El-Erian’s Predictions and The “New Normal” Nonsense

Pimco and its duo Bill Gross and Mohamed El-Erian have been pushing the “new normal” nonsense for the past 3 years. Insider Monkey, your source for free insider trading data, calls it “nonsense” because the jazzy term is nothing more than a lobbying tool for the Fed and the government. Here’s the story behind “new normal”:

In 2008, El-Erian was consumed with the breathtaking growth rates of emerging countries like China and India. He was predicting a wealth transfer from the west to the east (nothing original) and inflation due to the increases in commodity prices. He talked about global imbalances and speculated that the US should be consuming less (or saving more) and that China should be consuming more to resolve these imbalances. That was the “new normal” in the middle of 2008.

We couldn’t find any source supporting  El-Erian’s and Bill Gross’ talk of a 4-5% annual average return in any asset class as the new normal. Before the Lehman bankruptcy, we couldn’t find any source supporting the idea of the world economy growing at a much slower rate. All the jabbering started after Lehman went down.

The idea of Pimco’s “New Normal” came to life back in April 2009, when El-Erian appeared on CNBC. I am very underweight equities,” he said, adding that he has cut his exposure to stocks to 30 percent compared with around 60 percent in normal market conditions.

“Fundamentally we are in a volatile journey to what we call the new normal, the new destination. The world is changing,” El-Erian said.

If you read the rest of the CNBC article, you’ll see that El-Erian didn’t recommend stocks because of the “New Normal”. Shortly after, several other news sources (1, 2)  pointed to El-Erian’s New Normal. That’s when this nonsense really started.

On July 1st 2009, Bill Gross said low asset returns  for the coming years are the “new normal”. Taking a shot at investors, he added, “The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.”

Sixteen months after that genius prediction by Bill Gross, the SPY went up by more than 39%. Long term bonds (TLT) returned more than 9%. Medium term treasury bonds (IEF) returned more than 15%.

If Pimco’s prediction about 4-5% return for all asset classes per year was correct, it would have taken the S&P 500 more than 7 years to be where it is today. These are seriously flawed predictions, and they’re no more credible than Roubini’s nonsense stock market predictions. Only Pollyanna would think otherwise.

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