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In the January cover story in our sister publication Futures, Daniel Collins interviewed Mohamed El-Erian (left), the CEO and co-CIO of PIMCO. In the interview, El-Erian defines the “new normal,” suggests ways to navigate the "new normal" in investing and provides his outlook for fixed income in the New Year. Following is an excerpt of that interview; the complete interview is available on Futures Website.
Futures: Sprinkled throughout various speeches and commentaries by you and PIMCO founder Bill Gross is the term the "new normal." Generically it refers to an era of less robust growth due to lower leverage and more regulation. Explain what you mean by it and the implications of it on the investment landscape.
Mohamed El-Erian: The new normal is a world in which industrial countries face sluggish growth, persistently high unemployment, private sector de-leveraging and sovereign debt issues. It is also a multispeed world that sees an acceleration of the migration of wealth and growth dynamics from industrial to emerging economies. And remember, the new normal speaks to what is likely to happen given current conditions, rather than what should happen.
Futures: What are the implications for industrial economies of this migration and, seeing that you note this is what will likely happen rather than what should happen, what do you think should happen?
El-Erian: Industrial economies must adjust to this migration, and do so in a manner that is consistent with high global growth and an appropriate domestic retooling. In most cases, this involves a mix of structural measures aimed at strengthening international competitiveness, compensating for past resource misallocations (such as underinvestment in infrastructure and education), strengthening social safety nets and placing budgets and deficits back on more sustainable paths.
Futures: You have said QE2 is likely to backfire. Why?
El-Erian: There are both domestic and global dimensions. By buying securities, QE2 seeks to push investors and consumers out the risk curve. History suggests that when people are being pushed to do something they would not do on their own, they either resist or end up making unsustainable decisions.
Globally, QE2 is flooding emerging economies with liquidity at a time when many of these economies are already very close to overheating. And then there are the unintended consequences. The involvement of the Fedas a non-commercial player in markets that are functioning normally can cause distortions.
Futures: What is your outlook for the yield curve for 2011 and beyond?
El-Erian: Range bound, with a tendency to flatten. The front end will be anchored by the Fed pinning policy rates essentially at zero. The long end will be a tug of war between the impact of sluggish growth and concerns about medium-term inflation and the erosion of the global standing of the United States.
Read the entire interview with Mohamed El-Erian at FuturesMag.com.
Read Research Editor Gil Weinreich’s analysis of El-Erian’s markets and economic forecast for 2011.