WEBVTT - Surveillance: Future of Hong Kong with Winters 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.880 dot Com and of course on the Bloomberg terminal. Very 0:00:29.960 --> 0:00:32.120 very happy to catch up with Bill Winter's right now 0:00:32.120 --> 0:00:34.440 a standard chat at Bill. We've got to start with 0:00:34.479 --> 0:00:37.080 the topic, the story of the moment. Can you take 0:00:37.120 --> 0:00:39.280 us inside the bank and tell us how difficult it 0:00:39.360 --> 0:00:42.640 is right now to keep talent happy, to retain talent, 0:00:42.840 --> 0:00:45.960 to keep stuff on your side. Yeah, it's it's it's 0:00:46.000 --> 0:00:48.000 a big challenge. And we know that that the great 0:00:48.040 --> 0:00:50.919 resignation is it's touching every industry, is touching every part 0:00:50.920 --> 0:00:54.320 of the world. And we we are speculating endlessly on 0:00:54.320 --> 0:00:57.040 on what's driving this. Is it lifestyle changes on the 0:00:57.080 --> 0:00:59.120 back of the pandemic? Is that the fact that the 0:00:59.120 --> 0:01:02.240 world is flushed with UH and that cash is looking 0:01:02.240 --> 0:01:05.440 for ever greater talent thankfully for for for Santa Charter. 0:01:05.920 --> 0:01:09.600 While we we are above the trough levels of attrition 0:01:09.600 --> 0:01:13.440 in twenty where things really and people just so Downe 0:01:13.520 --> 0:01:16.039 was kind of back to normal in terms of levels 0:01:16.040 --> 0:01:18.640 of attrition. Of course, we needed to pay up, but 0:01:18.720 --> 0:01:21.200 we've also found ways to save money in other areas, 0:01:21.800 --> 0:01:24.199 so that net our expenses were more or less flat. 0:01:24.200 --> 0:01:25.920 And we haven't reported our full year earnings yet, but 0:01:26.319 --> 0:01:27.880 up to the third quarter were more or less flat 0:01:28.080 --> 0:01:30.480 here on here and uh and I would hope that 0:01:30.520 --> 0:01:32.679 we could continue with that trend. I find the savings 0:01:32.720 --> 0:01:35.560 to to pay for ever more pricey talent. How sticky 0:01:35.800 --> 0:01:38.240 are these forces right now? So? How sticky do you 0:01:38.240 --> 0:01:39.720 think they are? I think there's a hope in a 0:01:39.800 --> 0:01:41.520 C suite on Wall Street that this is a one 0:01:41.520 --> 0:01:43.800 off story, payout walk away, we don't do this again 0:01:43.840 --> 0:01:46.040 next year. How sticky do you think it is? I 0:01:46.080 --> 0:01:48.880 think they're sticky as the profits are sticky. So it's 0:01:48.880 --> 0:01:51.600 been an extraordinary year in in some aspects of the markets. 0:01:51.640 --> 0:01:53.480 And you saw from from from the US banks that 0:01:53.520 --> 0:01:58.520 have already reported the investment banking fees have have been fantastic. 0:01:59.040 --> 0:02:02.160 Um is that going to carry on? The fixed income 0:02:02.200 --> 0:02:05.600 businesses is also doing relatively well, but not as well 0:02:05.640 --> 0:02:08.000 as it did during the peak of the pandemic. I 0:02:08.080 --> 0:02:10.120 think if the profits are up, wages are gonna be up. 0:02:10.160 --> 0:02:12.440 That's the way it works on Wall Street Bill. How 0:02:12.480 --> 0:02:16.760 do you lift revenue? How do you lift the share price? 0:02:16.840 --> 0:02:20.000 You've had a nice rebound here recently, you nowhere near 0:02:20.080 --> 0:02:23.280 the pandemic level with an e M exposure that you have, 0:02:23.680 --> 0:02:26.960 with the Hong Kong exposure that you have. What is 0:02:26.960 --> 0:02:31.480 the strategy to jump start to growth? Yeah, that's the 0:02:31.520 --> 0:02:34.520 big question. And like we're we are releasing our earnings 0:02:34.520 --> 0:02:35.919 in about a month and as part of that we'll 0:02:35.960 --> 0:02:37.840 be we'll be sharing our story with with how we 0:02:37.880 --> 0:02:40.720 accomplish exactly that, which just a couple of bits of backdrop. 