This really isn’t anything new, but Mohamed El-Erian, Chief Economic Adviser of Allianz (I suppose its time I stopped describing him as ex-PIMCO big wig) thoughts on divergent central bank policy, and more. Well worth a read in full (link):
- Equity markets around the world are responding enthusiastically to news of further central-bank stimulus
- But central banks themselves are less confident than markets
- The latest unexpected interest-rate cut by China’s central bank and a comment by the European Central Bank’s president implying that more monetary easing is needed reflect weakness, not strength
Beyond the immediate market exuberance, investors would be well advised to keep three points in mind (bolding is mine):
- With every new round of central-bank leverage, markets are increasing their bet on two untested phenomena
- Not all central banks are increasing monetary stimulus. Most notably, the U.S. Federal Reserve is likely to continue diverging from the ECB and others, easing its foot off the accelerator (albeit really carefully). This divergence will likely emerge as a more important theme in 2015 that will require adjustments that go beyond just dollar strengthening — and that could cause volatility
- Considerable risk-taking in the financial markets has yet to be matched by a willingness by corporations to take on more risk
