Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3: I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, there are many dimensions of the ongoing market turbulent
Speaker 2: and trade tensions that we can't stop talking about, but
Speaker 2: a big one, and in a way, it's almost taken.
Speaker 2: People aren't talking about it that much right now because
Speaker 2: there's so many other things top of mind, a lot
Speaker 2: of questions about how the FED is gonna think about
Speaker 2: what's happening right here.
Speaker 4: Right And I know it's probably not very popular to
Speaker 4: sympathize with the central bank, but I gotta say I
Speaker 4: would hate to be Jerome Powell right now because in
Speaker 4: my mind, the consensus right now seems to be that
Speaker 4: we're heading for some sort of stagflationary scenario, at least
Speaker 4: in the short to intermedia terms, so higher inflation, lower growth,
Speaker 4: possibly even recession, and that to me just seems like
Speaker 4: a nightmare scenario for a central bank which constantly has
Speaker 4: to balance its twin mandate of price stability and low unemployment.
Speaker 2: It's really tricky, right because we've sort of been used
Speaker 2: to environments where it's really obvious. Right, So in twenty
Speaker 2: twenty two, twenty twenty three, it was clear that they
Speaker 2: were missing on one specific side, which was the price
Speaker 2: for much of you know, post two thousand and seven
Speaker 2: or two thousand and eight, the story was we growth, disinflation, whatever,
Speaker 2: so poor employment. I mean, this is going to be tricky.
Speaker 2: And look, when we're talking about restructuring the global economy
Speaker 2: or the internal economy, these are questions that there is
Speaker 2: a limit to the degree to which one monetary policy
Speaker 2: can solve them. They can maybe, you know, maybe things
Speaker 2: a little bit, but at the end, these aren't really
Speaker 2: monetary policy questions we're talking about.
Speaker 4: Here, right, And I think we all internalized that lesson
Speaker 4: in the twenty twenty pandemic, Right, We saw all these
Speaker 4: real world disruptions, supply chain issues, and that gave rise
Speaker 4: to the infamous transitory inflation as the FED called it.
Speaker 4: And it seems very much like that's a possibility again.
Speaker 2: Right totally, And like we've been saying, we've been going
Speaker 2: back to talking to all our old supply chain guests
Speaker 2: because you know, the whole world may be redrawn anyway.
Speaker 2: We're recording this after the market closed. It's April eighth,
Speaker 2: twenty twenty five. It's four h nine pm. We just
Speaker 2: had another crazy day in the market. S and P
Speaker 2: five hundred and a down one point five to seven percent.
Speaker 2: It had been up over four percent at one point,
Speaker 2: so we continue to whipsaw. Anyway, I'm excited to say
Speaker 2: we really do have the perfect guest, someone we've had
Speaker 2: actually on the show once before. We are going to
Speaker 2: be speaking with Rob Kaplan. He is a vice chairman
Speaker 2: of Goldman Sachs, member of the management committee. Prior to that,
Speaker 2: he was the president and CEO of the Federal Reserve
Speaker 2: Bank of Dallas. Prior to that, he had been Harvard.
Speaker 2: Prior to that, he had been at Goldman Sacks. Truly
Speaker 2: the perfect guest for right now, Rob Kaplan, thank you
Speaker 2: so much for coming back Outlaws.
Speaker 5: Thanks for having me. Good to talk with you.
Speaker 2: Tracy said she wouldn't want to be Jerome Paula. I
Speaker 2: would still take that job, but I'm just let's start.
Speaker 2: You're on this. Let's say you know this is all
Speaker 2: happening a few years ago and you're still at the FED.
Speaker 2: How stressful is this kind of environment for charting a
Speaker 2: course from monetary policy?
Speaker 5: Well, the last time we had a tiff issue. Yeah,
Speaker 5: you got to go back to twenty nineteen. I was
Speaker 5: at the FED at the time, and you may recall
Speaker 5: we preemptively cut the FED funds rate three times. I
Speaker 5: think we called it a tactical recalibration or something like that.
