Mohamed A. El-Erian: Economy: The Missing Elements for a Market 'Melt Up': "Stronger global fundamentals need to underpin elevated asset prices, and the Fed must maintain a tricky policy balance as the U.S. continues to outperform advanced countries.... The argument for a melt up (involving a pile on by investors who don't want to be left on the sidelines during a market rise regardless of any change in market fundamentals) essentially extrapolates forward the impact of central bank liquidity support in the context of the notion of investment portfolio underexposure to stocks and the continued proliferation of index products. This is also known as the FOMO, or fear-of-missing-out, effect...
...The most important risks when it comes to the melt-up scenario... have to do with... a slow and uncertain handoff to the stronger global economic fundamentals required to sustainably underpin elevated asset prices; and the tricky policy balance that the Fed faces in the context of a divergent global economy in which the U.S. continues to be the notable outperformer among the advanced countries.... The minutes of the last Open-Market Committee meeting confirmed that the Fed’s policy U-turn was influenced by concern that U.S. growth and inflation outlooks would be undermined by spillovers from weaker international conditions and volatile financial markets.... The possibility of Fed-induced volatility as central bankers try to guide later this year toward a less accommodating monetary policy than what’s priced into markets. All of this to say that, without a better liquidity-to-fundamental handoff and a more market-savvy Fed, the prospects for a melt-up scenario could well dim through the year....
#noted
