(Bloomberg) — One of the primary tasks of investment professionals is risk management, and the list of potential minefields these days is long.

From contentious elections around the globe to deadly wars in the Middle East and Ukraine, to economies at a crossroads following the most aggressive pace of central bank tightening in a generation, investors have had to navigate an uncertain path in search of returns.

But what about those dangers that fly under the radar?

To help assess the risks ahead, we spoke to three executives who have been managing money for years about the next big risk they see coming: Angel Ubide, head of economic research for Income fixed and macro at hedge fund giant Citadel; Armen Panossian, co-chief executive officer of Oaktree Capital Management; and Anne Walsh, chief investment officer at Guggenheim Partners Investment Management.

Their comments have been edited for length and clarity.

PANOSSIAN ARMENIAN

Oaktree Capital Management

The biggest risk I see is artificial intelligence. AI clearly has the potential for very large economic benefits, revenue growth, cost efficiencies and this investment opportunity is truly exciting.

But it's easy to overlook the social impacts of these efficiency gains. What happens to normal jobs that become obsolete due to AI? Think cashiers or drivers as AI becomes a real alternative to manual labor in some of those areas. Millions of people could lose their jobs. So who will retrain those people?

If we do not understand this, there may be social unrest.

In terms of markets, AI is clearly getting a lot of support. But like the Internet in the late 90s, there was this promise of rapidly growing revenues. While the benefits are clear in terms of their potential, their timing is improbable. And if that takes much longer than investors expect, I'd expect to see a pretty violent reset in valuations and potentially some losses for investors along the way.

We are careful about who and where we lend. We are not allocating capital to all players, but we are very selective and are participating in the growth opportunity that AI offers. With that said, we are careful not to jump over our skis and get too exposed or too focused on AI because we remember what it was like when the fiber optic boom was happening.

Now, if there is a dislocation and we see a revaluation in terms of asset valuation, we think there will be a lot of opportunity to invest in a more desperate or opportunistic way. Oaktree has a very strong business in distressed or opportunistic investments.

But if we continue to ignore the risks, we will fail to realize that there is a bill to pay in terms of employment and in terms of people who rely on paycheck to paycheck jobs who will find themselves untrained and unprepared for the economy new.

And we will be forced as a society to either have social unrest or have a welfare state. The danger is if we don't do anything about it now to retrain some of these people or prepare for a post-AI employment landscape, we're going to have problems with a deepening divide between the haves and the have-nots, the haves and those who don't have. people from paycheck to paycheck. And that will mean a significant amount of damage to many people who aren't expecting it to come their way.

ANGEL CHANNEL

The castle

One of the most important things for the coming years will be the strength and sustainability of the European economy. We are living in a new world that is very different from the last 20 years. And it is not clear to me that Europe is ready for this.

The US, China and Europe are now competing on a number of fronts. It's not just the economy – it's also national security, it's climate change, it's technology, it's energy independence. The US and China are adopting policies that are putting them ahead of Europe. Europe is lagging behind and my concern is if Europe is vulnerable then what happens to the stability of the global economy?

You have a three-polar world. The American economy is more independent, more autonomous. The Chinese economy is the same. Europe is more dependent. In terms of trade flows, in terms of alliances, in terms of what it should allow and not allow, Europe is in a more vulnerable position.

Europe must start thinking about its common interest and not about the interest of each of the countries. One problem with the European economy is that it is fragmented at the national level.

There are over 30 telecommunications operators in Europe. In the US there are four or five. Same thing with China. This means that European firms are smaller, they are looking after their national areas. Another way of saying the same statistic: Each European telecom firm serves about 5 million people. In the US, there are about 100 million people. There are 500 million people in China.

To compete in technology, in climate, in energy, in defense, in national security, you have to scale. So European countries have to think: Do you want to compete as a small country or do you want to compete as Europe? Now, I don't think they have a choice because the US and China have already started the race and Europe has to follow. There is no European company in the top 20 largest firms in the world. This is a problem.

You can have more control and less growth, or you can have less control and more growth. If countries trust each other more and build more European champions, instead of each country having its own national champion, growth will be better, productivity will be better, welfare will be better. good.

Right now, every European country wants to have its own telecom company, its own big banks, its own big energy companies. Why? Because they want to have national control. And the question is, are you willing to hand over some of that control to European firms?

There has been no progress in this regard. In a sense it is the legacy of the European crisis. It was very scary to see the bankruptcy in Greece. It was very frightening to see the sudden halt in capital inflows to some of these countries. There was a decision to insure yourself, how to insure that you have your own bank, telecom, your energy. And I think that's the issue that's blocking the thinking going forward.

A weaker Europe means a more bipolar world between the US and China. I will give you another example. I worked at the International Monetary Fund. The IMF is a global institution. Can we go in a direction where countries basically see something like the IMF as a more Western institution? And then China and its ball of influence basically withdraws from that and decides to direct its relations in a different way. We can go in that direction if Europe weakens. NATO is another example.

If Europe weakens, it becomes more difficult, because we do not have a common sense of what the forum is to resolve conflicts. The world is better if there is a common project and there is a common interest.

ANNE WALSH

Guggenheim

There are a number of cross currents that we haven't seen before and I can tell that we are in a post-Covid world. I call this a Covid echo because we are still recovering from policies and programs and the reactions of policy makers.

This huge amount of spending, we now have to pay the interest cost on that, and it has a dampening effect on how capital can be deployed. One of the biggest elements I've seen emerge from this Covid-echo period is the uneven application of capital. Normally, what happens in an environment where the Fed is on hold or tightening is that capital is rationed and capital goes to finance only the most deserving business ventures. In an environment where there is only so much capital flowing and so much liquidity, you continue to see uneven deployment of capital.

We have a very dual economy now. We have great businesses with access to capital. We have the wealth class in America, and then we have the working class who don't even have stock investments or savings, can't own a home yet because of the cost of capital, and the small and medium businesses that don't have the same access in capital and their cost is significantly higher.

The dual economy that exists is exacerbated by the two policies the Fed has in place: higher rates and quantitative easing.

It will continue as long as the yield curve remains inverted and the Fed's policies are not yet at the point of cutting rates.

Before Covid, the Fed was spending a lot more time dealing with this divergence of different earners and underperformers and this dichotomy that existed. I haven't heard anything from the Fed in the last two years on this issue and what some are calling the K-shaped economy. It will be interesting to see if their rhetoric comes back about themselves with the unemployed or the of the economy that earns less.

If I were in the Fed, I would think about the tools in the toolbox differently. I would use quantitative easing and to a large extent they have. If we look globally after Covid, $12 trillion came into the global economy from central banks everywhere. And right now we've seen about $5 trillion taken out. That still leaves $7 trillion in the system globally compared to where we were before Covid. Now adjusting that for higher GDP and GDP growth globally, we probably need to see about another $3 trillion come out before we get to a balance of where we were before Covid.

I don't think the Fed really appreciates the tool of quantitative easing as much as I do, and I think as much as the markets, relatively talking about sticking to their rates as almost the only tool. I find it a very open instrument.

I think fees are important here. I believe the rates should be lowered. I believe they should have come down sooner. They raised rates by 75 basis points after Silicon Valley Bank failed. This is unprecedented in Fed policy action to actually continue to raise rates after we've had a crisis.

The government has already grown too large. I would like to see us spend a lot less. What we have done is we have moved into a world of industrial policy, using large sums of money to address and advance various political and or political causes.

Those of us who have been in the investment world for decades look at this and say, “This is unsustainable.” But so far it's been stable and as long as we can stay in some sort of balance where we can afford the cost of debt and we can afford the debt burden, then we'll stay here. We have the reserve currency.

Having said all that, the cost of debt at this level of interest rates is very high and is holding back even defense spending.

It's Ronald Reagan who said: Once you have a federal policy, you can't get rid of it. And this is where we find ourselves. It has worked so far. So why not continue? It works – until it doesn't. It may take a black swan event, something significant enough, for us to realize that we have depleted our ability to continue spending indefinitely.

To contact the author of this story:
Sonali Basak in New York and (email protected)