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Educational Alpha
S3: Conversation with Paul Smith, Director, Financial Modeling Institute (FMI)
00:51:42
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- [00:05]
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Welcome to Educational Alpha. I'm Bill Kelly, your host, bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator, and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com.
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In the season three finale of educational Alpha, host Bill Kelly is joined by Paul Smith, Director at the Financial Modeling Institute, to explore themes of professionalism, sustainability and long term career growth in finance. Paul shares insights from his diverse global career, including his thoughts on AI asset management and the need for renewed trust in financial services. The conversation also tackles demographic shifts, global sustainability efforts, and the evolving role of finance in solving pressing global challenges.
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Paul Smith, welcome to Educational Alpha.
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Thank you Bill. Lovely to be here.
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This is going to be a great episode. I hatched this plan via email a week or two ago. You were off in London and agreed once you get back to Hong Kong you would come on. So I'm thrilled that you did join me and I think I last saw you almost a year ago to the day when I was having my very last days as CEO of the Kai Association. It was a little bit of a send off retirement celebration in Hong Kong and you were kind enough to between holiday parties and the like to stop in. So it was great to see you there and certainly the friendship will endure despite that. And a moment, Paul, true to form, as I do with all the guests, I'll ask you as my final guest to go through a little bit of your background, but I just want to make a couple of thoughts and maybe closing observations and I don't think the world will stop spinning if there's one less podcast in the world. There's plenty of them in financial services, but this will be when it airs on Christmas Eve, which hopefully will be a gift to our listeners. This will be the 108th episode of Educational Alpha across three years and three seasons and I think if I add up the cumulative minutes, over 4,000 minutes of hopefully very, very good content, I'll let the listeners decide on that. But I had a handful of thank yous I want to put in now so I don't forget them at the end. And most notably Paulina, who's in the background here, along with Susie and Camille, who did all the scheduling, the editing. Putting these episodes together, making me sound smarter than I was, has just been an absolute gift. So I do thank all of them, the hundred plus guests, including you, Paul, that have really have been special and different and have added value to the listeners. And the feedback I've gotten, not so much from me, but from the nuggets all of you have left have just been extraordinary. And then Lawrence Calcano and the gang at iCapital, and they've been supportive without question. And they never tried to influence who I had on what I said, never protested any position I took, even though some of them might have been contrary to their business and just an awesome group of professionals and great, great sponsors. And then lastly, as I think about the most important group is the listeners. They have shown up in a very big way. And if I add up the collective Downloads over these 108 episodes, it's been almost 40,000, approaching 40,000 downloads. So hopefully that's made a difference and maybe a conclusion. I've been asked often, bill, why do you do this? I'm curious by nature. I love to try to touch as many listeners out there. But I very much believe if I've bent the arc of transparency for the betterment of just a single investor, all of this is worth it. I like to think it was more than one, but it's just one. I'm good with that, even if this is indeed the final episode. So with that, Paul, I think the listeners know by the end why I chose you. But maybe you could just start with a little bit of your background and experience. And I think the listeners find out quickly that our careers have run in parallel tracks. Even though I didn't know you to maybe the third or fourth segment I career. But I'll let you run with that.
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C
Thanks, Bill, and congratulations on what's been an incredible run. From my perspective, you've been an absolutely model professional and a standout individual in our industry. And I think I'm absolutely certain, in fact, that you have bent the arc of transparency for far more than one person. So you should go into what I suspect won't be a particularly lengthy retirement with some great confidence on your side that you've made a real difference. So thank you for everything that you've done. Me. Very simply put, as your listeners can hear, I'm English, born in London, raised in London, spent the last 30 years in Hong Kong. I've had a Rather sort of mixed bag of professional life, if you like. I started as a chartered accountant in the uk, moved into asset management, ran an asset management business in Paris in France and in London for 10 or so years, then moved from there to Hong Kong to run a fund administration business, the bank of Bermuda, which was the second largest custodian and fund administrator in the alternative fund world. We sold that to hsbc. So I worked for HSBC for a few years doing pretty much the same job. Left there, started my own asset management business as a hedge fund seeder. Did that for a few years until the financial crisis made that a tenable business. We just didn't have enough capital to compete in a marketplace that I'm sure you remember well, changed dramatically in 2008, 2009. So I left there, became a third party marketer for a few years, found that an extremely unsatisfactory way of earning my living and so joined the cfa. And that was my final professional swan song, if you like. I ran the CFA from 2015 to the end of 2019. First time in my career when I exhibited perfect timing. I left literally six months before COVID hit. The only time in my life where I can actually genuinely hand on heart, say that my timing was perfect. Since then I've been primarily an independent director of investment funds, family offices, financial education businesses. That's really what I do today. Pretty busy. Got a full slate of what's, I think now commonly referred to as a portfolio career. I've got a full slate of bits and pieces that I do that keep me occupied and keep me connected with the industry.
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Excellent. Before we move on from that, I'd mentioned a couple of parallels. And you're a chartered accountant, I'm a cpa, Opiate labs. But we both started out what was then known as Pricewaterhouse, I believe.
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Yes, that's true, yeah.
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So a couple of parallels and we're about the same vintage. I've got five kids, I think. Do you have four or five?
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C
I have five. I think you're probably ahead of me in the grandkid states though, Bill. I've only got five at this stage.
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I've got just two. So you've got me beat there.
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Oh, well, I'm winning there.
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Two within three weeks of this year, so I'm catching up on you. But a couple of interesting career things. So maybe not completely parallel because we both started out at Price Wardhouse, but maybe some divergence, but I can sum my crew up to maybe four corridors. And that first period was trying to figure things out. I'm going to come back to that in a moment because I think it's important. And then I didn't start to specialize in asset management myself as well until probably I was about 30. So the first maybe six, eight years figuring out specialized and then doing what I really wanted to do and love doing, which is advocating for the client. And my vessel was a little bit of independent director work early in my career than I planned. But Kaya became the platform to do that. And now, like you, I'm in this. I don't know if I like the term portfolio phase, but for want of a better description, I'm going to use that. But it's really doing what I love and I've been able to pick the things that I got the most enjoyment out of in the 40 plus years of my career and now really trying to go deeper on those. And again, similar to this podcast, whether or not it makes a difference in a big span, I don't care so much. But whether or not I can influence and bend arcs, I think we can. And there's a reason why we should do that. Like you, Paul, through the work at professional bodies like Kio, cfa, or maybe just by dint of our age and time in this planet, I get a lot of young people reaching out to me, asking career advice and they want to get into that seat at KKR or Bain or Blackstone. And I say to them, like everything in life and career, the unknowable is present all the time. And you should look at your career as a body of work and where you are in that first six weeks, six months, six years matters less. As opposed to just constantly being, challenging yourself, being your own CMO and trying to figure things out. And you've done a lot of very interesting things. I don't think you had a grand plan, but maybe what your advice would be, and you probably do talk to a lot of younger folks that are saying, what do I do?
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C
I do. I never had a grand plan. I've always stumbled forward. But I guess if there was a theme to that, I think kind of what you're poking at the issues in life are firstly, don't be in a hurry, particularly nowadays where you're likely to work until you're 70. Now I know that's in some ways a depressing message to have to deliver, but both of us are there or thereabouts and it's not such a bad thing. It keeps you active, it keeps you busy, you don't need to rush. But what you do need to do throughout your career is, I think, be alive to two things. One is, are you always learning new things in your job? Really? And that's always been. My mantra is, if you stop learning, if you look back at the year, and obviously we're at a year end at the moment, if you look back at the last 12 months and you say, well, I've learned nothing new, then you've really got to stand back and sort of say, well, is this the right place for me? Because continuous learning, I know that's a bit of a cliche, but it's very, very important in the way that you approach your life. That's the first thing. And then secondly, never be afraid to take an opportunity that's presented to you. Whether it's. In my case, I've been very fortunate. I've lived and worked in France, in Ireland, in London, in New York, in Virginia, in Hong Kong. And all of those took a little bit of courage in that you've got to shake your personal life up, you've got to shake your professional life up, you've got to push yourself to do new things. But even if a particular move didn't really work out from a professional perspective, and some of those things didn't, they all worked out from an additive perspective in terms of adding to my knowledge, my experience, my ability to communicate and empathize with people across cultures, all of those things were very important to me in my career. And when you look back, they formed sort of building blocks that enabled you eventually to get to where you were going. You may not know it at the time, but. But all experience is very valuable. And if you keep yourself open to it, reach for opportunities that you might feel are a bit of a stretch and are a bit frightening, but have the courage to jump, then I think that coupled with a commitment to lifelong learning, you'll be surprised where you end up in life.
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One last observation, then we can move on. I agree with everything you said. Particularly, I want to put a bold underscore because I've said it so many times before. There's plenty of reasons to leave a job. I want to make more money. I don't like my boss. I don't like the hours. I don't like being in the office five days a week. Those are decisions you can make, and they're very binary. Whether or not you should make them is another question, but there's one that absolutely is. Hit the exit button is the moment you stop learning, if somebody cuts that lifeline off, you go and ask no questions. But in listening to you now, you and I did have the opportunity to present together a couple of times in my career. And the one I remember distinctly because I had a personal connection, was my son Sam was a fidelity. And he asked us to come in and talk to some of the younger professionals. And there might have been a hundred or so people in the room and several hundred piped in. And I remember something you said that stuck with me. And I've used the line myself, which is get yourself into as big of a global organization as you possibly can and build your network. That has served me well, as I thought about it then and now, where you go to organizations for UHSBC or for both of us, Price Waterhouse, I was at Bear, Stearns, Lehman Brothers. They didn't exist. They don't exist anymore. But I had awesome networks back then and that is a superpower. And I don't know if a lot of these young folks really realize how important that is later in your career.
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C
I absolutely agree. I think it fits into the you're going to be working a long time, don't be in a hurry. Particularly in my part of the world. Out here in Asia, you talk to young people and they kind of want to be on a beach, retired, by the time they're sort of 30, 35. You sort of say to them, well, nice idea, might be a long and boring life you've got in front of you, but it's unlikely to happen, really. I mean, very few people hit the ball out of the park in that way. And because they're in a rush, they tend to reach for bright, shiny things. And those bright shiny things in finance tend to be in your wheelhouse in the alternative world, for want of a better phrase. And so they naturally want to go into hedge funds or private equity where they can make a lot of money quickly in their eyes. And I think that's the wrong move for someone straight out of college or two or three years into their career for really the reasons that you articulated. And the final one that I would add into that is the learning of good habits and being trained. Big companies put training into you and although that may be really tedious at the time, you're sitting in the classroom and absorbing what you may think are not very useful lessons. But the training and the inculcation of good work habits is absolutely vital formation as it is for any young person, whether you're a 2 year old child or a 22 year old person, the most important thing that your elders can do for you is to instill good habits into you. And you don't get that in most environments, but you do get it in the mainstream, the bigger businesses. And that's another reason, I think, for saying early on in my career I want to work for a marquee name because they'll help me develop the disciplines that I'm going to need throughout my life.
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Great observations, a great segue to where I want to go next, which is the future, but more specifically the future of professionalism. Right before I signed on, Paul, I went to Happy Go Lucky chatgpt and asked it to tell me the definition and the outlook for the future of professionalism. And as we know, one of the criticisms of ChatGPT is it can hallucinate. But I'll read to you what it said and I don't think there's any hallucinations in here. So it says the future of professionalism in finance is going to involve the major shift from traditional to number crunching to strategic tech driven business partnering, focusing on skills in AI, data analytics, ESG and strong communication skills. And then I won't bore you with the details, but the very end it spit out the new and growing roles that professionals should be aspiring to. There's six or seven listed here and mid career, I can tell you without qualification, I've never heard of any one of these mid career. I know a bit about what they are today. Sustainability Finance Advisor, Digital Transformation Analyst, Financial Data Scientist, Reg tech Specialist, Cryptocurrency and Digital Asset Advisor, AI driven Financial strategist. None of that was covered in university for me. None of it was covered in any professional exam I ever took. But I can absolutely relate to these roles existing today. So I think that this can be very, very scary if you're mid career. I think it could be awesome if you're coming into this industry because if you think about where do you find alpha? You find alpha where there's great pockets of inefficiency and disruption and there's career alpha foot here but you've got to sort of lean into this big time. So there's a lot there. But I maybe just start with your view on the future of professionalism and you can take the other side of it. But I look at the pace of change in the last decade of my career and as I look out it's moving at warp speed and unlike anything I saw in the first 30 years of my career.
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C
I feel very grateful that I'm at the end of my career and not mid career or not start career. I have a great deal of sympathy for young people today who are trying to peer into the future. The only thing I would say is it's never been thus. I mean, no one has ever been able to really start their career out with certainty. As to what's going to happen in the future, I would agree with you. I think the pace of change in life in general for the last 150 years, every generation, it accelerates and it's still accelerating. And I think that's a concern for young people as to how they navigate their way through that. In terms of professionalism. I don't know who trained that LLM in terms of its view on professionalism, but it may have been one of your speeches or one of my speeches that it's learned that from. I think we would both say aye to that. The future of professionalism is in using your powers of judgment and experience in terms of bringing those to bear on whatever, whether it's data or regulation or any other field that you seek to get into. And I think that's really where professionalism can add value. And there'd be one other word that I'd build into that as well, which is trust. The future of professionalism, if it has to have a hook, it has to be around trust. In a world as we know where fake news, AI generated news, fake or not, is there, I think there's a place for a professional in terms of the trusted advisor that a client can have. But really the theme behind professionalism is the exercise of human judgment above and beyond that which AI can usefully determine. And I think that's another way of saying you either believe AI is going to deliver everything that we need as humans, or you believe that AI is essentially a tool that humans will use to better run our lives in every aspect of them, not just in a professional context. If you veer towards the AI as a tool, then that helps you see where you as an individual need to position yourself, whether you are interested in the softer sides of life or the more data driven scientific sides of life. That shows you where you can add value is the bit that you think you can add onto the top of what that tool can provide for you.
- [20:00]
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I agree with your concept of trust. It's such an important word. We are in the trust business. There's a fiduciary standard in most countries, in most regulation, but in the US and last time I looked at it, I used it as a reference. The definition is pages and pages might be a hundred plus pages long. So that Provides for a lot of gray area for the professional to work within, hide amidst. And I just don't know if that's good for the end client. Most days. I just came back from a two day conference that sometimes when you've been around long enough, they ask you to chair because they think you have intelligent things to say. But I chaired this two day conference on private credit, which is now by Most estimates a $3 trillion plus space. And the asset gathering is what's hit the headlines and that's what everybody's focused on. But just to pick on the mid and back office and even the use of tools like AI, they're nascent at best. So if I'm a service provider in this space, this is just a great field for them to be going at it because they can find ways of adding value. But I think when you're in the asset gathering mode, that moves so quickly that sometimes we don't take up enough pause to say, wait a minute, who is my end client? And we realize if we stop, it's no longer the Abu Dhabi Investment Authority, it's now Mr. And Mrs. John Q. Public and the sophistication and the expectations. And what defines trust changes by the makeup of the client on the other end. So I think we've got this big democratization move coming along. Regulation is not caught up. But if you take the definition of a fiduciary duty down to its finest point, that trust component is table stakes, even though it's not necessarily codified. So I think that does concern me and maybe I'll add one more thing and turn it over to you. I have never believed asset management has been a profession, is a great industry, but I don't believe it is a profession. But professionalism matters hugely. And I say it's not a profession because I'm using accountancy and law where the founding principles had professional makeup attached to them. The Buttonwood Agreement 240 some odd years ago under a tree on Broad street in downtown New York was built on collusion. There was 20 some odd specialists said let's only trade with us and let's fix the commissions. And off we went. I give great credit to bodies that came early like the CFA Institute, KAYA and cfp. But it should be mandated that professionalism matters. It never will happen in my book. So maybe your views about where we are in professionalism. I know it matters hugely to you and your DNA makeup. How does that fit into the mix in a rapidly changing world as we.
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C
Look ahead, it should fit into the mix. I absolutely agree with you, and I've used the term before, that financial services world is an industry and not a profession today, if it is to survive, and I think it fits in with the comments that we were making about how do you pilot your career in an AI driven world. If it is to survive, it can only survive really by placing client interest at the heart of everything that it does. And that isn't the case today, I freely admit. It's certainly not the case today. We are littered with examples of asset management companies who care more about their bottom line. Asset gathering, price fixing, higher prices than you're adding value. All of those features really speak to an industry that's more interested in generating its own profits than in generating returns for its clients. I was talking only yesterday about this within an ETF context. If you go into an active asset management company here in Hong Kong, we constantly torture ourselves on what's the right price for the job that we do. But the starting point should be if you're an active manager, strip out fees and look at your gross investment returns. Because most asset managers generate a gross investment return that's actually better than an etf. Why do they fall below the return of an etf? Because they charge fees that are in excess of the alpha that they're actually generating. And asset management companies don't think of the problem that way around. The way that they think about it is how much can I charge and get away with in the marketplace? What's my competitors charging? Where do I fit within a relative matrix? Rather than thinking about things in absolute terms, which is how do I deliver absolute value or have I delivered absolute value to my clients? And then what's appropriate to charge for that? And I think that's the nub of the problem that we have is that we don't look at them, we don't look at what we do from a client centric perspective. We look at what we do from our own perspective. And of course that's compounded because most asset management companies, perhaps not in the alternative world, but most asset management companies, certainly those of size, are publicly owned. Their primary duty, as they see it, is towards their shareholders rather than towards their clients. That's a real challenge to us as we try and talk about professionalism. The industry that I think is most obvious for professionalism should be the medical profession. That's where it all started really, in my view, is when you think about a professional, it's a doctor, a doctor, she or he. When we were kids, you really felt that they had your best interests at heart. The tragedy of modern life is that no one goes to a doctor today with that thought in mind. You go to a doctor thinking, what drugs are they trying to sell me and what's their margin on those drugs? And that's a real challenge for us in the modern world is how do we put client centric values back into most things that we do in life?
