Sundance 2013

degrees. Sunday's for cars has the rain clearing away from the South

West corner -- south-east corner. Showers will creep in from the West

and they could be wintry in Scotland. We are concerned about

some flooding over the next couple of days. Sunday night may have a

few showers around. It will stay quite breezy and after a window of

drier weather, yet more brain is on the cards for Monday. The saturated

ground will see another batch of A gunman wearing a gas mask has

died after attempting to rob a bookmaker in Plymouth. Police say

he was pinned down and disarmed by customers but was unconscious when

emergency services arrived and declared dead at the scene.

The Government insists its economic plan is working, after figures

suggested a drop in the country's output. GDP dropped by 0.3% in the

last three months of 2012. Labour says the coalition has been

complacent. Five people are reported to have

been killed and hundreds injured in violent protests in Egypt, marking

the second anniversary of the revolt that toppled President Hosni

Mubarak. Demonstrators say the government has betrayed the ideals

of the revolution. Bad weather continues to cause

problems for much of the UK. Severe snowfall is affecting parts of

Scotland and northern England. The Met Office says there could be

flooding this weekend, with a thaw and heavy rain forecast.

Now it is time for HARDtalk. From Is it time for the doom mongers to

admit they were wrong about the world economy? The eurozone is

intact, just. The US has not plunged off the fiscal cliff, and

even the most stagnant economy, Japan, is showing signs of life.

Could it be that central bankers and politicians are finally ready

to take bold decisions in their quest for growth. My guest today is

one of the world's most influential investors, the boss of the massive

fund management business. Caution, From Newport Beach, California,

welcome to HARDtalk. Thank you, Stephen. Last time we spoke, going

back a couple of years, you were gloomy about the outlook for the

world economy. One word you used to some of your feelings was

"terrifying". Has that fear gone now? To some extent, but not

completely. I was terrified about the prospects of sluggish growth,

persistently high unemployment, and social unrest. And what we have

seen over the last couple of years is exactly that - sluggish growth,

high unemployment and unrest in certain countries, like Greece.

However, we have also seen actions taken that have delayed the second

stage. I am glad, because as a parent, I would rather see the

world going concerned than into a bad state. For a long time I have

had the impression that you have filled political leaders around the

world, and maybe most particularly in the advanced economies, were not

up to the task of finding coherent strategies for growth. Do you feel

it is time to modify the negative view you had of political

leadership? So, I wish I could say yes, but not yet. So the reason why

the global system is in a somewhat better place has very little to do

with politicians and much more to do with central bankers. Central

bankers have stepped up to the plate, as they say here in the

States. They have used exceptional measures. It is like a drug company

putting out a medication that has not even been clinically tested.

That is what central banks have done, and they have bought time for

politicians to get their act together. But the politicians have

not, as yet, done their bit. They have not yet stepped up to the

responsibility of promoting economic growth. It strikes me

there is one country right now where the relationship between

politicians and central bankers may be, reform might be being changed

in an important and fundamental way. That is Japan, where we have the

new Prime Minister with a clear democratic mandate to take some

pretty dramatic economic policy decisions, decisions that he will

impose, in a sense, he is imposing on the central bank, all about

listening Monetary Policy and changing the key objectives which

the central bank has worked towards. Do you see that as fundamentally

important? Yes, because it tells us a few things about how the global

system is operating. Japan is being forced into this step because it

has had its currency appreciate. Another way of putting it is if one

central bank is pumping a lot of liquidity in, as the Fed is doing

in the US, other people have very difficult choices. Either they

accept the consequences of what the Fed is doing and see their currency

appreciate, and it hollows out their economy, as has happened to

Japan, or they decide to join the Fed into what is called

irresponsible Responsibility. So you are being irresponsible because

you are not reacting with your first best measure, but it is the

right thing to do because someone else is doing the responsible thing,

too. Here is where people look at you not just as an influential

commentator, but as a real player. Because you, with your fund, you

look around the world for the wisest place to put your investors'

money, particularly in bonds, fixed-income products, including

government bonds. I wonder what you look at the Japanese attempt to

stimulate the economy, which means we can expect a rise in inflation

in Japan, expect a devalued currency, and both of those carry

some dangers, do you look at what is happening in Japan and think it

is still a place you want to put money? You sound like a good

investment manager because he said exactly what is going to happen.

They will target higher inflation, weaken the currency, as they have

already, and the rest of us have to react to that. So our role, as

guardians of people's pensions, savings, investment, is to

understand what is going on and navigate in a way that delivers

returns and managers risk. So depended on which part of the

Japanese market you look at, there are both opportunities and there

are risks. The opportunities come from the fact that they are going

for growth, and that is good for certain markets. The risk is that

they are going to weaken the currency and therefore you have to

be careful about holding Japanese yen. We are talking about a country

with a really very large running budget deficit. Even worse than

that, a massive debt mountain which adds up to over 220 % of GDP,

national output. I am surprised you are sounding so sanguine about the

prospects, talking about opportunities in Japan. It seems

there is potential for massive collapse if the policy does not

work. You are asking what is likely to happen. If you ask what should

happen, we would have a different discussion. The reality right now,

whether it is Japan, whether it is the eurozone, whether it is the US,

everybody is taking short-term measures. They are not doing the

hard work, which is structural reform, dealing with all sorts of

economic, financial, social and political issues. Rather, they are

looking to central banks to deliver short term outcomes. That is the

reality of the world we live in. It goes back to what we said earlier,

Stephen, that politicians have not stepped up to their

responsibilities. Being a politician means making tough

decisions. So far, very few wish to do so. Despite the time delay

between us, I have to interrupt, because it is quite easy for you to

sit there, managing other people's money, but not a man held to

account by voters. You know as well as I do that voters around the

world, particularly in the US, Europe and Japan, they have people

who are not willing to accept high levels of unemployment and

continued very sluggish growth. They have to deal with that. And it

seems that one way they have decided best to deal with it is to

continue with highly stimulative policies, including quantitative

easing, including instructing central banks in some circumstances

to not just be preoccupied with inflation targets, but also to

think about removing the jobless as well, giving people new jobs.

Surely that has got to be right for a politician. It is right for a

politician to target higher growth and lower unemployment. I have been

saying it non-stop. You have to do something about it. But it is wrong

of politicians to think that central banks can deliver what I

call the immaculate recovery. Even central bankers are warning,

whether it is Mervyn King in the UK, Ben Bernanke in the US, they are

saying, do not depend on us, you need to do your role, too. We can

build the bridge but cannot deliver the destination. So the politicians

are focusing on the bridge, and what the people want is a

destination. That destination does not come until some pretty bold

decisions are taken by politicians. I want to quote to the words of

Paul Brockman, who has not been a huge fan of yours, because he

thinks you have been deeply conservative and underestimated the

importance of quantitative easing, for example. He says of Japan and

the residents of Japan, something remarkable is happening because the

country which pioneered the economics of stagnation may end up

showing us a way out. He thinks this could be a watershed moment.

wrote an article agreeing with him that starts by saying he is right.

For him to deliver the watershed moment, which is possible - not

probable but possible - you need the following. First, you need the

Bank of Japan to be convinced it can deliver on what the Prime

Minister wants to do. Second, you need a targeted fiscal stimulus.

Japan has a really bad track record about delivering fiscal stimulus.

They could not even do it after the earthquake and tsunami. Third, you

need society lack -- to accept the short-term costs of higher

inflation and higher gas prices. 4th, you need political harmony. We

are looking at Japan, hoping that Japan can deliver, but not

underestimating or they need to do. Let's broaden it out. He talked

about Mervyn King, current governor of the Bank of England, and Ben

Bernanke. There is one other big theme in the world economy, and

that is the idea that some of the old orthodoxy about inflation being

the only key priority for monetary policy and central bankers has to

be modified. There has to be a broader look at central banks

taking responsibility for growth, not just for inflation. The new guy,

who is going to replace Mervyn King, coming from Canada, he seems to buy

into that. Do you? I do. From day one I have recognised, and others

have, that inflation is a means to an end. That end is improving

living standards and better opportunity for all. History has

shown that when you have high inflation, you do not just give up

growth, but importantly you give up on income distribution, because the

poor cannot protect themselves against high inflation as well as

the rich can. So low and stable inflation is a means to an end.

People are finally realising that you need to target the end more

aggressively. I think that is a good thing. I just would not put

all of the burden on central banks. It is a shared responsibility among

different economic agencies nationally, and also a shared

responsibility globally. We need much better policy co-ordination.

