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Pimco CEO: We're Trained to Think the "Farther You Fall, The Higher You'll Bounce Back. We're Hostage to the V"-Shaped Recovery Model

George Washington's picture




 

Barton Biggs and Marc Faber think that investors should move out of bonds and back into stocks.

On the other hand, the chief executive officer of bond giant Pimco - Mohamed El-Erian - says
that most financial managers, investment officers and economists are
erroneously assuming this will be a V-shaped recovery because they are
"fighting the last war" instead of looking at what is really happening
in the economy:

El-Erian says many of the
bulls don't appreciate just how much the government props still under
the economy are masking its weakness. Instead of focusing on the
fundamentals today, he says, they're looking to the past, expecting a
quick economic rebound because that's what's happened before.

 

We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."

El-Erian says that the economy is on a "sugar high" and its growth, fueled by government intervention, is "unsustainable".

Of course, not all past recessions were followed by a v-shape recovery. For example:

(click here to see full image).

As you can see, the 1929 crash was actually very small compared to the "second leg down" crash which didn't end until 1932 or 1933.

While
El-Erian thinks we've probably seen the worst of the crisis, he thinks
that investors will again become scared and move into treasuries.
Analysts like Mish think
that we could very well have a W- WW- or L-shaped recovery over a
period of many years, rather than a quick V-shaped recovery.

Of course, the sovereign default of a large economy could change everything.

 

 

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Wed, 12/30/2009 - 12:48 | 177801 Species8472
Species8472's picture

Why are most folks ignoring demographics? It was the baby boomers that shaped the last 40 yrs and they will continue to dominate the next 40. Their party is over, their peak earning, spending and investing years are history. There is no population surge to take their place. Only 2 things really matter, population growth and rising efficiency (new technology). The investment performance from 1980 to 2000 was due to both. We now have neither.

Plus the government is now a big drag on the ecconomy and it will only get worse.

Wed, 12/30/2009 - 09:35 | 177625 phaesed
phaesed's picture

Hey GW, Faber just said Treasuries were oversold and due for a 3 month correction.... so ummm depends on Time Frame maybe? Getting in at the wrong time is just as bad as buying and holding.

 

*WHY* does everyone hate Bill Gross? Seriously... he's called this rally ludicrous, everyone knew he was long Fannie Mae and Freddie Mac.... I'm sorry but I don't see the reasoning, if you ask me, it's kinda player hating... and like the saying goes, "Don't hate the player, hate the game"

 

ROFL Even Rick Santelli is saying buy Treasuries....

Oh how quick the pendulum turns.

Wed, 12/30/2009 - 09:09 | 177611 Leo Kolivakis
Leo Kolivakis's picture

Bill Gross talks up his book every chance he gets and often tells investors to do the exact opposite of what they are doing. He may be the "bond king" but take what he says with a shaker of salt. Mohamed is a smart guy but he jumped ship from Harvard, which tells me he's not comfortable navigating in these type of markets. Just my opinion.

Wed, 12/30/2009 - 09:40 | 177635 Anonymous
Anonymous's picture

Leo, your opinion is that anyone who is negative
or even conservative is wrong. It doesn't matter
if it's Bill Gross or whoever.

Wed, 12/30/2009 - 09:37 | 177631 Anonymous
Anonymous's picture

Dont listen to anyone. Read everything but do your own
work.

Wed, 12/30/2009 - 07:58 | 177582 Anonymous
Anonymous's picture

At best, we've got a 2% GDP world out there. This is
nothing compared to previous recoveries....the airplane
is barely off the runway. Even if the knuckleheads
pull off a 4% GDP 1st quarter by some miracle, the market's
a good 30% above fair value and the GDP forecasts
slide due south after the first quarter down to
1% by year end. Every street creature thinks they're going to sell to a bigger fool in the first half of the year and then head for the bunkers for the duration. Same old game.

Wed, 12/30/2009 - 07:30 | 177573 theprofromdover
theprofromdover's picture

.... boat drinks ....

Mohamed speaks the truth, there will be no boat-drinks.

Wed, 12/30/2009 - 07:30 | 177572 johnny9iron
johnny9iron's picture

I am a Morgan Stanley alum and have learned over the years when to listen to Biggs and when to tune him out. He is wrong about this tune him out. El-Erian looks at the whole board, Biggs just guesses at good moves. Listen to Gross and El.

Wed, 12/30/2009 - 07:46 | 177575 Anonymous
Anonymous's picture

+2

Tue, 12/29/2009 - 22:58 | 177414 Anonymous
Anonymous's picture

Look at the NDX. Double bottom with divergences on the weekly for March lows. THAT's where it begins. You're looking in the wrong place. Geez.

Tue, 12/29/2009 - 22:47 | 177403 Anonymous
Anonymous's picture

I agree with the much-maligned Robert Prechter: it's a V, but we haven't seen the bottom of the V yet.

Tue, 12/29/2009 - 22:35 | 177395 Anonymous
Anonymous's picture

The problem is most folks have no idea how big a trillion dollar deficit actually is!

Currently the feds are running approximately a $120 billion a month deficit. How big is that?

Enough to buy EVERYTHING sold at WalMart, Costco, Home Depot, Lowes, and McDonalds in a month PLUS every new car sold in a month PLUS every new house sold in a month ... with $20 billion left over.

Sugar high ain't the half of it.

Tue, 12/29/2009 - 22:31 | 177388 mannfm11
mannfm11's picture

We are 150% of the 1929 top in valuations right now.  The US economy is twice as indebted as the 1929 economy.  El-Erian is at least somewhat right.  Even Mish doesn't believe in a new low.  i do.  The SPX is worth a high of 400 and a low of 275 if we don't fall totally apart.  in any case, the idea we are having a recovery is elusive at best. 

http://www.conference-board.org/economics/ConsumerConfidence.cfm

The Conference Board Consumer Confidence Index®, which had increased in November, rose again in December. The Index now stands at 52.9 (1985=100), up from 50.6 in November. The Expectations Index increased to 75.6 from 70.3 last month. The Present Situation Index, however, declined to 18.8 from 21.2 in November

 

Note this following comment which applies to the actual present reading. 

The Present Situation Index, however, continued to lose ground and remains at a 26-year low (Index 17.5, Feb. 1983).

The consumer confidence index has been registering around a 70 for the 6 month forecast for most of the last year, as the news media keeps talking recovery while the reality of the situation is depression.  When this sinks in and the next shoe of government finance collapse starts, we will see Dow 2500 or less.

Tue, 12/29/2009 - 23:01 | 177418 Ben Graham Redux
Ben Graham Redux's picture

mann, your math largely matches my thinking.  To add to your analysis of the consumer confidence number, historically, there's been a correlation of sorts between the market and the confidence number.  This broke down in April.  Also, the ICI data shows that retail has been taking domestic equity money out since August which somewhat explains the breakdown of the correlation - they don't believe the move either.

Lastly, if you look at the 12 month rolling average of our budget deficit, it's presently at 10% of GDP.  Given that we supposedly grew GDP by $100 billion in the 3rd quarter, we had to spend 15X times that number.  Said differently, we had to spend 10% of GDP to grow it 0.5% - that's pretty bad!

Tue, 12/29/2009 - 22:20 | 177375 Anonymous
Anonymous's picture

When folks talk about corrections/retracements, to what extent does the value of the dollar figure in? For example, if the dollar is worth 15% less than it was last March, does that mean a full retracement to the March lows would mean reaching an S&P number 15% higher than the nominal March low?

Tue, 12/29/2009 - 22:01 | 177361 Ben Graham Redux
Ben Graham Redux's picture

Robot, you'd be correct if we didn't have a fundamentally damaged economy.  Unlike past downturns, nothing has been done to repair the structural limitations of this economy.  In addition, we never really experienced a true market clearing level in the markets, so while I respect your work, I've got to disagree.  Also with Biggs, while he's my all-time favorite analyst, I believe he's missing the big picture.  I continue to believe this thing crashes again and that it will take out the March lows.

Some might question whether inflation can drive stocks higher (Faber) and I'd say no.  The reason is that inflation, this time around, would result in much higher costs of essential items but without rising wages like we experienced in the 1970's.  If I'm right, the asset base that underlies the equity markets is wholly inappropriate for a post inflation economy.  That suggests that the large caps of today's market won't be able to advance because corporate cash flow won't keep up.

Tue, 12/29/2009 - 22:29 | 177387 BS Inc.
BS Inc.'s picture

"In addition, we never really experienced a true market clearing level in the markets, so while I respect your work, I've got to disagree."

I was reading somewhere that the March lows did not show any evidence of "smart money" accumulation, which is the norm at good lows. The piece I was reading did not go into a methodology of how that is measured, but looking at a chart of the 2002-2003 bottom, there's definitely some oscillation around a mean prior to finally taking off in 2003. In March 2009, we just reversed one day and never looked back. That does seem odd.

Wed, 12/30/2009 - 09:02 | 177606 El Hosel
El Hosel's picture

"I was reading somewhere that the March lows did not show any evidence of "smart money" accumulation, which is the norm at good lows"

 Was there evidence of a 12 trillion dollar pump job by the working group?

Tue, 12/29/2009 - 22:57 | 177412 Ben Graham Redux
Ben Graham Redux's picture

BS, I recall the same pattern.  This expansion appears to me to be a coordinated effort to kills shorts to quickly drive up the market.  If I'm right, there is very little substance keeping the market at these levels.

Tue, 12/29/2009 - 22:19 | 177374 Anonymous
Anonymous's picture

"In addition, we never really experienced a true market clearing level in the markets, so while I respect your work, I've got to disagree."

I was reading somewhere that the March lows were peculiar in that they didn't really show any evidence of "smart money" accumulation, which is the norm at good bottoms. We just reversed one day and never looked back.

Tue, 12/29/2009 - 21:43 | 177345 RobotTrader
RobotTrader's picture

El-Erian ranks up there with Nouriel Roubini who is still fighting the 2008 battle, thinking that markets are going to have a huge crash.....

We already had the biggest crash in recent history.

It's over, and we've enjoyed one of the fastest stock rebounds ever....

Yeah, we are due for a big correction any day now, but no crash....

 

Tue, 12/29/2009 - 22:35 | 177394 mannfm11
mannfm11's picture

I'm no Roubini.  The next move down will be much worse than the last.  Read a few posts down where the real consumer confidence news is listed.  Todays report was another disaster, a 26 year low.  For the entire last year, consumers have been saying it might be better in 6 months, but when 6 months passed, the present number was worse than ever.  The Pimco guy has done pretty well.  Not one out of 1000 understand what this debt mess means.  What it means is depression and the Federal Government and the Federal reserve are going to find themselves run over by the true forces of nature.  There is not any real infinite fiat.  The best they can do is totally collapse. 

Tue, 12/29/2009 - 22:31 | 177391 BS Inc.
BS Inc.'s picture

"El-Erian ranks up there with Nouriel Roubini who is still fighting the 2008 battle, thinking that markets are going to have a huge crash....."

A really good retest of the March lows could take us down 35-40% from these levels. I wouldn't expect it to happen as quickly as the first move down, but I don't see anything specifically making me think that kind of decline is impossible from here.

Tue, 12/29/2009 - 21:43 | 177344 RobotTrader
RobotTrader's picture

El-Erian ranks up there with Nouriel Roubini who is still fighting the 2008 battle, thinking that markets are going to have a huge crash.....

We already had the biggest crash in recent history.

It's over, and we've enjoyed one of the fastest stock rebounds ever....

Yeah, we are due for a big correction any day now, but no crash....

