Mauldin Conference – Mohammed El Erian

Mohammed is the co-Chief Investment Officer at PIMCO. Like the title of this blog, he states that we’re living in interesting and consequential times.

He spent a fair amount of time rehashing the problems of Europe. He suggested that if you multiply its problems by a large number you get the world’s problems. Europe’s problems are:

1. Too little growth
2. Too much debt (in the wrong places, the weaker countries)
3. Too much economic dispersion (Spanish unemployment = 25%; Germany = 5.5%)
4. Lack of competitiveness

What follows is a stream of consciousness disjointed, badly-taken notes.

He described the problems with Europe as an infection in one’s toe. While it might be contained, it affects the body, and, left untreated, could leave the body on the operating table.

Range of outcomes for Europe is morphing from a bell-shaped distribution to a Bactrian camel–the two-humped kind–shaped distribution. Think of it as as high probabilities surrounding two outcomes–or two bell shaped curves. The one outcome is Europe becoming stronger; the other, weaker. PIMCO’s view is that Europe “tips” stronger, but that if it tips to the weaker, it tips hard that way. A stronger Europe is either a re-founded Europe or a smaller Europe( i.e. 14-15 countries.) A weaker Europe is a lower–albeit not de minimus–probability, a probability of fragmentation. Either way it’s a bumpy ride.

We’re living in the midst of a global realignment, a time of many Monty-Python-like flesh wounds. It’s not a time to go all to cash, but it is a time to think differently. Investors need to be able to navigate the “great escape.”

PIMCO likes companies with:

1. Lots of cash
2. Low leverage
3. High operating margins
4. Exposure to growth markets

They do not like investing in broad markets unless the tail risk is hedged away.

PIMCO likes the countries that are the cleanest dirty shirts. If all your shirts are dirty you grab the cleanest one. Those countries are Germany (“it’s the AAA of AAAs”) and the U.S. for now.

His advice included getting rid of unconscious biases. He talked about a PIMCO session in which a video was shown of folks tossing a basketball around. While they were counting passes a gorilla walked through. Made to feel silly for missing the gorilla, the next time a similar video was shown, Mohammed was dialed in, looking for the gorilla. This time, he missed the child walking through with a red umbrella.


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