Friday, August 6, 2010

PIMCO's Mohamed El-Erian Bumps Deflation Risk in U.S. Up to 25%

Patiently waiting to act in knee jerk reaction with the rest of lemmings in 15 minutes...

One of the more astute minds in the economic / financial community is PIMCO's Mohamed El-Erian.  With deflation all the rage the past 4-6 weeks, along with fears that we're heading to our Japan-like zen (please note you can read the phrase "We are Japan" on this blog  well over 2 years ago) we'll just add this to the pile.  It seems the bond market is sending similar signals... if not deflation, at least disinflation.

Via Bloomberg:
  • The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund. <
  • “I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian, 51. U.S. unemployment will probably stay unusually high, he told reporters today in Tokyo.
  • Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said
  • A mix of the lowest U.S. inflation rate in four decades and concern that the global recovery will falter is boosting Treasuries, sending two-year yields to a record low this week.

I was actually mulling this the past few days, as I think about our desperate Fed and the action in wheat.  Here is a nightmare scenario...

Step 1 - Fed sees pathetic economy and deflation risk, and floods system with more fiat currency.  
Step 2 - With weak end demand for said money and lack of credit worthy borrowers, the money continues to go into capital markets just as it did in 2009.

Step 3 - This causes commodities to rise, which Wall Street traditionally uses as a sign of inflation.  But in this case it is just Ben Bernanke handing money bags out to the oligarchs to speculate.  US. dollar weakens, speculator class continues to pile into commodities as a hedge.

Step 4 - Higher commodity prices cause pain to corporate profits via input costs - causing them even less incentive to hire, and of course pain to end consumers who need to pay more for food & energy - which weakens the economy.

Repeat step 1

It could be a very circular death spiral with the Fed actually causing much of the pain, rather than letting the market heal itself.

  • "On the road to deflation, which is what the United States is on today ... policy becomes less effective," said Mohamed El-Erian, chief executive of Pacific Investment Management Co.
  • Referring to the one-in-four odds he assigns to the deflation scenario, he said: "If you wonder how meaningful 25% is, ask yourself the following question: If I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012