Global Markets, World Uncertainties and the $2 Trillion Fund | Jens Stoltenberg & David Solomon

Okay, well, big welcome, big welcome, David and Jens. It's just incredible to have you both here because Stoltenberg, you invented the spending rule so that the politicians don't spend the whole fund, only three percent a year. Despite that, he's now accounting for more than a quarter of the Norwegian state budget. So, really great to have you here. And David Salomon, a very important person for the fund because you help us move the fund around and we interface with you in so many different ways. You help us trade equities and actually Stoltenberg made a trade earlier today which went to Goldman Sachs. They accepted it. It went quite well. It was a very small one. They help us trade the bonds, the corporate credit. They are doing a lot of the IPOs and we had a little chat here beforehand. Basically, David says that we are in all the IPOs because that's the way to make sure that it is a successful IPO. They have the deepest experience of any firm. We have a great relationship with you on the ECM side. We are big shareholders in Goldman Sachs. Absolutely. It's a very, very deep relationship. Thanks for that. Now, first question is going to Stoltenberg. You've been a politician trying to... I was still a politician. I know, but first you were a politician. Then you went to NATO trying to keep all these various countries working together. Now you're back in a government with a lot of different parties. What's more difficult? Is it to sort out the parties or the countries? I know that the correct answer is to say that it's more difficult to manage the world than to manage a minority government in Norway, but to be honest, I'm a bit in doubt because the reality is when you head an organization like NATO, there are some rules, some kind of stability in at least the institution, but in politics, it's much more, what do I say, unpredictable from day to day. Before I say anything more about that, let me just thank you, Nikolaj, for what you do, for leading the serveral fund in such an excellent way, and thank all the people in this room, because what you do is of great importance, of vital importance for Norway. As Nikolaj alluded to, now it's 27% of every kroner we spend on the Norwegian budget is financed by the return from the serveral funds. I remember back in 1996, it was zero, and it has gone from zero to now two trillion, and half of it, actually a bit more than half of it, is invested in the United States. Again, most people move forward in their life. I have started to move backwards, because I was Minister of Finance 30 years ago, and it's extremely great to be back, and not least to work again with the pension fund, and one of the most controversial decisions we made back in 1997, the year after we had the first installment, was actually to decide that we should not only invest in fixed income, which was the plan, but also start to invest in equity. Now the pension fund has earned more money from the equity investments than from oil and gas. So I thank you all, a tank of thanks for everything you have given me, and we spend it with, what shall I say, great joy every day in Norway. Thank you. David, you meet more CEOs globally than pretty much any other person. What's on the CEOs' minds these days? Sure. Well, first of all, thank you for having me, and I'm deeply appreciative for our partnership, which is longstanding and very significant for Goldman Sachs, and for your support and sponsorship. It's an interesting time. We had earnings today, and on our earnings call, a lot of the focus, we had a really good quarter. We had the second best revenue the firm's ever had. We had the second best earnings the firm's ever had, the second best EPS the firm's ever had. By the way, the stock's down $30 on that. But it's down, I think, because there's an expectation that at the moment with what's going on geopolitically and what's going on in the Middle East, the forward doesn't look quite the same as what the last three months looked. I tried on the call to, in a very balanced way, say, of course, I don't know what's coming. Nobody knows what's but I think for the most part, when you think about the things that drive our business, they're going on despite what's going on geopolitically in the Middle East. Of course, if oil prices remain high and elevated for a period of time, it will filter into the economy more and will have an impact and cause inflationary pressures and growth impacts. But CEOs broadly, and particularly here in the United States, feel like there's an opportunity to do things to drive scale because the regulatory environment is allowing scaled consolidation. And there is so much change coming with the acceleration of technology that CEOs are very, very front footed and very, very aggressive. And they're not letting the moment distract them from what they want to accomplish in the next three to five years. And that's very good for our business. And I actually think that's going to continue through 26 and 27, even if we have in the short term, some sand in the gears from what's going on in the Middle East. And so CEOs are quite forward leaning at the moment and really realize that technology is just accelerating the pace of change. And they know that if they spend time being cautious, and they're not really investing and participating in that acceleration, and they're not really gaining scale, that they risk weakening their competitive position, and they don't want that to happen. So they're kind of blocking out a bunch of the noise. Yeah. I thought we should just do one interesting thing and just touch on the Middle East, because we have the two incredible angles here. One, of course, from the security side, but then on the financial side, too. So Jens, first, how do you read the situation in the Middle East just now? Well, I read it as a very serious and dangerous situation. And of course, the war which is going on there is first and foremost about people who are killed, homes which are destroyed, and all the human suffering. But as we have seen so many times before, wars have also economic consequences. And we have seen the increase or the reduced supply of energy, the increase in energy prices, and of course, also, that many central banks and others also now predict higher general inflation, and actually also some lower growth. And that impacts the global economy and it impacts also the Norwegian economy. And of course, how serious that will be depends on how long this war will last. And for a long time, there will be reduced supplies of oil, gas, and other commodities from the Middle East. As a kind of, as a politician, but also as an economist, by, as I worked for many years ago as an economist, I'm a bit surprised that the markets have not reacted more. And David, why is that? Why haven't they reacted more? I would share the perspective that I'm surprised that equity markets haven't de-risked more. I do think markets, broadly, when you think about rate markets and the level of volatility increase in rate markets, that's been pretty significant over the course of the last month. Obviously, commodity markets have reacted, but equity risk premia has not really reacted. And I don't, I don't have a good answer. I think what the market is telling you is the market is telling you that it thinks there'll be a resolution to status quo. I think most of us that are observers, either as politicians or as business people that are really thinking about the situation, think the risk of this being a longer conflict that leaves sand in the gears of economic activity for a more extended period of time is higher than what the market's discounting at the moment. So I don't have a crystal ball. The one thing I know is I don't know, but I do know that in the distribution of outcomes, the outcome that this takes a lot longer to resolve and it leaves sands in the gears that slow economic growth or put more inflation into the economy is not an insignificant, small little tail. It's actually a reasonable possibility. And if it continues, you will see equity prices repricing over time. Do you think you can amplify the, what should we say, in certain signs we're seeing in private credit through higher rates, more difficult environments? I think when you're talking about private credit, you really have to recognize, you know, a handful of things, but one of the things I just say is credit broadly is an asset class and private credit is a small part of the overall asset class of credit broadly. It's, you know, direct lending, which is what's getting all the attention is $1.6, $1.7 trillion of assets, about 230 billion of which is kind of retail focus. If we have an economic slowdown, losses will increase. But I think, and I said this on our earnings call this morning, I think the thing people aren't putting in perspective, you know, what does a cycle look like? Well, if you take a very difficult cycle, the financial crisis, all leverage lending through the financial crisis, the loss rate was about, the default rate was about 10% and the recovery rate was 50%, which means the net loss rate was about 5% to 6%. And the coupons are 9% to 10%. So you have to keep that in perspective, both on the size of the asset class and the cycle. It doesn't have to be a systemic thing, probably won't for that asset class. And even though losses go up because we have an economic slowdown, it doesn't mean through the life of the portfolio that the performance hasn't been reasonable. If you're collecting 10% without a long cycle, if you collect 10% for 15 years, and then you go through a cycle where you have a 5% or 6% loss, your returns are actually going to be okay. Over the last 10 years in this fund, the investments in Europe have gone from 42% to 21%. It's halved. Those in the US have gone from 37% to 55%. And it's to a very large extent driven by difference in earnings growth. Jens, any reflection on just the relative power of Europe and the US? Well, it reflects a reality that the economy in the US has grown much more than the economy and markets in Europe. And since we are indexed, or at least mainly in an index fund, of course, that is reflected in the way the Norwegian Pension Fund is invested. I think as for a politician who is responsible for setting those indexes, the big issue is, should we change? Should we do something different? And we actually are some experts to evaluate that. And the main conclusion from that group is actually that we should not change. That the main idea we developed and agreed back in 1997, that we should follow the markets, we should spread across the world in almost all listed companies. As you know, we own roughly 1.5% of almost all listed companies more than 7,200 companies in total. That is the best way for a country, a democratic country to manage risk. I say this also partly because I remember again, when we made the decision that I had meetings with the Qatari Investment Fund and with Kuwait Investment Office and so on, and they had a totally different approach. We wanted to learn from them. But we decided to do the opposite, to be very conservative, to spread the risks. And also tell the Norwegian voters and the media and the journalists when they ask about obvious risks, for instance, to be so big in the United States, is that there's no way to hide 20,000 billion Norwegian kroner or 2 trillion. The alternative was to keep the value, the national wealth in oil and gas in the ground. That would have been even more risky. So this long answer has one conclusion, and that is that we strongly believe from the Norwegian government that we should continue to be diversified, small in many companies. And then we are extremely grateful for what you do also with the active management. But that's within limits that doesn't really change that main approach. And David, any reflection on the differential between Europe and not necessarily share price performance, but more the environment, the operating environment for companies? What are companies telling you about investing in Europe? Sure. And just the thing I'd highlight, because you're talking about it as an indexation against earnings growth, 10 years from now, it's going to continue because Europe is 0.7 trend growth and the US is 2% trend growth. And so what you're seeing and what you've seen, what's created this widening differential is one's growing meaningfully faster than the other, and that compounds. And it's going to keep compounding unless