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There's no one better to talk to than Michael Roberts, CEO of HSBC, a bank and CEO of the Corporate and Institutional Bank at the Region. I'm just curious, given the fact that HSBC and welcome is such a central bank in both trade as well as in both China and in the West, how significant do you see this latest eruption of trade tensions between the US and China. Does this feel different?
Yeah? No, First of all, thank you for having me today. Look, I think the world has got used to a lot of these tariff changes, although certainly this newest round is yet another bit of unpredictability. I think companies have been now looking for different ways to manage their supply chains. We have a survey that we did right after Liberation
Day which I think still hold trues today. We surveyed five thousand clients, so big survey, and they all said why and all of these tariffs are going to cause a lot of issues. Prices will go up to Most of now are looking at their supply chains. In the word, I think supply chain has now come to be one of the probably the most discussed terms in e C suite today. And thirdly, they're going to change and they
may even change business models. So this next round, this current round, I think, just tells you that they're going to have to significantly change what that is because one hundred percent tariffs, you can't absorb one hundred percent tariffs, So that means there'll be a greater acceleration to where those new supply chains will be. However, it is been a bit of a whack a mole because you have to constantly look at where the next tariffs will come from,
and that's been a challenge to many companies. They really have to figure out what is the least vulnerable place they can be or the most tariff proof place they can be, and how do they then export into the US or freightly anywhere to make sure that they can do so as effectively as possible.
How much of the extra costs from tariff's been realized, not just tariffs but also the rejiggering of supply chains.
Yeah, so rule of thumb, when I've talked to most people, probably seventy eighty percent is born by some the producer versus the importer. The last twenty percent analysis starting to seep into in buyer, the customer. I think most are saying, we can't continue to absorb that much additional costs as the importer or the distributor. Therefore it will start shifting more and more to the end buyer, the client, or
the customer. So that there's been a I think it's strong effort, however, to try to absorb as much as possible. So I talked to a retailer, high fashion retailer saying, me and distributor or the producer out of the Asia, and me as the distributor, are absorbing as much as we possibly can. We understand we could do that, but it will come to an end.
So John and Amory we're talking to FED Governor Chris Waller and about the balance between inflation and the labor market, and there's this feeling that any kind of inflation is going to be short lived and the effect on the labor market could potentially be initi Are you seeing that companies instead of raising prices, laying off workers or trying to revert to artificial intelligence to bridge the gaps.
Not yet, However, there is a lot of cost pressures. I think there's a delay, a lot of investments. I mean, that's the flip side of that, because I do think people want predictability. The companies need to understand where they're going to put down a lot of capital, that that capital is going to produce good returns because more predictability. I've seen slowing of hiring, but not real firing today, and so that's kind of again the flip side of
that coin. But really it's the capital and the investments that you're starting to see slow down quite a lot.
Meanwhile, we've heard a lot here at the meetings in Washington, d C. At a number of themes AI, which we'll get to any second, but also this question around credit froth and an AI related bubble. How much are you getting concerned akin to what JP Morgan's been talking about, of a real turn in the credit cycle or some sort of later innings that give you pause and make you more cautious.
Yeah. Look, I do think this is not the first instance of what is inventory financing fraud, which is essentially selling you know, or using the same bit of inventory to finance multiple times. We've seen that in Europe a couple of times as well in the last say nine months. So I am more concerned and something that we're very
focused on. So in fact, we're using technology we developed in our trade business and using it throughout all of our lending platforms now to try to go through and be very specific that everything we finance is good collateral, it doesn't have multiple leans on top of it, which is really what happened to First Brands. It's tough to do, and I think, you know, the fraustaters are getting better at it, so we're going to have to respond to
being much better on due diligence. You know, we were not involved obviously directly in First Brands, so don't know how much due diligence was done, but I think these type of financing arrangements are going to require much more due diligence, much greater technology, much more specific understanding exactly what you're financing.
