Tags: US | Financial | Repression | Fed

Pimco’s El-Erian: US Stuck in ‘Financial Repression’ Caused by the Fed

Monday, 12 Mar 2012 03:09 PM

Pimco CEO and co-CIO Mohamed El-Erian says the United States is in “financial repression” brought about by the Federal Reserve’s low interest rates, leaving investors scrambling for ways keep their portfolios afloat.

“The Fed is keeping rates artificially low in order to bolster debtors, and it is creditors that are paying the costs for that," El-Erian tells CNBC. "That is what is being done to deal with the debt overhang and at the same time to try and promote growth."

"You want a solid balance sheet,” says El-Erian. “We are still going to go through many years of (debt reduction) and you have to have that balance sheet defense.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

El-Erian says investors can protect portfolios from the adverse effects of the Fed’s move by investing in some of the many companies both here and around the world that have exposure on both the debt and equity sides to growing parts of the world and avoid countries with heavy debt burdens.

He notes that some foreign stock markets have done better than the United States: Russia has gained 23 percent this year, India’s markets are up 26 percent and the German market has risen by 18 percent.

"If you look at the advanced economies, the U.S. is the cleanest dirty shirt,” says El-Erian. “It is not purely clean, but it is cleaner than what you see in Europe, than what you see in Japan.”

Arirang News reports that, according to the Japanese government, the estimated economic damage from the tsunami that toppled Japan’s Fukashima nuclear plant a year ago is roughly $213 billion.

Meanwhile, El-Erian also says the U.S. economy is "muddling through" and that "one-off factors" have contributed to a recent stock market rally, the Market Oracle reports.

Even so, El-Erian says stocks will rally.

"We're looking at a growth rate just under 2 percent for the U.S.,” says El-Erian. “Within that, you will see a lot of differentiation. The key issues … is to be able to choose the different sectors and companies.”

“There are companies out there and our analysts and portfolio managers work very hard to identify them. Yes, you're going to get some companies doing really well and differentiation is going to be key."

El-Erian says the recent jobs report was “a good number — not just the headline but also the revisions,” as are the facts that the participation rate is going up and some of the structural elements are improving.

“Having said that, it's just indicative of the healing process,” says El-Erian. “We're not yet in a place where the labor market and consumers can push this economy forward."

El-Erian says markets have benefited enormously from liquidity. “Not just the ECB and the Fed, but the Swiss National Bank, the Bank of Japan, India, Brazil, everybody is easing monetary policy,” he says.

“Plus, we've had one-off factors. Do not forget the fall in the U.S. savings rate that has helped us. So, this rally is warranted. It is warranted by these temporary factors, but we now need to hand off to more permanent fact.”

Economic recovery will not come from the rest of the world, says El-Erian.

“They're slowing,” he says. “It's not going to be the government. It's not going to be the consumer. Could it be business? Yes.”

“But business has to have better assurances that demand will ultimately go up, otherwise they do not invest."

Editor's Note:
You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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2012-09-12
Monday, 12 Mar 2012 03:09 PM
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