El-Erian Predicts 2010 Hangover

Pimco CEO Mohamed El-Erian can move markets all by himself. With almost $1 TRILLION in AUM, the guy needs to be right more often than he's wrong. So when he says the party is almost over and compares the rally in the market to a 6-year old binging on Snickers bars at a birthday party, we'd probably do well to pay attention.

Among his predictions for the coming year are a call for a dramatic sell-off in the stock market amounting to 10% in a 3-4 week period, anemic growth in GDP for the next several years, and unemployment remaining above 8% at this time next year. All pretty believable.

"We're on a sugar high," El-Erian says. "It feels good for a while but is unsustainable."

His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.

Comments (13)

Dec 28, 2009 - 3:45am
zykke, what's your opinion? Comment below:

That's probably right. We're bound to feel the backlash of all that government spending and expansionary monetary policy at some point, sooner more probably than later

Dec 28, 2009 - 10:58am
Stringer Bell, what's your opinion? Comment below:

all the analysts where saying the exact same thing when we had the initial rally in the equities market back in 09. I feel like a lot of this is like timing the apocalypse; sure it's going to happen, but no one knows when.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
Dec 28, 2009 - 4:24pm
dagro, what's your opinion? Comment below:

anyone heard of the term "liquidity trap"? we're in one right now apparently. sure, there'll be a backlash, probably in the form of inflation, but that shouldn't be too much of a problem, should be gradual enough. at worst the FR and other central banks will soak up the extra cash with bonds or god knows what.

i think his apocalyptic prophecy isn't accurate. i believe the only real danger threatening the world economy is the extreme wastefulness and hyper-consumerism, the constant struggle to sell more and more. what will eventually happen is growth will slow, causing much trauma for stockholders. naturally i think it would be best, for a variety of reasons, but the slowdown will cause shockwaves and useless policies trying to jumpstart the growth-economy, which will be like banging your head against a concrete wall.

"... then, lobbest thou thy Holy Hand Grenade of Antioch towards thy foe, who, being naughty in My sight, shall snuff it."
  • 1
Best Response
Dec 30, 2009 - 10:49am
stk123, what's your opinion? Comment below:

Congratulations El-Erian on your great predictions:

Unemployment above 8% - So you are telling me that it will not decline more than 2% next year, or in other words we wil not create a net 3 million jobs, Really? There is probably a better chance for us to hit 12% than 7.9% (well not really, because the data will be skewed next year because of the million+ census hires).

GDP growth at 2% for an extended period - great out of consensus call, Not! The UK has been growing at less than 2% for the past 100+ years, so I would not call that a catastrophe or even a disappointment (I would be extatic with 2%). If this is true then we will be back to pre 2008 levels of GDP within two years; and if the S&P also goes to those levels above 1500 then we have two years of 20% returns coming up (which contradicts his statement to get out of equities).

He is getting out of "riskier" bonds and getting into treasuries - Good luck with treasury yields going even lower than they are today. Plus his bond funds seemed to underperform this year.

10% correction over a 3-4 week period sometime next year - This is my favorite prediction. I would be willing to bet my whole life savings that this will come true.There is a 95% chance that this happens, and a 5% chance that we have a 10% correction but it takes 5+ weeks.

This article was a complete waste of my time, i.e. it did not contain any bold predictions and I did not learn anything new.

I think El-Erian is wrong for the following reasons: Markets are irrational; Inflation fears (not yet real inflation) will start to creap in which will raise treasury yields and not lower them; Inventories are depleted and companies will want to replenish them with at least temporary workers, which will increase GDP output in the short term; The government will come out with another stimulus package which will further increase GDP growth temporarily; The Fed will not start raising interest rates until 2011 or very late 2010 (at the earliest), because it is an election year and the democrats have no chance of winning if the market starts falling when the Fed starts withdrawing its Quantitative easing; This means that the carry trade is still on (borrowing dollars for free and selling them short to invest into riskier assets such as stocks), in a QE market ALL assets go up in value;

The only thing that he says that makes sense is that there will be a correction, and this is exactly when I will be getting into stocks. It could be a great year for stocks.

You cannot have 2% GDP growth and a bad year for stocks, because the market is still pricing in a possibility of a double dip recession and once it finds out that there is none (2% growth) then the markets will go up even more. We will either have a V-shape or a W-shape, but the W will only happen if we start to see negative GDP growth again (which El-Erian is not predicting). Therefore if his predictions come true (all consensus calls = pretty lame) then we will have a V-shape recovery continuing into next year, especially if unemployment gets down to "above 8%".

Dec 30, 2009 - 10:07am
dagro, what's your opinion? Comment below:

Ad labore aut laudantium a architecto. Ipsa culpa omnis libero suscipit et. Eum temporibus voluptatem consequatur quis quo velit natus.

Laborum sint aut id sed. Voluptatum doloremque eius temporibus dolor cumque neque. Eos id vero vero debitis excepturi unde. Incidunt aut odio error.

In ut aliquid autem et alias et. Consectetur et dignissimos harum exercitationem sit ut.

Ut et ex nobis nam. Tempora fuga voluptatibus at ea ut. Et beatae eum rem labore velit quia velit. Veniam sed et culpa nemo.

"... then, lobbest thou thy Holy Hand Grenade of Antioch towards thy foe, who, being naughty in My sight, shall snuff it."
Start Discussion

Career Advancement Opportunities

May 2022 Investment Banking

  • Jefferies & Company (▲03) 99.6%
  • Bank of America Merrill Lynch (▲03) 99.1%
  • RBC Capital Markets (▲06) 98.7%
  • Lincoln International (▽02) 98.3%
  • Houlihan Lokey (▲07) 97.9%

Overall Employee Satisfaction

May 2022 Investment Banking

  • Jefferies & Company (▲12) 99.6%
  • Rothschild (▲02) 99.1%
  • Truist Securities (+ +) 98.7%
  • Greenhill (▲06) 98.3%
  • Robert W. Baird & Co. (▽04) 97.9%

Professional Growth Opportunities

May 2022 Investment Banking

  • Jefferies & Company (▲04) 99.6%
  • Bank of America Merrill Lynch (▲06) 99.2%
  • Lincoln International (▲03) 98.7%
  • RBC Capital Markets (▲08) 98.3%
  • Houlihan Lokey (▲06) 97.9%

Total Avg Compensation

May 2022 Investment Banking

  • Director/MD (9) $661
  • Vice President (36) $393
  • Associates (179) $247
  • 2nd Year Analyst (109) $161
  • 3rd+ Year Analyst (17) $156
  • 1st Year Analyst (348) $148
  • Intern/Summer Associate (73) $146
  • Intern/Summer Analyst (272) $91