After decades of trade liberalization, is the world moving toward deglobalization? Two experts in international finance assess the current geopolitical situation and how banks fit into the shifting currents.
Chana Schoenberger:
So welcome to American Banker's Leaders Forum. I have with me today two distinguished guests. We have Rebecca Patterson, who is the chief investment strategist at Bridgewater, which is the largest hedge fund in the world. And then we have Jean-Yves Fillion, the CEO of BNP Paribas USA, based here in the U.S, although it's a very large global French bank. Thanks for joining me, both of you.
Rebecca Patterson:
Great to be here.
Jean-Yves Fillion:
It's great to be here.
Chana Schoenberger:
So I'd just like to kick this off by let's discuss where we are today in geopolitics, that affect banks and the economy specifically in the US. Rebecca, do you want to start with the geopolitics angle?
Rebecca Patterson:
Sure. I think that sounds like a good move since Jean-Yves is going to be in a much better position relative to me to speak about the banks. So, you know, when we think about businesses such as banks, navigating geopolitical risks, this isn't anything new. This is table stakes. It's a type of the many risks that banks constantly have to navigate. I think what feels a little different today is just the breadth and the, the scope of the risks we're facing. And, and while there are many we could talk about, I would focus my comments on two of the more obvious ones, uh, Ukraine and China, uh, Ukraine, Russia, and China. And, you know, the war in Ukraine feeds through to economies. In many ways, it's hitting Europe obviously much harder than the United States, primarily through energy prices and energy prices leading to very rapidly rising, very high punitive electricity prices that are forcing policy makers to respond in ways that could increase their debt over time could actually increase already very high inflation rates.
Um, so there's no free lunch there in terms of how they try to alleviate the hit to consumers and businesses. That's the immediate hit, but there's also other cyclical and structural things that are going to fall out from this, uh, structurally you think about a country like Germany, where China's its largest trade partner, and it's gotten a lot of its energy over the last decades from Russia. As we go through these geopolitical risks, will Germany have to structurally reshape its economic model. And how does that flow through to the various economies of Europe and whether a US bank is doing direct business with Europe or not how the Europe economy and its markets fair, absolutely have an influence on US businesses and US markets. So I think understanding the ripple effects from the war in Ukraine matter for all US banks, whether they have global footprints or purely domestic.
And then with the second risk that I would focus on today, China, obviously we have a rising superpower, China, uh, really kind of having greater and greater tensions with an existing superpower, which is the US. And, um, sadly what we're seeing is countries kind of being pushed to pick sides and, and many trying to stay in the middle. Um, whether it's military security, economic access, trying to figure out how, how to align themselves as we see this decoupling between these two economies, at least to a degree. Uh, again, I think there are cyclical and structural issues at here at play that are going to flow through to banks, whether we're talking about restrictions for US banks investing in China. Um, could we see, for example, if we were hypothetically to have a conflict between China and Taiwan, would you see the same restrictions on US entities investing in China that you saw in US entities investing in Russia earlier this year?
Again, I'm just speaking hypothetically, but it's a risk that people are certainly considering today. Um, but even beyond that, how do you navigate the, the regulatory and the legislative landscape in the US towards China today, uh, is my understanding that we could have an executive order perhaps as early as this week from the white house, that would make it more difficult to make Ingo investments into China, from US entities that touch on certain sectors, that there'd be more scrutiny around those investments. Similar to CFIUS where we, uh, US government officials look at incoming investments from China to US entities and make sure there's no national security, uh, hurdle that they need to get over. And so there's, there's those types of risks around China, which again are going to feed through to US banks, whether they have direct ties with China or Taiwan or not, uh, because China given its economic heft, given its linkages with the rest of the global economy and markets is going to influence what's happening in the United States directly and in directly.
Uh, so I would, I would say that as the two big risks I'm looking at, although again, there's certainly more. And then one last comment for me, when I think specifically about what are some of the biggest ways this flows through to the United States, going back to the, the, um, the first comments that Chana made really, I want to think about globalization. I think this began well before the Russia Ukraine war, or some of the tensions with China, but we've definitely seen a change in globalization from the 1990s and two thousands. When we had rapid globalization, the last decade, we saw a plateauing of globalization and today I believe the risks are moving the other way that we could see outright deglobalization if not just a very lengthy pause. And that's partly because companies of various sorts across many countries are saying, it's not enough to have my lowest cost supply chain.
I need to have resiliency and resiliency from the pandemic led to people thinking about chemicals, pharmaceuticals, certain types of goods. Uh, the war in Ukraine obviously has led to people thinking about food and energy security. Um, the tensions with China have led companies to think about things like security with semiconductors. So you are seeing this shift and, and a recent survey by McKinsey. This was taken just before the war erupted earlier this year had 90% on look at my notes, make sure I get that number, right? Yep. 90% of respondents said they planned on at least doing some reshifting of supply chains regionalization within the coming three years. So I think a lot of this has not happened yet. It's ahead of us. Um, the other thing that's happening as a result of this de-globalization that I think is important to think about for US companies, such as banks is, um, what it means for fiscal policy.
You're seeing governments targeting fiscal stimulus in to a degree that we haven't seen in a couple of decades. The chips act in the United States is a great recent example, 53 billion to make sure we have a
resilient semiconductor industry here in the US. So we don't have to depend on a small handful of countries and companies overseas, but we're seeing similar efforts around the world. China is putting fiscal stimulus to support its own tech industry, FinTech, biotech. So it doesn't have to depend on the west. Europe is investing heavily in national defense, but also in energy security. And these fiscal stimuluses are going to go on for not just months or quarters, but I think the coming years and having that stimulus coming in the current environment, all else equal is going to make inflation relatively stickier. And that's going to be something that requires a monetary response that in our company's view may not be fully Des discounted into markets. So again, when I think about geopolitical risks, plenty we could talk about, but the two big ones what's happening with Russia, Ukraine, what's happening with China, to me of the many effects they're going to lead us to talk about the big one that I think has some tales that are going to last and affect the folks on this call today for the years to come is really what it means for globalization. Let me pause there.
Chana Schoenberger:
Thank you. That's a lot of great conversation starters. Let's switch over to Jean-Yves. Do you want to talk a little bit about how all of these winds are affecting banks?
Jean-Yves Fillion:
Oh, sure. And, uh, I think Rebecca, uh, very well described the exponentially complex world. We, um, are living and operating and, um, for banks it's really around two main, um, themes, uh, at least in terms of, uh, immediate impact. The first one is really for global banks, you know, where can they continue to operate, you know, uh, um, with safety, uh, and, uh, where can they continue to operate, you know, in an appropriate way. And for instance, recently you've seen most of the large US banks for obvious reasons, uh, announcing that it would be waiting from Russia. Uh, but it's not, it's not the only location in the world that, you know, global banks have to constantly adapt, adjust, um, just to make sure they remain, um, uh, safe and that they can deliver, you know, geopolitical, geopolitical situations are complex, but at times it's just, you know, making sure you can deliver to clients, um, in the most compliant way and safe way, then that's the first dimension.
The other one, and Rebecca alluded to it is, is sanctions and sanction is a complex world to navigate. Um, understandably it's driven by regulators, but not only it's driven by authorities and local authorities. Uh, if I look at the world of sanctions, you know, driven by the US and driven by Europe, uh, there is more and more convergence, but there are differences. And as a global bank, you have two understand every single nuance of these, um, you know, sanction programs to make sure you remain compliant. Um, and maybe the last point, which is, um, an important one to make. Um, at a time there might be some de globalization somewhere, somewhat the role of global banks is even more critical because in, in, in, in this period, which I hope is a transition period, there are the glue in terms of payments in terms of flowing in terms of trade, you know, this continues to take place and refer to I'm sure we'll speak about it later.
You know, supply chain and supply chain disruptions, global banks have a real world to play here to just, you know, keep everything together, irrespective of where, um, you know, these trends go. And just to end this comment on a more positive message, the, um, the banking system is, uh, remarkably rubbed. It it's, it's true for sure in the United States, it's true, uh, in Europe and particularly for the largest and more global banks, you know, these banks, including the firm I work with, you know, we've been heavily regulated. Uh, they are much better capitalized. Some would argue at times over capitalized and, you know, they are being stress test, you know, at times, you know, two times a year. And I believe that overall there are better managed. Then I think the, the, the banking system, I believe will not really have a role to play, but is, is equipped to, um, to, to, to hopefully help, you know, clients and hopefully the, the world economies to navigate the, uh, challenging, uh, forecast. We all expect.
Chana Schoenberger:
So just to go back to what we were saying a minute ago about the war between Ukraine and Russia, which, uh, is a war that everyone expected would last a few weeks, maybe a couple of months at most, and now it's gone on seven months and counting with no real end in sight. Um, it looked this week, like perhaps Ukraine was gaining ground, but there's no real telling whether this is the beginning of something bigger, just a, of, you know, a momentary victory. So it's, it's definitely not over yet. And it's so interesting because I I've been seeing a number of, of postings online from Europe. People exhorting the Europeans to pull together and end Russian energy domination by curtailing their own household use of energy. And it made me think of, you know, don't, don't, uh, you should turn your thermostat, uh, down in the winter wear sweater inside, turn off the TV when you leave the house, that sort of thing, all very retail strategies, but the, the idea of a shared sacrifice, which Americans have always found so difficult.
