2025 Economic Outlook with MohamedEl-Erian, President of Queen’s College, Universityof Cambridge
Willy Walker: Good afternoon, and thank you for joining us for another Walker Webcast. It is my great pleasure to have my friend, Dr. Mohamed El-Erian, join me today. Mohamed came to Sun Valley for the Walker & Dunlop Summer Conference last summer, and we published on the Walker Webcast the face-to-face interview we did. And here we are six months later. A lot in our world has changed, and I am honored to have Dr. El-Erian back on the Walker Webcast. Mohamed, let me do a quick bio. Not that it's needed for you, but just to quickly remind some people of the perspective you bring to my questions today. And then we'll dive into the conversation.
Dr. Mohamed El-Erian is the President of Queens College at Cambridge University. He served as chief economic adviser at Allianz, the corporate parent of PIMCO, where he was chief executive and co-chief investment officer between 2007 and 2014. He is chair of Gramercy Fund Management. He is a columnist for Bloomberg Opinion and a contributing editor at the Financial Times. He's a professor of practice at Wharton and a senior global fellow at the Lauder Institute. He serves on two corporate boards, several advisory committees, and nonprofit boards. Prior to PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney, Citigroup, in London. Before that, he spent 15 years at the International Monetary Fund in Washington, DC., where he served as deputy director before moving to the private sector. He also spent two years as CEO and president of the Harvard Management Company. He's a Cambridge University graduate with a master's and PhD. from Oxford.
Mohamed, I went back two years ago right now and you were on CNBC. And you said, “I'm not in the camp that a recession is 100% probability. But I am in the camp that the probability of recession is uncomfortably high.” And then you went on to say the probability of a soft landing is “meager.” So here we are two years later, and the uncomfortably high probability didn't happen, and it seems to be that the meager outcome has actually happened.
When we were together six months ago, you had a probability chart. It was actually wonderful. It was a multimodal distribution which, as you described to all of us, is very difficult for humans to look at and, if you will, not only analyze but have conviction around. But on that chart, you had the chance of a recession at 35%, the chance of a soft landing at 50%, and the chance of a better-than-soft landing at about 15%. Where do you stand today on that distribution as it relates to the chances of recession, soft landing, or even better?
Mohamed El-Erian: Thank you for having me. The good news is that the 35% probability of recession has not happened, and the 65% probability of something better has prevailed. What's even more interesting is that we really haven't had a soft landing. We've had no landing. Growth has remained robust. Inflation has gotten sticky. So we're not back to the 2%. In fact, the Fed itself has acknowledged that, once again, it has been confounded by what has happened to inflation. We are living in this no-landing scenario where growth is robust and hasn't reacted to what has been a significant increase in interest rates. Inflation has stopped coming down.The markets have repriced Fed cuts. The markets now only expect one to two cuts this year. We may get even less than that. We are in this world of economic exceptionalism. And I say that because, compared to Europe and other countries, we are doing extremely well, and we continue to surprise on the upside.
Willy Walker: So, let's dive in a little bit there on a number of things that you just said. On inflation being sticky, we've seen inflation come down. Last time I heard you speak about this, you said that we're probably going to be at 2.5 to 3% and that the Fed will be accepting of that higher range.
An area of inflation that's obviously very important to me, Walker and Dunlop, and our clients is shelter. And it appears that with the oversupply in both single and multifamily in 2024 leading into ‘25, prices have come down, rent inflation, if you will, rents have come down, and single-family housing prices have come down. Given the amount in the CPI that is shelter. If that continues to move down materially, iIsn't that going to get you below that target range that you said of 2.5 to 3%?
Mohamed El-Erian: And we'd hope so. I don't think we're going to get there, and I think more economists are recognizing that. Look, step back. The big bet was that we would get softer services, inflation, and housing inflation while goods were outright in disinflation. And by the time goods reversed and started inflating again, because prices can't go down forever, then you would get to 2%. That was the big bet.
It turns out that services, in particular, are very sticky, and we continue to get indicators that the service sector is very strong. You're not going to get enough disinflation from the service side before the goods side becomes less accommodating. That is the problem. Look, it's not an issue because, as you know, when we discussed this, I argued that if we were to establish an inflation target today, we wouldn't choose 2%. Structurally, we would go for a higher target of 2.5 to 3%. 2.5 to 3% is fine. It's stable. It does, indeed, anchor inflationary expectations.
The problem is that the Fed cannot explicitly change its inflation target because it has missed it for so long. So the hope is that they simply keep on pushing it back, saying, “We'll get there eventually,” and tolerate a somewhat higher inflation rate because the alternative of hiking interest rates would be very bad news for the economy.
