Chief Economic Advisor, Allianz
There's no way this bond market can fund the markets' needs without higher yields: Mohamed El-Erian
Mohamed El-Erian, The Wharton School Rene Kern professor and Allianz chief economic advisor, joins 'Squawk Box' to discuss the latest market trends, impact of the Iran war on the energy markets, state of the AI trade, and more.
About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has appeared frequently on financial news programs in recent months. He has stated that he expects the Federal Reserve to leave interest rates unchanged for the remainder of the year, arguing that the worst of inflation is behind the U.S. economy and that the Fed should remain in a "wait-and-see" mode. El-Erian has described the Fed as undergoing a necessary transformation after what he characterized as years of policy mistakes, including missing its inflation target for over five years and having five senior officials resign over compliance issues. He has said that the most important development at the Fed is not the rate debate but the broader institutional revamp under new Chair Kevin Warsh. El-Erian has also commented on the surge in demand for capital from governments, corporations, and AI-related investments. He has stated that the bond market cannot fund these needs without higher yields, and that he cannot identify where all the necessary funding will come from, predicting that borrowing costs will rise for the economy as a whole. Regarding AI, he has described it as a "rational bubble" and expressed confidence in its transformational potential, while also warning that the industry faces a "massive PR problem" and a growing public backlash. On the geopolitical front, he has said that the U.S.-Iran peace framework helped avoid a phase of "demand destruction" in the U.S. economy, though he noted that some developing countries have already experienced it.
Transcript (24 segments)
H
Host0:08
Welcome back to Squawk Box. I want to talk markets, the Fed, with Mohamed El-Erian. He is here. Wharton professor, chief economic adviser at Allianz. Long time friend of Squawk Box. Good morning to you. The cease-fire is not much of a cease-fire at all. And I don't know where you think or how you think that should or should not be impacting markets. You're looking at oil up a bit, but actually not a shocking amount. And while equities are off a bit, again, not a shocking amount, at least as it relates to the Middle East. We can talk about AI and the AI trade, but what do you see driving all of this?
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Mohammed El-Erian0:44
So it is having some spillover effect, but they're very contained. I think there's two reasons for this. One is the market deeply believes that these skirmishes are going to just remain skirmishes. It's not going to evolve into outright conflict yet. Again, it's not going to evolve into a long-term closure of the Strait. And then the second issue is there's so much else to focus on. And most of what else you have to focus on is positive. So you put these two things together and the market says, okay, I am going to reflect this in Brent going to high 70s, but I'm not going to take it to high 80s or 90s, which is where it would be if you believe that this is going to be much bigger than what it.
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Host1:23
Is, do you think that's the right call?
M
Mohammed El-Erian1:25
I do, I think it will be contained. I think neither side wants to go back to a full conflict, but both sides want to make their point for domestic reasons.
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Host1:33
You said there's a lot of other good reasons to overlook what's happening in the Middle East. What's that? What's on your list?
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Mohammed El-Erian1:39
So this is going to be a huge week. We get the inflation data. We get Governor Walsh going up to Congress, we get the retail sales data and all this within major transformations going on. So what am I looking for? I'm looking for this set of inflation numbers to say the peak of the inflation cycle. Retail sales to stay pretty strong. And continuing to see this fundamental transition to a more modern, forward-looking, reform-oriented Federal Reserve that's dragging the rest of central banking with it.
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Host2:13
Mithra, one other piece into our little pot. It's an interesting piece in the Wall Street Journal this morning about the bond market and specifically some of the bonds that are being sold, frankly, by the SpaceX, Nvidia and others of the world. And just how much appetite or lack of appetite there really is for what is clearly the single industry that it seems to be driving all of this.
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Mohammed El-Erian2:35
So if you look at my post on X, if you look at an article I did for the Financial Times a month ago, if you do a very simple sources and uses of funds, what we used to do all the time in the old days, there is no way this bond market can fund all that the tech platforms need, all that the governments need and all that the other corporate needs. Without higher yields, it just doesn't add up. Okay. And you saw that in Amazon. You saw the Apple. Two things happen in Amazon. One is people had to sell something else to buy Amazon. And despite that, Amazon had a lackluster performance last week in terms of its new bond issuance.
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Host3:11
Okay. So if that's true, what does that mean for equity prices?
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Mohammed El-Erian3:16
So equity prices, of course you never want to see higher yields for equity prices. But that's not what's driving equity prices right now. What's driving equity prices is this belief that when you look at the transformations ahead, the US will continuously outperform the rest of the world. And I think that is a correct assessment. Now, how much will they outperform in absolute sense as opposed to relative sense? That's harder to tell. But I have no doubt they're going to outperform in relative sense.
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Host3:42
Go ahead. Just the bond implication. The same thing, right. That's telling us that investors want to get paid more if they're going to fund this, or there's just not enough money to go around.
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Mohammed El-Erian3:54
So there's always enough money to go around. It depends on what.
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Host3:56
Price.
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Mohammed El-Erian3:57
What price it's going to be taken from elsewhere. And what you're seeing is being taken from other exposures, other bond exposures. Right now, the hope is that you manage to attract more money from the rest of the world. But as we discussed in a previous discussion, if you look at the traditional sources of funding for tech in particular, which is the Middle East, they will not be as forthcoming as they've been in the past. They've got a lot of local demands for funds right now.
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Host4:26
Because of the war that's happening right now.
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Mohammed El-Erian4:28
Correct. Because massive reconstruction and also, like everybody else, they realize that they need more resilience. So you're seeing more pipelines being built. You're seeing a lot more resilience being built in the system. And like any corporate CEO will tell you, resilience is necessary, but expensive.
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Host4:44
That's not a commentary on Amazon or what it's doing with AI or their belief in AI. It's just that was a big slushing pot of money that was floating around looking for a place to go. And then they realized, wait a second, we got to put it here to work at home for other things, correct?
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Mohammed El-Erian5:00
I mean, I am a big, big believer in the transformational ability of AI. I'm also a big believer that it's going to cost a lot of money. So if you look, the sources of funding is a little bit less. The uses of funds is a lot more. And the only way you get this to equal without a recession or anything awful is higher yields.
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Host5:21
But I think the thing that I'm trying to think about is if in fact, there's not enough money to go around, but it's going to require a lot more cost to all of these companies that should be reflected in the stock prices. No.
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Mohammed El-Erian5:34
So it is, I mean, if you look, we no longer have the straight up right thing that we've had. I think people are now realizing two things. One is it's more expensive than we thought. And two, not everybody is going to win. So the venture capitalist mindset is starting to set in. And that's why you see a bit more caution in terms of investors. And I think that's a
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Host5:56
Do you think we're at a fair price now, or do you think that there's a big opportunity to move up? I mean, part of it is the reason why I'm thinking about the move up or a continued move up. Up is I think Kevin Warsh needs a move up to actually do some of the things that he wants to do.
Like.
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Mohammed El-Erian6:12
Well, it depends what you think he wants to do with rates.
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Host6:15
No. So I think there's two issues. The economic payoff in terms of productivity is going to be significant. What you don't know is how many of these companies are going to ultimately succeed, because this is an arms race in terms of investments. So if you ask me on average, is the market fairly priced? I say yes. Individual names. Then I'll say to you, who's going to win? Who's going to win this race? Because whoever wins