- Regardless of what happens in the US presidential elections is it now clear to the US that China is the new long-term adversary and has taken the place of the erstwhile Soviet Union?
Trade is a major issue and there are legitimate concerns, and those concerns are just not American, they are European, Japanese and they need to be fixed and they are going to be fixed over time. If I were with you a year ago, there was a notion that there could be a big trade deal between the US and China, which most probably would have been the best solution to the trade conflict. But now it doesn’t look that this might be possible. Therefore, we will most probably get the phase – 1 mini-deal which looks more real and could mean liberalizing and opening-up some industries, addressing, intellectual property rights (IP) issues, halt some tariffs from increasing. But in such scenario I don’t know if there will ever be a Phase-2. If there is never a Phase-2, you will most probably see a gentle decoupling.
China and the United States have a lot of common interest – anti-terrorism, anti-proliferation, global growth. The cold war with the Soviet Union was a true cold war and potentially a hot war. There is so far no reason we should have a potential hot war in this situation. These are different systems and having different systems does have consequences and you see that currently playing around the world.
- We read so much about a recession but the signs are not clear. What is your reading of this?
Well, we know that one is coming we just don’t know exactly when. I don’t think it’s hugely productive to try and guess about the next recession. I have been in business my whole life and people are always trying to guess. Meanwhile, the world has doubled in size and things are fine. People rarely pick the inflection point and there is very little we can do about it anyway. We have seen global growth from being quiet high to moderate levels of 2.6% – at a 100 trillion US-Dollar global economy it is still close to 3 trillion US-Dollar global growth. We have to look at possibilities and there are multiple possibilities. While I don’t want to make a prediction, the current situation still looks like it may just be a slowdown. You don’t have a fiscal tightening, you don’t have monetary tightening, you have a fairly complex geo-political situation, you have the China-America conflict. In America, the consumer side is still doing quite well. It is the business side that feels some sort of stress of the trade conflict.
- What is your view on the recent steps by the European Central Bank (ECB)?
I am not a believer in negative interest rates. In 2010, they used them as they were trying to keep the Euro together but as a permanent policy. It doesn’t work, it has adverse consequences that we don’t totally understand; people as a consequence have to save more money; they will have less confidence in the future; it is an unnatural act. Some companies have no choice but to buy 10-year bonds and governments have been buying tremendous amount of them. I would never buy them as an individual. We still don’t know its full consequences yet.
- Even the US Fed is talking of another quantitative easing (QE) – will it happen?
I don’t think the Federal Reserve is a believer in negative interest rates. They have cut rates trice, they might cut them again, but this is just a reduction in rates, it’s not a QE program. The Fed balance sheet grew a lot and they have reduced it and they have indicated that at some point in time, they should have a normal growth in the balance sheet.
- So, is there no worry of negative interest rates in the US?
I don’t think so, but we are preparing for it even though I think it would be a terrible idea. Banks would not lend money, people will do things differently, savers have to save more money, and there will be adverse economic consequences of that. The thing about negative interest rates is that, if you are a central bank, you have to use data to make your decision, among that data is what the government is doing; but if you try to make up for bad government policy, is that a good idea? It is the same concept with negative rates. Monetary policy cannot be separated from fiscal policy, but if you see it to make up for fiscal policy, it would lead to consequences of which we don’t know the outcome.
- Last year, you were preparing for 10-year treasuries at 5% – what is your expectation now?
I still think that it is still a possibility – what we now expect is that rates will go down further but someday in the future, they will go up and you will have a reversal of all the things that caused the rates to go down. So, I still think we should prepare for that.
- It has been 10 years of easier monetary policy, if that didn’t get growth back, what will?
I think what will happen is very complex. The world had a lot of QE but a lot of that was a round-trip because regulations were changed and that money wasn’t lent down through the system. If you look at Europe and even the US, there was a huge deleveraging in the AAAs, that might have created a safer financial system but deleveraging means lower growth – all things being equal, if you go to Europe, for example, a lot of long-term investors are restricted from buying corporate bonds. Why develop a capital market if the natural buyers of corporate credit are restricted from buying it? I think these are very complex issues and we still don’t understand what we actually did.
- There is a divergence between the slowing economy and the equity markets are at a high – how do you marry these contrasting events?
It’s a conundrum. The equity prices tend to reflect what people think about the future. If you say there will be no recession, these prices are not that high. If you say there will be a recession next year, then the prices are quite high. On the other hand, if the 10 year rates go down the stock prices go up, but one looks like it is predicting recession and the other looks like it is predicting growth; it is really hard to tell and yet one affects the other. Central banks of the world bought 12 trillion US-Dollar of securities that had an effect, and we don’t completely understand the effect.
- What do you think about the collapse of valuation of Uber and WeWork?
I am not going to speak about a specific company. I don’t call them collapses of valuation. The fact that someone paid a higher price does not mean it was worth that. You don’t have daily price discovery like we have in the stock markets, so obviously some of these things were overvalued at the last valuation. Not all bought at the last valuation – they bought at a lot of different prices, so there is a lesson to be learnt about how big you can be, how much negative cash-flow you can have, if you have negative cash-flow, how much you can rely on the private markets. All these issues have been learnt and sometimes re-learnt.
- Shareholder value is gaining momentum from stakeholder value. Is this a paradigm shift in the way businesses will operate?
It is an evolution and some businesses already operate this way. We have stated since decades that the purpose of corporations is fundamentally to maintain and focus on shareholder value, and while that is true, it is also important to focus on customers, employees and communities – you can’t do one without the other. We just can’t act that shareholder value is the only component that matters because when the world hears that, it feels we are just interested In short-term profit seeking and we are not just about that. We believe it is important to portray a balanced and accurate representation of what we do. Some people feel that building shareholder value is just about yearly profits but that is not how you build corporations. When I talk to my other board members, we don’t talk about what the profit might be, but what else we are doing for years to come.