Mohammed El-Erian of Pimco had a recent commentary, posted here at Advisor Perspectives, on the sovereign debt explosion. He talked about different ways in which it could be resolved-some good, some not so good.
One of the points he makes is particularly relevant to investors watching the process unfold and trying to make investment decisions prospectively:
We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.
There is always a tendency to rely on what has worked in the past. Often that makes sense; there is usually some commonality of conditions. Yet the exclusive reliance on past paradigms can get you into trouble, especially if you don’t notice that linkages and relationships are subtly different than in previous episodes.
Relative strength, because of its insistence on what is, is often a very fruitful way of looking at a situation with fresh eyes. We know that debt-driven financial crises have occurred before and will again. What we don’t know is how, in subtle ways, they will play out slightly differently than in the past. Relative strength can keep us focused on the here and now-this is what the market thinks right now-which can keep us from adopting backward-looking analytical models that may fail going forward.
