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. ...