Warning From One Of The World's Most Respected Market Economist

Originally published by AxiTrader

Mohamed El-Erian, formally of PIMCO, and now Allianz (DE:ALVG) SE's chief economic adviser is one of the most listened to voices in global finance.

And he has a warning for traders and investors that the fairly quiet period we have seen in stock markets where volatility is low as prices rise has lulled markets into a dangerous level of complacency which has fed leverage and in doing so risk.

Now, of course, anyone trading foreign exchange or commodity markets hasn't been lulled into any sense of complacency. We've seen oil, gold, USD/JPY, the Aussie, iron ore, and copper - to name a few - all trade through wide, sometime wild, ranges recently.

But it's stocks where the action is as last night small fall in the S&P 500 and its impacts on bonds highlighted.

If stocks falter then, as we have seen before, markets will tend to correlate with that risk off tone and even the Fed could be derailed from its tightening path.

Which brings me back to El-Erian's warning.

Bloomberg reports he said the decline in volatility “encouraging people to take a lot more risk than they should, and understandably so...The longer that tipping point is viewed to be further away, the longer this continues.”

And volatility has been incredibly low by historical standards.

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But there's a problem with that El-Erian says, "The more you leverage your positions, the more the markets are calm. The problem with that is you get to a tipping point at some stage.”

Are we at that tipping point as traders and investors reassess the chances of the Trumponomics stimulus and tax cuts being delivered anytime soon?

Lipper data released overnight showed that for the second week in a row US-based stock funds saw a net outflow of cash.

That's important says El-Erian because while the administration clearly has an agenda it wants to deliver the question of if and when remain unanswered.

“Clearly there’s been intent --- tax reform, deregulation, infrastructure,” he said, listing some of President Donald Trump’s goals in the US “So there’s at least intent. Now the question is, ‘Can you get that through Congress?’ And it’s important to ask that question in this political environment.”

As readers of my work know I believe the chances are very high that the 5 wave structure from the 2009 low (or something that approximates one given I'm not really an Elliott Wavician) is likely to top in the 2400/2450 region. So far we've seen a high - this week - of 2403.

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It's still too early to call the top defintively as being in. BUt with teh S&P earnings season showing US corporates grew earnings around 15% in the year to the end of March and with the stimulus still somewhere in the pip I wonder why the heck the S&P is already well clear of 2400.

But it seems caution reigns.

Already this week a Bloomberg survey showed that on average analysts were looking for the S&P 500 to end the year at 2,425. That's not far from where we are now. But the key to this outlook is that it means that the precoditions for the market to build toward this tipping point are growing.

When that will be is impossible to know.

But El-Erian's warning is an important one.

Have a great day's trading.