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El-Erian On Whether The World Is Near A Tipping Point

Tyler Durden's picture


It's another day, which means the probability of a Mohamed El-Erian op-ed is 99%. However, while in the past we may have ridiculed these now almost daily missives which lead many an LP to wonder just which media double of the real El-Erian is managing Pimco's $1.4 trillion in AUM, this one is actually worth reading as it ties in the recent developments out of Japan, with the firm's previous insistence that there will be no QE3. Oddly, this party line still has not changed: "Some will undoubtedly call either for a QE3 or for the extension of
QE2. Others will warn against this type of “active inertia” in
policymaking, noting that the repeated use of such an instrument will
likely shift further the balance of outcomes away from “benefits” and
towards what Chairman Bernanke, in his Augst 2011 Jackson Hole speech,
correctly labeled as “costs and risks”. And remember, these costs and
risks – or what at PIMCO we have analysed as collateral damage and
unintended consequences – have consequential economic, financial, and
political elements that play out both domestically and abroad. Taking all this into account, our inclination is that the hurdle rate
for introducing a QE3 will prove to be very high, and rightly so."

World Near Tipping Point?

  • Much of the potency of policy responses has been used up in the successful efforts since 2008 to avoid global depression.
  • The longer the persistence of supply disruptions, the greater the risk of core inflation increasing.
  • Questions about the end of quantitative easing in the U.S. pose a challenge for policymakers.

interview was originally published on on March 21, 2011.
In this interview, Mohamed El-Erian responds to questions from readers
of beyondbrics, an blog focusing on emerging markets.

How to invest in a crisis?

beyondbrics reader: How do you see the events of recent days
impacting commodities prices and land prices, especially in emerging and
frontier markets that produce grains? Which sectors will benefit?

Due to the tragic events in Japan and to the Middle East uprisings,
the world economy is currently undergoing both a supply and a demand
shock; and it will continue to do so over the next few months.

On the supply side, national and cross-border production chains are
being disrupted by the horrific events in Japan and the high and
volatile price of oil, a key input for many activities. On the demand
side, consumption is declining in Japan, the third largest economy in
the world, while a greater share of consumers’ income all over the globe
is being devoted to energy and away from spending on other goods and
services. And all this comes on top of a generalized, multi-month surge
in commodity prices due to demand-and-supply imbalances, as well as the
adverse externalities of policies in some advanced economies.

Emerging and frontier economies, as well as advanced ones, are
impacted differently depending on their initial conditions and their
composition of trade.

At a general level, the biggest gainers will be the oil exporters who
are not currently impacted by geo-political uncertainties. These are
located mainly in the set of emerging and frontier economies (e.g.,
Angola, Gabon, Ghana, Indonesia, Nigeria and Russia) but also in the
advanced world (e.g., Norway).

The worse impacted are large net importers of commodities who also
depend heavily on manufacturing exports and tourism. Many, though not
all, of these reside in the advanced world and emerging Asia.
Fortunately, they have higher levels of income and wealth to act as a
buffer in the face of adverse external shocks. The ones in the
developing world face greater challenges.

As regards sectors, it is also a story of differentiation, both across and within sectors as well as over time.

For example, the energy complex may well continue to benefit in the
next few months though, within this sector, there will be increasing
questions about the future of nuclear power. Meanwhile the non-tradable
sector in advanced economies, most importantly real estate, will likely
face renewed headwinds. Similarly for some areas of tech and, to some
extent, autos, which may face production delays die to Japan’s role in
the vertical supply chain.

In addition to these country- and sector-specific issues, there is an
important macro question that we should all keep on our radar screens:
In aggregating the impact of all these exogenous shocks, how close is
the world economy getting to an unfavourable tipping point?

This question assumes growing importance and complexity given that
much of the potency of policy responses, be they fiscal or monetary, has
been used up in the successful efforts to avoid the global depression
that would have followed the 2008 global financial crisis.

Benefits for central bankers?

beyondbrics reader: Can the current new wave of uncertainty
tangibly decrease inflationary expectations – by slowing down the hike
in commodity prices and by triggering a move out of equities to
high-grade bonds – and, if that is the case, could this make life easier
for central banks in commodity-dependant emerging economies like
Brazil, under a lot of strain from currency appreciation and high

A great question that involves many intricate dimensions and interactions!

The reality and uncertainties of a demand shock would, in themselves,
act to reduce inflationary expectations. In monetary policy
terminology, the demand destruction would cause headline inflation to
converge down to a low and well-behaved core inflation level.

But, as explained in the response to an earlier question, the demand
shock is being accompanied by a supply shock which has the opposite
effect. Indeed, the longer the persistence of supply disruptions, the
greater the risk of core inflation converging up to the more elevated
headline inflation rate.

This latter phenomenon tends to be more pronounced in emerging
economies where food is a larger part of the consumption basket.
Moreover, the policy dilemmas you cite, including the linkage between
tight monetary policy and complicating surges in capital inflows, tend
to impact the effectiveness of anti-inflationary measures.

What about your questions on asset classes? Needless to say, the
asset allocation effects of all the ongoing shocks are complex, to say
the least, as one must also take into account developments in real
economic activity and the technical positioning of markets. As an aside,
this speaks to the recent pick up in both realized and implied
volatility in many asset classes over the last few weeks.

When faced with these uncertainties, investors must be clear about
what they think and, equally importantly, how they think it. This
relates essentially to the robustness and adaptability of analytical
underpinnings and the underlying frameworks.

At PIMCO, we found it advisable to complement our existing frameworks
with what my colleague, Bill Gross, has labeled “safe spreads”. The
operational test is the identification of expected high real returns –
that is, expected nominal returns adjusted for the evolution of risk
factors (e.g., inflation, liquidity, volatility, credits and equity
premia, etc…), as well as changing correlations across markets.

In its practical application, this concept serves to qualify in an
important manner some long-standing conventional distinctions that, we
believe, are less valid today – be it the one between advanced and
emerging economies or the conventional notion of “safe spread” in
government bonds.

Will Japan buy fewer US Treasuries?

beyondbrics reader: Will the Japanese disaster be an important factor for Treasuries? Will it result in less demand from Japan?

A great question, that speaks directly to how Japan will fund its reconstruction program.

After the required focus on human rescue operations and the
stabilization of the nuclear reactors, the attention of the Japanese
authorities will shift to a massive reconstruction programme to offset
the impact of the terrible earthquake and devastating tsunami. The
funding can come from three major sources: borrowing, debt monetisation,
and the repatriation of the considerable Japanese investments held

The impact on US Treasuries will depend on the exact mix of these
three. The larger the repatriation, the greater the upward pressures on
US treasury yields (and, also, the implications for some other assets

As regards demand, yes there will be a reduction in the Japanese
component as the country’s current account surplus will fall
significantly. Since global balances need to add up, the reduction in
Japan’s surplus will be accompanied by a higher surplus/lower deficit in
other countries. The net impact is what counts for US Treasuries.

Note that, according to the data issued by the US government, we have
had periods in which Japan has been a net seller of Treasuries. The
impact was offset by purchases by other countries, most notably China,
with similar asset preferences for Treasuries.

Based on all this, and in considering the level and composition of
the various marginal propensities to save that are in play, we are
inclined to the view that this demand effect would be also place upward
pressures on the existing level of US Treasuries yields.


beyondbrics reader: Who is going to buy Treasuries when QE2 ends in June? Will the Fed do it again?

It is not clear to us who will step in after June 30th when QE2
formally ends; and this is a challenge both for policymakers and for
current valuations in some market segments.

At current yield levels, we do not see sufficient demand coming in to
offset what the Fed has been buying, be it from domestic sources or
purchases from other countries. Meanwhile, on the supply side, we expect
the Treasury to continue with its heavy issuance program.

At this juncture, the Fed is minimising the problem by noting that
“stocks” matter more than “flows”. In other words, since the Fed has
effectively taken out a significant amount of Treasuries from the
marketplace (and they will not be selling them), other participants have
no choice but to buy the new supply. However, as others also suspect,
we think that it is much more complicated than that. And recall that the
FED has little history to guide its thinking here.

In response to your question on whether the fed “will…do it again,”
let us suppose for the sake of discussion that the economy weakens and
Treasury yields spike as we get close to the June 30th expiration of QE2
and/or in its immediate aftermath.

Some will undoubtedly call either for a QE3 or for the extension of
QE2. Others will warn against this type of “active inertia” in
policymaking, noting that the repeated use of such an instrument will
likely shift further the balance of outcomes away from “benefits” and
towards what Chairman Bernanke, in his Augst 2011 Jackson Hole speech,
correctly labeled as “costs and risks”. And remember, these costs and
risks – or what at PIMCO we have analysed as collateral damage and
unintended consequences – have consequential economic, financial, and
political elements that play out both domestically and abroad.

Taking all this into account, our inclination is that the hurdle rate
for introducing a QE3 will prove to be very high, and rightly so.

An emerging market bubble?

beyondbrics reader: Investors are reallocating their fixed-income
portfolios in order to increase their weightings in emerging market
debt, largely government bonds and issuances by SOEs with an implicit
government guarantee. Previous examples of such shifts in other asset
classes have caused unsustainable bubbles. Indiscriminate buying by
ill-informed new investors has often contributed to these bubbles. Given
the limitations of existing analytical tools, such as credit ratings,
what are the top three economic factors that investors should be
focusing on to differentiate emerging market sovereigns?

The data on mutual fund flows suggest that, in the last few months,
investors as a group have stopped allocating massively to emerging
market bonds. In fact, there have been a few weeks of net redemption
after very, very large inflows in 2010. This phenomenon is even more
acute for emerging market equities.

These flow patterns tend to be large relative to the absorption
ability of markets. As such, emerging markets tend to be subjected to
both over-shoots and under-shoots that are not warranted fully by
changes in underlying fundamentals. While these movements have tended to
decline with the gradual maturation of the asset class, they must
always be considered in investors’ decisions regarding the scaling and
timing of their allocations.

We would agree with you that it is unwise to rely just on the ratings
issued by credit rating agencies. Indeed, at PIMCO, our analytical work
eschews these ratings preferring, instead, to focus on our internal
assessments. This process of continuous re-evaluation is, of course,
part of a broader investment philosophy and process

As to the specific factors, the key is to cover those that materially
influence sovereigns’ ability and willingness to pay; and do so
pro-actively. We thus focus on solvency and liquidity variables for debt
and debt service, economic growth potential, and policy responsiveness.
This allows the continuous comparison of our forward-looking
assessments of credit with what is being priced by various segments of
the markets.

A sales tax to pay for US pensions?

If the old saying is true and demography is destiny, the
developed world faces a tsunami of pensioners over the next thirty
years. How can our economy cope with these retirees drawing down on
health care and other services, and who will pay for it? Do you see a
national sales tax in the future to pay for this?

These are critical issues that are finally attracting more attention
in policy circles. It is critical that the resulting deliberations lead
to meaningful and timely actions to pre-empt big problems down the road.

Should such actions not be forthcoming, we suspect that the answer to your questions will be yes, yes, and yes.

Yes, demographic factors are important and, indeed for some
countries, will become crucial in the years ahead and will overwhelm
more conventional economic and financial factors. This is particularly
true for rapidly aging societies that have made large entitlement
promises (pensions, health care, etc.) that they will find difficult to
deliver on.

Yes, there is a question as to who will pay and through which
mechanisms. Depending on the country, we will see a mix of higher
inflation, increased taxation, and disappointments on long-standing
entitlement promises.

And yes, we think that a national sales tax in the US will likely be
an option that will attract lots of deliberations and, potentially,

Printing money not enough for Ireland

To me it seems that the Irish government needs to print money, by
one means or another, to fill the gap left by the toxic bank assets in
Ireland. Do you agree? How could the Irish central bank do this in an
imaginative way, considering the coupling to the European central bank
and the complexities of European politics which determine how the Euro
is managed?

Let us start with the sad facts.

Ireland’s public finances have been overwhelmed, and in a bad way, by
the decision to assume so many banking sector liabilities. Because of
that, the country faces a series of potential challenges.

The huge budget hole requires a massive fiscal adjustment
notwithstanding large bail out funding from the ECB, EU and IMF. The
related uncertainties add to the headwinds facing growth and employment
creation. And membership of the Euro-zone limits policy options.

I suspect that these factors are the ones leading you to explore an
“imaginative way” for Ireland to “fill the gap left by the toxic bank
assets” – and correctly so.

Believe it or not, Ireland is already doing what you suggest. It works in the following way:

Public debt instruments are issued to the banking system which then
turns around and exchanges them for cash with the ECB, either directly
or via the Irish central bank. In effect, money is being printed.

We think that this will not be enough for at least two reasons.

First, there is an issue of size. Ireland’s toxic asset problem is
large, and will get larger if the economy is not able to quickly restore
economic growth.

Second, the type of funding that is being used is too partial. It
provides liquidity but not solvency support. As such, the protracted
debt overhang acts to discourage new investments that are key to
Ireland’s ability to grow at a high and sustained level.


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Mon, 03/21/2011 - 12:53 | 1082116 Alcoholic Nativ...
Alcoholic Native American's picture

An Unlimited budget Utopia.

Imagine if all treasuries got bought, all toxic garbage got bought. Imagine if 700 billions was just the tip of the iceberg.

Can you imagine it?

Mon, 03/21/2011 - 14:02 | 1082439 LowProfile
LowProfile's picture


Per Rickards, the maturing debt the Fed now owns can be used to buy $750B annually.  Instead of retireing it, they will simply purchase more debt. 

You cannow expect a minimum $0.75T bid on the market annually.

Mon, 03/21/2011 - 14:22 | 1082500 Alcoholic Nativ...
Alcoholic Native American's picture

Can't turn down guranteed returns even if projections calculate in QE.....1,2,3,4, yea right, the system is broken.

Mon, 03/21/2011 - 14:47 | 1082550 Thomas
Thomas's picture

Rickards math is wrong. It argues that the banks balance sheets will not increase, which implies that the Central Banks will not be monetizing anything. Such balance sheet stability would be great, but ain't gonna happen. It's akin to saying that your interest payments on your credit card will be used to pay off new purchases.

Mon, 03/21/2011 - 18:45 | 1083581 smlbizman
smlbizman's picture

due you mean how my whole life policy used to work?

Mon, 03/21/2011 - 12:50 | 1082119 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Sugar is gross.

Mon, 03/21/2011 - 13:35 | 1082317 Oh regional Indian
Mon, 03/21/2011 - 19:22 | 1083687 knukles
knukles's picture

El-Erain's missives have become more dense than Fuckushitnme's radio-nucleotide emissions.

Mon, 03/21/2011 - 12:52 | 1082120 williambanzai7
williambanzai7's picture

This guy would have much more cred if he was not with PIMPCO. Who knows what card he is playing.

Mon, 03/21/2011 - 12:55 | 1082137 Herd Redirectio...
Herd Redirection Committee's picture

Yeah, exactly, his intelligence gives him cred, but his associations clearly indicate you can't fully trust the man.

"The Day The Standards Died"

Mon, 03/21/2011 - 12:51 | 1082125 DutchTreat
DutchTreat's picture

I am going long ink, printers and trees.

Mon, 03/21/2011 - 14:10 | 1082460 mr. mirbach
mr. mirbach's picture

isn't fiat currency printed on cotton rag printing stock?  Too late to buy cotton fx? Or is that one of the reasons cotton fx is up?

