Transcripts
00;00;04;25 - 00;00;30;03
Tim Leary
Hello and welcome to the RBC Global Asset Management Navigator podcast. My name is Tim Leary and I'm a senior portfolio manager with the blue Bay fixed Income team at RBC. It's my pleasure to be joined today by Clay Lowery, Executive Vice President, Research and Policy at the Institute for International Finance. In today's episode of The Navigator podcast, we're going to discuss the mood in Washington leading up to the election cycle and the policy outcomes based on who takes power come November.
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Tim Leary
Clay, great to have you on the podcast.
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Clay Lowery
Tim. Thank you very much and a pleasure to join you. Even if the mood here in Washington is not that uplifting.
00;00;40;03 - 00;00;58;18
Tim Leary
Well, listen, we want to open up the discussion to how various scenarios can affect financial markets in particular. Now, our listeners come from all walks of life with a wide range of financial backgrounds, but I'm excited to have the opportunity to dig into some of their concerns that we all have, regardless of how financially savvy you may be.
00;00;58;21 - 00;01;04;27
Tim Leary
So let's set the stage here a little bit. What does the IIF actually do?
00;01;04;29 - 00;01;41;04
Clay Lowery
Is a global trade association. So we work with banks, insurance companies, asset managers. But we also do some work with central banks. And what we provide is basically a different, a variety of different things. A lot of research, so macroeconomic research, sovereign debt issues, etc., a lot of policy and regulatory conversation and discussion and comment letters, whether it's prudential regulation, digital issues or sustainable liberty and advocacy as well.
00;01;41;07 - 00;01;56;03
Clay Lowery
On behalf of institutions, obviously central banks that join us don't care about that. But but some of the private sector firms do care very much. We're very global. We're in over 60 countries and we have roughly 400 members.
00;01;56;06 - 00;01;59;12
Tim Leary
And how did you find yourself working at the idea?
00;01;59;14 - 00;02;21;19
Clay Lowery
I asked myself that every day. No, I, had a long career in government. I was at the U.S. Treasury Department. I started as a career civil servant. Kind of the lowest rung, there on the professional side. And I worked up until I was heading the international side, at the end of my career.
00;02;21;22 - 00;02;54;13
Clay Lowery
rnment, which would have been:00;02;54;15 - 00;03;03;06
Clay Lowery
Did that for about 8 or 9 years. And then I came to IAF five years ago, to be essentially the number two person here.
00;03;03;08 - 00;03;05;26
Tim Leary
Wonderful. So what's been keeping you busy?
00;03;05;28 - 00;03;35;27
Clay Lowery
Well, we're very busy trying to figure out. Well, first of all, we have a lot of big meetings that are coming up because, so every fall, the IMF, the International Monetary Fund and the world Bank, as well as the G20 and the G7 have annual meetings here in Washington, D.C. that's where I'm based. And, during that time, finance ministries, central banks and a lot of private sector institutions all get together to look at financial and economic world.
00;03;35;29 - 00;03;59;13
Clay Lowery
We at the IIF use that to take advantage. And basically bring in these type of speakers. And we have conversations about all the issues I was mentioning earlier. So we're kind of in full on mode in that, because that will come up in late October. So we'll be looking at some of the issues I mentioned, plus geopolitical risks.
00;03;59;16 - 00;04;09;14
Clay Lowery
And of course, we will be at that point less than two weeks out from the US presidential elections, which is clearly going to occupy a lot of people's time and space.
00;04;09;16 - 00;04;30;11
Tim Leary
I can only imagine. But you're particularly well suited to answer this question. So how do you see the, the power dynamic changing in Washington? What sort of scenario is your base case? And then I guess, what percentage chance would you would you give to sort of the left and right tail risk that there's a sweep on either side?
00;04;30;14 - 00;04;55;21
Clay Lowery
Okay. So, essentially there are two scenarios that play out. One, Donald Trump winning. And there's two scenarios that, play out for Kamala Harris winning. Let's start with Donald Trump.
00;04;55;24 - 00;05;15;04
Clay Lowery
If Donald Trump wins, which I would say is a little less than 50% chance. But who knows? I mean, most people would just say it's a 50/50 election right now. I was trying to give you some sort of an idea of where I think it is, but a little less than 50%.
00;05;15;04 - 00;05;45;05
Clay Lowery
So 40 lot roughly 42, 43, 44 percentage points of that is, he wins the Republicans win back the Senate and the Republicans hold the House of Representatives. Then there's probably about a five percentage point chance. So that gets you up to close to 50, a little less than 50, where Donald Trump wins and the Democrats actually hold on to the Senate or they take the House.
