Stim Ernot..?

Last night, in one of those rare moments when CNBC hosts restrain themselves and let their guests complete a thought, two interviews help frame the economic and investment climate quite clearly and, I believe, accurately.


The first interview was with Dr. Doom himself, Nouriel Roubini. To his credit, Mr. Roubini is one of the few economists who got the current crisis right for the right reasons. Yet spot-on prognosticators risk getting consumed in their moments in the spotlight and lose perspective. This, however, appears to be not the case with Mr. Roubini, as evidenced by today’s interview in which he stated his belief in a U-shaped economic recovery.

The second interview was conducted with PIMCO chief, Mohammed El-Erian. Mr. El-Erian described his “very bumpy journey to a new destination” thesis along with the advice that investors should “stop trying to call a bottom to the market”, that we are going to have “multiple bottoms”. Moreover, in the area of finance, Mr. El-Erian points out that the “short end of the funding market is working”. This is most evident in the TED spread now below 1% (down from nearly 5% just a few months ago).

Given the steady diet of bad news, the uncertainties regarding key elements of the government’s effort to restore economic and financial balance (concerns re: the Geithner nomination, for example), and the following partial list of woes:

-The US economy is in a deep recession.

-The global economy will trend toward zero growth and may even join the US and other.

-developed economies in the economic toilet.

-The financial sector is still under pressure.

-Government will have to play a more activist role for quite some time.

-Earnings results for the past and next two quarters will not provide a pretty economic picture.

It's understandable that investors will default to what they most recently experienced in 2008 and assume that 2009 will be similar. But it would be a mistake to ignore what El-Erian calls the “sequential healing process” underway and both his and Mr. Roubini’s view that, while we are far from out of the woods, the actions taken by government thus far should provide enough stimulus to stabilize the situation – and, hopefully, provide the catalyst for the private sector to rebound.

Investment Strategy Implications

Both Roubini and El-Erian bear witness to a more dispassionate perspective on the economy and markets and, in the process, help investors frame the current crisis in a proper context. Accordingly, a cautiously optimistic view toward equities does seem appropriate with a tilt toward high selectivity and prudent asset allocation decisions made – at least for the time being.

The real question is not whether the mountain of stimulus will or won’t work. It will. Rather, the real question is what happens if all that is being done fails to produce that necessary chain reaction in the private sector. If all that being done does not produce a sustainable recovery, it’s bomb shelter time.