In an interview with Yahoo Finance, the economist cautioned that excessive risk-taking by investors is behind recent credit troubles.
El-Erian noted that while there may be some “economic accidents,” he does not think there will be an economic shock.However, the economist added that the significant pressure on the lower ends of the income distribution for households is keeping him up at night.He also stated that the amount of debt that will have to be refinanced at higher interest rates is another issue troubling him.
Mohamed El-Erian, Chief Economic Advisor at Allianz, reportedly dived into the “cockroach” talk in the U.S. economy on Thursday, explaining why it might exist in the system.
During an interview with Yahoo Finance, El-Erian explained that there is a fundamental difference between cockroaches and termites when it comes to the economy.
“Cockroaches are unpleasant, they come in groups, but they don’t eat away at the integrity of the system. Termites eat away at the integrity of the foundation,” El-Erian said in the interview.
Excessive Risk-Taking
He added that the reason for the existence of cockroaches in the U.S. economy is that investors have stretched to extract additional returns.
“Some people went beyond their comfort zone and beyond their ability to do due diligence. So I don’t think we should be surprised that we will have these accidents, these credit accidents,” he said.
El-Erian noted that while there may be some “economic accidents,” he does not think there will be an economic shock.
What Keeps Him Up At Night
However, he added that the significant pressure on the lower ends of the income distribution for households is keeping him up at night. He said that the amount of debt that will have to be refinanced at higher interest rates is another issue troubling him.
“Those two things are potential areas of pressure, which would be made worse if we get a policy mistake,” he added.
Meanwhile, U.S. equities declined in Thursday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down by 0.34%, the Invesco QQQ Trust ETF (QQQ) declined 0.45%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) fell 0.22%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘extremely bullish’ territory.
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