WEBVTT - Interview With Mohamed El-Erian: Masters in Business (Audio) 0:00:03.279 --> 0:00:07.600 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.119 --> 0:00:12.160 This week on the podcast we have one Mohammed Allarion, 0:00:12.400 --> 0:00:14.840 and I have to tell you this was really a 0:00:14.920 --> 0:00:21.360 delightful conversation about all sorts of things related to central banks, economics, investing. 0:00:21.880 --> 0:00:25.239 There are few people in the world of finance as 0:00:25.320 --> 0:00:30.000 thoughtful and articulate as Mohammed Hllarian is. I have been 0:00:30.080 --> 0:00:32.600 chasing him down for the better part of a year 0:00:33.040 --> 0:00:37.080 before I finally cornered him and managed to wrangle him 0:00:37.240 --> 0:00:41.240 into submission, and he couldn't have been more charming or delightful. 0:00:41.960 --> 0:00:43.680 We only had him for an hour, so this is 0:00:43.680 --> 0:00:47.440 going to be a relatively quick, uh podcast. It's less 0:00:47.440 --> 0:00:50.920 than an hour, but it is. I promise you will 0:00:50.920 --> 0:00:53.360 listen to this more than once. It is full of 0:00:53.440 --> 0:00:57.320 insight and depth and really just just a tour to 0:00:57.400 --> 0:01:03.440 force conversation about the way to think about thinking about 0:01:03.480 --> 0:01:07.120 finance and investing. So, with no further ado, our conversation 0:01:07.200 --> 0:01:14.080 with Mohammed Larion. This is Masters in Business with Barry 0:01:14.160 --> 0:01:18.200 Ridholts on Bloomberg Radio. My special guest this week is 0:01:18.280 --> 0:01:22.800 Mohammed al Arian. He is the chief Economic advisor to Alliance. 0:01:22.920 --> 0:01:27.040 They're large insurance company with trillions and assets. They also 0:01:27.520 --> 0:01:31.119 owned Pimco and a number of other significant assets. I'm 0:01:31.160 --> 0:01:34.400 only going to give you the short version of our 0:01:34.440 --> 0:01:37.600 guests uh CV because the whole version will take up 0:01:37.640 --> 0:01:42.040 the full first segment. Cambridge and Oxford ultimately ends up 0:01:42.080 --> 0:01:45.720 as Managing director at City Group in London. Spent fifteen 0:01:45.800 --> 0:01:49.640 years at the International Monetary Funds in Washington, d C. 0:01:49.840 --> 0:01:53.960 Where he served as Deputy Director uh chair of the 0:01:54.000 --> 0:01:58.960 President's Global Development Council. Named to Foreign Policies, Top one 0:01:59.040 --> 0:02:02.560 hundred Global Anchors and one of the five most Powerful 0:02:02.600 --> 0:02:06.280 People on the planet. Named one of twenty five most 0:02:06.360 --> 0:02:11.560 Influential People's List to Investment Advisor's annual survey. Author of 0:02:11.560 --> 0:02:14.240 When Markets Collide, a New York Times in Wall Street 0:02:14.320 --> 0:02:17.760 Journal bestseller, the book one Financial Times Book of the Year, 0:02:17.800 --> 0:02:20.840 and the Goldman Sachs Book of the Year Award. His 0:02:20.919 --> 0:02:25.520 latest book, The Only Game in Town, Central Banks, Instability 0:02:25.560 --> 0:02:30.480 and Avoiding the Next Collapse. Muhammad Alarian, Welcome to Bloomberg. 0:02:30.600 --> 0:02:33.280 Thank you. I'm delighted to be here. I'm I'm very 0:02:33.320 --> 0:02:36.680 excited to have you here. Also, um, there's so much 0:02:36.720 --> 0:02:39.840 stuff I want to go over, But I have to 0:02:39.960 --> 0:02:44.560 start with with your upbringing, which is really kind of fascinating. 0:02:44.639 --> 0:02:47.360 You're born in New York City, you spend some time 0:02:47.400 --> 0:02:52.360 in Egypt. Ultimately your father becomes ambassador to France and 0:02:52.400 --> 0:02:55.720 you spend a number of years living in France. Given 0:02:55.760 --> 0:02:59.880 this international upbringing, how did that shape your view of 0:02:59.880 --> 0:03:02.960 the world. It had a very important influence on me 0:03:03.160 --> 0:03:07.079 because I got exposed two different cultures at a very 0:03:07.080 --> 0:03:11.960 early age. It wasn't easy. Changing not just friends and schools, 0:03:12.000 --> 0:03:15.280 but countries and languages was quite hard. You speak a 0:03:15.360 --> 0:03:18.360 number of languages, don't you. I