Surveillance: Structural Change With El-Erian

all going to make off of a natural disaster. Let's start right there with Mohammed al Arian, quaits college president and Bloomberg opinion columnist in place to say, joins us right now, Mohammed two way risk? Do you think we're appreciating the two way risk a little bit more we

are in the marketplace? I think the FED as yet hasn't It is absolutely convinced that there's just one outcome, so it's baseline is having a very high probability of materializing, whereas the marketplace is starting to think more in terms of a distribution of outcome that's tilted towards a horder economy than what the FED expects. Do you think Mohammad has an era of judgment, or just the factor of

the seat you're sitting in. If your market participant, you have to recalibrate day to day the balance of risk. If your policymaker, you just like is a focused on the destination. Now that's new, John. Remember we used to be forecast based, which would allow you to cause correct as you saw information come in. Now the FED on this new monetary framework has become outcome based. And when you are outcome based, you don't cause correct as you

go along. You wait for the outcome. And what the market is realizing now is that there's a downside to being outcome based when there are structural changes going on. The big message of the huge data miss, be it on Friday or yesterday, is that when the are structural changes going on in an economy, it becomes very difficult

for economists to foecus with any degree of accuracy. Mohammad, I want to go to the mathematical hierarchy, the architecture that we have right now, and we do this in honor of your Queen's College and the mathematical bridge that I know you've walked across the mathematical bridge right now to two thousand twenty three. It's not in any of the textbooks, is it. So then what do we use? So we have to have an open mindset and a

lot of humility. We have to recognize that we have to think in terms of a range of scenarios and not get become hostage to a single baseline. And we have to be able to make to cause correct. You know, this is the lesson of the past when you have take structural changes. And what's so important, your Dr Larian is the idea that we have a set of outcomes. The gloom crew, which you're not part of, pounces on

this every day with the great negativity. Do you have a confidence that corporate officers can adapt and adjust to some form of set of positive outcomes. Yeah, the ones I speak to are very open to the possibility that there are more outcomes out there than they've faced in

the past. So what you hear over and over again is this notion of resilience, this notion of optionality, being able to change your mind, this notion of agility, being able to move quickly when you have clarity, But that they are much more data dependent than policymakers have become policymakers now are focused on a destination with a degree of conviction Tom that isn't match with foundation and evidence,

and that's really unusual in our recent economic history. And John, you saw this yesterday with City Group where they talked about the resilience of the United Kingdom economy and ma homm chief said, they've been had hostage policymakers. This Federal Reserve is how hostage by its own framework. How do you think that being howed hostage right now? So the framework was the product of a certain world, and that was the world pre pandemic. It was a world of

deficient aggregate demand that had persisted for a while. That was the world the FED was formulating its framework force. And I have a lot of sympathy that that framework made sense for that world. In a world like that where the supply side is relatively stable structurally, where you have a persistent deficiency of aggregate demand, you go to average inflation targeting and you keep on signaling to the market over and over again that your outcome based. That

is not the world we live in today. It is very hard for anybody to argue that we have a deficiency of aggregate demand. We don't neither on the public sector, on the private sector, and on the on the supply side. There are fundamental structural changes going on in the world like that. You need optionality, You need to be able to change your mind. You cannot be pinned in a corner that says I will make up my mind after I see many months of data, because by that time,

if you're wrong, playing catch shop is really problematic. And what you're seeing is the market is actually being much more measured in how it's looking at risk, while the FED is pinned in a corner holding onto its conviction even though there isn't even though the evidence increasingly says be open on it. Through a little bit more humility, I'm Gonula asked this question advice check Clarida. How do you know if you're wrong? What do you think would

sell them if they're wrong? So he answered that question to you. He said, by the end of the year or the beginning of next year, we will know. And that's why they are not quote thinking about thinking. So think how many stages you have you have to go from thinking about thinking to thinking. Then you've got to start explaining how are you gonna taper? Then you're gonna start tapering. And remember they had no good answer to Mike mckie's question about what if you buy a hundred

