1 00:00:02,440 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,080 --> 00:00:10,440 Speaker 2: Joining us now, Mohammed el Arian, Where we're supposed to 3 00:00:10,480 --> 00:00:12,880 Speaker 2: talk about FED policy, this that we'll throw it out 4 00:00:12,880 --> 00:00:17,960 Speaker 2: the window. Mohammad al Arian is definitive in game theory 5 00:00:18,000 --> 00:00:21,960 Speaker 2: and thinking about the probabilities, the risk, the uncertainty of 6 00:00:22,000 --> 00:00:27,040 Speaker 2: given events, including what we saw yesterday. He is advantaged 7 00:00:27,040 --> 00:00:30,880 Speaker 2: by being at Queen's College, the University of Cambridge, which 8 00:00:30,920 --> 00:00:33,600 Speaker 2: means he's advantaged by one of the world's great Asian 9 00:00:33,720 --> 00:00:37,800 Speaker 2: programs with the leadership of Andrew Marsham, who's just absolutely 10 00:00:37,880 --> 00:00:41,519 Speaker 2: definitive on these studies. Doctor el Arian. I want to 11 00:00:41,520 --> 00:00:44,600 Speaker 2: go back to Martin Feldstein just a year and a 12 00:00:44,600 --> 00:00:49,320 Speaker 2: half before he died. The Japanese economy is a paradoxical 13 00:00:49,400 --> 00:00:55,040 Speaker 2: mixture of prosperity and failure. Martin Feldstein was so far 14 00:00:55,480 --> 00:01:01,680 Speaker 2: out front on their cyclic failure to be normal. When 15 00:01:01,760 --> 00:01:05,800 Speaker 2: Japan blew up yesterday with their new policy, when they 16 00:01:05,880 --> 00:01:10,600 Speaker 2: blew up yesterday the equity market decline, how does that 17 00:01:10,680 --> 00:01:14,600 Speaker 2: redound over to the American and the Western markets? 18 00:01:16,400 --> 00:01:18,759 Speaker 1: Palm, thanks for having me, and I thought we were 19 00:01:18,760 --> 00:01:21,280 Speaker 1: going to go straight to the miracle of the Mets. 20 00:01:21,319 --> 00:01:23,240 Speaker 1: Still being in the wild card chase. 21 00:01:23,280 --> 00:01:25,840 Speaker 2: That is a miracle. It was discussed the spirit in America. 22 00:01:26,840 --> 00:01:31,360 Speaker 1: Look, when you won an economy at low growth, high debt, 23 00:01:31,720 --> 00:01:36,360 Speaker 1: zero interest rates, and quantitative easing for a number of decades, 24 00:01:36,400 --> 00:01:41,040 Speaker 1: and that's what happened to Japan. Then you get first 25 00:01:41,240 --> 00:01:45,200 Speaker 1: the contrast that mighty Felstein correctly pointed out, which is 26 00:01:45,240 --> 00:01:48,680 Speaker 1: the flow numbers are awful, but the stock numbers are great. 27 00:01:48,720 --> 00:01:53,600 Speaker 1: So wealthy economy that nevertheless doesn't grow. But importantly, you 28 00:01:53,840 --> 00:01:59,680 Speaker 1: encourage that wealth to go seek higher returns elsewhere. And 29 00:01:59,800 --> 00:02:05,160 Speaker 1: that's what happened. The Japanese financial system became very large 30 00:02:05,160 --> 00:02:09,040 Speaker 1: holders of other people's securities. Then when you change the 31 00:02:09,120 --> 00:02:15,800 Speaker 1: regime and you raise interest rates, the currency appreciates, inflation 32 00:02:15,919 --> 00:02:23,160 Speaker 1: comes back. Suddenly people cannot refinance these positions and either 33 00:02:23,360 --> 00:02:27,519 Speaker 1: actual or perceived sales. So what happened in the last 34 00:02:27,520 --> 00:02:30,240 Speaker 1: few days is a shock that started in the US 35 00:02:31,440 --> 00:02:36,080 Speaker 1: migrated to Japan. It then exposed a vulnerability that a 36 00:02:36,080 --> 00:02:39,600 Speaker 1: lot of people knew about but didn't take a serious way, 37 00:02:40,000 --> 00:02:42,799 Speaker 1: and then that out got amplified, and then it came 38 00:02:42,840 --> 00:02:44,359 Speaker 1: back here one day. 39 00:02:44,600 --> 00:02:46,760 Speaker 2: The thing to me that's so important here Mohammad, And 40 00:02:46,800 --> 00:02:49,560 Speaker 2: this goes back to your arch excellence in game theory 41 00:02:49,720 --> 00:02:53,000 Speaker 2: is a tea decision. Japan has to make a tea decision, 42 00:02:53,040 --> 00:02:57,160 Speaker 2: except it's not like ten years ago way leot blackrax As. China, 43 00:02:57,200 --> 00:03:01,200 Speaker 2: if they're lucky, will do three percent real g growth. 44 00:03:01,320 --> 00:03:04,920 Speaker 2: No one's prepared for that. I understand how did Japan 45 00:03:05,160 --> 00:03:12,320 Speaker 2: adjust given the new struggling China. 46 00:03:10,680 --> 00:03:14,280 Speaker 1: So they have a financial issue and an economic issue. 47 00:03:14,320 --> 00:03:18,400 Speaker 1: The financial issue will be easier for barons, regulatory for bearers, 48 00:03:18,480 --> 00:03:24,400 Speaker 1: so they will not force sales from their financial institutions. 49 00:03:24,760 --> 00:03:28,040 Speaker 1: They will have a lot more patients with the mismatches 50 00:03:28,320 --> 00:03:32,960 Speaker 1: that the financial institutions have. In terms of their real economy. 51 00:03:33,160 --> 00:03:38,200 Speaker 1: They face the same issue that most countries face, which is, 52 00:03:38,240 --> 00:03:40,800 Speaker 1: with the exception of the US, and even the US 53 00:03:40,920 --> 00:03:43,800 Speaker 1: has a question mark over it, there isn't much growth 54 00:03:43,920 --> 00:03:47,680 Speaker 1: in the global economy, so there will be competing for 55 00:03:47,960 --> 00:03:50,920 Speaker 1: a limited pie, and China is way ahead of other 56 00:03:51,000 --> 00:03:53,800 Speaker 1: countries trying to get a bigger share of that pie. 57 00:03:54,240 --> 00:03:57,840 Speaker 2: I can't emphasize enough. Paul Bruce Casman a JP Morgan 58 00:03:58,000 --> 00:04:02,640 Speaker 2: was brilliant on this. In a globe will tepidness disinflation 59 00:04:03,000 --> 00:04:06,280 Speaker 2: is the overlay that affects us Mohammed. 60 00:04:06,680 --> 00:04:08,480 Speaker 3: When I started on Wall Street in the mid eighties, 61 00:04:08,560 --> 00:04:11,720 Speaker 3: a tour of duty in Tokyo was an absolute must. 62 00:04:11,760 --> 00:04:15,520 Speaker 3: That's how important Japan was to global Wall Street. But 63 00:04:15,560 --> 00:04:17,760 Speaker 3: then for the last twenty five or years or so, 64 00:04:17,800 --> 00:04:20,719 Speaker 3: we just never talked about it. What changed in the 65 00:04:20,760 --> 00:04:23,360 Speaker 3: last year or two that people like Warren Buffett are saying, 66 00:04:23,400 --> 00:04:26,480 Speaker 3: you really have to pay attention to Japan. What's changed? 