Should we listen to El-Erian?

By Felix Salmon
August 27, 2010
Matt Yglesias has suddenly come over all bah-humbug at the presence of Mohamed El-Erian on the Washington Post op-ed page:

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I’m not entirely clear why Matt Yglesias has suddenly come over all bah-humbug at the presence of Mohamed El-Erian on the Washington Post op-ed page:

If there’s a clash between what policies would be good for PIMCO’s investment positions and what policies would be good for the global economy, El-Erian has a responsibility to push for policies that would be good for PIMCO’s investment positions. Is there such a clash? Well, readers of The Washington Post op-ed page have no way of knowing. So what’s the point of publishing it?

The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds.

A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case. At that point, your assets under management are much more a function of the global savings rate than they are of your own expertise as a fund manager.

The best answer, however, is that it doesn’t really matter who wrote the op-ed: it should stand or fall on its own merits. El-Erian makes the case that we’ve lost the global cooperation and determination to change our ways that we saw 18 months ago: essentially, we’ve wasted our crisis.

An already polarized political environment is becoming even more fractured by real and far less substantive issues. There is virtually no political center that can anchor consensus and enable sustained implementation of policy. Meanwhile, as anti-Washington sentiments rise, interest in a national agenda is increasingly giving way to the election cycle. Internationally, the impressive degree of cross-border coordination seen during the global financial crisis has been reduced to inconsistent — and at times contradictory — national responses.

This worrisome trio of increasingly ineffective national and global policy stances, intense political polarization and growing social pressures speaks to the risk that the economy’s recent soft patch will evolve into something even more troublesome and sinister.

El-Erian has a global perspective, and from that point of view it’s pretty clear that another one-off stimulus package, even if it’s a big one, isn’t going to achieve very much. Instead, the former IMF technocrat is looking for something much more coordinated and strategic, where the G8 construct a vision of where they want to be, and then work out how on earth they’re collectively going to get there from here.

It’s not like El-Erian’s prescriptions are those of a fiscal cheapskate. Quite the opposite: this kind of shopping list comes extremely expensive.

Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

The point is rather that when Republicans can’t agree with Democrats, and Germans can’t agree with Americans, on any of this, the prospects for the global economy dim. And when the world is sick, the US can’t thrive. That’s not a function of who El-Erian is, or whether he’s conflicted. It’s just international geopolitical reality.


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On alignment of incentives between public and long-only bondholders: I’m not so sanguine.

Governments bend over backwards to avoid upsetting bond-holders, even more than shareholders. Ireland has pumped over EUR 24 billion (about 12% GDP) into a small, mostly commercial, bank, Anglo Irish, mortgaging the future revenues of the state – the taxpayers’ money – to avoid upsetting Anglo’s bondholders. The state tied its hands early on with its bank guarantee, which didn’t just cover consumer deposits, but bondholders too. It’s now ramming through an extension of that guarantee.

Meanwhile, the Irish media is too busy patriotically attacking ratings agencies like Moody’s for downgrading the state’s credit ratings in its editorial pages than calling the theft and treason (IMHO) of the state’s political class to account.

Posted by BarryKelly | Report as abusive

Wasted the crisis?

Who says it’s over? Or that the real crisis could not at all be coming?

Posted by vk9141 | Report as abusive

We have this phase of our crisis because the first phase of the crisis did nothing to change the dynamic of America running deficits and absorbing Chinese exports. So of course we could not get a self sustaining recovery.

We are inescapably in the maw of a globalization that transfers American jobs abroad and destroys one source after another of American job growth. There are no new sources of jobs in the USA to replace the ones wiped out by the real estate (and debt) bubble.

We’re stuck, and that will lead to political instability.

Before Stephen Roach became a China fan boy, he had a lot of misgivings on globalization:
“As skill sets converge around the world, the quick and seamless regeneration of hiring that underpins the theory of free trade starts to seem like an increasingly unrealistic assumption.” .pdf

Posted by nyet | Report as abusive

@BarryKelly I couldn’t agree more. To assume that bondholders interest is roughly equivalent to public interest is just silly. That is basically the status quo where the wealthy stay wealthy and the poor stay poor, not exactly what Felix would usually defend (I think).

I think this is a side effect of EMH that is still around. What is good for capital/GDP is good for the people. —FALSE.

Got to give it to PIMCO though, they talk their book better than just about anyone.

Posted by Tangerinebunny | Report as abusive

I’ve long been annoyed that El-Erian and Bill Gross have been unquestioningly accepted and quoted as impartial experts by much of the financial press, even though many of their pronouncements are clearly self-serving. It is long overdue that your community should be asking this question. The financial press may conclude that it is appropriate, or that changes have to be made, but I’m glad the question has finally come up.

As for an op-ed in WaPo for a general-purpose audience, I think it’s completely inappropriate, as a general-purpose audience is unlikely to appreciate the potential conflict of interest. Fortunately, unlike you, I could not discern any point to El-Erian’s meanderings in that op-ed beyond broad platitudes.

Posted by Curmudgeon | Report as abusive

Agreed. I find Bill Gross speaks much more clearly than El Erian, and doesn’t mind arguing very specific things. If El Erian was my financial advisor I would have no idea what he is suggesting most of the time. Which is too bad for us, because he is a terrific investor.

I think El Erian learned to speak in parables after he discovered his own awesomeness with ‘The Numbers are Horrifying’ released on January 17th, 2009. oints/2009/Viewpoints+Newsweek+Mohamed+E l-Erian+January+17+2009+Numbers+Horrifyi ng.htm

That was published in Newsweek, not the financial press. The world markets promptly collapsed in obedience.

Posted by DanHess | Report as abusive

I think this criticism of El-Erian is plain silly, but its one that you often hear whenever a fund manager expresses a market view. Look at it from the other way around: if a fund manager’s market position were the opposite of his op-ed market view, wouldn’t people think that it was odd? Is it really the case that even PIMCO can move the financial markets? I doubt it.

Posted by MrDodge | Report as abusive

Can Pimco move the market? They manage over a trillion dollars. Even in the giant bond market that is a ton of money.

But the size of the bond market is deceptive because much of the money in the bond market is passive and slow-moving (central banks, retirement funds, the social security trust fund, etc) and so active, faster money packs an even greater punch.

Posted by DanHess | Report as abusive

It is most refreshing to see that I’m not the only market participant who thinks Bill Gross and that El-Erian guy are a couple of loudmouth bond salesmen, aggressively talking up their positions.

Felix: Whatever happened to your usual scepticism? Mr. El-Erian wants you to think what HE wants you to think, not what YOU want to think. Reading an article signed by Mr. El-Erian in the WP is a subtle exercise in propaganda, all to the benefit of PIMCO. Really, you can – and have – done much better.

Posted by Gotthardbahn | Report as abusive

‘Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.’

I have two problems with this shopping list which, as you wrote, ‘comes extremely expensive’. First: How would it be paid for? With deficit financing? Gee, I wonder who would buy the treasury bonds issued to pay for all this? One guess. Two: If Mr. El-Erian feels so strongly about all these issues, then why doesn’t he run for office and get elected himself? Or is it just a lot easier to sit on a pile of cash in SoCal and tell everybody else what to do? One guess.

If you get the impression from my two posts that I am not a fan of PIMCO and these two bond fund salesmen, you are quite correct.

Posted by Gotthardbahn | Report as abusive

I agree with the previous posts insofar as we realize that: (1) No one really knows anything at any given time, and (2) we all must have our own “view” of the world, the geos, the markets, the economy, ad nauseum. It’s funny, we all get caught up in saying that El-arian or Gross move markets, or know what they’re talking about (or don’t), or have this political sway or that…when all it comes down to is YOUR view. One vote doesn’t mean much, or does my half mil in the market to the macro, but it means a lot to me. Bottom line: we can make money in this environment – those who complain will not or cannot.

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