Mohamed El-Erian, 63, President of Queens College Cambridge and chief economist for Allianz SE, warned that a war in Ukraine or wider one in Europe would put more selling pressure on Wall Street and lead to stagflation, where slow growth and inflation prevail in economic markets. “If it were to get worse—which is a big if—a very stagflationary wind would blow through the global economy,” El-Erian told Yahoo Finance Live. “The marketplace now is pricing somewhere between we get a good diplomatic resolution, or we stay in the uncomfortable no war and no peace. We’re not really pricing in the possibility that this may be an armed conflict,” hinting at steep decline in equity markets. Today’s 622.24 point or 1.78% drop in the Dow Jones Industrials show the kind of damage from the White House slow-drip policy on Ukraine, where no resolution looks in sight.
No one in the U.S. or Europe can forecast yet any end to the current standoff with Russia over Ukraine. Biden, his 59-year-old Secretary of State and 45-year-old National Security Adviser Jake Sullivan, have sent Wall Street sideways, moving up, moving down, but over all sending the average into correction territory. Whatever happens in Ukraine, the Federal Reserve Board Open Market Committee [FOMC] has said it plans to raise the Federal Funds rate seven times in 2022, amounting to seven 0.25 basis-point increases or 1.75%. No one knows whether Fed Chairman Jerome Powell will order a 0.5- basis-point increase in rates at its March 15, 16 meeting. El-Erian sees geopolitical threats in Ukraine as adding to market instability, remarking that central banks around the globe are in a tightening more. Central bank policies, including the U.S. Fed, could change rapidly based in what happens in Ukraine.
Keeping the Ukraine crisis going, Biden has damaged global financial markets that seek economic stability, something disrupted by potential war. El-Erian sees financial markets moving sideways or selling off because they see more global geopolitical threats. Biden refuses to meet 69-year-old Russian President halfway, to work out mutually beneficial security arrangement needed to resolve the current standoff. Biden’s approach has been to blame Putin for everything, ignore his requests for a legally-binding security arrangement that satisfies all parties. So far, Biden has ignored Putin’s request for security guarantees, telling Putin he can’t violate NATO principles to honor his requests. El-Erian worries about Russia’s contribution to world commodity markets, producing 45.6% of the world’s palladium, 9.2% of its gold and 8.4% of its oil, according to JPMorgan.
El-Erian worries about deteriorating geopolitical situation in Ukraine, making central bank’s tightening cycle more damaging to financial markets. “So the first element, simply a big cost push,” El-Erian said. “Second, you would have a significant blow to sentiment, confidence and a further blow to globalization,” warning about how geopolitical issues could derail global financial markets. El-Erian sees the Fed’s tightening cycle as factoring in to equity prices, potentially fueling more short-selling, where investors bet against he market rising. “For a long time, this market had the anchor of a very accommodating liquidity regime. Inflation changes all that. We can no longer depend and rely and predict massive injections by the Federal Reserve,” El-Erian said. When Russia expelled the No. 2 U.S. Russian diplomat, Deputy Chief of Mission Bart Gorman, markets flinched.
Biden has not taken geopolitical instability seriously as he figures out how to resolve the current Ukraine standoff with the Kremlin. Blinken told the U.N. today that Russia is planning a “false flag” operation as a pretext for invading. With Blinken beating the war drums, it’s exactly the opposite of what markets need to hear. Wall Street wants to hear Blinken say he will sit down with his 72-year-old counterpart Russian Foreign Minister Sergey and work out a deal on Ukraine. Biden and his national security team continue to fuel the conflict, refusing to honor Putin’s requests for legally-binding security guarantees. El-Erian is telling Biden that he’s adding to U.S. and global market instability, causing a drop in market wealth around the planet. Resolving geopolitical instability is a high priority, if Biden’s serious to providing stability and predictability in U.S. financial markets.
Biden needs to stop his information warfare program and get back to the bargaining table, coming up with responsible fix to the Ukraine situation. No one in the U.S. or Europe understands why Biden thinks Ukraine has national security significance enough to put U.S. and world financial markets into peril. If Biden pushes things too far in Ukraine, Putin could break off diplomatic relations with the U.S. To El-Erian’s way of thinking, that would lead to more stagflation, where commodity prices, including oil and precious metals, would continue to spiral as they have lately. Biden’s responsibility to U.S. national security requires him to stop playing psychological warfare and get back to the basics of face-to-face diplomacy. Lecturing Putin, hurling threats and continuing his propaganda and disinformation have rattled U.S. and global financial markets, spreading uncertainty on Wall Street.
