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from Expert Zone:
Egypt’s unfinished revolution will succeed
By Mohamed A. El-Erian
(The views expressed in this column are the author's own and do not represent those of Reuters)
NEWPORT BEACH - A year ago, Egyptians of all ages and religions took to the streets and, in just 18 days of relatively peaceful protests, removed a regime that had ruled over them with an iron fist for 30 years. Empowered by an impressive yet leaderless movement – largely of young people – the country’s citizens overcame decades of fear to reclaim a voice in their future.While much has been achieved since those euphoric times, Egypt’s revolution today is, unfortunately, incomplete and imperfect – so much so that some now doubt whether it will fully succeed. I believe that the doubters will be proven wrong.
Over the last year, Egyptians have voted in their first free and fair parliamentary elections. They have discovered and used freedom of expression in a way that, not so long ago, would have been deemed unthinkable. Participation in civic activities is on the rise. And Egyptians are learning a lot about who they are as a society, and what they can achieve collectively.
For the first time in decades, millions of Egyptians now feel that they “own” their country, and that they are directly responsible for its well-being, and for that of future generations. This is a priceless accomplishment for a country that had underachieved on so many fronts for so many years, in the process losing its self-confidence, failing to meet its considerable economic and social potential, and falling in international development rankings.
But greater ownership does not translate into full contentment. Dissatisfaction today is high and rising, and understandably so. Institutions are failing to adapt quickly enough. The legal system lacks sufficient legitimacy and agility. Everyday security, while improving, is still far from adequate.
Not surprisingly, the economy is struggling, and it will likely get worse in the months ahead. Growth is sluggish, amplifying alarmingly high youth unemployment. Shortages of some goods have started to appear, and the country is turning to the International Monetary Fund and other creditors for emergency financing.
from Anthony De Rosa:
The Davos Rookie
I'm going to level with you. I have little more than a vague idea of what I've gotten myself into here. An assembly of heads of state, titans of industry, the cliched 1%. I feel a bit like a fish out of water. What on earth is someone like me going to do among these power brokers?
I've got questions, for sure. What, if anything, has been accomplished as a result of the World Economic Forum since its inception? Going by Mohamed El-Erian's assessment, it seems not much. I don't say this out of malice. It seems like a well-intentioned idea to bring together people who have the power to effect change in the world. Nobody is expecting them to solve the euro zone crisis over the course of a week, but have they seized that opportunity because of coming here? I arrive with an open mind but a skeptical pair of eyes.
Are there examples we can point to where a Davos meeting led to the brokering of some improvement in the world? Perhaps we may never know. Many meetings here happen behind closed doors, out of the sight of nosy press like me.
It's far easier today than ever before for people to tap into what is occuring in nearly any part of the world, directly from the people living there, without the filter of media or government. It's easier for the people within those same places to communicate and organize among themselves. People who were previously unseen and unheard now have a voice. It's a very disruptive development for gatekeepers. Some may even be wondering if they really hold as much power as they think.
The upheaval in the Middle East and North Africa over the last year has proven, once more, that leaders are only as in control as the people they govern allow them to be. That may sound a bit hyperbolic, as things are still very much in flux, but few predicted how far the citizens of these countries have already come, how many leaders would fall, and with potentially more on the way.
Maybe that's the lesson those at the WEF should heed: to consider listening a bit harder not just to their fellow attendees, but to the people they've left behind.
from Chrystia Freeland:
Watch Chrystia on ABC’s This Week
Yesterday Chrystia sat down with PIMCO CEO Mohamed El-Erian, Washington Post columnist George Will, and former Council of Economic Advisors Chairman Austan Goolsbee on the set of ABC's This Week with Christiane Amanpour. Here's the video of their discussion about the latest developments in the European debt crisis, China's economic slowdown, and other dangers facing the global economy today:
video platformvideo managementvideo solutionsvideo player
Also, be sure to check out El-Erian's op-ed on Europe's crisis that Reuters published today.
from Tales from the Trail:
Washington Extra – Cattle prod
.As market maven Mohamed El-Erian told us today "The medium term has a way of creeping up on you." That's why everyone needs a cattle prod from time to time and today it was Washington's turn to get a goading.
