Exploring the Future of Alts Through the Prism of Global Economics, Geopolitics
The impact of global economics, geopolitics, immigration, and technology in shaping the future of the global alternatives industry was explored during an expansive discussion between John Sergides, MUFG Investor Services’ CEO, and Nobel Laureate Paul Romer to open the New York Alts & Private Markets Forum on June 5.
In an hour-long fireside chat, John and Paul discussed a host of topics, including the upcoming US elections, inflation and debt, investing in China, artificial intelligence, and a bold “charter cities” concept that combines elements of international business competition and immigration.
“As a business, we’re always interested in what is going on in the macro-economy because that impacts the products lines we develop, how we further diversify our business and how we protect ourselves as well,” John said.
Paul is a co-recipient of the 2018 Nobel Prize for Economics and former Chief Economist at the World Bank, who is now a professor at Boston College and directs its Center for the Economics of Ideas. He offered views on how the markets will develop following the US election in November, and the likely economic outcomes.
“I’m an optimist about inflation right now,” he said, adding that actual inflation is lower when comparing seasonal patterns year to year. “Inflation will come down and I think the Fed is going to actually acknowledge that finally and we’ll see some [interest rate] cuts this year.”
Interest rates are unlikely to dip as low as in the past but that could help eliminate economic “bubbles” and drive investors to increasingly consider long-term fundamentals again. “If we can return to more moderate, but normal positive real interest rates, there’ll be fewer episodes like the build-up for the financial crisis,” Paul said. “We may eventually see less financial instability, because we’re back to more normal real interest rates.”
In response to John’s question about US debt, Paul said, “As long as the United States is the global supplier of safe assets, it can continue to sustain the kind of debt deficits we’re seeing right now.”
As the industry continues to embrace new artificial intelligence technology, John noted the cost of hiring teams to produce models, “huge concern over the growth of models, and also the amount of data we create on a daily basis is enormous.”
Paul agreed, adding that the way AI programs use data is logarithmic, rather than exponential, which means “if you want to make the same small improvement you got from doubling data before, you have to double the data again, and each time you double, the total quantity used is even bigger,” Paul said. “The [AI programs] that will succeed will be the ones augmenting human decision-making rather than trying to replace people.”
Shifting to the US relationship with China, John cited recent comments by the Biden administration that labeled China as “uninvestable” and asked, “Do you think that changes in the future?”
“I think we’re headed into a period of intensifying military friction between these two countries, and I think it’s very dangerous,” Paul said.
China could use its large supply of US government treasuries “as part of the asset side of some institution that was issuing liabilities in some other currency, and develop another reserve currency,” he said. “The big problem they face is that they’re not ready to completely liberalize the exchange rate, because they don’t have a well enough regulated financial system yet.”
The concept of “charter cities” developed by Paul is one way to meld debates about international economics, geopolitics, and immigration and create economic behemoths.
“Urban scale real estate development is the biggest unexploited opportunity in the world,” Paul said. “If you took a piece of [unused] land, 30 by 30 kilometers, you could turn that piece of land into something that’s worth a $1 trillion.”
The concept follows the models of Singapore, Hong Kong or Shenzhen—one country rents unused land from a parent country, develops that land into a city that can embrace population and serves as a safe business center, trade zone or port, complete with the rule of law. The renter receives the benefit of larger GDP without immigration becoming an issue for its domestic economy.
He predicted that China could be the first country to attempt such a city but added that the US might easily follow.
“If they were competing that way, instead of trying to build more aircraft carriers, the whole world would be better off,” he said.