Rising commodity prices are threatening not only the United States, but also economies from emerging nations across the globe, Pimco Co-CEO Mohamed El-Erian told CNBC.
The surge in commodities such as oil and grains has posed a good news-bad news scenario that investors will need to watch closely, the head of the world's largest bond fund manager said.
"The good news is that the causality is shifting. You're coming from a period where higher growth meant higher commodity prices, to a period where higher commodity prices are going to mean lower growth," El-Erian said. "That means ultimately commodity prices are going to have to come down because growth is slowing.
"The bad news is it's not clear what the circuit breaker is. So be careful if you get into growth dynamics that are too negative that you get into a tipping point situation," he said.
El-Erian said it's not clear where the break in the commodities trade will come, but he said the economic problems posed by higher prices will be felt especially acutely in the United States. At the same time, other nations are altering their strategies to deal with soaring energy, raw materials and food costs.
"We may now be getting to a tipping point where commodities break the real economy, and that's what we have to worry about," he said.
"What has changed fundamentally in the last two months is that with the spike in commodity prices, the rest of the world that has been growing very rapidly and helping us is now starting to slow," he added. "And you're seeing policy makers in India and China saying, 'I'm willing to sacrifice some growth in order to contain inflation.' "
In wide-ranging comments, El-Erian also said he expects a shakeout to come in the financial sector, though he expected mergers rather than bankruptcies to dominate the landscape.
"Things are bad because the credit crisis has moved into an economic crisis and everywhere the economies are slowing down," he said. "Things are bad because policy makers don't have easy solutions."
Investors can find opportunities in this climate but need to be careful, he said.
"You need to be able to hold on when it gets bumpy," El-Erian said. "This is not a linear journey. This is a very bumpy journey and you have to have a long-term vision and have permanency of capital. Otherwise stay on the sidelines until things calm down."
"Remain diversified. Keep a cash cushion. You will have an opportunity to get in. It's better to be later than early in this market."