Income Generating Investments With Mohammed El Erian – March 6, 2016

Guest: Mohamed El Erian
The Income Generation With David J. Scranton
Mohamed El-Erian: The main point of the book is that all that we are seeing in terms of market volatility, in terms of negative interest rates in Japan and Europe, in terms of this very strange blame game between oil and stocks. All these things are part of a much bigger story and the story is actually quite a simple one, the world that we are on is ending. We will no longer be able to repress financial volatility, we will no longer be able to maintain low but stable growth. We are going to tip within the next three years the system is going to tip now what’s hard is that there are two possibilities. Nothing predestined about where we go, we could either tip in a much better place if our politicians response while alternatively it’s about recession, it’s about huge financial stability. So investors have to realize that we are entering this T-Junction, what the British call the T-junction the road ends and they have to think about the asset allocation accordingly. Which means doing things differently David.

David Scranton: How about oil? What’s your take on what’s been happening lately with oil? This is… this kind of sort of unprecedented.

Mohamed El-Erian: Yeah and it’s amazing to think that low oil prices have gone from being viewed as a blessing to be viewed as a curse. It’s not just a supply and demand issue, if it were just a supply and demand issue oil wouldn’t be where it is today it would be higher. It is also that the oil market has lost its seat belt, it has lost the swing producer, the notion that OPEC and Saudi Arabia would cut production in order to support prices. So the market right now is completely unhinged over the long term if you ask me where is it going to be in twelve to eighteen months’ time I’m pretty sure it’s going to be higher. But over the short term we’re going to see enormous volatility continue.

David Scranton: Do you think it’s another deflationary signal, the fact that oil has been dropping not as far because a lot of this is because the unhingedness that you just described. But in general, do you think it’s a deflationary signal as I do?

Mohamed El-Erian: Yeah, it is a deflationary signal with one qualifier it has a positive income effect. Why? It’s an immediate tax cut you go to the pump and you have more dollars in your pocket after you fill your tank. So this is an immediate tax cut, it has a deflationary price effect but it has a positive income effect the question as you rightly noted a couple of minutes ago is our households confident enough to spend this windfall?

David Scranton: Correct. In the last minute we have together today I’d like to you know time flies when you’re having fun. I’d like your take on what’s happened recently, a lot of advisors, traditional advisors are saying don’t invest in fixed income today because interest rates can only go up. But they miss the whole concept the offsetting element which is this the risk premium spread and we just talked in the last segment about risk premium spread. So do me a favor, tell our viewers what your take is on that.
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