How to Handle the Only Constant: Change

[Music] hi again everyone and thank you very much for that very insightful presentation I am absolutely thrilled to be sharing the stage with Mr Gary Cohen so welcome to the region and thanks for being here today thank thank you so much for having me so first of all Gary needs absolutely no introduction but important to point out that you are of course a businessman and philanthropist you served as the 11th director of the National Economic Council and the chief economic advisor to us president Donald Trump between 2017 and 2018 so over the next few minutes we're going to talk about Gary's experience and also maybe just get his views on what's happening in the world of Finance Tech and of course implications for the public sector as well so Gary to begin our conversation why was it important for you to be here in AB Darby today and attend this event well it it's important to be here because you can see how vibrant the economy is you know Abu Dhabi Dubai the UAE it really is sitting in the middle of the global economy so you've got you you've got Asia out to the east um and we see how important Asia has become China we've got Europe and the United States sitting to the west and the Middle East really is the bridge um to these big dominant economies and when you look at what runs through this this part of the world from global trade to Global tourism um to technology to what's being evolved this has become a much more essential part of the global Finance global trade global technology world so being here and being involved and seeing what's going on it's not only in the finance World we've got cob 28 coming uh the the balance of the week so the the the UAE has really put itself in a dominant position to to drive uh mindset Drive opportunity set and really Drive thoughts and sort of the evolution of the world's markets and the world's thoughts and there's deep pools of public and private capital in our part of the world are you surprised to see wall Street's renewed interest in the region uh I'm not I I don't know if it's renewed interest um you know in my prior life I ran a bank for a a long time um we always had massive interest in the region I don't think anyone ever lost interest in the region yes we went on a two plus year Hiatus from traveling because of the inability to travel to the region but there was still enormous amount of connectivity and communication with the region now that travel has reor normalized and conferences are back and Gatherings are back in the region um Wall Street and the global banking Community is back fully embracing the region for the for the points that you you raise you know this is a a natural meeting ground for Sovereign capital for private capital for venture capital for seed capital for private Equity um even and even publicly traded Capital there there's companies that are involved in all sectors of capital formation coming together in the region we're going to talk about AI we'll talk about tech as well we'll get you to put your IBM hat on but first I wanted to focus in on what we've seen in markets through the course of this year and how we're setting up for 2024 I was speaking with Ray Delio on stage yesterday and one of the observations that he made was the fact that we really have seen markets rally through higher interest rates and renewed geopolitical risk as well whether it's us China Taiwan whether it's Russia Ukraine or of course the situation in Israel right now as well do you think this Market momentum has Stained power yeah look it this year is is has been quite an interesting year you know I I always say to people if I would have told you you know at the beginning of the year that the FED would raise rates that Ukraine Russia would be at war that there would be a um Israel Gaza Palestine War um and that corporate earnings around the world would slow down in growth and ask you to predict where certain indic values would be you would all be lower than they are today there would no one that would pick where markets are today the the big Miss in that sort of equation is we went through something that was so unprecedented that none of us understood totally how to factor it into the equation and and what we went through is we went through this Global pandemic and in the global pandemic most if not all governments and central banks went out of their way to put money into consumers hands to make sure the consumers could Main maintain their quality of life uh make sure they could feed themselves make sure they could heat their homes make sure they could buy their their quote unquote Essentials but in doing that they were giving them amount of money that they thought was essential to live your basic life that amount of money was substantially higher than the cost of basic life once you took away most of your normal expenses um you know no one was going out to eat no one was traveling no one was taking clothes to the dry cleaners no one was paying babysitting Services no one was paying dog watchers no one was doing any of those other natural expenses so the amount of money that was being put in the system was extraordinarily more than the average consumer would have needed to basically live their life so we came out of the pandemic with the consumer around the world being in the best financial shape they had been in in decades so they had paid down their credit cards they had increased their savings rates um and they had pent up demand and so we continue to see this enormous re-energizing of spending across the world from the consumer that was unable to spend money for two plus years who wanted who wanted to needed to had to go out and visit their kids go out and visit their grandparents go take a vacation spend somewhere with the family they've now renormalized to the other end of the extreme of spending that money and that has really driven the economic growth that I think everyone would have missed had I given you the first set of scenarios at the beginning of this conversation and we're in that scenario today we're in the scenario where the consumer continues to drive economic growth I think the consumer continues to surprise people the the the raise in interest rates around the world um has had some effect but not as much effect as one might think there's a lot more fixed rate mortgag below Market values today so as rates go up the number one thing it would stop is it was it would curtail purchasing power if you had to pay more for housing costs but it hasn't really affected housing costs so we're still seeing the consumer in relatively good shape when we still see consumer spending you we just got through the biggest five-day cycle of consumer spending between you know Black Friday Cyber Monday and every other day in the middle and it was trillions of dollars of gifts were bought over this weekend and we still see the consumer driving the economy around the world and we see that with rates in what I believe have in an environment where rates I think have peaked for this cycle okay so if rates are at or near Peak then how soon before we start seeing Cuts in the United States so I think we are