WEBVTT - BlackRock Vice Chairman Philipp Hildebrand Talks Term Premiums Emerging in US Bonds

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

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<v Speaker 2>President Donald Trump's tariffs to slow growth and boost prices,

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<v Speaker 2>but the scale of the impact, of course, depends on

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<v Speaker 2>just how the tariffs are implemented. This week, the OECD

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<v Speaker 2>slashed its outlook for the second time this year, suggesting

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<v Speaker 2>the world is heading for its weakest growth since a

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<v Speaker 2>global pandemic. And while Trump has called for rate cuts,

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<v Speaker 2>FED officials have signaled they'll hold them setty until they

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<v Speaker 2>have a better understanding of how tariff's, immigration, and taxes

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<v Speaker 2>will all affect the US economy. So there's a lot

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<v Speaker 2>to discuss with Philip Hildebrand, the vice chair at Blackrock. Philip,

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<v Speaker 2>as always, thanks you so much for joining us. I

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<v Speaker 2>think last time we got up was right before the inauguration.

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<v Speaker 2>It was actually in Davos, and there we were trying

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<v Speaker 2>to figure out what kind of presidency or what kind

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<v Speaker 2>of impact it will have on globalization. We're now at

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<v Speaker 2>the start of juwe and what have you learned over

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<v Speaker 2>lost six to seven weeks.

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<v Speaker 3>It's good to be here, Francine, it's been a while. Look, guys,

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<v Speaker 3>I think generally speaking, it's pretty clear that we're moving

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<v Speaker 3>from a in a sense of longstanding policy equilibrium to

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<v Speaker 3>a new one, and we're I would say, in between.

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<v Speaker 1>And what is not.

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<v Speaker 3>Clear is where this new equilibrium will ultimately settle. And

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<v Speaker 3>so until that becomes clearer, and the budget that you

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<v Speaker 3>mentioned at the outset is another indication, until it becomes

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<v Speaker 3>clear where ultimately the new world will land, as it were,

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<v Speaker 3>we are in this transition period and that is a

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<v Speaker 3>period of volatility of very rapid news cycles. You know,

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<v Speaker 3>you wake up every morning and you have more news

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<v Speaker 3>and want to digest it to watch you and come here.

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<v Speaker 3>So I think we need to sort of step back

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<v Speaker 3>a bit and think about where does the world kind

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<v Speaker 3>of go to in this in this clearly new regime

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<v Speaker 3>that has that has begun, where do you.

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<v Speaker 1>Say going to?

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<v Speaker 2>But also is there a danger that you know, we're

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<v Speaker 2>going from A to B or A to say it

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<v Speaker 2>if it's radically different, that a lot of things break

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<v Speaker 2>in this journey.

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<v Speaker 3>I think that is the risk is always when you're

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<v Speaker 3>in these transition phases that you know, uncertainty is heightened.

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<v Speaker 3>Heightened uncertainty tends the way on demand. And then on

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<v Speaker 3>top of it, I think as an overarching theme, you

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<v Speaker 3>have high debt vulnerability in most countries, all countries virtually

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<v Speaker 3>have come out of the Great Financial Crisis, and then

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<v Speaker 3>COVID industrial policy.

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<v Speaker 1>These three big.

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<v Speaker 3>Forces have led most countries to accumulate huge debt loads, frankly,

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<v Speaker 3>and that kind of weighs over the entire system. And

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<v Speaker 3>you can see that in the sense that rates tend

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<v Speaker 3>to be edging up. There's a term premium that's beginning

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<v Speaker 3>to clearly emerge in US bond So you know, all

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<v Speaker 3>these things are indicators that we are in this volatile

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<v Speaker 3>and uncertain transition and we just have to kind of

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<v Speaker 3>stay fixated on the longer term and see where it

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<v Speaker 3>all lands.

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<v Speaker 2>And so I want to come back to actually the

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<v Speaker 2>debt in a second. But as a central banker, why

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<v Speaker 2>have we not seen so we have very concerning surveys

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<v Speaker 2>about people being worried not spending, but it hasn't quite

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<v Speaker 2>materialized yet. So does that come all at once? Is

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<v Speaker 2>it a laggered or could we get away with actually

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<v Speaker 2>the economy being okay?

