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Influencers Transcript: Mohamed El-Erian, March 14, 2019

ANDY SERWER: Wherever Mohamed El-Erian goes, he's been a leader and he's been in any number of high profile places. He commanded trillions of investment at the helm of PIMCO, where he doubled assets over his tenure. At the same time, he led a team of advisors who instructed President Obama on global development. Before that, he took charge of billions of Harvard University's endowment, and worked as Deputy Director of the International Monetary Fund. He's here to offer insight on the market, the Fed, the global economy, and how it's all intertwined.

Welcome to "Influencers," I'm Andy Serwer. And joining me now, Mohamed El-Erian. Mohamed, welcome.

MOHAMED EL-ERIAN: Thank you for having me, Andy.

ANDY SERWER: So you are a global strategist-- global macro strategist looking at the world looking at economic trends. And you were just telling me, Mohamed, that you think this environment is very invigorating?

MOHAMED EL-ERIAN: Oh, absolutely. It's very exciting. There are so many pieces moving, and moving in an unusual fashion, that you are getting unthinkables becoming reality. And the more unthinkables you get, the more it takes people out of their comfort zone. So it's fascinating to be able to figure out what is going on, and what should you focus on, and what shouldn't you focus on.

ANDY SERWER: And you were saying that the further away people are from the United States, the more uncertainty there is in the world?

MOHAMED EL-ERIAN: Yes. I mean, we I think underestimate our central role in the global economy. So when you go to Asia, when you go to the Middle East, when you go to various parts of the world, they think of the US as anchoring the global economy. It is in the middle of the global economy. It is the core. It's meant to be predictable, it's meant to be reliable.

And they can't explain what's going on in the US. They see all these strange things happening. And therefore, they become more nervous, and they try to understand what's going on. And there's a sense of, we don't quite understand this system anymore because the core isn't as predictable as it used to be.

ANDY SERWER: A lot of implications, there and I want to ask you more about that. But first, let's go back in time a little bit and I want to ask you about growing. Up because you grew up in New York, in Egypt, in England. And how did that prepare you for the current job that you have?

MOHAMED EL-ERIAN: So I was born in New York, we moved around a lot. And at one point, I told my dad and my mom, I can't do this anymore. We were living in Paris at the time, I was in school in Paris. And I said, I can't do this anymore. I need stability. So they said, what do I want to do? I said, I went to go to boarding school. And they looked at me and said, do you really want to go to boarding school. I was 14 years old. I said, yes, I don't want to change languages, friends, systems again.

I don't know if I'll be able to do it. And they said, where do you want to go? I said, the states. They said, too far, too expensive. What's your second choice? And without knowing what I was saying, I said, England. My mom, my dad said, you want to go to boarding school in England? I said, yes. He said, do you know what that means? I said, yes. I should have figured out he was warning me.

So I ended up going to boarding school in England. And then that provided me stability until I came back to Washington after I graduated.

ANDY SERWER: Did you ever think you were going to become a global market strategist? I mean, does one think about that when they're a kid or and even in high school or college?

MOHAMED EL-ERIAN: So I knew I wanted to be an economist. I've always found economics fascinating. I absolutely love it. So I knew I thought I was going to be an academic. But then my father passed away suddenly, and my mother had never worked. And I had a seven-year-old sister. So it became-- the issue became who pays economists, who pays PhD economists. And that the time-- this is a long time ago, Andy-- there were only two institutions that really paid PhD economists anything meaningful, which at the time was $50,000 a year. It was the IMF and the World Bank. So I ended up at the IMF in Washington, and that ended up being a great choice.

ANDY SERWER: So that was before Wall Street really hired economists, I guess is what you're saying, right?

MOHAMED EL-ERIAN: Correct, correct. I mean, Wall Street didn't have much regard for economists, they didn't see the need. And the demand for economists was really from the multilateral institutions.

ANDY SERWER: So you worked at the IMF and stayed there until there was some demand from Wall Street? Was that kind of how things happen.

