WEBVTT - Rob Kaplan on the Fed, AI, and How Globalization Is Happening Without the US 0:00:02.720 --> 0:00:16.440 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.400 --> 0:00:21.560 Hello and welcome to another episode of the Odd Laws podcast. 0:00:21.600 --> 0:00:23.960 I'm Jill Wassenthal and I'm Tracy Alloway. 0:00:24.200 --> 0:00:27.560 Today you are listening to a special episode of the podcast. 0:00:27.600 --> 0:00:30.440 It was recorded live at the future Proof conference in 0:00:30.640 --> 0:00:31.440 Huntington Beach. 0:00:31.720 --> 0:00:34.400 Yep, we're going to be speaking with former Dallas FED 0:00:34.560 --> 0:00:38.560 president Robert Kaplan. He is now vice chairman of Goldman Sachs. Again, 0:00:38.640 --> 0:00:41.279 this was recorded live on stage at future Proof. So 0:00:41.600 --> 0:00:42.240 take a listen. 0:00:42.640 --> 0:00:45.960 All right, let's just kick it straight off that jobs 0:00:46.000 --> 0:00:49.440 report that we got last week. In your view with 0:00:49.520 --> 0:00:53.280 your FED hat on, maybe is a fifty basis point 0:00:53.400 --> 0:00:55.480 rate cut in play for the next meeting. 0:00:55.800 --> 0:00:59.959 I think fifty basis points is still unlikely. I think 0:01:00.080 --> 0:01:02.720 we've been of the view for the last few months 0:01:02.760 --> 0:01:04.080 the job market was weak. 0:01:04.480 --> 0:01:06.400 This latest report was a little weaker. 0:01:06.800 --> 0:01:10.360 Having said that, the reason twenty five is more likely 0:01:10.400 --> 0:01:15.160 than fifty is it wasn't The jobs market is not. 0:01:15.200 --> 0:01:16.240 Falling off a cliff. 0:01:16.280 --> 0:01:21.000 We didn't get shrinkage, and inflation is running at two 0:01:21.000 --> 0:01:24.160 and three quarters to three percent above target, and so 0:01:24.360 --> 0:01:26.440 it sort of puts a little bit of a headwind 0:01:26.920 --> 0:01:29.280 on doing more than twenty five basis points. 0:01:29.640 --> 0:01:31.800 I mean, I take your point, but the report was 0:01:31.840 --> 0:01:34.440 still a huge surprise. So if you were in the 0:01:34.480 --> 0:01:37.240 newsroom when that number came out, just twenty two thousand 0:01:37.360 --> 0:01:40.880 jobs added, there was a sort of collective gas because 0:01:40.920 --> 0:01:44.679 it was way below basically the entire range of expectations 0:01:44.680 --> 0:01:47.360 for that particular month. If you're at the FED and 0:01:47.400 --> 0:01:50.600 you see a number like that, what does twenty two 0:01:50.640 --> 0:01:53.680 thousand actually tell you? Or are you sitting there going well, 0:01:53.680 --> 0:01:56.200 maybe I'll wait for the revision until I really make 0:01:56.280 --> 0:01:56.840 up my mind. 0:01:57.600 --> 0:02:00.800 I don't know that the weakness and the jobs market 0:02:00.840 --> 0:02:03.200 was a big surprise to the Fed. They didn't know 0:02:03.240 --> 0:02:05.480 exactly what the number would be, but they expected to 0:02:05.520 --> 0:02:10.920 be anemic. The reason that the unemployment rate is stayed 0:02:11.000 --> 0:02:16.840 low is we are not we've shut down undocumented immigration. 0:02:17.639 --> 0:02:20.160 We have not ramped up legal immigration, and as you 0:02:20.240 --> 0:02:25.120 well know, we are deporting some number of workers and 0:02:25.280 --> 0:02:29.680 chilling ten to fifteen million undocumented immigrants who were in 0:02:29.760 --> 0:02:32.680 the workforce, and some percentage of them are not going 0:02:32.720 --> 0:02:37.160 to work, and so supply is anemic. We've thought for 0:02:37.240 --> 0:02:40.080 the last few months that hiring was kind of we. 0:02:40.000 --> 0:02:43.200 Said at stall speed. You should assume if GDP. 0:02:43.000 --> 0:02:44.959 Growth is one a quarter one and a half percent, 0:02:45.520 --> 0:02:48.000 hiring is going to be anemic. So we could debate 0:02:48.080 --> 0:02:50.560 the number, but I don't think it was a big 0:02:50.600 --> 0:02:53.640 shock that it was weak, and I think it wouldn't 0:02:53.639 --> 0:02:56.800 surprise me to see the next number also lethargic. 