Mohamed, thank you very much for being here with us. We are really, really honored to have you here. I'll start from the non-farm payrolls. Well, it's good news for the job market, bad news for investors.
Yeah, I think of it as good news for Main Street, and for Wall Street, it just meant more pressure on interest rates. I think it's good news for Main Street, not only because the demand for jobs came in at three times what people expected and the prior numbers was revised up, but the supply of jobs improved, and that has been a problem for the US labor market for about a year. And we finally saw an uptick in labor force participation; that was the best thing we've seen for a year.
So do you think at this point the Fed should hike in September, will hike in September? You know, market expectations have been all over. Right after the report, they went from 50% to over 60%.
I don't know what they're going to do. It's a judgment call. If I were them, I would not hike. I would not hike for three reasons. One is that while core inflation is sticky, inflation expectations remain very well anchored. The second reason is I do believe there will be a positive supply-side shock from AI. And then the third reason is that a hike would simply weaken a housing market that's already weak. It won't do anything to the AI demand, which is on a completely different trajectory.
So do you think that if the Fed will not hike, the bond market will be happy?
I think the bond market right now is much more concerned with how it will digest an enormous amount of supply. We have in the US a 6% of GDP deficit. We have the hyperscalers increasing their supply by a factor of three to 800 billion. We had other corporates borrowing to try to implement changes for AI. And on who supplies the money, the reliable suppliers are less reliable. We heard that Norway is going to reduce its holding of Treasuries. China is not buying anymore for geopolitical reasons. Japan is stuck in this whole currency volatility, and the Gulf countries are having to borrow. So if you look, there's a fundamental imbalance between the supply and demand, and I think that that means interest rates will remain higher for much longer than what people expect.
But do you think that yields are driven more by inflation pressure, competition on funding, or AI, and we have also the fiscal, of course, reassessments?
So I don't think it's inflation because we have market measures of the inflation impact, and they've been relatively stable. I don't think it's Fed credibility. I do think it's fundamental supply and demand, and part of that is the fiscal side. There is no appetite for fiscal consolidation. So the US, with an unemployment rate of only 4.1%, is running a deficit of 6%. That was historically unheard of, and yet there's no appetite for consolidation.
You see the Treasury goes to 5%, and what would be the collateral effect on equity markets?
So I do think it will go up towards 5% for the 10-year, and it will drag everybody else up. And it will drag some countries even more than the US, the UK being an example. What it does to equities is all an earnings story: whether the market will continue to believe that we are in this earnings revolution where there's almost no limit to the addressable market. We're going to see this in the Anthropic IPO; we saw it in the SpaceX IPO—this notion that the addressable market is huge. So earnings really is what has shielded the equity market in the US from all sorts of issues, be it higher yields or higher oil prices.
But you call this not a boom in AI, a transition period. Can you tell us more?
So we are in a period of transitions on two major issues. One is AI, and we're seeing the demand effects and there's some excesses that are going to have to be taken out of the system. It's not unusual. The first phase of innovations tend to have excesses. You know, human nature is such that when you allow me to do something that I've never been allowed to do, I will oversupply and overdemand it. We saw it in fiber; we saw it during the railroad. But I believe that there is a productivity gain at the end of this, but how we manage both the promise and the peril... You know, AI is not easy. AI has crowding-out effects in the short term. AI has 20% at least of uses that can be bad; it has to be managed. And I think that transition is going to be much bumpier. And the other transition is geoeconomics. You see it in the US, but you see it starting elsewhere, where if you want to understand economic policy, it's less about economic logic and more about national security, geopolitics, and domestic politics. And we saw that with the intervention of the Treasury in the bond market.
And here we go. I want to ask you: it's the most interventionist Secretary of the Treasury that we have ever had. What is your take on, of course, buybacks to start, and on the yen?
So I worry it's overreach. I worry that because of the political angle, and in particular it's affordability... We have elections coming up in November in the US. Affordability is the number one issue. There's two elements to affordability: there's inflation, but there's also housing. You know, the average age now for an American to enter the housing market is 39 years old, and the American dream always had homeownership in it. So it's become a big political issue, and this administration wants to reduce interest rates in order to reduce mortgage rates to lower the cost of financing a home. So the mentality has shifted from "I'm going to try to influence markets" to "I'm going to try to impose my will on markets." And that, I think, is a step too far.
Because then you have bond vigilantes anyway...
Or you sacrifice the currency...
...or you sacrifice the currency...
...or you cause an inflation problem. Even if you could control the massive bond market, it comes with collateral damage.
