El-Erian: Stock Market's Reliance on Fed May Come Back to Bite It

Thursday, 14 Aug 2014 08:19 PM

By Dan Weil

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Stocks continue to stand tall, with the S&P 500 index within a few percent of its record high.

But the market remains dependent on the Federal Reserve's massive easing program, and that's a precarious place to be, says Mohamed El-Erian, chief economic adviser to Allianz.

"The bet on central banks assumes not just their commitment, which I totally agree with," he told CNBC. "But . . . it assumes their effectiveness, that somehow central banks acting on their own will be able to deliver great economic outcomes."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

And that's been a problem, El-Erian said. The economy has grown at an annual rate of only 2.2 percent since the recession ended five years ago.

"The reason is simple: they are using imperfect tools to try and achieve economic outcomes. So, unless the other policymaking entities get into the game, then we are going to play this repeated game. Meanwhile, the risk of financial instability goes up," he said.

Eventually there must be "a successful handoff from policy-induced growth to genuine growth," El-Erian said.

Illustrating stocks' dependence on the Fed, USA Today notes that they have dropped after the end of both previous rounds of central bank bond-purchases. The Fed now plans on finishing its third round of quantitative easing (QE3) in October.

"The fear with the taper is that markets [stocks] will see a repeat of what transpired back in 2010 and 2011 when QE1 and QE2 were wound down," Paul Hickey, co-founder of Bespoke Investment Group told USA Today.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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