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Two-Bits, Four-Bits, Six-Bits, a Dollar
by Bill Gross of PIMCO,
A successful handoff from public to private credit creation has yet to be accomplished, and it is that handoff that ultimately will determine the outlook for real growth and stability. Because quantitative easing has affected all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences. Who will buy Treasuries when the Fed doesn?t? The question really is at what yield, and what are the price repercussions if the adjustments are significant.
Differentiated Change in the Middle East and North Africa
by Mohamed A. El-Erian of PIMCO,
For two months, developments in the Middle East and North Africa (MENA) have taken most by surprise. What started as an protest in Tunisia has developed into a regional phenomenon that has toppled regimes and is threatening others. Indeed, every day seems to bring an historical event that is changing the region and impacting the global economy. Governments across the globe have spent weeks playing catch up in the midst of unthinkable developments in MENA. They have organized emergency evacuations of citizens and constantly responded to realities on the ground, including the violence in Libya.
The Global Economic Impact of this Weekend's Developments
by Mohamed A. El-Erian of PIMCO,
In the short run, regional developments will be stagflationary for the global economy. In the next few days, markets will react to the changed outlook for the region and the global economy. Over time, market apprehension is likely to give way as the impact of greater long-term stability in a key part of the world is felt.
Viewing Chairman Bernanke?s Remarks Through the Lens of Emerging Economies
by Mohamed A. El-Erian of PIMCO,
Bernanke's comments will raise eyebrows among policymakers in emerging economies. His remarks highlight persistent differences in analysis that complicate policy discussions. International cooperation will not materialize unless advanced and emerging economies converge on a common analysis of the key issues. My hope is that the G-20 meeting will take an important step in this regard, and do so by recognizing that there is more than one perspective to today?s global challenges. I fear, however, that this may not materialize as yet.
Muni Market Bargains? A Closer Look at Municipal Debt, Deficits and Pensions
Although real, pension problems will not lead to an immediate debt crisis this year or the next five years. A default by Detroit, for example, would not precipitate bankruptcy filings by large cities across the nation. The municipal market will continue to migrate from being a low-risk asset class to a credit asset class.
Spain Is Not Greece and Need Not Be Ireland
by Mohamed A. El-Erian of PIMCO,
Spain?s success is of acute relevance to the rest of the eurozone. Unlike Greece, Spain does not have a direct public finance crisis. Spain is where Ireland was a couple of years ago, but is clearly keen to avoid Ireland?s experience. To avoid a bad outcome in Spain (and the rest of the eurozone), additional, significant and highly visible progress needs to be made within the next few weeks.
Devil?s Bargain
by Bill Gross of PIMCO,
Money has become the economic and political wedge for profound changes in American society. Perhaps the most deceptive policy tool to lessen debt loads is the ?negative? or exceedingly low real interest rate that central banks impose on savers and debt holders. Old-fashioned gilts and Treasury bonds may need to be ?exorcised? from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.
Nice Speech, But Now Obama Must Act
by Mohamed A. El-Erian of PIMCO,
The president left no doubt that tackling unemployment was a priority. Success on this would also facilitate the medium-term budget reform that he is targeting. Mr. Obama must make clear jobs creation can no longer depend simply on stimulus, federal government hiring, and the hope that previous drivers (such as construction) will return.
Europe Is Running Fast to Stand Still
by Mohamed A. El-Erian of PIMCO,
The sequencing of Europe?s debt crisis is depressingly similar ? the plot stays the same, with a slightly different cast depending on the country in the spotlight. Yet, judging by the run-up to the meeting of European Union finance ministers in Brussels on Monday, European officials seem intent on repeating it over and over again.
Off With Our Heads!
by Bill Gross of PIMCO,
American politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion-dollar annual deficit. Meanwhile, policy stimulus is focused on maintaining current consumption as opposed to making the United States more competitive in the global marketplace. Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets.
Germany in a Lose-Lose Situation
by Mohamed A. El-Erian of PIMCO,
The problem is that Germany's current approach ? centered on dealing with liquidity problems now and solvency centered later ? is not working.
