In May of 2009 the phrase “the new normal” entered the lexicon of the financial media. The term was used by PIMCO analyst Mohamed El-Erian to describe an economic landscape consisting of stagflation, high unemployment, and slow growth. At a time when nearly everyone was grasping for a narrative that could succinctly explain an almost overwhelming deluge of complex financial issues, El-Erian’s letter provided the perfect sound-bite to fill that void.

In a public letter than attracted global attention, El-Erian used the phrase “The New Normal” as a headline above this paragraph; “For the next 3-5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and the U.S., where many short-term policy imperatives materially conflict with medium-term ones.”

He went on to hypothesize “the following potential configuration:

• We would look for financial rehabilitation in the U.S. to occur in the context of low growth and an eventual inflationary bias down the road.
• The U.K. would also be stuck in a low growth world, but with greater vulnerability to domestic and/or external financial instability.
• Core Europe will also grow slowly, influenced by its historical inflation phobia and concerns for the integrity of the European Union.
• Japan will continue to face growth headwinds as its economy is too encumbered by fiscal and demographic issues.
• Emerging economies will bifurcate more clearly into two groups. Those with weak initial conditions will return to the old emerging market paradigm that alternates between austerity and financial instability; those with strong initial conditions will maintain their development breakout phase; albeit not at the torrid pace of recent years.”

In fairness to El-Erian, this letter was released only two month s after what would later prove to be the bottom of a steep stock market decline when the world was in a general state of panic (the Dow Jones Industrial Average would close at 6,547.05 on March 9^th of that year, and is now above 17,000). His timing was impeccable in terms of identifying a clear dividing line between the past and future, but some of his predictions – especially those regarding inflation – have not (yet) materialized.

Now that it has been more than five years since those predictions were made and inflation remains low while unemployment is dropping and GDP is growing in the U.S., it is tempting to disregard El-Erian’s prediction as being overly influenced by the dark mood prevalent at the time. But the fact of the matter is many of his other predictions did prove true, and still persist today.

It is doubtful El-Erian could have anticipated the degree of central bank intervention here in the U.S. that would transpire over the next five years, culminating in a massive program of quantitative easing that, thus far, has avoided the stagflation scenario he envisioned. So, his first bullet point has not yet proven true, and the near term outlook for inflation remains muted.

However, his other four predictions were pretty much on the mark (pun intended), as just last week the European Central Bank introduced its own version of quantitative easing in an attempt to avoid deflation. Also this month, the Swiss National Bank removed trading limits on its currency (the Swiss franc) against the Euro, calling into question the integrity of the European Union.

More importantly, as investors we should be asking ourselves what we can learn from El-Erian’s pre-US Q.E. worldview, as that may inform the post-US Q.E. world we have now entered. Heightened volatility in the stock market suggests mounting concerns over our ability to continue to grow GDP in the face of a strengthening dollar, and a decline in wage growth (discussed by my colleague Bob Frick in this column last week) may portend a weaker middle-class with less money to spend on housing, automobiles, and consumer goods.

If nothing else, we shall soon get an answer to the question of whether or not Q.E. was an exercise in kicking the can down the road as some alleged at the time, accomplishing little more than simply delaying the stagflation scenario El-Erian anticipated. While I can see the slow growth half of that scenario coming true, I do not see the potential for a meaningful hike in inflation this year or next.

Many investors bailed out of the stock market in 2009, perhaps in part due to El-Erian’s pessimistic view of things to come. Instead, they chose to flee to the safety of cash and treasury securities, driving yields on them down to historic lows while missing out on a stock market recovery that almost nobody predicted.

That said, I admire the courage of people like Mohamed El-Erian who put their unambiguous opinions in writing and share them with the world, knowing one day they may be proven wrong. In El-Erian’s case, he may have gotten certain elements of the story wrong, and may have been premature in the timing of other aspects of it. But for all of us, one lesson we can draw from this exercise is already clear: how we respond to the fear of the unknown is more important than attempting to know it.