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Pimcos' El-Erian Warns About Irrational Exuberance, Sees January Sell-Off As Harbinger Of Things To Come
Nothing all that new here. Sovereign risk time bomb, blah blah. As a reminder, Zero Hedge was discussing the ramifications of the Sovereign risk explosion in May of 2009, long before talking about PIIGs, STUPIDs and other mot de jour became the prevalent topic among mainstream media. Indicatively, we still believe that not only is US CDS cheap, but we are convinced that German CDS is a screaming buy.
From Bull Markets Can't Last If You Mind The Gap, by Mohamed El-Erian, published on Bloomberg News.
In some Underground stations in
London, you are repeatedly reminded to “Mind the Gap” as you
enter and exit the train. The aim is to reduce injuries
occasioned by a structural anomaly that results in a large gap
between the platforms and the trains.
Judging from market valuations, I sense quite a gap between
consensus market expectations and key political and economic
realities, especially in the U.S. If the gap isn’t bridged by
the validation of the more optimistic expectations, investors
may well find that January’s global equity sell-off was just a
precursor to a disappointing year for several asset classes,
including stocks.
I am not a political expert but I respect and listen to the
insights of many who are. Their messages are eerily consistent,
and quite concerning.
The political atmosphere in Washington is tense and
increasingly polarized. Bipartisan backing for measures is
harder. With the political center shrinking, the ability to
“manage to the middle” is growing more elusive while the more
partisan wings don’t command sufficient broad-based support.
The situation isn’t helped by the diminished trust in key
institutions, both public and private. Policy decisions, past
and present, are second-guessed. Banks’ standing in society is
severely shaken. The regulatory framework is in flux, with
agencies fighting for turf. And the divide between large and
small firms is as big as I have ever seen it, as is the
disparity between the rich and the less-fortunate segments of
the population.
Growth Undermined
All this comes at a time of great economic fluidity and
challenge. The global financial crisis has undermined growth and
job creation; it has clogged many of the pipes that allocate
funds to productive uses; and it has rapidly taken public debt
and the budget deficit to worrisome levels.
I am particularly concerned about the surge in joblessness.
In the absence of bold structural measures, most of which face
political headwinds, we are looking at a period of persistently
high unemployment that will disproportionately affect the young.
We risk significant welfare losses and skill erosion, lower
labor-market flexibility, and yet another burden on the
country’s stretched public finances.
These are consequential political and economic questions.
They speak to a more protracted post-crisis resetting of the
U.S. economy -- what Pimco labeled last year as a bumpy
multiyear journey to a new normal.
All this is consistent with the academic literature on
post-crisis periods. Such research reminds us of the extent to
which massive disruptions -- such as the one experienced in
2007-09 -- expose structural cracks that, at best, can only be
masked temporarily by a massive cyclical policy response.
Resetting the U.S.
To make things even more complex, the resetting of the U.S.
is occurring in the context of secular shifts in global growth
and wealth dynamics -- principally on account of some
systemically important emerging economies (such as Brazil, China
and India) having reached development breakout stages.
The evidence is overwhelming: Economic and political
indicators are urging us to adopt a forward-looking structural
mindset. Yet too many markets -- and, I would also argue, too
many private and public institutions -- seem hostage to cyclical
forces. This inconsistency is apparent in the seemingly
unquestioned manner that so many have assumed in regard to the
following six scenarios for 2010:
-- First, an orderly handoff from temporary sources of
growth (think government stimulus and inventory rebuilding) to
sustainable components of final private demand.
-- Second, a smooth exit from unconventional measures, with
policies regaining much-needed degrees of operational
flexibility.
-- Third, the government’s delivery of a credible, pro-
growth medium-term fiscal adjustment program.
-- Fourth, a rebound in bank lending that alleviates the
enormous pressures facing small businesses.
-- Fifth, the ability to defend the institutional integrity
of key public institutions.
-- And finally, effective global policy coordination.
A more realistic assessment of these factors would caution
against an excessive focus on changes in growth rates at a time
when absolute levels are horribly out of whack. It would
encourage greater awareness of what the important insights of
behavioral finance tell us about the challenges of navigating
regime changes and resetting systems. And it would remind us to
mind the gap between structural realities and cyclical
fantasies.
The longer this is delayed, the greater the scope for
policy mishaps and market disappointments.
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Do you think he talks their trading position book, much, lol?
Sure, and Bill Gross does so even more transparently. But that doesn't necessarily mean you can find a whole lot of fallacies in their arguments.
+1
El Erian will be on Bloomberg Radio at 9:35 am today
http://www.bloomberg.com/audioplayers/playr_owm.html?clipName=Bloomberg%...
My apologies to the female readership for the following if it offends.
Every time I see the words "irrational exuberance" I wonder if they are describing the Muslim who has just died while setting off his own bomb and is now standing in front of his 72 virgins. Would he be described as irrationally exuberant or just plain horny as hell and dying (pun intended) to get started.
On a more serious note, has anyone been able to sufficiently explain why a widely followed religion that espouses honor, dignity, compassion etc would also promote such a crass and decidedly human reward as unlimited sex in the after life? Don't get me wrong, I'm an equal opportunity basher of all religions and the Christians are right up there at the top of my hypocrisy list. But I've never understood this part about the virgins.
The confusion comes from the translation of the koran into arabic out of its original aramaic. Look up christoph luxenberg. The syro aramaic translation of "hur" is not virgin, but "white", which was commonly used as a term for white grapes. Other revelation about the burka are eye opening as well......
I appreciate you info and I will spend some time looking at the reference.
But if you are correct, why would the reward for dispatching infidels be white grapes? Or is that just a phrase to mean something else. I really do wish to understand. I've always felt the virgins thing was not exactly kosher (sorry for the pun) but whenever I looked, I got a multitude of different explanations. It would seem to me that with a religion this old there would be a better understanding.
The confusion comes from the translation of the koran into arabic out of its original aramaic. Look up christoph luxenberg. The syro aramaic translation of "hur" is not virgin, but "white", which was commonly used as a term for white grapes. Other revelation about the burka are eye opening as well......
There are many examples of this in most religious translations. One that comes to mind in the bible is where it says that it is easier for a camel to pass through the eye of a needle than for a rich man to enter heaven. Obviously this is impossible, but in those times there was a small opening in the walls around a city where a camel would have to crouch down to get through and it was very difficult to get a camel through these openings. These small openings were referred to as the eye of the needle.
That's great news! I am not a goner!
More gold please!
It takes a person angry, disgruntled, shamed, or hopeless to do something like blow themselves up. SO start looking there for answers - the few terrorists out there have more in common with Timothy McVeigh than a devout Muslim (sad but true this must be stated). Of course wars of international occupation might have a little to do with hopelessness? (only 22% of Afghanistan's population has access to clean drinking water, so let's be real here - this is not about ideology).
From Timothy himself:
A man with nothing left to lose is a very dangerous man and his energy/anger can be focused toward a common/righteous goal. What I'm asking you to do, then, is sit back and be honest with yourself. Do you have kids/wife? Would you back out at the last minute to care for the family?....Think twice about the Constitution you are supposedly enforcing (isn't "enforcing freedom" an oxymoron?)....
In Islam all actions are by intention. Intention is a powerful force - and almost considered a real force. People will be judged by intentions not only actions. Therefore, Clintonesque ideas like "I did not have sex with that woman" are ridiculous - in that to think that you can fool the creator of the universe with word games is well...stupid. In the same vein, having eyes for "other women" is wrong in Islam, as it was wrong for Christ, and for every prophet before (remember the commandment "Do not covet your neighbour's wife"). So "lowering your gaze" is something someone of good behavior does, because it is good for the soul and the moral thing to do. Images are powerful things and love is connected to what we see.. Make a young person watch porno movies all day, and it is going to damage them. Unlimited sensual pleasure is wrong, and it is wrong because the designer of the human tells us it is bad for us. Within the constraints of marriage sensual pleasure is prescribed.
The whole 72 virgins thing is a part of a description of the divine pleasure in heaven, which comes in forms unknown to us in a place unknown to us. It is intended as a motivating factor for self-control in the here and now - the self control comes from realizing who made us and what the nature of this life is. Basically the Islamic conception is that this life is not the end - they are commanded to take in the earth (within prescribed limits) as if we are here forever and simultaneously realize that we may die tomorrow. One metaphor for the different realities is that this life is to a dream, as the afterlife will seem to this life. (ie a dream seems short when we are awake, it doesnt seem real, you can't believe it happened...thus in the afterlife, this life will seem short, and almost unreal). Saying that unlimited sex in paradise is a human reward (yes in concept) and therefore wrong and the whole system breaks down is um limiting. In that first the entire dimension of paradise is a translation into our consciousness of an entirely different plane of existence. We can go much deeper here, and Islamic scholarship does. However suffice to say, people don't brow beat themselves for doing something in their dreams that they couldn't imagine in real life....it is an entirely different dimension so applying the rules of here and now to there, is short sighted. Main point: are there signs that we are made by a designer, and do those signs logically make sense since we all have the inborn nature to see the truth, and if so what are the implications...that is how a Muslim thinks about this, to scratch the surface. You won't find this on CNN.
No where in the book does it mention 72 virgins. Irrational exuberance or 'nuts' are a dime a dozen.
The counter rally is showing weakness.
http://www.zerohedge.com/forum/market-outlook-0
I wonder if he would take Timmy's job if it were offered?
