Wednesday, December 17, 2008

PIMCO's Mohamed El-Erian on Fast Money

I was hoping someone like Mohamed El-Erian would be tapped for Secretary of Treasury; this guy is one of the sharpest guys out there.

I believe this video (8 minutes) is more than worth your time. Lost in the glee and clapping yesterday (I think Jim Cramer cried tears of joy), are what I want to warn about - the unintended consequences. Further, anyone who tells you "I know how this will all turn out" is simply lying. The actions are unprecedented and while some of the unintended consequences are probably easily modeled, others we won't even imagine. Frankly, we are solving a debt problem by ... asking consumers to take on more debt.

As you watch this video the most important question and answer was at the 4 minute period - the question I have been asking. How the hell do we ever get back to a normal market? The government is so involved and people are not thinking about how we are ever going to normalize to a moment when the government is not crowding out private investment. But again - as Americans - we only deal with the fire on the couch we are sitting on. We'll kick the can on other fires down the road.

Worth your time....

What does the head of the world's biggest bond firm have to say about the Fed’s extraordinary action Tuesday?

Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co, or PIMCO, said when he heard the news of the day only one word came to mind, “Wow!”

In other words he took the move to mean the Federal Reserve was willing to throw everything at the current financial crisis.

As you likely know on Tuesday the Fed reduced the federal funds rate (the interest that banks charge each other) to a range of zero to 0.25 percent. Also they pledged to use "all available tools" to stimulate the economy including the purchase of large quantities of mortgage-related debt and possibly buying long-term Treasury securities.

"They're not only saying effectively we're going to zero and we're going to stay there for some time.. but they're saying they're going to buy whatever they need to buy and blow up their balance sheet."

It's history in the making. "History books are going to be written about what happened on Tuesday," El-Erian says.

However don't expect a walk in the park. El-Erian is concerned about some unintended consequences. “The simple one is that the currency comes under pressure. The more difficult one is the outcome of messing around with market relationships.”

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