WEBVTT - Surveillance: Goldman CEO: Bumpy Times Ahead 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.720 and of course, on the Bloomberg terminal. We welcome you 0:00:30.080 --> 0:00:34.160 with Shannally bask in a conversation with Goldben Sachs Chief 0:00:34.240 --> 0:00:37.880 executive Officer David Solomon. We note that the gentleman from 0:00:37.880 --> 0:00:42.640 Hamilton College applied to Goldben Sacks a few years ago Chinali, 0:00:43.440 --> 0:00:47.360 and was rejected. That rejected was swept aside over the years, 0:00:47.640 --> 0:00:51.480 and the investment banker replacing Lloyd Blank find about four 0:00:51.560 --> 0:00:55.680 years ago leads Goldben Sacks forward into two thousand twenty 0:00:55.680 --> 0:00:59.360 three at their conference are Chanali Bassk, Tom, thank you 0:00:59.520 --> 0:01:02.080 so much for your time, and David, thank you for 0:01:02.200 --> 0:01:04.720 joining us. You know you have this conference here, you're 0:01:04.840 --> 0:01:07.399 entering your fifth year CEO. You're in such a different 0:01:07.400 --> 0:01:09.479 place than you were even six months ago. Your stock 0:01:09.520 --> 0:01:11.480 is actually holding up better than every single one of 0:01:11.520 --> 0:01:14.520 your rivals. But the reality too is here that everyone 0:01:14.640 --> 0:01:17.120 is preparing for what could be a mild or even 0:01:17.160 --> 0:01:20.560 deeper recession. As the CEO of Goldman Sachs, how do 0:01:20.600 --> 0:01:23.160 you prepare your bank for that? Well, first of all, 0:01:23.160 --> 0:01:24.880 thank you for having me, and I'm delighted to be 0:01:24.920 --> 0:01:26.600 here with you, and I appreciate your being at our 0:01:26.760 --> 0:01:29.640 financial services conference. This is a thirty three year We've 0:01:29.680 --> 0:01:31.399 got a terrific group of clients here and it's a 0:01:31.400 --> 0:01:33.480 great time to kind of reflect on our industry and 0:01:33.520 --> 0:01:36.360 really look at our industry going forward. I think you've 0:01:36.360 --> 0:01:39.160 framed it just just correctly. We're at a very uncertain time. 0:01:39.760 --> 0:01:43.040 Uncertain time given we're changing monetary and economic conditions very 0:01:43.120 --> 0:01:46.119 very quickly, and that's certainly having an impact of slowing 0:01:46.120 --> 0:01:48.560 down economic activity. And so if you're running a big 0:01:48.560 --> 0:01:52.760 financial services firm, I think you have to assume that 0:01:52.920 --> 0:01:55.120 we have some bumpy times ahead and you have to 0:01:55.120 --> 0:01:57.560 be a little bit more cautious with your financial resources, 0:01:57.880 --> 0:02:00.440 with your sizing and the footprint of the organization. I 0:02:00.440 --> 0:02:02.680 think you have to expect that activity levels are going 0:02:02.720 --> 0:02:05.840 to be more constrained in a tougher economic environment. So 0:02:06.200 --> 0:02:09.040 we have businesses that are very very correlated to economic 0:02:09.080 --> 0:02:12.160 growth in the world, and we're predicting economic growth will slow. 0:02:12.200 --> 0:02:15.000 Our Our economists predict one point nine percent economic growth 0:02:15.000 --> 0:02:19.320 around the world uhe, which is obviously slowing growth. And 0:02:19.360 --> 0:02:23.000 the big question is as central banks tighten monetary conditions 0:02:23.000 --> 0:02:25.600 and try to control inflation, can they do that in 0:02:25.720 --> 0:02:28.520 or constrate orchestrate some sort of a soft landing. And I, 0:02:28.600 --> 0:02:30.160 you know, I think that's still uncertain. I think there's 0:02:30.160 --> 0:02:32.560 a possibility of that, but I certainly think we could 0:02:32.560 --> 0:02:34.880 see our session in also, And so I think you've 0:02:34.880 --> 0:02:38.040 got to be cautious and prepare. How then do you 0:02:38.080 --> 0:02:41.959 prepare your staff around all of this. It's December, stand 0:02:42.000 --> 0:02:43.880 of the year. People are worried about jobs, people are 0:02:43.880 --> 0:02:46.959 thinking about jobs, are thinking about pay as well. It's 0:02:46.960 --> 0:02:50.880 bonus season coming up. We've reported that you are even 0:02:50.919 --> 0:02:54.920 thinking about having lower bonuses at businesses that will have 0:02:55.080 --> 0:02:58.200 rising revenue this year. How are you thinking about this? 0:02:58.240 --> 0:03:00.880 Bring us inside your decision making process us and what 0:03:00.960 --> 0:03:04.440 you're telling your staff right now? Well, we we operate 0:03:04.480 --> 0:03:07.480 a business for every single year, UM, we have to 0:03:07.480 --> 0:03:10.120 pay our most important asset, which is our people. It 0:03:10.160 --> 0:03:13.320 shouldn't be surprising to people watching the performance of the 0:03:13.360 --> 0:03:17.079 business this year. That one was an exceptional year. It 0:03:17.200 --> 0:03:19.600 was a record year for the firm, was the highest 0:03:19.639 --> 0:03:22.880 revenue year ever for the firm. Twenty two is a 0:03:22.880 --> 0:03:26.480 different year, and so naturally compensation will be lower. We're 0:03:26.520 --> 0:03:28.920 still early in the process of making those decisions. But 0:03:29.000 --> 0:03:31.600 just like every year, we pay for performance, and we 0:03:31.639 --> 0:03:34.360 will pay people based on the overall performance of the firm, 0:03:34.360 --> 0:03:37.480 and especially for our senior people. Um. You know, we 0:03:37.480 --> 0:03:39.920 we consider the overall performance of the firm as we 0:03:39.960 --> 0:03:43.160 go through our compensation process. How do you balance also, 0:03:43.240 --> 0:03:45.760 you know, this year you've been we introduced the you know, 0:03:45.800 --> 0:03:48.920 the natural calling of head count. The bonus discussion is 0:03:48.920 --> 0:03:51.520 not just here, it's obviously everywhere on Wall Street. How 0:03:51.560 --> 0:03:53.200 do you balance that with kind of the story that 0:03:53.200 --> 0:03:55.360 we saw just a year ago, this talent war, that 0:03:55.400 --> 0:03:58.960 we saw this booming market for people, and what's happening 0:03:59.000 --> 0:04:01.240 this year going into next stend a tougher time. How 0:04:01.240 --> 0:04:05.480 do you balance retention as well as those more difficult conversations. Well, 0:04:05.520 --> 0:04:08.080 we take a very long term view with with everything 0:04:08.120 --> 0:04:10.920 we do, and you have to adjust to the environment 0:04:10.920 --> 0:04:13.520 and so you make changes around the margin. Um. But 0:04:13.600 --> 0:04:15.200 at the same point, you know, you take a long 0:04:15.320 --> 0:04:17.599 term view, and you try to think about your business 0:04:17.680 --> 0:04:20.320 over time. We're extremely focused on serving our clients and 0:04:20.360 --> 0:04:23.520 our core businesses. Our clients have been active, and so 0:04:23.560 --> 0:04:26.120 it's important for us to strike the right balance in 0:04:26.560 --> 0:04:30.480 protecting our franchise and making sure that our people are 0:04:30.480 --> 0:04:32.960 paid for performance. On the other hand, where in an 0:04:33.040 --> 0:04:36.400 environment that's a tougher environment, broadly performance is not as strong, 0:04:36.440 --> 0:04:38.040 and so we balanced that. But we take a long 0:04:38.120 --> 0:04:40.680 term view. Our people take a long term view. But 0:04:40.720 --> 0:04:43.080 I just made some comments in the in the Financial 0:04:43.120 --> 0:04:46.200 Services Forum where I said that I'm surprised by how 0:04:46.240 --> 0:04:48.520 resilient the competition for talent is. And by the way, 0:04:48.520 --> 0:04:50.560 this is just not in our industry. You're seeing across 0:04:50.839 --> 0:04:53.560 the United States and around the world that labor is 0:04:53.600 --> 0:04:56.320 still relatively tight. Talent war is not over talent. Well, 0:04:56.440 --> 0:04:59.960 the talent war is is is um. I think there's 0:05:00.000 --> 0:05:03.560 and headwinds given we're changing economic conditions, but the competition 0:05:03.600 --> 0:05:05.520 for talent is still very very strong. Now. How that 0:05:05.560 --> 0:05:09.080 evolves in is unknown. Certainly, if we have a slower 0:05:09.080 --> 0:05:12.279 economic environment, it will have an effect. You can see 0:05:12.320 --> 0:05:15.560 across all industries, not just tech, that people are