Steady as She [the Fed] Goes, Peters Says

a thing's changing. Well. People definitely got very worried about the spike and wage growth the previous months, so the fact that that's coming down is important. But obviously we have a lot of noise in this data. There's something about the hours work swinging up and down that is in in these numbers in both directions. So I personally think it's important to look ahead, like what is the

trajectory of the economy. And what is really interesting is that they're not only have we got that the tax cut that is sort of working its way through its economy, but we have very very significant increases in physical spending in the second half of that year of this year, and actually first half from next year as well. That's

going to add a lot to growth. Right, So we're looking at what the economy is are doing now, but we know it's going to shift up a gear pretty much over the next twelve months and it will be very very interesting to see how the Fed reacts that. Are they going to sort of be reacting slowly or they're going to say, okay, we need to be a bit more proactive. That that's the key. So I can't tell you how many research nights have read this morning

with the word goldilocks in it. Kitchen Ciber at sock Jam with the with the title of his research this morning, who spiked goldilocks? Is Porridge and he's talking about the fiscal stimulus that come from Washington, d C. So help

me understand what this means for the Federal Reserve. They've had a raised for the last few years of output rich, inflation poor, and then all of a sudden they've got to start thinking about capacity constraints and what happens when the fiscal stimulus really starts to buy What is the prudent monetary policy response to that. You've got years on your side of just output rich inflation poor, but the

real prospect that things are starting to shift. Well, I think that the prudent monitory policy is to really keep your options open. So we were on TV like a couple of minutes ago, and we talked about, Okay, should the FED really make every single FED meeting live? I think that would be a good option here, Like they need to have the ability to step up the pace

of tightening if they see it. And one way of of of sort of bring that optionality into play is to make every single meeting a line meeting with the press conference. So that would be one thing. The other thing I think is to do with the signals that they send a little bit further ahead. I think increasing the pace of hikes beyond for a year right now will be dramatic step, but they can sick on okay next year, next year. We want to keep our options open.

We don't know exactly where our star is. It's a very ecademic concept, so perhaps we need to go longer than people anticipating. I think that's the kind of forward guidance they can send now, and I think that would soon be appropriate. Within the forward guidance is a Fed that has to act. Everybody seems to agree on that. How far behind are they the real rate? The Fed

funds real rate is still negative? Right yeah? Um. I think the problem is that we get so tied to this very academic way of analyzing what the equilibrium rate is. This our star concept is something that is incredibly difficult to calculate, and it's easy to say, Okay, here's a good academic paper. Now I'm going to believe there's number,

but reality nobody knows. So I think this is probably one area where we can go back to the Green Splan days and really go into the minutia and say, okay, how is each sector really responding to these slightly higher rates. I've heard this from other people. What what's you're reading of that? I mean, you're not out there looking at every sector, but what you're reading of each in every sector? Right now? Because John and I get mail when we say that it's a fully employed America, our our audience

thinks we're nuts. Well we can we can see the is definitely a big move in the participation right in the in the latest numbers. So that's very very interesting, and I guess Yellen was was very vocal a little while ago about saying, Okay, we need to push this economy harder to see okay, because there's some kind of

reverses the races we can bring into play here. And perhaps she was right, but I think in terms of evaluating what's going on with the economy, it's aweso important to think about, Okay, the various sectors, can they actually cope with higher rates? And what It's very interesting if you look at the sort of debt levels, right, there's often a lot of focus on the fact that, Okay, we have a fishcal problem, we have a dead problem

in in the government space. But if you look at the household sector, we actually have less debt relative to disposable income than we had the before the crisis. So that's a sector that I think can be quite resilient. So I think it's very very hard to to say okay, or a star is real rate a little bit above zero, maybe we can get too substantially higher normal rates than people are anticipating. Now. Well, yes, I think there's two ways of looking at this. And Danny blanche Flower of

Dartmouth was messaging me over the weekend. Of course he would be very dovish if he was on the Federal Reserve and the data backs him up. The participation rate is rising. This is an economy still printing three hundred thousand jobs apparently in a given month. We've been looking at two d K every other month seemingly, and yet wage growth isn't picking up. So there is a dovish picture you can paint of the labor market. At the

same time, there's another way of just looking at this. Practically, should rights at the FETE big around one and a half percent near an emergency setting when we this late in the psycho and GDP is as high as it is. Yeah, Now, I think this is the big debate, Like we can discuss the manusha about okay, what is the wage growth

number now? But the really big picture is when you set monitored policy, are you going to set it based on whether it's important that inflation is one point nine or two point zero or you're gonna take a bigger picture where you say, Okay, we have a strong economy and we want to have real rates. That's going to sort of create a degree of stability for the long term in the financial system. And I think we as

you look around the world. You're seeing some extreme examples of central banks that get extremely mathematical about getting to two point zero, and they are actually totally not focusing on this bigger picture. Well, the bigger picture here you said this earlier, the idea that we're going to see substantial currency movement. Give us an example of a pair where we're gonna see figure movement that somebody can enjoy making or losing money on today. Well, so we've seen

actually pretty big moves in two thousand eighteen. Right, We've had dolly in from one thirteen down to one of six. That's a pretty big move. And does it go further? It means it gonna go under a hundred, I think. So I'm obsessed with capital flows. I spent the last week just crunching all the Japanese capital flows because this is what our clients are very very focused on. Now, I think we're actually going to take a bit of a breather now. I think there's some of the forces

that pushed it very fast. They're going to take a breather. But I think the next big pair to focus on is sort of this thing about NAFTA versus China. We've had all the tension around the NAFTA currency in Mexico and Canada. The next piece of tension is going to be China, so I think there can be some very interesting movement there where there's relaxation around the NAFTA currencies

and more pressure on Asian currencies. With EXE data, John, why don't you bring in our next guest who just had he added to the g d P of the Greater New York Area that because he had to get a new mantle for his fireplace. His house is so big, he has like four fireplaces in it, and we bring it in the morning staff fixed in kind Manager of the Year. The trophy was so big he had to get you know, he had scaffolding up until they replaced it with a marble buttressed. Part of that PAGM team

is Greg Paid, his managing director and senior investment officer. Greg. It's always great to get you on a program to to get your time. Really fascinating. The compare and contrast between the January jobs report and a February payrolls report. The fear that the January payrolls report put into this mark kid next to the camp that was ejected into this market for risk assets on Friday following the February pay rolls report, where's the truth one of the other

somewhere in between. Greg, Yeah, the lesson is let's not get um too excited one way or the other month to month. I think we need to look at some of the longer trends. And you know, January was such an important set of data. It really kind of catalyzed a new regime in many different respects of higher yields, inflation getting out of controls on and so forth. UH, and the last UH and the last release on Friday

really just threw cold water on it. So I think the message, at least at least for us a p gym, is, you know, let's not get overly excited one way or the other. Let's look at the broader set of data and the broader trends. And when you look at that, it's clear that you're seeing some firming on the inflation side. But as far as UH, you know, runaway wage or kind of broad based inflation, I think it's to premature

to be called for that. So to that point, Greg, and we're seeing the shifting into a new regime or is it just the fear of a shift to a new regime that has gripped markets to some extent. I think it's more fear than reality at this point. Uh. You know, I do know that markets trade expectations. Uh, and so something that we watch very closely is inflation expectations. But at some point the expectations have to match kind of underlying hard data. Uh. And I think that became

somewhat disconnected the past several months or so. Um. So you know, you know, to us, as steady as she goes? Uh, you think the Fed continues to move uh, you know, three times this year maybe for two thousand and nineteen is the bigger question. The markets are still pricing in just one in a quarter for two thousand and nineteen. But um, yeah, I think it's steady as you go. It's quite Frankly, Jonathan greg what was the distinction that

made for your outstanding two thousand seventeen? What was the strategic decision you made within your fixed income portfolios to outpace the easy to find average. Yeah, so last year was uh, you know, gosh, you know, we're talking a lot about last year. This year is much much harder. I will say, last year, what I think the market's got really excited over the new administration coming in, yields really spice higher, UH and we felt like, uh, a lot of that was not going to come to fruition,

and in fact that played out. I think this year is very different though, as you are seeing tangible things happening. Right, you have seen a continued firming of the labor market at a trend that has been in place for you know, many years of course. But but but you have more pro growth policies and you have a tighter labor market, even though the jobs data report UH digit suggest and right fully so, that there's more um kind of sideline workers than many people envisioned. But I think last year

was really easy. Obviously retrospect is, you know, much easier to call. But if you look at the fact that you had a really bullish environment for credit as an example, with no volatility. I mean you were seeing sharp ratios across many different portfolios of over ten times, they were equity like returns almost are you managing for the coupon

this year? I think this year is much more difficult, and so we squeezed a lot of the juice out of the lemon last year, and I think this year is much more difficult, and so while we're not barish from a fundamental or economics standpoint, where we're more cautious,

there's really just valuations. As valuations have really come far and it's hard to get too excited, and that's why we've taken down a risk somewhat um and you to your point, Tom, it's you know, seems like much more of a coupon, hopefully with a little kiss to it.

But I think it's more of a coupon. You Well, Greg, let's work our way through it from rates three to corporates and begin with rates and talk to me about how you express this framework in the market for rates last year from speaking to you guys throughout the whole year. Stay short at the front end. The long end isn't going to drift higher in the way that people expect.

That's going to remain anchored. So you're looking for the curve to flatten short the front end and then we're just gonna stay anchored around tens through to through to thirties. How has that changed for you, Greg and rates? That is still broadly the case. I we still think that a curve flatten er is the preferred path or the way that uh, we see the rate curve playing out, but the front end is increasingly more difficult to be short. I I still think you need to be short at

the front end. Uh. And so we do have the same flatten Er bias for sure, but but it's not as uh as easy as it once was, as there's a lot being pricing to the front end now. And so we mentioned there's three full hikes priced in for two thousan eighteen. Uh. You know, if you get the four hikes, that's basically price for perfection. So I don't think you want to invest in something price for perfection until we're getting close. But I still think it's the

same trend. If you want to be long the belly uh, and the curve will flatten. What's the yield there? I mean, within the mix that you have at p Jim, can I get to a four percent all in coupon? Uh? It's it's hard, you know, I mean you know that's the point the underlying kind of yield construct not only here in the US, but more more so in Europe, and we are a global manager. Uh. It's uh, it's

it's very challenging to get high yields if you would, um. Uh. And so you know, quite frankly, speaking of high yield, that's an area that uh, you know, we've really liked for quite some time. We have taken in our risk down in uh, in the high yield market broadly. But what we're doing is that we actually think there's more value out the risk curve, and so we see more value in triple cs than we do double bees, which less clear that's where the performance has been this year

as well. Is that, uh, you know, because I think the double B market has been much more sensitive to the selling that you're seeing on the mutual fund and et F side, as that's more rate yield driven um. Whereas the triple C part of the market, which we think you're getting amply paid for, is about you know, over three point three times the amount of spread relative the double bees. It's more idiosyncratic. Uh, And you're not tied to kind of rates moving up and down. Great.

Just to be clear, are you blaming the tourists for the action and double bass No? I I just think that's where the you know, the rate sensitive the market is right. But to be clear, you have seen a proliferation of these short duration high quality funds both in investment grade UH and HI yould bonds. And so that's the first thing to be sold pageon Managings Director and Senior Investment Officer. This is a formal thing before we get to a serious conversation with Chad Bound at the

Peterson Institute. This is an annual thing that happens now, folks, we're handing the bracket to the head of my life to the bus to let her know that we are boiler up. Is this why I put you? Is in for our global audience? Yes, my whiz, I actually did pretty well last year. How are they ranked? They're like good, They're better? They're like what okay, there are two team say there it is provedn be nice to meets your hands to Pharaoh so he knows what not to do.

There you go. You just do the opposite of what Chad Bound with us for the Peterson Institute. We have a lot of fun with the brackets and we say good morning to allow you across the nation on serious sexption. On one nineteen, Mr Bown is to the Peterson Institute and we do need an update on terroriffs. Is that that nudges away in our vision and yet it should not Chad. What do we need to focus on now with this huge tariff debate, Well, the first thing we need to focus on is my buck now, Bison, my

my school number fifteen, Michigan State. Get to the important stuff to watching them go there. But more seriously, uh so we're still waiting to see how all this plays out. So President Trump on Thursday tariffs on steel, ten percent tariffs on aluminum. But the first thing he said was well, for now, we're not going to impose these things on Canada and Mexico. We're gonna potentially exempt them that we may hang it over their head a little bit in

the NAFTA talk. So we'll see what happens there. But everybody else is up for grabs. Now. He did open the possibility that are Security Alliance partners may be able to wiggle their way out of this somehow. So the U S Trade Representative, Robert Leidheiser was in Brussels on Saturday meeting with Cecilia Moms from the EU Trade Commissioner, the Japanese Trade Commissioner. Uh you know, potentially seeking them

to get exempted. But nobody else has been exempted yet so as of now, only Canada and Mexico are not going to be hit by these new tariffs. So it's the President United States has just twaited for USAULT to say the Secretary of Commas, Wilbur Ross, will be speaking with representatives of the European Union about eliminating the large tariffs and barriers they use against the United States of America.

The words of the President this morning chat, this is the time when ready the United States should be working with Europe, with Japan to address the issue that is China. Instead, there seems to be friction, tension between themselves at a time that China is sort of centralizing strength within President Shape talk to me about how difficult it will be to take on China alone if you don't have Europe, Europe and Japan with you. Yeah, that's exactly the issue here.

So the source of the underlying concern when it comes to steal aluminum is global over capacity, most of which has come out of China. Uh. And you know, the Europeans are suffering in much the same way as U s deal and aluminum. The Japanese are as well. So you would think that if you're the US administration that you would want to get the EU Japan to cooperate with you in dealing with this, this underlying problem of China. But that doesn't seem to be their approach. They're gonna,

you know, potentially slap tariffs on them. That EU has already come out with their list of products over which they're gonna have to threaten to retaliate against the United States. And so all of this is really a side show to the actual underlying problem. So let's get to the underlying problem. I'm still wanting for a great answer to this question, chat, what is the best approach for dealing

with China? Well, I do think you need cooperation. Uh. You know, having the United States trying to go at it alone, uh and without its key allies is really not going to work. So you do need to get the other major players out there to actually stand up, stand up alongside you. Now, you know, we we can't take that off the table completely. Uh. You know, there was a renewed engagement by the three the US, EU

and in Japan coming out of the weekend. You know, this was this meeting that they had on Saturday, was long scheduled. The timing ended up being a little bit awkward because it was right after President Trump's Triff announcement, But this thing had been in the planning for a while, trying to deal with China on uh steal an aluminium capacity, the bigger intellectual property issues that that they're worried about

jointly as well. So it's going to take a cooperative approach for for these and and all the other economies of the world to really address this. I'll chat. I'm sure that we'll touch upon this with you in the future. None of this matters. After the Bucknell Bison crushed Colgate. To get to the joy of facing Michigan State, Chad Bound, how does the strategy change as you move from Colgate

to Michigan State. Well, Michigan State is going to be tough, um, So I will say Bucknell does have a really good track record in the Big Dance. You know, it wasn't that long ago that I forget if they were at They actually took out Kansas in the first round, So you never know with my andh Why do I see buck now in your bracket? Tom King? It is not

in my bracket. What I what I suggest, Chad Bound, is you head over to the chemistry department at Bucktell Bucknell Folks, which was world acclaimed and maybe they could come up with some flubber or something to put on the ball to uh get you within shouting distance of Michigan State Chad bound in the Peterson Institute and Bucknell. As we look at teriffs and uh, really the fund for our global audience is just playing fun to look

at march Mandis because people know it's very simple. At two hundred West Street downtown is the Golden Sax Tower, forty four stories high. And of course all of Global Wall Street repealed for Fumta Bianca or Fumta and Era today and as Dac and Campbell knows, the ballots of the partners were burnt and the white smoke came out and David Solomon was annointed. I mean, you know, we've

talked a lot about these people. David. Let's talk about the process within Goldman, or for that matter, any other firm and what it means for Goldman Sax forward Pope Solomon is was he selected with joy or was this a really ugly battle. It's a good question. I think it depends on who you ask. I think if you talk to David or Harvey in their um in moments when they're being real, they would say this did get heated at times. Uh, not to the term, not to

the tune of you know, yelling at each other. But they both took it very seriously and they both wanted to win this. How do they compare and contrast the soul? There's that point in a William Cohen book where the leadership of Goldman Sex is having an excellent sandwich. I think it was it's three guys, uh him years ago when they did some genormous deal across a deli over and excelled sandwich. I mean, the heritage of the firm is conservative and basic. How did these two guys stack

up within the new Goldman Sex. Yes, so Harvey came up through the securities division. He did spend some time in the investment bank, but he's really thought of internally and by a lot of people externally as a trading as a sales and trading guy. David came up through the investment banking division almost exclusively. He ran that division

for uh, you know, a decade or more. Uh. It's worth noting that in seventeen the investment banking division turned in more revenue than the traders for the first time since two thousand, so the first time in seventeen years. So certainly you could say the investment bank and the people who have led the investment bank are ascended. Can you tell us a little bit about the person who

is Mr Solomon? I mentioned earlier that his assistant I believe it was earlier in the year, was arrested because he was found to have been stealing wine from Mr Solomon's wine collection. And he's got a background when he's uh went to Hamilton's College, black belt in karate. I believe that's harvy. I beg your pardon. Yes, So so David went to Hamilton's College. He's been investment banker for uh just about all of his career. Uh, and he

does have a wine collection. He is a DJ on that's what I Yeah, I confuse DJ and black belt. What was what about? So he plays electronic music? Uh, he does that about once a month. It's something that he got into several years ago. And is he considers one of his hobbies is the the issue of diversity and a social uh change. I guess is that a factor in in how Goldman Sax sees its future, and as a result, perhaps why Mr Solomon was tapped. David when he was running the investment bank, UH did a

lot in on diversity efforts. He really tried at the analyst level, so the incoming class, to to really get fifty percent men and fifty percent women. And his belief is if you can start at fifty fifty at the bottom, then by the time people leave, or UH you ask people to to go, by the time you get to the top, you'll have a much broader set of choices to make for the division or the firm senior leaders.

He took that message to the board and as I understand, really impressed the board with those concerns and with those what he's trying to do. There is a board removed from the partners because I'm looking at revenue growth, which is basically going nowhere within a general statement, and operating income is basically going nowhere is a general statement. I mean, this is really you know, forget about all the social stuff.

Is this just a financial exercise where Mr blank find didn't get it done in terms of running the bank. Running the bank, I'm looking at revenue growth, which is flat. I'm looking at operating income over four or five years. Great, it's a great margin thirty five cents thirty six cents on the dollar. But there's no growthiness here. I'm sorry, Diack, and that's what I'm seeing. Nobody's doing a James Gorman Victory lab that what this is about understood, this is

uh it is it is. I guess you could you could put this in terms of a vote for the future as opposed to a vote for the past. So if Goldman was a trading shop and they turned in thirty three billion in trading a loan in two thousand nine, then going forward, maybe they think that that they're not going to be a trading shop, that it has to be more broadly based investment banking. They're not giving up

on trading, let's not get ourselves wrong here. But they've also got asset management and they've got this consumer lender. I'm trying to get Henry Paulson as a DJ and I can't get there. Is Mr Solomon essentially a uh Paulson equivalent. Ah, he is definitely a client guy. The two of them shared that very much. Just so everybody understands. Henry Paulson has perceived as his high and mighty Wall

Street guy. He was out in the dregs of Chicago taking every single airplane flight domestically out of a hair that exists. I mean people don't know. I mean it's all the romance of being on the Upper East Side and deciding where to go to your second, third, or fourth country house. And as you know, Dacon, that's not what it's about. It's like a grind, isn't it. That's right,

it is. And and and David has been since he's been tapped as co CEO fifteen months ago, David has really continued the uh the schedule that he set when he was at the investment bank, going out, seeing clients, going out. He's, as I understand, he's introduced himself to maybe too many partners that he hadn't met before. So uh so that is sort of in his blood. And and uh he's similar to Hank Paulson in that how does the decision

like this get made? And uh, are there any other changes that you foresee happening at Goldman Sex because of his appointment. I want to say, I want to be careful saying I don't see any other changes, because I'll be I could be wrong in a heartbeat. Excuse me, Dakon Campbell wrong making note of that. But this is this is largely a choice made by the board and

also Lloyd blank Find. So at some point the board, as we understand, in February, came to a decision that they had seen enough among these two and that David was their guy, and so, uh, you know, it took him several weeks to to come out with the announcement, but that's what got us to today. James Johnson, Bill George, who we've had on this show many times. Mr Mattall, Michelle Burns, David Vinnier, we know him from another time. Peter Roppenheimer, Ellen Coolman is is, well, what's the character

of the board. It's a good question. It's changed in the in the last couple of years. They've added a couple of new members. Yes, certainly, but as I understand, these are largely people who are loyal to Lloyd blank Find and are gonna allow Lloyd despite what you might think Tom about revenue and earnings growth. The board is still content, as I understand, to let Lloyd sort of finish out his term. How that's important? How long is that for? Yeah, they haven't said a timetable yet. It

could be a year. I will not be two years. I have to ask a sense of question, and with great respect to Mr blank finds wonderful health. Is this about the fragility of his health over the last three or four years. I don't think so. I think he's largely covered beyond that from from that episode, from that cancer. What's the biggest challenge that Goldman Sex has right now? The biggest challenge I think is, as as Tom's spelled

it out, is revenue growth. With with the trading business, which had been such a big part of the revenue base in the past not doing well and certainly not going back to the days of the pre pre crisis days, they really need to figure out how to generate revenue growth other areas. Who's quickly? Who's next? Done? Wall Street? Do you have any idea where where there's sort of time for a CEO to change. Mr Gorman's had a heck of a run as he entrenched at Morgan. I

think he is. I think the next one you might see would be Jamie Diamond. I mean that's I don't really know anything, but that's that would be my guest Jamie's been there a long time. I think he if he had something else to do, and if he felt like he was at a good point in time, he might do something like this as well, taking Camel terrific briefing. Thank you that that was really valuable. Thanks for listening

to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio