Archive for April, 2009

Book Review: When Markets Collide

April 30, 2009

[Front Cover of When Markets Collide]

In this book subtitled “Investment strategies for the age of global economic change”, Mohamed El-Erian, a head honcho at bond giant PIMCO, convincingly argues that the global economy is undergoing a fundamental secular change driven by:

  1. The gradual ascendancy of a set of countries that previously had little if any economic power and influence.
  2. The accumulation of significant amounts of capital by a set of countries that were debtors and borrowers only a few short years back.
  3. The proliferation of new financial instruments such as derivatives that Buffett likes to call “weapons of mass destruction”.

These changes will result in a world markedly different from the past but the transformation will be a bumpy affair.

Interesting stuff but what does it mean for investors? Mr. El-Erian says that the secular shifts will result in higher inflation and strong commodity prices and outlines an action plan for investors. He suggests that US investors consider the following asset allocation that he expects to deliver a nominal return of 8 to 10 percent, a real return of 5 to 7 percent and a standard deviation of 8 to 12 percent:

US equities: 15%
Other advanced economies: 15%
Emerging economies: 12%
Private equity: 7%
US bonds: 5%
International bonds: 9%
Real Estate: 6%
Commodities: 11%
Inflation protected bonds: 5%
Infrastructure: 5%
Special opportunities: 8%

There is some criticism in other book reviews (such as this by My Money Blog and this by Million Dollar Journey) that Mr. El-Erian has written a somewhat obtuse book. In fact, the author himself acknowledges that he took the risk of the book ending up in the “muddled middle” between average investors and policy wonks with economics PhDs. I’m not a trained economist and though I found parts of the book tough sledding, I didn’t have much trouble following the points the author was making. After all, not every book is meant to be read like an airport novel in under a few hours. I think this book is worth the time and effort spent to read it.

The book is published by McGraw-Hill and has a cover price of $27.95 (US). More details, including an excerpt can be found on the publisher’s website here.

Guide to the Avian Flu

April 29, 2009


When the Avian Flu story lingered in the headlines in 2005, Don Coxe and Sherry Cooper wrote An Investor’s Guide to Avian Flu for BMO Nesbitt Burns. The report looked at the effect of a global pandemic on the economy and what (if anything) investors can do to be prepared:

The 1918 catastrophe was over in months. Soon, the world had entered the roaring 20s, and from that sustained outburst of economic activity and a booming stock market, there were hordes of newly-rich people… and many of the Old Rich had become fabulously rich.

They were the lucky survivors.

This time around, it will not be necessary to rely on luck to protect the value of one’s portfolio. Cash, put options on volatile stocks, high-quality bonds, and high-quality dividend-paying stocks of companies with minimal exposure to the risks we have described will be the best survival packs. They will provide the survivors of the pandemic with the capital to take advantage of the wide array of cheap assets that will—however temporarily—be available after the virus has joined its predecessors in whatever resting places the world has on offer.

With reports of the swine flu outbreak dominating the news, it may be useful to dust off the report and read it again.

The Atlantic Cover Story on Financial Survival

April 27, 2009

[Front Cover of The Atlantic, May 2009]

Jon Chevreau recently wrote a blog post on The Atlantic columnist Jeffrey Goldberg’s quest for sensible financial advice after finding that his broker had simply stopped calling him. The column, titled Why I Fired My Broker, takes a witty look at Wall Street and filled with great lines such as this:

I took a random walk down Wall Street and got hit by a bus.

Or this conversation that will remind you of shoeshine boys handing out stock tips:

Several years ago, I went to a party at a hedge-fund manager’s loft in Lower Manhattan. The elevator opened directly into the loft, which was as big as Mussolini’s office. An Austin Powers bed was parked to one side.

I left the party with a friend of mine, David Segal, who is now a business reporter at The New York Times. As we walked to the subway, he said, “You know, we should get one of those hedge funds.”

“Absolutely,” I said. “Where do we get one?”

“I don’t know. Maybe we can find one on the street. But we need one.”

“Yes, we do.”

When I think back on that conversation, I realize that it represents for me the apex of hedge-fund mania. Which is to say, when two reporters realize they should get into the hedge-fund business, it might be somewhat late to get into the hedge-fund business.

The column reminded me of that great satirical look at Wall Street that was first published in 1940 but still rings true today: Where are the Customers’ Yachts?. You should read it and check out the accompanying five-minute video.