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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Private debt, private credit, direct lending. Why are these asset classes capturing investors' imaginations around the world? Are they a viable option for individual investors or restricted only to the large institutional investors?

In this episode. I'm joined by Jimmy Keenan, chief Investment Officer and global head of private debt for BlackRock. We'll dive into the enigmatic world of private debt. Ask why it's having a resurgence in these particular market conditions and explore the risks and opportunities that are inherent from this alternative asset class. Jimmy, welcome to The Bid.

Jimmy Keenan: Thanks for having me, Oscar.

Oscar Pulido: So, Jimmy, we're here to talk about, private credit and I'd like to hear more about what is this asset class, but also private credit, private debt, sometimes I hear the term direct lending. Are these all different asset classes or are they the same thing?

Jimmy Keenan: Thanks Oscar. Yeah, I would say when you think about private debt in general, it’s as simple as it is. They are debt instruments that are done in the private market and most of the world is used to seeing the public equity markets or, public debt. Think about Investment grade market or the broadly syndicated loans or the high yield market, those are all securities or loans that trade publicly, and dynamically where you can get information on those borrowers.

The private market is really just referring to a similar type of loan or risk, but it is done in, I would call it more of a bilateral private negotiation between one or a few lenders, with a borrower.

So, the terms of that contract or that loan may not be available to the broad public, as well as the information of that borrower or company may not be as public. And so that is a private, negotiation with that, and that's essentially all that means. The evolution of the private debt space, is continuing to grow and I would say it incorporates a lot, but it’s as simple as that - it's a loan that is done that is not done through a bank, and the information associated to it is privately placed and not well known.

Oscar Pulido: So, the information is known by fewer parties. that's one difference. The similarity is that it's a loan, in this case less a bank involved and more a private lender. And so, it sounds like there's, a premium that is earned by that lender. And so, talk a little bit about like the risks and return differences with this asset class.

Jimmy Keenan: If you think about it, if you're a company, if you are a real estate developer, you're going to look and say, how do I finance my company? Or how do I finance this building? And there are different ways you can do that. You can go to a bank and the bank may. put together a financing package, and they may go to the public markets to syndicate that out. And that's typically what you see in the public markets.

The borrower may look at that and say there are positives associated to that but in many cases, they may look at it and say, what are my other options? And they may seek out a private debt provider as somebody like a BlackRock that might step in and say we'll offer you directly something that will give you a different package, meaning a different way to finance that real estate project or a different way to finance that company.

In that situation, that borrower or that corporate may opt in to having a direct relationship with BlackRock or any other private debt and provider, as opposed to going through a bank which might get syndicated out and there might be 50, a hundred plus people that are in that capital structure. And so there are a lot of different reasons why a borrower might choose one or the other it's just a marketplace that exists.

Oscar Pulido: I think it used to be, and correct me if I'm wrong, but particularly maybe before 2008, banks were the primary lender, right? But then the financial crisis hit, and I'm also thinking about even more recently, some of the recent bank failures that we've seen in the US and abroad that, that this development of the private debt ecosystem has been going on for a number of years, but that 2008 was an inflection point. Is that the right way to think about why this market has grown?

Jimmy Keenan: Absolutely. and that's a well-known fact and quantitatively you can look through that just with regards to the size of the banking systems. And even today, you mentioned it before with regards to some of the bank volatility, you've seen deposit flights of up to a trillion dollars coming out of the banking system. You're seeing risk management change, in which case it's reducing the size and scope of the banks that's changing regulatory environments, risk management and so, for a company or a real estate developer or an infrastructure project, finance, that doesn't mean that they don't need the capital.

It just might mean that their traditional lender or somebody at the bank, that relationship they might have, might not be there. So, what you said back in 2008, we saw a huge gap in financing post

the Lehman crisis, in which case credit dried up completely. And so, if you are a corporation, a middle market company, a real estate developer, like your ability to access capital, dried up.

That ultimately built in the fact that the ecosystem changed, I would call it private debt providers started to build infrastructure on how to face sponsors, corporates in a different way, directly. In the same way most of them set up shops that they can call it up. So instead of in the early two thousands, if you wanted to borrow money for an M&A deal or making an acquisition, you generally called the bank that you had that relationship with. Now you might look at a handful of options It doesn't mean that banks aren't significant and probably the biggest providers of capital and credit, but it means there are other options that you can look through and again, goes back to, the last comment, the reason somebody might, do a floating rate loan or a public high yield bond or private, direct loan may vary based off of the situations and circumstances, both for that company, but also where we are in the

Oscar Pulido: And maybe you can expand on that a little bit. You've alluded to where the financing might be utilized for, you mentioned like a toll road and real estate, but who are these borrowers? and what are the trade-offs they're evaluating between whether to use the public markets or whether to go through the private markets?

Jimmy Keenan: And it's not just price, right? often you can sit and say, why would somebody pay a higher price? At the end of the day in some cases, pricing looks fairly similar, right? And some of the premium that you get in the private market is reducing the fees that might be paid, if going through a bank process and ultimately syndicating it out, so that is generally an earned premium that private debt investors might get. But there are a lot of other reasons why, if you're a middle market company, in order to think about operating their business, dealing with a publicly syndicated loan or a high yield bond, means that you have to engage with a variety of different investors that are in your capital stack. And in some cases, if there are periods of volatility or you're going to be active with acquisitions that may be more complex in managing your business.

And those small companies typically have smaller teams, and so in some ways that might be easier and better for them from a long-term perspective to have a single or handful of lenders that might be in that capital structure.

Another example might be companies that are going through transition. they might be in a late-stage development project that have yet to kind of see more stable earnings. They might be transitioning different contracts or parts of their businesses, in which case they prefer to either have, show that concentration or that shift in the private markets as opposed to in the public domain.

So are strategic reasons beyond. I would call it pricing or structural reasons, in order to do that. And so, the bigger companies, you'll see more of that opportunity where sometimes they might issue a public deal and then, yeah, at other times they might move that and shift that to the private market. And you've seen more larger capitalized companies that might either go public and private and there'll be some pretty big headlines this year on that.

Oscar Pulido: Okay, so you've defined the asset class a bit and we've talked a little bit about, why it's come of age, particularly over the last sort of 15 years post 2008. You've talked about some of the different types of borrowers. But in your position, you're sort of the lender, right? You're the one

providing the capital and you're the investor. So where do you see the best opportunities? Is it across the entire asset class or there are subsets of the asset class that you find interesting?

Jimmy Keenan: I think all investors should look at it, at the end of the day, every investor's going to be a little bit different between how they think about their own risk reward and that includes liquidity.

But you think about the private debt markets as a whole, this is something that, for all the reasons that we just talked about, was not necessarily as broadly available of an asset class to invest as somebody might want to build their portfolio.

And now that for all those reasons, that supply that's been unlocked and based off of what's gone on this year, is only going to grow substantially over the next several years is going to provide an opportunity for people to build their portfolios in a different way. And you think about the risk reward or even the risk characteristics of some of these and how they fit in somebody's personal strategy, that they should be looking across all of this, because it is something that they can get a premium.

I think there are a couple things that are really interesting today because of the supply dynamic. Obviously, that banking system turmoil was met with some policy response in there and liquidity that was provided.

And so, there's not a fire sale per se that is going on, but you do have a shift in how those regulatory and risk management have. And so, over the next several years, you're going to see balance sheet downsizing, and we see a significant amount in the trillions of assets that are going to have to be reduced from the banking system.

And what that means is, as that balance sheet is reduced. There are really good deals that are coming at a very nice spread per unit of risk, meaning the yield that you can get relative to that underlying risk is going to look very attractive. And so, the stable income type products based off of that supply dynamic, I think are really interesting across the entire ecosystem.

Oscar Pulido: Right. So, some of the investment opportunities are because of regulatory shifts that impact the banks and therefore mean, some of what's coming off of their balance sheet is now available to investors like you. And then some of it is just the last 12, 18 months of interest rate increases have exposed some companies.

You touched on institutional investors and also individual investors now both have ways to access this private debt market, but there's probably a lot of investors who are approaching this for the first time. So, what are the things they need to know?

Jimmy Keenan: Private debt is a very wide-ranging term, when you're entering the space or even viewing the public and private markets where are you trying to anchor your risk? What types of risk you're looking for? And if you think about. private debt being a core part of your portfolio. Then you have to think about any private assets, which is what's your ability, to have illiquidity in your portfolio?

How much illiquidity are you willing to have in order to garner those either differentiated risks or that extra premium that you might get in the private market. And then you go to the private debt strategies of which one do I want which one fits in?

So, liquidity is a big portion of that again, balancing what you need and what you're trying to accomplish with what is the strategy? And then what's the vehicle.

That's probably the first thing somebody should be looking for of matching what they're trying to accomplish and what they're ultimately doing. I think the other things then fall down into those strategies of what are you trying to accomplish in that?

Then you start to realize, okay, alright. I'm going to look for the certain product, now I got to look for the manager. There's a lot of different products, there's a lot of different managers. But trying to find a product that you can kind of look through that it has a history, you want to look through that track record of that team, that product, to understand, has this historically acted in the manner that I'm thinking about investing or underwriting to and is the future of that consistent with how I want to invest?

Because at the end of the day, like if you're going to make that investment, you're in that product or in that manager you want that output to have a similar, return profile and potentially volatility profile that you're looking for in your portfolio. So those are like the two main things that I would recommend people try to dive into.

Oscar Pulido: Jimmy, you've been associated with the fixed income markets, your whole career and, particularly in credit and both public and private markets. you've, you're obviously very excited about the opportunity in private markets. So, take us five years ahead. What is, what does this space look like or beyond, maybe, if you can see that part? ahead?

Jimmy Keenan: I think it's something that has become far more of a common name associated to how people think about it, private equity 30, 40 years ago might not have been thought of the same way it is today.

So, I think, five years from now, people are just going to view this as part of their allocation in the institutional and the retail markets. I think from today's standpoint, like 2008. It's hard not to get excited, at the end of the day you have both a supply, a significant supply shift that is going on because of what's happened and what we just talked about in the banks, where trillions are going to come out, and a lot of those trillions are actually good deals, but the funding source of that from a banking system is changed, in which case they're now going to make their way to probably both the public and the private markets. That's a huge supply that it's going to ultimately come. That's going to grow demand, right? At the end of the day, it's going to create capital formation because you'll step into good deals and good financing and stuff like that.

So, from a business perspective, this is a huge opportunity that is going to be multi-years. and I think that because policy shifted, and we've seen this since the financial crisis where most central banks and governments around the world are acting quickly to try to continue to mitigate that risk of a significant credit crunch that dries up in economic activity.

So, I view this as something that is going to be significant for our clients and our investors, it's an opportunity to grow a strategy that they can ultimately get outsized returns relative to the risk profile. So, it's hard not to get excited about.

Oscar Pulido: Well, it's been a couple years since we had you on the podcast. We'll try to, not have it be that long of a gap this next time and that way we can. See whether your predictions are coming true So Jimmy, thank you for joining us on The Bid.

Jimmy Keenan: Thanks for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out the episode, 'Are you leaving Cash on the table?' Featuring Beccy Milchem, where she provides the top three things to consider when thinking about cash and volatile markets. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

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MKTGSH0823U/M-3067972

Claire Chamberlain: 39% of all Americans could not afford a $400 unexpected emergency expense and when you break it down further by gender and by racial demographics. The numbers are even more stark.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido. In an era of economic challenges and uncertainties, having an emergency savings fund is a financial lifeline that can provide peace of mind. During turbulent times, yet statistics reveal a startling reality.

66% of the US population lives paycheck to paycheck. And lacks adequate savings to weather, unexpected storms. The problem is not limited to the US, and it seems to only be getting worse. Is there light at the end of the tunnel to find out the answer to that question and how both the private and public sectors are trying to resolve the lack of emergency savings?

I'm pleased to welcome Claire Chamberlain, global Head of Social Impact at BlackRock. Claire, thank you so much for joining us on The Bid.

Claire Chamberlain: I am delighted to be here, Oscar, it is a pleasure.

Oscar Pulido: Well, Claire, in your role as Global Head of Social Impact at BlackRock, you come across a wide range of social and economic issues. So, tell us why emergency savings is so important to you.

Claire Chamberlain: Well, when we think about our work, we start with the core purpose of BlackRock, which as you know, is to help people build financial wellbeing and security over a lifetime. And with that as the going in philosophy, we said to ourselves, how can we advance that purpose? And building financial wellbeing is aspirational for far too many people because if you're living day to day paycheck to paycheck, that is something that is very hard to come by.

And so, in thinking about how do we help people get closer to that aspiration, emergency savings is a topic and a focus that really has emerged over the last couple of years.

Oscar Pulido: How big of a problem is this or are there any numbers that would allow us to quantify when we think of what an emergency savings pot looks like?

Claire Chamberlain: So, in 2017, for the first time, the Federal Reserve published a report which outlined the financial precarity of American households. In that report there was a statistic that was really a wakeup call for many people. And the statistic was 39% of all Americans could not afford a $400 unexpected emergency expense.

And that was not just people living under the poverty line, but all Americans. And in fact, that number, when you break out people living on low and moderate incomes was 58%. It's a big number affecting a lot of working families and it was much larger than people anticipated.

Unfortunately, while there had certainly been improvements in the labor markets since 2017, there was a report released this past May where the number showed some improvement, now 37%, but again, this is of all Americans and when you break it down further by gender and by racial demographics.

The numbers are even more stark. for low- and middle-income families, who are Hispanic is over 70%. And for black families it's 72%.

Oscar Pulido: So, the numbers are surprising because the percentages are high, covers a pretty meaningful part of the population, but also the emergency expense that you outline $400. It doesn't feel like a lot has to go wrong for all of a sudden somebody to have a $400 bill. So now what is the impact on individuals, businesses and then the economy? because it's not just affecting the individual who has that unexpected expense, it must reverberate even broader?

Claire Chamberlain: Absolutely. You can think about it top down or bottom up and either way it's, currently a pretty grim situation. $400 is not a lot for a hiccup, an unexpected expense, whether it's a car breaking down, an unexpected medical bill, increasingly in our country, natural disasters and when you don't have that cash cushion readily accessible on the sidelines, you have to resort to really costly alternatives like payday loans, or even dipping into your 401K retirement account.

And we know that not only comes with penalties, but it means then you've diminished the body of investible assets, which hits you down the road as well as in the near term.

That's the individual level, in addition to families it also impacts employers. And we know that the productivity loss due to financial stress is as much as 15 hours per week per employee, which turns out to be an estimated $5 billion to employers in this country on a weekly basis.

So, the numbers are big and they're numbers, frankly, that employers have started to acknowledge and take action to try and remediate.

Oscar Pulido: And I know BlackRock has been doing some research on this topic, maybe you could share a little bit of what are the findings of that research?

Claire Chamberlain: So, the BlackRock Foundation, is focused on, financial security. During COVID there was a pretty unique opportunity to study the impact of that material economic disruption on individuals and families. So, working with one of our nonprofit partners, Commonwealth, we were able to do some research around how did having liquid savings, impact your ability to weather the disruption of the pandemic? One of the findings that emerged is that people that had less than $2,000 of liquid savings available to them were twice as likely to tap into their retirement account prematurely. So that described a pretty direct connection between liquidity and being able to build for the long term.

Oscar Pulido: And you've mentioned that twice now it's an important thing, which is people have the money to draw now, but they're now foregoing a more comfortable retirement so they're just trading off one problem for the next. Is this a US issue only then? Because as you're describing this, I'm wondering if there are other countries that are also experiencing something similar with a lack of emergency savings.

Claire Chamberlain: Well, I'd love to tell you this is isolated to the United States. It is not. And in fact, we have been working with partners in the UK, Nest Insight in particular, which is the research arm of the Nest Pension Scheme, which is Britain's Public Pension Program and the stats over in the UK in some ways are starker than the stats here, Nest Insight did research that showed one in four citizens in the UK could not come up with a hundred pounds fund for an unexpected expense. So, the UK and the US among the wealthiest countries in the world, there was further research done again coming out of Covid that has shown that countries that are lower- and middle-income countries, the implications of economic disruption of interruption in wages, for instance, people have far less to fall back on. And so, the problem we've described here in this country is by no means unique.

Oscar Pulido: That's interesting, you said a hundred pounds or a hundred sterling. That's a lot less than even $400, which you mentioned in the US. So, the bar's even lower to an individual in the UK for, that lack of emergency savings to really hit them.

You've painted this problem that is clearly prevalent in some pretty major economies. When you look ahead, what's that light at the end of the tunnel that you're seeing?

Claire Chamberlain: Well, there is light at the end of the tunnel, because there is an endless amount of innovation that as humans that we are capable of and it's happening, in trying to address, this financial precarity. One of the things that we found, with our research and with the people who were interested in partnering with us, is that the workplace was a very receptive arena for exploring how do we address this financial stress and vulnerability that workers feel. And employers and those that support them, like record keepers and payroll providers and other financial institutions, they have a lot to gain from trying to crack this I mentioned $5 billion a week in lost productivity, well that turns out to over 250 billion a year.

So, the incentive to try and not just chip away, but to pivot in a meaningful way is definitely there. And shortly after those early Fed numbers were published, BlackRock founded the BlackRock Emergency Savings Initiative to try to begin to address the problem and to encourage and spur innovation. And we really wanted that innovation to take place across channels, meaning we wanted to see it with large scale employers and with record keepers, fintechs and payroll providers because we didn't know enough to pick the horse but we thought our hypothesis was the more demonstrations and pilots we could get out into the marketplace with workers, the greater our chances of making a difference and taking friction out of that effort to build short-term savings.

Oscar Pulido: And this BlackRock initiative that you mentioned, the emergency, savings initiative was 2019, I think is when it started. It's four years later we've lived through a pandemic during that period. So how would you say it's going, and can you give some examples? You said a couple of things, record keepers, payroll providers. Are there some examples of some of these stakeholders that you've worked with and things that they're doing?

Claire Chamberlain: So, a couple of things. The initiative, at the end of last year marked its completion of phase one, and we published a learnings report in June of this year. I'll share a little bit more about that later. but in the report we do highlight case studies of partners that we worked with among them are Voya, who was the first record keeper to join the BlackRock Emergency Savings Initiative, and they were working on making available an after tax liquid savings account that people could, when they set up their retirement plan contributions, could also indicate that they wanted to build some short term savings where they could, access it whenever they wanted to without penalty.

UPS also came on board, and they did a whole internal marketing refresh on their emergency savings account and as a result of that using some insights that we have gathered from behavioral economists, they were able to increase usage by 40% of people who were offered that opportunity to build short-term savings.

Another key partner, ADP is a payroll provider, they provide payroll services for one in six Americans, and they created a savings sleeve on their pay card app and that resulted in $1.5 billion dollars of new savings, so pretty significant adjustment to an existing product that had meaningful uptake.

And then finally, another partner was AutoNation which employs over 20,000 people across the country. As an employer, they recognized they have a very diverse workforce they didn't want to just put one offering in front of their employees so they are in the process of testing three different offerings you could do a split deposit right from your paycheck. Or you could build this liquid savings on a payroll card, or you could do the savings sleeve that's adjacent to the retirement product.

They're going to let you decide as an employee and you could pick some or all of those offerings. We've really had the privilege to see this take hold directly with workers, but as provided by employers or, companies that support those employers.

Oscar Pulido: And all these examples you mentioned. It's not that people can't save, but sometimes you just have to make it easy for them. You have to provide some convenient method to do it. We all have good intentions, but sometimes we just need somebody to point us in the right direction. And that, that seemed to be like a commonality and all these examples that you just discussed.

Claire Chamberlain: Absolutely. Ideally, it's set it and forget it, or it's have it set for you and forget it and watch it build. But that's exactly right. One of the key learnings from the Emergency savings Initiative is that people even, who are living on low and moderate incomes they can save if you give them the right tools at the right time, like the point of payroll, they can save money and that even saving small dollar amounts can have really significant benefits for individuals and families. And that kind of goes back to that notion of, gosh, if you only had $400 more and you need a car repair so that you can keep going to work so you can keep earning money because you're an hourly worker, it's that either virtuous or counterproductive cycle. And building up that small dollar savings is super important to people.

Oscar Pulido: And that story you just gave is very real, the hourly worker whose car breaks down. And boy, you said if they just have that $400, it really changes their day-to-day pretty significantly.

Claire Chamberlain: And probably the child that they're dropping off at daycare as well.

Oscar Pulido: Voya, ADP, you mentioned some of these partners along the way with the Emergency Savings Initiative. Those are private sector companies, but let's talk about the public sector. In the US there's been some legislation, the Secure 2.0 Act, how does that influence this emergency savings topic that we've been talking about?

Claire Chamberlain: The legislation secured 2.0 that you mentioned was passed in December with bipartisan support which is terrific. The thrust, the primary thrust of Secure 2.0 is to encourage more and more employers to offer retirement plan programs to their employees and to encourage employees to take advantage of those programs. As relevant to the conversation that we're having here today, there are provisions in Secure 2.0 to make it easier for employers to offer an emergency savings options to their employees.

So, there are two non-mandated options that employers now have to help employees build emergency savings. The first is a $1,000 emergency withdrawal that they can make in a year from their 401K or equivalent retirement account, and they can make this without penalty. The second option is a $2,500 emergency savings account, which is linked to the retirement account and has automatic enrollment option, meaning the employer can set that up so it just automatically funds from payroll go into this $2,500 emergency savings account, which then sits alongside the retirement account.

The auto enrollment feature is the first time we've seen this in use with respect to this liquid savings, and we think it really has, a lot of incredible upsides because we know from auto enrollment participation that we've seen with retirement accounts it makes all the difference in terms of, really amplifying usage among participants.

Oscar Pulido: And it just goes back to encouraging good behavior, people want to do it, but you need to almost set it up and then we're off to the races,

Claire Chamberlain: And just let it build. And then, having this account that you can use as necessary without penalty. And that's really the secret here. We think there is a lot more innovation still to be done because Secure 2.0 is set up with this account being in plan, meaning it's linked to the retirement plan, but we know that there's an opportunity down the road to set up something similar for employees that are not saving in their retirement account but still have those needs to build emergency savings.

Oscar Pulido: So that'll be one of the many next steps that is coming from this. So, you've touched on the private sector, now the public sector in terms of how it's trying to address the issue. How should an investor be thinking about this issue when it relates to their portfolio and they're putting money to work in the market?

Claire Chamberlain: I think one of the things that's been so exciting about this work are the results but through, our partners we're able to reach 10 million Americans and build $2 billion in incremental new liquid savings which is a fairly unprecedented impact metrics from a philanthropic endeavor and so we're very proud of that.

But back to your question, I think what that shows is there's real appetite for building liquid savings and there is real ability to do that if employees are offered, back to right product at the right time. And as an investor, I would think about, are the companies I'm investing in, what kind of prioritization are they making of the financial health of their employees, and emergency savings is a part of that. So, if you're an employer like AutoNation really thinking in a very 360 way about your commitment to your workforce, that’s the way I would take this perspective and translate it to my portfolio.

Oscar Pulido: All else equal, a happier workforce is more productive, more productive business is more profitable, and you can then put yourself in the mind of that investor. And I want to be invested in companies like that.

Claire Chamberlain: And sustainable over time!

Oscar Pulido: Claire, what brought you into this field of social impact? Hearing you talk about this topic, it's obviously a passion of yours, but where did this passion start?

Claire Chamberlain: I have always, gravitated towards important work, and I've always gravitated towards organizations that I think have the standing in our world to really drive important work.

I first started my career in finance and over time, had opportunities to get involved in philanthropy and into venture philanthropy and from that came, here to BlackRock and have been involved in the setup of our strategic philanthropy commitments and program and how we support our employees and how we show up in our communities. So, I feel very fortunate for the opportunities I've had.

Oscar Pulido: well, we're, fortunate to have learned a lot about emergency savings, the issue that it is, and how we're trying to fix it. Thank you for joining us on The. Bid.

Claire Chamberlain: Thank you, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our retirement miniseries featuring Anne Ackerley, discussing how to plan your roadmap to retirement. Subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3056091

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

When big events happen in the markets, or even in history, analysts, economists and journalists set out to discover what led to those events, often working backwards, organizing a chain of events into a logical timeline. But on the flip side, accurate forecasting is a far harder skill to master, and our guest today suggests that the same deciding factors we see so easily in hindsight could in fact be easier to see in the present if only we looked through the right lens.

Peter Atwater is a behavioral economics pioneer and professor of confidence driven decision making at William and Mary and the University of Delaware. His latest book, the Confidence Map examines the hidden role of confidence in the choices we make and why events described as being unprecedented are often entirely predictable.

Peter, welcome to The Bid.

Peter Atwater: Thanks so much, Oscar. Glad to be here.

Oscar Pulido: So, Peter, congratulations on publishing your book, the Confidence Map. It's your second book, if I'm not mistaken. So, in this book you mentioned control and certainty as these two variables and you describe a visual graph of four different sectors, so can you walk us through what that graph is and what it's intended to show?

Peter Atwater: As I was trying to write this book on confidence, I discovered that to most people they know what confidence looks like when they see it, but they have a hard time explaining it, and it becomes this random word cloud.

And as I did more research, what I found was that the feelings of certainty and control that we have are really what drive our behavior. That confidence is how we see ourselves faring in the future, we need there to be a sense of predictability and certainty to what's ahead, and we need to have a feeling that we're prepared for it, that we have a sense of control. What I did was to develop a relatively simple framework, it's a two-by-two box chart, a quadrant that looks at the different, magnitudes of certainty and control that we experience. So, the four boxes, there's the comfort zone where we have both certainty and control and the stress center where we lack both of them. And those are what we think of when we think about confidence.

The other boxes are hybrid environments. you'd be familiar with what I call the passenger seat, where we have certainty, but no control. Anytime we're on an airplane or in a cab that's the environment that we're in. And then the fourth environment is what I call the launchpad. Where we have control, but the outcome's unclear to us and in the world of financial services, every decision that we make, whether it's to lend, to borrow, to invest, are all made in that environment where we have to imagine what's ahead as we're making the choice today to enter into a transaction.

Oscar Pulido: Well, I'm taking an airplane later this week so I, I will definitely be in that passenger seat part of the quadrant. But maybe as you describe those four quadrants, how do people make decisions when they're in each one of those quadrants? You described it well but take us through the decision-making process for individuals in those four boxes.

Peter Atwater: So, no matter what box we're in, we have to recognize that we're making decisions where we're imagining the future and that imagination becomes critical. It involves the stories we tell and then the outcomes that we imagine based on the choices that we're making.

When we're in the stress center though, where we have a sense of vulnerability, and we don't think of it this way, but vulnerability is the opposite of confidence. We crave familiarity, we need things to be certain. When we feel vulnerable, something's wrong.

And so, what happens in that lower left box where we are in the stress center, is that our decision making takes a very narrow focus. I focus on myself. I focus on right here, and I focus on right now. I don't care about the future, I don't care about others, and I don't care about the places that are distant from me. If there's turbulence on your airplane flight later this week, the only person you're going to care about is you in that moment.

And this has a big bearing then on the choices we make, we see this in the investment world where people out of nowhere suddenly decide they want to hoard cash. They're craving that certainty. We saw the same thing during the early days of Covid where people were hoarding water and wipes and the things that we needed to address the, the vulnerability that we were experiencing. And so that focus alters what we want and in turn what we do.

At the other end of the spectrum, we're a very different person. There we tend to be focused on, what I say is 'us, everywhere, forever'. Where we're generous, we're cooperative, we explore, we're interested in the future, and we're planning for the future. And you can see this in the investment world with the kinds of things that we invest in when confidence is really high, they’re oozing with abstraction. We saw this in 2021 with the whole focus on eVs, space and, NFTs and crypto.

And today I think we're seeing a similar phenomenon with AI where we're so interested in opportunity and that's the antithesis of what we think about in terms of possibility versus familiarity.

Oscar Pulido: That stress zone you described certainly sounds like not a great place to be in, at least not for an extended period of time. But I can't help but think that if you're in that upper right quadrant, that high confidence, high certainty, it sounds really compelling, but could you be overconfident? Isn't there something healthy about, maybe a little bit of uncertainty that keeps you somewhat cynical, keeps you asking questions, keeps you intensely curious. How do you think about that upper right quadrant not becoming also a hindrance to the decision maker?

Peter Atwater: So, when we're in that upper right-hand box, we forget that scrutiny and confidence are inversely related. The more confident we are, the less we pay attention because we don't think we have to. And so, our cognitive processes are inherently lazy, and that laziness is a disservice to us when we're really confident because we're not paying the kind of attention that we should be. The result is that we take too much risk in too great a size while at the same time paying the least amount of attention. And as you imagine, those three things together often are what precipitate a crisis that then follows.

Oscar Pulido: So how does somebody then, who finds themself in a certain quadrant, what changes do they need to make in their decision making to migrate from one box to the next or what have been your observations of how people adeptly move across these four quadrants?

Peter Atwater: The first thing is to recognize that confidence isn't a one and done experience. The self-help world would like you to believe that once you have confidence, you're going to always have it. And so, we're constantly moving around, and I think it's always helpful for us to pause before we're making a decision to step back and say, so where am I?

Am I feeling certain and in control, am I feeling vulnerable? Because that's then going to give me clues in terms of what things I should do better. For example, in the stress center, we're as likely to be under confident there as we are overconfident in the comfort zone, and so we need to be careful and to take more risk rather than less risk when we are feeling vulnerable.

And that's very counterintuitive, that really fights against our gut, particularly in the finance world. But panic tends to be an experience that should lead us to be more optimistic than we are. Panic tends to be a behavior that reflects that the worst is behind us, not ahead of us like we imagine it to be. So that's one of the things we need to do.

In the launchpad, we need to be careful about our imagination of the future because if I have control, but no uncertainty, I'm likely to make a choice based on what I imagine. And particularly in the finance world, we need to be open to both sides of the potential outcome that's ahead.

And if you are certain of an outcome, that's God's way of telling you, you're either being too pessimistic or too optimistic about what's ahead.

Oscar Pulido: When you think about like high performing individuals or some of the people that you've come across, do they rotate across all four of these quadrants and that's okay. or do like high performing individuals, people in leadership positions, whether that's in the public or private sector, do they typically operate in only one or two of these?

Peter Atwater: No, so what I find is people who are resilient recognize that all four of these boxes are going to happen. So, it's not about avoiding a box, it's more about recognizing that I'm going to be in the stress center, I'm going to be in the passenger seat, I'm going to be in the launchpad. That those are a natural part of a business cycle of a life experience.

And so, their focus isn't on avoiding those, but getting comfortable in those boxes. And to appreciate that they're not going to be there forever. I think one of the mistakes a lot of inexperienced leaders make is that they get themselves in the stress center and they become paralyzed, they feel like it's never going to end.

Somebody who's resilient recognizes as oh no, this is today. and what I'm going to do when I'm in that box, and this is where the high performers, I think really differentiate themselves is that they pause to say, what can I do, what must I do to regain certainty and control? Both of those are very actionable and interestingly, one of the best things people can do is to ask for help. Asking for help isn't weakness, it's actually taking control of the situation.

Oscar Pulido: Right, and that leader who finds themselves in the stress center and knows how to cope with it, it's almost going back to an earlier question, right? The leader who's in the comfort zone, perhaps the really good leader recognizes that now is a good time to ask questions of what could go wrong or what am I missing, and to not develop overconfidence, but to be almost like a healthy paranoia, I think is how I'm picturing somebody who knows how to properly, navigate being in that box.

Peter Atwater: Yeah, they're never complacent, they're always anticipating something that could go wrong and they're not of it. They're not being doomsday about it it's a much greater awareness of the fact that conditions change.

I think about at the other end of the spectrum, some of the most interesting conversations I've had have been with, emergency room doctors. The stress center is their day, and they spend their day going back and forth and back and forth, and their behavior in the stress center is so different from what particularly in corporate leadership. If you listen to emergency room teams, they're talking candidly about what's wrong. they're sharing information. They're not focused on what happened as much as what is, so there's never a concern about blame or shame.

It's like, look, this is where we are, and all of the energy is focused on resolving not only the problem, but the vulnerability arising from the problem. In the medical world, the difference between curing a patient and healing a patient is the restoration of confidence, the elimination of the vulnerability that patients feel. And I think sometimes leaders get themselves so focused on the problem, what's broken, what's crashed, what's burned, and they forget that what makes something a crisis isn't the problem, but the feelings that arise from the problem and that as much attention needs to be given to those feelings as to the situation itself - because the crisis won't be done until those feelings are restored.

Oscar Pulido: And an emergency room doctor, certainly emotions run high in a hospital or any sort of medical setting. Maybe bringing it back to markets because emotions can run high with markets as well, and you talked about Covid and some of the behaviors that we saw during the Covid era, or you talked about hoarding cash, especially in stressful periods for markets where investors, don't want to lose money. When you think, about some of the recent market shifts in history, how do you apply this frame, these four boxes, to how investors react?

Peter Atwater: So, if we look at what happened with the regional banks earlier this year, you could see that sense of panic people moving rapidly into the stress center. And I think one of the things Oscar, that's so unique about today is the speed and scale at which groups can mobilize and translate changes in sentiment into action. Between social media and online trading, what we're seeing is these microbursts of energy and I think that in investors today need to appreciate that the speed at which markets are moving up and down, arguably meme stocks represent the behavior at the other extreme, is that we're seeing this highly impulsive, highly emotional behavior at both ends of the spectrum. and to not fall victim to it. As I've said, panic is a sign that we're approaching the

lows in confidence. It's not a time to be afraid, but a time to be preparing for a turn that's likely to happen imminently, and the same things with manias. Don't become seduced by the siren song.

Oscar Pulido: And it makes sense and I think about Warren Buffet and be fearful when others are greedy and be greedy when others are fearful. It's kind of what, you're touching on, being sometimes a contrarian, you know, Hopefully the emergency room analogy that person is a well-trained, professional who knows how to control their emotions. But it seems like in markets people have trouble controlling those or have you witnessed something differently?

Peter Atwater: So, what I found is that individuals may have a hard time controlling their own emotions. It's very helpful for them to use the framework that I have to identify where is the crowd today, where are others? And it's remarkable to me how quickly we can spot where the crowd is on this quadrant. And just being able to objectively say the crowd is panicking allows you to take what would otherwise be a highly subjective and emotional phenomenon and look at it almost clinically. And that then allows you to make decisions in a much more really decisive and definitive way that allows you to have distance between, your own emotion and actions.

Oscar Pulido: And that then speaks to how investors can use those insights, knowing where the crowd is in those four quadrants is what allows you to make that, forward looking decision in your portfolio. That is what sets you apart from the crowd. And if you do that, that's usually where you generate better performance.

Peter Atwater: Yeah, and there are three dimensions that are easy to identify because at all locations. Our confidence, those feelings of certainty and control, our actions and our stories exist in equilibrium. So, I can look at where the crowd is in three different ways. What are the headlines that we're seeing in financial television and or, what are the actions that we're seeing people buy? As an economist, we talk a lot about elasticity. I think we overlook something called confidence elasticity, which is to say, how does confidence drive the choices we're making? And there's a high confidence elasticity for cash, for example, when confidence is low, that's when we demand it most.

And just knowing that the range of investments that we're going to buy is a function of our level of confidence allows me at all times to spot where the crowd is. Because what's hot in the minds of investors is revealing their level of confidence. Are they stampeding into cryptocurrencies or are they stampeding into cash? Those are things that I see at the two ends of the confidence spectrum.

Oscar Pulido: Peter, when I think about investors, I'm thinking about mom and pop and the individual investor, but have you worked with what I'll call professional investors, portfolio managers, people who do this for a living, who wake up every day and are thinking about what stocks or bonds to buy, and if you've worked with those folks, how do they think about this confidence map, the four quadrants, and what do you observe in these individuals?

Peter Atwater: So, most of my clients are institutional investors, and in the same way that they're looking at economic data, they're looking at, industry data. They're using sentiment as another overlay. And so, what they're interested in is that the indicators of sentiment that I identify as being representative of things that might be important to them in their portfolios.

So, for example, looking at the behavior in luxury today and the excesses that we're seeing there and how is that different maybe from what we saw a year or two years ago? Because, cultural trends,

from the music we listened to, to the TV shows that we watch have a bearing on our behavior and they reflect how we feel. The media is an enormous mirror of our mood.

Oscar Pulido: And Peter, just taking a step back, maybe I should have asked you this at the beginning, but why is this topic of confidence something that you have dedicated So, much time to? Just curious as to what is it that got you interested in either this particular topic or maybe even just behavioral economics, in the first place?

Peter Atwater: As somebody who spent the first part of his career in financial services, I had never really considered the role that emotions play in the choices that investors make. I sort of missed the forest for the trees. During the financial crisis, it became clear to me that we made a series of choices to borrow, to lend to buy homes that were in characteristics completely different in 2007 from 2009. And so, what I wanted to do was to understand why did we make those decisions? Were there characteristics that were universal? That while the means may change, what are we doing differently and consistently from crisis to crisis, from euphoria to euphoria. Twain says, history rhymes and I wanted to know why. And what I found was that the behaviors that we exhibit all act in a very consistent way based on our level of confidence, and this is something that exists not just in the markets, but outside of the markets. The trends in fashion, repeat the trends in architecture, repeat the trends in politics, repeat. There's so many different ways that confidence sets up what we're doing outside of the markets that then become useful to investors in the markets.

Oscar Pulido: So, some of that you had real world experience, working in financial services and now when you stepped out into academia, you had an opportunity to just see the role that emotion plays in markets. And I think for certain, anybody who's watched the markets this year, or even over a longer period of time, could attest to the fact that it is an emotional, exercise investing and those who can control it probably do a better job in the long term. Peter, we appreciate you joining us and sharing with us your framework. congratulations again on your second book, the Confidence Map. And thank you for joining us on The Bid.

Peter Atwater: Thank you so much, Oscar.

Oscar Pulido: Thanks for listening to this episode of the Bid. Subscribe to the bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

For more information go https://www.blackrock.com/corporate/compliance/bid-disclosures

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3026434

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today we continue our best of summer series, which means I'm joined by our Bid producer, Stevie Manns. Stevie, this is becoming a nice little pattern, having you on the podcast.

Stevie Manns: It's fun. I'm enjoying my Bid debuts.

Oscar Pulido: So let's keep going through some of our favorite episodes, of this year and I think it's my turn.

Stevie Manns: It is your turn, and this is the final one.

Oscar Pulido: Okay. I was thinking back to earlier in the year in March when a seemingly quiet week in the markets turned into a lot of headlines around Silicon Valley Bank, a bank that I had not really paid a lot of attention to in the past, and it was a reminder that markets are stable until they're not, and all of a sudden we have a lot of volatility to talk about.

And we had to spring into action to record an episode with one of our favorite guests, Alex Brazier. Alex is the deputy head of the BlackRock Investment Institute, and Alex came on to talk to us about why these events that were occurring at the time in March were not like 2008, because I think a lot of us feared that it was a repeat of the global financial crisis.

Stevie Manns: Yes, we had to spring into action, like you said, we're speaking about it on Monday, we recorded it Tuesday and we put it out Wednesday. And to your point, there was a lot of panic about are these events the start of another 2008 crisis? What's going to happen next? Is this just limited to the us? Is this going to happen across the globe? And as you say, the market panic seemed to be everywhere.

Oscar Pulido: Exactly, and having lived through the 2008 financial crisis, I was reminded of how there are probably a lot of people who don't really understand how a bank works until it fails, and it really is, the banking model is all built on confidence and Silicon Valley Bank.

And we subsequently recorded a few more episodes in the weeks ahead, but Alex's was really the first one that reminded people that a bank is built on confidence and when, depositors deposit their money with a bank and the bank goes out and, invests it in an asset, when that asset,

underperforms, when it behaves a certain way, it can be difficult for that bank or perhaps impossible for them to pay their depositors who want their money back the next day.

And so to me it was like people, they walk by a bank, they drive by one, they go in one. Probably pretty frequently or they interact with one, but do they really know how it works? And this crisis reminds people just like the basic functioning of a bank.

Stevie Manns: And the way technology has changed, now that you're able to access your funds and your money so much quicker, and to some extent that exacerbated some of these circumstances. It was unprecedented in some ways and no one really knew how this would play out.

Oscar Pulido: And let's be honest, Alex is one of our favorite guests. You and I talk about this pretty often. I think maybe he's only made one mistake ever when he did a recording for us. He's very eloquent. Everything he describes makes a lot of sense, he can take very complex topics and make it easy for people to understand. So anytime we have Alex in the studio, it's just always a pleasure to listen to him.

Stevie Manns: Fabulous storyteller. And you're right, a one take wonder!

Oscar Pulido: Well, you get to hear his voice again. Here's Alex Brazier.

Oscar Pulido: Alex, we're both sitting here, it's Thursday, March 16th, financial markets have been spooked by events, in the banking industry on both sides of the Atlantic. so, can you just explain what's happening and what led to this crisis?

Alex Brazier: It's been, an eventful week, I suppose. The story goes back some way, but before we look in depth at the last week, I think it's useful to remind our listeners that really what's happening here is that the fastest rate hiking cycle since the 1980s was clear that was always going to cause some economic damage and expose some cracks in the financial system.

And what we've seen in the last week is those cracks actually beginning to appear and as we'll come on to discuss, that means more of the economic damage is yet to come.

So that's really the scene setter, the sharpest fastest rate hiking cycle since the 1980s. But then what actually happened over the last week, well, really useful to talk about three things that have happened.

The first is what happened with, Silicon Valley Bank and US regional banks. Then what did the authorities do? And perhaps, the third thing, bringing us up to date is how it's rippled across the Atlantic to European banks.

And starting with the first of those, US regional banks. What really happened at Silicon Valley Bank, well, it was a bit of an outlier in two important respects. The first is that it had a very large share of its deposits, greater than USD250,000. So, they're uninsured deposits, and those are typically more flighty and more likely to, be withdrawn in stress than insured deposits. And the second thing it had in which it was an outlier, was that it had a very large book of US treasuries and mortgage-backed securities. And of course, as interest rates have gone up a lot over the last year, the market value of those securities has fallen a lot.

Now, Silicon Valley Bank hoped that it wouldn't have to sell these securities. It hoped to just hold them until they matured. But to link these two outlying characteristics together, a lot of its depositors were spooked and asked to withdraw their money, and as a result, it was forced to sell some of these securities at today's market prices and realize some of the losses. That meant that more depositors withdrew their money as the bank realized some losses. and so, it entered this kind of spiral, downward and the authorities then stepped in to take control of what was at that stage, a failing bank. The issue of course, then prompted depositors, particularly uninsured depositors, to withdraw money from other regional banks like Signature Bank, and the authorities stepped in there, as well.

So, what did the authorities do when they stepped in? Well, they've seized control of these banks written down the equity, and they've protected the insured deposits as they normally would. But very importantly in these cases, they've also used what's called a systemic risk exemption, which allows them to protect the uninsured deposits as well.

So, these banks failed, over the weekend and on Monday morning, all the depositors. Whether their deposits were insured or previously uninsured had access to their money on Monday morning. So, the authorities have dealt with these banks not by giving a bailout to the shareholders. This isn't shareholder friendly, but by protecting, the depositors in those banks, so that was the US authorities.

And then the third aspect really of what's happened in the last week is that the crisis has rippled across the Atlantic. And it's not that European banks have in any way the same underlying issue as these regional US banks. And they're not directly connected either, but there is a channel of contagion, which is that following what happened in the United States. Markets are now applying greater scrutiny to banks around the world, including in Europe, and they're applying greater scrutiny to banks that have challenges or even where those challenges have been going on for years.

And as a result, we've seen market confidence and volatility in Europe, we've seen the Swiss National Bank step in with liquidity support for one of its banks, Credit Suisse, and so we see how this evolves from here.

But it's important to note that we don't have the kind of contagion channels that we had in 2008, but there is still this contagion channel across the Atlantic where markets are now looking at banks differently even where they don't have new challenges.

But I just go back to the root cause of all of this, which is the fastest rate hiking cycle since the 1980s, which was always going to cause some degree of damage and expose some financial cracks. And that's really the underlying root cause of everything that's gone on in the last week.

Oscar Pulido: Alex, you mentioned 2008, which is hard to believe it's a decade and a half ago, but the headlines of the past week, for those of us who lived through 2008 and that crisis, it's hard to not try and draw comparisons, and during that financial crisis, you were part of the team concerned with financial stability at the Bank of England, so you were in the thick of it then. How do you see what's gone on over the past week compared to what happened in 2008?

Alex Brazier: There are uncomfortable echoes of course, anytime you get any sort of problem in the financial system but there are some really important differences this time, which mean it's not quite the same.

The first really important difference going to what's happened in the US is that, back in 2008, the issue was really exposures on banks, balance sheets, subprime mortgage exposures that were really opaque, really difficult to find where they were, figure out how much they were worth... and so there was a lot of uncertainty across the banking system about who was holding the problem assets. And so, the contagion spread through the system as people lost confidence in all banks.

And the only way to solve it was effectively to dig into banks’ balance sheets with the stress tests at the time, and provide state recapitalization, taxpayers money, into banks that it was found had a hole in the value of their assets.

I think what's different this time in an important respect is that the assets at the heart of this in the US banking system, far from being opaque are actually the most transparent and easy to value of the lot. It's US treasury bonds and mortgage-backed securities. And so, it's very clear to assess where the losses are on those assets and who's holding them.

And that makes it very different in an important respect. And it's clear when you do that, that Silicon Valley Bank, for example, was a very big outlier. Relative to the whole of the banking system. So that's a big difference from 2008, we've gone from opaque losses. To very transparent, losses on some of these really transparent securities.

I think the other thing that's really different is where the system starts the banking system in particular, in terms of how much capital it's got, and that capital's there to absorb losses while protecting the deposits. So, we've started in a position where banks have lots more of their own shareholders money on the line than they did back in 2008.

And so even though pretty much all US banks hold US treasuries and mortgage-backed securities, and so they will have incurred some mark to market losses as interest rates have gone up over the last year.

The losses over the system as a whole are significant, but eminently manageable within the capital base that US banks have now got. So unlike 2008, this isn't a problem with asset values, that's going to overwhelm the kind of capital base of the whole banking system.

So those are two big differences, from 2008. And I think the third big difference is that the authorities now have more tools to deal with this.

We saw last weekend the Fed stepped in very quickly. I think because it was able to assess the problem and mark down assets and figure out who had the issues.

The Fed came in very quickly with a new lending facility, the bank term lending facility, to effectively support banks that were experiencing a withdrawal of deposits. So, where this had a knock-on effect from Silicon Valley Bank to some of the other regional banks, people with withdrawing their deposits to put them into bigger banks. The Fed was able to launch a facility to basically make that process run much more smoothly and stop regional banks needing to undertake forced sales of some of these securities like US treasuries and mortgage-backed bonds.

So, the authorities have more tools, they also now have more to deal with banks when they fail in a way, they didn't in 2008, when they faced a kind of invidious choice between bankruptcy, which of course means depositors money is locked up, and bailout.

This time they've got so-called resolution tools to deal with failing banks. So, in those three important respects, transparency of where the problem is, the ability to use the tools they've now got and a bigger capital base in the banking system. That makes this a very different proposition,

Oscar Pulido: And maybe specifically on that third point that you mentioned central banks and the toolkit that they have now, which is partly a learning from 2008. So, you've mentioned the Federal Reserve, putting that toolkit to use. You also mentioned the Swiss National Bank, which is acted as a backstop to one of their important financial institutions.

So, are we okay now or does this have ripple effects from a macroeconomic perspective going forward?

Alex Brazier: Yeah. I think despite this being different and despite all the tools at their disposal, this will have ripple effects for the economy, in the US and in Europe actually. And why is that when we're in this different situation? Firstly, in the US regional banks are still under pressure and they'll be under pressure for two reasons.

The first is that despite the way these failing banks were resolved over last weekend, Depositors are still withdrawing their money, in some cases, to place it with some of the bigger banks. So regional banks are finding it more difficult to raise deposits and fund their lending.

Now, as I said, because the Fed has launched this, bank term lending facility, that process can be much smoother than it might otherwise have been but nevertheless, what we're going to see is some of the regional banks need to adjust their businesses, shrink their balance sheets, and that means. Tightening their, credit supply conditions, the loan officers at these banks won't be extending lots of credit now, and that means for the economy as a whole, a tightening in credit supply means less credit available.

Now, that's going to have an economic effect. It's going to tighten financial conditions for businesses and households and that's going to help to slow the economy in the way the Fed's rate hikes were actually designed to do.

That's one ripple effect onto the economy and I think in Europe, a similar thing's going to happen. So even though it wasn't the same underlying problem, because of this contagion channel where markets are applying more scrutiny to banks, it is more costly for banks to raise equity, to issue debt. And that's going to be passed on to lending conditions to the broader economy.

And it's also going to tighten conditions in financial markets because those banks are going to be less willing to make markets, and act as dealers in those markets.

So financial conditions for the economy are going to tighten, not on the scale that, they did in 2008. And in a way, what we're seeing here is just the normal response to a rise in interest rates. It's happening through some sudden channels, but I go back to this point that the ripple effects here are really the effects of the sharpest rate hiking cycle since the 1980s, but it is going to affect economic activity through these channels.

Oscar Pulido: And so that fastest rate hiking campaign that we're seeing since the 1980s, what do central banks do now? Do they take a, pause, with hiking rates and remain in this, whatever it takes type of mode to backstop financial institutions?

Or do they continue with hiking rates to combat what has been a, an inflationary background, really globally?

Alex Brazier: This is a very different episode to 2008 in one other respect as well, which is that we go into this with central banks facing an inflation problem. Both the Fed and the ECB have got the problem of stubbornly high core inflation.

So, inflation's come off its highs, but it's still not on track either side of the Atlantic, to actually come down and settle close to their 2% targets. So, they were needing to raise rates, slow their economies probably generate recessions if they wanted to get inflation all the way back down to their targets, and that's a very different situation to the one we were in 2008 and the one we've been in every kind of financial wobble over the last 30 or 40 years, in fact.

So, the playbook where central banks respond both with tools to address financial problems like lending facilities like we've seen this week, and rate cuts isn't on the table this time. What we think they'll try and do, to the extent they can, is effectively separate two issues separate.

On the one hand, maintaining financial stability, where they'll be using lending facilities in the way they've done over the last week, and monetary policy, interest rates, where they'll be looking to deal with their inflation problem.

And in a way what the Bank of England did last September is a good model for this, a good guide for this, faced with problems in the UK gilt market, it launched one operation, some temporary purchases, of gilts to deal with that financial problem, whilst at the same time raising interest rates to deal with its inflation problem.

And that is the playbook we're more likely to see here at this stage, central banks using lending operations to deal with financial issues whilst using interest rates to continue to deal with their inflation issues.

Now that's very different, and we've seen actually the ECB just before we've recorded this, go through with its earlier guidance that it would raise interest rates by 50 basis points. this month it's gone through with that suggesting its use of interest rates isn't being diverted to addressing other issues in the banking system. That said, with credit conditions tightening as a result of these issues in the banking system, that's effectively going to do some of central bank's work for them. It's going to tighten credit conditions; it's going to slow the economy. Central banks won't need to raise interest rates as much as they otherwise would've done to deliver the economic outcome they're looking for- which is a recession and getting inflation down.

So, they're going to do a bit less than they would otherwise have done. So, more rate hikes, but not as many as we might have seen. But the big point here is that they won't be coming to the rescue of markets, in our view, with aggressive rate cuts because of the inflation issue, that they're facing and that's a big difference, I think to the past.

Markets have priced in now some big rate cuts over the course of the year, but as it stands, they're likely to try and maintain this clear separation of two sets of tools, two targets, lending facilities for maintaining financial stability and interest rates and monetary policy for dealing with inflation.

Oscar Pulido: The scenario you're describing sounds like central banks are going to be multitasking for the foreseeable future. Alex, I know you've had a busy week, thank you for spending part of it with us here on The Bid

Alex Brazier: Thanks Oscar for having me.

<<MUSIC>>

Stevie Manns: So Oscar, we talked earlier about how banking is all about confidence. Did you feel more confident about how things were going to progress and a few months later, what are your thoughts in terms of hindsight?

Oscar Pulido: Well, I think whenever you hear Alex you're talking to somebody who has many years of experience in the financial sector, and in this case, he has worked in the halls of monetary policy, in England someone who's speaking with credibility. So you immediately, are listening to him and thinking this is somebody with a credible opinion. But at the same time, in the midst of this market crisis and market volatility, living one day to the next.

And now that we can fast forward five months, and the banking crisis was relatively confined- it did not spread more broadly, we did not see another 2008. Actually markets have ground higher, over the course of the last few months. Stock markets are higher, inflation is starting to come down and so we're almost not even talking about this anymore, we're resurfacing this episode because we remember in the thick of the moment what it was like. But I did come out of that feeling more confident after listening to Alex and now five months later, a lot of what he said has really come true.

Stevie Manns: It must be great being Alex and you can be right about a lot of things.

Oscar Pulido: That's why we have him on as a frequent guest.

Stevie Manns: Definitely. Well, Oscar, it's been so fun reliving some of our favorite episodes for this summer series. Perhaps we can do it again sometime?

Oscar Pulido: That'd be great. Let's do this Best of summer series maybe every year. And for those of you that are listening, thank you for listening to The Bid. And don't forget to subscribe to The Bid wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

MKTGSH0823U/M-3041417

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today we continue our Best of Summer series, which means I'm joined by a guest, Stevie Manns, our producer of The Bid podcast.

Hi Stevie.

Stevie Manns: Hey, Oscar.

Oscar Pulido: So you and I have both picked one of our favorite episodes that we've done this year, and hopefully our audience has enjoyed re-listening to it or maybe listened to it for the first time. It's now your turn to pick one of your favorite episodes again. Which one is it?

Stevie Manns: It's the Art of Negotiation. How to ask for more with Professor Alex Carter. Norm Shah, was the host of this episode. you weren't here because it was women's history Month and sorry, Oscar, but that's not you.

Oscar Pulido: I understand.

Stevie Manns: So during the month of March we had senior leadership from around BlackRock interview women from the world of business and beyond, inspirational leaders that they look up to. And Alex Carter came in to talk about negotiation. She is a professor at Columbia Law School. She's written a book asking for more. It's and I love this episode. I think this is something that I will listen to at least once a year.

So many people think that negotiation is something that perhaps you do at work or it's always something where someone loses out on something and it's this idea that she talks about of steering, we are always negotiating to get to where we want to go, and it doesn't have to just be in a difficult conversation or situation.

Oscar Pulido: That's right. And I, recall as well from the episode that, there was a point in her life where she realized she needed to start putting into practice some of the things that she was telling people to do. So sort of following her own advice, and there was this moment of hesitancy, but she powered through and ultimately now following her own advice.

Stevie Manns: Absolutely. And there was something that Normandy said about the steering thing, and she, she said, um, she loved that metaphor you are steering and she said that she'll use it, going forward and every day.

And I checked in with her this morning. I said, Hey, Nirmitee, do you remember talking about this and saying that you were going to use it? How is that working out for you? And she said, Oh my God. It is so ingrained in everything that I do now, I almost forgot where it came from. And I love that, and it's so fun when you listen to an episode or a podcast and there's something that you take away and you really implement that. This podcast has been something that I've taken away and implemented. I even read Alex's book, she was kind enough to give me a copy, I think it's such a fabulous episode to re-listen to. There aren't that many episodes that I would do that for.

Oscar Pulido: Great. Well let's re-listen to this one again.

<<MUSIC>>

Nirmitee: Alex, welcome.

Alex Carter: Thanks, Nirmitee I'm happy to be here.

Nirmitee: So, let's start with the first question. Who is Alex Carter?

Alex Carter: Big question. I was born in Brooklyn. I am a lifelong New Yorker who made a 17-year temporary pit stop in New Jersey for the sake of my marriage. I am somebody who loves to learn. and now I'm really fortunate to be a person who is in her dream job.

By day, I'm a professor at Columbia Law School. I teach conflict resolution. I help people work out their problems, and I help students to step into their futures. And then outside of that, I'm a published author and a keynote speaker, a mom of a 12-year-old girl and a wife.

Between your tenure at Columbia and the book and motherhood and other things, when did you realize it was your Ah-ha moment that this is what you were meant to do?

Nirmitee, I'm a lawyer, so when you ask me for one aha moment, I'm going to give you two.

Nirmitee: Okay. Buy one, get one free. Indeed. Yes.

Alex Carter: The first moment was this. You know, I think a lot of people look at my CV and they assume that I always knew where I was going in life, and that couldn't have been further from the case.

I went into law school. I had absolutely zero idea of what I could do after graduation, and it wasn't until my last year there that I took the course that would change my whole professional life. The reason I took it is a friend of mine pulled me aside and she said, Hey, I just took this class. It involves a lot of talking. I think you'd be great at it.

So, shade aside, I enrolled in the class and this was mediation. And mediation is the art or science. We'll get to it of helping people work out a dispute, helping people negotiate. And the first time I stepped into this dingy room in the New York City courthouse and helped these people work out a dispute, it was as though I heard Morgan Freeman's voice coming down saying, Alex, this is it. This is what you should do for the rest of your life.

But here was the second moment, because you see after that, I grew really comfortable helping other people negotiate. I was really good at it. Then came the moment where for the first time, I had to negotiate for myself.

Early on in my career, I was in these jobs that were all lockstep. You walked in, the comp was but then I had to finally put on my power suit and my tall heels. That was my thirties back when I was wearing heels, walk into the office, and I got a good offer, and inside I had a crisis. Why? Because I realized that I thought I had to just accept the first offer I was given.

I realized that I had absorbed this message, that negotiation was something I could do for other people. But if I did it for myself, I wasn't collaborative, I wasn't going to be liked or worse, I would leave less for other people. But I had just enough on the ball to call a senior woman in my field, and I asked her, What should I do?

And she said, I'm going to tell you what to do, Alex. You're going to get back in there and you're going to ask for more. And here's why. Because when you teach someone how to value you, you are teaching him how to value all of us, meaning all women. So, if you're not going to go in there and do it for yourself, I want you to do it for the next woman who's coming after you, do it for the sisterhood.

That was the moment I realized I don't just have to do this for other people. I am worthy of applying my own skills to myself, and in fact, it doesn't leave other people with less. It builds a bigger table for other people to sit.

Nirmitee: I just want to comment on the fact that you make the table bigger, I agree with you 100%. But let's go back to the first point you made which was around art or science. So, what is negotiation?

Alex Carter: Well, it's interesting art and science are actually much closer than we think. They're just two different ways of trying to understand humanity, who we are, and to make sense of our world.

And negotiation, therefore, is both. There are observable phenomena that have been documented in research, and that's part of the science. But then you sit down at the table and it's two human beings or maybe more human beings looking at each other and talking, and that's nothing but art. Because I may go in with all of the research, but then in the moment I'm relating to another human being.

So, it's interesting because there have been all sorts of technological advances even when we think of negotiation, programs that can simulate bargaining, but in the end, unless the negotiators themselves are replaced by machines, we have to have some creativity, some differentiation, some sense of, the art, the creativity, the imagination behind negotiation.

Nirmitee I agree with you. So ChatGPT, everyone's talking about it! So, what happened is someone from BlackRock went to ChatGPT And said okay, create a portfolio that will be the market for the next 10 years. And ChatGPT instead of creating a portfolio actually created a disclaimer saying that you cannot beat the markets with predictability. But I feel like that's the machine versus human, that humans transcend logic sometimes or fall apart in face of logic. And that's what might make a negotiation more interesting

Alex Carter: Oh, we are, predictably irrational. In fact, Nirmitee, I start a lot of my negotiation classes by setting up a simulation.

Here it is. I set people into teams of two. and I tell them, each team, one person needs to raise their hand and volunteer for something. The person who raises their hand, I say, I've just handed you $20 and here's what you're going to do. You have one chance to turn to your partner and make an offer for how much of the $20 you'd be willing to split with them.

Here's the catch one offer. Accept or reject if your partner accepts you keep the $20 in the proportion that you propose. If they reject the $20 comes back to me. Do you know what happens, a lot of times, especially in shared groups? People offer $10. They might offer eight. They might

Nirmitee: I was thinking I would offer 10

Alex Carter: Okay. And why would you offer 10?

Nirmitee: Because it seems fair, and the chances of them wanting to split are higher. Maybe I would offer nine. But not more than that. Like I wouldn't go to eight. I would feel like maybe 11 bucks for me, nine bucks for them. Maybe a good offer and then that way we both get to keep some money.

Alex Carter: Yeah, because you took the risk, you raised your hand. So maybe you apply a little premium Yes. To the $10 to get a little extra, right? Yes. Okay. But you're thinking about risk.

Here's the thing. The economically rational thing to do, is if you're offering me to offer me one penny, and the economically rational thing for me to do would be to accept that penny

Nirmitee: Because you're better off with that one penny than you were a minute ago when you didn't have the penny.

Alex Carter: Correct.

Nirmitee: This reminds me of, Daniel Kahneman's experiments in behavioral finance.

Alex Carter: Absolutely. And I love his work, I'm always thinking about whether my brain is in system one or system two. But here's the thing, human beings don't act rationally when it comes to economics. And you see this play out all the time. You get a monetary offer. Maybe it's a deal you're striking with a client. Maybe it's for salary. And yes, you're thinking about, I want to be better off financially. But the money also means something, doesn't it? It stands for something. It stands for fairness. It stands for achievement. It stands for recognition. And so, we have to be aware that even though at the table there could be a Pareto optimal outcome, we're almost never going to be there because of the human beings at the table, who value sometimes things more than rationality.

Nirmitee: So, coming back to the art versus science have you seen a change in the last 20 years in terms of how people approach some of these negotiations, has the general level of understanding of negotiations improved?

Alex Carter: So yes and no. I will say when I look now at popular media, movies, tv. You remember that Show Entourage, right? You would see these high stakes negotiations all the time, and so I think in general public awareness has been raised about negotiation but not always accurately.

And that's part of the reason I wanted to write a book, because I felt like I was seeing depictions of negotiation everywhere that didn't mirror what I knew negotiation to be. If you look at Succession, for example, or Entourage, you're going to see a negotiation that means the following, it cuts to us. And actually, then we would be two guys in suits.

If you look up negotiation on Google and you go to the image search, I've done it. It's a lot of white men in suits. So that's part of the depiction we get about negotiation. And it's part of the reason I think that I've read a lot of negotiation literature and I didn't see myself in any of that.

 It was tough for me to pick up a book and to find something that I thought, yes, I can actually use this with my friends and colleagues and family. So, there's definitely a representation element to it, but there's also a substantive element in which I felt popular portrayals were falling short. They show the last couple rounds of a heated monetary negotiation to get to an agreement. And most people, in fact are taught negotiation is a back and forth over money to get to some kind of compromise.

Nirmitee: Yeah, when everybody loses, I'm so everybody loses right? There is no win-win in negotiation.

Alex Carter: And I reject that on a number of fronts. First of all, negotiation is not just about money. I actually learned what negotiation was on my honeymoon. And it's not just because I married another lawyer, okay? But picture this, we're in Hawaii. The two of us are in a kayak on the Waialua River, and our guide up ahead turns back and says, all right folks, let's negotiate these things to the left because we're going to hit that beach up there.

And I gotta tell you, everybody else was enjoying the scenery and my brain, love of learning was immediately somewhere else because of all places in the world a kayak in Hawaii was where I learned what negotiation really means because I thought, that's right, if I'm negotiating my kayak toward a beach, what am I doing? I'm steering.

And what if negotiation wasn't haggling over money? What if it was just the process, like a kayak of steering my relationships in the direction I wanted to go? And with that in mind, I went back to the office the following week and I saw opportunities to negotiate everywhere because it wasn't just about asking for salary once a year. It wasn't just about the twice a year I would sit down with a client and say, let's hammer out this retainer agreement.

I could be proactively calling and saying, tell me What's happening in the company? What's keeping you up at night?

And all of a sudden, we were negotiating, and our relationship grew closer. And then when I do have to deliver difficult news, when we do have to have a monetary conversation, we are in such a better place than we would be if I was in a kayak, and I just took my hands off the paddle.

Nirmitee: Steering, there is a part of me, the bossy part of me, which feels like I'm going to now use this as a metaphor for pretty much everything I do in my personal and my professional life. That was very insightful, but you started off your conversation with the space you wanted to create, so a woman not being represented, and as a woman, you wanted to make the pie bigger. So, what's the purpose? What drives you and what do you want to accomplish?

Alex Carter: Do you know the reason I'm sitting here with you today, and the reason I have a book published at all is that six years ago, a student of mine who had graduated and was now in law practice asked me to go to coffee. And we went to coffee, and I thought we were there to discuss some career advice for her.

And instead, she said to me, you've had such a profound effect on my life. I want to help you achieve your legacy. What do you see as your legacy on this earth? Her name's Kristen Ferguson. I was floored. And in that moment, I answered instinctively, and I said, my mission on this earth is to hold up a mirror so that every single person who comes to me, whether it's as a student in my course, somebody I'm training in negotiation.

And when I go into large companies, it's just a bunch of individual relationships. I see each person in that room in this way. I want them to hold up a mirror and see their highest and best and then I want to help them open up a window between them and somebody else to be able to resolve conflict, see the other person better, and see situations more clearly.

Nirmitee: And then if somebody asked you, somebody told you, where do I start? Besides reading your book, how does one start down this journey of steering and or looking at the world in a way where you create these situations for everyone around you to be better?

Alex Carter: The place you start is where every negotiation starts, and that's with yourself. If negotiation is about steering relationships, the most important, the most central relationship of your entire life, will be the one you have with yourself. And so, it starts with self-knowledge.

People ask me all the time, what's the source of my power in negotiation? I think they think it's how much you can go in and physically fill up a room and I'm five two in sneakers.

Okay? I will never be the biggest person in any room. But the expert negotiators are the people with the most knowledge, they understand themselves extremely well. They understand the situation extremely well, and then from that stable base, they're able to get to the table, listen minutely to every word the other person says, and by doing so, crawl up inside that other person's brain space and get to know them better than they know themselves.

That's how you become an expert negotiator.

Nirmitee: So, Alex, in your Wall Street Journal bestseller, Ask For More 10 questions to Negotiate Anything, what are the two or three most important questions? What's the distillation there?

Alex Carter: Back when Ask For More came out, I spoke to the Wall Street Journal and they asked me, Alex, where should everybody start in negotiation? And I said, you should start here, what's the problem I want to solve?

Most of your negotiation success, and if you're at a company, most of your company's innovation success will rise or fall on whether you are solving the right problem. That's number one.

A question I love for people to ask is, What do I need? And making a complete list in a negotiation of the tangibles and the intangibles. The tangibles spring to mind immediately, right? It could be money, a particular role, headcount, resources, but the intangibles are really important.

People might say, I need autonomy in this role. recognition. respect, and then I want you to ask, what does that look like for me? Because Recognition, respect, autonomy, can look totally different for you than for somebody else. So that's really important.

And then when you're talking to somebody else, I can't tell you how many teams I train, where people come into a business development meeting, and they start with a pitch. Hi, I'm Alex. Here's what we do. Here's what we can offer.

I tell people to walk in and ask what I call my magic question. Two words. Tell me about your business. Tell me what success would look like for you. here Tell me what's keeping you up at night? Tell me, if we were to work together and we had a phenomenal result, what would that look like in your business a year from now?

But it doesn't matter, whether you're asking that question in a business development meeting or you're asking it of your 16-year-old when they come home from school instead of “how was your day? tell me about your day. It is the broadest possible prompt. It gives you the most information, it creates the most trust, it is the number one question that you should ask in any scenario.

Nirmitee: Nice. I'm going to go and ask my 16-year-old “tell me how your day was instead of how was your day? Where I get meh and her staring into her phone, as most 16-year-olds do these days.

Alex Carter: Do you know why your 16-year-old doesn't respond when you say, how was your day?

Nirmitee: No, I wish I did

Alex Carter: It's because how was your day is not a real question. It's a social script. It's what we do when we are sitting down together. How are you today, Nirmitee? I'm great. How are you? How was your weekend? Wonderful. How was yours? It means let's get through this so that then we can discuss the real thing we're here to talk about. And nobody recognizes a fake question more than children. They smell it and they will not answer it.

And so, I started pivoting and I would ask my daughter, tell me about art class today. Tell me who got in trouble. Tell me the silliest thing somebody did today. And then I allowed for lots of silence and all of a sudden, we start rolling.

Nirmitee: Nice. So, I have homework. This is awesome. Alex, thank you for your time today.

Alex Carter: Thanks for having me.

<< MUSIC>>

Stevie Manns: So Oscar, I know you weren't part of that conversation, but listening back, How has that made you reflect on some of the conversations or negotiations that perhaps you may have in your everyday life?

Oscar Pulido: I think it goes back to something you said at the intro, which is that negotiation isn't just something that takes place in the workplace, that it's ongoing in our lives. And I actually like the part where Alex says, her job and her mission and her passion is resolving conflicts and helping people resolve their conflicts.

And, that has applicability in so many parts of your life. And frankly, if we did a little bit better job at that across the world, I think we'd be in a better place.

Stevie Manns: this was super fun. Thank you very much for going through this with me, and I look forward to your final pick next week.

Oscar Pulido: Sounds good. We'll keep you in suspense until then.

Stevie Manns: Okay.

Oscar Pulido: Thanks for listening to this episode of The Bid. We'll be back next week with our final best of Summer series episodes. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

And today we continue our best of summer series, which means I'm joined by Stevie Manns, our Bid producer. Hi Stevie.

Stevie Manns: Hi Oscar.

Oscar Pulido: So, I think it's my turn to pick another one of my favorite episodes, and I'm going to pick the one on geospatial data and how it can impact investing. I thought this was a really fascinating episode that had an interesting personal story attached to it that I didn't anticipate. You might remember Josh and Mike joined us to talk about how they're processing all of these, I think they used the word petabytes of data, that was the quantity that they about.

Stevie Manns: Yes, and we had to figure out how much a petabyte actually was!

Oscar Pulido: Yeah, I don't think I had heard that term maybe before they mentioned it, but the personal story was interesting because Josh talked about a set of friends that he had living in California who were constantly having to move due to wildfires. And it was that impact that wildfires had on California families that led him down this path of wanting to understand weather patterns and one thing led to the next then all of a sudden, they're processing all these different types of data points to think about the next investment decision.

Stevie Manns: Yes, and to be someone who's able to see something out in the wild and then bring it in and have it inform something that you do in your day job that's able to help clients, that's able to help other people. I thought that was really cool and impactful and I've found the whole conversation really insightful.

Oscar Pulido: it also made me think that I'm just a walking data point. I'm constantly leaving some sort of trail, whether I'm at an airport, if I'm checking into a hotel. and it's not just me, all individuals have a data trail that they leave, and businesses leave data trails. And he talked about alpha hiding in plain sight and for those in the investment industry, alpha's really hard to generate. it is what you're going after, excess return versus the market. So, the fact that he painted this picture of, well, it's actually right in front of you, you need to know how to put it together and where to look was an interesting visual.

Stevie Manns: I completely agree.

Oscar Pulido: Well, with that, why don't we give it a listen?

Stevie Manns: Let's do it.

Stevie Manns: So, Oscar, I know you work with Josh and Mike. Was there anything from that episode that perhaps you didn't know? Was there something new that you learned? What were your thoughts coming out of that discussion?

Oscar Pulido: I think it was just a reminder of how modernized investing is becoming how much almost science there is behind it. When you think about the quantity of data, when I went to business school and was taking finance classes, we were kind of digging through a balance sheet, trying to understand the financials of a company, and that still happens, but 20 plus years later since I've graduated, there are folks processing, petabytes of data. And so, I think for me it was just a reminder of how modernized investing has become and how much you have to stay ahead of the game if you really want to truly outperform the market or try and outperform the market.

Stevie Manns: Absolutely. And I think we're going to see AI allow for much more of that data analysis and will, I'm sure take this technology forward and take investing forward so it's an exciting space to watch.

Oscar Pulido: I agree. And I also thought, I'm glad Josh and Mike are doing this, because I certainly couldn't!

Stevie Manns: Oscar, this was fun. I think next time I'm going to pick the next episode.

Oscar Pulido: Indeed. Well, thank you for listening to this episode of The Bid. If you've enjoyed The Bid so far, do subscribe wherever you get your podcasts.

Disclosure

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.​

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.​

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.​

Oscar: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today I'm pleased to welcome a co-host, Stevie Manns, The Bid's producer. Welcome, Stevie.

Stevie: Thank you, Oscar. It's lovely to be here.

Oscar: Stevie. I'm just the voice, but it turns out you're the mastermind behind the production of the podcast, so it's great to have you on the microphone.

Stevie: Well, thank you Oscar, and if I may say, I think you're the host of the most!

Oscar: I appreciate that. So, Stevie, as we wind down our production for summer, we thought we'd take a look back at some of our favorite episodes so far this year in case our audience has missed any of them. And so, you and I are each going to pick two of our favorite episodes and talk a little bit about what made them stand out for us. So, you're going to kick us off for this summer series. What's your first pick for us?

Stevie: I'm really excited about this. So, my first pick is the Metaverse episode we did with CEO of Magic Leap, Peggy Johnson. I just loved this conversation, I loved her insights, it was such a visual episode. I loved picturing all of these future devices that we're going to be wearing, imagining what the future's going to look like. And you know what, it just brought me back to being a kid, watching the Back To The Future of Trilogy.

Oscar: That is also one of my favorite trilogies of all time. I have the music going through my head right now.

Stevie: Huey Lewis and The News?

Oscar: That is definitely one of the classics. And I love the scene where he's also judging the band early in the movie, which is like a nice irony that maybe the younger generations don't fully appreciate right now.

Stevie: I never got that until I watched it much later. I was like, that's Huey Lewis!

Oscar: Exactly.

Stevie: I'm a huge Star Trek fan as well so it really tickles me to see this come to life. Peggy mentioned these devices that we would be wearing, we only did this a few months ago and Apple has already come out with this new, very expensive device and that's what she threw forward to, that these devices are going to be so expensive when they come to end-consumer initially. What was it like for you to record this episode because you didn't know what she was going to say, so how did it feel to be interviewing Peggy?

Oscar: I didn't know what she was going to say and that's probably what made it very interesting, the visual that she painted. And I was picturing myself wearing these, augmented reality glasses walking down the street, thinking about how they would help me get to the location that I need to get to. So, it did feel futuristic, but also that it wasn't that far into the future.

Stevie: It's here. I don't know if it's here with Apple now, but it will certainly be in the next few years, I would think.

Oscar: So, let's take a listen to the episode.

Stevie: Let's do it.

Oscar: So, Stevie, what was one of the key takeaways as you listen to that episode again?

Stevie: I thought the stat about reducing training costs by 80% was astounding. And what that's going to give businesses the ability to do and the capacity and all the, all of those efficiencies. I think that's incredible. What about you? Was there anything else you took from that episode?

Yeah, I think going back to the visual nature of her discussion, just the comment around the factory worker. Learning how to use a piece of machinery in a very digital format, that really resonated with me as opposed to having to leaf through a very lengthy manual of instruction. I think we've all been in a job where we've been given a manual or a handbook or a guidebook and wish that there had been a much simpler way to do it. So, I hear you there.

Oscar: Sounds more fun. So, I think this is usually where I do the outro, but I'm going to let you do this part now.

Stevie: Ooh. Okay. I thought you would never ask! Next up on The Bid, we’re continuing to introduce a new short-form series from the BlackRock Investment Institute on Mondays, and then it's Oscar's turn to pick his favorite Bid episode as we continue our “best of” summer series. Thank you for listening to The Bid. I'm Stevie Manns.

Oscar: And I'm Oscar Pulido.

Stevie: Make sure you subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The first half of 2023 has seen its fair share of headlines and volatility across global markets, including higher interest rates, bank failures, and a dramatic US debt ceiling moment.

As we look ahead to the second half of 2023, what are the emerging trends investors should be watching and what opportunities might these factors present?

I'm pleased to welcome back Alex Brazier, Deputy Head of the BlackRock Investment Institute to help us look ahead to the rest of the year. Alex, welcome to The Bid.

Alex Brazier: Thanks Oscar for having me back.

Oscar Pulido: Well, Alex, you are back. In fact the last time we talked, we were discussing the relief that markets were feeling from the U.S. Debt ceiling agreement, and you mentioned that there was an upcoming investor Outlook forum taking place at BlackRock's headquarters in London. So perhaps, we can start with some takeaways from that forum.

Alex Brazier: Yeah thanks, it's been a busy few weeks and as you say, we did assemble, BlackRock's most senior investors, in London two weeks ago now for two days of intense discussion. And really I think the top line conclusion I took from that is a wide acceptance that we're in a new regime, a new macro and market regime, that brings new and different investment opportunities. So this new regime is something we've been talking about for a long time, it's actually playing out now. We had 30 years of stability where central banks always came to the rescue whenever anything looked to be heading south in our economies, and we had sustained bull markets. And now we've seen major developed markets flirt with recession, and yet central banks have raising rates and certainly holding tight with their policies.

So that's the new regime playing out from a macro perspective, but that's really not a council of despair. And the thing I took away from our meetings in London the other week is that, far from it, the opportunities may be different, but they are no less than they used to be. So, sure, this is an environment where, simple static portfolios at the broad asset class level won't any longer be the best you can do, and it's not an environment really for taking big macro risks when central banks aren't coming to the rescue.

The opportunities now come from zooming in being precise, finding the disconnects in the way markets are pricing some of the volatility, finding relative value, and also from harnessing some of the mega forces- the big tectonic shifts in our economies that are playing out now.

So yeah, I took away it's a new regime. It's a different regime. It's playing out but actually that means there are new and exciting opportunities that are different from the past, but no less than the past.

Oscar Pulido: I love some of these terms that you mentioned, Alex. "Zooming in, being more precise." I think you said "mega forces" and tectonic shifts. So it sounds like it was a lively debate in London to say the least. And we've talked about this new investment regime with your colleague Wei Lee a little bit earlier in the year.

So maybe just go into a little bit more detail about what we think this looks like when we say new investment regime and how this is playing out?

Alex Brazier: The big shift here as I say, is we're going from a world in which most major economies, their supply capacity was just growing steadily over time. And so the job of central banks was really just to keep stoking up growth and come to the rescue whenever growth threatened to head south. And that's the way they achieved their inflation targets.

So they had a structural easing bias. Rates were always below their neutral level. Central banks were always stoking things up, now we're moving to the opposite. And as I say, in develop developed markets, we've seen growth stall, Europe's had a recession as the energy shock has squeezed incomes. The US even on some measures, may have just about had one too, if you look at measures like gross domestic income alongside measures like gross domestic product.

And all of this is before the full effect of central bank actions come through- tightening financial conditions, tightening credit conditions- and yet central banks are not coming to the rescue with rate cuts. In fact, they're signaling further increases. Why is that? Well, it's cuz their economies are basically overheating despite having had recessions. And that's because economies aren't able to produce as much now without generating inflation because of things like labor supply problems and energy supply problems.

So central banks have gone from, having this sort of structural easing bias to having a structural tightening bias. They're constantly trying to hold back growth in order to get inflation down to their targets. So they're, they're holding tight, they're holding policy tight, and markets have been gradually adjusting to this. We've seen it in fixed income markets, for example, as bond markets have started to price in that, central banks won't be cutting rates this year, even as growth slows, they'll actually be keeping rates pretty high. The U.S. two year yields now up pretty significantly, and that's the market adjusting to the fact that central banks aren't coming to the rescue.

That does create challenges for risk assets. It means more volatility, means more growth, volatility, it means more earnings volatility means more equity volatility, and risk asset volatility, but... does also mean serious opportunities for income from particularly short dated bonds where yields have risen pretty sharply and increasingly emerging opportunities to lock in some of that income with longer duration too.

So this is a regime where there are challenges, sure, the macro regime creates more volatility, but also, central banks holding tight means higher yields means real opportunity for income in portfolios as well.

Oscar Pulido: Yeah, and it's interesting to hear the side by side. On the one hand you're saying there are big parts of the world that might be in recession, maybe you have to look closely at the data to really see it but by textbook definitionthey're experiencing a recession or certainly a slower growth environment.

You're saying there's gonna be more volatility, central banks are not coming to the rescue as they have in the past. But despite all of that you mentioned the opportunities are there. They're different, but they're no less. So where can investors look for those investment opportunities?

