8 “Major” Unanswered Questions

PIMCO’s Mohamed El-Erian recently sent 8 “major” questions to Business Insider with regards to the current economic environment.  I figured I could kill two birds with one stone and help Señor El-Erian sleep better (knowing the answers) and by helping to calm fears at PIMCO where everyone is probably freaking out over the recent bond “slaughter” (but not really).  Just kidding, I just thought these questions were pretty useful to answer so here goes:

  • Will the Fed taper in September, by how much and why?

CR:  The Fed will stick to a small taper from $85B to $65B per month, but will announce a readiness to increase bond purchases if economic weakness increases.  Markets will like the announcement.

  • Who will succeed Ben Bernanke at the Fed?

CR:  Larry Summers.  Done deal.  (plays loser horn).

  • Will Congress flirt with a government shutdown?

CR:  They’ll do their usual political grandstanding so they can get their faces in the press and make it look like they’re doing something there in Washington, nothing much will come of it and we’ll move on when the press gets their fill.

  • How will lawmakers handle the debt ceiling?

CR:  Like grandstanding fools who can’t agree on anything.  It will be increased in the end after an “agreement”.

  • Where will Chancellor Merkel take European policy after her expected victory in upcoming German parliamentary elections?

CR:  More of the same.  Hold the line.  Don’t give into fiscal expansion for fears of inflation, but maintain the current unworkable currency arrangement because it’s been pretty friendly to Germany overall.

  • How will official creditors respond to requests additional peripheral funding and the need for further debt reduction?

CR:  As long as the ECB has a backstop in place creditors will be okay with what’s going on.  Things will get dangerous if Germany begins to talk about cutting members loose or removing the backstop for countries who aren’t meeting debt:gdp targets.

  • Will Prime Minister Abe come through on Japan’s “third policy arrow”?

CR:  He’ll pull a page out of the American political playbook and talk a big game, but do little of substance.  In the end Abenomics will fail to generate sustained economic recovery and economic participants will realize that a central bank can’t scare the economy into having inflation.

  • How will the regional implications of Syria and Egypt play out?

CR:  This is just the beginning of a long period of leadership changes in the Middle East as the people of the region realize they’re on the wrong side of a raw deal.  This will play out over the course of many years and many leadership changes.  So get used to it.  Problems in the Middle East aren’t going away any time soon.  That’s a bad thing for oil prices in the intermediate term, but a great thing for the people of the Middle East.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. Stick to economics, not politics. Your economic views usually have basis. These political views are opinion (and hope).

    Little has changed substantively in the Middle East for many years. Leaders change. The situation does not. The US will support some other despot to help our geo-political goals. Freeing the people is not one of them.

  2. Misplaced optimism on the Middle East.

    “Revolutions have never lightened the burden of tyranny. They have only shifted it to” another shoulder.” George Bernard Shaw

    The longer the revolutions continue, the more radicalized the rebellions’ leaders and followers will become, such that, when (if) they finally win, their regimes will be even worse than the ones they replace.

  3. With the exception of maybe the last question, none of these questions or answers really matter much in the long-term, at least as far as the markets are concerned. We’re in the situation we’re in, and the markets will eventually go where they will, and it doesn’t matter who the Fed chair is, when they taper, or what politicans do.

  4. I agree with all of your answers, Cullen–does that make me cynical? :>)

  5. Cullen,

    You need to expand more on why you think Summers is going to get the Fed job.

    What are your views on how he will conduct monetary policy?

  6. Doug R, in case you didn’t grasp the concept here, Cullen didn’t ask the questions. So it would be kinda silly to skip one or two.

    Oh, and EVERY answer he gave is an opinion!

  7. Good answers, although ranging to Middle East politics is a long stretch.

    I don’t think Summers is a done deal. However, it probably doesn’t matter that much. The Fed has to fight deflation and baring some exogenous shock that is the long term trend. Summers might cut QE faster than Yellen if GDP growth muddles along or increases to 3% or so, but the short end will stay near zero until we get enough credit growth above productivity increases to drive inflation consistently higher than 2%.

  8. It smells a lot like civil war between the radicals and those that are more secular (by muslim standards).

  9. I like the “loser horn”! And most of the other answers. I am not that sanguine though about the government shutdown/debt ceiling thingy. The GOP has taken these games to the edge of the cliff one too many times. Someday they may slip and take the world financial system with them down the rabbit hole.

  10. “Summers’s career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.” is a quote from Oct 3, 2010 article by Charles Ferguson “Larry Summers and the Subversion of Economics”
    http://chronicle.com/article/Larry-Summersthe/124790/

    My opinion is that the financial press is going to love having Mr Summers as the new Fed chief. It will not be as not as easy as it has been for the staff writers of Colbert and Stewart with Anthony Weiner, but Summers’ past has so much balls out behaviour that financial sector nerds including the contributors to these pages will have plenty to write about for the next Fed term.

    Summers will be a gift to bloggers everywhere.

  11. You would know Nils, based on your profile pic. Not being sarcastic. I agree with your comment Nils.

    “I will call him, Mini Me”!

  12. @DRR

    You can search “Summers” at the bottom of the home page and see more of CR work on Summers. It’ll answer your question perhaps.

  13. “..the financial press is going to love having Mr Summers as the new Fed chief…. contributors to these pages will have plenty to write about for the next Fed term.”

    Chris Whalen recently alluded to Summers’ ‘baggage’ and while he admitted he’s the front-runner, and may even get the appointment, he thought he’d not make it through the confirmation hearing due to his close ties to Wall Street, and specifically his fight with Brooksley Born regarding off-balance sheet derivatives.

    The PBS documentary about this is fascinating: http://video.pbs.org/video/1302794657

    In short, he does not play nice with others when Wall St interests are involved, and that won’t play well in the hearing. Will be interesting to watch.

  14. Larry Summers is the worst possible pick for Fed Chairman; anyone is better than Summers. The best pick for Fed Chairman isn’t even being considered(Richard Fisher). Summers was the reason we’re here in the first place.

  15. El-Erian is the type of guy that if you randomly asked him for directions to the supermarket he would give you the plans to the D-Day Invasion. I have no idea how he gets out of the house in the morning. I have no doubt he contemplates the pros and cons of going to the bathroom without allowing for 4 contingency plans.

  16. The line up at PIMCO is nothing but a bunch of carnival barkers. I dream of the day when El -Erian and Gross sail off to some secluded island to spoon each other. I miss Paul McCulley. At least he was entertaining.

  17. Don’t troll the website anonymously, Matt. Thanks.

    What is it with people leaving anonymously useless comments on the internet? What is the point? Sheesh. I really don’t want to force people to register and use real names, but the amount of trolling that goes on here sometimes is just ridiculous. People feel like they can say whatever they want just because they’re anonymous. Better yet, what is the point? Are you just bored and being useless for no reason? Why bother. It’s such a waste of time.

  18. I know many here have told you to stick with finance and not politics but I love your answer to the Middle East question and I agree. This is better for the people. Where they end up is till unknown but so many more average Egyptians, Syrians, Iraqis etc are getting up and saying something now. Like the US in the 1700s, these are formative times and much will change and people will be hurt/killed. Will they end up with US style (cough cough) democracy (cough cough) ? I hope not because that will mean they are charting their own way away from these dictatorships/theocracies. If the internet had been around in 1700 what would we have been saying about the formative years of the US? Probably a lot like people are saying of the Middle East today. We came form rabble rousers and people who didnt want a KIng anymore, and many paid a big price. We werent sure where we would end but we knew exactly what we were running away from and even England changed after that.

  19. These rebellions are nothing like 1776. The U.S. revolution was fomented by aristocrats who had a strong economic interest in breaking Britain’s stranglehold on the colonies. Freedom? Yeah, yeah, they kept all their slaves, even though blacks were 1/10th of the colonial army, and many wanted to make Washington king after the war. Don’t fall for U.S. historical mythology.