WEBVTT - Matt Damon & His Clean Water Venture 0:00:00.080 --> 0:00:12.960 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:34.280 Bloomberg dot Com, and of course, on the Bloomberg. It 0:00:34.360 --> 0:00:36.959 was interesting to see the short end the two year 0:00:37.080 --> 0:00:40.519 treasury yields decline as well, by the second most so 0:00:40.600 --> 0:00:44.879 far this year. In response to the press conference, it 0:00:44.920 --> 0:00:48.320 was interesting to hear what j. Powell said about trade, 0:00:48.760 --> 0:00:51.640 even though he said that they do not do trade policy. 0:00:51.680 --> 0:00:54.640 He said trade is a new risk, a low prile 0:00:54.840 --> 0:00:58.680 profile risk that has become more prominent to the outlook 0:00:58.840 --> 0:01:01.960 with respect to how much it could curtail it. Here 0:01:02.000 --> 0:01:06.600 with us. Ibrahim Rabari, the Group head of Global Macroeconomics, 0:01:06.640 --> 0:01:09.280 joining us here in our eleven three studios. Ibrahim, thank 0:01:09.280 --> 0:01:10.800 you so much for being with us. I want to 0:01:10.840 --> 0:01:13.480 start with trade because J. Powell, uh, you know, pretty 0:01:13.560 --> 0:01:17.440 much stayed the course yesterday. But trade is really the 0:01:17.480 --> 0:01:20.680 big question. And from your perspective, based on what we 0:01:20.720 --> 0:01:23.880 know from President Trump's administration, how much do you think 0:01:23.920 --> 0:01:26.760 the rhetoric that we have heard so far will curtail 0:01:26.840 --> 0:01:31.119 economic growth this year. Well, thank you as a pleasure 0:01:31.160 --> 0:01:34.240 to be here today, and I I think our base 0:01:34.280 --> 0:01:37.720 cases it won't curtail activity that much, at least in 0:01:37.720 --> 0:01:39.800 the US this year. And that's on the assumption that 0:01:39.880 --> 0:01:41.760 we will see something along the lines of what the 0:01:41.800 --> 0:01:44.520 media reported it will be announced today, and that the 0:01:44.520 --> 0:01:47.960 response to that will be fairly moderate from from other countries, 0:01:48.480 --> 0:01:51.320 notably China. Of course, in that scenario, I think trade 0:01:51.640 --> 0:01:54.160 might be roughly neutral even for for for the U 0:01:54.240 --> 0:01:56.920 S or ever so slightly negative because of course some 0:01:57.040 --> 0:01:59.200 US companies are actually going to benefit from what these 0:01:59.520 --> 0:02:02.360 from what the administration tries to achieve. Well, let's let's 0:02:02.360 --> 0:02:04.080 just be very clear here. So we've already gotten the 0:02:04.080 --> 0:02:08.080 steel tariffs, but what we're really talking about today is 0:02:08.320 --> 0:02:13.080 the potential crackdown on theft of intellectual property from China. 0:02:13.160 --> 0:02:15.400 So that is what we're talking about. We're expecting possibly 0:02:15.440 --> 0:02:18.480 fifty billion dollars of sanctions in some in some form 0:02:18.560 --> 0:02:21.600 or another from President Trump today. I want to talk 0:02:21.639 --> 0:02:24.600 specifically about the escalations there because we are hearing that 0:02:24.720 --> 0:02:27.880 China would retaliate by way of grains and the mid 0:02:27.919 --> 0:02:31.120 and the Midwest States, So given a sort of escalation 0:02:31.120 --> 0:02:33.840 of that, would that change your outlook? No, And I 0:02:33.880 --> 0:02:36.720 think if it, If it, if it is limited indeed 0:02:36.720 --> 0:02:40.680 to retaliation that's perhaps targeted the specific states, mostly in 0:02:40.720 --> 0:02:43.840 the agricultural sector, then I think it's significant for those sectors. 