Alex Brazier: I think this is actually the big thing coming out of our discussions in London the other week. So the first is obviously that income is back with yields, higher central banks holding tight, there are opportunities now in portfolios to lock in some of that income.

Now, it's not a great environment for overweighting risk assets as a broad category in a portfolio, but nor is it an environment to bunker down and wait.

Partly because in this new regime, macro volatility is just something that's here to stay. It's a fact of the regime, so it's something to adjust to rather than wait to pass. The big thing is that we're not taking big macro risks in portfolios. We're just taking different risks in portfolios. and let me, give an example of a few here.

The first is that zooming in, within equities, there's an increasing population of stocks where investors are now compensated for some of the risks in the macro environment. And US equities, for example, remain the lion's share of our baseline portfolio. But there's also opportunity in zooming in further within developed market equities to tilt portfolios because we see opportunities, for example, in tilting equity exposures to towards Japan, where the macro pictures quite different to other developed markets.

The Bank of Japan is still in the business of ensuring inflation that actually gets up to its target rather than trying to squeeze it down like other developed market central banks. That means growth prospects are somewhat stronger there. We also see opportunities outside developed markets, tilting portfolios towards emerging market equities where many of the macro risks are actually better reflected in market prices.

And there's opportunities from zooming in within fixed income exposures as well. For example, towards US inflation linked bonds and away from European inflation linked bonds, given the ECBs even greater determination, we think, than the Fed to get inflation down to its 2% target. Now. All of that is just examples of how broad asset class exposures might not be the way to generate additional return in this environment, but by being precise, by zooming in to find these relative value opportunities within asset classes, actually there's real opportunities In the old regime where central banks were coming to the rescue, you didn't need to be particularly precise- broad macro exposures did the job as well as anything else in terms of generating investment return.

But now you can do a lot better by being precise and finding some of these relative value opportunities within the asset classes.

Oscar Pulido: And it's interesting you said don't wait for macro volatility to pass. it's here to stay, so adjust to it. And that gets me thinking that maybe investors tend to wanna wait for the coast to be

clear and everything is calm and then they start looking for those investment opportunities but maybe by then it might be too late and markets have moved and you've highlighted some of the areas that they should be identifying. You also mentioned mega forces. How many are there and why are these important?

Alex Brazier: we're highlighting five,in our outlook. what do we mean by megaforce? we mean these sort of big tectonic shifts in the way the world economy works and the way economies work that are gonna have a big effect, not just at the macro level but also on which companies win out relative to others, so they're gonna be a big driver of returns. And again, this is part of the general theme of focusing less on the macro picture and more on what are the underlying forces and what winners are they gonna create? So a good example of that's in the first half of this year. Where one of these big forces, these mega forces, turned out to be as important as the Federal Reserve in driving the SNP 500. And that is, the growth of artificial intelligence.

Over the first half of the year, much of the US equity performance has been driven by a handful of stocks reflecting the realization, I think, of the potential of some forms of AI and in particular the need for semiconductors and other chips to enable that to happen. So it's a real example of how even in a difficult macro situation, some of these mega forces, these themes, can be much more important as a driver of return. And actually, as we say in the Outlook document, we think that artificial intelligence theme could actually have further to run too, because looking carefully at it, there's not just opportunities in some of the chip needs but also in the needs for data to actually really exploit the power of AI.

So people who are involved in putting data sets together, cleaning data, making it able to be accessed for large language models, for example, stand to gain from this trend. And it's not the only mega force in town either. As I say, we've got five of them in the report, it's not just the growth of artificial intelligence, it's also aging populations.

It's also a rewiring of globalization, of course, the transition to a lower carbon economy, and also a reshaping of the financial system as well. So these are big mega forces, big drivers of relative returns, and as we say in our outlook, things to be harnessed, opportunities to be gained to increase returns in this new regime.

Oscar Pulido: And these mega forces feel like they have a long-term nature to them. but you mentioned that they've also impacted year to date returns with artificial intelligence being just as important as what Jay Powell was saying at the Fed. And you see that in the performance of markets, but AI gets a lot of attention so maybe talk about a few of these other, mega forces in more detail. You mentioned aging population, the rewiring of the global economy, I think is how you phrased it. Why are these important?

Alex Brazier: Well, it's not just that they'll shape the macro picture looking ahead. The forces we're looking at here, unlike AI actually are all things that will limit the capacity of economies to supply goods and services, at least for a period. Take aging populations, for example, as we age,as a collectively age at least, dependency ratios go up, there are more older people relative to people in the working age population. That means economies produce less, but they don't, in and of themselves demand less. The mix of spending in economies shifts towards things like healthcare, and that means they're generally inflationary. Central banks face a challenge. They have to, as we were saying in this new regime, hold tight to try and keep inflation down towards their targets, but

they don't just affect the macro picture. Because they change the mix of spending towards things like healthcare, they actually changed the mix of, earnings in the economy as well.

And so looking for opportunities where the aging of populations isn't really fully reflected in company growth expectations in things like healthcare or elderly care. It potentially creates interesting investment opportunities.

The other around, the rewiring of globalization is really the ongoing fragmentation of the global economy. We've been through a very long period where the only thing guiding supply chain construction was economic efficiency. We're now entering a period where it's not all about efficiency, it's about geopolitics as well. That's gonna reduce the efficiency of supply chains. It's gonna, again, hold back the supply capacity of economies, it's gonna shape the macro picture, but potentially creates really interesting investment opportunities as those supply chains rewire.

So where will new industrial capacity be built as supply chains are rewired? Is that reflected in pricing of securities in those geographies? Those are interesting questions to us for harnessing this particular megatrend, which sounds like it's a negative. And maybe is at the macro level, but actually creates interesting opportunities at the sector or company level.

And then of course, there's the transition to a lower carbon economy, which to us is being driven by policy, by technology, by changes in consumer preferences. And we're trying to assess how are those things changing? How is it gonna shape company earnings over time? And is that reflected again in, in market prices?

So to us we treat all of these mega forces in the same way as we treat Jay Powell. We ask, what does it mean for where the economy is heading? Is that reflected in prices and where it's not? That creates interesting investment opportunities.

Oscar Pulido: So, Alex, if I were to summarize a lot of what you mentioned, there's a lot happening. The new investment regime that you and colleagues from the BlackRock Investment Institute have mentioned. It's playing out, it's here to stay. And the investment opportunities are there. They might be different than what they've been in prior regimes, but they exist.

Alex Brazier: Absolutely right.Not the same opportunities, but lots of new opportunities.

Oscar Pulido: And Alex, maybe just a final question, which is when you describe this investor forum in London, is it a pretty cordial discussion or is it some good debate between the investors.

Alex Brazier: Yeah, it's, it's always pretty cordial, but, pretty healthy debate, I would say, especially in something like a new regime where we're collectively getting to grips with what the new dynamics are and where the new opportunities are. But I think everyone feels this is an exciting time. It's a new regime with a new playbook and new things to figure out, and that's a real opportunity for us to help our clients.

Oscar Pulido: All right, we'll look forward to hearing more c color commentary the next time one of these investor forms takes place. And Alex, as always, thank you for joining us on The.

Alex Brazier: Thank you.

Oscar Pulido: Thanks for listening to this episode, or The, Bid. Next up on The Bid. we're introducing our new weekly short form series from the BlackRock Investment Institute called Market Take.

Market. Take is a quick digest of what's driving markets and will be available as its own podcast where you can subscribe. You'll be able to hear the first three episodes right here on The Bid for the next few weeks on Mondays. So look out for our new market take series starting in July.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Mark Wiedman: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Mark Wiedman. Today we're talking about food: from the farm to your fork, to your recycling or compost bin. I'm pleased to welcome Mark Schneider, the CEO of Nestle. Nestle is the world's largest food and beverage company1 with more than 2000 brands and products in 188 countries. What does Nestle have to do with the transition? Well, the processing, the packaging, the distribution and the consumption of food actually produces about a third of human greenhouse gas emissions2. In this episode, we're going to talk about why and how Nestle is transforming their value chain in the transition to a low carbon economy. Mark, welcome to The Bid.

Mark Schneider: Thanks for having me.

Mark Wiedman: Why don't we start by talking about Nestle and your business?

Mark Schneider: To a US audience, Nestle is mainly known as a chocolate maker, but of course we do cover wide range of food and beverage products. In fact, we're the world's largest food and beverage company with about 94 billion Swiss francs of revenue in 2022. And we cover all the main categories in food and beverage from coffee to pet care, to medical nutrition, infant nutrition, and of course, the chocolate that we're so well known for. And, that also means, we are exposed to a wide number of agricultural commodities that are needed to make these products.

Mark Wiedman: Let's talk about Nestle and carbon emissions and start by why does it matter to Nestle what your carbon emissions are?

Mark Schneider: It matters to Nestle because when people think about greenhouse gas emissions, what comes to mind first is: air travel, automotive, energy generation, a heavy industry. But in fact, food production around the world is very much linked to greenhouse gas emissions. So depending on what study you look at, between a quarter and a third of the world's greenhouse gas emissions are caused by agriculture, so food and beverage production, and unlike many other activities, eating and drinking is not something that we can go without. As the leading company in this space, we feel an obligation to do something, and I believe this is part of future proofing the business. Just like you futureproof the business through convincing research and development and new products. So one additional feature that you want to work for is a better greenhouse gas footprint.

Mark Wiedman: What is your roadmap layout in a few simple bullets, and how are you tracking?

Mark Schneider: So minus 20% by 2025. This is judging from 2018 levels and it's regardless of the growth we achieve in between and it's the totality of all greenhouse gases, so not just co2. So that means we also need to tackle methane, which in some cases is trickier than co2. It's minus 50% by 2030. then it's that famous net zero by 2050.

Mark Wiedman: What are you most concerned about in terms of achieving your 2030 objective? What's the biggest obstacle?

Mark Schneider: There's a set of pretty steep mountains to climb. There's not just one individual obstacle here, but, clearly, we all had to run these projects. Some of them have tremendous lead time, so something you're doing now may give your results two or three years down the road only. And so learning how to try that to be sure that there is consistent improvement over time. I think that's also something that we had to train the organization on because, we had not done it before.

Mark Wiedman: Could you explain how food and the production of food and its disposal emits carbon? How does that work?

Mark Schneider: There's of course the carbon footprint of our operations. Some of the operations in our factories, the logistics both inbound in factories and outbound. All the things you would associate with the company's operations, including travel. That is the easiest part. And that's the part where we are already picking a lot of low-hanging fruit. And then there is about more than two-thirds that really sit in our agricultural supply chain. So this is the greenhouse gas emissions that come about as the key commodity ingredients that we use for our products are produced. And that's the hardest part, and that's the steepest hill to climb.

Mark Wiedman: So what produces those carbon emissions in the chain from planting food to getting it into your factories?

Mark Schneider: Well, It depends on the ingredient. But the key greenhouse gas emissions are related to everything associated with livestock. Think about dairy production. Think about meat. So there you have to first of all generate the food. And then, cattle in particular, you have methane emissions that come from the digestion and so it all adds up to a very powerful mix of CO2 emissions, methane emissions, that are very significant and a lot higher than with plant-based products.

Mark Wiedman: So animals, especially cows, lead to lots of carbon emissions, but there's also carbon emissions even with producing plants and vegetables, and other ingredients that feed into your food. Where does that carbon get emitted?

Mark Schneider: So a lot there has to do with the way we do our farming. In some cases, unfortunately there's deforestation to begin with, to create farmable land. Then the way we look after our soil, we tend to deplete the soil and that of course leads to a lot of, CO2 release from that soil into the atmosphere. It also leads to degradation of the quality of soil over time. So clearly changing our methods of farming and switching to either conservation agriculture or regenerative agriculture is a key unlock when it comes to improving the greenhouse gas footprint.

Mark Wiedman: What is regenerative agriculture?

Mark Schneider: Some of the common themes as part of regenerative agriculture are taking good care of the soil, keeping it covered at all times, having cover crops, having intermittent cropping minimum or low tillage. And just trying to keep the water management of the soil at its optimum. This way over time, not only do you avoid the depletion of the soil, but you can also in fact add to it and capture some additional carbon. There's also conservation agriculture. All of them are a material improvement over some of the traditional agricultural methods that are being used widespread today.

Mark Wiedman: So how are you working with your supply chain? How do you work with farmers?

Mark Schneider: So this is the key challenge. In addition to intermediate suppliers, commodity exchanges, we're dealing with six to 700,000 farmers directly around the world, or in some cases cooperatives. And, you can't just throw your weight around and tell them how to do it in a different manner the next day. You have to give them help. They're the most exposed part of the supply chain. They're immediately exposed to the maladies of the climate and weather, their capital cushion is a lot lower than many of the other businesses in the supply chain. And so this is where we need to give a helping hand. We call that concept a just transition. So it's about giving technological help. It's about also giving some of the micro lending and, financial support or paying a premium for products that are made according to these practices.

Mark Wiedman: Mark, give us some concrete examples.

Mark Schneider: So a good example is in cocoa farming where independent of the size of the farm, we are paying for a number of practices that we consider to be important for the long-term success of the farm, and also for preserving human rights and avoiding child labor , for example. So independent of the size of the farm, if you send your kids to school, we pay premium for that. If you're pruning your trees we pay premium for that. And if you fulfill all of the requirements, we pay some additional premium on top of that. And so this way, we're helping the farmers switch to more regenerative practices at the same time avoid issues such as, child labor and lead to higher farmer incomes.

Mark Wiedman: What's the biggest resistance that you hear from farmers?

Mark Schneider: The initial conversion from that traditional industrial agriculture to regenerative agriculture, day one requires some additional investment, and usually comes with a period of 2, 3, 4, 5 years of reduced outputs. So literally it's investing more and earning less, which of course, to anyone around the world, would not be an attractive proposition. And so people are reluctant to do this. You also then have to provide that safety net that people can make it through that period, and without too much of a financial disadvantage.

Mark Wiedman: How much of a production loss might that experience during those first few years?

Mark Schneider: Very much depends on the location of the crop, and this is another thing we have to do, it's not about basically writing one set of guidelines and then, one size fits all, rolling it out. You really have to work on that location specific solution. But it depends a lot on the specific circumstance.

Mark Wiedman: At Nestle, you touch farming, packaging, the production of actual food, logistics, recycling. Across that whole chain, where do you see the most promise for decarbonization?

Mark Schneider: Clearly in the supply chain, and unfortunately, that is the hardest part. And of course, you're literally removing greenhouse gas emissions, one kilogram, one ton at a time in so many places around the world. So there's not one factory that you switch around and turn around and then all of a sudden problem solved. It's an incredibly decentralized job that is why it takes some time to be effective.

Mark Wiedman: What about the product itself? Is there low carbon product?

Mark Schneider: I think there are products that by design have a lower greenhouse gas footprint, and so any plant-based alternative compared to a meat based one, for example, has that and consumers like that feature, in addition to any potential health benefits.

Mark Wiedman: What are you hearing from customers about their willingness to shift to plant-based alternatives from traditional cow-based production?

Mark Schneider: I think there is significant interest out there and for a number of different reasons. So clearly, environmental concerns are one. Animal cruelty, especially among the youngest of consumers, that's another key reason to switch to those products. And then for quite a few middle-aged consumers, there is an interest in switching to plant-based, simply due to health considerations, because quite often, we're offering a similar amount of protein with lower amounts of saturated fat and lower total calories.

Mark Wiedman: Many of your products are sold to supermarkets. How do the prices compare for low carbon versus high carbon food?

Mark Schneider: So in the case of plant-based initially they were more expensive and they still are more expensive. Some of that is simply the fact that they were positioned as more premium products. Some of it is the fact that, some key ingredients such as, soy isolates, pea isolates were initially in short demand. I think over time this will even out. And there is no reason why, in the long term, these products should be more expensive, because, when you look at the way they're being made, it's so much simpler to just basically have the crop and turn it into a product, as opposed to, having a crop, feeding an animal, and then making the product from that.

Mark Wiedman: I think a lot of our listeners understand decarbonization in the automotive sector. What's the biggest opportunity for making consumers more aware of the carbon impact of what they eat?

Mark Schneider: I think, some sort of standardized consumer facing labeling would certainly be helpful. Because right now everyone is using their own terminology. So I could easily envision a world where, in addition to some basic nutritional information, there would also be another label that gives basic environmental information, but gives it in a way that is standardized and harmonized across the industry. And then when it comes to the companies, I think, a pretty harmonized carbon disclosure is also very helpful so that investors and other stakeholders can basically form their own opinion.

Mark Wiedman: Where do you look to for having standardized disclosures for customers and shareholders?

Mark Schneider: Well, I think for the customers, it tends to be pretty much a country by country approach. It's the same for nutritional values so this is where you have to respect, you know, sovereignty and people taking care of their consumers within their jurisdiction. When it comes to, the corporate disclosures, I think there you have a better angle when it comes to international standards. You know, it could be under some of the disclosure rules, it could be under international agreements. There has been, for example, a very promising project led by

the World Economic Forum, trying to harmonize some of those. And obviously the audit firms also have an interest in agreeing on harmonized standards here.

Mark Wiedman: From a policy perspective, it may not be a straight line, but from consumer demand, is it a straight line? Are we seeing continuous demand increasing for decarbonized product?

Mark Schneider: So generally it was, then came COVID and then came the inflation wave. And so currently we're also dealing with affordability issues. Understandably when these products are more expensive, that diminishes some of the growth expectations short term. But I would be very surprised if, longer term you wouldn't see a resurgence of interest because the interest in the environment, interest in animal rights, I think all of those are on the rise.

Mark Wiedman: As a CEO, you have to disclose your carbon footprint. What are the biggest barriers for Nestle? What are the biggest obstacles to an efficient, clean, clear disclosures?

Mark Schneider: I mean, the key problem is, I don't have to disclose it as a CEO, and so people don't. And we do, we're quite committed to this, and every year you can see our progress. And in fact, we're one of the few companies where, in spite of our growth, the greenhouse gas emissions are already below our 2018 baseline and year after year, you'll be able to track our progress and you'll be able to judge whether we are in line with that net zero roadmap that we issued. But many companies don't bother to disclose. You have no idea where they are. And of course, you have to assume that it's not a priority, and that to me creates an uneven playing field and something that needs fixing.

Mark Wiedman: Mark, you joined Nestle six and a half years ago. How has your vision of decarbonization and your Nestle strategy changed during that period?

Mark Schneider: I think it gathered intensity, and to me, the key starting shot was that we were taking that pledge, according to the science based targets in 2019, that we were basically managing our greenhouse gas emissions consistent with the goals of the Paris Agreement, and that means limiting the rise of temperatures to one and a half degrees over pre-industrialized levels. And under those rules, then once you take that pledge, which of course is a highly public thing, within two years, you're required to issue a set of, time-bound intermediate targets and also specific steps on how to get there. That's our net zero roadmap, which we issued within one year of taking the pledge. Cause frankly, one of the reasons we had here was we, didn't wanna wait two years, this is an urgent matter and clearly plans rarely get better in the second years of their making. And so, when that came out, it was seen as the gold standard in how to do it in food and beverage, and that really gave incredible clarity to the organization and what they had to do and what the levers were, and it really galvanized the entire firm and added a lot of intensity.

Mark Wiedman: When you look at what Nestle needs to learn from other sectors, other industries, and what other industries can learn from Nestle, what would you highlight?

Mark Schneider: I think on the inside of the firm, our operations, this is where we do a lot of benchmarking with other industries, to see what the best practice is and, uh, what we can do, where we have no role model to look to is when we look upstream in our supply chain. This is where everyone is learning with us. And so this is literally learning by doing. And sometimes you make mistakes. You find a dead end that's not giving you the results you want. You have to give up on that, and then double down on something else that gives you better results. So this is a lot of trial and error. But of course at the same time, you have to work fast because, if you want to meet the first intermediate goal, which is a minus 20 percent by 2025, there's not a lot of time left.

Mark Wiedman: What's the number one criticism you receive either at Nestle or in your industry that you think is fair?

Mark Schneider: I do think in addition to the greenhouse gas footprint, the one other key concern that is highly visible is plastic spillage into the environment as a result of packaging being discarded. And so plastic has a lot of advantages when it comes to product safety and shelf life and avoiding food loss. But obviously, we have to work on better recycling systems. We have to work the spillage of plastic into the environment, and that one is highly visible. Unlike carbon, which is not visible, the plastic bottle on the beach somewhere that is highly visible and so consumers are quite concerned rightfully so.

Mark Wiedman: What's the most important thing to get the world to net zero?

Mark Schneider: I think consistent effort. That to me is key. And not just in our industry, but also elsewhere. If regulators and the public sort of fade in and out of this, nothing will get done because whether it's our industry over industries, I think all of this is long-term effort and, step by step we can get there.

Mark Wiedman: Mark, thank you for being so generous with your time and your thoughts.

Mark Schneider: Thanks for having me.

Mark Wiedman: Thanks for listening to this episode of The Bid. Make sure you subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

As we approach the midway point of 2023, the economy has had a turbulent ride thus far. This year, we've seen bank failures across the globe, a debt ceiling showdown in the US, high inflation and central banks raising interest rates to their highest rates in over a decade.

The typical 60:40 portfolio. needed an overhaul after a rocky 2022, and investors are looking for a new balance. But during that reassessment, one asset class seems to be having a standout moment among investors That asset class is gold. In this episode, we will take a look into the history of this commodity and what investors should consider when allocating to gold in their portfolios.

I'm pleased to welcome back Gargi Pal Chaudhuri, Head of iShare's Investment Strategy, to help us take another look at why gold is having its moment to shine.

Gargi: Gargi, welcome to The Bid. Oscar, it's wonderful to be here.

Oscar: You have a special seat, on The Bid podcast Gargi, you're a frequent guest. And today we're talking about gold, which is having a bit of a moment, and I think when a lot of people think about gold, they think about the gold rush of the 1800s or maybe a piece of jewelry, or maybe the color of the sky in New York in recent periods. But we're actually talking about gold as an investment. So, tell us a little bit about the history of gold as an investment in a portfolio.

Gargi: So, you ask an important question around the history of gold and thinking back, 2-3 thousand years ago, gold was still very much a medium of exchange.

It was a store of value and artifact of beauty. I think more recently, if you look back to about 700 BC, that's when we were really thinking about gold as a medium of exchange, a medium of payment. If you think about what happened in the 1790s with the Mint And Coinage Act US Congress passed that act putting a fixed price on gold with parity to the dollar.

And more recently, in 1971 when we broke the gold connection with the dollar, I think all of this was the period where, Gold came to the forefront as an investment as that second thing that we were talking about, which is around the medium of exchange and a store of value.

And I think it's important to think about why we as investors gravitate towards gold, and I'm sure we're going to talk more about it, but why is it gold? Why isn't it something else? When we are talking about precious commodities, and I'm Indian, as you can hear from the voice.

And obviously historically my family, has invested in gold. But why? And if you think about the periodic table and you look at all the elements and you take out the ones that are reactive to air or react with water or rust

too easily, you're left with very few that can actually stand the test of time, that can be stored without getting rusted, that are ductile and malleable.

That is why it has, held its value held its status as something that can be a source of investment and also be all of those other things like a medium of exchange and of course, artifact of beauty.

Oscar: So, you took us back to 700 BC, so you went way back in the history books to start to tell us a little bit about gold as an investment, but why is it having a moment right now if it's been around for so long? What is it about this particular period that is bringing it back into the spotlight?

Gargi: A few things. So, number one, there is a lot of concern around economic growth and historically we have found when there are periods of concern around the future of global growth, investors have turned to assets like gold, which are likely to be a good diversifier to traditional investments such as equities, such as bonds. So, number one, there is some concern right now around the growth dynamic globally of the US. So that's one reason. Number two, I think geopolitical fragmentation, geopolitical risks. Especially when you think back to just last year with the war in Europe, with Russia, Ukraine, that led to a lot of angst. Again, if we thought about what were some of the concerns you had for 2021, none of us put war in the forefront in 2021, for 22. So, I do think this geopolitical risk that arose and actually frankly concerns around more geopolitical political risks that might be abound is another reason that investors are thinking about gold as an alternative.

Another reason, and I think this is a very interesting and important one, is the path of interest rates and the part of the US dollar. And we talk about the path of interest rates, and particularly it's the path of real interest rates, so inflation adjusted interest rates. Remembering that while gold bangles are beautiful, and while gold can be stored in a vault for centuries, it still doesn't have a yield. So, when you buy a bond, you have an income associated with it, you have a coupon associated with it. When you buy a stock, you might earn some dividends associated with it. Gold does not have that. It's a non-yielding asset. So, in a world if interest rates are moving higher, you can gravitate towards the bond markets to earn that higher interest rates. You might not be as attracted to gold.

But in a world where you expect interest rates to move lower or remain stable, if you expect real interest rates, so that inflation adjusted interest rates to move lower, I think investors could find gold, more attractive in those moments. And I certainly think that's happening right now.

And then another one, we talked about the dollar, but I do think, historically the dollar and the gold has had a negative correlation. So again, if your expectation is for the dollar to decline or even just not to increase anymore, that could be another powerful dynamic for adding gold to a portfolio.

But for all of the things that I mentioned, I think two that are probably in the forefront of investors' minds right now, are number one this diversification away from the dollar, and we've seen many central banks, especially in the emerging markets, we've seen central banks such as China, India, Russia, that have been adding to their gold reserves to diversify away from the dollar. So that is something that's happening. It's been happening for a few years now, but certainly has been pretty profound in the last couple of months. And then the second one is this fear of a geopolitical event or a global growth slowdown that is driving this current moment and this current price action.

Oscar: So, you mentioned a number of things that impact the price of gold. But maybe just to go back to interest rates for a quick second- because it feels like that's always something that we're talking about, especially when we have you on The Bid- which is on interest rates if they're high, that all else equal doesn't make gold that appealing. But you're saying that it's not just the level of interest rates, but what they look like adjusted for inflation, and if those are headed lower, then that might provide a little bit of demand for gold in the market.

Gargi: So, it's a very good clarification, Oscar. We have to remember that markets are forward looking, so it is what investors expect interest rates to do. So, if I own a real rate, so if I own an inflation linked bond, for example, and I expect that real interest rate that I'm earning by owning that bond to go lower in the next six months or next year. Those are the two options, you own the bond that real interest rates that you're earning right now, it could go lower, or you could own that, and you expect that real interest rate on that inflation like bond could go higher.

So, in each of those scenarios, you are still earning a coupon on your inflation-linked bond. When your expectation is that real interest rates can either remain here or actually real interest rates are so low and remember in the US that real interest rates were zero or negative for a long period of time, then you might think that you could own a non-yielding asset, which might give you a better outcome.

But if real interest rates are you hold them, you expect them to remain pretty steady and you don't expect them to go lower in the near term, that's when you might want to gravitate towards gold. So, it's that relationship between real interest rates falling in a falling real rate environment you might want to gravitate towards gold as opposed to in a rising real rate environment where you might want to think about waiting to buy the real rates. Does that make sense?

Oscar: It does make sense? And I think another reason that investors look at gold is the belief that it's a hedge against inflation. is that a correct assumption for investors to make?

Gargi: Yeah, a lot of times, I have clients that talk to me about inflation and they're looking for that ultimate inflation hedge and investors turn to gold.

Historically, if you look at price performance, there was one period of time in the seventies, very, specifically in the early seventies where inflation, as we know, was in the double digits, and when gold was a hedge. Outside of that though no other period of high or very high inflation has actually resulted in gold being a good hedge.

So, outside of that very early 1971-1974 period we haven't found gold to be a good inflation hedge. What it has been is a good geopolitical hedge. What it has been is not so much an inflation hedge, but a hedge where more of a stagflation hedge actually, where again, if you expect real interest rates to go lower, which you would in a stagflationary environment, that's when it has actually worked as a better hedge.

So, I think it's a little bit of a misconception. And when you look at the performance of gold, it's been more mixed in inflationary or very high inflationary periods outside of that one time that I mentioned, but when we expect real rates to move lower- and by the way right now, I do expect real rates will stay at current levels for some time and then eventually by the end of this year or next year, start moving lower- I think that could be one catalyst for gold to remain in the forefront of investors' minds.

Oscar: You also mentioned the periodic table, I must admit I pulled it up, a couple days ago, but partly in anticipation that you and I would be speaking and actually, do you remember the symbol for gold on the periodic table.

Gargi: Come on! Au!

Oscar: Okay. Okay I remembered it too, but I needed to look at the periodic table and you touched on that there are other metals That have similar characteristics, there's not many, but there's things like silver, platinum, palladium,

Gargi: Rhodium, palladium,

Oscar: Very good, so now, why are those, not benefiting from this moment that gold is having? Or are they?

Gargi: Historically gold has been this really respected, metal, right? I would classify gold and silver in the same bucket. Obviously silver, not as much as gold. Rhodium and palladium were discovered much later, centuries later, we weren't reading about them in the time of the Egyptians and Bhagavad Gita and the Iliad and Odyssey, which all mentioned gold actually. So, they weren't around because they just weren't discovered. Platinum has a very high melting point, which again, you couldn't use that, especially in the olden days, you couldn't use that to build gold blocks or gold nuggets, et cetera. You couldn't use that melted down to create jewelry, now you can because modern technology- high temperature furnace- but you couldn't back in the day.

So today silver certainly can have its moment, but this risk of hedge characteristic, so all the things that I talked about earlier when it pertains to, geopolitical risk, that certainly resides more with gold. And that's because gold has, historically, we went back and talked about the 700 BC, the form of payment the 1792 Coinage Act, if you look forward 1934 Act, historically there has been a lot of correlation of gold as currency, gold as method of payment. Until 1971 you had to have your currency backed by gold, and then of course, in 1971 that was, dismissed. But silver and platinum never had that. So now, even though we don't live in a world when any currency globally is backed by gold anymore, those other elements just don't have that same cash to them, if you will.

I'll also add that when we think about silver or when we think about, any other precious metals, we always think about what are the users of it. So, silver does have many other users, obviously, in addition to being used for jewelry, you can use it for, other purposes, which gold can't be. So, I, I think depending on what you are looking for as an investor, Silver can be a very good addition to your portfolio, but it might not have the same risk of geopolitical risk, hedge diversifier for your US dollar reserve that gold does.

Oscar: Essentially gold just has a longer history and sort of unique aspects to its story of why it serves as an investment in a portfolio. And I think for much of that history, only until maybe recently, buying gold was a clunky exercise, literally buying gold bars, which are heavy, and you've stored them somewhere, in a personal safe. But that's changed dramatically over the last 15 or 20 years, right? So maybe talk a little bit about how investing in gold has modernized.

Gargi: So, to your point, you could invest in gold as a form of jewelry, but if you invested in gold bar form then there was the cost of storage, not only is it finding a place to store but the cost of that storage, not everybody has the capability of renting out space in a huge vault to store their gold bars. Or even if they do, I think that that's an expensive proposition. I think what we have seen in modern days today if you're an investor looking to invest in gold, there are a few ways to do it.

Obviously, you can participate in the futures market that's the right or the option to buy gold in the futures market - that's not actually gold. What many investors, especially those that are truly worried about a geopolitical risk event or a massive global growth shock, you actually want to see that asset that you own, and I think the rise of gold ETFs where when you buy that ETF you know that your ETF is backed by gold, which is in a vault in New York or London.

That has risen in the past few decades and that has given everyone, you don't have to be a rich billionaire with a home in Switzerland and a vault to have access to storing gold. You can, buy an ETF that gives you access to gold and do it in a very liquid and very efficient manner.

Oscar: I'm laughing a bit because I think about some of the recent episodes we've done, which hopefully you've listened to as well, and we talk about things like artificial intelligence, we've talked about digitization, and here we are talking about gold, which, feels like a bit of a relic in investment market. So how is it that gold has endured during this digital age?

Gargi: Sure. the risk of sounding like a relic, which I don't want to, I will say that gold has survived because it can be a diversifier in your portfolio. It gives you that ballast, and it can be tactically an opportunity for investors looking to invest in the face of slowing a growth shock or geopolitical tensions. And that has held through many business cycles. I'll also say another big reason that we're talking about gold now is that historically for institutions looking to trade gold, it has been a pretty expensive venture. We talked about that, the storage costs and things like that.

ETFs now more recently have helped and accomplish the digitization, for gold for every type of investor. For more sophisticated clients using technology such as blockchain ledger, having a digital gold currency could help institutions trade even more efficiently.

So, we have alleviated some of the issues that may have existed a few decades ago with digitization. And the main reason that we are still talking about gold is some of the drivers of gold that existed a hundred years ago. And what we talked about when we started the show in terms of holding its value, being a medium of exchange and being an artifact of beauty. Many of those things still hold, and that's why we are here talking about it. But the good news is it has entered the digitized age with ETFs, allowing every type of investor to have gold backed, ETFs in their portfolio.

Oscar: Gargi, you've given us a great history lesson. You also wore a piece of gold jewelry today that I noticed, and I think there's a little bit of a story behind it.

Gargi: I did. So, I got married 15 years ago, and as I mentioned, I'm Indian, so for many of you who don't know this, Indians are actually the largest buyers of gold for wedding jewelry purposes. And I wore my wedding jewelry for this podcast to bring home that point. And there is such a thing as wedding season demand. So, every year in September, August or September, October, you'll hear people in the western world talk about demand for gold coming from Indian wedding season. And it's so exciting whenever I hear someone random talking about it! And based on what I'm wearing, in my hands right now, it is factually correct. Lot of Indian wedding gold demand.

Oscar: Well, thank you for bringing that special token to today's podcast. And thank you again for joining us on The Bid.

Gargi: Thank you for having me.

Oscar: Thanks for listening to this episode of The Bid. Don't miss the next episode featuring our midyear outlook. And subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Historically, cash has often been seen as a temporary parking place for funds or as a means to bridge the gap between investment opportunities. However, with higher interest rates in effect and global economic uncertainties looming, cash has emerged as an asset class that demands another look. So how might investors consider cash as an asset class right now?

I'm pleased to welcome Beccy Milchem, Head of International Cash Management at BlackRock. Becky will join us to talk about the role of central banks and their recent rate announcements, how technology might impact the future of the asset class, and the top three things investors should consider when it comes to cash in uncertain market conditions.

Becky, thank you so much for joining us on The Bid.

Beccy Milchem: Thank you for having me, Oscar.

Oscar Pulido: So, Becky, today we're talking about cash, which I have to imagine is a topic that is of interest to a lot of people. but when I think about cash, I think about currency and bills in my hand. But when you think about it from the context of an investor's portfolio, I think it means more than that. So maybe you can help elaborate on that a bit.

Beccy Milchem: Yeah, and I think it's a really good point. The term cash can mean different things to different investors. From readily available overnight cash, which could be held in a bank deposit or an overnight money market fund to cash and cash equivalents, which could encompass things that term out a little bit more, typically out to three months. Or even anything out as far as 12 months to two years and physical, money market securities that are held within a portfolio.

Oscar Pulido: And I think of the. phrase "cash is king" that seems to be something that gets said once in a while, but actually for many years, over the last 10 or so, with interest rates so low, it was quite punitive, I think, to have cash- you weren't earning much of a rate of interest. Now we're going through a cycle where central banks have been hiking interest rates quite aggressively, so how does that impact now the way in which investors are thinking about their cash allocation and their portfolios?

Beccy Milchem: Yeah, and I've always preferred the term Cash Is Queen! I think we went through a long period of time where people really didn't focus on it. As the world went into lockdowns, central banks were responding quickly to help economies, and many reacted by taking interest rates down to near zero or maintaining negative rates. These lower base rates were intended to feed through to lower borrowing costs for businesses and households so that lending didn't grind to halt and that people were able to keep spending.

As an investor of cash through our money market funds, we really had to be focused on client needs through those initial lockdown periods, and the reactions to problems that we all faced and what that meant for clients’ liquidity needs. In times of market volatility, we know that liquidity is a priority for all types of clients, and we will typically hold much higher levels of overnight and weekly liquidity in the money market funds that, that we manage. The aftereffects of the pandemic though and how central banks are reacting now is also having a very direct effect on cash investors. Global shutdowns meant that we have experienced a huge global supply shock with certain parts and goods very limited in availability, which has had a knock-on effect on prices increasing as demand has outweighed supply, and the war in the Ukraine has further compounded this issue but also not helped investor confidence levels. While some of those higher cash balances that people had through the peak of the pandemic are being spent down as a necessity.

What we're finding is investors are still really cautious about dipping a toe back in and taking more risks, so actually there are a lot of people still holding higher levels of cash.

From late 2021, we saw the Bank of England make the step to increase interest rates, and they have been followed by the Fed in March 2022 and the ECB, which moved its deposit rate back to zero in July last year, having maintained a negative deposit rate since 2014. Each central bank is attempting to combat rising prices by slowing demand, and we have seen a steady pace of increases up to this point.

From a cash perspective, we've gone from an environment where the opportunity costs of returns, to your point around different cash investment options was really low, and thus cash probably became a bit of an afterthought within portfolios. And what we've seen in the last few months is that with interest rates constantly moving higher, a more proactive approach to managing cash is definitely warranted.

One of the reasons that many investors have turned to money market funds is to help them proactively manage duration, risk, and effectively outsource this to a team of portfolio managers whose job is dedicated to the cash investment options available through money markets. Typically, money market funds will position themselves extremely short in duration ahead of expected central bank hikes that the fund has dry powder to deploy post the rate increase and will quickly reflect a prevailing market rate.

Oscar Pulido: I think we're used to seeing sort of volatility in the stock markets, and for that matter, we've seen a lot of volatility in the bond markets, but you've also highlighted that there's just a lot going on in the cash markets with changes in interest rates across the world. Now this also reminds me, I've heard you say that not all liquidity is created equal. So, what do you mean exactly by that?

Beccy Milchem: So, one thing that I think tends to be common amongst cash investors is that when you have a need for cash, you want to make sure you have access to it and a reasonable amount of certainty as to what you have to hand.

Now, for us and for many investors, the ultimate liquidity is that overnight cash bucket, because you know you've got it there when you need it. And as I touched on earlier, one observation I would make about the last year is that coming out of near zero or negative interest rates into an extremely dynamic interest rate environment has meant that it has been very challenging to make the right call if you are terming out your cash investments beyond overnight.

When you've been at zero and suddenly there is something on the table, it's quite easy to have that bit of a magpie moment of something bright and shiny that's not zero and jump straight in. And what we've seen is a lot of investors locking up money for a few months or even a year, which might have looked really attractive at first, but when you consider how far central banks have moved, The Bank of England, has moved, 12 times in between that December 2021 and May this year. So many of the term exposures that clients may have invested in might not have paid off through the duration of that investment. We often hear of term deposits with banks being self-liquidating, which is true if you don't need the cash until maturity, but it's definitely not the case if you need it before. Term bank deposits are typically unbreakable, meaning that you have to pay a penalty if cash is accessed early. And similarly, if you need to

raise cash by selling direct investments in money market securities, there will be a price to pay if that instrument is not offering the prevailing rate.

Now, the case in point here has really been the short-term US T-Mobile market. In the run up to the debt ceiling debate, so highly rated short-term government bills typically offer significant liquidity in that they are easy to sell if you need to raise cash. But spreads on these exposures have been more volatile as investors have been avoiding holding positions with maturities close to the X-date, which is the date that would potentially mark the treasury running out of funds.

And to give you a live example, the yield on a US T-bill maturing on the 1st of June has at times been trading 200 basis points higher than a bill maturing at the end of May. That's a huge difference if you are a forced seller in this market, which is why we think that money market funds or liquidity funds make so much sense for investors.

They give you access to a sizeable pool of readily available cash, as well as portfolios of very high-quality holdings that evolve as the circumstances change. Now, we love T-bills for the liquidity that they would typically offer but what we typically do in this kind of scenario is rotate portfolios proactively in a way that as an investor, if you're not focused on the cash markets, you might not be able to do readily yourself.

Oscar Pulido: And you highlighted an example about investors who, as interest rates were going up, started to allocate to instruments that offered them a higher interest rate, but also locked them in at that interest rate and therefore they missed out as central banks continued to hike interest rates. And so therefore, as much as that is cash, it wasn't as liquid as they wanted it to be.

Beccy Milchem: Exactly, it's still cash and if you know you can hold that investment for the duration, it's fine. You're going to get your cash when you need it,

but sometimes those unforeseen expenditures can come and hit us at a personal level or even at the institutional level, and so that's where liquidity and it not all being equal comes into it.

Oscar Pulido: You've touched on central banks, you've mentioned the Bank of England, the Fed, the ECB, all have embarked on one of the fastest rate hiking cycles that we've seen in a few decades. As we're appearing to reach the cycle where maybe those rate hikes are going to slow or potentially even pause, what does that mean for some of those cash markets that you've been talking about?

Beccy Milchem: Yeah, central banks have a really difficult battle on their hands. They're continuing to grapple with bringing inflation down when economic growth is also perceived to be in a very delicate balance.

The recent May meeting saw a further 25 basis points increase from the three majors you mentioned, but it's definitely slowing the paces as we look forward, and we're probably close to the peak, but with a huge amount of uncertainty around inflation, numbers still running so high, and the added overlay of politics in each domestic market and at the global level, I think there's still a bit of an uncertain path ahead. Central banks themselves are now much more data dependent than they were a few months back with a growing awareness that the lag of transmission of previous hikes still has to catch up with within consumers. Now markets themselves are predicting that many central banks will go too far increasing rates and thus need to bring them back down a bit within the next sort of six to 12 months depending on which currency you are looking at.

This means investors are facing a yield curve that includes market pricing of those rate cuts, and in some cases has become inverted in that timeframe. So as a cash investor, you may plan your strategy based around when you have a known cash need and have different buckets for everyday use. A big expenditure for you and I might hopefully be something like a holiday, a car, or a house purchase, for institutional investors, that might be like a known acquisition or a transaction from a portfolio positioning taking

place, in a few months. But from a practical perspective, an inverted yield curve in short term markets means you're probably not going to get compensated appropriately for the risk of locking up your cash for say, six months or a year. There is also still a lot of risk in turning out your cash if markets have got it wrong and rates stay where they are or perhaps even move higher still.

So, the way our portfolio managers are thinking about this is that throughout most of this hiking cycle, the market has underpriced the level at which rates will be moved to by central banks. So, unless you're looking at the markets all day, every day, that's a really difficult thing to keep on top of.

And at the end of the day, an investment strategy comes down to tolerance and appetite for risk. But if you are a cash investor with daily or short-term need for cash, there are not too many downsides to staying short at the moment. So, options that give you daily or next day access to your cash will allow you to be nimble, but you do still need to make sure those options are reflective of where interest rates are, as with inflation running where it is right now every basis point earned on cash is also critical.

Oscar Pulido: So, Becky, one of the underlying themes that you've touched on is, being nimble, and being active and flexible with your cash portfolio, which is again, I think an area of the market that many people don't realize you need to be as nimble in. You've also touched on a number of things that have clients concerned, and perhaps one of the reasons why they continue to maintain a higher cash allocation. It's things like inflation, you touched on the war in Ukraine, you touched on the debt ceiling. What are some of the other concerns that clients are raising?

Beccy Milchem: The cash investors, are typically concerned about whether they're going to be able to get access to their cash when they need it. And the mantra that most cash investors live by including ourselves, comes under a three-pillar approach.

So, the first being safety or capital preservation, knowing what you're going to get back, the second being liquidity and knowing you've got access to it when you need it. And the third being yield. And when it comes to concerns or things being raised by clients at the moment, they've typically fallen under one of those pillars.

Firstly, the vulnerabilities in the banking sector this year have highlighted concerns of having all of your eggs in one basket, both from a capital preservation perspective, but also about always having that timely access to cash. As we talked about earlier, investors might be more defensively positioned than usual, given broader market sentiments. The level of cash they have may be much more than they are used to holding. Now in the past this may not have warranted too much thought, but now they may be thinking they need to practically diversify their exposures. Individual investors may have some level of government protection on bank deposit products, but investors with much larger cash balance, particularly on the institutional side, will need to think about how they prudently diversify their risk to individual counterparties and monitor their exposures.

Again, outsourcing the diversification and credit monitoring to dedicated products such as money market funds with their dedicated resources looking at this on a daily basis might be the most efficient way to manage those risks. Secondly, and as I've already mentioned, most investors are concerned about having access to their cash when they need it, and their liquidity and the debate around the US debt ceiling has prompted investors to be cautious around exposures in US T bills that may have some risk of delayed payments.

Now, I would hope by the time this recording goes out that we may have a resolution on the debt ceiling. But having been here before, this feels like a world trodden path for dedicated money market portfolio managers who will typically naturally rotate out of maturities in that X date window. And where investment guidelines allow, they'll rotate into overnight repurchase agreements.

They're collateralized by US government debt to give that portfolio the resiliency it needs. Now. Finally, my third pillar was yield, and the return on cash investments has also been much more in focus, in part spurred on by media coverage, prompting investors to review what their cash is earning. But cash has really gone from being the afterthought thought to being the asset class that many conversations are focused on as investors survey the options available.

Oscar Pulido: Beccy if we can switch gears a little bit and talk about technology. We hear a lot about artificial intelligence and how it's affecting virtually every industry, including asset management. How do you see the role of technology impacting the cash industry?

Beccy Milchem: So, in response to the US Regional Bank challenges, it's been widely reported that cash moved much more quickly in 2023 than it did during the global financial crisis.

Now, I think that is partly down to how quickly digital media spread the news of troubles in regional banks, but it is also down to the fact that physically moving cash can be a lot easier via technology today. We see a lot more of our investors accessing our money market funds through some kind of platform which can offer trading efficiencies and straight through processing, all enabled through the technology that exists today that didn't in 2008.

Similarly, a lot of the technology that helps companies look at things like cash flow forecasting means that a lot of institutional investors simply have a better line of sight on what cash they have available to invest today. Now we are seeing a lot of asset managers and banks investing in cash investment technology, and we're starting to see some of the functionality that we are used to in our personal lives through banking and investment applications on our smartphones be rolled out on institutional cash trading platforms.

I'm not quite sure it's in the realms of AI, but a big thing for investors is the level of automation that can be driven and across certain institutional investors, we see a lot of demand for sweep technology whereby the investment platform can simply take the level of excess cash determined by an underlying client and efficiently sweep this into their chosen investment products such as a money market fund.

And I think the other area that's really moved along is that technology can really help with all of the important reporting elements. And so, we look at the ways that clients interact with the technology, and they're looking at things like simplifying and automating things such as positions reporting, or what aggregate exposure is across a number of credits across their overall portfolio, even down to the cash.

Oscar Pulido: So maybe just looking ahead, you've touched on a lot of different aspects around the market environment right now, but what are two or three things investors should be thinking about with respect to their cash allocation as they look forward?

Beccy Milchem: So hopefully it's come through today, but I think cash is most definitely an asset class you need to think proactively about, and I think it comes back to that mantra that we live by capital preservation, liquidity, and yield, but maybe put slightly differently, know where your cash is, know how quickly you can access it and what it is earning.

Most of us don't have time or dedicated people in our teams to look at this all day, every day, so think about the tools you can use to more efficiently help you manage your cash and whether it's right to outsource it. And similarly in these uncertain times, which I don't think are going away, navigating terming out cash investments will continue to be challenging, but there are dedicated products that will continue to help proactively manage these risks. And my advice would be really to talk to an asset manager who has a specialty in this space.

Oscar Pulido: Well, Beccy, thank you so much for shining a spotlight on an area of the market that, maybe doesn't always get the attention that it needs. And thank you for joining us on The Bid.

Beccy Milchem: Thank you so much for having me.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next week on The Bid, Mark Wiedman talks to Mark Schneider, CEO of Nestle, on the role of food in the transition to a low carbon economy. Subscribe to the bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. Today is Thursday, June 1st.

The debt ceiling has been capturing headlines for weeks now. And the recent vote in US Congress has drawn a line under the drama on Capitol Hill for the next two years. But what does this mean for markets and are investors feeling reassured?

In this special episode of The Bid, I'll be speaking to Alex Brazier, Deputy Head of the BlackRock Investment Institute to look at what happened, how markets are reacting, and what investors can expect going forward now that the debt ceiling crisis is behind us.

Alex, thank you so much for joining us on The Bid.

Alex Brazier: Oscar, thanks very much for having me again.

Oscar Pulido: So, Alex, we're talking about the debt ceiling, which has been in the headlines for some time now, and I wonder if you can just take a step back and fill us in around, what has happened and where are we now?

Alex Brazier: Well, yeah, it's been front and center for the last few weeks really what happened is that the US government reached its debt ceiling, which is a level of debt set by Congress that it can't go beyond, and that limit was $31.4 trillion. And given the US government's spending and tax plans, it needed that to be lifted. But of course, its opponents wanted it to change its plans in return for lifting the ceiling. Now, importantly, without an agreement, US government would've basically run out of money to pay its bills. The US Treasury estimated that it would've run out of money on the 5th of June, so that would obviously have been hugely disruptive, both for the economy directly, but also for the financial system with the US government unable to pay interest on or make scheduled repayments on existing debt.

It would've been in default. And that's absolutely critical because the financial system relies on the US government and its securities as ultra-safe, reliable assets, hence the real focus on all these negotiations in Congress. But now, an agreement has been reached at the 11th hour, and it's been passed by the US Congress.

Now the debt ceiling limit has been suspended until 2025. And in return for that, the US government has moderated some of its spending plans. That means markets are breathing a sigh of relief now. But that just means really attention is shifting back to the underlying economic situation in the

United States, which hasn't really changed very much while everyone's been focusing on the debt ceiling.

Very sticky inflation, very tight labor markets, US economy is, effectively overheating. And the question that markets and policy makers are grappling with is, what will it take to bring inflation down? And that took a backseat for a while, that really important question, while everyone's focus was on the debt ceiling, but now that's coming back front and center.

Oscar Pulido: Alex, you said $31.4 trillion, which is a big number even for an economy as big as the us. Can you help clarify some terminology though? We talked about the debt ceiling, you mentioned default, and then we also were hearing about a government shutdown. How do those three things interrelate to each other?

Alex Brazier: So, the debt ceiling, as I say, is set by Congress and it limits the amount of debt that the US government can have issued at any one time. So, as I say, that's 31.4 trillion, even as you say, relative to the size of the economy, that's 120% of US GDP. So, it's a big number. Now default is a situation where the borrower, in this case, the US government, can't service the debt, that it has in issue, so it can't make scheduled interest payments, it can't make scheduled repayments of that debt. And the risk here was that because it was going to hit the ceiling and not be able to issue more debt, the US government would've had a cash flow problem. and been unable to make some of those payments, and therefore it would've been in default on its existing debt.

Now, a shutdown is also what happens if the government doesn't have the cash to run its operations and to pay its employees. And we've seen that in previous debt ceiling, episodes. And all these things are linked because if the government hits the debt ceiling and has a cash shortage, it effectively needs to shut down its functions.

It needs to stop paying its employees, furlough its employees, and it risks not being able to make payments on its debt and therefore it would be in default. So, the debt ceiling, the risk of default and the risk of a shutdown of its operations are all inextricably linked.

Oscar Pulido: It makes sense. And curious then, how has this impacted markets now that the risk of a default seems to have passed, I think that risk is now firmly off the table, if I'm not mistaken?

Alex Brazier: That's right. I think that the immediate risk is off the table. The debt ceiling itself has been suspended for two years now until 2025. But I think what's really critical, is that this doesn't mean we can just move on and forget this ever happened. We can't forget US fiscal policy, the tax and spend policy.

And this episode, this, negotiation will actually have a bit of a hangover on US economy and markets in two respects, really. Both of which will add to volatility in bond markets, in fixed income markets.

The first is that the position of US fiscal policy, by which I mean the government's tax and spending plans, is still pretty challenging. The agreement doesn't change those plans very much. the congressional budget office yesterday estimated that spending's going to be about 65 billion lower next year as a result of this agreement. But that's just 0.3% of the US economy. And you set that against a deficit, which is how much higher spending is than tax revenues, of around seven and a half percent of GDP at the moment, and you can see that actually the impact of this on the overall tax

and spend position is actually pretty small. Now. That deficit, that seven and a half percent of GDP deficit is higher than any time outside the second World War post the global financial crisis and the Covid crisis.

And it's happening at a time when the US economy is actually overheating. So, the US fiscal position is actually in a pretty challenging place and stabilizing government debt in the United States, in a situation where we've got higher interest rates, a big deficit actually means that tax and spending plans need to adjust quite a lot over time.

And in our view, market attention will increasingly focus on that over time, rather than on the kind of immediate debt ceiling risks. And that will add to, volatility in bond markets.

The second hangover, I think, is that we're going to see now a burst of issuance by the US government in coming months to effectively replenish its bank account. So, we're going to see issuance, particularly of short-dated treasury bills, all of this at a time when the Federal Reserve isn't buying US government debt through quantitative easing, but actually running down its holdings of government debt through so-called quantitative tightening. So that second hangover too, is going to contribute probably to some volatility, in fixed income markets. So, the immediate risk is off the table, but some of these important hangover effects are going to increasingly come into focus particularly in bond markets.

Oscar Pulido: And Alex, what about. Equity markets. You mentioned that there's going to be volatility in bond markets and sometimes that then unnerves the stock market investor, but perhaps the stock market investor is now saying, we have this headline behind us and time to take risk, or how do you think about that situation?

Alex Brazier: I think the equity market, a bit like the rest of us, will be breathing a sigh of relief that this agreement has been reached, but also focusing back on the underlying economic picture, which as I say is one of really sticky core inflation evidence of a tight labor market and rising wages and an overheating economy really, that presents real challenges for the Federal Reserve. And that's where the equity market, we think will turn its attention back to, and it's where it was before the debt ceiling episode, but that too was going to contribute to volatility, I think.

Oscar Pulido: And Alex, as we approach the mid-year point, what are you focusing on for the second half of the year?

Alex Brazier: Well, now that we've moved on from the debt ceiling issue, we are focused on this underlying economic situation of sticky inflation, tight labor market. And there are really two important macroeconomic questions in the United States now.

The first is how material and economic slowdown is needed to deal with that inflation? The Fed itself thinks a recession might be needed to do that. And the second is, how high will interest rates need to go to do what the Fed wants to do? Recent developments in the labor market and inflation actually suggests there's a real possibility now of more rate hikes over coming months.

And we're also focused on some of the longer-term trends, like how AI, demographic shifts, geopolitics and the energy transition will actually affect the economy and markets. It's difficult to lose sight of those, even amid some of this volatility around the debt ceiling.

So next week, BlackRock's assembling a hundred senior portfolio managers in London to debate many of these issues. I expect it to be pretty lively with some fierce exchanges. I mean, we’re pretty passionate about these issues because this is a new macro environment, it's really difficult. This inflationary environment's very different to anything we've had for the last 30 years.

And we are totally focused now on how we can unlock the investment opportunities in this new regime for our clients. And that's what we'll be debating fiercely, next week. And I hope you have us back to discuss some of our conclusions,

Oscar Pulido: We will absolutely have you back, Alex, thank you for providing us this update and we look forward to having you back to hear more about that convening that is taking place in London. Thanks for joining us on The Bid.

Alex Brazier: Thanks, Oscar.

Oscar Pulido: Thanks for listening to The Bid. Don't miss the upcoming episode on our mid-year outlook later this month. Subscribe to The Bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

What's the difference between developed, emerging and frontier markets? How do differences in per capita wealth, technological advancement, and liquidity affect the investment opportunities across these various economies?

Here to shed some light on this topic is Emily Fletcher, portfolio manager from BlackRock's Fundamental Equities business. Emily will highlight some of the risks and opportunities that emerging markets present and provide her observations as an investor who is meeting with companies and handpicking stocks across the world's developing economies.

Emily, welcome to the bid.

Emily Fletcher: Thanks so much for having me, Oscar. It's great to be here.

Oscar Pulido: So, Emily, maybe we could start with a simple definition, emerging markets and developed markets, we hear these terms a lot in investing, what's the difference between the two and then why is it so different to be investing in emerging markets?

Emily Fletcher: I think there's a bit of a misperception around emerging markets that they're countries that are less economically developed and poorer than developed markets. And whilst that is true for some countries such as your India or your Indonesia, which do have a much lower GDP per capita, it's not at all true of countries such as Qatar and the UAE, which are some of the richest in the world. It's also not really about level of technological development. Korea, for example, is extremely developed from a technological perspective.

Actually, definition of emerging markets is all about the level of development of the stock market, its settlement custodian, currency trading systems. Countries are analyzed and they're split into two buckets. Those that have the most developed systems in place, classified as developed markets, and those with less comprehensive trading systems classified as emerging markets.

Also, I think in the majority of cases, there tends to be a difference in the level of institutional development between emerging and developed markets with the institutional frameworks stronger within developed countries. In terms of what really sets apart emerging markets from developed markets, I think it’s the complexity, the volatility, and the dispersion that we see across the universe.

In terms of complexity, we're talking about 25 countries, each of their own political and economic cycles. They all have their own currency and bond markets. In aggregate the markets trade for 20 plus hours a day over six days a week, whereas developed markets tend to have harmonized economic cycles. In terms of volatility, emerging market index has had a peak to trough move of more than 20% in 19 in the last 20 years. And on top of these index level moves, we see huge dispersion between stock performance. Typically, two thirds of the stocks with emerging markets move more than 40% in each year. So, this makes it a really fantastic place to be an active investor because you'll get an opportunity to buy most companies at some point during each year.

I think there's a perception that high volatility is a negative feature for emerging markets. The historic emerging market narrative was that countries would grow faster than in developed markets and given how deeply cyclical all of the emerging markets are individually I think this illusion of smooth growth was never an accurate portrayal. Instead, what we really have is a wild, exciting, volatile hunting ground for active investors who can benefit from the complexity of 25 nonsynchronous markets, offering 4,000 highly diverse stock opportunities.

Oscar Pulido: So, you mentioned a few things there, and maybe just to recap, while the term emerging markets is one terminology to describe all these different countries, they can be very different. Some on a per capita basis are poorer, some are actually quite rich. The stock markets could behave very different from the economies. There's a lot of volatility, which I think for you as an investor represents good opportunity. We've heard from Wei Lee, our Chief Investment Strategist at the BlackRock Investment Institute, she's talked about how emerging markets are an interesting, investment opportunity, part of the reason being that coming out of the pandemic, the central banks in these countries were quick to raise interest rates and perhaps they're towards the end of that rate hiking cycle. So, talk a little bit more about what other reasons are there that excite you about emerging markets?

Emily Fletcher: Yeah. First to just follow up on Wei Lee, was saying, I agree. Inflation did start to rise in emerging markets and developed markets about the same time, so beginning of 2021. But interestingly at this point, the emerging markets generally started to hike interest rates, but in developed markets, we didn't see them start to hike until about a year later, so early 2022. And emerging markets have generally continued to hike interest rates since then. So as a result, for most of the countries in emerging markets, interest rates are now higher than inflation. Most of them have a positive real interest rate. And this early increase in those rates has meant that in some countries, particularly those in South America, we have seen an economic impact already feeding into the economies. And we've seen that slowdown in economic activity already happen in these countries, as we are perhaps worried about in more of the developed markets now.

When we went through Covid, developed markets such as the US the governments were able to give their population some handouts. And that was something that we didn't see in emerging markets to the same extent. They just didn't have the same capability to replicate that and in a way that has some benefits for emerging market now, because we are seeing lower second round impacts going into inflation to the point where we think inflation has fairly clearly peaked across the majority of emerging markets.

So emerging markets, they started raising interest rates first, and they're likely to be the first to cut interest rates. And as those interest rates come down, then we should see consumers and

companies that will end up with more money in their pockets as the cost of debt becomes cheaper and we should then see growth accelerate across emerging markets. And that turning point is normally a time when emerging market, equity markets, start to do quite well. And it's a good time to think about investing into these countries on the back of that cyclical activity pickup. I think another area to comment on would just be the huge credit expansion we've seen in China year to date. So, in the first quarter, China added total social financing of about $2.1 trillion, and that's something like adding the entire Indonesian banking system every month in terms of size. We did see significant slowdown in Chinese economy last year as they battled covid but with this credit extension, and we think we, that should really drive significant benefits with reopening, particularly with this liquidity we're expecting transaction volumes and values in the property market to pick up, and then as consumers feel wealthier for that wealth effect to then trickle down into growth in a lot of Chinese consumer areas.

I think another area is just around margins, so emerging markets have really progressed from copying to innovating to in some areas now actually being global leaders such as electric vehicles or leading-edge chip manufacturing. And these are areas where we now see higher margins in emerging market corporates versus their developed market peers.

So far, this isn't the predominance of emerging market investing and the aggregate margin difference across emerging and developed markets still remains high, but it would be really interesting if we could see any closure of this gap in the future, which would then mean that emerging markets, which are currently trading on trough from very low earnings, could arguably look really interesting from a valuation perspective.

Finally, I think it's just important to think about liquidity. For the majority of my career, emerging markets have been fairly out of favor, and as a result of that, I think we have seen liquidity come down in terms of the volumes that are traded on emerging markets, stock markets. There's a lot of commentary at the moment that, investors are looking for the Fed to stop hiking, looking for a pivot, and post that, they'll start looking at emerging markets, but I think we do need to remember that liquidity is low in these markets and sometimes it's actually hard to buy post-event when everyone is trying to move in the same direction.

Oscar Pulido: So, Emily, you've painted a really interesting background of the opportunities in emerging markets. I heard you mention profit margins are lower than in some of the developed markets, like the US, you’ve talked about companies that are, becoming innovators and leaders in their space. You also mentioned China. I think the amount of stimulus that China has enacted being the equivalent of the banking system of Indonesia, it feels like you could spend all your time just looking at investment opportunities in China as the largest emerging market but talk about maybe what other countries are of interest to you.

Emily Fletcher: Yeah, I wanted to pull out a couple of opportunities here actually. And the first one of them would just be Indonesia, which is a country that we think has seen a fairly substantial improvement in its economic outlook over the last few years. Indonesia's the world's largest exporter of nickel. Historically, nickel was predominantly used to make stainless steel, but by 2030, we think nickel will predominantly be used to make batteries for EV cars. So, Indonesia in 2020 exported nickel to the of about 12 billion. by 2025, that'll be $45 billion, already a pretty substantial growth. Now it's a country that historically has borrowed from abroad, it's run a current account deficit to finance its domestic growth. But the size of the increase

we're seeing in those nickel exports is such that that structural current account deficit was about 3% of GDP pre-covid. It's already shrunk by about one to one and a half percent of GDP. And we think it will do the same again over the next couple of years. So that should have the benefit of making Indonesia much less reliant on borrowing from abroad and needing to attract foreign capital. And that should result in improved domestic liquidity in higher domestic economic growth. The cost of borrowing in Indonesia should come down slightly, and the volatility and currency movements in Indonesia should reduce a bit, and that should make Indonesia a much more attractive investment destination.

And another country I'll pull out is very much a cyclical opportunity. But I think Brazil stands out at the moment. It's a country in the world, with the highest real interest rates. So, interest rates are very high, despite the fact inflation peaked in March, the economy at the moment has slowed. Brazilian companies and consumers have struggled with that really high cost of debt. And part of the reason that rates have been so high is that investors have been concerned, post the election of Lula as President in Q3 last year, that his administration would pursue very expansionary fiscal policies, but this really hasn't been the case to date. And as we go into the second half of this year, Brazil's likely to be in a position where the central bank could cut interest rates. As they do the pressure on companies and consumers will ease and we should see an acceleration of growth and that is a market that's currently trading around historic trough valuations, so I think potentially a cyclical opportunity there.

Oscar Pulido: When you talk about some of these individual countries you've mentioned the exports of nickel will be very helpful to Indonesia, so does that help every single company that's trading in Indonesia or does the economic backdrop in Brazil help every single company? Or do you then have to dig in and really sort of identify the winners and losers from that economic backdrop?

Emily Fletcher: Mm, so emerging markets is really about pulling together all the sources of information. So, what is happening in a country, those trends I talked about in Indonesia and Brazil are really important in kind of setting the backdrop for where you should be looking for stock opportunities. Then it's about digging in, as I said, it's about 4,000 different stocks within emerging markets that will all have their own specific company drivers. and all trade again with additional dispersion on top of that. So, you can see that that is just a huge amount of information to pull together, and you really want all of it to be pulling favorably, to be finding the best opportunities, so to be a great company, a great stock in a great market, and to pick it just before the turning point and then you can do really well. And that need to have all of those boxes ticked, I think is again, what makes emerging markets so interesting from an active perspective that you can, really find some interesting opportunities in and amongst.

Oscar Pulido: And Emily, it turns out you have a special expertise in frontier markets, so help us understand what is the difference between an emerging market and a frontier market?

Emily Fletcher: So, I really see Frontier markets as a sub-category within emerging markets. If we go back to thinking about the difference between emerging markets and developed markets, being around the level of development of the equity markets, frontier markets is really just a step down from that. It's the set of markets that are even less technologically developed than emerging markets, or it can be the set of markets, that trade with lower liquidity than emerging markets, so where you see a much smaller volume of trades executed over any given year. And actually, what's been interesting over the last 10 years since I started looking at frontier markets is that we have seen quite substantial technological advancements in a number of stock markets, that would've

historically been considered frontier markets such as Saudi Arabia or Qatar, and very much now promoted to become emerging markets.

Oscar Pulido: I think there's a reputation amongst these emerging and frontier markets of high volatility and in fact, you touched on it in some earlier comments about these big swings in stock markets that you see. How do investors manage these dramatic ups and downs?

Emily Fletcher: I think that's a very fair point to pull out and especially in some of these smaller markets in and of themselves they can be inherently and deeply risky and volatile.

But one of the really interesting things about these smaller markets particularly is that if you create aa basket of them put together a portfolio of them, you actually generally end up with something that in aggregate is much less volatile than if you were to look at emerging market indices at that level.

And it's a really interesting one, but they actually are still places in the world where you can find diversification. In these smaller markets and tends to be the smaller you, get with markets, the more there's a dominance of local political and economic events, and those events tend to impact performance more.

There are generally minimal trade flows between smaller, emerging and frontier countries, so problems in the real estate market in Vietnam will tend to have no impact on the level of oil production in Argentina. Recent election in Thailand had no impact on the subsequent Greek election. Constitutional change in Chile won't impact interest rate movements in Saudi Arabia. So, it's very interesting that you still have huge benefits of diversification from looking at some of these smaller markets.

Oscar Pulido: So, you, mentioned that you're an active investor, which means you're picking individual companies in each of these emerging and frontier markets and part of being an active investor, I imagine, is you're visiting these countries to be on the ground to understand what's going on in, the local economy. So, what are some of these countries you've visited and any good stories about some of your recent visits?

Emily Fletcher: So, I've been to about 35 emerging market countries now. Actually, I always find it rather unnerving traveling with security. I think it's having grown up in the UK I'm not used to seeing guns around at all. Luckily all the guns I've seen on my travels have been those held by my security detail. But there was one time in Nigeria where I was followed by Security on a track with, probably the largest sort of sub-machine guns I've ever seen that I did find a little bit unnerving.

I did get the opportunity once to visit the Zimbabwean Stock exchange while it was still using an open outcry system, which was absolutely fascinating to see but is now transitioned to a fully electronic system. Otherwise, I reckon I probably could have a successful second career as a travel agent. I would highly recommend visiting the mountains in Oman, the Polo Club in Lahore, Pakistan, the dead cow oil fields in Argentina, and there's some fantastic palm trees inside the Central Bank of Kuwait. My favorite food comes from Vietnam, but the best meal I've ever eaten was in Mexico.

Oscar Pulido: I thought I had some interesting stamps in my passport, but I'm realizing that it probably pales in comparison to yours. Emily, thank you for giving us this tour of, emerging and frontier markets and thank you for joining us on The Bid.

Emily Fletcher: Thank you. It's great to be here.

Oscar Pulido: Thanks for listening to this episode of The Bid. On the next episode, we will consider the world of cash investing and the opportunity for investors in an environment of higher interest rates. Make sure you subscribe to the bid wherever you get your podcasts.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Oscar Pulido: Another month, another Fed meeting, and yet another increase in interest rates. For the first time since 2007, the federal funds rate in the US is above 5%. Where does the Fed go from here? Have we reached a peak in inflation? Here to help answer these questions. Here to help answer these questions, I'm pleased to welcome Gargi Chaudhuri, Head of iShare's Investment strategy. Gargi will help us make sense of today's market environment and the investment opportunities that lie ahead.

Gargi, thank you so much for joining us on The, Bid.

Gargi Chaudhuri: It's great to be here. Thank you for having me.

Oscar Pulido: Gargi, it's May, the Fed has just raised rates for the 10th straight meeting. We're above 5% on Fed funds rate for the first time since 2007. Inflation is still a problem. The markets are volatile, and we've had the collapse of another bank this time, First Republic, getting taken over by JP Morgan. So with all of those concerns that, you're hearing, what are clients saying right now and how are you responding to them?

Gargi Chaudhuri: So to your point, we've had the fastest rate rising cycle with 500 basis points of rate hikes in a course of 14 months. It's hard to believe now that in the beginning of last year, rates were still at zero. the big thing that clients are reiterating over and over again to us is the need. To be flexible in this time, the need to be nimble in moving around portfolios because the story keeps shifting, right?

So, if we look back to the first quarter of 2023, when you came into January was actually a pretty good month. Remember, that was when the reopening of China story came about. Then you had February, not such a great month, then March, nobody saw the bank turmoil coming about, but that happened.

April comparatively was a lower volatile month, but of course you had some idiosyncratic risks and now we're sitting at May with what we think is the final rate hike for this cycle. So I think there's a huge amount of discussion around nimbleness in portfolios. That's one thing. And the second thing that we're talking a lot to clients about is really the return of income.

Clients are so excited that you can actually earn some income, especially in fixed income and where they should do that, how they should do that, and how they can reallocate back to the fixed income market. So that's been very topical for us. And this is across clients in the us LatAm and Canada, and globally,

Oscar Pulido: As you mentioned, every month has been different in 2023, so there's been no consistent pattern. Tell us a little bit about, the three P’s framework that, I know you've been talking to clients about. What are the three Ps?

Gargi Chaudhuri: One of the things that we discuss when we talk about markets is, what are the important things that clients should remember as they're thinking about asset allocation? What will drive markets right now for the next quarter, for the next few months, and at this juncture.

Those are number one. The Pause, that's the first P. Number two, profitability, and the number three, portfolios. So if we look at each of these individually and why they matter now. The first one is really about the pause, which is that the Fed has raised rates by 500 basis points, over 10 rate rising cycles over 14 months, and now, they pause.

The Pause is not the same as the other P word, which is pivot, which many investors expect. Actually, the market expects the Fed to cut rates. We don't think that's going to happen. And why not another P for you? Prices! Inflation remains pretty high, much above the Fed's target, which is 2%. As of right now, we're sitting in May, when we last looked at inflation numbers, they were closer to 5% than to 2%. So, all of this allows for the Fed to pause, but not pivot, not to cut. So that's the first P.

Also we're talking a lot about profitability, which is actually related to one of the, Ps, which is prices in a world where prices are going up, where inflation has been a consistent problem over the last 18 months.

Looking at companies that have the ability to pass on prices, that have the ability to have margin resiliency, to be able to be profitable, even in a period of slowing growth is really important. Finding those companies, finding those sectors that have pricing power, that have profitability, which have earnings growth, which have a strong balance sheet.

Those are really important. And then we'll move to the third P that we spend a lot of time talking about. As I mentioned earlier, which is around portfolios and specifically the role of fixed income in portfolios. How at this juncture with the Fed Funds rate being a little bit over 5% allows for investors to earn a lot of income in very high-quality parts of the market. So, you can sit in treasuries, which are backed by the faith and credit of the US government and earn 5% in certain parts of the treasury market. You can earn close to 6% in certain parts of the very high-quality corporate credit market. So again, thinking about the portfolio construction in this environment is really exciting.

Oscar Pulido: You mentioned Pause, and that's your view that the Fed is going to, take a chance to kind of just assess what they've done over the last 10 meetings for the camp that's out there that thinks that they will pivot, that they will cut rates. What's their argument as to why they think that will happen?

Gargi Chaudhuri: So, I'll talk a little bit about why we're in the pause camp, and then talk a little bit about the Pivot camp.

So, the Pause camp is entirely because of inflation, Congress has given the Fed two mandates. The first mandate is to have prices be stable which is defined by the Fed as 2% on PCE. The second mandate is having the job market remain pretty resilient.

Now they are doing very well on the job market front, unemployment rates as of right now, are sitting at close to 50-year lows. We haven't seen a labor market this strong in a very long time. But on the inflation side of the mandate, they are actually not getting to that 2% level that is their target. So, they don't necessarily need to raise rates higher at this juncture, 5% is a pretty high and a pretty restrictive level of interest rates, at the same time, they don't really need to cut rates either because they're so far away from their inflation target and the labor market remains strong.

The question is why then is there so much discussion and debate around whether the Fed should cut rates? There have been some financial cracks that have emerged more recently, as you pointed out earlier, was in the banking sectors where, especially for the small and medium sized banks, they have begun to come under a meaningful amount of pressure and the fear that pressure continuing would mean that credit will continue to tighten.

Small and medium sized banks are a big resort for small businesses for loans. If you're a small business in this country, you are responsible for a majority of the jobs of this country. So, if small and medium sized businesses are unable to get the credit that they need from the small banks, that becomes a problem for the entire economy in the US. So, investors and the market actually, that is now pricing in that 'pivot narrative' that is pricing in rate cuts by the end of 2023 is actually foreseeing this credit tightening becoming a larger issue as time goes on and the Fed needing to cut rates to stimulate growth as a result.

I'll also say that certain interest rate sensitive parts of the economy have already begun to show some slowing. You've seen that in the housing data, you've seen that in the auto sector. So there have been certain manufacturing components that have begun to slow down. there is the senior loan officer survey we were talking about earlier, Oscar, the Slews that's become a very common or very hip data point to look at these days because the Fed has popularized it and talked about it quite a bit.

All of that is showing a little bit of credit tightening in the economy as well. So those investors that are thinking about rate cuts for the remainder of this year are thinking about that because of the slowdown that is already emanating and expectations of more slowdown because of the impact on small and medium sized banks and the ramification that would have on the small businesses.

Oscar Pulido: So, can we go back then to profitability? Now you talked about quality companies and what does that mean? Are there particular sectors or industries that when we talk about quality, that tend to come to mind more than others?

Gargi Chaudhuri: So, when we say quality companies, what we really mean is a group of companies or certain sectors, that have really strong fundamentals. And what do we mean by those strong fundamentals? We talked a little bit about the ability to be profitable. It's really important for them to have low debt, especially in a world where interest rates are higher, where debt servicing costs can be going up, having that low leverage ratio can be important, and having free cash flow. That

ability to weather slowing economic periods and having the cash flow that allows them to do so. And all of that can be manifested in companies that are higher quality companies, so they have stronger balance sheets. Now, in a world, if interest rates were back to being zero, let's say we were back in 2020 and it rates were at zero.

I think in those environments that resiliency of balance sheet isn't as important because rates are at zero and companies, are not paying as much for the financing of their debt. Real rates were actually negative instead of, the very positive, amounts they're at now.

A lot more could be done in a zero real rate environment if you were a company that wasn't as profitable because you didn't have that debt burden or that debt financing burden. Right now though, we are in the camp of higher for longer. We've reached that higher part. We've gotten to above 5%, we haven't reached that longer part. So, the longer is going to happen for the remainder of the year, and in that environment of staying higher for longer, we think that quality characteristic really comes to head in both the equity as well as the bond markets. So, looking at sectors like energy, technology a lot of free cash flow, strong balance sheets. And frankly, those are the parts of the market, that have done very well. people have gravitated towards those very strong companies with strong balance sheets that have cash flow and are profitable and have earnings growth power.

Oscar Pulido: And then maybe to go to portfolios, you touched on there's income in the market now with interest rates having gone up, the investments in one's portfolio are generating more cash flow. You look a lot at flows. Where are people, what are they buying? What are they selling? what are you seeing are investors allocating away from stocks into bonds because of that income that they can generate? Or are they moving out of cash or is a little bit of all the above?

Gargi Chaudhuri: So first of all, last year, as we all know, and experienced, 2022 was just a rough one for investors, whether or not you were in the safest parts of the, market, which is, which tends to be bonds or if you were in the equity market, which tends to have a little bit higher volatility, you had a pretty rough, investment period for at least 20, 22.

Many investors had they chosen to be in cash, would have actually had a safer outcome. This year though, what has happened is quite the reverse. Both equity markets and bond markets have done well, but many investors because they had this negative experience last year have chosen to remain in cash. So, one of the things,

we are seeing investors do is actually step out of cash for the first quarter of this year, we saw them step out of cash to the very front end of the fixed income market, so to treasuries and investment grade credit in the front end, so you could earn a lot of income, but not take a lot of interest rate.

And more recently, in April and May, we're actually seeing investors taking a little bit more interest rate risk in the fixed income markets, but still remaining high quality. Still looking at companies or sectors that are most highly rated within the fixed income market, so whether that be treasury bonds, or whether it's very strong companies like investment grade credit rated companies. So, we are seeing those flows gravitate towards the fixed income markets.

The other thing that I would say that has been more of a recent phenomenon is actually investors moving away more from the value like stories. And when you think about the different types of, investments there are there's value and growth. Value of course tends to do well and the part of the business cycle where the growth is beginning to take off and now when there's some fear or

expectation of a slowdown, growth is where people are allocating capital to. Our research shows that growth does make sense, but allocating to those areas of the growth companies that are still fairly priced, so growth at a reasonable price.

And again, energy sector and certain areas of tech sectors could be things that investors could consider. The last thing that we are looking at or that we have found interesting in flows is gravitation towards gold, which is interesting. you have the trifecta of real rates that are moving lower remaining constant, you have a little bit of a fear, a flight to quality, if you will. And you also have, investors are, that are worried about a growth slowdown. And all of that has pointed to investors moving towards gold. So that's something, it's a pretty recent phenomenon, not something we often talk about, but certainly gold has, begun to shine again, to use, a very overused expression, but certainly seeing, some flows there.

Oscar Pulido: As you point out, last year was such a difficult year that investors are saying, if I had been in cash, I would've been fine. And so maybe I should do that again in, in 2023. But you've highlighted a number of different investment opportunities that have presented themselves this year and that you think are still very worthwhile going forward.

Gargi Chaudhuri: Yeah, look, if you need the cash for liquidity reasons, of course holding cash, especially, depending on how you're holding it, you can be something that is absolutely needed in your portfolio for liquidity reasons, and that makes sense.

But if you're holding it for fear reasons, if you're holding it because you expect an exact repeat of 2022, what I would say is the valuations have changed meaningfully, especially in the fixed income market. And this is where earning some yield in the fixed income markets and having that ability to make some total return in the fixed income markets, that opportunity has now risen because the Fed had not raised by 500 basis points this time last year.

Oscar Pulido: I'm just curious, you speak to a lot of clients and investors around the world, whether it's in the US and Latin America, Europe, you name it. And so, is there a common question or concern that you hear from them?

Gargi Chaudhuri: There’s a couple. One that comes up a lot is around the fears of a global recession. Interestingly, that was something that was coming up a lot towards the end of last year. There was a huge fear of a stagflation, so an environment where growth is slowing down, but inflation's remaining high. That slowed down pretty meaningfully in January, and perhaps some of that was because in Europe the winter wasn't as bad. China had the reopening. There was some sense of optimism, so that slowed down.

But more recently, I would say over the last three or four weeks, the questions around a recession have come back. They're not around a stagflation this time around, they're much more around a recession. If that's going to happen in the US if we expect that in Europe, so that's something that's definitely top of mind. And what should investors do in a recessionary environment? Where should they turn to in a recessionary environment? Especially because last year fixed income wasn't that appropriate allocation. So having that conversation around where in fixed income and why this time is different because of course we talked about, the US but globally, many other central banks like the Bank of Canada, for example, done with their hiking cycle. If you look at, Bank of England, they're closer to being done than not. And ECB probably still has some more rate hikes to go, but again, many of them have moved a lot further on that hiking process.

And then the second thing for the first time in a long time, US investors are asking about emerging markets as an option. So, I think that's interesting because I hear from for example, investors in the LatAm or investors in Europe who have historically been allocated to the emerging markets, especially in the equity space, but in the US this is the first time that we are seeing US investors ask about emerging market debt, local currency, emerging market debt, and single countries within emerging markets.

So not viewing emerging markets as a monolith, but a view around should we be allocating to India because they've heard about India now being larger in population than China, or thinking about China because of the reopening or thinking about Mexico because of friend- shoring.

So, the view of US investors thinking about, different emerging market countries has been really exciting and something that's new and hopefully will continue for some time.

Oscar Pulido: I'm listening to the comments that you're making and the statement that, or the phrase that comes into my mind is, it's a marathon, not a sprint. When you think about the discipline that you need to exhibit with long-term investing, and speaking of marathons, one thing I learned about you recently is that you've run 25 of them, in your life. So talk to us a little bit about the parallel between the marathons that you've run and what it is that your day-to-day looks like working in iShares investment strategy.

Gargi Chaudhuri: Thank you. Love this question. I want to write a book about this one day. So a couple of things immediately come to mind, when you train for a marathon, you have to put in the work, You have to go for your long training runs, and I think the work that we're doing with our clients and helping them understand the markets, and invest accordingly.

The other one I would say is, and I often don't do this, but I should, and after 25 marathons, I've learned the lesson is start slow and then get comfortable because it is a long run. And similarly, to running, I would say the same for investing.

Start slow. If all you can do is take a small amount and put that away in a diversified fashion. And that's all you can do. And you don't have to get too crazy. Don't have to listen to every earnings call of every company. You don't have to do that. Later, once you've gotten used to the investing lifestyle, once you've gotten used to looking at data or earnings or any kind of economic indicators, you can become a more sophisticated investor.

But start slow. The last thing, I guess I would say, and I use this for markets, but also for people's careers, run your own race. When you're running a race, you might be on mile 20 dying and someone might pass you by running seven minute miles. They are having another race. You are not running their race.

Similarly in investments, if you have a friend that's invested in something very cool and something very esoteric, that might be amazing for them. But you think about your own portfolio and what it needs. So run your own race in the markets in your career, but certainly in the investing landscape.

Oscar Pulido: It's great insight and we wish you luck on your 26th marathon whenever that takes place. Gargi, thank you so much for joining us on The Bid.

Gargi Chaudhuri: Thank you.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our recent episode with Way Lee on the new investment playbook in action.

Thanks for listening to this episode of The Bid. On next week's episode, I'll be talking to Emily Fletcher for a Stock Picker's Guide to Emerging Markets.

Disclosures

This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel:+ 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20- 549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. 

For Investors in Switzerland: This document is marketing material.

In South Africa: Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

 ©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

Mark Wiedman: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Mark Wiedman. Today we are going to India. You know that India has the biggest population in the world, but what you probably don't know is that it is leading the world in digital payments.

The man inspiring this leap forward is Nandan Nilekani. He is the co-founder of Infosys, the digital services firm and for 14 years he's dedicated himself to the digital transformation of India. I met with Nandan in Mumbai this year and invited him to share his story at our new Hudson Yards office in New York. In this episode, you'll hear about how Nandan landed the job to create this digital ID system. Why India has been able to leapfrog technologies and how building a digital public infrastructure has brought a new model of economic growth to India. Welcome Nandan. Nice to see you.

Nandan Nilekani: Thanks Mark. Thank you for having me here.

Mark Wiedman: The building out of Infosys. What was the founding vision and what is it today?

Nandan Nilekani: Well, the idea of Infosys was to create a globally respected technology company and it took us a long time because we began in 1981. And, uh, that was an India that was very different. There was no economic reforms. It was difficult to do business. But I think come the nineties when India had the first wave of liberalization we were able to grow very rapidly. And we set many, many records. We were the first Indian company to list in the U.S. We listed in NASDAQ in 99. We are among the first to deal with foreign investors so we introduced a lot of sort of cutting-edge reforms in the way capital markets work in India and set the bar for corporate governance and so on. And we have 1700 clients around the world. And, it's been a very successful 40-year journey.

Mark Wiedman: What was your contribution as a leader for the many years you were with Infosys full-time?

Nandan Nilekani: Well, I was primarily on the business side. I was looking at global sales, global marketing. And I was also the CEO for five years from 2002 to 2007.

Mark Wiedman: So we get into the mid-2000s, you're CEO. Take us on your personal journey from there to when you started embarking on the transformation of your country.

Nandan Nilekani: So I stepped down as CEO, I was the co-chairman. I also wrote a book in 2008, called Imagining India. It's a broad sweeping book about many ideas - why urbanization didn't happen, why education didn't happen, why something else happened, and so on. And one of the ideas was, let's also look at having a Digital ID and use technology to make a difference. So that was embedded in that book somewhere.

And then I got a call from Prime Minister Manmohan Singh, to implement this idea. And he said, we have this project for giving everybody an ID. At that time it was not a digital ID, it was just an ID. It had to be unique and unique meant that Mark gets only one number in this system. And why did we need this ID? The two reasons.

First was India was building its welfare state and was going to be sending money to people and wanted to make sure it reached the right person. Because without an ID, you can't do that. The second reason was that India didn't really have a very robust birth registration system in those days, and many births were not registered because the birth happened in the village far away from the district, you couldn't get a birth certificate. So, in some states, more than half the babies born did not have birth certificates. Again, that did not matter when they lived their entire life in the village, but the moment they started migrating without ID, they couldn't get anything done. They couldn't board a train. They couldn't get a job, they couldn't open a bank account. They couldn't explain to the cop who stopped them. So ID became an essential you know, asset for people. So both the inclusion of getting everybody into an ID system and the efficiency of giving money directly to them, drove the government to think of the ID project. It had actually begun conceptually in 2006 by the time I came on the scene in 2009, it was ready to roll and I stepped into that job.

Mark Wiedman: So that was the genesis, the birth moment. What was the founding set of actions you took in 2009?

Nandan Nilekani: So I brought a bunch of very good bureaucrats from the permanent bureaucracy, but I also needed deep technologists. I assembled a bunch of technologists from all over the world who all volunteered to make this happen. And then I brought this group together and they were from two different cultures. So I didn't want internecine warfare. So I set such an audacious goal that they forgot about the differences and focused on the job.

Mark Wiedman: And your big audacious goal was what?

Nandan Nilekani: I'll just take one intervening point. I served in the government from 2009 to 2014 and when I began my term, I had made a public statement that I, I would deliver 600 million IDs and then step down, which I did.

Mark Wiedman: So zero in 2009. 600 million by 2014. When was your first ID issued?

Nandan Nilekani: September 30th, 2010. Peak was one and a half million a day.

Mark Wiedman: I think something the, particularly the U.S. audience might not fully appreciate is that when you started, you had a huge portions of the population that had no formal other than the voting booth had no real actual status in the eyes of the government.

Nandan Nilekani: Yeah, exactly. Because the lack of birth certificates. In the U.S., maybe 98% of births are registered. So a birth certificate becomes your root document based on which you vote or whatever, decide your age. But if you don't have a root document, then how do you take a few hundred million people and give them an ID and they have no id. That was the challenge we had, and the only way we could do that was a very complicated technological thing called biometric de-duplication, where we took each person who enrolled and compared them to all the people we had in the database to see whether the person was duplicate or not. So if we had 500 million people in the database and a million people enrolled, we do 500 trillion matches every day to eliminate duplicates, very sophisticated technology wise, but the politics was more difficult than the technology.

Mark Wiedman: India is famously decentralized so getting all those individual states to sign up, how did you get it done?

Nandan Nilekani: First of all, I made it non-threatening because what happens in any organization and in the government is if we come with a new idea, they would've said, what do they do to me? So I had to prove to people that this was not in any way affecting anybody. All I was saying, John is John, Ashok is Ashok, Mohammad is Mohammad. Whether John deserves a passport, the passport guys will decide. Whether John deserves a driver's license. So I said, I'm not taking away your power or agency, I'm just helping you do your job better. So the moment you position this as something enabling them to do the job better, and you don't take away any of their power, they're fine with it. So I had to do that with all these players.

Mark Wiedman: So you get to 600 million, where are we today?

Nandan Nilekani: Now we are at 1.3 billion people have the ID.

Mark Wiedman: So right now, 1.3 billion. . Indians have the id. How do they use the id? What are the applications?

Nandan Nilekani: They use it in two ways. They use it to authenticate themselves so wherever they have to prove who they are, they can do an online identification verification, and that does about 80 million transactions a day. And you can also use that to do what's called as a ‘know your customer.’ It's called electronic KYC, and it's used to get a new mobile connection or to open a new bank account and so on. and that is about five to 7 million a day. One of the big use cases is what we call as micro-ATMs, is how, how do you get people to be able to withdraw money easily from the bank account? In the old model, you have to go all the way to the city to the branch. You have to go to an expensive atm. A micro-ATM is nothing but a small mobile phone, smartphone, with maybe a base app on it. So that is there with people around the country, in grocery stores and so on. And if I want to withdraw money from my bank account, I just go to the neighborhood grocery store, authenticate that I am X and I want to withdraw five hundred rupees from a bank account and he gives you five hundred from his drawer and on the system your account gets debited and his account gets credited, so it's all settled. So he becomes an atm, a manned ATM, and now we have a few hundred thousand of these micro-ATMs around. Suddenly you are made cash in, cash out, accessible to a billion people. So that's an example.

Mark Wiedman: Okay, so 2014 rolls along and shockingly you've hit 600 million. you step down. What'd you decide to do then?

Nandan Nilekani: Well then I also had a small detour and I stood for election and I lost the election. Okay, why was this crazy guy standing for election? So I felt I want to get more things done, and I thought if I'm inside the system as a politician, I can get more things done. That was my plot logic. Anyway, so that didn't work.

Mark Wiedman: So that was almost nine years ago, when you stepped down, went for the by-election for the world. May not have been great for you, but the election results were great for the universe because you just took on your next chapter. What was the next chapter and how did you continue?

Nandan Nilekani: See around that time, in the ID days, I built the direct benefit transfer platform with the NPCI, which is a National Payment Corporation of India, which is a nonprofit that does all payments in India. So I knew them very well and we started thinking about how to do a real-time mobile payment system. And that's what led to a new product we designed in 2013 called UPI. Unified payment interface.

Mark Wiedman: And this is where the world actually starts to pay attention.

Nandan Nilekani: We designed a payment system, real time payments, small value, small transaction fee between any bank account to any bank account from any consumer app to any consumer app. So this is what you call it, a four-party system. For example, I'm using Google and my bank account is State Bank of India, you're using phone pay your bank on HDFC Bank. You can seamlessly transact. So this was ahead of the curve in terms of thinking through how payment should be done, and we launched that in May of 2016 with the idea to create this kind of payment system.

Mark Wiedman: Before we go to the astounding results, what was the core kind of intellectual architecture connecting the unique ID to payments that you were able to unlock and create that system launching in ‘16?

Nandan Nilekani: So unique ID not only gave ID, it gave electronic KYC, and electronic KYC reduced customer acquisition costs for newcomers in markets like banking and mobile phones. So essentially, KYC reduced costs of customer acquisition and therefore allowed new newcomers to come and compete in markets. Then we felt that unless we make payments ubiquitous and cheap, you can't really create a transaction economy, and it had to be.

Mark Wiedman: When you say that, what's a non-transaction economy? What do you mean?

Nandan Nilekani: I mean, the way the West evolved the internet was, it was a advertising-led economy. Because in the, in the U.S. you spend $700 per person on advertising. And then that money was earlier spent on television and print. So what happened was that money migrated to the internet with digital advertising, with all the big, big tech companies. In India, there's no money in advertising, but people don't have that money to spend. So we had, we said, if you really want to create a flourishing internet economy, it has to be based off transactions. But then to make a transaction economy, you need to make them very efficient, low cost, and very small value. So that led us to the conclusion that you need a very fast real-time payment system.

Mark Wiedman: So the founding vision was, if we're going to make the internet a reality in Indian lives, we're going to actually need to create a real-time digital payment system because without it, we'll just never get there and, the internet will pass us by. So you launch in May 2016, what did it allow somebody to do?

Nandan Nilekani: It allowed somebody to make payments from any app to any app, from any bank account, but it was very small scale. We wanted to tackle person to person payments and person to merchant payments. By October of 2016, we were doing a hundred thousand transactions a month.

Mark Wiedman: Okay, so the vision is basically exploding these level of transactions directly, a hundred thousand in October ‘16. Then what happens?

Nandan Nilekani: Then in the month of November, on November 8th, 2016, India demonetized its currency. Essentially,we drew currency notes from the economy and said, we'll put in new currency notes, but then people could, didn't have money to pay.

Mark Wiedman: There was uproar everywhere. They're taking away the currency. Some people thought it was a bungled rollout, but it actually created a catalyst moment for you.

Nandan Nilekani: Yes, because, suddenly people said, can we do digital payments? And fortunately we had something to do digital payments and, and that's how the BHIM application was launched by the Prime Minister and then after all these other applications came. And so basically the payment boom was driven by two things. One was the demonetization stuff and the second was Covid. Because Covid again gave a big boost to contactless payments. So both these things gave the sort of tailwinds for the growth of digital payments.

Mark Wiedman: Where are we today in digital payments in India?

Nandan Nilekani: Today we have, last month was 8.7 billion digital payments. 300 million people use it and 50 million merchants have QR codes at which you can make these payments.

Mark Wiedman: So you walk into a small shop, a Kirana, there will be a little QR thing.

Nandan Nilekani: I mean, a guy on the street selling coconuts will have a QR code on his cycle. He'll give you a coconut, drop it out there and you make the payment.

Mark Wiedman: So, in New York, sometimes on the street, the vendors, they don't have a way of taking digital payments. You're saying basically anywhere except for maybe deep, deep, deep farmland, that person will be prepared to take the digital payments. How is that changing people's lives?

Nandan Nilekani: Well, it's increasing their efficiency. They're doing more transactions. It's improving the safety. Because if you are a woman selling vegetables on the street, if you take only cash by the end of the day, you have lots of cash and then you're eligible to extortion or theft. Now it's all going into the bank account. She doesn't have to go and deposit the money, it's all in the bank account. And they're also going new innovations, for one, is the payment speaks, it's a sound box. It's important because if I'm running you know, we have India, these restaurants where they make everything, dosas and whatnot, and he has no time to give the dosa and take the money and give a change. Now he has a small audio box there with a QR code, so he gives the dosa and tells the guy to go there. He go there, pays, and the sound box says, received 75 rupees. So he is using his audio hearing so he can deliver more dosa, his hands are free, no payments required. Millions of shops where they have these devices. Lots of innovation.

Mark Wiedman: So India today where is it going to be in five years regarding this ecosystem you're creating?

Nandan Nilekani: Well, first of all, you are going to have financial inclusion with everybody having a bank account. With mobile prices dropping, mobiles are going to be ubiquitous. Everybody already has the ID. UPI is expected to go to 1 billion transactions a day, from about 300 million now. We, we think we are halfway on this digital transformation journey. So there are three, four big ideas that are in the works. The first is democratizing credit because we think that if data can be, people can be empowered with their own. Then they can use it to improve their lives. So if a small business can use his bank details or his tax payment details or whatever and securely give to a lender and get credit, then he is using his information collateral to get credit. So we think that'll democratize credit to millions and millions of businesses who didn't get access to credit. So that's going to lead to broad-based economic growth. The small businesses can now get access to credit. So that's the one big idea.

Mark Wiedman: When you look around the world, where else do you see innovation around ID and payments?

Nandan Nilekani: Like this? Nowhere. I think that for example Brazil has a very good payment system called Pix, which has done extremely well. But it's only within the banks. I met the governor recently and I think it's doing a great job. It's a bank-to-bank real-time payment system that does high volume transactions.

Mark Wiedman: What was interesting is in Brazil, they started off the payment system because you have people in the Favellas who are very poor, much more dangerous than Indian equivalents who were being mugged and have all their cash taken. And so you had the urgency of getting cash out of the hands of a single woman or man walking home from his job and actually into the computer systems. Even though it's, you can obviously still there are ways of getting money from people, it's much harder.

Nandan Nilekani: That's right.

Mark Wiedman: So that same innovation, why have we not seen this level of innovation in the West?

Nandan Nilekani: So, it's actually a broader point, which is interestingly, countries that come later to technology can leapfrog.

Mark Wiedman: This is real leapfrogging. As somebody who's leapfrogged in a couple of ways already in your career, you've leapfrogged technologies more than once.

Nandan Nilekani: So we did well with ID, we did that with payments. We are doing that with democratizing credit and putting data in the hands of people. We are building a new infrastructure for open digital commerce, which allows everyone to join a grid of payments and grid of commerce. So, any small shop can become a supplier on this. So, it's gonna lead to a lot of hyper-local commerce. Unlike in the West where you have only large-organized trade, or you have e-commerce. India has millions and millions of small businesses, which is common by the way, many countries. So how do these small, millions of small guys, how do they participate in e-commerce? So, we are creating the pipes for that. And then we are also doing a lot of work on logistical improvements because India was a single market for service, because of the fact that our telecom banking regulations are national. So, it's a single market for services, but it was a fractured market for goods. So now with the government of India reforms in GST, putting in a single tax system, making all tax payments, digital, road tolling all that stuff, but much better versions. Making markets more efficient, creating a single market for products and services, enabling millions of small businesses to participate in commerce. And the basic thesis, Mark, is if the, if the world is going to be a digitally intensive economy, the architecture of that is very important.

Mark Wiedman: What would be your message to us, all of the listeners here around the world, about how to bring the kind of thinking and innovation you've brought to India, to the rest of the world?

Nandan Nilekani: Well, I think you know, now we call all these things, we call them as digital public infrastructure. And we think that this is an idea whose time has come. And we are happy to see that many countries are saying we want to adopt some of this around the world. We think there'll be about 50 countries who are looking at some, not the whole thing we did, because that's quite big, but, you know, pieces of this, like ID. Philippines is implementing ID similar to this, Morocco is implementing an ID. Some people are looking at payments, so I think you will see countries saying, oh, look, there seems to be a way of doing things which will actually benefit us. I mean, to go back to my point, the pandemic showed us that our lives were digitally intense. We are entwined, you know, we ordered our goods online, we ordered our food online, we did our learning online, we had our meetings online, we had relationships online. So if an economy and society is going be so heavily entwined with digital stuff, you have to think of the architecture of that in a way that's, that you have more economic growth. So our whole thesis is that actually a new model of economic growth, which is more democratic, more inclusive, and which is better for society. I think this is a great time to be doing these things. I think we have seen that you can bring massive change if you want to, and anybody can do it. It's not like, it's not the privilege of a few. So I think every one of these people here can change the world.

Mark Wiedman: You know, Nandan, it is a time in which ideas have a potential to reach scale like never before in human history.

Nandan Nilekani: That's right.

Mark Wiedman: Nandan Nilekani, thank you for joining us.

Nandan Nilekani: Thank you, Mark.

Alex Craddock: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Alex Craddock, Global Chief Marketing Officer at BlackRock.

The rise of the internet and social media has heralded in a new age of information, but also of misinformation in today's highly competitive market. Building and maintaining brand trust is essential for the long term and can make or break a company's reputation and bottom line. So how can businesses and brands protect their reputations, and how much does it matter to investors here to help us look to the future of brand trust?

I am really pleased to welcome Lex Suvanto, CEO of Edelman Smithfield, a specialized financial communications boutique within the global PR firm Edelman. Lex brings two decades of experience in PR with a focus on formulating compelling messaging to win support from investors and key stakeholders.

Lex, welcome to The. Bid.

Lex Suvanto: Thank you, Alex.

Alex Craddock: Great to have you here, Lex. So, look, to start, it would be really great to understand how do you define and measure trust?

Lex Suvanto: Why don't I provide a little background on the trust barometer? So, we've studied trust for, 20 years at this point. The latest survey, 28 countries surveying 30, 32,000 people. It's safe to say it's the defining research on a topic of trust and reputation.

If you think about it, trust is a forward-looking metric, a projection into the future, a willingness to accept uncertainty. People only, ex people only invest. If they believe in the future. So, after two decades of researching trust, we break it down into four dimensions: ability, dependability, integrity, and purpose.

Trust defines an organization's license to operate. Every year we conduct the research, and we find important and provocative insights about people about the world. For example, in recent years, it's become clear that trust has gone from being top down. To being conveyed locally, peer to peer.

Interestingly, people around the world view a coworker, someone like you, people like us as more credible than a CEO, more trustworthy than a politician.

Alex Craddock: Wow, thanks Lex. It sounds like you are measuring the ultimate currency in a relationship.

You just wrapped up your latest trust barometer in what has been a turbulent start to an economic year. What are some of the key trends that you are seeing, and are there any emerging trends that are important for us all to be aware of?

Lex Suvanto: A really important takeaway that's useful and important for the audience to understand. In recent years, a major insight is that business is now the only trusted institution. The business sector has a lead of more than 10 points versus government and media. On the other hand, governments are seen as a source of false and misleading information by almost half of respondents around the world.

Compare that, though, to my employer's newsletter, the newsletter that we get inside of our companies, that's considered by people around the world as the most trusted source of information. More broadly, more than half of people around the world say their countries are more divided. Today, economic optimism has decreased.

In 24 of 28 countries, we're seeing all-time lows in economic optimism. Personal anxieties are increasing, fear of job loss, inflation, climate change, nuclear war, and there's also a mass class divide. People in the top quartile of income brackets are more trusting than people in lower incomes. So, it's no surprise that respondents report that social fabric has weakened Amid this division, we also found that a person's ideology has become their identity.

Here's an interesting view of that. Only 30% of people say they would help a person in need if they strongly disagree with their point of view. Only 20% of people say they would work with somebody who has a strong different point of view. In this environment, survey respondents say they want the business sector to do more, regardless of political affiliation.

More than half want to see business doing more, collaborating more, to address societal issues such as climate change, economic equality, healthcare. But, at the same time, business can appear politicized when addressing these societal issues.

Alex Craddock: So, it sounds like there's been a lot of change over the last few years. So, let's go a little deeper. What are you seeing in the latest trust barometer findings that are specific to the financial services industry?

Lex Suvanto: So, low levels of trust clearly played a role in the recent banking crisis. Just this week in banking earnings, we saw one of the biggest regional banks lose a hundred billion in deposits.

We saw UBS gaining billions in deposits. Clearly, there's a difference of trust playing out right before our eyes. In the research over several years, financial services is among the least trusted sectors, second only to social media. That was an outcome of the great recession. It has gotten better over the last few years, but only 38% say financial firms serve the interests of everyone equally and fairly.

Central banks at the center of the recent crisis are not trusted. In four of the five global financial markets. But here's an interesting fact, again, back to my employer. Employees working inside of financial services companies trust their own employer more than in any other industrial sector that we survey.

This means that we've got brand ambassadors, anyone working inside of a financial services firm, we've got brand ambassadors that are ready to speak out on our behalf.

Alex Craddock: You just referred to the difficult and challenging start we've had to the year, um, global economy has been under stress.

The financial industry in particular with the collapse of several regional banks in the US and the acquisition of Credit Suisse by UBS, has really had a tough start to the year. In all cases, these fractures across the financial services industry happened fast, and the shocks have rippled around the world causing a huge amount of market volatility and stress. What are the implications of these recent events on trust in the financial services industry?

Lex Suvanto: So, a lot's happened in the last couple of months. We actually went back into the field in April. The earlier research I was citing was from a few months ago. But given the significance of the recent cycle, we went back into the field in April to measure any differences.

No surprise that in April, the research showed an increase in economic anxiety for people, which then translated into concerns about the health of their own bank. A majority of people are concerned that the recent disruptions will impact their own bank, 22%. Small but meaningful say that they would look for an alternative bank to place their deposits that's meaningful.

There have been notable declines in two areas that are worth mentioning. There was a drop in people saying that financial services has a vision for the future that they can believe in. There was also a drop in people saying that financial services serves the interest of everyone equally and fairly, a drop in number of people that say that.

But I refer back to Larry Fink's annual letter. And I quote, Long-term investing requires trust in the financial system, and a fundamental belief that tomorrow will be better than today. We need leaders today who will give people reason to be hopeful, who can articulate a vision for a brighter future.

Unfortunately, given after the recent cycle, the numbers are going in the opposite direction. So that's an opportunity for all of us to think about.

Also, the regional banking crisis highlighted the role of social media. Through the crisis in Silicon Valley Bank. There were thousands of tweets saying run on the bank with pictures of people lining up at the bank doors.

Clearly this added to the chaos and panic. Um, the crisis was then compounded by people having access to their deposits, being able to move their money at the push of a button. So that creates a new risk that anyone in this, uh, sector needs to think about a new risk for banking institutions. And one could easily argue that maintaining trust with consumers is getting even more important, the relationship, the communications, the marketing, given the fact that people can change their financial provider and partner with the push of a button.

Alex Craddock: So, talking about new risks and having seen how social media has disrupted trust, especially in the last few months, I can't help but think about the potential disruption from artificial intelligence we're all talking about it. Would love to hear your thoughts around AI and its implications for trust.

Lex Suvanto: Many may have read CEOs of large technology companies are referring to AI as terrifying. One CEO referred to AI as potentially leading to civilization destruction. So, the question of trust is a prominent part of the AI discourse happening right now.

The issue is that none of us really understand AI, and there's a rising concern about accuracy and bias. Even the CEO of Google recently pointed to hallucinations observed in the output of AI systems. Lack of transparency is a big part of that. Recent research found that 72% of people say that knowing a company's AI policies is important before making a buying decision.

So, here's the question. Do you understand your firm's AI policies? More than half of millennials and Gen Z say they will consider switching brands. If data policies, including AI, are not clear. So, brands and companies need to demonstrate responsible use of AI. Companies will need to be prepared to explain decisions made by those systems.

We've all read that AI increases the potential for bias, depending on who created the algorithm. One hurdle is that there's no agreed upon definition of fairness. So, the problem is there's no universally accepted fairness definition that can be programmed into ai. It begs the question. Whose values do we use in AI?

Then there's the question of accountability. If an AI system is wrong, who's accountable? When you call a customer service hotline, you can ask to speak to the manager, but if an AI system gives you an answer you don't like, who do you ask? What manager do you speak to? Ultimately, AI systems will need to be able to explain.

The system itself will need to be able to explain why it's giving you the answer that it's giving. Businesses will need to produce AI responsibility reports just like ESG reports. In the recent research we conducted in April, we asked consumers how they feel about AI and financial services products. We were encouraged to learn that two and five Americans believe AI will improve financial services.

Some say it already is, it already has started to improve these systems, so that's a good start. Our job as professionals and leaders in this sector is to maintain and build on that trust that will require building principles, fostering transparency, and helping people know how to use AI and the technology ourselves.

Alex Craddock: That's really interesting and it's great to hear that the ongoing theme for us all is this need for greater transparency and really helping our customers understand how AI is helping them and how we're using the data to help them.

Lex Suvanto: That's right.

Alex Craddock: So, it sounds like there's a potential opportunity there, which is great.

I think one of, one of the more exciting trends around the world, that we're seeing in investment management is the rapid emergence of a new generation of younger investor, think young millennials, older Gen Z, under the age of 35, could you tell me about the key characteristics of this generation in terms of building trust and how should they be treated differently than other generations?

Lex Suvanto: So, the gen Z generation is already one of the largest segments in the US- between millennials and Gen Z, it may very well be the largest already. Definitely poised to reshape consumer economic and political trends. But a major finding, and this cuts through all aspects of marketing to this generation, a major finding, is the emergence of what we call belief driven buying.

Nearly two out of three consumers today buy or advocate for brands based on their values. Gen Z is leading that trend. Here's some characteristics about Gen Z.

Gen Z consumers feel the need to take action and fight for their future given the issues that they see in the decades ahead.

They unite around causes such as sustainability, educational access, equality, mental health. This influences where they shop, where they buy, who they will vote for. They live and build relationships through technology; they control information flow through social media. As a result of all of this, gen Z is turning corporate marketing upside down.

Nine and 10. Gen Z-ers want the brands and services they buy to get involved in causes that they care about. They have a strong belief in the influence of experts and believe in influencers. They buy on their beliefs and want to work with brands that stand with them on the issues that they care about.

I was recently teaching a class to a group of Gen Z-ers from all around the country. One student from the Southwest said, when I see a brand that's getting involved in global and societal issues, it gives me hope. It gives me hope.

I share that anecdote because that statement isn't about politics. That statement is more about their view of the viability, their view of the health of the future. So, to build trust with Gen Z, corporate leaders need to ask themselves a few simple questions.

Are your products and services tailored to Gen Z? What do your products stand for? Are your technologies and social media meeting the expectations of Gen Z and how they use it.

Alex Craddock: So, there's a few things that we're going to have to think about as we want to engage this younger audience of investors and how we build trust with them, but I think it's such an exciting opportunity for our industry.

You've shared a lot of great insight about trust from the latest trust barometer study. Bringing all of these things together, what are the two or three key insights that investors should take away and what should they do differently to build trust with our customers based on your insights?

Lex Suvanto: Absolutely. I can offer a few high-level takeaways and then a few tactical takeaways. So, the first one is, business needs to business as the most trusted institution needs to work on helping to break the current cycle of anxiety. And division and polarization in our world as the most trusted institution, the business sector must help restore economic optimism.

Businesses must help temper polarization by investing in fair compensation training, focusing on local communities to address the mass class divide, businesses and government must work together to build consensus and collaboration on policies and standards and businesses must help advocate for the truth.

To be a reliable source of information to promote fair discourse. A few tactical considerations in this fast-paced environment. Just on the heels of the regional banking crisis, it's clear that it's important to over-communicate, make information easy for stakeholders to understand and access. Establish what we would call push channels.

Be prepared with communications tools that reach your audiences where they are quickly and easily. And action pack your narrative. What we mean by that is emphasize the actions you are taking to stabilize your company, to strengthen your position, even to stabilize the environment and the industry. And lastly, don't underestimate the importance, the growing role of the Gen Z generation.

If you can build trust and advocacy among Gen Z, they will become fierce advocates for your products and your brands.

Alex Craddock: Sounds like a great set of takeaways for us all and I think within that a lot of opportunity for us. So, look, Lex, thank you so much as always, I mean I love the trust barometer. It's just a great insight for us. We are in a time of change, there's a lot of market stress, but I always sort of look back over history and go, look, you know, in these times of change and these times of stress, actually there's a lot of opportunity. And I think, what you've given me, and hopefully everybody here is a lot of hope that there's a lot that we can actually do to build trust, especially with this new generation of younger investor that's embracing a highly digitized way of engaging with us.

We need to think differently and approach the experience differently. But I think ultimately, we're going to get the best reward of all, which is the trust of our customers and our clients.

So, Lex, thank you very much for joining me today on The Bid. I appreciate it and um, speak to you very soon.

Lex Suvanto: Thanks, Alex.

THEME MUSIC

Alex Craddock: Thanks for listening to this episode of The Bid. If you’ve enjoyed this episode, rate and leave us a review.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Have you ever wondered if the weather can impact your investment decisions? What if we could map the impact natural disasters have on economies, or immediately understand the impact of a geopolitical conflict on your portfolio?

Geospatial data provides information on the physical location and characteristics of assets, infrastructure, and resources. This data has the potential to revolutionize investment decision making by providing investors with insights into the spatial dynamics of different markets and assets.

To help us gain a better understanding of this new and cutting-edge investment trend and how this information is gathered and used, I'm pleased to welcome Joshua Kazdin and Mike Pensky, who are both part of BlackRock's active investment business. And we have spent the last several years developing a geospatial investment capability and bringing these insights into active investment portfolios.

Josh, Mike, welcome to The Bid.

Mike Pensky: Thanks for having us.

Josh Kazdin: Glad to be here!

Oscar Pulido: Mike and Josh, you both work in the active investment business, which I think of as you're trying to outperform the market, and in order to do that, you have to have really unique information and insights that allow you to do that.

I think historically, you're meeting with company managements, you're analyzing the financial statements of companies in order to develop those insights, and I think some of this still happens, but another way that you can do it - and that you guys have pioneered - is this thing called “geospatial data”. So, what is geospatial data and how did you start on this project?

Mike Pensky: So, Oscar, the way to think about geospatial data, is it's just data that's all around us. It can be objects or events or really anything that has a location associated with it near the surface of

the earth. Right now, you're sitting in the world somewhere, right now you're sitting here with us. Outside it might be really hot. People might be walking around the commercial district, the airport at the local city might have a lot of activity, there are a lot of hotels that might be booked in the area. All of these are concepts that are geospatial in nature, they're associated with location. And so, what are the data that are associated with it that we can measure?

We can measure the extremity of temperatures; we can understand the foot traffic around various stores and retail locations. We can understand what hotel bookings look like. We can measure the GPS traces on trucks as they're moving around the city.

All of these happen in certain locations, and they have investment implications associated with them that we can actually leverage in our portfolios. Ultimately, to us, geospatial data is about getting information that's more timely, that's different than what you can get from other data, and it really is associated with actual real human economic activity happening in real time.

Oscar Pulido: Maybe Josh, touch on why did the two of you partner up on this initiative?

Josh Kazdin: Part of the reason why, honestly, was I had a couple of friends in San Francisco who wanted to start a family, and usually when you start a family, you move out of the city and you go out into the suburb somewhere, maybe someplace that has a little bit more room to move. You have a yard for your kid to run in, there are schools. And every year after they moved out of San Francisco, they had to pack up their home and get into a car and drive away because there were wildfires. In California, you fear wildfire season every year. That cost on a family, on a community is really hard to quantify. We wanted to better understand how extreme weather events were ultimately impacting households, businesses, and the markets.

A couple of years ago, Mike and I decided to explore what were the effects of FEMA disaster declarations on economic activity at the county level in the United States. By the time we got comfortable trying to understand that relationship, the pandemic hit. And that became an entire geospatial problem in and of itself. Social distancing data started to get released both in the United States, in Europe, and across the world. And our group started to pull in that data and use it to forecast which areas were going to have a government shutdown, which businesses were going to be impacted, and how that was going to ultimately impact our portfolios.

The minute that we got comfortable with that, Russia invaded Ukraine. And in the horror of that atrocity, we immediately sprung into action to try to understand how the war was ultimately going to impact our client's portfolios. Where were the investments themselves and ultimately, which companies were likely going to be impacted?

Certainly, stranded assets during that time were much more about a McDonald's in Moscow than it was anything buried under the ground. Across each one of these areas, geospatial became a really critical piece to understanding either a risk or an opportunity that would impact our client's capital.

Oscar Pulido: You've both painted this really interesting picture, this sort of lens on the world that you are uniquely seeing with all these data points. You talked about airport activity and talked about social distancing activity and the insights that provided. But I can't help but think about the sheer quantity of all the data points that you're looking at. How should people think about what you're doing in the geospatial realm with this term big data that gets talked about a lot?

Josh Kazdin: So, our team's motto is that we turn data into alpha. Usually that data can come in three different ways. People think either it's traditional, it's big, or it's alternative. Let's just give a quick overview of each one of those.

Traditional data is the usual suspects of financial information that people have been using over the last century to try to understand markets.

This can be everything from, financial statements to the SEC, macroeconomic releases, industry reports, analyst ratings even returns themselves. Those are just the traditional data sets that we use to think about markets. Usually, you can put it into a nice spreadsheet, load it up on your computer and make a decision about what you want to invest in.

The bigness of data, however, covers both the size as well as the computing resources that you need to explore that information effectively. We're not talking about the megabytes of a PDF that you might download, or the gigabytes of an update to your iPhone, we're talking about terabytes or petabytes of data that require a huge amount of computing power to be able to understand.

Alternative data can be big or small, but usually it's strange, unstructured, not mapped to an investment that you're trying to analyze. So, if you are thinking about what people are searching for online in terms of a product that they might want to buy, or as Mike mentioned before, the GPS trace in trucks as they're moving through a supply chain or news that is coming out halfway across the world in a different language. What topics are they talking about? What is the sentiment? What companies are implicated by that? All that might be classified as alternative data because it's going to be hard to map to an investment. It's going to be difficult to wrangle, but it could ultimately lead to an informational advantage, that you can use to better make investments. But in order to use it effectively, you need to extract, translate, map, and transform it systematically and at scale to generate alpha.

So, in short, traditional data can be big, alternative data can be small, but by bringing all types of data together with some strong economic sensibility, we'll find value that's often overlooked by others in the market.

Oscar Pulido: Maybe going to the geospatial, you mentioned terabytes and petabytes. I'm not even sure I knew that second word to be honest. But how are you gathering all this information? I understand that it's insightful when you have it, but just gathering it and organizing it must be a lot of what you've spent your time on in these last couple of years?

Mike Pensky: The way I think about our geospatial effort is that it's been trying to marry three disciplines that are actually a little bit different from each other. The first one is technology and computing. The second one is data science, and the third one is economics or finance research. Let me take you through each one of those in turn, just to give you a bit of a flavor of what that means.

From a technology perspective, Josh just talked about big data, geospatial data can be really big. Just to give you some numbers, our geospatial platform up to this point has processed about 20 terabytes of data and we're really just getting started from my perspective. To put that into context, the entire printed collection of the US Library of Congress is about 10 terabytes of data. We've already exceeded that and we have a lot more to go. So, you really need a lot of expertise in computation and technology to be able to run operations on that type of data.

The second one is data science. Some of the data we use is publicly available, some we purchase, but in any case, we need to find ways to actually glean insights out of it.

One very simple example that's been a very important part of our project is trying to tie companies to physical locations. What we've done is we've purchased a database of about 200 million points of interest, so where companies are located around the world. What this database has is detail on what each location is. Maybe something relating to a website address or a description, but it really doesn't map very cleanly to tradable companies. What we've had to do is create data science models that give us a lot of accuracy in being able to map those 200 million locations to 60,000 tradable stocks. That is actually a really hard data science problem, it requires some really complex models, but that again is something that we really need to leverage in this effort.

And then finally, more traditional finance economics research. This is the most nuanced, but maybe also the most interesting. So, we have the data, for instance, NASA, the National Aeronautics and Space Administration, gives us data about the temperatures on the surface of the earth. We get it effectively as multicolored images. we have the data, it's free. So, what do you do with that? How do you actually glean insights?

This is what we do every day. You take some hypothesis, so this might impact economic activity somewhere. We run that through our research process, testing what activity it might impact, test how we might be able to implement that in portfolios. And really the goal is to get a lot of comfort that over an intermediate horizon we can reposition our portfolios in response to that data as we're getting it and benefit our clients.

Oscar Pulido: Do you have a maybe more specific example of how that happens. Because you've talked about the sheer quantity, the two times the library of Congress is what I heard in terms of the processing and you're still going, so you have a lot of data points but being able to make an investment decision from them, and what would be an example of how you use maybe some of the weather related information that you gather?

Josh Kazdin: Let's stick with the example of extreme temperatures just for a moment. In one of our first experiments looking at this topic, we observed that GDP growth in outdoor related industries tended to drop during periods of abnormal amounts of extreme temperatures, either extreme cold or extreme heat. Last summer, we observed hotter than average temperatures in Europe.

This had an immediate impact on economic activity. You can't put a new roof on a house when it's above a hundred degrees outside. You might not want to go to an outdoor event, but both can be moved into the future once temperatures start to moderate.

So, the data that we've looked into suggested that a drop in economic activity can oftentimes be temporary. This rebound effect is something that is often underappreciated in the market, and it creates an investment opportunity. For a macro investor, you might invest differently in European equities versus other opportunities during periods of extreme weather or extreme temperature, and then explore getting back into those positions after temperatures normal.

Mike Pensky: Another example I would give you is measuring the availability of renewable energy. To give you an example about 20% of the EU power generation comes from solar and wind right now and so as a result, the winter of 2021 to 2022 was a little bit of a tough one for Europe because it coincided with both very cold temperatures, so more demand for heating, but also at the same time

as following a period of calmer winds. One of the things we were able to find is that if you intersect the location of wind farms with the amount of wind that blows across them, you can measure how much wind power will actually be generated as a result.

Now intersect that with the extremity of temperatures at that time, and you can get an understanding of the marginal demand that you might see for non-renewable energy sources to plug that gap. And we were able to effectively demonstrate that by using these geospatial elements, these geospatial tools, you can predict what the change in prices of non-renewable energy, such as natural gas might.

Oscar Pulido: So what you're saying, Mike, is that you had information about the weather that gave you insights on the demand for energy, whether that be renewable or non-renewable, and at the end of the day, that just allowed you to make a forward looking decision in portfolios that in the absence of that weather data, you wouldn't have been able to make?

Mike Pensky: That's exactly right, Oscar. And the important thing to also emphasize is that it's not just having the data, but also relating that to the economics implications of what this means. you want to demonstrate that there is increased demand for energy at this point in time, but you also want to demonstrate that there is potentially a decline in marginal supply of renewable energy, which will then require an increased demand for that non-renewable energy source. And that's really what we can trade in portfolios.

Oscar Pulido: You know most people get up in the morning and they look at the weather and influence is what they're going to wear. Is it too hot? Is it too cold? And maybe you guys do that too, but you've also taken this a step further to think about what you're going to do from an investment perspective. Weather's an important component of this, but Josh what else does geospatial data do? Because I get a sense that there's more that it can do than just weather-related insights?

Josh Kazdin: Absolutely Oscar. Once you start looking for geospatial data, you'll see it everywhere. The question, as Mike was alluding to before, is not just what data you want to look at, but ultimately, what economically sensible questions do you want to answer? Most recently, there's been a lot of turbulence in the US banking sector centered around Silicon Valley Bank. One of the ways that we took geospatial approaches to this data was that we looked to see which banks were also exposed to the Bay Area, both in terms of where their physical locations were, but also importantly, the location of where all their deposits were, which we get, data from the FDIC on. This helped us better understand the spillover impacts of the most recent banking turmoil in other parts of our portfolio.

Mike Pensky: Another exciting project that we've just completed looks at trying to understand the evolution of portfolios from the lens of US cities. We often talk about trading country exposures in portfolios but one thing that we found quite exciting is that there's actually a lot of dispersion in economic activity even within, let's say the United States. An example would be, post COVID, there's been a lot of migration within the US particularly as, remote work has become more popular that actually has a lot of important spillover effects.

For example, as more people, let’s say, move into a region, economic activity might accelerate real estate in that market might accelerate relative to another region where maybe that is not happening. And what ends up happening is companies that are in those locations will actually benefit from that increased demand and as a result, you can actually position the portfolio in

response to shifts and economic activity, not just at the global level, but even in very small regions. And this all takes very specific and precise measurements of geospatial economic activity that we can trade within the United States.

Oscar Pulido: I'm remembering an example from a while back. You're probably going to tell me that we've moved on from this a long time ago and it's so much more robust, the satellite images of parking lots of a Walmart and the images would tell you whether there's high economic activity or not. And I think that's an example of geospatial. But you might tell me that we've moved on past that already.

Mike Pensky: I think you're right. When most people think about geospatial, they think of those images of cars in parking lots next to retail locations. But we have moved much beyond that. Hopefully the examples that we've given kind of demonstrate the breadth of the amount of data that we can process and the broad applicability of this. It's not just about retail, it's actually very broad. Where we can trade equities, country exposures, rates, currencies, it has very important meaningful implications that we can map to asset classes.

Josh Kazdin: In all honesty, the possibilities of this type of data are boundless. Some of the biggest questions that we have today in the market are geospatial in nature. What does the world look like after globalization as supply chains trade, start to move more into different regions? what do we think about how artificial intelligence will ultimately be changing production. And are we supposed to be looking at consumption physically as people are going to a mall or online? All these different questions have ultimately a geospatial component to them and to us, geospatial data is the alpha that's ultimately hiding in plain sight.

The ability to take anything from the physical world and map it into your portfolio, discover some economically sensible relationships and then position your portfolio to take advantage of them is a huge opportunity for our clients. It's like the number one rule in real estate, sometimes it's ultimately just about location, location, location.

Oscar Pulido: The statement you made around alpha hiding in plain sight resonates because what you're saying is the information's out there, there are insights to be derived about trends in the economy, trends in markets, but you need, it sounds like, computing power. And there's the two of you, but presumably there's a big team behind this that is helping you process, analyze the insights, but that alpha hiding in plain sight seems to best encapsulate the fact that the information's out there, it's just a matter of having the right resources to be able to derive it.

Josh Kazdin: A hundred percent. And in all honesty, this entire effort wouldn't exist but for a huge team of dedicated, talented, intelligent collaborators. These are engineers, researchers, portfolio managers, all unified by a passion to try to understand what's happening in the physical world so that we can better do financial research using geospatial technology, and help our clients maneuver their portfolios to take advantage of what's going on.

Mike Pensky: And then I'll say I think we are still in the early stages here, one way I sometimes think about this is natural language processing wasn't really a big part of the investment landscape now it's absolutely everywhere. we think it'll take time, but we think that this geospatial idea, these concepts, the data, it'll become much more important in portfolios over time, particularly as the tools are built out, and we're very excited to be a part of it.

Oscar Pulido: Mike, you talked about natural language processing has made a lot of advancements and how we use it. Think ahead the next 10, 20 years for geospatial. What do you imagine it's going to look like and how you're going to utilize it?

Mike Pensky: As I mentioned, Oscar, we're still at the early stages and I think we're going to take incremental steps towards a final vision, to be able to evolve portfolios really as the world turns. In the interim, what are things that we're trying to tackle? Interacting different data sets with each other, trying to use many things happening to predict what will happen then after that point. But ultimately the thing that we would love to happen is the world turns, a bunch of stuff happens on the surface of the earth, and we immediately know how to reposition our portfolios in response to that it'll become much more automatic where we'll be able to interpret these events and actually be able to reposition portfolios.

Josh Kazdin: If you think about today, any news article that you read is going to have a mention of a city or where the reporter is talking from. If you look on social media, you'll oftentimes find a geospatial tagged piece of information about what somebody is talking about, where they're talking about it from, or if they're live streaming from a concert or from an experience that they are having.

If you look at where ships are positioning across the globe and where tradable goods are moving, each one of these have geospatial data within them. And so, we want to be able to use all of that information in near real time to uncover actionable insights that we can use to better invest for our clients.

Oscar Pulido: Outperforming the market is hard work. But just listening to the two of you, it sounds like you're doing some pioneering work that hopefully increases the odds of that going forward. So, Josh and Mike, thanks so much for joining us today on The Bid.

Mike Pensky: Really appreciate it.

Josh Kazdin: Thank you very much.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out our recent episode on the top three tech mega trends for some other interesting developments in the world of investing.

And make sure you subscribe to The Bid wherever you get your podcasts.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. The digital transformation has been accelerating since the pandemic began in 2020, from fully remote to hybrid, working to the digitization of products and services.

Efforts are underway to integrate digital technology into all areas of business, fundamentally changing how businesses operate and deliver value to customers. It's also a cultural change that requires organizations to continually challenge the status quo, experiment and get comfortable with. Here to guide us through this change and help us look to the future.

I'm pleased to welcome Cristiano Amon, President and CEO of Qualcomm, a firm that has helped develop technologies that make the smartphone in your pocket, the computer that it is today, and that is now taking those same technologies and putting them into everything else from the auto industry to the Metaverse.

Cristiano, welcome to The Bid.

Cristiano Amon: Happy to be here, Oscar.

Oscar Pulido: Well, Cristiano, it's been three years since the pandemic began, and I think many of us were aware that there was a digital transformation going on in the world, although feels like the pandemic made that, more front and center for us as, many of us had to work from home. We found ourselves on video calls and zoom calls.

I'm just curious, was that when the digital transformation began, in your opinion, or when did it begin? When can we point to that being the start?

Cristiano Amon: That's a great question. I don't think it was the beginning but was the acceleration for sure. And there's so many different ways to describe it. I'm going to maybe describe it in a couple different ways. One is immediately when the pandemic hit companies needed to connect to the other people and, no matter where they were, but then they realized they also need to connect to their assets. And that's what we saw, and we continue to see that everything into a company needs to be intelligent; it needs to be connected, it needs to have a digital twin of it in the cloud.

I think the other way to think about it is it has been an ongoing process that the economy is becoming more digital. So, I think those two things are reality and I think what we saw, a significant acceleration of that into the pandemic.

Oscar Pulido: So, what are some examples that tell you that digital transformation is underway?

Cristiano Amon: I think one is cloud connectivity is now paramount. Everything is in the cloud. Your data is in the cloud. Information in general is in the cloud. The second thing is what I mentioned before, a digital twin of everything. It's a digital twin of you, a digital twin of your car, a digital twin of everything else.

And then the second point of this is, all of the processes are being digitized, and I think that creates a significant improvement in efficiency and productivity. Now, here's the interesting thing, we look at the current situation right now in the current macroeconomic environment, and we have not seen that it had slowed down some of the enterprise digital transformation because companies will digitally transform for growth, but they also digitally transform for cost reduction and become more efficient. I think that's really what you're seeing broadly and that has continued into 2023.

Oscar Pulido: Right, so even though the economy may be slowing down or feeling the effects of rising interest rates, the digital transformation is ongoing.

You mentioned at an enterprise level, it's ongoing and the pandemic accelerated it, what's the investment opportunity then? Because when we talk about digitization, it's certainly much more than just digitizing what's on paper. And so, when you think about the investment opportunity, how do you quantify that?

Cristiano Amon: It's very significant. If I'm not mistaken by 2030, we're going to see multiple trillions of dollars in investment in digital and it's really across the board. It's investment in cloud, it's investment in intelligent devices outside the data center.

It's investment in connectivity, and it is very significant. I almost want to focus on how industries are going to be competitive or not. I think there's now this broad understanding that if your industry is not being digitally transformed, you may not be able to compete.

And I think because of that, we see there is an accelerator chase for many enterprises how they're going to digitally transform. And the industries that are not traditionally digital, you start to see the creation of the Chief Digital Officer or those type of positions because it becomes paramount to what their future is going to be.

Oscar Pulido: And so, on that point of maybe focusing in on industries, I know that one of the industries that you speak a lot about, as CEO of Qualcomm, is the auto industry, which maybe some people find surprising when they think of the history of your firm. But how is the digital transformation, impacting the auto industry or how will it impact the auto industry?

Cristiano Amon: That's a great question and actually it has been one of my favorite topics of conversation. Everything that we just talked about it before I can look at what's happened in the auto industry, we can find many examples of that.

So, Oscar, first if you step back and you look what's happening in the industry, investors ask car companies two questions.

The first question is, are you electrical? But the second question is actually the most important one. Are you digital? You know, the car is really becoming a connected computer on wheels, and I think it's changing pretty much everything into the car. Let me walk you to some examples.

First, you have all of the digital cockpit experience, all of those different screens in the car right now, allow for the first time, the car company to communicate directly with their customers. Before that was done by the dealership. Now the car company is in direct contact with these customers.

So, you started to see things in the car, for example CRM systems going into the car. That's our partnership with Salesforce, how Salesforce get integrated into our platform and Snapdragon Digital Chassis. You started to see a lot of services coming to the court, digital services, especially with electrification.

It is being determined that if you have an electrical vehicle, when you're charging, you're spending more time in your car and if you're spending more time in your car, you're going to be entertained, you're going to work from the car the same way that you work from home. And I think all those things are happening as you have those screens in the car connected to the cloud.

The other thing that is happening is now the car is connected with its maker 100% of the time into its digital twin. You get new features, you get softer upgrades, you get new capabilities, you'll buy a car and it gets better over time. And the list goes on and on all the way to what's happening with leading towards a zero-crash environment with assisted driving and what we call ADAS, as well as autonomy getting a scale at really at all tiers. So, it's an incredible transformation with digital technology happening in this industry.

Oscar Pulido: Cristiano, when you talk about that vehicle that you just described, I was picturing myself sitting in this machine that has all these kinds of cool tools. How much of that is actually available now and how much of that is several years in the future. Where are we in that being a reality for most people?

Cristiano Amon: No, it's actually started to happen right now. If you look at some of the new cars they're launching right now in 2023 with some of our digital cockpit platforms, you start to see those beautiful screens, you'll see screens coming from the ceiling of the car and you started to see all of those new services enabled by 5G. It is happening now, but as you think about what's happening 24 and 25, we're now talking about new models in 25 and 26, it gets better and better.

Oscar Pulido: So you're saying it's starting to happen now. We recently spoke to Peggy Johnson, who's the CEO of Magic Leap, and she talked about the metaverse, this blending of our digital and physical worlds. And she talked about how for it to impact the end consumer, the hardware has to get better, the connectivity has to get better, and so we still weren't quite there yet, but you're describing it as like it's actually here already. How do you think about Peggy's comments in terms of what you're seeing in that digital cockpit?

Cristiano Amon: I think actually there's some similarities to what's happening in the car also with what's happening in virtual reality, augmented reality, mixed reality. For example, one of the things that we see a lot of interest in some of the car makers, and I'll come back to this virtual reality thing. But in the car, in addition of all the dashboard and all those screens, you also have a heads up display. You have the windshield and you also have an opportunity to super impose information that comes from the digital side into that display, so it's another area of transformation.

But let's go back to what's happening in the virtual reality / augmented reality space. We've been investing on this for more than 10 years. Virtually now every one of the commercial devices that you see out there for virtual reality, augmented reality, mixed reality is using Qualcomm platforms, a great example of that is the Quest devices from Meta.

We recently launched Pico, with ByteDance in China, and there's a number of other devices out there being built or launching. That concept that you just brought up, this is what's happening. You are going to have the connection between a physical and the digital world.

And for us, we can see that information in some of those experiences with glasses as a natural thing. So, the technology is going to cycles and if you look at some of the new devices that are being launched right now, they're significantly smaller. We know that humans are going to reject if you have to walk around

the street of a big helmet, but if you have something that is significantly smaller, then people are going to use it and then the potential is really incredible.

Let me give you an example of something simple. We used to make phone calls but then in the 4G era as the phones became computers and your smartphone, we started to text people and we communicate [via] text. But now we had the pandemic and now we hold the phone in front of us right now to do a video call. It's a very well understood technology challenge that we can do today, if you have a glass and I'm going to call you and I'm just going to render a hologram of you right in front of me and we're going to have a conversation, as simple as have a phone call like you right in front of me.

And so, I think the potential for this technology is very big and it could be as big as phones. We see a lot of interesting developments with this across all of the different ecosystems, and I don't think that reality is that far. If you look up what Meta has done, they already have critical mass, it was significant to have a lot of developers. There are some interesting enterprise applications. For training, for education, you have the ability to have collaboration tools and I think we're in the very beginning of something very big which is going to be the metaverse.

Oscar Pulido: I'm just old enough to remember the phone that you were describing that was clunky and big to hold. And certainly, when you think about how that piece of hardware has gotten smaller, lighter, and the transformation it has on people's lifestyles, and that's consistent with what Peggy said around as the hardware gets lighter, it becomes easier to use and therefore has a bigger impact on consumers.

So you touched on the auto industry and you painted a really interesting picture of how car manufacturers now can get better data about their consumers. Can we talk about maybe another example, the industrial sector? How is this impacting manufacturing or retail, this digital transformation?

Cristiano Amon: When we look at the diversification of Qualcomm and if you look at what we're doing right now in addition to mobile, the automotive industry, we have this very broad IOT category and one of those elements in the IOT is the industrial.

And we're starting to see a lot of demand because of the impact that it has on all those different verticals, one of those verticals is manufacturing. As a matter of fact we used to count our customers on two hands in mobile, and then at some point we're counting them on one hand. In industrial, we have over 16,000 customers today, and it shows how much, the potential is for our technology to be part of the digital transformation.

Let's go to your question, which is manufacturing, and is a very profound change enabled by technology. So you look into a factory floor facility and all you can do, you can connect every one of the equipment. Even the software that you are going to run on a robot, you can run that from the cloud, connected with technology such as 5G.

A couple things that changed, the name of the game in the nineties, you build the biggest factory you can build in Asia, and you're going to have the lowest conversion cost, and you have the higher productivity for your fixed capital. Now, if all of your equipment is connected to the cloud, you can have distributed manufacturing, you can have smaller factories all controlled by the cloud, and you have the economies of scale having a bigger factory.

It's changing how people think about manufacturing is actually bringing factories back to regions that would not have the ability to, because competitive. But that doesn't stop there. You have the ability in the factory floor to use those technology, you have handheld devices, you have the ability to use the same robots to do more than one product, you reduce the cost of re-tooling the factory if you have short product cycles because everything is wireless. You don't have to rewire the entire factory. And then you have also big data and how you use data and analytics to continue improving your process. So, it's a very big transformation and one that is also underway.

Oscar Pulido: And so, as companies and industries participate in this digital transformation, what are the cybersecurity risks that, they should be thinking about or that they're asking you about as they undergo this shift.

Cristiano Amon: Great question, Oscar. Especially if we think about everything becoming digital, everything's cloud connected, the surface area is now much bigger. One thing is somebody hacks into your phone and another thing is you have this technology now on the grid for the utility companies, you have the technology now on healthcare, you have the technology on manufacturing. I think that's both a challenge as well as an opportunity. One of the largest investment areas we have in our chips is security. Where do we store important things such as credential and biometrics? How we do it with encryption, how we do it with multi-factor authentication, how [do] we do softer attestation?

One of the things we just announced was a solution for industrials called Aware, which is a cloud layer that connects to the chips. We announced the Aware Signature, when you actually can validate that the software running on the chips has not been modified, and you can attest to the safety of the software. So, it's going to be an opportunity for innovation, it's going to be an opportunity for investment, it's going to be an opportunity for differentiation, but that's part of becoming digital. Security needs to be front and center.

Oscar Pulido: Maybe I can also ask you about AI, artificial intelligence, which is a buzzword now, and how does it fit in the context of this digital transformation?

Cristiano Amon: This is one of the biggest opportunities we have in front of Qualcomm right now, and I may not give it justice to the size of the opportunity the way I describe it - it could be transforming our company dramatically. So, things that are happening with AI, as AI is evolving and evolving fast, and you look at those Large Language Models, for example, like ChatGPT and you look of how those new models work. You have a very Large Language Model, you have to run them multiple times when you do those queries and you have the opportunity to do not only text, but it's going to be images and video and the reality is you're going to have to run those things locally into the devices.

You won't be able to scale into the data center. A simple way to describe this. If you do something as simple as a search and now, you're going to do a search by chatting with the search results and asking queries, you significantly increase the cost of the search because the computational power, so you have to move some of that to each individual device. This is now one of the fastest growing silicon areas for our chips, we're building very large capacity, very efficient processors because of our phone DNA, you have to run the very high-performance computation, but you cannot compromise on the battery life, and I think that's an opportunity to bring AI to everything.

I actually believe that in the same way that we have upgrade cycles, driven by the transition of a feature phone to a smartphone, the transition of a 3G to a 4G, to a 5G. People are going to want to build a new device, a new smartphone, a new computer, a new car just based on AI capability.

Oscar Pulido: So, Cristiano, you paint this picture of the digital transformation impacting so many industries now, and then what's coming in the future. And I, I said before I was old enough to remember that big phone, I'm also old enough to remember like an old school record player and it makes me think that maybe there are some things we don't want to digitize and some things we like to have in the analog version. So, as you think about this transformation going on, what are some of the things that you think we should keep in kind of analog form?

Cristiano Amon: That's a great question. Well, first, let's just hope that restaurants and, food places continue to be analog, it's going to be horrible if it's digital, but you know, it's an interesting question. I like to answer this question, when you think about something as simple as wrist to watches, right?

You can saw what happened from mechanical watches, going to digital watches, but you still have some charm and something special about mechanical watches. And I think some of that's going to happen, it's like vinyl coming back. So personally, I do a lot of work with the automakers to transform the car into a digital connected computer, but I have a passion for muscle cars from the seventies I'm restoring too. And those are all analogs and they are fun!

Oscar Pulido: Sounds like there will be room for both in the foreseeable future based on customer preference. Well, Cristiano thank you so much for joining us on The Bid today.

Cristiano Amon: Happy to talk to you.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our episodes on the Metaverse with Peggy Johnson and the top three technology megatrends.

And don't forget to subscribe to The Bid wherever you get your podcasts.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Recent events in the banking sector around SVB and Credit Suisse have made clear the importance of staying nimble as investors. The old investment playbook is out and a new regime that considers high inflation and interest rates is in. Here to explain what investors can expect in Q2, I’m pleased to welcome Wei Li, Global Chief Investment Strategist for BlackRock.

Wei, welcome to The Bid.

Wei Li: Thank you so much, Oscar, for having me. I'm very excited to be here.

Oscar Pulido: Wei, the markets have given us quite a ride already in 2023. And just taking a step back, it feels similar to 2022, not so much in terms of the returns across asset classes but what is driving those returns. Last year we talked a lot about macro drivers in the market, so things like the Fed, interest rates, inflation, that seemed to have a big impact. Would you agree that this year is more of the same?

Wei Li: Absolutely. So, if you think about the whole of 2023, so far it has been a very macro market, right? So, if you think about the US market, for example, more than 90% of the year-to-date return, were driven by seven names. Mostly tech names. So, we're talking about, the market being a very macro driven and duration driven type of market so far this year which is, I think intuitive in that what we have seen is significant rate moves translating into parts of the equity market that are duration sensitive, reacting and overreacting.

But our expectation is that the focus of market would shift from the broad brush, the prevalent market narrative being rates and duration and top down, back to fundamentals, back to basics, and back to earnings.

And on that basis, if you think about, the trends that we expected coming into this year, so specifically I'm talking about earnings would come under pressure and margins would compress, they're actually playing out. If you look at the last earnings season, for Q4 last year, it was the first quarter of earnings contraction since late 2020 for the US Equity market. And we have seen negative operating leverage, we have seen decreasing margins.

So, all of those trends they are playing out. It's just that actually markets were not taking note of that because the prevalent narrative of the market is very macro driven rather than micro driven. But it is my expectation that focus will shift to earnings and micro and fundamentals and basics over time as we look at the rest of 2023 because over a longer period, indeed it is the earnings that very much determine how equities would perform.

So just to put the year-to-date markets into context and frame that in a very macro perspective, but I do think that earnings will matter more and more as we navigate the rest of the year.

Oscar Pulido: So, as we enter the second quarter of the year, I can't help but think back to some of the themes that you and other members of the BlackRock Investment Institute have mentioned over the past year. You've talked about the end of the great moderation and the beginning of a new market regime that we'll see higher volatility across things like interest rates and inflation. You've also talked about how the investment playbook of the past may not apply going forward, specifically as it relates to central bank policy. So, take us through how your thinking has changed on some of these fronts.

Wei Li: That's a great question, Oscar. It’s a great question because it's important to take stock right now in the second quarter of the year.

As we entered 2023, the overall framing that we had is that this year is likely going to be on aggregate a better year for risk assets in comparison with 2022 where we had bear markets in equity than bonds. And the reason why we had that view and why we continue to have that view, is because we think that the inflation is falling, but parts of it will stay persistent. That's number one.

Number two growth is falling, but we're talking about a shallow recession, so not a deep and protracted one.

And then number three is central banks instead of hiking rates aggressively at some point this year they're going to pause and that is a different type of environment versus surprising on the hawkish side throughout the course of last year. So that's number three.

And number four for why we think that this year on aggregate will be a better year for risk assets is that China is restarting and reopening versus being in lockdown for 2022.

So, sitting at the beginning of Q2 and revisit all this framing that we had at the beginning of the year, what has changed? Did any of this change, let's go through them one by one.

Inflation is falling, yes, indeed. But also, our expectation that parts of inflation are persistent. And that's getting more and more appreciated. At the beginning of the year, there were hopes, not our hope, but there were hopes in markets that inflation would just fall down to target without pain to the economy. And I think that's now looking less and less likely and being appreciated as well. So, inflation is falling, but part of is persistent. So, we haven't changed our view on that front. And I think that's more embraced now, as we see evidence of a tight labor market and sticky core inflation.

On the second point about growth slowing down, I think the time horizon over which recession would kick in, I think that has been pushed out a little bit versus expectation at the beginning of the year, given resilient consumers- you look at retail sales, for example. So, we still think that recession is coming but instead of Q2/Q3, maybe second half of the year is looking, more likely given the resiliency in the consumer side of the economy. I would say, though, the banking turmoil may represent a downside risk that would take time for us to fully understand the magnitude of this banking shock and related credit crunch.

But I would say recession core is still in place, but maybe pushed out a little bit more versus expectation at the beginning of the year.

Central banks, we're getting close to peak in Central Bank rate hike cycle, that we have not changed. But markets are hoping that central banks would come to the rescue of the economy with markets currently pricing two rate cuts into the end of the year and two, three rate cuts heading into next year -that we don't think would happen.

So, we're still leaning against market hopes for rate cuts this year. And that's, why we have been modestly underweight parts of the equity market because markets are hoping for the old recession playbook, and

central bank's cutting rates. I just don't think that would happen for this year precisely because of the inflation dynamics. So that's point number three.

China restarts - we had a view that China growth for this year would have a six handle, and that was our view at the beginning of the year. I think consensus is moving closer to that now, and the momentum for China restarting is being more appreciated. So, we haven't changed the view, but I think it's becoming more and more of the consensus.

But what would say didn't quite appreciate is how strongly sentiment wanted to embrace the rebound. So you think about the strong momentum coming into 2023 our assessment is that it was really a fear of missing out rally, right? I hear from, clients and investors, across the world, that last year was really hard for portfolios because Equities were down and bonds were down.

So, it would be very costly, after experiencing last year, to miss out on a rebound, which is why some are positioning for the rebound, whilst recognizing that things could get worse before it gets better, and we could be heading into every session before we come out of it.

And yet some are already positioning for that rebound, and I think that fear of missing out is that sentiment boost to market. And it's always hard to quantify things like that, but I think that's the missing piece so far this year as I revisit what transpired in the first quarter.

Oscar Pulido: Way. You touched on 2022 and how tough a year it was for both stock and bond investors, but also you shared the view that 2023 would be better. Can you talk a bit about bonds in particular? I think this was an area that most surprised investors last year, and specifically the losses they experienced in their bonds. So what opportunities are you seeing now in this particular asset?

Wei Li: I think bonds are more interesting now because income is finally back. So, if there is one silver lining out of a very traumatic year, that was 2022, is that, yeah, you get paid now. For sitting in reasonably, no risky fixed income assets.

For the most part of last year, and for most part of this year we were close to maximum overweight investment grade credit, so quality credit. We trimmed that maximum overweight to modest to overweight to take some profit because spread has tightened quite a bit. But that idea of being paid for taking very little credit or duration risk, for that matter, is very appealing.

So I, like bonds on aggregate, but specifically front end of the curve- very front end, I'm talking about T-view in the US treasury market, as well as still a relative preference for quality credit over high yield, credit given our view that we are still heading to a recession and default currently tracking at a low single digit could go up a little bit, and that could impact high yield bit more than investment grade.

I would say last thing about investing in bonds, we currently also have a relative preference for emerging markets that over on aggregate developed market bonds because, emerging market central banks, they were ahead of the curve in hiking rates coming out of the pandemic to the extent that they now have a bit of a buffer, the number of emerging market central banks that are hiking rates is decreasing. And some of them are even talking about cutting rates. So, there is something there that makes emerging market that bit more attractive. And also, if you look at traditionally the excess return for emerging market debt versus their developed market equivalent, that tends to be proportional to the economic momentum of the emerging market economies versus developed market counterparts.

And currently given the restart, that is happening in emerging markets, and also specifically in China, that is boosting the relative growth momentum in emerging market, which is another reason that we favor emerging market debt.

But more broadly, just to say, income is attractive in bonds for once. After waiting for decades of very low yield, that makes bonds more attractive compared to before in developed world preference for very front of the US treasury market. And also, still a preference for, IG quality, credit over high yield and emerging market debt looks quite okay

Oscar Pulido: Okay. Got it. So it sounds like there are definitely opportunities in the bond market. You mentioned the shorter end of the government bond market. You talked about investment grade. You mentioned emerging markets. You've also talked about inflation, and I just want to come back to that. You said earlier that it is falling, but it will remain persistent.

And I want to come back to this theme of living with inflation and this concept that central banks won't be coming to anyone's rescue. So, what is it going to look and feel like for investors right now in terms of living with that kind of inflation?

Wei Li: Yeah, we're going to be living with higher inflation, higher than pre pandemic levels of inflation for longer than many expected.

And I think if you look at market pricing markets are under appreciating the degree to which we're going to have to do that. If you look at 10-year break even at some point it was just about 2- 2.1%. in our view in the US 3 is the new 2 in terms of where inflation would settle.

So, part of the new investment playbook is being more dynamic, it's being more frequently assessing your investment views. So, when market dislocation like that present itself, we leaned into it and we added to our inflation-linked, bond, preference even more. So now actually looking at the market pricing 10-year break-even is now comfortably above 2.3.

So, we have what we view as a target level as we think about where things should settle and if market dislocation present opportunities, we take advantage of that. That's point number one.

Point number two, you are absolutely right, Oscar, where in an environment where there are structural forces, that means inflation.

It's going to settle at a higher level than what we got used to previously. And that is considering some of the cyclical forces driving inflation down, right? So, we're talking about goods, deflation, like goods, service rotation coming out of the pandemic is bringing part of the inflation mix down.

But structural forces like aging demographics, labor shortage, geopolitical fragmentation, and the net zero transition, which ultimately is a series of supply shocks, means that inflation will settle at a higher level, which is why as we think about portfolio construction over both the medium and the long term, we need to think about inflation protecting our portfolios, which is why we think we’ve got to dig one layer below the debate of 60:40, 40:60, 50:50, or whatever it is, we actually need to go into another layer of granularity and think about, yes, 60:40, 50:50, but what is your 60, what is your 40 bonds? But it's, going to be more granular than that. We have a preference for inflation links, bonds over long duration nominal bonds for the reason that I just talked about in that market pricing, is under appreciating that we're going to live with higher inflation than before, but also thinking about the role of real assets in portfolio construction from the perspective of inflation protecting your portfolio.

So, as we evolve portfolio construction, think about real assets, private markets, but of course also recognizing the higher rate environment, what does that mean? But also thinking about, going one layer below and thinking about what your bond allocation should be and currently we have a preference for inflation linked bonds over normal bonds.

Oscar Pulido: Well, it sounds very consistent with everything that you've been saying about the new investment playbook that is required going forward.

So, Wei, thank you so much, for all these insights and thank you for joining us on The Bid today.

Wei Li: Thank you so much for having me, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid.

Next time on The Bid, Cristiano Amon, the CEO of Qualcomm, joins me to talk about the digital transformation that is underway and how it will transform industries across the board.

If you’ve enjoyed this episode, why not share it with a friend and subscribe to The Bid wherever you get your podcast.

Anne: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance.

I'm your host, Anne Ackerley, Head of BlackRock's Retirement Group. As we continue this mini-series, during Women's History Month, The Bid welcomes four senior female leaders of BlackRock and their guests for four special crossover episodes in partnership with my colleague Samara Cohen's LinkedIn video series, In Progress. I'm excited to continue this mini-series as I speak to another incredible leader about progress and purpose.

I'm pleased to welcome Dr. Lucy Marcil. Lucy is an assistant professor of pediatrics and associate Director for Economic Mobility at Boston Medical Center. She is the co-founder and executive director of Boston Medical Center's Street Cred Program, a non-profit providing anti-poverty financial services in pediatric waiting rooms. Dr. Marshall is also a TED Fellow and the recipient of the American Academy of Pediatrics Anne E. Dyson Child Advocacy Award.

Wow, Dr. Marcil, welcome and thank you for joining me today,

Dr Marcil: Thank you for having me, Anne. I'm very happy to be here.

Anne: Why don't you tell us about street cred and the work you're doing there?

Dr Marcil: Street Cred is a program designed to help improve financial wellbeing as a part of pediatric well childcare. We focus mostly on infants in the first year of life because that's when we have the most access, they come in and see us seven times. And at each of those visits, we deliver a bundle of economic services focused on building economic stability and asset building so that children and their families can be healthier and thrive.

We currently have about 225 babies enrolled in this program. And we've been operating since 2016. one of the services we provide is tax preparation. We've done about 6,000 tax returns and returned 14 million to families.

Anne: I mean, wow. Talk about meeting people where they are. What prompted you to start this program?

Dr Marcil: Really it was a patient driven innovation. As a pediatrician, I see every day that health problems kids come to me with are often driven more by their environment, their life circumstances, than the biology within their bodies.

So, for example, a child with asthma might keep coming back with asthma flares because the housing in which they live has a lot of mold in it, or there's air pollution in the environment around them. I give them an asthma inhaler, but it only temporarily helps. It doesn't really fix the problem. And sometimes parents can't even afford that inhaler.

I was frustrated by this and felt like we really need to address one of the root causes, which is poverty or financial instability. I knew that there was a tax credit called the Earned Income Tax Credit that is the largest cash transfer program available in this country but that 20% of families don't get it at all, and 60% of families who do, miss out on hundreds of dollars because they go to for-profit tax preparers.

In 2015 A colleague and I started talking to patients about this, trying to find out, do they get this credit? Do they know about it? How do they get it? Found a lot of mothers were not getting it, they didn't know about it, they maybe weren't even filing their taxes. We started trying to refer families to community-based free tax sites, thinking that would be a great solution.

We had a mom who took her infant and toddler on two buses and a train across town to this tax site. It was closed. She went back the next week because she was determined and found out that she was missing a key piece of documentation so they couldn't do her taxes.

Dr Marcil: But when she came back for her baby's next visit, she said, I have to come here all the time. Why couldn't you have just done this here for me? Why did you have to send me across town? So, she inspired this work. We thought that's really smart of you to want to do something that. makes better use of your time in a place you have to go anyway,

So, we started doing taxes. And then over time wanted to build on that and incorporate other underutilized financial services that could get families cash, things like food supports, food stamps, paid family leave, college savings accounts for children, asset building tools through housing. And that's where we're at!

Anne: It's such an incredible story and in some ways. so obvious and in other ways, so not obvious, that you could do this. But as I think about it, packaging financial services with pediatric care really requires trust. how did you, begin to build trust with your patients, in, what you were doing and in this program?

Dr Marcil: Luckily patients generally trust their doctors, which is what we wanted to take advantage of - people are used to talking to their doctors about very sensitive topics.

But money isn't usually one of them. So, we weren't totally sure if that trust would translate and kind of took a leap of faith and started asking patients, 'would you want to talk to us about this?' And interestingly, there have been a couple surveys now done. About 70% of families say, I do want to talk to my doctor about my financial status.

And they recognize that impacts both their physical and their mental health. So, we took advantage of that preexisting trust, and then we made sure in our model to build in longitudinal in-person relationships. We know that that really matters for trust- having that in-person connection, meeting someone every time they come into a visit, we found that that really helps build trust.

And the other thing that's very important and probably obvious is that we focus on trying to have a team that reflects the patient population we serve. So, making sure that we have shared language capacity, shared cultural background as much as possible so that patients feel like they can relate to the people who are serving them. You talked a little bit about the connection of health and wealth, that people are willing to talk about money with doctors.

Anne: So interesting. Where are you starting to see success in this connection bridging health and wealth, and as you think about the work that you're doing how do you think it's going to impact your patients' families and their futures?

Dr Marcil: There are a couple examples. The first is taxes. That's what we've done the longest, and we certainly have found that on average, get families back 2,500 to $3,000, but we can do up to three years of past tax returns. For some families, we get them $10,000 back at once, and that clearly has a huge economic impact, but it's not just the immediate money that they get back, it's also the accumulation of the effect.

We educate people about the fact that the earned income tax credit is actually designed to encourage work. The more you work up to a certain amount, the more money you get back. The maximum credit is about $6,600, and then it plateaus. This is very different than most public benefits, like say food stamps, which every dollar you earn decreases the amount of food stamps you get.

And one example, I had a mom, we did her taxes. She was working part-time for the government she said to me afterwards, 'wow, I didn't realize that if I work more, I get more of this credit back. I'm going to ask my boss tomorrow if I can work more hours' and so that is empowering to her and it also is going to have an accumulative effect so that over time as she works more hours, she makes more money, there's more economic stability in her family over years.

Another example would be the 529 college savings accounts we've been helping patients open. Our state Massachusetts as well as I would say about half of the states in this country now offer, an incentive to open an account.

So here in Massachusetts, if you open an account in the first year of life, the state will put $50 in, which isn't a ton of money, but certainly it's an incentive. Most of our patients have not actually, ever invested money. So, there are a lot of barriers to families taking advantage of this. Nationally, families who have 529 accounts tend to be white college educated and higher income earners.

The families I serve 90% of them are in Medicaid, about 40% of them are immigrants or English is not their first language, very low-income populations, majority of them identifies either black Hispanic or Latina, definitely do not fit the demographic profile of the typical 5 29 account holder.

We have found in our work opening 5 29 accounts that we're able to get about 20% of families opening accounts compared to about 3% nationally who hold these accounts.

And we know that having a college savings account, even if there isn't, money in the account or there's only a dollar in the account, is associated with three times increased likelihood of going to college and a similar increase in likelihood of graduating from college.

There's a study in Oklahoma that showed when the state put money into these accounts, it was associated with a decrease in maternal depression and an improvement in child, socio-emotional wellbeing at age four.

And that clearly is before they have access to the money. So, you might wonder why? Our thought is that it gives families hope and it creates a growth mindset. The sense that someone is investing in their family and that their child does have a chance for a better future. So, our hope in helping families open the accounts as that there will be a similar effect down the road. Parents are very enthusiastic about helping their children build a better life.

Anne: Wow, there was so much in there about the impact that you're having, and it makes me think a lot about getting people, the information they need when they need it to empower them, is just, so important and removing some of the frictions that keep people from taking these actions.

Maybe switching subjects a little bit, you work with women every single day, it's Women's history Month, but can you talk a little bit about some of the discrepancies that you've seen both medically and financially, with respect to women and, how do you think we can overcome them?

Dr Marcil: Yeah, that's such an important topic and there's a lot of work to be done in this area. The vast majority of parents that I see are women and women identifying. We certainly see some parents who, identify as non-binary or who are men, but, probably 90% of the parents I interact with identify as women.

They face a disproportionate burden of childcare in terms of the impact on their bodies, they have been pregnant, they have given birth, and also in terms of after having the children. Many of the parents, I know all of them that I see are raising children by themselves. So, there may be a partner who is involved but doesn't live with them, or there may not be a partner involved at.

Often there's multi-generational family members helping parents take care of their children, but the mother has the primary responsibility, which I think is probably on average true around the world. That is a lot of responsibility, on their bodies, but also on their physical lives. And understandably, that takes a toll on their health.

Pregnancy is inherently risky. It is associated with worse health than not being pregnant. There's a risk of death, and as you've probably seen in the headlines nationally, black women in particular, even when they're wealthy and well educated, are at increased risk of death from pregnancy and post -partum.

But having a child also impacts ability to work. Unfortunately, in this country, we do not have access to good, affordable childcare for many families. And on a daily basis, I see moms who really want to be working, they want to have a career. They understand not only that it's important for their family's economic stability, but for their own development and growth. But they can't afford childcare or they have a job that has erratic hours and that's a huge barrier.

Unfortunately, many women I see quit their jobs when they're pregnant because of the health problems they're having and because they know they're not going to be able to have childcare with the intent to start working again later. We know for women across the economic spectrum that quitting jobs then leads to backsliding in terms of wage potential and career trajectory.

So, it's kind of a depressing picture I just painted, but I do think there's a lot we can do.

One example is in Massachusetts, we do now have paid family medical leave. It's a state policy depending on the specific situation, women can get up to six months of leave, both for medical problems and for taking care of a new child. Non birthing parents can also get paid family leave. So, this is a super important policy that unfortunately we are seeing inequities in how it's being accessed. A lot of the parents I work with don't know about it and they're not taking advantage of it.

And then the last thing I'll say about this is that educating and empowering women around these topics is really critical. So, we actually right now are running a financial coaching group for parents all the parents who are participating identify as women, and they have told us how empowering it is to have this financial knowledge, but also to have an hour a week where they are not primarily taking care of their children.

We're providing childcare during these sessions and are just able to connect with other adults and think about adult topics like their finances. Financial literacy is something that could be embedded into many aspects of our society, and unfortunately, it's not. And so, it is something that we could be doing more of.

Anne: Going through my mind so much is the impact of, childbearing and childcaring on women that isn't just in the moment when they're having their kids or their kids are young, but it actually follows them all the way through their life.

And I'm the Head of Retirement and think a lot about women in retirement and this notion that women have to take off and not always have paid work to care for children, winds up showing when they get to retirement the money that they've been able to save is often, at least in America, 30, 35% lower than men. So, this is something that continues throughout their lives and I'm so with you on we need more paid childcare, and we need to make it easier for women to work and to have children.

Just so much in there and I love that you're empowering women, with knowledge that they're able to use to make their lives better.

So, moving on, one of the themes of Women's History Month, the series that we're doing, is really about purpose. And so how do you think about, the purpose in the work that you are doing?

Dr Marcil: That's a great question. My foundational belief is that everyone deserves the opportunity to have a good life. Right now, our society is structured such that that is not the case. At birth some children are inherently unlikely to thrive because of their race, their economic status, their family composition.

And so, the purpose of my work is to change that fact. Not just because it's the right thing to do ethically, I mean, it definitely is and that is my primary driver, but also because it's the right thing for our country. We cannot continue to thrive as a society when a substantial minority of our population is struggling economically and in respect to their health.

There is a huge financial case for this that you probably understand better than I do. There are great economic losses when we have this chunk of our population that isn't thriving economically, that isn't healthy, and children that are then not going to grow up and be able to contribute to the workforce and have health problems.

There is a financial case for that and as well as the kind of human rights argument, but that's the purpose of my work.

Anne: Stay tuned because BlackRock is soon to publish a report about, if we could fix some of these things, the impact of women in the workforce and what it could contribute to the overall economy. So, you're right, this is the right thing to do, but it's also important for our country in terms of continuing to be able to grow and make sure everybody can have the lives that they want to live.

I would imagine that it might actually take time to see the impact of what you're doing. How do you think about progress and measuring success?

Dr Marcil: Right. what. You just said is so true about pediatrics in general, that we struggle to quantify the impact of our work because often you don't see it for another 18 years. Children in general are relatively healthy compared to adults, so they're not that expensive to take care of. Health insurance and healthcare systems don't invest as much in them as a result because there isn't that upfront cost and they don't want to pay for something, they're not going to see a return on for 18 years.

So, part of it is just faith in the process. I know that investing and making sure an infant is at a healthy weight is getting good nutrition, is being emotionally nurtured appropriately is going to lead to a healthier, thriving adult.

Dr Marcil: But I also rely in the short term on the numbers of people we're serving and the metrics -how many tax returns we've done, how many accounts we've opened, how many connections we've made, as well as direct feedback from families. I am a practicing clinician, I see patients on a daily basis, and they often spontaneously give me feedback on the work that we're doing. And so that in itself, regardless of what happens in 18 years in the moment, it's been empowering to that family and that matters. I put all those things together and feel assured that the work we're doing is important and has an impact.

Anne: I'm so inspired by what you're doing. As we come to an end what piece of advice would you give your younger self, starting off in your career?

Dr Marcil: I think I would tell myself to stick with my gut and to follow my convictions. I say that because when I was young as a child and a young adult, I actually had the least self-doubt. I was very confident and sure of my vision and what I was going to do.

Medical training is a system that's really designed to mold physicians into a very specific career path and build specific characteristics. I don't exactly fit that mold, I'm a bit of an entrepreneur and innovator and throughout that process I did get feedback that maybe I should try to be a little bit more traditional. And it took me on a journey of doubting my convictions and trying to conform, but then coming back more recently to that conviction to follow my gut and my vision.

So, I would just say that believing in that internal clarity that you have is really important and not to get dissuaded by others.

Anne: That is great advice and thank goodness you are following your gut because you're doing really terrific work. I just want to thank you for the work that you're doing and really thank you for all the time you've given us today.

Dr Marcil: Thank you so much for having me, it's a delight to be here and I've learned a lot from you too, and I'm excited to read that report that you mentioned that's coming out soon.

Anne: Thanks for listening to this episode of The Bid. If you haven't already, check out the previous episodes in this four-part mini-series featuring some other inspiring female leaders as we celebrate Women's History Month.

And make sure you subscribe to The Bid wherever you get your podcasts.

Carrie King: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Carrie King, Global Deputy CIO within BlackRock's Fundamental Equities business.

As we continue Women's History Month The Bid welcomes four senior female leaders at BlackRock and their guests for four special crossover episodes in partnership with Samara Cohen's LinkedIn series In Progress. I'm excited to continue this mini-series as we speak to some incredible female leaders about progress and purpose.

Today, I'm pleased to welcome Keri Mandell. Keri is the owner and founder of Empower Yoga. Keri started her journey with yoga 13 years ago while searching for a way to become more active and find balance in her life.

Through the years, yoga transformed Keri physically, emotionally, and spiritually allowing her to connect with others, improve her fitness, and gain a better understanding of her true inner self. Having worked for over a decade as a special education teacher and school administrator, Keri is a teacher at heart. She is an also an ultra-runner, an Ironman, a CrossFit and triathlon coach, and a leadership expert with unstoppable energy and a can-do attitude that energizes and inspires others, including myself.

Keri, welcome.

Keri Mandell: Thank you for having me.

Carrie King: You and I met on the yoga mats, so to speak, a few years ago at your studio, I know yoga's a very big part of your life, what brought you to yoga 13 long years ago and what keeps you so committed?

Keri Mandell: When I first discovered yoga, I was living in Boston and I found it actually at a very difficult point in my life. I was 27, had just gotten married and I found out that I wasn't going to be able to have children and that was really hard and really challenging for me. I was in a little bit of a dark place. And a friend of mine said, “you need to go to yoga.” And I was like, what is yoga going to really do for me?

And one thing we say now is that, when the student is ready, the teacher will appear. And it was just the time. And when I went, I remember getting on my mat doing these moves that I've never done before. And it was so uncomfortable, yet so liberating.

I remember sitting there and just crying and all my emotions, all of this stuck energy, all the pent up feelings that I was having, the challenges that I was facing, was just released and afterwards I felt refreshed and renewed. I started going regularly and I started noticing a big difference, mentally, physically. Yoga's truly remarkable.

I think it teaches us a lot about who we are. It reminds us to be present, to be in the moment. Oftentimes shows us how strong we are too.

And whatever we do on the mat can often translate off the mat as well. We learn how to breathe, we learn how to take on obstacles and new difficult poses, and we can overcome them and then we can start to do that in our lives as well.

I love it so much and I'm so grateful for the practice.

Carrie King: Your story's very interesting, so you were a special Ed teacher and a school administrator in your prior career. Tell us about that and what fueled the change.

Keri Mandell: I had gone to school at Providence College, got my degree in elementary and special education. Followed that up with a degree in Special Ed from Wheelock College. And then, was working as a Special Ed teacher, I really enjoyed it. But I wanted to make more of a bigger impact and I decided to get into administration because I thought I could make some more changes and help more people.

But what I quickly discovered was that wasn't necessarily the case. And being a school administrator was really challenging, and while I had some really great moments, I also didn't have the control that I thought I would have.

I was becoming a little disenchanted with public education and as an administrator, the teachers were mad at you or the parents didn't like you. It was a very tumultuous environment to be in sometimes.

When I moved from Boston to New Jersey and started really getting into fitness and my fitness became such a huge part of my life I decided to switch a careers and decided to make a career in fitness.

It was unexpected I think a lot of people were surprised when I told them that I was going to leave my job and open a yoga studio, but you have one life and you’ve got to do what makes you happy and you’ve got to live it.

Carrie King: I think change can be really hard. It can feel very uncertain, very uncomfortable, even risky. How did you move past the discomfort of making that change and taking the leap to such a big transition in your life?

Keri Mandell: I wanted open a yoga studio yoga had been such a big, huge part of my life and had done so much for me over the years that I wanted to give back to others.

As I mentioned previously as administrator, you sometimes, get all the hate and that's one thing I love about the studio now is that, I get to be the best part of people's day, which is pretty incredible.

When I thought about opening the studio, I thought about what it would take, and financially, what did that mean for me? What did that mean for my husband? What did that mean for our family? And at the end of the day, it was a risk that I was comfortable taking. And I thought, you know what? If it didn't work out, the worst that could happen would be like the cost of a college education and opening up a business is just like that, it's an education.

So, I knew that if that was the worst case scenario and I was comfortable with it, I said, why not do it? And that's what we did. It wasn't easy. Our first location, fell through, and there were a few years when I quit my job to when the actual studio opened that, I was working all kinds of different jobs. I tried to piece things together to make some money, working at other yoga studios, teaching, coaching, it was hard!

At one point my husband looked at me and was like, you need to get your job back. And I was like, no. Challenging things happen, but it's about overcoming them, seeing it through and not giving up,

Carrie King: “Not giving up”, that's interesting that you mention it. something that absolutely astounds me and inspires me are the physical feats that I know that you've accomplished. So let me just recap them for our listeners, you've done the World Marathon Challenge, and correct me if I'm wrong, that's seven marathons on seven continents in seven consecutive days. you've also completed a 100-mile run.

What motivates you to embark on these sorts of extreme challenges, I can imagine they're also very emotionally challenging.

Keri Mandell: Definitely! Going back to when I came to yoga, I wasn't very active person - I didn't really become active until much later in life. And the turning point was trying to discover what my body could do.

I thought that I was going to have this life, this career, these kids, this family. And when that was taken away, I decided forget about what my body couldn't do. So I couldn't have kids. What did that mean for me? And my life changed.

I started to think about what I could do and that's how I started completing these physical feats. I wasn't a runner, so I decided to start running. I met a girl at the gym who was running on a treadmill and she was wearing a weighted vest. And I remember walking up to her and saying, what are you doing? What are you training for? And she said, the Boston Marathon.

And I started getting in the gym early and I would walk next to her and before I knew what I would jog next to her, then she introduced me to a running group and I started running.

So, from there, I always up the ante. I trained for a 10 miler and then a half marathon, and then I did my first marathon. And when I finished that, it was amazing. Felt like I was on top of the world. And then I was like, well, I want to do all the world major marathons. And once I finished that, I want to do all the marathons and all the continents. And then once I finished that, I was like, I want to run further.

It was just about discovering my edge and tiptoeing past it and really getting uncomfortable, that's been a big part of my push and my desire to do all these things.

Carrie King: I remember when you came back from the World Marathon Challenge and you were talking about it at the yoga studio, I think your first marathon of the 7 day, in the Arctic? And you were talking about how treacherous it was, and I remember you saying, I said, how did you finish it?

And you said, I knew there was no chance I was not going to finish every single marathon no matter what. I don't know where that empowerment comes from, it's just so interesting to me.

Keri Mandell: Antarctica was really challenging. My mantra during that race was actually, 'You will not break me' So the World Marathon Challenge takes place in February and, I was one of 166 people and 34 women in the world to ever do it.

And when we were preparing for it, in Antarctica, February is summer, so typically the weather is about 32 degrees, so it's something I'm very comfortable running in. But what was unexpected is there was a cold front that year, so it was actually negative 20 with 50 mile per hour gale force winds.

It was freezing. I ended up with frostbite and two fingers and a toe the snow drifts were up to my knees and it was crazy, but I was like, I didn't come this far to only come this far and it wasn't going to break me. And no matter how cold I was or whatever was happening around me I was just going to do it when I was determined.

With anything in my life, anything that I really believe in or anything I really want, I will make it work or figure out a way, to the best of my ability to get it done. And that's just how I've always been.

When people said you can't open a yoga studio, what are you doing? You don't know anything. I'm like, I'm going to learn it. “watch me. I will make this work and I will make it happen.” So when people doubt me, I usually say, watch me.

Carrie King: When you finish a feat like the World Marathon Challenge, how do you feel when you complete it? How much time do you give yourself to revel in the accomplishment before your brain goes to what's next? How do I up that?

Keri Mandell: Honestly every finish line is the start of the next race. It was a huge accomplishment. I remember crossing the finish line in Miami and thinking, “wow, I can't believe I did this.” After that I took a couple days and I let it try to sink in, but it was so big and I trained for it for so long and wanted it for so long that it almost felt surreal when it was actually happening and when it was over.

You had this big moment of wow, you finished. But how do you top that? Where do you go from here? Two weeks later, COVID hit, and the world shut down. So, you went from being on top of the world, literally to then isolated and home alone and you're not able to go anywhere or travel.

And I don't do well when I feel trapped. So that was really challenging. I couldn't wait to get back out and do another race. I was chomping at the bit to go out and do something.

Carrie King: How do you prepare yourself physically, but also mentally for these extreme adventures that you've accomplished?

Keri Mandell: It's definitely more mental than physical. Your body won't go where your mind won't let it - your mind gives up way before your body does. So, it's convincing yourself that you can do it. And for me it's about putting myself in uncomfortable situations all the time because the more uncomfortable you are, then you just you develop grit and resiliency, and it just makes you stronger and better. When things start to happen or come up, you already have these experiences that you can pull from to help you continue to keep moving on, to keep going forward.

I do spend a lot of time training different hours of the day in different conditions. I also listen to a lot of books. I like listening to David Goggins. He's crazy most people think that I'm crazy, but then I look at David and he's at a whole other level too.

David Goggins is a Marine and he has a really incredible, unique story. Because he grew up in poverty and he's become this machine and his whole goal in life is to try to show people what's really possible. And, that you can do hard things and he tries to live by those examples. When I was younger, I didn't think that I could do things. I never thought I could run we kind of pigeonhole ourselves into thinking that, your life has to be a certain way, or this is what it's supposed to look like, or this is what you can and can't do. So, it's about discovering what it is.

So, for me, David Goggins was great. He talks about being uncommon in the uncommon, amongst the uncommon. I don't want to be like everybody else. I want to be different. I want to be unique. I want to go against the grain. And, I want to challenge myself and challenge those around me, my clients, my students in the studio, to stoke that fire within, to start believing in themselves and empowering them to do their impossible.

Carrie King: That brings me to something I was thinking about, which is self-doubt, which so many of us, probably everybody has moments, some more, some less of self-doubt. It seems like there's really no

room for self-doubt. When you're preparing for these extreme challenges, do you ever feel doubt and how do you deal with it in your physical endeavors and in your life in general?

Keri Mandell: Really, there's no place for it. My attitude about it is you either think you can or you think you can't, and you're. So, if you think you can do something, you're going to do it. If you think you can't do it, you're not going to do it, you already set yourself up for failure.

When I want to do something, or if I'm trying to tackle really challenging tasks, you can't let that doubt creep in. You got to keep a positive mental attitude and you got to keep, pushing forward. So that's why I rely on positive mantras or ideas or pulling from those other experiences like “you've been here before, you've faced this before.”

Tough times don't last. you will get through this and it's reminding yourself during those challenging times, because if you doubt then that's when it's going to fall apart and you're not going to do it. You're going to fail.

Carrie King: What are some of the positive mantras that you fall back on?

Keri Mandell: Most recently I did Ironman, this past fall. It was really windy. It was probably one of the hardest bike rides 30 mile per hour winds. I actually got tossed off the bike in this big gust, it was so hard and anything I'm doing in the moment is the hardest thing I'm doing. Yeah, the World Marathon challenge is hard, but in this moment, this is the hardest thing.

So, I was biking and” I'm like, I am strong, I'm fast, I'm brave, I'm strong, I am fast. I am brave” because the wind was scary, and getting thrown off I was cut up and ended up in a ditch that I literally crawled myself out of to get back on my bike, to go back into the wind and I had 20 more miles to go. It would have been very easy to of give up But that's just not me. One of my favorite mantras is “it's a great day to be alive.” And I say that often, even when things get a little tough, because it can always be worse.

So, I always try to find the positive, and find the good in every day. The world is beautiful, there's amazing things, to see and do and experience. And, it is a great day to be alive.

Carrie King: So a big part of achieving goals is progress, and as we know, progress is not always linear. It can be very circuitous. how do you define progress in your life?

Keri Mandell: Yeah, sometimes it could be difficult to define. But for me it's about, reducing missed opportunities and increasing one's capacity to learn new things.

Personally, progress for myself is, trying really difficult things, doing things every day that are uncomfortable, stepping outside my comfort zone. I try really hard every day to try to be best and strongest that I can be and better than the day before. So it's taking those little steps each day that, overall makes a large progress.

In regards to business, I think about my studio my clients, studio growth. that means getting more clients, maybe larger revenue so that I could have more class offerings and help more people. I think about my classes progress. I look at where my students started when they came to the studio and where they are now and how much stronger they are physically, mentally, and I enjoy that process of watching people kind of grow and develop and be their best and strongest selves.

Carrie King: So it's multifaceted it sounds like for you. Everything you do seems so rooted in purpose and in the studio, the yoga studio, I hear you talk about purpose all the time. What does it mean to you to work towards a larger purpose and what is that purpose for you?

Keri Mandell: I think about the World Marathon Challenge, for example. And I knew that when I ran that race that I wanted to do it for myself, but I wanted to do it for something bigger than myself because there's so many opportunities to be able to give back, and to do something for someone else.

Prior to the World Marathon Challenge, I had lost my dad and my stepmom to cancer. And cancer has affected a lot of people I know, most recently my mom. So raising money for cancer is really a big part of the philanthropy work that I do, because I want all these things to be greater than myself, to help others.

That was why I decided to do the World Marathon Challenge. I didn't want to just run it. I wanted to raise money and awareness for the American Cancer Society, and I linked up with them.

And, when I think about the yoga studio, yoga had helped me so much it saved me in so many ways that if I could do that for somebody else, that's pretty incredible.

Carrie King: I know that the studio is such a big, important part of the community, and you give back in so many ways. So what's next for Keri Mandell?

Keri Mandell: I'll be competing in Ultraman, and this is a three day event.

I've discovered since the World Marathon Challenger I really enjoy these staged events. Why race for one day when you can race for multiple days? Day one is a six and a half mile swim, followed by a 90 mile bike ride. And day two is 171 mile bike ride, and day three is a double marathon.

So I look forward to tackle that in Arizona in March. I've been training for this for three years, COVID, last two years I wasn't able to do it. So I'm finally going to do it, I'm excited.

Carrie King: Keri, good luck and thank you for everything I know that you give back.

Keri Mandell: Thank you. I appreciate that.

Carrie King: Thank you for listening to this episode of The Bid. On our next episode, Anne Ackerley invites Dr Lucy Marcell, co-founder and executive director of Boston Medical Center's Street Cred program for a conversation about meeting people where they are as Dr. Marcell helps to bring financial education to families receiving pediatric.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido

Since our last episode on Friday where we discussed the impact of continued rate hikes on the economy and the banking sector, we learned that UBS would be acquiring Credit Suisse, a merger of two of Switzerland's largest financial institutions.

This action was taken in an effort to bring calm to financial markets and some stability to the banking sector. While the announced merger has brought some near-term stability to financial markets, US and European banking shares remain under. As investors assess the impact of the fastest rate hiking campaign since the 1980s.

Here to explain these recent developments and what investors can expect. I'm pleased to welcome Kate. Head of thematic strategy and Portfolio Manager on BlackRock's Global Allocation Team

Kate, thank you so much for joining us on The Bid.

Kate Moore: Oscar, thanks so much for having me. It's great to be here during this very difficult period in markets.

Oscar Pulido: Well, Kate, it's Tuesday, March 21st. It's only been a few days since our last episode, but there's been a lot of developments in the markets, particularly in the Swiss banking sector, between UBS and Credit Suisse. So maybe tell us a little bit about what happened over the weekend.

Kate Moore: I think Oscar, that was a master understatement right there. There have been enormous developments in the financial system and of course in market sentiment and expectations around policy. So, what's happened in the last couple days?

UBS is going to be purchasing Credit Suisse. I think we all know that at this point, but just a couple facts around that worth going through. Credit Suisse had been losing trust and faith of investors and of clients for years. This was not necessarily an early 2023 phenomenon. In 2022, they recorded a huge loss, I think it was around, $8 billion. It was their largest loss since the financial crisis, that further shook investor sentiment. And last week, what little confidence was left on the part of investors in the market was entirely wiped out when Credit

Suisse acknowledged, and this is a quote, 'material weakness' in its bookkeeping. That just shattered any expectation that Credit Suisse could be a going concern.

So, UBS, which is Switzerland's largest bank is buying Credit Suisse for what is a 3 billion Swiss francs. It's about 3.25 billion US dollars and that's a 60% discount to what Credit Suisse was trading at last Friday.

So, a huge markdown and an over the weekend rescue by the number one player in that banking market. And I think really importantly here, the Swiss National Bank has stepped in with some extraordinary statements as well, in terms of guaranteeing liquidity to both Credit Suisse and UBS's going concerns.

And that level of kind of oral commitment, has led to slightly more confidence in the overall financial sector and certainly across the broader equity market.

Oscar Pulido: There was definitely a shade of 2008 to, to the weekend that I had flashbacks to sitting on the edge of our seats, seeing if a deal was going to be done and if it would bring stability to markets and so far, that seems to be the case.

But one of the details in this acquisition that you described was the difference between how certain bond holders in Credit Suisse were treated versus the shareholders in Credit Suisse. And can you tell us a little bit about that nuance and why is it important?

Kate Moore: Yeah, I think the big drama is the AT1 bond holders are entirely wiped out, and AT1 stands for Additional Tier One bonds. There’s a clause in the AT1 agreements that basically said if the government has to step in, these bond holders will not be made whole, and that's $17 billion worth of debt that is going to zero. That's a tremendous shock to the system. At the same time, equity holders will have something out of it. Credit Suisse shareholders are going to receive one share of UBS for every basically 22 and a half shares they had of Credit Suisse. So, there is some equity transfer. But it's certainly at a massive discount.

And the regular bonds, between Credit Suisse and UBS are starting to converge in terms of pricing, but it'll take some time as the merger gets worked out over a number of years. Credit agencies came out this morning Tuesday, the 21st of March and downgraded, and put on negative watch, both UBS and Credit Suisse in large part because there's an acknowledgement that it will take a number of resources, and a significant amount of time to combine the two entities over the next couple years.

Although we expect that UBS and ultimately Credit Suisse legacy bonds are actually a good investment in the medium term.

Oscar Pulido: So, it's interesting that the headline over the weekend says there's been this merger, but you just described something that is going to be ongoing for potentially several years.

So, is this having the calming effect on markets and the economy that it was intended to have, or what are you seeing?

Kate Moore: I think it has some calming effect on the market, but what I will suggest is, it's going to be a painful process as UBS gets rid of Credit Suisse's investment bank. We know they don't want those assets. It's going to have to get wound down. There are going to be losses associated with that and yet it's going to be a huge addition for UBS to add on the wealth management and asset management of Credit Suisse. In fact, after this merger, or this acquisition, UBS will be the second largest wealth manager in the world.

And between wealth management and asset management will have about 5 trillion of assets. It's pretty significant. We're talking about a big stronghold in the wealth management and asset management business, but the investment bank unwind is going to be difficult and probably incur some losses.

Oscar Pulido: And we're talking about two Swiss banks, just a week or so ago we were talking about a couple of US regional banks. So, do you see more banks in the headlines here, in the foreseeable future? Should we brace ourselves for more of those headlines? And then maybe just as importantly, what should investors be thinking about in their portfolios at

this time?

Kate Moore: Yeah, Oscar, I don't think we're out of the woods when it comes to the US Regional Bank turmoil either. while we were really focused on this UBS acquisition of Credit Suisse over the weekend, the truth of the matter is that a lot of regional banks were speaking with different funding sources to shore up their own institutions. So that was happening in the background even while the Swiss banks were getting the headlines. I don't think we're out of the woods yet when it comes to the regional banks. Regional bank shares have fallen 24% over the same period, they've stabilized somewhat in the last few days as deposit outflows seem to have slowed up, but we don't have hard data there. And I think that's the big question for markets right now is that even if we've slowed down or, in some cases stopped, will those deposit outflows we saw over the last, call it seven business days, really shake the foundation of these regional banks and the big question after that is, what is the government going to do to regulate regional banks?

There have been lots of proposals from both sides of the aisle, almost no agreement on the approach. And we know this is going to be hotly debated in Congress with very little resolution in the near term. That may mean that some weaker regional banks with strong gearing towards things like commercial real estate and very concentrated industries may require bailouts or support sooner, rather than later, before that regulation gets finalized.

Oscar Pulido: So, we made it this far without talking about the Fed, but here we go, last week we talked to Alex Brazier, and he said the Fed is unlikely to pause with their rate hikes, because inflation is still an issue and the Fed has other tools, as Alex described, that they can use to address some of the financial stability concerns.

What's your take on Fed policy?

Kate Moore: There are few jobs I think that are more challenging right now than being a monetary policy decision maker. You're damned if you do and you're damned if you don't. In this case, inflation remains elevated around the world, particularly in the developed world, and at the same time, there's tremendous fear of economic slowdown or impending recession.

And you add on this additional layer of stress in the financial system and it's an almost impossible task to make everyone happy and to really assure markets that you are on the front foot. So, I don't envy Jay Powell and the rest of the FOMC and their decision making.

The market has changed its opinion on what the Fed is going to do pretty dramatically over the course of the last three weeks. At the end of February, because of stronger than expected economic data and inflation remaining quite hot, labor market remaining really tight the expectation was the Fed would raise policy rates by another 75 basis points and then perhaps cut 25 basis points at the end of the year, and now in just a very short period of time, less than three weeks basically, the market is now pricing in 75 basis points of interest rate cuts by the end of this year.

It's almost like 130 basis point move in terms of the Fed fund future's expectations by year end, I mean that level of rate expectation, volatility is nauseating to say the least.

So, it's been this huge move in terms of expectations for Fed Funds futures, and I don't think we've seen the end of it, Oscar, I actually think we're going to continue to see expectations evolve as we take in additional macro data, stresses in the financial system, and as the Fed reflects some of the regulatory changes in the banking system.

Our base case right now is that the Fed does raise policy rates here at the March meeting, and they raise by 25 basis points, but they offer a much more dovish and softer tone and really talk about continuing to incorporate not just the economic data but the events in the financial market into their decision making. You know, markets love certainty and equity markets love certainty, so maybe that level of uncertainty doesn't assure the market as much as otherwise a dovish tone might have. We'll be watching really closely the market reaction, but I just have to say, we prefer a much more cautious approach to risk taking at this point, even though the economic data hasn't collapsed, and even though we know that the policy makers will step in as needed.

The level of uncertainty, the lack of clarity, and the lack of clarity from companies and what their businesses are going to be doing and what their earnings are going to look like through the balance of the year, make it really hard to put on a lot of risk.

Oscar Pulido: Fair enough. It sounds like it's an evolving situation. I have to ask you, because you've been a guest in the past, is there a particular genre of music that you listen to in these periods of uncertainty? Because I know that's another passion of yours.

Kate Moore: Yeah, I am obsessed with music and putting together playlists that encapsulate the period and the mood.

So, I'm an alt rock kind of girl. If anyone listens to SiriusXM, I'm a Channel 36-er. and my favorite song right now is a collaboration between The National and Bon Iver called Weird Goodbyes that would be my, number one recommendation for everyone who's looking for diversion from these markets.

Oscar Pulido: Insights on financial markets and music recommendations. Thanks, Kate, for joining us on The Bid.

Kate Moore: It's great to be here, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. Be sure to subscribe to The Bid wherever you get your podcasts.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

As central banks have been trying to control inflation with the fastest rate hikes since the early 1980s, we've begun to see some cracks in the financial system. Most notably the recent collapse of two US regional banks, Silicon Valley Bank and Signature Bank, and the evolving situation around Credit Suite's liquidity position.

Here to explain what happened and what investors can expect, I'm pleased to welcome Alex Brazier, Deputy Head of the BlackRock Investment Institute.

Alex, thank you so much for joining us on The Bid.

Alex Brazier: Hi Oscar. Thanks very much for having me.

Oscar Pulido: Alex, we're both sitting here, it's Thursday, March 16th, financial markets have been spooked by events, in the banking industry on both sides of the Atlantic. so, can you just explain what's happening and what led to this crisis?

Alex Brazier: It's been, an eventful week, I suppose. The story goes back some way, but before we look in depth at the last week, I think it's useful to remind our listeners that really what's happening here is that the fastest rate hiking cycle since the 1980s was clear that was always going to cause some economic damage and expose some cracks in the financial system.

And what we've seen in the last week is those cracks actually beginning to appear and as we'll come on to discuss, that means more of the economic damage is yet to come.

So that's really the scene setter, the sharpest fastest rate hiking cycle since the 1980s. But then what actually happened over the last week, well, really useful to talk about three things that have happened.

The first is what happened with, Silicon Valley Bank and US regional banks. Then what did the authorities do? And perhaps, the third thing, bringing us up to date is how it's rippled across the Atlantic to European banks.

And starting with the first of those, US regional banks. What really happened at Silicon Valley Bank, well, it was a bit of an outlier in two important respects. The first is that it had a very large share of its deposits, greater than $250,000. So, they're uninsured deposits, and those are typically more flighty and more likely to, be withdrawn in stress than insured deposits. And the second thing it had in which it was an outlier, was that it had a very large book of US treasuries and mortgage-backed securities. And of course, as interest rates have gone up a lot over the last year, the market value of those securities has fallen a lot.

Now, Silicon Valley Bank hoped that it wouldn't have to sell these securities. It hoped to just hold them until they matured. But to link these two outlying characteristics together, a lot of its depositors were spooked and asked to withdraw their money, and as a result, it was forced to sell some of these securities at today's market prices and realize some of the losses. That meant that more depositors withdrew their money as the bank realized some losses. and so, it entered this kind of spiral, downward and the authorities then stepped in to take control of what was at that stage, a failing bank. The issue of course, then prompted depositors, particularly uninsured depositors, to withdraw money from other regional banks like Signature Bank, and the authorities stepped in there, as well.

So, what did the authorities do when they stepped in? Well, they've seized control of these banks written down the equity, and they've protected the insured deposits as they normally would. But very importantly in these cases, they've also used what's called a systemic risk exemption, which allows them to protect the uninsured deposits as well.

So, these banks failed, over the weekend and on Monday morning, all the depositors. Whether their deposits were insured or previously uninsured had access to their money on Monday morning. So, the authorities have dealt with these banks not by giving a bailout to the shareholders. This isn't shareholder friendly, but by protecting, the depositors in those banks, so that was the US authorities.

And then the third aspect really of what's happened in the last week is that the crisis has rippled across the Atlantic. And it's not that European banks have in any way the same underlying issue as these regional US banks. And they're not directly connected either, but there is a channel of contagion, which is that following what happened in the United States. Markets are now applying greater scrutiny to banks around the world, including in Europe, and they're applying greater scrutiny to banks that have challenges or even where those challenges have been going on for years.

And as a result, we've seen market confidence and volatility in Europe, we've seen the Swiss National Bank step in with liquidity support for one of its banks, Credit Suisse, and so we see how this evolves from here.

But it's important to note that we don't have the kind of contagion channels that we had in 2008, but there is still this contagion channel across the Atlantic where markets are now looking at banks differently even where they don't have new challenges.

But I just go back to the root cause of all of this, which is the fastest rate hiking cycle since the 1980s, which was always going to cause some degree of damage and expose some financial cracks. And that's really the underlying root cause of everything that's gone on in the last week.

Oscar Pulido: Alex, you mentioned 2008, which is hard to believe it's a decade and a half ago, but the headlines of the past week, for those of us who lived through 2008 and that crisis, it's hard to not try and draw comparisons, and during that financial crisis, you were part of the team concerned with financial stability at the Bank of England, so you were in the thick of it then. How do you see what's gone on over the past week compared to what happened in 2008?

Alex Brazier: There are uncomfortable echoes of course, anytime you get any sort of problem in the financial system but there are some really important differences this time, which mean it's not quite the same.

 The first really important difference going to what's happened in the US is that, back in 2008, the issue was really exposures on banks, balance sheets, subprime mortgage exposures that were really opaque, really difficult to find where they were, figure out how much they were worth... and so there was a lot of uncertainty across the banking system about who was holding the problem assets. And so, the contagion spread through the system as people lost confidence in all banks.

And the only way to solve it was effectively to dig into banks’ balance sheets with the stress tests at the time, and provide state recapitalization, taxpayers money, into banks that it was found had a hole in the value of their assets.

I think what's different this time in an important respect is that the assets at the heart of this in the US banking system, far from being opaque are actually the most transparent and easy to value of the lot. It's US treasury bonds and mortgage-backed securities. And so, it's very clear to assess where the losses are on those assets and who's holding them.

And that makes it very different in an important respect. And it's clear when you do that, that Silicon Valley Bank, for example, was a very big outlier. Relative to the whole of the banking system. So that's a big difference from 2008, we've gone from opaque losses. To very transparent, losses on some of these really transparent securities.

I think the other thing that's really different is where the system starts the banking system in particular, in terms of how much capital it's got, and that capital's there to absorb losses while protecting the deposits. So, we've started in a position where banks have lots more of their own shareholders money on the line than they did back in 2008.

And so even though pretty much all US banks hold US treasuries and mortgage-backed securities, and so they will have incurred some mark to market losses as interest rates have gone up over the last year.

The losses over the system as a whole are significant, but eminently manageable within the capital base that US banks have now got. So unlike 2008, this isn't a problem with asset values, that's going to overwhelm the kind of capital base of the whole banking system.

So those are two big differences, from 2008. And I think the third big difference is that the authorities now have more tools to deal with this.

We saw last weekend the Fed stepped in very quickly. I think because it was able to assess the problem and mark down assets and figure out who had the issues.

The Fed came in very quickly with a new lending facility, the bank term lending facility, to effectively support banks that were experiencing a withdrawal of deposits. So, where this had a knock-on effect from Silicon Valley Bank to some of the other regional banks, people with withdrawing their deposits to put them into bigger banks. The Fed was able to launch a facility to basically make that process run much more smoothly and stop regional banks needing to undertake forced sales of some of these securities like US treasuries and mortgage-backed bonds.

So, the authorities have more tools, they also now have more to deal with banks when they fail in a way, they didn't in 2008, when they faced a kind of invidious choice between bankruptcy, which of course means depositors money is locked up, and bailout.

This time they've got so-called resolution tools to deal with failing banks. So, in those three important respects, transparency of where the problem is, the ability to use the tools they've now got and a bigger capital base in the banking system. That makes this a very different proposition,

Oscar Pulido: And maybe specifically on that third point that you mentioned central banks and the toolkit that they have now, which is partly a learning from 2008. So, you've mentioned the Federal Reserve, putting that toolkit to use. You also mentioned the Swiss National Bank, which is acted as a backstop to one of their important financial institutions.

So, are we okay now or does this have ripple effects from a macroeconomic perspective going forward?

Alex Brazier: Yeah. I think despite this being different and despite all the tools at their disposal, this will have ripple effects for the economy, in the US and in Europe actually. And why is that when we're in this different situation? Firstly, in the US regional banks are still under pressure and they'll be under pressure for two reasons.

The first is that despite the way these failing banks were resolved over last weekend, Depositors are still withdrawing their money, in some cases, to place it with some of the bigger banks. So regional banks are finding it more difficult to raise deposits and fund their lending.

Now, as I said, because the Fed has launched this, bank term lending facility, that process can be much smoother than it might otherwise have been but nevertheless, what we're going to see is some of the regional banks need to adjust their businesses, shrink their balance sheets, and that means. Tightening their, credit supply conditions, the loan officers at these banks won't be extending lots of credit now, and that means for the economy as a whole, a tightening in credit supply means less credit available.

Now, that's going to have an economic effect. It's going to tighten financial conditions for businesses and households and that's going to help to slow the economy in the way the Fed's rate hikes were actually designed to do.

 That's one ripple effect onto the economy and I think in Europe, a similar thing's going to happen. So even though it wasn't the same underlying problem, because of this contagion channel where markets are applying more scrutiny to banks, it is more costly for banks to raise equity, to issue debt. And that's going to be passed on to lending conditions to the broader economy.

And it's also going to tighten conditions in financial markets because those banks are going to be less willing to make markets, and act as dealers in those markets.

So financial conditions for the economy are going to tighten, not on the scale that, they did in 2008. And in a way, what we're seeing here is just the normal response to a rise in interest rates. It's happening through some sudden channels, but I go back to this point that the ripple effects here are really the effects of the sharpest rate hiking cycle since the 1980s, but it is going to affect economic activity through these channels.

Oscar Pulido: And so that fastest rate hiking campaign that we're seeing since the 1980s, what do central banks do now? Do they take a, pause, with hiking rates and remain in this, 'whatever it takes' type of mode to backstop financial institutions?

Or do they continue with hiking rates to combat what has been a, an inflationary background, really globally?

Alex Brazier: This is a very different episode to 2008 in one other respect as well, which is that we go into this with central banks facing an inflation problem. Both the Fed and the ECB have got the problem of stubbornly high core inflation.

So, inflation's come off its highs, but it's still not on track either side of the Atlantic, to actually come down and settle close to their 2% targets. So, they were needing to raise rates, slow their economies probably generate recessions if they wanted to get inflation all the way back down to their targets, and that's a very different situation to the one we were in 2008 and the one we've been in every kind of financial wobble over the last 30 or 40 years, in fact.

So, the playbook where central banks respond both with tools to address financial problems like lending facilities like we've seen this week, and rate cuts isn't on the table this time. What we think they'll try and do, to the extent they can, is effectively separate two issues separate.

On the one hand, maintaining financial stability, where they'll be using lending facilities in the way they've done over the last week, and monetary policy, interest rates, where they'll be looking to deal with their inflation problem.

And in a way what the Bank of England did last September is a good model for this, a good guide for this, faced with problems in the UK gilt market, it launched one operation, some temporary purchases, of gilts to deal with that financial problem, whilst at the same time raising interest rates to deal with its inflation problem.

And that is the playbook we're more likely to see here at this stage, central banks using lending operations to deal with financial issues whilst using interest rates to continue to deal with their inflation issues.

Now that's very different, and we've seen actually the ECB just before we've recorded this, go through with its earlier guidance that it would raise interest rates by 50 basis points. this month it's gone through with that suggesting its use of interest rates isn't being diverted to addressing other issues in the banking system. That said, with credit conditions tightening as a result of these issues in the banking system, that's effectively going to do some of central bank's work for them. It's going to tighten credit conditions; it's going to slow the economy. Central banks won't need to raise interest rates as much as they otherwise would've done to deliver the economic outcome they're looking for- which is a recession and getting inflation down.

So, they're going to do a bit less than they would otherwise have done. So, more rate hikes, but not as many as we might have seen. But the big point here is that they won't be coming to the rescue of markets, in our view, with aggressive rate cuts because of the inflation issue, that they're facing and that's a big difference, I think to the past.

Markets have priced in now some big rate cuts over the course of the year, but as it stands, they're likely to try and maintain this clear separation of two sets of tools, two targets, lending facilities for maintaining financial stability and interest rates and monetary policy for dealing with inflation.

Oscar Pulido: The scenario you're describing sounds like central banks are going to be multitasking for the foreseeable future. Alex, I know you've had a busy week, thank you for spending part of it with us here on The Bid

Alex Brazier: Thanks Oscar for having me.

Oscar Pulido: Thanks for listening to this episode of The Bid. Subscribe to The Bid wherever you get your podcasts.

Nirmitee: Welcome to The Bid. Where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Nirmitee Shah, US Head of Insurance for Aladdin here at BlackRock

As we continue this mini-series during Women's history month, The Bid welcomes four senior female leaders at BlackRock and their guests for four special crossover episodes in partnership with Samara Cohen's LinkedIn video series In Progress. I am excited to continue this four-episode mini-series as I speak to another incredible leader about progress and purpose.

Today I am pleased to welcome Alexandra Carter, a clinical professor of law and director of the Mediation Clinic at Columbia Law School. In 2019, Professor Carter was awarded the Columbia University Presidential Award for outstanding teaching, Columbia's highest teaching.

Her first book, Ask For More, 10 questions To Negotiate Anything, was published by Simon and Schuster on May 5th, 2020, and became an instant Wall Street Journal Business bestseller.

Alex and I will discuss why negotiation skills are key to any career and how they're particularly important for women, and one thing you can do to start advocating for yourself in your career.

Alex, welcome.

Alex Carter: Thanks, Nirmitee I'm happy to be here.

Nirmitee: So, let's start with the first question. Who is Alex Carter?

Alex Carter: Big question. I was born in Brooklyn. I am a lifelong New Yorker who made a 17-year temporary pit stop in New Jersey for the sake of my marriage. I am somebody who loves to learn. and now I'm really fortunate to be a person who is in her dream job.

By day, I'm a professor at Columbia Law School. I teach conflict resolution. I help people work out their problems, and I help students to step into their futures. And then outside of that, I'm a published author and a keynote speaker, a mom of a 12-year-old girl and a wife.

Between your tenure at Columbia and the book and motherhood and other things, when did you realize it was your "Ah-ha" moment that this is what you were meant to do?

Nirmitee, I'm a lawyer, so when you ask me for one aha moment, I'm going to give you two.

Nirmitee: Okay. Buy one, get one free. Indeed. Yes.

Alex Carter: The first moment was this. You know, I think a lot of people look at my CV and they assume that I always knew where I was going in life, and that couldn't have been further from the case.

I went into law school. I had absolutely zero idea of what I could do after graduation, and it wasn't until my last year there that I took the course that would change my whole professional life. The reason I took it is a friend of mine pulled me aside and she said, "Hey, I just took this class. It involves a lot of talking. I think you'd be great at it."

So, shade aside, I enrolled in the class and this was mediation. And mediation is the art or science. We'll get to it of helping people work out a dispute, helping people negotiate. And the first time I stepped into this dingy room in the New York City courthouse and helped these people work out a dispute, it was as though I heard Morgan Freeman's voice coming down saying, "Alex, this is it". This is what you should do for the rest of your life.

But here was the second moment, because you see after that, I grew really comfortable helping other people negotiate. I was really good at it. Then came the moment where for the first time, I had to negotiate for myself.

Early on in my career, I was in these jobs that were all lockstep. You walked in, the comp was but then I had to finally put on my power suit and my tall heels. That was my thirties back when I was wearing heels, walk into the office, and I got a good offer, and inside I had a crisis. Why? Because I realized that I thought I had to just accept the first offer I was given.

I realized that I had absorbed this message, that negotiation was something I could do for other people. But if I did it for myself, I wasn't collaborative, I wasn't going to be liked or worse, I would leave less for other people. But I had just enough on the ball to call a senior woman in my field, and I asked her, "What should I do?"

And she said, "I'm going to tell you what to do, Alex. You're going to get back in there and you're going to ask for more. And here's why. Because when you teach someone how to value you, you are teaching him how to value all of us, meaning all women. So, if you're not going to go in there and do it for yourself, I want you to do it for the next woman who's coming after you, do it for the sisterhood."

That was the moment I realized I don't just have to do this for other people. I am worthy of applying my own skills to myself, and in fact, it doesn't leave other people with less. It builds a bigger table for other people to sit.

Nirmitee: I just want to comment on the fact that you make the table bigger, I agree with you 100%. But let's go back to the first point you made which was around art or science. So, what is negotiation?

Alex Carter: Well, it's interesting art and science are actually much closer than we think. They're just two different ways of trying to understand humanity, who we are, and to make sense of our world.

And negotiation, therefore, is both. There are observable phenomena that have been documented in research, and that's part of the science. But then you sit down at the table and it's two human beings or maybe more human beings looking at each other and talking, and that's nothing but art. Because I may go in with all of the research, but then in the moment I'm relating to another human being.

So, it's interesting because there have been all sorts of technological advances even when we think of negotiation, programs that can simulate bargaining, but in the end, unless the negotiators themselves are replaced by machines, we have to have some creativity, some differentiation, some sense of, the art, the creativity, the imagination behind negotiation.

Nirmitee I agree with you. So ChatGPT, everyone's talking about it! So, what happened is someone from BlackRock went to ChatGPT And said okay, create a portfolio that will be the market for the next 10 years. And ChatGPT instead of creating a portfolio actually created a disclaimer saying that you cannot beat the markets with predictability. But I feel like that's the machine versus human, that humans transcend logic sometimes or fall apart in face of logic. And that's what might make a negotiation more interesting

Alex Carter: Oh, we are, predictably irrational. In fact, Nirmitee, I start a lot of my negotiation classes by setting up a simulation.

Here it is. I set people into teams of two. and I tell them, each team, one person needs to raise their hand and volunteer for something. The person who raises their hand, I say, I've just handed you $20 and here's what you're going to do. You have one chance to turn to your partner and make an offer for how much of the $20 you'd be willing to split with them.

Here's the catch one offer. Accept or reject if your partner accepts you keep the $20 in the proportion that you propose. If they reject the $20 comes back to me. Do you know what happens, a lot of times, especially in shared groups? People offer $10. They might offer eight. They might

Nirmitee: I was thinking I would offer 10

Alex Carter: Okay. And why would you offer 10?

Nirmitee: Because it seems fair, and the chances of them wanting to split are higher. Maybe I would offer nine. But not more than that. Like I wouldn't go to eight. I would feel like maybe 11 bucks for me, nine bucks for them. Maybe a good offer and then that way we both get to keep some money.

Alex Carter: Yeah, because you took the risk, you raised your hand. So maybe you apply a little premium Yes. To the $10 to get a little extra, right? Yes. Okay. But you're thinking about risk.

Here's the thing. The economically rational thing to do, is if you're offering me to offer me one penny, and the economically rational thing for me to do would be to accept that penny

Nirmitee: Because you're better off with that one penny than you were a minute ago when you didn't have the penny.

Alex Carter: Correct.

Nirmitee: This reminds me of, Daniel Kahneman's experiments in behavioral finance.

Alex Carter: Absolutely. And I love his work, I'm always thinking about whether my brain is in system one or system two. But here's the thing, human beings don't act rationally when it comes to economics. And you see this play out all the time. You get a monetary offer. Maybe it's a deal you're striking with a client. Maybe it's for salary. And yes, you're thinking about, I want to be better off financially. But the money also means something, doesn't it? It stands for something. It stands for fairness. It stands for achievement. It stands for recognition. And so, we have to be aware that even though at the table there could be a Pareto optimal outcome, we're almost never going to be there because of the human beings at the table, who value sometimes things more than rationality.

Nirmitee: So, coming back to the art versus science have you seen a change in the last 20 years in terms of how people approach some of these negotiations, has the general level of understanding of negotiations improved?

Alex Carter: So yes and no. I will say when I look now at popular media, movies, tv. You remember that Show Entourage, right? You would see these high stakes negotiations all the time, and so I think in general public awareness has been raised about negotiation but not always accurately.

And that's part of the reason I wanted to write a book, because I felt like I was seeing depictions of negotiation everywhere that didn't mirror what I knew negotiation to be. If you look at Succession, for example, or Entourage, you're going to see a negotiation that means the following, it cuts to us. And actually, then we would be two guys in suits.

If you look up negotiation on Google and you go to the image search, I've done it. It's a lot of white men in suits. So that's part of the depiction we get about negotiation. And it's part of the reason I think that I've read a lot of negotiation literature and I didn't see myself in any of that.

 It was tough for me to pick up a book and to find something that I thought, "yes, I can actually use this with my friends and colleagues and family." So, there's definitely a representation element to it, but there's also a substantive element in which I felt popular portrayals were falling short. They show the last couple rounds of a heated monetary negotiation to get to an agreement. And most people, in fact are taught negotiation is a back and forth over money to get to some kind of compromise.

Nirmitee: Yeah, when everybody loses, I'm so everybody loses right? There is no win-win in negotiation.

Alex Carter: And I reject that on a number of fronts. First of all, negotiation is not just about money. I actually learned what negotiation was on my honeymoon. And it's not just because I married another lawyer, okay? But picture this, we're in Hawaii. The two of us are in a kayak on the Waialua River, and our guide up ahead turns back and says, "all right folks, let's negotiate these things to the left because we're going to hit that beach up there."

And I gotta tell you, everybody else was enjoying the scenery and my brain, love of learning was immediately somewhere else because of all places in the world a kayak in Hawaii was where I learned what negotiation really means because I thought, that's right, if I'm negotiating my kayak toward a beach, what am I doing? I'm steering.

And what if negotiation wasn't haggling over money? What if it was just the process, like a kayak of steering my relationships in the direction I wanted to go? And with that in mind, I went back to the office the following week and I saw opportunities to negotiate everywhere because it wasn't just about asking for salary once a year. It wasn't just about the twice a year I would sit down with a client and say, let's hammer out this retainer agreement.

I could be proactively calling and saying, tell me "What's happening in the company? What's keeping you up at night?"

And all of a sudden, we were negotiating, and our relationship grew closer. And then when I do have to deliver difficult news, when we do have to have a monetary conversation, we are in such a better place than we would be if I was in a kayak, and I just took my hands off the paddle.

Nirmitee: Steering, there is a part of me, the bossy part of me, which feels like I'm going to now use this as a metaphor for pretty much everything I do in my personal and my professional life. That was very insightful, but you started off your conversation with the space you wanted to create, so a woman not being represented, and as a woman, you wanted to make the pie bigger. So, what's the purpose? What drives you and what do you want to accomplish?

Alex Carter: Do you know the reason I'm sitting here with you today, and the reason I have a book published at all is that six years ago, a student of mine who had graduated and was now in law practice asked me to go to coffee. And we went to coffee, and I thought we were there to discuss some career advice for her.

And instead, she said to me, "you've had such a profound effect on my life. I want to help you achieve your legacy. What do you see as your legacy on this earth?" Her name's Kristen Ferguson. I was floored. And in that moment, I answered instinctively, and I said, my mission on this earth is to hold up a mirror so that every single person who comes to me, whether it's as a student in my course, somebody I'm training in negotiation.

And when I go into large companies, it's just a bunch of individual relationships. I see each person in that room in this way. I want them to hold up a mirror and see their highest and best and then I want to help them open up a window between them and somebody else to be able to resolve conflict, see the other person better, and see situations more clearly.

Nirmitee: And then if somebody asked you, somebody told you, where do I start? Besides reading your book, how does one start down this journey of steering and or looking at the world in a way where you create these situations for everyone around you to be better?

Alex Carter: The place you start is where every negotiation starts, and that's with yourself. If negotiation is about steering relationships, the most important, the most central relationship of your entire life, will be the one you have with yourself. And so, it starts with self-knowledge.

People ask me all the time, what's the source of my power in negotiation? I think they think it's how much you can go in and physically fill up a room and I'm five two in sneakers.

Okay? I will never be the biggest person in any room. But the expert negotiators are the people with the most knowledge, they understand themselves extremely well. They understand the situation extremely well, and then from that stable base, they're able to get to the table, listen minutely to every word the other person says, and by doing so, crawl up inside that other person's brain space and get to know them better than they know themselves.

That's how you become an expert negotiator.

Nirmitee: So, Alex, in your Wall Street Journal bestseller, Ask For More 10 questions to Negotiate Anything, what are the two or three most important questions? What's the distillation there?

Alex Carter: Back when Ask For More came out, I spoke to the Wall Street Journal and they asked me, Alex, where should everybody start in negotiation? And I said, you should start here, what's the problem I want to solve?

Most of your negotiation success, and if you're at a company, most of your company's innovation success will rise or fall on whether you are solving the right problem. That's number one.

A question I love for people to ask is, "What do I need?" And making a complete list in a negotiation of the tangibles and the intangibles. The tangibles spring to mind immediately, right? It could be money, a particular role, headcount, resources, but the intangibles are really important.

People might say, I need autonomy in this role. recognition. respect, and then I want you to ask, what does that look like for me? Because Recognition, respect, autonomy, can look totally different for you than for somebody else. So that's really important.

And then when you're talking to somebody else, I can't tell you how many teams I train, where people come into a business development meeting, and they start with a pitch. "Hi, I'm Alex. Here's what we do. Here's what we can offer."

I tell people to walk in and ask what I call my magic question. Two words. "Tell me about your business." Tell me what success would look like for you. here Tell me what's keeping you up at night? Tell me, if we were to work together and we had a phenomenal result, what would that look like in your business a year from now?

But it doesn't matter, whether you're asking that question in a business development meeting or you're asking it of your 16-year-old when they come home from school instead of “how was your day? tell me about your day." It is the broadest possible prompt. It gives you the most information, it creates the most trust, it is the number one question that you should ask in any scenario.

Nirmitee: Nice. I'm going to go and ask my 16-year-old “tell me how your day was” instead of how was your day? Where I get "meh" and her staring into her phone, as most 16-year-olds do these days.

Alex Carter: Do you know why your 16-year-old doesn't respond when you say, how was your day?

Nirmitee: No, I wish I did

Alex Carter: It's because how was your day is not a real question. It's a social script. It's what we do when we are sitting down together. "How are you today, Nirmitee? I'm great. How are you? How was your weekend? Wonderful. How was yours?" It means let's get through this so that then we can discuss the real thing we're here to talk about. And nobody recognizes a fake question more than children. They smell it and they will not answer it.

And so, I started pivoting and I would ask my daughter, tell me about art class today. Tell me who got in trouble. Tell me the silliest thing somebody did today. And then I allowed for lots of silence and all of a sudden, we start rolling.

Nirmitee: Nice. So, I have homework. This is awesome. Alex, thank you for your time today.

Alex Carter: Thanks for having me.

Nirmitee: Thanks for listening to this episode of The Bid.

On our next episode, Carrie King welcomes Keri Mandell, CEO and founder of emPOWER Yoga for a conversation on finding balance.

Make sure you subscribe to The Bid wherever you get your podcasts.

Samara: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Samara Cohen, Chief Investment Officer of ETF and Index Investments. As we embark upon Women's History Month, The Bid welcomes four senior female leaders of BlackRock and their guests for four special crossover episodes in partnership with my own LinkedIn video series in progress.

On my series In Progress, I speak with inspiring female leaders from the world of finance and beyond about their personal and professional journeys and how that ties back to what they define as their purpose. I'm excited to kick off this four-episode mini-series as I invite my BlackRock colleagues to have their own conversations about progress and purpose.

Today I'm pleased to welcome Annie McKee. a bestselling author, respected academic speaker, and sought-after advisor to top global leaders. Her latest book, How To Be Happy At Work, the power of purpose, hope, and friendships became a best seller during the pandemic. Annie has advised many of the world's most influential leaders from companies such as Thompson Reuters, Sanofi, the United Nations Development Program, Unilever and Luxotica, to name just a few.

Whether she's giving talks to business leaders, teaching doctoral students, or working in provincial government offices in South Africa, Annie is committed to helping good leaders become better and to creating vibrant workplace cultures where people and their institutions can thrive.

Annie, welcome to The Bid.

Annie: Thank you so much. I'm excited to be here.

Samara: I am so excited for our conversation because I'm a big fan of your work, but first I'd love to hear a little bit about your story. Who are you and how'd you get here?

Annie: Oh wow. Thank you for asking. I guess I didn't follow a typical path, but then again, what's a typical path? I grew up as a very poor kid and that carried on into adulthood, I did all kinds of things to keep my family going. And then I realized if I want to have impact the way I want to have impact on people and the world, then I’ve got to do something different because it's really hard to do it from here.

I finally went to college in my late twenties, and graduate school, and started working with businesses, and found that I felt really good about being able to impact individuals and companies and hopefully our nation and our world by helping people become better leaders.

And I couldn't have done that from where I started, so I had to find my own way. But really, everybody's got a story, right? Samara, you have a story. Yours is not like anybody else's, I know you faced challenges too, and one of the things I think is really important is to remember when we encounter somebody in the workplace, we may not know their story, we may never know their story, but they've got one!

And we need to be aware of that when we're interacting with them. And I think it helps us be more human be more helpful and be more respectful too.

Samara: I love that and thank you so much because I thought I knew a lot about you based on your work, but I didn't know that part of your story. And now you are a coach, an educator, a writer, a speaker, an advisor. What is the most exciting part of your work?

Annie: First of all, I absolutely love my work and I feel really fortunate. Not everybody does. Underneath all of the hassle and the problems at work, a lot of us really love what we do, but I really love my work. I love the world of ideas and trying to figure out some answers to the big problems that we face in our world, in our businesses. And we are facing big problems. Let's face it, we really truly are.

It's a cliche, but we're in an era of change that is unlike any other, facing geopolitical issues, facing market issues, facing changes in the way we live our lives. And what's most precious to me about my work is that I have the privilege of actually thinking about these problems and then finding ways to reach people, to understand how they experience their issues, their problems, their joys, their challenges at work, and then help them - help them leverage the joys and the strengths and the talents that they bring to the workplace and their lives, and also help navigate some of these challenges.

Samara: Absolutely. Okay, so you wrote an amazing book called How to Be Happy at Work, and you wrote it in 2015 and I actually didn't read it myself until 2022 and the book really exploded over the pandemic. And so, what were the key messages and why did they resonate so much in 2020?

Annie: So interesting. I did write that book prior to the pandemic, and the reason I wrote that book is because I'm actually not a happiness scholar, I'm a leadership person.

I work with leaders and help them be better leaders. And I started getting really frustrated because we know a lot about leadership. We know that emotional intelligence makes a difference, we know we need to be self-aware and be empathetic and to understand our people and motivate them. We know all this stuff, and yet I didn't see the needle changing fast enough in our companies. And I'm talking companies of all sorts all over the world, from retail to energy, to media, you name it.

I work in a variety of industries and sectors, so I could see that despite how much we know about leadership and culture and all that goes into that, we weren't moving the needle fast enough, so I went back and looked at a number of studies that I had done, not academic studies, practical studies that we had done in business to try to help them understand what's working and what's not in terms of their leadership, their management practices, and their culture. And I looked at all these interviews and I found that people were crying out for something.

Employees at all levels were saying things like, I want to love my job, I loved my company when I started, and I'm not sure I'd do anymore. Something's wrong. And I looked really deeply into that and asked, what are they asking for?

And what they were asking for was happiness at work. And I thought, what can I contribute to this?

So, I started doing some more research on my own, reading some of the positive psychologists, and I found that indeed, there are a few things people really need in order to feel engaged and happy at work and to be really good at what they do.

One of them, I think you'll be familiar with this, Samara, is a sense of purpose, a sense that our work is meaningful and that we have impact on people and on our company and on our communities, our customers and our clients.

Another is a sense of hope. And not just hope that our company's going to do well, but hope that we are going to do well, that we're going to realize our dreams, whatever those might be: that we have a path to a future that is meaningful to us. And that may be different - yours might be different than mine, Samara, but we need to feel that in our workplaces we're supported on that path.

And the final thing, I laugh because when I went to my publisher, and said, you know what people really want at work is friendships. And they said, oh, you can't really talk about friendships in the workplace. You can't have the hard conversations with friends.

And I said, on the contrary, no! If we are going to have hard conversations with people, we need respect, we need trust. We need to know each other a little bit. We need to share some values. We need to like each other. That is a definition of workplace friendship that may be different than in our personal lives, but it's critically important for us to feel that we are in it together and that we're trying to accomplish something that will better us all.

Samara: You're right, when you and I first met, we really connected over the importance of purpose and a sense of purpose in one's career and at work. And I think for me it was those other two things that were newer to think about but particularly resonated right now, especially coming off such a difficult and challenging markets environment as 2022, that sense of hope and optimism and the sense of friendship. So, I guess in the spirit of Women's History Month, are there aspects of being happy at work now that you think are particularly challenging for women?

Annie: We learned a lot during the pandemic about women and work and about our experience at work, or I should say a lot became exposed, because as women, we already knew it. Despite it being now 2023, we are still doing the bulk of the work in the home. We're doing the bulk of the work in our communities if we're in a partnership at all.

And we are working harder than our male counterparts for the same or less pay. And women started to become really fed up with that.

In many cases, they had no choice. They could not go to back to work because there was no childcare. But even coming out of that, women that I know and that I coach, and that I'm talking with, that the executive ranks are saying, I'm not sure I want to do that anymore. I'm not sure I want to give that much of myself to this entity, to this job, which by the way, I love and I'm really good at until the conditions change a little bit.

Women are standing up and saying, all right, we've been talking about this for 50 years, at least. It's time for change.

I think that's one thing we really have to pay attention to. For women, it's harder to find that hopeful path to the future. There are more barriers in our way. There just are, and we need to start calling them out. One of the things that I've noticed is that we talk about pay inequity. It's not always the dollar amount that's inequitable, it's the workload. Women often have to do 20 to 25% more work and do it better than their male counterparts in order to earn an equivalent salary. There's a problem with that. There really is, and we need to

be calling it out. We also need to recognize that our male counterparts, it's not their fault, they've not been telling our institutions to pay them more, make them work less.

They want these changes as much as we do. They do. We all do. So, what can we do about that? We can recognize that some of these things have gotten to the point where it's time we take a stand and make a change. That'll take a lot of courage. A lot of courage because it means changing systems that have been in place for a long time.

It won't happen overnight. But we can indeed make these changes if we say it out loud and not sweep it back under the rug where it was pre 2020 pandemic experience.

Samara: So, can you gimme an example of some of the changes today you find yourself advocating for or encouraging leaders who you work with to consider or look at?

Annie: Yeah. And this is relevant for both men and women by the way. One of the things that people have been saying coming out of this era, people have been looking at their lives and their work and they've been asking the question, how do I want to spend my time?

How do I want to engage with my work? How do I want to engage with my family, my loved ones, my friends, my personal life, whatever it might be? And they have found that the rules that have been in place for many years aren't really supportive of making the kinds of choices that a lot of people want to make.

So, when I'm working with executives, I'm talking with them about how will we engage our employees? How will we make sure people feel really excited and motivated and wanting to give that extra effort? It's not about counting the hours that they're in the workplace. It's looking at what do they need, how can I support them, what kind of lifestyle arrangements are we willing to make in this company to support people- not just women, men too. People who identify in a lot of different ways are going to want to speak up. They are speaking up and they're voting with their feet.

We are still in the era of the Great Resignation. Tragically there are layoffs happening partly because of the gigantic expansion that happened during the pandemic in certain industries, and that is really hard for people and for the companies who are engaging in this.

But we still need to hold on to our very best, and they're voting with their feet. If we're not able to look at what they want, a sense of meaning, they want to know they're having impact, they want to feel that the future is hopeful.

And you're right, Samara. It is hard in this market environment, especially in this industry. It is very hard and yet I think most of us, when we dig deep, recognize that if this is one of those major turning points in our economic world, then we do have to be at our very best to not only keep up with it, but to get ahead of it, and to see where we go in the future.

Samara: I agree. I think we have the opportunity to tell a tremendous story of resilience and of progress. And progress in fact is the theme of a lot of these conversations, what it means to be in progress, to always be a work in progress. What does that mean for you? What are you focused on progressing or improving the most in your work? One of the things I truly believe is that now is not a time to pretend we know all the answers. Not in the midst of this kind of change, and anybody who is pretending is either trying to put on that game face for folks at work or at home, or they're sticking their head in the sand.

Annie: So, I honestly think that all of us need to be looking at how we lead, how we manage, how we remain resilient. Maybe those things that we did in the past aren't going to work.

For me, it's related to that: How do I stay resilient in the midst of all this change? How do I ensure that I don't stumble? Or fall flat on my face because I'm exhausted and burned out? It happens to me. It happens to a lot of people, and we are in what I think is another pandemic, related to stress and mental health issues that are result of all the changes we've been talking about, the market conditions, this pandemic era, but also related to people's going 24/7 way before the pandemic.

Burnout is a real thing. So, we need to learn how to use our emotional intelligence to stave off burnout. How do we use our self-awareness and emotional self-control to see burnout when it's heading for us, right? Or when we're heading for it and stop it before it happens.

Samara: I really like what you said about just acknowledging that we don't have all the answers. Sometimes I think it's like the ultimate power move to be in a meeting and say, I don't know, let's talk about how we find out. But I'd love your thoughts since again, your audience is leaders around the world. How do you balance the need to inspire confidence and show strength and be strong for your peers and your teams with that, vulnerability and authenticity, how do you make those things live together?

I think there's a difference between decisiveness and a belief that we know all the answers, we can not know all the answers and still be ready to make a decision when needed and to bring our people along with us. I think those are two very different things.

Annie: The best leaders are decisive, and they do inspire confidence. But to get there, they open themselves up to as much information as possible, they don't stick their head in the sands, they're not susceptible to what I call CEO disease. You've probably heard that term, it came out a long time ago, but it's very real. The higher you go in an organization, the less people are willing to tell you, especially about yourself.

So, we need to create a culture around us where people will tell us the truth and with the truth, we can enter into uncertainty and make decisions with as much information as we can possibly get.

Samara: There are so many things that I could ask you. I wish that we had hours to talk, but going back to, your own story, which again, thank you for sharing with me. If you could go back and have a conversation with yourself, in one of your early days at figuring out how do you want to make money and how do you want to work? What's a one piece of advice you would have given yourself?

Annie: Trust yourself just a little bit more. I looked like I trusted myself because I was very bold, but underneath all that I was pretty scared. And as it turned out, I didn't need to be as scared as I was. So, for all of those listeners who are thinking, what's my next move? And I'm kind of scared to take it. Trust yourself. You are where you are for a reason and your next step is probably going to be easier than you think it will be.

Samara: Well, in the spirit of Women's History Month, I think trust yourself is an awesome mantra. Thank you so much, Annie. It's been really fun talking to you today.

Annie: Thank you, Samara, you too. Thank you so much.

Samara: Thanks for listening to this episode of The Bid. On our next episode, Nirmitee Shah invites Alex Carter, clinical Professor of Law at Columbia Law School to discuss finding her purpose in mediation and teaching. Make sure you subscribe to The Bid wherever you get your podcasts.

Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. As the stock market continues to see volatility with inflation and interest rate hikes, the pace of technological change has taken a giant leap forward and created opportunities for investors.

ChatGPT has been compared to the invention of the internet, robots are being introduced to workforce. And agricultural technology is being more widely implemented to try to solve for a growing global population. Today we'll be discussing the top three technologies we see shaping the future.

I'm pleased to welcome Jeff Spiegel, US Head of BlackRock, Megatrend International and Sector ETFs, to help us decode some of these new technologies and better understand the impact on both our lives and our portfolios.

Jeff, welcome.

Jeff: Thanks for having me back, Oscar!

Oscar: Jeff, there was plenty happening during the holiday season we had rate hikes, we had inflation, we had people maybe taking some time off. But we also, had notably the release of ChatGPT, which sounds a little bit science fiction y to me when I say it out loud, but maybe you can walk us through this technology and tell us how is it changing the world? How quickly do you see it progressing?

Jeff: Sure. I took some time off I hope you did. Unfortunately, I spent most of my time off playing with ChatGPT, so that begs the question, what makes ChatGPT special? Well, it's an advanced AI chat bot that can understand and create human-like conversation. It was released by a firm called OpenAI, the tools free to use, it quickly captured the attention of social media. It gathered over a million users just in its first five days which is a record for any sort of application. i

So, The G P T stands for generative pre-trained transformer. It uses a transformer algorithm which is based on a neural network or a computer program that mimics the way the actual human brain works. It was trained using a massive amount of data from the internet, books, Wikipedia articles, and other pieces of writing that amount to about 300 billion words. ii

As I said, I'm guilty of having spent way too much time playing with it, seeing how it thinks, seeing whether I could trick it. But the tech is, at the end of the day, a lot more than a novelty.

Jeff: So, two ways in particular that we think ChatGPT could really revolutionize the world.

The first is in search, so GPT could really upend the search model as we know it, and really as we've known it since the 1990s. Now, that search model has fostered a massive business, $680bn in digital advertising that occurs on platforms like Google, and that can be disrupted if you think about it, if you don't actually need to look at a list of hits, but if you could just ask the generative AI a question and be told the answer. iii That would be a massive disruption to a lot of existing businesses.

So, the second area is in the services industry. GPT can perform a wide variety of tasks that are currently done by humans, or at least augment them.

So, with the US still facing a labor shortage, about 4 million workersiv and aging populations around the globe, companies able to create AI tools that enhance productivity and efficiency of their employees could really benefit.

A lot of jobs required good research, vocabulary, and grammar skills. ChatGPT can actually level up a huge portion of the population that may not be as good at those things today.

It's also worth noting that GPT is only one kind of generative AI- it's trained on words. Other generative AIs can be trained on other data- visual data. In the case of DALL-E, which is an AI artist also from OpenAI as well as AIs that use neural networks to process, for example, spatial or numerical data.

Actually, the ultimate breakthrough, what we're really looking for in AI, and what a lot of people in the field are most excited about is what's called Multi-modal AI. Now, that's AI that can be trained in all of these ways at the same time. To really mimic a human and to operate in multiple domains in the real world, you have to be able to master more than just text-based information, it can think in text, it can think in numbers, it can think in space.

Oscar: So, you mentioned a number of things and going back, the disruptive nature of this technology to some existing business models like search engine- you talked about how it differs from similar AI technologies, but

you also touched on how you were using it and you didn't realize you were interacting with it so, it tricked you. Therefore, I guess the question is there any safety concerns, with respect to the usage of this technology or what should we be thinking about if it can trick a human?

Jeff: So luckily, I knew what I was dealing with, but if I hadn't been told in advance, it probably would've tricked me, and so to your point, that's the danger. People who were testing ChatGPT were quick to realize that they could do a number of things that maybe were a little less than ethical.

Coders realized that they could use the tool to win quick coding contests. Teachers have caught many a student, using the bot to plagiarize essays, and some people who uploaded their photos to a DALL-E like app, received back renderings that felt sexualized, that made them look skinnier or buffer younger even nude.

Jeff: So, the saying, garbage in and garbage out really applies on this latter point. To the extent that the data available to train AIs has pervasive bias or represent societal features that may not be ideal, an AI generally can't make that determination. It can't filter out that sort of bad data- or inappropriate data- effectively.

Solving for this is going to be critically important, and it's really going to be a hotly contested debate because if you think about it, there's a lot of subjectivity involved in where bias lies and what's culturally positive versus what's culturally negative amidst all of this massive amount of data, or remember 300 billion data points, that the AI can absorb. How do you sift through that?

Jeff: But we do think there are ways to use these safely and effectively and ethically today. And probably three things to keep in mind.

The first is understand the limits and consequences of what an app like this can do. AIs can fool us into thinking that they understand more than they do, and that can cause problems. ChatGPT gives really confident answers, but it doesn't think independently. And if it takes as gospel, for example, a Wikipedia page, it may very confidently make claims that are debatable or simply outright wrong.

Second, know what you're giving up. Every time we ask ChatGPT A question, the conversation is logged, and it's stored.

Sometimes it's analyzed by a human to make improvement, sometimes not. But either way, it's important to remember that we're giving up some data to online tools like ChatGPT, and that means it's probably wise not to share sensitive information or photos.

Third, use these tools to improve your work not to do your work. So today I'd say AI can be helpful if we're looking for a light assist. You could ask a chat bot to rewrite a paragraph in the active voice. A non-native English speaker could ask ChatGPT to remove grammatical errors from an email before sending it. A student could ask the bot for suggestions on how to make an essay more persuasive, but you need a human in the loop to make sure the outputs are correct, not to mention that they're in context, that they're appropriate, and that they're sensitive.

This is all fascinating as I'm listening to it and something that comes to mind is why don't we put this to the test right now. And, in fact, for our audience, we're going to introduce another special guest here, that Jeff is going to ask some questions to. And that special guest is ChatGPT.

ChatGPT: Hello Jeff and Oscar

Jeff: Okay, let's do this. ChatGPT, what is 153 times 257.

ChatGPT: The answer is 30,061

Jeff: So pretty basic question, basic work for the kind of calculator people have had in their pockets for years and years. But for any of you, lightning math wizards, actually you know the answer is not 39,061. It's 39,321. Pretty amazing that an app that can trick me into thinking it's a person can't do basic math.

So, let's ask another. Hey ChatGPT, no offense, but why are you bad at math?

ChatGPT: As an AI language model, I'm not bad at math but I don't have the capability to perform calculations as humans do. MY training data includes vast amounts of text about mathematical concepts and equations, so I can answer questions about math, provide explanations and generate mathematical text but I cannot perform arithmetic operations or solve mathematical problems.

Jeff: So ironically what we're learning here is ChatGPT actually quote unquote, knows that it's bad at math, but it didn't tell me that it gave me a wrong answer with confidence.

I'll elaborate a little bit more on ChatGPT's answer to why this isn't working, why it can't do what seems like a basic function for a calculator.

The idea is that the multiplication process involves carrying over digits and performing complex operations on large numbers. That's beyond the capabilities of this underlying technology because it's in the deterministic domain, meaning there's a definitive right answer. Multiplication is a simple rule, but text-based generative AI cannot comprehend deterministic rules.

Neural networks cannot learn rules simply because they are not designed to do so. They're multiplying and adding up inputs, weights, and biases, but they're not designed to learn simple, or we would think simple IF ELSE logic.

Oscar: So, as we've been talking about ChatGPT and artificial intelligence more broadly, you've referred to it as a way to perhaps help humans with tasks that they're performing. let's take that a step further, now let's talk about robots that are using artificial intelligence. We're certainly seeing more robots in the workplace and production lines; how might robots impact the labor market? Is there a risk that they are making, jobs that humans perform obsolete, or is it actually they're helping?

Jeff: So, I'm a history major, I'm a history buff. The first industrial robot was actually rolled out by General Motors in 1959. v The robot called The Unimate was a hydraulic arm that performed repetitive tasks such as welding. Seven years later, the Unimate, a friendly robot entered pop culture when it appeared on The Tonight Show with Johnny Carson to play golf.

But that raises the question, what's happened, from now to then? Well, what's happened is that the average cost of an industrial robot has fallen by 50% over the past 30 years, increasing the affordability of adoption. vi

So, robots are largely economically viable today in a way that they hadn't been historically, but country to popular concerns. They generally haven't been used to replace human factory workers. Instead, they've been used to free up those workers to focus on higher value tasks or supercharge the workers' output by essentially engaging together.

As a result, robots represent one of the most powerful tools in fighting a lot of today's economic challenges. Open jobs in US actually exceed unemployed workers by about 5 million people. vii Annual wage growth is 6%,viii supply chain pressures are a standard deviation above historical averages, ix a record number of jobs may be near or re-shored, x and the US and global populations are aging really rapidly.

Let's look at some of the most powerful robotics use cases and why economic conditions and innovation together are why the market estimates a 23% compound annualized growth rate for robotics through 2030. xi

And we'll look at this through the lens of logistics and the lens of healthcare. Let's start with logistics.

80% of warehouse operators agree that they're going to rely more on automation in the future. xii Look forward in 2023 to seeing Autonomous Mobile Robots- AMRs -proliferate. AMRs, unlike their more common cousins, Autonomous Guided Vehicles, or AGVs, don't require predefined paths or human oversight. AMRs are particularly helpful in healthcare settings, hospital settings. Cleaning robots are leveraging UV light to sanitize surfaces while navigating crowded spaces with large physical equipment and multiple moving pieces. Robots are already reducing warehouse error rates by up to 67%. xiii And robots help address warehouse injuries.

So today, over 200,000 non-fatal accidents happen every year in US warehouses. xiv That causes companies a cost of over $84m a week. xv And most importantly, it causes pain and suffering for employees. So, we can solve a lot of those problems with modern robotics and again, focusing on the ability to help the individual human and make our lives better, we come to healthcare, surgical robots are game changers.

A surgical robot will have one arm with a camera, giving the surgeon a view of an affected area at up to 10 times magnification versus the human eye.xvi A second robotic arm will hold surgical instruments allowing a degree of precision and steadiness that simply isn't possible with human hands, the smaller resulting incisions improve outcomes and shorten recovery times, reducing pain, reducing blood loss, and reducing.

Today, globally, only about 3% of surgeries are performed robotically. xvii And you can imagine how much tremendous runway that allows for growth. But again, as we were talking about with ChatGPT, no one's pulling the surgeon out of the equation. The surgeon needs to be involved. The surgeon needs to be monitoring, the surgeon needs to be operating the robot. This is really about how AI, robotics, and human beings can work.

As technology is becoming more powerful, efficient, and cheaper, robots are actually more ubiquitous. North America robot sales have reached record highs over three straight quarters. xviii We've also seen a range of robots enter our day-to-day lives. They vacuum floors, they mow lawns, they craft the perfect cup of coffee, and in some places, they even provide companionship.

Oscar: You're certainly painting a picture where robots are helping the labor markets not replacing humans, but I think you used the word supercharge what the humans, can do in their day-to-day. Maybe we can talk a little bit about agricultural technology and where you see robots and AI playing a role there. Because I think as of last count, there's about 8 billion people on planet Earth, or we're approaching that number by 2050. There is projected to be 10 billion people on planet Earth that we need to feed.xix So how do robots help the agricultural processes that we have in place now?

Jeff: So, Thomas Mathis, a philosopher, famously proclaimed hundreds of years ago that we would run out of food because the population of the world would just continue increasing. And there was only so much food that could be created.

What we've actually learned in the hundreds of years since is through better technology, better cultivation, genetically modified crops, we can actually increase the total food yield. Even as population rises, AI and robotics are going to be the next game changer in that progression. As we look to the future, disruptive technologies such as precision agriculture and agricultural robots can affect meaningful change towards more sustainable production and consumption.

AgTech makes it possible to produce more food on less land with less water in more locations. The resulting efficiency gains and lower food production costs are really game changing, and we can dig into a few specific

innovations that you're going to see bring together a lot of what we were already talking about in AI and in robotics.

We'll start with smart crop monitoring. This is really about AI. Here we're using real-time sensors and imaging to deliver water and nutrients within a farm system to where they're most needed, helping produce more food with less, and that enables increased yield through more efficient use of natural resources and inputs, and improved land and environmental management.

So agricultural producers are already turning to this technology to drive growth, the global market for precision agriculture reached 7 billion in 2021. xx By 2030, it could almost triple to over 21 billion. xxi That's a 13% compound annual growth rate. xxii Second area controlled environmental agriculture, often referred to by the initialism CEA, takes place in enclosed growing structures like greenhouses and warehouses, which provide protection from outdoor elements and maintain optimal growing conditions. The term vertical farming is really evocative here. Literally stacking layers of agricultural production at top one. CEA makes it possible to produce food year-round in urban environments and much closer to consumers.

So, imagine walking into your local grocery store on a snowy winter morning, but picking up freshly harvested lettuce, juicy tomatoes, and sweet blackberries, all of which were harvested, in your home city just a few hours prior. Vertical farming makes this possible because it allows farmers to grow crops indoors at scale in stacked layers all year round.

Produce grown in indoor vertical farms, travels only about 43 miles on average to reach grocery store shelves, compared to 2000 miles for conventionally cultivated product.xxiii

So, bringing together our topics today, robots are also on the rise in farming drones overhead that monitor crop health robots in field, automatically watering plants and autonomous tractors driving themselves all working 24 7 around the clock.

While adoption is still nascent, commercial agricultural robots are helping forward thinking farmers and agribusiness to produce more food on less land, and with fewer chemical.

Oscar: It sounds like a very futuristic world, that you talk about, but that's the point I think, is that the technological innovation that's going on is required. on the topic of technology, maybe we can talk about the CHIPS Act that was passed last year, and maybe you can describe, what, what did that piece of legislation actually does?

Jeff: So, it's critical for any discussion of technology in 2023 to note that de-globalization and geopolitical competition are really important considerations that are impacting the sector. When you think about the Chips and Science Act, and it's $53billion xxiv to support American Semiconductor capacity quote, it'll lead to the geographical realignment of manufacturing capacity away from Asia and that's according to Tony Kim, our leading technology portfolio manager here in the fundamental active equity business at BlackRock, who oversees 30 billion in tech assets.

Here and in other sensitive technologies like batteries, quantum computing and artificial intelligence, government intervention through carrots, think fiscal spending, but also sticks. Tariffs and regulation are likely to continue. That's going to create opportunities for investors. It's also going to create challenges.

Oscar: When you hear about all the technological innovation going on, a lot of which you just spelled out, people draw the comparison to change that went on during the 19th century industrial revolution. There was a lot of fears at the time and misconceptions, which also then carry through to today people fearful of all this change that you're talking about going forward. So how could these fears and misconceptions challenge progress and what should investors be thinking about?

Jeff: I think President Kennedy actually said it best, When looking at this sort of progress, the only thing we have to fear is fear itself.

Personally, I think the future is bright. I think the rise of robotics and AI will be a milestone. So, stay tuned, stay positive, because if we embrace change in progress, our descendants, I believe, will look at today's robotics and AI revolution as improving the world at a scale even beyond that of the Industrial Revolution itself.

Oscar: Jeff, I've said this before, when you've been a guest, you've given us a lot of great, facts to consider and, I want to thank you for joining us on the bid and actually, we had two guests today. I want to thank ChatGPT as well.

ChatGPT: You are welcome

Jeff: Thanks for having me, Oscar.

Oscar: Thanks for listening to this episode of The Bid. Subscribe to The Bid wherever you get your podcasts.

Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

The future of technology is changing rapidly and so is our engagement with it. The concept of the Metaverse has evolved from a virtual gaming space to something that now encompasses a much broader range of applications, including commerce, education, socializing, and entertainment.

It's been described as the next step in the evolution of the internet, a major driver of the future economy, and is likely to change not only the way we interact with technology, but with each other as well. Here to help us prepare for this technology focused future, I'm pleased to welcome Peggy Johnson, the CEO of Augmented Reality Company, Magic Leap that is working to create a more immersive digital world.

Peggy will discuss insights on how mixed reality and artificial intelligence will shape the metaverse and the challenges and opportunities that arise from this technology. Peggy, welcome. Peggy, thank you so much for joining us on The Bid.

Peggy: Thanks for having me, Oscar. I'm looking forward to this!

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Oscar: So, Peggy, perhaps we can start by just defining what is the metaverse, what is this emerging technology? And also, maybe talk a little bit about the difference between augmented reality technology and virtual reality technology, which often intersects with the metaverse.

Peggy: Yeah, and I think the terms do get interchanged and they're actually very different technologies. I would say in its absolute simplest form. We like to define the metaverse as the merging of your digital and your physical worlds. And both AR and VR can do that. But VR or virtual reality is when you have a device on your eyes and you're fully occluded.

You can't see your physical world around you, but there's digital content that's placed in front of your eyes and it's a great tool for entertainment, for gaming, there's typically avatars involved, but augmented reality is when you put the device on and your eyes still see your physical world, so you are not going to trip over the coffee table!

You, see what's in front of you and then digital content is placed very precisely and accurately in that, physical world. And really, for me, I think the potential for augmented reality is going to be far greater than virtual

reality, which is largely an immobile experience because you don't see what's in front of you, so you typically have to not be moving around too much, so you don't trip and fall.

Oscar: That's super clear as you painted that, picture. So, then what are some of the business opportunities with technologies like augmented reality which you said you see greater potential for, and then, have you seen any barriers that need to be overcome or just adoption not being as fast as you thought it would be?

Peggy: Yeah. I would say first and foremost, augmented reality is much harder to build because you have to get the optics just right. you have to scan your physical world so that you put that digital content at the right spot in your physical world. But the types of applications that you can do with augmented reality are much broader.

So, you could imagine both technologies are good for training, but with augmented reality, you can take a new factory worker and actually put them out on the factory floor much faster than say, having them sit and watch something through virtual reality. You can have them walk up to a machine and have a digital twin of that machine overlaid on top of it. So, their eyes see the physical machine, but they also see helpful content.

You know, turn this gauge if the pressure's gone too high, unplug this as the very first thing you do. And there's all sorts of digital pointers that can be in their field of view on top of that physical machine, which really from a training perspective.

Makes it a lot easier to understand versus say more traditional training, which is go sit in a classroom for three weeks and read these manuals and, let's walk through it. You're in front of the machine, you're on the factory floor. You're productive much earlier with this type of technology.

Oscar: Yeah, II was just thinking you're describing like a digital user manual for that factory worker.

Peggy: Exactly, and you had asked about some of the obstacles. The issue has been these devices have tended to be fairly heavy on your head. They can be hot; they’re processing a lot more than your mobile phone. And so, you can imagine an electronic device on your head for a long period of time could be uncomfortable.

So, we had to work hard to get the weight out to bring the size down to make it comfortable for workers to use all day long to make the optics as clear as possible, the color uniformity, the text legibility, all of these were really blockers to using this type of technology earlier than now what we're seeing come to market.

Oscar: So, is that factory worker when they put on that AR augmented reality technology are they now in the metaverse? Or maybe just to go back to, what the metaverse is -for people who don't think they've interacted with it, where would they have come across it?

Peggy: Well, that's a great question because people are already interacting with what we define as the metaverse, which is this merging of your digital and physical world. So, for instance, you're in a new city, you're looking for a building you can pull up Google Maps and see a picture of the building, that's just a digital image, but it's helpful in getting you to your end point.

That is a simple example of the metaverse. I think, even the fact that we can now access, say, corporate data from anywhere. You used to have to be sitting in front of your PC or it was a mainframe where you had a terminal and that was it. You couldn't access your corporate data. Now with mobile device management on your phones, you can access it anywhere.

That's another version of that. But the type of metaverse that we're entering, with augmented reality, is this type where you have a heads-up view of your world. You're not looking down at your phone and pulling that

digital content information out. You are looking at your physical world and that content is placed very intelligently in there.

So that same Google Maps experience can now be much better. It'll just be walking you right to the building, with big digital arrows in your field of view and a picture of the building before you get there. So, it'll be a tool that'll enhance the traditional digital experiences we have now.

Oscar: It sounds like it would be really hard to be bad at directions, if you have that technology with you, at least, in the future or, as you interact with that technology

Peggy: There should be no excuse anymore, right!

Oscar: You mentioned that, like one of the challenges with the technology has been the weight the feel of it on, on, on your body. So that's perhaps one of the problems. Are there other problems with the, technology that you're seeing that needs to be solved? And then perhaps on the flip side, what are some of the additional benefits that augmented reality technology affords

Peggy: So I would say some of the problems that more virtual reality struggles with is unfortunately, a feeling of nausea a certain percentage of the population puts on a virtual reality device and because you lose your frame of reference, you're now looking at an image of something in front of your eyes, it can be jarring and it can give you that seasick feeling or air sick feeling.

So that's a pretty tough challenge to overcome. I know folks are working on it, but we're augmented reality we don't have that same challenge because you do see your horizon, you do see your frame of reference, and that's not a problem in augmented reality.

I would say some of the areas where it's been beneficial is for instance, we've got several use cases now with surgeons that are using it within surgery.

They have, the ability to look at the patient in front of them. They see everything in the surgical suite, but on the patient you can put a digital incision line. You can have their vitals wherever it's comfortable for the surgeon to see them rather. Perhaps fixed on a wall across the surgical theater.

So it's going to change the way that, surgery is delivered because it's a tool to make the outcomes safer, more accurate, better for the patient with that sort of information just integrated into the field of view.

Oscar: When you talk about these futuristic technologies, you sort of to ask the question, what’s the impact on society? What do you see that impact being? Does it change the way we interact each other immediately, or does that shift happen more gradually over time?

Early days, there's use cases in the enterprise space for sure. Eventually we'll circle back to consumer, but the product has to get smaller and lighter yet again. So early days, the value is in training and any sort of 3D visualization. Any sort of remote assistance, let's say you're not the expert on something, and that could be in any field, you could call in an expert who can actually see what you are seeing with your eyes because it's all digitized and from any device, they can see what you're seeing.

Peggy: I think the opportunity over time is back to that heads up view that we'll have of our world again. You look at any conference, any meeting room, everybody's looking down at their phones. We can actually have a heads up view of our world. We could be hopefully more social with this type of technology going forward than looking down at our phones and typing It'll really change that interaction.

Oscar: You've talked about the factory worker, the surgeon, what are some other examples that you can think of right now where enterprises are using this technology at scale?

Peggy: Yeah, so we have quite a bit of activity in the public sector, in particular in defense training of soldiers, for instance. Right now, training scenarios can be pretty expensive. And if you want to change the scenario, you've got physical assets that you've got to move around, if you want to make a blind corner or something. You've got to stop the training, move the physical assets around, then put the soldiers back into the training theater and everything could be digital.

And you can change the scenarios very, very quickly. So it reduces the time it takes to train the soldiers. And you can actually be more flexible as far as different scenarios they can be quite advanced versus maybe just the physical assets you have in a single room. So it opens up training really of any type but we've seen quite a bit of, uptake in the defense, the public sector, any sort of first responder training.

Oscar: And are there any, as you think about the application of these technologies, do you find any ethical or privacy issues that users of the technology are encountering? and just curious, what is Magic Leap's view on these issues as they arise?

Peggy: Yeah, it's a great question because, this is still an emerging technology and we have the opportunity to get it right this time. Versus the internet, when we had to go back and refactor parts of it in order to keep our data private and secure.

This technology, at least as far as Magic Leap is concerned, was built from the ground up to keep the data that it's gathering and that it's analyzing private on board, so we don't send anything off board unless the corporation that you know has purchased the device, is bringing that data into their IT infrastructure. Obviously that's something that we enable.

But you really have to think of these devices as quite a bit different from a mobile phone. They're literally brimming with sensors. Five cameras looking out at the world, there's four cameras looking back at your eye. We have a whole variety of audio inputs. There's a laser pointer that can help you select things in a list. Your hands are actually an input as well. There's hand gestures that you can do to pick things.

And so between, all of the cameras, the projectors that are imaging your world, these are mobile phones on steroids, so the data's very personal. If you have four cameras looking at your eye, you can think of, there's quite a bit of biometric data there that the individual is going to want to keep private and secure.

So we built the device from the very start to keep that data on board and only to allow it off if you have the permission of the user or the corporation and we want to be part of the protocols going forward working with government and other companies to ensure that it stays that way.

Oscar: And maybe if switch the lens, from businesses and as a technology, let's think about the investor. What you're discussing sounds like a, an investment opportunity, not only directly, but their secondary impact on sectors and industries. But thinking about technology, it's been a challenging period for technology investing over past year, we had rising interest rates and supply chain issues. And as a CEO in the tech space, how do you think about the investment environment going forward?

Peggy: Certainly we're entering a challenging environment, but if you can bring a technology forward that can save money, can save time, shorten the time of resolution for instance of a machine that's gone offline in your factory that's all cost savings.

And we're seeing that with companies. We've been working with several manufacturing companies who are training with our device and they're able to cut their training costs by about 80% because they're getting these new factory workers out on the floor as quickly as they can versus that in classroom sort of training. And that's been a real benefit.

But I guess a something that was surprising to them, at this company, PBC Linear we've been working with in the Midwest, is the amount of scrap they've been able to reduce, which is clearly a big cost to the business. And they've been able to take that down by about 20% because the new workers are just better trained from the get-go.

And so there's some intangibles around there too. Workers can see a factory job as a modern job. Again, when you're wearing literally a computer on your eyes. And it's helping in recruiting and retaining, which has been a real problem in the manufacturing sector.

Oscar: And that's interesting it sounds like I was going to ask you about the return on investment that companies are seeing from the technology. And it sounds like you, you gave both a quantitative and a qualitative example- you said, scrap is being reduced by 20%, but you also talked about the factory worker potentially deriving more enjoyment from the job just based on that experience. What other examples do you have of that return on investment that companies are seeing as early adopters?

Peggy: Well, one of the companies we're working with in the healthcare space, they've been part, they're a med tech company that does heart catheterization. And how it's done now is there's an image of the live heart that they display on a PC or a 2D screen in front of the surgeon.

Now the surgeon starts to insert the catheter in the heart and they take their eyes away from the patient because they're looking over at the screen. they're watching the little camera on the catheter as it's going through the vessels of the heart. And with this device they've taken their app and rebuilt it onto the Magic Leap device.

Now, the surgeon has in front of our eyes the live image of the heart, real time, and it's just a more natural way to watch that camera go through the heart because it literally appears as if the heart is in front of your eyes and the outcomes are more accurate. They're safer, it's actually faster beginning to end than, making your mind do the translation from a 2D picture of a 3D heart to just having that 3D heart in front of your eyes.

So these are the sorts of metrics that are starting to accumulate. And we're just trying to say focused on a handful of areas, the ones you've mentioned manufacturing, public sector, healthcare, because they're ones that are already comfortable wearing things on their eyes. They've got use cases that fit with the state of the technology right now and so we've stayed focused in those areas, but clearly over time, any sort of training in any industry is going to be better off. the ability to view things in 3D in front of your eyes.

Oscar: So it sounds like a key takeaway away is that the end consumer may be experiencing much of yet in their day-to-day, but there's definitely applications in the business world with enterprises, you mentioned the public sector, as being one -manufacturing, but that there is a future in the not too distant future where the end consumer will see this as part of their day-to-day.

Peggy: Absolutely, and we believe that future, the format needs to be glasses and not what, right now looks a little bit like goggles on your eyes. Glasses are something that many are used to wearing already, but glasses mean lightweight, long-lasting battery.

There's a fashion sense as well, you don't want to look too much like a robot wearing these things. And it's why you don't see a lot of augmented reality headsets yet for the consumer. Because we're not there yet with the technology. Very similar to the mobile phone when it first came out, it was big, it was heavy, it was expensive,

but it served a purpose for enterprise. That was the entry point for mobile phones. So we had traveling sales people buying them because they didn't have to stop and find a parking spot and a phone booth and call their office they could just call from their car- there was an ROI there.

And so we're starting there. With Enterprise, eventually we will circle back and the industry will circle back to consumer AR but it'll be a while before the silicon is integrated enough and the components are reduced enough to get a glasses format on the consumer's head.

Oscar: I think that mobile phone analogy is a great one. And I'm realizing you, and I have been talking. I keep looking down at my notes, to think about the next question and, maybe in the future, I would've just been able to look straight ahead and see my notes in front of me. That's where we're going!

Peggy, thank you so much for all these insights and thank you for joining us on The Bid.

Peggy: Thanks for having me, Oscar.

Oscar: Thanks for listening to this episode of The Bid. Subscribe to the bid wherever you get your podcasts.

Catherine: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Catherine Kress. Today, we'll be discussing some of the geopolitical issues that are shaping the global investment landscape in 2023.

From conflict and war to energy crisis and technology competition, we'll be exploring the ways in which political factors are impacting the financial markets and what it means for investors. I'm pleased to welcome today Tom Donilon, Chairman of the BlackRock Investment Institute and former National Security Advisor to President Barack Obama. Tom, welcome.

Tom: Thank you, Catherine. It's nice to be here today.

Catherine: Tom, you were at the World Economic Forum's annual meeting in Davos, where you met with public and private sector leaders from around the world. What were your main takeaways from the week?

Tom: Yes, Catherine, this was the first full meeting at Davos in three years. There was a smaller meeting this past spring, but this was the first full-on session with the full attendance at Davos since January of 2020.

And what struck me on reflection is just how much the world has changed. It's been a tumultuous time the last three years – certainly as tumultuous a period that we’ve seen since the end of the Cold War – some would argue even a longer period than that. And this period has been characterized by a series of repeated shocks to the system and major crises.

The most prominent of which obviously are Covid and the Russian invasion of Ukraine – which is important to note is not just a regional security event, but has been an event with global impact and I think durable impact, which we can discuss. A new order has emerged over the last few years and it's accelerated a lot of trends that were already in train, but it's characterized by a number of things.

One is fragmentation – increased fragmentation between and among nations.

Second, a dramatically reduced amount of cooperation among and between the important powers. If you think about the Covid crisis, the United States and China, for example, were not able to organize a global

response. You would think a health crisis would be the basis on which you could have global cooperation among the major powers, and we weren't able to pull that together around the Covid crisis. Even during the course of the Cold War, the United States and the Soviet Union were able to work together to eradicate smallpox. And we saw that, in reflecting back on the Great Financial Crisis – the last global crisis prior to Covid – you had the G20 assembling in the spring of 2009, with the presidents of the United States, the Russian Federation and China working together to put together a common approach to trying to bring back the world from an economic abyss and to put together an economic plan for the world. That meeting, addressing a prominent global challenge, is really not conceivable today. That's a huge change. So you do have reduced cooperation.

And the third, I think, flows from the first two, which is the forming up of economic and geopolitical blocs. And with, frankly, geopolitics replacing markets and efficiencies as driving forces in terms of economic relationships and energy relationships.

So a more fractured world is the main major theme that I come away with.

Now, despite that very challenging environment, there were some elements of optimism coming through the Davos meetings.

And I think they were based on three or four things. One is a sense that a recession in the United States and in Europe will be less severe than had been expected. Two, a better than expected energy situation, where we haven't been driven towards the crisis I think people were expecting for a variety of reasons, including European policy, better weather than had been expected, and by the way, importantly, the United States supporting our European allies in terms of energy supplies. The China reopening that was announced coming into Davos and underscored by the presence there of Vice Premier Liu He, and continued Western unity on Russia. So I think those gave a sense, at least, of tactical optimism at this point.

I'll finish with just a couple of specific things that were prominent in the discussions.

One, obviously Ukraine, which was the backdrop to a lot of the discussions that took place in Davos. And again, as I said, unity. Also a recognition that there's really not, at this point, a short-term path that analysts see towards a resolution in Ukraine.

Second on China. Yes, an economic reopening, but still challenges and the Chinese, I think, acknowledge those challenges in terms of opening up and pursuing economic growth as the principal priority.

Energy was front and center, with the recognition during the course of the crises of the last several years of the importance of energy security, supply and affordability.

The Inflation Reduction Act came up in almost every setting. Some concerns on the European side about whether or not the United States had engaged in practices that give unfair advantage to US companies and investment in the United States. I think that we'll push past those. I think the major impact of the Inflation Reduction Act will be catalytic and will actually encourage and give momentum to investment in climate and energy technologies.

And last, there was a lot of talk about artificial intelligence, particularly ChatGPT where everybody was moving around with their favorite question and answer that they wanted to demonstrate. So those are some of the impressions I had coming away from the Davos meetings.

Catherine: So Tom, you mentioned that Ukraine really served as the backdrop to a lot of the discussions that you had at the Annual Meeting. We're coming up on almost a year now of the war in Ukraine. What's your take on the state of play?

Tom: Following a number of successful counter-offensives by the Ukrainians in the fall, the front lines have largely remained the same.

There's been some back and forth in some specific battles over the last few weeks, but both sides are essentially in a standoff at this point, going into the winter. The front lines are hundreds of miles long and, in some parts, there are really miles of trenches and almost a feeling of a World War I like warfare, including artillery duels, and again, troops entrenched along defensive lines that they're continuing to build out. That’s the first impression.

The second is that this war is exceedingly violent. Western officials have said publicly that they think that the Russian totals of killed and wounded is well over 100,000. The Ukrainians don't put out official statistics, so we’re really not really sure what the statistics are on the Ukrainian side.

Three, this has been and continues to be a humanitarian disaster for Ukraine. Nearly 8 million Ukrainians, Catherine, have been recorded since the Russian invasion last February, according to the United Nations. And the International Organization for Migration estimates an additional 6 million Ukrainians are currently displaced within Ukraine.

You know that adds up, to overall, one third of the Ukrainian population has been forced to leave their homes, since the beginning of the war. I should remark by the way, with respect, to the nearly 8 million Ukrainian refugees which have left the country, that they have been provided for through, quite a program of outreach and support by the Europeans. It's a notable aspect of the effort.

Next, I think that both sides appear to be preparing additional offensives. Experts believe that the Russians have deployed more than 100,000 mobilized personnel over the past few months to try to stabilize the lines to prepare for an advance.

These are far from Russia's best fighters, they're conscripts. In some cases, of course, a lot of the fighting has been done in critical areas by the Wagner Group, which is essentially a mercenary organization that works at the behest and direction of the Russian government.

I think that we can expect, if not before, certainly as we go into the spring, offensives in the war.

Next is that, continued economic and military support from the West is the most critical element I think for Ukraine going forward. President Zelensky has been quite clear about that in his interactions with leaders from around the world. We've had in the United States the passage of an additional $45 billion in support, which should provide, a lot of US support going into the first seven or eight months of 2023. There was a meeting in Germany at the Ramstein Air Force Base where substantial additional military support was committed to the Ukrainian cause. My judgment is that although you'll have debates as you get into next year, both in the United States and Europe, as the support levels. My bet is that the center will hold, and the support will continue.

There's a long way to go in this conflict is my judgment. Currently I don't really see a path towards a ceasefire or a peace process or de-escalation. That doesn't seem to be a viable path at this point.

In all scenarios, I think that there's a long-term standoff here between the West and Russia, across multiple dimensions, including political, military, diplomatic and ideological. And I also think we'll see, by the way, an increased interest in the West on pursuing war crimes prosecutions against Russia.

Catherine: Tom, in our analysis at the BlackRock Investment Institute, we've found that geopolitics often has the most significant impact on markets and economies when it affects oil and energy prices. And indeed, one of the most significant impacts of the war in Ukraine has actually been on energy. How are you thinking about the energy landscape today from a geopolitical and national security perspective?

Tom: Let me talk about the broad observation, Catherine, which is that the conflict was building on some dynamics before the war, but has engendered, I think with some experts, believed to be the most serious energy crisis since the 1970s. It is really the first global energy crisis, that we've faced.

And it's caused economic and energy relationships to shift along geopolitical lines as we talked about earlier. That geopolitics instead of efficiency and market forces, are driving energy supply and flows and prices – especially true in Europe, obviously, where we see, Europe separating itself from its largest, and most efficient supplier, at a tremendous political and economic cost.

So lots of dynamics here, I think driven by the war. Some observations though as to where the energy markets stand. The first is that energy security and reliability and affordability have come to the floor as issues in the wake of the war. And indeed they are now, for policymakers have to sit alongside the policy goals of decarbonization and climate goals.

Second, as we've seen the politicization and weaponization of energy resources. We've certainly seen the Russians engage in that cutting off energy supplies to the Europeans.

Third, we've seen a permanent diminishment of Russia as a global energy power moving forward, for lots of different reasons. They've had increased prices in oil and gas, which have sustained the Russian economy since the beginning of the war, but over the long term, I think you'll see customers leave a not reliable and secure supplier.

Sanctions, reputational risk will cause Western companies to pull out support. Most importantly from my perspective, has been export controls. Their infrastructure will suffer greatly over time as a result of the export controls. They're being denied at this point critical technology and also expertise from the West, which I think over time means it'll diminish.

The Gulf States have had a windfall as a result of increased energy prices.

And Catherine, I think a notable feature of the crisis has been the emergence of significant government intervention into the energy markets. We see that in Europe as European governments have tried to support their, both their consumers, their population and their industries from high energy prices.

And we've seen it of course most recently with the Inflation Reduction Act, which will invest $370bn billion into reducing carbon emissions and increasing domestic energy security, clean energy manufacturing, decarbonization in the United States. This, by the way, I think will end up being one of the most transformative pieces of legislation that we have seen in a long time in the United States.

I think another observation has been the United States has been a really important supplier and support for our European allies with respect to energy supply.

And last, I do think it will have another important dynamic, which is I do think it will enhance and accelerate investments in the transition, and in clean energy decarbonization and clean initiatives.

Catherine: Tom turning to China, you mentioned that China's reopening was one of the key topics of conversation at the Annual Meeting. China's reopening and the evolution of US-China relations more generally I think are going to be key drivers of this year's economic and geopolitical outlook. How are you thinking about China these days?

Tom: Yeah, I think that's right, Catherine. There was a lot of discussion about China's reopening, of its economy. I think that reflected three pivots in Chinese policy, really since the beginning of December. There's a pivot on Covid, pivoting away from zero Covid and actively pivoting to a post-Covid world in China. They’re trying to move there as fast as they can at a significant human cost, by the way.

The second pivot is a pivot towards economic growth. And this was on full display at Davos where Vice Premier Liu He and the Central Bank Governor Yi Gang both were at Davos. And the presentation was that there had been a significant pivot in Chinese policy, that the most important national priority at this point would be economic growth – coming off a year where economic growth was, according to the official numbers, at just 3%, which if you take away the Covid year 2020, is the lowest GDP growth that China's had in 30 years or so.

And the third pivot was toward more constructive relations with the West, particularly with the Europeans.

That's what's on display. There are a lot of issues with respect to each of them. With respect to the economic pivot, I think pushing past Covid, making economic growth the top priority will result in an increase in Chinese GDP in 2023. There are questions obviously that the Chinese have to wrestle with. I think they're aware of them, right? Which is revitalizing the private sector in China, which has been demoralized as a result of the number of dynamics over the last few years. Creating domestic demand, particularly with enhancing consumer confidence and also providing renewed confidence for foreign investors coming into China. This I do think is going to be the top priority for China coming into this year.

There's been some improvement in the tone in the relationship between the United States and China. This comes out especially out of the meeting between President Biden and President Xi [Jinping] at the G20 session in Bali where they I think we're looking to try to put a floor, if you will, under the relationship. I think US-China relations are in the most difficult spot that they've been in since the United States formally opened relations with China in 1979. No major agreements coming out of that, but again, some change in tone. Some of the dialogues, which have been shut down in the wake of Speaker Pelosi's visit to Taiwan, have been opened up, not all of them by the way - most concerningly not in the military area. And Secretary Blinken is following up on the President's meeting with President Xi with an early February trip to Beijing.

So some positive signs, but I think it is important to note though, that the structure if you will, with competition at the core of US-China relations, I think remains. I still think that's the core dynamic. You see that on the US side, where there's I think remains a bipartisan consensus in the United States to take a harder, more competitive line, if you will, towards China.

I do think that the tech decoupling – which is a targeted decoupling, not a wholesale decoupling between the two economies, but a targeted decoupling with respect to those technologies, which the United States judges could enhance Chinese military capabilities – that decoupling will continue, and I think will move beyond just semiconductors. Indeed, National Security Advisor Jake Sullivan has pretty much indicated that we'll move beyond semiconductors to other foundational technologies.

Catherine: So Tom, we touched on Ukraine. We touched on China. What are some of the other hotspots that you're worried about going into the year?

Tom: You know, Catherine, one of the dynamics that has come out of the Russian invasion of Ukraine has been a real damage done to the global nuclear nonproliferation regime. And we see that on display in the Russian invasion dynamics itself where essentially the Russians have repeatedly held the nuclear threat out there as a way to constrain attacks on Russia.

[There are] discussions about, whether or not Ukraine made a mistake in the 1990s, by giving up its nuclear capabilities. And there are questions around what lessons will countries learn out of the Russian invasion – talk, because of the increased tensions, of other countries who had heretofore not pursued nuclear weapons in Northeast Asia and in the Middle East – are they considering pursuing nuclear weapons at this point?

And two of the key places I think where this is really front and center is in North Korea and in Iran. And it doesn't get the kind of attention that the Russian invasion obviously has gotten, because it doesn't have the same immediacy and it's not a hot war, obviously. But nonetheless, the North Koreans have rebuffed talks with the United States. They've escalated provocations. They've been on a missile testing frequency over the last year or so at historically high levels, really levels and frequency that we'd never seen before. They've put out a much more aggressive, doctrinal set of statements. So, I think it's an important place to watch for increased tensions going forward.

A second example is Iran, where negotiations on reviving the nuclear deal between the international community and Iran have hit a standstill. United States officials have indicated that's not a current top priority, and there's really not a short-term path forward at this point. The sides haven't withdrawn totally from the negotiations. Nonetheless, I think that, to the extent that there are no negotiations taking place, that the constraints have been lifted, and Iran continues to push ahead with various dimensions of its nuclear program.

We could see the concern deepening with respect to the program and revisiting of the kinds of discussions we had in 2010, 2011, 2012 around whether or not there should be action taken to constrain the nuclear program. I think this is exacerbated by Iran's ongoing cooperation and military support for Russia.

Catherine: So there's a long list of things to be worried about. Anything that makes you hopeful?

Tom: Catherine, we've gone through a number of the challenges that we have internationally and domestically. And we do have significant challenges in a fragmented world – in a world where we don't have the same kind of mechanisms that we've had to manage global and other challenges. But there are some things that are, I think, optimistic and I think hopeful signs. I'll mention three.

Number one has been the resilience, adaptability, diversity of the US economy. We'll go into a downturn of sorts in 2023. It's hard at this point to judge exactly what that will look like, but overall, the economy has weathered all manner of crises and shocks in the last few years and done fairly well. We've also had the ability as a country – despite degrees of polarization we haven't seen in many years in the United States, maybe since the Civil War – we've also been able to put in place legislative and policy efforts to address our challenges and a number of them done on a bipartisan basis. The Bipartisan Infrastructure Act is an example. The Chips and Science Act is an example. And then we had the Inflation Reduction Act, passed this last year, which is the most significant investment the United States has made in climate and energy policy. So, yes, challenges – economic challenges, societal challenges – but a durable, adaptable and resilient economy and society in the United States.

The second is – I’m really struck by the ability of the international community to respond to meet the multidimensional challenge of the Russian invasion of Ukraine. The Russian invasion of Ukraine, as we discussed, is a global event with a lot of dimensions and challenges – military security, economic, energy, societal. We've talked about the refugee flows. And the international community has organized itself in a way to pretty effectively meet that challenge.

And the last I'd mention is technology. I continue to be optimistic about the pace of technological innovation around the world. If you look at the speed and scale of technology developments and the change in important areas like artificial intelligence and climate technologies, I think those are sources of hopefulness and optimism going forward.

Now, the challenge on this will be – and I'll leave on a negative note on my optimistic answer – is that I am concerned that policy has not kept pace with the challenges the technology presents. I think this has been a problem for a long time in the United States. Maybe it's a perennial problem with technologies, but this has really been a serious problem since the rise of the internet as the principle economic interface in the world.

And so that's one concern I do have. I'm optimistic about the technology, but concerned about the ability of policy and policymakers to keep up with the societal challenges that they present.

Catherine: Tom, this has been great as always. Thank you so much.

Tom: Thank you, Catherine.

Catherine: Thank you for listening to this episode of The Bid. Join us for the next episode of The Bid where we'll look at the top three technology megatrends that will shape the future. Make sure you subscribe to The Bid wherever you get your podcasts.

[00:00:00] Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

2022 was certainly a year to forget as far as investing goes. We saw record high inflation, market volatility, supply chain shocks, labor market shifts, and interest rate hikes.

So, as we turn the page in a new year, what does 2023 have in stock for investors to help answer that question today I welcome back a Bid regular BlackRock's CIO of US Fundamental Equities, Tony DiSpirito. Tony, welcome back and thank you for joining us on The Bid.

[00:00:37] Tony: Oscar, thanks for having me. I look forward to our discussion today.

<<THEME MUSIC>>

[00:00:41] Oscar: Well, great! Let's start with the fact that 2022 was a tough year for stocks. It was the worst year since the global financial crisis back in, in 2008. But if that weren't enough, it was also a bad year for bonds. So, investors suffered both in their stock portfolio and their bond portfolio. So, you know, you've been in an investor for a while. This was an unusual year. What takeaways do you have from 2022 and maybe help us look ahead to 2023?

[00:01:06] Tony: Sure. Yeah. As you point out, I think what was most unique about it was the fact that both stocks and bonds were down a lot, and that really makes it historically unique. We haven't seen anything like that in a really long time. When I think about the lessons learned from 2022, I think the biggest lesson is valuations matter. And that's true for both stocks and bonds. On the downside, high rich valuations are risk. Certainly, growth investors felt that. And on the other side, low valuations can provide a margin of safety, and that's why value did so well on a relative basis. When I look forward for 2023, I think valuations are much more normalized, today than they were a year ago. And so, I really think there's an opportunity for, barbell both value and growth in investor portfolios.

One thing that dominated the headlines last year was inflation, what the Federal Reserve was doing in terms of increasing interest rates to try and combat that higher inflation should we expect more of that in 2023? Or where do you think we are in that cycle of inflation and the Fed dominating the headlines?

I definitely think inflation is peaked, for the cycle. The Fed has done a lot of heavy lifting. We've had the steepest series of rate increases in the last 40 years, not to mention, add in quantitative tightening there. So, the fed's done a lot, and when you think about inflation, the components, goods, housing, core services, definitely goods and housing that has rolled over. Core services will be a little bit more sticky. but I see that coming down as well, just more slowly. But when you think about long-term, there's still the long-term drivers of inflation are still there, so I don't think we're going to go back to those ultra-low levels of inflation that we saw post global financial crisis over the last decade, we'll likely see something a little bit higher.

[00:03:01] Tony: And whether that's because of de-globalization and reshoring or just demographics, the aging of our societies globally or decarbonization, all these forces are going to put a little bit of pressure under inflation. So, I see it coming down cyclically, but I see long-term there's being some structural drivers that'll make it higher than what we're used to.

[00:03:20] Oscar: Right, so inflation is peaked, I think is what you said, but it's going to settle at levels, at least, maybe the percentage increases in inflation will be still higher than what we grew accustomed to for much of the last 20 or 30 years.

[00:03:32] Tony: Exactly. That's exactly what I would expect.

[00:03:34] Oscar: And another word that, maybe wasn't so much dominant last year, but started to appear more as the year went on and now here in 2023 is the word recession.

And are we in one? is it coming? How do you think about, the recession and maybe the impact on the stock market?

[00:03:48] Tony: Yeah. So, our colleagues in the BlackRock Investment Institute are fond of saying this is a recession foretold. And I do think this is the most predicted recession that I've ever seen, certainly, in my career. And, when you think about the telltale symptoms of a looming recession, they're there, Fed tightening for example, in 10 of the last 13 Fed tightenings have result.

In a recession, we see the yield curve, it's inverted. That's a classic predictor of a recession. and then, if you look at, fed activity, it happens with long invariable lags, the Investment Institute sort of sees that peaking, those effects peaking in the third quarter of this year. And then I would add, in terms of consumption trends, if you think about what happened with consumers, they saved a lot of money during the pandemic. A combination of greater government aid plus, there were fewer things to spend on that meant consumers built up their balance sheets, they built up saving.

Well, they're now working off those savings. And that's stimulative in the short run. But this can't go on forever and very likely we're going to start to see that slow as the year progresses. So, I do think there's a high likelihood of recession. That said, it's important to keep in mind the size, the depth, and the duration. I don't think this is going to be a big, bad recession. Muscle memory leads you back to 2008. I don't think this looks anything like 2008. 2008 was a, once in an eighty, once in a hundred-

year kind of event. I don't see those kinds of excesses, so I would expect something much more mild and moderate.

and therefore, the impact on earnings and the impact on the stock market should be more modest as well.

[00:05:23] Oscar: And I was going to actually ask about company earnings. You painted a little bit more cautionary tale around the economy, but acknowledging you don't think it'll be as deep as what we saw during the financial crisis, but now the next impact is what does it do to earnings? I don't think company earnings have suffered really just yet. Is that coming? and how do you then think about that when you're a stock market investor?

[00:05:43] Tony: Yeah, so I, I think in terms of earnings, the outlook is more dicey. Certainly, post Covid, we had some really robust series of earnings growth that's not going to repeat. and since the back half of last year, we've started to see earnings estimates trickle down. There's probably still some more to go. So, I don't see a lot of beta from the market, but I do see a lot of opportunity for us as stock pickers to really look for companies where maybe recession's already priced in, for example. And you could actually have upside once the reality sets in, you actually could see stock prices rise. I think there are also some companies where their earnings power is going to prove to be more resilient. And it's not priced in. I think that's also an opportunity. So, I do see whether it's because of dispersion and earnings estimates or dispersion valuations, real opportunities, for stock pickers over the next 12 months.

Is there such a thing as a recession-proof portfolio? I don't know, that might be a bit of a holy grail, but I imagine maybe something that, that you get asked about now or you will get asked if we do see a recession. Presumably it doesn't mean abandon the stock market altogether.

[00:06:47] Oscar: Where do you, try and find those pockets of resiliency, maybe to use the word you used?

[00:06:50] Tony: Yeah, I think resiliency is the right word. There's no equity portfolio that's recession proof. If you want recession proof, you should be invested in treasuries. That said, to your point, you can certainly make your equity portfolio more recession resilient. In the portfolios I run my largest sector overweight is healthcare. I think it's an attractive sector from a long-term growth point of view. historically, the earnings in the healthcare sector have proven to be very recession resilient. I see no reason why that won't happen in the next recession. And then I look at valuations, and here's the trick. Many of those more resilient sectors have been bid up in price, whether it's staples or utilities, et cetera.

Whereas healthcare, on average, healthcare is trading at a below market multiple. And so, it doesn't mean just buy the sector, wholesale, but what it tells me is there's a lot of opportunity. It's a fertile ground for stock pickers.

you started to talk about sectors and healthcare as an area to look for opportunity in a softer economy. Can we talk about energy, which, as bad as the market was last year, globally we talked about not only in stocks, but in bonds. Energy was this bright spot. So, do you think energy continues to outperform in a year like 2023?

[00:08:04] Tony: I think it can, I do think energy stocks are still attractive it comes down to supply and demand. Demand is still quite strong, particularly in the near term as we see China reopen, that's going to be a driver of positive demand. That's means higher oil prices. On the flip side, supply has been extremely constrained Energy companies went through a deep recession back in 2014 and they have been constrained on investment in, new discoveries, investments in new developments.

That means higher oil prices, so you combine the supply and the demand pitcher together, the outlook is actually pretty good for energy. I do think there's a lot of opportunity again for stock picking. One of the big dislocations that we're seeing is between US integrateds and European integrateds.

They both trade at low multiples, but the European integrateds are trading at half the multiples of the US integrateds, despite having fairly similar business models. I think that's a real opportunity.

We were actually talking a little bit before we kicked off here. you were sharing some viewpoints geographically. I know a lot of your focus is in the US, but just since you mentioned European integrated oil companies seeming more attractive than the us, is there a geographic lens that you would put on the stock market in terms of rank order where you see better opportunities or are they all in the US or are there some markets outside the US that are starting to look more appealing?

[00:09:25] Tony: I do see opportunities globally. I think the US what's great about the US is one, we have some of the best companies in the world. So, when you think about quality of business, US wins hands down. Also, in terms of earnings resiliency, it's easier for us companies to adopt to a slow, demand environment or recession. That's just the way it works in the US. Those are the two positives I see for the US in terms of international stocks. they have valuations in their favor. The US is the most expensive market. And so, from a valuation point of view, that's where I see opportunities outside the US. And it's just a tradeoff quality versus valuations.

[00:10:02] Oscar: Got it. So maybe let's go back to sectors for a second. You talked about healthcare, you talked about energy. Technology, you, you said this at the very beginning, growth as a style of investing lagged last year, technology was at the forefront of that. So again, we're going into 2023, how do you see the technology in those more growth-oriented sectors doing?

[00:10:20] Tony: Yeah, so there was a big valuation derating in 2022. In fact, to the point now, when you look at valuations for growth stocks broadly, certainly including technology, those valuations, those relative multiples are now back to historical averages. I don't think that there's a lot of valuation risk left, in growth stocks are in technology. So, then it really comes down to the earnings growth. Now demand for parts of tech is a little bit light, corporations are pulling back. A lot of CEOs, CFOs are worried about a potential recession that causes them to be a little bit more constrained when it comes to spending on technology. So, we are seeing a little bit of demand softening.

That said, we're seeing companies with very resilient business models. We're seeing, know, if you look at cost cutting tech is the area where we're seeing the most cost cutting and. an industry or a sector where there is, for lack of a better word, a lot of fat. I think that you'll see the earnings power hold up pretty well.

So, I do think technology, investments can be really good for 2023. In fact, I run value portfolios, and I mentioned that healthcare is our largest overweight Tech is our second largest overweight. I think that really tells you where valuations have and it goes back to what you said at the beginning,

valuations matter. It seemed like last year, the headlines were also dominated by events that were going on at a very macro level. The war between Russia and Ukraine, the Fed tightening, very macroeconomic type events. And you've mentioned a couple times, if you look at individual companies, there's opportunities, can you remember an environment that was either similar to this or is this a unique environment where what you're seeing at the company level is more interesting and, being missed by the headlines that tend to be more dominated by what's going on just from a policy and a geopolitical perspective?

[00:12:07] Tony: I think we saw peak macro in 2022. And that doesn't mean the macro's not going to be important. It is. But I think we're going to see much more emphasis placed on individual stock picking, much more emphasis placed on what's happening to this company. How is this company, this particular company, dealing with a slowdown in the economy, does it have pricing power? In 2022 with inflation, every company had pricing power effectively. That's the definition of inflation. In 2023 I think pricing power is going to be more selective. A company's ability to respond to a slow demand environment, all this tells me selectivity is going to be key. and that's where stock picking comes in.

Uh, So

[00:12:45] Oscar: lastly, Tony, with a New Year comes resolutions for 2023. If you were to give investors an investment related resolution for 2023, what would it be?

[00:12:54] Tony: When you ask that question, I immediately think of an ex-colleague of mine who had a sign on his desk. Patience equals profits I think that's great wisdom, for any investor, particularly in a time like now where volatility's high. When volatility's high investors tend to get more shortsighted, and that's a mistake.

[00:13:13] Oscar: Investors of all stripes, whether you're an asset allocator or a stock picker, I think investors in general do better when they take that long-term patient perspective. That's a great resolution. Patience equals profits is, is the line that hopefully people will remember. Tony, thanks again for, joining us on the bid.

Thank you, Oscar. My pleasure. Thanks for listening to this episode of The Bid. On our next episode of The Bid, Tom Donilon joins us to debrief on Davos and the year ahead. In terms of geopolitics, make sure you subscribe to the bid wherever you get your podcasts.

Anne Ackerley: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Anne Ackerley Head of BlackRock's Retirement Group.

In this final episode of our retirement mini-series and Gargi Chaudhuri Head of iShares Investment Strategy and Markets Coverage sits down at the Retirement Savings Summit with BlackRock's Matt Soifer, Head of Distribution for BlackRock's Retirement Group, to discuss what’s happening in markets, the road ahead, and the impact on retirement investors.

Matt Soifer: My name's Matt Soifer. I lead distribution for Black Rock Retirement Group and I'm thrilled to be joined here with Gargi. Gargi is one of our, absolute leading experts in the firm on capital markets. So, look, Gargi, I've got a couple, main objectives for this session, one want to talk about markets, where we're headed. But would love to talk about, the kind of tie together between markets and the impact on the end investor. But at the end of the day, the portfolio, it's owned by people. And those people, they're all in different places when it comes to this retirement journey. So, let's start with the macro environment, because 2022 couldn't be more different than 2021. Economically very different, geopolitically very different. And look, for me personally, I feel the undertone of uncertainty was there in 2021.

But it was super easy to just look the other way because markets were doing incredibly well. Fast forward a little bit, we’re not where we were before. So why don't we just start with your thoughts on just the current market regime and then I think we can peel this back a little bit more from there.

Gargi Chaudhuri: Hi everyone. It's good to be here. Matt, to your point, this hasn't happened since the 1970s, so it's a new regime for many people. The one thing that we are very thoughtful about is what opportunities are being created right now, and we'll talk a little bit more about that. But first of all, let's talk about this regime.

So, number one, we have inflation globally that has not been at these levels for 40 years in the US but in Europe, in the UK we haven't seen these levels. On the back of that, we have central banks that will do what it takes to wipe out or at least try to wipe out that inflation.

As a result of that, and perhaps purposefully, what the central banks want is to bring down demand, because that's the only way that these rising prices that we are all experiencing, whether you're signing a

new lease or whether you're getting a latte, you're experiencing that price inflation in a way to wipe that out what the central bank wants to do is bring down demand. That's really what they're telling us and what they've been telling us for this entire year, and that leads to lower growth outcomes.

And lastly, the geopolitics are interesting. So, it's not only about, Europe and Russia and Ukraine, of course, but it's also about China and Taiwan So, all of that means that we're in this new regime where perhaps what we've thought about in the past where every single dip in the equity market needs to be bought doesn't apply anymore. But I will also say, because I'm a pretty glass half full kind of person, that it's creating some incredible opportunities, especially in the bond markets. I actually think there might be some more pain ahead because of the macro regime that we are in but it's getting us to a place where a lot of the excesses are being taken out.

The fact that we lived in a world where high yield bonds were trading 4% was not normal. The fact that European Central Bank had rates at minus 40 basis points for a decade was not normal. I think this normalcy is good and it creates opportunity.

Matt Soifer: Excellent. If we're going to talk about end investors, I feel like we have to talk about inflation Now this is something that probably hasn't been, so acute. People haven't had to really address it in my lifetime, average inflation, 2.2%. but we know how problematic inflation could be. And if you're in a situation, let's say someone has a $500,000 portfolio, 2% inflation, low returns, boom, a third of the portfolio's gone in 20 years quite easily.

And so now we're staring at 8%, much higher hurdle. And if you're someone who's approaching retirement or in retirement, you're living off of a fixed income. inflation is massively corrosive. There was a recent survey by Schwab. They found that 79% of participants reported changing their savings and their spending habits due to inflation's pretty high number. And then on our own read on retirement survey, 87% of workers are worried about inflation. What I found really interesting was 40% of them said they had a strong understanding of the impact inflation has on their ability to save and to spend. So, 40% to me though, that's a pretty good number. So, I want to get your take on what's driving inflation, how that might be changing, and maybe get your candid impression of is this going to be a little bit more bumpy?

Gargi Chaudhuri: Ok, so, every single aspect of your life is impacted by inflation. end investors may not know the ins and outs of inflation, but they're definitely feeling it. No matter what you're doing. When you wake up in the morning, okay, you're going to the subway that's gone up, you're getting coffee, that's gone up, if you're going for a movie that's gone up. And I think it is important to think about, okay, so what's the future? Not just inflation till the end of this year, but really over18 months and then five years after that.

So, let's talk about why inflation moved so significantly higher and why it became so concerning to the central banks this year as opposed to last year, where obviously they called it transitory, , which was not right.

It's very easy to say that inflation was entirely driven by the war and the impact on food and energy, but that's not really true, right? So, we look at the headline inflation, which is a basket that all of us have which is everything that we spend, but that includes things that we can touch and feel -goods- and things that we consume - services. This is a mainly service based economy. So, services are a broader part of the basket. When we think about our own lives, we spend more on things like rent and housing than we spend perhaps on clothes. So similarly, the basket for a consumer, for the economy as a whole is more on things that you spend more money on.

Gargi Chaudhuri: And then there's this concept of core inflation, which takes out the impact of the more volatile like food prices, energy, price- things of that nature. So, core inflation has actually been moving higher and in 2021 we could say that it was these one-off things. The economy reopened, all of us rushed to go on holidays, hotel prices went up, airline prices went up. If you tried to rent a car last year for summer holidays, it was insane, right? So, you could blame it on one off things last year. But this

year you really can't. So, this is really the crux of the problem for the Fed, where for the sake of their own credibility, bring it back down closer to that 2% level, which is their target.

Now, this is something I want to stress on. The Fed targets 2%. Why is it this random number? Why is it 2%? Because at zero, which is where Japan has been historically, and Europe used to be, you get used to prices going down, so you don't spend, and we never want to be in an economy where people don't spend, that's bad for growth. And 3% or 4%, it's too corrosive for your take home pay. So, 2% seems to be that number that the Fed and other central banks could live with. Unfortunately, now we're nowhere near 2%.

The Fed will have some tools such as raising interest rates that forces demand lower. So already we are seeing that we are seeing house prices and housing demand coming lower because of mortgage prices. But they don't have the tools to control the supply side. If people are not able to participate in the labor market, if food and energy prices remain high, if there is a chip shortage a lack of availability to get components that you need to make a car, all of those things are not what the Fed can help with.

And this idea that they can bring the inflation back to 2% feels unlikely. I think inflation will come down, but I don't think no matter how high the Fed takes their funds rate to, I don't think they're going to be able to bring it back below 2%. The trade off, of course, will be that we'll go into a deep and crushing recession, which also they won't want to tolerate. So, it, it does put them in a hard place, and I think they'll eventually realize that there's two sides of their mandate. There is the inflation side, but there's also growth in the labor market. And they'll be willing to perhaps live with, 2.5% not 5.5%.

Matt Soifer: So, can we talk a little bit about housing? When we were considering people are going into retirement, their biggest expenditure is going to be housing unless people actually own their homes and a lot of them won't. So, whether you have a mortgage or whether you're renting, you've got the Fed raising rates, it's certainly hurting the real estate market. Do we get in this cycle though, where people start to rent more because they can't afford to buy a home, rental prices really start to move up quickly. And then, I think people would like to be able to access the home equity. if you own your home and that's an important piece of potential cash flow for people that are approaching retirement. So maybe just some views on what you think is going to happen in the housing market?

Gargi Chaudhuri: This is important, not just because of what the housing market represents to all of us in terms of our ability to live somewhere because we all have to live somewhere. But what it means for wealth generation, but also because of the role that it plays in inflation.

I talked about how inflation, is broken down into goods and services, a huge part of inflation. So, if housing continues to go up, the Fed has to perversely continue to raise rates. So, let's talk about how this housing market different from, and similar to our most recent housing experience, and I think this is a bias that we all have, right? When we think about an experience, we anchor to recency bias. So right now, when we think housing, we're thinking 2007 and crisis. So, the one thing I'll say is that if you look at the number of floating rates, so number of people that own their homes, but have a 30-year mortgage versus interest rate that will float higher that are going to be impacted by higher mortgage rates. It's a much lower number. It's about 10% of outstanding mortgages. So, while housing is going to slow down and has slowed down already, it won't have the same impact on the broad US economy that we saw in 2007 because it's such fewer people, at least in the US, where a 30-year mortgage fixed rate is a concept. A lot of people have fixed mortgages. About 90% of the mortgages are fixed. So that's one.

I think you bring up a very important point about renting. Obviously housing affordability has become really challenged because interest rates have gone up but housing prices haven't declined yet -as much as we expect to see them decline. Year over year housing is still actually increasing. And part of that is because of the, just the demographics. A lot of people are moving to that, 30 to 35 age bracket, and that is where you form your own household. Perhaps used to live with roommates and now you're going to get your own place. So, there's a demand. And because housing has remained so unaffordable, people have not been able to, or will continue to not be able to own housing, which does put pressure, you're right, it does make rental the only option.

So, when we look at what's happening to rental prices in some of the forward-looking indicators, they are beginning to fall. They haven't fallen as much as you would have normally expected in a slowing economy because of this dynamic where people have to live somewhere, and homes are not as affordable as they used to be, just buying a home is not as affordable. The demand doesn't go away. If you're forming your own household, you have to go somewhere.

Housing market slowdown is coming, but think about, a single digit growth in housing prices or just flat growth. We're not talking about a 40% declining housing prices because the organic demand is quite high, but it is not going to permeate to the US economy because of the makeup of the housing market, which is very different, and standards are much more stringent.

Matt Soifer: So, I want to go back to something I said in the beginning, people, they're all in different places on this retirement journey, so when you're young, you're going for growth, you're investing in risk assets, namely stocks, and then when you get ready to retire, you're starting to de-risk, obviously more into bonds. So, let's start with bonds first, Bonds have been phenomenal ballast for portfolios. this year, like you said, putting up double digit losses close to stocks but there's some potential silver lining in this, yields are up. There's actual yield to talk about. What's your take on what's happening in the bond markets, and do you think, bonds are going to be able to deliver on retirement income in a meaningful way?

Gargi Chaudhuri: Yeah, I think there has never been a more exciting time, or at least in my lifetime, to talk about bonds. Yes, the experience has been horrible, and I recognize how hard it has been to have your portfolio in stocks and bonds, expect bonds to be that diversifier and not have that experience. But also, what we are getting now is if you're in one-to-three-year investment grade credit, the highest quality credit out there, where again, default rates are not going to pick up meaningfully because this isn't going to be a 2008 type recession. This is going to be a very Fed led recession, not a balance sheet recession., I think earning about 6% in investment grade in the front end, taking no interest rate risk whatsoever, very little interest rate risk, about two years of interest rate, risk, and earning close to 6% coupon that you can clip the fixed part of fixed income and actually even the income part are both very attractive right now. Ability to earn that coupon, clip that 6%, I don't even think you have to be thinking about retirement.

So, whether or not you are close to retirement, or just starting your investment journey if you're out of college or your children are out of college, looking at bonds is absolutely essential. That's one of the best things that's happened, there's been a lot of horrible things this year, but the opportunity set that it has led to, especially in fixed income is absolutely wonderful for every generation, certainly for retirees, but I would say even someone that's not thinking about retirement yet.

Matt Soifer: Want to get your take on stocks?

Gargi Chaudhuri: So, I was looking at the number of, over 5% rallies that we've had on the S&P 500 this year there's been about five of those, and three of them have been over 7%. And if you look back at the last 20, 30 years, the average return on the S&P was 7%, so if you're feeling older and more tired, it's because the markets have made you feel that way. Honestly with what I have said so far in terms of, the Fed, I think we could still see some trouble periods ahead; I think earnings need to still come down a little bit. we're probably going to have some delayed impacts from the rising dollar on earnings. So, there are a couple of things that I think can still push equities lower. However, if you are thinking about the next, 5, 10, 20 years, if you look at S&P earnings and a PE ratio, that was 22 and now we've re-rated down to about 16.5. Still not cheap, but very fair. I think this has created an opportunity for those that are a little bit longer term investors, and especially when you look at some of the growthier parts of the market anything that's more interest sensitive. If you look at growth sectors, which have obviously been hit much more this year possibly can continue for another few quarters. But again, finding value in some of those pockets if you are a longer term investor, I feel very optimistic about the opportunity set that we are getting as a result of some of the repricing that had to be forced by the Fed to take place.

Matt Soifer: So I probably lean a little bit half empty, so can we talk a little bit about the big R, recession, not retirement. There are huge portions of our population that have never experienced a recession before it's like a unicorn, they've never seen it. if you graduated in 2009, you're starting to roll towards 35 years old, you felt maybe some turbulence, but you haven't felt a full-blown recession, but if you're approaching retirement or you're in retirement, you’ve seen a lot of them, what do you think it's going to be like or feel like this time?

Gargi Chaudhuri: Yeah, the beauty about this recession, if I can say that, given my half full status, glass wise, the beauty of this recession it is foretold. This one is very Fed driven.

I'm going to give it a 90% chance that It's not going to be as protracted and deep. It's probably likely to be a little bit shallower because again, this is forced by the Fed. I also think that it's going to be shallower, and I think that some of the tools that we've had in the past where we were at zero Fed funds rate, and then we had to do quantitative easing, or we were very close to zero and had to move to zero and then do QE. Some of those tools might be there, but we're also at a much better starting point. So, if, and when, we move to 5% on Fed funds, which is where I think we're going to get to, they need not even get back to zero. I think the number of tools that they have in their toolkit is amazing.

Last time they only got to about that level before they had to cut to zero in the previous cycle 2017 to 2020. I don't think that we should fear it as much as we feared other recessions. We've already seen much of the damage, not all of the damage, in the equity markets, and I think that bonds or fixed income will come back as a ballast when you do find yourself in recession.

Matt Soifer: Okay, we will wrap it here. Thank you, Gargi. Thank you.

Anne Ackerley: Thanks for listening to this episode of The Bid and this retirement mini-series. On the next episode of The Bid. Tom Donilon, a Bid guest favorite, will give us his views on the year ahead with a geopolitical outlook.

Make sure you subscribe to The Bid wherever you get your podcasts

Yemi Rose: We need to get comfortable with uncomfortable conversations, we need to say, if what we're offering is not having the effect that we would like, let's change it, let's get as much information as we can about the folks that we're trying to serve and let the data lead us.

Anne Ackerley: Welcome to The Bid, where we break down what's happening in the market and explore the forces changing the economy and finance. I'm your host Anne Ackerley Head of BlackRock's Retirement group.

This is episode two of three of our retirement mini-series and you were about to hear a panel conversation from our recent retirement savings summit entitled An Equitable Approach to Retirement.

As I mentioned in the first episode of this mini-series, everyone should have the ability to retire with dignity regardless of race, gender or ethnicity. And during this panel event, I spoke with three people who are at the forefront of changing the retirement space and are actively seeking to bridge the gap of racial and gender equity. We talked about various disparities facing people as they plan for retirement and the strategies that are being explored in this space.

Anne Ackerley: I know we all hear a lot about diversity, equity, and inclusion, but I don't know that it's necessarily been a focus of workplace retirement plans and, financial wellness plans.

Look, I think we all know that there is a significant gender and racial wealth and retirement gap in the United States, and some of the reasons, we know are wage gaps. We know it's whether somebody has access to a plan. We know it could be from unpaid caregiving. But actually today we're going to focus more on workers who probably have access to a workplace plan or a financial wellness plan or something adjacent, and we're going to drill in on whether women and people of color use them differently or do they use them less and do they not reap all the benefits? And I'm going to be provocative because I think we all know that today our employee bases are becoming much more diverse. And so I think it's critical

that we understand the diversity of our plan participants and the implications that this might have for how they plan and save and ultimately, maybe we should posit, that we need to rethink some of our approaches, whether it's in plan design, whether it's in communications, maybe it is new benefits, I don't know.

But how do we make sure that we have equitable outcomes for everyone within our workplace? and so with that sort of as the introduction, I am super excited about this panel. It's an important topic and we've got three experts who are grappling with this and doing something about it, they're really moving the needle on trying to make things more equitable. But let me briefly introduce. Karen Andres, who's been in the retirement space her whole career, is the project director of Retirement Savings Initiative at the Aspen Institute Financial Security Program, where she works to close access and policy gaps.

And then we have Yemi Rose, the CEO and founder of OfColor with its digital wellness platform of color, supports workers of color with FinTech saving and budgeting. Yemi, you've spent about two decades, I think, at the intersection of financial services and financial communications, previously at Pru (Prudential) and BlackRock. And then Holly Verdeyen is here from Mercer, where she leads the US Defined Contribution OCIO group, as well as the financial wellness business at Mercer. And you work very closely with clients on all things retirement.

Thank you for being here. So, let's dive in. I think to start, it's important to understand whether there are disparities in what we see in retirement savings before we could even start to think about what solutions could be. So, what do we know? And Yemi, I'm going to start off with you because I know you have some data on this and then we'll go to Karen and Holly and just what do we know today?

Yemi Rose: So great question and thank you for having me. So look, I guess a good place to start would be the just general information of the racial wealth gap, right?

So, we know that there's a 10:1 racial wealth gap in terms of the amount of wealth held by white Americans and specifically black Americans. And we know there's a 7:1 racial wealth gap, in terms of the disparity between white Americans and the Latino community. You go a step below that, and you start to focus on retirement savings and retirement readiness, and you see that, sans social security, there is a 7:1 savings gap between black Americans and white Americans when it comes to retirement savings. And that's, about a 5:1 gap when it comes to the Latinx community. So, this has serious ripple effects. The financial fragility especially that people of color and workers of color face in this country manifests itself in a number of ways.

If, for example, people of color when they're changing jobs, which by the way, we, will do a little bit more frequently because it's an opportunity to get that little 20 to 30% bump, you'll see that there's leakage there. We're much less likely to have that plan roll over to an IRA. We're more likely to cash that out. You'll also see in terms of savings rates, right on a monthly basis, folks of color save about 25% less a month. And a lot of that has to do with Its root is in the financial fragility that comes from the racial wealth gap but there's competition for dollars. There is access to different plans, right? So, there's an access issue when there's not an access issue as we see. if you look at the public sector, there's a lot more access there. You see an improvement, but you still see lower savings numbers. I would challenge the notion that we've done a great job on the accumulation front.

Yemi Rose: I think it has worked really well for some people. And the tools and the practices that we've put in place work, if you are probably starting at the same point, but it's really key and important to note that for a lot of folks of color in this country, you're trying to reverse. a lot of people say 400 years, but you're talking about decades and decades at least since civil rights movement of laws that have made it prohibitive and social constructs that have made it prohibitive for people of color to generate wealth.

Karen Andres: Our work on the retirement saving system at the Aspen Institute comes from a place of deep optimism about the system. And I found myself nodding with this, agreeing. Yes, we have built this incredible thing, even if its birth was somewhat accidental, but what, $10.4 trillion in wealth serving

millions and millions of American workers and it's the second largest source of household wealth, right after home equity, so I think we are optimistic about what the system is capable of. Also, we are not going to close the racial wealth gap, the gender wealth gap, the geographic wealth gaps, the generational wealth gaps, right? There's a number of wealth gaps that we're up against. We're not going to close those gaps without this. So, I think there's fundamentally a level of optimism. I don't need to repeat the stats that Yemi shared, but I will say that I was looking at the survey of consumer finances last night in preparation, and I actually brought up my notes cause I want to make sure I get it right.

But for working age families who have balances in retirement plans, the median white family has $50,000 saved compared to black or Latino families who have $20,000 saved. That's the median, not the average, the average is much higher skewed by these folks who've been participating and contributing for a long time.

How do we feel about $50,000 for the white family and of course $20,000 for the black or Latino family? But I think that there's a lot of work to do. I'll also say that if you dig into the Bureau of Labor Statistics data, you'll find that there are 24 million American workers who have access to a plan at work but aren't saving at all -aren't contributing. And we'll get into a little bit later what that means, but I think understanding who those folks are and what's driving their decision to either opt out, or not opt in, if they're having opt-in plan, I think will be really important to getting some of these numbers up over time.

Anne Ackerley: Great. Holly, anything you want to add to set the stage?

Holly Verdeyen: Yeah, I'm going to reference, a report that Mercer put out last year called Stepping Up For Equity, and the report was really designed to help employers address some career health and retirement savings disparities with their employee populations. The report really agreed with some of the things that my esteemed panelists just referenced. So, you know what Karen said, of course, the defined contribution savings plan is a major source of wealth for many Americans, but it is subject to all of the same forces that are driving broader wealth inequality.

And all the statistics that Yemi mentioned around lack of access for people of color, lack of savings, lack of accumulation because of those things. And also, it found that, people of color tend to invest more conservatively than their white counterparts. So, there's a lot there, but I'm going to just take this in a little bit different direction, Anne, and that is, the behavior of companies when it comes to, diversity, equity, inclusion with their defined contribution programs.

So the report found that a company's understanding the utilization of their people of color, when it comes to their retirement savings plans and their financial wellness programs is really important. Employers are missing a big opportunity to leverage data that they either have or have access to, to really understand some of those behaviors.

So just to give you a couple statistics. 90% of employers in this survey failed to track the investment behavior of people by race and ethnicity. 88% of companies failed to track savings behavior by race or ethnicity, and then 80% of companies failed to target or customize their financial wellness programs to people of color. And so we just think that, employers can really start digging into the disparities through the data that they have to start casting their plan design decisions through the lens of diversity, equity, and inclusion.

Yemi Rose: If I can add this. The benefits world is generally said, okay, we don't see color, we're not going to see race. But the result of that is that you're not seeing the disparate outcomes that are rooted in race. Race is the biggest predictor of wealth in this country.

I'm on stage right now. I'm, I think it's fair to say that, if you were describing me, you'd say he's that just a black man at stage. Right? And I own that and it's my racial identity is a big part of who I am. And all that

is beautiful and negative that comes with that in this country. I take that with me, it follows me, my FICO score, it follows me in all of these things.

So when we talk about personalization, we need to get comfortable with uncomfortable conversations, we need to say, okay, if what we're offering is not having the effect that we would like, let's change it, let's leverage our employee resource groups that already coalesce around race, let's have conversations, let's get as much information as we can about the folks that we're trying to serve and let the data lead us. Math is math, right? So it doesn't have an opinion. if the data is telling you that you have a subset of employees that have a problem and that are struggling, let's lean into that data and help them just as we would, new parents that need our support.

Karen Andres: Not everyone in the company, gets that benefit, but we recognize that new parents need childcare support and so we offer it. So let's lean in. I'll add one more data point that is adjacent to retirement savings, but I think deeply relevant. if we're talking about some disparities, I think emergency savings is retirement adjacent. Recently at an event where Anne and I were a few weeks ago, it was provocatively suggested, at our Aspen leadership forum on retirement savings that maybe what we should be automatically enrolling people into is actually emergency savings first with retirement savings as the sidecar. But to this point, 36% of black workers have no emergency savings. 28% of Latino workers have no emergency savings as compared to 24% of white households. everyone needs emergency savings. We should get all of those down to zero, but you can see that there is a disproportionate effect on households of color for all the reasons Yemi mentioned. That also matters for not only participation but cash out on the backside. At job change,

Yemi Rose: Two thirds of all hardship withdrawals come from black employees. Two thirds. Fact, those are numbers, it's the data is what the data is two-thirds. So, and sometimes it's to pay for, medical expenses. Medical expenses, right, when they have an HSA.

Holly Verdeyen: So, if I'm reading the minds of people in the room, I would bet that, at least some of you're thinking like, that's great guys, talk about the data, I don't have the data. My record keeper doesn't collect that data. We don't have that data in our HR systems I have concerns about having that data, but there are solutions underway, so we're going to talk about some of them as we go through the panel, but one step that people can do now is just encourage. Employees to self-identify in your HR systems. That's one step we can all be doing right now.

Karen Andres: I'll just jump right in. in pursuit of a more inclusive and effective retirement saving system, of course, part of what we need to do beyond the retirement saving system as it currently exists is expand access to the 57 million American workers who do not have access, right. And within plans there is a huge opportunity to improve outcomes. The challenge from a public good perspective, a public policy perspective, and a leadership perspective, is that the analysis that Holly is talking about is happening in very small pockets. Which is exciting.

It's exciting that some employers are starting to say, wow, it actually really matters that I know. How are my employees? Opting in or opting out? Are they auto escalating? What does the investment lineup look like? What are they selecting? Hardship, withdrawals, loans, and cash out among other things. And how does that vary by race, gender, age, marital status, income all of these demographic factors that right now live in different systems, usually within an employer. And so we have been partnering with, our friends at Morningstar and DCIIA to recruit a coalition of the willing of employers who are stepping up to say, Hey, we will connect those data systems and contribute our data on an anonymous basis to basically aid in the public understanding of what do we need to do from a plan design perspective.

What can we do? What are the levers that we have within our control that we can, or we can change some of those outcomes? What are the benefits that we may need to add that are adjacent, whether it's emergency savings, whether it's, student loan debt support. a very important one for issues of racial equity in particular and move in time to a set of or sort of action recommendations. So we at the moment have, I think hundreds of thousands of participants in the database we're lined up to have, millions by the

end of the year based on the pipeline. But I'll just say that we would be very interested in talking to any plan sponsor who is eager to step up.

And I'll just, the last thing I'll say is that, when we talk to, to plan sponsors who are really interested in this, there are two things of driving their interest. One is Morningstar has been leading their CEO Kunal Kapoor is deeply committed to this and has directed his team to generate a terrific customized readout, a custom plan analysis for free to any of the plan sponsors who participate. And I'll say that I think what gets our benefits and HR friends excited is that this is a way for the benefits pillar of a company to really make good on a lot of the DEI commitments, that have, have been made rightfully so over, over the last few years. So we are very interested in chatting with folks who are interested.

Anne Ackerley: We did want to end on what's the one thing, anybody in this room could do, coming out of this.

Yemi Rose: So collect the data, right? so talk to your people. start the conversation. You will find that something you probably perceived as being a really tricky, difficult, conversation filled with minefields will be a very welcome conversation for folks, frankly, in the DEI community that, all that's been offered to them is like diversity training for other folks, right? So you're talking to folks that will benefit directly from these initiatives, you'll find it to be very

Anne Ackerley: Do you want the last word, Karen?

Karen Andres: I'll take it. Y'all know what I want you to do, but I will say the Aspen Institute was founded in 1949, by business leaders actually in the wake of World War II, who said, what is the role of corporate leadership in a good society, in a free just and equitable society. I think there's an opportunity given the wealth gaps in this country that I believe are coming to define our society and unfortunately impact our democracy, I think that there's an opportunity for us to all put on our white hat as leaders and understand what we have our hands on the controls of, which is one of the most powerful wealth generating systems in this country and to treat it as such, right? This is not a benefit. This is part of a trillion-dollar wealth generating machine that if we stepped into that leadership moment, I think there's such good that we could do, not only for our participants and our plans, but also frankly for our society and our democracy, the country.

Anne Ackerley: Thank you guys.

Yemi Rose: Thank you.

Anne Ackerley: Thanks for listening to this episode of The Bid. Coming up on our final episode of the retirement mini-series, BlackRock's Gargi Chaudhuri, Head of iShares Investment Strategy and Markets Coverage sits down for a fireside conversation to take look ahead at the markets from the perspective of investing for retirement.

Make sure you subscribe to The Bid wherever you get your podcasts.

[00:00:00] Stephanie Linker: Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Stephanie Linker, head of Marketing for BlackRock’s Retirement Group

For the next three episodes of The Bid, we're exploring the state of the retirement investing landscape in a new market regime in this three-part retirement mini. We'll examine the need to retire old outlooks inequities in the retirement system, and how long-term investors might think about navigating the next market cycle today. In part one. I am pleased to welcome Ann Ackerley, Head of BlackRock's Retirement Group. We'll discuss why we're retiring old outlooks and look ahead to the next two episodes that Anne will host featuring recorded conversations from our recent Retirement Forum. 

 Anne, welcome. 

[00:01:13] Anne Ackerley: Thanks so much Stephanie. I'm delighted to be here and excited to be talking about retirement.

[00:01:18] Stephanie Linker: Anne, I'd love to have you start by outlining the economic landscape as it pertains to for retirement. This year's results from BlackRock's own Retirement drop in confidence for the first time since the start of the pandemic as we enter a new market regime, what does all mean the future of retirement? 

Anne Ackerley: Thanks, Stephanie, These are really uncertain times for people and there's so much market volatility, inflation, the war in the Ukraine, supply shocks. It's really unprecedented actually to have the stock market and the bond market both down in a year. In fact, it hasn't happened in the last 40 years. So, it's not surprising that people are feeling more uncertain. And in fact, we, did our seventh annual Read On Retirement Survey where we go out and we polled, about 3,000 savers, investors, retirees, and companies. And in fact, it showed that retirement confidence is down and it's down for the first time in a few years. 

The number one concern among people was inflation. Again, not surprising given what's happened in the market. but all of this uncertainty causes people to be concerned. And so, when we think about investing for retirement, we need to think about the fact that this often happens over decades and short-term market volatility while painful isn't going to be the whole story. We know the markets are going to recover. And so, when we look at people who are invested in their 401k, often they're defaulted into a target date. Now, a Target Date Fund is an age-based asset allocated fund, right? That changes as you get closer to retirement. We pioneered it at BlackRock back in 1993, but it keeps people in the right investments. 

[00:03:12] And what I would say to people if you’re in a target date fund, stay the course, as best you can. Now, not everybody can do that, but if you can, that's probably the right thing. There's an old adage, It's not about trying to time the markets, it's about time in the markets.

Stephanie Linker: We just concluded our 2022 Retirement Forum. The retirement group's first in-person event since before the pandemic. The next Bid episode will take an in-depth look at one of the key conversations we held there. Why do you think it was so important to bring people together and what were some of the issues that you wanted to address there? 

Anne Ackerley: You know, At BlackRock we believe every American should be able to retire with dignity on their own terms, and yet that has become really challenging for people. You think about the move from defined benefit to defined contribution, right? 

[00:04:00] People no longer have forms of guaranteed income. They're more on their own. We know people are living longer. Their money has to last longer, and even if they do everything right and they get to retirement, they have to figure out how to spend without outliving their savings. So, it's quite challenging, and then you throw in these markets. And so we wanted to bring people together to really, tackle some of these challenges.

I loved that it was in person after a few years of Zoom, and obviously Zoom was good during the pandemic, but getting people in a room, we really wanted to encourage conversation and encourage the generation of ideas. And it was fantastic to be back. And I believe when people from all different parts of the ecosystem come together, we can tackle the challenges that people are facing in retirement. 

[00:04:52] Stephanie Linker: You really can't replace that in-person energy.

Anne Ackerley: You can't.

[00:04:55] Stephanie Linker: The event sessions ranged in topic from longevity to policy and market outlook, to financial wellness, DEI and active investing. Were there any questions or comments that stood out or surprised you throughout the day? From the panelists or from the audience? 

[00:05:10] Anne Ackerley: So, I wouldn't say these surprised me, but maybe I would talk about two things.

The first was the issue of trust came up a lot. And our colleague Peter Fisher talks a lot about trust and mistrust and how it impacts what people do with their savings. And what we wanted to point out to, particularly the employer in the room is that while, trust in Government and some institutions are pretty low in the United States. Trust in employers is actually really high, and so we wanted to encourage the employers in the room to use that trust to provide more solutions for their employees and to provide more education. and to build upon that as a way to get people better prepared for retirement.

The second issue, which I think we're going to talk more about, was I wanted to focus on, diversity, equity, and inclusion. And I know we talk a lot about that in, in our company and in the world at large, what we wanted to do was focus on how does that impact the retirement system, and we wanted to take a look at who does the system work for, who isn't it working for, and maybe how do we start to address the gender and racial wealth gaps that we see. 

[00:06:28] Stephanie Linker: Looking ahead to the session, you moderated. And we'll listen to it in the next episode. It was titled An Equitable Approach to Retirement can you tell us more about what we mean by an equitable approach to retirement and how employers in particular should be thinking about it?

[00:06:42] Anne Ackerley: Sure, I have major passion for this. And again, I think we need to look at who the system works for and maybe who is left out of the system. And so, when you think about women, right? We know that when women get to retirement in the United States, their balances are often 30% less than men's. There are systemic reasons for right for that. There's the gender pay gap. Women often have gaps in employment for caregiving and yet their money has to last longer. When we look at people of color, we know that savings rates and savings differ. White Americans has seven times the savings of black Americans and it's five times for Latinx. 

And there's systemic issues, but there are, what we really wanted to do was say, if we look within the 401K system where people, we know people have access, are there differences within that system? And so, we wanted to call attention to the fact that how you design the plan may impact your employees differently. 

And this is sort of a new thing that we want to really encourage employers to look at. And I'll give you one example. And we have this great panel with so many people who are much more knowledgeable about this than I am, but how you design the match, right? the standard wisdom is stretch the match, get people to save more by saying, you don't get all the match until you're saving, let's say 8%. 

But really when you look at who's impacted by a change like that, it's often women and people of color because they can't quite meet those savings levels. And so, you think you're doing something good, and yet you're hurting the populations that maybe you don't want to hurt. And so, what we were trying to do on the panel is call attention to, even within 401k plans, you need to pay attention to your different populations and really think about how you're impacting people who may save and invest differently.

Stephanie Linker: The forum is filled with discussions like this that are critical about complex challenges that savers and retirees are facing today. These are not easy conversations. If you could sum up how you felt coming out of the forum in one or two words, what would you say?

[00:08:58] Anne Ackerley: Energized, Optimistic. I felt there was such great energy in the room and to bring people from all different parts of the ecosystem, right? No. No one company. Or institution is going to solve the retirement challenges that we face, right?

We need everybody working together to make it a better system. And I felt we had employers, advisors, consultants, nonprofits, people from the government, people from private industry, you all coming together to take on these challenges. And I know that we will make a difference.

Stephanie Linker: Anne, you mentioned we pioneered the target date fund 30 years ago, and since then the industry has had a huge focus on helping people save for retirement. But once they get to retirement, they still need to manage their spending throughout. How are we thinking about helping people with this complex problem? 

[00:09:53] Anne Ackerley: So, it is a complex problem, right? How to spend in retirement. The industry calls it de cumulation, but we really, it's just about, how do you spend so you don't outlive your money. 

Now, Bill Sharpe, the Nobel Laureate has called this the nastiest, toughest problem in finance and the reason why is there's so many unknowns, right? You don't know how long you're going to live. You don't know what your expenses might be, and you don't know what the market's going to do, and yet you retire, you've got a sum of money and you're on your own really to figure out how you would spend that down, and again, not outlive your money. So, it's complex.

So, the industry is turning its focus to that, to spending and trying to come up with strategies and solutions to help people you know, it used to be that many people had defined benefit plans. They got guaranteed income and they didn't have to worry about it. And so, a lot of people in the industry are trying to think, are there parts of the defined benefit that we can bring over to defined contribution? 

[00:10:54] And the notion is there some way to build in some guaranteed income within defined contribution so that people have more, certainty and one of the strategies or solutions that the industry is looking at, is trying to figure out, can you take the target date, which people know they're invested in, and somehow add a form of guaranteed income, maybe an annuity into it, in a way that's affordable, simple, and easy to use. And I think it's actually really exciting to watch the industry, innovate and try to make progress on making spending easier.

[00:11:31] Stephanie Linker: And we've learned, creating this sense of predictability is increasingly important, especially coming out of the pandemic. 

[00:11:37] Anne Ackerley: Oh my gosh, now everybody would love having some form of more certainty. And in fact, when we looked at the Read On Retirement Survey, we know that over 90% of employees and over 90% of employers want to find a way to bring guaranteed income into the 401k. 

Stephanie Linker: Absolutely. and maybe shifting gears a bit, but related, we've heard from employers that there's been increasing focus on financial wellness, especially over the last few years. What are we hearing from employers on the topic and how are we working with them?

[00:12:13] Anne Ackerley: I would say there were two main areas of focus. we talk a lot about retirement savings, but really what we know is that people can't save for the long. If they're not saving for the short term. And so really talking about how can we help people set up emergency savings, rainy day funds or sunny day funds, whatever you want to call it. 

The notion of people being able to have access to their money for emergencies. And then, once people get comfortable they have some amount for those emergencies. They can start thinking about the long term. And again, lots of participants in the industry are thinking, how to structure that. We had someone on the panel talk about making it part of payroll, right? Could be pretty easy. Put some money in your long-term, put some money in your short-term or having it be part of a sidecar to the 401k. You're making an investment. Some goes into short-term, some goes into long-term. So, I think that's a super exciting, evolution for the industry to people to be able to think about that.

The other focus was on student debt. We know just how many people, many Americans have large student debt, particularly our younger employees. The notion that they've got to pay off that student debt while still saving for retirement is quite daunting to them. And so again, there have been some solutions that have been suggested. Abbott Labs was the first to actually, get a ruling that said if somebody's paying off their student debt, the company can still contribute to the 401k. And I just absolutely love that as a solution to really help people who are burdened by student debt. So emergency savings, student debt education, all of that I think comes together to really try to help people have a lot more financial wellness. 

[00:14:04] Stephanie Linker: Absolutely. Anne, thank you for joining me today, and I'm looking forward to the next episodes in our retirement miniseries. 

[00:14:10] Anne Ackerley: Thanks so much, Stephanie.

[00:14:11] Stephanie Linker: On the next episode of The Bid, Anne will be in the hosting chair introducing a panel event she moderated from the Retirement Forum, featuring three leaders at the forefront of evolving the retirement space to one that is more inclusive, aiming to bridge gender and racial wealth gaps.

Make sure you subscribe to the bid wherever you get your podcasts.

MARK WIEDMAN: Welcome to The Bid miniseries, The Real Leaders of Net Zero, where we talk with CEOs about what they’re doing to move their companies and the world to net zero. I'm your host, Mark Wiedman.

In this episode, we’re moving from the land to the sea - to learn how Maersk, one of the largest shipping companies in the world, is leading the transformation of the shipping industry. We’ve talked to a lot of companies that are focused on bringing down their “scope 3” emissions (that’s emissions that come from the supply chain - like shipping, transporting the goods). And that’s where companies like Maersk come in. They’re working on making their ships greener and more efficient. Let’s hear about how they’re doing it.

Søren Skou has been the CEO of Maersk since 2016, and I am delighted that he is joining me from Maersk’s offices in Copenhagen. Soren, welcome.

SOREN SKOU: Thank you.

MARK WIEDMAN: Soren, let's start by talking about Maersk. What is Maersk?

SOREN SKOU: Maersk is a very big global shipping-- container shipping and container logistics company. We operate a global network of more than 700 ships. We are shipping around 12, 13 million containers around the world. It's about 15% to 16% of global trade. We are headquartered in Denmark, relatively small country. Only about half a percentage point of our business is actually involving Denmark. The rest is truly global. So the US is a huge market for us, China as well. We are present in 130 countries, and we cover many more than that and really play an important role in terms of enabling our customers to sell their goods in whatever market that is relevant for them around the world. We can get it there for relatively low cost. And also for those of our customers that buy stuff and resell it, we can enable them to buy from the most competitive suppliers and vendors around the world. That's really what we do.

MARK WIEDMAN: We're focused on decarbonization in this podcast series. Why is shipping and Maersk relevant?

SOREN SKOU: Well shipping is, of course, the most environmentally way of moving goods around. But because of the scale of global trade, we do actually make a lot of CO2. In the case of Maersk, we use 11, 12 million tons of fuel every year. So that's more or less the same as 80 to 90 million barrels of oil. And then on top of that, we have all of the landside operations. So we are quite substantial emitter of CO2 and therefore, we are clearly part of the problem. And we also want to be part of the solution.

MARK WIEDMAN: So let's dig in, however, to the efficiency of shipping. Because often people think well something's been shipped a long way it must have cost a lot of carbon relative to other transport mechanisms.

