WEBVTT - Mohamed El-Erian Talks Fed Policy, Markets 0:00:02.440 --> 0:00:06.760 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.080 --> 0:00:10.440 Joining us now, Mohammed el Arian, Where we're supposed to 0:00:10.480 --> 0:00:12.880 talk about FED policy, this that we'll throw it out 0:00:12.880 --> 0:00:17.960 the window. Mohammad al Arian is definitive in game theory 0:00:18.000 --> 0:00:21.960 and thinking about the probabilities, the risk, the uncertainty of 0:00:22.000 --> 0:00:27.040 given events, including what we saw yesterday. He is advantaged 0:00:27.040 --> 0:00:30.880 by being at Queen's College, the University of Cambridge, which 0:00:30.920 --> 0:00:33.600 means he's advantaged by one of the world's great Asian 0:00:33.720 --> 0:00:37.800 programs with the leadership of Andrew Marsham, who's just absolutely 0:00:37.880 --> 0:00:41.519 definitive on these studies. Doctor el Arian. I want to 0:00:41.520 --> 0:00:44.600 go back to Martin Feldstein just a year and a 0:00:44.600 --> 0:00:49.320 half before he died. The Japanese economy is a paradoxical 0:00:49.400 --> 0:00:55.040 mixture of prosperity and failure. Martin Feldstein was so far 0:00:55.480 --> 0:01:01.680 out front on their cyclic failure to be normal. When 0:01:01.760 --> 0:01:05.800 Japan blew up yesterday with their new policy, when they 0:01:05.880 --> 0:01:10.600 blew up yesterday the equity market decline, how does that 0:01:10.680 --> 0:01:14.600 redound over to the American and the Western markets? 0:01:16.400 --> 0:01:18.759 Palm, thanks for having me, and I thought we were 0:01:18.760 --> 0:01:21.280 going to go straight to the miracle of the Mets. 0:01:21.319 --> 0:01:23.240 Still being in the wild card chase. 0:01:23.280 --> 0:01:25.840 That is a miracle. It was discussed the spirit in America. 0:01:26.840 --> 0:01:31.360 Look, when you won an economy at low growth, high debt, 0:01:31.720 --> 0:01:36.360 zero interest rates, and quantitative easing for a number of decades, 0:01:36.400 --> 0:01:41.040 and that's what happened to Japan. Then you get first 0:01:41.240 --> 0:01:45.200 the contrast that mighty Felstein correctly pointed out, which is 0:01:45.240 --> 0:01:48.680 the flow numbers are awful, but the stock numbers are great. 0:01:48.720 --> 0:01:53.600 So wealthy economy that nevertheless doesn't grow. But importantly, you 0:01:53.840 --> 0:01:59.680 encourage that wealth to go seek higher returns elsewhere. And 0:01:59.800 --> 0:02:05.160 that's what happened. The Japanese financial system became very large 0:02:05.160 --> 0:02:09.040 holders of other people's securities. Then when you change the 0:02:09.120 --> 0:02:15.800 regime and you raise interest rates, the currency appreciates, inflation 0:02:15.919 --> 0:02:23.160 comes back. Suddenly people cannot refinance these positions and either 0:02:23.360 --> 0:02:27.519 actual or perceived sales. So what happened in the last 0:02:27.520 --> 0:02:30.240 few days is a shock that started in the US 0:02:31.440 --> 0:02:36.080 migrated to Japan. It then exposed a vulnerability that a 0:02:36.080 --> 0:02:39.600 lot of people knew about but didn't take a serious way, 0:02:40.000 --> 0:02:42.799 and then that out got amplified, and then it came 0:02:42.840 --> 0:02:44.359 back here one day. 0:02:44.600 --> 0:02:46.760 The thing to me that's so important here Mohammad, And 0:02:46.800 --> 0:02:49.560 this goes back to your arch excellence in game theory 0:02:49.720 --> 0:02:53.000 is a tea decision. Japan has to make a tea decision, 0:02:53.040 --> 0:02:57.160 except it's not like ten years ago way leot blackrax As. China, 0:02:57.200 --> 0:03:01.200 if they're lucky, will do three percent real g growth. 0:03:01.320 --> 0:03:04.920 No one's prepared for that. I understand how did Japan 0:03:05.160 --> 0:03:12.320 adjust given the new struggling China. 0:03:10.680 --> 0:03:14.280 So they have a financial issue and an economic issue. 0:03:14.320 --> 0:03:18.400 The financial issue will be easier for barons, regulatory for bearers, 0:03:18.480 --> 0:03:24.400 so they will not force sales from their financial institutions. 0:03:24.760 --> 0:03:28.040 They will have a lot more patients with the mismatches 0:03:28.320 --> 0:03:32.960 that the financial institutions have. In terms of their real economy. 0:03:33.160 --> 0:03:38.200 They face the same issue that most countries face, which is, 0:03:38.240 --> 0:03:40.800 with the exception of the US, and even the US 0:03:40.920 --> 0:03:43.800 has a question mark over it, there isn't much growth 0:03:43.920 --> 0:03:47.680 in the global economy, so there will be competing for 0:03:47.960 --> 0:03:50.920 a limited pie, and China is way ahead of other 0:03:51.000 --> 0:03:53.800 countries trying to get a bigger share of that pie. 0:03:54.240 --> 0:03:57.840 I can't emphasize enough. Paul Bruce Casman a JP Morgan 0:03:58.000 --> 0:04:02.640 was brilliant on this. In a globe will tepidness disinflation 0:04:03.000 --> 0:04:06.280 is the overlay that affects us Mohammed. 0:04:06.680 --> 0:04:08.480 When I started on Wall Street in the mid eighties, 0:04:08.560 --> 0:04:11.720 a tour of duty in Tokyo was an absolute must. 0:04:11.760 --> 0:04:15.520 That's how important Japan was to global Wall Street. But 0:04:15.560 --> 0:04:17.760 then for the last twenty five or years or so, 0:04:17.800 --> 0:04:20.719 we just never talked about it. What changed in the 0:04:20.760 --> 0:04:23.360 last year or two that people like Warren Buffett are saying, 0:04:23.400 --> 0:04:26.480 you really have to pay attention to Japan. What's changed? 0:04:27.920 --> 0:04:32.000 So I think what's changed is the hypothesis that they 0:04:32.040 --> 0:04:38.080 are finally exiting multi decades of economic majiocrity. That is 0:04:38.160 --> 0:04:41.599 I think what has changed, and that's why up to July, 0:04:42.520 --> 0:04:47.839 the Japanese stock market was the deer. I mean, people 0:04:47.839 --> 0:04:49.560 find in love with the Japanese stock market in a 0:04:49.600 --> 0:04:51.600 way that they haven't done for a very long time. 0:04:53.480 --> 0:04:57.040 That is what has changed. But again it's important exactly 0:04:57.120 --> 0:05:00.320 what you said, Most people stop looking at your hand, 0:05:00.600 --> 0:05:03.320 So the understanding of Japan is not as deep as 0:05:03.360 --> 0:05:05.599 you'd like it to be in Wall Street. 0:05:06.760 --> 0:05:09.159 All right, Muhammad, what I'd love to get your thoughts 0:05:09.240 --> 0:05:12.240 while we have you. What did you experience yesterday? What 0:05:12.240 --> 0:05:15.599 did you see yesterday in the US? Markets because boy, 0:05:15.920 --> 0:05:18.600 yesterday morning, it was because Tom Keen was not in 0:05:18.680 --> 0:05:19.400 the market, didn't know. 0:05:19.400 --> 0:05:22.200 What I took off yesterday, Mohammad, I was so stunned 0:05:22.240 --> 0:05:25.120 by the New York mets that I needed a day arrest. 0:05:25.360 --> 0:05:28.040 What did you make of yesterday's market action, Mohammad. 0:05:28.960 --> 0:05:31.760 So, yesterday was an example where we lost three anchors. 0:05:31.839 --> 0:05:35.159 We lost the notion that of the US economic exceptionalism. 0:05:35.240 --> 0:05:38.840 That anchor was put in doubt with the data. We 0:05:38.920 --> 0:05:44.040 lost the notion of policy anchors because people started calling 0:05:44.120 --> 0:05:46.840 under FED to do an intermeding cut. That was I mean, 0:05:46.880 --> 0:05:49.080 there was a lot, a lot of ridiculous things being said, 0:05:49.360 --> 0:05:53.279 and we lost Tom Keane's calm voice. So you know, 0:05:53.440 --> 0:05:57.080 it's incredible to see the two year move twenty basis 0:05:57.080 --> 0:06:03.120 points intert in today's incredible. I mean I got a sense, 0:06:03.520 --> 0:06:06.440 and I put this on X that we overshot on 0:06:06.560 --> 0:06:11.200 the fixed income side. So I was quite comfortable about 0:06:11.680 --> 0:06:16.640 treasury yields coming back. I was worried about whether credit 0:06:16.680 --> 0:06:21.240 would be contaminated. Credit was not contaminated in any meaningful 0:06:21.279 --> 0:06:24.720 sense yesterday. That was a pleasant surprise, and then I 0:06:24.839 --> 0:06:28.440 was reassured that we didn't have a market functioning problem 0:06:29.320 --> 0:06:29.520 with this. 0:06:29.680 --> 0:06:32.359 Mohammed al Aarian of Alliance and of course Queen's College, 0:06:32.440 --> 0:06:36.599 the University of Cambridge will continue with doctor Alarian. We 0:06:36.640 --> 0:06:38.880 had green in the screen, not like we had on futures, 0:06:38.920 --> 0:06:42.239 but we'll take it. Spxcept four tenths of a percent 0:06:42.480 --> 0:06:45.600 Vicks thirty two point four to eight. That's elevated off 0:06:45.640 --> 0:06:49.720 what we know for years. Hummadelary and I want to 0:06:49.760 --> 0:06:52.240 go back to your game theory and the tea decision. 0:06:52.960 --> 0:06:57.120 I take immense issue with the phrase emergency rate cut. 0:06:57.200 --> 0:07:00.960 There's no sense of history of what central banks should use. 0:07:01.360 --> 0:07:04.880 What is the tea decision that Jerome Pall faces after 0:07:04.960 --> 0:07:06.440 yesterday's festivities. 0:07:08.760 --> 0:07:11.600 The marketplace thinks it is whether to cut twenty five, 0:07:11.720 --> 0:07:15.040 fifty or seventy five in September. That is, that is 0:07:15.080 --> 0:07:17.840 what the marketplace thinks. I would bring you to the 0:07:17.960 --> 0:07:22.360 end of this month. And Jackson Hall he has a 0:07:22.520 --> 0:07:27.560 golden opportunity to regain control of the policy narrative, and 0:07:27.640 --> 0:07:31.960 to do that he has to pay some risk in 0:07:32.120 --> 0:07:34.440 laying out what he thinks the neutral interest rate is. 0:07:35.200 --> 0:07:37.640 In discussing like the back of Inkdan has discussed what 0:07:37.760 --> 0:07:41.080 structural changes are happening to the domestic economy and to 0:07:41.120 --> 0:07:45.200 the global economy. So for me, his teed decision is 0:07:45.240 --> 0:07:50.720 actually at Jackson Hall, whether he just gives a mail 0:07:50.800 --> 0:07:54.000 in speech or whether he tries to regain control of 0:07:54.040 --> 0:07:54.840 the policy narrative. 0:07:55.120 --> 0:07:57.440 Muhammad, we're going to get the surveillant's golf stream out 0:07:57.440 --> 0:07:59.720 to get you to Jackson Hall for a covers Lisa 0:07:59.720 --> 0:08:03.560 Brand and I will be at Jackson Hole. With that said, Mohammed, 0:08:03.600 --> 0:08:06.800 the heart of the matters you mentioned Boe and particularly 0:08:06.840 --> 0:08:10.360 Leguard's ECB, and she gave a speech last year at 0:08:10.400 --> 0:08:13.160 Jackson Excuse me, she wrote a paper last year at 0:08:13.240 --> 0:08:17.520 Jackson Hall on this, Mohammed, We're addicted. We're in a 0:08:17.560 --> 0:08:23.440 green Spannian measured cadence. Does that fit the events right now? 0:08:23.920 --> 0:08:27.480 Or does Powell have to elucidate at Jackson Hole that 0:08:27.560 --> 0:08:31.240 we can lose measured and be more ad hoc more 0:08:31.720 --> 0:08:33.400 unmeasured in our policy. 0:08:34.720 --> 0:08:38.480 So it's really interesting because I think the FED being 0:08:38.640 --> 0:08:42.880 so excessively data dependent has been actually quite at hock. 0:08:43.960 --> 0:08:46.840 The amount of pivots in the forward guidance we've had 0:08:46.920 --> 0:08:50.120 over the last twelve months is enormous, you know, I 0:08:50.160 --> 0:08:53.640 actually have a slide that shows every pivot. And that's 0:08:53.679 --> 0:08:57.520 the problem because if you allow data to swing you 0:08:57.640 --> 0:09:02.200 so much, then you become an amplifier of market volatility 0:09:02.320 --> 0:09:05.720 rather than a stabilizer. So I think they need to 0:09:05.720 --> 0:09:11.480 be less at home, less so data dependent, and have 0:09:11.640 --> 0:09:15.800 the courage to be strategic, have a courage to say 0:09:15.880 --> 0:09:18.200 this is where we think the economy is going. I 0:09:18.320 --> 0:09:20.840 understand why they're not doing that. They tried it in 0:09:20.880 --> 0:09:24.800 twenty twenty one with the famous transitory inflation call. They 0:09:24.840 --> 0:09:28.800 made a horrible mistake and because of that that shied away. 0:09:29.440 --> 0:09:31.400 But that's what a central back is supposed to do. 0:09:31.480 --> 0:09:34.520 That is what Greenspan did, that is what Bernanke did, 0:09:34.679 --> 0:09:37.600 that is what Yellen did. And I think it's important 0:09:37.679 --> 0:09:40.679 for this FED to be not just data dependent, but 0:09:40.720 --> 0:09:43.600 also to have a forward looking view of the economy. 0:09:44.080 --> 0:09:46.160 That's a great point, Muhammad, because a lot of folks 0:09:46.160 --> 0:09:48.960 that we speak to, both in academia and in practice, 0:09:48.960 --> 0:09:51.240 say they're not looking at the right data. They're not 0:09:51.280 --> 0:09:53.000 looking at the real time data. If they were looking 0:09:53.000 --> 0:09:55.280 at the real time data, they would realize that the 0:09:55.320 --> 0:09:58.000 economy is in fact slowing, that inflation is in flagged 0:09:58.040 --> 0:10:01.600 under control, and that they should be cutting rates right now. 0:10:02.000 --> 0:10:02.760 Do you go that far? 0:10:04.040 --> 0:10:07.080 That's where I was. I called for a cut last week. 0:10:07.480 --> 0:10:10.240 I've been arguing for the last three months that the 0:10:10.320 --> 0:10:13.719 US economy is slowing much faster than most people anticipate. 0:10:13.800 --> 0:10:16.440 Why because, in addition to the data, I've been listening 0:10:16.480 --> 0:10:19.120 to the companies, I've been listening to what they're telling 0:10:19.200 --> 0:10:22.000 us about what they're seeing in terms of demand. They 0:10:22.000 --> 0:10:25.199 should have cut in July. They didn't. That was a mistake. 