WEBVTT - Rob Kaplan on How the Fed Will Think about the Tariffs 0:00:02.720 --> 0:00:15.800 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.520 --> 0:00:22.279 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:22.320 --> 0:00:24.600 I'm Jill Wisenthal and I'm Tracy Alloway. 0:00:24.960 --> 0:00:28.720 Tracy, there are many dimensions of the ongoing market turbulent 0:00:29.080 --> 0:00:32.199 and trade tensions that we can't stop talking about, but 0:00:32.240 --> 0:00:34.480 a big one, and in a way, it's almost taken. 0:00:34.479 --> 0:00:36.160 People aren't talking about it that much right now because 0:00:36.159 --> 0:00:38.159 there's so many other things top of mind, a lot 0:00:38.159 --> 0:00:40.360 of questions about how the FED is gonna think about 0:00:40.360 --> 0:00:41.479 what's happening right here. 0:00:41.479 --> 0:00:44.879 Right And I know it's probably not very popular to 0:00:45.040 --> 0:00:48.720 sympathize with the central bank, but I gotta say I 0:00:49.280 --> 0:00:52.239 would hate to be Jerome Powell right now because in 0:00:52.280 --> 0:00:55.000 my mind, the consensus right now seems to be that 0:00:55.000 --> 0:00:58.600 we're heading for some sort of stagflationary scenario, at least 0:00:58.600 --> 0:01:03.200 in the short to intermedia terms, so higher inflation, lower growth, 0:01:03.280 --> 0:01:06.360 possibly even recession, and that to me just seems like 0:01:06.360 --> 0:01:10.360 a nightmare scenario for a central bank which constantly has 0:01:10.440 --> 0:01:15.319 to balance its twin mandate of price stability and low unemployment. 0:01:15.480 --> 0:01:18.160 It's really tricky, right because we've sort of been used 0:01:18.200 --> 0:01:21.479 to environments where it's really obvious. Right, So in twenty 0:01:21.520 --> 0:01:23.920 twenty two, twenty twenty three, it was clear that they 0:01:23.959 --> 0:01:26.280 were missing on one specific side, which was the price 0:01:26.720 --> 0:01:29.319 for much of you know, post two thousand and seven 0:01:29.440 --> 0:01:34.000 or two thousand and eight, the story was we growth, disinflation, whatever, 0:01:34.160 --> 0:01:37.040 so poor employment. I mean, this is going to be tricky. 0:01:37.120 --> 0:01:40.640 And look, when we're talking about restructuring the global economy 0:01:40.720 --> 0:01:43.959 or the internal economy, these are questions that there is 0:01:44.000 --> 0:01:46.920 a limit to the degree to which one monetary policy 0:01:46.959 --> 0:01:50.840 can solve them. They can maybe, you know, maybe things 0:01:50.960 --> 0:01:52.280 a little bit, but at the end, these aren't really 0:01:52.280 --> 0:01:54.320 monetary policy questions we're talking about. 0:01:54.080 --> 0:01:57.280 Here, right, And I think we all internalized that lesson 0:01:57.440 --> 0:02:00.200 in the twenty twenty pandemic, Right, We saw all these 0:02:00.320 --> 0:02:04.639 real world disruptions, supply chain issues, and that gave rise 0:02:05.040 --> 0:02:09.399 to the infamous transitory inflation as the FED called it. 0:02:09.520 --> 0:02:13.600 And it seems very much like that's a possibility again. 0:02:13.360 --> 0:02:16.000 Right totally, And like we've been saying, we've been going 0:02:16.040 --> 0:02:18.320 back to talking to all our old supply chain guests 0:02:18.320 --> 0:02:21.080 because you know, the whole world may be redrawn anyway. 0:02:21.320 --> 0:02:23.959 We're recording this after the market closed. It's April eighth, 0:02:24.000 --> 0:02:26.600 twenty twenty five. It's four h nine pm. We just 0:02:26.639 --> 0:02:28.560 had another crazy day in the market. S and P 0:02:28.680 --> 0:02:31.320 five hundred and a down one point five to seven percent. 0:02:31.560 --> 0:02:34.040 It had been up over four percent at one point, 0:02:34.280 --> 0:02:37.040 so we continue to whipsaw. Anyway, I'm excited to say 0:02:37.240 --> 0:02:39.520 we really do have the perfect guest, someone we've had 0:02:39.600 --> 0:02:42.120 actually on the show once before. We are going to 0:02:42.120 --> 0:02:44.520 be speaking with Rob Kaplan. He is a vice chairman 0:02:44.560 --> 0:02:47.919 of Goldman Sachs, member of the management committee. Prior to that, 0:02:47.960 --> 0:02:50.519 he was the president and CEO of the Federal Reserve 0:02:50.600 --> 0:02:53.079 Bank of Dallas. Prior to that, he had been Harvard. 