SOREN SKOU: Now clearly, if you're shipping a pair of sneakers from Vietnam to New York, then if you have to drive five miles in your car down to the mall to buy them, you'll use more CO2 doing that than it would have taken to ship them in a container ship all the way from Vietnam. And that's because of the size of the ships. The size of the whole global trade just means that the carbon emissions or the fuel use per single pair of shoes per unit of good is very, very low. Clearly, once we move to truck, it gets worse, even worse with airplanes. So the mode of shipping is a very environmentally good way of moving things around.

MARK WIEDMAN: So five miles of driving in my car to pick up the sneakers that you've shipped from Indonesia actually uses more carbon. Today, how do you power your ships?

SOREN SKOU: So today, we're using a lot of heavy fuel oil to propel the ship forward. It's the fuel oil, which is, if you will, the least refined product of a barrel of oil. Actually, we have to heat the fuel before we can put it in the engine. Otherwise, it won't ignite. So it is really heavy, heavy fuel oil. And it's quite efficient for large combustion engines. It's also quite cost effective. But of course, when you add up all the numbers, we still spent $8 or $9 billion a year on fuel. So it's a big, big part of what we do. But we have transitioned. We have started the transition already. And today-- this past quarter, we reached 3% of all of our containers being moved on biodiesel instead, so a carbon neutral fuel. That is, of course, a more expensive fuel for us, but a product that we are selling to our customers and that we see quite some uptick. And so the journey towards carbon neutrality has started for Maersk.

MARK WIEDMAN: Soren, why does decarbonization matter for you?

SOREN SKOU: Well first of all, it matters because we believe there is a global climate crisis. It's also very clear given that we burn 11 or 12 million tons of fuel that we are part of the problem. And we clearly also have to be part of the solution. Otherwise, nothing will change. We want to make a difference already this decade, and that's why we've started to develop carbon neutral products already that we can sell to our customers. But that's one side of the story. The other side of that story is, there's actually a customer demand out there for carbon neutral logistic services, shipping services. If we take our top 200 customers around the world, well that's pretty much any global brand that you can think of. It's pretty much any big retailer that you can think of, any big manufacturer of goods that you can think of, cars and so on. And more than 2/3 of our top 200 customers, they have themselves set science-based targets for how they want to become carbon neutral, many of them in 2050, some of them even before that. And most companies, they do have a large part of their emissions in so-called scope 3, so do our customers. And we are our customer's scope 3. They can only deliver on their commitments if we can provide them with carbon neutral products and services in the coming decades. So on the one hand, we know we are part of the problem. We want to be part of the solution. We believe there is a climate crisis. But on the other hand, there is also a market out there. There is a demand for carbon neutrality in products. So I think there's also a business opportunity there.

MARK WIEDMAN: So technology, let's talk about technology that you see changing your shipping. You've got 600 ships today. Over time, how is that shipping fleet going to change? What technologies are you bullish on and which ones do you think are actually unlikely to see the light of commercial production?

SOREN SKOU: So first of all, I won't spend much time on this. But of course, there's still a lot of energy efficiency to be held also in ships like in buildings. So since 2008, we have reduced the amount of fuel we use per container ship by more than 40%. We expect we can get that to 60% by the end of this decade.

MARK WIEDMAN: I just want to clarify. You've reduced not per container but per ship 40% to 60%?

SOREN SKOU: No. Per container we ship.

MARK WIEDMAN: Because you stack them really big and make the boats even bigger.

SOREN SKOU: Yeah, exactly, and employ any kind of energy saving technology we can think of on board the ships and also reduce speeds, which also help to lower the fuel bill. But going forward, at least for container shipping, we believe the answer is to burn-- instead of the heavy fuel we burn today, to burn a clean fuel. And the clean fuel to begin with it's biodiesel, but that probably will not be able to scale. There's a lot of competition.

MARK WIEDMAN: What's biodiesel?

SOREN SKOU: Biodiesel? So made from-- a fuel made from a biomass. In the U.S., you make them from corn. So basically the same stuff that you mix into your gasoline today. But that biodiesel-- that product, there's a lot of competition. It can also be used to be refined into aviation fuel and so on. So there are others that are willing to probably-- and are able to pay more than we are in the long term. So it's not a scalable solution. The next thing we will be moving to is using a green alcohol or green methanol to be precise, which we can also-- with some modifications, we can burn in a traditional combustion engine in a ship. And green methanol can be used with a starting point of renewable power, sun or wind, which we use to split water into-- water H2O into H2, so the hydrogen and the O on the side. And the hydrogen is relatively easy to reform to methanol and alcohol, which we can then burn onboard the ships. And that technology is well understood, but it needs to scale. And that's the path we're going down.

MARK WIEDMAN: So I think this is important just to capture. It starts with green hydrogen. All of what you're going to do beyond biodiesel starts with taking some form of renewable, non-carbon emitting electricity, splitting water, and getting hydrogen. And that's interesting because we're seeing in lots of other industries the use of hydrogen, whether it's a production of fertilizer or we're actually going to be powering fuel cells. So now you've got the hydrogen. Now how do you think about using that in your ships of the future?

SOREN SKOU: So in order to get it to become methanol, you actually have to add back CO2. And that, of course, in order for that to be green has to be from a biogenic source, so from biomass or from municipal waste or things like that. And then you make the methanol. I'm not a chemist, so I won't be able to explain all the details in this. But as I understand it, it's a fairly well understood and old technology to do that. But obviously, it will benefit from scaling so that we can get the cost down. The hydrogen, as you point out, can be used to a lot of things. And one of them-- one of the obvious things is it's also quite easy to reform into ammonia. And actually, there's a case also for using ammonia as a shipping fuel. When we get further towards the end of this decade, we expect that the engine manufacturers will be able to provide engines that can run on ammonia.

MARK WIEDMAN: There's at least three doors we can walk through you've just laid out. We could use the hydrogen itself. You could reform it into methanol or wood alcohol. Or you can turn it into ammonia. How do you think about those technologies and the pros and cons today?

SOREN SKOU: So for shipping, we're pretty sure that hydrogen in a fuel cell is not going to be a technology that's going to work any time soon for shipping for many reasons, including the fact that you have to keep the hydrogen under extreme low temperatures and so on. And all of that takes space on board a ship. Today, already here in 2022, we can buy ship engines that run on methanol. So this is really-- that's the go-to technology if you want to have an impact this decade. Towards the end of the decade, we expect to be able to use ammonia in the engines. And that's probably, in all likelihood, it's going to be cheaper way than methanol, in particular, because you don't have to worry about biogenic CO2. So maybe we'll transition to that fuel in the 2030s. But what I'm saying to my team all the time, we don't want to let perfect get in the way of good. So we're going to go ahead with what we know can work now. And if we have to pivot 10 years from now, then we'll pivot 10 years from now.

MARK WIEDMAN: Soren, my team teases me all the time because I quote Voltaire, don't let the best become the enemy of the good for that because let's get on with what we can do now.

MARK WIEDMAN: Have you ordered any vessels that will work with methanol?

SOREN SKOU: We have started already last year. So every ship that we build from now on will have the capability of using green methanol. Our total order is now up to 18 full-sized container ships. So we are building up the fleet. We'll have the first of them delivered-- first single ship next year. But from 2024 onwards, we will have that greenfield capability in a sizeable number of ships. And that's why I'm in a bit of a hurry to find fuel for these ships.

MARK WIEDMAN: Market opportunity there. Soren, how long does a container ship last?

SOREN SKOU: About 25 years.

MARK WIEDMAN: So the decisions you're making now and that the industry is making are actually going to drive the fuel usage for the next 25 years.

SOREN SKOU: I think so. I mean, obviously, this is one of the reasons for why people would like to wait for the perfect solution in ammonia and so on. But it may come at the end of the decade, but it may also not come at the end of the decade. It's not a trivial. There's some non-trivial safety issues to deal with.

MARK WIEDMAN: Ammonia is poisonous.

SOREN SKOU: I mean, it's super toxic. If you breathe it, you die. If you put it in the water, the fish die. So you have to really-- you really have to think very carefully about this. I mean, these are engineering problems. And they're also soluble. Lots of liquid ammonia is transported around in the world in gas carriers, so it can be solved. But as a fuel, those problems have not been solved.

MARK WIEDMAN: How do you think about scaling the production of fuels for your ships? You've talked about potentially getting involved really to catalyze activity. But for you, the constraint here is, if you don't have the fuel and you don't have the fuel in the right place, it's really difficult to move a ship around. So how are you thinking about stimulating that?

SOREN SKOU: The first thing we have done is, of course, try to create a market by ordering some ships. I mean, for a little while we had this chicken and egg situation that well there was nobody producing green fuels because no ships were actually using it. And there were no ships using green fuel because you couldn't get anything. But we took the leap and said, now we're going to order some ships to start create a market. But it's going to take more than that. We are willing to sign these offtake agreements. And then, of course, we are looking to see where are the most competitive places in the world to produce green fuel. And that's really where the renewable electricity is the cheapest to produce. So it's the countries that have a lot of sun or wind, and in best cases both, and then the countries where there's a good regulatory environment. And I have to say, what the US government has just done in the new acts around inflation, which is really about green hydrogen subsidies, has meant that the US is really becoming a very interesting destination for investments into production of green hydrogen. I mean, it's really massive what is going on. And I think a lot of this fuel has the potential to be produced in the US already today. I mean, places like Texas are pretty competitive when it comes to renewable power to begin with. And now we have this inflation limitation act on top to really help things along. But there are many other countries also where it's possible to produce, where it's very cost effective to produce renewable energy. About 2/3, as I understand it, of the cost of a ton of fuel is really the cost of the renewable power.

MARK WIEDMAN: Maersk and you have helped to lead not just your firm but the industry. Talk about what you've done with the industry.

SOREN SKOU: First of all, we set out as the first in our industry with a 2050 carbon neutrality target in 2018, at a time where we actually didn't have much clue on how we were going to deliver on that. And then what we have also done is that we established-- or actually our main shareholder, which is ultimately a foundation, has helped us fund a research institute here in Copenhagen that is actually doing a lot of technical research into the different fuel types, the different engine types. And that's one of the reasons for why we know that methanol is a good technical pathway for us. And we decided quite deliberately that we wanted to democratize that knowledge so that we could get the whole industry moving as quickly as possible. And this is the independent research institution. They're sharing their knowledge. There are lots of partners that have signed up and are contributing—engine manufacturers, shipping companies, oil companies, and so on. So there's really a body of knowledge there to figure out two things, the technical pathways for decarbonization of shipping, one. And two, the regulatory pathway. Because one thing is that we know how are we going to-- from a technical point of view-- can decarbonize. But we also need a way of making sure that there's an approximate level playing field around the world in this so that companies can compete in a fair way around decarbonization.

MARK WIEDMAN: What's the biggest uncertainty that you see in your own decarbonization path over the next 10 years?

SOREN SKOU: So right now, it is really about how we get the fuel, how we get enough of it, and how do we get it to scale in a way where we can see the extra prices coming down. Today, we have a large number of quite progressive customers that are willing to pay a premium for a carbon neutral product. But they are also-- all of them saying, look, this is not something we see ourselves doing forever. This is something we see ourselves doing while you guys figure out how you scale and get the cost down just as what has happened on wind and solar and so on. And I'm confident that we will also get there.

MARK WIEDMAN: What should the role of capital be in helping the transition for you, for the industry? Where can capital play a constructive role?

SOREN SKOU: Look, I think we have to understand that the scale-- that the task here is of a gigantic scale. I mean, today we have-- from a capital point of view, today we have a global energy system that is very much driven by the oil companies or integrated by the oil companies, right? They find the oil in the ground. They get it out off the ground. They put it into a pipeline into a refinery. And then the refinery delivers oil products that we can all consume in our cars or trucks or ships. We're talking about replacing that system. It takes billions or trillions actually to build out a new energy system. And they are, of course, even though we often talk about well there's plenty of capital out there, I mean, the scale of this is enormous. Secondly, a lot of this production will have to-- if it has to be cost efficient-- will have to happen in developing countries where you have the best conditions for solar or wind-- North Africa, Saudi, but, of course, also in the US. But there are some, if you will, considerations that capital also have to do. So I think there will be a huge role for capital to play in terms of getting some of these projects off the ground and in the early stage, being willing to invest in a project where the product that will come out of it will be higher priced than the product it's going to replace and therefore requires some leap of faith that this is actually going to work in the long term.

MARK WIEDMAN: Soren, last question. What do you think is the single most important thing that needs to happen to get the world to net zero?

SOREN SKOU: I mean, there are many things that need to happen. I think one of the really good things that is happening right now is that big business has really engaged in the last couple of years and really coming up with solutions, starting to invest real money in this agenda, and also starting to have some commercial strategies that are meaningful. Because this is not just about doing good, it is also about serving a market need that is out there. And we have to think about it in that context more than in the context of this is something I have to do because I have to save the planet. We really, really all have to think about this also as an opportunity. And I think that's quite well understood, if you will, in big business. I would like to see small and medium-sized enterprises embrace the agenda in the same way and dare to go out there and do these things. And I think we can move faster. Clearly, the populations around the world get it and certainly the younger parts of the generation-- people around the world see the risk of the climate crisis and wants to do something about it. And the politicians also broadly are moving in this direction. That is witnessed by the Inflation Reduction Act in the US and, of course, EU is big on this. And for a lot of developing countries, this is actually a huge opportunity. So I think probably the most important thing that can happen now is it's the small and medium-sized businesses also engage in the agenda.

MARK WIEDMAN: Soren Skou, thank you very much.

SOREN SKOU: Thank you. Thanks, Mark. Thanks for having me.

MARK WIEDMAN: Welcome to The Bid miniseries, the real leaders of net zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Wiedman.

Did you know that construction, buildings, are responsible for, wait for it, almost 40% of global CO2 emissions? That includes the emissions that come from processing the raw materials, think cement, think steel, and, even bigger, the emissions that come from operating and powering those buildings during their whole lifetime. So if you are in the business of building, how can you build greener?

Jan Jenisch, CEO of Holcim, a global leader in building materials, is working on that challenge. I got to visit Holcim's green cement plant in Switzerland to see firsthand how they are creating more sustainable building materials, how they're recycling materials to build more new from the old, how they're increasing building efficiency. After the tour was over, Jan and I sat down to chat more about Holcim and its plans for a net zero future.

MARK WIEDMAN: Jan, welcome to The Bid. Tell us about Holcim.

JAN JENISCH: Holcim is the largest building materials company in the world. Building materials are how we do houses, how we do infrastructure, how we do plants. Everything we use every day has to be built. And we come from originally cement, cementitious material. And now we’ve moved also in more sophisticated state-of-the-art applications, like roofing systems. And we make big inroads the last two years, and become one of the leaders globally.

JAN JENISCH: We have 70,000 employees and that needs a strong strategy to bind them all together and be successful.

MARK WIEDMAN: So let's talk about the basic chemistry about cement and concrete. How do carbon emissions happen?

JAN JENISCH: We have basically two sources. So for cement, one of our products with high carbon footprint, we have about 40% of that coming from the energy we are using to produce cement, which traditionally is fossil fuel based.

MARK WIEDMAN: To burn it hot.

JAN JENISCH: To burn it. And nowadays, of course, we go to renewables, we go to alternative fuels. And the other 60% comes from a chemical reaction when we transform the limestone into a cement stone. And that also needs to be decarbonized. So we are using alternative raw materials which are already decarbonized and to transform without this carbon emission.

MARK WIEDMAN: So I think this is critical for people to understand. Any concrete they see anywhere in the world, the very chemical reaction to make the concrete involved big carbon emissions. And the energy to heat it up, to actually create the process, itself takes lots of energy. Lots of carbon emissions. So how do you break that apart and bring down the carbon content?

JAN JENISCH: So I mean, absolutely, it's true for all building materials. You talk about glass, or steel, or plastics, they all have a relatively high carbon footprint. And concrete is the most used material after water, right? Because everything we do is such a fantastic building material for all the properties it has. So we have to use it also in the future, but decarbonize it. So how we going to do about it. So first of all, we need to use decarbonized raw materials to not have the chemical reaction. Then we have to use 100% alternative fuels and renewable energy to operate the plants. And then we have to also use alternative materials to use less virgin or fresh cement material. So we just are using, for example, construction demolition waste is one big source for us, where we are already the biggest recycler. And we use construction demolition waste as a raw material. But also to put straight away our new products.

MARK WIEDMAN: One of the points Bill Gates makes in his book on decarbonizing the economy is that the world, especially the poorer world, needs concrete for better living standards. So if we're going to have a better world for people to live in, better homes, that's durable and safe, how do we decarbonize something that inherently emits carbon when you make it?

JAN JENISCH: We decarbonize the process, and we decarbonize the materials we are using. It's possible. We have been on a nice tour in one of our plants today, and you can see how much different roadmaps we have in place to decarbonize. And we just launched, three years ago, our first green range of products, ECOPlanet for cement, ECOPact for concrete. And these products have the simple promise that the CO2 footprint is at least 30% reduced already, by applying the principles we discussed, alternative raw materials, alternative fuel, but also different minerals, and recycling into the final product.

MARK WIEDMAN: So you've launched a whole new range of branded products, which I think is new for you, having a consumer-oriented or architect-oriented brand.

JAN JENISCH: Absolutely. I had to convince my own people first to make this green range, and I'm glad we came to that decision because that gives us a whole new dimension for the customer. So suddenly, sustainability is a part of the buying process, is the buying criteria, and for us it's a unique selling proposition. So that gives us actually now a lot of space to engage with architects, with homeowners, because they are the ones who want sustainability to happen.

MARK WIEDMAN: So decarbonization, how does that relate to your business strategy?

JAN JENISCH: Oh, that's at the core of our strategy. Without decarbonization, you don't have a license to operate in the future. So we made it an opportunity, and we want to be the fastest-- lead in the sector of construction building to decarbonize totally Holcim, but also decarbonize the way we build and the way we live.

MARK WIEDMAN: Beyond using substitute materials as an additive, and also using some recycled concrete, what else can you do?

JAN JENISCH: Well, you have a whole range of different minerals you can use as a raw material. That can be waste material from factories, or waste from the cities. That can be construction demolition waste. Then we have a full range of alternative fuels. We are one of the biggest alternative fuels users in the world. So you get that from also from factories to municipal waste. And then finally, we have a whole range of minerals we can mix into the cement for the final mix to lower the actual cement content.

MARK WIEDMAN: So we can get the carbon content just using some basic substitutions. Now as we use your product, designing buildings, how can we actually change the carbon content of a building through design and how we build?

JAN JENISCH: So the materials is one thing, but we also have to build smarter. We have a huge demand to build more. And we have to do this much smarter and with less. So for example, today are building materials really used efficiently? In most cases, not. We build like two-dimensionals, right? When we make a ceiling or a floor at the moment, the whole thing has the same strength and thickness, all the way through even. You should only have that at the weakest spot, right? So we have to go into three-dimensional structures, for example. So with higher strength material, three-dimensional, and then we can reduce the materials being used.

MARK WIEDMAN: So what is a three-dimensional material? What do you mean by that?

JAN JENISCH: For example, 3D printing. We have done a showcase bridge, which is consisting of 52 elements 3D printed. And because 3D printing, you can then do it three-dimensional. And you only strengthen where you need to strengthen.

MARK WIEDMAN: So it's basically you're almost, through design, cutting away all the excess material?

JAN JENISCH: Absolutely.

MARK WIEDMAN: And that by itself, you've dramatically dropped the carbon content of a building.

JAN JENISCH: Absolutely. And that applies to a bridge, applies to a wall, or ceiling, or floor, where everything is just two-dimensional today, and we should make this a three-dimensional form piece, which is strengthened where strength is needed, and less material where the strength is not needed.

MARK WIEDMAN: In all this decarbonization of your actual building materials, do your costs rise? Hopefully, customers will pay more, but do your costs rise?

JAN JENISCH: Yeah, we have some. When you look at that recycling, that's actually very cost effective. Because we take waste in from other people. And we get paid to take that waste. And then we have a very smart way to recycle. So that's actually very profitable, when we look at the recycling. And we already made it a business. We have as of last year, we already recycled 6.6 million tons of construction demolition waste. That's more than 1,000 full truckloads every single day. So we make this already a volume business for us. And that's the task we have, right? Construction is huge volumes. So we have to scale up our supply chains to make that happen.

MARK WIEDMAN: So from your waste materials, even though you're in early days, 6 million tons of waste you're actually using to decarbonize, because it substitutes for something that would have created carbon, and people are paying you to take the waste away.

JAN JENISCH: Yeah, that's how it works. Now we have to be also realistic. So to decarbonize the first 20%, 30%, 40%, that is not an easy game, but that can be done very profitable, and maybe even at similar cost, than to decarbonize more. That then will cost us over proportion more money. So we have to make sure that the customer pays for it, or we have building norms or regulation requiring that type of material.

MARK WIEDMAN: We visited your quarry. Talk a bit about how you're automating your quarry.

JAN JENISCH: It runs 24/7. And we need to optimize it, not only to save costs, but also to make it a safe place to work. When you operate 24/7, you don't want to have a big workforce. You want to have automated processes. Now the quarry was an area which actually was very, until today, very manual, right? You have a lot of equipment, you need a lot of people to operate the equipment, and today, we visited a quarry where we have the first fleet of autonomous trucks, autonomous and electric trucks. And that's fabulous. And we are now testing that equipment this year. And it will run fully with the full fleet from beginning of next year.

MARK WIEDMAN: What I found amazing about visiting is that you're going to have a fleet of trucks. They're smaller than traditional trucks, because your labor costs are gone. Therefore, you can actually run them in smaller units. And when you put it all together with lower maintenance, and even though the trucks cost more than a small one with a driver, you're actually going to be reducing your costs and reducing your safety risks. Because quarries are extremely dangerous places. Where else do you see automation happening throughout your factories and your plants?

JAN JENISCH: So we take that alone. The quarry is still a big task. And then we have to also replace all the other equipment and make them optimized, and autonomous, and all electric. I think that's what we're trying to do over the next few years. We have also seen all our digitalization of the plant. So we are using now to observe the plant, we have drones, we have this electric robot dog, right?

MARK WIEDMAN: The Animal, the walking dog.

JAN JENISCH: The Animal. And what's great about all these things, it's also less risk for the people because they don't have to climb in any silo, or they don't have to climb up any chimney. And this equipment is collecting much more data. Because they register vibrations, noise, temperature. And we have now in a modern plant of ours, we have now this big data produced by all those sensoring. And that helps us to detect failure before failure happens, right? You can imagine with this big equipment, if one roller bearing bursts-- The roller bearing is little cost, but it destroys part of the equipment. And with all the sensors we have now, we can detect before it happens, because you have an increased vibration level, increased noise level, or temperature level, and actually you can replace parts before they break. So that's a big breakthrough. And we are now starting in all our factories to do this sensoring. So to measure every step for vibration, noise, temperature.

MARK WIEDMAN: With all this automation eliminating dangerous jobs, but eliminating jobs, how does your workforce react? And what do you think is the long-term social impact of this relentless digitization and automation?

JAN JENISCH: I think it's positive. Because when you see now the process we describe, I need more people in the lab, right? Because to take recycling material in and recycle, I have to make much more quality check of the incoming material, of the outgoing material. I have to operate all those drones, and the Animal, and the electric fleet, I need smart people. And I think that's a great job development. Because the workers we have now, that's the generation, but I think the next generation, they don't want to be necessarily a worker in the factory, but they would be interested to be a more sophisticated handler of all this digitalization. So I think it's a very positive development.

MARK WIEDMAN: I can certainly see how to attract a kind of talent that you might otherwise struggle to get. People who are actually really, they are engineers, or even like supervisors of machines. The recycling, and the circular economy. How do you see the main places where Holcim can actually drive business results by recycling?

JAN JENISCH: So I think last year we recycled more than 50 million tons of material, from alternative raw materials, alternative fuels, but also to this new mineral sources we are having. And we promised to double that to 100 million tons by 2030. And that's, for us, a great new dimension of the business. Because you can imagine, we talked about the demolition waste, I'm already taking back 1,000 truckloads a day, and we promised to-- not to double it, but bring it to 10 million tons by 2025. So basically then I'm at 1,700 trucks a day, and I have to make all that supply chain work. I have to be able to get the trucks in, I have to have the recycling station, I have to have different silos. Because you get different quantities of material out of the recycling. While demolition waste is fantastic, you can recycle 100%, no down cycle, you get different qualities depending on the input. So you have maybe a lower grade of recycling, then it goes into road works. You have a higher grade, it goes into concrete. And then you have the highest grade, you can even use back in the cement.

MARK WIEDMAN: Carbon capture. How are you thinking about it? How does it work?

JAN JENISCH: We have more than 30 projects around the globe for carbon capture. So for storage, or for usage. I think it's fantastic. We have piloting, where you're going to see the first plants of Holcim using carbon capture before 2030. It depends a bit on the legislation or the framework we have in each market.

One thing is important when we talk carbon capture is carbon capture comes at a cost, right? So you can calculate this will be 60 euros per ton of CO2, or 100, or so, or maybe in some cases, 200, where the framework is not so perfect. So one thing is key for me. I want to decarbonize as much as I can with all the initiatives we've talked about, because I want to actually capture as little CO2 as possible. Right? Then I will be the winner. So not just produce the way you produce, and then put a carbon capture on top, and take 100% of your current CO2. You better reduce that by 50%, and then you carbon capture.

MARK WIEDMAN: Emerging markets, poor countries, with low labor costs and generally lower ability to pay for building materials, how does decarbonization differ away from Zurich, which is a rather high cost location?

JAN JENISCH: Oh, that's a big unanswered question. I mean, we had the failure of the Paris Agreement. We have at the moment all this geopolitical tensions. So honestly, that's the big question. If we see now the big decarbonization plan we have in Europe. Now the US has picked up, surprisingly for many. So we're going to have decarbonization I think in both regions. If others will follow, that's the big question. You're still having big markets like India. They're still building coal plants. They are still building all sorts of carbon producing industries.

MARK WIEDMAN: So Jan, you run the world's number one buildings material manufacturer, and the number two recycler in the whole world. What do you think is the single most important thing that needs to happen to get the world to net zero?

JAN JENISCH: I think the biggest challenge we have are the geopolitical tensions we are seeing now everywhere, from the failed Paris Agreement, to the current missing world coalition against the war in the Ukraine, for example. And I think this will be our biggest challenge. If you cannot align, then you have Europe and North America with quite strong decarbonization paths, and then the rest of the world not following. That will not be the right solution.

MARK WIEDMAN: Jan, thanks very much for joining us.

JAN JENISCH: Thank you, Mark.

[00:00:00] Oscar Pulido: In 2022, the economy has experienced volatile and decelerating growth as well as high inflation, leading economists to believe that economic soft landings are unlikely to occur as central banks are set to over tighten policy. So what does 2023 have in store for investors?

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. 

The new regime of greater macro and market volatility is playing out as we [00:00:30] concluded in our mid-year outlook episode. And this does not seem set to change. Aging populations, geopolitical fragmentation and the net zero transition are long-term drivers that will constrain production capacity and keep us locked into this new regime over time. 

I'm pleased to welcome Wei Li BlackRock's, Global Chief Investment Strategist, and Vivek Paul Head of Portfolio Research and UK Chief Investment Strategist from the BlackRock Investment Institute. Today we'll look ahead to next. [00:01:00] And the lessons learned from 2022 that we carry into the new year as Investors Wei and Vivek, welcome. 

[00:01:07] Wei Li: Thanks for having us. 

[00:01:08] Vivek Paul: Hey, Oscar. Thanks for having us. 

<<THEME MUSIC>> 

[00:01:10] Oscar Pulido: Vivek. Perhaps let's, start with you. This has been to say the least, a very tumultuous year for the markets. so perhaps you can give us a highlight reel of 2022 and set the scene as we begin to talk about what to expect next year. 

Well, thanks Oscar. It's been an incredible year and I could try and list out all their huge features of it, but actually [00:01:30] I'm going to point to two. And the two big things I guess are just the sheer scale of moves in key asset classes across the year, the amount by which yields rose the amount by which equities have done various round trips, as the year's gone on. 

[00:01:44] Vivek Paul: But actually crucially and importantly, the fact that they've moved in the same direction. So if you think about a 60 40 portfolio that's been the sort of bedroom or the staple of investing for so long that's had a terrible performances here and actually thinking about that in particular, really isolates and [00:02:00] why this is a new market, a macro regime, the stuff that worked well in the course of the last 30 to 40 years isn't necessarily going to work well now.

So if I had to point to one thing that is defining this year and defining the era that we're about to enter, it's the idea that traditional 60:40 portfolio doesn't perform as well. And portfolio construction, which has been so crucial for so long, we think in this new environment is even more important. If you look back over the last sort of 30 or 40 years [00:02:30] actually, you've basically seen a joint rally, bull market in both equities and bonds at the same time, interest rates have come down. 

That's meant the equities have done really well, that's meant that fixed income was done really well. Now we're in an environment where they may not do really well at the same time, and I think that's really crucial as we look forward to the future. 

[00:02:48] Oscar Pulido: It's true. 2022 did feel like an inflection point, which I think is what you're touching on Vivek. And one of the other things that inflected this year seemed to be inflation. So Wei maybe, coming over to you when we think about [00:03:00] inflation in the US, the US just reported lower than expected inflation. In October, it was only 6.3%, which is kind of interesting because a year ago I think we would've thought of that as a high number. But do you think that inflation rates have peaked and do you think central banks will adjust their monetary policies, just yet? 

 The short answer is yes, but also how quickly inflation comes down is important as well when it comes to the calculus for central banks. Given base effects, [00:03:30] yes inflation will fall, but sequential inflation matters more. And here when we look at service inflation and wage pressure, they're still somewhat persistent. 

[00:03:40] Wei Li: So if you look at our forecast for inflation for the entirety of next year, we do see headline CPI in the US trending to 3% year on year by the end of next year. And this assumes some supply side recovery, not all the way back to pre-pandemic levels, but some [00:04:00] recovery nevertheless and similar level of inflation is our expectation in the Euro area. But we expect higher inflation in the UK finishing next year around 4.3% year on year. So implicit in this inflation forecast is our expectation that central banks will pause their aggressive rate hikes early next year because the focus, in our view, will shift from the [00:04:30] politics of inflation, which was driving this inflation fighting at all cost campaign in 2022. So the focus is going to shift from the politics of inflation to the economics of inflation as the damage from over tightening as the damage from fighting inflation at all costs becomes clear. Also, rounding out our expectation for the macro environment for next year, we are expecting a recession in the US of [00:05:00] about 1% fall in output first half of the year before rebounding. So, a shallow recession for the calendar year next year. And this is primarily generated by the Fed over tightening peak rate of around 5%, to be achieved early next year. And we also expect a Euro area and UK to hit recession actually this year in 2022 already. Again, more of a shallow recession rather than a deep one because we expect central banks [00:05:30] to pause. 

So essentially when you bring all of this together, we are forecasting a recession and higher inflation. But just to put that into perspective, this is not necessarily a bad outcome, Because the alternative could be worse, if the central banks do not pause the aggressive rate hikes, we could be looking at a deeper recession and higher unemployment rate than what we are forecasting. 

So bringing everything together next year could be a better year for markets than this year. 

[00:05:58] Oscar Pulido: Vivek. let's come back to [00:06:00] you and talk about labor markets and one of the things driving inflation that your colleague Alex Brazier has been talking about have been some of the constraints in the labor market feeding through to price pressure. So maybe you could talk a little bit about that and maybe also what impact is the aging population having on economies and how might we expect to see markets respond to this change over? 

[00:06:22] Vivek Paul: Yeah, I mean that's a key contributor as to why inflation is ultimately going to settle at greater rates than we've been used to for the last [00:06:30] decade or so. An increasing proportion of the adult population is over the age of 64. And if you cast your mind back to before the Covid pandemic or around about that time, we were saying a lot about the idea how certain key structural themes have been turbocharged. 

I think this is an example of that, the idea that there was this demographic shift that was occurring anyway, but it's had a rocket lit under it. We've had this acceleration by Covid. So those who were nearing retirement age effectively have had this catalyst to not come back [00:07:00] into the labor force. There were plenty of other examples of this, but I think this is one of those lasting legacies of that period. And in terms of how markets react I'm going to go beyond just this notion of demographics and more broadly to this idea of the fact that there are these supply constraints dominating now. 

This really is the heart as to why this is a different regime. This is the idea that it's not just the aging populations that cause inflation to settle at a higher rate, it's also the idea of the new geopolitical [00:07:30] environment that we're in and the journey towards net zero. These things are structural trends, which mean inflation will settle higher in different ways all about the supplier production dynamic. What that means, and why this is a new regime, is when those dynamics are causing the onset of inflation rather than explicitly demand dynamics, you have policy making, be that from central bankers or be that from governments, tougher than it was before because you have this environment where growth and [00:08:00] inflation aren't necessarily stable at the same time. Those policy makers have to choose one rather than the other. So coming to what this means for markets then, in that environment where you either stabilize growth or you stabilize inflation, you don't do both at the same time, It means that macro market volatility gets greater. 

[00:08:18] Vivek Paul: It means that effectively what investors do is they demand a greater compensation for bearing investment risk. So think about equity it means 'I want to have a greater amount of equity risk premium'. Think about, bonds, it means 'I want to have a [00:08:30] greater term premium or the compensation for holding longer dated securities'. 

So the amount we are demanding as investors for holding these key assets is going up, and that means that it's a more challenging time for long run returns all else equal. It also though, if I can round this out, means that building portfolios is more difficult in this environment because the macro environment is more volatile, and one of those things that we've relied upon for the last 30 to 40 years,, that negative correlation in general between government bonds and [00:09:00] between equity, that might be more challenged now. And so if you imagine you're building portfolios, you've had this kind of diversification benefit that's occurred for so long, maybe we don't get that as much anymore. So markets will react in a couple of ways, it means we'll demand a greater compensation for holding assets, but it also means how we put those assets together it's tougher to do, it's tougher to get right and it matters more now than it did.

[00:09:21] Oscar Pulido: And certainly one of the things that's contributed to the volatility Vivek, that you've touched on is what's been going on in the geopolitical arena. And so Wei maybe [00:09:30] coming back, over to you, early in 2022. we saw the beginnings of the war in Ukraine, that exacerbated a global energy crisis. It has caused, food supply chain issues, and we now see many countries pursuing self-sufficiency in sectors such as energy, food, and technology as a result of this. So how do you see these issues playing out on a global scale? 

[00:09:50] Wei Li: That's a great question. I believe that we have entered a new world order, like Vivek talked about, this macro framing of how we have seen the end of [00:10:00] the great moderation while as it relates to geopolitics we have also seen the end of the great geopolitical moderation tool, and this is the most fraught environment that we have seen in the world post World War. We have seen geopolitical, moderation, globalization and global coordination being supplanted by fragmentation into competing blocks with, actually if you look around the world, a large number of, hotspot. [00:10:30] So our current base case is that, a ceasefire in the tragic war in Ukraine seems unlikely, at this juncture and also strategic confrontation, competition between the US and China has only intensified. The US is actively trying to restrict China's access to high end technology and that is going to underpin, multiple themes when it comes to investing. But more broadly, if you look at how in the past Economies economics were [00:11:00] very much driving geopolitics, were very much driving, how geopolitical events could unfold. 

We're now in an environment where actually economics are being driven by geopolitical development, which is why geopolitical fragmentation is a permanent fixture and that warrants a more permanent risk premium from a portfolio construction perspective. So when we think about the new investment playbook in the context of new regime, we need to really think about [00:11:30] how to permanently factor in this geopolitical fragmentation theme that is here to

[00:11:35] Oscar Pulido: Vivek in the mid-year outlook, you talked about the net zero transition. So perhaps you could just remind everybody when we talk about net zero, what exactly do we mean by that? And how have the last six months shaped your views on this net zero transition? Is it still occurring or has anything, fundamentally changed with respect to that theme? 

[00:11:55] Vivek Paul: Great question. So at a high level, what this means is that economies [00:12:00] repositioning themselves, the functioning of the economy into one whereby we are moving to, an environment where we basically pollute less. We have an idea where it's net zero carbon emissions. It's an idea where it's more sustainable footing for the global economy. That's the idea, and that's the drive that we'll be talking about in this forum and others for a period of time. it's a great question, Oscar is it all over now or do investors care as much about it as they did before? One can ask the question when you look at the price of traditional energy stocks over the [00:12:30] last couple of years and say, hang on, look how well they've done, maybe that means therefore that this is something that investors care less about, and we take the other side of that. We think it does matter. It matters just as much as it did before. 

If anything, that transition that underpinned a lot of these conversations in the first place, we think that's accelerating. So let me expand on, why I believe that and what that means in terms of thinking about of building portfolios. Since we last spoke best part of what, six months ago or so now we've had the passage of the Inflation Reduction [00:13:00] Act bill in the United States with some 400 billion or so of investment and incentives in sustainable infrastructure, supply chains, et cetera. We've had key policy in Europe. We've had, the Repower EU, we've had Europe more broadly deliberately moving away from reliance on supply of energy from Russia. And actually part of the reason why we think that this transition is accelerated is because this has increasingly become something that is interlinked with national security, This is, increasingly [00:13:30] not just about if you like, doing the right thing for the planet, of course that's always crucial, but from the perspective of policy makers of politicians, it's about protecting the supply of energy that their citizens have access to, which is why we think ultimately the events of this year are an accelerating force. And we're recording this in the aftermath of the world again, focusing on the transition around climate more broadly in the aftermath COP 27. Now we've said before that this is transformational for asset allocation we can't ignore it. And the [00:14:00] simple parallel I'd give here is imagine if we said to investors who are out there the idea of look inflation's really difficult to predict, so we're going to build you a portfolio and ignore all that inflation because you know it's really tough. 

 Here's your inflation agnostic portfolio. We would rightly get laughed out of time trying to develop something like that. you have to have a view, And that is exactly the same when it comes to the climate transition. We have to have a view, we need to build a portfolio that takes into account the uncertainties around that. 

[00:14:27] Vivek Paul: But you can't ignore this. And this summer we [00:14:30] again re-looked at some of the key assumptions underpinning our long run risk and return estimates that govern how we build portfolios. And one of the things around that was this notion that markets aren't fully priced for the transition, So the idea that all of the dynamics we're going to see as economies shifting in the direction of net zero, not all of those are in the market price. And the long and the short of it is that we actually are even firmer of that view. Our latest research suggests that what we thought might be in the market price that has started [00:15:00] to to shift the market price in a statistically significant way. It wasn't always the case that before, but in the last few years we've seen evidence of this being statistically significant and over and above that the amount that we originally anticipated as the overall effect might be an underestimate. 

So you put it all together, of course in the last six to nine months there have been other things that have dominated markets. That doesn't mean that the net zero transition is any less important, and our view is actually that that transition is likely accelerated by what [00:15:30] we've seen and that actually maybe the overall size of the impact related to market prices might be greater than we originally anticipated. 

[00:15:36] Oscar Pulido: I can't help, but as I listen to both of you, I'll go back to using the term an inflection point, which is what 2022 really feels like, you talk about the acceleration in the net zero transition. Wei you talked about geopolitical coordination becoming geopolitical fragmentation, you've mentioned volatility in markets how that also, had a step change higher. So Wei, I'm looking back at the [00:16:00] last time we spoke and you mentioned that the old playbook can't be relied upon anymore and therefore we need a new playbook. So what is that new playbook and are there any new opportunities in this new regime to consider? 

[00:16:11] Wei Li: What a wonderful question to wrap everything up Oscar. so this idea of applying a new playbook in order to navigate a new regime absolutely is the right way to think about it. And while we know what is in the old playbook, right? like strategies like automatically by the dip and also a [00:16:30] mean revert frame when it comes to investing and also automatically hide in long duration bonds in a recession. So these are the things that we have to think through a lot more carefully and reevaluate and not take for granted as we think about navigating this new regime. So what is in the new playbook? 

I would start by saying for the first time in our year ahead outlook, we're not putting forward a set of investment views that are expected to work for the [00:17:00] entirety of the year. We recognize that the new environment, calls for more frequent adjustment to portfolios. So if you think about what are the characteristics of the new regime we're talking about higher macro volatility, higher market volatility. So dynamically assessing and understanding what's in the price is going to allow us to pivot between the different portfolio contours defined by different risk, budget and risk [00:17:30] appetites. So just to give an example of what's priced in, recently S&P 500 hit 4,000, price level that by our analysis represents, a peak rate of 5% and then starting to look at rate cuts next year. So looking at this components, that would be coherent with, a 4,000 price level for S&P 500, we would lean against rate cuts starting next year, and we will certainly, lean against 7% of years [00:18:00] growth for the US Equity market in the context of the upcoming recession. 

So when we look at and analyze what's in the price systematically, it would appear that markets are getting ahead of itself, pricing in a Fed pause and also earnings rebound, which is why we see further volatility and adjustment ahead. One more thing I would say, in this new playbook, is that this is perhaps an environment where markets could move ahead [00:18:30] before all the bad news are in the price, because we're talking about an environment where recession is foretold because it's going to be caused by central banks over tightening. 

[00:18:39] Wei Li: So from a risk positioning and portfolio construction perspective, there are other levers that we can pull that can allow us to pivot between the different portfolio count tools very nimbly. So currently underpinning our investment view is an implicit risk of starting point, but that could turn risk [00:19:00] on quickly as well. Again, just, going to show that we have to be a lot more nimble and expecting more frequent portfolio adjustment in the new regime. But as we wait to pull the trigger to perhaps become more positive on risk assets, we want to be paid waiting. We want to be paid by sitting in high quality credit and short end of the government bond market. 

And meanwhile, we're also finding some interesting opportunities in agency mortgages as well so given the spread [00:19:30] widening out and some isolation from the underlying housing market. So again, being nimble and being patient, but being ready to, put a trigger is what would, characterize the new playbook in a new regime. 

[00:19:42] Oscar Pulido: Well, it sounds like 2023 is going to have a lot in store for us. Thank you both for your insights on 2022 and we look forward to, your insights helping us navigate these waters in 2023. Thanks for being on The Bid with us. 

[00:19:56] Wei Li: Thanks for having us. 

[00:19:57] Vivek Paul: Thanks Oscar.

[00:00:00] Dr. Andrew Lo: It all began about 15 years ago, where over a seven year period, six people close to me all died of cancer. I realized that finance actually plays a pretty big role in cancer drug development, I started thinking about applying all of the tools of financial analysis, to thinking about how to change the drug development process to reduce the risks, increase the expected reward, and therefore bring more money into the space to get more drugs developed.

[00:00:20] Sara Shores: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Sarah Shores, the Global Head of Strategic Product Management for the Portfolio Management Group at BlackRock. Today we're discussing the rapidly evolving space of biomedicine.

A convergence of breakthroughs in biology, medicine, and technology is driving the industry to an inflection point and opening up the door to a wealth of new discoveries. But funding new drug development is challenging. Trials are expensive, complex, and lengthy, and only a fraction of the therapeutics that go into clinical trials will ever come out the other side approved and effective for their intended use.

In fact, a 2021 joint paper by Bio Pharma Intelligence and QLS Advisors estimates the likelihood a drug is approved is less than 10%. Today I'm joined by Dr. Andrew, economist, professor and author who is working to accelerate the pace of change in biomedicine. Dr. Lo is currently a professor at the MIT Sloan School of Management and co-founder and chairman of QLS Advisors, a life sciences and technology advisory firm.

Andrew, welcome to The Bid.

[00:01:34] Dr. Andrew Lo: Thank you for having me..

[00:01:35] Sara Shores: Andrew, your title is Doctor, but you're not a medical doctor... in fact, you've spent most of your career studying financial markets. Tell us more about your journey from traditional finance to healthcare finance.

[00:01:45] Dr. Andrew Lo: Well, it was a long journey and it began about 15 years ago where over a seven year period, six people close to me all died of cancer. And during that period of time, I felt that somehow knowing me was carcinogenic. And then I realized, of course, that we all deal with that situation.

Everybody's been touched by cancer either directly or indirectly. And I realized at the time, A cancer patient needs a financial economist about as much as a fish needs a 401k plan, we have nothing to contribute to their wellbeing. And that really frustrated me. So I began to learn more about the disease and about how to treat it and then I realized that finance actually plays a pretty big role in cancer drug development, sometimes too big a role in some cases, driving the scientific agendas rather than vice versa. And so that's when I started thinking about applying all of the tools of financial analysis, things like portfolio theory, diversification, risk management, securitization, and so on, to thinking about how to change the drug development process to reduce the risks, increase the expected reward, and therefore bring more money into the space to get more drugs developed. Part of that process involved applying quantitative tools, things like machine learning. And other financial analysis. And, , over the course of the last few years, a number of my former students and I realized that these tools actually had quite a lot of commercial relevance.

So we created a company called QLS Advisors, Quantitative Life Sciences, because we wanted to take our tools for quantitative finance and apply them to biomedical context. And through that process began to help biotech and pharma C. Manage their pipeline assets more effectively, thereby lowering the cost of capital, increasing the throughput of all of these various different pipelines, and ultimately getting more therapies to patients faster and ultimately cheaper.

[00:03:40] Sara Shores: It sounds like your work is bringing the concepts of financial economics to solving both the diversification and risk management aspects of the challenge. Also in helping to identify where you might have the most successful potential trials, so you're really trying to solve both sides of the equation.

[00:03:59] Dr. Andrew Lo: That's right, and given that I'm from MIT, I've got to talk about that equation. So let me back up and talk about what I call the fundamental theorem of healthcare finance. And it's an equation! And the equation looks something like this. I wish I had a whiteboard here. On the left hand side of the equation is the expected value of a particular experimental drug candidate. On the right hand side are just three terms. One is the present value of all cash flows of drug sales. If that drug is approved, multiplied by the probability of. minus the cost of developing that drug. So pretty simple equation as far as these things go,

Financial economists can tell you a lot about the present value of future cash flows. Financial economists can tell you a lot about the costs, but the one thing that financial economists have nothing to say about is the probability of success. So really the key parameter in valuing healthcare assets is really that probability, what is the likelihood that a clinical trial will succeed or fail?

Historically, it's been estimated using just past successes and failures, or it's been estimated by asking experts in the field, so-called key opinion leaders. We call them KOLs for short, and asking their opinion about the likelihood that a trial will succeed or fail. But at the end of the. It's really a mathematical and statistical question, and that's where the tools of data science can come in.

Using hundreds of thousands of historical clinical trial outcomes, we can now estimate fairly precisely what the probability of success is, and using the tools of modern data science that gives us an edge that's very hard to come by, even with the very best K. Because it's just difficult to translate qualitative senses of whether the science is good or bad into quantitative estimates of outcomes.

[00:06:01] Sara Shores: Andrew, all that sounds fascinating and also quite complicated. What is the benefit to taking this more data driven? Thinking about medical innovation.

[00:06:11] Dr. Andrew Lo: Well, you're right, it is more complicated. In fact, I think it was Albert Einstein who said that a theory should be as simple as possible, but no simpler, and I'm afraid that in this case it requires this level of complexity. Because drug development is complex. And so the main benefit of using these tools is we get more accurate estimates of these probabilities of success, which means that we're going to make better financial decisions as investors in which trials to fund in which trials not to fund.

And as a result, more money will come into the space because investors now understand what the risks are. But one of the key benefits, is the fact that with a quantitative approach, as with other kinds of technologies, we can now scale much more quickly and broadly than before.

So rather than relying on a few key opinion leaders for these forecasts, we can now do this on an automated basis, on a nightly basis across hundreds of thousands of clinical trials across thousands of drug companies. And we can analyze this data at speeds that are impossible for humans to do. So, like much of technology, what it does is it gives us the ability to automate and scale in ways that we could not before.

[00:07:26] Sara Shores: I understand why looking at a lot of different trials would be helpful. Why is speed important? I would think that the pace of change was relatively slow. What's changing on a day to day basis?

[00:07:36] Dr. Andrew Lo: Well, that's a great point. It turns out that everything is changing on a daily basis in biomedicine. You know, for example, if an Alzheimer's drug gets developed and approved by the FDA, that's great news, and it may take years for that to happen, and then on one day you get the approval. Literally the very next day, what you'll see is implications for all other drugs that have been developed in the Alzheimer's space.

That doesn't happen over weeks or months. It happens almost instantaneously, and it happens across tens of companies in ways that humans can't possibly keep track of at the same speed as computers. So taking into account all of these various different features and being able to implement them on a regular basis across the various different companies and trials and events is something that machines were perfectly designed to do.

[00:08:27] Sara Shores: I recently watched a 2014 TED talk given by NYU professor Roger Stein, where he estimated there are roughly 20 year’s worth of clinical trials for potentially life-saving drugs that are sitting on the shelf untested. That's a heck of a bottleneck.

Is that still reflective of what you see today? And if so, why is it so hard to get things funded and approved?

[00:08:51] Dr. Andrew Lo: I think it's actually even worse today. Are so many ideas that scientists and clinicians have, but not nearly enough money to be able to take those ideas into practice. And part of the reason, in fact, the vast majority of the reasons that these drugs don't get developed is risk. And that's something that financial economists know something about.

[00:09:38] Sara Shores: So what role can finance and investors play in helping to solve that funding problem?

[00:09:44] Dr. Andrew Lo: Well, financial economists and financial practitioners have been managing risk for centuries using the financial system, and so in the same way that we manage risk in a portfolio of stocks and bonds, we can actually manage the risk of a portfolio of biomedical assets. Things like portfolio theory, securitization, diversification and other kinds of risk management tools actually can change the way drugs are developed by altering the risk reward trade off.

[00:10:22] Sara Shores: So all your experience in traditional finance, you're now bringing to bear to help solving that problem for, for medical breakthroughs. What aspects of the research and risk taking are unique to the medical field?

[00:10:34] Dr. Andrew Lo:. There are three aspects of drug development that make it unique. Virtually no other industry faces all three issues. And then a big fourth one that I'll talk about in a minute. . The three issues have to do with the fact that drug development requires large amounts of capital, typically one or two orders of magnitude more capital than in other industries just to get proof of concept. We're looking at something like 10 to a hundred million dollars of investment, and that's not even all the way to clinical approval. That's really just to see whether or not the drug has some kind of efficacy for a given disease. Second, it typically takes five to 15. Of clinical testing.

So before you ever get the chance to approve a drug, you have to go through the process of phase one, phase two, phase three, clinical trials, and third, we're talking about very low success rates in the area of cancer, which I know best. The probability of success of developing a cancer drug historically is a little less than 5%.

That's a greater than 95% failure. And so all three of these characteristics makes it really difficult to invest in drug development from beginning to end. And the final whammy that makes us really tough is the fact that we're dealing with life and death issues. So there's an ethical dimension to drug development that doesn't exist for many other industries.

And so taken together, that creates huge challenges that really need to be addressed in ways that are different from what we've been doing over the course of the last few decades.

[00:12:10] Sara Shores: So it seems a miracle that anyone ever invests in drug development. Based upon some of those challenges, how can we try to mitigate those risks?

[00:12:19] Dr. Andrew Lo: Well, this is where finance comes in. If you take a look at the kinds of risks that drug developers are facing, you can really translate almost all of those risks with the possible exception of the ethical dimension. You can translate almost all of those risks into financial risk taking, and that's where financial engineering comes in.

Thinking about developing. As a portfolio, multiple shots on goal, to use a hockey or a soccer term, is really effective way of reducing that risk. The standard ideas of diversification play a really critical role. In how we think about risk. And then of course all of the tools of the modern financial trade, things like hedging strategies, using derivative securities, thinking about portfolio construction tools.

All of those tools can actually be applied to drug development. But with the understanding that we're talking about relatively binary risks. So we can't apply the tools as is, we have to alter them. We have to extend them to the case where you're really looking at zero one outcomes, either a drug succeeds or it fails. That kind of risk is something that we don't see in very many industries, and that's one of the reasons why we need to develop new tools to apply these kind of financial engineering concepts to drug development.

[00:13:32] Sara Shores: We live in a world where data is more abundant than ever, and we see companies embracing technology and big data across just about every industry and every discipline in ways that have really started to change the limits of the possible. Andrew, I know you have a lot of experience in Quantitative Finance, and you've been working in quantitative investing for, for decades. What opportunities do you see to apply these techniques around unstructured data and technology to the field of healthcare investing?

[00:13:59] Dr. Andrew Lo: First of all, you're absolutely right that data has completely transformed most industries, including healthcare. We all know about the importance of electronic medical records and how

they're changing patient lives by understanding what are the key drivers of health and disease. But that's also happening on the drug and device development side.

We now have large amounts of data, of clinical trial outcomes, and what that means is that we can apply the traditional tools of modern artificial intelligence, things like machine learning, uh, and other kinds of pattern recognition techniques to try to identify which clinical trials are likely to fail. So using these kind of machine learning forecasts, we can come up with better odds for drug developers and increase the likelihood that a portfolio of investment projects in drug development can actually give better returns to investors. In very much the same way that we apply these tools to quantitative portfolio management, we can actually apply them to quantitative healthcare portfolio management.

And that's the exciting part. There are not very many people working on it just. But I suspect that over the course of the next 10 or 20 years, you're going to see many, many more breakthroughs in this area. And what that will mean ultimately is more drugs to patients faster, uh, and better.

[00:15:13] Sara Shores: That's fascinating. You give us a few examples of some of the features that you might look like. Look, can you give us an example of some of the features that you might look at to try to identify what trials are more likely to be successful?

[00:15:25] Dr. Andrew Lo: Sure there are a number of them, some of which are pretty intuitive, but some of which are subtle. So for example, an intuitive feature that we use is track records. If a drug developer has succeeded in getting a FDA approval for a prior drug, It turns out that that actually dramatically increases the chances of success for that particular trial.

Second, if the drug has developed, second, if the drug has gotten an approval for a different disease, that also makes it much more likely that it will get approved for this new one. But an example of a feature that's a bit more subtle is if the particular clinical trial happens to recruit patients faster than, It turns out that that's actually a pretty good sign for approval.

Now, you might ask, why is that the case? Why should it be that if a clinical trial recruits patients much more quickly, that it's more likely to succeed? Well, so we talked to a number of clinicians about this, and they said that they've actually observed this anecdotally in the past. And the way it works is that if an experimental treatment is really effective, well the patients usually see an effect right away, and that means that they're doctors.

Realize that this is working right away. And what do the doctors do? They call all their friends. And so the other doctors that have patients with similar diseases, they will try to get their patients into that trial. So basically, purely from word of mouth, you'll see very effective clinical trials recruit patients exponentially faster than other trials, and that's something that we can detect with these machine learning tools.

[00:17:03] Sara Shores: Fascinating in the way that you're bringing in both the unique aspects of drug development alongside the more traditional mean variants along. Traditional investing concepts and really marrying the two. You must see a lot of different projects Concepts in your work are there any recent medical breakthroughs that you're particularly excited about?

[00:17:22] Dr. Andrew Lo: Wow. You know, I think there are many different breakthroughs that have been going on, and that's one of the reasons why I've been spending more and more of my research time in healthcare finance because we see so many breakthroughs happening right now, not enough funding to be able to take advantage of them.

And this is really an inflection point in the whole biomedical ecosystem. So just to name three examples. Number one, Gene therapy, the idea of being able to deal with certain genetic diseases by taking the correct form of a gene, inserting it into a virus, injecting it into a patient, and having that virus replace the defective gene with the correct one. That's a reality. We actually have approved products right now that

have. cured certain diseases, a one time treatment that basically reduces the patient to a totally normal life expectancy that actually is happening.

Second, gene editing the idea of not only being able to change the genetic structure one at a time, but to literally create new genes that will deal with disease at the very core of how they're being generated. Dr. Jennifer Doudna from U.C. Berkeley won Nobel Prize along with her co-authors for this amazing technology. And it is being implemented now in a number of biotech startups.

And third, all of the medical devices that are now allowing us to detect disease in some cases before even any obvious signs are occurring in humans, that's giving us a head start that we never had before.

And there are many other examples, but those are just a few that give me confidence that over the course of the next 10 years, we're going to see some tremendous progress in dealing with all kinds of human diseases.

[00:19:02] Sara Shores: So inspiring to hear how much potential there is and even a greater need then for us , to solve the funding problem, to be able to help some of those developments. You've described a really different model for funding therapeutic development that could open up a meaningful new source of capital for innovation.

What areas of research might now get attention that didn't perhaps get that attention before?

[00:19:23] Dr. Andrew Lo: Well, the real benefit of having additional funding right now, is that the riskiest and most significant breakthroughs that have not yet been developed can now be undertaken. Typically, what investors are willing to fund are opportunities where they understand the risk and reward, but sometimes in order to deal with disease, at its very core, you have to swing for the fences, which means you're going to strike out more often than not.

And it's really those really risky but extraordinarily transformative. The. For example, not just dealing with cancer at the tumor level, but figuring out how to prevent cancer by developing vaccines against certain kinds of cancers. Those are examples of things that we may want to take on if we had the funding, but where if we don't have enough funding, they're going to be focusing on the lower hanging fruit.

And sometimes a lower hanging fruit is not going to provide the same kind of therapeutic benefits as when you go for the really tough diseases and the really experimental but breakthrough the.

[00:20:26] Sara Shores: Andrew. Wow. This has been such an inspiring discussion. I'm thrilled that we had the chance to share your story and the role that investors can play in helping to bring life changing new therapeutics to patients all over the world. Thank you again for joining us for the bid today.

[00:20:41] Dr. Andrew Lo: Thanks so much for having me.

[00:20:42] Sara Shores: Thank you for joining us for this episode of the Bid. Make sure you subscribe to the bid wherever you get your podcasts.

Mark Wiedman: Welcome to The Bid miniseries, The Real Leaders of Net Zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Weidman.

We’re talking low-carbon vehicles today – but not ones parked in your garage. I’m talking about 44-ton electric heavy-duty trucks. I recently stopped by Volvo Group in Gothenburg, Sweden where I got to sit down with CEO Martin Lundstedt to learn how Volvo is helping transform the future of transport. Not only did we talk about these trucks, but Martin actually let me get behind the wheel and got in the cabin and take it for a spin.

Sound -up from test drive: Mark Weidman: Okay it’s definitely moving! // Martin Lundstedt:: Yeah it is actually and you feel how quite smooth it is right? // Mark Weidman: That is actually a pretty good turning radius. // Martin Lundstedt: Yeah it is!

It was an amazing. Volvo’s net zero strategy is to transport goods with zero carbon emissions in their fuel and ultimately have zero carbon emissions even in the construction of their trucks. That’s right – the whole vehicle, including its parts, will be carbon-neutral. We’ll learn how they’re doing it and why -- as Martin put so perfectly -- “partnership is the new leadership” to get the mobility sector to reach its net zero goals.

Welcome, Martin, to The Bid.

Martin Lundstedt: Thank you very much, Mark. It's great to be here.

Mark Wiedman: So Martin let's start off with just talking about what is Volvo?

Martin Lundstedt: Volvo is a global group. We are present in 190 markets. Around 100,000 great colleagues around the globe. We are operating mainly in transport and infrastructure solutions, providing trucks, buses, construction equipment industrial application, marine applications.

Mark Wiedman: So if I'm walking around the world, what are the examples of products I might see?

Martin Lundstedt: First and foremost, Volvo-branded trucks, buses, excavators, wheel loaders. We are proud owners of Mack Trucks of North America, we have Renault trucks or France and other brands as well. And then everything that is around that in terms of services, either added services, financial services, repair maintenance contracts, More and more bundled contracts, equipment as a service, and ultimately also starting to sell, transport as a service

Mark Wiedman: What are your biggest markets?

Martin Lundstedt: So the biggest single market, when it comes to a country, is the United States of America, and North America, together with Europe, are the two biggest regions today. We have a pretty well balanced presence around the globe. We still have opportunities, of course, in a fast-growing region like Asia, but

already established good footprint. We know that logistics, transport infrastructure are very important to drive prosperity for society, and we are really on a decarbonisation journey.

Mark Wiedman: Decarbonisation. Talk about that in your strategy.

Martin Lundstedt: If you take a step back and look into our industry and our sectors and our markets that we are serving, we see clearly that the need of transport, infrastructure, logistics will continue to increase, all the macro trends are telling us that. Growing population, growing urbanisation, eCommerce, you have a number of very important factors. It needs to be considerably more sustainable than we have it today. We have to admit that we still have a

fossil-based transport system, not only for ground transport, but for shipping and aviation, et cetera. So, increased transport, but considerably more sustainable. And that has been at the core of our strategy now for a long time. And sustainability, in that terms for us, is of course, safety, but it's also the ecological and biodiversity type of angles into sustainability. In addition, that you need to have a financial and social sustainable operation as well. And having said that, now we see also that there are a number of very strong factors moving in that direction amongst our customers and customers' customers and society at large. What we have done is we're clear about our commitment to Paris and to the higher ambition of 1.5 degrees. And when you look at our story, that means that 2050, our whole value chain downstream and upstream, must be decarbonized. It must be net zero.

Mark Wiedman: So what will I see? A truck that has no carbon emissions. What does it look like? What's it made out of? What is it powered by?

Martin Lundstedt: I think it's a great question, Mark, and our equipment is lasting, at least in the installed fleet, for 10 years, right? So 2040, globally, we're not talking U.S., we're not talking Europe. We're talking all over the place. And how will it look like? First and foremost input material will be produced by fossil-free material, and fossil-free energy and everything that comes into the hardware. But the biggest impact, of course, is how our products are used by our customers, and thereby emission-free , as you say, propulsion or drivelines.

Mark Wiedman: We're first saying is that the entire vehicle or the construction crane, whatever it is, will be made in with zero CO2 impact?

Martin Lundstedt:: Yes.

Mark Wiedman: Which means that it's going to have steel that's green, all the energy in it that goes into it green, et cetera.

Martin Lundstedt: Plastics, and electronics, the battery material, tires. So I mean there are lot of different materials, components and not only that, they need to be fossil-free sitting there, but the whole value chain upstream I mean between not only our direct suppliers, but the whole value stream upstreams must be fossil free.

Mark Wiedman: So you're saying the whole vehicle, even before it leaves your factory will be entirely CO2 neutral and then the big challenge comes, which is most of the emissions today are coming from when your vehicles or your machines are used.

Martin Lundstedt: Absolutely.

Mark Wiedman: So giant earth movers, giant mining machines, which means that the load on these machines, the stress, the energy needs, are much more intense than for a passenger car. So what is the preconception I should put aside if I'm thinking, Oh, I have an electric car. I know what Martin's doing. What's different for your customers in your business?

Martin Lundstedt: First and foremost, Yeah. I think you have been into a number of very important factors here. How do they look into, so to speak, their business? Because it's a business, and I always think ,about it at every unit, every excavator, wheel loader, a truck is it's own P&L, it's own profit and loss statement. And what is happening now is of course apart from the normal pieces of the P&L statement, the revenues this machine can provide and the cost associated in terms of, amortisation annual cost, repair maintenance driver, what have you. An additional factor in the P&L is now also that for the customers, that if I can make this fossil free, I can actually first get more contracts because my customers will ask for that. And second, I can get higher revenues because it has a premium amount of cases. For example, city construction, it could be urban distribution, what have you, so I think that is a big difference and coming down to, how will it look like when it comes to the driveline? It will be three fold. Basically, you will have battery electric vehicles. That we are actually in serial production now and we are scaling up as we speak. You will have fuel cell electric vehicles and as a third probably minor piece, but still very important will be combustion engines, but completely based on renewable fuels that are also sustainable renewable fuels because it will be a scarcity of these fuels and you need also to have a right distribution between sectors, not at least for shipping and aviation for example.

Mark Wiedman: Let's talk about the battery driven electric trucks. Why does a customer buy them? And what are the relative costs and the benefits for that customer?

Martin Lundstedt: First and foremost, the main driver today for customers to buy it is that they have their commitment, they want to participate in the decarbonisation. They have an increasing curve of request from their customers. Actually the transport buyers to get zero emission vehicles on the road.

Mark Wiedman: So why a customer buys one of your construction equipment or a truck that's electric, they're buying because it's gonna be co2 much lower footprint. But it's also quieter, in cities this matters.

Martin Lundstedt: It matters a lot and we see that for all activities, not only that, you can, get the citizens that are more pleased, but you can actually utilize the equipment more. You are allow to get in to the cities, for example, of distribution and waste collection earlier, working later, and every kilometer extra you actually drive with an electric, in relation to diesel, is a very good equation because since the CapEx piece is higher, but the opex piece is lower, then utilization will also be incentivized. And with the quietness you can actually drive more hours, for example, in the city.

Mark Wiedman: So Martin, I'm in New York. Are you telling me that one day your trucks will not wake me up when the garbage man comes by?

Martin Lundstedt: Absolutely. one day you will see that massively deployed also in New York.

Mark Wiedman: So New York, yorker's electrification at Volvo means you can sleep in. Uh, over the life of the vehicle today, does an electric truck cost more over time than a traditional engine?

Martin Lundstedt: Now I know you Mark so now you will blame me for not being precise enough. But it depends because we are still in this s-curve development, as we call it, so depending on what application, what geography, what segment, and that's the reason why we cannot talk about this as an average thing. But in certain segments, in today, certainly the TCO and the life cycle revenues for the customer actually shifting from a diesel to a battery electric is there.

Mark Wiedman: Total cost of ownership?

Martin Lundstedt: Yeah, And that depends on a lot of, not only as many people thinks, incentives, but really the logic behind it. How do you utilize it in terms of mileage? How does it look like when it comes to repair and maintenance needs, et cetera. With an increasing speed we see that the TCO parity and beyond will actually accelerate. And that is the most important because at the start, we need in certain areas, incentives, it could be investment incentives to get things going, but in the long run, it must always stand on its own merit. So very positive news here, we see that the equation is getting better and better.

Mark Wiedman:So if I'm a customer today, at least in some cases , I can find the electric truck better, probably not more expensive over its life. But it changes my relationship with you at Volvo. What does that relationship look like?

Martin Lundstedt: First and foremost already during the last decade or so we have been increasing our content of services together with the product. But when we are moving into the electric era here, it will further accelerate that. We see the customers really want to have not only the products, the traditional services of repair, maintenance, and financial services and insurance, but also, route planning, route simulation, battery optimization So a much more in depth, holistic type of relation over the whole life cycle. Great news for us because that isa very, recurring type of relation with the customers, and also to be frank, recurring revenues in a historically cyclical business.

Mark Wiedman: You don't need to be shy. The point of this is it has to be meeting your investors' needs too.

Martin Lundstedt: Absolutely.

Mark Wiedman: So a way of thinking about this transformation is that cash flows that originally were going to fossil fuel companies and distributors, now are shifting to the manufacturers of the vehicles and their suppliers. That all those cash flows are being brought earlier which is why actually they're more capital intensive, but it's also meaning that actually your revenues in this new business model are actually gonna be higher.

Martin Lundstedt: Really well said. And I think there are two key factors. what will these transformation for our industry mean? Number one, growth opportunities. Both, when it comes to what you say, the shift. If you look at the life cycle cost for a customer, historically, a 30 to 40% was fuel In the future, to your point, it will be battery and other type of equipment and electricity. So the revenue streams, the cash flows, that is very important opportunity. The second one, more and more into equipment as a service, meaning more of recurring revenue in our business, which is also in a traditionally cyclical business very important. We have already seen the underlying improvement of Volvo Group over the last six, seven years. Very important element of that has been actually the service component, and that will continue to increase. Apart from the investors that we feel we have a very good dialogue, we want to be really transparent about all the opportunities here. We also see it in, what I always say is a very important type of leading indicator is the talent acquisition.

other words, hiring people.

Martin Lundstedt: Yeah, hiring people And we see that, different type of expertise, international arena, different generations really want to join Volvo in the journey. And I think that is extremely inspiring. And one key reason is that you can make tangible execution of actually both here and now because transport industry is driving prosperity, but also for the future, shaping the world that we want to live in. This together with investors, I think that's the reason why we are still hanging around a love this industry.

Mark Wiedman: So I'm seeing battery Volvo trucks already. This decade maybe I will see fuel cell driven trucks.

Martin Lundstedt: Absolutely. And that is something that we're working on and I think what is important to understand between battery electric, fuel cell electric and combustion engine, is that we will not make any whatsoever compromise on that we need to get to net zero, but we need to be a realistic. Also, It's not only so to speak the truck or the excavator technology, the machine in itself. It's also about available energy, sources for different regions. How do you work with infrastructure, et cetera. So a lot of different factors must come together. And thereby we need to have different technologies.

Mark Wiedman: There's an important link actually between, it's worth talking about between autonomous capability and electric vehicles. When a customer shifts to an electric vehicle, they've increased their capital

cost and reduced their operating expenditure. They then want to use the vehicle as much as they possibly can. Autonomous capability allows them to use any kind of vehicle any time of day 24/7, very different than with human beings. How does this play into your broader electrification and decarbonization plan?

Martin Lundstedt: First and foremost, with technology now, connectivity, a lot of other type of developments that we've seen in terms of sensors in terms of artificial intelligence, autonomous solutions will come into play in our sectors much more quicker than in other segments that have been talked about. We will see it in confined areas. We will see it in quarries, in mines, in ports, but also hub to hub.

Mark Wiedman: That's important because everyone's talking about autonomous vehicles, or they certainly were six, seven years ago. It's gonna change the world. You're gonna be one of the first places in the world we see autonomous vehicles. Give us examples of that hub to hub, mining, controlled access. Talk about that.

Martin Lundstedt: We have a separate business area created two years ago, Volvo Autonomous Solutions. The main segments now mining quarry terminals, ports and number three, very exciting, also hub to hub applications, and that will start to be implemented first in North America. We are commercializing the confined areas like mines, quarries ports, terminals, because there are a lot of different factors and drivers why that is important. Again, coming back to that, we have B2B solutions, so it's safety. But it's also, productivity different type of planning in some areas actually to allow the capacity to be there. We have seen, for example, in United States, in the Port Los Angeles, it has been a lack of capacity, lack of drivers, et cetera. But it's also actually paving the wave for combined solutions because when you start to think about how do I design my autonomous flow, like you have historically done in the factory, you also can add other elements. For example, electrification, how do I generate energy because I can plan the operations. There you can also plan another bottleneck in this transformation that is the sourcing infrastructure. Because for battery electric and also to less extent for fuel cell electric, they will have a greater autonomy. It's very important also to have the right type of route planning and sourcing and do that in a smart and well-defined way will be key also for this transformation. So there is also very interesting connection, right?

Mark Wiedman: Looking across the whole commercial auto sector or vehicle sector. What do you think is the biggest challenge that you see in decarbonizing the entire system?

Martin Lundstedt: I think it's actually, if I may say so, synchronized roadmap because what you see now and we discussed that here, our technical roadmap. We have medium-duty trucks. We are just about now to continue to introduce heavy duty applications.And also going for excavators, wheel loaders, buses, et cetera. Products are there. Now, in order to get to the massive deployment of this need, to comply with our own targets, but also the societal targets, infrastructure, must be there. Sourcing or refueling stations for these type of entity sources and also the green generation of energy because, at the end of the day, if the tail pipe is emission-free but electricity is not produced in accordance with our ambition then it doesn't move us in the right direction. So it's a coordinated roadmap between a number of factors that must be there, and that's the reason why another of the elements of partnership.

Mark Wiedman: Collaborating within industries, across industries, all necessary together toward decarbonization.

Martin Lundstedt: Absolutely. How do we actually cooperate in order to get there and see the holistic view sector by sector? And that's the reason also why, for example, we are participating in First Move Coalition. When I looked into that the first time, I said, ‘Okay, it's another initiative. What is this?’ That is founded by Special Envoy for Climate Change Secretary Kerry together with the World Economic Forum. What I liked about it was actually the very pragmatic view. Taking a number of sectors like steel, like shipping, like trucking, and say, okay, what are the companies that are ready to join and to increase demand. To say, my company, Volvo, we have joined in three and possibly four now, different type of work streams. Trucking, obvious to us, in order to be credible that we are buying the best solutions for our own transport, but also steel, for example, because then we are sending a signal demand is there, if supply is there, we can get together. That is another way of connecting together this cross-sector type of needed initiatives.

Mark Wiedman: You've struck an unusual collaboration, a joint venture with your toughest competitor.

Martin Lundstedt: Daimler truck. Yeah. That was a couple years ago now. We announced actually our ambition and then realization of joint venture of fuel cell stacks. And what is that done? The fuel cells are actually on board, producing electricity from hydrogen. And we came to the conclusion, in order to move from this fossil-based platform to green platform in certain areas, in order to get scale, cost parity, all the investments needed, but also a signal or sign to everyone in society that we believe also in hydrogen or fuel-cell related trucks. We struck this deal, we formed Cell Centric, that is today operational young venture, doing actually this fuel cell stack. It will be open to others as well. Then when it comes to the truck, when it comes to the installation, when it comes to the operation, that we will continue to have a Daimler truck get a very respected competitor. So I, I think that's the right balance, to be fair, Mark, there are all areas where partnership will be needed in order to accelerate. Sourcing infrastructure is another example where we are joining forces with Daimler and Traton in Europe to quickly actually install 1,700 sourcing points in order to allow our customers to feel confident, and to, to get it going quicker. So in certain areas, partnership is the new leadership, in other areas you need to keep it at the core of your company to be successful.

Mark Wiedman: Partnerships, the new leadership. Why in this area in particular, why now?

Martin Lundstedt: I think why now is because, in certain areas in order to accelerate fuel cells, for example, huge investments it has been historically very high cost per unit. You need scale. You need standardizations. You need also the infrastructure to be built out. And therefore when we actually were filing for this, everyone understood this is a good thing. This will serve at the direction for societies to decarbonize, while still competing on the new green platform. I think what is very important for us is that we have changed our mindset from, okay, we want to lead or we want to follow the development to create. I think a key here is creating, and you cannot create alone. You cannot only create by actually saying okay, who are the different type of partners, both companies, institutions, but also people, that have the same values and will to do it. And then you can shift by creating markets that you never thought existed actually. And I love that type of dynamic because I think creating is both utilizing the platform that we have, all the good elements that we have in big companies, but together with the entrepreneurship needed for the future. So partnership is the new leadership is something that we are actually using because we like it. And that is the ecosystem. Because when people are talking about the ecosystem, they always put themselves in the center, okay, my ecosystem, but it will not be someone in the center. It will be players that will actually make the shift.

Mark Wiedman: , Martin. Last question. what do you think is the most important thing that needs to happen to get the world to net zero?

Martin Lundstedt: I think you can talk about capital allocation, regulation, permission times but I think the single most important factors are us as human beings, that we have a commitment and belief and understanding that this is for real. This is the challenge of our generation in order to hand over this planet in good shape. To be, part of a journey that is not only needed, but wanted. And when we get that drive, we see that in our company, we see that together with suppliers, partners, and of course, with our customers. It gives not only, so to speak, a competitive edge and a competitive opportunity, but it gives also this feeling of we want to change, we want to do something that is good. So I believe in this, drive together in order to, as we always say it, to shape the world that we want to live in.

Mark Wiedman: Martin Lundstedt that, thank you for joining The Bid.

Martin Lundstedt: Thank you, Mark. It was great to be with you.

[00:00:00] Alex: Russia's invasion of Ukraine has created a short term and serious issue for Europe, but will actually provide a longer term impetus towards using more renewable energy. 10% of its whole national income is its energy bill. that's higher than it was in the 1970s, oil crisis.

[00:00:17] Oscar: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Gas supplies from Russia have been significantly reduced due to the war in Ukraine. OPEC has announced oil production cuts and both Europe and the U.S. have stubbornly high inflation that central banks are trying to control with winter fast approaching and energy supplies depleted. 

What impact will that have on the economies globally and when will it ease? Joining me today in the studio, I'm pleased to welcome Gargi Chaudhuri, Head of iShares Investment Strategy and Markets Coverage. And from our London office, Alex Brazier, Deputy Head of the BlackRock Investment Institute, Alex Gargi, welcome.

[00:00:59] Gargi: It's great to be a thank you for having me, Oscar.

[00:01:02] Alex: Yeah, great to be here. Thanks for having us.

<<THEME MUSIC>> 

Oscar: Gargi, you're in studio here with me, so maybe I'll start with you. I,I should mention you have been both a host and now a guest of The Bid podcast. So you're a woman of many talents,

[00:01:15] Gargi: I am debuting my, participant responsibilities. It's very exciting.

[00:01:19] Oscar: Yeah. you tell me which is the harder role maybe at the end, , so let's start with you.

This has been a tough year for markets, for the economy. the word that is appearing more it feels like in the press is recession, are we in one? the textbook definition of recession is two consecutive quarters of negative GDP, And,and we've seen that. So maybe some people would argue yes, in the U.S we are already in recession, but I think it's more nuanced than that.

What are the indicators that you're looking at to determine whether in fact the US is in recession? 

[00:01:44] Gargi: So I will say that, as you pointed out correctly, the technical recession is when we have less than zero growth two quarters consecutively. We already saw that when we got the second quarter GDP report in the end of July. But I think you have to take a broader lens than that.

Our recession indicator that my team and investment strategy and I have put together is really looking at five areas of the. Economy,

[00:02:10] Gargi: So obviously the unemployment rate comes to mind, but broadly, how is the labor market doing?

It also looks at the manufacturing sector of the economy. We look at industrial production to see how that is versus the previous month that we got the data. We're looking at credit conditions. How much is that tightening or easing? So is there credit availability? Another indicator is, confidence. So small business optimism. Where is that and how is that shifting? And then I'd finally say the last thing that is important is for us, consumers. What is the personal income looking like? How's that growing or not?,

And when we look across all of these different measures, what we are finding at least today, and we're recording this in October, is that we're not really in a recession yet. can we see pockets of stress in the economy that will push us into a recession perhaps, but as of now, we are not seeing us in a recession at this moment despite the GDP data that shows the negative two quarters of growth in the U.S.

[00:03:10] Oscar: So if you look at a broader set of data, we're not in a recession. but come back to that in just a second. Alex, going across the Atlantic and you're sitting in London , what are you seeing from your perch across Europe more broadly? is Europe in a recession?

[00:03:22] Alex: Well, Europe as a whole, a bit like the answer, Gargi just gave the answer is no, not yet. the UK though activity is actually beginning to fall and it's showing more of those signs that Gargi was describing that you look for with a recession emerging. But the real issue is not so much are we in a recession, but are we gonna have one, is one foretold, at this point.

And, to our mind you look at where inflation is, certainly in Europe, and core inflation is once you strip out energy and food and those sorts of things at high rates, it's signifying that these economies are basically overheating, which is a bit weird given that they haven't yet regained where they were, pre pandemic.

and that's because the production capacity is constrained in the U.K. it's due to labor supply and energy availability, and in Europe as a whole, it's more to do with energy availability, but for those reasons, the economy is overheating. And that means if the central banks want to get core inflation pressures back down again, then there has to be a recession, we haven't quite seen it yet, but it's foretold in some ways because if the central bank wants to get inflation down, there's gonna need to be one.

[00:04:27] Oscar: So the commonality is that from both your perspectives, the US and Europe are not in a recession, not yet is, what is potentially pushing these regions towards recession the same underlying factor? You mentioned energy, for example, in Europe is a big driver of why that region may be headed into recession.

Is that also the reason that the US is potentially headed that way, or is there another driver of what's pushing the economy in that direction?

[00:04:50] Gargi: So in the U.S., when and if we do get a recession, one of the things that I believe is that it will be Fed induced, So the Fed does want to slow down demand right now they are looking at an economy which has headline inflation, above 8%. They're looking at core inflation, and as we know, core inflation strips out the impact of the more volatile components, so it takes out food and energy prices. But even having done that, it's still running at 6.6%, which is the highest it's been in 40 years. And the Fed does not want to see that . Their mandate is for inflation to be at 2% or thereabouts. And they are indicating to us that they'll do what it takes to bring inflation back down to that 2% level.

And what they mean by that is they'll actually have to let the unemployment rate rise. They'll have to weaken the labor market. They want to do that, they have to do that. the labor market's still very strong. So we're at 3.5% percent unemployment rate. There is about 1.6 open jobs for every person looking for work right now. So there's call it 10 million, open jobs right now. That's a very good sign. but the Fed doesn't want that to be the case, or at least they want to, bring that closer to about a one to one ratio. coming back to your question, what would drive the recession in the US? It does feel like it would be Fed induced it would be them moving interest rates to a very restrictive territory. And if we look at the market as we speak today and compare that to. December, 2021, the market was pricing in for a very gradual path of rate hikes about 75 basis points of rate hikes for the next year. Now, fast forward to today. We're now pricing in over 450 basis points of rate hikes. So it's not the fact that rates have moved higher, but it's how quickly they have moved higher.

