Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now, Mohammed el Arian, Where we're supposed to
Speaker 2: talk about FED policy, this that we'll throw it out
Speaker 2: the window. Mohammad al Arian is definitive in game theory
Speaker 2: and thinking about the probabilities, the risk, the uncertainty of
Speaker 2: given events, including what we saw yesterday. He is advantaged
Speaker 2: by being at Queen's College, the University of Cambridge, which
Speaker 2: means he's advantaged by one of the world's great Asian
Speaker 2: programs with the leadership of Andrew Marsham, who's just absolutely
Speaker 2: definitive on these studies. Doctor el Arian. I want to
Speaker 2: go back to Martin Feldstein just a year and a
Speaker 2: half before he died. The Japanese economy is a paradoxical
Speaker 2: mixture of prosperity and failure. Martin Feldstein was so far
Speaker 2: out front on their cyclic failure to be normal. When
Speaker 2: Japan blew up yesterday with their new policy, when they
Speaker 2: blew up yesterday the equity market decline, how does that
Speaker 2: redound over to the American and the Western markets?
Speaker 1: Palm, thanks for having me, and I thought we were
Speaker 1: going to go straight to the miracle of the Mets.
Speaker 1: Still being in the wild card chase.
Speaker 2: That is a miracle. It was discussed the spirit in America.
Speaker 1: Look, when you won an economy at low growth, high debt,
Speaker 1: zero interest rates, and quantitative easing for a number of decades,
Speaker 1: and that's what happened to Japan. Then you get first
Speaker 1: the contrast that mighty Felstein correctly pointed out, which is
Speaker 1: the flow numbers are awful, but the stock numbers are great.
Speaker 1: So wealthy economy that nevertheless doesn't grow. But importantly, you
Speaker 1: encourage that wealth to go seek higher returns elsewhere. And
Speaker 1: that's what happened. The Japanese financial system became very large
Speaker 1: holders of other people's securities. Then when you change the
Speaker 1: regime and you raise interest rates, the currency appreciates, inflation
Speaker 1: comes back. Suddenly people cannot refinance these positions and either
Speaker 1: actual or perceived sales. So what happened in the last
Speaker 1: few days is a shock that started in the US
Speaker 1: migrated to Japan. It then exposed a vulnerability that a
Speaker 1: lot of people knew about but didn't take a serious way,
Speaker 1: and then that out got amplified, and then it came
Speaker 1: back here one day.
Speaker 2: The thing to me that's so important here Mohammad, And
Speaker 2: this goes back to your arch excellence in game theory
Speaker 2: is a tea decision. Japan has to make a tea decision,
Speaker 2: except it's not like ten years ago way leot blackrax As. China,
Speaker 2: if they're lucky, will do three percent real g growth.
Speaker 2: No one's prepared for that. I understand how did Japan
Speaker 2: adjust given the new struggling China.
Speaker 1: So they have a financial issue and an economic issue.
Speaker 1: The financial issue will be easier for barons, regulatory for bearers,
Speaker 1: so they will not force sales from their financial institutions.
Speaker 1: They will have a lot more patients with the mismatches
Speaker 1: that the financial institutions have. In terms of their real economy.
Speaker 1: They face the same issue that most countries face, which is,
Speaker 1: with the exception of the US, and even the US
Speaker 1: has a question mark over it, there isn't much growth
Speaker 1: in the global economy, so there will be competing for
Speaker 1: a limited pie, and China is way ahead of other
Speaker 1: countries trying to get a bigger share of that pie.
Speaker 2: I can't emphasize enough. Paul Bruce Casman a JP Morgan
Speaker 2: was brilliant on this. In a globe will tepidness disinflation
Speaker 2: is the overlay that affects us Mohammed.
Speaker 3: When I started on Wall Street in the mid eighties,
Speaker 3: a tour of duty in Tokyo was an absolute must.
Speaker 3: That's how important Japan was to global Wall Street. But
Speaker 3: then for the last twenty five or years or so,
Speaker 3: we just never talked about it. What changed in the
Speaker 3: last year or two that people like Warren Buffett are saying,
Speaker 3: you really have to pay attention to Japan. What's changed?
Speaker 1: So I think what's changed is the hypothesis that they
Speaker 1: are finally exiting multi decades of economic majiocrity. That is
Speaker 1: I think what has changed, and that's why up to July,
Speaker 1: the Japanese stock market was the deer. I mean, people
Speaker 1: find in love with the Japanese stock market in a
Speaker 1: way that they haven't done for a very long time.
