Submitted by Taps Coogan on the 4th of January 2019 to The Sounding Line.
Allianz chief economic advisor Mohamed El-Erian recently spoke to CNBC about yesterday’s weak ISM report, as well as his outlook for markets and the economy in 2019. He remains of the belief that, while a US recession remains unlikely in 2019, liquidity is tightening, and a pickup in high yield defaults is likely.
“Global growth used to be about synchronized pickup. That’s where we were 12 months ago. Then we went into divergence with the US outpacing Europe and China. Now there is evidence of the wrong type of convergence, that the convergence is happening with the US is slowing to where the rest of the world is and that is why the market reacted to the ISM number…”
On a trade deal between the US and China:
“I have been consistently saying that we would get a good trade deal with China, because China has no other options than to do what Mexico, Korea, Canada, the EU do, which is provide concessions because the US wins a trade war. The issue is that that is not the main concern out there. The main concern out there is that there aren’t enough pro-growth policies. Certainly not enough in Europe, and in the US we’re not seeing much come out on infrastructure, which is really important. So yes, it would help at the margin. I think the first thing to change, if you think of the three things that are undermining markets: fundamentals, liquidity, and technicals, the first thing that will change to the positive are technicals.”
On the chances of a US recession in 2019;
“Small unless we get a massive policy mistake. Don’t underestimate the momentum still in this economy. So we only fall into recession through a massive policy mistake.”
(When the host notes: “Many people think we have already seen that from the Federal Reserve”)
“Nothing that can’t be corrected. What we’ve seen is miscommunication… and I think Chairman Powell has a chance to change the narrative on that tomorrow (the 4th of January), but it’s not going to be instantaneous. It’s going to be a process.”
On US government and corporate debt:
“I am not worried about America itself, in terms of the government debt. I think that’s manageable. but do look at the corporate sector. High yield issuance has stopped completely, and you have firms that have high cash burns, little liquidity, and refinancing needs. So you’re going to start seeing a pickup in the default rate in the high yield complex and that’s an issue to keep an eye on… Be very selective and make sure you can afford your mistakes. Especially with the fact that (the market) has over-promised liquidity with the proliferation of ETF’s and passive investment”
For what it’s worth, I would not say that the chance of a recession in 2019 is ‘small.’ That is not to say that a recession is guaranteed or even the most likely scenario for 2019, but it certainly is plausible. Forget that the market may be oversold in the short term. The idea that the general trend lower, which has been going on for nearly a year in most global markets, will reverse due to technicals alone, without some ‘reason to believe,’ is quite optimistic. We are either headed to a fairly obvious recession, or we pull out of this tailspin on the back of a change in the direction of monetary, trade, or global economic policy. I remain open minded to either possibility, if not modestly optimistic, but lets not kid ourselves, the possibility of a recession is not small.
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