higher for I think we are high for longer not higher we are high for longer I I I I I've said this many times I'll say it again the Fed was very late to the game you know the Fed was in this very strong view that we were having quote unquote transitory inflation their view of transitory was that yes all this money we put into consumers it was all being spent day one it was not a sustainable consumption path and be the supply chain for things they wanted to buy was still not working properly so once the supply chain got got straightened out the prices of goods would come down never believed it was transitory you just had to look at how much money was in bank accounts and it wasn't transitory so I I I now do think that the FED has realized it's not transitory it's sustainable the consumptive power exists the FED once they realized they had to raise rates you know they started slowly but moved very quickly they went from 25 basis point moves to 75 basis point moves relatively quickly they got ourselves the the 5% fed 5% plus fed fund rates and we're at a point now now where you know whether it's the fed's activity or the renormalization of spending or the wearing down of savings accounts it's all working together that we're sort of the end of this trend because the Fed was late they don't want to be early to leave when you're the last one to come to the party you have to be the last one to leave the party so the FED is going to be the last one to leave this party the economy will clearly turn down before the FED starts to cut in interest rates so I strongly believe that for the first half of 24 we will see no rate activity in in in in the fed maybe Q3 will start hearing Rumblings of some you know forward guidance of lower rates so I think for the the next basic six months we're going to be at these rate levels even though the market is already started to price in softer rates you know we've seen us 10year treasuries go from you know over 5% back to you know below 4 and a half% absolutely fascinating and fed fund Futures to your point are pricing in about a 100 basis points of cuts through 24 already exactly are markets getting it right you know I I think markets are probably more or less right um but markets tend to overreact and tend to react faster than the fed's going to react so I think in Direction the markets have it right in speed the markets probably are ahead of the actual speed of where we're going you know we we've had an inverted yield curve almost the whole time um and there were many many people that got on your network and every other network and said that is the precursor to recession there were many people like myself that got on and says it's an inverted yield curve it has nothing to do with recession um and and so that recession never came so I don't want to overly emphasize what the market is telling you but on the other hand I do think that the market is saying the FED is at their high water mark for for for rates the consumer continuously spending we see Consumer Debt numbers going up and hitting all record new record highs here we're over a trillion dollars of Consumer Debt in the United States right now the consumer is normalizing we're what I call my what I call the economy right now is we're back to a normal but we all forgot what normal is because we haven't seen normal for over two decades you know we went through a decade plus of zero interest rates we went through a decade of of quantitative easing zero interest rates and the FED doing what trying to see if they could create inflation there was you know if if you would have if you would have read the newspapers five years years ago and it would have been an article about the fed the article would have started like this will the FED ever be able to create inflation you know the fed's been at zero interest rates they've been buying mortgage backs they've been buying treasury Securities no matter what they do no matter how big their balance sheet gets it seems like we cannot create inflation so we've gone from the FED not being able to create inflation we now know the answer the FED can't create inflation but the market can um to us trying to unwind a shorter term inflationary shock we're back into a normal world so the the the 100-year average for 10year treasuries is about four and a half percent you know average inflation we're me we're running back towards the mean two two and a half percent so every piece of economic data if you look is is sort of heading back towards it's very longterm average if you look at these over hundred-year generational Cycles because we we seem to be running into that phase right now which is a good thing right and the reason I like asking people like you questions like this is because it's also critical for us in this part of the world what happens to the Federal Reserve in the United States ultimately impacts Regional central banks as well because of our currency Peg they have to move in lock steps so all of this is relevant to our audience here Gary what would you say is the single most important rare score Black Swan event that golf investors and capital allocators should be looking out for in the year ahead then look we we we've been through a lot of these risks you know the the the Middle Eastern situation I don't think anyone saw coming it's a hor it's a horrible horrific situation I think everyone would like to see a quick resolution the Ukraine situation um it is what it is again we'd all like to see a quick resolution I actually think the China relationship issue if I had to point Arrow up down or sideways I think it's getting better not worse I think the President Biden xiin ping meeting um was a good meeting it was a step in the right direction reor normalizing military Communications dealing with some of the fentanyl issues um you know the Taiwan issue is still out there I don't rate that as a very high Black Swan event you know everyone's talking about the real estate market and the mortgage market so that's not it I I been in the risk management business my entire life it's never the thing you're looking at that causes the problem so throw that one off throw that one off the table it's something that none of us are really talking about is and that's what makes it the Black Swan event so to me it would it would have to be something that we we we just don't see you know I I guess a massive move in the dollar you know we've all become accustomed to sort of dollar strength so a a massive move in the dollar would would but in many respects that would be helpful to a lot of countries that issue dollar denominated debt who've been squeezed so I don't see that it's not an obvious Black Swan event which should make everyone in this room very nervous because when when I tell you there's not an obvious event that means there's something really obvious right over here as I always used to say it's it's when I when I when I ran risk for a big bank it's like I I always used to say when I went home it's like okay we everything we that can happen we've taken care of so what haven't we taken care of because that's how we're going to lose money tonight so it's and it's the same