Mohamed El-Erian

The Key to Economic Growth: Productivity

The Key to Economic Growth: Productivity

Forget job creation, tax cuts and returning any sector back to its glory days. After running into (read: stalking) former Federal Reserve Chair Ben S. Bernanke in the CBS This Morning Green Room last week, he reminded me that the REAL key to boosting economic growth and more importantly, your living standard, is labor productivity. The reason is easy to understand: “In the long run, what we can consume as a nation is closely tied to how much we can produce,” wrote Bernanke more than a decade ago. 

Central Bank Bingo with Mohamed El-Erian

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The world’s largest central banks are once again dominating the chatter among traders and economists. Last week, the European Central Bank announced additional measures to simulate the moribund Eurozone; this week, the Bank of Japan will weigh potential action after its surprise decision to adopt negative interest rates in January; and the U.S. Federal Reserve will likely refrain from a rate hike at its two-day policy gab fest. The heightened central bank focus made last week a perfect time to interview Dr. Mohamed El-Erian, author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. El-Erian is Chief Economic Advisor at Allianz, chair of President Obama’s Global Development Council and a LinkedIn Influencer. Between December 2007 and March 2014, he was chief executive and co-chief investment officer of global investment management firm PIMCO.

I sat down with El-Erian during a LinkedIn webcast to discuss how far the economy and markets had come since the bear market lows of March, 2009 (the S&P 500 has soared over 240 percent, including reinvested dividends), as well as the significant challenges that still lie ahead for investors and for the global financial system.

As markets bottomed seven years ago, El-Erian and his PIMCO colleagues coined the phrase “The New Normal” to describe what was likely to be a slow growth economic recovery. That prediction was spot-on: the U.S. is now in the seventh year of 2 to 2.25 percent GDP. El-Erian credits the actions of central banks for even that measly pace. When it became clear that government stimulus plans were not large enough, central banks were forced to adopt a “Whatever it takes” mentality. In doing so, they were able to avoid a multi-year depression.
Unfortunately, the unintended consequence of aggressive central bank actions was an environment where investors relied on monetary policy to do the heavy lifting to promote growth. That reliance encouraged excessive risk taking, which helped drive up asset prices beyond economic justification and turbo-charged income and wealth inequality. (Those who already owned assets were the biggest beneficiaries.)

It’s not as if the Fed, the ECB and the Bank of Japan don’t get it, but just when global central banks are looking to hand off the responsibility of promoting growth, there seem to be no takers.

So where do we stand right now, seven years after we bottomed out? We have come to what El-Erian calls a “T-Junction”. As we approach the end of this recovery road, there is an equal probability that we turn left and right. On one side of the T, we remain in a stable, but slow growth world, riddled with high unemployment, increasing income inequality and political extremism. On the other side, we have politicians who wake up and get serious about creating an inclusive economy; make pro-growth structural reforms, remove debt overhangs in problem areas like student loans and get the overall architecture right. The result would be higher growth, job creation, decreasing income inequality and a drop in financial instability.

Could the stakes be any higher this political season? That’s why El-Erian says that we desperately need candidates to acknowledge the anger that the “inequality of opportunity” can breed; and then to address that anger with policies that promote inclusive growth and restore faith in the system. In other words, we need an “Economic Sputnik” moment. Perhaps that seems like a distant possibility this moment, but El-Erian remains optimistic that one can occur.

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MARKETS:

  • DJIA: 17,213 up 1.2% on week, down 1.2% YTD
  • S&P 500: 2022 up 1.1% on week, down 1.1% YTD
  • NASDAQ: 4748 up 0.7% on week, down 5.2% YTD
  • Russell 2000: 1087, up 0.5% on week, down 4.3% YTD
  • 10-Year Treasury yield: 1.98% (from 1.88% a week ago)
  • Apr Crude: $38.50, up 7.2% on week 7.2%, 4th straight weekly climb
  • Apr Gold: $1,250.80, down 0.9% on week
  • AAA Nat'l avg. for gallon of reg. gas: $1.92 (from $1.81 wk ago, $2.45 a year ago)

THE WEEK AHEAD:

Mon 3/14:

Tues 3/15:

Bank of Japan meets

FOMC Meeting Begins

8:30 PPI

8:30 Retail Sales

8:30 Empire State Mfg Survey

10:00 Business Inventories

10:00 Housing Market Index

Weds 3/16:

8:30 CPI

8:30 Housing Starts

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 3/17:

8:30 Philadelphia Fed Business Outlook Survey

10:00 JOLTS

Friday 3/18:

10:00 Consumer Sentiment

#257 Super Bowl Show with Mohamed El-Erian

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It doesn't get any better than spending an hour with the great economist, Dr. Mohamed El-Erian, author of the new book, "The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse". Mohamed is Chief Economic Advisor at Allianz and chair of President Obama’s Global Development Council and if that doesn't keep him busy enough, he is a columnist for Bloomberg View, a contributing editor at the Financial Times and an influencer at LinkedIn.