00;05;45;06 - 00;06;10;11
Clay Lowery
The reason I say that that's a very, very small percentage chance is because if Donald Trump wins, you would think there would be some coattails. And the Democrats, it's a very hard election for the Democrats in the Senate and the House. Okay. On Kamala Harris's side, let's say again, it's slightly above 50%. I would say of that, probably 35 percentage points is she wins.
00;06;10;14 - 00;06;36;07
Clay Lowery
But the Republicans either hold the House or they win back the Senate. So in other words, there would be a divided Congress to the, executive branch. And then I would give it about a 15 or slightly above 15 percentage points for Kamala Harris to win and to sweep. And why that's important is because that could actually have a that can make a difference on how economic policy is done.
00;06;36;07 - 00;06;59;03
Clay Lowery
So, so overall, the base case would be Trump wins and wins the Senate and House, Harris wins and wins, but does not win the Senate and House. Smaller percentage chance Harris wins and sweeps and much smaller chance Trump wins and has a divided, divided Congress.
00;06;59;06 - 00;07;17;08
Tim Leary
So basing based on the fact that it's unlikely we get a sweep on either side, let's talk a little bit about what can be done on the trade and immigration specifically related to financial markets, what can be done with the president's stroke of a president's pen, as opposed to, yeah.
00;07;17;08 - 00;07;26;18
Clay Lowery
Now, one correction, though, is that I actually think if Trump wins, I think the base case would be he wins it all. He wins the house and the Senate.
00;07;26;18 - 00;07;32;19
Tim Leary
So yeah. So there's about a 50/50 shot that the Republicans sweep.
00;07;32;22 - 00;08;04;27
Clay Lowery
Yeah. All right. So if you sweep, here's what the the key issue on the sweeping aspect is fiscal issues. And so for, for Donald Trump, what that largely means is that he can do the tax things that he would like to do. And what are those one, he I mean, he's been giving lots of presentations and speeches lately where he's clearly thinking about monkeying around with the tax.
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Clay Lowery
tax cuts, that were done in,:00;08;26;22 - 00;08;54;23
Clay Lowery
But and the but a fiscal deficit issue. But the reason why getting both the Senate and the House as well as being the president, is that what you would it will be very short, small, but fiscal issues are not necessarily going to be gummed up by the filibuster here in the United States, fiscal issues can be you can basically have a basic majority, and that's how you could win.
00;08;54;26 - 00;08;58;14
Clay Lowery
All right. So that's really important. If, for those in your audience who.
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Tim Leary
Because of the reconciliation aspect.
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Clay Lowery
Because of the reconciliation, you.
00;09;02;20 - 00;09;06;10
Tim Leary
Can always expand on that a little bit. Just explain how that process will work.
00;09;06;12 - 00;09;38;11
Clay Lowery
So reconciliation is this weird rule within the Senate that basically allows you to avoid the filibuster, but it can only be done on specific spending or tax bills. It can't be done like for instance, on, you know, some sort of a social issue or immigration or something like that. It can only be done for the specific type of fiscal issues, and you can only do it, by the way, once per Congress or, maybe it's once per year.
00;09;38;11 - 00;09;56;13
Clay Lowery
So, you'll see Republicans do this and Democrats do this. They try to kind of gear up a bunch of fiscal issues and try to do that. That's very important because if Kamala Harris wins and I as I said, I only give her about a 15 percentage point chance of winning both the Senate and the House, as well as presidency.
00;09;56;15 - 00;10;27;14
Clay Lowery
hat are supposed to expire at:00;10;27;14 - 00;10;48;16
Clay Lowery
So if you make if you're a family that makes more than $400,000 a year, your tax rates are going to go up. So that's an important point. Then. Also, it allows her to do some of the spending that she would like to do. It Trump or Harris, neither of them has been talking in ways that could be considered, fiscally responsible.
00;10;48;19 - 00;11;11;25
Clay Lowery
Now you did mention trade. So let's go back on trade. Trade is a different issue, which is. And and there will be arguments over this. But Donald Trump's argument obviously he has talked about that he wants to do pretty massive tariffs. That's something that he did in his first administration. He wants to do it in a more so so the he's talked about a 10% if not 20% across the board tariffs.
00;11;11;25 - 00;11;34;00
Clay Lowery
So that's from everybody. And for Chinese products it would be a 60% tariff. Now I don't know if he was going to do follow through on all of those things. The area that gets into an argument is there are different types of authorities that would allow him to do this. The authority that he talks about is something called EPA, the International Economic Emergencies Power Act.
00;11;34;00 - 00;11;56;00
Clay Lowery
So you would basically have to say there's an international emergency and we need tariffs to help resolve that. That's challenged in court. But it's a very difficult challenge. And so that would be a way for him to actually increase tariffs without having Congress do a darn thing. And so you could do that actually early in the administration and so forth.
