Mohammed El-Erian has a new warning to investors: take some money off the table.
In a wide-ranging interview with CNBC, El-Erian said that if he were a money manager, he would take some money from his funds at this time. In making his case, he identified risks coming from central banks, trade and fiscal policy.
Exiting stocks at their current levels could be a good thing as major U.S. indices have had double-digit gains this year.
In recent months, global central banks – except the Norwegian central bank – have been reading from the same script. In the United States, the Federal Reserve has slashed interest rates by 50-basis points, citing the slowdown in the U.S. economy.
Across the Atlantic, the European Central Bank (ECB) has pushed rates further negative and pledged to do more, including restarting QE later this year. In Japan, the BOJ has said that it too could be forced to slash rates. The only major central banks that have not sounded too dovish are the Bank of Canada (BOC) and the aforementioned Norwegian central bank, which raised interest rates this month.
Another central bank-related risk is in the repo market. Just today, the Federal Reserve added more than $63 billion to the financial system. This is after major banks asked for the money to relieve pressure in the money markets. The issue of repo has been in the market for two weeks after a shortage of cash led to a surge in repo rates. This was the first time the central bank was forced to do this since the financial crisis.
While El-Erian sees some central bank-related risks in the market, he believes that investors have already priced-in the upcoming actions.
El-Erian believes that uncertainties around trade could have major implications on the market. He said this a day after the Trump administration denied that it was considering de-listing Chinese companies from U.S. exchanges. The total market value of Chinese companies listed in U.S. markets is more than $1.2 trillion.
This statement is also ahead of the planned round of negotiations between Washington and Beijing scheduled for Oct. 10-11. The big risk on trade is that the two countries could continue to disagree on key issues. A realistic outcome is where China gives up negotiating with the U.S. and waits for the next president. This is possible because Chinese leaders are thinking about the long term rather than four-year election cycles.
Still, there are analysts who believe that a recession will happen with or without a deal. Last week, CCN reported that Mark Yusko believes a trade deal wouldn’t change anything about the economy or its long-term trajectory. He compared the ongoing trade negotiations with the United States Mexico Canada (USMCA) deal, which only had very minor changes from the previous NAFTA accord.
Investors have not yet priced-in fiscal policy risks in the market, according to El-Erian. He believes that nothing of value will happen before the next election. The much-touted infrastructure deal will not be possible because of the political divisions in the U.S.
The fiscal deadlock in Europe too could be a major issue in the global financial market. A recent survey of the world’s top investors found that German fiscal policy changes carried the most bullish sentiment in the market. Earlier today, the outgoing ECB president, Mario Draghi, said that monetary policy alone wouldn’t save Europe’s economy. He asked governments to incorporate further fiscal easing:
I [have] talked about fiscal policy as a necessary complement to monetary policy since 2014. Now the need is more urgent than before. Monetary policy will continue to do its job but the negative side effects as you move forward are more and more visible. Have we done enough? Yes, we have done enough — and we can do more. But more to the point what is missing? The answer is fiscal policy, that’s the big difference between Europe and the US.
This article was edited by Sam Bourgi.
Last modified: October 3, 2019 11:16 UTC