and ten million billion a month? What if you buy a hundred billion a month? Right? So, so they are very far away because they are in this outcome based a quote. So, and that's what the marketplace realizes is by the time the Fed figures out did they make the right call on transitory inflation? If they are wrong, the adjustment process itself could end up sending the economy. Let me just jump in because I think this is really important. When Mike McKie asked this question, does a

hundred and twenty billion get it done? A hundred and ten a hundred billion? The pushback from the likes of Neil cash Gari, it's a it's the same. This is the labor market, it's week and we need to support it. What I think they're failing to communicate right now is how billions upon billions of dollars of MBS purchases actually help them achieve that goal. Do you think the asset

purchase program is helping them achieve that goal? Especially when we spent the last several weeks talking about a supply side problem. It's not helping them because they can't deal with the supply side of the economy. They can't lift supply bottlenecks by flooding us with liquidity. They cannot improve the functioning of the labor market. They cannot open schools with liquidity. They cannot improve childcare with liquidity. They cannot have a better matching of skills to demand with liquidity.

And that's the problem. Um, we should spend more time looking at what the Bank of Canada did with the Bank of England did and say why is it that they feel confident they can taper a little bit, whereas the fact is really afraid. Oh, Mohammed, this is like a three hour conversation or control rooms deciding if we want to go there right now, have another biscuit baked in fourteen Mohammed, I want this is really really important, folks,

what we're talking about here. And I'm gonna go back Dr Larry into your essay of five years ago on the delusion of liquidity. Let us speak now, and I'm not putting this in the year words the Delusian ab outcome based we're trying to rationalize an ex post structure, as you say, and I'll really lean on Canada here. They've had the courage to get away from an ex post structure. What is the mechanism the United States does or uses the Federal Reserve to drag themselves away from

a deeply expost reality. I hope a robust internal discussion can be deducted in a in a safe zone that looks at the evidence and doesn't get dogmatic in terms of if we change our framework at this state, we lose credibility. That's going to be absolutely critical. They have to be open minded given the structural changes going on in the economy. Tak, do you not think that the stakes are higher for the Federal Reserve? They are just because of dollar, just because of dollar. Talking about typering

at the Federal Reserve? Can you imagine the impact we would have had at your thoughts out on that. This is so important John, as you bring up I mean, Mohammed, what is the outcome of a Canada like taper by your own power? Well, that's what scares them because they remember not just May June, but they also remember the massive U turn they had to do in January of nine when the marketplace didn't like the message. They're back to the Bank of Japan fifteen or eighteen years ago.

That's how tid they are, and and and tom. The question that the marketplace asks is what if we're wrong? What's the recoverability of the mistake? How we coverable is a mistake? That is what people in the marketplace ask. So, so if you think in that world, whereas there's lots of uncertainty, I may end up making a mistake. So instead of insisting that I'm gonna be white, let me ask the question, if I make a mistake, what mistake

would I abou to make? I think you would end up with a different outcome than where the FED is today. So I see me right. The build unly paced early this week Mohammed on where the FED funds right could go. I've really struggled with it. Many others did too, This idea that we could tolerate a fat funds right with a full hand, Dole, what did you make that pace?

So he's talking purely in terms of policy, and the economy can tolerate higher rates, And I'm not advocating higher rates, by the way, I'm advocating a taper of the que program. I just want to be straight. Um. The problem drawn as you saw it yesterday. You know, we've focused on the fact that equity is sold off, but you know what bonds sold off, bitcoins sold off, goal sold off.

And what you see is the reverse of what we've seen earlier, which is when there's some doubt about the liquidity paradigm which has supported all asset classes, they so called everything rally, when some doubts surface, and very small doubts have surfaced so far, nothing major market sell off across the board. There is nowhere to hide, and that's what the FED is afraid of. That you have a marketplace where there is nowhere to hide, and when there's

nowhere to hide, people start doing um city things. So that's what the FET is afraid of. It doesn't want unsettling financial volatility to contaminate the economy. The problem is, if it ends up being wrong, you will have at the same time policy slamming the brakes on and the marketplace tightening as well, and that's how you end up in a recession. That's why it's better to be somewhat preemptive then to wait till the last thing. I don't think there will be, but certainly I would argue they

need to be mahamma just to found a question. Then how would you be positioned ahead of what you think could be a messy summer? It is really hard because you're being You're being challenged both on return generation and risk mitigation at the same time. So sophisticated investors will look at tail hedges and that's why the Vicks moved away. It moved yesterday, um, But for the average investor it's

hard now. The average investor, in fact, all of us are hoping that the fet is right, because if the feed is right on its huge transitory inflation call, then we can have a smooth transition both economic policy as well as a smooth market adjustment. But it's a huge gamble at this point. Mom and I want to go to Cambridge Economics and unfortunately have very little time, not from Thomas melt there so the lawyer Angus Deaton. But I want to go back to the idea of Nikki Keldor,

who believes in a public solution. Are we going to get a public solution here or have we overreached so so the public solution comes to make the FED more comfortable about its ability to taper by being better on potential supervision and regulation. One of the things that is not spoken about is that risk has migrated and moved from the banks to the non banks, but the supervisor

and regulatory system is seriously lagging this. And I suspect if the FED had more confidence in the supervision and regulation of non banks, it would feel more comfortable on the monetary policy side. Mohammed, this was way too serious. We didn't even get to talk about your meds, succeeds, success, want to be I don't want him, I don't I don't want Tom to jinx them. So please, let's not talk about my mets. We are all quietly watching this. We've seen this movie before. We get hope for we

get grabbed in and then we get dumped. Right. Is it seven games now, John? And we're not commenting on either the seven game win next week or first place A Mohammed, It's gonna catch up. It's great to catch up. It's really good to see a mohammed erin their Queens College president and Bloomberg opinion columnists always generous. Dennis Gartman joins us, now retired editor of The Gartman Letter, with the University of Akron and domind fund as well done. It's I got eight ways to go, But I've got

to start with the market reaction. Here. You and I know this is not a correction, it's not a bear market. It's a little bit of what the French call agitasia. What do you do when you get this cacophany of events. I think you have to be very careful. I've really not like stocks for the last two months especially, I have not liked high tech. I've I like the things I've made it some somewhat famous. I like the things that if you drop them on your foot will hurt.

I'd like copper steel, tin, aluminum, automobiles, tires, that sort of thing, railroads, those sorts of very simple things. But I've been very ambivalent. Actually, I've been very barish about the stock market generally. And I think that we're going to have a bounce today. You can't take the dow down what points in the course of three days and not have some return, some bounce from the lows. But what bothers me, or what we should watch for, is

how the volume comes in. The volume came in yesterday on the downside, very hard. If we have a bounce today and the volume is less, the volume is limited, and I think it shall be, that'll be a deletarious circumstance, So be very I still think you have to be very careful. I think that the Dow can go down another several thousand points from you that's so much called, and still be within the confines of the long term multi year secular bowl market. But you could fall off

quite some distance in the next month or two. Us You and I have argued over this beverage of our choice, and that is the study of volume. I don't believe in it. You do. Is the volume study today the same it was what was when you and I were holding the standard and pours blodder in her hand, trying to figure out what to buy next. I think it does, Honestly. I still believe that good markets go up on strong volume and fall on weak volume, and weak markets go

up on lesser volume and down on strong volume. And that's what we've seen in the course of the past several months, is that the rallies have been on very light volume, the declines have been on very steep volume. And I think that that was the precursor to this weakness. We'll see if if my thesis holds, will see if your thesis holds. But I think right now watching the volume is a very important circumstance to pay attention to.

