Steve Blumenthal’s latest On My Radar (Are We In A Bubble) is a must read, offering great info and wisdom on various credible scenarios.
Steve’s summary of Mohamed El-Erian’s presentation at the recent Inside ETFs Conference is particularly interesting. More specifically:
- El-Erian pointed out that economic growth is synchronized and real (it’s not about leverage or debt, but consumption, investment and trade);
- there is more focus on pro-growth policies, especially in the U.S., where there’s been deregulation, tax reform and the potential for increased infrastructure spending;
- “It’s not the old type of growth that we had 15 years ago that was finance driven. It’s not about leverage or central banks; this is much more genuine”;
- there was no central bank policy mistake; there were no major disruptions to international trade; there was no surge in inflation; there was no surge in yields; there was no dollar appreciation; and there was no geopolitical shock to speak of.
Nothing phony, nothing made up, nothing excessive, nothing missed.
For good measure, El-Erian reportedly listed three big risks:
- “Geopolitics matter,” said El-Erian. “Markets cannot price in geopolitical shocks easily. If you get a shock, you could get a shift in markets that could be quite violent.”
- Central Banks: How successful will they be at normalizing their unconventional monetary policies.
- A market accident, particularly from index funds and ETFs with exposures to illiquid underlying assets.
In all, El-Erian said that “for the first time in a very long time, there’s reason to be optimistic about fundamentals gaining enough traction to validate asset prices.”
In plain words, this time is different!
Reading El-Erian’s arguments, I could not help but think of NBC’s “The Good Place” where people enter their afterlife in a utopian neighbourhood designed by an apparently benevolent Michael who, eventually, proves to actually be a bad person experimenting with human beings.
The world of “genuine growth” El-Erian describes was actually designed by Ben Bernanke and Mario Draghi.
Have we lived in this world long enough that we now forget its artificiality?
Have we lived in this world long enough that we now forget that it has been built on a mountain of government debt and central banks’ QE experiment?
Have we lived in this world long enough that we now forget that the “benevolent engineers” eventually must return the neighbourhood to its normal state and that they have no experience and no proven method to reverse the alchemy?
Back on earth, we will surely be faced with certain inconvenient facts unseen in El-Erian’s world:
- Global Debt Hits Record $233 Trillion.
- Interest rates remain artificially low throughout the curve and throughout the world.
- The U.S.government’s tax reform will significantly increase the U.S. budget deficit over the next several years.
- The Fed has already begun its Great Unwind.
- Most of the debt is short-term so rising interest rates will swiftly impact consumers, corporations and governments.
- The U.S. output gap has closed, right when a big fiscal stimulus is unleashed.
- Europe’s capacity utilization rate is now 84% and rising rapidly towards its historical peaks of 86%.
It is rather interesting that El-Erian makes no mention of inflation risk which, significantly, is one of the fundamentals gaining traction that would seriously invalidate asset prices.