Financial Crisis Raises International Risks

Dongtian Mountain Hall, by Dong Yuan (c. 934-c. 962), a painter in the Southern Tang Kingdom of the Five Dynastics and Ten Kingdoms period. National Palace Museum, Taipei.

The downturn spawned by the US financial crisis is causing severe economic problems and the threat of social unrest in developing nations around the world.

China's Slowing Economy

We know that China's export sector is being hit hard, and according to the Bloomberg story Roubini, Edwards Predict Slump in S&P 500 on China, the downturn is severe. Economics guru Nouriel Roubini said that China is in recession despite government data showing 6.8 pct 4th-quarter growth rate. Societe Generale's global strategest Albert Edwards, investment strategist of Societe Generale, said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

Slower Growth to Continue

The Financial Times reports in China data to show slowest growth in decade that economists are lowering their estimates of 2009 Chinese economic growth. After adoption of an aggressive policy of fiscal stimulus and deep cuts in interest rates, "recent figures for credit and money supply growth have encouraged hopes among some economists that the stimulus efforts are beginning to gain traction". Not all economists are impressed. RBS and Morgan Stanley lowered estimates of 2009 growth to "below 6 percent". This compares to 13% in 2007 and would be the lowest GDP growth rate in 20 years.

US Deleveraging Hits Trade Partners Hard

There are good reasons to forecast a continued slowdown in China, as Paul Kedrosky argued in Watch out, world: Americans are saving again. He noted that the US savings rate rose to 2.8% in November from zero at the start of 2008, and further opined that the savings rate could rise to 4% at the end of 2009 and 7% by late 2010. Even if the savings rate held at 3%, the capital flows to US banks would be five times the total of China's current Treasury holdings. As Kedrosky says, "all that money has to come from somewhere", meaning from China and other US trading partners. His prediction: "It will be biggest story of 2009: How will rest of world restructure in face of US hell-bent on replenishing its bank accounts?"

China Already Faces Political Problems

Even without the pressures of the global financial crisis, China already has problems with social and political stability. The New York Times reported recently in China Sees Separatist Threats that China's cabinet, the State Council, issued a white paper saying that it sees threats from independence movements related to Taiwan, Tibet and the western desert region of Xinjiang.

Tension in US-China Relations

The US will have to steer a careful course with respect to trade, as shown by China's sharp response to recent comments by the new US Treasury Secretary, Timothy Geithner. Mr. Geithner wrote to a senate finance committee that "President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency" and "President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practises." The chief economist at China Construction Bank, Hua Ercheng, responsed "I was very disappointed and surprised at the remarks. We are concerned about rising trade protectionism in the US."

Risk of Competitive Devaluations

There is always the risk that countries will try to protect domestic jobs by devaluing their currencies to make exports more competitive. In Alliance Bernstein's Asian Weeekly Insights, Anthony Chan reports Fear of Jobs Crisis Keeps Beijing Under Pressure to Depreciate RMB . Chan believes that the depreciation of the Renminbi against the dollar by about half a percent in the last two months signals a Chinese policy to move toward a weak currency, and that this policy is motivated by the need to create jobs:

With export growth falling off a cliff and the closure of small- and medium-sized factories becoming rampant along the export-dependent coastal regions, a strong exchange rate makes no sense from a political-economy perspective. China needs to create 10–15 million urban jobs each year to absorb the millions of rural workers migrating to the cities. Failure to do this would jeopardize social and political stability, and pose a serious challenge to the Communist Party’s one-party rule.

Widespread Unrest Predicted around the World

The Times warned recently that riots in Iceland, Latvia and Bulgaria are a sign of things to come. Speaking to a protest meeting in a Reykjavik cinema, Robert Wade of the London School of Economics warned that world was approaching new tipping point. He predicted large-scale social unrest starting in the period March-May 2009.

It will be caused by the rise of general awareness throughout Europe, America and Asia that hundreds of millions of people in rich and poor countries are experiencing rapidly falling consumption standards; that the crisis is getting worse not better; and that it has escaped the control of public authorities, national and international.

The article warns that Ukraine could be next because of its gas pricing deal with Moscow. Bulgaria has seen its worst riots since the fall of the Socialist government in 1997. Since the time of Wade's address, Iceland's government has fallen.

Capitalism Freezes in Worldwide Winter of Discontent

This was the headline of a Bloomberg article saying that, around the world, social strains are threatening the established political order, putting some countries’ very survival at risk. In past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell anti-tax protest in Siberia and China’s communist leadership warned of social agitation as 20th anniversary of Tiananmen Square massacre looms.

The article quoted Louis Michel, the European Union's development aid commissioner as saying that disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general.” The effects threaten countries around the world, including: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia, a more warlike North Korea, and “blood and tears” in Pakistan.

Herodotus, Aeschylus, and the Financial Crisis

There was an interesting piece about Herodotus by Charlotte Higgins called The Rest Is History in The Guardian this past weekend. Her point seems to be that Herodotus is admirable because stories in his histories illustrate that no one can take good fortune for granted -- that events can suddenly turn happiness into tragedy for even the most secure of us.

That's not a bad point to make to readers during today's financial crisis, where fortune reversed for so many people who thought that their high-debt, easy-credit way of life would continue forever. Those people are now getting accustomed to a way of life based on thrift.

Let us hope that our society reorganizes to encourage savings and channel resources into investments for the future (like education, research, and productivity) rather than current consumption. No sign of that yet.

As for Herodotus, I prefer the message that Higgins conveyed a couple of days later in her blog with Herodotus: a historian for today. There she said:

His achievement was extraordinary – he was one of the wave of Ionian Greek intellectuals (from the Aegean coast of what is now Turkey) to present a rationalising view of the world that removed the gods from the limelight and put human actions centre-stage. In particular, he was the first to write an account of the historical causation of a set of world-changing events: the Persian wars of the 480s, in which, quite astonishingly, a frequently disunited, jittery coalition of Greek cities fended off conquest by what was then the most impressive world empire in existence.

Whatever errors and iffy gossip they might contain, The Histories were a milestone in the development of a sense of history as consisting of events explainable in terms of human action. And it is hard to beat the Persian Wars for importance in determining the future of Western civilization.

Some of my favorite tidbits about the first Persian War concern the playwright Aeschylus and his brother Kynaigeirus, both of whom fought in the Athenian contingent at the Battle of Marathon. After the Greeks routed the Persians with a double envelopment, Kynaigeirus died of wounds suffered when pursuing the fleeing Persians to their ships. Aeschylus was evidently proud of his participation in the battle, given the epitaph on his tombstone:

This tomb the dust of Aeschylus doth hide,
Euphorion's son and fruitful Gela's pride
How tried his valor, Marathon may tell
And long-haired Medes, who knew it all too well.

Among the plays of Aeschylus is The Persians, which is set during the second Persian War and includes as characters the ghost of King Darius, his son Xerxes, and his widow Queen Atossa. (It is the only surviving play from the set that Aeschylus wrote in winning the drama competition at the Dionysia in Athens in 472 BC.) A notable aspect of The Persians is that, in addition to celebrating Greek victory, it also portrays the Persians as understandable and even sympathetic human opponents, rather than merely as brutish invaders or effete Asians. It is worth considering how likely such humanity would be in our literature today if the Greeks had lost.

The Persians also gets us back to the current financial crisis. After news of the destruction of the Persian fleet at the Battle of Salamis arrives in Susa, the ghost of Darius appears and blames the debacle on his son's arrogance. (Aeschylus also fought at Salamis.) Arrogance leads to disaster in war, and it is also an essential ingredient in financial bubbles. When real incomes were falling, it was arrogant to think that lifestyles could be supported forever with neverending credit and mountains of debt.

Such is the stuff of bubbles. Now we have to recognize when the bubble stops deflating.

Financial Crisis and Social Conflict

Darfur refugee camp in Chad

The current financial crisis is resulting in extreme economic strains on countries around the world, and especially severe strains are being placed on developing nations. In China, the collapse of a large part of the export sector has led to massive unemployment and worries about the reintegration of workers returning to their former rural homes. Extremely poor and strife-prone nations like the Sudan appear to be vulnerable to even small increases in the general level of impoverishment. There are worries that as the financial crisis spreads, increases in poverty may stimulate civil conflict in many societies around the world.