Willy Walker: Talking about hiking interest rates, I got something from JPMorgan. Michael Cembalest is an incredible economist, and they sent this out. In this analyst report called The Alchemists, which he put together at the end of the year, they looked at the 10-year treasury 65 days after the first rate cut, and they looked at it in 7 examples. In 5 of the 7, the 10-year was down 65 days after the first rate cut, somewhere between 40 and 60 basis points. In one instance in 1998, the 10-year had actually gone up by 10 basis points. But this time, we're up 90 basis points, wholly off the charts, as it relates to an anomaly. Talk for a moment, Mohamed, about why we're getting this sort of adverse or inverse reaction to rate cuts right now in the 10-year bond.
Mohamed El-Erian: So part of it is initial conditions. We didn't start this from a normal situation. We started from a situation where the Fed had been buying a lot of bonds. Interest rates were artificially low, and we had the combination of the Fed being late in raising interest rates and having to raise interest rates really quickly. QE (quantitative easing) when the Fed buys bonds and therefore puts downward pressure on yields, becoming QT (quantitative tightening) where they're reducing their balance sheet. So, the initial conditions really were completely different. That's the first issue.
The second issue is that the economy has proven really strong. It has proven almost immune to rate hikes. Certain sectors like yours are not immune, but if you look at other sectors, it’s done extremely well. Part of that is because corporations got ahead of the interest rate increases by pre-funding a lot of their needs, so that didn't hit.
And then the third issue has to do with the dynamics of inflation and the Fed not understanding the dynamics of inflation once again. So we have this very peculiar situation where the 10-year has gone up. I think that if we look at this year, it would not surprise me if, for most of the year, we average 4.75 to 5% for the 10-year, which would be quite high, given that, like you said, historically, the 10-year goes down in a cutting cycle and doesn't go up.
Willy Walker: And are you playing that if that's your rate range, if you will, from 4.75 to 5%, is that slowing down the growth? Because if you think about it in the sense of PE multiples and where the market is, are you playing that into that it is going to put downward pressure on growth in the year? Or where are you on GDP growth? Are you still at a 2.5 to 3% GDP growth for ‘25?
Mohamed El-Erian: I am where I was, but slightly lower on growth and the same where I was on inflation. But there was a big uncertainty, and that is that the incoming Trump administration has signaled policy intentions in three areas: one is tariffs, two is the repatriation of illegal immigrants, and therefore a labor force issue and three is on fiscal. Depending on where these things go, that's going to have a huge impact, especially on the inflation side of that equation.
Willy Walker: Talk about that for a second. I've heard you talk about the two effects of the new administration coming in, where you have deregulation and growth on one side, and then you have a potential unsettling of the labor markets and then tariffs on the other side. You have teed it up that there's going to be a battle between those two things, and which one actually wins is going to have a big impact on the overall economy. Given the things you've seen and heard from the incoming administration, do you think the growth and the deregulation efforts actually act to stimulate the economy more? Or do you think the tariffs and the labor disruption end up bringing it down where it's at net negative versus net positive?
Mohamed El-Erian: I think of it as a race. If you ask me who's going to win the race at the end, it will be the deregulation, the liberalization, and what that does to productivity and growth. If you ask me, think of it as a 400-meter race. In my mind, who will win the 400-meter race is undoubtedly the deregulation side. But in the 100 meters, and maybe in the first 200 meters, depending on what happens on tariffs, the other side may be in the lead. So there's a time and consistency aspect because you cannot move as quickly on all President Trump wants to do on the real economy as you can on tariffs. I suspect that we will get tariff announcements pretty quickly at the end of the day. This is now me guessing because it really is a decision of one person. I suspect tariffs will be particularly problematic for China. They'll be less problematic for Europe and for Mexico and Canada. At the end of the day, countries will offer something to the Trump administration to make sure that we don't get a massive tariff shock.
Willy Walker: Let's talk for a moment about deregulation because there was a very interesting analysis done by the American Action Forum back in April, by a gentleman named Doug Eakin, where they calculated the total cost of the final rules done by the administration from the Obama administration to the Trump administration to the Biden administration. There were a couple of stats, Mohamed, that just jumped out at me, which I think speak to your point as it relates to how the markets will react to the deregulation coming in from a Trump administration.
The total cost of the final rules by administration calculated by the American Action Forum under Obama, $1.1 trillion; by Trump, $25 billion; and by Biden $1.38 trillion. So Biden took the increased regulation from the Obama administration and took it to a whole different level, as it relates to the cost of the rules that were put in place. Just getting heads around trillions of dollars of regulatory hurdles and burdens is a little difficult to do. They also calculated paperwork hours. And I actually yesterday filled out my SEC Board annual survey, as it relates to any conflicts I might have. I'm assuming you've just done it for your two publicly traded boards recently, and I'm sitting there with 30 pages of questions that go all over any possible conflict that I may have being on the board of Walker and Dunlop.
But in paperwork hours calculated by millions of hours, the Obama Administration rules added 240 million hours, the Trump Administration (last time) 60 million, and the Biden Administration again taking the Obama Administration to a whole different level with 260 million hours of additional paperwork added by the rules that were passed by the Biden administration. So you've got to think that just any kind of reversion to where Trump was at, somewhere like less than 20% of the regulatory burden passed by the Obama Administration and the Biden Administration, will be massively helpful to the overall markets. No?
Mohamed El-Erian: That's how the markets are reacting. And it's not just the government. We're also seeing a change at the Federal Reserve where the market expects that this will unleash the banking sector even more. Certainly the markets are pricing in a significant impact on growth. And there's something else that you and I have talked about in the past, which is that we are seeing transformational changes in technology and life sciences. And then we're also seeing forced changes in defense, in healthcare. And those tend to have significant positive productivity effects. So, if we can manage through the next 18 months, what follows is productivity-enhancing and growth-enhancing. But we've just got to manage through the next 18 months.
Willy Walker: So I've heard you talk about change. I actually went back and watched the video you did on a TEDx speech you gave back in 2013. You were talking about change in financial services and about the need not necessarily to understand the why, but the what, in the sense of what are you going to do to change and get your organization ready for the type of change. Talk for a moment because you've been in so many scaled organizations that have had to deal with not only changing markets but the advent of new technology. Is today, Mohamed, in your view, wholly different from the technological changes that came in with the advent of the Internet, the changes that came into the financial services markets back in early 2012, 2013, and over the last decade? Is this something that companies that you work with and see today see as wholly different to the point where you literally have to stop everything and say, “Hold it. This is not the type of thing where you can just sort of evolve into the change, but you must dramatically change how you actually do what you do on a day-to-day basis?”
Mohamed El-Erian: Yeah. And you said the important word, the “how.” You know, most of the time, this impacts what you do. This impacts how you do it—in particular, artificial intelligence. I see this in education. I see it in health. We are just at the beginning of a fundamental change in how we do things. And the question I ask people when they say to me, “Well, how should I think about that?” is “Ask yourself the following question. If I were born an AI-native company, how would I be different?” Force yourself to go through the thought exercise of how you would look if you were born AI native, if you didn't have all the legacy issues that we do.
It's quite striking how different the world looks when you ask that question. And I do think that this transformation, which I do not believe is overhyped at all, is going to create leaders and laggards. And it's going to be fundamentally a different landscape in 5 to 10 years. I really do think that this is a structural break that's going on in the way we do things. And it's not just corporations. It is individuals, it is governments, and it also impacts how they react. And you heard me say 80/20, 80 is good, 20 is bad. And you shouldn't get carried away with either the 80 or the 20. You should embrace the 80 and the 20, and ask yourself, “How do I unleash the 80? And how do I contain the 20?” Because the 20 that is bad can be pretty bad.
Willy Walker: I want to loop back to that 80/20 in a second. I've got one other thing I want to talk about on AI before we talk about Europe and the US. But one of the things I thought was so interesting was if you look at the way that the US is focused on AI, they're focused on the 80% of the good. And the EU is 100% focused on the 20% that is bad. And that's just showing you the investments and the returns that they're both going to get from it, which I thought was very interesting. We'll talk about Europe versus US exceptionalism in a second. But on AI, Mohamed, one of the things that a lot of people have been a little concerned about is the amount of CapEx investing that is going into data centers and the hyperscalers. The analysis that Cembalest has in this JPMorgan report is that right now, with the CapEx spending of the hyperscalers, you could power 12,000 Chat GPTs, with the amount of capacity we have today in data centers for AI usage. And he goes and talks about Corning at the turn of the millennium, and the fact that when everyone was talking about broadband and fiber optics, that there was this massive investment in it, and Corning's revenues got to $4 billion in 2000, and that on real terms, Corning's revenues have never gotten back to $4 billion. Since then, they have had an oversupply of fiber optic networks, and therefore it's never actually caught up with the capacity we built. Do you get concerned that we're building too much capacity on the AI front right now?
Mohamed El-Erian: Look, this overreaction is part of the process. And it's actually what makes this process a big enabler. You can look back at fiber optics. You can look back at securitization in finance. You can look back at the steam engine. The minute an innovation is perceived to lower the barriers to both producing and using it, whatever it is, you get overconsumption and overproduction. That is part of the cycle of innovation—that you suddenly lower the barriers to entry for certain activities and people rush in. That's what we do.There’s excessive buying. There's excessive production.Then the system has a second round, where it shakes that off. I would rather go through this than what's happening in Europe right now, which is very little. I think if you look at the cost benefit, it is much better to go there. Look, you and I have discussed this in the past. What are the enablers of this AI revolution? One is data. There's a lot of data that is not being used. Two is expertise. Three is energy, and four is computing power. Those are the four things that allow this. And are we going to have excesses? Sure we are. But at the end of the day, we will be in a better place than Europe and then China. And that's important, because this is a transformational change.
Willy Walker: You mentioned energy. WTI crude is what closed yesterday at $74.22. That's the highest price in the last three months. So here we have an incoming administration that literally got elected on a theme of drill, drill, drill. Markets are supposed to look forward, not backward. And how is it, Mohamed, that we have WTI crude at $74 a barrel right now with an incoming administration that is looking to open up and produce more electricity in the United States—I should say, more oil, more natural gas, and derivatives from that over the next 4 years.
Mohamed El-Erian: Two reasons. One is Opec+ is controlling supply, and Saudi Arabia, in particular, is producing well below capacity to protect price. But there's something else going on, which is geopolitics. If you're in the marketplace, you have to price in some probability as low as it is. I'll give you a potential scenario. Right now, Iran has very few air defenses. Israel could be tempted to go after the nuclear facilities in Iran. There is a possibility—I'm not saying probability—that Iran responds by blocking the Straits of Hormuz.And next thing you know, oil is at $100 or $150. Now, is that a high-probability event? No, but it's an impactful event. There's this geopolitical cloud that's hanging over the energy market that results in a price that's much higher than what would be warranted by the demand side—ecause the demand side isn't that strong right now because of what's happening in China and what's happening in Europe. So for me, it's not surprising that between OPEC+ controlling production and this geopolitical cloud that's still there, we've seen prices in the $70s..
Willy Walker: It's interesting that you pointed out the shutting down of the Straits because I thought you were going to say, “We could lose Iran's oil production if Israel were to invade them.” But that's only two million barrels a day or something. That's not going to move world prices. But to your point, if they were to do something to disrupt the trade of oil, that obviously has much broader implications than just Iran production coming offline.
Mohamed El-Erian: Correct, and it's not that hard to block the Straits, right? I remember we used to be talked about a lot in the past, and we've forgotten about it because this American exceptionalism has acted as an incredible shield against very messy geopolitics. If you compare to when you and I discussed this in the summer, Russia has gotten the upperhand over Ukraine in that war. The conflict in the Middle East has continued and has spread. It has spread to Lebanon. Iit has spread to Iran. It has spread to Yemen. And we're seeing how fragile some of the countries out there are with what happened in Syria. Geopolitically, the situation has gotten messier than when we last spoke. And yet, we've had this shield that has protected markets and has protected the economy from this messy geopolitics.
Willy Walker: One other thing on energy, before we go to US exceptionalism, I've heard you say the good, the bad, and the ugly: good US, bad China, and ugly Europe. I want to get to that in a second. On energy, one of the other things that I've read, Mohamed, I'd love your thoughts on. We have increased oil production in the United States so dramatically that there isn't a huge amount of additional gains that can be had by this drill, drill, drill policy by the Trump administration. The numbers are that back from 2000 to 2010, the United States was producing crude, natural gas, and natural gas liquids of around 3 trillion BTUs per month. That then stepped up to 5 trillion BTUs per month from 2014 to 2018, and in 2024 we're producing 7 trillion BTUs per month. Our oil and natural gas production has just gone up so much. Biden's about to, I believe, sign an executive order that is going to ban drilling in the Atlantic as well as the Pacific. And it's one of those executive orders going back to the 1953 Outer Continental Shelf Agreement. Something like that is going to be very difficult for Trump to come in and turn over. Do you think that's having some impact here, or do you think that the Atlantic and the Pacific drilling is a minor issue, as it relates to just the general Trump theme and it's much more the global geopolitical issue than it is US domestic oil policy and not being able to find increased returns?