0:02:40.880 --> 0:02:43.320 I mean, we know, on the one hand, emerging markets, 0:02:43.440 --> 0:02:46.720 China in particular is out of favor with investors, uh 0:02:46.760 --> 0:02:49.680 in particular with Eculit investors, so that that clearly has 0:02:49.720 --> 0:02:51.840 an impact on our sharp price and others who have 0:02:51.880 --> 0:02:55.320 a heavy Chinese component. On the other hand, we know 0:02:55.400 --> 0:02:58.000 that these are the drivers of global economic growth as 0:02:58.040 --> 0:03:01.000 we as we look at China with a with a 0:03:01.240 --> 0:03:03.440 probably steight me about expectations with still quite a little 0:03:03.440 --> 0:03:06.440 four percent GDP growth in the first quarter, he said, Wow, 0:03:06.440 --> 0:03:09.720 that's that's that's pretty tough relative to the pent that 0:03:09.760 --> 0:03:12.360 we've become accustomed to in China, but four percent is 0:03:12.360 --> 0:03:15.119 still pretty good in the global context, and especially given 0:03:15.120 --> 0:03:17.320 the challenges the China faced in the early part of 0:03:17.320 --> 0:03:19.800 the year, and that will extend across Asia as we 0:03:19.880 --> 0:03:22.639 work through the pandemic effects and the like. But overall, 0:03:22.840 --> 0:03:25.519 the way that we lived profits is to continue to 0:03:25.560 --> 0:03:28.560 grow as we happen. We've been growing consistently now for 0:03:28.600 --> 0:03:31.480 several years. If we could exclude that, that that that 0:03:31.600 --> 0:03:33.760 impact of low interest rates, which is which is a 0:03:33.800 --> 0:03:36.320 real has a very high impact on the banking industry 0:03:36.320 --> 0:03:39.280 and us in particularly Bill. Your website on Hong Kong, 0:03:39.320 --> 0:03:42.800 where you are hugely predominant, says here for good great 0:03:43.280 --> 0:03:47.360 there is no banker more qualified to tell us about 0:03:47.360 --> 0:03:51.000 the potential move from Hong Kong to Singapore. Can you 0:03:51.080 --> 0:03:54.920 predict western banks, the more larger commercial banks are going 0:03:54.960 --> 0:03:58.360 to be forced to jettison Hong Kong for other geographies, 0:03:58.400 --> 0:04:02.280 including your Singapore. I don't think so. I mean the 0:04:01.920 --> 0:04:04.000 the the long story short as in Hong Kong has 0:04:04.040 --> 0:04:07.640 been and is ever more so, the entry point to China. 0:04:07.840 --> 0:04:10.400 It's it's the place that capital goes into and out 0:04:10.480 --> 0:04:12.560 of China and as and it's very much a two 0:04:12.600 --> 0:04:15.720 way street now. As we see, there's been massive flows 0:04:15.760 --> 0:04:18.000 in particular into bond funds over the past couple of 0:04:18.040 --> 0:04:21.440 years in China, in less so into equity funds that 0:04:21.440 --> 0:04:23.800 will probably balance out over time, but there's also been 0:04:23.839 --> 0:04:26.360 a very substantial flow of Chinese money out and that's 0:04:26.360 --> 0:04:28.920 only going to accelerate with the advent of things like 0:04:29.000 --> 0:04:32.400 the Wealth Connected Program, which is designed to allow Chinese 0:04:32.440 --> 0:04:35.839 savers to to increase the proportion of their savings that 0:04:35.839 --> 0:04:38.040 they can hold in currencies other than R and B, 0:04:38.520 --> 0:04:41.280 and that's going through Hong Kong. So Hong Kong is 0:04:40.920 --> 0:04:44.120 is absolutely solidified. If anything, it's I think it's in 0:04:44.160 --> 0:04:46.920 the strongest position has ever been in terms of acting 0:04:46.920 --> 0:04:48.599 as a gate where for capital in and out of China. 0:04:49.160 --> 0:04:52.160 Given the flows of capital, that's a pretty good gate 0:04:52.200 --> 0:04:54.839 way to have. The Singapore also has tremendous advantages we know, 0:04:54.920 --> 0:04:58.400 and and Singapore is UH is trying to make itself 0:04:58.480 --> 0:05:01.600 as attractive as possible for not just international talent but 0:05:01.640 --> 0:05:04.479 also the regional talent and then Singaporean talent, and they're 0:05:04.480 --> 0:05:06.080 doing a very good job of that. So yeah, a 0:05:06.120 --> 0:05:08.240 bit of healthy competition. We figure is a is a 0:05:08.279 --> 0:05:10.599 good thing. We as you, as you point out, have 0:05:10.680 --> 0:05:13.400 a very substantial presence in both markets. We intend to 0:05:13.400 --> 0:05:16.200 continue to have a substantial presence in both markets, uh 0:05:16.200 --> 0:05:17.760 and and we'll do everything we can to make each 0:05:17.760 --> 0:05:20.919 of them more attractive. Bill, Where's the biggest growth opportunity 0:05:21.000 --> 0:05:23.840 for you, especially given the fact that certain companies are 0:05:23.839 --> 0:05:30.000 thinking about diversifying supply chains globally. Yeah, the biggest source 0:05:30.040 --> 0:05:32.720 of growth, certainly by dollars, but also pretty close to 0:05:32.720 --> 0:05:34.920 the biggest source of growth by percent last year is China. 0:05:35.720 --> 0:05:37.359 That will continue to be the case. Why is that? 0:05:37.400 --> 0:05:40.200 I that that sounds counterintuitive. You know, China's under pressure, 0:05:40.279 --> 0:05:43.520 and obviously if we if we listened to some of 0:05:43.560 --> 0:05:45.160 the rhetoric, you think that the China was on the 0:05:45.200 --> 0:05:48.239 way down. Actually, China is opening up. China is opening 0:05:48.320 --> 0:05:50.640 up to the rest of the of the world, to 0:05:50.720 --> 0:05:52.920 the rest of the region in a very substantial way. 0:05:52.960 --> 0:05:56.280 And given the center charge role as a connector between 0:05:56.279 --> 0:05:58.320 the markets in which we operate, obviously one of which 0:05:58.360 --> 0:06:01.080 is China, that connect to roles is quite valuable for us. 0:06:01.120 --> 0:06:03.599 So I would expect to continue to see China as 0:06:03.600 --> 0:06:08.000 a as a real outsized contributor to our growth. Hong 0:06:08.040 --> 0:06:09.919 Kong as well. The Hong Kong has coming off of 0:06:10.160 --> 0:06:12.520 a couple of very tough years, right two thousand nineteen 0:06:12.520 --> 0:06:15.400 civil disturbances, obviously the pandemic they hid all of us, 0:06:15.680 --> 0:06:18.200 but then compounded by the National Security Law and some 0:06:18.240 --> 0:06:21.760 of the the sanctions and other pressures that if at 0:06:21.760 --> 0:06:25.159 Hong Kong, it was a tough two thousand into twenty one. 0:06:25.480 --> 0:06:26.960 Hong Kong is now back to all of the islands 0:06:27.000 --> 0:06:30.120 feet good strong drawing business for us, and we expect 0:06:30.160 --> 0:06:33.120 that will kick in, obviously both leveraging the kind of 0:06:33.160 --> 0:06:35.280 the China growth, but also in its own right, so 0:06:35.480 --> 0:06:36.960 that part of the world is stil a real driver 0:06:37.040 --> 0:06:39.719 for us. But you described yourself there as a connector, 0:06:39.720 --> 0:06:42.080 and I want to touch on something, something delicate, and 0:06:42.080 --> 0:06:43.719 I want to give you the best opportunity to talk 0:06:43.720 --> 0:06:47.359 about it. I think increasingly it's getting more difficult looking 0:06:47.360 --> 0:06:49.240 at where the West is going and looking where China 0:06:49.360 --> 0:06:51.520 is going at the moment, the allegations of genocide coming 0:06:51.560 --> 0:06:55.120 from the administration, the industrial scale human rights abuses there, 0:06:55.120 --> 0:06:58.200 the allegations coming from the UK government, a place where 0:06:58.560 --> 0:07:01.039 your bank is listed, Bill, do you ever feel like 0:07:01.040 --> 0:07:03.280 you have to be a diplomat sometimes as well as 0:07:03.279 --> 0:07:06.120 the CEO when you operate in China? And what do 0:07:06.120 --> 0:07:08.440 you think people are missing here? You're a company with 0:07:08.520 --> 0:07:11.200 a big presence in there. I'm sure you have to 0:07:11.200 --> 0:07:13.440 be very careful about what you say to maintain a 0:07:13.520 --> 0:07:15.960 presence there. At the same time you have these allegations 0:07:15.960 --> 0:07:19.120 of genocide. Bill. That sounds like a really tough position 0:07:19.160 --> 0:07:22.880 for a CEO to be in. How do you do it? Well, yeah, 0:07:22.920 --> 0:07:25.240 I did. I did once and my student days want 0:07:25.240 --> 0:07:27.920 to be a diplomat, and thankfully I I took a 0:07:27.920 --> 0:07:29.800 different route, but mostly because I needed to pay off 0:07:29.840 --> 0:07:33.560 my my university student loans. Thank you seem a good 0:07:33.600 --> 0:07:36.040 way to do that. But the I don't think it 0:07:36.040 --> 0:07:37.400 would be a great diplomat, so I won't try to 0:07:37.440 --> 0:07:39.400 be a diplomat. What I will say is that that 0:07:39.480 --> 0:07:42.679 the role that we play is bringing couple together, bringing 0:07:42.680 --> 0:07:45.560 people together, bringing ideas together from all parts of the world. 