El-Erian cautions investors: “Liquidity waves tend to break at some point”

Mohamed El-Erian, Allianz’s main economic advisor, and one of the most respected economists of the moment, has reviewed the economic and financial news, analyzing the main threats that he sees for the markets and for global growth. El-Erian has issued a warning to investors: “Liquidity waves tend to break at some point. I would be vigilant.”

In an interview with Foxbusiness, El-Erian has been cautious about the high optimism that exists in the markets. After years of tranquility, we could be close to a point of inflation that leads the markets to present a more ‘savage’ behavior.

“I am a little concerned that in this wonderful world in which we have been living with low volatility, everything that is going up may come to an end. But much depends on changes in behavior,” the expert warned.

“If I were an investor, I would recognize that I am going through a huge liquidity wave thanks to the Fed. But I would remember that waves tend to break at some point. So I would be very attentive “.

And the real economy?

El-Erian believes that the economy faces a number of risks that could further depress growth while prices remain higher. “As sad as it is to say this, it is what I hope, things will get worse before they get better,” says the economist.

“We are going to have more scarcity of goods. We will have higher prices. Inflation will remain at the 4-5% level. And it is going to take time to solve these things, they cannot be solved overnight, “says the Allianz economist.

Inflation will last longer than expected because the factors that are causing it will continue to push upward for a while longer, including the shortage of workers in certain sectors and the rise in wages as a consequence.

“I do not agree that inflation is transitory. There is a part that is transitory, that is related to the covid, but there are things that are fundamentally much deeper than that. They involve a change in behavior. So we should expect another. year, at least, of high and persistent inflation “, warns the expert.

El-Erian’s Recommendations

El-Erian believes that the Fed should “relax” the monetary stimulus it continues to inject into the economy in response to COVID. “That made sense at the most serious point of emergency. It doesn’t make sense now, so they should let go of the monetary stimulus pedal.”

In addition, El-Erian calls on regulators and the central bank: “We have to take excessive financial risk taking very seriously because what will happen if we are not careful is more inflation that will disrupt financial markets and then undermine the economy.” .

If liquidity continues to flow into the economy and inflation continues to advance, agents could begin to believe in higher future inflation (expectations), which in turn would exacerbate the current rise in inflation.

“And finally, we have to incorporate more people into the workforce. These things are feasible. What they require is the political will to implement them,” says the expert. Right now the US has a problem with the decline in labor force participation. Millions of Americans have stopped looking for work and they stay out of the workforce amid a historic worker shortage. Regaining that part of the population is critical to solving the current shortage and raising potential growth.