The impact of a spike in poverty to civil conflict is addressed in a recent article, "Sudden impoverishment as a trigger of civil conflict" by Antonio Ciccone, of the Universitat Pompeu Fabra in Spain and CEPR Research Fellow. The analysis in the paper supports the hypothesis that that droughts in Sub-Saharan Africa that suddenly reduce income also raise the likelihood of civil conflict. The paper looks at data on 48 civil conflicts in Sub-Saharan Africa that started during the 1980-2006 period and concludes:

If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

A Chinese migrant laborer returns to his home in Hefei, in the eastern Chinese province of Anhui, on Nov. 7, 2008, after being laid off from his job in Guangdong. Copyright © 2008, RFA. Used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

The economic downturn resulting from the present financial crisis is threatening workers around the world with a sudden the loss of their jobs. In China for example, the collapse of a large part of the export sector has led to massive unemployment and worries about the reintegration of workers returning to their former rural homes. Even official Chinese government press releases acknowledge that the job picture is "grim" and that labor unrest is a "top concern". In Factories Shut, China Workers Are Suffering the New York Times reported:

For decades, the steamy Pearl River Delta area of southern Guangdong Province served as a primary engine for China’s astounding economic growth. But an export slowdown that began earlier this year and that has been magnified by the global financial crisis of recent months is contributing to the shutdown of tens of thousands of small and mid-size factories here and in other coastal regions, forcing laborers to scramble for other jobs or return home to the countryside.

PLA Soldiers Enter Beijing (1949), Chinese Civil War

Fast-rising unemployment has led to an unusual series of strikes and protests, but the big impacts will occur in a reverse migration when factory workers return to their rural villages. Because factory closings are still underway in the once-booming urban centers, it is too early to have reliable estimates of how many of China’s 130 million migrant workers are heading back to their villages. However, the numbers are growing enough to raise the worry of social unrest, especially given that the recent past has raised expectations of economic progress.

Problems inside China may complicate international relations:

There has been speculation that the Chinese central bank would devalue the currency in an attempt to prop up economic activity. President-elect Barack Obama said in October that China must change its currency practices "because it pegs its currency at an artificially low rate." It is worrying that continuing economic woes will add pressure for China to do that. With many nations around the world being in the same recessionary boat, the temptations to engage in protectionism may eventually become too great for some country to resist -- setting off a round of competitive currency devalutations.

China isn't alone. The financial crisis is also forcing other major nations to raise protective trade barriers:

Boris Yeltsin, President of the Russian SFSR, standing on a tank in front of

the parliament to give an address opposing the August 1991 coup.

Ambrose Evans-Pritchard wrote an article that was published in The Telegraph with the catchy title Protectionist dominoes are beginning to tumble across the world. Russia is of course suffering financially because of the sharp decline in oil prices, and the international economic situation is adding to its woes. Now Russia is erecting trade barriers with import tariffs of 30% on cars, 15p% on farm kit, and 95% on poultry. Russia is not alone. "India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licenses" to choke off imports." As with China, Russia is facing internal unrest because of the economic crisis. The same article reported that there have already been labor protests in Russia because of a 13% fall in industrial output over the last five months. So far, there have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul, and police crushed the "Dissent Marchers" in Moscow.

These initial protectionist actions are raising worries that the era of economic globalization may be coming to a close, and with unfortunate consequences. Not one to mince words, Evans-Pritchard concluded: "The last great era of globalisation peaked just before 1914. You know the rest of the story."

Australian infantry with gas masks, Ypres, 1917.

The age of globalization has not ended yet, but many more risks to the current economic regime could easily unfold during 2009. As the latest headines indicate, Israel Starts Gaza Ground Push in Bid to Halt Rockets, there are already enough potential sources of conflict in the world, without adding pressures from the financial crisis.

2009 Outlook

Pieter Breugel The Elder, The Blind Leading the Blind (1568),

Conservato alla Galleria Nazionale di Capodimonte, Naples

Humans seem innately clueless at predicting the course of their economies and financial markets, and most 2008 market predictions look pretty ludicrous now. Anyone looking to fellow mortals for clues to the financial course of 2009 should remember the parable: "Can the blind lead the blind? Shall they not both fall into the ditch?"

To avoid the ditch, consider the following list not as a New Year's prediction but as an attempt to identify important factors and trends for consideration when contemplating the course of US and world economies and markets in 2009:


LONG RECOVERY, PERMANENT CHANGE

The financial crisis is part of a long term process of change. Some of the adverse changes will correct, but slowly. Some of the changes are permanent.

The immediate crisis is one of too-easy credit and poor risk management. It took years to build up consumer and government debt, and it will take years to work through the crisis brought on by that debt. The process of credit recovery has not even started. Consumers are still in debt and losing their jobs. They are under water with their houses, prices are still declining, and houses are still not affordable. As for the availability of credit, price discovery for toxic assets is still a long way off, and the day of highly leveraged credit is over.

The change in consumer behavior is a generational event. Consumers can now see the folly of spending themselves into debt, and they are rueing the consequences. It is likely that their embracing of a more frugal lifestyle is permanent. When the pace of economic activity recovers in the US, it will be to a lower level than the nation has been accustomed to.

The credit crisis is only one part of a long-term process of change that is affecting the entire world and will continue to put pressure on the US economy. After World War II the US was the only large industrial nation in the world with its plant, equipment, and work force remaining intact. The advantage that this gave the US economically has eroded over time, first as Europe and Japan recovered, and then as the developing world took off.

The hollowing out of the US has gone on for decades. We have seen industry after industry leave these shores and set up where labor is cheaper and management is nimbler. I'm not talking about buggy whips and whale oil: Textiles, consumer electronics, auto manufacturing and many others are vibrant industries that generate money and are based on important technologies.

In the face of competition, US industry and wages did not keep up with the pace of change. Debt filled the lifestyle gap for many Americans until recently. Now that the credit bubble has burst, consumers can no longer maintain lifestyles by going into debt and going to the housing ATM. They can now see that they are poorer than they formerly thought. They can see that they do not have a birth right to luxury and a fine life style. Americans are part of the wider world, and competition for the good life is here to stay.

Industry after industry collapses in the US and prospers overseas. What are Americans to do when the last industry fails? Sell hamburgers to themselves? We can see how hollow the promise of a "service economy" was.

When the last industry fails, will we be able to invent an industry to take its place? Maybe we have been expending resources on the wrong things.

Yes, we are still rich compared to most people in the world. Yes, improvements in technology may continue to improve everyone's life, even if our relative position in the world declines. Meeting expectations is another matter. Maintaining a vibrant economy is another matter.

THE CRISIS IS WORSENING AND WE WILL SEE NEW KINDS OF REPERCUSSIONS

There are already warnings in the press that vulnerable retailers will start to fail. Mall vacancies are increasing, and it will be difficult to make consumers spend what money they have.

As tax revenues drop, states and municipalities are in severe budget trouble and will be forced to economize. They will be challenged to deal with public pension funds stresed by stock market losses. Layoffs of public employees threaten to add to economic woes, and essential services will be stressed.
The rolls of the unemployed are growing and people are running out of benefits. Many support networks are already stretched to the breaking point.

Baby boomers approaching retirement have seen their investments evaporate but have few prospects of being able to work longer to fill the gap.
Demand for goods and services is dropping, and even the official statistics may eventually reflect the deflationary reality.

The Obama administration will use fiscal policy to try to counter the drop in consumer spending and business investment. Already there are warnings that the initial stimulus package (as large as it is) will not be enough, and that Congress will have to pass another package later next year. We will see how far this policy gets, and how long its effects last.


INVESTING WILL BE DIFFERENT

I hate to say "it's different this time", but the world does change.

