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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: In video, one name making up a little more than

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Speaker 2: four percent of the index and almost one hundred percent

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Speaker 2: of the enthusiasm to buy stocks in the last twenty

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Speaker 2: four hours, that single name adding two hundred and seventy

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Speaker 2: six points sixty five billion dollars in market cap in

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Speaker 2: a single day, a single day. That's a new record.

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Speaker 2: The old record belonged to Meta, and that was only

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Speaker 2: three weeks old. The move wasn't just isolated to just

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Speaker 2: one stock, one sector, or even one country. It was

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Speaker 2: enough to help push equity markets worldwide to record highs. Stateside,

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Speaker 2: the SMP all time high, then that's that one hundred

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Speaker 2: all time high. In Europe, the stock six hundred all

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Speaker 2: time highs. Germany stacks all time high. Even in Japan

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Speaker 2: we reclaimed a milestone going back to nineteen eighty nine,

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Speaker 2: then K two to twenty five at all time highs.

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Speaker 2: This is happnik with negative GDP in the UK, negative

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Speaker 2: GDP in Germany, negative GDP in Japan, and interest rates

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Speaker 2: in America at multi decade highs. The stock market is

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Speaker 2: evidently not the economy, and high interest rates have done

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Speaker 2: little to dampen the enthusiasm to buy equity. Some are confused,

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Speaker 2: Marko Klanovic a JP Morgan saying we find current market

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Speaker 2: developments odd. Others are nothing but jubilant. Danives of Wedburth

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Speaker 2: says this is a game changing moment for the tech

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Speaker 2: bulls and puts jeb fuel in the tech ball market thesis.

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Speaker 2: As the derivatives of AI play out over the coming

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Speaker 2: twelve to eighteen months. To discuss a week full of records,

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Speaker 2: I pleased to say we're joined by a good friend

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Speaker 2: of this program, Mohammad al Arian Muhammed, what a week

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Speaker 2: it's been. I just want your early response, your initial

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Speaker 2: reaction to the price section yesterday, off the back of

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Speaker 2: earnings on one single name.

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Speaker 3: I think John is totally understandable.

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Speaker 1: I think there is a revolution going on in AI

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Speaker 1: fed by four things that will only grow in importance,

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Speaker 1: and that is computing, power, data, and financing. There is

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Speaker 1: a very long runway both on the supply side and

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Speaker 1: on the demand side for this sector. On the supply side,

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Speaker 1: we're going to see capabilities improving expanding. On the demand side,

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Speaker 1: it's not just about AI, add ons that a lot

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Speaker 1: of companies are talking about today and trying to do.

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Speaker 3: It is about developing things that are AI native.

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Speaker 1: So when I look at this, I totally understand the

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Speaker 1: excitement about the sector, and I totally understand how that

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Speaker 1: sector can suck investment into many other things. So it

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Speaker 1: doesn't surprise me. This is a secular story, John. Now,

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Speaker 1: will there be excesses in parts of the market. Of

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Speaker 1: course there will be, But there is something real going

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Speaker 1: on that can enhance productivity and have a huge impact.

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Speaker 3: Secularly, call it.

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Speaker 2: A secular story. Can we talk about the cyclical impact.

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Speaker 2: We were talking to YenS Norvig of Excite Data, and

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Speaker 2: he was making the connection between what would happen to

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Speaker 2: growth in America to activity in America and how the

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Speaker 2: Federal Reserve might have to reconsider how high rates might

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Speaker 2: have to be in the years to come. Are you

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Speaker 2: making that connection.

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Speaker 3: Yet in years to come?

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Speaker 1: Yes, John, But this is not a FED that has

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Speaker 1: been basing policy on years to come. This is a

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Speaker 1: FED that's been basing policies on past data.

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Speaker 3: It's been overly data dependent.

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Speaker 1: But he's right in the sense that when working out

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Speaker 1: productivity and growth potential, you've got to factor that in.

