"If you're going to panic, do it fast and beat the crowd." ~ Jesse Livermore

Tuesday, March 5, 2013

Time to Take Profits per PIMCO’s El-Erian

Equity Prices Are Artificially High — It’s Time to Take Profits: PIMCO’s El-Erian | Daily Ticker - Yahoo! Finance: " . . . El-Erian explains that central banks have been compelled to undertake unconventional measures, things they haven’t done before, because other policymakers are not stepping up to take responsibility on the fiscal side. But central bank activism can be risky. For example, the more liquidity a central bank injects into the financial system, the more likely that nation's currency will drop in value against other currencies. Imports become more expensive in that nation while exports become cheaper. Other nations may take up similar policies in response. Can this result in beggar-thy-neighbor policies and a "race to the bottom"? El-Erian says yes, but “it can also work.” Here’s how. El-Erian asserts that by putting a lot of liquidity into the system and pushing up asset prices, central banks can make us all feel better and this can trigger “wealth effects” – we feel richer and therefore spend more. It can also trigger “animal spirits” – we get all excited and invest more. The hitch, El-Erian says, is that in the process, central banks may “break” something. A currency war would fall into this camp. So it’s “high-risk, high-reward and no one can tell for sure which way it’s going to tip,” he says. El-Erian says the U.S. economy can go from supported growth to genuine growth, but Congress has to first become less dysfunctional. “The key issue is for politicians to exploit the window being bought for them by central banks,” he notes. In terms of equity markets, El-Erian says investors are split into two camps. One camp believes that everything will go higher and central banks will succeed in their efforts. The other camp believes asset prices are going to come down to meet the fundamentals. El-Erian puts himself in the second camp. “We think that prices are artificially high, that maintaining them here is going to be hard as central banks become less effective, and that it’s time to book some profits and to wait for some better entry points,” he explains. He clarifies that this is not a “Lehman moment." But “prices that have gotten way ahead of what policy can deliver," he declares. . . ."

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