0:07:45.600 --> 0:07:49.360 And we operate in over sixty countries. Through the course 0:07:49.400 --> 0:07:52.640 of history. Some of those countries have been in conflict 0:07:52.680 --> 0:07:55.200 with others of those countries, some of them been in 0:07:55.240 --> 0:07:58.560 conflict with the UK. I got I got one final question. 0:07:58.560 --> 0:08:01.440 You're gonna run out of time here, Bill, you guys 0:08:01.680 --> 0:08:08.040 invented diversity standard Charter Bank for decades his live diversity. 0:08:08.120 --> 0:08:12.040 What is your strategic diversity mandate that you can teach 0:08:12.120 --> 0:08:16.040 other executives like, I don't know what we can teach anybody. 0:08:16.080 --> 0:08:18.200 I know what we've learned ourselves, which is that when 0:08:18.200 --> 0:08:20.560 you have a broader range of opinions around the table, 0:08:20.800 --> 0:08:23.840 you serve clients better, and you attract better people, and 0:08:23.880 --> 0:08:26.520 you make better decisions. And yeah, thankfully we are in 0:08:26.600 --> 0:08:28.320 datas as you point out with you know, because we 0:08:28.360 --> 0:08:31.160 operate in so many different countries, We've got a workforce 0:08:31.160 --> 0:08:33.000 that comes from those countries, and we have clients that 0:08:33.040 --> 0:08:36.600 have very different buying patterns and in different cycles. Uh. 0:08:36.880 --> 0:08:38.640 The key is to try to harness that and bring 0:08:38.640 --> 0:08:40.400 as much of that to the table as you can 0:08:40.480 --> 0:08:42.000 at any point in time. I think we do a 0:08:42.000 --> 0:08:44.120 pretty good job of that. We know we can do better, 0:08:44.240 --> 0:08:46.200 So I'm not sure we have anything to teach anybody, 0:08:46.320 --> 0:08:49.000 but we're happy to share our lessons built five more 0:08:49.040 --> 0:08:51.240 years is the answer we often get from an old colleague. 0:08:51.240 --> 0:08:54.120 If yours Jamie Diamond when we talk about succession and 0:08:54.240 --> 0:08:56.000 later in the bank can bail. I believe you've been 0:08:56.040 --> 0:08:58.360 there almost seven it's it's seven years and jo and Bill? 0:08:58.440 --> 0:09:00.800 Is that right? It's coming on? Set? Are you thinking 0:09:00.800 --> 0:09:02.920 a little bit about succession now? Are you happy with 0:09:02.960 --> 0:09:04.520 everything you've done or do you think it's more to 0:09:04.520 --> 0:09:07.400 be done? Jonathan, the day you called me a forever 0:09:07.440 --> 0:09:09.600 CEO is probably the day I should shoot the head 0:09:09.600 --> 0:09:11.280 for the door. But no, the guy we've we've got. 0:09:11.400 --> 0:09:14.040 We've got a task to complete here. It is not complete. 0:09:14.280 --> 0:09:16.600 That's reflected to our share price, but also in our 0:09:16.600 --> 0:09:18.600 own sense that that we have more that we can deliver. 0:09:19.040 --> 0:09:20.680 I want to get this thing done and uh and 0:09:20.679 --> 0:09:23.960 then hopefully whoever takes over from me will be will 0:09:24.000 --> 0:09:26.280 be will be taking something that's really very good shape. 