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It was an important point that you make on public asset management companies. And Bogle talked about this so eloquently decades ago about serving two masters. So conflicts can be okay, it's the life we live. But disclose them. And if the coin is standing on its side, sometimes you should lean toward the client. And when it doesn't, let them know about it. It's no more complicated than that. And it's interesting. You talk about medicine. I use this all the time. I use a hashtag. Maybe I'm the only one that tries to get it trending. What would Hippocrates think, the father of modern day medicine? These students had to take a vow about therapeutic nihilism. Not doing open heart surgery on a 90 year old cancer patient. You simply don't do it. And lastly, to really drive this nail home, I have a concierge physician and I go to him. His practice is now owned by private equity. So as a baker scholar from Harvard, sitting in the waiting room figuring out how to maximize the roi, and I think I'm going there for good health advice. Hopefully the two are the same in the us. I don't know if this is true in your part of the world, Paul. Private equity is now investing in law firms. I just don't know what that means in terms of independence. Public accounting firms, they're making investments. So is there a Chinese wall? I hope there is, but we've gotta be very careful. I'm not saying these things should never ever happen. But the world is getting more complicated and more conflicted and any profession has to point those conflicts out.
- [27:29]
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The light at the end of the tunnel may be to say that you live long enough, you see everything twice. And maybe this is a cycle that we're going through, the collapse of professionalism only to regenerate professionalism, perhaps long after you and I are no longer a part of this conversation. But at some point, and I think you see this a little bit in newspapers and news media in general, at some point, trust comes back into the equation that people don't have time, even with AI to sift through all of the doctors in their area or all of the lawyers in their area to figure out who's got the best business model, who's got the highest ratings. Ratings can be fixed, all of those things. It's not practical to be able to do that. So at some point, I think some of these businesses do come back to trying to distinguish themselves by overtly demonstrating that they're placing client interests above their own. That may be many decades in the future, I confess. But I think if your view of life is that it is cyclical, hopefully cycles that end higher up the beach than the previous cycle. But if you do believe in cyclicality, then I think what we're involved in at the moment is the downswing of the collapse of professionalism in many walks of life, which hopefully will lead to its regeneration in the future. I'm an amateur historian, as you know, and perhaps if you take the view that history is about human progress rather than this dystopian view that we live today in the worst of all possible worlds, then you can look to a time when hopefully professionalism will return.
- [29:12]
A
Great framing. I'll leave it there and maybe turn the page. So at the beginning of this discussion, Paul, I mentioned, I think me, and I believe you as well, we're now in the face of our career where we're doing what we love and hopefully where we think we can make a difference. And one of your chosen missions is sustainability and sustainable finance. And it's very interesting topic. It's gotten a lot of kicking of the dog here in the US for political reasons as opposed to maybe fundamental reasons. But if we put that aside for the moment, as I said, I do get asked to speak at panels. I moderated a panel not that long ago, and I had a senior asset allocator from Thailand, from Switzerland, from the UK and from one of the states in the 50 United States. And the views specifically on climate, certainly from the person in the US versus the other three who are quite divergent. But when you talk to somebody in Thailand where climate is an issue on the very shores of that nation, it comes up in very, very real time. And I think anybody listening to it would say, wow, maybe there is something there. And I think some of the challenges, if there's regulation and legislation required, certainly in the US the political will is two or four years, the time it gets to get reelected again, and then things change all over again. We need a sustainable lean into this. And maybe last point in this COP 30 sort of went out without even a banger or a whimper. I don't know if Many people even knew it was in Brazil.
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Went out with a fire.
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Exactly. It's about the fire. It's like page five of the B section of the Wall Street Journal. So there was no tomb handed down and this is the principle. So I think Cop 30 has lost its way. And I think, as I said at this conference, I got a chuckle, but I said it maybe less cynically, is that I think the White House offered to send the janitor down to Brazil and we had no delegation there and to at least not be there to listen to other people that are hopefully know what they're doing. So anyway, you've chosen this and I think for good reason. If I travel outside of the us, the views on sustainability and climate and sustainable finance are very different than you might hear in certain parts of the us. But why sustainable finance and maybe your outlook in terms of how you're going to make a difference and how we have to as a world make a difference going forward.