0:02:53.200 --> 0:02:56.320 Prior to that, he had been at Goldman Sacks. Truly 0:02:56.440 --> 0:02:59.120 the perfect guest for right now, Rob Kaplan, thank you 0:02:59.120 --> 0:03:00.600 so much for coming back Outlaws. 0:03:00.840 --> 0:03:02.600 Thanks for having me. Good to talk with you. 0:03:02.880 --> 0:03:05.239 Tracy said she wouldn't want to be Jerome Paula. I 0:03:05.240 --> 0:03:08.239 would still take that job, but I'm just let's start. 0:03:08.320 --> 0:03:10.440 You're on this. Let's say you know this is all 0:03:10.440 --> 0:03:12.320 happening a few years ago and you're still at the FED. 0:03:12.880 --> 0:03:16.880 How stressful is this kind of environment for charting a 0:03:16.919 --> 0:03:18.160 course from monetary policy? 0:03:18.520 --> 0:03:21.960 Well, the last time we had a tiff issue. Yeah, 0:03:22.000 --> 0:03:24.400 you got to go back to twenty nineteen. I was 0:03:24.440 --> 0:03:27.240 at the FED at the time, and you may recall 0:03:27.600 --> 0:03:33.440 we preemptively cut the FED funds rate three times. I 0:03:33.480 --> 0:03:38.560 think we called it a tactical recalibration or something like that. 0:03:39.160 --> 0:03:42.120 And the reason we were able to be preemptive is 0:03:42.160 --> 0:03:45.400 we didn't have an inflation issue, so we could afford 0:03:45.440 --> 0:03:49.800 to be preemptive. As we're sitting here today, the FED 0:03:50.040 --> 0:03:55.080 goes into this already before the tariff situation, with an 0:03:55.120 --> 0:03:59.680 inflation issue, and that inflation's sticky. Now the irony going 0:03:59.720 --> 0:04:05.440 into this, The source of the sticky inflation has been services, 0:04:05.480 --> 0:04:10.360 not goods. Goods have been disinflating up to now, up 0:04:10.440 --> 0:04:12.400 until say two months ago or a month and a 0:04:12.440 --> 0:04:18.040 half ago, and China over capacity has fed that disinflation. 0:04:18.720 --> 0:04:22.640 But despite that, you know, we're hanging around two and 0:04:22.640 --> 0:04:26.240 a half two and three quarters on the PCE. And 0:04:26.320 --> 0:04:31.200 I would argue that the excess inflation has been more 0:04:31.400 --> 0:04:38.760 about excess demand due to outsized fiscal spending. So we 0:04:38.839 --> 0:04:42.080 are now in a new administration where they are dialing 0:04:42.320 --> 0:04:48.360 down fiscal spending, so that excess demand is being pulled away. 0:04:48.520 --> 0:04:53.320 You would normally consider that disinflationary. But now we've got 0:04:53.320 --> 0:04:58.680 a supply shock issue related to tariffs, which relates ironically 0:04:58.720 --> 0:05:03.120 to goods, not service. And so the most important thing 0:05:03.200 --> 0:05:05.920 that FED is thinking right now is we don't have 0:05:06.000 --> 0:05:08.200 to have this figured out, because we can't have it 0:05:08.240 --> 0:05:11.680 figured out. If anything, they learned from the transitory episode, 0:05:11.920 --> 0:05:15.839 don't try to jump ahead to predict things that you 0:05:16.040 --> 0:05:19.839 can't know. And I think they're going to sit back, 0:05:20.360 --> 0:05:26.320 let the situation unfold and try to understand it, and 0:05:26.360 --> 0:05:30.359 they're going to be more reactive, not proactive, And I 0:05:30.400 --> 0:05:31.880 think that will be the difference. 0:05:32.520 --> 0:05:35.679 You know, I mentioned stagflation before, which seems to be 0:05:35.680 --> 0:05:40.159 becoming the consensus economic environment that everyone is talking about. 