0:02:57.720 --> 0:02:59.520 So why aren't we falling off a cliff. 0:03:00.440 --> 0:03:03.120 We still are running a large deficit, we have tax 0:03:03.160 --> 0:03:05.400 and sofs coming, We're in the middle of an AI 0:03:06.560 --> 0:03:09.680 data center power boom, as you just heard about in 0:03:09.680 --> 0:03:13.200 the previous session, and I think that's still bolsterining the economy. 0:03:13.440 --> 0:03:18.040 Well, then let me take the flip side of Tracy's question, because, okay, 0:03:18.040 --> 0:03:21.239 maybe setting aside reasons for concern, the flip side, as 0:03:21.240 --> 0:03:25.720 you mentioned, inflation is still running above target by most measures. 0:03:26.040 --> 0:03:28.120 The stock market I haven't actually I don't know what 0:03:28.200 --> 0:03:30.720 it's doing today, but it's very close to all time highs. 0:03:30.760 --> 0:03:33.560 Regardless of what it's doing today, all kinds of people 0:03:33.639 --> 0:03:36.000 are having a really nice time on the beach in 0:03:36.040 --> 0:03:40.760 southern California. What is the evidence that, as currently standing, 0:03:41.160 --> 0:03:45.040 that FED policy is actually restrictive? Clearly the FOMAC has 0:03:45.040 --> 0:03:46.640 come around to this view of cuts, it seems like 0:03:46.680 --> 0:03:48.760 cuts are locked in, but you don't have to have 0:03:48.800 --> 0:03:50.960 the FOMAC I view anymore. Like, is it obvious that 0:03:51.080 --> 0:03:52.720 cuts are needed at this point? 0:03:52.880 --> 0:03:53.640 Yeah. 0:03:53.720 --> 0:03:56.520 I think if it were not for the weakness that 0:03:56.560 --> 0:03:59.119 we've seen in the labor market, the FED would want 0:03:59.120 --> 0:04:02.800 to stand pat because we are It's one thing to 0:04:02.800 --> 0:04:06.000 be above your inflation target. We're not moving toward the 0:04:06.040 --> 0:04:10.040 inflation target right, We're going sideways to backing up. But 0:04:10.400 --> 0:04:14.640 with this week labor market, I think it brings the 0:04:14.640 --> 0:04:17.640 fact you need to cut into play. Now, what's the 0:04:17.680 --> 0:04:21.640 neutral rate? I think the neutral rate today you got 0:04:21.640 --> 0:04:25.000 a two and three quarters percent inflation rate. Seventy five 0:04:25.080 --> 0:04:28.120 basis point real FED funds rate means the neutral rate 0:04:28.160 --> 0:04:29.840 to me is around three and a half percent. 0:04:30.200 --> 0:04:31.400 We don't have a lot. 0:04:31.160 --> 0:04:33.839 Of space to cut to get to neutral, but I 0:04:33.839 --> 0:04:36.039 think you've got seventy five to one hundred base points. 0:04:36.080 --> 0:04:38.120 I think the goal of the Fed will be cut 0:04:38.120 --> 0:04:42.160 in September, stay restrictive, and if the labor market stays, 0:04:42.160 --> 0:04:46.159 we keep going. If it stabilizes, then then you have 0:04:46.200 --> 0:04:49.920 the option to hold off, and I think that's what 0:04:49.960 --> 0:04:50.440 they'll do. 0:04:51.520 --> 0:04:54.760 Just going back to financial conditions and stock markets at 0:04:54.760 --> 0:04:57.080 all time highs. I mean, if the FED cuts at 0:04:57.120 --> 0:05:00.000 this current juncture, you know, call it an insurance cut 0:05:00.160 --> 0:05:04.160 or whatever. But if the economy reaccelerates after that, which 0:05:04.160 --> 0:05:06.839 it may, Yeah, which it may, would you be worried 0:05:06.839 --> 0:05:10.000 about that side of the outcome, given that, as you said, 0:05:10.040 --> 0:05:13.920 inflationary pressures seem to be going sideways too, possibly up. 0:05:14.360 --> 0:05:14.600 Yeah. 0:05:14.600 --> 0:05:17.560 So a lot of people look at financial conditions and 0:05:17.920 --> 0:05:21.159 see it as a reason the Fed shouldn't act. I 0:05:21.200 --> 0:05:25.200 actually