67 00:04:27,920 --> 00:04:32,000 Speaker 1: So I think what's changed is the hypothesis that they 68 00:04:32,040 --> 00:04:38,080 Speaker 1: are finally exiting multi decades of economic majiocrity. That is 69 00:04:38,160 --> 00:04:41,599 Speaker 1: I think what has changed, and that's why up to July, 70 00:04:42,520 --> 00:04:47,839 Speaker 1: the Japanese stock market was the deer. I mean, people 71 00:04:47,839 --> 00:04:49,560 Speaker 1: find in love with the Japanese stock market in a 72 00:04:49,600 --> 00:04:51,600 Speaker 1: way that they haven't done for a very long time. 73 00:04:53,480 --> 00:04:57,040 Speaker 1: That is what has changed. But again it's important exactly 74 00:04:57,120 --> 00:05:00,320 Speaker 1: what you said, Most people stop looking at your hand, 75 00:05:00,600 --> 00:05:03,320 Speaker 1: So the understanding of Japan is not as deep as 76 00:05:03,360 --> 00:05:05,599 Speaker 1: you'd like it to be in Wall Street. 77 00:05:06,760 --> 00:05:09,159 Speaker 3: All right, Muhammad, what I'd love to get your thoughts 78 00:05:09,240 --> 00:05:12,240 Speaker 3: while we have you. What did you experience yesterday? What 79 00:05:12,240 --> 00:05:15,599 Speaker 3: did you see yesterday in the US? Markets because boy, 80 00:05:15,920 --> 00:05:18,600 Speaker 3: yesterday morning, it was because Tom Keen was not in 81 00:05:18,680 --> 00:05:19,400 Speaker 3: the market, didn't know. 82 00:05:19,400 --> 00:05:22,200 Speaker 2: What I took off yesterday, Mohammad, I was so stunned 83 00:05:22,240 --> 00:05:25,120 Speaker 2: by the New York mets that I needed a day arrest. 84 00:05:25,360 --> 00:05:28,040 Speaker 3: What did you make of yesterday's market action, Mohammad. 85 00:05:28,960 --> 00:05:31,760 Speaker 1: So, yesterday was an example where we lost three anchors. 86 00:05:31,839 --> 00:05:35,159 Speaker 1: We lost the notion that of the US economic exceptionalism. 87 00:05:35,240 --> 00:05:38,840 Speaker 1: That anchor was put in doubt with the data. We 88 00:05:38,920 --> 00:05:44,040 Speaker 1: lost the notion of policy anchors because people started calling 89 00:05:44,120 --> 00:05:46,840 Speaker 1: under FED to do an intermeding cut. That was I mean, 90 00:05:46,880 --> 00:05:49,080 Speaker 1: there was a lot, a lot of ridiculous things being said, 91 00:05:49,360 --> 00:05:53,279 Speaker 1: and we lost Tom Keane's calm voice. So you know, 92 00:05:53,440 --> 00:05:57,080 Speaker 1: it's incredible to see the two year move twenty basis 93 00:05:57,080 --> 00:06:03,120 Speaker 1: points intert in today's incredible. I mean I got a sense, 94 00:06:03,520 --> 00:06:06,440 Speaker 1: and I put this on X that we overshot on 95 00:06:06,560 --> 00:06:11,200 Speaker 1: the fixed income side. So I was quite comfortable about 96 00:06:11,680 --> 00:06:16,640 Speaker 1: treasury yields coming back. I was worried about whether credit 97 00:06:16,680 --> 00:06:21,240 Speaker 1: would be contaminated. Credit was not contaminated in any meaningful 98 00:06:21,279 --> 00:06:24,720 Speaker 1: sense yesterday. That was a pleasant surprise, and then I 99 00:06:24,839 --> 00:06:28,440 Speaker 1: was reassured that we didn't have a market functioning problem 100 00:06:29,320 --> 00:06:29,520 Speaker 1: with this. 101 00:06:29,680 --> 00:06:32,359 Speaker 2: Mohammed al Aarian of Alliance and of course Queen's College, 102 00:06:32,440 --> 00:06:36,599 Speaker 2: the University of Cambridge will continue with doctor Alarian. We 103 00:06:36,640 --> 00:06:38,880 Speaker 2: had green in the screen, not like we had on futures, 104 00:06:38,920 --> 00:06:42,239 Speaker 2: but we'll take it. Spxcept four tenths of a percent 105 00:06:42,480 --> 00:06:45,600 Speaker 2: Vicks thirty two point four to eight. That's elevated off 106 00:06:45,640 --> 00:06:49,720 Speaker 2: what we know for years. Hummadelary and I want to 107 00:06:49,760 --> 00:06:52,240 Speaker 2: go back to your game theory and the tea decision. 108 00:06:52,960 --> 00:06:57,120 Speaker 2: I take immense issue with the phrase emergency rate cut. 109 00:06:57,200 --> 00:07:00,960 Speaker 2: There's no sense of history of what central banks should use. 110 00:07:01,360 --> 00:07:04,880 Speaker 2: What is the tea decision that Jerome Pall faces after 111 00:07:04,960 --> 00:07:06,440 Speaker 2: yesterday's festivities. 112 00:07:08,760 --> 00:07:11,600 Speaker 1: The marketplace thinks it is whether to cut twenty five, 113 00:07:11,720 --> 00:07:15,040 Speaker 1: fifty or seventy five in September. That is, that is 114 00:07:15,080 --> 00:07:17,840 Speaker 1: what the marketplace thinks. I would bring you to the 115 00:07:17,960 --> 00:07:22,360 Speaker 1: end of this month. And Jackson Hall he has a 116 00:07:22,520 --> 00:07:27,560 Speaker 1: golden opportunity to regain control of the policy narrative, and 117 00:07:27,640 --> 00:07:31,960 Speaker 1: to do that he has to pay some risk in 118 00:07:32,120 --> 00:07:34,440 Speaker 1: laying out what he thinks the neutral interest rate is. 119 00:07:35,200 --> 00:07:37,640 Speaker 1: In discussing like the back of Inkdan has discussed what 120 00:07:37,760 --> 00:07:41,080 Speaker 1: structural changes are happening to the domestic economy and to 121 00:07:41,120 --> 00:07:45,200 Speaker 1: the global economy. So for me, his teed decision is 122 00:07:45,240 --> 00:07:50,720 Speaker 1: actually at Jackson Hall, whether he just gives a mail 123 00:07:50,800 --> 00:07:54,000 Speaker 1: in speech or whether he tries to regain control of 124 00:07:54,040 --> 00:07:54,840 Speaker 1: the policy narrative. 125 00:07:55,120 --> 00:07:57,440 Speaker 2: Muhammad, we're going to get the surveillant's golf stream out 126 00:07:57,440 --> 00:07:59,720 Speaker 2: to get you to Jackson Hall for a covers Lisa 127 00:07:59,720 --> 00:08:03,560 Speaker 2: Brand and I will be at Jackson Hole. With that said, Mohammed, 128 00:08:03,600 --> 00:08:06,800 Speaker 2: the heart of the matters you mentioned Boe and particularly 129 00:08:06,840 --> 00:08:10,360 Speaker 2: Leguard's ECB, and she gave a speech last year at 130 00:08:10,400 --> 00:08:13,160 Speaker 2: Jackson Excuse me, she wrote a paper last year at 131 00:08:13,240 --> 00:08:17,520 Speaker 2: Jackson Hall on this, Mohammed, We're addicted. We're in a 132 00:08:17,560 --> 00:08:23,440 Speaker 2: green Spannian measured cadence. Does that fit the events right now? 133 00:08:23,920 --> 00:08:27,480 Speaker 2: Or does Powell have to elucidate at Jackson Hole that 134 00:08:27,560 --> 00:08:31,240 Speaker 2: we can lose measured and be more ad hoc more 135 00:08:31,720 --> 00:08:33,400 Speaker 2: unmeasured in our policy. 136 00:08:34,720 --> 00:08:38,480 Speaker 1: So it's really interesting because I think the FED being 137 00:08:38,640 --> 00:08:42,880 Speaker 1: so excessively data dependent has been actually quite at hock. 138 00:08:43,960 --> 00:08:46,840 Speaker 1: The amount of pivots in the forward guidance we've had 139 00:08:46,920 --> 00:08:50,120 Speaker 1: over the last twelve months is enormous, you know, I 140 00:08:50,160 --> 00:08:53,640 Speaker 1: actually have a slide that shows every pivot. And that's 141 00:08:53,679 --> 00:08:57,520 Speaker 1: the problem because if you allow data to swing you 142 00:08:57,640 --> 00:09:02,200 Speaker 1: so much, then you become an amplifier of market volatility 143 00:09:02,320 --> 00:09:05,720 Speaker 1: rather than a stabilizer. So I think they need to 144 00:09:05,720 --> 00:09:11,480 Speaker 1: be less at home, less so data dependent, and have 145 00:09:11,640 --> 00:09:15,800 Speaker 1: the courage to be strategic, have a courage to say 146 00:09:15,880 --> 00:09:18,200 Speaker 1: this is where we think the economy is going. I 147 00:09:18,320 --> 00:09:20,840 Speaker 1: understand why they're not doing that. They tried it in 148 00:09:20,880 --> 00:09:24,800 Speaker 1: twenty twenty one with the famous transitory inflation call. They 149 00:09:24,840 --> 00:09:28,800 Speaker 1: made a horrible mistake and because of that that shied away. 150 00:09:29,440 --> 00:09:31,400 Speaker 1: But that's what a central back is supposed to do. 151 00:09:31,480 --> 00:09:34,520 Speaker 1: That is what Greenspan did, that is what Bernanke did, 152 00:09:34,679 --> 00:09:37,600 Speaker 1: that is what Yellen did. And I think it's important 153 00:09:37,679 --> 00:09:40,679 Speaker 1: for this FED to be not just data dependent, but 154 00:09:40,720 --> 00:09:43,600 Speaker 1: also to have a forward looking view of the economy. 155 00:09:44,080 --> 00:09:46,160 Speaker 3: That's a great point, Muhammad, because a lot of folks 156 00:09:46,160 --> 00:09:48,960 Speaker 3: that we speak to, both in academia and in practice, 157 00:09:48,960 --> 00:09:51,240 Speaker 3: say they're not looking at the right data. They're not 158 00:09:51,280 --> 00:09:53,000 Speaker 3: looking at the real time data. If they were looking 159 00:09:53,000 --> 00:09:55,280 Speaker 3: at the real time data, they would realize that the 160 00:09:55,320 --> 00:09:58,000 Speaker 3: economy is in fact slowing, that inflation is in flagged 161 00:09:58,040 --> 00:10:01,600 Speaker 3: under control, and that they should be cutting rates right now. 162 00:10:02,000 --> 00:10:02,760 Speaker 3: Do you go that far? 163 00:10:04,040 --> 00:10:07,080 Speaker 1: That's where I was. I called for a cut last week. 164 00:10:07,480 --> 00:10:10,240 Speaker 1: I've been arguing for the last three months that the 165 00:10:10,320 --> 00:10:13,719 Speaker 1: US economy is slowing much faster than most people anticipate. 166 00:10:13,800 --> 00:10:16,440 Speaker 1: Why because, in addition to the data, I've been listening 167 00:10:16,480 --> 00:10:19,120 Speaker 1: to the companies, I've been listening to what they're telling 168 00:10:19,200 --> 00:10:22,000 Speaker 1: us about what they're seeing in terms of demand. They 169 00:10:22,000 --> 00:10:25,199 Speaker 1: should have cut in July. They didn't. That was a mistake. 170 00:10:26,280 --> 00:10:30,040 Speaker 1: They can still regain control of the narrative, but it 171 00:10:30,160 --> 00:10:33,200 Speaker 1: is doing some really hard work that they need to 172 00:10:33,240 --> 00:10:35,160 Speaker 1: do and having the courage to share it with the 173 00:10:35,160 --> 00:10:36,079 Speaker 1: rest of us. 174 00:10:37,120 --> 00:10:40,880 Speaker 2: Look, we had time for one final question, and you know, 175 00:10:41,080 --> 00:10:43,800 Speaker 2: I got eight places to go here, but I'm going 176 00:10:43,880 --> 00:10:46,120 Speaker 2: to do an audible and your Muhammad, and we've done 177 00:10:46,120 --> 00:10:49,880 Speaker 2: this for years. We had a turnover of power, a 178 00:10:49,920 --> 00:10:53,360 Speaker 2: graceful turnover of power in England and now it is 179 00:10:53,400 --> 00:10:58,280 Speaker 2: a United Kingdom, and in England descending in the riots 180 00:10:58,320 --> 00:11:02,880 Speaker 2: and protests and reads, how do you observe that what 181 00:11:02,960 --> 00:11:07,880 Speaker 2: can be the government response to a persistent rioting as 182 00:11:07,920 --> 00:11:10,360 Speaker 2: we see in Starmer's England. 