There was a great interview with Mohamed El-Erian this morning on CNBC. El-Erian always presents a well though-out, articulate, and accessible perspective on various financial issues. This morning's interview was no different as he discussed the recent market rally and whether the economy is beginning to recover. As for the recent moves in the stock market, El-Erian believes that the run-up in prices, especially the July portion of the equity market rally, is part of a "sugar high," implying a correction is in order. As for the economy, El-Erian believes the current optimism is based on some false assumptions, including:
- Corporate profitability can be maintained with additional cost-cutting. Not true. You need revenue growth.
- The stimulus spending will have a permanent effect. Not true. Just look what happen in China on Wednesday when they decided to cut-back stimulus spending.
- The stabilization of housing is sufficient to get the economy growing again. Not true. A housing recover is necessary, but is not sufficient by itself.