WEBVTT - HSBC CEO Michael Roberts Talks Banking Industry

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>There's no one better to talk to than Michael Roberts,

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<v Speaker 2>CEO of HSBC, a bank and CEO of the Corporate

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<v Speaker 2>and Institutional Bank at the Region. I'm just curious, given

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<v Speaker 2>the fact that HSBC and welcome is such a central

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<v Speaker 2>bank in both trade as well as in both China

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<v Speaker 2>and in the West, how significant do you see this

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<v Speaker 2>latest eruption of trade tensions between the US and China.

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<v Speaker 2>Does this feel different?

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<v Speaker 1>Yeah? No, First of all, thank you for having me today. Look,

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<v Speaker 1>I think the world has got used to a lot

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<v Speaker 1>of these tariff changes, although certainly this newest round is

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<v Speaker 1>yet another bit of unpredictability. I think companies have been

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<v Speaker 1>now looking for different ways to manage their supply chains.

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<v Speaker 1>We have a survey that we did right after Liberation

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<v Speaker 1>Day which I think still hold trues today. We surveyed

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<v Speaker 1>five thousand clients, so big survey, and they all said

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<v Speaker 1>why and all of these tariffs are going to cause

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<v Speaker 1>a lot of issues. Prices will go up to Most

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<v Speaker 1>of now are looking at their supply chains. In the word,

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<v Speaker 1>I think supply chain has now come to be one

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<v Speaker 1>of the probably the most discussed terms in e C

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<v Speaker 1>suite today. And thirdly, they're going to change and they

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<v Speaker 1>may even change business models. So this next round, this

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<v Speaker 1>current round, I think, just tells you that they're going

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<v Speaker 1>to have to significantly change what that is because one

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<v Speaker 1>hundred percent tariffs, you can't absorb one hundred percent tariffs,

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<v Speaker 1>So that means there'll be a greater acceleration to where

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<v Speaker 1>those new supply chains will be. However, it is been

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<v Speaker 1>a bit of a whack a mole because you have

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<v Speaker 1>to constantly look at where the next tariffs will come from,

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<v Speaker 1>and that's been a challenge to many companies. They really

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<v Speaker 1>have to figure out what is the least vulnerable place

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<v Speaker 1>they can be or the most tariff proof place they

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<v Speaker 1>can be, and how do they then export into the

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<v Speaker 1>US or freightly anywhere to make sure that they can

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<v Speaker 1>do so as effectively as possible.

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<v Speaker 2>How much of the extra costs from tariff's been realized,

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<v Speaker 2>not just tariffs but also the rejiggering of supply chains.

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<v Speaker 1>Yeah, so rule of thumb, when I've talked to most people,

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<v Speaker 1>probably seventy eighty percent is born by some the producer

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<v Speaker 1>versus the importer. The last twenty percent analysis starting to

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<v Speaker 1>seep into in buyer, the customer. I think most are saying,

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<v Speaker 1>we can't continue to absorb that much additional costs as

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<v Speaker 1>the importer or the distributor. Therefore it will start shifting

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<v Speaker 1>more and more to the end buyer, the client, or

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<v Speaker 1>the customer. So that there's been a I think it's

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<v Speaker 1>strong effort, however, to try to absorb as much as possible.

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<v Speaker 1>So I talked to a retailer, high fashion retailer saying,

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<v Speaker 1>me and distributor or the producer out of the Asia,

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<v Speaker 1>and me as the distributor, are absorbing as much as

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<v Speaker 1>we possibly can. We understand we could do that, but

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<v Speaker 1>it will come to an end.

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<v Speaker 2>So John and Amory we're talking to FED Governor Chris

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<v Speaker 2>Waller and about the balance between inflation and the labor market,

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<v Speaker 2>and there's this feeling that any kind of inflation is

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<v Speaker 2>going to be short lived and the effect on the

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<v Speaker 2>labor market could potentially be initi Are you seeing that

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<v Speaker 2>companies instead of raising prices, laying off workers or trying

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<v Speaker 2>to revert to artificial intelligence to bridge the gaps.

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<v Speaker 1>Not yet, However, there is a lot of cost pressures.

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<v Speaker 1>I think there's a delay, a lot of investments. I mean,

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<v Speaker 1>that's the flip side of that, because I do think

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<v Speaker 1>people want predictability. The companies need to understand where they're

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<v Speaker 1>going to put down a lot of capital, that that

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<v Speaker 1>capital is going to produce good returns because more predictability.