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<v Speaker 3>Well, it's complicated because number one, if you look at

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<v Speaker 3>trade policy, we don't know where things will settle, and

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<v Speaker 3>you can see markets react as soon as there's some

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<v Speaker 3>pullback of the most extreme scenarios. So that's part of it.

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<v Speaker 3>The other part is it just takes time. It takes

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<v Speaker 3>time for these things to settle through. Investment plans don't

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<v Speaker 3>change overnight. Spending patterns don't change overnight. The US consumer

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<v Speaker 3>has always been resilient historically. There's also a lot of

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<v Speaker 3>cash on the sidelines, so if you look at it

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<v Speaker 3>from an investor's perspective, a lot of incentives to sort

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<v Speaker 3>of stand ready with the cash and invest when the

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<v Speaker 3>opportunity comes. So all these forces kind of lead to

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<v Speaker 3>this slightly uncomfortable interim period in a sense, between a

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<v Speaker 3>new equilibrium and the old equilibrium. And it takes time

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<v Speaker 3>for these things to manifest themselves in the real economy.

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<v Speaker 2>So the markets also behave differently because of all of

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<v Speaker 2>the money in private markets.

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<v Speaker 3>So I think that's part of it. You know, there

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<v Speaker 3>are some great opportunities out there in the marketplace. Let's

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<v Speaker 3>just look at a statistic the other day. I'm heading

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<v Speaker 3>to Germany tomorrow. There are apparently four thousand bridges in

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<v Speaker 3>Germany that are in urgent need of repair. This is

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<v Speaker 3>a very kind of basic infrastructure story. Then you think

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<v Speaker 3>about artificial intelligence, you think about the data centers, the

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<v Speaker 3>energy supply that that will require, the new data centers

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<v Speaker 3>that will be built. So there is so much there's

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<v Speaker 3>so many opportunities, and a lot of them do occur

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<v Speaker 3>or will occur in private markets, which is one of

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<v Speaker 3>the reasons we have invested heavily in our private markets capabilities.

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<v Speaker 1>Going forward, the US.

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<v Speaker 2>And China ratching up tensions. I guess, you know, the

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<v Speaker 2>concern is about debt. So Elon Musk has ways of

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<v Speaker 2>doing it which are a little bit unorthodox, going after

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<v Speaker 2>the president with you know, port field words. But the

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<v Speaker 2>bottom line is that he's worried about a debt and

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<v Speaker 2>that he's cut so much in dolge and that doesn't

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<v Speaker 2>go anywhere. How should we view treasuries? Should we start

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<v Speaker 2>thinking about, you know, is it as safe as it

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<v Speaker 2>used to be? Does this also change everything?

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<v Speaker 1>Yeah?

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<v Speaker 3>I think this is in a way the critical question

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<v Speaker 3>when we talked about the new equilibrium.

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<v Speaker 1>And again, debt is not an issue just in the US.

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<v Speaker 1>It's an issue in most countries. It's a result of

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<v Speaker 1>the last twenty years.

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<v Speaker 3>In a sense, I would say, you know, there are

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<v Speaker 3>only a handful of countries that have never put in

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<v Speaker 3>question the sanctity of their sovereign signature that have never

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<v Speaker 3>outright had a sort of outright default. It is extremely

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<v Speaker 3>important that the US remains firmly in that camp of

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<v Speaker 3>those handful of countries. The US dollar remains the world's

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<v Speaker 3>reserve currency, It remains the anchor of the cysts them.

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<v Speaker 3>The US mod market is the anchor of the financial system.

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<v Speaker 3>So it is extremely important that Congress, you know, which

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<v Speaker 3>is deliberating the new budget now, keeps in mind this

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<v Speaker 3>this critical issue of protecting the sanctity of the sovereign

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<v Speaker 3>signature in the United States as the anchor of the system,

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<v Speaker 3>notwithstanding whatever changes they want to make to the overall

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<v Speaker 3>economic order, to the trade order. In particular, this question

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<v Speaker 3>of you know, being able to rely on the sanctity

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<v Speaker 3>of the sovereign signature in the United States is very

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<v Speaker 3>very important.

