Bloomberg Audio Studios, podcasts, radio news. We have an opportunity to bring you a fascinating conversation. It's underway right now at the Bloomberg sell Side leaders Forum in New York. Our colleague, Bloomberg's Eric Shatsker sitting down with Rob Kaplan, vice chair at Goldman Sachs, former Dallas FED President.
Let's listen live. I'm Bloomberg TV and Radio.
Your career has taken a very interesting trajectory Goldman, Harvard, the Fed. Goldman again. Tell us a bit about it, how because I think it really helps to establish context for what you're going to hear from Rob.
Well, So, I'm from Kansas City, and I went to her City, Kansas, but I went to business school and I loved the markets from the time I was young. So I went to Goldman Sachs and it was I think the perfect place for me. I stayed for twenty two to twenty three years, but then I took a leave of absence to teach leadership at Harvard Business School.
I went from instructor to professor senior associate. Them did that for ten years, and then a former client was chairman of the board of the Dallas FED and I always wanted to do public service, and so that's how I moved to Dallas to be head of the Dallas FED. And in terms of coming back to Goldman, it's a different firm. I've been gone for a long time, but I was part of recruiting David Solomon and John Waldrin
to the firm. Believe it or not, I felt like I could help, and with what I've learned since I left, I felt I could particularly help. So it's been about a year and it's been a great experience so far to be back.
Tell us as a vice chairman about your focus, your responsibilities and to the degree that they've been articulated for you, and to the degree that you've been able to formulate them yourself about your objectives.
So it's funny.
David and I talked over a year ago about this concept and it's held pretty true. I spend two thirds of my time on clients all over the world. I'm an investment banker by training, but I spend a portion of my time in investment banking. I spend a lot of my time with trading clients. I spend a lot of my time with asset management and private wealth clients all over the world, and then because of my leadership teaching background, I will teach a leadership class in between
client meetings somewhere in the world in Golden Sets. Every week, I mentor and coach, I annoy people. I try to coach business leaders, division heads, heads of the firm about things I think we could do better. And that's pretty much what we agreed coming in and it's been so far. It's been a great experience. It's a fifty billion revenue firm with fifty thousand people, so the pool is deep and there's more to do than I can do, and it's been a fabulous experience so far.
One of the things Rob that I've always a preciated about you and talking to you, is the systematic approach you take to studying problems. I'm assuming that this started in your earlier days in Goldensacts, but no doubt you perfected it while you were teaching at Harvard. We're in the midst We're quite clearly in the midst of major policy driven structural changes in the US economy, both domestically
and internationally. Everyone in the room is wrestling with the implications of these changes give us your framework how to think about this.
So one of the things I brought to the FED is a focus on structural drivers. I'm a business person, not an economist, and business people, as most of you know, focus on structural drivers. You look at cyclical factors and data, but ultimately those come as a.
Result of structural drivers.
There's five big structural economic changes going on right now. That's a lot for any point in time. What are the five? Number one, the administration is trying to take what they perceive as an over leveraged US government. It's gone from mid seventies debt to GDP pre COVID to.
Now over one hundred percent.
And they come into this into their new administration wanting to de leverage, to take six and a half seven percent of GDP deficits lower. This is where you can debate the tactics, but this is where Doze came from, and a number of other things. But they would like to deleverage. We'll see at the end of day how far they get without carving it in titlements. They're doing a regulatory review of every industry with the hope that we can improve productivity growth. Three ways to grow grow
the workforce, improve productivity and leverage up. We've exhausted leveraging and so productivity growth through a regulatory review is one driver. They are trying to do a overhaul of the energy ecosystem, So what does that mean. They're trying to increase the global oil production. They hope to do it domestically, but it's not so easy at lower prices. But they're pushing
OPEC and Saudi Arabia to produce more. They're going to make it easier to run a refinery, permit a refinery, do transmission.
So why are they doing this?
Because they're sensitive that there are tens of millions of families in this country that roll down on an income of fifty thousand dollars a year or less.
They've lost twenty five percent purchasing power. They're struggling to make ends meet.
They help this administration get elected, they want to show them a tangible benefit.