It came in the form of Standard & Poor's decision to slap a negative outlook on America's top-notch credit rating because of Washington's plodding pace on deficit reduction. The White House and Congress need to get in gear and start making meaningful plans to cut the deficit or else be responsible for a dreaded downgrade in debt. The chances? One-in-three over two years.
S&P took most everyone by surprise, although the White House knew on Friday. In three days, it prepared the defenses: 1) S&P is making a "political judgment"; 2) "we shouldn't overreact"; 3) actually we are closer than you think in agreeing with Republicans about the way forward.
That might be so. But El-Erian, who has lived through many a debt downgrade and default over the years, noted there are three steps to any credible adjustment and the United States hasn't even done the first one: "formulating the action plan."
Here are our top stories from Washington…
S&P move puts pressure on Congress, White House
from The Great Debate:
El-Erian on the S&P’s negative outlook for US debt
JEN ROGERS, REUTERS INSIDER: S&P sending a shock through the markets after the credit rating agency cut its long term outlook for the US to negative from stable saying it believes there's a risk US policymakers may not reach an agreement on how to address the country's long term fiscal pressures. PIMCO has also had serious concerns about the US fiscal outlook, shifting to a short position in US government-related debt in March. PIMCO's CEO Mohamed El-Erian joins us now. So Mohamed, can you help us make sense of the bond market reaction to this news. Treasuries by and large now higher on the day; equities seem to be the one's taking it on the chin. What do you make of this?
MOHAMED EL-ERIAN, PIMCO: So on the treasury market, you're seeing a steepening; you're seeing the front end doing better and the long end doing relatively worse. And the reason for this is simple: people now recognize that you're gonna have to have some sort of fiscal tightening which means that the outlook for growth is less bright than it was before the announcement and therefore, short term treasuries are gaining. However, long term treasuries which reflect the fiscal risk premium are doing less well. As regards to other assets, it's very simple. You cannot be a good house in a deteriorating neighborhood. So, be it equities, be it credit, they're all being hit because people are realizing that the neighborhood itself is deteriorating.
ROGERS: You have been outspoken on the US before. A lot of people seem to be caught a little bit off guard by this news. Surprised- were you surprised?
EL-ERIAN: We weren’t surprised, a couple of qualifications. One is, we have our own internal ratings. So, when we look at S&P and when we look at Moody's; it's more for what it says to the rest of the world. As you know, we have been concerned for a while now about the need for the US to take more seriously its fiscal issues. Having said that, we must never forget that these rating agencies play a very important role in the industry. A lot of people invest on the basis of these ratings and therefore, you're seeing, in our view, a delayed reaction to the reality which is that the US needs to get its fiscal house in order.
ROGERS: Under your internal rating, is the US no longer AAA?
EL-ERIAN: The US risks losing its AAA on our internal ratings.
ROGERS: But it still maintains a AAA?
from Chrystia Freeland:
Readers’ questions for El-Erian
As Chrystia threatened at the end of her interview with Mohamed El-Erian today, we've compiled all the questions our readers submitted via the Newsmaker blog and Twitter and e-mailed them to him. El-Erian will be flying to Europe tonight after he finishes up his business in New York, and while we do hope he gets a little sleep, we also hope he stays up long enough to answer all of your questions. We'll post his answers right here once we receive them.
Global Markets
Are the current “mixed signals” by the various markets similar to the ones you said were being transmitted before the financial crisis, and do you think that the current stock market trading activity signals caution, confidence or complacency? (from i8emallup)
Are the markets too complacent about potential risks to growth (disturbance in global production chains, fiscal tightening) and inflation (Japans expected demand for resourses, continued strength in China, core EMU)? (From Michael D-R)
What percentage chance exists of default by G20 & G7 governments? (from Mark Melin)
Middle East
from Chrystia Freeland:
Your cleanest dirty shirt
To Mohamed El-Erian, the world's major reserve currencies -- the dollar, the euro, and the yen -- are a bit like your dirty laundry; every shirt is dirty, but compared to the alternatives, they historically have been the "cleanest dirty shirts." El -Erian thinks that arrangement will not last forever. He tells Chrystia that a long-term trade that PIMCO likes is a long position in the currencies of the successful emerging markets -- the clean shirts -- funded by the currencies of the U.S., the EU, and Japan.