0:05:40.800 --> 0:05:44.440 What's the playbook, I guess the traditional playbook for a 0:05:44.600 --> 0:05:49.320 central bank that's starting or trying to battle stagflation. You know, 0:05:49.360 --> 0:05:52.719 I'm thinking back to the nineteen seventies. Maybe Vulcar he 0:05:52.880 --> 0:05:56.520 raised rates really aggressively and ultimately he was willing to 0:05:56.800 --> 0:06:02.240 sacrifice employment in order to get down. Is there like 0:06:02.320 --> 0:06:06.039 a normal playbook that central bankers can follow here? 0:06:07.040 --> 0:06:10.600 Not really in this case, in that you're right in 0:06:10.640 --> 0:06:13.160 the seventies, we had a situation where we had slowing 0:06:13.200 --> 0:06:16.880 growth and an inflation issue. One of the things I 0:06:16.920 --> 0:06:19.120 would say about this situation, I think you have to 0:06:19.200 --> 0:06:23.600 assess it for what's driving it, what are the structural drivers? 0:06:24.200 --> 0:06:28.160 And I think that we have a lot of uncertainty. 0:06:28.560 --> 0:06:32.880 You have government spending cuts, you have a dramatic reduction 0:06:33.880 --> 0:06:38.479 in immigration and shutting down the border, which normally would 0:06:38.640 --> 0:06:42.560 slow growth and might actually create some stickiness in the 0:06:42.640 --> 0:06:45.599 labor force. And then you've got these teriff issues. But 0:06:45.640 --> 0:06:49.080 the issue with the tariff situation is it's in flux. 0:06:49.640 --> 0:06:53.440 You had the announcement last week on Wednesday, and it's 0:06:53.480 --> 0:06:58.520 still very unclear. How much is the administration our administration 0:06:59.520 --> 0:07:04.480 willing to negotiate, how much is this really about reciprocity? 0:07:04.520 --> 0:07:07.440 And I think, honestly, how much of this is about 0:07:08.120 --> 0:07:14.480 the administration might want to create more revenue and tariff 0:07:14.480 --> 0:07:19.000 for revenue, and actually while countries may come back to 0:07:19.080 --> 0:07:21.920 us and say we'll go down to zero and remove 0:07:22.040 --> 0:07:24.880 non trade barriers, I think we're going to find out 0:07:24.880 --> 0:07:29.600 how willing our administration is to in fact negotiate or 0:07:29.640 --> 0:07:32.920 how much do they actually want hire tariffs to keep 0:07:33.120 --> 0:07:35.960 the revenue, and so all those things are going through 0:07:35.960 --> 0:07:39.240 the fed's mind, and so we don't know. And so 0:07:39.360 --> 0:07:42.320 I think you just have to be patient, don't be 0:07:42.360 --> 0:07:47.040 a prognosticator, be a risk manager, allow this situation to clarify. 0:07:47.320 --> 0:07:48.840 Well, let me ask you a question. I mean, you 0:07:48.960 --> 0:07:53.520 must talk all the time to both investors and to 0:07:53.880 --> 0:07:58.320 real businesses of various sorts. Right now, when we're talking 0:07:58.320 --> 0:08:00.880 on April eighth, do you think there is still some 0:08:01.160 --> 0:08:04.080 belief that this can't be what the final tear of 0:08:04.120 --> 0:08:07.920 schedule looks like, whatever it ends up being, maybe negotiations, 0:08:07.920 --> 0:08:11.360 et cetera, That the idea that no, these numbers that 0:08:11.400 --> 0:08:14.920 were unveiled on that chart on April second, they can't 0:08:14.960 --> 0:08:17.240 really be what the new trading relationship with the rest 0:08:17.240 --> 0:08:18.240 of the world is going to look like. 0:08:18.640 --> 0:08:22.000 Okay, so let's talk about both groups, businesses and then 0:08:22.320 --> 0:08:26.120 capital allocators investors. I think there's a hope, there has 0:08:26.200 --> 0:08:29.520 been a hope by both that yes, this was more 0:08:29.560 --> 0:08:32.679 about reciprocity and there was going to be a negotiation, 0:08:33.240 --> 0:08:35.319 and so this isn't where we're going to end up. 0:08:36.280 --> 0:08:39.960 I think one of the reasons why the market is 0:08:40.080 --> 0:08:44.640 behaving in the way it is. I think businesses are 0:08:44.679 --> 0:08:47.920 still hopeful that this will be a negotiation, but they're 0:08:47.960 --> 0:08:50.840 not sure about that, and they're starting to make plans 0:08:50.840 --> 0:08:53.600 on how they're going to adjust, and there's a series 0:08:53.640 --> 0:08:56.760 of things they could do. They're already talking about pressuring 0:08:56.840 --> 0:09:01.600 suppliers to cut prices. They're talking about the potentially taking 0:09:01.640 --> 