El-Erian Notes
8
Michael Peltz EDITOR [email protected] twitter@mppeltz
Editor’s Letter
The Only Game in Town MOHAMED EL-ERIAN KNOWS HOW TO WORK A ROOM.
I got to witness the former PIMCO CEO in action at the annual Global Indexing & ETFs conference in Scottsdale, Arizona, in December. I had been invited to do a fireside chat with El-Erian — currently chief economic adviser at Allianz and chairman of President Obama’s Global Development Council — following his keynote address at the event, which is hosted by Information Management Network, a sister company within the Euromoney Institutional Investor family. We had agreed to meet before his speech to go over what he would be saying and my line of questioning. El-Erian, who had flown in from his Laguna Beach, California, home the previous day, found me near the registration desk, not far from a six-foot-high placard, displaying his face, that urged conference-goers to attend his keynote that morning. Not that they needed prompting. Investors have been hanging on every word El-Erian utters since June 2008, when he published When Markets Collide, a New York Times best seller that explained the structural changes behind the U.S. subprime crisis and offered advice on portfolio management, asset allocation and risk management in a world headed toward a global credit crunch. As El-Erian and I stood at the back of the Hyatt Regency ballroom waiting for him to be introduced, I learned that he wrote the 304-page book in just nine days. By the time El-Erian took the stage, the room was packed. He started his speech by describing how central banks have
become “the only game in town” when it comes to economic policy — a reference to the title of his soon-to-be-released second book. The problem, he explained, is that central banks don’t have the power to make the kind of changes needed for real economic growth: investing in infrastructure, reforming corporate taxation and labor markets. Politicians are required for that, but Washington has been frozen for the past six years. “Central banks don’t like being the only game in town,” El-Erian told the rapt audience. “But they don’t know how to get out of it.” The artificially high asset prices caused by zero interest rates and central bank purchases have created what El-Erian calls liquidity delusion. Investors, he warns, should be prepared for increased volatility as a result of the divergence in policy between the Federal Reserve and the European
“Central banks don’t like being the only game in town, but they don’t know how to get out of it.” MOHAMED EL-ERIAN Central Bank, the Bank of Japan and the People’s Bank of China: “Volatility will lead to patches of illiquidity that will accentuate volatility.” But all is not lost, El-Erian says. The key for investors is to remain very nimble and take advantage of volatility when asset prices overshoot. He suggests treating cash as part of the strategic allocation of a diversified portfolio — advice the longtime investor has put into practice for himself. El-Erian has had the bulk of his money in cash since last spring.
Contributors
DAVID MAHONEY
Based in Edinburgh, Scotland, since 2010, Mahoney has developed his own approach to illustration. The British-born artist believes in keeping tradition alive in an increasingly digital society through a signature style he calls “tradigital.” This issue he displays this technique with an illustration of Los Angeles– based value manager Joe Huber (page 44).
December 2015/January 2016 / institutionalinvestor.com
KATIE GILBERT
As a freelancer, Chicago-based Gilbert enjoys the variety of work she gets to tackle, as well as the ability to do it from anywhere. She showcases her versatility in this issue with two pieces, an interview with CocaCola Femsa CEO John Santa María (page 32) and an in-depth profile of exchange operator CME Group’s venture capital investing arm (page 38).
BRETT GUNDLOCK
Originally from Toronto, photographer Gundlock moved to Mexico City in 2012 for a multiyear project documenting peasant communities in the Mexican mountains. He enjoyed shooting Coca-Cola Femsa CEO Santa María, who was born in New York but raised in Mexico City, and hearing his perspective on Gundlock’s new hometown (page 32).
ILLUSTRATION BY LINA CHEN
Michael Peltz EDITOR [email protected] twitter@mppeltz
Editor’s Letter
The Only Game in Town MOHAMED EL-ERIAN KNOWS HOW TO WORK A ROOM.
I got to witness the former PIMCO CEO in action at the annual Global Indexing & ETFs conference in Scottsdale, Arizona, in December. I had been invited to do a fireside chat with El-Erian — currently chief economic adviser at Allianz and chairman of President Obama’s Global Development Council — following his keynote address at the event, which is hosted by Information Management Network, a sister company within the Euromoney Institutional Investor family. We had agreed to meet before his speech to go over what he would be saying and my line of questioning. El-Erian, who had flown in from his Laguna Beach, California, home the previous day, found me near the registration desk, not far from a six-foot-high placard, displaying his face, that urged conference-goers to attend his keynote that morning. Not that they needed prompting. Investors have been hanging on every word El-Erian utters since June 2008, when he published When Markets Collide, a New York Times best seller that explained the structural changes behind the U.S. subprime crisis and offered advice on portfolio management, asset allocation and risk management in a world headed toward a global credit crunch. As El-Erian and I stood at the back of the Hyatt Regency ballroom waiting for him to be introduced, I learned that he wrote the 304-page book in just nine days. By the time El-Erian took the stage, the room was packed. He started his speech by describing how central banks have
become “the only game in town” when it comes to economic policy — a reference to the title of his soon-to-be-released second book. The problem, he explained, is that central banks don’t have the power to make the kind of changes needed for real economic growth: investing in infrastructure, reforming corporate taxation and labor markets. Politicians are required for that, but Washington has been frozen for the past six years. “Central banks don’t like being the only game in town,” El-Erian told the rapt audience. “But they don’t know how to get out of it.” The artificially high asset prices caused by zero interest rates and central bank purchases have created what El-Erian calls liquidity delusion. Investors, he warns, should be prepared for increased volatility as a result of the divergence in policy between the Federal Reserve and the European
“Central banks don’t like being the only game in town, but they don’t know how to get out of it.” MOHAMED EL-ERIAN Central Bank, the Bank of Japan and the People’s Bank of China: “Volatility will lead to patches of illiquidity that will accentuate volatility.” But all is not lost, El-Erian says. The key for investors is to remain very nimble and take advantage of volatility when asset prices overshoot. He suggests treating cash as part of the strategic allocation of a diversified portfolio — advice the longtime investor has put into practice for himself. El-Erian has had the bulk of his money in cash since last spring.
Contributors
DAVID MAHONEY
Based in Edinburgh, Scotland, since 2010, Mahoney has developed his own approach to illustration. The British-born artist believes in keeping tradition alive in an increasingly digital society through a signature style he calls “tradigital.” This issue he displays this technique with an illustration of Los Angeles– based value manager Joe Huber (page 44).
December 2015/January 2016 / institutionalinvestor.com
KATIE GILBERT
As a freelancer, Chicago-based Gilbert enjoys the variety of work she gets to tackle, as well as the ability to do it from anywhere. She showcases her versatility in this issue with two pieces, an interview with CocaCola Femsa CEO John Santa María (page 32) and an in-depth profile of exchange operator CME Group’s venture capital investing arm (page 38).
BRETT GUNDLOCK
Originally from Toronto, photographer Gundlock moved to Mexico City in 2012 for a multiyear project documenting peasant communities in the Mexican mountains. He enjoyed shooting Coca-Cola Femsa CEO Santa María, who was born in New York but raised in Mexico City, and hearing his perspective on Gundlock’s new hometown (page 32).
ILLUSTRATION BY LINA CHEN
