Call Me Back - with Dan Senor - The New Inflation - with Mohamed El-Erian

Episode Date: July 30, 2021

https://www.ft.com/content/77ed35a0-cf91-4c7e-b779-a57ecc6b1045

Those of us who have been worried about inflation have said, listen to what the companies are saying. And what we are finding out, earning season after earning season, is one company after the other says, my costs are going up. I can't find labor. My labor costs are going up. My raw material costs are going up. My transportation costs are going up. And I'm going to pass it on into higher prices. And you know what? It's sticking.

So what the Fed has not done yet is to listen to what the U.S. companies are saying. Instead, it is relying on models that used to be quite accurate, but have not captured the change in the structure of the economy. Welcome to Post-Corona, where we try to understand COVID-19's lasting impact on the economy, culture, and geopolitics. I'm Dan Senor. The COVID-19 recession technically ended in April of 2020. At two months, it was one of the shortest economic recessions in history. Since then, however, some economists and market practitioners have been screaming from the hilltops about the risk of inflation.

That's because the U.S. government injected trillions of fiscal and monetary stimulus into the economy, the highest levels in history. And the U.S. government and governments around the world are still at it. And all this spending was against the backdrop of staggering changes in our economy. Are there bright red flashing warning signs of inflation right now? If so, were the inflationary trends already in place prior to the pandemic?

Or did the COVID response policies of governments here and abroad accelerate them? And how do we unwind an inflationary cycle before it's too late? Well, today we have the ideal guest to help us understand what we're dealing with. Dr. Mohamed El-Aryan is president of Queens College at Cambridge University. He serves as part-time chief economic advisor at Allianz, and he's chair of Gramercy Fund Management. He's a professor at the Wharton School. He's a Financial Times contributing editor.

He's a Bloomberg Opinion columnist, and he's the author of two New York Times bestsellers. Mohamed serves on several nonprofit boards, including the National Bureau of Economic Research and those of Barclays and Under Armour. But from 2007 to 2014, Mohamed served as CEO and co-CIO of PIMCO, which has over $2 trillion under management. He worked at PIMCO for a total of 14 years, and he was chairman of President Obama's Global Development Council. Previously, he also served two years as president and CEO of Harvard Management Company, the entity that manages Harvard's endowment. He's also been chairman of the Microsoft Investment Advisory Board. He's been doing that since 2007. Muhammad holds a master's degree and a doctorate in economics from Oxford, and he received his bachelor and master's degrees from

Cambridge University. Muhammad is an expert in a lot of things when it comes to the financial markets and the macro economy, especially inflation. So he's going to help us make sense of the madness. Is this inflation transitory or is it here to stay for a while? And if so, what should we do about it? This is Post Corona. And I'm pleased to welcome my friend Mohamed El-Erian to the Post Corona podcast. Mohamed, good to see you. Wonderful to see you. Thanks for having me on. I mean, my pleasure. It hasn't been that long. I mean, we were together in person,

actually, not that long ago, but now we're together. But I'm on your podcast. Can you imagine? Yes, a whole other level. Whole other level. All right. So I want to jump into this topic. You're going to help us understand

the very complicated, seemingly real-time issue of inflation that we're dealing with. And before we start, I want to quote Larry Summers, who in the beginning of 2021, so the beginning of this year, he suggested that there was about a 33% probability that inflation would rise substantially and persistently over the course of the year. There was a 33% probability that the rise would be transitory and inflation would at some point level off and perhaps return to pre-pandemic levels, a trend of approximately 2%.

And then he said there's a 33% chance that inflation would not rise substantially at all. And that would be because the Fed would tighten things up, QE, tapering, raising interest rates, whatever it would take, the environment would level off. So here we are a half year into 2021. We're sitting down with you. Where are we with these three scenarios? So if you ask me to assign probabilities, I would tell you we are 65% that inflation will remain high and that we have an inflationary process. We have 30% that inflation is transitory, meaning we don't have an inflation process. We have a once and