00;11;56;03 - 00;12;12;28
Clay Lowery
Now there are those that say, you know what? That doesn't completely work. And you would have to go through the different types of authorities that exist. There are authorities that exist to raise tariffs, but you then have to go through a much longer process of an investigation and so forth. You can't just do it like a like a whim.
00;12;13;00 - 00;12;25;10
Clay Lowery
And so I think that the Trump administration would try at least on, on something like EPA. But you would have that one is going to be something where people would probably take them to court on it instead.
00;12;25;11 - 00;12;36;08
Tim Leary
So just to take a step back to stay with tariffs for a second, how can the Biden administration didn't rollback all of the Trump era tariffs?
00;12;36;11 - 00;13;03;23
Clay Lowery
Okay. Great question. So both political parties have now become fairly protectionist, at least by the standards that we had for the last 25 years. And the Republican side is pretty clear. This is something obviously Donald Trump cares about very much. And he views tariffs as a good economic policy tool. Good leverage tool for negotiations.
00;13;03;25 - 00;13;30;01
Clay Lowery
And, you know, it's an help and it will help the fiscal situation in the United States on the on the Democrat side, they are they're essentially the same as Donald Trump in terms of their belief in free trade, which is not a high belief. They, have not going forward with more tariffs outside of on electric electric vehicles from China.
00;13;30;04 - 00;14;02;25
Clay Lowery
And instead of just not rolled them back. And that's because essentially they've ended up in the same place and they've ended up there. Some would say because of, their view that this is something that unions and labor think is very important. And so, this is something that they can give. There is very little belief, at least within the Biden administration, in the idea of, free trade agreements or, or or market access for the U.S..
00;14;02;28 - 00;14;21;18
Clay Lowery
So because of that, they're the, the two administrations, the Trump administration the first time and the Biden administration that's currently ongoing are actually fairly similar on tariffs. The difference now is that Trump would kind of try to ratchet up to 11, so to speak.
00;14;21;20 - 00;14;34;13
Tim Leary
And now when you think about your clientele and your the financial institutions that you represent, what are their concerns around tariffs? What what keeps them up at night? What solutions are you trying to provide for them.
00;14;34;15 - 00;15;21;22
Clay Lowery
So I think look, they are there's very few financial services firms that I can think of that are big believers in tariffs. Now they also realize that it is become harder and politically harder. Excuse me. To push back against them very in a tough way. So, I would say right now the, firms that I hear their is the ones that are U.S based are concerned about what this could do to the economy and to financial services flows and investment and so forth, and lending capacity.
00;15;21;24 - 00;15;51;27
Clay Lowery
And they're concerned about the potential rise of inflation based on these tariffs. If you're internationally based, it is the concern of what, reciprocity. Do other countries around the world basically, engage the U.S in tit for tat type of trade issues, as we saw in the last, when go around when Trump raised tariffs, we saw countries around the world actually raise tariffs on the United States.
00;15;52;00 - 00;16;28;24
Clay Lowery
And what and that actually harmed, farmers in the United States who were looking for market access. And so the response from the administration was to basically subsidize those farmers. And so that's obviously a fiscal drain. And, so I think right now, the like is their concern. Yes, there's concern about what this does to the economy, what this does to our fiscal picture, what this does to international business, and what this potentially does to a reciprocity problem and fragmentation around the world.
00;16;28;27 - 00;17;07;16
Tim Leary
And so is there any concern around the flow of capital internationally. Right. Is it going to be you thinking obviously Basel three is clearly front and center given the regulations, the regulatory environment, the banks find themselves in? Does the change in the administration? Well, why don't we start with explain to everybody what Basel three is and the work you've done around it, and then how does one sort of outcome Trump versus Harris split versus non affect how banks and how we as folks who are interacting with financial institutions every day talk to me about why my dad back home in Buffalo should care what Basel three is.
00;17;07;19 - 00;17;13;03
Clay Lowery
Okay, so the first thing your dad back in Buffalo is going to care about is the bills are three and zero and.
00;17;13;03 - 00;17;16;18
Tim Leary
They yes we are, yes we are.
00;17;16;20 - 00;17;46;23
Clay Lowery
And Josh Allen looks like he could be on his way to an MVP this year. All right. So beyond that all right so Basel three Basel. Well first of all Basel is a small city in Switzerland. There have been capital accords, that have been put together for the last 40 years. The reason why was because there are how do you find international standards so that banks are not competing on how much capital they have?
00;17;46;23 - 00;18;12;11
Clay Lowery
e was an attempt in the early:00;18;12;13 - 00;18;43;06
Clay Lowery
el three, all the way back in:00;18;43;06 - 00;19;06;25
Clay Lowery
Supposed to be kind of a global minimum standard. And again they're called the Basel Capital report. So Basel that's a city record is the idea of you come up with an international agreement roughly. That doesn't mean you have different implementation. You just have a and then capital is what banks hold. So that now I actually hate the word hold but I it's it's how so over the.
