Mohamed El-Erian: One of Wall Street's Sanest Voices

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Includes: IYF, XLF
by: Kevin S. Price

As we've noted before (here and here, for example), we think PIMCO's Mohamed El-Erian is one of the sanest voices on Wall Street. So when he appeared on yesterday's Squawk Box, we put the DVR to work so we could pass along a few of his most incisive observations. Here's our collection of El-Erian's highlights:

  • "Things are bad because the credit crisis has morphed into an economic crisis. Things are bad because policymakers don't have easy solution. No matter how well-intentioned they are, they will create collateral damage."
  • "As long as you can underwrite the volatility, there are major bargains out there...things high up in the capital structure."
  • "If you're going to recapitalize the financial system, which has to be recapitalized, you're going to dilute somebody. And who are you going to dilute? You're going to dilute existing shareholders."
  • "It takes time to recapitalize the financial system. It doesn't happen overnight."
  • "You need to be able to hold on when it gets bumpy, because this is not a linear journey."
  • "If you get an unexpected rise in prices that people are not ready for, the next move will be up. It's what economists call perverse [unintelligible]. When prices go up, people demand more rather than less; when prices go up, people supply less rather than more. It builds on itself, it feeds on itself, until it exhausts itself. The big question is: Do you break something in the process. It will exhaust itself at some point, but what is the collateral damage?"
  • "It's been a puzzle to many of us how 2-and-20 has lasted so long, given that most hedge funds don’t do that well. There are a few hedge funds that deserve it, but many that don't. And at some point investors will wake up and investors will realize that they can get the same service from more conventional providers of investment services. And I think another few quarters of disappointing returns, that will be the wake-up call."
  • "There are times, as they say, when you worry about the return on your capital, and there are times when you worry about the return of your capital. These days you should worry about the return of your capital."

Wise stuff from Mr. El-Erian.