Mohamed El-Erian's Guide to Global Investing

In today's markets, investors must navigate the simultaneous deleveraging of three distinct, though inter-related, balance sheets: those of the financial system, the housing sector and the consumer. The challenge goes well beyond just side-stepping the damage associated with the forced shrinkage of any one of these balance sheets; investors must also steer around the inevitably messy and unpredictable feedback loops resulting from the interaction of the three balance sheets.

For investors that hold long positions in any risk assets (such as equities and corporate bonds), the impact has been similar to that felt when oxygen is sucked out of a room: Everyone feels dazed and struggles to catch his or her breath, and the weak suffer more than the strong.

In other words, the process creates broad-based risks that, initially, are felt by all. Investors experience highly correlated declines across a number of domestic and international markets -- with the weakest segments subject to major turmoil. But the process also gives rise to isolated pockets of opportunities that can be highly rewarding.

With time, the deleveraging dynamics will dissipate -- either because they exhaust themselves, or because a circuit breaker is triggered that allows for an earlier and more orderly market bottom to form. At that stage, the isolated pockets of opportunities develop into broad-based ones that provide sustainable high returns for investors that understand and are able to exploit the new situation.

When Markets Collide seeks to offer investors tools to analyze the ongoing transformation of the global financial landscape. It is a book for those who believe that today's large market dislocations speak to the emergence of new return opportunities that, importantly, come wrapped in a new configuration of risks that must be managed proactively.

The book starts with an important historical perspective that highlights the extent to which markets signaled the initiation of key structural transformations through the simultaneous emergence of inconsistencies and pricing aberrations in key market and economic relationships; and, regrettably, the degree to which too many investors (and policymakers) dismissed these signals as constituting nothing more than normal "market noise" that requires no major change in mindset and strategies, and therefore, no bold response.

The failure to treat the noise as signals has resulted in the series of "market accidents" and "policy mistakes" that have been with us since the middle of last year. Too many balance sheets and market players were caught offside, with too much leverage and too little risk management. Market infrastructures were not adequately set up to deal with the proliferation of new instruments. And policymakers took too much time to recognize the problems. When they acted, they did so using blunt instruments and outdated information.

As a result, the unthinkable became thinkable. Well regarded iconic institutions tripped up and, in the case of Bear Stearns, ceased to exist. Long lines formed outside banks in the two most sophisticated financial centers in the world -- the U.S. and the U.K.-- as depositors rushed to pull their money from failing banks (IndyMac and Northern Rock in particular). A seemingly contained dislocation in the subprime segments of the mortgage market morphed into a generalized credit crunch that risks pulling the rug from underneath global economic growth.