Mohamed El-Erian Part I: Volatile Markets Ahead
b"With\\xa0Mohamed El-Erian, Chair of President Obama's Global Development Council\\xa0Chief Economic Adviser at Allianz, Author of The Only Game in Town: Central Banks, Instability, And Avoiding The Next Collapse
Mohamed El-Erian is chief economic adviser at Allianz (a multinational financial services company), the former CEO and co-chief investment officer at PIMCO, and author of The Only Game in Town:\\xa0Central Banks, Instability, And Avoiding The Next Collapse.\\xa0El-Erian serves as chair of President Obama's Global Development Council and is a columnist for Bloomberg View, as well as contributing editor to the Financial Times and a member of their A List.
In 2009, Mohamed El-Erian and his colleagues at PIMCO predicted that economic growth would hit a slower \\u201cnew normal\\u201d rate, which has largely come true and played itself out. He believes the \\u201cnew normal\\u201d is coming to an end as the Federal Reserve maneuvers to extricate itself as the primary driver of economic growth\\u2014 \\u201cthe only game in town\\u201d as his book\\u2019s title says. So El-Erian sees the U.S. economy approaching what he calls a T junction, with some uncertainty ahead.
He also addresses the impact of negative interest rates in the Bank of Japan and added stimulus by the European Central Bank as a means to overcome structural head winds and force money into the economy, and thereby pushing investors into taking more risks and triggering the \\u201cwealth effect\\u201d. He likens this to being pushed into a marriage, which he says is more likely to meet with resistance than being pulled into a loving union. So he believes Japan\\u2019s move into negative interest rates may not yield expected results. Moreover, such moves have caused companies to deploy their cash towards non-growth initiatives such as buybacks, dividends, and defensive mergers.
El-Erian believes risk has migrated from the banking sector to institutions and households through the stock market. Since banks are highly capitalized and very cautious about lending, the risk now lies in the non-banking sector; so the Fed\\u2019s extricating itself from supporting the economy is causing higher volatility in the stock market. He also points to changing relationships between traditional asset classes. Oil and stocks now move in tandem. A drop in oil prices causes a sharp drop in stocks, making portfolio diversification all the more difficult. Looking ahead, he sees short-term volatility and urges investors to increase their cash positions to 25%-30% to weather a potential storm. In spite of that, El-Erian views U.S. stocks as a sound place to be invested in over the long-run.
Click here for Part II"