come at it from someplace different. The economic statistics 0:05:25.520 --> 0:05:26.640 are reflective of. 0:05:26.560 --> 0:05:28.040 What's going on right now. 0:05:28.520 --> 0:05:30.880 In fact, even more than that what has gone on, 0:05:31.480 --> 0:05:34.920 not even what's going on right now. The stock market 0:05:35.200 --> 0:05:38.680 and other financial markets are a assessment of what's going 0:05:38.760 --> 0:05:42.520 to happen for the next three to five years. As 0:05:42.560 --> 0:05:45.760 we know, we're in the middle and the early innings 0:05:46.160 --> 0:05:50.440 of an AI data center power boom. I don't think 0:05:50.440 --> 0:05:53.880 it's showing up yet in a lot of productivity, but 0:05:54.000 --> 0:05:56.000 I think a year or two from now it will. 0:05:56.279 --> 0:05:58.640 The stock market, rightly or wrongly, I think is making 0:05:58.960 --> 0:05:59.599 that bet. 0:05:59.839 --> 0:06:02.560 It's betting that productivity is going to improve, corporate earnings 0:06:02.600 --> 0:06:04.920 are going to get better. You're not seeing a show 0:06:05.000 --> 0:06:07.919 up in the current economy. The Fed's job is to 0:06:08.000 --> 0:06:12.000 look at financial conditions, but adjust policy based on the 0:06:12.080 --> 0:06:15.760 current economy, not the bet the market's making for two 0:06:15.839 --> 0:06:16.560 or three years. 0:06:16.720 --> 0:06:19.520 I'm glad you brought that up about the AI boom, 0:06:19.560 --> 0:06:22.400 the powers, the data center boom, and so forth, and 0:06:22.440 --> 0:06:25.039 that it's not showing up yet in productivity, but it 0:06:25.080 --> 0:06:27.880 may be showing up in greater strain on the grid. 0:06:28.000 --> 0:06:30.640 It may be showing up in greater strain. 0:06:30.839 --> 0:06:34.760 On certain electrical gear that's necessary that's been in shortage 0:06:34.800 --> 0:06:38.640 for all manufacturers for years now. As of right now 0:06:38.760 --> 0:06:42.000 in September twenty twenty five, could we say that, if anything, 0:06:42.600 --> 0:06:44.760 the AI boom is like sort of having a crowding 0:06:44.800 --> 0:06:48.440 out effect or slightly inflationary where the costs right now 0:06:48.680 --> 0:06:51.720 just on a static stent setting aside the bet, are 0:06:51.720 --> 0:06:52.480 a bit of a drag. 0:06:52.839 --> 0:06:57.320 There are two big structural initiatives that are being pursued 0:06:57.360 --> 0:07:01.240 by this administration. One is regulatory view and regulatory relief 0:07:01.520 --> 0:07:05.640 because they want to ease the speeding to adoption of 0:07:05.680 --> 0:07:08.920 AI and get more capital available. But the second thing 0:07:09.400 --> 0:07:12.320 is there's an extensive re review of the power grid. 0:07:12.840 --> 0:07:18.680 We are behind China in having enough power to fund. 0:07:18.520 --> 0:07:20.480 The AI explosion. 0:07:20.880 --> 0:07:24.920 We've got to invest more in geothermal, more modular nuclear. 0:07:25.200 --> 0:07:27.160 We need to make it easier to run a refinery, 0:07:27.280 --> 0:07:29.880 make it easier to do transmission. And I think you're 0:07:29.880 --> 0:07:33.520 going to find there's going to be enormous efforts because 0:07:33.520 --> 0:07:36.120 we are behind, and in some states, to your point, 0:07:36.480 --> 0:07:39.160 there is a crowding out and I think people are afraid. 0:07:39.200 --> 0:07:42.320 At some states, the leaders are afraid to take more 0:07:42.400 --> 0:07:45.440 data centers for fear it's going to crowd out individuals. 0:07:45.840 --> 0:07:49.239 So this is a big structural initiative that isn't getting 0:07:49.280 --> 0:07:51.920 in the press a lot, but it's a big initiative 0:07:51.920 --> 0:07:53.080 going on in this country. 0:07:53.320 --> 0:07:55.320 That's a dramatic change and it's needed. 0:07:56.200 --> 0:07:59.000 What does that actually mean for FED policy? Because if 0:07:59.000 --> 0:08:01.800 I think about this crowding out idea and all the 0:08:01.840 --> 0:08:05.360 demand for databases and the things that power them, we 0:08:05.440 --> 0:08:07.920 have seen electricity prices start to go up. I know 0:08:08.000 --> 0:08:12.080 the FED, the fed's preferred inflation measure is x energy 0:08:12.160 --> 0:08:16.200 and food prices. But on the other hand, electricity prices 0:08:16.240 --> 0:08:19.400 feed into the cost of pretty much everything. And also 0:08:19.640 --> 0:08:22.240 this doesn't seem like a bottleneck that we're going to 0:08:22.320 --> 0:08:25.120 be solving, you know, within the next two or three years, 0:08:25.240 --> 0:08:27.440 or even ten years. To be frank, if you're at 0:08:27.480 --> 0:08:30.560 the FED right now and you see electricity prices going up, 0:08:30.840 --> 0:08:32.480 how are you thinking through that pressure? 0:08:32.880 --> 0:08:37.480 So let me put it in context. There are cross currents, 0:08:38.120 --> 0:08:39.559 I mean real cross currents. 0:08:39.640 --> 0:08:40.520 You just mentioned one. 0:08:40.920 --> 0:08:43.720 On the one hand, you've got the government is trying 0:08:43.720 --> 0:08:49.040 to reduce government directed spending and replace it with more incentives, 0:08:49.480 --> 0:08:54.320 tax incentives. Obviously the tariffs have been put in place. 0:08:54.400 --> 0:08:58.440 Those are slowing growth and they have a tendency to 0:08:58.559 --> 0:09:02.560 raise costs they might be one time. And the labor 0:09:02.640 --> 0:09:08.280 force I just mentioned, we are actually decelerating and reducing 0:09:08.360 --> 0:09:12.760 labor force growth because of immigration policy. That's actually helping 0:09:12.840 --> 0:09:15.640 us be at full employment, and the Fed's been taken 0:09:15.720 --> 0:09:20.280 by that, but also makes prices stickier, wages stickier. At 0:09:20.320 --> 0:09:23.800 the same time, you just said, you've got these booms 0:09:23.880 --> 0:09:28.200 and AI and the grid, and you've got don't we 0:09:28.240 --> 0:09:31.440 need more labor, we need more power and that. 0:09:31.360 --> 0:09:32.960 Actually stresses prices. 0:09:33.320 --> 0:09:35.480 So when you're at the FED, when you've got this 0:09:35.600 --> 0:09:38.840 kind of confusion, I think that's one reason why they've 0:09:39.160 --> 0:09:41.920 done nothing so far this year. But I think the 0:09:42.000 --> 0:09:44.760 labor market is forcing their hand where if it gets 0:09:44.840 --> 0:09:47.840 even weaker, they really don't want that, and that's why 0:09:47.880 --> 0:10:02.040 they're acting. 0:10:04.600 --> 0:10:07.280 Let's talk about AI and China a little bit more. 0:10:07.400 --> 0:10:09.200 You mentioned the power element, and there are a lot 0:10:09.240 --> 0:10:12.280 of people anxious about the constraints on the US grid 0:10:12.400 --> 0:10:14.839 and you all these big CAPEX numbers and can the 0:10:15.000 --> 0:10:19.000 great even support that? What else is different besides the 0:10:19.200 --> 0:10:22.880 electricity component, because some people we've talked to you talk 0:10:22.920 --> 0:10:26.160 about there is a very different attitude towards detech diffusion, 0:10:26.240 --> 0:10:29.720 particularly out of China or supply chains that run through China. 0:10:29.920 --> 0:10:32.880 So uh, and I just got back from Asia and 0:10:32.920 --> 0:10:36.040 I was in China last week. When we talk about AI, 0:10:36.679 --> 0:10:40.200 we tend to look at the hyperscalers, these big giant 0:10:40.240 --> 0:10:44.360 companies that make up a disproportionate share of the S 0:10:44.400 --> 0:10:48.079 and P five hundred, and they're spending hundreds of billions 0:10:48.080 --> 0:10:48.640 of dollars. 0:10:48.679 --> 0:10:52.520 They're making a lot of money. When I'm in China. 0:10:52.480 --> 0:10:55.480 And we talk about it about AI, they talk about 0:10:55.520 --> 0:11:00.200 the word used diffusion. They talk about regular businesses, the 0:11:00.320 --> 0:11:03.959 McDonald's of China, Luke and Coffee in China. 