Yahoo Finance

Welcome to a new episode of the opening bid podcast. I'm Yahoo Finance executive editor Brian Sai. Like I always say, this is the podcast that will make you a smarter investor, period. And we're gonna get a lot smarter here because I wanna bring my next featured guest here, IBM vice chair and former director of the National Economic Council, Gary Cohn. Gary, good to see you. Brian, thanks for having me. Last time I saw you're freezing our ass off at the World Economic Forum. Talk about AI and like an IBM hot house thing that they take down.Friday after the event ends so good, thanks for doing this. Appreciate it. Thanks

for having me. It's great to be here. So, and we are a lot warmer.

We are a lot warmer. We are a lot warmer. Um, Davos feels like totally like 97,000 news cycles ago, right? It,

it does, it does, you know, that was, that was, that was literally it was inauguration day. I think we, we might have met on inauguration. Yeah, it was wild might have been January 20th or January 21st right there.

Coming in, I remember talking to you about and there was optimism. There was optimism on growth, and now as we sit here at the end ofanimal spirits,

animal spirits, animal spirits was the word of Davos, animal spirits. Do

they still exist because since then, now we've seen growth slow down. I've got numerous people sending me notes about a potential recession. What, what the hell happened here?

Yeah, look, look, I think the world was really, really bowed up.When we were in Dallas, it was, it like I said, it was, it was either it was inauguration day plus or minus a day either side um and there was a huge view around the world, um, the, the regulatory environment was gonna dramatically change in the United States.That the deal calendar was gonna open up, that the M&A cycle was gonna come back, and this was gonna all happen overnight. Yes, I, I, I think you and I might have talked about this, so I said, look, all those things may be true, but none of this stuff happens overnight. You did say that, yeah, I, I did. I do know having lived through this once or twice before in my life.You know, the president appoints personnel personnel's policy, but it takes a while for the president to get his, his personnel and his nominees in place. We're seeing this unwind today every day we've got hearings in the Senate. Every day we're trying to get new appointees in, um, to to new places, so we will see policy shifts. We will see some of these things happen.In the meantime though, we, we, we have to be realistic the the market came in on relatively all time highs we came in on a year of last year of a lot of government stimulus, a lot of uh money being put in the system.A lot of money chasing risk assets. Multiples were high. Every of the price of all risk assets were high, and I think we've seen a, a little bit of a retracement here in the price of risk assets. We've seen a retracement in the price of the stock market, you know, the stock market by itself.You know, if we take out the mag 7, you know, was not up as much as people thought last year and by the way, it's not down as much as people think this year. So if you take some of the, the, the noisier names at the top out, we probably have less noise in the market and so we're going through a, I would say a recalibration.Period here which has now lasted what the better part of of of two months or so living in the calibration we're we're living in the 2 to 3 month recalibration zone of what is the new paradigm going to look like and like we're in this period of transition and transitions are always messy.It doesn't matter what transition you're going through. If you're going from a commodative cycle to a tightening cycle or you're going from a tightening cycle to a accommodative cycle, those paradigm shifts are always messy. I think we're going through a bit of a messy period right now and the way I, the reason I say it's messy is because you look at actual data, actual data today is not bad.

No, it's notrecession, no,

but you look at people's perception of of what's going on, it's pretty ugly.So when you look at, you actually look at GDP data, you look at unemployment data, you look at consumer spending data, it's all pretty good. Then you look at consumer sentiment survey or, or you look at consumer confidence numbers and they're coming in weak to very weak.

You know this, the, the economic team at Goldman Sachs. Well, I used to work at Goldman Sachs, so, uh, I got a shout out Jan Hatzius. Uh, I followed his work for many years. He's coming out saying now the market is not priced in reciprocal tariffs which theoretically can hit on liberation Day. How are tariffs bad for markets?

We need to see, you know, I, I, I, I think there's been an enormous amount of time spent talking about tariffs and gallons upon gallons of ink spent writing about tariffs. The, the honest answer is we need to see what tariffs look like before I can, I can honestly answer that. It may be bad. It may not be bad. What I'm trying to figure out is what is the objective of the tariffs.And, and we've heard lots of different objectives, and I think we've got to start understanding what the is the objective is to stop fentanyl initially it was, and by the way, that's a really good objective. I don't think there's any American citizen that doesn't want us to stop fentanyl flow in the United States. So if we have to take some really tough measures to stop fentanyl, we should take the tough measures. Now we're moving past the fentanyl sort of discussion, and we've heard discussions about is this about creating revenue?I, I, I, I will, I will quote someone the External Revenue Service, you know, I don't really believe in the External Revenue Service works and we can, we can sort of peel that one open and, and, and, and, and talk about that. Or is this about creating jobs back in the United States, manufacturing jobs back in the United States, or is it a combination of both? They, they, they, they both can be true. I think we need to understand what tariffs are, are, are going to be used for.If we're trying to use tariffs to generate money for the United States because we need a source of money, we need incremental money for the president and the administration to implement their full agenda, there are tariffs that we can implement that will create enormous amount of revenue for the US Treasury and will not be inflationary on the system, but

you seethem that's where you've different.In the past you see tariffs as inflationary.

