February 5, 2012

PIMCO’s El-Erian: QE3 Likely

Bond chief says not a question of ‘if,’ rather ‘how big?’

PIMCO CEO and co-CIO Mohamed El-Erian shared his thoughts on the economy. (Photo: AP) PIMCO CEO and co-CIO Mohamed El-Erian shared his thoughts on the economy. (Photo: AP)

PIMCO CEO and co-CIO Mohamed El-Erian spoke with Bloomberg Television Friday about last week’s jobs report and the global economy.

On jobs, El-Erian said, "let's not also forget the numbers outside these headlines … we should not lose sight that we have structural issues that are not being dealt with."

Also, "my gut says we are likely to see [QE3], but the question is when and how big." 

 El-Erian on Friday's jobs report:

"It is a strong report. We should welcome in job creation of 243,000 and welcome unemployment rate of 8.3%. But the qualifier, and it is an important one, is let's not also forget the numbers outside of these headlines. I look at long-term unemployment, those that have been unemployed for 27 weeks or longer, that is stubbornly stuck at 5.5 million, and second, youth unemployment is stuck at 23%. We should welcome the headline numbers. They are really good, but we should not lose sight that we have structural issues that are not being dealt with.  That's going to be the question mark. Is this just a cyclical bounce or can this hand off into a secular bounce, which the economy needs?"

On Bill Gross saying it’s a risk-on trade:

"It is a short-term risk-on trade. Markets are dominated these days by short-term trade for good reason. There are so many uncertainties about the global economy. People are not clear what Europe is going to look like, and whether you get the political response the American economy needs. A lot of investors have lost long-term conviction and are now focusing on the very short term. It is a risk-on trade in the short term, and in the longer term we will have to deal with these issues confronting the global economy and therefore markets."

On what the jobs report means for QE3:

"So far, the Fed has been dismissing the short-term data … they have been looking beyond the cyclical bounce, and saying that secularly the economy is still weak. What does it mean for policies, don't expect any change in the signal that they intend to keep interest rates float at zero or at exceptionally low levels until the end of 2014. In terms of QE3, my gut says we are likely to see it, but the question is when and how big."

"We need this handoff in two places in particular. First, hand off from short-term growth that is prompted by stimulus. We have massive liquidity pumped into the system. We have a savings rate that has come down from over 6% to 4%. These are all short-term effects. We need to hand off to a long-term engine of growth, and secondly, we have to remove uncertainties like Europe, the Middle East, and Iran. We need these two hand offs, and critically so far, it is a good cyclical story, but the structural and secular story remains worrisome."

On whether America needs a payroll tax extension:

"This economy does not have enough indigenous growth.  First, the savings rate for households has come down to 4%. There's a limit to how far down you can bring it.  Second, the rest of the world is slowing. Third, business investment is only going to happen if businesses are convinced that we have this sustainable bounce.  Therefore, if the government takes away too much too quickly, we will lose momentum."

On where the global economy is headed:

"It is very balanced right now. It is what we have called here at PIMCO the morphing into bimodal distributions–the two ends of the distribution of potential outcomes is high. I would look in the short term critically to Europe. The ECB has managed to press the pause button on the European crisis using a very powerful tool, the LTRO, and we have a second one coming up. The question is can other European entities press the rewind button to bring the crisis back? That is the main issue to look at. Keep an eye also on small things–Portugal, the Greek PSI discussion, they can press play again. So, focus on the very short term on Europe, on the longer term, position for the reality that we are living in this bimodal world."

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