WEBVTT - IBM Vice Chairman Gary Cohn Talks US Economy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us stay at the World Economic Forum, and please

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<v Speaker 2>to cite Gary Khane, the IBM Vice chairman and former

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<v Speaker 2>National Economic Council Director under Donald Trump. Gary, Oh, Gary,

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<v Speaker 2>it's going to see you.

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<v Speaker 3>Great to be here. Thanks very.

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<v Speaker 2>We mentioned this the last time we caught up in

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<v Speaker 2>New York, how different things might be this time around.

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<v Speaker 2>What are you hearing here in Davos, Switzerland. How different

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<v Speaker 2>are things this time around compared to years gone by?

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<v Speaker 3>You know, I started out with the pro polease in making.

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<v Speaker 4>I always take divis with the grain of salt because

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<v Speaker 4>you know, you have lots of different opinions here, and

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<v Speaker 4>I'm always the start of a new year.

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<v Speaker 3>Everyone likes to be excited. Everyone likes to be pulled up.

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<v Speaker 4>We obviously went through an inauguration and change of power

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<v Speaker 4>in the United States yesterday.

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<v Speaker 3>We know that's fairly positive for business. On the fundamental level,

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<v Speaker 3>it's positive for business.

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<v Speaker 4>It's a pro business, it's a smart regulatory environment.

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<v Speaker 3>So everyone's thinking that's very good for business.

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<v Speaker 4>But I think we're going to utimately have to see

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<v Speaker 4>what the year brings, because there's still more unknowns than

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<v Speaker 4>knowns in the equation at this point.

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<v Speaker 2>When you were last in the administration, the focus was

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<v Speaker 2>on taxes first, and I spent the best part of

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<v Speaker 2>the year trying to work out that tax bill. The

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<v Speaker 2>following year things shifted towards trade. There's a sense this

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<v Speaker 2>time around that maybe we can do everything all at once.

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<v Speaker 2>How difficult is it to do everything all at once?

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<v Speaker 3>So I'm not in Washington right now, so I don't know.

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<v Speaker 4>I can't speak for them, but doing taxes by itself

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<v Speaker 4>is going to be quite difficult. You know, there are

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<v Speaker 4>a lot of different constituencies in Washington when it comes

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<v Speaker 4>to doing taxes, and look, there are small margins of victory.

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<v Speaker 3>So especially in the House.

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<v Speaker 4>You know, you've got two or three today, it might

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<v Speaker 4>even be one or two seat majority in the House.

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<v Speaker 4>And within the House, you've got certain members that want

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<v Speaker 4>certain things to be able.

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<v Speaker 3>To vote for a tax bill.

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<v Speaker 4>You've got certain people that are deficit hawks, so they

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<v Speaker 4>do not want to see the deficit go out. You've

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<v Speaker 4>got other members that want to bring back as much

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<v Speaker 4>of the standard, the state and local tax deduction assault

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<v Speaker 4>as we always call the assaulted DUTs. You've got other

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<v Speaker 4>members that want to just extend everything in the Trump's

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<v Speaker 4>tax cuts. Then you've got those that want to not

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<v Speaker 4>only extend what's there and all of the additional things

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<v Speaker 4>that were talked about on the campaign trail. All of

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<v Speaker 4>those things have a price tag associated with them. So

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<v Speaker 4>it's four trillion, five trillion, six trillion, and you try

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<v Speaker 4>and balance those with the people that don't want to

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<v Speaker 4>have a deficit, and ultimately something has to be worked out.

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<v Speaker 3>And remember, the only thing that really has.

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<v Speaker 4>To change because it expires at the end of the year,

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<v Speaker 4>is the personal side of the equation. That doesn't mean

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<v Speaker 4>they won't touch the corporate side of the equation, because

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<v Speaker 4>to make this all work, they're going to have to

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<v Speaker 4>balance it. It's a balancing act, and there's numbers, so

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<v Speaker 4>you're going to need revenue from certain places to be

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<v Speaker 4>able to give it in other places.

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<v Speaker 1>It's a balancing act for Congress, and each congressional member

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<v Speaker 1>has its own power just simply because of the thin margins.

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<v Speaker 1>It is a one man show that when it comes

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<v Speaker 1>to tariffs, and are you surprised that we didn't see

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<v Speaker 1>more aggressive tariffs implemented or at least even announced from

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<v Speaker 1>the get go, other than what we heard about from

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<v Speaker 1>Mexico and Canada.

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<v Speaker 4>No, I'm not supplied prize. I think that even when

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<v Speaker 4>I was there eight years ago, there was always a

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<v Speaker 4>heavy debate on tariffs, on the positives and the negatives

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<v Speaker 4>of tariffs, on the intended consequences and the unintended consequences.

