Robert Kaplan (1:59)

I'm optimistic that it's clear the sport needs to deal with the disparity.

Tom Keene (2:06)

Yes.

Robert Kaplan (2:06)

Like other sports, how we're going to get from here to there, I don't know. But it's clear it would benefit everyone involved in the sport.

Tom Keene (2:14)

One Kansas final Kansas City question before serious issues. Am I right? Kansas City is big. Booming is. That's what I notice. The radar from here. It's booming. The new airport and all.

Robert Kaplan (2:27)

Of course. Yes. Listen, I'm. Kansas City is a fabulous place to live. I love it. I go back there regularly. And, and it's, it doesn't have a lot of like 43 other states in the United States. The state of Kansas and Missouri are, are not growing substantially in terms of population. But it's a fabulous place.

Tom Keene (2:46)

Yeah, it's good. Should we start the show?

Paul Sweeney (2:48)

Let's go.

Tom Keene (2:48)

Let's start the show. Paul Sweeney with Robert Kaplan, the former Fed president of Dallas.

Paul Sweeney (2:53)

Robert, you know, the Fed decision, I guess, was not surprising in March, kind of. But if I look at the WIRP function, look at where the market is thinking, the market's not really pricing in any cuts or even any rate hikes for the year. I guess that makes sense because there's so much uncertainty out there.

Robert Kaplan (3:09)

It makes a lot of sense. If you, if we talked literally just a month ago, we would have said we're set up for a strong year growth in 2026, tax incentives, regulatory reform, AI datacenter power boom. And I think the Fed was hopeful in the back half of the year that headline inflation would tail off a bit. So they might be able to cut rates once or twice. Obviously, because of what's going on in the Middle East, I think they're, they're going to need to step back. That's the right thing to do and let this unfold. And the market is sort of backed off also and is pricing in basically, no, no cuts this year.

Paul Sweeney (3:50)

What do you think? If I'm at the board level, if I'm at the C suite level, I've navigated tariffs, now I have to navigate what may be an inflationary slowing economy due to higher energy prices. What is the C suite? What is the board to do these days? Are they going to sit on their hands as well? A little bit. Do you think?

Robert Kaplan (4:10)

They're what we're seeing. They're not sitting on their hands because we are in the middle of not only an AI data center power capex boom, but now we're in the early stages of the adoption boom, which is going to improve productivity growth. And every business we talk to has got to be trying use cases and trying to figure out how that's going to work. And many are concluding that in this new era they're better off getting more size and scale and merging. So that's not slowing down at all. Having said that, if you want to, if your forecast for the year, this has put a little bit of a damper for many businesses on their growth outlook and they're going to be more careful and that will start with hiring and other expenditures. But they've got to Keep aggressively pursuing this AI situation and mergers will be part of that.

Tom Keene (5:03)

You're in the early crucible of this, of course, at the Dallas Fed. And we all know how Texas is booming, the philanthropy of Michael Dell and others. Here's Anna Crockett from Robert Kaplan's Dallas Fed. Salary not sole concern for young adults weighing career decisions. So you bring it over to AI in the boom, whether it's Deer Valley out in Phoenix or everything going on in Texas, what's going to be the incentive here to drive employment and happy employment forward?

Robert Kaplan (5:32)

So what we see, and I saw this when I was at the Dallas Fed and I see it more now, we've got all, we've got a lot of what I call mismatches. So the Fed worries about are we sickly growing, are we weakening? We got difference, we got structural problem. We got college graduates, programmers, others can't find jobs. They but I've never seen more open jobs, window installers, technicians, plumbers, people to work on the Ford Motor Company assembly line to make 135 grand a year, can't find them. And so these mismatches have to be worked through. And we're kind of struggling with that right now.

Tom Keene (6:07)

This is Senator Grassley. Welders in Iowa a million years ago. What's the simple issue? More pay for those working class people?

Robert Kaplan (6:14)

Some of it is aspirational. If I go to college, I didn't. Did I go to college to be a plumber or electrician? Turns out those jobs make a lot of money. And so I think you may see you're going to need to see more changes in our educational system where it wouldn't shock me if 15 years from now a state college offers a skill training option. They don't do that.

Tom Keene (6:37)

Now this would be, Paul, an agricultural and mechanical school like at College Point, Texas.

Paul Sweeney (6:44)

Exactly.

Robert Kaplan (6:44)

That's right. College Station.

Tom Keene (6:46)

Yep, station.

Paul Sweeney (6:47)

Exactly.

IBM/Mint Mobile Advertiser (6:49)

Robert.

Paul Sweeney (6:49)

I mean, talk to us about the M and A environment. We came into the second term of President Trump. The expectation was that this was going to be an administration that was going to be very supportive of M and A consolidation. Have we in fact seen that?

Robert Kaplan (7:03)

I think the I'll talk generally the attitude in boards is there is a window here where I think companies are more confident that if they want to do a merger that they'll be able to get it done and they want to take advantage of that window.

Paul Sweeney (7:19)

Private credit. If it weren't for the war in Iran, Tom and I keep saying to each other, boy, if it weren't for the war in Iran. This private credit issue would be maybe a bigger issue for global Wall street and concerns about is there a systemic risk in the private credit world which has seen such a tremendous amount of growth since the great financial crisis. How do you guys think about that?

Robert Kaplan (7:38)

Yes. So if you actually look under the hood in the portfolios, obviously you want to check what their industry exposures are, how much software exposure. By the way, there's nothing wrong with software companies. It just you may not want them to be leveraged five times ebitda. But. But there's the portfolio issue, which I would argue if growth is solid this year, we're unlikely to have a credit cycle in 26. So what's going on? There's a liquidity mismatch that's big problem. And I think they're being confused. Meaning There are certain BDCs that you have to offer quarterly liquidity. And when investors rush, rush for the exits and they think others are, then they're going to rush. And I think in portfolios that have good matching of assets and liabilities, liquidity, they may be fine. Having said that, this is the crisis before the crisis, to quote someone else, if we have a credit cycle next two or three years, I actually think this concern now is going to be healthy because if we have a credit cycle, then you're going to see more issues in private credit.

Tom Keene (8:45)

If you're listening across America, good morning to you, Paul Sweeney and Tom Keene. Bloomberg Surveillance on YouTube. Subscribe to Bloomberg Podcast. It's our digital distribution. Humbled by that success. And of course all of you on traditional audio as well. With us, Robert Kaplan of the Dallas Fed, now holding court again at Goldman Sachs as vice Chairman, I would say, like Mark Kimmet in the military, spans finance. Robert Kaplan, you span academics over to finance, over to your service at the Dallas Fed like no one else in America. Once again, we're studying within private credit the efficacy of hedging. In every single class ever been taught there's a point where a hedge catches up with you. How close are we within re hedging where the game, the shell game we're playing where we get to a shock, a tip point that upsets the apple cart.

Robert Kaplan (9:40)

So well, obviously the yield curve is drifted up because oil prices have drifted.

Tom Keene (9:47)

The real yields come up and people

Robert Kaplan (9:49)

are concerned that central banks just aren't going to cut in the way that we may have thought literally a month ago. Having said that, I think that the private credit issue, maybe not this year, but over the horizon, is about operational risk matching Financial risk. And we were taught way back when, if operational risk is high, be careful about the financial risk. And AI and disruption is going to increase operational risk. Businesses will figure it out. But you don't want to be as highly leveraged. And so that's something I think people are going to have to go back and scrutinize.

Tom Keene (10:23)

But to the private credit people, Paul will say, we're not leveraged.

Paul Sweeney (10:26)

We're not. Yeah, yeah, we're going to hear.

Tom Keene (10:27)

I'm listening to Robert Kaplan.

Robert Kaplan (10:29)

Well, the companies listen. We would have said in the past four or five times, ebitda, that's not over leveraged. Well, it is if there's a risk that your EBITDA might drop 30% because of the new innovation. That's the issue.

Paul Sweeney (10:44)

What's the message to your bankers these days when you sit down with your senior banks or coverage bankers and for the next few weeks, let's go out. We want to get this message out to our clients.

Robert Kaplan (10:53)

Let's, let's stay close to clients. Let's understand their needs. Let's be, let's bring the whole firm to bear, including our thought leadership to help them figure out what's going on. Corporate clients are very active. Investing clients across all our sectors are trying to figure out and handicap what's going on. And our job is to understand them, build our relationships and, and serve them by bringing the whole firm to bear.

Paul Sweeney (11:25)

Are you sensing that this, I mean, the AI revolution, I guess we'll call it, or just, I'm not sure what it is. We used to call it big data back in the day, but some people are telling me this is more important than the Internet and it might just be a cut below electricity in terms of the importance of society. I've had somebody express to me that way. Boy, if I'm a corporate board or CEO, I feel like I gotta get super smart super quick because it's either a friend or an enemy to my business. I'm not sure which.

Robert Kaplan (11:54)

Yeah. So here businesses are handling it in the following way. A typical business has 10 or 15 use cases. You know, how, how can we change our controllers department? Every, our marketing department? All, every, all the different things that they do. They're in the middle with partners, outside partners of going through those use cases. And I'd say we're in the early innings. And two years from now, they're going to be a whole lot smarter. Two years be an eternity. Yes, but businesses will be a whole lot smarter. Some of them are saying, I want to do more Strategic merger activity to help mitigate some of the risk here. But we're in, we're learning right now. So anybody tells you I know exactly how this is going, they don't know. The smartest people I know are in the middle of it and they're open to learning and are not prejudging it.

Paul Sweeney (12:40)

Yep.

Tom Keene (12:40)

On AI, what is your observation on a roll up of all the competitors now? Are there too many just on a, on a unit basis, are there too many players?

Robert Kaplan (12:50)

Well, so a lot of our attention because we can't avoid it is all the capex and the compute infrastructure part.

Tom Keene (12:58)

Yeah.

Robert Kaplan (12:58)

Okay. Then there's the adoption companies which are extremely highly valued. And the truth is I have no doubt we need to create more compute. How the adoption companies are going to shake out. I think that's where more of the uncertainty is and that's where the software situation, the first reaction is it's going to be disruptive. I think the second reaction, after people calm down is but clients are going to need advice to help with the installation of software. Companies are critical of that. So I think we're, we're literally wrestling our way through this.

Tom Keene (13:33)

Thank you for the comments on Kansas City, the Royals, I mean, was George Brett's bad tarred? I think Robert Kaplan. Thank you, thank you. Owner of the Kansas City Royals with a modest interest in Goldman Sachs and of course his public service at the Federal Reserve bank of Dallas.

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