0:10:26.280 --> 0:10:30.040 They can still regain control of the narrative, but it 0:10:30.160 --> 0:10:33.200 is doing some really hard work that they need to 0:10:33.240 --> 0:10:35.160 do and having the courage to share it with the 0:10:35.160 --> 0:10:36.079 rest of us. 0:10:37.120 --> 0:10:40.880 Look, we had time for one final question, and you know, 0:10:41.080 --> 0:10:43.800 I got eight places to go here, but I'm going 0:10:43.880 --> 0:10:46.120 to do an audible and your Muhammad, and we've done 0:10:46.120 --> 0:10:49.880 this for years. We had a turnover of power, a 0:10:49.920 --> 0:10:53.360 graceful turnover of power in England and now it is 0:10:53.400 --> 0:10:58.280 a United Kingdom, and in England descending in the riots 0:10:58.320 --> 0:11:02.880 and protests and reads, how do you observe that what 0:11:02.960 --> 0:11:07.880 can be the government response to a persistent rioting as 0:11:07.920 --> 0:11:10.360 we see in Starmer's England. 0:11:11.840 --> 0:11:14.640 I think it's a two step response. One is you 0:11:14.679 --> 0:11:18.199 first try to control the immediate situation, which is what 0:11:18.240 --> 0:11:21.480 you're trying to do. And then the second one is 0:11:21.520 --> 0:11:24.480 to look at the cause of this and the cause 0:11:24.520 --> 0:11:28.560 of the polarization and alienation of segments of the population, 0:11:28.679 --> 0:11:34.040 and it is about low, non inclusive growth. The new 0:11:34.120 --> 0:11:38.560 Labor government has called growth a mission. They now have 0:11:38.640 --> 0:11:41.600 a growth mission, so it comes right at the top 0:11:41.600 --> 0:11:44.400 of the policy agenda. And I think that unless we 0:11:44.440 --> 0:11:50.280 start generating high, inclusive, durable and sustainable growth, then the 0:11:50.320 --> 0:11:52.960 social and the political fabric will come under pressure. 0:11:53.480 --> 0:11:56.760 Doctor Larian, thank you so much. With Queen's College, University, Cambridge, 0:11:57.280 --> 0:12:01.760 Mohammed el Arian with an important timely discussion, particularly there 0:12:02.160 --> 0:12:04.240 on Japan. To me, Paul, that's the heart of the 0:12:04.280 --> 0:12:07.480 debate is I get the idea of global slow down 0:12:07.559 --> 0:12:10.120 in the Central Bank and the Fed and last week 0:12:10.240 --> 0:12:13.400 you know, et cetera, et cetera. But to me, it 0:12:13.520 --> 0:12:19.319 is the unwinding of the massive policy challenge. I carefully, 0:12:20.120 --> 0:12:21.400 I'm not going to go into it now, we don't 0:12:21.400 --> 0:12:24.600 have time. But the integram, the length, the duration of 0:12:24.679 --> 0:12:30.680 their inflation spurring experiment is unprecedent. It's like ever, it's 0:12:30.800 --> 0:12:35.040 never they never put so much into escaping the malaise. 0:12:35.720 --> 0:12:39.200 The great Marty Feldstein spoke of that was wonderful, magical 0:12:39.240 --> 0:12:42.560 to Mohammedalarian talking on the great work of the late 0:12:42.679 --> 0:12:46.920 Martin Feldstein of Harvard University. Red and Green in the screen, 0:12:46.960 --> 0:12:52.160 Nastex fractionally negative now up forty five points, the Vics 0:12:52.200 --> 0:12:54.320 thirty two point six to zero. Real churning in the 0:12:54.320 --> 0:12:58.040 market after what we saw yesterday. Thanks for all your comments, 0:12:58.040 --> 0:13:02.760 particularly the search and some tribe out at Bloomberg Podcasts 0:13:02.800 --> 0:13:03.480 on YouTube.