Griffin and El-Erian: Debating risk

April 27, 2015

photo of conversation between Griffin and El-ErianPut two of the world’s biggest investment managers and a seasoned journalist on stage and what do you get?

A general agreement that “dysfunctional governments” are hindering critical structural reforms, a carefully phrased disagreement or two on economic fundamentals, and at least one accusation that the moderator, Wall Street Journal Editor-in-Chief Gerard Baker, was focusing too much on the negative.

That came after Baker asked his panelists – Ken Griffin, CEO of Citadel, and Mohamed El-Erian, chief economic advisor for Allianz – whether the market’s seeming indifference to the economic impacts of the face-off in the Ukraine, the nuclear deal in Iran and the rise of ISIS in the Middle East was justified.

“We are five-sixths of the way into our talk and we’ve talked about only what can go wrong,” El-Erian said, pushing back with a smile. “That’s fun to talk about, but let’s not forget a ton of other things happening that are really exciting.” Leading that list, he said, is the way technology has enabled entrepreneurs like Uber and Airbnb to disrupt traditional markets, giving consumers lower-cost options to taxis and hotel rooms.

After a brief foray into the positive, the session returned to its primary focus – assessing the big picture risks facing the global economy. On those issues, Griffin and El-Erian were in general agreement on many issues, including their overall confidence in China, despite the slowdown in the once-sizzling economy, ballooning debts and an anti-corruption campaign that has nailed some of China’s leading companies and top government officials.

Both Griffin and El-Erian believe China’s top leaders retain enough political power and broad public support, backed by significant coffers, to avert a hard landing. Though there will certainly be rough times ahead, China can use its “$3-trillion war chest to selectively prop up parts of their economy,” Griffin said.The two differed, however, on whether a shift in the U.S. economy towards more business-friendly policies – such as the imposition of laws to curb the political influence of unions – was good for workers.

“Ultimately, what this does is create jobs in America, which ultimately gives labor pricing power,” Griffin said. His argument was that more business-friendly government policies lead to the creation of more jobs. That, in turn, would reduce unemployment and give workers more leverage to push for higher wages.

However, El-Erian said some of those same policies are contributing to a growth in income inequality, which he fears is creating an “inequality of opportunity” for future generations. Stay tuned for this issue to become a major topic in the 2016 campaign, he predicted. “There are few things both parties can agree on,” he said, but one of them was the importance of maintaining opportunities for the next generation.