Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg terminal. We welcome you
Speaker 1: with Shannally bask in a conversation with Goldben Sachs Chief
Speaker 1: executive Officer David Solomon. We note that the gentleman from
Speaker 1: Hamilton College applied to Goldben Sacks a few years ago Chinali,
Speaker 1: and was rejected. That rejected was swept aside over the years,
Speaker 1: and the investment banker replacing Lloyd Blank find about four
Speaker 1: years ago leads Goldben Sacks forward into two thousand twenty
Speaker 1: three at their conference are Chanali Bassk, Tom, thank you
Speaker 1: so much for your time, and David, thank you for
Speaker 1: joining us. You know you have this conference here, you're
Speaker 1: entering your fifth year CEO. You're in such a different
Speaker 1: place than you were even six months ago. Your stock
Speaker 1: is actually holding up better than every single one of
Speaker 1: your rivals. But the reality too is here that everyone
Speaker 1: is preparing for what could be a mild or even
Speaker 1: deeper recession. As the CEO of Goldman Sachs, how do
Speaker 1: you prepare your bank for that? Well, first of all,
Speaker 1: thank you for having me, and I'm delighted to be
Speaker 1: here with you, and I appreciate your being at our
Speaker 1: financial services conference. This is a thirty three year We've
Speaker 1: got a terrific group of clients here and it's a
Speaker 1: great time to kind of reflect on our industry and
Speaker 1: really look at our industry going forward. I think you've
Speaker 1: framed it just just correctly. We're at a very uncertain time.
Speaker 1: Uncertain time given we're changing monetary and economic conditions very
Speaker 1: very quickly, and that's certainly having an impact of slowing
Speaker 1: down economic activity. And so if you're running a big
Speaker 1: financial services firm, I think you have to assume that
Speaker 1: we have some bumpy times ahead and you have to
Speaker 1: be a little bit more cautious with your financial resources,
Speaker 1: with your sizing and the footprint of the organization. I
Speaker 1: think you have to expect that activity levels are going
Speaker 1: to be more constrained in a tougher economic environment. So
Speaker 1: we have businesses that are very very correlated to economic
Speaker 1: growth in the world, and we're predicting economic growth will slow.
Speaker 1: Our Our economists predict one point nine percent economic growth
Speaker 1: around the world uhe, which is obviously slowing growth. And
Speaker 1: the big question is as central banks tighten monetary conditions
Speaker 1: and try to control inflation, can they do that in
Speaker 1: or constrate orchestrate some sort of a soft landing. And I,
Speaker 1: you know, I think that's still uncertain. I think there's
Speaker 1: a possibility of that, but I certainly think we could
Speaker 1: see our session in also, And so I think you've
Speaker 1: got to be cautious and prepare. How then do you
Speaker 1: prepare your staff around all of this. It's December, stand
Speaker 1: of the year. People are worried about jobs, people are
Speaker 1: thinking about jobs, are thinking about pay as well. It's
Speaker 1: bonus season coming up. We've reported that you are even
Speaker 1: thinking about having lower bonuses at businesses that will have
Speaker 1: rising revenue this year. How are you thinking about this?
Speaker 1: Bring us inside your decision making process us and what
Speaker 1: you're telling your staff right now? Well, we we operate
Speaker 1: a business for every single year, UM, we have to
Speaker 1: pay our most important asset, which is our people. It
Speaker 1: shouldn't be surprising to people watching the performance of the
Speaker 1: business this year. That one was an exceptional year. It
Speaker 1: was a record year for the firm, was the highest
Speaker 1: revenue year ever for the firm. Twenty two is a
Speaker 1: different year, and so naturally compensation will be lower. We're
Speaker 1: still early in the process of making those decisions. But
Speaker 1: just like every year, we pay for performance, and we
Speaker 1: will pay people based on the overall performance of the firm,
Speaker 1: and especially for our senior people. Um. You know, we
Speaker 1: we consider the overall performance of the firm as we
Speaker 1: go through our compensation process. How do you balance also,
Speaker 1: you know, this year you've been we introduced the you know,
Speaker 1: the natural calling of head count. The bonus discussion is
Speaker 1: not just here, it's obviously everywhere on Wall Street. How
Speaker 1: do you balance that with kind of the story that
Speaker 1: we saw just a year ago, this talent war, that
Speaker 1: we saw this booming market for people, and what's happening
Speaker 1: this year going into next stend a tougher time. How
Speaker 1: do you balance retention as well as those more difficult conversations. Well,
Speaker 1: we take a very long term view with with everything
Speaker 1: we do, and you have to adjust to the environment
Speaker 1: and so you make changes around the margin. Um. But
Speaker 1: at the same point, you know, you take a long
Speaker 1: term view, and you try to think about your business
Speaker 1: over time. We're extremely focused on serving our clients and
Speaker 1: our core businesses. Our clients have been active, and so
Speaker 1: it's important for us to strike the right balance in
Speaker 1: protecting our franchise and making sure that our people are
Speaker 1: paid for performance. On the other hand, where in an
Speaker 1: environment that's a tougher environment, broadly performance is not as strong,
Speaker 1: and so we balanced that. But we take a long
Speaker 1: term view. Our people take a long term view. But
Speaker 1: I just made some comments in the in the Financial
Speaker 1: Services Forum where I said that I'm surprised by how
Speaker 1: resilient the competition for talent is. And by the way,
Speaker 1: this is just not in our industry. You're seeing across
Speaker 1: the United States and around the world that labor is
Speaker 1: still relatively tight. Talent war is not over talent. Well,
Speaker 1: the talent war is is is um. I think there's
Speaker 1: and headwinds given we're changing economic conditions, but the competition
Speaker 1: for talent is still very very strong. Now. How that
Speaker 1: evolves in is unknown. Certainly, if we have a slower
Speaker 1: economic environment, it will have an effect. You can see
Speaker 1: across all industries, not just tech, that people are thinking
Speaker 1: about their head count size, and they're making let's say,
Speaker 1: pruning cuts or adjustments just because they feel more margin
Speaker 1: pressure coming. So financial services is not immune to that,
Speaker 1: and I think we all have to watch the environment
Speaker 1: and make the right long term decisions for our organizations
Speaker 1: and for our shareholders, whether it's tight counter otherwise. As
Speaker 1: you think about this kind of tough for economic environment
Speaker 1: on certainty, do you think Goldman is going to have
Speaker 1: to pursue another round of cost cuts in any fashion?
