Business

Gary Cohn: Oil, Yellen And His Perfect Final Four

Gary Cohn, President and COO of Goldman Sachs, spoke with Bloomberg Television’s Stephanie Ruhle about the oil market, the Nasdaq Composite Index, and Federal Reserve and European Central Bank policies. Cohn also discussed how he arrived at his perfect March Madness final four bracket picks — he says “it wasn’t dumb luck” and credits his Midwestern roots. He was joined by Rich Berlin, Director of Harlem, the charity that Cohn is supporting with his participation in Bloomberg’s Brackets for a Cause.

On the oil market, Cohen said: “I think the front end of oil can go down.  And I think we’re getting to that point….What I think we’re going to see happen is the front end of oil come down, the  back end is going to stay unchanged, and the contango’s going to widen.  That still means we’re going to wake up to one day where we see a headline where the spot price of oil is substantially lower than it is.  And I still believe that’s going to happen.”

Gary Cohn Goldman Sachs

When asked about Janet Yellen, Cohen said: I still think she’s going to be patient. I still think she’s going to be dovish…If you were Janet Yellen, you would want to raise interest rates; you’d want to have the ability to lower interest rates if something went wrong.  There’s nothing scarier than being head of the central bank and not having the ability to stimulate the economic cycle.  That’s a bad position to be in. On the flip side, she’s got a dual mandate.  She’s got an employment growth mandate and she has an inflation mandate.”

Gary Cohn: Oil to Stay Low, Yellen to Remain ‘Dovish’

How Did Goldman President Gary Cohn Pick His Final Four?

GARY COHN:  Right now we’re still in the mid to high $40.  We’ve been ticking around $45 – $50.  And what I said recently is I think the front end of oil can go down.  And I think we’re getting to that point.

If you look at the storage capacity in the mid-continent of the United States, we’re basically close to capacity.  So if much more oil comes into the system in the United States, we’re going to fill up capacity.  We’re going to fill up storage.  We’re going to have to price in more contango to attract in more storage.

So what I think we’re going to see happen is the front end of oil come down, the  back end is going to stay unchanged, and the contango’s going to widen.  That still means we’re going to wake up to one day where we see a headline where the spot price of oil is substantially lower than it is.  And I still believe that’s going to happen.

And a little bit of it is the extra supply but as you get into the turnaround cycle, refiners change their refining mix in the spring and the fall.  Right now we’re changing from a heavy heating oil mix to heavy gasoline mix.  And when they change that cycle, they stop consuming crude oil for a few weeks while they change.  So we’re seeing crude oil back up in the system right now.

So I still believe that’s going to happen even though we’ve seen this recent correction.  There’s still correction has meant that we’ve traded between this $45 – $50 range.

STEPHANIE RUHLE:  Distressed and high yield guys seem to think that oil is the holy grail right now, amazing opportunities.  Do you agree?

GARY COHN:  I don’t really agree.  I think we’re at this price level for a relatively long period of time.  We’ve got a lot of supply of oil in the system and we’re continuously building supply.  The new trend that’s going on that’s quite interesting is because there’s no demand for new wells, oil rigs, drilling rigs, have become very cheap.

So what’s going on right now is people are starting to drill a lot of wells.  They’re drilling the wells and they’re just capping the wells.  They’re not fracking them; they’re not bringing them on production.  That means you can drill the well, you can cap it, you can sell the forwards against it.  If the price of oil goes up, you frack the well and you deliver into it.  If the price of oil goes down, you back your hedges.

So there’s going to be some natural cap in the oil market for the relatively near future, so I don’t believe the price of oil by itself is the next great trade.  I do think there are going to be some distressed assets that come  back if the price of oil stays this cheap this long, and I do think that’s going to happen. But it’s going to take some time for that to work through the cycle.

RUHLE:  Well, another big basketball fan, Mark Cuban, seems to think that we’re in a bubble when he looks at the Nasdaq and how well it’s been doing.  Do you agree?

GARY COHN:  I never like disagreeing with Mark but I’m going to disagree with Mark.  So — and I’ve said this with you before.  When you look at the Nasdaq at 5,000 now versus where it was last time we were at 5,000, it’s substantially different.  The composition of the index is different.  The companies that make up the index are different.  The multiples are substantially different.  The earnings power is different.  The fact that you and I are using companies in the Nasdaq as part of our standard, daily living — and I’m not sure we could live without those companies today.  They have become part of our everyday life, and they’re making our life different.  They’re making our life better and we depend upon those companies.

So when you think about an environment where we’re using the products and goods and services that those Nasdaq companies produce every day, those companies seem relatively fairly valued to me.

RUHLE:  Do you think Janet Yellen is substantially different than you were expecting?  I mean, we thought she’d be patient.  We thought she’d be so dovish.  That’s not the case.

GARY COHN:  I still think she’s going to be patient.

RUHLE:  Really?

GARY COHN:  I still think she’s going to be dovish.  I’ve been saying that for a long time.  I still think that she’s got to be patient.  I understand that Janet Yellen wants to, and I understand the need that she really wants to raise interest rates.  If you were Janet Yellen, you would want to raise interest rates; you’d want to have the ability to lower interest rates if something went wrong.  There’s nothing scarier than being head of the central bank and not having the ability to stimulate the economic cycle.  That’s a bad position to be in.

So I understand her position.  On the flip side, she’s got a dual mandate.  She’s got an employment growth mandate and she has an inflation mandate.  There’s no inflation in the system; there’s no signs of inflation in the system.  I think Q1 GDP is going to be lower than people think.  I think Q1 earnings are going to be lower than people think.  And I think she’s going to continuously be in this tough position of intellectually wanting to raise interest rates but fundamentally not being able to.

RUHLE:  See, I think there’s nothing scarier than being a central banker in Europe.  I mean, at least Janet Yellen is standing on top of a strong economy.  What do you think of the state of Europe right now?

GARY COHN:  Well, a stronger economy.

RUHLE:  Stronger.

GARY COHN:  Stronger economy.  I think the European Central Bank’s simple.  They’re in a devaluation of the euro transition (ph).  I mean, they’ve made it quite simple.  We’re in, what, week three or week four of QE?  They’ve got many, many more weeks ahead of us.  They’re going to continue to buy debt in Europe.  You know, the only parameter they’ve put on themselves is they won’t buy below minus 20 basis points and they won’t own more than 25 percent of any outstanding issue.  But that’s the only parameters and we’re just at the beginning of this process in Europe, which I think will continue to lower rates in Europe, which will continue to put pressure on rates in the United States, which will continue to be deflationary for the United States.

=========

STEPHANIE RUHLE: Check this out.  Gary’s picks for the Final Four were absolutely perfect.  He actually picked Wisconsin to win it all. That’s an outlier. If the Badgers are the champs, that means $360,000 for his chosen charity, Harlem RBI.  He will also win if Michigan State keeps the upsets coming and wins the championship. And Cohn also comes out on top if Duke beats Wisconsin.

I spoke to Gary earlier this morning, along with Harlem RBI executive director, Rich Berlin.  Rich told us about Harlem’s mission.

RICH BERLIN: Gary got involved with Harlem RBI several years ago as we were launching a capital campaign for our charter school building. So we started by taking an abandoned lot and turning it into a ball field.  That has grown into after school programs, charter school, family programs, and it is sort of culminating now in this $53 million building, which Gary helped anchor, along with Mark Teixeira of the Yankees and a few other heavyweights that you’ve  had on here.  So if it takes baseball or basketball to get done, we’re okay with that. The end product is enormous great stuff for kids and this guy has been a pretty solid supporter.

RUHLE: Well, $360,000 you stand to get here.  What are you going to do with it?

BERLIN: Well, the best part of $360,000 is it’s already spent, trust me. It’s a nonprofit world, it’s already spent. We spend ahead of raising, right? But really what this will do is allow us to expand programs, pre-K programs, the opening of our eighth grade next year, and most importantly, a new Harlem RBI in Mahaven in the South Bronx. The poorest congressional district in the United States where 400 kids are now in our program and we will build a ball field just like we did on East 100th Street.

RUHLE: Be honest, Gary. Was it dumb luck? How did you pick this top four? Be honest. Because, you know, I thought I had a good chance.

GARY COHN: So Dan Gilbert and I both picked Michigan State, I think. Right?

RUHLE: Yes.

GARY COHN: Okay. What do we both have in common?

RUHLE: You are both from Ohio.

GARY COHN: Cleveland.

RUHLE: There you go!

GARY COHN: We’re both from the Midwest. We both watched Big Ten basketball all year long.  Everyone in the in the Northeast watches the Big East and they watch the ACC.  They do not understand, or maybe they do understand but we just got lucky, they do not understand the quality of basketball that the Big Ten plays all year long.

What I think happened, and if you look at — I think six of the last seven years – you’ve had a Big Ten team in the Final Four.  What happens is all of the East Coast guys watch the ACC, they watch the Big East, they look at the Big Ten teams, they do not have the best records in the country because they beat each other up all year long, but when the Big Ten teams come in and play the others, they tend to shine.  And year after year, this happens. It happened in the football playoffs, Ohio State won the national football championship, a Big Ten team, and it has happened in the basketball playoffs. So it was not dumb luck at all.  I look at the two Midwestern guys, Dan Gilbert and myself, picking Michigan State and Wisconsin to be in the Final Four and I think it was for guys that watch Big Ten basketball, it’s pretty obvious.

RUHLE: Are you suddenly going to watch basketball this weekend? If it was not for the $306,000 on the line, would you be paying attention at all?

BERLIN: Let’s be clear, Wisconsin is my alma mater. I’ve got a little bit of a rooting interest in here, too. So Gary picked the right now. Now what makes it really interesting is our head fund-raiser is from Kentucky, but I think she knows her bread is buttered this weekend.

RUHLE: Where are you going to be watching this weekend, Gary? I mean, your wife and three girls, do they want to watch basketball?

GARY COHN: One of my daughters will watch with me.  My oldest daughter, Chloe, will watch basketball with me this weekend. I think my other two girls will have no idea there is basketball going on. And my wife will make sure she is nowhere near me.