Second, the continued effectiveness of central banks in repressing financial market volatility also needs to be questioned and even doubted. Some institutions have demonstrated a declining ability to perform this function. (A prime example is the Bank of Japan, which has experienced a huge erosion of its influence on the value of the yen.) Others, such as the Federal Reserve, have shown a lack of willingness to carry on as before. And in most cases, including the European Central Bank and the People's Bank of China, this reticence also is caused by the growing threats of collateral damage and unintended consequences.
As for the likely duration of market moves under the two tail scenarios, it would be unwise to take too much comfort from the snapback experienced in the aftermath of the Brexit in the U.K.
U.S. markets have much greater global prominence because of the dollar's status as a reserve currency and the extent to which other countries essentially have outsourced some of their financial intermediation function to American markets. As a result, the repercussions of a spike in volatility would likely be deeper and more durable. Add to that legitimate concerns about the possibility of strained market liquidity, and the possibility of unsettling moves should not be dismissed lightly.
Put all this together and it should come as no surprise that market measures of upcoming volatility have risen in the last week while equity markets have moved lower. The previously held comfort that the elections would have rather benign short-term market outcomes is being questioned on two counts: the recent tightening of the race for the White House, and the extent to which the artificial market stability of the recent past is threatened by a growing host of longer-term economic, financial, institutional and political disruptors.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.