Investors Position for a Synchronized Global Slowdown: El-Erian Published: Saturday, 2 Jun 20 2 !

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$he insufficient .ob creation, sta/nant earnin/s and alar'in/ lon/-ter' une'0loy'ent hi/hli/hted by #ay1s disheartenin/ .obs re0ort underscore 2'erica1s 0ersistent une'0loy'ent crisis3 $he nu'bers also s0ea, to a synchronized slowdown that is now ta,in/ hold of the /lobal econo'y 4 a 0heno'enon that is bein/ si/naled by virtually every other data release out of Euro0e, the 53S3 and e'er/in/ countries3 Getty I'a/es $he realization of lower /lobal /rowth, to/ether with increasin/ financial instability in so'e 0arts of the world 60articularly Euro0e7, is an i'0ortant driver of the recent shar0 selloff in e8uities and other ris, assets3 It has also turbochar/ed the colla0se in yields on hi/her 8uality /overn'ent bonds, with the 0-year 53S3 bond at a record close of 3"9: on ;riday 6and Ger'any even lower73 $o state the blatantly obvious, the best investor 0ositionin/ for the last few wee,s was an across-the-board defensive, <u0 in 8uality= one3 $he 'uch 'ore difficult 6and ur/ently relevant7 8uestion on 'any 0eo0le1s 'ind today is whether this still 'a,es sense 4 0articularly in view of the dra'atic valuation 'oves3 2lready, several analysts have co'e out reco''endin/ that investors react to the recent selloff by si/nificantly addin/ ris, assets to their 0ortfolios now3 2nd those who favor this >'ean reversion> a00roach, a theory that assu'es hi/hs and lows are te'0orary and that 0rices will eventually 'ove bac, toward the 'ean or avera/e, cite historical levels to su00ort their reco''endation3 $hey see enticin/ly chea0 0rice-to-earnin/s ratios for stoc,s to unsustainable low yields for /overn'ent bonds3

#oha'ed El-Erian (E) of PI#()

$hey would be ri/ht if history does indeed 0rovide a /ood /uide to what constitutes <fair value= at this 'o'ent in ti'e3 2nd in e%tra0olatin/ fro' what has been to what is and will be, investors are advised to consider four issues as they confront one unthin,able scenario after another3 Euro0e, the world1s lar/est econo'ic zone and a hi/hly interconnected one, is stu'blin/ fro' bad to worse3 $he funda'ental issue here /oes well beyond the usual 8uestionin/ of whether the euro zone will have an u/ly recession 6it will7 and 0olicy 'a,ers will intervene a/ain 6they will73 $he construct of Euro0e is in 0lay3 $his adds 'eanin/ful ris, by su00le'entin/ the usual credit, interte'0oral and 0olicy co'0onents with convertibility, settle'ent and co'0le%ity ris, 0re'iu's3 $he second factor involves the unusual level of 0olitical ditherin/ and bic,erin/ which, in so'e countries 6e3/3, Greece7, has led to hei/htened disillusion'ent and re.ection on the 0art of citizens3 $his serves to under'ine res0onsive 0olicy 'a,in/ and e%0oses econo'ies to new threats3 ?hile Euro0e is a/ain the 'ost obvious e%a'0le, it is far fro' the only one3 2'erica1s unusual level of 0olitical dysfunction@0olarization has resulted in 0olicy 0aralysisA it will also e%0ose the country to the 0ossible disru0tion of a <fiscal cliff3= $hird, with so'e se/'ents in the /lobal econo'y still hi/hly indebted and not /rowin/ 0ro0erly, u/ly delevera/in/ dyna'ics are re-i'0osin/ the'selves3 $he lon/er this 0ersists, the lower the 0robability of a 'uch-needed <safe deleverin/3= (entral ban,s could once a/ain intervene throu/h their e%0eri'ental co'bination of e%ce0tionally low 0olicy rates, unusual 0olicy co''unication and additional balancesheet 0urchases3 &ut there is /rowin/ reco/nition that this 0olicy brid/e is only effective if other 0olicy-'a,in/ entities are both able and willin/ to /et off the sidelines3 Be/rettably, there is little evidence that this will ha00en any ti'e soon3 ;inally, the ris, of a synchronized /lobal slowdown re8uires a coordinated /lobal res0onse3 Cet there is no conductor to s0ea, of3 $he 53S3 has lost an i'0ortant 0art of its /lobal leadershi0 role3 $he GD and I#; lac, le/iti'acy and credibility3 2nd the G20 is still wor,in/ on its o0erational effectiveness3 2ll this s0ea,s to continued uncertainty and volatility 4 econo'ic, financial, 0olitical and social3 Since the world starts naturally lon/ ris, assets, we could well see 'ore investors see,in/ less ris,y asset allocations, includin/ cash in what they dee' as <safe .urisdictions3= In the 0rocess, valuations 4 for bonds, co''odities, currencies, and e8uities 4 could well diver/e for a while fro' what 'any dee' to be historically fair valuations3

2s ?ill Bo/ers is said to have observed decades a/o, investors should be concerned with the return of their 'oney and not .ust the return on their 'oney3 ;or 'ore infor'ation, includin/ the analysis and findin/s, 0lease /o to htt0:@@'edia30i'co3co'@Eocu'ents@Secular:20)utloo,:2020 2FGlobal:20;inal30df Er3 #oha'ed El-Erian is (E) and (o-(I) of PI#(), the /lobal invest'ent 'ana/er3 BE+2$EE +IGHS IEerie EchoI of Pre-+eh'an