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Bond expert and economist Mohamed El-Erian

Portfolio > Economy & Markets

Political Gridlock 'Not Good News' for Today's Markets: El-Erian

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The conventional wisdom that Washington political gridlock is good for markets may not hold up this time, economist Mohamed El-Erian suggested Wednesday.

“We have to understand that it depends what path you think the economy is on,” the Allianz chief economic advisor said on CNBC’s Squawk Box as officials counted votes from Tuesday’s election to determine control of the U.S. House and Senate.

In 2010, the economy was on a similar path, meaning it would decline without stimulus from the Federal Reserve, he noted.

“This time around, the Fed cannot step in and provide stimulus. So I don’t think it’s good news that we’re not going to get anything out of Congress over the next two years,” El-Erian said.

“We need to focus on a new growth model, we need to take the supply side more seriously, and I do think there’s a problem that the emphasis will immediately shift to the election in two years’ time and very little will get done,” he said.

Apart from the election, El-Erian suggested the market hasn’t yet taken liquidity risk into account.

“We have overcome inflation risk and interest rate risk. … We are starting to understand credit risk, recession, etc. What we haven’t got our arms around as a market is market functioning risk, liquidity risk, and that’s the one thing I keep my eye on,” he said. “That still has to play out as the Fed continues to march up with these interest rates.”

While he would have preferred the Fed wasn’t so late in responding to inflation that it had to hike interest rates aggressively, “given that it’s so late I don’t think they have a choice. The alternative of not reacting would be worse for the economy and worse for the markets long term.”

El-Erian also noted Americans are relying more on their credit cards. “Revolving credit is now at a record high. It’s gone up by 9% in the last year,” he said.

The economy also is seeing a segmentation of the consumer base, even though consumers in general have a strong balance sheet and the labor market overall is strong. “If you are selling to the low-income segments of the population, you’re seeing significant declines in sales,” he said.

(Photo: Wei Leng Tay/Bloomberg)


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