Speaker 5: And the reason we were able to be preemptive is
Speaker 5: we didn't have an inflation issue, so we could afford
Speaker 5: to be preemptive. As we're sitting here today, the FED
Speaker 5: goes into this already before the tariff situation, with an
Speaker 5: inflation issue, and that inflation's sticky. Now the irony going
Speaker 5: into this, The source of the sticky inflation has been services,
Speaker 5: not goods. Goods have been disinflating up to now, up
Speaker 5: until say two months ago or a month and a
Speaker 5: half ago, and China over capacity has fed that disinflation.
Speaker 5: But despite that, you know, we're hanging around two and
Speaker 5: a half two and three quarters on the PCE. And
Speaker 5: I would argue that the excess inflation has been more
Speaker 5: about excess demand due to outsized fiscal spending. So we
Speaker 5: are now in a new administration where they are dialing
Speaker 5: down fiscal spending, so that excess demand is being pulled away.
Speaker 5: You would normally consider that disinflationary. But now we've got
Speaker 5: a supply shock issue related to tariffs, which relates ironically
Speaker 5: to goods, not service. And so the most important thing
Speaker 5: that FED is thinking right now is we don't have
Speaker 5: to have this figured out, because we can't have it
Speaker 5: figured out. If anything, they learned from the transitory episode,
Speaker 5: don't try to jump ahead to predict things that you
Speaker 5: can't know. And I think they're going to sit back,
Speaker 5: let the situation unfold and try to understand it, and
Speaker 5: they're going to be more reactive, not proactive, And I
Speaker 5: think that will be the difference.
Speaker 4: You know, I mentioned stagflation before, which seems to be
Speaker 4: becoming the consensus economic environment that everyone is talking about.
Speaker 4: What's the playbook, I guess the traditional playbook for a
Speaker 4: central bank that's starting or trying to battle stagflation. You know,
Speaker 4: I'm thinking back to the nineteen seventies. Maybe Vulcar he
Speaker 4: raised rates really aggressively and ultimately he was willing to
Speaker 4: sacrifice employment in order to get down. Is there like
Speaker 4: a normal playbook that central bankers can follow here?
Speaker 5: Not really in this case, in that you're right in
Speaker 5: the seventies, we had a situation where we had slowing
Speaker 5: growth and an inflation issue. One of the things I
Speaker 5: would say about this situation, I think you have to
Speaker 5: assess it for what's driving it, what are the structural drivers?
Speaker 5: And I think that we have a lot of uncertainty.
Speaker 5: You have government spending cuts, you have a dramatic reduction
Speaker 5: in immigration and shutting down the border, which normally would
Speaker 5: slow growth and might actually create some stickiness in the
Speaker 5: labor force. And then you've got these teriff issues. But
Speaker 5: the issue with the tariff situation is it's in flux.
Speaker 5: You had the announcement last week on Wednesday, and it's
Speaker 5: still very unclear. How much is the administration our administration
Speaker 5: willing to negotiate, how much is this really about reciprocity?
Speaker 5: And I think, honestly, how much of this is about
Speaker 5: the administration might want to create more revenue and tariff
Speaker 5: for revenue, and actually while countries may come back to
Speaker 5: us and say we'll go down to zero and remove
Speaker 5: non trade barriers, I think we're going to find out
Speaker 5: how willing our administration is to in fact negotiate or
Speaker 5: how much do they actually want hire tariffs to keep
Speaker 5: the revenue, and so all those things are going through
Speaker 5: the fed's mind, and so we don't know. And so
Speaker 5: I think you just have to be patient, don't be
Speaker 5: a prognosticator, be a risk manager, allow this situation to clarify.
