Mohamed El-Erian: Navigating the multi-speed world

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Mohamed El-Erian, CEO and co-CIO of Pimco, undeniably has of the brightest investment minds. His comments on the secular economic outlook make for particularly interesting reading.

His bullet-point summary is as follows.

  • Balance sheets, both across and within economies, are still out of equilibrium. We expect advanced economies will face sluggish growth and persistently high unemployment over the secular horizon. Emerging economies will achieve higher growth but face recurrent inflationary concerns.
  • We do not expect policymakers to boldly address structural problems. By targeting negative real interest rates, they will pursue financial repression that undermines the “real return” contract that savers expect.
  • Secular baseline portfolio positioning should minimize exposure to the negative impact of financial repression, hedge against higher inflation and currency depreciation and exploit the heightened differentiation in balance sheets and growth potentials.

El-Erian concludes his very thoughtful article with the paragraphs below:

“With the world continuing on its bumpy journey to a new normal, there certainly is a lot happening in the global economy that is of direct, and unusual, relevance for markets and for the way we position your portfolios. This is the nature of multi-year re-alignments, especially when they take place concurrently at both the national and global levels. They are messy and uneven; they turn parameters into variables; and, especially when it comes to policies and politics, they change the balance of benefits, costs and risks (to use a phrase from Fed Chairman Bernanke).

“These re-alignments become even more interesting when multi-speed growth, inflation, and credit dynamics are in play – as is the case today. Critically, they also become much more complex when the related balance sheet repairs proceed in a slow and uneven fashion.

“Expect us to do our utmost to continue to analyze well these multi-year, multi-speed dynamics; and to properly reflect them in everything that we do for you – from secular investment positioning to the design of investment solutions, and from client servicing to business management.

“The world will remain an unusually fluid place. By looking forward and retaining our culture of “constructive paranoia,” we will strive to ensure that your portfolios benefit from change, rather than fall victim to it.”

Click here for the full interview.

Sources: Bill Gross, Pimco – Secular Outlook, May 2011.

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