 The S&P 500 hasn't had a full-blown 10% correction in 19 months. So is there reason for worry? Here now is the Chief Economic Advisor at Allianz, Mohammed El-Aryan. Mohammed, it's great to see you here. Welcome. Thank you, Scott, for having me. So what do you think? I mean, stocks are at record highs. Is a pullback on the horizon this year? And would it be a full-blown 10% correction? It depends how big the shock is. If it's a small shock, the answer is no. Why? Because investors have been conditioned to buy any dip. And they've been conditioned to buy the dip because it has worked very well. Why? Because there's so much liquidity coming into the marketplace. From central banks? Predominantly from central banks, but also from corporate balance sheets. And also there's still quite a few investors that are coming in using passive products. So you need a big shock to have a major correction in soon. Could you give us an example of a big shock? Because North Korea certainly hasn't proven to be anything worrisome, at least from a market point of view. So for North Korea, or any geopolitics, you need it to go from raise in provocation, as I call it, to actual action. A major policy mistake would do it. The one I worry about most, Scott, is an endogenous shock that people are giving up liquidity, that people have become very comfortable to quickly buy the dip. And that at some point people will get overexposed in terms of their overall liquidity stance. That's what I worry about. So speaking of an entity that's sort of drying up their liquidity, we have the Federal Reserve looking to unwind its balance sheet, and many are expecting some sort of announcement on the balance sheet in just one week at the September meeting. How worried should we be about this balance sheet unwinding? It's going to be gradual, that we know. I think the Fed will aim for us to end up in a situation where we are going to watch paint dry. It's not going to be very exciting. They're going to do it very slowly, very gradually. I think that the Fed, to borrow a phrase from Ray Dalio of Ridgewater, who's used in a different context, he talked about the beautiful deleveraging a few years ago. We are in the midst of a beautiful normalization. I don't worry about the Fed per se. But I don't know, Scott, and that's something that investors should think about, is what happens if more than one central bank is normalizing at the same time? What if it's not just the Fed that I believe can deliver a beautiful normalization? What if it's the Fed, the ECB, and the Bank of Japan at the same time? And I think that's an open question. And the ECB and the BOJ actually have bigger balance sheets than the Fed, which is pretty hard to believe. And they're still buying. They're still putting in over 100 billion a month. So don't underestimate how much we have benefited here from the liquidity that's been put in in Japan and in Europe. Let me ask you, though, because couldn't you argue that this is a very lame duck Fed, right? We have three vacancies on the board of governors. We now have Stanley Fisher, who's stepping down. Janet Yellen's future is uncertain. So the Fed right now could be a very different Fed in a year from now, especially if President Trump appoints perhaps more hawkish Fed members. Isn't this a problem for any investor who thinks that there's this Fed put across the markets? That but also the realization, which I think is more important, that the Fed has been at it for quite a long time and they want to get out. And I think the market is underestimating the path of future interest rate, right? So we have now brought down the implied probability of a December hike all the way down to 30%. I think that's too low. We've pushed back the whole path of rate hikes. I think the market has gone too far in doing this. And the reason why the market has done it is because the market focuses on only one metric, inflation. And there is no real inflation. We are stuck in low inflation. But if the market was to take a broader perspective, which I believe is what the market would, what the Fed will do, it would realize that the probability of a Fed hike in December is not 30%, but it's 50% to 60%. Where do you see opportunities in the stock market? Do you see opportunities in U.S. equities right now? Two answers. One, I think that investors have to realize that in portfolio construction, it's upside down. In the old days, you had a good secular element, means trades that would work out over time. Then you had another one which was a structural element because you believe you have an edge. And then the small one was a tactical element, or market timing if you don't be polite. In these days, the structural is small, the secular is very small given valuation, and what's driving returns increasingly is going to be the tactical. So the first thing is understand that you're constructing your portfolio differently. It requires a different skill set. And that's simply because of where we are in this impressive rally and how much would decouple from fundamentals. The second element is I call put fewer dollars at risk, but go to where there was still a lot of valuation. So if you're just U.S. oriented, look a little bit to get international exposure. Don't over-focus on U.S. public equities. There's more. Are we talking European stocks, emerging markets? We're talking a mix of European stock, local currency, major market debt. There's still value there. So be a little bit more diversified, but fewer dollars at risk. I just want to end with this question because JPMorgan CEO Jamie Dimon got a ton of reaction from his comment saying that Bitcoin, which is up 300 percent so for this year, he said Bitcoin is a fraud. Help us out here. Do you agree with that? So what I agree with is that the minute you see something that looks like the Bitcoin price graph, you should start asking lots of questions. And the most important question is what is being assumed at these levels? And what's being assumed at these levels is major adoption of Bitcoin by many institutions, by many individuals. I think that's an overreaction. I don't think Bitcoins will get adopted simply because central banks are going to be very uncomfortable. Now, it doesn't mean that the Bitcoins disappear. They don't. They play a very important function, but it's not the function that's priced in right now in the marketplace. So I mean, have clients called you up and say, hey, what do I do with this Bitcoin thing? I mean, it's on fire. Do I buy Bitcoin or do I go to traditional currencies or gold? What's the answer? Is there an answer? The taxi driver asks that question. The taxi driver asks because you've had such massive movements and people have made so much money. Yes. So you do get questions, but you get questions from people who typically tend to come in late. And that's where the layer in lies the problem. Yeah. So I think if you're looking at Bitcoin, wait, be a little bit more sort of strategic about your timing, right? It doesn't mean it's going to disappear tomorrow. It's not. But given the price action, it could go higher, but it's more probable that we'll go a lot lower than a lot higher at this stage. All right. It's certainly something we'll be watching. Mohamed El-Aryan, thank you so much for joining us. Thank you, Scott. All right. I'm Scott Gamm, and you're watching The Street.