I was just discussing the recent revelation by the Federal Reserve’s Don Kohn that the Fed has secretly been aiding the banking sector via AIG (here, here and here), when it was pointed out to me that a number of smart investors have been following the “follow the bailout money” meme. Witness Warren Buffett.
He has invested in Goldman Sachs (GS) and General Electric (GE) via preferred shares and has significant stakes in Wells Fargo (WFC) and US Bancorp (USB). How is he doing? Not so well. Those investrments are getting crushed as this downturn continues to punish the financial services industry.
That is when I remembered a video of PIMCO’s head Mohammed El-Erian from January in which he made a remark that I would characterize as brazenly cynical: “Stay under the [government's bailout] umbrella.” It is fairly clear that Buffett and El Erian are following a strategy of investing in companies that are going to benefit from government largesse. It remains to be see whether this strategy will actually be effective. My friend Scott tells me that there is an investable index of stocks that have received bailout money and it is down 58%, far under-performing the S&P 500.
In any event, below is that video of El-Erian on CNBC from five days before Obama took office. It’s well worth a watch; El-Erian is a smart man. You should note he uses the ‘D’ word – depression and utters that phrase “stay under the umbrella” at about 3:00.