Speaker 1: And if that were to be the case, where could
Speaker 1: you see them? Well, we we always look at the environment,
Speaker 1: and we always size the firm to the environment. If
Speaker 1: the environment gets tougher, we will obviously make decisions to
Speaker 1: size the footprint of the firm appropriately. That can come
Speaker 1: from slowing down hiring, which we've already done considerably in
Speaker 1: the second half of the year um and that might
Speaker 1: also come from pruning in certain areas. So switching years
Speaker 1: a little bit here kind of broader financial services picture
Speaker 1: and talent war and whatnot. Last year fintech crypto firms booming.
Speaker 1: I'm curious whether the collapse of f t X is
Speaker 1: making you think in any fashion differently about crypto as
Speaker 1: an industry and the ability to potentially invest in some firms,
Speaker 1: maybe buy some assets here. Well, I've I've been very
Speaker 1: clear on my view around this space. I think the
Speaker 1: underlying technology of blockchain is extremely interesting. I think they're
Speaker 1: enormous opportunities for blockchain to play a role in evolving
Speaker 1: the infrastructure of our financial system. I think there's an
Speaker 1: enormous amount of friction and the way money moves. I
Speaker 1: think there are a variety of ways that this technology
Speaker 1: can be used to allow more participation and inclusive participation
Speaker 1: in financial activities. I think it can break down barriers.
Speaker 1: That has nothing to do with bitcoin or a cryptocurrency.
Speaker 1: I don't I don't really, you know, offer a view
Speaker 1: on on cryptocurrencies. I think they're highly speculative. They may
Speaker 1: hold value, they may not. But I'm interested in the
Speaker 1: underlying technology and how the underlying technology can help serve
Speaker 1: our clients, our customers, and really take friction out of
Speaker 1: the financial system and also help make it more accessible.
Speaker 1: But the reality too is kind of Goldman was pretty
Speaker 1: early in the market here when it came to futures trading,
Speaker 1: when it came to the industry at large. Do you
Speaker 1: think that there's a chance to lean in or is
Speaker 1: there still too many regulatory risks? Were we when when
Speaker 1: you say we're early, we've done a very narrow um
Speaker 1: selection of things around this broad area because from a
Speaker 1: regulatory perspective, we're extremely limited in terms of our participation
Speaker 1: UM and I don't I don't see that changing UM
Speaker 1: in the immediate future. And so we want to be
Speaker 1: available to give our client's advice and insight and how
Speaker 1: we think about some of these things, but our activities
Speaker 1: are extremely limited in the space. I want to take
Speaker 1: a moment to realize it's about to be a big moment.
Speaker 1: You're five, that you're becoming CEO here, that you've been
Speaker 1: running this firm for is there anything you didn't do
Speaker 1: in the first five years that will kind of be
Speaker 1: at the top of your list here to execute as
Speaker 1: you enter this kind of new things. Well, we laid
Speaker 1: out and I know you were there because you've covered
Speaker 1: it as a reporter. In our first investor day three
Speaker 1: years ago, a desire to grow the firm, to diversify
Speaker 1: its revenue base and make it more durable, to operate
Speaker 1: the firm more efficiently, and in particular, we focused on
Speaker 1: the opportunities for us and asset management wealth management, and
Speaker 1: on our recent reorganization, we've now got those businesses together.
Speaker 1: We run the fifth largest active asset manager in the world.
Speaker 1: We have a jewel of a wealth management business, and
Speaker 1: we see real opportunity in the coming years to continue
Speaker 1: to grow that and so we're on a journey to
Speaker 1: diversify the firm. I think the thing that we're most
Speaker 1: proud of over the course of the first few years,
Speaker 1: and I think our team has done an extraordinary job,
Speaker 1: is at the time of that investor day, there was
Speaker 1: a lot of skepticism about our markets franchise, particular Thick franchise,
Speaker 1: the returns we could generate, our client position in that business,
Speaker 1: and we've really strengthened that business. That is a leading
Speaker 1: franchise that's performing very well. We've taken over three basis
Speaker 1: points of market share in that franchise and that's really
Speaker 1: made the firm. It's our biggest business. It's made the
Speaker 1: firm much stronger. How do we really focused. We've really
Speaker 1: focused I'm sorry to it to interrupt you for a second, smile.
Speaker 1: We've really focused on the client experience and making sure
Speaker 1: that the way we serve our clients is really really
Speaker 1: differentiated and we're getting great feedback from from clients on
Speaker 1: that and that strengthening in our business. So we're on
Speaker 1: this journey to diversify the business, to strengthen the business.
Speaker 1: I think we've made a lot of progress, but we
Speaker 1: have a lot of work to do and m and
Speaker 1: we continue to focus on on growing and strengthening the firm.
Speaker 1: So you're leaning into so much of the core of
Speaker 1: Goldman Sacks. A couple of months ago you announced this
Speaker 1: general realignment, let's say, of Marcus and the consumer strategy.
Speaker 1: Do you expect more big changes to be announced a
Speaker 1: head as you have your next big investor day coming up.
Speaker 1: Do you think that you'll have a target here? Do
Speaker 1: you have any sense of when it can become profitable? Well,
Speaker 1: we we made a very purposeful decision in this reorganization,
Speaker 1: which was a significant decision to organize the business into
Speaker 1: three units. Are asset wealth management business, which we were
Speaker 1: just discussing, our banking markets business, which I was highlighting
Speaker 1: the strength of the markets franchise, and obviously our investment
Speaker 1: banking franchise is a is a leading franchise. And we
Speaker 1: took our platform businesses transaction banking, and our consumer platforms,
Speaker 1: and we put them together. We narrowed our focus purposefully
Speaker 1: on our consumer business and tried to align it with
Speaker 1: things that we think really play to our strength, whether
Speaker 1: it's the technology, development of platforms, our relationship to enterprise businesses,
Speaker 1: and also in alignment with our wealth business. With that
Speaker 1: narrowed focus, we're gonna be very very attentive to making
Speaker 1: sure we scale those platforms and they're profitable as quickly
Speaker 1: as possible. David Year five. You look around um all
Speaker 1: corporate America, not just Wall Street really, and you see
Speaker 1: so many companies as they think about succession planning. The
Speaker 1: CEOs have had to come back on multiple occasions. You
Speaker 1: see it at Disney, You've seen it at Carlisle when
Speaker 1: it comes to Golden Sacks. How are you thinking about
Speaker 1: succession planning now as you kind of move into this
Speaker 1: next part of your art. I am, I am, I
Speaker 1: am in your far. I've I've got a great team.
Speaker 1: We're working on all the things we were just talking about,
Speaker 1: and that's what I'm focused on. And there'll be a
Speaker 1: you know, there'll be a time when it will be uh,
Speaker 1: someone else's turn to Steward this great institution that's been
Speaker 1: around for hundred and fifty four years, and at that time,
Speaker 1: you know we'll make the will make the appropriate decisions.
Speaker 1: But for right now, this leadership team is really focused
Speaker 1: on continuing to grow and strength and golden stacks, and
Speaker 1: we feel like we've made a lot of progress, but
Speaker 1: we also feel like there's a lot that we can
Speaker 1: do and we're excited to talk about somewhere that in February.
Speaker 1: I'm looking forward to this investor day. Thank you so
Speaker 1: much for taking time with us on a really big
Speaker 1: day here at Goldman. You said thirty three year conference,
Speaker 1: thirty three years of the conference. Yeah, thank you so much.
Speaker 1: Thank you. It's nice to be with you. Shinali brilliant
Speaker 1: as always. The latest from city term a slowdown to
Speaker 1: a fifty basis point hike in December remains very likely,
Speaker 1: but we should expect FED officials to guide towards higher
Speaker 1: term rates and we maintain our call for another fifty
Speaker 1: basis point high can February had a terminal range of
Speaker 1: to five fifty. And here's the final line with asymmetric
Speaker 1: upside risk, that's the bottom line, sam As City, and
Speaker 1: that is a key determinant, and let us be clear
Speaker 1: here at the end of the year in celebration that Andrew,
Speaker 1: can we all agree Andrew Holland Horst and his team
Speaker 1: the way out from City in Bank America I think
Speaker 1: laughed at in spring of this year when they started
Speaker 1: to talk about how Finns FED might push it. It's
Speaker 1: turned out to be my my My basic take is
Speaker 1: Deutsche Bank had the recession hallway early, and Holland Horst
Speaker 1: had the interest rate vector just absolutely great. Now we
Speaker 1: got an update. Now Mr holland Horst of UCLA joins
Speaker 1: the chief US economist at City Group. Andrew, I'm gonna
Speaker 1: cut to the chase. The fancy math, the ratio math
Speaker 1: of the Bloomberg Financial Conditions Index is not good for Powell.
Speaker 1: Goes against your thesis as well. We are accommodative. It's
Speaker 1: in research notes this morning, Ben laydler over detro notes
Speaker 1: off the Chicago Financial Conditions series as well. How much
Speaker 1: are those measurements going against the chairman of the Fed.
Speaker 1: I think you're right, Tom, it's going in the wrong direction,
Speaker 1: the wrong direction from what share Powell would like to see.
Speaker 1: I watched those conditions every morning, just like you. Just
Speaker 1: like the viewers. And every morning I'm thinking, what is
Speaker 1: Chair Powell thinking when he sees this. I think that's
Speaker 1: true today. I think that was true after his comments
Speaker 1: at the Brookings Institution a week ago, where I think
Speaker 1: he was trying to send a hawkish message or a
Speaker 1: neutral message, and the market took it as stubblished. So
Speaker 1: it's just all more hawkish risk down the line if
Speaker 1: we extend the ex access out. Let's say we do
Speaker 1: that and we do move to a higher nominal rate,
Speaker 1: even more advanced real rates as well. Does that give
Speaker 1: our economy time to get used to a new higher
Speaker 1: rate regime. I think the idea was slowing down is
Speaker 1: it gives the FED a chance to really evaluate in
Speaker 1: real time what has been the effect of raising interest
Speaker 1: rates of tight ending financial conditions. We see that in
Speaker 1: the housing sector. We see a housing sector that's going
Speaker 1: in reverse, house prices that are coming down. That's where
Speaker 1: interest rate policy is very pogent and very effective. The
Speaker 1: issue that this Fed is facing is we have a
Speaker 1: really tight labor market and they're trying to loosen that
Speaker 1: labor market with a really blunt tool, which is interest
Speaker 1: rate policy. Not clear that that's moved far enough yet
Speaker 1: to see that loosening. Andrew, what are we missing? We
Speaker 1: keep thinking that there's going to be a much more
Speaker 1: sustained downturning, Yet the data keeps surprising. John was asking earlier,
Speaker 1: is this economy speeding up for slowing down? We can't
Speaker 1: tell based on some of the recent data. So what
Speaker 1: explains these surprises that we keep getting. So you've seen
Speaker 1: some areas of the economy slow down. We were talking
Speaker 1: about housing, which is going in reverse. Good spending in
Speaker 1: general has been a lot weaker, but really strong services spending.
