When Markets Collide: Investment Strategies for the Age of Global Economic Change - Rilegato

EL-ERIAN

Rilegato

ISBN 10: 0071592814 ISBN 13: 9780071592819

Casa editrice: McGraw Hill, 2008

Riassunto

SELECTED AS A 2008 BEST BUSINESS BOOK OF THE YEAR BY THE ECONOMIST

"ONE OF THE SMARTEST INVESTORS ON THE PLANET."--MONEY MAGAZINE

“This book is an essential read for those whowish to understand the modern world of investing.”
—Alan Greenspan

Winner of the 2008 Financial Times and Goldman Sachs Business Book of the Year Award

When Markets Collide is a timely alert to the fundamental changes taking place in today's global economic and financial systems--and a call to action for investors who may fall victim to misinterpreting important signals. While some have tended to view asset class mispricings as mere “noise,” this compelling book shows why they are important signals of opportunities and risks that will shape the market for years to come. One of today's most respected names in finance, Mohamed El-Erian puts recent events in their proper context, giving you the tools that can help you interpret the markets, benefit from global economic change, and navigate the risks.

The world economy is in the midst of a series of hand-offs. Global growth is now being heavily influenced by nations that previously had little or no systemic influence. Former debtor nations are building unforeseen wealth and, thus, enjoying unprecedented influence and facing unusual challenges. And new derivative products have changed the behavior of many market segments and players. Yet, despite all these changes, the system's infrastructure is yet to be upgraded to reflect the realities of today's and tomorrow's world. El-Erian investigates the underlying drivers of global change to shed light on how you should:

• Think about the new opportunities and risks
• Construct an appropriately diversified and internationalized portfolio
• Protect your portfolio against new sources of systemic risk
• Best think about the impact of central banks and financial policies around the world

Offering up predictions of future developments, El-Erian directs his focus to help you capitalize on the new financial landscape, while limiting exposure to new risk configurations.

When Markets Collide is a unique collection of books for investors and policy makers around the world. In addition to providing a thorough analysis and clear perspective of recent events, it lays down a detailed map for navigating your way through an otherwise perplexing new economic landscape.

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Informazioni sull?autore

Mohamed A. El-Erian is co-CEO and co-CIO of PIMCO, one of the largest investment management companies in the world. He formerly served as president and CEO of Harvard Management Company, the firm that manages the university's $35 billion endowment. He spent 15 years at the International Money Fund, working on policy, capital market, and multilateral economics issues. El-Erian has been featured by Bloomberg, Forbes, Financial Times, Latin Finance, CNBC, The New York Times, and The Wall Street Journal. In 2004, Fortune named him a member of its eight-person “Mutual Fund Dream Team.”

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The #1 New York Times and #1 Wall Street Journal Bestseller

“Mohamed A. El-Erian is one of the most gifted and successful riskmanagement practitioners in the world. In this book he combines anacademic’s insight into advanced risk analysis with a portfolio manager’sgrasp of real world economics. This book is an essential read for those whowish to understand the modern world of investing.”
—Alan Greenspan

"Few people are as well positioned to understand markets as Mohamed El-Erian. He is almost unique in being able to attack the credit crisis from the perspectives of academic economist, policy official, investment banker and fund manager...Mr. El-Erian's insights are as valuable as ever."
--Financial Times

"El-Erian is a doer and a thinker and someone who understands the risks of rare events. [Never before, have] I seen such a combination. Read this book."
—Nassim Nicholas Taleb, author The Black Swan

“This extraordinary book portrays the future with a powerful andtrail-blazing illumination of the past.”
—Peter L. Bernstein, author Capital Ideas Evolving

“Brilliantly written, easy to understand—a forceful explanationof our changing global economy.”
—Bill Gross, Managing Director, Founder and CIO, PIMCO

“Mohamed El-Erian, with his deep grounding in economics and his profoundknowledge of financial markets, has written a book that no one else could write.”
—Seth A. Klarman

