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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.

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Speaker 3: I'm Jill Wisenthal and I'm Tracy Alloway.

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Speaker 2: Tracy, there are many dimensions of the ongoing market turbulent

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Speaker 2: and trade tensions that we can't stop talking about, but

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Speaker 2: a big one, and in a way, it's almost taken.

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Speaker 2: People aren't talking about it that much right now because

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Speaker 2: there's so many other things top of mind, a lot

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Speaker 2: of questions about how the FED is gonna think about

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Speaker 2: what's happening right here.

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Speaker 4: Right And I know it's probably not very popular to

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Speaker 4: sympathize with the central bank, but I gotta say I

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Speaker 4: would hate to be Jerome Powell right now because in

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Speaker 4: my mind, the consensus right now seems to be that

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Speaker 4: we're heading for some sort of stagflationary scenario, at least

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Speaker 4: in the short to intermedia terms, so higher inflation, lower growth,

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Speaker 4: possibly even recession, and that to me just seems like

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Speaker 4: a nightmare scenario for a central bank which constantly has

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Speaker 4: to balance its twin mandate of price stability and low unemployment.

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Speaker 2: It's really tricky, right because we've sort of been used

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Speaker 2: to environments where it's really obvious. Right, So in twenty

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Speaker 2: twenty two, twenty twenty three, it was clear that they

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Speaker 2: were missing on one specific side, which was the price

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Speaker 2: for much of you know, post two thousand and seven

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Speaker 2: or two thousand and eight, the story was we growth, disinflation, whatever,

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Speaker 2: so poor employment. I mean, this is going to be tricky.

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Speaker 2: And look, when we're talking about restructuring the global economy

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Speaker 2: or the internal economy, these are questions that there is

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Speaker 2: a limit to the degree to which one monetary policy

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Speaker 2: can solve them. They can maybe, you know, maybe things

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Speaker 2: a little bit, but at the end, these aren't really

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Speaker 2: monetary policy questions we're talking about.

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Speaker 4: Here, right, And I think we all internalized that lesson

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Speaker 4: in the twenty twenty pandemic, Right, We saw all these

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Speaker 4: real world disruptions, supply chain issues, and that gave rise

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Speaker 4: to the infamous transitory inflation as the FED called it.

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Speaker 4: And it seems very much like that's a possibility again.

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Speaker 2: Right totally, And like we've been saying, we've been going

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Speaker 2: back to talking to all our old supply chain guests

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Speaker 2: because you know, the whole world may be redrawn anyway.

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Speaker 2: We're recording this after the market closed. It's April eighth,

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Speaker 2: twenty twenty five. It's four h nine pm. We just

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Speaker 2: had another crazy day in the market. S and P

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Speaker 2: five hundred and a down one point five to seven percent.

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Speaker 2: It had been up over four percent at one point,

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Speaker 2: so we continue to whipsaw. Anyway, I'm excited to say

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Speaker 2: we really do have the perfect guest, someone we've had

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Speaker 2: actually on the show once before. We are going to

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Speaker 2: be speaking with Rob Kaplan. He is a vice chairman

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Speaker 2: of Goldman Sachs, member of the management committee. Prior to that,

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Speaker 2: he was the president and CEO of the Federal Reserve

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Speaker 2: Bank of Dallas. Prior to that, he had been Harvard.

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Speaker 2: Prior to that, he had been at Goldman Sacks. Truly

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Speaker 2: the perfect guest for right now, Rob Kaplan, thank you

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Speaker 2: so much for coming back Outlaws.

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Speaker 5: Thanks for having me. Good to talk with you.

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Speaker 2: Tracy said she wouldn't want to be Jerome Paula. I

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Speaker 2: would still take that job, but I'm just let's start.

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Speaker 2: You're on this. Let's say you know this is all

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Speaker 2: happening a few years ago and you're still at the FED.

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Speaker 2: How stressful is this kind of environment for charting a

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Speaker 2: course from monetary policy?

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Speaker 5: Well, the last time we had a tiff issue. Yeah,

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Speaker 5: you got to go back to twenty nineteen. I was

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Speaker 5: at the FED at the time, and you may recall

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Speaker 5: we preemptively cut the FED funds rate three times. I

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Speaker 5: think we called it a tactical recalibration or something like that.

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Speaker 5: And the reason we were able to be preemptive is

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Speaker 5: we didn't have an inflation issue, so we could afford

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Speaker 5: to be preemptive. As we're sitting here today, the FED

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Speaker 5: goes into this already before the tariff situation, with an

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Speaker 5: inflation issue, and that inflation's sticky. Now the irony going

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Speaker 5: into this, The source of the sticky inflation has been services,

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Speaker 5: not goods. Goods have been disinflating up to now, up

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Speaker 5: until say two months ago or a month and a

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Speaker 5: half ago, and China over capacity has fed that disinflation.

