Chief Economic Advisor, Allianz
El-Erian on economy: It's a political implementation problem
Allianz Chief Economic Advisor Mohamed El-Erian on what is needed to boost U.S. economic growth.
About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has appeared on CNBC multiple times in recent months to discuss the economic impact of geopolitical conflicts, inflation, and Federal Reserve policy. He stated that the U.S. economy has so far avoided "demand destruction" from the Middle East war, but warned that the next phase of the shock would involve affordability issues severe enough to reduce consumer spending. He described the current economic environment as having four phases: higher energy prices, broader inflation, demand destruction, and potential financial instability. El-Erian said he is "really worried" about the UK, noting that the 10-year yield above 5% is "crippling for mortgages and for businesses" and makes government debt more explosive. Regarding the Federal Reserve, El-Erian said he expects the Fed to "sit on their hands" and not cut rates for most of the year, and that a rate hike is more likely than a cut. He suggested the Fed is tolerating a 3% inflation target rather than 2%, as long as inflation expectations remain stable. On Fed Chair nominee Kevin Warsh, El-Erian said he believes Warsh will "err on the side of lowering rates earlier" than the current Fed would, citing Warsh's belief in the productivity enhancement of AI. El-Erian also expressed concern about the volume of funding needed from capital markets, citing large IPOs, government deficits, and corporate borrowing for AI investment, and said he cannot identify where all the money will come from, predicting it will push borrowing costs higher.
Transcript (27 segments)
✨ AI-enhanced transcript with speaker attribution
H
Host0:00
Joining us right now is Allianz's chief economic adviser, Mohammed El-Erian. Mohammed, great to see you.
M
Mohammed El-Erian0:05
Wonderful to be here. Thank you so much for joining us.
H
Host0:06
So, I want to talk about the global economy and obviously the central bank meetings this week. But let me start on earnings. What is pressuring earnings? How would you characterize the earnings season so far?
M
Mohammed El-Erian0:17
So, low growth is starting to have a major toll. For those sectors that have been particularly badly hit by price declines, energy is particularly awful. But it's the continuation of the story, which is that the global economy and the US economy aren't able to get to escape velocity. We're continuing this low-level growth equilibrium.
H
Host0:37
In fact, we had Christine Lagarde on the show from the IMF about a week or two weeks ago, and she said the economy has worsened in the last six months. Do you see in the last six months a change?
M
Mohammed El-Erian0:47
So the big change has been the headwind from outside the US. We worry about China much more than we did a year ago. And what's happening is the longer you persist in low growth, the bigger the pressure on the system as a whole. So it's very hard to be a good house in a difficult neighborhood. Even a good house starts to suffer. And that's what's happening in the global economy.
H
Host1:06
And you look at central banks, a lot of people saying, look, they're out of ammunition. Look at the Bank of Japan this week has a meeting. All these expectations that Kuroda is going to be there with more stimulus. They come out, they say, we're just watching things. No more stimulus. And they've already got negative interest rates.
M
Mohammed El-Erian1:21
It's understandable why. Because when he went negative on interest rates, he was hoping to weaken the currency as a way to promote exports and growth. He got exactly the opposite results, and people were telling him be careful, you've gone too far. Now he decides not to do anything, and he also gets the wrong results. I think this speaks to something very fundamental, which is that central banks are less able to produce financial outcomes. We know they can't produce economic outcomes on their own, but until now they've been able to produce financial outcomes, and I think the ability to do so is declining.
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Host1:54
So what do you do then? What's going to move the needle on economic growth, whether it be Japan, Europe, and the United States?
M
Mohammed El-Erian2:03
So whether you look at Japan, Europe, United States, there are four common areas. One is we need to invest in real growth engines. That's tax reform, infrastructure, labor market retraining. Secondly, we need to better match the ability and the willingness to spend. That speaks to fiscal policy. Third, we need to deal with excessive indebtedness in Greece, student loans here. And finally, we need better policy coordination. Maria, it is not an engineering problem. This is a political implementation problem.
