>> what do you do to relax? >> to relax? [laughter] >> you do the same thing i do. >> flyfishing. >> absolutely. >> but i really do well. [laughter] >> he may cast better but i catch more fish. i get it out quick. >> i do that too but i read. >> thank you all. [applause] ♪ [captions copyright national cable satellite corp. 2015] [captioning performed by national captioning institute]

>> she is the best-selling author at the netbook on the global economy and financial system is going to be published later this year. please join me in welcoming our host. [applause] >> good morning. thank you for that very kind welcome and welcome to the first session of this years conference called the return to volatility.

i think the subtitle of that could be "yikes, what is going to happen next?" the role has been thrown at ordinary decade. first we had a gigantic credit bubble and then an even more shocking financial market collapse is not battle turbulence and then we had a truly staggering policy response. it has in many ways typical of financial markets into the equivalent of alice in wonderland. they reckon that $1020 of aid was provided by banks. we have had a debt increase of $57 trillion according to mckenzie. much of that actually has come from china. we also live today and it rolled extraordinarily long yields.

you have a number of companies that are issuing at negative yields. it is an extraordinary unprecedented time. we still have a global economy that is at best pretty sputtering. i was noticing in this morning financial times american companies are on track. ukraine, china come in many other places as well. are we heading for significant volatility and if so, will that the good or bad because of course, the dirty secret about volatility is that we love volatility. it helps sell papers, create news. many of you also love volatility.

it create enormous opportunity for all kinds of financial rubbish. we have a terrific panel of people to talk about where it is going. many of them are very well known to you. on my far right is alex friedman, who is ceo of gamb. next to me, josh friedman, cofounder of canyon. on my left, and many was very well known to you, a veteran of his time. josh harris, cofounder of apollo global management. on his left, alan howard. on the very end, carey lathrop. they will tell us what is happening in the world.

unusual to see the bankers outnumbered but i am sure you will do well. i would to start with alex and ask you when you look at the year ahead, are you worried about an explosion in volatility? mr. friedman: i spoke on this panel last year and i hope no one will remember what i said a year ago because i am sure a big chunk of it is wrong. to that question, i expect that at some point over the next 4-6 months, we will see real volatility and the market will pull back to something like 10%. i think we have about two years left in this central banks supported run. when you think about the big drivers, i'm not smart enough to get beyond the big drivers. we are pretty much everybody easing. you have cheap energy and

falling currencies and some of the more worrisome areas particularly in europe. more importantly, there is the quote from abraham lincoln -- "life is a choice and alternatives." volatility, yes. buying opportunities, still a couple years of this rising tide environment. >> a world where everyone is grabbing for risk. history suggests that rarely ends well. mr. friedman: every 5-8 years have been market recess. we will probably do that so to speak. what would be the not end well story -- a lot of political risk. longer, a huge structural issue around liquidity which we will

talk about. he met worries me the most is that as investors are further out on the risk curve you start to see the most traditional pension funds reallocating. as they reallocate, the elderly are not factored in. not indebted nations that lot to be bailing out there elderly who thought they had asked income savings to retire on. host: history suggests it is the dumbest money that jumps on the trend at the last minute. alan, do you think we are heading for another crisis? mr. howard: the market is inherently extremely off the table in the structure we have today. that is partly due to the regulatory effects of changing the way liquidity banks offer. clearly as we know, we have a small event and a much larger

one in terms of the s&p. these are examples of where the change in market infrastructures , the volatility they produce is of a mac and dude we have not seen before. that you any of these is small events ever lead to something bigger? we'll let it see if we get something more fundamental based in the future. host: josh, what do you make? are you concerned about the potential for not the shock in the next year or so? i am surrounded by josh's. mr. j. friedman: i think it is sometimes easier to prepare them to predict. when you have unnatural interference on a global basis with financial markets, you get

built up imbalances and they built up and build up and is a little like that last little grain you put on the sand pile and the top of it collapses. last year, we had quite a lot of volatile events take place. there were some significant out of the ordinary, major adjustments in certain areas. you had obviously what happened with the swiss franc and i think that got most macro players by surprise. what happened in oil was really extreme. the rise of isis was something generally not predicted by the general public. you now have the fed so intend a not surprising people on interest rates that they want people to the point where they do raise rates, it will be a shock. sometimes the best thing to do is to know that eventually, all of these unnatural buildups will produce an adjustment but rather

than spend to much time predicting one that will happen, maybe it is better to prepare. host: right. josh. mr. harris: i think there's been a change of the structure of the market. a people that used to make the markets for the banks and the banks were driven out of doing that. who has replaced them? really be people on the stage. when you think about the less sex income market, more than a third of it is dealing with liquidity. what happens when retail decides to move out of the daily liquidity vehicles buying assets that probably don't have daily liquidity in the event of a shock. when something bad happens, you will see an amplification of a trend it down because the people that had to step in and buy will

have much higher -- they will step the price of risk in a more aggressive way. there is a lot of capital on the sidelines. there is definitely people that will ultimately step in but there will be volatility within a range. i don't think it is bad for the system. i think ultimately, we probably having -- probably having people on the stage setting the price sky of risk -- price of risk. i think that it is what it is. the structure has changed to a more institutionalized market which will produce opportunities when things go down more aggressively and has created opportunities. you saw -- a lot of these markets are not that liquid. the high-yield market when we had some of the fiscal issues in the u.s. are when oil crashed, you saw the high-yield market trade-off 5-10 points.

you would buy a little bit of it and it will trade backup 10 or 15 points. that is the market we live in today. they are less liquid. i think there will be sort of regional ballots. there is a volatility in certain industries and structures. in natural resources commodities. there is volatility. why? the dollar is going up, china is slowing down. in retail, or the internet is remaking certain sectors there is volatility. many energy could there is volatility. i've i'm not sure you will see with the central banks these i have got your back policies. i don't think you will see broad-based volatility like you saw and last financial crisis but you may see rolling structural volatility around different industries, different companies, different markets different regional areas. host: let's take that issue of

regulation risk. i know it is something kerry has been looking at closely. i will come unto some of the geopolitical triggers for volatility. just how bad is this mismatch in the markets today? post 2008, we have seen the -- that is a big decline. it has created mismatches and pockets of potential liquidity. we are seeing the industry squealing. those of you who have not yet read your sp this morning may not have seen we had a piece this morning about how bankers are appealing for changes in the trace reporting system. the concern about a lack of look ligety. is this going -- lack of liquidity.

mr. lanthrop: i think ultimately, it will take rates rising and even if that does raise rates later this year it is likely to be the front end that moves and is probably the not -- not a longer end. the issue of regulation, i think that is something clients will throw in front of me and you will see deals go from 250 billion to roughly 50 billion depending on when you look at that. the reality is, some of that is overstated. if you think about it, you took out bank of america and merrill. same thing with --

you took capacity out of the market but there is no doubt we have strong balance sheets. they were not there for the benefit of our clients per se. there is no question directionally that is correct. part of it is not top-down coming from a, it is bottom-up. the cost -- an inventory there's a lot more equity today then and long-term debt which is more costly. it means offers have to widen out or there has to be greater velocity in the balance sheet. there has been some element of regulation but i think some of the do structural -- the buy side has grown more than the cel-sci. we could double our balance sheet. you would still have this problem and i think the daily liquidity -- you have this mismatch. when you think about what happened in the crisis, it was that where are you funding

long-term assets and short-term liabilities? you look at things like buying longer dated assets. they couldn't roll their liabilities one the market seized up. that is what it was looking for -- the catalyst, the grain of sand that causes the whole system to collapse and everyone to run? the challenges are that different from the crisis were you would have large market moves -- and if you think about what drives that as a market maker because you have is in balance very quickly of high yield -- less summer was at 5%. very quickly the market moves to 6%, 7% to try to create equilibrium so that the sellers become holders or buyers. buyers come in and say what can you offer. will he not a lot. aristotle in victoria around. it shuts -- really not a lot. the industry shuts down.

it takes a lot to recalibrate. it immediately snaps back and ends up at 5.5%. in an orderly market, you would watch things take from 5% to 5.5%. when it goes down, you have to buy whatever you can because when you look and see what actually traded, not a lot trades when it goes down and not a lot trades when it goes from seven to 5.5. i think the markets are very prone to that type of volatility in the future. host: it strikes me as the terrible irony of 2008. everyone agreed there was too much debt and a mismatch in terms of the duration. what happens now? we have a market with even more debt out there and even more potential miss message in terms of liquidity mismatches. -- potential mismatches in terms of liquidity mismatches. we have all heard the banks talk

about the problem of a liquid market and the regulatory changes. there's an argument to be made that markets are responding with entrepreneurial zeal to find other ways to plug that gap and we don't have to have a world dominated. mr. howard: it is how i think essential bankers are looking at the way the market is going to structure. not only are the banks inventories coming down but the way they behave in terms of offering liquidity has changed. because they put more pressure cutting cost and making sure business is more effective, they are clearly cutting -- using much more junior people on those training desks. people really have no idea how much they are really allowed to use.

a specific amount of material and will not use it anymore because he is concerned if he pre-positions for a trade or trades after he may retrospectively [indiscernible] market makers are not behaving at all with underestimate. that exacerbated that time of stress. the next thing to look at is the idea that the central banks moved products to central ccp. what happened that is very slow in another has been a lot of pushback from the banks about the specific risk of that clearinghouse. a lot of product goes there. they're taking a long time to get to that.

with -- the risk has changed. after the shock, they cannot model the way they used to. we are ending up with -- it is like liquidity is forcing more and more investors to use products to hedge their portfolios. so 10 or 15 liquid products are being used even more and are of increasing interest in those products. whenever we get a small shock and positioning is one way, you get outside move in these liquid markets. we are moving towards a structure where the banks are not going to go backwards. they are not going to let the banks take more product.

less market making by the banks. more standardized products. electronic exchanges. that is the way we are going and i'm not saying it is bad but it is a very different structure. it means you're going to get these large moves but we don't know if they will ever follow through to something bigger. mr. friedman: the institution that cause the left financial crisis were the banks. yet talking about the fact they have been somewhat pushed out of the market in terms of the market-making function. actually they are much less elaborate, they had a lot more equity. they're getting out of the risk businesses. the real question is systematically, no big is necessarily a bad thing for the system. i think they will be volatility within a range but the month of

capital sitting on the sideline waiting on with all been waiting. we're often talking about the same phenomenon and when it happens come you cannot buy anything. the minute you step in and buy something, it goes right back up. the row question is, more fundamental i think. the system is like choosing your poison. if you make the banks massive to the point where they are impossible to deal with if they get in trouble, and very difficult to manage, you get -- they may be willing to step in a bit but you have created a larger systematic issue. i think we are in a better place. host: i was talking with a group of central bankers who told me back in 2008, they helped that endowments would be liquidity providers in the crisis and that hope turned out to be completely wrong. some of them were suggesting

maybe next time around, the central banks themselves will have to step in and be the market of last resort. are you concerned about what will happen? are you willing to be a big liquidity provider in a crisis? mr. friedman: you reference are important point. central bankers hoped -- hope is an important point. we all want to think there is a force that will fix things and central bankers have stepped into the void and i've been that -- and they have been that. i think i somehow learned they had no idea what their exit plan was. they knew they wanted to get on the pack but did not know how they would get off of it. central bankers are people and they do their best but they cannot foresee all of the consequences. it gets worse when they are not driving so to speak. that is the volatility we are at right now which is essential

bankers have done the vast majority of what they can do so we are shifting to the fiscal side, inherently more messy at a time when there are a lot of elections coming up over europe and downstream in the u.s. you got into the unknown known donald rumsfeld thing. greece is the most analyzed known unknown there is. i don't that is what the rails everything. will the u.k. leave the eurozone? possibly. what is happening tragically in nepal today is a reminder of the unknown unknowns. they can really derail the story and the odds are there will be one of them upscale in the next 12 to 18 months. how do you position yourself against that? mr. j. friedman: forcible, crises come from the credit

world. unless you have massive amounts of leverage at the retail level the worst crises come from overshooting on credit. left a pressure through systematic easing globally that has caused disequilibrium and buildup. institutional framework is so different now, maybe they have achieved the purpose they were trying to achieve which is to get instead of having all of the risk and concentrated mismatch located within the banks, you have a shadow bank that is quite functional. you have many institutions like a lot of the people represented on the stage who run very on leveraged or very lightly leveraged institutions that don't have daily liquidity but are able to provide capital to the market the moment when the mismatch institutions -- we get worried when we see etf buying bank debt.

that is a mismatch. there are so many institutions at don't have that mismatch that have longer duration capital that aren't terribly leveraged and there is plenty of people who are think learned that the reading capital to those types of institutions post crisis represented by the downdraft in prices is a good thing to do editor profitable thing to do and i may be a little less worried about the systematic risks of the overshoot although i do think it is clear we haven't overshoot. host: do you feel functional? mr. harris: yes. 2008, the government was the last firewall. i think it is the same. i believe if you were to have a 2008 style crisis, that would have to happen again but once it happened, the people that would be facing risk would be pricing it with their own money with

their clients money in a much more analytical systematic way. i think that is ultimately -- i don't legal ultimately, the people that would have to step in have really changed and i don't think -- i do think the people that would make the markets are managers at this point and not banks. mr. harris: there is one issue -- the rise of passive governments. they are a bit of a blunt instrument. people who hold passive instruments are not aware of what they hold. last fall, it was because they had a lot of exposure to energy will stop you ask a lot of alligators who allocated, they were a bit more surprised than they should have an. you see a version of that in china now where it has been a

good investment but china is slowing and shouldn't actually be such a rising dynamic of an instrument and there will be a time when the market catches up with economics. host: a bit like in 2007 when a lot of mainstream investors realize what was sitting inside was not quite what they expected. as the loan banker on the panel, i think maybe you get four times the loan bank on the panel. let's get a word on this before he move on. is there anything you like to add on this issue? mr. lathrop: i think one of the challenges you have and we touched on regulation being one

of the issues -- one of the challenges is the changing market structure and i think probably defining managers is probably not right. we have touched here. what are the managers that have more longer term liquidity? those are the ones that can step in because whatever it is it will not be the known unknowns it will be something we don't anticipate. i think with some of the change in market structure -- more of the market is return money. when prices are going down, they will tend to sell and it is not like insurance or pension or yield driven. when you go back 30 years, there was more that have of fire -- type of fire. it has to be those 11 longer-term structural liquidity so if they buy -- it has to be those with longer-term

structural liquidity. mr. harris: certainly we had a lot of people made a lot of money and the last prices weighting and stepping in. the markets did not clear. the people that ultimately cleared the markets cleared them at much lower levels than fundamental value. that was highly lucrative and very profitable for many of us. everyone saw that. everyone is waiting for that. a lot of people are saying when is the next 2008? all of the things we're pointing out. i don't believe it will be that simple this time around. i think he will have to be much smarter and opportunistic about how you play industries and i don't think you will have this broad-based pullback. we see it today even in the stress landscape.

the level of returns today are not what they were. there are many more institutional players that said there and they wait -- that sit there and wait for any type of pullback energy. kind of the vocal drumbeat of hey this is the latest thing since sliced bread. i just don't believe that we are going to have the opportunity that we all had in 2008. the system won't really breakdown as much as it did. host: a good thing for a mainstream investor. let's change the conversation and look at some of the triggers that could start this volatility. i want to check if the audience is still awake.

i want to ask you all a couple questions. a quick show of hands for those of you who are still awake. i'm going to ask you when you think the next u.s. rate rise will be. june, autumn or not at all this year? all of you think it will be in june, hands up. janet has done her work. those of you weren't looking around can see that is nobody. a rate rise in autumn. ok. those of you think there will not be a rate rise at all this year. wow. that is a lot more bears than i would've expected. any of you want to comment on that? do you think it will be one of the sparks for potential round of volatility? mr. harris: i think the fed to

see the u.s. rate rise. i think the fed is -- has a very difficult decision to make and i think that they're really thinking about it and i think it is unclear. they really want to get off of zero rates because they see the unemployment numbers going down and they know that eventually, the u.s. economy is going to get inflationary and they don't want to overshoot which is a pretty significant tell risk. having said that, the data more recently has been negative and i don't think that this movement and the dollar has surprised people in terms of its effect on the economy. the conventional wisdom was that experts are pretty small number. movements of the dollar. matter very much and i think that wisdom is being challenged right

now and earnings have been pretty poor so i think ultimately, you have this on the one hand. and my guess is i think they're naturally dovish. they naturally want to be very cautious about d really what they see as a somewhat slow u.s. recovery. my guess is they're not going to act in june. as you get closer to your and, they will be worried about christmas so my guess is ultimately, it is january. i think they will want to do this early next year. but i think there are various conditions. everything i am saying -- if we started having 300,000 job as every month, they might move but i think that is not going to

happen. i think it will move into next year. host: alex, would you agree. mr. friedman: i would slightly differ with josh and that i do agree the fed is naturally dovish but i also think they are very cute into valuations and risk markets right now. i was struck by only 2% of the last 40 years as the s&p ever been higher. there are all these downstream applications which we have touched on. my guess is they will make a move in the fall but that it will be smaller than expected and they will start to telegraph incremental moves which to me is janet's threading through the data and her really desire to get the level they are on right now. mr. j. friedman: i think the

point alex raises is one people talk about. regulators are trying to use policy to allow them to keep rates lower for longer but the point josh made about stress, for the first time probably in 10 years, we are used to having stress investors saying i want to have a 20% return. then it was 15 and as returns get compressed for the first time, you have investors saying let me buy something that yields that i have higher confidence in to get the double-digit return i need for my clients. you're starting to see -- we all know one internal leverage turns into two. why is money flowing into credit? there was an issue a couple weeks ago in europe.

