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Mohamed El-Erian: "You Have To Buy On Both Liquidity And Solvency Solutions"
Amid last week's whirlwind media tour, in which the PIMCO dynamic duo of
Gross and El-Erian were jointly talking up their
book and providing useful insights on contagion, was this clip with the former
Harvard investment officer from an interview with Bloomberg's
Tom Keene. It is by far the most informative of all of El-Erian's
recent media guest spots. Below are the highlights.
Q. On coordinated fiscal policy in Europe.
Europe is buying time. Trying to avoid a very disorderly outcome - doing that
by throwing a lot of liquidity at the problem, and hoping that countries can
create serious fiscal adjustment.
"Liquidity as opposed to solvency, can
help bridge this difficult period."
Q. Do we still need a Greek restructuring?
"We need to do something about the debt overhang in Greece. John Lipsky
correctly said part of the solution are i) first deficit reduction and ii)
structural reforms. My sense is that is still incomplete."
Q. Where does Euro weakness stop?
"It stops when the market is convinced that Europe has a sustainable
solution, that Europe is dealing with its debt overhang, and that the good isn't being contaminated by the bad."
"The politics of austerity and the politics of bail out are very
difficult."
Q. Does the tightening Greek spread to Bunds sound the "all clear"
No - it is a function of shock and awe. The question that one must ask, is
whether the ECB's presence permanent. Are they
willing to contaminate their balance sheet by buying Greek bonds, or is it like
an FX intervention where they come in, they see if it works, they
step back and analyze.
Q. Is PIMCO focused on the fiscal issues of the UK?
"Yes we are. In 2010 the markets are going to wake up and realize the public
finances matter. We are focused not only on the UK, but across the world."
Q. What should US investors be watching for in Europe?
"The main question for any investors: can Europe stabilize the situation so
that the banking system does not get contaminated. The banking system is like
the oil in your car: it connects all sorts of things and allows the car to move
forward, so you want to make sure that the banking system functions well, which
goes back to what we spoke about earlier, you have got to make sure that Europe deals
with its debt issues."
Q. What do the European banks need to do?
"Banks need to raise capital, and "deal" with assets which are facing
headwinds. They have to do what the Us did which is bite the bullet and raise
capital and deal with these assets. Lots and lots of people bought Greece for
their government bucket, thinking it's interest rate risk. Well it turns out
Greece is credit and default risk, which means much more volatility, which means
that many investors out there, including the banks, are overexposed to Greece and
they will take every opportunity they have to reduce their exposure."
Q. How much cash will be deployed?
"Will not see the full trillion deployed. The IMF part is the least likely
part to be used: it can not precommit money for a region. The IMF
has two principles which are really important: "uniformity of treatment" and
"case by case." So each country will have to come to the IMF on its own and not
part of a region. The number's function was shock and awe. People are realizing
there is uncertainty about the package over time. "
Q. Is PIMCO long European banks, or purchasing European assets on the
margin?
"We are waiting. Better to wait and see how the solution goes. It is not
enough to buy on liquidity. You have to buy on both liquidity and solvency
solutions. we know that liquidity solutions can buy you some time, but
ultimately you need something that deals with the underlying problem."
h/t John
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I realize Mohamed El-Erian is talking his book often, but his comments for the past couple of weeks that I've seen have made a lot of sense. I haven't seen him really soft sell the European debt problems in interviews; he seems to think the situation is worse than the MSM wants to let on and hasn't been shy about saying so.
Right and that's why I enjoy his viewpoint too; my only critique (and it's modest) is that sometimes he is too far in front of the curve. Obviously you want to put yourself in a position before the action occurs, but in his case he tends to get there long before parties start. If memory serves me correctly he was bearish EU in 07 and Euro in 08/09
Anytime a con man speaks, listen, and do the contrary, that is, unless their jumping out of a window near 11 Wall St.
