakdown in relations are important the continuing to change after that initial shock as well so it is helping them navigate this new regime and these new correlations. So you've been working home for a little while now. What what's one thing you've learned working mom? We've always said it had to fill up some extra time. So we're taking care of a lovely ninety year old neighbor of als through covert in a very socially distance Mana. We've all sat for getting a hamster for the time being said of a dog whistle. Good Hedge on on return to office. Well thanks for joining us today. Michael Thanks Jack appreciate it. That's all for this week's markets update on exchanges Goldman Sachs and missed it. Check out our other ups of this week with Terry from Goldman Sachs research dives deep into clean energy and particularly advances in nuclear power. Technology is part of our venture. Capital is in series. Thanks for listening or prevalent. Safes have great again. This podcast was recorded on Thursday. May Twenty Eighth Two thousand twenty. Thank you all price. References and market forecasts correspond to the date of this recording. This podcast should not be copied distributed published or reproduced in whole or in part the information contained in this podcast does not constitute research or recommendation from any Goldman Sachs entity to the listener neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial economic legal accounting or tax advice or recommendations in this podcast. In addition the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener nor to constitute such person a client of any Goldman Sachs entity.