Mohamed El-Erian, chief economic adviser at Allianz, warns of a “big air pocket” in stocks, which could spell trouble down the road for investors.
“What worries me is fundamentals at some point have to validate valuations,”
he told CNBC.
“At some point fundamentals have got to validate valuations. That's the key issue and the key call over the medium term. For long-term investors, be careful of the heavily traveled public markets. Take a bit more in cash and take a bit more in opportunities that are harder to get to and, therefore, less crowded. That is the key issue over the longer term,” he said.
“I think since 2008 we have been muddling through and we have been powered by policy, ultraloose experimental central bank policy and money coming back from the corporate sector,” he said.
“At some point, if that doesn't get validated by fundamentals, then we're going to find that we have pushed public markets too far. I think that's the key point. Focus on the longer-term valuating valuations, otherwise quite a big air pocket” awaits stocks.
Meanwhile, he said the Fed is "likely to hike this year, most probably in September, because the weakness in the economy is transitory and [they're] not too worried about inflation either on the way up or the way down."
But he advised investors not to “obsess over the timing of the rate hike.”
Meanwhile, he warns that the Greece situation may be headed for a messy ending.
Greece and its Europeans creditors on Tuesday sought to play down fears that Athens would default on a payment to the International Monetary Fund next week,
Reuters reported.
Running short of cash to pay public sector salaries, pensions and debt obligations, senior members of Prime Minister Alexis Tsipras's government have said openly that Greece does not have the money to pay 300 million euros ($326.3 million) to the IMF on June 5, Reuters reported.
The threats have spooked financial markets, which fear a default could forces Greece out of the single currency, pushing the European and global economies into uncharted territory, Reuters reported.
And El-Erian doesn’t see a storybook ending for Greece.
“The economy is back in recession. The ECB is under tremendous pressure because it's the only institution putting money in. Capital controls are likely. The government is likely to issue an IOU in order to meet its payments. You are starting to see everything we saw in Argentina in October and November 2001 and very difficult to control things on the ground. I wouldn't underestimate the probability accident as they call it,” he said.
“I think it's more likely in terms of probability distribution that you get an accident. A few weeks ago I told you that I thought my probabilities were 5 percent that we get a good resolution. 45 percent that we muddle through and 50 percent that we get an accident. I think the probability of an accident is now somewhat higher. I don't think we can just muddle through forever on Greece.”
“The good news is this is not 2010, this is not 2012. The eurozone has done a lot to contain the risk of contagion. It doesn't mean it won't get some. Yes, you will, initially. A lot of legal uncertainties and this is not threatening the eurozone as was the case back in 2010 and 2012.”
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