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I am very pleased to be here. I want to thank Rahi Zachary and all of our friends and colleagues at Ames Summit for bringing us together. This is a particularly interesting time, as you heard at the beginning, and I would say this is a particularly interesting time for alternative investments. We are coming out of a period where both demand and supply for alternative assets had tremendous support.
Demand for alternative assets was driven by depressed yields, inflated valuations, massive liquidity, and regulators looking at alternative asset classes without fully understanding what they were looking at. It was also a great time for the offering, and we witnessed a massive proliferation of alternative assets.
We are entering a different period, a period in which many more questions will arise, and I will explain why. This is due to surrounding circumstances . I want you to imagine a simple image that I will use over and over again. You think you know your starting point. You think you know where you want to go.
But you have no idea about the path that will lead to this . Before the war in Ukraine, it was about long-term issues, like climate change: we knew where we wanted to go. We didn't quite understand how we would address the transition period. This was about combating future pandemics. How to vaccinate the world?
This was about the sustainability of supply chains. It was about inequality. We knew that our initial positions were unfavorable. We knew we wanted to achieve something better. We just didn't quite understand how to do it. And then came the war in Ukraine. And the war in Ukraine did two things. She pushed the starting point back.
And made this path even more uncertain. Now there are two ways to think about this. If you are a pessimist, and many fall into this category, it completely paralyzes you in terms of moving forward. If you're a super- optimist, you think, "Don't worry, everything will work itself out . After all, that's how it's been in the past." I want to be somewhere in the middle.
And I want to talk a little bit about what's been released now, complicating the long-term issues. First of all, this is a change in the baseline scenario. A year ago, the consensus was: high growth, temporary inflation. If you are in the asset market, this is a great message, you are supported by fundamentals and inflation is temporary, so there will be no shock to the liquidity regime.
Towards the end of the year, the baseline forecast changed. High growth, but persistently high inflation. Again , fundamentals were normal. Liquidity regime—start worrying about it. Now, stagflation has become the baseline scenario. Lower growth and persistently high inflation. This is a fundamentally different baseline scenario for the global economy and financial markets.
Stagflation used to be a risky scenario. Now the risk scenario is a recession. So, the first thing the war in Ukraine helped to do was completely change the distribution of potential outcomes for the global economy, and therefore the consequences for both public and private markets. Part of this, of course, is the changing role of central banks.
In a world of high growth and low inflation, in a world of high growth and temporary inflation , central banks are your best friends. They will provide you with liquidity and have the confidence to step in and tame any volatility. In a world of high inflation, central banks can no longer play this role.
So there is a fundamental change taking place in how central banks interact with financial markets. There are also fundamental social changes and inequality in this country. We are talking about a cost of living crisis, which is hitting the most vulnerable segments of the population particularly hard.
In some parts of Africa, there is talk of famine. Social aspects will become much more important in policymaking in the future. Debt problems will become increasingly important, especially in developing countries. I have a vision of small fires everywhere. If you are currently a commodity-importing country: higher food prices, higher energy prices, slowing global growth, stronger dollar.
This is not the best world for servicing your debt. And we also weaponized the payment system. Sanctions against Russia's central bank, which brought the world's 11th largest economy to its knees, were something that national security experts did not think about. They didn't realize that in economics and finance, it was effectively a nuclear weapon.
But now that we have used sanctions on international payments as a weapon on such a large scale, the real question is: what does this mean for the system as a whole? These three things, all of these things, directly relate to the three issues that concern the people in this room who are investing with you.
Expected return, volatility and correlations. And they wreak havoc in all three spheres. Why are they wreaking havoc on all three? Because in a world left to its own devices, these elements become more unstable. This is what economists call multiple equilibrium. You move away from your starting point, but instead of returning to the mean, the speaker pushes you even further.
This means that short-term problems are escalating, and long-term ones are becoming even more acute. And it's very difficult for us to predict four risk factors in particular. Interest rate risk, liquidity risk, credit risk, as well as market performance risk and regulatory risk. This is the world we all work in now.
This is a world that public markets have failed to cope with. You've heard about the record sell-off in " safe havens" at a time when you're experiencing over 20% losses in risky assets in public markets. And this is a world from which alternative investments will not be protected. This is a world in which alternatives will have to think smarter to navigate successfully.
So how do you navigate in such a world? I suspect a lot of this will be addressed in the panel discussion with Danny. You will form your own opinion on " neighborhood effects." Whether you invest in private equity or Bitcoin, you have a view of neighborhood effects and you need to make four clear judgments about them.
If you think in terms of what economists call integrated equations , you face incredible complexity. You don't want to be paralyzed by this. Therefore, you want to highlight a few factors that can explain 70–80% of the results. Not 100%, but 70–80%. What could it be? Regarding neighborhood effects, you will form an opinion about leadership.
Leadership at the national level and leadership at the company level. You will form an opinion about cognitive diversity. Are the people you are betting on cognitively diverse enough to think across systems? Are they willing to reconsider their beliefs as the world around them changes so rapidly? And are they able to remain impartial?
You will form an opinion about inflation. Not only will inflation decrease, but to what level will it fall? How great will the destruction be in this process? How much institutional trust will be lost and how serious will the political error be? We will make a political mistake because central banks are too late.
The question is, how big will it be? And finally, you will form an opinion not only about the war in Ukraine, but also about what this war has done to the global order. With these four perspectives, you can answer the next question, and that's where I'll end now , since Nouriel just came in. How long does the process of returning value to public markets take?
This will be a key factor for alternative investments. Are we done with bonds? Are we done with the shares? After all, sooner or later value will return to public markets, and the huge headwind that favored alternatives will weaken. The portfolio construction that was sought at the beginning was very polarizing.
You wanted to have short-term safe assets and alternative investments, effectively avoiding the public markets. With the return of value, there will be a shift from this polarity to something more balanced . Finally, what implications does this have not for where you invest your money, but for how you organize your companies?
How do you communicate with your customers? Successful companies must have three characteristics. First, sustainability. In the world we live in now, you will make mistakes. The world has become so uncertain. The question is, are these errors correctable? Most mistakes in the investment world can be corrected, but we need an open discussion about which mistakes are correctable, which are not, and how our clients view this.
So sustainability will be very important. Variety will be critical. You want to keep as many options as possible until the situation becomes clear. So, how quickly do you give up liquidity? At what price do you give up liquidity? Your confidence in private lending will be absolutely crucial. And the final factor that will distinguish successful companies from others is flexibility.
Because the world I see is full of risks, but at the same time it will provide enormous opportunities as we start anew at the level of companies, nations and the global level. I'll stop there and hand over the floor to Danny to lead and moderate our panel discussion. Wait. Wait. AT.
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