One on One with Mohamed El-Erian, co-CEO , Pimco
Monday, May 19, 2008
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SUSIE GHARIB: Joining us now, Mohamed El-Erian, co-CEO and co-chief investment officer of Pimco, the world's largest bond fund company. Mr. El-Erian, it's a pleasure to have you on NIGHTLY BUSINESS REPORT.
MOHAMED EL-ERIAN, CO-CHIEF EXECUTIVE OFFICER, PIMCO: Thank you, Susie.
GHARIB: Let me begin by asking you where you stand on this debate of what's the bigger concern for the economy right now. Is it recession and slow growth or is it inflation? What do you think?
EL-ERIAN: It's both. I mean, this is why it's such a confusing time for investors is that there's a tug of war between higher inflation and lower growth. And within the growth picture, there's a tug of war between an easing of the credit crunch and the fact that the consumer is getting under more pressure. So it's a difficult and fluid time for investors right now.
GHARIB: We're seeing in the bond market that yields, you heard our report, that yields are creeping up towards 4 percent. It seems like the bond market is signaling that inflation is the bigger concern. What do you say to that?
EL-ERIAN: I say that that's right. The bond market had fallen in love with the flight to quality and now there's realization that inflationary pressures are going up around the world and we've seen a re- pricing of the bond market consistent with the fact that inflationary pressures are higher.
GHARIB: So where do you see yields going in the near term, given that you believe that if these two scenarios are both happening at the same time, slow growth and inflation?
EL-ERIAN: You know, whether it's in the bond market or the equity market, people want to rush to one extreme or the other. It's a little bit like in sports you either want to play defense or offense. The reality is it's the middle ground that matters right now. So in terms of the yield curve your question, the front end of the yield curve is pretty well protected because it is unlikely that the Fed will hike aggressively. The longer end of the yield curve is vulnerable because it will re-price inflationary expectations. So it is absolutely essential for investors to go beyond the question of where are yields going and make it very specific to where on the yield curve they're talking about.
GHARIB: You wrote in a recent report that the Federal Reserve does not have the tools to deal with the housing crisis and rising consumer prices. What do you mean by that?
EL-ERIAN: The hardest thing for central bank is when it has good inflation and asset price deflation because the central bank does not have good instruments for that. The good news for the U.S. is what you said in the beginning of your show that the fiscal agency, in this case, the housing bill is starting to make its way out of Washington, DC and that can help the Fed but left on its own, this is a very heavy burden for the Fed to carry on its own.
GHARIB: So are you saying that this housing crisis could bring down the economy?
EL-ERIAN: I'm saying the housing crisis will be the fourth head wind that the consumer faces. The consumer already faces higher prices, declining employment and a credit crunch. And facing a housing crisis would put tremendous pressure on the consumer so it's very important for Washington to move and try to alleviate some of the pressures coming from housing.
GHARIB: I take it that you're in favor of this housing bill that we just talked about that may be coming out of the Senate?
EL-ERIAN: You know, one of the problems of being in a crisis -- and the U.S. has been in a crisis -- is that there are no first bests. You're dealing with second, third or fourth best. In that context, it's important to have a housing bill come out of Washington to help the process. It is not a first best but it's better than the alternative.
GHARIB: Real quickly given this economic environment, what's your investment strategy at Pimco?
EL-ERIAN: Be selective. Invest in areas that are recapitalizing, so the financial systems, the banks, the investment banks and play special teams. Don't go one way or the other but be very selective in terms of what value you should pursue until there's greater clarity as to this tug of war between higher inflation and lower growth.
GHARIB: Enjoyed hearing your insights tonight. Thank you. I hope you'll come back again.
EL-ERIAN: Thank you, Susie.
GHARIB: My guest tonight, Mohamed El-Erian, co-CEO and co-chief investment officer of Pimco.