Mon, 03/21/2011 - 14:45 | 1082546 DutchTreat
DutchTreat's picture

You're probably right in respect of USD and may be a reason cotton skyrocketed. Thanks to Ben the Cotton Picker!

The fiat currency I use to buy my (soon to be priced at 1 million EUR) bread is made of paper (and (non)-precious metal).

Now that I come to think of it: I should probably also go long Ames ( as soon, everyone will switch from a wallet to one (or more) wheelbarrow(s).

Mon, 03/21/2011 - 15:37 | 1082833 GubbermintWorker
GubbermintWorker's picture

Digital man, that's how they make money now! Paper money is so  passé!

Mon, 03/21/2011 - 15:16 | 1082695 Dirt Rat
Dirt Rat's picture

Go long on Crane Paper. They provide the paper for the banknotes, among other things. I used to use Crane paper for my hardcopy resumés.

Mon, 03/21/2011 - 12:52 | 1082130 Herd Redirectio...
Herd Redirection Committee's picture

You never can tell with El-Erian, he is clearly a smart guy, but it seems he is 'in too deep', or in other words, he has been compromised, and is giving us the best kind of disinformation, the kind that is 98% true!

Check out the latest from the Capital Research Institute "The Day The Standards Died":

We have spent a lot of time discussing the Gold standard and what it means to have the world reserve currency here at the Capital Research Institute. But today we want to look at something a little different, but just as crucial: the importance of accounting standards. OK, OK, I am hearing the yawns already, just bear with me! When the Financial Crisis hit in late 2008 not only did Capitalism die, when the Government decided bankrupt firms (of their choosing) should no longer be exposed to the risk of failure! The history books are going to be speechless on that one, and will simple relate: “It seemed like a good idea at the time!?!?” But what may have slipped under a lot of (non-accounting) people’s noses was that accounting standards were also effectively removed at that time. The most important of which were mark-to-market accounting rules.

Mon, 03/21/2011 - 15:02 | 1082613 HedgeFundLIVE
HedgeFundLIVE's picture

a few things everyone should know about AT&T's proposed acquisition of T-Mobile

Mon, 03/21/2011 - 12:55 | 1082138 Tulli
Tulli's picture

Portugal is near a tipping point: the main opposition party PSD will vote on Wednesday against austerity measures version 4.0 to be presented by the government to parliament.

The government is expected to fall as a consequence.

The rationale presented by PSD can be found here:

As it turns out, if they get elected they prefer to go for a bailout now, rather than procrastinate.

Kool aid forever.

Mon, 03/21/2011 - 12:57 | 1082148 SilverRhino
SilverRhino's picture

We're fucked.

Mon, 03/21/2011 - 12:58 | 1082159 Tail Dogging The Wag
Tail Dogging The Wag's picture

US Army 'kill team' in Afghanistan posed for photos of murdered civilians

Commanders brace for backlash of anti-US sentiment that could be more damaging than after the Abu Ghraib scandal

The original article with three (3) pictures from Der Spiegel,1518,752272,00.html

Mon, 03/21/2011 - 13:16 | 1082245 InconvenientCou...
InconvenientCounterParty's picture

memes are more powerful than bullets. When you hear about "winning hearts and minds" this is what they are referring to.

This hurts deeply on behalf of struggling Afgans and the altruistic young pepole in harms way. 

The "truth justice and the American way" meme, must be defended from within, which means eye-for-an-eye.

Mon, 03/21/2011 - 13:01 | 1082172 plocequ1
plocequ1's picture

Go long Gideons and Jack Daniels.

Mon, 03/21/2011 - 13:04 | 1082184 themosmitsos
themosmitsos's picture

Tyler I call BULLSHIT. I'll bet we see they BTFD in TSYs in huge size

Mon, 03/21/2011 - 13:05 | 1082185 Larry Darrell
Larry Darrell's picture

The world passed the tipping point in 2008.

It's just taken this long for the downhill slide to commence.

Think about sitting in the front of the rollercoaster.

You cross the top of the hill, but you don't start the acceleration to the bottom until the rest of the coaster cars come over.

We here on ZH have known we crossed the apex long ago.  We just didn't know how many cars were behind us before the full fledged descent could commence in earnest.

Mon, 03/21/2011 - 13:12 | 1082226 fragrantdingleberry
fragrantdingleberry's picture

El Erian for President...of Egypt!

Mon, 03/21/2011 - 13:11 | 1082228 SWCroaker
SWCroaker's picture

Um, when I look at a chart of the money supply, I see the Fed has been "Quantitative Easing" without an official recognition of it since, oh, about 1913.  When Hank P was our Sec Treas, we got all wrapped up in the amount of $750B.  When the Bloomberg FOIA data finally came out, it appeared that the Fed had actually been moving around $12T.

If a Fed printer eases in the woods, but there is no offical label for the MSM to report it, does it really happen?

Mon, 03/21/2011 - 13:19 | 1082250 SDRII
SDRII's picture

The myth of inflation "rates" no longer matter when absolute numbers become asphyxiating/unmitigatable/unmanagable 

Mon, 03/21/2011 - 13:23 | 1082278 Cursive
Cursive's picture

Taking all this into account, our inclination is that the hurdle rate for introducing a QE3 will prove to be very high, and rightly so.

