PIMCO's El-Erian Warns Investors (Again)

Mohammed El-Erian, Chief Executive and Co-Chief Investment Officer at Pimco has again warned investors of the investment climate ahead.

Through an op-ed piece in the Financial Times, El-Erian warns investors to begin to think and act in terms of absolute and current facts - not the rates of projected change. He used a recent, blunt quote from the Governor of the Bank of England as the foundation of his article. "It's the level, stupid - it's not the growth rates, it's the levels that matter here." Investors have not accepted the reality that absolute levels of income, debt, wealth and unemployment are what really matters today. The outlook for major countries will continue to be driven by the levels of these key variables.

El-Erian goes on:

First, consumer debt is still too high relative to income expectations and credit availability. This will hold back any sustainable bounce in aggregate demand.

Second, many banks' balance sheets are still being manipulated for the comfort of regulators or their own managers. This will inhibit them from lending to important components of the real economy.

Third, unemployment has risen well beyond expectations and is likely to prove unusually protracted. It will take years for US unemployment to return to a natural rate. This will dampen the recovery of consumption and investment, stress social contracts that assume a flexible labor market and endanger political support for essential structural reforms.

Fourth, public debt has grown so rapidly as to spark concerns about future debt dynamics. This would inhibit the effectiveness of future stimulus measures, as well as complicating the formulation of exit strategies. It would also erode the medium-term ability of the US to fund cheaply its large deficits by undermining both the global standing of the dollar as world reserve currency and the attractiveness of US financial markets.

Taken in total, these four issues will make it tough for the global economy to attain Larry Summers' view of "escape velocity" - which translates to the US achieving a sufficiently high and sustained growth to propel the world into recovery.

El-Erian warns that current market valuations assume companies will be able to robustly grow earnings through higher revenues, not renewed reliance on cost reductions that have juiced up earnings over the past six months. This assumes depending on what is likely to prove to be an elusive high-growth scenario for 2010.

Investors need to focus on levels now rather than rates of change later. We are in uncharted waters and predicting a future earnings without taking into consideration the above four issues is a big mistake.

Comments

[Kup:]

It's important to understand PIMCO positions as they have warn to get into treasuries/hq bonds the last few days. PIMCO is one of the three primary bond holders of CITI, whose fate will be decided by tomorrow. I've taken their comments as a friendly heads up.

Sep 30 03:32 PM

[Roger Knights:]

"predicting a future earnings without taking into consideration the above four issues is a big mistake."

But that's what the bulls are doing, with their inductive reliance on leading indicators that worked in different circumstances, coming out of postwar business-cycle recessions.

Sep 30 03:35 PM

[CautiousInv...:]

Todays news that (1) Schiller believes home price will move sideways for five years at today's prices, (2) approximately 80% of corporate executives expect both hiring and capital expenditures to remain flat for the next six months, (3) the widely watched Chicago PMI dropped almost four points to 46.1% and (4) loan delinquincies increased to 5.3% in the second quarter all align with El Erian's cautious view.

Sep 30 04:01 PM

[Moon Kil Woong:]

Good points Cautious investor. We also see commecial property falling and credit card delinquencies rise. Being that much of our economy has been fueled by the cash out my rising home equity craze, I don't honestly see a growth driver for increased debt or a faster money multiplier.

If I was Mohammed El-Erian, I would boil it down to 1 key variable: employment. No paycheck equals nothing. Falling rates of unemployment still means rising unemployment. And a 10+ % level is not an environment for growth even if it stops falling. Thus forget about the rate. Such a level is nothing to cheer about under any situation.

Sep 30 11:37 PM

[Mudduckk:]

And then there are people like El-Erian who just plain get it.

Sep 30 11:52 PM

[genghis khan:]

Moon makes a crucial point re: unemployment. As most know, the BLS is grossly understating unemployment at roughly 10%. So, by using more realistic numbers such as the BLS U-6 value, which states it at >16% or the SGS number at 21%, the jobless problem is sobering. Translating those into real numbers, with some 137 million workers in the US, 16% unemployment becomes 22 million and the 21% figure becomes 28.7 million people un- or under-employed. If we currently have between 22 and 28 million disaffected workers, it becomes apparent that this massive problem isn't disappearing anytime in the next 4-5 years. Many businesses who have been adding to these rolls have closed up forever. They will not be rehiring the furloughed workers.

Mr El-Erian really hit the nail on the head when he coined the term "new-normal".

Oct 01 12:11 AM

[storm999:]

Internationally we have yet to run though all the sovereign debt defaults. Trade is off massively. China's central bank reported a YOY -30% CPI -which gives more accurate picture of their economy than a lot of the fudge they serve up as hard numbers.

Domestically, we have high unemployment and a gutted manufacturing base hobbling a great portion of our country. The banking system is weak and is facing commercial mortgage defaults, option-ARM defaults and strategic mortgage defaults from the millions of homeowners with negative equity. Politically, the country is in disarray. The high savings rate reflects the fear of baby boomers, who have lost half their life savings. We have a 52% youth unemployment rate so millions of kids have failed to launch.

Next year will be ugly. Although, I am still rooting for weak growth, due to the shovel ready stimulus being spread around.

Oct 01 01:35 AM

[warriornasdaq:]

Tom you said to buy Imperial Capital Bank at $10 its now .40 cents im on board IMPC now time to back the truck up as well im buying Alliance Bank now the regionals charts are reversal underway climbing a mountain IMPC is the best regional you picked last september 2008.
IMPC book value $19.50 as of June 30, 2009, As California recovers IMPC will mirror that recovery $4.3 billion assets too big to fail and the CFO is one sharp guy.
As far as Pimco warning well they shouldve warned investors they couldnt pay interest or dividends last december, i did well with their ETF's ive since dumped them now im buying your regional banks Tom way to go just a year off.
But thats good i got a 99% hair cut off IMPC stock price, i waited thanks for IMPC Tom i got a great deal under .40 cents on IMPC, the charts now have now reversed. ABVA is good at $2.50 anyways Tom just thought i let you know the all clear sign for regionals like IMPC ABVA you can now back the truck up Tom eom

Oct 01 01:57 AM

[warriornasdaq:]

Tom back the Imperial Capital Bank truck up you loved it at $10 a year ago you must really like it now at .40 cents, put your money where your mouth is tom buy 100k shares i have. IMPC back up your comments and views Tom i challenge you to buy IMPC down at this beaten level. I dare you to buy IMPC.
Stocks to buy IMPC Imperial Capital Bank with book value $19.50 a turnaround situation a strong California regional bank with strong CFO, management has a big stake CEO owns 8%.

Franklin Templeton Quest Fund holds 8% of IMPC a beaten down left for dead $4.3 billion bank. Imperial has $1 Billion Ginnie Mae govt backed securities not counted towards tier 1 capital of 6.75% IMPC will mirror a California recovery,

IMPC securities portfolio will offset weakness in real estate income. It looks like the worst is over for Imperial, with a small float of 5 million shares this is a giveaway.

This bank has strong management with 20 plus years banking experience to weather the financial crisis. When it looks the worst its time to buy if Imperial backs the $1 billion GNMA securities back in tier 1 capital is like 25%, the govt should back its paper and stop playing games. This bank is a survivor.

The Federal Reserve should approve Imperials capital plan shortly. Once the govt O.K.'s Imperials capital plan the stock should rip north back over $1. I am buying IMPC all i can get/

The worst case scenario private equity will come in, Franklin Templeton holds 8% i doubt they will let their investment go under, which looks less likely with the economy rebounding, Hunting down gems and oversold stocks and doing your homework pays off. Its time to buy IMPC the chart has reversed.

The stock market is a discounting mechanism forecasting economic growth in either direction. Buying stocks that have not moved up yet is smart. Three value stocks and gifts like IMPC, SCMR, ABVA will likely outperform the market.

The second stock to buy is Sycamore Networks with nearly $1 billion cash, SCMR is likely to complete a large acquisition to grow revenues and earnings Credit Suisse says in a report. SCMR is trading below cash, use the selloff today to buy scmr i did.

The 3rd stock to buy is Alliance Bank ABVA with book value $8.50 a strong Virginia bank which i am buying around $2.50 a share. The strong deposit growth Alliance achieved this past qtr is likely to continue.

Virginia being the #1 business state a lot of deposits are up for grabs this is a mini Suntrust. ABVA another gift in this market.
Tom 4get about Pimco Bs, start backing what you believe and publish lets see how much faith you have in your own opinions back the friggen IMPC truck up at $.40 cents you said buy at $10 a year ago, do it or admit your full of chit.

Oct 02 01:27 AM

[warriornasdaq:]

Tom you missed IMPC today up a whopping 41% Imperial Capital Bank hired a new CEO wow!, you're the greatest tom you nailed it for me, my hero ya buddy were headed north with IMPC all the way back up to $19.50, Wallst gonna give the new Imperial CEO a chance to turn the ship around, wooooooooohoooooooooooo Tom IMPC going well over $1 now back up the truck you're forgiven eom

Oct 06 12:03 AM

[Thomas Smic...:]

Many of us missed the last leg of the financial crash. Taking a one year old plus post and waste your time hacking at it tells me you need professional help....not from a financial planner... from a shrink.


On Oct 01 01:57 AM warriornasdaq wrote:

> Tom you said to buy Imperial Capital Bank at $10 its now .40 cents
> im on board IMPC now time to back the truck up as well im buying
> Alliance Bank now the regionals charts are reversal underway climbing
> a mountain IMPC is the best regional you picked last september 2008.
>
> IMPC book value $19.50 as of June 30, 2009, As California recovers
> IMPC will mirror that recovery $4.3 billion assets too big to fail
> and the CFO is one sharp guy.
> As far as Pimco warning well they shouldve warned investors they
> couldnt pay interest or dividends last december, i did well with
> their ETF's ive since dumped them now im buying your regional banks
> Tom way to go just a year off.
> But thats good i got a 99% hair cut off IMPC stock price, i waited
> thanks for IMPC Tom i got a great deal under .40 cents on IMPC, the
> charts now have now reversed. ABVA is good at $2.50 anyways Tom just
> thought i let you know the all clear sign for regionals like IMPC
> ABVA you can now back the truck up Tom eom

Nov 05 12:46 AM

[warriornasdaq:]

Good job, admiting you're wrong tom is the first step to recovery, don't be angry tom you fked up on your call and now like a man admit it, im proud of you tom you're my hommie.
I'm just the messenger don't shoot. Can i have some of your zoloft tom??? lol
I'll cut you a break like Cam, now go and sin no more.
We should see what the new Imperial Bank CEO does sooner or later to raise cash, FDIC wants cash by Nov 12,
I was just testing you, i like you, i like spending my time chatting with you buddy ole pal tom keep up the positive posts keep it real eom

Nov 10 02:04 AM