Tag Archives: Mohamed A. El-Erian

Are We Turning a Mega Cycle?

According to trend researchers. the human evolution moves in cycles; some are short, about 10 years, others  are a bit longer. about 50 – 60 years. But the most fundamental changes in life on earth comes along about every 500 years or so. These changes are often dramatic and violent. What we are experiencing right now may very well be one of the really big turning points in the history of mankind.

“But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

Mohamed A. El-Erian

Charting the megatrends

One of the most sound characteristics of the global crisis I’ve read in quite some time comes from Mohamad El-Erian, CEO of the worlds largest bond fund, PIMCO. El-Erian faces the reality with no fear, admitting that there is no way of predicting what will happen next and points to four crucial factors that you should be watching if you want to be able to adapt to a rapidly changing world.  

“The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead,”  El-Erian writes.

Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of the book ” When Markets Collide“.

The following commentary was first published as a part of Project Syndicate.

This version appeared at Al Jazeera a few days ago:

The United States is having difficulties returning its economy to the path of high growth and vigorous job creation.

Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system. In the euro zone, financial crises have forced out two governments, replacing elected representatives with appointed technocrats charged with restoring order.

Concern about the institutional integrity of the euro zone – key to the architecture of modern Europe – continues to mount.

This uncertainty extends beyond countries and regions.

Those looking around the next corner also worry about the stability of an international economic order in which the difficulties faced by the system’s Western core are gradually eroding global public goods.

It is no coincidence that all of this is happening simultaneously.

Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.

Restoring these anchors will take time.

There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: Different countries are opting, either by choice or necessity, for different outcomes, and the global system as a whole faces challenges in reconciling them.

Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive.

Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.

The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation”.

The objective is not to account for everything, but rather to pinpoint a small number of variables that can explain key factors, albeit neither perfectly nor fully.

Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.

De-leveraging

The first relates to balance sheets.

Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbours that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.

Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.

A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression”, under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidise debtors.

Economic Growth

De-leveraging is closely linked to the second variable – namely, economic growth.

Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.

Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labour markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.

But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased. Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth”, which, most critically, involves greater “social justice”.

Social Justice

Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust.

Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?

Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labour, between current and future generations, and between the financial sector and the real economy.

This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both the US and Europe to point to a debilitating “lack of leadership”, which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes and governance systems.

Leadership

Unlike emerging economies, Western countries are not well-equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008 – have been predominantly cyclical. The longer they fail to adjust, the greater the risks.

Those on the receiving end of these four dynamics – the vast majority of us – need not be paralysed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes.

But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.

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Well, it is of course important not to lose faith.

However, “De-leveraging,” “economic growth,” “social justice,” and “leadership” – right now the two first are anemic, the two others are more or less absent.

Not cause for the greatest optimism…

Recommended reading: “Endgame: The End of the Debt Supercycle and How It Changes Everything”

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El-Erian: Economy Losing Momentum For Recovery

High unemployment and sluggish growth is causing the US economy to lose any momentum it had in terms of a recovery, Pimco‘s Mohamed El-Erian told CNBC on Thursday. El-Erian also pointed to Friday’s upcoming GDP numbers which he says will point to the negative trend.

“We are going to get confirmation with revised GDP numbers that are down and for the last quarter and downward revision for the third and fourth quarter.”

Mohamed El-Erian


“Today’s jobless claims numbers are better than last week’s. But it’s not a good overall. What this tells us is that the employment picture is difficult in creating and holding jobs. And the bigger picture is that the economy is losing momentum when it comes to growth.” Mohamed El-Erian, CEO of the world’s largest bond fund, says.

El-Erian also points to Friday’s upcoming GDP numbers which he says will point to the negative trend.

“We are going to get confirmation with revised GDP numbers that are down and for the last quarter and downward revision for the third and fourth quarter,” El-Erian says.

“This will also show slow growth.”

Negative Economic Trends

El-Erian goes on saying that the negative economic trends are forcing a new way to think about what makes up a recovery.

“If you think in traditional terms, then there will be a back and forth” (on economic numbers), he says.

“But if you think in terms of an economy that has to have escape velocity, so you have to achieve a critical mass in terms of growth and employment creation, the numbers are going to tell us that we are in this new normal of muted growth and high unemployment and we’re going to have to navigate through it.”

As for the bond market and a possible “bond bubble”, El-Erian saya that the rush into buying bonds is due to the fact that many investors are underexposed in the fixed income market– and that people are more risk adversed.