Ben Bernanke:  How's SPX 950 for a hurdle rate?

Mon, 03/21/2011 - 13:24 | 1082279 LostWages
LostWages's picture

It's hard to trust a man talking his book. 

Mon, 03/21/2011 - 13:59 | 1082413 Sophist Economicus
Sophist Economicus's picture

Or that sports a mustache that rivals Stalin's

Mon, 03/21/2011 - 13:36 | 1082319 squexx
squexx's picture

All this shit going on, and of course the market is up 200 points just now. I want to kill every Wall St fuck I can!

Mon, 03/21/2011 - 14:03 | 1082443 Sophist Economicus
Sophist Economicus's picture

Really?   Need directions or do your superhero powers breakdown when it comes to crossing rivers?

Mon, 03/21/2011 - 13:36 | 1082330 falak pema
falak pema's picture

Hat tipping point to Poutin?

Leg tripping point to Q-daffy. If we can find his legs in his bunker.

Butt tipping point in Yemen, Bahrein?

Head tipping points in Angola, Gabon?

Tooth picking point on WS?

Shit tipping points in Fukushima?

Tit tickling points when they turn the light out in Tokyo?

Brazilian babe tipping points if O'b and CEOs go nuts doing the mega contracts samba?


Mon, 03/21/2011 - 14:10 | 1082467 slaughterer
slaughterer's picture

So when do the insitutionals start selling off equities in fear of a stop in QE?  What is the precise time line here? Do we have another "Jackson Hole" type event to pin on our calendar as a type of one-day "binary event" or will the erosion be spread across April and May as the funds slowly "front jog" the QE discontinuation and plunge?   Please, Mr. El-Erian, you should know. 

Mon, 03/21/2011 - 13:46 | 1082365 DR
DR's picture


El-Erian says:
“The data on mutual fund flows suggest that, in the last few months, investors as a group have stopped allocating massively to emerging market bonds

Gross says in todays Bloomberg article:
“Pacific Investment Management Co. says investors should buy company debt in Russia, Brazil and other emerging markets where rising wages..”

Pimpco is trying to front run a flow back to EM…

Mon, 03/21/2011 - 13:51 | 1082386 DR
DR's picture

"Do you see a national sales tax in the future to pay for this?.....

Should such actions not be forthcoming, we suspect that the answer to your questions will be yes, yes, and yes."

Ouch....sounds like Pimpco believes a VAT is backed into the cake!

Mon, 03/21/2011 - 13:52 | 1082387 Saxxon
Saxxon's picture

QE until the shithouse blows into the air.

They will buy treasuries and whatever else is necessary, to stay in power.  They will call it something else; or call it nothing.  They will tell whatever lies are necessary.

Sorry, closed loop now.

The people are just flocks; and these gauges that El Erian uses are measurements of the nutritional value of what goes into their pens and crowded cages.  The likes of Mr. El Erian are untouched.


Mon, 03/21/2011 - 13:54 | 1082406 ghostfaceinvestah
ghostfaceinvestah's picture

Looks like we need to attack Chile next

Obama arrives in Chile on Monday, where protestors will greet him with demonstrations demanding apologies for the United States' support of President Agusto Pinochet in the 1970s and 1980s.

Early Monday morning, a small explosive device blew-out the windows of a U.S. cultural institute in Viña del Mar, on the Chilean coast. There were no reported injuries and no group claimed responsibility for the blast.

Mon, 03/21/2011 - 23:25 | 1084706 Real Estate Geek
Real Estate Geek's picture

Chile--because three wars aren't enough.

Mon, 03/21/2011 - 13:56 | 1082417 Eagle1
Eagle1's picture

I used to compete with PIMPCO when I managed the Marine Investment Management Co. back in the mid 80's. Certainly, some of what they say at the senior level can be self serving...but you cannot begrudge their performance. They were sharp then and are sharp now.

It all boils down to the fact that we are fu**ed pretty much no matter how you look at it and one's investment strategy should be formulated accordingly.



Mon, 03/21/2011 - 18:07 | 1083435 Calmyourself
Calmyourself's picture

George, I did not manage a large fund, so how do you adjust with no timeline for the Fu**ed portion of the party.  Money to invest but none to burn by being early in..

Mon, 03/21/2011 - 14:05 | 1082452 Stuck on Zero
Stuck on Zero's picture

Fukushima will be Japan's excuse to dump US Treasuries.  "So solly." 

It will be Bernanke's excuse for QE III.  "So needed." 

Mon, 03/21/2011 - 15:12 | 1082667 tiger7905
tiger7905's picture

Definitely agree Fukushima makes a great excuse, see these comments by Pento on how this will play out.

Mon, 03/21/2011 - 14:11 | 1082469 zenmeister
zenmeister's picture

Waaaayyyy too credible....

Mon, 03/21/2011 - 14:15 | 1082478 tradewithdave
tradewithdave's picture

Wrong.... Here's El-erian's quote; "Since global balances need to add up."

Ummm... since when are we operating in a vacuum and if that's not what he meant, what's to say that GAAP revisions and and new lifecycle accounting, new carbon credits, etc. are not two other ways to unbalance his assumption of global balances? The entirety of economics as an academic practice, based on efficient distribution of scarce resources, is being brought into question.  What model of "add up" is he talking about exactly; The new one as measured by his stated demise of the Smithian liberal Anglosphere?