Speaker 2: Well, let me ask you a question. I mean, you
Speaker 2: must talk all the time to both investors and to
Speaker 2: real businesses of various sorts. Right now, when we're talking
Speaker 2: on April eighth, do you think there is still some
Speaker 2: belief that this can't be what the final tear of
Speaker 2: schedule looks like, whatever it ends up being, maybe negotiations,
Speaker 2: et cetera, That the idea that no, these numbers that
Speaker 2: were unveiled on that chart on April second, they can't
Speaker 2: really be what the new trading relationship with the rest
Speaker 2: of the world is going to look like.
Speaker 5: Okay, so let's talk about both groups, businesses and then
Speaker 5: capital allocators investors. I think there's a hope, there has
Speaker 5: been a hope by both that yes, this was more
Speaker 5: about reciprocity and there was going to be a negotiation,
Speaker 5: and so this isn't where we're going to end up.
Speaker 5: I think one of the reasons why the market is
Speaker 5: behaving in the way it is. I think businesses are
Speaker 5: still hopeful that this will be a negotiation, but they're
Speaker 5: not sure about that, and they're starting to make plans
Speaker 5: on how they're going to adjust, and there's a series
Speaker 5: of things they could do. They're already talking about pressuring
Speaker 5: suppliers to cut prices. They're talking about the potentially taking
Speaker 5: some of this out of margin. There we're hoping up
Speaker 5: to now that maybe the dollar would strengthen, and then
Speaker 5: the other thing they're talking about is pricing, but they're
Speaker 5: in the middle of trying to figure that out. They
Speaker 5: are not, as much as you would hope, actively talking
Speaker 5: about expanding capacity here because they're concerned that something they
Speaker 5: build here is globally competitive, and you don't want to
Speaker 5: build a high cost facility that only is competitive because
Speaker 5: of the tariff mode. So that's where they are. They're
Speaker 5: treading water and trying to be receptive and figure this
Speaker 5: out and giving their views to the administration. Capital allocators,
Speaker 5: on the other hand, started the year wanting to be
Speaker 5: long the dollar dollar denominated assets, and what's happened is
Speaker 5: they have been moving on the margin away from the dollar,
Speaker 5: and you're even seeing in the last week that some
Speaker 5: dollar weakness ten year treasury backing up as opposed to rallying,
Speaker 5: which you would normally expect to see, and you're seeing
Speaker 5: a move I think, not between asset classes. You're seeing
Speaker 5: a move away from dollar denominated assets that is extremely unusual,
Speaker 5: and again they're doing it to hedge their bets depend
Speaker 5: on what the administration is trying to accomplish.
Speaker 4: I wanted to ask you about exactly this you mentioned earlier.
Speaker 4: Don't be a prognosticator, be a risk manager, and that
Speaker 4: sounds like we should make like inspirational posters with like
Speaker 4: little kittens hanging from trees with that text below. But
Speaker 4: on this note, one of the reasons this market move
Speaker 4: is particularly painful is not just because it's very, very big,
Speaker 4: a big downward shift, but also we're seeing bond sell
Speaker 4: off at the same time, and I think we've moved
Speaker 4: from like just under four percent on the tenure to
Speaker 4: something like almost four point three percent. Now, again, that's
Speaker 4: happening while stocks are selling off, which is something you
Speaker 4: wouldn't expect to see normally. I have seen all sorts
Speaker 4: of explanations for why this might be happening. I've seen
Speaker 4: people talk about, well, maybe investors are liquidating what they
Speaker 4: can sell in the current environment, not necessarily what they want.
Speaker 4: And then secondly, maybe it's the basis trade being unwound. Thirdly,
Speaker 4: maybe it's investors shifting away from US assets altogether. Where
Speaker 4: do you sort of lie on that spectrum of reasons,
Speaker 4: like what is the mix for why exactly yields are
Speaker 4: going up right now?
