Mohamed A. El-Erian 2013-05-23T01:44:58-04:00 Mohamed A. El-Erian http://www.huffingtonpost.es/author/index.php?author=mohamed-a-elerian Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Mohamed A. El-Erian Good old fashioned elbow grease. Thank You Dad for Such Great Advice tag:www.huffingtonpost.com,2013:/theblog//3.3209454 2013-05-03T12:05:16-04:00 2013-05-03T12:05:21-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
Well, I am extremely privileged and lucky to have received such advice well before I got to university in 1977. And since then, I have been very fortunate to pursue an academic and professional career that has reinforced its wisdom, relevance and power.

This great advice came from my late father who passed away in 1981. I suspect that he started conveying it to me early on in my childhood though I first became aware of it in 1971.

As a 13-year-old living in France, I asked my dad why he was paying for four -- yes, four -- daily newspapers. It seemed to me that they mostly covered the same news. Wasn't this a big waste of money?

No, he responded quickly. The four newspapers covered almost the entire political spectrum. As such, they conveyed to us much more than what had happened, why it occurred and when. In combination, they also delivered different ways to think about the same issues.

My father's simple advice -- the "how" can be as important as the "what" "when" and "why" -- was reinforced over the years... first by my undergraduate education at Cambridge University, and then during my job at the International Monetary Fund and, most recently, my tenure at PIMCO.

At Cambridge in the late 1970s, students in economics were exposed not to one or two, but to four -- yes, four -- different schools of thoughts: Neo-classical, Keynesian, Neo-Ricardian and Marxist.

Sure it was very confusing for me at first. Yet, over time, it reinforced my father's advice in a continuous and sustainable fashion.

Over the years, I have found it important to pursue more than one framework to think about some problems. And many times -- though certainly not always -- insights from several perspectives have dominated those offered by a single one.

During my time at the IMF (1983-2007), I was privileged to participate in many discussions -- and some very difficult negotiations -- with country officials around the world. Quite a few of these interactions struggled at times to overcome the fact that the parties at the table were looking at the same set of facts using different analytical frameworks, experiences and perspectives. Understanding this basic reality contributes to better outcomes.

Today, I am lucky to work at a firm that tries very hard every single day to ensure that different perspectives are heard -- indeed, they are actively solicited. And it is not an easy endeavor. Fortunately, Bill Gross, PIMCO's founder, has hardwired this into PIMCO in many ways over the years, thus letting structure do some of the heavy lifting.

For example, we periodically come together as a firm to listen to outsiders selected not for their specific views but, rather, for their thought leadership.

Sure what they say is important; but how they think is even more valuable to us. So, not only do we listen to them carefully, but we also try to make sure that we conduct the subsequent discussion looking at the world from their (and not our) perspectives.

We also give the floor to our brand new MBAs/PhDs in order for them to tell us what PIMCO should be thinking.

As these bright new colleagues are yet to drink the PIMCO kool-aid, let alone recognize the strong views that us "old timers" sitting in the audience hold, their narratives have been extremely valuable in both informing and influencing our collective thinking.

Also, every week, three committees are tasked to challenge the firm's Investment Committee; and they are judged by how well they question and probe.

Then there is the whole set of daily efforts aimed at flattening the internal playing field, including by combating vigorously any notion of historical or position entitlement.

The effort does not stop on the investment side. We are also working hard to ensure that inclusiveness and diversity drive an important part of HR efforts aimed at hiring, mentoring, empowering and promoting the range of talents that are so critical to the sustained success of a meritocracy like PIMCO.

So, as new graduates leave college and enter the labor force, they may wish to consider the advice that I was incredibly lucky to receive from my father as a child.

Be serious and disciplined in pursuing more than the what, when and why. Also be curious, and think deeply about the how.

In doing so, I suspect that you will come across many occasions where a range of perspectives enrich rather than confuse, thus leading to better outcomes. And to maintain this approach through your adult years, don't hesitate to let good structure to do some of the heavy lifting.]]> How to Read the Week's Economic and Market Signals tag:www.huffingtonpost.com,2013:/theblog//3.3169159 2013-04-27T08:45:09-04:00 2013-04-27T08:45:14-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
Friday's disappointing GDP growth -- 2.5% in the first quarter, short of the consensus forecast of 3% -- was the latest signal that the U.S. economy has again hit an air pocket. It followed disconcerting data on manufacturing and durable goods. Indeed, Thursday's jobless claim number was the only major indicator to surprise on the upside.

While worrisome, this pales in comparison to what last week's data told us about Europe. Economic weakness now encompasses both "core" (think Germany) and "peripheral" economies. In the case of the latter, unemployment is rising from one awful record to another. (In Spain, for example, the rate increased to 27.2%, with an even more stunning 57.2% rate among the young).

Last week's corporate earnings suggest that companies are still able to counter a worrisome revenue situation by cutting costs.

This option is not open to households. The average saving rate has already declined to quite low level; and it conceals the fact that better-off households continue to gain while others face even greater pressures. Ultimately, it is households -- here and abroad -- that provide demand for what companies make and sell.

In light of this, expect next week's policy meetings to signal that central bank stand ready to step in, once again, to maintain the disconnect between buoyant equity markets and sluggish economic conditions -- not as an end in itself but, given Congressional dysfunction, as virtually the only way today to support economic activity (and it is rather imperfect as the expected benefits come with growing costs and risks).

