Mohamed El-Erian: The worst of inflation is behind us

[00:00:00] Speaker 1: 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. Right. 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, you know, 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? [00:00:34] Speaker 2: I think what it says, and we've seen this with levered ETFs, we've seen that with everything, is if you lower the barriers to entry to markets where there's significant upside, you will get a major reaction. [00:00:45] Speaker 1: But is there significant upside? Because one of the things we keep learning in the prediction markets is that most people are losing. [00:00:51] Speaker 2: 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. The 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 notion. They like the lottery ticket. Yeah. They absolutely love the notion. And the fact that you lower 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. [00:01:25] Speaker 1: But do you think that's a good thing or a bad thing long term? [00:01:29] Speaker 2: That's a really complicated question. Yeah. We got some time. Right. 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. [00:01:57] Speaker 1: 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 is what? We're about 82. I don't know if we can flip that board around right now. 88. 88. You're looking at Brent's 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? [00:02:26] Speaker 2: 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 the 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 10-year treasury, whether you look at the yen. So, this is a fascinating time because everything is in equilibrium, but it's very unstable. [00:03:21] Speaker 1: 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? [00:03:31] Speaker 2: 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. [00:03:39] Speaker 1: So, you think that actually we're going to see a meaningful decrease in inflation come this fall, come this winter? [00:03:44] Speaker 2: Yeah, I mean, the one qualification is oil prices. And regular is above four today. And diesel is above five. 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. [00:04:10] Speaker 1: 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 is whether you think there's going to be an overbuilt on the other end. [00:04:25] Speaker 2: So, there's likely to be an overbuilt because every innovation tends to overdo it in the initial phases. We can look at fiber. I mean, I can take you back to every single innovation. [00:04:35] Speaker 1: But that could still be years out from now in terms of when is the moment you'll wake up one morning and go, okay, there's an overbuilt? [00:04:41] Speaker 2: Probably in three to four years. So, this can go, this can run for quite a while. 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. [00:04:58] Speaker 1: Is that different than the late 90s with fiber or some of these other technologies? I don't remember. And we should go back and, like, get the tapes. When you talked 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 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. [00:05:27] Speaker 2: 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 Monique at Google calls the inventor of inventions. Am I? Or recursive self-improvement. Right. It continuously allows for more things to happen. And it's very hard to predict. So I think it is almost impossible to predict the end point of this. Other than I do believe it will be in higher productivity, but also a lot of disruptions that come with that.