Speaker 5: So we're seeing all those potential explanations. I think the
Speaker 5: truth is we're not sure. There's certainly been comments in
Speaker 5: the market, and we've seen them flows about the unwind
Speaker 5: of the basis trade you referred to. We're seen among
Speaker 5: some asset allocators a desire to reallocate and rebalance their
Speaker 5: dollar exposures to other mare markets. And I think the
Speaker 5: most insightful thing I can say, certainly if I'm at
Speaker 5: the FED and sitting here at Goldmen Sachs, the only
Speaker 5: thing we can all agree on. It's something we are
Speaker 5: watching very carefully because it's a concern for a country
Speaker 5: that has a let's say, thirty six thirty seven trillion
Speaker 5: dollars of treasury debt outstanding and growing by at least
Speaker 5: two trillion a year. It's very critical that we are
Speaker 5: able to market our debt. We've struggled over the last
Speaker 5: few years to sell duration and that we've tried to
Speaker 5: front endload it. But it's critical for a country with
Speaker 5: debt to GDP one hundred percent plus. You want to
Speaker 5: be able to market your debt. You want confidence in
Speaker 5: what we're doing here, and I think it bears watching,
Speaker 5: and certainly if I were at the FED, I'd be
Speaker 5: watching that very carefully.
Speaker 4: You've had a very long career, and Joe his intro
Speaker 4: for you included many titles, many hats over your history
Speaker 4: as a financial market veteran.
Speaker 3: Have you ever seen anything like this?
Speaker 5: I think that normally what you're accustomed to in a
Speaker 5: week like this last week, you would normally see a
Speaker 5: flight to quality, you would see Treasury's rally, and you
Speaker 5: would eventually start to get a better grip on what's
Speaker 5: going on. Obviously, COVID was a good example of an
Speaker 5: enormous uncertainty that took a while to resolve. It's been
Speaker 5: unusual in my career to see a government led action
Speaker 5: as opposed to an external shock, a government led action
Speaker 5: I e. Man made that has in turn created this
Speaker 5: kind of uncertainty. The good thing about this kind of situation.
Speaker 5: If it's man made that created the uncertainty, it can
Speaker 5: also be susceptible to man made actions that will address
Speaker 5: the uncertainty. And I think that's what people in the
Speaker 5: market are hoping for.
Speaker 2: Do you worry that they? I mean this is this
Speaker 2: has come up and it's certainly true, right because at
Speaker 2: any given moment, Trump could say no, we're taking this back,
Speaker 2: but this is his life mission, or we're doing some pause.
Speaker 2: And we saw these sort of incredible rally Monday on
Speaker 2: a fake headline about the pause tells you something about
Speaker 2: the environment. But what the president can't do is undring
Speaker 2: the bell because he can't really credibly say he'll never
Speaker 2: do this again. Right, Like, do you worry that, like
Speaker 2: this is going to permanently change America's economic relationship with
Speaker 2: every country in the world.
Speaker 5: Yeah, I just got back from Europe. Yeah there are certainly,
Speaker 5: yes are strains around the world. Yeah, and yes those
Speaker 5: bear watching. Having said that, I do believe that there's
Speaker 5: a great opera coortunity to get this puzzle right and
Speaker 5: make this work. But yes, there is some cost to
Speaker 5: what's happened up to now. But I still think this
Speaker 5: can get resolved. But it's going to require some action
Speaker 5: on our part in order to do that. And I
Speaker 5: think the markets in their up and down reaction today,
Speaker 5: they're just not sure how imminent that is and whether
Speaker 5: that's going to happen, And so you're seeing this uncertainty
Speaker 5: prevail in the markets. The problem with uncertainty going on
Speaker 5: for too long is it flows activity. If I'm a
Speaker 5: consumer thinking about taking an action, I might pause it.
Speaker 5: If I can tell you talking to companies, they're not
Speaker 5: saying no, but they're saying not now. They have already
Speaker 5: had other uncertainties they're dealing with in their business, how
Speaker 5: to approach AI, which use cases for AI spending will work.
Speaker 5: They have other issues that they're always wrestling with, and
Speaker 5: I think all this does is cause them to be
Speaker 5: more careful pause actions they might have otherwise taken. And
Speaker 5: I don't think you want that to go on indefinitely.
