Inflation will be sticky around 4-5%: Mohamed El-Erian - CNBC

Fed Chair Powell finally sent markets the right message, says Mohamed El-Erian

Approaching the Brexit Vote,Hopes For Action in Europe

I'm hoping for a Sputnik moment-the collective realisation that,if we don't do something now,something bad is going to happen,said Mohamed El-Erian,referring to the Soviet Union's launch of the Sputnik satellite in 1957 that triggered the Cold War space race with the United States.Mr.El-Erian,chief economic advisor at Allianz,was commenting following the latest UK poll,which showed Britons leaning against approving the Brexit,the prospective British leaving of the European Union that goes to referendum on Thursday.*
If Brexit were to occur,it would add institutional instability and accelerate the journey to the neck of the T-junction of the global markets and the economy.Imagine this chair with one-and-a-half legs.Monetary union is complete;banking union halfway.We need to complete the regional architecture in Europe,and we need a lot better global policy engine.*
Mr.El-Erian is a native of Egypt and formerly headed the Harvard Endowment.He was most recently co-CEO and co-CIO at PIMCO.*
Allianz SE (Milan:ALV)

What Investors Should Look For

It's getting very confusing,said Mohamed El-Erian,CEO and co-CIO of PIMCO.What you're having at the Fed fundamentally is,difficult decision-making in uncertainty and changing leadership.1.Not a really good feel for the economy 2.Trying to get the market focused on the journey,but the market is focused on the destination.Put on top of that the change in leadership.*
It's really important to act on what you know for sure.1.You know they can't hike rates;the economy just isn't strong enough.2.You don't know about tapering,and we're stuck in a low level growth equilibrium of 2%,and high unemployment with low inflation.We don't see the demand for the high liqiudity.The transmission mechanism is blocked.*
Look for the safest fixed income,the front end of the curve,up to five years.On the equity side,companies that will continue to take cash out and distribute through dividends and buybacks.*
Our assumption is,Congress will not create yet another self-manufactured crisis,Mr.El-Erian added.He is a long time associate of PIMCO founder Bill Gross,"the Bond King,"and formerly managed the Harvard endowment.

What Bernanke's Testimony Means

The stock market is at all-time highs,but markets tend to seize on what they want to hear and run with it.A case in point is Federal Reserve Chairman Ben Bernanke's testimony before Congress last week,which was assessed by Mohmamed El-Erian,CEO of leading asset manager PIMCO.This testimony is rather dovish,Mr.El-Erian said.Bernanke was saying that 1.The unemployment situation is unsatisfactory.2.Don't worry about inflation;it is too low.3.We have a number of instruments we can use. He's trying to strike a difficult balance between confidence and excessive risk-taking.The journey is full of ifs.The market extrapolates this to the destination.Markets are different from the Fed.They want to know where we are going,and when we're going to get there.1.The unaddressed cost and risk of unconventional policies.2.You've convinced other central banks to follow you,but does it make sense if everybody does it? The underlying economy is still fragile.The fundamentals with the technicals would call for lower yields from here.1.The real economy is weak.2.Banks have reduced risk exposure,so their ability to earn is less.It will be interesting to see how sustainable their earnings are. Mr.El-Erian,who formerly managed the Harvard endowment, is also co-Chief Investment Officer of PIMCO,along with founder Bill Gross.

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."

The New Economic World

We're living through change,says PIMCO's co-CEO and co-Chief Investment Officer Mohamed El-Erian.There is lots of transition friction and tension.A lot of improbable things have happened.What the markets are doing is pricing that in.It's more of a square root symbol,leveling off at about 2% growth.There is something fundamental going on,an ongoing structural change.It's all about balance sheets.
The emerging markets had a small heart attack.When the big one came,they had better conditions.It's a good thing we have them there.It's gonna take 2-4 years for the new normal to play out.Only the corporate sector has a healthy balance sheet in the U.S.The market is telling us that balance sheets matter.
The U.S. economy is on a bumpy journey to an uncertain destination-without many spare tires.All indicators are flashing yellow:employment,retail sales and the flow of funds.If you do the bottoms-up analysis,there isn't a sector that's big enough to do the serious heavy lifting.Private sector de-levering and government re-levering are not the formula for growth,but for a multiyear adjustment.We as a financial system are de-levering.Until that is over and we recapitalize,that cycle hasn't been completed.It's definitely a new world,in Mohammed El-Erian's opinion.
Mr.El-Erian is a fan of the New York Mets and Jets,he professes with a smile.

