Why He Is Holding 30% in Cash
Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, has decided to adopt a “barbell trading strategy” to take advantage of the tail-end volatility in this market environment. He says his portfolio is comprised of almost one-third cash and plenty of venture capital investments at the moment.
Noticeably absent is the presence of publicly traded securities, like stocks and bonds. According to an interview he gave to Bloomberg, El-Erian is steering clear of those assets because of incessant and aggressive actions undertaken at the nation’s central bank. (Source: “El-Erian Holds 30% in Cash as Central Banks Distort Markets,” Bloomberg, October 20, 2016.)
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From his perspective, publicly traded assets have had their prices distorted by the persistence of monetary stimulus. Continual downward pressure on interest rates, excessive money printing, and wobbly forward guidance are collectively the object of El-Erian’s ire.
“There’s enormous risk in public markets because that’s the one that central banks have distorted to the greatest extent,” said El-Erian. “It’s very hard to say I’m going to buy a basket of public equities and go to sleep for the next five to 10 years and feel good about the returns. Similarly with bonds.”
He did not limit his criticisms to the Federal Reserve or U.S. markets. In fact, he made these remarks while in Singapore, suggesting his comments extend to Japan. The Bank of Japan famously pushed interest rates into negative territory, leaving many analysts perplexed as to what that meant for the values of yen-denominated assets.
Negative interest rates are a historical anomaly, yet they are being proliferated across Japan and parts of Europe. El-Erian believes that stocks and bonds have been skewed by their existence, and that many investors are “conditioned to believe, over and over again, that central banks can shield them” from market volatility.
That’s why he is holding assets from opposite ends of the risk spectrum: cash and venture capital. The idea is that avoiding stocks and bonds is to avoid the middle of the risk spectrum, leaving his assets weighted on either side (hence the barbell metaphor).
On whether economic conditions can improve enough to justify the elevated valuations, El-Erian seems skeptical. He thinks it’s more likely that the situation will deteriorate and lead to greater instability and downside risk.
“The probabilities are now starting to tip in the likelihood of a bad outlook,” El-Erian said. “They’re starting to tip in favor of low growth, giving way to periods of recession. This is a better time to be a seller of stocks than a buyer.”