0:09:04.320 some of this out of margin. There we're hoping up 0:09:04.360 --> 0:09:07.200 to now that maybe the dollar would strengthen, and then 0:09:07.240 --> 0:09:10.320 the other thing they're talking about is pricing, but they're 0:09:10.360 --> 0:09:12.640 in the middle of trying to figure that out. They 0:09:12.679 --> 0:09:16.160 are not, as much as you would hope, actively talking 0:09:16.160 --> 0:09:21.680 about expanding capacity here because they're concerned that something they 0:09:21.720 --> 0:09:25.960 build here is globally competitive, and you don't want to 0:09:25.960 --> 0:09:29.360 build a high cost facility that only is competitive because 0:09:29.360 --> 0:09:32.680 of the tariff mode. So that's where they are. They're 0:09:32.760 --> 0:09:35.800 treading water and trying to be receptive and figure this 0:09:35.920 --> 0:09:40.080 out and giving their views to the administration. Capital allocators, 0:09:40.120 --> 0:09:42.959 on the other hand, started the year wanting to be 0:09:43.720 --> 0:09:48.800 long the dollar dollar denominated assets, and what's happened is 0:09:49.320 --> 0:09:53.960 they have been moving on the margin away from the dollar, 0:09:54.760 --> 0:09:58.079 and you're even seeing in the last week that some 0:09:58.280 --> 0:10:05.199 dollar weakness ten year treasury backing up as opposed to rallying, 0:10:05.520 --> 0:10:08.480 which you would normally expect to see, and you're seeing 0:10:08.520 --> 0:10:11.520 a move I think, not between asset classes. You're seeing 0:10:11.520 --> 0:10:17.199 a move away from dollar denominated assets that is extremely unusual, 0:10:17.920 --> 0:10:21.960 and again they're doing it to hedge their bets depend 0:10:22.000 --> 0:10:24.640 on what the administration is trying to accomplish. 0:10:25.120 --> 0:10:28.160 I wanted to ask you about exactly this you mentioned earlier. 0:10:28.240 --> 0:10:32.080 Don't be a prognosticator, be a risk manager, and that 0:10:32.240 --> 0:10:36.360 sounds like we should make like inspirational posters with like 0:10:36.440 --> 0:10:40.160 little kittens hanging from trees with that text below. But 0:10:40.480 --> 0:10:43.240 on this note, one of the reasons this market move 0:10:43.360 --> 0:10:47.199 is particularly painful is not just because it's very, very big, 0:10:47.440 --> 0:10:51.240 a big downward shift, but also we're seeing bond sell 0:10:51.280 --> 0:10:53.720 off at the same time, and I think we've moved 0:10:53.800 --> 0:10:57.040 from like just under four percent on the tenure to 0:10:57.280 --> 0:11:01.720 something like almost four point three percent. Now, again, that's 0:11:01.720 --> 0:11:04.040 happening while stocks are selling off, which is something you 0:11:04.080 --> 0:11:08.160 wouldn't expect to see normally. I have seen all sorts 0:11:08.160 --> 0:11:10.920 of explanations for why this might be happening. I've seen 0:11:10.960 --> 0:11:14.120 people talk about, well, maybe investors are liquidating what they 0:11:14.200 --> 0:11:17.360 can sell in the current environment, not necessarily what they want. 0:11:17.920 --> 0:11:22.320 And then secondly, maybe it's the basis trade being unwound. Thirdly, 0:11:22.640 --> 0:11:28.120 maybe it's investors shifting away from US assets altogether. Where 0:11:28.160 --> 0:11:31.599 do you sort of lie on that spectrum of reasons, 0:11:31.720 --> 0:11:34.560 like what is the mix for why exactly yields are 0:11:34.559 --> 0:11:35.400 going up right now? 0:11:36.200 --> 0:11:40.960 So we're seeing all those potential explanations. I think the 0:11:41.040 --> 0:11:45.600 truth is we're not sure. There's certainly been comments in 0:11:45.640 --> 0:11:48.160 the market, and we've seen them flows about the unwind 0:11:48.160 --> 0:11:51.959 of the basis trade you referred to. We're seen among 0:11:52.080 --> 0:11:57.600 some asset allocators a desire to reallocate and rebalance their 0:11:57.720 --> 0:12:01.600 dollar exposures to other mare markets. And I think the 0:12:01.640 --> 0:12:04.600 most insightful thing I can say, certainly if I'm at 0:12:04.600 --> 0:12:07.880 