Look for the Federal Reserve to alter the thrust of its policy narrative. Rather than advance its prior emphasis on tapering its monthly $85 billion purchases of market securities, it will seek to reassure markets by iterating its willingness to do more if needed.

Across the Atlantic, the European Central Bank will face increasing pressure to cut its interest rate (currently at 0.75%) and liberalize the collateral requirements it imposes - both meant to loosen monetary conditions.

Such policies, combined with the very aggressive monetary measures of the Bank of Japan, provide comfort to investors. Sadly, the beneficial effects do not extend to the economy in a material fashion. Here, unfortunately, outcomes fall short of both expectations and what is urgently needed.

Given the underpinnings of both hyperactive central banks and our persistently sluggish economy, don't look for the unusual disconnect to disappear overnight. But don't be fooled into believing it can last forever.

At some stage, convergence will occur. Either artificially high valuations will be validated by improving fundamentals; or they will fall to levels warranted by weak fundamentals.

Neither possibility overwhelmingly dominates the other at this stage. Moreover, timing remains uncertain. Much depends on what happens in the coming weeks and months.

Such a wishy-washy conclusion is far from satisfactory. Yet today it is the inevitable outcome of this period of enormous fluidity in the global economy and politics.

Whether you are a worker or an investor, a student or an entrepreneur, this is the time for a combination of resilience and agility.

Monitor developments carefully. Maintain as much operational optionality as possible. Be opportunistic. Understand your downside. And do not lose sight of the artificiality of current economic and market conditions.

It is best to recognize today's "unusual uncertain outlook" (using Fed Chairman Ben Bernanke's characterization) rather than predict confidently (and foolishly) on the basis of partial information and incomplete analysis.]]> Real and Persistent Struggles of Billy Elliot tag:www.huffingtonpost.com,2013:/theblog//3.3128724 2013-04-21T17:43:33-04:00 2013-04-21T17:55:41-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/ Billy Elliot with them. We loved it. Yet in sharing our reactions to this musical driving home, it soon became clear that our 9-year-old daughter and I had been impacted quite differently.

Both of us wish for a sequel, a Billy Elliot II, to tie up fascinating loose ends and extend a truly enjoyable experience. But, having focused on different aspects of the musical, we were looking for a range of answers.

For those not familiar with this long-running musical that started in the U.K., Billy Elliot tells the story of the struggles of a 10-year-old boy, and that of his community, in northern England in the 1980s.

The two face overwhelming odds from day one -- though it takes quite a while for them all to realize it.

Billy seeks to overcome adverse stereotyping and profiling in order to pursue his passion as a ballet dancer. He battles bravely, and ultimately successfully, to overcome the priors of a macho community whose proud traditions are said to dictate that sons always follow their fathers down into the coal mines.

Meanwhile, his community fights to avoid pit closures that would destroy their way of life. The miners strike for over a year. Displaying impressive solidarity, they confront an equally-determined government.

Led by Margaret Thatcher (as in "Iron Lady" and TINA, for "there is no alternative"), the government is intent on winning -- both as an end in itself (to reform the mining sector), and as a means to break the power of the unions and thus overcome what it perceives as a major contributor to Britain's persistent economic malaise. And the government does win.

Interestingly, this multifaceted plot immediately hit a chord with both our daughter and me.

She has her own artistic aspirations. She participates in community theatre, as well as "talent shows" at school. She is fascinated by the stories of young artists. And she dreams of making it to Broadway and living the life of a singer, dancer and actor.

I happen to have been at university in the U.K. in the early 1980s and still vividly remember the political tensions of that time. And my memories were refreshed by all the media reporting over Mrs. Thatcher's death last week.

So much for the similarities; now for the differences.

Our daughter was totally inspired by how Billy pursues his passion and ends up by making it to the Royal Ballet School in London. She is now even more determined to try to overcome all that she has been told about the tough and uncertain career of artists, and the related need for remarkable talent, determined perseverance and lots of good luck.

Billy Elliot took me to another place. Throughout the musical, I found myself torn between the feeling of solidarity with a community battling for its way of life, disappointment that it was defeated after fighting so bravely, and recognition that the outcome was a quasi-inevitable consequence of economic evolution and the lack of timely reforms.

Now both my daughter and I are hoping for a sequel. We so wish that the creators of this beautiful musical would tell us what happened next.

Did Billy Elliot succeed in London and make it to the big stage? Did the inhabitants of that determined and united northern village retool and avoid secular decline? And how did Billy subsequently interact with his friends and family back home?

So many questions! Yet as far as we know, there is no Billy Elliot II in the works. Instead, we are left to wonder... but not really.

As a parent, an economist and a financial market participant, I cannot but help think about the parallels between the musical and the world we live in today.

In this particularly fluid global economy, the Billy Elliot struggles play out repeatedly in many families, towns and cities around the world.

Personal ambition, passion and drive often battle the forces of unequal opportunities, unemployment, budget cuts, lagging education and deprivation.

Communities are challenged by unusually fluid economic conditions, political dysfunction, reduced net transfers and a realigning global economy.

For every success and inspiring story, there are -- unfortunately -- too many disappointments and tragedies. And for every seized opportunity, there are too many foregone chances and wasted talents.

Billy Elliot is more than a remarkable musical. It is a window on recurrent struggles that many face; and more should be done to empower and enable them to succeed.]]> You Are Truly Boston Strong tag:www.huffingtonpost.com,2013:/theblog//3.3128651 2013-04-21T17:06:14-04:00 2013-04-21T17:06:19-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
We mourned the loss of life at the Boston Marathon on Monday. We grieved at the casualties that followed. We despaired at how Boston and neighboring cities were brought to a standstill.

