PIMCO’s Mohamed El-Erian says the U.S. economy is improving, but still has big issues to deal with. “We continue to heal … but we’re not at escape velocity,” El-Erian tells CNBC. He says that while improvement can be seen in areas like housing, the U.S. hasn’t gotten over “the three big issues”: not enough aggregate demand, too few structural reforms, and too much leverage (which has been shifted from the private sector to the public sector). El-Erian says he thinks Treasury yields may actually fall in the next few months, but he thinks that the long-term environment is one of rising rates. He also says the Federal Reserve’s economic growth projections are too high.
PIMCO’s Mohamed El-Erian says what’s happening in Japan is key to what will happen with the bond market in the U.S. El-Erian tells CNBC that the latest stage of the stock market rally seems to have been driven by Japan’s big stimulus efforts, and by the notion in general that central banks around the globe are “all in” in terms of bolstering markets. El-Erian says he thinks that over the next few months we’ll find that Japan central bank policies are becoming “increasingly ineffective”, however. He says markets have priced in the idea that central bank growth will give way to genuine growth — which means the big issue is whether or not that transition actually occurs before the effectiveness of central bank policies runs out. If the transition doesn’t go smoothly in Japan and other areas, El-Erian says we could be in for a “hell of a lot more volatility”.
PIMCO’s Mohamed El-Erian says that all assets are trading at “very artificial” levels due to central bank policies. El-Erian tells Yahoo! Finance’s Daily Ticker that central banks’ flooding of the markets with liquidity is the reason why stocks are up significantly this year while Treasury rates have actually fallen. He says that the U.S. economy is healing slowly, and that companies are helping markets by giving cash back to shareholders. But he says the markets are front-running central banks’ liquidity deluge, and that the most recent rise in U.S. markets is a front-running of the Bank of Japan’s loosening policies. All of this is okay if genuine growth at some point begins to drive things, El-Erian says — but if it doesn’t we could be in for big declines in asset prices as the liquidity flood stops. He says investors need to monitor things closely, and also should look at areas of the markets that aren’t driven by loose central bank policies, including some emerging markets and areas of U.S. markets that liquidity doesn’t reach.
PIMCO’s Mohamed El-Erian says central banks are continuing down a path that has an incredibly bifurcated set of outcomes. “Rather than step back and ask why (the measures have not succeeded), they just go deeper and deeper,” El-Erian tells CNBC of the loose money policies central banks around the globe are using. “The question is, will they finally succeed in transitioning from assisted growth to real growth, or will it end in tears? I think that’s a major uncertainty and the market doesn’t quite understand just how binary this outcome is.” El-Erian says that the U.S. unemployment problems are structural, not cyclical, but that Federal Reserve Chairman Ben Bernanke continues to address the problem with cyclical measures because “he feels he has no choice. … He feels he has to buy time for other agencies that can address the structural issues. … The question is, how much time is he going to buy, and how much collateral damage is he going to create in the process?”
PIMCO’s Mohamed El-Erian says it’s time to gradually take money off the table because asset prices have gotten ahead of fundamentals. “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,” El-Erian tells Yahoo! Finance’s Daily Ticker. But he also says that this isn’t a “Lehman moment.” But he thinks “prices that have gotten way ahead of what policy can deliver.” El-Erian also talks about how the easing policies of central banks around the globe may be leading to currency wars between countries.
When the financial crisis of 2008-09 hit, bond giant PIMCO was quick to say that the U.S. had entered a “New Normal” of slow growth, high unemployment, and debt woes. Now, PIMCO’s Mohamed El-Erian says that we may be nearing the end of the “New Normal”.
“We said in 2009: three to five years,” El-Erian tells CNBC, referring to how long he thought the New Normal would last. “Sectors have healed. The ‘new normal’ [has] allowed time for the corporate sector to heal, for the housing sector to heal, and that’s positive. That’s how you come out of the New Normal.”
But what comes after the New Normal isn’t clear. El-Erian says it’s a two-tail scenario: “Everybody wants the positive tail, which is we tip into higher growth, lower unemployment, and we deal with our debt issues through economic growth.” But he added, “We have to be careful because the other tail, which is Europe doesn’t get its act together, the Middle East gets more complicated.”
El-Erian says that while the New Normal has allowed time for certain areas of the economy to heal, other factors — perhaps most notably political risk at home and abroad — have grown more troublesome. He points to potential currency wars as one of those issues. “As investors, it’s not just about top-line revenue growth. It’s not just about the economy. It’s also about political risk and policy risk.,” he says.
PIMCO’s Mohamed El-Erian says that if the U.S. avoids the “fiscal cliff”, he and PIMCO don’t think the U.S. will enter recession in 2013. El-Erian tells Bloomberg that he thinks we’ll continue to see sluggish growth in the 1.5% to 2% range as the economy continues to heal. “The big question for us is how effective will policy support be,” El-Erian says, explaining that he thinks Federal Reserve policy support has become less effective as time has passed.