Pimco co-Chief Executive Officer Mohamed El-Erian is almost ready to call an end to the New Normal.
I am constantly in awe of Pimco, the sovereign-like bond manager that runs the huge and prolific Total Return Fund, the world’s largest mutual fund. Part of the allure is that Bill Gross and El-Erian steer this nearly $300 billion supertanker out of a nondescript office building in the parking lot of one of California’s largest malls. But I struggle with whether Pimco’s oft-quoted New Normal prophecy of 2009 was ultimately more right or wrong.
Yes, as presaged, Treasury yields have consistently fallen, unemployment has remained high and growth subdued, even amid the unprecedented, repeated interventions of the Bernanke Federal Reserve. But deleveraging doesn’t exactly describe corporations right now—actually, not at all—and the stock market is at a five-year high. That doesn’t bode well for the theory’s argument that when the U.S. economy does hit full recovery, there will be far less credit to go around and chronically high consumer caution.
On Thursday, the Dow Jones Industrial Average closed above its highest level since December 2007, when unemployment was at a belle époque-like 5 percent and few suspected Bear Stearns and Lehman Brothers were approaching failure. Similarly, homebuilders just had their best year since 2008.
The queue for first-time claims for unemployment insurance is at its shortest in five years. Market volatility is at five-year lows, and nearly three-quarters of the Standard & Poor’s 500-stock index companies that have reported quarterly numbers have beaten their estimates. Wall Street is ordering lots of late-night takeout as it prepares to crunch numbers on Dell (DELL), which stands to be the most high-profile private equity megadeal since the LBO meshugas of 2007.
Somewhere up high on tonight’s evening news, anchors will have to mention that the Dow closed at a five-year high—to say nothing of how the blue chip composite would already be at a record if it’d bothered to include the world’s largest company, and likely higher if investors had come to the party earlier. “This is where the fireworks begin,” said Laszlo Birinyi, the president of Birinyi Associates, at Thursday’s Bloomberg Global Markets Summit.