00;19;06;28 - 00;19;08;24
Tim Leary
That most of it's borrowed right.
00;19;08;27 - 00;19;29;25
Clay Lowery
Yeah. Yeah. All the capital really is is basically to say you have your assets out there. Now we need to find ways to get to get your liabilities. So the liabilities can be debt that you issue or you can issue equity. I mean an equity is considered to be something that is more expensive. However it creates a buffer.
00;19;29;25 - 00;19;57;27
Clay Lowery
came up in last year, July of:00;19;57;29 - 00;20;26;04
Clay Lowery
Their approach on how we're going to do this whole thing, there was a massive pushback against it. And that's because the, they would have taken what was supposed to be the minimum capital standard and increased it by a substantial amount on an aggregated basis. The Fed's estimates are that it would have been a 19% increase. The, the banking world in the United States particularly went crazy over this.
00;20;26;04 - 00;20;52;29
Clay Lowery
So other countries are already implementing Australia, Japan, Canada, they're implementing Europe in the United Kingdom have gone through the process, but they're not implementing because they want to see what the United States is doing. So what we just saw was that the fed realized they, frankly, had made a mistake, and they they had to walk back. They had put they had made the standard to, gold plated, so to speak, too much.
00;20;53;02 - 00;21;12;20
Clay Lowery
And so they've tried to walk it back. And so now we're in a situation where they're trying to figure out what will be next. All right. Now let's return to Buffalo. Why the heck does any of this matter? I mean, besides being a bunch of technological gobbledygook that I just tried to try to say without saying that all the technical gobbledygook words.
00;21;12;23 - 00;21;39;23
Clay Lowery
What do banks do? Banks help provide finance and they provide finance to real economy. So your father in Buffalo, I don't have a clue what he does for a living. But basically, if he's in a business that needs finance, banks are usually one of the ones that supply that. So what you're trying to figure out with the capital standard is how do you get the balance right, so that banks can be profitable.
00;21;39;23 - 00;22;05;05
Clay Lowery
nancial crisis like we saw in:00;22;05;07 - 00;22;26;00
Clay Lowery
So I think that that is, for regular people who are not in this world. I think that that's kind of how you think about it is how does the financial system interact with the business and personal lives of regular people and capital? And, can have an impact on that?
00;22;26;02 - 00;22;47;12
Tim Leary
All right. So so let me let me just take this one for one second or so. The fed in your mind has gone too far in terms of the restrictions in place. Is that is that a function of, meaning in the sense that they've asked for too much capital? And is it the same amount of capital? Is part of it.
00;22;47;12 - 00;23;12;25
Tim Leary
Let me take a step back. Is that because the largest banks make such a large component of the lending in the United States, or is it the same amount of capital across all of the regional banks in the United States? Clearly, there was some volatility in the regional banking space the beginning of the year. And, you know, is it is it one for all or clearly there's different levels depending on how big these banks are, the too big to fail sort of notion.
00;23;12;28 - 00;23;34;21
Tim Leary
How do you see this playing out over the next. Well, let me depending on who taking it back to politics, what are the ramifications for regional bank lending for Main Street USA, and what are the ramifications for Wall Street? Depending on who takes office? Are we going to see those capital ratios? You know, the capital buffers lessened as a result of one particular candidate.
00;23;34;21 - 00;23;39;04
Tim Leary
And actually in your mind, what's better for Main Street?
00;23;39;06 - 00;23;59;27
Clay Lowery
Okay. So, a few things there. First of all, it's not my opinion. It's the Fed's opinion. The fed actually is the one who basically said that they are kind of changing what they did because they realized they had gone too far. Now we don't have right now, they've only given a speech saying that they're basically going to be walking back to this proposal.
00;23;59;29 - 00;24;23;19
Clay Lowery
ind of have problems in early:00;24;23;22 - 00;24;48;06
Clay Lowery
And then, of course, are much smaller local banks. The capital accords applied or they had without a doubt they apply to the biggest financial institutions. They also will apply to the kind of more regional medium sized institutions. And then they, does sometimes sprinkle down into how smaller institutions have to do, their balance sheets and how they, they manage their books.
00;24;48;09 - 00;25;06;03
Clay Lowery
We think there's going to be walking that there will be no question. There will be when the fed and the SEC and FDIC come out with their new proposal, which we're not exactly sure when that will be. But when they come out with that new proposal, there is almost assuredly going to be pushback from those who think you didn't go far enough.
