Submitted by Taps Coogan on the 3rd of April 2019 to The Sounding Line.
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Allianz chief economic advisor Mohamed El-Erian recently spoke with CNBC about what he believes caused the enormous difference in markets between Q4 2018 and Q1 2019, namely central banks
Mohamed El-Erian:
“My basic view is that the US economy is in a good spot. We are going to grow by 2.5% to 3% and the problem is outside. China’s PMI is encouraging, but did you see Germany today (April 1st)? Germany revised down to the worst numbers since 2012.”
Becky Quick:
“And yet the stock market there, Germany, is the biggest advancer in the European continent today too (April 1st)”
Mohamed El-Erian:
“Because they are thinking two things. One is ‘China matters’ and two is the ECB is going to be even more dovish. It’s about central banks. If you look at what happened in Q1 (2019) versus what happened in Q4 (2018), the only significant difference is that central banks got much more dovish and that’s what it’s been all about… Fixed income also had a very strong (first) quarter. And you know what? Yields on government bonds came down. All the traditional correlations failed once again. This is about liquidity, not fundamentals. That’s where the argument comes in for rate cuts. I don’t think you need them. Why? Because I think the US economy is in a good place… This is the big irony… and this is a problem for markets going forward: The Fed solidified its u-turn on March 20th hoping to get off the stage. Not to be in the spotlight. What do we find now? A massive tug-of-war. On the one hand the White House pressing for 50 basis point cuts. Not only do they say cut, but they specify how much they should cut. On the other hand you have Fed officials saying ‘not only are we unlikely to cut his year but hikes aren’t off the table.”
As we discussed here, the real economy only matters to financial markets to the degree to which it justifies continued monetary stimulus. In other words, bad news is becoming good news once again.
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When the stock market started to wobble two months ago President Trump increasingly ratcheted up his attacks on Fed Chairman Jerome Powell for “ruining the party.” Trump has put pressure and blame on the Fed causing markets to pull back.
The idea that that rates should not be raised is of course very popular and solidly endorsed by those who have benefited by feeding at the trough of easy money. The article below delves deeper into who is wrong about rates.
https://Trump Monkey Hammers Powell Into Slowing Rate Hikes! html
The other side of the coin markets like to avoid because it rarely creeps up is solvency… you can provide all the liquidity you want to company that just filed bankruptcy with a crap tonne of debt, still wont save the shareholders who will get wiped out in favor of the bond holders. Sure mark to market rules may get suspended bankrupted debt leveraged companies shares will be valued near zero.
Indeed