Transcription
Joining us now IBM vice chair Gary Cohn. He also served in the Trump administration as a director of the National Economic Council. I always like having you on. You were in the administration. Like so many people, a lot of things that that the president does, you're like, wow, that's great. But every once in a while, I'm sure in the first administration is like, that's not my favorite thing. Heard a lot of Republicans with with tariffs. Not my favorite thing. Although many of them conceded that there were some things that we should probably deal with after 40 years of of that wasn't fair. Now the markets are all all highs. We had Liberation Day. Everybody was negative. We heard gloom and doom and inflation and, you know, spiraling prices. We heard all that. The market is telling us the worst case scenario didn't happen. Do you like tariffs now or do you do you admit maybe they're raising revenue. Or do you still think all this is happening for other reasons in spite of the tariffs?
So Joe, I think you ask a really interesting question. So I think tariffs do serve some important purpose. And you and I have talked about that. We have you know, the one the one thing that we learned and we all need to remember is during Covid, we realized how fragile our supply chain is in the United States. So when we take a look back and say, what can't we allow to happen ever again in this country, we cannot allow ourselves as a as a nation to be exposed to certain goods where the supply chain gets clogged up or stops and really slows down our economy.
It's been five years. Have we made progress on that?
We have. We have made progress on that. So, you know, you can go back into the prior administration and the Chips act. We knew that chips were one of the biggest bottlenecks that came out of the Covid crisis. Everything that was just about everything that was manufactured in the United States ceased manufacturing because we no longer had access to chips, because the supply chain slowed down, it was quite obvious that we needed to manufacture chips here domestically so we could continue to build from toasters to sophisticated weaponry. All of them had chips in it. So the piece of the equation where we are forcing and incentivizing and incentivizing is important key parts of the supply chain components back into the United States, I think everyone agrees is a really important part of what the administration is doing, and we should applaud that, because we are a safer and sounder.
All the way to the point of taking a stake in Intel.
Look, I'm not sure I would argue that taking a stake in Intel is the right thing to do.
But we already we already gave money. We might as well get a stake.
I agree, once you give them money, the question is do you want equity or do you want debt? And by the way, and I'll remind you guys, it wasn't it wasn't the best few months of my life. But in 2008, the banks went through this when Hank Paulson tarp the banks. Yeah. You know, they the US government put capital. They put debt into each of the banks. You had.
You wanted it or not.
You had whether you needed it, wanted it or not, whether you'd gone out and raised capital the week before, which the bank I was with, had you got capital injected in your bank, you owed them a very high coupon and they attached warrants to it. So this idea that the federal government should get a return on capital for something they do to stimulate economic growth is not.
The only thing that makes it publicly palatable for taxpayer dollars.
Honestly it does. Well, what should makes it publicly palatable for taxpayer dollars is the sovereign protection and the security we get by being able to control our supply chain, that we saw, how vulnerable we were and Covid, well.
They just did it with rare earths.
Yeah, we should not have to live through that again. But the flip side is, Joe, when you look at tariffs as a whole, you know, I think what you have to tell you is take a step back and look at how corporate America is dealing with this tariff equation. And I think this is not as well understood. I think it's a very interesting phenomena that's going on right now. So if you look at corporations today and they look at their input costs and they're buying goods and the cost of those goods are going up and they feel like their ability to raise their prices to end consumers is very limited. Yes, they can slowly, incrementally raise prices, but they're being charged tariffs overnight. Companies are being forced to figure out how to deal with that equation or that conundrum. They have actually figured out how to deal with that conundrum. And I think we see it in the data.
That we didn't that was not in our calculus for what might happen.
We scratch our head. We scratch our head. So what are we seeing? We're seeing companies they can't deal with the cost of goods, the cost of goods, the input costs. They can't deal with the sales cost. But what companies have figured out in the last decade or so and this has been going on pre tariff but got accelerated by tariff is companies are figuring out that they can be dramatically more efficient and run with less human capital. So we're seeing companies cut down on the amount of employees that they need to run their business.
We're trying to rebuild the center of the country. And so some of this isn't it's counterproductive to what we're trying to do as well.
You just have to understand, when you're running a company.
You have to do it.
