PIMCO CEO Mohammed El-Erian is one of many prominent names voicing a deep skepticism of the stock market, suggesting the time to exit risky assets is at hand.
In an article published at the TheAtlantic.com on Wednesday with the arresting title, "The 1 Equation Investors Need to Know to Understand the World Today," El-Erian, who along with Bill Gross serves as PIMCO's co-chief investment officer, gives the formula as: 4 Global Transitions/4 Global Experiments = 1 Unusual Market.
And that unusual market, El-Erian makes clear, is one investors should walk away from.
The four transitions are from assisted growth to genuine growth; central banks purchasing stability to efforts to achieve structural stability; clumsy U.S.-China and inter-European relations to more effective global and regional cooperation; social and political dysfunction to institutional renewal.
El-Erian hints to worry about the success of these transitions by citing Federal Reserve Chairman Ben Bernanke's recent remarks about today's "unusually uncertain outlook." In the investor's lexicon, "uncertain" is a dirty word.
Responding to today's crisis, governments and central banks unwilling to leave these transitions to market forces are engaging in four bold experiments: China is seeking to build internal demand; Europe is forging ahead with integration despite its many problems; Japan is aggressively pursuing unconventional monetary policy; and in the U.S., the Fed is trying to rescue the economy amid the paralysis of a political system that would normally supply the policy tools needed for growth.
The market, anticipating policymakers' lofty objectives, has tried to "front-run tomorrow's financial returns," El-Erian says. If policymakers succeed, there will be more money to be made. But the PIMCO CEO sees the complexity of these efforts as difficult to pull off, and is advising clients to gradually reduce risk.
"This may not be the time to sprint away from risk," he warns. "But it is the time to walk away."
