Thursday , 25 July 2024

Mohamed El-Erian: Markets May Soon Face “jump conditions.” Here’s Why

…Mohamed El-Erian, chief economic adviser to Allianz…warned today in the Financial Times thatinvesting markets may soon face “jump conditions,” which he defined as a “leap to a different set of circumstances, rather than a smooth and incremental evolution” [and that] such a leap could “change longstanding economic and financial relationships,” “fuel political anomalies,” and “undermine some of the institutions and basic tenets of the capitalist system.”

The comments above and below are excerpts from an article by Mike Larson ( which has been edited ([ ]) and abridged (…) to provide a faster and easier read.

El-Erian cited:

  • fall elections in Europe and the U.S.,
  • exceedingly risky central bank policies,
  • herding behavior by investors and
  • potential European bank turmoil.

as possible triggers for a negative market “jump.”

…He wrapped up with the following words of advice:

The biggest mistake for investors — and it is an easy one to make — is to believe that this period of artificial market calm is destined, in itself, to lift the fundamentals that ultimately determine asset value. The opposite is, unfortunately, more likely.”

My take? El-Erian has to speak in Wall Street-ese because that’s the world he makes his living in but, in plain English, he’s basically saying all heck could break loose soon…because big-money investors:

  • are all overloaded with the same assets
  • are all chasing yield in everything from high-risk bonds to emerging market debt (again),
  • are all 100% reliant on central banks providing more volatility-suppressing, asset-inflation-provoking easy money at the first sign of a crisis anywhere and they
  • are extremely complacent about any and all risks, as evidenced by the low level of “fear gauges” like the VIX.

None of…[the above] means stocks have to immediately melt down today, or tomorrow, or next week, but it does mean that there’s a lot of risk percolating just below the surface – and El-Erian is worried that when it does bubble up, it could be more like a volcano than a hot spring.

…[Are] El-Erian’s words worth listening to or just empty talk? Is it better to go with the flow of this market, and ride it to even higher highs or is the risk of a “jump” to much higher levels of volatility, and therefore lower prices, too great? Add your voice to the debate in the comment section below or on Facebook.

Disclosure: The above article has been edited ([ ]) and abridged (…) by the editorial team at (Your Key to Making Money!) to provide a fast and easy read.
“Follow the munKNEE” on Facebook, on Twitter or via our FREE bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner)