Category Archives: Economy

El-Erian: Expect Major Volatility – and Big Opportunities

Mohamed El-Erian, says to expect major volatility in the coming months — volatility that will create some great opportunities.

“We have a bumpy road ahead of us, but I keep on stressing, it will create a lot of attractive opportunities,” he told CNBC. El-Erian said the global market may experiencing a shift to a “higher volatility regime,” meaning that asset allocations will become aggressive and price multiples will begin “looking high.” That’s when markets overshoot and act with too much correlation, creating the opportunity is, he says.

He also says that opportunities may well be occurring in emerging markets and oil, but he advises caution. “If you already have exposure, wait a little bit, there are going to be even more attractive positions—there are still people stuck in those markets looking to get out,” he said. “We’re going to look back on this, and this is going to be a very attractive stage. … It’s one of these things that happens once a decade… but be careful because it’s going to be incredibly volatile in the next few months.”

El-Erian also says investors would be wise to stop obsessing so much over potential interest rate hikes. He says the tightening cycle, if and when it occurs, will likely be the “loosest tightening in the history of the Fed”.

Dalio Sees Significant QE Before Significant Rate Hike

Hedge fund guru Ray Dalio says he expects the Federal Reserve to make a significant quantitative easing move before it makes a significant interest rate hike.

“To be clear, we are not saying that we don’t believe that there will be a tightening before there is an easing,” Dalio writes in a recent post on his LinkedIn page (h/t MarketWatch). “We are saying that we believe that there will be a big easing before a big tightening. We don’t consider a 25-50 basis point tightening to be a big tightening. Rather, it would be tied with the smallest tightening ever.”

Dalio says that the risks of the world being “at or near the end of its long-term debt cycle are significant”. Being at the end of the long-term debt cycle means interest rates around the world are near zero, spreads are low, and debt levels are high, he says, and central banks have a limited ability to ease — all while many people have a dangerous bias to the long side. He says those secular factors should outweigh short term debt and business cycle factors –which the Fed seems to be weighing more heavily — that would typically mean a tightening phase is due.

Despite the very limited ability to ease at this point, he thinks easing is the path the Fed needs to take. “While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces,” he writes. “These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions.”

Dalio says that, while the Fed has been more focused on short-term business cycles than the long-term debt cycle, it will react to what happens going forward. He seems to think that will mean more quantitative easing before we hit a significant tightening phase, but he also says that he is worried that the Fed will feel that it must stick to its guns and follow through with the tightening it has been discussing.

Nygren: Relax, and Rebalance

Much of the speculation about the reason for the market’s recent plunge has been that investors are downright scared about China’s slowing growth. But top mutual fund manager Bill Nygren says the sort of correction we’ve seen recently is simply a part of life when you are investing in stocks. And from a long-term investing perspective, he does not think China’s slowdown will have as big an impact as many believe.

“I think sometimes we just forget that the market doesn’t really need a reason to have a 10% correction, which we basically had over the past four trading days,” Nygren tells Morningstar. “They occur pretty frequently–about once every year and a half, on average, historically–and they are really nothing for investors to worry about as they are pretty common.”

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As for China, Nygren laid out some interesting numbers regarding its slowdown’s possible impact on the US. “For long-term investors … where we’re trying to estimate the value of a business five to seven years from now, it’s hard to imagine China being important enough to cause a 10% reduction in values,” he explained. He says China accounts for about 16% of world GDP, so a 5% to 10% change in Chinese output would represent a 1% hit to global GDP, and an even smaller impact on US multinational firms. “We’re seeing this as increased opportunity of values falling substantially less than prices,” he says.

Nygren says that, historically, the stock market has been the best investment vehicle, even though there are periodic corrections and bear markets. And, he says, no one has found a way to time those declines. He says investors should use the recent market declines as a chance to rebalance their portfolios. “Over a long period of time, the best way for an individual to make sure that they can sleep at night and get through these tough periods is to have a balanced portfolio and use large moves in the market–either direction–to frequently restore balance to that portfolio,” he says. “If you don’t do that, the market is taking your portfolio out of that balanced position and giving you more risk exposure to a sector that’s already performed well and maybe getting extended. So, I think most investors should take a deep breath, know that equities are good long-term performers, and take a look at their portfolio and see if they can take advantage of it.”

Nygren also talks about the pros and cons of rising interest rates as they pertain to bank stocks, why he is high on some industrial stocks, and why he thinks investors are overreacting to oil price declines, creating opportunities in oil stocks.

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El-Erian: “Classic Overshoot” In EMs Will Hurt Now, Create Opportunities Later

Mohamed El-Erian says we are seeing a “classic overshoot” to the downside in emerging markets right now, which should lead to more pain in the near term but opportunity over the longer term.

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Got Rate Hike Fever? Relax, Says Yardeni

Will the Federal Reserve raised interest rates in September? That’s a question that many investors have been fixating on. But top strategist Ed Yardeni says that a rate hike really isn’t that big of a deal.

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Faber Says We’re In A “Stealth Bear”

While stocks are up slightly this year, Marc Faber of the Gloom, Boom & Doom Report says that a “stealth bear market” has been going on under the surface.

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Paulsen: Watch For Commodities To Surprise — If This Happens

Wells Capital’s James Paulsen says a commodities rebound will depend on what the dollar does, and he thinks the dollar has been in “peaking mode” since March.

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