It's a really tough policy call, not only do domestic indicators conflict with external ones, but the Fed itself has only a partial handle on the economy - and inevitably so. This is a time of significant policy uncertainty, particularly given that what's on the table is a policy regime change - namely the first interest rate hike in over nine years.

Mohamed El-Erian

Categorized in : Company News

The world is on a bumpy journey to a new destination and the New Normal.

Mohamed El-Erian

new-normal journey world

Investors should invest on what they know. The biggest mistake is to invest on what they don't know.

Mohamed El-Erian

investors should mistake

Investors have to ask themselves two questions. How much can we grow our investments? And, can we afford our mistakes?

Mohamed El-Erian

investment mistake two

Investors should be cautiously positioned as the global economy and markets face major uncertainties. The downgrade will be a further headwind to growth and job creation in the U.S.

Mohamed El-Erian

growth faces jobs

We normally think if you're going to lend someone money, you should get some reward for doing this. In Europe, it's a tax!

Mohamed El-Erian

rewards europe thinking

How long can interest rates stay negative? Think about this. Not only are you lending your money to governments, but you're paying them interest for the privilege of doing so.

Mohamed El-Erian

government long thinking

The one instrument that has relative political autonomy is monetary policy. Central banks do not need to go to Congress to get approval for an interest rate hike.

Mohamed El-Erian

political approval needs

Once you start moving [market] lower, then you trigger of all sorts of things. You trigger people who have to sell because they're over-levered. So they sell their winners and their losers. They're just trying to raise cash. So, what you then get is spreading malaise throughout the global markets.

Mohamed El-Erian

trying people moving

Most people are under exposed to global assets, including foreign stocks, bonds and currencies.

Mohamed El-Erian

currency assets people

Today's reports confirm that, unfortunately, post-crisis America is still not back to its good economic self.

Mohamed El-Erian

self today america

America's downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country's eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

Mohamed El-Erian

country america needs

The theory is that if you take interest rates negative, people are going to say, "That's a silly game! I'm not going to lend my money to governments who want me to pay them. I am going to go into the stock market where I can get positive returns!"

Mohamed El-Erian

government games silly

The world changes! So we're in a situation today where the only policymakers that have flexibility are central banks. But they don't have the instruments! So they've had to experiment, and the more you experiment, the more uncertainty and the higher the risk of collateral damage.

Mohamed El-Erian

risk today world

As we spend more, and as companies are pushed to invest, they say, "Hey wait a minute! There's more demand in the system. Let's invest more."

Mohamed El-Erian

hey demand waiting

I remember when I was growing up, you would go to a bank to open a deposit, and they'd give you a toaster. A free toaster. These days, if you're a company, and you go to a bank, they could easily turn you away! They don't want your deposits anymore.

Mohamed El-Erian

toasters growing-up giving

If you happen to be the only one with negative interest rates, you also weaken your currency, which means you make your exports more competitive.

Mohamed El-Erian

currency mean negative

[When] the market is trying to get to terms with, first, lower global growth, particularly out of emerging markets and China. And, second, the market is worried the central banks have run out of ammunition. So put these two things together, and then investors are repricing the market lower.

Mohamed El-Erian

growth running two

The once-unthinkable loss of the AAA rating will constitute a further hit to already fragile business and consumer confidence.

Mohamed El-Erian

rating consumers loss

It is hard to imagine that, having downgraded the US, S & P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.

Mohamed El-Erian

effort europe country

As a whole, investors should welcome attempts to safeguard the integrity of markets. You need very clear rules applied to markets.

Mohamed El-Erian

welcome integrity needs