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joining us right now is a Leon's chief economic adviser Mohamed el-erian Mohamed it's good to see you thanks so much for joining us this morning Thank You Maria so what do you think about this latest effort to repeal Obamacare if it fails next week in the Senate how will that weigh on markets what's your take in terms of this policy coming out of Washington and how it impacts stocks I think we're that the markets are less focused on health care reform and much more focus on tax reform so the question in the marketplace is will this facilitate or complicate tax reform and that's a really uncertain question and people are just waiting to get indications out of Washington yeah I know and and the tax package you would think would move the needle on economic growth right mohamed and yet right now the triggers or the catalyst for this market have been just a fundamental backdrop that seems to have improved quite a bit yeah it's been three triggers one as you say the overall context of economic growth has improved mainly on account of what's happening outside the US to the Fed the markets are very comfortable that the Fed and other central banks will continue to be supportive three there's a lot of cash sitting on balance sheets of companies and that gets put back into the marketplace so those three things have been pushing stocks higher and higher and the hope is you're gonna validate asset prices by improving US fundamentals meanwhile let me ask you about the Fed Muhammad the Federal Reserve obviously announced yesterday it's going to start reducing that massive four and a half trillion dollar portfolio of bonds and securities or next month that's a decade after the biggest financial crisis in generations chairwoman Janet Yellen called the move a vote of confidence in the economy here's what she said yesterday basically that look the economy is doing well and we should start doing this but this is something we haven't seen before Muhammad just winding down a four and a half trillion dollars portfolio how easy is this going to be so the Fed intends to make it as unexcited as possible they really wanted to make it as if we are gonna watch dry dull predictable that's how they want to make it and I think they're gonna succeed because they're gonna go so slow more interesting Maria is that the Fed is continues the signal higher interest rates than what's priced into markets and we saw some reaction yesterday bond yields have gone up the dollar has strengthened as markets are starting to realize that the Fed still has a December rate hike on its radar screen yeah and I think that sync signal that yesterday is that the right course Mohamed another interest rate hike in December because I just mentioned I know things have gotten better but sometimes it's two steps forward one step back I mean does higher rates crash or slow down an economy that is just beginning to gain traction I don't think they crash the economy I also don't think they slowed the economy why I think that there is momentum in this economy not great momentum but strong enough momentum there's potential upside if we get tax reform done so when the Fed looks at its two mandates it gets a green light from the employment mandate it gets a flashing yellow light from inflation because it believes inflation is too low well below its target of two percent but it also has to think about financial stability so when I put these three things together I would urge a weight hike in December as opposed to a wait-and-see attitude all right meanwhile look around the world for us mohamed S&P today cutting its credit rating for china first time they're cutting the credit rating since 1999 they're talking about risks from the soaring debt the country faces this is the second downgrade by a major ratings company this year what's your take on the move and would you be putting money today in emerging markets including china europe look around the world for us so first the china downgrade shouldn't come as a great surprise to markets why because like you said Moody's moved earlier a few months ago and everybody was expecting S&P to follow but it is a signal to the Chinese politicians ahead of a very important gathering that they have to take seriously their growth model that can no longer depend on credit and debt to power this economy forward so it's a very strong message within China not a great surprise to markets as opposed to what investors should do a few weeks and months ago I was on your show and I kept on saying the key thing is to get exposure elsewhere internationally and that has been the white call now unfortunately it's not as easy a call because emerging markets have done extremely well I think right now one has to look at these valuations and start thinking maybe at this point I should take some cash off the market not a lot of cash but some cash off and wait for a better entry point yeah it's interesting how well the international markets have done do you feel that way in the US as well mohamed we know this market is up better than 20% since the election valuations around 18 times earnings would you buy US stocks today depends what my starting point is but but I join the many professionals who look at this market and say we understand why it has done so well and it's great that so many people have benefited but at some point you've got a validate these asset prices through better fundamentals and ultimately it goes back to what we started on it's a political call it's about the ability of Congress and the administration to get tax reform done to step up infrastructure and to continue on deregulation yeah we're all watching that for sure and real quick on the dollar Mohamed you mentioned earlier the dollar has begun to rise again it's obviously had a tough year the euro was soaring earlier in the year what's your take on the dollar and the continued sustained strength here so ironically the tough year for the dollar which means the weaker dollar has been good for the economy and good for the stock market why because companies earn from selling abroad and the weaker the dollar the more competitive they are having said that my major concern is that the system as a whole doesn't accommodate a strong currency so for Europe it's not great news that the Euro has been strengthened it's like a hot potato no one wants a stronger currency so one has to keep an eye not on the US the u.s.
is fine but on how you add up a global economy that not strong enough to support a very appreciated currency yeah that makes a lot of sense Mohammed it's always a pleasure to see you sir thanks so much Thank You Maria Mohamed el-erian joining us there
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