This week I have a very special Outside the Box for you. Peter Bernstein is recognized as one of the more brilliant and insightful analysts of our times. At 89, he has been writing prescient material longer than most of us "young guys" (I am 59, and hope I am still writing at 89, or even able to write!) have been even marginally in the markets. His Economics and Portfolio Strategy Letter is read by the true cognoscenti of the investment world.
He has given me permission to reproduce his latest letter in which he offers two insights. Rather than give you some teaser copy, why don't you just jump in a read. And trust me, anything that Peter writes is worth reading more than a few times.
For those interested, you can learn more about Peter and subscribe to his letter at www.peterlbernsteininc.com.
Today's "Outside the Box" will be a combination of 2 different writings. The 1st is an email that I received from Research Affiliates Chairman Rob Arnott in response to my letter last Friday, "Honey, I Created a Bubble." The 2nd is the latest article by the well-known fund manager, John Hussman. Upon reading both commentaries, I was struck by the similarity between the two. It behooves us to pay attention when two very intelligent gentlemen that both actively (and successfully!) manage billions of dollars are marching to the beat of the same drum.
For those of you who are unfamiliar with Rob and John, let me say that both have stellar credentials. Rob is Chairman of Research Affiliates where he manages a multi-billion fund for PIMCO. In addition, he is editor of the Financial Analysts Journal and creator of a new index fund concept. John is the President of Hussman Investment Trust where he manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
In their commentaries below, both Rob and John take a look at what inflation and bond yields mean for the market. I strongly recommend that you read each piece thoroughly and hope that you will find them to be "outside the box."
This past week I sent a special edition Outside the Box titled "Breakpoint in Iraq." I hope that you found it to be both timely and insightful. Today's article should be equally interesting with a unique take on the behavior of bond yields. My good friend Richard Duncan thinks rates were acting a little funny over the past couple of years, and he sheds some light as to why that might have been.
Richard Duncan has worked as a financial analyst in Asia for more than 18 years, conducting research and publishing investment reports on companies, industries, and economies from India to Japan. One of the first to warn of the impending economic crisis in Thailand in the mid-1990s, Mr. Duncan worked as a consultant for the International Monetary Fund at the height of the Asian financial crisis and subsequently joined the World Bank in Washington, D.C. He is also author of the widely acclaimed book The Dollar Crisis, published in 2003. Mr. Duncan currently works for ABN AMRO Asset Management as the Head of Investment Strategy.
This week's letter is once again from two of my favorite economists, Van Hoisington and Dr. Lacy Hunt of Hoisington Investment Management Company in Austin, Texas. They specialize in management of fixed income portfolios for large institutional clients by setting long-term investment strategies based on economic analysis. They have been one of the most successful bond managers in the country. (I have no affiliation with them.) I eagerly read all of their writing and analysis, and find it to be some of the most thought provoking anywhere.
Their second quarter 2006 Quarterly Review and Outlook looks at the current economic situation in the US after a 1st half sell-off, inversion of the yield curve and a recession threatening. With the markets "teeter tottering" between excitement and fear, Hoisington's article proves to be both insightful and timely, which is why I picked it for this week's "Outside the Box."
Whether short term rates are high today is one of the louder debates among economists. And why are long rates so low? Will an inverted yield curve mean what it has for the past 40 years, i.e., a slowdown and/or a recession?
This week's letter is a recent essay by Bill Gross, the Managing Director of Pimco, also known as the Bond King. Gross sits on top of the largest pile of bonds in the world. He thinks short term rates are high and nearing a peak for this cycle and that the economy will begin to slow down next year. He includes the main points, sent to their investment committee, which Pimco is looking at when viewing the bond market.
Will he be correct in his assessment of rates? When someone as large as Pimco offers their view of the market, we should keep an eye on them and that is why this was picked for Outside the Box.
This weeks article comes from one of my must read economic analysts, Bill Gross of Pimco. Bill sits on top of the largest pile of bonds in the world and is often referred to as the Bond King. His latest Investment Outlook is called "The Strange Tale of the Bare-Bottomed King." Pimco had a Secular Forum in May and this is Bill Gross's take on some of the issues discussed.
Bill sees our current prosperity built not on productivity and technology but on finance-based consumption fed from asset appreciation based on the [Fed's] Pump. He worries about increased market liquidity, leverage and systematic risk. While he does not predict when and how the imbalances will change, he clearly believes it must (as do I). Let's hope it is an orderly and not a precipitous event.
I have talked a lot about Bretton Woods 2 recently and that is why this was picked for Outside the Box.