We admired the courageous and effectiveness of all first responders, and we join millions of others in thanking them for all that they did. We were impressed by the successful multi-agency coordination. And we were more than relieved when we heard on Friday evening that the remaining suspect had been apprehended.

Last week was also so surreal for us that we can just imagine the turmoil that communities must have felt, and many still do.

While we lived there, we took visitors to what will now be sadly and regrettably remembered as the site of the two horrific bombs. We attended events at MIT where the brave policeman died. We pumped gas at the station where the suspects released a hostage. And, with our wonderful Cambridge neighborhood bordering Watertown, we walked our dog very near the house where the final shootout occurred.

Like millions of other Americans, and like many more millions around the world, our hearts go out to the impacted families, friends and neighborhoods. Our thoughts and prayers are with all those that lost loved ones. Our words of encouragement and support go out to all those that must now overcome the shock and horror of last week's awful events. And we hope for the healing of the many physical and emotional wounds.

They say that adversity is the true test of character. Well, what happened last week was much, much more than an adversity. Yet it demonstrated that the people of Boston and its surroundings sure know how to step up when called upon; and they did so with enormous courage and dignity.

Thank you for how you responded and what you did. Thank you for how you inspired and continue to inspire. And thank you for what you have shown the world.

Being a New York Jets fan -- and thus suffering regularly at the hands of the New England Patriots -- I (Mohamed) am used to bantering with friends in Boston. Not this time.

You are all truly and impressively Boston Strong; and, by example, you inspire us all to be Boston Strong.]]> Cyprus Rescue: From Bad to Worse tag:www.huffingtonpost.com,2013:/theblog//3.3070921 2013-04-12T14:00:32-04:00 2013-04-12T15:51:17-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/ Hey, They Are Stretching the Truth Way Too Far" -- it served to further weaken the credibility of the mechanism that is at the center of Europe's crisis management.

In approving a EUR10 billion package, Europeans called on Cyprus to find an additional EUR 6 billion to cover what is now a larger funding hole. In other words, it now needs to generate a total of EUR 13 billion. This is a huge amount for a country the size of Cyprus, even after it goes after uninsured deposits in local bank accounts.

Some European politicians suggested that Cyprus should sell its gold holdings for this purpose. But this was quickly countered by the head of the European Central Bank. He reminded his European colleagues that the priority for the gold is to cover potential losses by the national central bank.

These were not the only issues fueling a general sense of confusion and indecision in Dublin today, and a related sense of despair in Cyprus. To make things worse, a top European Union official stated that neither he nor other members of the Troika had a good handle on Cyprus's growth outlook.

All this confirms what I argued a week ago -- namely, that "anyone even remotely familiar with the details of the Cypriot program realizes that the country is a long way away from what [a Troika official claimed to be] "a durable and fully financed solution," let alone a sustainable path towards recovery."

Despite losing control of both growth and funding dimensions, European officials are yet to find the courage to recognize publicly what must be crystal clear to them in private (and was evident to others a week ago): "Key assumptions of the program are outdated if not totally obsolete."

For its part, the IMF is yet to acknowledge that adherence to its operational principles would preclude it from lending a country with an incomplete program design and an uncovered financing gap. If, instead, it opts to stick with a non-credible approach (as a means of kicking the can down the road), its ability to convince others to follow its lead on this and other rescues would be undermined further.

The immediate victim of all this is, of course, the Cypriot people: Having hoped for leadership from Europe to help them recover from a massive crisis, all they see is confusion and incoherence. The result is an even more uncertain daunting future for them.

The credibility of the Troika is also taking another beating. Its ineffectiveness and internal coordination problems are clear for all to see.

In sum, we are now watching the second botching of a Cyprus rescue in less than a month. The implications cannot be good for Cyprus... and for Europe as a whole.

Cross-posted from CNBC.com.]]> Hey, They Are Stretching the Truth Way Too Far tag:www.huffingtonpost.com,2013:/theblog//3.3032415 2013-04-07T09:09:34-04:00 2013-04-07T09:09:37-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
In seeking to strike a rather delicate balance, the natural inclination often is to err in the direction of being too positive rather than too negative. But once in a while, we come across a vivid an example of how easily this can turn counterproductive, especially if the reassuring statement is meant to play a "catalytic role" -- that is, encourage others to do something they are hesitant to do.

A striking example this week comes from the three institutions now charged with the difficult task of rescuing yet another (the fifth) European country. And it is an example that serves as a reminder and warning to others.

The "Troika" (which consists of the European Commission, the European Central Bank and the International Monetary Fund) is activated to salvage economies on the brink of bankruptcy. Armed with inevitably imperfect information and incomplete analysis, they race against time to negotiate a "reform program." Their counterparts are shell-shocked country officials (often in denial), as well as reluctant creditors (who are often also angry and uncooperative).

Once negotiated, the program has to be sold widely. There is a particular tough part to this unenviable task: Convincing the trio of those directly providing the emergency cash (namely, the political bosses of the Troika), those who carry the brunt of the burden (citizens in the country being rescued), and those whose parallel actions can contribute to making or breaking the program (private investors).

It is therefore natural that the announcement of the program is accompanied by a very sophisticated and coordinated PR effort. The primary aim is to try to shape a constructive narrative, particularly by accentuating the positive elements while recognizing (but not amplifying) the challenges.

