David Solomon Goldman Sachs CEO: 'I'm concerned about the path' for the Fed

Goldman Sachs CEO David Solomon joins Yahoo Finance Live from the 2022 Milken Institute Global Conference to discuss the state of capital markets, recessionary concerns, inflation, supply chain challenges, unregulated capital, and the opportunities for investment.

Video Transcript

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- Goldman Sachs CEO David Solomon has struck a sobering note on the economic outlook. "Yahoo Finance" Editor in Chief Andy Serwer sat down with Solomon at the Milken Conference.

ANDY SERWER: I guess the first question's pretty obvious. We have had the worst start to a year, January through April, I think, what, in like 80 years. How-- are you worried, David? Are you concerned?

What's going on? How do you explain it? And what's your take on the capital markets right now?

DAVID SOLOMON: Well, we're going through a period of change and shift after a long period of monetary policy that was very, very accommodative. And there are a handful of things that have happened over the course of the last few years that have led to a relatively abrupt change in policy. And that change in policy is affecting asset prices. That change in policy is trying to undermine the inflation that's now rooted in the economy.

I'm concerned about the path of this. I think we'll find a path through. It's hard to estimate whether we'll have a soft landing, or whether we'll ultimately have to have a recession to slow down this inflation that's embedded in the economy.

But we're really getting a response to a combination of loose monetary policy, the pandemic, the disruption it caused, significant fiscal policy, and we're now coming out of the pandemic and trying to unwind all that in a much more complicated world. I think the situation in Ukraine has made the world more complicated. Geopolitics and China have made the world more complicated. And so we have a more uncertain period that we're all going to have to navigate through.

ANDY SERWER: It seems pretty clear the Fed's going to raise by 50 basis points this week. How confident, David, are you in what Jay Powell is doing in his course of action right now?

DAVID SOLOMON: Well, the Fed is on it. And it's focused. I think that the perception of how aggressively they're going to move to raise rates has changed over the last couple of months.

But the course of that, and whether or not they can land the plane very smoothly, is uncertain. But I know the Fed's focused on it. And that's a good place to start.

ANDY SERWER: Are you changing the strategy or the objectives of the firm at this point because of maybe the sea change in rates, or even in the macro environment sort of over a five-year period? How is that affecting how you're managing things?

DAVID SOLOMON: We laid out-- in 2020, we laid out a strategy to continue to grow Goldman Sachs, diversify the revenue base of Goldman Sachs, and find a broader set of products and services that we could deliver to serve our clients and our customers. And we're executing on that. This is an environment that probably creates some headwinds versus the environment we were living in and operating in in 2020 and 2021.

But it doesn't change our strategy. Doesn't change the way we're executing against that strategy. Might slow some things down a little bit, but we're focused on executing and making sure that we're making the firm more durable while improving the ways that we can serve our clients.

ANDY SERWER: All CEOs are dealing with interest rates, supply chain, labor shortages. Maybe not supply chain for you so much-- does supply chain effect Goldman Sachs?

DAVID SOLOMON: Well, supply chain is-- doesn't affect Goldman Sachs the same way it would affect a manufacturer. But when you think about our business, a lot of our business is delivering intellectual capital--

ANDY SERWER: Right.

DAVID SOLOMON: --to our clients. And that requires us to have extraordinary people. And the world right now is very competitive. Labor is very, very tight. And so like all businesses, we're working to ensure that we're attracting, developing, supporting our people. And that's a super important part of our supply ecosystem is making sure that we've got the best people who can really work with our clients to help them deal in this time of uncertainty.

ANDY SERWER: One of the big questions of our time, I think, David, is about globalism. And, you know, we had this sort of unimpeded rise of globalism since World War II. We were just talking about the Clinton era. Maybe that was the high watermark, China entering the WTO.

Obviously, over the past five years, we've seen a retreat in terms of globalism. You're a global firm. This obviously has consequences for you. And I think the question is-- sorry it's long winded-- is this just a blip? Or are we seeing, you know, a major change back to nationalism against globalism?

DAVID SOLOMON: Well, I've talked about this a couple of times today in discussions. And I think it's never black and white. It's not forward, reverse.

ANDY SERWER: Right.

DAVID SOLOMON: But there's no question that there were a variety of macro factors that in my opinion really led to-- [COUGHS] excuse me-- more capital flow on a global basis around the world. I think the fall of the Berlin Wall ushered in a period of really thinking about what's the cheapest place to make something so you can, therefore, sell it to wherever demand is in the world. And there are some things going on right now in the macro that are causing people to reconsider some of that.

I think there's certainly significant shifts going on in where people buy energy, and how people think of where they get their energy, and energy security. I think people are thinking about their commodity supply chains. I think people are obviously thinking about food.

And so I think there certainly is a shift toward more regionalization and more nationalism. But I would be quick to call an end to the global economic system we all participate in. You know, I think we're pretty economically connected. And while there are some rebalances and changes, I don't think it's a straight-out reversal.

ANDY SERWER: Shifting gears a little bit, does it concern you that so much capital has flowed to parts of our capital markets that are not regulated by the SEC, maybe in terms of it being riskier in terms of systemic risk that there is so much money in hedge funds, private equity, venture capital that's not directly seen-- overseen by the SEC? And then is it just simply unfair to Goldman Sachs that you have to play by these rules and those guys don't?

DAVID SOLOMON: Well, we're a regulated financial institution.

ANDY SERWER: Right.

DAVID SOLOMON: And we have certain activities that are inside what I'll call the regulated moat. We also operate in a variety of those businesses. We're a big asset manager.

ANDY SERWER: Right.

DAVID SOLOMON: We're one of the top five active asset managers in the world. And so we operate in those businesses, too. I certainly wouldn't say it's unfair. I do think that there's a lot of activity that used to be in the regulated banking system, a lot of lending activity that's moved outside the system. And I think that's something that everyone needs to watch over time.

But broadly speaking, I think markets are relatively efficient. We participate in those markets. But we're a regulated entity. We accept that. And, you know, we operate our business to be as successful as a regulated banking entity as we can be.

ANDY SERWER: What are the greatest opportunities you see in the capital markets, or maybe just equities, or the greatest opportunities for the firm? I think it's maybe three questions, but go ahead.

DAVID SOLOMON: I think the innovation economy in the US is alive and well. And I think there are incredible opportunities. I think there's enormous change going on in AI and robotics. There's great opportunity for risk capital to come into areas where new technologies can be developed to accelerate climate transition and really improve our ability to deliver, you know, a greener world more broadly. I think there are enormous opportunities in biotechnology and medical technology, and great advances occurring that can obviously help us all and help the people we love.

And so I think there's a great innovation economy that's alive and well. Those are three big buckets I'd highlight. But the opportunities that will come out of those areas in the coming decades are enormous. And we're trying to find ways to support clients, allocate capital, intermediate, and support that investment in that activity that only strengthens the overall US ecosystem.

ANDY SERWER: Last question, David. And it has to do-- you mentioned the possibility of a recession. So what specifically is your outlook? You can lean on the firm economists if you want for that.

DAVID SOLOMON: I'll lean on the firm economists.

ANDY SERWER: Yeah, right. But so what are they saying? And what does that mean for the core businesses-- the IPOs, the M&A, capital markets stuff?

DAVID SOLOMON: So our US economics team, you know, forecasts about a 30% or 35% chance of a recession in the next couple of years. And I said in a panel I was on earlier, I don't think speculating whether that's high, low, is it 30% or 35%, is it 40% or 50%, I don't think that really matters. What matters is we're going through a period where there's real inflation. We're seeing a shift in monetary policy, and we're raising rates.

ANDY SERWER: Right.

DAVID SOLOMON: And the risk of a recession is higher than we perceived it was 12 months ago. And so people have to think about risk appetites, risk capacity according to that. And they have to discount appropriately.

And so we think about our risk appetite. As we talk to clients and advise clients, we tell clients, you have to be prepared that in the distribution of outcomes, there's a larger possibility of an economic slowdown now, given what's happening than there was, you know, a year or two ago. But I'm sure we'll navigate through it. And, you know, hopefully we'll have as soft a landing as we possibly can.

ANDY SERWER: Quick last question, David. Have they asked you to DJ at the party this afternoon or tonight?

DAVID SOLOMON: I-- you know, I'm working on Goldman Sachs business this week, so all Goldman Sachs this week, no music this week.

ANDY SERWER: OK, serious stuff here. David Solomon, CEO of Goldman Sachs, thank you so much for joining us.

DAVID SOLOMON: Great to be with you, Andy.