We Must Learn to Profit from "Constructive Paranoia"

May 16th, 2011
in econ_news

Econintersect: Mohamed A. El-Erian, PIMCO's CEO and co-CIO, has posted a wide ranging post wrapping up their annual Secular Forum.   Because the balance sheets of the advanced economies are so far out of balance, the average market risk spread on advanced economies now exceeds that on emerging economies.

These realities are playing out notwithstanding bold policy reactions in advanced countries aimed at mitigating them and delivering a more “normal” recovery. Indeed, for most of the post-crisis period, policymakers (particularly in the U.S.) have been fixated – and understandably so – on stimulating growth through aggressive fiscal and monetary policies.

Follow up:

Indeed, some policymakers have even embraced explicit initiatives to boost asset prices, driving a significant wedge between economic fundamentals and turbo-charged asset valuations.


The view of the future from this forum.

Looking forward, there are some encouraging signs that speak to an accelerated healing of the global economy over the next three to five years, its growing resilience and, within this, the ability to remove in an orderly fashion the exceptional support provided by unconventional policy actions. There are also signs that suggest that emerging economies are well anchored on their historical development breakout journey; and that China, in particular, will be able to navigate what is inherently a complicated middle income development transition.

Unfortunately, there are also signs that point to an uneven and faltering global recovery for the next three to five years. Think of the debt overhangs in advanced economies where projected rates of economic growth are not sufficient to avoid mounting debt and deficit problems. Some are already flashing red, and they will force even more difficult decisions between restructuring and the massive socialization of losses (e.g., Greece). Others are flashing orange (e.g., the U.S.), and already require future sacrifices, most likely through a combination of higher inflation, austerity and, importantly, “financial repression” (i.e., governments seeking to impose on savers negative real rates of return).3 Needless to say, demographic transitions, commodity constraints and geo-political uncertainties complicate all this.

The consensus is that core inflation will exceed the Federal Reserve targets.  PIMCO will profit from all the "new normal" dynamics in play with inflation, growth and credit.

These re-alignments become even more interesting when multi-speed growth, inflation, and credit dynamics are in play – as is the case today. Critically, they also become much more complex when the related balance sheet repairs proceed in a slow and uneven fashion.

Expect us to do our utmost to continue to analyze well these multi-year, multi-speed dynamics; and to properly reflect them in everything that we do for you – from secular investment positioning to the design of investment solutions, and from client servicing to business management.

The world will remain an unusually fluid place. By looking forward and retaining our culture of “constructive paranoia,” we will strive to ensure that your portfolios benefit from change, rather than fall victim to it.


source: PIMCO

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