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<v Speaker 1>I know.

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<v Speaker 2>Larry Fink also pends a really interesting opinion piece, and

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<v Speaker 2>this is a quote that we picked out which is

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<v Speaker 2>basically the thesis of what he wrote, which is, you know,

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<v Speaker 2>what's emerging now is globalization's second draft, a red globalization

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<v Speaker 2>built not just to generate prosperity, but to aim at

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<v Speaker 2>towards the people in places left behind in the first time.

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<v Speaker 2>You know, it's difficult to see exactly where it ends up.

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<v Speaker 2>Given US China and this fight that keeps on escalating

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<v Speaker 2>every day, including today, it's difficult to know how ends

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<v Speaker 2>up because of AI that will break a lot of things.

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<v Speaker 2>When does it settle well.

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<v Speaker 3>I think we can see certain things emerging. And Larry

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<v Speaker 3>says nicely, you know, it's in some ways easier to

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<v Speaker 3>look at the seven years ahead than the seven days ahead,

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<v Speaker 3>which I thought was a great line. I would say,

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<v Speaker 3>we know that that issue has to be addressed.

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<v Speaker 1>I think that's critical.

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<v Speaker 3>It'll take time, and frankly, the best way to address

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<v Speaker 3>it is through growth policies.

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<v Speaker 1>You know what we have not seen it.

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<v Speaker 3>If you think about the sequencing of the new administration

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<v Speaker 3>in the United States, much of what has come initially

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<v Speaker 3>has been contractionary, has raised uncertainty, has in some ways

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<v Speaker 3>led to more volatility in the marketplace. The next leg

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<v Speaker 3>of it, hopefully at some point, will be the question

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<v Speaker 3>of what can you do to promote a pro growth policy.

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<v Speaker 1>If you recall.

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<v Speaker 3>Early on during the campaign, there was much talk about simplification, deregulation,

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<v Speaker 3>easing a bureaucracy, things like that that can help growth.

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<v Speaker 3>So there's no question that sustained higher growth would be

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<v Speaker 3>the best way to deal with the debt and deficit

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<v Speaker 3>problems in combination with reasonable budgetary policy.

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<v Speaker 1>And so I think that really is the key.

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<v Speaker 3>To make sure that we can maintain stability around debt,

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<v Speaker 3>because with all the other uncertaints that we have, the

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<v Speaker 3>last thing you want is questions around again the sanctity

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<v Speaker 3>of the SOLVEMN signature. The other thing that you can

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<v Speaker 3>see emerging and Larry has been very consistent on this

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<v Speaker 3>is the.

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<v Speaker 1>Power of capital markets.

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<v Speaker 3>It is clear that when you have debt levels the

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<v Speaker 3>way we have them across the world, governments will be

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<v Speaker 3>constrained in what they can do with public finances. And

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<v Speaker 3>this is the moment in a sense where private capital

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<v Speaker 3>has the step been.

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<v Speaker 1>We talked about the large cash balances.

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<v Speaker 3>This is needed for governments, it's needed for future prosperity.

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<v Speaker 1>It's a great opportunity.

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<v Speaker 2>Do you think, I mean, does capital get deployed differently

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<v Speaker 2>in you know, globalization two point zero and is it

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<v Speaker 2>being redrafted because of allies? Is it geopolitics or is

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<v Speaker 2>it about the economics?

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<v Speaker 1>Well, I think it's a bit of both.

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<v Speaker 3>Again, you know, we have this fragmentation of geopolitics. The

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<v Speaker 3>new system will be different than the eighty years that

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<v Speaker 3>we've known since World War Two. There may be more

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<v Speaker 3>of a home bias in how capital is deployed. I

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<v Speaker 3>firmly believe the globalization is not over, but it will

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<v Speaker 3>be reconfigured in a different way, and a stronger home

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<v Speaker 3>bias may well be part of the way you deal

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<v Speaker 3>with these fragmented geopolitical conditions.

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<v Speaker 1>So take Europe as an example.