“If you look at what the (bond) market is telling you, it’s saying that the outlook is for low growth and disinflation. “The bond market may be cheap in terms of a slow recovery scenario, “ the Pimco-boss adds:

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Deflation Risk; 25% or higher

El-Erian also agreed with Nouriel Roubini of Roubini Global Economics who told CNBC on Thursday, that the US economy has a high risk of going in to a double dip.

“I think Nouriel is correct when he says the ‘US has no spare tire’ to fix the economy if something happens,” El-Erian says.

“I put the risk of deflation at 25 percent and the latest figures show it may be even higher.”

And in regard to policies of the Federal Reserve, whose members are meeting for their annual symposium on Jackson Hole, Wyoming, El-Erian says that he’d like to hear them talk about the so-called liquidity trap, or the idea of using monetary policy to get companies and banks to take more risks with their money when they don’t want to.

“I’d like to know if they (the FED) have any idea of how close we are to a liquidity trap. I think we are close to one, and if so, we would have to look beyond the Fed to help move the economy. They (the FED) won’t be to force people to use their money and we’ll have to look elsewhere to solve our problems.”

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El-Erian On G20: A Non-Cooperative Game

Pimco’s Mohamed El-Erian considers whether the G20 Summit in Toronto created a constructive compromise on financial stability, or generated a losing plan to turn around a slowing global economy. The chief executive of the worlds largest bond fund see the last alternative as most likely.

“The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.”

Mohamad El-Erian


“We are digesting this morning an unusually long communique from the G20 Summit in Toronto. This self-congratulatory statement is worth reading for what it says and how it says it-both of which make me worry even more about the future of a post-global financial crisis world that is in desperate need for better cross-border policy coordination and harmonization,” Mr. El-Erian writes in today’s edition of Financial Times.

Some will attribute the length of the “G20 Toronto Summit Declaration”-49 main points and another 82 in 3 annexes-to the pronouncement in the very first paragraph that this was the “first Summit of the G20 in its new capacity as the premier forum for our international economic cooperation.” And we should have no doubt that the G20 is a much more representative global policy forum than the outmoded G7/G8.

Yet, there may be much more to the unusual length of the communique.

I suspect that many veterans of multilateral gatherings will see this communique as typical of those drafted by a committee whose members have different views and priorities, and speak to different national audiences.

Indeed, we are already seeing the G20 communique being spun very differently in national capitals.

If anything, the outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world.

If anything, we are being exposed this morning to the realities of different national historical experiences, different national initial conditions, and different national views on how economies should and do work.

The differences are most visible in the sections on fiscal adjustment and growth. They are also evident in the discussion of financial sector reform. Indeed, there is something for everyone!

Before we rejoice too much about the ability of the G20 to deliver constructive compromises, we should think carefully about the consequences of leaving major issues unresolved and, thus, essentially kicking the can down the road when it comes to serious analysis and courageous decisions.

Consider the following three points as a partial illustration of this risk:

First, the communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms.

The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.


Second, taken at face value, the communique speaks to a relative world in which the US will be the only major country to pursue expansionary policies while others focus on addressing budgetary consolidation-either because they have to or because they wish to.

This is yet another factor that points to an increasingly unstable global configuration over time.

Third, we will likely face growing bilateral frictions due to the inability to use this weekend’s G20 gathering to properly address what I argued in a Friday FT column to be an incomplete and narrow characterization of the “growth now” versus “austerity now” debate.

The bottom line is as follows: I worry that, absent some urgent mid-course corrections, this weekend’s G20 gathering has failed to mark a much needed turning point for a slowing global economy with persistently high unemployment in industrial countries.

Instead, it reinforces the concern than we are in for a future of muted growth, deleveraging, periodic debt dislocations in some countries, and higher protectionist pressures.

Populations in Europe and the US may have much more to worry about than seeing so many of their teams knocked out early from the World Cup tournament in South Africa.

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Mohamad El-Erian is chief executive and co-chief investment officer of Pimco. El-Erian’s previous commentary on the G20’s earlier Busan summit is available here.

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G20: Another Meaningless Summit

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G20 Protesters Turns Violente; Police Cars On Fire, 150 Arrested

Norway’s Foreign Minister Makes “Chainsaw Massacre” of G20 Meeting

Webster Tarpley: The Financial Reform Is A Failure

JPMorgan’s “Poison Pill” Strategy

Romania’s Pension Cuts Ruled As Illegal

Desperation Gets A Grip: Greece Puts Islands Up For Sale

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