[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.

This article has 6 comments

  1. I used to hold a significant investment in the PIMCO Emerging Markets Bonds Fund managed by Mohamed El-Erian. I sold off my holdings in that fund when he converted almost all of the Top 10 holdings over to credit default swaps and currency derivatives.
    After all, I originally bought the fund because I wanted to hold government bonds issued by countries like Brazil, Russia, Chile, Turkey, etc. When those Top 10 holdings all but disappeared and were replaced with stuff that you would normally associate with hedge funds, I “voted with my feet” and got the heck out of that fund! If I wanted to invest in a hedge fund, I would have bought a hedge fund. I wanted to hold Emerging Market Government Bonds and his fund ceased to hold those securities even though it was still called that by name.

  2. When I have read the book, I felt it basically focused to trade than investing. The criticism found in the said two blogs seems exactly due to the nature of contents. Even though, he tried to focus on some points that is useful for all not considering whether he is a trader or investor.

  3. I thought this book was “ok”. He has a lot of interesting thoughts but it is a bit hard to read and there is nothing “practical” to be learned from it.

    If you are a real keener then you might really like this book.

  4. I am intrigued by his ideas re: asset allocation.
    I know you have probably gone over this a million times but do you or anyone see benefits or more pains in trying to diversify some equities over a few different sectors such as energy, materials, agriculture, infrastructure, REITS, etc?

  5. I read this and Peter Shiff’s books. Both made good points but somehow left me wanting for more practical advice. Also, f these guys are so smart, why didn’t their respective firms investments make out like bandits through the “crisis” they saw coming?

  6. Pingback: Weekly Blog Reviews April 27- Announcements and Giveaways | Financial Highway