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Bond Boom Good for PIMCO, but Not for U.S. Economy, El-Erian Says

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PIMCO’s CEO and Co-CIO Mohamed A. El-Erian says business at the bond shop is “booming,” which is not a good sign for the U.S. economy, he told Bloomberg in a radio interview on Friday, September 10.

El-Erian said that net inflows into bond funds reached $120 billion in the first eight months of 2010.

The PIMCO Total Return Fund, for instance, attracted $2 billion in June and the same amount in July, according to the Financial Research Corp. It now has about $240 billion in assets, says FRC.

“It has a bad impact on the economy as a whole,” El-Erian said in the Bloomberg interview. “The average investor is de-risking their portfolio, moving from equities into cash and bonds and that is not a good sign for the economy if people become more and more risk- averse.”

The bond shop recently made its own push into equities, introducing the PIMCO Equity Series Pathfinder Fund in April, its first active equities product. In addition, it plans to offer four or five more new global equities strategies over the next few years, according to Neel Kashkari, head of PIMCO’s investment initiatives, who spoke with Reuters on September 7.

El-Erian also recently shared his comments with the Financial Times and online regarding U.S. economic policy.

The PIMCO CEO says he’s like to see: a set of self-reinforcing measures on both the demand and supply side that signal the Obama Administration’s recognition of the seriousness of the economic situation, as well as plans to address the increasingly visible structural headwinds that undermine high growth and meaningful job creation and that stand a good chance of implementation.

El-Erian would also like to see change in “the widespread perception that, to date, economic policy responses have been ad hoc, piecemeal, uncoordinated and reactive. This requires the Administration to communicate a credible and clear medium-term economic vision – one that is strategic in nature, unifying in design, and closely linked to measures that inform, influence and lead developments on the ground,” he wrote.

Also, he is calling for Obama to put his economic team “in a more credible global position.”

“This is not an easy undertaking, especially given the currently polarized political environment and the anti-Washington mood in the country as a whole … With the November elections looming, the Administration must hit a home run,” El-Erian concluded.

In late August, PIMCO Co-CIO, managing director and founder Bill Gross urged the Treasury Department to put in place a mass refinancing plan for all non-delinquent mortgages backed by the federal government.

“Taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a 50-75 basis

point fee attached to each and every mortgage. Seemed commonsensical to me,” he wrote in his September online commentary.

“If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more ‘liar loans’ or ‘no docs’ and a much sounder foundation for future homeowners and investors. The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case,” Gross explained.

“Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed. The private market was nowhere to be found, because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement,” he concluded.

Also in August, PIMCO managing director and portfolio manager Paul McCulley shared his views online about what U.S. monetary leadership should be doing to improve the country’s economic conditions.

“When the economy suffers from Post Bubble Disorder, characterized by private sector deleveraging and a fat-tail risk of deflation, conventional monetary policy is not enough,” McCulley wrote.

“In such circumstances, the central bank has a profound duty to act unconventionally, ballooning its balance sheet by monetizing assets, either government or private, or both,” he wrote. “The central bank has a profound duty to meld itself with the fiscal authority, until the fat risk of deflation is eliminated.”

His overall conclusion is that now is not the time to exercise fiscal restraint: “To generate increased growth in aggregate demand, some sector of the economy must be willing to pro-actively lever its balance sheet. And that must be the fiscal authority, if the private sector is intent on delevering. Yes, I know all about the perils of long-term fiscal unsustainability. But I also know that in the long run, we are all dead. I see no reason to die young from fiscal-orthodoxy-imposed anorexia.”