- [31:29]
C
I'm actually very optimistic on sustainability. I think obviously we're going to miss all of our targets, whether you believe in them or not. The empirical evidence is that the world is heating up and kind of goes back to one of our AI themes as well. My biggest advice to young people is travel. Because you can't get everything you need from a computer by traveling the world, you do change your perspective on things. And the one thing that it absolutely will overwhelm you if you travel is that there isn't a country you will land in where the locals will not tell you that the weather over the last five or six years has been very odd. That's an empirical fact. I don't care what anyone says as to why it's happening. It is empirically obvious that it is happening. And countries around the world are responding to that, including your own. They're responding to that because business is more perhaps focused on reality than regulators are for the electoral cycle reasons that you mentioned. And the world is well served by American companies that are involved in all sorts of green technology that is built around generating more climate friendly power for us all as you go around the world. That's also very definitely the case that businesses taking the lead in developing what we as a planet are going to need going forward. The disappointment is that regulators, because they are essentially political, they're political appointees, they have to listen to their political masters. Regulators are subject to electoral cycles which sometimes go in their favor and sometimes go against us. And we're in a poor electoral cycle phase at the moment. And from A sustainability perspective. Why am I interested? Because I think the finance industry has a role to play, a very big role to play in making sure that it conducts investment to where we need it to go. And you don't have to be a climate messiah to really argue for that. You just have to be someone who is thoughtful about where the industries of the future are going to be and where profits are going to be generated. And you can say, yes, solar power or wind power or anything today is more expensive than fossil fuel power, but those prices are coming down. And I believe as we continue to invest in battery technology, storage technology, all of those ancillary technology, that you'll find that the cost of actually digging stuff out of the ground is more expensive than the green solutions. That's where I think we're headed. That's where business is pushing us. I think regulators will eventually catch up. As you travel the world, you know that there are climate related challenges, whether they're man made or just the turning of the heavens. And it's our turn to go into a mini ice age like we did back in the 17th century. I don't know, I'm not clever enough, I'm not enough of a scientist to know what's causing it, but I do know it's happening. And here in Asia, just to sort of underscore the point about travel, I don't know what you hear in the US but 500 people were killed in Sumatra by flooding in the last month. Several hundred people in Sri Lanka have died through flooding in the last month. These things are very real. If you come to Asia, you cannot but know that climate change is happening all around us and that we need to respond to that because it's not going to go away anytime soon. Irrespective of who's actually causing it. We need to deal with it. That's kind of my interest in it. It's very personal. As I say, I'm not messianic about the reasons behind it. I am messianic about the fact that there's huge business opportunity there and that finance has a role to play in making the technologies that I believe we need as a planet cheaper and better and more accessible for everybody. I think that's going to happen.
- [35:40]
A
Well, I'm glad you've picked that mantle up. So if we're going to solve for climate, you've got to have certain sovereigns at the table, not the least of which is mainland China. It's interesting because they're a command based economy. And while they may or may not have showed up at cop 30. I'm not even sure, but there's probably a lot going on as it relates to climate in China. Maybe more for the good than the bad that people might not be aware of. So you can run with that. And then maybe since you're right there in Hong Kong, maybe your outlook and impact on China's economy and what it means to the rest of the world.
- [36:15]
C
It's a great comment on China and sustainability because people do misunderstand. There's no country on the planet that is more committed to green technologies than China. And I'll give you a sort of a personal anecdote here in Hong Kong. Fifteen years ago, we moaned about our pollution in Hong Kong. People did studies on it, and most of our pollution blew in from factories in southern China. The amusing fact there is that most of those factories in southern China were actually owned by Hong Kong businessmen. By the way, that's not to demonize China in that regard, but that was where our pollution was. Now we all go shopping in a town called Shenzhen, which is just over the border in mainland China from Hong Kong. We all go shopping there. But everybody comes back and says the air quality in Shenzhen is far better than the air quality in Hong Kong. Why? Because China is almost 100% electric vehicles. Apart from anything else, everybody knows one thing about China is that it's making electric vehicles and depending on your perspective, selling those to the rest of the world at knockdown prices. But they've also bought them all themselves. And so the air quality in China today is vastly better than it is in Hong Kong, where although we're a small country, we failed to take gas guzzling cars off our roads. That's a measure, if you like, a personal anecdotal measure. Goes back to. My theme about travel, is to show you that in China, air quality is improving rapidly. Now they have huge problems because like India, a lot of their power is still generated by fossil fuels. And that's something that they're gradually weaning themselves off. But the one thing I can tell you about the Chinese is they will get there. And they are determined to get there. But they look at things in a more transitionary way than perhaps some of the people who like to beat China up look at them. And they want to push China to go further and faster than the Chinese can, because needless to say, the fossil fuel industry is also a huge employer in China. As well as a generator of electricity, the