Economic Advisor:Where We Are and What You Can Do

The key issue is that the road we are on right now is going to end,predicted Mohamed El-Erian,chief economic advisor at Allianz.Central banks will no longer be able to borrow against the future;we're getting less growth out of the system;the political regimes are getting more extreme.That has massive implications on how you're going to position yourself at this T-junction.The Fed doesn't want to be forced by the market into a change of policy stance.The market welcomed the rate hike;now its view is shifting.
We never achieved liftoff.We never got to what this economy is capable of,and that's a tragedy.*
This year,it's hard to get a recession.I think the probability of a recession goes up to about 30% for 2017,and then we get to the T-junction where major decisions have to be made.We have financial prices separated from the fundamentals.We can't let the currency markets carry all the burden.*
I think this year will be a great year for those who can pick the right stocks,and there's going to be lots of opportunity.I still think you need cash;you need 25-30% cash right now,advised Dr.El-Erian,who holds degrees from both Oxford and Cambridge Universities.His new book is "The Only Game in Town:Central Banks,Instability and Avoiding the Next Collapse."

Will the Fed Raise Rates This Month?

I think the volatility is going to sideline the Fed in September,said Mohamed El-Erian,Chief Economic Advisor at Allianz.The second and the third facts have turned violently against the Fed.If they make a mistake,it could spill over into the economy.There isn't much the Fed can do.The market doesn't have the circuit-breakers that it needs.That is a major paradigm change for the marketplace.The market has to find its own equilibrium and level,and that's going to take some time.*
China helped create a market bubble in their stock market,and now they're finding it very hard to control.I think they will be able to soft-land the economy at around 6%,but we are going to observe the financial instability.
I pay a lot of attention to the currency markets.It started flashing red early on and started contaminating other markets.Central banks are having tremendous difficulty because the currency markets are coming unhooked regardless of what the fundamentals are,and the fundamentals are stronger relative to the rest of the world,noted Mr.El-Erian,who is a native of Cairo,Egypt.

Leading Economic Advisor Says Barbells Are Best Portfolios

Mohamed El-Erian,chief economic advisor at Allianz,says he has a barbell investment strategy for the current conditions.It consists of cash and then more high risk exposures to startups and hedge funds,because the most highly trafficked part of the risk-return is the public markets.Why? Because the Fed has been pushing everybody to the public markets,pushing up market prices.So if you look at long-term valuation,it makes more sense to become bar-belled and reduce your exposure to the most heavily trafficked and artificially lifted asset prices.That's why there's this barbell of cash and then hedge funds,startups and illiquids-and that's what a lot of investors are starting to do,by the way.
As long as we don't get the Fed fundamentals,we are more at risk of not validating the higher asset prices.At some point,you have to hand off to investing in equipment and hiring.I still think the Fed is going to raise rates in September.They're going to focus on this,the loosest tightening the Fed has ever done.*
Will the ECB pull the plug on Greece? No,because no one wants to go down in history as having done it.My greatest worry is,we get an accident in that world.The chance that Greece is pushed out of the Euro-zone is quite material.The fundamentals all call for a stronger dollar.In the short term,a Greek exit will shock the market.Long-term,it doesn't matter much.Take equity exposure to Europe,but not euro currency exposure,Mr.El-Erian advised.*
Mohamed El-Erian was born in Cairo,Egypt.He was manager of the Harvard Endowment,then co-CEO and co-CIO of PIMCO with Bill Gross before they had a falling out.Eventually,Gross himself was fired by the company he co-founded and went over to Morgan Stanley.*
Morgan Stanley (MS),Allianz SE SP/ADR (AZSEY)

What Investors Should Consider for the New Year

The case for favouring European stocks is based on:
1.their attracive valuation
2.the ECB being ready to pour on aid
3.a weaker euro.
On the other hand,Greece is a big risk and could be a substantial challenge for Europe.Also,
1.US companies have less exposure to Russia and Ukraine.
2.They have cash for dividends.
3.The banking system is strengthening,points out Mohammed El-Erian of Allianz.*
I wouldn't be surprised to see increased volatility for the first six-nine months of the year,says JJ Kinahan of TD Ameritrade.The nice thing is,maybe the greater volatility will help clients realise you don't have to own something forever.I would say one thing:you don't have to buy the bottom.Be very careful of the falling knife.*
John Kilduff,founding partner of Again Capital,notes that,in light of energy market conditions,oil company property and the oil beneath it is going to have to be revalued,cutting the borrowing base.The commodities are so out of favour.David Tice,CFA,founder of the Federated Prudent Bear Fund,adds that Iraq and Russia production came back,along with fracking coming on line.We love the gold mining stocks.Their biggest cost is energy;therefore they are levitating.The price of gold has almost doubled since June,and you can't print money as your way to prosperity.*
Market Vectors Gold Miners ETF(GDX),Federated Prudent Bear Fund(A)(BEARX)

Portfolio Management:The Need For Income Now

We've transitioned to an emergency need for income,said Rick Rieder,Chief Investment Officer of Fundamental Fixed Income at BlackRock.Rates are gonna be low for a long time.To get any real income,you have to take risk at levels that are uncomfortable.
Central banks are crowding out investments at a record level.You create a portfolio rebalancing act that is profound.We live in a delevering world.You'll create bubbles like we had in prior decades if it goes on for too long.
Maybe there will be no tapering of Fed policy until 2014.Because you're distorting the interest rates so low and lengthening the portfolio,you're creating potential risk in the fixed income portfolio higher than in equities.Tactical short term,we've taken some interest rate exposure;longer term,loans and structured products without a lot of interest rate risks,such as CMBS,collateralised mortgaged-backed securities.
We think the growth of the real estate business has some real durability to it.People underestimate what a big deal it is.You have an environment of liquidity today.It's part of what will keep the real estate market in strong shape.
The delevering in Europe is gonna go on for years.
It's very hard to generate yield when the 10 year Treasury is at 1.50%,Mr.Rieder pointed out.Central bank policies are causing a haircut for investors,PIMCO co-CIO Bill Gross agreed.
People are excited about the equity market,yet anxious about the artificiality of central bank assistance,his colleague Mohamed El-Erian added.If these prices are not validated by data,they will look very artificial.
BlackRock,Inc(BLK)

Where The Financial Problem Is-and how to deal with it

The problem is,central banks don't have the right tools,according to Mohamed El-Erian,CEO of PIMCO.The best they can do is provide a bridge,but it has to be a bridge to somewhere.
The politicians aren't doing enough.People are refusing to invest because of the uncertainty.The Fed has been the investor's best friend,supporting valuations and markets.
Our baseline is 1.5% growth-plus or minus 0.5%.If politicians don't get their act together,that would push us into recession.If nothing happens,that will unambiguously throw us into recession.
The sooner,the better.Already businesses are pulling back,investing less.
Be very careful.Focus on sovereigns and companies with strong balance sheets and can give back cash to shareholders,Mr.El-Erian counseled.
Mohamed El-Erian is also co-Chief Investment Officer at PIMCO along with founder Bill Gross.The company now offers a wide range of both active and passive exchange-traded funds,as well as mutual funds.

An Edgy Era

We are entering a world of higher inflationary pressures,Mohamed El-Erian said.The Pimco executive thinks we will witness a period of continued shrinkage of balance sheets.The economy will shift away from traditional drivers of growth.Expect a significant realignment of the financial sector over the secular horizon.There is no perfect response by the Federal Reserve;there are no easy policy solutions.Inflationary pressures are complicating the global outlook,Mr.El-Erian reflected.

El-Erian:A Quiet Voice

Mohamed El-Erian,an executive with Pimco,feels it is a time of great tumult and great opportunity.The credit crisis has morphed into an economic crisis.You can't just take the financial system and recapitalize it.There are major bargains out there,but you've got to be careful.You need support,because it is a bumpy time.Remain diversified;keep a cash cushion.It's better to be later in this market,Mr.El-Erian advised.