FIRST TEST: Kevin Warsh confronts a difficult start at the Fed

[00:00:00] Speaker 1: Could it happen and could it derail the bull rally that you see on your screen? Let's get right to the floor show. Joining me now, former PIMCO CEO, Allianz, Chief Economic Advisor in the Wharton Schools, Rene Kern, Professor of Practice, Mohamed El-Erian. Let's put up oil. Right now, WTI pulling back, but we still have it well above. And same with gasolene prices that still are at a four-handle, right? So we have inflation now, the most recent price that was indicated for the CPI at 4.2%. 4.2%, right? Really, really, really high. Not as high, certainly, as what we saw back in 2022, but do you think there's any hope of a rate cut this year? [00:00:40] Speaker 2: I think we'll neither get a hike nor a cut. I think the Fed is going to wait. The bond market, while it's pricing in, as you said, the likelihood of a rate hike, it's not doing so with conviction. On the other side, yields hardly move today. As you pointed out. One and a half basis points. Yeah, I mean, it's nothing. If I had told you oil would collapse by 5%, that we would have a 3% day on the Nasdaq, I would have thought you'd see a good 5 to 7 to 10 basis points move. Why aren't we? Because I think the bond market is waiting to make sure that this deal holds and that oil prices continue to come down. [00:01:22] Speaker 1: The Fed meeting starts tomorrow. It's Kevin Warsh's first. President Trump made it very clear. He wants to see rates come down. So Warsh is in a very, very interesting test position. But what is the real test here? Whether he can convince the whole group to move toward his theory that we should see rates come down? Or is it simply getting consensus among the group to hold? [00:01:43] Speaker 2: So I think he'll get consensus to hold. But he'll get consensus to hold because it's a highly divided Fed. So because there are so many on each side, they'll end up holding. I cannot tell you how difficult the situation that he's inherited is. Just think about it. It's his first meeting and any new Fed chair needs time to impose his authority or her authority. Second, he's got his predecessors sitting in the room with him. That's not easy. Third, the landscape is really complicated. Fourth, he wants to reform this institution. So give him time. He needs time. The first meeting, the most important thing about the first meeting, is what does he say at the press conference and whether he submits his dots. Whether he is the first to say enough with a communication tool that has misled and confused rather than clarifying. [00:02:35] Speaker 1: You're talking about the dot plot where each one of the Fed anonymously puts a pencil dot on where they think rates will be at the end of the year. So maybe we see the dot plot die? [00:02:45] Speaker 2: I think you'll see the dot plot being less important and then I suspect it will die, yes. [00:02:50] Speaker 1: Okay. Let's talk about the markets and how all of this might affect what we see as a rip roaring rally that has gone on for several years now. [00:02:59] Speaker 2: Yes. And I think the markets are rightly buying into the promise of productivity increases. It's buying into an economy that has proven incredibly resilient to all sorts of shock. And it's buying into the fact that the U.S. is the most attractive market right now relative to other markets. So you get these three things coming together and powering us along. The only thing I'm worried about is at what price do we mobilize all this funding we need for SpaceX, for OpenAI, for Anthropic, for a lot of companies that need to fund investment plans and for governments. At what price does that capital come? [00:03:41] Speaker 1: Are you saying that when we're talking about the mega-IPOs, we just saw SpaceX, as you mentioned, Anthropic and OpenAI could be close to a trillion apiece as well, that these are going to force, we had a countdown closer on Friday who said people will sell other stocks so that they can raise capital to buy these. Is that what you're talking about? [00:04:00] Speaker 2: So that is what I worry about. Why worry? Sorry? Why worry? Because if there isn't enough money first time around, you're going to have to have an adjustment in the prices of markets around. So it will be higher interest rates and low equity values in order to free up the market, the money to do that. Look, SpaceX is incredible. And the fact that it's up another 16% today, that's really, really important. But there's a lot in the pipeline, not just IPOs, but the government funding a 6% deficit, the companies funding massive investment plans. [00:04:36] Speaker 1: So does anything about this bull run say that we no longer believe that trees can't grow to the sky? When you're teaching your class at Wharton, what do you tell the students? We do not see this market shaken very often, and it just continues to hold very strong and grow. [00:04:55] Speaker 2: So I say it really helps to be the most attractive economy and the most attractive market because you will attract capital from elsewhere. I also say there's a limit to valuations. And markets overshoot on the way up and markets overshoot on the way down. So make sure, if you happen to be investing, and quite a few of the students are investing, make sure that you construct your portfolio on a bottom-up basis. [00:05:19] Speaker 1: Yeah, you don't, not too much in one particular sector, ahem, tech. Mohamed, great to see you. Thank you very much.