Economic Smackdown: El-Erian vs. Summers
There is no denying the fact that the stock market's focus changes over time. Therefore as active investors, it is vital to be able to both identify and understand what the current focus is at all times. For example, 1999 was the year of the semiconductor while in 2008 the focus was on the alphabet soup of mortgage derivatives. And at the present time, all anybody can talk about is the outlook for the economy.
So, if you want to make sense of the stock market these days, you'd best have a good handle on who is saying what about the economy and which horse you should be betting on. Which brings us to the current economic smackdown: Pimco's Mohamed El-Erian vs. Obama's National Economic Council Chair Lawrence Summers. Talk about a match of economic heavyweights!
In case either of these names is unfamiliar to you, Mohamed El-Erian is Co-CEO of the worlds' largest bond house – Pimco – and happens to be the co-manager of the largest bond fund on the planet. Thus, it is safe to say that Mr. El-Erian's job depends on having a pretty good handle on what is going on in the economy.
Lawrence Summers is President Obama's top economic advisor, Chairman of the National Economic Council, and a former Secretary of the U.S. Treasury. And as such, we'll bet that Mr. Summers knows a thing or two about what makes the world go 'round from both and economic and governmental standpoint.
Based on their resumes, you really couldn't be blamed for hitching your horse to either of these men's wagons. But unfortunately, their views on the future of the economy aren’t exactly in tune these days. So, it is time to pick a side.
Bloomberg reports that El-Erian says the U.S. economy is in for a sustained period of below-normal growth. And as you might expect, Mr. Summers disagrees. In an October 8th interview with Bloomberg News, Summers said, "I would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly."
El-Erian, a past President of Harvard Management Company who also spent 15 years at the IMF, suggests that the economy is likely to expand at a 2% annual pace in the coming years, which is well below the 2.8% average rate of GDP expansion seen in the five years before what is now being referred to as the Great Recession of 2008 began in December 2007.
Mr. El-Erian told Bloomberg that the 'new normal' includes higher level of government intervention in the economy and that "the potential growth rate of the U.S. is going to come down."
On the other side of the ring, Summers says that the recent bout with economic contraction hasn’t changed the growth potential for the U.S. "The American people have not become less capable of entrepreneurship," Summers told Bloomberg. "They have not become less dedicated to hard work, and the productive potential of this economy has not declined," he added.
Not surprisingly, Summers points to the work the administration has done in order to promote growth. While not everyone will agree that the $787 Billion stimulus program is completely stimulative in nature (this group would include those of us here at TopStockPortflios.com), Summers says that the stimulus plan has helped put the U.S. back on the path to recovery.
El-Erian, who has developed a penchant for economic analogies these days, likens Summers' view to a rocket ship trying to escape the earth’s gravity. He says the first stage of Mr. Summers’ rocket is government spending, which will then be followed by inventory reduction, and finally, consumer demand.
But at the October 9th meeting of financial pro's in Toronto, El-Erian said that the rocket just doesn’t have the power. Although not quite as catchy as the Start-Trek version of the phrase, he told the audience, "We don't have enough to achieve escape velocity."
So, which of these economic heavyweights should you believe; the guy who is responsible for $842 Billion of other people's money or the administration official who recognizes that an economic recovery is MUCH better for his party? Hmmm… I think we'll go with the realist here.
** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit: TopStockPortfolios.com
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