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The ‘golden age’ of investing is over: Three key insights from Mohamed El-Erian’s Hub Dialogue

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The Hub‘s executive director Rudyard Griffiths recently spoke with leading global investor Mohamed El-Erian, about his new book, co-authored with former U.K. Prime Minister Gordon Brown and Nobel Prize-winning economist Michael Spence, entitled, Permacrisis: A Plan to Fix a Fractured World.

The two discussed, among other topics, the rising cost of borrowing for companies, governments, and individuals, the structural challenges of a supply-constrained world, and the prospects for a long-run inflation rate in excess of 3 percent. Here are three key insights from their conversation.

1. Yields will be higher for longer

RUDYARD GRIFFITHS: Do you think that this surge in yields will turn into something that could be the next shoe to drop on the global economy?

MOHAMED EL-ERIAN: We are going back to levels of interest rates that were normal, before the global financial crisis. The problem we have is that people believe the abnormal was normal. Central banks pressing interest rates down, throttling them to zero, or in the case of the ECB negative levels, wasn’t normal. People believe that central banks flooding the system repeatedly with money was normal. That was abnormal. So we are going back to something that’s normal. The way we’ve done it, is the issue that raises the risks you mentioned. I think of it as a series of shocks. Shock number one was last year when central banks had to move very aggressively, because they were scrambling to catch up with inflation dynamics. We got the most aggressive and concentrated set of wage increases that we have seen for decades. That didn’t need to be, and it was the result of the mischaracterization of inflation as transitory.

Shock number one came in terms of central bank action. Shock number two, which was for most of the first half of 2023 came in the form of a recognition, that central banks would stay higher for longer. That meant that you had to reflect the higher interest rate throughout the structure. So, you saw long rates go up. Shock number three is what is going to play out in next year, which is the question mark, are there enough buyers for U.S. Treasuries? We’re seeing a massive increase in US Treasury issuance and we’re seeing deficits running at six, 7% of GDP. We have bonds that are being refinanced as three times what they cost before. Who is going to buy all the debt? The Fed can no longer buy treasuries, because it has to deal with inflation. There’s a question mark as to China’s willingness to buy treasuries, Japan’s ability to buy treasuries, and institutional investors are sitting on really big losses.

2. Government deficits and debt

RUDYARD GRIFFITHS: Do you see in that scenario inflation as less of a risk and something that takes a backseat to the growth of deficits and debt as fiscal sustainability and public expenditures move center stage?

MOHAMED EL-ERIAN: I think that’s happening, and issues of the funding rather than sustainability, the funding of deficits and refinancing is going to capture the market’s attention for a while. On the inflation issue, it fundamentally comes down to the following choice that I believe the Fed will face. Do you continue to pursue a 2% inflation target that’s arbitrary to begin with and risk crashing the economy? Or do you accept for now a slightly higher inflation rate, call it 3%, see whether it’s stable, and whether you can live with it. That’s the choice that the Fed is going to be confronted with. I hope that they recognize that the world has changed, that we live not in a world of insufficient demand, but in a world of insufficient supply and that the supply side simply isn’t flexible enough.

3. The golden age of investing is over

RUDYARD GRIFFITHS: Have you thought through what a what the investable world would look like with 3% inflation targeting across the advanced economies?

MOHAMED EL-ERIAN: I think the major implication for investors is the recognition that the golden days over. When a central bank floors interest rates to zero and injects liquidity it will push up every asset.

The example I use is what used to happen when I was at PIMCO. In the investment committee, someone would come forward with an investment proposal to invest in this company or country, and they would be pushed very hard on balance sheet resilience management, market outlook, etc. It was necessary but not sufficient to convince the investment committee on every single one of these issues because we always asked one more critical question: who will buy after us? Now the subsequent buyer is very important, because the subsequent buyer first validates your own purchase, pushes the price up, and brings other people in. The subsequent buyer also provides liquidity in case you have to change your mind about the investment. And we change our minds for many reasons all the time.

If I tell you the subsequent buyer is a central bank with a printing press in the basement, infinite willingness to use it, and someone who doesn’t care about the price they buy at, you will end up taking a hell of a lot more risk than you would have otherwise, which means that all asset prices get pushed up. That’s the golden age we lived in. It didn’t matter whether you own equity, bonds, or real-estate—everything went up in price. Why? Because there was so much liquidity, the subsequent buyer was seemingly an infinite buyer. That’s the notion of a “BFF”, that the central banks are your best friends forever. That has all changed now. I think we need to address the fact that we did live to a golden age that had consequences for inflation, and the sense of malaise we’re dealing with now.

Listen to Mohamed El Erian’s full interview with The Hub’s executive director Rudyard Griffiths on the audio player below or on your favourite podcast app.

