Feb 11 2009

When Markets Collide

Published by at 3:25 pm under Books

by Mohamed A. El-Erian

Subtitled: “Investment Strategies for the Age of Global Economic Change”

This title must have been the publisher’s attempt at grabbing attention on book racks and news stands. The “markets” that are colliding are our current market and a not yet well defined future market. The collision metaphor seems to be an overlay by the author, and a stretch, on an assessment of the causes of current turmoil and a forecast about major trends in the economic and financial sectors. Keep in mind that this book was written in 2007 and very early 2008 so it does not reflect all the recent financial and economic upsets, but that gives it a little more credibility.
The book talks about macro economic and the structure of financial markets and associated institutions, but it is somewhat chatty and relatively easy to read. Discussions are based on a mix of disciplines that bear on financial processes and macro economic policy. In a lot of ways, I find the authors view of the world fits, but only the future will tell.
In a nutshell, the book attempts to justify a view of the world economy and derive prescriptions for personal investment and institutional changes consistent with that view. A quick outline of the view is:

  • The engine of economic growth is moving from US toward emerging countries in Asia and the Middle East.
  • Emerging markets will inexorably go from export oriented to more consumption oriented.
  • US will diminish its high level of consumption financed by debt.
  • Global inflation will rise driven by commodity demand and an ongoing reduction in the deflationary pressure derived from low wages in emerging market countries (e.g. Chinese wages will rise).
  • The Sovereign Wealth Fund’s in emerging market countries in Asia and the Middle East which are running a surplus will impact developed economies and allocation of capital worldwide (i.e. they will be big players).
  • The global financial system will be upset by technical and systematic problems as systems evolve.

The book covers a lot of ground and tries to provide specific advice for investors and for policy makers. China and India loom large in the picture and seem a bit over stated given more recent events. Their economies seem now to be more coupled than de-coupled from the US and other developed markets. Similarly, the commodities boom has turned to bust, for now, but commodities may be strong again once the current problems get sorted out. So some content rings less true than it did a year ago, but the book attempts to identify long term pressures and drives; not month to month fluctuations. Perhaps ominously, an extended period of serios starts/stops, calms/upsets are part of the story. Certainly upset now!

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