Foreword

I suspect that most of us have a daily routine when it comes to reading the news and looking for insightful commentary and analysis. I know that I do; and my routine includes seeing what John Authers has to say.

John’s daily column in the Financial Times is a “must read” for many of us who are not just interested in markets, but also involved in their inner workings, daily fluctuations, and volatile emotions. His writings provide us with timely insights into market developments and the outlook; and they fuel interesting, and at times, lively debates in the marketplace.

You will understand, therefore, how delighted and honored I was when John asked me to write a foreword for this wonderful book. I also felt intimidated at the thought of appearing in print together with one of the best writers in the financial media. Thankfully, this fore-word is of a length that would limit any meaningful comparison of my approach to writing with John’s engaging and insightful style.

This enjoyable and fast-moving book is written in the style of John’s daily columns—concise, relevant, and containing perceptive examples. Think of the book as your vehicle for a journey of discovery. Each stop will precisely inform you of the forces that have come together to determine market valuations and correlations—or, in the words of John, the drivers of the rise in markets, their collapse, and their ongoing re-emergence (albeit one still vulnerable to failures and weak regulatory and private infrastructure).

During this journey, you will discover why markets can move together for a long time and to an excessive degree (for example, the formation of “bubbles”) before correlations collapse in a spectacular and wrenching fashion; why so many investment managers fall victim to herd behavior; why inappropriately specified and monitored principal/agent relationships result in a misalignment of incentives between the end investors and the managers that work for them; how risk management techniques can morph from being mitigators of risk to amplifiers; and why regulators have so much trouble maintaining their finger on the pulse of the markets.

As you proceed with your journey, you will come across a lot of interesting tidbits, including how emerging markets acquired the name and evolved into an investible asset class. Most importantly in my eyes, you will also see how society is being forced today into important tradeoffs between stability and efficiency—and yet this imperative balance (that will impact both current and future generations) is being inadequately considered by governments around the world.

The timing of this book is also highly appropriate. It is published at a time when, having survived a near-death experience during the 2008-09 global financial crisis, too many market participants have reverted to old and eventually unsustainable mindsets and behaviors; at a time when regulators are slipping in both the design and implementation of measures to strengthen market infrastructure and limit systemic risk; and at a time when political expediency risks overwhelming economic and financial logic.

Yes, this book is about a highly relevant journey and about great timing. It is also about what the destination is likely to be, as well as what it should be.

On reading the book, I suspect that you will come away with a much clearer understanding of the remaining potential for market accidents and policy mistakes. You will be exposed to a summary of what governments need to do to lower the risk of additional large market disruptions. And you will be armed with an expanded toolset to consider where risks and opportunities lay in today’s (and tomorrow’s) marketplace.

This book is of even greater relevance if you buy into the work that my PIMCO colleagues and I have done on the manner in which markets and economies will likely reset after the 2008-09 global financial crisis. Our work suggests that rather than be subject to a conventional reversion to the most recent mean (the “old normal”), the global system is now engaged on a bumpy, multi-year journey to a “new normal.”

For reasons cited in John’s book—including inadequate framing, herding behavior, and backward-looking internal commitments and principal/agent problems—it will take time for societies to fully recognize and adapt to the regime changes. This is not for lack of evidence. After all, who would deny the multi-year influence of the sudden, simultaneous, and large deterioration in the public finances of advanced economies; the unexpected surge in several of these economies’ unemployment rates, coupled with the realization that the rates will stay high for an unusually long time; the consequential erosion in the institutional standing of both private and public entities; and the growing importance of socio-political factors in driving economies and markets?

My bottom line is a simple one: John’s book should be read by all those interested in the way markets operate, be they investors, analysts, or policy makers. Yes, markets are here to stay; and, yes, they are still the best construct for organizing, valuing, and allocating resources. But this should not blind us to the fact that markets do occasionally fail.

Markets do become overly synchronized at times and overshoot, and they can involve activities that are insufficiently understood and inadequately supported by the necessary infrastructure. By neatly and succinctly speaking to all this, John Authers’ book also gives us hope that markets could also be made to work better in enhancing global welfare.

Mohamed A. El-Erian, CEO and co-CIO of PIMCO, and author of When Markets Collide