El-Erian Says ‘Big Shock’ Needed to End View That Fed Is Friend

  • Investors are used to central banks cushioning volatility
  • Risk mitigation has become much more complicated, he says

Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, explains how markets are benefitting from a Goldilocks scenario provided by the U.S. government. He speaks on 'Bloomberg Daybreak: Americas.' (El-Erian is a Bloomberg View columnist. The opinions expressed are his own.) (Source: Bloomberg)

Mohamed El-Erian, Allianz SE’s chief economic adviser, said people have become so used to monetary policy makers cushioning market volatility that it will be hard to shake assumptions that more help will always be around the corner.

“Investors are very comfortable right now with the notion that you should bet on the central banks as their best friends,” El-Erian said Friday in an interview on Bloomberg Television. “So you really do need a big shock to get us out of this conditioning.”

The U.S. Federal Reserve has raised interest rates only four times in the past two years after holding them near zero since the financial crisis. The pace of monetary tightening has been slow after bond markets panicked at the idea of more rapid rate increases. Last year’s U.K. Brexit vote also discouraged the Fed from lifting rates more swiftly, as has low inflation.

“Markets are confident that central banks will continue to be willing and able to repress volatility,” El-Erian said. “That’s what they’ve been doing for years.”

The S&P 500 and other U.S. indexes climbed to records this week, extending a bull market that began in 2009. El-Erian reiterated his view that investors who profited from the rally in the world’s largest economy should reallocate some funds to emerging markets, where he sees more attractive valuations.

Still, he said there’s reason to believe that both stocks and bonds could continue to gain in developed nations, in part because of central bank policies. Also, corporations and rich individuals are accumulating a growing portion of wealth, and they are more likely to invest in securities markets than the average person, he said.

“So you have a lot of liquidity coming in, and that depresses yields, so bond prices go up,” he said. “And it boosts equity prices. So it’s all a liquidity story. This is a massive liquidity trade.”

Investors should guard against complacency, however, warned El-Erian, who is also a Bloomberg View columnist.

“If liquidity turns around, you could face the possibility of losses both on equities and on bond markets,” he said. “And professional investors tell you that risk mitigation has become much more complicated.”

— With assistance by Jonathan Ferro, and Alix Steel

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