A liquidity approach that delays the day of reckoning may be good regional politics, but it's bad economics. It does not restore sustainable growth to the periphery, and it exposes the core to contamination. Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery?s debt overhang and competitiveness problems.
Allentown
by Bill Gross of PIMCO,
The global economy is suffering from a lack of aggregate demand. In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive. Unless developed economies learn to compete the old-fashioned way ? by making more goods and making them better ? the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.
Ireland Rescue Is Not a Game Changer
by Mohamed A. El-Erian of PIMCO,
Ireland's new liquidity package does little to deal with its debt overhang, or to reduce the embedded cost of its debt. Instead it aims to introduce stability into market conditions. It took time for Europe to recognize the severity of the peripheral debt crisis. Now it is also recognizing that liquidity support (while necessary) may not be enough.
Irish Crisis Demands New EU Response
by Mohamed A. El-Erian of PIMCO,
Advanced economies are not wired to operate at elevated levels of sovereign risk. The longer these spreads persist, the greater the decline in investment activity and employment. If things are left as they are the risk of further social unrest will rise, while tax revenues will collapse at a time when budgets are already under enormous strain. The policy responses of eurozone governments were supposed to buy a few years of calm, but ended up by delivering only a few months. A more effective and credible approach is now needed.
A Kind Word For Ben
by Paul McCulley of PIMCO,
The Fed makes policy consistent with its legislative mandate handed down by the democratically elected government of the United States. Price stability (mandate-consistent inflation) that promotes bubbles in asset prices and debt creation is a prescription for a debt-deflation bust and a subsequent liquidity trap. Acting irresponsibly relative to conventional wisdom is precisely the right approach for reversing an economy facing, or worst yet, mired in a liquidity trap.
We've Voted. What's Next For the Economy?
by Mohamed A. El-Erian of PIMCO,
With the two chambers of Congress split between Democrats and Republicans, the conventional wisdom likely to be repeated over the next few weeks is that political gridlock is good for the economy. While often true, that is not the case today. Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities.
Run Turkey, Run
by Bill Gross of PIMCO,
The Fed's announcement of a renewed commitment to quantitative easing has been well-telegraphed, and the market's reaction is likely to be subdued. We are in a 'liquidity trap,' where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there. The Fed's announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
The Fed Feels Compelled to Experiment
by Mohamed A. El-Erian of PIMCO,
Judging from the minutes of the September 21 Federal Open Market Committee meeting, it is virtually a foregone conclusion now that the Federal Reserve will announce on November 3 that it is re-engaging in 'unconventional policies.' As a body, the FOMC recognizes that the benefits of quantitative easing come with potential costs and risks, including unintended consequences. Despite this tricky and uncertain balance, it feels compelled to act.
Stalled Post-crisis Reforms Must Be Restarted
by Mohamed A. El-Erian of PIMCO,
In the early part of this crisis, swift coordinated global policy action saw a painful economic collapse replaced by employment gains and greater financial stability. However, the marked failure to continue coordinated action reflects two critical weaknesses that now must be taken seriously: an insufficient appreciation of the mix of post-crisis forces; and a growing void at the center of the international system. For the IMF this means acting on long-standing governance and representation problems ? and doing so by going well beyond what is being currently contemplated.
Cyclical Outlook
by Paul McCulley of PIMCO,
The influence of emerging economies is on the rise, while developed countries are retrenching. Monetary policy in the developed countries will remain extraordinarily accommodative for an extended period, with policy rates pinned close to zero and use of quantitative easing. PIMCO will therefore position its duration and curve strategies accordingly: overweight investments in the developed world, concentrated in the 'belly' of yield curves. In contrast, an increasing share of its positioning in the 'spread sectors' will be allocated to the emerging markets, including their currencies.
Beyond Brinkmanship: A Better Economic Path for the U.S. and China
by Mohamed A. El-Erian of PIMCO,
It is in virtually no country's interest - including that of the United States - for China's economic development to derail. China is the world's strongest growth engine, its largest creditor and its biggest trade partner. Rather lecturing China on its exchange rate, the United States should be doing more to push its European allies to allow a larger Chinese voice in multilateral forums. Beijing, in turn, should think carefully about how it can help the United States and the global economy to bridge the hole of balance-sheet repair.
Stan Druckenmiller is Leaving
by Bill Gross of PIMCO,
The economic drivers that once pumped up asset prices and favored the production of paper over commodities are now retrograde. The reality during Stan Druckenmiller's 'old normal' was that prosperity and overconsumption were driven by asset inflation that in turn was correlated with leverage and interest rates. Investors are now faced with bonds yielding 2.5 percent and stocks staring straight into new normal real growth rates of 2 percent or less. There is no 8 percent there for pension funds. There are no stocks for the long run at 12 percent returns.
An Interesting Week Ahead
by Mohamed A. El-Erian of PIMCO,
The failure to reduce risk spreads in peripheral European countries means that the public sector bailout is not working. The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level. This week will shed light on whether policymakers can do anything to deal with these two issues.
Judging Obama, Geithner and Goolsbee
by Mohamed A. El-Erian of PIMCO,
The Obama Administration's announcement Wednesday of its new economic policy initiative will be closely watched by markets and will likely impact equity and bond valuations around the world. A disappointing performance today would be met with even greater market skepticism, higher 'self-insurance' by households and companies and further disappointment among America's friends and allies.
Why Another Fiscal Stimulus Won't Do
by Mohamed A. El-Erian of PIMCO,
The main debate in Washington today is whether or not to do more of the same: another fiscal stimulus and another round of quantitative easing by the Federal Reserve. This conflicts with evidence that a broader and more holistic response is needed. Policymakers must address key structural issues, including the drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.
Mr. Gross Goes to Washington
by Bill Gross of PIMCO,
Americans now know that housing prices don't always go up, and that they can in fact go down by 30-50 percent in a few short years. Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
When Unconventional Become Conventional
by Paul McCulley of PIMCO,
Conventional monetary policy is undergirded by the doctrine of central bank independence, founded on the proposition that fiscal authorities, hostage to the political process, inherently are prone to an inflationary bias. When the economy suffers from private sector deleveraging and a fat-tail risk of deflation, however, conventional monetary policy is not enough. In such circumstances, the central bank has a profound duty to act unconventionally, ballooning its balance sheet by monetizing assets, either government or private, or both.
Deciphering Today's Violent Market Moves
by Mohamed A. El-Erian of PIMCO,
Tuesday's Federal Open Market Committee statement confirmed what the high frequency partial data have been signaling for a few weeks now: that the U.S. economic recovery has lost momentum. Expectations have evolved in an interesting manner - from the more familiar bell curve (a dominant mean and thin tails) to a much flatter distribution with fatter tails. In such a universe of expectations, short-term news can have a disproportionate impact on market valuations. When you are potentially on the road to deflation, a small change in probability will have an amplified impact on markets.
El-Erian on Why the Payrolls Report Matters
by Mohamed A. El-Erian of PIMCO,
The employment picture constitutes yet another headwind - and a significant one - to the already-faltering U.S. recovery. More Americans are struggling to earn enough to maintain their standard of living. The time has come for Washington to realize that the existing policy mix is not appropriate for the task at hand.
Uncertainty Changing Investment Landscape
The unusual uncertainty in the economic outlook reflects the disruptive combination of deleveraging, reregulation, structural unemployment and other ongoing structural changes. It seems that, wherever we look, the snapshot for 'consensus expectations' has shifted from traditional bell-shaped curves to a much flatter distribution of outcomes. This changing shape of distributions affects conventional wisdom in the investment world.
Private Eye
by Bill Gross of PIMCO,
The economy's New Normal of deleveraging, reregulation and deglobalization will neither be aided nor abetted by a slower-growing population, or by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. It would be far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly health care services.
Facts on the Ground
by Paul McCulley of PIMCO,
What the developed world faces is a cyclical deficiency of aggregate demand, the product of a liquidity trap and the paradox of thrift, in the context of headwinds borne of ongoing structural realignments. Front-loaded fiscal austerity would only add to that deflationary cocktail. And that's what the market vigilantes are wrapped around the axle about: They are not fleeing the sovereign debt of fiat currency countries but rather fleeing risk assets, which depend on growth for valuation support.
Stress Test Is No Shortcut to Stability
by Mohamed A. El-Erian of PIMCO,
Will the testing of 91 European banks by regulators stabilize the region's finances? After all, a similar approach in the U.S. last year may have helped normalize financial markets there. The U.S. stress test, however, applied to institutions that were the main cause of the financial instabilities, and the government had budgetary room to support the sector. Europe's concern about banks is a derived concern, reflecting worries about sovereign debt in some countries and the overall economic situation; and there are greater limits today on budgetary resources.
The Real Tragedy of Persistent Unemployment
by Mohamed A. El-Erian of PIMCO,
The US faces a low growth/high unemployment trap, which would have four consequences: erosion of skills in the labor force, pressure on social safety nets, dampened spending by those who are employed, and less risk-taking by companies. El-Erian suggests several policy initiatives to combat unemployment.
Alphabet Soup
by Bill Gross of PIMCO,
The lack of global aggregate demand ? resulting from too much debt in parts of the global economy and not enough in others ? is the essence of the problem. The solution, according to William Gross, may be to add the letter 'R' to your name (as in Roubini, Reinhart, Rogoff, and Rosenberg) or, better yet, to embrace the words 'New Normal.'
Mohammed El-Erian on a Disappointing G-20 Compromise
by Mohamed A. El-Erian of PIMCO,
Mohammed El-Erian digests the 'unusually long communiqu from the G-20 Summit in Toronto.' El-Erian expresses his concerns about the future of a post?global financial crisis world that is in desperate need of better cross-border policy coordination and harmonization.
Beyond the Growth Vs. Austerity Debate
by Mohamed A. El-Erian of PIMCO,
This weekend?s G-20 meeting will likely fuel, not resolve, the heated debate triggered by a combination of exploding debt and deficits in industrial countries, and the recognition that many now face a future of muted growth and high unemployment. In one corner stand the 'growth now' camp, arguing that expansion is a prerequisite to service their debt sustainably. Against them stand the 'austerity now' camp, who want budget cuts to lower risk premiums and stave off disruptive debt restructurings. The two sides are both right, and wrong.
Sovereign Wealth Funds in the New Normal
by Mohamed A. El-Erian of PIMCO,
Sovereign wealth funds are generally well-equipped to navigate financial markets after the crisis of 2008 and amid current fiscal strains in Europe. Yet they too face potential challenges, as the global economic recovery is unlikely to follow a straight and simple path. How these funds confront these challenges will speak directly to their effectiveness in investing national wealth to benefit current and future generations, as well as their contributions to stabilizing a fluid global economy.
Some Unpleasant Keynesian-Minsky Logic
by Paul McCulley of PIMCO,
Thirty years ago, virulent inflation demanded robust monetary authority independence, so as to pursue a draconian monetary policy that even disciplined fiscal authorities when their loose policies contradicted the overriding goal of winning the war against inflation. For the past decade, however, a more collaborative relationship between monetary and fiscal authorities has been required in order to cut off the fat tail of deflation risk, notably in recessions. The European Central Bank needs to realize this, even if future policies threaten to unmoor long-term inflation expectations.
Can Emerging Markets Save the World Economy?
High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. But that growth has significant longer-term implications. If the current pattern is sustained, the global economy will be permanently transformed. Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50 percent mark when measured in market prices.
On the Need to Listen Carefully to What the G-20 is Saying
by Mohamed A. El-Erian of PIMCO,
The recent G-20 communique is a further confirmation that structural and balance sheet realities are imposing themselves on the global economy. Compared to what the world has known for the last 40 years, this results in a highly unusual configuration of growth, debt and deficits. It also raises legitimate questions about the prospects for self-sustaining private sector recoveries in industrial countries. Finally, it loudly illustrates the limitations of cyclical policy responses and international coordination, as well as associated problems with unintended consequences and collateral damage.