183 00:11:11,840 --> 00:11:14,640 Speaker 1: I think it's a two step response. One is you 184 00:11:14,679 --> 00:11:18,199 Speaker 1: first try to control the immediate situation, which is what 185 00:11:18,240 --> 00:11:21,480 Speaker 1: you're trying to do. And then the second one is 186 00:11:21,520 --> 00:11:24,480 Speaker 1: to look at the cause of this and the cause 187 00:11:24,520 --> 00:11:28,560 Speaker 1: of the polarization and alienation of segments of the population, 188 00:11:28,679 --> 00:11:34,040 Speaker 1: and it is about low, non inclusive growth. The new 189 00:11:34,120 --> 00:11:38,560 Speaker 1: Labor government has called growth a mission. They now have 190 00:11:38,640 --> 00:11:41,600 Speaker 1: a growth mission, so it comes right at the top 191 00:11:41,600 --> 00:11:44,400 Speaker 1: of the policy agenda. And I think that unless we 192 00:11:44,440 --> 00:11:50,280 Speaker 1: start generating high, inclusive, durable and sustainable growth, then the 193 00:11:50,320 --> 00:11:52,960 Speaker 1: social and the political fabric will come under pressure. 194 00:11:53,480 --> 00:11:56,760 Speaker 2: Doctor Larian, thank you so much. With Queen's College, University, Cambridge, 195 00:11:57,280 --> 00:12:01,760 Speaker 2: Mohammed el Arian with an important timely discussion, particularly there 196 00:12:02,160 --> 00:12:04,240 Speaker 2: on Japan. To me, Paul, that's the heart of the 197 00:12:04,280 --> 00:12:07,480 Speaker 2: debate is I get the idea of global slow down 198 00:12:07,559 --> 00:12:10,120 Speaker 2: in the Central Bank and the Fed and last week 199 00:12:10,240 --> 00:12:13,400 Speaker 2: you know, et cetera, et cetera. But to me, it 200 00:12:13,520 --> 00:12:19,319 Speaker 2: is the unwinding of the massive policy challenge. I carefully, 201 00:12:20,120 --> 00:12:21,400 Speaker 2: I'm not going to go into it now, we don't 202 00:12:21,400 --> 00:12:24,600 Speaker 2: have time. But the integram, the length, the duration of 203 00:12:24,679 --> 00:12:30,680 Speaker 2: their inflation spurring experiment is unprecedent. It's like ever, it's 204 00:12:30,800 --> 00:12:35,040 Speaker 2: never they never put so much into escaping the malaise. 205 00:12:35,720 --> 00:12:39,200 Speaker 2: The great Marty Feldstein spoke of that was wonderful, magical 206 00:12:39,240 --> 00:12:42,560 Speaker 2: to Mohammedalarian talking on the great work of the late 207 00:12:42,679 --> 00:12:46,920 Speaker 2: Martin Feldstein of Harvard University. Red and Green in the screen, 208 00:12:46,960 --> 00:12:52,160 Speaker 2: Nastex fractionally negative now up forty five points, the Vics 209 00:12:52,200 --> 00:12:54,320 Speaker 2: thirty two point six to zero. Real churning in the 210 00:12:54,320 --> 00:12:58,040 Speaker 2: market after what we saw yesterday. Thanks for all your comments, 211 00:12:58,040 --> 00:13:02,760 Speaker 2: particularly the search and some tribe out at Bloomberg Podcasts 212 00:13:02,800 --> 00:13:03,480 Speaker 2: on YouTube.