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I Am American Business

Mohamed El-Erian

Producer Notes

Before our PIMCO shoot, we were warned that the PIMCO trading floor was kept extremely quiet, so the traders could focus. We told our crew to be as silent as possible. But when we first cautiously tiptoed out onto the trading floor, we heard the distinct buzz of voices. Why was that? Bill Gross and Mohamed El-Erian were in a meeting, that's why. Most of the time, Bill and Mohamed sit at their side-by-side desks right in the middle of the trading floor. When they're not there, apparently, the volume goes up... to a low murmur. PIMCO's US headquarters is located in Newport Beach, California. Traders start arriving at 4 AM to be ready for the East Coast trading day, and by the end of the PIMCO day, all the monitors in the offices are switched to follow the Asian markets. We happened to be at there during one of the most turbulent weeks in stock market history. But you couldn't tell. The company focuses on long-term investments, and whatever was going on that day, they seemed to be taking the long-term perspective. In 10 years time we'd look back and it would all make sense. Meanwhile, the beach, with spectacular cliffs over the Pacific, was only a few minutes down the road.

Video Interview

Part of a Big Pie
Is the World Changing?
Too Much of a Burden
Rational Fools
Paranoid About Everything

The "I Am" Q&A


What kind of car do you drive?
An Audi.

What’s your favorite place to go?
Home.

What website do you like to visit?
CNBC.

What was your worst moment in business?
My first day.

What’s your favorite drink?
Water.

What’s your favorite food?
Chinese.

What’s your idea of fun?
Spending time with my family.

And at work?
Getting it right.

What personal weaknesses do you forgive in someone?
Someone who works very hard, but doesn’t get it completely right.

What movie star do you like?
I was going to say Aladdin. Aladdin.

Who’s a business hero of yours?
Bill Gross.

What personal qualities do you admire in business?
Ethics.

What is your dream?
To see my daughter graduate.

What is your present state of mind?
Optimistic.

Transcript


CNBC:
What did your international upbringing teach you as a child?

MOHAMED EL-ERIAN:
When I was a kid, we were living in Paris. Everyday, we’d get four, five newspapers delivered. And they would cover the whole political spectrum. And I remember asking my father, “Why do we need so many newspapers?” And his response was, “Because you have to understand the perspectives of different people, if you want to understand what’s going on in the world.”

CNBC:
So what is happening in the global economy now?

MOHAMED EL-ERIAN:
We’re going through a global transformation. We’re going to look back in ten, fifteen years time and say, “wow, that was a time of change.” And that global transformation has two big drivers. First, global growth, the engines of growth are going from the United States to the rest of the world. Imagine a plane that used to fly on one big engine, called “the US consumer.” Well, that engine is now tired, but is being replaced by another- by a number of other engines. The other transformation is one of wealth. The rest of the world’s getting wealthier, and what they do with their wealth, will determine how well investors do.

CNBC:
Given the shift in wealth, what is your perspective on protectionism?

MOHAMED EL-ERIAN:
You know, change is not comfortable, people hate change. And when wealth, is going somewhere else, when growth is going somewhere else, the temptation is to resist. The temptation is not to give up historic entitlements, even if they don’t make sense today. So one of the big threats, to what’s going on, is protectionism. People will resist change, even though change is necessary. And it’s critical that that does not happen. There are two types of protectionism. There’s protectionism on trade, which would stop the US consumer from getting cost-effective goods. And there’s protectionism on capital, which is the temptation to say, “I don’t want someone else to own me.” The reality is, sometimes you need someone else to own you because they can bring in fresh capital, they can allow you to expand your business. And to be even more profitable in the future. The biggest risk to the global economy right now is that people will resist change. People will try to protect themselves, not realizing that by doing so; they will harm themselves more in future, than they do by just accepting change.

CNBC:
How can protectionism interfere with the adjustment that’s going on with the global economy?

MOHAMED EL-ERIAN:
Protectionism stops the free-flow of goods and of capital, and therefore, the global economy operates at a much lower level of productivity, employment, and growth.

CNBC:
Historically, has the world been more stable when wealth was more evenly distributed?

MOHAMED EL-ERIAN:
We’re going from a uni-polar world to a multi-polar world. That means that this world is more stable. There are more engines of growth, wealth is more widely distributed, and critically, nations are economically interdependent. If you look at history, you normally don’t get wars among countries that are economically interdependent. You get wars among countries that do not have economic independence. When you are part of a big pie, then everybody loses when that pie shrinks. The global economy will be a more stable place, if growth is balanced among the world.

CNBC:
We’re going through an economic slow-down in the US. So where will the growth be?

MOHAMED EL-ERIAN:
We’re living in a world of hand-offs. And perhaps the most important hand-off is that of the consumer. Moving from a world, which depended on the US consumers, to a world that depends on many more consumers. And the most important consumers in this new world will be those in the emerging market. They’re getting wealthier, they want to consume more, and they can consume more.

CNBC:
I know people are concerned now that China’s having a slow-down.

MOHAMED EL-ERIAN:
When there’s a global economic slowdown, countries will depend more on the domestic growth. You’re seeing that today in China, you’re seeing it in Asia, and you will see it in other emerging markets. We live in a world in which the emerging economy has depended only on export growth. And we’re going towards a world in which they can now rely more on domestic growth, on domestic consumption and investment.

CNBC:
As an investor how can you approach this situation, where everything is changing?

MOHAMED EL-ERIAN:
The critical thing today, and it’s something that we do at PIMCO is to second-guess yourself. Don’t take things for granted; always ask the question, “Is the world changing?” Otherwise, you will miss the big shifts. So it’s critical to be asking that question and to be anchored by a process that forces you to second-guess yourself.

CNBC:
How do you do that?

MOHAMED EL-ERIAN:
You use structure, you let structure help you. You create frequent events where you get together. You create another group that second-guesses you, and pushes you on your assumptions.

CNBC:
I think people are concerned that investors will no longer look at the American markets because of our instability right now.

MOHAMED EL-ERIAN:
The US markets have a structural advantage that virtually no other market has today. Which is size, predictability, and the rule of law. That doesn’t go away quickly. And as long as it’s not abused, investors will come back to the US market.

CNBC:
They say, “may you be cursed to live in interesting times,” but it really is an interesting time. I think especially for someone like you…

MOHAMED EL-ERIAN:
But the most amazing thing is our ability to tell our grandkid, kids, that we lived through this period.

CNBC:
What will you tell your grandkids?

MOHAMED EL-ERIAN:
We’ll tell them we lived through a period of change. It was bumpy. It was unpredictable. It was an uncertain journey. But we got to a better destination.

CNBC:
Why will it be a better destination?

MOHAMED EL-ERIAN:
Because it’s a world in which many people are growing faster, are coming out of poverty, and it’s a safer and more balanced world. And there’s less poverty, and therefore less instability. But getting there is the interesting thing.

CNBC:
What is PIMCO’s strategy?

MOHAMED EL-ERIAN:
At PIMCO, we analyze both the destination and the journey. We want to know what the new world will look like. And we spend a lot of time analyzing it. But we’re also interested in how we’re going to get there. What’s the journey going to look like? Will it be bumpy? Will there be lots of twists and turns?

CNBC:
Can you give me an example?

MOHAMED EL-ERIAN:
If you’re an investor, looking at this world that’s changing very quickly, you need to be structurally positioned for the new world. Because it’s going to come, it’s a matter of time. At PIMCO, we manage both risk and return. So we look at how we’re going to get somewhere. And we make sure that we manage the risk and we harvest the return opportunities.

CNBC:
Can you talk about fiscal versus monetary policy?

MOHAMED EL-ERIAN:
When we entered this crisis, back in the summer of ’07, the policy response was focused on monetary policy. Cutting interest rates, injecting equity. That was necessary but not sufficient. Monetary policy was asked to carry too much of a burden, and it couldn’t do it. And then, we saw fiscal policy come in. We saw the use of the government wallet, to help navigate this difficult situation.

CNBC:
You talk about, “constructive paranoia.” Can you tell me what that is, why it’s important?

MOHAMED EL-ERIAN:
PIMCO has a culture of constructive paranoia. Paranoia means you ask, “what am I doing wrong? Should I be doing something different?” And you do this every single day. And not only do you ask it of yourself, but you ask it of your colleagues. But it’s not just paranoia. It’s constructive. We ask these questions with a view to getting to a better answer. And, therefore we try to combine being constructive with the importance of also being paranoid.

CNBC:
And also, you talk about the pitfalls of being a “rational fool.” What is that?

MOHAMED EL-ERIAN:
One of the difficulties of navigating this new world is that there are many uncertainties. And often, uncertainty freezes you. There's so much “maybe this, maybe that,” and you end up doing nothing at all. And that may be the worst outcome. There’s a phrase for it, in the economic literature. It’s called a “rational fool.” It is rational to do nothing, when there’s so much uncertainty. But you end up being a fool.

CNBC:
A lot of people are looking for someone to say to them that the crisis is over. You know, “today it’s over, no, tomorrow it’s over. No this is the bottom, this is the end…” Is it over?

MOHAMED EL-ERIAN:
This crisis will end. And when it ends, we’ll find ourselves in a better place. A more balanced global economy, a less risky financial system. The question is not, “if it’s going to end,” the question is “when?” No one can guess when, but the important thing is to always be able to live another day. To be able to navigate this journey.

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