Top economist Mohamed El-Erian warns of a jobless recovery – and recommends investors ride the liquidity wave

Mohamed El-Erian
Mohamed El-Erian.

  • Mohamed El-Erian warned the US economy could rebound without a jobs recovery.
  • The Allianz economist suggested workers might lack the skills employers want.
  • El-Erian predicted an “everything rally” and advised investors not to cash out.
  • See more stories on Insider’s business page.

Leading economist Mohamed El-Erian raised the prospect of a jobless recovery and advised investors to hold their nerve in a CNBC interview this week.

Pointing to the disappointing US employment data last week, Allianz’s chief economic adviser questioned whether workers have the necessary skills to fill the jobs available. Employers may have embraced new technologies such as AI, robotics, and automation faster than the labor market, he added.

“That’s the biggest fear we have because what we don’t want is a jobless recovery,” El-Erian said. “There’s a massive question mark as to how many will actually be able to get jobs again, or be willing to get jobs again.”

He cited improved unemployment benefits, insufficient childcare, and school closures as other potential drivers of the weak jobs data. If people are earning more by staying home instead of working, and if parents can’t leave their kids at daycare or at school, they might not be filling the jobs available.

El-Erian also recommended investors resist the urge to cash out as inflation fears and signs of market excess mount. “You will get the everything rally,” he predicted, arguing that monetary and fiscal stimulus will continue pumping liquidity into markets and boosting asset prices in the weeks to come.

“Leon Cooperman captured it really well: “Even if you’re worried about the world, you want to be a fully invested bear,'” he added, referring to the billionaire investor’s current stance on markets.

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Stocks are in a ‘rational bubble’ as long as investors remain confident in continued Fed support, economist Mohamed El-Erian says

Mohamed El-Erian
  • Mohamed El-Erian told CNBC stocks are in a “rational bubble” and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to support the markets. 
  • “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher,” the Allianz chief economic adviser said. 
  • El-Erian said that the US will continue to see a contrast between what the market is doing and what the broader economy is indicating because of the liquidity in the market.
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Mohamed El-Erian told CNBC on Wednesday stocks are in a “rational bubble” at the moment and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to provide support for the markets.

“This is not an irrational bubble. This is a rational bubble,” the Allianz chief economic adviser said. “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher.”

Typically, a stock market bubble is created when asset prices surge to levels that greatly exceed the their intrinsic value. Legendary investor Jeremy Grantham said on Tuesday that the stock market is in a  “fully-fledged epic bubble,” driven by extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior.” 

For El-Erian, there is a rational reason why stock prices keep going up, and it’s investor confidence in support from the Federal Reserve.

Read more:Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

Stock prices ballooned in 2020: the S&P 500 gaining 16%, while the tech-heavy Nasdaq soared 43%. El-Erian said there’s so much liquidity “sloshing around the system,” that stock prices will continue to move higher this year.

The result is that stock prices continue to rise despite political and economic turmoil outside of Wall Street.  On Wednesday as protesters stormed the US Capitol building, the stock market remained unbothered. The Dow Jones closed at a record high, while the S&P 500 closed up 0.5%. 

El-Erian said that the US will continue to see a contrast between what the market is doing and what “conditions on the ground” are saying because of the liquidity in the market.

Also on Wednesday, the ADP monthly employment report revealed that the US lost 123,000 private payrolls in December. The reading marks the first contraction in nationwide hiring since April. El-Erian said that the report was a “big miss” and demonstrates the “power of liquidity.” 

 

 

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