Mohamed El-Erian, chief economic advisor at Allianz
Photograph by Patrick T. Fallon — Bloomberg via Getty Images
By Stephen Gandel
May 6, 2015

Mohamed El-Erian says investors are expecting a better economy than they are going to get in 2015.

El-Erian, who is the chief economic adviser at Allianz and chairman of President Obama’s Global Development Council, says the markets seem to be trading like we are going to have more than 3% growth in gross domestic product this year. And El-Erian says we won’t get it.

“Economic risk taking is up…” El-Erian said. “But the willingness of businesses and individuals to take economic risk is down….”

El-Erian commented on the economy as part of the opening panel of the annual hedge fund confab SALT investment conference, which is taking place this week at the Bellagio hotel in Las Vegas. About 1,800 people have showed up for the event this year. El-Erian also talked to Fortune about his views on the economy following the panel discussion.

Also on the panel were Gene Sperling, who served as an economic advisor at the White House, and George Papandreou, the former Prime Minister of Greece.

El-Erian isn’t the only one sounding the alarm on economic growth. Recently, a number of signs have suggested the economy could be slowing. The U.S. GDP growth number for the first quarter was barely positive.

But El-Erian said that’s just a “head fake.” As was the case over the past few years, El-Erian expects the U.S. economy will soon rebound from the first quarter’s weak growth. He predicts the economy will grow in the range of 2.5% to 3% in 2015. That would be up from 2.4% last year. But the problem is the stock market, which is trading near all-time highs, seems to expect more.

“The Fed has tried to narrow the gap between financial risk taking and economic risk taking, but that’s very hard to do,” El-Erian said.

El-Erian also noted that he thought the growing divergence between policy choices in the U.S., where the Fed is nearing raising interest rates, and Europe, where policy makers are still trying to drive down interest rates, could cause problems for markets this year. And he said that regulation and other changes since the financial crisis have made the markets less capable of avoiding of avoid shocks. He says that’s why we have seen big moves recently in European bonds, and a little bit less so in U.S. debt markets.

“When investors are trying to reposition, it’s much harder than it used to,” said El-Erian.

As a result, El-Erian said that when interest rates move, they will move quickly, but not that far. “We are not going to see [long-term] interest rates above 4% anytime soon.”

Papandreou, Greece’s former prime minister, said that markets have become too complacent about a potential Greece exit from the Euro. He said that would be disastrous for Greece, and bad for Europe in general, hinting that that’s why the governments of Greece and Germany won’t let it happen. But El-Erian said the market may force a Greek exit, anyway.

“There is this illusion that governments are in control. I wonder if that’s still the case,” said El-Erian. “You are going to start seeing small defaults and IOUs in Greece, and that’s not going to be so easy for governments to control.”

Sperling said he thought the U.S. economy could soon get a big boost from a better housing market. He said there are many more Americans who want to buy houses and can afford them. But regulation is holding back some of that lending. Sperling thinks policy makers will ease regulations in the next year.

El-Erian also said that it was clear that some of the worst fears about what could happen after the financial crisis clearly turned out to be wrong. And, indeed, things might be even better than they appear. He said Uber and others have clearly shown that new companies can grow and thrive in the post-crisis U.S. economy. He said that such developments are driving economic growth and employment in ways that are not always easily picked up in government statistics.

“We could use corporate tax reform, but I am less worried about start-ups,” said El-Erian. “New companies are coming.”

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