adjustment. And 5% that the Fed will act early in order to preempt an inflation problem. I think that we are looking at inflation that is higher and will persist for much longer than most people expect at this stage. And just to be clear, when you're breaking down that 30 plus, 60 plus percent, you're saying 30% probability that it's transitory or 30% of it, 30% of the inflation? No, 30% of it, 30% probability is transitory, 65% it's persistent, and 5% is preempted by the Fed. Okay. So my next question is, just to take a step back before we get granular with some of these issues, why is this important? In other words, when I talk about inflation, when colleagues of mine talk about inflation,

what we often find is we're talking to people, by the way, me included, who've never really lived in a tuned in kind of adult paying attention kind of way through a real inflationary period in the United States. So there's no reference point to it. I get the sense that lay people don't really, by and large, understand how serious a threat inflation can be. So can you just explain what inflation is and why it matters? And let me say it's understandable that people don't have a feel for it because we haven't had it.

If anything, we've had inflation that is too low for decades. So this is a major paradigm shift. If you're as old as I am, I'm 62. Not that old. You will remember the late 70s and the 80s when inflation was a problem. Now, we're not talking about going back to the double-digit inflation rates of then, but we are talking about 4% to 5% inflation. So why is that a problem? First and foremost, none of the economic or financial system is wired for that sort of

inflation. People have gotten used to no inflation, and therefore there's very little inflation protection in the system. And therefore, when the system tries to adjust to the reality of high inflation, there's a risk that it does so in a disorderly fashion. Second are the social consequences. Inflation is a major tax on the poor. The poor are the least able to protect themselves. Why? Because they live from paycheck to paycheck. So they don't have the ability to counter inflation by savings or even by having their savings indexed somehow to inflation. So study after study has shown that inflation tends to worsen income, wealth, and the inequality of

opportunity. And the last thing we needed in this country, which is already polarized, where there's already a good segment of the population that feels marginalized and alienated, is to have further inequality of opportunity. So it's an economic issue and social issue. Then it becomes a political issue. And if you live in a world where it's very easy for people to become one issue voters, inflation can become that issue. So can you provide just like a practical real life example of how someone on the unfixed income or on the low end of the wage scale would have to deal with inflation in their day-to-day life. What actually changes for them practically? So it's happening now.

We've just had data that came out in the context of the US GDP numbers that shows that the consumer basket has gone up by 6% quarter on quarter. So imagine that you are someone with limited income, that you spend most of your money on food, on transportation, you drive a car, and you are suddenly 6% worse off than you were a year ago. So you have two choices. Spend less or try and generate more income if you want to maintain

your standard of living. Now imagine that happens quarter after quarter after quarter. It will start seriously eating into your standard of living. And you have no way to protect yourself. Now, the rich don't spend all their income, have ways to protect themselves. So it is a real social issue. Now, ask anybody who has gone into a supermarket, and they will tell you they are getting less stuff for their weekly budget. And that's the reality of inflation. And they're not getting a pay raise.

They don't have more money, and the money they have is worth less. Correct. And that's how the inflation process sets in. So at some point, workers say, wait a minute, my real wage, which is what I get paid adjusted for inflation, has gone down. So employer compensates me. And then the employer has to make a choice. Do they lose their workers? Do they risk a strike? Or do they compensate the workers? Typically, they'll compensate the workers. But then what will they do? They'll go out and raise prices to maintain their profit margin.

And that's when a one-off inflation hit becomes an inflation process. We've also seen it happen in the chip industry. We started out by having a problem of the supply of chips. Next thing we know, the price of new car goes up. A new car? A car. Why? Because cars are cheap. Automobile. Automobile. Right. price of new car goes up next thing we know a car why because car automobile right next thing we know the price hold on let's just stay on that for one second because i don't so so there is lots of

press coverage about these chip shortages and your your point is suddenly car prices are going up and people are like what's the connection between chip shortages and cars? And your point is these chips power automobiles, and if suddenly there's a chip shortage, then the inputs to a car suddenly get more expensive, and then just buying a regular, not high-priced automobile becomes cost-prohibitive for a lot of people. Correct. And then what happens next? The price of used cars goes up

because more people go from buying new cars to buying used cars, and that goes up. What happens next? The price of rental cars goes up. Which anyone who's tried to rent a car recently will know, the prices of rental cars have gone off the charts. Correct. And part of that has to do with the transmission mechanism. So it starts somewhere else. And that's why I laugh at people when they say,

oh, it's isolated. It is contained. Because they haven't lived through an inflation process, they don't realize that the whole thing cascades through the economy. It takes time, but it then tends to

develop really deep roots. That's why the lesson of the 70s and the 80s was don't let an inflationary process get out of control. And when the Fed, I don't want to come to the Fed in a minute, but generally when they say, oh, if we get into an inflationary cycle, we can control it. You know, they often said that after, said that after some period after the global financial crisis and then the subsequent 13 years, whenever there was talk about the risk of inflation, they'd say, oh no, if it starts bubbling up, we can jump in. And you're saying easier said than done. There isn't, Dan, a single historical example, not a single one, of which the Fed has been late to the inflation party and by acting it hasn't caused a recession. So yes, they can

control inflation, but at what cost? I think the Fed has two problems today. One is that it doesn't want to move early and two, it cannot move early. One of the ironies of all this is having lived in a world where low inflation was the problem, not high inflation, the Fed changed its framework. It went from a forecast-based framework to an outcome-based framework. Means in the past, when it saw inflation coming, it would act. Today, it has a framework that says, I have to be absolutely convinced that inflation is in the system and has persisted before I act. Why? What accounts for that flip? So we used to have a problem of demand, not enough demand in the system.

Coming out of the pandemic, we flipped this around. We have ample demand in the system. The US consumer is sitting on $2 trillion of excessive savings. They're going to continue spending. Governments are spending a lot of money. Companies have very strong balance sheet. They are starting to spend a lot of money. Companies have very strong balance sheet. They are starting to spend a lot of money. So you cannot argue we have a problem of demand,

but we have a problem of supply. We have a problem of workers. There's 9.2 million openings. Workers aren't being matched to available jobs. We have supply chains that have been disrupted all over the place. We have factories that are closed in Vietnam because of COVID. We have shortages of chips. So the problem today is the supply side.

The Fed changes paradigm based on the demand problem, and it's now applying it because we have a supply problem. So they really got caught by this thing that no one could have predicted, which is the COVID. When they've tried to sort of dabble, dip their toe in the water in years past, all post-global financial crisis, to shrink the Fed, that is, when they've tried to shrink the fed that is when they've tried to shrink the balance sheet bring down interest rates so you look at like 2018 where they took modest steps you know raised interest rates to two and a half percent and they and they again tried to shrink their the the fed balance sheet

just a little bit 2018 caused a 20 stock stock market decline globally. And then the Fed, I think it appeared like panicked and quickly changed course. So what happened there? They sort of almost experimented with it. And then they got a really negative reaction and got spooked and don't want to try again. Yes. And the same thing happened in May 2013. I remember on May 23rd, Ben Bernanke, then head of the Fed,

said on Capitol Hill that they were going to taper. And I remember people looking up, what does taper mean? And they realized what taper meant is that the Fed would buy fewer securities, would inject less liquidity. And we had what's called the taper tantrum. And markets not only fell in value, but started becoming dysfunctional. another Fed chair, Jerome Powell, comes along and says, you know what, it's time to stop this exceptional injection of liquidity because the benefits are not clear and the costs and risks are rising. And what happened? The market has another tantrum and there's major losses. And any parent will know that if you condition your child to expect candy in ample and predictable quantity every single day, the minute you take that candy away, the child will cry.

And what the Fed has found out is it doesn't have the tolerance to recondition the marketplace. And that's why we continue today with emergency injections of liquidity of $120 billion a month, including buying $40 billion of mortgages to support a housing mortgage that is red hot. Which is on fire. Right, it's on fire. And the irony, it is pricing Americans out.

More and more Americans can no longer afford homes. And yet the Fed continues to buy mortgages as a way to support the housing market. And it's doing it not because it's for positive reasons, but it's afraid of the consequences of not doing it. So I understand the way you're explaining why the Fed is reluctant to jump in. I obviously don't agree with the decision, but I understand the way you're explaining it. What I don't understand is how they have underestimated inflation so consistently. So if you just look at every one of their meetings this year, they've underestimated it. It's June monetary policy meeting.

The median forecast among Fed officials for the year, for this year, was 3%. And then in March, their forecast was 2.2%. And then in June, the actual consumer price increase was almost 5.5% from the previous year. So it's not just that they're slightly off. They've been really wrong. Why? What are they seeing that we're not or vice versa? So they base their inflation forecast on two things

that are giving false predictions. One is longstanding macroeconomic models that do not capture the change in the structure of the economy, in particular what's happening to the supply side. Two is what people call decomposition, is they tend to look at every element and try and predict it in isolation of the interactions. Those of us who have been worried about inflation have said, listen to what the companies are

saying. You can go back three to four months when Warren Buffett made the following statement. He said, people are raising prices to us. We are raising prices to other people. And you know what? It's sticking. And what we are finding out, earning season after earning season, is one company after the other says, my costs are going up. I can't find labor. My labor costs are going up. My raw material costs are going up. My transportation costs are going up, my raw material costs are going up, my transportation costs are going up, and I'm going to pass it on into higher prices. So what the Fed has not done yet is to listen to what the US companies are saying. Instead, it is relying on models that used to be quite accurate, but have not captured

the change in the structure of the economy. So I want to go back to a previous period. We've touched on it here during this conversation, which is the post-global financial crisis, 2008, 2009, and emergency measures that were taken. And then the emergency measures were never really lifted by the Fed, by the monetary authorities globally, for many of the reasons that you're articulating. And many experts predicted consumer producer inflation as a result of these emergency measures staying in place. And the defenders of those policies argued that there wouldn't be consumer producer inflation, and they basically argued that they were right. So A, were they right? And B, if so, why? And what can we learn from that for this moment? Like,

what was going on then that's not going on now? So fundamentally, inflation is when you have too much demand relative to supply. Too many people want something you want, and there isn't enough of it. So how does the market clear? By increasing the price. That's how it works. So it is demand relative to supply. Coming out of the global financial crisis, we did not have a problem of supply.

We were still in the midst of a technological revolution. Companies were getting more and more productive. They could do more with less. There was no problem in terms of supply, but there was a major problem in terms of demand. Go back to the three sources of demand I said before. The government, if you remember, it was after the 2010 shellacking in Congress, split government, basically nothing

got done. In fact, we went a number of years without a new budget. We just rolled. So there was no meaningful government demand increase. Consumers were still shell-shocked by what had happened during the global financial crisis, and their precautionary motives had gone up, so they were not spending. And companies, seeing that neither the government nor the households were spending, did not invest. In fact, we had a very low level of investment. So during that period, we had ample supply and limited demand. That's why the phrase that came out was deficiency of aggregate demand. And it seems like while there was fiscal relief injected into the economy back then, it seems in retrospect, while it seemed a lot at

the time, in retrospect, certainly by comparison, it seems quite modest relative to the fiscal injection we've had into the economy during the pandemic. So by my count, $4.7 trillion with a T in pandemic-related relief spending since 2020. Right. And then add another $4.7 trillion with a T in pandemic-related relief spending since 2020. Right. And then add another $4 trillion from the Fed, because it has expanded its balance sheet to about $8 trillion. And those numbers make what happened in 2008 and 2009 look very small. Now, at the time, it was huge.

Right. I remember the debate over the Obama stimulus bill, which was what, like just under a trillion dollars, right? 700 billion. Right. Yeah. I mean, there's no comparison. I think we've gotten used to throwing money at problems. And we certainly have thrown a lot. Here, I must say, I have a lot of sympathy for the fiscal spending because we had a sudden stop in the economy and we had to make sure that temporary and reversible problem didn't become permanent. If a company, if a restaurant had a liquidity problem, you didn't want that restaurant to go bankrupt completely. I have less understanding, honestly, for what the Federal Reserve has done, because it has decoupled the financial markets even more. Now, that's great for all of us who have financial assets.

They've made us richer. But it's not good in terms of the Wall Street versus Main Street disconnect that at some point has to be resolved. So let's talk about the structural changes that are contributing to this current and coming inflation that are a result of the pandemic. You've touched on them a little bit, and you also expanded on these three major structural changes in a recent column in the Financial Times, which we'll post in the show notes. Talk a little bit. Let's start with structural changes to supply chains and what that means. So a supply chain basically is how do you get everything you need for the end product. And we lived in a world of globalization where two dominant themes influence a lot of what

companies do. One is just-in-time delivery. So don't waste money on inventories and everything else because you can deliver things around the world really well. And two is cost-effective internationalization, which means have one component of your production in country A, another component in country B, and exploit all the cost efficiencies. And since you can connect the world in such an efficient manner, that works great. Now, that doesn't work when you have a system that stops travel,

when you have different countries doing different things vis-a-vis infections, vis-a-vis vaccinations, vis-a-vis new variants of COVID, and suddenly your strength becomes your weakness. So certain companies have decided to rewire their supply chains. They decided to regionalize them or localize them in order to reduce these vulnerabilities. And the word efficiency went a little bit out of fashion and resilience became the N-word. So now we are trying to rewire supply chains.

It's a little bit like trying to change an engine of a plane while the plane is flying. You will lose altitude. You're hoping not to crash, but you will lose altitude. So there is a genuine change in the way the global economy works. Part of it is necessitated by the fact that the Vietnam factories, as an example, are closed because of COVID. So if you're looking for them to send you cottonware, for example, you're not getting it. Part of it is because companies are on purpose changing the supply chain. Then there's the issue of transportation.

Transportation gets impacted by COVID, but also transportations get impacted that when we shut everything down, the containers were not in the right place. So you have that going on. And then the final issue is workers. You often hear people say correctly that our labor force is 7 to 8 million workers smaller than it was before the pandemic. That is correct. Labor force participation has come down.

That is correct. At the same time, we have a record level of job openings, so-called jolts, 9.2 million. And what we're discovering is that the labor market no longer matches the worker to the work opportunity. Now, there's a lot of theories for that. Some are short-term. Maybe it's because of unemployment insurance benefits that have been so high that people get paid more staying at home. Maybe it's because schools have been closed. We will find out in September. Schools being closed, meaning so many parents have to be home rather than work. Correct. And that $4.7 trillion we talked about is part of what's sustaining them while they're home with their children,

but soon schools are going to be back open and presumably this fiscal stimulus will not continue indefinitely. Correct. So these things are reversible. But there's two other things that are more serious if they turn out to be a major cause. One is skill mismatches. Maybe this massive digitalization of the economy that has occurred during COVID has meant that you have workers with the wrong skill set. Can you give an example or two of that?

So, for example, when you go to, just think of how you and I have changed our behaviors now. We go to touch lists, all sorts of things. We check out touch lists. We use the internet much more to shop than we do physically. All that has huge implications for the labor force. You need people who can build the machines for touchless payments. You need people who staff a completely different sort of retail delivery than when you and I go into a shop. That's one of many, many examples. Companies have also, industrial companies have gone much more technologically savvy than they have before.

So it may be that we have a mismatch of skill set, or it may be that the propensity to work has changed. So let's talk about that for a moment, because we had on this podcast our mutual friend, Adam Grant, to talk about the future of work. We also had Derek Thompson on from The Atlantic. Those two were our first two back-to-back episodes. a lot of people rethought how they wanted to engage with their careers, with their work lives, with the workforce. Obviously, this will have implications on the supply of labor, which will have ultimately potential implications for future inflation. Talk a little bit about what's going on in terms of how people are thinking about what role they want work to play in their daily lives and how they organize it? We don't know. We're going to find out. You're talking to someone who

had a change in my work-life balance when my daughter confronted me with the consequences of me traveling so much, which is missing all sorts of things that she thought were special. I think a lot of people are revisiting their work-life balance during the pandemic and after the pandemic. So we will find out. We don't know yet why it is that we can't match unemployed people and people outside the labor force to all these opportunities that are available. But we're going to find it out in the next few months. Many experts and market practitioners like you who are screaming from the hilltops about

the possibility and the risk of inflation, in your case, the probability of it. There is a small minority out there, I just want to give them a hearing, who are skeptical and even believe that we could be heading for a deflationary period. So just, I know you don't share that view, but I'm just curious, if you were to articulate the case for a deflationary period coming out of the pandemic, what would it be? So there's two deflationary arguments, and they are very distinct. The destination is the same, the journey is very different. Journey one is a policy mistake, that we end up by having high and persistent inflation. The Fed slams the brakes, or to use the phrase of a Bank of England official, ends up by having to do an emergency handbrake U-turn. And next thing you know, we go from

growth and inflation to recession and deflation. And that is a massive policy mistake. That's one way of getting to that destination. And that's not a really nice way to get there. And let's hope we don't get that way. The other way is that it turns out that all the supply disruptions that I've talked about are temporary, fully reversible, and then the inherent deflationary forces come in. And if you want to think of the inherent deflationary forces of technology, think how Amazon, Google, and Uber have changed our lives. Amazon means that we can sideline all middle people. So we no longer have to pay a premium to people who are intermediating things for us.

