|When Markets Collide: Investment Strategies for the Age of Global Economic Change
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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 who. wish to understand the modern world of investing.?. . . .
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..
This booke seemed to be a mosthy a discussion of emerging China and its interaction with the ecomonies in the developed countries. I believe that the book has increased my understanding on this subject a lot....more info
- Expected more
I purchased this book at an airport while waiting for a flight. It was prominently displayed in the business section of the bookstore (perhaps that should have been a warning). The book includes endorsements from such august figures as Alan Greenspan, Seth Klarman and Michael Spence, yet I doubt if any of them actually read the book in its entirety. Moreover, Mr. Greenspan works as a consultant for PIMCO (also the employer of the author).
The book makes some decent macro-orientied observations but none of them are really new or unique. Moreover, the writing style is ponderous and prolix. The typical, individual investor can skip the first five chapters and go directly to chapter six, where you will find a recommended portfolio. However, there is nothing especially enlightening about the portfolio he recommends. (He also fails to mention the tax issues surrounding TIPS).
I was surprised at how he rather cavalierly addressed index funds vs. actively managed funds when discussing equity allocations. I understand that he didn't want to get into the active vs. passive debate, but I was expecting more from someone with his background and expertise. For example, he suggests that retail investors use Lipper and Morningstar (bottom of page 203) to gain "insights" into this process. However, he doesn't say how using these services will lead one to pick a superior actively managed fund.
In addition, although the book was published in 2008, it would have greatly benefited the reader if it had included more discussion and insight into the events and implications surrounding Bear Stearns, Fannie and Freddie. At times (and I realize that this is not directly the author's fault) the book sounded outdated. While hindsight is 20-20, both the author and the reader might have been better served if the book was released later to allow Mr. El-Erian to include more of his candor and insight on these important developments. ...more info
- Finance bio from philosophical perspective
George Soros is a very interesting thinker.
It is true (as he more or less admits in his book)
that his philosophical ideas are somewhat "inexact"
by the analytic standards of that profession,
but the insights are real. He gives market equilibrium
theorists a run for their money.
- A must read
This book suprised me in that it was a very easy read and yet I came away with a better understanding of the causes of the current economic mess and much more importantly it serves as a valuable guide to market participants so as to aviod future market diasters. John Dee...more info
- Not worth reading
I do not believe that this book is worth buying or reading
because of three factors:
1. It contains minimal advice for investors wishing to
change their investment strategies.
2. It is written for an audience for professional economists
with advanced degrees.
3. The editing of the text is very poor. Each chapter contained
multiple references to something "that I will deal with in
the next chapter" or "that I covered in previous chapter."
A few of these references is understandable, but the text
is so poorly written and edited that these references quickly
became a distraction and a nuisance.
I would strongly advise prospective readers to avoid this book. ...more info
- Buy a pizza instead!
"This book is an essential read for those who wish to understand the modern world of investing."
Only someone who has an interest in having his friend sell as many books as he can would say something as blatantly false as this. There's nothing new in this book.
Moreover, El-Erian's egotistical writing style jars the serious reader with constant references to a previous or upcoming chapter. There's endless name dropping that in some cases extends up to 3 lines at a time. (None other than the great Greenspan wrote the above supportive quote, the same Greenspan who keep interest rates low for too long, inflaming the credit crunch, the same one El-Erian apparently discusses.)
There's plenty of references to other books, speeches, theories and very little thought. The first 3 chapters are devoted to recapitulation of what happened in the markets during 2007. He describes, rather than explains, what happens, and the tone implies that everyone is a bungling idiot for not having seen what was coming.
Turns out he's just as hoi polloi: around page 110, he conjectures what might happen next (assuming publication in Spring 08). He figures the emerging worlds will lead the developed countries out of the current fiasco. And with every word that follows, I began screaming "wrong wrong wrong".
Chapter 6 promises to advise on how to navigate the journey. "For investors, this means capturing risk-adjusted returns." Really, now that's an original thought!
And another, "Nation policy makers have to figure out how to make a debitor nation a creditor one." Wow!
Finally, the most important thing he learned at his very important time at the International Monetary Fund was how to manage time by defining the difference between urgent and important.
It's quite important that potential buyers urgently ignore the impulse to buy this book....more info
- Needs a good edit
El-Erian's publisher McGraw-Hill badly let down the author, and his readers, with a poor to nonexistent copy-edit. The book is full of jargon and poorly written paragraphs--to illustrate, here is a rather typical one-sentence paragraph: "The challenge of how to deal with consequential and volatile endogenous liquidity relates to another policy issue that I will discuss in Chapter 7: how to refine the traditional instruments of monetary control and ensure more meaningful and sophisticated supervision on a range of activities, with volatile leverage, that have been enabled by the ongoing structural transformations and yet are outside meaningful oversight."
This is technocratic obfuscation at its worst, and El-Erian, who is no lightweight, could have better been served by a heavier edit.
Perhaps the worst feature of the book is its attempt to reach three entirely different audiences--individual investors, policy-makers, and institutional investors. If you are an individual investor, realize that 75% of the book is written for others.
If you find your way through the jargon and infelicitous structure, some solid, thought-provoking ideas gleam in the darkness. Be prepared to dig, though, and bring your headlamp!...more info
- Best heard on CNBC or Bloomberg
I LOVE well written books on current finance and have such a voracious appetite for financial news that my Tivo only records business related suggestions.
Having seen El-Erian a few times on CNBC and Bloomberg, and being impressed with his pithy comments, I decided to read this book. I wish I had read the reviews before I did. The book can be summarized to less than 20 pages. He is great on CNBC, but his editor ought to be fired.
Save your money on this one. ...more info
- 4.5 stars-Needs to clearly differentiate risk from uncertainty
The author of this book is clearly quite knowledgeable about the standard approach to risk management.He knows that it is badly flawed under conditions of herd behavior.Herd behavior occurs under conditions of Keynesian uncertainty(The decision maker DOES NOT know enough or have enough data that is reliable and non-conflicting to specify a unique distribution.The decision maker works with a set of different distributions and/or intervals.Keynesian or Ellsbergian revision can lead to a change in the underlying probability distribution being used as a best estimate of the data.This is completely different from the subjectivist Bayesian view upon which all risk management courses are based on) and/or Ellsbergian ambiguity.The standard risk (The decision maker DOES KNOW the particular probability distribution's population parameters and/or the sample statistics under conditions of risk.Bayesian updating/revision simply means that you continually revise/update the estimates of the mean and standard deviation of the SAME initially specified distribution through time)
management techniques, taught universally in all undergraduate and graduate classes in economics,econometrics,finance,business,and actuarial " science " worldwide, are completely unable to prepare the student for what can happen under uncertainty.For example,the author appears to correctly realize that herd behavior and cascades results from decision making patterns which are completely rational for the individual decision maker operating under conditions of uncertainty but make no sense whatsoever if operating under conditions of risk.Such behavior patterns appear to some authors in the socalled " new " field of behavioral finance to be the result of " irrational exuberance " .Keynes and Ellsberg knew better.Extensive discussions of risk and risk management are made throughout the book but no clearcut distinction appears anywhere in the book that clearly differentiates risk from uncertainty.
Another important analyst's perspective is missing .The missing analyst is Benoit Mandelbrot's distiction between the wild risk of the Cauchy distribution and the mild risk of the normal distribution.The mild risk of the Normal distribution is what risk managers mean by controlling/managing risk.Risk managers are completely helpless when faced with behavior patterns that generate the wild risk of the Cauchy distribution.The recently proposed 1-1.5 Trillion dollar bailout of Wall Street by President Bush,Ben Bernanke,and Treasury Secretary Paulson demonstates the complete and total intellectual bankruptcy of the standard approach to risk management
I recommend that the book be purchased because the author does make it clear that present analytic techniques for evaluating and choosing stock portfolios is flawed.It would have helped if he had been more specific about the nature of the flaws and how the work of Keynes,Ellsberg,and Mandelbrot,if implemented ,would have prevented this type of catastrophe from occurring or reoccurring in the future....more info
- Analysis of the Current State of Financial Markets in 2008
When Markets Collide, by Mohamed El-Erian, describes the ongoing evolution of the world's financial markets in terms of both the current path and likely destination. His approach is very much in the "Big Picture" style; don't look for specific investment recommendations or specific predictions of market behavior. That said, Dr. El-Erian provides a very good overview of the current state of the financial markets as of early 2008 and overall direction in the future.
