00:00I'm just curious, given the fact that HSBC and welcome is such a central bank in both trade as well as in both China and in the West.
00:08How significant do you see this latest eruption of trade tensions between the U.S. and China? Does this feel different?
00:14Yeah. No. First of all, thank you for having me today.
00:16Look, I think the world has gotten used to a lot of these tariff changes, although certainly this newest round is yet another bit of unpredictability.
00:26I think companies have been now looking for different ways to manage their supply chains.
00:32We have a survey that we did right after Liberation Day, which I think still holds true today.
00:37We surveyed 5,000 clients, so a big survey.
00:41And they all said, one, all of these tariffs are going to cause a lot of issues. Prices will go up.
00:46Two, most of them now are looking at their supply chains.
00:49And the word I think supply chain has now come to be one of probably the most discussed terms in any C-suite today.
00:55And thirdly, they're going to change, and they may even change business models.
00:58So this next round, this current round, I think just tells you that they're going to have to significantly change what that is.
01:05Because 100% tariffs, you can't absorb 100% tariffs.
01:09So that means there will be a greater acceleration to where those new supply chains will be.
01:14However, it has been a bit of a whack-a-mole because you have to constantly look at where the next tariffs will come from.
01:20And that's been a challenge to many companies.
01:22They really have to figure out what is the least vulnerable place they can be or the most tariff-proof place they can be,
01:29and how do they then export into the U.S. or, frankly, anywhere to make sure that they can do so as effectively as possible.
01:37How much have the extra costs from tariffs been realized?
01:39And not just tariffs, but also the rejiggering of supply chains.
01:42Yeah, so rule of thumb, when I talk to most people, probably 70%, 80% is borne by the producer versus the importer.
01:54The last 20% now is starting to seep into end buyer, the customer.
01:59I think most are saying we can't continue to absorb that much additional costs as the importer or the distributor.
02:05Therefore, it will start shifting more and more to the end buyer, the client or the customer.
02:11So there's been, I think, a strong effort, however, to try to absorb as much as possible.
02:17So I talked to a retailer, a high-fashion retailer, saying me and the distributor or the producer out of Asia and me as the distributor are absorbing as much as we possibly can.
02:27We understand we could do that, but it will come to an end soon.
02:30John and Anne-Marie were talking to Fed Governor Chris Waller and about the balance between inflation and the labor market.
02:37And there's this feeling that any kind of inflation is going to be short-lived and the effects on the labor market could potentially be pernicious.
02:43Are you seeing that companies, instead of raising prices, laying off workers or trying to revert to artificial intelligence to bridge the gaps?
02:51Not yet.
02:52However, there is a lot of cost pressures.
02:54I think there's a delay a lot of investment.
02:56I mean, that's the flip side of that, because I do think people want predictability.
03:01The companies need to understand where they're going to put down a lot of capital, that that capital is going to produce good returns because of more predictability.
03:08I've seen slowing of hiring but not real firing today.
03:13And so that's kind of, again, the flip side of that coin.
03:15But really, it's the capital and the investments that you're starting to see slow down quite a lot.
03:19Meanwhile, we've heard a lot here at the meetings in Washington, D.C., about a number of themes, AI, which we'll get to in a second, but also this question around credit froth and an AI-related bubble.
03:30How much are you getting concerned, akin to what J.P. Morgan's been talking about, of a real turn in the credit cycle or some sort of later innings that give you pause and make you more cautious?
03:40Yeah, look, I do think this is not the first instance of what is inventory financing fraud, which is essentially selling or using the same bit of inventory to finance multiple times.
03:49We've seen that in Europe a couple of times as well in the last, say, nine months.
03:53So I am more concerned and something that we're very focused on.
03:56So, in fact, we're using technology we developed in our trade business and using it throughout all of our lending platforms now to try to go through and be very specific that everything we finance is good collateral.
04:09It doesn't have multiple liens on top of it, which is really what happened at First Brands.
04:13It's tough to do.
04:14And I think, you know, the fraudsters are getting better at it.
04:16So we're going to have to respond to being much better on due diligence.
04:21You know, we were not involved, obviously, directly in First Brands, so don't know how much due diligence was done.
04:27But I think these type of financing arrangements are going to require much more due diligence, much greater technology, much more specific understanding of exactly what you're financing.
04:37The other aspect has been just sort of how much AI has actually boosted productivity, boosted profitability versus been a real cost center for the most part.
04:45Ken Griffin came out of Citadel saying that he's not seeing evidence that AI programs can really make an edge in financial markets.
04:53I know that HSBC has been big in quantum computing and has this test.
04:56Are you seeing real gains?
04:58Are you actually deploying quantitative strategies from quantitative computing on your trading floors?
05:04Yeah.
05:05So just for those who don't know, we had a partnership, still do, with IBM.
05:09We developed quantum computing really for financial markets, focusing on the bond market.
05:13And we used both quantum computing and more traditional computing, brought them together, changed the way we looked at data.
05:20There's this thing called representation data that we actually flipped into more of a quantum computing type of mode.
05:28That led to a 34% improvement in our ability to predict a trade.
05:33So if you were going to make a trade, we get to understand that trade 34% better to see the matching between buyer and seller is really what it comes down to.
05:40So that was very effective.
05:42It's an initial study.
05:44We did, however, test it on multiple quantum computing machines.
05:48We did all the statistical analysis.
05:50So we really do think there's something there.
05:52It can be used for any traded asset, so any asset class.
05:58I think the power that that brings is going to give an edge.
06:01I don't know how it wouldn't give an edge.
06:03But I think it will be, once we roll it out and others roll it out, there will be quick adoption by, I think, the industry.
06:09I mean, it's the same industry that tries to reduce latency to its smallest possible amount.
06:14So I do think technology does bring a substantial edge.
06:17Do you think it's going to replace traders?
06:19That I don't know.
06:20I mean, I think there will always be humans involved, but I think it will help traders quite a lot.
06:23And I think it will change, really, the way traders think about it.
06:26Because when you have that much compute power and you could really use it, I think today, you know, we use a lot AI, as you said, through algorithmic trading.
06:35This will just be one more substantial boost to the power of algorithmic trading that we see today.
06:41So will there be less traders?
06:43Don't know.
06:43But are they going to have powerful machines?
06:45Definitely so.
06:46The other theme here, and this is something that comes up in pretty much every conversation, is the debasement of the dollar.
06:51And this question of how much the dollar is losing its heft as a reserve currency.
06:57Internationally, do you see any signs that people truly are moving away from the greenback?
07:02Yeah, it's a great question.
07:03So I happen to be traveling to Asia right after Liberation Day.
07:06And I would say that was probably the number one conversation that I was having by very big, very sophisticated, large holders of dollars.
07:14And they were quite focused on this idea of de-dollarization or debasement of the dollars of reserve currency.
07:20And the mere fact that they're talking about it and the terms they were tells you something is different.
07:25Now, if you look at where the dollar is today, trade flows, reserves, the primary currency of invoicing for most commercial flows, the markets flows, it's all well north of 50%.
07:38It's, you know, 60%, 70%, 80% in all those various metrics.
07:41It will take a long time to find another reserve currency.
07:45And the other biggest question is, if you're going to go away from dollars, what are you going to do?
07:50And, you know, what will be that reserve currency that replaces it?
07:53There is no other alternative today.
07:55And so that's the twin issues that you have, the conundrum.
07:59Maybe go away from dollars, but what are we going to go to instead?
08:02To wrap it all up, there is this feeling that the center of finance has shifted.
08:06And it's not so clearly in the United States.
08:10And that's something that you've been focusing a lot.
08:12How do you see the sort of tentacles of finance in terms of where they are flowing from transforming, really, over the past couple of years?
08:19Yeah, no, I think there's significant transformation going on.
08:21And if you think there was a unipolar world with the U.S. right in the middle of it, it still is.
08:26And, you know, the U.S. capital market is the most liquid of the world, still the dominant place to trade.
08:31However, you need to look at where trade and commercial flows are going, where financial flows are going.
08:36I would look between the Middle East and Asia, as an example.
08:40Substantial increase of flows between those two regions.
08:42And they're not flows that are necessarily coming from the West, just being transhipped through those regions.
08:48They're actually wealth that is being rechanneled in that region itself.
08:53I think you'll see that more and more.
08:54I think you'll see Asia, Middle East coming together more and more.
08:58And I think you'll have a much more balanced equation.
09:00I don't think there'll be as a dominant, you know, source of financial flows that you've seen before.
09:05And, you know, great for us because we have to be very strong in those two regions.
09:09But I do think people need to understand that there's a significant change going on.
09:13And those flows will not just go through New York as they used to in the past.
Be the first to comment