The career of Mohamed El-Erian has been an interesting one. He started off
at the IMF, moved briefly into the world of banking, and then became the single
most important emerging-market bond investor in the world. Expectations were
that eventually he would end up either in charge of bond giant Pimco, or else
he’d take over the top job at the IMF. Instead, he took the job of running the
$30 billion Harvard endowment. With the IMF and World Bank evidently
still being carved up between Europe and the US, there’s a good chance that
the Egyptian El-Erian will stay in Cambridge indefinitely. And judging from
column today, he’s doing all the right things while he’s there.
To understand El-Erian’s sophistication, it’s worth comparing his outlook to
that of his Harvard colleague Larry Summers. Summers is an economist who has
a tendency to privilege theory over reality. In a recent
talk, he called himself a "chastened prophet" with regard to his
doom-mongering over the US current-account deficit — but then went straight
ahead and reiterated all his old warnings, saying that things were likely to
go very bad very quickly at some unspecified point in the future. Other economists
such as Robert
Reich take the same approach, talking about bubbles and how they’re destined
El-Erian, on the other hand, is more nuanced in his outlook. He’s
not a bubble-spotter: you can’t be, in his job, since worrying too much about
bubbles bursting is exactly the kind of bearishness which prevents money managers
from outperforming. On the other hand, he’s not some kind of short-term momentum
trader, either, who will do very well until one day he blows up. Rather, he
takes a more sophisticated and layered approach to investing, which has served
him very well.
El-Erian sees one main factor driving up asset prices: the economically inefficient
allocation of capital by develping countries’ central banks. There’s no sign
at all of that coming to an end any time soon, which means, he says, that it’s
a sensible trade to be in for the time being:
In the short term, the phenomenon has significant momentum that can only
be derailed by a series of economic and technical dislocations. A single dislocation
will not suffice as illustrated by the temporary setbacks of May-June 2006
and February 2007.
El-Erian then puts on longer-term trades as well: what he calls "a strategic
asset allocation that emphasises secular themes". But he’s well aware that
he wants to make money on the way to his "long-term destination,"
and not just upon his arrival there. His proven ability to do so is what sets
him apart from his fellow economists, and makes him a first-rate investor.