they issued 100 year bonds. is there that much natural duration risk for 100 year mexican bonds. it rallied six or seven points on the break. it is pretty now below 4%. at some point come it is not crazy to think that could trade at 6%. that is a 66 quarter on a dollar point. a percent is still not a crazy number. if you're just buying it because you can use yield, what is the only thing you can do is to sell it. you can see anyone understand why investors are moving like that because they are getting squeezed but it sets you up for

more volatility and investors are going in places in a prolonged time of low rates. whether it is retirees or it is hard to make business models work in zero rates. host: that raises the question which is the issue is really not when the rate occurs, it is how fast rates go up. maybe what we should do is try to visualize janet yellen and a swimming pool which is a strange image but imagine her in a swimming pool with a giant beach ball and she is standing next to you and holding a giant beach ball underwater under your chin and essentially saying not yet not yet not yet in just one you start to relax, she lets go of that beach ball and it shoots up out of the water and hits you hard in the face. the point being if you can imagine that that sometimes

things conflict to the surface very fast by way of reaction. does that worry you? [laughter] the vision of the rates suddenly shooting up much faster than people expect? mr. howard: i think there is a big difference. a lot of them have a problem with rates. that is not a hike in their mind. as they move off zero, they will make it clear by easing it to watch her conditions. don't think they will allow the market you think they will be hiking very quickly or in any way to allow asking prices to sell off dramatically because after eight years of surveys, the last thing they want is a small hike to cause an armageddon. in other bears any chance of that going too high. maybe a year later, we will have to see how the rates are going

with europe and japan. how does that affect the dollar and corporate america? maybe that will affect the pace and the amount they hike at. host: what about you? are you concerned about the beach ball or do you think they can keep it rising slowly and steadily? mr. j. friedman: i do find the janet yellen image disturbing on all sorts of levels. [laughter] mr. j. friedman: apart from that, it was interesting to see the results of the poll. the fed has managed to convince everyone they are never raising rates because we take this poll last year and you thought it was earlier and it has moved out and moved out and when the actually raise it come i think it will surprise everybody because no one really believes they're going to raise rates and they have raised rates on a relative basis because of the negative

rates we see in europe and elsewhere globally. in some sense, you can say rates are quite high relative to other places in the u.s.. i think it is very, very difficult for us to figure out a way to actually make money predicting rates. i think the exact timing and the speed with which they increase it are equally difficult to predict and i think the world of wooded with brilliant economists who love gotten this wrong so may times in the pet -- who love gotten this wrong so many times in the past. had you protect your self question mark how do avoid the credit bubbles taking place in the system? you look at the possibility of transactions. there are no comparisons to 2007. you don't have the massively

leveraged institutions holding the securities. maybe there is less danger. i tend to think the fed is not going to do something to drastic , too quick, too severe. i have for people on the other side and i don't know but i do know going out on a risk spectrum in today's environment seems like an awfully dangerous thing to do to me given where high-yield is. we have just been avoiding it. host: many people are going out in the risk spectrum. let's try another poll and then. i'm going to vote on two things. one is will we have a greek default in the next six months? secondly, will we have grexit? those of you think greece will default in the next six months

but your hands up. 50-50 on default. and on grexit? who expects a greece will stay a part of the eurozone? not only has a janet yellen convinced many of you but angela merkel has convinced many of you. not only have half of you not expected to see greek default but only a small minority of you are expecting to see grexit. alan, is that too complacent? mr. howard: i think it is a bit complacent. what is going on in russia ukraine is currently occupying russia. i think the two together. that could change.

what does it mean one year down the road? i don't know what will happen. once you understand that, if you are a folder in one of the southern european countries, do you really want to hold your money? now the argument is to not worry about it. everyone is behaved well so unlike the greeks, we make sure there is not a problem.

i don't exact will work. what happens when you have an election in france? are they going to say we saved you so now you will relocate? those countries will do nothing. this is extremely dangerous. more than the two week event. host: and hello marco -- angela merkel saying maybe that will get resolved. host: is actually the ukraine in terms of the geopolitical risk. mr. friedman: title think there will be a greek exit either.

maybe greek should not have been in the eurozone in the first place but it is and we are in this predictable time between the articles of confederation and the constitution. you don't kick out west virginia once it is in. it is what it is. host: do you smell opportunity? go out and buy a cheap greek island? [laughter] mr. harris: it is a good place to visit. i don't think it is really significant. a lot of the greek debt which has transferred into ec or

central bank will allow it to be dealt with without systematic issues. if greece were to default. i don't think -- i think is much more of a longer-term issue. i don't see it ring an important factor in moving -- i don't see it being an important factor in moving the markets. the fixed income is zero. the rates are negative. the quantitative easing going on there is as large as all of the qa that existed in the u.s.. i think what you see in europe is what you saw in the u.s. which is massive amounts of euros are being put into the system, stimulating the stock market, making consumers feel better, and starting to drive

asset pricing up as people who move out of traditional fixed income and get into the stock market and real estate. i think you will see a rebound in europe of this and i think you already see it and when you look at what happened in the u.s., it makes sense. they are following -- it is following the u.s. model seven years afterwards. i think the ec is heading the other direction. mr. j. friedman: i would disagree and agree a little bit. i generally agree with the analysis. for financially, greece probably has -- is a small issue but politically, a big issue. politicalconsequences of the exit

-- they're all sorts of unanticipated consequences that could take place beyond the economic consequence. the economic consequence is the least important. we know there'd be some unanticipated parts but the political consequences could be quite significant. we don't know what type of meddling will take place in greece if it does exit. when you have an unstable world as we see in other parts of the world, you can have very large, significant, global events take place that are completely unexpected. no one expected world war i to take place. that is why i think that while financially, greece is a bit of a rounding error, politically, it is not. host: maybe it is a geopolitical contagion rather than a financial contagion. i was very struck -- those of you at doubles this year and we know that once this year, --

last year for the first time ever, income inequality jumped to the top of the list. this year, it was topped by something else, interstate conflict. to my mind, it is an astonishing finding. mr. friedman: i am just worrying , nodding. [laughter] it is a very asymmetric global instability right now which is very worrisome, because by definition asymmetric means you cannot predict it and what was unpredictable about that was the actual trigger point. at the time, everyone thought commerce was too connected for there to be were but there was this saturation moment. what could that be today? a lot of things. mr. harris: i would push back a

little on greece. greece exiting is certainly not good for the world or europe but when you think about militarization of the soviet union and around ukraine and some of the other nations, when you think about what is going on in the middle east like were israel to attack iran were there to be -- i think that is unlikely. if you think about china being more aggressive, which china is really improving its navy and air force and military quite significantly and is acting more aggressively with new leadership. it is hard to predict. i feel like those are much bigger. if you want to talk about geopolitical risk, those are more significant to the world economy than say grexit would

be. host: those issues are being discussed over the next two days. someone trained in international politics -- the degree to which macroeconomists are waking up and realizing the numbers are not always the answer. it is a wider question that is driving things right now. let's have a look at some of the other risks. i like the i to ask the audience again. let's talk about oil. that is the key issu shaping the global economy. three choices. how many of you think the oil price will be where it is in a six months time? how many of you think it will be $20 higher in the six months time? how many of you think it could be $10 lower?

