Mohamed El-Erian, former CEO of Pimco spoke with Bloomberg TV's Olivia Sterns and Alix Steel about the selloff in stocks and the implications for Fed policy.
When asked whether we are looking at another 1998, El-Erian said: "I'm not a buyer that this is 1998. Nor am I am a buyer that that's 2008. And in 1998 you had a lot of fixed exchange rates. Now you have fewer of those. And 2008 was about the payments and settlement system. This is not about the payments and settlement system. This is an old-fashioned repricing of two things."
He added: "I'm not a buyer that this is the crisis of all crises. Yes, this is a very unpleasant repricing, very unpleasant. And it's going to go quite deep, but it's not going to derail the economy in a major way."
El-Erian said he believes a December rate hike is still possible: "I think December is still on the table, and for the following reason. The economy will benefit from lower commodity prices, particularly oil. And the economy will benefit from lower interest rates. And that's going to fuel some underlying strength that the economy does have.
The big question is how much damage are we doing to the wealth effect, and to what extent will external demand collapse? We cannot answer that question yet. So I would think December is still a possibility, but September is unlikely to happen."
El-Erian Video
Contradictions
Link if video does not play: El-Erian: This Is Not 1998 or 2008
This may not derail the economy, unless of course the stock market is the economy.
But it's not really the economy traders are worried about, it's the stock market.
Did you catch El-Erian outright contradiction?
- It's not going to derail the economy in a major way.
- The big question is how much damage are we doing to the wealth effect, and to what extent will external demand collapse? We cannot answer that question yet.
If you do not know how much damage the selloff will do to the wealth effect or whether or not a selloff will collapse external demand, then statement number one is impossible to make.
Six Points El-Erian Misses
- It should be 100% obvious the entire global economy is slowing.
- The US economy is growing at about 1% a year through three quarters (using the Atlanta Fed GDPNow model as the GDP estimate for third quarter).
- Even a "minor" disruption at this point can sink the US into recession.
- Lower commodity prices are a reflection of weak demand, not a boost to consumer demand
- Rent prices and Obamacare eat up 100% if not more of recent wage hikes for those in lower income brackets.
- The only underlying strength in the US economy pertains to autos and housing. Neither will benefit from rate hikes.
I stick with my recession call. Perhaps we are even in one right now. Regardless, El-Erian sees mirages that simply do not exist.
Mike "Mish" Shedlock