Google allows us to price search in a very efficient manner, so we get pricing power that we've never had before because we have information. And Uber allows us to use an existing asset that is underutilized to meet a surge in demand. And that's really powerful. You know, you and I use our cars maybe, what, 10% of the time? Now, if suddenly you can transform that to meeting surge demand, then you completely change the pricing dynamics of a society because you don't have to go and produce an extra car.

So the ones who are seeing the deflation in an orderly fashion are saying that it's just a matter of time before the supply side reasserts the deflationary as opposed to an inflationary force. What about the role of demographics? Because I've heard the deflationary case for the fact is that reproductive rates are dropping everywhere, most everywhere in the developed world, in parts of the developing world. So the global population is going to shrink and that will have a deflationary effect long term. It would. And now you said the key word, long-term. Demographic effects are like watching paint dry. It dries, right?

But you don't see massive transformations month to month or year to year. So yes, over the very long, but the debate about inflation is over the next two years. It's not over the next 20 years. And there's something funny going on that we, you know, when the word transitory was first used, it was referring to two to three months. Then it became a couple of quarters. Now transitory is proving to be incredibly elastic. Some people are using transitory to mean one to two years. And I think those people who use

transitory to mean one to two years, they better go back and read about the history of inflation, because things change when you run a system at higher inflation for that long. Can you give us any historical parallels to this period? If you look at all the inputs you've described that are fueling this inflation, what would be the most apt comparison looking back in history? There is no apt comparison, unfortunately. And that's why there's so many puzzles out there is because we have no game plan for this. We have no historical experiences.

I don't think people quite realize how we are transforming the economic system. It took 80 years to create as much money as we created in a month, just to put it in history. On government spending, I don't think we ever thought a trillion was a possibility, let alone multiple trillions. We never thought that you could have a situation where the counterparty risk, now you're in finance, you know what it's like. Counterparty risk is when you don't trust the other person. When you don't trust the other person, you step back from any interaction. So when two banks don't trust each other, we have a financial crisis. But that's okay because the Fed can come in. But COVID means human counterparty risk. I don't know how healthy you are. You don't know how healthy I am. That changes the dynamics of how we operate. So I can't find a historical parallel. That's why the one thing I keep on telling people is keep an open mind. Don't repeat the same thing with conviction,

because if you're honest to yourself, you don't know. And when you don't know, you have to think about the probability that you'll make a mistake. We don't want to make a mistake, but if the world is unusually uncertain, if we have no guide to what's going on, the probability of us making a mistake is high. So what we have to focus on is to reduce the probability of a non-recoverable mistakes. Most mistakes are recoverable. Some are not. And that's why the importance of keeping an open mind, of scenario planning, of asking the difficult question is so critical if we're going to navigate this very unusual period. What would be an example of a non-recoverable mistake? So for example, if we create a financial crisis on top of an economy that's not functioning properly, that would be

a non-recoverable mistake. That would impact our generation. Another one, if we don't seriously address the issue of inequality. I'm speaking to you from California, 30 miles up the LA school district. When the LA school district was forced like every other, all other districts in this country to go virtual, they lost touch with 30% of their students. They haven't regained yet touch with most of them. Now, what happens to that 30%? They fall out of the system. They become unemployed. They go from being short-term unemployed to long-term unemployed.

And then they become unemployable. And that is a lost generation. Why do they become unemployable? Because you as an employer, for entry-level people, you're more likely to employ people fresh out of school than people who have been sitting home for three years doing nothing. So that's an unrecoverable mistake, to have a lost generation. So it's really important for us to sit down and say, we are likely to make mistakes. Let's minimize the probability of making unrecoverable mistakes.

Speaking of unrecoverable mistakes, if you look at the public, the equity markets, so going back March of 2020, so when the markets were crashed, when they were at a low due to the pandemic, to now, basically, let's tell June 30th of this year, the S&P has gone up by 96%, including dividends. So it's like one of the most turbocharged increases, recoveries, whatever you want to call it, in modern times. Is there anything you said before that the inflationary risk is, there's nothing to compare it to? Would you say the same about the public markets?

Yes, because here we have a generalized risk of a bubble. This has been called the everything rally. So you picked the S&P, you could have picked corporate bonds. You could have picked cryptocurrencies. You could have picked private equity. It goes on and on and on. Everything has gone up. And it's what economists call the common global factor. There's one factor pushing everything up, and that is liquidity, central bank liquidity. And the way I explain it to my daughters is the following. When you buy an apartment or a house, you always want to be secure in the knowledge that there'll be someone else willing to pay a higher price for your house or your apartment. Because what does that do? It validates your own purchase and it provides you liquidity in case you want to change your

mind. Now, imagine I come to you and say, you know what? The buyer behind you is a central bank with an infinite printing press in the basement, a willingness to use it, and the central bank is a non-commercial buyer. The central bank isn't buying to make money. They're buying for some other reason. So

they'll keep on buying no matter how expensive your house is. If you know that, you will go ahead and buy 10 houses in front of them. So the whole market has been conditioned to buy ahead because the Fed is turning up every month and injecting $120 billion of liquidity. And that's why the three most commonly heard phrases on Wall Street today is, buy the dip, Tina, there is no alternative to doing that, and FOMO, fear of missing out on yet another rally. And as long as that conditioning continues, we will completely disconnect from fundamentals. And it goes back to what we were talking about earlier. It's the reason why the Federal Reserve is so terrified of taking the candy away, because there will be a tantrum. hats, if you were to recommend one or two books for lay people to read about this, to better

understand this period we're going through, even though there's not a perfect comp, but to really understand inflation and the history of inflation and the role that inflation can have, not just in a narrow economic sense, but in a societal sense, what would you tell our listeners to read? So I would have to go away because there's quite a few different books on this. You know, first I would tell them to read probably the Kindleberger book on manias and bubbles. But then I would encourage them to read a book on behavioral science to understand what happens to us when we get taken out of our comfort zone.

There's a great book by Don Sull called The Upside of Turbulence, which is really the positive side. How do you develop resilience and agility so that you navigate through a period like this? That I have found. And then there's Adam Grant's book, Rethink, the ability to keep an open mind.

I think that the difference between successful and unsuccessful endeavors is going to be the ability to absorb new information and address your priors and be willing to think differently. And I think Adam's Grant book is great in terms of showing both how to do that and the implications on not doing that.

One last question on inflation. If we indeed run into an extreme inflationary period, if we're looking back at it as historians, what would be the big mistake in hindsight? Like, well, if historians, if we're sitting around doing this podcast years from now and looking back and saying, only if they'd done this or only if they didn't do that, it's a risk of oversimplifying. What are the policy errors that we'll look back at and say, it should have been so obvious?

I think we will go back if it happens and say, why did the Federal Reserve behave like a lawyer and not like an economist? Lawyers have the ability to argue with 100% conviction, even though foundation is low. They don't need high foundation. They are just there to argue with. If they get high foundation, that's a bonus, but they can argue with 100% conviction to protect their client and defend their client. Economists need a high level of foundation to argue with a high level of conviction. Today's Fed is arguing with a very high level of conviction that inflation is transitory and a very low level of foundation. And people like me say, look, it's better to ease your foot off the accelerator now than have to slam the brakes later. If it turns out that you've eased your foot too early, you can step on the accelerator again. So I think we're going to look back and wonder,

why is it that the Fed didn't have a symmetrical risk paradigm? Why is it that the Fed didn't worry as much about being wrong, about inflation being transitory, as it was convinced that its inflation is transitory? That would be the mistake. Before we let you go, I do want to... You alluded earlier to your personal career, your personal decisions that you made in terms of work life priorities and i i as we said i think a lot of people are thinking about those issues

and have been over the last year and a half because they've dealt with loss they've dealt with human catastrophe they've watched human catastrophe all around us they have suddenly been more in touch and spent more time with their families, their loved ones, their children than they ever have before, or they have not been able to spend time with parents and grandparents because they forced to be separate during the lockdown. So I think there's been so many societal changes in ways that we don't even fully appreciate right now, and it's going to take a long time to unravel. But back in 2014, you made a decision to step down from a very intense, very high-performing career atop PIMCO. And if you don't mind, I think it would be interesting for you to just

articulate what you alluded to before, but really explain what happened. How did you suddenly make this? What in the markets and in the business press, the financial press was jarring when you, Mohamed, made the announcement that you made. So can you talk a little bit about that? Yeah, I had a nine-year-old daughter at the time. It was May 2013, actually. And it was the biggest wake-up call and the best wake-up call I had. It was one day I told her to go brush her teeth. She didn't.

I told her to go brush her teeth again. She didn't. I said, Samia, what's going on? I'm more than your dad. She didn't. I told her to go brush her teeth again. She didn't. I said, Samia, what's going on? You know, I'm more than your dad. We're friends. She said, just a minute. She went to her room and came back with a folder. And she started reading dates out. And she said, do you know that on September so-and-so, you missed my first day of school? Do you know on September so-and-so, you missed my first soccer game? Do you know on September so-and-so you missed my first soccer game? Do you know on September so-and-so you missed the parent-teacher gathering? And she said, in fact, this school year you've missed 22 events. And she gave me the piece of paper. And every single one was documented. And I started immediately defending what I had done. I said, no, I remember I had to go to Japan

in September to do this. Or I remember I had to do this. And then she sort of gave me the final blow, the finishing blow. She went up to her room and came back with her yearbook and opened the yearbook to her class. And there was a picture of some event. And there I was sitting there. And I thought, great, I'm sitting there. I was in the background. And she said, look, I'm sitting there. I was in the background. And she said, look what you're doing. And I was looking at my BlackBerry. And she said to me, daddy, even when you're here, you're not here. There was a devastating blow.

The next day, I went into PIMCO, sat with the founder of PIMCO and said, over the next year, I'm stepping down. He asked me why. I explained why I was going to step down. I think it came to him as a huge surprise. And I said, it's up to you whether you want me to step down now or later. What I found interesting is a few things. One is that I was incredibly privileged to be able to do this. This is not something that many people can do. Meaning step back. To step back and walk away from a regular paycheck. And reorganize your life.

And reorganize my life. And I said I was going to write a book. I said I wasn't going to have a full-time job. I was going to have a portfolio approach to regain flexibility. Because when you're CEO, you're basically doing what everybody else wants you to do. And you're traveling all the time, et cetera. So first, I was very privileged to be able to do that. Second, I was really interested that people didn't believe me.

They thought there was another way. The amount of people that have told me, you're going to go work for a competitor of PIMCO, aren't you? I said, no, I'm not. But they said, no, anybody who steps down for family reason, that means there's something else. Some people thought I was sick. One person said, you have cancer. I said, no, I don't.

And then the third reason is a few people who could do it said to me, you know what? We don't have the courage to do it. This was forced on me by my daughter. It's the best decision that I've taken. Some people thought it was irrational. Today will be different, though, than I must say. Today there's a much greater awareness of the importance of getting work life right,

that if you want to maintain your employees, you have to flex. But I didn't think of that. I thought that working was 100% in. And I must say, I'm really glad I did it because now that my daughter's going to college, we've established a really wonderful foundation for a long friendship. And I love that. And you can't get those years back. Correct. Muhammad, you're a wonderful teacher in academia, in work, in financial markets, but also in life, really. So I'm always grateful for the time we have together. And I always learn, always learn when I'm with you. So hopefully our listeners got a taste of that today. Thank you for joining the conversation. Thank you very much. I really appreciate it. That's our show for today. If you want to follow Muhammad's work, you can follow him on Twitter. I'll spell it out.

It's at E-L-E-R-I-A-N-M, which is his last name and then his first initial. You can also follow him at the Financial Times and at Bloomberg. And if you want to purchase any of his books, which I highly recommend, you can go to barnesandnoble.com or your favorite independent bookstores or that other e-commerce site. I think they call it Amazon. Post Corona is produced by Ilan Benatar. Until next time, I'm your host, Dan Senor.