Tuesday, December 23, 2008

El-Erian "2009 - Year of the Economic Crisis" & CNBC Europe Needs to Come to America

One of the few rationale (non cheerleading) voices on CNBC America (along with Rick Santelli) is Mohamed El-Erian of PIMCO [Dec 17: PIMCO's Mohamed El-Erian] I have not posted much of his stuff because there has been quite an inherent conflict of interest between PIMCO and the US government; it seems the US government goes to PIMCO (the biggest bond investor on the planet) on how to solve the credit/bond market issues and PIMCO is "perfectly" positioned for the bailouts - that they essentially advocate. Imagine that. It is sort of like Government Sachs of the West Coast. That said, it is what it is - of the 3 main talking heads from PIMCO that CNBC continuously brings on, El-Erian is the best in terms of broad line economic views. And relative to what they normally put on over the past decade+, it's nice to see a rational view that does not include pom poms.

As an aside, I get a lot of readers who email me saying CNBC is downbeat of late and why do I think they cheerlead; folks I'm working on a 15 year body of evidence not the past 6 months... just go back 1 year ago today when the CNBC cheer was Goldilocks economy (Kudlow), there would be no recession since data did not point to it, housing would recover in spring 2008, don't fight the Fed, and since Middle Easterners were investing in banks, so should you ; the financial bottom was in - that was the daily "analysis". If you listened you were down 40-50% in under a year (worst if you bought those idiotic financials). It was not much different in mid 2000-mid 2001 before they finally threw in the towel and got negative. Rah Rah. I also have a major beef that all these pundits they bring on who continuously call bottoms & do NOT have their history shown on the bottom of the screen (please note pundit Joe Schmoe said no recession in January 2008, called for a bottom March 2008, said to be 90% in stocks June 2008, etc etc) We all get things wrong but why they bring the same guys who are wrong 80% of the time out - is beyond me. So if you want sober analysis I guess Bloomberg is the place to go.

Here is El-Erian's latest. At the bottom of this post, I'd highlight an even more interesting video from our friends in CNBC Europe. CNBC Europe is like the adult in the house - sober, analytical, and an utter lack of cheerleading outfits. It's too bad American investors are shielded from this sort of conversation. (they can't handle the truth?) If you only watch one of these two videos, go straight down to the bottom of this post and see what non- USA! USA! USA! types are thinking.

(1) First El-Erian... just a short 2 minute video - more conceptual than "specific stock/bond advice" - the text below is different than the video.

As the meltdown in the economy gains steam, investors in 2009 will need to return to the basics of investing such as diversification and risk management, said Pimco co-CEO Mohamed El-Erian.

Even though those same principles did not serve investors well in 2008, the coming year will present a different set of obstacles that will require a different strategy, he said.

"2008 was the year of the crisis of the financial system. 2009, unfortunately, will be the crisis of the economic system," El-Erian said on CNBC. "So the news is going to be full of unemployment, defaults, companies defaulting, etc. For investors, it's going to be going back to the three things that work well and that haven't worked well in 2008."

Those three things are diversified asset allocation, good implementation vehicles, and solid risk management.

"For 2009, every investor should to back to the basics and recognize that there will be a lot of government initiatives," El-Erian said. "We're going to see fiscal stimulus packages going into the trillions of dollars. We're going to see support for various sectors, and despite that the economy will be bumpy."

As far as specific bond investment vehicles, he identified mortgages, banks, municipal bonds, and high-quality investment grade corporate debt as well as the top emerging markets. Pimco is the largest bond-fund manager in the world.

Investment in stocks will lag, he said, until there's an increase in confidence that equities will provide solid rewards without all the risk, and the economy shows signs of stability.

"What 2008 has told you and what 2009 is telling you is that for the average investor conditions have changed and therefore the game plan has got to change, which means don't go and chase what are very attractive valuations from a historical standpoint," El-Erian said.

With the exception of Treasurys, which are offering historically low yields, a multitude of other investment vehicles are likely to be attractive--and possibly a trap for investors.

"But don't fall into that trap," El-Erian said. "Rather, go for those assets that are not only dislocated but where there's a catalyst for normalization, where you can actually identify what it is that's going to bring valuations back to somewhat more reasonable (levels). If you do that you will get both the upside and protection against the downside. That's going to be the key issue in 2009."

(2) Onto the sober Europeans - about a 7 minute video

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