And obviously we know implications of that mortgage rates have moved higher in a meaningful manner. So Fed induced as of right now. But at the same time, there are some glimmers of hope, which is of course, that the labor market is still very strong.

[00:06:54] Oscar: It's interesting cuz like you said, a year ago, the expectation for the Fed was 75 basis points. of rate hikes over a year. And there's been times this year where we expect that amount of rate hikes in a meeting 

 it goes to your point of, Fed induced that the market this year has been, perhaps surprised to the extent that the Fed has been raising interest rates and maybe that's a big reason for why we could tip into recession. Alex, is that the same in Europe? Central bank policy and rising rates, that is the real reason for why, the region could move into recession or I think you also touched on energy being another contributor there. 

So I think the picture's same, same but different, on this side. And it's the same in the sense, as Gargi was describing, of having these core inflation pressures. So broad inflation in the Euro area, it's about 5%. In the UK it's about 6% relative to targets, of 2%, So they've got this imbalance between activity and the economy and the activity level that can be comfortably sustained without driving up prices. And so the central banks need activity fall if they're gonna get core inflation back down again.

[00:07:56] Alex: And that's similar, between Europe. and the U.S. the difference though is how much work the central banks in Europe need to do to generate that outcome. the Fed has to do the heavy lifting in the US to get that outcome. In Europe, the scale of the energy shock which is driving up headline inflation, but really importantly, squeezing household incomes and damaging business confidence that's actually gonna drag on activity in the economy. So the central banks here, the ECB and the Bank of England, they don't have to do as much as the Fed. In order to generate the same kind of outcome and to give you a sense of the scale of the issue here, gas prices from the next year in Europe are hovering about 150 Euros a unit.

That's about six times what it was. in, 2021, uh, and it's the equivalent of an oil price of about $250 a barrel. So that's the scale of the energy shock in Europe, it's driving up headline inflation rates to north of 10%, so double digit headline inflation rates, and it's what's really squeezing household incomes and company, activity despite the fact that governments are providing a very big amount of support for the rest of the economy. But despite that, they're really feeling the pinch in households and companies across Europe, and that's gonna be dampening activity. And the central banks, they won't be cutting interest rates into that. They'll be raising them into that because like the Fed, they're actually looking to generate, a slowdown in demand.

[00:09:22] Oscar: Alex, can you remind us what is it that's caused the energy crisis,in Europe? Why is it that, energy prices are at the equivalent of $250 a barrel of oil. and then, let's talk a little bit about how Europe is trying to cope with that.

The original cause was, following Russia's invasion of Ukraine, Europe, seeking to wean itself off of its reliance on Russian energy supply. And what that meant was it effectively stranded Russian fossil fuel, energy supply as Europe searched the globe for alternative supplies and put pressure on those supplies, try and get them into Europe.

[00:09:58] Alex: Now, what's happened since, is that Russia has taken action to disrupt supply,through the Nord Stream, pipelines and Europe is now very reliant on sourcing. liquid natural gas, and coal from other sources around the world and that's really driven up prices,

So Europe's effectively trying to wean itself off of Russian energy, and as a result, it's needing to pay a lot more, for its energy. That was the original cause of the energy shock here. 

[00:10:22] Oscar: And how is Europe replenishing some of those reserves or replacing some of the energy supply that they would otherwise get from Russia? Is it enough and what will it mean for growth and inflation in the region as they replenish their energy supply?

[00:10:36] Alex: So Europe's actually done reasonably well in building up inventories, particularly of gas. So gas storage facilities are about 95% full. The levels of storage are above where you would normally expect them to be at this time of the year. So in recent months, Europe has actually used the time very effectively to build up pretty much as much of a stock of gas as it can.

And actually now this week you see that prices of liquid natural gas for delivery now have fallen very sharply. Why? Well, there's simply nowhere to put it. there's no more storage left,to fill. But the issue though is how things look after the winter. And even if Europe gets a kind of unusually warm winter, we will still see those stocks depleted pretty significantly.

And if Russia continues to restrict supply through the pipelines, and remember, Europe doesn't really want that Russian supply ideally either that means. Big depletion of stocks, through the course of the winter into the first quarter of next year. And in all likelihood, in our view means that there will need to be some form of gas rationing, in Europe, by the first quarter of next year.

That will be one thing weighing on activity, in Europe. It'll be something restricting the capacity of the European economy to produce goods and services, particularly And it'll also be adding to persistent inflation pressures in those outputs.

[00:11:58] Alex: So we expect disruption in gas supply and also some reduction in overall activity, as a result with some extra, persistence of inflation because of this too.

[00:12:09] Oscar: Gargi listening to Alex, we're sitting here in the US it feels like the energy crisis in Europe is more severe. but having said that, Energy prices in the US have also gone up, and OPEC has recently announced, production cuts in oil. So what does that mean for what energy prices are gonna do in the US and what is that gonna then mean for inflation?

So to your point, OPEC did recently announce their cuts of about 2. Million. I do wanna point out one quick thing around that, that it's not actually 2 million barrels. It's from their, baseline guidance, so it ends up being a little less than that because not every country is producing at the level that they should be at. 

[00:12:49] Gargi: Call it about a million barrels. But that's still a lot in terms of supply, especially when you think about a world in which there was already demand supply imbalance in the oil market, which wasn't necessarily related just to the war or some of the, factors that Alex was struck talking about, but more broadly about the underinvestment in the space that has taken place over the last, few years. 

Now, I'll say that it's very interesting in the US markets because there are twin forces that are driving, price action in the energy market. So on one hand you have the supply, cut from the OPEC Plus obviously that is something that could and has lead to a knee jerk reaction higher. and this is also coming at a time when global inventories are already pretty tight. 

They're already pretty low and. You know, some thoughts around China eventually reemerging from the covid zero policies that have been in place for a very long time. And that's, again, another 2 million barrels a day coming back online for demand when that economy opens up. And we know that people have huge amounts of pent up desire to travel. 

We saw that here in the US last year, But against that, I talked about those twin forces. you do have a pretty rapidly declining macroeconomic environment. And we started off talking about a recession, saying that we're not in one in the US yet or in the European region yet but that we could get there, and of course that would mean that would destroy demand to a certain extent. Now, when we balance all of that, when we look at the drivers of higher prices, so we think about the demand that could come back from China, we think about the inventory levels that are already pretty low. 

[00:14:31] Gargi: We think about OPEC pluses actions more recently, and we balance that. The slow down in growth, it still looksat least to me, to a picture that could mean that energy prices remain elevated for a longer period of time. And I wanna come back to something that's really important, especially in the US more recently, which is with respect to the strategic. 

Petroleum reserves. The SPR, think of that as sort of an emergency stockpile of petroleum that the US has in store and they release that when it's absolutely necessary, such as now. Andsince March, we have been releasing petroleum from that reserve and we're sitting at 40 year lows when we look at what the, holding levels, in SPR is, the stockpile reserves can hold a little bit over 700,million barrels and, we're at 40 year lows, and between now and the end of the year, President Biden announced that they will be releasing 15 million more barrels a day, which is perhaps the final tranche. But an interesting note is, that they will eventually have to stop releasing inventory and if anything, they have to, refill the reserve, right? 

And they've talked about at what price levels they'll refill that reserve, which is around 67 to 72,dollars, a barrel. So I think that's, again, certainly supply that can come to the market, but it's not unlimited supply and we've already had that from March. And if anything, we are soon going to be thinking about refilling that because we need to do that and hopefully do that when price levels are a little bit more conducive. 

So all of this leads me to believe that there is a higher floor. I'm not going to necessarily say that we're gonna continue to see oil prices climb from here. I hope that's not the case for all our wallet's sake and for the sake of global inflations and central bank policies. But at the same time, it does mean that the floor remains higher than where we have seen it in the past. 

So maybe Alex, on this intersection of the energy crisis in Europe and what it means for investment opportunities. We talk about this, concept of transition investing, and how the energy crisis might accelerate this transition to a net zero economy. 

[00:16:39] Oscar: So can you just start with what do we mean by transition investing and then, how is the net zero transition evolving, given what you're seeing in Europe?

[00:16:48] Alex: So that transition we actually see being accelerated by the energy crisis that's unfolding in Europe. Now, obviously the immediate issue in Europe to alleviate pressure on families And companies is actually to source the immediately available alternatives to Russian supplies of fossil fuels, particularly gas. 

And that's a vital move, over the coming months in the way we've been discussing. But the other thing that's happened here is that by driving up the prices of fossil fuels that Europe has pay, it's effectively create an extra incentive for Europe to drive its own transition towards using more renewable energy. 

And why is that? Well, first of all, it's the economics. on a kind of like, for like basis, the cost of solar power generation and wind power generation is now much lower than the cost of generating power in Europe through Fossil fuels. So there's an economic incentive in Europe to drive that transition. 

But there's also an incentive in Europe now to drive for energy security and without ready domestic supplies of fossil fuels. The only way for Europe to do that is to build out its own supply of an infrastructure around clean energy. So Russia's invasion of Ukraine has created a short term and serious issue for Europe, but will actually provide a longer term impetus to drive that transition forward. 

And to give you a fact that illustrates the scale of the problem, Europe is now paying almost 10% of its GDP 10% of its whole national income is its energy bill. And that's as high or higher than it was in the 1970s, oil crisis. And that's really what's spurring Europe to make these changes. 

And the  Repower EU Plan commits Europe to massively increase its reliance on clean energy over the rest of this decade. And the authorities have announced,speeding up of permissions to build the infrastructure around this, a series of grants and loans. And to go back to the question about transition investing, this build out in Europe will require huge investment in this sort of infrastructure and development in the transition, and those incentives are being put in place by the authorities. 

So this is a huge investment opportunity because Europe will have a huge investment need

[00:19:05] Oscar: And I really like this example because a lot of our discussion so far has been, a bit sort of glass half empty, right? Not yet in a recession, but we might be headed there. Interest rates have been going up, an energy crisis. But on the other side of this discussion is thisreality that there are investment opportunities that are arising from all of this. And so Alex maybe I'll just kinda wrap up with you here. given your background as an economist. Does this remind you of any period of, in the past,what do you see going forward? Is there some light at the end of the tunnel that we can leave our audience with?

 I would just draw out two points. The first is that maybe unlike the 1970s, which is probably the closest historical parallel inflation expectations have remained fairly well anchored on central bank's targets, and that's because relative to that position,we now have in most of the developed world credible, independent central banks. People are very sure that ultimately, ultimately may take time, but ultimately they will bring inflation down and that means we won't need to see the kind of recessions we saw in the early eighties that were really necessary to squeeze all the inflation out of the system. 

[00:20:09] Alex: We're talking about having a recession to bring the overall level of activity in the economy down a bit, into line with its kind of comfortable supply capacity. That's a very different type of recession, to the one we had in the 1970s. The other lesson from the 1970s is that the oil shock back then really drove innovation and structural change in the economy. 

Economies over the subsequent decades really adapted to that new environment. The oil intensity of GDP fell steadily over time, and that shows you that when economies are having trouble, they're very good at adapting. Very good at creating new investment opportunities. Very good at building new resilience and to apply that to the current situation, particularly in Europe. Europe has realized that relying on Russian supplies, particularly of gas, is an expensive business and a volatile business and cuts across its geopolitical objectives as well. And so this will really drive Europe on its transition, towards cleaner energy, use in particular, which is what creates these huge structural shifts in the economy that create these investment needs, and these investment opportunities as well.

[00:21:23] Oscar: I think that's a great point to end on. Alex, as always, you're a fantastic guest. Gargi I think you've done as good a job,as a guest, as you do as a host. you can now wear both hats. Thank you both for being on The Bid. 

[00:21:33] Gargi: Thank you for having us.

[00:00:00] Will: When you have a year like 2022, the tendency is to look to history for a comparison, for some insights or lessons or patterns, something to help guide your investing playbook. But 2022 has really been an anomaly in so many ways. So I'll start by asking each of you, how has your own experience or study of history shaped your view of the markets this year? 

[00:00:23] Tony: Well, I'll, I'll start with that, Will, I think history's incredibly important. And as both of you know, Larry Fink often talks about the importance of being a 'student of the markets'. And part of that is being a student of market history. given today's topic, I figured history would come up, so I brought with me two quotes that I wanted to share, so I'll read them. 

 One is from Winston Churchill. He says, 'The farther back you can look, the farther forward you are likely to see.' And I think that applies to a range of fields, obviously politics, sociology, but also markets. And then John Kenneth Galbraith specifically talking about markets says 'For practical purposes, the financial memory should be assumed to last at maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on a previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene impressed as had been its predecessors with its own innovative genius' and he's talking a lot about financial bubbles, and that's how he relates that quote. 

So I absolutely do think studying history is important and on our team, in 2021 when we saw inflation starting to increase, we went back and asked all our analysts to study the 1970s, cuz that was the last bout of significant inflation. And not only did we ask them to look at stock returns and and stock prices, but we also asked them to go back and read 10 K's to read what management was saying in their reports year by year, and to see how that inflation impact evolved. And that really helped us set our playbook for this year. That's really what active management's about. It's about, studying history, studying the current data but then adding judgment to that because data and history doesn't see around corners, human judgment does. And that in nutshell is how we can add value as active investors. 

[00:02:14] Will: Our fundamental equities group surveyed over a thousand U.S. Individual investors in the first half of this year, and it was interesting to see the differences in views by generation. The younger investors, the millennials, were more comfortable adding to their equity allocations this year. So Caroline, as a fellow millennial, what do you make of this phenomenal? 

[00:02:33] Caroline: Well, I think there are two factors at play here. The first is that investors of my generation just haven't seen a period of sustained high inflation in their lifetimes,. As the forces of globalization and technology and demographics have put downward pressure on inflation and rates over the past 40 years. And since we've been in this environment of tame inflation for so long, we've grown accustomed to the Fed being quick to pause or even pivot at the first signs of economic weakness. And so I think because of this experience of relatively recent history, younger investors are maybe more inclined to believe that, the Fed will pivot here, which would be positive for equities. The second, and I think the more important factor at play here is this younger generation has a longer investment horizon. 

So sure, equities could fall further from here but over the long term, its earnings compounding that drives returns, and we know that missing out on just a handful of the best days in the market can significantly negatively impact those returns, and so it's important to stay fully invested. As they say, it's time in the market, not timing the market. 

[00:03:49] Tony: I, I think that's great wisdom. I've lived through multiple bear markets, right? 1990 2000, 2008. And at the time they all seem massive they're quite frightening to be honest. But when you get some historical perspective, they start to look like small speed bumps on the way to good long term returns. 

And t hat's the power of compounding, right? That's your point about staying in the market. It's time in the market, not trying to time the market. And so you look at this year and the market's down about 25% through the third quarter. Earnings estimates have actually gone up over this time period, so the multiple contractions even greater and it doesn't feel good. 

But reality is stocks are on sale. Could they go down from here? Absolutely. But I think once we get some time between now and, and then and get some hindsight, this will look like an attractive opportunity to be adding to equities. It reminds me of my own experience in 2008, I started to increase my equity exposure in October. 

Was that early? Yes. But with hindsight, those were great investments that I was making at that time. I think that's the lesson. 

[00:04:55] Will: One thing that all the respondents in the survey agreed on was that inflation. Biggest risk to stocks over the next six months, and certainly inflation and higher rates have been particularly hard on growth stocks. So Caroline, as a growth manager, what's your outlook for growth stocks at this moment? 

[00:05:12] Caroline: The pandemic, no doubt created excesses, for example, in the spending on goods over services, and some of those excesses are now being worked off and combine that with higher rates, which disproportionately impact growth stocks as longer duration assets, and some of this repricing was warranted. That being said, we're long-term investors and the secular tailwinds that we're investing behind continue. Whether that's the trend toward eCommerce or public cloud adoption or automation, innovation is not slowing. I'd also add that the odds of a recession, have increased and recessionary environments tend to favor growth stocks just given a scarcity of economic growth. The macro is highly uncertain here, but evaluations for growth stocks in particular have come in and the sell off has been pretty indiscriminate, which I do think creates attractive opportunities for active managers to pick up quality growth stocks with secular tailwinds and with pricing power to manage through a potentially inflationary environment for a longer period of time at a now attractive. 

[00:06:23] Will: And then Tony. It's a different story for value stocks, right? Which is what you specialize in and value tends to outperform in higher inflation regimes. So are you concerned that value could fall out of favor as inflation recedes 

[00:06:36] Tony: So I'd go back to the history, and I think it's important to keep in mind just how unique the decade after the global financial crisis was, It was a period marked by really low growth, really low inflation, and really low rates. That's a tough time on a relative basis, at least to be a value investor, right? So value stocks went up during that period, just a lot less than gross stocks or the market. While I do see inflation rolling over from here, so I think it's very likely inflation is peaked and is coming down. I don't see it going back to the levels of the post global financial crisis era for a couple of reasons and one is I think there are just some structural things in place that are just gonna mean higher inflation. 

It's some of the things you mentioned earlier, Caroline, the deglobalization decarbonization as well as demographic changes. All those lead to higher inflationary forces. So I think we're, as investors, it's not our job to look at the last decade. It's to ask what's the next decade gonna look like? 

And so I think that's gonna be one that's much more favorable to value investing. Also starting points matter. And one of the things that we look at is valuation spread. So value stocks are always statistically cheaper than the market, but how much cheaper varies over time. So sometimes those spreads are pretty narrow and sometimes they're really wide. 

As we sit here today, Those spreads are very wide. In fact, statistically you'd say two standard deviations wider than normal. So Caroline's just told you why growth stocks are interesting. I just told you why value stocks are interesting. How do you square that, right? I think that's a natural question. 

We went back and looked and said, 'What if you took a portfolio of growth stocks and a portfolio of value stocks and blended them 50:50 and then compared that to investing in the market?' And what is that growth and value blend is actually very cheap versus the market today. 

So what that's telling you is the stocks in the middle are actually very expensive, and historically from this starting point, you do really well blending that growth and value.

[00:08:37] Will: So let's talk about the risk. So we did the survey of investors in January, then again in May, and inflation was cited as the top risk both times it's October now. Do you think inflation will still be the biggest risk to stocks in the next six months? 

[00:08:52] Caroline: I do, because I think it's inflation that's ultimately driving the Fed's rate hikes. Of course the Fed is going to talk tough on inflation because they need the market to believe that inflation will not be persistent. But the reality is that. If inflation begins to moderate, it gives the Fed room to pause. 

My concern is that the inflation that we're seeing right now is supply driven and broad based, and we have this very tight labor market, and I think it may be difficult for the fed to tame inflation with the tools that they have without causing a recession. 

[00:09:29] Tony: Yeah. From my perspective, if you go back to the beginning of the year, I had two concerns, One was the fed was clearly behind the curve in raising rates. So I think spiraling inflation was a real risk at the beginning of the year. The other risk was they'd tighten significantly and that could cause a recession. 

Obviously, the Fed's goal was right up the middle, soft landing. Although history, would tell you don't expect a soft landing. The only soft landings we've ever seen have been when the feds ahead of the curve, not behind the curve And so you fast forward to today, the Fed's actually done a lot of work since then we've never seen such dramatic or since Volker, we haven't seen such dramatic rate hikes in such a short period of time. 

And we all know rate hikes affect the real economy with a lag at least six months. But most economists would tell you something more like 18 months. And so I think there's a strong likelihood that the Fed overshoots and that we do end up in a recession. And in the portfolios I've run, we've lowered the beta of those portfolios in an effort to protect ourselves from a potential recession. 

[00:10:30] Will: Let's shift gears to sustainability. In our survey, millennials have shown the greatest interest in sustainable investing than either Gen X or Boomers. And it's certainly a newer and growing area of investing. So as active investors, and I'd be remiss to point out that one of the three of us is a ESG professor here, how do you define the investing opportunity in sustainability here? 

[00:10:53] Tony: So I'm really excited about the alpha potential and I think that's important to emphasize the alpha potential of ESG investing. And, I look at it just like I look at other alpha drivers but I do think ESG is becoming an increasingly important driver of Alpha. 

And I think about in terms of it's about companies following consumers, where their minds are at, where they're headed. It's about attracting a talented workforce in helping the company execute on its strategy better, and if a company manages their ESG risks better, they have a lower cost of capital. 

And so all those things generate alpha. And then as an active investor, I think there's a real opportunity for us to go beyond rating agencies coming up with our own ratings of companies based on ESG. And there's also the opportunity for us to think about how companies might improve on ESG to create more value for shareholders to lower their cost of capital et cetera. 

There's also some opportunities to be a little bit more contrarian and a little bit more thoughtful. And, I'm actually gonna bring you into this Will, because you're our resident expert on energy. And I think we've done some interesting thinking on, and positioning around ESG there. So why don't you talk about that. 

[00:12:02] Will: Yeah. Perhaps we can do another episode of the bid to go through the many nuances of energy and sustainability, but in general, I think what unfolds this winter in Europe, is gonna be a pretty watershed moment in this whole discussion. The market's realizing that pushing too quickly into intermittent renewables without them achieving scale first is a recipe for inflation and energy insecurity, And it's a regressive tax for the least financially well off in our society today. I also see, continue to see a big opportunity to invest in natural gas, which has a key role to play for decades to come replacing coal and power generation emitting half the carbon emissions of coal. And finally, some of the largest oil and gas companies today, for as much as they're vilified can play a key role, In two things. They can generate inflation protected dividend income for investors' portfolios, and at the same time with high commodity prices. They can also develop some of the key technologies that we need for them to become the largest renewable energy companies in the coming 1, 2, 3 decades. So another sector that's in the headlines, which is technology, so Caroline Tech and innovation, big parts of growth investing. What do you see for technology stocks as we get closer to turning the page to 2023. 

[00:13:22] Caroline: the technology sector holds a lot of these poster children of growth stocks where the earnings were supercharged during the pandemic and higher rates have had a significant impact on valuations. But I'd emphasize again that the secular tailwinds driving these businesses continue. And I actually think that the challenges businesses are facing today from a tight labor market and higher input cost could drive greater adoption of technology as businesses just look for efficiencies. 

 I'm optimistic about the tech sector as the market rewards earnings growth over the long term, and you do now have a more attractive entry point. But I'd also point out that I think you can find innovation across sectors. for example, healthcare or industrials. And the technology sector itself is a pretty heterogeneous sector. 

So I think that active management, again here is really important and picking your spots is critical. 

[00:14:23] Will: So no matter how much you've seen, studied, or how long you've been investing in the markets, 2022 was an unusual and humbling year for all investors. So what was your biggest learning that you'll take with you as you invest next year and beyond? 

[00:14:38] Caroline: For me, it's the importance of knowing what you don't know. So if we rewind to this time last year, valuations for growth stocks were stretched versus history, and inflation was elevated, and so in retrospect, it might seem obvious that a sell-off in growth was overdue, but you have to remember at the time that valuations for growth stocks had been stretched or elevated, versus history for years. 

And there were all these reasons to believe that the inflation we were seeing at the time was transitory, just a byproduct of these temporary supply bottlenecks. So the lesson for me is that these regime changes or inflection points in markets are just really difficult to predict. And I think our job is to be aware of the risks and to diversify our portfolio. 

[00:15:33] Tony: So when I think about this year in inflation and rates, I think about Dornbusch's Law and the gist of Dornbusch's Law is, in finance or economics, whatever you think should happen, ultimately takes much longer to start happening, but once it does start, it moves at a pace way faster than you would've expected. 

And so I think that's what we've seen with inflation and rates this year. For over a decade the Fed was trying to get inflation up and it couldn't, and then it finally did. And once it did it started to rise at a pace that far exceeded policy makers expectations. And that's a lesson I think we just see over and over in financial markets. 

[00:16:12] Will: We covered a lot of ground today. Tony and Caroline, thanks for joining me. 

[00:16:17] Tony: Thanks.

[00:16:18] Caroline: Thank you. 

Will: Thanks for tuning into this episode of The Bid meets our Expert-to-Expert investing series. For more equity market insights, check out our recent episode 'A stock picker’s guide to inflation,' featuring Tony DeSpirito.

MARK WIEDMAN: Welcome to The Bid miniseries, the real leaders of net zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Wiedman.

Did you know that construction, buildings, are responsible for, wait for it, almost 40% of global CO2 emissions? That includes the emissions that come from processing the raw materials, think cement, think steel, and, even bigger, the emissions that come from operating and powering those buildings during their whole lifetime. So if you are in the business of building, how can you build greener?

Jan Jenisch, CEO of Holcim, a global leader in building materials, is working on that challenge. I got to visit Holcim's green cement plant in Switzerland to see firsthand how they are creating more sustainable building materials, how they're recycling materials to build more new from the old, how they're increasing building efficiency. After the tour was over, Jan and I sat down to chat more about Holcim and its plans for a net zero future.

MARK WIEDMAN: Jan, welcome to The Bid. Tell us about Holcim.

JAN JENISCH: Holcim is the largest building materials company in the world. Building materials are how we do houses, how we do infrastructure, how we do plants. Everything we use every day has to be built. And we come from originally cement, cementitious material. And now we’ve moved also in more sophisticated state-of-the-art applications, like roofing systems. And we make big inroads the last two years, and become one of the leaders globally.

JAN JENISCH: We have 70,000 employees and that needs a strong strategy to bind them all together and be successful.

MARK WIEDMAN: So let's talk about the basic chemistry about cement and concrete. How do carbon emissions happen?

JAN JENISCH: We have basically two sources. So for cement, one of our products with high carbon footprint, we have about 40% of that coming from the energy we are using to produce cement, which traditionally is fossil fuel based.

MARK WIEDMAN: To burn it hot.

JAN JENISCH: To burn it. And nowadays, of course, we go to renewables, we go to alternative fuels. And the other 60% comes from a chemical reaction when we transform the limestone into a cement stone. And that also needs to be decarbonized. So we are using alternative raw materials which are already decarbonized and to transform without this carbon emission.

MARK WIEDMAN: So I think this is critical for people to understand. Any concrete they see anywhere in the world, the very chemical reaction to make the concrete involved big carbon emissions. And the energy to heat it up, to actually create the process, itself takes lots of energy. Lots of carbon emissions. So how do you break that apart and bring down the carbon content?

JAN JENISCH: So I mean, absolutely, it's true for all building materials. You talk about glass, or steel, or plastics, they all have a relatively high carbon footprint. And concrete is the most used material after water, right? Because everything we do is such a fantastic building material for all the properties it has. So we have to use it also in the future, but decarbonize it. So how we going to do about it. So first of all, we need to use decarbonized raw materials to not have the chemical reaction. Then we have to use 100% alternative fuels and renewable energy to operate the plants. And then we have to also use alternative materials to use less virgin or fresh cement material. So we just are using, for example, construction demolition waste is one big source for us, where we are already the biggest recycler. And we use construction demolition waste as a raw material. But also to put straight away our new products.

MARK WIEDMAN: One of the points Bill Gates makes in his book on decarbonizing the economy is that the world, especially the poorer world, needs concrete for better living standards. So if we're going to have a better world for people to live in, better homes, that's durable and safe, how do we decarbonize something that inherently emits carbon when you make it?

JAN JENISCH: We decarbonize the process, and we decarbonize the materials we are using. It's possible. We have been on a nice tour in one of our plants today, and you can see how much different roadmaps we have in place to decarbonize. And we just launched, three years ago, our first green range of products, ECOPlanet for cement, ECOPact for concrete. And these products have the simple promise that the CO2 footprint is at least 30% reduced already, by applying the principles we discussed, alternative raw materials, alternative fuel, but also different minerals, and recycling into the final product.

MARK WIEDMAN: So you've launched a whole new range of branded products, which I think is new for you, having a consumer-oriented or architect-oriented brand.

JAN JENISCH: Absolutely. I had to convince my own people first to make this green range, and I'm glad we came to that decision because that gives us a whole new dimension for the customer. So suddenly, sustainability is a part of the buying process, is the buying criteria, and for us it's a unique selling proposition. So that gives us actually now a lot of space to engage with architects, with homeowners, because they are the ones who want sustainability to happen.

MARK WIEDMAN: So decarbonization, how does that relate to your business strategy?

JAN JENISCH: Oh, that's at the core of our strategy. Without decarbonization, you don't have a license to operate in the future. So we made it an opportunity, and we want to be the fastest-- lead in the sector of construction building to decarbonize totally Holcim, but also decarbonize the way we build and the way we live.

MARK WIEDMAN: Beyond using substitute materials as an additive, and also using some recycled concrete, what else can you do?

JAN JENISCH: Well, you have a whole range of different minerals you can use as a raw material. That can be waste material from factories, or waste from the cities. That can be construction demolition waste. Then we have a full range of alternative fuels. We are one of the biggest alternative fuels users in the world. So you get that from also from factories to municipal waste. And then finally, we have a whole range of minerals we can mix into the cement for the final mix to lower the actual cement content.

MARK WIEDMAN: So we can get the carbon content just using some basic substitutions. Now as we use your product, designing buildings, how can we actually change the carbon content of a building through design and how we build?

JAN JENISCH: So the materials is one thing, but we also have to build smarter. We have a huge demand to build more. And we have to do this much smarter and with less. So for example, today are building materials really used efficiently? In most cases, not. We build like two-dimensionals, right? When we make a ceiling or a floor at the moment, the whole thing has the same strength and thickness, all the way through even. You should only have that at the weakest spot, right? So we have to go into three-dimensional structures, for example. So with higher strength material, three-dimensional, and then we can reduce the materials being used.

MARK WIEDMAN: So what is a three-dimensional material? What do you mean by that?

JAN JENISCH: For example, 3D printing. We have done a showcase bridge, which is consisting of 52 elements 3D printed. And because 3D printing, you can then do it three-dimensional. And you only strengthen where you need to strengthen.

MARK WIEDMAN: So it's basically you're almost, through design, cutting away all the excess material?

JAN JENISCH: Absolutely.

MARK WIEDMAN: And that by itself, you've dramatically dropped the carbon content of a building.

JAN JENISCH: Absolutely. And that applies to a bridge, applies to a wall, or ceiling, or floor, where everything is just two-dimensional today, and we should make this a three-dimensional form piece, which is strengthened where strength is needed, and less material where the strength is not needed.

MARK WIEDMAN: In all this decarbonization of your actual building materials, do your costs rise? Hopefully, customers will pay more, but do your costs rise?

JAN JENISCH: Yeah, we have some. When you look at that recycling, that's actually very cost effective. Because we take waste in from other people. And we get paid to take that waste. And then we have a very smart way to recycle. So that's actually very profitable, when we look at the recycling. And we already made it a business. We have as of last year, we already recycled 6.6 million tons of construction demolition waste. That's more than 1,000 full truckloads every single day. So we make this already a volume business for us. And that's the task we have, right? Construction is huge volumes. So we have to scale up our supply chains to make that happen.

MARK WIEDMAN: So from your waste materials, even though you're in early days, 6 million tons of waste you're actually using to decarbonize, because it substitutes for something that would have created carbon, and people are paying you to take the waste away.

JAN JENISCH: Yeah, that's how it works. Now we have to be also realistic. So to decarbonize the first 20%, 30%, 40%, that is not an easy game, but that can be done very profitable, and maybe even at similar cost, than to decarbonize more. That then will cost us over proportion more money. So we have to make sure that the customer pays for it, or we have building norms or regulation requiring that type of material.

MARK WIEDMAN: We visited your quarry. Talk a bit about how you're automating your quarry.

JAN JENISCH: It runs 24/7. And we need to optimize it, not only to save costs, but also to make it a safe place to work. When you operate 24/7, you don't want to have a big workforce. You want to have automated processes. Now the quarry was an area which actually was very, until today, very manual, right? You have a lot of equipment, you need a lot of people to operate the equipment, and today, we visited a quarry where we have the first fleet of autonomous trucks, autonomous and electric trucks. And that's fabulous. And we are now testing that equipment this year. And it will run fully with the full fleet from beginning of next year.

MARK WIEDMAN: What I found amazing about visiting is that you're going to have a fleet of trucks. They're smaller than traditional trucks, because your labor costs are gone. Therefore, you can actually run them in smaller units. And when you put it all together with lower maintenance, and even though the trucks cost more than a small one with a driver, you're actually going to be reducing your costs and reducing your safety risks. Because quarries are extremely dangerous places. Where else do you see automation happening throughout your factories and your plants?

JAN JENISCH: So we take that alone. The quarry is still a big task. And then we have to also replace all the other equipment and make them optimized, and autonomous, and all electric. I think that's what we're trying to do over the next few years. We have also seen all our digitalization of the plant. So we are using now to observe the plant, we have drones, we have this electric robot dog, right?

MARK WIEDMAN: The Animal, the walking dog.

JAN JENISCH: The Animal. And what's great about all these things, it's also less risk for the people because they don't have to climb in any silo, or they don't have to climb up any chimney. And this equipment is collecting much more data. Because they register vibrations, noise, temperature. And we have now in a modern plant of ours, we have now this big data produced by all those sensoring. And that helps us to detect failure before failure happens, right? You can imagine with this big equipment, if one roller bearing bursts-- The roller bearing is little cost, but it destroys part of the equipment. And with all the sensors we have now, we can detect before it happens, because you have an increased vibration level, increased noise level, or temperature level, and actually you can replace parts before they break. So that's a big breakthrough. And we are now starting in all our factories to do this sensoring. So to measure every step for vibration, noise, temperature.

MARK WIEDMAN: With all this automation eliminating dangerous jobs, but eliminating jobs, how does your workforce react? And what do you think is the long-term social impact of this relentless digitization and automation?

JAN JENISCH: I think it's positive. Because when you see now the process we describe, I need more people in the lab, right? Because to take recycling material in and recycle, I have to make much more quality check of the incoming material, of the outgoing material. I have to operate all those drones, and the Animal, and the electric fleet, I need smart people. And I think that's a great job development. Because the workers we have now, that's the generation, but I think the next generation, they don't want to be necessarily a worker in the factory, but they would be interested to be a more sophisticated handler of all this digitalization. So I think it's a very positive development.

MARK WIEDMAN: I can certainly see how to attract a kind of talent that you might otherwise struggle to get. People who are actually really, they are engineers, or even like supervisors of machines. The recycling, and the circular economy. How do you see the main places where Holcim can actually drive business results by recycling?

JAN JENISCH: So I think last year we recycled more than 50 million tons of material, from alternative raw materials, alternative fuels, but also to this new mineral sources we are having. And we promised to double that to 100 million tons by 2030. And that's, for us, a great new dimension of the business. Because you can imagine, we talked about the demolition waste, I'm already taking back 1,000 truckloads a day, and we promised to-- not to double it, but bring it to 10 million tons by 2025. So basically then I'm at 1,700 trucks a day, and I have to make all that supply chain work. I have to be able to get the trucks in, I have to have the recycling station, I have to have different silos. Because you get different quantities of material out of the recycling. While demolition waste is fantastic, you can recycle 100%, no down cycle, you get different qualities depending on the input. So you have maybe a lower grade of recycling, then it goes into road works. You have a higher grade, it goes into concrete. And then you have the highest grade, you can even use back in the cement.

MARK WIEDMAN: Carbon capture. How are you thinking about it? How does it work?

JAN JENISCH: We have more than 30 projects around the globe for carbon capture. So for storage, or for usage. I think it's fantastic. We have piloting, where you're going to see the first plants of Holcim using carbon capture before 2030. It depends a bit on the legislation or the framework we have in each market.

One thing is important when we talk carbon capture is carbon capture comes at a cost, right? So you can calculate this will be 60 euros per ton of CO2, or 100, or so, or maybe in some cases, 200, where the framework is not so perfect. So one thing is key for me. I want to decarbonize as much as I can with all the initiatives we've talked about, because I want to actually capture as little CO2 as possible. Right? Then I will be the winner. So not just produce the way you produce, and then put a carbon capture on top, and take 100% of your current CO2. You better reduce that by 50%, and then you carbon capture.

MARK WIEDMAN: Emerging markets, poor countries, with low labor costs and generally lower ability to pay for building materials, how does decarbonization differ away from Zurich, which is a rather high cost location?

JAN JENISCH: Oh, that's a big unanswered question. I mean, we had the failure of the Paris Agreement. We have at the moment all this geopolitical tensions. So honestly, that's the big question. If we see now the big decarbonization plan we have in Europe. Now the US has picked up, surprisingly for many. So we're going to have decarbonization I think in both regions. If others will follow, that's the big question. You're still having big markets like India. They're still building coal plants. They are still building all sorts of carbon producing industries.

MARK WIEDMAN: So Jan, you run the world's number one buildings material manufacturer, and the number two recycler in the whole world. What do you think is the single most important thing that needs to happen to get the world to net zero?

JAN JENISCH: I think the biggest challenge we have are the geopolitical tensions we are seeing now everywhere, from the failed Paris Agreement, to the current missing world coalition against the war in the Ukraine, for example. And I think this will be our biggest challenge. If you cannot align, then you have Europe and North America with quite strong decarbonization paths, and then the rest of the world not following. That will not be the right solution.

MARK WIEDMAN: Jan, thanks very much for joining us.

JAN JENISCH: Thank you, Mark.

[00:00:00] Jean: We think that if central banks are to bring inflation back to 2% very quickly we're seeing need for at least 3 million jobs to be disappearing in order to bring inflation quickly back to 2%.

[00:00:12] Oscar: Welcome to The Bid, where we break down what's happening in the markets and explore the forces, changing the economy and finance. I'm your host Oscar Pulido.

The U.S. Economy has reopened post COVID 19 pandemic U.S. unemployment rates remain at historically low. But because of the pandemic, we've seen a large fraction of the labor force that remains on the sidelines with the Fed aggressively raising interest rates in an effort to reduce inflation.

What impact will this have on the labor market going forward? To help me answer that question, I'm pleased to welcome Jean Boivin, Head of the BlackRock Investment Institute. Welcome Jean.

[00:00:49] Jean: Hi Oscar, great to be here.

[00:00:51] Oscar: Jean, can you give me an overview of how the labor market has been doing over the last couple of years and where is it now?

[00:00:58] Jean: So I think the first point I would [00:01:00] make at the outset is we are facing a very unusual labor market dynamic at this juncture. And the typical playbook of how you're thinking about the labor market in the recession and then the recovery is not useful, the key unusual feature is we've seen a story that was mostly about the labor supply but typically when you go to an expansion in a recession, most of the action comes from companies demand for labors.

If in expansion they're gonna go heavy in the labor market, demand more, that's gonna drive down the unemployment. And when things go bad, recession, they're gonna lay off people. And then the demand pulling back is what leads to the fluctuation in the labor market.

This time it's really driven by the labor supply. So because of the pandemic we've seen a large fraction of the labor force that has for whatever reason, decided to stay on the side of the labor market. The big constraint here is really that we have difficulty to bring people back to work. There could [00:02:00] be demographics, various reason, aging and so on, but there's also the time it takes for people to reengage with the labor market after having stopped the economy like we've never done before.

So key point here is the dynamic of last couple of years is really a labor supply story like we haven't really seen before that hasn't normalized yet and as a result this is very unusual.

The other layer, which is, also adding to this labor supply story is that we have seen over the course of the pandemic, the biggest sectoral reallocation on record, we went massively away from services to goods.

It goes beneath that rather more granular sectors. And that has led to a very significant mismatch between the type of skills that the employers are looking for in different sectors and the employees available. So it's not only an aggregate labor supply story, but it's also allocating that labor supply now is much more difficult than it used to be and it creates these bottlenecks, these matching issues that we're seeing in the labor market. So again, key point is this is really a labor supply story.[00:03:00]

[00:03:00] Oscar: Okay. So now that we know what's happening in the labor markets, let's try and connect the dots. How does that tie into inflation?

[00:03:07] Jean: Well, this is very important because the diagnostic on where you think the labor market is and why leads you to different implications about how it's gonna map into inflation.

So a big question thinking about the inflation outlook is whether this participation that we've seen declining very massively over the course of the pandemic will come back. We don't think all of it will come back, as I mentioned, there's demographics aging population that has been part of that story and there's stories about the pandemic accelerating those decisions toward retirement, this is part of it. But that explains about half of the shortfall that we would have expected to recover since the pandemic and still hasn't.

So I think there's hope for some more labor participation to pick up. And if it happens, it's gonna ease some of the labor market pressure and that's gonna help to bring inflation down. But it's not the entire story and it won't be covered entirely but the key point is as long as the labor [00:04:00] supply is the limiting factor, unless easing factors come into play, that will eventually lead to wage pressures and could be a risk to provide even more inflation push than we have seen up to now.

I think it's important to note that the labor market, despite all of the attention that we had on it by policy makers, market participants, and so on, the fact that there's a lot of questions about this unusual behavior, we haven't seen yet wage pick up to an extent that it is part of the current inflation story, so I said it could become, but it hasn't yet. So that's an important part to watch and will be a key factor determining the policy stance of central banks over the course of the next few months.

[00:04:40] Oscar: So the labor market is tight, meaning unemployment is low. And while that has led to higher wages, you're saying it hasn't really been the cause of higher inflation. So what would have to change for companies to start increasing wages at a rate that does start to impact inflation?

[00:04:58] Jean: So we're seeing here it [00:05:00] takes longer for firms to fill jobs economists like to talk about something called the Beveridge curve, this is really about the relationship between the job posting vacancies in relation to the level of unemployment that you see, you would tend to think that the lower unemployment rate, the shorter posting would be , it would go faster to fill vacancies if we have a very tight labor market. It turns out that this relationship has been broken during COVID, what we are saying is that despite the very low unemployment rate we're seeing job posting being at an unusually high level. So it takes longer for firms to fill jobs. I think it speaks to this big sectoral reallocation story that I've talked about.

I think that sectoral reallocation has affected maybe the lower skill part of the employment and and of the labor supply, which takes longer to be reallocated or find jobs in other sectors. It takes longer for firms to be convinced by the fact that they found the right employees and so on.

So that explains the down correlation in the relationship, the fact [00:06:00] that it takes longer to fill jobs than it used to, but the reality is there's a more competition for the pool of worker that is available, and that is more restrained than it used to be. And over time that is gonna put some pressure on wage, and we're seeing nominal wage growth has been picking up, has been pretty strong. In fact, we see ample evidence that this is also adding to people trying to quit and move out of their job, creating some vacancies, because one way to bid up your salary is actually to change job rather than staying in the job,

so there's been some incentive to do that. So this is a mix that eventually could lead to wage pressure that will then translate into more inflation, but it's important to acknowledge though that at this point it hasn't been the case and the reason is that firms have been able to raise the price of the things they sell faster than the wage that they're paying to their employee.

So despite the fact that we have a tight labor market, we are seeing wages going up but real wage, adjusted for inflation have been falling. So [00:07:00] that's why it's not yet affecting the company's bottom line, it's not creating incentive for firm to raise prices even faster to cover their wage bill cuz their wage bill in real term hasn't really increased yet, and that has been the story so far, but that's the thing that could change if the tightness of the labor market persists.

[00:07:17] Oscar: So Jean, what you're saying is, there are more jobs on the market, there are simply fewer people to fill those jobs, and thus far wages are not going up as much as the cost of living is going up?

[00:07:28] Jean: Absolutely these are the three facts I've put on the table here. And right now it creates a bit of a conundrum, we talk about a very tight labor market it creates some concern. People are linking that to inflation, but it hasn't been the story of inflation yet, it could become, but it hasn't been yet.

[00:07:43] Oscar: Recently fed chairman, Jerome Powell has come out and said that the us labor market is hot to an unhealthy degree. Help me understand if labor markets are growing. Why is that so bad for the economy?

[00:07:55] Jean: I need to start by taking a different perspective on the characterization of the labor market the word, the use of [00:08:00] word very hot I think there's a risk here, I cannot speak for the Fed, but to me, it sounds as applying the old playbook of the labor market in a typical business cycle. And when you see these kinds of low unemployment rate, the kind of vacancies we're seeing, typically it has been a sign of a very hot, unhealthy labor market. That's true when this is all driven by companies pushing hard on the labor market because demand of consumers and so on is exuberant. That's not the situation here. As I said, it's the scarcity in the labor market is coming from not enough worker as opposed to too much demand for workers.

And so that is very different. I think hot and unhealthy conveys there's too much of it. The fact is that there's too little. There's too little of labor available to work. Very different from what used to be called a very hot labor market. So I agree with you, it's odd to say that when in fact we would like to have more people working but again we are used to see a world that is very driven by the demand side, whereas this . Time is really driven by the supply side and the kind of frame wording template [00:09:00] playbook we use don't necessarily translate as easily to characterize the current situation. So bottom line is I don't see the current labor market as being hot, unhealthy this is really about bringing more people to labor force helping a more smooth reallocation of workers across sectors to unplug these bottleneck that are characterizing the labor market at this stage.

[00:09:21] Oscar: So if current unemployment levels are not sustainable at the moment, and you start to get more people back into the labor force, what is that level of unemployment that would be consistent with more stable wage growth and more stable inflation?

[00:09:35] Jean: So I think we need to embrace the fact that we will likely have to see some increase in the unemployment rate from the low levels we're seeing here.

That's gonna happen normally as more people come to work the demand and the restart of the economy starts to cool off. We're gonna stabilize at a rate of unemployment is gonna be somewhat higher than where we are now. I don't think the unemployment rate that we have now needs to be compared historically to the same [00:10:00] level, which were very hot labor markets.

So I think we, we don't wanna do this translation or this comparison, but at the same time even if it's not hot per se it's not necessarily unhealthy because that's part of restarting. It's not the level that I would expect to be sustained over time. So I think we're gonna be in a world that's gonna get closer to 5% over time. I think this is the natural level that a US economy has been operating will continue to operate after things settle. It doesn't mean that this three-ish numbers we're seeing now is unhealthy. I think it's part of the adjustment we're going through it's . Not the same 3% as we would've seen in the past or 3.5, 3.9, but it's gonna be up from here to some extent however that's gonna also depend on what central banks decide to do and how they interpret this world.

We think that this is a world again, it's very different from what we've seen over the last 40 years we think the Great Moderation, what's the characteristic of the last forty years is over and as a result, central banks are facing a much more severe choice between either the stabilized inflation or they [00:11:00] stabilized growth.

I don't think they can have both anymore because this is a world where the main driver is production constraints of many sorts.

So given the sharper choice central banks we'll have to decide whether we live with somewhat more inflation or we insist on bringing inflation back to 2% quickly.

We think that if central banks are to bring inflation back to 2% very quickly that's gonna come at a very important cost, we don't think this is the best outcome necessarily for society, and in that case, you could see unemployment going to above 5%, we're seeing need for at least 3 million jobs to be disappearing in order to bring inflation quickly back to 2%. I think the economy can operate at a lower level, maybe five. But if we insist on bringing inflation quickly back to 2%, then we'll have to accept higher employment rate than that.

[00:11:48] Oscar: So John, I think you've touched on this, but it sounds like what's happening to the labor market now is, is not something that we necessarily see very often, but, but rather a symptom of a broader phenomenon is that [00:12:00] the right way to think about it?

[00:12:01] Jean: I, yes, I think the answer is yes. And I talked about this being an unusual labor market dynamic this time being driven by the labor supply as a key constraint.

There is a longer term structural story that is going on here. These this is a manifestation of a limitation to production to the ability to produce. So the labor supply labor market is one of the bottleneck we're facing.

There's actually a few more of those restarting the economy has been difficult, and we haven't managed to yet go back really to the level we were able to sustain before the pandemic in large part because of the bottleneck that the labor market is representing. But there's more it's, we still have supply chains issues that needs to be resolved. And I think we've learned through COVID that, the global economy is a pretty well tuned complex network, which was working fine and had not been disrupted too much. But I think now that we've disrupted it, we've learned that it's a very complex network that is subject to the weakest link. Right now the labor market is one of the weakest link holding back the [00:13:00] entire supply chain, but it's true more broadly.

This is also longer term issues. Demographics has been one of the reason why labor supply is so low is something that we knew for a long time. The easiest thing to forecast 20 years in advance is demographics. Cuz you pretty much know who has been born and who was gonna be there in 20 years.

So that demographic is not news, but now we're seeing that being like a driver at this stage and a key limiting factors. You add that to other longer term phenomenon, the rewiring of globalization that ,is happening accelerated by COVID and you also have the climate transition.

These are all things that have something in common, which is about restraining our ability to produce their supply constraint. And that's what makes this world now very different from what the last 40 years have been. And I think the labor market is the most direct manifestation, but it's much broader in nature.

[00:13:49] Oscar: So all that being said, John, what does this mean for the fed and their plan around interest rates?

[00:13:55] Jean: The big story here is that These forces we talked about here, labor [00:14:00] supply being constrained, and more broadly, these production constraints, it's not something that will be affected or eased by the central bank hiking campaign.

So we just saw the latest decision of the Fed, they're clearly determined to bring rates up very quickly. Another 75 basis points hike we've seen. And as a result this is creating a very important risk for the markets at this juncture. We will see as a result very significant cost for the economy to those hiking campaign without seeing the benefit on inflation for a very long time.

So before they feel they have succeeded in bring inflation down, we will have to go through the cost because that's actually the only way to bring inflation down through rate hikes is to raise an employment and to reduce activity very significantly. We don't think this is fully acknowledged by the Fed or any central banks for that matter at this juncture, and so this much sharper cost we're gonna have to face the reinflation down leads us to be pretty concerned about risk markets. Now, in fact, we're underweight equities as a result and that continue to be a conviction. So we think we're in a world where central banks will [00:15:00] be over tightening before they realize that a lot of the issues we're facing now are things that are not responsive to the interest rate hike.

And if we insist on bringing inflation down the damage for the labor market and more broadly will be a deeper

[00:15:13] Oscar: Well, it's clear. The fed has been very busy this year, uh, with interest rate decisions. I think we're all waiting very patiently to see what the impact of that is in the future. Jean, thanks for all your insights today. And thank you for joining us on The Bid.

In 2019, Repsol was the first oil and gas company in the world to announce its commitment to be net zero by 2050. Why did they make that decision? What's their plan to get there? On this episode of our series, The Real Leaders of Net Zero, Repsol CEO Josu Jon Imaz joins host Mark Wiedman to talk upstream and downstream, electrification versus decarbonization, and why technology is the biggest ally in this ambitious effort.

Mark Wiedman: Welcome to The Bid miniseries, The Real Leaders of Net Zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Wiedman. On this episode, I'm joined by Josu Jon Imaz, CEO of Repsol, a global multi-energy company based in Madrid, Spain. In 2019, Repsol was the first oil and gas company in the world to announce its commitment to be net zero by 2050.

Why did they make that decision? What's their plan to get there? We'll talk upstream and downstream, electrification versus decarbonization, and why technology is the biggest ally in this ambitious effort. Josu Jon, welcome.

Josu Jon Imaz: Thank you, Mark.

Mark Wiedman: Could you give us a quick overview of Repsol and explain upstream versus downstream in your operations? 

Josu Jon Imaz: Repsol is an energy company, based in Spain. We were an oil and gas company that six years ago started a journey moving towards a multi-energy view, providing to our clients all the energies they need: either hydrocarbons, gas and also renewable power either for electric mobility or to be used at home. We were from the very beginning a company with more downstreamers, let me say, than upstreamers. Downstream in our sector means all the industrial activity, in our case it is: refining, chemical plants, LPG plants (and so on) and all the distribution and commercialization businesses we have to be very close to our clients. That means our service stations and also the retail power business. We have our main downstream activity in Iberia, (Spain and Portugal), also in Peru. When we talk in our business about upstream, we are talking about the exploration and production activity of hydrocarbons, so that means oil and gas. Because Spain is not an oil producer country, we have, of course, an international footprint that is mainly based in North America, United States and Canada, and Latin America, where, because of our historical language, linkages, etc., we have a strong presence. We have an exploration and production activity in the North Sea (UK) and Norway, and also in Northern Africa, Algeria and Libya. On top of that, we are also in South Asia, producing gas in Indonesia. Let me say that we are mainly gas producers, that means that two thirds of our total production in what we call the upstream, the production of hydrocarbons, is gas. Natural gas is a really important fuel at home in terms of security of supply as we are seeing today, but also in terms of transitioning and reducing the carbon footprint in the world. We were the first oil and gas company in the world committing with a 2050 net zero target. We launched that commitment in 2019. We have a clear pathway to get these targets. 

Mark Wiedman: So today you're about 2/3 in oil and gas. You expect that number to drop as you've made that commitment to get to net zero by 2050. Why is decarbonization part of your business and part of your strategy? 

Josu Jon Imaz: First of all, because we know that we are part of the problem, because hydrocarbons (they) are CO2 emitters. We want to be part of the solution, that means that the world has an important concern related to the emissions of greenhouse gases and this kind of emissions have to be reduced, so we have a clear commitment to do that. It's important to measure this effort, so to know what we have to do, we have defined an indicator. (We are in some way, engineers, chemists, and so on). That is called the carbon intensity index. That is some way of measuring the total CO2 emissions we produce, not only in our operations, also taking into account the CO2 emissions of our products that is produced by our clients, divided by the total energy we produced, including here, oil, gas, renewables and so on. Talking about 2050 is easy, because it's far, but it's also important to have clear milestones and targets to evolve year after year. That means that by 2025, we are going to reduce by 15%, this carbon footprint and 28% by 2030. By doing that, we are going to be aligned with the effort that the world needs to fulfill the Paris Agreement targets.

Mark Wiedman: From a public policy perspective, I completely understand why we need to shift under the Paris Agreement, but as a CEO, as a steward to your shareholders, why do you care about reducing your carbon emissions?

Josu Jon Imaz: Because I don't want to have a profitable Repsol in 2021- 2022. I want to guarantee that we are building a company that could be profitable in 2030, 2040. Being profitable in the short term, having profits in a quarter, is quite easy. In some way, the dilemma of a CEO is to try to combine both targets. I mean, being profitable today, delivering today, but at the same time, paving the way to be profitable in the long term. To do that, you need, in some way, first of all, to have a clear vision about what to do. Second, to build, let me use the term, some kind of coalition, where you have to include your employees, the high management of the company, your board that has to support this view, because sometimes you are going to suffer in some metrics in the short term to get these targets. And, of course, your shareholders, they have to be part of this narrative, saying that today at 40% of the current institutional investors of Repsol are investors sharing these ESG targets. That means that they want to invest in companies that are not only focused in having profits in the short term, but also building the foundations for being profitable in the long term. So, let me say that we are doing that also to make money today, but mainly to be able to make money in the future.

Mark Wiedman: Why is decarbonization the key for oil and gas companies for making money in the future?

Josu Jon Imaz: We have to gain the license to operate. The world is changing. We have to think that the world is going to develop a great effort to reduce the CO2 emissions in the future. I mean, otherwise we are not going to have a solution in terms of temperature increasing, climate warming and so on. That means that we have to think that the oil demand, not now, not perhaps in five years, but in 20-30 years, is going to be lower than what it is today. New forms of energy are appearing and these forms of energy are going to be part of the energy basket that our clients are going to use, so I think that it makes sense, first of all, to leverage in the current client base we have to build this new business. I'm going to put you an example, I don't like to be very theoretical sometimes. If we have 24 million clients in Spain and Portugal and we are selling them today gasoline, diesel, LPG at home and so on, it makes sense to start offering not only the diesel they need for a car, but perhaps the electric recharging service that they need for an electric car that is starting to be part of the current car fleet in Spain or in Portugal. We launched, for instance, 13 years ago this electric vehicle recharging service in Spain. We were the first company starting with this service. We are today the company that is growing the most in the number of clients we have in the retail power business, because we are starting to offer bundle offers to our clients to refill or to fuel your car, but at the same time, offering the possibility to have a full, renewable power consumption at home, so that is part of our business. We have this competitive advantage and at the same time, we are paving the way to be competitive in the future.

It doesn't mean that oil is going to disappear from our world, because even in a world with no emissions, (zero emissions), we are going to see that a part of this whole production is going to be used to produce fibers, asphalts, fertilizers, plastics, and so on. All that is going to be needed, but probably a part of these energy demands is going to be fulfilled. You’ll see some other forms of energy that could be renewable that are going to be part of the basket, but then let me say that sometimes we try to make a confusion between electrification and decarbonization and it's not exactly the same. I mean, electrifying is important. It's an important part of this effort, but we are going to need decarbonizing liquids to decarbonize a main part of the economy. For instance, planes, the maritime sector, trucks, chemical companies, cement plants and so on are not going to be electrified knowing the current technologies in the short term, so we are going to bet also in favor of decarbonizing liquids.

Mark Wiedman: You're making an important point when most people think about decarbonizing, in their minds, what they really mean is electrification. Because they're talking about basically driving an electric car and using a heat pump to heat and cool their homes. That's what they're thinking. But what you're also saying is that, actually, huge parts of the carbon intensity of our economy come today from industry, from agriculture and from things that cannot be electrified easily, like heavy trucking and long-distance airplanes. So what are the technologies and businesses that you are driving at Repsol to actually capitalize on the transition?

Josu Jon Imaz: We have a quite a unique refining business in Europe in terms of competitiveness. We have five refineries in Spain. If you analyze the in net cash margin terms of all the European refineries, you will see that our five refineries are in the first quartiles in terms of competitiveness, so we are investing hard in this refineries and we are transforming, in some way, this concept of refinery and trying to shift them towards what we call multi-energy hubs. What does it mean, is that oil is going to be a part of the feedstock of these refineries, but on top of oil, we are starting to use a feedstock of vegetable oils, recycle oils, animal fats, products coming from urban waste, products coming from plastic pyrolyzing, etc. to produce fuels or hydrogen, we are going to use CO2 industrial streams plus renewable power. All that is starting to be part of the feedstocks of our refinery. So, what is the output of all that? That the products we are producing, sometimes diesel, sometimes jets, sometimes gasoline, are more and more decarbonized and their total carbon footprint, it’s scope three, is going to be reduced because a part of the CO2 they are emitting has been previously fixed, because they come from wastes, vegetables and so on, so that is part of this industrial transformation. From our point of view, that is going to be fully needed, because otherwise we are not going to be able to decarbonize all these sectors you mentioned before.

Mark Wiedman: I want to capture this point. You've got lots of work to do to replace, gas and petroleum for electricity generation for mobility, but what you're saying is that for a long time, we will be using fuels that come in liquid form. What you're talking about is decarbonizing the production and the carbon content of those fuels, so that airplanes will continue to fly without magical electric batteries, that ships will continue to go the oceans, but the fuel that we'll use will have a lower carbon content. What’s the biggest challenge in making that happen?

Josu Jon Imaz: Let me first of all say the advantages, because the first advantage is that that is going to allow us to decarbonize these sectors, because otherwise we are not going to have solutions in decades to decarbonize then. Second, that we, as a society, are saving a lot of money, because the infrastructure is there. The plane is there, the engine is there, and the challenges, of course. There are a lot of challenges in this journey. The first one we have is to develop some technologies. We have to invest more in these refineries. We have invested in Repsol, 400, 500 million euros per year in this business to decarbonize these plants. Today, for instance, we have a project that is going to be in operation next year, in 2023, that is going to produce 250,000 tons per year of sustainable biofuel, coming from waste that is going to be used either for biodiesel, biojet as a sustainable addition fuel and so on. We are launching another investment in Tarragona, in the Northeast part of Spain, that is going to use urban waste (400,000 tons per year, more or less) to produce methanol that could be used either to feed the chemical cracker to produce plastics or to be combined with gasoline to decarbonize these gasolines. We have technological challenges. We have to invest higher in that, as perhaps the unknown part of all is that technology has to be developed for some of these applications, but, I think that on top of that, we need a more open mind from regulators, because sometimes when regulators are, in some ways restricting the view about the technologies that could be used to decarbonize the world, they are reducing the incentive we could have to invest in these new technologies that are going to be fully needed to decarbonize the world.

Mark Wiedman: When you think about the technologies that exist today and the business models associated with those technologies, what's most attractive for you in investing today, towards a decarbonized world?

Josu Jon Imaz: Short term, what is profitable today? Clearly speaking, biofuels, advanced biofuels, but in products where we could guarantee today, the feedstock supply, power generation produced with wind and solar energy and of course, all the areas related to the materiality supply to our clients in commercial terms. The first one is hydrogen, but from my point of view, we are fully committed with this pathway, because we think that we have a unique position in the Iberian peninsula to boost this business and when we enter in new advanced biofuels, (in some cases coming from biomass, coming from urban waste) and when talking about what is called e-fuels or synthetic fuels that are going to be produced (I'm talking about hydrocarbons that are in molecular terms, diesel and gasoline molecules or jet molecules, but that are produced using as feedstock, CO2 streams from an industrial stream that is going to be reduce a carbon monoxide, CO, and hydrogen produced with renewable energy that in combination with carbon monoxide is going to produce these hydrocarbons). I mean, that is not science fiction. It's something that we are starting to launch, so I think that we have to invest in what is the short term, what is going to give us profits today, but at the same time, we have to pave the way to some technologies that could be in some years, part of our business. And, uh, let me say that as an oil and gas company, it is part of our business also to combine risks and having a basket of investment work, we are taking different degrees of risks in our portfolio.

Mark Wiedman: Let's imagine that you and I start a venture capital firm together. Where would you make your biggest long-term bets on technology and business models changing?

Josu Jon Imaz: Let me say, and that is perhaps, I have a biased view of it, because not only because of my history as a chemist, but also because of my background as a refiner and in the chemical business of Repsol, but I think that it would be in the decarbonization of liquids, which is perhaps one of the most hidden parts of what we are going to need in coming years. We could have a unique opportunity to boost this business and we are in the right place to do that, because Spain, I mean, is wonderful from the point of view of many things, like the style of life and so on, but on top of that, Spain is also a core country in terms of developing renewable businesses, because we have not only the resources: sun, wind, and so on, we have the talent, because we started as a country in this business of renewable energies 25 years ago, so we have the infrastructure to do that. To produce these new e-fuels, this new hydrogen, this new synthetic fuel work, we are going to use waste based in the circular economy and at the same time we are going to use renewable power as feedstock to produce these kind of products and having the right industrial assets to do all that.

Mark Wiedman: You've worked in the public sector. Now you're leading a private firm. How do you think that government, companies, other social actors need to work together to drive decarbonization?

Josu Jon Imaz: I think that the dimension of effort requires a company effort, not only from companies and from the public sector. (I think) from the rest of the society, also citizens. They have to be engaged in this effort, because we need a clear view from the public sector, defining regulatory terms, the targets and the pathways to achieve this figure. We need commitments from private companies. Private in the sense of private owners, managed companies like Repsol, and we need all (of them), because we have to invest in this new, low carbon platforms in this business. We are also going to need the commitment of the whole society, because we also have to act on the demand. I think that being able to reduce the demand from consumers and not only now, because we are in the midst of an energy emergency in Europe, but also in terms of being able to cope with the CO2 emission effort. So I think that we need this coalition, this combined action among these three actors. 

Mark Wiedman: Last question. What do you think is the single most important thing that needs to happen to get the world to net zero?

Josu Jon Imaz: Perhaps, if I have to give you three answers, I would say technology, technology and technology. I think that technologies are allowing us to achieve what we are doing, I mean, we couldn't imagine 15 years ago what we have achieved as a society in terms of producing the current, cheap renewable power using solar panels, so I think that we have to invest in technology and we have, from the public sector, to allow companies in an open-minded view to incentivize this effort to invest in technology. I think that technology is going to be one of the biggest allies we are going to have to get this ambitious effort.

Mark Wiedman: Josu Jon, thank you again for joining this episode.

Josu Jon Imaz: Thank you, Mark. It has been a pleasure.

Larry Fink: Welcome to The Bid, I’m Larry Fink, Founder, Chairman and CEO of Blackrock. As a 3-time guest of the podcast, I am honored and delighted to introduce The Bid’s 100^th episode. The Bid started in 2018 as a new channel for the firm to reach our end investors and provide them with key conversations about the world of finance. As well as hitting 100 episodes The Bid also recently hit 1 million downloads. I am excited for the next 100 episodes where we’ll continue the in-depth conversations that make The Bid so unique.

On this episode of The Bid, Blackrock’s Gargi Pal Chaudhuri has a conversation with a prominent personal finance expert, Lauren Simmons, on the topic of financial literacy, something that we firmly believe in here at Blackrock. Only 32% of Americans feel confident in their investing knowledge and here at the firm we strive to ensure our clients of all backgrounds achieve their own financial goals, wherever they fall on the wealth spectrum. Lauren Simmons is participating in Blackrock’s Future Ballers campaign where she will lead up-and-coming basketball players through a curriculum to develop their financial skills

I am sure you will enjoy this episode and If you haven’t already, I invite you to subscribe to The Bid where you can get more episodes like the one you are about to hear.

Gargi Pal Chaudhuri: [00:00:00] Welcome to The Bid. I'm your host, Gargi Pal Chaudhuri, Head of iShares Investment Strategy and Markets Coverage. Lauren Simmons is a personal finance expert and former stock trader as well as being a producer writer and the host of Going Public, a web series, following the stories of founders on their capital raising journey and her own podcast, Money Moves.

Lauren is part of BlackRock's new [00:00:30] iShares Baller$ campaign, where Lauren is taking five college basketball players, under her wing to coach them through a financial literacy curriculum.

Hi Lauren, welcome! It's so great to have you. How are you?

Lauren Simmons: I'm so grateful to be here. I'm doing great. How are you Gargi?

Gargi Pal Chaudhuri: I am well, thank you. I've been so excited to speak to you about the Baller$ campaign. The one thing that I was thinking [00:01:00] about is the tagline it's called playing the long game, tell me a little bit about what that means to you and why did this campaign resonate with you so much?

Lauren Simmons: This campaign resonated in so many different ways. especially when it comes to young, new athletes coming into a lot of money, thinking about the broader markets and how everyday retail investors are looking at how to invest for their future.

And so the saying goes and it's, and it's what is [00:01:30] coined for this campaign is "play the long game. That is how you want to look at investing. Look at the long term, don't get too excited about instant returns and instant money, and how can we continue to grow and build our wealth for the long term..

Gargi Pal Chaudhuri: Especially, in these volatile markets, that makes a lot of sense. So as you were doing this campaign, and you talked about young people a little bit ago, what would you want young people generally to learn from this project?[00:02:00]

Lauren Simmons: I want them one, to obviously recognize that these players that are getting their contracts are the 1%. But there is still relevancy there in the sense of how you are investing and looking at your financial future for the long run. So I don't want people to feel intimidated or think that they aren't gonna be able to learn some of the tools that, is developed throughout this campaign.

Gargi Pal Chaudhuri: Yeah, Let's talk about you a little bit. So as I was researching for The Bid, I noticed that you have a degree in Genetic Science. And, I'd love to learn a little bit about how you translated that degree into this amazing career in finance that you've built. And, I speak [00:03:00] to a lot of women in finance that often ask about what classes they should be taking, and I tend to tell them that it doesn't matter you learn on the job.

Lauren Simmons: Yeah. So I study Genetic, Counseling and I had a really strong statistical analytical background there was definitely correlation when I went in to become an equity trader and having to analyze different stocks.

. And when we're looking at [00:03:30] the Gen Z population overall, they are the largest population that aren't even going to college. They're going directly into entrepreneurship. So when it comes to finances, I don't think to your point, there needs to be a direct correlation, there are definitely books that I could recommend, but to learn, in the Capital Market space is learning on the job. And even when it comes to your personal finance journey, it is. Learning, in order to be good with money, you have to be bad with money. And hopefully you can [00:04:00] make those mistakes earlier on, but having open transparent conversations about finances and what your journey is, is going to, help improve, one, your investment journey, but two your personal finance journey.

Gargi Pal Chaudhuri: And on that note, in terms of your journey of personal finance, I would say some of that relationship with money actually comes from when you were growing up. and I know that I am an immigrant in this country.

I grew up in India and so much of how I feel about money today comes from the lessons that [00:04:30] my parents taught me about saving and investing and how to think about cash versus the markets. And I'd love to hear from you around some of those same topics when you were growing up, what were some of the lessons that you learned about money and what were some of the relationships that you or your parents had with money?

Lauren Simmons: So my relationship with money, I come from a household where my mom was very good in personal finance, almost too good. In the sense of she was. frugal, but she also saved everything saved so much [00:05:00] so that she didn't really have a balance of, just living life and, and experiencing, different moments, going on vacation or going out to eat and as I got older, I realized that there has to be a healthy balance. you don't have to cut back on everything. You don't have to necessarily save everything, but I had to learn how to spend money. And, I, I recently had an executive coach tell me it's okay [00:05:30] to, spend money and have some risk involved that is healthy, right?

Let's not avoid having debt, let's not avoid making investments, but let's do it in a smart, reasonable way. so I've had to unlearn some of that thinking of if I spend money then I'm gonna be completely outta money.

The other thing that I've learned on my personal finance journey is that while my mother was great when it came to personal finances, she didn't invest at [00:06:00] all. I had to learn what it meant to invest, what my risk tolerance was, what my ethos was around investing and what I want to invest in and making sure that I was investing for me and not because of something I read on TV, something I read in the news and, and just making sure that I was in a solid place to start investing and a solid place is, building that emergency fund, making sure I have all of my revolving debt paid off. And then from [00:06:30] there taking the tools that, I learned in the household to, to make, my investing decisions.

Gargi Pal Chaudhuri: I love that Lauren, I have a strong belief that it's mothers of young girls that teach them about investments because it was definitely my mother who's a doctor who taught me all about um, saving well, I should say. so let's talk about the sports professionals that you're working with we'd love to hear if you have worked with sports professionals before, or if there were any expectations that you had going into this project and also, what are you [00:07:00] looking forward to the most?

Lauren Simmons: So I've not worked with sports professionals before, but I have worked with, clients that were younger, that came into a lot of money, whether it's working in entertainment, music, et cetera. And, there is a lot of correlation. From just the conversations that I have with my initial conversations, with some of these rookie players that I've been talking to, we have not had our one on ones yet, which I'm really excited to dive into that

But what I [00:07:30] hope is that, I'm a soundboard, that I'm a guidance, that I'm someone that is a trusted voice, that they can ask any and all questions. that they have related to finance and when it comes to the financial industry, and seeking financial advisors, many people get intimidated because the person sitting across from them doesn't look like them, whether it's lack of representation, whether it's, a young woman, or just women in general.

And [00:08:00] Sometimes when you feel like you don't have a seat at the table or the person that you're talking to relates to you, there can be an intimidation factor and everything that I do is all about giving that accessibility, giving people seat at the table, making sure that they're seen, they're heard that they're not being talked down to and that they feel comfortable asking all the questions that they want.

Personal experience coming onto the trading floor, when I worked at the New York stock Exchange, I did feel that level of intimidation of [00:08:30] working with 250 men and feeling like my financial literacy wasn't on par with theirs but what I learned was it is okay to ask for help. It is okay to ask any and all questions.

There is no such thing as a dumb question, especially when it comes to finance. And honestly, I'd rather ask a dumb question and be smart with my finances than not ask the question at all. But I'm curious, Gargi did you have that same experience working in finance?

Gargi Pal Chaudhuri: [00:09:00] Sure. So I, grew up on the bond trading floor at Merrill Lynch. I, started my career in 2001. So as you can imagine, not very many women, certainly not very many of color, certainly not very many women who speak with an accent. but my experience was actually wonderful.

I had people that I could ask questions to. Of course I felt out of place. I remember I felt so out of place probably even a couple of years where I felt very different. and I didn't have the confidence then that I do [00:09:30] now where I could say different is fine. Now you and I can say that you can be different and that's our, advantage.

That's our edge, 20 years ago that wasn't the case. Thankfully, I think, if you walk into a bond trading floor now, I think it looks slightly different. I hope not, not hugely, but slightly. And hopefully with women like you, there is a lot of representation and what you said earlier really resonated with me.

You can't be what you can't see. So having you there [00:10:00] and, especially having women, investors, showing women and people of color that you too can invest your money. So thank you for doing all the work that you're doing and, being visible. it's so meaningful. I'd love to talk a little bit about the curriculum that you're designing for these players. the philosophy that you're perhaps approaching it with and, how the relationship that you're building with them is expected to grow.

Lauren Simmons: we actually touched on this a little bit earlier, but I'm starting with the foundation of what is your relationship with money, [00:10:30] because it is very indicative to how you look at finances and how you are going to have different spending and investing habits. And I think so often is we jump right into, okay, these are different vehicles that you can put your money into.

This is what you can do for the long term. And that goes over people's head. And isn't a connecting point. If you don't understand how they are operating the way that they are operating and regardless if the players or [00:11:00] just anyone that is listening to, this conversation today has a financial literacy background or not, just know that your relationship with money is going to follow you throughout your entire life. And your relationship with money is going to continue to change and how you look at investing and saving and et cetera is going to change with different, life stages. Who I was at 18, going into college and who I was at 21, starting a job, making, no [00:11:30] money basically. And then who I am now making six figures plus. The, the milestones are gonna be different. I'm a little bit older. And so I'm hoping with these players, they can at least articulate what are some of their visions that they have, as far as how they're thinking about growing their money. and then also recognizing that they can change the mindset of how they've been raised. So I'm really doing it from a very holistic, psychological standpoint, and then [00:12:00] growing into the conversation of money and again, understanding what their risk tolerance is and how we can look at investing the a hundred thousand dollars that they've been given. but the biggest thing is that I want them to feel empowered and I want them to stand by the decisions that they make. One of the best lessons I've learned while working at the New York Stock Exchange is that you had to make, decisions and microseconds when being an equity trader and whatever decision you made, you had to be firm in that decision. There was no [00:12:30] hiding behind someone. There was no making excuses. And Because I learned that so early on every decision that I make, especially with my personal finance and investing journey, I stand by it. And maybe it is a bad decision. That is okay, there, is no it's bad or good it's the decision that you felt was right for you and whatever the outcome is, the outcome is.

And so I want these players to feel empowered by the decisions that they make and regardless of what happens. Feeling [00:13:00] good that they made those decisions because they were able to come up with those decisions.

Gargi Pal Chaudhuri: I think you make an important point, the decision is your decision and owning it. I think it's very similar when you're trading or when you're managing risk as an investor, you have to own your decision and you have to know that there are consequences to the decision and that's okay.

And I love that you're teaching them that at this juncture. so talking about decision making, especially for the players given their age [00:13:30] and the particular career that they're in, which is obviously different for the one that you and I have had as traders and investors. are there certain issues that come up?

I suppose the one that immediately comes to mind is injury and perhaps a shorter timeframe of their careers. Is there something to think about there?

Lauren Simmons: You touched right on it. with athletes in general, their peak salary is gonna happen a lot younger than how an everyday person . That is working in the typical workforce, you continue to scale on a yearly [00:14:00] basis. You keep growing, you keep building towards your retirement, and there are definitely similarities there.

 but their money, is going to peak unless they decide to do other business ventures and continue to grow and develop, the more business side of their brand. so with that in mind, they have to be very intentional and very strategic in what they are thinking about doing with their finances in the long run and not just get so excited about, oh, I have so much money right now because that's only today. That could be [00:14:30] next year. That could be even five years. But when we talk about how long we are living on this earth, it's very, it's relatively a very small percentage of the time that they will be alive and they need to be making those long term decisions, as early as possible.

Gargi Pal Chaudhuri: That makes complete sense, and we're talking about the athletes a lot, because of course it's super exciting, but everyone listening to this, podcast, isn't an athlete. So what are some of the teachings that you have and [00:15:00] spread it across people of all ages? What should they be learning an investment 101 if you will..

Lauren Simmons: So of course the, the standard advice that everyone always gets is following the 50, 30, 20 rule. And that is a great foundation. 50% is gonna go to your everyday expenses. 30% is gonna go to your future. And 20% is going to go towards your savings now, Now that 30 20 can be flipped. but with that added the 30 or 20% that is going to go towards your investing [00:15:30] and that's a great foundation. I think that those numbers will continue to change as you will get into your different life stages. But with that, the other important thing is making sure that you have. Credible voices around you so that you can't ask and articulate any and all questions. And the main thing is making sure that you don't just have one voice when you have one voice. You're usually following that one ideology, which may not be a direct reflection on how you want to invest or [00:16:00] what your financial decisions are. So I do think. Being able to source different voices in the space, asking questions, getting different ideologies, and then putting those together, figuring out what works for you, your ethos, your risk tolerance, and going from there.

This is advice that I would tell someone who is making a million to someone who's not making any money at all.

Gargi Pal Chaudhuri: Love that Lauren. And I'll just add a couple of things. And these are from conversations that I've had with friends and family, that often come up. And the one thing that [00:16:30] people ask is around, oh, how much money do I need to have to start investing? I'm sure you come across that too. And I'd say that no amount of money is too small to start investing. There's so many ways to invest now at such cost efficient ways. And number two, I don't think you need to know everything about everything to start your investment journey. I think people often get overwhelmed because they're like, oh, but I don't know about the earnings report and I don't know about CPI and I don't know about fed.

[00:17:00] It doesn't matter. You can start small, you can start in a diversified manner and take little steps. And then you can think about asset allocation later, just remain remaining diversified in the beginning, instead of putting all your eggs in a single basket, I think is one thing that I often tell friends and family.

Lauren Simmons: And I think that that's really important. especially when you're just starting out, because you get to figure out what kind of investor you are. And I think as you are going on your journey and [00:17:30] you understand what your risk tolerance is, what type of investor you are, the better you can shape yourself to maybe more specific vehicles. but I think the more diversified you are to your point the better.

Gargi Pal Chaudhuri: I know that there's been so much concern recently with the volatility in the markets or with mortgage prices going up. And of course, with inflation being at four decade highs, I guess when people are worried about some of these things such as, not being able to buy a home because home affordability, has moved meaningfully with [00:18:00] mortgage rates or things like social security, not being around how do you talk to them about ways of building wealth in the traditional manners that we had perhaps thought about earlier? with some of those perhaps not being, as in reach.

Lauren Simmons: to answer your question, when it comes to real estate, there's still ways to be able to buy real estate without directly buying real estate but again, take your time to do your due diligence, there are definitely barriers of entry into all these different, vehicles and, and continuing to [00:18:30] be able to diversify your money.

The accessibility is there, especially when we have the technology and just different avenues to be able to do things. I wouldn't get too narrow focused on "I'm not able to, to purchase a home." Of course, that's the American dream. Everyone wants to do that, but you can still be part of Real Estate just in different ways and get dividends and passive income, which is a plus. So That is where asking the questions comes into mind. but I think, let's not [00:19:00] sugar coat it the next year or two is going to be a little tough, right? and the cost of living has gone up but there are cycles in the financial market. there is cycles in the economy and if you can breathe through this, do all the smart strategic decisions. Especially when we talk about playing the long game.

Gargi Pal Chaudhuri: I like that. Talk to us a little bit about what you see to be the biggest barriers for financial literacies, [00:19:30] especially to women and to people of colour who perhaps don't have access or formal education on financial literacy as many others do.

Lauren Simmons: what I am learning now, have worked a few years in, in finance is that it's not just minorities and women that don't have that financial literacy acumen. I'm learning that the conversation around money just doesn't happen overall, and I think we can be more empowered by [00:20:00] having those conversations. And this can open up a floodgate of a lot of things, but having the conversations on what is proper salary, how do I budget? How do I save? Knowing how much you have to pay in taxes at the end of the year, the more that you can start having those conversations, especially the earlier on the better it is down the road when you get through those different milestones and you don't have to figure it out right on the spot. Financial literacy, isn't about reading the [00:20:30] best book or, reading the best newspaper. It is just about having the open conversation around money and so much in society. Money is so taboo that we don't even have the conversation.

I am grateful that I was raised in a house. Where my mom had very transparent conversations with me about how much money she made, what her actual job was, how she was saving and budgeting her money. And I think it always starts in the household. If [00:21:00] parents could have conversations with their childrens around that, the better it is.

And there's no shame in having open, transparent conversations about what your salary is. I think the more that you can have those conversations, then when those kids turn into adults, they know how to strive for more later on in life.

Gargi Pal Chaudhuri: Yeah, fully agree. I actually always talk to my team about this and I tell them how important it is to have those conversations about [00:21:30] expectations, about pay no salary at the end of the year should come as a surprise ever. So hopefully if you're listening to this, you are having conversations about your expectations of compensation.

you talked a little bit about books and I'd love to ask you, what are you reading these days? Anything on top of your playlist, and anything that you're watching that you'd like to share with us?

Lauren Simmons: Just in general or finance related I always have CNBC Bloomberg, all the financial channels in the background. [00:22:00] This is the time for anyone that's listening if you wanna understand how markets move, how the economy is going, this is the time to do it This is the time to learn because the market is so volatile you get to learn in real time and understand why the market is moving the way that it is and forecast for the future. And I think that that will prepare you for the next recession, 10 plus years down the road and what that looks like.

There's so much. room to [00:22:30] learn when the market is as volatile as it is. So that is a plus side to that. When I just want to unwind and relax, streaming services have been really great. We're talking about basketball, but I really love the show, Winning Time on HBO, max. I don't know if you all have watched it, but it is incredible.

I love just relaxing on a Sunday night watching that. and outside of that, I, I listen to a lot of podcasts, but I'm curious, what do you watch Gargi?.

Gargi Pal Chaudhuri: I'd say that one of my goals for 2022 is to [00:23:00] watch less TV and read more books. So I'm trying to get to 50 books by the end of the year. So I am currently reading some of my beach reads. I just finished, Wahala by Nikki May. It's a fun book about four, British Nigerian women so that was a fun beach read. I tend to never read, finance books because I read so much for work when it comes to the markets, but I do consume financial literacy via podcasts. So Bloomberg's Surveillance is my [00:23:30] favorite and of course The Bid, it's another good one so those are some of the ways in which I consume financial literacy. Lauren, I'd love to hear who are some of your role models within the financial space or even more broadly, who are some people that you've looked up to?

Lauren Simmons: In the financial space, a great role model and I just met her for the first time was Arlan Hamilton. She is an African American woman in the VC space and she is just doing phenomenal things. And again, back to representation, seeing a [00:24:00] woman be able to raise so much capital and assets under management, is just absolutely phenomenal and inspires me to think beyond my limits of what I wanna do for my career and my future.

And then outside of that, I really am inspired by my family, my mom, and my brother, I have a disabled brother and he has this optimistic, mindset that just empowers me to just move forward every single day to never use excuse as a reason why I can't do something because he doesn't [00:24:30] use any excuses. And he is really the passion and the motivation to why I do everything that I do today. And then of course, I have a younger sister who inspires me. She keeps me in the know of what this world is that we're in, especially with her being 19 and I just feel like I'm so detached but she, she keeps me young, And I love looking at the world through her eyes as well, it's nice to have a different perspective and what this next generation is [00:25:00] thinking about going.

Gargi Pal Chaudhuri: That's awesome. I'm sure you're teaching them all about investing and they're going to be super investors in no time. Lauren, this was so much fun. Thank you so much for your time. I learned so much and it was such a pleasure meeting you.

Lauren Simmons: It was so amazing meeting you as well. I'm so grateful that we had this conversation and I'm excited for everyone to hear these golden little nuggets that we have to share.

Gargi Pal Chaudhuri: Thank you for listening to this episode of the bid. On our [00:25:30] next episode, Mark Wiedman will be back with another episode from the mini series, The Real Leaders of Net Zero, where he's interviewing CEOs who are leading the private sector through sustainable business practices and towards the net zero future.

Make sure you subscribe to the bid wherever you get your podcasts.

Title: Blockchain and crypto: next-gen investing, tokenization and NFTs

Published Date: 01/24/2022

Links: Spotify, Apple

SARA SHORES: This month, the Bank for International Settlement, a financial institution owned by central banks worldwide, called decentralized finance, a “decentralized illusion.” The bank says that decentralized finance, or DeFi, is extremely vulnerable due to high leverage, liquidity mismatches, and the lack of internal shock absorbers, like banking institutions, but at the same time, the global blockchain market is rocketing. In fact, market researcher Grandview Research expects the industry to top 394 billion by the year 2028, representing a compound annual growth rate of 82 percent. 

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Sara Shores. This month, we’re exploring how technology, in its many roles, is impacting society and investing. On our final episode of our tech mini-series, we’re talking about blockchain.

Today, I’m pleased to introduce not one, but two guests - Greg Schvey, CEO of Axoni, and Robbie Mitchnick, Head of DLT & Digital Assets at BlackRock. Together, we’ll break down how blockchain is changing the way global transactions take place, how transparency could force change in institutional banking and capital markets and the value of NFTs. Welcome Greg and Robbie, thanks so much for joining me today.

GREG SCHVEY: Thank you very much for having me. Great to be here.

ROBBIE MITCHNICK: Thanks, Sara, well it's great to be back on The Bid and thanks for having me today.

SARA SHORES: Robbie, I want to start with you. For years, the word on Wall Street has been bullish on blockchain, bearish on crypto. But today, crypto is actually the technology that seems to be going more mainstream while blockchain is still struggling to gain wider adoption. Why do you think that blockchain as a core technology has been slower to take off outside of crypto? And how would you characterize the interplay between the two today?

ROBBIE MITCHNICK: I think some of these attempts to draw this clear delineation between concepts in this phase, blockchain, crypto, digital assets, DeFi, et cetera, can be misguided. The reality is that all these pieces have a certain degree of commonality and overlap.

But if we want to zero in on enterprise blockchain specifically, and typically we're talking about that in the context of permissioned systems, then I think one of the challenges that they've had is that any time you pit permissioned, closed networks against open, permissionless, decentralized networks, typically the latter is going to have an advantage.

It's just like we saw with the internet. The open, decentralized, permissionless internet won out over private intranets. That is very much at play here. And so you might say, well, why don't enterprises, why doesn't capital markets just move to that model? And it's simply not practical today for many large financial institutions to turn their operations and their systems over to a truly open, decentralized network.

So this concept of enterprise DLT in a permissioned sense, has helped to address some of the needs in the interim of large financial institutions around privacy of transactions around AML and KYC, around trust in terms of how secure a system is. But over time, it's possible we'll see financial institutions get more and more comfortable with a more open, permissionless system.

The other element of this, I think, comes around adoption, timing, and governance. So if you think about crypto, crypto adoption can happen by any individual or institution as soon as they're ready. Whereas when we talk about enterprise blockchain networks, you really need all the critical players in an ecosystem to be ready to adopt it roughly the same time.

SARA SHORES: OK, so that's really interesting, Greg. I'd love to hear your perspective on how that ecosystem is shaping up for Axoni. You use a distributed ledger technology, or DLT, as the backbone of your platform with the mission of transforming the infrastructure for global capital markets. But to Robbie's point, you need all the players in the ecosystem to try and participate. So how are you working to try to break through?

GREG SCHVEY: So there's a whole bunch of different pieces that have to work in coordination to get something like this going. Robbie definitely touched on a couple of the really key ones. So one is there's the technology components, second is going to be the business case that you're building around it. And the third is going to be building up sufficient adoption, really out of the gate, or at least giving people enough sense of belief that that's going to happen fairly quickly to make the investment in the time and the energy. If you think about the scale of the shift of what we're talking about with enterprise DLT, you know it is huge, the amount of value that we're talking about moving over to these types of networks.

SARA SHORES: Greg, give us some context on the way that Axoni is working with BlackRock. Can you say a little bit more about how that partnership came to be and how we're working together?

GREG SCHVEY: Certainly, so Axoni has been building out industrial grade distributed ledger networks since 2017. A couple of years ago we began working with some of the larger banks to establish a network for equity swaps, which are infamously difficult to manage due to the complexity of the data and the processes required. One of the interesting aspects of our business is that our clients quickly realize that the more of their counterparties are in the network, the better life becomes for everybody involved. So they aren't shy about making introductions.

BlackRock as a major counterparty for most of the largest sell-side firms quickly became a top priority for us in that process. And to their credit they very quickly realized the benefits of what we were building and became strong supporters since then. So this summer we announced publicly that BlackRock was live on that network and that we had built out an integration with the Aladdin platform which has a whole bunch of other longer term implications for the network, for the relationship as well.

SARA SHORES: So one of the applications of blockchain that I've been reading about that I think is particularly compelling is the tokenization of financial assets. Robbie, what's the implication on capital markets for tokenized assets? How might that change things like private markets in the way that we can trade different types of assets?

ROBBIE MITCHNICK: So maybe to rewind for a second, if we define a token as in effect an ownership right issued in a digitally native format on a blockchain where that token or that record then can be traded, settled, recorded directly over a blockchain as opposed to in some centralized, siloed database. Obviously, there are a lot of applications of that.

I think of tokenization as, in many ways, an extension of some of these enterprise blockchain concepts and networks that are being built and one that potentially makes them significantly more valuable.

If you think in the general sense of what the value prop of tokenization is for capital markets, it's things like global interoperability, real time transferability and frictionless settlement, programmability, divisibility, and where desired, transparency. So today in capital markets, there's this huge constellation of intermediaries that do the work of ensuring the rights, the obligations, the rules are followed and the various data records match up to each other.

In the future, a lot of these vital functions could be embedded into code within tokens and then executed automatically. So clearly that would lead to a significant increase in efficiency and automation across the system. Now in practice, there are a lot of frictions on the way to crossing that chasm from here to there in transforming from our current infrastructure to a tokenized world.

And that's things like regulatory clarity, comfort in the security, the existence of institutional grade issuance providers, of institutional grade alternative trading venues for tokenized securities to trade on. And in this case, it's the weakest link that defines the strength of the system. You really need all of those elements to be firing at once. So progress in some sense has been slow. But that's not to say there isn't meaningful progress.

If you look at just the breadth of use cases that are being pursued for tokenization, that spans equities, it's both public and private, fixed income securities, funds, commodities, real estate, of course now art and many other things down the line. So we're seeing that proliferation of projects trying to take advantage of this tokenization theme.

And of course, the most significant asset class of all that's being tokenized is cash itself. And so that's this whole ecosystem around stablecoins as well as potentially central bank digital currencies.

SARA SHORES: Now, you've both touched on some of the potential transformations in financial services around things like asset tokenization and asset settlement. Greg, can you share some of the things that you're most excited about in terms of innovations in financial services? How do you think blockchain can catalyze those transformations?

GREG SCHVEY: So in the enterprise space I do see it happening in a sequence. So first, and what we're seeing today is really around the coordination of data and processes, particularly for contracted assets like derivatives which are created bilaterally.

And there is a massive, well-understood need to improve coordination across parties. And so the reason this is a first step is that you can add incremental value every time a counterparty joins the network rather than having to try to convert an entire market at one time.

But where I see that going is really two other major next steps.

So one is with the data available on the core ledger, for many of these assets we expect that the next major advancement is going to be the integration of other vendors to take action on those. And then you'll ultimately end up with the seamless coordination of activity across all of these various processes happening across these different parties, which can be extraordinarily complex based on rigid bespoke connections today now happening in a standardized way.

So what that does is it gives end users the ability to easily onboard or off board vendors to act on their data, enabling the market to pick the vendor that performs the best, not necessarily be stuck with the ones that are just entrenched because of all those bespoke connections that have just been there for a very long time. So at Axoni we refer to that as the digital assembly line. And it's a process already working with a number of vendors to integrate into our networks to build out that next phase of value.

And then the third is, I do think the point of tokenization we were talking about before is that we do expect that there will be a migration of existing securities markets on ledger particularly as the industry pushes towards T zero. I think what a lot of people don't really understand about expediting settlement though, is that the reasons for delay are really not as much technical. They're really due primarily to the coordination of processes across parties, reconciliations, allocations, things like that that have to happen.

As a final thought on that, on the crypto side I would argue, actually that we're on the cusp of widespread adoption within institutional finance, at least for Bitcoin. And we see that as kind of the gateway to many other things. The general legitimization of cryptocurrencies as an asset class I would argue has already occurred.

The infrastructure is available, the transact at least in most of the major currencies for institutions, and we're seeing things like sell-side research becoming more common, digital asset teams being stood up at many of the largest firms, and even something as simple as clearing Bitcoin futures is something that's become pretty common. So I think that the impact is going to be both infrastructural as well as creating an entire new asset class for a lot of these institutions to act in.

SARA SHORES: I think we would be remiss if we didn't talk a little bit about some of these challenges and risks. What do you think the biggest challenges are that stand in the way of these potential transformations and how could it all go wrong?

GREG SCHVEY: As the institutional side and the public side start to blend, I think what we're going to find is that you're going to find more areas of the public networks that are regulatory compliant. And you're going to find more access within the institutional frameworks for accessing those public markets and crypto-assets. And that line as it starts to blur is something that can be very powerful for both communities as they exist today and kind of bring them together. And if people were averse to doing that, I think everybody would miss out in a pretty big way. There is risk of regulatory overhang on these things that could really impact innovation in a major way.

I will actually say I do think that from what I've seen so far for the most part, most developed markets, the regulation around crypto, blockchain as it's relevant has actually been fairly rational and founded in a lot of the existing regulations which exist for a reason. It is not always super convenient for everybody in the space, but the application of existing laws has so far really not squashed innovation too much, but there is a risk that places that are financial centers today stop becoming financial centers because the world operates differently. So I think as regulators are sorting these things out, continuing to be pragmatic about the way that it's getting addressed is going to be really important to make sure that places like the United States, and Europe, and others don't miss out on a major foundational opportunity for the next 100 years.

SARA SHORES: OK, I can't resist asking you guys about NFTs because the tokenization of art has really taken off this year. For the first time in 2021, there was even a top 10 list for NFTs and it included the first ever tweet, a lot of digital art, and even a pair of NFT sneakers that sold for more than $3 million.

So what do you think NFTs are really about? Is it speculation? Is it adoration? How far do you think NFTs will go and how could they change the way that we consume? 

ROBBIE MITCHNICK: I'm curious for Greg's views on this. I'll confess that in the early days of this trend, I missed it on NFTs. I'm the type of person who's never seen a lot of value in real world autographs or collectibles. And so I didn't see a lot of value in the digital version of that, especially when people can screenshot and copy, and paste, et cetera. But I think that misses the point.

NFTs solve a real problem, which is how do you establish strong property rights over digital items? That's the innovation of NFTs. An NFT can represent anything. It can be real estate, a song royalty, a financial instrument, art, or yes, digital sneakers. And there's no question that a significant share of NFT activity today is just absolutely unfettered speculation.

But underneath that, there's an ongoing trend of digitization across all aspects of our economy. And so digitally native assets will become more and more critical. And NFTs have the capability to handle the property rights for these digital items. So in the same way that strong property rights are fundamental to growth and innovation in the physical economy, so too will strong digital property rights be a critical foundation in enabling an innovative digital economy.

GREG SCHVEY: Yeah I would tend to agree with most of that. I think what we have to keep in mind is that the market for unique items, whether it's art, or sneakers, or anything like that, that's all existed for a long time.

So the digitization of that, given that there's now a technology that can be applied to it, doesn't seem terribly surprising. I can't say I predicted it quite the way it's gone. But it doesn't surprise me to see that there's been an application there.

The other thing you have to keep in mind is that what we're seeing is that the DeFi world where a lot of these NFTs are being used in virtual capacities is also a bit of a testing ground for things that could happen in the real world. So we're seeing things like titles for digital property. When I say property, I mean like in virtual worlds.

I think there's something like $6 billion worth of digital property, that's been bought in this virtual world, which is up from zero three years ago or whenever it was when they got started. And there's mortgages against it, and there's people trading them and transferring them. And so you might say, OK, that's ridiculous, why does somebody want a place in a virtual world?

Well, you know, first of all, people have their own interest, so let them spend the money on whatever they want. But you know, what it does also do is it shows you, hey actually, if we were going to build the title industry and title management, it might look a lot different than going to the county clerk's office and not really being sure about what is going on with the property you just bought.

But I think a lot of the innovations that we're seeing in the NFT space for this idea of digitally unique assets, we're going to start to see flow into other things that we're doing, even if it's just as a bit of a proving ground that's somewhat speculative today.

SARA SHORES: So let's take that a step further. You've both spent your careers in finance but I would say that you're innovators at heart, first and foremost. We've talked a little bit about how these ideas might transcend that financial industry. But, what are some of the non-financial applications for this kind of blockchain and distributed ledger technology? What are you watching for and what are you most excited about?

GREG SCHVEY: I think one of the ones that I'm keeping an eye on, and I would say my excitement level on it is a mixture of excitement and anxiety, it's just around the idea of digital identity. So the idea that you can have a provable identity you can take anywhere in the world, anyone in the world could validate that it's accurate. That is something that I would expect becomes more prominent as you can access these open globally accessible databases. The way that that gets applied, I think there's a lot of very serious ethical questions around that and what level of tracking is going to be available on these kind of things is a very serious question. But I do expect that we'll start to see more and more of that over the next few years here.

SARA SHORES: And Robbie, how about from your side? What potential innovations are you most excited about?

ROBBIE MITCHNICK: Well I think there's a lot of those applications that have been talked about, not a ton to show for it frankly. Every time that we venture into that territory, something else in finance pops up that seems to be bigger and more interesting. And I think that's kind of the case now. Again, with the emergence of DeFi which we haven't really touched on. But clearly in DeFi, a lot like in NFT space, it's inarguable that there's a ton of rampant speculation. In the case of DeFi there's this added element of a regulatory overhang that at some point is going to be figured out. But again, like in the case of NFTs, there's an underlying innovation and potential transformation there that's very powerful. So there's a lot that needs to be worked out in DeFi, but the significance of what that technology is enabling is too large to ignore.

SARA SHORES: I want to thank you both for joining me today. I learned a lot. I really appreciate you helping us explore this fascinating topic. Thanks so much for being here today.

GREG SCHVEY: Thank you, Sarah

ROBBIE MITCHNICK: Thanks for having us.

 OSCAR PULIDO: With inflation at the highest level in decades and volatility continuing to surge, equity investors are questioning their next moves.

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Today, I get to welcome back an audience favorite to The Bid, BlackRock's CIO of US Fundamental Equities, Tony DeSpirito. From market winners and losers to underappreciated opportunities, together we'll break down how inflation is impacting the economy and what history can teach us about the outlook for the stock market. 

OSCAR PULIDO: Tony, welcome back to The Bid.

TONY DESPIRITO: Hi, Oscar. How are you?

OSCAR PULIDO: Good. This is fun to do again. So let's talk about the stock market. The first half of the year marked the worst start for the S&P 500 since 1970 and we've seen a lot of volatility in the market. A big reason for this has been that inflation has been a lot higher than people expected. So how do stocks typically do when we're in these periods of high inflation?

 TONY DESPIRITO: So let's start by talking about this year and then maybe relate that back to what we've seen historically. At the beginning of the year, financial conditions were very loose by any means historically, and we've very rapidly moved from loose financial conditions to tight financial conditions, and that's had a huge impact on valuations.

OSCAR PULIDO: And is that interest rates? When you say financial conditions, is that one of the ways-- 

TONY DESPIRITO: It's mostly interest rates, but it's broader than that. It's liquidity in the market, it's multiples, it's market enthusiasm, et cetera. So it's a little broader than just rates, but that's definitely a big part of it. And when you think about the Fed, towards the end of the last year the Fed was still saying inflation is transitory, don't worry about it. And now the message from the Fed is completely different. It's, inflation is our number one problem and we're on it and we're going to fight it and even if that means risking a recession. And so you really see how the pendulum has swung when it comes to monetary policy. And if you look at the market, earnings have actually been creeping upwards. So earnings have been quite healthy. What's been the pain point has been multiples. That's a huge change. So now let's look at the historical context. Inflation is painful and challenging all around.  It's certainly painful and challenging for consumers. They have to stretch their dollar further. That's tough on consumers, particularly lower end consumers where things like energy and food are a higher proportion of their income. It's also tough for bond investors. The coupon payment is typically fixed in nominal terms. That's why they call it fixed income. And what that means is those coupon payments buy you less in terms of real dollars as inflation goes up. It's also challenging for equities, but when you think about corporate revenues, profits, dividends, they actually go up with inflation. So rising inflation actually benefits those numbers. The challenge for equity investors is on multiples. Rising inflation usually means rising rates, which it has meant this year. And rising rates usually means falling multiples, and you've seen it this year. What's unique about this year in a historical context is the speed and the size of that change has been very dramatic. Now inflation doesn't treat all stocks alike. It's typically tougher on growth stocks than it is on value stocks. That's what we saw in the '70s. That's what we're seeing this year. So I think that really sets the historical context for what we're seeing.

OSCAR PULIDO: And you're talking about multiples, so which is really just a way of thinking about the valuation of the stock market. And you've mentioned they've come down because stock prices have come down, but earnings remain pretty solid.

TONY DESPIRITO: So we're definitely keeping an eye on earnings. But I do think valuations are very important when it comes to forward-looking returns for the stock market. I like to say starting points matter. Now, if you look at PE multiples, they're not very predictive of near-term returns, certainly not over the next 12 months. So in that sense, a change in valuation doesn't matter for what you'd expect from stock prices for the next 12 months. But as you look further out, 3 years, 5 years, 10 years. The further out you look, the more predictive multiples are of stock price returns. So lower multiples, better future returns. And so I do think this presents a better buying opportunity for long-term investors. So as long as you're patient and you can withstand the market volatility that we're seeing, I do think the buying opportunity today is better than it was six months ago. 

OSCAR PULIDO: And that long-term investor could be somebody saving in their 401(k) and their retirement plan and therefore the starting point matters.  

TONY DESPIRITO: Yeah, absolutely. I mean, think about your time horizon. If you're investing for your retirement depending on your age, that could be for the next 10, 20, 30 years. Certainly that qualifies as a long-term investor, and this would be a buying opportunity for someone like that.

OSCAR PULIDO: You also talked about value stocks and growth stocks a little while ago. So growth stocks, I think, of the big tech companies that were the real focus of, really, the last couple of years, generating great growth in a period where we were living through a pandemic. And I think of value stocks as like the older economy, the industrial plant, the energy company paying dividends. I'm kind of generalizing here.  But when you think about those two different camps of the stock market, where do you see the opportunities? Are you seeing differences between the growth stock camp and the value stock camp?

TONY DESPIRITO: Yeah, we're seeing big differences in returns this year. And if you, again, look at a history lesson, a post global financial crisis, we had very slow growth, lots of slack in the economy, unemployment was high for an extended period of time. That meant inflation and rates were low along with slow growth. That's a great environment for growth stock investing. The discount rate is low, growth stocks benefit from that low discount rate. Growth is hard to find. And so when you think about supply-demand for growth stocks, there's a lot of demand for growth stocks relative to the supply. So it's a good environment for growth stocks. That got accelerated by the pandemic. As you point out, many of the growth stocks are tech in orientation. And in that low contact world, tech stocks were definitely-- the earnings power of those stocks was accelerated, meanwhile interest rates went even lower.  That was a great period. What we saw, though, is valuation spreads started to really widen. It's just how wide is that discount. That discount got abnormally wide. And at the same time, we started to see inflation. And inflation is certainly good typically for value stocks, as we discussed, and at the same time you saw a little bit of a COVID hangover, I'll call it, some rebound effect on some of those growth tech stocks. So in that sense, this recent environment has been very good for value investors. And when you look at history, value stocks tend to do well in periods of inflation and rising rates, et cetera.

OSCAR PULIDO: And so you mentioned value stocks do well in periods of rising inflation. So when it comes back to stock market investing, is there a difference between how you build an inflation-proof portfolio versus how you build a recession-proof portfolio, or are those kind of the same things?

TONY DESPIRITO: No, they're very different actually, and that's one of the challenges for investors. So if you think about the Fed, the Fed's in a tough spot. Obviously they're trying to slow the economy just enough to slow inflation without creating a recession. That's the goal. A soft landing so to speak. But tighten too little and then you risk inflation spiraling out of control, like the '70s, tighten too much and you risk a recession. So what's an investor to do? When I think of the barbell, I think, on one hand, of cyclicals. That's the risky part that will benefit from inflation. I think about companies like energy stocks. Clearly there's a supply-demand mismatch that's part of the inflationary story. Energy companies benefit from that. I think about financials. It's one of the few sectors that actually benefit from rising rates. I'm also increasingly thinking about select opportunities in consumer discretionary. The fears of tightening, the fears of recession have definitely beaten up a number of consumer discretionary stocks. They've gotten incrementally cheaper, so I would put in that part of the barbell as well. On the other end of the barbell is the recession fighters. And there I favor health care stocks. I think that's a very attractive sector. I think about defense companies. And also, in the portfolios I run, we've been running a little bit of a cash reserve as well on that end of the barbell. And then, of course, we're fundamental stock pickers, and when a market moves this quickly, this rapidly, inevitably the babies get thrown out with the bathwater. And so there are a lot of opportunities for folks like myself in fundamental equities where we're active stock pickers to sort through the wreckage and find some really good stock-specific unique opportunities.

OSCAR PULIDO: I'm just curious, when the inflation narrative started to take over, when we went from not worrying about it a year ago to now it's the only thing we talk about, were there any changes in sector performance in the stock market that were unexpected?

TONY DESPIRITO: So one of the things that I task my team with doing is really going back and do a historical study of the period that the Fed calls the ‘Great Inflation” which really started in the late '60s and went all the way to the early 80s. And there were clear winners in that environment. Energy was number one, financials number two, health care number three. We've largely seen that pattern here again. And then on the flip side, growth stocks were hurt.

OSCAR PULIDO: Let's focus maybe a bit on the underappreciated sectors.

TONY DESPIRITO:I think energy had been left for dead. We all know we're transitioning to a lower carbon environment, but it's going to take time. And in the interim, there's still a lot of cash flows to be had in the energy sector, particularly from companies that are transitioning in a smart, economically productive way. So that's something maybe investors forgot about. Health care, I think, is particularly interesting. We talked about the portfolio you want in an inflationary environment versus a recessionary environment. Interestingly, I think health care fits the bill in both cases. It's one of the few, if not the only sector, I think, that really does that. 

OSCAR PULIDO: Right. You're going to get sick in a recession or if times are good, there's going to be demand --

TONY DESPIRITO: You still have to spend on your doctor. What's interesting to me there is-- obviously, I think it'll be more recession resilient than in the past, and that's because government has become a larger percentage of health care payments. A higher percentage of people are in the Medicaid rolls, on the Medicare rolls, or receiving subsidies for the exchanges than in prior recessions. In fact, exchanges didn't exist in prior recessions. So I think health care will prove to be even more recession resilient this time.

OSCAR PULIDO: I think a big part of why inflation has gone up is because the economy was restarting. We talked about, hey, we're in person, we're doing this live and COVID is slowly kind of receding, people are coming back to the office, the economy is opening up. That's what's caused inflation to increase, because we had these bottlenecks in the supply chain. So, is inflation now actually going to recede to the background? Is this a short-term phenomenon, or do you think inflation is going to be more persistent over a longer period of time?

TONY DESPIRITO: So it's both. So without a doubt, you're right. The stop, start nature of COVID has definitely resulted in big supply bottlenecks, and that's led to a lot of the inflation we've seen. But we did have big stimulus, both in terms of fiscal and monetary policy, with hindsight, probably more than we needed. Now, I think inflation is-- we're probably getting pretty close to the peak in terms of inflation. We're going to start to see it come down partly because of both fiscal and monetary policy are tightening partially just because those supply bottlenecks will start to ease. And so without a doubt, we're going to come down from these high levels. The question in my mind is, but what level do we come down to? And I do think that there are some real long-term inflationary pressures that we as investors need to be aware of. The biggest of which revolves around globalization. If you think about the last 40 years, globalization has had a huge disinflationary impact on the economy. Mostly China in terms of China really becoming an industrial powerhouse, a manufacturer for the world. That's been hugely disinflationary. But that's largely run its course. In fact, now the labor age population in China is actually starting to shrink. And then there's some powerful forces towards deglobalization that we're starting to see. Some of it relates back to the trade war under the Trump administration, certainly COVID highlighted the need. Historically supply chains were built for efficiency. COVID really highlighted the need more for resiliency of supply chains. And then certainly with what's going on with Russia and the Ukraine, that also highlights that need of reshoring. And so that's what we're starting to see, is the trend is away from globalization to reshoring. Without a doubt, that's inflationary.

OSCAR PULIDO: And just efficiency versus resiliency. So supply chains were built for efficiency in the past. That meant--

TONY DESPIRITO: Lowest cost--

OSCAR PULIDO: Lowest cost.

TONY DESPIRITO: Wherever it was.

OSCAR PULIDO: Resilience is now I can get it quick, and I might have to hire more expensive labor, but it's closer to home, and I'll have my good or service quicker.

TONY DESPIRITO: Exactly.

OSCAR PULIDO: And that's what you mean by-- that's one of the manifestations of deglobalization.

TONY DESPIRITO: Exactly. And so I think that's a big trend. Also, if you think about decarbonization, that's also going to be costly, because for a period of time we're going to have to run two energy sources. We're going to have to invest in renewables at the same time that we maintain a certain amount of old fossil fuel. I think ultimately in the long run that can be deflationary, but that's a long way off before we get there. And during the building process, that's going to be inflationary. It's going to add to costs running these dual systems. And then finally, just demographics. The aging of the population, the slowing of immigration, that's also inflationary. And so you put those three things together, I don't see us going back to the ultra low levels of inflation we saw post global financial crisis. So sum it up, we're coming down from these high levels, but we're going to end up somewhere higher than we were certainly over the last 10 years.

OSCAR PULIDO: And we've been talking about globalization and deglobalization and just what's going on outside the US. So is inflation a similar concern in many other international markets?

TONY DESPIRITO: Oh, absolutely. It's a concern almost everywhere around the globe, except maybe China, which has some of its own issues with COVID. And so if you look around the globe, start with emerging markets, there's where inflation is most concerning. Remember, the items that have inflated the most are food and energy. And when you think about emerging markets, consumers in emerging markets are spending a higher percentage of their total disposable income on those things. And so they're really feeling quite pinched from a GDP and consumption perspective. So I think inflation's a real struggle for emerging markets. If you look at around the world at other developed markets, certainly the US is unique amongst developed markets in terms of the degree of our energy self-sufficiency, which is really helpful in this time of high oil prices. So Japan and particularly Europe are struggling with energy. Europe, particularly because of the dependence on Russian natural gas, and so you're actually seeing the possibility of having energy shortages and rationing going on later this year in Europe. And so when I think across the developing-- the world, the US is really the best house in a tough, tough neighborhood in that sense. And that's why you've seen the dollar be as strong as it has been this year.

OSCAR PULIDO: And so inflation is really a global phenomenon with maybe some exceptions. But your view is that stocks-- but specifically certain areas of the stock market can be a good way for investors to try and position themselves for a higher inflation environment.

TONY DESPIRITO: Exactly.

OSCAR PULIDO: And of course, if we head into a recessionary environment, those dynamics might change a bit, but stocks ultimately can provide some protection against inflation if you're in the right areas.

TONY DESPIRITO: Right.

OSCAR PULIDO: Yeah, yeah. Maybe one last question, which is it's been, I think, tough for people to be an observer of the stock market this year. It's sort of we got out of the gates on that footing and we've kind of been trending down for much of the first half of the year. But what's it just like for you? You've been a stock market investor for a number of years. Are these fun periods for you when you get lower stock prices? Or is it equally as tough to be an investor as it is an observer?

TONY DESPIRITO: So I think it's always tough to be an investor, actually, but it helps to really take that long-term perspective, and it helps to have a historical perspective. And the market we're in right now is a good reminder that stocks don't always just go up, that there's volatility, that volatility cuts both ways. But as an equity investor, you shouldn't really be thinking about the next three months, six months, next year even. You should be thinking about the next 3, to 5, to 10 years, and that's the perspective you need to bring. And it really helps in markets like these when you have that perspective. And obviously, it's been emotionally difficult because there's been a lot of pain, there have been a lot of losses. And so that's hard for all of us, both professional investors as well as our clients. But there's also some excitement to be had. The fact that we've seen a lot of stock dispersion. And that means there's a lot of opportunity out there as well. And so while it can be tough emotionally, it's also a time of optimism and excitement, and that's what I see across our team.

OSCAR PULIDO: Well, thank you for the historical perspective that you've provided, and I'm sure it's going to serve you well here as we go through the rest of the year and then in the years ahead. Tony, thanks again for joining us on The Bid.

TONY DESPIRITO: Thank you, Oscar. My pleasure.

OSCAR PULIDO: Thanks for listening to this episode of The Bid. For more insights on the future of the market, check out our last episode, The Mid-year Outlook. 

The Bid: 2022 midyear outlook: Back to a volatile future

Oscar Pulido:

The Great Moderation of recent decades –that period of stable growth and low inflation–is over. During the BlackRock Investment Institute’s first in-person Outlook Forum in 2-1/2 years, some 100 portfolio managers and executives from around the firm took a closer look at how market conditions have led us to this this critical juncture and what it means for investors going forward. Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. 

The war in Ukraine has exacerbated high inflation and sparked sharply higher commodity prices. Central banks face a stark inflation-growth trade-off: either crushing growth with sharply higher rates or living with inflation. We have entered a new regime driven by higher macro and market volatility and braving this new world requires a fundamental revamp of portfolio positioning. So what should investors be concerned about and are there any opportunities to be had during this period of volatility?

Today, I’m pleased to welcome Jean Boivin, Head of the BlackRock Investment Institute (BII). Vivek Paul, Head of Portfolio Research for the BlackRock Investment Institute and Wei Li, Global Chief Investment Strategist for Blackrock.

Oscar Pulido: Together, we’ll be breaking down Blackrock’s Midyear Outlook and uncovering the top 3 investment themes guiding investors in 2022. Welcome Jean, Vivek and Wei.

Jean Boivin: Hello,

Wei Li: Thanks for having us.

Oscar Pulido: So Jean, let's turn to you first. The outlook seems tough. Is it really as bad as it looks?

Jean Boivin: Well, I'm sorry to start by saying, yes. it's probably as bad as it looks. But it's better to acknowledge things as they are. We've seen historic decline this year in both bond and equity. Things we haven't seen in decades, really, and, to answer the question straight, we don't see things or the condition for this to reverse, at this moment, and in fact, we see reasons for that to be sustained or this environment to persist. People are talking about recession and inflation. Of course, this, these are major concerns currently in the markets and in the narrative we're hearing. But, I think it's important to make the point that even if recession concerns were to pass temporarily, or if we avoid a recession, it's something more profound that is happening at this juncture that, I think is driving markets and will continue to drive markets.

So it's broader than recessions, broader than inflation, in fact, we believe that, over the last couple of years, what we've observed and what we are in now is the end of the Great Moderation. The Great Moderation was a period that lasted about 40 years, where we ultimately have been pretty lucky to face a pretty steady growth environment, mostly because of demand exuberance or, collapse in sentiment by consumers and investors, these were really the driver of this environment demand driven. It was an environment that turned out to be, uh, a lot easier to stabilize for policymaker.

It was an environment where you know what to do. You can raise rates to cool off the economy. You can lower rates to stimulate the economy. And you can do that without having to worry too much about inflation. So we've seen a very stable environment, in terms of growth inflation. And we think this is over this environment has changed. And the reason it has changed is that we are facing shocks. Dynamics, drivers that are not about demand, but are really about constraints to the supply side of the economy, constraints to the ability to produce, that's what generates the inflation pressure, but that's also what generates the weak growth and this environment as a result is very different. Impossible to stabilize efficiently, both from the inflation and the growth side. It has an intrinsic trade off. That is a lot starker than what we've seen over the last 40 years. Central banks will not be able to both stabilize growth and inflation.

And they'll have to choose. They'll have to choose, but, no matter what happens, we're going to end up with a worse combination of both inflation and growth, not clear what they're going to choose, but it's going to be a worse combination. and that's why, as a result, the outlook is more problematic than it has been. And we'll talk about this, but that's why we are adopting a much more cautious stance at this juncture.

Oscar Pulido: Understood. Thank you so Wei, coming out of the outlook what should people be watching as we head into the second half of the year?

Wei Li: Absolutely, so if you think about this new regime that Jean just spoke to, which is a regime characterized by higher macro volatility and subsequently as a result of that higher market volatility has direct investment implications. So thinking about potentially higher risk premium for equities and for bonds, thinking about this, being an environment where, past ways, would not work as well in this new regime and also the typical 60/ 40, portfolios not working as well. So looking at 2022 being actually the worst year on record for 60/ 40 portfolio and also in this environment, one would expect risk models, calibrated to history, not working as well. And in this environment, we believe that investing will have to be more dynamic, will have to be more granular potentially at a sector level or potentially even below that, and then being thoughtful about some of the behavior biases. Because we're talking about regime change. So the portfolio changes in response to regime change will have to be more dynamic, potentially also of a bigger magnitude.

So as we make big portfolio shifts, being aware of some of the behavior biases, being aware of inertia bias, for example, is important. Now specifically, as we look at the second half of this year, we talked about the need to be more dynamic. And looking back. We have been quite dynamic to the extent that we have been reducing risk at various points so far this year.

And at this juncture, as we look ahead to the second half of the year, we reduce portfolio level risk taking again, pricing equity correction so far this year reflect rate pricing, but not necessarily a significant slowdown in earnings growth, which we are expecting, so there is potentially further catalyst for equities to react to. Whereas if you look at credit, already prices in a very slow growth environment and they're starting to offer attractive view now for the first time in over a decade, right? So there are some relative opportunities to be investigated embraced at this juncture as we further reduce portfolio level risk taking in light of this new regime characterization that Jean just spoke to.

Oscar Pulido: Indeed Jean, back to you for a moment. The topic on everyone's mind right now is inflation considering the Fed and other major central banks, recent responses to inflation, what effect is that going to have on the debt burden? What constraints does this put on the market and also how closely linked is inflation to the net zero transition?

Jean Boivin: I mentioned at the outset that we think this is a regime change, the end of the Great Moderation is going to be a more volatile macro environment. Inflation is one manifestation of it, that's the most concrete manifestation that we're, observing now, and it's in everybody's mind, as you say. But the more fundamental challenge that we're facing is this very sharp trade off now between trying to stabilize this inflation, but the cost that is going to have to imply in terms of reducing growth. If we were to try to really stabilize inflation. One implication of the fact that the Great Moderation is over is that we don't think a soft landing is in the cards. We don't think a soft landing is possible, where we would stabilize gently inflation back to 2% while we would maintain some stable growth environment. That's not feasible given the sharp tradeoff that I've been spelling out. That means that central banks and the Fed in particular will, need to choose. They will need to choose how much of and how quickly they wanna bring inflation back to 2% and how much they're willing pay the price for it, or have us all pay the price for it. And the problem is right now, not only the Fed, but central banks, uh, are not really in our view, acknowledging that reality.

We are hearing from central banks a lot more of a whatever it takes approach. We'll do whatever it takes to bring inflation to 2%. But that doesn't line up with the reality that is a lot more complex but for now that's the story they're running with. And in fact, I think they've pretty significantly boxed themself into responding and wanting to appear as if they're dealing with this inflation as aggressively as they can.

So for now that means that we expect them to respond aggressively to the inflation. In phase one, I'm going to break that into phases, but in the first phase, which you can think of it as, until the end of this year, we expect them to respond aggressively to any inflation news that surprise on the upside.

We think they're going to bring in the U.S., the policy rate above neutral. So bringing the interest rate in restrictive territory, but as they do that, we expect the damage to become more concrete and real. So, in our view, now we're going to see stalling growth that will have the effect of stalling, the restart that we've tried to, to engineer over the last couple of years. And as this become clear we expect then some kind of a pivot from central banks that will ease off a bit the hiking pressure.

And at the end of the day, some time in 2023 we are going to see central bank eventually accepting to live with some inflation. So I don't think we're going to see inflation going back to 2%. We're going to be maybe more in a world where inflation is more around 3%, ultimately. So living with some inflation to avoid the big damage that otherwise this environment will have to imply in terms of growth. So two phases first, this is about pretending we're doing whatever it takes for inflation. We are going to go too far for some time. We're going to see the damage but sometime in 2023, I think we're going to see some pivot and ultimately we're going to end up living with some more inflation.

One reason why the pivot we think is going to have to happen, uh, in 2023 beyond the damage that it will be real is also that there are pretty significant constraints that are constraining the ability to raise rates. So high leverage in the system globally, both in terms of public debt, but also in the terms of private sector will constrain the ability to raise rates or will mean that the interest rate increase will have magnified in terms of a restraining activity.

So that's going to play a role. And then, as you say, the net zero transition is one example of a phenomenon that's going to raise production cost not only this year, but in a sustained way over the years to come and we'll continue to present this sharp trade off and another constraint and ongoing constraint and a reason again why we think eventually we're going to see a pivot and ultimately I think we'll end up living with some more inflation not out of control inflation, but inflation above targets for the years to come.

Oscar Pulido: And Vivek, want to bring you into the conversation  - inflation volatility makes the transition toward a decarbonized economy that's already underway that more daunting. How can investors navigate this transition and what should they take into consideration?

Vivek Paul: So, I guess the first thing to say would be, it'd be very tempting in a year like this one with all the extreme market movements we've heard about from Jean and way to maybe think that this doesn't matter anymore. That markets have moved on. Other things are more important and that's way too simplistic and masks a really important point.

The first point is in periods of material market gyration, all the things we talked about, just there, high inflation, big shifts in monetary policy, we should expect that those things dominate markets in the near term, we should, but that does not mean the net zero transition no longer matters.

And if anything, I think the events of the last six months actually redouble the focus that some regions will have in incentivizing the creation of more renewable energy sources, incentivizing that overall transition. And for an investor building a portfolio, this is all about being able to capture opportunities and be resilient to the risks in that regard.

It's no different from any other thing that's affecting investment markets, and there is an investment case to be made for assets linked to the transition we believe, and a strong one for a couple of reasons. The first point would be that even though current policy isn't necessarily sufficient in and of itself to achieve net zero by 2050, we think that the transition could accelerate as technology develops greater evidence of societal preferences shifting occurs.

And just in general, the human and economic cost of climate change becomes clearer. And as that does, we think the investment opportunities will come even clearer. And secondly, why that's really important from capturing the opportunities is markets haven't fully priced that. We published some research back in 2020, suggesting that markets would, over time, increasingly value the assets of companies, which are better prepared for the transition relative to those that aren't, we find that some of that repricing has already occurred, but importantly, much of it is yet to come.

And the recent work that we've done actually suggest if anything, our initial estimate of the total repricing that would occur is perhaps a bit too conservative. I think that's the first point to make there that this is, this is very much a live story, but it's a strategic horizon story.

I think another really important thing when investors think about how to navigate the transition and make the most in terms of their asset allocation, is that there are different ways of accessing this dynamic.

This isn't just about investing in the inverted commas "already green" companies, right? but it's also investing in those companies that are well chosen. That might [00:12:00] well be currently carbon intensive, but have a credible transition plan or those that supply the materials, the equipment, the services that are needed for the transition, the commodities are a prime example and something that we debated a lot in our team, the demand for some of those transition critical minerals, for instance, is expected to grow materially and over time.

All told, we shouldn't expect that transition sensitive assets will relentlessly outperform week in, week out. You month or month, there will be times that other dynamics dominate, but positioning for the transition is completely central to how we build strategic horizon portfolios.

We think there's increasing evidence so that repressing dynamic is occurring and there are positive returns to be had in this period where markets have yet to fully price in those dynamics.

Oscar Pulido: Wei thinking about global volatility. China has been a fast growing economy allowing for cheaper investment, but with its growth slow down from COVID lockdowns, what has the impact been on the broader EM community?

Wei Li: That's a great question in terms of the impact on emerging markets, but also the evolution of emerging markets. So I will go at it from a broader perspective. So when we think about emerging market investing it's come a long way, hasn't it? So if you think about the composition of emerging market indices. Like back in the days, it was very heavy on industrials, for example but now if you look at the breakdown of MSCI emerging market benchmarks is very heavily concentrated in tech and financials. So emerging markets has evolved and come a long way and not all emerging markets are equal. So you talked about China and China does stand on its own, but so far, if you look at the development even this year the differences between various parts of emerging market regions and countries have been growing as well. Energy and commodity importers versus exporters. So the first point I want to make is that when we say emerging markets, what we mean by that, that needs to evolve to reflect the fact that emerging markets has come a long way and not all emerging markets are created equal.

And the second thing I would say about emerging markets investing is really around this idea that in the past we talk about emerging market investing it's very much around buying into the growth story, buying into the cheap asset story that needs to evolve at this juncture in our view. So this new market regime also suggests to us that we should really focus on economies and markets that can generate income in a environment that is also characterized by globalization rewired. So instead of the old play of growth and capital appreciation think a boring emerging market is good at this juncture of development. And the last thing I will say, and in the context of what's been happening so far uh, this year, and also one of our tactical conviction is our view on emerging market debt, specifically our view on emerging market local currency debt. So a lot of emerging market central banks, they hiked early this time round and some of their interest rate levels are well above the pre-COVID levels. So a lot of rate hikes have happened and a lot are already in the price. And that supports a more favorable view on local emerging market debt this juncture.

Oscar Pulido: For investors who have longer term objectives out for the next 5 or 10 years, how do the themes we've discussed today around bracing for volatility, living with inflation and the net zero transition influence how they should be building portfolios?

Vivek Paul: What are the longer term strategic horizon implications, that sort of thing. Okay, so I wanna pick up on something that Jean said a little bit earlier around multiple phases of the environment that we're in, in terms of the policy reaction function, and more broadly, how policy makers deal with this environment. And, if you think about the coming year, I think we heard Jean talking about this idea, the central banks are dealing with the politics of inflation and that accentuates for us the risk of a near term downturn, you couple that with the idea of very real challenges in Europe facing the energy crisis et cetera, this is not the time to be taking a material near term risk stance. That's why we've made the portfolio allocation changes that Wei's been talking about, but that isn't where we think we're going to settle. And in that environment of trade off that is more awkward and is going to persist. We think ultimately policy makers are going to end up settling with more inflation, as we've heard my colleagues say before and what that means is that ultimately trying to limit to some degree and more than they have in the coming period the output volatility that we might see all our else equal, what that means is the outlook for risk assets, equities, et cetera, is a little bit more positive when you take that longer term view.

One example of this is to think about the path of interest rates and  building on the comments from earlier in the near term, we think that central banks are likely to go into restrictive territory dealing with that politics of inflation, but ultimately they will bring back rates to levels that in the long run look not particularly high relative to the inflation that we anticipate seeing. That means that's an environment where we have reasonable nominal growth, low nominal, interest rates, all else equal, that should in all else equal be an environment that's relatively benign for equity, particularly given some of the drivers I spoke about earlier, about opportunities coming around from the transition towards net [00:17:00] zero that is a benefit for developed markets in particular.

So portfolios that we position for over multiyear horizon reflect a lot of the dynamics that we've talked about today, more broadly, and this idea of living with inflation in the allocations, we have a sizable overweight allocation for us is to inflation link bonds.

We see inflation settling at higher levels. That's something that we position for over the long term. You couple that with the idea of an underweight to nominal government bonds, because we continue to expect yields to rise. We're not yet at the levels that are destination for us. And that transition to net zero.

We've talked about is embedded in everything, I guess, that we do when we're building our long term portfolios, but typically, and explicitly around this idea of a preference for developed market equities and perhaps move away from certain Mar uh, aspects of the sub-investment grade universe, such as high yield.

The final thing I'd say when we're thinking a little bit longer term in building portfolios is typically when we're thinking about strategic horizon asset allocation, it's something that typically people do they set it and the tactical [00:18:00] allocations are the ones that move around more materially, but in an environments which are more volatile, you can see big market moves in a short space of time. And there are periods where effectively you'd want to shift your strategic horizon portfolio as well because of the size of some of those moves. And in the portfolios that we built over the last couple of years, they look very different to where they did um, before the COVID crisis started because of this dynamic.

This is a different regime, as we've heard about, and portfolios might need to shift materially if the market gyrations are big.

Oscar Pulido: Thank you all.  There's much to consider as an investor right now. Thank you all for joining me.

OUTRO

Thanks for listening to this episode of The Bid.

On our next episode of the Bid – A Stock picker’s Guide to inflation – we’ll be joined by Tony DeSpirito, BlackRock’s CIO of U.S. Fundamental  Equities, for a look at how to navigate these tumultuous market conditions.

On our next episode Gargi Chaudhuri Head of Blackrock’s  iShares Investment Strategy sits down with Financial Advisor and influencer Lauren Simmons to discuss financial literacy, being a woman on Wall Street and her experience with the four draft basketball players taking part in our Ballers campaign. You won’t want to miss this one. Make sure you subscribe to The Bid wherever you get your podcasts.

The Power Of Clean Energy | The Real Leaders Of Net Zero Pt. 5 feat. ENEL

(Vox pop sound) Francesco Starace: So the culture of this industry is a culture in which number one, don't make mistakes. Number two and three also. Nobody wants to have mistakes, but you have to accept that they happen. You cannot have innovation if you don't want to have mistakes"

Mark Wiedman: Welcome to The Bid miniseries, The real leaders of net zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Wiedman. I'm super excited about our guests for this episode. Francesco Starace, the CEO of Enel, an Italian-based gas and electricity utility that operates in more than 40 countries around the world. Francesco's been with the company for over 20 years and has been an integral leader of the company's ambitious net, zero plans - from creating the Enel Green Power Group back in 2000 to just last year when the company announced it was accelerating its net zero commitment by 10 years from 2050 to 2040.

Why and how ENEL doing it. We'll talk about the transformation of the clean energy market. We'll talk about renewable. And about the role of technology and innovation and failure in the net zero transition.

Francesco. Welcome. And thanks for joining us. 

Francesco Starace: Thanks for having me.

Mark Wiedman: So Francesco, let's start by telling us about ENEL.

Francesco Starace: ENEL was born right after the second world war in the sixties, when like most governments in Europe, the Italian government realized that they had to nationalize what private companies existed in the electricity space in order for electricity to be brought to parts of the country that didn't have it. And so it was born as a nationalization of more than a thousand large, medium and small private companies that existed at that time. And the mission was to basically electrify Italy throughout - so not just the cities under the places where people would live, but everywhere. So, this is what happened more, more or less in all European countries, right after the war. Now we are no more just an Italian company, we're a global company, but it happened in different phases as a function of the evolution of this sector in Europe, which took place between, say beginning of the sixties until the end of the nineties, that's where most of the privatization took place. That's where we are today.

It's a large company. It's a multinational. e are the largest distribution network system privately owned around the world, in 30 countries. Italy included, of course, but I don't think that was in the idea when was formed, but it happened...

Mark Wiedman: Can you talk about the evolution from a heavy fossil fuels organization to one that is leaning into a green energy generation platform?

Francesco Starace: The funny thing is that when ENEL was formed, it was mostly a hydroelectric company. So most of that energy was generated by hydro plants. Then during the sixties, oil was mostly used. After the first oil shock in the seventies, ENEL like many other European companies started a nuclear program to use less oil and that was canceled after the Chernobyl accident. And then, at that time, ENEL moved into coal and gas, and as things unfolded during the privatization of the energy sector that took place, like I said, around the nineties in Europe, following the Europe directive that covered the sector ENEL started investing in gas and then started developing renewables around 2008, 2007. They were completely a niche technology, but ENEL created ENEL Green Power at that time where all the renewable energy plants we had were put together. Nobody knows but the USA was the first acquisition that ENEL made outside of Italy, and this was the beginning of a new ENEL which gave us the major impulse of really de-carbonizing, our energy mix between 2008 and 2009. Just when the Lehman Brothers crisis was out.

Mark Wiedman: The transition started in 07/08. In terms of shifting towards renewables. What triggered that transition? Was it economic regulatory, technological?

Francesco Starace: ENEL needed to reduce the debt. So ENEL created this company and said, we'll put it in into the market and need the proceeds to cut down debt. This debt was accumulated because a little bit earlier we had acquired Endesa, which was a big Spanish company a few months before the Lehman crash. Then we had ENEL Green power, we had the vision that this business was going to become very competitive. At that time, it was a very protected and subsidized niche We said this cannot go on for a long time, but there are reasons why we thought that these technologies will take over thermal generation. And you might remember at that time, this was called alternative energy sources. And we also said alternative to what? Basically, they will become mainstream. So, the vision we had was that this was going to become a very wide-open battlefield of competitiveness driving the industrial evolution of these technologies. And that proved to be right. At the beginning it was very difficult because people didn't understand, even the market didn't understand. People saying, you must be stupid. Why don't you just follow the money? Why don't you forget this dream of competitiveness? But that actually happened.

Mark Wiedman: So you were triggered by the Lehman crisis to actually set up ENEL Green Power, what were the underlying economic and technology drivers that made that effort work as opposed to doing it 10 years before?

Francesco Starace: I think it was the fact that technology had improved and the cost of generation with renewable energy was going down faster than people thought. Two forces were doing that. One was a digital thing and the improvement in material science. So things that make things, materials with which things are made kept improving and are still improving a lot. And also, I would say the industry had at a certain point reached, it became in a few years, a large industry, and that drove costs down.

Mark Wiedman: Digitization, materials, science advancement

Francesco Starace: And dimension…

Mark Wiedman: and scale. What is digitization? What does that mean in terms of the efficiency of generating electricity

Francesco Starace: For the improvement of technology, computing power became large enough to simulate the behavior of machines in a better way. So that designers had ways to improve without having to go through cycles of trial and error but just do it, also digitization is a large force behind improvement in material science for exactly the same reasons simulations can take place. And that drove the whole thing down.

Mark Wiedman: Where will you be at the end of the decade?

Francesco Starace: We have a path that says we're going to be zero in 2040

Mark Wiedman: What's the biggest obstacle in getting there?

Francesco Starace: The speed at which you can convince regulators that you can close thermal power plants. Grid operators and the grid managers always feel that the moment of detaching the existing power plants is a little bit risky. There is always a relative pushback for the integrity of the network for supply service and concerns. It's not the money, it's not the projects, it's permitting. But this will eventually be something that in retrospect, people will say, why didn't we do this before we knew this was going to happen? And, we lost a little bit of time.

Mark Wiedman: Can you talk about the cluster of issues around stability of the grid, storage of when renewables are not able to function and the technologies you see as bringing those together?

Francesco Starace: Say that every time we flip a switch in our home or factory or offices, we introduce a micro disturbance in the perfect equilibrium that electricity production consumption has to have every time. So, the system is self-balancing most of the time  provided that things happen with some tolerance. So, networks are designed to cope with these kinds of turbulences all the time. These are networks that were built when the power was supplied by very large power plants, and then moved out into millions and millions in homes but as you de-carbonize it becomes much more fragmented. So all we need to do is make sure that the flexibility of the network is kept balanced. Technology today helps you have a lot more contraptions you can use to do that. Who knows how networks will behave when electric cars will be millions and not a few thousands. When heat pumps will be millions and not a few thousands. And how can these networks be changed in order for this to happen safely? And the answer again is digitalization. So, you have to digitize the networks so that they go in two directions, not just in one, not just from the generation to the consumer, but from the consumer back. Or to a consumer, to another consumer, and this is again another benefit of the digital transformation of the sector that enables flexibility with limited costs and much more security of supply.

Mark Wiedman: Is that what we call a smart grid?

Francesco Starace: That's a smart grid. Smart grid is a grid that uses intelligence and automation to move electrons in different directions, according to the need in the most, most efficient way.

Mark Wiedman: Let's talk about innovation and your approach to innovation, which is about disciplined vision is the way I look at it. How do you combine short term results with radical reinvention?

Francesco Starace: You have to accept mistakes. You cannot have innovation if you don't want to have mistakes. Nobody wants to have mistakes, but you have to accept that they happen. This industry is all about not making mistakes because mistakes will invariably result in huge problems. So the culture of this industry is a culture in which number one, don't make mistakes and number two and three also. What you want to do is first of all, debunk a little bit, this no make mistake story and let people feel free about making some mistakes provided they don't keep repeating them. And then don't try to innovate if you cannot in this climate, but rather come with problems that you want somebody else to solve. And we created these innovation hubs outside of ENEL. We have now 13 around the world where we bring problems for smart people to go out and try and solve. And then what happened is that when you see that out of five ideas, four are useless and one works then suddenly our people also understood that it is. Even the smart people make a lot of mistakes. They did lots of rubbish there too. So they started coming with their own ideas and we found that we had innovation at the company only were scared and feeling that they didn't want to look bad.

Mark Wiedman: How long do you give a new technology or experiment before you decide it's a failure?

Francesco Starace: In this field, if you try hard a technology that doesn't show a good sign of improvement in three years. Take costs, they should go down 50% in the first three years, if they don't do that, maybe it's time to give up. There's no shame in that. It is an amount of time that you should be able to see some decisive moves. If you don't see a good in three years, maybe it's time to really take a hard look at it and say, maybe not.

Mark Wiedman: Carbon capture buyer or seller?

Francesco Starace: Not in this industry. We tried for much longer than three years. We tried for 15 years. the whole industry tried hard. I don't need to decarbonize when you get de- carbonize at the root.

Mark Wiedman: What is success for hydrogen?

Francesco Starace: Could work. We are in the three year time. So we are the first of the three years. It's early to call, but call me again in a year and a half, , theoretically there's a chance. It's cost parity of green hydrogen with present hydrogen production. So it means you have to have a hydrolyzed whose cost should go down a factor of six.

Mark Wiedman: Okay. So just to unpack what you're saying, green hydrogen, which is the manufacturing from renewable sources of hydrogen which you can burn at a later time. You're saying success is in two years, that the cost is down 87% versus today.

Francesco Starace: Basically sixfold, yes.

Mark Wiedman: Do you think that the Russian invasion of Ukraine is an accelerant or a retardant of decarbonization of the economy in Europe?

Francesco Starace: Definitely an acceleration. Although in the short term, it's probably going to produce more CO2 because of the coal substitute, but that's just a blip.

Mark Wiedman: If you were starting a totally new company Francesco's startup, where would you focus regarding the broad transition to a low carbon economy?

Francesco Starace: On storage. Because the storage we're using today is a byproduct of the storage that cars are using. So it's a compromise between the performance as a storage and the weight of it because you have to move it around, but it's not the best performing technology. I think that's a very hot moment for that stuff.

Mark Wiedman: So our startup, cuz it's gonna be both of us is going to be about batteries that don't move effectively, getting away from lithium ion technologies, gas.

Francesco Starace: Yeah, perhaps, or finding something else, but definitely forget about the weight of the battery and focus on the performance and the cost.

Mark Wiedman: One last question about technology in your business, you are repurposing your gas and coal plants. What are you doing?

Francesco Starace: In most cases, there is nothing else than just convert the site to another industrial or non-industrial use. There's no generation of electricity worth mentioning. So what we did is we said, dear mayor of the city nearby, this site is no future. So we're gonna shut down. Now, why don't we just create a small committee and altogether invite entrepreneurs, architects, whoever wants to come with an idea to what to do with this site. And together we choose what we like. And our job is to clean up, of course, we get the stuff out of the site and give it to you and it's surprising how many ideas come up. It's you find all kind of things, tourist villages, extreme sports centers, commercial centers, museums, there's plenty of stuff that you can do.

Mark Wiedman: Our battery startup could have a subsidiary in converting power plants into laser tag facilities.

Francesco Starace: Why not? There's plenty of stuff you can do.

Mark Wiedman: Can you talk about what you've learned about leading people, your organization, including stakeholders outside the organization through this transition to a much lower carbon footprint business?

Francesco Starace: Well, I think leading people requires clarity on what we want to do. If you say follow me, that's not enough. You have to tell the people, look, we would like to do this. This is the reason why we are here. Our purpose is this one. And to that end, we think we should do this and that. Typically, this is, most of the effort is to be clear to what we want to achieve together. Make it understandable to you first. And then if you understand it, then it's easy to transmit. In ENEL years ago, we asked the people what they thought were the basic values of ENEL and so it was pretty easy. They were pretty aligned. It was not that difficult. By the way, when you communicate outside, you should communicate exactly in the same way. You cannot have a communication with your people and a totally different one outside. It has to be coherent.

Mark Wiedman: In the digital age of social media, one story for all stakeholders, you can't have multiple.

Francesco Starace: Exactly, you can’t have internal, external, transversal, north, south, it’s impossible.

Mark Wiedman: When you look at the landscape of other parallel industries that are going through a similar transformation, everything from automobiles to shipping, to construction, generally, do you favor the attackers or the incumbents?  

Francesco Starace: It depends on the incumbents. I mean, it is funny, but the incumbent have a upper hand only they don't know. Because the attackers are successful in so far, they are sleepy. But if the incumbents behave in the right way, it's very tough for an attacker. Actually, it's almost impossible. So it actually depends on the incumbent. How quickly he frees himself from the legacy. It's all about. How you wanna get rid of the legacy that ties you to your past the fastest you do it, the more difficult for an income or for an attacker is. 

Mark Wiedman: So incumbents, wake up, come out of your enchantments and the future is yours. 

Francesco Starace: yeah, yeah, yeah. Yeah. They have a huge chance. 

Mark Wiedman: Let's talk about the future. If you could redo from a white sheet of paper. the world's energy system right now. What would it look like?

Francesco Starace: Much more interconnected, much more dispersed, and the proximity between consumption and production should be much bigger than today.

Mark Wiedman: How would you price in that world?

Francesco Starace: I think it would be probably on a fixed price, regardless of consumption.

Mark Wiedman: So effectively high fixed costs, capital, right? Like using data for your cell phone plan.

Francesco Starace: yeah. Your phones, there was a time ago where, I remember my mother said, you cut it. Cut it because you were paid by the minutes, but it's gone. It would be flat.

Mark Wiedman: Last question. What do you think Francesco is the single most important thing that needs to happen to get the world to net zero?

Francesco Starace: It’s one thing that will happen in two steps, the first step is take the word net away and focus on zero because only that drives innovation. Deep enough, if you put the net word before you never get there, because net is an illusion but if you start with the net, it cuts the innovation by a factor of 10.

Mark Wiedman: To get to real zero. What's the number one thing that has to happen.

Francesco Starace: We have to focus on innovation. Innovation. We get there. It's really the key to that.

Mark Wiedman: Innovation in technology, business?

Francesco Starace: Innovation in both in technology and business models, because they go hand in hand typically technology brings about business models, radical innovation. So you have to be open to both. They sustain each other in a big way. If you look at closely to this climate, Is a unifying force. I like no other that in the history of mankind, there's never been a planetary problem that everyone recognized more or less. So it's a huge opportunity. It's a strong effort that everyone sees us doing something for himself, not just for some distant planet somewhere. That force can be used, provided you free innovation and you innovate business models.

Mark Wiedman: From Francesco, by the end of the decade, you'll be 90% down in carbon emissions relative to most electricity producers. Looking forward to talking to you again then, and thanks again for joining us here on the bid.

Francesco Starace: Thank you so much. It's been really fun. I loved it.

Mark Wiedman: Take care Francesco.

The path to zero-carbon plastic feat. Dow | The real leaders of net zero pt. 4

(Music intro)

MARK WIEDMAN:  Welcome to The Bid podcast and our miniseries, "The real leaders of net zero." I'm your host Mark Weidman. We're talking with CEOs about what they and their companies are doing to move the world to net zero. It's exciting stuff, so let's jump into our next episode. Our guest today is Jim Fitterling, CEO of Dow. Dow is a material sciences company, a global firm that many of you may know. You've probably seen their logos on the products you use every day, which you probably don't know is that they're a leader in decarbonizing the economy and their products and how they actually make them. We're going to talk about recycling, cracking, nuclear, carbon pricing, and plastics, both how they're made and how they're used and reused.

(Music interlude)

MARK WIEDMAN:   Jim, welcome to The Bid.

JIM FITTERLING: Thanks, Mark. It's great to be with you. Thanks for having me.

MARK WIEDMAN: Let's start off with the basics. Tell us about Dow.

JIM FITTERLING: We're actually celebrating 125 years in business this year, so we've come a long way. We were founded in Midland, Michigan, which is where I am today. Today, Dow operates 104 manufacturing sites in 31 countries. We employ about 36,000 people worldwide. And we do business across really four big market segments, packaging for plastics, for consumer goods, and industrial goods; infrastructure; consumer markets; and the mobility market. Think about things that you might buy every day that would be made with our products into any grocery store. Products like you would use every day like your pillows and your mattress at home, automotive seating, et cetera.  We make products that make them more comfortable for you to use but also make them recyclable at end of life. Another big area would be insulation for homes and buildings to create more energy-efficient buildings and reduce carbon emissions, products that we make like films to cover solar panels that allow the solar panels to last longer. And then if you're in the area of mobility, transformation, or other alternative energy and mobility, a lot of content in electric vehicles, autonomous vehicles, and in any vehicle, including internal combustion engine to make them lightweight and to make them quieter. So those are the kind of technologies that we're into and the kind of end markets that we're into.

MARK WIEDMAN: So Jim, we're talking about the transition to a low-carbon economy. what does carbon, the climate, global warming-- what is any of that have to do with Dow?

JIM FITTERLING: The carbon economy has impacted Dow in a number of ways, I think, as a growth opportunity . The ability to have more energy efficiency to move to alternatives, et cetera creates market growth for us. On the other hand, to make any kind of materials, whether you're making cement or steel or polymers like we're making, or petrochemicals, or oil and gas, you need energy to make that happen. And so if you think about our carbon footprint and our scope 1 and 2 emissions, about half of that comes from generating power and steam, which are utilities to run our assets. And about half of it comes from using natural gas to fire furnaces, where we crack hydrocarbons. The two biggest molecules we make every day are ethylene and propylene. They're the two biggest molecules in the chemical industry. And they make all the plastics that you would use and also a lot of the other chemicals that you would use. And in order to do that, we have to have a lot of heat to make that happen. And direct firing natural gas is a good way to do it. So that's half of our CO2, and the other half was power and steam. So we've got a good plan, not only for market growth, but we've got a plan to basically retool our footprint from a power and steam standpoint and from an ethylene and propylene production standpoint to get our scope 1 and 2 emissions to zero by 2050.

MARK WIEDMAN: You've set a goal - zero by 2050. What are you aiming to achieve? And then critically, why?

JIM FITTERLING: Well, we achieved about a 15% scope 1 and 2 emission reduction between 2005 and 2020. We're going to do another 15% by 2030, so we will have reduced absolute emissions by 30% by 2030 and then the balance by 2050. Two reasons. One is the consumer demand. We see the driving force from the consumer to get the CO2 emissions down. They want to incorporate our benefit and our footprint into their product claims. Today, on a food package, you're more likely to see a recycle label. But I think in the future, you're going to see a product carbon footprint on that package. I think you'll see that this package used this much CO2 to make this package that the product is in. I think our bulk customers that are buying tons of material will want to see proof that what they're buying has a low or zero carbon footprint on it so they can make claims to their customers so that they can incorporate that into that their brand. And with about 70% of our materials going to consumer brand owners, that's where the pool is coming from to be able to make those claims because that's what the consumers are telling them that they want.

MARK WIEDMAN: You mentioned there were two things. The first was the consumer demand, but there was a second you had in mind.

JIM FITTERLING: I think the second one is-- you see policy change and regulatory change coming. So in Europe, for a number of years, we've been part of a voluntary emissions trading system that now is moving into a mandatory type system. So in the voluntary scheme, you had an emissions cap based on your footprint, and then it would reduce by two and a half percent per year. Under the mandatory scheme, that rate of decline is almost going to double. And what that is doing is driving up the cost or the price of CO2 per ton. So it's incentivizing industry to reduce its absolute CO2 emissions. Because if you don't and you don't keep up with that pace of change, you have to pay into the system. If you stay ahead of that curve, you can actually claim those credits and sell into the system. So that's a regime to actually drive industry to decarbonize. And we're going to see that in more places. There are about 30 to 40 countries today that have emission trading types of schemes in place.  The United States doesn't yet have one, but I think it's something that we need to see here to really incentivize the market and bring the capital markets into investments for decarbonization to really accelerate that. And the alternative would be another regulatory regime that could come in could be a tax. But if I were to be taxed on carbon, I'd just be paying that money into the government, and the government would be deciding what to do with it. And in that case, that's not going to create a return on investment for my shareholders. And so our view is we need to advocate more for a market-related system and a market-based price on carbon. Because that's what's going to bring literally trillions of available liquidity that's in the marketplace today to drive innovation and investment.

MARK WIEDMAN:  Jim, let's take it back to how your decarbonizing your actual operations. You had it in two parts. There's making stuff, and there's using energy. Can you give us some examples of how you're decarbonizing how you make stuff?

JIM FITTERLING:. On how we make stuff, you think about the most basic thing we do every day is make ethylene and propylene. And we take natural gas liquids like ethane and propane. These are cuts off of natural gas. We use that methane to fire a furnace in a hydrocarbons facility to basically take that ethane and propane and crack it and make ethylene and propylene. Now, when we make ethylene out of ethane, we make two by-products. We make methane and hydrogen. And so today, one of the ways we're decarbonizing is taking that by-product of methane and hydrogen, bringing it back through an autothermal reformer. An autothermal reformer basically converts methane and hydrogen into pure hydrogen. And then we will take that pure hydrogen and fire the cracker furnaces with that, replacing that methane. So we've got an emissions out of the cracker furnaces that is literally 5%, where today the emissions from firing natural gas are 100% of our CO2 footprint. We’ll eliminate 95% of the CO2 footprint by bringing that recycle methane and hydrogen around and making hydrogen as the fuel for the furnace. So it's a really elegant solution and one that's kind unique to our industry but one that is really attractive. And by going through that autothermal reformer, then I can more cost effectively scrub the CO2 out of the emissions and then sequester that. So hydrogen and carbon capture and sequestration are the two things that will drive the investment and really drive the acceleration of CO2 reduction in our scope 1 and 2.

The other area is power and steam for utilities. So we use a lot of electricity in our facilities, and we use a lot of steam. And we use kind of equal amounts of both. So for many years, one of the most efficient ways to generate that power and steam has been combined cycle gas turbines. We get good electricity output. We get good steam output. That helps us fire the facilities. Between now and 2050, almost all of those assets that we have at Dow will reach their end of life. So in every facility, as they reach end of life. we will replace them with the most effective technology that's low CO2. For example, today, we're repowering our site in Plaquemine, Louisiana. It'll be done in a couple of years. And when it's done, we will have lower cost power and steam utilities, and we will drop the CO2 footprint at that site by 350,000 tons. That's significant. That's about 15% of our 2030 target. And so we'll just go site by site around the world on our power and steam and invest in better technologies and lower-cost technologies. And also, get CO2 reductions that will help us stay ahead of that curve.

MARK WIEDMAN: Energy sources for your business. Today, you're heavily using gas. In the future, we talked about hydrogen. What do you see that mix looking like in 20 years?

JIM FITTERLING: Over time, we made the switch from coal to natural gas back in the '80s. We completed it. Now, we're looking at what's next after natural gas. And I think realistically, because we need 24/7 available dispatchable power, we run very large machines, rotating equipment that is very highly engineered and very expensive. And we can't afford even a millisecond interruption in power. It means we need really reliable supply. Wind and solar can provide an increment for us, but they can't provide that baseload. And so one of the things that we're looking at longer term, especially in the United States, is the idea of advanced nuclear. Advanced nuclear is new technology, relatively new. I say that the nuclear navy in the US has operated it for many years very safely. But it's a different fuel type. It's a different reactor design than these one gigawatt plants that you see at a utility building. These would be done on a smaller scale, maybe 60 megawatts to 200 megawatts. And something of that scale would be just the right size for a medium-sized manufacturing facility that I might have. So we're looking at a couple of facilities in the US. There might be good offtakers for an advanced nuclear project and talking to advanced nuclear companies about being an offtaker and do we have the right location and the right chemistry and the right other issues to really have a successful project there and how we could participate in that and proving out that technology.

MARK WIEDMAN: You've talked about the circular economy and the recycling of the plastics that you make. So now it's less about the manufacturing. It's the actual usage and ultimately the recycling. Talk about how that is part of your strategy.

JIM FITTERLING: Well, the biggest challenge that the world is facing today on plastics is this issue of plastic waste. And there are a lot of reasons for the waste issue. In the United States and Europe, you have pretty effective waste management systems, whether it's managed landfills here, or in Europe, a combination of both landfills as well as waste to energy and recycling drives. But in the rest of the world, especially in the developing world, there's really a lack of infrastructure, and it hasn't kept up with the growth. And so you've seen a lot of evidence that waste goes out into the environment. To stop that, we need to do a couple of things. We need to make sure that the waste is managed properly. And one of the most effective ways to do that is to be able to create a market for that waste material. It's estimated today that the value of all that waste plastic that goes into the environment is about $80 to $120 billion a year as a feedstock. So we can take that plastic back and convert it either through a mechanical or advanced recycling back into a useful product. It's that much material that we don't have to go take from virgin fossil fuel feedstocks. And our commitment is to try to get a million tons a year diverted from landfills or dumps and going back into the marketplace. And the other one is close the loop. And that's really about design.  So being able to make everything that we make fully recyclable. We're starting to see brand owners today demand more postconsumer recycled material in their products. And this is a big difference over the last 20 years. Today, most brand owners that we deal with have targets to have 30% of their packaging have postconsumer recycled content in it by 2030. In reality, today, the market can conly deliver about 2% of that number. And so there's a huge unmet demand and need out there, and there's a lot of money today moving toward both mechanical and advanced recycling. And also, automated and more sophisticated municipal recycling facilities so that we can create good pure waste streams which can become feedstock streams for our industry.

MARK WIEDMAN: Jim, let's talk a bit about you. You've worked in the chemical sector for your whole career. How has decarbonization started to come into that sector as part of your life in your career?

JIM FITTERLING: Well, if I go back to when I first joined Dow was in '84. At the time, Dow was retiring the last of it's coal-fired power plants and moving over to natural gas. And if you'll remember at the time, there was a big pressure on NOx and SOx, nitrous oxide and sulfur oxide. We were having issues with acid rain if you remember at the time. And through regulatory regimes, there was essentially caps put on the emissions. And that drove a lot of process technology to make that happen. That drove the industry away from carbon for power and steam to natural gas. And we really went-- and at least, in our case, we went and never looked back. We did some looks early days at hydrogen fuel cells for big industrial installations with GM. It didn't prove out to be the most effective technology, but sometimes, those ideas are 20 years ahead of their time. And here we are back to hydrogen again as a potential option. And the reason we're back, I think, right now is if you think about the way the capital markets work, for an industry like ours, where cost competitiveness is key. It really drives you to the lowest, both capital cost and operating cost solution, because these markets are price-sensitive. A difference of $100 or $200 a ton can mean you're out of a market. Now, you've got a different equation that we have to solve for. The world is saying, yeah, we want you to be low cost, but it needs to be the best combination of low cost and low or zero carbon emissions. And what that's going to mean for industry is the low-cost, low-carbon solution is going to be higher cost than just the low-cost solution we have today. And that's why policy is so important to get that right because with the right policy, with a market based price on carbon, with some R&D incentives around new technology to scrub out the CO2, with some infrastructure investment through deals like the Infrastructure Bill that was passed here, we can develop carbon capture hubs and hydrogen hubs. Those kind of policies all together will help us cover the cost so that that doesn't all have to get passed downstream to the consumer.

MARK WIEDMAN: Let's talk about the role of capital and investors in helping to fund the transition. And from your perspective as a CEO, start with simply, how is decarbonization part of your conversation with your investors?

JIM FITTERLING: In October, we had a big investor day at New York Stock Exchange, and we unveiled the game plan to get to zero scope 1 and 2 emissions by 2050. And as this year progresses, every time we update investors, we're going to give them in more detail behind what's in that. What we said to them was we're going to commit a billion dollars a year of CapEx between now and 2050 to making that reduction. That would be making sure that we're investing in technologies that are low cost, technologies that have a return on capital that meets their expectations and our expectations. And that we think by doing that, we can methodically site by site go around the world and take that power and steam and that hydrocarbons footprint to zero. It’s one of the most comprehensive plans that was laid out to investors, so they're still trying to digest it. But I think they appreciate that we believe it's possible if we have the right support to do it. If we have some help with a market-based price on carbon, it doesn't take a lot to move the needle. What we've seen in Europe is that once the price on carbon got to $60 a ton-- and now, it's operated between 60 and a little more than $100 a ton. And as Europe ratchets down the allowances, that price on carbon is going to move between $100 and $200 a ton.

That kind of a market price on carbon incentivizes me to invest capital faster to decarbonize because as I do that, I avoid large payments in the future. And this is what investors are concerned about. If you do nothing in the near term, what's the bill going to be for you in the long term? And what they're worried about if you do nothing is what's the tail risk on your business? How much is a tail risk on your business if you wait for everything to be put into place?

My view is in the near term, the demand for these products is going to exceed the supply. And for some period of time, there's probably going to be a premium that can be obtained through the sale of these products. It won't last forever because as technology moves and as other people come into the market, that will go away. But if we can move faster, we're going to attract a lot of capital into these markets. And the markets have proven time and time again that they're the best allocators of that capital. They will find the most effective technologies. They will make those investments. And the ones that aren't the winners, they will sort that out pretty quickly as well. This is why I think the market-based price on carbon is absolutely necessary.

MARK WIEDMAN: Jim, some of our investors, some of our clients look to divest out of what I'd call dirty, and you'll call hard to abate sectors. What do you say to them?

JIM FITTERLING: You have to look at the demand for the end products. And so the demand for the end products that we make today isn't going to go away. Plastics today have a CO2 footprint that is four to five times lower than any of their substitute materials. It's one of the reasons they've grown the fastest of any material class out there is because they're lighter cleaner, faster, and stronger than the next available material. And that's going to continue to be the case. And if we can take plastics to a zero carbon footprint, nothing's going to come close to it. So I would say, don't bail out before the cooking is done here. I think we're going to show the path on how to get there and still be the lowest cost and win that game. On the other hand, there's a big growing concern around the oil and gas industry today. I would say take it away from just the discussion around oil and gas and take it to energy, in general. This world has never used less of any energy source that it produces. Even though we're moving away from coal to natural gas, the world still uses more coal every year because many developing countries need coal to be able to electrify their country. If it's basic needs, they're trying to get themselves into middle class. Electrification is one of the things that has to happen. And that's the most efficient way they can do it. Natural gas would be the next most efficient. But in order to do that, many countries don't have natural gas, so they need to import LNG. That's a lot of capital. That's a lot of investment that has to happen, not easy for a developing country. And when you think about energy, obviously, our view is you need all of the above energy policy. Right now, you've got different factions trying to say, no more fossil fuels. And I'm like, fossil fuels isn't the problem here. The emissions are the problem. We want no more CO2 emissions. We want to get CO2 emissions to zero. We don't have to go determine that the answer is no more fossil fuels. Focus on the emissions and let the technologies give us the answer. And I think if we would get those two decoupled and get our policies around the emissions, we'd see a massive change in the CO2 footprint. Without doing much, we saw a huge change in CO2 footprint in this country, moving from coal to natural gas. The next move doesn't have the same kind of economic incentive that coal to natural gas had. We're going to have to create that incentive. And that's where a market price on carbon and some subsidy or some tax break for innovative technology investments is going to have to help.

MARK WIEDMAN: Jim, my last question-- what do you think is the single most important thing that needs to happen to get the world to net zero?

JIM FITTERLING: Focus on the CO2 emissions reduction. Open up the aperture to have an all of the above energy policy. Don't try to determine what the future energy mix is going to look like. It's a physics equation. The energy markets will get you to the right answer. And let the technologies that can reduce the CO2 emissions come to the forefront. And they will. Some of them are already here today and can be done in a scalable fashion like blue hydrogen and carbon capture. Let them roll. We'll make more progress in the next 10 years with those two technologies than just about anything else I can think of.

MARK WIEDMAN:  Jim Fitterling, CEO and chairman of Dow, thank you very much.

JIM FITTERLING: Thank you, Mark.

OSCAR PULIDO: What comes to mind when you hear the words transformational industries? From robotics to transportation to the supply chain, today we’re uncovering clues around how megatrends are revolutionizing the very fabric of our economy.

Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido.

I’m excited to welcome back to the podcast Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs and also joining this episode is Tanya Chanda, Senior Investment Strategist on the BlackRock Megatrend team and they just put out a new paper – name to come. Together we’ll explore how megatrends are changing the way we navigate supply chain disruptions, what robots labor means for human employees and whether or not millennials – in their prime spending years – are able to impact the economy to the same degree as older generations.

Jeff and Tanya, thank you so much for joining us on "The Bid."

JEFF SPIEGEL: Thanks for having us, Oscar.

TANYA CHANDA: Thanks, Oscar.

OSCAR PULIDO: Jeff, I know we talked about this last time. I think you are now, perhaps, the record holder of famous podcast appearances to talk about megatrends, and great to hear you've brought a colleague of yours along as well.

JEFF SPIEGEL: I am honored. I actually wasn't sure what the count was going into this, but it's a big deal for you to share that with