Pimco's El-Erian sees zero growth in '09

NEW YORK (Reuters) - Mohamed El-Erian, co-chief of the powerful money manager Pacific Investment Management Co., on Wednesday said the U.S. economy "unambiguously" faces the prospect of zero growth in 2009, even if interest rates keep falling, and it is too soon to say markets have bottomed.

Speaking via teleconference at the Reuters Investment Outlook Summit in New York, El-Erian said markets are suffering as consumers, businesses and investors race to reduce risk.

"It puzzles me that people feel confident to declare the bottom," he said. "What we're looking at is a very bumpy journey that will continue well into 2009. We're looking at multiple bottoms."

El-Erian helps oversee $800 billion in assets at Pimco, the world's biggest bond fund manager, and along with famed investor Bill Gross is Pimco's co-chief investment officer.

He said markets are suffering from a "turbo-charged perfect storm" as investors fly to the safest and most liquid assets, such as U.S. Treasuries, and where money doesn't flow properly throughout the financial system.

The deterioration in housing has "morphed" into a retrenchment first among lenders, then by consumers, and ultimately by economies around the world, especially in emerging markets, he said.

El-Erian said 2009 will be "unambiguously a year of sluggish or zero growth," where U.S. gross domestic product could fall at an annualized rate of 1 percent to 2 percent.

Thereafter, he said growth could recover, but at a more moderate rate than the economy previously enjoyed. "We are looking, unfortunately, at a reduction of the speed limit of growth in the U.S. economy over the medium term," he said.

El-Erian said the U.S. Federal Reserve is likely to halve its current 1 percent benchmark short-term interest rate at its policy-setting meeting next Monday and Tuesday, but such a move will have minimal impact.

FOLLOWING THE GOVERNMENT

At a time the government is buying or guaranteeing payments on trillions of dollars of debt considered less safe than Treasuries, El-Erian remains defensive though he said he doesn't have a heavy weighting in Treasuries.

He said Newport Beach, California-based Pimco has been buying high-quality debt such as "triple-A" rated bonds issued by banks and backed by the Federal Deposit Insurance Corp, as well as mortgage and agency securities.

In contrast, El-Erian said it remains premature to buy U.S. equities or high-yield debt, despite yields that now average more than 22 percent.

He also said Treasury inflation-protected securities, or TIPs, look attractive at current levels.

On Tuesday, the government sold four-week Treasuries that carried a zero yield, and some Treasury bills briefly carried negative yields.

"Ultimately, these levels will look silly, but right now they are consistent with the realities of today's world," El-Erian said.

El-Erian also said the U.S. dollar is likely to weaken starting sometime in 2009, but that it is too soon for investors to "short" the greenback, betting on a decline.

The dollar is up nearly 20 percent against a basket of currencies .DXY since July. El-Erian said the dollar has experienced a "cyclical strengthening" as investors shy away from perceived risk and unwind carry trades, and as economies weaken around the world.

"If you analyze why the dollar has strengthened, it has more to do with the rest of the world than with the U.S.," he said. "You don't want to be shorting the dollar until you have evidence the deleveraging has run its course. Our sense is that about three-fourths of the deleveraging has taken place."

(Additional reporting by Vivianne Rodrigues; Editing by Tom Hals)