0:02:43.880 --> 0:02:47.120 But I don't think it will be more than a 0:02:47.200 --> 0:02:50.959 very minor influence on our micro forecast the feds overall 0:02:51.000 --> 0:02:53.880 outlook as well, and therefore monitory policy. We're gonna catch 0:02:53.919 --> 0:02:56.880 up with Bloomberg's Tom mackenzie from Beijing a little bit 0:02:56.919 --> 0:02:59.200 later in the program to get more details on how 0:02:59.280 --> 0:03:01.240 China may rest bond to the tariffs that could be 0:03:01.280 --> 0:03:03.480 unvilolated by the President. I want to get your view 0:03:03.800 --> 0:03:06.080 on the Federal Reserve. Abraham, what have we learned about 0:03:06.080 --> 0:03:10.720 the reaction function of Chairman Power yesterday? Well, relative to 0:03:10.919 --> 0:03:14.080 I think the uncertainty and and and and some expectations, 0:03:14.080 --> 0:03:17.360 I think he came through as very gradualist and in 0:03:17.400 --> 0:03:21.360 some sense as very little changed from the leadership under 0:03:21.520 --> 0:03:25.960 under his predecessor, and clearly reactive. So I think the 0:03:26.000 --> 0:03:30.720 most significant statement in the press conference was that the 0:03:30.760 --> 0:03:34.280 committee didn't see any signs of an acceleration of inflation, 0:03:34.520 --> 0:03:36.840 so that tells me they're going to stay the course. 0:03:36.880 --> 0:03:38.800 I think it's still the expectation that we will see 0:03:39.200 --> 0:03:42.480 a higher quarter until quote unquote something breaks. But we're 0:03:42.480 --> 0:03:44.720 certainly not seeing a change of tack. The message seems 0:03:44.720 --> 0:03:46.920 to be shown me the data. Now. Federal Reserved chair 0:03:47.040 --> 0:03:49.360 Janet Yellen used to say, we're data dependent. But this 0:03:49.400 --> 0:03:51.680 sounds like an individual that is truly going to be 0:03:51.760 --> 0:03:54.760 data dependent, who is not married to a certain economic 0:03:54.840 --> 0:03:57.400 model in the expectations of what might develop based on that. 0:03:57.600 --> 0:04:00.680 Is that your interpretation too, I I would certainly think 0:04:00.720 --> 0:04:04.200 that he's not quite as as wedded to a certain 0:04:04.560 --> 0:04:07.480 way of looking at the data. In the sort of 0:04:07.520 --> 0:04:10.320 academic tradition of Phillips curves, neutral rates, they came up 0:04:10.400 --> 0:04:13.200 very often as well. I don't think he's more data 0:04:13.240 --> 0:04:16.359 dependent than Chairman Yellen was, but I think he was 0:04:16.640 --> 0:04:19.680 at least clearer that he didn't see the trade off 0:04:19.720 --> 0:04:22.760 between growth and inflation in a way that would necessarily 0:04:22.800 --> 0:04:26.600 push him to catch up with that outlook. Meanwhile, perhaps 0:04:26.680 --> 0:04:30.679 for Powell isn't necessarily offering up a prediction of where 0:04:30.720 --> 0:04:34.320 he sees the credit cycle. But some investors have some 0:04:34.320 --> 0:04:37.600 prominent investors and they're starting to see, in particular Scotland 0:04:37.720 --> 0:04:42.800 Minard of Guggenheim Investment Management seeing a flat yield curve 0:04:43.320 --> 0:04:46.680 in a year and a recession six to nine months 0:04:46.720 --> 0:04:49.880 after that. Do you agree so? I think the risk 0:04:49.960 --> 0:04:52.440 of a recession or at least a significant downturn over 0:04:52.440 --> 0:04:54.280 the next two to three years is pretty high, and 0:04:54.760 --> 0:04:56.800 I would guess it would be associated with a flat 0:04:56.839 --> 0:04:59.119 yield curve as well. Now, of course, the uncertainty around 0:04:59.120 --> 0:05:01.240 it is high. To when we think about downturns. What 0:05:01.279 --> 0:05:04.680 we have to think about is vulnerabilities and shocks. Vulnerabilities 0:05:04.680 --> 0:05:07.000 are clearly going up. Shocks are hard to predict. But 0:05:07.040 --> 0:05:09.359 I think that two to three horizon seems very plausible. 0:05:09.520 --> 0:05:12.800 Just in terms of yesterday, the disappointment for very hawkish 0:05:12.880 --> 0:05:15.640 expectations was that we didn't quite make it to four hikes. 0:05:17.279 --> 0:05:19.839 We did drift higher in terms of their projections for 0:05:19.920 --> 0:05:24.560 rates through through and Tilsa's point this flattening of the curve. 