Speaker 4: Just going back to the FED for a second, what's
Speaker 4: the pain threshold for the Central Bank in terms of
Speaker 4: movements in the financial market? Like how bad does it
Speaker 4: need to get before maybe they start rolling out some
Speaker 4: tools to try to calm things down?
Speaker 5: All right, So the Fed back the headline, what I'm
Speaker 5: worried about is full employment and price stability. Stock market
Speaker 5: going down substantially does not by itself necessarily cause me
Speaker 5: to do anything other than I'm aware of it. Credit
Speaker 5: spreads beginning to gap out gets my attention more because
Speaker 5: I'm concerned that that, in fact would be an amplifier
Speaker 5: of a potential slowdown. I e. Businesses might not fire
Speaker 5: people because there's is down, but they might start to
Speaker 5: if they see their business slowing and credit spreads widening
Speaker 5: and they're worried about financeability. So I'm watching that still
Speaker 5: not acting normally. If you see a potential demand shock
Speaker 5: and the soft data, which is what we're seeing, weaken,
Speaker 5: but the hard data is still hanging in there, you
Speaker 5: might start thinking. If you didn't have an inflation issue,
Speaker 5: you might think about taking some action. But the FED
Speaker 5: does have an inflation issue, and so I think you'll
Speaker 5: see the Fed, as we said, be more reactive until
Speaker 5: you're clearly seeing evidence that there is a slowing and
Speaker 5: you're going to want to see at the FED to
Speaker 5: act more than just an inching up in the unemployment rate.
Speaker 5: You start seeing a much more dramatic move up, and
Speaker 5: then you're going to realize that we could be entering
Speaker 5: into a demand shock which would actually be disinflationary, which
Speaker 5: might offset part of this supply shock. And that's where
Speaker 5: you'd see the FED be more willing to act. But
Speaker 5: it's going to be at least a period of time.
Speaker 5: It's not the main meeting. I think they're going to
Speaker 5: watch it very carefully, and I think the sooner you
Speaker 5: might see that materialize would be into June and over
Speaker 5: the summer. The only other thing I'll mention that I'd
Speaker 5: be watching for very carefully at the FED is you
Speaker 5: want to make sure there's orderly market function and particularly
Speaker 5: orderly treasury market functions. And again, as long as that's
Speaker 5: the case, I think the FED will watch all these
Speaker 5: things I just said, but be patient, and they're going
Speaker 5: to want to see real hard evidence of the slowing
Speaker 5: before they took an action. And the reason is they
Speaker 5: don't want to jump the teriff situation gets resolved and
Speaker 5: at the aftermath we still have an inflation issue and
Speaker 5: they regret that they've jumped into it and cut the rate.
Speaker 5: I think they're going to need to be more reactive,
Speaker 5: which does mean that by the time they move, you know,
Speaker 5: normally say that are going to be on Maybe you
Speaker 5: could be accused of being late that. I think they're
Speaker 5: willing to take that risk.
Speaker 2: Let's pivot a little bit. Tracy wrote about something last week,
Speaker 2: or maybe it was two weeks ago. My brain is
Speaker 2: getting fried, so I don't have any concept of time anymore.
Speaker 2: The the Dallas Fed's energy survey, which I think comes
Speaker 2: to a quarterly, unlike the manufacturing is service. It's just
Speaker 2: unbelievable stuff up there. And this is from an industry
Speaker 2: which we all know tends to be, you know, probably
Speaker 2: pretty sympathetic to the current administration politically. They're talking about
Speaker 2: uncertainty like they've never seen. They've talked about the increased
Speaker 2: cost of all of their parts for drilling. I mean,
Speaker 2: it was like kind of apocalyptic. And that was actually
Speaker 2: before the last week and a half. One of the
Speaker 2: things in Vestent's three three three plan was getting three
Speaker 2: million more barrels of oil drilled and expanding energy dominance. Meanwhile,
Speaker 2: WTI just falling to his lowest level in four years,
Speaker 2: in part because opek is turning on the gusher, in
Speaker 2: part because of these recession firms tell us what's going
Speaker 2: on down there on the energy patch.
Speaker 5: So we started the Dallas Fed Energy Survey when I
Speaker 5: was running to Dallas Fed, and we did it particularly
Speaker 5: for this reason. We wanted to get a grip on
Speaker 5: what will break even levels, at what levels are you
Speaker 5: profitable at, what prices are you more likely to drill,
Speaker 5: and what we're seeing as the following four years ago,
Speaker 5: when the industry heard drill, baby, drill, they would be
Speaker 5: they were very excited about that. I think over the
Speaker 5: last three or four years they have been drilling subject
Speaker 5: to cash flow. They've been pressured by shareholders to return
Speaker 5: more capital, and cost to drill have gone up, and
Speaker 5: tariffs will increase cost to drill more. And so the
Speaker 5: industry will drill at one level if the price is
Speaker 5: eighty dollars, but it's going to drill at a lower level,
Speaker 5: all things being equal, if prices get into fifties or sixties.
Speaker 5: And so I think we may well find over this
Speaker 5: next year that actually the level of drilling activity doesn't increase,
Speaker 5: and I think people who are drilling are going to
Speaker 5: be more careful, particularly as the price has come down.
Speaker 5: You see OPEK. I think the US may have more
Speaker 5: success pressuring OPEC and Saudi Arabia to produce more, and
Speaker 5: we will in this country make it easier to permit
Speaker 5: a refiner, will make it easier to build transmission. So
Speaker 5: I think the price will come down. Is coming down
Speaker 5: and may stay down, but it may not be because
Speaker 5: of more US drilling, and maybe because of demand falling
Speaker 5: off because of concern about tariffs, and also because OPEK
Speaker 5: actually producing more, probably under some influence from the Trump administration.
Speaker 4: I'm looking at h chart of the Baker Hughes oil
Speaker 4: and Gas re account right now, and it's kind of funny.
Speaker 4: I guess we'll take what we can get nowadays. But
Speaker 4: it went up in twenty twenty one and twenty twenty
Speaker 4: two quite a lot under the Biden administration, and since
Speaker 4: I guess for most of twenty twenty four, it's kind
Speaker 4: of been flatlining. And in fact, Joe, the energy survey
Speaker 4: that I wrote up, I think the headline on our
Speaker 4: newsletter was instead of drill, baby drill, it was nil
Speaker 4: baby nil, right, because there's no new oil and gas
Speaker 4: rigs actually getting built and not much more production coming
Speaker 4: on stream.
Speaker 5: That's right. And you've seen the reason for that trend
Speaker 5: you just described is prices were higher in twenty one
Speaker 5: and twenty two that led to more drilling as prices moderate,
Speaker 5: and they're actually lowering now. I think you'll see more
Speaker 5: tepet activity as you just described.
Speaker 4: And in terms of your experience at the Dallas FED,
Speaker 4: I wanted to ask you because you were there, I
Speaker 4: think it.
Speaker 5: Was fifteen through twenty one, thank you.
Speaker 4: Thank you for doing my research for me. But that
Speaker 4: included twenty eighteen when we saw the tariffs under the
Speaker 4: first Trump present, did and see what was your experience
Speaker 4: like then and what lessons or surprises did you encounter
Speaker 4: at that time.
Speaker 5: So Texas is a very large exporting state, and we
Speaker 5: did an enormous amount of work at the Dallas said
Speaker 5: on the impact of tariffs, and I probably in those
Speaker 5: years read every tariff paper that I could get my
Speaker 5: hands on. And what we concluded, me and my team
Speaker 5: concluded is tariffs could have some price impact, but the
Speaker 5: biggest impact we saw if tariffs is of the potential
Speaker 5: of they had to slow growth and so as a
Speaker 5: result of it. You may remember back in eighteen and
Speaker 5: nineteen I said, I think we should be more proactive
Speaker 5: here lower rates, and that if you wait to see
Speaker 5: the weakness in GDP and employment, you've waited too late.
