- El-Erian cautioned that even though the U.S. is the only one in a position to declare victory in the Iran war, it cannot impose outcomes.
- The economist warned that he is starting to see a destruction of demand in other economies that can accumulate, and added that there could be an impact on demand in the U.S. as well.
- El-Erian noted that Asian economies are not worried only about crude oil prices but also about actual shortages.
Mohamed El-Erian, Chief Economic Advisor at Allianz, on Monday warned that there could be financial instability if the shocks to the U.S. economy due to the Iran war continue to escalate.
During an interview with CNBC, the economist stated that the inflation shock from the Iran war could lead to reduced spending, particularly among low-income households.
“If this continues… so you start with energy shock, interest rate shock, inflation shock, demand shock… then if this continues, which I hope it won’t, we’re going to be talking about financial instability,” he added.
US Can Declare Victory, But Can’t Impose Outcomes, Cautions El-Erian
The economist also cautioned that even though the U.S. is the only one in a position to declare victory in the Iran war, it cannot impose outcomes.
“I think we are going from a price shock to a price shock and a demand shock, and that’s the economic logic of all these tipping points being triggered in the war. I must say, I’m more worried than the average person because of the dynamics of the war. It’s an asymmetrical war, and you now have four parties in the war, all of whom believe they’re winning,” he added, noting that this makes it more difficult to end the conflict.
El-Erian also warned that he is starting to see a destruction of demand in other economies that can accumulate, while adding that there could be an impact on demand in the U.S. as well. He added that Asian economies are not worried about crude oil prices alone, but about actual shortages, highlighting that this is another tipping point for the global economy.
Meanwhile, crude oil prices hovered above the $100 a barrel level at the time of writing.
U.S. West Texas Intermediate (WTI) crude futures maturing in May gained more than 2% to hover around $102 per barrel. Brent crude futures expiring in June also rose 2% to $107 per barrel.
The United States Oil Fund ETF (USO) rose 2%, while the ProShares Ultra Bloomberg Crude Oil ETF (UCO) was up about 0.4% at the time of writing.
El-Erian Says He Won’t Buy The Index At This Juncture
The economist added that while his risk meter has gone from reduced to maximum risk-off, and now to finding some stocks attractive, he still wouldn’t go into the market and buy the index at this point.
El-Erian also stated that there have been multiple tipping points in the Iran war, with the first being disruption and the second being damage to infrastructure, both energy and non-energy.
“We’re starting to realize it’s not just about oil, it’s about fertilizers, it’s about helium, it’s about aluminum,” he added, stating that he worries that there will be a broader shock.
The next tipping point, according to El-Erian, is physical shortages of energy, which could result in higher prices for products imported from Asia to the U.S. He also cautioned that there could be concerns about the availability of these products.
Meanwhile, U.S. equities gained in Monday’s opening trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.57%; the Invesco QQQ Trust ETF (QQQ) rose 0.34%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) gained 0.94%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘extremely bearish’ territory.
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