Financial markets have failed to price in the remaining problems that bedevil a long-term economic recovery, Pimco's Mohamed El-Erian told CNBC.
Inconsistencies that the market faces include the tax on bailed out banks that President Obama announced Thursday and its effects on their ability to lend; long-term unemployment issues and the difficulty in fixing them due to the federal budget deficit, and weaknesses with sovereign balance sheets, Pimco co-CEO El-Erian said in an interview.
Despite these issues, stocks continue to climb, with the market about 60 percent above the March 2009 lows and posting mild gains so far in 2010.
"You come to the conclusion that the market simply hasn't priced in the reality of what we talk about every single day," said El-Erian, who helps run the world's largest bond fund.
The bank tax will slap a $90 billion levy over a 10-year period on banks to cover expected lossed from the government bailout fund, the Troubled Asset Relief Program, or TARP.
"We have this inconsistency out there," he said. "On the one hand we expect the banks to lend, to extend credit to get the economy going again. But on the other hand there's a tremendous desire to tax them to target leverage, to target size."
El-Erian said the "serious, sequential contamination" of world balance sheets will be a larger issue in 2010 and require corrective measures.
Yet he also said US gross domestic product gains are likely to be in the 4 to 5 percent range and will present the illusion that the economy is recovering more strongly than fundamentals would indicate.
"What you're getting is a recovery phase, a healing phase that was artificially created," he said. "The history of crises is very clear. They expose structural problems and when you look at the structural problems you need a structural response, and so far we've only had a cyclical response."
El-Erian's comments echoed those he made July 29, 2009 on CNBC in which he said the market was on a "sugar high" that was not reflective of economic slowness. Stocks have gained about 15 percent since those comments.
A lasting recovery will only be built on real growth and not that which is stimulated by government, he said.
"We want it to happen," he said. "But navigating our clients' assets through this very fluid market is not about what we want to happen but what is likely to happen."
Clarification:An earlier version of the story overstated El-Erian's position on the bank tax.