Money managers think the credit bust is going to be more pernicious than previously thought, and the recovery slower and more subdued.
If correct, this view could vindicate some institutional investors - early fears of "negative feedback loops." In these scenarios, the deleveraging of the housing market and resulting problems with mortgage loans would first wreak havoc with financial institutions, but then spill over into the consumer sector and other areas of the economy. With unemployment rates rising to 5.7% in July and a number of gloomy second-quarter earnings announcements by financial, airline and retail companies, some of these fears appear to be coming to pass.
“The compression of the three different balance sheets” — those of the housing market, financial institutions and consumers — “makes the recovery inevitably bumpy and unpredictable,” said Mohamed El-Erian, co-CEO and co-CIO of Pacific Investment Management Co. LLC, Newport Beach, Calif. The firm had $829.5 billion in assets under management worldwide as of June 30.
Even worse, the demand for U.S. products from the rest of the world, which has been a tailwind for the U.S. economy, is likely to turn into a fourth headwind as the global economy slows, Mr. El-Erian said in an interview.
Peter R. Fisher, managing director and co-head of the fixed-income portfolio management group at BlackRock Inc., New York, echoed: “It's hard for the global trade to add extra strength to the U.S. economy.” He predicted the global economic growth will continue to slip in the next six to nine months to zero or negative. As of June 30, BlackRock's assets under management worldwide totaled $1.43 trillion.
A new report from Merrill Lynch & Co., New York, warned that investors are still underestimating the magnitude of the global credit crisis.
“The credit crisis is broad, deep and global, and it is not likely to end soon,” Richard Bernstein, Merrill Lynch's chief investment strategist in New York, said in the report.
“Investors are significantly underestimating both the scope and the depth of the credit bubble and its subsequent deflation. The problems are certainly not limited to large U.S. institutions that are overexposed to U.S. subprime. The effects are global and far-reaching,” he added. He predicted that “the global financial sector is heading for a massive consolidation.”