Surveillance: Top Risks 2019 With Eurasia Group

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg John Fifth AVENU are really down towards New York University in the offices John of your Raisia group, And of course that always means our annual first of the year visit with Ian Bremer and their top risk for two thousand and nineteen, we've had a spirited discussion through the morning, John, Why don't you kick it off with Dr Bremer and

I Speagan shadowy with the tough risk that you guys are looking at. You put out this list every single year, and we have the privilege of opening some of our overage up with you when you do do that. And I think it's interesting that you mentioned what could transpire over the coming years because of what is happening now,

the bad seats that we're planting. Just walk us through that thinking again, sure, I mean you know there are so if you look at the major things that are happening in the world today, the geopolitical trends, both domestically, within countries and internationally, all of them are trending in the negative directions. The first time since we started the company twenty one years ago when we could say that

none of them are urgent. Whether we look at the erosion of US political institutions, whether we look at challenges inside Europe as a whole and inside those individual countries, whether we look at the system of global alliances US Russia, US China, Transatlantic and within the Middle East, or the rise of populism and nationalism, none of these things are urgent. All of them trend in negative direction. All of the mean that we won't respond effectively to the next crisis

when it comes. Your team is so good a calculus the first and second derivative rates of change of international relations. I love your word. I gotta pronounce it right here. Escalatory. We are escalatory right now. What is our movement towards escalatory crisis? Well, I guess I would say, with the global economy doing well, it doesn't feel like twenty nineteen

is your challenge. But if you think about when the big recession hit in two thousand eight, everyone responded constructively so that we avoided depression the United States, there was a lot of strength nine eleven. The response came from the United States. The whole country came together behind the coalition of Russians. No, no, whatever the next shock is, whether it's cyber or terror or more likely the next economic downturn, the reaction inside our country and internationally is

gonna be toxic. And I think that that's what's under appreciated issue. What measure for is the confidence of the system right now in the markets, in all of global Wall Street that listens to us every day, they're hard wired to the confidence for investment, the confidence to find the bid in various markets as well. What is our I our confidence right now? Yeah, I mean the confidence

in the economy is I would say reasonably strong. The i R. The international relations confidence is low and trending worse on a daily basis. Now A lot of that, A lot of the reason that I our confidence isn't high in the markets is because of Trump. But it shouldn't be that. It should be much more structural. It should be that the forces that got Trump elected in the United States, it should be the forces that led

to Brexit in the UK. It should be the forces that have led to the Italian government as well as the rise of China. Is here one off? I mean, that's the question. I see you out doing all the media for your raising group and all that, they never ask you that, just the pregnant question. Is President Trump

a one off phenomenon? I think of William James Bryant when I see Alexander your Ocasio Cortez on sixty minutes yesterday saying, uh, I may get the facts wrong, but you need to focus on the underlying morality of what I'm saying. Right, That's exactly what Trump was saying. Take him seriously but not literally. That's exactly why the Brexit is the Is the liberal progressive new confidence that we see in the House, will that be a one off? Or is there a real sustained move back to a

more liberal theology in America? I get what I'm saying is I think the center not holding is not a one off. And while Trump himself, in terms of his volatility is character or lack thereof that that is indeed an extreme outcome in the US, the likelihood that the next president or series of leaders would come from the

farther right and farther left I think is growing. Do you have an optimism that we can do in practice democracy given this polarity, I mean, George Herb Walker Bush was one of our great losses for two thousand and eighteen, That middle ground seems to be gone. I have an optimism that American political institutions are surprisingly strong and resilient and they can withstand whatever Trump and his administration has to offer against it. But that's different from saying that

democracy fundamentally is working for a majority of Americans. I think that when Trump says the system is rigged against you, and people respond to that, it's because he's right. Now. Trump hasn't made the system less rigged against them, but he did identify the problem. And a lot of people out there are telling their constituents liberal democracy has been gained to create much greater inequality and to give access to power and speak power to truth. And that's not

a useful thing for most of those. When I look at bad seas, US, China, cybergloves off europopulism, Mexico, Ukraine and the rest. I want to go back to the arching theme of surveillance for last year, and I don't think I nailed this of months ago, which is technology. What all of our listeners global Wall Street people just wired into Wall Street, in the great professional group of all ages that listen to us, they're all affected by technology.

And you're calling for an innovation winter. What is that? Innovation winter means that a combination of a fragmentation of the most important technology trend. So five G, which is going to be the backbone not just of smartphones, but the Internet of things smart cities, is not going to be one system like four G was. It's gonna be a China lead system and a Western lead system and they won't interact. That's one part, and the second part is the growing tech lash, the political trends against the

big tech firms in the West. To ask you this question, and does technology enhance or accentuate the guilded age so many of our listeners feel we're living in. It makes uh those that don't participate in the guilded age age more aware of the fact that they're left behind. It makes it easier for them to connect with others that feel the same way. UM. It also speeds up the ability of those in the Gilded Age UM to build

walls that effectively differentiate these people. What will the Democratic Party, or you're a great student of domestic politics, what will the new Democratic Party look like? Um? Because they are all um focused on twenty twenty after these midterm elections, and focused on April of this year and Trump, Well, I mean they're they're gonna be focused on impeachment proceedings as well. And I have a hard time seeing Pelosi

uh keeping that off of the agenda. But I do think that it helps to coalesce the Democrats when they are all kind of on message against the American president. But let's be clear, seventeen Republican candidates, most of them were pretty establishment in the middle. You're gonna have freny to thirty Democratic candidates and they're going to be some in the middle, some on the left, and some complete outsiders. And that does make from the Democratic perspective, much more

of a crapshoot. What you get, Brower, Thank you so much. Top Risks of two thousand nineteen at euris your group as we visit his office is here, unfit there having I want to bring it in Pria Misra, now TV Securities head of Global Race Strategy, to talk about the bond market, Priya, A big change in tone from the chairman.

Just to go through some of his recent comments, listening carefully to market risks, prepared to be patient, flexible, even open to balance sheet policy change, Priya, the Chairman seems to be all over the place the last couple of months. Hi, John, Um, Yes, So I think the market interpretation of the chairman's comments has changed now. I do think in in the December press conference, he was trying to signal this flexibility, but we were we sort of went into that meeting expecting

a lot. Uh. There were certainly people expecting no hikes there, uh, and the Chairman did hike. I think it's very hard to hike and then sound extremely nervous or panicky. So I think, you know, the hikes sort of set him up to sound somewhat hawkish. But what we heard from him on Friday was this idea that they're flexible, nothing is on autopilot. Um. You know, I think the fact that he's listening to financial conditions actually tells me that, you know, he's setting up somewhat for a pause here.

So um, you know, whether it's a pause, whether um it's it's the end of the hiking cycle. I think that only data will tell us. But at least we have the FED now suggesting that they are watching uh, the tightening and financial conditions much more closely than they were earlier, uh, you know, the last few months. So let's begin by talking about potential for a pause, and then we can explore this tension between the market and

the economic data. I think for many people, for now, many investors are going to run with the idea that Poal is going with the twenty sixteen FED playbook. Can we take a page out of the playbook in I think we can. I mean, the similarity of is is pretty high right now. Now. It is ultimately going to depend on whether we get the global growth rebound that we did see in twenty six we saw significant China easing.

I'm not sure that the triple our cut is enough, but but if we do get you know, significant fiscal easing in China, if global growth rebounds, I think then twenty six uh is the reasonable uh you know thing to um sort of watch for. If growth starts to decelerate, so we actually don't get that rebound, then I think we're you know, I'll be looking more at two thousand seven. So I think right now, just given that we don't know enough, the US economy still seems to be you know,

powering true. I think we really have to look at what happens to global growth, what happens on the trade front, to say whether this is or this is two thousand seven had some really extreme price action on the Thursday, never mind the Friday. In fact, maybe Friday told us more about the extreme positioning after Thursday than it did

anything else. Prayer, I just wander your thoughts on the on the tension right now between financial markets where things are a little bit darker relative to twelve months ago, maybe a whole lot darker in your view, compared to the data. Whether data seems to be okay, especially here in the United States. Softer, yes, in some parts, but

the labor market still looking very strong, right. I think the tension that you're talking about is also you know, in the data front, a lot of the forward looking measures are looking uh, you know, more worrisome. I think the Bureau report is still somewhat of a backward looking data point we still have for still using in the system in the US. So I think what we're seeing is that the US economy, at least backward looking, seems

to be pretty strong. We sort of knew that. I think the fear is that the China I s M, the U s I s M, all of these forward looking measures are suggesting some slowdown. Now, if we slow down from a three and a half the cent GDP to let's say two and a half the cent GDP, that is the slowdown, But then two and a half is still well above potential. So I think that can allow the market to sort of stabilize. I think if we're slowing down much more than that, and that's what

we really don't know, that's where the tension is. I think all forward looking measures are going to be extremely strutinized by the market because I think now the Fed policy mistake issue that should go in the background. I think now it's all going to be does the US economy slow down above potential or do we go below potential? And how is the global growth backdrop here? I think that's where you know, what's what's going to become extremely important as we analyze data. It's really going to be

the forward looking versus backward looking different. So we need to analyze the soft data versus the hard dates are once again, and the tension between that and not just the tension between the data of the market. Preyer, I want some final thoughts on what your base cases right now for the US economy and for US rates. How difficult is it to construct a base case? It is very difficult, Um, I say, you know, what we're suggesting is for investors to stay somewhat in the front end.

You know, when the two year old or three month treasury builds are giving you two forty or um. You know, basis points versus the tenure that's giving you to sixty, you're not getting a whole lot more to take on the additional duration risk. So I'm actually still suggesting that investors stay in the front end and then start looking at parts of the fixed in markets where risk premium

has been adequately repriced. So some of the markets have seen significant widening in spreads, I think it might make sense to start dipping in your tours. They're keeping an eye on the data because if if the data does start to deteriorate significantly, then you want to move out of risk asses. But something we have that signal just yet.

Pre always great to catch you out with your TV Security's head of Global Rights Strategy and bringing in Meredith Sumter of ERAISA Group head of Research, Strategy and Operations. I was a bit surprised for him. It's the first time I've brought it up. President of Trump, the huge distraction in Davos last year, and he goes for re DUX this year if he can get through the t s A at the airport to fly there. I mean

President Trump against speaking to the international community. Yes, Davos is certainly a critical stage for him and for his brand globally. Like that his brand, his brand for sure, and I think he also his speech at last year's Davos played fairly well according to the White House, so look for a repeat performance there. But also watched for President Trump to have a sideline meeting with Chinese Vice

President Wong she Sean at Davos. That is something that all of us will be watching for signs as to how the ongoing round of negotiations between the US and China are faring. We've spent a lot of times to the morning was really up top your Chinese risk as well. I want to dress right now your lengthy essay on Europe populism, which is decidedly different than it was twelve months ago. What is the threat to democracy in Europe

right now? Well, twenty nineteen is really the year when the populace will take center stage in Europe and begin to erode the EU from within. We've written for several months now about the lives of populism and populist leaders and uh, you know Europe's third and fourth largest market economies in other countries such as Hungary and Poland. But what's critical now is that we expect that populists their numbers are going to fare even better in twenty nine

and keep an eye on the May parliamentary elections. We expect that their numbers are going to grow following those elections, which will put them at center stage in Europe's most important democratic institution. In the dominant countries as well. Your age group was so out front on the fractures of Germany one and two and even three years ago, and of course Mr mccrawl with the challenges Now, how does that readdound back to Brussels, where I was just two

weeks ago. I guess when when I look at Brussels, what is the strength of this European Union within the

media frenzy of Brexit. Well, look the Brussels it's it's dealing both with Brexit, but it's going to have to deal with the growing voice and the growing influence of the Populace not only in the European Parliament following May's elections, but tom if if the Populace get enough of a strong showing in the May parliamentary elections, you combine that with their fairly solid basis of support and several Keys states, and you have a risk of uh, you know, euroskeptic

populist having a voice not only in the parlor meant, but also in the European Commission, which oversees the day to day operations of Europe, as as well as the European Council. This affords them real decision making power. Is this within all of your top risks your Asia group? Is the system fractured? To steal a word from Franci

Laquois earlier this morning, is the system fractured? Are you optimistic with Dr Bremer that we can see a healing If not in two thousand nineteen, then on through twenty after the presidential cycle. In the ensuing years so is the question more so with Europe or broadly spec Broadly speaking, I think our listeners are you know, they're they're interested in Europe, and they're interested in Wall Street and that. But it's sort of a broad feeling of Okay, when

does this heal? Right, Look, it's going to take several more years of healing. But but the length of time that it takes for us to actually heal depends upon the ability of leaders from largely industrialized economies tackling head on the reforms that are necessary to bring more of their popular ations into the economy of the future. A lot of the geopolitical flux that we're seeing now part of it. It's a long term process of evolving from the post World war to order to what that new

world war, what that new world order? Will know that this is critical. Do we know that new order that's out there? Cicaria, post American order, bremer g zero world, your own writings, Merit of the Sumter as well, and others. What's the new consensus after the Washington Consensus? I don't

see it. Well. Part of that will depend upon what role Washington decides to play in this post world war to order and to what extent Washington can get along with other key power brokers, even if they don't agree with them, even if they don't agree with him. This this fundamentally includes China Beijing. So regardless of whatever tariff deal is agreed to, our call is that that relationships between the two that these two world powers, is going

to get even huffer and he will. Let's bring the immediacy of a shutdown where the president's made clear it's his way or the highway. Is that his relationship with China. Is that what we're going to see in the talks this week, the talks maybe at Davos, and the talks and the talks and the talks after that. Is it a Trump lateral world. It would be a Trump lateral world if we had an unending US economic growth and strength,

but that's not necessarily what we're seeing right now. Trump is fairly confident in the U s economy, but we're all watching the increased market volatility. We're all watching signs of a potential slowdown in the US economy, and that could force his hand earlier than than he would like. But the key question is whether it's Trump or post Trump to what extent is America going to lead and what does that mean for the post world order? You, more than any other guest we speak to, is hardwired

for distance from capital. You did your academics at the University of Washington. You where were you? You and the grizzly bears up an anchorage? Right, something like that. I'm from Alaska, but it did my my graduate work at LSE. I know you went to London for your graduate work. I get that. But nobody I know spent more time distance from a capital than you. What does Wanhington not

get about what's out there? The rest of the world is moving on regardless of what that's right, that's right, And if you if you're in Washington circles and you listen to the kind of discussions happening there, to me,

it's not apparent. That reality is not yet apparent to the key thought leaders and decision makers in Washington, and the faster they realized that, the faster that they're able to turn away from this high levels of partisanship and internal naval gazing and really focus on, no kidding, what does it really take for America and the American workforce to be competitive and global economy? Then take it over to your wheelhouse of international relations. We're not getting along

with their allies. Is that one off of this distrust with our this limited US, as you say, with our allies, or is there can there be a recovery towards some trust with our core ellis it's going to be a bit of an apphole battle to get a recovery of

the kind of trust that we saw pre Trump. In other words, I think we're going to have to see a refashioning of the US related commitment to its alliance relationships, not only with traditional allies but also with new emerging partners with with whom Washington will need to partner to be an effective and strategic power in person, Meredith Sumter, thank you so much with your raising group, Head of Research,

Strategy and Operations. Folding in the state of our capitalism and particularly the state of our technology, which means it's a wonderful time to speak to Sally craw Check. You know her from Wall Street, you know her from Elevant, uh, Elevate and Elavesta should say and all that she's done within digital, particularly with a thrust towards how women should adapt to the markets and to capitalism and she joins us.

This morning, Sally, what have you and Albus learned about how the digital platforms, the digital technologies will deal with volatility. You enjoyed February, then you enjoyed October and on to the end of the year. It's different than Smith Barney, isn't it. Well, it is different than Smith Barney and different from Merrill Lynch and everybody told me. And the conventional wisdom is if you have a digital first investing platform and we get into some tough markets, your clients

will leave you. There won't be a person there to either sue them or grab them around the ankles and keep them from leaving. And Tom, that's it, not at all what we saw that you know, we have built a product platform here at Labs that shows our clients are they on or off track for achieving their goals.

We built in plenty of down markets as we project there and eating their goals, buying that home, starting that business, retiring at the age of six, and can show them on a day by day, moment by moment basis are they on track or off? And so what we found was attrition ary actually went down during the periods of volatility because our clients were able to log in and see I'm fine, okay, back to living my life. This is incredibly important, folks. And of course the age old

idea here is everybody's talking their book. The constant themes Sally has been low interest rates, where the fees have been compressed. We saw Abby H. Johnson up at Fidelity having to go to two funds I believe index funds that were completely free of fees as well. Fold in the fee micro economics that you see for the future of personal investment, Well, the fees are coming down, an Tom. What's interesting is since you and I were since you

were a little kid and I was a baby. Um, everybody has said the pressure, feed pressure, feed pressure, but it didn't really show up. In fact, you know, in the fifteen years before I took responsibility for Merrill Lynch Wealth Management, the r o A revenue on assets had been flat for that fifty years. Now, there were certain products where there was seed pressure, but overall that business

continued to earn. And you've seen the research that says that the cost of financial intermediation is you know called one and a half or two percent. All in technology, we're able to UM bring that cost substantially down to really the first time, and the benefit of the cost coming down goes straight into the pods of the consumers. So you're giving them highly customized investment portfolios put together through investing algorithms that don't panic when the market goes down.

You're able to to you know, feed them information on or off track, and you're able to do it in much lower price than having a thick layer of person in their lead to what do I mean thick layer the person who's doing all the you know, not only the client relationship, but also the investing right also the planning. By using technology to do what technology does best, in using people to do what people do best, the ultimate end client is better off both emotionally and when it

comes to dollars and then slid crow check. I'm wondering if you could just expand a little bit on the algorithm that LVEST uses because it's tailored specifically to women's incomes and also to their life cycles, and this is

something that no one else has really been able to do. Well. Look, if you are planning to um you know, you're saving and investing for retirement, and you put together plan and you assume in your plan that you die on average, UM, and you assume in your plan that your earnings grow on average for an industry. That works really well. If you're a man, because I hate to say a gentleman, but you know, you die earlier. UM. It also works

really well because you earn more. For a woman, you know, the chances of being left without you know, an income at the end or without wealth at the end are much higher unless you take it into account. And so l of us was really the first two things we do to you know, really, um customize this to either gender, but to women. They are about a thousand other things that we do based off of hundreds and hundreds of hours of research that women said they were looking for

one as goals based investing. And by the way, I know many of your listeners, what an investing platform for women? That is so dumb? I thought so too, up until I realized that women weren't investing nearly as much as men were. It costs typical woman hundreds of thousands a million plus over the course of her life, and what the industry was doing, which was telling her to change, telling her she needed more financial education, telling her she needed to just buy a mutual fund. We can keep

trying to do that, but it wasn't working before. So we saw no reason that was work going forward, and so we built an investing platform completely around her. And by the way, there are a lot of guys who love it too. I would imagine, can you tell us all about something called the risk quiz and why that's not enough and why it's about reaching the goal, not necessarily what happens in the market on a day to day or even month to month basis. It's a great question.

So most investment providers out there ask client potential clients their list tolerance. What we found when we did the research is many will answer that question. Men on typically will answer that question. They don't know the answer to it, but they will answer it. Women typically will not answer the question, and we'll leave and say, I gotta go figure this out, I gotta go buy a book, I gotta read about it, and I'll come back, and then they never come back. The truth is, no one really knows.

The research shows you, and my my years in the business tell me no one really knows what their risk tolerances until they face up to a down market, and then they figure it out. And asking the question and then investing based on that. We as a producer at all of us, uh no, what we do instead it tell us what you want to achieve. And if you don't have an emergency fund, I don't care if you think you're going to take on it. You want to take on a lot of risks, you're not. We're not

letting you. And by the way, if your twenties five and your only goal is retirement, we're going to build you a portfolio with quite a bit more risk there because you'll have the time to earn the returns and recover for interns. So we give a risk budget rather than hey, what do you want? And then you know, act the act in that way, Sally, the top risk of two thousand nineteen lead us to the top risks of a generation, whichever that generation may be. And to me,

it comes down to actual assumption. We've had the gift of a bull market which has made not all but a select group look pretty smart. Do you just assume? And I go and folks, this is with Sally's iconic work at Sanford Bernstein in math and securities analysis years ago. Do you just assume? Finally, the single digit world is upon us. That's what that's what we project and so that and if it isn't fantastic, but at l of US we project that and if the returns end up

being better, so be it. So not only do we project single digit returns, but then we also project to try to get her to the quantitative goal she wants to achieve in the substantial majority of markets, so we try to build in a layer of conservatism to conservatism to conservatism, which can make the initials sell hard time because we're not out there saying it will be a millionaire, but we believe it a prudent way to help her plan for her future and look for the For the women,

this is important. You know, you hit an important point. Women live longer than men do. Therefore, if we do not have enough money as a country for retirement savings, it is a gender issue. It is a gender issue, and so our goal at Elvest is to help close this gender investing gap, to help close the retirement savings gap.

And if you think about it, if we could get more money in the hands of women, close the gender pay gap, close the gender investing gap, that helps the it's good for everybody, helps the economy grow, It puts money into the markets, It helps the women have more resources, it helps there their families. You know, it's not a

zero sum game by any means. And so for Elvest, we are an investing firm for women, but we're really mission driven to try to you know, at our core is to try to help women live and better live. So I'm gonna leave it there. Thank you so much. Sally called check of ls to helping out Ian Bremmer today with a top risk of two thousand nineteen. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform

you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.