Speaker 5: And the thing is I had the luxury of being
Speaker 5: able to argue that in those years because we did
Speaker 5: not have an inflation all right.
Speaker 4: So clearly there is a lot going on, some of
Speaker 4: it in many ways very unprecedented. What are you looking
Speaker 4: out for next in terms of not just the impact
Speaker 4: on the FED and how this might influence their immediate
Speaker 4: monetary policy path, but also in terms of the sort
Speaker 4: of big structural trends of the global macroeconomy, of geopolitics,
Speaker 4: you name it.
Speaker 5: Yes, so they're including tarifster. Five big structural changes going
Speaker 5: on right now. We've already hit on on. The Number
Speaker 5: one is we are attempting to reduce fiscal spending with
Speaker 5: the desire and obviously it's been somewhat risk of stating
Speaker 5: the obviously been jarring, but with the desire to try
Speaker 5: to reduce the current six and a half seven percent
Speaker 5: of GDP deficit to something lower than that. We've gone
Speaker 5: from twenty nineteen to today debt to GDP in the United
Speaker 5: States net approximately in the mid seventies over one hundred percent.
Speaker 5: And so first structural changes tried to have an economy
Speaker 5: that is less fiscal spending lead and more private sector led.
Speaker 5: That's number one. Fiscal spending reductions, though slow growth might
Speaker 5: in fact be disinflationary, but that's the first one. Second
Speaker 5: one is regulatory review in every industry with the ambition
Speaker 5: of improving productivity growth. In an aging country that is
Speaker 5: highly leveraged, the X factor that can help you deleverage
Speaker 5: is productivity growth. The issue with regulatory review is they'll
Speaker 5: take some time for that to translate into greater growth,
Speaker 5: and that's the issue. It'll be a time like third
Speaker 5: big change, which we've talked about, is I would say
Speaker 5: a restruction of the energy ecosystem. Encouraging drillers here we
Speaker 5: just talked about to drill, although they're going to be
Speaker 5: more reluctant, but then encouraging Saudi Arabia and others to
Speaker 5: produce more and addition will be easier to permit a refinery,
Speaker 5: easier to create transmission and the idea is to help
Speaker 5: low moderate income families here visibly who've lost twenty five
Speaker 5: percent plus purchasing power to allow them to pay a
Speaker 5: lower price at the pump and for power. The fourth
Speaker 5: big one is two big drivers of US EXSGDP of
Speaker 5: the last three or four years. One I would argue
Speaker 5: was excess fiscal spending, and then the second was immigration
Speaker 5: and labor force surge is due to some percentage of
Speaker 5: undocumented immigrants entering the workforce that obviously has ended. Workforce
Speaker 5: growth will decline this year from previous years. And there
Speaker 5: are millions of undocumented immigrants in the country who are
Speaker 5: uncertain of their status, and they make up half the
Speaker 5: construction workforce in a state like Texas, they make up
Speaker 5: a chunk of the agriculture workforce, and other workers in
Speaker 5: the service sector. And what I'm hearing from employers is
Speaker 5: some number of those workers are not showing up at
Speaker 5: work because they're concerned about an ice rade and they're
Speaker 5: concerned about their status. They're certainly not spending. And I
Speaker 5: think there's going to be a question as we go here,
Speaker 5: do we want to clarify, does the government want to
Speaker 5: clarify how far they want to go here so those
Speaker 5: people can get back to their lives. But the juries
Speaker 5: out on that. And then the last one we just
Speaker 5: talked about is tariffs, which has created all the impacts
Speaker 5: of potentially stickier prices, which is a supply side shock,
Speaker 5: but also is likely based on our work it's likely
Speaker 5: to slow growth. So that's the package of things going on,
Speaker 5: and so the question then with all that, it's one
Speaker 5: thing that growth slips from what it might have been
Speaker 5: two and a quarter two and a half percent. We
Speaker 5: thought some number of weeks ago to say one and
Speaker 5: a half for one and three quarters, but you now
Speaker 5: have our own economists and other economists are now suggesting
Speaker 5: that growth is going to slip well below that, approaching
Speaker 5: zero or half of one percent. And if these tariffs
Speaker 5: continue it those estimates may even get revised down. You've
Speaker 5: got a risk of a meaningful slowdown in growth. Again,
Speaker 5: it doesn't have to unfold this way, but a lot
Speaker 5: of it is going to be a function of what
Speaker 5: actions are taken here over the next days and weeks.
