WEBVTT - Robert Kaplan Talks Rate Hikes, Warsh at Jackson Hole

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News begin this hour with

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<v Speaker 1>Stocks and Bonds, Steady of CPI e is the September

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<v Speaker 1>rate high bets. The next read on inflation out at

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<v Speaker 1>eight thirty am Eastern with PPI on deck. Goldbnsachs Vice

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<v Speaker 1>chair and former Dallas FED President Robert Kaplan joins us

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<v Speaker 1>now for more. Robert great to catch up with you.

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<v Speaker 1>I want to start just by asking you your take

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<v Speaker 1>on the economy and whether you are surprised by the

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<v Speaker 1>relatively weak labor market report and then the very much

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<v Speaker 1>in line yet confusing CPI report.

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<v Speaker 2>What I'm seeing in the economy, if it's associated with

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<v Speaker 2>the AI infrastructure build or AI adoption, then it's strong.

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<v Speaker 2>What I hear from a number of companies who are

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<v Speaker 2>more tied to housing autos the strength of the low

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<v Speaker 2>modern income consumer, I would say they describe the economy

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<v Speaker 2>as okay, not great, somewhat sluggish, and so in that regard,

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<v Speaker 2>the job market report.

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<v Speaker 3>Kind of was in line with that.

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<v Speaker 2>You don't see aggressive hiring, but you don't see aggressive firing.

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<v Speaker 2>And I still think we're several months or a year

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<v Speaker 2>away from companies having enough confidence in the AI use

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<v Speaker 2>cases to work aggressively use AI to replace people, but

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<v Speaker 2>that is likely to happen.

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<v Speaker 3>I think there'll be new.

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<v Speaker 2>Jobs great also, But the point is unit labor costs

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<v Speaker 2>are very well behaved.

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<v Speaker 3>I think you and I have talked about this.

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<v Speaker 2>The share of GDP going to profit is increasing, the

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<v Speaker 2>share going to labor is more muted.

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<v Speaker 1>What's the FEDS role given this backdrop right now?

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<v Speaker 3>So you've got a lot of cross currents, and.

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<v Speaker 2>In fairness, if we didn't have the war in Iran

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<v Speaker 2>and the spike in oil prices, which I think has

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<v Speaker 2>raised headline inflation and bleeds into other items, my guess

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<v Speaker 2>is we might not be even be talking about the

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<v Speaker 2>prospect of a rate increase. And I think the federle

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<v Speaker 2>here should be to try to understand these cross currents.

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<v Speaker 2>The AI infrastructure build is probably inflationary, and you've got tariffs,

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<v Speaker 2>labor constraints, oil spike that exacerbate that. On the other hand,

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<v Speaker 2>AI adoption should ultimately be disinflationary. Chinese over capacity should

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<v Speaker 2>be disinflationary. And so it's not surprised to me that

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<v Speaker 2>there's a lot of debate and they're trying.

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<v Speaker 3>To weave through this. I think what I would be doing.

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<v Speaker 2>In my former seat is I would not have raised

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<v Speaker 2>rates in July. I think they made absolutely the right decision.

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<v Speaker 2>I probably wouldn't have cut in December either, by the

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<v Speaker 2>way that last cut I would not have done, And

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<v Speaker 2>I would be keeping an open mind between now in September.

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<v Speaker 2>If I see meaningful improvement, might be willing to kick

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<v Speaker 2>the can and do nothing. But I want to take

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<v Speaker 2>every bit of time between now and September before I

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<v Speaker 2>make a judgment and avoid being rigid or predetermined in

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<v Speaker 2>assessing this.

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<v Speaker 1>People talk about the death of forward guidance, and part

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<v Speaker 1>forward guidance has no role at a time where no

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<v Speaker 1>one knows what's going to happen, and it's very hard

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<v Speaker 1>to predetermine what exactly could transpire. At the same time,

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<v Speaker 1>reaction function does seem to be important. And from your

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<v Speaker 1>vantage point, Rob, what would you be looking for to

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<v Speaker 1>see that there is some sort of departure from this

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<v Speaker 1>sort of mess, this muddle, to something that is more

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<v Speaker 1>of a protracted, persistent inflation.

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<v Speaker 2>So the term forward guidance gets used very broadly. What

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<v Speaker 2>it started out as is, I'm going to make a

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<v Speaker 2>current commitment today to a future action BERNANKI used it

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<v Speaker 2>during the Great Recession, we I think overused it in

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<v Speaker 2>the fall of twenty twenty and into twenty one in

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<v Speaker 2>committing to keep rates low until we reach full employment.

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<v Speaker 2>I dissented on that, but I think the FED has

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<v Speaker 2>learned it's less than there and is much more reluctant

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<v Speaker 2>to use that type before a guidance. Now, what forward

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<v Speaker 2>guidance seems to mean is I don't want to over predict.

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<v Speaker 2>I agree with that too, and I always say the

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<v Speaker 2>Fed's job is to be a risk manager, not a prognosticator.

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<v Speaker 2>Having said all that, I do think in the press

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<v Speaker 2>conferences you ought to be able to explain why.

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<v Speaker 3>You made the decision you made.

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<v Speaker 2>And describe what the pros and cons and what the

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<v Speaker 2>debate was. And I would probably like to see that

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<v Speaker 2>more in future press conferences, and I think that would

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<v Speaker 2>illuminate the debate that's going on, and I think that

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<v Speaker 2>would be useful. And I don't think that box is

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<v Speaker 2>in the FED at all.

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<v Speaker 1>Do you think that there's an understanding of the reactionary

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<v Speaker 1>function right now of this Federal Reserve?

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<v Speaker 2>I think the understanding comes from individuals giving speeches about

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<v Speaker 2>their reaction function. And I actually think, in fairness to

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<v Speaker 2>Chair Warrish, he's been gently counseling people on the committee.

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<v Speaker 2>Don't over predict what you're thinking, don't over explain it.

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<v Speaker 2>You're going to box yourself. I actually think that's good advice.

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<v Speaker 2>I think in the future, I think a little bit

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<v Speaker 2>more explanation from the Chair to help frame all this,

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<v Speaker 2>I think would be useful, and I would think and

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<v Speaker 2>hope over the next several months you probably will get that.

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<v Speaker 1>Do you think there's now more emphasis around his jackson

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<v Speaker 1>Hole speech?

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<v Speaker 2>Given all of this, Listen a time fed chair speaks,

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<v Speaker 2>there's a lot of attention. The jackson Ole speech historically

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<v Speaker 2>is a little bit of a five hundred thousand foot

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<v Speaker 2>philosophical speech. I think because of his confirmation hearings and

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<v Speaker 2>what he's done in the first two press conferences you've

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<v Speaker 2>already got and a lot of philosophical views from Chair

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<v Speaker 2>of warsh So I think I think in this speech

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<v Speaker 2>I would give some of the philosophical but I might

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<v Speaker 2>do a little bit of a if it were me,

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<v Speaker 2>and he may not follow this, I might insert four

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<v Speaker 2>sentences to explain why we made the decision in July

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<v Speaker 2>that we made you know, we thought inflation readings were cooling.

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<v Speaker 2>We're aware that this is not an excess demand situation.

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<v Speaker 3>That's my view.

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<v Speaker 2>In the economy, it's more of a supply driven cap

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<v Speaker 2>X driven and in that regard.

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<v Speaker 3>And we have the special situation of the war, and in.

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<v Speaker 2>That regard, a majority of the voters decided on the

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<v Speaker 2>committee decided it would be best to be patient, but

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<v Speaker 2>will remain vigilant. I would insert something like that to

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<v Speaker 2>just so he can get the framing and the July

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<v Speaker 2>decision out there, But that's me.

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

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<v Speaker 2>Going to get any more attention than any other Jackson

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<v Speaker 2>Ole's speech, which always gets a lot of attention.

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<v Speaker 1>Rob, how worried are you about today's thirty year auction

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<v Speaker 1>coming out the twenty five billion dollars or thirty year

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<v Speaker 1>notes sold by the Treasure Department.

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<v Speaker 2>Yeah, so this is where you've got diverging pass There's

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<v Speaker 2>the debate at the FED and g is the FED

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<v Speaker 2>funds rate ultimately need to be somewhat higher. But if

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<v Speaker 2>it needs to be higher, we're talking about over the

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<v Speaker 2>next year to you know, fifty seven I don't know,

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<v Speaker 2>fifty seventy five base points We'll see the FED will

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<v Speaker 2>figure it out. May not be pretty, but they'll figure

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<v Speaker 2>it out. The part that's that I'm struggling with more

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<v Speaker 2>and I think the markets are struggling with the long

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<v Speaker 2>end of the treasury curve. This is true of government

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<v Speaker 2>bond curves globally. I think are struggling with something else.

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<v Speaker 2>They're struggling with supply demand of treasuries. The size of

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<v Speaker 2>these deficits. Are the deficits going to start moderating. In

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<v Speaker 2>a solid economy, you would normally think that deficits would

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<v Speaker 2>moderate somewhat. These deficits are not moderating. And I think

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<v Speaker 2>you're seen a global backup, not just US. Global backup

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<v Speaker 2>of the long end of the curve. Some people have

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<v Speaker 2>attributed to the FED, but I actually don't think so.

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<v Speaker 2>I think this is a different It is a structural dynamic.

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<v Speaker 2>And normally, when the economy weakens, you would typically expect

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<v Speaker 2>the long end of the treasury curved to rally, or

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<v Speaker 2>if there's a geopolitical event, you expect a flight to

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<v Speaker 2>quality in a rally.

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<v Speaker 3>Hasn't been acting as much.

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<v Speaker 2>That way, I would argue in the last year and

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<v Speaker 2>a half two years, I think we have a new

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<v Speaker 2>structural development.

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<v Speaker 3>And I think I think it's appropriate to be wrestling

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<v Speaker 3>with that a little bit.

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<v Speaker 1>Just real quick here, Rob, what would you be more

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<v Speaker 1>bullish on going into the next year, bonsor stocks?

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<v Speaker 2>Well, there is a great earn as you've been reporting,

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<v Speaker 2>and we're seeing it. There is a great earning story

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<v Speaker 2>that's unfolding. And the economy, yes, is being stimulated by

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<v Speaker 2>AI infrastructure. But broadly every company I talk with has

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<v Speaker 2>got twelve to fifteen use cases on AI adoption and

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<v Speaker 2>is optimistic that they're going to find ways to improve margins,

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<v Speaker 2>improve their business, improve productivity. And so I think the

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<v Speaker 2>SMP broad earning story is alive and well for not

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<v Speaker 2>just this year but into the future. I'm a little

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<v Speaker 2>more nervous about whether we can get these deficits under

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<v Speaker 2>control and what's going to happen to the long end

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<v Speaker 2>of the government bond curve.

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<v Speaker 1>Rob, thank you so much for taking the time this morning.

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<v Speaker 1>Always illuminating to speak with you. Goldman SAXFICE Chair Robert

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<v Speaker 1>Kaplan