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