Surveillance: Goldman CEO: Bumpy Times Ahead

executive Officer David Solomon. We note that the gentleman from Hamilton College applied to Goldben Sacks a few years ago Chinali, and was rejected. That rejected was swept aside over the years, and the investment banker replacing Lloyd Blank find about four years ago leads Goldben Sacks forward into two thousand twenty three at their conference are Chanali Bassk, Tom, thank you so much for your time, and David, thank you for joining us. You know you have this conference here, you're

entering your fifth year CEO. You're in such a different place than you were even six months ago. Your stock is actually holding up better than every single one of your rivals. But the reality too is here that everyone is preparing for what could be a mild or even deeper recession. As the CEO of Goldman Sachs, how do you prepare your bank for that? Well, first of all, thank you for having me, and I'm delighted to be here with you, and I appreciate your being at our

financial services conference. This is a thirty three year We've got a terrific group of clients here and it's a great time to kind of reflect on our industry and really look at our industry going forward. I think you've framed it just just correctly. We're at a very uncertain time. Uncertain time given we're changing monetary and economic conditions very very quickly, and that's certainly having an impact of slowing

down economic activity. And so if you're running a big financial services firm, I think you have to assume that we have some bumpy times ahead and you have to be a little bit more cautious with your financial resources, with your sizing and the footprint of the organization. I think you have to expect that activity levels are going

to be more constrained in a tougher economic environment. So we have businesses that are very very correlated to economic growth in the world, and we're predicting economic growth will slow. Our Our economists predict one point nine percent economic growth around the world uhe, which is obviously slowing growth. And the big question is as central banks tighten monetary conditions and try to control inflation, can they do that in or constrate orchestrate some sort of a soft landing. And I,

you know, I think that's still uncertain. I think there's a possibility of that, but I certainly think we could see our session in also, And so I think you've got to be cautious and prepare. How then do you prepare your staff around all of this. It's December, stand of the year. People are worried about jobs, people are thinking about jobs, are thinking about pay as well. It's

bonus season coming up. We've reported that you are even thinking about having lower bonuses at businesses that will have rising revenue this year. How are you thinking about this? Bring us inside your decision making process us and what you're telling your staff right now? Well, we we operate a business for every single year, UM, we have to pay our most important asset, which is our people. It shouldn't be surprising to people watching the performance of the

business this year. That one was an exceptional year. It was a record year for the firm, was the highest revenue year ever for the firm. Twenty two is a different year, and so naturally compensation will be lower. We're still early in the process of making those decisions. But just like every year, we pay for performance, and we will pay people based on the overall performance of the firm,

and especially for our senior people. Um. You know, we we consider the overall performance of the firm as we go through our compensation process. How do you balance also, you know, this year you've been we introduced the you know, the natural calling of head count. The bonus discussion is

not just here, it's obviously everywhere on Wall Street. How do you balance that with kind of the story that we saw just a year ago, this talent war, that we saw this booming market for people, and what's happening this year going into next stend a tougher time. How do you balance retention as well as those more difficult conversations. Well, we take a very long term view with with everything we do, and you have to adjust to the environment

and so you make changes around the margin. Um. But at the same point, you know, you take a long term view, and you try to think about your business over time. We're extremely focused on serving our clients and our core businesses. Our clients have been active, and so it's important for us to strike the right balance in protecting our franchise and making sure that our people are

paid for performance. On the other hand, where in an environment that's a tougher environment, broadly performance is not as strong, and so we balanced that. But we take a long term view. Our people take a long term view. But I just made some comments in the in the Financial Services Forum where I said that I'm surprised by how resilient the competition for talent is. And by the way, this is just not in our industry. You're seeing across the United States and around the world that labor is

still relatively tight. Talent war is not over talent. Well, the talent war is is is um. I think there's and headwinds given we're changing economic conditions, but the competition for talent is still very very strong. Now. How that evolves in is unknown. Certainly, if we have a slower

economic environment, it will have an effect. You can see across all industries, not just tech, that people are thinking about their head count size, and they're making let's say, pruning cuts or adjustments just because they feel more margin pressure coming. So financial services is not immune to that, and I think we all have to watch the environment and make the right long term decisions for our organizations

