PIMCO's El-Erian - 'New Normal' Will Last Several Years

Mohamed El-Erian of PIMCO and author of When Markets Collide, has offered his secular outlook for the next 3-5 years. El-Erian, who gave us the term "new normal," gives his views of what that new stratus will be and how to invest in it.

El-Erian says we are entering the "new normal," and we will be in it for several years to come. Some of the characteristics of this new era are slower growth worldwide (more so in the G-3 than in emerging markets), higher unemployment, more deleveraging, more regulation, and a weaker U.S. dollar. He states that government interventions around the world may avoid a depression, but the actions will not be successful in returning economies to the high growth and low inflation of the past few years.

Of the banking system, El-Erian says it "will be a shadow of its former self," changed for years to come because the sector will be "de-risked, de-levered, and subject to greater burden of sharing."

El-Erian calls future economic growth "muted" because of "excessive regulation, higher taxation, government intervention," and he opines that the greater risk for equities over the coming 3-5 years is pointing downward.

To invest according to his outlook, El-Erian recommends senior debt and international debt as better than holding just equities. He points out that to offset a weaker U.S. dollar, real assets such as commodities may offer some protection for USD holdings. He expects emerging market economies to grow faster than the G-3, and he sees China as the strongest of the emerging economies. ... he sees equities in general as one of the riskier asset classes over the next 3-5 years.

The entire article can be found here.

Disclosure: The author has positions in PGMDX, which is co-managed by El-Erian, and in MCHFX.

Comments

[CautiousInv...:]

Mohamed El Erian is an indisputable bright guy that has an amazing ability to see through fragmented clouds and grasp a coherent vision. Along with the characteristics of the new normal cited by the author, I think profit margins will be pressured from (1)higher taxes and/or reduced eliminations and (2) less leverage. Combined with slower growth in sales, the intermediate-term outlook for corporate profits is less than stellar.

Other are eager to explore and better under the "new normal" and a conference is being organized by Barry Ritholtz to explore this concept with an a panel of geusts including Doug Kass and Nassim Taleb. I have pasted below more details on the conference.

______________________...
As this bear market rally fades–or, at least, consolidates around this new level–we’re confronted again with questions about what the “new normal,” in Mohamed El-Erian’s phrase, will actually be. This is the main topic of discussion for The Big Picture Conference that will take place on June 3rd in New York.

The purpose of the confab is to get some of the smartest people we know together and hash out the main questions: not how did this happen but what will the future be like? We all accept that the country and the economy are going to take years of sorting out. But within that larger question there are many other smaller questions to work out.

Nassim Taleb will talk about his vision of a capitalism that can withstand shocks.
Barry Ritholtz will lead a panel with Jesse Eisinger, Randall Forsyth, Daniel Gross and Dylan Ratigan exploring what the media may be missing right now based on how the fourth estate missed much of the weakness of the boom.
Dylan Ratigan will lead discussion of future of alternative investments with Doug Kass and Paul Kedrosky.
Josh Rosner is going to give an analysis of the banking and credit system that seems to have dropped into the background.
Dylan Ratigan is working on getting two members of Congress to join us for a frank discussion about the government’s continuing role in fixing the banks.
John Mauldin will end the day with “Thoughts on the Continuing Crisis: How Do We Get Back to the Garden?”
Finally, in the weeks leading up the conference, Barry will be soliciting your questions for the panels. And we’ll be offering a series of video presentations from the conference afterwards. There will be a fee for the full versions of the panels but video will also be available on the site.

May 13 08:16 AM

[johnmorrison9:]

If some information sheds light on the manipulations and mismanagement of the ecomony by government the 'collective' plays deaf and dumb.

May 13 10:06 AM

[bbowen7:]

El-Erian's description of the "new normal" seems quite reasonable. However, the jump to investing in bonds with the prospect of high inflation seems to be a leap.

May 13 11:35 AM

[whidbey:]

The Pimco crowd knows its book and always talks its book.

Of course El-Erian like bonds, he owns a few!

May 13 06:00 PM