people to think the oil price will be roughly right where it is in six months time? ok. those of you think it could be significantly higher? and those of you think it could be even lower? ok. so, those of you who cannot say the majority of you think it will be roughly the same level. a significant minority think it will below or add very few expected to be significantly higher. mr. friedman: you are getting at the secular stagnation point. host: we have a global economy where demand is weak and they do not need much oil relative to stockpiles. josh, any thoughts on what that might mean? mr. harris: we spend a lot of time trying to get ahead of the volatility in oil. predicting oil.

i think it is really difficult will stop them of the factors -- difficult. in the short run, we have a 95 million barrel per day market. that is to let in 3 million barrels oversupplied to storage. it is filling up a bit. you have seen the price of oil go up a little bit. if you think about that, the 2 million -- the 2% excess supply has caused oil to go from 100 to 50. that shows you that little excess supply swings it wildly. what is happened is that the higher prices created an entrance into the market which was north america. the u.s. show was adding one million barrels a day every year and the people that were taking

supply out of the market -- that maybe market over slide and for a number of years, opec dealt with that by taking supply off. they are the low-cost producer and the saudis are the swing market maker within opec so they have lowered their production from 12 to 10. one day they woke up and said this doesn't make sense for us. we are the low-cost producer and if we allow this to continue, incident having a market that is oversupplied, we will have one 5 million oversupplied. they change their strategy and said we will not lose any more market share which i think with economically rational for them.

i think it will eventually happen. but just an interesting comment on kind of some of the facts, quantitative easing. people ignoring the volatility. >> right. right. >> i think the main effect is actually for how it affects -- if we have -- at this -- october last year was coming down and i'm sure that the low price of oil and the low headline inflation helps the europeans do their qe. six to nine months from now, inflation will be much, much higher than now. not reacting to the fact that they're not going to be doing anymore qe in the places.

coming for the interview. >> maybe not today but closer toward that if we reach that level, i don't see how the markets are going to have it at these levels when they understand the qes coming globally which could have an effect on markets which are there today. may not be the right level. >> it's potential for risingeing volatility given these mismatched with the structure in a world where everyone has been reaching for risk. can you tell the audience, you know what is your top trade that you would put on at the moment? what advice would you give to

the people in the audience? >> i think it's an enormously challenging investment environment. i would -- i think the most interesting part of the market is -- so where the banks are pulling back in sort of the 8 to 10%, credit and then now we're talking about it broadly. but you're in a world where everything is overvalued if it has a number. if it's quoted and if it is rated. so you have to get out of that world. you have to buy issuers that may not be rated. you have to do things like shipping loans and not performing loans and other

things that the market can't really absorb. the banks used to be the buyers. they're not anymore. so there's an interesting opportunity in the credit you know, in the sort of crossover space. but i think it's a very complicated world right now. >> right. okay. what do you think about that? >> i think a couple of ideas. i think, one, you know with the team of -- i think at the end of the day liquidity is going to win out. at the end of the year economic growth is okay. it's supported for risk assets. i go to the point that joshua is, these more structured products will continue to do well. you'll see a low liability for one example. just fundamentally in a world where you have so much government collateral trading at negative rates. it may not sound that exciting

but for the right investment who's looking for a safe you know liquid well structured, again, battle tested. it has a stigma but that's probably why it's so cheap. i think that's an atrier of the facts tractive asset. i think u.s. assets are more attractive. we're starting to see some of those flows of european government bonds flows of european credit. but we have to look at european credit versus american credit. not all the institute us have that mandate. the currency of that trade. >> i think the main thing -- the mean event for a moment for us the negative rate is not being written enough about, about what's going on with these negative rates and the affect

that's having on portfolios in many investments. i don't know how long it's going to take but i think that will have an affect on currentcyicies for a while before they get out of that. >> you think they'll eventually rebel? >> i think that all investors with european bonds or negative yielding assets will over time sell them out. the idea that you're giving government in some is not going to last. we'll have to see how long that takes. especially in the scenario such as if oil goes out. and that's the big thing that has not played yet.

second thing is regarding risk assets assets -- those are two things i would say. >> very good. very good. >> japanese stocks? why >> >> so japanese stocks are a good buy? >> good buy. >> whether you believe in them or not they're still good. >> it's going to see what happens in the visit to washington next week. >> i think it will go through at some point but i'm sure that will go through. i'm confident. >> that would be a good thing if that happens. >> josh and alex, what do you make of this? what's the best way? >> the flip side of having extraordinarily high equity multiples that alex referred to as well as extraordinarily low cost of debt is there's a lot of

transactions. this the causes not only event-oriented equity price changes -- we're also in a world, the overlay on that is we also have a regulatory structure where it's awfully hard to predict the outcomes to some of these transactions. we saw what happened to the time werner deal last week the cisco foods last month. when you get a negative surprise to the market all the spreads blow out. and what's interesting is you also get recap transactions because smart people figure out they can borrow at zero cost causing credit quality to ping pong all over the place. you have bonds that suddenly go from investment grade to noninvestment grade. so time werner cable, charter acquisition. and then comcast comes in back

to investment grade. and then the bonds go back south. so you get -- and you get markets that are discontinuous and don't communicate with each other. so i think there are many of these event-oriented somewhat short duration plays that have very attractive risk rewards because of the volume of these transactions and the amount of somewhat unpredictable regulatory oversight. i would also agree with josh's comment about nontraditional lending in places where banks are not trading. there's clearly been a very significant pickup of loans in the 10, 12, 14% area in situations that are slightly less liquid. >> alex? >> okay. so i'll go with europe and in two parts. i think over the next kind of six to nine months european equities particularly cyclicals are in good position because of cheaper oil, cheaper currency

and qe support and you also have negative yields just in terms of a technical shift. related to that though i think it's coming up time to be short some of the debt in europe. particularly i think the german are the biggest problem in existence. >> thank you guys. it's been a fascinating discussion. i mean i have three or four key takeaways. firstly, you are certainly bracing for a lot in the next year or two. but interestingly, not over much. you're seeing much more stagnation than in 2008. sadly, i think your comment from the regulation structure suggests to me that it's not quite as black and white as the

reported suggests. the question is whether some of the money sitting on the sidelines will come in next time around. i would think the biggest point that comes out of the conversation to me at least is that it's not just a world of financial contagion. it's also geopolitical copyedit conta. so thank you very much. -- contagion. so thank you very much. best of luck to you. [applause]

the freedom act received

overwhelming bipartisan support and what it does is not only continue authorities that currently exist and are not controversial. for example, the capacity of the fbi or other law enforcement agencies to use what's called a roving wiretap. so if we know there's an individual where there's probable cause, that individual might be engaged in terrorist acts by switching cellphones we can move from cellphone to cellphone. those authorities would be continued. what it also does is it reforms the bulk of data collection programs that have been a significant concern and that i promised we could reform over a year and a half ago. so we now have democrats and republicans in both the house and the senate who think this is the right way to go.

we've got our law enforcement and national security teams and civil liberties proponents and advocates who say this is the right way to go. the only thing that's standing in the way is a handful of senators who are resisting these reforms despite law enforcement and the ic saying let's go ahead and get this done. so we've only got a few days. these authorities expire on sunday at midnight. and i don't want us to be in a situation in which for a certain period of time those authorities go away and suddenly we're dark and heaven forbid we've got a problem where we could have prevented a terrorist attack or apprehended someone who was engaged in dangerous activities but we didn't do so simply because of inaction of the senate.

well, i think we ought to start, folks if i can have your attention, i think we'll begin. there will be a few more drifting in i'm sure as we're talking. good morning everybody and welcome to the atlantic council. we're pleased to have you here this morning to discuss this very timely and important issue in the world of energy geopolitics and i think the importance of this issue is emphasized by the large crowd that we have this morning and i think it's also a credit to the really incredible panel that we have. today's event will focus on the

recent leadership changes in saudi arabia and what these changes mean for global energy markets as well as regional stability and security. and i'd also like to mention that today's event is a cross center collaboration between three of the centers here at the council. i guess i should have introduced myself. i'm dick morningstar and we're obviously involved in this program but also the rafiq kareri center for the middle east. the former ambassador to turkey is the director and is part of the panel. i want to thank everyone here for their cooperation in organizing this event. i want to give a special welcome to the only two-time ambassador to saudi arabia i'm sure many

of you know and you remember ambassador walter cutler who is here as well as esteemed board member mr. aberdeen who's also a true expert on the middle east. we have really an outstanding panel of experts to discuss these important issues today. the discussion will be moderated by david goldwin who i'm sure most of you know is the chairman of the atlantic council's energy advisory board and the president of goldwin energy strategies. david has had -- i've known him for, god, 20 years at least -- and he's had a long distinguished career in both the private and public sectors. we were colleagues in the state department when david was the

special envoy and coordinator for international energy affairs and i was working on eurasian affairs. we go back to the early 90s. he's an expert on middle east policies and the author of more than 50 books. he's also served as a consultant to the state and defense department during the afghan and iraq wars and has worked extensively in saudi arabia and throughout the gulf. i mention the vice president of the council and the director of the raffi center for the middle east and prior to joining the

council, frank was a long time career foreign service officer. he's been ambassador to turkey, egypt, philippines. three times. so obviously a very distinguished career. he has over 25 years experience in international banking and finance and i'm also very happy to announce that as of officially last night, he's joined the global energy center as a senior fellow. so we couldn't be happier than to have such an esteemed expert

working with us. so let me finally say that for the audience here and for those watching the live webcast, you can contribute to the conversation on twitter by utilizing #acenergy and #acmiddleeast. i'll now turn it over to our moderator david. thank you. [applause] thank you, dick. and welcome, everyone. we're here this morning to talk about the leadership changes in saudi arabia and obviously it's of great interest judging by this crowd and the folks watching at home. and that's because saudi arabia is clearly central to the

market. their decision in 2014 not to pursue market share and not to seek -- certainly rippleddd rippled across the world. certain the air attacks in yemen have also had consequences. they're also essential to diplomacy too with iran and for the containment of isil as well. that's why we have this panel here today. i guess i want to start with the leadership changes because people are used to very slow, steady, you know, changes in saudi leadership and when the king came to power, three months later removed the crown prince, it started vibrations across the diplomatic community. so take us through the leadership changes and what they mean and what this says about

the stability of leadership in saudi arabia. >> well first in terms of disclosure, i have to admit that i've gone from never trusting anybody over 30 to no longer trusting anybody under 70 if the [laughter]. >> but i think what needs to be -- became probably not. he is old. he faces a time period in which consolidating power achieving something as a leader pushes him toward taking decisive action. more than a year before he became king, everybody was talking about the pressures and changes that would occur when

abdullah was there. i think having been through this again and again and again, watching this focus on the royals, we need to be extremely careful because these changes do matter but often we don't really pay attention to changes because they involve a minister of defense or a significant shakeup in the ministry of the interior. you abolish the national security council and you create a top security structure and it produces absolute indifference on the part of the media except for a few experts who write commentary, it doesn't get much pickup. the most dramatic i think is that you have a very young

minister of defense. that is an uncertainty. but looking back at this over the years we have done about as well in understanding these shifts as people do in picking a fantasy football team. there are all kinds of theories about what this leader will be. there are all kinds of extrapolations based on what they did in the past. people turn to one expert or another and anybody who's been in saudi arabia realizes that characterizing the royals is almost an ongoing sport. as long as you only talk to one saudi, you get a very clear explanation. my background is dealing with the national security the intelligence, the defense structure, and i have not focused on things like education

or the many other areas that really matter in the kingdom. but what i have seen is an awful lot of structural consistency. and you do have very powerful institutions. you have budgets. plans that have a driving impact on a lot of what the kingdom does.

they have been somewhat transitional and the decisionmaking structure has, in many ways, been technocratic and professional within the services, or it has moved up into a more consensus oriented structure. remember if you go back to -- certainly did review all major decisions, procurement activity, and so on, he was not at the same time by any means a micromanager.

his son did not become the minister of defense. he was followed by someone, who again, did not emerge as a strong central controlling figure. and that has been a pattern which may or may not continue. we'll find out if several ways. him him him one of them is going to be what happens in the areas where the kingdom faces immediate security challenges. iraq, syria, dealing with lebanon, dealing with yemen. the whole problem of relationships with jordan, egypt -- these are issues where at any given time relatively young man may be confronted with some serious defense oriented decisions. but my guess would be that these will almost immediately move upwards and into a kind of royal

court, senior leadership position. now, one thing that will be a major change is the shift to a foreign minister. i don't think there's anyone who would challenge the personal competence of the minister, but he's not a member of the royal family. one of the key questions will be when the first real crisis arises, what will the role of the foreign minister actually prove to be? and that may be a matter of influence as much as a matter of competence. and we'll find out because in the real world that's what happens when you have a shift in leadership. now, there are a whole host of other shifts in leadership. when i looked at the actual announcement that came out of the palace and then the next three days, there's something like more than 30 people who were affected one way or the

other by these shifts. and a lot of them really mattered in areas like education, health, we'll hear about energy later. what i didn't see was anything which would address the fundamental structure of how the department or rather the kingdom deals with defense. i didn't see a major shift that would affect the national guard, although that may come. i didn't see a solution to creating a meaningful national security council equivalent because there's been this building and then you try to figure out what the hell actually happens at these buildings, and it seems to be somewhat personal and not where the decisionmaking is structured. saudi intelligence is going to be, i think, an open question.

we'll see whether that emerges as better organized, more advanced. we have problems of our own in dealing with this region. and it certainly isn't simple. so i'm not in any sense particularly in a place where i would say, ok, we had one very dramatic midnight event and it's fundamentally going to affect the security of the kingdom in predictable ways because of personalities. i don't think the midnight event was anywhere near as important as the changes that took place in the intelligence and national security structure before this. i have no way to know whether a young man is going to emerge as a more proactive, successful, or failed minister of defense in a

system where the minister of defense's role was always a little anomalous in terms of actual exercise of tolerance by the standards of other governance. one thing i am sure of is that when it comes down to actually allocating money, that's going to be a critical issue. we'll hear about that in terms of oil revenues. we'll hear about it in terms of how the kingdom has to deal with the other security issues we are going to discuss. but you spent about $81 billion a year of the kingdom's budget directly on defense. you steadily expanded internal security to the point where it now in many ways is a counterpart to the ministry of defense. the ministry of the interior is as important to saudi security in a lot of ways as the ministry

of defense is. how that will play out in an era of declining oil revenues, i don't know. the other issue is that when you look at this, you're also having to absorb something on the order of $90 billion worth of new arms orders from the united states alone over the next three to five years. and that is an immense challenge, and it is only the beginning. since you're talking about $12 billion to $18 billion worth of arms orders a year. if you would like me to bet on which royal wins or which royal succeeds the last royal, david i'm going to have to give up because quite frankly you could

write all the op-eds or one page summaries of this you want, but let's go back to the fantasy football image. those of you who are lucky enough to get it right, if you ever bothered to play that game, congratulations. david: i won't ask you to predict the future, but let me come back with this decision on crown prince. it did seem that some of these questions were foreseeable, the leadership decisions were foreseeable. did something happen between january and april? something in the external environment? some greater sense of urgency? was it a greater sense ever mortality on the part of the king that led to that shift? it does seem anomalous even taking what you say into consideration about the reality of the rest of the leadership changes. anthony: first, there hadn't been a deputy crown prince before. second, for all this talk of the group that was supposed to

review, the selection, that was king abdullah. guess what? there is a different king. i think many people were very surprised by the appointment in the first place. given the pressures on the kingdom, again, the need for stability, for change, to go from an old king that does have some health problems to a stable succession at a time you face serious security challenges on all of your borders, i think if i had been suddenly shifted from crown prince to king, i would have done something very similar and done it very quickly. david: jean francois, turn to you and talk about some of the changes in leadership in the oil sector.

if you could take us to the changes at ramco and the ministry. and i think what underlines that, what's the connection between these changes in leadership and any likely change in saudi oil policy? are we also looking at steady as she goes? jean francois: i totally agree with dr. cordesman. in the case of the oil policy, i think we are seeing a very, very strong technocratic structure in place. in my view somewhat reinforced unlike what we have seen in the press at times whereby some people are saying he's just king salaman trying to put his sons on each side of the saudi ramco, and the minister who then will -- could become minister and then chairman of saudi ramco.

it's not what happened. the changes was that the minister of oil, that's the big changes, the one who's been controlling oil policy in saudi arabia the past 20 years, he's been replaced. he's been trying to resign for a long time because he wants to retire. he's 79 years old. but he has been removed from the board of directors. he's still minister of oil, but it has been announced that oil will no longer be handled by the ministry of petroleum and minerals. so the industry of petroleum and minerals is becoming the ministry of minerals. and energy in general, i suppose. but the c.e.o. of saudi ramco has been named minister of health, which is a very difficult position in saudi

arabia. a huge budget. somewhat dysfunctional ministry. and his responsibility is to make it work. at the same time, they named him chairman of saudi ramco. now saudi ramco is technocratic. it always was. the board of directors doesn't have a single prince. so the minister of oil no longer the chairman. in terms of the change, the big change, supposedly, it's now a supreme council for saudi ramco which is supposed to be this sort of committee that sort of handles major decisions at saudi ramco. that's been presented as being something very new. it was not new. in fact, there was such a committee last year already. before that there was a supreme oil petroleum council which was chaired by the king, co-chaired by the crown prince, with the

minister of foreign affairs as one of the major princes in charge of the committee. that committee never did anything because everybody's too busy and never had the time to do anything. today, the council for saudi ramco, the supreme council, is now controlled, chaired i should say, by muhammad. and that is viewed as a very important position, which it is. but the fact is muhammad has very little time on his hand to really manage oil policy especially since it is so technocratic, so difficult to handle. however the man in charge of this council is really the secretary-general of the council is a commoner. a doctor who is basically in my view, handle the policy.

the committee is supposed to be composed of 10 people, five from the board of saudi ramco, the prince, and i don't know who else will be there yet. i haven't read it even if it has been announced i haven't read it. what i'm saying is that nothing much has changed. and therefore i don't expect policy to change very much either. so, yes, indeed, he's not directly involved in saudi policy, this may a good thing in the long-term. and halil, much more of a technocrat will be handling some basic policies. the new c.e.o. is a temporary c.e.o. he's now on the board of saudi ramco and senior vice president, and he will be handling the day to day relations, day-to-day

business at saudi ramco. what's interesting to me is that halil is known for having put saudi ramco into chemicals. he has negotiated petrol which is today a $20 billion company it was $10 billion. it doubled the size, $20 billion company. mostly the big joint venture with dow chemical also a $20 billion project. those are very advanced chemicals. it's putting saudi arabia in a totally different pattern of production. it's making saudi ramco look a lot like exxonmobil. i'm not sure the saudis would like to hear that, but i think that's what's happening. in fact it's a very good thing. that may bring a lot of changes in the kingdom in terms of

running the economy, because the company which is now the second largest chemical company in the world after b.s.f., they have lost their chair, c.e.o. the c.e.o. is now working in the minister of defense. what he's doing there, i'm not sure. i believe and perhaps dr. cordesman would know better, i believe he's working on appropriations and things of this nature. which means it's part of the professionalization of some of the problem ministry health and ministry of defense. so i would not be surprised if there was some reorganization in saudi arabia of maybe saudi ramco becoming much more of a chemical company because of him. or on the other hand maybe take the chemicals away and put them into sabic. in terms of the ministry itself,

now that the ministry's not supposed to be supervising saudi ramco, they still have to supervise the rest of their purview, which is the minerals. a very important company in saudi arabia, still relatively small, but it is one of the largest fertilizer manufacturers in the world today. and it's doubling production. that is also a joint venture today and with mosaic of the united states, i think there will be a lot of reorganization at that level as well. making it much more professional and we'll see how that develops. the purpose of all this is to end up having this large state companies provide facilities for smaller companies to create jobs. one of the key issue of course is security as has been mentioned, but the second

biggest issue, if not the biggest in saudi arabia today, is creating jobs for their young saudis. i would not be surprised if muhammad is now in place because the need to create jobs for 60% of the population, which is the below the age of 30, so they provided one job already. they need to -- i think that's what's going to happen. david: let me come back to you. i could read the moving of the deck chairs in two ways. one is saudi ramco will be more autocratic and look at increasing solar, less of the oil for power generation finding ways to access gas. the other way to read it is that there isn't a c.e.o. of saudi ramco yet, the chairman has never been traditionally the leader of the organization, and he has two jobs. the role of the ministry is undefined. and muhammad is at the top of

the chain with indetermined leadership. you wrap that together, who really is in charge, then, of oil policy in deciding how low can you go? jean francois: i think the policy, which was in my view anyway, defined the past few years will continue. i don't think they have to make much of a decision at this point. i think the saudis have decided that they were going to keep producing in order to impose its will on the markets and basically on the noneffect producers and not just chair but mostly russia, but we have talked about this in the past. they may not concede. but that's the policy, i think. who is going to make future policy? i think very much a combination of halid and prince muhammad. definitely.

i think that's where the policy is going to be made. frankly, that's not much of a change. david: prince abdullah is not really a player in this? jean francois: if the minister of oil resigns, leaves, the ministry because of age, and so on, maybe could be replaced by prince aziz who has rank of minister as deputy but he doesn't have oil. by removing the ministry from saudi aramco, they remove him just as much. i think there will be almost no change. i would agree, though, that maybe he might be named to the council of 10 people. it is not a huge position. yes, i would agree that the ministry may go to other things like solar. it's very big and trying to do more. nuclear, maybe, maybe increase prices on natural gas. a few odds and ends which would create a lot of issues in the kingdom.

but it's still a bit unsettled. we'll see a lot more changes as i started hinting in terms of changes at least in the industry side of things. but also on the oil side. david: we have been warned by tony not just to focus on the royals. and we have seen a bit of a generational change. you're back from saudi arabia and i think you have seen a little bit of this generational change up close. can you tell us about what you saw and think it means? frank: i can. i'd like to start by confessing to the people in this room particularly not only this panel but in the front row here, people like ambassador cutler and others who have forgotten more about saudi arabia than i'll ever hope to learn. and making probably only my sixth trip to the kingdom over the span of a career doesn't make me an expert. maybe more typical of what i was, a foreign service officer who can sometimes be a mile wide and inch deep. sometimes we flip and go the other way, we get very deep in a

particular subject. i'm not deep in saudi arabia but i have strong impressions. because what i saw there was so counter my prejudices going in. i had followed the kingdom mostly from ringside seats in egypt or iraq or elsewhere in the region over a number of years. all of us tend to think, all of us americans of saudi arabia is the most change resistant, most conservative of all the gulf states. among the most conservative of all the arab players. we watched the center of gravity of the arab world in so many fields, business, education, art, science, medicine, ideas, communications, media shift from the -- my beloved cairo and

increasingly toward the gulf. we explain yes, of course, money will do that. all those petro dollars. why is the kingdom evidently so resistant to change? we make so much when a ruler goes and this son or that person gets named. we speculate so much about the role of individuals. i came with a lot of questions. one of the conceptual frameworks that used to bring to the great privilege of the service i had as an american diplomat foreign service officer was sort of crystallized in a book about 15 years ago that probably most people here have heard about called "the tipping point" malcolm gladwell. the job of diplomats, good businesspeople, good analysts and think tanks, is to look for trends. much as the changes are happening but one of the changes that are going to happen. not just the threats of instability and revolution, when

we think about tipping points, but the opportunities. where are tomorrow's explosive trends and fashions and business opportunities going to come from? if you think about the work of malcolm gladwell, there's been some wrihing over the years, things like the law of the few. there are things that hide in plain sight. often trends are counter intuitive until they become obvious and break out. one of them is the law of the few. it doesn't take a majority of people starting to think in a certain way to make the trend. by the time it's the majority the trend is well under way. so there's a few people that he calls them the mavens, or the salesmen, connectors, people are passionate about something, see something, want others to understand. in a short visit, such as i had

, there's no hope of having a representative sample, ok. that wasn't the point. the point was to expose me, to educate me, to some interesting things going on. the proximate reason to go there was something that i thought would be very stayed. it was something called the institute for diplomatic studies. a bit of a relationship with the atlantic council. principally heretofore through the scowcroft center. going to the saudi institution and usual ways of dealing with them. i had my expectations firmly under control. we went, several day conference, very well organized, more than just older guys. people speak -- four women from the council, very outspoken, very articulate. not just saudi officials. people from the world of business, private sector. and a really rich interchange,

respectful, but not inhibited in the way that i expected to find. a lot of interesting ideas and banter and so forth of -- i had been to the kingdom before, but it was just fresher and better. i thought, this is a positive impression. one swallow doesn't make us drink. i had been in touch with the prince. he wasn't available so i met with his son who is one of the leaders of something called the king faisel center for research. in islamic studies. he pointed out to me that for research was added to the title. it used to be the king fissel center for islamic studies. they collect venerable copies of the koran. but what he wanted to talk about, and one of his scholars wanted to talk about was their research.

it was research a stack ever publications, which i actually looked through to assess how they stack up what we do in washington, they were in english, strikingly. they do some in arabic as well. i thought they were pretty good. pretty interesting. including assessments on american foreign policy in the region. it was pretty insightful and thoughtful. and assessments on, as you would expect, iran, syria, egypt, the region. not simply justifying the kingdom's outlooks on things but really pretty thoughtful legitimate scholarships. the conversation itself was wide ranging, interesting, very probing in the way of the prince himself. i could see the father and the son, princeton educated. that was again just positive.

not another swallow making this right. finally i went to something that was startling. even in its very title, even after the title my expectations were this can't be for real. the title of this institute, which is at a university, all male campus, they haven't built a female campus yet, 70% majority of female students on that campus, that was interesting for me intermingled. not visibly segregated to me. there is an institute called the institute for the study, in english they call it the study of innovation and government. and in arabic it is even more startling than that. it's governmental creativity.

governmental innovation, had a ha, ha. how impossible. it started for when the prince oman center for innovation in government. and i met about a dozen people. i think all americans were women. i will mention two women in my remarks here. one of them is an american named ann habibi, who is a real management consultant in organizational change. she has her own consultant she's from harvard. goes from boston and riyadh to do this work. i think it's called, one world, all the world. all worlds live network. serious professional, long

established track record working in the field in the united states. they hired her of all people to lead this effort. she brought in other people who had experience with deloitte and maybe different management consulting firms. but it wasn't just these few americans. there were then the thing that gets to the point about a tipping point that makes me wonder, maybe come back and ask my staff to do more research and i put it out here for anyone else in -- i wanted to do research on the question of is there a tipping point happening or several in different fields in the kingdom as well as across the gulf, perhaps more broadly? i mean a positive tipping point. i don't mean a tipping point toward revolution. or not negative. political revolution. i mean positive revolution. that is this.

there were over half a dozen i'll say about eight saudis, ranging in age from their 20's into probably approaching 40. one of them had come back from study at oxford. the others had all come back from study in the united states. one was a woman, didn't cover her hair amongst the other men in the room. much less her face. dressed in sort of black robes. and the conversation was, was really insightful, full of passion for what they are doing. they really wanted us to understand what they were about and how important it was. so this king solomon center for innovation and government started as an idea in 2013 revved up in 2014. 2015 they published a catalog of the 227 agencies that they found

of the kingdom's government. they fought to actually survey what is the government here? what does it look like? then they took, i don't recall about 30 of those, and dug down into how they were working. best practices compared to worldwide management best practices. what's working, what's not working? e-governance, apps, how is it serving the people? what's working, what needs to be thrown out. what needs to be abolished consolidated? who are the best leaders? how to hold them to account. they published on this and they are doing more work, and these young saudis are fired up. and evidently feel released and empowered to do it. again, the data that i think merits some analysis, some gathering of analysis come from the work of the other --

just touched upon by a small piece by one of our staff. a young lady, stephanie, who couldn't join us today. she's off. i don't know whether ann is in boston or the kingdom at this moment. perhaps we can have her come here. it is about the numbers of saudis who have studied in this country or europe and gone back. if you go back to gladwell's work, you see the different things matter in examining and analyzing trends, tipping points before they reach the tipping point. one of them is numbers do matter, but they don't have to be really great. they just have to reach a certain threshold. in 2005, king abdullah and president bush got together at his ranch and decided to have a major scholarship program to send people to the united states. they sent 5,000 or 6,000 the first year.

by now there are about 100,000 saudis actively studying in the united states, many of those now over this decade have returned. similar stories across the gulf. the numbers were small in earlier years, they grew, grew grew. it is quite a trend, a fashion a movement if you're a well-to-do person in the gulf to send your kids not just to the west, but to the united states and typically very ambitiously for the best places. and then they come back. they are not all immigrating to the united states. they are going back, running the family businesses. they are not going -- famously a lot of employment in gulf is made work. get it. the people i saw were not those jobs. they were fired up. they weren't working for their pay. they were passionate about what they were doing in the way that people at the atlantic council

are or other institutions around the united states. i guess that's the area for further study to look at. not just the demographics. we all know there's a youth demographic across the arab world, particularly in places of the gulf. that starts to taper off as they urbanize. but what is the subset who have studied not visited, tourism lived among americans, british and i choose the english speaking world advisedly, why? that's how the link the world to the internet and ideas and you read everything that's out there. some are going to france and other countries in the west. what are those numbers? david: major occurrence of modernization. frank: what are the channels there? how many are they? where are they concentrated? surveying them, what are their experiences? we get a lot of episodic stuff foreign service officers when they report. get some data, but a lot is impressionistic.

you talk with three, four, five people and make some vast conclusions from these things like i'm doing here. i'm saying it should be tested. look at the numbers. and are they reaching a tipping point where people are coming back, male and female, and having an impact on institutions of civil society, and even government. and big companies. it has famously been in the oil industry over a long time, of course. i put that question for further research. stephanie is doing it with us. i just was blown away by the work that ann is doing in saudi arabia. david: thank you. tony? tony: i have to say that having done some surveys, it's always interesting to be sent by the saudis to places where saudiization is supposed to have occurred. it is also a fact that no five-year plan from the last

four five-year plans has reflected a serious improvement in saudiization. you've got, i'm going to give you the c.i.a. figures approximately 11 million people in the labor force. it's hard to estimate. 80% of those are foreign. approximately 600,000 saudis reach job age every year. youth employment among saudis, 24 and under, is rated at close to 30%. now, you have a lot of money going in to job creation economic cities. but you also have the oddity that more women graduate from secondary school and university and they take far more serious courses because it isn't dominated by religious instruction. you look at those demographics

and you take them into account because, yes, we have those people. we also can look at significant parts of the kingdom where that development hasn't occurred where there are constant security problems, where there has been a difficulty with al qaeda in the arabian peninsula and now rising attacks that have begun to emerge from the islamic state. not all of them are out in rural areas or the border. there are serious security problems in areas like riyadh in -- and the kingdom has had to react. yes, we need to get to the numbers, but -- and there are a lot of positive trends, but i think we have to be very, very careful about the demographics here. and this is a country that's gone through an incredible amount of population pressure. it's technically more than 84% urbanized going from something

like less than 10% in 1950. and you get an idea of the stress involved. so, yes, there are tipping points but i think we need to be very careful. they can tip in two directions. david: let's talk about yemen and iran and come back on oil policy before we open it up. we have seen sort of a new level of engagement by the saudi military in local conflict. in particular the air campaign in yemen may not have gone as well as far as they intended. i wonder if you could talk about what this means for saudi's role in the region? is this a vulnerability? muhammad has been the face of this campaign. he's been more personalized maybe than is traditional in saudi politics, but if it goes badly, is the vulnerability for him?

and is it an opening for further iranian aggrandizement if it looks like the campaign goes poorly? tony: i think we need to be careful in looking at this. it's an air campaign which has begun. looking at the claims it's very difficult to figure out what has actually happened. but certainly they have hit quite a number of military and security targets. what if anything they accomplished in dealing with the houthi and shiites is hard to determine partly because it's a very mixed population the area in the y.a.r. 35% of the population of yemen roughly, nobody knows precisely, is shiite. they are only part of a much broader movement and the head of state, remember, was a shiite. for many, many years. dancing on the head of snakes

was done by a shiite. not by a sunni. the other side of this is at the end of this did they seriously think they could bring the previous leader back? i don't think that was something you can blame on the minister of defense. and i'm not sure anybody thought they could. if the bombing campaign is followed by some kind of political deal. and by buying off the right amount of power brokers and calling yemen a democracy is shall we say, one of those generalizations that does not reflect reality, it may be somewhat successful. but the broader problem in yemen is -- what you do not see reflected in the bombing campaign is, for years they have

been debating whether there should be a truly massive barrier defense along the border. the answer no scenes to not only be yes, but to try to create a buffer zone on the yemen side to try to block the flow of illegals. but it is mostly to try to contain the problem while essentially insuring you do not have major iranian influence. the saudis have a much more negative view of iranian influence in the houti movement than the u.s. we do not see that level of arms transfers or presence. but we can agree there is a bombing campaign. i think it is fair to say that yemen is one of the few countries in the world that most people who are development

