WEBVTT - IBM Vice Chair Gary Cohn IBM’s Cohn Talks Warsh’s Fed

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

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<v Speaker 2>Joining us now the former NEC director and IBM Vice

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<v Speaker 2>chair Gary Kirk. Gary, good morning, good.

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<v Speaker 3>To see you, Good to see you. Thanks for having You've.

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<v Speaker 2>Been following the debate. I wonder your reaction, you know,

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<v Speaker 2>Kevin Wash well, what is everyone getting wrong? And I

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<v Speaker 2>say everyone, I mean the consensus for you on their

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<v Speaker 2>reaction to that news conference last Wednesday.

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<v Speaker 4>I'm not going to characterize as anyone's getting anything wrong

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<v Speaker 4>or anything anyone's getting it right. What I'm going to

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<v Speaker 4>characterize this as Kevin is a masterful student of the market.

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<v Speaker 3>Kevin has been at the FED before.

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<v Speaker 4>He understands the limited toolbox, but the effective toolbox that

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<v Speaker 4>the FED has.

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<v Speaker 3>What Kevin is.

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<v Speaker 4>Doing right now, and I think people don't like this,

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<v Speaker 4>is Kevin is reverting the FED to the historic norms

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<v Speaker 4>of what the FED did. We, unfortunately, as newscasters or

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<v Speaker 4>as market makers or as traders, we got spoiled from

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<v Speaker 4>the eight period on. From eight period on, the FED

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<v Speaker 4>has been an open box. They've been completely transparent. They

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<v Speaker 4>have not done anything that you wouldn't know they would

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<v Speaker 4>do hours or weeks or months before they did it,

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<v Speaker 4>and the market became addicted to knowing what the FED

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<v Speaker 4>was going to do.

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<v Speaker 3>What Kevin is doing right now.

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<v Speaker 4>He's trying to get the market off the addiction of me,

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<v Speaker 4>the FED chairman and the FED board having to tell

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<v Speaker 4>you what we're going to do, and.

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<v Speaker 3>You the market and you participants.

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<v Speaker 4>You should go and participate however you think it makes

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<v Speaker 4>sense for you and wherever you think the opportunities are.

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<v Speaker 3>This is a tough transition.

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<v Speaker 4>People liked having the answers to the quiz before they

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<v Speaker 4>took the test.

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<v Speaker 2>So there's a market's question. I also think there's an

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<v Speaker 2>economics question that needs to be addressed. The issue for us,

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<v Speaker 2>I think is less about the lack of guidance, less

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<v Speaker 2>about having the answers before the test, more about you've

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<v Speaker 2>got an inflation problem, why you're not doing anything about it,

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<v Speaker 2>which essentially was the Mike mckeak question in the news conference.

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<v Speaker 2>Why are you waiting? What are you waiting for? Without

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<v Speaker 2>giving us any real clarity on the preferred tool, why

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<v Speaker 2>they're waiting, whether they're carry on waiting, and at the

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<v Speaker 2>same time telling us to believe them that I do

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<v Speaker 2>something about inflation. I think the economic question is the

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<v Speaker 2>difficult one. To answer.

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<v Speaker 3>Chairman Worrish is going out of his way.

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<v Speaker 4>I mean he's literally going out of his way to

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<v Speaker 4>tell you he is an inflation fighter, that the stable

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<v Speaker 4>price mandate and the two percent inflation guide is his

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<v Speaker 4>bell weather, and he's going there.

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<v Speaker 3>He has limited tools to get there, as we know.

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<v Speaker 4>In fact, he has said in the speech, I have

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<v Speaker 4>two tools to help us get there. I can raise

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<v Speaker 4>rates or I can sell down the balance sheet. Those

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<v Speaker 4>are his two tools. Raising rates, as we know, will

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<v Speaker 4>affect the overnight rate the Fed Fund. That has very

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<v Speaker 4>little effect on the economy as a whole. The real

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<v Speaker 4>effect on the economy is, let's say, let's call it

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<v Speaker 4>a five to ten year bucket. That's where most people borrow.

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<v Speaker 4>That's where consumers borrow. That's where credit cards are, and

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<v Speaker 4>that's where student loans are, that's where automobile loans.

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<v Speaker 3>Are, that's where mortgages are. Kevin knows that.

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<v Speaker 4>What he's also telling you is right now, the market

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<v Speaker 4>is doing its own work in steepening the yield curve.

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<v Speaker 4>So in less than a year we have gone from

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<v Speaker 4>a twos tens interest rate curve inverted about twenty basis

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<v Speaker 4>points to positive forty basis points. We've moved sixty basis

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<v Speaker 4>points in two tens rates. So Kevin is saying, look,

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<v Speaker 4>the market is doing my job. They're making the ability

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<v Speaker 4>to borrow money out on the curve more and more expensive,

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<v Speaker 4>and it's going to continue to get more expensive. If

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<v Speaker 4>I raise FED funds, yes, I can raise FED funds,

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<v Speaker 4>I'm not sure that has the effect. I think what

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<v Speaker 4>he would probably prefer to do is he'd prefer to

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<v Speaker 4>sell down the balance sheet, which again would put more

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<v Speaker 4>supply in the market, which would steep in the yield curve.

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<v Speaker 3>But the market's doing that for him right now.

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<v Speaker 4>So being in that chair for less than two months

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<v Speaker 4>or about two months, but he happened to come in

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<v Speaker 4>a funny time where a week and a half after

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<v Speaker 4>he came in he had his first meeting, Then thirty

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<v Speaker 4>days later he had a second meeting. He then tells

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<v Speaker 4>you nothing happened in those thirty days. He's sitting here

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<v Speaker 4>and I think he's a value waiting where he wants

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<v Speaker 4>to be. He's lucky on the schedule. He doesn't have

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<v Speaker 4>an August meeting. He does have Jackson Hole. He could

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<v Speaker 4>tell us what's going on in Jackson Hole.

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<v Speaker 3>So I think.

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<v Speaker 4>Kevin wanted to probably get through those first two meetings

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<v Speaker 4>make it clear to the market that he is an

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<v Speaker 4>inflation fighter, make it clear to everyone who's watching that

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<v Speaker 4>the market is doing much of what he would have

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<v Speaker 4>tried to get accomplished early, and to have the month

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<v Speaker 4>of August before the September meeting to come out and

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<v Speaker 4>deliver a relatively baked plan. In his mind, He's not

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<v Speaker 4>going to give you the baked plan, but he himself

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<v Speaker 4>will have a highly baked plan.

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<v Speaker 1>Do you think that the selloff in the long end

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<v Speaker 1>of the yield curve is by design that what he

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<v Speaker 1>saw after the FED meeting with thirty year rates going

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<v Speaker 1>to the highest level since two thousand and seven, was

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<v Speaker 1>a good thing.

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<v Speaker 3>It's doing Kevin's jobs for him.

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<v Speaker 4>At the end of the day, if you want to

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<v Speaker 4>slow down the economy and you want to tamp inflation,

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<v Speaker 4>you have to make the cost of money more expensive.

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<v Speaker 4>So if the thirty year rates weren't up, which they did,

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<v Speaker 4>tenure rates went up in the front end of the

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<v Speaker 4>curve basically stayed the same, which means we had a

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<v Speaker 4>curve steepener. You are accomplishing what a FED chair would

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<v Speaker 4>want to accomplish if you're trying to tamp down inflation

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<v Speaker 4>and moderate I don't think it's just Kevin that's doing that.

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<v Speaker 4>I mean, Kevin's being very realistic to what the environment

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<v Speaker 4>is today. He knows the treasury barrings are going up

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<v Speaker 4>every year. He also knows there's this enormous amount of

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<v Speaker 4>need for debt in the AI compute data center world,

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<v Speaker 4>where we're talking about potentially now the trillion dollars of

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<v Speaker 4>issuance going on in the market day. The market is

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<v Speaker 4>finding a home to clear these bonds. It's also raising

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<v Speaker 4>longer term rates, it's putting.

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<v Speaker 3>More risk premium into the curve.

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<v Speaker 4>All things that Kevin is probably happy are happening without

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<v Speaker 4>him having to do anything.

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<v Speaker 1>Scott Bussett did something over the weekend, and I wonder

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<v Speaker 1>how related you see this as the idea that there

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<v Speaker 1>was a coordinated intervention In the end, some people are

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<v Speaker 1>speculating it's because the Japanese financement is story with selling

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<v Speaker 1>treasuries to finance their unilateral intervention and their currency and

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<v Speaker 1>this could potentially help support US yields from going much higher.

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<v Speaker 1>Do you believe there is any coordination between the two.

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<v Speaker 3>Well, we know that the US and Japan court. I

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<v Speaker 3>think no one's no one's a.

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<v Speaker 1>Thirty year yields in the US and potentially what happened.

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<v Speaker 4>I think there are multiple factors and why the US

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<v Speaker 4>would have got involved in an intervention. Obviously the rate

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<v Speaker 4>the trades that would force people into transactions where they

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<v Speaker 4>may be selling US securities to buy at home.

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<v Speaker 3>It also has to do trade balances.

