Mohamed El-Erian Explains Why He Is Now "Mostly
In Cash"
7/4/2015
"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.