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Speaker 5: But despite that, you know, we're hanging around two and

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Speaker 5: a half two and three quarters on the PCE. And

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Speaker 5: I would argue that the excess inflation has been more

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Speaker 5: about excess demand due to outsized fiscal spending. So we

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Speaker 5: are now in a new administration where they are dialing

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Speaker 5: down fiscal spending, so that excess demand is being pulled away.

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Speaker 5: You would normally consider that disinflationary. But now we've got

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Speaker 5: a supply shock issue related to tariffs, which relates ironically

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Speaker 5: to goods, not service. And so the most important thing

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Speaker 5: that FED is thinking right now is we don't have

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Speaker 5: to have this figured out, because we can't have it

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Speaker 5: figured out. If anything, they learned from the transitory episode,

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Speaker 5: don't try to jump ahead to predict things that you

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Speaker 5: can't know. And I think they're going to sit back,

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Speaker 5: let the situation unfold and try to understand it, and

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Speaker 5: they're going to be more reactive, not proactive, And I

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Speaker 5: think that will be the difference.

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Speaker 4: You know, I mentioned stagflation before, which seems to be

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Speaker 4: becoming the consensus economic environment that everyone is talking about.

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Speaker 4: What's the playbook, I guess the traditional playbook for a

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Speaker 4: central bank that's starting or trying to battle stagflation. You know,

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Speaker 4: I'm thinking back to the nineteen seventies. Maybe Vulcar he

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Speaker 4: raised rates really aggressively and ultimately he was willing to

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Speaker 4: sacrifice employment in order to get down. Is there like

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Speaker 4: a normal playbook that central bankers can follow here?

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Speaker 5: Not really in this case, in that you're right in

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Speaker 5: the seventies, we had a situation where we had slowing

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Speaker 5: growth and an inflation issue. One of the things I

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Speaker 5: would say about this situation, I think you have to

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Speaker 5: assess it for what's driving it, what are the structural drivers?

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Speaker 5: And I think that we have a lot of uncertainty.

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Speaker 5: You have government spending cuts, you have a dramatic reduction

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Speaker 5: in immigration and shutting down the border, which normally would

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Speaker 5: slow growth and might actually create some stickiness in the

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Speaker 5: labor force. And then you've got these teriff issues. But

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Speaker 5: the issue with the tariff situation is it's in flux.

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Speaker 5: You had the announcement last week on Wednesday, and it's

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Speaker 5: still very unclear. How much is the administration our administration

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Speaker 5: willing to negotiate, how much is this really about reciprocity?

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Speaker 5: And I think, honestly, how much of this is about

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Speaker 5: the administration might want to create more revenue and tariff

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Speaker 5: for revenue, and actually while countries may come back to

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Speaker 5: us and say we'll go down to zero and remove

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Speaker 5: non trade barriers, I think we're going to find out

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Speaker 5: how willing our administration is to in fact negotiate or

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Speaker 5: how much do they actually want hire tariffs to keep

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Speaker 5: the revenue, and so all those things are going through

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Speaker 5: the fed's mind, and so we don't know. And so

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Speaker 5: I think you just have to be patient, don't be

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Speaker 5: a prognosticator, be a risk manager, allow this situation to clarify.

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Speaker 2: Well, let me ask you a question. I mean, you

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Speaker 2: must talk all the time to both investors and to

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Speaker 2: real businesses of various sorts. Right now, when we're talking

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Speaker 2: on April eighth, do you think there is still some

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Speaker 2: belief that this can't be what the final tear of

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Speaker 2: schedule looks like, whatever it ends up being, maybe negotiations,

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Speaker 2: et cetera, That the idea that no, these numbers that

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Speaker 2: were unveiled on that chart on April second, they can't

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Speaker 2: really be what the new trading relationship with the rest

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Speaker 2: of the world is going to look like.

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Speaker 5: Okay, so let's talk about both groups, businesses and then

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Speaker 5: capital allocators investors. I think there's a hope, there has

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Speaker 5: been a hope by both that yes, this was more

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Speaker 5: about reciprocity and there was going to be a negotiation,

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Speaker 5: and so this isn't where we're going to end up.

