"I am mostly concentrated in cash... because I think most asset prices have been pushed by central banks to very elevated levels. Central banks look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something; so they artificially lift asset prices... Because they hope that they will trigger what’s called the wealth effect, but there is a massive gap right now between asset prices and fundamentals."
"The Fed has been pushing everybody into the public markets... it makes sense to reduce your exposure to the most trafficked assets."
Reflecting Julian Robertson's warnings from yesterday that, unless The Fed acts to end this bubble, there will be a "complete explosion," El-Erian points out the difference between what The Fed will do and what The Fed should do...
That will probably be the last time Mohamed El-Erian is invited to CNBC for a while. Here is what El-Erian said previously on this topic from the OC Register.
Q. Where is your money? Stocks? Treasuries? Bonds?
A. It is mostly concentrated in cash. That’s not great, given that it gets eaten up by inflation.
But I think most asset prices have been pushed by central banks to very elevated levels.
Q. So we’re nearing a bubble?
A. Go back to central banks. Central banks look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something. So they artificially lift asset prices by maintaining zero interest rates and by using their balance sheet to buy assets.
Why? Because they hope that they will trigger what’s called the wealth effect. That you will open your 401k, see it has gone up in price, and you’ll spend. And that companies will see their shares are going up and they will be more willing to invest. But there is a massive gap right now between asset prices and fundamentals.
The West fell in love with the wrong growth models 10 years ago. It fell in love with finance as an enabler of prosperity. The whole society fell in love with leverage and credit as a way of prospering. We were entitled to accumulate debt! People bought homes they could not afford. Governments borrowed money that they could not pay back.
Regulators believed that finance was so sophisticated that you could lessen regulations on it. This romance with the wrong growth model fell apart in 2007 and 2008.
Q. Now what?
A. We are struggling to find a new growth model because the political system hasn’t stepped up to its responsibilities. Obvious things like investing in infrastructure at extremely low interest rates are not being done. The reform of corporate taxation. The reform of labor markets – retraining workers, developing apprenticeships through public-private partnerships.
Either governments and politicians and companies will step up to their economic governance responsibilities and we will turn to something sustainable or, if we don’t, then you will have low growth and financial instability.
Income inequality has risen so much that consumption as a whole is undermined. That’s because rich people have a much lower propensity to consume than poor people. But it is the rich people that have captured all the income growth for the last seven years.
A little bit of inequality is good for the system because it creates incentives. A lot of inequality actually creates negative economic effects. It has become an inequality of opportunity.
* * *
It certainly seems like El-Erian has the same fears that Julian Robertson described as we concluded yesterday:
Robertson's conclusion: we can certainly see a 2008-like market crash because "the bigger this bubble gets, the bigger the burst."
I am looking at a bubble that is almost sure to pop at some time and I don't know when it's going to happen, but I know it's going to happen.
His conclusion, and the reason why there is no CNBC any time in Julian Robertson's future is his answer to how big a selloff we could get: "I don't think it's at all ridiculous to think of a selloff like we saw in 2008." Obviously, he uses the term "selloff" loosely.