Mahindra, Moynihan, Schwarzman on Navigating Global Instability

Condition just a few days in the end of the week, right? I'm walking, yeah, just from walking around our fair city. Well, you know, Carol started to sort of tee this up, not only from your perspective, but if I think about what's been going on, we have the House of Representatives talking impeachment, we have Boris Johnson flying back early to London to deal with his Parliament there, we have an ongoing dispute that doesn't seem to be coming toward a resolution between the US and China, and it's Wednesday. So Steve, I'm gonna point to you.

It's very difficult for almost any government to function. If you come out with a plan, you have instant mobilization of opposition to anything you're doing. It even makes it difficult for companies sometimes with this roving band of opposition. And financially, you have a few weaknesses in the system. I think the European banking system isn't as strong, certainly as the US, which is in great shape. You have private investments in the technology... a closed circle among itself, and then it pops out into the real world, and the real world says, 'What are you thinking?' That's usually a wake-up call. But that part of the world isn't big; that's a relatively small set. And I guess any of us on this stage... and I'll finish because I don't want to dominate. When you have 13 trillion dollars of negative interest rates, I don't even know what a negative interest rate is. In other words, why would I take my money and give it to somebody, and for the privilege of them holding it, I have to pay them? It's not stimulative because banks have trouble earning money in that kind of environment. If banks don't do well, they don't grow their capital, they can't extend credit, and countries don't grow unless there's credit extension. This whole movement, particularly in Europe, to negative interest rates, I think is some kind of warning sign, some type of wake-up call. How did we get in that position? Why are we in that position? Not us as Americans, but us as financial people looking at the world. So Brian may know more than I.

I think Steve's point is right. There's the monetary policy decision to take rates as low as possible to accommodate the economy, accommodate growth. They're lower in this country than they've been historically, but they're still positive. In other places, they're negative, and there's a significant amount of it. I think there's a debate whether it actually transmits to the economy, because if you look in some of the countries where the rate structure has been negative for five years, the banks still have to pay consumer depositors interest because, to Steve's point, they're not gonna give us $100 and get 95 back and think it's a great thing. So I think there's a great debate the economists will hack out, but the reality is it's showing a weakness in economies there. It means probably more fiscal work, more reform work to stimulate those economies. And well, good luck with that.

One set of rules that you can understand, one law that covers an economy, it's the largest in the world, as opposed to multiple laws. So you're seeing the US continue to grow, unemployment low, and consumers continue to spend. So the question really from the macro sense is, all that parade of interesting things to ponder and worry about on a Wednesday is offset by 70% the US economy has been speeding up its activity all this year, and that is the biggest Chinese economy. So when is that tension gonna be really wrestled to the ground? That's the question.

Well, I put that to you because you look across a hundred countries, you're operating in a hundred countries, I believe. Are we at a breaking point?

But why does it feel... I know we talked so much about... to businesses and CEOs, they're hesitant to spend, but then you talk about the strength of the consumer. How do you reconcile those two, and are you still ruling out a recession?

Nobody... if you look at all the consensus, the 38 economists when I talked to David, I said, 'Look, there's nobody who has a negative sign in front of any of their estimates.' The bottom five probably average 5.5 for GDP US next year and stuff. So even though people say the probability is going up because of the uncertainty, the question is nobody's predicting it's going to happen. The fear you have is, to your point, it's only Wednesday, and what's going on? Will you get the consumer confidence to deteriorate? Right now, it's come up, it's come down a little bit. If that starts to happen, that's the worry. You do not see at any point in the last eight, nine years the employment levels being high, so that's always the good news. The question is what breaks that, and that's what I worry about. The psychology of business deteriorating somewhat again, high still very high but tipped over a little bit. When does a business owner convey to their teammates that it might not be as good for you this next year? Higher wages, a bigger bonus, more incentive plans, or you get to keep your job? We don't see that. Our middle market loans are growing at a faster clip now than they were the last few years, so it's all okay. And that's the question. I think the fear could cause us to back up before the data will show you.