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Speaker 5: I think one of the reasons why the market is

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Speaker 5: behaving in the way it is. I think businesses are

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Speaker 5: still hopeful that this will be a negotiation, but they're

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Speaker 5: not sure about that, and they're starting to make plans

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Speaker 5: on how they're going to adjust, and there's a series

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Speaker 5: of things they could do. They're already talking about pressuring

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Speaker 5: suppliers to cut prices. They're talking about the potentially taking

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Speaker 5: some of this out of margin. There we're hoping up

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Speaker 5: to now that maybe the dollar would strengthen, and then

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Speaker 5: the other thing they're talking about is pricing, but they're

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Speaker 5: in the middle of trying to figure that out. They

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Speaker 5: are not, as much as you would hope, actively talking

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Speaker 5: about expanding capacity here because they're concerned that something they

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Speaker 5: build here is globally competitive, and you don't want to

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Speaker 5: build a high cost facility that only is competitive because

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Speaker 5: of the tariff mode. So that's where they are. They're

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Speaker 5: treading water and trying to be receptive and figure this

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Speaker 5: out and giving their views to the administration. Capital allocators,

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Speaker 5: on the other hand, started the year wanting to be

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Speaker 5: long the dollar dollar denominated assets, and what's happened is

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Speaker 5: they have been moving on the margin away from the dollar,

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Speaker 5: and you're even seeing in the last week that some

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Speaker 5: dollar weakness ten year treasury backing up as opposed to rallying,

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Speaker 5: which you would normally expect to see, and you're seeing

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Speaker 5: a move I think, not between asset classes. You're seeing

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Speaker 5: a move away from dollar denominated assets that is extremely unusual,

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Speaker 5: and again they're doing it to hedge their bets depend

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Speaker 5: on what the administration is trying to accomplish.

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Speaker 4: I wanted to ask you about exactly this you mentioned earlier.

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Speaker 4: Don't be a prognosticator, be a risk manager, and that

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Speaker 4: sounds like we should make like inspirational posters with like

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Speaker 4: little kittens hanging from trees with that text below. But

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Speaker 4: on this note, one of the reasons this market move

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Speaker 4: is particularly painful is not just because it's very, very big,

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Speaker 4: a big downward shift, but also we're seeing bond sell

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Speaker 4: off at the same time, and I think we've moved

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Speaker 4: from like just under four percent on the tenure to

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Speaker 4: something like almost four point three percent. Now, again, that's

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Speaker 4: happening while stocks are selling off, which is something you

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Speaker 4: wouldn't expect to see normally. I have seen all sorts

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Speaker 4: of explanations for why this might be happening. I've seen

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Speaker 4: people talk about, well, maybe investors are liquidating what they

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Speaker 4: can sell in the current environment, not necessarily what they want.

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Speaker 4: And then secondly, maybe it's the basis trade being unwound. Thirdly,

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Speaker 4: maybe it's investors shifting away from US assets altogether. Where

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Speaker 4: do you sort of lie on that spectrum of reasons,

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Speaker 4: like what is the mix for why exactly yields are

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Speaker 4: going up right now?

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Speaker 5: So we're seeing all those potential explanations. I think the

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Speaker 5: truth is we're not sure. There's certainly been comments in

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Speaker 5: the market, and we've seen them flows about the unwind

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Speaker 5: of the basis trade you referred to. We're seen among

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Speaker 5: some asset allocators a desire to reallocate and rebalance their

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Speaker 5: dollar exposures to other mare markets. And I think the

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Speaker 5: most insightful thing I can say, certainly if I'm at

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Speaker 5: the FED and sitting here at Goldmen Sachs, the only

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Speaker 5: thing we can all agree on. It's something we are

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Speaker 5: watching very carefully because it's a concern for a country

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Speaker 5: that has a let's say, thirty six thirty seven trillion

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Speaker 5: dollars of treasury debt outstanding and growing by at least

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Speaker 5: two trillion a year. It's very critical that we are

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Speaker 5: able to market our debt. We've struggled over the last

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Speaker 5: few years to sell duration and that we've tried to

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Speaker 5: front endload it. But it's critical for a country with

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Speaker 5: debt to GDP one hundred percent plus. You want to

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Speaker 5: be able to market your debt. You want confidence in

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Speaker 5: what we're doing here, and I think it bears watching,

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Speaker 5: and certainly if I were at the FED, I'd be

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Speaker 5: watching that very carefully.

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Speaker 4: You've had a very long career, and Joe his intro

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Speaker 4: for you included many titles, many hats over your history

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Speaker 4: as a financial market veteran.

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Speaker 3: Have you ever seen anything like this?

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Speaker 5: I think that normally what you're accustomed to in a

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Speaker 5: week like this last week, you would normally see a

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Speaker 5: flight to quality, you would see Treasury's rally, and you

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Speaker 5: would eventually start to get a better grip on what's

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Speaker 5: going on. Obviously, COVID was a good example of an

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Speaker 5: enormous uncertainty that took a while to resolve. It's been

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Speaker 5: unusual in my career to see a government led action

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Speaker 5: as opposed to an external shock, a government led action

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Speaker 5: I e. Man made that has in turn created this

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Speaker 5: kind of uncertainty. The good thing about this kind of situation.

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Speaker 5: If it's man made that created the uncertainty, it can

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Speaker 5: also be susceptible to man made actions that will address

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Speaker 5: the uncertainty. And I think that's what people in the

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Speaker 5: market are hoping for.