“Mohamed El-Erian’s book is an important, wise and insightful analysis….”
—Michael Spence, recipient of the Noble Prize in Economics (2001)

“I can think of no better guide to the terrifying yet exhilaratingnew world of global finance….”
—Niall Ferguson, William Ziegler Professor at Harvard Business School

“Mohamed El-Erian is a deep thinker of the global financial and economic scene.”
—Arminio Fraga, Founding Partner, Gavea Investimentos and Former President, Central Bank of Brazil

“Mohamed El-Erian is that rare creature: a skillful participantin financial markets who is also a brilliant analyst of them. He has writtena book that is important and urgent.”
—Fareed Zakaria, editor, Newsweek International

"Mr. El-Erian . . . offers extremely detailed advice.”
--Paul B. Brown, The New York Times

“El-Erian...specializes in spotting trends amid the blur and clanging noise of markets in motion. He steps back to consider the big picture and offer tips on how to allocate your assets in his new book, When Markets Collide: Investment Strategies for the Age of Global Economic Change. El-Erian does offer something valuable for investors seeking to benefit from the global economic realignment: a road map. In a chapter on asset allocation, he provides an illustrative mix for a long-term U.S.-based investor.”
--Bloomberg News

“The recent turmoil in financial markets is a symptom of realigning economic power around the world, promising investors more rough times ahead, prominent fund manager Mohamed El-Erian writes in a new book.”
--Reuters

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WHEN MARKETS COLLIDE

INVESTMENT STRATEGIES FOR THE AGE OF GLOBAL ECONOMIC CHANGEBy MOHAMED A. EL-ERIAN

The McGraw-Hill Companies, Inc.

Copyright © 2008 Mohamed A. El-Erian
All right reserved.
ISBN: 978-0-07-159281-9

Contents

Chapter One

ABERRATIONS, CONUNDRUMS, AND PUZZLES

In the Introduction, I noted that over the last few years, economic and financial issues have arisen that could not be explained using existing models, mindsets, or prior experiences. As a result, they came to be called "aberrations," "conundrums," and "puzzles," and many in the marketplace dismissed them as being just "noise" and, as such, devoid of meaningful information. But these issues were, in fact, signals of underlying shifts or transformations that have proven to be of great consequence—in particular, as illustrated in the crisis that shook the foundation of the international financial system starting in the summer of 2007. These signals remain significant to investors now and will continue to be so in the future.

Perhaps the most famous reaction to the phenomena of anomalies and inconsistencies was contained in then Fed chairman Alan Greenspan's semiannual monetary report to the Senate. In the February 2005 report, he noted that "for the moment, the broadly unanticipated behavior of world bond markets remains a conundrum." I still remember the reaction on PIMCO's trade floor when Greenspan used the word "conundrum." Many were struck by how the most-respected, well-read, and influential policy maker of the day did not have an explanation for something as basic as the shape of the U.S. interest rate curve (that is, the "yield curve").

Greenspan was far from alone. Later in 2005, The Economist ran a cover story about the puzzling global economy. A few months later, Larry Summers, the Harvard professor and former secretary of the U.S. Treasury, referred to "an irony of our time" when reflecting on the configuration of global payments imbalances. He was commenting on the large flow of capital from developing to industrial countries, or from the poor to the rich—a flow that runs completely counter not only to what is predicted in economic textbooks but also the logic of rich-poor relationships. Summers observed: "To my knowledge it was neither predictable nor predicted and the implications are large and have not yet fully been thought through." The finance minister of New Zealand was similarly perplexed when asked to comment about the actions of investors in his country. In a September 2006 interview with the Financial Times, he described these investors as "irrational," noting that their investment behavior was consistent with "someone [who] would have to be slightly strange."

