Chief Economic Advisor, Allianz
We have yet to see demand destruction in the U.S. economy, says Mohamed El-Erian
Mohamed El-Erian, The Wharton School Rene Kern professor and Allianz chief economic advisor, joins 'Squawk Box' to discuss the latest market trends, state of the economy, impact of U.S.-Iran peace framework, SpaceX IPO, the Fed's two-day policy meeting, and more.
About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has appeared on CNBC multiple times in recent months to discuss the economic impact of geopolitical conflicts, inflation, and Federal Reserve policy. He stated that the U.S. economy has so far avoided "demand destruction" from the Middle East war, but warned that the next phase of the shock would involve affordability issues severe enough to reduce consumer spending. He described the current economic environment as having four phases: higher energy prices, broader inflation, demand destruction, and potential financial instability. El-Erian said he is "really worried" about the UK, noting that the 10-year yield above 5% is "crippling for mortgages and for businesses" and makes government debt more explosive. Regarding the Federal Reserve, El-Erian said he expects the Fed to "sit on their hands" and not cut rates for most of the year, and that a rate hike is more likely than a cut. He suggested the Fed is tolerating a 3% inflation target rather than 2%, as long as inflation expectations remain stable. On Fed Chair nominee Kevin Warsh, El-Erian said he believes Warsh will "err on the side of lowering rates earlier" than the current Fed would, citing Warsh's belief in the productivity enhancement of AI. El-Erian also expressed concern about the volume of funding needed from capital markets, citing large IPOs, government deficits, and corporate borrowing for AI investment, and said he cannot identify where all the money will come from, predicting it will push borrowing costs higher.
Transcript (14 segments)
✨ AI-enhanced transcript with speaker attribution
H
Host0:00
Let's bring in Allianz's chief economic adviser, Mohamed El-Erian this morning. Break down the rally today, the news over the weekend. We'll get to the nicks, Mohamed. I promise. But with the SpaceX sticking the landing on Friday, are those enough of clearing events to go back to pre-war playbooks?
M
Mohamed El-Erian0:21
So they're certainly very important and I don't want to in any way underemphasize how important they are. Are they enough to go back? Not yet. Think first of Iran-US. As Vice President Vance said on air today on CNBC, there's lots of details to work out. There's a question mark about how quickly do you restore the shipment and production of oil. And then there's the role of other countries. On the one hand, you have the European allies very eager to get involved to make it a lasting peace and security. On the other hand, you have Israel saying, 'Hey, wait a minute. I'm not quite ready to agree to the Lebanon element.' And finally is the scarring element, the longer-term effect. So it is certainly good news, but not enough. On SpaceX, wow, that was an incredible IPO, historical in so many ways, but it raises a question, and Leslie just talked about it. We are needing a lot of funding over the next few months, not just for the equity market for new IPOs, but also for the bond market, governments and corporates. And I can't figure out where all this funding is going to come from.
H
Host1:34
So where do you think that manifests itself in treasuries, in long-dated and corporates? Where do you think we feel that?
M
Mohamed El-Erian1:43
So a lot of people are surprised that we're only three basis points lower on the 10-year. We're stuck at 4.45. People would have thought it would come down a lot more. Part of this is the inflation uncertainty. How much will headline spill into core? And part of it is just the bond market recognizing that there's an enormous amount of issuance, both corporate and government, in the next few months.
H
Host2:08
Yeah, that's going to be interesting. Kind of brings us to a discussion of the Fed's first meeting this week, what we might get out of the dots, and whether or not this, Mohamed, kind of quiets whatever hawkish concerns there might have been if it hadn't come along.
M
Mohamed El-Erian2:24
I think it does. I think the tone will be less hawkish than it would be otherwise. But Carl, to be a fly on the wall, a chair's first meeting, the previous chair sitting there, a highly divided committee going in, and let's not forget a complicated landscape. So it must be a fascinating two days in the room. Outside the room, I wonder whether Chair Walsh will submit dots. You know, he's unhappy, like many are with the communication approach that has been adopted by the Fed, and it wouldn't surprise me if he makes a statement on day one by not submitting any dots into the SCP.
H
Host3:07
Mohamed, I want to get back to the markets themselves. When you talk about worries about a lack of supply, I'm just curious as to what you're actually talking about. What do you mean?
M
Mohamed El-Erian3:16
So I grew up, David, in a world where you looked at the sources and uses of funds and you asked the question: are they going to meet on the uses of funds? We have an enormous increase in the demand for funds, not just from the tech companies — SpaceX, 75 billion, Anthropic, OpenAI — also from other companies that need to increase investment. You know, adapting to the AI world is not cheap but is absolutely necessary. Then you have governments, including the US, running a deficit of 6% and refinancing debt that was first incurred at much lower interest rates. That's an enormous increase in the demand for capital market funds. Look at the supply side. Where is that going to come from? Certain reliable suppliers, especially to the tech world, the sovereign wealth funds in the Gulf are not able in the short term. They have reconstruction needs at home. The Bank of America's survey suggests that cash levels are pretty low. So the big hope is the retail sector, and that's why you saw this incredible emphasis in the SpaceX on the retail sector.
H
Host4:30
And I think that's going to be the question. Can the retail sector step up when this...
Money markets, I mean it's an interesting point although it always seems as though when I hear it that ultimately we solve for it somehow. We never seem to run out of capital in some way. I mean your point is well taken and I make it all the time in terms of certainly the biggest most successful companies of all time that are now going to be running negative free cash flow as a result of all the spending. That said, I don't know. Mohamed, we always seem to find the money somewhere.
M
Mohamed El-Erian5:02
Oh, David, we will solve for it. I have an article out in the Financial Times today. We will solve for it. It's at what price do we solve for it? That's the question. But I, like you, have enormous faith in the capital markets and we will, yes, we will solve for it, but at what price? And I think the fixed income market is much more sensitive to this right now than the equity market is.
H
Host5:25
Yeah.
PIMCO saying that defaults in debt markets are starting again, kind of warning that we're seeing some turbulence under the surface. Is that something that you're concerned about?
M
Mohamed El-Erian5:38
It's certainly worth looking at. I would have been more concerned had we not got the agreement yesterday. You know, the two phases of the disruption from this war were first energy prices and then a broader price kick. Had we persisted with this, we would have got demand destruction. And when you get demand destruction, credit risk goes up. So I think we might have avoided a bullet here by not going to the next stage of demand destruction in the US. You know, in some developing countries, unfortunately, that has happened already and you're seeing demand destruction. We haven't. Our economy remains incredibly resilient. So keep an eye on it, but it's more a tail risk than a baseline risk.