El-Erian on Greece and its consequences

By Felix Salmon
May 7, 2010
Mohamed El-Erian is fast becoming the biggest and most important bear in the world when it comes to the consequences of the Greece crisis:

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Mohamed El-Erian is fast becoming the biggest and most important bear in the world when it comes to the consequences of the Greece crisis:

Since Greece is part of a general phenomenon of bloated public finance and higher systemic risk, we should also expect a generalised and volatile step-increase in risk premia around the world. Capital will thus be more selective in terms of destination, as it opts for liquidity over returns and for safe government bonds over equities…

For the next few days, we should worry about cascading disruptions in the European banking system as interbank activities are undermined by renewed uncertainties about each institution’s exposures to peripheral European names.

Mohamed’s talking his book, to a certain extent, here: the more volatile that the world of investment becomes, the more important it is to have smart professionals like the folks at Pimco running your money. Buy-and-hold is a strategy which worked very well for much of the past 50 years or so, but it’s far from obvious that it will continue to work going forwards. And besides, a lot of the tail-risk hedging that Pimco can do is simply impossible for retail investors: how would you hedge the risk of cascading disruptions in the European banking system?

If we’re about to see people move their savings from equities into bonds as stocks become just too volatile to hold for someone with a normal risk appetite, then it’s worth asking serious questions about the best way to invest in bonds, which always need to be actively managed, if only because they have maturity dates. Given that the biggest risks to the bond market are the ones surrounding sovereign default, El-Erian’s drumbeat of op-eds on Greece might well help his company get mandates from investors who want to park their money with a company thinking seriously and presciently on such matters.

Especially since it looks as though, at least until now, he’s been pretty accurate.

Update: Just to be clear, when I say that El-Erian is talking his book, I don’t mean that he’s short Greece, or anything like that. I don’t think he is. I just mean that he increases his assets under management, and makes money, when the world gets complicated. And so it’s in his interest to point out just how complicated the world is getting.


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No question that El-Erian is as good as they get. But I’m not sure if any “mass market” Pimco fund gives you El-Erian straight-up, even as they like to put him and Gross as their face to the world. Total Return, the big one, is just too big to engage in the tail risk strategies that one might want. I think El-Erian was going to start a market neutral fund, but I haven’t seen anything about that lately.

Posted by maynardGkeynes | Report as abusive

Is “sovereign default” really the best term to use re: Greece? If you are forced to default are you really sovereign? A true sovereign does not need to borrow (or tax) to “finance” government spending.

It’s a bit off blaming this crisis on “bloated public finance.” It’s not the size of public deficits in EMU nations that presents the fundamental systemic risk – it’s the fact that EMU nations like Greece MUST finance their expenditures- and these bonds represent real debts, payable to private banks, and default would have catastrophic knock-on effects. Can’t find the Euros you need, miss a payment, blow up your banking system. Why is the EMU a good idea? Honestly.

If default does occur, where would all the smart money go? To US Treasuries, of course. Why? Because everyone knows (deep down) that the US is a real “sovereign,” unlike Greece, and the US could never be forced to default on its obligations.

Posted by Sensei | Report as abusive

I agree with your comments about Pimco trying to drum up business. They have been effective at this.

For my own personal situation, Pimco Total Return is the only bond fund offered in my 401k. A “cash” alternative is a GIC offered by a bank. We also have a full range of target date funds based on the Dow Jones target date indices, so I can get a diverse bond index at varying asset percentages through that.

I think we are in the middle of a once or twice in a lifetime economic and financial crossroads (1929-1945, and 1972-1982 are the other similar events over the past 80 years). Normally, I have been a buy and hold investor, even through the dot.com crash where I had focused in 1999 on avoiding tech and so did fairly well through that meltdown even though I was 100% in equities.

Since 2007, I have made very uncharacteristic moves in reallocating my portfolio. One of my moves has been to put much more money into Pimco Total Return to balance my employer-funded ESOP and because of their agressive active portfolio management. At the moment I have my 401k portfolio split between the Pimco fund and a target date fund to get a mix of active and index bond investing.

The last few years have proven that “conventional wisdom” by the “pros” has in many case been badly founded on faulty principles. Pimco has been one of the best at trying to get ahead of the curve on the debt instrument side. However, like any active manager, they may make a significant mistake at some point, so I look to counterbalance their approach with an index approach.

I don’t think there is any way to identify who is “right” among all of the prognosticators, but it is clear that multi-decade world-wide lows in interest rates, multi-decade world-wide highs in total debt, and 10-yr real PEs of 20 for the S&P 500 are not a recipe for easy investment success over the next decade or two.

Posted by ErnieD | Report as abusive

El-Erian is representing the interests of still active portions of the defunct Turkish Empire. As such his remarks regarding Greece and other ‘peripheral’ European powers are to be taken less as investment advice and more as scurrilous racial and religious remarks. A lot of money does not mean a lot of common sense.

Posted by cranston | Report as abusive

this is very interesting… I don’t know if this is true or not. I could not find any other sources to verify this story.

Israel buys 13 Greek islands..


Posted by beyazkorsan | Report as abusive

Trouble with El is, he’s not just pointing out how complicated the world has gotten: he’s taking a fork-tongued approach to the public sector and glossing over after the fact how Greece got the patsas kicked out of it – and by whom.

It’s rather superficial and indecently early to write Greece off as something that “just happens” but that’s what El’s up to here. Otherwise, as many self-fulfilling prophecies go, El’ll probably appear right, especially after his IMF cohorts have finished wrecking the joint. But nobody who really matters will applaud.

Posted by HBC | Report as abusive