The other aspect has been just sort of how much AI has actually boosted productivity, boosted profitability versus been a real call center for the most part. Ken Griffin came out of Citadel saying that he's not seeing evidence that AI programs can really make an edge in financial markets. I know that HSBC has been big and quantum computing and has this test. Are you seeing real gains? Are you actually deploying quantitative strategies from quantitative computing on your trading floors.
Yeah. So, just for those who don't know, we had a partnership still do with IBM. We developed quantum computing really for financial markets, focusing on the bond market, and we use both quantum computing and more traditional computing, brought them together, changed the way we look at data. There's a thing called representation data that we actually flipped into a more of a quantum computing type of mode. That led to a thirty four percent improvement in our ability
to predict a trade. So if you were going to make a trade, we get to understand that trade thirty four percent better. To see the matching between buyer and seller is really what it comes down to. So that was very effective. It's an initial study. We did how we we're tested on multiple comtmcuting machines, we did all the statistical analysis, so we really do think there's something there. It can be used for any traded asset, So any asset class. I think the power that that brings is
going to give an edge. I don't know how it wouldn't give it edge, but I think it'll be once we roll it out, another's roll it out, they'll be quick adoption by I think the industry. I mean, it's is the same industry that tries to reduce latency to its smallest possible amount. So I do think technology does bring a substantial edge.
Do you think it's going to replace traders that?
I don't know. I mean, I think they always be humans involved, But I think it'll help traders quite a lot. And I think it'll change really the way traders think about it because when you have that much compute power and you could really use it. I think today, you know, we use a lot ai as you said, through algo rhythmic trading. This will just be one more substantial boost to the power of a rhythmic trading that we see today. So will it be less traders? Don't know? But are
they going to have powerful machines? Definitely.
So the other theme here, and this is something that comes up in pretty much every conversation, is the debasement of the dollar and this question of how much the dollar is losing its heft as a reserve currency internationally. Do you see any signs that people truly are moving away from the green back.
Yeah, that's great question. So I happen to be traveling to Asia right after Liberation Day, and I would say that was probably the number one conversation that I was having by very big, very sophisticated large holders of dollars, and they were quite focused on this idea of dedollarization or debasement of the dollars of reserve currency. And the mere fact that they're talking about it and the terms
they were tells you something is different. Now. If you look at where the dollar is today, trade flows reserves the primary currency of invoicing for most commercial flows, the markets flows, it's all well more than fifty percent, it's you know, sixty seventy eighty percent in all those various metrics. It will take a long time to find another reserve currency. And the other biggest question is if you're going to go away from dollars, what are you going to do?
And you know what will be that reserve currency that replaces it? There is no other alternative today. And so that's the twin issues that you have. The conundrum, maybe go away from dollars, but what are we going to go to instead?
To wrap it all up, there is this feeling that the center of finance has shifted, and it's not so clearly in the United States, and something that you've been focusing a lot. How do you see the sort of tentacles of finance in terms of where they are flowing from transforming really over the past.
Couple of years. Yeah, No, I think there's significant transformation going on. And if you think there was a unipolar world with the US right in the middle of it, still is. And you know, the US capital market is the most liquid of the world, still the dominant place to trade. However, you need to look at where trade and commercial flows are going, where financial flows are going. I would look between the Middle East and Asia as example,
substantial increase of flows between those two regions. And they're not flows that are necessarily coming from the West just being transhipped through those reasons. They're actually wealth and that is being rechanneled in that region assel. I think you'll see that more and more. I think you'll see Asia Middle East coming together more and more, and I think
you'll have a much more balanced equation. I don't think there'll be as a dominant source of financial flows that you've seen before, and you know, great for us because we have to be very strong in those two regions. But I do think people need to understand that there's a significant change going on and those flows will not just go through New York as they used to in the past.
Michael Roberts, thank you so much for taking the time. Really wonderful to speak with you and John. That was Michael Roberts of HSBC, and some of the key topics here in the idea of how much that financial center has shifted