Financial markets are ignoring economic realities that will pull them back to earth, says Pimco Chief Executive Mohamed El-Erian.
He told CNBC that investors are ignoring problems in three areas: banks, employment and sovereign debt.
As for banks, they will suffer from President Barack Obama’s proposed tax on bailout recipients, El-Erian says.
"We have this inconsistency out there," he said.
"On the one hand we expect the banks to lend, to extend credit to get the economy going again. But on the other hand there's a tremendous desire to tax them.”
As for employment, it’s sluggish.
“Unemployment is persistently high, and the ability to respond is limited by the deficit, which is already high and likely to go higher,” El-Erian said.
Then there’s the sovereign debt problem.
“There is concern about the sovereign balance sheets,” he notes. Why?
“We’ve had a sequential contamination of balance sheets that have a tremendous impact,” El-Erian said.
“We had first housing, then banks, the household and now the governments. Put all that together and compare it to market valuations, and you come to the conclusion the market simply hasn’t priced in the reality of what you (CNBC) talk about every day.”
Others also are concerned about banks and the economy.
“If banks are not able to reasonably expand their balances sheets, the economy will not be strong enough to fuel spending,” Malcolm Polley, chief investment officer at Stewart Capital Advisors, told Bloomberg.
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