PIMCo's El-Erian Warns of the 'New Normal', Says Fed's Moves Could Spur Inflation

Mohamed El-Erian, CEO of the Pacific Investment Management Co. (PIMCo), who popularized the phrase "new normal" to describe how growth will be depressed by consumer retrenchment and tighter financial regulation, says the Fed's purchase of Treasuries will lead to faster global inflation while failing to revive US economic growth.

(October 27, 2010) — Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co. (PIMCo), who popularized the idea of a ‘new normal,’ has said that investors should expect lower-than-average historical returns with greater regulation, lower consumption, slower growth, and a shrinking global role for the US economy.

“It is our base case, but it’s not our dominant case,” El-Erian, who runs the world’s biggest bond fund, said in an interview on “Bloomberg Surveillance” with Tom Keene. “We are looking at a world where there are many possible outcomes. It’s no longer like the old days when we can be confident in just one outcome.” According to the CEO, investors should expect 4% to 6% returns on average and said that gains will come in a “volatile” fashion, Bloomberg reported.

PIMCo has adjusted to a new normal by offering equity funds to investors in April, while moving into stocks to allow customers to diversity their holdings as areas such as emerging markets outperform other regions, Bloomberg reported. PIMCo’s $252 billion Total Return Fund returned about 11.87% in the past year, surpassing about 76% of its peers.

El-Erian has said that the Federal Reserve’s Treasury purchases will accelerate global inflation while failing to lower US unemployment. He has said that he doesn’t believe in the effectiveness of the Fed’s “quantitative easing” program to deliver high growth or low unemployment, referring to the Fed’s strategy of injecting more money into the economy. “QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky,” El-Erian said in an interview with Bloomberg Monday at a gathering of the Financial Women’s Association of New York.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742