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  • Download this week's show (MP3)

Mohamed started our conversation by explaining the role of central banks and how that role changed dramatically during the financial crisis, as bankers relied on a “Whatever it Takes” mentality to help rescue the economy. While he was supportive of those actions, Mohamed also recognizes that there have been serious consequences that have occurred.

During our conversation, he outlined some big problems that the global economy faces, including how to sustain inclusive growth, how to address income and wealth inequality and the yawning gap between markets and economic fundamentals.

Mohamed says that we are coming to a "T-Junction": on one end, we are destined for a low growth economy, plagued by high unemployment, increasing income inequality and political extremism. On the other end, we see a resumption of growth and broad-based job creation, with decreasing income inequality and a drop in financial instability. While we all hope for the more positive outcome, Mohamed says that there is an  equal probability that either scenario plays out.

For more, you can snag a copy of his new book, "The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse".

Schlesinger and El-Erian at LinkedIn FinanceConnect15

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

El-Erian: “Income Inequality is Horrific”

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There is nothing better than an hour spent talking to Mohamed El-Erian at the annual LinkedIn Finance Connect event. El-Erian has a unique ability to break down hardcore economic concepts into digestible, easy-to-understand analogies. For example, when I asked him about his prediction about worldwide growth this year, he said, “imagine if you were a elementary schoolteacher and I told you that overall, your classroom would be better this year than it was last year. Unfortunately, that slightly better classroom that still has troublemakers." Those rambunctious troublemakers include: Russia/Ukraine, Greece, Brazil, Venezuela, Nigeria – any one of them could disrupt global economy and threaten the progress of the “limping along” economies of Japan and Europe, as well as the improving U.S. economy. One bright spot for El-Erian is China, which is clearly downshifting from 10 percent growth over the past three decades, to a more sustainable 6-7 percent rate. Although many have predicted looming disaster for the world’s second largest economy, El-Erian believes that China will be able to make a soft landing.

He’s less sanguine about Greece, where the probability of three possible outcomes is:

  • 45% Greece and Eurozone officials muddle along
  • 50% Greece leaves Eurozone (“Grexit”) and a massive dislocation in financial markets ensues
  • 5% Greece wades through and comes out better

As Greece teeters on the edge of disaster, other European countries (Germany, Switzerland, Sweden, Denmark) are seen as bastions of safety. In fact, some investors are actually paying countries to hold their money. Mohamed says that there are two types of investors, who buy bonds with negative interest rates: (1) Those who are willing to pay up to ensure that their money is safe and (2) those who are betting that negative returns get more negative. Although negative interest rates have persisted longer than El-Erian though they would, he does not believe that the situation will last.

The US economy should continue to expand this year at a 2.5 percent annualized rate and El-Erian is hopeful that monthly job creation will average over 200,000. The combination will prompt the Fed to increase interest rates at its September policy meeting, but El-Erian noted that this is likely to be “the loosest tightening in history,” so it will take a considerable period of time before conditions look normal again.

As far as the labor market is concerned, while job creation should pick up, stagnant wages are limiting growth. “Income inequality is horrific,” and while this is a decades long trend, in the six years since the official end of the recession, only a small percentage of Americans seem to be back or better off than they were before the recession. El-Erian said, “100 percent of the total income growth during this recovery has gone to the top 5 percent of earners.”

While some companies are actually doing more to help narrow the income gap, El-Erian would like to see an overhaul of the corporate and personal tax systems. On the individual side, lawmakers should consider raising the minimum wage and eliminating some of the benefits, which wealthy taxpayers enjoy, like not paying tax on carried interest and the mortgage interest deduction.

[The April jobs report did not show much progress on the wage front. While the job market recovered in April after getting roughed up in March, the Bureau of Labor Statistics said 223,000 new jobs were added last month and the unemployment rate ticked down to 5.4 percent, the lowest level since May 2008. This time around, the unemployment rate slid for the right reason: 166,000 additional workers entered the labor force and snagged jobs. Average earnings were up 2.2 percent from a year ago, up from 2.1 percent in March - a tiny improvement, but a far cry from 3 percent annualized rate seen during the last expansion.]

Last year, when I interviewed El-Erian, he said that the US economy was approaching a “T-Junction”, where it could veer in one of two directions: (1) growth accelerates, justifying current stock prices; or (2), growth remains sub-par, central bank policy loses effectiveness and stocks tank. This year, he said that the US is moving up the neck of this critical junction and continues to believe that the odds are 50-50 for either outcome. With even chances, the disconnect between markets and economic reality is the biggest risk facing investors and according to El-Erian, you may want to hold a little more cash in your portfolio, just in case the more negative scenario plays out.

MARKETS: In a volatile week, the bulls won out and pushed indexes within striking distance of all-time highs.

  • DJIA: 18,191, up 0.9% on week, up 2% YTD
  • S&P 500: 2116, up 0.4% on week, up 2.8% YTD
  • NASDAQ: 5,003 down 0.04% on week, up 5.6% YTD
  • Russell 2000: 1234, up 0.5% on week, up 2.5% YTD
  • 10-Year Treasury yield: 2.15% (from 2.1% a week ago)
  • June Crude: $59.39, up 0.4% on week
  • June Gold: $1188.90, up 1.2% on week
  • AAA Nat'l avg for gallon of regular Gas: $2.66 (from $2.61 week ago, $3.66 a year ago)

THE WEEK AHEAD: With earnings season mostly winding down, investors are turn their attention oversees, where once again, problems in Greece and Russia/Ukraine pose risks.

Mon 5/11:

Tues 5/2:

Greece is due to make a 750M euro payment to IMF/Euro Finance Ministers meet

9:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover Survey

11:00 Household Saving and Debt Report

Weds 5/13:

Macy’s

8:30 Retail Sales

Thurs 5/14:

Kohl’s, Nordstrom

8:30 Producer Prices

Fri 5/15:

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Consumer Sentiment

One-on-One with Mohamed El-Erian

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It’s not every day that you are fortunate enough to interview a world-renowned economist, but that’s just what happened to me last week. I sat down with Mohamed El-Erian, the soon-to-be former CEO of PIMCO at LinkedIn’s FinanceConnect 2014. Over the course of nearly an hour, El-Erian outlined his thoughts on the global economy, Federal Reserve policy (and new chairwoman Janet Yellen) and what ordinary investors should be doing right now. The good news is that El-Erian believes that for Main Street, 2014 will be a better year than 2013. The bad news is that while the recovery continues, the economy faces three major issues: a debt overhang from the boom and bust, a labor force that requires re-tooling and an outsized reliance on households to drive growth. The combination has pushed the US towards what he calls a “T-Junction”: As the economy approaches the intersection, it can veer in one direction, where the system will continue to heal; or in the other direction, where growth remains low and consumers and the government remain under pressure due to heavy debt loads. El-Erian put the odds of either outcome at a sobering 50-50.

When I asked about the nation’s debt problem, he responded with four potential solutions: (1) Grow our way out (the best case) (2) Default (see: Detroit) (3) Austerity (see: Europe) and (4) Rely on “artificial stimulus” from the Federal Reserve (see: US from August 2010-present). El-Erian acknowledged that while the first solution would be the best, it requires participation from lawmakers. Without Congress, the Fed’s monetary policy has become the next, best solution, at least in the short-term.

The problem with the Fed’s current policies, according to El-Erian, is that as we move further from crisis mode, the cost and risk of highly accommodative policy outweigh the benefits. In other words, it’s one thing to rely on zero percent interest rates and bond buying to normalize markets amid a financial upheaval, but five+ years later, the risk of asset bubbles exploding becomes more threatening than the potential that the wealth effect will further boost economic growth.

On the positive side, El-Erian believes that Janet Yellen is up to the task of unwinding the policy she helped create. He said that she was not only a “qualified economist” with “a passion for policy,” she was also “caring, gracious and inclusive.” That said, the removal of liquidity from the system is bound to create more volatility for investors and he warned anyone with money at risk in the markets to “Come up with a plan for the worst-case scenario,” and determine which mistake you can avoid making, because “Volatility plus human nature means you are going to do the wrong thing at the wrong time.”

MARKETS: Investors chalked up weak data to the severe weather and drove stock indexes to their best week of the year. Emerging markets, where much of the winter turmoil began, are up 6.9 percent since the Feb. 3 lows.

  • DJIA: 16,154, up 2.3% on week, down 2.5% YTD
  • S&P 500: 1838, up 2.3% on week, down 0.5% YTD (+5.6% since Feb 3 lows)
  • NASDAQ: 4244, up 2.9% on week, up 1.6% YTD (Highest close since 7/17/00)
  • 10-Year Treasury yield: 2.75% (from 2.68% a week ago)
  • Feb Crude Oil: $100.30, up .4% on week
  • April Gold: 1318.60, up 4.4% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.39 (from $3.64 a year ago)

THE WEEK AHEAD: After the day off, a fresh round of data from the nation’s real estate market is due. The pace of activity is expected to slow, with sales likely dropping by over 5 percent from year-ago levels. Part of the fall-off is likely attributable to the current goat - bad weather, though housing experts note that the slowdown should be expected, because last year’s rapid pace is simply not sustainable.

Economists are trying to determine the effect of the severe weather on the economy. While most statistics are adjusted to strip out normal seasonal patterns, a challenge arises when winter weather is much worse than normal, like the recent spate that the nation has experienced. Economists believe that Q1 growth is likely to drop by an annualized 0.3 percent to 2.2 percent. The good news is that after the weather returns to normal, consumers might unleash pent-up demand, helping to spur a marked improvement in overall economic activity.

Mon 2/17: US MARKETS CLOSED FOR PRESIDENT’S DAY

Tues 2/18:

Coca-Cola, Herbalife

8:30 Empire State Manufacturing Index

10:00 NAHB Housing Market Index

Weds 2/19:

Tesla

8:30 Housing Starts

8:30 PPI

2:00 FOMC Minutes

Thurs 2/20:

Groupon, Hewlett-Packard, Nordstrom, Wal-Mart

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed Survey

Fri 2/21:

10:00 Existing Home Sales

Sat 2/22

G-20 finance ministers meet in Sydney, Australia