Blame It On Stability

This week we look at length at an outstanding new book just hitting the bookstores by good friend Paul McCulley (of Pimco fame), called Your Financial Edge . The main themes will give me an opportunity to weave in a few thoughts about some recent data, and a lengthy telephone interview with Paul, done just before writing this week's letter, will bring us up to date on his current thinking. I think readers will take away a few good ideas, so let's jump right in.

Paul McCulley is someone we should listen to. He not only runs a rather large portfolio at PIMCO, his calls on the Fed are critical. In just one day, a correct prediction by McCulley that the Fed will unexpectedly raise or lower its Fed funds rate by a quarter of a percentage point can mean a $3-5 billion jump in the value of the $670 billion worth of mutual funds and private client funds managed by PIMCO. He writes a monthly column that I consider a must read, and his writing has been a feature in Outside the Box more than that of any other analyst. He is simply one of the best financial minds in the country. When he talks, you should listen.

Your Financial Edge was co-written with Jonathon Fuerbringer, a reporter for 24 years with the New York Times , who brings a very clear, crisp, and fast-paced style to the book; but long-time fans and readers of Paul recognize the source for the driving themes of the book. The book is subtitled "How to Take the Curves in Shifting Financial Markets and Keep Your Portfolio on Track" and is a marvel in how it simplifies the problems facing investors in the coming years, giving us a framework for both understanding and dealing with them. This book should be read by both investors just starting out and seasoned pros, and both will come away with a lot of new ideas and understanding of how the market works. I really can't recommend this book highly enough, and if you read it you will see why I think it deserves at least a full letter on its own.

This is not just a book on economics. It is a practical book, giving you a view into how Paul would specifically allocate investments in both short-term and long-term portfolios that he personally manages. For a bond guy, he has more tolerance for risk than you might think, and that is for a reason he outlines in the very first chapter. (Quotes are from the book, except where noted.)

This is a…