Thursday, May 13, 2010

Pimco Says Europe Shows World Caught in ‘New Normal’

Bloomberg News

May 13 (Bloomberg) -- Pacific Investment Management Co. said the debt crisis in Europe shows its outlook for an extended period of below-average economic growth remains valid, even after global markets rebounded from the financial crisis.

“What is happening in Europe is a vivid illustration of an underlying theme of the new normal,” Mohamed El-Erian, the chief executive officer of Pimco, said in an interview. There are “structural forces overwhelming traditional cyclical ones,” he said.

European policy makers unveiled an unprecedented loan package this week of almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in financial markets and the euro. El-Erian has said Europe’s problems may spread across the globe because of investor concern that governments have borrowed too much to revive their economies.

Pimco, which coined the phrase “new normal” a year ago to describe a world characterized by high unemployment rates, more regulation, and a shrinking importance of the U.S. in the global economy, reiterated the view at its annual investment meeting last week in Newport Beach, California, the firm said today on its website.

‘Many Tensions’

“It is even clearer today than it was a year ago that the global economy has embarked upon a multiyear journey that is subject to many tensions,” El-Erian wrote in a commentary on the website.

El-Erian, in an interview today with Tom Keene on Bloomberg Radio, said the euro remains weak after the European Union’s rescue package because of uncertainty about the measures and the growing debt of nations such as Greece.

“Europe is buying time,” El-Erian said today.

Pimco manages more than $1 trillion in assets, including Bill Gross’s $225 billion Total Return Fund, the world’s biggest mutual fund. Gross shares the position of co-chief investment officer with El-Erian.

El-Erian said the rally in markets worldwide over the past 12 months is a “strong cyclical bounce” that hasn’t translated into a level of job creation and investment that past recoveries would suggest. Government spending, which fueled some of the rebound, has become a source of investor concern that countries won’t be able to service their growing debt.

Maturing Bonds

Europe’s debt-ridden nations have to raise almost 2 trillion euros within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Merrill Lynch data.

Governments, meanwhile, are seeking a bigger say in economic matters after using taxpayer money to bail out the financial system, highlighting what Pimco calls “state capitalism” and leading to heightened regulation in the markets.

Pimco’s outlook has been challenged by Legg Mason Inc.’s Bill Miller and White House economic adviser Lawrence Summers. Miller in a letter to investors in October said that El-Erian’s perspective is an “inside view” that makes a prediction about the future based on current conditions, and doesn’t take historical precedents into account. Summers, in an Oct. 8 interview with Bloomberg News, said he would be “very reluctant to accept the idea” of an extended period of slow growth for the U.S. economy.

The Standard & Poor’s 500 Index has surged 33 percent in the past year on signs of economic growth. The U.S. economy expanded at an annual rate of 3.2 percent during the first quarter as households spent more. ‘

‘Structural Headwinds’

The U.S. continues to face “large and mounting structural headwinds,” despite moves by corporations to cut costs and by banks to shore up their balance sheets, according to El-Erian. He cited high unemployment levels, government and municipal finances, and elevated levels of consumer debt. The U.S. unemployment rate rose to 9.9 percent in April from 9.7 percent.

Growth and wealth will shift to emerging economies such as Brazil, China and India, driven by rising employment and income, according to Pimco. Europe will struggle as it tries to ward off deflation, and questions are “multiplying” about the euro and the makeup of the euro zone, El-Erian said.

Pimco’s annual meeting, known as the Secular Forum, brings together the firm’s investment professionals and outside experts and guides Pimco’s investment approach over the next three to five years.

The meeting was attended by guest speakers Kenneth Rogoff, a professor of economics at Harvard University; Ian Goldin, director of the James Martin 21st Century School at the University of Oxford; Greg Ip, an editor at the Economist magazine; and Arminio Fraga, former president of the Central Bank of Brazil. More than 400 Pimco investment professionals from 11 offices around the world attended the event.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at