I can't remember a time in my career, which is nearly 40 years—nowhere near as long as your career in the city—but nearly 40 years where everything has depended on one man so much and one man's attention span. Can you, given your huge experience which you've talked about a lot in Streetwise, can you remember a time when we are so hair-trigger?
No, and believe me, I've thought a lot about it. I've thought about US history. I've thought about, well, obviously there have been dictators and, you know, people without, you know, because of them we had wars, without them we might not have had them. There were other consequential figures, but certainly in a democracy with checks and balances, we haven't had somebody who's used executive power in that way in US history as far as I can recall.
Aren't you worried about those checks and balances? Having studied history and politics myself, and included within that the United States, I thought those checks and balances in the United States were stronger than they appear now.
Well, I'm not sure they're not strong. I think they're holding. I think the courts are doing it. I think people are a little bit unnerved at the way at which those norms, those guardrails are being tested because usually people don't get that close and don't lean against them and don't push in them and don't try to bend them and certainly don't try to break them. But so far, you know, courts have given orders, people, you know, the administration has appealed them, but they haven't really violated them. You know, some people contest whether they're honoring them in spirit, but there's been no concrete black letter violation of those laws. So, I'd say they're holding, but they're being stressed more than I wish they were.
But even for instance, the big issue of the day, has America gone to war or is it conducting some form of special operation? For all intents and purposes, the Americans have gone to war. That should have been checked through Congress, shouldn't it?
You know, I'm not giving—look, I'm not the constitutional law expert to give a judgment here, but I think the last time Congress declared war was the beginning of World War II. And since then, you know, we had Korea and Vietnam and a lot of other actions that may not have been exactly war, but they kind of rhymed with war. So, I think in these fast-moving times, the commander-in-chief gets a lot of latitude. There's a War Powers Act that allows the president of the United States to act when there's an imminent danger, to find imminence, and people will debate that, but then Congress has recourse to it, gets a certain number of days to express itself, and if they express themselves in a negative way, the president has to stop. Again, go to someone else if you want an exact and precise definition, but I believe that's it in content. So there's precedent by this, and by the way, Lyndon Johnson invaded the Dominican Republic, there's been these police actions, we bombed Bosnia under Clinton. So, there's been this before.
But in terms of the consequences of this war, and we'll call it a war for all intents and purposes as well, how concerned are you that this could derail a lot of what the president actually wants for the United States and actually what a lot of people fear this will play out as a major economic downturn?
Well, it might be both. It might turn into a major—it is a downturn at the moment, but the market is behaving as if it's not going to be sustained. It's very consequential. It'll last some time because infrastructure, you know, everybody's staring at the price of oil and that's going to be affected for at least some time just because of the injury to the infrastructure. So that could be, but there's a lot of other competing considerations. You know, at the end of the day, economic dislocation, a lower stock market, higher interest rates is not existential. I would say ballistic missiles with, you know, nuclear weapons. That's existential. And so it depends on how credible you think the threat was, how unique an opportunity this was to get rid of the threat was. And so, you know, people are going to debate this, but I would say that it's certainly an objective to get inflation down, to have a lower price of energy, which is important to the supply chain, to maximize employment. Those are all important, but other issues pop up from time to time that displace that, that are more urgent, sometimes existential, and the president has identified this as one, and people can say, 'No, it really wasn't.' And I'm sure everybody's focused on whether it was the imminent risk. And then somebody might point out that the risk might not have been imminent, but this might have been the best opportunity to deal with a situation that inevitably at some point would become imminent. So I'll leave that to the other different set of talking heads to debate that, but I can understand how we are where we are.
Can you understand where we are on markets? Because I think I've picked up some commentary from you that you do have some concerns about the complacency of markets. The market is pricing in a scenario where it thinks this is going to have potentially a benign outcome, a short-term outcome, but actually, do you think we're too complacent in valuations?
I think, frankly, if you're a risk manager or even a risk taker, we're not in the realm now. It's too hard to forecast and too consequential depending on which side of a line something falls. I don't think anybody really knows at this point. I think we're in the realm of contingency planning. I think you have to have a strategy if it goes this way or if it goes that way. If it looks like it's going to be longer term—and by the way, there's now a middle of that because originally the market was saying that we had a situation where spot oil is trading over 100 and the forward was 75. Now the forward is higher because people know that even if it stopped tomorrow, there's been so much damage to the infrastructure, the stress is going to last longer anyway, even if there was a resolution tomorrow, and there's no reason to think there's a resolution tomorrow. And by the way, it's dangerous for risk takers and risk managers to go on the basis that it will all be resolved, and it's also dangerous to say that it's never going to be resolved because, you know, people, as you know from your own market experience, you could put on hedges and those hedges could be worthless tomorrow if things go in other ways. I think you just have to stay in this market closer to home, not take, you know, this would not be the time to have your maximum risk that you would ever take, and be very fleet of foot and very protective of your position. I think there are other times when you can, safer times, when you can express a point of view about outcomes. I think people should be good contingency planners at this time.
But Lloyd, markets love to focus on one factor. They love to queue up their crises and say this is the one that matters at the moment. But on top of this Iran war and the fallout from that, there are credit concerns going around. There are private credit concerns going around. There are overall valuations of the market, there's AI bubble concerns. There is the fiscal deficit concerns as well. If this is the piece of straw on the back of a bail of straw on the back of the camel's back, that's my concern.
Look, there hasn't been a reckoning in a long time. So, there's a lot of inventory on people's balance sheets that may not be marked well, because there's been no forcing function. We haven't had the crisis of the century for a long time. We used to have the crisis of the century every four or five years. We really haven't had that since the global financial crisis. And, you know, we're coming off, we're in a period now where private equity isn't selling its inventory of prior investments, even though we've just come off of a great equity market and a great financing market. And so that's, so you wonder, gee, maybe these things are marked a little bit, you know, that there has to be a reckoning, we haven't had one, the longer between reckonings, the worse it could potentially be. But I think the general background of the pre-war—let's call it a war, not a police action—the pre-war market was more tailwinds than headwinds. We had an economy where there was pretty good employment, it got a little bit soft at the fringe but still pretty good. We had good growth. The last reading was lower than we wanted and we're a bit nervous about that, but still pretty good. You know, some of that lower growth was explainable by the government shutdown. Pretty good market. And into that pretty good market, we have incoming fiscal stimulus, the big beautiful bill. We have the monetary stimulus debate. Are there going to be one interest rate cut or two? But interest rate trends were towards a lower interest rate, was starting at a relatively low.
Wait, how does that work? Sorry to butt in, but how does that work? You got a pretty good economy with good tailwinds with low unemployment with good GDP growth and then we juice it with fiscal levers and then we juice it with tax rebates. That sounds to me the wrong thing to do for an economy that's ticking along nicely.
Well, that's part of the debate that we see observed between the Fed, which was being very, very slow in cutting rates again, rates that they believe are on the tightening side of it, restrictive rates, and the president who would like those rates lower. You may have watched this debate go back and forth between the Fed and the president. And so that's why I'm saying that there were people thinking in an economy that was going pretty well where there was more nervousness on the inflation side than on the employment side, but into that market, stimulus was coming. And so that's why I suggest that asset—we were in a position where there were tailwinds for asset prices, and except now that's all been made secondary or tertiary to what's going on in the war and the price of energy. But if you say what was the backdrop of this, the backdrop of this was generally favorable conditions. And by the way, in addition to all this other stimulus, there's private sector stimulus, all that spending by individual hyperscalers, spending over a hundred billion dollars on R&D.
Should we go there, Lloyd? Because in Streetwise you cover the dot-com bubble burst. In fact, you cover eight other crises of the century as well, but we'll talk about the dot-com one seeing as you went there with the hyperscalers as well. You mentioned some of those companies that Goldman's backed that did well and some that did pretty badly as well. Aren't we in very, very similar territory now to 1999, early 2000?
Thanks for that, because you know, there's a big—look, some of the things, undoubtedly not everything is going to work, and even if a company is working on something that's going to work, there might be 10 companies working on it. The world will only have three of them after a time. So undoubtedly we're making investments in places where those investments will get written off, will be bad. But that's the nature of everything. You don't know. We had a crash in 2001. If we're in similar territory now, aren't we again?
Yes, we had a crash, but we also produced Amazon and all these other great companies. Yes. Look, you can draw a straight line from here back to the past. There's an infinite number of straight lines from here to the future and you don't know which one is going to be the destination you're eventually going to get to. So, you're going to always do things where there's going to be wrong, where some things are going to be wrong and you wish you hadn't have done it, but we don't know which one. We don't know which large language models are going to work. We don't know. And so I think we're always destined to overdo it a bit in hindsight, but in prospect, you know, the people making these decisions are pretty good at their job, and by the way, the other founders of their companies, and it's large and a lot of it is their own wealth tied up in it when you think of the hyperscalers, and they're all still to this day, for the most part, dominated by the founders who are the controlling shareholders. And so I bet with them.
And I bet with them as well. But in order to get to these wonderful companies we have today, the ones that have driven so much growth in the United States, you mentioned wealth creation and so much wealth, the Amazons, the Googles, the Microsofts, the Metas, we had to go through a cleansing process from 2001 and for a long, long time. What I'm saying is, are we ready for a cleansing process so that we can sort the wheat from the chaff?
It will, as I said, there hasn't been a reckoning in a long time. But if we had a reckoning, in other words, if we had to deal with the reality of past investment decisions that have already been resolved, but there are zombies out there that are never going to make money or assets on balance sheets that are overmarked, it still wouldn't help me know how much we should invest in AI, how good and how effective and how much more productive it's going to make us. And there's a big debate and it's going on all the time. None of it in my mind is resolved. And I would continue with trepidation and care and some anxiety that we're overdoing it and worry. I would still go forward. I would still go forward where we are. Are we—if you're spending a hundred billion dollars of research a single company in a year, is that going to be the most efficient? No. No. We're not husbanding those resources. We're in a rush to get it done. Now you could question, should we be more careful? Should we do it slower? Should we be more disciplined? But it's a competitive market. We're competing, these companies are competing with other companies here. And we're competing with China and other countries. And so there's no doubt that we will wish we had not always spent where we had spent, but that's not the same as making the judgment that we're overspending today because we're dealing in a world where the outcomes are unknowable. Once the outcomes are knowable, I'll look back and I'll tell you where the mistakes are.
