00:00:02
Speaker 1: Bloomberg Audio Studios, Podcasts, radio News begin this hour with Stocks and Bonds, Steady of CPI e is the September rate high bets. The next read on inflation out at eight thirty am Eastern with PPI on deck. Goldbnsachs Vice chair and former Dallas FED President Robert Kaplan joins us now for more. Robert great to catch up with you. I want to start just by asking you your take on the economy and whether you are surprised by the relatively weak labor market report and then the very much in line yet confusing CPI report.
00:00:37
Speaker 2: What I'm seeing in the economy, if it's associated with the AI infrastructure build or AI adoption, then it's strong. What I hear from a number of companies who are more tied to housing autos the strength of the low modern income consumer, I would say they describe the economy as okay, not great, somewhat sluggish, and so in that regard, the job market report.
00:01:09
Speaker 3: Kind of was in line with that.
00:01:11
Speaker 2: You don't see aggressive hiring, but you don't see aggressive firing. And I still think we're several months or a year away from companies having enough confidence in the AI use cases to work aggressively use AI to replace people, but that is likely to happen.
00:01:31
Speaker 3: I think there'll be new.
00:01:31
Speaker 2: Jobs great also, But the point is unit labor costs are very well behaved.
00:01:38
Speaker 3: I think you and I have talked about this.
00:01:39
Speaker 2: The share of GDP going to profit is increasing, the share going to labor is more muted.
00:01:46
Speaker 1: What's the FEDS role given this backdrop right now?
00:01:50
Speaker 3: So you've got a lot of cross currents, and.
00:01:56
Speaker 2: In fairness, if we didn't have the war in Iran and the spike in oil prices, which I think has raised headline inflation and bleeds into other items, my guess is we might not be even be talking about the prospect of a rate increase. And I think the federle here should be to try to understand these cross currents. The AI infrastructure build is probably inflationary, and you've got tariffs, labor constraints, oil spike that exacerbate that. On the other hand, AI adoption should ultimately be disinflationary. Chinese over capacity should be disinflationary. And so it's not surprised to me that there's a lot of debate and they're trying.
00:02:41
Speaker 3: To weave through this. I think what I would be doing.
00:02:43
Speaker 2: In my former seat is I would not have raised rates in July. I think they made absolutely the right decision. I probably wouldn't have cut in December either, by the way that last cut I would not have done, And I would be keeping an open mind between now in September. If I see meaningful improvement, might be willing to kick the can and do nothing. But I want to take every bit of time between now and September before I make a judgment and avoid being rigid or predetermined in assessing this.
00:03:11
Speaker 1: People talk about the death of forward guidance, and part forward guidance has no role at a time where no one knows what's going to happen, and it's very hard to predetermine what exactly could transpire. At the same time, reaction function does seem to be important. And from your vantage point, Rob, what would you be looking for to see that there is some sort of departure from this sort of mess, this muddle, to something that is more of a protracted, persistent inflation.
00:03:37
Speaker 2: So the term forward guidance gets used very broadly. What it started out as is, I'm going to make a current commitment today to a future action BERNANKI used it during the Great Recession, we I think overused it in the fall of twenty twenty and into twenty one in committing to keep rates low until we reach full employment. I dissented on that, but I think the FED has learned it's less than there and is much more reluctant to use that type before a guidance. Now, what forward guidance seems to mean is I don't want to over predict. I agree with that too, and I always say the Fed's job is to be a risk manager, not a prognosticator. Having said all that, I do think in the press conferences you ought to be able to explain why.
00:04:29
Speaker 3: You made the decision you made.
00:04:31
Speaker 2: And describe what the pros and cons and what the debate was. And I would probably like to see that more in future press conferences, and I think that would illuminate the debate that's going on, and I think that would be useful. And I don't think that box is in the FED at all.
00:04:49
Speaker 1: Do you think that there's an understanding of the reactionary function right now of this Federal Reserve?
