Mohamed El-Erian says the supply bottlenecks causing inflation aren’t going away anytime soon

Mohamed El-Erian
  • Mohamed El-Erian said supply bottlenecks will continue in the near term in a CNBC interview on Monday.
  • The chief economic advisor at Allianz criticized the Fed for its lack of “humility” and “open-mindedness.”
  • “These bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.
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Mohamed El-Erian, the chief economic advisor for Allianz and president of Queen’s College, Cambridge, sat down with CNBC on Monday to talk markets and the topic of inflation quickly came up.

El-Erian said that he believes supply bottlenecks causing inflation will persist.

“I’m of the view that these supply disruptions, these bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.

The chief economic advisor for Allianz added that based on conversations he is having with CEOs, there is considerable input pressure from rising commodity prices on corporations that are going to be passed onto the consumer in the form of higher prices.

“The thing I’m hearing most commonly from companies’ CEOs is: we’re having problems securing inputs, and we’re looking to increase prices and wages,” El-Erian said.

In El-Erian’s view, over the short-term, the Fed won’t change its position that inflation is transitory because they have stated they need “unambiguous evidence” of inflation before tapering asset purchases or increasing interest rates.

El-Erian argued the Fed’s conviction that inflation is transitory comes despite evidence from every corner of the market.

He also noted that the University of Michigan’s index of consumer sentiment released last Friday showed a sharp increase in consumers’ expected inflation rate for the next year in May(4.6% compared with 3.4% in April).

The Consumer Price Index posted its largest most month-over-month jump since 2009 in April as well, while “core” inflation jumped the most since 1982.

Further, El-Erian pointed out that the Bank of Canada and the Bank of England have already started to discuss addressing inflation via tapering quantitative easing policies, and said he worries the fed might be “late” to action.

When asked what would happen if the Fed is “late,” El Erian said, “the market may start getting nervous, and then the Fed will have to slam on the breaks. The last thing we need is the Fed slamming on the breaks because experience shows when that happens, we end up with a recession.”

El-Erian went on to criticize the Fed for its lack of humility and open-mindedness in crafting policy.

“Why is it that you can dismiss all this evidence both from the top-down and bottom-up and hold onto a conviction? You should be more open-minded have a bit more humility about the fact that we don’t understand well supply bottlenecks,” El-Erian said.

“Economists typically lag when it comes to supply bottlenecks,” he added.

Read more: Goldman Sachs says these 23 stocks have strong pricing power and rock-solid margins that could protect against soaring inflation

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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.
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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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Mohamed El-Erian says the Archegos blow up is a ‘one-off’ but it may lead to tightening financial conditions as banks become more cautious

Mohamed El-Erian
Mohamed El-Erian, Chief Economic Advisor of Allianz and Former Chairman of President Obama’s Global Development Council, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017.

  • Mohamed El-Erian said the Archegos blow-up is a “one-off” in a CNBC interview Monday.
  • The Allianz chief economic adviser added he doesn’t believe it will lead to a “fast-moving contagion” in the markets.
  • El-Erian did warn investors about “tightening financial conditions” if banks become more cautious as a result.
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Mohamed El-Erian says the Archegos blow-up is a “one-off,” but it may lead to a tightening of financial conditions as banks become more cautious.

Over the weekend reports came out that showed Archegos Capital Management had been behind roughly $20 billion worth of block sales of companies like ViacomCBS and several Chinese tech stocks including Tencent and Baidu.

The sales came after the hedge fund failed to meet margin calls from Credit Suisse, Nomura, and Goldman Sachs.

Queen’s College President and Allianz chief economic advisor told CNBC on Monday that he believes the incident was a “one-off,” caused by Archegos’ “highly concentrated positions”, “massive leverage”, and “derivative overlay on top of that.”

El-Erian said that he doesn’t see a “fast-moving contagion” spilling over and creating a significant market sell-off, adding that “for now it looks contained.”

The Allianz chief economist did say investors should be keeping an eye on “slower-moving contagion forces” which might cause a “tightening in financial conditions” forcing banks to become more cautious.

“There’s been so much liquidity sloshing around the system that there has been excesses and we’ll get fender benders like this one, but what we don’t want is a pile-up, and that’s why it’s really important to look at these slow-moving contagions,” El-Erian said.

El-Erian said he hoped the Archegos blow-up would lead to “better discipline in the marketplace because we’ve lost a lot of discipline.”

He added that Archegos’ positions, overall, are a “small” portion of the market, but said it could cause banks to make changes.

“I can tell you that in a lot of investment houses right now, and banks, people are being asked look how we are positioned, who are we exposed to, do we have enough margin, is the collateral moving or not, and all that causes somewhat of a slowdown in the system,” El-Erian said.

When asked what caused Goldman Sachs to force the liquidation when it did, the Queen’s College President said that “price action”, “how big was the margin overall”, and desire to move first and catch other banks “offsides” was the reason Goldman made its liquidation call.

Goldman Sachs told Bloomberg that its losses from the Archegos liquidation were “immaterial” while Nomura and Credit Suisse both face “significant” losses after the blow-up.

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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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