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The BID podcast

Make sense of financial markets with The BID, and uncover BlackRock’s perspective on timely market events and investment ideas. Every other week, strategists and portfolio managers discuss the latest on topics such as geopolitics, sustainable investing, technology and artificial intelligence.

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  • Episode 23 transcript - Building the cities of the future

    Oscar Pulido: Picture this: you wake up in the morning to a grueling iPhone alarm, roll out of bed, and put together breakfast. As you walk to the gym, you dodge scaffolding and turn up your music to wash out the sounds of construction. After the workout, you head to the nearest WeWork to start a day of work.

    In just a couple of hours, you’ve interacted with just a few of the many ways real estate is changing. Cities from New York to new players like Denver and Seattle are growing and developing by the second. Brick and mortar stores are being replaced by e-commerce; e-commerce are actually opening brick and mortar locations. And co-working and co-living spaces are becoming the norm.

    So what will the cities of the future look like? On this episode of The BID, we’ll speak to Ben Young, Head of BlackRock’s U.S. Real Estate Business. We’ll talk about how real estate has been and will continue to be disrupted and what that means for how we live and work. I’m your host Oscar Pulido, we hope you enjoy.

    Ben, thank you so much for joining us today on The BID.

    Ben Young: Thank you for having me Oscar, happy to be here.

    Oscar Pulido: So let’s start with the basics on real estate. I’m thinking about a personal residence when I say the word, or the term, real estate, but it’s really much more than that I think.

    Ben Young: It is. And it’s a very good question. When we’re talking about real estate, what we’re really talking about is the building blocks of society actually. It’s the land and the buildings on it that are utilized to support the normal functions of the economy. It’s the four main categories we call the four main food groups. And the types of commercial real estate are office, apartment, retail and industrial. Together, these sectors actually account for trillions of dollars in U.S. property value. With millions of people employed in the investment and management of these properties.

    Oscar Pulido: And my suspicion is that the real estate industry like virtually every industry in the world these days is being disrupted. So when you think about what is disrupting the real estate industry, any themes that we should be aware of?

    Ben Young: Absolutely. What I would start with and say is look, the needs of people and businesses are constantly changing and the real estate environment’s needs tend to adapt. But most changes are gradual. Adding dog walks to apartment buildings or moving heaters away from the base building office walls to increase window height, but they are also major long term disruptions to real estate. I think the first that comes to mind, to myself, and probably everyone else is e-commerce. E-commerce is the main disruptor. But you can’t forget about a couple of more and those are the sharing economy and 5G.

    Oscar Pulido: So start with e-commerce, because you’re right, I probably have an Amazon package at home I have to pick up, so I’m guessing that’s where you’re headed with this.

    Ben Young: Exactly. We’re all aware of how easy it is to order something from Amazon as you just noted, and how the internet has made price discovery as simple as a few clicks on your cellphone or your iPhone. But what is interesting is consumers prioritize speed and convenience when shopping. Thirty-nine percent of consumers rank speed as the largest factor when choosing purchases online. Versus 23 percent actually say price was its determining factor. So this makes e-commerce competitive actually with traditional stores, allowing online sales growth to be actually quite rapid. This in turn is actually creating more what we call demand for industrial or logistical space around the United States to warehouse all of these products. Consumers are quickly being accommodated to ordering things and arriving really quickly. My daughter thinks if it’s not arriving there in two hours, there’s a problem.

    Oscar Pulido: For sure. We absolutely all need next-day delivery, so what are the demands on space that are required in order to be able to fulfill what your daughter wants?

    Ben Young: We’ve done some estimations and actually we think we’re going to need 28 football fields per week—think about that. 28 football fields per week of new industrial logistical space to be leased by 2021. It’s phenomenal. This is clearly resulting in healthy rent growth and price appreciation for the warehouse and industrial space. At the same time – and it’s important to complement this – that we’re not calling for the death of the shopping center. Centers anchored by grocery stores which are less susceptible to online competition. And experiential retailors such as restaurants and gyms are actually performing much better than malls or the large power centers that I used to visit and my daughter doesn’t visit these days. My daughter constantly reminds me that, dad, you can’t get your hair or nails done over the internet. So there is a place for retail, business models are a bit more defensive of this in this e-commerce economy. But one last component which is really interesting and puts a twist on retail: there is a new demand coming from an unlikely place, I’m going to come back to e-commerce. E-commerce companies are actually looking for storefronts. Companies such as Bonobos, Warby Parker, and even Amazon have opened up retail locations. So the goal is not just to have more store sales but to improve their customer loyalty, and then in turn, drive more online sales.

    Oscar Pulido: So you’ve done a nice job covering e-commerce, now let’s go to the sharing economy which you touched on earlier. And this is a relative new term really when we think about it. I was reading that by the year 2021, it’s estimated that 86 and a half million Americans – that’s almost a third of our population – will be using the sharing economy. So what are we talking about exactly when we use that term?

    Ben Young: The disruption of the sharing economy is absolutely happening in real estate. I would call this thing a unit, or as I would coin it, it’s a unitization of everything. And what do I mean by that? Think back to Apple, what they did and how they utilized technology. They figured out how to sell a single song from an album. It was revolutionary to break down the whole into its parts and meet consumer demands and even charge a premium on this unit basis. Today there are 35,000 flexible workplaces in the world. WeWork alone now accounts, believe it or not, to be the largest private lease holder markets, like New York, Boston, and Washington DC. And these flexible workspaces have broken down the office lease into these smaller units. In other words, you can rent an office space for a week, a day, or even hours. That was unheard of before. And a consumer, again, as I said, is willing to pay a premium for this individual unit to have that flexibility and experience, not unlike that individual song from Apple. But the office market is not the only space being disrupted by this sharing economy. There are companies that provide shared conference room space. There is even a company that is starting to unitize retail space, believe it or not. What does that mean? The asset class that many people thought is dead or is dying is being unitized where companies can lease space for a year, a month, a week, a day, or even an hour like the office space. And what is really fascinating as I sort of alluded to before, is that these e-commerce companies are starting to leverage this technology to lease physical space on a short term basis to improve their own sales. Go figure. E-commerce is helping physical retail.

    Oscar Pulido: And so you mentioned WeWork and I imagine AirBnB lives in this category as well, unitization. But there is also companies like Uber and Lyft that are conducting some form of unitization as you used that term before. How does Uber and Lyft affect the real estate market or does it?

    Ben Young: It does. But I would say on a longer term shift than rather a near term disruption on real estate. It’s an interesting statistic. If you think about it, less than 20 percent, believe it or not, of U.S. adults have ever used a ride sharing service.

    Oscar Pulido: Right.

    Ben Young: So being in New York, you think 100 percent uses it, but if you think about the economy, less than 20 percent uses that. So the rate of adaptation is clearly becoming shorter and shorter, so that will increase the size. But it’s still a long term asset class; it will take time to affect real estate. But ride sharing and the prospect of driver-less cars, meaning we need less parking, not more, this means space can be redeveloped into higher and better use. We were just talking about malls. Mall owners have real estate that is dedicated to parking. So you have to think about repurposing that. How can you reincorporate it and make it flexible? Think about parking decks. They’re typically slanted or inclined on every floor. Well what about making them flat and just having a ramp at the end to repurpose the space, altering parking decks to make better use out of that? And I think if you step back and think about cities, this is really an interesting statistic, is that cities in general, 20 to 35 percent of their land, is devoted to parking in general. Thinking about that massive redevelopment opportunity is pretty exciting from a real estate perspective.

    Oscar Pulido: I feel like my whole life I’ve felt like I wished I owned parking lots, because it just seems like a lucrative business but you’re making me think that maybe that’s not the way of the future. You also touched on 5G, by the way, as another disruptor. What did you mean by that as it affects real estate?

    Ben Young: Global urgency to deploy this 5G is heightening competition between governments, companies, and investors to achieve 5G leadership and capture a multitude of new market opportunities. Advances in technology such as these driver-less cars and even battery storage will have material implications for real estate, real assets in urban areas. And as I relate it to real estate from my perspective, we see it particularly in the construction industry where the use of drones, of how to figure out developing, taking pictures, how is an architecture design for how a real estate building is going to be designed is leveraging this 5G technology. Believe it or not, wearable technology is all transforming the way we construct buildings.

    Oscar Pulido: Ben, let’s switch gears here and talk about cities. It’s estimated that two-thirds of the world’s population will live in cities by 2050, which would be double the percentage of what it was in 1950. Personally, I’m actually raising a family in a city and I don’t feel like that’s odd anymore, so what is actually driving this move into cities and away from maybe the more rural or suburban areas?

    Ben Young: So am I in the city and I don’t feel either. This is clearly indeed a phenomenon that is going around not only in the U.S. but around the world. Cities have been leading the areas for job and wealth creation, Oscar. This is largely a function of where talent is choosing to reside. Young educated workforces have been drawn to this what we call, live, work, play environment. And it’s areas like New York City but it’s even areas like Japan. The overall population that I think a lot of people know is declining in Japan overall given the ageing population, but what people don’t necessarily realize is in cities like Tokyo, the population is increasing and increasing at a rapid rate. So it’s that desire to be in those major urban cities to have that live/work/play. But what is really important to remember is cities are going to need to adapt and be smart. They’re going to need to continue this technology and infrastructural improvements and the connectivity between this real estate in infrastructure.

    Oscar Pulido: And cities therefore, the landscape is changing. You and I both work in New York and anybody who has visited New York recently will not have missed the Hudson Yards project on the west side of Manhattan where there was previously I think just barren land, and now it’s sort of a city within a city. So do you see more of these micro-cities developing in the likes of New York and maybe Tokyo?

    Ben Young: No doubt, Oscar, no doubt. Hudson Yards is an example of a creative economic development. If you think about, Hudson Yards is essentially being built on newfound land in Manhattan. They basically are placing large plates above railyards that park many of the trains we use on a daily basis in the city. But the developers have been able to build on top of this. And what they’re really creating, to your point, is this micro-city within a city. We’ve seen even a similar development in Boston. You think about the build-out of the Seaport area and that Seaport District from an area of older industrial sites, to one of new offices, retail and apartments.

    Oscar Pulido: And speaking of apartments, recently in New York, there was some legislation that came across about rent affordability, and this have implications both for people who are looking to rent but then also implications for the landlords. So talk to us a little bit about what that legislation was and your view on it, and are we going to see more of this in other parts of the world?

    Ben Young: No doubt, and it’s an interesting question Oscar, as you talked about it from both an owner and renter perspective. Homeownership in many markets has declined for the last decade. This has happened for a couple of reasons: delayed family formation, high student debt — I’m facing that, my daughter going off to college, so I’m living and breathing that — and job growth occurring at higher rates in urban areas that I just talked about. So a key measure that we actually follow to understand how all these factors interplay with apartment demand is what we call rent affordability. Simply, a rent can only rise so high until the tradeoff between home purchase with a mortgage makes more sense. But in most markets, we see a favorable backdrop for apartment investors and renters; high tenant demand, rising incomes, but as mentioned, rent levels attractive relative to the cost of home ownership. Now in New York, to your specific question, it really has come into play. There was legislation passed I believe on June 14th and what it was called was Housing Stability and Tenant Protection. And the bill passed key reforms that really put much more stronger controls in place for rent stabilized or rent controlled multi-family units, and makes that deregulation from an owner’s perspective, whether it be for high income earners or improvements made to the unit, uncertain, right. So it looks like more rent stabilized units will stay there for longer. And it has affected, Oscar, over a million units in New York City. And look, while we expect there might be some modest hits to value from an owner’s perspective, we don’t expect market distress from an owner’s perspective because many are well-capitalized and low-leveraged. But demographically, the emergence of the millennial generation in the workforce has been a large lever of multi-family demand, and these millennials, highly educated with the jobs that we talked about, commanding strong incomes, are choosing to work in the cities. Housing costs are high but they’re able to afford it, they’re delaying it because of the student debt, they’re delaying family formation so that demand for these rents in these big cities are continuing. So it’s meeting both landlord and renter demand.

    Oscar Pulido: I was going to ask about millennials and they seem to be less interested in owning a home as opposed to prior generations. Is that a permanent trend, or will the millennials when they’re turning 40, 45, as opposed to the ages that they’re at now, we will see the homeownership rates increase?

    Ben Young: It’s an important cohort to talk about, but I’m also going to mention other cohorts because we need to put this in perspective. It’s interesting to see the decisions made by what we call Gen Y, which is the millennials, I’m actually Gen X, can’t believe it, but I am. And what the millennials are doing, they definitely show a preference for this live/work/play, no doubt about it, but it’s also important to understand where they came from, Oscar. If you think about their growth, they grew up in one of the great economic boom times of their generation when they grew up under their parents, and off to college, and now. But on the other hand, I think about my daughter’s generation, which is now going to be called the Gen Z. She’s 18 years old. And she grew up in families that experienced the Great Recession. Right, so think about putting that generation into that perspective, how are they going to view real estate and life given that backdrop? Will they be more conservative, will they think about the silent generation before the baby boomers and how they reacted to the economy? It’s all very interesting. Do I have the answer of how they’re going to affect real estate? No, but I’m absolutely confident about one thing. They’re going to embrace technology, and it’ll be a critical part of their lives.

    Oscar Pulido: It seems like the younger generations also care a lot about sustainability, we talk about ESG or environmental social and governance considerations. So, how does that affect real estate? I’ve seen buildings that say they’re green buildings: is that the way to think about it, or is there more to it?

    Ben Young: Yes, a bit, I’m glad you said that because they’re literally not green.

    Oscar Pulido: Right.

    Ben Young: But they’re involved in what we call environmental, social and governance, or ESG. And I think what is important to note is look, real estate provides a central services and tangible benefits to society, but the same time, as we talked about, they are physical structures occupying space in the communities that they serve. So naturally, they’re going to have an impact on the needs of society through this environmental and economic impact. The best thing I would say and to give you a description is, let me give you an example. We own a 1.8 million square foot office building in the Port of LA or the Port of Los Angeles. It’s a boring industrial asset if someone looks at it. But, what was really exciting given our intertwining with our real assets and infrastructure, we were able to look at the real estate value and say, how do we create value, not just as an owner but for the community and employees around? And long story short what we were able to do was to connect with one of the largest solar panel developers in the city of Los Angeles. And we leased out our roof to the solar panel developer and they installed over 50 acres of solar panels. It was the largest solar panel installation in the world until Apple’s headquarters came by, so now we’re the second-largest. So what did it do for us? It gave us a 3 and a half million dollar free new roof, it gave us income for ten years. But what else did it do? It created enough power to power 5,000 homes with renewable power, in the City of LA. That’s powerful. But it’s not enough. That renewable power mitigated 500,000 tons of what we call GHG or greenhouse gas emissions. If you put that in perspective, it’s approximately taking off 100,000 cars off the road in one year. Just as importantly, the rooftop was also installed by U.S. veterans who are now skilled in solar panel installation. Oscar, I call that a win, win, win, right? It’s a win for the investors, it’s a win for the residents, but just as importantly, it’s a win for the community.

    Oscar Pulido: It’s a great story of multiple facets of sustainability, and somebody in LA listening to this is hoping they heard that you actually physically took 100,000 cars off the highway, it would massively improve their traffic situation. But Ben, to think about your career in real estate, you’ve been doing this for over 30 years. What’s the one thing that has surprised you about the market and how it’s changed?

    Ben Young: First of all, thank you for dating myself, Oscar, I really appreciate that. But the one thing that I would say – and I think this is true for real estate but everything else is – the only think that remains the same is change. And it’s interesting. I recently read an article about the Koch brothers or the Koch family, for those who may not know of them, they’ve made a fortune on old school industries like oil and gas. But what they recently said about embracing technology is amazing. They said, do it, or you’ll end up in the dumpster. Totally shocking coming from that group. Billionaires who made a fortune by traditional means recognize that technology will disrupt every part of their life, and yes, what I would like to say, unitize everything.

    Oscar Pulido: And you’ve alluded to a lot of the things that are already changing in real estate, but if you had to look forward another ten years or so, what else do you see evolving in this sector?

    Ben Young: No doubt it’s technology. If you really think back, it wasn’t really until 2007 when the iPhone came out. That’s 12 years. Think about what technology has happened in those 12 years. All aspects of real estate are changing due to technology. New demand drivers, new threats, new tenant models, even new technologies to underwrite and analyze the management of properties. There has never been a time of more technological change in real estate than now.

    Oscar Pulido: Well thanks, Ben, I’m going to end with a rapid fire round, and in the spirit of looking ahead, I’m going to ask you tell me if you think the following things will happen in five, ten, thirty years or never, so are you ready for this?

    Ben Young: Sure, let’s go.

    Oscar Pulido: Brick and mortar is replaced with 100 percent online shopping.

    Ben Young: I’m going to go with never, Oscar. But it’s not in the not-so-distant-future that the share of e-commerce to total sales will be much higher. We think that is going to increase at a rapid rate. There will always be a place for physical retail, but the utilization of that physical space is going to be evolving like I mentioned before. More defensive retail, experiential, all will continue to support physical retail demand.

    Oscar Pulido: Autonomous vehicles surpass traditional vehicles?

    Ben Young: It’s a more difficult question. I’ll get to the timeframe at the end of my thought here, but the advances in technology are definitely accelerating in this space. Large investment is being made by automakers as well as governments that are trying to create new ways to connect and smarten the infrastructure. So really regulations may need some time to catch up to how quickly technology is going, but it’s funny. Back to your original timeframe. I think autonomous vehicles will be a significant part of our life in five years. But my daughter doesn’t think so. So who is embracing technology now?

    Oscar Pulido: Exactly. Scooters supplement traditional public transportation.

    Ben Young: I was actually recently on vacation back in July with my family in Paris, and we were just taking a tour down the River Seine and it was interesting. And so many people including myself used scooters to do some sightseeing down by the river. Within a couple of minutes, I figured out how to download the Lime App, how to sync it with the scooter and use it. So there is a place. I recently went on a property tour in Los Angeles, and Downtown Los Angeles there were scooters not only every corner, but every block, scattered all over the place. That’s a whole other question of how we fix that, but I do believe they will support public transportation. It will change over time, but it’s really in the near future; it’s this year and next year where it’s starting to support public transportation.

    Oscar Pulido: Well, and I can relate because the town that I live in has just had a whole army of these scooters unleashed on it recently, so I’m seeing the pros and cons to it. The last one for you is hyper-loops or what we know as high-speed trains between cities, come to fruition, again, five, ten, thirty years or never?

    Ben Young: Good question. The hyper-loop system is one piece of technology that has a real potential to disrupt a lot of key locations and bring cities together that either have high car volume traffic or even high air traffic, right. But while it’s an uncertainty and innovation that I think is going to occur, over the next century to give you a timeframe, Oscar, high-speed trains are an area where the U.S. definitely could see some benefits. But you’re going to need private and public stakeholders who are engaging this together, and the price tags are really steep. So it’s not just about technology; U.S. infrastructure needs a fair amount of improvement and a lot of money to bring the scalability to market. In 30 years, maybe.

    Oscar Pulido: Ben, this has been incredibly insightful. You mentioned your daughter a number of times, I think you said she was 18, which if I’m doing the math, means you’re going to be paying tuition and housing costs for a couple of years. So your real estate background is going to come in handy here. Thanks for joining us on The BID today.

    Ben Young: Thank you very much Oscar, and I think that I’m going to need another 30 years of experience for that.

  • Episode 22 transcript - 5 megatrends shaping our future

    Mary-Catherine Lader: Movies don’t exactly reflect reality. But there’s a lot they can tell us about how our society is changing.

    For example, in the 90s, as we were first mapping genes, Jurassic Park showed us an amusement park of dinosaurs brought back to life through the inconceivable magic of DNA. I’m not sure what it costs to map a dinosaur’s genome these days, but since that movie came out, the cost of mapping a human genome has dropped 99.9% from 14 million dollars to one thousand, and that’s enabled scientists to tailor breakthrough medical treatments to our individual DNA.

    Another example: The Terminator, or any other movie where robots threaten to take over the world. In a way, that’s right. Robots are a 15 trillion-dollar market worldwide. But they’re not a threat; many would argue they’re an opportunity. They help us avoid the dangerous jobs in resource exploration and manufacturing.

    On this episode of The BID, we’re discussing megatrends – topics once the stuff of science fiction but now becoming science fact. Megatrends are the long-term shifts in society that transform the way we live and work. They continue to capture our imagination on the big screen, but also every day, for example we see self-driving cars in San Francisco or read about China producing more billionaires than any other country in the world. They’re also changing the way we invest.

    Today, we’re going to talk about the five megatrends we see shaping the way we live, work and invest with Evy Hambro, Global Head of Thematic and Sector investing. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Evy, thanks so much for joining us today.

    Evy Hambro: Thank you. It’s a great pleasure to be here.

    Mary-Catherine Lader: So, Evy, what makes a trend mega?

    Evy Hambro: The megatrends really are opportunities that we’ve identified, where we see significant structural, long-term drivers of change in the global economy that are matched to things that are fundamental beneath them. And what we think the output of that change is, that it would generate opportunities for companies to adapt and evolve their business, and new companies to start up, and they will benefit from the kind of tailwinds of growth that are driven by the changes and the trends that we see. So, as a firm, BlackRock has identified five key megatrends. One is related to technological breakthrough, the big shifts in demographics and social change around the world, the very rapid urbanization that we’re seeing of the global population. Clearly, climate change and resource scarcity are ones that are fronts of mind for most people. And the last one is obviously the big shift in wealth around the world, where there’s growing importance and emergence of the kind of middle class and increasing wealth concentrations in emerging economies.

    Mary-Catherine Lader: So let’s talk about urbanization for a minute. Infrastructure investing and infrastructure spending aren’t really new. So what’s different this time?

    Evy Hambro: The big driver is more people living in urban environments and the associated change with that. It can be related to infrastructure, so the obvious things that you would think about in terms of construction and so on. But, actually, you know one of the big trends of today’s world comes back to the concept of convenience and when we think about urban populations and the desire for convenience, one of the big shifts recently that we’ve seen with regards to eating habits is the reduced desire to eat out, and to have food delivered. That is a consequence of technology, which is one of the megatrends playing into or attaching itself to urbanization. So, the ability to be able to get cost-effective, efficient distribution of food to a point of consumption that is more convenient for the end-consumer, is clearly sitting at the kind of confluence of two big megatrends that are happening at the same time. You think about the concentration of people in urban environments and how they like to get around, whether it’s the sharing of mobility through different business models of ownership or transportation, whether it’s the evolution away from the combustion engine towards an electric vehicle, this is a huge subject.

    Mary-Catherine Lader: So, basically megatrends point to more food delivery. So, as a New Yorker, food delivery is a pretty familiar concept to me, but how is urbanization different in a developed country like the U.S. versus an emerging country or market like India or China?

    Evy Hambro: That, again, is a good question, and it varies hugely by country. If you think about the developed world and developed world nations, they have lots of infrastructure, lots of kind of traditional ways of doing things, whereas in the emerging world, there’s a desire not to be constrained by what they see in the developed world, but there’s an aspiration to have a standard of living that is similar. So, they didn’t want to go through all the iterations of development because they want to go to the best that’s available today, without trying to kind of put the historic infrastructure in place and then upgrade it, which is the burden that the developed world is having to carry. So, when you go to many of the emerging cities that are kind of under construction and evolving, you see phenomenal infrastructure being put in place immediately. The concepts to accommodate growth rather than the constraints of the fact that we used to have streets that were created because of the horse-drawn carriage and the weights that were attached to it. You know, they’re thinking about, “How do we get people moving around most efficiently, and what will that look like in the future?” So, I think there is a fundamental difference that we’re seeing playing out here between the developed world and what’s happening in the emerging economies.

    Mary-Catherine Lader: I’m curious how do you see the demographic change that you’re talking about playing out differently in different countries and markets?

    Evy Hambro: Yeah. So, this is a fascinating one and it’s a huge, huge topic. Longevity is clearly something that we’re all facing. It’s a benefit to us. The statistics say we’re likely to live for much longer than our ancestors did. There are consequences of that and there are benefits of that. The consequences is, it’s going to cost a lot more to sustain your standard of living throughout the duration of your life. And to go into old age with dignity is I think a desire for most people. So, you need to think about how you are invested, to be able to support your life post the most active periods of employment. You also need to think about the costs. What are the costs of living longer, whether likely to be, is likely to be a high-cost at the start, and it’s going to come with things that you aren’t incurring as a younger person. So, for us, as an investor, we need to think about what does that mean for business, what does that mean for the pharmaceutical companies, what does it mean for the care homes, how does society evolve? What does it mean for older people coming back into the workplace? What roles can they do? And we’re also thinking about it from the other thing, if I want to talk about the millennials or the younger population. How do they act as a consumer today that is different to how their ancestors acted as a consumer? Are they much more focused on not owning things? Do they want to go into the kind of restrictions of being committed to a mortgage and home ownership and everything else? Would they rather spend on an experience with technology or a luxury good? All of these things around the consumer and the shifts in pockets of the consumer because you have now a group of people that are living for much longer and you have at the other end of the spectrum a new group of consumers who are consuming in a different way.

    Mary-Catherine Lader: How is a demand for green solutions with the effects of climate change and other megatrend changing the way that cities are built?

    Evy Hambro: We’re definitely going to see change happening in that way and you’ve just got to travel the around the world to see that. You’re seeing much more renewable power generation being consumed and I think that’s a really great way for society to be thinking about the future. I think also, when you are thinking about the urbanization, you’re thinking about the impact of having more people living in a confined environment and how people are going to get on, how are they going to be transported, how are people going to act as consumers in that environment. Are we going to see changes in property prices? If we’re going to have a fleet of automated vehicles, we don’t need the parking spaces. What does that do for freeing up space in urban environments? So, I think technology is going to be impactful on the trend of urbanization. It’s going to allow us to live in a closer environment in a way that is different to the past and probably better than we would have imagined a few years ago when we look to the solutions of the future.

    Mary-Catherine Lader: So, it seems like technology underpins the five megatrends you mentioned, is that right and how do you think about that?

    Evy Hambro: So, we think about the megatrends as A, independent but also linked. Each one of them on their own is powerful. But when they converge is when you get the most change. So, technology is hopefully finding solutions to climate change. It’s changing the urban environment that we live in. But demographics are also driving urbanization. Demographics are also changing the way that we spend our money and changing how consumers consume and technology is also changing how people consume. So, the trends are identified on their own, but where they link up, it’s most powerful. And then when we think about the themes that we are using to play exposure to the megatrends, we think of three factors that are kind of the key parts of identifying a theme. The first one really is regulatory change. When we have governments coming into a business or to an industry and they are forcing change through regulatory powers, then that is an incredibly powerful kind of push factor that we see. When we have the next factor which is society, when society wants change, then you get two factors: that kind of pull factor coinciding with the push factor regulatory. And that will result in kind of the emergence of an inflection point for businesses to identify with. And then the last factor is really the economics. When the business today identifies a solution and they come up with something that is superior, either its lower cost or it does things better and you combine that with those other two factors, regulatory and society. When you get the convergence of all three together, you get to that inflection point of change in market share. And then you get these incredibly rapid growth rates that emerge. And that’s when the businesses really start to reflect the changes in the fundamentals that they’re seeing.

    Mary-Catherine Lader: So, you mentioned thematics, and the notion of being able to invest along a theme is so logical. How long has this been around, how big is it now, and why is it getting particular attention at this point in time?

    Evy Hambro: I think the main thing that I have noticed, as a result of this role, is that we couldn’t have done what we do today a few years ago. We just didn’t have the access to the data. It wasn’t available to us. We couldn’t identify the subthemes of revenue that we can now look at using the tools and information that we have right now. So, for example, we can, rather than looking at a company’s set of accounts and looking at one revenue line, we can now dig into that revenue line for a company and we can see the different points of sale, and we can break down that revenue line into a whole range of different subcomponents, and we can therefore see if we’re targeting a certain theme, how much a company is exposed to that theme as a percentage of its sales. That is an area that we’ve never had the level of visibility that we have today. We haven’t had that before and so, therefore, our ability to construct portfolios more accurately to give the desired outcome that we’re trying to solve for is just brand new.

    Mary-Catherine Lader: So, you talked about getting granular about revenue, you can probably also get a little more granular about cost. As companies are pushing for more automation and robots are getting more sophisticated, there is a growing narrative that there is an opportunity for a lot of cost saving and perhaps a lot of job loss unfortunately with more automation. On the flipside, an optimist could suggest that humans will just do more engaging work and robots can do the things that we don’t want to do anyway. What’s your view, data-driven or not on that particular question about the impact of AI and automation on work?

    Evy Hambro: Yeah, I think this is a very emotive subject and you can have a polarization of views here as you’ve said. You can have a landscape that looks quite scary with people being put out of work. Think about the automation of driving and what that does to transportation and the jobs that are attached to that. But I think one of the things that gives me a kind of more optimistic outlook is that we’ve seen increasing levels of automation and change over many, many decades, centuries and things going back into the past. Each time, the human workload hasn’t changed massively. There’s just been new roles, new jobs that are being created on the back of this, and new industries arise, people go into different skillsets. So, I think that rather than looking at it too pessimistically, I would think more optimistically and think about what are the benefits to society of automated driving? What will happen to the cost of transportation? It will probably fall beyond everyone’s imagination to incredibly low levels as cars get high utilization rates. You remove the cost of the driver, you reduce the cost of insurance because of the reduced frequency of accidents and so on, the increased safety on the roads. What does that mean for access? People who couldn’t afford the level of transportation that they were able because the cost was too high, can now get access to it at a much, much lower entry point. And so, what does that mean for their standard of living? How does that improve? So I think there’s a whole range of consequences that are incredibly difficult to forecast accurately when you’re thinking about very big subjects like this. But I would tend to look more optimistically because that’s what has happened in the past.

    Mary-Catherine Lader: That makes sense, it sounds good. So, some of this is driven by innovation and innovation doesn’t necessarily do a sustainable business. There’s plenty of examples of that in today’s market with lots of early stage funding and a focus on innovation perhaps over the business at times or in economics. Where do you see innovation not occurring? Are there areas that are overlooked?

    Evy Hambro: This is a question that often we raise in company meetings and we talk about it to management teams. We say, “What threats are you seeing as business?” Because innovation is both an opportunity and a threat, and if you are not ready for change as a business and as a management team, then you probably are about to be out of business. So today, we’re in an environment where the cost of technology is much lower than it was in the past. The productivity that’s going to come through technology is going to continue to increase. So therefore, that’s going to change people’s perspectives on how they can do business, the cost of doing business and what they can actually do and achieve. So, I continue to be incredibly excited about the benefits of innovation and when we think about it, everything is available to be changed, to evolve, to be disrupted. That’s what makes investing thematic so exciting because when you think about it from an active investment point of view, you’re always looking forward, you’re always trying to think about what’s next? You’re trying to think about which companies are going to grow faster? What opportunity sets are going to come along? You’re also thinking about which companies are going to be disenfranchised. And so having a portfolio that’s able to evolve as the markets evolve and hopefully before they evolve, because we anticipate that change and look to benefit from it, then that to me is a real source of true investment management.

    Mary-Catherine Lader: So much of what we’ve been talking about feels very contemporary, very current. I’m curious, do you see these megatrends as generational in some way?

    Evy Hambro: Yeah, I would say that the trends that we’ve described at the start of this are likely to be around beyond generations. We talked about demographics, demographics are multi-generational. Urbanization has been happening over many, many generations. I think resource scarcity, hopefully, we get to start solving some of the problems around climate change and resource scarcity so that we have generations in the future to look forward to. To live in a world that isn’t too badly impacted by the way we’ve been doing business in the past from an industrial point of view. So, I would like to think these megatrends are going to be around for a very long time.

    Mary-Catherine Lader: One last question before we wrap up with a rapid-fire round. What does this mean for the retail investor?

    Evy Hambro: I think there’s multiple things here. When I talk to kind of my parents about investing, they’re not interested when I start talking about long duration currency swapped products and things, you know, I don’t think they’re interested about factors and so on. When I start talking about, “Oh, my goodness it’s amazing young people today. They don’t want to go to a bank, they want to bank online. Or it’s likely that the next car is going to be an electric car, not a combustion engine.” It brings the themes to life, but it also brings the investments to life. You create stories that people can relate to and they say, “Oh, actually, I’m seeing more electric vehicles on the road. This has to be a growth opportunity. You know, I haven’t been to a restaurant this week because I had all my food delivered to me through some kind of delivery service.” When you can create a portfolio that allows you to invest directly in what you’re seeing and how it’s affecting your life, that really makes investing tangible and I think that’s incredibly powerful.

    Mary-Catherine Lader: So, I’m going to end with the rapid-fire round. I’m going to ask a series of questions, this or that questions related to some of the megatrends and themes that we talked about today. Are you ready?

    Evy Hambro: Yeah, absolutely.

    Mary-Catherine Lader: Real meat or fake meat?

    Evy Hambro: There’ll always be a market for real meat because there’s always a legacy market but I think the direction of travel is that people’s spending habits are going more towards the kind of the alternative because they are thinking about the impact, not just the cost but the actual impact of food production. Also, I think technology has allowed to create the alternatives. Having experienced some of these new products, they taste just as good. So, as a traditionalist, I know which way I would naturally lean but I’d been amazingly impressed by the alternative.

    Mary-Catherine Lader: Interesting, okay. Real assets or crypto assets or both?

    Evy Hambro: Yes. I’ve been skeptical of crypto assets for a very long time and I think that’s because they’ve been described to me in a very straight forward fashion with regards to crypto currencies. But I think the underlying technology behind them has a role to play and clearly, we’re seeing more and more business aligned in this way. So, I think the technology behind it is likely to be a winner, but I’m not so sure about the underlying coins.

    Mary-Catherine Lader: Combustion engine or electric car?

    Evy Hambro: We have to evolve away from the combustion engine. The world can’t continue in a way that it’s done so for the last hundred years. So, we have no choice but to move away from the combustion engine. I think the next step is electric and then maybe beyond that we have another alternative. Maybe it’s a fuel cell-driven vehicle or something like that. But the key to solving for this and for many of the other things that we are looking at with regards to, say, renewable power is cracking the chemistry of batteries.

    Mary-Catherine Lader: Last one, ownership or sharing?

    Evy Hambro: I would like to think that society wants us to move towards a more of a circular economy and it’s something that I’m very passionate about. I think we are in an environment where resources might not necessarily be scarce in terms of the true definition. But the cost of production isn’t just about the money, it’s about the impact of production. And if we can find a way of making sure that we’re getting the maximum out of the above ground resources, whether they are using a car today that sits still for 95% of its life, we can find a way of getting capacity utilization up to 50% and that has to be more efficient. It has to be better for the world. It has to be better for people and the costs of use. I am very much in favor of moving away from the kind of full ownership and going towards a much more circular economy and one of the areas that I would be sharing.

    Mary-Catherine Lader: Thank you so much Evy for joining us today. It’s been a pleasure having you.

    Evy Hambro: No problem. Thank you for the opportunity.

    Mary-Catherine Lader: Visit to find out more about megatrends and how to invest.

  • Episode 21 transcript - How to reduce investment bias

    Mary-Catherine Lader: Here’s a story for you. A well-known home goods store starting selling a bread machine. When the bread machine first came out, sales were, perhaps unsurprisingly, slow. But then they put a deluxe version out that was 50 percent more expensive. And suddenly, the original started flying off the shelves. When it was put next to the new version, it was a bargain.

    Here’s another story. Duke students slept outside for weeks to get basketball tickets. Some students got tickets and some didn’t. The students who didn’t get tickets said they’d be willing to pay up to $170 dollars for tickets. And those who did, said they wouldn’t accept any less than $2,400 for their tickets.

    So humans are irrational. We learned this from Dan Ariely, behavioral economist and frequent user of that word, “irrational.” But when it comes to money, we’re even more so. We’re biased, we compare prices and the value of things relative to what is sitting next to them, and other arbitrary markers. We perceive what we own as more valuable simply because it’s ours. And when we have a chance to get something for free, we’ll wait in line, even if it means waiting for hours just to get it.

    On this episode of The BID, we’ll continue our discussion of behavioral economics with Emily Haisley. Emily leads BlackRock’s behavioral finance initiatives, where she focuses on how she can help portfolio managers and investors make better decisions. I’m your host, Mary-Catherine Lader, we hope you enjoy.

    Emily, thank you so much for joining us today.

    Emily Haisley: It’s a pleasure to be here.

    Mary-Catherine Lader: So on our last episode, we spoke with behavioral economist Dan Ariely. You are a specialist in behavioral finance. Now Dan defined behavioral economics as the study of how and why humans behave irrationally for various reasons, as opposed to the perfectly rational model that economists have historically worked from. So what is the difference between behavioral economics and behavioral finance, which you’re focused on?

    Emily Haisley: Well, they’re highly related topics. They are both obsessed with this distinction between what the economically optimal thing is to do versus what people actually do when you empirically measure them. And it’s just really that behavioral economics is more broad. It looks across all areas of economic life: savings, spending, altruism, incentives, negotiation, cheating, all things economic, whereas behavioral finance really zeroes in on the behavior of investors and how their individual biases might aggregate at the market level. But I’d say both of them really use psychology to explain this difference between what is economically optimal and what people actually do and may use psychology to try to fix it, to try to bring them closer together.

    Mary-Catherine Lader: So how did your team come about?

    Emily Haisley: The team has been around for about two and a half years, and it came about because of the co-heads of Risk and Quantitative Analysis had this realization that risks don’t only come from markets. Risks can come from investor psychology, the people making the decisions. So psychology matters, and when they looked around at the diversity in RQA, they found that there were very few people that had training in psychology and so they thought, ah ha, this is a risk, we have to get some of that talent in. And the burgeoning field of behavioral finance just has paper after paper after paper saying why psychology is important for investment decisions.

    Mary-Catherine Lader: What does that mean in practice? What does that entail?

    Emily Haisley: So, what we’re doing is taking all these biases identified in the academic literature, and trying to find them in our BlackRock portfolio managers and fund managers. And the idea is that if we can measure and identify their biases, we’ve struck gold because where we see a bias, there is an opportunity to either have them take risk in a more efficient way or to potentially improve their performance. Now, the way that we find these biases is we look at various different types of data, so we might just look at their fund history of holdings and transactions and performance. We may ask them to give us some data, so we have a trade diary project where we have some fund managers record their rationale, the time that they trade, and then we can do really cool analyses using natural language processing to take that free text rationale, put it into trade categories that can be analyzed, and link it to trade level performance. And then we also look at how they interact in groups, so we observe teams and look at data related to the team dynamics. And then finally, we even look into investor physiology, so we look for biases not just related to the brain but also biases related to the functioning of the body.

    Mary-Catherine Lader: So those are so many interesting questions. Of all those lines of inquiry, what finding has surprised you the most?

    Emily Haisley: Gosh, so I have to say that this is going to sound boring I think, but it’s just the variation. The natural variation that you see from person to person as individuals. I come from an academic background, and you’re just used to looking at experimental group 1 versus experimental group 2, and looking at average behavior. And so now I’m looking at individuals, so you get to know individuals on a really personal level, about their strengths and their weaknesses, the motivations for their decisions, and it’s just that no two people are alike. A bias one person may struggle with is not an issue at all for another, and vice versa.

    Mary-Catherine Lader: So one of the projects you’re doing is at the physiological conditions, and how that impacts an investor’s behavior. What are you doing and what have you found so far?

    Emily Haisley:  Yeah. Well, so far we’ve just ran very small pilots on this topic, but we are poised to scale right now. And what we do is we actually measure investor physiology using several pieces of wearable technology. So one is a ring. And this gives us investors’ sleep, stress levels, activity levels, on pretty much a daily basis. It takes really accurate measurements while they sleep. And we also use something that is worn on the upper-arm that gives us basically real time stress levels during the day as they’re making decisions at work. I should stress that this all completely voluntary. Just whoever wants to participate can, nobody is obligated to. And it’s also completely confidential, so everybody controls how their data is used and who sees it. And the goal is pretty simple, the idea is that we want to help employees succeed and if they take care of themselves, they’re going to perform better. We know that chronic stress drains performance, and moreover, chronic stress actually kills risk appetite, which is essential for investors to be able to take risks and be sensitive to opportunities in the market. As opposed to becoming insensitive to those opportunities, because their bodies are fatigued or stressed.

    Mary-Catherine Lader: So once you’ve uncovered a bias or a certain trait for an investor—it sounds like you work with both traders and investors, right?

    Emily Haisley: Mainly with fund managers, hedge fund managers, yeah.

    Mary-Catherine Lader:  Okay.  So once you uncover a bias that a fund manager might have, then do you work with them to alleviate it, to avoid it the next time?

    Emily Haisley: Absolutely, yeah. We’ll measure biases, we find one, and we can offer some help, some guidance. And then we show the evidence, they quite rightly kick the tires on it. We’ll then implement different interventions for overcoming the bias. And again, this depends on what exactly the bias is, it depends on if it’s coming from the individual or whether it’s coming from the team, so very personal in the recommendations we give.

    Mary-Catherine Lader: What other biases do you see in people who are managing portfolios and fund managers, and how do they come about? Are they earlier on in a career, do they get more pronounced after years of experience?

    Emily Haisley: I think that this is a really interesting question and one that deserves a lot more study. I don’t have an answer for every bias, but one really common bias is called the Disposition Bias. And this is related to loss aversion. Our brains are kind of wired to encode losses as twice as painful as an equivalent gain is pleasurable. And this is so hardwired, even monkeys show loss aversion when you let them use currencies and tokens that they can exchange for grapes and cucumbers, and let them gamble with coin flips and things like that. And what this leads to in investment decisions is sometimes if you buy a security and it doesn’t perform well, you may hold onto it for emotional reasons, rather than rational reasons. You may hold onto it because you don’t want to realize a loss, you don’t want to crystalize loss and feel that pain. So there is this tendency, particularly for retail investors, or everyday investors, or for more junior fund managers, to have the Disposition Bias, to not want to admit when they’re wrong, to not want to admit defeat. And then as investors get more and more experienced, they realize that in markets, you’re wrong all the time and if you’re slightly more right than you’re wrong, you can outperform. So they kind of get used to being wrong to accepting their mistakes, and they develop a discipline for cutting their losses. So the Disposition Bias tends to be one of the first ones that goes away.

    Mary-Catherine Lader: And do some biases come up at different times of day, different times of year? What kinds of context and external conditions can investors control?

    Emily Haisley:  Yeah. There are all different biases related to calendar effects and related to weather effects, things related to the outcomes of sports games. When your country’s team loses, the investors become more pessimistic. Over the course of the day, because we’re looking at investor physiology, one of the findings that we notice is that people have these natural rhythms through the day of when they’re having greater readiness or greater levels of energy, and then they typically kind of hit a trough towards the middle of the day, and then might come back. And there are individual differences, some people are more morning people, some people are more evening people. But what we notice is that investors’ conviction throughout the day—so how much conviction they have in particular trade also follows this diurnal rhythm, this intraday variation in readiness. So they maybe have les conviction in a particular investment idea, simply because they’re picking up on an internal signal from their body that may be a bit fatigued rather than information about the fundamentals of the company.

    Mary-Catherine Lader: These all sound kind of personal in getting to know these subjects, if you will, pretty closely. Do you find that people you are working with get a little defensive or don’t really want you to know so much about them?

    Emily Haisley: Well, I don’t really so much think of them as subjects as more like almost like clients. Like they are people that I’m there to help and to support however I can. And the more data they give me, the better I can support them. But in answer to the question about defensiveness, I was shocked that they aren’t more defensive. I’m really surprised—pleasantly surprised by the culture here, the fund managers. They have what psychologists call a growth mindset, in that they don’t believe that skill or intelligence is fixed, it’s not something you are just born with and then that’s it. They have the belief that through hard work and persistence, and constantly evolving their investment process, they can get better and better over time. And so they see behavioral finance as a way to do that, as a way to get an edge.

    Mary-Catherine Lader: Have you all found that biases ever result in better decision-making?

    Emily Haisley: I think that typically biases are defined by people making decisions that are not optimal in some way. Normally that’s in some kind of economically rational way. So it may be that if you define the outcome of a decision as, “Are you maybe happier?” maybe then biases can help you. But you’re typically poorer as a result. For example, the decision to play the lottery. Many people think that is related to a bias of overweighting the small probability of a win. So lotteries are clearly not great investments, they have a highly negative expected value, but they may bring you some joy. Some excitement, some entertainment value. But I will say that biases, while they generally don’t result in economically better decisions, the whole nudge literature is based on this idea that you take biases that normally work against people and turn them around to work for people instead. Let me give you an example. In some research I did in academia, we tried to use lotteries which are normally seen as playing lotteries as a bias. And we used them to supercharge incentives for preventative healthcare in a company that was trying to promote better healthcare in its employees. So we ran an experiment where we compared giving a financial incentive for participation in preventative healthcare program as a lottery, or you could have the expected value of that lottery for sure. And we found that there was much better participation with the lottery incentive.

    Mary-Catherine Lader: You’ve also run a study where employers emailed employees about contributing to their 401(k) and just like tweaking little bits of language here and there, a couple words had an impact.  So can you talk a bit about what you found there?

    Emily Haisley: This paper was called “Small cues change savings behavior.” And in this we found that by giving people either a high or low anchor as they were considering how much they should save for retirement, dramatically influenced how much they would save. So consider increasing your savings contribution, you could perhaps increase your contribution by 15 percent, a high number. Very few people actually did that, but it dragged up the amount that people were actually were willing to increase their savings contribution. And this was much higher than if you gave them a low anchor saying, consider increasing your savings contribution by say one percent. Then we actually dragged it down a little bit relative to control groups. And I think this really emphasizes for people who are trying to implement these nudge policies to really test their interventions, experimentally, scientifically, and make sure that they’re nudging people in the right direction.

    Mary-Catherine Lader: There are a bunch of nudges already incorporated in 401(k) plans; employer match, and automatic enrollment set up. So what are those plans doing right, and what could be improved?

    Emily Haisley: Well yeah, I think these plans have come a long way in terms of incorporating lessons from behavioral psychology. In terms of how they can improve it, I think that the use of technology could dramatically improve outcomes for people. And increasingly, they’re starting to use apps. So putting in the palm of someone’s hand the ability to really easily increase your savings contribution is really important. And particularly, if you’re going to deliver financial education seminars, everyone in the seminar might agree, yeah, I want to increase my savings contribution. But then when they leave, life gets in the way. And they may not have their log-in details and they may not exactly remember what it was they decided to invest in, et cetera, et cetera. So putting it right in the palm of their hands so they can take action immediately, I think the impact of that cannot be underestimated. And then moreover, you can incorporate all types of nudges into the app. So for example, you could give them high anchors, you could try to get them to do impulse saving. What is really successful is having people commit in advance to not save right now today, but to increase their contribution rate at the time of their next bonus or the time of their next pay raise pay raise.

    Mary-Catherine Lader: How does this apply to everyday investors, people who may trade stocks in their spare time, or who are planning for retirement, for example?

    Emily Haisley:  I’d say there are a couple of biases that are really important. The first is loss aversion, which we touched on before. The thinking about losses in the near term that comes when you begin to invest can really put people off investing. They tend to overestimate the probability of the loss and intuit that if they have a loss, it’ll feel really bad. And this can stop them from investing for their future. Economists often puzzle at why stock market participation is so low, so this idea of loss aversion can help explain it. Another example for everyday investors is that sometimes things that feel really safe are actually really risky. The safety is just an illusion. For example, investing in stocks from your own country, the country you live in, can feel less risky than investing abroad. Or investing in companies that you’ve heard of, like high street companies or household names, just because you know a lot about the company can make it feel less risky than it actually is. And so investors may under-diversify globally, or under-diversified within their stock portfolio as a result.

    Mary-Catherine Lader: And does something about our personal backgrounds inform those sorts of behaviors? For example, if you came of age during a recession or financial crisis, how does that affect peoples’ loss aversion or other biases?

    Emily Haisley: Yeah, absolutely. This is called the Depression Baby Hypothesis. And it’s this idea that whatever slice of financial history you experience is going to shape your risk preferences, your anxieties about inflation, and affect your investment decisions. In a really clever application of this, there is a recent finding that Fed bankers who set monetary policy, their forecasts, the hawkish or dovishness of their speeches, and their voting record is predicted by their birth year. By how much inflation there was over their lifetime.

    Mary-Catherine Lader: And what’s the science on bubbles for example? So I’m just thinking of other behavioral trends that have a historic impact on markets. Is there any science around massive buying behaviors that are divorced from fundamental value for example, that create bubbles?

    Emily Haisley: I think there are a lot of things that contribute to bubbles. You can think about herding behavior and this fear of missing out, and people talk about irrational exuberance. One of the funnest studies that’s looked at this is in this new field called neuro-economics, where they actually put subjects in fMRI machines, so they can see their brains. And in one study, the experimenters used an experimental trading market, where they knew bubbles tended to form, and they thought, okay, what’s leading to this irrational exuberance in their brains? And they expected emotions might be involved, so they were focusing in on emotions centers of the brain, and sure enough, they found that as the bubble was forming, there was this excess activation in the reward pathway of the brain. And so the reward pathway was leading to the value of the securities and overshooting their fundamental value. And so you might conclude from this, that okay, we’ve got to take emotion out of investment decisions, emotions trip us up, but it’s not that simple. What the investigators also found is that there were some participants who sensed that the bubble was about to burst and got out before it burst. And they were like the best performing subjects in terms of the amount of money that they made in the experiment. And what led these subjects to get out before the burst was also an emotion. It was activation in emotional center of the brain related to pain, discomfort, even disgust. And if you think about disgust, that’s an emotion that makes you spit out something, reject it, and that is exactly what these participants did. They had this emotion of disgust as an early warning signal that gave them the intuition to get out before the bubble burst.

    Mary-Catherine Lader: So can you test investors for disgust but then give them the courage to act on contrarian views?

    Emily Haisley: If only I had an FMRI wand, yeah, you’d better believe I’d be using it. But alas, the technology is not there yet.

    Mary-Catherine Lader: This is so fascinating, we could keep talking for a long time. But I’m going to end with a rapid fire round. So, I’m going to ask you a couple questions and answer each of them in one sentence or less, ready?

    Emily Haisley: Ready.

    Mary-Catherine Lader:  Okay.  So you’ve consulted companies like Google, McKinsey, obviously BlackRock, banks, and even the U.S. Department of Health and Human Services, in your behavioral science research. What one project across all of those, not just in the realm of behavioral finance, has surprised you?

    Emily Haisley: Well, I’d say rather than one project, it’s been a commonality across all of them that psychological framing of a decision trumps economic incentives.

    Mary-Catherine Lader: What’s a behavior of your own that you’ve tried to change based on your expertise?

    Emily Haisley: Every single aspect of myself. So how much I eat, how much I exercise, how much I procrastinate. I’m constantly trying to nudge myself towards better behavior.

    Mary-Catherine Lader: So what do you do to stop procrastinating?

    Emily Haisley: So actually, Dan Ariely’s work really influenced me there, where he has a paper on the impact of deadlines. And how much better students do if they have intermittent deadlines rather than just one deadline at the end. So I carve out my tasks with intermittent deadlines, and then to avoid procrastination, I just plan enough time to work to meet the deadline with a bit of a safety factor.

    Mary-Catherine Lader: Interesting. What is the secret behind being a smarter investor?

    Emily Haisley: This is a self-serving answer, but know the common mistakes and know your biases.

    Mary-Catherine Lader: Best book recommendation on behavioral science?

    Emily Haisley: Far and away, Michael Lewis’s book, who is the author of The Big Short, The Undoing Project.

    Mary-Catherine Lader: Interesting. And then based on all of your expertise and study of this subject, does money buy happiness?

    Emily Haisley: So savings buys happiness. It’s not that more income is going to make you happy, it’s being able to live within your means and having enough of a saving and investment buffer that lasts a long time if your income were to stop coming in today gives you peace of mind.

    Mary-Catherine Lader: Fascinating, thank you so much for joining us today, Emily.

    Emily Haisley: Thank you very much, Mary-Catherine.

  • Episode 20 transcript – The rationality of irrationality with Dan Ariely

    Mary-Catherine Lader: What’s something irrational you did today? Hold that thought. Here’s what people said when we asked around.

    Female 1: I spent more money on a flight because I had credit card points that I could use, even though I could have used them on anything, but I just bought a more expensive flight.

    Female 2: The most irrational thing I did today was started a fight over nothing with my husband.

    Female 3: I packed my lunch and I worked really hard to pack it and forced myself to bring it this morning, and then I bought lunch anyway.

    Mary-Catherine Lader: Despite our efforts to make every decision right or to go through a day without making mistakes, it’s pretty much impossible to actually do that. You buy a shirt you don’t need, just because it’s on sale. Or you buy $4 – well, in New York, $5 coffee even when there’s cheaper, equally-good coffee across the street.

    On this episode of The BID, we speak to an expert on irrationality: Dan Ariely. Dan is a renowned behavioral economist and a professor at Duke University. There, he co-founded Common Cents Lab, a nonprofit focused on increasing financial well-being for low-to moderate-income people in the United States. BlackRock is working with Common Cents Lab to help people build emergency savings.

    Dan has published six books, given six TED talks, and co-founded five startups. In fact, he ends his emails with a signature sign-off: “Irrationally yours.”

    Today, we’ll talk about just that: what makes us irrational, particularly when it comes to money, and how behavioral economics can help us tackle big issues like the short-term savings crisis and the retirement crisis.

    I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Dan, thank you so much for joining us today.

    Dan Ariely: It is my pleasure.

    Mary-Catherine Lader: So let’s start by explaining perhaps an often-used term that may not be totally well-understood by all those who throw it around: what exactly is the behavioral economics?

    Dan Ariely: Yes, it’s actually I think not exactly understood even by the people who practice it. So, behavioral economics is really easy to understand in contrast to standard economics. So what is standard economics? In standard economics, we assume that people are rational. That people take all the information into account, that people can think into the future, they don’t have emotions, and so on and so on. And because of that, we think people always, always, always make the right decision. In behavioral economics, we say, not so fast, let’s not make assumptions about people; let’s just put people in different situations and see how they behave. So the first difference is that social science and behavioral economics are experimental in nature, rather than based on assumptions. And when you get people to behave, you see that they’re often irrational. And now comes a really interesting point is if you believe that people are rational, you will build the world in a certain way. You would convince people to stop smoking or stop texting while driving in one way. But if you believe that people are irrational, in systematic and predictable ways, then you would go about improving the world in different ways, right, you wouldn’t necessarily say to people, hey, did you know that texting and driving is dangerous, stop immediately; you would do other things. So the difference is about the assumptions, how we learn about people, and what are the implications for improving society?

    Mary-Catherine Lader: So is there a magic answer about what exactly makes us irrational, and how those solutions designed for irrational humans are different? Or is it different depending on the kind of choice you’re solving for?

    Dan Ariely: Yes. So, there is one way to be rational and there are many ways to be irrational.

    Mary-Catherine Lader: So it’s not so simple.

    Dan Ariely: It’s not so simple. And it depends on the level of granularity that you want to talk about. So, if you’re trying to think about the most general case, you could think about evolution. And you could say, our brain was developed to deal with an evolutionary environment that is very unlike the environment we’re in right now. Just think about the differences of running in the savannah and being afraid from a tiger to being afraid that your stock portfolio is going up or down. And then if you get to more specific levels, and you say, but is there one reason? The answer is no. For example, one reason is emotions, right, emotions get us to be derailed from our long term best interest many times. We have things that have to do with our difficulty in computing things, difficulty in holding multiple hypotheses in mind, difficulty of thinking many steps ahead. So there are many, many things that we do wrongly on this specific level, but they all stem from this fact that we’re basically utilizing brain mechanisms, think about them as tools, in a way that they were not designed for.

    Mary-Catherine Lader: We talk a lot on this podcast about choices people make around money, whether they’re professional investors or individuals. You started Common Cents Lab, essentially a research organization to help focus on better decision making around money. What is specific to irrationality when it comes to how people engage with money?

    Dan Ariely: Yeah. Can I ask you if you thought about your biggest money mistake, what was it?

    Mary-Catherine Lader: It’s not investing enough soon enough; it’s waiting too long to try to make the perfect decision.

    Dan Ariely: Yeah. So one is procrastination, just delaying, and that actually has a few causes to procrastination. And then the second thing is not sacrificing enough now for the future.

    Mary-Catherine Lader: Yeah.

    Dan Ariely: Which is to say, I see a new bicycle now, I really feel like it, it’s really wonderful. If I delay to the future, how exciting is that? Not very exciting. So if you think about the process of de-cumulating wealth, and making the rational decision, it’s really, very, very tough. You need to know how long you’re likely to live, and what will you need in retirement. If I told you, you were going to die at age 50, life is much simpler from computing how much you need to save. But if you don’t know if you live to 60 or 100, now things are very difficult. So the thing about money is both that it’s a wonderful, wonderful invention, it’s at the level of the wheel in terms of its contribution to society. It’s unbelievable what this abstract notion is doing to us as a society in a good way. At the same time, really hard to think about it. And I’ll give you one example, we went to a Toyota dealership a few years ago. And these were people who went to meet the dealer, they knew what the price of the car was, and they had to decide yes or no. And we stopped them, and we said, “Look, if you are going to go ahead and buy this car, what would you not be able to do? What is it coming instead of? What is the opportunity cost?” And people had no answer. Why? Because they never thought about it. So we pushed them and pushed them, and then the most common answer we got was, “If I go ahead and buy this Toyota, I can’t buy a Honda,” which of course is not the answer we were looking for. The answer we were looking for is, this is going to be instead of three weeks’ vacation for the next three years and 700 lattes and 16 books and so on. It turns out that the most beautiful thing about money which is that we can buy lots and lots of things with it, is also what makes it really hard to think about. The abstract notion. So if I gave you now $3 dollars, what exactly did I give you? How exactly do you think about it? Do you think about the marginal value of $3 dollars? No. By the way, it’s a simple representation. We find that we have a much easier time getting people to do something for a cappuccino than for $3 dollars.

    Mary-Catherine Lader: That’s fascinating. Why, they didn’t trust you when you offered the $3 dollars? The value is different to everybody?

    Dan Ariely: It’s the representation. Imagine I was on the street corner, I said, “Hey excuse me, will you fill a survey for $3 dollars?” What exactly is this $3 dollars giving you? It could give you a cappuccino, but it could give you a lot of other things. But at that moment, you’re not thinking about a cappuccino, even something better. But when I say, “Would you fill a survey for ten minutes for a cappuccino?” Now all of a sudden, you represent the value of what you’re getting. And that is part of the challenge with money is we have a hard time representing the value of money. And because of that, we make lots of mistakes in how we spend.

    Mary-Catherine Lader: So what are some practical real world examples of trying to help make people make better decisions about money? Particularly decisions in the moment that have the kind of future implications you’re talking about?

    Dan Ariely: So I’ll tell you about some tricks we found in the lab and there is a digital wallet called Capital that implemented it. There are some things that are bills that are just coming out. But the things we have control over are discretionary spending, restaurants, cabs, coffee, beer, supermarkets.

    Mary-Catherine Lader: Right.

    Dan Ariely: Now if you gave people a monthly budget for these things, we find that people run out very quickly. Let’s say your monthly budget is $2,000, you look at it at the beginning of the month, you say, look at me, I’m so rich, I have $2,000, and two weeks later you’re at zero. So we found out that a month is too long of a timeframe to plan, so we pushed it for a week. And then we found out that a week that starts on Friday is very different than a week that starts on Monday. If the week starts on Friday and I give you $500 in this spending account, people spend way too much on the weekend. If I put it up on Monday, it will savor for the weekend. So this company called Capital took this idea seriously. And they give people a prepaid debit card. And they load up the amount of money that you need for the week every Monday. And they show you how much money you have from your plan. So that’s one trick, and of course you could do it yourself; you don’t have to do it with somebody else, but the idea is the month is too long, get it to be weekly, start the week on Monday.

    Mary-Catherine Lader: Picking the number, the right number is a whole other question I’m sure.

    Dan Ariely: That’s right. It’s not basically pick a number and the dangerous thing to do is to see what have I been spending so far? And just using that number, because that is a recipe for repeating past behavior. What you really want to figure out is what kind of joy am I getting? And that’s another study we did is we asked people to look at their spending and for each spending event, we asked them to what extent they were happy with this and to what extent they regret it. When we buy things, it’s always with an eye to the future: how would I feel if I got this, how would I feel if I did this? We don’t very often go back and reflect on what we’ve done, and say, was this a good decision or a bad decision? And when we get people to do that, there is lots of categories that people say, I did spend way too much money. By the way, the leading category that people regret is eating out. And it’s not because eating out is a bad idea, it’s because they eat out, they eat too much, they drink too much, and they regret all of those the next day. So trick number-one is weekly budget, starts Monday; trick number-two is from time to time, think about what makes you happy. And part of the challenge in the world is that everybody wants something from us, every app, every coffee shop, everybody wants our time, money or attention right now. And because they design the environment, they have a really easy time derailing us from our goal. So let’s say you go to the supermarket, and you have a goal of what you want to get. The supermarket also has a goal, it’s just not the same as yours. And guess what, they decide what is going to wait for you by the cash register, and they decide to put things in there that would ignite your emotions and get your curious and make you likely that you will buy it. They don’t put the tomatoes and cucumbers there. So, another important thing is to try to remember what we’re working towards, what we really want, and not be swayed as much by the environment, and that is also why having discretionary spending is good. For example, I’ll give you my own example, I think I need to change my car in three years. And every time I get a salary, there is a fixed amount of money that goes to a separate account for my future car. And I don’t trust myself if it’s in my checking account, I could just say, here is my balance, minus something. I basically want to see the balance actually reflecting more correctly what I have. And for the goals I want, I try to move the money to those goals automatically, so that it accumulates and I don’t have to worry about it.

    Mary-Catherine Lader: So is this what you call choice architecture?

    Dan Ariely: All of this is part of choice architecture, absolutely. So choice architecture is the idea that the design of the environment really matters, you design the environment one way, you’ll behave one way. If you put the fruits and vegetables in your refrigerator in the bottom drawer, you will not get to it very often, and by the time you do, they’ll rot. If you put them at eye level, you eat more fruits and vegetables, right, if you set up things to move money automatically to some categories, you’ll have money for those categories, if it doesn’t, you’ll find ways to spend it on other things.

    Mary-Catherine Lader: So then how does this apply in the context of professional investors? You could argue the incentive is pretty clear: professional investor or portfolio manager has to make money to earn a return, whereas maybe in our personal lives, as you’ve been talking about, sometimes it’s hard for us to be really honest about our goals or to size them appropriately. What have you learned about choice architecture or controlling for the irrationality in investing in public markets, for example?

    Dan Ariely: Yeah, so this belief that the moment we become professional we become somehow better is really interesting. So you could say, maybe if it’s not your money, you don’t care so much, so you’re not as emotionally invested. But of course we pay financial advisors proportional to how much money they make, so it is their money. You could say maybe getting a lot of training is helpful, like professional chess players, they’re really good, they play, they play, and they’re really good at it. But to develop that, you’ll need a lot of repetition and you’ll need accurate feedback. The stock market of course doesn’t give it to you. So there are cases where a professional could be distant, for example, lots of patients go to their doctor and say, doctor, you’re recommending this procedure, what would you do? Or if it was your son or daughter or mother, what would you do? And Jerry Groopman in one of his books, he’s a very good physician, he analyzed many situations, and said that it’s really good for doctors not to care about their patients.

    Mary-Catherine Lader: That sounds terrible.

    Dan Ariely: Yeah. Yeah. But he said that when they care about their patients, they are biased in their opinion. And when they don’t care, they are more able to give them objective, clean information. So there are cases where professionals are more objective; I’m not sure the stock market is like that. And there are cases where people can get lots of experience by repetition and by doing things differently and seeing how things work, and they also become professionals. Again, I don’t think in the stock market it is the case. So I actually don’t view a lot of professional investors as investors in that, but what I think they can be good at is helping people understand the psychology of money. You get out of college, you get your first job, you have a tendency to want to get an apartment, and a new sofa, and a TV, and maybe a car, and do all these things. A good financial advisor would say, slow down. Right. It’s more of the let me help you figure out how to run your life with this amount of money.

    Mary-Catherine Lader: So those kinds of tradeoffs, visualizing those, understanding those, studying them, is part of what you do at Common Cents Lab. Why did you start Common Cents Lab and why focus on money and particularly lower middle-income Americans?

    Dan Ariely: So first of all, why focus on money? So I think about all the cases in the world where we as human beings don’t live up to our potential. So I think we waste our time, we waste our money, we waste our health, we don’t create the right conditions for motivation in the workplace, we waste the environment and we hate. Mainly those are the big ones—

    Mary-Catherine Lader: So many! Big problems, yeah.

    Dan Ariely: —yes. And I picked a few years to focus on money because I think that the transformation of the cell phone and digital currency gives us tremendous opportunities to do that. So as long as we had physical money, there was not much we could do with it, not much that we could change in how people think and represent it. But now that it’s digital, and we have the phone walking around the world with us, it means we can have a decision aid in real time, helping us do things better. And there is one way to go which is Apple Pay, which is to say let’s make it easy to spend money. Let’s make it frictionless, let’s make it such that people don’t think about spending money, that they tap or swipe or touch and then they get very surprised at the end of the month. Or you could say let’s create a different type of technology and get people to think a little bit deeper and maybe it will be a bit more painful, but make sure that it’s more likely people would spend according to their long term goals in a way that is actually good for them. So that was the first reason for going into the domain of money, and we focus on low-income because the mistakes there are incredibly devastating. Imagine a low-income person that lives hand to mouth, and they have no extra. And one month, something bad happens, they have no extra! What do they do? They borrow, in the current environment, they borrow at a very, very high percent interest rate. And let’s say that there months later, that problem they had is fixed, maybe somebody was sick, the roof was leaking, something like that. Now they are three months behind plus interest.

    Mary-Catherine Lader: Right.

    Dan Ariely: Right. And that spirals down. So for people, I’m a university professor, I have a salary, if there is a negative income shock, I am perfectly able to handle it; but if you don’t, that creates tremendous turmoil and just to give you some statistics, what percentage of Americans do you think don’t have enough money to be able to pay an unexpected bill of $500 dollars?

    Mary-Catherine Lader: I’ll say 60?

    Dan Ariely: It’s a little bit less than 50, but it’s a lot, right. When you think about that statistic, you think about a third world country, you don’t think about the U.S.

    Mary-Catherine Lader: Right, totally.

    Dan Ariely: Imagine you have 100 percent of wealth and you broke Americans into five compartments, the poorest 20 percent, the next 20 percent, the 20 percent in the middle, the richest, and the absolute richest. And you ask the question, “From this 100 percent of wealth, how much does each of those buckets of 20 percent, hold?” And of course we know the top 20 percent own a lot of the wealth, but what people often don’t know is how little the bottom people have. So from a total of 100 percent, the bottom 40 percent of Americans have about 0.3 percent of the wealth.

    Mary-Catherine Lader: Wow.

    Dan Ariely: Basically nothing. And we focus on inequality of the top side but the real terrible thing is it’s the bottom. So if I could get somebody in the middle range of the distribution to save another $1,000 dollars, that’s lovely. But if I can get somebody at the bottom end of the distribution to save $500 dollars, I could protect them from some serious downsides. And you could ask, can they save? And the answer is, yes. We’ve shown it in slums in Africa, we can get people who live on $10 dollars a week to save some money for a rainy day, and we’ve shown that if you just open an account for people and you call it the saving account for their kids, and you put a tiny amount of money in it, people start thinking of their kids differently. All of a sudden, the parents say, oh my goodness, this kid is 2-years-old, but has a college savings account. And they start reading to them more and all kinds of things happen. So money is not just a way to accumulate wealth, it’s also a way for people to think about themselves. And in some of the research, it’s shown that let’s imagine somebody who owes $10,000 dollars in credit card debt, and you could say, what should I do first? Should I get them to pay it first or to build a little savings account? And the rational answer is to get them to put as much as possible towards the debt, because they pay higher interest rate on that than they make from their savings account.

    Mary-Catherine Lader: Right.

    Dan Ariely: But it turns out that having some money in a savings account gives people a lot of hope and confidence and optimism. And that by itself, is an important thing to do. Here is another statistic, what do you think is the turnover rate in places like Pizza Hut, McDonald’s, Burger King, how often do people change their jobs?

    Mary-Catherine Lader: I would say every eight months, and maybe the turnover or the attrition is like 30 or so percent?

    Dan Ariely: The turnover rate is 130 percent.

    Mary-Catherine Lader: Whoa!

    Dan Ariely: So basically what you said, right, people change more than once a year. And when people change jobs, it’s not that there is another job waiting for them.

    Mary-Catherine Lader: Why do they leave?

    Dan Ariely: You know what, it’s a big mystery, but somebody could get in a situation where they can’t make it—their car broke down, and then they feel embarrassed to show up again. It could be that somebody got a shift that didn’t work well for them. So, lots of things happen and there is lots of pain in the lower-income—everywhere in the world, but in the U.S., we should be better.

    Mary-Catherine Lader: Totally, totally. And so you mentioned, you sort of hinted at the connection we make between money and work. You’re doing more research these days what drives people and what motivates people in the workplace. So what have you learned about the extent to which money motivates people to show up to work? Whether they’re working at a Pizza Hut and they need to show up for that one day after they missed a shift, or in a completely different context?

    Dan Ariely: I have data on about hundreds of companies, big companies in the U.S. stock market, and I have data about all kinds of ways how people treat their employees. And I can look at this data, and I can say, if companies treat their employees well, do the companies also do better in the stock market? And it turns out that absolute salary doesn’t matter that much, relative salary matters a lot. Right. So it’s much more about the sense of fairness.

    Mary-Catherine Lader: Relative to people who do similar work to us? Or to the people in our communities?

    Dan Ariely: So it’s relative to the people at your job who are doing similar work. Right, that is the most salient one. And one way to think about it is your absolute level of salary doesn’t come into your mind very often. But when you see injustice in your company, that really bothers you. Another thing that seems to matter a lot is the sense of autonomy. If you think about work, a lot of things about work are the things that allow us to prosper, where you don’t think you’re like a pawn and someone tells you what to do and you’re just executing. But you feel a sense of connection and meaning and so on. And those things really matter, and we find in these large datasets that companies who are better at this – giving their employees a sense of meaning and autonomy – also do better in the stock market.

    Mary-Catherine Lader: And so then if money is part of it, autonomy is a big part of it as well, then what creates that sense of meaning in a productive workplace, how can companies do a better job in giving their employees that sense of meaning and autonomy?

    Dan Ariely: So lots of ways. I think the first thing to do is to realize in how many ways we are killing autonomy. And basically, that is what bureaucracy does. Think about what bureaucracy is, it is basically the company saying to the employee, we don’t trust you. Right, and it could be that we don’t trust you that when you go to dinner you’re doing the right thing, so we want to see the receipt, and we want an essay about who you met and we want recording of all the things. So one thing we need to start doing is to realize the cost of bureaucracy, the cost of lack of trust to employees. And then the second thing about giving autonomy is that we need to understand that while giving autonomy, there are pluses and negatives, just the plus outweighs the negatives. I’ll give you an example, if I have a new person in my research lab comes in, the easiest thing for me to do is to meet them on the first day, and say, here is the project you’re on, go. And we’ll help you do it of course, but this is what you are assigned to do. A much more difficult position is to say, tell me a little bit about you. And help me understand what you are curious about, what interesting is for you, what your career goals are, what you want to learn in the few years that you’re going to be here. And then, tailor something to them. And say, why don’t you go and think about these three projects and see which one fits you better. Now if you think about this, it’s something that loses efficiency. I just wasted a meeting with somebody, I learned something about their parents, and their hobbies, and so on. I gave them a task for the next week. They’re not going to execute, they’re just going to think about what fits them better. And you could say, this is a very inefficient use of time. But if you think about people not as robots, think about what will be the sense of meaning and connection and commitment to the project, for somebody in my first story versus the second story, it’s very, very different. We need to understand that if we aim for efficiency, and everything is about efficiency, we’re also going to take away this sense of connection, belonging, autonomy, and these things need investments of time and resources. They just pay very well.

    Mary-Catherine Lader: And do you see companies trying to do that at scale and prioritizing it? And how does it end up paying off for the company to make that initial investment in understanding what gives their employees a sense of meaning, even at an individual level?

    Dan Ariely: So from the datasets I told you about, hundreds of companies, I can tell you that the companies that were doing well on employee motivation in my data, do about 12 percent over the S&P on average. So companies who are good at this, in my dataset, have a 12 percent return a year on their stock value.

    Mary-Catherine Lader: And how do you know if they’re good at it?

    Dan Ariely: In my research, I have measured about 80 different dimensions of employee well-being, satisfaction, all kinds of things. Some of them, as I told you, don’t seem to matter, like absolute salary. Some of them really matter. And I can take the ones that matter, and I can compute how much better the companies that treat their employees well do compared to companies who don’t treat their employees well or compared to the average company. It’s a very large study, it took me a really long time, but I think it is starting to show that the returns are substantial.

    Mary-Catherine Lader: So purpose really matters then for companies?

    Dan Ariely: Yeah. Absolutely. Here is the thing. Think about the minimum you need to do not to lose your job, and the maximum you can do if you’re really excited.

    Mary-Catherine Lader: It’s a really big difference.

    Dan Ariely: This is called good will, how much good will do you have? And as we move to the knowledge economy, good will is bigger and bigger. Because if you had a job like organizing the chairs around the table or something, somebody can see and measure it. When your work is between your ears, it’s happening in your brain, it’s very hard to supervise, very hard to contract on it. So now it’s just a question of how hard do you want to work? You can sit at your desk and ponder life, you can work really hard, you can think, you can read, you can do lots of things. It’s up to you to decide what your motivation is. And the question is, what gets people to be motivated? And meaning, purpose, a sense of connection, teamwork, all of those things really, really matter.

    Mary-Catherine Lader: Well, that’s an inspiring and also challenging note for us to end on. Let me end with a rapid fire round, where I’m going to ask you a couple quick questions that you can answer in one sentence or less. Ready?

    Dan Ariely: Okay.

    Mary-Catherine Lader: So what motivates you?

    Dan Ariely: Reducing misery.

    Mary-Catherine Lader: That’s pretty powerful. And it sounds like you’re doing that in spades. What is the hardest decision that you’ve ever had to make?

    Dan Ariely: It was as medical decision. I will give you more than one sentence, but I was badly burned, over 70 percent of my body was burned, and many years ago I was in the hospital for many years. And there was a real question about amputating my arm or not, and the doctors all recommended it for all kinds of reasons. I decided against it. My hand is not very functional and it’s quite painful. I’m not sure it was a good decision but it was a very, very tough decision.

    Mary-Catherine Lader: That sounds extremely challenging. And what as the easiest?

    Dan Ariely: What was the easiest decision? Okay. I turned 50 two years ago and I decided to celebrate with my best friend. We are friends from 7th grade.

    Mary-Catherine Lader: Wow.

    Dan Ariely: And we decided to take a month — we grew up in Israel — we decided to take a month and hike in Israel. And we hiked from the north to the south for a month, and every day we invited people to join us. Some people we knew; some people we didn’t know. And that decision to take a month off and simply hike and spend time with a friend was one of the best decisions I’ve made.

    Mary-Catherine Lader: It sounds like it, it sounds pretty memorable. And in the spirit of choice architecture, you talked about how we can change our environment to make different decisions. What have you done to change your choice architecture?

    Dan Ariely: I do lots of things, but I do have a standing desk, for example. And every night when I leave the office, I put it in the up position.

    Mary-Catherine Lader: Ah, smart.

    Dan Ariely: And what that guarantees is when I come in the morning, I start by standing. It’s electrical, it’s not that difficult to do.

    Mary-Catherine Lader: Right.

    Dan Ariely: But I found that even if I come in the morning and it’s in the down position, I don’t put it up. So that’s one example. Another thing I’ve done is I have created an accountability rule for myself. I have a cousin who I love dearly, her name is Yael, she lives in New York. And we made an exercise pact. It’s very hard to exercise: I travel a lot. It’s not too complex, but for example, you can have one dessert only on the weekend. And we have to exercise three times a week and if we don’t do it on a weekly basis, we have to report and then we get punished by the other person. And that system of accountability really helped me gain much better control over my health, both eating and exercise, plus I get to talk to my lovely cousin.

    Mary-Catherine Lader: One last question: in your spare time, you’re a chef, you’re actually working on a book about cooking. What is your favorite dish to make?

    Dan Ariely: So, first, this book is like my Moby Dick. One day I will write it. So what is my favorite dish? I think that my favorite thing to do is actually to make homemade pasta.

    Mary-Catherine Lader: Challenging.

    Dan Ariely: I think there’s like a dramatic difference in the quality, and there is also something incredibly — I don’t do it when I’m just by myself, but when I invite people — it has the extra sense of taking care of people that I like as well.

    Mary-Catherine Lader: Well that sounds really compelling. Dan, thank you so much for joining us today, thank you sharing you insights, your research, a little bit about your own choices; it’s been an absolute pleasure having you.

    Dan Ariely: It was lovely, and I’m looking forward to our next meeting.

    Mary-Catherine Lader: BlackRock is partnered with Dan’s Common Cents Lab on our Emergency Savings Initiative. We’re enrolling and encouraging thousands of Americans to save. To learn more about the Emergency Savings Initiative or get involved, visit

  • Episode 19 transcript – What will drive markets through 2019?

    Jack Aldrich: The world is full of great debates. Like, Coca-Cola or Pepsi? Android or Apple? And which was better: the book or the film?

    At our recent Mid-Year Investment Outlook Forum in London, portfolio managers and strategists held some great debates of their own. Is the next downturn on the horizon, or do we believe this business cycle still has room to run? And what will drive markets over the remainder of 2019: policymakers and central banks? Hard-to-predict but enduring geopolitical dynamics? Or something else entirely that we’re not paying enough attention to?

    On this episode of The BID, we’ll talk about where these debates netted out. Each summer, we release our Midyear Investment Outlook, which talks about the themes we see shaping markets for the rest of the year. In preparation, we sat in on our midyear forum to hear how our strategists are thinking about today’s markets.

    We’ll walk through our views on the remainder of 2019 through conversations with members of the BlackRock Investment Institute, like Jean Boivin, Head of BII; Elga Bartsch, its Head of Macro Research; and Tom Donilon, its Chairman, as well as investors like Rick Rieder, BlackRock’s Chief Investment Officer for Global Fixed Income. I’m your host, Jack Aldrich. We hope you enjoy.

    Over the course of two days, about 100 of our portfolio managers and strategists came together to hash out our mid-year outlook for markets. One critical theme that came up throughout: the prospects for regime change, or a paradigm shift in how markets, the economy and policy work.

    Our view? We are late in the business cycle, and global growth is slowing. We think this cycle is set to play out over a longer time frame, and economic over-heating or a recession are not immediate market risks. But the back-drop is a fragile one – and vulnerable to potential regime change.

    Rupert Harrison, a portfolio manager in Multi-Asset Strategies, spoke with BII’s Elga Bartsch to discuss what’s on the line.

    Rupert Harrison: What do you mean when we talk about regime change?

    Elga Bartsch: Yeah. So regime change can mean one of two things, one is a regular regime switch that would be, let’s say, from a low volatility to a high volatility regime, so basically allows you to go back and forth between two states of the world and you can go back to how things were. But there is also the possibility of more radical regime change which basically changes more fundamentally the underlying system, the characteristics of it, and it means that you’re most likely not going back to how things were.

    Rupert Harrison: We’ve seen that really exacerbated with the shift at the end of last year. We had a big selloff in markets, we had to make a big judgment about was that turning into a recessionary regime. We took the view that no, the global economy was still in a decent place and we’ve seen a big rebound since then. I’d say I guess what is a little bit more difficult is thinking about when can you tell the difference between a regular regime change and a radical regime change? So thinking about some of the different challenges we’re facing from U.S. trade policy for example. Are there any signposts for you that would help us to distinguish what is a regular regime change and whether we’re seeing the beginning of something more radical?

    Elga Bartsch: I think the minute you are starting to see developments that look very much like an escalation, that could be described as non-linear and where you really feel that tectonic plates are shifting. And I do think that what we are at the moment seeing in trade policy could be that, because it could mean that a lot of working assumptions on the global economy, deeper integration, leveraging scale, seamless technology, just in time management and all the benefits of globalization could potentially be on the line now.

    Jack Aldrich: As Rupert and Elga mentioned, we’re facing new and different challenges today. In our view, trade disputes and broader geopolitical frictions are now the key drivers for the global economy and markets, rather than late-cycle recession risks.

    These geopolitical tensions may pivot us from an era of globalization to de-globalization, where countries take a more nationalist rather than cooperative stance in the global arena. But it’s more than that. According to Tom Donilon, BII’s chairman and former U.S. National Security Adviser, we’re moving to a different stage in the world order – and the U.S. is a main driver of geopolitical and economic uncertainty. BlackRock’s Vice Chairman Philipp Hildebrand sat down with Tom to get his perspective on what might be changing from here on out.

    Philipp Hildebrand: From your perspective, what is unique about this juncture, both in terms of the economy but also how politics interacts and plays into the economic outlook?

    Tom Donilon: Yeah. I think a couple things are unique. Number one, we do have an unusually large number of volatile and unstable situations in the world. Now, they won’t all go to worst case scenarios, but there is a large number of them that have to be considered by markets. Second, I think we’re in a different phase in terms of the world order. The post-Cold War period has ended. We’re in a new phase at this point where you have a number of players, including obviously China as a big player right now. Third, I think the relationship between economics, technology, and geopolitics is quite unusual. We see that in the competition that has developed between the United States and China over technology issues, which are really driving a lot of what’s going on between the two countries in terms of their interaction. And of course, we have a trade situation right now, which is one of the principle threats to the economic order.

    Philipp Hildebrand: When we heard initially at the Inauguration, the president articulate the America First Strategy, you couldn’t quite figure out what it meant today. When I look at it from Europe or from Asia when I travel, when you look at it from outside the United Sates, it looks more and more that what this really means is the U.S. is exporting fragmentation, volatility, and these are all things that are very new. If we think of the post-world order, the hegemon so to speak has always been there as a stabilizer, as a guarantor to some extent of the rules. Of course with some enlightened self-interest in mind. Is this really a completely new game that we’re entering here?

    Tom Donilon: It’s a very different approach. I think what we’re seeing right now is the implementation phase of the America First Policy that has been put forth by President Trump. And it is a departure in a lot of ways as to the way the United States has conducted themselves with respect to alliances and trade most directly—international agreements, international institutions. It’s most clear in the trade area, where today, the United States, I think it’s fair to say analytically as a matter of fact, is in trade disputes with most of its major partners around the world simultaneously. And it’s using a number of tools right now to press its case. They’re unusual, especially tariffs, and a number of steps that have been taken that are typically reserved for adversaries, right, during the Cold War. President Trump has undertaken to use these tools to impress the economic case for the United States in an unusual, and in some cases, an unprecedented way. So yes, I think we’re seeing something different. I think we’re seeing the implementation of America First policy. I think it is different from the way the United States has approached a number of key issues over the last 75 years, and it’s been disruptive, there’s no doubt about it.

    Philipp Hildebrand: And of course, the key question will be, how does this impact market pricing? I think we have to assume that there is some sort of risk premium across all of this. Investors are focused on the reelection campaign that is about to get going in earnest in a couple of weeks’ time. There is a Federal Reserve that’s back in play with potential interest rate cuts. So we have essentially countervailing forces that are going to make it very challenging to have a clear sense of how we should think about the implications.

    Tom Donilon: A lot of different vectors, I think, a lot of different vectors. We do have an election coming up in the United States, and I think that the right analytical tool when you look at Washington right now, if you’re trying to determine which way one of the parties is going to go is through the 2020 electoral lens. I think that is what is going on in the United States. And we’ve already had the elections really kick off in the United States with debates. Second, we do have again, an aggressive trade policy which has to be considered by markets. And we’ve seen that the president is engaged in yes, China, and I think the markets thought that would be the principle focus, but he’s also engaged in a number of other places and is willing to use the tariff tool with respect to Mexico, in a non-tariff, non-trade arena, in order to pursue a policy of a political goal: that is unusual for a president of the United States, and I think that is going to continue. I think essentially what’s happened is that President Trump’s approach to foreign policy has come into sharp relief. I think we now have a sense of his style, his approach, his goals, and I think we are going to continue to see that for the remainder of his term, whether that’s through 2020 or thereafter. I think this is the Trump approach to foreign policy and economic policy.

    Philipp Hildebrand: The big risk of course is that this could undermine the fabric of the global economy and really damage growth potential in the long term, potentially having inflationary effects in terms of higher prices as a result of it. So this would be a very unpleasant combination basically of lower potential growth and higher inflation as a result of this fundamental questioning of the economic order. Do you see a risk here tearing at the fabrics of the global economy that could lead to lower potential growth and higher inflation over time?

    Tom Donilon: I do see the risk. There is a risk that in achieving short term narrow goals if you will by the United States—in the trade area for example—that you could be, through the approach, risking the health of the overall system going forward. The United States at this point is not a strong supporter of the WTO system or the international free trading system generally; it’s seeking in many ways to upend that system and to interact in a transactional way with allies and friends around the world. So the risk is yes, achieving some short term goals, but when the United States steps back from leading that system, what happens? The system does start to fray, bad behaviors emerge throughout the system, but most importantly, I think when there is a crisis, if you don’t have a leader in the international system—for example, as we did in 2009–

    Philipp Hildebrand: Yeah, I saw firsthand what happens in the crisis, how important that U.S. leadership was.

    Tom Donilon: And so that is the question: if you don’t have that leadership, if you haven’t built up these habits of cooperation, if you haven’t really kind of worked on the same values and outlooks, in a crisis, you can have grave difficulty which was really important, for example, in 2009, that the United States was in a leadership position and working in a cooperative way with the world to address the crisis. It really made all the difference at the end of the day.

    Jack Aldrich: As Philipp and Tom discussed, we believe geopolitical conflicts have the potential to undermine the global economy.

    One our Forum’s most central debates was how a trend toward de-globalization could affect inflation. One side sees tariffs and supply chain disruptions as a supply shock that could prove inflationary, both in the short run and longer term. They see the possibility for an unfavorable mix of slowing growth and rising inflation pressures over time, as prices rise and productivity falls.

    Another camp believes protectionism could actually be disinflationary, due to the gradual realignment of supply chains and manufacturing capacity. On top of that, technological innovation could also keep a lid on inflationary pressures – think about how companies like Uber have made the ride-sharing market more competitive, and caused lower prices among other ride-sharing companies and taxis.

    Jean Boivin, Head of BII, spoke to Rick Rieder.

    Jean Boivin: One thing we’ve discussed which I think to me is a big deal not only for fixed income but for the other asset classes, is what is going to happen to inflation? One place where we’ve been debating is what trade context is doing to that, and does it change the supply chain picture? Does it lead to bigger adjustments? And at the same time, we’re worried about potentially inflation being too low. So we have now a pretty interesting divergence.

    Rick Rieder: So I have felt for a long time that it’s hard to create, that inflation is in a structural downshift. I believe that because if you look historically, particularly when you have trade wars, you think about what happens when you have a trade war, you can have a near term shock to inflation, you can have a bit more inflation. But what happens is, you increase productive capacity. You saw it in agriculture, you certainly saw it in energy, you think about the development of shale and deep water and oil sales. You create productive capacity. So I think the other thing you do with tariffs particularly, is you’ll dull aggregate demand, you’ll dull growth. So today, I could see a little bit more inflation, certainly wages are accelerating and we think inflation will pick up a bit from where it is today, which has been pretty depressed. But I think there are some headwinds to long term structural inflation, and we talk about it a lot. That entrepreneurialism, innovation today, I’ve never seen anything like this in all my years in investing or even studying history. But that entrepreneurialism and innovation is literally targeted right at price. It’s targeted right at margin. And where the new companies develop, it’s literally where there is margin and price today. So you’ve got a big headwind. I’m not saying you can’t create a bit more inflation, but there is something structural in commerce that is unique to anything I’ve ever seen in studying economies for years.

    Jack Aldrich: Like Rick said, we appear to be breaching new territory here. But there’s a lot to be optimistic about: we do think the cycle, and risk assets like stocks, have room to keep running forward. There’s more space to take risk, we just prefer to do so with some resilience built in.

    Jean sat with some of our portfolio managers to get a sense of how they’re thinking about investing at this point in the year. First, we turn back to Rick for his views on the Fed and the path forward for fixed income.

    Rick Rieder: I think the big deal is this shift the Fed made back in January. For investing, it’s the biggest thing that we think about. You’ve got a Fed now that is not hiking rates, that is not tightening against you. So when you think about managing risk, you think about your portfolio and risk assets, you have a central bank that is sensitive to what happens to growth and inflation. It’s a very big deal.

    Jean Boivin: What is tricky for me as we were debating is that I think it’s a bit different. It’s not only about the data anymore, but it’s about what is happening with tensions and trade and tariffs. And the tricky thing is that it’s not clear that easing will be the solution for any of these predicaments we’re dealing with.

    Jack Aldrich: For now, the Fed has pivoted to an easing stance, and central banks around the world are following suit. Yields on government bonds have plummeted, but we still like them as a way to buffer portfolios against market swings.

    There are sources of resilience and quality in the stock market, too. Tony Despirito, Head of U.S. Active Equity, shared with Jean why he’s still optimistic about certain stocks.

    Jean Boivin: Q4 last year has been a difficult quarter. What lessons have you drawn from that and how does it affect your outlook for the next six to nine months?

    Tony Despirito: Well, one of the lessons is that markets are always more volatile than underlying economic reality. So the market is going to predict more recessions than we actually have. And I think that is what is happened.

    Jean Boivin: Many more.

    Tony Despirito: Many more. And I think also you see policy responses when there are growth weaknesses. We saw the Fed become more dovish, for example, and I think that is to be expected. You know, we are getting later in the economic cycle, and cycles don’t die of old age. But there is less pent up potential and as you get later in the cycle, I think volatility picks up. It’s natural. And so that is something that we need to keep an eye on going forward. The other is I think the market is giving us a free opportunity with respect to balance sheets. The market is not distinguishing much between companies with really strong balance sheets and companies with weak balance sheets. And I view that as a free option to upgrade the portfolio towards stronger balance sheets. Now is a great time for that.

    Jean Boivin: So how much of your constructive view and the valuation story you just said depends on what is going to happen with the Fed? And there is a lot of cut being priced in right now by the market. How important is that to your process?

    Tony Despirito: Well, I don’t think it’s about the Fed, I think it’s about long rates, right, and the market has adjusted regardless of the Fed. So I think in terms of the rates scenario, we’re seeing that in the long bond already. And one of the things that we’re looking for in the U.S. is high quality, stable companies that haven’t yet gotten bid up like bond proxies, and we’re seeing a couple industries like that, like insurance brokers, pipeline companies in the U.S. are examples of that, steady cash flow yet not bid up in stock price. That means you should pay up for growth and you should pay up for high quality, bond proxy-like companies. And so I think that is important. On the margin side, I do worry a little bit that we’re late cycle and therefore, maybe there is some risk to margins, whether that’s wages—we’ve had a rising wages, now that has come off a bit. The global trade that we talked about, the supply chains, that can mean that costs go up and margins go down for companies. So that is one of the things I’m worried about.

    Jack Aldrich: So we’re not necessarily at the peak of stock market potential, but we do see reasons to be cautious going forward.

    Many topics were in debate as we worked through our views for remainder of the year. So where did we net out? Global growth is slowing, and the pivot of global central banks to easy policy has bought investors time to make their portfolios more resilient

    Geopolitical tensions – from the U.S.-China relationship to an ‘America-first’ policy – might wind back decades of globalization. And it’s critical we understand what this de-globalized world might look like, and what it might mean for inflation and central banks against what has been a longstanding backdrop of disinflationary forces.

    For the full read-out of these discussions, head to to read our complete Global Mid-Year Investment Outlook.

    Thank you for joining us on this episode of The BID. We’ll see you next time.

  • Episode 18 transcript – Gauging deglobalization: How to identify geopolitical disconnects

    Catherine Kress: Markets are sending pretty mixed signals. At the end of 2018, we saw a downturn, yet in the first half of 2019, we've seen the stock market rally against a backdrop of incredible volatility in the international environment.

    This geopolitical whiplash looks set to continue with the 2020 elections in the US in full swing, a Brexit deadline postponed to October, trade disputes ongoing in almost every world region, and tensions building in the Persian Gulf. This wide range of unstable situations leads us to believe that trade tensions and broader geopolitical concerns will be a key driver of the macro and market environment moving forward.

    On this episode of the The BID, we'll be speaking with Eric Van Nostrand, head of Macro Research and Portfolio Strategy in BlackRock's Multi-Asset Strategies Group. Eric is one of the smartest people I've met when it comes to teasing out what big picture issues like geopolitics mean for markets and investing. He's pioneered a variety of approaches for helping to identify the disconnects between macro developments and market movements and seizing on the opportunities that those disconnects create. From the BlackRock Investment Institute, I'm your host, Catherine Kress. We hope you enjoy.

    Eric, thanks very much for joining us today.

    Eric Van Nostrand: Thank so much Catherine, great to be with you.

    Catherine Kress: Let's start off big picture. There's been a lot going on on the geopolitical front. What's top of mind for you right now?

    Eric Van Nostrand: Catherine, the last six months have seen the evolution of a lot of different geopolitical issues that have been festering for a couple years but have really come to the forefront in the past two months. Chief among them is China and its trade relationship with the U.S. The breakdown of the negotiations at the start of May in Washington have, in our view, fundamentally changed the relationship between the U.S. and China in a way that's going to make it more strategically competitive and more economically competitive in the years to come. And that matters a lot for financial markets. At the same time that these U.S. and Chinese tensions are rising, we're seeing persistent geopolitical risk in the Gulf and continued uncertainty coming out of London as the Brexit negotiations continue. All these risks together, coming from different angles, but each mattering a lot for financial markets in their own way, are going to be very important for investors to watch in the near term.

    Catherine Kress: Right and we've specifically highlighted that geopolitical risks can matter more for markets when the economic backdrop is weak, so these will all be pretty important issues to watch I think moving forward.

    Eric Van Nostrand: That's exactly right, slowing global growth makes this all much more important than it otherwise would be. I think it's clear that geopolitics has mattered a lot more to financial markets in the past few years than it it did in the past few decades. But more specifically, geopolitics has mattered a lot more just in the past couple weeks. I think the biggest difference is that in the first week of May, the U.S.'s relationship with China changed meaningfully in a way that is unlikely to improve pretty meaningfully in the near term. That's something that matters a lot to markets in the months to come. BlackRock's own indicators of geopolitical risk, for example, have shown a much higher correlation with overall financial asset moves – with what stocks and bonds have done in the past couple weeks – even more so than they have over other periods of the Trump era where geopolitics has mattered a lot. So it's going to be incomplete to have a financial market conversation in 2019 without really engaging thoughtfully on the geopolitics.

    Catherine Kress: When you say correlations, you mean that geopolitics and markets are moving much closer together, implying some kind of a closer relationship than perhaps we would have seen previously?

    Eric Van Nostrand: That's exactly right. The markets are following the geopolitics. What's happening out there in the world matters a lot for U.S. investors.

    Catherine Kress: We both just highlighted U.S., China. What are some of the key issues or flashpoints that we should be thinking about?

    Eric Van Nostrand: So I think in general, we should take a step back and recognize the following, which is that it's very easy to talk about the various geopolitical issues of the day and say that they might matter for financial markets in general, but unlike most of the things that investors at BlackRock track to forecast financial market moves, geopolitics is very hard to measure. So the particular flashpoints we're going to be looking for are those that really bring into focus geopolitical risks and geopolitical concerns that right now appear to be in the background. There are really two types of flashpoints I think we're going to be watching from a geopolitical perspective as we think about asset allocation and investing in the firm: (i) those that involve short-term tactical positioning – thinking about how the Brexit parliamentary negotiations are going to shake out over the coming weeks; or (ii) more strategic themes, such as how broader trends of deglobalization and the economy are going to evolve over the years to come. Deglobalization in particular is probably the single most important thing for financial market participants who are concerned about geopolitics to be following. Because what that reflects is the reversal of a trend that has really characterized the evolution of the global economy over the past couple decades and that we've become quite used to as a source of ongoing stock and bond market returns. Every piece of trade news that comes out of the Trump administration's negotiation with China, every bit of information about when auto tariffs with Europe might start to materialize, is going to be important for figuring out the extent of that trend and what it matters for the economy.

    Catherine Kress: One thing that I noted was particularly interesting in your comments is you mentioned that geopolitics is pretty difficult to measure. Why is that and how do you grapple with that issue?

    Eric Van Nostrand: Most of the investors at BlackRock, who use macroeconomics to forecast trends in the economy that matter for financial markets, are doing it from a quantitative perspective, or they're doing it with things that can be measured quantitatively. We're trying to figure out what's happening with growth. We're trying to figure out what's happening with inflation. We're trying to figure out what's happening with unemployment. There is a deep academic literature from the economics community and from the market research community on how to measure those impulses and how to understand their likely path forward. Geopolitics is different. Geopolitics is the most purely qualitative input to our investment process that we can imagine. I know that China is a topic today, and I know that China was a topic in May 2018. But it's hard. It's not obvious for me to measure how different, quantitatively, the impact of China is in those two different periods. And that's really the frontier of our research on these issues are trying to attack that hard question and try to start measuring those topics.

    Catherine Kress: Got it. And so, you mentioned deglobalization. That seems like one of the biggest themes that I can imagine that might be one of the more difficult ones to measure. How do you actually, as an investor, define deglobalization and then begin to actually process that and its impact on markets?

    Eric Van Nostrand: Sure, so what the trend of globalization has meant over the past couple years has had a lot of important primary and secondary effects on the way we investors think about the evolution of financial markets. And the reversal of those trends recently are equally important for a number of different reasons. The first is trade flows. When economies are working closer together, when trade lines are open, the obvious first-order impact of that is that countries are going to import and export more with one another. That trade flow is itself an important source of growth. It boosts productivity growth because countries can focus more on their comparative advantage and deploy their labor and capital in more productive ways. That's something that benefits markets but also incomes across the distribution of incomes in all sorts of global economies. As we've seen over the past couple years, as countries have become less inclined to work with one another, and more inclined to put up barriers between trade, a lot of those positive trends for the economy risk getting a lot worse. This is a particularly worrying time for global productivity growth. Since the global financial crisis, productivity growth has slowed meaningfully, and economists don't have a lot of great answers about why, particularly in this period, where we look at the reach of the internet around us and it feels like we're innovating more. But economists say that productivity has been slowing according to the data. This is a big downside risk that could result in much lower productivity growth going forward. And that has implications not just for market returns, but for all participants in the global economy.

    Catherine Kress: What's the timeframe that we're thinking about here? Is this something that we're seeing happening now, over the next couple of months, or do you think it's going to take years or maybe even decades to play out?

    Eric Van Nostrand: That's a great question, Catherine, and that really gets at the crux of the different ways we think about different geopolitical issues. Deglobalization is something we view as a strategic theme that we expect to emerge over the next couple of years. I'm not going to change my clients' investment profile based on my view of how a certain bit of trade negotiation is going to unfold over the next week or so. That's not something that, in investment parlance, I have any edge on. What this trend reflects is the change in the way global trade is perceived over the next couple years, and that's something we're going to be watching closely.

    Catherine Kress: That makes sense, so it's not just about China. There's something much deeper and broader going on here.

    Eric Van Nostrand: China's obviously been the flagship of the deglobalization tension over the past couple months but as we've seen with the Trump administration's relationship with Mexico and the threatened tariffs there and the specter of auto tariffs in Europe as an example, it's clear that this is a tool that within the United States, the Trump administration plans to use on an ongoing basis even beyond China. But even beyond all that, it's not just Trump. Related to broader trends of political populism and what it's meant for attitudes toward global trade, we're starting to see other economies begin to talk about and, in some cases, take some protectionist measures. That means that this is something that's going to outlast Donald Trump. It's going to outlast the current round of U.S.-China trade spat. And it's going to be important to the conversation for years to come in our view.

    Catherine Kress: So shifting gears a little bit, Iran has been front and center in the headlines recently. That and trade seem to be dominating conversations. May marked the one-year anniversary of the U.S. pulling out of the Iranian nuclear deal, and just within the last month or two, we've had a series of attacks on oil tankers in the Persian Gulf and off the coast of Yemen, an Iranian attack on a U.S. drone and retaliatory cyber-attacks by the U.S. on Iran. We also saw a somewhat incredible series of events in which President Trump called off air strikes against Iran at the last minute. Between this, trade talks, one thing that's been very interesting to me is how well riskier assets are performing. I would have expected a much rockier road, frankly, given all these geopolitical tensions, but the U.S. equity market, for example, has returned to all-time highs. What's your view on what's going on here?

    Eric Van Nostrand: That's a really important point because it illustrates something we can't forget as we're having this conversation. We just talked a lot about how geopolitics matters—and it does, and it matters more than it used to. But it's still not the only thing that matters. The past couple weeks of equity market performance in the United States have been principally driven by an increased expectation of central bank action from the Federal Reserve and other global central banks to keep monetary policy easy by keeping interest rates low. That's not unrelated to geopolitics. In fact, it's in large part a reaction to some of these geopolitical tensions that have manifested globally, but it underscores the fact that those easing moves by the central banks, which are having a positive impact on asset prices today, are in the past couple weeks mattering more than the worries about geopolitics themselves. That's if you look over the past two weeks. If you look over the past eight, you see a different picture as geopolitics has been the real driver.

    Catherine Kress: You're an investor who actually has to make decisions about your portfolios with geopolitics in mind. What's your starting point?

    Eric Van Nostrand: As I said before, the principal challenge is that this feature, geopolitical risk, is really hard to quantify relative to conventional macroeconomic variables like growth and inflation. In our broader investment process, we use a lot of modern quantitative techniques like various forms of artificial intelligence and various forms of machine learning to forecast economic data and get a sense on what it means for asset returns. We don't have an artificial intelligence algorithm that's going to predict what Kim Jong Un is going to do in the next six months. That remains well beyond the capabilities of the quantitative investment community. We have developed over the past few years an indicator that we lovingly refer as the BGRI, the BlackRock Geopolitical Risk Indicator. What the BGRI measures is how much attention markets are paying to a given geopolitical risk. When our BGRI is high, that tells us that markets are very focused on geopolitics and that worries about geopolitics are likely in the price already. That means that we don't need to worry as much about a big downside tail event because the market's already on it. Things are already priced. When a BGRI is low, the market's not paying close attention to a particular risk, so if our geopolitical research team thinks that risk is a real one, then we better watch out because the markets are likely not discounting it.

    Catherine Kress: How do you actually build that indicator? What's the process that goes into creating it?

    Eric Van Nostrand: Thank you, Catherine. I love it when people ask me these methodology questions because I get to geek out about our research processes, and I'm pretty proud of this one. This is a great use and one of our flagship uses of what's typically called big data or unstructured data. What does that mean? It means we subscribe to and read in our systems, a tremendous amount of global news articles and financially-oriented publications. We scrape and read a tremendous amount of broker reports published by Wall Street firms and other research outfits that reflect the market topic of the day, and we zoom in on social media, look for accounts on Twitter that tend to discuss finance and look at what they're talking about. We use the same artificial intelligence tools we use to design quantitative signals around macroeconomics to measure how much those market sources are talking about geopolitics. The theory behind that is when they're talking about it a lot, that's an indicator to us that the market probably already knows about it. It's not a secret. When they're talking about it very little, that's when we tend to be a bit more on the defensive.

    Catherine Kress: Are there ever instances where we might interpret a particular geopolitical issue or event as being not so great, but it turns out to be positive for markets? And I guess with that question, how might the BGRI help us identify that disconnect?

    Eric Van Nostrand: Yeah, so that's something that happens a lot in analyzing the interplay of geopolitics and markets. The classic example of that is the 2016 U.S. presidential election. It had been widely forecast leading into November that the election of President Trump, were it to occur, would be a negative for risk assets because of associated uncertainty. As we know, that wasn't the case. The expectation of his tax and infrastructure policies when he was elected, wound up driving markets higher, in combination with the expectation of lower interest rates which are also central to equity prices in general. So sometimes you get market responses like that that are based on a different interpretation of the geopolitical event than you had before. But other times, and this is where the BGRI comes in, you might see a negative event happen that was already priced in before the event were to occur. An example of that might be the first round of U.S.-China tariffs in 2018. It was kind of telegraphed that this was starting to come. The BGRI rose as markets talked about it and then when the tariffs were actually imposed, it wasn't that big a surprise, and markets weren't damaged by that too meaningfully because it was already priced in. And that's really where we focus a lot of this research is understanding when markets price this in and when they don't, because that helps us understand the profile of risks that'll drive our investments overall.

    Catherine Kress: Sure, so if I were sitting on my couch starting season 1 of Game of Thrones, could I use this methodology to forecast who would take the Iron Throne at the end of the series?

    Eric Van Nostrand: I don't think anyone could forecast that, certainly given how things panned out. But I do think what something like the BGRI could tell us if we ran it in Westeros is who the consensus choice was going in, who the broad expectation was would wind up on the throne, if you will. And in the case of the real world or in the case of Westeros, we might think oh, if the market's crowded, if everyone expects it to be Daenerys, then perhaps there's a potential for surprise that we're not appreciating. And that I think would have, avoiding spoilers, that would have paid off in both Game of Thrones and the markets I suppose.

    Catherine Kress: So if we had actually created a dashboard for Game of Thrones, and we qualitatively said that we thought it was going to be someone else that wasn't Daenerys, but market attention on Daenerys was high—that would have been an interesting point to flag where we could have taken advantage of some opportunities.

    Eric Van Nostrand: That's exactly right, Catherine, and that's a great analogy for what we do when we think about geopolitical risks at BlackRock. We're never going to put a lot of risk on things that are inherently uncertain, such as the output of a lot of these geopolitical risks, but we're always going to be exposed to them. And what we need to understand is the way the markets are likely to respond in different scenarios so that we have a balanced allocation of risks, and exactly the process you laid out is just how we might think about that.

    Catherine Kress: Taking it back to the real world outside of the Seven Kingdoms, where does the BGRI sit for the risks we talked about earlier? So I know we have BGRIs for each of our top 10 risks that we track but, for example, global trade, U.S.-China competition, Gulf tensions, what are those indicators telling us?

    Eric Van Nostrand: Perhaps unsurprisingly, Catherine, all the risks we talked about are risks that the market isn't missing. And the BGRIs for each of those three topics are all very high. And they all say that, for example, the market attention to each of those topics is significantly higher than it has been in recent years, and that's not a surprise because we're talking about them, too. Those are the popular topics right now. And let me be clear. I don't mean we shouldn't be paying attention to them. Those are real risks in all three cases, and all three will be very important to markets over the coming years. But we think markets have largely appreciated the fact that these are happening in the background, sometimes not even the background, and are already getting the focus they need. Where we tend to worry is when we have a view that a certain geopolitical risk is on the horizon, but markets aren't paying as much attention to it.

    Catherine Kress: Alright, Eric, I'm going to end with a rapid-fire round. In one sentence or less, I want you to answer the following questions. Are you ready?

    Eric Van Nostrand: Let's do it.

    Catherine Kress: What is the market missing?

    Eric Van Nostrand: One geopolitical risk the market has paid less attention to recently is North Korea, which drove the focus in 2017 and 2018 but has since fallen out of the conversation.

    Catherine Kress: We just spent a lot of time on geopolitics. What about just politics?

    Eric Van Nostrand: One sentence on just politics? I would say domestic politics matter as much for the micro as they do for the macro; watch specific industries for their relationship with the policies proposed as we approach the election next year.

    Catherine Kress: Perfect. What about the macro environment?

    Eric Van Nostrand: Well, I think growth is slowing, but the markets know that, and central bank policy is working hard to offset it.

    Catherine Kress: Final question, a bit of trivia for you. Sansa Stark in Game of Thrones is played by an English actress named Sophie Turner. Who is Sophie Turner married to in real life?

    Eric Van Nostrand: The Jonas brother. I can't name my Jonas, though.

    Catherine Kress: Which one?

    Eric Van Nostrand: Hard pass, hard pass there.

    Catherine Kress: Alright, the answer is Joe Jonas.

    Eric Van Nostrand: I'll keep that in mind.

    Catherine Kress: Eric, thanks so much for joining us today. It was a pleasure having you.

    Eric Van Nostrand: Thank you.

  • Episode 17 transcript – The tech topics we aren’t talking about with NYTimes’ Kevin Roose

    Mary-Catherine Lader: Sometimes it feels like all topics lead to technology these days. And it’s not just in dialogue with our friends, our families, our coworkers, it’s also what we ask when we’re alone. Our Google searches of buzzwords like blockchain and 5G are up over 1,000% in the past couple years. Searches for fintech are up 843%. And Google searches for AI have risen 38%, even though AI is a decades old subject. But what tech topics aren’t we talking about? We asked around to find out.

    Man 1: How bad actors are using technology to disrupt our political and financial systems and what we can do to defend ourselves both personally and as society against those actions.

    Woman 1: I don’t want to carry around credit cards anymore because I want to use Apple Pay for everything.

    Woman 2: Corporate governance within ride sharing companies.

    Man 2: Within the next 10-15 years, we’re going to be living in a society where people will be walking around with glasses that will give you directions of where to go, tell you the names of buildings. Keep an eye out for augmented reality, it’s going to take over.

    Mary-Catherine Lader: So what else aren’t we covering? On this episode of The BID, we’ll speak to Kevin Roose, technology columnist for the New York Times and best-selling author. We’ll discuss how technology is influencing our politics and culture, and his own journey as he tried to stop using his phone. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Thanks, Kevin, for being here.

    Kevin Roose: Thank you for having me. What a pleasure.

    Mary-Catherine Lader: Such a pleasure to have you. You write a technology column for the New York Times called The Shift. Before that you covered Wall Street, you’ve written a couple books. And you’re really familiar with the world of business, politics, and also the underbelly of the internet. What got you into this cross section and what about technology got you to start writing The Shift?

    Kevin Roose: Well, I have always been obsessed with technology. I was a child hacker, prodigy—not prodigy, but I liked to go on weird parts of the internet, I had lots of Geocities webpages. I had a little web design business with my brother. From a pretty early age, I was into not only the internet but the things that the internet made possible. And then I graduated from school, I got into financial journalism because I was writing a book about Wall Street. And then after that, I saw sort of the world moving to tech. A lot of my sources, people I talked to in finance and in consulting, they were moving out to San Francisco to work at startups, they were transitioning into engineering, they were going back to school to learn how to code. It just felt like there was this kind of tectonic shift that was happening that was pushing people that I knew and respected into tech. And I thought, well that is interesting. Maybe I should go spend some time trying to figure that out. And then it just happened that the woman that I was dating at the time, and am now married to, lived out in California for school. So I thought, well maybe I could combine these things and go to California to write about technology, and that’s what happened, and here we are.

    Mary-Catherine Lader: But you came back to New York.

    Kevin Roose: Well, this partner of mine, this spouse, my wife, she is law school here in New York. I just keep following her around basically and adjusting my career accordingly—but no, I like writing about technology from New York, because I think I lived in Silicon Valley for several years and have an understanding of the reality on the ground there. But I think it gives me a useful remove to have some distance. Often I felt in San Francisco, it’s hard to be objective about the tech industry. When your friends work at these companies, you are constantly running into people that you know. And you get a very cloistered worldview at certain times out there.

    Mary-Catherine Lader: And so much of what you write about is what people aren’t talking about, and then they start talking about it, because you have a great ability to spot these sorts of trends and things that we should be talking about. What do you think people aren’t talking about right now? It feels like tech dominates all headlines, all companies are technology companies, so what is there to cover that isn’t being covered?

    Kevin Roose: I do think technology is the story right now. It really feels like we’re transitioning from one economy to another. And we’re part of the way through that, which is why you see every company being a tech company. But I guess they call it the fourth industrial revolution. Which is not a phrase that I love, but I think it’s useful in terms of it positions this as the correct size of transition, I think. And so I don’t think we’re talking enough about AI and labor and the future of work. We talk a lot about it, but I think if we had a better understanding of what was happening, it would be all we were talking about. Do you feel like there are other things we should be talking about?

    Mary-Catherine Lader: No, I think that is a lot of it, AI and the future of work. We think about that all the time in financial services. There are a lot of jobs that will be affected. And it’s funny, because it’s hard to figure out where you start in the conversation about AI and ethics and work. Do you just bemoan the potential loss of jobs in the future?

    Kevin Roose: I had the same question, like I didn’t really know where to start with it. So a couple months ago, I started going back and reading about the first, and second, and third industrial revolution, what was it actually like to be a farmer in the 19th century who suddenly saw these factories springing up and thought, “Oh Man, I’ve got to go to the city now and leave my farm and go get a job in a factory.” What was it like to work in an auto plant in the mid-20th century and see the robots coming in around you, and you think, “Oh, I should probably find something else to do.” And was the actual cumulative impact of the changes on the societies which took place? I’m a little bit of a history nerd, so I love going back and reading contemporaneous, you know, what were the people of 1830s England saying about the factories?

    Mary-Catherine Lader: And have you found a good analysis that gives you hope about the future? For example, I sometimes wonder, has anyone done an economic analysis of the impact of the washing machine? That was positive for most people. Have you found good work that gives you hope about what this could mean in the fourth industrial revolution?

    Kevin Roose: I think that the default story is one of hope, right, because we all used to have terrible jobs, like farming is not a fun job and it’s back-breaking, and it’s unsafe. And it’s good that only two percent of us need to be farmers now to feed the other 98 percent, it’s good that our productivity has resulted in better jobs. But there is some pain involved in the transition. It’s not like we just snap our fingers and all the farmers become factory workers and all the auto engineers learn to do other skilled labor. It takes a while for society to catch up with the technology, and that is happening faster this time. It took a long time for technology to proliferate in these earlier shifts, and now it’s happening every day.

    Mary-Catherine Lader: And where do you think the dialogue among technology leaders, founders, people you interview about this is like right now?

    Kevin Roose: Well, there is kind of a public dialogue and a private dialogue. So, I’ve heard both because I’m a journalist, so when people talk to me, they usually have their public face on. In that case, the public discussion is, we’ll get through this essentially. We have made every transition before in our history work, automation is going to create new categories of jobs we don’t even know what they are yet, and people will find new opportunities. There is not a fixed pie. The private conversation was often a little bit bleaker than that, I find. Because these companies feel enormous pressure to automate. They feel if they don’t do it in the next quarter, their competitor is going to do it. And their margins are going to get fatter, their shareholders are going to reward them for that and the people who don’t automate, are going to be left behind. So I think there is an incredible amount of pressure felt by corporate leadership to do this as quickly as possible. And frankly, maybe too quickly. Maybe it should take a little longer for this to be implemented in the company, knowing that people are going to be affected by this.

    Mary-Catherine Lader: Do you see anyone trying to do anything about that? I think about the minimum basic income advocacy and some attention to solutions. Is that about headlines and PR? Are you seeing anything tangible?

    Kevin Roose: No, I don’t think that is about headlines and PR. I think people understand that every transition has some elements of good things and some elements of pain. And if we can ease the pain for people, that’s good. We should do that. And I’m actually optimistic. I think that part of what we see in periods of technological transformation is that actually huMan skills become more important. A lot of people for a lot of years, their jobs were basically robotic, they were taking things from one place and putting them in another place, or they were changing cells on a spreadsheet. And it’s good if we don’t have to do that anymore, we get to do more creative things. We just need a system that supports that transition and the people who can’t make the jump or can’t make the jump as easily.

    Mary-Catherine Lader: Part of what we’re doing at BlackRock through Aladdin Wealth is basically building technology software algorithms that help our clients, banks and wealth Management firms transition to using technology to make a financial advisor’s life more about their connection with the client. And what is funny is that a lot of those startups who a couple years ago were like, “We don’t need people, we don’t need huMan advisors. It’s going to be all the algorithm.” They’re now adding huMan advisors. So there is this equilibrium of huMan plus technology that we’re reaching at least in wealth Management. What kind of trends have you followed in financial services or fintech, given that you started your career on Wall Street, and how have things played out maybe any differently than you would have expected?

    Kevin Roose: I’m fascinated by the venture market right now. I know it’s not exactly financial services but the VC economy is really interesting to me. I know Uber filed to go public. And that is a fascinating example of a company that got enormously large, raised more money than probably any private company in the history of private companies. And it’s just a different model. We’ve never seen a company go public this large with this much venture money in it. I’m fascinated by the growth and explosion of the venture capital backed ecosystem and all those services that we all depend on every day that may not have gotten off the ground were it not for these resources of private capital.

    Mary-Catherine Lader: And do you think in the wake of these IPOs, that people are raising just as much money? It seems like nothing has really changed. It’s not daunting the hopes of today’s entrepreneurs or the expectations of today’s venture capitalists doing those early stage deals.

    Kevin Roose: No, I think there is a natural skepticism of loss-making companies, but I think people generally understand that you lose a lot of money for a little while, and hopefully you get market share, and then you can have pricing power. The bad example of this is MoviePass, which I wrote about last year, which had explosive growth because they were basically losing on every transaction, they had negative margins on every new customer. So that is not the best model, but there are models I think that work. We saw Amazon be unprofitable for Many years, and I think they’re doing okay now.

    Mary-Catherine Lader: But that premise of get so big so that you have pricing power, there is something about that that is a little complicated in terms of its relationship to the consumer, right. And it’s amazing to see all these brands be so beloved by all of us, because they’re convenient. But ultimately if the business model is to have pricing power, it’s a little anticompetitive. Do you think we’re catching on to that? Do people talk about that when you are covering them, or no?

    Kevin Roose: It’s great for consumers. They get all this cheap stuff, right. We get movies for free and we get rides to the airport for probably 20 or 30 percent less than their natural price would be in an unsubsidized market. So for consumers, it’s great. I think if you’re the investor, how long are you willing to subside growth? I think those are questions above my pay grade. For consumers, I think we’re living in a golden age of cheap stuff. And I used to joke, I had a friend who was a venture capitalist out in San Francisco and every time I would use one of these services that he funded, I would say thank you for the three dollars, really appreciated the discount on that ride. And he didn’t think it was funny.

    Mary-Catherine Lader: But he should have thanked you for being a user. So what other kinds of things are you writing about these days?

    Kevin Roose: Right now I’m really interested in social media and the reckoning around privacy and data use, and extreme content. I’ve been doing a lot of reporting on Facebook and YouTube, and I think we’re sort of at a moment now where we’re collectively reckoning with the fact that a lot of our lives are connected to these platforms that may or may not have our best interests at heart.

    Mary-Catherine Lader: And what do you think will change as a result of the increased public attention around behavior or policy?

    Kevin Roose: I think there will be some regulation. I think everyone at this point expects regulation of at least privacy and maybe some content stuff. I think people are starting to view these services differently. I’m not sure what the average user of these services feels, but I know at least amongst the people that I know, they’re having different conversations about it than they would a couple of years ago, I don’t know, what do you think?

    Mary-Catherine Lader: I think the piece about the fact the devices in your home may have a huMan listening, maybe attached to a huMan that is transcribing your words, when that becomes real, that is pretty powerful. Whether it changes your behavior, I don’t know. I haven’t changed any of my behavior. I check Facebook a little bit less.

    Kevin Roose: But you’re still on it.

    Mary-Catherine Lader: I’m still on it.

    Kevin Roose: So am I.

    Mary-Catherine Lader: I still love the device in my home. And I‘m curious what lessons from the financial crisis and regulation in the wake of that there are for social medial platforms and whatever may transpire here. The content is so different, the nature of the issues are so different, there may not be any whatsoever. But it will be kind of interesting to see how that gets shaped and written and then how it gets digested by these companies, particularly because it’s not really an area where those writing the rules have a lot of depth of expertise or even use it themselves.

    Kevin Roose: Yeah. I’ve sat in enough hearings to know that Congress is not logging into Instagram all that often for the most part. I think there are some useful lessons from the financial crisis and one thing that we saw with a lot of the post-crisis regulation is that it really did entrench the big financial institutions. It became prohibitively expensive and hard to start to form a new bank. There are basically zero new banks since the financial crisis. And I think the big banks are probably safer and less levered and have better capital controls than they did before the crisis. So in that sense, I think the financial system is better for more people. But, if the goal was to break up the banks, they certainly didn’t do that.

    Mary-Catherine Lader: So bridging your two worlds that you’ve covered the most, financial services and technology, and now that we’re in this fourth industrial revolution, what ways do you see financial services ripe for disruption and change?

    Kevin Roose: Well, I think some of this is happening around the margins, we’re seeing little things like the lending models are changing for personal finance, we’re seeing robo-advisors. There is a lot of startup activity that is being used as a pilot vehicle for the rest of the industry, like oh, we can do that we can do robo-advisors, let’s do that, or acquire one ourselves. My sense is that the financial service is actually ahead of a lot of industries in terms of technological adoption. So high frequency trading has been a thing for decades, and there’s been lots of automation throughout these firms. I still think there is room for improvement on a lot of these. I think a lot of things like underwriting, there is still a lot of opportunity for automation there. I think you have to be careful with things like underwriting because if you have biased data, you’re going to have biased results for things like home mortgages. But trying to get through one interview without mentioning the Blockchain world, it’s very hard these days. But I do think there are probably some useful applications there.

    Mary-Catherine Lader: As you’re covering these tech companies and everything they’re going through in Washington and with consumers now, any lessons for financial services?

    Kevin Roose: I think one thing that has really stood out to me and that has surprised me actually is how responsive these tech companies have been to their own workers. We’ve seen in the past year, engineers at Google and Amazon and Microsoft and other large tech companies, push for real change within those companies, and be listened to. I think that because the talent pool is so tight there, because these are such valuable employees, they’ve found out that they have a lot more leverage than they thought. And if their firms aren’t doing things that they feel proud of, they can band together and change that. And it doesn’t take very Many of them. It doesn’t take very long. So I think that in financial services and every industry, some social responsibility can be led from the top and the hope is always that the top is leading, and in the cases where it’s not, the workers actually have a pretty substantive impact in the right situations.

    Mary-Catherine Lader: That makes a lot of sense, especially since millennials are now the majority of a lot of these firms –

    Kevin Roose: Really?

    Mary-Catherine Lader: Yeah. Yeah. The average age at BlackRock is 34, which is a millennial actually. Well, also millennials not so young anymore.

    Kevin Roose: Right.

    Mary-Catherine Lader: So a lot of what you spend time on is gloomy and negative, but you also--

    Kevin Roose: What are you talking about?

    Mary-Catherine Lader: I guess the dark underbelly of the internet. But you also give out good tech awards. So who got good tech awards this year and why?

    Kevin Roose: This is my favorite column of the year, because you’re right, I do spend 51 weeks a year in the muck of the internet. But then at the end of the year, I like to actually look at some of the people and companies who are doing great things for the world. So this year, let’s see, I had a company called Zipline that does blood delivery by drone. So they have remote places in Sub-Saharan Africa or other places that need medical supplies for hospitals and remote clinics. And they actually now have drones that they can plop the bag of blood onto and shoot it out, and get it to the place where maybe you couldn’t get an ambulance. So that is really cool. There was also a great project run by Code for America which is a non-profit that does civic coding projects. In San Francisco they had a law passed where you could expunge your criminal record if you had a marijuana-related conviction. But it involved a lot of paperwork, it was kind of cumbersome. And so a lot of people just didn’t know how to do it who were eligible for it. So Code for America teamed up with some organizations and built an automated system where you could just automatically expunge these convictions, which was a great example of automation in practice, creating more justice and equity for people. So things like that, I like to save up through the year. I have a little folder in my inbox that is good stuff, and every time I feel a little bit down in the dumps, I just look at that and remind myself that not everything is horrible.

    Mary-Catherine Lader: Right, exactly. So I’m going to end with a rapid fire round of a couple questions for you. Okay, are you ready?

    Kevin Roose: Yes.

    Mary-Catherine Lader: Okay. So you were on Times’ list of 140 best Twitter feeds.

    Kevin Roose: Oh my god.

    Mary-Catherine Lader: What is your social media of choice, Twitter, YouTube, Instagram, other?

    Kevin Roose: Other. I’m really into TikTok right now, which is a Chinese lip-syncing app—

    Mary-Catherine Lader: Why?

    Kevin Roose: It’s amazing, it’s so good. I wrote a whole column about it, you can go check it out. But it’s very happy. It’s just people being silly on the internet, like it used to be. And it’s delightful. You will feel very old if you are over 25 and you open TikTok. Like I felt like I was chaperoning a school dance or something. But it’s delightful.

    Mary-Catherine Lader: So you had a 30 day breakup with your phone. What is the consensus?

    Kevin Roose: Phone, but less phone. I did this detox because I was on my phone for five and a half hours a day on average. And it was getting in the way of my marriage and my work and life, and I just thought, this sucks, I don’t want to do this anymore. So I got a phone coach, who helps me--

    Mary-Catherine Lader: That exists?

    Kevin Roose: She’s amazing, she’s my phone coach, and she helped me get down from five and a half hours a day to one and a half hours a day. No phone is not the answer. No one can have no phone in 2019 unless you’re like Amish. No shade on the Amish, they’ve got it figure out. But I do think we can be more intentional about how we use our phones and not just use it to kill time.

    Mary-Catherine Lader: So in that period, you picked up pottery?

    Kevin Roose: I did.

    Mary-Catherine Lader: Are you sticking with it?

    Kevin Roose: I hope so, it’s really fun. It’s fun to do something with your hands that doesn’t involve a screen. It gets your hands really dirty, you can’t really check your phone while you’re doing pottery, and it’s very meditative. I made some very crappy bowls—if anyone is in the market for some mediocre bowls, I’ve got a cupboard full of them.

    Mary-Catherine Lader: Who has been your most memorable interview?

    Kevin Roose: I did a show at an anime convention once, you meet a lot of characters at an anime convention. So let’s see, I interviewed a vocaloid, who is a hologram pop singer. So it doesn’t actually exist, but I did a story about these imaginary pop singers who have thousands and thousands of fans that come to their “concerts.” So that was pretty weird.

    Mary-Catherine Lader: So all more memorable than Mark Zuckerberg?

    Kevin Roose: Mark Zuckerberg is fine. He’s no hologram.

    Mary-Catherine Lader: And what book do you want to write next?

    Kevin Roose: Oh Man, well I am writing a book now but I can’t talk about it yet. It’s loosely on this issue of AI and the future. So 2020, get your Amazon carts ready.

    Mary-Catherine Lader: Okay. So stay tuned.

    Kevin Roose: Yes, stay tuned.

    Mary-Catherine Lader: Thank you so much for joining us, Kevin.

    Kevin Roose: Thank you for having me.

  • Episode 16 transcript – How China became a technology superpower

    Oscar Pulido: It’s no secret that there is a race for technology dominance. The speed of adoption in digital technologies in China has caught the world by surprise. From superpowers like Alibaba and Tencent to artificial intelligence, to the development of 5G technology, China has become one of the most vibrant hubs for technology in the world.

    Surprisingly, it’s all pretty recent. In 2010, a little over one-third of China’s population was using the internet. And most of that was desktop based. In the U.S., it was 71 percent. So how did China become this superpower, and how will the race move forward from here?

    On this episode of The BID, we’ll speak to Rui Zhao, Portfolio Manager for Chinese equities within BlackRock’s Systematic Active Equity Group. We’ll talk about how China grew into the superpower it is today, what makes Chinese technology different and where she sees opportunities for investors. I’m your host, Oscar Pulido. We hope you enjoy.

    Rui, thank you so much for joining us today on The BID.

    Rui Zhao: Thank you so much for having me here.

    Oscar Pulido: Let’s start at the beginning: where was China five or ten years ago in terms of technology and how did it become the superpower it is today?

    Rui Zhao: China has completely evolved to a very different country as of today. And ten years ago, we don’t have much big data or machine learning going on in China, but fast forward to today, those are very widely available and very prominent in China. I would say the transition really started in 2003 after China added itself into the WTO. The whole stock market only started in 1993 and in that year, it only was six companies. And the whole purpose for the stock market is not anywhere for people to invest, it’s more about helping the SOEs, State-Owned Enterprise, to divest their shares. And the stock market really becomes investible to normal people after China entered WTO. So the number of private companies in China, growing rapidly, and also the size of those companies, also grow rapidly. A lot of the GDP growth which is generating wealth and cash flow are not cash flow generated by the publicly listed companies, rather they were generated by private companies or companies owned by the government. That’s why they can direct the usage of the cash flow generated to long term investment. The government has been directing all those cash flows to invest in future infrastructure projects, or in technology upgrade. And also in venture capital companies that help to fund a lot of the initiatives in the technology development. I think that is also part of the reason we have seen such a fast growth in China’s technology sector. But also I have been thinking about this question myself a lot as well, so I think in China, the education component really played a key role in this fast catch-up process. Back for myself when I go through my school process, we were always told math, physics, and chemistry are the key things we need to learn and I think for my generation everyone has learned a lot of hard science but very little of the liberal arts. So it’s pretty narrow knowledge but it’s really helping us to take advantage of the engineer component.

    Oscar Pulido: The government plays a role in this as well. My understanding is that President Xi’s Made in China 2025 Initiative seeks to transform China into a leader in new technologies. So how does this support actually play out?

    Rui Zhao: Yes. You’re absolutely right. The government has been a key component in driving the technology upgrade in China. The Chinese government usually set a five year plan and revisit it every year so they have expressed a key focus on the technology upgrade and recently, called five years ago, the big data usage in the whole economy. I think in the long run, the government really recognized that big data and technology can increase the speed of catching up and can increase speed of economic growth as well as stability in the society. The Made in China 2025 has been widely quoted among the media and it’s caught a lot of peoples’ focus, this time I think it’s part of the trigger for the U.S./China tension so that is why it has become a very widely quoted concept. But really when you look back in China’s history, they always have a five year plan going on, and they also have a couple times this 30 year discussion. But for 2025, the government wants to upgrade the technology platform in China, not only on the AI and machine learning, and they really want to apply technology in normal peoples’ daily lives to increase the whole productivity of the society.

    Oscar Pulido: Rui, what are some of the advantages that the leaders in China have when helping with this investment in technology that perhaps leaders in the U.S. and Europe don’t have, in your opinion?

    Rui Zhao: I think in China we all recognize it’s a one party dominated system, so I think there is nothing wrong to say that out loud. That is really give the country or the government advantage to implement. So when they committed to anything or when they decide any change they want to make, they can really implement it quite efficiently. The downside is usually lacking very thoughtful discussion and deep understanding about the impact on the environment and society. But in terms of getting things done, they do have the advantage of that. And also I think the party system have a very detailed focus that is on stability. So I think the whole government agreed on the main agenda is to focus on stability, and to deliver stability, they need to deliver growth so that the public can enjoy some of the growth and improvement in daily life, and also at the same time, the employment has been a key focus of the government. So I think China has been enjoying high growth historically but the most of that agenda is really to deliver or maintain stability over the long run.

    Oscar Pulido: Let’s talk about the consumer base in China. For example, in the U.S. when I think about technology, there is a hesitancy to share personal information with tech platforms or there is worries about privacy, but in China it seems like the opposite. I just heard that at major airports in China for example, you can walk up to a kiosk that scans your face and gives you all of your boarding information: is that true?

    Rui Zhao: Yeah. I also heard about that, but I haven’t tried it myself, but I will not be surprised this is happening in China or is going to be widely available in China in the near future. I think you are right, maybe part of the culture or maybe part of the past experience of history, Chinese people are less concerned about their privacy. They are really more concerned about the growth for their wealth. So that is why they are willing to share their information in order to maybe grab a better opportunity or at least try to grab a better opportunity or try something new. But I think the next generation things might change. I already seen some dramatic difference over the current generation and the young generation, the millennials. So I think things can evolve, but it just happens to be in the past few generations people focus more on the growth and wealth perspective rather than other parts.

    Oscar Pulido: That’s interesting, people are less worried about privacy and it sounds like they’re more focused on economic advancement. And that makes me wonder, the idea of a super-app where you can do everything all in one experience — it’s not something that you typically see in the U.S. but for example, WeChat is a good example of this where you can message a friend saying you‘re on the way to dinner, you can order a car, you can play a game on your ride to the restaurant, you can order your food before you get to the restaurant; there are a number of things you can do all within a single app. Do you see this being replicated outside of China, and what do you think are some of the advantages and disadvantages of any app like this?

    Rui Zhao: Yes, I think it really helps people to manage their daily life in a higher efficient way. And I personally enjoyed it a little bit when I was traveling in China. You can use WeChat to handle everything. I think in China it’s probably the first place, this type of super-app started, especially WeChat. But I think slowly we have seen some major companies in the U.S. starting to try out and expand out of their normal business lines, and to give user a better experience to try to do things together. For example Amazon started as an online company and now they are consolidating online and offline with Whole Foods; and Apple expanded into ApplePay which is an online transaction system. So I think in the U.S., we are seeing some of the new apps or new companies being tested out but in China there was an advantage that a lot of the companies started with the same idea and each of them can go out and find a lot of the users because of the huge population. That’s usually what happens in China, it’s not just a one company coming to play. And also there are pretty decent amount of the venture capital funding available in China, either backed by the government or by large existing companies, and they have helped to fund all those trials. So that is why we have been seeing in China a lot of new ideas being tested, and on the other side, as we mentioned earlier, in China the consumers are less concerned about their privacy. They are quite excited to try out some new apps either to have a better experience or just to increase their day to day efficiency. So they are very open-minded to try those things which also help those super-apps to grow.

    Oscar Pulido: Do you think that Tencent which owns WeChat and Alibaba and perhaps others, would they have been as successful if they weren’t trying to launch their businesses in China? Or do you think they’ll have equal success abroad?

    Rui Zhao: That’s a great question. Honestly, I think Tencent can only exist in China. And also, I think they take advantage of China being semi closed on the economy and market. One big advantage that they had was Google was not available in China. So I think if it’s in the U.S., Google will probably become a dominant player in the whole market, however, while they are not in a hurry to enter the other fields, like banking, like investing, or for food delivery, for example. So they are really taking it slowly and more carefully plan their business trajectory, versus in China, a lot of things are moving super-fast.

    Oscar Pulido: So it’s interesting now you’re comparing and contrasting Chinese companies versus non-Chinese companies and what each other do well. So in what way do you see China learning from some of these other global players—you mentioned Google for example—and what way do you see China setting the bar for some of these global companies?

    Rui Zhao: I think in China, it’s only been 15 years in this decent high growth regime, so they have a lot to learn. The U.S. is a very mature market and developed market, and there are a lot of the cutting-edge technique available here. But I think on the other side, China is really good at executing. So when they have the idea, when they see the opportunity, they tend to move very fast and also because of the competition in the industry, usually there will be multiple companies to start, so they tend to have really push to move faster compared to the U.S. peers. And also the government did help the companies by supporting this technology upgrade, and also big data availability agenda. So the data has really become more available in China compared to the U.S. For example, in the U.S., I think a lot of companies who try to use data will be varied about the legal consequence, versus in China, consumers are less concerned about the privacy. So those type of data tend to be more easily available.

    Oscar Pulido: You mentioned the competition going on between companies in the U.S. and China. I want to talk more about the race for technology dominance between these two countries. We’ve heard so much about this in the headlines: what started the race and where do we stand today?