thinking 0:05:15.560 --> 0:05:18.640 about their head count size, and they're making let's say, 0:05:18.640 --> 0:05:21.520 pruning cuts or adjustments just because they feel more margin 0:05:21.600 --> 0:05:24.400 pressure coming. So financial services is not immune to that, 0:05:24.440 --> 0:05:26.120 and I think we all have to watch the environment 0:05:26.160 --> 0:05:29.160 and make the right long term decisions for our organizations 0:05:29.160 --> 0:05:31.520 and for our shareholders, whether it's tight counter otherwise. As 0:05:31.560 --> 0:05:33.600 you think about this kind of tough for economic environment 0:05:33.680 --> 0:05:35.640 on certainty, do you think Goldman is going to have 0:05:35.760 --> 0:05:38.799 to pursue another round of cost cuts in any fashion? 0:05:38.960 --> 0:05:41.000 And if that were to be the case, where could 0:05:41.040 --> 0:05:43.960 you see them? Well, we we always look at the environment, 0:05:43.960 --> 0:05:45.920 and we always size the firm to the environment. If 0:05:45.920 --> 0:05:49.040 the environment gets tougher, we will obviously make decisions to 0:05:49.080 --> 0:05:51.640 size the footprint of the firm appropriately. That can come 0:05:51.680 --> 0:05:54.599 from slowing down hiring, which we've already done considerably in 0:05:54.640 --> 0:05:56.600 the second half of the year um and that might 0:05:56.720 --> 0:06:00.240 also come from pruning in certain areas. So switching years 0:06:00.240 --> 0:06:03.000 a little bit here kind of broader financial services picture 0:06:03.000 --> 0:06:07.600 and talent war and whatnot. Last year fintech crypto firms booming. 0:06:08.040 --> 0:06:11.080 I'm curious whether the collapse of f t X is 0:06:11.160 --> 0:06:14.440 making you think in any fashion differently about crypto as 0:06:14.480 --> 0:06:19.120 an industry and the ability to potentially invest in some firms, 0:06:19.160 --> 0:06:22.680 maybe buy some assets here. Well, I've I've been very 0:06:22.680 --> 0:06:25.120 clear on my view around this space. I think the 0:06:25.160 --> 0:06:29.159 underlying technology of blockchain is extremely interesting. I think they're 0:06:29.240 --> 0:06:33.760 enormous opportunities for blockchain to play a role in evolving 0:06:34.240 --> 0:06:37.440 the infrastructure of our financial system. I think there's an 0:06:37.520 --> 0:06:40.160 enormous amount of friction and the way money moves. I 0:06:40.200 --> 0:06:43.040 think there are a variety of ways that this technology 0:06:43.080 --> 0:06:46.160 can be used to allow more participation and inclusive participation 0:06:46.640 --> 0:06:49.280 in financial activities. I think it can break down barriers. 0:06:49.600 --> 0:06:52.840 That has nothing to do with bitcoin or a cryptocurrency. 0:06:52.920 --> 0:06:55.480 I don't I don't really, you know, offer a view 0:06:55.480 --> 0:06:58.760 on on cryptocurrencies. I think they're highly speculative. They may 0:06:58.800 --> 0:07:00.880 hold value, they may not. But I'm interested in the 0:07:00.920 --> 0:07:04.440 underlying technology and how the underlying technology can help serve 0:07:04.480 --> 0:07:07.360 our clients, our customers, and really take friction out of 0:07:07.360 --> 0:07:10.120 the financial system and also help make it more accessible. 0:07:10.240 --> 0:07:12.400 But the reality too is kind of Goldman was pretty 0:07:12.400 --> 0:07:14.800 early in the market here when it came to futures trading, 0:07:14.880 --> 0:07:17.080 when it came to the industry at large. Do you 0:07:17.120 --> 0:07:19.080 think that there's a chance to lean in or is 0:07:19.120 --> 0:07:22.040 there still too many regulatory risks? Were we when when 0:07:22.040 --> 0:07:26.320 you say we're early, we've done a very narrow um 0:07:26.560 --> 0:07:30.440 selection of things around this broad area because from a 0:07:30.480 --> 0:07:34.160 regulatory perspective, we're extremely limited in terms of our participation 0:07:34.680 --> 0:07:37.440 UM and I don't I don't see that changing UM 0:07:37.440 --> 0:07:39.680 in the immediate future. And so we want to be 0:07:39.720 --> 0:07:42.360 available to give our client's advice and insight and how 0:07:42.360 --> 0:07:45.240 we think about some of these things, but our activities 0:07:45.280 --> 0:07:48.040 are extremely limited in the space. I want to take 0:07:48.040 --> 0:07:50.000 a moment to realize it's about to be a big moment. 0:07:50.040 --> 0:07:52.480 You're five, that you're becoming CEO here, that you've been 0:07:52.560 --> 0:07:55.040 running this firm for is there anything you didn't do 0:07:55.080 --> 0:07:57.000 in the first five years that will kind of be 0:07:57.000 --> 0:07:58.800 at the top of your list here to execute as 0:07:58.840 --> 0:08:01.560 you enter this kind of new things. Well, we laid 0:08:01.640 --> 0:08:03.360 out and I know you were there because you've covered 0:08:03.360 --> 0:08:05.560 it as a reporter. In our first investor day three 0:08:05.640 --> 0:08:09.040 years ago, a desire to grow the firm, to diversify 0:08:09.080 --> 0:08:12.080 its revenue base and make it more durable, to operate 0:08:12.080 --> 0:08:14.960 the firm more efficiently, and in particular, we focused on 0:08:14.960 --> 0:08:18.280 the opportunities for us and asset management wealth management, and 0:08:18.280 --> 0:08:21.600 on our recent reorganization, we've now got those businesses together. 0:08:21.640 --> 0:08:24.240 We run the fifth largest active asset manager in the world. 0:08:24.560 --> 0:08:26.440 We have a jewel of a wealth management business, and 0:08:26.440 --> 0:08:29.240 we see real opportunity in the coming years to continue 0:08:29.240 --> 0:08:31.240 to grow that and so we're on a journey to 0:08:31.320 --> 0:08:34.040 diversify the firm. I think the thing that we're most 0:08:34.080 --> 0:08:36.520 proud of over the course of the first few years, 0:08:36.520 --> 0:08:38.440 and I think our team has done an extraordinary job, 0:08:39.040 --> 0:08:41.199 is at the time of that investor day, there was 0:08:41.240 --> 0:08:46.000 a lot of skepticism about our markets franchise, particular Thick franchise, 0:08:46.040 --> 0:08:49.000 the returns we could generate, our client position in that business, 0:08:49.440 --> 0:08:51.880 and we've really strengthened that business. That is a leading 0:08:51.920 --> 0:08:55.720 franchise that's performing very well. We've taken over three basis 0:08:55.720 --> 0:08:58.000 points of market share in that franchise and that's really 0:08:58.000 --> 0:09:00.120 made the firm. It's our biggest business. It's made the 0:09:00.160 --> 0:09:03.240 firm much stronger. How do we really focused. We've really 0:09:03.240 --> 0:09:05.240 focused I'm sorry to it to interrupt you for a second, smile. 0:09:05.280 --> 0:09:09.520 We've really focused on the client experience and making sure 0:09:09.559 --> 0:09:11.920 that the way we serve our clients is really really 0:09:11.920 --> 0:09:14.760 differentiated and we're getting great feedback from from clients on 0:09:14.800 --> 0:09:16.800 that and that strengthening in our business. So we're on 0:09:16.840 --> 0:09:20.080 this journey to diversify the business, to strengthen the business. 0:09:20.120 --> 0:09:21.559 I think we've made a lot of progress, but we 0:09:21.600 --> 0:09:23.320 have a lot of work to do and m and 0:09:23.360 --> 0:09:26.520 we continue to focus on on growing and strengthening the firm. 0:09:26.600 --> 0:09:28.480 So you're leaning into so much of the core of 0:09:28.480 --> 0:09:31.600 Goldman Sacks. A couple of months ago you announced this 0:09:31.720 --> 0:09:35.760 general realignment, let's say, of Marcus and the consumer strategy. 0:09:35.840 --> 0:09:38.319 Do you expect more big changes to be announced a 0:09:38.400 --> 0:09:41.880 head as you have your next big investor day coming up. 0:09:42.440 --> 0:09:44.719 Do you think that you'll have a target here? Do 0:09:44.760 --> 0:09:47.720 you have any sense of when it can become profitable? Well, 0:09:47.760 --> 0:09:51.400 we we made a very purposeful decision in this reorganization, 0:09:51.400 --> 0:09:55.240 which was a significant decision to organize the business into 0:09:55.800 --> 0:09:58.640 three units. Are asset wealth management business, which we were 0:09:58.679 --> 0:10:01.920 just discussing, our banking markets business, which I was highlighting 0:10:01.960 --> 0:10:04.440 the strength of the markets franchise, and obviously our investment 0:10:04.480 --> 0:10:07.760 banking franchise is a is a leading franchise. And we 0:10:07.800 --> 0:10:11.720 took our platform businesses transaction banking, and our consumer platforms, 0:10:11.720 --> 0:10:15.520 and we put them together. We narrowed our focus purposefully 0:10:16.000 --> 0:10:18.200 on our consumer business and tried to align it with 0:10:18.320 --> 0:10:21.079 things that we think really play to our strength, whether 0:10:21.120 --> 0:10:25.640 it's the technology, development of platforms, our relationship to enterprise businesses, 0:10:26.080 --> 0:10:28.800 and also in alignment with our wealth business. With that 0:10:28.920 --> 0:10:33.720 narrowed focus, we're gonna be very very attentive to making 0:10:33.720 --> 0:10:36.480 sure we scale those platforms and they're profitable as quickly 0:10:36.559 --> 0:10:39.800 as possible. David Year five. You look around um all 0:10:39.920 --> 0:10:42.560 corporate America, not just Wall Street really, and you see 0:10:42.600 --> 0:10:45.800 so many companies as they think about succession planning. The 0:10:45.840 --> 0:10:49.240 CEOs have had to come back on multiple occasions. You 0:10:49.280 --> 0:10:51.880 see it at Disney, You've seen it at Carlisle when 0:10:51.880 --> 0:10:53.680 it comes to Golden Sacks. How are you thinking about 0:10:53.679 --> 0:10:56.200 succession planning now as you kind of move into this 0:10:56.320 --> 0:10:58.520 next part of your art. I am, I am, I 0:10:58.559 --> 0:11:01.760 am in your far. I've I've got a great team. 0:11:01.840 --> 0:11:04.319 We're working on all the things we were just talking about, 0:11:04.360 --> 0:11:06.520 and that's what I'm focused on. And there'll be a 0:11:06.640 --> 0:11:09.240 you know, there'll be a time when it will be uh, 0:11:09.320 --> 0:11:12.200 someone else's turn to Steward this great institution that's been 0:11:12.200 --> 0:11:15.439 around for hundred and fifty four years, and at that time, 0:11:15.600 --> 0:11:17.680 you know we'll make the will make the appropriate decisions. 0:11:17.679 --> 0:11:20.319 But for right now, this leadership team is really focused 0:11:20.640 --> 0:11:22.760 on continuing to grow and strength and golden stacks, and 0:11:22.800 --> 0:11:24.160 we feel like we've made a lot of progress, but 0:11:24.200 --> 0:11:25.880 we also feel like there's a lot that we can 0:11:25.920 --> 0:11:28.520 do and we're excited to talk about somewhere that in February. 0:11:28.600 --> 0:11:30.920 I'm looking forward to this investor day. Thank you so 0:11:31.000 --> 0:11:32.480 much for taking time with us on a really big 0:11:32.559 --> 0:11:34.760 day here at Goldman. You said thirty three year conference, 0:11:34.800 --> 0:11:36.839 thirty three years of the conference. Yeah, thank you so much. 0:11:36.960 --> 0:11:39.960 Thank you. It's nice to be with you. Shinali brilliant 0:11:40.080 --> 0:11:53.640 as always. The latest from city term a slowdown to 0:11:53.679 --> 0:11:57.160 a fifty basis point hike in December remains very likely, 0:11:57.280 --> 0:11:59.680 but we should expect FED officials to guide towards higher 0:11:59.760 --> 0:12:02.000 term rates and we maintain our call for another fifty 0:12:02.000 --> 0:12:04.959 basis point high can February had a terminal range of 0:12:05.920 --> 0:12:09.200 to five fifty. And here's the final line with asymmetric 0:12:09.280 --> 0:12:13.320 upside risk, that's the bottom line, sam As City, and 0:12:13.360 --> 0:12:15.839 that is a key determinant, and let us be clear 0:12:15.920 --> 0:12:18.320 here at the end of the year in celebration that Andrew, 0:12:18.440 --> 0:12:20.559 can we all agree Andrew Holland Horst and his team 0:12:21.120 --> 0:12:24.040 the way out from City in Bank America I think 0:12:24.120 --> 0:12:26.240 laughed at in spring of this year when they started 0:12:26.280 --> 0:12:29.240 to talk about how Finns FED might push it. It's 0:12:29.240 --> 0:12:31.719 turned out to be my my My basic take is 0:12:31.760 --> 0:12:35.120 Deutsche Bank had the recession hallway early, and Holland Horst 0:12:35.120 --> 0:12:39.680 had the interest rate vector just absolutely great. Now we 0:12:39.720 --> 0:12:42.200 got an update. Now Mr holland Horst of UCLA joins 0:12:42.200 --> 0:12:45.640 the chief US economist at City Group. Andrew, I'm gonna 0:12:45.679 --> 0:12:48.440 cut to the chase. The fancy math, the ratio math 0:12:48.800 --> 0:12:53.000 of the Bloomberg Financial Conditions Index is not good for Powell. 0:12:53.440 --> 0:12:57.400 Goes against your thesis as well. We are accommodative. It's 0:12:57.440 --> 0:13:01.120 in research notes this morning, Ben laydler over detro notes 0:13:01.559 --> 0:13:06.120 off the Chicago Financial Conditions series as well. How much 0:13:06.160 --> 0:13:09.360 are those measurements going against the chairman of the Fed. 0:13:10.480 --> 0:13:12.640 I think you're right, Tom, it's going in the wrong direction, 0:13:12.760 --> 0:13:15.040 the wrong direction from what share Powell would like to see. 0:13:15.320 --> 0:13:18.160 I watched those conditions every morning, just like you. Just 0:13:18.280 --> 0:13:22.240 like the viewers. And every morning I'm thinking, what is 0:13:22.320 --> 0:13:25.360 Chair Powell thinking when he sees this. I think that's 0:13:25.360 --> 0:13:28.520 true today. I think that was true after his comments 0:13:28.559 --> 0:13:32.520 at the Brookings Institution a week ago, where I think 0:13:32.520 --> 0:13:35.640 he was trying to send a hawkish message or a 0:13:35.679 --> 0:13:38.760 neutral message, and the market took it as stubblished. So 0:13:38.880 --> 0:13:41.520 it's just all more hawkish risk down the line if 0:13:41.520 --> 0:13:44.600 we extend the ex access out. Let's say we do 0:13:44.840 --> 0:13:48.000 that and we do move to a higher nominal rate, 0:13:48.280 --> 0:13:51.840 even more advanced real rates as well. Does that give 0:13:51.880 --> 0:13:55.360 our economy time to get used to a new higher 0:13:55.480 --> 0:13:59.280 rate regime. I think the idea was slowing down is 0:13:59.320 --> 0:14:02.720 it gives the FED a chance to really evaluate in 0:14:02.800 --> 0:14:06.240 real time what has been the effect of raising interest 0:14:06.320 --> 0:14:09.120 rates of tight ending financial conditions. We see that in 0:14:09.160 --> 0:14:11.400 the housing sector. We see a housing sector that's going 0:14:11.440 --> 0:14:14.120 in reverse, house prices that are coming down. That's where 0:14:14.160 --> 0:14:18.200 interest rate policy is very pogent and very effective. The 0:14:18.240 --> 0:14:20.720 issue that this Fed is facing is we have a 0:14:20.760 --> 0:14:23.440 really tight labor market and they're trying to loosen that 0:14:23.560 --> 0:14:26.240 labor market with a really blunt tool, which is interest 0:14:26.360 --> 0:14:30.280 rate policy. Not clear that that's moved far enough yet 0:14:30.400 --> 0:14:33.040 to see that loosening. Andrew, what are we missing? We 0:14:33.160 --> 0:14:35.240 keep thinking that there's going to be a much more 0:14:35.280 --> 0:14:38.960 sustained downturning, Yet the data keeps surprising. John was asking earlier, 0:14:39.280 --> 0:14:41.880 is this economy speeding up for slowing down? We can't 0:14:41.960 --> 0:14:44.920 tell based on some of the recent data. So what 0:14:45.200 --> 0:14:48.840 explains these surprises that we keep getting. So you've seen 0:14:48.880 --> 0:14:50.760 some areas of the economy slow down. We were talking 0:14:50.760 --> 0:14:53.760 about housing, which is going in reverse. Good spending in 0:14:53.800 --> 0:14:57.600 general has been a lot weaker, but really strong services spending. 0:14:57.680 --> 0:14:59.640 And when we keep seeing that spending data that's coming 0:14:59.680 --> 0:15:03.280 in wrong, we think back to all of the savings 0:15:03.280 --> 0:15:05.640 that built up over the last couple of years that's 0:15:05.680 --> 0:15:08.360 coming down. Now. The savings rate is historically low, but 0:15:08.400 --> 0:15:10.800 it looks like there maybe even more of that excess 0:15:10.840 --> 0:15:13.800 savings to work through. You look at credit card balances 0:15:13.800 --> 0:15:17.880 which are rising. That can't continue forever, But remember consumers 0:15:18.040 --> 0:15:20.960 were very under leveled coming into this year, and there's 0:15:20.960 --> 0:15:24.200 a lot of room to grow credit on consumer balance sheets, 0:15:24.240 --> 0:15:27.160 so that process is underway. All of that is stoking 0:15:27.560 --> 0:15:30.600 continued demand, and as long as the demand is out there, 0:15:30.760 --> 0:15:32.680 you're going to see firms that at the very least 0:15:32.680 --> 0:15:34.680 want to hold onto their existing workers. These are hard 0:15:34.680 --> 0:15:37.360 workers to hire. It's been a tight labor market, so again, 0:15:37.640 --> 0:15:40.920 very very hard to loosen that labor market. Andrew, we're 0:15:40.920 --> 0:15:43.600 hearing about white collar workers that are getting laid off first, 0:15:43.680 --> 0:15:45.760 exactly to your point that the rank and file that 0:15:45.800 --> 0:15:49.000 actually make things go on a tangible level are needed 0:15:49.040 --> 0:15:51.320 and necessary. How much do you think that a soft 0:15:51.400 --> 0:15:53.520 landing is pretty much off the table, despite the fact 0:15:53.560 --> 0:15:56.480 that so many people are basically betting on that being 0:15:56.520 --> 0:15:59.360 the outcome. I think we just need to be really 0:15:59.400 --> 0:16:02.440 clear on this, Lisa, and it is an unfortunate reality 0:16:02.520 --> 0:16:05.440 to have to acknowledge, But the likelihood of a soft 0:16:05.520 --> 0:16:08.640 landing is quite low. Yes, it's possible. Yes, there's a 0:16:08.680 --> 0:16:10.960 hopeful scenario where you can get a soft landing, and 0:16:11.080 --> 0:16:13.600 everybody would like to see that, but we need to 0:16:13.640 --> 0:16:17.920 be realistic the balance of the historical evidence, as well 0:16:17.960 --> 0:16:20.600 as the fact that inflation is just running so high 0:16:20.600 --> 0:16:23.640 and it's so difficult to bring down inflation from these levels. 0:16:24.040 --> 0:16:27.119 I think if you acknowledge those facts, and you acknowledge 0:16:27.120 --> 0:16:29.400 that we really do have a wage price spiral here, 0:16:29.440 --> 0:16:32.120 I know that it's very unpopular to say that, but 0:16:32.200 --> 0:16:35.000 there's no question wages are rising, prices are rising, there's 0:16:35.000 --> 0:16:37.520 an expectation that they continue to rise. It's a self 0:16:37.560 --> 0:16:42.520 reinforcing dynamic that is likely going to take a recession 0:16:42.800 --> 0:16:45.440 to bring those inflationary forces back down. At what point 0:16:45.480 --> 0:16:47.840 is a financial accident going to be the trigger to 0:16:47.920 --> 0:16:50.360 some sort of more rapid decline rather than just sort 0:16:50.400 --> 0:16:51.880 of waiting for kodoh, which is what a lot of 0:16:51.880 --> 0:16:54.560 people seem to be doing, and then confirming their experience 0:16:54.800 --> 0:16:57.320 or their expectation, rather for some sort of downturn and 0:16:57.360 --> 0:17:00.360 specific data. I think that's where you're kind of balance 0:17:00.400 --> 0:17:02.800 what's going on in financial markets and what's going on 0:17:02.880 --> 0:17:05.320 in the real economy. So, like we were talking about 0:17:05.320 --> 0:17:08.400 financial conditions tight and very aggressively now loosened from those 0:17:08.440 --> 0:17:12.119 tighter levels, and we've seen the economy slow down in sectors, 0:17:12.119 --> 0:17:15.160 but we haven't seen this broad slowing that's cool demand 0:17:15.480 --> 0:17:19.240 and broad inflation down. So it could be the case 0:17:19.400 --> 0:17:23.159 that financial conditions just continue to tighten further, need to 0:17:23.160 --> 0:17:26.000 continue to tighten further from here, Then the risk that 0:17:26.280 --> 0:17:29.919 there's a more significant breakdown in the financial sector becomes higher. 0:17:30.240 --> 0:17:32.760 I would say that looking at the world today, look 0:17:32.800 --> 0:17:36.920 at the US in particular today, pretty clean consumer balance sheet, 0:17:36.960 --> 0:17:39.520 it's banks that are not over levered as well. All 0:17:39.520 --> 0:17:42.280 of that makes us feel more comfortable about the ability 0:17:42.320 --> 0:17:45.040 of the economy to withstand higher interest rates. But certainly 0:17:45.040 --> 0:17:47.640 those risk rises you continue to find the financial poditions. 