0:05:24.920 --> 0:05:28.920 You do have this situation where rates in twenty are 0:05:28.920 --> 0:05:33.680 actually materially higher above where they see the long term 0:05:33.760 --> 0:05:36.240 neutral rate. What do you make of that dynamic in 0:05:36.320 --> 0:05:38.920 terms of the forecasting at the moment Abrahim. I think 0:05:38.920 --> 0:05:41.040 it is very interesting, and I think particularly what's been 0:05:41.080 --> 0:05:43.800 going on for the over the last six months is 0:05:43.800 --> 0:05:46.560 actually very interesting. If you go back to September, only 0:05:46.640 --> 0:05:49.200 five people at the on the effort and see were 0:05:49.520 --> 0:05:52.920 at three percent or higher. Now it's twelve, so it's 0:05:52.920 --> 0:05:56.239 a really big change in that specific number. I personally 0:05:56.279 --> 0:06:00.120 think one reason why that number is now three in 0:06:00.160 --> 0:06:02.760 four percent above the long term neutral rate is actually 0:06:02.760 --> 0:06:05.320 so that they don't have to raise rates faster today. 0:06:05.560 --> 0:06:08.400 So it's a warning sign for things not to get 0:06:08.400 --> 0:06:10.840 out of fans that may have some coming influence. Does 0:06:10.839 --> 0:06:13.160 this play into that idea that they are still slightly 0:06:13.160 --> 0:06:16.960 cautious about the potential of overheating. I think they're cautious, 0:06:16.960 --> 0:06:18.760 but at the same time, again, I think they're kind 0:06:18.760 --> 0:06:23.280 of they're fairly reactive. So I think what the new 0:06:23.360 --> 0:06:25.680 chair laid out yesterday's I think the data have to 0:06:25.760 --> 0:06:28.880 convince him that inflation is picking up faster than expected. 0:06:29.200 --> 0:06:31.200 How much is this out of the Fed's hands. How 0:06:31.279 --> 0:06:33.000 much of this has to do with the fact that 0:06:33.040 --> 0:06:36.719 the US is issuing a great proportion of debt on 0:06:36.760 --> 0:06:39.919 the short end to finance its deficit, thus raising the 0:06:40.000 --> 0:06:43.080 rates in the near term at the expensive growth of 0:06:43.080 --> 0:06:46.080 the long term leading to a flattening of the yield curve, 0:06:46.160 --> 0:06:49.920 even if the FED is somewhat cautious. So very recently, 0:06:49.920 --> 0:06:51.880 we've seen a lot of movement in in in the 0:06:51.880 --> 0:06:53.920 short term for a variety of reasons. As you mentioned, 0:06:54.480 --> 0:06:59.159 issuance is one. We've seen the tax band effect, corporate 0:06:59.160 --> 0:07:00.920 behavior as well. And the FED of course is also 0:07:01.040 --> 0:07:04.719 changing it's it's it's balance sheet. But in terms of 0:07:04.720 --> 0:07:06.840 the steepening or flattening dynamic that we've seen over the 0:07:06.920 --> 0:07:08.520 last couple of months, the long and actually did move 0:07:08.520 --> 0:07:12.400 significantly too. And I think there it isn't really it 0:07:12.520 --> 0:07:16.080 is really these factors, even though tax plan and FED 0:07:16.120 --> 0:07:18.920 balance sheet coming. But to leasis point, Abraham, something is 0:07:18.960 --> 0:07:21.400 happening at the front end in terms of short term 0:07:21.440 --> 0:07:24.880 borrowing costs, whether you go through Libel commercial paper, what 0:07:25.000 --> 0:07:28.560 you see in short data, investment grade treasury bills, borrowing 0:07:28.640 --> 0:07:32.880 costs in the short term getting higher. Now, is that 0:07:32.920 --> 0:07:35.240 going to result in tide of financial conditions in a 0:07:35.280 --> 0:07:39.480 way that perhaps the FED doesn't actually quite want just yet. Yes, 0:07:39.520 --> 0:07:42.280 And I was curious to see that nobody asked them 0:07:42.360 --> 0:07:45.240 about that specific failure of the press pack in the 0:07:45.240 --> 0:07:49.280 news conference, isn't it? Well, you tell your colleagues, but 0:07:49.920 --> 0:07:53.760 you know what I think you will. I do think. 0:07:53.760 --> 0:07:55.480 I mean there's a debate. I think there is a 0:07:55.520 --> 0:07:59.040 moderate degree of financial tightening coming through on that score. 