 Well, thank you very much indeed for joining us for what I believe is actually a really pivotal 30 minutes where we are going to be discussing something that's going to affect all of us and even it hasn't had its ramifications yet. And I believe we're only in the foothills of the ramifications of higher interest rates as well. We are going to attempt over the next 30 minutes to decipher this new era of interest rates. And as you're all very aware, we've seen an unprecedented pace of interest rate hikes in 2022 and going back a little bit earlier as well. A prolonged era of higher rates potentially on the agenda, what else is it going to affect? Is it going to have big ramifications for the labor market for debt sustainability? And just to put this into some form of context, and I know you're mostly aware of what we've seen, but in a couple of days' time we could see the Federal Reserve hiking by another 25 basis points, which means over 10 consecutive meetings. We have seen interest rates rise 500 basis points, which is unprecedented this century, going up to 5%. That is the highest level since 2006. The World Economic Forum has been just finding out a gauge of what their chief economist outlook is at the moment. And we've got a graphic that can just show our audience on the live stream. And the hearty souls who have joined us here as well. Nice to see you all. Just what the ramifications are as far as the economists are concerned. And you can see that 82% expect high rates to slow now in the face of financial stability concerns. Well, no, at least one of our panelists thinks, well, maybe the market could be a little bit ahead of itself on that one, ahead of its skis, so to speak. 79% expect central banks to face a trade-off between managing inflation and maintaining banking sector stability. I just want to know what the other 21% were thinking on that front, because I think we've all seen that live and well this week with First Republic once again, and the concerns that Jay Powell has about that institution. And I just briefly say it could have an effect on property markets, financial business, global financial markets, and as I mentioned, sovereign debt sustainability. Let us move on then and just take a look at this excellent panel we have here as well. In no particular order, and I've already met her today, it's been a pleasure to do so, Karen Harris, who is managing director of macro trends group at Beynonco. Lovely to see you again. Jorge Cecilia is the chief economist at BBVA. Good to see you, sir. And Max Pond-Bismarck, who is the chief business officer and managing director at Raisin. Good to see you all. Thank you. Right, Jorge, I'm just going to start off with a very generic question and get you to tear us off on this one as well. What we have seen, I believe, is a historic increase in rates as well, but they are going to be higher, but are they going to be higher for longer? And are we seeing, as of yet, the ramifications of these historic moves? Thank you for having me here. I do think, as other economists do, that we are closer to the peak at which central banks are going to take interest rates in developed economies. After having increased abruptly interest rates in the U.S., it has been the most abrupt increase since the 1970s. And this comes on the wake of having reacted belatedly to an inflationary shock after a very long period of deflation that generated some doubts in the process. Now, when we look back and see where we are at after these increases in interest rates, so we have that inflation has come down dramatically, so four basis points, four percentage points, both in the U.S. and Europe, but core inflation remains very sticky. We see that growth has been relatively resilient, and more importantly, what we also see is that central banks are a little bit less worried now about second round effects coming through the economy. And this means that at least they can take a pause after increasing a little bit interest rates further and see what are the consequences eventually of this process. Now, the big issue here is that after a very long period in which inflation has been very low, we are still not sure how economic agents are going to react. So the elasticities that we typically apply in different models as regards profits or wage behavior, we don't know if they're going to react with a lag, and we might have further problems down the road in terms of inflation. Now, when you put that against what we have been seeing in financial markets, it is clear that this abrupt increase in interest rates has generated some nonlinearities that might generate some downside shifts to growth in the future. So they're going to keep that in mind. But I think that for central banks it's going to be much more important, the lesson of the 1970s in which, if you remember, Volcker increased interest rates. That was the first mistake without inflation expectations being anchored. And when we had another inflation increase, then central banks had to increase interest rates dramatically. So even though they might have some financial stability concerns, I think they're going to be much more worried about inflation going forward. And that means that interest rates are going to be higher for longer than what the market expect. Just a very quick follow-up on that then. Is there a complacency in the markets? And I'll come to complacency concern in terms of the effects