It is 3am in New York but Mohamed El-Erian is not sleeping the contented sleep of a man who, only hours earlier, collected a prestigious prize for his book on world markets. He is up and preparing for a dawn flight west – back to work as co-chief executive of Pimco, the giant California-based investment management company.
When Markets Collide, the winner of the 2008 Financial Times and Goldman Sachs Business Book of the Year Award, has an intensity, urgency and topicality that makes parts of it read as though it was written yesterday. But the idea for the book was planted in El-Erian’s head in August 2007 – partly on the basis of comment pieces that he had written in the FT and other publications. The first draft was filed in November and it was finalised in January.
Before bringing the book out in May, El-Erian’s publisher gave the fund manager and former International Monetary Fund official just enough leeway to insert a reference to the disintegration of Bear Stearns, the investment bank. But otherwise he has been powerless to update the book to take account of the deepening financial crisis.
In an interview conducted by phone after his arrival back in California, El-Erian says he originally envisaged When Markets Collide as a forecast, but “as the book was being finalised, it became a book about current affairs and then I started worrying that it would become a book about history by the time it came out”.
In fact, he believes the book’s thesis that we are experiencing a collision between “the markets of yesterday” (broadly domi-nated by developed economies) and the emerging markets of tomorrow still holds true. Certainly, the book retains much of its original force. It was lauded by Lionel Barber, the FT’s editor and one of the book prize judges, as “lucid and prescient”. What El-Erian calls the “advocacy” sections of the book, in which he advises policymakers to take action to address problems in the financial and supervisory infrastructure of the world economy – from the World Bank to the rating agencies – look increasingly relevant.
Still, some will now take issue with his prediction that new markets and their sovereign wealth funds will provide the multiple engines of future global prosperity as the motors of developed countries fail. After all, falls in commodity and equity prices in emerging markets could yet trigger serious financial crises across Asia.
El-Erian concedes that the world economy has fallen further than he thought it would when he wrote the book, but adds that he still believes the developing countries will “form the base” of future growth and that sovereign wealth funds will be “part of the solution”.
But while El-Erian believes the destination of the financial system is still the same, he admits that the world is moving faster than he forecast along the bumpy journey towards it. The way in which Lehman Brothers collapsed last month, triggering the frenetic reactions of recent weeks, came as a shock to him: “The manner in which Lehman failed surprised me. Not the fact that it failed, but the manner in which it failed and the way it disrupted the payment and settlement system.”
His main concern now is that while policymakers have recognised the problem, and designed and implemented a response – creating a vast future risk of moral hazard in the process, El-Erian points out – it may not prove to be effective. Ominously, El-Erian says it took two huge interventions to stabilise the crisis-hit economies of Mexico and South Korea a decade ago.
Even in the week in which developed countries committed hundreds of billions of dollars, pounds and euros to recapitalise the banking system, El-Erian believes “we’re going to see some additional measures” covering both the banking and non-banking sectors.
Where does this turmoil leave private investors? When Markets Collide adopts an avowedly eclectic style. El-Erian wants it to reach not just academics, policy wonks and Wall Street traders, but also ordinary people struggling to manage their own assets. The mixture of home-spun metaphors and parallels with references to “endogenous liquidity” and “orthogonal” policy responses often makes the book a challenging read. But its direct advice for investors is plain enough: concentrate on limiting risks rather than maximising returns as world markets buckle and shift. In practical terms, El-Erian says that means investing in top quality securities that are linked to recent government interventions: cash, obviously, but also senior debt issued by banks that are now supported by the taxpayer, and mortgage securities backed by Fannie Mae and Freddie Mac, the home loan agencies recently underpinned by the US government.
Reiterating one of his favourite maxims for surviving volatile markets – cited in When Markets Collide – he says: “There are times that you worry about the return on your capital and times that you worry about the return of your capital.” El-Erian is adamant that the second part of the saying still applies.
‘When Markets Collide: Investment Strategies for the Age of Global Economic Change’ by Mohamed El-Erian (McGraw-Hill). To read an extract from the book and find audio and video interviews with the winner, go to www.ft.com/bookaward
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