0:07:59.480 --> 0:08:02.040 Might expectation for now is it will actually reverse and 0:08:02.080 --> 0:08:04.120 that I think the Fed is going to wait to 0:08:04.200 --> 0:08:06.400 see to see that happen. And it is linked to 0:08:06.520 --> 0:08:09.000 some of these influences like the tax plan, but perhaps 0:08:09.040 --> 0:08:11.680 also Treasury issue. Abraham rack Barr is Citty Group, Head 0:08:11.720 --> 0:08:28.520 of Global Macroeconomic it's a big question how much will 0:08:28.600 --> 0:08:32.319 a full blown trade war crimp the economic growth that 0:08:32.360 --> 0:08:34.880 we've seen so far. Lara ram is going to answer 0:08:34.920 --> 0:08:37.679 that question for us in complete detail, and you can 0:08:37.840 --> 0:08:40.120 trade on it from here on out. Laura Ram is 0:08:41.320 --> 0:08:45.880 Chief US Economists. So give us a number, alright, uh number? 0:08:47.320 --> 0:08:50.720 Percent of of a crimp in the U economy? Yeah, 0:08:50.760 --> 0:08:53.800 you know, small, really small. I think you know, less 0:08:53.800 --> 0:08:58.120 than point one percent um in terms of economic impact 0:08:58.280 --> 0:09:00.959 of tariffs. I think one of the questions we have 0:09:01.040 --> 0:09:04.560 to ask ourselves. You know, two months ago, this market 0:09:04.640 --> 0:09:08.640 rally seemed unstoppable. It was a one way rocket going higher, 0:09:09.400 --> 0:09:13.679 and I think it speaks to the fear and power 0:09:14.000 --> 0:09:18.040 of the you know, any kind of protectionism that we've 0:09:18.120 --> 0:09:20.840 has actually stopped, Like what's changed now two months ago? 0:09:21.240 --> 0:09:24.720 It's really been this trade rotoric and you know, the 0:09:24.720 --> 0:09:29.199 economy is still looking solid. Um, global economies are still 0:09:29.200 --> 0:09:32.480 looking solid. The FED is getting a little more confident, 0:09:32.520 --> 0:09:34.760 but their outlook really hasn't changed. And in fact, we've 0:09:34.760 --> 0:09:37.320 had all this new government stimulus that makes the economy 0:09:37.320 --> 0:09:40.600 look even better. This rhetoric has power, and I think 0:09:40.600 --> 0:09:42.520 we all need to be humble in the face of that. 0:09:42.720 --> 0:09:45.760 So here's my question. Everyone is saying that, you know, 0:09:45.800 --> 0:09:48.200 the U. S economy is gaining steam, it could possibly 0:09:48.200 --> 0:09:50.200 get an even bigger bump because of the tax cuts. 0:09:50.800 --> 0:09:54.959 What could change that would make you advise your clients 0:09:55.000 --> 0:09:57.319 that it is time to be more cautious. So I'm 0:09:57.320 --> 0:10:01.199 already there, Um, I think because saying sounds good, Because 0:10:01.320 --> 0:10:04.000 you know, markets are so forward looking and there's already 0:10:04.120 --> 0:10:07.080 so much good news priced in. How do we get 0:10:07.720 --> 0:10:11.200 better news priced in? From here? Everybody has been tripping 0:10:11.280 --> 0:10:15.040 over themselves to raise their GDP forecasts. So when I 0:10:15.120 --> 0:10:18.040 look ahead, I see, you know, our an economy that's 0:10:18.080 --> 0:10:21.920 still really powered by the consumer. Well that's great, but 0:10:22.520 --> 0:10:26.599 it's really powered more by wealth gains than wage gains. 0:10:26.679 --> 0:10:30.120 And how do we connect that to financial markets? Because 0:10:30.559 --> 0:10:32.240 why do we care about the economy. We care about 0:10:32.240 --> 0:10:34.840 the economy because it's what drives our financial returns and 0:10:34.880 --> 0:10:39.000 our financial picture. And when you connect those dots, it 0:10:39.040 --> 0:10:44.240 makes the consumer hyper sensitive to changes in market sentiment. 0:10:44.679 --> 0:10:47.960 So when I look out across growth over the next year, 0:10:48.160 --> 0:10:53.160 we're still overly reliant on the consumer business investment. Green 0:10:53.200 --> 0:10:57.920 shoots of recovery there, but not you know, really confident traction. 0:10:58.720 --> 0:11:01.920 And so I see it is a more precarious picture 0:11:02.280 --> 0:11:04.440 with a lot of good news already priced in. Okay, 0:11:04.559 --> 0:11:07.120 So when you're saying that it's dependent on wealth gains, 0:11:07.320 --> 0:11:09.920 in other words, are you saying that a sell off 0:11:10.000 --> 0:11:15.480 in equities could potentially lead directly to aid economic downturn, 0:11:16.400 --> 0:11:20.160 especially without wage gains for the US consumers, and especially 0:11:20.240 --> 0:11:22.800 given the fact that US consumers have actually packed on 0:11:22.880 --> 0:11:25.559 quite a bit of non mortgage debt which is set 0:11:25.600 --> 0:11:29.559 to reprice given the higher short term rates. Yeah, and 0:11:29.600 --> 0:11:33.439 you know, downturn is probably strong, but you know, moderation 0:11:33.640 --> 0:11:35.920 from here, and I you know, look at the savings rate. 0:11:36.040 --> 0:11:38.040 A lot of people discount that, and I think that's 0:11:38.040 --> 0:11:42.400 a mistake because people have forgotten how it felt to 0:11:42.400 --> 0:11:46.959 be over levered going into the last um you know, downturn. 0:11:47.320 --> 0:11:50.120 And I think right now, when we look at what 0:11:50.320 --> 0:11:53.319 is powering the consumer, Yes, everyone has a job, but 0:11:53.400 --> 0:11:56.360 the wages just aren't there a short time borrowing Colston 0:11:56.400 --> 0:11:58.520 ready started to push higher UM no matter what you 0:11:58.559 --> 0:12:00.440 look at, what's the net effect of that on the 0:12:00.480 --> 0:12:03.720 US economy at the moment, and that has a significant impact. 0:12:03.760 --> 0:12:05.839 A lot of the treasury debt that's being issued is 0:12:05.920 --> 0:12:08.920 short term debt, so that raises the funding costs for 0:12:08.960 --> 0:12:12.760 the government. And yeah, all these credit card debts, you know, um, 0:12:12.800 --> 0:12:16.040 you know, the short term debt that consumers have taken on. 0:12:16.520 --> 0:12:19.600 A lot of that is UH is priced off of 0:12:19.640 --> 0:12:22.080 the short end of the curve. So I think it's 0:12:22.200 --> 0:12:26.319 this chipping away and it's human nature, right, we all 0:12:26.360 --> 0:12:29.040 get too pessimistic and then we all get too optimistic. 0:12:29.080 --> 0:12:30.880 And that's what I saw at the end of last year, 0:12:30.960 --> 0:12:37.000 everybody just embracing that goldilocks growth and financial market environment 0:12:37.559 --> 0:12:42.360 and forgetting that we've had, you know, complacency to me 0:12:42.440 --> 0:12:45.840 is really set in and where advising investors to be 0:12:46.480 --> 0:12:50.840 prepared for much higher volatility and to be really prepared 0:12:51.000 --> 0:12:55.440 for a much more difficult investment terrain to navigate. It's 0:12:55.480 --> 0:12:58.360 so interesting for me to hear you talk about consumer 0:12:58.480 --> 0:13:01.880 leverage because most analysts an economists I speak to write 0:13:01.880 --> 0:13:04.160 it off. They say, if you look at it, it's 0:13:04.280 --> 0:13:07.000 you know, on a sort of per GDP growth basis 0:13:07.120 --> 0:13:10.240 or per household wealth level, it's really not that big 0:13:10.240 --> 0:13:12.760 of a deal. And yet you raise a really good point, 0:13:12.840 --> 0:13:14.800 which is there's sort of a two tier system here. 0:13:14.880 --> 0:13:17.280 We've got the consumers that don't have mortgages, that are 0:13:17.280 --> 0:13:20.480 paying higher fixed costs with rents, etcetera. Have taken out 0:13:20.520 --> 0:13:25.520 a record amount of debt, whereas the wealthiest have remained 0:13:25.640 --> 0:13:28.040 a pretty pretty well set. Can you talk about how 0:13:28.080 --> 0:13:30.199 significant this is for the economic out look going forward? 0:13:30.360 --> 0:13:32.880 So you know, this is one of the things, UM, 0:13:33.040 --> 0:13:36.360 that we still need to really pay attention to because 0:13:36.840 --> 0:13:40.040 as we haven't seen the wage gains come through, it's 0:13:40.080 --> 0:13:43.600 really impacting everything. I was speaking to UM a group 0:13:43.679 --> 0:13:47.800 of you know, human resources executives UM that really are 0:13:47.960 --> 0:13:52.360 at large UM nationally publicly traded companies they talk about 0:13:52.400 --> 0:13:56.320 the fact that they are still being very cautious on 0:13:56.360 --> 0:13:58.800 the wage front and doing everything they can to not 0:13:59.000 --> 0:14:04.640 increase wages UM partly because as they're publicly traded, they 0:14:04.679 --> 0:14:07.880 