PIMCO's Cyclical Outlook:Aftershocks of Financial Dislocation

In its latest Cyclical Outlook,composed at an investment forum by its international cadre of financial experts,PIMCO portrayed a world that is still very much feeling,and being influenced by,the shock waves from the global financial crisis.
Notwithstanding the recent calmer tone in the markets,wrote PIMCO's Joachim Fels,Global Economic Advisor,and Andrew Balls,CIO Global Fixed Income,in a PIMCO Insight,the weaker global growth economic momentum at the end of 2015/start of 2016 and the significant,though temporary,tightening in global financial conditions in January/February meant that 2016 economic growth and inflation would likely come in at or below the ranges they had forecast in December for most major economies.*
Consequently,the investment forum lowered PIMCO's forecast for calendar year 2016 global real GDP growth by a quarter-point,to a range of 2-2.5%.Actual global GDP growth was 2.8 in 2014 and 2.6 last year;their forecast sees the slowdown continuing.*
Wherever one looks around the globe,PIMCO believes,nominal and real GDP growth and,therefore,interest rates are likely to stay well below historical norms,very much in line with their New Normal concept of a world economy transformed after the global financial crisis of 2008.The New Normal,Fels and Balls explain,is characterised by both weak potential output and a lack of aggregate demand,reflecting high debt levels and an excess of global desired saving over investment-the global savings glut.This continues to provide significant headwinds for growth,not only on their secular 3-5 year horizon;but also over the cyclical 6-12 month timeframe.It underpins their expectations for a low "neutral" central bank policy-along with The New Normal,they have described The New Neutral,referring more explicitly to central bank policies converging to lower neutral rates than in past economic cycles.*
PIMCO puts the probability of a US/global recession over the next 6-12 months as at most 20%.This is because,right now,none of the typical signs of imminent collapse are flashing:no over-consumption;no over-investment;no over-heating;and no monetary overkill.In short,they expect this expansion to last,lackluster though it be.

Economic Advisor:Where We Are and What You Can Do

The key issue is that the road we are on right now is going to end,predicted Mohamed El-Erian,chief economic advisor at Allianz.Central banks will no longer be able to borrow against the future;we're getting less growth out of the system;the political regimes are getting more extreme.That has massive implications on how you're going to position yourself at this T-junction.The Fed doesn't want to be forced by the market into a change of policy stance.The market welcomed the rate hike;now its view is shifting.
We never achieved liftoff.We never got to what this economy is capable of,and that's a tragedy.*
This year,it's hard to get a recession.I think the probability of a recession goes up to about 30% for 2017,and then we get to the T-junction where major decisions have to be made.We have financial prices separated from the fundamentals.We can't let the currency markets carry all the burden.*
I think this year will be a great year for those who can pick the right stocks,and there's going to be lots of opportunity.I still think you need cash;you need 25-30% cash right now,advised Dr.El-Erian,who holds degrees from both Oxford and Cambridge Universities.His new book is "The Only Game in Town:Central Banks,Instability and Avoiding the Next Collapse."