This statement, unless it's a set-up, makes me want to at least reevaluate one aspect of my previous opinion on the PIMCO/Goldman cage fight.  Is it possible that the surprising regularity of the El-erian editorial feed has possibly been established for the purpose of well-timed and selective disinformation in anticipation of the inevitable reset button?  What would the motivation be otherwise?  It's not just a new economic paradigm... it's a new religion and President Obama is "calling you dude."

Dave Harrison

Mon, 03/21/2011 - 15:07 | 1082642 da sharkster
da sharkster's picture

Dave, can you clarify the Pimco/Goldman cage fight for me...seems Pimco bailed on Treasuries and Goldman is shorting them? Seems like they are on the same side?

Mon, 03/21/2011 - 14:34 | 1082522 sbenard
sbenard's picture

From John Mauldin's newsletter this weekend, he has a very good inside-the-Fed source to suggest that QE3 is on its way:


I come to the end of the letter with a brief note on a very worrisome conversation I had yesterday with Martin Barnes, editor of the esteemed Bank Credit Analyst. Martin is one of the people I call when I want to know what the Fed might do. I guess I was looking for assurance that the Fed would not do QE3. I did not get it.
“Look, John” (insert Scottish brogue as I paraphrase), “if the Fed sees the economy rolling over into recession they will put their mandate for employment ahead of their mandate for stable prices.”
“But that would mean higher inflation in the face of a slow economy.”
“And?” he shot back. “That would just be the price of trying to increase employment, in their minds.”
“But at some point you have to bring out your inner Volker!” I intoned. “What about the future?”
The conversation continued, but I never got my warm and fuzzy assurances. For the record, another round of QE, unless there is a true liquidity crisis (and the last QE did not qualify!), would be a disaster, at least from the cheap seats where I sit. There are all sorts of inflationary and stagflationary consequences, none of which I like.

Mon, 03/21/2011 - 14:57 | 1082585 6 String
6 String's picture

Taking all this into account, our inclination is that the hurdle rate for introducing a QE3 will prove to be very high, and rightly so.

No, the hurdle rate is only there at all because the pressure Bernake is starting to receive...from Congressman like Ron Paul, to Richard Fisher, and many more.

So, their will be a QEIII. But not until things start to unravel in the summer. The Fed doesn't want things to unravel too close to June 30th...that way they can claim the "see we needed that QE shit" in time to ram in another few rounds...

So, Pimco is just waiting for the unravel part. Since they admit their isn't enough money to fund our ongoing deficits means they think treasuries will go bidless and chaos will ensue. It can't mean anything esle.

Thus, QE3 by August/Sept.

Mon, 03/21/2011 - 15:01 | 1082601 da sharkster
da sharkster's picture

The way out is too bleed QE2 through the fall, slowly allow rates to rise giving cover for banks to start lending again, the market will trade sideways until the end of the year, speculators in PM and Comm. will begin to bail and re-invest in the mkt./bonds as rates rise and the fear the inevitable crash of the PM/Comm. bubble...demographics and emerging markets will slowly drive "real" demand back to pre-rec levels and real estate will hit bottom by early 2012 but be flat to marginally higher for a few more years.

Inflation fears will "pop" from time to time but will ultimately subside as PM and Comm. prices drop as does oil as the ME situation clams down (as will Japan's reactor issues) which all will reduce "input cost inflation".

While the overall Fed Balance sheet is terrifying it will force Congress to take action...sadly, the fate of the Euro and Yen are already written...Japan's debt, demographics and slowing demand will put severe pressure on the Yen in the mid to long term and the Euro will become increasingly more difficult to manage as austerity measures are rejected by the net importing countries and bailouts are rejected by the net exporting countries.

As in the past, America will get lucky because all of these issues plus a more aggressive FED oversight will finally put a floor under the dollar. Lastly, China is a massive bubble with social unrest brewing - any appreciation of the yuan will be met with increasing hostility towards the communist party.

Thus, yes we are truly screwed up here in the US but fortunately for us, the rest of world is more so...

da sharkster




Mon, 03/21/2011 - 15:21 | 1082744 Sophist Economicus
Sophist Economicus's picture


QE2 cannot be bled, because the social program commitments (UC, Social Security, Medicaid, etc) cannot be unwound during this downturn without serious political and social ramifications.   Inventory restocking fades putting pressure on companies to further tighten, Real Estate inventory overhang continues to grow as banks more 'dead' supply enters the banking system while prices continue to erode, creating a growing cancer on bank balance sheets.

Couple this with increasing prices as continued disruptions in oil, continued bad weather patterns due to a shift to 'global cooling' for the next decade or more  - further squeezing grain/fresh food supplies, gambits by self deluded governments to attempt to increase taxes (i.e.theft of their citizens) .vs. eliminating themselves, promises coming due to the populace via retirement that exceeds the country's GNP by several times, etc, etc, etc.....

And one can argue that 2012 will witness a rush to PMs and an exodus from the District before justice is served - hopefully on a silver plater

Mon, 03/21/2011 - 15:41 | 1082864 da sharkster
da sharkster's picture


No question the issues you bring up are very real. I believe your scenario has better odds post 2020/2025.

Dollar support in the near- and mid- term is more likely as the affect of gas prices etc. is more acute than the need for long term cuts to entitlements. 

I see tremendous pressure building for a stronger dollar position by the Fed. No question rates will rise (my take is that this will help the dollar not hurt it) most believe this will crush the market and I am sure there will be a sell-off but I think it will snap back as investors feel more comfortable with real growth indicators and not Fed induced growth.

At this point in time if the other industrialized nations had there collective acts together we would be in big trouble. The dollar will eventually come back into favor as the world realizes the underpinnings of the Yen and Euro are worse. (but it would help if we had an effective leader who understood the value of a strong dollar.)

da sharkster


Mon, 03/21/2011 - 15:55 | 1082933 Sophist Economicus
Sophist Economicus's picture

I see the logic in a strong dollar, I just don't see the political class falling into line.  Rising interest rates will squash the marginal consumer, business and residential/commercial real estate debt - a good thing in the long run, but not without lots of short term pain.    The 2012 elections are already front-and-center amongst the cock-roaches in Washington, I doubt their ability to make the proper hard choices -- cynical, I know...

Should be an interesting next 12 months..

Mon, 03/21/2011 - 23:35 | 1084721 Real Estate Geek
Real Estate Geek's picture

Rising interest rates will squash the marginal consumer, business and residential/commercial real estate debt . . .

Don't forget to include the budget on that list.  IIRC, the nat'l debt's duration is < four years.

Mon, 03/21/2011 - 15:35 | 1082831 6 String
6 String's picture

da sharkster, i give this a generous less than 5% probability. What you're saying is our monkeys in charge will be able to fly this 747 through a fucking paper cut.

Well, good luck to that one.


Mon, 03/21/2011 - 15:48 | 1082906 da sharkster
da sharkster's picture

6 String-

My premise is not they will "fly this 747 through a f___ paper cut" instead its that they will "fly around the paper cut for another 8-10 years" until they are out of gas or the cut heals itself (best I could do with that one)

The basis of my belief is that marginally higher interest rates is a net benefit in the short run as it will ease oil prices through a stronger dollar (much of oil's rise is due to speculation not fundamentals.)




Mon, 03/21/2011 - 16:02 | 1082965 6 String
6 String's picture

da sharkster,

Well, sure, that's what they're gonna try to do. They don't have any other options, really now, do they? But when was the last time these boys have landed anything smoothly?

I don't see the basis for your scenario either. 1% increases in our interest rates add $140 billion to service our debt. All higher interest rates mean is a near guarantee of more QE--the end game.

In other words, flying around the paper cut for 8-10 years will be like doing a triple-double three times on the same jump 30 feet up--hardly likely. As for this fucker healing itself.....



Mon, 03/21/2011 - 16:33 | 1083099 da sharkster
da sharkster's picture

"1% increase in interest rates add $140B to service the debt" - yes and no...its more complicated because it depends on what type of maturing debt is issued and what debt at what rate is maturing...but in essences I agree with your point.

However, my take is that they can and will get you see Portugal unraveling today...this is a precursor to the very near blow-up in the Euro (and when investors focus on the Yen fundamentals) a inevitable flight to the dollar...this will allow for two things:

1. The Fed gaining time - which they need - to ease the economy of "the sugar"

2. A spike in short term rates (but not in long term rates which funds most the debt)

I am okay with you not agreeing with is a dicey situation but from a trading perspective I would just be careful with any long positions in the Yen, Euro or PM. They are undoubtedly the investments of choice for this board and the investment community as a whole but I always fear a run with the masses...maybe there is value at seeing the other side of the coin...pun intended.

Best, da sharkster





Mon, 03/21/2011 - 17:16 | 1083266 6 String
6 String's picture

I'm not sure about an inevitable flight to the dollar: middle east blows up and the dollar declines; Japan, ditto. In fact, it seems like the run-for-cover trade has been toward P.M.s, which make up such a small part of all financial assets.

We'll just have to wait and see I suppose what gets the bid in the next run-for-cover bid, but I do agree as QE unwinds PM's could take an initial hit short term.

But even then, Gold got the bid last summer in that scenario too. Which points me in the direction that the dollar isn't seen as athe safe-haven it once was. It might get a bounce for short term reasons, but once QE III is ultimately unleashed--it's off the the races again for PM's.

I'm going into the unwind of QE II with this conservative allocation:

33% Swiss/Candian Dollar--33% Gold/Silver--33% short Russell 2000.


Mon, 03/21/2011 - 17:50 | 1083369 Life of Illusion
Life of Illusion's picture


The only way out of our debt problem is to print and devalue the dollar.

I think Ray Dalio gets it.

In the U.S., quantitative easing is coming to an end. What happens then?

The Federal Reserve's printing of money will continue through June and the fiscal stimulus will carry through the third quarter. We are also seeing a modest pickup in private-credit creation. Later this year, the economy's two major sources of stimulation, monetary and fiscal policy, will be declining significantly. Most likely, growth will slow significantly going into year end, unless the pace of private-credit growth picks up.



What does all this mean for emerging countries?

China and Brazil and some other emerging countries are in the opposite situation. They should be tightening monetary policy, but they can't have a tighter monetary policy because their policy is linked to the U.S. As time progresses, their inflation and their bubbles will become more severe.