And your obligation is to your shareholders to create a return on capital. And you have to be able to pay back your debt if the cost of your inputs goes up and you can't charge more for your finished product, you have to figure out how to become more efficient. So look at the data for Q2. In Q2, revenue as a whole for companies went up just over 6%. I think it was like 6.3%. Was the growth in revenue for Q2 earnings. EPs went up by 11.8%. Now, you could say there's some efficiency. As you get bigger, you get more efficient. So the last dollar in is more efficient than the first dollar in. But companies found ways to make themselves more efficient. They sold more product with less cost. And that cost wasn't cost.
Because everyone.
Said it was labor.
Everyone said people around here said you're going to see it in profit margins, and that's why we're going to get hurt. Well, the market wouldn't be trading at all time highs if.
You were wrong on profit.
They were wrong. But do you.
See you see it as you see it in unemployment.
You see it in the jobs numbers and the employment rate. Is that the catch 22 that you can't have your cake and eat it too and have everything.
Yeah. Look, when you squeeze the tube one place, it's got to come out somewhere else. And I think what we're seeing and we're all sort of a lot of people are scratching their heads going, I don't understand this. The economy is good, earnings are good, retail sales are okay, but the job market is weak. Well, the job market is weak because to make the equation work companies are getting smaller you know.
And by the way they can do it with AI. Right now they're being handed tools that lets them.
So here's the interesting part, Becky. I think AI is a part of this, but we're still in very early innings with AI. When you look at the data and you talk to CEOs today, everyone's using AI, but they'll tell you that the return on investment is still fairly low. Everyone knows that the return on investment in AI is going to grow and grow exponentially, and that's when people will make much larger investments. Right now, people are doing this actually with human capital. They've realized that their companies have just gotten sort of fat and heavy, and they they they just continue to do it. And it's almost easy in this cycle because we are at a time in the history of this country where every week, 80,000 plus people turn 65. So that means you've got people naturally leaving the workforce. So you don't necessarily even have to terminate people or let people go. As you've got more and more people reaching retirement age every day in this country, as you have people retire, if you don't replace them, your headcount is.
Not letting the Fed's balance sheet run down.
You're naturally shrinking. You see, that's what we're seeing going on here. So, you know, look, instead of raising prices, we just we just decided to put it in.
You didn't you weren't able to you didn't see Charlie Scarfone earlier this week did you. Or did you see any of that interview?
I didn't see Charlie, but I actually spent a lot of time with Charlie this weekend. He and I were talking about how much overhead he was taking out.
I made him say it twice, because he said on our air that a lot of small and medium sized companies that he deals with, they were okay with the tariffs. They said there's been 50 years of unfair trade practices. We're okay with, with trying to adjust some of that stuff and we're going to deal with it. We're not you know, we're not unhappy if they voted for this administration and they're going to deal with it. And I hadn't heard that before. I thought it was universally reviled that that these tariffs were put. And they also the levels where we finally settled at aren't as onerous as we thought.
Early on. If you would have gone on to ask Charlie what he's doing in his own business. Yeah, I had that discussion with him Sunday.
And.
He would tell you that he has significantly downsized the amount of human capital.
Back to what you're talking.
About in his bank. He is he he went out of his way to talk to me on a Sunday. I had a large Canadian, sorry, a large Mexican company. Tell me the same thing. Two other American companies tell me the same. It was indirectly, as I was talking to companies over the weekend at the US open, everyone was telling me sort of, hey, this is what we're doing. We're down, we're down. That explains.
The conundrum of why you see the jobs market down.
That's not what we want. We're onshoring to try to bring jobs back here we don't want to lose.
Well, look, hopefully we will see a rebirth in jobs. We'll see a rebirth in manufacturing. If rates come down, we we would hopefully see a restart in housing, the housing, housing sales, housing numbers look horrible right now. New construction looks horrible, you know. But again the Fed's going to lower fed fund rates overnight rates. No one borrows for a house on overnight rates. They borrow on five year or seven year or 30 year money. We're going to have to see what happens to the curve. I'm not as optimistic that that we get a parallel shift on the curve coming down. I think more likely we get some steepening of the curve. It will help, but it's not going to create a housing boom. And when you see all the CapEx that's been foreshadowed to be spent. Look, it will get spent. It just not all getting spent in 2026. It's 26, 27, 28, 29, 30. And a lot of it is more equipment than it is people. When you're building these huge data centers. Yeah, you're buying a lot of steel, you're buying a lot of cement, you're buying a lot of copper.