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<v Speaker 4>Remember, we've got administration that is fixated on trade deficits,

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<v Speaker 4>so to the extent that you know, foreign products come

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<v Speaker 4>into the United States below what we think is a

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<v Speaker 4>market clearing price, or our products are extraordinarly expensive to

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<v Speaker 4>someone that would we would like to sell to. There's

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<v Speaker 4>a way to try and equal out the trade deficit

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<v Speaker 4>the trade balance with the country as well. So I

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<v Speaker 4>don't think it's a single factor model. I think when

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<v Speaker 4>Scott Besson gets the phone call from the bank in Japan,

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<v Speaker 4>he's evaluating all of these factories. He's evaluating what's going

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<v Speaker 4>on in supplied demand of treasuries from foreigners, what's going

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<v Speaker 4>on in the trade market, what's going on with the

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<v Speaker 4>trade deficits, specifically with Japan, And each one of those

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<v Speaker 4>has a different input into the equation to go ahead

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<v Speaker 4>and move forward.

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<v Speaker 2>No investant, it might have been the one that made

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<v Speaker 2>the call, you know, sort of laser focused on these issues.

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<v Speaker 1>Well, he has had an experience with that with the

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<v Speaker 1>Bank of England, so why not bring it over to Japan.

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<v Speaker 2>How frangile is the bank drop for markets right now?

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<v Speaker 2>All these little things going on, tension in Japan, situational awareness,

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<v Speaker 2>that fund getting into a bit of trouble in the

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<v Speaker 2>last week too. How fragile do you think the bankdrop is?

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<v Speaker 4>I don't know if the mark if I'd call it fragile,

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<v Speaker 4>I would say we have as much instability or balls up.

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<v Speaker 3>In the air as we've had.

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<v Speaker 4>I mean, usually there's one or two driving factors in

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<v Speaker 4>the market. Today, we've got a myriad of factors. You know,

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<v Speaker 4>we've got the war going on, We've got the price

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<v Speaker 4>of oil going on, we've got the major capex AI.

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<v Speaker 3>Investment going on.

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<v Speaker 4>And the question is you've taken some of the largest

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<v Speaker 4>companies in America that historically have owned intellectual property and

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<v Speaker 4>we're massive free cash flow generators, and then they recirculated

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<v Speaker 4>that cash into the market, either by buying assets, buying

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<v Speaker 4>other things, returning dividends, buying back shares. You've taken those

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<v Speaker 4>companies and you've now made them huge, huge asset gathers,

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<v Speaker 4>huge asset builders, and they're no longer creating free cash flow.

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<v Speaker 4>In fact, it's the first time I can remember in

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<v Speaker 4>the history of an earning's call of some of these

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<v Speaker 4>largest companies when they're talking about we will stay positive

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<v Speaker 4>on free cash flow. It's hard to understand that these

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<v Speaker 4>are companies that we're producing tens of billions of dollars

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<v Speaker 4>a quarter in free cash flow. So the market's digesting

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<v Speaker 4>that we went through the software scare versus the AI scare.

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<v Speaker 4>Markets digesting that we're trying to figure out where all

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<v Speaker 4>these pieces come together. So there's an enormous amount of

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<v Speaker 4>instability in the market at the same time rates are

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<v Speaker 4>going up. But the consumer, we know the consumer continues

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<v Speaker 4>to spend, spend, and spend. So even when you look

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<v Speaker 4>at the GDP numbers, the strongest pieces in there are

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<v Speaker 4>the consumer spending. Now, we could even go further. We

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<v Speaker 4>know the consumer is spending, but we also know that's

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<v Speaker 4>a bit of a bifurcated event. We know that the

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<v Speaker 4>wealthier consumers in this country are consuming at extraordinary high levels,

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<v Speaker 4>and we know that the low end consumer is barely

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<v Speaker 4>getting by, and this is one of the dilemmas that

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<v Speaker 4>everyone's trying to deal with. And how does this filter

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<v Speaker 4>through markets? I think all of these pieces of instability

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<v Speaker 4>are out there, and look, markets can handle one or

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<v Speaker 4>two pieces of instability. They start to fail when it's

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<v Speaker 4>three four and five, and they really fail when it's

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<v Speaker 4>three four and five and they're totally out of their control.

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<v Speaker 4>Or the answer is six to twelve to eighteen months off.

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<v Speaker 2>And that's what I'm trying to work out. How close

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<v Speaker 2>now we So you've got a massive competition for capital

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<v Speaker 2>you want circulate that really well, You've had a huge

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<v Speaker 2>to trade shock at the energy market that's hitting Japan

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<v Speaker 2>when they've already got a frenchile backdrop. On top of that,

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<v Speaker 2>there's evidence of leverage building up in places like South

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<v Speaker 2>Korea and hedge funds blowing up. And I wanted to

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<v Speaker 2>go back to the very beginning of this conversation whether

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<v Speaker 2>now is a good time to go back to the

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<v Speaker 2>old world of reducing forward guidance in the handholding POSTGFC

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<v Speaker 2>at central banks. How difficult will that mission be?

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<v Speaker 3>I don't think it's difficult.

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<v Speaker 4>Like I said, we've been trained since two thousand and

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<v Speaker 4>eight to today to expect the FED to telegraph and

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<v Speaker 4>for a guy prior to two thousand and eight, when

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<v Speaker 4>I was trading for a living and running bigging trading desks,

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<v Speaker 4>we did not know when the FED was going to move.

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<v Speaker 4>There were surprise meetings after surprise meetings, after surprise meetings.

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<v Speaker 4>You know, the FED doesn't have to wait for a

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<v Speaker 4>scheduled meeting to cut or raise industrates. Now they have

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<v Speaker 4>not done it really since the I guess they did

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<v Speaker 4>in COVID. The last time they did it was twenty twenty.

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<v Speaker 4>We had one hundred basis point cut on a Sunday

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<v Speaker 4>evening in COVID, if you remember. But we've now guid

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<v Speaker 4>in this point where the market insists not only there

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<v Speaker 4>be a meeting, there'll be a meeting with a press conference.

0:11:06.160 --> 0:11:07.959
<v Speaker 4>You can't have actions that there's a meeting with a

0:11:07.960 --> 0:11:10.800
<v Speaker 4>press conference. I think the chair is trying to say, no,

0:11:11.120 --> 0:11:14.160
<v Speaker 4>I have a job to do. We will meet whenever

0:11:14.360 --> 0:11:16.920
<v Speaker 4>necessary to raise or lower rates. We will meet whenever

0:11:16.960 --> 0:11:19.800
<v Speaker 4>necessary to do any action we need to do based

0:11:19.840 --> 0:11:22.200
<v Speaker 4>on what's going on in the environment, not based on

0:11:22.240 --> 0:11:24.520
<v Speaker 4>the schedule that I put out eighteen months in the air.

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<v Speaker 2>Let's bringing the discipline back to capitalism and financial markets.

0:11:28.320 --> 0:11:30.400
<v Speaker 2>I'm not averse to that at all, Just trying to

0:11:30.440 --> 0:11:33.319
<v Speaker 2>work out the consequences of making the switch when you've

0:11:33.360 --> 0:11:37.000
<v Speaker 2>been feasting gone easy money and forward guidance for fifteen

0:11:37.120 --> 0:11:39.800
<v Speaker 2>sixteen years and knowing they're always going to be there

0:11:39.840 --> 0:11:42.200
<v Speaker 2>to have your back and step in whenever there's a problem,

0:11:42.320 --> 0:11:44.200
<v Speaker 2>and they'll off fee the guidance and so you're the

0:11:44.240 --> 0:11:45.839
<v Speaker 2>way you put it, they'll give you the answers to

0:11:45.880 --> 0:11:48.559
<v Speaker 2>the quiz before you sit the test. Wall Street's feasted

0:11:48.600 --> 0:11:48.960
<v Speaker 2>on that.

0:11:48.880 --> 0:11:49.800
<v Speaker 3>For years they have.

0:11:50.160 --> 0:11:51.960
<v Speaker 2>That's why I use the word French out how much

0:11:51.960 --> 0:11:55.199
<v Speaker 2>fragility is in the system that needs to be unwound

0:11:55.320 --> 0:11:57.439
<v Speaker 2>as we make that transition back to the world.

0:11:58.120 --> 0:12:00.840
<v Speaker 3>I don't think there's as much fragility as you think.

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<v Speaker 4>Like I said, most of my career trading I had

0:12:05.000 --> 0:12:06.280
<v Speaker 4>the opposite world.

0:12:06.720 --> 0:12:10.000
<v Speaker 2>You had the two way discipline you HaDin.

0:12:09.320 --> 0:12:10.319
<v Speaker 3>I had to be disciplined.

