Donald Trump wasnt the only one to snatch victory from
the jaws of defeat in recent months, says Mohamed El-Erian,
chief economic adviser at Allianz and former CEO of Pacific
Investment Management Co.
The avid sports fan, known for wearing a New York Jets
jersey in his TV appearances, sees a parallel in last
months Super Bowl. Expecting the unexpected is
becoming a lot less rare these days, he told me in a
recent e-mail exchange.
Few expected the New England Patriots to climb back from a
28-3 deficit late in the third quarter of the Super Bowl, when
they were losing to the Atlanta Falcons. But then, few
expected the U.K. to vote for Brexit, Donald Trump to win the
U.S. presidency, and over 30 percent of global government debt
to trade at negative yields last year, El-Erian, former
chief manager of Harvard Universitys endowment, points
out. So add the Patriots historic comeback to the
growing list of realities that not so long ago were improbable,
if not unthinkable.
Given the stinging defeats that his beloved Jets have
suffered at the hands of the Patriots over the years, El-Erian,
58, wasnt surprised by New Englands Super Bowl
rally. For over a decade now under the powerful
BelichickBrady combo, I have gotten used to New
England doing some amazing things.
While Trump is famous for his combative nature and thin
skin, El-Erian is quite the opposite. Thats not much of a
surprise given that his father was a diplomat, working at the
United Nations and serving as Egypts ambassador to
France. Though he had no time to sit for an in-person interview
Institutional Investors preferred way of
doing things El-Erian, whose long-respected views are
even more in demand since the election, graciously agreed to
answer all of my questions via e-mail. He was unfailingly
polite in our correspondence, replying to my queries quickly
It certainly fits the economists character that he
kept quiet after leaving PIMCO despite public attacks by the
firms mercurial co-founder Bill Gross. Its also no
surprise that El-Erian, educated at Cambridge and Oxford
universities, writes in patrician English.
As for Trump who has claimed support from Patriots
coach Bill Belichick, star quarterback Tom Brady, and owner
Robert Kraft his economic policy has the potential to do
great good or great harm, El-Erian says.
Trump has offered two visions for his policy, one that would
be fruitful and one that wouldnt, says the economist, who
knows a thing or two about policymaking from his days as deputy
director of the International Monetary Fund.
The first approach revolves around three pro-growth
themes: deregulation, infrastructure [spending], and tax
reform, El-Erian says. If these measures are well
designed and implemented carefully, they have the potential to
boost economic growth.
Then theres the downside. The second set of
policy announcements worries markets a lot more, and
understandably so, he explains. It speaks to trade
protectionism, including the possible dismantling of [the North
American Free Trade Agreement], the termination of bilateral
free trade agreements, and the imposition of punishing import
tariffs on China and Mexico.
Its unclear whether the darkness or the light will win
out, El-Erian says. And thats not up just to the
Congress will have an important say, particularly when
it comes to tax reform and the infrastructure program,
says the former chairman of president Obamas Global
If the focus is on deregulation, infrastructure spending,
and tax cuts, economic growth could be boosted by both the
supply side, including productivity growth, and the demand
side, thanks to fiscal expansion. That fiscal expansion
would also allow for an orderly normalization of monetary
policy, El-Erian says.
The other possibility is less positive. If protectionism
wins out and leads to trade wars, the outcome could be
stagflation, that nasty combination of low growth and
high inflation that the advanced countries havent
experienced since the early 1970s to early 80s,
In terms of their impact on financial markets, the
good Trump policies would boost stocks and the
dollar because of stronger growth, higher inflation, and
capital flows to the U.S., the economist figures. It
would also push government yields higher while containing risk
spreads on emerging markets and corporate bonds, including high
The bad Trump policies would have a quite
different effect, he says. They would be detrimental to
stocks, with more ambiguous effects for the dollar.
Slower growth is bearish for the dollar, but a trade war and
higher inflation might buoy the greenback. In the bond market,
government yields would find themselves in the midst of a
tug of war between the impact of lower growth on one hand and
higher inflation and less foreign bond buying on the
other, El-Erian says.
Trump isnt the only source of potential trouble for
financial markets and the global economy, El-Erian says.
Theres the risk of political turmoil in Europe with the
rise of the xenophobic right wing. And theres a
possibility of the dollar getting too strong too quickly, thus
fueling political issues at home and dislocating foreign
governments and corporations with heavy dollar-denominated
debt burdens, he says.
Although much of the financial worlds focus is on
Trump, Federal Reserve policy remains important. El-Erian
thinks the Fed should be moving a bit more quickly to exit its
accommodative stance. He wrote of the limits of central bank
easing last year in his book The Only Game in Town: Central
Banks, Instability, and Avoiding the Next Collapse.
While I understand the reasons for the Fed being
inclined toward low [rates] for longer, I see the
case for a somewhat faster policy normalization, El-Erian
By that he means quicker interest rate increases and
more-hawkish policy guidance. I believe this is warranted
by the economic data and would serve to lower the risk of
financial instability down the road. The economy grew an
annualized 2.7 percent, on average, in the third and fourth
The Fed raised rates once in 2015 and once in 2016.
Officials estimated in December that they will lift rates three
times this year; El-Erian sees that as the most likely outcome,
even though the federal funds futures market points to only two
moves. And the balance of risk is tilted slightly to more
than three should Trump, working with Congress, deliver on his
infrastructure and tax announcements, El-Erian says.
Trump has indicated that he wont reappoint Fed chair
Janet Yellen when her term expires next year. Some analysts are
worried that he might replace her with someone far outside the
mainstream. But El-Erian isnt too concerned. So
far, President Trumps appointments in the economic domain
have been appropriate, he says. As such, I
dont worry about whom he appoints should he choose not to
keep Yellen for a second term.
But perhaps we should expect the unexpected again.