Mohamed El-Erian: I think it's more the global issues than the US issues. It is incredible that the US now is not only the major producer, but we have basically replaced Russia in LNG exports to Europe. It is amazing how Europe is now dependent on US LNG to replace what it lost in Russia. If I look at the US LNG equation, it is totally dominant. On balance, I expect it will become more dominant going forward. But we also have to deal with the fact that there are OPEC+ producers. You also have to deal with the fact that markets need to price something for tail risk. You can't completely ignore tail risk. I think that that's where we are. For me, the most amazing side of the energy is the demand side, because, had people projected the weakness in Europe and the weakness in China, they would have projected much, much lower oil prices. It is striking that oil prices have remained there. And again, it's because of the supply side.
Willy Walker: This summer, you spoke about the US consumer and concern over I think you called it a K -
Mohamed El-Erian: K-shaped economy.
Willy Walker: K-shaped economy where the low end falls and the upper end goes up. And you're looking at averages that hold true, but it's distorted because there are fewer people who are driving the economy at the high end and you're getting the lower going out. And that was all based on a weakness in the credit markets and a weakness in consumer demand. Six months later, are you still concerned about that K-shaped economy? Or do you think that the lower end holds up better than you had projected?
Mohamed El-Erian: I'm still concerned. If you look at the debt numbers, the credit card numbers at the amount of savings that 50% of the population has, the lower end of the household segment is significantly under pressure. And it played out in the elections that people simply have not felt the US exceptionalism. What they felt was the impact of inflation. What they felt was the pandemic savings dwindling and disappearing. That's what they felt. Financial insecurity was a big theme in the election. I do worry. What has surprised me in a positive way is that it hasn't migrated up the income distribution. It has remained concentrated in the lowest segment. I worry very much about them, but it hasn't impacted the averages if you like, because it hasn't migrated up.
Willy Walker: Super interesting. Let's talk about Europe, the US, and China. When I went back and looked at that TED talk you gave in 2013. I also watched another interview you did in that same timeframe. And it was interesting to see the emergence of China and China's economy becoming stronger than that of Japan. We talked about Americans complaining about our unemployment rates and the stimulus not taking hold. And you talked about potential sovereign defaults in Europe, in Greece at that time had been wholly something we never, ever would have thought that a sovereign could default in Europe. And here we are 13 years later, we have incredible US exceptionalism. And as I said previously, “You have it played out that the good is the US, the bad is China, and the ugly is Europe.” Talk for a moment. Talk for a moment about why China is so bad and why Europe is so ugly.
Mohamed El-Erian: Europe being ugly: Europe has stopped investing in itself. It is not focused on productivity enhancing. It is not focused on the growth engines of tomorrow and it is stuck in this low-growth equilibrium. When you get stuck in this low-growth equilibrium, the probability of bad things happening is high. I'll give you an example. France lost its government. Next thing we know, the spread there with the market risk assessment of French sovereign risk is the same as in Greece. That was unthinkable. Europe is supposed to have the core, Germany and France, strong and solid, and then the periphery, weak. Now suddenly, France from the core is being treated like Greece. And that gives you a sense of when you're not growing, you don't have the resilience to absorb shocks. Political shocks happen, geopolitical shocks happen, social shocks happen,and economic shocks happen. So Europe is in this low-growth equilibrium and now has lost leadership. Germany is about to have an election. France is pretty well without a government that can govern properly. And those are the two largest economies in Europe. I really worry about Europe that if it doesn't get its act together, it will fall further behind. And as it falls further behind, it will become more insular.
Willy Walker: Very interesting. We're talking about labor productivity. In this JPMorgan research report, they talk about the fact that you go back to 2017 and you put labor productivity in Europe and in the US on par at 100. As for labor productivity over the subsequent seven years between ‘17 and ‘24, in the US, we've moved up to 118 on that scale. Mind you, they were both at 100 and Europe has only moved up to 103. You look at this scale of labor productivity, and the US is hard up to the upper right. And Europe stops right along where it was back in 2017. It's quite striking what has happened from a labor productivity standpoint between the US and Europe.