Dr. El-Erian's background includes a doctorate in economics from Oxford, long service on the IMF, followed by a transition to the private sector, first at Salomon Smith Barney, then as CEO for the Harvard University endowment, and currently as CEO at PIMCO. The major themes he sees in the current financial situation include the following.
The Mortgage Mess
Over the last decades, mortgage originators (primarily banks and S&Ls) have moved away from issuing mortgages for their own long-term investment portfolio. Instead, they have written mortgages to capture the loan origination fees and then sold the mortgages for inclusion in packages that were marketed to other investors. The logic of this "securitization" process was that by pooling many mortgages in a single package, the risk of any one mortgage holder defaulting on a loan would be greatly reduced. In the process, the mortgage originators shifted their focus from the borrowers' long-term credit worthiness to the short-term.
In tandem with the shift in focus to the short term, the extensive use of derivatives, especially credit swaps, designed to mitigate the risk of default, tended to obfuscate the true risk in a securitized package of mortgages. The result was that many investors were lulled into the belief that their mortgage investments were low in risk when they really had no clear idea of how to evaluate the risk in a pool of mortgages and the associated derivatives.
These patterns lead me, a non-specialist, to suspect that any effective resolution of the mortgage mess must include either a shift back toward mortgage writers holding the loans for their own long-term investment or some other means of increasing the long-term financial responsibility of the originators for the loans they have approved.
As recently as 1998 financial crisis, the emerging markets as a group were subject to dramatic inflows and outflows of capital that dwarfed their domestic savings and investments. Their overall economic performance was also highly dependent on exports, dwarfing domestic demand and consumption. This situation has changed. Many of the emerging markets have emerged in several respects. The largest and most advanced (Brazil, Russia, India, China, Mexico, South Africa) are characterized by significant domestic demand and consumption that are able to at least partially sustain their economies even when the developed world's demand for their exports decreases. They generate significant domestic savings and investment, both private and public, the latter often in the form of Sovereign Wealth Funds (see below).
Many of these newly emerged markets (Russia and China may be the exceptions) are also less burdened by the demographics of an aging work force, suggesting that they may be better positioned to continue their growth over the coming decades than many of the industrialized nations.
Sovereign Wealth Funds
Sovereign Wealth Funds (SWFs) originated in the oil producing states (Kuwait, Abu Dhabi, Norway, Alaska) and some of the early developers in Southeast Asia (Singapore). The SWFs hold oil royalties or earnings from foreign trade in long-term investment funds to spread the benefits of the cash inflows into future years for future generations. To date, they have tended to be very conservative investors, placing most of their capital in short- to medium-term debt instruments of the governments of the industrialized world, especially the US.
In a way, this situation presents a potential role reversal between the emerging markets and industrialized nations. The industrial nations may now be subject to significant capital inflows and outflows controlled by the SWFs. As Dr El-Erian observes, the response of the industrialized nations to this role reversal should not be to institute controls on capital flows or other protectionist measures. These approaches would be self-defeating, hurting the industrialized nations more than the uncontrolled capital flows. Rather, the best prescription is the same one that the West advocated to the emerging markets in the past: Sound monetary and fiscal policies.
In the coming years, as the SWFs managers gain experience, expertise, and confidence, we can expect to see them change their focus from conservative short-term debt instruments to investments that offer higher long-term returns. This switch is likely to decrease the overall demand for government debt, increasing the interest rate on these instruments, and increase the demand for equities, driving up share prices.
Monetary policy has become harder to implement over the last 30 years. The money supply, once defined as currency in circulation plus demand deposits, has become almost impossible to define, let alone control. Once, only commercial banks could "create" money, concerting a dollar in deposits into several dollars by means of the reserve requirement ratio. Now, all manner of "shadow banks", hedge funds, private equity funds, investment banks, some domestic, some foreign, can use small amounts of equity capital to raise large amounts of debt capital, mimicking the prior role of the commercial banks. The difference is that these entities are not subject to the same regulations, such as reserve requirements, as commercial banks. We seem to be in the midst of a major evolution of the financial regulatory system in the US. The roles of the Fed, FDIC, Treasury, and other agencies will undoubtedly change. Let's hope that the changes are intelligence and for the better.
I found Dr. El-Erian's book both interesting and insightful and recommend it to readers looking for a broad overview of the current state of financial markets and their likely evolution in the future. Don't expect concrete investment advice; that wasn't his intent. (I suspect he saves such advice for his PIMCO clients.) My only criticism is that the style of writing is typical of many academic economists, somewhat convoluted and obtuse. The more complicated the concepts become, the simpler the sentences must be to convey them clearly. Still, I found the style a minor price to pay for what I think I gained.
- An important weakness
El-Erian's strength is in identifying and explaining the "major fundamental transformation" that is going on. After discussing the transformation and emphasizing the investment needs for internationalization, foreign currencies, and inflation hedges, he discusses asset allocatrion. His asset allocation table and discussion are fine, except for one glaring ommission. He never mentions managed futures.
In an investment environment that appears to be negative for both debt instruments and equities, managed futures could be the most appropriate investment....more info
- Systemic Change - Helping Identify some of the Potenial Winners or Losers
When the author was penning this book in late 2007, the markets were surely colliding. However, as we look into late 2008 and early 2009, it would appear that the markets and governments around the world are doing unprecedented things like actually cooperating with each other on many levels. There are many reasons to why and with many of them explained quite nicely throughout the book.
This does not take away from the theme of colliding markets as we truly have had a systemic change with all this cooperation. We have also been rewriting the rules with respect to what a business contract is as TARP's outcome ripples thru the system and whether banks can or should honor a loan. There will be both winners and losers in this new system with the increasing influence of Sovereign Wealth Funds and the once Emerging Market central banks now with coffers full of foreign reserves.
As Mohamed describes in the preface, " The outcome will be nothing less than a regime change in which the next stage in globalization and integration." If you want or need help in potentially identifying some of the probable winners or losers, When Markets Collide is a highly recommended read....more info
- Not for the average investor
Mr. El-Erian's book reflects his high-level knowledge and understanding of economic issues. It is perhaps suitable for people at his level, policy makers etc. However for individual investors it is not worth the money, nor the time reading it. His writing style is exasperating as it sounds much like some Harvard publications. His long, complex sentences are time-consuming to understand. He loves to use all the most recent jargon to impress his readers. His ultimate recommendation for investing for the future is banal, buy a bit of everything! After finally finishing the reading of this book (it was painfully boring) I was left with the feeling that I didn't learn anything worthwile for my purposes....more info
When you read a book like this, you are hoping to learn about the back story about an issue, the inside scoop. The only useful insights I received from this book are that the influence of the IMF and the Fed are dipping due to globlization. Other than that, the author spends a lot of time trying to convince us that the balance of power in the financal system is shifting from the US and Europe to the "expanding economy."
Many years ago when I was a McKinsey consultant, Paul Volcker gave a talk to the staff about how the accumulation of dollars in the middle eastern countries would lead them to unprecedented power over our economy, and possibly our ruin. They would be able to manipulate our financial system. They have more of our money today than ever and it is still not true today. The author seems to be stuck on this page as well.
What he could have covered was how the IRAQ war was designed, in part, to revive our financial system, much as the second world war was partially designed to get us out of the depression. Or he could have explained that globalization hasn't yet worked for the US since nobody "over there" is using the dollars we sent them to buy our products. They buy our financial products that are soon without value due to shenanigans such as the sub prime mortgage mess or the dot com collapse, etc.
Well, I'm not going to rewrite his book for him. But if I did, I would eliminate the stilted academic language that conveys little meaning....more info
- A pointless insight-free book recommended by Goldman Sachs
Remember how research analysts at Goldman Sachs sold you all those worthless internet stocks. Well now they have given their annual book award to a useless tiresome book. The author makes ominous statements about current "structural transformations" and then disappoints with factoids so mundane and commonplace that even Bloomberg talking heads would be disgusted. Furthermore the author chooses to recycle wisdom from a smattering of recently popular authors (like the combustible, but also pointless, Nassim Nicholas Taleb) and some oldies like Keynes at inappropriate moments throughout his book in a losing battle to seem relevant. Finally, if you read this book you will constantly be baited with phrases like "as I will discuss in Chapter 7". This technique serves to lure readers into thinking that if only they are more patient with the current inanities they are reading, readers will be rewarded with great insights later on. However they are later greeted by phrases like "as I discussed in Chapter...". In the introduction the author talks about detecting signals in market noise. Alas, this book is more noise than signal....more info