Taps Coogan – January 7th, 2022

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After spending all 2021 imploring the Fed to taper sooner and faster, lest they be forced to play catchup in 2022, Mohamed El-Erian, Allianz Chief Economic Advisor, recently spoke with CNBC to warn that the Fed has, in effect, traded 2022 for the rip-roaring bull market of the last couple years.

Mohamed El-Erian:

“They are having to play massive catchup and the question is at what point do they lose their nerve… The marketplace assumes they are going to get it just right and the Fed has been incredibly supportive of markets, so the conditioning of the marketplace is to assume the Fed will get it right. But, economists will tell you that it is not a dominant probability… The Fed has exchanged 70 record highs and the third year of double digit returns for the marketplace for a much more difficult 2022 policy outlook…”

“The Fed continues to buy. We are not going to see the genuine response of the bond market until the Fed stops its purchases and that’s going to happen in the first quarter of the year… The bond market senses it, but it’s not fully pricing it in yet because the purchases are so dominant…”

“If you look purely at valuation… you are very tempted to rotate out of the US and Europe into Emerging Markets and China… However, if the Fed is in play and the Fed can end up with a policy error, you really don’t want to do that… When the US sneezes the emerging world catches cold… I am worried about the policy error and I am also worried about what ‘Zero Covid’ policy means for economic activity in China…”

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

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