Book Review: When Markets Collide by El-Erian
Investment Strategies for the Age of Global Economic Change
Dec 11, 2008
This book is a New York Times and Wall Street Journal bestseller. Mohamed El-Erian describes his target audience as investors and national and international policy makers. Policy makers may well find the book an appropriate eclectic mix of analysis, observation and insight. However, it is less likely to appeal to the investor, who will be drawn specifically to chapter six but will find less substance than desired there or anywhere else.
Noise Versus Signal
El-Erian starts out by identifying recent and current puzzles that have dominated the economic and financial landscape. His insight is that these phenomena are not noise in a turbulent world but signals of ongoing financial and secular transformations.
The author then goes on to describe how increasing risk tolerance led to the credit crunch triggering emergency policy responses around the world. Changes in growth, trade, price formation and capital flows will ultimately lead to a regime change in the next stage of globalisation.
Finally, the author attempts to help navigate a path through that turbulence by looking at drivers for nonlinearity and possible market accidents as well as the influence of potential policy mistakes and using that information for investors to benefit from the upside and better manage the downside.
Belly and Tail
The challenge for investors is described as designing and implementing an asset allocation plan that is consistent with forward looking realities or the belly of the distribution for global outcomes. The second component involves managing the tails of the distribution to protect portfolios and mitigate risks against the journey to the “new secular destination”.
Muddled Middle
The author noted that a risk to his approach of writing for two audiences was that the result would be a “muddled middle”. The result in the end can only be judged by the reader but investors should note that whilst the premise of the book is good the execution may contain considerably less substance than desired. To take a key example about separating a signal from noise:
- How to identify signals from noise is discussed in anecdotal form and process terms rather than practically. No concrete example is used
- The examples that are used such as about a fire and the “market for lemons” are intended to direct the investor to “evaluate prices against the fundamentals”, but that statement does not help to achieve any clarity on how to do it
- Introducing behavioural science and neuroscience, along with Taleb’s Black Swan again does not bring clarity to separating signals from noise
About Mohamed El-Erian
Mohamed El-Erian is co-CEO and co-CIO of PIMCO, an investment management company. Formerly served as president and CEO of Harvard Management Company, managing the University’s $35 billion endowment fund. He spent 15 years at the International Monetary Fund and has featured in Bloomberg, Financial Times, CNBC, New York Times and Wall Street Journal.
When Markets Collide: Investment Strategies for the Age of Global Economic Change by Mohamed El-Erian. McGraw Hill 2008. ISBN: 978-0-07-159281-9
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