El-Erian: U.S. Improving, But “Not At Escape Velocity”

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.

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El-Erian On How Japan Impacts The Bond Market

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”.

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El-Erian: Markets Front-Running BOJ

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.

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El-Erian: Fed Using Cyclical Medicine To Treat Structural Problem

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?”

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El-Erian: Time To Scale Back Risk

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.

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El-Erian: End May Be Near For “New Normal”

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.

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El-Erian on Recession Odds

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.

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El-Erian On How To Handle The Fiscal Trouble

PIMCO’s Mohamed El-Erian says policymakers trying to address the country’s fiscal problems should focus on getting businesses and individuals to put the “ton” of cash now sitting on the sidelines to use, both via investment markets and capital spending. “If you make that your objective, you’re going to move not only just on fiscal reform but on labor market reform, on credit market reform, and on housing reform, and that’s what this country needs,” El-Erian tells CNBC. He also says that he thinks tax reform should involve both increases to rates and an expansion of the tax base.

El-Erian on Sandy’s Economic Impact

Just what impact will Hurricane Sandy end up having on the economy? PIMCO’s Mohamed El-Erian recently tackled that question in a piece for CNBC.com.

One of El-Erian’s key points was that the government likely won’t be able to play its usual role in the recovery, with more being required of the private sector. “In more normal times, we would look to federal, state and local governments to increase spending, particularly on reconstruction and rehabilitation of infrastructure,” he writes. “Indeed, government assistance to the uninsured and less well-off sectors — both personal and small business — has proven especially valuable in curtailing negative social and economic effects. But budgets are already under pressure. Meanwhile, the Federal Reserve has already floored policy rates, limiting its ability to assist unless it goes even more unconventional.” The result, he says, will be that the recovery will be less front-loaded and less comprehensive, and spread out over a longer period.

El-Erian also discusses how different sectors of the economy will be impacted. Some, like insurers and retailers, should take a hit. Others, like construction companies and infrastructure firms, should benefit.

With its hands somewhat tied at a terrible time because of budget constraints, will Congress finally be moved to get its act together and address the country’s fiscal problems? El-Erian isn’t optimistic. “If history is a guide, and notwithstanding the significant devastation created by Hurricane Sandy, there should be limited expectation that even this stark situation will prompt Congress to take concerted and meaningful action,” he writes, though he does think Americans will come together to address the crisis. “In the immediate term, American communities will rally their considerable resolve and resilience, and they will summon their culture of giving to help victims of the storm,” he says. “The challenge is also to facilitate the longer-term ability to harness fully resources of private and public sectors currently undermined by deep political divisions, thus removing what has been a constant dampener of entrepreneurship and value creation.”

 

El-Erian: ‘Central Bank Put’ Won’t Last Forever

PIMCO’s Mohamed El-Erian says global central bank policies have inflated asset values beyond what fundamentals merit, and says that won’t last forever.

“That central banks are essentially ‘all in’ is, in the short term, good news for all types of markets,” El-Erian writes in a piece for CNBC.com. “Yet … investors should not get too carried away. There is a limit to how far and how long prices can deviate from fundamentals. This is particularly the case when central banks, acting without the support of other government entities, do not have sufficiently-refined tools to secure good and sustainable economic outcomes.”

El-Erian says that “investors’ romance with the ‘central bank put’ should not be unconditional or everlasting. Moreover, it needs to be accompanied by significant portfolio differentiation, responsive management of overall risk exposures, and positioning that also reflects more durable global themes.”

In the end, El-Erian says, either fundamentals will improve, or asset prices will decline. “Which outcome we eventually see depends in large part on whether other government entities finally step up to their policy responsibilities,” he says.