are really reticent to pass that along, you know, through 0:14:07.880 --> 0:14:10.560 their earning statements. So I think we have to wonder 0:14:10.600 --> 0:14:13.319 where we get to the quarter where either they end 0:14:13.400 --> 0:14:15.960 up passing along those higher costs and the earnings look 0:14:16.200 --> 0:14:20.640 less favorable. Um. But all of it really speaks to 0:14:20.800 --> 0:14:24.160 the fact that this tightness in the labor market and 0:14:24.240 --> 0:14:28.440 this UM strain on the consumer household balance sheet, something's 0:14:28.440 --> 0:14:30.800 out a gift. So, as John was pointing out, really 0:14:31.000 --> 0:14:34.240 uh wisely, the rise and interest rates, the rise in 0:14:34.280 --> 0:14:36.320 short term rates and we're talking lib or, which is 0:14:36.320 --> 0:14:39.160 one of the benchmarks, but also two year yields, and 0:14:39.160 --> 0:14:42.800 and uh take it, take it the range. How much 0:14:42.840 --> 0:14:46.960 will this directly go into higher defaults and delinquencies on 0:14:47.040 --> 0:14:49.800 this consumer debt? So, you know, so far delinquents to 0:14:49.960 --> 0:14:52.880 rates look really good, which is one of the things 0:14:52.920 --> 0:14:59.360 that most analysts used to UM discount concern about this 0:15:00.160 --> 0:15:04.560 UM and defaults. Higher debt levels, they're never a problem 0:15:04.640 --> 0:15:09.000 until it's a big problem. UM. So you know, speaking 0:15:09.000 --> 0:15:11.000 to the credit investor leaks, so that turns around you 0:15:11.000 --> 0:15:16.200 and says, credits okay because default right alone, Yeah, exactly, 0:15:16.200 --> 0:15:19.080 that's exactly right. So we're all sort of frogs in 0:15:19.120 --> 0:15:21.640 the pot, you know, but the heat is slowly getting 0:15:21.680 --> 0:15:24.160 turned up. So I think, you know, it really just 0:15:24.240 --> 0:15:27.720 speaks to the fact that, um, when we get optimistic 0:15:27.800 --> 0:15:30.920 about growth, we need to still be realistic. You know. 0:15:31.040 --> 0:15:34.120 Optimism to me is still two and a half percent growth, 0:15:34.560 --> 0:15:38.760 so low relative to past economic cycles. And the reason 0:15:39.360 --> 0:15:42.280 for that is because when we look at the consumer 0:15:42.680 --> 0:15:45.560 and we look at how the consumer is power going forward, 0:15:45.840 --> 0:15:49.040 there just isn't a lot of juice left in the 0:15:49.080 --> 0:15:51.640 juice box, you know, there's I think we're really coming 0:15:51.680 --> 0:15:54.600 to a place where we either need to see business 0:15:54.640 --> 0:15:57.680 investment pick up significantly or we need to see wages 0:15:57.800 --> 0:16:01.280 ride rise, which means inflation um. And I think the 0:16:01.320 --> 0:16:05.640 fact that the consumer is so reliant on wealth gains 0:16:06.080 --> 0:16:08.960 means that there is a vulnerability there to a correction 0:16:09.000 --> 0:16:13.560 the stock market, which is new for us watching the economy. 0:16:13.680 --> 0:16:15.600 It's been great to cash shot with you managing to 0:16:15.640 --> 0:16:17.760 make it over from Philadelphia to New York City and 0:16:17.800 --> 0:16:20.080 some terrible weather over night. So thank you very much 0:16:20.080 --> 0:16:35.640 for joining us FS Investment Solutions Chief US Economists. Today 0:16:35.880 --> 0:16:39.280 is World Water Day. We should recognize that and to 0:16:39.360 --> 0:16:42.560 solve the global water crisis, it would take donations of 0:16:42.600 --> 0:16:45.960 about two hundred and billion dollars a year. Two hundred 0:16:45.960 --> 0:16:49.320 billion dollars a year. How much do you think pim 0:16:49.360 --> 0:16:53.160 the aid is annually? It's actually eight billion dollars, which 0:16:53.200 --> 0:16:55.160 is a huge gap. Here to talk about how to 0:16:55.200 --> 0:16:58.520 bridge that gap is Gary White and Matt Damon, co 0:16:58.600 --> 0:17:02.200 founders of water dot Org and Water Equity. Matt Damon 0:17:02.400 --> 0:17:05.040 is also known as his for his side gig of 0:17:05.160 --> 0:17:07.040 acting Um. But I want to start with