H
Host2:31
Yeah, I think you make a great point, and I'm glad you mentioned debt because we don't hear that enough. $19 trillion in debt. Obviously, that's going to come back to bite us at some point if we don't do something about it.
M
Mohammed El-Erian2:40
Correct. What excessive debt does is two things. Not only does it crush the debtor directly, but it stops capital from coming in. Look at Greece. There is no state in the world in which Greece can grow without debt forgiveness. Now, no one likes debt forgiveness. It's unfair. It's the wrong incentive. But beyond a certain point, it's the only solution.
H
Host2:58
Yeah. Let me ask you about the US, because a lot of the things you're saying really indicate what we've all been thinking, and that is that the central bankers are out of ammunition. So we need something on a government level. Since President Obama took office, the US economy has grown at an annualized rate of 1.7%. This is going to go down, Mohammed, as the first president ever not to see a single year of 3% economic growth. That's pretty extraordinary.
M
Mohammed El-Erian3:24
It is. And it speaks to us having invested in the wrong growth model 10 to 15 years ago. Go back, and we started investing in finance as a growth engine. We started believing that finance was the next level of capitalism: agriculture, industry, manufacturing, services, and if you're really lucky, you get to finance. And we stopped investing in what really promotes economic growth. Since then, we haven't been able to pivot. Why? Because the political system has been so polarized.
H
Host3:52
Yeah. And that continues. So where should we be investing now?
M
Mohammed El-Erian3:56
So I think investors should realize the first thing. One is we are in a huge range-bound market, which means that simply investing and doing nothing at all is not going to produce the results. You're going to either have to be more tactical. Name selection is going to be critical. Look at the difference between an Apple and an Amazon to give you an example of how extreme that can be. So be more tactical, name selection, and then keep some cash, because there's going to be a lot more opportunities down the road.
H
Host4:24
So you think that this market sells off before it comes back? Maybe we can get better prices if we want to invest in the stock market.
M
Mohammed El-Erian4:30
Correct. I think we are in a big range, and we are towards the top of the range. Let's not forget where we were just on February 10th. It's not so long ago that we were 10 to 12% lower than here.
H
Host4:41
Right. Right. Well, let's not forget the beginning of the year. We had the worst beginning of the year of any year.
M
Mohammed El-Erian4:44
Right. Because everyone was worried about the global story. It was the same thing in November. It was the same thing last summer. We have been in this very sort of wide roller coaster, and investors should realize that that's the world we live in right now.
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Host4:56
Yeah. Now, you answered a question when I said where should we invest? I'm glad you did that, because I was going there anyway, but I was coming off of your comment that we invested wrongly 15 years ago. So, in terms of what kind of policy you would like to see to move the needle on growth, is it tax policy? Is that what you want to see, for example, from the next president?
M
Mohammed El-Erian5:15
So, tax reform is absolutely key. We haven't done that since the mid-80s, and we have a tax system that's anti-growth. Secondly, at such low interest rates, and certainly at negative interest rates in Europe, we should be investing in infrastructure. The return on infrastructure is high. If you do a couple of these things, you can unleash the massive cash that's on the balance sheets of companies, and then the private sector will do a lot of the heavy lifting. We have this absurd situation where financial risk-taking is up here, but economic risk-taking is down here. Companies need just a little bit more clarity on the environment, and they can do a lot of the heavy lifting.
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Host5:48
By the way, I'm hearing some good things about Europe. A lot of people are looking for opportunities there. Would you put money in Europe, and would you put money in Japan given the negative interest rates?
M
Mohammed El-Erian5:57
So in terms of the economy, the US is still the better economy. It's a 2% economy, whereas Europe is 1 to 1.5%, and Japan is at best a 1% economy. In terms of valuation, the US has outperformed so much the rest of the world. It's expensive now. It's relatively expensive. So I would wait for the US. I think you're going to have lots of entry points, and just remember we are in this range-bound world, and there's no need to rush.
H
Host6:23
Yep. Mohammed, great to have you on the program. Thank you.
M
Mohammed El-Erian6:24
Thank you so much.
H
Host6:25
Always wonderful insights from Mohammed El-Erian.