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El-Erian: Investors Are Overlooking 6 Major Sources Of Global Uncertainty

Tyler Durden's picture




 

Authored by Mohamed El-Erian via Mareeg.com,

This has been an unusual year for the global economy, characterized by a series of unanticipated economic, geopolitical, and market shifts – and the final quarter is likely to be no different. How these shifts ultimately play out will have a major impact on the effectiveness of government policies – and much more. So why have financial markets been behaving as if they were in a world of their own?

Apparently unfazed by disappointing growth in both advanced and emerging economies, or by surging geopolitical tensions in Eastern Europe and the Middle East, equity markets have set record after record this year. This impressive rally has ignored a host of historical relationships, including the long-established correlation between the performance of stocks and government bonds. In fact, correlations among a number of different financial-asset classes have behaved in an atypical and, at times, unstable manner.

Meanwhile, on the policy front, advanced-country monetary-policy cohesion is giving way to a multi-track system, with the European Central Bank stepping harder on the stimulus accelerator, while the US Federal Reserve eases off. These factors are sending the global economy into the final quarter of the year encumbered by profound uncertainty in several areas.

Looming particularly large over the next few months are escalating geopolitical conflicts that are nearing a tipping point, beyond which lies the specter of serious systemic disruptions in the global economy. This is particularly true in Ukraine, where, despite the current ceasefire, Russia and the West have yet to find a way to ease tensions definitively. Absent a breakthrough, the inevitable new round of sanctions and counter-sanctions would likely push Russia and Europe into recession, dampening global economic activity.

Even without such complications, invigorating Europe’s increasingly sluggish economic recovery will be no easy feat. In order to kick-start progress, ECB President Mario Draghi has proposed a grand policy bargain to European governments: if they implement structural reforms and improve fiscal flexibility, the central bank will expand its balance sheet to boost growth and thwart deflation. If member states do not uphold their end of the bargain, the ECB will find it difficult to carry the policy burden effectively – exposing it to criticism and political pressure.

Across the Atlantic, the Fed is set to complete its exit from quantitative easing (QE) – its policy of large-scale asset purchases – in the next few weeks, leaving it completely dependent on interest rates and forward policy guidance to boost the economy. The withdrawal of QE, beyond being unpopular among some policymakers and politicians, has highlighted concerns about the risk of increased financial instability and rising inequality – both of which could undermine America’s already weak economic recovery.

Complicating matters further are the US congressional elections in November. Given the likelihood that the Republicans will continue to control at least one house of Congress, Democratic President Barack Obama’s policy flexibility will probably remain severely constrained – unless, of course, the White House and Congress finally find a way to work together.

Meanwhile, in Japan, the private sector’s patience with Prime Minister Shinzo Abe’s three-pronged strategy to reinvigorate the long-stagnant economy – so-called “Abenomics” – will be tested, particularly with regard to the long-awaited implementation of structural reforms to complement fiscal stimulus and monetary easing. If the third “arrow” of Abenomics fails to materialize, investors’ risk aversion will rise yet again, hampering efforts to stimulate growth and avoid deflation.

Systemically important emerging economies are also subject to considerable uncertainty. Brazil’s presidential election in October will determine whether the country makes progress toward a new, more sustainable growth model or becomes more deeply mired in a largely exhausted economic strategy that reinforces its stagflationary tendencies.

In India, the question is whether newly elected Prime Minister Narendra Modi will move decisively to fulfill voters’ high expectations for economic reform before his post-victory honeymoon is over. And China will have to mitigate financial risks if it hopes to avoid a hard landing.

The final source of uncertainty is the corporate sector. So far this year, healthy companies have slowly been loosening their purse strings – a notable departure from the risk-averse behavior that has prevailed since the global financial crisis.

Indeed, an increasing number of firms have started to deploy the massive stocks of cash held on their balance sheets, first to increase dividends and buy back shares, and then to pursue mergers and acquisitions at a rate last seen in 2007. The question is whether companies also will finally devote more cash to new investments in plant, equipment, and people – a key source of support for the global economy.