you, Gary. 0:17:07.240 --> 0:17:10.080 I want to talk about bridging this gap, how you're 0:17:10.119 --> 0:17:13.440 trying to attract investors, what the interest is and frankly 0:17:13.480 --> 0:17:16.600 for our audience, are their actual returns here or is 0:17:16.640 --> 0:17:20.080 this just a charity play? No, there actually are returns here. 0:17:20.119 --> 0:17:22.639 And I think that what underpins this is that you know, 0:17:22.680 --> 0:17:26.240 there's billions of people who lack access to water and sanitation, 0:17:26.760 --> 0:17:29.639 and the reason this can work as an invest business 0:17:29.640 --> 0:17:32.439 investment model is because they spend hundreds of billions of 0:17:32.480 --> 0:17:35.800 dollars every year coping with this crisis. So they're spending 0:17:35.840 --> 0:17:38.920 time walking to collect water hours each day. Women will 0:17:38.920 --> 0:17:41.680 spend two hundred million hours today walking to collect water. 0:17:42.040 --> 0:17:44.359 They could be spending that time at a productive activity, 0:17:44.640 --> 0:17:48.399 or they're sick because of contaminated water, or in urban areas, 0:17:48.480 --> 0:17:51.400 they're having to pay for water from water vendors uh 0:17:51.480 --> 0:17:54.320 sometimes twenty of their income. So it seems like there's 0:17:54.320 --> 0:17:56.600 a market here, and what we've been able to do 0:17:57.160 --> 0:18:00.919 is to connect investors with small loans micro loans at 0:18:00.920 --> 0:18:04.040 the household level so that women can get a water 0:18:04.080 --> 0:18:07.720 tap at their house as opposed to walking hours each 0:18:07.800 --> 0:18:09.760 day to get water, and then they can use those 0:18:09.800 --> 0:18:12.440 savings or the time they spend working at a paying 0:18:12.480 --> 0:18:14.840 job to repay the loan. So we found a way 0:18:14.880 --> 0:18:18.200 to connect investors who want to have that social impact, 0:18:18.240 --> 0:18:21.280 but also our fund provides a targeted three and a 0:18:21.320 --> 0:18:25.560 half percent financial return to investors while helping people escape 0:18:25.600 --> 0:18:28.280 the water crisis. So, Matt, I want to talk about 0:18:28.320 --> 0:18:31.639 your involvement in this. Obviously, um you are known for 0:18:31.680 --> 0:18:34.399 other things other than water preservation. You're also known for 0:18:34.600 --> 0:18:37.400 the many Hollywood movies and awards that you've garnered over 0:18:37.480 --> 0:18:40.560 your lifetime. Um, I'm just wondering what attracted you to 0:18:40.800 --> 0:18:43.760 this and uh and sort of what has your celebrity 0:18:43.760 --> 0:18:48.399 Brian mean, who are you trying to sort of target here? Uh? Well, UM, 0:18:48.440 --> 0:18:50.760 I got interested in in the issue of water and 0:18:50.840 --> 0:18:53.200 sanitation in two thousand six on a on a trip 0:18:53.240 --> 0:18:55.640 that I took to kind of learn about issues extreme poverty. 0:18:56.400 --> 0:18:58.480 Just the enormity of it just floored me. And the 0:18:58.480 --> 0:19:01.320 fact that nobody, uh I wasn't aware of anybody really 0:19:01.320 --> 0:19:04.360 talking about it. And um so I started to try 0:19:04.359 --> 0:19:06.600 to get involved and and and and do something. I 0:19:06.640 --> 0:19:08.960 started something called H two Africa and we were basically 0:19:09.000 --> 0:19:11.760 trying to raise raise funds for little ENGOs that we're 0:19:11.800 --> 0:19:15.840 doing good work um throughout Africa. And and but I still, 0:19:15.840 --> 0:19:17.840 as as I started to get more familiarized with the 0:19:18.320 --> 0:19:20.680 issue and the complexity of it, I was trying to 0:19:20.720 --> 0:19:23.200 think about how I could really maximize my impact. And 0:19:23.200 --> 0:19:25.000 and that was what made me think I should I 0:19:25.000 --> 0:19:27.359 should partner with the kind of pre eminent expert I 0:19:27.359 --> 0:19:29.719 could find. And that's what led me to to Gary 0:19:29.760 --> 0:19:32.720 and and Gary's being very humble about this idea of 0:19:32.720 --> 0:19:35.280 of micro lens. He kind of pioneered