The ongoing China-U.S. trade war, political uncertainty in the U.S., climate change, cyber risk and the slow embrace of blockchain and other new technologies in the U.S. were among the challenges facing our securities markets that were cited by experts at an SEC conference in Washington, D.C. on Wednesday.
“The United States has enjoyed an enviable position being the dominant capital market in the world,” said Gary Cohn, former director of the U.S. National Economic Council and President Donald Trump’s ex-chief economic advisor, at the State of Our Securities Markets conference. “We’ve owned that position for a long period of time,” he noted.
But he warned: “We are on the fringe of potentially losing that position, and I say that because the capital markets around the world are developing quite quickly, in a much more digitized fashion than the U.S.”
For example, he pointed out, digital payments in China are much easier, although he conceded that’s because China has a “relatively unregulated banking system” – one he stressed he doesn’t want for the U.S.
But “we have to embrace this digitization” of assets and securities that’s being seen across the global financial markets, he argued. What’s important is for U.S. regulators to “lead, not follow,” when it comes to embracing technology.
Real-time clearing in the financial services industry is needed, Cohn also said, and he and Glenn Hutchins, co-founder of private equity firm Silver Lake Partners, agreed “there’s no technological constraint” to achieving that now.
The U.S. must also embrace the move to secure smartphones, Cohn said, noting, “we’re virtually at the secure phone line right now” with the arrival of 5G next-generation wireless service. “Once we get to the secure phone, we’re going to be able to use [it] for everything we need financially,” he said.
Although Cohn and Hutchins agreed that blockchain offers significant opportunity to the securities market, Cohn said he wasn’t bullish on cryptocurrency because, in the U.S., “we still believe in safety and soundness.” However, Hutchins said blockchain and cryptocurrency go hand in hand.
Cohn and Hutchins also agreed that it has become harder to measure productivity and the economy overall. That is largely due to the increased shift to a services-based economy, Cohn said, noting: “We’re [an] 80 percent service economy” now in the U.S. That means we’re no longer measuring our economy based on how many cars, machines and airplanes we manufacture, but instead on how many people are buying Starbucks coffee, going to the dry cleaner and nail salon, going out to a restaurant for dinner and paying for accounting and banking services, he told the conference.
Cohn also argued one unfortunate side effect of regulations, including the Dodd-Frank Act, that was created after the 2008 financial crisis and the costs created by them, combined with the increased globalization of industries, ended up driving at least some financial services jobs to other, lower-wage countries including India. After all, in those lower-wage countries, somebody can be paid $35,000 for doing the same job as those paid $135,000 in New York, he said.
One other potential area of concern today is the “massive movement of money toward index funds,” Hutchins said. That’s because “the problem always comes from where the bubble is” when looking at economic crises, he said, noting the increased demand for index funds seems to be the “biggest transformation in the flow of funds” since the 2008 financial crisis, aside from what’s happening in the Chinese banking system.
Overall, Cohn provided a cautiously optimistic take on the overall U.S. economy. Consumer confidence seems high and consumers are spending money, as witnessed by the strong Black Friday and Cyber Monday retailers – or, more accurately, online retailers – just had, he noted. But he added: “The one concern I have in the U.S…. is corporates are not spending money” in the U.S. now, in part due to uncertainty over the next presidential election and the ongoing trade war, he said. Cohn famously left the Trump administration due to his disagreement over tariffs.
Meanwhile, the “two places that we’re paying insufficient attention to” when it comes to risks to the capital markets are “climate change and cyber risk,” Hutchins went on to say. The insurance sector can be especially hard hit by climate-related issues, he said, adding it’s important to make sure companies are “adequately disclosing their exposure to climate change.”
In a panel session that followed, Marko Kolanovic, global head of Macro Quantitative and Derivatives Research at J.P. Morgan, pointed to uncertainty that has been created in the securities markets by the Trump administration’s trade policies and potential changes that could happen if one of the more liberal Democratic candidates wins the next presidential election and enacts progressive policies. For example, energy prices could soar if fracking was stopped and that could even lead to a depression, he predicted.