Speaker 1: And when we keep seeing that spending data that's coming
Speaker 1: in wrong, we think back to all of the savings
Speaker 1: that built up over the last couple of years that's
Speaker 1: coming down. Now. The savings rate is historically low, but
Speaker 1: it looks like there maybe even more of that excess
Speaker 1: savings to work through. You look at credit card balances
Speaker 1: which are rising. That can't continue forever, But remember consumers
Speaker 1: were very under leveled coming into this year, and there's
Speaker 1: a lot of room to grow credit on consumer balance sheets,
Speaker 1: so that process is underway. All of that is stoking
Speaker 1: continued demand, and as long as the demand is out there,
Speaker 1: you're going to see firms that at the very least
Speaker 1: want to hold onto their existing workers. These are hard
Speaker 1: workers to hire. It's been a tight labor market, so again,
Speaker 1: very very hard to loosen that labor market. Andrew, we're
Speaker 1: hearing about white collar workers that are getting laid off first,
Speaker 1: exactly to your point that the rank and file that
Speaker 1: actually make things go on a tangible level are needed
Speaker 1: and necessary. How much do you think that a soft
Speaker 1: landing is pretty much off the table, despite the fact
Speaker 1: that so many people are basically betting on that being
Speaker 1: the outcome. I think we just need to be really
Speaker 1: clear on this, Lisa, and it is an unfortunate reality
Speaker 1: to have to acknowledge, But the likelihood of a soft
Speaker 1: landing is quite low. Yes, it's possible. Yes, there's a
Speaker 1: hopeful scenario where you can get a soft landing, and
Speaker 1: everybody would like to see that, but we need to
Speaker 1: be realistic the balance of the historical evidence, as well
Speaker 1: as the fact that inflation is just running so high
Speaker 1: and it's so difficult to bring down inflation from these levels.
Speaker 1: I think if you acknowledge those facts, and you acknowledge
Speaker 1: that we really do have a wage price spiral here,
Speaker 1: I know that it's very unpopular to say that, but
Speaker 1: there's no question wages are rising, prices are rising, there's
Speaker 1: an expectation that they continue to rise. It's a self
Speaker 1: reinforcing dynamic that is likely going to take a recession
Speaker 1: to bring those inflationary forces back down. At what point
Speaker 1: is a financial accident going to be the trigger to
Speaker 1: some sort of more rapid decline rather than just sort
Speaker 1: of waiting for kodoh, which is what a lot of
Speaker 1: people seem to be doing, and then confirming their experience
Speaker 1: or their expectation, rather for some sort of downturn and
Speaker 1: specific data. I think that's where you're kind of balance
Speaker 1: what's going on in financial markets and what's going on
Speaker 1: in the real economy. So, like we were talking about
Speaker 1: financial conditions tight and very aggressively now loosened from those
Speaker 1: tighter levels, and we've seen the economy slow down in sectors,
Speaker 1: but we haven't seen this broad slowing that's cool demand
Speaker 1: and broad inflation down. So it could be the case
Speaker 1: that financial conditions just continue to tighten further, need to
Speaker 1: continue to tighten further from here, Then the risk that
Speaker 1: there's a more significant breakdown in the financial sector becomes higher.
Speaker 1: I would say that looking at the world today, look
Speaker 1: at the US in particular today, pretty clean consumer balance sheet,
Speaker 1: it's banks that are not over levered as well. All
Speaker 1: of that makes us feel more comfortable about the ability
Speaker 1: of the economy to withstand higher interest rates. But certainly
Speaker 1: those risk rises you continue to find the financial poditions.
Speaker 1: What what drives me nuts here, and maybe it's my
Speaker 1: fossildom is well, do you see what's sounder? Cassidy said
Speaker 1: to me yesterday. Do you want to repeat that for people?
Speaker 1: We missed it? I think because I'm not saying it's
Speaker 1: like if I go home Vett Bill screaming at me
Speaker 1: on the Cassidy the Cassidy diet. We'll talk about that
Speaker 1: in a minute. Andrew, older people like me know that
Speaker 1: we somehow survived a five percent terminal rate. The ut
Speaker 1: of America, including you think we're all gonna die on?
Speaker 1: Can't we survive where we're going to with this city
Speaker 1: group call? Well, there's a really important concept which I
Speaker 1: know we talked about all the time, but it's important
Speaker 1: to emphasize, which is the real interest rate, the nominal
Speaker 1: interest rate minus inflation. And that's really what I think
Speaker 1: fed officials are focusing on more here, and we just
Speaker 1: saw on the wage data wage growth that's five percent
Speaker 1: plus we've known for some time, and the price inflation data,
Speaker 1: price inflation this five percent plus. So when you look
Speaker 1: at that five percent interest rate and you're noting at
Speaker 1: the top we were saying five percent policy rates, five
Speaker 1: and a half percent policy rates with upside risk to that,
Speaker 1: that's because just getting to five percent, we get that
Speaker 1: real rate just back to zero. So if you think
Speaker 1: that real interest rates need to move positive, then the
Speaker 1: Fed would need to move potentially beyond that level. Um
Speaker 1: And to your point, talk in an economy that's running
Speaker 1: high inflation, five percent plus interest rates should not be surprising. Andrey,
Speaker 1: thanks for being with us great core this year, No
Speaker 1: doubt we're talk before year end. Andrew Holland, host there
Speaker 1: of city joining us now, Amy Wuve Silverman. According to
Speaker 1: derivative strategist at RBC Capital Markets, Amy, can we begin
Speaker 1: with a consensus view for next year. Here's a quote
Speaker 1: for you. Evidence of slowing core inflation, peaking official rates,
Speaker 1: and signs of economic recovery should pave the way for
Speaker 1: more risk taking in a second half of I want
Speaker 1: to be clear here, Amy, I'm not picking on any
Speaker 1: single bank. That is the consensus view for next year.
Speaker 1: Do you share it? Yeah? It's interesting because I think
Speaker 1: if you looked at any outlook it would say almost
Speaker 1: the same thing. And when I was in Europe last
Speaker 1: week speaking with clients that is also their view, I
Speaker 1: would say that, you know, it's it's really hard to say.
Speaker 1: The options market when we look at pricing to that
Speaker 1: term structure is sort of fifty fifty. Essentially, you know,
Speaker 1: no one is placing big bets yet that will see this,
Speaker 1: you know, miraculous second half rally. But certainly that's the
Speaker 1: sentiment that is being expressed, but it is nowhere in
Speaker 1: the positioning yet. Amy, Honored to have you with us.
