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 → Washingtons Blog
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 - Washingtons Blog

Tuesday, December 29, 2009

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


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.


4 comments:

  1. This is a credit-economy-induced deflationary spiral that is creating the economic ill-wind.

    It's a perfect storm of sorts, demographic, ideological, philosophic...

    There's nothing that can be done, except to stay in cash and -do not- own anything, especially something that makes you look too rich!

    The banks won't lend to the deadbeats any more.

    Unemployment keeps rising right along with the growing deflationary catastrophe in housing equity, which is a drain on all the credit.

    Add to that the idiocy of derivatives, which were thought up like a Howard Hughes aviation experiment -but with no parachute should the plane decide to crash.

    Let the gas out. It's putrid anyway. All credit is putrid, -eventually.

    The credit economy is dead, and all the so-called science behind it died with it.

    The fantastic irony about this picture (and that graph that keeps popping up) is that so many economists still pointing to this picture and the graph, are entirely unaware of what they are looking at.

    That phony 60% uptick is there because there are that many suckers still willing to throw good money after the bad money they lost in the rigged markets on the first nosedive.

    Everyone who has read the history of the Great Depression knows how crooked the markets were then. But idiots put more money into them after the first nosedive, and the Wall Street thieves are always willing to take your money, regardless the circumstances.

    When the plug gets pulled and the music stops this time, everyone is going to end up so cash-poor, you won't be able to SELL food. (That's a lesson I learned from stories about the Great Depression from my Aunt -rest her soul.)

    The overall economy his not improved one iota.

    The overall economy has continued to deteriorate entirely unabated, even if the government has gained some new-found lying skills -aided by modern statistics, fuzzy record keeping, and a lock-stepping mainstream media.

    The deterioration has actually accelerated because of an insane Princeton idea -that by throwing more gasoline (credit) onto the fire, it might be snuffed out.

    Good luck.

    The only historic "solution" the government has left -is another world war. They're trying!

    And again, GOOD LUCK!

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  2. Another interesting question is whether stock market need to go down to improve coverage of Fed bond auctions.

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  3. I got out of Treasuries against my better judgment because I couldn't stand losing money in low-risk investments. What's going to happen when inflation hits hard while joblessness and income losses mount? Interest rates are already inching up. Now what?

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