El-Erian Sees Risk of Political Contamination as New Normal Ends

(Bloomberg) -- Mohamed El-Erian, Allianz SE’s chief economic adviser, said the slow but steady economic expansion of the post-financial crisis era could be at risk if elected leaders are unable to take the reins from monetary policy makers in stimulating further growth with structural reforms.

“If we do not make that transition,” El-Erian said Tuesday in a Bloomberg Television interview, “we’ll find out that central banks are less effective at repressing financial volatility and less effective at promoting growth. The political system is going to get more complicated, politics will contaminate economics even more. And then markets are going to have to ask themselves, does it make sense where valuations are given the economic and political background?”

The equity rally spurred by President Donald Trump’s surprise election win has stalled. While the Dow Jones Industrial Average is still up about 12 percent since Nov. 8, the benchmark has dropped for eight straight trading days, the longest streak of declines since 2011. Investors are concerned that Trump will struggle to enact his pro-growth agenda after failing to win passage of a plan to overturn former President Barack Obama’s health-care reforms.

El-Erian has popularized the term “new normal” to describe the long period of slow growth the world faced in the wake of the 2008 credit crisis. While the Federal Reserve worked to stimulate the economy with low interest rates and the expansion of its balance sheet, legislators have struggled to enact tax reform or approve long-term infrastructure improvements that could propel longer-term growth.

‘The Good News’

Even in an era of declining unemployment, workforce participation has dropped in the U.S., and economic gains have eluded many blue collar workers, fueling Trump’s ascent. That mirrors the rise of other populist movements around the globe with calls for trade barriers that alarm many economists.

“The road that we’ve been on for such a long time, the so-called ‘new normal,’ is coming to an end because it’s being eaten up by its own contradictions,” said El-Erian, who is also a Bloomberg View columnist. “The good news is if we pivot to a policy-driven recovery in growth and a boost in earnings. If not, we can go the other way.”

He said that many investors are holding large sums of cash, which could provide a cushion against disruption if leaders can’t provide policy solutions. Still, that can only last for so long, according to El-Erian.

“I think we have a couple of years,” he said. “As long as there’s cash, that is going to limit the market reaction. But there’ll come a time when that’s no longer going to be there.”

--With assistance from Jonathan Ferro

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net.

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net, Steven Crabill