0:11:04.400 --> 0:11:06.080 Ray, you look them in New York City right now, 0:11:06.080 --> 0:11:07.600 and I tried one and it's very good. 0:11:07.960 --> 0:11:16.040 Yes, but those companies are actively using AI to lower costs. 0:11:16.960 --> 0:11:19.680 So why is that happening. I'd say we're further along. 0:11:19.840 --> 0:11:23.120 China's further along than we are. Why their margins are lower. 0:11:23.520 --> 0:11:26.360 They're doing it out of necessity. Our margins in the 0:11:26.440 --> 0:11:29.120 US and our companies are higher, and so they're not 0:11:29.200 --> 0:11:32.679 as much pressure to lower costs and make AI experiments. 0:11:32.840 --> 0:11:35.959 In China, they don't have a choice. It's so competitive 0:11:36.360 --> 0:11:39.520 they need to lower costs. But the thing that struck 0:11:39.559 --> 0:11:43.320 me there's a lot to learn from what they're doing 0:11:43.400 --> 0:11:47.119 in China. Normally, if we were a little more globally integrated, 0:11:47.160 --> 0:11:51.000 we would learn those things and bring those learnings back 0:11:51.040 --> 0:11:54.800 to the United States. And it reminded me that globalization 0:11:56.120 --> 0:11:59.599 is not dead. United States is choosing to play a 0:11:59.640 --> 0:12:02.199 different role in it and stepping back. But I got 0:12:02.240 --> 0:12:04.200 to tell you, the other thing I saw there is 0:12:04.240 --> 0:12:09.760 there's more coupling going on between China and other countries 0:12:10.120 --> 0:12:13.520 that are aggressively. Canada is much more aggressive in trying 0:12:13.520 --> 0:12:17.640 to form new partnerships. So I think globalization and the 0:12:17.720 --> 0:12:20.600 Ai story go together. And I got to tell you, 0:12:21.120 --> 0:12:24.280 globalization not going away, and the US is going to 0:12:24.280 --> 0:12:25.920 have a choice in the years to come how much 0:12:25.960 --> 0:12:28.319 of a role we want to play in participating. 0:12:28.600 --> 0:12:31.000 But it's going to happen with us or without us. 0:12:31.400 --> 0:12:33.320 So we can sit here and ask you what you 0:12:33.400 --> 0:12:35.680 saw in China and what your thoughts were about China. 0:12:35.720 --> 0:12:37.280 But I am very aware that when you go on 0:12:37.280 --> 0:12:40.079 that type of trip, you have Chinese clients who are 0:12:40.120 --> 0:12:43.720 asking you your thoughts on the US and what's going 0:12:43.760 --> 0:12:45.880 on here. What are the type of questions that you're 0:12:45.880 --> 0:12:47.880 getting from Chinese clients at the moment, what are they 0:12:47.880 --> 0:12:48.440 interested in? 0:12:49.080 --> 0:12:54.560 So the biggest item i'd say of discussion is and 0:12:54.679 --> 0:12:56.840 I used to be in Asia for the first part 0:12:56.840 --> 0:13:02.320 of my career and what I found in Korea, Taiwan, China, 0:13:02.360 --> 0:13:05.880 to a large extent, their whole effort was to go 0:13:05.960 --> 0:13:10.760 from low value added manufacturing to high value added manufacturing. 0:13:11.120 --> 0:13:16.400 And they try to wean off of lower value added manufacturer. 0:13:16.400 --> 0:13:19.000 What's an example. T shirts and sneakers used to be 0:13:19.040 --> 0:13:22.480 made in China. Today they're made in Vietnam. Why China 0:13:22.679 --> 0:13:26.000 wants to move up the value chain because their feeling 0:13:26.120 --> 0:13:28.720 is they're going to raise the standard of living. 0:13:28.600 --> 0:13:30.599 To higher value added manufacturing. 0:13:31.280 --> 0:13:34.760 The question sometimes I get when I'm over there is 0:13:35.320 --> 0:13:38.559 if you're going to reshore to the United States, are 0:13:38.600 --> 0:13:43.760 you going to really reshore lumber, aluminum, some of these 0:13:43.800 --> 0:13:51.320 other lower value added manufacturing wouldn't. Solidifying the relationship with 0:13:51.679 --> 0:13:55.160 Canada and Mexico makes sense where you can get cheap 0:13:55.280 --> 0:13:59.520 natural resources from Canada, cheap labor from Mexico, and solidify 0:13:59.600 --> 0:14:03.360 North America. And so I'd say that they're not critical 0:14:03.400 --> 0:14:05.959 of us, but they're scratching their heads a little bit 0:14:06.000 --> 0:14:10.920 to say, what's the strategic rational Because you're tied on labor, 0:14:11.480 --> 0:14:16.280 you normally want to move up the value chain. And 0:14:16.360 --> 0:14:19.480 I think they realize that some of these tariffs are 0:14:19.560 --> 0:14:23.160 also intended to help generate revenue and reduce the deficit. 0:14:23.520 --> 0:14:26.600 They understand that, they're just questioning how strategic it is. 0:14:26.920 --> 0:14:29.280 Well, let me ask you a question of the on 0:14:29.400 --> 0:14:32.520 the question of what are we going to bring back 0:14:32.640 --> 0:14:35.840 in the United States, if anything, just from your purge 0:14:36.080 --> 0:14:39.920 at Goldman, do you see any private money that's come 0:14:39.960 --> 0:14:42.800 into the US for fresh sort of I don't know 0:14:42.880 --> 0:14:47.000 Greenfield capital investment either in something low margin or high 0:14:47.040 --> 0:14:50.200 margin because the terriffs have changed the math and made 0:14:50.200 --> 0:14:51.440 that investment economical. 0:14:51.720 --> 0:14:56.200 So I will say there, yes is the answer. I 0:14:56.200 --> 0:14:58.760 think there are US companies that will do more on 0:14:58.800 --> 0:15:03.160 the margin manufacturing here. I've talked to overseas companies, including 0:15:03.960 --> 0:15:07.280 I won't mention the name of one contract manufacturer in China. 0:15:07.720 --> 0:15:11.040 They are building more in the United States, and so 0:15:11.920 --> 0:15:15.080 the thing is, I don't know how long it will take, 0:15:15.160 --> 0:15:19.240 what the magnitude will be, but yes, it is happening. 0:15:19.640 --> 0:15:23.720 The flip side of that is there are many companies 0:15:23.760 --> 0:15:29.680 in the US that benefited from access to lower cost goods. Yeah, 0:15:29.840 --> 0:15:31.680 and I won't mention their name that you can you 0:15:31.760 --> 0:15:35.200 know some of them and their margins are being squeezed. 0:15:35.600 --> 0:15:37.720 And then I talked to a number of small businesses 0:15:38.080 --> 0:15:41.480 that don't have the levers to manage these tariffs, and 0:15:41.560 --> 0:15:44.000 some of them will actually go out of business or 0:15:44.120 --> 0:15:45.600 considering it by the end of the year. 0:15:46.520 --> 0:15:48.440 This is a little bit of an unfair question, but 0:15:48.440 --> 0:15:50.240 I'm going to ask it anyway. If you had to, 0:15:50.360 --> 0:15:52.600 if you have to choose one right now, would you 0:15:52.640 --> 0:15:57.040 say that tariffs are more effective at bringing back manufacturing 0:15:57.040 --> 0:16:00.960 to the US, or more effective at raising income for 0:16:01.000 --> 0:16:03.280 the US government at a time when people are worried 0:16:03.280 --> 0:16:04.000 about the deficit. 0:16:05.000 --> 0:16:12.240 I think they'll start with the second part. Tariffs raise revenue, 0:16:12.480 --> 0:16:16.480 but they slow growth, and so for every dollar of 0:16:16.600 --> 0:16:20.200 tariff revenue you have to accept, you may give some 0:16:20.400 --> 0:16:23.120 back in a little bit lower growth. I think that 0:16:23.280 --> 0:16:27.560 trade is very much worth it if you're bringing back 0:16:27.760 --> 0:16:30.960 high value added manufacturing. I don't know if it's such 0:16:30.960 --> 0:16:35.080 a good trade if you are pushing to bring back 0:16:35.160 --> 0:16:38.640 lower value added I think this administration knows that, and 0:16:38.720 --> 0:16:40.160 I think they'll be more strategic. 