From a markets point of view, North Korea worries haven’t rattled the stock market beyond a few minor selloffs.
But there is a scenario where North Korea could pose a big shock to the markets, according to Mohamed El-Erian, chief economic adviser at Allianz.
“For North Korea – or any geopolitical [issue], you need it to go from brazen provocation as I call it, to actual action,” he said. “A major policy mistake would do it.”
The one shock he worries about most is an endogenous shock. “That people are giving up liquidity, that people have become very comfortable to quickly buy the dip and at some point people will get over exposed in terms of their overall liquidity stance,” he said.
As for the unwinding of the Federal Reserve’s balance sheet, which many expect the central bank to announce a start date for this process next week, El-Erian likens the process to watching paint dry.
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