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Speaker 2: Do you worry that they? I mean this is this

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Speaker 2: has come up and it's certainly true, right because at

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Speaker 2: any given moment, Trump could say no, we're taking this back,

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Speaker 2: but this is his life mission, or we're doing some pause.

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Speaker 2: And we saw these sort of incredible rally Monday on

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Speaker 2: a fake headline about the pause tells you something about

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Speaker 2: the environment. But what the president can't do is undring

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Speaker 2: the bell because he can't really credibly say he'll never

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Speaker 2: do this again. Right, Like, do you worry that, like

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Speaker 2: this is going to permanently change America's economic relationship with

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Speaker 2: every country in the world.

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Speaker 5: Yeah, I just got back from Europe. Yeah there are certainly,

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Speaker 5: yes are strains around the world. Yeah, and yes those

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Speaker 5: bear watching. Having said that, I do believe that there's

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Speaker 5: a great opera coortunity to get this puzzle right and

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Speaker 5: make this work. But yes, there is some cost to

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Speaker 5: what's happened up to now. But I still think this

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Speaker 5: can get resolved. But it's going to require some action

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Speaker 5: on our part in order to do that. And I

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Speaker 5: think the markets in their up and down reaction today,

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Speaker 5: they're just not sure how imminent that is and whether

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Speaker 5: that's going to happen, And so you're seeing this uncertainty

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Speaker 5: prevail in the markets. The problem with uncertainty going on

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Speaker 5: for too long is it flows activity. If I'm a

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Speaker 5: consumer thinking about taking an action, I might pause it.

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Speaker 5: If I can tell you talking to companies, they're not

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Speaker 5: saying no, but they're saying not now. They have already

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Speaker 5: had other uncertainties they're dealing with in their business, how

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Speaker 5: to approach AI, which use cases for AI spending will work.

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Speaker 5: They have other issues that they're always wrestling with, and

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Speaker 5: I think all this does is cause them to be

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Speaker 5: more careful pause actions they might have otherwise taken. And

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Speaker 5: I don't think you want that to go on indefinitely.

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Speaker 4: Just going back to the FED for a second, what's

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Speaker 4: the pain threshold for the Central Bank in terms of

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Speaker 4: movements in the financial market? Like how bad does it

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Speaker 4: need to get before maybe they start rolling out some

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Speaker 4: tools to try to calm things down?

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Speaker 5: All right, So the Fed back the headline, what I'm

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Speaker 5: worried about is full employment and price stability. Stock market

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Speaker 5: going down substantially does not by itself necessarily cause me

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Speaker 5: to do anything other than I'm aware of it. Credit

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Speaker 5: spreads beginning to gap out gets my attention more because

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Speaker 5: I'm concerned that that, in fact would be an amplifier

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Speaker 5: of a potential slowdown. I e. Businesses might not fire

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Speaker 5: people because there's is down, but they might start to

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Speaker 5: if they see their business slowing and credit spreads widening

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Speaker 5: and they're worried about financeability. So I'm watching that still

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Speaker 5: not acting normally. If you see a potential demand shock

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Speaker 5: and the soft data, which is what we're seeing, weaken,

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Speaker 5: but the hard data is still hanging in there, you

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Speaker 5: might start thinking. If you didn't have an inflation issue,

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Speaker 5: you might think about taking some action. But the FED

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Speaker 5: does have an inflation issue, and so I think you'll

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Speaker 5: see the Fed, as we said, be more reactive until

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Speaker 5: you're clearly seeing evidence that there is a slowing and

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Speaker 5: you're going to want to see at the FED to

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Speaker 5: act more than just an inching up in the unemployment rate.

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Speaker 5: You start seeing a much more dramatic move up, and

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Speaker 5: then you're going to realize that we could be entering

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Speaker 5: into a demand shock which would actually be disinflationary, which

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Speaker 5: might offset part of this supply shock. And that's where

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Speaker 5: you'd see the FED be more willing to act. But

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Speaker 5: it's going to be at least a period of time.

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Speaker 5: It's not the main meeting. I think they're going to

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Speaker 5: watch it very carefully, and I think the sooner you

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Speaker 5: might see that materialize would be into June and over

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Speaker 5: the summer. The only other thing I'll mention that I'd

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Speaker 5: be watching for very carefully at the FED is you

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Speaker 5: want to make sure there's orderly market function and particularly

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Speaker 5: orderly treasury market functions. And again, as long as that's

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Speaker 5: the case, I think the FED will watch all these

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Speaker 5: things I just said, but be patient, and they're going

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Speaker 5: to want to see real hard evidence of the slowing

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Speaker 5: before they took an action. And the reason is they

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Speaker 5: don't want to jump the teriff situation gets resolved and

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Speaker 5: at the aftermath we still have an inflation issue and

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Speaker 5: they regret that they've jumped into it and cut the rate.

