Mohamed El-Erian: Investors Must Embrace Diversity In A New World Of 'unthinkables'

He identified mounting US protectionism, slowing growth, unreliable central bank policy, the growing unreliability of traditional metrics, and the failure of the economics profession to understand systemic change as the key factors creating a new economic reality for investors.

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Speaking at the CFA Institute annual conference last week, the former chair of President Barack Obama's Global Development Council said: "There is an unusual amount of fluidity in the economic and financial system, and it will continue.

"It is not going away. Unthinkables will become reality more and more. This is the world you have to navigate."

The ex-PIMCO CEO said: "In this world [investors must] forget about your normal distribution", explaining that humans "are hard-wired to think in terms of a normal bell-shape distribution… with very high likelihood outcomes and [thin, low probability] tails".

The new distribution, he explained, involves the "belly of the curve going down and the tails going up", adding this is "not good news for good decision-making".

El-Erian said investors will either be in "complete denial" of a change in distribution or simply rephrase the new reality - "hearing what they want to hear" - or, the "most dangerous" option of active inertia whereby investors realise they need to do something different but end up doing the same thing.

He added: "You have a high probability of making the wrong decisions."

To combat these "behavioural mistakes", El-Erian said "investors must bring in the insights of different disciplines - you

need to have a lot of cognitive diversity around your table".

He added: "Without cognitive diversity you will get group think and a very closed mindset.

"You cannot get cognitive diversity without gender diversity, educational diversity and experience diversity.

"Who does well and who does less well will depend upon...how intellectually curious are they? How open is their mindset?

"Do they understand the structural relationships we have lived with for a long time... have become variables?

"Are they willing to explore their behavioural biases?

"Do they have resilience... optionality... and agility?" 

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What is next?

Elsewhere, El-Erian spoke of the market's "obsession" with continued trade tensions between China and the US, which under President Donald Trump's administration is quickly "becoming the most protectionist country in the world".

He said under this administration, whereby trade is thought of as "a matter of national security", the US "will win every trade war in relative terms".

El-Erian said: "China has not [yet] made major concessions.

"However, China will realise that, like Canada [and] Mexico...the best thing to do is to provide concessions and de-escalate tensions, but that is very difficult to do internally. In the US, there is a view that this is a way of containing China's emergence."

He also warned the remainder of 2019 will be marred by further "diverging growth, questions asked of the industrial structure, bouts of volatility and central banks having difficulty keeping everything together".