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<v Speaker 3>Europe has extraordinary ten to eleven trillion euros are sitting

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<v Speaker 3>on bank deposits in Europe. That money sits on bank deposits.

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<v Speaker 3>It's not entirely idle. Of course, bank balance sheets are

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<v Speaker 3>being used to support the economy, but it's sitting there

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<v Speaker 3>in a way that doesn't really generate much of a return.

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<v Speaker 3>If part of that money can be deployed and mobilized

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<v Speaker 3>into the capital markets, and that is of course one

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<v Speaker 3>of the key objectives I think for Europe, this capital

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<v Speaker 3>markets union or savings and investment union. If that can happen,

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<v Speaker 3>you can see enormous growth potential, innovation potential that comes

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<v Speaker 3>out of that.

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<v Speaker 2>When you look at Europe, how confident are you that

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<v Speaker 2>this is not going to be a wasted opportunity that

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<v Speaker 2>Europe sticks together, comes together with more capital solutions and growth.

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<v Speaker 2>But is there a danger that I guess these you know,

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<v Speaker 2>even if trade goes back to normal, that there are

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<v Speaker 2>deeper issues that stay because of what we lived over lost.

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<v Speaker 3>Six There is always this danger frenzy, and Europe is

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<v Speaker 3>a very complicated construct that moves in complicated ways.

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<v Speaker 1>Whatever I explained Europe.

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<v Speaker 3>To my American colleagues, it's a difficult task. However, I

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<v Speaker 3>would say this, this is Europe is now under maximum pressure.

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<v Speaker 1>This is Europe's moment.

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<v Speaker 3>This pressure has always generated responses in Europe.

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<v Speaker 1>If you look at the last.

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<v Speaker 3>Time we've seen anything like this was in eighty nine

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<v Speaker 3>when the Soviet Union collapsed and lod behold what happened.

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<v Speaker 3>Within four years we had the Masters Treaty, which set

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<v Speaker 3>the foundation for the euro So I very much see

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<v Speaker 3>this as a similar moment where there is the New

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<v Speaker 3>World is exerting maximum pressure on Europe. And I think

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<v Speaker 3>we talked about the capital markets, completing the single market,

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<v Speaker 3>in telecom and energy and finance, there are huge opportunities

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<v Speaker 3>that Europe can rise to and really change the growth outlook.

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<v Speaker 3>And frankly, also in global investors outlook, they will reallocate

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<v Speaker 3>to Europe, at least at the margin, if they can

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<v Speaker 3>see Europe taking these actions that are necessary.

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<v Speaker 1>I want to put you on the spot.

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<v Speaker 2>If I give you five million today, where do you

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<v Speaker 2>I mean, given all the uncertainties you know, maybe let's

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<v Speaker 2>say it's a seven year horizon, where do you put

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<v Speaker 2>that five million.

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<v Speaker 3>I think infrastructure is a in all its kind of dimensions,

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<v Speaker 3>is a clear need that the world has.

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<v Speaker 1>It's a place where you have stable returns.

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<v Speaker 3>It's a place where governments can poort the mobilization of

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<v Speaker 3>private capital with the right policies. And I think Europe,

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<v Speaker 3>if again, if this pressure moment that Europe is under

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<v Speaker 3>can generate the actions that are required, particularly around the

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<v Speaker 3>capital markets Union, I think Europe is a great opportunity.

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<v Speaker 3>The world is very long dollars. The dollar will remain

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<v Speaker 3>the reserve currency. That's not going to change anytime soon.

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<v Speaker 1>But at the.

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<v Speaker 3>Margin, the world has gone very long the US dollar,

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<v Speaker 3>and at the margin, I think some reallocation to Europe

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<v Speaker 3>is very likely to occur, particularly if Europe can rise

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<v Speaker 3>to this unique challenge frankly, but also unique opportunity that

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<v Speaker 3>it has given the new geopolitical and financial order.

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<v Speaker 2>So thank you so much. I could speak to you

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<v Speaker 2>for anotherose three hours, so you'll have to come back

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<v Speaker 2>really soon. Philip Hildebrand, a vice chair at black Rock