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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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