For me, the biggest puzzle of all centered on the reaction of investors—particularly the ability and willingness of the financial system to overconsume and overproduce risky products in the context of such large systemic uncertainty. Like others, I was struck by how two phenomena that you would expect to be negatively correlated ended up being positively correlated for so long—namely, on the one hand, the significant fall in the premiums that investors were paid to assume risk and, on the other hand, the investors' desire to assume even more of this mispriced risk.

The dynamics behind this positive correlation, which I will discuss in greater detail in Chapter 2, went something like this: Some investors were hesitant to accept the lower expected returns associated with the generalized decline in risk premiums. Accordingly, they tried hard to squeeze out additional returns. Leverage served as the best way to do so: By borrowing, they could put more money to work in their best investment idea; and this seemingly made sense as long as the expected return was higher than the cost of borrowing. In turn, the leveraged positions pushed risk premiums even lower, encouraging another round of leverage.

That cycle is just one illustration of the amazing sense of calm and self-confidence that prevailed despite the abundance of things that could not be explained. Rather than stay on the sideline until proper explanations emerged, many investors rushed into ever riskier trades and even higher leverage. Wall Street responded by putting the production of ever- more-complex products into overdrive. Many of these products offered investors "embedded leverage," playing directly into the hands of those looking to magnify what would otherwise be for them, low expected returns. And while national and multilateral policy makers expressed a mix of concerns and bewilderment, no meaningful actions were taken to "take the punch bowl away."

A few months later, the world economy found itself in the grip of significant market turmoil. Unlike the majority of the global financial crises of the preceding 25 years, this one was triggered by events in the world's most sophisticated economy, the United States. It impacted segments closest to the monetary authorities—namely, the interactions among banks. The results were bizarre to say the least.

Consider the highly unusual intraday swing in interest rates of over 100 basis points that occurred in the U.S. Treasury bill market, that on at least one occasion, was associated with highly unusual erosions in liquidity and market flows. You would expect such a systemwide event to cause collateral damage or be contagious, perhaps even envisioning people lining up outside banks to pull their money out. Based on recent history, you might also expect the casualties to be in an emerging economy with a weak banking system and not in another industrial country with a sophisticated financial system.

There was indeed a bank run, but it came from the United Kingdom. The event panicked the government into guaranteeing all bank deposits and triggered an amazing turnaround in the publicly stated policy of a highly respected central bank—the Bank of England. And there was collateral damage to an extent that in years past would have resulted in job losses on the part of ministers of finance and central bankers in emerging economies and in some cases, prime ministers and presidents. But this time, the high- profile casualties were the CEOs of some of the most influential banks in the world and other senior corporate officials.

The list of aberrations goes on. Interestingly, the numerous instances did not involve just one market, one country, or one set of actors. They pertained to several. Also notable was that the more usual tendency of inconsistencies occurring sequentially gave way to the emergence of inconsistencies occurring simultaneously.

It is therefore no surprise that, in the presence of so many anomalies, some conventional approaches to making investments have become less effective. Conventional strategies and business models are no longer adequately capturing the real dynamics that exist in the global economy; and the dominant industry players are being challenged by competitors who once seemed to be undertaken only lower-value-added activities and, as such, were not viewed as influential market participants. At the same time, policy measures and coordination mechanisms increasingly lack relevance and effectiveness.

In the following sections, I will discuss the nature of the aberrations, conundrums, and puzzles that have recently emerged. By focusing on topics that relate to market and policy issues, it will be clear that these inconsistencies contained important signals about underlying global transformations. In the process, I will shed light on the future evolution of the fundamentals that influence expected returns and risk—namely, global growth, trade, price formation, and financial flows.

Global Payments Imbalances and the Role of Developing Economies

Economics textbooks agree that the baseline expectation for the natural direction of capital flows across borders in the global economy is from developed countries to those countries still in the process of developing. The presumption is that because they are capital scarce, developing countries can offer a potentially higher expected return on a unit of invested funds than that offered by developed countries. The argument is based on the relative cheapness of labor in developing countries, as well as the relative lack of sophistication in their financial markets. Both factors serve to enhance the expected return on a unit of capital coming from developed economies.

