Taps Coogan – October 7th, 2020

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Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC about why the market continues to trade at or above its pre-Covid levels despite an unprecedented number of people still on unemployment, the prospect of higher personal and corporate taxes, and tightening lockdowns across much of Europe. Mr. El-Erian’s answer: it’s all about liquidity, i.e. monetary stimulus

 

Some excerpts from Mohamed El-Erian:

“There are three arguments being put forward (for the market’s bullishness). I think that the strongest one is the liquidity one. The first one is that the market has gone on to expect the unexpected so (nothing) matters. I don’t buy that so much. The second one is that the market is looking through all of this. There will be a vaccine. There will be a president after November. We will have stimulus, so forget about the short term. I don’t buy that either, because the short term matters, especially when it comes to whether you have a stimulus or not… So I end up with the third argument, which is that it’s all about liquidity coming from central banks and coming from the fiscal authority and the market has embraced the notion that whenever there is weakness there will be liquidity…”

If it sounds familiar that’s because ‘bad news is good news’ has been the overarching driver of asset prices for the last 12 years and, with the exception of about 5 weeks in February and March, it remains the case today. That’s been the overarching legacy of interventionist monetary policy and if there is one thing that is unlikely to change in the near future, it’s interventionist monetary policy.

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