El-Erian: Central Banks Have 'Distorted' The Public Market

Mohamed El-Erian, a well-respected economist and chief economic adviser at Allianz, isn't a fan of owning stocks.

In an interview with Bloomberg, El-Erian said he isn't avoiding stocks because of the perceived risks. In fact, his portfolio composition contains assets generally considered to be riskier than stocks, namely exposure to venture capital.

El-Erian believes stock market prices have been "distorted" by central banks across the world, and he isn't comfortable with buying shares of public companies and sitting on them for five to 10 years.

'Barbell Strategy'

El-Erian believes a "barbell strategy" is most appropriate at this time. The strategy involves holding as much as 30 percent in cash (safest investment on one end of the barbell) while also holding highly risky assets on the other end of the barbell such as venture capital exposure. In between the two ends of the barbell is a much smaller exposure to equities and other asset classes.

Related Link: Why A 1% Rise In Interest Rates Could Produce "One Of The Worst Drawdowns In The Past 50 Years"

He explained that central banks in the United States, Japan and Europe have implemented programs of asset purchases to support their economies. However, the Federal Reserve is now thinking of raising interest rates for the second time in a year and the Bank of Japan is giving up on prior plans to lower the benchmark 10-year yields.

El-Erian continued that stock markets have "decoupled" from the economic reality.

"They've been conditioned to believe, over and over again, that central banks can shield them," he said.

Bottom line, El-Erian believes now is a better time to be a seller of stocks rather than a buyer.

ETFs

  • SPDR S&P 500 ETF Trust SPY is up 5.11 percent year-to-date.
  • iShares MSCI Japan ETF EWJ is up 2.81 percent year-to-date.
  • The MSCI UK ETF, iShares Trust EWU, is down 5.51 percent year-to-date.

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