0:09:26.640 --> 0:09:28.800 Any thoughts about going back to JP Morgan, It's that's 0:09:28.800 --> 0:09:31.800 something you'd ever roll out Bill in the future. I 0:09:31.800 --> 0:09:33.400 think the likelihood of that is about as low as 0:09:33.440 --> 0:09:35.400 you could possibly get. As great as that from this, 0:09:35.520 --> 0:09:39.120 I don't think the bell got to catch up Set. 0:09:39.240 --> 0:09:40.840 As always, it's good to hear from you. A timely 0:09:40.880 --> 0:09:50.160 conversation with Bill Winters have standard shout at David mel 0:09:50.240 --> 0:09:52.880 Pass as a president of the World Bank, and we're 0:09:52.880 --> 0:09:56.520 thrilled at Mr mel Pass could join us this morning. David, 0:09:56.559 --> 0:09:59.920 I look at the World Bank website and you moder 0:10:00.120 --> 0:10:04.760 lyn growth to slow. How fragile is it right now? 0:10:05.040 --> 0:10:09.679 You and I have studied stan Fisher and other crises 0:10:09.720 --> 0:10:16.720 as well. How close to instability and emerging markets are we? Hi, Tom, 0:10:16.760 --> 0:10:19.840 good morning. I think that's a big challenge because as 0:10:19.960 --> 0:10:22.920 as you slow down, the population grows are still fast 0:10:22.960 --> 0:10:26.280 in some countries, and the if you're not getting ahead, 0:10:26.320 --> 0:10:28.960 then the people look at it and say, what's in 0:10:29.000 --> 0:10:31.720 it for me? And that brings that brings the physical 0:10:31.760 --> 0:10:34.840 insecurity that we're seeing in some parts of the world. 0:10:35.080 --> 0:10:38.280 The solution is to grow more and to get higher 0:10:38.559 --> 0:10:45.000 per capita incomes as well as of course health programs, vaccinations, education. 0:10:45.640 --> 0:10:49.600 All that goes with good development practices is the institutional 0:10:49.640 --> 0:10:53.280 integrity there for you and across the street the International 0:10:53.360 --> 0:10:58.040 Monetary Fund. Are these nations listening to you as they 0:10:58.080 --> 0:11:02.959 struggle with some of the financial challenges they have? So 0:11:03.440 --> 0:11:06.240 many countries do listen. But I think a big part 0:11:06.280 --> 0:11:10.240 of the challenges the global environment. It's you know, very unequal. 0:11:10.320 --> 0:11:13.640 People at the lower end of the income scales aren't 0:11:13.840 --> 0:11:17.320 simply aren't doing well because the wealth is concentrating, and 0:11:17.360 --> 0:11:19.960 so that's a big problem. You can you can put 0:11:20.000 --> 0:11:24.360 in good, better policies in your country and still not 0:11:24.480 --> 0:11:28.120 see much in the way of results. That's a big problem, David. 0:11:28.200 --> 0:11:30.960 Given this backdrop where the recovery has been much slower 0:11:30.960 --> 0:11:33.679 and more painful in the developing world, how concerning is 0:11:33.720 --> 0:11:36.600 it that a wall of debt maturities is coming up 0:11:36.640 --> 0:11:40.560 for a lot of these nations. This is a challenge. 0:11:40.679 --> 0:11:43.160 You know, it was discussed in the last two years 0:11:43.200 --> 0:11:47.120 and by the G twenty, but frankly the progress installed 0:11:47.160 --> 0:11:51.440 on that. So as we look at nine two UH, 0:11:51.600 --> 0:11:55.960 the the UH, the payment from the IDA countries that's 0:11:56.000 --> 0:11:59.480 the low income countries are going to be thirty five 0:11:59.520 --> 0:12:04.120 billion dollars. That's the payments on principle and interest, which 0:12:04.200 --> 0:12:07.720 is way beyond the resources of the countries. That creates 0:12:07.760 --> 0:12:11.080 added challenge because they need the money for other things 0:12:11.280 --> 0:12:14.640 like fighting the pandemic. David, How concerning is it that 0:12:14.679 --> 0:12:18.280 amidst this backdrop you have seen persistent dollar strength, you 0:12:18.360 --> 0:12:22.040 have seen persistent inflation and base goods I mean basically 0:12:22.080 --> 0:12:25.360 painted scenario for us how this transpires of the rest 0:12:25.400 --> 0:12:30.839 of We know worldwide that inflation really subtracts from people 0:12:30.920 --> 0:12:33.040 that are on fixed income or on the bottom end 0:12:33.040 --> 0:12:36.600 of the income scale. And that's particularly true of developing countries. 