Speaker 1: I've never seen the physics envy I see in this
Speaker 1: year's set of outlooks. You and I can look at
Speaker 1: time series and go Matthew and all that. Guess what
Speaker 1: predicting out the January to me seems as uncertain is
Speaker 1: gaming June or December? How do you interpret not the
Speaker 1: indecision but the pivotness that we see the nodes, the
Speaker 1: points along two thousand twenty three where things are going
Speaker 1: to happen. Who are we kidding? We can't predict that.
Speaker 1: You know, I've been thinking about this a lot, Tom,
Speaker 1: and I think this year, more than any other year
Speaker 1: in the market, has really come down to positioning so much,
Speaker 1: because if you think about it, last year, sentiment wise,
Speaker 1: we were kind of in the same place. You know,
Speaker 1: there was a barish outlook. We knew the FED was
Speaker 1: going to go into a hiking cycle. But you saw
Speaker 1: that in equity skew. You saw that in your favorite word,
Speaker 1: in critosis. Right, we saw so much hedging demand from
Speaker 1: last year at the beginning of this year, and you
Speaker 1: see none this year. Why is the positioning so different
Speaker 1: if the sentiment is the same. I think because people
Speaker 1: remain off sides or they've gone touristing in other markets,
Speaker 1: and you know, equity is just not that there is
Speaker 1: no alternative world anymore. What does the epsilon look like?
Speaker 1: That randomness, that systematic error off the back side of
Speaker 1: the algebra? What is the character of our uncertainty? Are unknown?
Speaker 1: So so here's where I would say I'm quite concerned
Speaker 1: in terms of tales. On the down side, what I've
Speaker 1: heard from a number of clients is a potential systemic
Speaker 1: risk and leverage loans. You're starting to see that, uh,
Speaker 1: you know, specifically in b k L and which is
Speaker 1: the proxy et F. That's a big downside risk. Geopolitics
Speaker 1: continue to play a downside risk Taiwan or Russian Ukraine.
Speaker 1: Now on the upside, it's much more general. People just
Speaker 1: cannot miss rallies. You're seeing this in zero day to
Speaker 1: exprey trading, and that tells me that the reach for
Speaker 1: upside remains the pain trade, even though the sentiment remains parish.
Speaker 1: I think those tails are not priced. Everyone's between thirty
Speaker 1: their price targets, and yet those tales remain something that
Speaker 1: we need to watch for next year. Amy, I'd love
Speaker 1: you to elaborate on those systemic risks, whether it's leverage loans,
Speaker 1: whether it's the private markets, which a lot of people
Speaker 1: have been pointing to, whether it's just interest rate swap
Speaker 1: overlaid currency debt issues that we're seeing our just currency
Speaker 1: swap overlaid on top of debt, and this is something
Speaker 1: the Bank of International Settlements has been pointing to. What
Speaker 1: are you most concerned about? What's the transmission mechanism to
Speaker 1: the broader market that hasn't already yet taken place. So
Speaker 1: I think it's two things. I think you know, especially
Speaker 1: on the credit side, when we speak to credit investors,
Speaker 1: they know these risks are out there. For instance, you
Speaker 1: know if down grades by the rating agencies in the
Speaker 1: fourth quarter of next year caused something and leverage loans.
Speaker 1: I think what the concern is if the positioning, as
Speaker 1: I mentioned prior, is really all to the upside, right,
Speaker 1: so all your demand is sitting on that call wing,
Speaker 1: then you're going to get quite a cycle when people
Speaker 1: start to need to reach for that downside because that
Speaker 1: downside tail, you know, a three standard deviation draw down
Speaker 1: on the market. We measured that with t dex is
Speaker 1: treating in its second percent. Hell over five years. People.
Speaker 1: People are not sitting on tails. You're not using downside
Speaker 1: protection right now, and so when that grab happens, I
Speaker 1: think it'll be quite violent. And when you have the
Speaker 1: VIX now you know, back to a twenty handle, I
Speaker 1: think that can reflate quite quickly. Lisa. I mean something
Speaker 1: I want to finish with is just to give you
Speaker 1: the opportunity to go over something you delivered a number
Speaker 1: of months ago. So a note about why this market
Speaker 1: regime is going to come with more volatility, and that's
Speaker 1: going to stay with this for longer than many people think.
Speaker 1: Amy can we finish that? What are you seeing? And
Speaker 1: what have you seen? Two that you think we need
Speaker 1: to live with? Three and perhaps even beyond. Yeah, you know.
Speaker 1: I think one nuance that people forget because they're so
Speaker 1: fixated on where VIX goes from thirty to forty is
Speaker 1: actually that if you've noticed all year, VIX essentially hasn't
Speaker 1: dropped below twenty. So it's not necessarily that we're spiking
Speaker 1: the higher levels during the pandemic we hit a VIX
Speaker 1: of eighty. It's that our floor has simply gotten higher.
Speaker 1: Our bits is not moving below twenty. And there's a
Speaker 1: result of that, you know, the correlation components of volatility,
Speaker 1: it's a big component to old index. Volatilities has remained
Speaker 1: high and I think will continue to remain high if
Speaker 1: that VIXED floor does not come down from that twenty handle.
Speaker 1: I think we remember the years tom when the floor
Speaker 1: was tent was that four or five years ago? Twice?
Speaker 1: A big change. It's a big, big change, that's for sure.
Speaker 1: It's a big, big change. You know, to under to
Speaker 1: take the rail from a thirty one ish into a
Speaker 1: twenty a better market, a lower vix as well. But
Speaker 1: I really have trouble Frame and John, other than a
Speaker 1: massive bull market, how do you get from twenty to seventeen?
Speaker 1: That that that there's a lot of inertial force that
Speaker 1: has to be overcome. And he's been putting in amy
Speaker 1: thank you for payment to Sami with Silverman that of
Speaker 1: obviously capital markets now a joy Edward Morrise honed hydrocarbon
Speaker 1: analysis in the street at a small shop called Lehman
Speaker 1: Brothers years ago. He did this off of his academic
Speaker 1: work at Princeton, his political economic work on oil over
Speaker 1: many decades, and now hold shop with global head of
Speaker 1: Commodities research at City Group or thrilled he could join
Speaker 1: us today with that the call of the year, Let's
Speaker 1: go the other way. What did the one dollar over
Speaker 1: a barrel? People get wrong? They got wrong, Uh, both
Speaker 1: supply and demand, but more and more on the demand side.