Europe changes the way it operates, which it doesn't seem that Europe has the collective ability to materially change the way it operates to get that growth level up to a different place. And you have to step back and look at the size and the scale of Europe and its growth rate against the size and the scale of the US and its growth rate. And it looks like that's going to continue to compound unless something were to change that doesn't seem likely. What could they change? Well, I think, I mean, the thing that I've talked publicly about is that, you know, the theory of the European Union was to harness the collective economic power of all the European nations. But that's not happened. You know, we can talk about the great experiment of the European Union, and there have been benefits, obviously, but the real benefit was to harness the economic might of 450 million people and get people to work collectively. But what we really have is 27 nations operating relatively independently, a big bureaucracy that sits in the middle that actually inhibits growth and investment. And, you know, look, I think Mario Draghi's paper have a lot of good ideas, but only about 11% of them have been implemented. So one thing you can do is implement 50% of them. But given the way Europe operates, I think the chance of that is low. And that will continue to be a headwind for European growth and will continue to shift the weighting of where a fund like yours, if you're indexing against earnings around the world, when you look forward 10 years, unless there's a shift in that, that will widen. I totally agree. I think it's in one way, it's quite obvious what Europe should do, and that is to actually create a real single market. In the 90s, they were quite successful to establish the internal market, to establish a common currency. I think many people believe that was not possible. They did it, and it triggered some growth. Then it has slowed down. And just to be able to create a capital union, a saving union, and to really have a common regulation would be a huge step forward, would help them a lot. And when you meet political leaders in Europe, they all see it. But so far, they're not been able to really implement that. At some stage, I really hope and believe they will do it. Then remember, the European Union, it's 450 million people. But if you look at Europe, for instance, defined by NATO allies, which are European countries, but not members of the EU, like Norway, and add them to the 450, then we have 600 million people. So this is a huge economy, and a lot of people, and a great potential. But then we need to overcome the fragmentation and all the national regulations which still exist in Europe. Two things that I think need to happen to do that. One, you've got to create European champions. So for example, you need a couple of European champion financial institutions that can compete with the leading financial institutions in the US. But to do that, you can't be worried about whether they're located in France or Germany or somewhere else. They just have to be located in Europe. It has to be in the collective entrance of Europe to create banking consolidation across borders so that you have a scale of institution that has the ability to compete globally. You have to have centralized capital markets, fragmented capital markets, so you can have capital formation. The other thing that I think is really lacking in Europe, broadly speaking, present company excluded, is there is not a risk-taking culture in Europe. There is not a risk-taking culture in Europe. One of the great things about the United States is people want to take risk. And taking risk spurs investment which drives innovation, drives economic growth. A lot of the risk-taking genes left with Mayflower. Because the risk-takers, per definition, is just like, hey, let's take some risks, let's go to America. And so the people who are left in Europe are the people who don't want to change. We want to be at home with mommy. So that's a bit different. Like you and me. Well, at least I studied here. Okay, neither. David, one of the reasons for the difference in trend growth is technology. And, of course, you're seeing it in the large concentration in stock markets and so on. How does AI change the way you work at Goldman Sachs? I mean, I'm super excited about AI technology and what it's going to do over the next decade or two to accelerate growth and productivity in the world. This is a powerful technology acceleration that the best enterprises will figure out how to use it to really remake operating processes in their business so that they have more capacity to invest in growth in their business. And so at Goldman Sachs, there are two ways that we think about this. The first is our business, because it's a professional services business, has a lot of smart people. And so one of the things we obviously do is get these tools, these technology tools, into the hands of smart people so the smart people can find ways to do things more productively. That's easy. We've done that for ages with technology. But the more powerful thing here is that this technology is allowing big enterprises to remake operating processes, really fundamentally take out a white sheet of paper and say, the way we've always done this, this particular process, we can do it differently. And the result of that is enormous efficiency and productivity gains. And the benefit of that is not just that you can bring your costs down. The benefit for most enterprises is it gives you more capacity to invest in places where you want to invest to grow that you've been constrained in terms of how much you can invest. And so we're extremely focused on that combination of re-underwriting certain operating processes to create efficiency and create more capacity to invest in growth in places where we feel constrained. And most CEOs that I talk to are really focused around that thought process. A paradox I know about Norway on this is that when you look at Europe, they have not invested as much in digital solutions and AI as the United States. But Norway is an exception for some reason. It's quite high. And I think that demonstrates that we don't have the big tech companies, but we are able to use to implement the solutions they are providing at a higher scale than most of the European countries. And again, for a politician, the issue is not only to understand the potential of AI, which is obviously great, but how can we as politicians create a framework so actually the society is able to take benefit and to use that technology. And I think that's at least a lesson from Norway is that high level education helps and also high level digital solutions. For instance, in the public sector, I lived for some 10 years in Belgium, and it's a nightmare when it comes to basic issues like tax reform or all financial transactions, compared to in Norway, where you do it on your cell phone, most of those transactions. And the fact that we like to spend some quality time at our cabins in the mountains should be a driver for using AI. That's correct. But I just saw an overview in The Economist, they compared productivity, and Norway, again, they were quite high when it comes to overall productivity. But in particular, when it comes to productivity per hour worked. So when we don't work so much, but we are very productive when we work. The joking aside on hours worked, I mean, just a lens for people to think about when people talk about this. You know, when you think through history, you have technology change, and it destroys jobs, and it changes jobs, and things shift. If you go back 115 years, when Henry Ford was starting to mass produce cars, people think about Henry Ford as being famous for creating the assembly line to build cars. But another thing that Henry Ford was famous for, is he was the first CEO of a big US company to say the company was going to go to a five day work week from a six day work week. And he thought because the assembly line was increasing productivity, he could in a five day work week with that assembly line, get as much productivity or not more than he was getting in a six day work weekend would be better for his employees. So lens to look at in the world we live in today, we don't have to be locked in a five day work week, it doesn't mean that everybody works hard, but productivity can go up in many ways. And things that look so certain today might not look so certain, you know, 10 years from now with the productivity leverage that we have. And it's just interesting to go back in history and think about the shift from 95% of jobs coming from farming, to an industrial revolution to now a technological revolution, and there'll be things that mirror in different ways. But we are increasing productivity massively. And that doesn't mean that it doesn't come from the same metrics that we've always looked at. But we are now up against China, where they where they don't really talk about four week is more like six day week, right? And they are applying AI, even more than we do, even though on the models, then they'd be slightly behind, the application is very strong. So earlier today, I had a I did a podcast with the CEO of Pfizer, he thinks that within one to two years, they'll be ahead of us also in cancer medicine. So just how do you see the Chinese competition when you talk to your China's a very, very significant economy, and they might they might be ahead of us in certain things. But I think anyone that's so certain as to how this plays out, you know, should just look at history as a lens because it's not so simple. You know, Jim O'Neill was a very, very famous Goldman Sachs economist, he is the Goldman Sachs economist, who coined the phrase bricks. In 2014, Jim O'Neill predicted that China would be the largest economy in the world. And in 2027, it would be a $21 trillion economy. Well, we got the 21 trillion, right? It looks like China's a $22 trillion economy in 2027. But what he got massively wrong was how the US would grow competitively, and how the US's position would change. And so if we were sitting here in 2018, you all three of us would agree China would be the largest economy in the world sometime in this decade. Now we'll all sit here. And everyone would agree there's no way China will be the largest economy anytime that we can see in the future. So the world is competitive, they're going to be a very large economy, we have to figure out how to work with and integrate with China, there's a lot of function there. But it's not cast in stone. And I would just say that in the history of the world, it is very, very hard to compete in a globally competitive world when all the capital allocation is centrally controlled. That doesn't mean that this time it won't work. But I think it'll be very dynamic. I think we need China, I think China needs us, there'll be places where they run ahead, there'll be places where we run ahead. But we have to, if we stick to the knitting of really driving growth and freedom and combining those two things, we'll do just fine. But there'll be gives and gets. Absolutely. And before we open up for a question, last thing. David, what advice would you give to the Norwegian Minister of Finance when it comes to the Sovereign Wealth Fund? One thing for sure, I am not a politician. When I look at the history, I have such enormous admiration for what you've done. Because I think that you intuitively or academically or otherwise really understood the power of believing in growth in the world and of compounding. And I'm still a big believer, the world's not perfect, things are going to be wrong. But I'd bet you a lot that if we were sitting here 25 years from now, the world will continue to be better. And if the world continues to be better, that means it's growing. And if it's growing and you're investing and you're participating, you're compounding. We all know that 7% for 10 years, you double your resources. I don't think I need to give you advice. I think you get it. The world's going to grow. You're going to participate in a very powerful way. And you've got to stick to keeping that participation where the growth is in the world. And if you're aligned with the growth and earnings in the world, you're going to do just fine. I really believe that. I'm a huge optimist. You've got to step out of the moment. Find me a 25-year period of time where the world was not better 25 years in the future from where it was 25 years in the past. You can't find one for the last thousands of years.