Mohamed El-Erian: Absolutely. Now, imagine what that's going to look like as the US invests in tomorrow's engines of productivity and growth and Europe's stuck in yesterday's entrance. It's going to get a lot bigger. Ironically, Europe knows what to do. Mario Draghi, who was the highly respected president of the ECB, European Central Bank, and then the prime minister of Italy, did a very good assessment of why European competitiveness has eroded and what needs to happen. This is not an engineering problem. This is a political implementation problem. It's a leadership problem. And until European politics improve, it is simply not going to get the implementation of what you need. And I say that because the contrast with China is really striking. They know what they need to do and in the past have been really good at course correcting. The way China has managed itself, it knows where it wants to be in 20 years’ time. It knows what it needs to do in the first two or three steps, and then it learns from its experience. It learns from others' experiences and, of course, corrects. But in the last five years, we've seen very little course correction. Something has to change in the way the Chinese economy is managed. And now they're stuck between, on the one hand, facing enormous pressure to stimulate the old engine—think of a car engine that is exhausted, that spills oil all over the place. If you rev it up, you're going to end up having a lot of collateral damage and unintended consequences. But there's enormous pressure to rev it up to meet a 5% growth target. On the other hand, if you have to completely rebuild the engine, that means you have to sacrifice growth in the short term. And I've been looking at these two things, and literally they are paralyzed between the two and getting neither of them done. And that is why this notion of “Is China investable? Is China not investable?” has become such a frequent topic of conversation among investors. Know this before you put it into geopolitics.
Willy Walker: I was going to say that's a pre-increase in tariffs, right? Talking about the size of the US economy, one of the things in Europe versus the US, there was a neat chart in this report that tracked 200 US IPOs since 2000 and 50 European IPOs since 2000. The cumulative market cap of those 200 US IPOs is $18 trillion. And the cumulative market cap of those 50 European IPOs is less than $2 trillion. You look at your point about investment in AI in the future and the market value of those. But one of the things that I want to get your opinion on, Mohamed, is the dominance of the US market. If you go back to the US market cap in 2007, we had 42% of the global market cap in the US markets, Europe had 38% and Japan had 10% in 2007. Now we fast forward to 2024, US 70%, Europe 16%, and Japan 7%. Europe's fallen from 38% of the global market cap down to 16% in 2024. We're clearly too big to fail, but do we get to a certain point where so much is coming to the US that it isn't good because we've lost the ability to grow it? Going back to that oil issue that I mentioned earlier, we've increased oil production so much that the relative returns that we can get out of more drilling in the United States, particularly if Biden closes off the Atlantic and the Pacific, might have diminishing returns to it. Do we have to see Europe trying to get back to get global GDP and our growth going? Or is it okay for the US to be the belle of the ball for the next decade and continue to have all eyes and all investments coming to our shores?
Mohamed El-Erian: Right now, there's a huge sucking sound, in which we are sucking in capital from the rest of the world and for good reasons. You make more money in the US. It's that simple. And because of that, the capitalization of US companies continues to go up. And the rest of the world continues to go down. And that seems great with two important qualifications. One is that the concentration issue here is that there are a few companies that account for a lot of what's been happening. But the other thing is that we live in a world of interdependencies. You cannot outpace the rest of the world without at some point having the consequences of living in a bad neighborhood. I keep on reminding people how good your house is also a function of the neighborhood. And the global neighborhood is problematic because of what's happening in China, and what's happening in Europe. That spills over to the emerging world. The hope is that we remain up here and the others start converging toward us over time. That is a healthy global economy. That is a global economy that can address common challenges. And there are going to be a lot of common challenges going forward. The risk is we are up here and this goes back down. At some point, we get pulled down like you point out. We're not there yet, but that is the risk. We actually have significant interest in Europe, in particular, and China getting their act together and a number of emerging countries. We used to call it convergence, this notion that the less well-off would converge to the better-off. We've seen divergence. And again, it's good if you are on the sunny side of the divergence, but at some point, you've got to worry about the neighborhood.
Willy Walker: And in all eyes being in the US and that you're making more money here. Obviously that means that people are buying dollars. That obviously has been extremely good for both the value of the dollar as well as the ability to sell our government debt. I want to talk about debt in a second. But as it relates to currency, one of the things you said this summer, Mohamed, that was very interesting to me was that China is building pipes around the dollar, that it's not that their currency is something that anyone actually wants to go out and buy. It's not as if either the euro or the yuan is a value that investors want to buy. But China's set up a bunch of networks around the world that have basically bypassed the dollar. How much of a threat to the US dollar being the reserve currency are those actions by China?
