Main points:
We are definitely in an environment of higher rates.
We witnessed the pandemic disrupts worldwide supply chains and meaningful fiscal stimulus employed.
It is not surprising this led to inflation embedded in our economic system fairly consistently.
We are now in the process of unwinding this.
Inflation is such a punitive tax on economic activities and naturally you see monetary policies shift rather quickly to a period of higher rates.
The treasury curve is inverted. The market is making an assumption that we will reach the terminal rate sometimes soon, and the forward, will bring the rates back down. After some time, looking at the interest rate cycle historically, we do see reversal of the rates.
Still early, still uncertain. Economy is still strong. Look at the tight labour market. We still has a way to go before taming inflation.
"Anyone who tells you they know, they don't know."
2.30
Our economists are calling for a lower growth next year; 1.9% economic growth globally.
They are of the view that there is a reasonable chance of a soft landing. Definition of soft landing means: inflation back close to 4%, 5% terminal rate with 1% growth.
There is also a very reasonable possibility of a recession. Most CEOs are cautious in how they operate their businesses. They are looking through the lenses, I don't know and I will rather prepare for that period of tough economic environment. They are more cautious and that creates a negative cycle, slow down on planning, hold back their spending, start trimming excess labour in preparation for a more difficult environment.
Goldman Sach's business is very correlated to the world economic activities, thus in an environment that slows down quickly, this has an impact on our business. We have record revenues and earnings in 2020, 2021 and even higher; our footprint grew not surprisingly, therefore we have to trim in some areas. We have to narrow our footprint a little bit.
4.32
GS is a professional, human capital business. 50% in GS around the world are in their 20s. They are in GS for the experience, to work in teams, to learn; these are at present fragmented. We need a culture of bringing people back quickly to the office as we think this is hurting part of our competitive advantage in the business. Bottom line, we are now operating closely to where we operated before the pandemic. Working from home is an issue mainly in the US and not in the rest of the world.
6.00
Ukraine war. China.
Deglobalization.
Variety of global forces in place for a long time that are expanding and connecting economic activities around the world. Inflation may have a negative effect on poverty especially in the developing world, example, the energy crisis. We would rather be economically intertwined globally. In a more complex geo-political environment, people started making different decisions.
For the last few decades we operated with the ethos all over the world that we make it in the place where it is least expensive as possible and sell it in the place where we can establish the highest margins.
Now people are rethinking: on energy, food, minerals, certain healthcare needs, microchips, people are saying, "I need security. Although I consider the cost of frictions, but I need also access and stability." These by themselves are inflationary. These are by themselves maybe permanent shifts. But this does not mean we are deglobalising. In this globalised world, we are choosing more carefully and more thoughtfully, who our partners are on certain things. These issues are being amplified at the moment because the geopolitical world has got more complex.
8.04
Business in China
Deploying more capital into China.(?)
We are dealing mainly with global companies operating in China. We are more cautious in our plans and our outlook. Talking to those in Washington and the hill, there is a risk of a more restricted capital allocation policies coming from either sides. For capital allocation, we may have to have a tighter control of our resources so that you have less exposure to that given the uncertainty of the environment you are operating in.
We are cautious, we need more clarity on how the policies will be in the coming years. In 2019, our dialogue on China would have been different. We have allocated a narrower footprint in China than we might have had 3 or 4 years ago.
10.16
Quick firing questions and answers
In a year's time, will this asset be up or down?
US Stocks - lower
Treasury yield - we are on the curve.
10 year Treasury yield - if we get the soft landing, this will be higher. If not a soft landing, you will see reversal of policies, then the rates will be the same or lower.
US dollar - slightly stronger
Soft landing - 35% probability
Oil - higher
Residential real estate - lower
Commercial real estate - lower Real estates at the end of the day is a financing trade, when interest is higher, real estate by definition, the cap rate, is going to be lower.
Crypto - what about it? 11.46 Very focused on the underlying technology; the ability to innovate financial services and financial infrastructures. Speed of transacting reduces risk and freeing capital from being tied up. Hope going forward, regulatory measures will allow the big financial institutions to participate more broadly in its innovations.
Crpto tokens - Bitcoin - any value in 10 years? - I don't know. (I don't care.) Value of bitcoin is a speculative thing. I don't see any use case for Bitcoin.
FTX bankruptcy - will there be more cryptos falling too? - stable coin, tokenization. Stable coin is just any form of bank deposits. Rules need to be set around them. Central bank digital currency. Cryptocurrency. etc. All these fall into a big basket we call crypto. (14.00)
We still excluded from participating in a lot of these by regulatory perspectives. We are spending a lot of time in trying to innovate using the blockchain technology. Digital loan administrative platform. How can this technology take risks out of the market system and strengthen the market system?
16.06
Scope of Goldman Sachs. 30 to 40 items to focus on.
Wreckage of the technology industry, any thing here to benefit Goldman Sachs?
Developer is a big part of Goldman Sachs. Competition for engineering talents is fierce. Puzzle of the digitalisation of the financial world. Banking is a highly regulated industry. Moving these into the clouds, connecting the clients on the platform. Good opportunities for Goldman Sachs.
18.46
Twitter
How much do you think Twitter is worth? I don't know.
A super interesting platform. Can Elon get it right and turns it into a great business.
Leveraged finance and buyout market. Buyout market is presently constrained. Significant repricing on multiples and significant repricing on financing, and these quickly brought down the activities to significant lower levels (constrained very quickly).
Historically, leveraged lending on large bank balance sheet that is underwater, is at a historically low level. When you think about other cycles when you have a pretty aggressive cycle and then something stops the cycle, the revaluation of the leveraged finance broadly, risk exposures are much much modest at that point than at other points in a similar cycle.
21.00
What happens to due diligence? Due diligence is an incredibly important part of the process of anything you do - whether you are going to invest, you are going to acquire, or you are going to be involved with a partner, As a long term observer of the market for a long term, there are periods of ebullience in the market, where people are riding the momentum wave and making a lot of money on the momentum wave, and disappointing behaviour when it weakens. We see this again and again. People choose to do things with a velocity, speed and vigor; and when they choose to do it early in the momentum train, they get away with it. Sometimes they get caught and get left off in a bad place. However, this is not the way a good professional investor operates and I don't see much change in the behaviour of the investors.
22.22
Pensions near-explosion in UK (gilt-rates went up the roof). Commercial real estates, challenges around liquidity.
Where do you see the greatest risk in the financial system? Significant growth in government debt around the world. In 2020, market functioning around government debts at time when governments are increasing borrowings. A lot of activities of the banking system which are now outside the regulatory banking system the last 10 to 15 years. Leverage of financing around that. A lot of direct lending occurs outside the regulatory banking system; this is good but needs to be watched especially people are using leverage to drive returns and capabilities around that.
So far in this contraction and tightening of the economic conditions, we haven't really seen material moves in the credit spreads. To the degree that something is moving the credit spreads in a material way, then I will be looking at lending activities. How concern are you on liquidity risk? Commercial estate and long term funds looking for liquidity. The problem of rising interest rates and people not coming into offices to work, is this a cause for concern? Real estate is valued at how much it cost to finance it. If the people are financed very long in the real estate, they can withstand all sorts of things for many cycles. If you are financed short term, if have not financed your assets to match your tenants and the rent flows, then you are obviously more vulnerable to that. I feel prime commercial real estate in prime cities are relatively protected. Third class real estates in most cities are going to have a relatively tough time. because of this debate whether people are going back to their work places or not. The expectation of what you get in a world class building and the evolution of space continues to make the older buildings require more capital to make it competitive in the market.
25.57
Corporate responsibility
Diversity in the governance in listed companies, public and private.
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