Ten years ago, the CME Group could have been forgiven if they determined that lady luck simply wasn’t on their side. It was the second week of September in 2008 and they were set to kick off the first edition of the Global Financial Leadership Conference (GFLC) when the financial markets were sent reeling as Lehman Brothers declared bankruptcy. But rather than fold their tent, the CME persevered that day and today the GFLC stands as one of the preeminent gatherings for leaders from government, media, business, and more. Celebrating the 10th anniversary last week in Naples, Florida, the CME once again delivered a quality line-up of thought leaders.
The program was slightly restricted this year as some of the top speakers, including the Bush brothers (George and Jeb) and former GE head Jeff Immelt, spoke on an off-the-record basis. With that condition in mind, this recap focuses on the financial market and trading issues that were raised and discussed during the two day conference.
Market Outlook: Risks and Opportunities in the Global Financial Industry
The first panel on the Tuesday morning of the conference had the most to say directly about markets and trading and, not surprisingly, the most direct comments came from the former chairman of one of the largest proprietary trading firms in the world. Ron Insana of CNBC led the discussion with Lorenzo Bini Smaghi from Societe Generale, Adam Schenk of Milliman Financial Risk Management, and Vinnie Viola from Virtu Financial.
On the subject of market risk, Viola stated that reforms following the 2008 meltdown have generally worked as the markets are less levered now and factors such as reasonable valuations and the preponderance of passive investing are good indicators of future stability. Smaghi and Schenk seemed to take somewhat opposite views with Smaghi arguing that the next correction may be more extreme when it comes because of how the markets are reacting as central banks exit their extended period of easing. Meanwhile, Schenk held to the belief that market participants are fairly accounting for this risk by pricing “skew” appropriately and by the growth of volatility control strategies. The argument was a draw but the old cynic in me found myself leaning towards Smaghi in expecting a market shock in the future. Viola, for his part, also raised the specter of cybersecurity as a big risk because clearing houses (CCPs) have become more and more important over the past ten years and that creates a potential single point of failure.
Titans of Modern Financial Markets
Each year, the CME Group awards the Melamed-Arditti Innovation Award to those “whose innovative ideas, products or services have created significant change to markets commerce or trade.” This year the award went to two individuals whose diligent study and work indirectly led to a dramatic fall in the cost of investing for everyone: Jack Bogle of Vanguard Investments and entrepreneur Mac McQuown. Bogle with his evangelizing for traditional index funds and McQuown for his pursuit of scientifically based investment strategies directly drove the evolution and maturation of investment practices that saved billions and billions of dollars for investors.
Insana once again moderated a discussion with Bogle and McQuown and it was interesting to note that the battles that both men have waged for decades are still going strong. Bogle is a poster child for KISS and he is no big fan of ETFs, which he describes as vehicles for passive investing for active investors. Bogle eats, breathes, and lives traditional index funds and stands ready to skewer any half-baked, trendy new theory that promises better performance but actually delivers sub-optimal returns. McQuown is somewhat less dogmatic but he didn’t hesitate to call smart beta a cliche and point out that alpha suffers from ex-post bias. That being said, both men are optimists and are not particularly concerned about any particular risks, including a “bubble”.
Beyond Trading and Markets, One Common Topic In Particular Was Very “Hot”
Interestingly, one theme came up repeatedly as nearly every major speaker gave a full-throated and unequivocal endorsement to the importance of addressing climate change, usually with a complete commitment to the Paris climate accords. Speakers including George and Jeb Bush, Ban Kyi-Moon, Michael Bloomberg, and Sir Richard Branson insisted that climate change is the pre-eminent issues of the day. Branson, as might be expected, suggested that there has never been a better time to be an entrepreneur as the issues to be addressed will require ample doses of creativity and change. The message came through loud and clear.
On the other hand, the subject of cryptocurrencies did not get a whole lot of attention this year despite the fact that bitcoin might be the biggest financial headline of the year. There are a number of ways to interpret this with the most logical being that cryptocurrencies have captured the public’s attention but the fact remains that they are still small potatoes when it comes to global finance. In fact, turnover in cryptocurrencies was on the order of 0.2% of all financial transactions in 2016 according to the World Bank so even a five or tenfold increase this year leaves them as a small blip on the screen for global financial markets. It may also be that these smart businessmen weren’t ready to tip their hands on what their crypto and blockchain strategies are. The GFLC may be a venue to share ideas but some projects are better kept close to the vest!
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