speak some, um, But 0:03:18.440 --> 0:03:21.200 I tell you as I got older, UM, I found 0:03:21.200 --> 0:03:23.320 it harder. And I asked my father ultimately to send 0:03:23.320 --> 0:03:26.480 me to boarding school because I couldn't change countries and 0:03:26.600 --> 0:03:30.000 languages and friends every two to three years. That's amazing, 0:03:30.040 --> 0:03:33.359 And given that background, I would have pegg you for 0:03:33.400 --> 0:03:38.360 a career in either public policy or international diplomacy. What 0:03:38.360 --> 0:03:41.200 what attracted you to finance? So that's why I started 0:03:41.320 --> 0:03:45.200 in terms of the international under refund. It was global, 0:03:45.480 --> 0:03:49.640 it was policy oriented. Um, it was based on economics, 0:03:49.720 --> 0:03:53.000 and when I was turning forty, I realized that I 0:03:53.040 --> 0:03:55.200 had never tried to private sector, that I had spent 0:03:55.240 --> 0:03:57.920 fifteen years at the IMF, that I had never tried 0:03:57.960 --> 0:04:00.600 to private sector. So I took it to you leave 0:04:00.880 --> 0:04:03.200 from the IMF and I joined what was at the 0:04:03.240 --> 0:04:06.720 time Solomon Brothers that then became Solomon Smith Bonnie then 0:04:06.720 --> 0:04:11.280 became City and I wanted a taste of the private sector. 0:04:11.720 --> 0:04:13.600 And I can tell you barried was quite a change, 0:04:14.280 --> 0:04:17.280 I can imagine, to say the least. So you were 0:04:17.360 --> 0:04:19.880 let's let's start with that public policy works. So you 0:04:19.920 --> 0:04:23.600 were the I m F for fifteen years. What were 0:04:23.680 --> 0:04:26.039 some of the biggest lessons you learned there? And what 0:04:26.120 --> 0:04:28.920 do you think the future role of the I m 0:04:29.000 --> 0:04:32.560 F should be in the global economy. So the amazing 0:04:32.600 --> 0:04:35.240 thing about the IMF is that at a very young 0:04:35.320 --> 0:04:41.120 age you get exposed to policymaking. You're part of discussions 0:04:42.720 --> 0:04:46.599 in crisis economies, countries facing crises, and they have to 0:04:46.640 --> 0:04:50.400 make really difficult policy choices, and you realize very early 0:04:50.440 --> 0:04:54.400 on how difficult that is. These aren't academic debates where 0:04:54.440 --> 0:04:56.600 people are trying to figure out how many angels can 0:04:56.680 --> 0:04:58.800 dance on the head of a pin. These are real 0:04:58.880 --> 0:05:03.080 countries in the midst real either fiscal or other forms 0:05:03.120 --> 0:05:06.640 of crisis. How does that affect the process by which 0:05:07.279 --> 0:05:11.600 policies are made? It seems like everything is an emergency footing, correct, 0:05:11.640 --> 0:05:13.240 and you don't want to get there. So the whole 0:05:13.240 --> 0:05:14.720 point of the I m F is to make sure 0:05:14.800 --> 0:05:16.960 that you don't get there, and you don't get there 0:05:17.000 --> 0:05:20.479 by having an annual checkup is called the article for surveillance. 0:05:21.200 --> 0:05:24.599 But at some point quite a few countries get there. 0:05:24.640 --> 0:05:27.000 And I was there when there were all sorts of 0:05:27.080 --> 0:05:30.240 crisis going on UM and I was lucky enough to 0:05:30.720 --> 0:05:34.760 have UM a front row seat in that, and you 0:05:34.839 --> 0:05:38.719 learned very quickly that you have to make compromises. That 0:05:38.800 --> 0:05:41.640 a lot of the time policy makers are making decisions 0:05:41.640 --> 0:05:44.840 within complete information and they don't control the politics of it. 0:05:45.200 --> 0:05:48.279 So for me it was an amazing eye opener because 0:05:48.320 --> 0:05:51.200 I came from the academic world and I realized it's 0:05:51.279 --> 0:05:54.560 much more complicated in practice. So so you're dealing with 0:05:54.640 --> 0:05:58.920 real world conditions, you're dealing with politics, and that's before 0:05:58.960 --> 0:06:02.080 we even get to how do you assemble a policy 0:06:02.560 --> 0:06:05.600 on that sort of footing? So what surprised you most 0:06:05.640 --> 0:06:09.280 of all the various emergencies, the I m I had 0:06:09.279 --> 0:06:11.760 to deal with. What what was the one thing that 0:06:11.800 --> 0:06:14.560 you witnessed that said, that's amazing. I never would have 0:06:14.600 --> 0:06:18.080 imagined either a this happening in the first place, or 0:06:18.160 --> 0:06:21.080 be this sort of response to it. So so what 0:06:21.160 --> 0:06:25.599 amazed me in the beginning is how misunderstood financial markets were. 0:06:25.760 --> 0:06:28.200 So I'll give an example. This is the mid eighties. 0:06:28.720 --> 0:06:35.000 Mexico had almost declared bankruptcy. Latin America was hit and 0:06:35.120 --> 0:06:37.840 they decided to send a team of US to New 0:06:37.920 --> 0:06:41.880 York to talk to the financial sector. And, believe it 0:06:41.960 --> 0:06:44.200 or not, at the time, that was very, very unusual. 0:06:44.640 --> 0:06:46.000 So a group of US went and we went to 0:06:46.000 --> 0:06:48.880 see an asset manager and we asked the question, what's 0:06:48.920 --> 0:06:52.000 the first thing you did when you heard that Mexico 0:06:52.200 --> 0:06:55.599 was having difficulty facing and paying its debt? And that 0:06:55.680 --> 0:06:59.400 financial asset manager said something that was very surprising to me. 0:06:59.640 --> 0:07:02.960 He said, I sold Chili. Now, as the economist in me, 0:07:03.000 --> 0:07:05.279 I thought, what a city thing to do. Why would 0:07:05.320 --> 0:07:07.599 you ever sell chili? Chili is a well managed economy 0:07:07.640 --> 0:07:10.480 out there. It is not Venezuela, it is not Argentina. 0:07:10.800 --> 0:07:13.680 You keep Chili, And I said, so I reacted, why 0:07:13.680 --> 0:07:17.040 would you do that? Thinking, wow, he are irrational markets, 0:07:17.360 --> 0:07:20.040 And he explained it in a way that makes total 0:07:20.080 --> 0:07:22.960 sense to me now having seen the market the market side, 0:07:23.320 --> 0:07:27.360 which is that he expected redemptions from his Latin American 0:07:27.440 --> 0:07:32.240 funds because the Mexican news would lead to redemption. He 0:07:32.560 --> 0:07:35.800 needs to sell across the board and what hadn't been 0:07:35.920 --> 0:07:38.440 hit hard as yet was Chili. So he sold Chili. 0:07:38.880 --> 0:07:42.480 And for me, that was a realization that economists needed 0:07:42.520 --> 0:07:46.200 to understand the financial markets much better. I'm very hults. 0:07:46.240 --> 0:07:49.480 You're listening to Masters in Business on Bloomberg Radio. My 0:07:49.560 --> 0:07:54.040 special guest this week is Muhammad Alarian. He is the 0:07:54.080 --> 0:07:58.320 economic advisor to Alians, a contributing editor to the FT, 0:07:58.840 --> 0:08:03.320 and a calumnist Bloomberg View. Let's jump right into a 0:08:03.400 --> 0:08:07.760 phrase that you were coined back in oh nine, the 0:08:07.880 --> 0:08:11.360 new normal? What is the new normal? So the context 0:08:11.640 --> 0:08:15.360 was coming out of the crisis. PIMCO was in a 0:08:15.440 --> 0:08:18.320 much better position than others because we had navigated the 0:08:18.360 --> 0:08:23.040 crisis relatively well and had protected our clients assets, and 0:08:23.080 --> 0:08:25.920 we could look forward and ask the question what comes next? 0:08:27.080 --> 0:08:30.880 And starting in January, we realized that this was not 0:08:31.320 --> 0:08:34.800 your typical cyclical crisis. This wasn't like an elastic band 0:08:34.800 --> 0:08:37.880 you stretched and comes back. That this was a structural 0:08:38.000 --> 0:08:43.320 and secular phenomenon. And we debated how best to communicate 0:08:43.840 --> 0:08:47.760 to our own people and to the outside world that 0:08:47.880 --> 0:08:50.440 this is not business as usual, that we have to 0:08:50.679 --> 0:08:54.839 think differently, And after lots of different permutation, we came 0:08:54.880 --> 0:08:57.040 up with the concept of the New Normal as a 0:08:57.080 --> 0:09:02.320 way of signaling that it not be a cyclical recovery, 0:09:02.360 --> 0:09:05.840 but instead we would face a prolonged period of low 0:09:05.920 --> 0:09:09.520 growth and structural challenges. So there are a couple of 0:09:09.520 --> 0:09:14.680 other people who have described this era similarly. Larry Summers 0:09:14.720 --> 0:09:18.280 famously called it the secular Stagnation? Is that all