Mohamed El-Erian is the former chief executive and co-chief investment officer of Pimco.
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Mohamed El-Erian is the former chief executive and co-chief investment officer of Pimco.
Mainstream politicians throughout Europe would be well advised to heed the warnings of Manuel Valls, the French prime minister, who labelled yesterday’s European election results “a shock, an earthquake that all responsible leaders must respond to”. That is not because the European project will be derailed by the new parliament (it will not). Rather, it is because an inadequate response risks damaging its members further, in ways that would be even harder for any government to fix.
Until now, many of Europe’s more traditional leaders had taken considerable comfort in the massive transformation of the region’s financial landscape. In less than two years, they had gone from battling a financial crisis to enjoying a period of tranquillity that even saw these same spreads reach record low levels just a couple of weeks ago. Yet some were punished heavily at the ballot box because they failed to deliver on what really matters for citizens – particularly growth, jobs and rising living standards. Continue reading »
It is in everyone’s economic interest, both short and long-term, to solve the Ukrainian crisis; and therefore they will – or, at least, that is what rational thinking would suggest. But the reality is very different. And it is not necessarily because the parties involved in this crisis are irrational. Rather, it is because they are stuck in what game theorists call a “prisoners’ dilemma”. In the process, the risks of adverse global economic spillovers are on the rise.
The recent escalation of events in Ukraine has narrowed the set of options available to the four major parties involved – the country itself, Russia, central and western Europe and the US. As this occurs, the probability of each party attaining its desired outcome is rapidly declining, let alone them retaining sufficient control over developments on the ground. Indeed, the current course is one that leads to growing internal Ukrainian fragmentation, biting western sanctions on Russia, counter-sanctions by Moscow on western energy supplies, and a mounting financial bill for all. Continue reading »
The numbers are in for first quarter performance for global stocks and bonds. Taken at face value, the price signals emitted by public markets contrast quite a bit with what they were predicting last year for the global economy. Yet the economic and policy realignments implied by markets may well fall on deaf ears when it comes to immediate and durable changes in the behaviour of key economic actors.
Judging from their absolute and relative performance, last year’s markets correctly signalled a better growth trajectory for advanced countries, overall and compared to their counterparts in the emerging world – the most notable contrast pitting enthusiasm for a Japanese rebound against Chinese growth pessimism. Continue reading »
Last week was a good one for global economic rebalancing, or so it seems at first sight.
Encouraging data from several countries point to a global economy that is operating on more cylinders and, therefore, growing in a more balanced fashion. Yet the manner in which this is being achieved, together with a still-inadequate overall level of global activity, are concerns. With the crisis in Ukraine also raising the stakes, the Group of 20 needs to work even harder to deliver on its innovative growth commitment.
A careful reading of recent policy statements in advanced economies points to an intriguing possibility: after being forced into quite a similar stance, individual central banks will try to implement more differentiated monetary policy approaches. The driver is greater evidence of multispeed economic growth. The challenge is for other components of economic policies to support the more differentiated set of central bank policies. And what is fundamentally at stake is the much-desired shift from policy-induced growth to genuine self-sustaining private sector engines. Continue reading »
For some time, the monthly release of the US unemployment rate has been seen as much more than a snapshot of conditions in the real economy. It has also provided important insights on the likely actions of the Federal Reserve, America’s most important economic policymaker and the world’s most powerful central bank.
This situation is evolving on both fronts, and the implications are widespread. Continue reading »
One striking aspect of last year’s markets is the extent to which emerging market assets underperformed those in advanced economies. As investors search for returns this year among some frothy asset markets, such unusual underperformance attracts even greater attention.
Emerging markets’ underperformance was broad-based, affecting virtually every asset class. EM equities underperformed the aggregate world index by a stunning 29 percentage points as measured by their MSCI index components. In external credit, the return on EM sovereign bonds was a notable 14 percentage points lower than that on high yield bonds (as measured by JPM EMBI Global and ML HY indices, respectively). Local currency EM bonds did even worse, returning minus 9 per cent according to the GBI EM index. Continue reading »
With equity markets reacting enthusiastically to the Fed’s historic policy change announced last week, many have rushed to declare victory. Whether in asserting investor comfort with the policy regime shift or in declaring the definitive end of dependence on quantitative easing (“QE”), they believe that the markets’ short-term reaction can indeed be extrapolated into the longer-term.