It depends where you tariff. So I'll give you an example. If you tariff Maseratis, Ferraris, Lamborghinis, and really high-end expensive,

don't do that,

don't do in real and high-end fashion brands and the wealthy consumer in the United States has to pay dramatically more for them.It's in it's those prices are higher, but it's not inflationary because they have an enormous amount of disposable income and it's not gonna affect their purchasing power. It's not an either or. It's not like I buy the Ferrari or I buy milk and still buy two Lamborghinis. They can still buy two if they want, even if they put a 100% tariff on them. So if you tariff certain goods.It's not inflationary. On the flip side, it doesn't have inflationary impact on the system. On the flip side, if you start tariffing what I would say consumer staples, if you start tariffing things that people have to buy to live.Not, not liquor. Let's go to Real Consumer staple. If you start tariffing, you know, basic clothes, basic shoes, basic food that every that hardworking Americans need to buy to go to work, to clothe their kids to go to school, to put food on the table.And that tariff gets passed along to those consumers and they spend 100% of their disposable income because they, they need to to live, they now have less consumption power. They're making either or decisions. I buy an.Extra t-shirt for my kid. I buy my kid the pair of shoes or I don't or I don't buy that. They're making this, those are very inflationary because now you're affecting consumer behavior and your dollars go less far, meaning you're having to make decisions. So until we understand what the tariffs are, I can't say and say yes, they're inflationary on the economy and they will have a negative impact on the economy. Now if we're trying to create jobs, which again.Admirable that we want to bring manufacturing jobs back to the United States, you know, we could argue, you know, how difficult is it to bring manufacturing jobs back to the United States. We do have a very high cost of labor here, but in addition to the high cost of labor here, we've got a lot of environmental controls and we've got a lot of other issues that have forced manufacturing out of the United States. We have to deal with all of those as well. If you're going to force jobs back to the United States, the way you do that, and this is a.Historically what tariffs have been used for, you take a foreign product where the foreign manufacturer has a competitive advantage and can therefore undercut the price of the US product so the US products no longer competitive. You put a tariff on it, you make the foreign product more expensive than the US product, meaning you have to pass the tariff on the consumer. Now, lo and behold, the US product, whether we're manufacturing it today or we need to create the manufacturer.Can be manufactured at a competitive price, potentially even cheaper than the foreign product and therefore we do create jobs, but you can't do that if you don't pass the tariff along. If the price of the foreign product still stays stays cheaper than the domestically manufactured product, you're not going to create jobs in the United States. Fair

point. So we still don't know the impact of a tariff, but would you tell the president, Mr. President, we need certainty. This daily back and forth.Is weighing on the economy would you tell him that? Is that

fair? Well, look, I would tell anyone who wants to understand what's going on in markets.That markets thrive on predictability and they they thrive on certainty so ambiguity is the number one enemy of a market when a when a company creates ambiguity in their earnings profile, in their growth profile, in their business model, the market will punish that stock.When politicians, legislators create ambiguity in the way that taxes are gonna work, the way that capital gains are gonna work, the way that they're gonna, um, impose tariffs or things, they create ambiguity in new markets.The market as a whole reprices. They price in the ambiguity. Markets tend to overreact to good and bad news, and they tend to, and they tend to price it in very quickly.

All right, Gary, hang with us. We're going to go off for a quick break. Uh, we'll be right back on opening bid.All right, welcome back to, uh, opening a bid here. Having a fun chat. It's flying by. I kind of wish it was this was one of those 7 hour podcasts. He probably doesn't, uh, Gary Cohn, I it hasn't been 7 hours. No, it hasn't been. No, come on, it's supposed to be fun. Gary, come on, man. Uh, IBM vice chair and former director of the National Economic Council, Gary Cohn here with us, uh, at the NASDAQ for opening bid. I'm convinced and I was convinced this a while ago, you know, basically everyone, uh, especially at Wall Street, is this community starting to get a little twitchy on what they're seeing from the administration?

I, I, I, I wouldn't say twitchy like the as, as I just said, the, the Wall Street community, the banking community, as well as the CEO community in every industry, they don't like ambiguity. Like we can deal, we, we as, and I put I said we, those, those in the, in the Wall Street community, they can deal with any environment as long as they know what the environment is, you know, whether it's tight monetary policy, loose monetary policy.Whether it's, it's it's a very tough regulatory environment, a very loose regulatory, they can deal the the the the community can deal with all of those outcomes because they have and they do. The problem they have is not knowing what environment they're in and how to run their business, how to staff appropriately, how to cover their clients, and more important, what advice to give their clients. Remember Wall Street is in the advice business whether it's from this.Simple retail investor all the way up to the most sophisticated boardroom CEO, they're in the advice business and when the ambiguity, it's really tough to give good advice.

Isambiguity going to be the characteristic of this administration for the next 3.5 years?

I don't know. Look, I, it, it, it's, it's a, we don't know. We, we could end up in a position where the administration settles down on what they want to do with tariffs. They get tax policy through Congress.Um, they get budget through Congress. We understand what where we're going from a financial standpoint. We understand what they need tariffs for. They don't need tariffs for, and they settle on a on a methodology and we get into a, a very stable position. A lot of the appointees and nominees get confirmed. They, they get into their offices, uh, and they start running their businesses in a way that is predictable, whether it's tight.Relation loose re regulatory, very accommodative, not accommodated at all, but all of those things as you keep adding onto the pile, I think we, we remove some of that ambiguity. Where

are theGary Cohns in this administration and the more levelheaded folks who have the other, you know, they could present the other situation, the other side of the coin. Are they inthere?

Look, I'm, I'm sure they're in there. I'm sure there's in there. Like, the president has the ability to attract and retain great people.There's an enormous amount of people that wanted to go into the administration. He had the ability to choose from a really talented slate of people. I'm sure, and I know there are people in there that are giving him all sides of the issue.

Fair point. I want to talk about some tech here because the other part of your title is IBM vice chair.Uh, so we gotta talk a little tech and one thing that has come to, to me, at least the time of this podcast, is Alibaba's chair Joey saying we're in a, a bubble of AI infrastructure. It's something I don't see, but given what you see, do you see anything like that?

You know, I, I, I won't say we're in a bubble of AI infrastructure. First of all, a lot of this AI infrastructure has been built yet. I mean, we're having enormous conversations about building AI infrastructure, and there's a lot of AI infrastructure that is scheduled to be built.But you and I know just because something's scheduled to be built and people are talking about building it doesn't mean it necessarily happens um and, and look, capital is very quick to move capital is moving to where they think the void is now and it needs to be filled.The minute they think that void has been filled and there's not great returns on that capital, it will stop moving relatively quickly. So I think this is one where, yes, there's an enormous amount of people talking about investing, talking about building, talking about committing capital, and they will do that as long as they see the returns. The minute the returns diminish or they think there's a bigger void or better opportunity, I think they will move it relatively quick.

Any sense of it on anything slowing compared to when when I last saw you in in

Davos? No, not, not really. I think the AI AI phenomena continues to percolate. I, I think what we are seeing, and this happens day by day, and we were talking about this in, in Davos, um, the reality of small models and the value of small models.Which is our value proposition at IBM. um, we've always felt that you need small models that are more efficient, uh, more efficient on time, more efficient on energy to solve specific problems. I think we're starting to see more and more adaptation to the smaller models in companies designed to solve specific problems, and that is getting more traction. Companies are now going from.That um sort of place where a year or so ago everyone talked about yeah we're going to use AI but we don't know what we're gonna use it for to now yes we are using AI and here is what we are using it for so we're seeing that evolution from from from.Concept to reality, but we're just at the beginning of the reality and in the frontier where AI can be helpful and can solve problems, it gets bigger and bigger every day as people start understanding the capacity of these these really well trained smallermodels.

What impact do you think it will have on the US labor force?

You know, it, it's like every other great technological invention, you know, the people doing certain things and certain skill sets will become obsolete, you know, as I remind people when we went from, from, from horse and buggy to the internal combustion engine, people that worked in the stalls and people that put shoes on horses, they became obsolete pretty quickly.But people that could fix an internal combustion engine, they became in great demand very quickly. We, we, we saw that with, with, we saw that with, with, with, with email. We saw that with the internet, you know, when I first went to Goldman Sachs, every floor had a person that delivered mail and printed off the memos that told you what time the meeting was on the floor and where to meet, you know, you, you, that person lost their job relatively quickly, but on the other hand.They got redeployed to something that was much more higher, much higher value added. I think we're gonna see the same thing in AI. Yes, we are getting rid of some of the jobs that people don't like that have the highest turnover rate, that have the highest error rate, and they have the highest job dissatisfaction, and we're able to move those people and redeploy them into jobs that have much higher.Higher satisfaction and much more value to the company and we're starting to see that like it's like every other evolution those people will evolve into better jobs, more job satisfaction, and higher pay.