 

Tue, 12/29/2009 - 17:50 | 177183 Anonymous
Anonymous's picture

@Leo: Perhaps El-Erian has in mind has a longer time frame than you.

Tue, 12/29/2009 - 21:19 | 177337 Rainman
Rainman's picture

Sugar High kind of nails it. Attempts at re-inflation of a bubble with an expanding hole is pretty obvious too. A total misread of this recessionary downturn will be the gist of the history books.....especially as it relates to government policymaking and stimulus.

The RTC model of the 80's is where the " brains " gravitated before recalculating to real time realities. Even my Garmin could have seen it.

Sorry. Wrong turn.

Tue, 12/29/2009 - 17:21 | 177150 Leo Kolivakis
Leo Kolivakis's picture

Short Pimco/ Long Biggs & Faber on this one.

Wed, 12/30/2009 - 08:52 | 177602 El Hosel
El Hosel's picture

"El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness".

  Where would the markets be and where will they go if the bureacrats let them all clear ( Housing,Credit,Bond etc. ) themselves naturally..... Nobody knows because we are miles away from true free markets at this point and all the numbers are cooked.

Do we get a correction, a crash, or a meltdown? ..... I say YES.

Tue, 12/29/2009 - 23:58 | 177451 Tom North
Tom North's picture

Biggs stated at one point the perhaps we should all stock-up on canned goods & tp and head out for our remote compounds to wait for the dust to settle....

Faber still considers the US to be "Dead Man Walking", just a matter of time.....

Therefore, I consider their bullish call to be consistent with a bear market rally view, and not significantly different from el Erian's

Wed, 12/30/2009 - 08:34 | 177592 Anonymous
Anonymous's picture

A summary of every one of Leo's posts (to save
people time): "I'm bullish for the next decade
and there's no way I could be wrong and
anyone who doesn't agree is an idiot."

Tue, 12/29/2009 - 23:46 | 177444 Anonymous
Anonymous's picture

Short Leo, always.

Tue, 12/29/2009 - 22:21 | 177377 Anonymous
Anonymous's picture

Arrogant to think that there's no way things
could turn sour.

Tue, 12/29/2009 - 17:48 | 177178 Anonymous
Anonymous's picture

@Leo: Perhaps El-Erian has in mind has a longer time frame than you.

Tue, 12/29/2009 - 16:29 | 177077 Anonymous
Anonymous's picture

Well now....

Seeing how a 3% move ....CAN STILL WIPE OUT THE BANKS WORLDWIDE....

And understanding that there will be REVOLUTIONS if
there is another govt. bailout....

The distance between the rock and the hardplace....

Just gets closer and closer....

Particularly when the US is currently buying a major portion of its own debt.....and will have to buy even more
in 2010 and beyond....

It is as if the game is passing the HOT POTATO to the slowest thinker....

Tue, 12/29/2009 - 23:09 | 177421 Implosion Therapy
Implosion Therapy's picture

 I agree with all your points but one..that there will be revolution...I mean Timmy just extended the crutch to Fannie and Freddie for all eternity...and not so much as a wimper..not to mention the insane bonuses the management is getting for running an insolvent company..Can the avg. person even keep track of all the bailouts and fed help anymore? I cant..There is TARP ,TIRP, FART etc etc etc...People are trying to make ends meet and put food on the table...another bailout or QE2-100 willl be a news cycle and then its back to Dancing with the stars and Mcdonalds for the avg American't. I talk to friends about whats going on right now and most justdon'tcare..people feel defeated and beat down...mental midgets watching the propaganda box and shoving french fries down their throats while they are being led to slaughter...we cant even get people to turn the TV off much less take to the streets...A nation of entitled jobless sociopaths with the idea that our way is the right way...if we are lucky all this gloom and doom talk will come true and we can push the big red reset button...thin out the herd and maybe get back to the meaningful things in life...we forgot that things and green paper arent real wealth..weve mistaken the menu for the meal...

 

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