Submitted by Taps Coogan on the 23rd of December 2018 to The Sounding Line.
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Allianz chief economic advisor Mohamed El-Erian recently spoke to CNBC about the Fed’s recent rate hike and the market sell-off that has followed. He reiterates his belief that despite the market collapse, economic fundamentals are ‘solid’ in the US.
El-Erian:
“Let me tell you the good, the bad, and the ugly. The ‘ugly’ is it feels terrible. Prices are gapping. There is no way to hedge. Even good names get thrown out with bad names. This is very unsettling. The ‘bad’ is, if we are not careful, and this is a message to Washington…, bad market technicals can become bad economics… The ‘good’ is this was going to happen at some point. It would have been better if it happened a little bit earlier. It would have been less violent. But, it is going to create value and it is going to create a sustainable basis going forward.”
“I think the actions weren’t a problem. I think it was the communication of the actions that were a problem and part of that is because you don’t have people in the Fed… that are sensitive to markets and have lived markets on the trading floor… (Jerome Powell) is a private equity guy. I have huge respect for him… but he didn’t live on the trading floor. He hasn’t seen how technicals can dominate markets and completely ignore fundamentals… They (the Fed) are trying to break the co-dependence and the fact that the markets have held the Fed hostage… We will live through this. The economy is solid… I think that the Fed can self-correct by simply saying ‘we are very sensitive to what’s happening to the rest of the world and we will continue to asses spill backs’ and second to hint that balance sheet policy is not off the table.”
There is more to the discussion, so enjoy it above.
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The economic fundamentals are sound NOW. What about when the enormous corporate debts can’t be serviced? What about inevitable waves of bankruptcies? What about Emerging Markets imploding due to astronomical dollar based debts and malinvestment? What about resulting waves of layoffs? And finally, what about the huge hit to the housing market that will have?
Everyone, and I mean EVERYONE never seems to mention the risks. They are there and they are HUGE.
I discuss the risks all the time. I find that it’s also good to have opposing opinions. El-Erian always has a bullish slant, but he makes interesting points. When the market was last selling off this hard in 2008, we were IN a recession, growth was negative, and banks were failing. We may be headed for a recession, but we are not in one right now.
The Fed does not exist to support the Street! Period!
Main Street or Wall Street?
Ample and predictable liquidity will be the cause of the next Great Depression.
Will we have the social cohesion to endure?
Great comment! The amount of wealth that escapes the next large economic crisis is very important because it will set the bar that determines the rate of inflation or deflation in coming years. Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer. The amount of wealth stored in these intangible areas based on faith have grown at a massive rate during the last several decades and were relatively minor players until recently. Currencies, also known as fiat… Read more »
Taps, thanks for another great article and have a very Merry Christmas!
While I appreciate the opinion of Mohamed El-Erian I think he may be a bit to close to the elite’s view of the economy garnered from years of soaring asset prices. The economy may not be nearly as good across much of America as these guys think. The selloff we are seeing has been a longtime coming and they can place blame wherever they want but bubbles always pop.