Sobering prediction: U.S. losing altitude

Listening to Mohamed El-Erian describe the unfolding “stable disequilibrium” of the global economy can be mind-boggling and depressing at the same time. Mr. El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co. LLC, expects that next year will see the continued decline of developed economies' dominance and dramatic growth in emerging markets. To advisers, that means planning for slower growth in the United States and less dependence on U.S. consumer spending as the main driver. “The global economy used to be like a plane flying at a high altitude, fueled mostly by U.S. consumer debt, but we're moving toward a world of more lower-flying planes,” represented by several smaller economies, Mr. El-Erian said. He isn't sure that the United States is fully prepared for the transition. “I worry about 2010 and beyond,” Mr. El-Erian said. “Next year will be much harder than is being priced into the equity markets, which right now are acting like 2008 was a flesh wound.”
For Pimco, which has built a reputation for expertise in fixed income, the future will involve more emphasis on global asset allocation and equities. What Pimco does gets the attention of advisers and investors, who see Mr. El-Erian and his co-CIO, Bill Gross, as two of the biggest names in the financial services industry. “Pimco's view of the new normal and how global economies and markets will be in the next 10 years is getting more attention,” said Tom Lydon, president of Global Trends Investments. “Advisers are saying that if they believe in anything Mohamed El-Erian is saying, they have to position themselves and their clients for changing climates,” Mr. Lydon added. The slump in U.S. consumer spending is central to Mr. El-Erian's outlook for the stock market and the economy, which he believes will be held down by stubborn and protracted unemployment. “The stock market and the policymakers have underestimated how high unemployment could get and how long higher unemployment could last,” he said. “The second half of 2009, which benefited from massive government stimulus, will be as good as it gets for a while.” Mr. El-Erian, who is often described as Mr. Gross' likely successor though they share the CIO title, won't take the bait. “We don't think that way around here,” he said. “My impression is, Bill isn't going anywhere, and we don't want him to go anywhere.”