Chinese will get there. They are still increasing its true fossil fuel consumption. So they're still burning dirty coal, but they do intend, it's part of their planning, to get off that as soon as they practically can. I'm a big bull on China as far as that's concerned. In terms of, in general, I think the light motif of the rest of our life, Bill, is the clash between America and China, which is essentially a trade war. It's going to blow hot and cold. For what it's worth, I think we're going into a cold phase. My reading of the tea leaves is that America and China right now are trying to find a modus vivendi that will see us through the next three or four years. So I'm quite positive. And straws in the wind there are. You've got lots of American companies who kind of gave up on this part of the world, fund management companies who gave up on this part of the world a year or so ago. And out back, Hong Kong is quite busy at the moment with visitors who are coming through Hong Kong on their way to China and trying to reconnect with what's going on on the mainland. So we're edging towards a compromise. But for the rest of our lives we have to accept that what we've got here is a rising China and a defensive US. And that is only going to lead to continuous clashes for the rest of our lives, really. And that's something that we have to be ready for and respond to in the right way. China is going to need at least a generation before it moves from being a production based economy towards being more of a balanced, consumer driven economy. That's going to take a long while and whilst that happens, there are going to be these challenges that from a Western perspective we're going to be accusing China of state subsidies and dumping goods on us and destroying our industry. From a Chinese perspective, they look upon that as the west trying to keep them down and to prevent China from fulfilling its destiny. That leitmotif, if you like, is gonna be with us. But think about it not in terms of a class of civilizational values. Think of it more in mercantile terms in that what this is is an industrial challenge. Who is going to trade with whom and in what goods and how are we going to try and find the balance there. I was reading a great article the other day which I think is right, is where China is today is that China wants to manufacture everything. That's a problem because it can't actually trade with the rest of the world if it doesn't want to buy anything from the rest of the world goes back to sort of Adam Smith. The whole purpose of international trade is that you sell me something that I want and in return for that, I pay for it with something that you want. And at the moment, the challenge is that China's national security interests are that they want to manufacture everything, but at the same time they want to sell all of those goods to the rest of the world. That's an unsustainable future, obviously. And that is going to have to be amended. But goes back to our theme of this conversation. It can't be amended unless there's trust on both sides. And obviously trust has broken down between China and America and also between China and Europe. So we're finding it very hard to have mature, intelligent conversations around how we can help China grow and reach its potential and at the same time build sustainable economies in the west that are going to thrive as China rises, rather than seeing this as a zero sum game, which is unfortunately the way that we talk about it today.
- [42:16]
A
Appreciate all that insight, Paul. Maybe a final question somewhat related to all of this is throughout my life, personally and professionally, I've always tried to be an optimist. I don't like pessimists. They're usually wrong. Maybe they're right in the short term, longer term, usually optimism wins out. But I do think about and maybe because as I get older, what kind of skunk could show up at this economic picnic? And there's two things that worry me. One is inflation and the size of debts and deficits and the percent of those as it relates to GDP just don't seem to be sustainable. So that's one. But then the other, and this is what I was thinking about when I was listening to your assessment of China, is demographics. I don't know if enough people think about it. Maybe I worry about it too much. I'm at the tail end of the baby boomers here in the US And I sit back and say, who's going to buy all of our stuff? Do they want the big houses? Is there enough people to buy the big houses? How crowded is that window going to be when all of these baby boomers are putting things on the table at the same time? And you probably are closest to seeing this a little bit live in real time because the demographics in India are awesome. China not so much and probably even less so in Japan. So what is your take from where you sit in Hong Kong? We could put aside inflation because we probably don't have enough time to get to that. But maybe just stick with Demographics, how big of a worry should that be?
- [43:37]
C
I think obviously a huge positive as far as the planet is concerned. If we can go from nine and a half billion to seven billion over the next 50 or so years, which some demographers think is the likely arc, then I think that's hugely positive for the planet. But for individual countries within that, it is going to present relative issues for them. And obviously China is the poster child for that. The Chinese population is falling and will probably continue to fall for the rest of this century. That will give China a relative value issue, if you like, in terms of its status within the world, but it's positive for the world in general. Will we economically be able to replace the factors of growth? That population increase provides that multiplier effect, but I suspect it will. Japan is still growing, although its demography is appalling. Italy is still growing, although its demography is terrible as well. Countries do find a way of living with aging. I think Japan and Italy are two countries that can teach China and other countries that are faced with that. A lot of the benefits that come from a shrinking population. But obviously you don't necessarily want to own real estate, certainly not private real estate in situations where there are going to be fewer buyers for it. So it's going to be pockets of challenge. But overall it's a positive that we're in a resource constrained place where the resources that we have are going to go further because there are going to be fewer mouths to feed.