Some of that fear and caution, Steve, comes from... about what it takes, but we'll have that commercial in a moment. But you do write extensively about China in the book, your experience there, the Schwarzman Scholars, your relationship with President Xi. How does this get resolved, at least to the satisfaction that the CEOs that Brian is talking about specifically feel good enough to start spending money again?

Yeah, I'll talk about that in one second. But just in terms of risk, I've always felt that this cycle, when it comes to an end, won't come from normal business cycle issues, because that seems to be... production of goods and things like that. I could be wrong, but I've been thinking about this for a few years, and we've got enough of these major things that could change people's attitudes. Weird full employment, so people have a good situation, but their behavior may change if they're scared of something. As to China-US, it's an interesting situation because it's basically driven by the fact that in the last presidential election, we discovered that 40% of Americans couldn't... education has really slipped dramatically over the last 30 to 40 years, and those people are very unhappy. They are demanding some type of change. Part of that change happens when they don't get satisfied with domestic solutions. Historically, with populism, you get angry at some foreign entity, and China's the target. It was pretty obvious that it was going to happen. I talked to the Chinese about that right after the election, and they were not sensitive to that. I told them, 'Don't worry about it, we'll...' But now, they said, 'Okay, well, if that's the case, we're gonna have to adjust.' Now China for four years has been growing faster than any major country in history. So whatever practices they have, which in history when you were a developing country or underdeveloped country, now we call them emerging markets, the United States did this in the 19th century. We hid behind tariff walls, protected our industries, didn't let foreigners into certain things. But now they're rich? Their GDP per capita is $10,000, ours is roughly 60. But when they started this sprint 40 years ago, I think it was like $400 a person. So this has been enormous progress, but they're still about one-sixth of us. And now we're demanding, our bottom 40% in effect, and also European countries have similar problems, that we're asking China to become a more mature country and join the rest of the world. Their attitude is, 'We're still poor.' So if we have to make adjustments, it's not our... and on the Chinese side, they're trying to figure out how far and how fast they want to get someplace. The two countries got quite close in May, at which point the Chinese just withdrew. They had agreed to a variety of things we thought, and then they looked at the whole and said, 'My goodness, let's not do that.' And now this is starting again. Meanwhile, what's happened in this two-and-a-half years is that the two countries have started, as a result of false starts and a variety of other tactical stuff, to sit in a very interesting place.

Figuratively and literally between China and the United States, how do you see it?

Bureaucracy and things that were difficult to operate have been dealt with; they can be improved, and everybody knows. I think the broader context here though is global trade. If the China-US situation will take longer, the question is what can we resolve in the interim? This is where, unfortunately, I'm not sure what happens given the politics in the situation this week. USMCA and things like that are critical to get done, because as much as India is a beneficiary, Mexico and Canada in trade with the US are beneficiaries. In a sense, it's a way to operate. Let's make it simpler: the wage scale in Mexico is actually lower than parts of China. They could use the jobs; there's a lot of people who could move manufacturing there. There are a couple things to knock out first, and one of them is USMCA. I just don't know politically if they push it through, even though I think both sides seem to want it. If they could push that through, that would be good and give more time to work on China.

So Brian, I want to stick with something you said in the context of the meeting that you had with Prime Minister Modi, which is clearly CEOs are stepping into a brighter and maybe higher expectation type spotlight. We hear it over and over again. Do you feel a greater responsibility now, especially given what's going on in Washington and London and capitals around the world, to speak out both on your own issues related to business but also social issues?

The idea of the purpose statement by the BRT, the work I do that we all do with the International Business Council and the World Economic Forum leadership for years, Mike's leadership on the climate, you pick your thing. The idea is we have to have companies that can do both: produce a great profit and make progress on the SDGs. So I think all the CEOs agree with that. The attribute where people say we're speaking out publicly on an issue generally comes from the need on that second, but it also reverberates the first. If you have teammates working for you, and you want... what we went through over the last five or six years on post-nightclub, Charleston, Vegas, Houston, Parkland, you had teammates in every one of those situations that led our team to say we ought to take a stand on something. It had to come out because it was our headquarters town; our people would not travel there. So what people are thinking is about me or something, it's not. It's about we have to represent the 200,000 teammates, 500,000 or 600,000 people and their families, and ensure them, pay them well, but also we need them to be successful and produce great profit and sustain progress on SDGs. That is the key. As long as we can do that, the investors and stuff should stay with us, and it gives us the permission and availability. But it comes from the view that our customers, our teammates, our communities, and our shareholders are more aligned. It's nothing new. We came out of the community; we were formed by people saying we need financing, to Steve's point, in this community 230 years ago. So start to think about we've been through all the impeachment... any day that means communities grow, that means we grow. So in India, we handle the same thing. We built a Children's Museum in Mumbai. Why? Because they never had a Children's Museum. How's that consistent? Well, that's what teammates wanted us to do to help out. So it's work on both sides.

Steve, I want to bring you back in because I'm curious. On the campaign trail, some of the candidates have kind of put private equity on their radar and said we've been happy with... but I am curious, they're saying private equity is responsible for some of the inequalities that are in our world. What do you say to that?

Real estate aside, we buy companies and we try to make them grow faster because when you exit, you get a higher multiple for higher growth. To do that, you have to invest in these businesses. They just don't grow faster because it's in your interest. So you put more capital in them, you come up with good strategies, and you drive growth. When you grow businesses, you typically need more people. So this is a virtuous circle. From a financial risk perspective, we went through the global financial crisis, and private equity... you are in typically for your investors, who are pension funds, regular people, firemen, government employees, corporate employees. You make double the stock market indexes. So basically, this is a really good model. In the 1980s, it wasn't so much like that. In the 1980s, there were only a few firms, and prices were so low that you could buy something and just cut costs, lay off some people, and you were successful. That world is just gone. With the kind of higher prices that you have to pay to buy anything today, you just can't be... situation whether it's in the retail business. But you must look at retail generally, and Brian would know more than I do. Retail has been with the disintermediation of the internet. The number of retail companies that have gone bust is huge. The same way, you could get a private equity company that owns a newspaper that was in this political treatise that one of the candidates came up with. What's happened to newspapers? The vast majority of them have gotten into trouble. So you can take one example and make something out of it. But just to give you context, the United States was 21 million... the number of total jobs in the private equity owned companies is 11 million. So when you look at the massive amount of companies, where do you get those 21 million people who lost their jobs? It's not from private equity. It's a very small part of the whole economy. So this argument is wrong. It's sort of a mistake, and I think there's an ideology that goes with it, and also terrible marketing on the part of the private equity industry.

Is it fair to say that when we look back on this week, even this very newsy week, the star, and I apologize to all of you, is gonna be a 16-year-old, Greta Thunberg, her statement about what the world is doing or not doing related to climate change. I'm just going to quote what she said to the heads of state: 'People are suffering, people are dying, entire ecosystems are collapsing, we're at the beginning of a mass extinction, and all you can talk about is money and fairytales of endless economic growth. How dare you.' That's a memorable issue. Are we not doing enough as governments and those companies to really face this, and are corporate leaders at least listening?