Having worked for 15 years earlier in my career at a multilateral institution involved in country rescues, I know how difficult and time consuming this can be; and I remember the long hours spent with the multiple wordsmiths, including seemingly endless debates as to whether "significant" is better than "substantial" in a particular sentence.

Yet I was still struck by what came out of the Troika this week after it finished negotiating the program with the authorities in Cyprus.

This is not the first time officials bungle an element of the Cypriot rescue. Only three weeks ago, they agreed on the first iteration of the program that, within just a few hours, attracted so much worldwide criticism that the Troika sought to disown it (having endorsed it earlier). And all were forced red-faced back to the negotiating table.

So, consider this summary sentence from a Troika press release a few days ago (and which was picked up by the media and disseminated broadly): "We believe that [the program] provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustainable path toward a recovery."

Anyone even vaguely familiar with the details of the Cypriot program realizes that the country is a long way away from "a durable and fully financed solution," let alone "a sustainable path toward recovery."

Already, key assumptions of the program are outdated if not totally obsolete (including, and particularly regretful given the social costs, a programmed economic contraction limited just to 8% this year). Little is being done to realistically develop new job engines for a country that is suddenly void of any meaningful growth model. Accordingly, the fiscal adjustment being asked from Cyprus will likely prove inconsistent with social and political realities.

Especially after the earlier debacle, the Troika could be forgiven in seeking to oversell the Cypriot program. Yet, by going too far, this critically-important group is risking credibility that is key to its success here, as well as in other difficult European rescue cases (and there will be other cases).

Few, if any, investors are likely to commit funds to Cyprus when the Troika seems so disconnected from reality. If anything, they could be tempted to use this period of relative and temporary tranquility (if you can even call it that) to pull whatever they have left out of the country.

Lacking a credible good outcome down the road, citizens will resist making the sacrifices that are being asked from them, increasing the risk of social unrest. And those who still keep money in local banks will be more inclined to withdraw it, thus deepening a financing hole that is far from covered.

These types of Troika statements do not reassure. If anything, they raise doubt about the judgment of officials that are central to a good outcome for Cyprus. Indirectly, they also harm the probability of future European country rescues, and do so at a time when the continent is yet to regain a stable footing.

The Troika is not the first to make this mistake. Many companies, governments and individuals have fallen into the same trap. Let us hope that this rather vivid example serves to limit similar mistakes going forward.]]> Unfortunately, the Cyprus Crisis Is Not Yet Over tag:www.huffingtonpost.com,2013:/theblog//3.2997878 2013-04-02T08:29:18-04:00 2013-04-02T08:37:42-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
Working with European officials and the International Monetary Fund, Cyprus briefly re-opened its banks last week after imposing a large levy on uninsured deposits and onerous banking restrictions.

From check writing to cash withdrawals, account holders' access and use of funds are now very heavily constrained.

The immediate goal is to limit deposit outflows, thereby reducing the risk of a bank run that would push the country into depression and potentially threaten the functioning of the euro zone.

History tells us that this approach only works if controls are followed by a re-alignment of economic incentives and by offering the population a genuine hope for recovery and return to normalcy. Otherwise, what is viewed initially as a "circuit breaker" ends up making the underlying situation worse.

In the case of Cyprus, the current set of controls will choke off what little remains in terms of growth momentum and job creation:

• With diminished access to bank deposits, household consumption plummets and saving rates are forced higher in a dramatic fashion;

• Investment activity comes to a standstill given the enormous disruptions to aggregate demand;

• The little flow of capital that occurs is reduced to one direction - out of Cyprus; and

• With a portion of companies' working capital trapped, even more routine corporate activities are curbed.

As meaningful as all this is, we are just talking about the immediate impact. Longer-term, Cyprus has to find a new growth model to compensate for the dismantling of one based on its prior (and now discredited) status as an offshore financial center.

It will take time to come up with the replacement mix of agriculture, tourism and light manufacturing -- especially for a country that experienced a significant loss in economic competitiveness (another consequence of having opted for a finance-dependent model); and that currently relies on an internal devaluation to restore factor productivity.

Cyprus can hope that its tragic situation will unlock more generous funding from the "Troika" of the European Commission, the European Central Bank and the IMF. Indeed, given recent developments, including the badly bungled initial rescue of two weeks ago, the Troika's estimate of the country's funding gap (and its related commitment to a partial financing of EUR 10 billion) is already obsolete.

Cyprus needs much more funding from the Troika; and mostly as grants (rather than loans) given the sharp deterioration in creditworthiness and growth prospects.

Political realities and internal coordination challenges render this hard, though not totally impossible.

Yet the "Icelandic alternative," including in the case of Cyprus a euro zone exit and the use of a nominal exchange rate devaluation as part of the adjustment process, seems equally unpalatable to Europe given contagion worries: Even if the spillover were to be limited to other "small non-systemic" cases (as opposed to Italy and Spain), a growing number of such cases could constitute a systemic threat.

Pending a decision among two unpleasant options, all eyes will turn to the ECB in the hope that it can come up with prolonged bridging operations. Here, again, the options are limited.

The ECB could well inject massive liquidity through the use of the ELA mechanism that has already been deployed in Greece and Ireland. This alternative way to get lots of financing into a country that has become a ward of the European state is less visible and does not require parliamentary approvals.

In doing so, the central bank would accept highly dubious collateral from Cyprus. It would also need to get the Troika to sign off on the issuance of more government debt.

Wherever they look, Cyprus and its European partners are running out of easy options. Rather than seek additional short-term palliatives, they would be well advised to invert the operational logic:

Start with what would restore growth and jobs in Cyprus over the medium term and then work back from there to what constitutes the least painful initial steps on this road.

Cross-posted from CNBC.com.]]> Celebrate Nelson Mandela Now, and Also Later tag:www.huffingtonpost.com,2013:/theblog//3.2986572 2013-03-30T22:54:47-04:00 2013-03-30T22:54:59-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
My already high respect for Mr. Mandela has only grown in the last year. During this period, I have gained even greater insights into his approach. I have also deepened even more my understanding of the context in which he delivered for South Africa and beyond.

Those unfamiliar with his accomplishments -- and those who underestimate the odds he faced and the adversity he conquered in such a humble and effective manner -- need only witness how, after an incredibly encouraging start, the Arab Spring has stumbled and disappointed so many.

Countries like Egypt demonstrate vividly the difficulties societies face in completing their revolutions, no matter how genuine, justified and legitimate they are.

The well-being of historic transitions, especially those fueled by massive grass root support (as was the case in South Africa and, later, in Egypt, Libya, Tunisia, etc.), depends critically on credible and visionary leadership.

Yes important advances in social media allow movements us to overcome coordination challenges in remarkable ways. But nations still need political leaders to convert the energy and drive that topple repressive regimes into the unified dynamism that builds a better and lasting future.

They also look to them to reconcile the legacies of an ugly and violent yesterday with the hope of a brighter and peaceful tomorrow.

Mr. Mandela managed this in the most difficult of circumstances. In spearheading the most critical of all revolutionary pivots, he inspired his nation "to forgive but not forget."

Throughout the years, his accomplishment and dedication repeatedly astonished the "experts." And so many were dumbfounded by how he delivered a relatively peaceful transition in a highly polarized and potentially revenge-seeking context.

Yet, despite all this, too many of those who face similarly challenging revolutionary pivots today -- and too many of those who support them and wish them well -- are so caught up in the weeds that they fail to pose a simple yet potentially-enlightening question: "What would Nelson Mandela do?"

This phenomenon seemingly is not limited to those involved in historic transitions.

In reading the comments on last year's Mandela piece, I was particularly struck by those suggesting that I should have waited until Mr. Mandela's passing. "Save it for the obituary" was how one succinct and direct comment put it.

NO, we should not wait until then to recognize the amazing contributions of this historic figure.

NOW is the time to understand better, admire further, and celebrate more what Mr. Mandela offers the world.

So please find below the text/link to last year's piece. And please join me in conveying to Mr. Mandela our best regards and in wishing him a speedy recovery.

Thank you very much.

The World Wishes Mandela Well and Needs Him]]> Markets Sending Unusual Signals tag:www.huffingtonpost.com,2013:/theblog//3.2978301 2013-03-29T09:00:39-04:00 2013-03-29T09:00:41-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
The rally reflects slowly-improving economic conditions, relatively robust corporate profitability and anticipation of stronger domestic and foreign inflows into the equity market. Yet this is far from the whole story.

Investors need only look at where some other benchmarks ended the quarter to get a feel for the unprecedented and artificial nature of today's capital markets.

Few would have predicted that the impressive equity performance would be accompanied by a 10-year U.S. Treasury rate as low as 1.85 percent, a 10-year German government bond (bund) rate as low as 1.29 percent and gold as high as $1,596 an ounce. Think of this as the markets' way to signal to investors some key issues for the quarters ahead.

The persistence of this unusual combination of bond, equity and gold prices speaks to how central banks around the world -- and the Federal Reserve and European Central Bank in particular -- have fueled risk taking in the face of rather sluggish economic growth, recurrent concerns about European disruptions and lingering worries about geopolitical risk.

In the weeks ahead, we will get a sense of central banks' willingness to continue to support asset prices pending a stronger and more comprehensive recovery in economic growth.

I suspect that, notwithstanding some internal opposition, they will signal continued resolve as a way to enhance -- via the wealth effect and animal spirits -- prospects for growth and jobs. Indeed, the willingness call is a relatively easy one. The much more difficult call relates to the sustained ability of central banks to maintain control over the range of competing and conflicting forces.

Investors are unable to refer to historical precedents or reliable models to predict confidently what lies ahead as:

1. The scope and scale of central bank policy experimentation are already unprecedented.

2. The imposition of capital control by a euro zone country (as occurred this week in Cyprus) was deemed so remote as to be essentially unthinkable.

3. And -- particularly with what is happening in Afghanistan, North Korea, Pakistan and Syria -- even the most experienced analysts struggle with some of the world's most volatile areas.

Looking ahead, the validation of prices in risk markets needs the fuller engagement of healthy balance sheets and more robust economic activity, including what my PIMCO colleague Saumil Parikh refers to as the transition from "assisted growth" to "genuine growth."

While there is reason to expect that this will continue to occur gradually in the U.S. absent political/policy disruption), it will unfortunately not happen in Europe for quite a while.

Effective central bank intervention remains critical to the well being of the equity market in the quarters ahead. Actions need to be strong enough to offset Congressional dysfunction and headwinds from abroad. But if too strong, they would damage for a long time the functioning and integrity of markets.

Central banks did a good job in striking this balance in the first quarter. The hope, going forward, is that they remain not just willing to do so but also able.

Mohamed A. El-Erian is the CEO and Co-CIO of PIMCO, which oversees $2 trillion in assets including the PIMCO Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year, and was named a book of the year by The Economist and one of the best business books of all time by the Independent (U.K.).

Cross-posted from CNBC.com.]]> Mohamed El-Erian: Cyprus Crisis Reminds Me Of An Old Saying tag:www.huffingtonpost.com,2013:/thenewswire//2.2970523 2013-03-28T08:34:07-04:00 2013-03-28T08:34:26-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/ Cyprus: Better Designed Rescue, Challenging Implementation tag:www.huffingtonpost.com,2013:/theblog//3.2948735 2013-03-25T10:59:29-04:00 2013-03-25T11:40:40-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
Yet implementation will be very challenging, especially as Europe is yet to find an answer to the most important question of all: how to improve growth and employment prospects in a significant and sustainable manner.

After a badly botched attempt, Cyprus and its "Troika" of supporters (European Commission, European Central Bank and the International Monetary Fund) agreed last night on a technically more robust rescue program which would unlock some EUR 10 billion in external support. If implemented fully, Cyprus would thus avoid an immediate financial collapse. But its economy, nevertheless, faces significant economic contraction and tremendous social costs.

The revamped approach to Cyprus centers on two important pivots: from a blunt approach to the banking system to an institution-focused one; and from taxing all depositors to safeguarding insured accounts (i.e., those below EUR 100,000).

These two critical pivots are a material and obvious improvement on what had come earlier. Indeed, many will wonder why Cyprus and its creditors failed to include them in the prior rescue iteration.

Specifically, the pivots reduce the probability that the rescue is "dead on arrival" (as was the case earlier); they enable the ECB to remain engaged; and they maintain the sanctity of deposit insurance.

The new rescue package also meets a couple of other objectives that some Europeans favored: downsizing an offshore banking center that they viewed as too lax and too large; and reducing the risk of a change in the geo-political order within Europe.

At the practical level, creditors now need to specify how they will share the burden of financing Cyprus. In some cases, contributions must be approved by national parliaments (e.g., Germany, Finland, and the Netherlands). And then there is the question of what additional burden will be allocated to Russia and how.

Creditors also need to minimize the risk of significant capital outflows from Cyprus once the banks reopen - thus the immediate focus on capital controls. They also have to convince Cypriots that this bitter pill should be swallowed given that the alternative would have been much worse. And they need to keep a close eye on contagion risk (particularly the reaction of depositors in other vulnerable European economies).

These challenges are significant, and they will not be overcome easily and immediately. Yet, as large as they are, they pale in comparison to the big elephant in the room: the rescue contains very little to enhance Cyprus's ability to grow and create jobs.

With the de facto dismantling of its offshore financial industry, Cyprus loses an important driver of domestic economic activity. Accordingly, no one should underestimate the social costs and the related risk of political dysfunction and protests. Moreover, in addition to imposing a large levy on large foreign depositors, the bank resolution process destroys many corporates working capital and domestic wealth.

The markets are right this morning to initially welcome the latest Cypriot agreement. It avoids an immediate and disorderly financial implosion, with potentially negative contagion effects for other European countries. And it does so using a better approach to bank resolution and a less regressive burden sharing (or PSI, for private sector involvement).

For this to persist, however, Europeans still need to find a way to combine immediate financial relief for Cyprus with realistic prospects for growth and job creation. They also need to overcome the strong signals they gave out last week regarding coordination problems within the Troika, generalized bailout fatigue, breakage of all sorts of taboos, and a willingness to shoot before aiming properly.

Mohamed El-Erian is the CEO and Co-CIO of PIMCO, which oversees nearly $1.8 trillion in assets and runs the PIMCO Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide, " was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year, and was named a book of the year by The Economist and one of the best business books of all time by the Independent (U.K.).

Cross-posted from CNBC.com.]]> Don't Forget the Geopolitics of Cyprus tag:www.huffingtonpost.com,2013:/theblog//3.2932353 2013-03-22T10:26:45-04:00 2013-05-22T05:12:01-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
The greater the sense of desperation among Cypriot citizens (and the deeper their disappointment with the responsiveness of western European governments), the higher the probability that the country will turn more to Russia for help. Such help would not be granted without conditions. Indeed, Russia would seek assurances of greater and more durable access to some key Cypriot strategic assets.

Cyprus is already quite linked to Russia. Specifically:

  • The Cypriot government received last year a sizeable loan to tie the country over as negotiations with "the troika" (consisting of the European Commission, the European Central Bank and the International Monetary Fund) dragged on and on;


  • Deposits from Russian individuals and corporates facilitated the (excessive and irresponsible) expansion of Cypriot banks;


  • Russian tourism is a notable source of income for the island; and


  • There is considerable Russian interest in Cyprus's underdeveloped gas fields.



IF the current crisis were to intensify to such an extent as to force Cyprus to leave the eurozone, look for it to turn to Russia for immediate financial assistance to stabilize what would likely be a very disorderly domestic situation. And IF this once-improbable (indeed, once-unthinkable) event were to materialize, expect Russia to be highly willing and very able to step into the chaos.

A greater strategic role in Cyprus would compensate Russia for its diminishing influence in Syria, another Mediterranean access point. Meanwhile, its involvement in the development of Cypriot gas fields would give it an even greater say in the supply of energy to western Europe.

