Goldman Sachs’s Cohn: Fed in ‘Tough Position’ on Interest Rate Hike
Interest-Rates / US Interest Rates Feb 11, 2015 - 01:37 PM GMTBy: Bloomberg
Gary Cohn, President and COO of Goldman Sachs, joined Bloomberg Businessweek reporter Brad Stone for an interview on Bloomberg TV. He spoke about the company's investments in the technology industry, regulation of the financial industry and the outlook for oil prices and Federal Reserve policy
When asked whether we will see a rate increase this year, Cohen said: "The Fed is in a very tough position...They’re going to be constrained by circumstances, going to be concerned about the strength of the dollar, and other countries are going to continue to devalue.”
On last week's better-than-expected employment numbers, Cohn said: "I am not convinced that one good jobs report last Friday has changed the whole world."
When asked about Goldman Sachs being ranked among the most hated companies in America, Cohen said: "Of course it bothers me."
BRAD STONE: Thank you, Gary, for being a host today and for doing such a great job interviewing Apple CEO, Tim Cook. How did that feel to be the interviewer instead of the interviewee?
GARY COHN: Oh it's always fun to interview a great CEO like Tim.
STONE: That's right. Well one of the things he said that stood out for me was about data privacy. Apple is not collecting health care data or purchasing data with things like Apple Pay. He framed that as a statement of values, but is it also good business, seeing as how its primary competitor, Google, is collecting that data?
COHN: First of all, let me thank you for being at our technology and internet conference. I think Tim stated his corporate objective pretty well. Apple is in the business of selling components. They want to sell iPad's. They want to sell iPhones. They want to sell Macs. They are not in the business of collecting data on their clients. And that's the business decision that Tim has made. And I thought he explained himself very well up there.
STONE: Now Trish just mentioned that Apple has crossed a $700 billion in market cap threshold for the first time. Is that significant? I mean what does it mean for business, for global business that any company is reaching such highs, and maybe even a one trillion market cap is in reach at some point?
COHN: It's not significant. It's just a representation. It's a number, it's a size. Apple is an iconic company in America. It's a brand that is known not only in America. It's known worldwide. If you listen to Tim they're talking about their sales growing all over the world. He talked about revenue over the last few years growing from $1 billion dollars to $38 billion in China alone.
STONE: Will you be buying an Apple Watch in March?
COHN: I don't know. It was pretty enticing. He was picking on my old watch in there.
STONE: He was. He was. So we are in the middle of an incredible cycle here in Silicon Valley. We're minting these companies like Uber, Airbnb, Dropbox, Square. You have been in tech for a while in investment banking. How does this cycle compare to say the last cycle with the social networks and the online communities like Facebook and Twitter? What is different about these companies now?
COHN: I think it's hard to compare this cycle to the last cycle. The last cycle was a long time ago, and more importantly, the companies you just mentioned, the Airbnbs, the Dropboxes, the Ubers, they are creating real products that you and I are using every day. When we go on that phone, and we hit that Uber button and that car shows up, we are using it and we are paying for those services. These are not companies designing products, hoping that we will someday use them and they'll create profit. Uber is servicing their customers every day, and creating revenue by doing it, and getting more and more acceptance and creating a bigger worldwide network literally every day.
STONE: Right. Now Goldman Sachs has been active in this round of innovation as an investor.
COHN: Yes.
STONE: You were in Facebook and Mobileye, Uber's latest round.
COHN: Yes.
STONE: Is the investment business now as important as the traditional investment banking business?
COHN: Well we are in the business of raising capital. And we are in the business of matching people with capital with people that need capital, which enables the economy to grow, which enables us to create jobs. And that's our business. So we have been involved with these companies at various stages of their career and evolution, and we just continuously be -- are involved with them. And so, yes, we have been involved lately in these new rounds. And we'll continue to be involved with the next round and the next round. Eventually, we believe all of these companies will become public companies.
STONE: And so let's talk about that then. Is it -- is 2015 the year when we think about these unicorns, Xiaomi, the Chinese mobile phone company, Uber, maybe Airbnb? Everyone sort of wants to know when. Is it sooner rather than later that we might see some of these companies go public?
COHN: I don't know. I don't know. Right now there is an enormous amount of capital available in the system. And so these companies to the extent they need working capital, and not all of them need working capital, have an enormous availability of capital to them. So to the extent they want to stay private longer, capital is not the constraining item right now.
STONE: Right. Is -- is tech the biggest sector for investment banking right now? I mean this has become really a cornerstone of the Silicon Valley calendar.
COHN: It's not necessarily the biggest, but I don't know how you measure size. Our tech franchise is a very important franchise to us. We've got other equally as important franchises.
STONE: So explain this to me. Some of the big tech companies, Amazon, Apple are raising money in the bond market now, and sometimes over in Europe. Given that in some cases these are very profitable companies, why is the bond market so appealing right now?
COHN: Rates are low. Rates are very low. Rates are extremely low in Europe. They're lower than dollar rates. To the extent you can use money in Europe, you are borrowing money. We have seen a bunch of companies borrow money in Swiss franc. We have seen a bunch of companies borrow money in euros. The all-in borrowing costs in those places is substantially lower than it is in dollars right now.
STONE: Is there anything worrying about that that there's so much fundraising now happening in the bond market?
COHN: No. These companies are sound, fundamental companies. They are going to raise debt. They are raising it in the cheapest place they can raise it, and they are taking advantage of the opportunities presented to them in what is going on in the European economy.
STONE: So at Davos last month you talked about currency wars, basically countries using currency to fuel growth. And you said that was concerning to you. Is that -- do you see, still see that happening and why?
COHN: It is concerning to me. It's concerning to me because it's a never-ending cycle. If you're out there devaluating your currency and you're forcing me to devalue my currency, how do you stop this game? And the flip side of it, we in the United States are having to learn to live with a stronger and stronger dollar, not necessarily because we have got a stronger and stronger economy. And although our economy is strong, we are having a stronger and stronger dollar because you have got to devalue against something.
STONE: I see. And you also said that you forecasted the price of oil perhaps going down as low $30 a barrel. Of course it has rebounded somewhat. What do you see happening in the oil markets right now and what does that mean for American business?
COHN: Well I answered the question. It could go to $200 and it could go to $30. I said, yes, could be true to both of them. So the oil market right now is in a very fluid situation. We have seen five, ten percent moves over days and weeks in the last few weeks, but I think the oil market is trying to figure out an equilibrium price.
The danger here as we try and find an equilibrium price at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations, and it might be a locational issue. And you may just see gluts of oil in certain locations around the world where oil will have to price to such a cheap discount vis-a-vis the forward price that you make second tier, and third tier and fourth tier storage available. So in one of those scenarios, which could happen relatively quickly as we saw oil move relatively quickly $10, --
STONE: We could see the price still and go down.
COHN: You could see the price fall relatively quickly to make that storage work in the market.
STONE: Okay, continuing on the theme of addressing past statements, you have expressed concern over the Fed's ability to raise interest rates. Of course we had a good jobs report recently. Has that equation changed?
COHN: We had one good job report last Friday, and the whole world seems to have changed.
STONE: But you're not convinced.
COHN: I am not convinced that one good jobs report last Friday has changed the whole world. You did see in that good jobs report the dollar again rally, gain strength, euro declined. So again if you look at what happened last week, you had interest rates go higher in the United States, you had oil go higher in the United States. And basically the dollar get weaker.
All those by themselves are making financial conditions in the United States tighter and tighter. So I actually think the Fed is going to continuously be in this tough dilemma where they are going to want to raise interest rates, and I fundamentally understand why they want to raise interest rates.
STONE: But they're constrained by the circumstances.
COHN: They're going to be constrained by circumstances and they will be concerned about the strengthening of the dollar. And other countries around the world are going to continue to devalue. Remember, devaluation is another way to export your disinflation that is coming into the United States. So I do think they're going to be in a tough position, and central bankers tend to need to see the real inflation before they move.
STONE: So prediction time, will we see a rate increase this year?
COHN: I don't really make predictions. I think the Fed is in a very tough position.
STONE: Okay. Let me ask you about the future of Goldman Sachs. The regulatory environment over the past few years since the financial crisis seems to have changed the equation for a lot of investment banks, maybe less so at Goldman Sachs. Do you see that changing going forward?
COHN: The regulatory environment is what it is. We've talked about the regulatory environment nonstop for five years. In some respects we're happy to be getting a lot of the regulatory environment behind us, understanding how to run our business, what we need to do to run our business, the amount of capital we need to run our business. Those are all very helpful for us. And we're operating our business the best we can in the regulatory environment we have. We're trying to be as effective as we can with our capital, capital allocation, doing that while making sure we're being there for our clients, serving our clients and being able to accommodate what our clients need on a daily basis.
STONE: But does it bother you that Goldman Sachs is ranked among the most hated companies in America? Do you feel like that's something that you need to change?
COHN: Of course. Of course it bothers me.
STONE: Yes, understand. Gary Cohn, Goldman Sachs, thank you very much.
Courtesy of Bloomberg Television
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