Mohamed El-Erian Is In On It

Summary

• People don't much care for Wall Street analysts, but they do love "gurus."
• So I went out and found a "guru" for you.
• And guess what? He agrees that your gains are (almost) entirely attributable to central bank liquidity and corporate buybacks.

Let me tell you something that amuses me.

Retail investors are almost universally predisposed to being skeptical about anything Wall Street says while simultaneously hanging on every word that emanates from a "guru" like say, Warren Buffett.

If you want to truly understand how markets work, that is not a great way to approach things.

This isn't a perfect analogy, but listening to amorphous aphorisms from your favorite "titan" of the investing universe while summarily dismissing what the guys and gals on the Street are saying is a lot like going into a retail store, overhearing the salespeople telling each other that no one is buying anything, and then writing that off as meaningless because the CEO of that retailer said everything was fine on the last conference call.

See the thing is, it's worth listening to the people on the frontlines - even if you think they might have ulterior motives, like say talking their own book and/or trading against their institutional clients.

Because let's face it - some of the research they put out doesn't promote specific trades or any trades at all, for that matter. So you know, when you hear people saying things like "Wall Street analysts are always a contrarian indicator" or "they're just trying to increase their trading revenues," you might consider that some of them, sometimes, are just trying to do their jobs.

Even if you believe it's all one giant, nefarious plot to create a new robber baron class, I can tell you definitively that some of the macro analysts I cite in my posts are not part of the conspiracy. I know them. I talk to them everyday. They aren't out to deceive anybody. Turns out, they show up at their desks, write some research, and catch the train home in the afternoon like everybody else.

Imagine that, right?

But unlike everybody else, they are actually around the people who are doing the trading, executing the big orders, etc. They have their fingers on the pulse of markets in a way that you don't.

Yet article after article, I read comments from folks who insist that all they need to know is what someone like Charlie Munger said one time. And guess what? As I wrote these very lines, I did a Twitter search for Charlie Munger and someone just retweeted something which illustrates exactly what I'm trying to tell you. Have a look:

Thanks for that.

That's not a nugget of "wisdom" - it's something everybody already knows.

Anyway, the reason I bring this up is actually not to introduce some quotes from another analyst I happen to like, but rather the opposite.

That is, for the purposes of this post, I'm going to go ahead and accept the fact that the vast majority of readers trust the "gurus" more than they trust a desk analyst.

So I'll indulge that predisposition by citing a completely generic piece Mohamed El-Erian penned for Bloomberg over the holiday.

El-Erian is an example of someone who is widely respected, and quoted everywhere as an "expert." He hasn't reached the status of a Buffett yet, but if you're a journalist and you need to impress a bunch of people or otherwise rack up some web traffic, just add "El-Erian Says" to your title.

I'm going to assume that a lot of folks who frequent this platform think Mohamed is a pretty smart guy and would be more inclined to trust his take on markets than some random analyst I'd quote that you've never heard of.

Well, here are some excerpts from El-Erian's latest (which you can read in full here):

Forget economic and policy fundamentals. Liquidity ruled: Liquidity injection was — once again — what mattered most for traders and investors in the first half of the year, offsetting not just economic and policy headwinds, but also geopolitical, institutional and political ones, too. And this ample liquidity came from three sources. First, record corporate profit levels, which translated into continued stock buybacks and higher dividend payments by companies, including dramatic announcements by banks last week after a green light from their regulator. Second, elevated inequality levels that continued to result in a significant portion of the incremental income generated in the economy accruing to wealthy households with a higher propensity to invest in financial markets. Third, the continuation of ultra-stimulative central bank policies, including sizable monthly asset purchases by the Bank of Japan and the European Central Bank.

And throughout all of this, the contrast between two key features of a liquidity rally intensified: Given the importance of liquidity — in determining not just returns but also in repressing volatility and in changing fundamentals-driven asset class correlations — markets ended the period in the midst of an intensified tug of war between crowded trades and “buy on dips” investor conditioning.

Now, would anyone care to explain to me how that is any different than what every single macro analyst has been telling you for months and months on end?

The message is simple: central bank liquidity and corporate buybacks are what matter for stocks (SPY) and the flow of liquidity from those two sources has conditioned investors to buy every dip, a mentality which perpetuates the low volatility regime that in turn creates a carry trade-friendly environment.

I've shown chart after chart after chart to illustrate this dynamic, but the two visuals that perhaps constitute the most glaring visual proof are these, from Citi:

(Citi)

To be sure, I'm not constructing a straw man here. You can read countless examples of comments from folks refuting the idea that the central bank/corporate liquidity flow is what's behind what you're seeing in markets.

My argument has always been that people's unwillingness to accept this is rooted in a propensity to avoid admitting that retail investors didn't all just happen to become geniuses at the exact same moment that central banks started pumping liquidity into markets. But no matter how hard it is for people to admit that to themselves, this isn't all one giant coincidence.

Relatedly, the idea that it's central banks behind the whole thing isn't a conspiracy theory.

And if you want to persist in believing that it is, well then Mohamed El-Erian is in on it too - or, put differently, a "guru" is now a conspiracy theorist.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.