WEBVTT - Mohamed El Erian Talks Fed Cuts

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio.

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<v Speaker 2>News joining us now to continue this conversation, and police

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<v Speaker 2>are scize. Mohammed al Aaron of Queen's College, Cambridge, Mohamed,

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<v Speaker 2>let's talk about the totality of the data. I'm going

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<v Speaker 2>to sound like a FED official. When you look at

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<v Speaker 2>the totality of the data, are you seeing concrete signs

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<v Speaker 2>of an economic slow down, a loss of momentum? And

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<v Speaker 2>do you think a conversation about reducing interest rates as

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<v Speaker 2>soon as next month is warranted?

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<v Speaker 1>Yes? And yes, John, So if you look at the

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<v Speaker 1>data as a whole, the economy is slowing, and it's

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<v Speaker 1>slowing faster than most economists expect, and certainly more faster

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<v Speaker 1>than what the FED expects. So yes, on the whole,

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<v Speaker 1>the economy is slowing. And let's remember this is an

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<v Speaker 1>economy that has very few buffers. Most of the buffers

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<v Speaker 1>that we've had in terms of personal savings, in terms

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<v Speaker 1>of debt capacity, they've been one down. And that leads

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<v Speaker 1>you to the second question, which is a forward looking

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<v Speaker 1>FED would certainly have the possibility of a July cut

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<v Speaker 1>on the table.

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<v Speaker 2>How much daylight do you think there is between what

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<v Speaker 2>you think they should do and what they will do

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<v Speaker 2>too much.

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<v Speaker 1>You know, if I were them, I would seriously look

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<v Speaker 1>at July as being a live meeting. I don't think

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<v Speaker 1>that's the case. I think that's even a question mark

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<v Speaker 1>in the market. And certainly if you look at what

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<v Speaker 1>the narrative of the last few days by FED official

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<v Speaker 1>as to whether even September is alive right now, the

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<v Speaker 1>market gives less than a fifty percent probability of a

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<v Speaker 1>weight cut in September. So their narrative has been pushing

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<v Speaker 1>back the weight increase towards the end of the year,

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<v Speaker 1>had one or two federal officials would like to keep

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<v Speaker 1>open the possibility of a hike, and I think that

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<v Speaker 1>is a long way from where they should be based

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<v Speaker 1>on what's happening to the economy. But unfortunately, John, that've

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<v Speaker 1>been burnt a couple of times or ready, and let's

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<v Speaker 1>not forget there's still excessively data dependence, so it it

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<v Speaker 1>takes quite a bit of historic data to get them

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<v Speaker 1>to change.

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<v Speaker 3>So I'm not going to sound like John here. Let's

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<v Speaker 3>not talk about the totality of the data or a

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<v Speaker 3>FED official.

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<v Speaker 4>Let's cherry pick.

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<v Speaker 3>Let's talk about some very specific numbers. I want to

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<v Speaker 3>cherry pick personal income coming at zero point five percent

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<v Speaker 3>versus the expectation of zero point four percent, that is

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<v Speaker 3>up from zero point three percent in the prior month, Mohammed,

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<v Speaker 3>just looking at personal income and the fact that it's

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<v Speaker 3>increasing even as personal spending declines, does that give you

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<v Speaker 3>a sense if we just wanted to terry pick that number,

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<v Speaker 3>understanding the totality of the data is different, that maybe

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<v Speaker 3>people are actually in a better place and have a

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<v Speaker 3>greater ammunition and set of financial tools to keep spending

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<v Speaker 3>at a pretty robust pace.

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<v Speaker 1>Lisa, I'd love to be where you are, okay, But

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<v Speaker 1>there's a problem even if we cherry pick, and even

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<v Speaker 1>if we say one month, data has a ton of

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<v Speaker 1>information content. So these are big, two big assumptions. I

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<v Speaker 1>wouldn't know if the increased savings that comes from income

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<v Speaker 1>going more than spending is it voluntary or is it

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<v Speaker 1>forced people voluntarily saving more or people do people feel

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<v Speaker 1>forced to save more. So as much as I would

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<v Speaker 1>like to go to where you are in terms of

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<v Speaker 1>that number, I hesitate because you first you have to

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<v Speaker 1>assume away some pretty important things. But secondly, we don't

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<v Speaker 1>know whether it's voluntary or forced that's.

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<v Speaker 3>A fascinating point. I'm sitting here thinking about that at

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<v Speaker 3>a time. What other people might say, the reason why

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<v Speaker 3>they're not spending is because they're not buying homes and

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<v Speaker 3>they're not feeling like they have the capacity and the

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<v Speaker 3>mobility to do so. One argument that some of the

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<v Speaker 3>more inflationistas out there have made is that if the

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<v Speaker 3>FED were to cut rates by twenty twenty five basis

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<v Speaker 3>points next month, that would reignite a surge of interest

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<v Speaker 3>in the housing market, and then you could see actually

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<v Speaker 3>prices climb much more substantially as a result. Do you

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<v Speaker 3>believe that to be the case, and if not, why so.

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<v Speaker 1>I don't think twenty five basis points are going to

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<v Speaker 1>make that much of a difference to the housing market.

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<v Speaker 1>That's the first issue. I think you'd need a lot

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<v Speaker 1>more than twenty five basis points. Don't forget how much

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<v Speaker 1>we've moved the other way. That's the first point. And second,

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<v Speaker 1>on housing, it gets even more complicated because supply has

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<v Speaker 1>been impacted in a way that most people didn't expect.

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<v Speaker 1>So most people thought that the demand for housing would

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<v Speaker 1>come down as rates went up. What they didn't realize

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<v Speaker 1>is that the supply of housing would also come down

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<v Speaker 1>as people hesitated from going from a very low weight

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<v Speaker 1>mortgage to a current mortgage. So you know, again that

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<v Speaker 1>market has been distorted by what happened during this long

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<v Speaker 1>period of rock bottom rates, and we must not forget

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<v Speaker 1>that a lot of distortions occurred, and in slower moving

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<v Speaker 1>asset classes like housing, it takes time to get these

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<v Speaker 1>distortions out of the system.

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<v Speaker 3>I'm just wondering if twenty five basis points wouldn't necessarily

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<v Speaker 3>reignite the housing market, is there still a reverse argument

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<v Speaker 3>that if they don't cut by twenty five basis points

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<v Speaker 3>next month, that they could be accelerating a tipping point

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<v Speaker 3>that the US labor market is already reaching.

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<v Speaker 1>So that's where I am. I think if you look

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<v Speaker 1>at the tails of the distribution, or if you look

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<v Speaker 1>at type one error, type two error right now, the

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<v Speaker 1>one that scares me more is that they are too slow.

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<v Speaker 1>They are too high for too long, and that economy

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<v Speaker 1>slows in such an extent that two things happen. First,

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<v Speaker 1>they can't moderate the slowing, and second they end up

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<v Speaker 1>by having to cut weights much more than they would

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<v Speaker 1>have otherwise, just like they ended up by hiking weights

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<v Speaker 1>much more than they would have had otherwise because they

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<v Speaker 1>were so late. So when I look at the tails

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<v Speaker 1>of the distribution, and remember I put on the table

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<v Speaker 1>the notion that a soft landing is fifty percent thirty

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<v Speaker 1>five percent, is that we end up in recession because

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<v Speaker 1>the FED doesn't react quickly enough, and fifteen percent is

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<v Speaker 1>the bigger but not hotter that you get a supply

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<v Speaker 1>a positive supply shot something like that. When I look

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<v Speaker 1>at that distribution, yeah, I do worry. I do worry

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<v Speaker 1>that the more likely error right now is that the

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<v Speaker 1>FED will not start cutting early enough, and then we'll

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<v Speaker 1>be forced into cutting a aggressively, but it's not going

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<v Speaker 1>to have the impact in terms of slowing or moderating

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<v Speaker 1>the slowdown, and then we'll overshoot on the way down

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<v Speaker 1>yet again, maham.

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<v Speaker 2>And there's a new wrinkle. How independent is all of

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<v Speaker 2>this from policy out of the White House in twenty

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<v Speaker 2>twenty five?

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<v Speaker 1>So, John, I've been fascinated by the discussion you've had

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<v Speaker 1>as to why are markets so calm about US politics?

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<v Speaker 1>Why are so market calm when the yen is at

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<v Speaker 1>one sixty? Why are so markets calm when French Germany

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<v Speaker 1>the spread is at eighty four basis points, and the

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<v Speaker 1>list goes on and on. Why are they so calm

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<v Speaker 1>on the Middle East conflict can intensify? And I think

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<v Speaker 1>the reason is because we here in the US have

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<v Speaker 1>three things going for us. One is it belief in

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<v Speaker 1>economic exceptionalism that we can soft land the economy or

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<v Speaker 1>even no land at all. That's still actually the central

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<v Speaker 1>scenario for a lot of people. That's number one. Two,

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<v Speaker 1>that we ultimately believe the FED will cut and we

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<v Speaker 1>believe that in Nvidia and the AI revolution is such

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<v Speaker 1>a positive supply shock that it's going to keep on

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<v Speaker 1>giving and giving and giving. You know. On the three,

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<v Speaker 1>I worry most about the economic assumption. And that's why

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<v Speaker 1>if that economic assumption is tested in the months ahead,

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<v Speaker 1>then the politics what's happening around the world, suddenly all

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<v Speaker 1>these things will become will capture much more attention in

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<v Speaker 1>the marketplace than they have so far.

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<v Speaker 4>Muhammad, that we're waking up after a moment where the

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<v Speaker 4>sitting president had what everyone is calling a disastrous debate.

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<v Speaker 4>Obama's former campaign manager went on MSNBC and called it

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<v Speaker 4>def Con one. Alarm bells are ringing. What would be

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<v Speaker 4>enough between now and November, or potentially what political movement

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<v Speaker 4>could move the markets between now and November.

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<v Speaker 1>This is your world and very much more than mine.

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<v Speaker 1>I think the market truly believes, despite what they hear

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<v Speaker 1>from some economists, that when push comes to shove, whether

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<v Speaker 1>it's as in Biden re elected or whether as President

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<v Speaker 1>Trump comes back into the White House, the degrees of

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<v Speaker 1>freedom is not going to be as much the degree

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<v Speaker 1>of freedom what there will be maybe on tariffs, but

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<v Speaker 1>we've seen that both of them actually are very similar

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<v Speaker 1>in what they end up doing. So the market i

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<v Speaker 1>think senses that, despite what the economs are telling them

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<v Speaker 1>about fiscal policy, tariffs, everything else, that when push comes

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<v Speaker 1>to shove, these two individuals when in power, will be

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<v Speaker 1>relatively similar in economic policies. Why because we've had four

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<v Speaker 1>years of each and the market has been able to

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<v Speaker 1>observe what they've done. Now bring in the possibility of

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<v Speaker 1>someone new, and that suddenly changes that whole construct. So

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<v Speaker 1>responding to your question, you know, that's the big question

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<v Speaker 1>is that if you bring someone new into the equation,

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<v Speaker 1>how will the market evaluate and what degree of confident

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<v Speaker 1>as will markets have. It really helps the market that

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<v Speaker 1>they saw both individuals in the White House.

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<v Speaker 2>Maham gonna just want to finish on this and get

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<v Speaker 2>you to elaborate on a final detail. In the UK,

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<v Speaker 2>the guilt market has been a constraining regulating force on

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<v Speaker 2>all kinds of policies coming out of either party in

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<v Speaker 2>this election race, and you can see that in the

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<v Speaker 2>nervousness they have talking about the deficit. You're seeing a

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<v Speaker 2>similar thing take place in France right now. Do you

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<v Speaker 2>think this treasury market could become a regulating force over

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<v Speaker 2>the next administration in this country in the United States?

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<v Speaker 2>Or will we retain that unique privilege to do other things?

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<v Speaker 1>We will unique that we will retain that unique privilege, John,

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<v Speaker 1>because the rest of the world is so messy. So

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<v Speaker 1>I think of it very simply. Whether it's France, whether

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<v Speaker 1>it's the UK, they solve in absolute space. If there

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<v Speaker 1>is physical irresponsibility, then they will feel it, regardless of

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<v Speaker 1>what's happening elsewhere. The US solves, the US bond market

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<v Speaker 1>solves any relatives. So as long as other countries are

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<v Speaker 1>more irresponsible than us, then we can continue being irresponsible.

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<v Speaker 2>Muhammed is one of the best Muhammad I'll air in

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<v Speaker 2>there