Chief Economic Advisor, Allianz
Mohamed El-Erian: The worst of inflation is behind us
Mohamed El-Erian, The Wharton School Rene Kern professor and Allianz chief economic advisor, joins 'Squawk Box' to discuss his thoughts on prediction markets, latest market trends, inflation outlook, state of the AI boom, and more.
About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has stated he expects the Federal Reserve to keep interest rates unchanged for the remainder of the year, a position he described as a "strong expectation." He characterized the Fed as undergoing a necessary transformation after years of policy mistakes, including its 2021 characterization of inflation as transitory and issues with compliance and forecasting. El-Erian also said the Fed is likely "tolerating a 3% target" rather than its stated 2% target. He noted that the ECB's rate hike was appropriate given its single mandate, whereas the Fed, with a dual mandate, should wait. Regarding inflation, El-Erian said "the worst of inflation is behind us" and that it will likely peak in mid-2025. He linked remaining inflationary pressures partly to AI-related investment, which he described as having a positive supply-side effect. On AI, El-Erien said its productivity potential "can be more than Greenspan," but warned the industry has a "massive PR problem" and that more attention is needed on adoption and diffusion. He called tech valuations a "rational bubble," arguing that over-investment is a less costly mistake than under-investment. El-Erian expressed concern that the bond market cannot fund the combined needs of AI investment, government deficits, and corporate borrowing without higher yields, asking rhetorically where the funding will come from.
Transcript (26 segments)
I
Interviewer0:00
Out, do you keep going? What happens?
M
Mohammed El-Erian0:02
It's different. Like with tennis. I don't think there's a tiebreak on the. Is there on the winning the match, winning the? Tennis keeps on going. Until finally with...
I
Interviewer0:10
I'm going to transition to markets. But on my way to transition to markets, I'm going to ask you a prediction market question, which is... I'm actually curious when you hear those numbers, which we just talked about, just the sort of sheer number volume of people who are now playing the markets. And that's in addition to the president's teleprompter operator. What do you think of that in terms of what's happening in the marketplace? Meaning in terms of just animal spirits, does it say anything? Is this a good thing or a bad thing that everybody is wanting to trade on everything now?
M
Mohammed El-Erian0:43
I think what it says, and we've seen this with leveraged ETFs, we've seen that with everything, is if you lower the barriers to entry to markets where there is significant upside, you will get a major reaction.
I
Interviewer0:55
But is there a significant upside? Because one of the things we keep learning in the prediction markets is that most people are losing.
M
Mohammed El-Erian1:01
Correct. But if you ask the individual fan, okay, they go in thinking there's... Look at the plane going to Las Vegas relative to the plane coming back from Las Vegas. I always contrast that: people going there are happy, they look at the upside; the people coming back have the reality of what the odds are like, okay. But people like the...
I
Interviewer1:19
They like the lottery ticket.
M
Mohammed El-Erian1:21
Yeah, they absolutely love. And the fact that you lowered the barriers to entry and you can bet on so many different aspects of the game, allows individuals to think, 'Oh, I'm specialized in this area, I am going to prevail in this area.' I totally understand these numbers don't surprise me at all.
I
Interviewer1:35
But do you think that's a good thing or a bad thing long term?
M
Mohammed El-Erian1:39
That's a really complicated question. Yeah.
I
Interviewer1:42
We got some time, right?
M
Mohammed El-Erian1:45
Do I? Look, the social implications are not great. And you see this in the lottery numbers as well. Those who tend to bet are those who are least able to underwrite the losses. Okay. But in general, I think access to markets are a good thing. And if you provide more access to markets, that's a good thing.
I
Interviewer2:06
Talking about markets, one of the things that's fascinating right now is the fighting in Iran continues. Unfortunately, another service member was lost in the process. But one of the things we're looking at this morning is oil. We're about 80... I don't know if we can flip that board around right now. You're looking at Brent at 88 and you're looking at crude at 82. And yet, by the way, equities, though obviously Friday was not a good day, are up this morning. Does that make sense to you?
M
Mohammed El-Erian2:35
And when I went to bed last night, Brent was in the 90s, in the low 90s. Look, we talked about it last week. The fundamental view in the marketplace is these escalations will be contained. And this was tested this weekend because unfortunately, and it's tragic, we lost servicemen. There was an expansion of the attacks on both sides. And yet the market continues to believe this. I think the biggest contrast, and Joe talks about a tiebreaker, is between really messy news and relatively stable markets. And that combination is very striking. You normally don't get that combination at all. And even if you look within the so-called stable markets, it's an unstable equilibrium. Whether you look at the ten-year Treasury, whether you look at the yen. So this is a fascinating time because everything is in equilibrium. But it's very unstable.
I
Interviewer3:30
On the inflation side. Where do you think we are? What do you think is going to happen? And how do you think that somebody like Kevin Warsh needs to be thinking about all this?
M
Mohammed El-Erian3:40
I'm not into the we need three rate hikes. I don't think we're going to get any rate hikes. I think the worst of the inflation is behind us.
I
Interviewer3:48
So you think that actually we're going to see a meaningful decrease in inflation come this fall, come this winter. What's your...
M
Mohammed El-Erian3:54
Yeah. I mean, the one qualification is oil prices. And regular is above $4 today. And diesel is about $5. And I keep an eye on those two prices. I look at them every single day. But if you look at the tariff inflation, that's behind us. Most of the oil inflation is behind us. The AI-related inflation is inflation that I can live with because I truly believe there's a productivity gain coming on that.
I
Interviewer4:20
And does that come down? Because look, right now there's a shortage of so many different parts just to make this whole ecosystem even work. And the question is, how long do you think that persists on one end? And then, by the way, there's the flip side: whether you think there's going to be an overbuild on the other end.
M
Mohammed El-Erian4:36
So there's likely to be an overbuild because every innovation tends to overdo it in the initial phases. We can look at fiber. I can take you back to every single...
I
Interviewer4:45
But that could still be years out from now in terms of when you... When is the moment you'll wake up one morning and go, 'Okay, there's an overbuild'?
M
Mohammed El-Erian4:53
Probably in 3 to 4 years. However.
I
Interviewer4:55
If this can go, this can run for quite a while.
M
Mohammed El-Erian4:58
It could. But you and I speak to tech people. They believe that it's almost impossible to define where this thing is going to end. Right? Okay. And if anything, we simply don't have the imagination.
I
Interviewer5:08
Is that different than the late 90s with fiber or some of these other technologies? I don't remember. And I should... we should go back and get the tapes. When you talk to CEOs of folks building out fiber, did they say, 'Oh yeah, we're just building, you know, there's an end state here. We're going to do this for another year or two. Then we'll, you know, we'll have laid down the train tracks and we'll be fine. And that'll stop.' This is not that. This is like we're going to be laying down train tracks forever. And by the way, we'll have to keep upgrading the train tracks along the way.
M
Mohammed El-Erian5:37
Yes. I heard you say, you know, 'Where is the end point?' And a lot of people say there is no end point. And there's a perfect reason for this. It's not just a general purpose technology like electricity. It is what James Manyika at Google calls the 'inventor of inventions' — a recursive self-improvement, right? It continuously allows for more things to happen, and it's very hard to predict.