This guy is as bearish as they come. I take what he saids with a grain of salt as with anyone else's advice that has a conflict of interest. This guy stands to make a lot of money and his whole PIMCO crew when everyone runs back to "safer" assets. Like Bill's new normal, dont buy the hype and approach his ideas with a good amount of skepticism. Dont forget he is also promoting a booK!
I may be drunk on the kool aid but there is a paper that Bernanke coauthored with Harold James in 1990 titled "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparision" which I think is a good read and completely relevant to what exactly was the basis for the unprecedented actions taken by the Fed.
Anyway, still have a lot of my money with Pimco but just saying watch out for that conflict of interest when this guy talks.
In my opinion, the odds of those six 2010 scenarios happening is ZERO. Now, how do I hedge?
The Problem
"The situation isn’t helped by the diminished trust in key institutions, both public and private."
The Solution
"the challenges of navigating regime changes and resetting systems."
Until Obama throws the Three Stooges (Bernanke, Geithner and Summers) under the bus, there will not be any trust in our government's economic policies. Simple.
Never trust a guy with "Mohamed" as his first name.
Go away, troll. People here are a whole lot brighter than you.
I guess we can trust you godfader. Grow the fuck up asshole.
Seriously. I kept waiting to see that other guy float like a butterfly, but he never got off the ground at all.
Just because he may be talking his book doesn't mean his analysis is wrong. I mean, if you disagree with him, you must think we really are just starting up the ramp to a raging bull market, and a new Golden Age of worldwide prosperity. So which one is it?
Well. It's not even necessary to comment anymore, right? Market went up in 2009 driven by QE and 2010 will be the crash-O-matic year of wild bull stampede into Fed paper with exuberant spin on how great the security of Tbills is.
All your 401k are berong to US. (Gee, look at that unintentional pun. I should slap myself on the back. Hard.)
-MobBarley
You all should read the Jesse's Cafe article from yesterday. If nobody is buying up the equities...then why do they keep going up? Jesse's explanation is that Blackstone is buying up the market with the government's money. Could this be true?
http://jessescrossroadscafe.blogspot.com/2010/02/why-is-blackrock-broadly-buying-big.html
"Could this be true?"
Roy,
Do pigs fly?.........
Same as out Treasuries and Bonds,,,,,,,,,,,
Anyone who thinks foreigners are sucking up the majority, or even 50% is on the pipe.
This is a classic conspiracy theory, but if you read the end of the article, it explains that all the fillings were linked to the acquisition of BGI, so the need to re-file the holdings in their name, unless that was just the smokescreen...
Maybe it did have something to do with Barclays...I don't know. However, never be so quick to dismiss "conspiracy theories", because lately they turn out to be pretty true. (Global Warming cooked numbers, War in Iraq lies, etc.)
Paraphrasing Mr. Spock, who was quoting his cousin Sherlock Holmes, "When all other solutions have been eliminated, the one remaining, no matter how illogical, is the answer."
Not necessarily talking his own book. Look at it this way,if trust goes away,so does everything else. Equities and bonds will be in the same boat if everything collapses. You have collapse in the economy which might force goverments to issuemore debt,and you will have a collapsing equity market and a collapsing bond market due to monetization. So may be he is realy scared from such a scenario...
Of course, he's talking his book. I WANT him to talk his book. He should put his mouth where his money is (sorry for that phrase, which is properly put, but which will inevitably evoke jokes). Would you want to listen to someone who invests hundreds of billions one way and then talks another? These guys take loses: after all PIMCO is only a marginally better bond company than most (though we invest precisely because of those margins). So, he's not omniscient. But he's saying it and investing it the best way he can. And, what, precisely, is he saying here which isn't true? His problem (OUR problem) is that he's hoping for rational response in an irrational (and getting crazier by the moment) world.
Nicely put.
Why the hell do people bash this man? He's telling the truth, who cares if it's his book or it isn't...
Basically I'm saying... Quit HATING!
PS... Wooo Mardi Gras!
He nots talking his book. He still trying to make up for bearish calls at 800 and 900 on SPX on the way up.
I think he'll miss, and should just reverse.
Pain is getting worse. Numbers are all good. Recovery!
So, the world is settling back into normality and I should wish that I had listened to all those PM bears over the last few weeks who predicted gold would fall to somewhere between $1000 and $400, right?
Or does this crisis may have some way to play out yet?
what exactly does this website stand for besides criticism?
Interesting no where on the list is Restore manufacturing capability. The great secret to off-shoring manufacturing is that American companies who did so were profitable. Just not obscenely profitable as they would become after gutting the country of its manufacturing economy. This was the real end to the middle class, and the beginning of CEOs making 800 to 1000 times more income than the first line worker. And manufacturing can be restored without resorting to Third-world incomes in the process, but then CEOs won't be able to make 800 times the average worker.
In India there was an Italian factory that laid off hundreds of workers. The workers stormed the factory, dragged the CEO into the street and beat him to death. A good model for the US and high time to start.