Mohamed El-Erian

My focal point of interest over the past month or two has been debt crisis, both European and US. My big fear is of disorder in the Euro-Zone, the chaos over what happened with the US debt ceiling came as a surprise to me. The back drop to all of this is that the world is changing [James Wolfensohn], [David Mayhew], [Terry Smith]. We have also, in the west, been simply living beyond our means. A huge burden of debt has been transfered from business to the state. Governments are in a position where it is hard to see how they can act as the bank of last resort, and so it goes on.

Mohamed El-Erian, the co CEO of PIMCO is one of the most straight forward commentators and analysts of the changing world - he refers to the change as the "New Normal". His opinion is that we are moving to a new status quo. The future will be different. For me as somebody learning about investment it is interesting and important. It is not enough to choose a "best of breed" company and buy it at an attractive valuation - you have to look forward to where, in the words of Charlie Munger; "the puck is going to be". A really simple example would be that however attractive the valuation I would be reluctant to invest in a newspaper business why? well really the time for newspapers looks to be passing. I would not invest in a UK defense company, leaving aside I find the product rather distasteful, living beyond our means something has got to give - the cuts here seem to me inevitable and progressive.

Returning back to the bigger picture I think that it is important to have an idea of where the world is going, what the long term markets are going to look like, who is going to be buying what. Look for, as Roger Montgomery, calls it A1 businesses with big picture, long term, legs. Then let the cook - for how long? I am looking for a hold period of 10-20 years.

Returning back from the bigger picture to where I started. Here is a video by Mohamed El-Erian, one of my all time favorite commentators. The video is something like 15 mins. It is well worth the time. My take anyway.

Mohamed El-Erian - Interview

A fascinating interview from El-Erian chief executive officer of Pacific Investment Management Co. This is one of the few interviews that succulently expresses some important ideas Europe. Europe is a two speed economy - on the inside there is Germany and France on the outside Spain, Portugal, Ireland etc. As a result the ECB's job is tricky - it needs monetary policy and support for the banking system.

Spain is improving Spain is not Greece and need not be Ireland. It has a banking issue but not a government debt problem. It could, like Ireland take on liabilities of the [savings] banking sector or it can try and force as many savings banks as possible to raise capital merge etc. It is trying to fore it to get the private sector to take care of the problem. As a result it is significantly outperforming Greece and Ireland. Greece and Ireland are using liquidity to address solvency and growth problems - and approach that can not continue indefinitely. The underlying issues need to be addressed. They need to restructure the debt like Uruguay, also structural reforms to allow them to grow.

For reasons that I don't fully understand but are probably due to copyright I could not embed the video but you can get it from here.