Um, it, it reminds me of the stories that my English grandparents used to tell about, uh, being in London during the blitz and how, you know, all the various things that the British people had to do, because there was this, they were very much under siege and I think it's, it sounds like the Europeans very much feel that way as well. Um, of course here in the US, we are not under direct attack nor is our energy really, that much affected, but we are seeing a lot of knock on effects from it. So any thoughts on what you think will happen next in terms of the financial system, as I guess with this is related to energy prices and supply chain instability because of this war,
Rebecca Patterson:
Maybe I could start with a couple comments and, and I'm sure Jean-Yves will have additional perspectives to add. When I think about, um, the hit from, from the war, especially when we take it to the United States, you're absolutely right. Uh, ha that it, the crude oil market is global. And so as oil prices rose particularly earlier this year, it affected every country, including the United States, although because the US is no longer a large net importer, we don't suffer from higher oil prices. To the same extent we did earlier, uh, decades ago, we do of course feel it through gasoline prices, uh, which we got, as we all know, close to $6 a gallon on a national average basis this summer. And we saw that, you know, the inflation that hits people in a psychological way, your gasoline, your vacation costs, your food costs for your summer barbecue really affected consumer confidence. And now as those prices have started to come down a little bit, you're seeing consumer confidence and consumer activity benefiting at the margin from that. So the crude oil effect from the war definitely has flowed through to the United States, both bad earlier and now improving somewhat gas is much more of a regionalized market. So it's, it's feeding through, into high electricity prices in Europe, very, very differently than what we're seeing here. Um, what I think is important though, for the US, from what's happening in the war in Europe is consumer and business confidence in Europe and activity in Europe. You know, we forget sometimes if, if you just have US equity exposure, you own the S&P you think, well, I just have exposure to the US economy, but we have so many multinational companies in the S&P 500.
And quite a lot of US companies revenues do come from overseas and particularly from Europe. So to the degree that Europe, you know, even if they stick together and the burden is shared across governments, across households, across businesses, this winter, uh, unless they get incredibly lucky and have a very mild winter and, or the war ends, uh, much faster than, than the consensus currently expects. I think you are going to see a negative growth shock in Europe. Uh, probably more, uh, deep than the ECB, the European central bank is currently forecasting. I think at their latest meeting, they had a GDP estimate of around 0.9%. We think the bias of risk is that you will have a contraction not, not stagnant growth, um, and that will flow through to US companies. So we'll see that as something that feeds into earnings of US multinationals and will continue to see some of those constraints on commodity prices, depending on how the war evolves.
Jean-Yves Fillion:
I, you know, I it's, so it's, it's, uh, it is so well said as it relates to the client dynamic. Well, first and foremost, I good or bad. I believe that this situation is making the US economy even more than ever the most resilient economy in the world. Um, for, you know, most of the reasons highlighted by Rebecca, um, you know, sitting between Europe and, and New York and having a good access to capital flows, uh, we've seen, uh, increasingly, um, you know, inflows of, uh, capital from, uh, outside of the US, into this economy, just, you know, elevating increasing the liquidity world that is already existing here being invested already to be invested. And from this standpoint, our economists expect actually, uh, over time, the dollar probably to, to, to get stronger, would love to have rabbi cash view on that as well. Um, and, um, and, and that's, that's definitely definitely a trend if I were to highlight differences and similarities between Europe and US here, while we see actually a fairly similar inflation rate and both central banks are, you know, fighting against it, uh, ECB, um, you know, a few days ago, uh, higher by 75 bps, by the way, there is any positive.
Um, I'm a positive person, always trying to find positive things, right. Uh, with this is finally, the Eurozone is back into positive, um, you know, right. And, and I think eventually it's going to be healthier, but the main difference, and I think, again, back to Rebecca's comment, this inflation in Europe is mostly or massively driven by the energy crisis. The inflation we face here is not, not only, but, uh, very driven by the supplies side of the economy, which I believe the ish fed continuing, and they will continue. They are not pivoting today. What they do, we will eventually, um, you know, uh, probably counter or control inflation going forward, which will probably make this economy even even more resilient. I can tell you, well, obviously this is where you get the best return anyway, given the level of the rate and it's being seen more than ever by all clients or investors are as probably the flight to quality today in this, uh, amazingly volatile environment.
Rebecca Patterson:
Maybe I'll just add quickly on the dollar. Um, that, that is a big part of my background. I started my financial career covering currency markets for JP Morgan. So, um, this is near and dear to my heart. Um, I, I agree, I think in the near term that the flight to safety flow and the US economy being relatively resilient compared to many of its, uh, rest of world peers, is probably bringing capital in and helping lift the dollar. What's different from history is, you know, we're looking at a dollar now on a broader basis. That's getting close to the levels we saw in the mid 1980s, which is when policy makers got together and agreed to depreciate the dollar, um, to avoid other ripple effects. That's not going to happen this time because of inflation in the United States. The federal reserve is absolutely thrilled that the dollar is so strong because it acts to help curtail inflation pressure here.
And so it's going to be very difficult to have a coordinated action to try to stabilize or bring the dollar down, given that the US needs that strong dollar today. So the dollar probably in the short term still goes higher. I would note though that there's, there's a volatility risk here that things could turn when you look at some of the vulnerabilities of the dollar, maybe not in the very short term, but further out, uh, the US now has a current account deficit. That's widening very quickly around 5% of GDP. Our timely estimates suggest it could be even larger. And so we have a large external financing need, uh, foreign investors as Jean-Yves alluded to are putting a lot of money here and by our metrics, the foreign exposure, just to US equities, forget to treasuries is at the highest levels we've seen in a few decades, probably around four decades.
