El-Erian to Investors: Don't Fight the Central Banks

Sunday, 23 Dec 2012 03:26 PM

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The Federal Reserve and other central banks have taken steps to flood their respective economies with liquidity, weakening currencies and pumping up stock prices and commodities in the process.

Don't bet against them, even if all economic conditions and indicators suggest otherwise, said Mohamed El-Erian, CEO of fund giant Pimco.

"Respect what the Fed, ECB and BoJ are telling us," Pimco CEO Mohammed El-Erian told CNBC, referring to the European Central Bank and the Bank of Japan, which have all rolled out stimulus measures in various degrees of intensity.

"They are all-in, and they are going to be in there supporting asset valuations."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

The Fed has been particularly aggressive with its monetary stimulus tools, which range from cutting interest rates to near zero and pegging them to unemployment and inflationary metrics to multiple rounds of quantitative easing.

Under quantitative easing, the Fed buys bonds such as Treasurys or mortgage debt held by banks, pumping the financial system full of liquidity in the process to make sure borrowing costs stay low across the economy.

The Fed is currently running a round of quantitative easing in which it buys $85 billion in mortgage-backed securities and Treasury holdings a month from banks on an open-ended basis.

Past easing rounds injected over $2 trillion into the economy over the past four years, pumping up stock prices in the process.

Under such conditions, shorter-term Treasurys will represent sound bets compared to longer-term government bonds, though don't expect hefty returns.

"The front end will be more stable, anchored both by purchases by the Fed and the [policy statement] language about keeping interest rates at zero," El-Erian said.

"The long end is going to be more volatile and more dangerous, so it depends where on the curve you look."

Other noted investors point out that even though the U.S. runs hefty budget deficits and carries large debt burdens, Federal Reserve demand for Treasuries will pump up liquidity levels and push down interest rates that stocks have little room to rise but up.

"The [Fed] has created an environment where there is no effective alternative to stocks," Omega Advisors CEO Leon Cooperman told CNBC.

"I could keep [money] in cash and that's zero, and the Fed has told us that it's going to be zero for a couple of more years."

Quantitative easing aims to encourage investing so businesses will hire and bring down persistently high unemployment rates.

Some Fed officials, however, say the stimulus tool alone won't solve the nation's labor-market ills, as too many fiscal uncertainties will keep capital spending at bay and dampen demand until companies know what they will be paying in taxes next year, a topic currently stalled in Congress.

"Quantitative easing is a necessary but insufficient tool to spark job creation," Dallas Fed President Richard Fisher said at the Gainesville Area Chamber of Commerce, according to Reuters.

"Employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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