Compare this with what we have been hearing from central banks. Reactions there have been quite muted. Humility may well be a factor, especially given that three prior attempts to “exit” earlier versions of QE regimes had to be abandoned. But there may well be more at play. Central bankers have good reason to be more cautious about declaring victory at this stage. And the rest of us would be well advised to ask why. Continue reading »
At times, policy makers find themselves in the role of magicians, especially when they are pivoting from one well-accepted policy stance to another less certain one. In fact, this is what the US Federal Reserve will be doing in the next few weeks – perhaps as early as next week (a 50/50 chance), more likely in January and most definitely by the end of March.
As signalled already by Fed officials, and as nearly implemented in September, the central bank is on the verge of altering its policy mix in a material fashion – gradually reducing its reliance on monthly asset purchases (which have been held unchanged at $85bn since the announcement a year ago) and relying more on indirect tools. Put another way, the Fed is seeking to maintain its support for the US economy and markets while reducing the use of a highly experimental tool that, many believe, risks longer-term collateral damage and unintended consequences. Continue reading »
One system believes in limiting how much power money can buy and imposes redistribution mechanisms to counter inequalities of opportunities and outcomes. The other throws the weak out of the premier stratum of society, and uses large income distribution to perpetuate dominance and power structures.
No, I am not referring to the socioeconomic systems pursued by different countries. Nor am I referring to some grand academic experiment to test whether high growth with redistribution is indeed feasible. Instead, I am talking about the contrast between professional sports on the two sides of the Atlantic Ocean. Continue reading »
Janet Yellen’s confirmation hearing last week reaffirmed that the Federal Reserve remains risk markets’ best friend – and not by choice but by necessity.
This is music to the ears of investors conditioned to position their portfolios to gain from steadfast central bank liquidity support, especially in the US. But with Wall Street having already reflected this in asset prices, and with the benefits for Main Street continuing to disappoint, investors may well need an increasingly differentiated approach if they are to continue to benefit from the “central bank put”. Continue reading »
It will be instructive to compare this Wednesday’s policy announcements from the Federal Reserve with the gradual tapering and forward policy guidance many analysts and commentators forecast just a few weeks ago. I suspect the US central bank will appear to be stuck with the same mix of policy tools even though growth outcomes have consistently fallen short of their expectations. And while recent congressional dysfunction has reduced its room for manoeuvre in the short term, there are deeper forces at play that blunt America’s job recovery, with implications that extend well beyond the Fed.
At the conclusion of their two-day policy meeting, Fed officials are likely to announce few if any changes to the big three components of their current policy stance: floored policy rates will not be touched; forward guidance language will not evolve much; and balance sheet purchases will remain as is, at $85bn a month (also with no change in composition). Continue reading »
With the US government shutdown and the possibility of a debt default occupying a lot of the bandwidth, last week’s International Monetary Fund/World Bank annual meetings struggled to deliver on already-low expectations regarding major policy breakthroughs. Yet, if they internalise well what was discussed in formal meetings, in panels and in the corridors, policy makers from more than 180 countries would return to their national capitals with four important realisations. Continue reading »
As the annual meetings of the International Monetary Fund and World Bank approach, I remember vividly the exceptional collective awakening that took hold of this same gathering five years ago. Hundreds of officials from around the world came to the joint and simultaneous realisation that the global economy they inhabited was on the verge of falling into an abyss.
This collective “intervention” led to unusually candid policy conversations, common analysis and admirable policy co-operation. It culminated six months later in the highly-actionable London Group of 20 Summit. There, the world’s major economic powers agreed on co-ordinated fiscal and monetary policies that helped to sidestep a very costly global depression. Hundreds of millions of people consequently avoided devastating poverty and misery. Continue reading »
The Federal Reserve refrained on Wednesday from reducing its experimental bond purchase program, thus maintaining its unconventional support for markets and the economy. In doing so it is probably signalling more than continuing worries about America’s tepid recovery, high unemployment rate and the risk of another round of self-manufacturing problems courtesy of Congress. It may also be signalling its concern about triggering renewed financial volatility that would undermine growth, job creation and global financial stability – worries that are unlikely to dissipate easily given the different reaction functions of the economy and markets.
Starting in the last few months of 2008, the Fed successfully normalised markets whose functioning was severely stressed by the global financial crisis. It pivoted in 2010 to the more ambitious goal of using unconventional monetary policies to deliver better economic outcomes; and did so with little policy support from other government agencies with better tools, but constrained by political polarisation. Continue reading »
This week’s heavy schedule of data releases will likely have a big, if not determining, say in “when” and “how” the US Federal Reserve tapers its quantitative easing programme – that is, start moderating its exceptional support for markets and the economy. And while most assessments will focus on the timing, scale and scope of the policy adjustments, the “why” will be as important, if not more so in shedding light on what may lie ahead.
The context, while quite well known by now, is worth mentioning given its relevance to the outlook. Continue reading »
August is usually considered a bad month for implementing major changes to investment strategies. With so many traders on holiday and with volumes at seasonally subdued levels, liquidity can be quite patchy. Yet, this time around, there are good reasons why investors may wish to reconsider the conventional wisdom of waiting for the autumn to reposition their portfolios.
The next few months promise to be particularly tricky and volatile for markets, with uncertainty coming from the US, Europe, Japan and the Middle East. Continue reading »
With interest rates floored near the nominal zero bound and with balance sheets having already expanded significantly, central bankers are placing greater emphasis on forward guidance to influence private sector expectations and behaviours.
By credibly committing to a transparent path, central bankers hope to avoid the instability that often accompanies changes to monetary policy. In the meantime, they would continue to support activity and markets, thereby providing more time for their economies to heal and for other policy making entities to get their act together. Continue reading »
Once again, markets will pay close attention to signals from the US Federal Reserve’s Open Market Committee, which meets this week.
Coming on the heels of a dramatic two-month rollercoaster – as the S&P 500 fell 6 per cent between May 21 and June 24 before recovering to finish last week near its record high – the scope for misinterpretation is far from trivial. So here are seven points investors may wish to keep in mind as they navigate yet another fluid policy phase. Continue reading »
It is hard, if not impossible, to hear or read anything optimistic about Egypt these days. Unrest on the streets continues, with an uncomfortably high threat of renewed confrontation involving some combination of the supporters of Mohamed Morsi, the ousted president’s opponents and the military. The political class struggles to coalesce around immediate transitional measures to run the government, let alone those needed to restore the country on the road to A durable democracy. And the economy is in free fall as poverty spreads, shortages grow, inflation rises, unemployment increases and incomes collapse.
There is no denying. Today’s Egypt lacks any robust economic, financial, institutional and political anchors. Even its social anchors are under unprecedented pressure. Continue reading »
Financial markets are on tenterhooks after yet another wild week. Triple-digit intra-day moves in the Dow have become the norm rather than the exception. Conventional asset class correlations have broken down. Virtually every financial security has lost money. And liquidity dislocations are common.
Damage is not contained to financial markets. If these factors persist, they will undermine global economic fundamentals, thereby threatening adverse vicious cycles. So here are six factors that speak both to recent developments and what may happen next. Continue reading »
Markets rallied sharply late on Thursday on unconfirmed indications that the Fed may push back more forcefully on investors’ fear of a pre-mature tightening in monetary policy. To sustain the change in market sentiment for more than a few days, the Fed would need to follow up with greater details or, even better, have its beneficial market impact gradually superseded by an accelerated improvement in economic fundamentals.
I suspect that, having witnessed the recent market turmoil and fearing that the related liquidity disruptions could feed on themselves, Fed officials worry that investors are abandoning too quickly the notion of a “central bank put.” After all, financial markets in general, and equities and corporate bonds in particular, had surged quite nicely on the (repeatedly demonstrated) notion that central banks were investors’ best friends. Continue reading »
Friday’s US jobs report is even more eagerly anticipated by financial markets now that investors are being pushed to take longer-term views that they had hoped to avoid, at least for now. With global equities selling off, tepid job creation would end up creating more turbulence and uncertainty. And reaction to something else, that is a number on either side of the distribution of possible outcomes, depends in large part on the faith that investors retain in the unquestioned powers of central banks. Continue reading »
There is no better topic than gold to polarise an investment discussion. So the recent sharp drop in the metal’s price has pushed to fever pitch the debate between two camps with deeply held convictions: those who view gold as overvalued and lacking both income and capital appreciation attributes; and those who feel it is only a matter of time before others appreciate again gold’s unique role as an antidote for virtually any economic ill that could hit a diversified investment portfolio.
As interesting as this debate is, it understates the potential significance of what has taken place. The recent volatility speaks to a dynamic that has played out elsewhere and, more importantly, underpins the gradually widening phenomenon of western market-based systems that have been operating with artificial pricing for an unusually prolonged period. Continue reading »
After last week’s horrible unemployment numbers from Europe, some may be tempted to downplay the monthly US jobs report coming out this Friday. That would be a big mistake. The data will help shed light on four issues that are central to the wellbeing of both America and the global economy.
First, some context. Almost five years after the global financial crisis began, western economies as a group still struggle to overcome a “new normal” of unusually sluggish growth and persistently high unemployment. The longer this persists, the greater the risk that – rather than serving as a transition to revamped growth and job creation models – the new normal will morph into one or more lost decades with terrible human costs. Continue reading »
Officials from around the world gathering for the semi-annual meetings of the IMF and World Bank should go beyond the important issue of how individual countries emerge more quickly from their malaise. They should also spend time on the implications of the new global economic configuration for the west’s ability to project and deploy economic power Continue reading »
The US monthly figures are eagerly anticipated for more than the insights they provide into the health of the economy. These days they also serve as an indicator of the direct impact of congressional dysfunction, the evolution of experimental policies from the Federal Reserve and trends in income inequality. Continue reading »
Has Cyprus reignited the regional debt crisis, pushing the eurozone to the brink of collapse and risking a potentially destabilising change in the geopolitical order? Or is the country, with only a million people and accounting for 0.2 per cent of the region’s gross domestic product, a small problem that could be solved within days?
These are the two dominant narratives for Europe’s latest woes. And after being caught by surprise by developments on the ground, analysts and market participants have rushed in the last week to choose among what appears to be two competing interpretations involving opposing predictions. Continue reading »
Having stressed publicly that Greece was an exception and that no other rescue would impose losses on senior private creditors, European officials embarked this weekend on a controversial path for Cyprus. They did so for understandable reasons, which they will argue are unique. Yet the specifics of the rescue will bring implementation challenges that will undermine its effectiveness and may lead to negative side-effects. Continue reading »
Few would have predicted the Vatican would beat the International Monetary Fund in electing a non-European as its leader. The considerations that reportedly led to the selection as Pope of Argentina’s Jorge Mario Bergoglio will resonate well with those who feel the IMF has been increasingly short-sighted in holding on to an outdated nationality-based approach for selecting its managing director. Continue reading »
The next few monthly jobs reports, including this Friday’s, will be watched especially closely to assess the balance in a rather unusual tug of war that has developed in Washington: between a dysfunctional Congress set on creating headwinds to a slowly-recovering US economy, and a central bank willing to roll out one untested measures after the other in its attempt to steer the economy towards higher growth and more robust job creation.
The “sequestration” is, of course, the latest example of America’s self-made obstacles. This set of blunt budgetary cuts, which automatically went into effect this week due to Congressional inaction, will add another fiscal drag of 0.5 percentage points off gross domestic product in 2013. Coming on top of January’s tax increases and recovering (but still-weak) endogenous growth drivers, this will serve to again limit the annual growth rate of the economy to 2 per cent or less – and do so without involving a rational and durable reform to America’s medium-term fiscal dynamics. Continue reading »
Today’s world of dysfunctional politics is one that pushes central banks further away from their comfort zone and excludes the best possible responses. The resulting inconsistencies can only be resolved through a more comprehensive policy approach that deals directly with the West’s challenges of too little growth, too much debt, and too polarised a political discourse. In the meantime, central banks will have no choice but to opt for what they perceive as the lesser of two evils – that of maintaining a visibly imperfect policy stance. Continue reading »
A simple observation last week by the Bank of England’s Monetary Policy Committee speaks volumes to the historic evolution of modern central banking – a process that is consequential, unprecedented and inadequately covered in traditional “money and banking” texts.
In its February 7 statement, the MPC stated that, due to a sluggish UK economy facing fiscal contraction, it is “appropriate to look through the temporary, albeit protracted, period of above-target inflation”. And it sure has been “protracted”; and will remain so.
The BoE is not the only central bank coping with inconsistencies. The European Central Bank has repeatedly been forced to react in ways once deemed contrary to its philosophy and practices. Under pressure from the new government, the Bank of Japan is in the midst of a historical U-turn. Continue reading »
Having solved its urgent problem, the eurozone needs to deal with a new dilemma: that of an appreciating currency. There is a growing number of countries seeking to weaken their own currencies. Indeed, in the last six months, the euro has appreciated by 11 per cent against the US dollar and by 8 per cent in nominal trade weighted terms. It has appreciated by a lot more against the Japanese yen. Continue reading »
The Bundesbank, Germany’s central bank, has decided to move part of its gold holdings from the Federal Reserve Bank in New York and other central banks such as the Banque de France to Frankfurt. This unusual and highly-visible decision is sure to trigger an explosion of media commentary relating both to motivation and implications – especially since Germany joins Iran, Libya and Venezuela in making such a move.
I suspect that Germany’s motivation is purely domestic: officials are responding to growing internal pressures ahead of elections later this year. Continue reading »
Governments’ policies will lag economic reality – this is the easy part of the prediction for the coming year. The more difficult is whether policymakers will be forced to deliver better outcomes for citizens, or be able to delay big decisions as was the case in 2012. Continue reading »
These are welcome indications that the labour market continues its gradual healing after the extreme trauma and severe dislocations inflicted by the 2008 global financial crisis. But these improvements have to be accelerated if America is to fully overcome an unemployment crisis that weakens social cohesion and aggravates inequalities of income, wealth and opportunities. Otherwise, the healing process will plateau, leaving joblessness too high and the labour market too exposed to disruption Continue reading »
For the first time in a very long time, average Egyptians feel empowered and able to influence the destiny of a country that they now own. To outsiders, this comes across as loud and messy. And it is. But it is also an indication of Egypt’s new checks and balances and, more broadly, its bumpy journey towards a vibrant democracy. Continue reading »
Despite a courageous public stance by the International Monetary Fund, European officials failed again on Tuesday to deal with the critical issue of Greece’s debt sustainability. If this continues, they will undermine yet another bailout package for Greece and suffer further erosion in credibility, especially in the eyes of their own citizens. They also risk seeing another hard-fought cash infusion do little more than buy a few months for a struggling Greek population. Continue reading »
The minutes of the US Federal Reserve released on Wednesday are an essential read for those interested in a real time snapshot of the complexity of modern day central banking. They are also a cautionary note for all who believe that, acting on their own, today’s hyper-active central banks can engineer good economic outcomes. Continue reading »
There is nothing better than the widespread perception of a close election for the full spectrum of “experts” to get carried away with what might occur under alternative outcomes. And carried away they were.
Many argued that the two presidential candidates would implement meaningfully different economic policies and, thus, trigger different market reactions. But now that the election outcome is known, it will soon become apparent that the main risk is that investors’ prospects remain hostage to the same issues that existed long before the election. Continue reading »
Compared to previous natural disasters, the compensating factors for the economy from reconstruction after Hurricane Sandy may not arrive as soon as expected, or be as comprehensive in reach. Federal, state and local budgets are already stretched, undermining their ability to assist uninsured businesses and households, which is critical for limiting the damage from the hurricane to economic activity Continue reading »
If Greece is to remain a eurozone member, we need greater emphasis on official debt forgiveness. If the objective is to safeguard Greece’s wellbeing outside the eurozone, there must be greater emphasis on returning Greece to a national currency while keeping the country in the European Union. Instead, Greece and the troika have opted again for the muddled middle – one that talks about sustainable eurozone membership but does not do enough to make this highly probable. Continue reading »
A brighter picture from Friday’s jobs data must be sustained if America is safely to deleverage those segments of the economy that remain over-indebted. A significant part of the monthly improvement is associated with part-time, rather than full-time, employment. With Congress too divided to enact meaningful policy measures, the Federal Reserve will have no choice but to remain deeply engaged in uncertain policy experimentation. Continue reading »
If you want to cause major discomfort at a meeting of European policymakers, just try mentioning “OSI”, or official sector involvement. The notion that official creditors may need to accept a reduction in their contractual claims on Greece is anathema to many. Yet the issue will surface repeatedly, given the current overly-constrained approach to solving Greece’s deep problems. Continue reading »
It is now over 30 years since Paul Volcker came into the US Federal Reserve and unambiguously put crushing inflation at the top of his agenda. What followed was a period of price stability – by the middle of the last decade, many people had bought into the concept of “the great moderation” and the “Goldilocks” economy (not too hot, not too cold).
Continue reading »
Through both its actions and what it refrained from doing, the Federal Reserve confirmed on Thursday that it is operating in policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences. Continue reading »
This year, the critical question in Europe has changed from whether policymakers could find the required policy instincts – they have – to whether they are moving fast enough to get ahead of the deleveraging by the private sector. By announcing a new conditional bond purchase program on Thursday, the European Central Bank took a major step to close what, at one time, seemed a near-insurmountable deficit in this race. It now needs the support of other policymaking bodies to fully eliminate the gap. Continue reading »
There is great interest in the annual symposium of central bankers that starts tomorrow, and rightly so. Whether it is in Europe or the US, central bankers continue to carry most of the policymaking burden, and do so deep in experimental territory. There is no better place to discuss central banking than Jackson Hole, in Wyoming. Continue reading »
On the surface, it seems strange: Spain is offered large loans at below-market interest rates, coupled with significant additional support by a regional central bank willing to buy the country’s government debt on the secondary market. Yet the government is reluctant to officially request this help. Continue reading »
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