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Speaker 5: I think they're going to need to be more reactive,

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Speaker 5: which does mean that by the time they move, you know,

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Speaker 5: normally say that are going to be on Maybe you

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Speaker 5: could be accused of being late that. I think they're

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Speaker 5: willing to take that risk.

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Speaker 2: Let's pivot a little bit. Tracy wrote about something last week,

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Speaker 2: or maybe it was two weeks ago. My brain is

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Speaker 2: getting fried, so I don't have any concept of time anymore.

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Speaker 2: The the Dallas Fed's energy survey, which I think comes

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Speaker 2: to a quarterly, unlike the manufacturing is service. It's just

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Speaker 2: unbelievable stuff up there. And this is from an industry

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Speaker 2: which we all know tends to be, you know, probably

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Speaker 2: pretty sympathetic to the current administration politically. They're talking about

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Speaker 2: uncertainty like they've never seen. They've talked about the increased

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Speaker 2: cost of all of their parts for drilling. I mean,

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Speaker 2: it was like kind of apocalyptic. And that was actually

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Speaker 2: before the last week and a half. One of the

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Speaker 2: things in Vestent's three three three plan was getting three

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Speaker 2: million more barrels of oil drilled and expanding energy dominance. Meanwhile,

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Speaker 2: WTI just falling to his lowest level in four years,

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Speaker 2: in part because opek is turning on the gusher, in

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Speaker 2: part because of these recession firms tell us what's going

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Speaker 2: on down there on the energy patch.

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Speaker 5: So we started the Dallas Fed Energy Survey when I

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Speaker 5: was running to Dallas Fed, and we did it particularly

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Speaker 5: for this reason. We wanted to get a grip on

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Speaker 5: what will break even levels, at what levels are you

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Speaker 5: profitable at, what prices are you more likely to drill,

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Speaker 5: and what we're seeing as the following four years ago,

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Speaker 5: when the industry heard drill, baby, drill, they would be

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Speaker 5: they were very excited about that. I think over the

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Speaker 5: last three or four years they have been drilling subject

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Speaker 5: to cash flow. They've been pressured by shareholders to return

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Speaker 5: more capital, and cost to drill have gone up, and

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Speaker 5: tariffs will increase cost to drill more. And so the

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Speaker 5: industry will drill at one level if the price is

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Speaker 5: eighty dollars, but it's going to drill at a lower level,

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Speaker 5: all things being equal, if prices get into fifties or sixties.

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Speaker 5: And so I think we may well find over this

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Speaker 5: next year that actually the level of drilling activity doesn't increase,

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Speaker 5: and I think people who are drilling are going to

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Speaker 5: be more careful, particularly as the price has come down.

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Speaker 5: You see OPEK. I think the US may have more

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Speaker 5: success pressuring OPEC and Saudi Arabia to produce more, and

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Speaker 5: we will in this country make it easier to permit

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Speaker 5: a refiner, will make it easier to build transmission. So

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Speaker 5: I think the price will come down. Is coming down

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Speaker 5: and may stay down, but it may not be because

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Speaker 5: of more US drilling, and maybe because of demand falling

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Speaker 5: off because of concern about tariffs, and also because OPEK

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Speaker 5: actually producing more, probably under some influence from the Trump administration.

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Speaker 4: I'm looking at h chart of the Baker Hughes oil

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Speaker 4: and Gas re account right now, and it's kind of funny.

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Speaker 4: I guess we'll take what we can get nowadays. But

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Speaker 4: it went up in twenty twenty one and twenty twenty

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Speaker 4: two quite a lot under the Biden administration, and since

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Speaker 4: I guess for most of twenty twenty four, it's kind

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Speaker 4: of been flatlining. And in fact, Joe, the energy survey

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Speaker 4: that I wrote up, I think the headline on our

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Speaker 4: newsletter was instead of drill, baby drill, it was nil

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Speaker 4: baby nil, right, because there's no new oil and gas

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Speaker 4: rigs actually getting built and not much more production coming

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Speaker 4: on stream.

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Speaker 5: That's right. And you've seen the reason for that trend

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Speaker 5: you just described is prices were higher in twenty one

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Speaker 5: and twenty two that led to more drilling as prices moderate,

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Speaker 5: and they're actually lowering now. I think you'll see more

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Speaker 5: tepet activity as you just described.

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Speaker 4: And in terms of your experience at the Dallas FED,

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Speaker 4: I wanted to ask you because you were there, I

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Speaker 4: think it.

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Speaker 5: Was fifteen through twenty one, thank you.

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Speaker 4: Thank you for doing my research for me. But that

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Speaker 4: included twenty eighteen when we saw the tariffs under the

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Speaker 4: first Trump present, did and see what was your experience

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Speaker 4: like then and what lessons or surprises did you encounter

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Speaker 4: at that time.

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Speaker 5: So Texas is a very large exporting state, and we

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Speaker 5: did an enormous amount of work at the Dallas said

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Speaker 5: on the impact of tariffs, and I probably in those

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Speaker 5: years read every tariff paper that I could get my

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Speaker 5: hands on. And what we concluded, me and my team

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Speaker 5: concluded is tariffs could have some price impact, but the

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Speaker 5: biggest impact we saw if tariffs is of the potential

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Speaker 5: of they had to slow growth and so as a

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Speaker 5: result of it. You may remember back in eighteen and

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Speaker 5: nineteen I said, I think we should be more proactive

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Speaker 5: here lower rates, and that if you wait to see

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Speaker 5: the weakness in GDP and employment, you've waited too late.

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Speaker 5: And the thing is I had the luxury of being

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Speaker 5: able to argue that in those years because we did

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Speaker 5: not have an inflation all right.

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Speaker 4: So clearly there is a lot going on, some of

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Speaker 4: it in many ways very unprecedented. What are you looking

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Speaker 4: out for next in terms of not just the impact

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Speaker 4: on the FED and how this might influence their immediate

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Speaker 4: monetary policy path, but also in terms of the sort

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Speaker 4: of big structural trends of the global macroeconomy, of geopolitics,

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Speaker 4: you name it.

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Speaker 5: Yes, so they're including tarifster. Five big structural changes going

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Speaker 5: on right now. We've already hit on on. The Number

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Speaker 5: one is we are attempting to reduce fiscal spending with

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Speaker 5: the desire and obviously it's been somewhat risk of stating

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Speaker 5: the obviously been jarring, but with the desire to try

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Speaker 5: to reduce the current six and a half seven percent

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Speaker 5: of GDP deficit to something lower than that. We've gone

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Speaker 5: from twenty nineteen to today debt to GDP in the United

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Speaker 5: States net approximately in the mid seventies over one hundred percent.

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Speaker 5: And so first structural changes tried to have an economy

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Speaker 5: that is less fiscal spending lead and more private sector led.

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Speaker 5: That's number one. Fiscal spending reductions, though slow growth might

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Speaker 5: in fact be disinflationary, but that's the first one. Second

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Speaker 5: one is regulatory review in every industry with the ambition

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Speaker 5: of improving productivity growth. In an aging country that is

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Speaker 5: highly leveraged, the X factor that can help you deleverage

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Speaker 5: is productivity growth. The issue with regulatory review is they'll

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Speaker 5: take some time for that to translate into greater growth,

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Speaker 5: and that's the issue. It'll be a time like third

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Speaker 5: big change, which we've talked about, is I would say

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Speaker 5: a restruction of the energy ecosystem. Encouraging drillers here we

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Speaker 5: just talked about to drill, although they're going to be

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Speaker 5: more reluctant, but then encouraging Saudi Arabia and others to

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Speaker 5: produce more and addition will be easier to permit a refinery,

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Speaker 5: easier to create transmission and the idea is to help

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Speaker 5: low moderate income families here visibly who've lost twenty five

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Speaker 5: percent plus purchasing power to allow them to pay a

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Speaker 5: lower price at the pump and for power. The fourth

434
00:26:20,240 --> 00:26:25,240
Speaker 5: big one is two big drivers of US EXSGDP of

435
00:26:25,240 --> 00:26:27,520
Speaker 5: the last three or four years. One I would argue

436
00:26:27,560 --> 00:26:32,000
Speaker 5: was excess fiscal spending, and then the second was immigration

437
00:26:32,440 --> 00:26:36,040
Speaker 5: and labor force surge is due to some percentage of

438
00:26:36,119 --> 00:26:41,719
Speaker 5: undocumented immigrants entering the workforce that obviously has ended. Workforce

439
00:26:41,800 --> 00:26:46,040
Speaker 5: growth will decline this year from previous years. And there

440
00:26:46,080 --> 00:26:50,639
Speaker 5: are millions of undocumented immigrants in the country who are

441
00:26:50,720 --> 00:26:54,240
Speaker 5: uncertain of their status, and they make up half the

442
00:26:54,280 --> 00:26:58,520
Speaker 5: construction workforce in a state like Texas, they make up

443
00:26:58,560 --> 00:27:02,560
Speaker 5: a chunk of the agriculture workforce, and other workers in

444
00:27:02,600 --> 00:27:06,000
Speaker 5: the service sector. And what I'm hearing from employers is

445
00:27:06,040 --> 00:27:08,320
Speaker 5: some number of those workers are not showing up at

446
00:27:08,359 --> 00:27:12,080
Speaker 5: work because they're concerned about an ice rade and they're

447
00:27:12,119 --> 00:27:16,199
Speaker 5: concerned about their status. They're certainly not spending. And I