experts have given up on. there is no way to deal with the population pressure, the failed economy. the other factors involved. it is going to be unstable and a mess indefinitely into the future. and that is something that has gotten lost in this focus on the air campaign, which seems to have been, incidentally, for what they were trying to do, reasonably effective, which is a message being sent. it did reveal some other problems which had nothing to do with this young minister of defense. saudi arabia needed to turn its red sea fleet into a real fleet for the last 20 years. they have not done it. they need to give their fleet in the gulf the same level of modernization that they have given their air force. they have not done it. these are basic structural

problems that affect their security, that need solution. whether this has anything to do with the appointment of a young prince is an open issue. they have a major problem in their military cities, which are reorganizing by trying to put a new one in yemen combined with the new port, but they tend to be static. yemen is today's headlines. they have been deeply involved in the syrian civil war from the start. but they say that prince bandar was a bit of a disaster. it was an open contest as to who could do the worst by trying to intervene in syria. the obama administration -- there is a great thesis to be written on comparative incompetence, if any of you are trying to have a doctorate. [laughter] anthony: you have the problem of iraq, where i think we have done

better and they have been too isolated, unwilling to engage. but iraq is on their border. it is real. and the islamic state, the al nusra front, they are real threats. they are active. they have attacked. they have a very effective, i think, counterterrorism force, but they also have terrorists. you have very weak partners. nobody wants to talk about oman, but it has a very weak, ill head of state, growing security problems, its own demographic and economic problems. they are caught up with bahrain, where you have a deeply divided royal family that paralyzes movements toward real reform.

you have qatar, which seems to be a little more balanced, but frankly depends on us for real defense. it is not really part of the gulf cooperation council in an integrated sense. you have a kuwait with its own divided royal family, less visible, which is undergoing its own internal political problems and is right on the border of iraq and iran. and from a saudi viewpoint whatever you may think of yemen, understand that if we solve the nuclear problem the way we are planning to, what we are really saying is we will keep them at something approaching the

breakout level, with about two years warning, indefinitely into the future. we will not solve a massive buildup of iranian missile capabilities, a major buildup in asymmetric warfare capabilities in the gulf. we are not going to deal with the expansion of iranian influence. let me say, in all of these issues, which when i talked to the saudi's dominate their perceptions of security, along with their own internal shiites and internal security problems focusing on the age of the current minister of defense and focusing only on yemen is not terribly realistic. and one problem we need to remember is, yes, this is a long way away from us. it is right on their borders. on all their borders. and these are debates which go far beyond all of this focus on the leadership.

and when i think there is a lot of continuity, but no good answers. none of these problems seem likely to go away in the next half decade, and that is probably optimistic. anthony: on that happy note, -- david: on that happy note, jean-francois, it does not look like accord is much in the offing. how does this play out? the p5 plus 1 agreement, late in 2016, iraq is reported to be able to deliver one million barrels of oil a day if the revamped takes off as planned, which is in question. how is this going to play out, given the challenges in the regional dynamics? is this a race to the bottom?

or does revenue maximization trump everything else and we will see a production cut at some point? jean-francois: very easy questions, but i think in this question to bring back the yemen issue, i think that one of the reasons the saudis are so intent on making a show of force in yemen is really to show to the iranians that they exist as a military power. maybe not very strong, but they exist, and they have to be accounted with in any kind of settlement. if the p5 plus one arrangement takes place, i would not be surprised if there is an arrangement between iran and saudi arabia on many other subjects, because i think everybody understands that you cannot fight the islamic state just with saudi arabia alone. you have to have a saudi-iranian

arrangement. if that does not happen, the islamic state will continue to survive really well. so if the arrangement works out and the saudis move forward with the iranians on developing a more stable situation in syria in particular, and in iraq, i think a lot of things will happen at the same time. if terms of the oil production definitely the iranians can produce 600,000, 700,000 barrels more in a year or two years, and the saudis have time to deal with that. let's remember, i think that -- and there are people in this room who know this much better than i do, anyway. but i think the focus of iran is really on natural gas. if saudi -- if iran can find some capital to reestablish their gas yields, they can start producing. today, iran is a net importer of natural gas, and it has the second-largest reserves in the

world. they could start exporting their gas to pakistan and through turkey to europe. there is an enormous amount of possibilities for iran. they could develop their liquid natural gas industry, which is nonexistent at this point. a lot of people would be quite happy to help them develop this if the gas can be produced. so i think the gas angle of this could be one of the part of the deals they work out with the saudis. so i am not too worried about a race to the bottom in terms of price. part of the deal is the saudis could reduce a little bit to make up for an increase in iranian production targets. iraq is a problem, as iraq has much more capacity to increase production if there was some kind of arrangement with iraq. today i was reading in the

middle east economic survey yesterday, i think, kurdish territories are unhappy with iraq because iraq stopped paying according to the agreement they made in january. the kurds are basically being pushed out again. they could start producing not big production -- we have our own companies up there. they have their own pipeline to go to turkey. it is not huge amounts of oil, but it could mount to have a -- half a million, maybe million barrels over the years. iraq is in trouble. they do not have the security arrangement completely worked out. i do not see much risk of iraqi oil. last month, they were producing and exporting more than ever but that was with kurdish oil, field invaded by the kurds. maybe i should not, but i

actually discount iraq as a problem in terms of the race to the bottom at this point. if the iranian-saudi deal never takes place, there might be some arrangement in iraq, who then could produce more. what we are talking five years down the line, an eternity in terms of oil. david: let's turn to the audience. we can start with ambassadors row, and we can take two or three questions at a time. yes? >> i am on the board of the atlantic council. one thing not mentioned in this discussion -- king salman comes to experience -- comes to power with more experience in domestic policy than his processors. he has worked with the u.s., with arab countries.

he was governor of riyadh. he has excellent relationships with the tribal community. this should be emphasized. you have a king who is experienced. you have a king that has traveled. you have a king that has good relationships with many leaders in the arab world. that is something that should be emphasized. david: let's take a couple more. professor heller? >> very interesting discussion. i go way back with saudi arabia, and managed to experience it once in a while. i go back to the days when king salman was prince salman governor of riyadh. what is a governor? he was much more than a governor of the capital or the province. he was on the inside of

policymaking in the royal family for years and years. at the same time, crown prince then king abdulah, he was the number two. i tried to keep in touch with him. i thought, this bedouin -- how can he ever run a country? i was astonished to see how he took over. he had hardly traveled outside the arab world. and i think instituted a lot of very important reforms. some people can say they were not enough, but whatever. i think the leadership is very good. let me go to the one question which you raised, and that is education. saudi arabia has done marvelously on educating.

the 100,000 saudis who are studying in the united states, it is very good for our bilateral relationship and for the country. but it does relate to something called jobs. we just had the president of tunisia here last week, and he made that point. in tunisia, he said, under the president and then afterwards, there were two reforms -- women and education. women is ok, but now we have so many educated people without jobs. i think obviously this is a risk for saudi arabia. you mentioned the whole idea you have to get away from having this ship of state run by a crew of people from other countries. it has to be done. when i was there, we tried hard, and i think since then, we have helped them with establishing a

vocational training program, working with your hands. it was not very successful. i think there is this tipping point. i hope it is going to be a positive one. last point -- yes, you have two very young future leaders there. and i think that is a good thing. i think basically all that i have heard is that, look, that is good. we can now look ahead not just for a couple years with a leader, but maybe a couple decades. there is a feeling of, keep us safe, and maybe this will. random thoughts. david: thank you. let's take a couple more. right here in the front row. and back there. >> ok? david: go ahead. david: introduce yourself.

>> sorry. i'm out of practice. to a guy that is getting ready to go in a couple of days to the kingdom in a role i am still trying to grasp -- specifically, it is going to be in a training and advisory role with the saudi arabian national guard. advice, counsel? we do not need to bore the rest of the scholars here, but i would like a few minutes afterwards if either of you gentlemen would be so inclined. david: ariel? ariel: ariel cohen, atlantic council. excellent presentation. thank you very much. can you please drill down a little bit about the saudi-iranian dynamics in view of a possible agreement on the iranian nuclear program?

specifically to what extent the saudi counterpart of a nuclear program can appear, and where will it go? and on a separate note, in terms of the yemen scenario, to what extent do you think they affect shipping of oil around the peninsula and to the red sea? thank you. we've got education and job risk. toni you want to start? >> well, first, i think there's no question you have a king who is a proven and very competent person. but i'm not quite sure and i think we all need to worry about is saudi arabia isn't the only problem in