thing it's sort of the same thing in the global economy I'll get you to put your IBM hat on now and maybe just walk us through some of the I guess other developments that we're seeing in the technology space and among them I guess Most Fascinating for us in the room right now is what's happening with artificial intelligence just listed in this presentation on stage here what do you see as the biggest opportunity the biggest risk when it comes to Ai and how is IBM thinking about some of these challenges so I would take artificial intelligence and unwrap it deeper than the last presentation um that was a chat gbt look at artificial intelligence which is the retail product so I understand why we look at it as a retail product we at IBM we're an Enterprise business so the question is what are companies doing when you see that chart where 80 90% of companies say they need to use AI what are they using it for what are the Enterprise functions for AI and I and I also remind everyone in the room that you know IBM has been in the AI world for over 50 years you know we we won at Jeopardy which is a which is a mind challenge game in the United States we won in 2011 Watson beat Casper off a chess in 2012 that's AI in its basic form that's if you move your your piece on the chess board here I'm going to move mine here and my my computer can think smarter f faster than your mind so those are all AI background material so what I'll give you examples of what we're doing and one was mentioned like code assist we've got a lot of companies big Banks who over time have accumulated 30 or 50 different software programs that may run on multiple different languages that they're trying to consolidate into one operating system instead of hiring literally thousands or millions of people hours to reprogram you can put the you can decide what your language of your bank is going to be and you can take an AI code assist machine and it can rewrite all of the languages you don't want into the language you want and it works 24 hours a day it works seven days a week and it has a zero error rate so it's it's it's very it's very powerful another one where we did at IBM and and and and we were client zero so we know it works we reposition 700 people out of our Human Resources office how do you take 700 people out of your Human Resources office well a lot of what human resources offices do is they act as facilitation facilitators for employees of a company you go out and rent an apartment or buy a house today you need a letter of recommendations saying oh I've worked for CNBC for x amount of years my salary is so and so and my title is so and so well you could call someone in HR ask them they jot it down they they a a day or two later they go look at the file then a day or two later they remember to send out the letter or you can go ask an HR chat chatbot say hey I need a letter of reference and I need it sent to this address and I need it sent today and it goes out real time and if it goes out to the wrong address it's because you put the wrong addressing so we automate that function that someone would have manually had to do do and there's a a a pretty decent chance there be an error and that person had zero job satisfaction going to look at your personnel file figuring out how long you've worked at a firm so we take that person now and we have them doing much higher value added things like going out and recruiting better talent to the firm helping us with our promotion processes so there's a bunch of real life applications um in the AI world that are really changing the way corporates think about running their businesses um environmentally we can help companies run their their business much more environmentally friendly in the pharmaceutical industry there's an awful lot of information going on on Pharmaceuticals um and you can go to the next step you can take Quantum Computing and artificial intelligence and put them together we're doing a project it will resonate here we're doing a project with the Cleveland Clinic in Cleveland where we put a quantum computer in there and they're taking the multiple genomes they have around the world because they've got more genome sequences than anyone because of their global presence around the world they're putting them into a quantum computer and they can literally see you know if we add this chemical mix into these genomes how does it affect all the organs in the body simultaneously so there's a lot of really interesting opportunity coming out of the the AI World on the Enterprise level not just the chat not just the do search faster for me level fascinating and I know we're out of time I'll ask you one more question before we wrap it up Gary um with regards to AI a lot of the promise has kind of been overshadowed by the conversation around the risks and I'm wondering from a US perspective do you think the B administration at least is getting the regulation right right now so look the whole issue of regulation of AI is a big long topic and we spend the rest of the day on it I'll try and do this succinctly you know we at IBM and I think most of the big leaders in AI believe that there has to be some highlevel guard rails on AI um what we we want to see is we want to see activities regulated we don't want to see AI itself regulated and and by that you know I I I I would almost compare it to the automobile industry like you can go out and build any car you want and you may go choose to buy a Lamborghini saw a bunch of them around last night I don't own one uh or you can go buy a little PUO um but you and I can both drive them the same speed on the highway because how fast we drive is regulated it's not regulated what car we buy and the car manufacturers can get creative as they want and Manufacturing those cars and you can spend a million and a half dollars and I can spend $10,000 we can both get from point A to point B but we're not stifling creativity so when you look at AI regulation we believe that we want to create as much creativity attract as many dollars into the system so we believe in open we believe that things should be open source so everyone can be involved we believe that at a high level there should be guard rails and at a lower level the government should agree on what activities need to be regulated so if you're using AI for bad activities those should be highly regulated you also should be highly regulated and you should have some burden to make sure your AI is not producing false outcomes it's not producing tainted outcomes it's not producing prejudicial outcomes it doesn't have biases in it and we think that's incumbent upon the AI model creators to go out and prove that you're not doing that we at IBM has gone has gone as far as indemnifying our models that we will not produce bias outcomes that we will take in all of the data that's present and we tell you where we take our data in from to show you that we're producing the best outcomes available on the data that's available in the world really interesting Gary I wish we had more time we'll have to leave it there but I really appreciate you joining us here at ww Finance week ladies and gentlemen Mr Gary