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PIMCO's El-Erian: QE3 Won't Produce The Outcomes We Want
In his typical forthright manner, the moustachioed maestro appeared on Bloomberg TV today discussing Europe's crisis and the US economy. While we (ZH) wonder what (or who) the 'we' El-Erian is speaking for, he notes that the Fed "doesn't have enough policy instruments to deal with the challenges facing the economy" and that QE3 will not work (a possibility we discussed last week). From investing in a fat-tailed environment to the Fed's liquidity trap and why Europe needs to 'refound' the euro-zone, his fragile hope is that crises remain 'contained' yet prefers the USD's 'safety' for now and worries on the US stocks 'cleanest dirty shirt' bullish argument, suggesting defense is the better play currently.
Bloomberg Television - transcript:
El-Erian on the unpredictability in global markets leading to extreme events around the world:
"Normally, we're used to thinking of a bell shaped distribution. There's a dominant theme and very thin tails. Today we're looking at something different. We're looking at a distribution that is much flatter and the tails are much fatter. Think of Europe. Increasingly, most people agree that Europe can no longer kick the can down the road. One of two things is likely to happen. Either the euro fragments completely or you strengthen the euro zone but change its construct. That is what the fiscal compact we just heard is about. Increasingly, as you look around the world, we are moving towards a bimodal distribution that has significant implications for how you invest."
On where he sees the most market impact:
"First, it is not just risk. It is also opportunity. One exciting thing about this world is that when there are major transformations, there are both risks and opportunities. The biggest risk is interest-rate risk in sovereign space is becoming credit and default risk. The most extreme example is Greece. It used to be viewed as interest-rate risk--in the government bucket as stable. It has now become default risk. We may as well see haircuts in excess of 50%. The biggest risk is that people's mindsets don't evolve to understand that the underlying characteristics are changing."
On whether the Federal Reserve should move on QE3:
"The Fed does not have enough policy instruments to deal with the challenges facing the economy. They're trying to use communication as an extra tool now. WE have used rates, we have had QE, now you see them using communication, trying to push investors to take on more risk. The problem is two-fold. One is there is disagreement on the FOMC. Secondly, it is not a very effective policy instrument. There are not just limited benefits, but there are also costs and risks. The Fed is in a difficult position. It is trying to be active, but it does not have effective instruments at this stage."
On whether the U.S. is stuck in a liquidity trap:
"That's one of the views. Which is why not just jump start the whole thing and give a high inflation target and hope the system reflates. Critics talk about how difficult it is to produce the right outcome. You could overshoot and create a different problem. The fundamental issue is that the Fed cannot solve this alone. It is a bridge to somewhere. This has to include other agencies stepping up to the plate. So far, only the Fed has been doing its job. The others seem to be asleep at the wheel."
On whether QE3 is appropriate for the economy at this time:
"I do not think that on its own [QE3] can produce the outcomes we want. The outcomes would be higher job creation and contained inflation. That is the fundamental issue. The Fed is willing to do things, but it cannot guarantee unfortunately outcomes. For good outcomes, we need other agencies to also be doing their jobs."
On what needs to happen over the next few months to get over the mountain of debt facing European nations:
"We're seeing an important shift in the narrative. It goes from saving the periphery to strengthening the core. We need to see Germany and France to agree on how they will 'refound' the euro zone. Secondly, we need to counter the continued fragility of the banks. We just heard about an Italian bank. Third, we need to be able to mix that containment with growth. Finally, we need to decide how the burden will be shared in the peripheral economies that are insolvent. It is quite a list. They will have to do a lot of work. Hopefully they will be able to do it."
On how Europe's crisis will affect the U.S. and whether it will be a situation where nations around the world go up and down together:
"I think it will be a bit of the latter because it is a massive head wind. No matter how strong your internal dynamics are, there is this massive headwind called Europe. The banks are interlinked around the world. A lot of companies sell in Europe or export to Europe. We cannot avoid Europe. It is a significant headwind everybody has to cope with."
On the need for investors to stay defensive while remaining agile enough to take advantage of opportunities:
"One lesson from these big macro themes is that they tend to be indiscriminate. That is another way to say that they cause sell-offs in credit and stocks that are fundamentally sound. By focusing on the fundamentals and respecting the technicals, there are opportunities to be selectively offensive. Uncertainty and unpredictability should never lead to paralysis. It leads to figuring it out how the risk is changing and how the return is changing. We're living in an exciting world where there are lots of realignments. Sources of risks and returns are changing."
On where to invest safely right now:
"In the short term, the U.S. dollar is the best place. It is the cleanest dirty shirt. There aren't pure shirts anymore out there, so you have to focus on the cleanest dirty shirt. In addition to dollar exposure for the short term, stay focused on some emerging currencies that continue upward migration in terms of wealth and income. Stay away from the high-beta currency that are likely to be incredibly volatile in this less predictable world."
On whether U.S. stocks are also the 'cleanest dirty shirt':
"They are. But in this case, we have to ask the question. Alcoa is going to be very important as will other firms. To what extent are they being hit on revenue? To what extent can they continue to contain costs? We're going to get lots of information."
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Just Admit It, Everyone Should be LOADING-UP on Zee Gold ...
Ah, it is Monday -- it must be El-Arian.
When Bloomberg pulls in El-Arian for a gloom/doom piece it means thery want market sentiment to turn south. It's not that he's wrong, it's the timing. He's believed this all along but today Bloomberg decides they need to spread bearish views. God forbid that the ten year auction fail on Wednesday. After the 180 billion in treasuries are sold this week they can get back to the rose-colored glasses. Next week they will say that all is well.
Exactly. The only reason these @#%&#s ever open their mouths isnt as a public service, but to push the public into what they already own and direct sentiment towards their trades.
yeah, who is this "we" that Ahab is talking about??
he wants austerity and rentier serfdom for the public. THEY have all the paper assets; they want their mothafuggin coupon paid now, bitchez.
"Peonage."
The whores of Babylon are on their knees, begging, pleading for more QE from Ben 'Easy Over' Bernankincide:
5 Tech Stocks to Watch if QE3 Happens
I am glad that ZH noted uncertainty about who is exactly "WE":) PImco is the part of the group, is on the treasury borrowing advisory and other places
don't buy into bearishness yet.... wait a month...don't help " them" out with the short squeeze... reduce their upside and save yourself until they have nothing to squeeze but themselves. let them eat their own tale...
True, and dont forget the other metals like cans, firearms, ammo, etc.
Tin Goods..
Lets go the European way!
Canned Goods are so 2008, 2009, 2010 & 2011..
Tin Goods are 2012 Baby!
and Silver! Gold!! and of course Weather Proof Ammo!!
Signed, Christian Constitutionalist
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GOLD!
El Erian help create this crises. I doubt he has a solution for it. More like talking his book.
Cartoons sum it up:
http://financeall.tumblr.com/
Of course it won't produce the outcomes that "we" want. The question is whether it will produce the outcomes that Bernanke wants.
"Allegedly" won't work.
Please!
The goal of many debtors is to pay back in cheaper dollars. From that perspective (i.e., debtor viewpoint) more QE which results in a devaulued dollar may, indeed, actully "work."
'QE' is over, just as over as lowering interest rates is over, but theyre perfectly happy letting everyone believe at any moment theyll be showered with more free money.
No kidding, the tone of this interview is so blasee as to let one think there isn't anything major going on.
When your best option is wearing your "cleanest, dirty shirt" doen't that tell us all something? The money will be hoppong all over the place once Europe vomits in the laundry.
QE3 is working perfectly.. for them.
Communications policy propaganda and deception is soothing to the masses.
The equity market does not go down in the face of obvious manipulation, shaky fundamentals and technicals that scream "Dive!".
The PM commodities are being effectively suppressed.
Credit is being denied its natural effect on equity in light of stealth QE counterfeit swap, repo, twist, hide the salami printing.
The perception of “all is well” is widespread.
It’s working just fine.
sheepie, you ever hear the story about the little boy who cried qe3????? the townspeople, made up of banks, and stock investing professionals, and commodities holders, were infuriated with the little boy. they kept pouring more money into their investments every time little ben ran back to the village screaming, "theres the possibility that further easing may be coming depending on certain economic conditions!!!!!" in that story though, qe3 never actually showed up................
The goal of many debtors is to pay back in cheaper dollars.
Debtors borrow to a) leverage something they believe they can extract more value from, or b) pay for something they really can't afford (often older debt). That's it.
Inflating the problem away with 40 days and nights of falling fiat can eradicate the debt, so long as you don't mind that the price for both a loaf of bread and a house is $5,000.
Exactly. I suppose it has crossed people's consciousness that a higher Fed inflation target, big printing, will cause not only devaluation of debt (which many people apparently think is a good thing) but also massive new unemployment as marginal operators find they can't cover costs because their market is elastic, their good has a substitute import, or their service is a luxury. Obviously devaluing US debt seems attractive right up to the moment the interest rate on that debt cancels the shrinkage effect. Nice world we live in.
Quite, the inflation (if it comes) will be in prices but not in wages.
Normally, we're used to thinking of a bell shaped distribution.
There you have it, the apex of circular reasoning.
Maybe he actually said 'Ba'al'.
QE3, lol.
Cleanest dirty shirt alright....
Cleanest dirty shirt I have is the old raggety one I use to keep my junk silver from tarnishing. :)
I'm sure you mean the best looking horse in a glue factory?
The shaking camera on the reporter is annoying (although she is quite pretty...)
She looked stoned to me.
It allows Bernanke and the Federal Reserve banksters to steal more money. Bernanke works for the banks not the US citizens.
All I here is "by physical assets".
PSLV over a 33% premium.
ima see if i can short that long slv or the iag...nope, no shares on AMTD to borrow
Well, he's right about the FED only having 'communications' left to drive markets. In other words 'carrot and stick' economic model.
Nothing will produce the outcome until that next Lehman moment. Then we will have outcome. A very wretched one.
QE3 WILL be successful:
In driving up commodities prices
In starving millions more around the globe
In driving the world ever closer to WWIII.
All these are Bernanke's goals.
FED has the same type of "brilliant minds" (or was it broken minds?) as everybody else so there's really not much more to expect than same ol' same ol' money printing.
Here's one of those brilliant minds proving "it's really NOT different this time either".
Fed's Lockhart says concept of Euro is an "excellent idea"http://ransquawk.com/headlines/195805?utm_source=twitterfeed&utm_medium=...
what "other agencies?" dept of jobs? how about private business
"I do not think that on its own [QE3] can produce the outcomes we want. The outcomes would be higher job creation and contained inflation. That is the fundamental issue. The Fed is willing to do things, but it cannot guarantee unfortunately outcomes. For good outcomes, we need other agencies to also be doing their jobs."
I had the same question. Miniplenty or Minitrue?
Critics talk about how difficult it is to produce the right outcome. You could overshoot and create a different problem. The fundamental issue is that the Fed cannot solve this alone. It is a bridge to somewhere. This has to include other agencies stepping up to the plate. So far, only the Fed has been doing its job. The others seem to be asleep at the wheel."
I scratched my head on that too. Maybe he means CIA?
some form of commodity price controls ala nixons price freeze on gas ( beef, corn, hogs, wheat, you insert here).....you know ....gotta keep the inflation down ......damn greedy producers......wanting a higher price while we print....They will try to keep the price down and grocery shelves will grow emptier.
Bullish on GOLD!
Did she ask him if he is buying Greek Bonds! Does he have any? I dont think so!
there's no more QE folks - they're preparing the public psyche for the historic DEFAULT to come.
anyone dependent upon "income" is F*d
You totally got it wrong! "Communication" is much more fucking powerful than "Printing"
RMB baby. China can't find enough workers and are hiking wages. Living standards are going up in China and going down in the US.
Dirty Shirts?
Sounds bullish for detergent makers.
look at the Dow and S&P for the last eight days. they are not moving, stuck in a tight trading range...dying to correct lower. remember Jan is the seasonal equity strength. it has flopped. even with massive bond buying buy the ECB via HUGE USD swaps with the FED which is essentially QE3. point is the money printing cannot drive these markets higher. Good to watch is if ASia sells hard on their open and starts buying USDs again.
That interview was really disappointing. Denninger is correct in that the what has to happen in the near- to intermediate terms is that government expenditures and revenues have to be brought into balance. All of the economic problems we have right now can be traced directly to too much debt, borrowing from the future, and kicking the can down the road. El-Erian has to know this. He's a smart guy. And yet nowhere in his interview does he even hint at that. He appears to still be propagating the "growth will save us" concept.
Douchinger is a retard and categorically wrong about most everything
He sure doesn't think so. He thinks he is ALWAYS right. Did u know he's an expert on washing machines along with EVERYTHING else?
Some of his calls have been right though....
Is there a reason El-Erian is featured so much on this site? His fund's returns (PIMCO) are not that great... they don't seem to have as sincere of a grasp of things as much as other players..
Yes it will! GOLD/SILVER TO DA MOON!
The cleanest dirty shirt is brown.
Is this guy really suggesting that if the fed had MORE "policy instruments" then it could positively impact the economy and "create jobs" and control inflation!
Does this guy give a rats ass about the economy or is he just on TV doing what he can to minimize collateral damage to his portfolio? My opinion, this guy has no interest in revealing the truth and he's not nearly as ignorant as he sounds.
Doesnt matter what he says here. His, and the firm's, bets are in: MBS long and hard.
Who is "we"?
He is saying that the normal distribution is gone and that the stable-Pareitian (fat tails) is happening. Old news. Stable-Paretian has been around for decades in financial markets.
Who is "We"?!?!?!
No QE3? no problem, just call it "QE to infinity"...there, fixed it for ya
0 as in ZERO credibility. pablum. a complete waste of bandwidth. your saccharin paean and obsequious fawning homage to this malevolent money monger displays a lapse in judgment or worse.
OT : Fuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuck
Reports: Israeli President calls urgent cabinet meeting to discuss #Iran, underground enrichment may be 'trigger' needed for attack.
Reports: Israel urging the US to 'make a decision now. Are you with us or not? We must act now (on #Iran) make your choice'
Report: EU to decide on #Iran oil embargo on Jan 23, earlier than planned. Tensions escalate further.
A great little illustration of Biflation's effect: While the ECRI Weekly Leading Indicators (WLI) is predicting recession, the Conference Board Leading Economic Indicators (LEI) is at pushing all-time highs :-) !! Hahaha
http://advisorperspectives.com/dshort/commentaries/Conference-Board-ECRI...
To the contrary, QE3 shall produce exactly the outcome that I want: inflation that prompts the federal government to impose price controls on consumable commodities, e.g., automotive fuel and other petroleum derivatives. Folks, I am counting on this outcome.
-- Paul D. Bain
paulbain@pobox.com
they already have price controls through Fed policy and selective enforcement of margin and exchange rules. (the baloney that poor Fed nobody is helping is baloney) the Fed desires an inflation rate higher than the interest rate, an inflation target. their big problem is money velocity, which isn't responding to their efforts to control supply. the Fed can park money in MM accounts all day, that dog won't hunt. eventually everyone will move out of MM and into CCs and savings accounts, and the only one in the MMs will be the Fed. as a consumable commodity money is the biggest problem for them, and once they start drawing down supply they are really in trouble.
Why is El-Rian always on the new and who cares. Did the FED handed his ass to him when He tried to short treasuries?
Who really thinks that if the FED prints more is to help the average Joe?
The FED is private entity. Figure out who owns the shares and their interest, then You will know where the FED's interests are.
El Erian is a clown. He was a complete joke at Salomon , a useless idiot basically , and its no surprise he has Harvard and IMF on his resume. He couldnt invest his way out of a paper bag. He is just another MSM Keynesian schill. Its long time that Tyler stopped spamming ZH with his dribble.
1. The Chief Economist for the IMF, Olivier Blanchard, as much as said we are not growing our way out of this without a miracle and 20 years of everything going perfectly. See his Dec. 2011 end of the year speech.
2. Ben Bernanke said if he ever faced these conditions, he could peg to gold, engage in gold purchases to drive up prices, devalue the dollar, and print like crazy. See his 11/21/2002 speech.
3. Ben also said he'd abandon inflation target and go straight to price targets, announcing to the market that the Fed's objectives were to reach pre crisis price levels plus 2% or so for every years since that date. See his 5/31/2003 speech on Japan.
QE3: Of course QE3 will work, for the banks. Everything we've done so far has been for the banks. Nothing has been done to fix the system, so experts saying they won't print because it won't work have their heads in the sand.
The Great Global Fiat Devaluation is upon us. The people in the know have talked about it for years. Suddenly every analyst thinks the same people who got us here are going to have a change of heart and not continue to do what they've said they would do?
Totally agree, very well said. Just listening to him again makes me think he's over exposed....too much air time, loves TV etc. So much time has passed, so much non-prosecuted crap has gone on its easyy to forget where it started, all the while everyone seems to be 'waiting for some big thing to happen, that never does...a large bank fail, country fail, currency fail etc.' The Markets are massively interferred with and still don't seem a safe place to play any more.
you know what crossed my mind during this interview.... when he talked about the three things that have been tried so far... with encouraging investors to continue to invest being the last thing? He did not mention what the next step will be, did he? I was waiting for him to say it but he did not..... 4th stage = FORCING investors to keep investing (in faulty debt instruments.... via their retirement accounts, etc).
Not a prediction.... just a fear.
You have to wonder what he thinks "the solution" is. I don't think it's one I'd like to try out though given this response:
On whether the U.S. is stuck in a liquidity trap: