Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us stay at the World Economic Forum, and please
Speaker 2: to cite Gary Khane, the IBM Vice chairman and former
Speaker 2: National Economic Council Director under Donald Trump. Gary, Oh, Gary,
Speaker 2: it's going to see you.
Speaker 3: Great to be here. Thanks very.
Speaker 2: We mentioned this the last time we caught up in
Speaker 2: New York, how different things might be this time around.
Speaker 2: What are you hearing here in Davos, Switzerland. How different
Speaker 2: are things this time around compared to years gone by?
Speaker 3: You know, I started out with the pro polease in making.
Speaker 4: I always take divis with the grain of salt because
Speaker 4: you know, you have lots of different opinions here, and
Speaker 4: I'm always the start of a new year.
Speaker 3: Everyone likes to be excited. Everyone likes to be pulled up.
Speaker 4: We obviously went through an inauguration and change of power
Speaker 4: in the United States yesterday.
Speaker 3: We know that's fairly positive for business. On the fundamental level,
Speaker 3: it's positive for business.
Speaker 4: It's a pro business, it's a smart regulatory environment.
Speaker 3: So everyone's thinking that's very good for business.
Speaker 4: But I think we're going to utimately have to see
Speaker 4: what the year brings, because there's still more unknowns than
Speaker 4: knowns in the equation at this point.
Speaker 2: When you were last in the administration, the focus was
Speaker 2: on taxes first, and I spent the best part of
Speaker 2: the year trying to work out that tax bill. The
Speaker 2: following year things shifted towards trade. There's a sense this
Speaker 2: time around that maybe we can do everything all at once.
Speaker 2: How difficult is it to do everything all at once?
Speaker 3: So I'm not in Washington right now, so I don't know.
Speaker 4: I can't speak for them, but doing taxes by itself
Speaker 4: is going to be quite difficult. You know, there are
Speaker 4: a lot of different constituencies in Washington when it comes
Speaker 4: to doing taxes, and look, there are small margins of victory.
Speaker 3: So especially in the House.
Speaker 4: You know, you've got two or three today, it might
Speaker 4: even be one or two seat majority in the House.
Speaker 4: And within the House, you've got certain members that want
Speaker 4: certain things to be able.
Speaker 3: To vote for a tax bill.
Speaker 4: You've got certain people that are deficit hawks, so they
Speaker 4: do not want to see the deficit go out. You've
Speaker 4: got other members that want to bring back as much
Speaker 4: of the standard, the state and local tax deduction assault
Speaker 4: as we always call the assaulted DUTs. You've got other
Speaker 4: members that want to just extend everything in the Trump's
Speaker 4: tax cuts. Then you've got those that want to not
Speaker 4: only extend what's there and all of the additional things
Speaker 4: that were talked about on the campaign trail. All of
Speaker 4: those things have a price tag associated with them. So
Speaker 4: it's four trillion, five trillion, six trillion, and you try
Speaker 4: and balance those with the people that don't want to
Speaker 4: have a deficit, and ultimately something has to be worked out.
Speaker 3: And remember, the only thing that really has.
Speaker 4: To change because it expires at the end of the year,
Speaker 4: is the personal side of the equation. That doesn't mean
Speaker 4: they won't touch the corporate side of the equation, because
Speaker 4: to make this all work, they're going to have to
Speaker 4: balance it. It's a balancing act, and there's numbers, so
Speaker 4: you're going to need revenue from certain places to be
Speaker 4: able to give it in other places.
Speaker 1: It's a balancing act for Congress, and each congressional member
Speaker 1: has its own power just simply because of the thin margins.
Speaker 1: It is a one man show that when it comes
Speaker 1: to tariffs, and are you surprised that we didn't see
Speaker 1: more aggressive tariffs implemented or at least even announced from
Speaker 1: the get go, other than what we heard about from
Speaker 1: Mexico and Canada.
Speaker 4: No, I'm not supplied prize. I think that even when
Speaker 4: I was there eight years ago, there was always a
Speaker 4: heavy debate on tariffs, on the positives and the negatives
Speaker 4: of tariffs, on the intended consequences and the unintended consequences.
Speaker 4: You know, it's day one of a four year administration.
Speaker 4: You don't have to put tariffs on day one. I'm
Speaker 4: sure there's an enormous amount of debate going on in
Speaker 4: the White House today as there was in the transition,
Speaker 4: on what to do with tariffs, Where to put tariffs,
Speaker 4: Where can tariffs be helpful?
Speaker 3: Where can tariffs be hurtful?
Speaker 4: There are places, i'm sure where there's pretty universal agreement
Speaker 4: that we should tariff. There's other places where there's probably
Speaker 4: divided opinion, and there's places where people think there should.
Speaker 3: Not be terriffts.
Speaker 1: So we're here in Davos where everyone's incredibly excited about
Speaker 1: all the good and not really considering the potential inflationary
Speaker 1: component of this, the potentially the potential rate rise that
Speaker 1: could accompany this, or the potential slow down from an
Speaker 1: increase in the price of goods. Time when spending power
Speaker 1: has been coming down. Are you trying to tell corporate
Speaker 1: executives who you meet with or others maybe tep or
Speaker 1: your enthusiasm.
Speaker 4: No, I'm not trying to tell corporate executives anything. I
Speaker 4: think every one of us is eyes wide open. Everyone
Speaker 4: has a fairly good view.
Speaker 3: Of what's going on in Washington.
Speaker 4: Look, the one thing about the Trumpet administration is they're
Speaker 4: very transparent, and the administration is very transparent. They've had
Speaker 4: enormous access. The corporate community has access, The corporate community
Speaker 4: has been involved. The Trump administration has wanted to hear
Speaker 4: from corporate community. So I don't need no one needs
Speaker 4: to tell the corporate community to slow down. I think
Speaker 4: what people are starting to understand is what are the
Speaker 4: intended what are the unintended consequences? As you've talked about
Speaker 4: we've seen a higher rate environment. We're talking about an
Speaker 4: environment where we may not get cuts this year. We're
Speaker 4: talking about a steeper and steeper yield curve. I think
Speaker 4: the realization that the COVID financings that we're five year
Speaker 4: financings come do there's a big maturity wall coming up.
Speaker 4: There's also a lot of deals in the pipe. If
Speaker 4: you look back at the vintage years of sort of
Speaker 4: twenty ten on in the venture world, the private equi world,
Speaker 4: there's been very little to no liquidity out.
Speaker 3: Of twenty ten vintages on.
Speaker 4: There's a lot of investors, especially pensions and endowments, started
Speaker 4: looking for a return of capital from those vintage years.
Speaker 3: There's a lot of pressure in the.
Speaker 4: System to do transactions and get deals done. We all
Speaker 4: feel that, we all know that that would be great
Speaker 4: if we can get it all done. But I think
Speaker 4: there's a realism that not all this can get done
Speaker 4: at the same time, and we'll have to see what
Speaker 4: the market can bear it. And we have all of
Speaker 4: this at the exact same time when we have very
Speaker 4: tight credit spreads and very high multiples in the market.
Speaker 2: You've said it, repeat to b coming into this year,
Speaker 2: there's a lot of paper that needs to be moved.
Speaker 2: There was a moment in the hearing with Scott Besson,
Speaker 2: the incoming Treasury Secretary, where he was asked about scrapping
Speaker 2: the debt ceiling, the debt limit, and he said something
Speaker 2: instead of the warrant didn't really let him speak, But
Speaker 2: what I ultimately was going gut was that he wanted
Speaker 2: to survey market participants, And what I sensed about where
Speaker 2: he was going was he wanted to find out how
Speaker 2: market participants would respond to that headline. Now, you've been
Speaker 2: in both office and the administration, and you've known the
Speaker 2: business financial markets and your time at Goldman Sachs. What
Speaker 2: would you be telling Scott Besson about that, about how
Speaker 2: that headline would be absorbed in financial markets? I mean,
Speaker 2: you're concerned that we could get some pushback to some
Speaker 2: of these plans.
Speaker 3: Well, I think you will get some pushback some of
Speaker 3: these plans. You know, the market.
Speaker 4: Is getting to a point now where they're telling you
Speaker 4: we are more concerned about the debt and the deficit
Speaker 4: today than we have been in a while. And I
Speaker 4: think there's a few factors there. The debt and deficit
Speaker 4: continues to get bigger, but we're also getting closer and
Speaker 4: closer to that Social security sort of tipping point, you know,
Speaker 4: and they work together. We all know that the Social
Speaker 4: Security Trust Fund will be unable to fund itself in
Speaker 4: a matter of years. So it's five six seven four,
Speaker 4: you know, somewhere in there. And I think we're all
Speaker 4: confident that no one's going to cut Social Security payment.
Speaker 4: There's no member of Congress that is going to vote
Speaker 4: to cut soci security papers, nor should they. So not
Speaker 4: only do you take the pre existing debt that we have,
Speaker 4: the debt that we're going to continue to build by
Speaker 4: running this government, you're going to have a new source
Speaker 4: of additional debt called Social Security.
Speaker 3: That you're going to have to have to fund.
Speaker 4: So you start putting all those things together, and you
Speaker 4: look at what the government's need going to need to
Speaker 4: borrow in the near future, and it's a fairly large number.
Speaker 4: And the rollovers, the quarterly rollovers, are going to start
Speaker 4: getting quite staggering. Add to that that the prior administration
Speaker 4: did not really elongate the maturities on the debt. They
Speaker 4: were using a very short dated maturity system, which I
Speaker 4: didn't understand when we had low rates. When you have
Speaker 4: low rates, you want to elongate your debt. We're going
Speaker 4: to have to deal with the problem that we never
Speaker 4: really put duration into the pre existing debt. So we've
Speaker 4: got to roll the duration of the pre existing debta out.
Speaker 4: We got to add to it the exist the new
Speaker 4: debt we're going to create, and we got to be
Speaker 4: prepared for Social Security.
Speaker 2: And do you think we can term out of debt,
Speaker 2: just to unpack one piece of that. If we turned
Speaker 2: out the debt right now and you're fantaska this. We
Speaker 2: talked about it for front end of the curve. At
Speaker 2: the moment it is priced around FED funds on twos.
Speaker 2: The curve is what forty to fifty basis points steep,
Speaker 2: maybe forty something like that. The last time I check, historically, that's.
Speaker 3: Not that much.
Speaker 2: I mean, I don't think there's any real sign that
Speaker 2: we're freaking out about the fiscal definity. Yeah, that's before
Speaker 2: you even do all of these things you've talked about.
Speaker 3: We're not.
Speaker 4: Look, I think is a good opportunity to term our debt.
Speaker 4: We've got a, as you said, a forty point inverted
Speaker 4: yield curve.
Speaker 3: Historically, we've got to positively shape yield curve.
Speaker 4: You know, we still need to continue to elongate our
Speaker 4: maturities in the United States.
Speaker 2: You think we have the space to do that right now?
Speaker 2: Because I think it's about forty basis points steep a
Speaker 2: twos versus ten. Do you think we have the space
Speaker 2: to do it still steep?
Speaker 3: Yeah? Yeah, it's Steve, You're right, we do. We do
Speaker 3: need to do it in forty basis points. I still
Speaker 3: think it's the right place to go.
Speaker 2: Your message to the people that didn't live a steep
Speaker 2: yield curve and things that right now at the moment
Speaker 2: like this might be it. What's your message to them?
Speaker 3: My message is go back and look at history.
Speaker 4: You know, if you go back and look at history
Speaker 4: the one hundred years, your ten year rate average in the
Speaker 4: United States is over four percent. If you look at
Speaker 4: the steepness of the yield curve over the one hundred years,
Speaker 4: we've always had one hundred and fifty basis points of
Speaker 4: steepening in of steepness in the curve if you look
Speaker 4: at FED funds out so we are still in a
Speaker 4: relatively flat curve.
Speaker 2: Gary, appreciate your time. Always shop. It's going to catch up.
Speaker 2: Thank you, Sir, Gary Khanna the former National Economic Council
Speaker 2: Director and of course formerly of Goverment Sachs as well