Allianz SE chief economist’s 61-year-old Mohamed El-Erian questioned the Labor Department’s data that showed the U.S. added 2.5 million jobs when claims for unemployment benefits continue to go up. If the Labor Department report is dramatically revised, El-Erian fears a new wave of selling, something Wall Street hasn’t seen since bottoming out March 11 at 21,200.52 or 39% off its record high Feb. 12 of 28,551.42. Yesterday’s close of 27,110,98 is an historic run up when the unemployment rate hit 14.7% May 8, a stunning reversal from 3.5% before the March coronvirus crisis AKA SARS-2 or Covid-19, forcing 73-year-old President Donald Trump to do the unthinkable under pressure from his infectious disease experts to shut down American business. Yesterday’s tick down to 13.3% was welcomed news but El-Erian for one isn’t sure that the Labor Department’s data is correct.
El-Erian warns investors about fundamentals, not the artificial stimulus provided by the Federal Reserve Board and the March 27 CARES Act that pumped $2.2 trillion into the U.S. economy. El-Erian worries the Labor Department’s numbers are a “head fake” or a faulty aberration, not reflecting what’s actually happening in the economy. “That’s the nightmare scenario,” reflecting the government easing shelter-in-place restrictions, reopening businesses in many states. “The big risk . . . is that this is a head fake, a major head fake that we are picking up the impact of both data distortion and policy distortions,” El-Erian said. Wall Street reacted with a furious rally yesterday with the Labor Departments news, driving the Dow Jones Industrial Average up 829,16 points, only 2,000 points off its Feb. 12 record high. With Wall Street in Covid-19 rally mode, El-Erian worries about another big sell off.
Rising some 7,000 points from his March 11 low, share prices are now inflated enough to sustain another round of short-selling. No matter how rosy things seem, El-Erian shared concern that the market lacks fundamentals, thinking that it will take years for the real economy, that is, profitable businesses with sold earnings, to bounce back. It’s one thing to rally on the future, it’s still another to have no earnings to justify the run up. “No one was looking for an uptake in jobs,” El-Erian said. “It may be that the economy has picked up in a major way. That’s the hope. And that’s certainly what the market has embraced,” showing more skepticism about whether there’s been any real fundamental change in the economy. Whatever happened on Wall Street since March 11, it’s a typical disconnect from Main Street, where coronvirus and nationwide race riots haven’t helped the economy.
There’s no way anyone on Wall Street or the Federal Reserve can forecast how long it will take to recover from what most economists see as another Great Recession if not depression. Reading the tealeaves, 68-year-old Federal Reserve Board Chairman Jerome Powell slashed interest rates March 15 while Wall Street was nearing the height on an historic sell off. Powell, who had been cutting rates for the last year, knew that he had to go for broke with monetary policy, slashing the Federal Funds Rate of zero to a quarter percent, the same that former Fed Chairman Ben Bernanke did Dec. 15, 2008 during the Financial Crisis. Powell, while a member of the Fed’s board of governors, thought the Fed had far better leverage in 2008, since the problems were primarily financial, not a deadly infectious disease crisis. While Wall Street does its thing, real economists have to evaluate market risks.
El-Erian, whose background running the nation’s largest bond investor Pimco, taught him caution, has healthy skepticism about Wall Street’s Covid-19 rally. “Or it may be two other things: that government polices were very effective in reducing those who were officially unemployed. Or it may be that the data is very, very noisy,” El-Erian said. El-Erian, knowing macro economics, knows that whatever the government did was a Band-Aid to a very serious hemorrhage to the economy. Adding jobs in May when more people filed for unemployment benefits, makes zero sense. “What is really striking is if you look at continuing claims, they went up, not down. So every other indicator you look at suggest that the labor market is not as healthy as these numbers,” El-Erian said, warning investors they could be in for more turbulence. Unemployment claims can’t rise while the unemployment rate drops.
Debating a second relief package in Congress, El-Erian hopes lawmakers don’t get too cocky about the economy’s improvement. Without more stimulus, it’s likely another wave of selling will hit Wall Street, helping major funds take profits but decimating the retirement accounts of ordinary investors. El-Erian worries that “the political process may have moved away from relief and repair,” something that would harm any attempt at economic recovery. “We’ve got to understand these numbers better, and we’ve got to continue with the message to Congress that there is still a big hole we find ourselves in, even if you believe these number,” El-Erian said, warning Congress not to back off the next round to stimulus. States, counties and cities around the country have run out of cash, promising to slash essential services, including education, health care, infrastructure, transportation and parks and recreation.