Let's bring it closer to home and talk about the United States. When

you talk about the need for policy makers across the piece to be on

the same page and to have a coherent strategy for economic

management, I imagine you are not actually thinking about the way in

which the White House and the US Congress currently work together,

or more precisely do not work together. The fiscal cliff was

avoided, but is the sense of crisis around managing public finances in

the United States still alive? Still alive is the underlying

problem. The US does not have as much of an economic issue as it

does a political issue. We are seeing an extreme degree of

political dysfunction in Congress. I look at this, and it is the image

of a divorcing couple arguing over a pillowcase. There are bigger

issues in the estate, are bigger issues in the US. And our

politicians can't even resolve the argument over a pillowcase. In fact,

they create other pillowcases to argue about. If you are living in

this country, you have very little confidence in Congress. Less than

10% of the population think Congress is doing a good job. This

political dysfunction is holding back growth and employment.

Congresses, it seems, ready to kick the can down the road when it comes

to the debt ceiling. -- congress is, it seems. They have to lift it

above where it currently stands if the US government is not to default.

It was going to come to a head in late February and now it seems it

may be put back for another three months or so. Ben Bernanke says if

this is not sorted, it could be a recovery-ending event. Is it right

The longer this persists, the more the growth momentum while a decline.

It is not just that this is dampening growth, it is also taking

attention away from other issues. We need improvement in the function

of the labour market. We need help on the functioning of the credit

markets. They are still clucked, small businesses cannot get credit.

We need help on the functioning of the housing market. There are a lot

of items on the to do list of Congress but they are being crowded

out by this continual fight over the fiscal issues that simply is

repeated a month after month after month. Before we finish our quick

tour of the world economy, I have to take you to Europe as well. We

spoke last time about the future of the euro and you said there were

very real fears that the euro in its current configuration would not

survive. Again the Eurozone has pulled through a series of crisis,

are you prepared to say you were wrong about the durability of the

common currency? I certainly underestimated the extent to which

the Europeans would throw money at the problem and the delayed dealing

with the fundamental issue which is that countries like Greece are

unable to grow within the eurozone and that difficult decisions have

to be made. Where I still stand is something is going to have to give

up. Either the Eurozone will transition to a smaller, less

imperfect Eurozone or Germany and other strong economies are going to

sign up to endless checks to countries like Greece. One of the

two decisions will be made in the next 12 months or 24 months. To be

clear about this, Mohamed el-Arian, just the other day in the studio I

had the vice-president of the European Commission tell me quite

confidently that the period of existential threat for the euro was

categorically over. In your view was he being premature? I have

always said the euro survives, the question is what does the Eurozone

look like? Here is a question that has to be made -- here is a choice

that has to be made by European countries. One is to opt for

something that works better because there is better political, economic,

banking integration. That is one possibility. The other one is to

say, you know what, we are going to maintain a political project that

does not make total economic sense but that is OK because the

creditors will subsidise the debtors embassy. They have to make

a decision and until they make that decision growth will not

materialise in the poorer economies and unemployment will remain too

high. You 0.2 decisions that are yet to be made and you point to the

way in which new forms of integration have to buttress the

strength of the Eurozone which leads me very easily to a

discussion of the historic decision taken by David Cameron to go for

the gamble of a dinner-out referendum here in Britain on

membership of the European Union. The thought is he will negotiate a

loser settlement and put it to the people in a referendum. As an

outside observers and an investor in Europe, what do you think of the

strategy he is now adopting? Having lived for years in Britain, both

school and university, it does not surprise me that he has gone down

that path. I remember how strongly people felt about the British

sausage, I remember a comedy series about it so it does not surprise me.

It speaks to till very important issues. Britain used European Union

as a means to an end, it is a common market that leads to more

trade and more employment. The Europeans, especially the Germans

and French, see it as an end in itself, it is about political

integration, it is about reducing the risk of something terrible.

There is a fundamental difference in how people see this. The first

thing it's tells me is that this fundamental different perspective

has not yet been resolved. The second thing it tells me is that

the more the Eurozone, the 17 countries, seek closer and closer

integration, the more proper - and the more problematic it is for

members like Britain who are members of the Europeans have Union

but not members of the eurozone. You are a huge leak influential

investor and economist, in your opinion, can the United Kingdom are

fought to leave the euro? The European Union. That is going to be

one of the options in this referendum, can the UK afford it?

It will certainly suffer the consequences of exit, which will

probably mean a lower growth, low investment initially, it will be A1

of shock and that is the political, economic cost of political decision.

Then it will reset in an association process like other

countries have. Politically this will translate into lower

investment and lower growth. You'll be aware that a senior figure in

the State Department recently came to London and said the United

States regarded as a key national interest for the United Kingdom to

be inside the European Union, as a private investor in the United

States, who looks at Europe, will the UK be less attractive to you?