Fourth Big Change.
One of the reasons the US economy has outgrown the world. One of them is, i would argue, is very high levels of fiscal spending and special programs. But the other reason is we've had a surge in labor force growth heavily due to immigration, much of it. Undocumented, they are risk of state in the Obviously they are shutting that down. They haven't yet ramped up legal immigration, but hopefully they will. And they are also working to deport at a minimum,
people with criminal records. The issue is, which we can talk more about. There are many millions of workers in agriculture, in construction, other industries who are undocumented.
They're probably thirteen million Green card holders in the United States.
In addition, and I would say at a minimum, the undocumented workers are very unsure of their status.
I'm hearing from businesses.
They're not in some cases coming into work, They're not sending their kids in some cases to school, they're certainly not shopping. It's having a chilling effect on the workforce and probably on consumption. So that's the fourth one, and
then it gets to the one. We're getting all the airtime tariffs and suffice it to say, I had thought going into this, if you want to level the playing field, which I think makes sense, fairer trade, better access, and you want to encourage reshoring, the challenge is you'd probably carve out Mexico and Canada because that allows you logistics and supply chain arrangements which allows people to domicile here. You might even carve out poorer countries who don't have
a hope to buy our goods. Vietnam might be an example, where their GDP per capita is four thousand a person. They tend to do lower value added manufacturing. We probably don't want here, and they're going to struggle to buy US goods because their GDP per capita, And you would center on a handful of countries you really want to rebalance the arrangement with we've instead created terrace on everyone. And I think we're now negotiating deals one by one.
But it takes time to negotiate a trade deal, and it's very critical that there are many things we do with China. Yes, they're an adversary in certain things, they're a competitor in others, and there's some places where inextricably linked agriculture market for our farmers rare earth back to US intermediate goods is forty percent of the imports. And so I think what you're seeing now is a working through one by one how.
Do we.
Lower these tariffs because US companies right now are struggling to do all this at once in an abrupt way, and so that's the process we're working through. But those are the five big changes. And if that sounds like a lot, it's because it's a lot, and it's a lot going on at once.
There is more going on. Are you leaving those things out because they are not big enough or because they amount to noise?
The other things you're referring to, will just say what you're I think you're referring to the things going on with higher education, other battles away, and I'm I'm always careful in my previous job and my current job to stay away from the you know, the political parts of these. But the one thing I do see around the world in pools of capital, which we talk with regularly, is countries that maybe a month ago a lot of the uncertainty had to do with the abrupt nature of the
tariffs and adjusting to it. I think it is broadened out a little bit where countries and investors around the world, including here, are asking what's the institutional makeup of the United States, what will it be in the next three or four years, and whereas they came into the years saying if in doubt, I want to over allocate to the dom at a minimum, they're saying, maybe I want to be more balanced, and even in some cases they're saying,
I want to reduce my exposure to the dollar. And we're seeing a little bit in weakness of dollar rallying, gold, ten year treasury backing up. And I think all this is part of a mosaic that we can work through, but it's creating this amount of uncertainty, including institutional uncertainty, is affecting asset allocation and access to capital for the United States.
There's no question rob in uncertainty is the word on everyone's lips.
You hear it.
Perhaps now I haven't used the Bloomberg and the AI tools that we've been given to determine yet you know how much more often we're hearing it. But anecdotally it seems like never before. You mentioned earlier, you told us, in fact earlier that you spent about two thirds of your time with clients. What is the mood in the c suite and in the boardroom is it? Would you go so far as to say it's one of sort of paralysis.
I wouldn't go that far. In that Listen, we started the year. It's interesting because a lot's happened in a short period. We started the year with great enthusiasm and optimism, and I think the regulatory review was a big part of that. And the company said, you know, I'd love to improve productivity. We're sort of being constrained in all these different ways, and I'm excited that we're going to be able to be freer to run a capitalist business.
That a number of these changes happened, the terriff uncertainty, and I'd say i'd say businesses by and large, because that's sort of the DNA, including me, of most business people. You want to be optimistic, cautiously optimistic, but they're struggling right now to be to figure out how they want to adjust either supply chains or their business or their access to workforce. And they'll, well, they'll work through this. Business people adapt. Capital allocators also adapt, but business people
will adapt. I think to the extent we negotiate, for example, tariffs down to mutually zero versus say ten percent or twenty percent with these various countries, it will make it easier for them to adjust. And right now they don't know what the endpoint is going to be in the timing of it, and that's why they're wrestling to work through the ones that are wrestling. The most last comment
is big businesses have a lot more levers. Small businesses we're hearing are struggling in that they don't have a lot of levers and they don't know how to replace the supply they've gotten, but they're afraid they're not going to be competitive. And many more small businesses we talk to are more nervous at this moment about their business failing and certainly not being able to employ as many people as the employer, certainly not being able to employ them full time.
Problem is that now there are we presume because we don't have a ton of visibility into the details, but we presume there are multiple negotiations going on with multiple countries on multiple timelines.
Right.
David Solomon, in fact, was saying earlier today that the delay in tariffs didn't decrease the level of uncertainty. In some ways, the delay increased the level of uncertainty. So, with the feedback that you've been getting from clients, what is it that business leaders, CEOs, members of the board will need to see to feel a degree of certainty, a degree of confidence such that they're more willing to transact.
They're more willing to commit capital. They're more willing, for example, to do what they're largely not doing now, which is investing cap X.
So CEOs are watching the news and their teams are watching the news more than they're historically a customer. By the way, this administration is talking to businesses very extensively, so they're giving their views, but depend on who they are. What's an example, many businesses want to see the relationship with Canada and Mexico resolved because they need the logistics and supply chain arrangements, and if they're going to change those, it's not a thirty day process. It is an extensive
process to move them. They're watching carefully the negotiation going on with Japan, and so they're literally just I think what would help businesses if they're encouraged listen. They're also where it takes a long time to negotiate a trade deal.
Trail deals are very complicated.
Normally in the past it might take nine months or a year or longer to do a trade deal.
So they're watching.
Maybe there's going to be an agreement in principle lower the tariffs, then negotiate the details. But I think the more progress that's visible over the next couple of weeks or thirty days, it will make people think that more progress is coming. But every company I talk to has a little different supply chain arrangement, whether it's with Vietnam or with Canada or Mexico or elsewhere. They're ready to adjust that, they're not sure how. The one thing they
do say is it probably isn't at the moment. Unless there is really very high level technology, it's hard to imagine replacing all of it in the US and being globally competitive.
And that's the key every question every.
CEO wants to whatever they're going to do, it's got to be globally competitive. The irony is on China, what they're looking for is not more news. They're actually looking for less. And I was joking around with someone the
other day. If you hear no discussion from our administration or either side about China for a few days, I think it may increase confidence that negotiations are going on, because with China they need to go on unseen behind closed doors, not in the press, And so maybe the less said on China that would also encourage businesses.
I was in Washington last week and had some conversations with people in the administration, and one thing I was told, which I'm not sure it necessarily surprised me, but it stuck with me, is that, of course CEOs are complaining right, they're highly self interested. They're either self interested because it's their job to husband the bottom lines of their companies, or in a similar vein they may be even more self interested because their conversation is so closely linked to
their stock price and so certain. And the message to me was that some of what the administration is hearing from corporate America is being discounted?
Is that fair?
I can't speak for the administration, should they be? I think my senses they're listening. What CEOs are now trying to also gauge is is this going to lead to a modest slowing or something more severe? And that's the other thing they're gauging. And the other thing that's a
little jarring. They're watching the dollar, they're watching gold, and they're watching the long end of the curve because I think they would be heartened by seeing a capital allocation away from dollars and US treasuries come the other way.
And so.
CEOs their job is to express their views, be advocates for their companies. The job of the administration is to make good policy they think's the right thing. There's attension there, and there probably ought to be attention.
There, whether it's from CEOs, whether it's from current or former diplomats. There is some level of concern about what these changes that we're getting in the world of policy from the Trump administration will mean for America's place in the world.
Share with us your.
