Credit Crunch: What the Pros Are Telling Nervous Investors
Posted by: Lauren Young on September 15, 2008
Here’s a round up of questions posed to top money managers, financial advisers, and economists about the market meltdown on Monday:
Mohamed El-Erian, co-CEO, Pimco, and author of When Markets Collide: Investment Strategies for the Age of Global Economic Change
Q. Back in May you said we were well into a major dislocation. Can the financial system survive more shocks?
A. We are still in the midst of a deleveraging process that is getting bigger, not smaller, and is being fueled by a turnaround in housing, financial services, as well as the turnaround in the consumer.
In the process, we are redefining the financial landscape. We are not doing it with a plan, but in reaction to a crisis. At some point we’ll need to reconcile all the facts on the ground. (The financial system) is going to come back in a slimmer and more stable mode. We just have to navigate the journey.
Rob Arnott, chairman of investment advisory firm Research Affiliates
Q. You were pretty bearish in June. What’s next?
A. Many consumers have been hoping this thing would just pass. Now the impact is real. They are starting to realize, “Boy, this is turning out to be fairly serious.” Whether it is the homeowner facing higher mortgage rates or even foreclosure, or the person worried whether the ripple effects from financial services will reduce sales at companies and produce more layoffs, the consumer shoe has yet to drop.
Lawrence Kotlikoff, professor of economics at Boston University and president of Economic Security Planning
Q. What went wrong?
A. The Treasury and Fed's method of help is hurting. They come to "rescue" entity X and everyone sees from Bear’s that their rescue operations entail wiping out shareholders, so everyone figures that X's equity is about to be wiped out and no one buys X's shares or wants to continue doing business with X, so X fails.
The government should have bought Fannie Mae and Freddie Mac stock and changed its managers, but kept it private. It's now taken on over $5 trillion in debts with no clear idea what the assets are.
The government should have lent money to Lehman to keep it going rather than close it off from the discount window, which was telling the market that, "Gee, Uncle Sam doesn't trust Lehman and you probably shouldn't either." In other words, the government's ham-handed help is making matters worse.
Azim Nakhooda, financial adviser and principal at Cedar Brook Financial Partners
Q. What should a sophisticated investor do right now?
A. Adopt an institutional (versus retail) approach to this market. Specifically, allocate only an institutional segment to the equity capital markets – in all market conditions. For the core base of the portfolio, consider a mindset change toward other alternative asset classes: real estate, commodities, private equity, hedging, secured assets, etc.
This is the only way to truly compartmentalize volatility in these markets.
Scott Thomas, financial adviser at The Financial Farmer
Q. What are you worried about right now?
A. AIG is a potentially bigger long term effect on most Americans than Lehman Bros in my view for the following reason: Insurance carriers in aggregate will adjust how they invest and will move to more conservative approach and we should expect great premiums in all areas of insurance coverage. When investment performance has been greater in the past for insurance carriers they are more aggressive towards gaining market share and lower pricing.
--with Chris Farrell