El-Erian forecasts a medium-term weakening of the yen as Japan will repatriate more funds than the market currently expects in order to finance reconstruction. Of the three options Japan has for funding reconstruction -- borrowing, repatriating funds, or monetizing debt -- repatriation has the fewest risks. With a debt-to-GDP ratio well north of 200% and a diminished credit rating of AA-, borrowing money or monetizing debt could each cause a rise in Japan's interest rates.
In the near-term, though, before Japan can think about reconstruction it will have to muddle through the immediate aftereffects of the tsunami: a one-off destruction of wealth and a 25% reduction in Japanese energy generation. El-Erian pointed out that auto companies and tech firms around the world continue to announce production slowdowns due to the tsunami's of supply chains -- just two days ago Ford announced a temporary shutdown of a factory in Belgium in order to preserve car parts. His biggest worry is the "stagflationary wind" that's blowing from Japan towards the rest of the global economy.
Posted by Peter Rudegeair.
from Chrystia Freeland:
The bond vigilante speaks
Reuters finance blogger Felix Salmon has previously written that "if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache" of PIMCO CEO Mohamed El-Erian. Well, this morning Chrystia sat down with this famous bond vigilante for an hour-long Thomson Reuters Newsmaker interview and asked him why PIMCO decided to dump all of its holdings of U.S. government bonds earlier this month. Here's what he had to say:
Everything you buy and hold must have value; it's that simple... And our estimation at the time was that there was better value elsewhere... Now if the valuations of Treasuries change -- and it has been changing; they have been getting cheaper -- we will revisit that. But when we looked at what else was available, you have Treasury-like instruments that offer you a lot more value than Treasuries. You have government instruments in other countries that offer you more value. We made a portfolio decision that said at these prices we find better value elsewhere in the fixed-income market for this mutual fund, and as it turned out, that was the right decision to make.
El-Erian listed three concerns PIMCO had about the market for U.S. bonds. First, the Fed, which has been buying 70% of new Treasury issuance in its second round of quantitative easing, will cease it purchases in June, and it is unclear who will step in to buy Treasuries at current prices. As El Erian said, "when you can't identify a buyer, you don't want to hold that instrument." Second, El-Erian doubts that Washington can find a political solution to the U.S.'s medium-term fiscal problem in the near future. Finally, U.S. inflation is a worry for PIMCO. Though increases in the prices of food and energy have yet to feed back into core inflation, El-Erian's experience investing in emerging markets has taught him that the convergence point between headline and core inflation will be higher this time around than it has been in recent decades.
In response to questions via Twitter about the Fed's latest round of quantitative easing, El-Erian said "I would not have done QE2." He speculated that the only reason the Fed undertook a second round of asset purchases was because it believed Congress would not pass an additional fiscal stimulus, and that had the Fed known there would be an extension of the Bush tax cuts and a payroll tax cut, it would not have started QE2. El-Erian also doubted the Fed would embark upon a third round of quantitative easing after the current program ends in June, citing an improving economic outlook at a bleaker political situation:
Posted by Peter Rudegeair.
from Newsmaker:
Mohamed El-Erian on Reuters Insider television
Last June, PIMCO CEO Mohamed El-Erian spoke with Reuters Editor-at-Large Chrystia Freeland on Reuters Insider about his short-term outlook for the global economy. Nine months later, it is surprising how prescient El-Erian's forecast turned out to be.
In the clip below, El-Erian predicts that Greece's GDP will fall by a minimum of 7%, that Portugal tops the list of EU member states investors should worry about, and that the European Central Bank will face political opposition if it increased its purchases of Greek bonds.
From the fourth quarter of 2009 to the fourth quarter of 2010, Greece's economy shrank by 6.6%, quite close to El-Erian's estimate. Portugal is on the brink of needing to ask the EU for a bailout after its debt was once again downgraded this week. Finally, the ECB has faced a firestorm of criticism of its bond-purchase plan, which ultimately led Axel Weber, the frontrunner to replace current ECB chairman Jean-Claude Trichet, to withdraw his name from consideration.