Thoughts well, so listen us. Exceptionalism is real. There are many distinctive elements of that. We've got the most I mean, we have the most most outstanding companies in the world, extremely innovative. We're a magnet. We've been a magnet for talent globally. Our higher university system has been part of that story where we attracted great talent who now run and work in many of our most innovative companies. We have been a place that workers around the world want
to come to. My grandparents were not born here, and that's been critical. And it's been a place where you always know rule of law.
And other aspects.
You can have confidence in our own institutional framework. And I think people are very hopeful and I'd say cautiously optimistic, but they're hopeful that will come out of this period with those intact, because that those are critical to our future.
To the degree that maybe I'll put it differently, American companies have in some ways been ambassadors for American exceptionalism as America was leading the trade liberalization of the world in the post war period. It was led by companies like Coca Cola, for example, or Procter and Gamble on the consumer goods side, but also companies like Golden Sacks and JP Morgan on the financial side. Will it become more difficult for American companies to do business outside of the United States.
So this is a blow. So we run a goods deficit with the world, and we know that some of it is for low value added goods, some of it's for intermediate goods, and some of this has to be rebalanced. On the other hand, I think you're getting this. We also are very aware we run a large service sector surplus with the rest of the world. Our leading companies here do a lot of business around the globe, and
when in doubt, we are great beneficiary of that. And I think people are also hopeful that we make improvements on the manufacturing side, but we don't in retaliation, we don't lose our edge on the very distinctive competitive advantage we have for services, which is enormously beneficial to the United States and causes us to run a big services surplus.
Let's go back for a moment to your five point structural framework that we talked about at the beginning of the conversation. One of the things there is, at least there would appear to be an underlying objective to each of those five things, and you articulated it quite well. But what's missing, what I hear from business leaders is missing is a coherent narrative. What's the objective, what's the endgame, who's supposed to benefit?
Is there a strategy?
Yeah, so I think i'll give I'll take a stab at that because I think the narrative, if I would articulate it, is we want a less government spending led economy, more private sector organically driven economy.
We want we want tough.
Regulation, but more balanced we can get more productivity growth. And I think the purpose of this is to create an economy where low moderate income workers can get good jobs and with living wages, and we can become more globally competitive. I guess that would be the narrative I would put on it, and I think most CEOs and business leaders in this country share those aspirations. I think the debate we're having these days is just more on
the tactics and the implementation. I think the objectives are ones that many people share.
Speaking of tactics, we should talk about the elephant in the room that I've ignored up until now, which is the Federal Reserve. Given that you are observed as the president of the Dallas FED, your point of view on the subject is important and certainly relevant. Chairman Powell is the target, as we all know of repeated attacks by the president, not quite daily, but it's getting to the point where it's close. He has a nickname now too late.
Try to walk us through Chairman Powell's mindset right now?
What is he thinking?
So we come into twenty twenty five with it's interesting. Service sector inflation still sticky, running in the low to mid threes, but goods inflation in pretty good shape. Goods have been disinflating, and so why did we have sticky services? Probably a little bit of excess demand. You might attribute some of that to excess government spending. Okay, we're now shifting to seeing a cost shock, which we don't know how it's going to unfold because we don't know what
these tariff deals are going to be. But at the minimum we got right now ten percent tariffs. So we're having a cost shock, which affecting goods, which which had sort of been helping us.
And so.
This is a big structural change, and I think Japali's handled this very well. And what he's trying to do is say, listen, we are watching carefully. If there's a downturn, we're going to carefully monitor market function. If there's any question that there's not orderly market function, we're prepared.
To step in. But we don't see that yet.
And what we want to assess is how significant is the cost shock, and in particular is the drop in growth going to which should be disinflationary help offset some of the cost shock. While he's waiting to see that, he needs to anchor inflation expectations. What I mean anchor You don't want inflation expectations to get away from you because that'll.
Make it harder to cut rates.
