Bin Laden's Death and U.S. Economy
Economics / US Economy May 03, 2011 - 04:31 AM GMTBy: Bloomberg
Mohamed El-Erian, CEO and co-CIO of Pimco, appeared on Bloomberg Television today with Willow Bay from the Milken Conference in Los Angeles, where he discussed the effect of Bin Laden's death on the markets as well as the U.S. economy and Federal Reserve policy.
El-Erian on Bin Laden's death and short-term security issues on the minds of investors:
"You have to balance a longer-term issue, which is that the threat has been eliminated and the overall risk has been reduced vs. the fact that certain parts of the world will not welcome this news. What the market is trying to do to navigate a longer-term issue with a short-term reality. The main question on my mind is a bigger issue. President Obama referred to it last night, which is will this be a moment for unity and for common purpose and that is critical right now."
On Bin Laden's death adding to geopolitical stability or contributing to uncertainty and moving people away from riskier asset classes:
"It is both. And I know you will not like that answer. On the medium term, there is no a certain terrorist has been taken out and that is good in risk assets. But also in the short term, not everyone in the world will welcome this. There are certain places that will want to react. In the short term, the market has to take that element into account. You see a medium-term trend with a qualifier short-term. The big issue is that this is a moment for the U.S. to seize. A moment for President Obama to bring unity and common purpose that we will need for the budget and other issues where right now there is no political middle. The discussion is so polarized it is difficult to see how we are going to get to where we need to get to."
On Pakistan and what Bin Laden's death means for the region:
"It makes that region as unpredictable as it has been. No one can predict what will happen in that part of the world right now. So many changes going on. Who would have thought that Egypt and Tunisia but go through revolution? Who would have thought that Libya and Yemen would be so close to being failed states. We don't know what we are going to see in Pakistan after this news. The key issue for an investor is not necessarily to be able to predict that, but to be able to react quickly. To have the framework to incorporate this high-frequency information because it is almost impossible to predict."
On his term "the global orchestra" and his suggestion that not all of the instruments are playing in sync:
"The first [discordant note in the global orchestra] is monetary policy. Certain parts of the world are tightening monetary policy--that is the emerging world. Other parts making very loose monetary policy. On the fiscal side, certain countries have been forced into adjustment, think of Greece. Others have chosen to adjust, think of the U.K. The third group is delaying the adjustment, think of the U.S. Then there are credit trends. It is a real differentiated outcome that investors have to navigate. The hope, and I say the hope because I don't think it's going to happen, is for some external body like the G-20 or even perhaps the IMF can be the conductor. But I do not think that will happen. More likely it will be a lot of noise and the global economy is going to be subjected to risk of a lack of coordination, it is what economists call an uncoordinated game."
On "sleepwalking through the American unemployment crisis":
"It is very serious. On the economic front, it is the most pressing…I think there is too much obsession with a number that is not very meaningful, so we all call it the unemployment number and we'll do it again on Friday--8.8%. But there is something deeper. The size of the labor force is shrinking. The structural components of unemployment are going up. 24% of 16-19 year old is unemployed and it is a staggering number. At that age, if you are unemployed for more, you become unemployable.”
"We have to recognize it for what it is--it is more than a cyclical problem--it is a structural problem. The economy created jobs in the last few years, but mainly in construction, housing, retail and leisure. We need to now create better, higher quality jobs, which means fundamental work on the education system and worker retraining and better social safety nets. That is where the debate should be. Instead, the debate is stuck elsewhere and meanwhile the structural component of the unemployment problem is getting worse. I do not even call it a problem anymore, I call it a crisis."
On Fed Chairman Bernanke labeling inflationary pressures as transitory:
"I wish we could eliminate that word from the dictionary. That word transitory results in complacency. We are calling the inflation problem transitory. Unemployment problems transitory. Which is another way of saying we can look through it. I do not think that that is the case. Today we are facing inflation issues and I think people are going to be surprised by the extent to which headline inflation is going to drag up core inflation are going to meet in the middle."
On the global consequences he is most concerned about:
"The dollar. It is inevitable that the dollar will weaken as the U.S. runs a loose monetary policy relative to the rest of the world. That has consequences. We can't simply ignore it and say it is other people's problems. It is also our issue. Therefore, in formulating monetary policy, we have to look first and foremost the national dimension, but we must not totally ignore the global dimension."
On the adjustment downward in growth rates to 1.8%:
"I am worried. Some of the impact is reversible. It had to do with weather. Some of the impact unfortunately not as quickie reversible--oil prices. But fundamentally, this economy still needs a lot of stimulus to keep growing."
"I do not think [that we will get more stimulus]. I think the political debate has evolved in Washington to make fiscal stimulus more difficult. I think that Bernanke acknowledged last week that the benefits of unconventional policies no longer dominate to the same extent to the costs and the risks.. I do not think that we can depend on stimulus. We need high-quality growth, not borrowed growth."
On Pimco not investing in Treasuries or buying U.S. debt:
"We are out of Treasuries because we find better value elsewhere. It is a value proposition. Any investor has to ask the question, if I own this in my portfolio, is it because it dominates other opportunities? When we look at treasuries at the current price and when we look at the outlook, we think that the current price is a better value elsewhere."
"There is certain debt in the U.S. that is more attractive, such as high-quality companies, multinationals, that have gotten their act together. We find other opportunities in the world. As we said, it is a global marketplace. There is no reason that you should limit yourself because of a label."
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