that 0:09:18.400 --> 0:09:21.480 different from the New Normal? No, it's very much the 0:09:21.559 --> 0:09:23.880 same thing. I mean. The irony here Berry is that 0:09:24.200 --> 0:09:26.400 when we went public with it in May of two 0:09:26.400 --> 0:09:29.200 thousand and nine, it got very little attraction. In fact, 0:09:29.280 --> 0:09:32.199 I remember a policymaker telling me it was an idiotic 0:09:32.240 --> 0:09:36.120 concept that the West lives cyclically and it's the emerging 0:09:36.200 --> 0:09:40.640 world that lives secularly and structurally. Makes sense with time 0:09:40.720 --> 0:09:44.000 when it became evident that we were having difficulty growing, 0:09:44.480 --> 0:09:46.840 when it became evident that the forecasts were all being 0:09:46.880 --> 0:09:51.800 revised one side downwards. This notion started to gain acceptance 0:09:52.720 --> 0:09:54.960 in two thousand and fourteen. The I. M. F called 0:09:54.960 --> 0:10:00.480 it the new mediocre, and then familiar, and then um 0:10:00.559 --> 0:10:04.640 Larry Summers came up with the phrase this is seculist tegnation. 0:10:04.679 --> 0:10:06.680 But it speaks to the same thing, which is a 0:10:06.720 --> 0:10:11.080 prolonged period of low growth. The irony Berry is that 0:10:11.240 --> 0:10:13.800 now the conventional wisdom has gotten to the new normal. 0:10:14.440 --> 0:10:16.560 As I argue with my book, I don't think it's 0:10:16.720 --> 0:10:20.240 any more a powerful concept for describing what's ahead of us. 0:10:20.280 --> 0:10:22.240 I think we're going to tip one way or the other. 0:10:22.640 --> 0:10:25.400 So in their book ran Hunt will go Off this 0:10:25.440 --> 0:10:29.000 time it's different. Eight centuries of financial folly. They talk 0:10:29.080 --> 0:10:35.280 about what is normal following a financial crisis subpart GDP, 0:10:36.160 --> 0:10:41.520 weak job creation, mediocre retail sales, but surprisingly pretty robust 0:10:41.880 --> 0:10:46.480 equity markets off of the lows. Um That seems pretty 0:10:46.480 --> 0:10:49.560 consistent with with new normal as well. How much of 0:10:49.600 --> 0:10:53.800 the new normal is a function of us living in 0:10:53.840 --> 0:10:58.640 a post financial crisis world a huge part, And there's 0:10:58.640 --> 0:11:01.320 two elements to it. One, as as Ryan had and 0:11:01.400 --> 0:11:05.400 Rogoff pointed out when you have a massive balance sheet issue. 0:11:05.520 --> 0:11:08.720 It takes you time to work through it, and you 0:11:08.800 --> 0:11:13.880 basically have four choices. You can either default, which is 0:11:14.000 --> 0:11:17.040 very very costly. You can grow your way out of it. 0:11:17.120 --> 0:11:23.360 What that's really difficult. You can try and have a 0:11:23.520 --> 0:11:28.120 voluntary structuring. Alternatively, you can go through financial repression, and 0:11:28.160 --> 0:11:32.400 that is central banks pushing interest rates down in order 0:11:32.760 --> 0:11:37.440 to tax creditors and subsidize theaters. And that's what we've had. 0:11:37.920 --> 0:11:41.760 We've had financial repression. We've had central banks use both 0:11:41.920 --> 0:11:46.760 interest rates and their balance sheets to push down interest 0:11:47.320 --> 0:11:50.600 um costs and try and promote risk taking in order 0:11:50.600 --> 0:11:54.920 to recapitalize the system. So you call this financial repression. 0:11:55.240 --> 0:11:59.520 Ray Dalio of Bridgewater calls it the beautiful deleveraging. There 0:11:59.520 --> 0:12:03.040 are some lightful phrases to describe what is a not 0:12:03.200 --> 0:12:07.400 so delightful era that that we've been coming out of. 0:12:07.800 --> 0:12:10.480 And I have to ask, I know that something like 0:12:10.520 --> 0:12:16.280 sixty or sixty baby boomers are retiring every day, how 0:12:16.360 --> 0:12:20.199 much of this new normal and the secular stagnation is 0:12:20.360 --> 0:12:23.840 a question of just demographics. So part of it is 0:12:24.080 --> 0:12:27.160 there certainly are demographic elements to it, and they are 0:12:27.200 --> 0:12:30.400 also politicular elements, but there's lots of economics elements to it. 0:12:31.280 --> 0:12:35.080 I think the major issue, vary for anybody retiring