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Oppenheimer Holdings Inc. Message Board

  • superbmindset superbmindset Dec 8, 2010 8:36 PM Flag

    A new Normal or a new Anomaly?

    In the new normal, investors will be faced with anemic returns and they’ll seek alternatives, says El-Erian of PIMCO. Although I’ve disagreed with past statements like “we’re on a sugar high,” I do find his new normal theory relevant once again. I think Mohamed could have also coined it a “new anomaly” rather than a “new normal.” I say this because in his book “When Markets Collide” he outlines his observations of various anomalies, such as how long-term bond yields rose even as the Fed raised interest rates in 2005. He also highlights the importance of picking up information signals from apparent noise, in order that one may make sense of these anomalies.

    But I guess the “new normal” is more relevant to the destination i.e. the way that the world has evolved differs from the past. El Erian’s predictions below are now the “new normal”:

    (1) For those seeking to understand global economic and financial developments, it is no longer sufficient to get the US, Europe and Japan right. It is also a matter of getting the emerging market economies right.

    (2) New pools of capital, in particular sovereign wealth funds, have become increasingly important and people need to understand what and why these new investors are likely to buy.

    (3) Fundamentals are no longer sufficient for projecting forward. Financial innovation via derivatives means it is also necessary to understand how the technical dimensions of markets are evolving i.e. financial infrastructure, the interactions between derivatives and underlying assets.

    Although this book is dry and not as easy to read as my previous recommendations, what’s interesting here is that the book was published in May 2008! You can now also go ahead and read the Third Major Axiom from the book the Zurich Axioms! :)

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    • A little more clarity on my “New Anomaly” theory: Back in November, I highlighted my correct predictions during the past few years….following that, I laid out the framework for what will potentially play out in the coming months.

      My prediction, what I coined as a “New Anomaly”, highlighted the findings of the author of the book “When Markets Collide.” (the author is of Egyptian origin)

      I highlighted how to understand global economic and financial developments, it is no longer sufficient to get the US, Europe and Japan right. It is also a matter of getting the emerging market economies right. And went on to stress the need to look at SWFs and the interactions between derivatives and underlying assets.

      Well, for those who don’t know, the majority, if not all SWFs’ origin, are oil investments!

      The “New Anomaly” theory here is that even though Global Economies will collapse, this might be a case similar to the anomalies witnessed in 2005 with bond yields. In other words, we might go through a crisis in the economies but not necessarily correspond to the same time interval when stock markets will face headwinds….

      We are already experiencing this phenomenon…When most economists were predicting a robust US economy with GPD growth for 4th quarter ranging from 3.5% to over 5%, I was certain it would be lower than 3%. Well, the number came in at 2.8%, combined with dismal housing data, and the markets are still moving along nicely.

      This is why I believe we need a superb mindset right now, and diversification is the most prudent tactical strategy, for now.

    • Wow, El-Erian revised his outlook for U.S. growth in 2011 taking into account the announcement on additional fiscal stimulus measures and the extension of the tax-cuts.

      Although Mohamed knows, as he has stated, that the US has used its spare tire to fix the economy, however the reality of today collides with the reality of years ago, where cars had spare tire wells to fit the full size spare. A strategic mindset today, would allow him to see that we’re stuck with a donut spare!

      To me, it’s more of a new cyclical reality rather than a secular one, simply because a donut spare tire is not made for extended service. Most of these donuts offer a maximum life of 70 miles!

      And if you think about the signals within the noise: donuts have no tread to speak of; the body of the donut is not reinforced and there is no tread belt to protect it from projectiles and road anomalies. Navigating with a donut is difficult and it is designed simply to get you to a destination: the repair facility!

 
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