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<v Speaker 1>I've seen slowing of hiring, but not real firing today,

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<v Speaker 1>and so that's kind of again the flip side of

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<v Speaker 1>that coin. But really it's the capital and the investments

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<v Speaker 1>that you're starting to see slow down quite a lot.

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<v Speaker 2>Meanwhile, we've heard a lot here at the meetings in Washington,

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<v Speaker 2>d C. At a number of themes AI, which we'll

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<v Speaker 2>get to any second, but also this question around credit

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<v Speaker 2>froth and an AI related bubble. How much are you

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<v Speaker 2>getting concerned akin to what JP Morgan's been talking about,

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<v Speaker 2>of a real turn in the credit cycle or some

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<v Speaker 2>sort of later innings that give you pause and make

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<v Speaker 2>you more cautious.

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<v Speaker 1>Yeah. Look, I do think this is not the first

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<v Speaker 1>instance of what is inventory financing fraud, which is essentially

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<v Speaker 1>selling you know, or using the same bit of inventory

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<v Speaker 1>to finance multiple times. We've seen that in Europe a

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<v Speaker 1>couple of times as well in the last say nine months.

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<v Speaker 1>So I am more concerned and something that we're very

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<v Speaker 1>focused on. So in fact, we're using technology we developed

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<v Speaker 1>in our trade business and using it throughout all of

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<v Speaker 1>our lending platforms now to try to go through and

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<v Speaker 1>be very specific that everything we finance is good collateral,

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<v Speaker 1>it doesn't have multiple leans on top of it, which

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<v Speaker 1>is really what happened to First Brands. It's tough to do,

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<v Speaker 1>and I think, you know, the fraustaters are getting better

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<v Speaker 1>at it, so we're going to have to respond to

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<v Speaker 1>being much better on due diligence. You know, we were

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<v Speaker 1>not involved obviously directly in First Brands, so don't know

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<v Speaker 1>how much due diligence was done, but I think these

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<v Speaker 1>type of financing arrangements are going to require much more

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<v Speaker 1>due diligence, much greater technology, much more specific understanding exactly

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<v Speaker 1>what you're financing.

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<v Speaker 2>The other aspect has been just sort of how much

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<v Speaker 2>AI has actually boosted productivity, boosted profitability versus been a

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<v Speaker 2>real call center for the most part. Ken Griffin came

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<v Speaker 2>out of Citadel saying that he's not seeing evidence that

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<v Speaker 2>AI programs can really make an edge in financial markets.

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<v Speaker 2>I know that HSBC has been big and quantum computing

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<v Speaker 2>and has this test. Are you seeing real gains? Are

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<v Speaker 2>you actually deploying quantitative strategies from quantitative computing on your

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<v Speaker 2>trading floors.

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<v Speaker 1>Yeah. So, just for those who don't know, we had

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<v Speaker 1>a partnership still do with IBM. We developed quantum computing

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<v Speaker 1>really for financial markets, focusing on the bond market, and

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<v Speaker 1>we use both quantum computing and more traditional computing, brought

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<v Speaker 1>them together, changed the way we look at data. There's

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<v Speaker 1>a thing called representation data that we actually flipped into

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<v Speaker 1>a more of a quantum computing type of mode. That

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<v Speaker 1>led to a thirty four percent improvement in our ability

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<v Speaker 1>to predict a trade. So if you were going to

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<v Speaker 1>make a trade, we get to understand that trade thirty

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<v Speaker 1>four percent better. To see the matching between buyer and

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<v Speaker 1>seller is really what it comes down to. So that

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<v Speaker 1>was very effective. It's an initial study. We did how

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<v Speaker 1>we we're tested on multiple comtmcuting machines, we did all

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<v Speaker 1>the statistical analysis, so we really do think there's something there.

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<v Speaker 1>It can be used for any traded asset, So any

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<v Speaker 1>asset class. I think the power that that brings is

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<v Speaker 1>going to give an edge. I don't know how it

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<v Speaker 1>wouldn't give it edge, but I think it'll be once

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<v Speaker 1>we roll it out, another's roll it out, they'll be

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<v Speaker 1>quick adoption by I think the industry. I mean, it's

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<v Speaker 1>is the same industry that tries to reduce latency to

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<v Speaker 1>its smallest possible amount. So I do think technology does

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<v Speaker 1>bring a substantial edge.

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<v Speaker 2>Do you think it's going to replace traders that?