Mohamed El-Erian: I'm glad you brought it up. We have this incredible contrast. If you compare us to any other national currency, the dollar dominates. No one comes close to the role of the dollar in the system. If you compare us to non-national alternatives, gold, Bitcoin, suddenly the dollar doesn't look as strong. And that's because you've had these pipes being built around the dollar. No one wants to replace the dollar as their reserve currency. No one has the willingness or the ability to do so. Compare us to any other currency, we look great. However, hundreds are starting to say, “Can we operate outside the dollar system?” A lot of the interest in Bitcoin is the reason why central banks have bought more gold as part of their reserves in the last few years than they've had for a very long time, and that they've slowly diversified away from the dollar. And then the question I get asked a lot when I go around the world is, how did Russia do it? Didn't you tell me, Mohamed, that when Russia gets kicked out of Swift, gets kicked out of the dollar system, its economy would collapse? Its economy seems to be doing quite well, it continues to trade. How does it do it without using the dollar? And what has happened is this very clunky, inefficient system involving at least four other currencies, none of which are the dollar, has emerged. It's very inefficient, but it works. And the worry for the US is that more countries will join that system. It's not going to replace the dollar anytime soon, but it is a threat over time.
Willy Walker: I think your point about Russia is so interesting. The one thing I would point out there, as you well know, Mohamed, is the US economy is a $29 trillion economy. Russia's economy is a $2 trillion economy. And I think a lot of people think of Russia because it's a superpower, that its economy actually at one time was a competitive economy like the United States. There are many states in the United States, actually three of them, that are bigger than the economy of Russia. I think that's something that people point out about them trading around us in their economy; being able to trade even though they were kicked out of the Swift system is very relevant. At the same time, I think people do sometimes think that Russia is a much larger player on the global scale than they actually are. You mentioned Bitcoin. I went back and this is the problem of being as widely watched as you are and having to talk all the time about projecting the future because you've been wildly pressured on many things. But six years ago you were on CNBC when Bitcoin collapsed to $6,000 from $20,000 per coin. And you said, “I don't think it gets back to $20,000.” And obviously we're now a little bit beyond that. You also said at that time to Andrew, who was asking you the question, “Where do you buy?” And you said, "I'll buy it for $5,000.” And he said, “Why $5,000?” You said, “I don't know. It's a gut feeling.” Did you actually buy Bitcoin when it got to $5,000? Very few do not move Bitcoin.
Mohamed El-Erian: This is sad. You're absolutely right. I was asked this when Bitcoin had gone first off to $20,000 and I was asked would you buy it here? I said, “No. Look at the chart. It's ridiculous.” It's very speculative. And then he said, “Where would you buy it?” And I said, “I would buy it below $5,000,” and went away. And quite a few months later, it was trading below $4,000. I felt compelled to buy. And I bought it. And then over the next few months, it went back to $20,000. And because this is a typical investment behavioral mistake, because $20,000 had become somehow my anchor, I sold the $20,000. And then I watched it go all the way up to $64,000, thinking I was really silly. Then I thought about going back down and now it's over $100,000. And I say it to myself because when it comes to Bitcoin, which I didn't really understand, I did all the mistakes that you make, which is that you get anchored by some things that stick in your mind that are actually quite arbitrary. I do think where I still believe I'm right is that. I never bought into it as a fraud that is going to disappear tomorrow. No, it is part of the payments ecosystem and it will remain part of that. But it will not be the global currency that people want it to be. It will be a commodity, like gold, that will be in more portfolios up to 5%, 10%. It will be in certain payments and it will exist in that world. But it's not going to replace the dollar. It will compete with the dollar at the margin, but it will not replace it.
Willy Walker: Your comment there, Mohamed, about the the investors' dilemma of where you got anchored at $20,000 makes me think back to something I heard you talk about—the way that when you ran PIMCO, you had your investment committee. But then there were three other groups at PIMCO that were tasked with testing and checking the assumptions that were being made by the investment committee and that their job was literally to sit there and basically come in and try and tear apart all the theses that had been created for a certain investment. I can't help but think that if on Bitcoin, you had three other groups probing your assumptions as it relates to getting anchored at $20,000, you might not have sold it at $20,000. Talk for a moment about how beneficial that is and what you set up at PIMCO. But if someone's listening to this and saying, “Wow,” whatever business, not necessarily a firm that is global and is scaled like PIMCO, what would you suggest to someone who's running their business as it relates to the challenging of certain assumptions of how you're running your business, how you're investing your dollars, and what's best practice as it relates to testing those assumptions?
Mohamed El-Erian: You need to test them all the time, especially in today's world. I tell people, “Here's my baseline, but I'm testing my baseline every single day against data because there are lots of uncertainties right now.” The biggest trap lots have fallen hostage to is not realizing that things are changing around you. IBM learned that lesson with the PC, which it missed completely. Kodak, of course, learned that in a big way. Nokia learned it in a big way. You're so successful that you believe that you're doing everything right and you don't kick the tires often enough, and then suddenly you wake up to what's actually happening. Getting cognitive diversity, and getting people to kick the tires for you has to be wired into the system. You have to let structure do the heavy lifting, otherwise you won't do it. You literally will not do it. And that's Bill Gross at PIMCO. He realized that you needed things like that. You needed what we call shadow investment committees, whose role was to shadow the actual investment committee. You need something that makes the whole firm go away once a year and look forward to three to five years, and get away from the day-to-day and try to take a view of which way the highway is going. Are we going east? Are we going west? We should know where we're going because the day-to-day is what lane you are in and what cars are around you. But you better know where the highway is going.
