One L of a global banking crisis

These mandates conflict with each other, particularly in an economy in need of radical deleveraging, or the shedding of debt. Unless Bernanke can pare back his obligations and clearly articulate that he will help promote growth as a top priority, it will be difficult to assure investors that the central bank is being guided by policy focused on restoring profitability to banks and companies.

Since Bernanke has not clearly made that choice, El-Erian believes that investors should essentially consider the Fed hostile to their interests. And thus as a practical matter, he thinks we should dramatically underweight equities in our portfolios. While most Americans probably have 90% of their investable funds in U.S. stocks, he recommends that they cut back to having just 50% of their money overall in stocks and, of that, apportioning just 30% to U.S. companies. That would mean just 15% of an overall portfolio invested in American stocks.

Why so little U.S. exposure despite seemingly low prices? As the son of an Egyptian diplomat who is fluent in Arabic and French as well as strong enough in English to have published the best-selling book "When Markets Collide" this year, El-Erian says that Americans need to realize that the United States and Europe have lost their role at the center of the investment universe. He observes that we are currently at a unique moment in world history when the richest countries on Earth are borrowing heavily from the poorest countries -- and, paradoxically, Western banks are hitting up Eastern investors every time they find a new hole in their pocket.

An 'upside-down' world

To put this into perspective, El-Erian says that the world is no longer "flat," as suggested by the title of a seminal 2005 book by New York Times op-ed columnist Thomas Friedman. Instead, El-Erian says, the world is "upside down" when you consider the strange turn of events that have led irresponsible New York banks to go hat in hand to Abu Dhabi, Singapore and China's sovereign wealth managers in search of new capital. "Poor countries are recapitalizing the rich countries. It's a complete change," he said.

As a result of this transformation in world finance, emerging economies are buying developed countries' assets on the cheap and thus will be first to benefit when global deleveraging is complete. And even at present, while heavily indebted consumers in the United States, United Kingdom and Australia are cutting back on their purchases, dampening their countries' economic growth, consumers in Eastern Europe, China and India who have never had credit cards or subprime mortgages are actually accelerating their purchasing, helping their local economies power ahead.

Going forward, El-Erian believes we should anticipate a widespread realignment of the U.S. banking system, with dozens of medium-sized and large banks disappearing and a few supersized entities, such as, potentially, JP Morgan, emerging. If you care to speculate on this change, he advises that you focus on companies whose fundamental value is proven and then stick to the highest level of the capital structure, which means super-senior bonds rather than equities. But even then, don't expect much over the next year as our world sinks further into a living L before finding its happy U.

Fine Print

Check out El-Erian's book "When Markets Collide."

See his interview with Charlie Rose here.

At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.

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