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Speaker 1: It is a transformational and it's not the only one, John,

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Speaker 1: you know, for you've been hearing me three that say,

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Speaker 1: there's three of them. There's what's happening to genitive AI,

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Speaker 1: there's what's happening to life sciences, and there's what's happening

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Speaker 1: to green energy. And you've talked to my colleague Michael

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Speaker 1: Spence on these issues, and you know how strongly he

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Speaker 1: feels as well.

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Speaker 2: Spencer was fantastic. I want to talk about the recent

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Speaker 2: FED communication we've had as well, Mohammed. Governor Walla, what's

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Speaker 2: the rush? Do you share that opinion?

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Speaker 1: What is the rush? Do you remember when when you

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Speaker 1: repeated what I said a few months ago when you

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Speaker 1: asked me what's going to happen? I told you what

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Speaker 1: let me tell you what should happen, and let me

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Speaker 1: tell you.

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Speaker 3: What will happen.

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Speaker 1: And I said at that time three cuts starting in June.

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Speaker 1: And that was at a time when the market was

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Speaker 1: seeing six to seven cuts starting in March. So we

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Speaker 1: are now in a really good spot. We are now

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Speaker 1: at a point where the market has finally converged to

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Speaker 1: what the FED has signaled, and it's really important to

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Speaker 1: try and maintain that alignment because there's so much else

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Speaker 1: going on. So I think it is right to say patients,

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Speaker 1: but that communication shouldn't go too far. What's going to

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Speaker 1: be hard, John, is to stick to the three cuts,

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Speaker 1: both by the market and by the Fed, at a

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Speaker 1: time when the inflation data is going to get much

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Speaker 1: more bumpy.

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Speaker 2: Muhammed, what surprised me? I'll tell you what didn't surprise me.

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Speaker 2: That's spread closing to close. I'll tell you something else

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Speaker 2: that didn't surprise me. How that spread closed? I was

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Speaker 2: with you the market coming towards the Federal Reserve. It's

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Speaker 2: what didn't happen as that spread close that shocked me.

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Speaker 2: We've priced out all those cuts we had priced in

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Speaker 2: since the end of October. We've pushed out the timing,

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Speaker 2: we've reduced the magnitude of interest rate cuts this year.

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Speaker 2: And yet still this equity markets carried on rallying. The

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Speaker 2: two year yields are fifty basis points in just something

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Speaker 2: like three weeks and change. And my habit in still

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Speaker 2: this equity market carried on running. And if you'd asked

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Speaker 2: me at the time, whatever my views worth back then,

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Speaker 2: if we're going to close that gap in that fashion,

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Speaker 2: if trewe ye yelds we're going to reprice higher by

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Speaker 2: let's say, fifty basis points in three weeks. I would

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Speaker 2: have said stocks down, stocks down, hard stocks are up.

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Speaker 2: How do you explain that, Muhammad? How important is monetary

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Speaker 2: policy to equity market pricing given the dynamics in Nvidia,

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Speaker 2: in AI, in big tech?

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Speaker 1: You know, John simply put is one of three factors.

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Speaker 1: Interest rate risk, of course, has been a significant headwind,

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Speaker 1: but you've had two very strong tailwinds. One we just

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Speaker 1: talked about, which is a secular journey that we've embarked

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Speaker 1: on led by these incredible innovations. And then the second

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Speaker 1: significant tailwind is the strength of the economy. You know,

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Speaker 1: we were also surprised by a three point three percent

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Speaker 1: growth rate in the fourth quarter. We were also surprised

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Speaker 1: by an almost five percent growth rate in the third quarter.

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Speaker 1: And the US locomotive has been strong enough to offset

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Speaker 1: the numbers you showed in terms of recessions in Germany,

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Speaker 1: UK and Japan.

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Speaker 2: Do you think that should lift all boats abroad? Though,

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Speaker 2: and you mentioned the recessions in the UK, Germany and Japan,

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Speaker 2: we've also got all time highs in Germany and Japan. Mahammick,

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Speaker 2: can you explain that just by the US alone.

