That’s the intriguing thesis from Mohamed El-Erian, chief economic adviser to Allianz. You’ve probably seen El-Erian on CNBC before, as he is a longtime fixture on the financial news channel (and in print media outlets).
In the Financial Times today, he warned that markets may soon face “jump conditions,” which he defined as a “leap to a different set of circumstances, rather than a smooth and incremental evolution.”
Such a leap could “change longstanding economic and financial relationships,” “fuel political anomalies,” and “undermine some of the institutions and basic tenets of the capitalist system.”
|Is all heck about to break out?|
El-Erian cited fall elections in Europe and the U.S., exceedingly risky central bank policies, herding behavior by investors and potential European bank turmoil as possible triggers for a negative market “jump.” And he wrapped up with the following words of advice:
“The biggest mistake for investors — and it is an easy one to make — is to believe that this period of artificial market calm is destined, in itself, to lift the fundamentals that ultimately determine asset value. The opposite is, unfortunately, more likely.”
My take? El-Erian has to speak in Wall Street-ese because that’s the world he makes his living in. But in plain English, he’s basically saying all heck could break loose soon.
That’s because big-money investors are all overloaded with the same assets. They’re all chasing yield in everything from high-risk bonds to emerging market debt (again). They’re all 100% reliant on central banks providing more volatility-suppressing, asset-inflation-provoking easy money at the first sign of a crisis anywhere. And they’re extremely complacent about any and all risks, as evidenced by the low level of “fear gauges” like the VIX.
|“In plain English, he’s basically saying all heck could break loose soon.”|
None of that means stocks have to immediately melt down today, or tomorrow, or next week. But it does mean that there’s a lot of risk percolating just below the surface – and El-Erian is worried that when it does bubble up, it could be more like a volcano than a hot spring.
So what do you think about El-Erian’s words? Worth listening to? Or just empty talk? Is it better to go with the flow of this market, and ride it to even higher highs? Or is the risk of a “jump” to much higher levels of volatility, and therefore lower prices, too great? Add your voice to the debate when you get a minute.
Until next time,
What are ultra-low interest rates doing to asset prices and corporate debt levels, and how should investors like us respond? Several of you weighed in on that over the past couple of days.
Reader Justin said: “Everything is secondary to the yield-seeking juggernaut. The $64,000 question is: What catalyst will stop it and when? All other discussions are pointless. Find that answer, and become a financial hero for the ages.”
Reader Nels added: “If the Fed does not raise rates, ZIRP will bankrupt TBTF insurance companies and pension funds. If the Fed does raise rates, interest payments will bankrupt another group of TBTF organizations, including federal, state and local governments. Raise, lower, stay at zero – it ends badly no matter what.”
With regards to corporate earnings and the impact on share prices, Reader Gordon said: “You’re right Mike, it’s a ‘smoke and mirrors’ way of doing business today – the classic example being General Electric (GE).
“Buy another company and lay off a good chunk of its staff due to duplicity. Tighten up your business (constant restructuring). Borrow cheap money and buy back your shares. Get your bookkeepers to sharpen their pencils and play funny with the books and voila – you have had another great year and the suckers pile in and buy the stock. It’s not just GE, but all businesses.”
Reader Chuck B. offered up this warning, too: “If companies plan to survive the coming events, they had best be figuring how to pay off the debt they have built up, and how to do without. This means dodging the M&A debt market, cutting debt-fueled expansion, even reducing dividends where necessary.
“The problem is that such moves might leave them as prey to companies that are not so fiscally conservative, and which may ultimately fail themselves. We could even see well-known brands disappearing in stores – unless they are bought up by other companies at fire-sale prices.”
Lastly, Reader Jim B. said: “There is a moral hazard shared between governments and business that seems to hold the fate of our so-called civilized/industrial nations. Our path forward is never clear, predictable and is fraught with corruption from wrongdoers.
“I suspect a cleansing will eventually happen, but the party is far from over. The smoke and mirrors is so dense it is beyond comprehension for most to even begin to fathom. We are all occupied by the daily grind, and bursts of news events that change with the winds, and die just as quickly. We are truly a nation founded by geniuses, but run by idiots.”
Thanks for taking the time to weigh in on these important topics. The chase for yield, in a time of ultra-low interest rates worldwide, is clearly driving the markets here as Justin and El-Erian noted. It is also responsible for several behaviors that will ultimately prove dangerous to investors – the only question is timing. If you have anything else to add, please do hit up the comment section and share.
Yahoo (YHOO) was an early pioneer in the Internet business, but soon, it’ll just be another business in the Verizon Communications (VZ) empire. The phone giant will acquire the main business units of Yahoo for $4.8 billion, ending a months-long auction process.
Democratic National Committee Chairwoman Debbie Wasserman Schultz resigned after the release of thousands of emails by WikiLeaks. The emails show Wasserman worked closely to favor Hillary Clinton’s campaign over the campaign run by Bernie Sanders, something that has left Sanders’ supporters disillusioned and angry heading into this week’s Democratic convention.
So maybe the “Pokemon Go” phenomenon isn’t such a grand slam for Nintendo (NTDOY) after all. Shares of the Japanese gaming and console maker plunged more than 17% today after it warned that the red-hot mobile gaming app won’t immediately boost profit.
Retail investors had dog-piled into the shares in recent days as millions downloaded and played the mobile game on their smartphones, causing Nintendo to double in just two weeks. But the plunge today wiped away more than $6 billion in market value.
A late-night shooting in Fort Myers, Florida, left two dead and more than 14 injured, according to police. It’s unclear what motivated the shooting at a teen night that Club Blu was hosting.
What do you think about Yahoo’s long transition from pioneer to also-ran in the Internet industry? How about the political turmoil at the DNC? Any thoughts on the Pokemon fad, the latest shooting, or any other news stories I didn’t cover here? Let me hear about them when you get a minute; the comment section can be found below.
Until next time,
A note from Jeff Cantor: Fact! You are FOUR TIMES more likely to DIE in an active shooter incident than a fire. Learn how to SAVE YOURSELF and YOUR LOVED ONES, click here.