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The Good, Bad, & Ugly Of Virus Response: El-Erian Admits Govts & Central Banks Can Only Do So Much

The Good, Bad, & Ugly Of Virus Response: El-Erian Admits Govts & Central Banks Can Only Do So Much

Look for this week to be full of news about governments and central banks signaling their “whatever it takes” willingness to take additional policy measures to fight the contractionary impact of the coronavirus on virtually every economy around the world. Already, the Federal Reserve signaled on Friday readiness to loosen monetary conditions in the United States while Italy announced on Sunday a “shock therapy” of fiscal measures.

As more announcements materialize during the week, it will be crystal clear that the question will not be about the willingness to act but about the effectiveness of those actions. For the most part, the answer will be only partly satisfactory in the short term until two underlying health conditions change. Less obvious will be the need to weigh immediate benefits — partial and as necessary as they are — against the possibility of longer-term unintended consequences associated with the inevitable use of ill-suited policy tools for the task at hand. Those include more borrowing of growth from the future and even greater reliance on activities bolstered by central bank liquidity injections.

An increasing number of sectors and countries are experiencing sudden-stop dynamics as the economic effects of the coronavirus spread more widely around the world. Both demand and supply are being hit hard and in multiple ways. For example, News Corp., the owner of the Wall Street Journal, banned nonessential travel for its employees this weekend; more conferences are being cancelled around the world; airlines are reducing flights; and companies are asking employees to work from home.

…click on the above link to read the rest of the article…

My Main Worry is Europe

My Main Worry is Europe

Can it get any better than this? That’s the question investors are asking themselves after an exceptional year. Despite a slowdown in the global economy and increasing trade tensions, almost every asset class is up for the past twelve months.

Mohamed El-Erian

Mohamed El-Erian is convinced that the world is nearing a tipping point. According to the internationally renowned economist who coined the term «New Normal», the faith of the global economy depends on a successful hand-off from monetary to fiscal policy and structural reforms. Otherwise, the world will sink into a mire of financial volatility and political collapse, he fears.

«As good as the ‹New Normal› was for the last ten years, I don’t think it will continue during the next ten years», says Mr. El-Erian in an extended interview with The Market.

In his view, Europe is getting much closer to a fateful junction. If the European economy hits stall speed, chances of a recession are increasing, Mr. El-Erian argues. Furthermore, he cautions that the U.S.-China deal will be a short-term truce since trade is no longer just about economics but also about national security.

Mr. El-Erian, investors are looking back at an amazing year with many turns and twists. What’s ahead for the financial markets in 2020?
There’s a tendency to what I call a «one issue market», meaning the market embraces a single issue and is influenced by that issue most of the time. For a long time, this issue used to be Central Banks, then it has evolved into trade. Trade will continue to be an important issue, even with the recent short-term truce. We have pressed the pause button on globalization. Now, the big question is if we press the play button again and continue to globalize as the market is assuming or if we step towards pressing the rewind button on globalization and deglobalize. That uncertainty is not going to go away. It’s going to be with us for the whole of 2020 because trade is no longer just about economics. It’s also about national security.

…click on the above link to read the rest of the article…

CONfidence

CONfidence

Markets are subject to a giant con game. The game of CONfidence. Confidence must be maintained under all circumstances or we’re heading into a global recession first and then a US recession to follow.

Consider the macro context here: Nine major economiesare either in recession or on the verge of it. This includes Germany, UK, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, Russia. Everything else is slowing down hard. Yields are plummeting for a reason and once again the world is looking to central banks to bail everyone out and for stimulus programs to be launched to rescue a global economy that hasn’t been able to do without in 10 years. US consumers are holding the US economy up is the consensus as they keep spending for now, but already we saw a dip in confidence. Why? Trade tensions, political tensions, and yes, concerns that the longest business cycle may come to an end. Add scary stock market headlines and before you know it the consumer is holding back.

And hence confidence must be maintained under all circumstances. This has been the game for 10 years and hence any market drops that would add pressure to confidence must be averted. You really think it’s an accident we see intervention always at the point of serious trouble?

Retail sales dropped hard in December as markets plummeted. It’s no coincidence. Hence any prolonged malaise must averted.

As Mohamed El-Erian pointed out so clearly this week:

“We may end up in a situation where people read these alarmist headlines, they get concerned, they stop spending. As they stop spending, companies stop investing. And then we get a major slowdown:” ⁦

Alarmist headlines? How about headlines that point out reality? But the larger point is clear: Lose the consumer and a recession is unfolding perhaps more quickly than anyone can imagine. After all nobody on the planet called for a 1.5% US 10 year yield in 2019 or a German 10 year bund at -0.72%.

 …click on the above link to read the rest of the article…

Globalist Disinformation Spotlight On – Mohamed El-Erian

Globalist Disinformation Spotlight On – Mohamed El-Erian

In this new series of “Spotlight” articles which I will be publishing intermittently I plan to highlight specific individuals who work within globalist institutions or who often express pro-globalist sentiments. More to the point, I will be dismantling propaganda coming directly from the pontifications of globalists. I often hear people make the argument that alternative analysts should be “naming the enemy” more often in our work. Of course, if we chased that goal every time we published something each article would be longer than a book.

I often suggest to those wanting to know who the globalists are that they simply identify people who explicitly promote globalism. It’s not as if the elitists are invisible. They are generally narcissists, and narcissists have big mouths. They are always looking for attention – it’s one of their greatest weaknesses and it makes them easily identifiable.

But what is “globalism”? Well, it is a combination of ideological elements. First and foremost, they believe in total centralization of power. This means the eventual erasure of all national borders, all economic divisions, all cultural distinctions. They want a one world system, with a single economic authority, a single currency and a single global government.

This system is sometimes presented as a kind of future “Utopia”, in which war would be a thing of the past and poverty will be eradicated. The cost of such trade is never mentioned, though. The complete extermination of individuality, personal choice, free thought, and self sufficiency is the price of the globalist contract with the devil.

Globalists also tend to support programs which openly or indirectly favor population control. This includes programs posing as environmentally conscious. The climate change and carbon taxation schemes in particular are designed to reduce access to energy, making production expansion impossible thereby shrinking the means to support the current population.

…click on the above link to read the rest of the article…

El-Erian: 1000-Point Swings In The Dow Are The “New Reality”

While even some of the most dogged bulls are throwing in the towel on their optimistic forecasts for the US (see Goldman taking the axe to its 2019 GDP forecast noted earlier), there are those who steadfastly believe that 2019 will be a solid year for the US economy, and that no recession is still in sight.

One among them is Allianz chief economic advisor Mohamed El-Erian, who dismissed concerns that the US is facing a recession in the coming year, saying in an interview on Fox News Sunday that the economy is likely to continue growing at 2.5-3%.

“[A recession] is certainly not becoming a reality. You need either a major policy mistake or a massive market accident to push us into recession. But we will slowdown unless we build on the pro-growth policies.”

On the same day that he penned a Bloomberg op-ed, explaining why “life is getting harder for central banks” in which he concluded that “whichever way you look at it central banks will be exposed to more criticism from politicians, market participants and analysts” – and rightfully so, after all it was the central banks that engaged in the biggest can-kicking experiment in history by injecting $16 trillion in liquidity and the time to pay the piper is fast approaching, El-Erian said that “Trump’s frequent criticism of Fed policy is unusual” (in fact, as Goldman observed earlier it is not at all unusual and that “it is far from unprecedented on a longer-term comparison”), adding that the independence of the central bank is important to economic security (at this point we could go into a tangent how only career economists believe the Fed is “independent”, especially from commercial bank pressure but we won’t).

…click on the above link to read the rest of the article…

“EM FX Never Lies” – BofA Warns As Brazilian Real Is Routed

Mohamed El-Erian warned overnight that Brazilian policy makers are “in quite a tricky position — and there’s little room for error,” and judging buy this morning’s rout in the real, he is dead right.

Crippling nationwide trucker strikes, which prompted the resignation of Petrobras CEO, and forced Brazil and Argentina to roll back their planned fuel-price increases have, according to Bloomberg’s Davison Santana, undermined their already fragile currencies and deter investors eager for signs authorities are serious about putting fiscal accounts in order.

Brazil’s projected budget deficit as a percentage of gross domestic product stands at 7.4 percent, the highest among major emerging-market peers.

The gap, as El-Erian explained succinctly, leave government with a stark choice: keep borrowing or cut spending.

As Santana notes, borrowing more isn’t a healthy option. Higher deficits make currencies less attractive, leading to rising interest rates that reduce growth and erode government revenue in a cycle that ends up, you guessed it, swelling the deficit. Reining in spending typically makes more sense. That’s why it’s all the more remarkable that Brazil recently capitulated in their efforts to remove artificial price controls that kept fuel costs low. After all, it’s much harder to reduce spending while maintaining subsidies.

So where does this leave the real? It means authorities will have to keep intervening in currency markets, a costly use of foreign-exchange reserves that can only stop for good once the nations tackle their underlying fiscal problems. And indeed, after Brazil’s real tumbled to a two-year low on Tuesday, the government effectively tripled its support – which has already failed dismally.

A month ago we explained how critical the Brazilian Real is to identifying just when the Emerging Market turmoil will go viral.

…click on the above link to read the rest of the article…

Toxic Politics Versus Better Economics

Toxic Politics Versus Better Economics

NEW YORK – The relationship between politics and economics is changing. Advanced-country politicians are locked in bizarre, often toxic, conflicts, instead of acting on a growing economic consensus about how to escape a protracted period of low and unequal growth. This trend must be reversed, before it structurally cripples the advanced world and sweeps up the emerging economies, too.

Obviously, political infighting is nothing new. But, until recently, the expectation was that if professional economists achieved a technocratic consensus on a given policy approach, political leaders would listen. Even when more radical political parties attempted to push a different agenda, powerful forces – whether moral suasion from G7 governments, private capital markets, or the conditionality attached to International Monetary Fund and World Bank lending – would almost always ensure that the consensus approach eventually won the day.

Newsart for Is Populism Being Trumped?

In the 1990s and 2000s, for example, the so-called Washington Consensus dominated policymaking in much of the world, with everyone from the United States to a multitude of emerging economies pursuing trade liberalization, privatization, greater use of price mechanisms, financial-sector deregulation, and fiscal and monetary reforms with a heavy supply-side emphasis. The embrace of the Washington Consensus by multilateral institutions amplified its transmission, helping to drive forward the broader process of economic and financial globalization.

Incoming governments – particularly those led by non-traditional movements, which had risen to power on the back of domestic unease and frustration with mainstream parties – sometimes disagreed with the appropriateness and relevance of the Washington Consensus. But, as Brazilian President Luiz Inácio Lula da Silva demonstrated with his famous policy pivot in 2002, that consensus tended largely to prevail. And it continued to hold sway as recently as almost two years ago, when Greek Prime Minister Alexis Tsipras executed an equally notable U-turn.

…click on the above link to read the rest of the article…

Look Who’s Dragging Down the Global Economy Though No One Is Allowed to Say it

Look Who’s Dragging Down the Global Economy Though No One Is Allowed to Say it

“A bit of inequality is good as it creates incentives for hard work and rewards entrepreneurship,” explained Mohamed El-Erian, Chief Economic Advisor of Allianz and former CEO of PIMCO. “Lots of inequality is bad, disenfranchises segments of society, and erodes the social fabric,” he said, joining the chorus of voices that have been lamenting income and wealth inequality as an economic problem.

But none of these voices dare to mention the cause – though they all know it. And we just got numerical confirmation.

Hundreds of millions of people have been lifted out of abject poverty over the last two decades, mostly in Asia. In that respect, inequality has been reduced. But on a national level, “you get a different picture,” El-Erian said in the interview published on Monday:

Whether in the US, Brazil or China: there has been a significant increase in both income and wealth inequality, and so much so that it is now affecting access to equal opportunities. The minute you start talking about opportunities, you start making it a much deeper problem and harder to solve.

“Social cohesion is at risk,” said Allianz Chief Economist Michael Heise in the same interview. “That is a danger for industrialized and developing countries alike. In recent times we have seen social upheavals and conflicts where poverty played a major role.”

…click on the above link to read the rest of the article…

 

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