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Speaker 1: Well, what you can explain by is people looking at

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Speaker 1: valuations differentials and seeing that other markets look incredibly cheap

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Speaker 1: relative to the US and wanting to go fishing there

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Speaker 1: as well. Of people have been saying, well, if I'm

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Speaker 1: going to invest in the US at these levels, just

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Speaker 1: look at how much cheaper other markets are. So you're

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Speaker 1: getting massive spillovers because people are looking at relativities.

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Speaker 2: John, do you think those easy financial conditions should be

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Speaker 2: of concern to certain central banks still grappling and lacking

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Speaker 2: confidence of getting inflation backed down towards target.

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Speaker 1: So you're taking me to the question that you know,

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Speaker 1: I don't really like discussing, which is what is the

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Speaker 1: appropriate target? Were living in a world where, given everything

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Speaker 1: that's going on on the supply side, we're talking about jeopolitics,

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Speaker 1: we're talking about companies, we're wiring their supply chains, we're

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Speaker 1: talking about what's happening in the labor market, that when

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Speaker 1: you look at all this, if I was a central banker,

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Speaker 1: I would be aiming at the actually long journey back

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Speaker 1: to two percent. I wouldn't wish to get back to

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Speaker 1: two percent because in the back of my mind I believe,

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Speaker 1: as I believe right now, that if I was to

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Speaker 1: set an inflation target today, it will be hired than

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Speaker 1: two percent. It will be closer to three percent. But

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Speaker 1: of course I can't change that because I've missed my

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Speaker 1: target for so long. So in the back of my mind,

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Speaker 1: I would not be in a rush to force it

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Speaker 1: back to two percent, And that's really important. If that

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Speaker 1: is my mindset, then I can live with these financial conditions.

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Speaker 1: If my mindset is I need to get to two

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Speaker 1: percent really quickly and that's the right inflation target, then

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Speaker 1: I would be concerned about financial conditions.

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Speaker 2: Well, mahould, we also have to acknowledge why you said

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Speaker 2: that all that time ago. The reason you said that

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Speaker 2: is because you believed initially that in order to get

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Speaker 2: back to two percent and oversay eighteen months two years,

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Speaker 2: we needed to crush the economy to do that. The

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Speaker 2: lesson of last year was that maybe we don't. Perhaps

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Speaker 2: what's the question now that you'd be asking with regards

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Speaker 2: to that, do you think we can achieve that inflation

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Speaker 2: target without crushing the service side of the economy. Given

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Speaker 2: the disinflationory trends that have emerged over the previous six months.

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Speaker 3: So let me give you my probabilities.

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Speaker 1: I think it's about fifty five percent probability that we

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Speaker 1: can that we can get towards a stable inflation rate

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Speaker 1: that's low enough. It won't be two percent, but that's

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Speaker 1: low enough, and that's stable enough that it anchors inflation

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Speaker 1: expectations without crushing the economy.

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Speaker 3: I'll give that a fifty five percent.

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Speaker 1: I'll give a thirty percent of probability that either because

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Speaker 1: of an external shock and there's a lot going on

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Speaker 1: in the world right now, or a domestic political change,

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Speaker 1: or a policy mistake from the FED of staying too

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Speaker 1: tight for too long, fifteen percent that will slip into

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Speaker 1: a mild recession. And so thirty percent will slip into

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Speaker 1: mild recession. And fifteen percent is that the productivity gains

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Speaker 1: that will occur over a number of years happen much

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Speaker 1: more quickly, and then we find out that we get

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Speaker 1: towards some people call the low landing that grows stays

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Speaker 1: incredibly robust while inflation stays well behaved Mohammed.

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Speaker 4: Governor Waller yesterday was talking about they want to see

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Speaker 4: a couple of months of inflation data to make sure

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Speaker 4: that they're prepared for these cuts. You're looking at June.

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Speaker 4: What needs to happen in terms of goods disinflation between

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Speaker 4: now and June for you to be comfortable.

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Speaker 3: No, I'm comfortable now.

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Speaker 1: Okay, I'm comfortable now because I look way beyond. I

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Speaker 1: think that data dependency doesn't mean data obsession. It's very, very,

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Speaker 1: very problematic if you get obsessed by data, because you

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Speaker 1: need to look forward. Your measures act with a lag,

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Speaker 1: as you know and Marie, so if you are totally

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Speaker 1: basing policies on the last few months of data, you

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Speaker 1: will get it wrong.

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Speaker 3: And that is why we have had such a reactive FED.

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Speaker 1: That is why communication has been such a problem. So

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Speaker 1: I don't need to see two more months of data

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Speaker 1: to feel comfortable cutting three times starting in June because

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Speaker 1: of what I see ahead. But if this FED remains

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Speaker 1: obsessed with being data dependent and seemingly solely data dependent,

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Speaker 1: that they want to see goods inflation staying well tamed

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Speaker 1: while service inflation coming down, that's what they need to see.

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Speaker 3: Maham.

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Speaker 2: Let's just finish this segment by asking a simple question.

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Speaker 2: I know it's difficult to answer, but what evidence is

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Speaker 2: there that they are sufficiently restrictive looking across the economic

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Speaker 2: data we've had not over the last month, but over

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Speaker 2: the last twelve.

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Speaker 3: So boring costs have gone up.

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Speaker 1: True, spreads haven't gone up like everybody expected, but that

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Speaker 1: has to do with the fact that credit risk has

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Speaker 1: got has been supported by economic growth. Inflation has come down,

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Speaker 1: and it's not just a supply side issue where you've

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Speaker 1: seen major adjustment and interest rate sensitive sectors, so there

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Speaker 1: is evidence that they've had an impact through higher rates.

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Speaker 3: John.

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Speaker 1: My concern, honestly is that now the market and the Fed,

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Speaker 1: surprised by the fact that the inflation numbers are getting

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Speaker 1: more bumpy, will end up being too tight.

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Speaker 3: For too long.

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Speaker 2: Okay, let's just go there again. Let me ask that question, Muhammad,

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Speaker 2: you think the biggest risk here is that they hold

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Speaker 2: too long, not cut too soon.

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Speaker 3: Correct.

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Speaker 1: If they don't cut in June, then you'll hear me say,

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Speaker 1: oh no, we're now making the opposite policy mistake that

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Speaker 1: we made back in.

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Speaker 3: Twenty twenty one.

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Speaker 2: Interesting this conversation, Mohama's going to continue. It's fantastic to

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Speaker 2: have you with us, Mohammed al Arian. You know where

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Speaker 2: the elephant in the room is here, it's the three

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Speaker 2: hundred billion dollars in Russian Central Bank reserves that were

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Speaker 2: effectively frozen back in twenty twenty two. What are we

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Speaker 2: going to do with them?

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Speaker 4: It's a great question these reserves. Some people are saying, potentially,

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Speaker 4: if there's going to be an opening to have a

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Speaker 4: peace negotiation, does the US use this as a caroten

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Speaker 4: stick approach. This is something that everyone says, amongst all

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Speaker 4: the sanctions that's been levied on Puchin, this is the

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Speaker 4: one that hurts the most.

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Speaker 2: Muhammed A Leran still with us, Mohammad, we don't have

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Speaker 2: to talk about this directly, but more broadly, the world

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Speaker 2: become in a more fragmented place. You and I've been

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Speaker 2: talking about assuring, friendshuring, deglobalization over the last few years.

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Speaker 2: When you look at those things, Mohammed, does that still

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Speaker 2: contribute to your idea that this is going to be

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Speaker 2: a regime post pandemic that has higher inflation, more volatility

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Speaker 2: than the one we had before the pandemic.