Through 2011, and into 2012, these links are going to cause intolerable conditions. I believe that sometime in the next 18 months, we will probably have a seismic shift, very similar to the Bretton Woods breakup in 1971, in which linked monetary policies and linked exchange-rate policies come undone. The pain of holding them together is going to be terrible, and that's going to create the seismic shift.

What is the likely outcome?

The likely outcome is a big exchange-rate shift between those two groups. Generally, creditor countries that are running surpluses, whose growth is too strong and whose inflation pressure is too high, and that have linked exchange rates, will revalue their currencies in order to have independent monetary policies. Debtor countries that can't print money will restructure their debts, and those that can print money will devalue their currencies.

What does that mean for their bond markets? ......

Mon, 03/21/2011 - 15:11 | 1082672 onlooker
onlooker's picture

The Zero Hedge gift of today may be this::::::::::::::


------When faced with these uncertainties, investors must be clear about what they think and, equally importantly, how they think it. This relates essentially to the robustness and adaptability of analytical underpinnings and the underlying frameworks.At PIMCO, we found it advisable to complement our existing frameworks with what my colleague, Bill Gross, has labeled “safe spreads”. The operational test is the identification of expected high real returns – that is, expected nominal returns adjusted for the evolution of risk factors (e.g., inflation, liquidity, volatility, credits and equity premia, etc…), as well as changing correlations across markets.-----


It may be SOP for many of you but new news for many older “invest in a stock” folks. Anyway, worthwhile bits of information regardless of the intent. It makes the ZH site worthwhile for us that may not be able to assimilate everything but only bits and pieces.

Mon, 03/21/2011 - 15:17 | 1082711 huggy_in_london
huggy_in_london's picture

As I have repeatedly said on this board... there won't be a QE3.  Insiders keep repeating this.  The private consultancy firms are all reporting this from various sources.  So baring some ridiculously unforseen event, there won't be a QE3.  Question is can the SPX deal with no more stimulus while sitting at (basically) 1300?  I don't think so. 

Mon, 03/21/2011 - 15:29 | 1082790 long juan silver
long juan silver's picture

El'Erian could get a zero on a True/False exam!


Mon, 03/21/2011 - 16:12 | 1082997 ivars
ivars's picture

QE3 will not happen due to peak oil. Here is the forecast stock response, which indicates USA recession in q1 2012, on the level 2-4% q/q annually.

Mon, 03/21/2011 - 16:23 | 1083057 Slipmeanother
Slipmeanother's picture

When prostitutes ask to be paid in silver its over for the dollar.

Its called the Charlie Sheen index

Mon, 03/21/2011 - 16:28 | 1083079 SuperRay
SuperRay's picture

hey Tyler, why haven't i seen anything about this on ZH? c'mon, dude, I just donated $20 to ZH. What do I get for all that swag?

Mon, 03/21/2011 - 16:29 | 1083082 tony bonn
tony bonn's picture

qe(n) depends upon the answer to the question cui bono? are the banks still ladled with toxic "assets"? if so, there will be qe(n). would the fed's balance sheet be impaired if the solipsistic market for its "assets" vanished? if so, there will qe(n).

one bankster may roll another under the bus for the good of the team or for sheer avarice, but it is not the case that he will permit the industry consisting of gs, jpm, ms, db, and hsbc to go down....look at their balance sheets to see where the risk of qe(n) is. but don't forget the fed and the treasury. (or the gses and pimco).

there will be more qe....

Mon, 03/21/2011 - 16:52 | 1083182 da sharkster
da sharkster's picture


the green light for the dividends was the precursor for no qe(n)...Fed cant justify lower dollar in short term...acute rise in oil, gas, comm. etc will trump the need be the treasury buyer of last resort. Short term rates will climb, the mkt will take a hit but money will flow into dollar (and treasuries) as euro and yen are a mess...

Mon, 03/21/2011 - 16:45 | 1083160 falak pema
falak pema's picture

Qe is like quiet Eddie ... a guy with a billiard cue which is skewed to make you think it can't shoot pool straight but is in fact a lethal weapon of 'fast eddie' to cheat you out of your bread n butter before you can blink twice. That's the Benocide strategy...make you think he's going down main street and in fact take you down a closed ally and then...strip you naked by a PD henchman.

The market is going to get more dangerous every day as the swings and roundabouts will become very bumpy. Stay on the right side of the street. Or stick to virtual pool games and avoid the real sharks.

Mon, 03/21/2011 - 18:43 | 1083576 gwar5
gwar5's picture

Bullshit. QE will continue under the guise of capital flows which is the same thing. The Fed will use the capital flows from the UST, which produce $750 billion per year, to finance the US debt and continue the same program as QE 2, but by another name. It's still QE.

Mon, 03/21/2011 - 19:55 | 1083837 CrashisOptimistic
CrashisOptimistic's picture


At a general level, the biggest gainers will be the oil exporters who are not currently impacted by geo-political uncertainties. These are located mainly in the set of emerging and frontier economies (e.g., Angola, Gabon, Ghana, Indonesia, Nigeria and Russia) but also in the advanced world (e.g., Norway).


This is disappointing from El Erian.

Indonesia has not been an oil exporter since March 2004.

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