MOHAMED EL-ERIAN: So I stayed there for 15 years having the time of my life. And then I was turning 40, I had never tried the private sector. And the IMF had this wonderful program, where they encouraged people to go away for a couple of years-- your reentry was guaranteed. So it's basically a free option. And even then, I understood optionality well, so I thought, why not try the private sector.

So I moved from Washington to what was Solomon Brothers and became Salomon Smith Barney in London. And then after about eight months, I got this phone call from a headhunter telling me about this west coast firm called PIMCO. And I interviewed with them, fell in love with them, and never looked back after that.

ANDY SERWER: So was there the idea, Mohamed, that an economist would say that say, the Deutsche mark is going to do this against the dollar. And if the firm puts all this money on this trade, they'll make money. And if they did, would they come back to you and say, that was genius. Thank you for helping us make money? Was that how it sort of worked?

MOHAMED EL-ERIAN: So at the time, the traders, who are significantly younger than me at Solomon-- significantly younger-- would have two modes. One mode, where markets were trading on fundamentals, and they really wanted to hear from the economists and the strategists. Another mode, when markets were trading on technicals, and they would literally push you away. Say, whatever you tell me is going to confuse me, because markets aren't listening to fundamentals. And the great traders are the ones who understood the pivot.

So there were times when they were consuming your content, and there were other times when they rightly thought, you're completely irrelevant to what's going on over the next day, or two days, or three days.

ANDY SERWER: Was there a time though when they were very grateful in terms of steering them towards the right kind of trade, I guess?

MOHAMED EL-ERIAN: Sure. I mean they understood that ultimately, fundamentals assert themselves. And the reason why PIMCO was so great-- because it basically is anchored by long term view, the secular horizon. And that is when fundamentals assert themselves. So what technicals give you are entry points. But it's not the thesis. The thesis is a fundamental base thesis. And PIMCO's success has been to understand what the big secular themes are and to position for them.

ANDY SERWER: Right. And you can make money that way over the long term in fixed income. That was the focus of the firm to a degree.

MOHAMED EL-ERIAN: Yeah. And in virtually any asset class, as long as you can ride out the short term fluctuations. So there are times at which the long term thesis isn't working out, and it's very important in addition to having portfolio managers who have conviction and foundation-- both-- conviction is not enough without foundation-- to have customer relations people, client facing people who explain over and over to your investors that this is going to play. Now PIMCO had developed a track record that investors had a three year horizon in terms of their patience with the thesis working out.

ANDY SERWER: Now you left PIMCO to go to Harvard to run the endowment there. And that must have been interesting, to say the very least. Today, that endowment is what $37 billion. And I guess one question-- maybe you have some thoughts on this-- should Harvard and universities like that be free? I mean, these endowments are so vast, right?

MOHAMED EL-ERIAN: So it's important to understand what these endowments do. They fund somewhere between 30% to 40% of the university's annual budget. So that is a huge benefit. And in fact, I now co-chair in England, the Cambridge University Capital Campaign, because they've understood that they need some source of funding that's independent of governments and independent of project financing. So what an endowment gives you is the ability to fund part of your budget on a more predictable basis.

The second thing that the endowment gives you is that very often-- and people don't realize that-- are the funds are restricted. So it's not as if you can do anything. So they are directed. So you can develop long term programs. I think most universities would love to have bigger endowments, but it is an issue in terms of not whether you should have it, but how you get treated when you have to.

ANDY SERWER: Right. I mean, but there are students who were going to these universities-- maybe not Harvard-- but other places where there is an endowment, and they still feel like they're being pressured to come up with the funding, right?

MOHAMED EL-ERIAN: Right. But the biggest source of student assistance comes from endowments. That's what people don't realize. That the reason why Harvard can basically give a cost free ride to people under a certain level-- and that level is quite high in terms of family income-- is because of that endowment. And that's critical if you're going to try to level the playing field to give everybody equal opportunity.