This natural flow can be interrupted or even reversed by certain risk factors. For example, concerns about barriers to exit—such as capital controls or outright nationalization and confiscation—will discourage the flow of capital to developing countries. After all, why invest in a foreign country if you cannot repatriate the dividends, profits, and remaining capital as appropriate? For those reasons, the overall flow of capital can change directions—often so much so that there are outright large reversals in conjunction with episodes of capital flight as nationals of these countries also seek to protect or disguise their holdings.

As illustrated in Figure 1.1, the last few years have seen a sharp and sustained change in both the expected and historical trends. For example, at the end of the 1990s, the trend of developing countries' registering account deficits over time turned as these countries began to run up sizable surpluses—that is, they saved more than they invested. These surpluses have been large and persistent, resulting in a significant accumulation of international reserves. For example, as of 2007 China's reserve growth had been running at around 10 percent of its gross domestic product (GDP) for three straight years.

Another unusual aspect to these surpluses is that they have been accompanied by a pickup in economic growth and imports, not a decline. This is in stark contrast to past episodes when developing countries had to resort to highly restrictive economic policies in order to generate a surplus. Specifically, in the past, governments would have had to cut spending, raise taxes, and devalue their currency to generate the types of surpluses that have materialized in recent years.

In short, the last few years have been different. Developing countries have run persistent surpluses, and they have done so in a manner that suggests economic strength rather than weakness. And they have saved in a lasting manner an important portion of the surpluses. This unusual phenomenon has caused a ripple of other irregularities. One of the most visible was, of course, the ability of the United States to run a counterpart and large current account deficit that, at one stage, consumed over 90 percent of the world's savings. While this burden on global savings has declined, the country distribution of payment imbalances remains highly skewed; and the United States is the notable exception in the international line-up (Figure 1.2).

At PIMCO, we used the term "stable disequilibrium" to characterize this highly unusual configuration of global payment imbalances. The size of the U.S. deficit constituted a clear signal of disequilibrium. The willingness of developing countries to fund this deficit cheaply made it stable, at least in the short term. This situation led to a set of emerging economies becoming creditors to the United States (Figure 1.3). Imagine that: The poorer countries were lending to the rich country, which meant that they were accumulating large claims against this rich country. As they grow in importance as holders of industrial countries' assets, whatever the emerging markets say about how they allocate their funds can and does influence markets globally. Their impact is felt in the pricing of bonds, in the valuing of specific companies, and in the movements of exchange rates.

These are just some indications of the extent to which the shift of developing countries from operating in debtor regimes to creditor regimes is leading (and has led) to a gradual change in how investors perceive the role of these countries within the world economy. And the transformation has been enormous, aided in some cases by large inflows of funds on the capital account that have turbocharged the reserve accumulation dynamics, including through inflows of portfolio and foreign direct investments.

Just a few years ago, developing countries were viewed as the predominant sources of economic disruptions, and for good reasons. After all, there was Latin America's lost decade of the 1980s during which the damage to the global economy went beyond the period of stagnant growth, higher poverty for the region, and deteriorating social conditions; the well-being of the money center banks in the United States and elsewhere was threatened by the region's debt restructurings. We had the 1994 and 1995 Mexican "tequila crisis," which required massive emergency assistance, partly in response to concerns that millions of Mexicans would come across the border into the United States trying to escape a severe economic crisis and high unemployment at home. And who could forget the 1997 and 1998 Asian crisis and the 1998 Russian default that contributed to the demise of Long-Term Capital Management (LTCM)—a hedge fund collapse that was seen to threaten the stability of the global financial system?

More recently, developing countries have been viewed less as a threat of systemic disruptions and more as a source of global stability. This shift was unimaginable just a few years ago. Yet this new view has developed deeper roots and is being felt through several channels. And the view has found support in the emerging countries' contributions to global economic growth and their willingness to provide massive amounts of cheap financing to the U.S. government, banks, brokerage companies, and other private sector entities.

