El-Erian Market Analysis

I keep CNBC on in the morning on mute while I work and read.  Once in a while, depending on the guest, I will unmute to hear their thoughts on the economy.

One of those guests is Muhammad El-Erian the CEO of PIMCO, which is the largest bond fund in the world.

He had a mesmerizing conversation this morning about the state of the economy and where we go from here in terms of market direction.

I felt he said everything that I wrote about earlier in the week, only he said it much better. (His salary is slightly higher than mine)

He feels that the Federal Reserve's QE2 is now baked into the markets.  What is fascinating to me is that the markets have bought up every asset available, not only what they feel the Fed will purchase.  Here is my analysis of each asset class:

Bonds - This is easy.  The Fed's main target has been and will continue to be treasury bonds first, and mortgage bonds second.  Professional investors purchasing now understand bonds are terribly overpriced and this is a short term buy and sell, similar to "flipping" a house.  They are just trying to front run the Fed.

Stocks - This investment in my mind is the most dangerous.  As El-Erian beautifully describes, investors purchasing stocks right now are not only betting on QE2, they are betting it will work and improve the underlying economy significantly.  I am not in this camp, and I feel that stocks are a very dangerous purchase at these prices.

Commodities/Precious Metals -  El-Erian describes the "side effects" of purchasing unlimited assets and the most direct is the devaluation of the dollar and the increase in commodity prices.  Since the inception of this website over two years ago, my focus has been toward this final outcome that we find ourselves in today.  I feel that just as in stocks, QE2 is now priced into commodity prices.  However, opposite to stocks, I feel that commodities are a strong long term investment and even though they are rocketing higher today, their long term movement is in the early stages.

So with this outlook, how would I create an investment plan?

Continue to hold the assets (if they are strong) that you already own.  Keep new incoming cash available as dry powder for pull backs should the Fed disappoint.  This is a dangerous entry point for new investment, even the long term strong assets.

The great discussion with El-Erian is below: