Submitted by Taps Coogan on the 20th of February 2020 to The Sounding Line.

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Allianz chief economic advisor Mohamed El-Erian recently spoke with Bloomberg about his view that central bank accommodation is now the primary, if not only driver behind advancing markets. Accordingly, he warns that any tightening or ineffectiveness of momentary policy could destroy the technical support for advancing markets.

 

Some excerpts from Mohamed El-Erian:

“It’s living the dream. It’s what we had for the whole of last year. We get great returns on risk assets. We get good returns on risk-free assets and we get no volatility. It is living the dream… It’s about faith in central banks’ ability and willingness to keep supporting this. And if that changes, more than the data, I think this market will absorb data surprises one after the other, but if there is shaken confidence in willingness and ability…”

“One thing that flew completely under the radar screen is the minutes of the Reserve Bank of Australia. They are very hard hit by (the slowdown in) China. You know why they didn’t cut rates? Because they are worried about encouraging excessive borrowing. Think about this. That is what lower rates are supposed to do. Now Central Banks are worried about that. (With regards to effectiveness) go to the ECB. If the ECB on the one hand with effectiveness and the Reserve Bank of Australia on the other hand with willingness become a general theme, which is going to take time, …then this market loses its technical support.”

If this story sounds familiar, it is because we have re-lived it repeatedly since the ‘Greenspan Put‘ was established in the late 1980s. Central banks respond to natural slowdowns in the economy with artificial stimulus that inflates financial assets. Once a sufficiently large financial bubble has formed, they then pop it, always to terrible effect.

Lately, the Fed has been insisting that they will only tighten policy if inflation rises far above their target for a very long time. Presumably, that means that they will let the current bubble get wildly, wildly out of control before they realize their mistake and then pop it.

There is a bit more to the interview, so enjoy it above.

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