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.