Speaker 1: I mean, this was supposed to be a year depending
Speaker 1: on whose projection you're looking at, that was going to
Speaker 1: continue that five or six percent demand growth post pandemic,
Speaker 1: and it just fritted out, fritted out, largely because it's
Speaker 1: something nobody expected, namely the pace of the slowdowns and
Speaker 1: the recessions emerging in the largest economies in the world, China,
Speaker 1: the US, and obviously Europe. So the demand side really
Speaker 1: is the the big killer on this. Uh, we're looking
Speaker 1: at probably maybe one point seven demand growth this year
Speaker 1: compared to projections of Right. Well, what's interesting add to
Speaker 1: me as the price as we come down and everyone's
Speaker 1: rationalizing along the way to a price point where riod
Speaker 1: reacts or Washington reacts, etcetera. What is the price point
Speaker 1: you have in your head where this becomes painful for
Speaker 1: the oil winners. Uh, Well, the price point when it
Speaker 1: comes really painful, it's going to be below sixty five.
Speaker 1: There's plenty of oil that can be productively, Uh, you know,
Speaker 1: exploited at seventy. We start getting into some fields that
Speaker 1: just don't work at six five. But I guess unbelievably
Speaker 1: painful below fifty five. But we still have and you
Speaker 1: just remarked on it. Uh, the U. S Government having
Speaker 1: indicated it might start buying oil if w t I
Speaker 1: falls below seventy, and I think that's the first test.
Speaker 1: I think OPEC has said, Hey, we're gonna stick to this.
Speaker 1: We're not gonna change forecasts. We're not going to change
Speaker 1: our our our oil projections of what we're putting in
Speaker 1: the market. Maybe evaluate them in February, the next time
Speaker 1: their JMMC, the Monitoring Committee meets. So I think the
Speaker 1: next political move on managing the market will be up
Speaker 1: to the US, up to the U S. How so,
Speaker 1: what are you looking for? Well, I I I go
Speaker 1: back to the President's point that at seventy dollars a
Speaker 1: barrel they can start buying back oil for the strategic reserve,
Speaker 1: and that's meant as an encouragement to the industry to
Speaker 1: keep drilling and to keep producing. So well, it'll be
Speaker 1: a test to see what happens and whether the President
Speaker 1: is serious about this, thinks that, hey, maybe this is
Speaker 1: the time when we're really getting off of oil because
Speaker 1: demand for it may be falling faster than people thought.
Speaker 1: Why are we talking about the downside surprise at a
Speaker 1: time when China is potentially reopening, when these headlines don't
Speaker 1: seem to be moving the needle at all, even though
Speaker 1: this is definitely a big concern and people thought that
Speaker 1: perhaps it could send oil prices two a barrel on Brent. Well,
Speaker 1: I take exception to that you know, we had the
Speaker 1: China news that really did move the market and moved
Speaker 1: the market up but a little bit higher than the
Speaker 1: fundamentals warranted. And now we're having the good news in
Speaker 1: the US, the good news about the economy, which is
Speaker 1: really bad news in terms of the commodity markets because
Speaker 1: it indicates that the FED is going to keep going
Speaker 1: and raising the prices at the prior level that people thought.
Speaker 1: So the dollar gets more expensive, the economy slows down more,
Speaker 1: and demand for oil fall. So I think that the
Speaker 1: market is responding to news. It's just today's news is
Speaker 1: the good news in the US. Last week's news was
Speaker 1: the good news in China. But it's also this wee
Speaker 1: this week that we're getting some news about China perhaps
Speaker 1: loosening some of the testing requirements in Beijing after reducing
Speaker 1: them in Shanghai just yesterday. How much does this sort
Speaker 1: of come together and something that does accelerate demand more
Speaker 1: than perhaps the base case, or is that not even
Speaker 1: on the table because of how much the Russian barrels
Speaker 1: are coming back on. I just am not understanding the
Speaker 1: price action at all right now, based on some of
Speaker 1: the narratives people have been saying for a while. Well,
Speaker 1: the first thing you have to remember about the price
Speaker 1: action is liquidity is dried up even more than it
Speaker 1: already dried up. People are fleeing the market because of
Speaker 1: the level of market uncertainty and because we're getting towards
Speaker 1: the end of the year, and those who made money
Speaker 1: this year don't want to lose any come the end
Speaker 1: of the year. So liquidity has dried up. And when
Speaker 1: liquidity drives up, you get an incredible volatility coming out
Speaker 1: in the market. I think that's a very important point.
Speaker 1: The second point is the uncertainty about Russian oil. Uh.
Speaker 1: We thought that there was going to be a significant
Speaker 1: increase in demand for oil from other sources as you're
Speaker 1: moved off of Russian oil. We actually had that, and
Speaker 1: it was an incredible increase in exports out of the
Speaker 1: United States. A week ago the print was about eleven million,
Speaker 1: seven hundred thousand barrels a day of gross exports and
Speaker 1: crude oil and petroleum products out of the US. The
Speaker 1: US has been replacing those Russian varils, and uh, you know,
Speaker 1: we've had our inventories fall on the crude side, but
Speaker 1: they're rising on the product side. You know, this was
Speaker 1: supposed to be a period of time when diesel demand
Speaker 1: was going to be high and diesel cracks we're gonna
Speaker 1: stay at forty And now diesel cracks are going down
Speaker 1: and we're actually building an inventory. So the data mixed,
Speaker 1: but they're they're you know, they're to equally Barrishes, they are,
Speaker 1: and Morris, I want to touch back on your years
Speaker 1: of work with Woodrow Wilson at Princeton and Johns Hopkins
Speaker 1: and the rest as well. We have a miracle happening
Speaker 1: to the President of the United States is going to
Speaker 1: attempt to turn the inertial force of globalization on its
Speaker 1: ear by traveling out to Arizona where we're gonna build semiconductors.