Another snorting horse. "Deal" with their debt? How? By hiding it even more than they have before? By increasing it? We all know that their inability to deal with the excessive debt IS the problem. If there were an honest way to deal with it, the EU wouldn' be in trouble, it would be a DONE deal. There are only two ways to deal with debt; pay it off or default.
What "investors" should do is grab their money and run like hell.
I find that the guy can say nothing and use the most language of anyone. Makes him sound good, but I ask.
1)where do I put my money
2) what are the practical effects
3)what should I expect in the markets.
he talks in such generalizations. it's like greenspan lots of talk saying almost nothing.
did we do this; " They have to do what the Us did which is bite the bullet and raise capital and deal with these assets."
i don't see it. mark to myth so capital not raised to deal with losses, and money spent on bonus instead of realizing looses. I have come to the conclusion he's an ass
I will be clear for you. Practice disintermediation. Remove the middle man, the banks, the investment advisors, the money managers, the real estate agents that all take a portion of the return on your capital. Buy an asset with your savings, say a home in your neighborhood. Rent it out yourself. Expect a fair return on your capital and your efforts to maintain, or improve, the property. Nothing more. The practical effects are that you will sleep better at night.
Know leverage, know hedge.
No leverage, no (zero) hedge.
How about thinking for yourself. The idea that one needs to find the "right expert"... who will then tell you how to make money, baby... ya, ya, ya just rip it away from the smartest traders in the world... is a particularily naive subset of the Free Lunch Expectation. You are a Greek pensioner, no?
>>> 90% of the financial markets are highly efficient... and effectively a Random System for non-professionals, baby. Especially the gold market... which tanked about 50% 2008-9 after Every Last Mook had backed up the truck.
Wonderful. A person with all the answers! Please map out your deep-thoughts plan for us ordianary humans...
every tenth mook hasn't even bought the first dollar of gold related assets even yet. ownership figures are in the low single digits from what i see (anyone have good figures?). and another thing, it's especially nice to have that violent correction behind us, assuming one owns gold assets, as it makes a repeat a little less likely. the move also coincided with the long treasury hitting 2.6%. the case for a similar tsy move seems harder to make after q.e.1 looking at q.e.2....
"...do what the Us did which is bite the bullet..."
This line got me as well. Exactly how has the US dealt with it's debt problems again?
Ex-fxxking-actly.
Borrow, borrow, borrow,
and fire up the mint,
borrow 'till you can no more,
then print, print, print!
We basically socialized losses and increased moral hazard x100. His comments here have me puzzled as well.
better eye, for sure :)
LOL!! Thx Bol. I had to make Janice, Fish and Rocky happy. (and God knows who else. LMAO!)
He's referring to the billions of dollars we gave the banks via TARP and all of the other programs that to a certain extent anyway have repaired the banks balance sheets so they can pay out those nice bonuses, and tell themselves how great they are.
Of course that doesn't rule out our banks receiving hundreds of billions of dollars in the future as things go to hell again, but at least the case can be made our banks are in better shape right now, when considering the publicly acknowledged balance sheet information.
I'm not really clear on how all the TARP stuff worked but as I understand it, the banks were initially given all that money because with the "then new" mark-to-market rules, the banks appeared technically insolvent, even though their loans and structured investments were just starting to go bad (and collapsing in value). Then quite quickly the government seemed to drop the mark-to-market rules so the appearance of insolvency went away, like magic! From their I'm assuming they have been using all that TARP money to play in the markets, waiting for the next wave of defaults when they might actually need it.
When I look at the targets for upcoming mortgage resets, it looks like we are well past the sub-prime crisis, past the low (eye-of-the-storm) of resets in February of this year, and now quickly ramping up in the Alt-A and Option ARM mortgage resets which should peak in September 2011. That probably means they may need all that money again soon enough.
TARP was the shiny thing they showed Congress and the American people that the true banksters then paid off to show how "strong" they were and what good guys they are, cause hey they paid TARP back.
The bailout wasn't TARP, it was all the other acronym programs that got no press and allowed the Fed to spend $trillions on buying assets worth pennies from the banks at par. The true crime was all the "other" stuff, TARP was just there to throw the masses a bone.
I heard on the news yesterday that there is a big demand for TARP-like solutions in Greece. In fact homeowners all over Greece are searching frantically for green or dirt-colored TARPs to cover their swimming pools. It seems the Greek government is using satellite imaging to find homes with pools so they can tax them $1000 more per year.
Yep! Exactly. From the start, TARP was half temp liquidity to fill in investment gap and half political cover for FED operations. The media went right along with it. On the news nightly should have been the FED details. What a scam.
You got that right Grasul, the banks used TWIRP and TWAP to pay off TARP and now they owe more than ever. This is just a shell game. I agree that the loans were used to kite their own market cap and then raise cap with new issues. Equity values and public perception of markets was the whole basis of this. But note that if the markets tank again, it will take the banks down with it because they transferred assets from debt to equity, neither of which are on sound footing.
When, not if, the markets tank, they loose liquidity once again. Now you know why they permit GS to rig the markets.
What I have heard out of PIMCO is:
1) favor the fixed income bonds of natural resource based currency countries like Canada & Australia.
2) and by entering the Equity business I think they are indicating most fixed income is dangerous.
I choose to own hold cash, physical gold, short-duration gov't bonds in the U.S. and Canada, and start adding some stocks with pricing power on dips.
But what to do in a world of depeciating fiat currencies is indeed one heck of a puzzle. Big Brother is painting personal wealth into a corner...
Whenever you see currencies depreciate as a result of rising risk of default, it generally means the host country has high risk to its financial system. So the money seems to flow away from fixed investments like real-estate within the country into more portable assets like gold/silver, other 'safe' currencies, collectibles, some commodities, etc. Over the past year or so, collectibles like art and coins have escalated almost as much as gold, if not more.
I agree. But I want to be sure the portable assets are fungible in a sh*t-storm, so I would add firearms and related ammunition. I am not sure art would be on my list. But thanks.
It might be worth having a nice portrait of someone with the eyes cut out so you could hide behind it and survey the neighborhood with your favorite firearms at your side.
But, on the other side of that, there's delevering which could affect all asset prices. It's such a tough call.
heh, he has a degree in the bleeding obvious from somewhere, leave him alone. He dresses very smartly!
The market knows that Greece is a heroin addict that just got another hit to avoid withdrawl shakes.
Now the problems of 2% of the Euro Zone's GDP are now the problems of 100% of the Euro Zone.
"All for one, and one for all" they say as they dance to the graveyard of fiat history...
Germany is going to use the blueprint for turning round East Germany after the fall of the Berlin wall and roll it around the PIIGS. Extra taxes of 10% of GDP for ten years. East Germany is twice the size of Greece, but somewhat smaller than the majors of Italy and Spain. The UK is used to austerity. It pivots between profligate spending and austerity like a patient between two psychiatrists.
Time is running out.
Our lives are about shift parabollicaly..
Reminds me of the grossly inadequate responses to the Black Plague--the dance of Death.
Hey, if it works for you, don't argue. It's hockey playoffs time so before each game of my home team, I do my routine and put on my playoff duds to make sure they win. So far they are winning and none of the guys have gotten the Black Plague!
best to save the above clip as Bloomy is now charging for Keene's interviews
separately Ken Prewitt`s interviews are still free (which is good as he has forgotten more about journalism than Keene knows)
This is a great interview from early Friday AM with Jim Shrugg of West pac - he talks about dead babys and dead old people due to the bailout of the banksters and associated austerity
http://media.bloomberg.com/bb/avfile/News/First_Word/v5GUcFM9BRbo.mp3
Anyone? ::: "The main question for any investors: can Europe stabilize the situation so that the banking system does not get contaminated. The banking system is like the oil in your car: it connects all sorts of things and allows the car to move forward, so you want to make sure that the banking system functions well, which goes back to what we spoke about earlier, you have got to make sure that Europe deals with its debt issues."
OMFG! Let's make sure the banks haven't stepped in it!! Or else!!! OMFG!!!
I think this statement qualifies this gentleman for a "Lloyd!"
Or in super clear language: "How does the banking system "solve" the problem (buy the poo) by "creating liquidity" and even if they shift the shit to the US not get contaminated by having done the nasty deed?"
Ohhh dawling, the Erozone was so virgin, with no printing press wounds and now look.
Mohamed El-Eran has assimilated the LA financial lifestyle... While Timmay thinks he understands the other side of the trade.. hahahaha
http://www.youtube.com/watch?v=J2121FLyz64
I seem to remember during the Asian financial crisis a number of years back, the U.S. government was pretty insistant that Asian nations not prop up the banks and instead let them fail in an orderly takedown of some sort so the strongest would survive and the weak would be purged - a true market-based solution. So that's what they did. They had a couple of painful years and then came roaring back.
Now that the shoe is on the other foot, it isn't fitting very well. Maybe because the Asian banks weren't funding Asian politicians(?). What's odd is that most of the bail-out funds seemed to go not to banks that support the financial system, but investment banks that prey on the system. That more than just about anything else is what I can't come to grips with here. Part of me says that if a financial collapse is coming for the U.S., it is just a vehicle to purge the political system and hopefully restore it to its original foundations.
the other lesson from TD`s post is that Bloomberg radio is probably the best of a bad bunch in terms of business media - it`s on XM or local in the north east and it`s online - it is my primary business media other than blogs.
1130 on the AM dial or online at
http://www.bloomberg.com/audioplayers/playr_go.html?&clipName=Bloomberg%...
When they don't have answers (he doesn't) or they sounds foolish on the turn (he does), be worried. It's hardly even his fault. He tried. I'm surprised he or Bill talk at all. I think bite the bullet has a different meaning lately too.
I saw a tape of William White in Hong Kong yesterday, ex-BIS banker. He's smart. check it out
PIMCO will say whatever it will say. I'm not sure that they're really that impressive of an institution.
Maybe someone will disagree. Soros has made dumb calls, Rogers, has made dumb calls in the past, Jones has made mistakes...
Bonds in general are just kind of rife with insider trading by their nature, so it's tough for me to say that I respect what comes out of the company.
They're definitely a 'dependent' institution, like most. Bill's "ring of fire" paper was pretty solid.
Liquidity and solvency.
Fine, and admirable, but if you keep imposing austerity - which means income cuts for most people - and tax rises, more regulation and less borrowing and spending, and if this goes on for a period of years, productivity growth will be hindered.
GDP might even grow, but that's just a number, otherwise meaningless. Maybe we'll see more stock market activity, more securitization, more lending, more IPOs, more mergers & acquisitions, but that does not indicate economic health.
Unless the OECD nations see real increases in productive output, NOT necessarily measured in terms of currencies, there will be no increases in incomes, employment or spending, let alone the ultimately necessary SAVING. No business formation, small business start-ups or hiring.
This is a desperate gamble on behalf of all QE-employing nations; that somehow growth will be kickstarted even WITH tax rises, more regulation of the free market and lower incomes...all WITHOUT real savings! The likelihood of this happening is less than NIL...
Don't look for leading, innovative ideas from El-Irian et. al. PIMCO is of course wedded to continuation of the current Keynesian system, because to try to solve the solvency problem would be worse...
+100
Maybe we'll see more stock market activity, more securitization, more lending, more IPOs, more mergers & acquisitions, but that does not indicate economic health.
Corporations have record amounts of cash yet we see no wage increase... The system must be destroyed and remade.
However, PIMCO is just trying to make money... as primarily a fixed income shop, they are praying for an equity crash trying to stay 1 step ahead of the Gov. Seeing that most of retail has migrated to their sanctuary, I can't really pray for their demise...
I might get myself a hot pic too! :) I know that we have at least two great malfunctions in this economic landscape. One is that the economy can no longer measured in dollar terms, the other is that savings can no longer be transmitted to investment via the monetary system. Both of these mean the system is broken. I am still a little optimistic that the 2-3 year delay brought about by the debasing tactics of central banks and governments might result in a new type of economics/politics, but the clock is certainly ticking as loudly a the debt register in Times Square.
Corporations have record amounts of cash yet we see no wage increase..
This is how Greenspan did it for a decade. You can keep the counterfeiting going as long as CPI or wages don't jump. That's the key to prolonged easy money, isn't it? Isn't that exactly what he accomplished? Used the "free trade" dividend (cheaper products) against the middle class by increasing money supply to his buddies. Didn't M3 track the numbers he'd rather not discuss?
This seemed like a perfect scenario to engineer massive hidden leverage. BECAUSE the money never CAME BACK to the average American. That's the point, the hope, and the way to conceal the amount of money being gambled at the top of bank-corporate chain. Did Greenspan know this? Damn, how could he not. It looks perfectly engineered. It couldn't have happened without NAFTA, WTO and new capital flight rules in place. That peace dividend and free trade consumer dividend was essentially stolen to cover for an increase in ponzi money supply. Perfect monetary crime. That's my theory.
Everyone wonders why all these former third world countries have state of the art financial centers, skyscrapers, etc..? U.S. dollar leverage, loans, access to natural resources. They just scaled out the game with the US dollar to build their global empire, IMF, WB which might be fine if the gains were shared in some way with the nation supporting the currency and taking its risks. F-no. They shed the risk and took the gains. No mention of balance of trade or other bothersome problems for the country. The FED betrayed the country and the 98% of people in it. Greenspan would brag about lifting the world out of poverty? I always thought that was an admission of sorts. Wages flat in the US, non-inflationary growth a big red flag before all busts, major debt being taken on, but he's bragging about global poverty and global wages?
The U.S. dollar doesn't belong to Americans anymore. It now belongs to int'l money trusts who practice inverted socialism. Mind you, not for the world's poor, that's just a lark, for them.
With what they had in front of them (an underdeveloped world looking to develop with U.S. guidance) it shows you how uncreative, ineffective and stupid they really are. They end up back in the U.S. selling shitty mortgages to Americans, running home equity scams during a bubble with FED support, tearing the last bit of capital out of everyone's hands and sinking fellow citizen and banks too. They're immoral, stupid and greedy. 10-20% gains aren't enough. They had the world, the biggest military, the biggest banks, the best educations, the reserve currency....and they ripped their own country off.
It's unreal.
Amen brother.
Fraud-Esq,
As a Conservative Republican I figured you would have been in fact more in tune with your party and their pushes into the foreign policy?
Global Wages? The cheapest commodity on the planet is human labor, no?
NAFTA? http://www.nascocorridor.com/ Damn those Liberal Democrats.
I guess above and beyond your stated complaints, that your real bitch is that the quality of life is waning for the Middle? Or the Bottom?? The de-valuation of Money? Which causes duress to the broad majority of Americans.
Since the 1950’s… the quality of life has been deteriorating! now that you are out of work and your lil failed experiment Bush drove us all off the cliff, thru the use of an austerity measure… NOW! You see it, NOW! You have a clue? NOW! You want to rise up! NOW! Works for you…
Your clue is a day late and far more than a dollar short. One of a GAZILLION! Bloodsucking vultures esquires that roam the land who has developed a conscience? After the fall?
You are the problem, you are the issue… YOU! Not them… and army of you put them in power and an army of you enjoyed it for a good lil while.
When I think of YOU! And people like you I cannot help but hope that if the lights go out… that the roaming crowds stop by and visit your daughter first.
How’s that for some fucking clarity… You pretend to care now because you are affected? Where were you before? Heres an old song for you.. http://www.youtube.com/watch?v=bDbpzjbXUZI
As a Conservative Republican
Easy pirate. How in the hell do you come up with me being a "conservative Republican", Republican or anything else for that matter. This was a bizarre retort...dude.
