PIMCO’s Bill Gross and Mohamed El-Erian, the leadership of the world’s biggest bond shop, sat for an interview with Bloomberg Television Monday, in which the chairman and the CEO, respectively, discussed lessons learned in 2011, the speed of economic change and the crisis in Europe, among other topics.
In response to questions from host Tom Keene, Gross said that Europe can turn around its crisis, but “they have to get it together.” El-Erian reiterated that it’s ultimately about Germany, which “needs to make a decision.” On investment opportunities in Europe, Gross said “we cannot clean the dirtiest shirt.”
On what they’ve learned in 2011:
Gross: “I think we’ve learned that policymakers are most important in these types of markets. We have seen that in Operation Twist, policy in terms of lack of fiscal spending and a move towards stringency, all of which has affected bond and equity markets. Follow the policymakers to the extent you can.”
El-Erian (left): “A couple of things. The Europeans have taken a long time to understand the depth of their issues. The other thing is that the rest of the world is standing there, puzzled as to how the U.S. and Europe can be having so many difficulties. That is important because we all live in a world where the core is the West. The rest of the countries depend on this core and they are seeing this core weak. What I learned is that people are unsettled. They are confused, and hopefully, we are going to have some anchors restored.”
El-Erian on whether there will be a shift in IMF votes soon:
“I hope so. Part of the problem the IMF has is that it is not viewed as credible and legitimate enough. Part of that is because Europe has all the votes compared to the developing world. What we are seeing is a slow process, but hopefully it will get accelerated. But we need the IMF. We need a conductor to help organize what is increasingly very conflicting policy measures at the regional and national level.”
El-Erian on whether he’s surprised by the speed of economic changes in the last 18 months:
“We have not been surprised for several reasons. We had a sense, as a society, that we would have to pay back for all the overborrowing and overleveraging. Secondly, we are now catching up with the reality of slow growth for a long time. Part of Europe’s problem is it has not been growing enough for years. Therefore, deleveraging safely their economy is proving to be difficult.”
Gross (left) on whether it’s a strategy of PIMCO to take advantage of Europe’s crisis to find value in equities or better quality bonds:
“We cannot clean the dirtiest shirt. The Netherlands is on the borderline, they are close. It’s not liquid. Germany obviously qualifies. France, perhaps, Mom and I have mild disagreements there. But the other countries are at risk, from the standpoint of spread, investors’ perception of growth and the standpoint of the ECB and their willingness to move all in. They certainly haven’t done that. They didn’t do that today with 2 billion worth of purchases in terms of Italy.”
On whether Europe can turn around its crisis:
Gross: “They can, but they have to get together. They are dysfunctional. They are a family that does not function well. That’s obviously because the fiscal and monetary authorities are not co-joined. They cannot get together and agree on things. Germany wants to do it their way, Greece wants to do it their way. There is never a total agreement, no significant change. It’s always ad hoc and at the margin.
El-Erian: “It is about Germany. Germany needs to make a decision. It needs to decide does it want a fiscal union with greater political integration. The model I have in my mind is what West Germany decided about East Germany. The West said it will be a fiscal union with political integration. Yes, that’s a big bill, but we’re willing to pay it. Or does Germany opt for a smaller and less than perfect union of countries with similar conditions? Germany holds the key. Germany needs that to make that decision.”