Taps Coogan – November 15th, 2022

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Mohamed El-Erian, Allianz Chief Economic Advisor, recently spoke with CNBC to warn that the economy and markets are not out of the woods yet and are not pricing in liquidity risks and declines in household finances.

Some excerpts from El-Erian:

“I think we have overcome interest rate risk and inflation risk, we’ve fully incorporated that. I think we’re starting to understand credit risk, recession, etc… What we haven’t gotten our arms around as a market is market functioning risk, liquidity risk… I think that still has to play out as the Fed marches up with its interest rates…”

“I’d rather the Fed not be late, I’d rather they not have to increase rates so quickly, but given that it’s so late, I don’t think they have a choice (to keep raising)…”

“Revolving credit is now at a record high. It’s gone up by 9% in the last year. It’s keeping up with inflation but it’s still at a record high and what we’re seeing is the segmentation of the consumer base. So while consumers in general have a strong balance sheet, while the labor market in general is strong, once you look at the composition, if you are selling to the lower income segment of the population you are seeing significant declines in sales.”

“The conventional wisdom is that (congressional) gridlock is good for markets but we have to understand, it depends on what path the economy is on… The Fed cannot step in and provide stimulus… (like they did in 2010).”

People tend to focus on the rate hikes and forget about QT. Nonetheless, QT represents a dollar-for-dollar drain of liquidity available to financial markets at the pace of $1.14 trillion a year. Whether the Fed raises another 75 basis points or another 100 basis points is going to matter much less to markets than how long they maintain the current pace of QT.

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