The latest equity outlook from PIMCO’s Neel Kashkari is one long Terminator analogy.
If you’ve seen the movie, you know that means we’re headed for a disaster that nearly wipes out mankind:
Washington has certainly tried to prevent it: Quantitative Easing. Stimulus. Cash for Clunkers. Homebuyer tax credits. None have led to sustainable economic growth.
Is this really surprising? It is easy to generate strong economic growth when we are borrowing money to boost consumption. But now the private sector is paying down debt — a good thing, yet it results in slower economic growth, and painful, sustained unemployment. How could we expect a short-term boost of government spending (of virtually any magnitude) to make up for a long-term reduction in private sector demand?
The economy needs to continue adjusting, and frantic activity by policymakers won’t change that, any more than Sarah Conner’s years of planning were able to stop Skynet.
But if you’ve seen the movie, then you know it has a happy ending. Sort of:
Yes, Sarah Connor failed to stop Skynet. But she did successfully prepare her son, John Connor, to lead the resistance against the machines. While we may not be able to avoid sluggish growth, we believe investors can earn attractive risk-adjusted returns by looking globally for the companies with strong balance sheets that are best positioned to thrive in the multi-speed global economy. And, hopefully society can institutionalize the lessons from this crisis so that future generations don’t repeat it: Individuals, corporations and countries should only borrow to fund long-term investment, not current consumption.