And so there's a lot of positions here already. Um, and the risk is if something were to happen to make the US less attractive or to make other countries look more attractive and end the war could be one of those possible catalysts. You could see money leaving the United States, um, because people want to have more diversification in their portfolios. And given that large current account deficit backdrop and the high valuation of the dollar, uh, you could see a pretty quick dollar reversal occur. Again, that's not my view in the short term, but I think it is a risk that people need to think about, especially the banks that are, are looking so closely at currency exposures on their own balance sheets and on behalf of their clients, um, that we've got a lot of dollar pressures right now that they could easily turn the other way if the rest of the world outlook looks even brighter.
Chana Schoenberger:
Yeah. And most American investors are majorly in US equities and not in international equities. Right?
Rebecca Patterson:
Correct. Right. So again, if you were to see stimulus from China, perhaps lifting of their COVID zero policy leading to a reopening, and they had growth momentum, you saw some positive occurrence in Europe because of policy because of, uh, the evolution of the war. Um, you see, Japan is now talking about lifting some of its restrictions to bring tourist in and with the yen at over 140 against the dollar, taking a trip to Tokyo or Kyoto this fall is, has become unbelievably attractive from a value point of view. So, so there is, um, there, there is a, um, a chance here that, um, that we could see money going back out to, to get some of these valuations, again, not our view in the very short term, but something I'd watch for.
Chana Schoenberger:
Well, I'll be the first one on that plane I've been, I used to live in Japan and I'm dying to go back.
Rebecca Patterson:
It's a good time to go.
Chana Schoenberger:
Yeah. Sounds like lots of fun. Um, okay. So I would love to talk about inflation, widen that a little bit. I think we, we have all had, and everyone has had the personal experience of inflation, especially this summer. Everything's just more expensive, Just yesterday, someone tried to sell me a $10 tub of Philadelphia cream cheese to which the only possible answer is, are you kidding me? Um, and I would love to hear about how this is affecting the banks because inflation means that, you know, wages are higher. It means that clients are, are paying their own people more and they're paying more for goods, but they're also bringing in more in revenue if consumers will bear it. So what does this look like for banks?
Jean-Yves Fillion:
Well, it's, uh, it's mainly affecting our clients then consequently, obviously it's affecting the banks and banks have to adjust accordingly. If I were to look at the main ask of our clients recently would get back to the first one. It's still about funding, uh, medium term funding and working capital needs and, and supply chain is critical. Um, the second one, which is the one really to inflation is really, uh, risk management and hedging strategies. We've never had this level of inquiries request activities. You know, BNP Paribas is one of the largest derivatives banks in the world as it relates to, uh, hedging strategies across, um, across rates, uh, across equities, uh, um, and obviously more recently commodities. And that's, that's really the, the, the first will impact I can see on banks and particularly global banks supporting our clients, managing hedging. And, uh, as we just discussed, you know, hedging inflation in this country versus, uh, finding solutions for affiliates of US, US multinationals located in Europe or in Asia, uh, is a slightly different value proposition, otherwise inflation affecting banks.
But I don't think it's idiosyncratic to banks, obviously it's back to retaining the best talents it's back to, um, you know, combining attrition at times, it's back to making sure you, uh, continue to reward your, uh, employees and staff within the, um, current environment, which obviously is extremely inflationary. And this is obviously something that we are, are extremely focused on, which by the way makes, um, uh, uh, for banks globally, but for global banks specifically focusing on cost control on, you know, uh, the [inaudible] effect to remain positive on investing in further digitalization to provide more effectiveness and efficiency, and eventually continue to be profitable and product the bottom line. Very critical.
Chana Schoenberger:
Interesting. We just did a, a piece on supply chain finance this week, and, um, our reporter chased it back to ancient Mesopotamia, but it's such an interesting idea that if, uh, you know, that in addition to just financing things, you're actually financing suppliers. And in some cases, the suppliers of the suppliers, which allows everyone to get paid faster and have more liquidity.
Jean-Yves Fillion:
I read and I loved it by the way. And I love the historical dimension of, of the reference. Um, this is, you know, working capital needs, uh, historically always important, but never really a C suite discussion today. I can tell you, it's a C suite discussion. It's a CEO discussion with our clients. It's, this is a lifeguard. And obviously even more specifically for the more, uh, manufacturing driven, um, uh, internationally, uh, you know, uh, formatted of our clients, then here, it's really around, um, you know, providing inventory financing payment programs. Secularization is a, an important tool as well, to help managing, uh, in general, the working capital needs, but more specifically, uh, helping our clients navigating the, you know, uh, supply chain disruption situation is, uh, has become absolutely critical. It's about advising them on and you wrote on it very, very well by the way, advising them on helping them relocate by the way, not only what we call real domestication of supply chain, but, uh, what I see mostly these days is, is clients, you know, still looking if I make call it this way for cheap labor, but effective labor relocating locating some of their supply chains still overseas, but, you know, from, uh, uh, one country to a more effective country or a more, um, you know, uh, easy, easier to navigate country.