I agree with that. The reality is we have to make progress, and we have to make a lot of progress. It costs about two trillion dollars a year is the estimate for the environmental part of the SDGs, six trillion overall. All the charity world is 800 billion a year. The US government budget is only four trillion a year. So no governments could solve this, and no charity is gonna solve it. Who's gonna solve it? Capitalism, driving the change. From 2007 to 2019, we did 125 billion dollars of stuff around the environment. In the next seven to ten years, we'll do 300 billion. That is green bonds, that is... the United States is a wind farm financing. There's a tremendous business opportunity, but it's time for capitalism to drive it, because that's where the money will be. So it's how we operate a company, all of us have companies you operate, driving them to carbon neutrality and making that commitment. It's how we then finance the build-out. And the last part is, we can't be... in the Western developed countries, we cannot be of a sort that we will not allow other countries to have the energy that they need to develop. We have to produce the right energy form, sustainable energy for all. The last UN Secretary General figured out a plan and how much it cost. That is the critical thing. We can't be arrogant in the West or developed countries and say, 'Hey, you can't have the power.' We have to sit there and say, 'We will get you the power.'

You guys have HD investments over Blackstone, so I know it's just the compounding effect of everybody doing more and more. Is it going to be enough? There's a great debate every year for the last 40 years about that. The question is, if we do more next year than this year, and you get more people doing more, and you get the investors, not only the steel but also the mainstream investors, to say if you're not doing something on this, we're gonna start to take your money, not the oil companies but all of us, right? Then you'll see the compounding effect of that, and it is powerful. Just think of it, called an ambition loop, which is already in. We set an ambition three years ago about reducing our carbon footprint by 25% in three years. We did it in one year, so we made another rollover.

A saying of mine: yeah, I mean, really, there's not much trade right. What are we doing? Is it fast enough? Because I think one of the things that was brought up on one of the panels is we're kind of running out of time. You can't reverse what's done. So do we need to be more ambitious with our goals and policies? I read a book recently that said you should always go big. Yes, excuse me, I said I read a book recently that said you should always go big, Steve. Yes, well, that's one of the big takeaways. The hardest thing to do is change what people think and form consensus. I think on sustainability, that's happened. Virtually every large retailer... we hired a team to start putting in sustainability stuff. I know this sounds almost primitive, but on the roof of every one of these retailing units is some air conditioner condenser or something. It's what keeps the store cooled. We just sent somebody up to look at every one of them, and what you found is that a little rubber thing that makes some of these circular things do something like... we could cut electric bills by 15 to 20 percent. Who could be against this? The practices at the beginning were the problem, but what's happened is there's a sensitivity on these issues that has driven the business community to do all kinds of things that are basically... some of them are not even so hard, and they're really important. It's a mindset.

We only have a couple minutes, so we're gonna ask you to be kind of quick, but we'd like to end on an optimistic note, because we do feel like we're all challenged every day with some of the headlines that are coming out. So give us your optimism.

We went through the impeachment of President, we went through the civil rights issues, we went to the DNC with riots in the street in '68, '69, Bobby Kennedy, Martin Luther King. Twice as many people work in the US? Six million working less manufacturing, 80 million more people working. The unemployment new claims today that are filed on a Thursday are the same nominally as they were back then, and the population has come from 215 million people to 300-some million people. 80 million people more work, all because of the ingenuity in the US. That's a very optimistic way through this. If we can figure out if there's any configure wasters, Europe can configure its way through. It's just going to take some time. But you have to be optimistic that all the talent of 7.8 billion people in the world are gonna figure out solutions. We just have to get them working.

A special kind of head of a country, but what gave me enormous optimism is they went around part of the room, and in each CEO was talking about what they were doing in India. Each of these individuals were really amazing, what they were doing, what they were innovating, what they were creating, the way they presented themselves, the way they were conceptualizing how to expand. It just happened to be one country that I sort of looked at this resource that's really unique. The drive of these speakers, and I said, 'You know, we've got a winning hand long term, because there are people, and back of each of those people who are equally gifted.' I think that's a part of America we take for granted, or we don't see it. But anybody who's sat in that room watching, listening, had to be dazzled by the people who were in charge of substantial organizations trying to do really interesting things. And those people will do that in other areas as well.

Crazy headlines. All right, well, gentlemen, thank you so much. Thank you to our audience. Steve Schwarzman, J Mahindra, Brian Moynihan, and Carol Massar. Thank you so much.