Pimco’s El-Erian: U.S. Could Become Japan

February 14, 2014, 8:30 A.M. ET

Pimco’s El-Erian: U.S. Could Become Japan

By Jack Otter

Mohamed El-Erian, the outgoing CEO and co-CIO at Pimco, said at a conference Thursday that the U.S. was in danger of “becoming Japan” if Congress cannot get over its dysfunction and take action to spur growth. El-Erian, speaking with CBS business analyst Jill Schlesinger at a LinkedIn conference in Manhattan, warned that the U.S. economy cannot be supported forever by the Federal Reserve alone.

At the outset of the discussion, El-Erian said with a laugh that he had written a “boring speech,” but that Schlesinger wouldn’t let him deliver it, so he posted it on LinkedIn and answered her questions instead. Her first question of course, was what he planned to do after leaving next Pimco next month, and he didn’t offer many details. He said he was “very interested in the intersection between Main Street, Wall Street, and policy.”

So maybe he’ll join a think tank and grow his hair long like his former colleague Paul McCulley.

El-Erian covered a lot of ground, from his affection for Janet Yellen to an explanation of why Fed policy has an outsize effect on emerging market economies. On Yellen: “She really cares about unemployment, she really cares about inequality.” On emerging markets: “Why do so many lottery winners end up bankrupt?” he asked. Emerging market economies were not equipped to handle the massive influx of dollars that flooded in when the Fed was easing, or the resilience to withstand the sudden outflow when investors feared an end to easy money.

But mostly the discussion kept coming back to the U.S. economy. Looking back on the financial crisis, which he said was largely created by a love affair with debt, he emphasized the severity of the downturn with a Monte Python reference – it was “not a flesh wound,” he said. Realizing that massive deleveraging would be needed to improve corporate and personal balance sheets, he said, and that the reduced spending would slow economic growth for years, “we came up with this silly term, the ‘new normal’.”

He identified four ways for the nation to escape debt: First, and by far best, is to grow out. Second, default, which he said would come at huge cost. Third, austerity, which he said was not working out too well in Europe. (Though he did predict growth would improve to 1% on the Continent this year.) And fourth, the current course: artificial stimulus from the central bank.

While he credited the Fed’s first round of quantitative easing with saving the economy, he said QE 2 and its subsequent iterations were very different, and that the “costs and risks are starting to get close to the benefits.”

“The Fed has the willingness to help, but it doesn’t have the tools,” he said. “But with a polarized Congress it’s impossible to solve the problems.” How to stimulate growth, “that is how the debate over debt should begin and end.” Though he avoided specifics, he did suggest Congress would need to spend more, not less, presumably in the short term.

And without any acknowledgement that the term has become politically charged, El-Erian declared that inequality was holding back the economy as well. “It is not just inequality of income, or inequality of wealth, but inequality of opportunity,” he said, pointing out that the unemployment rate for college graduates is 3% while it’s above 10% for those without a degree.

While he declined to predict where the market was headed, he is confident the road will be rocky. “So if you are an investor you’d better get ready for volatility,” he said.  “You’re going to get more of it… Come up with a plan for the worst-case scenario. Volatility plus human nature means you are going to do the wrong thing at the wrong time.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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