Goldman Sachs Vice Chairman Rob Kaplan Talks Economic Uncertainty
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Bloomberg Audio Studios. Podcasts. Radio. News. We have an opportunity to bring you a fascinating conversation. It's underway right now at the Bloomberg Sellside Leaders Forum in New York. Our colleague Bloomberg's Eric Schatzker sitting down with Rob Kaplan, vice chair at Goldman Sachs, former Dallas Fed president. Let's listen live on Bloomberg TV and radio. Your career has taken a very interesting trajectory. Goldman Sachs.

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 University of 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 22, 23 years.

But then I took a leave of absence to teach leadership at Harvard Business School. I went from instructor to professor to senior associate dean, did that for 10 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 Waldron to the firm, believe it or not. And 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 Goldman Sachs every week. I mentor and coach clients.

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 so far, it's been a great experience. It's a $50 billion revenue firm with 50,000 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 appreciated 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 at Goldman Sachs, 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 U.S. economy, both domestically and internationally,

Everyone in the room is wrestling with the implications of these changes. Give us your framework on 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

U.S. government. It's gone from mid-70s debt to GDP pre-COVID to now over 100%. And they come into their new administration wanting to deleverage, to take 6.5%, 7% of GDP deficits lower. This is where you can debate the tactics, but this is where Doge came from.

and a number of other things, but they would like to deleverage. We'll see at the end of the day how far they get without carving in entitlements. 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 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 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 rely on an income of $50,000 a year or less. They've lost 25% purchasing power. They're struggling to make ends meet. They helped 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. The risk of state in the obvious, 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.

There are probably 13 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 $4,000 a person.

They tend to do lower value-added manufacturing we probably don't want here. And they're going to struggle to buy U.S. goods because they're GDP per capita. And you would center on a handful of countries you really want to rebalance the arrangement with. We've instead created tariffs 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 we're inextricably linked. Agriculture market for our farmers. Rare earths back to us. Intermediate goods is 40% 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 U.S. 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?

So the other things you're referring to, we'll just say what I think you're referring to, the things going on with higher education, other...

other battles away. And I'm always careful in my previous job and in my current job to stay away from 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 year saying, if in doubt, I want to over-allocate to the dollar.

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 the dollar, rallying gold, 10-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, 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 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? 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 and

that a number of these changes happened

the tariff uncertainty. And I'd say businesses by and large, because that's sort of the DNA, including me and most business people, you want to be optimistic, cautiously optimistic. But they're struggling right now to figure out how they want to adjust either supply chains or their business or their access to workforce. And 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, 10% or 20% with these various countries, it will make it easier for them to adjust.

And right now they don't know what the end point is going to be in the timing of it. And that's why they're wrestling to work through it. 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. Part of the problem is that now there are

we presume because we don't have 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 increase 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 invest in CapEx.

So CEOs are watching the news and their teams are watching the news more than they're historically accustomed to. And by the way, this administration is talking to businesses very extensively. So they're giving their views. But depending on who they are, what's an example? Many businesses want to see the relationship with Canada and Mexico resolved quickly.

because they need the logistics and supply chain arrangements. And if they're going to change those, it's not a 30-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 aware it takes a long time to negotiate a trade deal. Trade 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 30 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, but 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 set on China, that would also encourage businesses.

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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 they're

In a similar vein, they may be even more self-interested because their compensation 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. But should they be?

I think my sense is they're listening. What CEOs are now trying to also gauge is, is this going to lead to a modest slowing or

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 a tension there, and there probably ought to be a tension 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 way of policy from the Trump administration will mean for America's place in the world. Share with us your thoughts.

Well, so listen, U.S. exceptionalism is real.

There are many distinctive elements of that. We've got the most, I mean, we have the 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 we'll come out of this period with those intact because 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

you know, 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 & Gamble on the consumer goods side, but also companies like Goldman Sachs and J.P. Morgan on the financial side. Will it become more difficult for American companies to do business outside the United States? 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 a 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

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 they would appear to be, an underlying objective to each of those five things. And you articulated it quite well. But what's missing, or 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 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 tough regulation but more balanced so we can get more productivity growth.

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're 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 2025 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 a minimum we got right now 10% tariffs. So we're having a cost shock, which is affecting goods, which had sort of been helping us. And so...

This is a big structural change, and I think Jay Powell'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

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 by anchor, you don't want inflation expectations to get away from you because that will 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 J-PAL 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-moderate income families. He doesn't want to signal that they're going to ease up. And so it's a pretty complicated communication process.

and tactical balance he's trying to weave. And I think that's what you're seeing. And the irony is, if Jay Powell could find his way clear in the committee, and if I were there, if I could find my way clear to 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 it 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 40 years, certainly since I first recall hearing the term interest rates in the early 1980s, two things as gospel, right? The respectful dynamic of

in the relationship between the White House and the Federal Reserve and the importance of central 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, 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 be, 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 Volcker did.

in the late '70s, early '80s, 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 who've 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 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 at Goldman Sachs since starting there out of business school in 1983 and now for the past 11 months back there as Vice Chairman Mike shared with us the fantastic anecdote about programming in Fortran.

You know, what has changed the most? Clearly, nobody's programming in Fortran 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 2,000 people at the firm when I joined. We were primarily U.S.,

Today, we are a global firm. We're in a number of divisions and businesses, including asset management. We weren't in when I joined. We've got 50,000 people, a much bigger footprint. So globalization was sort of the headline, I would argue, in the 80s and the 90s. Goldman was part of it. Many U.S. businesses became globalized.

There's been a change, I would argue, in the last 10 or 15 years, and we see it in our business. I'd say if you lost your job in the United States 20 years ago, it might have been due to globalization. In the last 10 or 15 years, probably more likely due to technology and technology-enabled disruption.

And businesses, the rate of disruption, innovation has accelerated. That has been critical to 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 literacy, 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 the society has got a different set of policy decisions to make because of that. MR. 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 1983 and which ones are different today and why? So business principle number one, clients' 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 40 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, it was one of the keys of the firm. Today,

You multiply that statement by 50. 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 or team will bring the whole firm to bear. That's key to our business.

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