Uh, the last couple minutes of, uh, the podcast we always love to get, uh, hot takes from our guests. I don't write these things down. I'm just like living in a moment here, Gary. What, what do you think about the work that Doge is doing and how fast they're moving?

So the concept, let's talk about the concept. Getting rid of waste, fraud and abuse, to the extent there's waste, fraud and abuse, and, and by the way, there is waste, fraud and abuse in the government. So I, I, I'm not here, I'm not here to take the other side of that.It has to be done. It has to be done. So, you know, every business, there's not a business I've ever been involved in that when I walked in, I didn't try and figure out where the sort of money was being wasted.Um, where we couldn't streamline it, where we couldn't get rid of certain things, and by the way, every time I've done it and I, and I've reorganized a lot of businesses in my life, you have to come in with a big bold approach and you have to eliminate things and once you eliminate them and someone and someone yells and screams that you eliminate something and you add it back.So you're not smart enough day one to just sort of take the scalpel out. You have to take the machete out and after you take the machete out you sort of add things back in. So the approach to me is really the only thing you can do in something as big and as bold and as vast as the government.What I also would like to see him do and and I think we're seeing this is instead of going after sort of waste, fraud and abuse, I think we need to look holistically at the government and see how many redundant services we have. So we'll go back to the financial services, you know, how many different financial service regulators do we have in the United States?You know, if you're a typical bank in the United States and you're involved in the sales and trading world, you have 8 to 10 regulators that you deal with on a daily basis. What are the other 7 doing? Yeah, so in, in Europe you have 2 in Asia you have 2. You have a markets regulator and you sort of have a consumer regulator, you know, maybe we need 3 or 4 in the United States, but we probably don't need 8.We created one in 2008 out of Dodd Frank, which is the consumer CF CFPB, um, maybe we should get rid of that one, you know, that one costs a lot of money and it's doing something that a bunch of other agencies have the responsibility to do as well. So to me there's not only getting rid of the waste fraud, abuse in the existing agencies, let's take a clean sheet of paper and say, look, if we were starting again, what would we look like?How many financial services regulators would we have? We'd have a lot less than we havetoday.

It sounds like maybe, maybe you should be like the deputy doege director, uh, because I'm sending this segment to Elon after this. I'm just gonna put it on X. That's some good ideas. Put it on X. Go ahead. But to your, that's a really good point. I mean, and what would that do for for economic growth, getting rid of regulators like that?

Well, look, I'm not, I'm not anti-regulation. I'm actually very pros smart regulation.What I'm anti is redundancy and upon redundancy upon redundancy regulator. So look, we've got a, uh, uh, a CFTC and an SEC, both of which, you know, CFTC regulates the, the futures market. The SEC regulates the this, the, the equities market. They're there to regulate those markets as well as protect consumers in there. Then you got the consumer, the, the consumer protection.All these consumer protection regulators, well, isn't that the SEC's job? Isn't that the CFTC's job? Why do we have multiple regulators doing the same thing? And by the way, once you create those regulators, they're gonna have to find things that are wrong and they're gonna have to go find people to justify their existence. I think we're really much more efficient to do it in one place.

Good to see you as always and actually this conversation is reminding me that I failed my series.the first time and I got I got paid $200 to be a stockbroker trainee amonth.

So I, I, I, I gave you my last final story. So I didn't take my series 7 though I became a partner at Goldman because I grew up in the Hawaii side. So I was a, a late Series 7 taker. Everyone else, I think in my partner class it was like a big thing. So the pressure to pass it was on. I completely overstudied. I think it was the highest grade I ever got on an exam. I think I.95 and all my fellow partners yelled at me because I wasted all that time overs studying.

You know what? That's news you can use. Gary Cohn, IBM vice chair and former director of the National Economic Council, hanging out in the opening big podcast at the Nasdaq. good to see you as always. Appreciate it. Thanks for having me. All right, and, uh, like I always say, hit us with those likes on the podcast platforms, thumbs up on YouTube. Appreciate all the love, support. I try to answer all of your questions. We'll talk to you soon.