and for our shareholders, whether it's tight counter otherwise. As you think about this kind of tough for economic environment on certainty, do you think Goldman is going to have to pursue another round of cost cuts in any fashion? And if that were to be the case, where could you see them? Well, we we always look at the environment, and we always size the firm to the environment. If the environment gets tougher, we will obviously make decisions to

size the footprint of the firm appropriately. That can come from slowing down hiring, which we've already done considerably in the second half of the year um and that might also come from pruning in certain areas. So switching years a little bit here kind of broader financial services picture and talent war and whatnot. Last year fintech crypto firms booming.

I'm curious whether the collapse of f t X is making you think in any fashion differently about crypto as an industry and the ability to potentially invest in some firms, maybe buy some assets here. Well, I've I've been very clear on my view around this space. I think the underlying technology of blockchain is extremely interesting. I think they're enormous opportunities for blockchain to play a role in evolving the infrastructure of our financial system. I think there's an

enormous amount of friction and the way money moves. I think there are a variety of ways that this technology can be used to allow more participation and inclusive participation in financial activities. I think it can break down barriers. That has nothing to do with bitcoin or a cryptocurrency. I don't I don't really, you know, offer a view on on cryptocurrencies. I think they're highly speculative. They may

hold value, they may not. But I'm interested in the underlying technology and how the underlying technology can help serve our clients, our customers, and really take friction out of the financial system and also help make it more accessible. But the reality too is kind of Goldman was pretty early in the market here when it came to futures trading, when it came to the industry at large. Do you think that there's a chance to lean in or is

there still too many regulatory risks? Were we when when you say we're early, we've done a very narrow um selection of things around this broad area because from a regulatory perspective, we're extremely limited in terms of our participation UM and I don't I don't see that changing UM in the immediate future. And so we want to be available to give our client's advice and insight and how we think about some of these things, but our activities

are extremely limited in the space. I want to take a moment to realize it's about to be a big moment. You're five, that you're becoming CEO here, that you've been running this firm for is there anything you didn't do in the first five years that will kind of be at the top of your list here to execute as you enter this kind of new things. Well, we laid out and I know you were there because you've covered

it as a reporter. In our first investor day three years ago, a desire to grow the firm, to diversify its revenue base and make it more durable, to operate the firm more efficiently, and in particular, we focused on the opportunities for us and asset management wealth management, and on our recent reorganization, we've now got those businesses together. We run the fifth largest active asset manager in the world.

We have a jewel of a wealth management business, and we see real opportunity in the coming years to continue to grow that and so we're on a journey to diversify the firm. I think the thing that we're most proud of over the course of the first few years, and I think our team has done an extraordinary job, is at the time of that investor day, there was a lot of skepticism about our markets franchise, particular Thick franchise, the returns we could generate, our client position in that business,

and we've really strengthened that business. That is a leading franchise that's performing very well. We've taken over three basis points of market share in that franchise and that's really made the firm. It's our biggest business. It's made the firm much stronger. How do we really focused. We've really focused I'm sorry to it to interrupt you for a second, smile.

We've really focused on the client experience and making sure that the way we serve our clients is really really differentiated and we're getting great feedback from from clients on that and that strengthening in our business. So we're on this journey to diversify the business, to strengthen the business. I think we've made a lot of progress, but we have a lot of work to do and m and we continue to focus on on growing and strengthening the firm. So you're leaning into so much of the core of

Goldman Sacks. A couple of months ago you announced this general realignment, let's say, of Marcus and the consumer strategy. Do you expect more big changes to be announced a head as you have your next big investor day coming up. Do you think that you'll have a target here? Do you have any sense of when it can become profitable? Well, we we made a very purposeful decision in this reorganization, which was a significant decision to organize the business into

three units. Are asset wealth management business, which we were just discussing, our banking markets business, which I was highlighting the strength of the markets franchise, and obviously our investment banking franchise is a is a leading franchise. And we took our platform businesses transaction banking, and our consumer platforms,

and we put them together. We narrowed our focus purposefully on our consumer business and tried to align it with things that we think really play to our strength, whether it's the technology, development of platforms, our relationship to enterprise businesses, and also in alignment with our wealth business. With that narrowed focus, we're gonna be very very attentive to making sure we scale those platforms and they're profitable as quickly

as possible. David Year five. You look around um all corporate America, not just Wall Street really, and you see so many companies as they think about succession planning. The CEOs have had to come back on multiple occasions. You see it at Disney, You've seen it at Carlisle when it comes to Golden Sacks. How are you thinking about succession planning now as you kind of move into this next part of your art. I am, I am, I am in your far. I've I've got a great team.

We're working on all the things we were just talking about, and that's what I'm focused on. And there'll be a you know, there'll be a time when it will be uh, someone else's turn to Steward this great institution that's been around for hundred and fifty four years, and at that time, you know we'll make the will make the appropriate decisions.

But for right now, this leadership team is really focused on continuing to grow and strength and golden stacks, and we feel like we've made a lot of progress, but we also feel like there's a lot that we can do and we're excited to talk about somewhere that in February. I'm looking forward to this investor day. Thank you so much for taking time with us on a really big day here at Goldman. You said thirty three year conference, thirty three years of the conference. Yeah, thank you so much.

Thank you. It's nice to be with you. Shinali brilliant as always. The latest from city term a slowdown to a fifty basis point hike in December remains very likely, but we should expect FED officials to guide towards higher term rates and we maintain our call for another fifty basis point high can February had a terminal range of

to five fifty. And here's the final line with asymmetric upside risk, that's the bottom line, sam As City, and that is a key determinant, and let us be clear here at the end of the year in celebration that Andrew, can we all agree Andrew Holland Horst and his team the way out from City in Bank America I think laughed at in spring of this year when they started

to talk about how Finns FED might push it. It's turned out to be my my My basic take is Deutsche Bank had the recession hallway early, and Holland Horst had the interest rate vector just absolutely great. Now we got an update. Now Mr holland Horst of UCLA joins the chief US economist at City Group. Andrew, I'm gonna cut to the chase. The fancy math, the ratio math of the Bloomberg Financial Conditions Index is not good for Powell.

Goes against your thesis as well. We are accommodative. It's in research notes this morning, Ben laydler over detro notes off the Chicago Financial Conditions series as well. How much are those measurements going against the chairman of the Fed. I think you're right, Tom, it's going in the wrong direction, the wrong direction from what share Powell would like to see. I watched those conditions every morning, just like you. Just like the viewers. And every morning I'm thinking, what is

Chair Powell thinking when he sees this. I think that's true today. I think that was true after his comments at the Brookings Institution a week ago, where I think he was trying to send a hawkish message or a neutral message, and the market took it as stubblished. So it's just all more hawkish risk down the line if we extend the ex access out. Let's say we do that and we do move to a higher nominal rate,

even more advanced real rates as well. Does that give our economy time to get used to a new higher rate regime. I think the idea was slowing down is it gives the FED a chance to really evaluate in real time what has been the effect of raising interest rates of tight ending financial conditions. We see that in the housing sector. We see a housing sector that's going in reverse, house prices that are coming down. That's where

interest rate policy is very pogent and very effective. The issue that this Fed is facing is we have a really tight labor market and they're trying to loosen that labor market with a really blunt tool, which is interest rate policy. Not clear that that's moved far enough yet to see that loosening. Andrew, what are we missing? We keep thinking that there's going to be a much more sustained downturning, Yet the data keeps surprising. John was asking earlier,

is this economy speeding up for slowing down? We can't tell based on some of the recent data. So what explains these surprises that we keep getting. So you've seen some areas of the economy slow down. We were talking about housing, which is going in reverse. Good spending in general has been a lot weaker, but really strong services spending. And when we keep seeing that spending data that's coming in wrong, we think back to all of the savings that built up over the last couple of years that's

coming down. Now. The savings rate is historically low, but it looks like there maybe even more of that excess savings to work through. You look at credit card balances which are rising. That can't continue forever, But remember consumers were very under leveled coming into this year, and there's a lot of room to grow credit on consumer balance sheets,

so that process is underway. All of that is stoking continued demand, and as long as the demand is out there, you're going to see firms that at the very least want to hold onto their existing workers. These are hard workers to hire. It's been a tight labor market, so again,

very very hard to loosen that labor market. Andrew, we're hearing about white collar workers that are getting laid off first, exactly to your point that the rank and file that actually make things go on a tangible level are needed and necessary. How much do you think that a soft landing is pretty much off the table, despite the fact that so many people are basically betting on that being

the outcome. I think we just need to be really clear on this, Lisa, and it is an unfortunate reality to have to acknowledge, But the likelihood of a soft landing is quite low. Yes, it's possible. Yes, there's a hopeful scenario where you can get a soft landing, and everybody would like to see that, but we need to be realistic the balance of the historical evidence, as well as the fact that inflation is just running so high and it's so difficult to bring down inflation from these levels.

I think if you acknowledge those facts, and you acknowledge that we really do have a wage price spiral here, I know that it's very unpopular to say that, but there's no question wages are rising, prices are rising, there's an expectation that they continue to rise. It's a self reinforcing dynamic that is likely going to take a recession

to bring those inflationary forces back down. At what point is a financial accident going to be the trigger to some sort of more rapid decline rather than just sort of waiting for kodoh, which is what a lot of people seem to be doing, and then confirming their experience or their expectation, rather for some sort of downturn and specific data. I think that's where you're kind of balance what's going on in financial markets and what's going on

in the real economy. So, like we were talking about financial conditions tight and very aggressively now loosened from those tighter levels, and we've seen the economy slow down in sectors, but we haven't seen this broad slowing that's cool demand and broad inflation down. So it could be the case that financial conditions just continue to tighten further, need to continue to tighten further from here, Then the risk that there's a more significant breakdown in the financial sector becomes higher.

I would say that looking at the world today, look at the US in particular today, pretty clean consumer balance sheet, it's banks that are not over levered as well. All of that makes us feel more comfortable about the ability of the economy to withstand higher interest rates. But certainly those risk rises you continue to find the financial poditions. What what drives me nuts here, and maybe it's my fossildom is well, do you see what's sounder? Cassidy said

to me yesterday. Do you want to repeat that for people? We missed it? I think because I'm not saying it's like if I go home Vett Bill screaming at me on the Cassidy the Cassidy diet. We'll talk about that in a minute. Andrew, older people like me know that we somehow survived a five percent terminal rate. The ut of America, including you think we're all gonna die on? Can't we survive where we're going to with this city

group call? Well, there's a really important concept which I know we talked about all the time, but it's important to emphasize, which is the real interest rate, the nominal interest rate minus inflation. And that's really what I think fed officials are focusing on more here, and we just saw on the wage data wage growth that's five percent plus we've known for some time, and the price inflation data,

price inflation this five percent plus. So when you look at that five percent interest rate and you're noting at the top we were saying five percent policy rates, five and a half percent policy rates with upside risk to that, that's because just getting to five percent, we get that real rate just back to zero. So if you think that real interest rates need to move positive, then the Fed would need to move potentially beyond that level. Um And to your point, talk in an economy that's running

high inflation, five percent plus interest rates should not be surprising. Andrey, thanks for being with us great core this year, No doubt we're talk before year end. Andrew Holland, host there of city joining us now, Amy Wuve Silverman. According to derivative strategist at RBC Capital Markets, Amy, can we begin with a consensus view for next year. Here's a quote

for you. Evidence of slowing core inflation, peaking official rates, and signs of economic recovery should pave the way for more risk taking in a second half of I want to be clear here, Amy, I'm not picking on any single bank. That is the consensus view for next year. Do you share it? Yeah? It's interesting because I think if you looked at any outlook it would say almost

the same thing. And when I was in Europe last week speaking with clients that is also their view, I would say that, you know, it's it's really hard to say. The options market when we look at pricing to that term structure is sort of fifty fifty. Essentially, you know, no one is placing big bets yet that will see this, you know, miraculous second half rally. But certainly that's the sentiment that is being expressed, but it is nowhere in the positioning yet. Amy, Honored to have you with us.