Speaker 1: From where you sit with your decades of experience, can
Speaker 1: we be successful in stealing back manufacturing processes from around
Speaker 1: the world. Actually, I think we can, and you mentioned
Speaker 1: a deglobalization. Effectively, we're not gonna see trade growing the
Speaker 1: way it did in the in the go go years.
Speaker 1: In we're seeing all three major economies, China, the US,
Speaker 1: and Europe putting blockages on trade and being a little
Speaker 1: bit protective here. There's a coincidence of interest between the
Speaker 1: US and Europe based on what the Europeans are calling
Speaker 1: their sea BAM UH, their carbon border adjustment mechanism. Having
Speaker 1: the US effectively putting the same sea BAM on China
Speaker 1: helps them competitively. So there's a commonality of interest there.
Speaker 1: China is pulling back on trade because of energy security
Speaker 1: issues and you might say commodity security issues, and one
Speaker 1: more made at home or more important, not by seaboard trade,
Speaker 1: but by on land trade. Hence the Belton Road initiative,
Speaker 1: hence the pipelines from Russia and the like. So we're
Speaker 1: seeing all three major economies pulling back from globalization, getting
Speaker 1: those supply chains at home. And I think that's an
Speaker 1: important shift that's going to dominate the next decade. And
Speaker 1: I just want to squeeze is saying, just to blend
Speaker 1: two stories, she and rhyat this week. What are you
Speaker 1: expecting from that mating. The one thing you can expect is,
Speaker 1: you know, greater ties on the oil market side. UH.
Speaker 1: China and the Saudis already have an agreement and putting
Speaker 1: in new refining, testing out the Saudi technology to convert
Speaker 1: oil directly into petrochemicals. UH. Petrochemicals is where the growth
Speaker 1: and demand is going to be the Saudis have an
Speaker 1: answer there. So so I think it's gonna be partly
Speaker 1: about the world, partly about new alignance alignments. The lot
Speaker 1: the alignments are not gonna, you know, be totally solidly
Speaker 1: moving to the to the east. For the Saudis, if
Speaker 1: you look at where their interests are in terms of
Speaker 1: UH issuing bombs, in terms of putting out shares on
Speaker 1: the I p o s of their state owned enterprises.
Speaker 1: They can't go away from London and New York. They
Speaker 1: can't get what they can get in London and New
Speaker 1: York provided by either Moscow or Beijing. But it is
Speaker 1: a move solidifying UH that line of of purchasing of oil.
Speaker 1: The Saudis are there to provide oil that is kind
Speaker 1: of under the table. It's meant to go into into
Speaker 1: strategic stocks. The Chinese want as the prices go down,
Speaker 1: to get their strategic stockpile built up to the level
Speaker 1: they want. They have Russia that's selling oil at a
Speaker 1: distress and they're saying, well they can get through the
Speaker 1: Saturdays as well. At wonderful to catch up with you,
Speaker 1: I'm wonderful co in the last couple of months and
Speaker 1: most that and I'm not gonn immnce words. This is
Speaker 1: newly meanted at the Keene household. I feel lucky to
Speaker 1: have this. This is the fancy iPhone for those of
Speaker 1: you on radio. It's a what we call Faraoh purple
Speaker 1: and it's yeah, it's like sort of like the Tots uniform,
Speaker 1: the kit that they have cared with the awake thank you,
Speaker 1: But um, I feel lucky to have this. Demand is
Speaker 1: so great that it's hard to find. Yeah, I had
Speaker 1: to wait like weeks and the answer is they want
Speaker 1: to bring the stuff in here, the Magic Canny Year
Speaker 1: over to America. That's all there is to it. Very cool.
Speaker 1: We're gonna talk about that Today. Tim Cook of Apple
Speaker 1: and other worthies will join the President of the United
Speaker 1: States in Barry Goldwaters, Arizona. There's a calculus here of
Speaker 1: science and technology, chips and security. Brian Deese, the Director
Speaker 1: of National Economic Council for the President, is with us
Speaker 1: for an early morning brief before he travels to Arizona.
Speaker 1: I want to get right to the political economics of this, Brian,
Speaker 1: that you studied at Middlebury, which is low and behold
Speaker 1: a democratic runaway in Arizona. Hearkening back to even nineteen fifty.
Speaker 1: If the president moves for investment, does that bring democratic votes?
Speaker 1: I mean, is this a political victory lab for the
Speaker 1: president as well as a science victory lap Well, the
Speaker 1: most impactful thing I've learned today is your color choices, Tom,
Speaker 1: But what this is today is a big milestone for
Speaker 1: the country for economic and national security reasons, as you said,
Speaker 1: inside that iPhone, but also importantly inside military applications. Inside
Speaker 1: our most advanced computing applications are these leading edge semiconductors,
Speaker 1: and today we produced none of them in the United
Speaker 1: States zero. So t SMC's announcement today, he signals the
Speaker 1: beginning of building out that American supply chain. And the
Speaker 1: other thing we're gonna be doing in Phoenix, though, is
Speaker 1: underscoring that we're seeing this across the board. It's not
Speaker 1: just in semiconductors, it's in clean energy innovation. It's an
Speaker 1: upgrading infrastructure. So you see across the Phoenix area big
Speaker 1: investments in electric vehicle batteries, in um in in the
Speaker 1: fiber that will lay for broadband across the country. That
Speaker 1: does bring big economic benefits and I think a renewed
Speaker 1: sense of economic optimism to places like Phoenix, there has
Speaker 1: to be an inertial tip point where you push against
Speaker 1: all the foreign manufacture. What is your timeline, Brian? I mean,
Speaker 1: let's be honest, we're really not moving the global semiconductor needle.
Speaker 1: Here Out there, somewhere is where America gets a critical
Speaker 1: mass and manufacturing these complex processes, including lithium batteries. How
Speaker 1: long is it des timeline to get to where we
Speaker 1: move the semiconductor needle. Well, look, these are big projects
Speaker 1: and the key in this industry is scale, so that
Speaker 1: doesn't happen overnight. Building one of these fabs, like the
Speaker 1: President will see today, is a very complicated, multi year process.