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<v Speaker 4>You know, it's day one of a four year administration.

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<v Speaker 4>You don't have to put tariffs on day one. I'm

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<v Speaker 4>sure there's an enormous amount of debate going on in

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<v Speaker 4>the White House today as there was in the transition,

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<v Speaker 4>on what to do with tariffs, Where to put tariffs,

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<v Speaker 4>Where can tariffs be helpful?

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<v Speaker 3>Where can tariffs be hurtful?

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<v Speaker 4>There are places, i'm sure where there's pretty universal agreement

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<v Speaker 4>that we should tariff. There's other places where there's probably

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<v Speaker 4>divided opinion, and there's places where people think there should.

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<v Speaker 3>Not be terriffts.

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<v Speaker 1>So we're here in Davos where everyone's incredibly excited about

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<v Speaker 1>all the good and not really considering the potential inflationary

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<v Speaker 1>component of this, the potentially the potential rate rise that

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<v Speaker 1>could accompany this, or the potential slow down from an

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<v Speaker 1>increase in the price of goods. Time when spending power

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<v Speaker 1>has been coming down. Are you trying to tell corporate

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<v Speaker 1>executives who you meet with or others maybe tep or

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<v Speaker 1>your enthusiasm.

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<v Speaker 4>No, I'm not trying to tell corporate executives anything. I

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<v Speaker 4>think every one of us is eyes wide open. Everyone

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<v Speaker 4>has a fairly good view.

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<v Speaker 3>Of what's going on in Washington.

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<v Speaker 4>Look, the one thing about the Trumpet administration is they're

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<v Speaker 4>very transparent, and the administration is very transparent. They've had

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<v Speaker 4>enormous access. The corporate community has access, The corporate community

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<v Speaker 4>has been involved. The Trump administration has wanted to hear

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<v Speaker 4>from corporate community. So I don't need no one needs

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<v Speaker 4>to tell the corporate community to slow down. I think

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<v Speaker 4>what people are starting to understand is what are the

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<v Speaker 4>intended what are the unintended consequences? As you've talked about

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<v Speaker 4>we've seen a higher rate environment. We're talking about an

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<v Speaker 4>environment where we may not get cuts this year. We're

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<v Speaker 4>talking about a steeper and steeper yield curve. I think

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<v Speaker 4>the realization that the COVID financings that we're five year

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<v Speaker 4>financings come do there's a big maturity wall coming up.

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<v Speaker 4>There's also a lot of deals in the pipe. If

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<v Speaker 4>you look back at the vintage years of sort of

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<v Speaker 4>twenty ten on in the venture world, the private equi world,

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<v Speaker 4>there's been very little to no liquidity out.

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<v Speaker 3>Of twenty ten vintages on.

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<v Speaker 4>There's a lot of investors, especially pensions and endowments, started

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<v Speaker 4>looking for a return of capital from those vintage years.

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<v Speaker 3>There's a lot of pressure in the.

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<v Speaker 4>System to do transactions and get deals done. We all

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<v Speaker 4>feel that, we all know that that would be great

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<v Speaker 4>if we can get it all done. But I think

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<v Speaker 4>there's a realism that not all this can get done

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<v Speaker 4>at the same time, and we'll have to see what

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<v Speaker 4>the market can bear it. And we have all of

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<v Speaker 4>this at the exact same time when we have very

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<v Speaker 4>tight credit spreads and very high multiples in the market.

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<v Speaker 2>You've said it, repeat to b coming into this year,

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<v Speaker 2>there's a lot of paper that needs to be moved.

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<v Speaker 2>There was a moment in the hearing with Scott Besson,

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<v Speaker 2>the incoming Treasury Secretary, where he was asked about scrapping

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<v Speaker 2>the debt ceiling, the debt limit, and he said something

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<v Speaker 2>instead of the warrant didn't really let him speak, But

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<v Speaker 2>what I ultimately was going gut was that he wanted

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<v Speaker 2>to survey market participants, And what I sensed about where

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<v Speaker 2>he was going was he wanted to find out how

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<v Speaker 2>market participants would respond to that headline. Now, you've been

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<v Speaker 2>in both office and the administration, and you've known the

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<v Speaker 2>business financial markets and your time at Goldman Sachs. What

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<v Speaker 2>would you be telling Scott Besson about that, about how

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<v Speaker 2>that headline would be absorbed in financial markets? I mean,

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<v Speaker 2>you're concerned that we could get some pushback to some

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<v Speaker 2>of these plans.

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<v Speaker 3>Well, I think you will get some pushback some of

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<v Speaker 3>these plans. You know, the market.

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<v Speaker 4>Is getting to a point now where they're telling you

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<v Speaker 4>we are more concerned about the debt and the deficit

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<v Speaker 4>today than we have been in a while. And I

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<v Speaker 4>think there's a few factors there. The debt and deficit

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<v Speaker 4>continues to get bigger, but we're also getting closer and

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<v Speaker 4>closer to that Social security sort of tipping point, you know,

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<v Speaker 4>and they work together. We all know that the Social

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<v Speaker 4>Security Trust Fund will be unable to fund itself in

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<v Speaker 4>a matter of years. So it's five six seven four,

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<v Speaker 4>you know, somewhere in there. And I think we're all

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<v Speaker 4>confident that no one's going to cut Social Security payment.

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<v Speaker 4>There's no member of Congress that is going to vote

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<v Speaker 4>to cut soci security papers, nor should they. So not

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<v Speaker 4>only do you take the pre existing debt that we have,

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<v Speaker 4>the debt that we're going to continue to build by

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<v Speaker 4>running this government, you're going to have a new source

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<v Speaker 4>of additional debt called Social Security.

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<v Speaker 3>That you're going to have to have to fund.

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<v Speaker 4>So you start putting all those things together, and you

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<v Speaker 4>look at what the government's need going to need to

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<v Speaker 4>borrow in the near future, and it's a fairly large number.

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<v Speaker 4>And the rollovers, the quarterly rollovers, are going to start

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<v Speaker 4>getting quite staggering. Add to that that the prior administration

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<v Speaker 4>did not really elongate the maturities on the debt. They

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<v Speaker 4>were using a very short dated maturity system, which I

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<v Speaker 4>didn't understand when we had low rates. When you have

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<v Speaker 4>low rates, you want to elongate your debt. We're going

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<v Speaker 4>to have to deal with the problem that we never

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<v Speaker 4>really put duration into the pre existing debt. So we've

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<v Speaker 4>got to roll the duration of the pre existing debta out.

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<v Speaker 4>We got to add to it the exist the new

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<v Speaker 4>debt we're going to create, and we got to be

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<v Speaker 4>prepared for Social Security.

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<v Speaker 2>And do you think we can term out of debt,

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<v Speaker 2>just to unpack one piece of that. If we turned

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<v Speaker 2>out the debt right now and you're fantaska this. We

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<v Speaker 2>talked about it for front end of the curve. At

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<v Speaker 2>the moment it is priced around FED funds on twos.

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<v Speaker 2>The curve is what forty to fifty basis points steep,

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<v Speaker 2>maybe forty something like that. The last time I check, historically, that's.

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<v Speaker 3>Not that much.

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<v Speaker 2>I mean, I don't think there's any real sign that

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<v Speaker 2>we're freaking out about the fiscal definity. Yeah, that's before

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<v Speaker 2>you even do all of these things you've talked about.

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<v Speaker 3>We're not.

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<v Speaker 4>Look, I think is a good opportunity to term our debt.

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<v Speaker 4>We've got a, as you said, a forty point inverted

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<v Speaker 4>yield curve.

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<v Speaker 3>Historically, we've got to positively shape yield curve.

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<v Speaker 4>You know, we still need to continue to elongate our

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<v Speaker 4>maturities in the United States.

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<v Speaker 2>You think we have the space to do that right now?

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<v Speaker 2>Because I think it's about forty basis points steep a

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<v Speaker 2>twos versus ten. Do you think we have the space

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<v Speaker 2>to do it still steep?

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<v Speaker 3>Yeah? Yeah, it's Steve, You're right, we do. We do

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<v Speaker 3>need to do it in forty basis points. I still

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<v Speaker 3>think it's the right place to go.

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<v Speaker 2>Your message to the people that didn't live a steep

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<v Speaker 2>yield curve and things that right now at the moment

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<v Speaker 2>like this might be it. What's your message to them?

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<v Speaker 3>My message is go back and look at history.

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<v Speaker 4>You know, if you go back and look at history

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<v Speaker 4>the one hundred years, your ten year rate average in the

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<v Speaker 4>United States is over four percent. If you look at

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<v Speaker 4>the steepness of the yield curve over the one hundred years,

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<v Speaker 4>we've always had one hundred and fifty basis points of

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<v Speaker 4>steepening in of steepness in the curve if you look

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<v Speaker 4>at FED funds out so we are still in a

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<v Speaker 4>relatively flat curve.

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<v Speaker 2>Gary, appreciate your time. Always shop. It's going to catch up.

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<v Speaker 2>Thank you, Sir, Gary Khanna the former National Economic Council

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<v Speaker 2>Director and of course formerly of Goverment Sachs as well