I've never seen the physics envy I see in this year's set of outlooks. You and I can look at time series and go Matthew and all that. Guess what predicting out the January to me seems as uncertain is gaming June or December? How do you interpret not the indecision but the pivotness that we see the nodes, the points along two thousand twenty three where things are going to happen. Who are we kidding? We can't predict that.

You know, I've been thinking about this a lot, Tom, and I think this year, more than any other year in the market, has really come down to positioning so much, because if you think about it, last year, sentiment wise, we were kind of in the same place. You know, there was a barish outlook. We knew the FED was going to go into a hiking cycle. But you saw that in equity skew. You saw that in your favorite word,

in critosis. Right, we saw so much hedging demand from last year at the beginning of this year, and you see none this year. Why is the positioning so different if the sentiment is the same. I think because people remain off sides or they've gone touristing in other markets, and you know, equity is just not that there is no alternative world anymore. What does the epsilon look like? That randomness, that systematic error off the back side of

the algebra? What is the character of our uncertainty? Are unknown? So so here's where I would say I'm quite concerned in terms of tales. On the down side, what I've heard from a number of clients is a potential systemic risk and leverage loans. You're starting to see that, uh, you know, specifically in b k L and which is the proxy et F. That's a big downside risk. Geopolitics continue to play a downside risk Taiwan or Russian Ukraine. Now on the upside, it's much more general. People just

cannot miss rallies. You're seeing this in zero day to exprey trading, and that tells me that the reach for upside remains the pain trade, even though the sentiment remains parish. I think those tails are not priced. Everyone's between thirty their price targets, and yet those tales remain something that

we need to watch for next year. Amy, I'd love you to elaborate on those systemic risks, whether it's leverage loans, whether it's the private markets, which a lot of people have been pointing to, whether it's just interest rate swap overlaid currency debt issues that we're seeing our just currency swap overlaid on top of debt, and this is something the Bank of International Settlements has been pointing to. What are you most concerned about? What's the transmission mechanism to

the broader market that hasn't already yet taken place. So I think it's two things. I think you know, especially on the credit side, when we speak to credit investors, they know these risks are out there. For instance, you know if down grades by the rating agencies in the fourth quarter of next year caused something and leverage loans.

I think what the concern is if the positioning, as I mentioned prior, is really all to the upside, right, so all your demand is sitting on that call wing, then you're going to get quite a cycle when people start to need to reach for that downside because that downside tail, you know, a three standard deviation draw down on the market. We measured that with t dex is treating in its second percent. Hell over five years. People.

People are not sitting on tails. You're not using downside protection right now, and so when that grab happens, I think it'll be quite violent. And when you have the VIX now you know, back to a twenty handle, I think that can reflate quite quickly. Lisa. I mean something I want to finish with is just to give you the opportunity to go over something you delivered a number

of months ago. So a note about why this market regime is going to come with more volatility, and that's going to stay with this for longer than many people think. Amy can we finish that? What are you seeing? And what have you seen? Two that you think we need to live with? Three and perhaps even beyond. Yeah, you know. I think one nuance that people forget because they're so fixated on where VIX goes from thirty to forty is actually that if you've noticed all year, VIX essentially hasn't

dropped below twenty. So it's not necessarily that we're spiking the higher levels during the pandemic we hit a VIX of eighty. It's that our floor has simply gotten higher. Our bits is not moving below twenty. And there's a result of that, you know, the correlation components of volatility, it's a big component to old index. Volatilities has remained high and I think will continue to remain high if that VIXED floor does not come down from that twenty handle.

I think we remember the years tom when the floor was tent was that four or five years ago? Twice? A big change. It's a big, big change, that's for sure. It's a big, big change. You know, to under to take the rail from a thirty one ish into a twenty a better market, a lower vix as well. But I really have trouble Frame and John, other than a massive bull market, how do you get from twenty to seventeen? That that that there's a lot of inertial force that

has to be overcome. And he's been putting in amy thank you for payment to Sami with Silverman that of obviously capital markets now a joy Edward Morrise honed hydrocarbon analysis in the street at a small shop called Lehman Brothers years ago. He did this off of his academic work at Princeton, his political economic work on oil over many decades, and now hold shop with global head of Commodities research at City Group or thrilled he could join us today with that the call of the year, Let's

go the other way. What did the one dollar over a barrel? People get wrong? They got wrong, Uh, both supply and demand, but more and more on the demand side.

