The always fascinating Mohamed El-Erian of PIMCO joined us Tuesday night on NBR. El-Erian, apart from being one of the most generous contributors to financial media, is one of the broadest and deepest global economic thinkers around. I urge you to re-view our interview from last night if you saw it or watch it for the first time if you didn’t.
El-Erian’s main thesis these days is that the prices of “risk assets,” especially stocks, are disconnecting from what he calls the “fundamentals.” Put another way, unless real growth kicks in (and El-Erian is suspicious it will), equity prices are starting to look stretched. That’s why, said El-Erian, “we are walking away from risk.” Not running, he said, but walking away at PIMCO.
El-Erian elaborates in an essay he recently wrote for PIMCO. I urge you to read it in its entirety.
In our all-too-brief interview Tuesday evening, we didn’t get to cover some of the other topics Mohammed wrote about. Let me try my best to summarize some of them here.
Don’t go into a totally defensive shell.
“Look for continued, selective offense to accompany our increasingly defensive general positioning,” he said. Where, and how? El-Erian said look for opportunities that are un-tied to the liquidity Tsunami currently being supplied by the world’s central bankers.
Look for true value.
Remember, said El-Erian, that “cheaper” does not necessarily mean “cheap.” He points to high-yield bonds by way of illustration. They may indeed be cheaper than investment-grade securities. But El-Erian questions whether today’s yields sufficiently compensate the buyer for the bonds’ higher risks.
Keep some dry powder.
Or, as El-Erian puts it: “Do not give up liquidity cheaply.” Some assets may come on the market, especially from European banks, at distress prices. You want to have cash on reserve to pounce when they do.
Get ready for moderating returns.
“Return expectations may adjust down from here,” he said. Stocks have had a great run this year and since March 2009, the bear market low. El-Erian sees the “risk of severe air pockets” if underlying economic growth disappoints.
Sunny skies and smooth sailing? No, not exactly. You may not agree with him, but El-Erian calls it as he sees it and is always a voice worth listening to.
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