The global financial market disruptions that started in the summer of 2007 highlighted the change in the international standing of emerging economies. To the surprise of many, the emerging markets showed enormous resilience in the face of market turmoil so severe that it shut down segments of the credit markets and paralyzed interbank activity in industrial countries. Even more surprisingly, some of these emerging markets were seen as playing a critical role in trying to safeguard the viability of such western financial icons as Citigroup, Merrill Lynch, Morgan Stanley, and UBS.

In addition to showing resilience, some emerging markets acted as de facto market stabilizers. As an example, consider the November 27, 2007, announcement that ADIA, the investment arm of the Abu Dhabi (a member state of the United Arab Emirates [the UAE]) government, would inject $7.5 billion of capital into Citigroup. In the process, ADIA's holdings of convertible stock would, upon mandatory conversion into common stock, make the institution the largest single Citigroup shareholder (at just under 5 percent). This announcement came on the heels of a sharp drop in Citigroup's share price as investors reacted negatively to the news of large write-offs. The stock had closed the previous day at a price of $29.80, representing a decline of over 40 percent since the start of the year (and compared to a positive return of 4.4 percent for the Dow). The ADIA news helped the stock recover by 12 percent in the next four trading sessions and by 4 percent more the next week. It also helped the Dow record what constituted at that stage as the biggest two-day rally in the last five years (in excess of 500 points).

A few weeks later, UBS coupled the announcement of a $10 billion subprime loss with indications that it too would sell a stake to sovereign wealth funds (SWFs) led by Singapore's Government Investment Corporation (GIC). As in the case of Citigroup, the mechanism for this capital injection was a bond issuance that would convert into equity stakes. And again, the markets responded favorably to indications that inflows from a pool of large and patient capital would materialize and act as a stabilizer. Finally, Morgan Stanley combined its announcement of large losses in December 2007 with the news that it had obtained a $5 billion injection from Asia. China, through the Chinese Investment Company, bought mandatory convertibles that gave them a stake of almost 10 percent in Morgan Stanley.

In short, we have and will continue to witness a complete transformation in the systemic role of developing countries in the world economy, which is part of the broader phenomenon occurring in the financial industry that was unthinkable just a few years ago. Martin Wolf, the economics editor of the Financial Times, captured well the switch in the roles between the developed and emerging economies when describing the causes behind the market turmoil of 2007: "Its origin lie with credit expansion and financial innovation in the U.S. itself. It cannot be blamed on 'crony capitalism' in peripheral economies but rather on irresponsibility in the core of the world economy."

The Interest Rate Conundrum

These historical aberrations were part of a larger phenomenon. And who better than Alan Greenspan to describe the interest rate "conundrum" that took hold of the largest bond market in the world?

In his 2007 book, The Age of Turbulence, Greenspan shared the following scene: "What is going on? I complained to Vincent Reinhart, director of the Division of Monetary Affairs at the Federal Reserve Board. I was perturbed because we had increased the federal funds rate, and not only had yields on ten-year treasury notes failed to rise, they'd actually declined.... Seeing yields decline at the beginning of a tightening cycle was extremely unusual."

(Continues...)

Excerpted from WHEN MARKETS COLLIDEby MOHAMED A. EL-ERIAN Copyright © 2008 by Mohamed A. El-Erian. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Dettagli dell?edizione

• Editore: McGraw Hill
• Data di pubblicazione: 2008
• Lingua: Inglese
• ISBN 10: 0071592814
• ISBN 13: 9780071592819
• Rilegatura: Copertina rigida
• Numero di pagine: 361
• Contatto del produttore: non disponibile
• Persona responsabile: Ufficio Anagrafiche Messaggerie; 0039 0245774342; ufficio.anagrafiche@meli.it; ; Via Verdi, 8.; Assago Milano; 20090; Italia