I mean, this was supposed to be a year depending on whose projection you're looking at, that was going to continue that five or six percent demand growth post pandemic, and it just fritted out, fritted out, largely because it's something nobody expected, namely the pace of the slowdowns and the recessions emerging in the largest economies in the world, China, the US, and obviously Europe. So the demand side really

is the the big killer on this. Uh, we're looking at probably maybe one point seven demand growth this year compared to projections of Right. Well, what's interesting add to me as the price as we come down and everyone's rationalizing along the way to a price point where riod reacts or Washington reacts, etcetera. What is the price point you have in your head where this becomes painful for the oil winners. Uh, Well, the price point when it comes really painful, it's going to be below sixty five.

There's plenty of oil that can be productively, Uh, you know, exploited at seventy. We start getting into some fields that just don't work at six five. But I guess unbelievably painful below fifty five. But we still have and you just remarked on it. Uh, the U. S Government having indicated it might start buying oil if w t I falls below seventy, and I think that's the first test. I think OPEC has said, Hey, we're gonna stick to this.

We're not gonna change forecasts. We're not going to change our our our oil projections of what we're putting in the market. Maybe evaluate them in February, the next time their JMMC, the Monitoring Committee meets. So I think the next political move on managing the market will be up to the US, up to the U S. How so,

what are you looking for? Well, I I I go back to the President's point that at seventy dollars a barrel they can start buying back oil for the strategic reserve, and that's meant as an encouragement to the industry to keep drilling and to keep producing. So well, it'll be a test to see what happens and whether the President is serious about this, thinks that, hey, maybe this is the time when we're really getting off of oil because demand for it may be falling faster than people thought.

Why are we talking about the downside surprise at a time when China is potentially reopening, when these headlines don't seem to be moving the needle at all, even though this is definitely a big concern and people thought that perhaps it could send oil prices two a barrel on Brent. Well, I take exception to that you know, we had the China news that really did move the market and moved the market up but a little bit higher than the

fundamentals warranted. And now we're having the good news in the US, the good news about the economy, which is really bad news in terms of the commodity markets because it indicates that the FED is going to keep going and raising the prices at the prior level that people thought. So the dollar gets more expensive, the economy slows down more, and demand for oil fall. So I think that the market is responding to news. It's just today's news is the good news in the US. Last week's news was

the good news in China. But it's also this wee this week that we're getting some news about China perhaps loosening some of the testing requirements in Beijing after reducing them in Shanghai just yesterday. How much does this sort of come together and something that does accelerate demand more than perhaps the base case, or is that not even on the table because of how much the Russian barrels are coming back on. I just am not understanding the price action at all right now, based on some of

the narratives people have been saying for a while. Well, the first thing you have to remember about the price action is liquidity is dried up even more than it already dried up. People are fleeing the market because of the level of market uncertainty and because we're getting towards the end of the year, and those who made money this year don't want to lose any come the end of the year. So liquidity has dried up. And when liquidity drives up, you get an incredible volatility coming out

in the market. I think that's a very important point. The second point is the uncertainty about Russian oil. Uh. We thought that there was going to be a significant increase in demand for oil from other sources as you're moved off of Russian oil. We actually had that, and it was an incredible increase in exports out of the United States. A week ago the print was about eleven million, seven hundred thousand barrels a day of gross exports and

crude oil and petroleum products out of the US. The US has been replacing those Russian varils, and uh, you know, we've had our inventories fall on the crude side, but they're rising on the product side. You know, this was supposed to be a period of time when diesel demand was going to be high and diesel cracks we're gonna stay at forty And now diesel cracks are going down

and we're actually building an inventory. So the data mixed, but they're they're you know, they're to equally Barrishes, they are, and Morris, I want to touch back on your years of work with Woodrow Wilson at Princeton and Johns Hopkins and the rest as well. We have a miracle happening to the President of the United States is going to attempt to turn the inertial force of globalization on its ear by traveling out to Arizona where we're gonna build semiconductors.