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<v Speaker 1>I don't know. I mean, I think they always be

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<v Speaker 1>humans involved, But I think it'll help traders quite a lot.

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<v Speaker 1>And I think it'll change really the way traders think

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<v Speaker 1>about it because when you have that much compute power

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<v Speaker 1>and you could really use it. I think today, you know,

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<v Speaker 1>we use a lot ai as you said, through algo

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<v Speaker 1>rhythmic trading. This will just be one more substantial boost

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<v Speaker 1>to the power of a rhythmic trading that we see today.

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<v Speaker 1>So will it be less traders? Don't know? But are

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<v Speaker 1>they going to have powerful machines? Definitely.

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<v Speaker 2>So the other theme here, and this is something that

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<v Speaker 2>comes up in pretty much every conversation, is the debasement

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<v Speaker 2>of the dollar and this question of how much the

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<v Speaker 2>dollar is losing its heft as a reserve currency internationally.

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<v Speaker 2>Do you see any signs that people truly are moving

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<v Speaker 2>away from the green back.

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<v Speaker 1>Yeah, that's great question. So I happen to be traveling

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<v Speaker 1>to Asia right after Liberation Day, and I would say

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<v Speaker 1>that was probably the number one conversation that I was

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<v Speaker 1>having by very big, very sophisticated large holders of dollars,

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<v Speaker 1>and they were quite focused on this idea of dedollarization

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<v Speaker 1>or debasement of the dollars of reserve currency. And the

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<v Speaker 1>mere fact that they're talking about it and the terms

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<v Speaker 1>they were tells you something is different. Now. If you

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<v Speaker 1>look at where the dollar is today, trade flows reserves

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<v Speaker 1>the primary currency of invoicing for most commercial flows, the

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<v Speaker 1>markets flows, it's all well more than fifty percent, it's

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<v Speaker 1>you know, sixty seventy eighty percent in all those various metrics.

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<v Speaker 1>It will take a long time to find another reserve currency.

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<v Speaker 1>And the other biggest question is if you're going to

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<v Speaker 1>go away from dollars, what are you going to do?

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<v Speaker 1>And you know what will be that reserve currency that

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<v Speaker 1>replaces it? There is no other alternative today. And so

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<v Speaker 1>that's the twin issues that you have. The conundrum, maybe

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<v Speaker 1>go away from dollars, but what are we going to

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<v Speaker 1>go to instead?

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<v Speaker 2>To wrap it all up, there is this feeling that

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<v Speaker 2>the center of finance has shifted, and it's not so

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<v Speaker 2>clearly in the United States, and something that you've been

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<v Speaker 2>focusing a lot. How do you see the sort of

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<v Speaker 2>tentacles of finance in terms of where they are flowing

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<v Speaker 2>from transforming really over the past.

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<v Speaker 1>Couple of years. Yeah, No, I think there's significant transformation

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<v Speaker 1>going on. And if you think there was a unipolar

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<v Speaker 1>world with the US right in the middle of it,

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<v Speaker 1>still is. And you know, the US capital market is

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<v Speaker 1>the most liquid of the world, still the dominant place

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<v Speaker 1>to trade. However, you need to look at where trade

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<v Speaker 1>and commercial flows are going, where financial flows are going.

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<v Speaker 1>I would look between the Middle East and Asia as example,

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<v Speaker 1>substantial increase of flows between those two regions. And they're

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<v Speaker 1>not flows that are necessarily coming from the West just

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<v Speaker 1>being transhipped through those reasons. They're actually wealth and that

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<v Speaker 1>is being rechanneled in that region assel. I think you'll

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<v Speaker 1>see that more and more. I think you'll see Asia

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<v Speaker 1>Middle East coming together more and more, and I think

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<v Speaker 1>you'll have a much more balanced equation. I don't think

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<v Speaker 1>there'll be as a dominant source of financial flows that

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<v Speaker 1>you've seen before, and you know, great for us because

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<v Speaker 1>we have to be very strong in those two regions.

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<v Speaker 1>But I do think people need to understand that there's

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<v Speaker 1>a significant change going on and those flows will not

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<v Speaker 1>just go through New York as they used to in

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<v Speaker 1>the past.

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<v Speaker 2>Michael Roberts, thank you so much for taking the time.

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<v Speaker 2>Really wonderful to speak with you and John. That was

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<v Speaker 2>Michael Roberts of HSBC, and some of the key topics

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<v Speaker 2>here in the idea of how much that financial center

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<v Speaker 2>has shifted