Recovery Without A Script

Mohamed El-Erian,co-CE0 and co-Chief Investment Officer at PIMCO,said that Friday's employment report was a half-full/half-empty report.It points to long term unemployment going up.There are structural aspects to unemployment.The question is whether you believe levels matter.You really need big changes.Mr.El-Erian doesn't believe there is a playbook to this.What with sovereign debt risk and regulatory shock,you need to reach escape velocity.The question is what you get in the second half of the year.
There is an inventory spillover,Mr.El-Erian pointed out,asking whether it is sustainable.Do balance sheets matter or not?The tug of war between cyclical and structural is very interesting.A tremendous amount of temporary and temporal stimulus is in the system right now.Do you face a hand-off to private demand or structural headwinds which the market isn't comfortable with?
Unfortunately,the crisis has been a balance sheet issue.There are few occasions of a balance sheet shock on top of a cyclical story,as we have now.PIMCO builds portfolios with four different layers:secular;structural;cyclical;and tactical.At this point,there are certain corporate bonds that PIMCO likes,Mohamed El-Erian noted.He was formerly manager of the Harvard Endowment.

Bill Gross Raises Cash

Bill Gross,"the bond king,"has rebalanced the industry-leading bond fund,the PIMCO Total Return Fund.He raised cash to 7% of the fund in November from -7% in October.Mr.Gross also cut government securities to 51% from 63% in October,which was a five-year high.He sliced mortgage securities from 16% to 12%,the lowest on record.The Total Return Fund is up about 17% year over year,better than 55% of comparable funds.
Mr.Gross feels that the bonds will decline in value when the Federal Reserve,reacting to an improving U.S. economy,raises interest rates in 2010.He is co-CEO and co-Chief Investment Officer at PIMCO,along with Mohamed El-Erian.They have been adding exchange-traded funds to PIMCO's offerings recently.

The Final Demand Question

Mohamed El-Erian,co-CEO and co-Chief Investment Officer of PIMCO,says what we have in the market right now is a sugar high.It is caused by 1.the impact of the inventory cycle,but will we get a hand-off to final demand by the consumer? and 2.a tremendous amount of liquidity missed the rally and is coming in now.When we get personal consumption and retail sales numbers-these are critical numbers.
Unfortunately,Mr.El-Erian noted,there is a lack of excitement about the upcoming G20 summit in Pittsburgh,which is concerning.I hope we're gonna jump-start this whole summit process.We at PIMCO have positioned ourselves more cautiously in higher quality assets around the world.Asset prices reflect a lot about this third hand-off to final demand,which the data don't reflect yet.Up till 2019,the debt-to-GDP ratio is gonna continue to go up.The dollar is gonna weaken.It's part of the global rebalancing.The question is whether it will do this in a disorderly fashion.Without intervention or coordination,the risk of this is high,Mohamed El-Erian cautioned.

Fund Manager Sees Overextension

Barbara Marcin,fund manager of the PIMCO Blue Chip Value Fund,thinks we're about 6-9 months ahead of ourselves.You should be a little more defensive,buying high quality companies with global exposure that pay a dividend,such as PepsiCo,Kraft Foods or Johnson and Johnson.They have good balance sheets with strong cash flow.Their relative performance is what's gonna stand out in the next year or two,Ms.Marcin believes.Her colleague at PIMCO,Mohamed El-Erian,says that the market and economics are not reconciled right now.

Some Good Sectors

Mortgages,municipal bonds and corporate bonds are attractive,Mohamed El-Erian thinks.The critical question is,what mistake can I afford to make? If you can't,then wait.When you have a new world emerging,you have to scale your investments.There have to be mid-course corrections.You have to adjust.We live in a very fluid world,the former manager of the Harvard Endowment noted.

A Strategy for Today

I am very underweight equities-below 30%,Mohamed El-Erian revealed.I am increasing as the rally unfolds.Fade the strong rallies;buy the strong sell-offs.It's hard to do,taking you out of your comfort zone.There are four contracting sectors now:housing;finance;the consumer;and the rest of the world.At least two of the four must recover in order to be considered a turnaround.Now people are trying to get up.It's gonna be sequential.The federal programs are getting traction,but it's early.Commercial paper,money markets and mortgages are getting better,but it's a long lag between conception and effectiveness,Mr.El-Erian believes.

The Unemployment Impact

Balance sheet effects dominate slope,Mohamed El-Erian observed.We have massive unemployment.It will take time to adjust.The real answer is,we don't know where the bottom is.Analytically,the employment report is no longer backward-looking.People will save more in the face of unemployment.It impacts forward-looking behavior such as home-buying,Mr.El-Erian pointed out.

A New Landscape

Mohamed El-Erian,co-CEO and co-Chief Investment Officer at Pimco,says that,fundamentally,we are in a volatile journey to the new normal.The world is changing.We've redefined the financial landscape.The critical things for investors are to reposition and navigate for the new normal.The American consumer will return,but it will be a saner consumer,more concerned about retirement and not over-extended,Mr.El-Erian feels.

What Geithner Is Like

Tim looks at you and is very frank,telling you what a policy can and cannot do,Mr.El-Erian revealed.He has the self-confidence that comes from years of experience.There is no alternative for government involvement;Mr Geithner understands it has to be targeted and reversible,and that's a good thing,Mr.El-Erian observed.Susie Gharib,co-anchor of Nightly Business Report,has served with Mr.Geithner on the board of trustees of the Economic Club of New York.She describes him as very smart,thoughtful and humble.He is very diplomatic,she said.Mr.Geithner,who is the married father of two,is Mr.Experience.He has served under three presidents and five Treasury Secretaries,holding posts in the Federal Deposit Insurance Corporation,the Federal Reserve and the Treasury Department,where he was Assistant Secretary for International Affairs.He is currently President of the Federal Reserve Bank of New York,helping to resolve the Bear Stearns,American International Group and Citigroup issues.

What Geithner Faces

There are so many moving pieces in the financial crisis,you can't find a bottom,Mohamed El-Erian feels.It's better to have the mindset that we are in a protracted healing process.Stay on the sideline and wait for the crisis to morph.Don't be a hero at this point,Mr.El-Erian counsels.

Who Is Timothy Geithner ?

Mohamed El-Erian,co-CEO and co-Chief Investment Officer of PIMCO,says he met Timothy Geithner,President-elect Obama's Treasury Secretary-designate,in the midst of the Russian and Asian crisis.He is very cool,Mr.El-Erian said.He has the crisis management experience that you need at this point.Hank Paulson,the current Treasury Secretary,and Mr.Geithner have worked together.The more certainty we can get,the more the healing process can go forward in a good manner,Mr.El-Erian thinks.

The Legacy of the Crisis

The banking system is at the heart of every market economy;where we're going to is a world where the banking system is slimmer,de-risked,and with less return on equity,Mohamed El-Erian believes.We are turning the banking system into a utility,because the public cannot accept privatizing gain,while socializing risk.When the tide comes down,it exposes good things that you want to buy,but you've shaken the trust of the retail side.It will take time to heal.We shouldn't expect a linear recovery;it's gonna be a bumpy recovery,Mr.El-Erian predicted.

The Nature of the Crisis

This was a crisis of the system as a whole,according to Mohamed El-Erian.The policy response goes beyond an attempt to stabilize markets.We are in the midst of a major policy regime shift.It will be a gradual and fragile process,a protracted one.The policy regime shift cannot repair all the damage the system suffered.Policy response can change the drivers of markets.No one seems to be turning to the International Monetary Fund for advice.This is the sort of crisis that is at the heart of what the IMF was set up to control,in Mr.El-Erian's opinion.