0:12:10.600 --> 0:12:13.040
<v Speaker 4>I had to assume when I went home with the

0:12:13.040 --> 0:12:15.839
<v Speaker 4>position or I made a price for something. And I

0:12:15.920 --> 0:12:18.040
<v Speaker 4>ran a big mortgage business for a while. Man ran

0:12:18.040 --> 0:12:19.520
<v Speaker 4>a big treasury business for a while, ran a big

0:12:19.520 --> 0:12:22.200
<v Speaker 4>at christ business. I had to assume that the FED

0:12:22.320 --> 0:12:25.880
<v Speaker 4>could meet any moment and change policy, and were we

0:12:26.679 --> 0:12:31.200
<v Speaker 4>trading appropriately? We're we're managing risk appropriately instead of saying, oh,

0:12:31.360 --> 0:12:33.360
<v Speaker 4>I don't have to worry about because that there's a

0:12:33.360 --> 0:12:38.040
<v Speaker 4>FED put or rates can't change until September something. Now,

0:12:38.120 --> 0:12:41.599
<v Speaker 4>because there's no FED meeting, maybe they'll say something in

0:12:41.679 --> 0:12:43.920
<v Speaker 4>Jackson Hall. So I'll manage my risk up till the

0:12:44.000 --> 0:12:46.040
<v Speaker 4>Jackson Hole meeting. I'll wait for that, then I'll manage

0:12:46.040 --> 0:12:47.800
<v Speaker 4>my risk differently after that.

0:12:47.800 --> 0:12:49.520
<v Speaker 3>That's not the way markets should work.

0:12:49.559 --> 0:12:53.560
<v Speaker 4>The markets should manage themselves in a way that anything

0:12:53.640 --> 0:12:55.280
<v Speaker 4>is possible on any given day.

0:12:55.679 --> 0:12:57.520
<v Speaker 2>I hope we got back to that world. I just

0:12:57.600 --> 0:12:59.559
<v Speaker 2>know that when the guard tried that, we're not here

0:12:59.559 --> 0:13:04.440
<v Speaker 2>to close breads. Look God quickly closed spreads straight afterwards. Right.

0:13:04.920 --> 0:13:06.400
<v Speaker 2>It's difficult to make the transition.

0:13:06.679 --> 0:13:08.600
<v Speaker 1>The question, and I think you're alluding to it, John,

0:13:08.640 --> 0:13:11.680
<v Speaker 1>how much has the financial market changed and debt built

0:13:11.760 --> 0:13:14.800
<v Speaker 1>up under the old regime that has to be unwound

0:13:14.920 --> 0:13:17.640
<v Speaker 1>in a period of a new regime that potentially is

0:13:17.720 --> 0:13:20.960
<v Speaker 1>much less transparent but allows markets to do their things.

0:13:20.960 --> 0:13:23.000
<v Speaker 4>Did you write the pace, Gary, I did not write

0:13:23.000 --> 0:13:26.560
<v Speaker 4>these that said, you know, there are an enormous amount

0:13:26.559 --> 0:13:30.200
<v Speaker 4>of hedging tools today. So as you see debt move

0:13:30.280 --> 0:13:32.840
<v Speaker 4>up and you see the private credit markets explosed, which

0:13:32.880 --> 0:13:33.800
<v Speaker 4>has been very helpful.

0:13:34.080 --> 0:13:36.600
<v Speaker 3>You know, you can head your interest rate exposure.

0:13:37.080 --> 0:13:39.720
<v Speaker 4>You can't hedge your credit exposure as much, but heaving

0:13:39.840 --> 0:13:42.520
<v Speaker 4>underlying interest rate exposure happens to be one of the

0:13:42.520 --> 0:13:44.680
<v Speaker 4>most developed markets in the world. You can hedge interest

0:13:44.720 --> 0:13:48.200
<v Speaker 4>rate exposure in almost virtually every currency that we issue

0:13:48.200 --> 0:13:51.280
<v Speaker 4>bonds in today, So managing interest rate exposure is not hard.

0:13:51.320 --> 0:13:53.680
<v Speaker 4>Now people have historically said, well I know exactly what

0:13:53.720 --> 0:13:54.480
<v Speaker 4>the Fed's going to do.

0:13:54.559 --> 0:13:55.720
<v Speaker 3>I don't need to manage this.

0:13:56.080 --> 0:13:58.920
<v Speaker 4>That's probably not a good outcome. It's probably a better

0:13:58.960 --> 0:14:01.480
<v Speaker 4>outcome when people will look at their risk and say,

0:14:01.320 --> 0:14:04.320
<v Speaker 4>my interest rate risk is x AM I happy with

0:14:04.400 --> 0:14:06.839
<v Speaker 4>that or not not? Oh, I don't really care because

0:14:06.840 --> 0:14:07.840
<v Speaker 4>the Fed's got my back.

0:14:08.000 --> 0:14:10.480
<v Speaker 2>Gary cond toalt you all day. I appreciate it, Thank you,

0:14:10.800 --> 0:14:13.800
<v Speaker 2>Thank you very much. Gary Conere, the IBM Vice chair