    Rui Zhao: When China stared to upgrade into the higher tech of industry on the sector of the economy, some of the competition naturally happened. And the way I think about China 20 years ago is mainly being labeled as a big industry of manufacturer and assembly. Versus today, they are entering this higher value added sub-industry sector of the market, of the economy. Some areas have been traditionally dominated by the U.S. players, so some of the competition happened naturally, but at the same time, because China moved so fast in the past 15 years, a lot of those things are not really done very carefully. For example, regulation set up for a potential data breach risk or even the consumer privacy. Even though people don’t care about it today, that doesn’t mean they won’t care about it in the future. So a lot of regulations haven’t been really thought about very carefully. Versus the U.S., things tend to be moving in the more careful fashion. So the conflict will naturally start. I think this is a good opportunity for China and also for the U.S.—the U.S. has been helping China in terms of the past fast growth, but in China’s case, I think it is a good time to take a pause and think about what is the best way to set up regulation for the long term growth.

    Oscar Pulido: It seems to me like there are a couple of areas in particular where this race in technology is most prevalent: 5G comes to mind, as does artificial intelligence. And I want to start with artificial intelligence since that seems like the basis for a lot of the most recent and rapid advancements in Chinese technology. How competitive are the U.S. and China when it comes to artificial intelligence?

    Rui Zhao: I think for artificial intelligence, it’s a very broad topic and it can be applied to anywhere. But in the end of the day, if you want to teach the machine anything or you want the machine to learn anything out of itself, you have to have the data. And that is one of the advantage of China because data availability is huge and is really lack of constraint. So a lot of the AI can be trained and applied to this vast amount of data. Versus in the U.S., I think regulations already followed up quite quickly, so some of the data becomes not easy to access. So that might make the speed of the development different.

    Oscar Pulido: What about 5G: it seems like there is the U.S. versus China when it comes to this topic that this is where there’s another tension between the two countries and their advancement in this technology. Does there have to be a winner and loser when it comes to 5G?

    Rui Zhao: I hope the answer is no, because I do think there will be a big benefit for both countries to collaborate in this area. As I mentioned, the U.S. really has the thought leadership and the cutting-edge innovation, and in China, it’s pretty good at executing the ideas or has been executing ideas. And also because of the amount of data, you can see whether it’s successful or failure idea, quite quickly. So I think if we can really combine the two country’s strengths, that could benefit everybody in the world. But I think going forward, there could be different focus between the U.S. and China in terms of the 5G technology and AI.

    Oscar Pulido: So let’s talk about some of the investment implications, I want to take advantage of your background as a portfolio manager looking at markets. What does all of this mean for investing in technology? We had heard from Kate Moore on a recent episode that in her opinion, it felt like you needed to invest in U.S. and Chinese tech independently just given the difference in the two ecosystems. I’d be curious to hear your view as to the investment opportunities based on everything you’ve mentioned.

    Rui Zhao: I totally agree with her view. I think she has a good point that as an investor, you might want to own both U.S. and China in terms of technology development because they might be going so different paths. This competition might become long term, and the advantage of the two countries are also quite different. China is good at implementing testing and finding data for the test, and the U.S. has cutting-edge innovation. And also I think in China, the technology or the use of internet, use of the mobile app has rooted deeply into peoples’ daily lives. From consumer day-to-day life, to investing, you can also buy mutual funds with the Tencent WeChat app, or to healthcare, you can see doctor on your phone either through a VC or through just a text chat or through picture. So a lot of the development in China are focused on the usage perspective which helps to improve humans’ daily lives, versus the U.S., it could be more focused on a different aspect. So I think owning both sides of the company can probably provide investors a more comprehensive view of the technology upgrade or growth.

    Oscar Pulido: Another one of the differences you mentioned between these two countries is the willingness of individuals to give up data about their social media usage. So how do you use this when you’re making investment decisions?

    Rui Zhao: Yeah. That’s a great question. So I’ll focus on China first, so we can get a lot of information from internet, including social media, but also including a lot of these disclosures that companies are required to broadcast to everybody. So we combine data from different data sources together to give us a more comprehensive view about a company. One example I will use is back 30 years ago, even in the U.S., an investor can only get information by reading through the financial statement the company put up, or talking to the management team through one-on-one meeting, But fast forward to today, we can get a lot of information about a company though their online activity because we know how many people click their website every day, or we know how many people opened up their app and look at the company how long they spent lingering around in the app. We can read through social media and see which brand people like and which brand people complain. So just overall by leveraging the data, it answers a lot of the questions we always wanted to answer before, but we couldn’t. And today with the data and technology, it’s just helps our human being to answer this question. 

    Oscar Pulido: Well, it’s apparent we’re going to be talking more about China particularly in the context of our portfolios based on everything you’ve just shared. Rui, I want to end with a rapid fire round where we’re going to predict the future a bit, or at least we’re going to try. I’d like you to tell me whether you see the following things happening in five, ten, thirty years, or never. Are you ready?

    Rui Zhao: Yes.

    Oscar Pulido: Okay. Household robots.

    Rui Zhao: Within five.

    Oscar Pulido: A cure for cancer.

    Rui Zhao: Five years.

    Oscar Pulido: I sure hope you’re right on that one—there are a lot of people rooting for you on that answer. Personal jetpacks.

    Rui Zhao: Ten years.

    Oscar Pulido: That’ll be a good way to get to work I suppose if that works out. One world currency.

    Rui Zhao: I would say somewhere between 30 years and never.

    Oscar Pulido: Commercial space travel.

    Rui Zhao: Ten to thirty years, and I’m actually looking forward to this. I’ve already been talking to my kids that someday I’m going to take them to the moon. But they didn’t show any interest so far.

    Oscar Pulido: It’ll be a great way to earn accelerated airline miles for sure. Rui, thank you so much for joining us today. It was a pleasure having you on The BID.

    Rui Zhao: Thank you so much for your time and thank you for having me here.

  • Episode 15 transcript – China: too big to ignore

    Oscar Pulido: In 1987, China’s gross domestic product, or GDP, was just shy of $273 billion dollars. Sounds like a lot, right? Fast forward 30 years to 2017. GDP was over $12.2 trillion dollars. That’s over a 4,000 percent increase. In the same timeframe, the U.S. experienced about a 300 percent increase.

    China has had huge economic success in the last 30 years. While it was once considered a mainly poor and rural country, it’s become a global manufacturing power, and a quickly growing middle income economy. But until now, investors haven’t been able to take part in its success. Chinese authorities have kept financial markets closed and prevented them from being integrated with the rest of the world. Now, this is starting to change. The Chinese market is opening gradually, creating more and more opportunities for investors to take part.

    On this episode of The BID, we’ll speak to Jeff Shen, Co-Head of BlackRock’s Systematic Active Equities Group, who believes the market opportunity in China is too big to ignore. I’m your host, Oscar Pulido. We hope you enjoy.

    Jeff, thank you so much for joining us today on The BID.

    Jeff Shen: Thanks very much, it’s great to be here.

    Oscar Pulido: And I should say welcome back, because this is now your second time on the podcast, so I think you know how this works.

    Jeff Shen: I hope it’s a good sign.

    Oscar Pulido: Let’s talk about China’s growth. It’s actually really impressive when you think about what they’ve been able to accomplish over the last 30 years. What’s been the catalyst of that?

    Jeff Shen: I think number one is China really started to reform starting in 1979. And whenever we think about China, I always tell people that are three things that are actually most important. It is government, government, and also government. That certainly has been a major catalyst for the country to move from essentially a country that was quite a bit below poverty, think about 90 percent of the population lived below poverty back in 1979. Earning less than $1.19 a day. Fast forward to 2019, there is only less than one percent in this kind of extreme poverty. So I think the policy has certainly been the first most important driver. I think the second one is China joined the WTO in 2001, and that certainly allows China to open up to the rest of the world. And I think it’s certainly gone from a country in the 60s and 70s that was actually quite isolated to the rest of the world, to essentially having China come on to the world stage, whether it’s trade, whether it’s investment. That desire to interact with the rest of the world certainly allows a country to progress quite well since joining the WTO. And so these are the two things that I think we’ve certainly seen this extraordinary economic growth that we haven’t really seen in any other countries or at this type of scale in the human history. So it certainly has been pretty phenomenal.

    Oscar Pulido: And you mentioned government. So back in 2015, China’s president Xi Jinping unveiled the Made in China 2025 plan. What exactly are the details of that plan and is this also one of the reasons why we continue to see this extraordinary growth?

    Jeff Shen: Made in 2025 is certainly a way to think about to the next phase of economic growth for China. And I think, if you will, this mindset in China that what got you here won’t get you there. So for the next every five or ten years, you’ve got to do something that is fundamentally different. And Made in China 2025 is certainly emphasized from a growth perspective the country’s got to go from the quantity of the growth into the quality of the growth. And to go for quality, essentially you need to have a lot of technology to enable you to swim up on the value added curve and there is quite a bit of discussion around electric cars, AI, robotics, big data. So there is certainly quite a bit of emphasis on using technology to drive the economic growth going forward in this. And I think the one last thing I want to say that is I don’t want people to get the impression that it’s a new thing. In the sense that China is actually pretty regimented about coming up with these five five-year plan, ten-year plan, 20-year plan. And the technology certainly has been in a bit of DNA in the country, certainly produces one of the largest science and engineering graduates in the world. I think it’s important to think how this is actually not that much different from what the country has been doing for the last 30, 40 years.

    Oscar Pulido: Is China unique in its ability to think more strategically about its economic plan? It feels like sometimes maybe we just hear a lot of the short-term news about quarterly growth in an economy, maybe a new piece of legislation. But what you’re describing suggests that China thinks with a much longer time horizon than maybe other countries, other governments.

    Jeff Shen: Yeah. I do think that this is maybe because of the civilization has been around for a long time, there is a certainly a long horizon planning, long horizon thinking, which I think sometimes is good, sometimes it’s bad. But I think it certainly helps for a country of 1.5 billion people to think in a longer horizon, because otherwise, things tend to go much slower. In 2015, we talked about Made in China 2025; that was also the time the government decided on artificial intelligence alone, there is going to be hundreds of billions of dollars that’s going to be spent on these types of initiatives, over the next five to ten years. So this certainly longer horizon allows the government to be much more decisive in driving some of these key initiatives.

    Oscar Pulido: And you mentioned artificial intelligence, and I think you mentioned robotics. China is becoming a bigger player in technology, so as they transition from being more about quantity of production to quality, it’s certainty a benefit for China, but is that a benefit to the rest of the world, or is it a threat to the rest of the world?

    Jeff Shen: I think there are two elements here. One is I do think that China is about 1/6, 1/7 of the world’s population, so from that perspective, if we can use technology, whether it’s AI or big data or robotics, to make life for 1.4 billion people better, I think that in itself is certainly a good thing for the human race. And I think as to the impact to the rest of the world, this is not necessarily a zero sum game, in the sense that the technology discovery will certainly benefit countries, not in a singular sense, but really in a plural sense across the globe. And I think that certainly has been the case in scientific community, if there is a major breakthrough discovery, that type of discovery certainly tends to be beneficial to the overall community. At the same time, I do think that this is not going to the park to have a picnic either. I do think there is some element of competitiveness in there, in the sense that it does drive a bit of a competitive edge for different companies or governments. You can also think a little bit along the lines of military. So I think that part is certainly I think also part of the reason why that’s introduced in some geopolitical tension, because for the rest of the world, China does present different economic growth model that is quite different from how we traditionally think about capitalism, that it should be. So I think that alternative model as it gets stronger, as it gets infused with more AI and robotics, it does worry the rest of the world a bit.

    Oscar Pulido: So you said “geopolitical tensions,” and it feels like the headlines that we read about China have those words in them all the time, and we lose sight of the longer term perspective of what’s been going on from a growth perspective. What’s your opinion on the trade war, what is its impact on the Chinese economy, and how should we think about it in terms of investing in China?

    Jeff Shen: I think the trade war can really be thought about as a bit of a tip of the iceberg. The trade deficit between the China and the U.S. has certainly been around and persists. And I think that is an issue that is quite a focal point. At the same time, I think underneath the surface, we can certainly mark 2018 as a year that the U.S./China relationship has gone from historically, certainly has been a model of cooperation to the new phase of a model of competition. And I think given just the sheer size of the Chinese economy, even though on a per capita basis, it’s still a below middle income developing country, but given the population size, and also the transformation it’s gone through, that certainly has created a bit of a tension. It’s actually not only with the U.S. — it’s actually also with the rest of the world. Think about state ownership, the political system that is very different from a typical Western growth model. So I think it’s not only the economic interest, but also what is the ideal way of growing that is presented to the reset of the world, that is at stake here. So I think we are entering the phase of competition—that being said, that may not always be bad. A bit of a competition can potentially drive a bit of a growth and innovation that we have seen before. So I don’t think it’s all bad, but I do think, at the same time, that we need to recognize we’re going into a new era.

    Oscar Pulido: Does China think more about prioritizing growth and less so about managing some of these geopolitical relationships? That is what it sounds like listening to you talk, and that is what it sounds like will be the case at least in the foreseeable future. But at some point, does China start to really think about the importance of maintaining more stability in some of these geopolitical relationships? Or will it always just be about growth?

    Jeff Shen: I think the rising tide certainly can lift up a lot of boats from a domestic perspective. I think the growth can certainly lead to domestic stability, which if you think about the growth that’s been happening in China over the last 40 years, that certainly allows the Communist Party to be much stronger and also extraordinarily well-liked in the country. So I think domestically growth has actually been a recipe for success. It is the case that the economy is large enough, the global implication is certainly one that is sometimes outside the Communist Party’s direct control. If you think about the populism that we see around the developed countries, a lot of the jobs actually have gone away in the developed countries either because of globalization or maybe, actually, importantly, because of technology. But nevertheless, you just need to go to some of the manufacturing centers in some of the developing countries to realize that the China story rising up on the horizon certainly has global implications. And that is something that I think China has to think about it—I think they’ve been forced to think about it, so this is actually giving us additional context to think about not only just growth in its full form, but also what are the collateral damage, what are the opportunity costs, of that growth? Whether it’s the environment, whether it’s the global implication, these are the things that are additional problems as China rise up on the stage, that it needs to think about.

    Oscar Pulido: There is no question that the economic growth story in China is very impressive, it sounds like government plays a big role in that, it’s having effects around the world on other economies. But then let’s talk about the investment opportunity, because many times we hear about economies that are doing well, but that doesn’t necessarily mean the stock market of that economy is doing well. When you think about the investment opportunity then in China, actually buying companies in China, is there a compelling case there the way you’ve made a compelling case around the economy?

    Jeff Shen: I think the relationship between growth and the investment returns is certainly a complicated one. And especially when it comes to China, I think it is even more complicated. Higher growth doesn’t always necessarily mean if you just buy and hold a bunch of companies, you’re going to make a lot of money. So I think in China the exciting thing that happened in 2018 certainly has to do with the MSCI inclusion of the Chinese A-shares market into the global equity market. And this is certainly a market that historically, international investors have had very little access to it, most of the holdings have been through the domestic institutions, and importantly, domestic retail investors. So that market essentially has stocks that are traded in Shanghai and Shenzhen, that is opening up to the rest of the world through Stock Connect mostly. And so that is a big deal in my mind that this is a give or take, around $8 trillion dollars in market cap, and that’s a big market, that is actual opening up to the rest of the world. There are 2,000 plus stocks listed in there and the market trades $40 to $50 billion dollars a day. There is a large deep market. And I think for investors who want to tap into the growth story of China, I think it certainly presents a pretty rich opportunity set.

    Oscar Pulido: Talk a little bit more about when you say the markets are opening up, because I think for many investors, at least the way I think about it is that investing has become very democratized. It’s a lot easier to invest in markets around the world. So it sounds like it wasn’t easy to invest in China maybe not so long ago, but what does opening up mean practically?

    Jeff Shen: Yeah. Before, as international investors, certainly you can invest in Chinese A-share market, stocks listed in Shanghai and Shenzhen. But it was a pretty complicated process to do that. You needed to go through what people typically call a Q fee, quota license to be able to invest in that. And it’s a lengthy a bit cumbersome process to go through that. It took us also a while to get a license to invest in that. We got it about seven years ago from the BlackRock as a firm perspective. Sometimes people joke that my second PhD in anthropology always takes a little bit longer to get than the actual license. But I think fast forward to today when we say opening up, is that if an international investor can invest in stocks in Hong Kong, now they can essentially invest in stocks in Chinese domestic A-shares market. So I think it’s very exciting for the international investors, the process is getting to be much more robust and open. So you just need to pick the right ones.

    Oscar Pulido: If I look at the S&P 500, I look at an index that’s very diversified, companies of different sizes, the sector representation is pretty diverse. You have banks, you have tech companies, you have healthcare and the list goes on. If I were to look at the A-shares market in China, what is the composition of that market look like from a sector perspective? And talk a little bit about the corporate governance of the companies in China: should we have the same level of confidence in corporate governance that we would maybe with a U.S. or European company?

    Jeff Shen: Yeah. I think the sectorial composition is also quite diversified. So whether it’s MSCI indices of Chinese A-shares market, or locally they also have a CSI 300 Index, when you look at any of these sectorial compositions, they are actually quite similar to the rest of the world. They are quite diversified, it’s a large economy that has not only got a state-owned enterprise, but has also got a large representation of the privately owned companies, some are exporters, some are also very much domestic oriented. And I think the interesting thing of the Chinese A-share market is that we can also gain access to some of these domestic consumption stories that you probably historically haven’t really been able to get that exposure to through international equity market. Now the corporate governance element of it, the typical perception is that for emerging market countries, sometimes these corporate governances may be a little bit below the international standard. The Chinese governance structure is actually quite strong. The stock exchange actually requires quite a bit of documentation, compliance and information for any companies to be listed and there is even quite a bit of requirement on the company to make profit for three years before they can even be considered as listed, especially in the main stock exchange, in Shanghai. So, I think the governance and also transparency and information and data, surprisingly, is actually quite abundantly available. The Chinese economy is actually transforming very quickly into a digital economy. So from a data availability, transparency, information, you actually find a lot of that in China that is actually often times to peoples’ surprise.

    Oscar Pulido: And transparency, the Chinese consumer, or the individual, is a big user of technology and social media, and that leaves a pretty rich digital footprint. In your role, being able to access that data I believe is an important part of how you can analyze the investment opportunity set. How is it that you use that big data to understand where are the better opportunities in China?

    Jeff Shen: Absolutely. I think China certainly is a great playing ground for using big data, using artificial intelligence to gain a bit of investment insight. For example, for fundamental information, you can actually use satellite image information to get a sense of the metallic content on the ground, essentially to get a sense whether it’s industrial manufacturer or the real estate companies where the metal frames of the buildings are coming up, to essentially get a sense of how industrial production is coming along, or whether there are trucks moving around port, or whether the building site is actually progressing at normal pace. So you can measure fundamentals using these kind of alternative data source like satellite image to give you additional sources of information to validate some of your prediction. Same thing, through social media, you can certainly get a sense of some of the retail flow sentiment, just to get a sense of the 130 million retail investors. Are they loving the stock market? Are they worried? What their mood is. This information certainly historically was never available because people never really blog or Tweet about what they like. But today in aggregated form, you can get a sense of overall market sentiment. So I think we can certainly use some of this new informative alternative data to essentially enrich your understanding of the market, but I think a lot of it is also about asking the right question, making sure that with the new set of data, you can ask some interesting and relevant investment questions, and hopefully we can use new data and tools to gain a bit of an edge.

    Oscar Pulido: And what is the data not telling you? I imagine there is still a role for going to China, spending time there, talking to people, that supplements maybe some of the analysis that you mentioned.

    Jeff Shen: I think we use a lot of tools, a lot of models, and sometimes people think we are just a bunch of machines. But in reality, humans play an enormously important role in driving an investment result. If you really want to understand what is going on with the government, we talk about how important that is, certainly very important to gain a bit of insight from the policymakers, what’s on their mind, clearly you can supplement that with a bit of data science to look at some of the trends people actually use to gain a bit of a sense of what is on the policymaker’s mind. But at the same time, I do think that a model at the end of the day, or data, the insights you gain, is essentially a simplification of the world. And the world is pretty complicated. So I think the human’s job is certainly around asking interesting questions, but it’s also asking, “What is the model missing?” The model has never seen a trade war in its life, but it’s certainly going to be important going forward to think about what the new era is going to really mean for investment. So I think this is probably also why we love what we do, because nothing will work forever and you’ve got to keep innovating.

    Oscar Pulido: And with a market as big and complicated as China, I’m sure having all those tools is something that helps a lot. We’re going to end with a bit of a rapid fire round, where I’ll ask you a series of more personal questions, I hope you’re ready?

    Jeff Shen: Absolutely.

    Oscar Pulido: I know you live in San Francisco: so I have to ask, electric scooters or electric cars?

    Jeff Shen: I think electric scooters with helmet, so take risk but with a bit of risk management.

    Oscar Pulido: And this is your mode of transportation to work in the morning or is that just on the weekends?

    Jeff Shen: Weekends, I walk to work.

    Oscar Pulido: Now I’ve heard your daughter watches Shark Tank, which shark do you prefer? Mark Cuban or Mr. Wonderful?

    Jeff Shen: I think Mr. Wonderful is a little bit scary for my kids, and Barbara Corcoran is actually the family’s favorite.

    Oscar Pulido: Yeah, Mr. Wonderful is pretty honest, that’s for sure. Which idea would you bring to Shark Tank?

    Jeff Shen: I think I love artificial intelligence and I also certainly am a big fan of China. So I think maybe a Chinese restaurant with AI driven robots as servers will be my idea.

    Oscar Pulido: Okay. That’s interesting. Now you teach a course on international investment at NYU. I happen to know, because I was a student there. And I didn’t have time to take your class unfortunately, but what is the one word students would use to describe your teaching style?

    Jeff Shen: I think “engaging” may be the word. I do teach an intensive class there that involves 6 hours a day, so that is a lot of coffee and a lot of Q&A, so it’s a lot of fun.

    Oscar Pulido: And then the last question: will China’s stock market capitalization ever exceed that of the U.S.?

    Jeff Shen: I think it’s possible, but I think I’m also a big believer of the U.S. market and U.S. system. Again, I think in this case, there is probably a lot of China versus U.S., but it’s China and U.S. both can be quite good.

    Oscar Pulido: Jeff, thank you so much for sharing your insights today and joining us on The BID.

    Jeff Shen: Thank you very much, it’s great to be here.

  • Episode 14 transcript – Is the sun setting for fossil fuels?

    Oscar Pulido: Electricity is a little bit like the air you breathe: You don't really think about it until it’s missing. When you switch on a light, charge your phone or cook your food, you’re using electricity. But do you ever wonder where it comes from? How it was generated or how it got to your home?

    Increasingly, that power is coming from renewable sources like wind and solar power. We’re moving away from coal and fossil fuels to cleaner energy sources. And as we focus more on society’s impact on the environment and our climate, renewable energy is becoming harder and harder to ignore.

    On this episode of The BID, we’ll speak to David Giordano, Global Head of Renewable Power and the Chairman of the Board of Directors for the American Council on Renewable Energy. We’ll discuss what’s going on in the renewables market today and what it means for us as members of society and as investors. I’m your host, Oscar Pulido, we hope you enjoy.

    David, thank you so much for joining us today.

    David Giordano: Thank you so much for having me, Oscar, it’s great to be here.

    Oscar Pulido: So David, let’s start with the basics. When we say renewable energy, what exactly do we mean by that?

    David Giordano: It’s a great question, and when we’re talking about renewable energy, what we’re really talking about is harvesting the wind, harvesting the solar insulation, the power from the sun, and then transforming that from that raw resource into electricity. We can also do this with hydro plants, do this with geothermal, but the most common technologies out there, are wind and solar.

    Oscar Pulido: And how has the renewable market grown over time?

    David Giordano: As you think about power generation in the developed world and the United States specifically, two-thirds of our power generation comes from the fossil fuel technologies, coal being included in those technologies. This is shifting over the next thirty years to renewable power, but the real sort of inflection point where we industrialized renewable power happened kind of in the early 2000s. I think that's when you really saw that revolution from kind of a niche generation technology into something that was on the track that gets us to where we are today, where renewable power is a mainstream source of power generation. As I think about the technology disruption in electricity generation, I think a great example of that is if you look at telecommunications and the telephone. If you go back to sort of the original Alexander Graham Bell telephone and you think about what an iPhone looks like today, they’re almost unrecognizable. It’s a completely different form of technology. And you see what’s happened in the developing world where many countries and many regions essentially skipped the landline and went right to mobile technology. Well, now take us to electricity and imagine Thomas Edison walking around New York City. He might look up at a transformer hanging downtown in Manhattan and think that it was one that he hung. If you took somebody to a coal-fired power plant, yes, it will have new emissions controls and new systems around it, but it’s essentially the same basic technology. We hadn’t had that kind of disruption in the power generation world until we really began to see the industrialization of renewables.

    Oscar Pulido: So it’s interesting because everywhere around us, it seems like industries are being – you used the word “disrupted” – but you’re saying it really hasn’t come to the power generation market yet, and why is that? Is it because of cost? What is it that has prevented the power generation market from experiencing the type of disruption that has hit other industries?

    David Giordano: I think it’s really two-fold. I think on the one hand, it’s a very high barrier to entry from a capital standpoint to transform that infrastructure, and it’s a very difficult part of the infrastructure equation to do piecemeal. So say unlike telecom, which is a highly regionalized opportunity, with electricity you’ve got to make some major changes. Power plants are one of the essential physical infrastructures that creates this centralized input of electricity into a very old transmission and distribution system, and it’s really kind of the first 1.0 if you will of the power generation infrastructure, transmission, and distribution. The wind blows in places that you wouldn't put a coal-fired power plant, so that changes the need for transmission and distribution.

    Oscar Pulido: So that is an interesting point. When you talk about renewable energy and wind and solar – and this might sound like a silly question – but what happens if the wind doesn't blow or the sun doesn't shine? Do we not have power? How does that get accounted for in a transition to renewable energy?

    David Giordano: Yeah, it’s a key aspect to this energy transition, and the intermittency is the primary criticism and challenge of the transformation. First and foremost, natural gas is going to be a huge part of the transition to how power is generated here in the United States and I think across the developed world. You know, the biggest enemy to coal-fired generation is really not renewables. It’s natural gas. Natural gas is cheap, it’s efficient, it’s low emission. So that's one piece to it. The other piece is the continued growth and proliferation of storage, and right now we’re seeing lithium ion battery storage as the primary technology to be able to have dispatchable power as needed, 24 hours a day, 7 days a week. You draw upon the battery to use electricity when you’re not getting enough power from your renewable source, whether it be wind or solar, and so that's the way that you kind of balance out the supply and demand. The next leg of that stool I really think about is just being smarter about how we consume power. And so right now there’s very few places where an end user is actually encouraged to modify behavior around an efficient use of power being generated, whether it be from renewable sources or any other source.

    Oscar Pulido: You talked about natural gas, you made mention of lithium ion batteries, so just take a step back again and help us understand. There’s the traditional coal-fired power plant, and I’m picturing that as a piece of infrastructure, and help us understand what that infrastructure looks like as we shift to a world where there’s more renewable energy.

    David Giordano: One of the things to think about is you think about centralized power generation that requires a feedstock fuel. Let’s just sort of stay generic with it, right? First and foremost, you’ve got to be located at a place that is centralized for the delivery of that feedstock fuel, so you’ll see a lot of coal-fired power plants along rivers, right, so barges bring coal in. For a natural gas-fired power plant, you’ve got to be on the gas pipeline, the interstate gas pipeline system. Piece two of it, which is an important one as well, is access to water. The most efficient power plants are water cooled, not air cooled. You can air cool some gas-fired power plants, but the water cooling makes for a much more efficient power plant, but it requires a healthy access to water. And then you’ve got the transmission system, which those are the big lines that you see that are carrying massive amounts of electricity over longer distances, and then you get into the distribution which that's really more about the load centers and the end users. So now switch your thinking to what renewable power projects look like. Now, you’re on higher elevations where you can harvest the wind, where you’re going to have more consistent wind, so that's putting you in a very different part of the country than you would, say, for traditional fossil-fired generation. And then that means you need a different transmission infrastructure to support that centralized power generation. And then you go to the distribution level where you start to see power generated on site by a solar array let’s say. Now you’ve got a very different need on the distribution system. It needs to be two-way, so that when you’re generating more power than you’re using on site, you have a way to get that out into the grid to users that need the electrons.

    Oscar Pulido: And you touched on, it’s different parts of the country –

    David Giordano: That’s right.

    Oscar Pulido: – where the infrastructure might live just because of the elements that you need around you for it to succeed.

    David Giordano: Yeah. What state in the U.S. do you think generates the most renewable power?

    Oscar Pulido: I’m picturing wind turbines somewhere in the Midwest, so I’m going to say Nebraska.

    David Giordano: It’s actually Texas, so from sort of a political perspective, I think it’s interesting to think about, you know, Iowa gets 33% of its power from wind. It’s parts of the country that frankly in the past didn't see that kind of economic development and now are really at the forefront of the energy transition, and it’s bringing not just electricity and not just cheap electricity but it’s also bringing jobs along with it as well.

    Oscar Pulido: So if Texas generates the highest amount of energy from renewables, I’m picturing obviously there’s a lot of land there, open land where they can put wind turbines for example, but could you do that in a part of the country that's more densely populated like the Northeast for example?

    David Giordano: So the first opportunity is really just continued developments in technology. There are technologies out there already that are being worked on like thin film over windows of skyscrapers that are essentially solar panels, roof tiles that are also capturing solar energy. One of my favorite gadgets that I use when the power goes out are some light bulbs that have little solar panels on them and that store it up in a small battery and make light. And then the other place is offshore, especially here on the East Coast and especially here in New York. Long Island is perfectly situated for offshore wind. The water depth is right, the wind resource is right, and you’re offsetting some of the most expensive retail electricity prices we have anywhere in the country.

    Oscar Pulido: And so if I think about an economy that's moving to renewable energy, I start to think about something like electrical vehicles, but what else, what other technologies are out there that we will start to see and that will start to impact our lives as an economy transitions to renewable energy?

    David Giordano: You’ve touched on the biggest one, right, which is going to be electric vehicles, and that's going to be a huge driver also in lowering the cost of battery storage because the technology used in electric vehicle batteries is the same that’s used for large centralized battery storage. The next place is just what they’re calling kind of the electrification of things, and so just more things that we do day-to-day with other sources of energy we’re going to start to do with electricity because a) it has zero emissions and so that's a positive, but also b) the economics that drive it. It is the cheapest source of new energy, it’s the fastest-growing source of new energy, and so we’re going to see more things that we do transition to being driven by electricity.

    Oscar Pulido: So if the industry is at a tipping point, what will be the driver that will ultimately turn it on its head?

    David Giordano: The main driver will be the economics. The cost of solar power has come down 80% over the past 10 years. The cost of wind has come down about 46% over that same period of time. In many countries today, wind and solar are actually the cheapest form of new power to go into the grid, United States included by the way. And the other thing to remember in that transformation is the average age of a coal-fired power plant is over fifty years. The average age of a nuclear plant is over thirty years. Just the simple cost of operating a piece of equipment that old means it needs to be replaced, and it’s going to be replaced with the cheapest option available. The other driver is just the demand for power coming from end users. You see individuals looking to add solar in particular but solar and storage, either in their community or directly on their own properties, and so these are big, big drivers of that transformation as well. And then finally, it’s just at the policy level. You’re going to continue to see policies that facilitate the energy transformation. I think they very well will transition to be technology-agnostic, and that takes us back to the beginning of this conversation which is the economics.

    Oscar Pulido: With everything you mentioned, why aren’t we all using renewable energy at this point?

    David Giordano: There’s two big barriers to the transition. First and foremost, it’s just the supporting infrastructure, but secondly it’s just the high upfront cost. There’s no cost for fuel when it comes to a wind project or a solar project, but the counterbalance to that is a higher upfront capital cost. The challenge becomes then folks that can’t afford that kind of generation end up bearing a disproportionate amount of the cost of the existing grid, and so as we think about that transition, we’ve got to also think about a way in which that happens where not only the folks that can afford it end up with renewable power. 

    Oscar Pulido: And what role does government play in this? How could federal policies in the U.S. affect the growth of renewable energy?

    David Giordano: It doesn't have a direct impact. I think an important thing to remember in the United States in particular is that there really isn’t a federal energy policy that then gets granular down at the actual implementation level. It’s much more of bottoms-up industry. So for something like off-shore wind, the federal government will play a more direct role because they are going to control the permitting of off-shore wind projects, so if you have an administration that is not excited about more off-shore wind, you could see that maybe not having the same velocity as it would under other administrations. But really the bigger drivers are going to be state level policies around it. We have over thirty states in the United States that have targets for renewable energy. And you do see some waxing and waning at the local levels around renewables, and renewables don't come at sort of zero societal cost. I mean they change viewscapes, they have a different impact on wildlife depending on where they’re located. And so as we see that transition, it’s going to be really important I think as an industry that we stay very focused on the social and governments component to the ESG just because the environmental piece is so compelling when it comes to renewables.

    Oscar Pulido: And are there countries outside the U.S. where you see the federal government playing a bigger role in enforcing the growth of renewable energy?

    David Giordano: Absolutely. In Europe for example, the EU has hard targets with real teeth behind countries missing their targets, and so that's a place where you see that kind of centralized approach to facilitating renewable power investment as being one of the main drivers, and that's why I think you see a much more mature renewable energy infrastructure and industry in Europe. China is another place where again we’re seeing on an absolute basis the largest amount of growth that's happening there, and that's because it’s being mandated down from the federal government. So under a different construct, the federal government plays a huge role, but here in the United States it plays a much lesser role.

    Oscar Pulido: So you’ve given us a good background of this transition to a renewable energy economy, some of the impediments that we might have along the way, but ultimately some of the benefits that we could feel, so let’s transition to thinking about from an investor’s perspective. You’re the Global Head of Renewable Power at BlackRock, and how do you think about investing in renewable energy?

    David Giordano: I think about it all day every day.

    Oscar Pulido: I’m sure.

    David Giordano: I think what was attractive about this strategy back in 2011 when we launched it here at BlackRock was that it’s a space that has a lot of growth potential, as you think about 9 trillion dollars of infrastructure investment around the energy transformation to renewable power. I think the other thing about renewable power investing is that it requires very specific skillsets just in terms of underwriting investment opportunities, you know, the technological issues are specific to the industry, also the measurement of resource and really understanding how that resource is going to behave over time and how that then translates into an investable opportunity if you will. I think the other thing about this space is that it’s evolving, and that there’s going to be changes that are fundamental, that are disruptive, to go back to a word we used earlier in our discussion, and that is where we see real opportunities for attractive risk-adjusted returns for our partners in the space.

    Oscar Pulido: I picture an investor who is used to opening up the financial statements of a company and thinking about an investment in that sense, and there are certainly companies that are involved in renewable energy that trade as stocks and which you could pursue the analysis in that way, but there’s also I’m picturing people who have to do a completely different type of due diligence when they’re looking at a renewable energy project, which is maybe visiting a piece of land and understanding, I don't know, how fast the wind is blowing for example. Is that the right way to think about it?

    David Giordano: Yeah, it really is the right way to think about it. I mean early on in the industry, you used to go around and look for where the trees grew bent because the wind blew so hard. We’ve gotten a lot more sophisticated with the science in terms of measuring the wind and then forecasting what that's going to look like over the life of the asset, which is thirty years plus or minus. And so it becomes a very specific and self-learning model around measuring the resource, measuring the way in which the equipment is going to transform that resource into electricity, and then the efficiency with which that electricity is going to get delivered to the end user, and really thinking about that kind of holistically is the big driver in evaluating the risk associated with one of these investments. Because at the end of the day, the way that this investment is not going to go well is going to be primarily because you didn't produce the number of kilowatt hours that you expected when you made the investment.

    Oscar Pulido: So if fossil fuels were Electricity 1.0 and what you’ve discussed with renewables is Electricity 2.0, what does the future look like? What does 3.0 look like?

    David Giordano: I think it comes down to kind of three main factors. The first I’d say is flexible supply, so again it’s that movement from just a fully centralized power generation strategy to transmitting the power from the renewable sources, but also locating the power generation closer to the demand centers. I think the second piece of it is flexible demand, and so getting smarter about how we use electricity on a day-to-day basis. If it’s cheaper to use wind power at night, we shift operations, whether it be at the home or whether it be in the commercial and industrial world, to that time of day to where we can get the cheapest, most reliable power. And then finally, it’s the decentralization of the grid in general and going more to micro grids so that we’re able to really take advantage of the inherent benefits of a localized power supply and end user of electricity.

    Oscar Pulido: So while maybe this industry hasn’t been disrupted as much as others in the past, it certainly sounds like we’re on the precipice of something, and I’m going to be looking out for trees that are slightly bent as a potential site of a good investment in renewables. That was one of my key takeaways from listening to your comments here.

    David Giordano: You would have made a great wind power analyst in the nineties.

    Oscar Pulido: Alright. What we usually do here at the end, David, is we end with a rapid-fire round, and we’ve been talking about the shift happening in energy so I wanted to ask you about the shift that's happening in other industries. I’m going to ask you whether you think the following statements will happen in five, ten, thirty years, or never. Are you ready?

    David Giordano: I’m ready.

    Oscar Pulido: Okay. Brick and mortar is replaced with 100% online shopping.

    David Giordano: I might come across a little old-school here but I’m going to say never. I am going to say that we’re going to shift more to experiential shopping, but I think the idea of being in a store, interacting with the staff there, I don't think that's ever going away so I’m voting never.

    Oscar Pulido: I tend to agree with you on that one. Corporations shift to a four-day work week.

    David Giordano: That's a tough one. I think that's it’s not ever going to be officially a four-day work week, but I do think the flexible hours is going to not just be something that we talk about, it’s going to be something that we do, and it really plays into our whole conversation today, right? It might just make more sense to have all these computers going at night, and we know we all have plenty of friends that are night-owls. You know, I’ve watched my son play Call of Duty all night plenty of nights as he’s grown up, so I’m sure he could be a candidate for a night shift computer job. 

    Oscar Pulido: So I know you’re from Philly: when will they win the Super Bowl again? Again five, ten, thirty years, or never?

    David Giordano: That's a hard one because up until two years ago, the answer was never, and I think that there’s a lot of people that would still vote for never, but I like where Carson Wentz and Doug Pederson are, so I’m going to say that's within the next three years.

    Oscar Pulido: Okay. As of the 2016 census in the U.S., over 76% of Americans drive alone to work every day. Only 5% take public transit. When will we see a day where more Americans use public transportation instead of cars going to work?

    David Giordano: I don't know that we’re going to go that direction. I think that we’re going to get to a place, though, where those numbers turn on their heads in terms of ownership of vehicles. I think that we’re going to see less and less people actually just owning their own car, and I think that's where that big shift is going to happen. 

    Oscar Pulido: Do you own your own car?

    David Giordano: I am about to go carless, so I am trying an experiment. Beginning at the end of this month, I will be car-free for the first time since I was 16 years old.

    Oscar Pulido: Alright, I’m sure you’ll survive. David, thank you so much for joining us today on The Bid.

    David Giordano: Thank you so much for having me, Oscar, it was a pleasure.

  • Episode 13 transcript – What poker tells us about risk

    Mary-Catherine Lader: Poker may seem like a vice, but perhaps it teaches us less about how to win money and more about how we make decisions. Like investing, for example, poker requires us to make decisions, gauge risk and trust our choices, all with incomplete information. And we’re not as good at making decisions as we may think we are. So how do we overcome uncertainty, our biases, and do our best to get it right? 

    On this episode of The BID, we’re doing something a little different. We’re bringing you a live recording from our Latin America Investment Forum in Miami, where we spoke with Maria Konnikova. Maria is a psychologist who specializes in risk and decision making. She’s a New York Times bestselling author, and a world champion poker player.

    Maria talks to us about how she got into poker, even though she detests gambling, why sometimes the smartest people in the room can often make the worst decisions, and why the only certainty in poker, as in life is – yeah, you guessed it – uncertainty. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Thanks so much for joining us today.

    Maria Konnikova: Thanks for having me.

    Mary-Catherine Lader: I’m going to ask the obvious question first, how and why did you get into poker?

    Maria Konnikova: So, I initially got into poker for a book, which is going to be my next book, called The Biggest Bluff, about the role of chance in our lives. And I had no interest in poker, I didn’t know anything about it. I hate casinos, I hate Las Vegas, I hate gambling, I hate everything that has to do with that world. And I came across poker actually from game theory. So someone recommended that if I’m interested in chance, I should read John Von Neumann. And it ends up that John Von Neumann created game theory because of poker; he was an avid poker player. He was a horrible poker player. But he had this insight — he also played chess, he played Go, knew a lot about the gaming world – that if you wanted an analog for life, if you wanted an analog for true strategic decision making, poker was the game for you. It wasn’t chess, because chess he found incredibly boring because it was a game of complete information. There is always a right answer; there is no uncertainty because everyone knows everything and theoretically, you can solve chess. Poker, like life, is a game of incomplete information. There are things that we know in common, but there are things that only I know and there are things that only you know. And we need to play each other and we need to portray ourselves in certain ways, and we bluff and we do things that always convey information. He said that is human decision making. If I can solve that, I can solve the world. And so that is how I initially got into the game. And it was so funny, because I ended up becoming good, leaving The New Yorker, where I’d been for a number of years, to play poker full time. And people would say, oh my god, you became a professional gambler? And I would say, absolutely not. Because if you think that poker is gambling, you don’t understand poker. Gambling is when you can’t control things, and poker is a game of skill. So over the long term, the most skilled poker players, the most skilled investors are going to come out on top. And the key is approaching it the right way, and using it correctly to approach your decision making process. And if you do that, then it becomes something very, very different from gambling; it becomes a strategic endeavor that can I think unlock some of the greatest things about human decision making and help you think about risk, help you think about uncertainty in a much smarter way. When I was getting my PhD in psychology, I studied decision making and decision making under conditions of risk and uncertainty. And over and over, what you come up with is that we’re really bad at it, that the human brain is really bad at probability, that we have all of these biases. And what I realized was that poker is actually a solution, because the human brain learns from experience. It doesn’t learn very well from descriptions. So I can tell you about probabilities and you’re not going to actually be able to internalize it in a way that’s going to translate into your actual decision making process. Poker forces you to make these decisions and to sample probabilities correctly and becomes the tool that can help you un-bias your decision making in very powerful ways.

    Mary-Catherine Lader: That was very convincing. I’ve never played a very successful hand of poker, so next time I see you, I’ll ask for a personal tutorial because it sounds like it’s a very useful approach and framework for life. So taking us out of that specific game and sort of what you learned about decision making, what are some of the attributes that you’ve observed in your research of good decisions made under conditions of uncertainty versus bad decisions?

    Maria Konnikova: Yeah. So one of the key things that I‘ve learned is that we need up being pretty bad at figuring out what we can and can’t control. When you put us in a stochastic environment, and environment where there is a lot of uncertainty, especially an environment that is noisy where there’s not necessarily direct feedback between what you do and what happens—like the stock market for instance. There are so many things going on and you can’t account for all of the factors. We tend to assume a little bit too much agency, so we tend to assume a little bit too much control over outcomes if those outcomes are good. If something goes the right way, we say I am the best, I am so smart, look at me, look at how well I decided that. And then if a decision goes against us, there is so much in the environment you can blame. You can say, you know what, I actually thought of everything but this one thing happened, it’s not my fault. I can’t control it.

    Mary-Catherine Lader: Sounds like that is familiar—laughter in the audience.

    Maria Konnikova: So the beauty of poker is it’s a game, it’s a circumscribed environment, that is why it’s easy to learn because there are only so many variables. In the investment world, the variables are infinite, life is messy and there is so much noise. When I did my thesis work, which involved stock market games, we actually had actual investors play stock market games. And I found that people who were incredibly smart and very good at what they did, ended up falling prey to something known as the illusion of control which is thinking that you’re in control when you’re actually not. So they had to pick stocks and bonds and get feedback based on their decisions, on how much money they were making, and then they could have a strategy and then they could change that strategy. And what ended up happening was when the environment shifted, the people who were very smart didn’t shift as quickly as the people who were less successful, because they said, oh, no no, my strategy is good it’s just there are all these other things wrong. So I’m just going to keep doing what I’m doing because I know what I’m doing. And then other people would actually listen to negative feedback and say, well I don’t know what I’m doing and so I guess maybe I should do something different and they ended up making a lot more money. And so, that’s one of the key variables that I’m trying to get people to stop doing; stop falling for this illusion of control because it’s very powerful and it impedes learning. You’re not going to become a better investor, you’re not going to start making better decisions, if you constantly blame other things for your mistakes and you constantly take credit, even when maybe your decision was actually absolutely wrong and you just got incredibly lucky.

    Mary-Catherine Lader: That’s really powerful and compelling, but it’s very hard to put into practice, right? So what does that mean, trust yourself less is the right answer? How does one do that every day, how do you do that successfully and still have the sort of confidence to make decisions?

