Monday, October 11, 2010

Mohamed El-Erian:Assumptions And Actuality

Mohamed El-Erian,CEO of Pimco,has had many subtle thoughts regarding the present situation.For instance,he feels that the market has priced in an assumption that Quantitative Easing 2,or the Federal Reserve's adding assets to its balance sheet,will impact the real economy.In fact,every policy action carries a number of risks,such as:1.debasing the dollar;2.raising commodity prices;3.continuing the trend of outcomes falling short of expectations.There are not just benefits for investors to consider;but also costs and risks of Quantitative Easing 2.
The stimulus achieved a lot,but did not reach the unemployment target.People's expectations of stimulus were disappointed.The expectations were for a quick exit from government involvement.Now we have the prospect of more government involvement in the form of Quantitative Easing 2.Consistently,the policy expectations have not been matched.
We need fundamental structural reform to get this economy going again,to deal with supply and demand.You've got to get the housing market functioning again.It's a long list.
Our job is to navigate what's likely to be.There is no perfect solution in a world of second,third and fourth best.The political world is unwilling to decide what we're willing to give up.
The rocket has to go up sharply to reach escape velocity.There's a lot at stake,but you have to recognize the private sector is hoarding cash and continues de-risking.We went through a great age of leverage;now we're adjusting.The government has stepped in,but the private sector still wants to delever.It's the fundamental issue.It's all about balance sheets,Mr.El-Erian believes.
Pimco has more than a trillion dollars under management.The firm is best known for its bond funds,but has recently been developing its equity side.Mr.El-Erian shares the Chief Investment Officer role with Bill Gross,"the bond king."

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