Some argue that the recent lackluster performance of global stocks is evidence that markets are tenuously positioned on an air pocket.
We would put it differently. While markets have deviated quite a bit from economic fundamentals, this is due to central bank activism.
Over the last few months, central bankers have re-inflated the wedge that separates weak fundamentals from high market prices.
Whether it is the Fed's open-ended QE3 and extended forward interest rate guidance, or the European Central Bank's unlimited securities purchase program, robust asset markets are an integral part of policy attempts to counter tail risks and deliver economic growth and jobs.
By artificially inflating asset prices above levels justified by sluggish fundamentals, these two central banks hope to calm market concerns, ignite animal spirits and trigger the wealth effect. And their actions are contagious.
Whether they like it or not -- and many don't -- other central banks continue to be pulled into more accommodating monetary policy. Witness this week's round of interest rate cuts in Brazil and Korea as an example.
These cuts did not happen because they constitute a first best policy. Rather, they seek to counter the collateral damage emanating from the unconventional policies pursued by Western central banks.
That central banks are essentially "all in" is, in the short term, good news for all types of markets -- especially when compared to the air pocket hypothesis. Yet, as I detailed in Thursday's Financial Times, investors should not get too carried away.
There is a limit to how far and how long prices can deviate from fundamentals. This is particularly the case when central banks, acting without the support of other government entities, do not have sufficiently-refined tools to secure good and sustainable economic outcomes.
As argued in Thursday's column, investors' romance with the "central bank put" should not be unconditional or everlasting. Moreover, it needs to be accompanied by significant portfolio differentiation, responsive management of overall risk exposures, and positioning that also reflects more durable global themes.
Central banks should be respected. And they can certainly counter air pockets, but not forever.
Either fundamentals will improve or asset prices will fall. Which outcome we eventually see depends in large part on whether other government entities finally step up to their policy responsibilities.
Mohamed El-Erian is the CEO and Co-CIO of PIMCO, which oversees nearly $1.8 trillion in assets and runs the Pimco Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year and was named a book of the year by The Economist and one of the best business books of all time by the Independent (UK).
© 2012 CNBC.com
We have entered a cycle of boom and bust based on speculation and low credit. It is exactly what it was like prior to the banking and market regulations prior to the New Deal. We are returning to those glory days of big bubbles and dramatic bursts, and until we come to our senses and re-regulate both the banks and the markets, and we raise capital gains taxes to a reasonable 50% or more, and short term capital gains to at least 90% - we will be in this cycle of boom an bust. The banking and market regulations created an environment where inventory cycles were the primary reasons for market rises and dips, but those gentle days are gone.
Get ready for your new lives, where the the next speculative bubble and bust is just around the corner.
It's a travesty that Bernanke et al. believe that easy money will solve everything. How did that work out for Greenspan at the end of the decade starting in 2000? Not so well? Perhaps the central banks should stop their nonsensical pursuit of employment and focus on the value of their currency; I mean, that's what Volcker did, and heaven forbid we repeat that.
You see, here it is, people--this is what they do. They hide behind jargon and they don't tell you what they're doing. You're supposed to think "well, I'm just not as smart as these smart people, so I have to trust them."
What the Fed and the European Central Banks are doing is printing money and giving it to rich people. They're giving it to rich people by buying junk from the rich people at inflated prices. The design is to make sure the rich people get richer. The way they fake you is they say "well, the rich people get richer and stay richer and that'll create jobs. But if the rich people take a tumble, then the whole thing comes down."
But what the rich people are really doing is using stagnant wage growth and high unemployment as tools to keep inflation down while they gorge themselves on giant bales of liquid cash fronted to them for free by corrupt Central Banks. Under this formula, they win big, and you lose big.
And they get guys like the author of this article to use a lot of fancy-schmancy jargon to keep you confused, docile and compliant.
I guess when people dont purchase food items, they go to food pantries so the inflation benefits the banks who sponsor the pantries.
I don't believe any of you have a clue about anything.
From what I've seen as a 0% you all go merrily along complicating things and then hire more of your friends to try and unfunk what it is you have done
Then more friends are hired to try and explain it all away as being too compllcated for anyone or anything to control it
that you affect so many people that starve, live in war zones, and lose everything doesn't mean a thing
you're all part of the problem, keep it simple, keep it concise, and regulate the perverts that funk everyone in the process
I suppose so, but they should never be trusted.
I have a 401k, but I don't really have a choice about that as a retirement vehicle. It's what there is. I certainly have no control over what the markets do. The markets are all manipulated for the benefit of the big investors, the investment firms, etc, anyway. Little me is not even on their radar. I do not exist.
http://youtu.be/_kLTcDtk8FM
And that is comparing a high tax on companies in 1962, compared to the low tax regime now! Which puts the multiplier on share prices even higher.
Put simply, the biggest share bubble has occurred since the Eighties, where dividend yields starting declining sharply. The decade of Wall Street and the London Stock Exchange. It is safe to say, without the market manipulation, shares would probably be a third of the price, and private pensions well funded. The speculation bubble all depends on the every growing share price, NOT dividends. But without dividends, how can you judge the correct stock price? The false idea now is share prices are a function of turnover (at a rough valuation of companies of 10 times their turnover). NOT PROFITABILITY.
The trading value of stocks has grown lockstep with the consumption of fossil fuels. Now that the cheaply extracted fossil fuels are gone, more capital is required to keep up the production of just about everything. Human capital is paying the price right now. Wages are down, offsetting the higher cost of energy. This is killing the demand side. An accelerating race to the bottom ensues.
The Fed continues to create wealth out of thin air, by so-called quantitative easing. Most people don't recognize the wealth is just that. The question is when is that big fart coming?
Investors make money on stocks in two different ways: dividends and/or growth in the share price. Companies that issue NO dividends retain their earnings, causing their share price to rise (all things being equal). And typically, the capital gain growth prospects for companies which don't offer dividends is higher due to the higher prospects for earnings growth from to the company's more prevalent investment opportunities.
Drawing any conclusion about the costliness of common stock based on changes in dividend yield is ludicrous! Back to Biz 101, dude...
Seriously, you cannot see the flaw in that whole idea?
- Plank 5 of the Communist Manifesto, 1848
Bush's Fed did EXACTLY what economic liberals like Krugman told it to do. EXACTLY. No wonder the implosion of the housing bubble took Krugman by completely surprise.