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Speaker 1: That's absolutely because you have two distinct factors. You have

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Speaker 1: first the non commercial determination of supply chains for geopolitical reasons,

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Speaker 1: and then you have a second factor that's coming in

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Speaker 1: as well that tends to aggravate all that, which is

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Speaker 1: the continued weaponization of economic and investment tools for the

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Speaker 1: purposes of national security, which is totally understandable, but both

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Speaker 1: these tend to be inflationary. John, I think the biggest surprise,

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Speaker 1: including for me, is that the Russian economy did not

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Speaker 1: suffer as much as most of us expected, did not

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Speaker 1: suffer in terms of the contraction. There were projections of

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Speaker 1: ten to fifteen percent when Russia was thrown out as

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Speaker 1: swift when the sanctions were put on, and the IMF

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Speaker 1: in its latest projections increased growth for this year in

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Speaker 1: Russia to over two percent. And that tells you two things.

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Speaker 1: One that with hindsight, the West should have been much

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Speaker 1: harder on the sanctions, fewer exceptions, and taken the risk

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Speaker 1: of collateral damage that you just heard Michael talk about.

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Speaker 1: Because the second issue that that does it signals to

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Speaker 1: the rest of the world that maybe you can live

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Speaker 1: outside the Western system. Well, that is not as much

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Speaker 1: as a threat as most of us thought it was.

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Speaker 4: Well, we were talking earlier Peater Cheer about the fact

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Speaker 4: that Russia just created new markets India and China is

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Speaker 4: where they now sell all their energy in Europe at

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Speaker 4: one point was one of their biggest partners. So in

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Speaker 4: that sense, Muhammad, have sanctions actually worked.

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Speaker 1: So not only had they created new market and Marie

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Speaker 1: that created new payment systems that bypassed the dollar completely.

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Speaker 1: And that is I think what has surprised many, including me.

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Speaker 1: The Russian technocrats, working with others, have come up with

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Speaker 1: this very clunky system but nevertheless allows for international payments

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Speaker 1: without going through the core of the system, which is

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Speaker 1: this image of little pipes being built.

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Speaker 3: Around the core.

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Speaker 1: And the worry is that you're going to encourage more

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Speaker 1: people to build these little pipes. So that's the fragmentation

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Speaker 1: of the economy. Look, there was a decision to be

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Speaker 1: made early on about how hard are you on energy?

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Speaker 1: Should you threaten secondary sanctions or not, And for the

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Speaker 1: reasons that Michael pointed out, the decision was don't go

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Speaker 1: that far.

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Speaker 3: And therefore that you know.

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Speaker 1: Sanctions are as effective as the sanctions you employ.

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Speaker 3: And there were two major loopholes left in round one.

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Speaker 2: It's hard to know the answer to the following question

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Speaker 2: with any certainty, but let's just explore it any way. Mohammad,

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Speaker 2: the elephant in the room. If they confiscate those Russian

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Speaker 2: central bank reserves that were frozen two years ago. How

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Speaker 2: concerned would you be that other countries would begin to

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Speaker 2: ditch Western currencies.

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Speaker 1: I think other countries would look at that very carefully.

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Speaker 1: Look John, In economics, there's always this notion that says,

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Speaker 1: make sure that you have enough tools to meet the

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Speaker 1: number of objectives you have. And we are pursuing sanctions

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Speaker 1: for three objectives. One is to punish Russia, two is

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Speaker 1: not to excessively harm the global economy, and three is

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Speaker 1: not to excessively harm the role of the dollar in

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Speaker 1: the global system. And you cannot get these three objectives

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Speaker 1: with just a single tool of sanctions. And that's why

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Speaker 1: you hear you know, sanctions are not enough. But the

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Speaker 1: risk is that you end up trying to pursue all

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Speaker 1: three using a single sanction, and then you end up

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Speaker 1: with not satisfying any of this.

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Speaker 2: Great, I am Hammed, This was great, just awesome to

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Speaker 2: catch up with the good friend of this program, good

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Speaker 2: friend of mine. Mohammed al Aaron of Bloomberg Opinion