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Thread: PIMCO's El Arian on likely EuroZone effects on the USA

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    Default PIMCO's El Arian on likely EuroZone effects on the USA

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    (snip)"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"(snip)

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    Default Re: PIMCO's El Arian on likely EuroZone effects on the USA

    Recent U.S. economic data, such as the modest drop in the unemployment rate and the massive expansion of consumer credit, have suggested that the American economy is finally recovering. Opposite conclusions are being thrown at Europe, where many are convinced that recession is returning. Not surprisingly then, the dollar is currently hitting a multi-year high against the euro. The strength of the dollar itself is often held up as one of the major proof points that the U.S. economy is "improving." But the data points that I believe really matter continue to suggest an economy on life support. I believe that the dollar is rising for reasons that have nothing to do with America's economic health.

    The ongoing sovereign debt crisis in Europe is unquestionably the center ring in the current economic circus. Given the difficulty of setting policy across borders and national interests, the negotiations in Europe have been messy, acrimonious, inconclusive, and conducted under the glaring lights of global media scrutiny. The action has diverted attention away from America's problems, which in many ways are even greater than those in Europe. In contrast, America's ability to print the world's currency at will, and the nearly seamless agreement of policy between the Administration and the Federal Reserve, means that the United States has been able to virtually ignore the issues that Europe has been forced to confront. This relative calm has been mistaken for strength, and the dollar has beckoned as the ultimate safe haven currency.

    The fact that the dollar is perceived as a safe haven acts as a self-fulfilling prophesy. Investors flee the euro and pile into dollars. The dollar then rises to reflect the demand. The increase validates the decision to buy in the first place, and the rising dollar then attracts even more buyers looking to profit from its appreciation. It's a nice ride while it lasts.

    Most "safe haven" dollar purchases are directed toward U.S. Treasuries. As a result U.S. interest rates are far lower than they would otherwise be without this inflow of spooked liquidity. But objectively speaking, the U.S. and Italy, for instance, have very similar national debt profiles. Yet interest rates in Washington are currently 600 basis points lower than they are in Rome. This means that Americans can borrow and spend much more. The result of all this extra debt financed consumption is a boost in employment and GDP. The positive economic impact makes the dollar even more attractive, thereby perpetuating the cycle.

    http://www.financialsense.com/contri...r-lucky-streak



    Remember you can't have confidence..... Without the con.
    The country has been looted.

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    Default Re: PIMCO's El Arian on likely EuroZone effects on the USA

    As Dr El Arian said himself during the interview, 'the US Dollar is the least dirty shirt' !

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