Mohamed El-Erian, CEO and co-chief investment officer of PIMCO, is one of the most knowledgeable people you can find on global financial issues. Prior to joining Bill Gross as co-CIO at PIMCO, El-Erian managed the Harvard University endowment fund, was a managing director at Salomon Smith Barney/Citigroup and spent 15 years at the International Monetary Fund.
He is in his second stint at PIMCO, formerly serving as a senior member of PIMCO’s portfolio management and investment strategy group before taking the reins of the Harvard endowment. His 2008 book, “When Markets Collide,” addresses global capital shifts before the dramatic events of that year confirmed them.
We spoke with El-Erian regarding PIMCO’s outlook for bonds and attempts to navigate the “new normal” global financial landscape.
Futures Magazine: Sprinkled throughout various speeches and commentaries by you and PIMCO founder Bill Gross is the term the "new normal." Generically it refers to an era of less robust growth due to lower leverage and more regulation. Explain what you mean by it and the implications of it on the investment landscape.
Mohamed El-Erian: The new normal is a world in which industrial countries face sluggish growth, persistently high unemployment, private sector de-leveraging and sovereign debt issues. It is also a multispeed world that sees an acceleration of the migration of wealth and growth dynamics from industrial to emerging economies. And remember, the new normal speaks to what is likely to happen given current conditions, rather than what should happen.
FM: What are the implications for industrial economies of this migration and, seeing that you note this is what will likely happen rather than what should happen, what do you think should happen?
ME: Industrial economies must adjust to this migration, and do so in a manner that is consistent with high global growth and an appropriate domestic retooling. In most cases, this involves a mix of structural measures aimed at strengthening international competitiveness, compensating for past resource misallocations (such as underinvestment in infrastructure and education), strengthening social safety nets and placing budgets and deficits back on more sustainable paths.
FM: In analyzing the U.S. and other Western nations' response to the financial crisis, you talk about winning the war and losing the peace. Please explain what you mean and tell us what needs to be done to win the peace.
ME: A bold and coordinated global response succeeded in avoiding a worldwide depression in 2009 that would have devastated output, demand, investments and employment around the world. Policymakers thus won the war. However, the peace is yet to be secured. As a result, the global growth outlook is still fragile, unemployment remains stubbornly high, investors are waiting on the sidelines, the risk of protectionism is increasing, sovereign debt crises are periodically erupting and global policy coordination has given way to fragmentation, frictions and, even, talk of “currency wars.”
FM: You praise the reaction by policymakers to the initial crisis. Are you referring specifically to TARP or the multiple Fed actions beginning in 2007? As a trader are you worried about the level of government intervention in the markets? How has that changed, if at all, your decision making?
ME: It goes well beyond a specific measure. The six-month period, October 2008 to April 2009, will go down in history as an amazing time of global policy coordination. National policies in both industrial and emerging countries were aligned by the trio of common analyses, purpose and focus. The effort involved many countries, coordinated via the G-20. It also included multiple national agencies, acting jointly in an unusually cooperative and constructive fashion.