PIMCO: The New Normal Will Stick Around and Europe is Solvable

In a rare combined interview on Consuelo Mack’s program Wealth Track, PIMCO’s Mohamed El-Erian and Bill Gross jointly reiterated their widely quoted prediction, originally articulated in 2009, that due to structural problems, the U.S. economy will continue on its slow growth path (aka the "new normal") and perhaps approach stall speed in the near term.

“[Recession] is now a very real risk,” Gross and El-Erian agreed.

Co-founder Gross, manages the world’s largest mutual fund, the Total Return Fund while El-Erian serves as PIMCO’s CEO. Both act as advisers to the U.S. government and other international institutions, weighing in on financial matters.

Both Gross and El-Erian assert that the widely accepted forecast of a “new normal” in the States and the rest of the developing world, will lead to continued unimpressive growth and sub-par investment returns.

Gross explained that the 1-2% growth rate thus far throughout the year implies a problematic fourth quarter given the weight of the spending power accounting for somewhere between 65-70% of growth and the general public’s aversion to buy as a result of wages failing to keep pace with profits and other growth metrics.

The current market is “consumer dependent but consumer weak,” Gross, known as the “bond king” said, leaving few opportunities for good investments. “If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road,” Mack highlighted.

Meanwhile, El-Erian took on the European debt crisis, as Mack questioned if the euro-zone is globally problematic and whether or not any concrete solutions are surfacing.

“The euro zone is the biggest economic region in the world, there are a lot of banks and there will be implications; but it didn’t need to get this bad,” the chief executive said.

He likened the crisis to a benign infection that works its way up from an individual’s indiscriminate toe, yet without care, taints his vital organs. Furthermore, he explained that the people are begging for leaders to “get [their] acts together.”

With that said, a solution, while, to some extent, inevitable, will not guarantee a return to previous standards or norms.

“It simply means we don’t spiral downward; solving the euro-land crisis is a big piece of the entire puzzle.”

In an effort to bring the topic back to PIMCO and its clients, El-Erian expressed his understanding toward investment managers frustration.

“Today, the markets and therefore clients capital is influenced to a huge extent by policy makers [and] markets hate that… As a society and as an industry, we’re much more comfortable looking at bottom-up issues; but the reality is we’re now sitting in the back seat of a car being driven erratically by policy makers; they’re arguing among each other… not telling us where they’re going, and somehow we have to stay in that car.”

He added that major structural changes must be implemented in order for failing economies to reemerge on the road to recovery.

Moving back to the topic of the Eurozone, El-Erian said Saturday that it is not too late to solve the European debt crisis but that swift actions are needed.

“Europe can no longer kick the can down the road,” El- Erian told CNN Saturday.

“The good news is it’s not too late to solve,” El-Erian said. “The bad news is with Italy, the crisis has entered a very dangerous phase.”

El-Erian, who is a former deputy director of the IMF, said that Italy needs to persuade markets it’s serious about taking actions that will allow the economy to grow.

 

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