Stocks and bonds are in for a 'painful' journey and cash is safer, according to top economist Mohamed El-Erian

• Stocks and bonds could be in for more pain as interest rates stay high, according to Mohamed El-Erian.
• The top economist said he plowed more of his wealth into cash, which is yielding 4%-5%.

Stocks and bonds are in for a rough ride, cash is the safer option for investors wary of the latest bout of volatility, according to top economist Mohamed El-Erian.

The Allianz chief economic adviser outlined his investment strategy in the current economic environment in a recent podcast with the Financial Times, saying that he's opted to up his allocation to cash and cash-like assets, which can yield around a 4%-5% for investors given where interest rates are today.

"If you are uncomfortable in the stock market – as I am, by the way – then there's a really good place to park your money where you can get paid four to five percent on your money and that will compound," he said on the podcast. "The time will come when I'll be much more comfortable increasing my equity exposure but I've been quite cautious," he said of stocks.

On the other end of the risk spectrum, he's also putting money in distressed debt assets, such as by investing in distressed private credit.

"Slowly over the next few years, we're going to go back to something more normal where traditional correlations and therefore traditional risk mitigation come back… I can tell you about the destination, but the journey is really painful," he later added.

Stocks and bonds have already been feeling the pain as the Fed raised interest rates and sharply tightened financial conditions. The prospect of higher-for-longer interest rates sparked a sell-off in US Treasury bonds, causing prices to plunge and yields on the 10-year Treasury to near 5% last week. Meanwhile, the S&P 500 slumped 20% in 2022 as higher borrowing costs slammed firms.

El-Erian has repeatedly sounded the alarm for more economic pain to come. Higher interest rates can help lower inflation, but they risk pushing the economy into a recession. He says the odds of a downturn increased after yields on the 10-year Treasury jumped to a 16-year record in early October.