Speaker 1: That is what has changed. But again it's important exactly
Speaker 1: what you said, Most people stop looking at your hand,
Speaker 1: So the understanding of Japan is not as deep as
Speaker 1: you'd like it to be in Wall Street.
Speaker 3: All right, Muhammad, what I'd love to get your thoughts
Speaker 3: while we have you. What did you experience yesterday? What
Speaker 3: did you see yesterday in the US? Markets because boy,
Speaker 3: yesterday morning, it was because Tom Keen was not in
Speaker 3: the market, didn't know.
Speaker 2: What I took off yesterday, Mohammad, I was so stunned
Speaker 2: by the New York mets that I needed a day arrest.
Speaker 3: What did you make of yesterday's market action, Mohammad.
Speaker 1: So, yesterday was an example where we lost three anchors.
Speaker 1: We lost the notion that of the US economic exceptionalism.
Speaker 1: That anchor was put in doubt with the data. We
Speaker 1: lost the notion of policy anchors because people started calling
Speaker 1: under FED to do an intermeding cut. That was I mean,
Speaker 1: there was a lot, a lot of ridiculous things being said,
Speaker 1: and we lost Tom Keane's calm voice. So you know,
Speaker 1: it's incredible to see the two year move twenty basis
Speaker 1: points intert in today's incredible. I mean I got a sense,
Speaker 1: and I put this on X that we overshot on
Speaker 1: the fixed income side. So I was quite comfortable about
Speaker 1: treasury yields coming back. I was worried about whether credit
Speaker 1: would be contaminated. Credit was not contaminated in any meaningful
Speaker 1: sense yesterday. That was a pleasant surprise, and then I
Speaker 1: was reassured that we didn't have a market functioning problem
Speaker 1: with this.
Speaker 2: Mohammed al Aarian of Alliance and of course Queen's College,
Speaker 2: the University of Cambridge will continue with doctor Alarian. We
Speaker 2: had green in the screen, not like we had on futures,
Speaker 2: but we'll take it. Spxcept four tenths of a percent
Speaker 2: Vicks thirty two point four to eight. That's elevated off
Speaker 2: what we know for years. Hummadelary and I want to
Speaker 2: go back to your game theory and the tea decision.
Speaker 2: I take immense issue with the phrase emergency rate cut.
Speaker 2: There's no sense of history of what central banks should use.
Speaker 2: What is the tea decision that Jerome Pall faces after
Speaker 2: yesterday's festivities.
Speaker 1: The marketplace thinks it is whether to cut twenty five,
Speaker 1: fifty or seventy five in September. That is, that is
Speaker 1: what the marketplace thinks. I would bring you to the
Speaker 1: end of this month. And Jackson Hall he has a
Speaker 1: golden opportunity to regain control of the policy narrative, and
Speaker 1: to do that he has to pay some risk in
Speaker 1: laying out what he thinks the neutral interest rate is.
Speaker 1: In discussing like the back of Inkdan has discussed what
Speaker 1: structural changes are happening to the domestic economy and to
Speaker 1: the global economy. So for me, his teed decision is
Speaker 1: actually at Jackson Hall, whether he just gives a mail
Speaker 1: in speech or whether he tries to regain control of
Speaker 1: the policy narrative.
Speaker 2: Muhammad, we're going to get the surveillant's golf stream out
Speaker 2: to get you to Jackson Hall for a covers Lisa
Speaker 2: Brand and I will be at Jackson Hole. With that said, Mohammed,
Speaker 2: the heart of the matters you mentioned Boe and particularly
Speaker 2: Leguard's ECB, and she gave a speech last year at
Speaker 2: Jackson Excuse me, she wrote a paper last year at
Speaker 2: Jackson Hall on this, Mohammed, We're addicted. We're in a
Speaker 2: green Spannian measured cadence. Does that fit the events right now?
Speaker 2: Or does Powell have to elucidate at Jackson Hole that
Speaker 2: we can lose measured and be more ad hoc more
Speaker 2: unmeasured in our policy.
Speaker 1: So it's really interesting because I think the FED being
Speaker 1: so excessively data dependent has been actually quite at hock.
Speaker 1: The amount of pivots in the forward guidance we've had
Speaker 1: over the last twelve months is enormous, you know, I
Speaker 1: actually have a slide that shows every pivot. And that's
Speaker 1: the problem because if you allow data to swing you
Speaker 1: so much, then you become an amplifier of market volatility
Speaker 1: rather than a stabilizer. So I think they need to
Speaker 1: be less at home, less so data dependent, and have
Speaker 1: the courage to be strategic, have a courage to say
Speaker 1: this is where we think the economy is going. I
Speaker 1: understand why they're not doing that. They tried it in
Speaker 1: twenty twenty one with the famous transitory inflation call. They
Speaker 1: made a horrible mistake and because of that that shied away.
Speaker 1: But that's what a central back is supposed to do.
Speaker 1: That is what Greenspan did, that is what Bernanke did,
Speaker 1: that is what Yellen did. And I think it's important
Speaker 1: for this FED to be not just data dependent, but
Speaker 1: also to have a forward looking view of the economy.
Speaker 3: That's a great point, Muhammad, because a lot of folks
Speaker 3: that we speak to, both in academia and in practice,
Speaker 3: say they're not looking at the right data. They're not
Speaker 3: looking at the real time data. If they were looking
Speaker 3: at the real time data, they would realize that the
Speaker 3: economy is in fact slowing, that inflation is in flagged
Speaker 3: under control, and that they should be cutting rates right now.
Speaker 3: Do you go that far?
Speaker 1: That's where I was. I called for a cut last week.
Speaker 1: I've been arguing for the last three months that the
Speaker 1: US economy is slowing much faster than most people anticipate.
Speaker 1: Why because, in addition to the data, I've been listening
Speaker 1: to the companies, I've been listening to what they're telling
Speaker 1: us about what they're seeing in terms of demand. They
Speaker 1: should have cut in July. They didn't. That was a mistake.
Speaker 1: They can still regain control of the narrative, but it
Speaker 1: is doing some really hard work that they need to
Speaker 1: do and having the courage to share it with the
Speaker 1: rest of us.
Speaker 2: Look, we had time for one final question, and you know,
Speaker 2: I got eight places to go here, but I'm going
Speaker 2: to do an audible and your Muhammad, and we've done
Speaker 2: this for years. We had a turnover of power, a
Speaker 2: graceful turnover of power in England and now it is
Speaker 2: a United Kingdom, and in England descending in the riots
Speaker 2: and protests and reads, how do you observe that what
Speaker 2: can be the government response to a persistent rioting as
Speaker 2: we see in Starmer's England.
Speaker 1: I think it's a two step response. One is you
Speaker 1: first try to control the immediate situation, which is what
Speaker 1: you're trying to do. And then the second one is
Speaker 1: to look at the cause of this and the cause
Speaker 1: of the polarization and alienation of segments of the population,
Speaker 1: and it is about low, non inclusive growth. The new
Speaker 1: Labor government has called growth a mission. They now have
Speaker 1: a growth mission, so it comes right at the top
Speaker 1: of the policy agenda. And I think that unless we
Speaker 1: start generating high, inclusive, durable and sustainable growth, then the
Speaker 1: social and the political fabric will come under pressure.
Speaker 2: Doctor Larian, thank you so much. With Queen's College, University, Cambridge,
Speaker 2: Mohammed el Arian with an important timely discussion, particularly there
Speaker 2: on Japan. To me, Paul, that's the heart of the
Speaker 2: debate is I get the idea of global slow down
Speaker 2: in the Central Bank and the Fed and last week
Speaker 2: you know, et cetera, et cetera. But to me, it
Speaker 2: is the unwinding of the massive policy challenge. I carefully,
Speaker 2: I'm not going to go into it now, we don't
Speaker 2: have time. But the integram, the length, the duration of
Speaker 2: their inflation spurring experiment is unprecedent. It's like ever, it's
Speaker 2: never they never put so much into escaping the malaise.
Speaker 2: The great Marty Feldstein spoke of that was wonderful, magical
Speaker 2: to Mohammedalarian talking on the great work of the late
Speaker 2: Martin Feldstein of Harvard University. Red and Green in the screen,
Speaker 2: Nastex fractionally negative now up forty five points, the Vics
Speaker 2: thirty two point six to zero. Real churning in the
Speaker 2: market after what we saw yesterday. Thanks for all your comments,
Speaker 2: particularly the search and some tribe out at Bloomberg Podcasts
Speaker 2: on YouTube.