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While we continue to wait for the president, let's check the broader markets as stocks try to build on yesterday's gains. We invite Mohamed El-Erian, Chief Economic Advisor of Allianz. Mohamed, nice to see you. I hope you don't mind if we have to rush to the president. But in the meantime, uh, more belligerent comments from Collins today, Mester, Goolsby yesterday .
But your general point is that many of these things are not currently controlled by central banks . Yes, I mean the main problem is supply, um, and in particular energy, and this inherent focus on demand. I understand that. You know, if central banks become the sole driving force again, they will only be able to act through demand.
But this is not the right decision. I think the right solution is to do something on the supply side, and if you can't do that, address the demand side through the budget. And that helps, as you know, Carl, also take some of the pressure off long-term returns. So do we risk falling into this trap again , bringing the central bank to the forefront and saying, “You’re the only game in town.
" Now deal with the problem we have ." Right. Do you expect them to start pressuring Congress to impose some fiscal discipline ? No, I think Kevin Warsh was absolutely right in saying he was going to stay in his place. So they won't do it. In Europe they do it. Christine Lagarde says this all the time.
The US is different, so I don't expect them to say that, but I hope more Wall Street analysts will focus not just on the Fed, but on all the tools we have and ask the question: "What is the best solution?" Not just going back to...Oh, it's the Fed. This is the Fed. So do you think there will be, I mean, I think there will be a big auction of two-year debt this afternoon.
Um, we know these auctions are coming up, and they're big, there's competition , and there are fiscal concerns. Do you expect there to be any profitability issues ahead? Do you think we haven't seen the worst yet? I think yields will remain elevated. Look, oil, both WTI and Brent, is below 100, and the 10-year bond is worth 4.95.
We did not get the relief on 10- year bonds that one might have expected. 30-year bonds were almost unchanged. The curves have straightened out. Why? Because two-year bonds have risen. So the yield complex tells you that there is a demand problem, and that particularly creates space for hyperscale bond issuance.
Look, we should be very proud that we have capital markets that are willing to fund such incredible innovations. But we need to create space for them, and that brings us back to the fiscal side again. Goolsby said something interesting yesterday, Mohamed , which is that maybe it's time to stop, uh, looking at supply disruptions, because at some point it becomes either too...
Too much patience or too dramatic. I wonder if you think this is Mark's moment or not. Um, I don't think they want to repeat the mistake of 2021 when they called inflation temporary. And so it rose to 9% at the CPI level. That's another matter. Um, I'm worried that the markets will force them to act again and again.
We are already considering three more raises by the middle of next year. I worry that we will find ourselves in what Kevin Warsh rightly called the “hall of mirrors” phenomenon, where the market forces the Fed. I think the Fed had no choice, for example, but to hike last week because expectations were 92%.
I hope we get some supply-side relief, and I hope fiscal policy can help solve the problem or at least stop it from getting worse. After all, that's how it was with stocks. I mean, do you see a headwind for stocks as yields remain high, or is AI trading just too powerful? I think the profits are just too powerful or not.
Profits, I think, are the shield that was able to repel almost everything from the stock market, as you noted, almost to the highs. So it all comes down to earnings growth, and if it remains steady, the stock market will continue to amaze everyone.
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