Mohamed El-Erian, chief economic adviser at Allianz and chair of Gramercy Funds Management, warns that financial markets are losing a critical safety net. He argues that a "policy put" – the expectation that monetary and fiscal policies would intervene to prevent market downturns – is disappearing. This expectation had deeply conditioned market psychology, turning volatility into an automatic buying opportunity for many investors. He points to the rapid stock rebound after the Iran war, even with the Strait of Hormuz effectively closed, as an example of this ingrained market behavior.
El-Erian, in a Financial Times op-ed, highlights that high inflation, elevated interest rates, and soaring debt are now limiting the ability of central banks and lawmakers to deploy similar rescue efforts. He suggests that the current market strength, marked by record highs, is predominantly fueled by the AI boom and significant capital expenditures from hyperscalers. Investors are reportedly overlooking underlying economic concerns such as shrinking real incomes and plummeting consumer confidence.
This shift implies that market selloffs may no longer be short-lived, as the historical safety net is no longer reliably in place. While AI stocks are driving gains for now, the absence of this implicit policy support could expose markets to greater volatility and sustained downturns in the future, as policymakers have less room to maneuver in a crisis.
