Pimco CEO: Investors Face Journey To 'New Normal'

   DOW JONES NEWSWIRES 
 

The chief executive of one of the world's largest bond funds said Tuesday that investors are facing "a world of lower growth and accelerated country realignments" as global markets look to reestablish themselves in the wake of last year's shocks.

Investors are on a journey to a "new normal," Pacific Investment Management Co.'s Mohamed El-Erian said, adding that they must determine how to reconcile short-term imperatives that conflict with longer-term realities.

Firms and investors should question theories that suggest that following a shock, markets will not revert to business as usual, El-Erian said, and be suspicious of forecasters who say the potency of policy measures are changing.

But despite applying those standards, it's difficult to dismiss the view that we're in the middle of a regime change, El-Erian said. Once the immediate dislocation associated with the deleveraging, de-globalization and re-regulation is over, investors and policy makers will "find themselves in a landscape that only partially resembles that which dominated the 2003-2007 period," he said.

Long-term investors can use that to their advantage as many other market participants are looking to the short term, he said.

El-Erian identified several questions to ask to determine how to navigate the road to the new normal about how the balance will shift away from markets and toward governments, how governments will finance their growing role in the economy, and what that means for the U.S.

He said policy makers must intervene in the market with a clear idea of when and how they will get out, manage their involvement in a way that minimizes disruptions to the markets and address any adverse consequences of their actions. Governments, especially the U.S., will have to signal that they intend to return to "longer-term fiscal sustainability," he said, by generating budget surpluses.

El-Erian said the U.S. has until recently seen lower funding costs and greater flexibility in macroeconomic policy. "In other words," he said, "the U.S. has operated like a large closed economy even though it is an increasingly open economy that is gradually losing its size advantage."

-By Kerry E. Grace, Dow Jones Newswires; 201-938-5089; [e-mail]