The Warning
Mohamed El-Erian, Allianz’s Chief Economic Advisor, thinks that most investors, institutions and retail, are operating under the assumption that there will be no more Fed Fund rate increases this year.
His take is that there are likely to be two more in calendar 2016. OMG! Of course, my reaction is, ‘who cares?’ Rate increases, off such a low base and in such tiny increments, may cause some short-term market discomfort; but, in the greater scheme of things, they will amount to no major negatives for stocks. They actually will represent a positive, a vote of confidence that the Fed feels more confident in the ability of our economy to stand on its own two feet, without the support of zero interest rates. Now, if you are a trader you may be able to profit from this thought (and I say ‘may’ with great reservation). But, for investors it is only noise.
On the other hand, my headline (“El-Erian’s warning to the world”) would definitely lead the average person to the conclusion that something dire is afoot. Of course, that’s not the case. The headline reads the way it does to appeal to humanity’s inclination to run toward negative news (If it bleeds, it leads). It is designed to bring viewers and readers to the story. Obviously, it got my attention.
Who is this El-Erian, and why should we care about his warning?
Mohamed El-Erian was the former Chief Investment Officer and CEO of PIMCO. Both PIMCO Founder Bill Gross and El-Erian had storied careers building the fixed-income management firm into a two trillion dollar asset management behemoth. Their careers at PIMCO ended tumultuously about one and a half years ago after a period of prolonged underperformance by the assets they managed and significant infighting developed between the two. Gross went off to start a fund at Janus and El-Erian to his current post with Allianz.
During the period immediately before their departures from PIMCO, both had become very visible on CNBC and in other financial media, issuing negative pronouncements about the economy, Federal Reserve Policy and the stock market. In June of 2013 I issued a post (kortsession.com #40, “Be afraid, very afraid” June 13, 2013) covering the controversy and stating my counterpoints to their routinely negative arguments. Part of that post included a link to comments by El-Erian, “Walk, don’t run away from equities,” where he urged people to “step away from risk.” Being more specific, “Reduce your equity, credit and liquidity risk.”
One of the great things about kortsessions.com is the electronic trail you have to everything that I have written and all the pronouncements that the so-called pros or experts that I have quoted (or routinely that I have taken to task) made. This record has been live since February 2013, over three years. Please go back and take a look at kortsession 40 for a full discussion on Gross and El-Erian.
But, I digress.
How did El-Erian’s 2013 advice work out?
As you might imagine, not so good. He gave his lengthy admonition in an interview (linked above) June 4, 2013 on CNBC’s “Squawk box.” That day the S&P 500 closed at 1631.32. As I pen this post, it stands at 2066.86, up over 430 points (at the all-time high close, May of 2015, it was up 497 points, or about 30%). Interestingly, the arguments made in the clip, could still be used today. ‘Growth is not coming fast enough.’
Mohamed El-erian is not a stupid man. He is highly educated, articulate and speaks with great conviction. He had an exciting career growing a bond management firm in the middle if the greatest bond bull market in history. Bull markets make everyone feel ‘ten feet tall and invincible’ equipped with magical powers of reckoning, which generally depart along with the bull market. Even though he helped build a magnificent firm and great wealth for people in the process, he is human and prone to error. So, if you followed his advice, if you were out of the market entirely June 4, 2013, you missed out on a huge move. Also, if you liquidated into that rally, you would also have missed most of a very significant move.
Unfortunately, many of the prognosticators and talking heads in the financial media are much less educated or qualified to give advice than El-Erian. Yet, in the case of El-Erian and others the media keeps trotting them out, portraying them as wise men and women to whom we must pay attention, when they are often just simply wrong.
Kort’s warning to the world: “Close your eyes and ears. Listen and read at your own peril.”
What do you think?
he information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
So to whom do we listen?
Chal, this is a tough question. As it is very difficult to avoid some so-called expert or politian spouting off about the dire condition of the globe and the economy, a better question would be, ‘how should you listen’? When partaking, you must remember the end of the world is a rare event (although the media would like you to think it is just around the corner). In my opinion investing is a long race. Ergo, suggestions that you can trade a stock or index to avoid short-term economic weakness (a recession)is foolish. If you own individual stocks, you need to ask yourself the question, ‘if I were the sole proprietor of a business, would it even ever cross my mind to think about selling to avoid an economic slowdown?’ The answer is NO. The only reason you would think of doing it with a stock is that you can. So, beside the Armageddon warnings, the advice to trade on short-term news or forecasted events is usually wrong. The forecasts are usually wrong and result in costly whipsaws. Finally, as it pertains to owning individual stocks, REALLY KNOW WHAT YOU OWN AND WHY YOU OWN IT. This will keep you from panic on short-term market swoons.
If you index, Over the last 50 years in the stock market, Geopolitical events and economic events have really been Tumultuous. I guarantee you during that 50 yearS, there was a disaster around every corner, both real and imagined. If you were around in 1965 and had the good fortune to put money in Warren Buffett’s first partnership, you would have compounded at 20 1/2%. If you were so unfortunate as to place money in the S&P 500 at the same time, your compound return would’ve been closer to 10%. This is not too shabby.
Finally if you continue to insist on keeping up on the financial news and views, I will recommend two sources that I follow that give a pretty balanced view of the world. Both can be accessed through Seekingalpha.com (a free internet aggregator on investment news and views): Fear and Greed Trader and Jeff Miller. Good luck and thanks for the question.
bk