In your opinion will it be a less strong economy if it were to be

outside the European Union? A lot depends on what conditions prevail

when it is outside. If you force me to stay, in general I would tell

you yes because it will have less preferential access to a bigger

market and that translates into lower economic potential so, yes,

it will be worse off. But the only thing I would caution is let us

wait and see under what condition this would occur. That, on the

surface of it, Britain economically would be less well-off. And you

would be loath to put more money into the UK if that is your

analysis. Yes, one problem that David Cameron has to deal with is

that when you make A4 wood announcement, and he has made a

formal announcement, this referendum is not any time soon,

people like us stop putting in an uncertainty premium. We start

pricing that if we have to make investment decisions, which we do,

that play at over five or 10 years, what does the regime look like in a

five or 10 years and the uncertainty premium associated with

that goes up when you are not sure what the relationship between

Britain and Europe may be. We may face five years of uncertainty. We

know that if David Cameron wins the next election he will insist on a

referendum by the end of 2017, what you seem to be suggesting to me is

that potential length of time of uncertainty could be very damaging.

It could. The one silver lining is in that period we will also get

information on the Eurozone. Remember we have the Eurozone here,

the inner core, and we have Britain in the outer core of the European

Union. Britain's well-being depends on what happens in the inner core

so we have a lot to talk about -- about in the next few years because

it is not just whether Britain goes out but what happens in the inner

core. This is a very fluid time for Europe and the global economy.

final thought on Britain. Right now there is speculation that because

our economic performance is poor, we could be close to losing our

triple A credit rating internationally. You follow this

closely because it is germane to your business, investing in debt.

Do you think Britain will lose its rating? It depends who is writing

her own. If you are talking about the rating agencies, they have

already signalled a high likelihood that Britain may lose its triple-A

status. We do not follow the rating agencies analysis. We do our own

internal ratings and our own internal ratings suggest that, in

fact, British risk now is better than has been in the past, because

of the economic policies being pursued. Yes, well they are likely

be a downgrade from the rating agencies, yes. They have already

signalled that. Very few countries, very few countries are likely to

maintain their triple-A right now given the course everyone has

embarked on. But for us investors we may do so -- different

assessments and most of the time we disagree with the rating agencies.

Finally we have talked about Japan and the US and European economy, in

this terrible phrase that economists and people like you used,

are you risk on all this off in your mind set at the beginning of

2013? We are taking a risk off the table. We were at risk on and our

clients benefited and now we are taking risks of. Economic

fundamentals are here. Valuations are much higher than economic

fundamentals because central banks have created a huge wedge, a huge

liquidity wet. If you listen to what Ben Bernanke said in September

he said the objective is to push investors to take more risks. He

has pushed investors to take more risks and valuations have gone up

but if our relations -- fundamentals do not validate these

valuations, valuations will not come down. At this month we are

saying be careful because acid prices artificially supported and

there is a limit to how long you can divorce assets prices from

fundamentals. We are taking a risk of the table right now. Mohamed el-

Arian, thank you very much for The weather continuing to give us

some problems as we start Saturday. After the overnight snow it is all

going to freeze and we will be left with widespread eyes. Still the

potential for travel disruption. If you're travelling first thing on

Saturday morning BBC local radio is a good place for local information.

A mixture of rain and sleet and snow is clearing away from the

south-east by 9am. We will start to see things brightening up.

Temperatures will sit there just above a frisson. In northern

England there are still some light snow around with temperatures

hovering about freezing. The ice is a concern here. Temperatures for

Edinburgh and Glasgow are around two degrees. It should be fine with

some sunshine. If similar story for Northern Ireland. Things are

quieter rain down in Wales with temperatures in Hollywood -- Holly

Aird a seven degrees. Still quite cold in Cardiff. For many Saturday

is not looking too bad a day. It should be bright in the afternoon

but it tends to become more overcast in the West later on in

the day with more rain starting to show for Wales and Northern Ireland

and South West England. Whether colder halt dominie East

temperatures will still struggle. - - where the cold air holds on Any

the east. Heavy rain will sweep across the country so a wet start

to Sunday-morning but not as cold as recent days. Temperatures for

some are beginning the day at around eight degrees. It will stay

windy with blustery showers in the West which could be wintery just

across the high ground of Scotland. The snow was beginning to melt as

we have the milder air and had on the effects of the rain and we are

concerned about flooding in the next couple of days. Sunday night

there maybe a few showers around with tightly-packed isobars that