or 0:12:35.120 --> 0:12:39.320 anybody at all, is that part of the response to 0:12:39.320 --> 0:12:41.880 the new normal has been to borrow growth from the 0:12:41.920 --> 0:12:45.920 future and borrow financial returns from the future. As a result, 0:12:46.480 --> 0:12:48.760 as you point out, equity markets have done very well 0:12:48.880 --> 0:12:51.640 while fundamentals heaven. So we have a big gap. And 0:12:51.679 --> 0:12:55.600 the big question facing us today is two fundamentals, improve 0:12:55.679 --> 0:12:59.360 and validate asset prices and push them higher. Alternatively to 0:12:59.600 --> 0:13:03.120 to ask prices come down towards fundamentals and overshoot and 0:13:03.160 --> 0:13:06.760 pull the fundamentals down. That is the t junction facing 0:13:06.880 --> 0:13:12.680 us today as we navigate the consequences of having relied 0:13:12.760 --> 0:13:17.400 too much on financial repression. So given that, what what's 0:13:17.440 --> 0:13:22.440 the biggest surprise of the post crisis financial repression era? 0:13:22.760 --> 0:13:24.840 What what has happened in the past let's call it 0:13:24.880 --> 0:13:28.800 eight years that stands out as nobody really expected that 0:13:28.880 --> 0:13:31.800 to occur. Oh, I can give you a whole list 0:13:31.920 --> 0:13:35.960 of improbables and unthinkable. I mean, think of the fact 0:13:35.960 --> 0:13:39.400 that we have negative nominal interest rates. How many people 0:13:39.440 --> 0:13:42.080 would have predicted that would have negative nominal interest rates. 0:13:42.160 --> 0:13:45.800 People were forecasting rising rates, hyperinflation, and collapse of the dollar. 0:13:45.880 --> 0:13:48.000 None of that came. None of that came to. Who 0:13:48.080 --> 0:13:52.640 would have predicted that this frustration with low growth would 0:13:52.760 --> 0:13:58.520 lead to the emergence of non establishment and an anti establishment, 0:13:58.679 --> 0:14:02.079 non traditional political forces on both side of the Atlantic, 0:14:02.160 --> 0:14:04.680 and that we see it. We see it in America clearly, 0:14:04.720 --> 0:14:08.480 the Trump Sanders phenomena is reaction to something that's going on, 0:14:09.000 --> 0:14:11.160 no doubt about that. And in Europe, and we see 0:14:11.160 --> 0:14:13.440 it in Europe with the emergence of UK with the 0:14:13.440 --> 0:14:16.160 emergence of the various parties in Germany, and of course 0:14:16.200 --> 0:14:19.160 the natural front in France. Who would have predicted that 0:14:19.200 --> 0:14:22.200 we'd have a lot of risk taking in finance and 0:14:22.360 --> 0:14:26.840 very little risk taking in corporations. Corporations are still sitting 0:14:26.920 --> 0:14:29.200 on a massive amoun amount of cash even though it's 0:14:29.200 --> 0:14:31.880 earning zero and now they're being forced to give it 0:14:31.880 --> 0:14:35.120 back rather than invested. Who would have thought that we'd 0:14:35.160 --> 0:14:37.680 have this big divergence, and yet we have the list 0:14:37.720 --> 0:14:40.200 of unthinkable Who would have thought we would have such 0:14:40.200 --> 0:14:43.680 a worsening in income, wealth, inequality, so that at least 0:14:43.720 --> 0:14:46.000 to an inequality of opportunity. I can give you the 0:14:46.040 --> 0:14:49.960 whole list of unthinkables and improbables that have occurred because 0:14:49.960 --> 0:14:53.600 we've been living this artificial world. But I stress it's 0:14:53.640 --> 0:14:56.400 coming to an end. I'm very Ridhults. You're listening to 0:14:56.560 --> 0:14:59.840 Masters in Business on Bloomberg Radio. My special guest today 0:15:00.080 --> 0:15:04.880 is Muhammad Alarian. He is an economic consultant to financial 0:15:04.920 --> 0:15:08.920 giant Alliance, a contributing editor to the FT, writes a 0:15:09.000 --> 0:15:12.840 column where I do also at at Bloomberg View dot com, 0:15:12.880 --> 0:15:16.120 and has has really been named one of the hundred 0:15:16.200 --> 0:15:20.760 most important or influential global thinkers by Foreign Policy and 0:15:20.760 --> 0:15:27.800 and generally an all around eloquent person describing the complex 0:15:27.800 --> 0:15:32.320 and occasionally chaotic world of finance. And I wanna use 0:15:32.400 --> 0:15:36.160 that eloquence to jump right in to your current book. 0:15:36.480 --> 0:15:41.360 The only game in town central banks instability and avoiding 0:15:41.360 --> 0:15:45.000 the next collapse. So let's talk about the FED. Are 0:15:45.040 --> 0:15:48.840 they the only game in town? Yes, they are, as 0:15:48.920 --> 0:15:52.920 is the ECB, the Bank of Japan, the People's Bank 0:15:52.920 --> 0:15:56.680 of China. The list is long. Um central banks have 0:15:56.840 --> 0:16:02.040 taken on enormous responsibility. The first phase made sense whether 0:16:02.240 --> 0:16:08.360 they had to step in and normalize very dysfunctional financial markets. 0:16:08.360 --> 0:16:11.560 But then starting in the case of the FED and 0:16:12.360 --> 0:16:14.080 in the case of the e c V, they took 0:16:14.080 --> 0:16:18.480 on the responsibility for delivering macroeconomic outcomes, and they did 0:16:18.520 --> 0:16:23.400 so not by choice, but by necessity because other policymakers 0:16:23.480 --> 0:16:27.040 weren't stepping up to the plate. You know, Nixon famously said, 0:16:27.120 --> 0:16:30.320 we're all Keynsians now, and that has led to a 0:16:30.400 --> 0:16:34.280 pretty standard manual for what to do. Following a recession, 0:16:34.840 --> 0:16:38.680 private sector demand plummets, the government steps in with some 0:16:38.760 --> 0:16:42.600 sort of fiscal stimulus, whether it's repairing bridges and roads 0:16:42.720 --> 0:16:46.600 or some other big policy statement. The government steps in 0:16:46.880 --> 0:16:50.880 that substitutes for a short period of time that missing demand, 0:16:51.120 --> 0:16:54.760 and then eventually the private sector catches up and the 0:16:54.800 --> 0:16:57.360 public sector can step out of the way. That seems 0:16:57.400 --> 0:17:00.320 to be missing this cycle is that part of the 0:17:00.400 --> 0:17:04.960 reason you say the federal Reserve had no choice. So 0:17:05.600 --> 0:17:10.119 it happened, but it didn't happen big enough, and most importantly, 0:17:10.119 --> 0:17:14.280 it happened isolation of three other things that needed to happen, 0:17:15.160 --> 0:17:18.119 and therefore it was not as effective and you didn't 0:17:18.119 --> 0:17:23.439 get the handoff that you're talking about. So what was missing? First, 0:17:23.840 --> 0:17:26.760 we invested in the wrong growth models, go back ten 0:17:26.800 --> 0:17:29.720 to fifteen years we somehow fell in love with finance 0:17:30.080 --> 0:17:33.400 and believed that it could promote economic growth. We even 0:17:33.480 --> 0:17:35.280 changed the name. We used to call it the financial 0:17:35.320 --> 0:17:38.040 service industry because we had this notion that it served 0:17:38.119 --> 0:17:41.240 the real economy. But then ten to fifteen years ago 0:17:41.320 --> 0:17:43.840 we changed this notion and it became a standalone. I 0:17:43.840 --> 0:17:46.640 remember people talking that it was the next level of capitalism, 0:17:46.920 --> 0:17:51.679 agricultural industry, manufacturing services, and if you're really lucky, you 0:17:51.760 --> 0:17:55.600 get to financial services. So we invested in the wrong 0:17:55.840 --> 0:18:00.600 growth model, and we stopped investing in infrastructure, in pro growth, 0:18:00.800 --> 0:18:04.520 tax reforms, in labor retooling. The second problem is we 0:18:04.520 --> 0:18:08.760 didn't deal with the lessons of past debt crisis. You 0:18:08.800 --> 0:18:11.880 mentioned Ryan Hard and Rogoff earlier. They point out that 0:18:11.960 --> 0:18:14.640 when you start with excessive indebtedness, if you don't deal 0:18:14.640 --> 0:18:18.560 with it quickly, not only does it crush those who 0:18:18.560 --> 0:18:21.520 are over indebted, but it stops new capital from coming 0:18:21.560 --> 0:18:25.920 and you get no new oxygen, fresh oxygen into the system. 0:18:26.000 --> 0:18:28.480 And then finally we forgot how in the dependent the 0:18:28.480 --> 0:18:31.639 world we live in is, and we didn't step up 0:18:31.680 --> 0:18:35.600 with global policy coordination, except for one instant in April 0:18:35.640 --> 0:18:38.520 two thousand and nine at the London G twenty. So 0:18:38.880 --> 0:18:42.320 the problem is that while we had a stimulus, it 0:18:42.400 --> 0:18:46.720 wasn't big enough, and most critically, it wasn't accompanied by 0:18:46.720 --> 0:18:50.320 these three other things, and therefore the handoff never occurred, 0:18:50.880 --> 0:18:55.399 which pulls central banks deeper and deeper into taking on 0:18:55.600 --> 0:19:00.600 too many policy obligations with too few instruments. So so 0:19:00.680 --> 0:19:03.520 let's bring this back to the only game in town, 0:19:03.880 --> 0:19:05.960 um the new book, and we'll talk a little bit 0:19:06.000 --> 0:19:08.600 about the FED. In the book, you point out something 0:19:08.640 --> 0:19:13.439 that I found fascinating, Matt O'Brien writes in the Washington Post, 0:19:13.600 --> 0:19:16.560 and he did a I love this word count way 0:19:16.600 --> 0:19:19.880 of looking at FED transcripts to figure out what they're 0:19:19.880 --> 0:19:23.000 talking about. And in two thousand and eight, as we 0:19:23.000 --> 0:19:25.960 were heading to the crisis, was the FED worried about 0:19:26.040 --> 0:19:31.520 systemic risk? Well, according to O'Brien, and you passed this along, Uh, 0:19:31.560 --> 0:19:34.399 they were much more concerned with inflation. And if you 0:19:34.440 --> 0:19:38.119 think about the June meeting, the word count four hundred 0:19:38.160 --> 0:19:41.800 and sixty eight mentions of inflation, only thirty five of 0:19:42.280 --> 0:19:46.639 either systemic risk or crisis. In August, that ratio was 0:19:46.680 --> 0:19:50.800 three two to nineteen and then the September six, two 0:19:50.840 --> 0:19:53.199 thousand and eight, meaning and let me point out this 0:19:53.359 --> 0:19:56.919 was immediately after the collapse of Lehman Brothers. It was 0:19:56.960 --> 0:19:59.879 still a hundred and twenty nine mentions of inflation for 0:20:00.040 --> 0:20:04.040 US is just four of either systemic risk or crisis. 0:20:04.640 --> 0:20:07.399 What does this tell us about the FED? So I 0:20:07.400 --> 0:20:10.320 think it tells you something much bigger and and and 0:20:11.119 --> 0:20:14.480 I ended up by going along and looking at behavioral 0:20:14.480 --> 0:20:17.679 science to understand decision making and why it is that 0:20:17.800 --> 0:20:20.760 we tend to frame things in a backward looking manner, 0:20:20.760 --> 0:20:22.880 because that's what the FED did. It tells it it's 0:20:23.040 --> 0:20:26.120 very hard to pivot your thinking from what you're comfortable 0:20:26.200 --> 0:20:31.880 with to what is happening and is new, and it's understandable. 0:20:31.880 --> 0:20:34.120 We don't like doing it. We we as humans don't 0:20:34.119 --> 0:20:37.679 like doing it. We have an inclination to always go 0:20:37.760 --> 0:20:40.240 back to comforting things. So either we are in denial 0:20:40.400 --> 0:20:44.200 the so called blind spots, or we reframe um issues 0:20:44.560 --> 0:20:46.159 so that we are more comfortable. And that's what the 0:20:46.160 --> 0:20:49.160 FED was doing. I'm very helps you're listening to Masters 0:20:49.160 --> 0:20:52.320 in Business on Bloomberg Radio. My special guest today is 0:20:52.440 --> 0:20:56.560 Muhammad Alarian. He is the economic consultants and adviser to 0:20:57.160 --> 0:21:01.560 global financial giant Alliance UH and writes for both the 0:21:01.640 --> 0:21:05.560 Ft and Bloomberg View. You know, in the previous segment, 0:21:05.600 --> 0:21:10.960 we were discussing UH some of the more fascinating impacts 0:21:11.200 --> 0:21:15.719 of of the FED fighting the last last battle, and 0:21:15.920 --> 0:21:19.040 I have a quote that I have to start this 0:21:19.119 --> 0:21:22.600 segment off with you. What all of this speaks to 0:21:22.760 --> 0:21:27.400 is the repeated ability of central banks to decouple asset 0:21:27.480 --> 0:21:32.280 prices from fundamentals. What does that mean. It's very simple. 0:21:32.320 --> 0:21:34.800 If you have a printing press in the basement and 0:21:34.880 --> 0:21:38.120 you're willing to use it, and you're willing to engage 0:21:38.280 --> 0:21:42.919 in asset purchases, you can have any immediate influence on 0:21:42.960 --> 0:21:47.000 asset prices. It's that simple. And that's why we say, 0:21:47.359 --> 0:21:51.800 you say asset prices decouple from fundamentals, correct for quite 0:21:51.840 --> 0:21:55.679 a while. You can decouple asset prices by increasing the 0:21:55.760 --> 0:21:59.879 demand and by changing risk preferences, and that's what central 0:22:00.000 --> 0:22:02.639 acts have done. Now, this is a bet that makes 0:22:02.680 --> 0:22:08.840 sense if you also manage to trigger better fundamentals so 0:22:08.840 --> 0:22:13.359 that ultimately the fundamentals validate the asset prices. If you don't, 0:22:13.840 --> 0:22:18.040 you cannot maintain for whatever this wedge between artificially high 0:22:18.080 --> 0:22:21.879 financial assets and sluggish fundamentals. So here we are on 0:22:21.920 --> 0:22:25.200 the first quarter of six and it looks like stock 0:22:25.240 --> 0:22:29.520 prices are coming down to weak fundamentals. We're gonna get 0:22:29.560 --> 0:22:32.359 into the issue of what else can be done to 0:22:32.440 --> 0:22:35.600 stimulate the fundamentals. But but let's talk a little bit 0:22:35.640 --> 0:22:40.080 about the global state of the economy. Why did market 0:22:40.200 --> 0:22:45.280 suddenly discover it seems like after having ignored the fundamentals 0:22:45.280 --> 0:22:48.240 for a number of years, why did they suddenly decide 0:22:48.320 --> 0:22:51.120 that maybe we have to pay attention to a weak 0:22:51.200 --> 0:22:55.040 economic growth because of the perfect storm? You know, there's 0:22:55.040 --> 0:22:57.440 notion of a perfect storm is three things come together 0:22:58.040 --> 0:23:01.040 and what you get is not just a holatility, but 0:23:01.119 --> 0:23:03.840 to get the improbable as well. So what has been 0:23:04.320 --> 0:23:07.320 the perfect storm? The elements of the perfect storm. First, 0:23:07.720 --> 0:23:13.320 we are questioning like never before global economic fundamentals. We 0:23:13.359 --> 0:23:16.119 are worried about China. We are worried about the slowdown 0:23:16.840 --> 0:23:20.280 that's happening around in emerging the emerging world. Europe has 0:23:20.359 --> 0:23:23.879 cut its growth forecast. There's even talk of the possibility 0:23:23.880 --> 0:23:26.840 of a recession in the US. So suddenly, the first 0:23:26.840 --> 0:23:30.800 element of the perfect storm is concerns about fundamentals. The 0:23:30.880 --> 0:23:34.679 second element about of the perfect storm is the last 0:23:34.840 --> 0:23:39.560 of trust in central bank effectiveness. Two reasons for that. 0:23:39.680 --> 0:23:42.800 One is we have divergent monetary policies. Now central banks 0:23:42.800 --> 0:23:45.359 are no longer on the same side. We have the 0:23:45.400 --> 0:23:48.760 FED that has exited Quei and that has started hiking 0:23:48.760 --> 0:23:52.960 interest rates, so it is taking its foot off the accelerator. Meanwhile, 0:23:53.000 --> 0:23:57.480 the e c B, the People's Bank of China, and 0:23:57.600 --> 0:24:00.359 the Bank of Japan are going the other way. This 0:24:00.480 --> 0:24:05.160 divergent central bank context, it's very different from what we've 0:24:05.160 --> 0:24:07.800 had before, and it has raised doubts about the effectiveness 0:24:07.800 --> 0:24:12.200 of central banks in repressing volatility. And then the third 0:24:12.240 --> 0:24:15.560 element is the lack of patient capital. There is no 0:24:15.720 --> 0:24:20.000 big balance sheet with quote permanent capital that can step 0:24:20.040 --> 0:24:24.640 in now and act countercyclically. In fact, liquidity is challenged 0:24:24.680 --> 0:24:28.120 because the broken dealer's appetite for countercyclical risk has has 0:24:28.160 --> 0:24:31.919 been reduced. So put these three things together and you 0:24:32.000 --> 0:24:37.919 get this volatility, enormous volatility um that then causes its 0:24:37.960 --> 0:24:40.400 own dynamic. Now, the good news bery is that so 0:24:40.480 --> 0:24:45.680 far this has been a financial event, It hasn't contaminated 0:24:46.160 --> 0:24:49.199 the wheel economy and that is the major call for 0:24:49.320 --> 0:24:54.639 two thousands sixteen. Will this continued financial volatility contaminate the 0:24:54.680 --> 0:24:58.000 real economy? Or is the real economy resilient enough to 0:24:58.080 --> 0:25:02.480