Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast we have one Mohammed Allarion,
Speaker 1: and I have to tell you this was really a
Speaker 1: delightful conversation about all sorts of things related to central banks, economics, investing.
Speaker 1: There are few people in the world of finance as
Speaker 1: thoughtful and articulate as Mohammed Hllarian is. I have been
Speaker 1: chasing him down for the better part of a year
Speaker 1: before I finally cornered him and managed to wrangle him
Speaker 1: into submission, and he couldn't have been more charming or delightful.
Speaker 1: We only had him for an hour, so this is
Speaker 1: going to be a relatively quick, uh podcast. It's less
Speaker 1: than an hour, but it is. I promise you will
Speaker 1: listen to this more than once. It is full of
Speaker 1: insight and depth and really just just a tour to
Speaker 1: force conversation about the way to think about thinking about
Speaker 1: finance and investing. So, with no further ado, our conversation
Speaker 1: with Mohammed Larion. This is Masters in Business with Barry
Speaker 1: Ridholts on Bloomberg Radio. My special guest this week is
Speaker 1: Mohammed al Arian. He is the chief Economic advisor to Alliance.
Speaker 1: They're large insurance company with trillions and assets. They also
Speaker 1: owned Pimco and a number of other significant assets. I'm
Speaker 1: only going to give you the short version of our
Speaker 1: guests uh CV because the whole version will take up
Speaker 1: the full first segment. Cambridge and Oxford ultimately ends up
Speaker 1: as Managing director at City Group in London. Spent fifteen
Speaker 1: years at the International Monetary Funds in Washington, d C.
Speaker 1: Where he served as Deputy Director uh chair of the
Speaker 1: President's Global Development Council. Named to Foreign Policies, Top one
Speaker 1: hundred Global Anchors and one of the five most Powerful
Speaker 1: People on the planet. Named one of twenty five most
Speaker 1: Influential People's List to Investment Advisor's annual survey. Author of
Speaker 1: When Markets Collide, a New York Times in Wall Street
Speaker 1: Journal bestseller, the book one Financial Times Book of the Year,
Speaker 1: and the Goldman Sachs Book of the Year Award. His
Speaker 1: latest book, The Only Game in Town, Central Banks, Instability
Speaker 1: and Avoiding the Next Collapse. Muhammad Alarian, Welcome to Bloomberg.
Speaker 1: Thank you. I'm delighted to be here. I'm I'm very
Speaker 1: excited to have you here. Also, um, there's so much
Speaker 1: stuff I want to go over, But I have to
Speaker 1: start with with your upbringing, which is really kind of fascinating.
Speaker 1: You're born in New York City, you spend some time
Speaker 1: in Egypt. Ultimately your father becomes ambassador to France and
Speaker 1: you spend a number of years living in France. Given
Speaker 1: this international upbringing, how did that shape your view of
Speaker 1: the world. It had a very important influence on me
Speaker 1: because I got exposed two different cultures at a very
Speaker 1: early age. It wasn't easy. Changing not just friends and schools,
Speaker 1: but countries and languages was quite hard. You speak a
Speaker 1: number of languages, don't you. I speak some, um, But
Speaker 1: I tell you as I got older, UM, I found
Speaker 1: it harder. And I asked my father ultimately to send
Speaker 1: me to boarding school because I couldn't change countries and
Speaker 1: languages and friends every two to three years. That's amazing,
Speaker 1: And given that background, I would have pegg you for
Speaker 1: a career in either public policy or international diplomacy. What
Speaker 1: what attracted you to finance? So that's why I started
Speaker 1: in terms of the international under refund. It was global,
Speaker 1: it was policy oriented. Um, it was based on economics,
Speaker 1: and when I was turning forty, I realized that I
Speaker 1: had never tried to private sector, that I had spent
Speaker 1: fifteen years at the IMF, that I had never tried
Speaker 1: to private sector. So I took it to you leave
Speaker 1: from the IMF and I joined what was at the
Speaker 1: time Solomon Brothers that then became Solomon Smith Bonnie then
Speaker 1: became City and I wanted a taste of the private sector.
Speaker 1: And I can tell you barried was quite a change,
Speaker 1: I can imagine, to say the least. So you were
Speaker 1: let's let's start with that public policy works. So you
Speaker 1: were the I m F for fifteen years. What were
Speaker 1: some of the biggest lessons you learned there? And what
Speaker 1: do you think the future role of the I m
Speaker 1: F should be in the global economy. So the amazing
Speaker 1: thing about the IMF is that at a very young
Speaker 1: age you get exposed to policymaking. You're part of discussions
Speaker 1: in crisis economies, countries facing crises, and they have to
Speaker 1: make really difficult policy choices, and you realize very early
Speaker 1: on how difficult that is. These aren't academic debates where
Speaker 1: people are trying to figure out how many angels can
Speaker 1: dance on the head of a pin. These are real
Speaker 1: countries in the midst real either fiscal or other forms
Speaker 1: of crisis. How does that affect the process by which
Speaker 1: policies are made? It seems like everything is an emergency footing, correct,
Speaker 1: and you don't want to get there. So the whole
Speaker 1: point of the I m F is to make sure
Speaker 1: that you don't get there, and you don't get there
Speaker 1: by having an annual checkup is called the article for surveillance.
Speaker 1: But at some point quite a few countries get there.
Speaker 1: And I was there when there were all sorts of
Speaker 1: crisis going on UM and I was lucky enough to
Speaker 1: have UM a front row seat in that, and you
Speaker 1: learned very quickly that you have to make compromises. That
Speaker 1: a lot of the time policy makers are making decisions
Speaker 1: within complete information and they don't control the politics of it.
Speaker 1: So for me it was an amazing eye opener because
Speaker 1: I came from the academic world and I realized it's
Speaker 1: much more complicated in practice. So so you're dealing with
Speaker 1: real world conditions, you're dealing with politics, and that's before
Speaker 1: we even get to how do you assemble a policy
Speaker 1: on that sort of footing? So what surprised you most
Speaker 1: of all the various emergencies, the I m I had
Speaker 1: to deal with. What what was the one thing that
Speaker 1: you witnessed that said, that's amazing. I never would have
Speaker 1: imagined either a this happening in the first place, or
Speaker 1: be this sort of response to it. So so what
Speaker 1: amazed me in the beginning is how misunderstood financial markets were.
Speaker 1: So I'll give an example. This is the mid eighties.
Speaker 1: Mexico had almost declared bankruptcy. Latin America was hit and
Speaker 1: they decided to send a team of US to New
Speaker 1: York to talk to the financial sector. And, believe it
Speaker 1: or not, at the time, that was very, very unusual.
Speaker 1: So a group of US went and we went to
Speaker 1: see an asset manager and we asked the question, what's
Speaker 1: the first thing you did when you heard that Mexico
Speaker 1: was having difficulty facing and paying its debt? And that
Speaker 1: financial asset manager said something that was very surprising to me.
Speaker 1: He said, I sold Chili. Now, as the economist in me,
Speaker 1: I thought, what a city thing to do. Why would
Speaker 1: you ever sell chili? Chili is a well managed economy
Speaker 1: out there. It is not Venezuela, it is not Argentina.
Speaker 1: You keep Chili, And I said, so I reacted, why
Speaker 1: would you do that? Thinking, wow, he are irrational markets,
Speaker 1: And he explained it in a way that makes total
Speaker 1: sense to me now having seen the market the market side,
Speaker 1: which is that he expected redemptions from his Latin American
Speaker 1: funds because the Mexican news would lead to redemption. He
Speaker 1: needs to sell across the board and what hadn't been
Speaker 1: hit hard as yet was Chili. So he sold Chili.
Speaker 1: And for me, that was a realization that economists needed
Speaker 1: to understand the financial markets much better. I'm very hults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest this week is Muhammad Alarian. He is the
Speaker 1: economic advisor to Alians, a contributing editor to the FT,
Speaker 1: and a calumnist Bloomberg View. Let's jump right into a
Speaker 1: phrase that you were coined back in oh nine, the
Speaker 1: new normal? What is the new normal? So the context
Speaker 1: was coming out of the crisis. PIMCO was in a
Speaker 1: much better position than others because we had navigated the
Speaker 1: crisis relatively well and had protected our clients assets, and
Speaker 1: we could look forward and ask the question what comes next?
Speaker 1: And starting in January, we realized that this was not
Speaker 1: your typical cyclical crisis. This wasn't like an elastic band
Speaker 1: you stretched and comes back. That this was a structural
Speaker 1: and secular phenomenon. And we debated how best to communicate
Speaker 1: to our own people and to the outside world that
Speaker 1: this is not business as usual, that we have to
Speaker 1: think differently, And after lots of different permutation, we came
Speaker 1: up with the concept of the New Normal as a
Speaker 1: way of signaling that it not be a cyclical recovery,
Speaker 1: but instead we would face a prolonged period of low
Speaker 1: growth and structural challenges. So there are a couple of
Speaker 1: other people who have described this era similarly. Larry Summers
Speaker 1: famously called it the secular Stagnation? Is that all that
Speaker 1: different from the New Normal? No, it's very much the
Speaker 1: same thing. I mean. The irony here Berry is that
Speaker 1: when we went public with it in May of two
Speaker 1: thousand and nine, it got very little attraction. In fact,
Speaker 1: I remember a policymaker telling me it was an idiotic
Speaker 1: concept that the West lives cyclically and it's the emerging
Speaker 1: world that lives secularly and structurally. Makes sense with time
Speaker 1: when it became evident that we were having difficulty growing,
Speaker 1: when it became evident that the forecasts were all being
Speaker 1: revised one side downwards. This notion started to gain acceptance
Speaker 1: in two thousand and fourteen. The I. M. F called
Speaker 1: it the new mediocre, and then familiar, and then um
Speaker 1: Larry Summers came up with the phrase this is seculist tegnation.
Speaker 1: But it speaks to the same thing, which is a
Speaker 1: prolonged period of low growth. The irony Berry is that
Speaker 1: now the conventional wisdom has gotten to the new normal.
Speaker 1: As I argue with my book, I don't think it's
Speaker 1: any more a powerful concept for describing what's ahead of us.
Speaker 1: I think we're going to tip one way or the other.
Speaker 1: So in their book ran Hunt will go Off this
Speaker 1: time it's different. Eight centuries of financial folly. They talk
Speaker 1: about what is normal following a financial crisis subpart GDP,
Speaker 1: weak job creation, mediocre retail sales, but surprisingly pretty robust
Speaker 1: equity markets off of the lows. Um That seems pretty
Speaker 1: consistent with with new normal as well. How much of
Speaker 1: the new normal is a function of us living in
Speaker 1: a post financial crisis world a huge part, And there's
Speaker 1: two elements to it. One, as as Ryan had and
Speaker 1: Rogoff pointed out when you have a massive balance sheet issue.
Speaker 1: It takes you time to work through it, and you
Speaker 1: basically have four choices. You can either default, which is
Speaker 1: very very costly. You can grow your way out of it.
Speaker 1: What that's really difficult. You can try and have a
Speaker 1: voluntary structuring. Alternatively, you can go through financial repression, and
Speaker 1: that is central banks pushing interest rates down in order
Speaker 1: to tax creditors and subsidize theaters. And that's what we've had.
Speaker 1: We've had financial repression. We've had central banks use both
Speaker 1: interest rates and their balance sheets to push down interest
Speaker 1: um costs and try and promote risk taking in order
Speaker 1: to recapitalize the system. So you call this financial repression.
Speaker 1: Ray Dalio of Bridgewater calls it the beautiful deleveraging. There
Speaker 1: are some lightful phrases to describe what is a not
Speaker 1: so delightful era that that we've been coming out of.
Speaker 1: And I have to ask, I know that something like
Speaker 1: sixty or sixty baby boomers are retiring every day, how
Speaker 1: much of this new normal and the secular stagnation is
Speaker 1: a question of just demographics. So part of it is
Speaker 1: there certainly are demographic elements to it, and they are
Speaker 1: also politicular elements, but there's lots of economics elements to it.
Speaker 1: I think the major issue, vary for anybody retiring or
Speaker 1: anybody at all, is that part of the response to
Speaker 1: the new normal has been to borrow growth from the
Speaker 1: future and borrow financial returns from the future. As a result,
Speaker 1: as you point out, equity markets have done very well
Speaker 1: while fundamentals heaven. So we have a big gap. And
Speaker 1: the big question facing us today is two fundamentals, improve
Speaker 1: and validate asset prices and push them higher. Alternatively to
Speaker 1: to ask prices come down towards fundamentals and overshoot and
Speaker 1: pull the fundamentals down. That is the t junction facing
Speaker 1: us today as we navigate the consequences of having relied
Speaker 1: too much on financial repression. So given that, what what's
Speaker 1: the biggest surprise of the post crisis financial repression era?
Speaker 1: What what has happened in the past let's call it
Speaker 1: eight years that stands out as nobody really expected that
Speaker 1: to occur. Oh, I can give you a whole list
Speaker 1: of improbables and unthinkable. I mean, think of the fact
Speaker 1: that we have negative nominal interest rates. How many people
Speaker 1: would have predicted that would have negative nominal interest rates.
Speaker 1: People were forecasting rising rates, hyperinflation, and collapse of the dollar.
Speaker 1: None of that came. None of that came to. Who
Speaker 1: would have predicted that this frustration with low growth would
Speaker 1: lead to the emergence of non establishment and an anti establishment,
Speaker 1: non traditional political forces on both side of the Atlantic,
Speaker 1: and that we see it. We see it in America clearly,
Speaker 1: the Trump Sanders phenomena is reaction to something that's going on,
Speaker 1: no doubt about that. And in Europe, and we see
Speaker 1: it in Europe with the emergence of UK with the
Speaker 1: emergence of the various parties in Germany, and of course
Speaker 1: the natural front in France. Who would have predicted that
Speaker 1: we'd have a lot of risk taking in finance and
Speaker 1: very little risk taking in corporations. Corporations are still sitting
Speaker 1: on a massive amoun amount of cash even though it's
Speaker 1: earning zero and now they're being forced to give it
Speaker 1: back rather than invested. Who would have thought that we'd
Speaker 1: have this big divergence, and yet we have the list
Speaker 1: of unthinkable Who would have thought we would have such
Speaker 1: a worsening in income, wealth, inequality, so that at least
Speaker 1: to an inequality of opportunity. I can give you the
Speaker 1: whole list of unthinkables and improbables that have occurred because
Speaker 1: we've been living this artificial world. But I stress it's
Speaker 1: coming to an end. I'm very Ridhults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. My special guest today
Speaker 1: is Muhammad Alarian. He is an economic consultant to financial
Speaker 1: giant Alliance, a contributing editor to the FT, writes a
Speaker 1: column where I do also at at Bloomberg View dot com,
Speaker 1: and has has really been named one of the hundred
Speaker 1: most important or influential global thinkers by Foreign Policy and
Speaker 1: and generally an all around eloquent person describing the complex
Speaker 1: and occasionally chaotic world of finance. And I wanna use
Speaker 1: that eloquence to jump right in to your current book.
Speaker 1: The only game in town central banks instability and avoiding
Speaker 1: the next collapse. So let's talk about the FED. Are
Speaker 1: they the only game in town? Yes, they are, as
Speaker 1: is the ECB, the Bank of Japan, the People's Bank
Speaker 1: of China. The list is long. Um central banks have
Speaker 1: taken on enormous responsibility. The first phase made sense whether
Speaker 1: they had to step in and normalize very dysfunctional financial markets.
Speaker 1: But then starting in the case of the FED and
Speaker 1: in the case of the e c V, they took
Speaker 1: on the responsibility for delivering macroeconomic outcomes, and they did
Speaker 1: so not by choice, but by necessity because other policymakers
Speaker 1: weren't stepping up to the plate. You know, Nixon famously said,
Speaker 1: we're all Keynsians now, and that has led to a
Speaker 1: pretty standard manual for what to do. Following a recession,
Speaker 1: private sector demand plummets, the government steps in with some
Speaker 1: sort of fiscal stimulus, whether it's repairing bridges and roads
Speaker 1: or some other big policy statement. The government steps in
Speaker 1: that substitutes for a short period of time that missing demand,
Speaker 1: and then eventually the private sector catches up and the
Speaker 1: public sector can step out of the way. That seems
Speaker 1: to be missing this cycle is that part of the
Speaker 1: reason you say the federal Reserve had no choice. So
Speaker 1: it happened, but it didn't happen big enough, and most importantly,
Speaker 1: it happened isolation of three other things that needed to happen,
Speaker 1: and therefore it was not as effective and you didn't
Speaker 1: get the handoff that you're talking about. So what was missing? First,
Speaker 1: we invested in the wrong growth models, go back ten
Speaker 1: to fifteen years we somehow fell in love with finance
Speaker 1: and believed that it could promote economic growth. We even
Speaker 1: changed the name. We used to call it the financial
Speaker 1: service industry because we had this notion that it served
Speaker 1: the real economy. But then ten to fifteen years ago
Speaker 1: we changed this notion and it became a standalone. I
Speaker 1: remember people talking that it was the next level of capitalism,
Speaker 1: agricultural industry, manufacturing services, and if you're really lucky, you
Speaker 1: get to financial services. So we invested in the wrong
Speaker 1: growth model, and we stopped investing in infrastructure, in pro growth,
Speaker 1: tax reforms, in labor retooling. The second problem is we
Speaker 1: didn't deal with the lessons of past debt crisis. You
Speaker 1: mentioned Ryan Hard and Rogoff earlier. They point out that
Speaker 1: when you start with excessive indebtedness, if you don't deal
Speaker 1: with it quickly, not only does it crush those who
Speaker 1: are over indebted, but it stops new capital from coming
Speaker 1: and you get no new oxygen, fresh oxygen into the system.
Speaker 1: And then finally we forgot how in the dependent the
Speaker 1: world we live in is, and we didn't step up
Speaker 1: with global policy coordination, except for one instant in April
Speaker 1: two thousand and nine at the London G twenty. So
Speaker 1: the problem is that while we had a stimulus, it
Speaker 1: wasn't big enough, and most critically, it wasn't accompanied by
Speaker 1: these three other things, and therefore the handoff never occurred,
Speaker 1: which pulls central banks deeper and deeper into taking on
Speaker 1: too many policy obligations with too few instruments. So so
Speaker 1: let's bring this back to the only game in town,
Speaker 1: um the new book, and we'll talk a little bit
Speaker 1: about the FED. In the book, you point out something
Speaker 1: that I found fascinating, Matt O'Brien writes in the Washington Post,
Speaker 1: and he did a I love this word count way
Speaker 1: of looking at FED transcripts to figure out what they're
Speaker 1: talking about. And in two thousand and eight, as we
Speaker 1: were heading to the crisis, was the FED worried about
Speaker 1: systemic risk? Well, according to O'Brien, and you passed this along, Uh,
Speaker 1: they were much more concerned with inflation. And if you
Speaker 1: think about the June meeting, the word count four hundred
Speaker 1: and sixty eight mentions of inflation, only thirty five of
Speaker 1: either systemic risk or crisis. In August, that ratio was
Speaker 1: three two to nineteen and then the September six, two
Speaker 1: thousand and eight, meaning and let me point out this
Speaker 1: was immediately after the collapse of Lehman Brothers. It was
Speaker 1: still a hundred and twenty nine mentions of inflation for
Speaker 1: US is just four of either systemic risk or crisis.
Speaker 1: What does this tell us about the FED? So I
Speaker 1: think it tells you something much bigger and and and
Speaker 1: I ended up by going along and looking at behavioral
Speaker 1: science to understand decision making and why it is that
Speaker 1: we tend to frame things in a backward looking manner,
Speaker 1: because that's what the FED did. It tells it it's
Speaker 1: very hard to pivot your thinking from what you're comfortable
Speaker 1: with to what is happening and is new, and it's understandable.
Speaker 1: We don't like doing it. We we as humans don't
Speaker 1: like doing it. We have an inclination to always go
Speaker 1: back to comforting things. So either we are in denial
Speaker 1: the so called blind spots, or we reframe um issues
Speaker 1: so that we are more comfortable. And that's what the
Speaker 1: FED was doing. I'm very helps you're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest today is
Speaker 1: Muhammad Alarian. He is the economic consultants and adviser to
Speaker 1: global financial giant Alliance UH and writes for both the
Speaker 1: Ft and Bloomberg View. You know, in the previous segment,
Speaker 1: we were discussing UH some of the more fascinating impacts
Speaker 1: of of the FED fighting the last last battle, and
Speaker 1: I have a quote that I have to start this
Speaker 1: segment off with you. What all of this speaks to
Speaker 1: is the repeated ability of central banks to decouple asset
Speaker 1: prices from fundamentals. What does that mean. It's very simple.
Speaker 1: If you have a printing press in the basement and
Speaker 1: you're willing to use it, and you're willing to engage
Speaker 1: in asset purchases, you can have any immediate influence on
Speaker 1: asset prices. It's that simple. And that's why we say,
Speaker 1: you say asset prices decouple from fundamentals, correct for quite
Speaker 1: a while. You can decouple asset prices by increasing the
Speaker 1: demand and by changing risk preferences, and that's what central
Speaker 1: acts have done. Now, this is a bet that makes
Speaker 1: sense if you also manage to trigger better fundamentals so
Speaker 1: that ultimately the fundamentals validate the asset prices. If you don't,
Speaker 1: you cannot maintain for whatever this wedge between artificially high
Speaker 1: financial assets and sluggish fundamentals. So here we are on
Speaker 1: the first quarter of six and it looks like stock
Speaker 1: prices are coming down to weak fundamentals. We're gonna get
Speaker 1: into the issue of what else can be done to
Speaker 1: stimulate the fundamentals. But but let's talk a little bit
Speaker 1: about the global state of the economy. Why did market
Speaker 1: suddenly discover it seems like after having ignored the fundamentals
Speaker 1: for a number of years, why did they suddenly decide
Speaker 1: that maybe we have to pay attention to a weak
Speaker 1: economic growth because of the perfect storm? You know, there's
Speaker 1: notion of a perfect storm is three things come together
Speaker 1: and what you get is not just a holatility, but
Speaker 1: to get the improbable as well. So what has been
Speaker 1: the perfect storm? The elements of the perfect storm. First,
Speaker 1: we are questioning like never before global economic fundamentals. We
Speaker 1: are worried about China. We are worried about the slowdown
Speaker 1: that's happening around in emerging the emerging world. Europe has
Speaker 1: cut its growth forecast. There's even talk of the possibility
Speaker 1: of a recession in the US. So suddenly, the first
Speaker 1: element of the perfect storm is concerns about fundamentals. The
Speaker 1: second element about of the perfect storm is the last
Speaker 1: of trust in central bank effectiveness. Two reasons for that.
Speaker 1: One is we have divergent monetary policies. Now central banks
Speaker 1: are no longer on the same side. We have the
Speaker 1: FED that has exited Quei and that has started hiking
Speaker 1: interest rates, so it is taking its foot off the accelerator. Meanwhile,
Speaker 1: the e c B, the People's Bank of China, and
Speaker 1: the Bank of Japan are going the other way. This
Speaker 1: divergent central bank context, it's very different from what we've
Speaker 1: had before, and it has raised doubts about the effectiveness
Speaker 1: of central banks in repressing volatility. And then the third
Speaker 1: element is the lack of patient capital. There is no
Speaker 1: big balance sheet with quote permanent capital that can step
Speaker 1: in now and act countercyclically. In fact, liquidity is challenged
Speaker 1: because the broken dealer's appetite for countercyclical risk has has
Speaker 1: been reduced. So put these three things together and you
Speaker 1: get this volatility, enormous volatility um that then causes its
Speaker 1: own dynamic. Now, the good news bery is that so
Speaker 1: far this has been a financial event, It hasn't contaminated
Speaker 1: the wheel economy and that is the major call for
Speaker 1: two thousands sixteen. Will this continued financial volatility contaminate the
Speaker 1: real economy? Or is the real economy resilient enough to
Speaker 1: be able to continue it's gradual healing process. That's that's
Speaker 1: quite fascinating. Let's let's talk about this divergence amongst central banks,
Speaker 1: because if you look at it in a chronological order,
Speaker 1: it doesn't so much look like they're diverging as much
Speaker 1: as they're out of phase. The US under Ben Bernanki
Speaker 1: was very aggressive in the O eight oh nine crisis,
Speaker 1: zero interest rate policy, quantitative easing, operation twist. They threw
Speaker 1: a lot of stuff and it had an impact. Europe
Speaker 1: was a little more stand or office and Japan had
Speaker 1: been trying all sorts of things over the years. It
Speaker 1: looks like Japan saw the US was succeeding and said, okay,
Speaker 1: we'll try quantitative easing as well. And then a few
Speaker 1: years after that Europe finally said, well everything else we've tried,
Speaker 1: this austerity thing ain't working. It looks like the US
Speaker 1: and Japan's QUEI is working on don't we follow them?
Speaker 1: Are they as much divergence as just kind of out
Speaker 1: of phase, out of out of step with each other.
Speaker 1: So you're absolutely right about the super and sing absolutely right,
Speaker 1: and you're absolutely right that each country was pursuing its
Speaker 1: domestic objectives taking into account its domestic conditions. The problem
Speaker 1: is we live in an interdependent world. So let me
Speaker 1: give you the image of an orchestra. You have the
Speaker 1: different sections in the orchestra. They have music, and they
Speaker 1: decide to play from different parts of the music, and
Speaker 1: then they look up and there was in a conductor.
Speaker 1: On a stand alone basis, each section will sound okay,
Speaker 1: but you're not listening to it on a standalone basis.
Speaker 1: You're listening to the whole orchestra, and the whole orchestra
Speaker 1: is incoherent. And that's why I went earlier in our discussions.
Speaker 1: I said, I've never seen such low level of global
Speaker 1: policy coordination. So yes, it's true that it's been sequential.
Speaker 1: It's true that every country has responded to domestic conditions.
Speaker 1: The problem is that we live in a world that's
Speaker 1: very interconnected in the deependent, so it has to add
Speaker 1: up and so and and it's not adding up of
Speaker 1: the lack of conductor being an issue. Who do you
Speaker 1: see as playing that role? Is it the leaders of
Speaker 1: the United States, is that the I m F. Is
Speaker 1: it the U N who should step in and help
Speaker 1: to coordinate global central bank monetary policy. It should be
Speaker 1: the I m F for both positive and negative reasons.
Speaker 1: The positive reason is that it has universal membership, hunting
Speaker 1: in eight eight countries, It has amazing staff, very high expertise,
Speaker 1: and it has the mechanism to consult with different countries um.
Speaker 1: The negative reason is is that nothing else works. The
Speaker 1: G seven is no longer representative of the global economy,
Speaker 1: the G twenty doesn't have a permanent secretariat, and the
Speaker 1: G one The United States has been so inward focused
Speaker 1: because of our dysfunctional politics that it's not playing the
Speaker 1: role of conductors. So for both positive and negative reason,
Speaker 1: it needs to be the IMF. But for that to happen,
Speaker 1: you need to deal with some pretty legitimate I m
Speaker 1: F credibility and governance issues. Is there any likelihood that
Speaker 1: we're going to see that happen. They've been criticized for
Speaker 1: some of their less UH president forecast, They've been criticized
Speaker 1: about some of the emergency measures they've put in place.
Speaker 1: Can the I m F fulfill that role? So I
Speaker 1: think it can if Europe is willing to give up
Speaker 1: some of its historical entitlements, particularly when it comes to
Speaker 1: voting power and representation on the board and and and
Speaker 1: provide that to the emerging world. Until that happens, countries
Speaker 1: like China will build little pipes around the I m
Speaker 1: F and the World Bank. We've seen them do this
Speaker 1: with the Asian Infrastructure Investment Bank and with various bilateral
Speaker 1: swap arrangements. So you really do need to deal with
Speaker 1: governance issues. Let's let's shift gears a little bit and
Speaker 1: talk about oil. So you have oil now at about
Speaker 1: thirty dollars a barrel. That's down from well over a
Speaker 1: hundred less than two years ago. It's a drop. What's
Speaker 1: the impact of this on the economy and what does
Speaker 1: this suggest about future growth? Is this just a supply
Speaker 1: issue or is this also a demand issue. It's a
Speaker 1: supply issue, it's a demand issue. And what has caused
Speaker 1: the overshoot? In other ways, I'm saying that oil prices
Speaker 1: today cannot be justified by just supplying demand issues. If
Speaker 1: they were, oil will be higher. What has caused the
Speaker 1: overshoot is that oil has changed operating modalities. It no
Speaker 1: longer can rely on OPEC as a swing producer on
Speaker 1: the downside, and the minute you take the safety net away,
Speaker 1: oil will overshoot. And we are right now overshooting on
Speaker 1: the downside. And it's going to take time for the
Speaker 1: old market to find its footing because it has lost
Speaker 1: its swing producer. Um the irony we we talked about improbables.
Speaker 1: If I was sitting with you two years ago and
Speaker 1: told you oil, what prices will collapse? You would say
Speaker 1: to me, and I would have said you, that's great
Speaker 1: for the economy. That's right, because it is an immediate
Speaker 1: tax cut. It leaves cash in the pocket of people,
Speaker 1: and it is particularly beneficial for lower income people who
Speaker 1: have a higher modinal propensing to consume. But ironically, oil,
Speaker 1: the low oil price is viewed as a negative thing.
Speaker 1: It has gone from a blessing to a curse. Why.
Speaker 1: The only good reason is because the US now also
Speaker 1: produces energy. The bad reason is that oil market volatility
Speaker 1: is being blamed as a course for equity market volatility.
Speaker 1: People not don't realize that the two are due to
Speaker 1: something much bigger, which is this change in in in
Speaker 1: the perfect storm that we talked about earlier. But it
Speaker 1: is ironic that the biggest tax cut is being viewed
Speaker 1: as a curse and not a blessing. We've been speaking
Speaker 1: with muhammadal Ayan of ALIAS of Financial Times and Bloomberg View.
Speaker 1: If you enjoy this conversation, be sure and hang around
Speaker 1: for our podcast extras, where we keep the tape rolling
Speaker 1: and continue the conversation. You could check out more of
Speaker 1: Mohammed's writings at both FT and Bloomberg View dot com.
Speaker 1: His most recent books, which I'm holding right here, uh,
Speaker 1: When Markets Collide was named FT and Goldman Sachs Book
Speaker 1: of the Year. The new one is Mohammed Allarians The
Speaker 1: Only game in Town, Central Banks, Instability and Avoiding the
Speaker 1: Next Collapse. Mohammedarian, thank you so much for for hanging
Speaker 1: around with us. This has been terrific, great pleasure. Thank
Speaker 1: you very much. Be sure and check out my daily
Speaker 1: column on Bloomberg View dot com. Follow me on Twitter
Speaker 1: at Rid Halts. I'm Barry Ridhults. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio. Mohammed, thank you so
Speaker 1: much for doing this. This is uh my great pleasure,
Speaker 1: really fascinating. I have to tell you my my head
Speaker 1: of research is Mike bat Nick, and he has called
Speaker 1: you the most eloquent thinker on financial matters. He says,
Speaker 1: no matter what he is talking about, it always comes
Speaker 1: across as just interesting and erudite and makes you enjoy
Speaker 1: debating abstract financial discussions. He's very kind, and this is
Speaker 1: his book, which you're going to sign a sign for
Speaker 1: him later. So let's let's go through a few questions
Speaker 1: which we didn't get to, and then I want to
Speaker 1: ask you some of my standard questions I asked all
Speaker 1: my guests. So your colleague at PIMCO, Paul McCulley, is
Speaker 1: a friend. I go fishing with him every summer up
Speaker 1: in Maine in August, and he was a big timan
Speaker 1: Minsky fan. Obviously, the book refers the mention of instability,
Speaker 1: refers to Minsky's great thesis, which is stability breeds instability.
Speaker 1: So he's a Minsky fan, you're a Minsky fan. I'm
Speaker 1: curious as to how this developed internally. Who influenced too?
Speaker 1: So I think we both influenced each other. And Paul
Speaker 1: has had a huge influence on me um and his
Speaker 1: friendship is something at I have valued enormously. You know,
Speaker 1: Paul has this ability two translate complex issues into simple
Speaker 1: phrases that are very powerful. The Minsky moment is Pouls.
Speaker 1: The shadow banking system is Paul, and both of us
Speaker 1: love a particular chapter in Kiness General Theory, and that
Speaker 1: is chapter twelve. Chapter twelve is very different from the
Speaker 1: rest of the general theory as this chapter twenty two
Speaker 1: because it speaks about human behavior. He speaks about what
Speaker 1: tends to happen um, and this whole concept of animal
Speaker 1: spirits and overshoots, and that was really at the origin
Speaker 1: of Minsky and this notion that you can get instability
Speaker 1: from stability. It makes perfect sense. People start to become complacent,
Speaker 1: they start to be more greedy and less fearful, and
Speaker 1: that leads to further instability. Yes it does. And and
Speaker 1: also policymakers become more complacent. And I think we saw
Speaker 1: this um. You know, go back to the mid two
Speaker 1: the mid nineties, the mid two thousand's, when when policymakers
Speaker 1: became convinced that we no longer had cycles, the great
Speaker 1: moderation right, that it was goldilocks, and that the financial
Speaker 1: system could regulate itself. And we know we know how
Speaker 1: well that came worked out. Let's let's talk a little
Speaker 1: bit about currencies which seemed to be in turmoil whereat
Speaker 1: something like twelve year highs for the dollar despite all
Speaker 1: the predictions of a collapsing dollar. What does the turmoil
Speaker 1: in currencies tell us about the economy and what does
Speaker 1: it tell us about central banks actions? So we are
Speaker 1: going through an important transition in currencies. Up to the
Speaker 1: beginning of February, currencies were basically reflecting differential monetary policy.
Speaker 1: So when the US embarked on its que, first the
Speaker 1: dollar weakened, the euro strong strengthened, and then when the
Speaker 1: Eurozone and Japan embarked on their que the opposite happen,
Speaker 1: and as you point out, the dollar strengthened. But we
Speaker 1: have switched regimes, and it'll be interesting to see how
Speaker 1: long we switched regimes. Now that there's question marks about
Speaker 1: the effectiveness of central bank policies, we are seeing currencies
Speaker 1: start to reflect more fundamental So look at the end.
Speaker 1: The end has tryngthened, notably against the dollar in February.
Speaker 1: Why because people have stopped wearying about negative interest rates
Speaker 1: in Japan and about quei and have started looking at
Speaker 1: the balance street of Japan. Very strong about the ability
Speaker 1: of the private sector to repatriate capital and a pretty
Speaker 1: good current account situation. So we are on the cusp
Speaker 1: of a transition in paradigms, and the question is going
Speaker 1: to be whether that that continues or not. Let's let's
Speaker 1: go to some of my favorite questions, because I know
Speaker 1: I only have you for a little while longer. Um,
Speaker 1: who are some of your earlier mentors? So my father
Speaker 1: played a very important role, and there was a particular
Speaker 1: moment um we were in Paris, and I questioned why
Speaker 1: it is that we got four different newspapers every day.
Speaker 1: I thought that that was a complete waste of money.
Speaker 1: And why did we get what else? We got? Lament
Speaker 1: the fig we got Francis, and then we got one
Speaker 1: from the right, which will come back to me in
Speaker 1: a second. Oh no, we got Luin lumin from the left.
Speaker 1: And I asked him why is it that we need
Speaker 1: his phone newspapers? After all, news is news news reporting,
Speaker 1: his news reporting. Why are we wasting our money on
Speaker 1: phone newspapers? And he said to me, you've got to
Speaker 1: understand that people interpret things differently, and you've got to
Speaker 1: be open to different interpretations. No one has a monopoly
Speaker 1: over the right interpretation. And by encouraging you to read
Speaker 1: four different newspapers every day, you will realize that different
Speaker 1: people interpret the same facts differently, and you've got to
Speaker 1: understand that. And that for me was very influential, and
Speaker 1: it has helped me keep an open mind at a
Speaker 1: time when it's been very easy to slip back into
Speaker 1: the familiar. That's that's quite fascinating. Um. How about some
Speaker 1: favorite books other than your own? What are some of
Speaker 1: your favorite reads over the years. So my own are
Speaker 1: not favorites. In fact, I do not read what I've written.
Speaker 1: I'm neither too. Will I listen to this podcast, believe
Speaker 1: it or not? No, No, I I really don't enjoy
Speaker 1: doing that, um at all. You know, I've been influenced
Speaker 1: by by loss and loss of books, and I've been
Speaker 1: lucky for the last few years to be on the
Speaker 1: financial time jury for book of the Year, which exposes
Speaker 1: me to books that I don't have the discipline to
Speaker 1: read otherwise. That's why I keep on doing it. Um.
Speaker 1: I'm very struck recently by books that talk about fundamental transformations,
Speaker 1: but that the ability of disruptors to disrupt you even
Speaker 1: though they don't know much about your sector. Airbnb I'll
Speaker 1: give you a simple statistic. Berry, it took Hilton a
Speaker 1: hundred years to provide seven hundred thousand rooms to its clients.
Speaker 1: It took ABNB six years to provide a million rooms,
Speaker 1: and a BnB didn't build a single hotel. They don't
Speaker 1: manage a single hotel, and they do with six hundred people.
Speaker 1: Look what Uber has done to that. I am fascinated
Speaker 1: by these disruptions. And there's been a number of books
Speaker 1: written about the disruptors, especially in the music industry. The
Speaker 1: music industry has been disrupted beyond anything. Any standout books
Speaker 1: you want to mention by title, so um I would
Speaker 1: The one book I would mention in particular is The
Speaker 1: Disruptive Role of Robots um is by Martin Ford. It
Speaker 1: is a very provocative book. You may or may not
Speaker 1: agree with his policy recommendations, but you better realize that
Speaker 1: we are in the next phase of a transformation. Machine
Speaker 1: learning is an incredibly powerful disrupter. This is rise of
Speaker 1: the robots, right, This is like number three in my queue.
Speaker 1: I want to move it up, move it up. Really,
Speaker 1: it's it's right, But then I'll be right behind Sapiens
Speaker 1: is number one, and like you, what, what else? Stands
Speaker 1: out as an interesting book. You mentioned Um Keynes clearly,
Speaker 1: so Kanes. For me. I was lucky enough to go
Speaker 1: to Cambridge for for my undergraduate and I never opened
Speaker 1: a textbook. Really, they didn't use textbooks. We always have
Speaker 1: all iPods, right, it was, it was we all went
Speaker 1: to the library and went to the original work and
Speaker 1: I read Canes also that has had a huge influence
Speaker 1: on me. Um and chapter twenty two and chapter twelve,
Speaker 1: as we mentioned before, in particular Um John Robinson UM
Speaker 1: has had a huge influence on me. Herold And and
Speaker 1: the various biographies of Kines have had a huge influence
Speaker 1: on me. Um. So I put that, but but I
Speaker 1: wouldn't recommend, and that necessarily to two young people. Recommend,
Speaker 1: for example, the book How Music Got Free? Okay, again,
Speaker 1: encourage people to think differently, be willing to question conventional
Speaker 1: wisdom because we're going through massive transformations. Joan Robinson stands
Speaker 1: out because there's a quote of hers that I just
Speaker 1: adore and use all the time, which is we study
Speaker 1: economics not to learn about the economy, but so as
Speaker 1: to not be fooled by the economists. And I find
Speaker 1: that quite quite fascinating. Perspectives. So let me give you
Speaker 1: my my wake up call. Um. I was asked for
Speaker 1: an interview at Cambridge, and my teacher at school gave
Speaker 1: me a book that had just come out and said,
Speaker 1: read this book, and I don't care what you do,
Speaker 1: but mentioned it in an interview because they're going to
Speaker 1: be really impressed that you read it. I knew my
Speaker 1: interview was forty five minutes. I went up there in
Speaker 1: in minute forty two. I hadn't had an opportunity to
Speaker 1: mention the book, and I was panicking. At that point,
Speaker 1: I pivoted completely from what we were talking about and said, oh,
Speaker 1: this reminds me of the book. I was being interviewed
Speaker 1: by two people, one person who had been taking notes
Speaker 1: and the other person had been asking the question. Suddenly
Speaker 1: the person taking notes smiled, and I should have realized
Speaker 1: that that was a warning sign. Put down his note
Speaker 1: and asked me tell me about the book. And I
Speaker 1: went very into a perfectly prepared monologue, and my confidence
Speaker 1: was rising, and I finished thinking this is great, I've
Speaker 1: nailed it. And then he asked me a single question
Speaker 1: that demolished the whole thesis of the book, and I
Speaker 1: was speechless. He then got up. It was his room,
Speaker 1: went to his bookshelf, pulled off an off print and
Speaker 1: gave it to me. It was his review of the book.
Speaker 1: And he said to me, Mohammed, just because it's published,
Speaker 1: it doesn't mean it's right. And then I realized, it's
Speaker 1: not what you think, but how you think. And for me,
Speaker 1: that was a really important moment. That's that's quite a lesson.
Speaker 1: So in the last few minutes, I have two favorite
Speaker 1: questions I love to ask because we always get fascinating answers.
Speaker 1: The first is, if you were speaking to a millennial
Speaker 1: or a recent college grad and they asked you for
Speaker 1: some career advice, what would you tell them. I would
Speaker 1: tell them sequence your career correctly, take risks early on,
Speaker 1: because as you get older you'll find it harder to
Speaker 1: take risk. Be willing to join startups. There's a lot
Speaker 1: of exciting things happening. Be willing to fail because most
Speaker 1: of the people who have succeeded in life did that
Speaker 1: after failing. Right, and don't go into a conventional career
Speaker 1: too early. Sounds like very good advice. My last question
Speaker 1: is sort of related. What do you know today about
Speaker 1: investing or finance or industry, or or anything really that
Speaker 1: you wish you knew when you started your career thirty
Speaker 1: years ago. So I wish I had questioned earlier on
Speaker 1: the conventional wisdom that cash has no role to play
Speaker 1: in asset allocation. That is a conventional wisdom that cash
Speaker 1: has absolutely no role to play. But when you enter
Speaker 1: into artificial world, an artificial world where central banks are
Speaker 1: not just your referee, but they also on the field,
Speaker 1: cash gives you three things that are most valuable. One
Speaker 1: resilience you can afford to make mistakes elsewhere you will
Speaker 1: not be forced out of positions that quickly. Second, it
Speaker 1: gives you optionality. You can change your mind. With liquidity diminishing,
Speaker 1: optionality becomes really important. And thirdly, it gives you agility.
Speaker 1: Because when you get volatility, you get price contagent, you
Speaker 1: get price overshoots, and good companies get hammered by what's
Speaker 1: happening to bad companies. So the one thing I would say,
Speaker 1: and I would say today, is is this conventional wisdom
Speaker 1: that cash has no part to play in an acid
Speaker 1: allocation should be we visited. And I wish I had
Speaker 1: realized that earlier. On fascinating fascinating stuff Mohammed, thank you
Speaker 1: so much for being so generous with your time. UH,
Speaker 1: be sure and if you enjoy this conversation, be sure
Speaker 1: and look up an inch or down an inch on
Speaker 1: Apple iTunes and you could see the other seventy eight
Speaker 1: or so such conversations we've had. I would be remiss
Speaker 1: if I failed to thank Mike bat Nick, uh, my
Speaker 1: head of research, and Charlie Volmer, my recording engineer for
Speaker 1: the day, as well as Tella Riggs, who produces and
Speaker 1: books the show. I'm Barry Ridholts. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio.