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April 6, 2010
In the video below, I think Mohamed El-Erian described the situation very clearly after the employment report was released last Friday.
Investors who are only focusing on the cyclical events in the economy are clearly becoming more positive with the economic news. The stock market has obviously been in that camp and the better than expected earnings have been a huge help. The hope is that the massive government stimulus programs will kick-start the economy enough to become self-sustaining. Now that employment numbers are positive for the private economy, confidence is building in that sustainability. There have also been other indicators such as increasing capital investment and spending on such things as travel.
Like Pimco, John Mauldin, John Hussman, Dave Rosenberg, etc., we are focused more on the structural changes that have occurred (deleveraging balance sheets in the private economy, more regulation, massive government deficits, higher taxes) that will slow growth for years to come. The possibility of another decline in real estate prices with higher foreclosures is simply icing on the cake. It isn't a required event for this economy to prove disappointing to investors.
Unfortunately, our thesis is not proved right or wrong for 6 months or more. I liked Mohamed's point that the bounce back of 4 - 5% real GDP growth for 2 or 3 quarters should be expected from the low levels we were at a year ago and the massive amount of stimulus from both fiscal and monetary policies. Inventory rebuilding has to occur as does some rehiring. But with lower amounts of credit available to small businesses and consumers and with lower real estate prices and the lingering effects of that problem I don't understand how the bulls can believe the recovery will be an "old" normal one.
In the video, El-Erian's views were now basically dismissed by the consensus economists and the commentators on Squawk Box. I was feeling his pain.
