 Our third and last speaker will now zoom to the subject of investment business right away. Dr. Klaus Wellershoff is also an ideal guest at our event this evening. Now chairman of the board at Wellershoff and partners. Klaus Wellershoff was formerly chief economist at the Swiss Bank Corporation and then at UBS. He's also president of the supervisory board of the Institute of Economics at the University of St. Gallen and works pro bono with several foundations and organizations supporting science, culture and sports. In 2008 Warren Buffett called derivatives financial weapons of mass destruction. Of the quants those formula loving number wizards had brought the world to the brink of destruction with their illusionary risk models. Whether we are talking nuclear, digital or financial weapons of mass destruction, the question remains what determines at the end of the day whether a devastating catastrophe occurs or not. I launched our series of keynote speakers here with a look at the outbreak of the first world war. I would like to introduce our final speaker with a true fact regarding the danger of weapons of mass destruction during the Cold War. And at the same time I would like to pay tribute to Stanislav Yevgravovich Petrov. You never heard of him? Yes. But you owe him your life. We all do, provided we were born before September 25, 1983 even though you may not have been aware of this until now. Because in the night of September 25 to 26, 1983 Stanislav Petrov saved the world and he did it single handedly and unlike James Bond he had no screenplay to count on in which the happy ending is as firmly scheduled as the Amen in the church. On the evening of September 25, Lieutenant Colonel Stanislav Petrov was the duty officer of the Soviet satellite surveillance command center 50 kilometers north of Moscow. Suddenly all the screens in his bunker started flashing giving the alarm that a nuclear missile had just been launched from a US base in Montana and was heading towards Moscow. The satellite radar then showed that four more were on their way. Then at the very latest he should have followed orders and reported the incidents to the top Soviet leadership who would have retaliated within maximum 28 minutes with their own nuclear missiles against the west. But to comrade Petrov it didn't really make sense for the Americans to attack with just five missiles. He had a hunch that it might be a technical false alarm and he knew for well that if he transmitted the alarm to Moscow this would most likely mean the start of the third world war and total annihilation. So Lieutenant Colonel Petrov took a decision that changed the world although it was kept secret for a long time. He listened to his intuition rather than the computers a decision that could have cost him his neck. He later explained his reason for doing so after all we humans are more intelligent than computers because we built them. So that is why in those few fateful minutes he told the top Soviet leadership that it was merely a false alarm on the control screens in his bunker but he didn't know. And the man who saved the world from destruction on the evening of September 25 1983 and on all the evenings thereafter was right. The Soviet satellites had wrongly thought that the reflection of sunlight of clouds above the US nuclear bases was a missile attack. After all the humans are more intelligent than computers because we built them. I'm looking forward to hearing whether our final speaker is more a fan of intuition and gut feeling or of algorithms and formal models. Ladies and gentlemen please welcome him with an explosive round of applause resonating with our confidence that he will tell us how to invest in such a way as not to regret the decision the day after the crash. Dr. Wellesoff ladies and gentlemen. I'm not in the business of scaring people these two gentlemen are apparently but therefore a good reason and in a sense I will be sharing some of the attitude they have. And I do think the attitude that has been projected to us and I 100% would subscribe to it is that we need to be realistic. And sometimes it hurts and it makes you sick when you look at things and I come from a military family. My father was an admiral and I feel very sick about the German Navy. I'm a German national. We have six submarines left which is for Germans a strange number as you might British like that by the way six submarines left. Only five five of them are not operational at the moment because of lack of funding in the military services. Now I said I'm not in the scaring business and then and I try to be optimistic. I think in many ways there are reasons to be optimistic when it comes to our field and with that I mean economics and finance if we are realistic. And I try to give you some sense of optimism in my presentation. I know that is not an easy thing because when you look at the media and the way our field or my field at least is portrayed there. There's that we see lots of big letter headlines which can frighten you which can fright you as well. I will not talk about these things that the gentlemen have talked about because we will discuss about it. I will not talk about Donald Trump. It's one of the few evenings in this autumn where I'm not asked to talk about Donald Trump or say anything. My reason for being optimistic is actually is a look back into history and I don't know whether you know what Winston Churchill has said about the Americans. Winston Churchill who was war minister, British war minister in the first world war prime minister in the second. And he said something like you can count on the Americans that they will do the right thing. But only after they have exhausted all other opportunities. So that's my sense of optimism when I look at the Americans. So I will not go into trade war and these things in a way I will because I will try to convince you that these headlines are rubbish useless and should influence his political beings but not in our assessment of the world economy. And I will do that with data. I know that's very old fashioned to show data. This is all fake news that I will be representing. You probably have read about the interview with Donald Trump. I didn't want to talk about him. I shouldn't but I think last night he was interviewed and he said there are no terrorists. Who's talking about terrorists? We're not imposing any terrorists. So data don't matter. In my world they do and in you as well. And I do believe in markets in general they matter even though markets can be very irrational. I think I couldn't fulfill my role as an advisor and previously I couldn't have fulfilled my role as a chief economist or as the head of a buy side research at a very large private bank and the chairman of the investment committee of that bank if I wouldn't believe that in the end rationality would carry the day. So my first piece of data in my first observation I'm going to make about what is going on in the world is that we are foolishly tempted by these media to believe that politics matter and I do think politics matter much less than we think. They matter when it comes to things of war and peace but they do not matter very much when it comes to trade policy and not even monetary policy. That's probably something that you guys tend to think a lot about and I do this. I dare to say this because I like charts like this. This is a look at the U.S. national income. So the only country where we have, well it's hard to say reasonable data, we have some data which is really long term. It starts in the year 1800 and what I really like about the chart is that you don't see anything. I think that's a very instructive chart. You don't see politics with the exception of the Second World War. You see this little wiggling in the middle of the, that's war. We see politics when it comes to war but you don't see whether there was a Democrat or Republican at the helm. You don't see any protectionist policies there. You don't see any impact of monetary policy at all on this. So when you do think long term and I thought investment was partially about the long run, you can be reasonably relaxed that growth is a very strong process that is much stronger than politics. By the way, there's something else that you don't see and that's technology. Isn't that fascinating? Particularly in these days where ATH is constantly bombarding us with this digitization terror, I would call it, and these calls to arms to support the mint faculties, which is absolute nonsense because the mint faculties and none of the new innovations we'll see will bring us better growth in the future. This starts in 1800. Do you see any of the big technological waves there? Do you see the Industrial Revolution, for example? Most people's states started around 1820 to 1840 in the United States of America. Do you see the Industrial Revolution? Do you see the chemical industry? Electricity? Railways? Do you see the internet? Nothing, right? Man is a very curious, creative, inventive animal and of course we will need technology and of course technology will decide on whether the company that you work in or my companies that I have founded will survive, be successful or will just go under. But if you look at it from a macro perspective for the country, the next technology will not bring us the next big growth spurt. So forget about that when you try to analyze the world. If you really have a sharp eye, you see something else in there. You see next to these little wiggles that this is not a straight line. I probably would have to go down here and I can see it. It's not a straight line. It's getting slightly flat, even though it's a logarithmic scale and all of you are trained in that so you know what this means. This means that the trend growth rate is actually coming down and that's a very natural phenomenon and I don't know, I haven't really looked at the CFA economic schedule. I hope you are familiar with basic growth theory and you've learned that there is something within the economic system that is the situation where the richer you are, the less fast you can grow. So it's diminishing returns to your investments that you actually make. If you look at productivity, that is what technology is going to show. There is one relationship that is quite firm and that is that the additional growth that productivity can bring diminishes with the level of average income in the society. So the more advanced, the more development your economy is, the more these additions actually receive. That's actually very important for another remark I want to make. Trend growth is coming down not only because of demographics for example but also just because of a very simple growth engine that we operate. My second observation is now more closer to home in the sense of finance. This is the real economy. This is real. This is volumes. This is production. This is cars. This is things that you can count. The financial world is very often described as less real and people use this difference between the real economy and the other economy which most of us actually work in. And I also see an observation which there's also an observation that sometimes frightens me. I do think people don't take their models very seriously. When you look at the financial markets at the moment, well not the last three weeks but in very general terms, you might think that we are very rich. We look at real estate prices for example. You might think that real estate prices are really high and we are wealthy but are we? Are we really? I think sometimes people have forgotten about basic economics. We live in a world of zero interest rates. So how rich are we? What does this mean zero interest rates? Basically means that every dollar you want to spend in the future, every Swiss franc, every pound sterling, everything you want to spend in the future, you either have to work for or you have to take out of existing assets. Because there's no return. Isn't that a frightening thought? Have you thought about that? It's this very old formula that all of you I'm sure have learned. What is the value of a perpetual bond? It's the one divided by the interest rate formula. It's the simplest, the only one I can remember in finance actually. It gives us the answer to the puzzle that we all think we're rich. We have these account statements which are very bulky and the banks make a lot of money of that because they charge fees in percentage terms on the assets under management. I think today we had a large bank which made some nice quarterly profit on it and created good news on it. But are we really rich? Well, it's for sure we're not, right? What has happened over the last 40 years or so, interest rates have fallen. So if you take the value of anything which is a perpetual income stream, that value of the income stream has gone up, right? Assume you have one Swiss franc in terms of pension and the interest rate 40 years ago was 10%. What was the value of that permanent income stream was 10, right? One divided by 0.10 which is one tenth or 10% was 10. So you need to take 10 Swiss francs to put into a bank account. At 10% that gives you the one franc. You are nodding and I'm boring you, I know. But it's easy to forget. It's the simple things which are sometimes very powerful but they're very, very easy to forget. Now, in recent times, interest rates have fallen from 10 to 1. So what is the value of this one Swiss franc pension you're receiving? One divided by 0.01. So that's 100. That's the ingenuity of this asset management business model that you charge a percentage on this, right? So the income of the banks and the asset managers has actually gone tenfold. Are we richer after that decrease in interest rates? Well, we have a bank account which says, or a portfolio which says 100. But how much can we spend? We still only have one Swiss franc of pension, right? There is a huge illusion in our minds that in a world where interest rates are very, very low that we all feel very, very rich. Now you will say, but Klaus, wait, you talk about a fixed income stream and there's no growth in your model, right? And you're absolutely right, there's no growth in my model and I need to amend that with the growth rate of my income stream. But you know all about these models to understand that at least for some time, for 40 years now, we have had a period where the account statements were growing very, very fast and at interest rates at zero or very low, that growth will not repeat itself, right? So whatever my future expectation for income from capital is needs to be much lower than the last 40 years. You can look at the data. It's actually borne out very nicely. Always use US data, I don't know why, maybe the theory is from the US and then it works out better. This is just what I described in words, right? You've seen the yellow line is the corporate bond yield. I take a valuation of stocks here as an example. You see these tools in 1960, it starts to the recent period. This is a corporate bond yield, pretty difficult stuff as published on the Federal Reserve Banks of St. Louis website. I should have put the source under it, my apologies. And you see these two periods where you have rising interest rates first up until 1980 roughly and then you have falling interest rates. These are the two trends. Will interest rates fall further? Your call, maybe they will fall again. Probably they will fall again in the next recession but we don't see that recession for the time being. Will they fall for another 40 years? I doubt it. My kids would say I doubt it, Daddy, I doubt it. In Switzerland it's very difficult to imagine that interest rates would fall further from these levels, even corporate bond yields. So what does this mean? This means that the performance of the blue line, that's the price index of the standard post 500 large wide US stock index, will probably not look like what it has looked like in the 1980 onwards, which was fantastic, which instills all the hope that we have that asset management is a great business, right? Which by the way still drive a lot of expectations in asset allocation models when it comes to expected returns because we have only significant data on a larger area of asset classes we only have out of that period where interest rates are falling. So most of our data is actually contaminated by that falling interest rate effect but we never really care to think about it. Anyway, what will it look like? It will probably look like the red line, right? Normal GDP. Isn't that fascinating? Thomas, whether you've seen that before when you take a long lens, suddenly macro things matter and actually work. I really find this interesting. So are we rich? Are we poor? I think we're much poorer than we think, even though we will have growth in our earnings. We will have positive returns to some extent in some asset classes, but it will be much, much less than we were used to. My third observation is really close to home. I mean, this is really close to home. It's right at the center of what most of us are doing, and now I'll talk about asset allocation for a moment and I'll share an experience with you. I had in the year 2004, still working for my previous employer there and we were asking ourselves in those days, so are we really good at what we're doing? How do you measure that, whether you're good at what you're doing? We would say you have to have a benchmark. You measure yourself with a benchmark. But in asset allocation terms, what is the benchmark for the benchmark? It's a difficult question, right? What is the benchmark for the benchmark? And in those days, there was a new field of research coming up, and some people suggest it, and I'm not claiming any originality here. It's everything stolen that you'll see in a moment. They suggest it, well, let's take as a benchmark what you would get if you were a really stupid investor. It's a bit like the monkey throwing darts at the Wall Street Journal's page with all the stock prices. So what does that mean? So how would a non-educated, well, probably still reasonably rational investor invest? Non-educated means they have no clue what the returns look like, whether stocks are better than bonds in the long run, how they are correlated, or how you would match the asset classes into an asset allocation. So that basic finance stuff that we are using to create these portfolios would be not available to that person. So what would that person do? He would take, look, count the number of asset classes he or she has in front of her, and would put equal amounts into each bucket, right? That's the naive asset allocation. You would put as much money as you, you would put into bonds, into stocks, into real estate, into gold, and whatever you would accept as an asset class. Well, well, let's check. Let's see whether we can beat that benchmark, and I first saw this picture, but a very similar picture in the year 2004. And we compared strategy funds. That was my business. I was on the buy side if you want to. We compared strategy funds performance with this benchmark, and I've updated it a little bit for you. And this is what you would get. It's the average of the Swiss strategy funds, so I'm not trying to pick on any bank or any asset manager. And the average actually, by the way, in the beginning, I think is only one, and then it's two and three relatively quickly, and now we have much more, obviously, in there. It's statistically, academically, probably a very difficult way of doing this, but as an illustrative approach, I think it's kind of nice, and it's probably reliable. And you can see what the re-outcome is. After 28 years, your investments would have been, would have advanced more if you had done what the stupid investor has done. By the way, you would not have only had a better return, but also a lower volatility, as you probably can see from the chart. I find this a devastating observation for industry. All of the things that I've been doing in my career, I mean, I started to apply economics in the year 1995. It's with Bank Corporation, so this is basically my career, which you see there. Actually, in a large chunk of it, I was responsible for some of that nonsense, right? All of that was not adding value, but was destroying value. My takeaway from this is finance needs to improve, and I'm optimistic it can. But we can only, if we dare to challenge the fundamental tenets that we hold. And sometimes we will be successful, I'm sure, sometimes we won't, but we have to be very honest, because the clients that we service with these products, they're not stupid. They have understood this all the way, and it's one of the main reasons why they're so skeptical with the industry. It's not only bonuses and this bogus discussions we have in the media. It's the performance that we actually have delivered in the industry. Now, how can you improve? You have to be extremely critical, I think, and realistic. And I give you an example how difficult that can be. And my example is for me personally very difficult, because I could not think, I cannot imagine a way how financial markets could work if they wouldn't work the way that finance postulates. And I'm talking about risk and return. I cannot envisage an equilibrium world in which there's not a relationship between risk and return. So you take on higher risk, eventually you will be rewarded by higher returns. Eventually. Not every year, we know. Eventually. If we are brutally honest and realistic and we look at data, we have to realize that this is a very, very difficult model in our minds. It's, again, strategy fund data I'm presenting to you. Risk and return, the way you are used to seeing the data. Ten-year periods, so the ten, so 18 isn't done yet, so I had to take 17. So 8 to 17, 98 to 07, 88 to 97. Fascinating, right? And I'm not saying there's no relationship between risk and return, but over the last 20 years or so, it has grown very weak. Again, I cannot envisage how the world could work if there was not that relationship. I'm too stupid. And the young guys in the room find a better way. And I would be very happy to sign up to your school and listen to how you teach me to rethink this. But if you have to improve in the real world, what should you do or what is it that you should not do? I think the first conclusion that we have to draw from this is we shouldn't build business models around this. If we have clients that look at our results at the way we service them, outside of a framework of 30 years. So if you have somebody in over the 30 years, it has worked, right? You can build averages. I don't need to do that for you. So if you're a life insurance company, maybe that's the right thing to think about the problem. But if you service private clients, I think that's a very dangerous business model. We have to rethink business models. Why is it dangerous? Because you have frustrated clients. You told them in the last 20 years or so, we told the clients take on a little bit more risk and you get a little bit more return, right? Let's see how much risk you can take. Or you can take a little bit more, right? That's the way things work. It doesn't work. 20 years, it didn't work. For 20 years, it didn't work. So give me one bank in this country that doesn't have a value proposition in private banking built around this model. And I give you seven out of eight banks within the market and material who claim there is this relationship. And what happens with the clients? You believe, of course, you believe the expert. You believe your banker. It is a respectable person. And next year, you'll be disappointed. The banker says, well, there's volatility and there's always a little bit of risk in the markets. And next year, you're disappointed. 10 years, you're disappointed. 15 years, you're disappointed. 20 years, do you think these clients love you? Well, ask them. Try to ask them. A friend of mine have opened a little company which is called Swigh Wealth Experts. You might want to check it out. We try to sit on the other side of this table. We advise private clients to find good asset managers and asset managers that don't screw them in the process. Actually, the subsection of good asset manager and not screwing is actually relatively small. But they do exist. There are good asset managers which are fair with their clients. It's funny. It's funny to listen to you guys, actually, when you sit there. You make a complete ass of yourself, but you don't notice. There's one way of what you should not be doing, right? This is something that has to stop. Otherwise, the industry will never regain its credibility. I talk about private wealth management, all of the other people in the room. One way of being honest and getting there. So my conclusions in simple terms are this. We have to be realistic about growth. It's about financial returns. We have to rethink our value proposition. Have you tried and looked into fintech solutions in the asset management side? What is built in there? You have these neat little things. You take your finger on the iPad and you increase risk and you turn. Forget that nonsense. It's not going to work. It's going to frustrate your clients even more because the lure of technology, the credibility that these wonderful surfaces that you can work on actually brings with them will give even higher and firmer expectations that what you promise, a higher return for taking on more risk is a reasonable promise. And I tell you it's not a tenable promise, at least not in the short run. Your business model and rethink your fintech solutions. Maybe to put it on an even more abstract level, I think what I've tried to tell to you or say to you is that what is going on? We have a problem of the elites and I count all of you amongst them telling stories which are not true. And when you think the populists are populist because they are using fake data, use your data first before you go out and proclaim that you know how to make it. Thank you very much.