0:16:40.280 --> 0:16:41.560 I think you can do both. 0:16:42.320 --> 0:16:46.360 I think you could level the playing field, get a 0:16:46.520 --> 0:16:50.080 more tariff revenue. With some level of tariff revenue, I 0:16:50.120 --> 0:16:52.160 think we were thinking they were going to be closer 0:16:52.200 --> 0:16:55.000 to ten percent than twenty percent. You mean the high 0:16:55.080 --> 0:16:57.560 teens is a little higher than we expected. And you 0:16:57.640 --> 0:17:03.000 can also yes on semiconduct in other strategic areas, you 0:17:03.040 --> 0:17:06.880 can redomicile those. I think the question is you sure 0:17:06.920 --> 0:17:09.000 you want to go down the road of lumber and 0:17:09.080 --> 0:17:12.280 aluminum or do you want to let Canada do it? 0:17:12.359 --> 0:17:14.919 Is that a good strategic trade? I'm not sure. 0:17:15.840 --> 0:17:16.800 Since you mentioned it. 0:17:17.040 --> 0:17:20.000 Why is the neutral rate of interest to the extent 0:17:20.040 --> 0:17:22.520 that we can form some educated guess as to what 0:17:22.520 --> 0:17:24.719 it is. Why is it so much higher than it 0:17:24.800 --> 0:17:26.680 was in say twenty nineteen in your view. 0:17:29.200 --> 0:17:34.520 So the fact of the matter is, I think if 0:17:34.560 --> 0:17:37.720 you go way back in the Stone Age to twenty nineteen, and. 0:17:37.720 --> 0:17:39.280 It does seem like forever ago. 0:17:39.160 --> 0:17:39.679 It does. 0:17:40.840 --> 0:17:45.320 I think if we had not had COVID, I think 0:17:45.320 --> 0:17:48.440 at the right before COVID hit, the ten year treasury 0:17:48.720 --> 0:17:51.359 I think was in the neighborhood of maybe one in 0:17:51.440 --> 0:17:54.520 three quarters to two, the Fed funds rate was in 0:17:54.560 --> 0:17:55.359 the mid ones. 0:17:55.880 --> 0:17:58.679 I think we would have inched our way up a little. 0:17:58.440 --> 0:18:00.840 Hard know how good we had all those people complaining, oh, 0:18:00.920 --> 0:18:03.520 yields are so low, and then now they all wish 0:18:03.600 --> 0:18:04.520 they could go back there. 0:18:04.840 --> 0:18:09.320 Yeah, Listen, the inflation rate today is stickier. Back in 0:18:09.440 --> 0:18:11.119 nineteen it was probably one and a half one and 0:18:11.200 --> 0:18:14.240 three quarters. I still think even then the neutral rate 0:18:14.320 --> 0:18:17.040 real rate was three quarters of one percent. So the 0:18:17.080 --> 0:18:19.440 neutral Fed funds rate back then I think was two 0:18:19.520 --> 0:18:22.320 and a half ish. Today it's closer to three and 0:18:22.359 --> 0:18:24.840 a half. But there's only one reason for that. The 0:18:24.840 --> 0:18:28.440 inflation rates higher. If inflation got back down to two. 0:18:28.840 --> 0:18:30.679 I think you'd see the neutral rate back down to 0:18:30.680 --> 0:18:44.840 two and three quarters. 0:18:47.600 --> 0:18:50.679 Since you mentioned sticky inflation. There's one other thing that 0:18:50.720 --> 0:18:53.040 seems to be top of mind at the moment, which 0:18:53.080 --> 0:18:56.879 is federal reserve independence, and we should talk about that. 0:18:56.960 --> 0:18:59.160 But I guess we can get your thoughts on you know, 0:18:59.800 --> 0:19:02.119 that specific idea in a second. But one thing that 0:19:02.200 --> 0:19:05.760 seems surprising so far is that we're having this debate 0:19:05.920 --> 0:19:09.359 about what happens to the federal reserve with what seems 0:19:09.359 --> 0:19:11.920 to be a more activist Trump administration that seems to 0:19:12.000 --> 0:19:14.840 want to have a heavier hand in monetary policy. We 0:19:14.960 --> 0:19:18.520 haven't really seen much response from the market. If you 0:19:18.520 --> 0:19:20.320 look at the long end, it doesn't seem like there's 0:19:20.320 --> 0:19:23.080 a big risk premium building there. What's going on? 0:19:23.880 --> 0:19:25.760 So's make two comments. 