This is a rather weighty list of questions. Yet financial-market participants have largely bypassed them, brushing aside today’s major risks and ignoring the potential volatility that they imply. Instead, financial investors have trusted in the steadfast support of central banks, confident that the monetary authorities will eventually succeed in transforming policy-induced growth into genuine growth. And, of course, they have benefited considerably from the deployment of corporate cash.

In the next few months, the buoyant optimism pervading financial markets may prove to be justified. Unfortunately, it is more likely that investors’ outlook is excessively rosy.

 

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Thu, 09/18/2014 - 13:19 | 5230649 Grande Tetons
Grande Tetons's picture

Despite all of this the market will rip higher. 

Thu, 09/18/2014 - 13:25 | 5230674 summerof71
summerof71's picture

S&P at 20,000 by year end. Janet needs a new Super Cut!

Thu, 09/18/2014 - 13:27 | 5230683 boogerbently
boogerbently's picture

Gee,

The King of bonds pushes the "improved business" myth.

Thu, 09/18/2014 - 13:52 | 5230735 nope-1004
nope-1004's picture

Agreed.  The guy is full of shit.

 

Thu, 09/18/2014 - 13:59 | 5230760 NidStyles
NidStyles's picture

Almost 8 billion people and this genius could only come up with 6...

Thu, 09/18/2014 - 14:44 | 5230912 max2205
max2205's picture

Blah blah blah.....,

Thu, 09/18/2014 - 13:28 | 5230685 PartysOver
PartysOver's picture

OK, that might be a little ambitious.  LOL.  But the Ponzi will continue.   Getya some.

Thu, 09/18/2014 - 13:49 | 5230723 MalteseFalcon
MalteseFalcon's picture

The FED trumps all uncertainty.  There could be 1,000 overlooked risks.  Doesn't matter

Thu, 09/18/2014 - 13:34 | 5230702 El Oregonian
El Oregonian's picture

"Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's."

It's all going to burn here anyway.

Thu, 09/18/2014 - 13:20 | 5230650 unionbroker
unionbroker's picture

ZIRP forget everything else

Thu, 09/18/2014 - 13:27 | 5230662 yogibear
yogibear's picture

The new norm is for the trading bots to take the market ever higher. Plenty of Federal Reserve cheap money to pump it there.

The Fed can't and won't dare disrupt the expontental climb upwards. Once a trigger does occur to sell it will be an amazing sight.

The PEs will probably have to beat the insane PEs of the DOTCOM since the Fed has no intentions on normalization.

 

 

Thu, 09/18/2014 - 13:46 | 5230718 SheepDog-One
SheepDog-One's picture

Oh wow, another financial oracle says markets may go up, or down. From looking around over the last 6 mind melting years, I wouldn't be betting on the 'down'.

Thu, 09/18/2014 - 13:51 | 5230730 taketheredpill
taketheredpill's picture

 

 

 

Moe Green

 

 

Thu, 09/18/2014 - 13:51 | 5230734 taketheredpill
taketheredpill's picture

 

 

Sorry.  Greene.

Thu, 09/18/2014 - 13:52 | 5230740 Dragon HAwk
Dragon HAwk's picture

But But But.. I thought the Crash comes when Things start Looking Good...

Thu, 09/18/2014 - 13:52 | 5230741 Government need...
Government needs you to pay taxes's picture

When the debt/equity/commodity markets are finally allowed to clear without manipulation, where they be +/- the 2008 lows?

Thu, 09/18/2014 - 14:02 | 5230778 Canucklehead
Canucklehead's picture

Summing up this article:

...on the one hand... on the other hand...

...Who knows?

Thu, 09/18/2014 - 14:06 | 5230789 Bell's 2 hearted
Bell's 2 hearted's picture

7. US recession

 

historically, we have one when no one thinks we will.