0:12:36.920 --> 0:12:39.960 So as the as prices go up, they just don't 0:12:39.960 --> 0:12:43.320 have enough money for food, for the basics, for for 0:12:43.480 --> 0:12:46.800 education and for health. You know, in in the developing world, 0:12:47.040 --> 0:12:51.320 the education because of the school closures, education has really 0:12:51.400 --> 0:12:54.840 slid backwards. That means the ability to read and and 0:12:55.080 --> 0:12:58.720 UH and write and so those are concerning UH. And 0:12:58.800 --> 0:13:01.720 that gets us to the to the end endpoint that 0:13:01.800 --> 0:13:06.040 the if interest rate hikes start, that's going to be 0:13:06.160 --> 0:13:09.680 really a double whammy. That inflation and the interest rates 0:13:10.320 --> 0:13:12.360 are a challenge. I think it would be better if 0:13:12.360 --> 0:13:15.720 the central banks looked at the capital allocation around the 0:13:15.720 --> 0:13:18.839 world and looks for better ways to allocate so that 0:13:18.880 --> 0:13:21.440 not all of the money goes to the biggest corporations. 0:13:21.520 --> 0:13:26.400 Your previous story was just about Microsoft cash. David, you 0:13:26.480 --> 0:13:29.760 are is qualified as any World Bank president in history 0:13:29.840 --> 0:13:34.800 to look at, study and advise on dollar dynamics. Does 0:13:34.800 --> 0:13:37.880 the World Bank in the poor countries of the world. 0:13:37.960 --> 0:13:41.560 Just take the content of Africa's one example. How desperate 0:13:41.600 --> 0:13:47.400 are they for a week dollar? Uh? They're The strong 0:13:47.480 --> 0:13:51.280 dollar really puts pressure on them because their currencies weaken 0:13:51.360 --> 0:13:53.760 and then capital doesn't want to flow to them. Plus 0:13:53.840 --> 0:13:57.520 prices go up more than they are in the United States. UH, 0:13:57.640 --> 0:14:01.679 So I wouldn't care drives it as desperate for a 0:14:01.720 --> 0:14:06.600 week dollar. What they What benefits everyone is when currencies 0:14:06.640 --> 0:14:09.560 are stable, and that starts with the dollar. Uh and 0:14:09.960 --> 0:14:14.079 long term stability, I think is is the strongest support 0:14:14.440 --> 0:14:18.839 for development. So the countries want that. But right now, 0:14:18.920 --> 0:14:23.360 as we go into a probable interest rate hiking phase, uh, 0:14:23.400 --> 0:14:26.480 that adds uh. That adds to the dollar and makes 0:14:26.520 --> 0:14:30.280 the challenges bigger for the developing countries. As I say, 0:14:30.320 --> 0:14:32.840 I think the world needs to look at the capital 0:14:32.880 --> 0:14:36.920 allocation and ask why is so much of the money 0:14:37.440 --> 0:14:40.240 going to the rich end of the scale. How do 0:14:40.360 --> 0:14:43.200 we amend that? I mean, it's one thing to comment 0:14:43.320 --> 0:14:46.320 on it and to identify it, but how are we 0:14:46.400 --> 0:14:50.840 proactive for a new capital allocation? Away from buying more 0:14:50.920 --> 0:14:55.480 apple shares? You have to think about small businesses. That 0:14:55.520 --> 0:14:59.760 means floating rate uh money, That means uh money at 0:14:59.760 --> 0:15:02.600 the short into the curve. But we have this oddity 0:15:02.720 --> 0:15:08.600 where the government is supporting existing businesses, existing people and 0:15:08.840 --> 0:15:12.560 demand and not so much the supply side. So that's 0:15:12.800 --> 0:15:15.920 problem one. And then on the central bank side, Uh, 0:15:15.960 --> 0:15:19.640 they're they're allocating that. You know, they have four tools, 0:15:19.680 --> 0:15:24.080 they're only using talking about two tools that interst rate hikes. 0:15:24.120 --> 0:15:26.520 That hurts people at the short end of the curve 0:15:26.600 --> 0:15:30.160 because short interest rates go up first. Uh, and even 0:15:30.200 --> 0:15:33.440 more so in developing countries. Uh. And they're also talking 0:15:33.440 --> 0:15:38.480 about shrinking or tapering the size of the balance sheet. 0:15:38.880 --> 0:15:41.920 There are two more tools. One is the duration of 0:15:42.000 --> 0:15:45.840 the central bank holdings and one is regulatory policy. I 0:15:46.280 --> 0:15:49.240 call it post monitorism. We're not really in a money 0:15:49.280 --> 0:15:53.680 supply world. We're in a very heavily regulatory world right now. 0:15:53.720 --> 0:15:58.520 It penalizes small businesses. So having an explicit focus by 0:15:58.560 --> 0:16:01.920 both fiscal and monetary policy that you want to support 0:16:01.960 --> 0:16:06.000 smaller businesses so they can help the supply chain. I 0:16:06.040 --> 0:16:10.520 think that's critical and could help worldwide. David, given where 0:16:10.520 --> 0:16:13.120 we are now, given that these changes will take time 0:16:13.160 --> 0:16:16.320 to be implemented, do you think that the developing world 0:16:16.360 --> 0:16:19.040 complex can deal with four rate hikes from the federals 0:16:19.080 --> 0:16:22.640 are of this year. Uh. It's it's going to be 0:16:22.800 --> 0:16:25.920 really challenging. We already see it in country after country 0:16:26.040 --> 0:16:29.080 from the political side. You see it daily in the news. 0:16:29.640 --> 0:16:32.280 I think it would help if the Central Bank said 0:16:32.440 --> 0:16:36.480 what the strategy is. Uh. You know, I really think 0:16:36.520 --> 0:16:39.280 they should be looking at the duration of their assets 0:16:39.360 --> 0:16:42.720 and saying they'll stop buying so many assets at the 0:16:42.840 --> 0:16:46.640 long end uh and have more of their mix be 0:16:46.920 --> 0:16:51.600 capital favorable, small business favorable. That helps developing countries. Mr 0:16:51.640 --> 0:16:54.040 melt Pass, thank you so much for joining us. David Melpiss, 0:16:54.240 --> 0:17:03.600 World Bank President, Bank of America adjusting to what they 0:17:03.680 --> 0:17:07.040 see out there from sea to shining Sea. Sevita Subermanian 0:17:07.119 --> 0:17:10.840 joins US now US Equity and Quantitative Strategy at Bank 0:17:10.920 --> 0:17:13.520 of America Security. Sevita, I want to go to your 0:17:13.600 --> 0:17:18.840 latest research note where you dovetail in nicely the Subramanian 0:17:19.000 --> 0:17:22.119 misery index. When Brian moynihan wakes up every morning, he 0:17:22.119 --> 0:17:26.200 looks at the Subermannian misery indicator, and the reality is 0:17:26.320 --> 0:17:30.320 you look at consumer discretionary and you look at industrial 0:17:31.040 --> 0:17:35.520 and those are two big important sectors linked directly in 0:17:35.960 --> 0:17:40.159 to rising labor costs. Absolutely these are two of the 0:17:40.200 --> 0:17:45.720 most labor intensive sectors of the SMP five. But oddly enough, 0:17:45.840 --> 0:17:49.840 these are the two sectors where analysts are forecasting all 0:17:49.960 --> 0:17:54.480 time peaks in margins by the third quarter of this year, 0:17:55.240 --> 0:17:58.760 which just doesn't really jive with what we're seeing in 0:17:58.840 --> 0:18:01.320 terms of tightness in the labor market in terms of 0:18:01.359 --> 0:18:04.960 as you pointed out, compensation expenses in almost every industry 0:18:05.000 --> 0:18:08.520 starting to see really strong upward pressure. UM. You know, 0:18:08.560 --> 0:18:11.119 I I think that something's got to give this year, 0:18:11.200 --> 0:18:13.600 and it might be margins. That's where we think that 0:18:13.680 --> 0:18:17.800 analysts are too uh too optimistic, if you will, UM. 0:18:17.840 --> 0:18:21.240 So if you think about the corporate Misery indicator, UM, 0:18:21.240 --> 0:18:24.119 this is an indicator that we used to track whether 0:18:24.200 --> 0:18:26.760 margins are starting to see a squeeze and and whether 0:18:26.760 --> 0:18:30.240 earnings are actually gonna fault. And so far, so good. 0:18:30.280 --> 0:18:33.439 So so far, we've seen prices generally keep up with 0:18:33.560 --> 0:18:36.919 costs um although this quarter we're starting to see that 0:18:37.000 --> 0:18:40.120 fray a little bit. And and we've seen unit volumes 0:18:40.160 --> 0:18:44.359 sales increase. So those three factors are the ones to watch. 