Speaker 2: Robert Kaplan, you know, when we scheduled this episode several
Speaker 2: weeks ago, I didn't think we realized it would be
Speaker 2: quite such interesting times. But this was the perfect timing,
Speaker 2: perfect guest. Thank you so much for coming back on.
Speaker 3: Odd lotch That was great.
Speaker 5: Great to talk with.
Speaker 2: You, Tracy, that was great. I, like I said the end,
Speaker 2: didn't quite realize how much there would be to talk about.
Speaker 3: You know what I think I shouldn't have said that.
Speaker 4: You should have just been like, yeah, we were thinking
Speaker 4: about what's going on in markets, and we had Rob
Speaker 4: Kaplan on speed dial and he was We knew he
Speaker 4: was the perfect person.
Speaker 2: Knew who you know what, Tracy? That tenure yield four
Speaker 2: point twenty eight, it was at four on the fourth
Speaker 2: so on Friday. Yeah, that's a crazy chart. That's an
Speaker 2: ominous chart. It's an ominous chart.
Speaker 4: You know what worries me more? Yeah, I'm looking at
Speaker 4: swapspreads right now.
Speaker 2: Oh yeah.
Speaker 4: It's never a good sign when you start seeing headlines
Speaker 4: about swap spreads like these are supposed to be relatively boring,
Speaker 4: and uh, they're not boring right now.
Speaker 2: So what's going on in swap spreads?
Speaker 4: So they're dropping quite a lot, and I guess the
Speaker 4: speculation is whether or not that has to do with
Speaker 4: hedge funds unwinding that basis trade that we mentioned.
Speaker 2: It's really funny, man, it's really funny also thinking that,
Speaker 2: you know, I totally forgot basically until right during that
Speaker 2: conversation that three three three bestent thing, which just seems
Speaker 2: like such old news. The idea is like, Okay, we're
Speaker 2: gonna modestly decrease the deficit over time.
Speaker 3: It doesn't come up that much anymore.
Speaker 2: We're gonna have three percent GDP Brothers like, man, they
Speaker 2: really just took a They really did not go with
Speaker 2: that approach. Did they to say the least?
Speaker 5: No?
Speaker 4: No, they did not show. Here's a question, do you
Speaker 4: still want to be fed chairman?
Speaker 5: I would take it.
Speaker 4: If you become FED chairman? Will you come on on
Speaker 4: my solo All Thoughts show and talk to me?
Speaker 2: It would be fun if you go. It's so great
Speaker 2: to reunite with you, Tracy. I got a new job,
Speaker 2: but it's always fun to come back and check out.
Speaker 2: How Yes, I'll do that. I'll leave it. I would
Speaker 2: even be a regional FED president. Can yeah, can listeners
Speaker 2: tell that we're totally fried?
Speaker 4: I wonder like, yeah, our our banter y is not
Speaker 4: great at the moment, but okay, shall we leave it
Speaker 4: there on the note that we cannot banter any longer?
Speaker 4: All right? This has been another episode of the au
Speaker 4: Thoughts podcast. I'm Tracy Alloway. You can follow me at
Speaker 4: Tracy Alloway.
Speaker 2: And I'm Jill Wassenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Kerman Rodriguez at Kerman Arman, Dashel Bennett
Speaker 2: at dashbot and kel Brooks at kel Brooks. From our
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Speaker 4: the Central Bank is going to do right now, then
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Speaker 3: Thanks for listening in