The big insight that I got from Bill, who did it so well, is you structure to do the heavy lifting because otherwise you won't do it. The management gurus have this famous matrix of urgent and important, and we're very good at knowing what's urgent and important. We're also pretty good at knowing what's not urgent and what's not important. But what trips us up is that we often focus on the urgent and not important, and we don't focus on the important, but not urgent. The important and not urgent, not the strategic issues. You need structure to help you do that.
Willy Walker: I think I've heard you before talk about two great analogies. One is the frog in the boiling pot. It doesn't feel like today is a time when many people are going to be the frog in the boiling pot. And to the extent that AI is such a dramatic change in our world that everyone's challenging their assumptions about it, it's not a time for complacency, which is what kills the frog that's sitting in the boiling pot. The other one that I loved was when you went back and used Monty Python and the Holy Grail, the scene where the knight is sitting there and he gets his arm lopped off and he gets the other one. He keeps talking and he's like, “It's a mere flesh wound.” I laughed heartily on that one, Mohamed, because I thought it was so great. But it makes me think about what you talked about testing the assumptions and what to drive toward. I think one of the big concerns that people have in this period of massive CapEx and investment is what happens all of a sudden if that 35% of your chart as it relates to hard landing all of a sudden comes about.
Looping back to close this discussion out, as you think about the challenges that business leaders face today of a new administration, of geopolitical risk, generally very positive economic indicators, yet seemingly significant risk, if you're sitting around the board table, as you do often, is this generally speaking, do you have to risk on right now? I guess the easiest way for me to ask that question is that there are obviously always things that we're all thinking about and saying, “If I went and did that, the world could change.” But you also said when we were together in July that you have to look at this bimodal chart and basically plan for everything. Our minds will go to the 65% probability of a 50% soft landing and the 15% that it's better and we'll say 65%--go with that. And yet at the same time, to be a good investor as you have been for so many years, you must keep in mind that there's that 35% capability, but that makes it very difficult to make actual binary decisions of invest, don't invest, go long, what have you. As you sit there today, is today a time to sit there and say we move forward and we invest solidly? Or is now a time where it says, “The markets may have gotten ahead of all the things that are coming up in the new administration? The markets may have gotten ahead of US exceptionalism and now is the time to be a little bit more tempered or cautious in what you're doing.”
Mohamed El-Erian: It's easier for a financial investor than it is for a real investor, for someone who has to decide about plants and equipment and everything else because you can be barbelled. I'll give you an example. You can have a safe element. You want it to be barbell-agnostic to the extent that it is. And these days you get paid a lot for it, unlike a few years ago. And then on the other side of the barbell are well-structured, risky investments. And that combination gives you the three things that you've heard me stress over and over. Resilience is the first one. This bid gives you resilience. Two, it gives you agility. As opportunities arise over here, you can redeploy from here to here. And three, because you've got these two things there in front of you, you've got to have a broad mindset. You can't just focus on, “Oh, I'm risk-averse or Oh, I'm risk-loving. No, it's a company. I've got to be a combination of both.” I tell people to always ask themselves the question. You structurally have resilience. You structurally have agility and you structurally have optionality. Because those are the three things that pay off in the world that we live in today.
Willy Walker: You have lots of optionality in what you do with your time. And I am deeply thankful to you for spending an hour with me to talk about the markets and the world that we live in today. It's great to see you at the beginning of the New Year. And I am certain that everyone who listens to this will gain a lot as it relates to their outlook and thoughts about what is happening in our world, what's happening in the US, Europe, China, the new administration, and all the economic indicators that you've discussed in such clarity today. And I'm deeply thankful for you spending an hour with me, Mohamed, and our friendship.
Mohamed El-Erian: I thank you and thank you for the friendship and thank you for the really interesting conversation that scares me that you go back all the time. Happy New Year to you and happy New Year to everybody listening to this.
Willy Walker: Greatly appreciate it, Mohamed. Have a wonderful day.
Mohamed El-Erian: You too. Bye bye.
Willy Walker: Take care, Bye bye.
