NEW YORK (TheStreet) --While Allianz chief economic advisor Mohamed El-Erian was acting as PIMCO's CEO he planned out several scenarios for the Lehman weekend, the weekend the Lehman Brothers filed for bankruptcy as a result of 2008's global recession. El-Erian, though having a low probability of that happening, still had a plan in place.
"Scenario analysis is absolutely critical because the probabilities have become so fluid," El-Erian said on Wednesday morning's "Squawk Box" on CNBC.
His scenario analysis was again put to the test as he commented on what he believes the next most likely scenario for the markets will be.
"I think the least likely is we continue in this slow but stable growth, and we continue in sideways markets. I do not think we can stay in that paradigm for the next two or three years, something is going to break," El-Erian said.
He believes we could easily see a scenario in which low growth translates to a recession, where "artificial stability becomes instability," he noted.
El-Erian attributes this to the underlying tensions between governments and central banks. However, he believes that if the governments were to "step up" we could transition to a higher growth situation that validates prices.
"I think they key thing is built up cash right now. Do not think that this dream team of higher growth, low volatility, and favorable correlations will last forever. We are in an artificial period which we will come out," he explained.