00;25;06;03 - 00;25;28;17
Clay Lowery
You need to have higher standards, and there will be pushback from those that say you went, you still have gone too far. You need to push it back even further. And you're you're creating an unfair competitive landscape across the globe because other institutions, other, jurisdiction, excuse me, are not putting on as high a capital standards as you the fed are doing.
00;25;28;19 - 00;25;54;17
Clay Lowery
All right, now, let's go to the politics of this. So if Donald Trump wins the first thing he can do is he can appoint a new head of the OSC. And he probably. So this one's a little bit shakier. FDIC usually is is. So it's a there's five people. It's usually A32 majority for whoever's the president's party.
00;25;54;17 - 00;26;19;29
Clay Lowery
cally up for reappointment in:00;26;20;01 - 00;27;03;24
Clay Lowery
the rest of the governors in:00;27;03;26 - 00;27;30;29
Clay Lowery
For Kamala Harris. She has the same things about and appointments and so forth. The Biden people who have been appointed are the ones who are right now trying to figure out how to implement. Now, Kamala Harris may have different viewpoints. I don't think she's expressed huge viewpoints on this so far. But if you go with the continuity theory, then you would think that she would be trying to figure out how do we get this to work and to implement.
00;27;30;29 - 00;27;49;27
Clay Lowery
't happen until at least late:00;27;50;00 - 00;27;56;07
Tim Leary
Well, thank you very much. And then my next question how often do cryptos crypto come up in these conversations.
00;27;56;09 - 00;28;03;28
Clay Lowery
So crypto comes up a fair amount. And then and I'm going to unpack that a little if you don't mind. And.
00;28;03;29 - 00;28;04;14
Tim Leary
00;28;04;16 - 00;28;26;15
Clay Lowery
And if you do just shut me off okay. So so crypto depends on how we look at it. So crypto has I always think of crypto as digital assets. And so there are a variety of different digital assets. There are the ones that central banks are talking about creating, which is called a central bank digital currency.
00;28;26;15 - 00;28;58;24
Clay Lowery
And there's both a retail side of that and a wholesale side of that. Right. So that's one bucket. There's a second bucket which is essentially what are known as stablecoins. So these are digital assets or tokenized assets that are backed by something like a dollar or they're backed by a reserve. And then there are crypto currencies, which are basically digital assets that are created by tech, that technological factors, or, and, and, and actually cryptography.
00;28;58;26 - 00;29;23;08
Clay Lowery
Why I break all that down is because I think if you look at financial institutions, they are very excited about the idea of sort of building the new foundations, the new in for, technological infrastructure, for how a payment systems could work in the future. How can you take tokenize deposits? So, in other words, a digital form of deposits, and actually do something with that and create a platform?
00;29;23;08 - 00;29;57;15
Clay Lowery
And that's something that if we're actually helping private sector and, central banks do at the same time, banks have to intermediate, that's what they do. And so there are clients out there who want to actually conduct business in these different digital assets. But if you make it too expensive through regulation for, financial institutions to do that intermediation, those clients will seek financing and intermediation from others that are maybe not necessarily in the regulated system.
00;29;57;18 - 00;30;28;03
Clay Lowery
So financial institutions, whether they're banks or they're all trying to figure this, this, source out. And so I think that's really important. Now, let's bring in politics in the on the political side, the United States is rare in that we actually don't have legislation that kind of has a framework around this. What right now we're kind of regulating, which that's referred to as regulating through enforcement, whether it's the SEC or the CFTC.
00;30;28;06 - 00;30;53;28
Clay Lowery
approaches that were back in:00;30;54;01 - 00;31;23;03
Clay Lowery
President Trump has obviously recently come out very much kind of in favor and gangbusters on crypto assets. In fact, I think he's actually he and his family have come into investing in some sort of a digital asset themselves. The I think Kamala Harris is also trying to be proactive and positive about we need to come up with a framework, but probably not nearly as aggressively as president or former President Trump.
00;31;23;03 - 00;31;34;22
Clay Lowery
So, I think that there are divergences between the the two political parties on this, but there but maybe the divergences aren't as wide a gap as some people would think.
00;31;34;25 - 00;32;03;09
Tim Leary
So the divergences that happen or that are there between the two parties is one thing. But where do we diverge relative to the likes of Europe and really China? You know, was I think about central bank activity and some of the things that China does to stimulate its economy. You know, there are at a time where we are global, it feels like we are taking a more protectionist approach to trade in the United States.
00;32;03;12 - 00;32;21;21
Tim Leary
And it feels to me that crypto would be sort of a way to skirt that system, potentially for some. And unless I'm putting words in your mouth, it feels like a way to transact globally without outside of the regulatory framework if we don't do it the right way. So what's the right way to do it? And what are your clients asking and thinking about?
00;32;21;27 - 00;32;27;28
Tim Leary
And then I really want to kind of get into you could if I'm if I'm not mistaken, you were just in China recently, right?
00;32;28;01 - 00;32;45;26
Clay Lowery
Yeah. So let me do the international, first and then I'll kind of hit on China. So I think that, in terms of central bank digital assets, or CBDCs, there are different, different viewpoints around the world. I mean, a few years ago, China was kind of a leader in kind of coming up with central bank digital currencies.
00;32;45;26 - 00;33;04;22
Clay Lowery
There was this all this literature that said about literature, there were all these opinions that came out that said that this is going to create a national security problem, that this is going to basically leave the dollar in the dust, that, that could create financial stability in the United and the United States is way behind the curve.
00;33;04;24 - 00;33;09;25
Clay Lowery
I found most of that to be, I don't want to swear on your program. Hogwash.
00;33;09;27 - 00;33;12;12
Tim Leary
I will go with hogwash. Thanks, Clay.
00;33;12;14 - 00;33;34;11
Clay Lowery
And so, and my rationale is, is, first of all, this is all new, and nobody exactly is sure how it's going to work. And so if you're not first out of the box, that doesn't mean you're last means also, you might not be making the same mistakes as everybody else, and you can learn from those that do make mistakes.
00;33;34;13 - 00;33;59;05
Clay Lowery
Secondly, what is exactly the purpose of these things? So that's been a big argument. And so you so there are differences around the world on how we should look at it. I think in the United States, I think that a lot of I think the Federal Reserve is really not that interested in what's called a retail Cbdc. I think they are thinking about how does a wholesale Cbdc potentially work, along with, as I mentioned earlier, tokenized deposits.
00;33;59;08 - 00;34;21;27
Clay Lowery
So I so I think that that is where the system will continue to grow. We need to come up with legislation, as I said, that creates a better framework for the whole system. In terms of China. I was there, about a week and a half ago or so. And, I was I was there to give a presentation on some, a number of things.
00;34;21;29 - 00;34;49;02
Clay Lowery
And I talked mainly to, a lot of financial services players. So I didn't go to Beijing. I went to, Shanghai. So I was not really talking with the government. I was talking to the, private sector. And I have usually been a, I don't know, optimist is way too strong a word, but I've usually been a fairly neutral, if not slightly optimistic viewpoint on how China's economy is going.
00;34;49;05 - 00;34;51;24
Clay Lowery
I came away from these meetings.
00;34;51;27 - 00;34;54;23
Tim Leary
Would you like some Chinese real estate bonds divisor?
00;34;54;26 - 00;35;14;25
Clay Lowery
Yeah, exactly. With all exactly the other opinion, which is I've never I mean, you know, I've been hearing about China, the pessimism of China's economy for 20 the last 20 years and for 20 years, frankly, there's been a lot of people who've been wrong. But right now I am being some of the pessimism that I was hearing there.
00;35;14;25 - 00;35;40;21
Clay Lowery
And so that was pretty negative. I mean, the real estate bubble bubble, which you just mentioned is basically it didn't pop like it did in the United States. It's been kind of a slower deflation, and you just don't know where is the end point. And I think that that has created a bit of concern. It's hollowing out those that have made it to the middle class because real estate was an asset that they could be purchased in.
00;35;40;23 - 00;36;08;04
Tim Leary
And speculated on, which is I mean, that's the correlation, right? Like it was speculated on throughout the middle class in China, and the government was there to grow that, you know, grow the modern apartment building and development throughout the entirety of the country. I guess so. I guess my question is from the from an economic perspective, did you get the sense that the slowdown there is going runs the risk that it's going to be widespread or there is contagion there?
00;36;08;04 - 00;36;22;02
Tim Leary
And from a bank, you know, looking through that banking lens from your client lens, in the private sector lens, there, did you come away more bearish or less bearish from as a general walking as an optimist that you are?
00;36;22;04 - 00;36;37;07
Clay Lowery
I'm not much of an optimist, but the, but I did come way more bearish. And I think it's because of a few things. First, confidence that I saw from a lot of people I talked to that are based in China. Some of them work for Chinese headquartered firm. Some of them worked for European firms or American firms.
00;36;37;07 - 00;37;00;27
Clay Lowery
But they're they're Chinese. I walked away that their confidence is very low. All right. So then all right, so that's confidence. Fundamentals have become very shaky. You mentioned real estate. Also if you look at the local government level the debt levels are very high. Consumption has been decline meaning credit creation is at an all time low right.
00;37;00;27 - 00;37;31;16
Clay Lowery
Then if you take policy levers. So the biggest policy levers are fiscal issues and monetary on the fiscal side there does not seem to be the desire to use them. On the monetary side, most of the measures that we've seen have been slightly ineffective or not being used now, just today, as of September 24th, the PBoC, the Chinese central bank, basically came out with a series of steps to try to actually stimulate the economy.
00;37;31;19 - 00;37;53;15
Clay Lowery
We'll see how effective they are and how big they really are. But, but I think that it is a little bit of concern in China, first of all, that they have deflation. And then secondly, that kind of to my point, which is like it's it's kind of now becoming harder and harder to see where economic growth is going to really come from.
00;37;53;18 - 00;38;13;27
Clay Lowery
So I'm a little bit negative now. How much does that spread? You know, we'll see. I mean, obviously, I'm sure that it is. One of it is having an impact on commodity markets because China is usually the big Chinese demand, commodities that drives the price up. And we're not seeing that as much as we used to see, because the demand is not nearly as high.
00;38;13;29 - 00;38;24;04
Tim Leary
And well, within financial services. Do you think there will be more more of an American presence in Chinese financial services five years from now or less?
00;38;24;07 - 00;39;00;07
Clay Lowery
I can say that I think China has tried to open up its financial sector to greater competition. This is something I worked on a lot when I was in government, but that was a while back. I felt like we would make incremental, successes. I think that things have actually gotten better and there's more liberalized market. However, it's not as it's not that it it's becoming harder to invest there, but it's not necessarily because of governmental problems in terms of not allowing you to which there are some of those, but it's because a lot of investors aren't as interested.
00;39;00;09 - 00;39;20;27
Clay Lowery
Because China doesn't seem like a great investment, right now. So I think from financial services perspective, in terms of whether or not there will be more American firms there or something, I, I don't really know. I know that, there's bipartisan consensus here in the United States that, I mean, that I mean, the government officials don't like China very much.
00;39;20;29 - 00;39;33;06
Clay Lowery
And so, the private sector is probably a lot more careful about what they do and say about investment and so forth into China because of political concerns as much as anything else.
00;39;33;08 - 00;39;47;27
Tim Leary
Staying international, what have your clients been most focused on, or what sort of questions have they been asking you about the Middle East and the price of oil, and what the conflict in the Middle East does for their business life?
00;39;47;29 - 00;40;14;08
Clay Lowery
Yeah. So, I mean, I would say the biggest question now on the Middle East is, is a little bit different than when this started. So it started obviously, and not, last October when Hamas, which is a terrorist organization, essentially invaded, Israel. The concern at that time was, would this metastasize to other parts of the Middle East?
00;40;14;08 - 00;40;48;05
Clay Lowery
So the Israel conflict, when it drag in Iran, would hit Dragon Hezbollah, which is the organization up in Lebanon. And could that therefore, affect supply chains and potentially affect different economies in the region, particularly Egypt, that has now changed, I think, and instead we are I think what the concern would be now is right, there has been a change.
00;40;48;05 - 00;41;35;28
Clay Lowery
Clearly over the last few days. We've been seeing, that the conflict between Israel and Hezbollah in Lebanon again is becoming real. And, so if is there a settling down or do things continue to, as I said, metastasized? And does that bring the United States more directly into this situation, which so far the United States has been has largely been a supporter of Israel through largely military means, probably some financial but largely military, but that's more like equipment and so forth, as opposed to getting more directly involved.
00;41;36;00 - 00;42;01;29
Clay Lowery
The only time I think the US has been directly involved is when Iran launched a number of missiles into Israel. This was last April or this April, excuse me. And the US, along with Israeli forces and others helped basically shield Israel from this. Clearly this can this is a large concern in terms of does this lead towards, frankly, a wider war?
00;42;02;01 - 00;42;18;19
Clay Lowery
And what would that do to the economy? Just as I mentioned, to supply chains kind of do something to commodities and so far that we haven't seen that. But that's probably the biggest concern that at least when you hear about.
00;42;18;21 - 00;42;28;28
Tim Leary
And so who are the power brokers in DC as it relates to, you know, behind the scenes in political or politicians ears talking about the Middle East?
00;42;29;00 - 00;42;52;06
Clay Lowery
So I think this one goes to the very top. I think this is something that the president of the United States is quite involved in. Obviously, as secretary of state, you've seen multiple missions by Biden administration officials to the Middle East to try to see what they can do about creating some sort of an environment to allow for a ceasefire.
00;42;52;08 - 00;43;23;26
Clay Lowery
I think that, it is becoming harder and harder to see that given again, some of the issues that are popping up between, now Israel and Hezbollah and as opposed to before it was Israel and Hamas, as we all know, there there remain many hostages taken by Hamas, that are still, well, hostages. So I think the power of this is probably the highest levels of diplomacy that the United States has.
00;43;23;26 - 00;43;26;22
Clay Lowery
These are the people that are involved in this.