After the the Federal government's unprecedented intrusions into the financial markets this past year, financial markets are operating under more uncertainty than ever. When will failing enterprises be allowed to fail? How creditworthy is an apparently investment grade security? Who really owns an enterprise? Will the government honor its own guarantees to investors? These factors will drive valuations of securities for all the enterprises touched by Federal bailouts, but the government has changed its mind often enough to leave investors uncertain of the rules. As mentioned in a Dec 30 New York Times article, In 2009, Economy Will Depend on Unlocking Credit, investors will be hesitant to risk their money until they know the rules.

If investing has been politicized, one approach is to buy what the government supports. As Bill Gross implied in an interview (Big Brother Investing) in Forbes, some of the government's support rules have been established. If the government will continue to throw money at ailing financial institutions, it is presumably safe to invest in sufficiently senior debt of those institutions.

Finding wealth in the stock market is looking less likely. Consumer frugality, declining demand overseas, and the prospect of increased regulation suggest that corporate profitability is unlikely to return to levels seen in recent years. Government promises to consume a bigger share of economic resources. Less leverage and a lower investor risk appetite threaten to reduce the demand for equities.

Many observers suggest that investment-grade investment debt as the place to invest in the new year. Others worry that a surge in US debt issuance (to pay for bailouts and stimuli) will crowd out private debt. Whichever way it goes, a lot of money rides on the the government's issuance and the reaction of the bond market.

Some day in the future, Jim Rogers will be proven right, and we will see a definite and sustained renewal of the uptrend in overall commodity prices. It is hard to imagine this for 2009, but at some point prices will reach a level where those with a long-term planning horizon will start to accumulate commodities. Maybe some selected commodities are already at that point.

THERE IS A RISK OF MORE POLICY FAILURE

We have already seen the Federal government react wildly to the financial crisis with an ill-considered and ineffective bailout package for the financial industry. With this track record, there is more than enough reason to mistrust future government actions. A failure to restart the economy could lead to yet more wild measures.

Need a concrete example? A recent posting on The Big Picture (Low Mortgate Rates to Spur New Wave of Defaults) already suggested that a failure to restart housing could be met with a wild measure such as permitting "no appraisal" re-fi's. What a prescription for worsening the crisis -- extending loans to unqualified recipients who are already under water.

WORLD REACTIONS POSE SEVERE RISKS

Beggar Thy Neighbor. In a depression, every country wants to protect domestic industry from foreign competition, and one way of doing that without formal trade barriers is to debase your currency. The hope is to avoid protectionist reactions by debasing currency enough to make products cheap to trading partners and their products expensive to import. In view of the skyrocketing Federal deficit, the US might be well on its way to debasing its currency. If other countries follow suit, will any currency be worth anything?

However, other countries are in economic trouble too. Far from sinking the dollar, our trading partners may fight hard to debase their own currencies and support the dollar. On the other hand, they may lose patience with our sinking currency and let us sink.

Protectionism. The President-elect has already mentioned the possibility of raising trade barriers to protect American jobs. This is a sure way to worsen the crisis, which we can hope will be avoided.

Foreign Support of US Indebtedness. Trade partners have found it in their interest to park funds in US Treasury securities and to pursue currency policies supportive of exporting to the US -- and to supporting US over-consumption. Now that US Federal debt threatens to skyrocket, there is the oft-mentioned risk that China and others may cut their losses and withdraw support from Treasury prices and the dollar. However, these trade partners have much to lose from such a disruptive move. Continued deleveraging of the financial system should also tend to support the dollar.

PEOPLE WILL REACT TO THE CRISIS IN UNEXPECTED WAYS

Social Change in Developing Nations. Reduced demand in the First World for manufactured goods and natural resources is being felt in much of the developing world in terms of sharply increased unemployment in the export sector of their economies. Depending on their circumstances, different nations will face different challenges in managing the consequences of the downturn. There have already been protests by the unemployed in Russia. Will China be able to find a role for the newly unemployed, for example, reintegrating returning workers back into rural economies? Oil-rich nations may also be stressed as they cut back on consumer subsidies and public projects. The outcome of all these social and political stresses is far from clear, but we should remain alert for disruptive changes that could exacerbate the economic downturn.


Social Change in the US. This crisis has brought about big changes in lifestyle and attitudes for many Americans. Considering the degree to which elite groups continue to profit from the crisis at the expense of the majority of America, it is surprising that social reactions have been very muted so far. What kinds of reactions could arise? Extremist movements among the dispossessed hopeless? Violent reactions to economic reversals have happened before in this country. Or perhaps positive changes will occur, such as an increase in community participation and other cooperative ventures. Something unexpected in the human dimension may very well come out of this crisis.

Smarter Economic Policy. The American people may soon realize that budget deficits, easy credit, and unregulated financial markets have resulted only in wasting their precious, limited resources. Resources squandered on leveraged speculation and on unnecessary consumption and housing were unavailable for savings and investment. Without savings, there was no investment. Without past investment, America today lacks the human capital, national infrastructure, and efficient industrial processes necessary to compete in today's world and provide for the Americans of tomorrow. Good times are some time off in the future, beyond 2009, because it takes time to save, invest, and build an economy.


Surprises of Nature. Everything we do depends on the natural world, and that is changing too. Global warming always poses the risk of disrupting human enterprises through unexpected extremes in the climate.



CAN WE ADAPT TO CHANGE?

Evolutionary success depends on the ability to adapt to changing circumstances. We cannot predict the future, but we can watch events unfold and try to adapt. To do that, we need to know what kinds of events to watch for, and a framework in which to interpret events. The purpose of this list is to stimulate that process a little bit for 2009.

We are sure that readers have their own ideas, and we hope that they can improve on this framework and profit in 2009. Let me hear your thoughts.



Cassandra, Evelyn de Morgan (1855-1919),
De Morgan Centre, London

Christmas Linkfest

Links to Christmas posts from around the blogosphere:

Live webcam from the skating rink at Rockefeller Center:
http://www.calculatedriskblog.com/2008/12/live-from-new-york.html

Puritan attitudes toward Christmas in England during the time of Oliver Cromwell:
http://www.thefirstpost.co.uk/4626,opinion,oliver-cromwell-and-the-original-pc-brigade

From The Vindication of Christmas, 1652:
http://mercuriuspoliticus.wordpress.com/2008/12/21/a-christmassy-post/

From Nicholas Breton's 1626 Fantasticks:
http://chronologi.wordpress.com/2008/12/20/a-bit-more-breton/

Nativity art:
http://www.marginalrevolution.com/marginalrevolution/2008/12/merry-christm-1.html

The authors of the linked-to blogs selected very clever and cheery messages for the holiday season.

Mohammed El Erian on Investing in 2009

PIMCO's Mohammed El Erian appeared on CNBC this morning and gave his views on investing in 2009.

CNBC labeled the interview Back to Basics for Investors in 2009, which is not a bad summary of the interview. The investing basics mentioned in the interview included asset allocation, risk management, and solid investment vehicles.

Underlying the investing advice was a view that the economic downturn will worsen next year. El Erian contrasted 2008 as a year of financial crisis, with 2009 as a year of economic crisis. He listed "unemployment, defaults, companies defaulting, etc." as examples of the economic crisis.

Investors can expect 2009 to be different from 2008. One of the differences will be that in 2008 investors could not count on the investment basics: asset allocation, risk management, and investment vehicles that are perceived to be good ones.

In addition to going back to the basics, El Erian advised investors to consider government initiatives. "We're going to see fiscal stimulus packages going into the trillions of dollars. We're going to see support for various sectors, and despite that the economy will be bumpy."

One would expect a PIMCO bond manager to talk his book, but El Erian mentioned asset classes that many other investment managers have also mentioned in recent weeks. Among his favored classes for 2009 are investment quality fixed income, mortgages, and the top emerging markets.

He recommended moving out of Treasuries, but was also cautious about that move. He said specifically that some attractive assets could turn out to be "traps". To capture the upside and avoid the downside risk, he advised looking for "assets that are not only dislocated but where there's a catalyst for normalization."

Although he advised a "back to basics" approach, El Erian also warned: ". . . for the average investor conditions have changed and therefore the game plan has got to change, which means don't go and chase what are very attractive valuations from a historical standpoint".

Here is a link to the CNBC video: Video: El-Erian Talks About the Economy for 2009