So, what should we make of all this; and how will it play out in markets?
I come away with the strong feeling that today’s G-20 communiqué is a further confirmation that structural and balance sheet realities are imposing themselves on the global economy.
Compared to what the world has known for the last 40 years, this situation results in a highly unusual configuration of growth, debt and deficits; it raises legitimate questions about the prospects for self sustaining private sector recoveries in industrial countries (and the related ability to grow out of excessive indebtedness); and it loudly illustrates the limitations of cyclical policy responses and international coordination, and associated problems with unintended consequences and collateral damage.
I fear that all this may continue to catch off guard at least three dimensions that are still significant in today’s marketplace:
- Mindsets that have difficulties recognizing regime shifts, preferring instead the illusionary comfort of the more familiar cyclical frameworks;
- Approaches that focus excessively on rates of change and inadequately on levels; and
- Investment portfolios that are over-exposed to equity and credit risk, and that maintain insufficiently hard interest rate duration.
In concluding, I would repeat what I said early yesterday morning when asked by a reporter “what does the US jobs report mean for markets:” Investors should keep their seat belts on and tight.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material was reprinted with permission of the Financial Times. Date of original publication June 5, 2010.
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