ANDY SERWER: Right. They've had some problems with turnover with people running that place. What does that all about, do you think?

MOHAMED EL-ERIAN: You know, it's never easy to have an investment management operation in some other body. So let's go away from the endowments. Very few insurance companies, Allianz being the exception with PIMCO, have allowed investment management companies to flourish under their umbrella, and give them autonomy. Because like any other industry, the bigger mass tends to start wanting to either interfere or influence.

So endowments typically have this issue where on the one hand, they're supposed to be commercial oriented, but they live in an academic environment. So you get continuous conflicts. It can be on things as simple as where you invest. It can be on compensation. It can be on what do you do with the funding. So it's really important to figure out what is the white governance and then stick to it.

ANDY SERWER: Yeah. I can see with some of those friction points, how those could be problematic. You went back to PIMCO, and you worked for a number of years with Bill Gross. Bill Gross recently retired from another firm. You guys knocked heads sometimes, I gather. What were some of the pluses and minuses of working with him? What were some of the his strengths and weaknesses?

MOHAMED EL-ERIAN: So his strength is his ability to focus on the long term, incredible discipline. His ability to embrace innovations. He's very open minded on that. And his ability to evolve the structure. He used to have a phrase, which I have found very powerful. Let structure do the heavy lifting. I'll give you an example.

Some time in the '90s, he realized that markets were getting more and more sophisticated. So the old model was, you want to be a specialist. And then he realized that the right model is what he called the hub and spoke. Is you put the generalists in the middle, and then you put the specialists all around the generalist. And you create a two way interaction between them. So that the generalist benefits from very in-depth expertise of the specialists, but the specialists benefit from understanding the overall environment in which you operate. This notion is, no matter how good your house is, the neighborhood matters.

That was a brilliant change in the way you run an investment management firm. He was right at the front of that change. So he had that vision, and was able to adapt by the marketplace.

ANDY SERWER: But you didn't always get along.

MOHAMED EL-ERIAN: I think you know, fundamentally, I have nothing but respect for Bill, and I wish him well. I think his impact on our industry has been really important and will outlive-- I'm still amazed that if you go around the world, things that he came up with are now being applied every day.

ANDY SERWER: Right. I mean, he was the Bond King, right?

MOHAMED EL-ERIAN: He was. And he had a massive kingdom-- $2 billion-- $2 trillion, I can't--

ANDY SERWER: $2 trillion.

MOHAMED EL-ERIAN: $2 trillion.

ANDY SERWER: $2 billion, that's selling it pretty short.

MOHAMED EL-ERIAN: $2 trillion.


MOHAMED EL-ERIAN: Which he started from nothing at all. And his initial idea was, you know what, bond investing shouldn't be about going down to revolt, and tearing the coupon, and sending it, right? Let's use these assets more productively. A little bit like Uber figured out, let's use the cars more productively, like Airbnb figured out . But you're talking about the early '70s.

ANDY SERWER: Right. Let's go back to the markets. What is your outlook then for the US economy and the US market?

MOHAMED EL-ERIAN: So the US economy on a standalone basis is very easy to explain and to predict. Growth will continue. The two most important sector in the economies are fine. The household sector has been supported by amazing employment creation. And now, wages are going up again. The business sector has ample financing and ample cash.

So if you were simply to look at the US economy on a standalone basis, you could see 2.5% to 3% growths going on and on. It would help enormously if Congress got its act together, and in my view, implemented an infrastructure program that modernizes our infrastructure, and makes it more digital friendly. So you want to add a bit more gas in the growth engine.

Where the issues come up with the US economy is what do you do with three factors. The rest of the world is weakening. Europe is really slowing, and is going to get near Andy, what's called a stall speed, where the risk of bad things happening goes up. China is having enormous difficulty revamping its economy for the new realities. That it is much larger and cannot depend on the outside world as the end game.

So the first uncertainty has to do with the global economy. The second uncertainty has to do with central banks. Then transition-- we've never done this transition before. It's clear to me that one systemically important central bank can handle it, but can three systemically important central banks do it? I don't know.

And the third uncertainty is the years of central bank support have decoupled asset prices from fundamentals. And there's a question mark as to whether fundamentals can improve fast enough to validate asset prices, or whether asset prices come down.

The reason why the fourth quarter of this year was so scary for people is because nothing much happened on fundamentals. But the minute the Fed came across as being too hawkish, next thin you found is asset values plummeting, and people are very worried that that will pull down the economy.

ANDY SERWER: Yeah, I want to follow up on that. So two of your three worries are central bank related, and that's not surprising to me, because I'm somewhat perplexed by Jay Powell and the Fed and what they've been doing. Are you?

MOHAMED EL-ERIAN: I don't know I was always perplexed. I have sympathy for them because they're navigating an inherent contradiction. If they look at the domestic signals, which by the way, they're mandated to do, and if they were to focus just on their two objectives, then it's green light for tightening policy. If they look at the rest of the world, and if they look at the risk of destabilizing market, it's flashing either yellow or red.

So you have one green light here, and one either flashing yellow or flashing red here. And they are somehow-- so what they've done is they swung too much in favor of one, and now they've swung back too much in favor of the other. And somehow, they've got to understand not to be pulled like this, because if they continue like this, they'll become a source of instability.

ANDY SERWER: Which we maybe saw in December and January, right?

MOHAMED EL-ERIAN: Yeah. And you saw it again, by the way, in January, February.


MOHAMED EL-ERIAN: If you look at what's happened to markets, basically, we're up since the lows of December 24. We're up around 20%.

ANDY SERWER: So what should the Fed do then?

MOHAMED EL-ERIAN: So the Fed should be, in my view, less short term data dependent.

The data dependency makes sense when you don't know where the transition is. But at some point, you've got to take a longer term view, and you've got to position for that longer term view. And don't get swung around by short term indicators, because at the end of the day, you risk becoming A, co-opted by the markets, which no one wants central banks to be co-opted by markets. And two, your risk being a source of instability.

ANDY SERWER: So switching gears a little bit, I want to ask you about some of the political trends we're seeing in the United States, say with Alexandria Ocasio-Cortez and her proposals to tax the super wealthy, complaining about the billionaires. Do you think that she has a point?

MOHAMED EL-ERIAN: So I think she has a point in saying that we've got to do something about the trifecta of inequality.

ANDY SERWER: What's the trifecta?

MOHAMED EL-ERIAN: So the trifecta of inequality is not just an inequality of income and wealth. This country can actually tolerate an inequality of income and wealth. And thus views that actually, this is a good thing, you incentivize-- you know, if you create Facebook in your dorm, of course, you should be a billionaire. But when it becomes a trifecta of income, wealth, and opportunity, that's a real problem. And what we've seen happen since the global financial crisis is that it has become a trifecta.

And therefore, we have to think more seriously, not just about growth, but about what I call inclusive growth. Growth that really brings in more segments of society. Otherwise, we're going to risk a major alienation and marginalization of part of our country, which is a real problem.

ANDY SERWER: And how would we do that, Mohamed?

MOHAMED EL-ERIAN: So first of all, we have to focus more on growth, OK? Which means position for longer term issues. I talked to you about infrastructure-- that's really important. We need to spend a lot more time thinking about how do we operate an economy when technology is changing not just what we do, but how we do it. And you know, Andy, that when you change how, people become very nervous, they become very insecure. So we've got to have frameworks for that.

Secondly, some distribution is warranted. We've gone too far in terms of the inequality. Now there's ways to do it that don't distort the economy.

ANDY SERWER: What ways?

MOHAMED EL-ERIAN: For example, the way we tax inheritance in the states. The amount of exemptions we provide people. We still have a distorted tax system. So you can do a lot with the tax system to clean it up, which you'll find is pro-growth, and pro redistribution. And the burden on the rich would not be that much. It simply would be fixing stuff that over the years, has become embedded in the system.

ANDY SERWER: Would that include taxing carried interest perhaps, as well?

MOHAMED EL-ERIAN: That's a perfect example, it's very hard to justify the treatment of carried interest.


MOHAMED EL-ERIAN: I mean, in my view, it's impossible. And yet, it has persisted year after year, when most people agree that we need to fix it.

ANDY SERWER: They must be pretty good lobbyists, those people.

MOHAMED EL-ERIAN: Indeed, indeed.

ANDY SERWER: What is your advice for investors in the bond market and the stock market for the balance of the year, Mohamed?

MOHAMED EL-ERIAN: So it's a little bit different, OK? In the bond market, I would tell them never forget that we're coming out of a period of distorted pricing. A 10 year US doesn't belong under 3%, given our economic reality. The reason why 10 year US is under 3% is because a 10 year German bond is under 20 basis points. So already, if you were to plot the difference between the US yields and German yields, we are near historical highs. The historical highs where a few months ago at 270. We're now at around 260. So the only reason we're here is because of what's happening in Europe.

So understand that debt when you're buying out the curve, you're taking a European view, not a US view. You're much safer further in the curve where there was value, and there's a lot less risk. So on the bond side, I would say, be careful. Understand that this bond market is not your everyday bond market. This is a distorted bond market, has a lot to do with what the ECB is doing, with Europe, et cetera.

On stocks, I would say become more selective. Understand that these big swings are going to continue, and that just like we've been up 20%, we could be down 20% in three to six months time if the Fed stumbles in its communication again. So you have to be a little bit tactical in addition to being long term.

And I always got the pushback-- you want us to day trade? I said, no, I don't want you to day trade. I just want you to understand that this is a market that's really impacted by what the Fed says.

ANDY SERWER: It sounds like you're thinking is we haven't yet paid the price for or adjusted from a period of incredible easy money from the Fed.

MOHAMED EL-ERIAN: Correct. Easy money did two things. It pushed everybody to take more risk. And secondly, it changed our mindset. We believed that central banks were our BFFs, our best friends forever. And once again, that's proven to be the case. Market had a bit of a temper tantrum in the last quarter. And guess what-- the Fed changed course completely.

ANDY SERWER: But at some point, they can't be our BFFs.

MOHAMED EL-ERIAN: Correct. And people have to realize that this is actually going to do that. I think if you talk to central bankers, and they were completely honest, they would say, you know what, we understand that we influence market. We don't like the extent to which markets have held us hostage. We just don't know how to get out of this. And I think what you saw in the Fed in the middle of last year was an attempt to get out of this. But they underestimated the reaction of the markets.

ANDY SERWER: It all sounds a little scary to me, to be quite honest with you.

MOHAMED EL-ERIAN: Yeah. I think people have to understand that markets have ways of embracing you. And you know, they don't let go, because markets ultimately can disrupt the real economy. If markets couldn't disrupt the real economy, no one would care. But markets can disrupt the real economy.

ANDY SERWER: Is this what you mean by that phrase that you've coined, new normal?

MOHAMED EL-ERIAN: So no. The new normal view, which came out of work done at PIMCO with my colleagues, during and right after the financial crisis, was the realization that what was impacting the advanced economy wasn't a cyclical shock. It was a structural shock. In the sense that it wasn't a rubber band. That when you stretch it-- and then it won't go back.

So we came out saying, be careful. When you recover from the immediate financial disruption, growth is not going to pick back up. It's not going to be a V. It's going to look much more like an L. The immediate reaction was that's quote, "idiotic." That was what was said to me by someone I respect tremendously in Washington. That's idiotic. Why? Because our mindset has always been that it's the developing countries that live in structural space. The advanced countries live in cyclical space, so of course, we're going to bounce back.

We weren't going to because before the crisis, we overinvested in finance, and we under invested in other things that make the economy grow on a sustainable basis. So we had a tremendous catch up to do. And unfortunately, we didn't do it.

ANDY SERWER: Mohamed, Donald Trump is on the phone, and wants to talk to you, and he wants to ask you for advice about handling the economy. What would you tell him?

MOHAMED EL-ERIAN: I would say your deregulation and your tax policy has given this economy significant momentum. You need now to work with Congress and convince them to add a third element in your program, which is an infrastructure program which can mostly pay for itself. And I know that when people say that, they say, no, take advantage of how low interest rates are. Take advantage of all these private-public partnerships that are under exploited.

And do that because we need to put more gas in the growth engines. And if we do that, we can navigate well the slowing in the rest of the economy. And the Fed will normalize without a high risk of an accident.

ANDY SERWER: A lot of people know you as an economist, but there are other sides to Mohamed El-Erian. I remember you said that you had to improve your work-life balance from your daughter. And you're also a football fan, right?


ANDY SERWER: Talk about those two things.

MOHAMED EL-ERIAN: So there was a point where my daughter felt the need to confront me with a list of 22 things I had missed during the school year. And that made me realize that I had gotten the balance wrong. In fact, you know, I could justify each one of them, but I realized that that's not the point. And then to add to my dismay, she brought out the yearbook from school, and she opened on the page of her class. And there was one event that I actually turned up too. And she said, look at the background. And there I was sitting on a tiny stool looking at my BlackBerry.

ANDY SERWER: Of course, right.

MOHAMED EL-ERIAN: And she said, dad, even when you're here, you're not here.

ANDY SERWER: How old was she?

MOHAMED EL-ERIAN: She was 10 years old. And that for me was like a light bulb. And we-- since then, I went for what's called a portfolio approach, where you do many different things, but you regain flexibility. And it has been the most wonderful thing that I've done. And I really thank her-- and I do repeatedly for having, you know, the foresight of presenting me with evidence that was so compelling at the time.

ANDY SERWER: And how many years ago was that?

MOHAMED EL-ERIAN: That was five years ago.

ANDY SERWER: Great. And you haven't looked back? A good five years it's been.

MOHAMED EL-ERIAN: No. I haven't looked back. And I think it's been the best thing that has happened to me. Ironically, because she wants to be an actor on Broadway, she opted for a boarding school. So now, it's me who goes to her every month. But if I hadn't had those wonderful four years, I don't know what I would have done.

ANDY SERWER: And football? What's your team?

MOHAMED EL-ERIAN: So, unfortunately my team is the New York Jets. You have to understand that I was a 10-year-old in New York when the Mets won the World Series, the Jets won the Super Bowl. And I was sucked in, and one of my tendencies is to be quite loyal. So I'm loyal to them, even though it's been nothing but disappointment for those two teams.

And every season, Andy, my hopes go up. We win one or two games. And then the predictable letdown happens. And it's quite an emotional roller coaster for me.

ANDY SERWER: Well, it's the off season now. And finally, Mohamed, this show is called "The Influencers." How would you like to use your influence going forward?

MOHAMED EL-ERIAN: So I think the most important thing for someone like me is to try to convey to people the importance of operating in intersections. So I operate in the intersection of economics, policy, markets. It's very easy to operate in one of these three. It's a little bit harder to operate in both. But when you operate in three, you get accused of not operating in any. And yet, the real world happens in the middle of this.

So if you're in the Fed, for example, it's not enough to understand how the policy impacts the world and economics. You better understand markets. If you're in markets, you but understand policy and economics. And if you're in economics, you're not going to predict for example, the global financial crisis if you don't understand what markets are doing.

So where I try to influence people is get out of your comfort zone. Don't be hostage to just one or two, but look at the intersection, because that's where the world actually operates.

ANDY SERWER: All right, Mohamed El-Erian, thank you so much for coming by.


ANDY SERWER: You've been watching "Influencers." I'm Andy Serwer. We'll see you next time.