Speaker 1: But the good news is that we now have enacted
Speaker 1: these long term incentives, and I think that's one of
Speaker 1: the key pieces to understand about what we accomplished legislatively
Speaker 1: here in both clean energy and semiconductors. We now have
Speaker 1: incentives in place for multiple years, a decade really, and
Speaker 1: that gives private companies and private capital the ability to
Speaker 1: move in and move quickly. A lot of people say, well,
Speaker 1: but you know, we may not see the benefits of
Speaker 1: this for a couple of years, but we're seeing it
Speaker 1: right now and companies pulling forward investment and deciding to
Speaker 1: invest in the United States. So while the full timeline
Speaker 1: to build out the supply chain to produce chips here
Speaker 1: in the United States, to produce batters here in the
Speaker 1: United States, that's a multi year project, we are seeing
Speaker 1: in ways that a lot of people didn't think was
Speaker 1: possible activity and that activity will result in economic opportunity
Speaker 1: in right. How concerned are you? How concerned is the
Speaker 1: President with some of the tension that this has caused
Speaker 1: with European allies who say that this is investment not
Speaker 1: going into Europe, that this is anti competitive and really
Speaker 1: draws a lot more dollars to the US and a
Speaker 1: lot more of the tech industry. Well, the President had
Speaker 1: a good conversation with President McCrone on that topic and
Speaker 1: other European leaders as well. A couple of points. The
Speaker 1: first is the President makes no apology for the fact
Speaker 1: that his economic strategy is focused on generating more economic opportunity,
Speaker 1: more economic security, and resilience for our economy and our workers.
Speaker 1: At the same time, the opportunity globally for the US
Speaker 1: leadership in these areas is quite significant. You know, in
Speaker 1: semiconductors and energy, these are areas where the world is
Speaker 1: short supply. We need more electric vehicle batteries globally, we
Speaker 1: need more semiconductors globally. So when the United States invests
Speaker 1: pulls forward innovation that lowers cost, that makes it easier
Speaker 1: to deploy in other jurisdictions as well. So certainly we're
Speaker 1: gonna work with our partners and allies. Where there are concerns,
Speaker 1: we can sit down and talk about them. But the
Speaker 1: President's strategy here an industrial strategy to make the United
Speaker 1: States and attractive place to invest but also pull forward
Speaker 1: innovation reduced cost, is one that will have benefits for
Speaker 1: the whole world. One of the problems with creating some
Speaker 1: of these policies historically has been that it has to
Speaker 1: be a longer term basis for that investment to bear fruit,
Speaker 1: for those factories to actually take a stance. How important
Speaker 1: is consistency. And I say this at a time when
Speaker 1: President Biden Ron Clean was talking about this in the
Speaker 1: past couple of days is expected to announce a running
Speaker 1: again and members of the Economic Council Cecilia Rouse I
Speaker 1: know has talked about leaving the Council and others I
Speaker 1: know that there have been rumors about yourself. How much
Speaker 1: is that implore into was kind of keeping things on
Speaker 1: the rails. Well, you're raising a really important point, which is,
Speaker 1: if we're going to provide long term incentives and certainty
Speaker 1: for private capital to invest here in the United States,
Speaker 1: we need policy certainty. But one of the important elements
Speaker 1: of what we got done over the course of the
Speaker 1: past year is that most of what we passed has
Speaker 1: broad bipartisan support. It certainly has bryan partisan support outside Washington.
Speaker 1: You look at the Chips and Science Act, it had
Speaker 1: brought bipartisan support in Congress as well. You've got Democrats
Speaker 1: and Republicans, but also people business leaders from across the country,
Speaker 1: from the center of the country, from the coast, all
Speaker 1: kind of buying into this idea that having the United
Speaker 1: States as a leader in clean energy manufacturing, a leader
Speaker 1: in semiconductor production, that is a worthwhile, long term national
Speaker 1: investment that will help provide that stability that private investors need.
Speaker 1: You know, Brian, I love that you were wearing Hugo
Speaker 1: Boss to the State dinner or the other night with
Speaker 1: Mr McCraw and all. You're enjoying your Rouge River Blue cheese.
Speaker 1: Let me cut to the Chase Brian, how's our trade
Speaker 1: relationship with the French? As we talk about the technology
Speaker 1: and all that, how are we doing? Look, I think
Speaker 1: the relationship as a whole is very strong and certainly
Speaker 1: undergirded by a great state visit, and it's always important
Speaker 1: when the two leaders have an opportunity to really sit
Speaker 1: with each other, spend time, break bread, and that happens
Speaker 1: here we have. Look, you know, we have our challenges,
Speaker 1: but we also are able as to two countries to
Speaker 1: lift up. And there were really poignant moments, for example
Speaker 1: at the state dinner with the toasts of the two leaders,
Speaker 1: marking just how our two countries have been there for
Speaker 1: each other when it really matters. And obviously with Ukraine
Speaker 1: UH and the fight in Europe, the United States is
Speaker 1: proving once again that it's a reliable ally. We're gonna
Speaker 1: have our concerns, We're gonna have the issues that we're
Speaker 1: going to discuss, but you know, overall, I think the
Speaker 1: relationship is quite in a quite a strong place. Can
Speaker 1: you confirm it was actually a hugo boss? I think
Speaker 1: it was in the building. I was in the building
Speaker 1: and I can confirm definitively it wasn't here go, Brian,
Speaker 1: can you confirm definitively is staying with the administration? Can
Speaker 1: we wrap that one up? I can confirm that I'm
Speaker 1: totally focused on the work we have to do. We
Speaker 1: have a lot to do here between now and the
Speaker 1: end of the year. That's where my focus is. I
Speaker 1: can confirm you kind of touch that one. But Brian,
Speaker 1: fantastic to catch up with, he said, thanks for it
Speaker 1: time this morning. We appreciate it. On AC Council, this
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
Speaker 1: live weekdays from seven to ten am Eastern. I'm Bloomberg
Speaker 1: Radio and on Bloomberg Television each day from six to
Speaker 1: nine am for insight from the best and economics, finance, investment,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on
Speaker 1: the terminal. I'm Tom Keene and this is Bloomberg