0:18:44.359 --> 0:18:47.360 And when it starts to get problematic is when prices 0:18:47.400 --> 0:18:51.919 increased too much, demand starts to deteriorate and costs still 0:18:52.640 --> 0:18:55.560 creep higher. And that's what we're worried about as we 0:18:55.600 --> 0:18:59.119 move into uh, you know, subsequent quarters this year. I 0:18:59.119 --> 0:19:01.359 think the good news says that a lot of the 0:19:01.400 --> 0:19:04.760 sectors in the SMP five hundred have become very labor light, 0:19:05.080 --> 0:19:08.320 like for example, you know, technology, even industrials. A lot 0:19:08.359 --> 0:19:11.240 of these sectors have automated a lot of that labor away. 0:19:11.280 --> 0:19:13.119 But there are still pockets of the market that we 0:19:13.160 --> 0:19:16.600 think look dangerous from that perspective. AT did some wonderful 0:19:16.640 --> 0:19:18.920 work over the last twelve months on the labor intensitive 0:19:18.960 --> 0:19:21.600 the overall SMP five hundred, the change of it over 0:19:21.640 --> 0:19:23.480 the last not just few years, but over the last 0:19:23.480 --> 0:19:26.959 decade as well. I'm just wondering, then, the concentration of 0:19:27.040 --> 0:19:29.480 that you've worked through that work with me at the 0:19:29.520 --> 0:19:32.520 index level, what's the biggest challenge of the index level. 0:19:32.560 --> 0:19:35.160 You're at forty six hundred year end on the SMP. 0:19:35.320 --> 0:19:39.879 What gets us there? We are we might get there today? Um, 0:19:39.680 --> 0:19:42.800 I think that, you know, I mean, here's the thing. 0:19:42.880 --> 0:19:45.840 I think that it's hard to be long the entire 0:19:45.920 --> 0:19:48.760 market when you've got all of the positive forces that 0:19:48.840 --> 0:19:52.399 have been playing through be an easy monetary policy, easy 0:19:52.440 --> 0:19:57.160 fiscal policy, super low interest rates, UM, you know, relatively 0:19:57.280 --> 0:20:02.919 healthy balance sheets of summers corporates, you've got um, you know, 0:20:03.160 --> 0:20:07.000 strong earnings acceleration off of a you know, global pandemic low. 0:20:07.400 --> 0:20:11.720 All of those factors are basically slowing down. So I'm 0:20:11.720 --> 0:20:14.160 not barish on the SMP five hundred, but I think 0:20:14.160 --> 0:20:16.000 this is gonna be a year where we're gonna hit 0:20:16.040 --> 0:20:19.840 that a bunch of times, and you're gonna want to 0:20:19.880 --> 0:20:23.200 pick your spots. The way to pick where to invest 0:20:23.280 --> 0:20:27.320 this year is very very simple. Look for free cash flow. 0:20:27.440 --> 0:20:31.159 This is the most important factor in an environment of 0:20:31.560 --> 0:20:34.480 tightening monetary policy. In our Qualt work, and you know, 0:20:34.520 --> 0:20:37.000 I'm a math person, So in our Qualt work, we've 0:20:37.040 --> 0:20:39.720 back tested all these different strategies of investing and we 0:20:39.840 --> 0:20:43.240 found that free cash flow to enterprise value is the 0:20:43.560 --> 0:20:47.160 single best way to pick a stock during periods during 0:20:47.200 --> 0:20:49.639 the first year of the FED tightening cycle. So create 0:20:49.680 --> 0:20:53.359 a Bloomberg screen, sort all your companies by free cash 0:20:53.359 --> 0:20:55.240 flow to enterprise value, and that would be the way 0:20:55.280 --> 0:20:58.080 I would look for opportunities. And I think, what's interesting, 0:20:58.280 --> 0:21:00.439 if you give me one more minute on this is 0:21:00.480 --> 0:21:03.240 that when we saw that tech route the other week, 0:21:03.400 --> 0:21:05.560 it was just maybe, yeah, I can't keep track of time. 0:21:05.560 --> 0:21:08.359 Maybe a week ago we saw massive down in the 0:21:08.640 --> 0:21:13.320 in the NAS deck and UH, and then miraculously mid day, 0:21:13.840 --> 0:21:18.000 the free cash flow opportunities within that tech benchmark grew 0:21:18.040 --> 0:21:21.359 attractive enough for industris to start to leg back into tech. 0:21:21.680 --> 0:21:23.560 So I think that's the type of market we're going 0:21:23.600 --> 0:21:26.200 to be in where you have to really watch these factors, 0:21:26.600 --> 0:21:29.320 look for free cash flow generation, and just be nimble. 0:21:30.040 --> 0:21:33.600 Volatility is great for for markets, for active managers, and 0:21:33.600 --> 0:21:35.200 I think that's where we're going to be this year, 0:21:35.320 --> 0:21:37.400