this idea of 0:19:35.320 --> 0:19:38.560 taking the the concept of microfinance and applying it to 0:19:38.600 --> 0:19:40.520 the water sector. And he did that because he had 0:19:40.520 --> 0:19:43.080 spent his entire adult life in these communities and and 0:19:43.119 --> 0:19:45.600 had that realization that people were paying for water. The 0:19:45.640 --> 0:19:48.520 poorest of the poor. We're getting their water somehow, either 0:19:48.680 --> 0:19:51.119 either with their time or they were in many cases, 0:19:51.119 --> 0:19:53.840 as he said, that spending up to their income just 0:19:53.880 --> 0:19:57.040 to get that water. And so, but what they didn't 0:19:57.040 --> 0:19:59.959 have with savings, so he knew they could pay off 0:20:00.080 --> 0:20:03.000 alan if if if if we fronted the money. You know, 0:20:03.040 --> 0:20:06.240 in a lot of these uh urban areas that you know, 0:20:06.320 --> 0:20:09.280 the municipality is piping water right under the feet of 0:20:09.320 --> 0:20:11.040 the people who live in these slums that they're they're 0:20:11.040 --> 0:20:12.960 just not connected to it. So they're paying ten to 0:20:13.040 --> 0:20:15.800 fifteen times more for their water than the middle class 0:20:15.800 --> 0:20:18.720 in their country. So so the theory went, And when 0:20:18.720 --> 0:20:20.320 I first met Gary, this was kind of in its 0:20:20.400 --> 0:20:22.760 nascent stages, but the theory went, well, if we could 0:20:22.800 --> 0:20:25.480 front them the money, um, they could pay the loan 0:20:25.560 --> 0:20:27.919 back and and then they'd be connected and they'd have 0:20:27.960 --> 0:20:31.000 bought all this time back and so and so, you know, 0:20:31.040 --> 0:20:33.879 not only would they you know, would they be uh 0:20:34.240 --> 0:20:35.920 able to pay pay off the loan. They'd have more 0:20:35.960 --> 0:20:37.840 income in the future because they'd have more time to 0:20:37.840 --> 0:20:39.760 work at at at a job, rather than waste all 0:20:39.760 --> 0:20:41.560 this time standing in line or going on you know, 0:20:41.600 --> 0:20:45.440 collecting water um. And the idea has really Gary called 0:20:45.480 --> 0:20:48.439 it water credit. That idea has been more successful than 0:20:48.440 --> 0:20:50.160 we ever really could have hoped. I mean, it's been 0:20:50.200 --> 0:20:55.480 just wonderful to see what's happened. These loans payoff at um. 0:20:55.520 --> 0:20:57.560 You know, these are the poorest people on the planet 0:20:57.560 --> 0:21:00.760 paying these loans back. It's really it's really wonderful to see. 0:21:00.800 --> 0:21:03.399 And and they're participating in their own solutions, and it's 0:21:03.440 --> 0:21:05.240 just kind of shattering this image that the poorest of 0:21:05.240 --> 0:21:08.920 the pork can't can't uh you know, can't can't change 0:21:08.960 --> 0:21:11.160 their circumstances if they're you know, if if they're given 0:21:11.520 --> 0:21:13.359 you know, a hand up, it's just it's just they're 0:21:13.359 --> 0:21:15.919 given this opportunity and they absolutely take advantage of it. 0:21:15.960 --> 0:21:19.560 And and we went from in two thousand twelve reaching 0:21:19.560 --> 0:21:22.760 our first million people too, we're reaching a million a 0:21:22.840 --> 0:21:25.520 quarter now. And it's a really scalable idea and and 0:21:25.560 --> 0:21:28.440 in fact, our micro finance partners in in the countries 0:21:28.480 --> 0:21:30.520 were work and when we talk to them, the biggest 0:21:30.560 --> 0:21:34.399 bottleneck they identified for their work was access to affordable capital. 0:21:34.440 --> 0:21:36.680 Because the demand is absolutely there. We could be doing 0:21:36.680 --> 0:21:38.760 this so much more if we just had more money. 0:21:38.760 --> 0:21:41.280 And that's how we came to this concept of water Equity, 0:21:42.000 --> 0:21:43.639 just to put the question maybe to both you, is 0:21:43.680 --> 0:21:45.679 the issue that the water is disappearing or that you 0:21:45.720 --> 0:21:48.919 have crumbling infrastructure all over the world and that you 0:21:48.960 --> 0:21:51.480