If you enjoy Hub Dialogues, be sure to check out more insightful commentary on The Hub’s YouTube page:

As schools shift towards ‘decolonized’ curricula, historians say their job is to understand history, not judge it

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In the past decade, as Canadian educational institutions have attempted to grapple with this country’s complex past, the teaching of Canadian history has undergone a shift toward “decolonization.” Now, historians are discussing the pros and cons of this approach.

On Thursday evening, the Canadian Institute for Historical Education wrapped up a three-part speaking series titled “Sir John A. Macdonald in Historical Context.” The speakers touched on why decolonial perspectives can be appealing, what value those perspectives have, and what the proper role of historians is in judging the past. 

Once a widely celebrated figure in Canadian history, Macdonald has recently suffered a fall from grace. His connection to residential schools in Canada and his role in restricting Chinese immigration have led many in the academic and intellectual communities to re-evaluate his legacy. 

“Should he [Macdonald] be judged by the standards of his time, or by the changing standards of the present?” asked David Wilson, a professor of history at the University of Toronto. “If the former, he emerges as an impressive and admirable nation-builder. If the latter, he becomes an architect of cultural genocide and an agent of anti-Chinese racism. The contradictions remain an integral part of the Canadian story.” 

Christopher Dummitt, a professor of Canadian history at Trent University and host of the podcast 1867 & All That, said he is not opposed to fresh perspectives on the past, and that they should always be sought.

“Obviously, history changes. Revisionist history is not bad history,” he said. “If you have new evidence, wouldn’t you want to incorporate that evidence…and offer a fresh perspective?”

On one level, Wilson agreed. He believes the historian’s task is to understand the past on its own terms, according to the best evidence, good reasoning, and imaginative insights—and with a sense of humility. Within this approach, applying new perspectives and new evidence as they emerge can play a positive role. 

“Such attempts [are] well worthwhile, and at their best, have produced work of great value,” he said. “They’ve opened up new perspectives, they’ve forced many historians to question earlier assumptions.” 

As an example, he cited the late senator Hugh Segal, who once lauded Macdonald’s role in Confederation but later tempered his view to acknowledge the decisions Macdonald made that were harmful to Indigenous people.

Wilson did, however, offer a warning about the perils of a decolonial approach to history. 

“Decolonization goes wrong when it becomes an ideological weapon. When in the service of a social justice agenda, characterized by absolute moral certainty, it falls prey to distortions, to presentism, and attempts to impose its worldview on academic pursuits in general,” he said. 

As Macdonald and other historical figures have come under greater scrutiny, many universities and even governments have chosen to focus on their discriminatory policies and have renamed buildings honouring them or removed their statutes from public spaces. This is presentism in action—the interpretation of past events through modern-day standards.

In the face of these developments, Wilson said the role of a historian is not to serve an agenda, even if it is appealing. 

“Our task is to make the past more intelligible, not to dole out praise or blame,” he said. “It is not, or should not be, the historian’s role to act as John A. Macdonald’s defense attorney, just as it should not be the historian’s role to act as a prosecuting counsel.”

Dummitt believes curiosity is the skilled response for historians, and that stepping past initial reactions and denunciation requires time, caution, and reflection. 

“It’s easy to pick out the racism,” he said, adding that not stopping there is the key. “What else do you see? What are you surprised by? How else can you explain what you see there?” 

Of concern to Dummitt is what he calls a betrayal of the “JFK principle,” which refers to the former U.S. president’s famous quotation: “Ask not what your country can do for you, ask what you can do for your country.”

Dummitt said the principle remains a noble sentiment, and he places it in the context of what he calls the “Historian’s Ethos”: “Ask not what does the past owes you, but what do you owe the past.”

J.D.M Stewart, a former teacher at Bishop Strachan School in Toronto, might argue that the least we owe the past is engagement with it. He spoke about the importance of teaching history. 

“I was giving an address to the Model United Nations, and I mentioned Lester B. Pearson. I said, ‘Okay, kids, who can tell me who Lester B. Pearson is?’ And none of the kids knew,” said Stewart. 

Stewart critiqued the poor teaching of history in some Canadian provinces and lamented that students may be unaware of what are thought to be some of Canada’s most important and well-known prime ministers of the last two centuries. He singled out Ontario as a province in which history is often not prioritized, and where the brief lessons may often be poorly crafted and focused on condemnation of figures such as Macdonald. 

He mentioned historian Jack Granatstein’s 1998 book Who Killed Canadian History?, which critiqued the decline of teaching Canadian history in the education system and called out the negative effects of this trend on society as a whole. 

“Jack said in the book, ‘Someone who is walking around without an understanding of the nation’s history, or a nation that doesn’t understand its past, is like an amnesiac walking around the streets.’”