PIMCO's El-Erian: Structural Problems Need To Be Addressed
August 10, 2011
Pimco’s Mohamed El-Erian shared in a CNBC interview aired last Friday his warning that if American and European policymakers “continue to disappoint, markets [will see] the regrettable prospects over the next few weeks of continued volatility and further losses.” Based on the market reaction, his message appears to be spot on.
Speaking last week after a series of grim economic reports, sub-par progress in job creation and a rattled market resulting in a 2000 point drop on the Dow Jones Industrial average, the co-CEO of the world’s largest bond manager explained that the necessary ingredients for a market bounce back are available, yet policy weakness in the western world is overcoming corporate strength to prevent a recovery.
El-Erian outlined three distinctive causes that will determine the fate of the markets in the final weeks of summer.
2. The Federal Reserve’s failed attempt to implement QE2. Analysts, investors and the general public worry Washington is out of funds to establish effective alternative policies.
“If we lift this macro uncertainty there is potential for a significant market rally because of cash on the sidelines,” El-Erain said. “Companies have the strongest balance sheets that I’ve seen for a very, very long time. And they have cash on that balance sheet. But… you need to lift the macro policy uncertainties in the U.S. and in Europe.”
“The key challenge is how to deliver western economies that became too dependent on credit and debt. You need growth. Unfortunately, there are too many structural impediments to grow.”
Most recently, Italy has swapped spots with Greece as Europe’s chief concern, considering its hefty debt and a bailout plan that many worry will not be substantial enough to support bondholders.
He put forth additional recommendations, suggesting investors should refrain from creating “transient money” by dashing into the bond market.
“These are [the] issues that need to be addressed if markets are to regain and maintain their composure,” he said. “This will require much better economic policies in both America and Europe…”
El-Erian predicts that the global landscape will remain stressed until policymakers develop a public debt program that will significantly aid the challenged economy; however, he remains hopeful.
[In the U.S.] we didn’t solve the medium-term fiscal issues. In fact, we made it worse. There are significant structural impediments. Until we see structural solutions out of Washington, (slow) growth will not allow us to deliver fast enough.”
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