This willingness is accompanied by significant financial ability. Cyprus's funding gap is puny in relation to Russia's international reserves ($520 billion) and annual current account surplus ($81 billion in 2012).

These considerations should play a prominent role in Europe's assessment of whether, how and when to provide exceptional support to Cyprus. And in making the calculus, Europe may wish to recall the historical case of Egypt from the 1950s (albeit the parallels are far from perfect).

When the West turned down Egypt's request for financial assistance to build a new dam on the Nile -- a national project deemed vital for the country's well-being -- the government of the time felt it had no choice but to go to the Soviet Union for help. By doing so, it committed the country to almost 20 years of Soviet influence, changing the geopolitics of the region in a consequential and durable manner.

Europe has more than an immediate economic and financial interest in working with Cyprus to stabilize an increasingly volatile situation. And it should do so driven less by the need avoid an institutional Eurozone exit and more by the importance of fundamentally restoring growth and hope to Cyprus. There is little time to waste if Europe is to avoid both an economic and geopolitical shock.]]> Sobre el terreno en Europa tag:www.huffingtonpost.com,2013:/theblog//3.2930218 2013-03-22T04:05:43-04:00 2013-05-21T05:12:01-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/
Saliendo el miércoles del aeropuerto, y con mi más que deficiente español, intenté averiguar la opinión del taxista, que me confirmó que la sensación casi de pánico se ha rebajado bastante durante los últimos meses, y especialmente tras la dramática declaración del Banco Central Europeo de julio, según la cual se iba a hacer "todo lo que fuera necesario". De todos modos, inmediatamente añadió que la situación económica subyacente de España sigue siendo horrorosa.

Para el español medio, las recientes mejoras en los indicadores financieros no han servido para que su situación mejore notablemente. Evidentemente, la hipótesis contraria habría resultado aún menos favorable ya que a los ciudadanos les habría ido peor si se hubieran mantenido las turbulencias financieras. Pero es difícil trabajar con hipótesis, y ciertamente estas no se traducen en ingresos más elevados ni en la creación de más puestos de trabajo.

Muchos de los amigos y familiares del taxista llevan bastante tiempo en el paro y no son demasiado optimistas. Mientras tanto, sus ahorros van menguando y tienen poca fe en que el Gobierno vaya a poder seguir proporcionando redes sólidas de seguridad social.

Los problemas son especialmente acuciantes para los más pobres, los jóvenes, los pensionistas y otros segmentos vulnerables de la población.

Y después está el problema de los depósitos bancarios asegurados. Le pregunté al taxista si le preocupaba la seguridad de los ahorros que tuviera en los bancos locales, especialmente tras el sorprendente anuncio de una tasa sobre los depósitos bancarios chipriotas. Me contestó que no. Y rápidamente me expuso sus dos razones: "En primer lugar, porque no tengo mucho dinero, y porque la mayoría de lo que tengo está en casa, y no en el banco".

Así pues, mi viaje del aeropuerto al hotel me confirmó lo que la mayoría ya teníamos claro: con excepción de algunos países (especialmente del norte de Europa), el viejo continente está en grandes aprietos, y los segmentos más vulnerables de la población se encuentran en un grave riesgo.

Esta mañana esperaba encontrarme un panorama diferente. Me tenía que reunir con dos profesionales importantes, con trabajos seguros y contactos a nivel global, y, al menos en teoría, estos son quienes lo tienen más fácil para proteger sus ahorros y demás activos.

Bueno, pues la hora de conversación que tuvimos me sirvió para ver que los contratiempos ya no se limitan a las clases medias y bajas de la ciudadanía. Parece que incluso los segmentos más pudientes están teniendo que enfrentarse a presiones y dudas. Como uno de ellos me dijo, "tenemos buenos amigos que están desempleados, y a muchos de ellos les resulta cada vez más complicado hacer frente a sus hipotecas y alquileres".

Ahora ellos tampoco notan alivio alguno por la mejora de los indicadores financieros. Y en este momento parecen más de acuerdo con el viejo dicho según el cual es imposible que una casa medre si el barrio lo pasa mal.

Resumiendo, mientras buscan el modo de solucionar el lío de Chipre, a los funcionarios europeos les vendría bien recordar constantemente una realidad que, sospecho, no es en absoluto exclusiva de España: pese a toda la alegría que se desprende del descenso de los déficits y de la reducción de los diferenciales de crédito soberano, los ciudadanos todavía no observan una mejora notable en su nivel de vida, actual o futuro.

Día tras día, la situación va minando la confianza de la población en que sus representantes electos, el sistema político o los partidos tradicionales vayan a la dar con la respuesta oportuna. Y cuanto más persista dicha situación, más complicado será encontrar el tipo de reformas políticas necesarias para evitar de manera tajante más años de dificultades económicas.]]> On the Ground in Europe tag:www.huffingtonpost.com,2013:/theblog//3.2917499 2013-03-20T15:16:50-04:00 2013-05-20T05:12:02-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/ raging you may wonder why I am sharing with you a couple of stories from my current business trip to Spain. I do so because I believe they crystallize in a vivid manner issues that are key to Europe's future.

On the way in from the airport yesterday, I used my primitive Spanish to seek the insights of the taxi driver. He confirmed that the sense of near-panic has subsided quite a bit in recent months, and especially after the dramatic "whatever-it-takes" policy statement in July by the European Central Bank. He was quick to add, however, that the underlying economic situation in Spain remains horrid.

For the average Spaniard, the recent improvements in financial indicators have not materially boosted living conditions. Yes the counterfactual would have been less favorable -- in that citizens would have been much worse off had the financial turmoil persisted. But counterfactuals are hard to grasp; and they certainly don't translate into higher incomes and more jobs.

Many of the taxi driver's friends and family members have been unemployed for quite a while. They regard their prospects as dim. Meanwhile, their savings are dwindling. They have little faith in the ability of their government to continue to provide solid social safety nets.

These problems are especially acute for the poor, the young, pensioners and other vulnerable segments of the population.

Then there is the issue of insured bank deposits. I asked the taxi driver whether he was worried about the safety of his savings kept in the local banks, especially after the surprised announcement of the levy on Cypriot bank deposits. He replied no. Then he quickly added two qualifiers" "I don't have much money to begin with; and I keep most of it at home rather than in the bank."

My trip from the airport to the hotel thus confirmed what most of us know well: With the exception of a few countries -- particularly in northern Europe -- the old continent is struggling; and the most vulnerable segments of the population are at great risk.

This morning I was expecting a somewhat different perspective. I was meeting with two high-powered professionals with secure jobs and global linkages. And, at least in theory, they are also those most able to protect their savings and other assets.

Well, my hour-long conversation suggests that the challenges are no longer limited to the lower-middle and lower classes of the population. It seems that even the better-off segments are facing pressures and uncertainties. As one of them put it, "people we know well are now unemployed, and many are increasingly unable to meet their mortgages and rents."

They too are now sensing little relief from the improvements in the financial indicators. And now, they seem more open to the old adage that you cannot remain a great house in a pressured neighborhood.

So, as they scramble to sort out the mess in Cyprus, European officials would be well advised to constantly remind themselves of a reality that I suspect extends well beyond Spain: Despite all the happy talk about smaller deficits and lower sovereign credit spreads, citizens are yet to feel any notable improvement in their actual standard of living and in their prospects.

Day in and day out, this situation undermines the population's confidence in the timely responsiveness of their elected representatives, the political system and traditional political parties. The longer this persists, the harder it will be to pivot to the type of policy reforms needed to decisively avoid more years of economic difficulties.]]> What You Should Know About the Cyprus Controversy tag:www.huffingtonpost.com,2013:/theblog//3.2897831 2013-03-17T20:06:05-04:00 2013-05-17T05:12:02-04:00 Mohamed A. El-Erian http://www.huffingtonpost.com/mohamed-a-elerian/ On Saturday, European officials stunned Cypriots (and many others) by announcinga rescue package for their country that involves a levy on all bank deposits. The news is spreading far and wide, causing quite a bit of controversy in the process. There are also questions about what will happen next in Cyprus and beyond.



Having posted an FT column on this earlier today, here is a summary:



The Context: With massively overextended banks and a stumbling economy, Cyprus is in desperate need of external funding. Like other struggling euro zone members, it turned to its European partners and the International Monetary Fund for help.



After months of negotiation, a 10 billion euros ($13 billion) bailout package was announced. It spreads the burden sharing in an unprecedented manner by including a de facto haircut on all bank deposits (de jure, depositors receive an equity claim).



The Controversy: "PSI" (private sector involvement) has been featured in other European rescue packages, but none have imposed losses on deposit holders. This one does, and it covers all deposits -- through a tax that ranges from 6.75 percent to 9.99 percent, depending on the size of deposits. In addition to its highly regressive design, this element sets aside decades of convention and laws that protect bank deposits below a certain threshold (100,000 euros, in the case of the European Union).



The Rationale: European and Cypriot officials argue that, in light of an extremely challenging situation, this was the best among the unpleasant options available to them; and seemingly they could not ignore bank depositors all together since it is their funds that inadvertently enabled the careless over-expansion of the Cypriot banking system.



There is also a feeling among European officials that Cyprus could be a lax offshore jurisdiction that intermediates funds of dubious origins. The levy counters that. It also conveys a message to peripheral countries that have been getting more complacent on the back of ECB support, a signal that hardliners within Europe have been keen to send.



The Risks for Cyprus: Citizens are furious -- towards their government, European partners and the IMF -- with a bank levy that covers everyone, big and small. The specification of such a small differential (6.75 percent vs 9.99 percent) adds fuel to a fire of discontent. All this serves to increase political tension and the risk of social unrest.



Other Issues: There will be lots of talk about the potential for spillovers. Among the immediate ones: Will this weekend's noise disrupt the financial tranquility that has prevailed in Europe after the ECB announced its "whatever it takes" approach to stabilizing matters; and how will the ECB and other central banks react?



Will the negative contagion be contained (after all, Cyprus is a small country) or could it spread to global equity markets that have embarked on record runs?



How will this impact the phenomenon of growing distrust between citizens and established political orders and parties? And to what extent will this influence broader investment flows?



Next Steps: The parliament in Cyprus is scheduled to meet on Monday to discuss the bailout package. We should expect quite a bit of controversy, and quite a close outcome. The terms could be revised. There are also indications of some divisions within Europe. And the possibility of legal challenges cannot be excluded.



This blog post originally appeared on CNBC.com.

Mohamed El-Erian is the CEO and Co-CIO of Pimco, which oversees nearly $1.8 trillion in assets and runs the Pimco Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year, and was named a book of the year by The Economist and one of the best business books of all time by the Independent (U.K.).

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