0:17:48.080 --> 0:17:50.119 What what drives me nuts here, and maybe it's my 0:17:50.240 --> 0:17:53.040 fossildom is well, do you see what's sounder? Cassidy said 0:17:53.080 --> 0:17:55.000 to me yesterday. Do you want to repeat that for people? 0:17:55.000 --> 0:17:58.360 We missed it? I think because I'm not saying it's 0:17:58.400 --> 0:18:02.359 like if I go home Vett Bill screaming at me 0:18:02.400 --> 0:18:05.040 on the Cassidy the Cassidy diet. We'll talk about that 0:18:05.320 --> 0:18:08.640 in a minute. Andrew, older people like me know that 0:18:08.680 --> 0:18:12.800 we somehow survived a five percent terminal rate. The ut 0:18:12.920 --> 0:18:16.119 of America, including you think we're all gonna die on? 0:18:16.840 --> 0:18:19.720 Can't we survive where we're going to with this city 0:18:19.720 --> 0:18:24.399 group call? Well, there's a really important concept which I 0:18:24.440 --> 0:18:26.800 know we talked about all the time, but it's important 0:18:26.800 --> 0:18:29.800 to emphasize, which is the real interest rate, the nominal 0:18:29.840 --> 0:18:33.960 interest rate minus inflation. And that's really what I think 0:18:34.240 --> 0:18:37.320 fed officials are focusing on more here, and we just 0:18:37.400 --> 0:18:40.320 saw on the wage data wage growth that's five percent 0:18:40.359 --> 0:18:43.280 plus we've known for some time, and the price inflation data, 0:18:43.320 --> 0:18:45.880 price inflation this five percent plus. So when you look 0:18:45.880 --> 0:18:48.199 at that five percent interest rate and you're noting at 0:18:48.200 --> 0:18:51.640 the top we were saying five percent policy rates, five 0:18:51.680 --> 0:18:55.160 and a half percent policy rates with upside risk to that, 0:18:55.160 --> 0:18:57.240 that's because just getting to five percent, we get that 0:18:57.280 --> 0:18:59.960 real rate just back to zero. So if you think 0:19:00.040 --> 0:19:02.600 that real interest rates need to move positive, then the 0:19:02.640 --> 0:19:05.720 Fed would need to move potentially beyond that level. Um 0:19:05.720 --> 0:19:08.320 And to your point, talk in an economy that's running 0:19:08.400 --> 0:19:13.040 high inflation, five percent plus interest rates should not be surprising. Andrey, 0:19:13.160 --> 0:19:15.000 thanks for being with us great core this year, No 0:19:15.000 --> 0:19:17.440 doubt we're talk before year end. Andrew Holland, host there 0:19:17.760 --> 0:19:25.040 of city joining us now, Amy Wuve Silverman. According to 0:19:25.040 --> 0:19:28.160 derivative strategist at RBC Capital Markets, Amy, can we begin 0:19:28.200 --> 0:19:30.679 with a consensus view for next year. Here's a quote 0:19:30.680 --> 0:19:34.080 for you. Evidence of slowing core inflation, peaking official rates, 0:19:34.080 --> 0:19:36.320 and signs of economic recovery should pave the way for 0:19:36.359 --> 0:19:39.400 more risk taking in a second half of I want 0:19:39.400 --> 0:19:40.920 to be clear here, Amy, I'm not picking on any 0:19:40.960 --> 0:19:44.440 single bank. That is the consensus view for next year. 0:19:44.640 --> 0:19:49.680 Do you share it? Yeah? It's interesting because I think 0:19:49.720 --> 0:19:52.240 if you looked at any outlook it would say almost 0:19:52.240 --> 0:19:55.040 the same thing. And when I was in Europe last 0:19:55.040 --> 0:19:58.560 week speaking with clients that is also their view, I 0:19:58.600 --> 0:20:02.120 would say that, you know, it's it's really hard to say. 0:20:02.200 --> 0:20:04.639 The options market when we look at pricing to that 0:20:04.800 --> 0:20:08.000 term structure is sort of fifty fifty. Essentially, you know, 0:20:08.080 --> 0:20:11.440 no one is placing big bets yet that will see this, 0:20:11.600 --> 0:20:14.760 you know, miraculous second half rally. But certainly that's the 0:20:14.840 --> 0:20:17.479 sentiment that is being expressed, but it is nowhere in 0:20:17.520 --> 0:20:20.560 the positioning yet. Amy, Honored to have you with us. 0:20:20.600 --> 0:20:23.400