00:04:56
Speaker 2: I think the understanding comes from individuals giving speeches about their reaction function. And I actually think, in fairness to Chair Warrish, he's been gently counseling people on the committee. Don't over predict what you're thinking, don't over explain it. You're going to box yourself. I actually think that's good advice. I think in the future, I think a little bit more explanation from the Chair to help frame all this, I think would be useful, and I would think and hope over the next several months you probably will get that.
00:05:35
Speaker 1: Do you think there's now more emphasis around his jackson Hole speech?
00:05:39
Speaker 2: Given all of this, Listen a time fed chair speaks, there's a lot of attention. The jackson Ole speech historically is a little bit of a five hundred thousand foot philosophical speech. I think because of his confirmation hearings and what he's done in the first two press conferences you've already got and a lot of philosophical views from Chair of warsh So I think I think in this speech I would give some of the philosophical but I might do a little bit of a if it were me, and he may not follow this, I might insert four sentences to explain why we made the decision in July that we made you know, we thought inflation readings were cooling. We're aware that this is not an excess demand situation.
00:06:26
Speaker 3: That's my view.
00:06:27
Speaker 2: In the economy, it's more of a supply driven cap X driven and in that regard.
00:06:34
Speaker 3: And we have the special situation of the war, and in.
00:06:36
Speaker 2: That regard, a majority of the voters decided on the committee decided it would be best to be patient, but will remain vigilant. I would insert something like that to just so he can get the framing and the July decision out there, But that's me.
00:06:53
Speaker 3: Otherwise, I don't think it's.
00:06:55
Speaker 2: Going to get any more attention than any other Jackson Ole's speech, which always gets a lot of attention.
00:07:00
Speaker 1: Rob, how worried are you about today's thirty year auction coming out the twenty five billion dollars or thirty year notes sold by the Treasure Department.
00:07:06
Speaker 2: Yeah, so this is where you've got diverging pass There's the debate at the FED and g is the FED funds rate ultimately need to be somewhat higher. But if it needs to be higher, we're talking about over the next year to you know, fifty seven I don't know, fifty seventy five base points We'll see the FED will figure it out. May not be pretty, but they'll figure it out. The part that's that I'm struggling with more and I think the markets are struggling with the long end of the treasury curve. This is true of government bond curves globally. I think are struggling with something else. They're struggling with supply demand of treasuries. The size of these deficits. Are the deficits going to start moderating. In a solid economy, you would normally think that deficits would moderate somewhat. These deficits are not moderating. And I think you're seen a global backup, not just US. Global backup of the long end of the curve. Some people have attributed to the FED, but I actually don't think so. I think this is a different It is a structural dynamic. And normally, when the economy weakens, you would typically expect the long end of the treasury curved to rally, or if there's a geopolitical event, you expect a flight to quality in a rally.
00:08:24
Speaker 3: Hasn't been acting as much.
00:08:25
Speaker 2: That way, I would argue in the last year and a half two years, I think we have a new structural development.
00:08:32
Speaker 3: And I think I think it's appropriate to be wrestling with that a little bit.
00:08:37
Speaker 1: Just real quick here, Rob, what would you be more bullish on going into the next year, bonsor stocks?
00:08:43
Speaker 2: Well, there is a great earn as you've been reporting, and we're seeing it. There is a great earning story that's unfolding. And the economy, yes, is being stimulated by AI infrastructure. But broadly every company I talk with has got twelve to fifteen use cases on AI adoption and is optimistic that they're going to find ways to improve margins, improve their business, improve productivity. And so I think the SMP broad earning story is alive and well for not just this year but into the future. I'm a little more nervous about whether we can get these deficits under control and what's going to happen to the long end of the government bond curve.
00:09:28
Speaker 1: Rob, thank you so much for taking the time this morning. Always illuminating to speak with you. Goldman SAXFICE Chair Robert Kaplan
Speaker 1: Bloomberg Audio Studios, Podcasts, radio News begin this hour with Stocks and Bonds, Steady of CPI e is the September rate high bets. The next read on inflation out at eight thirty am Eastern with PPI on deck. Goldbnsachs Vice chair and former Dallas FED President Robert Kaplan joins us now for more. Robert great to catch up with you. I want to start just by asking you your take on the economy and whether you are surprised by the relatively weak labor market report and then the very much in line yet confusing CPI report.
00:00:37
Speaker 2: What I'm seeing in the economy, if it's associated with the AI infrastructure build or AI adoption, then it's strong. What I hear from a number of companies who are more tied to housing autos the strength of the low modern income consumer, I would say they describe the economy as okay, not great, somewhat sluggish, and so in that regard, the job market report.
00:01:09
Speaker 3: Kind of was in line with that.
00:01:11
Speaker 2: You don't see aggressive hiring, but you don't see aggressive firing. And I still think we're several months or a year away from companies having enough confidence in the AI use cases to work aggressively use AI to replace people, but that is likely to happen.
00:01:31
Speaker 3: I think there'll be new.
00:01:31
Speaker 2: Jobs great also, But the point is unit labor costs are very well behaved.
00:01:38
Speaker 3: I think you and I have talked about this.
00:01:39
Speaker 2: The share of GDP going to profit is increasing, the share going to labor is more muted.
00:01:46
Speaker 1: What's the FEDS role given this backdrop right now?
00:01:50
Speaker 3: So you've got a lot of cross currents, and.
00:01:56
Speaker 2: In fairness, if we didn't have the war in Iran and the spike in oil prices, which I think has raised headline inflation and bleeds into other items, my guess is we might not be even be talking about the prospect of a rate increase. And I think the federle here should be to try to understand these cross currents. The AI infrastructure build is probably inflationary, and you've got tariffs, labor constraints, oil spike that exacerbate that. On the other hand, AI adoption should ultimately be disinflationary. Chinese over capacity should be disinflationary. And so it's not surprised to me that there's a lot of debate and they're trying.
00:02:41
Speaker 3: To weave through this. I think what I would be doing.
00:02:43
Speaker 2: In my former seat is I would not have raised rates in July. I think they made absolutely the right decision. I probably wouldn't have cut in December either, by the way that last cut I would not have done, And I would be keeping an open mind between now in September. If I see meaningful improvement, might be willing to kick the can and do nothing. But I want to take every bit of time between now and September before I make a judgment and avoid being rigid or predetermined in assessing this.
00:03:11
Speaker 1: People talk about the death of forward guidance, and part forward guidance has no role at a time where no one knows what's going to happen, and it's very hard to predetermine what exactly could transpire. At the same time, reaction function does seem to be important. And from your vantage point, Rob, what would you be looking for to see that there is some sort of departure from this sort of mess, this muddle, to something that is more of a protracted, persistent inflation.
00:03:37
Speaker 2: So the term forward guidance gets used very broadly. What it started out as is, I'm going to make a current commitment today to a future action BERNANKI used it during the Great Recession, we I think overused it in the fall of twenty twenty and into twenty one in committing to keep rates low until we reach full employment. I dissented on that, but I think the FED has learned it's less than there and is much more reluctant to use that type before a guidance. Now, what forward guidance seems to mean is I don't want to over predict. I agree with that too, and I always say the Fed's job is to be a risk manager, not a prognosticator. Having said all that, I do think in the press conferences you ought to be able to explain why.
00:04:29
Speaker 3: You made the decision you made.
00:04:31
Speaker 2: And describe what the pros and cons and what the debate was. And I would probably like to see that more in future press conferences, and I think that would illuminate the debate that's going on, and I think that would be useful. And I don't think that box is in the FED at all.
00:04:49
Speaker 1: Do you think that there's an understanding of the reactionary function right now of this Federal Reserve?
00:04:56
Speaker 2: I think the understanding comes from individuals giving speeches about their reaction function. And I actually think, in fairness to Chair Warrish, he's been gently counseling people on the committee. Don't over predict what you're thinking, don't over explain it. You're going to box yourself. I actually think that's good advice. I think in the future, I think a little bit more explanation from the Chair to help frame all this, I think would be useful, and I would think and hope over the next several months you probably will get that.
00:05:35
Speaker 1: Do you think there's now more emphasis around his jackson Hole speech?
00:05:39
Speaker 2: Given all of this, Listen a time fed chair speaks, there's a lot of attention. The jackson Ole speech historically is a little bit of a five hundred thousand foot philosophical speech. I think because of his confirmation hearings and what he's done in the first two press conferences you've already got and a lot of philosophical views from Chair of warsh So I think I think in this speech I would give some of the philosophical but I might do a little bit of a if it were me, and he may not follow this, I might insert four sentences to explain why we made the decision in July that we made you know, we thought inflation readings were cooling. We're aware that this is not an excess demand situation.
00:06:26
Speaker 3: That's my view.
00:06:27
Speaker 2: In the economy, it's more of a supply driven cap X driven and in that regard.
00:06:34
Speaker 3: And we have the special situation of the war, and in.
00:06:36
Speaker 2: That regard, a majority of the voters decided on the committee decided it would be best to be patient, but will remain vigilant. I would insert something like that to just so he can get the framing and the July decision out there, But that's me.
00:06:53
Speaker 3: Otherwise, I don't think it's.
00:06:55
Speaker 2: Going to get any more attention than any other Jackson Ole's speech, which always gets a lot of attention.
00:07:00
Speaker 1: Rob, how worried are you about today's thirty year auction coming out the twenty five billion dollars or thirty year notes sold by the Treasure Department.
00:07:06
Speaker 2: Yeah, so this is where you've got diverging pass There's the debate at the FED and g is the FED funds rate ultimately need to be somewhat higher. But if it needs to be higher, we're talking about over the next year to you know, fifty seven I don't know, fifty seventy five base points We'll see the FED will figure it out. May not be pretty, but they'll figure it out. The part that's that I'm struggling with more and I think the markets are struggling with the long end of the treasury curve. This is true of government bond curves globally. I think are struggling with something else. They're struggling with supply demand of treasuries. The size of these deficits. Are the deficits going to start moderating. In a solid economy, you would normally think that deficits would moderate somewhat. These deficits are not moderating. And I think you're seen a global backup, not just US. Global backup of the long end of the curve. Some people have attributed to the FED, but I actually don't think so. I think this is a different It is a structural dynamic. And normally, when the economy weakens, you would typically expect the long end of the treasury curved to rally, or if there's a geopolitical event, you expect a flight to quality in a rally.
00:08:24
Speaker 3: Hasn't been acting as much.
00:08:25
Speaker 2: That way, I would argue in the last year and a half two years, I think we have a new structural development.
00:08:32
Speaker 3: And I think I think it's appropriate to be wrestling with that a little bit.
00:08:37
Speaker 1: Just real quick here, Rob, what would you be more bullish on going into the next year, bonsor stocks?
00:08:43
Speaker 2: Well, there is a great earn as you've been reporting, and we're seeing it. There is a great earning story that's unfolding. And the economy, yes, is being stimulated by AI infrastructure. But broadly every company I talk with has got twelve to fifteen use cases on AI adoption and is optimistic that they're going to find ways to improve margins, improve their business, improve productivity. And so I think the SMP broad earning story is alive and well for not just this year but into the future. I'm a little more nervous about whether we can get these deficits under control and what's going to happen to the long end of the government bond curve.
00:09:28
Speaker 1: Rob, thank you so much for taking the time this morning. Always illuminating to speak with you. Goldman SAXFICE Chair Robert Kaplan