So I would argue the speech he gave last week in Chicago and other things you're hearing. They're trying to keep inflation expectations anchored while they have time to see how these policies are going to unfold. Does not mean that Jpal and the FED won't be ready to act, but they need to understand better. And the last thing they want to do is telegraph we're going to abandon or ease up on the inflation fight. We've just gone through an inflation trauma. I think for many low modern
income families. He doesn't want to signal that they're going to ease up, and so it's a pretty complicated communication and tactical balances trying to weave. And I think that's what you're seeing. And the irony is if j palll could find his way clear in the committee, and if I were there, if I could find my way clear at the lower rates, I'd love to, but I need to understand how this is going to unfold. I doubt they'll be able to figure it out by May. They're
going to take at one meeting at a time. They're not going to be prognosticators. They're going to be risk managers, and I think that's what you're seeing.
We have taken for the past forty years, certainly since I first recall hearing the term interest rates in the early nineteen eighties. Two things is gospel right, the respectful dynamic in the relationship between the White House and the Federal Reserve, and the importance of cimple bank independence. What's at stake if they go away?
So I've always felt, and I do believe today after having looked intensively at this and lived at the FED, a mark of a successful country in the modern era has been an independent central bank. Now they each of them have different objectives. We have a dual mandate here, some have just had an inflation mandate. But you want there are times where you can have a crisis and you need an independent central bank to have the independence to come in and help with that crisis.
There are also times.
Where maybe we get overheated, and the FED, as it's done in the last few years, has got to do something very unpopular, or Paul Volker did in the late seventies early eighties, very unpopular, but necessary in order to tamp down inflation. And I think that independence that's not wrapped up in the political system has been critical to the success of our economy now. I think people have worked at the FED would be the first to say there have been mistakes along the way and lessons learned, and.
I would certainly say that.
But I think the independence is a is a cornerstone of what one of the many factors that's helped the United States be successful in the world.
I want to touch on one thing before we run out of time, and it concerns the time that you've spent a Golden Sacks since starting there out of business school in nineteen eighty three and now for the past eleven months. Back there as vice chairman, Mike shared with us the fantastic anecdote about programming and Fortrand. You know what has changed the most, clearly, nobody's programming in Fortrand and punching in cards any longer. We do things at
Bloomberg very differently. What's most different at Goldman Sachs about the way the firm operates now relative to the way things were done when you got there.
So there might have been I forget, maybe two thousand people at the firm when I joined, we were primarily us.
Today we are a global firm.
We're in a number of divisions, and businesses, including asset manager.
We weren't in when I joined.
We've got fifty thousand people, much bigger footprint. So globalization was sort of the headline, I would argue in the eighties and the nineties. Goldman was part of it. Many US businesses became globalized. There's been a change, I would argue in the last ten or fifteen years, and we see it in our business. I'd say, if you lost your job in the United States twenty years ago, was
probably might have been due to globalization. In the last ten or fifteen years, probably more likely due to technology and technology enabled disruption and businesses the rate of disruption innovation has accelerated. That has been critical the Goldman Sachs and the opportunity for us, But it's also changed our economy to where the United States probably hasn't done as good a job. And that's why many of us at the firm are involved in education early childhood literally see
secondary education, digital divide skills training. We've got to improve that in the United States to help people make the adjustment. There'll be plenty of jobs that will require improved education, and I think we're seeing those changes in our businesses. At Goldman Sachs globally, and I think, I think the society has got a different set of policy decisions to make because of that.
You've experienced and observed as well as anyone what it takes to be successful, not just at a firm like Goldman, but at an industry well represented here Wall Street. If you will, what about those ingredients to success are the same as they were in nineteen eighty three, and which ones are different today?
And why so?
Business principle Number one, client's interests come first. If they succeed, our own interests will follow. It's always been number one. And number two, our people are our most important asset. And you better take care of your people, mentoring, coaching, developing your people. That was true forty years ago, and it's never been more true. That's never been more true today.
Also, anything different, anything new.
The complexity We always were a teamwork oriented firm was one of the keys to the firm today. You multiply that statement by fifty. In order to serve a client, we bring the whole firm together. Globally, we've got to get dramatically better. The world is so much more complex. Clients don't want to hire an individual. They want to hire a firm and know that that person covering them. Our team will bring the whole firm to bear. That's key to our business.