From where you sit with your decades of experience, can we be successful in stealing back manufacturing processes from around the world. Actually, I think we can, and you mentioned a deglobalization. Effectively, we're not gonna see trade growing the way it did in the in the go go years. In we're seeing all three major economies, China, the US, and Europe putting blockages on trade and being a little

bit protective here. There's a coincidence of interest between the US and Europe based on what the Europeans are calling their sea BAM UH, their carbon border adjustment mechanism. Having the US effectively putting the same sea BAM on China helps them competitively. So there's a commonality of interest there. China is pulling back on trade because of energy security issues and you might say commodity security issues, and one more made at home or more important, not by seaboard trade,

but by on land trade. Hence the Belton Road initiative, hence the pipelines from Russia and the like. So we're seeing all three major economies pulling back from globalization, getting those supply chains at home. And I think that's an important shift that's going to dominate the next decade. And I just want to squeeze is saying, just to blend two stories, she and rhyat this week. What are you expecting from that mating. The one thing you can expect is,

you know, greater ties on the oil market side. UH. China and the Saudis already have an agreement and putting in new refining, testing out the Saudi technology to convert oil directly into petrochemicals. UH. Petrochemicals is where the growth and demand is going to be the Saudis have an answer there. So so I think it's gonna be partly about the world, partly about new alignance alignments. The lot the alignments are not gonna, you know, be totally solidly

moving to the to the east. For the Saudis, if you look at where their interests are in terms of UH issuing bombs, in terms of putting out shares on the I p o s of their state owned enterprises. They can't go away from London and New York. They can't get what they can get in London and New York provided by either Moscow or Beijing. But it is a move solidifying UH that line of of purchasing of oil. The Saudis are there to provide oil that is kind of under the table. It's meant to go into into

strategic stocks. The Chinese want as the prices go down, to get their strategic stockpile built up to the level they want. They have Russia that's selling oil at a distress and they're saying, well they can get through the Saturdays as well. At wonderful to catch up with you, I'm wonderful co in the last couple of months and most that and I'm not gonn immnce words. This is newly meanted at the Keene household. I feel lucky to have this. This is the fancy iPhone for those of

you on radio. It's a what we call Faraoh purple and it's yeah, it's like sort of like the Tots uniform, the kit that they have cared with the awake thank you, But um, I feel lucky to have this. Demand is so great that it's hard to find. Yeah, I had to wait like weeks and the answer is they want to bring the stuff in here, the Magic Canny Year over to America. That's all there is to it. Very cool.

We're gonna talk about that Today. Tim Cook of Apple and other worthies will join the President of the United States in Barry Goldwaters, Arizona. There's a calculus here of science and technology, chips and security. Brian Deese, the Director of National Economic Council for the President, is with us for an early morning brief before he travels to Arizona. I want to get right to the political economics of this, Brian, that you studied at Middlebury, which is low and behold

a democratic runaway in Arizona. Hearkening back to even nineteen fifty. If the president moves for investment, does that bring democratic votes? I mean, is this a political victory lab for the president as well as a science victory lap Well, the most impactful thing I've learned today is your color choices, Tom, But what this is today is a big milestone for the country for economic and national security reasons, as you said,

inside that iPhone, but also importantly inside military applications. Inside our most advanced computing applications are these leading edge semiconductors, and today we produced none of them in the United States zero. So t SMC's announcement today, he signals the beginning of building out that American supply chain. And the other thing we're gonna be doing in Phoenix, though, is underscoring that we're seeing this across the board. It's not

just in semiconductors, it's in clean energy innovation. It's an upgrading infrastructure. So you see across the Phoenix area big investments in electric vehicle batteries, in um in in the fiber that will lay for broadband across the country. That does bring big economic benefits and I think a renewed sense of economic optimism to places like Phoenix, there has to be an inertial tip point where you push against

all the foreign manufacture. What is your timeline, Brian? I mean, let's be honest, we're really not moving the global semiconductor needle. Here Out there, somewhere is where America gets a critical mass and manufacturing these complex processes, including lithium batteries. How long is it des timeline to get to where we move the semiconductor needle. Well, look, these are big projects and the key in this industry is scale, so that