Other trend I see in terms of dividing our clients as well, we have presence in 72 countries. Then we have people in the field, we have boots on the ground and it's, it helps obviously giving guidance, uh, uh, the concept of diversification of the supply chain. Not so much of re domesticating is very, very important then, um, I, I would like to share, um, actually, uh, um, uh, a service, we just actually initiated with a, um, a great partner, Apollo and their, uh, insurance company Athene and actually a FinTech, which here assist our clients to move from today. Probably the, the not efficient anymore, what we call, um, you know, just in time to just in case. And here this, this product basically helps clients, uh, anticipate and help clients to build what we could, an inventory buffer, um, but in a cost efficient way, meaning we've managed with Apollo and BNP Paribas to provide the funding, then we own the inventory until the client needs it.
Then it's off balance sheet, it's cost efficient because they don't have to pay for it right away. And it's available. And the FinTech in this mix is helping when necessary clients to basically manage the flow and the logistics to make sure that the inventory will be ready where it's being needed. It's, I'm mentioning this because I think beyond this example, uh, which now by way is being looked into and quite, uh, actually, uh, looks very attractive to some of the largest US multinationals, particularly, but not only in the tech sector. This is to me, an administration where banks can play a role in this case, it's really injecting liquidity in the disrupted supply chain, uh, process, and, and, um, and hopefully it contributes and helps.
Rebecca Patterson:
And if I could just add, I think, I think what you just described, Jean-Yves, is so important when we think about not just the cyclical forces affecting inflation, but more the structural forces, uh, that could drive inflation and affect your clients, you know, really globalization and, and probably secondly, the climate transition, those are probably the two biggest inflationary forces that, that now are front and center that simply didn't exist a decade ago. And so to the degree, you can find creative, innovative ways to try to mitigate at least some of that inflation through providing liquidity, through changing how, and when companies pay for extra inventory, um, that's going to be important if enough players do that in the market, it can help again, reduce at least some of that new inflation pressure that we're seeing. That's going to shape the landscape the years to come.
Chana Schoenberger:
It's interesting.
Jean-Yves Fillion:
Oh, no, please. Oh, uh, just rebounding on, on my big comment as well. I, and you two mentioned it earlier. I do see, uh, some companies now, uh, embarking on the train of real investigation though. Um, you know, um, actually very recently, um, uh, a very large, uh, chip company. I think it's public. I can name them it's Intel, uh, and to diversify their sourcing of chips, uh, announced actually three major investments. I think to telling like over 90 billion of the next five years, that's really significant to really, uh, uh, improve and diversify and, and enhance what I would call their front hand manufacturing capacity. And these investments will be made in the US and in Europe. Then I, I see, I see this happening. I wouldn't say this is like the major trend, but I, now I see things I was not seeing happening before. As you mentioned earlier, Rebecca, I think the chief's act is actually a driver, uh, uh, uh, of that as well. It's probably based on my interaction with clients, it's probably easier to Rescate in this country. What's already very automated versus what's more manual because obviously the work for the labor, uh, availability is, uh, is obvious, still, I think, would be still an issue in terms of availability. And honestly, in terms of cost compared to the, uh, cost efficiency of, uh, overseas supply chain, sorry for interrupting, uh, just, uh, thought came from mind.
Chana Schoenberger:
No, no, not at all. I, I was just going to ask, if you could expand on what you were just seeing about, uh, companies, your clients are, are moving, they're not stopping their offshoring, but sometimes they're offshoring to, to different countries. They find it a little easier to deal with, or perhaps where the politics are more friendly to an American company. What are some of the newly popular countries where you see them going now?
Jean-Yves Fillion:
Uh, mainly, um, you know, obviously other countries in the Southeast Asia, uh, you know, uh, and, and, and obviously it varies depending on which sector you are in and, and, and basically your existing base as it started related to more friendly or more, uh, cost efficient it's as well, based on more diversification as well, even if what they have works well. And interestingly, I see some, um, um, relocation in, um, in Latin America, uh, um, um, Mexico is not new, but some of these country and Latin benefit from that are ensuring interestingly as well, and probably pre conflict, but, uh, certain countries in Europe and even, you know, from Eastern Europe were, uh, really a favor.
Chana Schoenberger:
Interesting. Yeah. Um, you don't think of Latin America as being a place where you would do a lot of the more sensitive manufacturing, but of course it makes perfect sense. It's not far,
Jean-Yves Fillion:
I think this is the right, this is the uncharted territories we've entered. Uh, I see. And I'm say saying this very modestly. I see, uh, a lot of paradigms. I was even myself, you know, believing into just, uh, just, just being, being challenged or, uh, being put on the side. It's, uh, I think it's, it's part of the volatility and uncertainty we were facing today.