the FED and sitting here at Goldmen Sachs, the only 0:12:07.880 --> 0:12:10.079 thing we can all agree on. It's something we are 0:12:10.120 --> 0:12:15.839 watching very carefully because it's a concern for a country 0:12:16.280 --> 0:12:20.360 that has a let's say, thirty six thirty seven trillion 0:12:20.440 --> 0:12:26.600 dollars of treasury debt outstanding and growing by at least 0:12:26.600 --> 0:12:30.480 two trillion a year. It's very critical that we are 0:12:30.559 --> 0:12:33.840 able to market our debt. We've struggled over the last 0:12:33.880 --> 0:12:36.400 few years to sell duration and that we've tried to 0:12:36.440 --> 0:12:40.360 front endload it. But it's critical for a country with 0:12:40.520 --> 0:12:43.599 debt to GDP one hundred percent plus. You want to 0:12:43.640 --> 0:12:47.040 be able to market your debt. You want confidence in 0:12:47.160 --> 0:12:50.640 what we're doing here, and I think it bears watching, 0:12:51.280 --> 0:12:54.280 and certainly if I were at the FED, I'd be 0:12:54.360 --> 0:12:56.160 watching that very carefully. 0:13:11.800 --> 0:13:15.200 You've had a very long career, and Joe his intro 0:13:15.360 --> 0:13:19.960 for you included many titles, many hats over your history 0:13:19.960 --> 0:13:21.320 as a financial market veteran. 0:13:21.360 --> 0:13:23.120 Have you ever seen anything like this? 0:13:23.840 --> 0:13:27.320 I think that normally what you're accustomed to in a 0:13:27.360 --> 0:13:30.880 week like this last week, you would normally see a 0:13:30.960 --> 0:13:35.480 flight to quality, you would see Treasury's rally, and you 0:13:35.520 --> 0:13:38.320 would eventually start to get a better grip on what's 0:13:38.360 --> 0:13:41.600 going on. Obviously, COVID was a good example of an 0:13:41.720 --> 0:13:46.520 enormous uncertainty that took a while to resolve. It's been 0:13:46.800 --> 0:13:50.720 unusual in my career to see a government led action 0:13:51.480 --> 0:13:55.600 as opposed to an external shock, a government led action 0:13:55.720 --> 0:13:59.760 I e. Man made that has in turn created this 0:14:00.080 --> 0:14:03.040 kind of uncertainty. The good thing about this kind of situation. 0:14:03.720 --> 0:14:07.520 If it's man made that created the uncertainty, it can 0:14:07.559 --> 0:14:11.679 also be susceptible to man made actions that will address 0:14:11.760 --> 0:14:13.840 the uncertainty. And I think that's what people in the 0:14:13.840 --> 0:14:15.360 market are hoping for. 0:14:15.679 --> 0:14:17.480 Do you worry that they? I mean this is this 0:14:17.520 --> 0:14:19.800 has come up and it's certainly true, right because at 0:14:19.840 --> 0:14:23.400 any given moment, Trump could say no, we're taking this back, 0:14:23.600 --> 0:14:26.480 but this is his life mission, or we're doing some pause. 0:14:26.520 --> 0:14:29.720 And we saw these sort of incredible rally Monday on 0:14:29.760 --> 0:14:32.280 a fake headline about the pause tells you something about 0:14:32.320 --> 0:14:35.960 the environment. But what the president can't do is undring 0:14:35.960 --> 0:14:40.360 the bell because he can't really credibly say he'll never 0:14:40.400 --> 0:14:42.680 do this again. Right, Like, do you worry that, like 0:14:42.760 --> 0:14:47.080 this is going to permanently change America's economic relationship with 0:14:47.120 --> 0:14:48.080 every country in the world. 0:14:48.400 --> 0:14:51.280 Yeah, I just got back from Europe. Yeah there are certainly, 0:14:51.360 --> 0:14:54.680 yes are strains around the world. Yeah, and yes those 0:14:54.760 --> 0:14:59.360 bear watching. Having said that, I do believe that there's 0:14:59.400 --> 0:15:03.200 a great opera coortunity to get this puzzle right and 0:15:03.320 --> 0:15:06.360 make this work. But yes, there is some cost to 0:15:06.440 --> 0:15:09.520 what's happened up to now. But I still think this 0:15:09.600 --> 0:15:13.200 can get resolved. But it's going to require some action 0:15:13.880 --> 0:15:16.240 on our part in order to do that. And I 0:15:16.280 --> 0:15:20.239 think the markets in their up and down