PIMCO's El-Erian fears deflation
From the Telegraph:
“I do not think the deflation and double-dip is the baseline
scenario, but I think it’s the risk scenario,” Mr El-Erian, chief
executive officer at Pacific Investment Management Co. (Pimco), told
reporters in Tokyo on Thursday.
"If you wonder how meaningful 25pc is, ask yourself the following
question: if I offered you that I would drive you back to work, but
there's a one in four chance that I get into a big accident, would you
come with me?"
Mr El-Erian, who helps manage more than $1 trillion in assets, warned
that action needed be taken quickly to prevent a economic slowdown.
Mr El-Erian said that downward pressure on prices – translating into a
rise in real borrowing costs – was already encouraging companies to
accumulate cash "in a way that was unthinkable just two years ago",
while individuals were being driven to save.
"On the road to deflation, which is what the United States is on today ... policy becomes less effective," he said.
He also warned that US unemployment was likely to stay "unusually high".
US inflation is currently at it lowest rate in 44 years. Consumer
prices dropped 0.1pc month-on-month in June, following a fall of 0.2pc
in May. The core consumer price index, which excludes volatile energy
and food prices, increased 0.2pc in June, but is well below the 2pc
growth targeted by the Federal Reserve.
Concerns over deflation has already led some major investment funds to
hedge against stock falls while buying more interest-bearing assets.
The rush to safety saw two-year US Treasury yields fall to a record low
of 0.51pc on Tuesday. The 10-year Treasury yield dropped to a 15-month
low of 2.85pc in July.
Bill Gross, manager of Pimco's record $239bn Total Return Fund, raised
holdings of US government-related debt to the highest level in eight
months in June, according to the company’s website.
“I do not think the deflation and double-dip is the baseline
scenario, but I think it’s the risk scenario,” Mr El-Erian, chief
executive officer at Pacific Investment Management Co. (Pimco), told
reporters in Tokyo on Thursday.
"If you wonder how meaningful 25pc is, ask yourself the following
question: if I offered you that I would drive you back to work, but
there's a one in four chance that I get into a big accident, would you
come with me?"
Mr El-Erian, who helps manage more than $1 trillion in assets, warned
that action needed be taken quickly to prevent a economic slowdown.
Mr El-Erian said that downward pressure on prices – translating into a
rise in real borrowing costs – was already encouraging companies to
accumulate cash "in a way that was unthinkable just two years ago",
while individuals were being driven to save.
"On the road to deflation, which is what the United States is on today ... policy becomes less effective," he said.
He also warned that US unemployment was likely to stay "unusually high".
US inflation is currently at it lowest rate in 44 years. Consumer
prices dropped 0.1pc month-on-month in June, following a fall of 0.2pc
in May. The core consumer price index, which excludes volatile energy
and food prices, increased 0.2pc in June, but is well below the 2pc
growth targeted by the Federal Reserve.
Concerns over deflation has already led some major investment funds to
hedge against stock falls while buying more interest-bearing assets.
The rush to safety saw two-year US Treasury yields fall to a record low
of 0.51pc on Tuesday. The 10-year Treasury yield dropped to a 15-month
low of 2.85pc in July.
Bill Gross, manager of Pimco's record $239bn Total Return Fund, raised
holdings of US government-related debt to the highest level in eight
months in June, according to the company’s website.
Views: 1
© 2012 Created by Maulik Mody.