- [45:16]
A
I agree with that and maybe AI solves some of this, but I think also the sovereign has got to be thinking back to the early part of this conversation, upskilling and training. Because there are a lot of individuals that are in jobs today that may be gone five years from now, but they could be viable and contributing factors to their family and to the economy as well. But it's not going to happen without some form of intervention and some industries are just going to get disrupt. I was at a funeral today for a 90 year old who lived a couple blocks away from me. I didn't know him well, lived a full life and I just went to college, pay my respects. And as I looked around the church, the priests and the undertakers all were older than me and I don't know who's going into professions like that. So there may be some professors who are just going to have to rethink how this model is going to work full stop. But it's going to be interesting and I think once it gets sorted out, you and I will have Gone to a better place perhaps too. But I think being vocal and contributing, asking why and raising questions is part of what you and I have done the entirety of our careers. And I think if enough of us can continue to do that, I am an optimist and things will work out.
- [46:27]
C
One of the places we haven't talked about is the emerging world in Africa in particular. And if I was to voice my biggest fear, it's that Africa's population obviously is exploding. I can't remember what the numbers are, but it's over the next 50 years, it's going to grow very quickly and generate a lot of young people who have very little economic future as the world stands today. And even more worrying, as far as I'm concerned, are going to be divided from the developed country by technology. Now you can look at that and say, well, technology will help them accelerate their development as people and as countries, and I hope that's the way it works out. Or you can be a little bit more negative about that and say technology is going to keep those emerging people, if you like the next generation of Africans down because they're just not going to be able to bridge that divide and they're going to become almost second class citizens in a world that has spun past them to such an extent that they're never going to catch up. I think from a purely European perspective, that is such an interesting question. I mean, we have a President of the United States who's pointing out civilizational collapse in Europe under the pressures of uncontrolled immigration. And whilst I wouldn't agree with the way that he's necessarily painting that picture, what he is pointing out is that Africa is on Europe's doorstep. There is nothing we can do about that. Geographically, Africa and Europe are separated by a very, very narrow strait, and through the Middle east they're actually pretty much connected. If we cannot give young Africans a reason to stay in Africa, they are coming to Europe. And it doesn't matter what our immigration policies are. They are going to come because they have no alternative, they have no choice. And we will be overwhelmed by that inward immigration if we cannot give Africans a reason to live in Africa. Going back to your comments about why I'm interested in sustainability and all of these things, for me that's the biggest challenge that I face as a European, albeit one who lives in the Far east, is how do we help Africa grow and develop? And it's just not a subject of much conversation, but I think it's the biggest challenge that we face. Arguably globally Today it's an excellent point.
- [49:00]
A
And I'm glad you raised it. Like most things in life, there's two sides to the coin. And yes, we need to provide these folks a reason to stay, but sensible opportunities to leave as well. And if you look at the United States, it was founded on an immigration principle. It was a brand new country owned by the Indians and they were displaced when people immigrated in. And maybe there's a second wave of that where if we have an aging demographic base in the US we need more qualified younger folks coming in. The best means to that end is having a sensible immigration policy where you're providing opportunity to folks that want to come in, but providing better outcomes for our local economy and the global economy as well. So I think it is an important aspect and touches sustainability as well that no matter what happens, the G20 countries will just turn up the AC when it gets hotter. But the damage that's being done to those emerging market countries and our level of responsibility to that, that's another debate that we can have. But to recognize or to state that we have no responsibility whatsoever for that is shortsighted. I don't know what the answer is, but it's got to begin with a discussion and a reasonable debate. The solution's going to be a compromise. Somebody's going to have to compromise or both sides gonna have to compile us to find a reasonable outcome that we can all live with. And here live maybe with a capital L because we are talking about lives at risk.
- [50:28]
C
Well said, Bill.
- [50:29]
A
Paul, thank you for joining me on what is my final episode on the KAYA platform. I may find a home for this going forward, but if not, my curiosity like yours will be taken elsewhere. But now the listeners who know why I chose you as this final episode. I know the way you think, but I learned a lot from listening to you this evening and I know our listeners will as well. So thanks for joining me. I wish you and Beth a safe holiday season and hopefully I'll see you in the course of my less travels. I used to fill up a passport every year. I did not leave the United States in the entire calendar year of 2025, but that too shall change.
- [51:08]
C
Thank you, Bill. It's been a real pleasure and good luck going forward. I know you'll continue to live a very valuable and contributory life. So I look forward to following your career in the future and hopefully see you soon.
- [51:20]
A
Thank you, Paul. Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Chi association and subscribe to the show@caia.org that's C A I A dot org. See you next time.