MOHAMED EL ERIAN - CHIEF ECONOMIC ADVISOR ALLIANZ GROUP

This is a phenomenon that has no abundant precedents and, therefore, there are possibilities for us to make a wrong interpretation of it. We could say that, on the one hand, this is the result that investors are moving towards safer positions and confidence in the North American market begins to diminish; We are talking about a force more powerful than the ability of monetary authorities to regulate the amount of money present in the economies. On the other hand, we could affirm that the corresponding monetary authorities, in an extremely risky and dangerous strategy, are contributing with the corresponding governments in their task of stimulating economic growth through negative interest rates; This is an economic absurdity and puts the financial systems of these nations in serious danger. We must note that, for politicians, there are no absurdities, only short-term goals.



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This is a consequence of the events that are happening in the financial markets of Japan, Germany, France, Holland, Belgium, Switzerland and Sweden. Undoubtedly, investors are perceiving that the global economy is moving towards a scenario where the isolationist tendency of the United States and China will prevail; therefore, they are emerging from positions taken in "weak" markets. The new bond issues that are made from now on in these markets must be honest about their level of risk and offer conditions that adapt to the new times, showing a logical proportion between the face value of the document and the value requested from investors. These financial markets would be acquiring characteristics of the markets of emerging countries.







Without a doubt, the influence of seasonal factors is evident. The commerce, telecommunications and entertainment sectors should be the engines of these results. However, Germany's service sector is highly volatile, but with a growing trend. That is, in January the depressing statistics should return.

An interesting week of economic data started with the IFO business confidence numbers for Germany.
The slight improvement in the overall number for the third month in a row (please see below from the Financial Times) came with a continued pronounced contrast in the outlook for services (positive) and manufacturing (negative).
#economy #markets #Germany #IFO #FT #growth #manufacturing

The scheme of adoption of expectations that are formed around financial markets indicates that this is the correct reasoning. However, we have to take into account that the Fed reacts to the behavior of the real variables. It is an extremely reactive institution and is never proactive, which is a very appropriate directive that prevents its officials from being victims of speculators and their anxiety to earn a lot of money quickly and easily. On the other hand, the "optimism" event before a probable mini agreement between the USA and China is full of political elements that will make many investors risk averse nervous and add volatility to the financial markets.

Question for you:Are we going to repeat the market-policy cycle of earlier this year?Context: The US yield curve continues to flatten this morning as optimism about a mini trade deal becomes more guarded, recasting a shadow over global growth.Will the next stage include renewed market pressure on the Fed to loosen monetary policy more?

For this week we cannot expect substantial variations in the indicators of the most important financial markets, we will have to wait for the disclosure of some economic variables of some economies. In any case, the attitude that prevails in investors is that of trust, but with great prudence. I believe that the possibilities of an agreement on trade war disputed by the USA and China are void; I believe that it is a political trick of Trump to prevent that issue from transcending the political discussion that will take place with respect to the presidential elections. If Trump wins, we will have by 2021 and a resurgence of the trade war and the manifest intention of accelerating the trade deficit rapidly, whatever the cost.

A market look ahead
With quarterly corporate earnings releases winding down and with big data expected to be relatively light (that is, except for the Eurozone PMI numbers), financial markets are likely to focus on the China-US trade negotiations and central banks.
The latter includes the minutes of the last policy meetings of the European Central Bank and the US Federal Reserve, as well as lots of speeches by central bankers (the most notable of which is Friday's by Christine Lagrade, the new President of the ECB.

Mohamed El Erian is characterized by being precise and accurate in his comments, it is a virtue that few analysts have in the field of economic sciences. However, I believe that as a consequence of commercial tensions we will have a "slowdown" in the globalization process for the next decade and the isolationist currents will be reborn strongly. I consider the idea outlined by El Erian to be fundamental in stating that the biggest losers of budding isolationist processes will be emerging economies and especially the poorest countries. Globalization is an unprecedented process by integrating economic processes into low-income economies. On the other hand, I see Brexit as a sharp increase in economic isolation, that is, for industrial economies a rapid process of isolation would mean economic disaster with unpredictable consequences. Obviously, the isolationist wave will alter the traditional links present in financial markets, another success pointed out by El Erian.

https://www.ft.com/content/d9c625e2-ffe9-11e9-b7bc-f3fa4e77dd47?fbclid=IwAR0UCeHQTOHz6IB7IoBHPdekr2-dJegYqGYnDODURjBOhpQWCQmuKkflRyM

Those who hold power in the authoritarian way do not recognize that the behavior of human beings is regulated by unwritten laws inspired by the desire of our gender to have a dignified life. Some political scientists inquire about what those laws are. The middle classes when they maintain their position for several decades come to abhor authoritarian political systems, while the lower classes are prone to admire these political systems. The only way in which the middle classes stop their sequence of protests is through the impoverishment of their members, something that can take a few decades.

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Pension funds are responsible for managing gigantic portfolios, so their priority in terms of resource allocation rests on the directive of investing in very low risk roles. Of course, assigning some percentages to volatile or very high-risk financial assets does not reverse the main directive and allows to obtain a slightly higher and therefore attractive profit margin. These "administrative criteria" are dictated by mathematical and statistical models of impressive complexity, but which usually fail when they are not updated in a rapidly changing environment. On the other hand, many robots automatically carry out the transactions since they react quickly to sudden bursts that could occur in the market. The use of robots also reduces the chances of losses but they also often fail if the program that directs them is not updated from time to time.




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We have to keep in mind that it is the largest stock market in the world, any phenomenon we study will reach, for this reason, impressive figures. Uncertainty motivates investors to "move their position" to acquire, according to their criteria, more security. Given the immense credibility that this market has, investors do not leave it but instead "relocate"; This is why, despite the immense uncertainty and negative outlook for the global economy, the indicators of these markets continue to rise. The stock markets are no longer the reflection of the national economy in which they are located, now, all are the reflection of the behavior of the global echoomy.

Ready to Boost Stocks: Investors’ Multitrillion Cash Hoard

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The functions of the European Central Bank are clearly defined by its statutes and cannot be "overreached" under penalty of serious penalties. Obviously, Europe needs policies to stimulate its aggregate supply, which is characterized by an impressive weakness; otherwise, it is exposed to suffer serious crises. But, I consider that the monetary authority is not the appropriate body for these purposes. When these occur, when there is an "institutional vacuum", political consensus is required to take the appropriate measures, which, in Europe, looks extremely complicated.



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I believe that there should not be a great cause for alarm. Although the US economy is located on its growth ceiling, an overvalued dollar will cushion every inflationary outbreak. This drop in the interest rate is a blow to the trade war as it will incentivize imports. North American academics should make efforts to establish a "risk interest rate" that guides investors about the risks associated with each rate level. For emerging economies, this is good news because it will inject "speculative oxygen" into many economies that are drowned.



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The indicator indicates that the sector is still on its long-term trend which cannot be considered as something negative since it is an economy that is stagnant. His best moment was barely 10% above the long-term benchmark. France, despite coming from showing 9 years of stagnation, has not yet fallen into recession due to all the mechanisms present in the counterweight systems created by the European Union. French society places great emphasis on social benefits and, I understand, lacks interest in technology; This makes us think that it will be very difficult for us to see explosions of economic growth in this country.

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To study some markets you have to be very careful, especially when we use a two-dimensional graphic as a fundamental tool. For this case it might have been more appropriate to try to build a simple mathematical model and then evaluate the values thrown by its parameters. However, many statistical tools show their result in a two-dimensional graph, so analysts are accustomed to using it as the basis of their study. I believe that explaining the volume of transactions of these instruments based on volatility is not appropriate and we would need a theoretical backing to support it. Still it is interesting how the "panic feeling" encourages speculators to carry out the transaction.

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One of the factors that contributes to the rise in the value of the uncertainty indicators is that the global macroeconomic context indicates the presence of many novel situations that seem not to be explained satisfactorily by the experts. The bibliography published by specialists does not have the forcefulness to which analysts are accustomed. For example, Milton Friedman, in the late 1970s, was clear about the direction that politics would have to take at the time.

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We are talking about growth rates above 5%. It is a simply colossal figure for the second largest economy on the planet. Any economic behavior above 5% cannot be considered bad news. It is natural that a national economy tends to stabilize around a more or less fixed growth rate. Even if this "natural" growth rate falls below 5%, it should not be considered bad news. The pessimism of the stock markets that analysts explain as an increase in distrust in Chinese growth is related to comments about the "gasoline" that drives that growth.

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The contradictions in the official communiqués continue: a slow global economic slowdown with zero risk of falling into a global recession should not generate concern as to the effectiveness of the economic policies of the most important countries on the planet. If the risk of the global slowdown becoming a global recession is high, then the ineffectiveness of monetary and fiscal policies is a matter of great concern.

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Excessively low interest rates generated the 2008 crisis. After that date, the level of supervision of the various financial systems increased. It may be an alarm for some European or Asian countries, but it should not be for the United States.

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The most important economies of the planet unanimously adopted expansive monetary and fiscal policies for two decades in order to prolong the boom created by the telecommunications sector during the 90s. Gasoline is now over and, no doubt, many dangers loom over the functioning of the global economy. The next decade should be decisive in setting the course of the history of this century.



.Japan is a case study from which we can learn a lot. It has suffered prolonged periods of economic stagnation without pronounced disturbances in the political or social order. It is quite likely that for the next decade everyone, except China and the USA, will fall into a stalemate similar to the Japanese. However, I believe that the Japanese tendency to suicide and to work for many hours has cultural roots and has no direct link with the issue of macroeconomics.

The Japanese nightmare is the product of events related to the commercial aspect of that nation. Japan was the export sensation of the eighties but could not withstand the push that brought the low wages of Asian tigers and China. Their "irrational" monetary policy is more the result of the desperation of not being able to cut the hole in which they find themselves than some successful political-economic strategy. I admire how the Japanese stoically bear all the inconveniences generated by years and years of economic stagnation.

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Economists still need to analyze in detail the recently issued data about the possible contraction of the manufacturing sector. Then, we must give context to this information in order to predict that the economy would soon enter into recession. I think there is a lot of nervousness among economists because there is still no certainty about the consequences of the Trump administration's commercial and fiscal policy.

WSJ Survey: Majority of Economists Say Manufacturing Sector in Recession