448
00:27:16,240 --> 00:27:18,479
Speaker 5: think there's going to be a question as we go here,

449
00:27:19,160 --> 00:27:21,679
Speaker 5: do we want to clarify, does the government want to

450
00:27:21,720 --> 00:27:24,520
Speaker 5: clarify how far they want to go here so those

451
00:27:24,560 --> 00:27:27,439
Speaker 5: people can get back to their lives. But the juries

452
00:27:27,520 --> 00:27:29,520
Speaker 5: out on that. And then the last one we just

453
00:27:29,560 --> 00:27:33,720
Speaker 5: talked about is tariffs, which has created all the impacts

454
00:27:33,800 --> 00:27:39,520
Speaker 5: of potentially stickier prices, which is a supply side shock,

455
00:27:40,080 --> 00:27:44,240
Speaker 5: but also is likely based on our work it's likely

456
00:27:44,320 --> 00:27:48,320
Speaker 5: to slow growth. So that's the package of things going on,

457
00:27:49,000 --> 00:27:52,280
Speaker 5: and so the question then with all that, it's one

458
00:27:52,320 --> 00:27:55,000
Speaker 5: thing that growth slips from what it might have been

459
00:27:55,040 --> 00:27:56,960
Speaker 5: two and a quarter two and a half percent. We

460
00:27:57,040 --> 00:27:59,720
Speaker 5: thought some number of weeks ago to say one and

461
00:27:59,720 --> 00:28:02,320
Speaker 5: a half for one and three quarters, but you now

462
00:28:02,400 --> 00:28:06,199
Speaker 5: have our own economists and other economists are now suggesting

463
00:28:06,680 --> 00:28:10,439
Speaker 5: that growth is going to slip well below that, approaching

464
00:28:10,680 --> 00:28:14,040
Speaker 5: zero or half of one percent. And if these tariffs

465
00:28:14,040 --> 00:28:18,320
Speaker 5: continue it those estimates may even get revised down. You've

466
00:28:18,359 --> 00:28:22,160
Speaker 5: got a risk of a meaningful slowdown in growth. Again,

467
00:28:22,240 --> 00:28:25,600
Speaker 5: it doesn't have to unfold this way, but a lot

468
00:28:25,600 --> 00:28:26,960
Speaker 5: of it is going to be a function of what

469
00:28:27,080 --> 00:28:30,240
Speaker 5: actions are taken here over the next days and weeks.

470
00:28:31,359 --> 00:28:34,920
Speaker 2: Robert Kaplan, you know, when we scheduled this episode several

471
00:28:34,960 --> 00:28:36,920
Speaker 2: weeks ago, I didn't think we realized it would be

472
00:28:37,040 --> 00:28:40,200
Speaker 2: quite such interesting times. But this was the perfect timing,

473
00:28:40,360 --> 00:28:42,720
Speaker 2: perfect guest. Thank you so much for coming back on.

474
00:28:42,680 --> 00:28:43,720
Speaker 3: Odd lotch That was great.

475
00:28:43,880 --> 00:28:44,640
Speaker 5: Great to talk with.

476
00:28:44,640 --> 00:29:00,360
Speaker 2: You, Tracy, that was great. I, like I said the end,

477
00:29:00,560 --> 00:29:03,160
Speaker 2: didn't quite realize how much there would be to talk about.

478
00:29:03,320 --> 00:29:04,800
Speaker 3: You know what I think I shouldn't have said that.

479
00:29:04,880 --> 00:29:06,600
Speaker 4: You should have just been like, yeah, we were thinking

480
00:29:06,640 --> 00:29:09,040
Speaker 4: about what's going on in markets, and we had Rob

481
00:29:09,120 --> 00:29:11,480
Speaker 4: Kaplan on speed dial and he was We knew he

482
00:29:11,560 --> 00:29:12,360
Speaker 4: was the perfect person.

483
00:29:12,440 --> 00:29:15,920
Speaker 2: Knew who you know what, Tracy? That tenure yield four

484
00:29:16,000 --> 00:29:19,520
Speaker 2: point twenty eight, it was at four on the fourth

485
00:29:19,600 --> 00:29:22,480
Speaker 2: so on Friday. Yeah, that's a crazy chart. That's an

486
00:29:22,480 --> 00:29:24,560
Speaker 2: ominous chart. It's an ominous chart.

487
00:29:24,720 --> 00:29:26,880
Speaker 4: You know what worries me more? Yeah, I'm looking at

488
00:29:26,880 --> 00:29:27,840
Speaker 4: swapspreads right now.

489
00:29:27,840 --> 00:29:28,680
Speaker 2: Oh yeah.