And I think it's barish at this point. And Dennis, some people trying to work out how they protect themselves because quite clearly, if the risk is inflation that you don't protect yourself with treasury bonds because you know too high yesterday too, what do you do? Do you raise some cash, keep some dry Piet when you pull back

a deep risk, what is the actually look like? Dennis Well, as the chairman of the University of Akron's endowment, I actually pushed hard and we we moved in February to reduce our exposure to the equities market by three percent, which in in endowment land, that's a material change. When you reduce anything by one or two or three percent, you've made a material change. And we actually took a position in gold to hedge out inflation risk. That's proved to be wise. I've been very lucky thus far from

given the fact that we've made that change. In very late February, the rustle's down about four or five percent from that level and golds up five or six percent. Call it good luck, call it fortune, call it maybe a wise trade. But I think reducing exposure to the equities market, raising a little cash, buying a little gold, buying tips probably is not a bad idea, and buying monthly dividend paying e t f s that that are well covered, and I think that's that's the way to go.

Raising cash is not a bad thing at this point. Let's talk about gold, because that's a really really interesting point. When you moved, as you describe it, that has been a good play. Over the last couple of weeks. We've had to move off the month slows. It hasn't worked all year, though, even though inflation is dominated the conversation. Yesterday another example, it was down about one percent, even

though the key theme was inflation. What's been going on do you think, Dennis, just in terms of relationship between inflation and gold, I think millennials at the balance like to like to speculate, or like to take positions with their with their stimulus checks uh in in bitcoin and in ethereum and the rest of them. And I think that that's been a drain at the margin at the all price of all the commodities, all price of all stocks, all price of all bonds is actually made at the margin.

When the last two percent of the buyers become sellers. When the last two percent of the sellers become buyers, that's when price changes. And I think we've seen some movement on the part of an investors into bitcoin, into the cryptocurrencies, and away from gold. However, I'll think that the several thousand years history of gold will will will trump the five year or six years, seven year history of the cryptocurrencies. But I think that's cryptoes that have

been the pressure point very quickly. Or Dennis, it's ninety six dollars at four dollars a gale and for you to fill up the Bentley, you know, ninety liters. It's a twenty four galon tank. Tell you're living in the heart of this no gasolene thing. Is it all over again? It feels like it it has that that looked to it. There are the lines at some of the service stations around here in Southeast Virginia, especially on Tuesday, we're very long,

very very surprising. It's you can find gasoline in the morning when the tanker trucks come in, but by noon they're they're running out of running out of gas. And it does have that feel of the nineteen seventies when the odds and even license plate numbers were allowed to go and buy gasoline. It's a this will resolve itself. Obviously, the colonial pipeline said that they're gonna be back online or camera back online last night. It's the last mile.

It's difficult. By the weekend we'll be it should be resolved. I'm so sorry as the typo there, Dennis, I gotta get this corrected. Dennis Carbon thinks so much wonderful to see you. This is a really really important interview. And let me put it in context. James Sweeney literally staked his career three or four years ago by saying, Europe, get over it. There's not going to be deflation, there's not going to be disinflation. You're wrong, wrong, wrong. The

credit sweet chief Economists joins us. Right now is the tables have been turned towards worry of rising inflation. James Sweeney, should we fear a redux of the nineteen sixties? M hm um no. I think we should be open minded to that risk. But I think what we're really talking about here on the upside is you know, core inflation running for a year something like that. Um that that's not our forecast. It's a little bit higher than our forecast. But I think the evidence is mounting that that kind

of outcome could happen. If that happens, that's not the end of the world. That's kind of maybe it's nineteen sixty six to nineteen sixty seven, sixty eight before inflation really got out of hand at the end of the sixties and into the eighteen seventies. But the FED is going to handle that in a different way than they than they did in eighteen sixties. And um, you know, it's it's it's not the end of the world, but it is a big change for financial markets and thinking

about what happens to monetary policy. Uh, if we get that outcome is really important for for us at christ. How do you expected inflation expectation consumer inflation expectations to shape up, James, given the experience that they're having right now in this country. You know, I don't really know what consumer inflation expectations are. Um, you know, these are

these are strange surveys. Most people I know don't have a clear sense of of what they're answering when they When they answer that question, usually those surveys people are saying, what's happened to gasoline prices? Um, But you know, the question is are the surveys stable? Like in my view that when inflation expectations increase and it leads to inflation, what that really means is not that a bunch of

surveys jumps. It means that people have started buying more stuff because they think the stuff is going to be more expensive in the future. So to me, the expectation has to be embedded in the demand behavior to actually get a problematic inflation spiral. And you know the risk of that is rising. But um, but we're not there right now. We're in a we're in a data fog period where we're reopening and there's vaccinations and there's base effects.

You know that there's and there's supply chain issues. So you know the risk of it is rising, but we should be a little careful about jump into extreme conclusions. That's the point I'm trying to get to hit James, because we can have this real need, deep intelligent conversation. You can run me through all the different paths in this inflation basket. They're driving inflation higher. It's the experience of everyday people with prices that will really set the

tone here. And I'm trying to understand how you will gauge when you will know that those expectations for higher prices become embedded in prices and become higher prices and this becomes a virtuous cycle. Well, there's two there's two things. I mean, one is I want to see the demand acceleration. So right now, it's gonna be really hard for retail

sales to continue to accelerate. I mean, maybe tomorrow will be up, but in level terms, are probably near a longer term peak in retail sales because we've just had so much income. But on the services side, which is two thirds of inflation, it's a little different because we all want to rush out of our houses and consume in person services, recreational services. Those are labor intensive businesses.

They're gonna have to hire a lot of people. What's gonna happen to So so we're gonna be looking at demand, but we're also going to be looking at how much wage pressure are we seeing? And I think it's gonna take a little while before we have good information on wages. I mean, our average hourly earnings are not good information on but the anecdotes are definitely mounting that that this that this process is at least in its early stage. You guys are writing my script. That's right where I

wanted to go. James Sweeney, what's joyous about your notes? As you've got microeconomics in them and you really emphasize this time around that's supply demand in inventories really matter. But with that, how do you digest the McDonald's headline we saw an hour ago, John, help me here, all of a sudden we got one, two, three, four, five companies going up to ten thousand X employees clearly near fifteen dollars. How does that filter into supply and demand? Well,

I mean that's that's your margin issue. Actually, that's true, that's your wage issue. This is a labor market supply and demand issue. When you're when you're talking about that, so you know the question is you know, first, Okay, so McDonald's just facing a little bit of trouble hiring workers. They need to raise wages. That's fine, we understand. So that eats into their margins Are they going to raise prices on their food as a result. They might not,

They might just eat the margin increase. We we don't know, but I think it's it's you know, this is again just another symptom. I mean, the commodity pricing creasy even is a symptom. There are symptoms all over the place. But we need, you know, the nerds in the data need to see sufficient breadth across these, both inflation and price and disease to you know, to to to be confident that we're going to actually have a real issue that is unlike anything in the past, in the past

thirty years. For now, you know, you're looking at inflation overshooting right now from base effects, potentially coming a little bit lower after that. But is it gonna settle back down and kind of tune and a half percent or lower, or is it going to be kind of three three percent higher? And again from a market perspective, that's absolutely critical from the Fed's perspective. In either way, they're gonna say it's temporary, but that's not you know, who cares temporary.

What we care about is when are they gonna hike? Is this going to change the tapering schedule? Housing market going to react. Is this the regime shift that we can't even get inflation up there? Because not long ago, as you know, a lot of people thought you couldn't. James James tweety very quickly here the Brethren and Zurich email in and say, would you please ask the question about the German tenure James Sweeney, what is the symbolism

when Germany tenuere goes positive? His Swiss twenty year diad ages ago? Well, I mean, you know, European yields are are are rising, and there's a little bit of an expectation now that that European growth a few months out could actually start accelerating relative to the US because we've had our massive stimulus push um in the spring, and it turns out they're actually vaccinating at a reasonable pace

now across across Europe, so rates arising. But you know, going back to the inflation part, it's hard to see much of that inflation in Europe. Historically, when you get a proper inflation wave going way back, they tend to be pretty correlated across major economies. But but right now, you know, the inflation outlook in Europe is going to

have a little base effect just like the US. But the big pictures is you're still looking at sluggish inflation well below two percent for the foreseeable future in the Eurozone. James Small, as always, we spent nothing less. Gen Sweeny, Chief Economist. Right now, Julie Norman is with us with the University College London. She is a political science professor

and she is so competent. She has a set of wheelhouses and one of them is the levant and the challenges of Israel with all the various Arab nations of the region. Dr Norman, good morning, we have nine, we have nineteen sixty seven. Can you say that two thousand twenty one alludes to those periods of conflict? Well, good morning, Tom. Obviously, what we're seeing now is the highest level of violence and escalation that we've seen in a number of years.

With that said, it mirrors very much the Gods of Wars that we saw in pretty recent memory two thousand two nine, when we again saw this kind of perfect storm of events coming together that quickly escalated into rockets coming into Israel and air strikes going back to Gaza, and unfortunately, with that, of course, the civilian casualty rates going up very quickly, already over sixty today. I want to get up the map, but I don't want to look at the racket trajectory. We can study that, We'll

have experts tell us about that. But Professor Norman, I'm fascinated by the distance of Gaza to the Old City and to the Mosque under question, one of the great sites of Islam. What is the distance for the people of Gaza to what they venerate in the Old City of Jerusalem mo time. I think it's so important to underscore here is that Jerusalem and the Oxomasque in particular are very important to Palestinians and definitely the Palestinian Muslims,

no matter where they're located in their region. And indeed Hamasked was very savvy over these last few weeks in linking much of their politics and campaigns to what was going on in Jerusalem, and linking the Palestinian cause as always what was happening in Jerusalem. In terms of physical distance, it's not too far either, but due to the way the restrictions are set up right now in Israel Palestine, people from God that have not been able to go

to Jerusalem Forum for years now. But still very much resonance in terms of what it means the people shocking. It's shocking, Dr Norman, the fragility of democracy in Israel. I've been told by some reports and the Times in the Washington Post of the election transfer being within minutes literally before this war came out. How do you link the Net and Yahoo transfer power if you will, to this conflict. Are they truly linked or are they separate

and unimaginably close issues. Well, everything is aligning in a certain way right now. I think the tinder box that has erupted, so to speak, in these last few weeks, was due to a number of causes. But we have seen is the leadership crisis on both sides feeding into it, and we see politicians on both sides definitely exploiting the

moment for Net and Yahoo. Of course, right now, coming out of this fourth attempt to try and form a government unable to do so, he is now trying to frame his response to this as showing why he should stay in power. His opponents and critics are of course saying this is the reason why it's time for him to step aside. And on the Palestinian side, we again see a lot of jockeying between the Palestinian authority and ham ask for who can be the voice for Palestinians

and for resistance. Julie brief us on the new Hammas they have evolved over the years. Americans have a memory of a most difficult Beirut. There's fought and the rest. Give us a tone of the new Hamas even as Israel announces they have assassinated selected leaders. Yes, so Hamas has held control of the Goddess Stripped for the last fifteen years. That was after they were successful in the

two thousands fifth legislative elections in Palestine. That was a real shift for him As in a kind of quasi normalization, for being solely a resistance militant group to being a political group as well. Now they kind of operate with both of those wings, the political group UM governing in a way in Gaza, whereas their militant wing carrying out

these rocket attacks primarily. UM still in some ways have popular support in terms of being a voice of resistance in terms of their social services, but a lot of disillusionment in Palestine also with him As because of their lack of ability to govern properly. Julie Norman. Thank you so much there on the conflict that we see in Gaza and many people saying it edges towards or She is with the University of College of London. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the surveyor this podcast on Apple podcast, SoundCloud, Bloomberg dot com and of course on the terminal. I'm Tom keene In. This is Bloomberg m