Bailout

El-Erian on Greece and its consequences

By Felix Salmon

Mohamed El-Erian is fast becoming the biggest and most important bear in the world when it comes to the consequences of the Greece crisis:

Since Greece is part of a general phenomenon of bloated public finance and higher systemic risk, we should also expect a generalised and volatile step-increase in risk premia around the world. Capital will thus be more selective in terms of destination, as it opts for liquidity over returns and for safe government bonds over equities…

For the next few days, we should worry about cascading disruptions in the European banking system as interbank activities are undermined by renewed uncertainties about each institution?s exposures to peripheral European names.

Mohamed’s talking his book, to a certain extent, here: the more volatile that the world of investment becomes, the more important it is to have smart professionals like the folks at Pimco running your money. Buy-and-hold is a strategy which worked very well for much of the past 50 years or so, but it’s far from obvious that it will continue to work going forwards. And besides, a lot of the tail-risk hedging that Pimco can do is simply impossible for retail investors: how would you hedge the risk of cascading disruptions in the European banking system?

If we’re about to see people move their savings from equities into bonds as stocks become just too volatile to hold for someone with a normal risk appetite, then it’s worth asking serious questions about the best way to invest in bonds, which always need to be actively managed, if only because they have maturity dates. Given that the biggest risks to the bond market are the ones surrounding sovereign default, El-Erian’s drumbeat of op-eds on Greece might well help his company get mandates from investors who want to park their money with a company thinking seriously and presciently on such matters.

Especially since it looks as though, at least until now, he’s been pretty accurate.

Update: Just to be clear, when I say that El-Erian is talking his book, I don’t mean that he’s short Greece, or anything like that. I don’t think he is. I just mean that he increases his assets under management, and makes money, when the world gets complicated. And so it’s in his interest to point out just how complicated the world is getting.

Full post as published by Macroprudential on May 07, 2010 (boomark / email).