Policy Confusions & Inflection Points-El Erian
El Erian on trends shaping the future.
- During this important annual event, PIMCO colleagues from around the world debate the major trends that will play out over the next three to five years, focusing not on what should happen, but what is likely to happen. Based on the 2012 Secular Forum discussions, we expect three themes to play out: continued policy and political confusion, overly incremental public and private sector responses and, therefore, greater potential for inflection points.
- In terms of regions, the status quo is no longer an option for Europe. The higher probability outcome – though not dominant – is a smaller and less imperfect eurozone. The journey would be bumpy and expensive; and it would require much more responsive and agile policymaking. Thus, the horrible risk of eurozone fragmentation is not de minimis.
- The U.S. will look good relative to Europe, outperforming in terms of growth and financial stability; but, amid political scrimmages rather than grand bargains, concerns will remain about growth, jobs, inequality, debt and deficits. Financial repression will persist as growth proves insufficient to quickly and safely delever segments that are over-indebted.
- Emerging economies, meanwhile, will continue to outpace both Europe and the U.S. over the secular horizon. Their path of expansion and convergence will be more volatile, especially as some countries undertake needed and tricky transitions in their growth models (including China).
- Portfolio implications: Maintain a sizable quality bias for sovereigns and corporate credits; supplement high-quality equity positioning (low financial leverage, high operating margins, and growth exposure) with dividend streams, where possible, as a means of de facto shortening duration; consider real assets to guard against confiscation risk; expand risk management to include cost-effective tail hedging; and evolve strategies, guidelines, dividing lines and mindsets that have guided investing in the past but will likely be challenged in the context of inflection dynamics.
and the bottom line,
In July 2010, the Chairman of the Federal Reserve Board, Ben Bernanke, came up with an elegant term to characterize the United States’ cyclical outlook – he called it “unusually uncertain.” PIMCO’s 2012 Secular Forum suggests that this term could well prove as resilient as our May 2009 forecast for a “new normal.” Given our analysis, Bernanke’s unusual uncertainty applies to more than the cyclical timeframe, and to more than just the United States. It is both secular and global.
Now uncertainty, even of the unusual variety, does not – and should not – translate into investor paralysis. We believe that specific areas of the secular horizon are already clear and actionable today; others are subject to significant two-sided fat tails that should be detailed and managed accordingly.
Over the next few weeks, we will provide you with several more detailed notes from our specialists on how the Forum’s conclusions affect their individual sectors. We will also continue to fill out the secular topology, especially as we learn more about how the global economy is accommodating historic multi-dimensional changes – be they in advanced countries, in emerging economies or in the functioning of the international monetary system. And you can be assured that we will work very hard to do so well ahead of others.
Full reading here.