Want to learn the ideas in When Markets Collide better than ever? Read the world’s #1 book summary of When Markets Collide by Mohamed El-Erian here.
Read a brief 1-Page Summary or watch video summaries curated by our expert team. Note: this book guide is not affiliated with or endorsed by the publisher or author, and we always encourage you to purchase and read the full book.
Video Summaries of When Markets Collide
We’ve scoured the Internet for the very best videos on When Markets Collide, from high-quality videos summaries to interviews or commentary by Mohamed El-Erian.
1-Page Summary of When Markets Collide
Dealing with Transformations
Investors have to deal with a constantly changing world. They can get burned if they don’t recognize when things are changing and what it means for their investments. The 2007 US mortgage market collapse was precipitated by complex economic shifts that were hard to identify, but investors who understand those shifts can avoid the risks of rapid change and earn profits.
The markets are constantly changing, and that’s good. The changes can be minor or major, but they’re always important to pay attention to. Sometimes the changes will feel like noise; something small and temporary in nature that isn’t worth paying much attention to. However, sometimes the changes will be more serious and indicate a larger shift in how things work. It’s important for people who understand economics to keep their eyes out for these shifts so they can get ahead of them before everyone else does. In 2004, there were several big shifts happening all at once: 1) Emerging economies grew bigger than some Western countries 2) Former debtor nations became creditors 3) Developing countries started creating sovereign wealth funds
- There are new instruments and mechanisms that have made the markets more complex. These innovations can create a lot of benefits, but they can also be destructive to the economy. For example, derivatives and structured investment vehicles (SIVs) have become very popular in recent years. However, when these products failed during the financial crisis, it caused huge problems for American banks as well as money market funds and commercial paper markets.
Entering New Territory
As early as 2005, experts in the financial markets had a hard time explaining how interest rates were behaving or why there was an imbalance of capital flow between rich and poor countries. The number of risky investment products increased along with investors’ willingness to buy them.
There are two major factors that have affected the global economy. The first is emerging economies’ growing surpluses, which has made them stronger and given them a greater role in international finance. The second factor is that these countries have become creditors to developed nations, rather than being their debtors. This historic switch will affect foreign exchange rates as well as bond and stock prices for companies based in developing markets such as China, India and Singapore. Emerging market SWFs (sovereign wealth funds) played a big role during the financial crisis by recapitalizing banks like Citigroup, UBS and Morgan Stanley
While these changes were happening, the bond and stock markets in the US started acting strangely. The federal funds rate rose by 150 basis points, which would normally cause long-term rates to rise too, but instead they fell as short-term rates went up. This caused an inverted yield curve where bonds with longer terms had lower yields than those with shorter terms. This happened at the same time that stocks were rising, which is usually a sign of strong economic growth.
Missing the Boat
Many investors and experts turned to the International Monetary Fund (IMF) as a logical institution to act as a main adjudicator. But for various reasons, the IMF failed in its role. The IMF may not have been able to foresee the impact of new products on banks because it lacked expertise in that area. For example, HSBC took back onto its balance sheet about $45 billion from two SIVs (structured investment vehicles), which had the effect of cutting its regulatory capital ratio. Soon, Citigroup followed suit by taking back some of those assets onto their balance sheets, prompting credit rating agencies to downgrade them and causing Citigroup’s stock price to fall sharply. This eventually forced Citigroup into seeking outside capital from sovereign wealth funds or other large corporations like Berkshire Hathaway Inc., J P Morgan Chase & Co., and Abu Dhabi Investment Authority. By January 2008, an early report found that Merrill Lynch, UBS AG and Morgan Stanley had joined HSBC, Citi Group Inc., UBS AG and many other financial institutions in tallying up $108 billion in portfolio write-downs.
