A prominent economist has spoken out about three “silver linings” in today’s battered economy, writing that the current trouble in equity markets could be a correction in the direction of more sustainable and realistic growth.
In a column on Monday, Allianz chief economist Mohammad El-Erian addressed what he perceives as three reassuring aspects of the economy at present, which analysts increasingly believe is headed for a recession. These three “silver linings,” while realistic about the likelihood of troubles ahead, nonetheless attempt to salvage some cause for optimism from the present state of the economy.
First, El-Erian notes that recent stock and cryptocurrency turbulence is a sign that markets have begun to reflect the real value of assets, as opposed to the “artificial” and inflated highs spurred on liquidity from the Federal Reserve. El-Erian views this as a positive and necessary development, with better prospects for long-term investors.
Secondly, El-Erian observes that bond markets have returned as a low risk, low reward staple in investment portfolios, after a period in which government bonds were seen as having lost credibility as a reliable investment. Under ordinary conditions, El-Erian argues, bond markets and stock markets are inversely correlated in value as investors act out of greed or fear. While this correlation was disrupted for much of the pandemic, El-Erian notes that the bond markets have recovered from an initial sell-off simultaneous with the stock market sell-off, giving cautious investors a more reliable option.
Finally, the veteran investor and economic analyst postulated that the main risk factors to equity markets had occurred in a sequence, as opposed to a more dangerous simultaneous shock from all risk factors, which could have devastated the market far more than the staggered disruptions of recent months.
“For long-term investors, it will prove beneficial over time that markets are exiting an artificial regime that was maintained for far too long by the Fed and that resulted in frothy valuations, relative price distortions, resource misallocations, and investors losing sight of corporate and sovereign fundamentals,” El-Erian wrote. “The promise now is one of a more sustainable destination. Unfortunately, it comes with an uncomfortably bumpy and unsettling journey.”
This “unsettling journey” has been discussed with increasing apprehension and alarm in recent months, as the word recession has figured more prominently in the vocabulary of economists, bankers, and executives since the stock sell-offs and rate hikes which began last spring.
The picture that emerges from these recent remarks from El-Erian is of an economy which, though experiencing turbulence in the short term, remains on track for more sustainable growth than that seen during the pandemic era.
Though he does not sugarcoat the likelihood of hard times ahead, El-Erian has seemingly concluded that the troubles of the current year are a necessary correction for years of artificially stimulated equity markets, which in the long term will facilitate a more thriving economy.
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