    Maria Konnikova: Yeah. I think that it’s a very fine balance: you can’t constantly question yourself because then you’d be paralyzed if you wanted infinite information, because ultimately we are making decisions under conditions of uncertainty. And we’re not going to be able to know everything. But I’m a big believer in having as objective of a framework as you possibly can. When you’re playing poker, it’s very easy to make a bad decision then get lucky when the one card you needed comes your way, and then you kind of forget that your decision was bad because you’re outcome-oriented. You look at the outcome and you say, my decision was good. And on the other hand, if you made the correct decision, but then you ended up losing, sometimes you start questioning yourself. And so it’s incredibly important to actually divorce yourself from the outcome. So when I talk to my coach – and I think everyone needs coaches no matter what you do — you need to have someone with whom you can talk through things. I think this is incredibly true in the investing world. So when I talk to my coach, he actually doesn’t care if I won or lost. He doesn’t care what the outcome was — all he wants to know is to go through my decision making process. At every single step, why did I do what I did? What was I thinking was going to happen? Did I think several steps ahead, did I think how people would react to my decision? So because I know I’m going to be explaining this, I actually have to think through it rather than just reflexibly acting. So I think this is something that we can implement in everyday life in all of our decisions. At every step of the way, actually keep a record of what you’re thinking, what variables you’re considering, what things you think will look like, so that you don’t fall prey to something known as hindsight bias which is where you take the data that you have right now and retroactively apply it to back then. I call it a decision diary and I think these can be incredibly useful to help you get back in the moment.

    Mary-Catherine Lader: This is the right moment to mention your husband is a portfolio manager and you regularly dispense this advice to him. So let’s switch gears a little bit, taking about risk, decision making to talking to about trust. Everyone in this room relies on trust for success, in our relationships, in our word, trust in the brands and organizations that we support. And we’re also living in a time of great diminishment in trust, particularly in large institutions. So what is going on, what do you make of that, what is the research on why we trust today?

    Maria Konnikova: Yeah. I think the first thing, which is a really wonderful thing, is that trust is usually really good, and we’ve evolved to trust. So when I first started researching the psychology of trust, I didn’t know if it was good to trust or bad to trust. Because you can see that both arguments would kind of make sense, right? That maybe it’s better to not trust anyone, because you’re safer. But it ends up over time that we seem to have evolved to trust and that trust is actually the default human condition. And if you stop to think about it, it makes a lot of sense, because who is going to survive in the wild, right? Is it the lone wolf or is it members of the pack? You actually see throughout time and over history and throughout different societies that societies that have higher levels of something called generalized trust, which is trust in your fellow human beings, they tend to thrive. They tend to do better economically, they tend to have stronger social institutions. And on an individual level, individuals who score higher on a measure of generalized trust, they tend to do better academically, they sometimes have higher IQ in certain areas, they tend to be healthier, they tend to be happier, they tend to live longer. So it actually ends up that –

    Mary-Catherine Lader: Trust is good.

    Maria Konnikova: Yes, trust is good, and trust is associated with all sorts of really positive outcomes. And like I said, trust is the default. So when you run studies where you actually don’t give people any instructions and you have them play different games where they’re playing with other people, they start off trusting usually and they end up doing much better. And if you give them specific instructions like hey, that guy over there might not be so trustworthy, you might want to look out for them — then all of a sudden, that dynamic falls out the window and they end up doing much worse and getting worse results as a group. But to me, it’s actually inspiring that if you don’t tell them anything, they start off with good intentions. Now that said, right now we are living at a time where we do see levels of trust at an all-time low. So in a lot of surveys around the world, you see that people are trusting governments less, they’re trusting institutions less, they’re trusting journalism less. We have the fake news hashtag, right? That seems to be permeating everything. But I also think that we can overcome it because I do believe in the power of trust ultimately. And I think that people understand that too.

    Mary-Catherine Lader: So you mentioned two things that were particularly current and interesting: one is that you believe we can recapture trust, and the second that, on an individual level, it’s very powerful. And it’s interesting to think about how even as we have this diminishment of trust in large institutions, we have these large technology platforms that mean that more and more of us are getting in an Uber with a stranger and trusting them to drive us somewhere. We’re trusting a stranger to host us in their home because of AirBnB. And it’s intermediated by technology, and somehow that app or that technology platform creates trust. Why does that work, why does that happen? And what is the takeaway that you see in that for how we can build and recapture trust in pretty short order?

    Maria Konnikova: Well, I think it’s interesting and it goes back to something that I talked about earlier on about how the mind learns, and the fact that we learn from experience. Experiences are much more vivid than any description, than anything you read, than anything you hear. And as these technological platforms become ubiquitous and they’re everywhere, what is your experience usually? It works out, right?

    Mary-Catherine Lader: It works out, and if it doesn’t, you complain and give them two stars, and you get a free ride.

    Maria Konnikova: But normally it doesn’t work out in horrible ways. Normally everything is fine, and if it doesn’t work out, it’s because your driver was on his phone or your driver was annoying, or the AirBnB had a broken shower. These are small problems and we trust that they’ll get taken care of and normally they do. And so we actually have had a lot of positive experiences that will then make us more likely to trust this. Now, if anyone here ever had a really, really nasty experience, with AirBnB, with Lyft, with Uber, with anything, where you have this sharing economy, all of a sudden, that is going to go out the window. Because experience is going to trump everything else. So even if everyone says, you can use this, you can say, well I had this one crazy driver who got into an accident and then I had to go to the hospital. I’m never using ride sharing again. And then you end up in the middle of nowhere with no car and ride sharing, and what do you do? The one thing that can fight through negative experience is convenience. Because we’re also pretty lazy. And so you can go on a moral crusade about how you’re never going to use Facebook because of their privacy violations, but then it’s just really convenient so you just keep your account on the side. I think that is one of the reasons that these technologies have been successful and that we do trust in them. And I think the underlying nature of this is that – my last book was about deception and people who deceive us – and it ends up that most people aren’t out to get you. Humans are pretty decent for the most part. And so normally it’s just fine to trust, and the bottom-line of that book was that yes, you might be deceived and you probably will, but that is okay because that’s a side effect of being human. And you don’t want to live in a world where you couldn’t be deceived because that’s also a world where trust is dead.

    Mary-Catherine Lader: It’s interesting. Much of what you just said really applies to fintech actually. But when you have a bad experience with your money, it’s pretty painful. It may feel more painful to some than getting stranded in ride sharing. And so what we’re going through now is seeing many of these fintech start-ups trying to add in the necessary process, the necessary procedures, and even really user design, to ensure that they comply with regulations, to ensure they can protect against those bad outcomes. And much of the challenge is that tension between wanting to create convenience and wanting to preserve against a bad outcome. What do you think then is the solution and is an answer for some of these tech companies to build that trust? Is it this sort of quick feedback loop that you mentioned, or sort of big solutions like some of the government actions that have been described?

    Maria Konnikova: Yeah. I think feedback is incredibly important. I think transparency is very important, being transparent with what you are doing and aren’t doing, and what you can’t yet do, even though you wish you could. By the way, this is a slight tangent, but I think that this is one of the reasons why people have trouble sometimes with AI technologies, because there isn’t transparency there and you want to know what goes into those decision making algorithms so that you can make a decision for yourself. What are the factors, and can I trust them? Because an AI is only as good as the people who built it. And if we don’t know what goes into that black box, that’s scary. And that goes back to what we were talking about at the very beginning: uncertainty. The human brain hates uncertainty and hates ambiguity, and doesn’t function well in those types of environments. We want to resolve it. And the people who are going to come out ahead are the people who not only tell the best stories, but tell stories that check out.

    Mary-Catherine Lader: So going back to that theme of uncertainty, it’s exactly right in that it has a sort of negative dynamic. What is the psychology behind that? Why does uncertainty necessarily imply that we have to somehow exercise caution and prepare for the worst?

    Maria Konnikova: I think it’s just the way that the human brain is wired: all of the data we have about the way that humans think makes it very clear that we want things to be neat. That’s why we just jump to say, A causes B; we jump to put people in categories, to put labels on things, to make the world explainable. Otherwise, if everything is uncertain, then what world are you living in? Is this room here, am I here? You get into these metaphysical/existential debates right away. And it actually ends up that the way that we are wired, so to speak, to see the world, it’s a two-step process that was first described by a psychologist named Daniel Gilbert, at Harvard University. And what Gilbert found is that there’s two stages to any sort of perception, any interaction, basically anything that happens. The first one is belief. So first we need to believe that things are true. Because that is the only way our brain can process it. Even if it’s just for a millisecond. I call this the Pink Elephant Effect. So the moment I say “pink elephant,” to understand what I just said, just for a second, you need to picture a pink elephant. And then the second stage if verification: is this true or is this false? And you can right away think, oh, pink elephant, pink elephants don’t exist, false. But what ends up happening is that the second step isn’t automatic, unlike the first step. So the first step always happens. But the second step doesn’t always happen. It can be disrupted. We can be busy, we can be stressed, we can be emotional, we can get distracted. And so we just have this belief, this underlying belief that stays in our mind and becomes an incorrect memory. But that is also one of the reasons why we have false certainty about certain things we’re so much more confident in than we should be given the information that we have, because we have this memory of, oh, it’s definitely true. But just imagine how many pink elephants you encounter every single day and they don’t have a big waving flag that says hey I’m a pink elephant. You have to figure out whether or not I actually exist. You just say, yup, pink elephant, come into my head and stay there. And so I think this false sense of certainty is one of the ways that we deal with uncertainty and one of the reasons we become so overconfident, especially in areas where we have some sort of expertise. Because the more you know, often times the more you think you know. And some of the studies on overconfidence that scare me the most are that the greatest experts in certain areas are most prone to overconfidence because they have so much experience that they can’t entertain the notion that they might not know a specific thing.

    Mary-Catherine Lader: So we’re back where we started, the uncertainty of uncertainty as the only certainty. And pink elephants is a very memorable visual of that. I’m going to end with a rapid fire round of questions, which we do on every episode.

    Maria Konnikova: All right.

    Mary-Catherine Lader: Okay. You ready? So you have to answer in one sentence or less.

    Maria Konnikova: Okay.

    Mary-Catherine Lader: Fake news: fad, or here to stay?

    Maria Konnikova: I think if I had to choose one of the two, it would be fad because I believe in the human mind’s ability to get through fake news.

    Mary-Catherine Lader: You’re an optimist in this.

    Maria Konnikova: I’m an optimist.

    Mary-Catherine Lader: In poker, Five Card Draw or Texas Hold ‘Em?

    Maria Konnikova: Texas Hold ‘Em.

    Mary-Catherine Lader: Why?

    Maria Konnikova: Because if you’re looking for a model of human information, it’s the perfect mix of knowns to unknowns. In Five Card Draw, it’s too much chance, there’s too little information that is in common.

    Mary-Catherine Lader: Davos, where you gave a keynote this year, or Miami?

    Maria Konnikova: I have to say Miami, right?

    Mary-Catherine Lader: There was a correct answer to that question. Which brand do you trust the most?

    Maria Konnikova: Wow. Which brand do I trust the most. So I don’t buy a lot of clothes, I hate shopping, so I’m going to say one of the brands that I actually trust is a clothing brand, Everlane. And it goes back to some of the things that we were talking about with trust and transparency. So they tell you exactly where they’re sourcing every single thing that they use and they break down their price, they show you exactly why you’re paying what you’re paying. And they pay their workers really well.

    Mary-Catherine Lader: And what about the least?

    Maria Konnikova: Facebook.

    Mary-Catherine Lader: Popular answer these days. Thank you so much for joining us, Maria.

    Maria Konnikova: And I still have a Facebook account.

    Mary-Catherine Lader: And so do I. Thank you so much for joining us, it’s been a lot of fun.

    Maria Konnikova: Thank you so much.

  • Episode 12 transcript – Can the stock market rally continue?

    Oscar Pulido: Let’s take stock of the stock market. After a bumpy ride in 2018, U.S. markets and investors alike started to fear that the next recession was around the corner. This year? We’re seeing a different story play out. Stocks have rallied. The question is, what’s behind the rally and can it last?

    On this episode of The BID, we’ll answer these questions with Chief Equity Strategist Kate Moore. We’ll talk about why Kate still likes taking risk in stocks, why we shouldn’t bet against China, and how the tech sector has influenced nearly every sector of the economy. I’m your host, Oscar Pulido, we hope you enjoy.

    Kate, thank you so much for joining us today.

    Kate Moore: Yeah. I’m really excited to join The BID today.

    Oscar Pulido: So Kate, last year, I think everybody knows was a tough year for the stock market, particularly the last couple months of the year — I think it made the holiday season tough to enjoy if you were looking at the stock market. But this year, global stocks are up 12 percent, the S&P is up over 15 percent: were stocks supposed to do this well, this soon?

    Kate Moore: Well, it depends on who you talk to. The fourth quarter of last year was really surprising for all of us. The fundamentals hadn’t significantly deteriorated; we were actually still in a very supportive policy environment. There was some good growth data, and sure we knew that the comparisons in 2019 and things were going to be a little bit tougher. The magnitude of the underperformance was really outsized. And in particular, I was watching what happened to equity valuations, which dropped precipitously. And at the start of this year, we said, some of that has to reverse because over the course of 2018, we saw the worst multiple contraction or derating of the equity market, the third worst over the last 30 years. Most years after that happens, you see a snapback. But at the start of this year, not only did valuations rise and enthusiasm for equities return as people realized the Fed and other central banks were going to be supportive. But actually, the market kept running even while people became skeptical about the sustainability. So that was a long way of saying probably not that much; it shouldn’t have run as far as it has. But it’s interesting to note that we have a lot of good things happening in the equity market that I think are under recognized.

    Oscar Pulido: And so do you think that momentum can continue throughout the rest of the year? Or is it unrealistic to think we’ll just repeat this performance quarter after quarter?

    Kate Moore: If we have a mid-teens quarter for four quarters in a row, I’ll be retiring, truthfully. That will be a pretty good story for my personal account, and actually I think for a lot of the funds here. So no, I think that is unlikely that we’re going to have that magnitude of run. That said, it’s possible the markets run a little further, because one of the things that really drove the equity market in the first quarter was the tone from the Fed and other global central banks, namely that they are going to continue to be super-accommodative that we’re not going to get big rate increases, and that really has reopened I think the possibility for multiples to stay at higher levels and for the earnings environment to be supported. Valuations in equities are really dependent on where interest rates are frankly. And with interest rates staying very low, there’s possibility for equity multiples to go a little bit higher from here; not a lot, but a little bit higher.

    Oscar Pulido: When we started on the year on rates, the belief was that the Fed was going to raise rates, albeit maybe very limited type of increases. But now, as I understand it, there is a belief that maybe the Fed would cut rates by the end of the year; I’m not saying that’s your view but that seems to be the market’s interpretation.

    Kate Moore: Yeah. So we had some great debates at the November BlackRock Investment Institute Forum about what the Fed might do over the course of not just the next quarter but of the next four to six quarters. And I’ll tell you, those debates raged on into the beginning of the year when the Fed really changed its tone. But the market pricing of Fed expectations has been what’s moved the most I think that is what you’re referring to, where the market was expecting two hikes throughout the course of 2019, moved to a cut in January, bounced back up to no move, and is back down to a cut again, and perhaps two cuts over the course of the next twelve months. It’s been a little schizophrenic. We think the bar for the Fed to move either way – to raise rates or to cut rates – is extremely high, and so we’re expecting more of the same: no significant change in policy over the coming quarters.

    Oscar Pulido: Last year was a great year for earnings, and some of that was helped by some fiscal stimulus, in the U.S., the tax cut. But this year it seems like earnings growth is slowing. So how does a slower growing economy, slower earnings growth, translate into still more equity returns ahead? It seems like those things don’t go hand in hand.

    Kate Moore: Yeah. So let’s go back to 2018 and also 2017, because we actually had two exceptional years of global earnings growth. 2017 I always like to highlight. It’s a year where every major equity region posted higher than ten percent earnings growth. That was the first time that had happened since 2006, so it was a really exceptional year. And then last year, as you pointed out, super-charged by the tax cuts and fiscal stimulus, and led by the U.S., we had another really strong earnings year. Not every region growing ten percent or more, but many. And this year, we know the comparisons are going to be hard, and without a significant amount of fiscal stimulus or a change in policy, we’re just not going to get to those numbers. But I would be cautious in general about comparing GDP growth and earnings growth too closely. Actually, over any period of time, the relationship between those two things is very loose, sometimes non-existent. It’s because companies have a lot more levers to use and to pull when they’re working on their earnings. It’s not just a question of how fast the economy is growing. What do they do with costs? What are their labor pressures, what is the competitive environment? What is the interest rate environment, what is the tax regime? There are many other things that go into earnings. We have to be careful about being too reliant on history, because corporate balance sheets and behavior is different today than it has been in the past. Excellent quality balance sheets and companies that are behaving much more conservatively than they have in previous cycles, I think that leads to a longer duration earning cycle than we’ve ever seen. A slower growth environment is something we have to watch for. But it doesn’t always necessarily dictate the course of the earnings growth.

    Oscar Pulido: When we think about the economy, I think about the bond market, which we talked about stocks, but this has been also a reasonably good year for the bond market, which some might interpret as not a good sign, the fact that bond prices have gone up, interest rates have come down, that that’s still telling us something about the outlook that maybe the recession is getting closer. Do you think that is what the bond market is telling us, or does this go back to central banks are going to be patient and therefore people are putting money to work across different asset classes?

    Kate Moore: So I think there are two things to say on this one. The first is, both the equity market and the bond market have celebrated a much more dovish tone from central banks. It has been a rally in equities, a rally in bonds, it was one of those years where if you were just invested at all, you’re feeling pretty good as we start the second quarter. I think the fact that we’re going to continue to have low rates and actually supportive fiscal policy like government spending in a number of major regions, is going to be good for stabilizing economic growth, albeit at a lower level. But there is a second part of this too which is people are skeptical about the duration of this cycle. Even though we don’t have a lot of weak data points yet, at ten years into a bull market and ten years into an expansion, we’ve seen investors put a lot of money into bond funds in 2019 and take money out of equities. I would actually argue that that positioning means that equities can grind higher, because they haven’t been buying into the rally. I do worry that there is too much enthusiasm for bonds, especially just based on the duration of the cycle.

    Oscar Pulido: Right, I was going to ask you about complacency and whether you were seeing complacency from investors given the rally, but what you’re saying is investors are actually taking money out of equity funds.

    Kate Moore: Yeah. There is not as much complacency as you would expect. There are some areas of complacency that we’re monitoring around certain geopolitical risks, where maybe the best case scenario for U.S. and China trade or European politics are getting priced into the market. But when it comes to overall equity enthusiasm, both the external fund flows data that we monitor as well as our internal analysis, it’s all kind of showing that people have been fading this move over the last three months. And that means I think the pain trade is higher.

    Oscar Pulido: So let’s talk a little bit more specifically. As you think about regions, maybe that is a good place to start: are there specific regions of the world that you think the stock markets are better positioned to do going forward?

    Kate Moore: We are actually holding our regional recommendations steady, the ones that we had at the start of 2019, and really for the bulk of 2018, which is our preference for the U.S., given quality, strong fundamentals, the great geographic and global reach of a lot of companies, combined with some strong growth momentum we’re seeing in the emerging world. Now emerging market stocks did—I’m trying to think of a really polite and kind way to say this, but really badly at the end of last year, and it felt completely unjustified. Yes, there were some policy and regulatory headwinds around China for example, but it wasn’t the end of the world, and actually we see great longer term demand and actually even near term demand coming out of some of these markets. And the Chinese government has been stimulating, the consumer, giving incentives to purchase autos or white goods, which are like basically appliances, targeted credit expansion. And all of that stuff should help really stabilize the Chinese economy and demand. So, we see a lot of opportunity for emerging market companies and for equity markets that are geared towards the Chinese story.

    Oscar Pulido: And that is interesting, because most of the China headlines are around trade and trade tensions, and that would lead people to believe emerging markets are an area to avoid. But you just touched on actually the positive headlines which maybe don’t get enough coverage, which is the Chinese economy stimulating. And that helps global growth and that helps maybe the performance of some of these markets.

    Kate Moore: Absolutely. I think it’s a very poor trade to bet against Chinese political will too. Policymakers from all different parts of the Chinese government are very, very committed to stabilizing and expanding growth. They are committed to the consumer, particularly in targeted policies that encourage spending, whether it’s on autos or appliances, on credit to companies and industries that they want to see grow, and they are showing a huge amount of support for the technology sector, also communications and internet companies, that really are the next round of leadership for the Chinese economy. I think it’s important to watch what they’re doing where they are spending their time and attention, and not just on this conflict or perceived conflict between the US and China on trade.

    Oscar Pulido: So let’s talk about the technology sector, which has been a phenomenal sector to be invested in over the course of this ten year bull market. You can’t go far without hearing the terms 5G, artificial intelligence. Are there any other areas outside of those that you think are worth touching on? Or maybe you could touch on the 5G and AI themes.

    Kate Moore: Yeah. So there are limitless themes it feels like in technology, and some of our technology investors here at BlackRock had actually sketched out for me at one time why we didn’t need to invest in any other sector, because within technology and now as part of communications as well, you were touching on all different parts of the economy. I think that is true. You have technology companies that operate in the healthcare space, technology companies that operate on the consumer side, technology companies that are replacing financial services. This is a broad and cross-sectoral theme, and there are great opportunities to invest in the disruptors and the winners across the entire market. I think really important – and this ties back to the China theme, though – as we think about 5G and AI and some of the most innovative and perhaps disruptive parts of technology, the Chinese are leading in many parts of the world. They have great partnerships with countries outside of the U.S. We would expect actually that some of this trade tension, even if we have an agreement in the near term will lead to a decoupling of the global tech sector and actually perhaps two separate tech protocols will be developed on a go-forward basis. If you really want to invest in technology, I think you have to own both U.S. and Chinese tech.

    Oscar Pulido: You made a compelling case for the technology sector, but is there any other sector that we should be thinking about?

    Kate Moore: Yeah. So we still really like healthcare. Healthcare has a couple different elements to it. It has a quality side to it where we have companies that have solid balance sheets that have the potential to continue to grow their earnings even in a slower part of the cycle. It actually has a technology and innovation aspect to it as well, which is quite exciting especially when you look industry by industry within the sector. And then you have a third element which is a demographics element, so a really long cycle where we’re seeing more and more consumption of healthcare products and services, and an aging developed market population that will be spending more and consuming more on the products and services in that sector. So we see a lot of reason to own it for the long term, and also at this point in the cycle.

    Oscar Pulido: Kate, you’ve given us a lot of really good things to think about here, more tactically, but let’s just take a step back for a second, when you think about investing in the stock market for the long term, what are some basic things that you think we should be keeping in mind as we approach the stock market.

    Kate Moore: Well, a few things that come to mind are that no one is so brilliant that they can time the market perfectly. Stick with high quality and growth themes in your portfolio for the long term, and don’t panic too much if the news flow turns the other way. I think it’s also really important to understand your own risk tolerance. I like to invest in emerging markets; I feel really comfortable owning EM for the long term. I understand that it’s going to be volatile, I understand that we can see swings in policy, whether it’s around trade or specific domestic policies that affect the prospects. But for me, compounding returns in emerging markets is extremely exciting. Understand your risk. I have a belly for risk so I can do it. And then I think the third thing is to recognize that taking a diversified approach is super important, because it’s not just good enough to know who is winning right now, but because every sector and every industry is being disrupted, you need to take a broad approach both on a geography as well as sector basis to your equity allocation.

    Oscar Pulido: Great advice. We usually do something here at the end of our segment where we ask some rapid fire questions that touch a little bit on your personal life, so I hope you’re ready for these. These are meant to be-

    Kate Moore: I’m strapped in, ready to go.

    Oscar Pulido: --quick responses. We talked about tech, what is the disruptive piece of technology that you’re most excited to use in your daily life?

    Kate Moore: So I’m not sure how disruptive it is, but the technology that has most changed my life are my Sonos speakers. I’m obsessed with music, and being able to fine tune my music all over the apartment and at other homes, is super important.

    Oscar Pulido: All from your mobile device I’m sure.

    Kate Moore: All from my mobile device, streaming my Sirius and Spotify and having all of my playlists imported, it’s changed my life.

    Oscar Pulido: I heard you’re an avid skier. Where do you like to hit the slopes?

    Kate Moore: I will skill anywhere, but I spend most of my time at Jackson Hole which is my favorite place on earth. I am trying to convince the BlackRock Leadership Team to let me open an office in Jackson, just a hint-hint.

    Oscar Pulido: I will join you if that is in fact the case, and I have to admit having gotten my three-year-old on skis this year was a big challenge, so maybe one day he’ll go to Jackson Hole as well. I’ve also heard you love to read. What book would you recommend right now?

    Kate Moore: So I’m really into science fiction and fantasy, I read the entire Game of Thrones series before there was even a rumor it would become a television program, that’s how nerdy I am. One of the best books I read recently is called The Three Body Problem. It is a science fiction story that was translated from the Chinese. A bunch of our colleagues in San Francisco suggested I read it. I thought it was a fascinating take on both the impact of the Cultural Revolution on decision making as well as some real nerdy science/outer space type of stuff.

    Oscar Pulido: And the last question, what is your favorite place to go in New York?

    Kate Moore: Central Park. I have a golden retriever, and we spend a ton of time in the park, especially during off-leash hours, I’d say before 9 a.m. on Saturdays and Sundays, with a cup of tea and throwing the ball and watching my dog run around is one of my favorite things to do in New York City.

    Oscar Pulido: And now we’re in spring so you hopefully have a little bit more time to be able to do that.

    Kate Moore: Absolutely.

    Oscar Pulido: Thank you Kate for joining us on The BID.

    Kate Moore: Thanks for having me.

  • Episode 11 transcript – Brexit – and beyond

    Jack Aldrich: If you’ve been following the news over the last few years, chances are you’ve been tracking the latest drama concerning Brexit, the United Kingdom’s June 2016 decision to leave the European Union. But Brexit is just one part of the European story, and at times, it’s overshadowed other key developments playing out across the continent.

    On this episode of The BID, we’ll take a Euro trip with Chief Multi-Asset Strategist, Isabelle Mateos Y Lago. We’ll try to make sense of what is happening now, what is bubbling beneath the surface and what we should be watching for beyond Brexit. From the BlackRock Investment Institute, I’m your host Jack Aldrich. We hope you enjoy.

    Isabelle, thank you so much for joining us today.

    Isabelle Mateos Y Lago: My pleasure.

    Jack Aldrich: So much going on, particularly with Brexit, so I’d love to start there. March 29th was supposed to be the day that the UK left the European Union. Yet that hasn’t happened. Why? Every day, we’re hearing of some new political upheaval. What’s going on?

    Isabelle Mateos Y Lago: Yes, good question, everybody’s trying to answer it here in London as well. So look, what’s happened is that Theresa May, the prime minister, hasn’t managed to get the UK Parliament to approve the withdrawal package that she negotiated and agreed with the European Union. And as a result, it’s been necessary to request an extension of that deadline for exiting the EU in order to prevent the chaos of a so-called “no deal Brexit.” So there are now basically two scenarios. One scenario is that Theresa May at long last manages to get a Parliamentary majority for her deal. That is still looking somewhat unlikely, but a number of members of Parliament have been revisiting their position recently, so it’s not completely ruled out. If that happens, the UK will leave the European Union on May 22nd. If, however, there is no such majority in support of Theresa May’s deal, then other options will need to be explored. Something that the Parliament is going to begin to do very shortly with so-called “indicative votes.” But in almost all of these other scenarios, more time will be needed, and that will mean that by April 12th, the UK will then need to notify the European Union that it needs a longer extension, and therefore also will need to take part in the European elections. So the situation is still very fluid, full of uncertainty. I would say the one element of clarity that we do have at this stage though, and that’s a very important one, is that the prospect of a no-deal Brexit, which would have been extremely disruptive in economic and market terms, is pretty much off the table. And that is because Theresa May has said formally that she will not allow a no-deal Brexit unless there is a majority in Parliament for it, and we know there is a large majority against it. So we avoid that acute short term risk, but in the near term, the uncertainty remains very deep.

    Jack Aldrich: So it’s not quite all settled.

    Isabelle Mateos Y Lago: No, it’s not all settled at all. Whatever the scenario, we’re going to see a protracted period of uncertainty, and that’s likely to weigh on UK assets for the foreseeable future.

    Jack Aldrich: I’d love to circle back to the European Parliamentary elections. Could you explain what those are and what they mean?

    Isabelle Mateos Y Lago: So these are the elections for the European Parliament. This is the only body in the European governance structure that is directly elected by European citizens in the context of national constituencies. So it’s a pretty big deal, and the European Parliament is co-legislator together with the European Council, which is comprised of EU heads of state and government, so it has substantial powers particularly with regard to well pretty much all the legislative framework as well as trade relations.

    Jack Aldrich: The results of these elections influence who are Europe’s political leaders, correct?

    Isabelle Mateos Y Lago: Yes, that is absolutely right. In fact, there is an expectation that the leader of the party that has the largest grouping in the European Parliament becomes the head of the European Commission, which is the European executive if you will. In fact, one thing that is almost for sure this time around is it will not happen, because a substantial number of heads of state are against the system. So there is going to be some kind of negotiation to determine which country, which party gets to lead the European Commission. And then of course whoever gets picked as president of the European Commission will have an impact as well on who will replace Mario Draghi as President of the European Central Bank when his mandates expires in October. Because there is always an expectation that different countries get the different jobs; so for example, if you were to have a German to run the European Commission, then it would be very difficult to have a German run the European Central Bank. But vice versa, if you don’t get a German to lead the European Commission, then that opens the door to potentially having a German run the European Central Bank, which has never happened before. And so this is an important fallback effect from the European elections.

    Jack Aldrich: Got it. So these are a big deal.

    Isabelle Mateos Y Lago: It’s a pretty big deal, yeah.

    Jack Aldrich: And I know that one of the sticking points in Brexit is that if the United Kingdom is leaving the European Union, it would be a little odd to participate in upcoming European elections. Is that the right way to understand it?

    Isabelle Mateos Y Lago: Yeah. That is exactly right. As Theresa May, the British Prime Minister, said in her television address recently, it’s been almost three years since the UK voted to leave the European Union and the population probably wouldn’t take it very well, it wouldn’t understand it, if they were asked to participate in elections to the European Parliament. On the other hand – and that is the way the European Union sees it – if the UK is going to remain a member for a while longer, and we don’t know if it’s a short or long while, or forever, then it would be violation of the treaties if it did not elect representatives to the European Parliament. Now obviously it is an involved process and one can see why the main parties in particular are not excited, neither of them, at the idea of running European elections. On the other hand, it’s probably less absurd to do that than to stockpile food and medicine to prepare for no deal. So that is the state of the discussions today.

    Jack Aldrich: After the UK voted to leave the EU, it was widely feared it would start a domino effect of multiple countries doing the same. I recall the potential monikers circulating: Frexit, Grexit, even Ita-leave. Where do these fears stand today?

    Isabelle Mateos Y Lago: No, I think those fears are very much diminished in part because of or thanks to the chaos that the Brexit debates both within the UK and between the UK and the European Union have caused. I think the whole rest of Europe is watching this and thinking, oh my goodness, what a mess they’ve made. And don’t want to have it at home. When you look at peoples’ support for membership in the euro or membership in the European Union across the different countries, it is now as high as it has ever been, it’s over 75 percent of the European population who thinks that membership of their country in the EU is a good thing. So how much of that is linked to Brexit versus simply improvement in the economy, or other reasons, is obviously hard to say. And the main parties that previously had campaigned on an openly anti-EU platform. like the Front National in France or even the League in Italy and others, have had to tone down very significantly their anti-EU rhetoric. But that being said, there is an open acknowledgement now even by mainstream parties, the French president and the head of the government party in Germany, that this status quo is not acceptable. There is a lot of things that need to be improved and fixed in the way the European Union works and that is going to be at the center of the campaign for the European Parliament elections which are getting under way now.

    Jack Aldrich: I know polls predict a small showing for as you mentioned a lot of the populist parties that are either in power today or very much waiting in the wings, and have been laving this period of time to ferment local support. Is that right, does that matter?

    Isabelle Mateos Y Lago: So that is definitely right that opinion polls are projecting a significant increase in the representation of populist parties both on the right and left of the spectrum; that being said, they’re starting from a very low level and so the baseline scenario is still that the mainstream parties between them will remain comfortably within the majority position. I think the key question is, could all the populist parties together reach one-third of the seats, in which case they would have substantial blocking power? But having said that, we shouldn’t forget that these different populist parties don’t agree on most things. They might agree on not liking the way the EU functions today, but in concrete terms, some of them want much more respect for the fiscal rules, others want to throw them out of the window. They have very different visions in terms of foreign affairs for example, how to deal with Russia, with China. So what I think is fair to expect is probably more complicated, more convoluted decision-making going forward after the new parliament is in place but not necessarily a strong shift in one direction or the other in terms of policy making.

    Jack Aldrich: What I think is so interesting Isabelle is this notion of populist parties competing with each other is true both across Europe, but also within the different countries, right? So you have in Italy and France for example, populist parties on both the left and right competing for people’s hearts and minds.

    Isabelle Mateos Y Lago: Yeah. That is absolutely right. And there is a broad agenda of protecting people but frankly, even Emmanuel Macron in France is campaigning on a slogan of Europe that protects its citizens better. So there are issues on which there will be substantial agreement, for example, better protection of EU borders; for example, overhauling the asylum seekers and refugees policy. But then there are other issues like what stands to take on free trade or what do we want to have in the trade agreement that the EU is going to sign with third parties. There will be very significant differences of views there.

    Jack Aldrich: When you think about all that is going on in Europe, there seems to be no shortage of risks. What else is keeping you up at night? Spain’s upcoming elections I know are in April, there are ongoing budgetary tensions between Italy and the European Union. What is on your list?

    Isabelle Mateos Y Lago: So really my biggest concern is how is Europe going to cope with the next recession? If you look at the U.S., and you think what will the U.S. do when the next recession approaches, you can pretty sure that the Federal Reserve will take decisive steps, cut interest rates for example to try and support growth and quite possibly you would get Congress to approve some fiscal stimulus. In Europe, you can pretty much rule out both of these. In terms of the central bank, there’s no space to cut interest rates and we now know the ECB has promised to keep rates at negative point four until at least the end of the year. It’s very politically constrained to restart its quantitative easing program, its asset purchase program. So there is very little room to maneuver on the monetary policy side. And then on the fiscal side, different member states have very different vies as to what needs to be done, and generally speaking, the countries that do have fiscal space like Germany and the Netherlands, don’t want to use it. Whereas those who most want and need to use it like Italy and other periphery countries don’t have the space and wouldn’t be allowed most likely by existing rules to use it. So that would be the conundrum, and at that point, it’s quite possible that markets, again, would really worry about the sustainability of the debt of a number of the periphery countries and you would see a bit of a viscous cycle between market conditions and growth conditions getting worse and worse and worse until you get some kind of a policy response, but that may come pretty late in the game. So in the medium term, that is my main worry. In the short term, there is of course the issue of the threat of tariffs, EU car exports to the United States, which keeps coming up every now and then in the U.S. president’s Twitter feed. That would deal a big blow in terms of economic confidence in the EU and we would almost immediately seen a retaliation from Europe, which would cause a lot of collateral damage as well.

    Jack Aldrich: Got it. So it really looks like you’re looking ahead to the next downturn and fearing how that might turn out. Do you think the trigger for that would have to be economic, or could it be political?

    Isabelle Mateos Y Lago: No, I don’t see political events. I mean, apart from that, it would have to be an economic driver to see a recession in Europe. And frankly, I don’t see this as being around the corner. If anything, now the base case is more a stabilization or reacceleration in the wake of the same thing happening in China. But if you look at the next 18 months to two years, where the risk of a recession striking in the U.S. increases, it’s hard to see a Europe that would decouple from that. So I see this as an economic risk that would get magnified by the lack of an adequate policy reaction than an inherently political risk.

    Jack Aldrich: On the subject of tariffs, it’s interesting because so many of the headlines recently have been around the United States and China. It seems like this is a big deal for Europe through: are we paying enough attention?

    Isabelle Mateos Y Lago: Yeah. So in our view actually it is quite clear that market attention to global trade tensions has been almost entirely driven by developments in the U.S./China relationship. And so in the indicators we use to track market sentiment and market concern around this topic, what we see is a sharp decline in concern since basically last fall. And that is probably justified when it comes to U.S./China, although we don’t expect a permanent truce; we do expect some kind of agreement to be found there. But more importantly, there are other trade issues out there that are largely unresolved, and one of them is the new NAFTA that looks difficult for it to get through Congress. People have forgotten about that. And the other one is these trade talks between the U.S. and Europe, which were supposed to get under way last July after the meeting between President Trump and President Juncker. And these are not going particularly well, in fact, both sides can’t even agree what to talk about. The U.S. wants to talk about agriculture, Europe is saying absolutely not, we will only talk about industrial goods. And President Trump has spoken on many occasions of what he perceives as being a very tough stance from Europe. He’s accused Europe of being even tougher than China. And clearly, from his standpoint, using the threat of tariffs as you go into a negotiation strengthens your hand. Certainly that would suggest to be the experience from the trade talks between the U.S. and China. And so the president now has in his hands a report on the so-called Section 232 which would allow him to declare EU car imports a threat to national security—now one may agree or disagree with that judgment, but it would give him a legal basis to impose tariffs of as much as 25 percent on European car imports, and that is a very significant chunk of the European economy, particularly for Germany, but also through supply chain effects frankly for the entire European economy. So that is something that really markets should be more worried about, and that has been very much out of the headlines and is for us a meaningful downside risk.

    Jack Aldrich: And I think another thing that’s been out of the headlines, and we’ve talked about being one of the under the surface issues between the U.S., China and Europe has been this issue of technology. Can you talk a little bit about that?

    Isabelle Mateos Y Lago: Yeah. So that is another complication. Well beyond trade, the tensions between the U.S. and China are now focusing on technological rivalry for things like 5G networks, artificial intelligence. Europe frankly is at risk of being left behind and having to choose sides in terms of providers between the U.S. and China. And right now a number of European countries are looking at their options and feeling very uncomfortable towing the line that the U.S. would like them to, which is to ban Chinese equipment providers. So that is another source of irritation or tension if you will between the U.S. and a number of European countries who have said, well I don’t really care what the U.S. says, I’m going to allow Chinese companies to provide some of our advanced telecoms equipment.

    Jack Aldrich: And this doesn’t seem like an issue that will be resolving itself any time soon.

    Isabelle Mateos Y Lago: No, indeed.

    Jack Aldrich: So with all of this said Isabelle, should investors steer clear or Europe for the moment or are you seeing opportunities?

    Isabelle Mateos Y Lago: Well, there is always opportunities. There is a bunch of very good companies in Europe that are internationally oriented, and that benefit from a relatively weak euro right now, and we do not expect the euro to strengthen significantly any time soon. Having said that, when you look at the return expectations that you can hope for from European markets compared to the risks – and these are primarily downside risks at this stage – Europe doesn’t look very attractive compared to, in particular, regions like the United States or emerging markets. So this doesn’t mean to say remove any European assets from your portfolios, but we definitely advocate an underweight stance to European equities. We do see opportunities in European credit, where the very dovish posture of the central bank combined with an okay-ish growth outlook means there are opportunities.

    Jack Aldrich: Isabelle, we always end our episodes with a rapid fire round of questions that are a bit more personal.

    Isabelle Mateos Y Lago: Okay.

    Jack Aldrich: The first is, we talked a little bit about technology and I know you’re a tech-watcher: 5G, artificial intelligence, the internet of things, which of these buzzwords are you most excited about?

    Isabelle Mateos Y Lago: Look, I think the exciting part is the combination of all of them. Frankly, AI combined with 5G and you get the internet of things, you get autonomous vehicles, you get all sorts of really exciting as well as frightening developments. Because I think all of us human beings are going to be able to focus on more value-adding activities and maybe have a lot more free time to spend on listening to podcasts.

    Jack Aldrich: And Isabelle, I know you’re on the road quite a lot: do you have a favorite tech device that you can’t live without?

    Isabelle Mateos Y Lago: My phone and my AirPods but we don’t want to do advertising here.

    Jack Aldrich: Switching gears, you, before working at BlackRock, spent 15 years at the International Monetary Fund, which I think is very cool. What is one of your best memories of that experience?

    Isabelle Mateos Y Lago: Well, in 2007, after a couple of years of intense and very difficult negotiations, we managed to overhaul a decision that had been in place since 1977, so a 30-year-old decision on how the International Monetary Fund should enforce surveillance of exchange rate policies over its members, in other words, how it would prevent countries form manipulating their exchange rates. So we accomplished this modernization. It was very hard because the different member countries had very, very different views on what to do. And it was a great moment of happiness once we reached agreement of the executive board to endorse this new framework. And then that lasted about a week and it turned into a big disaster because it turned out that one of the largest member countries really couldn’t live with it; and then, the IMF spent the next three to four years undoing it.

    Jack Aldrich: I know you’ve had a very international career and have lived in the U.S., the UK, and France, in addition to some I’m sure I’m not even aware of or forgetting—how many languages do you speak?

    Isabelle Mateos Y Lago: I speak five languages, but to different degrees.

    Jack Aldrich: Which ones?

    Isabelle Mateos Y Lago: So English, UK English, American English, French, Spanish, German, and Russian.

    Jack Aldrich: Great. Well Isabelle, thank you so much for sharing your insights with us today.

    Isabelle Mateos Y Lago: My pleasure, thank you Jack.

  • Episode 10 transcript – Mind the retirement gap

    Mary-Catherine Lader: March is Women’s History Month in the United States. People are celebrating women’s empowerment in their companies, in their communities, and families. But when it comes to retirement, there’s still a big gap – an investing gap – between men and women. And we may not be fully aware of it, or what to do about it.

    We’re seeing a crisis in retirement, and that crisis is magnified for women. Only 52% of women are saving for retirement, versus 61% of men. More women than men feel stress at the thought of investing, and are more likely to believe that investing isn’t for people like them.

    On this episode of The BID, we’re talking to the expert on these issues. Anne Ackerley heads BlackRock’s U.S. and Canada Defined Contribution business, and she co-founded our Women’s Initiative Network. She’ll talk about what we can do to get more women invested, share advice from 34 years working in financial services, and discuss why she thinks the word “retirement” is outdated. I’m your host, Mary-Catherine Lader, we hope you enjoy.

    Anne, thank you so much for joining us today.

    Anne Ackerley: Thanks so much for having me.

    Mary-Catherine Lader: So on our last episode, President Rob Kapito talked about the retirement crisis, and his view is that it’s actually getting worse. The problem is magnified for women, and our Investor Pulse found that only half of all women have started to even save for retirement. You’re an expert in this area; you lead our defined contribution business, and you’re also, of course, a woman who’s been in financial services for decades, observing these trends over time. Why is this particularly bad for women?

    Anne Ackerley: Let me just take one step back and say, actually, when I think about statistics like that, where I first go to is access, and the fact that a third of Americans don’t have access to an employer-sponsored retirement plan. So for both men and women, we start off with a lot of people not being able to save through their employer. Then when we look at women and only 50 percent, about 50 percent of women are even saving for retirement, I think it has to do with something I call The Triple Whammy. So women are going to live longer, we live longer and our money has to last longer. Two, we tend to make less than men, in the United States, 82 cents on the dollar. And third, we often have gaps in our employment, and sometimes we’ll miss out on benefits. And when you take the effect of the three of those things, when we look at 401(k) plans, we sometimes find that when women get to retirement, their balances might be up to 40 percent less than men’s.

    Mary-Catherine Lader: Wow.

    Anne Ackerley: And yet, that money has to last longer. So we have a retirement crisis in the U.S., and we really have a retirement crisis for women.

    Mary-Catherine Lader: Those three things you mentioned – living longer, making less, and gaps in employment – they’re sort of out of women’s control. So what can we do about it, and what can women do themselves?

    Anne Ackerley: So, money is the number-one stressor for both men and women, but when we specifically ask women, why aren’t you saving, why haven’t you saved enough? Women will tell you that they feel alienated from the finance industry and alienated from retirement. Three out of four women consider themselves savers, not investors. Women will say that there’s too much jargon, there’s too much choice, they’ll say sometimes their advisors aren’t actually helping them, they’re telling them, they’re not teaching them. So what can we do? I think as an industry, we’ve just got to do better here. We’ve got to have less jargon, we’ve got to make retirement easier, easier for women, easier for men. I think tools can go a long way to helping everybody save more. We’re focusing on building a digital technology enabled platform to help people save more for retirement. I think that can go a long way. I think we have to help financial advisors get better at working with women, and helping them think about how to save.

    Mary-Catherine Lader: Right. So making the complex simple and putting aside jargon really requires a mindset shift. Often, we think that the complexity is what allows us to add value. Do you see financial advisors and wealth management firms in particular interested in doing that?

    Anne Ackerley: I think we’re trying, as an industry. I remember back when I was in our marketing department, and somebody once said to me, it was a portfolio manager, and they said to me, “But if we don’t make this complicated, how will people know we’re smart?” And I think there is something in that, that you’re right, the value that we at least historically have tried has been is, look, I’m smart, I know a lot, I’m the expert. But it doesn’t resonate, and in particular doesn’t resonate with women. This isn’t about dumbing it down. But it is about using words and using language that people can understand, and that resonates with them.

    Mary-Catherine Lader: So that’s a part of a problem. At a more micro level, if you have to narrow it down, what are the three things you tell people to do to help plan for retirement?

    Anne Ackerley: So am I allowed to say, start saving now, three times?

    Mary-Catherine Lader: Absolutely.

    Anne Ackerley: Start saving now, start saving now, start saving now. But in all seriousness, the younger you start to save, the better you’re going to be. The impact of compounding over time is immense. So if you start saving at 22 versus start saving at 30, that has a very big difference into what you will have in retirement. So start saving now. Save more. Do everything you can to try to save a little bit more. 401(k) plans and employers allow you to auto-escalate, so every year, you can set it so it increases automatically. You’ll hopefully get raises, it’ll just come out, you won’t even notice it’s gone. I would say the third thing is invest appropriately. I am a zealot about target date funds, I think for most people getting into an age based asset allocated product is the right thing. It’s easy, the professionals are doing it for you, and we know that asset allocation ultimately drives a lot of returns.

    Mary-Catherine Lader: And how do people think about that age today, and should women be thinking about that age any differently than men? And when I think about when I signed up for a target date fund, my first 401(k), I was 22, I probably picked 65 because that is the number that you have in your head as a retirement age, even though that’s increasingly unrealistic, right?

    Anne Ackerley: Yes. Unrealistic and probably not wanted. If you’re going to live to 100, 102, 105, I think the statistic is that the ten year olds today will live to 105 in the United States, 107 in Japan, the notion that you’re going to retire at 65 and have 40, 45 years “in retirement”, that’s becoming very outdated and unrealistic. And I think we’re going to have to start thinking about careers in stages, or encore careers. It probably isn’t going to be go to school, get a job, retire. It’ll probably be go to school, get a job, go back to school, take a sabbatical, go do something else. But since I said invest target date, and I think target dates will evolve over time as retirement changes. But today, think about an age that you might think about retiring. Maybe it’s not 65, maybe it’s 70, maybe it’s 75, and put your money in that.

    Mary-Catherine Lader: And how do you see target dates evolving over time? So if today you pick that date and then its asset allocation is optimized for a certain outcome based on the risk you’re willing to tolerate to that date, what do you think might be an option for a 22 year old graduating in 2025?

    Anne Ackerley: Great question. I have two young adults. So I spend some time trying to convince both of them to save, to set up their 401(k)s, to try to put some of their money in it. I could see it going a whole bunch of ways. As we get to more customized investing, maybe we’ll have more customized target dates. I have often thought should men and women have different target dates, given that our longevity and our earnings profiles are different. That being said, I just want to come back to, as a zealot, for most people, a target date can be a great investment.

    Mary-Catherine Lader: So contributing to a 401(k) is one piece of the puzzle, but you also mentioned the idea of just saving more, and taking advantage of the mechanisms that are out there to help people plan for retirement.

    Anne Ackerley: One of the biggest issues is just that people aren’t saving enough. When you look at participants across the board in 401(k) plans and their employer sponsored plans, only ten percent of people who save in 401(k)s actually reach the IRS match.

    Mary-Catherine Lader: Wow.

    Anne Ackerley: People aren’t taking advantage of let’s say the employer match, or they’re not maxing to the IRS and taking advantage of all the tax situations. We still need to help people get the full employer match, get the tax benefits, and try to continue to save. And not to scare people, but today, if you start at 22, and you’re going to retire at 65, and you invest in a target date, you probably should be saving combined with your employer, 15 percent a year.

    Mary-Catherine Lader: 15 percent of your total income pre-tax?

    Anne Ackerley: Yes, pre-tax, a year. I think in the United States, the average savings rate is probably closer to six. So we have a lot of way to go between where people are and probably where they should be. If we go into a period of low returns, that 15 percent might become even higher. So there’s a lot that we can do to just get people to save more.

    Mary-Catherine Lader: And you’re part of dialog not only with our BlackRock and our clients but also with government, and different regulators around this issue. What level of awareness and interest do you see in solving the consumer education that you were just talking about, now relative to five, ten years ago?

    Anne Ackerley: I think there has been increased interest on the part of government around retirement generally, and today, as we look at the legislature, there are quite a number of bipartisan bills around retirement. And I know a rallying cry for BlackRock has been make it easier. Make it easier for the employer to offer plans – by the way, I would just tell you that in the United States, there is no law, there is no rule that says an employer has to provide a retirement savings plan.

    Mary-Catherine Lader: So why do they all do it? To attract employees?

    Anne Ackerley: Actually many don’t. The large companies tend to, but many, many, many don’t. And so some of what we have advocated here at BlackRock is make it easier for employers, particularly the small employers. If you do offer one, there is a lot of reporting requirements and you probably need to make it simpler for employers. We might actually have what they call MEPs which would allow small employers to pool money and make it easier as well.

    Mary-Catherine Lader: So let’s switch gears a little and talk about something more personal. You’ve been in financial services for 34 years. What’s different today about being a woman in finance versus 5, 10, 34 years ago?

    Anne Ackerley: Let me just start by saying I think finance is a great place for women; I think it’s a super-dynamic industry and I think it is a great place to build a career. So I would say to women, come to finance. Over the last 34 years, I think there have been a lot of changes. There are more women coming, I think there is much, much more consciousness about some of the things that maybe kept women from getting ahead. I think there is a lot more willingness to see women get ahead in finance.

    Mary-Catherine Lader: You started the Women’s Initiative Network at BlackRock, it didn’t exist until what year?

    Anne Ackerley: We started it in about 2010.

    Mary-Catherine Lader: And what as the intention there and how has it been impactful?

    Anne Ackerley: We had just come out of the merger with Barclays BGI and you had BlackRock and BGI coming together. And so it was a great moment in time I think from a cultural perspective to bring these two groups together. The network was formed to help BlackRock capitalize on all the female talent that it had. Women are more than 50 percent of the population. To the extent that BlackRock wasn’t making as much use of women, we were leaving talented people on the sidelines. So the network focuses on helping women develop and make the most of their potential here at the firm.

    Mary-Catherine Lader: So in your 34 years in the industry, you have worked with and increasingly mentored so, so many women. What piece of advice do you find has been most impactful as you’ve talked to them about their careers?

    Anne Ackerley: I talk to a lot of young women. And a lot of times they’ll come in and they’ll ask me, Anne, I’ve heard about this opportunity, do you think I should put my hand up for it? And mostly what I find is they just need somebody to believe in them, to see them as being able to do it. And so a lot of the time, really I’m not giving them—I’m saying, yeah, raise your hand, you can do it, you’re talented, go for it. And there is nothing better than seeing a young woman raise her hand, put herself out there, get that job, and then just totally crush it.

    Mary-Catherine Lader: So I’m going to end with a rapid fire round, so I’ll ask you a couple quick questions that you can answer in one sentence or less, ready?

    Anne Ackerley: Okay.

    Mary-Catherine Lader: Do you think you’ll retire?

    Anne Ackerley: Okay. Now you’ll know the truth, the hate the word “retirement.” I think we need to banish it from our vocabulary for everybody, because the world is changing, we’re going to live longer. I think this should all be about phases, transitions, encore careers. In my encore career--

    Mary-Catherine Lader: Right, new term, better term.

    Anne Ackerley: --rather than my retirement, I hope to help women invest and then I’d love to travel, garden and cook.

    Mary-Catherine Lader: That sounds like a busy encore career, like three at the same time. That sounds awesome. So I’ve heard that your son is in a band. What song would you make a guest appearance on?

    Anne Ackerley: I have absolutely zero musical talent, so it would be much better for my son and me if I just stayed as a groupie. But if he forced me to pick, I’m partial to their song “Keep Mother Sane.”

    Mary-Catherine Lader: Is this in honor of you?

    Anne Ackerley: No, it is not. To be very clear, it is not.

    Mary-Catherine Lader: What’s the name of the band?

    Anne Ackerley: Jackals.

    Mary-Catherine Lader: Very cool. What book are you reading right now and would you recommend?

    Anne Ackerley: That is a hard one to pick. So the book I’m reading right this minute is called Say Nothing, I believe it’s by Patrick Keefe. And it’s about Northern Ireland and the troubles. It’s fascinating. It’s kind of a true murder mystery, wrapped into that time. But I also just finished Becoming by Michelle Obama. Highly recommend that. And could I do a third?

    Mary-Catherine Lader: Go for it.

    Anne Ackerley: Okay. Bad Blood by John Carreyrou.

    Mary-Catherine Lader: Love that.

    Anne Ackerley: About Theranos. Fascinating read.

    Mary-Catherine Lader: I just read Becoming and Bad Blood also, really enjoyed them both, they’re great. What’s something your colleagues don’t know about you?

    Anne Ackerley: When you work at a place for 20 years, I think they know everything.

    Mary-Catherine Lader: Is that really true?

    Anne Ackerley: They know a lot. They know a lot. Maybe that my first job was on a farm stand.

    Mary-Catherine Lader: Doing what?

    Anne Ackerley: I was a cashier. So from the cashier on the farm stand selling corn to the world of high finance on Wall Street.

    Mary-Catherine Lader: Wow, and where was this farm stand?

    Anne Ackerley: On Long Island.

    Mary-Catherine Lader: Okay. And in those 34 years, what is the one thing you’re most proud of?

    Anne Ackerley: Well, I’d obviously have to say my two children, Jack and Juliette. But if it’s work related, I’d say coming to BlackRock, helping to build this company and staying true to our mission of helping people have better financial futures.

    Mary-Catherine Lader: Thank you Anne so much for talking about how exactly you’re doing that today and thanks for joining us.

    Anne Ackerley: Thanks for having me.

  • Episode 9 transcript – Can money make you happier?

    Mary-Catherine Lader: It’s a timeless question, and it’s puzzled people for thousands of years, from Cicero in Ancient Rome to rappers like Kendrick Lamar today: Can money really make you happier or does more money just mean more problems? We surveyed 27,000 people around the world to find out. And what did we learn? Money can make you happier, just not in the way that you think.

    People who invest are 24 percent happier, 19 percent less stressed, and report a 36 percent increase in their sense of well-being; simply investing a few dollars into your future makes most of us feel better today. So if investing can deliver a quick hit of happiness, then why are less than half of Americans doing it?

    That’s the question we’ll ask BlackRock’s president Rob Kapito on today’s episode of The BID. In our last episode, we talked with Frank Cooper about wealth as a critical part of every person’s well-being, and today, we’ll dive into the research supporting that theme. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Rob, thank you so much for joining us today.

    Rob Kapito: Well, thank you for having me.

    Mary-Catherine Lader: So every year, we survey thousands of people around the world in this Global Investor Pulse Survey, to understand how they’re feeling about their financial health, and particularly about how they’re feeling about retirement. This year we found that just 56 percent of people in the U.S. had actually even started to save for retirement. So can you put that in perspective? Why is that such a problem?

    Rob Kapito: Well, it’s not just a problem; it really is a crisis. People need larger nest eggs to fund their longer lives. We found that Americans are too worried about their financial situation today to think about saving for the future. And part of that is because of the high cost of living, healthcare costs, and of course, rising prices. But we know one thing for sure: you can’t invest for the future in the future. You have to start today. And there are benefits of course to starting early. In addition to financial dividends, our survey found that there are immediate emotional dividends for those who have a retirement savings plan.

    Mary-Catherine Lader: You were a founder of BlackRock in 1988 and two-thirds of the roughly $6 trillion dollars that we manage are retirement assets. So that gives you, as the company’s president, a really unique perspective in what it takes to deliver retirement security for people all around the world. You just talked about the retirement crisis. From your perspective, is this getting better or worse?

    Rob Kapito: No, I think it’s actually getting worse. People are starting to become more aware that they are going to live longer. Now when did that become a problem? So because of modern healthcare, if people are going to live ten to fifteen years longer than they thought, they actually not only need to save but they need to invest that money. Now this is going to become a bigger issue because think of it, when you get older, your costs actually get higher when it comes to healthcare and healthcare costs are of course rising. And then there are other needs because you may not have a paycheck coming in, so you have to dip into something. So if you have to work longer, then that means there will be less jobs for the next generation; and the next generation has to be thinking of this because it’s about their parents and about the older generation. So I find that a lot of millennials when I bring up this situation, they just are not that interested. They have plenty of time to save. And then I remind them that if they don’t get their parents to start saving for retirement now, that their parents are actually going to move back in with them. That gets them actually very, very interested in having this discussion with their parents about saving for their future.

    Mary-Catherine Lader: It’s conventional wisdom that millennials and women aren’t as likely to invest, you’ve already touched on this. So if that has been true for a while, and it’s true today, what does it say to you about what is missing in the way that we serve people?

    Rob Kapito: Well, what is missing is actually awareness. Money is ranked as the number one source of stress amongst the respondents in this survey. But we know that there are immediate effects for those that start early, so people on the survey indicated that they are less stressed when they actually save for retirements, and much like physical exercise that has both short and long term benefits, investing for the future actually helps alleviate stress and can improve your overall well-being today. Millennials, who represent a third of the U.S. workforce, reported that they are more worried about their finances than any other age group. And more than half of millennials said they are too worried about their current financial situation to even think about the future. Seventy-seven percent of them said they feel there are too many investment options to choose from. And that is important because we have to make it simpler. If you think about the most successful companies in the country today, I think it’s all about convenience. Certainly companies like an Amazon that will deliver a product to you right away, make life more convenient. Companies like Google give you the information immediately. Companies like Uber where you can have a car waiting outside for you. It seems to me that the world is focused on convenience. And certainly the way investing today is taking place, it’s not as convenient as it could be. And I think that convenience not only will come through better tools for the financial advisor, but it will also come through technology, and technology where people can get their questions answered very simply, where they can create portfolios that will weather the storm for the future, and help them to be able to retire in dignity.

    Mary-Catherine Lader: So if money is the number-one source of stress, and less than half of Americans we talked to weren’t even investing, it sounds like we need to help, to your point, make it simpler to get started. So how do you break down, as a professional investor, founder of an investment firm yourself, what it takes to get started?

    Rob Kapito: So basically, I think you first have to be in the mindset to focus on the long term. There is a lot of news that comes out every day that creates volatility in the markets and a lot of uncertainty, and investors don’t like uncertainty. There have always been issues in the political, regulatory front, there’s always been issues globally around the world. That is not going to change. So thinking for the long term is the best way to invest. Secondly, the cost of investing is very important because returns have been low in the last couple years, the costs eat into that return. So I think keeping cost low is very important. There is no question that being diversified is very important, not putting all your eggs in one basket as I’m sure your mom or dad used to tell you. A lot of people who are working actually have a 401(k) program, so companies have created that as a benefit for their employees. Inquire about that and get into your 401(k) which also has the benefit in many cases of being matched by employees so you actually are getting an advantage by investing in your 401(k). And lastly, I think working with a financial advisor is critical. There are a lot of people that are very good, have a lot of information, have lived through various cycles, and have people just like yourselves that they have helped in the past.

    Mary-Catherine Lader: How do you think the industry, and particularly BlackRock, should tackle this retirement problem? As if it were as easy as those steps that you mentioned, surely the data would be different and everyone would be doing it.

    Rob Kapito: Well, we’re going to step up to the plate and start to create more awareness for people around the globe. The first thing we’ve done is we’ve created some easy-to-use technology solutions that will help people get more involved in their investments and help pave a path to a more financially secure future. Interesting in the survey, among those who have started investing, seven in ten U.S. respondents said new technology solutions would help them be more involved in their investments. Now the good news is there are more tech enabled tools available today to make it easier for new investors to get started, with investment apps such as Acorns lowering the barriers to entry, by making it simple to invest at a low cost. Now while investors are embracing technology, they aren’t turning away from professional human advice. So it’s man and machine. Now most people that we are talking about today have children and they are really in their early careers, and retirement probably feels far away. And so we think also appealing to the younger generation through the use of technology will also have a benefit.

    Mary-Catherine Lader: A few years into your successful care as a trader, you left that job and you took a risk to form BlackRock with your partner Larry Fink. So as you look back at your own career, how did you think about your own financial risk?

    Rob Kapito: Well, I don’t come from money, so I also was in a situation where I didn’t really have that extra capital to invest. But as I started in my career and did better, I would take a certain percentage away each year and put that in a long term plan to invest. You know, I never really thought about a future that far out because I was in the beginning of my career. But what I learned as I watched people move from one company to the next company, is that you can’t always count on the current job you have being the job that you’re going to have for the future; you do really need to think of that time when you may retire.

    Mary-Catherine Lader: You have kids, you probably share this similar advice to what you just shared with us with them, how do you find advising your own kids about their financial futures? What do you say to them?

    Rob Kapito: Well, I think my kids are like everyone else’s kids: they know more than we did and they have dreams of what to do in their future. I do think it’s important that we impart some wisdom to them that life is not always straight up, and different things happen, and we certainly see that in the market. We’ve seen it in the job place, we’ve seen it in federal government shutdowns—you can never really be certain. And I do think that I try to impart to them that you can’t invest and save for the future in the future, that the earlier you start that, the better it’s going to be. So I think I am like every parent trying to impart some wisdom and some of it sticks. But I think you need in this case to be very repetitive because things you tell your kids when they’re 15 and 20, and 30 and 50, it means something different to them. Because they have more experiences to relate it. So you always hear kids say to their parents, don’t repeat yourself. You’ve already told me that. I think you have to overcome that and continue to repeat it, until it really sinks in.

    Mary-Catherine Lader: And as you look back, do you think there was a defining moment in your life that changed how you felt about money?

    Rob Kapito: Well, as I said, I come from a different world than I’m in today, and my father owned a business, he owned a garage with his two brothers and sister for 50 years. And one day at 13 when I came home, my father had a stroke. And so he wasn’t able to do the same type of work he was before. So when you’re a blue collar worker and you depend on your physical fitness to be able to do work, and then the next day you can’t, what do you do? So that was defining moment to me because it meant that I had to step up to the plate and be as much of a breadwinner as the rest of my family did in helping that situation out. So those are the types of experiences that stay with you, that show you that life can change in a moment. And so using that experience, made me even think more about saving for the future and investing, because you really can’t predict what is around the corner.

    Mary-Catherine Lader: Speaking of predicting, where do you predict we’ll be with retirement security in two years? Where do you hope we’ll be?

    Rob Kapito: So I think we’re going to be better. I’m an optimist. I think with all of the information that is coming out and the ability to get information today, which is much easier, I do think people are going to take this seriously. If people in the industry will go out and talk about this more, and create this awareness, and also create the tools and technology and types of investments that people will appreciate later on. So I am an optimist. I’d like it to move faster, because time moves very quickly as we all know. But I do see incremental changes which make me an optimist.

    Mary-Catherine Lader: Well that is encouraging for all of us. So I’m going to end with a rapid fire round, where you can pick over the other. We understands you’re a little bit of a sports fan, that you like cars, so this is to test some of your preferences, ready?

    Rob Kapito: I’m ready.

    Mary-Catherine Lader: Okay. Jets or Giants?

    Rob Kapito: Oh, definitely Giants.

    Mary-Catherine Lader: House of Targaryen or House of Stark?

    Rob Kapito: Targaryen.

    Mary-Catherine Lader: Why?

    Rob Kapito: I just think they’re in a much better position, less politics in the house.

    Mary-Catherine Lader: Dunkin’ or Starbucks?

    Rob Kapito: Dunkin’ Donuts. I know that I may be in the minority here, considering the lines that I see around the corner, but I like lighter coffee, much more consistent.

    Mary-Catherine Lader: The Met or the MoMA?

    Rob Kapito: The Met. I’m in favor of the older portraits.

    Mary-Catherine Lader: Ford Thunderbird or Pontiac Firebird?

    Rob Kapito: Well, the Ford is really a classic and the Thunderbird—actually I just bought a 1959 Pontiac Station Wagon, so I like that better than the Firebird.

    Mary-Catherine Lader: Okay. And cooking or eating out?

    Rob Kapito: Cooking definitely, one of my favorite things to do.

    Mary-Catherine Lader: What’s your favorite dish to make?

    Rob Kapito: Well, I make a sea bass that is just unbelievable. There’s a recipe that is in Epicurious that is just really, really special. It’s a miso sea bass, look it up, you won’t be disappointed.

    Mary-Catherine Lader: Okay. I’ll look it up. Last question, Disney’s Frozen or Moana?

    Rob Kapito: Well, I have three grandchildren right now. My words of wisdom, if I could do it again, I would have had my grandchildren first because they’re much better than kids, and they tell me that Frozen is much better, so I’ll go with them on Frozen.

    Mary-Catherine Lader: Rob, thank you so much for joining us today, it’s been a pleasure having you.

    Rob Kapito: Thank you.

  • Episode 8 transcript – Money talks, stress walks

    Mary-Catherine Lader: Fun fact: jogging used to be considered strange. In the 1960s, jogging wasn’t correlated to health at all, nor was it commonplace behavior. But then Nike made the connection. They turned something that was feared and doubted, into something that is part of the overall picture of our well-being. Today, you can’t walk on the streets of any city, or really anywhere, without passing by someone who is on a run. Decades later, the rise of gyms, countless types of classes and athleisure wear, has made fitness something for everyone, and frankly, part of a lifestyle.

    Those changes – Nike’s push to make jogging normal, the rise of gyms, the classes, the athleisure – they were driven by marketing. They were driven by companies that had a product that they thought could make peoples’ lives better.

    Forty-nine percent of individuals globally rate money as the top stressor in their lives; that’s more stress than physical health, work, or family. What’s most surprising? Fifty-seven percent of those people aren’t investing at all. So what’s stressing them out, and what can they do about it?

    On this episode of The Bid, we’ll talk to BlackRock’s Chief Marketing Officer Frank Cooper. His career spanned Pepsi, BuzzFeed, Def Jam, and today, financial services. We’ll talk about why money should be part of our overall picture of well-being and how we can tackle making investing approachable, one small step at a time.

    Frank, thank you so much for joining us today.

    Frank Cooper: So happy to be here.

    Mary-Catherine Lader: Your background before you came to BlackRock was in consumer and entertainment, and well before that, in law. Now that you’ve been here and you’ve been diving into this question of what gets more people investing around the world, what have you learned?

    Frank Cooper: Let me explain my background, because it seems like a chasm between where I’ve been and where I am today, right, so consumer goods and technology, and entertainment, and now financial services. But there is a common denominator to all of it. In marketing, what we’re trying to do is make change happen; we’re trying to change peoples’ perception and we’re trying to change their behaviors. And that’s what I’ve done my entire career, you can do that in food and beverage, you can do that in entertainment, you can do that in technology, just applying that same discipline now here in financial services. And I feel like there is no better time than now to actually be in financial services, because we’re at a moment in time where people are starting to awaken to the fact that their relationship with their money is important to their overall sense of well-being.

    Mary-Catherine Lader: And what’s been the catalyst for that change, why now?

    Frank Cooper: If you look at just what is happening in culture, with institutions, it all has come together in a way that I think has led people to this place. Mindfulness overall has increased; people are much more conscious about what actually makes me happy. And much more demanding about that. And we saw it happen in food, right, where people said, I need to understand how nutrition actually gives me greater energy and improves my sense of well-being. We saw it happen in physical exercise. And if you’ve ever been to SoulCycle—I’ve never been to these places, by the way—but if you’ve been to SoulCycle or Flywheel or Barry’s Bootcamp, I know the names –

    Mary-Catherine Lader: I’m a big Barry’s fan, have to say, really big Barry’s fan, twice a week.

    Frank Cooper: I hear incredible things happen in there.

    Mary-Catherine Lader: They do, it’s amazing.

    Frank Cooper: But people come out and they feel this greater sense of energy, but a heightened sense of well-being. And so now that’s the expectation that people have, that I want things that actually contribute to my overall sense of well-being. If it doesn’t, it’s actually put into another category, it’s put into the category of the mundane or a commodity and they’re not going to pay a premium for it; they’re not going to pay attention to it. What I believe is that we’ve artificially separated our relationship with money from our sense of well-being. And now we have that chance to bridge the gap. There’s this deep sense that money actually contributes or can prevent you from achieving a certain level of well-being but no one has really unpacked that. Because there’s taboo around talking about money, there’s a lack of clarity about what it means to earn your money and spend it, and save it, and borrow it, and give it, and invest it. There are all these barriers, cultural, social, familial, that actually prevent people from exploring that relationship and understanding and how money contributes to their overall sense of well-being.

    Mary-Catherine Lader: That resonates with probably most people. But from where you sit, what can you do about it? We don’t touch consumers, we’re an investment firm, we’re an asset management firm, we don’t have a consumer brand. So much of what you mentioned feels deeply personal and about human behavior, so what levers do you have where you are to help drive that change? We’re an input in the outcome, but how can we be a driver?

    Frank Cooper: The way I think about any business in any industry is I start with a deep obsession about the customer, the end customer. Everything flows from that end customer. Think about when I worked at Pepsi Co., people often think of Pepsi Co. as a consumer brand only. But we don’t go direct to consumers, we never did. But they see a Super Bowl commercial with Beyoncé or a World Cup promotion with Messi, and it feels like it’s a consumer brand, but what Pepsi did was they sold to retailers, an intermediary, that had the direct contact with the shopper. But if we didn’t actually have the obsession with that end consumer, what makes them tick, what brands do they love, what enhances their sense of value, how do they perceive value in a product, then you could never actually provide value to the retailor. Same thing in financial services. Yes, we serve intermediaries, institutions, financial advisors, but ultimately, all of us are serving an end investor, we’re serving a person at the end of the chain. And I like to work back from that. And if you can understand that person better, not only can you serve them better, but you can serve the intermediary better. So, I spend almost all of my time being obsessed with the end customer and working back from there.

    Mary-Catherine Lader: That end customer, as you say, cares more about the things in their life contributing to their sense of well-being: where today does money and investing stack up? It sounds like you think there is a lot of room for improvement.

    Frank Cooper: Well, first I’ll say money is definitely not a panacea; money is not the answer. I’m not here saying that you will find happiness if you could only achieve a certain level of money. In fact, I think that is the wrong way to think about it. The thought is, people need to reconcile their life goals with money. And I think the challenge for us as a society, and for individuals within our society, is to reconcile that across the full dimension of money. How do you earn your money? And people are talking about that all the time and we’re starting to crack the code of that. People are now demanding, I want something as I earn my money and have my job, I want something that is fulfilling to me, that actually meets my own personal sense of purpose, my own sense of values. And Larry’s letter to CEOs, both this year and the year before, which speaks to this idea of purpose, in part is driven by employees who are increasingly demanding that the companies for which they work actually serve some higher purpose and that meets their own personal sense of purpose. But it’s also how people save their money and how they give it. It’s easier to see it in how you spend it, because that’s the most visible thing. If I spent some money and suddenly I have—I don’t buy this—but you have a Gucci belt or Gucci purse, or whatever it might be, like okay, I have this item, it’s visible, I can enjoy it, other people can enjoy it, it says something about me. When you save, you don’t see it, so that becomes a more difficult thing for people to grasp. When you invest, oftentimes, people don’t see it. And so the opportunity I see now though is that as we look at technology, and its ability to actually give people signals back from the things that were previously invisible—so if you save and there is something that happens on your mobile phone that indicates that you’ve saved and gives you a signal that, wow, isn’t this a great thing. That’s our opportunity now to start to send those signals in ways that enhance peoples’ sense of accomplishment and to nudge them toward the behaviors that we think would improve their relationship with money.

    Mary-Catherine Lader: And so investing you would put in that category of positive signals to get people to invest? And the reason I ask is because so much research shows that actually the best investor outcome for the average consumer is to think very little about their investments, and to just save, put it aside and not think about it. So is what you’re suggesting just a more dynamic relationship with what’s happening, even if it’s not an active set of choices that people are making?

    Frank Cooper: I’m suggesting that, but I’m also suggesting that there is—we found this in our own Global Investor Pulse, there’s a large percentage of the population across the globe, that just believe investing is not for them. It’s too complicated, I don’t have enough money, this is for a small, elite group of people, it’s not for me. And so the best way to actually transition from that belief is partly knowledge, but knowledge we found is not in and of itself an effective tool. You can do financial literacy all day, and the percentage of people who actually shift their behavior is pretty small. And it’s really almost the Nike mantra, just do it. We found that people who actually just invest something—it’s not about the amount—invest something, that behavior in itself creates momentum, creates a sense of confidence, creates trust. And that is the behavior that kind of reinforces itself and allows them to become investors. The last thing is this, some people may never even perceive themselves as investors. The image of an investor, and the role models that they’ve seen in advertisements are far away from how many people perceive themselves.

    Mary-Catherine Lader: Right.

    Frank Cooper: But that’s okay, as long as they’re doing the behaviors that we believe investors should, right. So are they actually contributing in a consistent way? Are they thinking long term? Do they believe in the growth of the equity market, are they balancing it in a way that meets their expectations, are they developing a realistic retirement fund for themselves? To me, those are the behaviors that we want. They can call themselves savers, investors, earners, believers, whatever they want to call themselves.

    Mary-Catherine Lader: Right.

    Frank Cooper: But those are the behaviors that we want to instigate.

    Mary-Catherine Lader: A phase that you’ve used internally at BlackRock and in a lot of your public appearances, is the importance of bringing well-being through wealth to more and more people. “Wealth” is a really controversial term, particularly in that more broad/mainstream context, so how and why did you choose that? Not only was your background as a lawyer and then your particular attention to language – that must have been a very deliberate choice. So how do you think about what wealth means today and what power you think it has to mean something different in the future?

    Frank Cooper: Yeah. I really wanted to reinforce this idea that wealth is not just for the wealthy. And so part of what I wanted to do was make a distinction between being wealthy, which often times is perceived as a destination, which changes. And so when people say, when I just cross this threshold of net worth or investments, at that point, I’m wealthy. And then I can have some sense of relief. That goal keeps moving, number one, but even if it didn’t, even if it remained static, it excludes way too many people. And what I saw in coming into this industry, is that wealth, this idea of your relationship with money, is really rooted more in a set of behaviors than it is in a particular destination. Are you saving, are you spending in ways that are conscious, are you conscious about what you’re earning and what you’re giving, are you investing? And I wanted to use that term precisely because it was provocative. We could soften it and say, it’s peoples’ relationship with money and how that actually contributes to their well-being. But I think because that phrase is softer, it’s easier for people to gloss over it. I want people to pause. But here is the interesting thing, the people who pause the most, the people who cringe the most, are people in the industry. Because partly it’s a term of art in the industry, and when they say “wealth management”, they mean people who have investible assets over a certain amount Cringe. They hear “wealth”, they think isn’t that alluding to the elitism and the inequality that may exist, and that term feels so loaded. You go outside into general culture, you get less of a sting. In fact, what you find is that the average person is unafraid of the term wealth, they just think it’s inaccessible. And so for me, I saw it as an opportunity to define it for what it is, wealth means a set of behaviors which allows you to move forward, no matter where you stand. And so I love the term, it’s proactive, it starts conversations. Being wealthy is different from acquiring more wealth.

    Mary-Catherine Lader: We’ve been talking about a lot of big themes, big consumer insights and a few big picture ways that can change the way people feel about money and investing. We do this Global Investor Pulse once a year, this year’s results show that people still feel a ton of stress when it comes to their personal finances. What actions would you hope to see in 2019, such that 2020’s results might be a little different?

    Frank Cooper: One action I’d love to see is to demystify the language of financial services. Can we speak in a language, and in a way, that is intuitive to people? And so I think having that more intuitive short form, easy to understand language is one step forward; two, I’d love to make money part of the cultural conversation. It’s been taboo, people don’t want to talk about it, but increasingly we’re seeing parts of the population talk about it. One of my jobs before had a really young population of employees, really young. I think the average age was 24.

    Mary-Catherine Lader: This was BuzzFeed?

    Frank Cooper: Yeah. This was BuzzFeed. And what I noticed is they were very open in talking about money, very open. They shared salary information with each other, they talked about money and renting in a way that I had not seen for other generations. And so I am encouraged by this idea that money can become part of the cultural conversation. The third thing is I think in our advertising, we need more relatable role models. What we know about this whole idea of self-efficacy, of people advancing, whether it’s in sports, or money, or anything actually, seeing relatable role models actually makes you feel like, I can do it. So suddenly this notion that investing is not for me is diminished significantly, because I see someone who is like me actually doing it. And the last piece is this, is technology. Are there ways in which people can start to advance through small steps, mostly through technology, by leveraging the knowledge and expertise that we have, but doing it in a way that makes it easy and comfortable for them? Small steps are meaningful steps.

    Mary-Catherine Lader: Demystifying financial services is an important step, but there are also persistent concerns about whether the public trusts financial services and trusts our industry in the wake of the financial crisis, even though it was ten years ago. We’re now looking at a crisis of trusted technology. How important do you think trust in institutions is in driving some of that change? The reason I ask is all the things you mentioned could be driven outside financial services actually, right? You can have some of those role models, you can change the conversation through popular culture, and not as much have the existing financial services institutions lead the way. So my question is, where do you think we are in terms of public trust of financial services, and how important is that in driving these changes?

    Frank Cooper: Yeah. Well, first this whole decline of trust in institutions is a broad theme that’s been happening for at least the past 30 years, arguably the past 40 years. And it’s been consistent. Look at any poll, you can look at the Edelman Trust Barometer, you can look at the Gallup Polls, they’re all saying the same thing that there is a declining trust in institutions. It’s accelerated recently, but it’s accelerated on a global scale because we’ve seen the Panama Papers, we’ve seen the Tesco meat scandal, we’ve seen the Global Financial Crisis. If you look at where trust sits today, it sits on platforms that allow people like us ordinary people to be the checkers of truth, right. So you’ll sit on a platform like an Uber, or an AirBnB, and you’re effectively saying, I actually trust this stranger more than I trust an institution because I believe that the stranger has less motivation to do me wrong. And that’s what we’re seeing over and over and over. Meanwhile, the institutions that we’ve seen over the years, people believe that their motivations have not been aligned with the customer, not have been aligned with society at large. And you get to financial services, it gets even more acute. Financial services tends to be at the bottom of the trust surveys along with journalism. And it’s in part I think because there’s the truth that the financial services industry, particularly asset management and investment management, have been perceived as serving a small percentage of the population. And that perception is hard to overcome, in part because there’s a segment of the industry that absolutely does that. But there are other segments of the industry that serve that ordinary person, we just don’t talk about it much. The fact that we have at, BlackRock, two-thirds of our assets under management related to retirement, retirement for teachers and nurses and fire fighters, and policemen. But we don’t really talk about that and people don’t perceive it that way, they look at a narrow slice of what we do. And I think the industry has done it to itself. And I think we have an opportunity now to be a lot more transparent about the full range of what we do. I think there is a lot of good in what we do, but we need to share it, but we also need to be honest about the areas in which we could do better. And so for us, what I’m excited about, is that we now stand in the place where we have this opportunity to help more people, that this idea of financial inclusion can be a reality, that our expertise can help people beyond just our clients. And I think it stems from really the reason why we exist as a firm, is to do that, is to help more and more people build their worth, both financially and sense of self-worth.

    Mary-Catherine Lader: I want to end with a rapid fire round, but I’m going to ask one personal question before I do that.

    Frank Cooper: That’s scary.

    Mary-Catherine Lader: Especially when it’s about money.

    Frank Cooper: Yeah.

    Mary-Catherine Lader: Is there a moment you can think of, a decision you made, a realization, good or bad incident that changed your relationship with money?

    Frank Cooper: So when I came out of law school, I clerked for a judge. And what I learned is, I got out of law school, first week before I was going to go in to start working for the judge, I loaned a friend a significant amount of money, which never got paid back.

    Mary-Catherine Lader: How long had you known this friend?

    Frank Cooper: For a long time, all my life.

    Mary-Catherine Lader: Okay.

    Frank Cooper: Twenty some odd years. And then when I went into work, I realized that my paycheck was going to come a month later, because of the way the pay cycle worked. And for me, that was a hard lesson because at that point, I was committed to the idea that I never wanted to be in a position where I had not thought through personal cash flow and savings and how I actually manage my own money against all the things I want to do. So after that point, I was much less impulsive, much more thoughtful about how I handled money. The interesting thing is it didn’t make me, I hope, more stingy, it just made me more thoughtful about how all these things relate together.

    Mary-Catherine Lader: And do you find that as you learn about financial services, about investing, your own behavior has changed?

    Frank Cooper: I’m more conscious of how money works and how investments work, yeah. It’s changed my behavior; it’s also changed even how I discuss money with other people, family members, for example. At first, I would say I was talking about it in more technical terms, because I was picking up the jargon here.

    Mary-Catherine Lader: Right.

    Frank Cooper: But now I have actually gotten to a point where I can actually translate that in ways that are easier for family members or friends to understand. And so, I don’t go around every night preaching, what are you doing with your money, how’s your wealth?

    Mary-Catherine Lader: You’d have fewer friends.

    Frank Cooper: But I found that I can actually be more helpful with people who are close to me in explaining how they might actually take a step forward to have greater financial stability.

    Mary-Catherine Lader: I want to end with a rapid fire round. As we’ve mentioned, your background goes well beyond the world of BlackRock and investing, from Harvard Law School to Def Jam, to Pepsi, BuzzFeed. So I’m going to ask you a series of this or that questions, ready?

    Frank Cooper: Okay. Let’s go.

    Mary-Catherine Lader: Kanye or Drake?

    Frank Cooper: Kanye or Drake, that’s a tough one, but I have to go Kanye—I have a deep bias because I’ve worked with Kanye and worked extensively with Kanye, and I have not worked as closely with Drake. But even if that were not true, I’m still going to be a Kanye person on that front. Because I feel like he’s actually changed music in a much more fundamental way, bringing in samples from jazz, using voice in a way that actually had never been used before. If you listen to a Kanye song, he’s layering voices and different types of voices throughout the song. But also, opening the way for people like Chance the Rapper and Kendrick Lamar, by making the lyrical content of rap a little bit more thoughtful and more expansive beyond just money and cars.

    Mary-Catherine Lader: I love that you say you haven’t worked with Drake as much, as opposed to not at all. So another one, now that you’re not on their payroll anymore, Coke or Pepsi?

    Frank Cooper: It’s definitely Pepsi.

    Mary-Catherine Lader: Come on.

    Frank Cooper: It’s no question—you guys don’t remember the Pepsi Challenge? Just do a blind taste test, and you’ll find out which one is better.

    Mary-Catherine Lader: BuzzFeed Tasty or the Try Guys?

    Frank Cooper: That’s an easy one, Tasty all the way. I’m not even a foodie and I certainly don’t cook, but I’m mesmerized by a Tasty video. It’s like 45 seconds to one minute from a first-person point of view in a hyper lapsed video, and you see it from the first ingredient to the final product. It’s just something about that that’s almost like meditative in a way. And so Tasty, all the way. And I love the Try Guys, but Tasty.

    Mary-Catherine Lader: Okay. Frank, thank you for sharing your insights with us today, it’s been a pleasure having you.

    Frank Cooper: Thanks for having me. Appreciate it.

    Mary-Catherine Lader: Interested in seeing more of the numbers behind our Global Investor Pulse? Visit to learn more about the largest ever study conducted on wealth and well-being.

  • Episode 7 transcript – Geopolitics update: Key themes for 2019

    Catherine Kress: It’s nearly impossible to read the news nowadays without some kind of story related to geopolitics showing up in your newsfeed. There’s headlines like “Chinese Tech Investors Flee Silicon Valley,” or “Why Autocrats Love Emergencies,” or even, “America’s Electric Grid has a Vulnerable Back Door and Russia Walked through it.” There is no question we are inundated by breaking developments and competing narratives on a daily, if not hourly, basis. The challenge? Separating the signal from the noise, identifying what matters and what is coming next. On today’s episode of The Bid, we’ll learn how to do just that.

    We’re kicking off the first of our bi-monthly series on geopolitics from the BlackRock Investment Institute. Every other month, we’ll discuss different topics at the intersection of markets, politics, and policy making. Today we’ll speak to Tom Donilon, Chairman of the BlackRock Investment Institute and former U.S. National Security Advisor, to recap the World Economic Forum in Davos and get his thoughts on how geopolitics will shape the year ahead. I’m your host Catherine Kress, we hope you enjoy.

    Tom, thank you so much for joining us today.

    Tom Donilon: Catherine, thanks for doing this today, it’s great to be here.

    Catherine Kress: You just got back from the World Economic Forum in Davos, Switzerland, with attendees ranging from business executives and political leaders, to even and Bono. What resonated with you the most this year?

    Tom Donilon: Well, I can report to my colleagues at BlackRock that I didn’t spend a lot of time with and Bono, but some things did strike me. One is a focus on a slowing global economy but still growing economy. Obviously, as there is every year at Davos, there was focus on geopolitical risk. Principally, I think in this session, the state of U.S./China relations, which were really front and center at the conference, and even more particularly with respect to the U.S. and China, where we are in terms of technology competition. There was a really big focus in a lot of the panels and discussions there. It’s interesting, there were fewer political leaders there this year than there had been in the past. I think that reflects a couple of things, including a number of difficult situations that political leaders face around the world. There was a particular interest I noted also in sustainable investing. We had a very good event on sustainable investing with a terrific turnout, and I think there was a lot of interest in Larry’s latest CEO letter, most especially the focus on corporate purpose and the broadening out of the stakeholders to which corporations need to attend.

    Catherine Kress: You mentioned populism and U.S./China relations. It’s clear from your comments that geopolitics will continue to cast a shadow over markets in 2019. And we can’t really talk about geopolitics without a discussion of the U.S. We have a very different type of administration in the White House. Trade has moved to the center of U.S. foreign policy, and with midterm elections behind us, we’re have a divided government. Republicans are in control of the Senate and Democrats have taken control of the House. Let’s start with our domestic outlook: What is one word you would use to describe U.S. politics in 2019?

    Tom Donilon: Well, it’s hard to do it in one word, but I think it would be loud, boisterous. I think we’ll have a very high level of political combat in the United States over the next couple of years. As you mentioned, we have a different kind of administration in the United States since 2016. President Trump promised a different kind of administration in the 2016 election. It’s a different foreign policy approach, really a departure from a number of the approaches the United States has taken over the last few decades. One thing that will continue I think to be front and center of U.S. foreign policy will be trade, and we’ve seen that over the last year. You mentioned the midterm elections. The midterm elections in the United States this year had tremendous energy; the turnout was the highest it had been in the United States in a midterm election since 1914. We had a very diverse set of candidates elected to the Congress, the largest number of women in the history of Congress. One hundred and six women are now in the Congress coming out of the midterm elections, and a statistic that I love is that in the class that is just starting in the Congress this January, this year, this month, 22 were from the military or the CIA, so we have a really core of national security veterans in the Congress coming out of the midterm elections.

    Catherine Kress: Wow.

    Tom Donilon: As you said, the midterm elections brought us divided government, and divided government will make legislating more difficult I think, combined with the deep polarization that we have in the United States. I think you’ll also see a lot of investigations with the Democrats coming back in control of the Congress, you’ll see the move to oversight hearings and investigations going forward, and I think also, essentially the 2020 campaign has begun already. We have I think seven or so announced candidates already, with a dozen or more to come on the Democratic side, and we’ll see what happens on the Republican side, whether or not President Trump draws any primary challenges. The bottom line though, to answer your question directly, is I think we’re in for a year or two of quite loud political debate and combat, and I think for investors, it’s going to be a challenge to really try to separate the signal from the noise as we determine which of these things actually affects markets.

    Catherine Kress: So we clearly have an interesting year ahead of us in the U.S. And in my mind, there is no doubt that is going to have a global impact. In fact, the International Monetary Fund just lowered its global growth forecast for the second time in six months, highlighting U.S. trade tensions as one of the key risks to its outlook. Do you think these trade tensions are going to resolve any time soon?

    Tom Donilon: Trade really is at the core of the Trump Administration’s approach to international relations and foreign policy. And if you think back, 2017 was the year of mainly rhetoric around trade. 2018, however, saw quite a bit of action on the trade front; indeed, at the beginning of 2018, we had trade disputes under way in most of the regions of the world. Now, during the course of the year, a number of these were either resolved or put in the frameworks or discussions – I think in order to clear the decks, to focus on China – but it doesn’t mean they’ve all gone away. So we have under way trade negotiations under a framework with the EU, we’ve begun a trade negotiation for a free trade agreement with Japan. We did come to agreement with Canada and Mexico, in the United States-Mexican-Canadian Free Trade Agreement, a new accord, the follow-on to NAFTA. That still though has to be approved by the U.S. Congress and that is going to be a bit of a battle, because we’ve had this change in the makeup of the Congress, and it’s not clear at this point whether that can get ratified. It’ll be a high priority for the President to see it ratified. We did have one trade agreement finalized with the Koreans. So we have ongoing trade issues around the world, but none more important than we have under way with China, where we’re in the midst of a 90-day negotiating period between the United States and China, trying to come to some sort of set of accords, understandings and framework to go forward. So I think that trade is going to remain really, as I said, really at the center of U.S. foreign policy and even where we may have made some progress, there are still some outstanding issues, but none more important than the U.S./China trade negotiations. And we still have, by the way, a number of tariffs on allies and partners around the world, including the steel and aluminum tariffs are still in place, and we have a discussion under way about whether to put tariffs on auto and auto parts right, and that report is due some time in February.

    Catherine Kress: Tom, the centrality of the U.S./China relationship has come up a couple of times now in your remarks, we’ve talked about it mostly in the context of trade, but can you talk about the U.S./China relationship more generally and how you see it evolving over time?

    Tom Donilon: Yeah. Catherine, clearly the most important relationship in the world right now, and I say a couple of things about it. One is that the U.S./China relationship has entered a new, more competitive phase, and that competitive phase involves not just economics, which are front and center right now, but really a whole range of issues, including military, even ideological, political issues, where China and the United States really are in a much more competitive posture than they had been in before. This shift I think reflects a lot of things, including a fundamental rethink that is under way I think in the United States around the nature of U.S./China relations, and that fundamental rethink is bipartisan. And that has really moved the consensus here I think in the United States with respect to China. So we may be seeing a shift from what had been the United States approach, which had really be strategic engagement and cooperation, really since Richard Nixon went to China in February of 1972, to a much more strategic, competitive approach by the United States. And I see a similar set of rethinks and approaches under way in China as well. So it’s going to be a challenging time in U.S./China relations. There is a lot of responsibility on the leaders on both sides to manage it.

    Catherine Kress: One of the issues you and I spent a lot of time talking about, trying to understand and disentangle is the rise of populism and global anti-establishment sentiment. History shows us that populist movements have typical lifecycles, with similar drivers, and more or less predictable outcomes. This time though feels very different. Would you agree with that?

    Tom Donilon: I would. Well, first, I’ll make a couple of points. I think one is that we are not at peak populism I don’t think, in the world, today. There had been some thought after the 2017 victory of Macron in France that we may have reached peak populism; that the center may have held, moving forward. But the Macron victory was also quite a dramatic pushback on the traditional parties that had been in the majority in running France since World War II, so in and of itself, it was a pretty big push back on the establishment. But I think what we see is populism still rising, you see it rising in Europe. So, we are not at peak populism, and even where populist parties haven’t taken control of the government, they also really are driving the discussion in a lot of places around the world. And as you’ve said, typically populism is seen as part of a cyclical economic process, right. I think we’re seeing something different here, and it may be more structural. It is broad, it’s simultaneous in a number of countries around the world, including some of the large economies in the world.

    Catherine Kress: Right.

    Tom Donilon: It reflects not just economics, but really rapid change in culture, and demographics, and society, and most important, technology. A number of the things that are driving it are still present in the world, including concerns about inequality and the performance of government. And as I said, it really is emboldened and enabled by technology. And the questions really are these—it’s also taken place during a benign economic environment. What happens when we have the inevitable downturn, and then, because you have these continued populist pressures, what happens to the ability of governments, policymakers, to deal with the next inevitable downturn? So I think it’s a really interesting question and important one for investors to focus on. It’s historically in places where you’ve had populist governments that has had impacts on economic approaches. But I think this may not be cyclical. I think this may be more long-lasting and structural.

    Catherine Kress: So to summarize in terms of some of the key geopolitical risks we think will loom over markets in 2019, we’re talking about trade, U.S./China relations, as well as this anti-establishment populist wave you just spoke about. What are some of the key risks we’re not talking about?

    Tom Donilon: That’s interesting. I don’t think we’re talking enough about the investment needs in society, and specifically the challenge presented by technology, which will bring a tremendous amount of benefits but also challenges particularly in the labor markets. And I don’t know that we have had enough discussion about how we as societies are going to deal with the impact. We’re going to have less people needed to accomplish specific tasks. You’ve seen a number of studies which show significant percentage of current activities or tasks or jobs could be eliminated by a technology, particularly artificial intelligence and robotics. And so I don’t think that we really have come to grips with what the impact is going to be and what the response needs to be to deal with these labor market impacts. There was some discussion about it at Davos, but if you look at the major economies in the world, I don’t think we’re having the in-depth discussion, who is responsible for dealing with this? How do you divide the responsibility between governments and companies for this? We’ve had some discussion, for example, about guaranteed incomes: what’s the impact on really the identity impact, people have so much identity and psychological investment in their jobs and what they do every day, and we’re in for a pretty rapid change. So I don’t think we’re having enough conversation about what investments are required in order to deal with this challenge.

    Catherine Kress: Tom, you’ve had a decades-long career in government, so to close, I’d like to ask you a few more personal question about that.

    Tom Donilon: Okay.

    Catherine Kress: How many presidents have you worked for, and starting when?

    Tom Donilon: I’ve worked for three presidents of the United States beginning in June of 1977.

    Catherine Kress: How old were you?

    Tom Donilon: I was 22-years-old. I started working in June of 1977 for President Carter, really the week I got out of college.

    Catherine Kress: Who was your favorite to work with?

    Tom Donilon: My favorite president to work with?

    Catherine Kress: Yes.

    Tom Donilon: Well, as is said, I’ve worked for three U.S. presidents since 1977, President Carter, where I worked in the White House and then did his campaign for reelection, I worked for President Clinton, I prepared him for his debates in 1992, led the preparation for his debates in 1992 and then was a chief of staff for the State Department during President Clinton’s term. And then I worked for President Obama beginning in 2009, where I did his debate preparation in the campaign, in 2008, and then was Deputy National Security Advisor and then National Security Advisor for President Obama. So I’ve been exceedingly fortunate to work for the three U.S. presidents during the course of my career. Now to go to your question, which you thought I was trying to avoid. The answer to your question, Catherine, is this. One of the keys to being able to work closely, have the privilege or working closely with three U.S. presidents is not to answer the question you have asked.

    Catherine Kress: Very good answer. How about another one?

    Tom Donilon: Okay.

    Catherine Kress: How many of your members of your family have you worked with at the same time in the same office?

    Tom Donilon: Good question. In the first Obama term, I worked in the Obama White House, in the West Wing and I worked within 20 feet of my younger brother, Michael--

    Catherine Kress: Wow.

    Tom Donilon: --who was the Assistant to the Vice President. And within probably 20 yards of my wife, Cathy Russell, who then was working for Mrs. Biden, and then she went on to be the United States Ambassador for Women’s and Girl’s Issues at the State Department. But during that first term of the Obama Administration, I was working in the same office with my wife, and with my younger brother.

    Catherine Kress: I think the closet I’ve come to is going to school with two of my siblings, but I haven’t been so fortunate as to work with that many members of my family.

    Tom Donilon: We really did have our public service release, kind of a family project, and it was we worked quite closely during that great period, it was really terrific.

    Catherine Kress: That’s great. So the final question I have for you is you have had a very long history in foreign policy. Who is the most impressive foreign leader you’ve met in that experience?

    Tom Donilon: That’s a good question. I’d have to say Prime Minister Yitzhak Rabin of Israel who was tragically assassinated in the mid-1990s. I was deeply involved in the Middle East peace process, Catherine, during the early-1990s and afterwards. Rabin was really one of the most impressive leaders I had ever seen. He was a quiet man, a modest man. If you went to visit him at his home, outside of Tel Aviv, it was a modest apartment; tremendously strong, great moral authority, and despite his overt modesty when he came into the room, everybody knew they were in the presence of greatness, and there were just people that you—and I worked with many foreign leaders over the course of my career, including as a presidential envoy to a number of them, but all these years, that is the person who really deeply impressed me the most. I knew I was in the presence of a great person.

    Catherine Kress: That’s an inspiring note to end on. So Tom, thank you so much for sharing your insights with us today; I really appreciate it.

    Tom Donilon: Catherine, great to do it. Thanks a lot.

    Catherine Kress: To our listeners, if you’re interested in learning more about our views on geopolitics, search for the BlackRock Geopolitical Risk Dashboard on our website. We’ll see you next time on The Bid.

  • Episode 6 transcript – Tech takes sustainable investing mainstream

    Oscar Pulido: When you picked up your coffee this morning, what did you notice? Maybe it was the man at the counter who brought his own Thermos instead of using a cup from the store. Perhaps it was the use of paper straws instead of plastic, or compostable bowls and utensils. Or maybe it was the woman who took her coffee to go on the e-scooter she rode to work. Thinking sustainably is no longer just an option, or reserved to the innovators of San Francisco. It’s becoming a way of life.

    So what if you could apply this to the way you invest? Sustainable investing is starting to become mainstream. And according to one man, sustainability is really the future of investing. His name is Brian Deese and he is BlackRock’s Global Head of Sustainable Investing. On this episode of The BID, we’ll talk to Brian about why now is the time to get ahead of this trend, and how technology and data are going to get us there. I’m your host, Oscar Pulido, we hope you enjoy.

    Brian, thank you so much for joining us today on The BID.

    Brian Deese: Happy to be here.

    Oscar Pulido: So it turns out that you and I actually have something in common. We both have lived parts of our lives in Washington, D.C. I was an undergrad student living a few blocks from the White House. You actually worked in the White House as an advisor on climate and energy policy and you helped negotiate the Paris Climate Agreement. So, I think it’s fair to say that you probably have far more interesting stories to tell about your time in Washington, D.C. But you then joined BlackRock in late 2017 as the Global Head of Sustainable Investing. We know there’s a lot of interest in sustainability as a lifestyle choice, but what does it mean to invest sustainably?

    Brian Deese: Well, it’s a great question and it’s an important place to start because this is an area that is marked by a lot of confusion, confusion in terms, lots of different acronyms. So, we start from the basics with a simple definition of sustainable investing. So, sustainable investing combines the best of traditional investing with insights about the environment, about governance, about society in an effort to improve financial outcomes over time. So, then, how do you invest sustainably? Well, typically, clients come at this from two perspectives, either the impulse to avoid, I think people may have heard about traditionally the idea of excluding certain industries or exposures, think excluding tobacco companies or excluding companies that manufacture controversial weapons. But there’s another impulse which is the impulse to advance. That’s really about aligning your capital with positive behavior or positive outcomes. What we’re seeing increasingly in the market is that this an area which traditionally was dominated by those avoid approaches. Increasingly, there’s more and more interest about, “Can I actually advance with my capital as well?” Now, the last thing in the definitions department that we have to get out of the way is, what is ESG? ESG stands for environmental, social and governance. I think the best way to think about ESG is it’s an aggregation of data, of different inputs, ways of measuring how companies operate, how assets perform. They get bucketed in these three areas, environmental, social and governance but really, it’s a playground. It’s an opportunity to look at data and try to understand if there’s insights that we can glean that would help us be better investors.

    Oscar Pulido: So, those definitions are really helpful. It’s clear that there is interest in sustainability but there’s also not been as much willingness for people to put their money where their mouth is. Now, I say that and actually in Europe, this is a topic that is much more relevant to investors than we tend to see in other parts of the world. Would you agree with that? Where are we then in the adoption cycle when you look at it more globally?

    Brian Deese: Sure. We’ll start with some context. Last year, there was about $760 billion in assets in combing of vehicles, in ETFs or mutual funds sustainability-related. About two-thirds of that was in Europe. So, to your point, there is more interest there. Compared to the broad market of investments, $760 billion is relatively small, but two important points about that. One, it’s growing very quickly. Over the last couple of years, we’ve seen in excess of 20% annualized growth in this asset class. Two, that growth is occurring in ways that might surprise that conventional thought that this is just a European phenomenon. So, in fact, in the last couple of years, we’ve seen greater growth but off a lower base in the Americas, for example. So, I think it’s fair to say that this is an area where as you mentioned, traditionally, there has been more interest than there has been actual assets deployed, but that’s changing and it’s changing very quickly.

    Oscar Pulido: Is there a particular cohort of the population that you think gets more comfortable with sustainable investing first? When I think about the millennial generation, is this where you think the adoption will be – at least the initial adoption and then it will spread or do you think that this is broad based across investors of all types?

    Brian Deese: Well, there’s always that old adage that people refer to, about people being very liberal with their money when they’re young and they get more and more conservative as they get more assets. So, there’s always a little bit of a hesitance to look at the younger generation and draw conclusions. But that said, if you look at the data and in the investing patterns of the millennial generation right now, you see clearly a greater preference and a greater interest in prioritizing a variety of factors about what a company’s purpose is or what an investment’s purpose is in addition to generating financial return. Then you combine that with the fact that we are on the precipice of something unprecedented in human history which is we’re about to see the largest transfer of wealth from the Baby Boom generation to this next generation. Probably, about $24 trillion or $25 trillion over the next 15 years that will transfer to this next generation that really is revealing a different set of interests and investment patterns across time and you start to see how we’re just on the front end of that.

    Oscar Pulido: Speaking about Millennials, it seems like that’s a generation that interacts more with technology than any other generation up until this point. What impact do you think that has on their investments and specifically how they might think about sustainable investing?

    Brian Deese: Well, I think first, that generation and that cohort that has grown up as a tech enabled and tech savvy generation is going to expect more out of how they invest, and that includes -- you guys have talked about on this podcast before, making investing go with the grain of how people increasingly use technology. Sustainable investing is going to have to be part of that, both in terms of the ease in investing, but also the customization that people will increasingly expect. The other element of technology that’s really exciting in the sustainability space is that improvements in technology and data are allowing us to actually measure things in ways that we haven’t before. So, you take the issue of climate-related risks and how exposed a company or an asset is to the risk of extreme weather events along a coastline like we happen to be sitting along the East Coast of the United States right now. In just the last couple of years, the combination of improvements in satellite imagery, downscale data and computing power are allowing us to get a much finer grain picture down not only to the zip code but the individual building and asset level of the types of risks that an area might face. So, when you take those types of technologies which are not directly investment related, but then you apply them to how we measure and how we assess these sustainability-related risks and we start to be able to develop higher conviction, better investment strategies as well.

    Oscar Pulido: What role do companies play in helping this ecosystem? In other words, providing information around their sustainability. Do you see all companies embracing this very strongly or do some companies provide more information more than others?

    Brian Deese: Well, disclosure is a big part of how you can invest sustainably, because essentially you’re trying to look uniformly across companies to understand how they approach a different issue, like climate risks or like how they deal with the employee training and development. Definitely, disclosure is not uniform. One, you see what we refer to in wonky terms as a size bias. So, in ESG data there is a clear size bias: larger companies, better resources, they have more ability to disclose, put out reports, put out information, that’s much harder if you’re a small company. Two, the regulatory regimes differ. So, they have different disclosure rules and obligations in Europe than they do in the United States for example. But I think you’re going to see two things that are exciting. One is, I think you will see greater convergence and not uniformity but convergence around those types of disclosure regimes. But also, you’re increasingly seeing again data and technology, empower the ability to say, I’m interested not just in what the company is telling the market or what the company is disclosing. But also what the market is saying about the company, right? So, increasingly for example, if you want to understand how happy and engaged employees are at a given company. While you’re interested in part on what the disclosed data coming out of that company is, but you’re also interested in the proliferation of data on social media sites and on job application sites and otherwise. Looking at that unstructured data and looking for patterns and information in that data is also going to be a part of how we fill in this picture of which companies are better positioned to take advantage of sustainability-related risks and opportunities.

    Oscar Pulido: So this is a topic that’s gaining more interest. There is growth in the space, clearly adoption is on the rise, both in and outside the U.S. It seems to me then that the question has shifted to why sustainable to why not sustainable. So why now?

    Brian Deese: A lot of the conversation around sustainable investing whether explicitly or implicitly has been marked in the last couple of decades by this idea of a negative trade off that you had to sacrifice some value in order to invest consistent with your values. Even among those who were the most ardent believers in sustainable investing, there’s always this overhang of skepticism that, “Yeah, this is nice,” but you’re trading something off. I think what we are seeing which is an important moment is that increasingly, the data in the evidence suggest that that’s no longer by definition the case. You can actually in a growing number of asset classes and investment styles invest in a sustainable approach and get the same risk adjusted return outcomes as a non-sustainable variant. So, I think that’s powerful because it has the potential to shift that conversation that for all these decades, there’s been not negative presumption which you could distill into the question why? “Why would I do this? Why would I trade off some financial return to invest consistent with my values?” You shift to a scenario where the question really becomes, “Why not if I can get the financial outcomes that I’m looking for?” Then, “Why wouldn’t I shift to the more sustainable variant?” We still have a lot of ways to go, there are still lots to improve in the data and otherwise, but it’s a very significant exciting moment that we can see that opportunity. I think that that’s a part of why, what we’ll see is that this is not a space that will grow linearly, that we’ll see bigger step changes when people get comfortable, but that’s actually where we are.

    Oscar Pulido: Let’s bring this to the current environment. There’s a lot of talk around the path of interest rates, the Fed, geopolitical concerns, there’s all these things that are driving markets day to day. When we take some of these structural trends around sustainable investing and bring it to right now, can investing sustainably help in the current environment with all of the headwinds and tailwinds we have?

    Brian Deese: One of the things that’s most interesting if you look at ESG data, this again, this is the scores that are generated by ESG providers is that they share a lot of characteristics with some traditional style factors, particularly quality or minimum volatility. So, you look and you say, “What do we know about those types of companies?” What we know is that they tend to be more resilient which means that if you’re in a risk on period in the market, they may actually underperform.

    Oscar Pulido: Risk on meaning, stock market is doing well, right?

    Brian Deese: The people are seeking greater risk, right? But at that same time, it means that when we move into periods of greater uncertainty, you see a flight to safety, that those quality attributes are actually likely to overperform.

    Oscar Pulido: When you say quality, just describe that a little bit more. What does that mean about a company?

    Brian Deese: Traditionally, quality in a style factor has been thought about as traditional financial metrics that would reinforce the view that this was a solid company from a financial and operating perspective. What’s interesting about ESG is that ESG is correlated with, but could be additive to saying, high scoring ESG companies are potentially higher quality companies which means that they may not generate as much upside. There may not be as much opportunity in those high-risk market environments. But these companies are more likely to weather economic downturns and come out on the right side, on the other side. So, that’s one interesting element about the market. Today, as people are asking questions about how do I make my portfolio more resilient? How do I weather this period of uncertainty? Well, ESG may actually be a helpful way to improve the resilience of your portfolio.

    Oscar Pulido: Brian you’ve made a very compelling case for why investors should be thinking about investing sustainably but what would the skeptics say?

    Brian Deese: That’s a great question, because this is the space where there’s been a lot of skepticism and while I think we’ve made a lot of progress, the skeptics and that view continues to be important in the space. One, as far as we’ve come on the data, we still have some distance to travel. And so, if you look at the amount of data that we have on some of these key sustainability metrics, it’s less than you would want. And if you look at the uniformity of the ways in which different ESG data providers, for example, look at different companies. By definition, these issues are more subjective, so there’s not as much uniformity. And two, the fact that it is now possible for example to identify ways of investing sustainably without giving up risk adjusted return doesn’t mean that it’s an “as always connection.” Like any good area of investing, this is an area that is growing up and getting more mainstream and as a result, there needs to be a hard focus on what actually does work and where can we prove that out and then scaling that and moving away from areas where if it sounds too good to be true, it actually is too good to be true. For me, part of what’s exciting is that the proliferation of data and some of the uncertainty and questions that it raises is an extraordinary opportunity, because this is data that is newer and this is data that’s less well understood. And anytime you see that, there’s opportunity. Opportunity to bring better techniques to bear and ultimately, you know, bring a better and then higher conviction to bear as well.

    Oscar Pulido: Brian, let’s move away from investing for just a moment then. Last year BlackRock announced a partnership with France, Germany, and a variety of philanthropies to develop an investment vehicle that will invest in climate infrastructure in emerging markets. Talk a little bit about that, I know you’re involved in it and what does that all mean actually?

    Brian Deese: Look, you start at the beginning. We know that in order to see a transition to low carbon economy, there is a huge demand for investment in low carbon infrastructure. What does that mean? It means renewable power, but it also means in the infrastructure around electric vehicles, energy efficiency, public transport and otherwise. And there was growing market opportunity that now extends beyond traditional developed countries like the U.S., like many European countries into emerging market economies. And in a number of these places you’re seeing that on a project by project basis it’s actually the same or cheaper to invest in solar for example than to invest in new coal. But these markets are also challenging to operate in. There are other risks that are associated with operating in these markets and so oftentimes what you need is you need to put together a structure that is not typical or not conventional. So, this partnership stemmed from a set of conversations where a couple of countries, the Germans and the French, a couple of foundations, as well as BlackRock sit around the table and said, could we put together a structure that would help overcome those risks and really help accelerate the deployment of capital to climate friendly infrastructure in these emerging market economies. And so it’s the type of thing where again, the goal is to generate returns that are attractive to investors, investors that may not be principally motivated by a sustainability consideration but show that you can increasingly do that at scale and again coming back to that original definition of sustainable investing that we’re bringing an insider an opportunity by sustainability and combining it with a traditional investing approach with the hope of generating better return over the long run.

    Oscar Pulido: And so, it goes back to your point of avoid versus advance. This is clearly within that category of thinking about sustainable investing and advancing a financial goal but also advancing a sustainability goal.

    Brian Deese: That’s certainly the goal.

    Oscar Pulido: I want to end with a rapid-fire round. I’m going to ask you series of things here and I want you to tell the audience whether you think they will come to life in 5, 10, 30 years or never. You ready for this?

    Brian Deese: I’m ready.

    Oscar Pulido: Okay. Renewable energy makes up 10% of global energy consumption?

    Brian Deese: Inside five years.

    Oscar Pulido: All countries meet the Paris climate agreement’s objective to limit the global temperature rise to 1.5 degrees Celsius.

    Brian Deese: Well, I’ll cheat a little since those objectives are inherently set on about a 30-year time horizon and be optimistic and say 30.

    Oscar Pulido: Mail delivery by drones replaces mail delivery by humans.

    Brian Deese: I like this one because I have no particular comparative advantage answering it. I’m going to say 10.

    Oscar Pulido: All right. And the last one here, humans become able to control technology with our minds?

    Brian Deese: I’m a tech optimist, so I’ll say 30.

    Oscar Pulido: Great. And do you have a favorite place in Washington D.C. that you used to go to?

    Brian Deese: Well, I have two small children and so Washington D.C. is fantastic because of all of the extraordinary museums and other Smithsonian apparatus, all of which are fantastic and free so, the Air and Space Museum was one we spent a lot of time.

    Oscar Pulido: I agree. It’s a great city. Brian, thanks for joining us on The BID.

    Brian Deese: Thank you for having me.

  • Episode 5 transcript – U.S. recession? Not quite

    Oscar Pulido: It’s been ten years since the last U.S. recession, and while it’s nearly impossible to think of 2008 without also thinking about the financial crisis, it was also a year of growth and innovation. 2008 was the year that the iPhone 3G launched, helping make GPS accessible to more and more people. It was also the year that the Android operating system launched, the year America elected its first African-American president and the year that Michael Phelps set records at the Beijing Olympics. 2008 wasn’t just a year of struggle, it was also a year of human and technological advancements. So I wanted to find out, where were you in 2008?

    Where were you in 2008?

    Man 1: I was a sophomore in high school. The one thing I remember from that year is, I used to wake up every morning early enough to read the newspaper when I was eating breakfast. And I remember one day, getting the paper off the driveway, and coming inside and opening it up, and on the front page, this was like March of 2008, it just said something about Bear Stearns, you know, going under, JPMorgan acquiring like overnight. I was like, I have no idea what Bear Stearns is, but this is weird. And so I just kept reading, and it was kind of interesting. Little did I know that was the tip of the iceberg of what was about to unfold.

    Woman 1: I was in Shanghai in 2008. I was working as a financial journalist, I covered the coal industry. I went down to a city in the Southern Province of Guangdong, China, which is a manufacturing base. I found factories that had closed, and workers that had been laid off and trying to find their unpaid salary. To us, it was a very interesting, sort of, I wouldn’t say precursor, but it gave us a view of something is happening there, but we don’t know what exactly was happening yet.

    Man 2: I was working at Pepsi, and we were working on the renegotiation of our deal with the NFL. And at the time, the NFL had the highest TV ratings. And, you know, despite what was happening on a global scale in the financial markets, that one event, particularly the Super Bowl, continued to grow. For me, it was a beacon of optimism at that particular time.

    Oscar Pulido: Ten years later, financial markets have recovered substantially and the economy is in far better shape. But 2018 was a bumpy year for markets and we’re starting to ask ourselves a question: is a recession on the horizon, or do we still have a ways to go? On this episode of The Bid, we’ll get to the heart of this question with Richard Turnill, Chief Investment Strategist for the BlackRock Investment Institute. We’ll discuss what will drive markets in 2019, how to think about investing in times of uncertainty, and what has Richard most excited for the year ahead. I’m your host, Oscar Pulido. We hope you enjoy.

    Richard, thank you so much for joining us today.

    Richard Turnill: My pleasure, thank you for inviting me.

    Oscar Pulido: Richard, let’s start by level setting a bit here, take our listeners behind the scenes. What is the BlackRock Investment Institute and how do you go about forming your views on the market?

    Richard Turnill: The BlackRock Investment Institute is a function within BlackRock. It’s set up really to help our portfolio managers become better portfolio managers, better investors, but also to produce thought provoking investment insights for our clients. And we produce those insights both by originating work ourselves, examples this year would include work we’ve done on sustainable investing, on geopolitics, on the economic cycle, but we also work very closely with the asset class experts we have across all asset classes – equities, fixed income, alternatives – really to determine where BlackRock has an edge, where BlackRock has something not say, and to bring that to our clients with clear, actionable views.

    Oscar Pulido: We’re kicking off 2019 with our Global Investment Outlook. I’d like us to talk more about the three themes that you outlined in that outlook, but before we go into our views on the year ahead, let’s rewind a bit. 2018 could not have been more different than 2017. In 2017, stocks were routinely hitting new highs, growth was strong, particularly in the U.S., and it seemed pretty easy to be an investor. On the other hand, 2018 was marked by increased volatility and more muted returns. Richard, when you look back at 2018, what’s been the biggest driver of markets?

    Richard Turnill: We fully agree that 2018 was a very tough year for investors; we’ve seen negative returns both in terms of equities and fixed income, globally. We see a couple of big drivers of markets last year. The first was the Fed in terms of continually raising interest rates, making cash a viable asset class competing for capital again, and as a result of that, having an impact on all investments. But the other factor turned out to be uncertainty associated with geopolitical risk. And actually I think one of the strongest messages our own measures of geopolitical risk – we produce a Geopolitical Risk Indicator – really tracked very closely the movement in markets. This rise in risk associated particularly with trade, also to some extent, with European fragmentation risk, that led investors to become much more cautious, much more uncertain. And it was that rise in uncertainty that in our views, was the key driver of market returns in 2018.

    Oscar Pulido: So if rising uncertainty, particularly geopolitical was the biggest driver of 2018, what do you think is going to be the biggest driver of markets in 2019? Perhaps you can talk a bit about the three themes you outline?

    Richard Turnill: So we look forward to 2019, then, the first thing to say is geopolitical risk is still likely to be with us. But what we expect to be the key driver going forward is growth, and that leads us to the three themes that we see really moving markets in the year ahead. The first of those is that we expect to enter a late cycle growth slowdown, where the U.S. economy in particular, which delivered very strong growth in 2018, is set to slow. We’re already seeing slowdowns in other parts of the world such as Europe, and we expect to see growth come down much closer to its long term average around the world. The second theme is that we expect the Fed to pause interest rates as interest rates approach neutral. So big difference in 2018, where we saw the Fed persistently raising interest rates, as the level of interest rates gets closer to the long run, neutral level, we expect the Fed to signal a pause, and to wait and see just to what extent the growth slowdown is going to take hold. And then then the third and final theme is the need to better balance risk and reward in portfolios. This is likely to be another year of uncertainty, another year of volatility, and our views it that you want to have safe assets such as fixed income on one side of your portfolio to cushion you for that uncertainty, and then really take risk in those assets where you are being paid to take risks and where you see upside reward, and that would include U.S. and emerging market stocks.

    Oscar Pulido: Richard, you mentioned the term growth slowdown. It seems like markets and investors are increasingly worried about the next downturn, we’re starting to hear the word “recession” a little bit more these days. There’s been headlines around the yield curve inverting, we mentioned higher volatility before. So actually the question is, will there be a recession in 2019?

    Richard Turnill: We see a very low probability of recession in 2019. Actually we’ve put some numbers in that, we see less than a 20 percent chance of recession in 2019. And why is that? Well in part, that is because the U.S. economy is entering the year with good momentum, good strong growth, and on top of that, we don’t see financial conditions as tight. The level of interest rates in the U.S. is still low in any historic context, and we don’t see the financial vulnerability, so for example, the level of very high leverage we saw in some parts of the market going into previous recessions. We don’t see those financial vulnerabilities there. So for the year ahead, we see low probability of recession. A growth slowdown, but low probability of recession. I think what markets needs to focus on is as we look beyond 2019, particularly to 2020 and 2021, as fiscal policy starts to tighten in the U.S., that risk of recession starts to rise quite materially.

    Oscar Pulido: So it sounds like at least in the near term, you’re still relatively upbeat on the U.S. economy, we need to start thinking about risk as we go into 2020 and beyond. Sticking on the U.S. for a second though, U.S. stocks have been leading the charge in terms of asset class returns, for much of the last five to ten years. Do you still think that is going to be the case? You mentioned cash starting to be a very viable alternative, so where are you more optimistic about asset class returns? Is it still the U.S. or are there other areas of opportunity?

    Richard Turnill: We still believe the U.S. can lead the way in 2019. Actually these periods of late cycle slowdown, when growth slows as you get towards the latter stages of an economic cycle, actually historically, those periods have actually been good periods for stocks. The reasons for that are actually you typically get a potential Fed pause, and importantly, we still look for growth in the U.S. economy of above two percent in the year ahead – and that’s GDP growth – and that translates into earnings growth of mid to high single digits, and in that environment, with the Fed pausing, that still creates an environment where our base case would still be low, but positive returns from U.S. stocks in the year ahead. And it’s worth reflecting that the U.S. economy is one of what we think of as the highest quality economies, has a quality stock market, in the world, and where we have the greatest confidence on those growth expectations being met, in what is likely to be a much more challenging global environment in the year ahead.

    Oscar Pulido: Richard, it seems like we can’t talk about U.S. stocks without talking about the technology sector, certainly one of those sectors that got the most attention last year. We had news around privacy concerns, we’ve had ongoing headlines around trade tensions with China. Do you think technology stocks will bounce back here, or will it be another bumpy ride for investors in that sector?

    Richard Turnill: Our view is investors need to be more selective within technology going forward. We’ve had a great ride for technology stocks for many years, but we’ve now got a number of headwinds. We’re seeing regulatory pressure around the tech sector, we’re seeing the tech sector buffeted by trade concerns and the battle for technology dominance between U.S. and China, and we’ve got some headwinds around what we describe as crowded positioning, technology has become a well-loved sector as a result of its very strong performance over the years. So as a result of those factors, we think that technology can still do well, but it’s going to be more about picking your spots within the tech sector rather than just holding the sector in aggregate. So for example, we’d still favor the software sector where we see strong secular growth at enterprise spending, around software, and where the valuation reset you’ve seen in the last few months has created much less of a valuation headwind going forward. So overall, I think a bumpy ride for tech, but still some very attractive opportunities within the tech sector.

    Oscar Pulido: And so if you’re more cautious on tech, albeit you do see some opportunities, but it sounds like the tone changing slightly, what sector are you most excited about in 2019?

    Richard Turnill: The sector we see the greatest potential for, and we would have the highest conviction, is actually the pharmaceutical sector. And we see a number of positives there. So the first is that pharmaceuticals trade at a significant valuation discount. What does that mean? That means they’re cheaper than other traditional defensive sectors such as staples and utilities. But yet they have very strong balance sheets and they have very strong fundamentals. What do I mean by fundamentals? I mean, strong earnings growth driven by demographic trends, and visibility on that earnings growth, so a lack of patent cliffs, for example. And importantly, the pharmaceutical sector tends to be somewhat less exposed to the economic cycle than many other sectors, so less vulnerable in the scenario of a gradual slowdown in growth that we see going forward. It offers that attractive, long term growth drivers at reasonable valuations, but without the economic sensitivity. So we see very attractive opportunities within that sector.

    Oscar Pulido: Richard, in March, so just a few months from now, we’re going to hit ten years since the beginning of the bull market that began back in March of 2009. And we’ve been talking about markets and your views on the year ahead, but what does it mean for investors right now? How should we think about investing almost ten years since the beginning of the bull market at this point in the cycle? You touched on the theme of balancing risk and reward.

    Richard Turnill: One important message is you really shouldn’t measure bull markets in terms of the years, in terms of age. Really what you want to focus on are where are the signs that the bull market is getting tired? Where are the signs that it’s potentially coming to an end? So you’re right, this has been a very long bull market, but it started at a very extreme level, after the global financial crisis. So it’s been recovering for some time. So when we think about investing now, what we have to take into account is the outlook for growth. We mentioned we were entering that late cycle slowdown phase. We have to think about risks in terms of monetary policy, the good news is we see the Fed pausing, we see monetary policy and interest rates in the rest of the world, remain very low for some time. And we have to consider valuations. Perhaps one of the most surprising features of this very long bull market is actually as yet that bull market has not led to extreme valuations. So when we look forward, we still think this is a market which is positioned for positive returns going forward, but risks arising. And volatility is likely to remain high. So what does that mean? It means you need to better balance risk and reward. So on one hand, one side of that equation, you want to have assets which protect you from any unforeseeable shocks going forward, whether that’s a trade shock or the economic cycle slowing more rapidly than we expect, and bonds play that role in a client portfolio. And actually we’ve seen it over the last two or three months, as markets have become more concerned about the growth outlook, just how well bonds have protected many investors’ portfolios from that volatility. But bond yields are still low, and what that means is on the other side, you want to own those assets where you believe you’re being paid to take risk. And there again, you want to be selective about where you’re really being paid to take risk. And we focus on two areas geographically. So one is U.S. stocks, we’ve already talked about that, we see the U.S. as being a resilient economy; the other is emerging markets. So why emerging markets? Well, first of all, many emerging markets have just had their recession, so many investors are worried about an upcoming recession in developed markets, but actually many emerging markets are in the early recovery phases from a recession. On top of that, they benefit from any pause in U.S. interest rates, and perhaps most importantly, you’ve had a significant resetting of valuations. And for investors who are able to take a long term view, we believe that emerging market stocks in particular, particularly those in Asia, offer attractive compensation for risk for what are still risky assets. There is likely to be volatility but you’re being paid to take that risk right now.

    Oscar Pulido: Just on that last point Richard, a quick follow up, it seems that we can’t go much time without reading a U.S./China headline, China being the biggest emerging market. But you’re saying that there is opportunity in emerging market stocks despite the fact that we still might have these trade headlines that cross the wires all the time.

    Richard Turnill: That’s exactly right, and that is partly because you’ve seen the valuations of many assets exposed to those trade headlines reset, so the Chinese market is a good example. It’s now trading on 11 times earnings. China actually had an earnings recession in 2018, and actually what we’re seeing is the beginning of China rebounding from that, actually both signs that economic growth is starting to stabilize in China and actually we expect that the easing we’ve seen in both Chinese monetary and fiscal policy to impact the economy as we go through 2019 and see growth stabilize, but we’re seeing earnings growth already starting to bounce back. So again, that doesn’t mean there aren’t risk associated with emerging markets, there certainly are, and we expect those trade headwinds to be there for some time. But we want to focus on where you’re being paid to take those risks, and where we see some potential catalysts and actually China is an example of that.

    Oscar Pulido: Richard, before we go, I thought we’d have a little bit of fun here. I’d like to end with rapid-fire round. I’m going to ask you a series of questions that I’d like you to answer in just one sentence, if you’re ready for that.

    Richard Turnill: I’ll do my best, Oscar.

    Oscar Pulido: Okay. All right, I’ve got a couple here for you. What’s going to happen to stock markets this year?

    Richard Turnill: So, we’ll go for low returns but higher volatility. This is an environment where you should expect to get good returns from stocks in terms of high earnings growth, but given all the uncertainties we’ve talked about, you should expect that volatility will remain high; there will be some drawdowns along the way.

    Oscar Pulido: Okay. What is the next bubble in markets?

    Richard Turnill: Well, I’ll answer this one even more concisely. I just don’t see a bubble in markets right now. One of the extraordinary features of this very long bull market is that it yet just hasn’t created any significant excesses. And when we look across the valuations of all assets, whether that’s fixed income assets or equities or private markets, we see some areas where valuations are high, but we see nothing today near bubble territory.

    Oscar Pulido: We’ve talked about China a few times, so will China be the world’s largest economy in 2050?

    Richard Turnill: So I’ll just go for yes. For China to get there, that implies Chinese growth of around three and a half percent per annum over the next 30 years. Today, China is growing around six percent. So actually I think it’s very likely that China will be the world’s largest economy by 2050, and actually, potentially much sooner.

    Oscar Pulido: If you had one dollar, or in fairness, you’re in the UK, or one pound sterling to allocate, where would you put it?

    Richard Turnill: I’m going to actually give you a broader answer here, because my view is that if you are making an investment decision today, you shouldn’t put that dollar or that pound into just a single asset class. What actually matters is that you have got a portfolio which is balanced between risk and reward, and reflects your investment outlook. So my answer is I’m going to put that one dollar into a well-diversified portfolio, which balances my risk between equity upside on one hand, and fixed income protection on the other.

    Oscar Pulido: And last but not least, 2019 will be the year of…

    Richard Turnill: This is going to be the year of the driverless taxi, Oscar, because I think technology disruption is something we’ve touched on, but tech disruption is escalating and it’s having a bigger and bigger impact on all parts of financial markets. And one of the big headline events to look out for this year is the widespread use of driverless taxis for the first time. AI is coming.

    Oscar Pulido: Well, hopefully we’ll have a lot of passengers in those driverless taxis listening to your outlook on 2019. Richard, thank you so much for joining us today. It’s been a pleasure having you.

    Richard Turnill: My pleasure, Oscar.

    Oscar Pulido: We’ll see you next time on The Bid.

  • Episode 4 transcript – Man and machine: A 21st century centaur

    Mary Catherine Lader: This summer, a portrait by a French art collective sold at auction for $432,000. Now, that doesn’t sound uncommon. But this was no ordinary piece of art. It was the first painting generated by artificial intelligence and sold at a major auction house, and it sold for 20 times more than had been expected. Nearly every day, we read about AI being used in new ways. It’s being used to write songs, to address diseases, to drive cars, and under the hood in all kinds of everyday applications on our mobile phones. This is exciting, and it’s a little frightening. So what does it mean for us as investors, and as people?

    Welcome back to The BID, and to our mini-series, “Behind the hype: Demystifying fintech.” Today, we’ll talk with Stephen Boyd. He’s the chair of the Electrical Engineering department at Stanford University in Palo Alto. He’s also a pioneer in artificial intelligence, specifically in convex optimization. He’s written four books and dozens academic papers on control, optimization, and he literally wrote the book on machine learning with two of his colleagues. His open-source software has been used across multiple industries, including to launch rockets and to optimize investment models. We’ll talk today about the applications of artificial intelligence in investing and beyond, and whether or not AI is going to take over our jobs, and, well, the world. I’m your host, Mary-Catherine Lader, we hope you enjoy.

    Stephen, thank you so much for joining us today.

    Stephen Boyd: Thanks Mary-Catherine, very happy to be here.

    Mary Catherine Lader: Let’s just clear this up: we hear the term “artificial intelligence” used today in the same way as machine learning, and data science. What is artificial intelligence? Is it all these things at once, and does it even matter to define it?

    Stephen Boyd: That’s a great question. It’s not clear to me that actually figuring out carefully defining what is AI, what is machine learning, for that matter what is traditional statistics makes a whole lot of sense. The truth is there is really a group of technologies and methods that have names like AI, machine learning, optimization is one. And they’re all related. And I actually think that the great promise lies using all of these methods. I don’t really distinguish among them, I know there are lots of people who get really riled up and say, “No, I’m a data scientist,” or, “I don’t do machine learning.” I think there is a broader group of mathematical and computational methods, and the promise is in using all of them together.

    Mary Catherine Lader: In our second episode, Jeff Shen talked about how AI is used in the investment process. But the applications for AI, data science, machine learning, they go far beyond that in financial services alone. And they can span anything from improving operations to how we engage and interact with clients. So what are some of the most interesting uses of artificial intelligence you’ve seen in finance?

    Stephen Boyd: You asked about what is especially interesting about finance, and in fact, I think if you don’t mind, I’ll respond with the exact opposite. What I find really interesting is actually the commonalities between different industries and applications in these areas. I’ve worked with people who are doing aerospace, energy systems, machine learning, fraud detection, and they all have their own dialect, their own set of problems. These dialects are usually mutually unintelligible. What is really interesting is that when you listen, and start figuring out what they’re saying, is actually how common the problems are, across these fields. It’s crazy to think that for example electronic circuit design would, once you understand what’s really going on, have a lot of commonalities with for example fraud detection or for aerospace problems. It’s very, very interesting to me.

    Mary Catherine Lader: Does that mean that you see learnings from other industries that are useful in financial services and FinTech? And if so, could you give an example?

    Stephen Boyd: Sure. One is the whole area of models, how do you use models, how do you create models? How do you validate a model? After a while, after you’ve seen it in a couple different industries, then in fact it does become very useful to pull one idea from one industry – or application – to a completely different one. Here’s one, almost everyone who builds models knows that they’re wrong. They may be useful, but they’re probably going to be wrong, and that things many change and they become bad. And then the question is, how do you test a model? How do I know that my model of let’s say returns, or for that matter, my model of consumer demand, or something like that, how do I know that is still a good model? The different places, different industries have different ways of doing this, it’s very interesting to take stuff from one and take those ideas to another one.

    Mary Catherine Lader: If models are wrong, then what can you do to account for the uncertainty? I mean you’ve worked in extremely high stakes areas, ranging from software that launches rockets to designing models that manage billions of dollars. So what does it mean if the models are wrong?

    Stephen Boyd: To answer your question how do you deal with the uncertainty, that’s the real essence of multiple fields. Finance, it’s everything, that’s the whole point. If you knew what the returns would be, it’s game over, you know exactly what to do. And the whole point of finance is that you do not. Actually, those two applications are much, much closer than anybody might imagine. If you wanted to land a first stage, let’s say, you would basically solve an optimization problem, planning out all of your actions from right now until when you hit that landing pad, you plan a whole trajectory. Now that trajectory is based on things like the winds, when you get down near the landing pad, all sorts of stuff that in fact you don’t know. But you make predictions and you make that plan. And then what happens is a tenth of a second later, you do the whole thing again, and you replan and you execute the first one. What’s crazy is that is exactly how portfolio optimization works, right. If you have a portfolio and you want to know what should I trade, then the typical way to do it is actually make a plan based on future predictions of what is going to happen with risk and return, and with things like transaction costs. Then, that’s your plan. You solved an optimization problem and you execute the first one. And the next day or the next hour, or the next minute, you do the whole thing all over again. So those two, even though they sound and look wildly different, at some very basic level, they’re almost the same problem. And there are other areas too, like control systems, right, where you can make predictions about what is going to be happening on the road, or something like that, or winds, as an airplane is landing, or something, those are not going to be right. And so many applied areas, the real focus is exactly how to handle the uncertainty.

    Mary Catherine Lader: So speaking of uncertainty, when people hear the term AI, it often sparks a mix of emotions today. Many people sort of fear it and might see it as a threat to their job, their way of life, and our utility as humans in a numbers of ways. Are those fears justified?

    Stephen Boyd: I think they certainly could be. That’s not a function of the technology, right, those are social and political questions as to how we deal with AI and AI-related methods, as new capabilities come in and things like that. But I should say that in all the areas I’ve seen, this hasn’t happened. For example, let’s take circuit design. It used to be done by people who would sit down and draw circuits out, and simulate them, and after a while, say, oh cool it works, and ship it of or something. A lot of that has been automated and people were very worried about, well there will be no more circuit designers. And the truth is, that is not what happened. What happened was the circuit designers simply moved up the food chain and they let the things that could be done automatically be done automatically and efficiently, and in fact, their work became much more interesting because they became instead of the masons, the architects. They were the ones laying out a high level idea of what the chip is going to do. And then the low level stuff that probably wasn’t that much fun anyway, that’s what was automated. It changed how people work in that field, but I think very much for the better, and I would think they would all agree too, it’s a much more interesting and fun thing to do. But there are tons of other examples like that. I think the point about this is that the most successful applications couple people and machines. Some people even call it – they have a weird name for this, it’s kind of a silly name – but they’re called centaurs, right, so it’s half machine, half people. But in some sense, all applications are that. You have the people who architected the AI and machine learning and implanted it, you had the people who tuned it to make it work. So all of these things are really a combination of the people designing these things and running them, and then the machines who actually execute a lot of the parts that in fact would be kind of boring.

    Mary Catherine Lader: I’d never heard that centaur phrase before, and while as I think about my own attachment to my smartphone and computer and the like, feel like I may be well-prepared for that future.

    Stephen Boyd: Now you know that when you’re holding your phone, you’re a centaur, so.

    Mary Catherine Lader: Exactly.

    Stephen Boyd: It’s not a pretty picture actually, sorry.

    Mary Catherine Lader: Right, it’s fraught, it’s complicated, because these things make our lives so much better but also distracted and a number of other things. I’m curious how can we prepare ourselves for that future, both as workers, and then more broadly, what do you think we need to be doing at an even higher level to make sure that we’re ready for the centaur invasion?

    Stephen Boyd: I would say that first and foremost, it’d be really good to really understand what these things can do, and also very, very important, what they cannot do. Right now, it’s so overhyped and so overheated. When our PhD students finish and even our master’s students finish, they say, I have a PhD in neural networks, the offers are getting absurd. Because this is all hideously overhyped. A lot of people get very nervous, they say, oh no, oh boy, if a computer can beat a Go champion, what is going to happen to me or something like that. And this is just not right. And actually, it’s a whole lot simpler. I’ll let you in on a dirty secret right there, these things are a whole lot simpler than some people would like you to think.

    Mary Catherine Lader: We like to think at BlackRock that our problems are really complicated, and part of what we’re excited about having you and several of your colleagues as leaders of our Artificial Intelligence Lab, is to help simplify some of those and bring it back to reality. So I’m curious, could you just talk for a moment about what you’re doing at the lab, what you guys are working on?

    Stephen Boyd: Sure, and by the way, that question was absolutely perfect, that is kind of what we do. Everyone’s practical problem is super-duper complicated. You talk to somebody who did supply chain, right, they would tell you there’s this and that, you can’t do this, and I forgot to tell you before Thanksgiving, X, Y, and Z happens. It’s all sorts of crazy stuff. We’re not entirely academics, and we’re also teachers. And the whole point is that usually the first step in solving a complicated problem is to abstract it and to say, sure, the details are complicated, but in fact, there’s really only three things going on here, and they can be very complicated, this is different if that’s a bond, and this is different if that’s a derivative, and it’s different if that’s an ETF, but to see the commonalities, because that’s actually when you can start actually coming up with methods for them. Another great advantage of that, and that is when you come up with general methods, they often apply to other areas that you had no intention of addressing. So someone comes up to you and say, “Oh boy, you must help me scheduling of my high speed train,” and you work out and do stuff that would help them do that. But in the end, you realize, wow, I can use the same ideas to actually do things like allocate resources at a data center. That is actually sort of the fun, but it’s also the power of academia.

    Mary Catherine Lader: And you do make it sound so simple to simplify. On that note, thinking about the big picture thing that lies ahead of us, and how things that today seem really compelling could become reality, I’m going to end with a rapid fire round and just ask you, when you think these four things will come to life, in five, ten, thirty years, or never. Ready?

    Stephen Boyd: Okay. Sure.

    Mary Catherine Lader: Okay. How about autonomous vehicles?

    Stephen Boyd: No, that’s like—well you don’t have zero on your list here. That’s already here! Put it this way, it’s here in Palo Alto.

    Mary Catherine Lader: How about human life on Mars?

    Stephen Boyd: I’m going to go with 30 years on that one, yeah. It could even be never, but I’m going to go with 30 years. It’s not going to be 10.

    Mary Catherine Lader: How about commonplace use of gene editing?

    Stephen Boyd: That’s coming. Of course it is done now, in small amounts. I think in five years, you’re going to see a whole lot more, and in ten, a whole lot more.

    Mary Catherine Lader: And what about when electric vehicles will exceed the number of gasoline powered vehicles?

    Stephen Boyd: That’s a good question. I’m going to go with—I’d like to say five years, but I’m going to say ten, that’s what I’m going to say. That’s a guess at ten.

    Mary Catherine Lader: As I recall, you get around Palo Alto on your bike, is that right?

    Stephen Boyd: I do, that’s right.

    Mary Catherine Lader: So perhaps neither of those is that relevant to you, but – 

    Stephen Boyd: Yeah.

    Mary Catherine Lader: In any case, we appreciate your expert opinions on all of the above, thank you so much Stephen for joining us today.

    Stephen Boyd: Mary-Catherine, it’s been my pleasure.

    Mary Catherine Lader: To our listeners, we’ll be taking a break for the holidays, but we’ll see you in the New Year. Thanks for listening.

  • Episode 3 transcript – How Acorns has democratized investing

    Mary-Catherine Lader: What do you picture when you hear the word “investor”? Mostly men on Wall Street, probably a trading floor, waving hand signals and in front of a lot of computers. But picture this instead: your morning commute, the person next to you on the subway, the barista at the coffee shop, the woman to your left in the elevator, and the people you sit next to at work, or if you’re a college student, in class. All of those people can be investors. Investing isn’t too far out of reach for, well, nearly anyone. And that’s the core concept behind Acorns.

    Welcome back to The Bid, and to our mini-series: “Behind the hype: Demystifying fintech.” Today we’ll talk to one man who set out to show that wealth isn’t just for the wealthy. It’s for everybody. His name is Noah Kerner and he is the CEO of Acorns, a micro-investing app that helps customers build better financial futures by setting aside their spare change in an investment account. BlackRock partnered with Acorns in the spring of 2018 to help more and more people experience well-being through wealth. Today we’ll learn more about what Acorns is and how it does exactly that. I’m your host Mary-Catherine Lader. We hope you enjoy.

    Noah, thank you so much for joining us today.

    Noah Kerner: It’s good to be here MC.

    Mary-Catherine Lader: Noah, you’ve been a DJ, you worked in real estate – sort of, WeWork, reinventing real estate, you’ve done a lot of different things. And now you’re the CEO of an investment company. So how did that happen and why, given that you don’t have a background in investments, did you decide that this was an important purpose to pursue?

    Noah Kerner: Yeah. So my background started around 11 or 12 in New York City, selling baseball cards. And when I was 14, I got turntables, at 16 started doing nightclubs, and then started working with artists and so on and so forth. And senior year in college started my first company. And that was really born out of passion, curiosity, a desire to create and to build and to put things out into the world. So I started my first company at 21, and then a second at 25, and a third at 27. At around 32, I started to feel that creating for the sake of creating was not enough and that I needed to make impact, positive impact, and that if I took all of the things that I had learned and passion to create and apply that against things that mattered more in the world and made more impact, that that would be really fulfilling for me. Financial wellness when I look at the problems in the country, is top three. It’s one of the leading drivers of suicide, it’s one of the lading drivers of domestic violence and abuse. It’s something that leads people to feel invisible when you’re struggling financially. Going back in time to the dinner table as a kid—so my father was the first corporate social responsibility officer in America and he had that role at Bankers Trust Company. So it sort of came full circle that way. My second company was an agency called Noise, and we became the leading product development and marketing agency for the young adult markets. So it’s funny enough, on the consumer product side of things, in financial services and into most every category, I have a lot of experience. And people talk to us about the fact that we’re a FinTech company, and I actually think we’re a consumer brand company. Obviously we make technology, we design product, we do all these things, and at the end of the day, we are a brand. And what does the brand stand for? The beautiful thing about Acorns is acorns grow into mighty oaks, and so our brand stands for growth and potential. And that is a really powerful metaphor and it’s what people need to think about when they’re going through their financial journey of life. I wake up every day, with all the challenges you face of trying to build a company and manage a company and manage a complex business, it sort of all falls away when I think about the impact and the customers we serve, which is everyday Americans aspiring for more. The fact that we get stories all the time of people being the first person in their family to save for retirement, that’s really fulfilling.

    Mary-Catherine Lader: And really powerful. So how many users do you have today?

    Noah Kerner: We’ve opened up four million accounts in the United States.

    Mary-Catherine Lader: And how are they distributed across the country?

    Noah Kerner: Like census data, so really well-distributed – we’re everywhere. Really, the most exciting part is this is needed. To build product and a brand for everyday Americans, many of whom are struggling, 70 percent of whom don’t have a thousand dollar emergency fund, 66 percent of whom can’t pass a basic financial literacy test, over 60 percent spend more than they make, that’s the space to focus on. And we focus on that customer in every way, from the product perspective, from the pricing perspective, we use subscription pricing. The reason we chose subscription pricing is because it’s simple, it’s transparent, it’s predictable. And in a category where there have been all kinds of surprise hidden fees, things behind asterisks and pages and pages of information, we felt like subscription pricing is the exact right model: here’s what you pay, here’s what you get. For a dollar a month, you get the Core investment account, plus all of our financial literacy content, plus our Found Money Rewards Program, plus all kinds of other features; for $2 dollars a month, you get all of that plus Acorns Later, which is our automated retirement account, and for $3 dollars a month, you get all of that plus Acorns Spend, which is the first debit card with a checking account that saves and invests for you. And we go from there.

    Mary-Catherine Lader: We’re constantly conducting research with investors and a recent survey we did found that 57 percent of people around the world haven’t begun to invest because they don’t believe they have enough money to even start. What about the Acorns brand and the experience gives people hope that they can invest?

    Noah Kerner: Beginning with our brand, from tiny acorns mighty oaks do grow, that is our whole concept. So I think everything about our brand conveys that message, all of our language. When we say what our mission is, to look after the financial best interest of the up and coming, we don’t talk about the forgotten, or the underbanked or the underserved, we talk about America’s up and coming. And literally everything is about up, upward potential, the branch on our product animates in up, on our card, there is a branch going up, the way we talk about our customers, all the language, our core brand value is to uplift.

    Mary-Catherine Lader: So is your vision that your users will only have a financial relationship with Acorns, or do you think that that’s not necessarily possible?

    Noah Kerner: Our vision is definitely that customers will move their primary bank to Acorns, and our vision is to be a financial wellness system that enables everyday Americans to save and invest every day. So it’s a very purpose-driven product experience, it all comes back to helping you save and invest. We’re not building Acorns Spend to have a debit card and a checking account, we’re building that product because how you spend impacts how you save and invest. We have a whole product line built around helping people earn extra money, because the number-one reason people don’t save enough is because people don’t earn enough, and same with all the other areas of personal finance. So we want to be in every area of your financial life, but always coming back to helping you save and invest money for the future.

    Mary-Catherine Lader: Sometimes the math just doesn’t work in terms of what you’re earning, what you’re spending, when you think about the market today, it’s November 2018. The market is now flat to down for the year, how do you guys think about your brand and delivering on that purpose when you can’t control those factors?

    Noah Kerner: The way I think about our brand at the most basic level is that spare change adds up over time. And not everybody, but most people can invest spare change, most people can round up the purchase and have that spare change invested into a portfolio, which is the core of what Acorns is. And as a product, one of the things that I love about Acorns is because you’re contributing so frequently, you see the balance add up, and even when the markets may have a dip like they have now, and you may lose ten percent in the market, you’re still contributing and you’re still growing your savings and investing account. And that is positive reinforcement and conditions that type of behavior that we all want to create out there.

    Mary-Catherine Lader: And do you guys see that your customers behave any differently, engage with you differently when the markets are volatile or down?

    Noah Kerner: Yeah, so that is where our financial education comes into play, and we really try to get that message of stick with it out there, and stay the course. And I always like to say, if you look back in history, every downturn has ended in an upturn. And the only way you lose money is to pull it out after the market goes down. And to really reinforce those messages, and it’s not just because obviously we’re trying to build a business and we want to keep our customers and grow our business. But I and we truly put our customers’ best interests first, our mission is to look after the financial best interest of the up and coming. And it is in your best interest to stick it out, like that is just a fact. I have suffered as a result of pulling money out when I panicked, my parents did it twice. They did it after 2001, probably lost 100 percent of their money as a result of not being there when the market went back up. We can help people avoid those mistakes, which is why we really focus on that education stuff, focus on uplifting people and giving people some of that confidence you need during those tough moments, cause no matter how good of an investor you are, when the market goes down 2,000 points in a week and a half, you get the jitters, yeah.

    Mary-Catherine Lader: You also work with Richard Thaler, who won the Nobel Prize for Economics. How are you guys experimenting with behavioral economics research, and perhaps your users, to figure out ways you can nudge certain behaviors, beyond the brand and the messaging?

    Noah Kerner: We formed a program called The Money Lab, and it’s chaired by Schlomo Bernartzi, who is a top behavioral economist. There are 25 academic groups that participate in it, and we’re basically looking for insights from the top academic minds and behavioral economists in the country to help find ways to encourage our customers to engage in the right types of behavior. And the best example I have of that is we have a feature called the Recurring Investment Feature, and the way it works is by the day, week, or month, you can set an automatic investment that pulls money from your bank account. So you can do $5 dollars a day, or $35 dollars a week, or $150 dollars a month. And there is a default amount set. We tested what happens if you set the default to $5 dollars a day, $35 dollars a week, or $150 dollars a month? What are the participation rates when you set the default to those different levels? And what we found is that there is a four-times participation rate when we suggested $5 dollars a day versus $150 a month. It’s a smaller amount, the tradeoff in your mind is smaller, it’s like I can give up a coffee versus giving up your cable bill. So people frame things that way. And what was really interesting is when we looked at the data by socio-economics and compare people who make $100,000 dollars to people who make $25,000 dollars, the participation rate when we suggested $5 dollars a day was the same. And that says, with a simple nudge, you can close the savings gap potentially. Our goal as a company is 100 million everyday Americans saving and investing every day. And I don’t really care if it’s just us that makes that happen, I’m thinking about the Money Lab as this platform and program that we can make accessible to everybody to really raise America up overall together.

    Mary-Catherine Lader: Acorns just celebrated four years in August. You’ve accomplished so much, but you’re still a pretty young company. So what are you guys doing to help drive your future growth?

    Noah Kerner: We’ve built a team of almost 250 people, really talented people internally; we’ve opened up four million accounts, so we’re starting to get a group of people who are advocating for us and talking about the virtues of the product. We have a referral program that 250,000 of our customers have participated in. So people are spreading the message, and that is really helpful. And we have a really talented team across every department from Data Science to Support. One of my favorite prats of Acorns is our Support Department, we hire these really brilliant primarily young people, who come in, work in Support for a year or two, and then matriculate into the organization. But you’ve spent one or two years listening to the customer, to their excitement, to their pain. I always tell people you have got to stay close to the pain. Because that is where that good stuff comes from. In fact, actually when we onboard people, you have to go listen in on calls. We just had an experience where there was some stuff that happened at the company and we had a little bit of a backlog in support, and the manager of the Support Team actually trained the whole company in support. And our whole company came together answering customer emails. I think we had 42 people across the company do it.

    Mary-Catherine Lader: That’s awesome.

    Noah Kerner: I think developing that kind of culture is hugely important and it’s encouraging to me when I see a company like ours kind of everybody come together around these kinds of things. By the way, from a cultural perspective – and this is a little bit off the question, but –we organize around team first, customers second, shareholders third.

    Mary-Catherine Lader: Team first--

    Noah Kerner: Customers second, shareholders third.

    Mary-Catherine Lader: Shareholders third? Why not customers first?

    Noah Kerner: The philosophy is, when we think about what a company is, is a group of people all working together toward a common goal. So get the best people, create a culture where they flourish. They’re going to work together to create great product, provide great service, customers will be happy as a result, and then shareholders will be happy. So that’s how we’re organizing—that’s our organizing principle. And by the way, from a customer perspective, it’s not like we don’t prioritize customers obviously.

    Mary-Catherine Lader: Or your shareholders.

    Noah Kerner: Or our shareholders, yeah, yeah, yeah. But I tell our investors, listen, the truth is you want to be third.

    Mary-Catherine Lader: Right.

    Noah Kerner: You do, you want to be third.

    Mary-Catherine Lader: Yeah. So a ton has changed for Acorns in four years. How have you see the industry, whether it’s financial services, or perhaps media, perhaps other start-ups, react to your success, and adopt some of what has been working for you guys?

    Noah Kerner: I was talking about this yesterday, I actually feel like the industry, and certainly beyond, is pretty supportive of us because of what we’re trying to do and how mission-oriented we are. Whenever I talk to people and give talks, people come over and are like, we’re really rooting for you guys. Because really at the need of the day, we’re trying to help close the savings gap, we’re trying to get people to invest for a better future.

    Mary-Catherine Lader: Who doesn’t want that?

    Noah Kerner: Yeah. If you don’t, you probably look in the mirror.

    Mary-Catherine Lader: You and the Acorns teams have been pioneers in driving this new approach to investing. It’s part of why we’ve been so excited to partner with you, we share so much of what your mission is all about here at BlackRock. So in that spirit of looking ahead to the future, you are a serial entrepreneur, you have a knack for predicting what might be ahead. I’m going to end with a rapid fire round, and we want to know whether you think these things are going to become part of our lives in five, ten, thirty years or never. Ready?

    Noah Kerner: I need to get my crystal ball out real quick.

    Mary-Catherine Lader: Yeah, exactly. Yeah. No one is going to hold you to it; we’re not betting on it.

    Noah Kerner: Okay.

    Mary-Catherine Lader: Let’s start with human life on Mars.

    Noah Kerner: 50 years.

    Mary-Catherine Lader: Not optimistic, or you just don’t think it’s that interesting?

    Noah Kerner: 50 years, yeah, that’s my prediction.

    Mary-Catherine Lader: Okay. It’s better than never I guess. Commonplace use of gene editing?

    Noah Kerner: Ten years.

    Mary-Catherine Lader: Electric vehicles outnumber gasoline-powered vehicles.

    Noah Kerner: I’m a little pessimistic about this one, because of how powerful—you’re talking about in America?

    Mary-Catherine Lader: Yes.

    Noah Kerner: How powerful this infrastructure and lobbying organizations are, I might say 20 years. And I’m sad to say that, but I might say 20 years.

    Mary-Catherine Lader: What about RFID chips in our skin for any number of purposes?

    Noah Kerner: Hopefully never. I’m trying to never become a borg.

    Mary-Catherine Lader: Scary thought. And finally, 100 million Americans saving and investing on their phone.

    Noah Kerner: Ten years.

    Mary-Catherine Lader: Thank you so much for joining us today, Noah.

    Noah Kerner: Thanks, MC, appreciate it. It was fun.


  • Episode 2 transcript – Big Data: The race is on

    Mary-Catherine Lader: Ninety percent of the world's data was created in the last two years. That was true last year, and the year before that. So, in other words, there's an explosion of data. This creates a massive opportunity, but it also raises new challenges. With so much data out there, how do you value it? How do you harness it? How do you make meaning out of it?

    Welcome back to The Bid and to our mini-series Behind the Hype: Demystifying Fintech. On our last episode, BlackRock's Chief Operating Officer, Rob Goldstein, set the stage for us and talked about how transformations in technology are disrupting industries and influencing how companies scale their business.

    Today, demystifying the buzz around big data is Jeff Shen. He's Co-Chief Investment Officer of Active Equity, and Co-Head of Systematic Active Equity, BlackRock's quantitative investing platform. With Jeff, we'll get to the root of what exactly big data in investing is, how it's used, and whether it creates a bigger or a smaller and more competitive opportunity for investors. I'm your host, Mary-Catherine Lader. We hope you enjoy.

    Mary-Catherine Lader: Hi, Jeff. Thanks so much for joining us today.

    Jeff Shen: M.C., thanks very much for having me.

    Mary-Catherine Lader: Today we're talking about big data, machine learning, and what that means for your team and for the investors whose money you manage. We're all familiar with how smart phones, GPS, and smart home devices are totally changing our lives. They're changing communication, transportation, daily tasks. I know I get my news, my weather from a device in my home. So, as that technology grows, new forms of data, of course, grow with it. The term "alternative data" or "Big Data" gets thrown around a lot. What exactly does that mean, from your perspective as an investor? And what kinds of data sets can your team now interact with that you might not have been able to when you started out as a manager 14 years ago?

    Jeff Shen: I think it's an extremely exciting time for us to look at data and the implication for investment. What I like to call it is "bits over atoms." Now, what do we mean by that? We used to collect information by moving atoms around. So if I wanted to see where the factory is being built, I fly over it to check out if the factory has been built. And if I want to get a sense of the real estate development that's coming online, I do a field trip. So, there are a lot of atoms moving around to collect some of this information. Fast forward, today, a lot of this information now can be collected through bits. Bits really means zeros and ones; we're using a digital form to collect some of this data and some of this information. And then, when we look at how portfolio managers are processing this information, increasingly, the information are coming at us through these bits. And to the extent we can leverage data and technology for our investments, we're certainly in a bit of a brave new world.

    Mary-Catherine Lader: So what are some specific examples? I mean, do you now have access to foot traffic data? That's a famous example of using that to assess, like, retail demand, to social media; you know, what in the past year or two can you now look at to get a sense of investment opportunities that you couldn't before?

    Jeff Shen: I think I would classify this probably into three major categories. Number one is really about fundamentals. If you think about -- to your point, a person comes to the store, if that results eventually into a sale, then tracking the foot traffic data through Wi-Fi beacon information will certainly be quite helpful to capture fundamental information. It could also be through the second category that I like to call sentiment. If we want to get a sense of how 100 million retail investors in China are thinking about the equity market, then social media information give us a glimpse of the human intentions and emotions. We get a sense of what they are thinking about the Chinese stocks locally in Shanghai and Shenzhen. The third category of information that we also like to track is certainly try to look at policymakers' potential movements. And it could be fiscal policy; it could be monetary policy movements. From this, we're also using natural language processing to process a lot of these data and text to get a sense of what are the potential policy movements going forward. To sum it up, what we are looking at is certainly using these alternative datasets to track fundamentals, sentiment, and also macro policy; to see that can give us better answers to a set of classic questions that we've been tracking for a long time.

    Mary-Catherine Lader: Jeff, that policy example is so interesting, because there's so much bad information about what's going to happen with policy. There's so much bad information about what management teams or government leaders, human leaders might do that could influence companies. So, how do you parse through that kind of information for either policy indicators or sentiment to really figure out and discern the signal from the noise, what's good information versus bad information?

    Jeff Shen: Signal to noise is certainly a huge challenge. What we do over here on the policy front is certainly try to have a bit of a supervised machine learning, if you will. So on one hand, we want to give machine a bit of direction on where to look for information, especially related to policy. It could be monetary policy. It could be fiscal policy. The world is certainly right now switching from monetary policy to a regime where fiscal policy is becoming much more important. So what we are doing is to guide the machine to look for -- in a sense, away from the monetary policy stance, into the fiscal policy stance. And then, the natural language processing technique is quite critical. What we are looking for is not only to get a sense of the policymakers are becoming positive or negative on a particular set of policy directions, but also importantly what are the emerging topics that can be coming up from some of their speeches and some of their discussions? So, to a certain extent, it's no different from you and me reading a corpus of text and to figure out where the policy could be, except in this case here we like to hire a lot of PhDs, who I joke sometimes may not like to read, but would like to use a machine to read a lot of these texts.

    Mary-Catherine Lader: So there's basically a person reviewing all of this. That's what you mean by "supervised machine learning," that there's like a human check at the end of it all?

    Jeff Shen: A human will set up the framework of thinking through this, and if you will, humans really determine what the algorithm is. And the machine is coming in to provide scalability to read through thousands and thousands of documents in one go. And we process seven major languages in the world. So not only being able to read in English, but also try to read Spanish, Portuguese, Chinese, and Japanese. Across languages there are a lot of nuances. So when you get into some of these details, some of these techniques, the machine nuances become quite important. But ultimately, it is really about human-plus-machine that we think can solve the overall puzzle.

    Mary-Catherine Lader: So are there any examples of really strange outcomes, either strange investment recommendations or even weird sets of data that you've found less useful, but that human check was critical to identifying?

    Jeff Shen: We like strange things. Our perspective here is that, if the questions or the answers are too obvious, it's probably priced into a market too quickly. And to a greater extent, it is about potentially asking a different set of questions that nobody has actually asked before. One specific example that I have is what we like to call as signal combination. So essentially what we're trying to do is to look at 200-plus reasonably generic insights that can predict stock returns. But rather than combining them using common weights across every single signal, what we want to do is to look at each individual stock and to have potentially a different weighting according to the characteristics of the stock: which country it is in, which sector it is in, which market capitalization it is in. So, essentially give us a very individualized combination. This, to a certain extent, is instead of having a forest view, what we want to have is to zoom from the forest into the tree, to have a very individualized combination. Now, that particular type of questions are certainly a bit of a strange question in the sense that without the leverage and scalability of a machine, we were never able to ask these types of questions before. But fast-forward to 2018, we are able to ask this set of questions and also come up with pretty interesting answers.

    Mary-Catherine Lader: I mean, it does make you wonder about the importance of evolving all investors' skill sets. I started out as an investor at the beginning of my career and had to key in every company's financials, build my own model, kind of project their financials, call up and do research. And so, to be able to do that at scale so quickly and just tweak the things that require your own judgment sounds extremely compelling. In that context, I mean, what is the future of an investor who's using an Excel spreadsheet and a 10K, and how will they compete?

    Jeff Shen: I think investors need to evolve, especially given the new context of data and the algorithm revolution that's sitting in front of us. And I think to a great extent, historically, a lot of discretionary fundamental-oriented managers certainly have a lot of depth of knowledge, knowing one or two or a dozen companies extremely well, and being able to achieve depth of understanding. The systematic quantitative investors historically tend to be very wide in terms of understanding, but sometimes can be a bit shallow. So they know a lot of different things. But at the same time, at the individual company level, they may not know that much. I think we're into a phase and world where it's potentially possible to have both breadth of knowledge, but also with depth of understanding. And I think that's where the future state of an investor -- for active management -- that's extraordinarily exciting. And it's not really limited to systematic quantitative managers, per se. Fundamental discretionary-oriented managers can certainly leverage of these new data and new technology to evolve. So, I think the race is on. And ultimately, it all comes down to evolving the investment process and to leverage data and technology going forward.

    Mary-Catherine Lader: Can I ask you a slightly personal question?

    Jeff Shen: Absolutely.

    Mary-Catherine Lader: Do you have kids?

    Jeff Shen: Two daughters, 10-year-old and 7-year-old.

    Mary-Catherine Lader: So if your 10-year-old said, "Dad, I really want to be an investor like you. What do I need to learn?" What would you tell her?

    Jeff Shen: Funny enough that you ask. She's actually a big fan of Shark Tank on CNBC, for whatever strange reason. But I think to answer your question, I think it's going to be a bit of a combination of, on one hand, I think the kids today need to get a better understanding of how a machine would work. So, understanding of computer science, of algorithms, and understanding the subtleties of how to use this algorithm for what specific setting and context is going to be quite an important skill set to have. But on the other hand, I do think that liberal arts majors would have a bright future for the future state of investment, because ultimately it is not only about coming up with a set of answers to a set of questions, but it's also more importantly coming up with better questions to ask, to making sure that we have a critical mindset to think about some of these issues. So ultimately, the questions may matter even more than the answers.

    Mary-Catherine Lader: I know we at BlackRock are a big fan of hiring a mix of people with liberal arts backgrounds for exactly that reason. Even if you're, for example, a student of history, you're studying judgment over the course of human history and thinking about what causes certain unpredictable events, and therefore the right questions to ask to think about the future and project. So, if your daughter is going to be learning how machines work, and possibly learning how to code -- and she might want to be an investor, given how much she already loves Shark Tank -- then are we just at -- we're already in an arms race, and what today is cutting-edge, what today is being used by funds like SAE is just going to be the norm in the future?

    Jeff Shen: I think so. And it's not only investment in the machine, in the data, that is critical -- it's table stakes for sure. At the same time, it is also about talent, about the people that we can attract. But it's also about making linkages. I do think that the diversity issue in investment is a critical one. I think not only we want to have people with very strong computer science/engineering background, but also making sure that we can make connections across some of these answers and try to answer these questions in a holistic fashion. Technology companies are certainly pretty strong competitors in this space -- I mean, San Francisco I certainly see it outside my window. At the same time, I would say that to solve the investment problem, some of the challenges are quite fundamentally different from solving a regular engineering problem. The fuzzy objective function for investment is certainly quite different in the sense that when we think about a better investment result, not only higher return, lower risk is important; the journey also matters. The only thing that we know for the future is that it's going to be different from the past. Whatever we've done in the past 30 years in systematic quantitative investment, we know that for the future the requirement is going to be higher, and we're going to need to make sure that we have the right talent to tackle some of the new challenges.

    Mary-Catherine Lader: So we think of financial markets and investing as being so precise, but it's funny you mention that actually a lot of the questions we're asking, the data is kind of fuzzy. And that's part of what appeals to talent. I remember when we were setting up the artificial intelligence lab with Stephen Boyd, who's of course a professor at Stanford, and some of his colleagues from Stanford and Berkeley earlier this year, they mentioned that that was a big part of why they started working with you and the SAE team, is because these questions are so undefined, and markets are so unpredictable. So can you talk a little bit about what Stephen and some of his colleagues are working on at the AI lab in Palo Alto?

    Jeff Shen: I think there are two very important elements that Stephen and the AI lab at Palo Alto is helping us. I think number one is that, coming from investment and finance background, I think all of us are very much used to a data-poor environment, historically. And I think what Stephen and the advisors bring onto the table is certainly a mindset that allows the data to tell us a bit more of what's going on in the world. So rather than going from theory to the world, this is actually going the opposite way; it's actually coming from data to inform us what's going on, really going on in the world. I think the second part is also this concept of machine learning, in the sense that the machine can really learn. And I think that's a bit of a new-new world, in the sense that historically we're very used to telling what a machine to do, with human judgment and human intuition. In the new world, I do think that the machine, with a very simple, fundamental algorithm embedded in there, can potentially learn things that we've never thought about as possible. And this concept of "machine can learn on its own" I think is going to have an increasingly greater role in investment and how we operate our business going forward. So, both -- whether it's data to tell us a bit more, or let the machine to learn, I think are going to be quite disruptive in our own investment business.

    Mary-Catherine Lader: We're going to end with a rapid-fire round, and since you spend all day thinking about the future, and you have a pretty unique breadth of data with which to assess and analyze the future, I'm going to ask you how many years you think it'll take for some of these things to become reality. So five, 10, 30, never. You know, whatever you think. Ready?

    Jeff Shen: Yes.

    Mary-Catherine Lader: Okay. Autonomous vehicles.

    Jeff Shen: Five years.

    Mary-Catherine Lader: Okay. I'm going to ask some follow-up questions. So, why five years?

    Jeff Shen: I already see them on the street corners in San Francisco, and I think the challenge there is more to do with how do you put autonomous vehicles alongside with human driving in a cohesive fashion? The technology itself is getting to be quite mature. But I think the challenge is really how to fit that into the existing framework. If the world is driven completely by autonomous vehicles, I would say that's probably within one or two years we can do it. But the problems are human.

    Mary-Catherine Lader: Human life on Mars.

    Jeff Shen: Thirty years. Mars is pretty far away. [Laughs] And I think it's not only getting there that's difficult, but it's also how do you stay there over the intermediate horizon. I think it's going to take a while.

    Mary-Catherine Lader: What about commonplace use of gene editing?

    Jeff Shen: Ten years. I think that's a part that is surprising, in the sense that the technology breakthrough there is quite real. But at the same time, I think the realization is that you may have a dictionary of a particular language, in this case here, for DNA. But to truly be able to solve the puzzle with one dictionary is actually not enough. Human body and the human evolution is much more complex than we thought. At the same time, the computational power is probably going to allow us to make some breakthrough over the next 10 years.

    Mary-Catherine Lader: How about when electric cars might outnumber gasoline-fueled cars?

    Jeff Shen: Twenty years will be my guess. I think ultimately it comes down to the cost of battery and the regulatory environment. We may see a bit greater adoption in markets like China or India, where the existing infrastructure is such that existing gasoline cars are still on the rise, and people may have much greater adoption in some of these emerging markets than developed markets.

    Mary-Catherine Lader: That's fascinating. And a little discouraging. Anyway, thank you, Jeff, so much for joining us today. It's been such a pleasure to talk with you about what you're doing at SAE, how you and your team use machine learning, big data, these often-used but not-that-well-understood terms. And what it means for the future of investing. Thanks again.

    Jeff Shen: Thanks very much, M.C.

  • Episode 1 transcript – Behind the hype: Demystifying fintech

    Mary-Catherine Lader: We’ve all seen the headlines so much that we might be sick of them: “The Robots are coming for Wall Street.” “AI Is Changing The World, Are We Ready For It?” “This App Will Help You Retire.” So with all the swirl, how do you know what’s real and what’s not? We know technology is changing financial services, we know it’s changing our future, but how exactly is it doing that today?

    Welcome to The BID, and to our mini-series, “Behind the Hype: Demystifying FinTech.” Over the next four episodes, we’ll talk to experts at BlackRock and beyond to go behind the hype and take a look at the real application of technology in financial services. We’ll uncover how it’s used, what it means for our future, and how the world might be different tomorrow as a result. On our first episode, we’ll start with Rob Goldstein. He’s BlackRock’s Chief Operating Officer, and the Head of its Technology Business, Aladdin. We’ll discuss the rapid rise of FinTech and why now, more than ever, all companies across industries are technology companies at their core. I’m your host, Mary-Catherine Lader, Chief Operating Officer of BlackRock Digital Wealth. We build technology to help financial advisors and everyday people manage their money simpler. Let’s get started.

    Rob, thank you so much for joining us today.

    Rob Goldstein: Great. Thank you, MC, I’m so excited to be here.

    Mary-Catherine Lader: So you’re Chief Operating Officer of the world’s largest asset manager, but you’re also part of a team that founded a FinTech business, Aladdin, which is part of BlackRock. You have one of the most unique perspectives on FinTech, probably in the world. What is the hype all about, and do you think it’s overblown?

    Rob Goldstein: Well first of all, I think that the number one lesson learned that I have in terms of being part of this journey, is that it really is about a strong team of partners. And I think when you look at FinTech today, it’s actually quite amazing because the hype is clearly overblown. I don’t even think there is any question about that. I don’t even think anyone would doubt that at this point. I think we’re actually going through a period now where things are becoming a little bit more realistic and that is actually exciting for us, because we’d rather people focus on what’s real than what’s an illusion. People love talking about things like cryptocurrencies, just as one example. So that’s like really sexy, but at the same time, I think that a very large component of what is exciting to me is when you actually look at the financial services ecosystem, start in the basement and work your way on up, there is so much inefficiency. We are still in a world where most people in our industry still struggle with a common language. A common language for what is a portfolio, a common language for how to think about constructing a portfolio, a common language for how to transmit trades. In many regards, what we have today is this incredible ecosystem where everyone is speaking a different language, and then you have tons of people whose job it is to try to translate among those languages after things break. And what is really exciting to me – and I know many people at BlackRock – is the opportunity for Aladdin to be that common language because the industry really, really requires one. It’s just no one has been successful to date in creating one.

    Mary-Catherine Lader: Today many people building distributed ledgers or blockchains are pursuing the same objectives—trying to solve similar problems. What’s the difference, and what do you think about that?

    Rob Goldstein: Well, distributed ledgers would be a tool to accomplish it; it wouldn’t be the language itself. One of the things we found as we’ve done as you know MC, very well, enormous experimentation and a lot of it under your leadership with regard to digital ledgers, is that it doesn’t alleviate the problem of someone has to define the language. Once that language is defined, it’s another effective database technology for capturing that. There is a lot of advantages that database technology brings with it. But the language itself, what you put in there, still needs to be defined. A lot of the operating infrastructure is much more complicated than people would ever expect to believe. So the common language is really hard. I think what has happened at an industry level is that there’s been many people who have tried but they’ve tried for one piece. And then they’ve seen that even that one piece is hard, so they focused on what I would think of as more of the lowest common denominator as opposed to the highest common denominator. And one of the benefits of the Aladdin community that we’ve established and just the sophistication of those clients is that through having those clients on one platform with one language, that really creates a critical mass for the common language of the industry.

    Mary-Catherine Lader: A lot of those problems have been around for a long time, so why now, what is driving the shift? Why is the hype being escalated so much in 2018?

    Rob Goldstein: It’s a good question. I think that a lot of the reason why it’s changed are the broad trends that we all know about. There’s more data than there’s ever been in the world, all sorts of statistics, the 90 percent in the past two years, I think we probably are all tired of those statistics. What we know is that in a year, there will be a lot more data than there is today. We also know computing power in a year will be much cheaper than it is today. It was much cheaper than a year, two years ago, five, ten years ago. So all of those big macro trends are part of it, but I also think that a key, key part of it is that as an industry, this industry has really been focused on technology much more so than any other industries. I think what is happening is that trading volumes and just the amount of information that gets processed, is going up so quickly, so the industry’s requirements are changing and compounding exponentially in such a way that requires that whatever inefficiency has to be extracted out. So what is most interesting is that when I would go to the doctor, and you see it’s like going to an office in the 1960s, they’re writing stuff down, you’re filling out a form, then you see someone type it in, then they don’t have it when you go in the room. You’re like how is this possible? And finance was not like that. Ten years ago it was not like that. Finance has always been somewhat digital, I think relative to other industries, it’s been on the pretty good and extreme end of the digital scale. What is happening now is really the last three percent, five percent, not the first 95 percent, and given the explosion in activity, that’s what is leading to this being the topic right now.

    Mary-Catherine Lader: So everything you said – you’ve used no jargon, super simple terms –

    Rob Goldstein: I’ll start the jargon – ask me a question that’s good for jargon.

    Mary-Catherine Lader: But identifying those opportunities, understanding how they’re exciting, having an idea as to how you could execute on them requires a lot of knowledge, a lot of industry knowledge and that is perhaps a barrier that financial services may have in attracting talent. So how do you think about translating that to someone who is also thinking about solving other technology problems that they experience every day on their mobile phone?

    Rob Goldstein: Well, to me one of the most awesome things about both financial services but also what we do at BlackRock is that there really is an infinite number of hard problems that are unique. Finance has always been an information processing business. People used to process the information through writing it down in really big books, then they processed it on mainframes, and now they’re processing it in different ways. But this is one of the biggest big data businesses, one of the biggest opportunities for machine learning. This is one of the most natural places to apply artificial intelligence. And one of the things that I’ve learned is that it’s very attractive, including for people who have multi-decade careers or people in the academic fields, who have been doing this stuff their whole lives with no financial services experience, at some point, they want to try to tackle these problems because they recognize how hard they are to solve, which is also quite exciting.

    Mary-Catherine Lader: Do you think it’s relevant to ask whether an asset management company is a tech company, is a FinTech company – is that a non-sequitur question?

    Rob Goldstein: Some colleagues would disagree, I personally believe it’s a weird question, and not only do I believe it’s a weird question, I think it’s a silly question. And the reason why is very simple. So, I think if you are in the stage coach business today, if you are in the stage coach business in 2018, you’d be in a technology business. Now I always have had that thesis, and as I was preparing to talk at a conference once, I actually started to research the stage coach industry.

    Mary-Catherine Lader: And it exists?

    Rob Goldstein: It exists, and funny enough, they pride themselves on doing everything by hand like they did in the 1800s. So I was very disappointed because my thesis was proven wrong, and then as I did more digging, one of the things that they pride themselves on is they actually used the tools that were the same tools from the 1800s to build the stage coaches. So, then as I went another layer deep, I figured out that those tools that they use, those tools were actually built by 3D printers. So when you really look into it, in 2018, there really is no business that isn’t a technology business. It’s just the reality of it. I think whether you’re running a restaurant, an asset manager, a hospital, whatever it is, a grocery store, at this point, technology is used to do everything in your business. And I think that great businesses, no matter the industry, have a natural cadence with regard to looking at all problems through the lens of how can technology solve this problem? And they’ve not only done that at the most senior levels, but they’ve permeated that throughout the whole organization.

    Mary-Catherine Lader: So what got you interested in the asset management business?

    Rob Goldstein: It’s an interesting question. What got me interested in the asset management business is probably not the most comfortable story to tell, but when I was graduating university, I basically asked a bunch of people, what job in financial services – because I knew I wanted to work in financial services – I said what job in financial services pays the most, and you have to work the least? Because I assumed that is what you’re optimizing for. And they told me at that time, and this was in 1993, this would have been, they told me at that time you want to be an institutional bond salesperson. And I said okay, that sounds awesome, how does one become an institutional bond salesperson? And they said, well you have to get a job for a couple of years, then you go back to business school, and then you could enter a program to be an institutional bond salesperson. And I didn’t really want to go back to school, but someone told me, if you could get a job in analytics and survive through that, that typically gives you a pass in terms of not having to go back to business school. So that was the path that I pursued. So I started working at BlackRock. And my strategy was to work here for a couple of years, and then use that as an opportunity to go to the sell side and be an institutional bond salesperson. Obviously that didn’t happen, but I think it’s really interesting because it says a lot about the world, not so much me, but the world. If you go back to the mid-90s, the institutional bond salesperson, that was the job. The analytics person, the technology person, the data person, that was definitely not the job. And if you fast-forward till today, basically in the institutional bond salesperson has been largely replaced, displaced, repriced through technology, and the rise of the analytics, the data, the technology people, they’ve effectively taken over a very significant chunk of the financial services landscape, and importantly, they’re now the rock stars, they’re the sexy guys, whereas the world was a very different place 24 years ago.

    Mary-Catherine Lader: Speaking of opportunity, you’re so focused on execution and scale, are part of your refrain as COO of the firm, making sure that now this organization of roughly 14,000 people is still delivering every day. What do you see as some of the ingredients for scaling a business and successful execution and how do you identify them at the outset?

    Rob Goldstein: It’s something that we’ve thought a lot about, and I think the number-one ingredient for scale, funny enough, is having a tremendous amount of hope. And I know that seems like a very weird thing to say. I’m not someone who believes that hope is a strategy, in fact, I often will remind people that hope is not a strategy. But when I say “hope,” so many of the things that we did at BlackRock five, ten, fifteen, twenty, thirty years ago, people had hope and people had vision that we were building not for the tiny problem we had that day, but this was going to be massively big. So a big part of scale is a mindset of process, of technology, and of people, and importantly, it’s a mindset of always doing the extra steps required initially to solve the problem you hoped to have in five years or ten years, as opposed to the problem that you’re experiencing that day.

    Mary-Catherine Lader: You’re talking about hope in the context of building a business, but a lot our business is really about making other peoples’ hopes and dreams come true, by managing their money so they can retire, so they can send their kids to college. It’s still way too complicated. There are a lot of companies trying to use technology to simplify it. Do you think tech can help close that divide?

    Rob Goldstein: I actually believe this is one of the most important issues of our time, and I say that as a citizen of the world, not as an employee of BlackRock, in that when you look at the world today, the statistics around people saving and investing for their retirement, they’re actually sad. It’s actually a place where you really need to have a lot of energy to have hope, and a big part of the reason for that is, it is frightening today to figure out how to save, how to invest, and not have it seem completely overwhelming. And I say that, it’s frightening for me and I know what I’m doing. So for people who aren’t in this industry, I could only imagine how overwhelming it is for them. I think technology, if you really look at what has happened in this information age we live in, what it’s done, is it’s created an environment where people can learn on their own. They can learn on their own in their own way, on their own timeframe, and they could learn however they so choose. And I think the number one requirement that BlackRock has is to make sure we recognize that no matter who our clients are, if you look at BlackRock’s assets today, roughly two thirds of them are retirement assets. And that responsibility is a remarkable responsibility. But those people, many of them don’t understand what is actually happening, and I think the ability to help them understand what is happening is something that we have to spend more time and energy on, and we’re trying. But it’s hard. Because the reality is that the ecosystem of financial services today is really complicated. I’ll give you an example that’s a recent example that I personally experienced. I refinanced my mortgage a few months ago, and this is after the financial crisis, and after the financial crisis, there was unanimous support broadly on the requirement to simplify getting a mortgage, and make sure that the people who are getting a mortgage, mom and pop, understood what was going on. And I will tell you that the new revised documents are like impossible to follow. They are completely insane. They are not comprehensible by normal humans to be honest, I don’t know if they’re comprehensible by humans. And when you look at that, we have to be able to do better.

    Mary-Catherine Lader: In what timeframe do you think we’ll have an easy way to understand where your next dollar needs to go?

    Rob Goldstein: These are not problems that are solved overnight. I think that there is many forces that are bringing it together. I feel going back to the pension and retirement problem, companies feel a much greater responsibility to help their employees including through financial literacy. Interestingly, I think in a world of much lower unemployment, it creates more requirement for companies to really make sure their employees recognize the benefits they’re getting and value them appropriately. I think technology is an incredible enabler in this. I think that financial products are becoming more transparent, easier, I think the ability for example, to build a portfolio through ETFs is a major technology breakthrough that obviously is transforming the industry quite quickly. So when you bring all these things together, there is just enormous not only opportunity, but enormous change that is happening. But even when there is enormous change, it still takes a while for it to really impact and I think that it will get there. There are mechanisms for people of all different stages—you look at a tool for example like Acorns, and a tool like that is effectively helping with all of these things also for a very specific demographic of the market.

    Mary-Catherine Lader: So you’re an optimist?

    Rob Goldstein: I am an optimist. I started working at a company with 80 people and $19 billion dollars under management, so how could I not be an optimist?

    Mary-Catherine Lader: In the spirit of optimism and looking ahead to the future, I’m going to ask you if you think these things will be part of our everyday lives, and when, five, ten, fifteen, twenty years.

    Rob Goldstein: Awesome.

    Mary-Catherine Lader: Gene editing.

    Rob Goldstein: Ten years.

    Mary-Catherine Lader: The singularity, or humans merging with machines.

    Rob Goldstein: 10,000 years.

    Mary-Catherine Lader: Electric numbers outnumbering gasoline powered vehicles?

    Rob Goldstein: 15 years.

    Mary-Catherine Lader: RFID chips in our skin?

    Rob Goldstein: In the United States or other countries?

    Mary-Catherine Lader: Excellent question, how about China?

    Rob Goldstein: Pass.

    Mary-Catherine Lader: The United States?

    Rob Goldstein: Not for a long time.

    Mary-Catherine Lader: And on that note, thank you so much Rob for joining and sharing your story about BlackRock and how you think about FinTech today.

    Rob Goldstein: Great. Thank you.

    Mary-Catherine Lader: Tune into our next episode of The BID where we’ll demystify big data with Jeff Shen.

Midyear investment outlook
The key change in our outlook is that we now see trade and geopolitical frictions as the principal driver of the global economy and markets.
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