Vice Chairman at Goldman Sachs Robert Kaplan Talks Trade War's Impact
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Bloomberg Audio Studios. Podcasts. Radio. News. We always like to start the day and start the week with someone with broad perspective. Right now joining us is Robert Kaplan. We're thrilled that he could join us today. Forever associated with his Goldman Sachs, but his public service noted to the nation as the president of the Federal Reserve Bank of Dallas and just a really broad view of where we are.

Thrilled, Robert, that you would begin our Monday with us. Where are we right now? In a broad sense, can our institutions survive this onslaught of uncertainty? They can survive, but we've got a number of weeks more to go to get through this fog. And in particular,

You know, there's three big changes going on. There's the government spending cuts. There's the changes in immigration policy, which are having even a bigger effect than are being discussed.

And on tariffs, the thing that we're just not sure about is the Trump administration intending to negotiate tariffs down to zero, 10%, 20%. I noticed over the weekend, they said that they want to settle out at 20% to 50%. And those are dramatically different outcomes. Right.

Your charm, Robert Kaplan, among, you know, the people think that everybody within the Kaplan school comes from six zip codes somewhere in the vicinity of Boston or New York or Washington. You are a brethren of Kansas.

out of the University of Kansas. This makes you different. You understand the span of America. I'm looking at a statistic where Kansas has $2.3 billion worth of products in aerospace to the rest of the world. How a threat is Kansas from this upset in Washington?

Well, it is threatened. It's got a lot of farmers, big agricultural economy, and our farmers rely very heavily on foreign markets, China for an example. There's a lot of concern in Kansas. Also, there are a lot of small businesses. Bigger businesses I'm seeing, they don't love the uncertainty, but they have a lot of levers to manage. Small businesses are telling me

that they're at risk if this goes on for a number of more months. There are many of them are thinking that they won't be able to stay in business. Paul, over the weekend, buried in the headlines, I know you weren't paying attention. At least it wasn't paying attention. China canceled 12,000 metric tons of United States pork shipments.

Oh, that's a lot of bacon. That's a lot of bacon there. And I think we're going to see more of that. Robert, when you have discussions with your clients, Robert, with your bankers at Goldman Sachs, is the discussion about a recession is coming or whether it's coming and whether we can get through this? What's the real economic fallout that you're hearing from your clients and bankers?

I think people see that in certain sectors, there's already a slowing. So travel, leisure, there's less tourism. That we know. Shipping we know is weak, and you were talking about earlier. And in other parts,

The sentiment is very negative, but we don't see a severe decline. I think most people I talk to are expecting further slowing. It's not a fait accompli, but I think they're worried that there's been pre-ordering, it's artificially bolstered GDP recently, and that there's a little bit of a cliff coming at

a more substantial decline in growth, but they don't know. But they're preparing for a more severe slowing. - In that regard, Robert, what do you think the Federal Reserve can do, should do?

I think they should be making clear, as I think J-PAL did a couple of weeks ago, that they're still very focused on fighting inflation. You don't want inflation expectations to get de-anchored, unanchored here. And that's what he was trying to do. And otherwise, don't make predictions. Don't talk about June or not June, because they don't know. We don't even know what the tariff policies are ultimately going to be.

going to be. Keep your options open and don't try to be a prognosticator. Be a risk manager. Formerly with the Dallas Fed and now at Goldman Sachs, Robert Kaplan with us to start us strong this morning in this extended conversation. I mean, I guess we could try it out, Robert Kaplan, the Fisher equation, the Fisher hypothesis, rather, of central bank theory. But it does come down to lagging or ex post or after the fact. I

I mean, that's the only fallback the central bank has. They have to wait and see the labor market crack before they act, right? Well, they need to see more evidence in the hard data of slowing. And also, they don't know, and we don't know, this cost shock we're about to get. How inflationary is it going to be?

The irony is, up until January 20th, goods were disinflating globally. There's a lot of global overcapacity for manufacturing. And the service sector was where the inflation issue is. Now it's changing. And so the Fed's going to have to see more evidence. And in fairness to them, it's hard to make

policy forecasts or judgments when you don't know yet what the policies are and they don't. I mean, Paul, should we do a chart on Bloomberg Radio Monday morning? Yeah, that works. I think a chart works with Robert Kaplan. And you know where I'm going with this, Robert Kaplan. I'm going to the 10-year real yield. We are in betweeny within the dispersion, folks. And the answer is at 1.99%. Paul, it really begins to show this economic slowdown.

down at 1.80. So we are distant from that identifying of a slowing economy. Yeah, we're certainly seeing GDP forecasts on Wall Street coming down. Robert, when you talk to your corporate clients at Goldman Sachs, what are they doing about some of their longer term plans, whether it's long term CapEx, whether it's M&A? Are they hitting the pause button? Are they trying to move forward?

They're mainly hitting the pause button. They're not canceling plans, but they're pausing them. And the other thing they're doing is, and again, these tariffs have come very abruptly. So many CEOs have told me, listen, if I had six to 12 months, I wouldn't solve this, but I could make moves, but this is happening now. And so they're re-looking at their plans for supply chains and logistics.

And on the investing side, we are seeing people who started the year wanting to over-allocate to the dollar

are now saying, "Maybe we're over-allocated to the dollar." They've done a 180, and they're starting to look at broader alternatives away from the dollar. That doesn't mean that that's what they're going to be doing six months from now, but they're concerned, and it's more than tariffs, that they don't understand the U.S. economy and U.S. institutional framework as well as they thought they did, and that's giving them some pause.

Should we go to the Dallas Fed with Robert Kaplan? No, we can do that. I think we can do that. Robert Kaplan, as you know, each Fed has its own characteristics, its own past, the Robert McTeer, Robert Kaplan past of the Dallas Fed, but it's on the border as well. Not speaking for the Dallas Fed, I want to make clear that Dr. Kaplan doesn't do that, folks, but Robert Kaplan, to be clear here, how do you perceive our tension with Mexico-

as you look at all the research of your Dallas Fed? Yeah, so Texas, as you note, is the largest exporting state in the country. The relationship between Texas and Mexico in terms of logistics and supply chain arrangements, as well as people, by the way, from Mexico coming across the border to shop,

in Texas, that those relationships are essential. And this is why for many companies domiciled, not just in Texas, but in the country, being able to send goods back and forth across the border with Mexico as well as Canada has been essential.

to domiciling in Texas and in the United States and making sure we're globally competitive. And people don't realize that if you want to encourage reshoring to the U.S. and you want to take share from Asia, you would want to preserve those logistics and chain arrangements. So with all your experience, Robert Kaplan, how do the people around the president, including the secretary of treasury,

allow him to save face and walk back from his McKinley-ite tariffs? So I think the nub of the issue right now is it's unclear how much cost savings we're getting out of Doge.

Okay? And I think that's part of this discussion. And I think they're still a little bit wedded that we're going to get the offset, we're going to get revenue from tariffs, and that'll help us in the deleveraging, it'll help us justify a bigger tax cut. And I think all the studies I've looked at have shown that every dollar of tariff revenue you get, you give it back.

portion of it in terms of lower growth and damaging groups. But that's the key to, I think, why they're clinging to these tariffs at higher levels, not at zero. And I think they may be better served

letting go a little bit on that concept. In the zeitgeist this morning, Paul Sweeney has a bar chart. I'm going to give credit to the Tax Foundation showing the teensy-weensy revenue build from tariffs versus the ginormous revenue that comes in from income taxes. Right. It's a sobering chart. It is. Robert, as former president of the Dallas Fed, you have an appreciation for taxes.

Immigration, legal and illegal, being in that part of the country here. What do you believe the impact of this reduction of illegal immigration coming across the border will do to the U.S. labor market? Because I'm not sure really folks are clear on how that works.

So one of the things I would say over the last four years, and during the Trump administration, we had in excess of a million workers a year, immigrants, who came in and joined the workforce.

It appears now this year that could be in the low hundreds of thousands. We can't tell yet. So that's going to slow workforce growth. That slows GDP. It tightens the workforce. But the bigger thing going on that I would call out, there are millions of undocumented immigrants in this country in the workforce who are unsure of their status. And I'm hearing from their employers that some number of them are not coming into work and they're certainly not shopping.

and because they're concerned. And so that is making the labor force, at least in the service sector, tighter, and it will slow GDP growth, and it's probably affecting consumer spending. Robert Kaplan, generous of you to be with us this morning. Vice Chairman Goldman Sachs, thank you so much. And again, his public service at the Dallas Fed. There are presentations.

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