Two Will Get You Three (or) Three Will Get You Two
by Bill Gross of PIMCO,
Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that will likely face muted growth rates and a continued bumpy journey toward their destinations. Investors must respect this rather tortuous journey in the months and years ahead for what it is: a deleveraging process based upon too much debt and too little growth to service it.
Return of the Nervous Weekend
by Mohamed A. El-Erian of PIMCO,
Having over-romanticized the cyclical bounce, some investors are now scrambling to reposition their overextended portfolios now that structural problems are undeniable. The disruption in financial markets is not a garden-variety market fluctuation. Instead, it?s an overdue recognition that the global economy faces an uncertain future that involves slower growth and greater government regulation. Structural problems require structural solutions. The question is whether policymakers in Europe will acknowledge this, or remain hostage to hope for an immaculate recovery.
Difficult Choices Still Facing Europe
by Mohamed A. El-Erian of PIMCO,
The beneficial impact of last weekend?s $1 trillion 'shock and awe' intervention by Europe to save Greece and safeguard the euro is fading - even more quickly than officials had feared. This is the result of two main factors. First, having analyzed the news out of Europe in depth, markets recognize that the liquidity-based approach cannot sustainably address what is at heart a solvency problem. Second, markets are concerned that short-term stability is being pursued at the cost of long-term viability.
Driving Without a Spare
by Mohamed A. El-Erian of PIMCO,
Mohamed El-Erian recounts the results of last week's PIMCO Secular Forum on the three- to five-year outlook for the global economy and the markets. Participants concluded that we are heading toward a world that is re-regulated, de-levered, and growing less rapidly in the industrial countries. It will be a world in which concerns about the dark side of globalization temper enthusiasm for its net benefits, and in which politics matter a lot for markets and the economy. The drama playing out in Europe these days is a vivid illustration of this general secular characterization.
After the Crisis: Planning a New Financial Structure - Learning from the Bank of Dad
by Paul McCulley of PIMCO,
This commentary contains remarks by PIMCO's Paul McCulley at last month's Hyman Minsky Conference on the State of the U.S. and World Economies. McCulley says that the Federal Reserve, the FDIC and the Treasury all provide public goods to banking by guaranteeing that demand for liquidity will not exceed bank assets. It's quite natural that levered-up non-bank financial intermediaries don't want to be treated like banks. If they are going to have access to the public goods associated with banking, however, then they must follow the same rules that banks do.
Understanding the Greek Aftershocks
by Mohamed A. El-Erian of PIMCO,
The Greek crisis has already morphed into a regional shock. It now stands on the verge of morphing into a more global phenomenon. Some countries will benefit, mainly on account of capital flows coming out of the euro area. The majority will not. And even those that do benefit should remain vigilant and responsive. Like most other countries in the world, they will also end up suffering from the consequences of lower international demand and renewed disruptions to the global banking system.
Lovin' Spoonful
by Bill Gross of PIMCO,
If a chef were to concoct a gourmet investment recipe, he would likely blend a teaspoon of intelligence with a tablespoon of common sense. The rating agencies in recent years have displayed little of either. In addition, they have brazenly sold their reputations for unbiased judgment to the very companies they purported to judge. Those looking to profit at their expense will dismiss them. They no longer serve a valid purpose for investment companies that are free of regulatory mandates, and that can think with a teaspoon of intelligence and a tablespoon of common sense.
Many More Chapters Left in the Greece Drama
by Mohamed A. El-Erian of PIMCO,
Sunday's loan announcements from the European Union and the International Monetary Fund will not mark the end of the Greek debt crisis, nor will they constitute a much-needed turning point that can be sustained for many months. Instead, they will part of the multi-stage process that still has a few rounds left. If design and implementation issues emerge, future rounds may involve a reopening of negotiations and a recasting of the approach in some areas.
Greek Crisis Endangers Private Sector
by Mohamed A. El-Erian of PIMCO,
The Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and what started out as a Greek issue has become a full-blown crisis for Europe. Absent some remarkable change in the next few days, things will get even more complex for the public sector. It may have no choice but to combine its own exceptional financing efforts with talks on a controversial approach that will be familiar to emerging market observers - private sector involvement.
Results 1,501–1,550
of 1,561 found.