Hello, hope everyone had a pleasant and enjoyable weekend. We have officially entered the 4th quarter of 2006 and all eyes seem fixated on the major market averages with the stakes being a new all-time high for the DJI. For this week's "Outside the Box," we turn our attention towards a recent article by PIMCO's Managing Director and widely heralded "Bond King," Bill Gross.
Bill currently manages the largest bond fund in the world, the PIMCO Total Return Fund. PIMCO is one of the largest specialty fixed income managers in the world with its office headquartered in Newport Beach, CA and many offices spanning the globe.
In his article "Empty Nesting/Successful Investing," Bill shares what Texas hold'em and Blackjack can teach us about investing in today's markets. He goes on to further explain the importance of knowing yourself as well as separating volatility from risk. I hope that you enjoy this edition and continue to find value in reading the opinions of others.
The markets have been forced to digest a plethora of events over the past several years, ranging from continuous geopolitical turmoil to a new Fed chairman, from blowups like the Refco scandal to an inflated housing market, each of these occurrences has raised considerable coverage from the financial press yet one cannot lose sight of the longer term trends (and threats) that still loom. The most obvious, and potentially most significant, is the coming generational aging of the boomer generation and the subsequent healthcare conundrum.
This week's "Outside the Box" will feature an article by the widely proclaimed "Bond King," Bill Gross, on the impact of boomer retirement and what that means for healthcare, the workforce and social security. Many of you will find some of his comments controversial. I do not agree with his analysis on tax cuts, as an example. But he is right about the issues which will face us as a generation attempts to retire without having saved enough assets to do so, either as individuals or as a country.
My long term readers are familiar with Bill as he is a Managing Director at PIMCO. During his tenure there, he has become regarded as the most prominent figure in the fixed income sector while at the helm of the largest bond fund in the world, the PIMCO Total Return Fund. PIMCO is one of the largest specialty fixed income managers in the world, with more than $617 billion in assets under management and more than 800 employees in offices in Newport Beach, New York, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong.
May you find value in Bill's "outside the box" commentary and enjoy a safe and fun-filled Labor Day.
So exactly how far is the Fed going to go? Are they done? Perhaps another raise in August? Could that not even be enough? These are all questions of uncertainty that have the faces of investors looking more puzzled than ever over Fed policy. In my Friday letter I commented on how the Fed is concerned about inflation, and how it is still making them uncomfortable pegged in the high end of their range. In this week's "Outside the Box," Paul McCulley, to much surprise, confesses that he wears Austrian shoes (as in Austrian economics), and explains the risks to the markets of central banking policy.
A current Managing Director at fixed income powerhouse PIMCO, Paul is an intelligent thinker and economist who always provides an insightful perspective on the markets. He is a self-confessed "religious Keynesian" with respect to his views on monetary policy. In his July "Global Central Bank Focus," Paul discusses his thoughts on targeting asset prices and its affects on inflationary pressures.
I think you will find this piece helps shed some light on the problems facing the Fed and the reasons for the fog surrounding Fed policy.
Any time a central bank speaks there are scores of investors lined up and waiting to listen. Each is interested in any number of tidbits that might have a plethora of implications affecting his positions and portfolio. Even after the long-winded speeches and discussions, that action does not stop as investors continue to try and anticipate the next set of policies.
My readers are well aware of how keen I find the writing to be of Paul McCulley, managing director of PIMCO. In his global central bank focus article, Paul ventures beyond the normal apparatus to discover what he labels a "moral hazard."
My Friday letter, Thoughts from the Frontline, has been written about some of the data variables that affect the decision making policies of the Fed. I believe that Paul's piece will shed some light on what the Fed might be facing, as well as add some global perspective to the central banks as a whole. May you find this editorial to be helpful in your outside the box thinking.
I religiously read Bill Gross of PIMCO. I particularly enjoyed this month's piece. Gross is talking to his clients about the problems of bond investing. Given that he sits on top of the biggest pile of bonds in the world, I find it always useful to pay attention to him. This month he discusses the problem of valuation, risk and indexing. He comes to some novel conclusions. Let me quote one line deep into the piece:
"What I'm suggesting is essentially this: to be successful in the future a money manager/plan sponsor must in today's market be willing to embrace more risk outside of index space by accepting (remarkably) less risk in absolute space. Ultimately your absolute returns should benefit and the volatility of those returns may in fact be significantly lowered."
This is a piece that is truly Outside the Box. Enjoy.
Every month I read the outstanding commentary by Bill Gross, Paul McCulley and others at PIMCO. This month they have comments by Chris P. Dialynas, Managing Director, Portfolio Manager and Senior Member of PIMCO's Investment Strategy Group.
Dialynas offers his views on the flat yield curve, the new Bernanke era and the theory of a global glut of savings. He sees a global economy awash in liquidity due to the increased risk of investment and the Chinese currency being pegged to the US Dollar. This has caused inflation to show up in some places and the imbalances in the world give Bernanke an extraordinary challenge and that is why it was picked for this week's Outside the Box.
This week's letter is by good friend Paul McCulley, Managing Director of PIMCO. About once a year he puts together an economic debate between his favorite friend and family pet rabbit, Morgan Le Fay. It always presents a very readable look at global economics and a forecast of what could be ahead.
My Friday letter, Thoughts from the Frontline, included a graph that looked at GDP growth and mortgage equity withdrawals (MEW) and Paul explores what could happen if MEWs come to an end, or at least slow down. McCulley once again takes a look at Bretton Woods II, the housing marketing in the US and what might lead to a slowdown in the economy for 2006.
This is an important piece to help you in your understanding of the issues surrounding the debt, trade and housing bubbles. I am going to touch on a few of his ideas next Saturday in my weekly letter, particularly the quote from around the middle of this essay that has his rabbit asking the following question (MLF throughout are the initials for Morgan Le Fay:
"MLF: So, the housing bubble, or whatever you want to call it, ain't America's fault, but rather the Emerging World's fault?
"PM: No, Morgan, it isn't anybody's fault; it just is. When the Emerging World decided to shift from being a net user to a net provider of savings, those savings had to go somewhere, they had to finance something. Otherwise, the entire world would have fallen into a liquidity trap, triggering a global depression."
Read this when you have some time to think about it. In a few weeks I will be putting together my forecast for next year and I am on the lookout for opinions, like McCulley's, that can help us think 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.
Readers know that Paul McCulley of Pimco, and his cohort Bill Gross, are two of my must read economic analysts. Pimco is in Newport Beach, California, and oversee more than $400 Billion in assets, predominately in fixed income.
This is Paul McCulley's August 2005 Fed Focus letter. Several weeks ago I talked about Greenspan's remarks that the Fed was targeting asset prices. There is nothing more he would like to see than the ten-year bond yield rise, but to this point it has been flat or down. McCulley looks at why the ten-year yield has not gone up, in what he calls the "Greenspan Put" and why an inverted yield curve may be in our future. That is why this was picked for this week's 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.
Readers know that Paul McCulley of Pimco, and his cohort Bill Gross, are two of my must read economic analysts. Pimco is in Newport Beach California and oversee more than $400 Billion in assets, predominately in fixed income.
Last week my weekly letter called "The Problem with the Endgame" quoted some of Paul McCulley's January 2005 Fed Focus letter. This article was so interesting that I decided to make it this week's Outside the Box. The letter is a little longer than normal, but well worth your attention as it explores what might be in the economic future for the global imbalances, risk taking and the Fed.