The Fed 'safety net' on stocks could be shrinking

Pimco's Mohamad El-Erian says he thinks a taper will happen in the next year, and it will be gradual.

By MSN Money Partner Nov 21, 2013 1:52PM
Dice on stock listings © Kate Kunz/CorbisBy Matthew J. Belvedere, CNBC

As the Federal Reserve taper talk heats up around a possible December start, Pimco's Mohamed El-Erian told CNBC on Thursday that the "safety net" on risk assets like stocks is diminishing.

"[But] the Fed cannot get to its economic objectives without going through the asset markets," he said in a "Squawk Box" interview. "So the Fed feels obliged to continue to support the asset markets; not as an end in itself but a means to an end. The economy."

The minutes from the Fed's October meeting -- released Wednesday afternoon -- intensified speculation in the market that the central bank might begin to scale back its $85 billion monthly bond purchases when policymakers meet next month.

El-Erian said he doesn't know exactly when the Fed will taper. But he thinks it will happen in the next 12 months, and it will be gradual.

Against that backdrop, the Pimco CEO and co-CIO said to look at the bond yield curve trade. "The front end of the yield curve is protected [by the Fed]. And you can make money going long the front-end, short the long-end."

More from CNBC

Nov 22, 2013 2:18PM

I have to wonder if the Fed will ever cut back, whether they mean to or not . Seems like the new Fed theme song is "I'm just a girl who can't say NO!". (This will become funnier when it gets attached to Janet Yellen.) Seriously, this idea they now have that they are responsible for managing financial market prices, it really has no precedent, no long-term value, and is building up pressures that are exceedingly dangerous. 

Nov 22, 2013 9:06PM

Yellen will continue the ruse and likely get more aggressive to make a name for herself. "Bring it on" has been the psychopathic battle cry that is typically succeeded with failure. We have no economy. Nothing funded by QE has the ability or substance for enterprise.

A good example is cars. Apparently the 3rd Quarter 2013 was a windfall for sales, but the same 90 Million of us unemployed or under employed the same time last year still are. So who bought those vehicles? The government... because it attempted to raise the GM stock price before unloading the last of it's bail-out holdings. It didn't work because none of us are and colluding alumni buy foreign.

We will fail because alumni with authority always pay themselves first, bungle the mission, then take off out the back door to go fishing. There is no historic reference of college degrees finishing, fixing or accomplishing an objective. The ACA website will cost billions to fix. People who stole pens from the office have been mass terminated for 5+ years now. ZERO ACA executives were canned. We don't fire alumni, we re-assign them and give them raises.

Nov 22, 2013 11:29PM
Very simply put.........

"If something cannot go on forever, it will stop"
     ---Steins Law

"Men, It has been well said go mad in herds and recover their senses slowly and one by one"
    ----Charles MacKay
Nov 21, 2013 8:22PM
What will the market look like when it has to stand on actual company earnings?  I wonder if that will ever happen because Wall Street is now addicted to cheap money.  
Nov 23, 2013 9:23AM
Taper or not, either way the FED is trapped and so are the Markets. The fear should not be if they Taper, but that they don't aka the growing size of the Fed's balance sheet. I would NOT trust anything coming from the Pimco Folks, they are always double dipping. Ditto for Buffet these days.

What I find interesting is how the Mainstream Media has talked very little about the Tax Benefits of companies borrowing money to do stock buybacks. What I find interesting, how little companies are spending towards their actual employees. This is a clear Race to the Bottom, that Big Thud you eventually will hear at some point, the Stock Markets Global crashing under their own Weight. The Big Boys will have long gone cashed out, the little guys will be left holding the BAG. They always lock in profits, they don't expect you to ever do the same.
Nov 24, 2013 12:45AM

If you come back.....Robert P. and Active, I have just one that is fitting...No, I've got two..

"Bull Markets are born on Pessimism,

Grown on Skepticism,

Mature on Optimism, and

Die on Euphoria."

            John Templeton

"The 'Return of ' your Principal, is more important then the 'Return on' your Principal."

            Will Rogers

Nov 21, 2013 8:36PM
 But he thinks it will happen in the next 12 months? Dah, 12 times $85 billion is another $1 trillion. So is it still QE3 or are we now in QE4? So they take 3-4 meeting to go back to the real zero interest deal.  Or do they institute negative rates and charge enterprises and investors for time deposits? We're still 2-4 years from seeing interest rates of 3-4% which means you'll lose another 6-16% sitting on the side lines.
Nov 25, 2013 11:03AM
They can't EVER Taper...everyone will understand this in about a year or two.
Nov 25, 2013 11:21AM
It's going to be a great Christmas retail sales season and the stock market is going to 20,000. They are going to spend your money for you if you won't spend it. They will loan it to students that have no intention of making the grade. They will loan it to Green Energy fake business. They will give it to deadbeats in record numbers........... BUT IT WILL GET SPENT.
Nov 25, 2013 11:29AM
Watch for an article about Nasdaq 4,000.
Nov 24, 2013 2:19PM
For a guaranteed decline in your wealth, pay attention to any of these morons!

Yuk yuk!
Nov 21, 2013 5:43PM
Of course the FEDs are running of money - they are responsible for sucking up most of it !!
Nov 23, 2013 11:27PM

There really is no legitimate reason a true "crash" (20+%) will occur.  I believe that there will be more likely a market correction to bring trailing P/E's more closely in line with historical levels.  I believe that there is enough world growth to support a normal correction phase and then a fairly long term meandering of markets in a +/- range of five to six percent for up to a couple of years as inflation, bond rates and employment start to normalize.


I do not see a true bear market occurring or anything to factually support a 50+ percent drop from where the markets are currently.


I will note that I personally have taken most of our profits for the year and have >80% in "cash" (money market) currently.   Why? Because I see the chance of a 10% drop from where we were in early October to be much more likely than a 10% increase from where we are now.  The factors I consider are year end loss harvesting, sales early in 2014 to lock in the huge profits from 2013 and a decidedly likely political caused drop in Equities (tapering, debt ceiling, and 2014 mid-term elections). 


I still have a long list of equities I am following and I will buy if any of them drop into an appropriate price range.  The <20% I have in the market currently is all in silver and gold miners with the December PM contract closings next week being a high possibility for a positive upside.  If not, that will be okay as I only bought companies I would not mind holding for at least 2 years.


With my belief that there will not be a major crash there will still be those hurt significantly by a fairly quick and likely large drop.   Those that lose are almost always those least able to weather the loss - the retired who invest in equities as bonds are paying less than inflation: the young who are moving money out of bond funds which are now running negative return rates and finally those closing in on retirement trying to find a way to get enough "saved" to be able to actually retire........

Nov 21, 2013 3:20PM

Good points.The Repubs would just love a market crash to try to make Obama look bad.

The bitterness the Repubs have bothers them 24/7.

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