Mohamed El-Erian

Bloomberg TV’s Betty Liu spoke with Mohamed El-Erian of PIMCO, who said that the Federal Reserve is likely to provide additional assistance if the economy weakens further, but there is “no immediate need” to do so.

El-Erian also said that the U.S economy needs to add 250,000 to 300,000 jobs every month if we are to “seriously start reducing unemployment to something that is acceptable,” but that “the labor market is cooling off and doing so too early.”

El-Erian on today’s GDP numbers coming in softer than expected:

“The level is softer, 2.2 versus what was expected, 2.5. More importantly is the composition. What surprises on the upside was personal consumption, but unfortunately that came on the back of dissavings. The personal savings rate has gone down from 4.5% to 3.9%. That raises the question of how long we can consume as a society by saving less? What we really want to see go up, business investment, ended up coming down. Whether you look at the level or the composition, this signals we are an economy that, unfortunately, is having difficulty getting traction and the engines are not sustainable engines. It’s interesting. Business investment just saw a gain of 1.4%, a drop from what we saw in the prior quarter.”

On job growth in the U.S.:

“We certainly will not see enough job growth. We’re still stuck at 8.2% with over 5 million Americans unemployed. It is particularly bad among the young. That is not good news. We need a very vibrant labor market and we are not getting that. It speaks to other things, which is the need to reform certain elements. We need labor retooling and retraining. We need education reform. We need public finance reform. There are things that need to be done that are not being done, therefore the economy is going forward but much slower than what is needed…Every month, we need to create between 250-300,000 jobs if we are to seriously start reducing unemployment to something that is acceptable from a society perspective.  We are not there yet. There are indications that the labor market is cooling off and it is doing so too early. We need to continue to focus on that.”

On whether we’ll see necessary job growth at any point this year:

“It is unlikely. What I worry about most is that we will repeat what we saw in 2010- 2011, where we started the year off strongly and then come the second and third quarter, it slows down and we lose the momentum that is so important to sustain a really good recovery.”

On whether we have already seen the momentum for the year:

“It’s hard to say. You have these really big uncertainties, like Europe, out there as well which speaks to a fundamental investment theme. Rather than try to go for the headliner, do the work at the company level. If you talk to our equity portfolio managers, they’re really excited about certain companies that share the following characteristics. They have good cash buffers. They have high operating margins. They have low financial leverage. They are exposed to growth areas. That is where we should focus including not just the corporate but the sovereigns.”

On Bill Gross’ stating on Apple that, “‘if our stock market and economy is so dominated by one stock and its daily fluctuations, be careful”:

“This speaks to something that we have been looking out for a number of years now which is how to formulate good indices. Whether it is on the equity side and particularly on the debt side at a time when sovereign debt is exploding, this notion of market capitalization, where the bigger you get, the bigger your weight in the index, the more people have to allocate to you. When you get beyond a certain point that becomes counterproductive. We have been looking at indices, and we have a launched a whole set of them that says let’s look at a different way to weight countries. We do it by GDP, which we think captures better the potential of an investment instead of market capitalization which, beyond a certain point, can become distorted.”

On his near to medium-term outlook for the U.S. stock market:

“I think cautious. We have had a really nice rally in the first quarter. We have basically been paid forward, on the assumption that we can sustain this recovery and the assumption that tranquility can be maintained in Europe. Both of these assumptions are under question, so I would be careful and go back to what I said earlier. Rather than focus on the markets as a whole, be very differentiated. There are certain stocks, sovereigns, that will do well, and others that simply do not have enough cushion to navigate a more bumpy road.”

On how long it will take the market to go down if volatility isn’t expected in the short term:

“The role of policymakers is huge in sustaining valuations that are above fundamentals and in sustaining correlations that are historically strange. Policymakers are playing a very important role. When you look at policymaking, you have to distinguish between the willingness to do something, the ability, and effectiveness. I do not think there’s any question that policymakers are willing to do whatever it takes to maintain market valuations high in order to hand off a healthy economy. That is what the market believes. The more difficult question is effectiveness.”

On whether the Fed will make a move if the economy deteriorates:

“Yes, I do. I do not think there is an immediate need now, but if we continue with this weakening trend the Fed will come back in to try and sustain this market and economy.”

On whether the markets should be moving down since there are signs of economic slowdown:

“You can make either case. On the macro, you can make the case the market is too high. On the micro, which is the strength of the company, you can say the market can go further. It is interesting that this market has absorbed eight two-notch downgrade for Spain, which a few months ago, this market would not have been able to. This is a very delicate balance.”

On whether Spain is too big to bail:

“You do not want to be in a position where you need to both fund the government and the capitalization of the banking system because these two things can be large. Can we fund both of these things? I will say let’s not go there…it means that everything has to be done by Spain and by Europe to make sure that Spain can finance itself. That Spain can retain access to the markets.”

On whether the 25% austerity cuts are realistic:

“That’s the big question. We’re looking at a 24% unemployment rate and S&P just told us that they expect the economy to contract by 1.5%. They expect the debt to GDP to go up to 90% by 2015. It is not going to be easy and that is why everyone needs to keep their eye on Spain. Let’s not forget what happens on May 6th. There are a whole host of elections in Europe.”