Transcription
Hello everyone, and welcome to At Barons. I'm Andy Sherwer, and welcome to our guest, Muhammad El Arian, economist. Muhammad, great to see you.
>> Thanks for having me.
>> Let's start off by talking about the dollar and the issue about whether it really still is the world's reserve currency or will continue to be. You've seen the dollar weaken, gold, all the craziness going on there. Crypto seems to be back. What's your take?
>> So, one of the big surprises this year is that the dollar is having the weakest year for a very long time, even though every single other US asset is attracting a lot of attention. And part of that explanation lies in what you see foreign ETFs that invest in the US do. They're very happy to take US corporate exposure, but they're hedging the dollar. And what you're seeing outside the US is an understanding that they have started overweight the dollar, that the dollar is not the reserve currency that they thought it was. There is no other reserve currency to replace it. So, it's not as if they're going from the dollar to the euro or to the Chinese currency. At the margin, they're going into gold, but they're hedging any additional dollar exposure.
>> And is this some sort of indictment of US government policy on the one hand, and also approval of the private sector in the United States, and you're talking about that bifurcation then?
>> Yeah. My my daughter, when we talked about it, said, "Oh, so they go long US corporates and they short the mess." And yes, they are shorting things that is taking them time to understand. That includes the complete change in US trade policy, the weaponization of tariffs in a way we haven't seen for a very long time. That includes concern about high debts and deficits, and that includes, as well, the change in the US approach on industrial policy. They understand that the US is rewiring its domestic economy. They hope that this is a Reagan moment, that the US will emerge from this more efficient, stronger, but they're staying on the sideline. They don't want to increase the exposure to the dollar until they see how this works out.
>> And are you bearish on the dollar or bullish, or is it hard to say at this point?
>> I think the dollar, let me give you some numbers. Um, during the April selloff, the dollar index sold off to about 97. Today, we're at 98. Everything else is back at record levels, not the dollar. I suspect we will we will stay at 97-99. And if we are to move in either direction, it's more likely to be towards depreciation than appreciation.
>> AI obviously is the talk of the moment in the stock market, but also employment. Are you concerned about AI in regard to both of those facets of the economy?
>> So, I cannot tell you how optimistic I am about AI. I think that this is a general purpose technology that promises us something that we haven't seen for quite a long time, which is a massive productivity upgrade. And I'm super excited about this. As a parent, we need higher productivity to deal with our debt, to deal with our deficits, to deal with our growth, to deal with inequality. So, so the promise is enormous, but it requires certain things. And one of the things that requires relating to your question is that companies don't just fall in love with the cost minimization of AI that AI produces, so-called labor displacement, but also realize that there's a labor enhancement element to it. And that is a corporate responsibility that some companies, Walmart, Accenture, understand, but most don't as yet. So yes, is there a risk that AI will simply be seen as a way to minimize cost and result in in massive displacement? Yes, there is. And if that happens, you will get a backlash, and that backlash can frustrate on the upside. The other thing that the Fed will have to deal with, and it's already happening, is what do you do when GDP growth remains strong but the labor market is weak? How do you respond to that? Normally, these two things are very highly correlated, but in the last few months, we've started to see a gap between the two, growth in the 3% area, and people really worried about a weakening labor market.
>> And then there's the stock market. What about that? Is the stock market in a bubble? I've heard you talking about a rational bubble, which is something that's real, but the prices are too high. Is that right?
>> So, yeah. So AI [clears throat] um is an irrational bubble. And what do I mean by rational bubble? That if you analyze it in terms of incentives, whether you are working on AI or whether you're investing in AI, it makes sense to overinvest in it, to overspend in it, because the payoff is enormous. So, you've got many people overspending in AI because of the payoff. Now, there will be a small number of winners. There will not be as many winners as there are people now seeking the big prize, and the big prize is AGI, artificial general intelligence. So, there will be tears. Then you've got a second, but it's rational. If you're an investor in AI or if you're an AI company, you should aim for the big prize. There's a second group that's irrational, and I've seen it all around. These are companies that simply put an AI label on what they do and suddenly attract investments. That's going to end up in tears. What that has done is it has pulled up other elements of the stock market, and there's two dynamics here. One is index buying. The bigger that the technology names get in indices, the more the indices react, the more they attract money into it. And the second one has to do with the typical risk compression.
>> When things start going up, you look for those that haven't gone up yet, foreign foreign stocks, Russell, the Russell index. um in credit, you go all the way out the high yield curve and you try to seek risk compression. So, yes, AI has pulled everybody up with them, and some names don't deserve the valuations they have right now. Others do.
>> Getting back to this paradox of strong GDP but perhaps weakening employment. Would you say then, Muhammad, that the economy is strengthening or weakening?
>> I think the economy is surprisingly resilient, Andrew. We've thrown everything at it. Absolutely everything at it, including a shutdown. Um, that's that's gone on for over a month. And yet this economy doesn't skip a beat. If I had, if you had told me at the beginning of the year, these are all the shocks we're going to get, internal and external, and we would deliver 3.8% growth in the second quarter, I'd say, well, maybe one quarter. I suspect we did 3% in the third quarter as well. So, it's an incredibly resilient economy, and it speaks to the entrepreneurship, the dynamism of the private sector.
>> Mhm. Are are you concerned though about inflation?
>> So, if the target of 2% is a serious target, and you and I have discussed this before, then we're in our fifth year of exceeding the target. The Fed itself says that for at least another two years, we're going to exceed the target. That's seven years.
>> Yes, I would be really concerned, but I don't believe 2% is the right target for an economy that's going through such fundamental structural change. I think that the equilibrium inflation rate for this economy is two and a half to 3%. And we're seeing the inflation rate come around there, and we're seeing inflationary expectations stable. So, I don't worry about inflation because I, in my mind, think that the right inflation level for this economy going through structural change is not the 2%, it's higher than 2%.
>> So you're going to get a t-shirt change the dang rate.
>> Um, I'm not going to do that because that would be a waste of money because this Fed will not change it. And the reason why is if you've missed it for seven years, for five years, and you predict another two, if you change it, you risk um admitting a massive mistake. And this Fed will not admit a massive mistake. They had enough difficulty admitting the the transitory inflation mistake of 2021. But you have at least a couple of Fed officials that are leaning that way. Um, which is to have an implicit target that's higher than what they tell the public. So, the way it's going to play out is they're going to keep on telling us 2% is in our future somewhere, and they keep on pushing, pushing it back. But right now, we're in a situation where they're cutting rates and wondering what you think about that.
>> Um, so I think they are cutting rates because they're worried about the labor side.
>> They're cutting rates because they realize they over worried about inflation, that the pass-through from tariffs to inflation is less than they expected. Um, what we haven't, we haven't heard from them two things that really worry me. One, is this a Greenspan moment or not? Do they believe that we are on the verge of a productivity improvement that will allow this economy to run faster in a non-inflationary way? We should expect our central bank to have a strategic view on this. They haven't talked about this. The second element I haven't talked about is what we've just talked about: in a world where employment decouples from growth, what do they do?
>> So, um, I think what we've needed for a long time, and we need even more now, is a strategic fit, one that acknowledges that simply being data-dependent is necessary but not sufficient. It has to be complemented by a view of the future that gets tested. Um, we haven't had that, unfortunately.
>> It does this speak to the fact that you think that their definition of um, the job market is too narrow?
>> Um, I, it's not their definition of the job market because that's that's provided by Congress.
>> Okay. Um, what's too narrow is that they haven't spent enough time looking at both the demand and supply aspects of the labor market.
>> Um, the assumption is, if we have a problem with the labor market, it's all about demand, and therefore monetary policy has a role to play. What if it's about supply? What if it's about structural changes in the economy that they haven't spent enough time doing?
>> Right. And and they face a trilemma of of problems, right? I mean, can you speak to that a little bit? I mean, there's
>> So, so
>> mandate plus, right?
>> Yeah. So, they, they, they have first, they have this balance between inflation and employment,
>> right?
>> Then secondly, they have this balance within that, they have the balance between GDP growth and and employment. And then within that, they have a third element. What about financial stability?
>> Right?
>> So, you know, if you want a nightmare scenario, I'm not saying this is my scenario, okay? But this is the, the worst scenario for the Fed is the employment side says cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, cut, 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>> You have said Muhammad that Fed chair J Pal should step down to maintain the independence of the Fed. Do you still feel that way?
>> I do. But now we've passed. Um, and the reason why I said it, and it was not an easy thing to say because I, I respect the Fed enormously. I respect Chair Powell enormously. But for me, central bank independence is absolutely critical to the well-being of an economy. I think of it as the well-being of my daughters because central bank independence um allows you to conduct policy without being swung around by the political cycle. So I value that enormously. What was clear to me from day one is that the relationship between President Trump and Chair Powell had soured in a way that was not recoverable, and that the longer this continues, the more the administration would look at the Fed looking for cause.
>> It would [clears throat] look for cause. And the more you look at an institution and start poking here and poking there and poking there, you will find things. And the Fed has not reformed the way it has reformed. So I was worried about exactly what happened. The attack on the buildings, the attacks on Lisa Cook. Having said that, one positive thing has come out is that the Fed itself now, the Fed officials themselves now realize that they need to self-reform. If not, it will be done for them by people who don't understand monetary policy like they do.
>> Right. I guess the counter to that might be though, Muhammad, that wouldn't President Trump just put in a yes man or a yes woman, someone who caters to the president's wishes?
>> So that could happen anyway because Chair Powell's term was going to end in May. It's not as if Chair Powell was here for two more, three more years. But again, what has surprised a lot of people is that the five finalists are very credible central bankers. You know, I don't think you have among the five people who don't have expertise, people who don't have experience. Now, how they will behave is something we'll all have to find out, but they are incredibly credible candidates.
>> You're back in the United States now after some time in the UK. What about you? Would you like to be the Fed chair?
>> It's not a, I'm not among the five, but I have views on the five. Um, on there, and I think whatever comes out, the test is going to be how they proceed. But I'm pretty confident that the next chair for of the Fed is going to be a very responsible chair.
>> Do you have a favorite, or do you have someone who you think is maybe the best candidate?
>> So, of the ones I know well, um, I have a lot of regard for Kevin Walsh. I have a lot of regard for Wick Reader. I think both of them would make excellent Fed chairs. Um, Chris Waller has certainly impressed, and he has been willing to think out of the box, which is important to have someone who's willing to think out of the box um in a world in which we're seeing a lot of changes. You know, it's a very bad situation to be in to have a Fed that's highly data-dependent, because that's a Fed that looks at the rearview mirror.
>> That's interesting, because oftentimes people say you need to be data-dependent, full stop, but actually the world doesn't quite work that way, does it?
>> I mean, think of how absurd that statement is.
>> A lot of people say it though.
>> Every monetary policy acts with long and variable lags. That's what we learn. Data captures the past. So you're telling me that I'm setting policy for some outcome in the future based on data of the past. Unless I complement that with some strategic view of where we're going, I am going to be continuously late. And I think that we've seen the Fed continuously late. They were so late in responding to the inflation surge of 2021. It is a miracle that we didn't fall into recession. I remember Chair Powell in August of 2022 warning about pain. I remember Bloomberg going with a headline, 100% probability of recession, 100% in 2023, and that didn't happen.
>> Well, they call that driving with while looking in the rearview mirror.
>> Correct.
>> Right.
>> On a curvier road.
>> I want to ask you a little bit about trade policy. Um, is um, it the case that President Trump's trade policy is helping America or hurting it?
>> So, so far, it is helping America in a fashion that has surprised me and has surprised many economists. And there's two reasons for that. One is we've had virtually no retaliation. The only notable retaliation has been from China, but Europe, the UK, most Asian economies have basically said, I'll give you US what you want. That I didn't expect. I thought we would have some retaliation. We would have elements of a trade war. We haven't had elements of a trade war.
>> The second thing that hasn't happened, and the jury is still out, is that most companies have not passed on the price effect, and that hasn't, in any way that that has been passed on, hasn't destabilized inflation expectations. But what has happened, the US now trades on a more level playing field than before. The US now collects around 250 to 300 million dollars a year in tariff revenues. There's more incentive to reshore than we've had before. So, so far, yes, the US economy, ironically, is better off. What I don't know as yet is how big the resource misallocation will be of these these levels of tariffs. I have been surprised by what hasn't happened.
>> What are the most important elements for investors to consider right now, given everything going on?
>> That this is a world in which the macro is so fluid, because we are in a world of geo-economics.
>> Of what economics?
>> Geo-economics. So, geo-economics is one of the fastest growing um aspects of economics. It is also being reflected in in corporate America, where chief geopolitical officers has become a job. And what it basically tells you is, for a very long time, economics was driving the bus. We had an agreement on domestic policies, the so-called Washington consensus, and we had agreement on international policy, globalization. And national security and domestic politics and geopolitics were all sitting in the back seat. Now, economics is lucky to be in the back seat. And it's the decisions on economic policy are being made according to national security, geopolitics, and domestic politics. And what econ, what the markets and investors and businesses have to realize is that economic outcomes will have less to do with economic logic and commercial logic than they'll do with these other things. For example, if, if the administration decides to take ownership in a company, it completely changes that company. It completely changes
>> and its competitors and
>> totally the landscape completely changes. Suddenly, this company has a lot more partners, and its competitors are are worse off. Similarly, if, if suddenly there's a tariff imposed on an ally like the Canada tariffs recently, and you've French law because that's what you thought was safe, you you're now looking at different worlds. So politics and and geopolitics and national security have to enter into decisions in a way that hasn't been the case for a very long time.
>> And private markets for retail investors. Quick follow-up. What, what are your thoughts there?
>> A little bit nervous. Um, these, these are very different markets. There's much less transparency. Um, there's way too much money being thrown at it. When Jamie Diamond came up with the word cockroaches, um, I agreed with him in the sense that we're going to see quite a few cases of bad lending, bad due diligence, fraud. It's not, they're not termites. And the difference is, termites eat away at your foundation. They eat away at the asset class as a whole. They eat away at financial stability. Okay, we're not in a world of termites, but I do think Jamie Diamond is right that we are in a world of cockroaches, and people have to simply realize that we will see quite a few credit accidents because of the amount of money that has been thrown at this asset class.
>> There's a lot of bugs around here.
>> There's a lot.
>> Right. Um, and I want to just ask you about China. Are we doing the right thing in engaging with them the way that we are?
>> Um, so define the way that we are, because one week we're escalating, one week we're deescalating. That's the way we are. Um, I think we should continue on this roller coaster as long as we're doing two things. One is that we are reducing our vulnerability to China on the supply chains, on markets, on everything else. And two is we're making sure that we're building alliances around China. Um, because I do not believe that any period of deescalation is durable. I think it's tactical deescalation with a view to achieving a short-term objective is not strategic deescalation.
>> And final question, Muhammad, and I think this is an important one as a data-driven and strategic economist. How do you square that with the fact that you root for the New York Jets, which is arguably the worst football team? In fact, it's not arguable. They are the worst football team in the NFL over the past decade. How do you square those two things?
>> I thought we were friends.
>> I'm just asking a question, sir.
>> The same way I square it with my support of the Mets. The same way I square it for those who know English football, with my support of Queens Park Rangers. Um, a terrible team. Um, it's loyalty. So, I fell in love um with the Mets and the Jets in 1969. It was a pretty special year. And my, what has happened to me since, um, was captured by a video that went viral um after the Jets lost the seventh game, of a 12-year-old kid saying, "I hate this team, but I was born into it." Clearly, he was born into a Jets family. And you could see the pain that he had suffered from watching another awful performance. It's loyalty, Andy. And that's that's why I remain a Jets fan. And I hope, the more interesting question is, why do I hope? Why haven't I learned that they are going to crush me virtually every single week?
>> Why is that?
>> I don't know. I need a psychiatrist for that.
>> All right, we'll explore that maybe next time you visit with us. Muhammad Arian, thank you so much for your time.
>> Thanks for having me.
>> This is at Barons. I'm Andy Sir. We'll catch you next time.