Chana Schoenberger:
Okay. So I know that, um, you like to call yourself a positive person and that's great, but what are the, the negative pressures that US companies are going to face in the next year in terms of financing and how do you think banks are going to deal with this?
Jean-Yves Fillion:
Uh, I, I think re Rebecca highlighted some of them, most of them very, very well, you know, the, the headwinds definitely an ish fed and, uh, we expect another 50 bps and maybe 25 bps before year end until the central bank reach is what we call some sort of a neutral point. Obviously it impacts companies differently, depending on how much you can transfer the, uh, increased cost to, uh, to your, uh, end and, and consumers and clients. But I think that's definitely one, I think we just discussed another one that is really systemic, which is the supply chain disruption. Um, and the third one for the more global ones it's, uh, it's becoming increasingly complex to navigate, um, the, the, the world, for sure. Uh, I think we, we discussed one way for banks to help on the, uh, uh, manufacturing, supply chains, both in terms of advising, funding, being creative.
Um, the other challenges, obviously based on the volatility, hedging strategies, I think banks have a role to play here, uh, to, to really provide, uh, uh, advise these solutions across the whole spectrum. As I mentioned before, you know, rates and communities and equities and currencies, by the way, uh, uh, we've, we've been very active, uh, over the last few months to support companies in needs of funding and not only in US dollars or euros, but, you know, uh, supporting in, in pound or supporting in Swiss francs, which at times, uh, is provide some relief. And last but not least, as I mentioned earlier, uh, companies are still looking for funding, uh, working capital funding for sure, but medium term funding as well. And one of the challenges, and it's not yet here because these capital markets to me, even though obviously, uh, uh, with symptom volatility, but remain one of the most, uh, resilient, uh, cap markets in the world.
But, uh, high grade on the debt side has been quite resilient, even though issuers have to pick their windows. High yield has been more volatile. And what banks have been doing here, and we've been very active as well, is when clients didn't think it was the right window to, uh, issue. We've actually be, we've been lending more, uh, uh, to these companies providing, um, to funding turn loan until they can, uh, they decide the windows better. Then you would probably see banks, you know, using their balance sheets more and lending more to help some of these companies bridge, uh, the timeline between today and when they believe the capital markets can provide an effective solution. It's less the case in Europe, because as you know, here, 80% of the funding is provided by the capital markets, which I think is very healthy for the banking industry, because you can recycle your balance sheet at a faster pace in Europe, uh, not having the same developed capital markets. 80% of the balance sheets of banks are actually, uh, providing funding to the economy, which could be, um, uh, uh, a further challenge there.
Rebecca Patterson:
And if I could on, maybe I'd just add one more challenge, um, not, not to be the, the bearer of doom and gloom on this call, but as we think about the next six to 12 months, Jean-Yves talked about his firm's view on how high US interest rates could get. Um, so much is going to depend on how quickly inflation comes down. And that will determine if the fed can finish its hiking cycle sooner or later. Uh, we see some risk that inflation while moderating is going to come down more slowly than what the markets are discounting. And that in turn could suggest that the fed has to raise rates higher and, or just stay at high rates for longer before it can start easing again, you know, mainly we're seeing that stickier inflation on the back of expectations that wage pressures will remain high for longer, right now, the Atlanta, uh, inflation tracker, which we view as a better measure of wage pressure than some of the government reports it's running at 6.7% annualized.
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So I'm sure everyone on the call with employees is feeling that right now. Uh, how do you retain employees and pay them well with that kind of wage pressure? A and then the second piece of inflation we're thinking will be stickier again, moderating, but stickier than what's discounted is rents know is as mortgage rates, surge, and people can't afford a home anymore. They're being pushed to rent and rents reset more slowly. So even as housing activity broadly comes down in the coming year or so, uh, we think those rent pressures will lag that. And so I sail this because if we have this inflation environment that pros stickier and the fed has to raise rates more, I think that creates pressures on the economy that aren't fully discounted. We could see earnings come down more, that'll weigh on equities more. We could see bond yields higher, and certainly that wealth effect hitting, uh, the bank's clients, both through the stock and bond channel, as we saw in the first half of the year, uh, that could be a pretty big challenge. It erodes wealth on behalf of the clients and certainly for the public companies, their valuations could get hit. So that would be an additional risk that I think is going to be front and center for the banks going into 2023, if we're right on that inflation, just taking longer to come down than the market's discounting.
Jean-Yves Fillion:
And, and if I may, Chana and Rebecca, this is, this is why, you know, still today, um, while we've all seen the many activity and the trends obviously, uh, reducing significantly for obvious reasons, but we still see some of these debt markets quite active for companies who are con the ones who have access of this. You continue to do liability management, particularly with today, still inverted yield curve. Exactly. For the reasons you mentioned, Rebecca anticipating this potential scenario, it's still remains, uh, reasonably low rate environment today. And they, most of them, and we've been very active with them have made the executive decision to actually continue to, um, refinance their maturity towers, you know, in anticipation of the worst case scenario going forward as you very well described.
Chana Schoenberger:
Yeah. There are a lot of scary scenarios that that could happen, but hopefully they won't all come to pass. Um, an interesting question from the audience that I wanted to bring up, um, which is, it looks like the world is being carved up into two poles. What happens to countries that don't want to pick side? So for instance, India and the ASEAN countries financially,
Rebecca Patterson:
I mean, what, what we're seeing is that, um, there are lots of countries and I think about Southeast Asia in particular, although certainly not limited, uh, that, that want economic access to countries like China, which is still a huge growing economy, uh, absolutely enormous consumer potential market, but they also want to have the security of the US. And so they're trying to find a middle ground. I think we've seen that, uh, very starkly from countries like Indonesia when they're hosting multilateral meetings and trying to invite leaders from the different countries to stay neutral. Uh, you're certainly seeing that in countries like India, uh, which is, is really dealing with a lot of horrible shocks right now, and they're importing energy and, and other things from Russia, but trying not to alienate themselves from the US. And, and I think a lot of how this plays out going forward is going to depend on, on the type of tensions between the US and ch and China, the US being the leading player and what the US tries to either, uh, encourage other countries to do, or potentially coerce other countries to do.
And when I say coerce, I don't mean to be hyperbolic about that. I'm thinking about sanctions against Russia as a analogy, again, potentially in a worse case scenario. And so for now, you've got countries that are clearly aligned, and then you have countries that are in the middle and trying to figure out how to balance their interests. I, I don't see in the short term, them being pushed one side or the other, but I don't rule it out in the future that they might have to choose. And that would be a really unfortunate scenario, uh, for the global economy, which at the margin to me would be very stagflation area. I think it would weigh on growth. It would weigh on sentiment and at the margin, if countries have fewer trading blocks and fewer opportunities to reduce costs, um, that's going to push up inflation at the margin. So it would be really worse case outcome, not only geopolitically, but also economically
Chana Schoenberger:
That doesn't sound good. Not at all really.
Jean-Yves Fillion:
<laugh>, um, just a thought back to impacts on clients and economy, which, you know, beyond what we discussed, I, I believe, and this is the positive side of me that's coming back. Uh, hopefully I, I believe that while the conflict in Ukraine, obviously, uh, on the European energy crisis as inevitably had impacts on energy policy and investment in the near term, and we see some return to fossil fuel energy and so on, I, I believe actually that the energy transition will continue in the medium term and that ESG more broadly will continue to be a focus for clients, for investors, for governments. I think this is the trend. This is what I see from shareholders stakeholders, by the way, staff, in terms of sustainability and supporting, uh, sustainable finance, another place where banks have a role to play by the way. And I think back to the need for energy sources, diversification, I think that's, that's going to be even more important.
Just I'm looking at my notes, just, uh, uh, statistics I wanted to share. I mean, in spite of what's happening today, um, uh, I, uh, ESG corporate bond sales, uh, for the first half of 2022, uh, represented almost 20% of overall new issues volume as you know, green social sustainable and sustainably linked sales held up significantly better than the more conventional, um, you know, uh, regular, uh, debt issuances. I, I, I can share that if I look at the last, even at the last few months, uh, most, if not all of the, um, sustainability linked instrument, we underworld at BNP Paribas were massively over subscribed, uh, by, you know, any time, you know, five to six times, which, and I'm sure, Rebecca, would love to have your view on that shows as well, the investors appetite for this type of, uh, structures.
Rebecca Patterson:
Oh, definitely. I mean, when we think about both on the geopolitical side, where could countries find common ground? I think this is one of those areas where if we want to be hopeful, that's an area to be hopeful around it's in a, it's something that clearly affects the globe. And, and it seems like there's still more progress than not on a multilateral basis. And then from your point, Jean-Yves, on the flows and the demand, um, absolutely. You're seeing it in liquid equity markets. You're seeing in private markets that in terms of growth of sub-asset classes, sustainable or ESG or climate focused, uh, strategies continue to do very, very well. And I, I think that is a reflection of both, um, end user demand. People want to be helping change the world for the better. And again, it's something that, with all the geopolitical things that divide us today, hopefully that can be one that, that brings countries more together than not, um, which can be good for the future of humankind. Um, certainly good for the investors, a and even good for the banks that are able to offer those strategies to their clients and help facilitate them.
Chana Schoenberger:
There was an interesting piece in the Wall Street Journal this morning, which you may have seen on the, the California wind projects, offshore wind projects. And they're trying to build a number of, uh, of wind floating wind turbines, which would solve, uh, a decent part of California's energy problems and would go a long way towards making them, you know, carbon neutral in 10 years from now or so. But of course the, the problem is that they're a number of people who don't like the plan, some of whom you'd expect, commercial fishermen and the like, and others of whom are other environmental groups. And so then you get into this environmental trade off of which one is worse for the environment, not to have the wind or to have the wind power and have it hurt a marine ecology or some other type of thing. And it, it was sort of symbolic of, of all the problems that we have when we try to get together, you know, as a, as a, a global unit and say, this is what we're going to solve, because nothing is, is really on its own. Everything is affected by everything else.
Rebecca Patterson:
Absolutely. I, I think we could, we could go back to your Mesopotamia analogy from earlier that we've seen this throughout history, that one innovation that solves one problem can inadvertently create another, um, you know, you could go back to the dust bowl in the United States a hundred years ago, and it led to, this is a horrible event and it led to a migration of people to the west that helped develop those states and those economies. And it led to innovation technology and farming that increased our crop yields tremendously. So one problem created other solutions and then other problems, I think China joining the WTO in 2001, I mean, it, we saw global poverty levels fall dramatically from the globalization that ensued from that at the same time, it created a lot of inequality divisions getting worse within certain countries, as we saw migrations of jobs from one country or one sector to another.
And so understanding as we look at things like globalization today or climate, um, we're trying to solve for X when we solve it, what are the second and third and fourth order impacts that could happen? And are we making sure that we're thinking about all of them adequately now, rather than realizing a decade from now, oh, shoot, we missed this one unintended consequence, um, not an easy thing to do, but I think every time you see these cycles play out, you realize how important that exercise is to try to at least limit the number of unintended consequences as we, as we move forward on some of these big global initiatives,
Chana Schoenberger:
As much as we can. Well, the problem of course is we don't really have labor mobility, even in a place like the US, which has been historically marked by people who, you know, mark their, their transition to adulthood by getting up and moving to another place and taking a job and putting down roots and essentially seeing their family once a year at Christmas, that that's not really so much happening anymore. And certainly across borders, it's very difficult. You can't, you really can't move to another country if you don't have the permission to work there. And so you can, you can move capital, but you can't really move people.
Rebecca Patterson:
I, I hear you. I, I, haven't looked at statistics recently to see, uh, cross border migration among the developed world, but, but certainly within the US, you are seeing less labor mobility between states than we've had for quite some time. Um, so that's one of the factors keeping upward pressure on wages that even if there are more jobs available on the east coast versus west coast, making that up, can you entice people to change where they're living to take those jobs and reduce some of the inflation pressures that feed through to everybody? Um, and so that can become a, a pretty important constraint.
Jean-Yves Fillion:
Uh, and I would say not, not to mention that, uh, the working from home, the digitalization of <laugh>, uh, the labor is, is an a, an additional factor to what the two of you just, just, uh, mentioned.
Chana Schoenberger (
Definitely. And the other thing that we saw that really this is, and now we've gotten pretty far from banks, but that, that we saw during COVID is that, uh, it was very hard to have a family member who was in a nursing home or some other congregate care facility. And I think a lot of families, especially the ones who, who can afford it have now made the decision that they will not be sending their elderly members to live in those places. And instead we'll be taking care of them at home often themselves. And that means you all have to live in the same place. So you can't just move to Colorado because you like Boulder, you have to live where grandma lives or grandma has to go to Boulder with you.
Rebecca Patterson:
Well, and also if part of the workforce, I I'm, I wasn't aware of that. That's super interesting. And, and intuitively it wouldn't surprise me at the margin, uh, given the, the COVID, um, situations that happened, which were really unfortunate nursing homes and care centers around the country. But if part of the labor force left during COVID to take care of family members, and they're not all coming back, um, we need that labor supply desperately. And so if that's more of a structural shift than the cyclical one, even at the margin, I, I, I know I sound like a broken record, but all else SQL that keeps that, that labor pressure higher, which translates to the fed to bonds, to stocks all the above. So it's a, it's a really interesting point you're making Y Hannah and something I want to dig into because I, I'm not aware how much stickiness we're seeing in people who left to take care of families who aren't coming back yet.
What I have seen is that people who retired during COVID so far are not coming back. Most of the labor participation returning that we're seeing is coming from prime age workers, kind of twenties to mid fifties. Uh, and so normally late in the cycle, older workers, you know, they thought they might retire. And then they realized, gosh, my, the valuation of my retirement income has gone down. I probably need to work another few years, or I want to work a few more years between realizing life is short during the pandemic. And the fact that in this pandemic people's net worth went up, not down. It's very different from past cycles because of all the stimulus that took place because of the huge equity rally. Um, I think a lot of this older cohort doesn't feel the desire or need to come back to work. So that retirement cohort, that supply, I think a good chunk of it at least is structurally gone. So what you're suggesting, uh, ha is that maybe there might be another cohort that's not coming back to the same degree as we might expect. So that's, that's really interesting.
Chana Schoenberger:
I think so, well, we're nearly out of time. I just want to thank both of you for coming here today to talk to, to me virtually this has really been fascinating. I'm from DC, and I will take any opportunity to talk about wonky stuff like this.
Jean-Yves Fillion:
So it's been a privilege and a pleasure to be with the two of you, Chana, Rebecca, amazing discussion conversation. So insightful for me.
Rebecca Patterson:
Oh, thank you too. I, I really enjoyed speaking with both of you today and I hope I hope the remarks were useful for the audience.