from central banks who you said are a little more comfortable and a little less worried. But is there a complacency in the interpretation that markets are making on when we will see some form of pivot? So I think so. So the short answer would be yes. Now whether that complacency comes, because markets might have a better perspective for inflation, and thus they expect that central banks are going to have room to get interest rates, that would be in a sense a complacency that stems from a different outlook for inflation and growth. Or you can have a complacency which is a worse type of complacency if you think that central banks are going to react to growth in a very similar way than the one they reacted during the period where inflation was very low. And that is not going to happen. So if in any of the two cases what you're going to have probably is reassessment of the markets of where interest rates would be. But the task might be much more difficult for central banks if the market is on the second part of the complacency. And the worry is of course that the central banks were very slow in appreciating the kind of inflation we have now. And they thought it was transitional and transitory for way too long. And Karen, you still have many questions about the kind of inflation we're seeing and what a more inflationary world means rather than a higher inflation rate as well. Just explain to our viewers and the livestream in the audience here exactly what you mean by that. Sure. And to the credit of central bankers I think if we look back two years ago there was a reasonable argument for transitory inflation. But they were wrong. Well they were but did they. I don't think many of us expected Putin to invade Ukraine. And I. And we did over stimulate in retrospect. But when the economies reopened that did have some salutary effect but yes they were wrong. But I think what's interesting and to think about what Jorge was saying about how will people haven't pivoted to this new era that we have an era that will be structurally more inflationary. A world of post globalization where we won't have the same scale of trade. There will be more trade barriers. An older demographic that is both means that the retirees who are savers aren't saving the same way. And we have a declining workforce which requires investment in automation in many markets. So less generation of capital less free movement of capital and goods more demands per capital. That means inflation the impulse of inflation will be higher. That doesn't mean and I think Jorge was making the same point. It doesn't mean that inflation prince will be higher. But it does require real rates to be higher. Good news about that of course for central bankers is it's easier to raise rates than to do what the Bank of Japan has had to do and try to stimulate or deal in Germany with negative real rates. Right. As I said earlier it's a lot easier to gain weight than to lose weight. So it's easier to hike rates than to try to bring them down in an effective way. And I think that's the era that that we need to get accustomed to. And I think as Jorge rightly pointed out that creates a lot of risk as we don't know where in the financial system the calibration to an era of low rates is so entrenched that getting used to higher rates that torque will create failures that we haven't yet seen or anticipated. And do you anticipate that as I said earlier on we haven't necessarily have the ramifications of these high rates because a lot of people are still paying the the old rates the lower rates. But when when the penny drops are you expecting more than just ripple effects are we going to see tsunamis. Is it going to create one ripple after another. I mean and for instance one era of tension being the commercial property market. Right. Yes. Of course CRE is where attention is which you know I hate to be so skeptical but I always feel like if we're all looking then that's not where the problem is going to end up even though the data would say that that's probably too I don't want to be too dismissive. But I do it sort of defies logic to me that we've had failures and we've had the British pension fund crisis Silicon Valley Bank signature bank. First Republic over the weekend credit sues and that now we're done. There's not another institution on the planet that in a 30 year rain of low rates made the right bets and now everyone's managed to pivot in this massive torque of interest rates rising without flawlessly in a way that won't create problems. That feels like a tough story to sell. Whether that means we have contagion. That's a different question. So far I think the US Fed has done a really nice job of containing this and the worry is what's happening in the non banking market. Will there be a failure. The Lehman or the AIG that has counterparty risk that we that we don't anticipate and I think that's I think that's something that companies should be planning for in one of their planning scenarios. What if how would we want to manage our balance sheet because it's still a real risk. One thing I know from from talking to counterparties of Lehman's back in 2008 2009 is they didn't necessarily know they were counterparties of them. They were peeling back the onion as one of my friends in securities ladies had been there we are again. They're our counterparty yet again and we never even knew. Max Pombis Mark as well. You are a fintech pioneer. You're aiming to democratize global savings and investment markets as well. What are the ramifications so far on your customers on your business and your business model dare I say of these high rates. Sure. First of all let me say it's great to be here. A very long time ago I used to be a fellow at the World Economic Forum and it's nice to be back here in Colonie. So I agree with Jorge that I would expect rates higher for longer. And the first question is what does it mean for savers. I think first of all we need to recognize that the period of zero and in the Eurozone negative rates was really tough on the average saver. So everyone who owned assets real estate or equities had their asset values inflated by expansionary monetary policy and basically automatically got richer. Whereas there's a vast amount of people who own very little assets and have most of their savings and cash savings and they de facto were desaved. So for them higher rates in principle is great news. The problem so far is that most banks in Europe and in the US are not passing on those higher rates to their savings customers. So what does that read. The average savings rate in the United States is 0.37 percent along those lines. Exactly. It's below 40 basis points and in Europe it's below 20 basis points. So I mean that's great for bank profitability but it's not so great for savers. And I think that's one of the areas where innovation and also FinTech can come in. I mean if you just look at Apple just having. Exactly. Launched a savings product. I think they published. They did almost a billion in the first four or five days. Another example would be a business such as ours where we basically provide a platform that makes it super convenient for savers to access more attractive rates from those banks who are willing to provide them. And we're at 40 billion AUM now and in the US also in last three months we've grown one billion. So I think what it does is two things. It provides alternative alternatives for savers but it also puts pressure on the big banks to give their own customer a better deal. Yes. Just all that then. I've got another question for you but I'll come back to that. So what happened to the legendary net interest margin model that was supposed to be so fantastic in a rising rate scenario because it wasn't supposed to be like this for bank valuations. It wasn't supposed to be like this with bank rescues on both sides of the Atlantic. We were supposed to see a house in days with net interest margins making everything so fantastic for the bank. Just I mean does anyone jump in. What happened to this golden scenario for banks that never happened. Oh hey. Come in. No but this this continues to be the case in most banking business models that the sensitivity to an increase in interest rates is a net positive impact. Doesn't feel like that. No it does. It does both on the liability and the on the asset side because of the timing of the repricing. So this this this is really happening. Now another issue is what happened in the in some banks in the US which for a variety of reasons they didn't have that positive sensitivity to an increase in interest rates because they they they had on the on the on the liability side. They had deposits that were not guaranteed. So they could go very quickly. So they either needed to reprise them or they would lose them. And on the asset side they just suffered the huge increase in interest rates because most of the assets were basically interest rates sensitive instead of credit sensitive. But now another question is whether we should see higher valuation in banks. And there I agree with you that with the current environment if we do not have a recession what we what we're going to need to see is the book value. I mean the the asset value of banks going up at least to the level of the book value. Although one of the anchor tenants right that that you've touched on this what Max is helping to disrupt which is banks the stickiness of that deposit source of funding was upended. And that was I think unanticipated that you could go on to your phone and move all your deposits out overnight because of what you saw on Twitter which creates much better situations for savers who aren't getting point three percent returns but is very disruptive. I think yeah I partly disagree with that because if you look at the I think we're going to see a much more competition for deposits and in particular retail deposits that are insured. And if you look at Silicon Valley Bank they had over 90 percent of their deposits were uninsured deposits. I think signature bank was also around 90 percent and first Republic I think around 70 percent. So actually I think insured retail deposits have behaved relatively stable and that's why I think you're going to see a growing push banks to have a higher portion of deposit insured retail deposits because if you're saver and you know all of your deposits are insured anyway there's obviously much less need to kind of run and take your money out. So I think one of the issues was actually not that technology generally had made deposits more fungible but that those banks were not really very well diversified in terms of their deposit base. And I think in Europe about 75 percent of deposits are retail deposits in the US it's about 50 percent. I was just going to say you've laid out a path of more insured deposits or what we've seen in the US is more deposits at least de facto insured. That's the other. Just one more to come back to you on specifically your area of expertise as well. And I just want to look at the ramifications of well the derivative of what we've seen with higher rates and the banking crisis we've seen in the States and what happened to the Silicon Valley Bank as well. Has it meant that investment and availability of capital for innovation and for technology is going to be diminished somewhat because even though the deposits are still there they gravitated towards perhaps safer institutions and say on the back of the speed of which they could do so. But has that meant that actually there is a less willingness and then we can open it up to you too as well for investing in higher growth areas of the market. I would say no. So I think there's two different angles. So if you take that specific angle actually platforms and technology and we're doing this partly can it also make it much easier to access deposits for smaller regional institutions or in Europe have a kind of Irish Bank offer deposits to German customers or a Spanish Bank offer deposits to to Dutch customers. So I think there's there's a role to play for innovation in a way to strengthen balance sheets and diversify funding. But I think what we're seeing more broadly in the FinTech space is that the underlying trends are still continuing. Digital is growing more customers are moving to digital. I think what's changed is valuation and and access to capital. So I think if we look at twenty one twenty twenty one it's fair to say with all that liquidity sloshing around there was some period of exuberance and there were deals being done that I think didn't make sense and at valuations that didn't make sense. And I think we've left space we're back in the atmosphere where the laws of gravity apply. And so I think there's much more focus now on business models on profitability or path to profitability to cash flows and a decent X multiple. And I think that's sustainable. I mean you'll just have more focus on quality versus quantity. And and I think that's healthy but like good businesses with solid unit economics will continue to get funded and maybe one if I think about we've been around for about 10 years. When we started the decade average of new unicorns created globally per year was four per year in twenty twenty one it was five hundred thirty four in one year that was probably not sustainable. But it's probably going to be a lot less than twenty one but still a lot more than when we started. Let's move on to a few of the other questions. I'm painfully aware we have nine minutes left and let's put you lot on warning that I expect a question or two from from our dedicated audience here who have foregone lunch in order to be here as well. Oh hey we're all the central banks see the job through everything we've talked about as well as the major risk we've already spoken about is what's happening with the banks as well. And whilst it looks like many systemically important banks are very strong and asset values seem by and large are pretty stable. Is the concern about banks going to actually mean that the central banks will not be able to see through the job on seeing off inflation or at least this high level of inflation. No I don't I don't think so. I think that after this abrupt increase in interest rates and they're going to want to wait and see how the transmission of this monetary policy runs through the economy. And this events this UK event and what has happened in the U.S. banking sector when you have real interest rates that are already positive gives you the framework in which you can wait a little bit to see what happens. Now the concern here I think is not in the banking sector but whether we're going to have some pockets of instability that we're not sure where they might be. But in a world where leverage has been very high because you had very low interest rates for a long period of time in which liquidity is not going to be as ample as before. You're not going to know when where the next problem is going to be. If you read one of the one of the chapters of the financial stability report of the of the IMF they basically set a map in terms of look at leverage look at liquidity but also look at interconnectedness because if the interconnectedness of pockets of instability don't go to the banking system that typically provide lending it need not generate a significant problem and thus central banks can continue focusing on inflation. That doesn't mean that we're not going to have instability but it means that it's going to be worse down the road if inflation doesn't come down to levels close to two or three percent and central banks are still there. Do you both agree with that and I'll just jump in with this because I'm pretty sure I heard Jay Powell at the last meeting saying that he still believed that the job of the central banks perhaps some of the heavy lifting can now be done by the tightening liquidity conditions in the banking sector because of the events we've just seen. So central banks will see it through without necessarily the help from the banks tightening liquidity. Karen do you want to jump in on this. Well seeing it through is consistent with what Jorge was saying. Lowering rates is not consistent with that so that does feel. So we're not going to see lower rates are we. I don't think that's the Christmas present that Wall Street is going to be getting this year. They wouldn't wait before Thanksgiving for the Halloween. They went early didn't they. You know they're eager. It just we have to remember how pernicious inflation is. It hits the lowest earners. It it is massively regressive. And it creates real crises for good reason. I mean correct me if I'm wrong the period of high inflation in the United States. It was two dips actually it kind of broke and then I mean that's what happens it breaks and then comes back and I think that's the fear is nobody wants to be Arthur Burns and watch it you know come back after all we learn about Arthur Burns experience. Max do you want to come in on this one. Yeah I would probably agree with that. I would. I can see a pause but I don't see rates coming down quickly for some of the same reasons. I think the political kind of ramifications of long term sticky inflation at rates to high is just to also giving historical experiences. Yeah it's very interesting to talk about the political implications of a set of institutions which are totally independent of course. We can have our questions about another. Does anyone have a question for our panel. This lady here just tell us who you are and thank you very much indeed for your question. Hi there I'm Lita Prima from BMO from Canada. Just wondering you were looking or we're speaking about banks corporations but what about the municipalities. I mean this is where there's a really great impact on the individual because then you've got property taxes that may go up. There's municipal taxes. They fund a lot of the transportation infrastructure and so on. So they will have debt that is also now going to be a lot more expensive and unless they're going to start raising taxes as well I mean we're coming into a vicious circle at this point. So I was wondering if anybody had been watching municipalities at all. I don't want to pick up on that as well. The side effects of this as well and who it's going to affect is it in municipalities we need to worry about or is there another part of the I mean you've already said if we're all looking at commercial real estate then that probably isn't the problem because we've all got it covered as well but I mean municipalities potentially. Right then of course there'll be massive reductions in commercial real estate in places like New York and San Francisco we're already seeing that impact. I don't mean to dismiss it but we're watching that. I do think to your question the state of Illinois got a nice free pass during COVID and now everyone remembers that they're bankrupt effectively in Chicago and the struggles there. It's been interesting to watch the migration of population which we've seen two interesting effects over this millennia for instance 2000 one is the the slowing growth of cities but tier one cities have become wealthier and wealthier and populations have been able to migrate to the excerpts and the particularly the excerpts not the suburbs were a sort of brief phenomenon during COVID but the excerpts and that I think creates is the sort of hope at the bottom of all of the important things you've pointed out in that Pandora's box in the sense that that is creating new drive for infrastructure we've seen the the potential for those urban environments but I don't so I wouldn't write off I can't speak to cities collectively but there the the dark spots that we saw before I think will they haven't improved in situation and there is a real risk of particular the pension level that's worth as you know worth watching. Thank you very much for your question. We have any other questions from audience. Okay well and I will carry on we have we have about three minutes left as well so where are all the greatest tensions where are the greatest vulnerabilities in the global system the global economy we're at a government level we're a bit of consumer level or regional level where do we see the greatest concerns. And again you've touched upon a few of them as well. Oh hey where do you say and then we'll ask Max the same question. So you have so there are lots of answers to that to that question but building on this one you have some business models that are going to be you're going to need to rethink whether there are viable in a world where interest rates are higher and the risk aversion is going to probably increase but that is not necessarily bad this type of things you have it in every in every cycle. So are you going to have bankruptcies you are. Are you going to have business models that are not going to be able to compete if interest rates are higher for longer. Sure but that doesn't mean that the economy as a whole is vulnerable enough not to be able to withstand this with a normal recession and not the type of recession that we had 10 years ago. So in a sense what I expect is that we're going to go back to a normal business cycle where some firms are not going to be able to compete some others are going to need to merge. Scale is going to be important. Funding is going to be different liquidity is not going to be as freely available as before. Now the big the two big questions here are one in this world where real interest rates are increasing are real interest rates are going to be higher than trend growth because if that is the case you have a fiscal sustainability problem. So if it's not the case you can you can cope with the issue. And the second is are we not seeing vulnerabilities in the system that are going to generate larger problems when growth comes down. And here we can look at the data but eventually there are lots of places where we do not have enough data to make a solid assessment. And this might be the case in non financial banking sector. But for now I think the vulnerabilities are low that R is going to be below G and we're going to have a normal cycle. Max come in. The tension and Jorge they're talking about business models being reassessed as well. That pretty much points a finger to perhaps a world that you inhabit as well innovation FinTech as well. Some of those business models aren't looking sustainable at a higher rate. But then actually this is a great exercise in seeing which actually are the good business models because the wheat and the chaff are being sorted now. Yeah so I mean in the FinTech space I think there are certain business models that are kind of benefiting from a high rate environment. Luckily what we're doing is higher rates are more helpful. If you look at Google search for savings products they're up like 3x from about a year ago and also bank demand for deposits going up. So there are business models where a high rate environment is helpful. The other business models I would think about areas such as buy now pay later where in a rising rate environment the risk of default goes up quite a lot. So I think you'll see a little bit of some business models doing better than others. In terms of overall risk I would ask all ourselves to almost do our contrarian risk index because after many years of Davos I almost find it's often the things that we didn't pay attention to in some of our discussions that in the end materialized. I can't tell you what that's going to be. Oh you could. I really was. OK so look we've got a final round we've already gone over just by a minute or so I think we'll let us off on that one as well. So just a final round really that the biggest ramification that each of you see in perhaps 30 seconds each from this current era of higher rates as well. What are the stuff for you Karen on this one. The biggest one is we are at the end of the era of globalization which in finance also means the end of a system which has the dollar as its apex. That's a big statement end of globalization end of global post globalization. Goodness me the global trade but I think that restructuring in finance to match what everyone believes is already happening in goods is going to be an interesting evolution over the next few years. Max maybe that's a statement from our own perspective but I think the general feeling was that we had a big innovation and technology and fintech boom now rates have gone up and this is all over and this is like 2000pets.com and I think the reality will be that we'll see many many fantastic businesses created in this time that will have massive impact hopefully for the benefit of many people and savers in particular. We've all got our favorite dot com from 2001 haven't we and whole hay to finish off. So I have five trends in terms of being optimistic about about growth. You can think in terms of climate change you can think in terms of digitalization you can think in terms of how migration and the change in retirement age might generate an increase in the labor force. You can think about liberalizations insofar as it continues and globalization. So those are those are the five big trends of growth. So what I'm worried about is the same as Karen is worried about whether this geopolitical conflict is going to not only erode the peace dividend in which we are living we have lived over the past 30 years but how much is it going to erode those five trends which is very interesting because that specifically wouldn't be where I would have thought that you would have said about the ramifications of high rates but actually the geopolitics and the concern about the ramifications of globalization that that that is obviously a very closely related subjects and something I'm sure we'll talk about a lot at a later day. So by and large I would say that this is a very optimistic panel in terms of the effects so far we wait and see we want to see what cumulative and lags to take the words out from Jay Powell brings us forth as well. No complacency but a little bit more relaxed from the central banks but the markets the markets have got this wrong your word pernicious I love that word as well that it can last a lot longer and be a lot sharper than many people had expected as well. So thank you very much. I just want to say before I thank the panel finally we have the chief economist outlook May 2023 edition which we've been referring to throughout the QR code if you want to have a good look at that and I suggest you do so is on your screens now but I would like to say in this what turned into a thirty four minute panel I was indulging with the time Karen Harris managing director macro of macro trends at Bane and Co lovely to see you twice today how lucky I am Jorge Silia is the chief economist at BBVA lovely to meet you sir and get your thoughts as well and Max von Bismarck as well great to hear things from your point of view here of course is the chief business officer and managing director razor and a special thank you to the hearty souls who missed their lunch to join this and so I bring it straight panel thank you very much indeed everybody. Thank you.