reaction today, 0:15:20.160 --> 0:15:23.760 they're just not sure how imminent that is and whether 0:15:23.840 --> 0:15:27.160 that's going to happen, And so you're seeing this uncertainty 0:15:27.360 --> 0:15:31.000 prevail in the markets. The problem with uncertainty going on 0:15:31.760 --> 0:15:37.000 for too long is it flows activity. If I'm a 0:15:37.040 --> 0:15:40.480 consumer thinking about taking an action, I might pause it. 0:15:40.520 --> 0:15:43.520 If I can tell you talking to companies, they're not 0:15:43.720 --> 0:15:48.360 saying no, but they're saying not now. They have already 0:15:48.440 --> 0:15:51.200 had other uncertainties they're dealing with in their business, how 0:15:51.200 --> 0:15:55.560 to approach AI, which use cases for AI spending will work. 0:15:56.000 --> 0:15:59.840 They have other issues that they're always wrestling with, and 0:16:00.200 --> 0:16:03.720 I think all this does is cause them to be 0:16:03.760 --> 0:16:07.080 more careful pause actions they might have otherwise taken. And 0:16:07.120 --> 0:16:09.640 I don't think you want that to go on indefinitely. 0:16:10.440 --> 0:16:13.240 Just going back to the FED for a second, what's 0:16:13.320 --> 0:16:16.480 the pain threshold for the Central Bank in terms of 0:16:16.840 --> 0:16:20.000 movements in the financial market? Like how bad does it 0:16:20.080 --> 0:16:24.280 need to get before maybe they start rolling out some 0:16:24.400 --> 0:16:26.880 tools to try to calm things down? 0:16:27.160 --> 0:16:31.120 All right, So the Fed back the headline, what I'm 0:16:31.120 --> 0:16:35.880 worried about is full employment and price stability. Stock market 0:16:35.960 --> 0:16:40.840 going down substantially does not by itself necessarily cause me 0:16:41.000 --> 0:16:44.480 to do anything other than I'm aware of it. Credit 0:16:44.560 --> 0:16:49.920 spreads beginning to gap out gets my attention more because 0:16:50.120 --> 0:16:53.720 I'm concerned that that, in fact would be an amplifier 0:16:54.560 --> 0:16:58.600 of a potential slowdown. I e. Businesses might not fire 0:16:58.680 --> 0:17:02.120 people because there's is down, but they might start to 0:17:02.200 --> 0:17:04.919 if they see their business slowing and credit spreads widening 0:17:04.960 --> 0:17:08.920 and they're worried about financeability. So I'm watching that still 0:17:08.920 --> 0:17:14.000 not acting normally. If you see a potential demand shock 0:17:14.080 --> 0:17:16.760 and the soft data, which is what we're seeing, weaken, 0:17:17.200 --> 0:17:20.320 but the hard data is still hanging in there, you 0:17:20.400 --> 0:17:23.480 might start thinking. If you didn't have an inflation issue, 0:17:23.560 --> 0:17:27.359 you might think about taking some action. But the FED 0:17:27.480 --> 0:17:30.880 does have an inflation issue, and so I think you'll 0:17:30.880 --> 0:17:35.040 see the Fed, as we said, be more reactive until 0:17:35.160 --> 0:17:40.399 you're clearly seeing evidence that there is a slowing and 0:17:40.440 --> 0:17:42.359 you're going to want to see at the FED to 0:17:42.440 --> 0:17:45.880 act more than just an inching up in the unemployment rate. 0:17:45.960 --> 0:17:49.479 You start seeing a much more dramatic move up, and 0:17:49.560 --> 0:17:52.200 then you're going to realize that we could be entering 0:17:52.280 --> 0:17:58.280 into a demand shock which would actually be disinflationary, which 0:17:58.560 --> 0:18:02.080 might offset part of this supply shock. And that's where 0:18:02.119 --> 0:18:04.359 you'd see the FED be more willing to act. But 0:18:04.440 --> 0:18:07.480 it's going to be at least a period of time. 0:18:07.560 --> 0:18:10.200 It's not the main meeting. I think they're going to 0:18:10.240 --> 0:18:12.960 watch it very carefully, and I think the sooner you 0:18:13.080 --> 0:18:16.640 might see that materialize would be into June and over 0:18:16.680 --> 0:18:19.840 the summer. The only other thing I'll mention that I'd 0:18:19.840 --> 0:18:22.439 be watching for very carefully at the FED is you 0:18:22.480 --> 0:18:25.200 want to make sure there's orderly market function and particularly 0:18:25.640 --> 0:18:29.560 orderly treasury market functions. And again, as long as that's 0:18:29.600 --> 0:18:32.640 the case, I think the FED will watch all these 0:18:32.640 --> 0:18:35.600 things I just said, but be patient, and they're going 0:18:35.680 --> 0:18:39.320 to want to see real hard evidence of the slowing 0:18:39.400 --> 0:18:42.160 before they took an action. And the reason is they 0:18:42.160 --> 0:18:46.760 don't want to jump the teriff situation gets resolved and 0:18:46.840 --> 0:18:49.439 at the aftermath we still have an inflation issue and 0:18:49.480 --> 0:18:52.520 they regret that they've jumped into it and cut the rate. 0:18:52.840 --> 0:18:55.400 I think they're going to need to be more reactive, 0:18:55.760 --> 0:18:59.119 which does mean that by the time they move, you know, 0:18:59.200 --> 0:19:01.760 normally say that are going to be on Maybe you 0:19:01.800 --> 0:19:03.920 could be accused of being late that. I think they're 0:19:03.960 --> 0:19:05.120 willing to take that risk. 0:19:06.000 --> 0:19:09.560 Let's pivot a little bit. Tracy wrote about something last week, 0:19:09.680 --> 0:19:11.240 or maybe it was two weeks ago. My brain is 0:19:11.280 --> 0:19:14.960 getting fried, so I don't have any concept of time anymore. 0:19:15.520 --> 0:19:20.760 The the Dallas Fed's energy survey, which I think comes 0:19:20.800 --> 0:19:24.760 to a quarterly, unlike the manufacturing is service. It's just 0:19:24.840 --> 0:19:27.439 unbelievable stuff up there. And this is from an industry 0:19:27.480 --> 0:19:30.639 which we all know tends to be, you know, probably 0:19:30.640 --> 0:19:34.520 pretty sympathetic to the current administration politically. They're talking about 0:19:34.640 --> 0:19:37.760 uncertainty like they've never seen. They've talked about the increased 0:19:37.760 --> 0:19:40.600 cost of all of their parts for drilling. I mean, 0:19:40.680 --> 0:19:42.639 it was like kind of apocalyptic. And that was actually 0:19:42.680 --> 0:19:45.920 before the last week and a half. One of the 0:19:45.920 --> 0:19:49.920 things in Vestent's three three three plan was getting three 0:19:50.000 --> 0:19:54.440 million more barrels of oil drilled and expanding energy dominance. Meanwhile, 0:19:54.640 --> 0:19:57.440 WTI just falling to his lowest level in four years, 0:19:57.760 --> 0:20:00.239 in part because opek is turning on the gusher, in 0:20:00.280 --> 0:20:03.440 part because of these recession firms tell us what's going 0:20:03.480 --> 0:20:05.480 on down there on the energy patch. 0:20:05.920 --> 0:20:09.639 So we started the Dallas Fed Energy Survey when I 0:20:09.720 --> 0:20:12.000 was running to Dallas Fed, and we did it particularly 0:20:12.000 --> 0:20:15.200 for this reason. We wanted to get a grip on 0:20:15.840 --> 0:20:19.119 what will break even levels, at what levels are you 0:20:19.200 --> 0:20:22.240 profitable at, what prices are you more likely to drill, 0:20:22.800 --> 0:20:26.320 and what we're seeing as the following four years ago, 0:20:27.080 --> 0:20:29.719 when the industry heard drill, baby, drill, they would be 0:20:29.840 --> 0:20:33.080 they were very excited about that. I think over the 0:20:33.160 --> 0:20:37.480 last three or four years they have been drilling subject 0:20:37.520 --> 0:20:42.280 to cash flow. They've been pressured by shareholders to return 0:20:42.359 --> 0:20:46.320 more capital, and cost to drill have gone up, and 0:20:46.480 --> 0:20:49.960 tariffs will increase cost to drill more. And so the 0:20:50.080 --> 0:20:53.000 industry will drill at one level if the price is 0:20:53.080 --> 0:20:56.240 eighty dollars, but it's going to drill at a lower level, 0:20:56.280 --> 0:20:59.440 all things being equal, if prices get into fifties or sixties. 0:21:00.240 --> 0:21:03.680 And so I think we may well find over this 0:21:03.760 --> 0:21:07.360 next year that actually the level of drilling activity doesn't increase, 0:21:08.119 --> 0:21:10.080 and I think people who are drilling are going to 0:21:10.080 --> 0:21:12.480 be more careful, particularly as the price has come down. 0:21:13.000 --> 0:21:16.320 You see OPEK. I think the US may have more 0:21:16.400 --> 0:21:21.280 success pressuring OPEC and Saudi Arabia to produce more, and 0:21:21.359 --> 0:21:23.960 we will in this country make it easier to permit 0:21:24.000 --> 0:21:28.280 a refiner, will make it easier to build transmission. So 0:21:28.359 --> 0:21:31.800 I think the price will come down. Is coming down 0:21:31.880 --> 0:21:34.800 and may stay down, but it may not be because 0:21:34.840 --> 0:21:39.680 of more US drilling, and maybe because of demand falling 0:21:39.720 --> 0:21:44.159 off because of concern about tariffs, and also because OPEK 0:21:44.640 --> 0:21:49.960 actually producing more, probably under some influence from the Trump administration. 0:21:50.760 --> 0:21:53.440 I'm looking at h chart of the Baker Hughes oil 0:21:53.440 --> 0:21:56.800 and Gas re account right now, and it's kind of funny. 0:21:56.920 --> 0:21:59.040 I guess we'll take what we can get nowadays. But 0:21:59.400 --> 0:22:02.240 it went up in twenty twenty one and twenty twenty 0:22:02.240 --> 0:22:05.000 two quite a lot under the Biden administration, and since 0:22:05.400 --> 0:22:08.200 I guess for most of twenty twenty four, it's kind 0:22:08.200 --> 0:22:12.000 of been flatlining. And in fact, Joe, the energy survey 0:22:12.040 --> 0:22:14.440 that I wrote up, I think the headline on our 0:22:14.480 --> 0:22:17.800 newsletter was instead of drill, baby drill, it was nil 0:22:17.840 --> 0:22:21.400 baby nil, right, because there's no new oil and gas 0:22:21.440 --> 0:22:25.359 rigs actually getting built and not much more production coming 0:22:25.400 --> 0:22:25.879 on stream. 0:22:26.000 --> 0:22:28.800 That's right. And you've seen the reason for that trend 0:22:28.880 --> 0:22:33.000 you just described is prices were higher in twenty one 0:22:33.000 --> 0:22:37.639 and twenty two that led to more drilling as prices moderate, 0:22:37.880 --> 0:22:41.400 and they're actually lowering now. I think you'll see more 0:22:41.440 --> 0:22:43.360 tepet activity as you just described. 0:22:44.200 --> 0:22:46.320 And in terms of your experience at the Dallas FED, 0:22:46.359 --> 0:22:48.600 I wanted to ask you because you were there, I 0:22:48.680 --> 0:22:49.399 think it. 0:22:49.440 --> 0:22:51.959 Was fifteen through twenty one, thank you. 0:22:52.040 --> 0:22:54.520 Thank you for doing my research for me. But that 0:22:55.080 --> 0:22:59.000 included twenty eighteen when we saw the tariffs under the 0:22:59.040 --> 0:23:02.560 first Trump present, did and see what was your experience 0:23:02.960 --> 0:23:07.280 like then and what lessons or surprises did you encounter 0:23:07.359 --> 0:23:08.040 at that time. 0:23:08.520 --> 0:23:11.639 So Texas is a very large exporting state, and we 0:23:11.640 --> 0:23:13.800 did an enormous amount of work at the Dallas said 0:23:14.359 --> 0:23:17.600 on the impact of tariffs, and I probably in those 0:23:17.680 --> 0:23:21.000 years read every tariff paper that I could get my 0:23:21.080 --> 0:23:24.720 hands on. And what we concluded, me and my team 0:23:24.800 --> 0:23:30.840 concluded is tariffs could have some price impact, but the 0:23:30.880 --> 0:23:34.399 biggest impact we saw if tariffs is of the potential 0:23:34.520 --> 0:23:37.800 of they had to slow growth and so as a 0:23:37.840 --> 0:23:40.520 result of it. You may remember back in eighteen and 0:23:40.640 --> 0:23:44.480 nineteen I said, I think we should be more proactive 0:23:44.520 --> 0:23:48.440 here lower rates, and that if you wait to see 0:23:48.440 --> 0:23:52.720 the weakness in GDP and employment, you've waited too late. 0:23:53.240 --> 0:23:55.720 And the thing is I had the luxury of being 0:23:55.720 --> 0:23:58.840 able to argue that in those years because we did 0:23:58.880 --> 0:24:01.000 not have an inflation all right. 0:24:01.040 --> 0:24:04.000 So clearly there is a lot going on, some of 0:24:04.040 --> 0:24:07.760 it in many ways very unprecedented. What are you looking 0:24:07.800 --> 0:24:11.040