0:19:26.200 --> 0:19:31.520 So regarding political independence, let me just make sure I 0:19:32.119 --> 0:19:37.240 frame this regulatory policy at the FED is not, underline, 0:19:37.320 --> 0:19:40.720 not politically independent. It hasn't been for a number of years. 0:19:40.920 --> 0:19:42.880 What do I mean by that? You get a new president, 0:19:43.119 --> 0:19:46.120 they pick a new head of supervision, and it's very 0:19:46.160 --> 0:19:49.160 much has been influenced for the last many years by 0:19:49.200 --> 0:19:52.800 whoever's in office. The balance sheet I would argue, is 0:19:52.880 --> 0:19:55.280 maybe a little bit in the gray air on setting 0:19:55.280 --> 0:20:00.000 the FED funds rate. Though the Fed has been politically independent. 0:20:00.720 --> 0:20:03.400 Why is the market, you said, well, not reacting more 0:20:03.440 --> 0:20:03.720 to this. 0:20:04.280 --> 0:20:04.800 I mean, the. 0:20:04.800 --> 0:20:09.000 Reality is the stock market likes the idea of lower rates. 0:20:09.640 --> 0:20:12.880 I think the thing, it's not that the markets aren't reacting. 0:20:13.640 --> 0:20:17.199 The stock market likes it. So it's starting now to 0:20:17.240 --> 0:20:19.840 take into account. It makes the real acceleration you talked 0:20:19.840 --> 0:20:23.800 about more likely. The gold market is very much taken 0:20:23.880 --> 0:20:26.080 note of it, and gold is up more than thirty 0:20:26.080 --> 0:20:28.320 five percent year to DA eight. I see it's up 0:20:28.320 --> 0:20:31.920 another one percent today, So it has and I actually 0:20:31.960 --> 0:20:36.480 think duration on the long bond while while the tenure 0:20:36.640 --> 0:20:40.280 is rallied because of slow growth, I still think we 0:20:40.359 --> 0:20:42.800 have an issue. We've got thirty seven trillion of debt 0:20:42.800 --> 0:20:46.320 to sell on our way to forty trillion. I think 0:20:46.800 --> 0:20:49.879 that the bond market may pay at the long end. 0:20:49.960 --> 0:20:54.080 We'll pay attention to how this current situation works out. 0:20:54.640 --> 0:20:56.480 What is going on? 0:20:56.560 --> 0:20:59.119 How much more gold talk is there these days than 0:20:59.119 --> 0:21:00.280 there were a few years ago. 0:21:01.359 --> 0:21:04.920 Well, I actually I've gone back over look back over 0:21:04.960 --> 0:21:06.880 the last fifty years. When's the last time we got 0:21:06.880 --> 0:21:10.600 a rally in gold like this, I think in the 0:21:10.640 --> 0:21:14.320 aftermath of the Great Recession. Remember the Great Recession, the 0:21:14.359 --> 0:21:19.359 FED took its balance sheet from eight hundred billion to 0:21:19.480 --> 0:21:23.040 four trillion, okay, and stopped and we started to run 0:21:23.080 --> 0:21:25.760 it down a little bit. In response to COVID, we 0:21:25.840 --> 0:21:30.440 went from four trillion to nine trillion, and we authorized 0:21:30.480 --> 0:21:34.920 six trillion dollars of extraordinary spending in a twenty seven 0:21:35.000 --> 0:21:40.119 trillion dollar economy. And the GDP, the net debt to 0:21:40.160 --> 0:21:43.480 GDP went from mid seventies to over one hundred percent. 0:21:43.920 --> 0:21:47.760 When you've got leverage in the United States and to 0:21:47.880 --> 0:21:52.159 some extent in the developed world getting much higher in 0:21:52.200 --> 0:21:57.080 response to COVID. That's where people started to look at gold, bitcoin, 0:21:57.600 --> 0:22:01.240 other alternatives to paper currency because they're worried that this 0:22:01.359 --> 0:22:03.880 leveraging is just keeping going on and on and on, 0:22:04.320 --> 0:22:06.159 and so it's understandable. 0:22:07.480 --> 0:22:10.879 Wait is it, though, Because one of the weird tensions 0:22:10.920 --> 0:22:13.560 of our current market situation is we have US stocks 0:22:13.560 --> 0:22:16.360 at all time highs, but also gold making new records 0:22:16.400 --> 0:22:21.600 almost every week. It feels like those two things are incompatible, 0:22:21.680 --> 0:22:24.919