During an interview on CNBC yesterday, Allianz CEO Mohammed El-Erian said that a surge in corporate bankruptcies can slow down this red-hot market.
“What derails this market isn’t more China-US tension, it isn’t more political differences, it would be if we get large-scale bankruptcies. That is what derails this market. Otherwise, you have very strong technicals supporting this marketplace,” said El-Erian.
The technical support that he refers to is the technical analysis of stock charts. The market continues a steady climb since the March lows. With this, many stock charts look great from a technical level. Also, El-Erian said that’s enough for the market to continue climbing higher despite deteriorating fundamentals.
“The message from the market last week, from the last few weeks, even today is very strong technicals. It’s all been about technicals and that allows the market to over and over again to shrug off fundamentals. Am I surprised? No. Do I think there’s a limit to technicals supporting markets on their own? Yes. It just can go on for quite a while.”
El-Erian believes that we need the “v-shaped” recovery to avoid a surge in bankruptcies and that a “square root” recovery where we go up a little and then level off won’t be enough.
“The damage done to the economy is large. I don’t think that just simply leveling off in GDP growth is going to make us avoid a couple of things I’m really worried about: long term unemployment and on the other hand a series of capital impairment corporate events: bankruptcies. So we need growth to pick up again. We need to get back to this notion of a “v” as opposed to a square root, where we come up and level off.”
He says the one thing the Fed can’t fix is a spike in bankruptcies. These will also spill over into a higher unemployment rate.
“Bankruptcies go from short-term liquidity problems to long-term solvency problems. If you get that, then unemployment becomes more problematic, and you get capital impairment,” he said. “Believe me, if there’s one thing Federal Reserve money cannot help markets through, it’s capital impairment events. So keep focus on this risk of non-payments, because that’s the only thing at this point that derails the market that has such strong technicals.”
One investment that El-Erian likes at this point is gold. He says it now has both technical demand, after pushing above $2,000 per ounce, as well as fundamental demand.
“Both technical and structural demand” support gold, according tho him. “And the reason why is very simple: if you look at what risk-mitigating assets are out there, very little is attractive at this point. So gold is starting to attract people who are worried about all sorts of things: worried about inflation, worried about armageddon risk, worried about the dollar, and I think what you are going to see is gold demand being underpinned by something very new: which is gold capturing a much bigger place in people’s model portfolio, their long-term portfolio. So I expect gold prices to remain strong from here.”