To take a closer look at where this could all be headed, Wall Street Journal’s Thorold Barker spoke with David Solomon, chief executive of Goldman Sachs Group Inc., at the Wall Street Journal’s CEO Council Summit. Here are edited excerpts of the conversation.
WSJ: Are we in a new world of higher interest rates and higher inflation? Or will we see a reversal of what we have seen in recent years?
MR. SOLOMON: The pandemic disrupted supply chains and then we saw significant fiscal stimulus. Another Black Swan event was the war. It is not surprising that this has led to inflation.
We’re in the process of resolving this. Of course you will see a change in monetary policy relatively quickly, so we are in a period of higher interest rates. Now the market is assuming that the US Federal Reserve will soon stop raising interest rates.
But we are still at the beginning. I think it’s uncertain. And we still have a pretty strong economy. If you look at the service industries and look at how tight the job market is right now, we still have a long way to go to find the right balance. Anyone who tells you they know doesn’t know.
WSJ: Are you concerned that the markets have overtaken here and were hoping for that slightly golden result?
MR. SOLOMON: One of the things I’ve learned in my almost 40 years in this space is that markets are pretty smart, but that doesn’t always mean they’re 100% right at all times.
Our economists certainly expect slower growth next year. They call for growth of 1.9% worldwide. But they believe there is a reasonable chance of a relatively soft landing. I would define a soft landing as follows: we’re back to almost 4% inflation, the Federal Reserve stops raising rates at 5%, we have 1% growth.
There is a reasonable possibility that we could navigate such a scenario. But there’s a very reasonable possibility that we could have some kind of recession. When I speak to most CEOs, when I speak to customers, most CEOs are cautious about how they run their business. They say, “I’d rather prepare for a more difficult environment and I’m a little more careful now.” That creates this negative cycle. People slow down their planning, they hold back on spending, they start cutting back on work.
WSJ: How much are you cutting in anticipation of that?
MR. SOLOMON: Of course, we are very focused and correlate with the economic environment. Our business is highly correlated with global growth and activities. In an environment where it slows down very quickly, it affects our business.
It is a natural phenomenon so you will need to trim and pull back in some places. We’re thinking about how we’re going to do that. But surely we need to narrow our footprint a bit.
WSJ: You’ve been trying to get people back into the office for a while. Has this encouraged people to come back in ways they might not have been before?
MR. SOLOMON: Every company has to do what it thinks is right. I didn’t have strong opinions about how others should run their business. But I have very strong beliefs about how Goldman Sachs should run its business. Our firm is a professional services human capital firm with 50% of Goldman Sachs employees worldwide in their 20s. They come to Goldman Sachs to gain experience, learn, work in teams and collaborate. And when it’s all fragmented, that experience collapses. We had to create a culture that would bring people back very quickly because we felt it hurt our competitive position as a company.
And so we pushed, persuaded, developed further. But the bottom line is that we’re generally working pretty much like we did before the pandemic.
WSJ: One of the big changes in the world in the last year or so was the war in Ukraine, the disruption of energy supplies to Europe. We’ve had a lot of tensions with China, people trying to rebuild their manufacturing and diversify away from being dependent on China. How do you see the perspectives of globalization?
MR. SOLOMON: For the past few decades, we’ve operated with an ethos: “Make it where it’s as cheap as possible, and sell it where you can get the higher margin.”
Now people are rethinking certain things – energy, food, minerals, certain health needs, microchips. People say, “I need security. I have to consider cost and friction.” There are some things where cost and friction don’t matter; what counts is security, access, stability. This is a more permanent shift. But that doesn’t mean we’re de-globalizing, it just means we’re choosing our partners a lot more carefully and a little bit more thoughtfully about certain things. That’s only amplifying because the geopolitical world has gotten more complex at the moment.
WSJ: I want to ask a very quick series of questions, just give myself a prediction of whether these things are going to go up or down in a year’s time. US stocks in a year?
MR. SOLOMON: Lower.
WSJ: Treasury Yields.
MR. SOLOMON: A little bit stronger.
WSJ: Treasury Yields, 10 years
MR. SOLOMON: A soft landing sees you 10 years higher. If you don’t, you will see a policy reversal, and then you might see the same or lower interest rates.
WSJ: Soft landing, yes/no?
MR. SOLOMON: May I say 35%?
WSJ: Oil.
MR. SOLOMON: Higher.
WSJ: Residential Real Estate.
MR. SOLOMON: Lower.
WSJ: Crypto.
MR. SOLOMON: I find cryptocurrencies, bitcoin, those things that people speculate on, totally uninteresting, not really relevant, not in our mindset. We focus on the ability to innovate in financial services, to innovate in financial infrastructure. We closed a bond issue for the European Investment Bank just last week, which we settled in 90 seconds instead of the usual three to five days it would take.
WSJ: Do you personally think Bitcoin will have any meaningful value in 10 years? Do you think this will be something?
MR. SOLOMON: I do not know. For all of the things we’re focusing on, the value of bitcoin is something that I don’t see as really significant. It’s a speculative thing. It might be worth something, maybe not. But I don’t really see that it has a use case, which I think is the more interesting thing to focus on.
WSJ: Will we see more bankruptcies after FTX?
MR. SOLOMON: There’s an entire infrastructure of companies trying to innovate all of this, and they span the spectrum. A lot of the companies are going to be very successful I think, especially in areas like infrastructure innovation in terms of how money moves.
There are opportunities for people to do interesting things. But when you get into the infrastructure that’s basically taking cryptocurrency tokens and lending against them and trying to build a funding business against those platforms, a lot of air has gone out of it, but that’s a place where the business models are more insecure, more vulnerable . Harder for me to see how they develop with a five year perspective.
WSJ: Is there anything in this wreck that is interesting for a company like you to improve upon? Any of those exchanges that are interesting for a regulated company to try and develop?
MR. SOLOMON: Regarding cryptocurrency and these tokens etc. we are still barred from participating in a lot of it from a regulatory perspective. I would come back to the underlying technology. We spend a lot of time innovating around blockchain technology.
Think bank loans when people buy and sell bank loans. The latency in terms of settlement, it takes 30, 60, 90, 120 days to pay off a bank loan. We have been working on a digital loan management platform that we recently launched. This gives us the opportunity to reduce latency when processing bank loans. So I think there are a lot of interesting areas for big institutions like ours to look at the technology and say, “How can this technology take risk out of the market system and strengthen the market system?”
WSJ: If you look around the financial system, where do you see the biggest risks?
MR. SOLOMON: The national debt is growing significantly. That’s something to watch and think about. Given how the regulatory structure has evolved over the last 10, 15 years, there is a lot of activity.
There is a lot of activity that used to take place within the regulated banking system that is now outside of the regulated banking system and against it there is leverage and funding. Many loans are granted outside the regulated banking system. That’s actually a good thing. But you have to watch where people are leveraging to increase returns and capabilities in that space.
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