El-Erian On Markets Balance Solvency, Growth and Liquidity

Another week has passed by and more ugly signs of how deep our economic troubles are have emerged. The only thing that keeps our financial house of cards from collapsing is the endless stream of money coming from the central banks – primary the US Federal Reserve and the European Central Bank (ECB). But doubts about the final outcome still persist.

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity.”

Mohamed El-Erian 

In spite of the massive injection of money into the financial system by the central banks, key economic indicators continue to disappoint.  And by now, the central banks have painted themselves into a corner where there’s little else to do. The global economy is practically in state of stagnation – the next stage is depression…

Mohamad El-Erian at PIMCO is one of the top leaders who have managed to keep his cool and not lose his head throughout this whole mess so far.

He openly admits he does not have all the answers, but as usually he points to some key factors that we all should be aware of.

Here’s his latest commentary, as published by CNBC today:

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity. Fortunately for investors, the valuation impact is being compensated by central banks‘ wide open liquidity spigots,” El-Erian writes.

And continues:

To counter disorderly private sector de-levering and avoid an economic depression, governments and central banks around the world have aggressively ballooned their balance sheets.

This has helped heal some private balance sheets but job creation has remained very anemic, income inequality has increased, and growth has been too weak to allow for the de-levering of the public sector (including fiscal deficits and central balance sheets which now vary in size from 20% of GDP in the US to 30% in Europe).

In the US, Friday’s disappointing GDP print for the fourth quarter was a reminder of the challenge, especially in view of a less-than-reassuring composition.

Consumer growth was limited to just 2% notwithstanding yet another decline in the savings rate to 3.7%, a level last seen at the end of 2007. Export growth also decelerated. Indeed, were it not for a surge in inventory, the economy would have probably succumbed to the drag from government components.

The extent of the growth challenge in Europe was highlighted by Friday’s higher than expected increase in Spanish unemployment (to an agonizing 22.9%).

Meanwhile several of the region’s governments, ECB, IMF and private creditors continued to squabble about how to allocate the inevitable losses on Greek debt.

In Portugal, another highly vulnerable economy, market measures of default risk reached record highs this week.

The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region’s debt crisis.

Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.

Read the full post at CNBC.

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