My bullish USD warnings since 2009 on weekly and monthly charts have not changed and further USD strength and thus EURO weakness is still expected, so USD rally and EURO downtrend will continue.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Austerity Bitches!!!!
Germany? and their push? That’s what I call easy money!
France? And their push for? I don’t know something? More easy Money!
How about this… when has there been an Austerity push that did NOT! lead to a Trillion Plus dollar bailout?
Anyone? (crickets chirping…. Chirping…. Chirping…. Chirping to infinity and beyond Bitches!)
So, ever fucking time one of you freaks get your wet dream of austerity measures into a news cycle a trillion Puppies DIE! Just to be clear!
…and I want to take this time to say Thank You for the chanting, pushing and / or use of the Voo Doo Dolls. Whatever you guys are doing to make the markets go up and down with a regular rhythm, I am all for… short Europe, LET ME COUNT THE WAYS TO SHORT THEE! God Bless America and FUCK everyone else!
Austerity Bitches!!!!
Mohamed comes down from the mountain, stoned tablets in hand.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Sept. 11, 2007 (Bloomberg) -- Mohamed El-Erian unexpectedly resigned as head of Harvard University's $34.9 billion endowment fund to return to Pacific Investment Management Co., manager of the world's largest bond fund, as co-chief executive officer.
The 49-year-old executive, who led Harvard Management Co. to its best results in seven years after taking over in February 2006, said in a statement that he was returning to Newport Beach, California-based Pimco to be closer to family members.
Harvard recruited El-Erian to fill the void left in September 2005 by the departure of 15-year investment chief Jack Meyer, who took almost three dozen Harvard officials to start a Boston-based hedge fund. El-Erian rebuilt the staff and guided the fund to a 23 percent gain in the fiscal year ended June 30, adding $5.7 billion to the world's biggest university endowment.
``It's a huge loss for Harvard,'' said Ken Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund, where El-Erian worked 15 years, in an interview. ``He is just incredibly impressive and dynamic and a brilliant person. I'm sure it won't be easy to find a replacement.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=amEadiYp7zkg&refer=home
Given the timing of El-Erian's brief tenure as manager, Harvard's enormous losses in private equity, hedge funds, real estate and interest rate swaps are his responsibility. Structuring the endowment fund according to his perscipacity and acumen, Harvard led the ivy league pack in losses vis-a-vis Princeton, Yale, Brown, etc.
~~~~~~~~~~~~~
Given that Harvard lost 27% of its endowment last year – the worst performance in the Ivy League – it’s not surprising that most of its managers lost money.
http://www.charlesskorina.com/new_skorina/endowments-foundations-and-investments/
The 13-F is a snapshot and is not fully representative of Harvard's overall holdings. But the chunk of the portfolio revealed in the most recent 13-F looks like it was chosen by someone who watched a few episodes of CNBC's Squawk Box and heard that the hot new investments were emerging markets, commodities, and private equity.
The 13-F shows Harvard with some 231 positions worth nearly $2.9 billion, highly concentrated in popped macroeconomic bubble plays. The top 10 holdings, which Bloomberg helpfully breaks out, account for 70 percent of the value of the disclosed holdings.
http://www.newsweek.com/id/169643
Former Harvard president Larry Summers has a multitude of sins to account for but mismanagement of Harvard funds is not one of them as often seen attributed. That accrues to El-Erian given the timing, tenure and responsibilities of their respective positions.
Very nice Pat, Thank You for the easy read... damn nice of ya!
Have a Fantastic Sunday, JW
mountain or valley, metamorphic, or igneous, it appears that Mr. Meyer was swallowed by the void... and the convexity capital converted to concavity and swallowed him in a Crimson Flash of Vanishing Green...
http://www.thecrimson.com/article/2007/2/15/convexity-capital-falls-shor...
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