The Only Game In Town by Mohamed A El-Erian - Some thoughts

A very interesting read for people who are struggling to understand the state of global economy and the actions of central banks.  I have been perplexed by the actions of the central banks where global asset classes debt and equity both seem to be doing well simultaneously whereas growth in industry is lagging. 

The books chronicles in a way the actions of the central banks since the 2008 crisis. it is weird that the central banks are today governed by the volatility in the wall street rather than the main street. It is more like the tail wagging the dog with a few percentage points correction in wall street …statement of taper or rising interest rate is replaced with “patience “ and "will do whatever it takes”.  Also, the world is greatly intertwined and that makes it difficult to contain issues - Grexit or Graccident or likely to lead to turmoil in global financial markets. 

Also equally worrying is that the justification of increasing global / FII flows to justify valuations of emerging markets. Brian rightfully classifies this money as “tourist “ money and the money can witness flight very quickly- something which was witnessed during the recent taper talks by Fed. While, the emerging markets are the only island of growth - but this growth itself has been very patchy and investor confidence  is much higher than industrialist confidence. Industry is yet to meaningfully invest in capacity creation.  Also, bad economic news is followed by more stimulus from central bankers and higher asset prices as bankers resort to curbing volatility. A reminder of early 2008 when cut in rates was cheered by the markets.  Also, the 1974 Boxing match between Ali and Foreman is a must watch - How Ali changed his style to tire out Foreman and get a knock out. 

Some interesting quotes:

On Negative policy interest rates:   “ no history book to turn to".  “ it was like learning to drive backwards.” 

  

Why economies stall because of trust: 

Imagine a customer ordering a big Mac meal at her local McDonalds drive -through. She is directed to 2 windows after placing the order- one to pay for the meal (payment) and the other to get the food (settlement).  it is just a few yards between the two. Yet aware of the recent bankruptcy in which clients at another fast food joint had been stranded in between these 2 windows - having paid for but not recd the meals - she request instantaneous settlement at the time of payment. but the system isn’t built for such simultaneous payments for settlement. it assumes a certain amount of trust.

During periods of large capital flows induced by a combination of sluggish advanced economics, robust risk appetites and highly stimulative central bank policies, emerging markets serve as a destination for a huge pool of crossover funds - or tourist dollars. … At the fist signs of instability, they essentially tend to rush to the airport……

ON growing inequality :  “….on one hand the stunning contrast between sluggishness on Main street , and on the other the notable post-crisis recovery on Wall street , as well as the continued historic surge  in corporate profits record share of GDP.”

Main street is “ how come you are bailing them out and not bailing me out?”

ON corporates not investing:    “…it has been less an issue of the wallet ( or ability) to spend and more a question of will ( desire).

It is about not letting the urgent always crowd out the important…