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Mohamed El-Erian breaks down the January jobs report: 'It's a disappointing report in many respects'

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The U.S. added 49,000 jobs in January. Queens' College, Cambridge University President and Allianz Chief Economic Adviser Mohamed El-Erian joins Yahoo Finance Live to discuss.

Video Transcript

MYLES UDLAND: Jobs day here in the US. Non-farm payrolls growing by 49,000, a bit light of estimates. The unemployment rate, however, coming down to 6.3% from 6.7%.

Joining us now to talk more about the jobs report and everything else going on in the markets these days is Mohamed El-Erian. He's the President at Queens' College, Cambridge University. And he's also the Chief Economic Advisor at Allianz.

And Mohamed, you just tweeted out something a couple of minutes ago about what we're seeing across the yield curve this morning, the steepening that we've seen priced in. Do you think that today's number points to the need and perhaps provides the impetus for additional fiscal stimulus as Congress continues those negotiations?

MOHAMED EL-ERIAN: So I think it will certainly support those who argue to go big. It's a disappointing report in many respects. One is not enough jobs creation, especially given the revisions we've had to prior months. Two is labor force participation came down. And three is if you look at the internals, there is no momentum building up in the economy.

So for those who argue for more fiscal, that's going to be used. But it does raise a bigger issue, which is, do we have the policy mix correct? And that's what the marketplace is trying to signal.

JULIE HYMAN: Hi, Mohamed. It's Julie. Good morning. I keep wondering about the stimulus or aid package as a bridge, and a bridge to what, right? Because if that's how we think about it-- and I continue to be struck by restaurant and bar workers still being so much lower than we were before the pandemic. Are all those people going to get jobs again? I mean, in other words, if a stimulus package is designed to take them to beyond, is beyond the place where they're going to have jobs?

MOHAMED EL-ERIAN: So the beyond bit is what's missing partially from this, but for good reason. It's supposed to be coming as a second step. Go back, Julie. You've heard me say over and over again, a good fiscal effort covers four things.

It covers immediate relief for those suffering. It covers support to the COVID battle-- accelerate vaccines, reduce infection, the rates we just heard about. Three, it provides more household economic security. And four, it battles what's going to be downward pressure on productivity.

What this fiscal package does is 2 and 1/2. It certainly provides a lot of relief, and it provides support for COVID-- the COVID war, if you like. What it doesn't do is enough on the productivity side.

Now, the administration will tell you that's coming, just wait. So if it is meant to be a bridge to a second package-- but the question is, will Congress have appetite for two packages within a few weeks?

JULIE HYMAN: Yeah, it's a good question. Although as we know, because of the vote early this morning, the Democrats will be able to potentially push through this one, if not a second one, without Republican support.

So Mohamed, if it is indeed just 2 and 1/2 right now, two questions then. Is that good enough for the economy right now, and is it good enough for the markets right now? I suspect I know the answer on the second one.

MOHAMED EL-ERIAN: So it is good enough for the immediate economy, but it's not good enough to battle what economists call scarring-- this notion that short-term problems become long-term problems, this notion that short-term unemployment becomes long-term unemployment. You know, companies go bankrupt, et cetera. So it doesn't address the scarring, but it is enough for now. In fact, there's some who are arguing that it's too much for now.

As to the market, you've heard me say over and over again, for now the path of least resistance is higher. However, however, we are really decoupled from fundamentals. And keep an eye on the bond market. The bond market could be the spoiler in all of this in a few weeks if the current trends continue.

MYLES UDLAND: And there you have the opening bell on Wall Street on this jobs report Friday. Mohamed, I do want to stay on jobs here. Do you think the economy is back to creating robust jobs this spring or do you think that timeline, based on this report, should be pushed back even longer?

MOHAMED EL-ERIAN: So I think it's going to take time. But we can get a momentum going. But it's going to take time.

And you talked about it previously. We haven't yet controlled infections. We are in a good spot right now because of accelerating vaccines, and infections have come down. But they've come down, remember why? Because we've gotten through Christmas and New Year, and we've gotten to the hump of that.

So it is going to take time. I don't think it's done by spring. But we're going to start seeing positive signs as vaccination spreads.

MYLES UDLAND: You know, Mohamed, obviously it's jobs day this morning, and there's a lot to discuss on the economic side. But the story in markets over the last couple of weeks has just been extraordinary, the action we've seen in some names and the way it didn't impact the broader markets just for a small time and in a small amount. When you see this kind of enthusiasm in individual names, retail frenzy, how are you thinking about animal spirits, especially considering that we're here discussing an OK but stalling out type economic recovery?

MOHAMED EL-ERIAN: So you know, I've been pointing to the disconnect between financial and the real economy. You know, I love the phrase rational bubble. It is a bubble. But it's rational, because there's so much liquidity being pumped in.

The problem with pumping in so much liquidity is that you encourage people to take too much risk. And therefore, the risk of a market accident goes up. Last week we came very, very close to a market accident-- very close. It was avoided through various things, but we came very close.

And ask yourself the question, did anybody see this coming? And the answer is no. And that's the problem with market accidents. They're very hard to spot beforehand.

So the risk here is that this disconnect between the financial side and the economy, between Wall Street and Main Street gets so big that you get an accident that puts pressure. And remember, it was a small bunch of stocks. They were being shorted. Then it was the rebellion by the retail investor that led to a 5% fall in the S&P.

That's a very small thing. The tail wagged the dog for a few days, and would have wagged the dog more if the retail investors weren't frustrated from buying more of the stocks that they were using for the short squeeze.

JULIE HYMAN: Mohamed, you can argue a lot of different factors went into that, from the sort of perception on the part of those retail traders that the system is not working in their favor to the composition of the rest of the market, which is heavily concentrated in index funds and ETFs, for example. So if it's got a lot of different causes or underlying reasons, what do you do about it to try to prevent some kind of systemic risk going forward from something like this?

MOHAMED EL-ERIAN: So you're right, Julie, there's lots of signals in this. And there's a lot of debate going on right now as to, is this the equivalent of August 2007, when two hedge funds at BNP had issues and people didn't realize that there were underlying issues?

I have an article in "The Financial Times" today that says look beyond what actually happened, because it pointed out to a market structural problem. It pointed out to systemic risk problem. And it also pointed out to the long-standing unlevel playing field that's tilted in favor of the big players and against the small players.

So we've got to take seriously the signals from last week. But the biggest signal for someone who's investing in the market as a whole is that there is a lot of risk-taking. There's a lot of leverage. And rightly so, because liquidity is abundant and the cost of borrowing is so low. But a lot of leverage tends to create excessive risk-taking.

BRIAN SOZZI: Mohamed, what might the regulatory response be here, and how might that impact investors?

MOHAMED EL-ERIAN: So they have to play massive catch-up. We have done well in reducing systemic risk in the banking system. But what regulators haven't done well is recognizing that risk doesn't disappear. It morphs and migrates. And it migrated to the nonbanks.

So what you're going to see happen right now is a massive catch-up process. But very little is going to come out, because you have four competing claims on the regulatory process. One is the protection of the small investors. You know, some small investors are getting hit really hard by what happened and what's been happening.

Two is you have a question of, is Reddit some sort of collusion? Is it some sort of market manipulation? What is it exactly? Three is you have questions about the intermediary and the hedge funds. Was there collusion there?

And four, you have a question of investment suitability. So this is a complex regulatory issue. And I think we're going to hear a lot about it. But I doubt that you're going to see deterministic actions anytime soon.

MYLES UDLAND: Yeah. Mohamed, that's such an interesting framing of it, because last week there were so many folks incorrectly calling it a one-track populist type issue, which clearly it's not. And I think as you outlined those four issues-- and we could probably branch more separate issues off each of the ones you just outlined for us, at a minimum. And we'll be talking about this for some time.

But before we let you go, we've got to talk a little bit of football-- who you like this weekend, what you're thinking. And we were discussing in the break, as big football buffs, kind of a sad day, because on Monday it's all over. And now we're waiting seven months for the season to start back up.

MOHAMED EL-ERIAN: Yeah, very sad. You know, I actually hate the Super Bowl, because it's the beginning of the end-- it's the sort of beginning of seven months of no games. But this one I'm looking forward to, because I don't go in with a strong feeling. So I'm not going to be disappointed. So I'm looking forward to the game. But like you, Monday morning is going to be horrible.

MYLES UDLAND: All right. Mohamed El-Erian there, splitting the difference on who wins on Sunday. We'll catch up with you, certainly, sometime after the Super Bowl. Thank you, as always, for your time. Mohamed El-Erian, with Allianz and Queens' College, Cambridge University. Appreciate it.