490
00:29:28,720 --> 00:29:31,720
Speaker 4: It's never a good sign when you start seeing headlines

491
00:29:31,800 --> 00:29:35,000
Speaker 4: about swap spreads like these are supposed to be relatively boring,

492
00:29:35,320 --> 00:29:37,560
Speaker 4: and uh, they're not boring right now.

493
00:29:37,800 --> 00:29:39,480
Speaker 2: So what's going on in swap spreads?

494
00:29:39,600 --> 00:29:42,280
Speaker 4: So they're dropping quite a lot, and I guess the

495
00:29:42,280 --> 00:29:44,920
Speaker 4: speculation is whether or not that has to do with

496
00:29:44,960 --> 00:29:47,800
Speaker 4: hedge funds unwinding that basis trade that we mentioned.

497
00:29:48,640 --> 00:29:53,000
Speaker 2: It's really funny, man, it's really funny also thinking that,

498
00:29:53,160 --> 00:29:55,760
Speaker 2: you know, I totally forgot basically until right during that

499
00:29:55,840 --> 00:29:59,760
Speaker 2: conversation that three three three bestent thing, which just seems

500
00:29:59,760 --> 00:30:01,800
Speaker 2: like such old news. The idea is like, Okay, we're

501
00:30:01,800 --> 00:30:05,200
Speaker 2: gonna modestly decrease the deficit over time.

502
00:30:04,960 --> 00:30:06,640
Speaker 3: It doesn't come up that much anymore.

503
00:30:06,840 --> 00:30:09,120
Speaker 2: We're gonna have three percent GDP Brothers like, man, they

504
00:30:09,200 --> 00:30:12,840
Speaker 2: really just took a They really did not go with

505
00:30:12,920 --> 00:30:14,920
Speaker 2: that approach. Did they to say the least?

506
00:30:15,160 --> 00:30:15,360
Speaker 5: No?

507
00:30:15,840 --> 00:30:18,480
Speaker 4: No, they did not show. Here's a question, do you

508
00:30:18,480 --> 00:30:19,600
Speaker 4: still want to be fed chairman?

509
00:30:20,360 --> 00:30:21,120
Speaker 5: I would take it.

510
00:30:22,800 --> 00:30:25,880
Speaker 4: If you become FED chairman? Will you come on on

511
00:30:25,960 --> 00:30:28,400
Speaker 4: my solo All Thoughts show and talk to me?

512
00:30:29,080 --> 00:30:31,040
Speaker 2: It would be fun if you go. It's so great

513
00:30:31,080 --> 00:30:33,520
Speaker 2: to reunite with you, Tracy. I got a new job,

514
00:30:33,560 --> 00:30:35,600
Speaker 2: but it's always fun to come back and check out.

515
00:30:35,600 --> 00:30:38,040
Speaker 2: How Yes, I'll do that. I'll leave it. I would

516
00:30:38,080 --> 00:30:41,120
Speaker 2: even be a regional FED president. Can yeah, can listeners

517
00:30:41,120 --> 00:30:42,440
Speaker 2: tell that we're totally fried?

518
00:30:42,640 --> 00:30:48,000
Speaker 4: I wonder like, yeah, our our banter y is not

519
00:30:48,080 --> 00:30:50,240
Speaker 4: great at the moment, but okay, shall we leave it

520
00:30:50,240 --> 00:30:53,680
Speaker 4: there on the note that we cannot banter any longer?

521
00:30:53,720 --> 00:30:56,320
Speaker 4: All right? This has been another episode of the au

522
00:30:56,360 --> 00:30:59,240
Speaker 4: Thoughts podcast. I'm Tracy Alloway. You can follow me at

523
00:30:59,320 --> 00:31:00,760
Speaker 4: Tracy Alloway.

524
00:31:00,280 --> 00:31:03,200
Speaker 2: And I'm Jill Wassenthal. You can follow me at the Stalwart.

525
00:31:03,520 --> 00:31:07,240
Speaker 2: Follow our producers Kerman Rodriguez at Kerman Arman, Dashel Bennett

526
00:31:07,240 --> 00:31:10,360
Speaker 2: at dashbot and kel Brooks at kel Brooks. From our

527
00:31:10,400 --> 00:31:13,520
Speaker 2: Oddlogs content, go to Bloomberg dot com slash od Lots.

528
00:31:13,520 --> 00:31:15,920
Speaker 2: We have a daily newsletter and all of our episodes,

529
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Speaker 2: four to seven in our discord discord dot gg slash

531
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Speaker 2: od loots.

532
00:31:22,960 --> 00:31:25,200
Speaker 4: And if you enjoy odd Lots, if you like it

533
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Speaker 4: when we tap former Fed presidents to talk about what

534
00:31:28,200 --> 00:31:30,400
Speaker 4: the Central Bank is going to do right now, then

535
00:31:30,440 --> 00:31:33,840
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536
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540
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Speaker 3: Thanks for listening in