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

by: Larry House

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.