 

Philadelphia fed has a quarterly survey of professional forecasters ... in Q4 2007 the consensus real GDP forecast

 

Q4 2007 ... +1.5%

Q1 2008 ... +2.2%

Q2 2008 ... +2.3%

Q3 2008 ... +2.8%

Q4 2008 ... +2.8%

 

http://www.philadelphiafed.org/research-and-data/real-time-center/survey...

Thu, 09/18/2014 - 14:10 | 5230818 NotApplicable
NotApplicable's picture

Why is El-Erian bothering with reality when discussing the financial world?

Thu, 09/18/2014 - 14:29 | 5230867 TheRideNeverEnds
TheRideNeverEnds's picture

All of those things are bullish, everything is bullish in fact.  There is not any scenario within the realm of possibility that could be bearish to this market.  

 

Everything goes in one of three categories.

 

1- good news, economic recovery, buy equities. 

 

2- bad news, no economic recovery, more QE, buy equities. 

 

3- no good or bad news, status quo, buy equities. 

Thu, 09/18/2014 - 14:32 | 5230873 sdmjake
sdmjake's picture

Ok I'll bite, El-Erian. I think the first 'screw to fall out of the hinge' is your "Draghi's Dilemma".

----In order to kick-start progress, ECB President Mario Draghi has proposed a grand policy bargain to European governments: if they implement structural reforms and improve fiscal flexibility, the central bank will expand its balance sheet to boost growth and thwart deflation. -----

My understanding is that the big european economy that matters, Germany, is against quantitative easing and opposes the rate cuts and asset purchases. You[or the ECB] can call it 'fiscal flexibility' all you want but all it really is: more debt to fix a debt problem. It has worked thus far but, when it ends, it'll be be spectacular!

Thu, 09/18/2014 - 14:40 | 5230895 redbird
redbird's picture

I always liked his soundbites in the past. He ususally has well structured, insightful arguments.  This drivel was alot a worlds that said nothing actionable.  No news here.  Time to move on.

 

Thanks, 

Thu, 09/18/2014 - 14:42 | 5230903 Eagle Keeper
Eagle Keeper's picture

I need some .22LR

Thu, 09/18/2014 - 15:19 | 5231029 Salsipuedes
Salsipuedes's picture

No longer pimping for Pimco, El-Erian (Erian: Relating to, or constituting a subdivision of the American Devonian. - Mirriam Webster) should worry less about being fundamentally correct in a meaningless way and being more truthful in a fundamental way. Yer no spring chicken Mohamed and I'll bet you've got kids...

"The dogmas of the quiet past are inadequate to the stormy present. Let us disenthrall ourselves." - Assasinated American President

Thu, 09/18/2014 - 15:53 | 5231180 Kirk2NCC1701
Kirk2NCC1701's picture

I'm looking at the followers of El-Ohim* and its spin-offs** as the cause of most the Uncertainty -- and the cause of much worse.

HOW MANY people have died in the name of Monotheism?  Over a Hundred Million have died, and Billions have suffered.  I don't see the followers on non-Absolutist religions coming anywhere close to these numbers or duration (millenia!).

I find the Messed-Up Bible Stories far more educational than the BS they pumped into me as a child.  Far less harmful too.

 

* Elohim: aka El, El Shaddai, El Elyon, YHWH (Yahweh, Yahuweh, Yehuweh, Yehowa h), Adonai

** Spin-offs = Christianity, Islam

Thu, 09/18/2014 - 16:47 | 5231388 XRAYD
XRAYD's picture

"the buoyant optimism pervading financial markets may prove to be justified"

Or NOT.

Bingo!

Fri, 09/19/2014 - 20:10 | 5236388 AgeOfJefferson
AgeOfJefferson's picture

I use to like his comments. But I agree with people here. His comments are too general and obvious; they don't tell us anything we don't already know. He plays it too safe and seems to lack the courage to tell us what he REALLY thinks. 

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