00;43;26;25 - 00;44;03;26
Tim Leary
I guess where I was going with the question is more and you could ask the same question around, you know, trade with regard to tariffs with regard to China, with regard to international. I mean, you like, who are the actual agencies or lobbyist groups and like, what are they really after? If you were if you were one of our listeners at home and you wanted to get a sense for, you know, an unbiased opinion as to who's really behind the scenes donating, you know, urging certain politicians to vote in a certain way, like, where's a good place for us to go get that information?
00;44;04;04 - 00;44;15;23
Tim Leary
What should we be paying attention to that we're that you're uniquely well qualified to sort of ask, like, answer, where should we go for that unbiased information? Is, is there such a thing these days?
00;44;15;25 - 00;44;42;29
Clay Lowery
Well, that's a that's obviously a broader question. I'm hesitating only because, look, look, the United States has been a genuine supporter of Israel for a very long time, and it's been a bipartisan issue. So trying to find what you're trying to find is like, what is actually happening? What are the events on the ground? How are the, people responding there?
00;44;43;00 - 00;45;15;08
Clay Lowery
Obviously look, there think tanks and there are intelligence agencies in there that are thinking about this very deeply. I don't know, I don't think that there's necessarily anybody who is creating these big influences. I think that could this potentially a political overture. Sure. And we've seen that we saw this with all the protests around universities earlier this year, of people thinking that the Israeli government had gone too far.
00;45;15;10 - 00;45;38;23
Clay Lowery
But I think right now this is a matter this is less in the hands of private sector actors and, non-governmental organizations and much more in the hands of people that are paid to think about the national security of the United States. And what is our foreign policy, our best foreign policy. And those and some of that can get political.
00;45;38;23 - 00;45;58;02
Clay Lowery
But a lot of it right now is, I think, a lot of technicians, and diplomats trying to figure out, like, how does the United States continue to be supportive of Israel, but at the same time try to calm tensions down so that this does not spill into a wider war?
00;45;58;05 - 00;46;02;03
Tim Leary
And then what what is the rebuild look like, and how does that get financed?
00;46;02;06 - 00;46;14;00
Clay Lowery
I don't know, because, right now, as far as I can tell, the, we're a long way off from a rebuild and how that, I think, you know, I think right now.
00;46;14;07 - 00;46;15;02
Tim Leary
I was thinking.
00;46;15;04 - 00;46;15;22
Clay Lowery
I don't.
00;46;15;25 - 00;46;18;28
Tim Leary
I don't know, I was thinking more rhetorically, I suppose.
00;46;19;00 - 00;46;23;13
Clay Lowery
Than I think I think people are focused much more on how you calm things down.
00;46;23;16 - 00;46;33;14
Tim Leary
So like, we're we're just about out of time here. So before we go, what have we touched on? What's the most important thing I haven't asked you yet today.
00;46;33;16 - 00;46;34;18
Clay Lowery
I don't know.
00;46;34;20 - 00;46;40;25
Tim Leary
Where you can or or or you could just tell me who's going to win the election. What is your bank on that? Well, I tried.
00;46;40;25 - 00;47;05;02
Clay Lowery
To do that earlier. I gave you my 50% and 48%. No, look, I think you've covered a lot of ground, obviously. You know, what's the most important thing? You know, how is the U.S. economy doing? And is the Federal Reserve? They just did a 50 basis point cut first time they've done a cut in, like over four years.
00;47;05;05 - 00;47;23;03
Clay Lowery
Are they going to stick with that? Was that a signal that, more is to come, or is that a signal that, hey, we're just getting ahead of this because we felt like we were not in balance? I think kind of those are those type of questions are going to be very important, especially as we look at how it is.
00;47;23;03 - 00;47;41;03
Clay Lowery
And, you know, I noticed that last week there was hardly anybody who asked Jay Powell about the interaction between fiscal policy and monetary policy. That could be a very important interaction as the fed tries to figure out its own trend line or what they're going to be doing with, with, interest rates.
00;47;41;05 - 00;48;04;07
Tim Leary
All very, very fair points. So, listen, I appreciate your time. This is great to spend an afternoon chatting with you. And I want to thank our listeners for tuning in to the episode of The Navigator. And if you haven't already, please make sure you hit the follow button to get notified of new episodes. As for the latest views with RBC Blue Bay's US fixed income team, you can visit our website at RBC Gamescom.
00;48;04;10 - 00;48;06;05
Tim Leary
Clay, thanks so much for your time.
00;48;06;07 - 00;48;12;25
Clay Lowery
Hey Tim, thank you very much. And, no offense to Buffalo, but go commander's far.
00;48;12;27 - 00;48;38;06
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00;49;25;09 - 00;49;33;28
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