doesn't happen overnight. Building one of these fabs, like the President will see today, is a very complicated, multi year process. But the good news is that we now have enacted these long term incentives, and I think that's one of the key pieces to understand about what we accomplished legislatively here in both clean energy and semiconductors. We now have incentives in place for multiple years, a decade really, and that gives private companies and private capital the ability to

move in and move quickly. A lot of people say, well, but you know, we may not see the benefits of this for a couple of years, but we're seeing it right now and companies pulling forward investment and deciding to

invest in the United States. So while the full timeline to build out the supply chain to produce chips here in the United States, to produce batters here in the United States, that's a multi year project, we are seeing in ways that a lot of people didn't think was possible activity and that activity will result in economic opportunity

in right. How concerned are you? How concerned is the President with some of the tension that this has caused with European allies who say that this is investment not going into Europe, that this is anti competitive and really draws a lot more dollars to the US and a lot more of the tech industry. Well, the President had a good conversation with President McCrone on that topic and

other European leaders as well. A couple of points. The first is the President makes no apology for the fact that his economic strategy is focused on generating more economic opportunity, more economic security, and resilience for our economy and our workers. At the same time, the opportunity globally for the US leadership in these areas is quite significant. You know, in semiconductors and energy, these are areas where the world is

short supply. We need more electric vehicle batteries globally, we need more semiconductors globally. So when the United States invests pulls forward innovation that lowers cost, that makes it easier to deploy in other jurisdictions as well. So certainly we're gonna work with our partners and allies. Where there are concerns,

we can sit down and talk about them. But the President's strategy here an industrial strategy to make the United States and attractive place to invest but also pull forward innovation reduced cost, is one that will have benefits for the whole world. One of the problems with creating some of these policies historically has been that it has to be a longer term basis for that investment to bear fruit, for those factories to actually take a stance. How important

is consistency. And I say this at a time when President Biden Ron Clean was talking about this in the past couple of days is expected to announce a running again and members of the Economic Council Cecilia Rouse I know has talked about leaving the Council and others I know that there have been rumors about yourself. How much is that implore into was kind of keeping things on

the rails. Well, you're raising a really important point, which is, if we're going to provide long term incentives and certainty for private capital to invest here in the United States, we need policy certainty. But one of the important elements of what we got done over the course of the past year is that most of what we passed has broad bipartisan support. It certainly has bryan partisan support outside Washington. You look at the Chips and Science Act, it had

brought bipartisan support in Congress as well. You've got Democrats and Republicans, but also people business leaders from across the country, from the center of the country, from the coast, all kind of buying into this idea that having the United States as a leader in clean energy manufacturing, a leader in semiconductor production, that is a worthwhile, long term national investment that will help provide that stability that private investors need.

You know, Brian, I love that you were wearing Hugo Boss to the State dinner or the other night with Mr McCraw and all. You're enjoying your Rouge River Blue cheese. Let me cut to the Chase Brian, how's our trade relationship with the French? As we talk about the technology

and all that, how are we doing? Look, I think the relationship as a whole is very strong and certainly undergirded by a great state visit, and it's always important when the two leaders have an opportunity to really sit with each other, spend time, break bread, and that happens here we have. Look, you know, we have our challenges, but we also are able as to two countries to

lift up. And there were really poignant moments, for example at the state dinner with the toasts of the two leaders, marking just how our two countries have been there for each other when it really matters. And obviously with Ukraine UH and the fight in Europe, the United States is proving once again that it's a reliable ally. We're gonna have our concerns, We're gonna have the issues that we're going to discuss, but you know, overall, I think the

relationship is quite in a quite a strong place. Can you confirm it was actually a hugo boss? I think it was in the building. I was in the building and I can confirm definitively it wasn't here go, Brian, can you confirm definitively is staying with the administration? Can we wrap that one up? I can confirm that I'm totally focused on the work we have to do. We have a lot to do here between now and the end of the year. That's where my focus is. I

can confirm you kind of touch that one. But Brian, fantastic to catch up with, he said, thanks for it time this morning. We appreciate it. On AC Council, this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg