Referring to the Friday market selloff, which ended the worst quarter of losses on the S&P since Q4 2008, Mohamed El-Erian, CEO and co-CIO of PIMCO, said that it was a “particularly bad omen” for worse times to come.
In a Monday Reuters opinion piece, El-Erian said that, while he would like to say that all the volatility and fear in the markets was just an “irrational cycle of self-feeding fear,” instead he felt that, despite the continuing solidity of multinational companies, the market was instead sending signals about rapid deterioration in the world economic outlook. It was also, he added, “lamenting astonishingly inept policy-making in far too many western economies.”
Unless policies in both the U.S. and Europe change drastically, he said, the global economy will get worse before it gets better—much worse, taking years, if not decades, to recover and damaging both economies and lives around the world.
Focusing on three factors he said were responsible for the situation, he ticked them off: poor economic growth, excessive contractual liabilities, and disappointing policy responses. As a result, he said, economies in the West are bound up in the trifecta of an unemployment crisis, a debt crisis, and a banking sector that is growing increasingly fragile.
Those three crises—debt, unemployment, and banking woes—must be addressed and resolved, he said, or the global economy will spiral downward as it is deleveraged. “Selling will beget selling,” he predicted; those with money to spend will refrain, and even healthy companies eventually will be hit.
Recovery is in the hands of policymakers who so far have been reluctant to act in any substantive way; indeed, said El-Erian, they have already procrastinated too long and thus all their viable choices are fraught with high costs and risks, making them hesitate even more. With markets totally dependent on policymakers, he said, and people becoming more and more disenchanted with them as they fail to act, the situation is dire; he cited the Economist cover for the week, which said, “until politicians actually do something about the global economy … be afraid.”
He cautioned investors to wait “for stronger evidence that policymakers have the willingness, ability and effective instruments to respond properly.” Then, he said, those who must deleverage will present investors with promising opportunities. Investors should be patient, he added, and urged that firewalls be strengthened to “limit the further spread of economic contamination and financial contagion.”