Investors face a “New Operating Regime,” El-Erian Says

Mohamed El-Erian, chief economic advisor of Allianz SE and chairman of President Obama’s Global Development Council, says “[f]inancial markets are now transitioning . . . to a new operating regime.” He contends that this means “volatility bouts will be more frequent and, in some cases, more violent than in the last few years.” Further, he suggests that that “challenge will be in monitoring carefully the tipping points for various market segments, along with related price overshoots and undue asset-class contagion.” El-Erian points to nine aspects of the change:

  • “Bouts of volatility are to be expected;”
  • They will be “amplified by fragile market liquidity;”
  • “Excessive volatility . . . is detrimental to the real economy;”
  • “Concerns about excessive volatility are a lot greater when markets approach tipping points,” which is reflected in energy, high-yield bond, and emerging-market currencies;
  • “[S]tabilization has repeatedly fallen to liquidity injections from . . . central banks . . . and companies;”
  • With volatility apparent, “some market participants are quick to call for the central bank to step in and restore calm;”
  • “The Fed is in no hurry to reverse course” after its recent rate hike, and “[a]s a result, more of the burden of stabilization will fall to the deployment of corporate liquidity;”
  • “This configuration is a lot less supportive of financial markets;” and
  • “[W]e should not expect economic and corporate fundamentals to play a sufficiently deterministic stabilizer role for asset markets.”