via businessinsider:
- Mohamed El-Erian addressed the key concerns investors are grappling with today, in an Insider interview.
- He flagged recession risks, covered credit-crunch concerns, and bemoaned the Fed’s tight monetary policy.
- The top economist also sounded the alarm on commercial real-estate risks in a world of high interest rates.
A credit squeeze is threatening the US economy, high interest rates have heightened the risk of “financial accidents”, and the commercial real-estate sector is facing its “moment of truth,” Mohamed El-Erian told Insider in an exclusive interview.
The chief economic adviser at insurance-to-asset management giant Allianz addressed the current key concerns of investors – seemingly fueled by the Federal Reserve’s steepest interest-rate increases since the 1980s. The central bank has boosted benchmark rates toward 5% from almost zero just over a year ago, to curb decades-high inflation that policymakers had initially dismissed as “transitory”.
“Having started late in addressing inflation, the Fed has been forced into a highly concentrated set of rate hikes that have not only enormously narrowed the path for a soft landing but have also increased the risk of both recession and financial accidents,” El-Erian said on Wednesday.
APOLLO: “Data from downtowns show that cellphone activity in San Francisco is at 31% of pre-pandemic levels.
New York is at 74%
Chicago is at 50%
Boston is at 54% ..… This has implications for retail, restaurants, and office.” [Slok] pic.twitter.com/6Zk7apNspI
— Carl Quintanilla 🔥 (@carlquintanilla) April 24, 2023
53% of Americans say they don't have any emergency savings, per CNBC: pic.twitter.com/RK3eWVQZ4Q
— unusual_whales (@unusual_whales) April 24, 2023
The Philly Fed Manufacturing Activity Index is a key indicator of economic activity. It has been trending downward in recent months, indicating that the economy may be heading for a recession.
Charles Hugh Smith: Extremes Get More Extreme
To assess just how extreme things have become beneath the placid surface of peachiness, let’s look at federal debt, the Fed balance sheet and Household Net Worth in relation to inflation and GDP, two standard measures of growth.
All else being equal, most economic-financial metrics will roughly track either inflation or Gross Domestic Product (GDP), the broad measure of the economy’s activity / expansion /contraction.
In other words, one way to identify extremes is to look for metrics that are way out of line with GDP and inflation. Consider federal debt as an example. We can be forgiven for assuming federal borrowing would more or less track the expansion of GDP.
But as the chart below shows, if federal debt had tracked GDP since 1990, it would be around $16 trillion, half of its current bloat of $32 trillion. Hmm, $16 trillion here, $16 trillion there and pretty soon you’re talking real money.
The GDP of Japan is around $4.3 trillion, the GDP of Germany is about $4 trillion, so that $16 trillion in “excess federal borrowing and spending” is the equivalent to four GDPs of the third and fourth largest economies in the world (just behind the US and China).
Does an “excess $16 trillion” of federal debt qualify as extreme? I think the fair conclusion is “yes.”
Next up, the Federal Reserve Balance Sheet, which reflects the sum created out of thin air to buy US Treasury bonds and mortgage-backed securities as the means to inject gobs of US dollars into the financial system as liquidity for speculation.
Hmm, if the Fed balance sheet had tracked GDP, it would have risen from around $700 billion in the early 2000s to a meager $1.8 trillion, a far cry from its current level of $8.6 trillion. In round numbers, this is about $7 trillion in “excess Federal Reserve stimulus,” not quite the combined GDPs of Japan and Germany but hey, $1 trillion at these levels is a mere rounding error, right?