Jorge Piedrahita
"At the time of the elections, the country will already be in recession; our economy will be similar to that of the eighties"
Speaking to LPO, Gear Partners CEO Jorge Piedrahita said there's not much Biden can do to reverse the economic situation.

 Jorge Piedrahita is an Argentine executive based in the United States since 1996, when he arrived at Citibank's operations in New York. He is currently the CEO of Gear Capital Partners, a macroeconomic, policy and debt restructuring advisory firm. Piedrahita is "a Wall Street veteran" with more than 20 years of experience in financial services. In addition to having been a Citibank official, he was international treasurer of Ford Credit, a director at Ford Motor Company and co-founded of Torino Capital LLC.

In a dialogue with LPO, the executive said that there might be a recession in the country at the time of the elections and that might lead the Democrats to lose control of Congress and have two complicated years ahead in the government.

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Imagine moving forward an economy during the "eighties", which allowed, at the time, Ronald Reagan to take over the presidency. "The United States remains a very divided and polarized country; that's not going to change. There is a lack of clarity about the candidates of both parties for 2024. De Santis is shaping up well, Biden might not be a candidate. There are talks for Kamala Harris, but she still faces rejection. The Democrats need to raise her bar," he warns.

Is a recession avoidable as Biden recently said or are we already experiencing one?

Soft landings (as used as a financial jargon) are sometimes the product of chance, and difficult to promote. Jerome Powell raised rates by 75 points and there are talks that they will hike another 75 points in July. They will do anything to lower inflation to the 2% annual target. And to achieve that, they're going to have to put the economy into a recession. Even Powell acknowledges that perhaps a recession cannot be avoided.

The Fed lost credibility, I think it now has the task of rebuilding it. But it's a process that's going to lead to a recession. Recession is difficult, it is not inevitable, but it will be hard to avoid.

"The real estate sector is very inflated by rates and needs to deflate. What is key in that sector is affordability, that is, if the person can pay their mortgage, because it went from 3% to 6%, a relevant jump. That causes many buyers to be left out of the market."

What the White House can do to avoid that scenario is limited...

What Biden can do is limited. Unless there is a fiscal package in Congress that would certainly not be approved, he can truly do very little. Unfortunately, at the time of the elections, the country will already be in a recession. It will slow down sharply. That's the central scenario right now. You see it in the prices of financial assets. The Stock Exchange discounts future expectations.

And to make matters worse, inflation will continue to be present with a drop in the economic activity.

If you look at inflation projections, it's not just a matter of lowering them but of anchoring expectations. It is not a 2-month task; it takes longer. In terms of Taxes, there is no space. The Democrats will be in a bad position at the time of the elections, and they will be left with a "lame duck" administration, as dubbed, without being able to do anything in the second half of the mandate. Congress will be opposition, and a president without Congress can't do much.

Is this scenario already beginning to be felt in any sectors adjusting to higher rates and lower activity?

If we look at the economy, there are several bubbles that need to be deflated. The real estate sector is very inflated by rates and needs to deflate. What is key in that sector is affordability, that is, if the person can pay the mortgage fee, because it went from 3% to 6%, a relevant jump. That causes many buyers to be left out of the market, and that's why demand will plummet. It is inexorable that the fall in the real estate sector will slow down new construction.

And will inflation drop faster because of the economic situation? That's what the Fed is betting on.

I think inflation will go down fast because of the drop in activity. It will take 1 or 2 years. I don't see a scenario like the 70's with inflation and a sharp drop in activity. We are starting from a different base of low inflation. I would believe that in 2 years, inflation would be within the range that the Federal Reserve has set. They can raise rates to more than 3-3.5%, but at the end of the day there is no magic within that process.

"The Democrats will be in a bad position at the time of the elections, and they will be left with a "lame duck" administration, as dubbed, without being able to do anything in the second half of the mandate. Congress will be opposition, and a president without Congress can't do much.

Will the economic activity have resumed for the 2024 presidential elections?

It is possible that by then we will have entered the initial part of the growth cycle. Recessions rarely last a long time, but the voter's perception may not be from the period we are living, but from a general perspective, which includes the past. Still, the president is believed to have more power than he actually has. Oil went up, as well as gas prices, and there isn't much that Biden can do. The tax holiday can't change the situation. It's a political effort that shows they're trying to do something. That's all.

What kind of economy are we moving into in terms of historical comparison?

In the coming year, amid a high probability of recession, it will be like living in the 80's for Democrats, which allowed Reagan to win, with a country beset between inflation and economic activity where Reagan bursts onto the scene. The United States remains a very divided and polarized country; that is not going to change. There is a lack of clarity in the future candidates of both parties. De Santis is shaping up well, Biden might not be a candidate. There is talk for Kamala Harris, but she still faces rejection. Democrats need to raise her bar, put her in charge of critical issues such as foreign relations, something that has visibility. It is also a complicated scenario.

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