Mohamed El-Erian commented Friday on some of the more troubling spots in the global and U.S. economy.
El-Erian, Allianz’s chief global strategist and PIMCO’s former CEO, discussed Brazil’s recent downgrade, the oil market, the unstable Chinese economy and the tech sector’s disruption of traditional industries in an interview with Bloomberg’s Betty Liu and Pimm Fox on Bloomberg Markets.
Earlier this week, Standard & Poor’s lowered its rating on Brazil’s debt to junk status.
“It’s so sad,” El-Erian told Bloomberg Markets. “Brazil is stuck in this stagflationary environment, in which they cannot regain control of either of the growth dynamics or the inflation dynamics. The result of that is that budgetary policies become much more difficult, which then accentuates politics, which then feeds back. So they are stuck in this vicious cycle and the S&P was right to downgrade them. It’s sad to see them lose their investment grade, but that’s their reality right now.”
And El-Erian doesn’t see Brazil’s situation changing anytime soon.
“They’ve got to regain control of the growth and inflation dynamics and that means much more political boldness in terms of taking measures,” he said. “And I don’t see that happening anytime soon, unfortunately. So I remain quite worried on Brazil.”
El-Erian, who on multiple occasions has called the oil market “unhinged,” commented on a new report from Goldman Sachs that suggests oil could fall to as low as $20 a barrel in a worst-case scenario.
“The oil market has been unhinged,” he told Bloomberg Markets. “It’s like the market for emerging market currencies. they’ve been fundamentally unhinged. They’ve had an earthquake. The oil market has had an earthquake on the supply side, on the demand side, and you know what, they’ve changed their swing producer, so the pricing dynamics have completely changed.
While El-Erian said $20 a barrel is “possible,” he’s a little more optimistic.
“[Goldman Sachs is] in saying ‘Don’t underestimate the potential for enormous volatility,’ but I think $20 is really aggressive,” El-Erian told Bloomberg TV. “I don’t see oil going down to $20 unless there is a major global economic catastrophe. But, [Goldman is] right in saying that this is a much more volatile oil market just like it’s a much more volatile market for foreign exchange in emerging markets.” China
Regarding China’s slowing economy, El-Erian thinks the disruption in China has been financial more than economic.
“If the Chinese policymakers are right, they believe they can contain the impact to the financial sector,” El-Erian told Bloomberg TV. “Meaning, it’s not going to impact household behavior. The risk is that it does impact household behavior. I’m a buyer of the notion that financial instability will continue in China but they can protect the real economy, which means that it will soft land.”
China predicts it will reach its growth target of around 7% in 2015, but El-Erian isn’t so optimistic. He predicts growth closet to 6%.
“But I am a buyer that they can soft land the domestic economy but financial instability is going to continue because there’s such a bubble in the equity market there,” El-Erian said.
El-Erian called what’s happening in the tech sector “very exciting” in its ability to disrupt traditional industries.
“Look at what Uber has done to urban transportation. Look at what Airbnb has done to Sheraton, Starwood and Hilton,” El-Erian told Bloomberg Markets. “They are disrupting those sectors – without building a hotel building, without having taxis that they own themselves. This is a very exciting time for tech because you can disrupt from another world.”
He also discussed whether or not the tech space is sucking funding away from other businesses.
“I don’t believe that that means you’re crowding out other sources of funding,” he said. “There’s lots of capital available for the right opportunities. The problem today is not the lack of capital, the problem is that economic risk-taking in certain areas is not high enough and therefore they’re not using capital.”
— Check out Analyzing the Odds of a Fed Rate Increase on ThinkAdvisor.