Mohamed El-Erian, an economist, spoke to CNBC Monday about the U.S. economy and markets. He also discussed the Federal Reserve’s response against inflation.
El-Erian is president of Queens College, Cambridge University. El-Erian is also the Chief Economic Advisor at Allianz. Allianz is the corporate parent to PIMCO, which was where he served as CEO and cochief investment officer.
The markets seem to have realized that there are three problems. The first is persistent inflation, which is very high. The Fed is far behind at two, and the path to orderly disinflation seems very narrow.
These factors are causing companies to be concerned about their growth prospects. He pointed out that Monday’s report by investment bank Goldman Sachs stated that 35% of the country will experience a recession within the next two-years. El-Erian said that 35% is a significant number.
“So, the big question now is: Can we navigate this inflation growth landscape that has become more difficult?” He noted that bank CEOs are concerned about the macro environment.
The restoration of value
After the weekend selloff of major cryptocurrencies including bitcoin, the chief economic advisor at Allianz was asked what the future outlook for crypto markets is.
He stated that the main concern for cryptopeople is the fact that the decline is occurring at a time gold is rising and hitting nearly $2,000 per year. “Because crypto is a diversifier. It’s attractive at the time of inflation. Recent developments have shown that crypto is no longer attractive.
According to the economist, there is a reason for this. It’s because cryptocurrency, unlike gold, has greatly benefited from all liquidity injections. What you are seeing in crypto is a tug-of-war between the recognition that liquidity is being withdrawn from the whole system and its attractiveness as an investment diversifier. It’s the liquidity that has won so far.
He further detailed:
You are seeing the restoration of value across all assets. That’s a good thing. It’s everywhere: in stocks, bonds, and crypto.
He said, “We are only adapting to a paradigm where liquidity is not abundant and is not predictable.”
El-Erian stated again: “So I see this as part of restoring value that we are witnessing in quite a number of assets, not all yet but quite a lot already.”
The Fed’s Inflation Targets and Crypto Market
El-Erian was also questioned about whether the Federal Reserve would change its inflation target or what it would look like.
He replied, “What will force them change their target? The recognition that they can’t reach their target by being so late and their credibility is endangered.” They would be concerned that if they hit the brakes too hard, this could cause the economy to go into a long-term recession. He said, “They will be very tempted and many people will push them for a higher target of 2% to 3.3% as a way to get out. It’s not an easy path out and it will be controversial.
El-Erian stated that this is what you get if you wait too long to recognize inflation and take action. We should have initiated QT last year. But we didn’t. We are now seeing the effects of QT being delayed by the Fed.
When the Fed follows his description, what would happen to crypto and gold? He responded: