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El-Erian, Others Warn of Bubble Risk as Easy Money Sloshes Through Market

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What You Need to Know

  • The crypto industry just topped $3 trillion, junk bonds are surging and stock indexes are near record highs.
  • A week of dovish central bank bombshells have fueled the easiest financial conditions in nearly four decades.
  • BlackRock's Rick Rieder and Allianz's Mohamed El-Erian warn that systemic risks will multiply unless central bankers act to cut back pandemic stimulus.

Bubble warnings are ringing louder after a week of dovish central bank bombshells fueled the easiest financial conditions in nearly four decades.

BlackRock Inc.’s Rick Rieder and Allianz SE’s Mohamed El-Erian are among those warning that systemic risks will only multiply, unless monetary officials take more decisive measures to pare extraordinary pandemic stimulus. While policy makers are acutely aware of the dangers in the easy-money era, their accommodative stances are encouraging ever-increasing flows to the riskiest markets.

The crypto industry just hit over $3 trillion in value, the biggest junk bond exchange-traded fund is booming after getting the most cash since March, and major stock indexes are sitting near records. No wonder a cross-asset gauge shows the easy U.S. investing climate is one for the history books.

The risk binge is intensifying worries over market froth and lax central bank watchdogs. The world’s biggest, the Federal Reserve, signaled last week a delay in interest-rate increases until the labor market is in better shape after it announced a widely expected reduction in asset purchases.

“The risk is you’re creating overheating prices,” Rieder, BlackRock’s CIO of global fixed income, told Bloomberg TV on Friday. “The risk to the system is you get too much liquidity in the system creating excess.”

Bloomberg hart - easy money

Last week the Bank of England shocked markets with a decision not to raise rates. Meanwhile European Central Bank President Christine Lagarde pushed back against wagers on a rate hike in 2022.

With supply-side pressures threatening growth, central bankers risk either acting too fast and derailing recoveries or being too slow and letting inflation get out of control. Officials are therefore taking a measured approach, despite some investors pressing for a more decisive end to pandemic stimulus.

“It’s not clear to me why we need to continue to run monetary policy so hot,” El-Erian, a Bloomberg Opinion columnist, said on Bloomberg TV on Friday. “The economy is doing just fine. But the collateral damage it’s creating, the unintended consequences that are resulting, are spreading. This is a Fed that’s going to wait and I fear is going to fall behind and we risk a pretty big policy mistake.”

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Catherine Mann, one of the Bank of England policy makers who voted to keep rates on hold, sounded a cautious note in minutes of the meeting. The ex-Citigroup Inc. economist was seen urging an early end to asset purchases, saying it was fueling an “elevated level of risky asset prices.”

Bloomberg chart - junk bonds

Investors may be doubling down on risk, but at least they’re building a protective cushion.

According to the latest Bank of America Corp. monthly fund manager survey, cash allocations rose to a net 27% overweight, the highest since July 2020, while institutional traders are hedging in the stock-derivatives market. And with corporate earnings beating expectations, there are good reasons for credit and equity rallies in America and Europe.

At the same time while policy makers have been slow to turn off the liquidity hose, they’re at least making a start, said Rieder.

“Could they do it a bit faster? Yeah I think so,” he said. “But at least the door is open and we’re moving in the right direction.”

Kristina Hooper is among those downplaying a market rout scenario from any moderation in growth and tighter monetary policy, though she sees a cap in the rally for risky stocks like cyclicals and small caps.

“We are in a transition to a more normal economy,” Invesco’s chief global market strategist told Bloomberg Radio. “That, to me, is the theme for 2022. And that suggests that we’re going to see growth moderate, and defensive and large-caps perform better.”

– With assistance from Jonathan Ferro and Nathan Hager.

(Photo: Michael Nagle/Bloomberg)

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